IE 8580 Module 2: Transportation in the Supply Chain

Transcription

1 IE 8580 Module 2: Transportation in the Supply Chain Lecture 2.5: Supplier Sourcing Decisions Adapted from: Chopra, Meindl, Supply Chain Management (Chapter 14)

2 The Role of Sourcing in a Supply Chain 2 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 Decision to outsource is based on the growth of supply chain surplus provided by the third party

3 Benefits of Effective Sourcing Decisions 3 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 Good procurement processes can facilitate coordination with suppliers Appropriate supplier contracts can allow for risk sharing Firms can achieve a lower purchase price by increasing competition through the use of auctions

4 Third- and Fourth-Party Logistics Providers 4 Third-party logistics or 3PL provider Focused on a specific function Table 14-2: Services Provided by 3PLs Service category (transportation, warehousing, IT, etc.) Basic service provided Specific value-added services Fourth-party logistics or 4PL provider An integrator that assembles the resources, capabilities and technology of its own organization and others to design, build and run comprehensive supply chain solutions

5 Supplier Scoring and Assessment 5 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

6 Supplier Assessment Factors 6 Replenishment Lead Time On-Time Performance Supply Flexibility Delivery Frequency / Minimum Lot Size Supply Quality Inbound Transportation Cost Pricing Terms Information Coordination Capability Design Collaboration Capability Exchange Rates, Taxes, Duties Supplier Viability

7 Example 14-1: Total Cost of Suppliers 7 Green Thumb manufactures lawn mowers, snowblowers Purchases 1,000 bearings ($1 each) per week from local supplier Another source is willing to supply at $0.97 per bearing Local supplier Average lead time = 2 weeks (std dev = 1 week) Lot size deliveries of 2,000 New source Average lead time = 6 weeks (std dev = 4 weeks) Minimum batch size of 8,000 Holding cost of 25% Customer Service Level of 95% Average weekly demand of 1,000 (and Std Dev = 300) Based on these costs, which supplier should be chosen?

8 Example 14-1: Total Cost of Suppliers 8 Local Supplier Annual material cost = 1,000 x 52 x 1 = $52,000 Average cycle inventory = 2,000 / 2 = 1,000 Annual cost of holding cycle inventory = 1,000 x 1 x 0.25 = $250 Std dev of demand during LT = % % (1 % ) = 1, Safety inventory required = NORMSINV(0.95) x 1, = 1,787 Annual cost of holding safety inventory = 1,787 x 1 x 0.25 = $447 Total annual cost = $52,000 + $250 + $447 = $52,697 New Source Annual material cost = 1,000 x 52 x 0.97 = $50,440 Average cycle inventory = 8,000 / 2 = 4,000 Annual cost of holding cycle inventory = 4,000 x 0.97 x 0.25 = $970 Std dev of demand during LT = % % (4 % ) = 4, Safety inventory required = NORMSINV(0.95) x 4, = 6,690 Annual cost of holding safety inventory = 6,690 x 0.97 x 0.25 = $1,622 Total annual cost = $50,440 + $970 + $1,622 = $53,032

9 Design Collaboration 9 ~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

10 The Procurement Process 10 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 firm Differences between direct and indirect materials listed in Table 14-7 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

11 Product Categorization by Value and Criticality 11 High Criticality Low Critical Items General Items Strategic Items Bulk Purchase Items Low Value/Cost (Figure 14-2) High

12 Sourcing Planning and Analysis 12 Procurement spending should be analyzed by part and supplier for 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

13 The Role of IT in Sourcing 13 Sourcing Software Design collaboration Supplier selection, contracts, and evaluation Negotiate Buy Supply collaboration Design collaboration firms Agile, Matrix One Procurement firm Ariba ERP firms SAP, Oracle

14 Risk Management in Sourcing 14 Supply disruption Increased procurement costs Intellectual property

15 Making Sourcing Decisions in Practice 15 Use multifunctional teams Ensure appropriate coordination across regions and business units Always evaluate the total cost of ownership Build long-term relationships with key suppliers

16 Supplier Selection: Auctions and Negotiations 16 Supplier selection can be performed through competitive bids, reverse auctions, and direct negotiations Supplier evaluation is based on total cost of using a supplier Auctions: Sealed-bid first-price auctions English auctions Dutch auctions Second-price (Vickery) auctions

17 Contracts and Supply Chain Performance 17 Contracts for Product Availability and Supply Chain Profits Buyback Contracts Revenue-Sharing Contracts Quantity Flexibility Contracts Contracts to Coordinate Supply Chain Costs Contracts to Induce Performance Improvement

18 Contracts for Product Availability and Supply Chain Profits 18 Many shortcomings in supply chain performance occur because the buyer and supplier are separate organizations and each tries to optimize its own profit Total supply chain profits might therefore be lower than if the supply chain coordinated actions to have a common objective of maximizing total supply chain profits How to address this? Design a contract that encourages a buyer to purchase more and increase the level of product availability Supplier must share in some of the buyer s demand uncertainty, however

19 Buyback Contracts 19 Allows a retailer to return unsold inventory up to a specified amount at an agreed upon price Increases the optimal order quantity for the retailer, resulting in higher product availability and higher profits for both the retailer and the supplier Most effective for products with low variable cost, such as music, software, books, magazines, and newspapers Downside - Buyback contracts result in surplus inventory Disposal of unused inventory increases supply chain costs Can also increase information distortion in the supply chain Supply chain reacts to retail orders, not actual customer demand

20 Revenue-Sharing Contracts 20 Buyer pays a minimal amount for each unit purchased from the supplier but shares a fraction of the revenue for each unit sold Decreases the cost per unit charged to the retailer, which effectively decreases the cost of overstocking Can result in supply chain information distortion, however, just as in the case of buyback contracts

21 Quantity Flexibility Contracts 21 Allows the buyer to modify the order (within limits) as demand visibility increases closer to the point of sale Better matching of supply and demand Increased overall supply chain profits if the supplier has flexible capacity Lower levels of information distortion than either buyback contracts or revenue sharing contracts

22 Contracts to Coordinate Supply Chain Costs 22 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

23 Contracts to Induce Performance Improvement 23 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