Key Concepts

Key Concepts
Purchasing, Supply Management, and Supply Chain

Management Defined
Increasing Importance of Purchased Materials.
Supply Managements Impact on the Bottom Line

Increased Sales
aster to Mar!et or "ime#Based Competition
Supply Management and $eturn on In%estment
"he Progression to Proacti%e Supply Management

1-1
Si& Key Business unctions
'Supply Managements $ole in Business(
). Creation, the idea or design function, fre*uently +ased on
research and de%elopment
,. inance, the capital ac*uisition, financial planning and control
function
-. Personnel, the human resources and la+or relations function
.. Supply, the ac*uisition of re*uired materials, ser%ices, and
e*uipment
/. Con%ersion, the transformation of materials into economic
goods and ser%ices
0. Distri+ution, the mar!eting and selling of goods and ser%ices
produced
1-2
1%olution of Purchasing unction
Purchasing2 a Dynamic Profession
"ransition to Supply Management
3ider in Scope
4alue#5dding Benefits
Strategic ocus
4alue65dding Benefits
Strategic ocus
1-3
Supply Management
5 i%e Stage Process

Identification of item or ser%ice re*uired
Identification of +est supplier

1sta+lishment of a fair and reasona+le price
Creation of an enforcea+le agreement
Management of the relationship
Supply Management utili7es Strategic Sourcing

1-4
Strategic Sourcing
Strategic sourcing is understanding the mar!ets

you8re purchasing from inside and out9
9and learning from your o:n organi7ation and your

suppliers8 organi7ational processes,9
9:or!ing as a mediator +et:een suppliers and your

organi7ation,9
9and capturing information and using it to impro%e

relationships.
Strategic sourcing re*uires t:o#:ay continuous

impro%ement process :or! from each organi7ation
1-5
our Principles of Strategic Sourcing
). Define the total %alue of the relationship +et:een
purchaser and suppler,
,. De%elop solutions +ased on a deep understanding
of the supplier8s economics and +usiness dynamics,
-. ;se differentiated purchasing tactics in order to
optimi7e the economic relationship for +oth
purchaser and suppliers, and
.. Im+ed the re*uired changes in the organi7ation so
the purchaser achie%es not only a near#term
measura+le performance impro%ement +ut also the
a+ility to continuously impro%e
1-6
Increasing Importance of Purchased
Materials
"he i%e Ms of Business2 Machines, Manpo:er,

Material, Money, Management
Materials costs ha%e increased

5s a percentage of the cost of goods sold
La+or costs ha%e decreased
Machine po:er has replaced much of human 'and horse(

la+or o%er the last )/< years
"he result=
Materials costs are increasingly the focus of management

1-7
Supply Management and the Bottom Line
Purchased items account for a large

percentage of the cost of goods sold.
>utsourcing allo:s firms to focus on

their core competencies.
>rgani7ations outsource :hen they decide

to purchase something they had +een
ma!ing in#house.
5 dollar sa%ed in materials cost has a

larger impact than a dollar increase in
profit
1-8
Supply Managements Impact on ?et
Income and the Bottom Line
Increased Sales2
aster to Mar!et
Impro%ed @uality
Pricing le&i+ility
Inno%ation
1nhanced Customer Satisfaction
Supplier of Choice
Customer ulfillment le&i+ility
Shorter Cycle and Lead "imes
Lo:er "otal Cost2
5c*uisition Cost
Processing Cost
@uality Cost
Do:ntime Cost
$is! Cost
Cycle "ime Cost
Con%ersion Cost
?on#%alue 5dded Cost
Supply Chain Cost
Post >:nership Cost
igure )#,
1-9
Return on
Investments
10.0%
Total assets
$4,000,000
Sales
$5,000,000
Divided by
Profit
margin
8%
sset turnover
rate
1.!5
Multiply
"as#
$$00,000
%%ount
re%eiva&le
$$00,000
Inventories
$500,000
s
s
e
t
s
'a&or
$(00,000
)aterials
$!,$00,000
*ver#ea+
$800,000
*
,
e
r
a
t
i
n
g

%
o
s
t

e
l
e
m
e
n
t
s
-$515,000.
-$$,/85,000. -$!,185,000.
-10.$%.
-1.!/.
-$$,0(5,000.
-$1,0(5,000.
-$4(5,000.
-1$.0%.
1#at if 2e
+e%rease
materials %ost
&3 5%4
-or $115,000.
Sales
$5,000,000
5et in%ome
$400,000
Divided by
6i7e+ assets
$!,000,000
"urrent assets
$1,100,000
Plus
*t#er %osts
$800,000
Sales
$5,000,000
"ost of
8oo+s Sol+
$$,800,000
Minu
s
Plus
Supply Management and $eturn on
In%estment
igure )#-
1-10

"he Impact on $>I of $educing Materials
Costs %s. Increasing Sales
If the same profit increase :ere to +e

generated +y increasing sales, :hat
sales increase :ould +e re*uired=
5t the e&isting AB profit margin, the

follo:ing calculation pro%ides the
ans:er9
Profit increase C ne: sales D .<A
E))/,<<< C ne: sales D .<A
ne: sales C E),.-F,/<<

