22/09/21
Sourcing
Title
Subtitle
International
Supply Chain
Education Alliance
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Make Vs. Buy
or
Manufacture vs. Outsource
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The role of sourcing in a supply chain
• Sourcing is the set of business processes required to purchase goods and
services
• Sourcing processes include:
• Supplier scoring and assessment
• Supplier selection and contract negotiation
• Design collaboration
• Procurement
• Sourcing planning and analysis
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Benefits of effective sourcing decisions
• Better economies of scale can be achieved if orders are aggregated
• More efficient procurement transactions can significantly reduce the overall
cost of purchasing
• Design collaboration can result in products that are easier to manufacture and
distribute, resulting in lower overall costs
• Good procurement processes can facilitate coordination with suppliers
• Appropriate supplier contracts can allow for the sharing of risk
• Firms can achieve a lower purchase price by increasing competition through the
use of auctions
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Supplier scoring and assessment
• Supplier performance should be compared on the basis of the supplier’s impact
on total cost
• There are several other factors besides purchase price that influence total cost;
late or partial order delivery, poor quality, supplier flexibility, viability, etc.
• Supplier selection has become a much more important decision because a
company’s success may well be determined by the company’s partners in the
supply chain.
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Supplier assessment factors
• Replenishment lead time • Pricing terms
• On-time performance • Information coordination
capability
• Supply flexibility
• Design collaboration
• Delivery frequency / capability
Minimum lot size
• Exchange rates, taxes, duties
• Supply quality
• supplier viability
• Inbound transportation cost
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Vendor selection – In practice
The Supplier Agreement (All Suppliers)
Suppliers must sign a legally binding agreement with Walmart Potential suppliers
should review the agreement completely with their attorneys, and/or with an
attorney who specializes in supplier contracts. It is important for potential suppliers
to make sure they understand all terms and conditions, particularly all stipulations
relating to allowances, new store discounts, merchandise warranties,
defective/return merchandise allowances, warehouse allowances, soft goods
allowances, late shipment penalties and markdown dollars or discounts. Execution
of this agreement does not, however, create an obligation on the part of
Walmart to transact business with a supplier.
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Vendor selection – In practice
Retail Link® (Product Suppliers)
Retail Link® provides information and an array of products that allows a supplier
to impact all aspects of their business. By using the information available in Retail
Link®, suppliers can plan, execute and analyse their businesses—thus providing
better service to our common customers. Retail Link® is a website that is
accessible to any area within your company. Walmart requires all product suppliers
to participate in Retail Link® because of the benefits it provides. Should you
become a supplier with Walmart, you will be provided with the requirements for
accessing Retail Link®.
Electronic Data Interchange (EDI) (Product Suppliers)
EDI has proven to be the most efficient way of conducting business globally with
our suppliers, by electronically sending and receiving core business documents.
Walmart/Sam's Club has EDI documents to support these business areas: Supply
Chain Management, Global Indirect Sourcing, Accounting, Inventory Management
and Logistics.
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Vendor selection – In practice
Other Supplier Requirements at:
• Lead-time requirements (product suppliers)
• Timely shipping
• Quality assurance through testing
• Membership at ICIX
• Industry knowledge and integrity
• Transportation logistics
• Equal opportunity practices
• Office of Regulatory Compliance (ORC)
• Security source tagging
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Supplier selection - auctions and negotiations
• Supplier selection can be performed through competitive bids, reverse auctions,
and direct negotiations
• Participation limited to qualified suppliers
• Auctions:
• Sealed-bid first-price auctions
• English auctions
• Dutch auctions
• Second-price (Vickrey)
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Contracts & supply chain profits
Many shortcomings in supply chain performance occur because the buyer and
supplier are separate organisations and each tries to optimise its own profit
Total supply chain profits might therefore be lower than if the supply chain
coordinated actions to have a common objective of maximising total supply chain
profits
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Contracts and supply chain performance
• Contracts for product availability and supply chain profits
• Buyback contracts
• Revenue-sharing contracts
• Quantity flexibility contracts
• Contracts to coordinate supply chain costs
• Contracts to increase agent effort
• Contracts to induce performance improvement
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Contracts for product availability & supply chain profits
• An approach to dealing with this problem has been to design contract types;
buyback, revenue sharing, and quantity flexibility, that encourages a buyer to
purchase more and increase the level of product availability
• The supplier must share in some of the buyer’s demand uncertainty, however
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Contracts to coordinate supply chain costs
• Differences in costs at the buyer and supplier can lead to decisions that
increase total supply chain costs
• Example: Replenishment order size placed by the buyer. The buyer’s EOQ does
not take into account the supplier’s costs.
• A quantity discount contract may encourage the buyer to purchase a larger
quantity (which would be lower costs for the supplier), which would result in
lower total supply chain costs
• Quantity discounts lead to information distortion because of order batching
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• There are many instances in a supply chain where an agent acts on the behalf
of a principal and the agent’s actions affect the reward for the principal
• Example: A car dealer who sells the cars of a manufacturer, as well as those of
other manufacturers
• Examples of contracts to increase agent effort include two-part tariffs and
threshold contracts
• Threshold contracts increase information distortion, however
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Contracts to induce performance improvement
• A buyer may want performance improvement from a supplier who otherwise
would have little incentive to do so
• A shared savings contract provides the supplier with a fraction of the savings
that result from the performance improvement
• Particularly effective where the benefit from improvement accrues primarily to
the buyer, but where the effort for the improvement comes primarily from the
supplier
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Design collaboration
• 50-70 percent of spending at a manufacturer is through procurement
• 80 percent of the cost of a purchased part is fixed in the design phase
• Design collaboration with suppliers can result in reduced cost, improved
quality, and decreased time to market
• Important to employ design for logistics, design for manufacturability
• Manufacturers must become effective design coordinators throughout the
supply chain
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Procurement process
• The process in which the supplier sends product in response to orders placed by
the buyer
• Goal is to enable orders to be placed and delivered on schedule at the lowest
possible overall cost
• Two main categories of purchased goods:
• Direct materials: components used to make finished goods
• Indirect materials: goods used to support the operations of a company
• Focus for direct materials should be on improving coordination and visibility
with supplier
• Focus for indirect materials should be on decreasing the transaction cost for
each order
• Procurement for both should consolidate orders where possible to take
advantage of economies of scale and quantity discounts
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Sourcing planning and analysis
• A company should periodically analyse its procurement spending and supplier
performance
• Procurement spending should be analysed by part and supplier to ensure
appropriate economies of scale
• Supplier performance analysis should be used to build a portfolio of suppliers
with complementary strengths
• Cheaper but lower performing suppliers should be used to supply base
demand
• Higher performing but more expensive suppliers should be used to buffer
against variation in demand and supply from the other source
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Making sourcing decisions in practice
• Use multifunction teams
• Ensure appropriate coordination across regions and business units
• Always evaluate total cost not just lowest bidder
• Build long-term relationships with key suppliers
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