1-11

"he Impact on $>I of $educing Materials
Costs %s. Increasing Sales
therefore9..
'E),.-F,/<< G E/,<<<,<<<( D )<< C

,A.AB
or a sales increase of ,A.AB is re*uired

to match the profit increase generated
+y a /B reduction in materials cost
1-12
5 Definition of Supply Chain
Management
Supply Chain Management is a set of approaches utili7ed

to efficiently integrate suppliers, manufacturers,
:arehouses, and stores,9
9so that merchandise is produced and distri+uted at the

right *uantities, to the right locations, and at the right time,
at the right price, at the right *uality
9in order to minimi7e system :ide costs
9:hile satisfying ser%ice le%el re*uirements.

1-13
Source2 Simchi#Le%i, Kamins!y, and Simchi#Le%i, Designing
and Managing the Supply Chain, Ir:in, McHra:#Iill, ,<<<.
"he Supply Chain
)ot#er
9art#
*riginal
9:ui,ment
)anufa%turers
-*9).
97tra%tors
)iners
;arvesters
"onverters
-su,,liers.
igure )#.
Materials and Service
Information/Funds/Relationships
1-14
"he 4alue Chain
)ot#er
9art#
*riginal
9:ui,ment
)anufa%turers
-*9).
97tra%tors
)iners
;arvesters
"onverters
-su,,liers.
)ar<eters
=istri&utor
s
9n+ "ustomer
-t#e sour%e
of fun+s.
igure )#/
Materials and Service
Information/Funds/Relationships
1-15
"he Supply and 4alue ?et:or!s
le&i+le %irtual systems lin!ed +y

communication systems and alliances.
Simultaneous acti%ities.
ocus is on the ultimate customer to deli%er2
4alue creation through inno%ation
4alue deli%ery through order fulfillment
4alue maintenance through after sales ser%ice

1-16
Implementing Strategic SCM
Strategic Supply Management Institute and The Warren Company
Copyright 2006
12
Pro-Active To Customer Responsive to Customer Reactive to Customer Isolated from Customer
Time Focus
Performance
Metrics
Speed & Integration,
Design Supply Base
Integrated Supply Strategy
Process Innovation,
Develop Reuirements,
!ear Defect "ree Supply
Suee#e t$e %endor
Internet Auctions !ot$ing
Basis of
Competitive
Advantage
Performance
Metrics
Timeliness & &fficiency
'o( Component)*nit Cost,
+n Time Delivery
Speed, &ffectiveness, ,onitor
Supply &nvironment
Coordination & Sync$ronicity
Interconnectedness
Relations$ips & Trust
Coordination & Cost, Develop
Suppliers
T$roug$-Put
-lo.al Impact
'everage Si#e of Buyer
Po(er Dynamics Bet(een Buyer
& Seller Do t$e /o.
,oderate Integration Internal &
&0ternal Integration1 Supply ,
R&D, 'ogistics, +perations,
&ngineering, ,ar2eting,
Customer Service
Partial Internal Integration
Procurement, 'ogistics,
+perations, &ngineering 'o( Internal Integration
Procurement & 'ogistics
!o Internal Integration
Purc$asing
Integration Level &
Functional Elements
Revenue & Bottom 'ine Impacts
Increase S$are 3older %alue
Transform Innovation into %alue Improve Bottom 'ine
Some Consideration of Revenue
Impacts
Improve Bottom 'ine
!o Consideration of Revenue
Impacts +ver$ead-Cost Center
Financial Impact
Innovation
Top & Bottom 'ine
Internal Integration
4uality,
/ust In Time
Total Cost of +(ners$ip
Purc$ase Price
Timely Availa.ility,
Convenience
Value Driver
! "trategic
"uppl# C$ain Mgmt
%! Proactive
"uppl# Management
&! Transactional
Mec$anical
'! (eactive
Clerical
Burt Burt- -Lynch Supply Chain Evolution Model Lynch Supply Chain Evolution Model
)!* +orld Class !* !) %!* %!) &!* &!) '!* '!) (ating
Transactional & Colla.orative Transactional, Colla.orative, &
Alliance
Adversarial & Transactional
Personal
"upplier
(elations$ips
e-Commerce
5S$ould Cost6 Analysis
T$omas Directory,
P$one Boo2
Rolode0
*nderstand Industries, Supply
Base
*nderstand Suppliers ,no-ledge
VA(IABLE
Building to +orld Class
Note: Some Elements of an Earlier Stage are Carried as a Foundation into the next stage, while other elements may be discarded
Copyright D.N.Burt & R.P.Lynch
Pro-Active as ,ar2et
Differentiator for Customer Considered As Part of TC+ Added Cost "actor !ot Considered
Environmental
1-17
Concluding $emar!s
Purchasing is the foundation of Supply

Management and a +asic acti%ity common to all
organi7ations.
1ffecti%e Supply Management has an

o%er:helming impact on the firms +ottom line
gi%ing organi7ations a competiti%e edge.
Supply Management has +ecome the C1>s

strategic :eapon
Supply Management pro%ides tremendous

career opportunities
1-18
actors affecting organi7ational structure
Classification of responsi+ilities and acti%ities
Management
BuyingGSupply Management
Contract and $elationship Management
Strategic Planning and $esearch 3or!
ollo:#up and 1&pediting
Clerical 5cti%ities
actors affecting organi7ational structure
Operational ctivities Strate!ic ctivities
"lacin! "urchase Orders Supplier #evelopment
Responsi$ilities
Mana!in! Contracts/Blan%et
Order Releases
Coordinatin! the
"rocurement System
E&peditin! In$ound Orders #evelopin! Lon!-'erm
Contracts
Continuity of Supply to
"roduction Lines
#evelopin! and Inte!ratin!
Supply Strate!y
Mana!in! Supplier
Relationships
Mana!in! Ris%s in Supply
Chain
'ransactionally Focused
ctivities
Strate!ically Focused
ctivities
>rgani7ational 5uthority
Centrali7ed 5uthority J decision ma!ing
responsi+ility in hands of one indi%idual or
one location.
Decentrali7ation of Purchasing 5uthority#
decision ma!ing responsi+ility delegated
to cross functional areas or di%isions.
Benefits of Centrali7ed 5uthority
$eduction of duplication of effort
Le%eraging of %olume purchases
Consolidation of re*uirements
"ransportation sa%ings
Indi%idual speciali7ation
$eduction of suppliers costs
Impro%ed in%entory control
Lo:er administration costs
Centrali7ed control
$eduction in costs of ser%ices
Benefits of Decentrali7ation
Specialty +uyers can e%ol%e
aster response time for multiple locations
Better understanding of locations
re*uirements.
More efficient +uying of lo: dollar, odd
+uys.
>rgani7ational Structures
"he Supply Chain Management Structure
Denia
>rgani7ing :ith Cross#unctional "eams
$e%ie: of 5ppendi&
Concluding $emar!s
5ppropriate organi7ational structure is
critical to effecti%e supply chain
management.
Key Concepts
5 "ransformation in $elationships
"ypes of Buyer#Supplier $elationships
"ransactional $elationships
Colla+orati%e and 5lliance $elationships
Colla+orati%e $elationships
Supply 5lliances
"he Supplier8s Perspecti%e
De%eloping and Managing Colla+orati%e and
5lliance $elationships
4-26
Key Concepts
Situations 3herein 5lliances may not +e

5ppropriate
5 Portfolio 5pproach
?e: S!ills and 5ttitudes $e*uired
1#Commerce and the K$ightL "ype of

$elationship
$elationships of the uture

4-27
5 "ransformation in $elationships
"he transformation from reacti%e and mechanical

purchasing to proacti%e procurement and on to strategic
Supply Chain Management parallels a similar
transformation in relationships +et:een +uyers and
suppliers
Prior to the )MA<s most purchasing relationships :ere

reacti%e
Interaction +et:een %endor and purchasing resulted in

outcomes :here ones gain :ould +e the others loss
4-28
"hree "ypes of Buyer Supplier
$elationships
"ransactional
Colla+orati%e
5lliance
4-29
Continuum of Bu#er."eller (elations$ips
Continuum of Buyer#Seller $elationships
igure .#)
Communication
Competitive Adv.
Connectedness
Continuous Impr.
Contributions to NPD
Difficulty of Exit
Duration
Expediting
ocus
!evel of Integration
High pot. for problems Systematic approach
Low High
Independence Interdependence
Little A focus
Few Many ESI
Low ifficult high impact
Short Long
!eacti"e #roacti"e
#rice $otal cost
Little or none High or total
ctivity/ttri$ute 'ransactional Colla$orative lliance
4-30
Continuum of Bu#er."eller (elations$ips
Continuum of Buyer#Seller $elationships
Number of "uppliers
#pen $oo%s
&uality
'elations
'esources
"ervice
"(ared orecasts
"upply Disruptions
)ec(nology Inflo*s
)ype of Interaction
Many %ne or few
&o 'es
Incoming inspection esign (uality in system
Inward loo)ing *oncern w+well being
Few low s)ill le"el #rofessional
Minimal ,reatly impro"ed
&o 'es
#ossible -nli)ely
&o 'es
$actical Strategic synergy
ctivity/ttri$ute 'ransactional Colla$orative lliance
igure /#) Continued
4-31
"ransactional $elationships
Characteristics
5n a+sence of concern
>ne of a series of independent deals
Costs, data and forecasts are not shared
Price is the focus of the relationship
5 minimum of purchasing time and energy is

re*uired to esta+lish prices
"ransactional purchases lend themsel%es to e#

procurement
4-32
5d%antages of "ransactional
$elationships
$elati%ely less purchasing time and effort

are re*uired to esta+lish price
Lo:er s!ill le%els of procurement

personnel are re*uired
4-33
Disad%antages of "ransactional
$elationships
Potential for communication difficulties
1&pediting and monitoring of incoming *uality
Infle&i+le :hen fle&i+ility may +e re*uired
"end to result in more deli%ery pro+lems
@uality :ill +e only as good as re*uired
Suppliers pro%ide the minimum ser%ice re*uired
Less effecti%e performance +y suppliers
Customers are su+Nect to more supply disruptions
Supplier is not moti%ated to in%est time and energy de%elopment
of +uyers products
4-34
Colla+orati%e and 5lliance $elationships
KF0B of C1>s thin! e&ternal colla+oration

:ith +usiness partners and customers is
!ey to inno%ationL
Colla+orati%e and alliance relationships

tend to result in lo:er total costs and
impro%e performance of the supply chain
4-35
"hree Success actors
$esearchers Stanley and Pearson found

that the three most important factors in a
successful +uyer#supplier relationship are2
')( t:o#:ay communication,
',( the supplier8s responsi%eness to supply

management8s needs, and
'-( clear product specifications

4-36
Colla+orati%e $elationships
Colla+orati%e relationships tend to foster9.

Longer term contracts
$eduction of ris! for suppliers
$educing total costs
Impro%ement of processes
Impro%ement of products
Increased in%estment in $ O D
Increased in%estment in training
Increased in%estment in e*uipment
Better focus on customer needs
4-37
Benefits of Supply 5lliances
Lo:er total costs.
$educed time to mar!et
Impro%ed *uality
Impro%ed technology flo: from suppliers
Impro%ed continuity of supply

4-38
5lliance 5ttri+utes
Continuous impro%ement
Interdependence and commitment.
5tmosphere of cooperation
Informal interpersonal connections
Internal infrastructures to enhance learning
>penness in all areas of the relationship
5 li%ing system
4-39
5lliance 5ttri+utes Continued
5 shared %ision of the future
1thics ta!e precedence o%er e&pediency
5dapta+le in the face of change
Design of e&periments and supplier certification
3in#3in negotiations
1&ecuti%e le%el commitment
5%oid terms that could pro%e destructi%e

4-40
Strategic 1lements of a $elationship
Is one supplier head and shoulders a+o%e the rest in

terms of the %alue it pro%idesP including price, inno%ation,
a+ility to adapt to changing situations, capacity to :or!
:ith your team, tas! Noint ris!s, etc=
5re some suppliers KstrategicL to your +usiness=
3ould your company +enefit greatly if the supplier :ere

more Kintegrally connectedL :ith your company=
Do your customers re*uire high degrees of fle&i+ility and

speed of responsi%eness=
4-41
"he Suppliers Perspecti%e
Suppliers :ant good customers
Se%eral issues affect their assessment,

among them are2
Cash lo:
>penness and 5pproacha+ility
5%aila+ility
Professionalism
4-42
@uestions to +e 5ddressed Before
Proceeding
Is there a danger that the supplier may act in an opportunistic

manner o%er time=
Do electronic systems allo: for optimum communication and

sharing of information=
Is the potential strategic alliance a+le to stay current in the
industry=
5re +oth the organi7ations :illing to !eep attention focused on
the Noint customer=
5re there other suppliers :orth in%estigating +efore committing

to a strategic alliance=
Ias the supply manager +een thoroughly trained=

4-43
@uestions to +e 5ddressed Before
Proceeding
Is the organi7ation proud to +e aligned and associated :ith the

supplier=
Is the organi7ation comforta+le :ith the le%el of ris! associated

:ith reducing the supply +ase=
5re +oth supplier and +uyer aligned in :hat their ultimate
customer considers to +e %alua+le=
If there is su+stantial ris! for the supplier to de%elop ne:
technologies, products, processes, or ser%ice support=
5re +oth supplier and +uyer aligned in their respecti%e %isions=
5re there sufficient operational points of interaction=

4-44
5ppropriate
Sta+ility
Price 4olatility
Demand 4olatility
Iigh S:itching Li!elihood :ith Iigh S:itching Costs
Capa+ility
?o PartnershipG5lliance#Capa+le Supplier for the Item
?o PartnershipG5lliance#Capa+le Supplier in the Heographic 5rea
$apid "echnological Change
Mismatch of Cloc! Speed
4-45
5ppropriate
Competition
?on#Competiti%e Mar!et
Supplier Dependency Creation

?eglected 5reas
Suppliers See!ing to $educe Competition
Benefits
?o le%erage from Partnership
?o Iard Sa%ings from Partnership
Internal Buy#In
?o Internal Customer Buy#In

4-46
"he Portfolio 5pproach
Successful supply chain management re*uires

the effecti%e and efficient management of a
portfolio of relationships
"hree en%ironmental factors to consider2
')( the product e&changed and its technology,
',( the competiti%e conditions in the upstream mar!et,

and
'-( the capa+ilities of the suppliers a%aila+le

4-47
?e: S!ills and 5ttitudes $e*uired
De%eloping and managing colla+orati%e and

alliance relationships re*uire supply
professionals that possess the follo:ing s!ills
and attitudes2
$ecogni7e the +enefits of colla+oration
5+ility to identify, o+tain and use data
5+le to :or! in chaos and uncertainty
5gile, fle&i+le, and highly adapti%e

4-48
1#Commerce and the K$ightL "ype of
$elationship
QIo: does B,B eCommerce affect our

selection of the 8right8 type of relationship=K
Selection must +e a function of the

re*uirement, not of the InternetR
B,B eCommerce is an ena+ler

4-49
Key Concepts
"he Strategic Sourcing Plan
Disco%ering Potential Suppliers
1%aluating Potential Suppliers
Selecting Suppliers
Bidding 4ersus ?egotiation
$e%erse 5uctions
":o#Step BiddingG?egotiation
"he Solicitation
3eighted#actor 5nalysis
$esponsi+ility for Source Selection
De%eloping Suppliers
Managing Suppliers
Key Concepts
5dditional Strategic Issues
1arly Supplier In%ol%ement

Supply Base $eduction
Single 4ersus Multiple Sourcing
Share of Suppliers Capacity
Local, ?ational and International Sourcing
Manufacturer or Distri+utor
KHreenL Supply Management
Minority# 5nd 3omen#>:ned Business 1nterprises
1thical Considerations
$eciprocity
"he Strategic Sourcing Plan
3orld class Supply Management re*uires

supply management to de%elop a strategic
sourcing plan that details ho: supply
management :ill disco%er, e%aluate,
select, de%elop and manage a %ia+le
supplier +ase
Strategic Sourcing Plan Stages
igure ))#)
Disco%ery
Supplier 3e+ Sites
Supplier Information
iles
Supplier Catalogs
"rade $egisters O
Directories
"rade Sournals
Phone Directories
iling of Mailing Pieces
Sales Personnel
"rade Sho:s
Company Personnel
>ther Supply
Management
Departments
Professional
>rgani7ations
1%aluating Potential Suppliers
Supplier Sur%eys
inancial Condition 5nalysis
"hird Party 1%aluators
1%aluation Conference
acility 4isits
@uality Capa+ility 5nalysis
Capacity Capa+ility 5nalysis
Management Capa+ility 5nalysis
Ser%ice Capa+ility 5nalysis
le&i+ility Capa+ility 5nalysis
Information "echnology Capa+ility 5nalysis
Selecting Suppliers
Bidding 4ersus ?egotiation
$e%erse 5uctions
"he Solicitation
3eighted#actor 5nalysis
$esponsi+ility for Source Selection

Bidding %ersus ?egotiation
e: topics generate more passionate

discussions than +idding %ersus
negotiation
"he selection of +idding or negotiation

should +e decided +y using o+Necti%e
criteria, a total cost perspecti%e and sound
supply management logic
Prere*uisites to Bidding
Dollar %alue must +e large
Specifications must +e clear
Mar!et must consist of an ade*uate num+er of

sellers
Sellers must +e *ualified and :ant the

contract
"ime a%aila+le must +e sufficient

Conditions Demanding ?egotiation
Impossi+le to estimate costs :ith a high

degree of certainty
Price is not the only important %aria+le
Purchasing firm anticipates a need to ma!e

changes in the specification
Special tooling of setup costs are maNor

factors
$e%erse 5uctions
In contrast to competiti%e +idding, re%erse auctions
produce Kreal#timeL interaction.
"hough effecti%e for achie%ing cost sa%ings, re%erse
auctions are not appropriate for all situations.
$e%erse +id process can ha%e an ad%erse affect on
long#term relationships.
;sed in situations :here inade*uate

specifications preclude the initial use of
traditional competiti%e +idding
"he t:o steps are2
Step )2 "echnical Proposals

IBs for Step , are sent only to those sellers :ho su+mitted
accepta+le technical proposals
Step ,2 Price Bidding

"he Solicitation
IB
$P
Item description
Info on *uantities
Deli%ery schedules
Special terms and conditions
Standard terms and conditions

3eighted actor 5nalysis
Steps to de%eloping
De%elop factors to ser%e as criteria
De%elop su+#factors or performance factors
De%elop a scoring factor
Score or e%aluate the supplier

De%eloping Suppliers
De%elopment of suppliers is one of the greatest

untapped frontiers in supply chain management
1%en suppliers recogni7ed as the K+est of the +estL

re*uire in%estment on the part of the +uying firm to
reali7e the full +enefit of the colla+orati%e relationship
"his important topic is addressed in detail in the

chapter on Supplier De%elopment
Managing Suppliers
Managers must ensure the suppliers perform as re*uired.
Suppliers must meet the firms long#term needs.
If suppliers are unli!ely to meet future re*uirements the

firm may2
5ssist :ith financing G technological assistance.
De%elop ne: sources.
Be re*uired to de%elop the capa+ility internally.
5dditional Strategic Issues

Single 4ersus Multiple Sourcing

Local, ?ational and International Sourcing
Minority# 5nd 3omen#>:ned Business 1nterprises

$eciprocity
1arly supplier in%ol%ement '1SI( is an

approach in supply management to +ring
the e&pertise and colla+orati%e synergy of
suppliers into the design process
1SI see!s to find K:in#:inL opportunities
"oday, early supplier in%ol%ement '1SI( is

an accepted :ay of life at many proacti%e
firms and a re*uirement for 3CSM
1SI >pportunities
Materials
Ser%ices
"echnology
Specifications and
"olerances
Standards
>rder @uantities
Lead "ime
Processes
Pac!aging
"ransportation
$edesigns
5ssem+ly Changes
Design Cycle "ime
In%entory $eductions
$easons for ;tili7ing 1SI
Het supplier inputs +efore the design is

fro7en
Capitali7e on the latest technology
Sa%e time since design cycles are getting

shorter
Let the supplier !no: that it is part of the

team
Supply +ase reduction is achie%ed through +oth reducing

%ariety and increasing consolidation
":o +enefits of supply +ase reduction cited +y Sohn Deere

are2
increased le%erage :ith suppliers
+etter focus and supplier integration in product de%elopment
Increased le%erage is also due to the increased in%ol%ement

:ith the suppliers :hich +uilds good:ill and trust
Considerations for Single Sourcing
Lo:er total cost results from higher %olume
@uality considerations dictate
Buyer o+tains more influence :ith the supplier
Lo:er costs to source, process, e&pedite, inspect
Sust#in#time re*uirements
Significantly lo:er freight costs may result
Special tooling is re*uired
"otal system in%entory :ill +e reduced
Supplier :ill ha%e an impro%ed commitment
Impro%ed interdependency and ris! sharing result
"ime to mar!et is critical
Dual Sourcing ;sing the KF<#-<L
5pproach
F< percent of the %olume is a:arded to one

supplier
-< percent to a second supplier
1conomies of scale are o+tained from the

K+ig supplierL
"he Klittle supplierL pro%ides competition
3hen the K+ig supplierL fails to perform the

percentages may +e re%ersed +y the +uyer
Considerations for Multiple Sourcing
Protect the +uyer during +ad times
Maintain competition
Pro%ide a +ac!#up source
Meet local content re*uirements
Meet customers %olume re*uirements
3hen the customer is a small player in the mar!et for a

specific item
5%oid complacency on the part of a supplier
3hen the technology path is uncertain
Suppliers tend to KleapfrogL in technology

Many firms try to not e&ceed more than )/ to ,/

percent of any one suppliers capacity
"his issue +ecame all too real in the early

,<<<s
Many companies cancelled orders that had long

supplier lead times, :hich resulted in suppliers
+eing caught :ith, in some cases, hundreds of
millions of dollars of :or!#in#process
Local, ?ational and International
Sourcing
"he lines +et:een local, national, and international sourcing

ha%e +ecome +lurred in the last -< years
Local source
irms head*uarters and all facilities are located in the city or region
:here the materials or ser%ices :ill +e used
?ational source
"he source is head*uartered :ithin the country and has facilities in
multiple regions throughout the country
International source
irm is head*uartered outside of the +uying firms country, +ut this
does not define the location of operations
Local Buying 5d%antages
Closer cooperation +et:een +uyer and seller is possi+le
Deli%ery dates are more certain
Lo:er prices can result from consolidated transportation

and insurance
Shorter lead times reduce in%entory
$ush orders are filled faster
Disputes are usually more easily resol%ed
Implied social responsi+ilities to the community are

fulfilled
?ational Buying 5d%antages
1conomies of scale
Superior technical assistance
Better handling of fluctuating demand
Shortages are less li!ely

Potential Benefits of a Distri+utor o%er

Buying Direct from the Manufacturer
1conomy of scale
$eduction of orders
$eduction of paper:or!
Special ser%ices
"echnical ad%ice
Credit
$ecycled materials
1n%ironmental issues
Lia+ility issues
Minority# 5nd 3omen#>:ned Business
1nterprises
Many forces moti%ate a +uying firm to ensure that M3B1

+usinesses recei%e a share of the firms +usiness, such as2
ederal and state legislation
Set#aside *uotas in go%ernment appropriations
5ctions of regulatory +odies
irms Kcorporate social consciousnessL
Customer +ase includes M3B1 +usinesses and their employees
Bottom#line profita+ility
Hood +usiness sense
Conflicts of interest
1&ists :hen supply managers must di%ide

their loyalty +et:een the firm :hich employs
them and another firm
Such conflicts al:ays should +e a%oided in all

source selection decisions
Concluding $emar!s
"he increase in long#term colla+orati%e

relationships is highlighting the need to de%elop
strategic sourcing plans
"he plan aids in source selection +y detailing ho:

suppliers :ill +e disco%ered, e%aluated, selected,
de%eloped and managed
"he plan should +e de%eloped in a colla+orati%e

en%ironment that includes all rele%ant functional
area representati%es and supply chain mem+ers
gen+a
Intro+u%tion to 8lo&al Sour%ing
)inimi>ing Ris< t#roug# t#e Strategi% Sour%ing Pro%ess
1. nal3>e S,en+
!. Profile "ategor3
$. =evelo, Strateg3
4. =evelo, eR6? or )anage =eman+
5. "ontra%t 2it# Su,,liers
/. )anage Su,,liers
(. Im,rove Su,,liers
"ase Stu+ies
"on%lusions
?@
Hlo+al Strategic Sourcing Process
Asing t#is ,ro%ess 2ill minimi>e ris<
#rofile
*ategory
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Manage
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Supplier1s2
Manage
Suppliers
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Strategy
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Spend
Impro"e
Supplier1s2
Profile
Category
Develop
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!a"age
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+"aly,e
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=is%over3
9valuation Sele%tion
=evelo,ment @
)anage
5naly7e Spend
#rofile
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&egotiate
%!
Manage
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*ontract
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Supplier1s 2
Manage
Suppliers
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Strategy
Analy3e
Spend
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Supplier1s 2
Profile
Category
Develop
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Negotiate
R
!a"age
De#a"$
Co"tra%t
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!a"age
()pplier
Develop
(trategy
+"aly,e
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Spend $y
Re!ion
()*
+orth merica
,-*
South merica
.,*
sia "acific
,/*
'O'L S"E+# 011 M
0 1 ! $ 4 5 / ( 8 0
5um&er of Business Anits
Windings
Motors
Resin
IT Software
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a
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i
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"
a
t
e
g
o
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i
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+um$er of Business 2nits Buyin! 3iven Cate!ory
Anal#/e "pend B# Mont$
80% of Soft2are s,en+
goes t#roug# 1(
su,,liers
!0% of Soft2are s,en+
goes t#roug# 140
su,,liers
Month
!001
!000
$C
$500,000
$1,000,000
$1,500,000
$!,000,000
$!,500,000
$$,000,000
$$,500,000
Dan 6e& )ar ,r )a3Dun Dul ugSe,t*%t 5ov=e%
Cate!ory Spend By Month
Month
!00(
!00/
$C
$500,000
$1,000,000
$1,500,000
$!,000,000
$!,500,000
$$,000,000
$$,500,000
Dan 6e&)ar ,r )a3Dun Dul ugSe,t*%t 5ov=e%
$C
Dan 6e& )ar ,r )a3Dun Dul ugSe,t*%t 5ov=e%
Supplier +ame nnual Spend * of 'otal
"I $4,$08,0/0 !4%
SP $4,$00,(04 !4%
Be7 Soft2are In%. $1,0$5,000 /%
Soft,oint $/!1,5/5 $%
Eets $510,4$$ $%
%tual "or,. $40/,054 !%
Rational Soft2are $$(!,000 !%
*ra%le $$41,8/1 !%
"ross2orl+s $$05,(/! !%
meri%a *nline In%. $$05,!0( !%
SP $!00,(4( !%
*t#er $!/(,144 1%
S3n%#ronous In%. $!50,(0! 1%
)er%#ant $!41,$41 1%
"onne%te+ Resour%es $!1!,84! 1%
)%allister $10/,550 1%
"ontinental Resour%es $1((,5(! 1%
1itness S3stems In%. $101,$(8 1%
140 Other Suppliers $$,044,(0( !1%
3rand 'otal .45)//5))4 0 .//*
Europe
nal3>e S,en+
S,en+ s#oul+ &e anal3>e+ &3 region, su,,lier, +ivision, ,lant, %ategor3 an+ an3 ot#er
sli%ing t#at 2ill ,rovi+e a goo+ anal3sis of t#e +ata
*&servations Potential Solution Ris< t#at is
minimi>e+
Too man3 su,,liers for a small
amount of s,en+
'everage s,en+ 2it# fe2er su,,liers Su,,l3F6inan%ial
'argest ,er%entage of s,en+ in
Sout# meri%a
Regionali>e t#e &u3 Trans,ortation
S,en+ tren+ is +ifferent from t#e
,revious 3ear
Revie2 s,en+ against a%tual an+ fore%ast
sales an+ +etermine if t#e s%#e+ule %oul+
&e%ome more %onsistent
Inventor3
ll &usiness units &u3 a %ategor3
at a lo%al level
"entrali>e t#e &u3 Su,,l3
Pur%#ase at +ifferent levels of t#e
su,,l3 %#ain -ie motors an+
2in+ings.
*utsour%e t#e 2in+ings )a<e vs. Bu3
#rofile
*ategory
e"elop
e!F./
&egotiate
%!
Manage
emand
*ontract
0ith
Supplier1s 2
Manage
Suppliers
e"elop
Strategy
Analy3e
Spend
Impro"e
Supplier1s 2
Profile
Category
Develop
eRFQ /
Negotiate
R
!a"age
De#a"$
Co"tra%t
&it'
()pplier
!a"age
()pplier
Develop
(trategy
+"aly,e
(pe"$
-#prove
()pplier
Profile "ategor3
Su,,l3 )ar<et nal3sis
Ge3 glo&al su,,liers
)ar<et tren+s
Su,,lier %a,a&ilities
Regional e%onomi%s
8lo&al e%onomi%s
Pro+u%t tren+s
"om,etitive nal3sis
"ategor3 "#ara%teristi%s
S,e%ifi%ations
6un%tionalit3
Aser re:uirements
"riti%alit3 to &usiness
6uture ,ro+u%t tren+s
S,en+ nal3sis
S,en+ &3 ,artF%ategor3
S,en+ &3 region
S,en+ &3 su,,lier
S,en+ &3 &usiness unit
S,en+ &3 mont#F3ear
"ost +rivers
Internal %osts
Su,,lier %osts
9%onomi% levers
9ngineering of ,ro+u%t
Performan%e %riteria
"ategor3 Profile
"olla&oration 2it# engineering
An+erstan+ all %ost elements
)at%#ing s,e%s to %a,a&ilit3
Rig#tCsour%e &ase+ on %riti%alit3
"#e%<ing finan%ial status
Ta<ing a+vantage of glo&al

net2or< %om,le7it3
Re+u%e un%ertaint3
Pre,are for une7,e%te+

R
i
s
<
R
i
s
<
Much analysis !oes into the
cate!ory profile in order to
ta%e ris% out of the process
R
i
s
<
#rofile
*ategory
e"elop
e!F./
&egotiate
%!
Manage
emand
*ontract
0ith
Supplier1s 2
Manage
Suppliers
e"elop
Strategy
Analy3e
Spend
Impro"e
Supplier1s 2
Profile
Category
Develop
eRFQ /
Negotiate
R
!a"age
De#a"$
Co"tra%t
&it'
()pplier
!a"age
()pplier
Develop
(trategy
+"aly,e
(pe"$
-#prove
()pplier
De%elop Strategy
Routine
)an3 e7isting alternate ,ro+u%ts an+

servi%es
)an3 sour%es
'o2 value
Small in+ivi+ual transa%tions
Hn3oneI %oul+ &u3 it
Ans,e%ifie+ items for ever3+a3 use

Levera!e
;ig#Ce7,en+iture area
)an3 e7isting alternate ,ro+u%ts an+

servi%es
)an3 :ualifie+ su,,l3 sour%es
8oo+s an+ servi%es are rea+il3

availa&le
Strate!ic
Strategi% to ,rofita&ilit3 an+

o,erations
6e2 :ualifie+ su,,l3 sour%es
'arge e7,en+itures
=esign to :ualit3 %riti%al
"om,le7 s,e%ifi%ations
Bottlenec%
Eer3 %om,le7 s,e%ifi%ations re:uiring

%om,le7 manufa%turing or
servi%ing
6e2 alternate ,ro+u%ts availa&le
6e2 :ualifie+ sour%es of su,,l3
)a3 #ave a &ig im,a%t on ongoing

o,erations or maintenan%e
5e2 te%#nolog3 involve+ in ,rovision

of t#e ,ro+u%t or servi%e
B
u
s
i
n
e
s
s

I
m
p
a
c
t
Supply Market Complexity
#rofile
*ategory
e"elop
e!F./
&egotiate
%!
Manage
emand
*ontract
0ith
Supplier1s 2
Manage
Suppliers
e"elop
Strategy
Analy3e
Spend
Impro"e
Supplier1s 2
Profile
Category
Develop
eRFQ /
Negotiate
R
!a"age
De#a"$
Co"tra%t
&it'
()pplier
!a"age
()pplier
Develop
(trategy
+"aly,e
(pe"$
-#prove
()pplier
De%elop Strategy
Business
Impact
./pe"$it)re level
-#pa%t o" pro$)%t

$iffere"tiatio"
-#pa%t o" lea$er*'ip

te%'"ology
Fail)re i#pa%t
Lo6
7i!h
7i!h Lo6
Levera!e
2se competitive
advanta!e to reduce total
costs
8olume used as
ne!otiation tool
Off shore/+ear Shore

+on-critical
Simplify and streamline

purchasin! process to
achieve efficiency
Reduce 9 of suppliers :
simplify order process
On Shore
Strate!ic
Ensure lon!-term
availa$ility of supply-
potentially ;+ear Shore<
Focus on relationship-
$uildin! and process
inte!ration 6ith supplier
Bottlenec%
Reduce/eliminate
company=s ris% and
e&posure to price
increase/supply ris%
Secure e&istin! sources

of supply5 search !lo$ally
for su$stitutes5etc> ;Off
shore/ +ear Shore<
Su,,l3 )ar<et "om,le7it3
N)#0er of optio"*
1)yer leverage
2e%'"i%al %o#ple/ity
#rofile
*ategory
e"elop
e!F./
&egotiate
%!
Manage
emand
*ontract
0ith
Supplier1s 2
Manage
Suppliers
e"elop
Strategy
Analy3e
Spend
Impro"e
Supplier1s 2
Profile
Category
Develop
eRFQ /
Negotiate
R
!a"age
De#a"$
Co"tra%t
&it'
()pplier
!a"age
()pplier
Develop
(trategy
+"aly,e
(pe"$
-#prove
()pplier
eRF? path Mana!e #emand path
Business Interruption Ris%s
"onsi+eration s#oul+ &e given as to t#e %onse:uen%e of an3 &usiness
interru,tion 2#en sele%ting t#e num&er an+ lo%ation of su,,liers
)ission %riti%al items s#oul+ #ave a su,,l3 &a%<Cu, or ris< mitigation ,lan
Forei!n Currency E&posure
Sour%ing generall3 s#oul+ &e in t#e %urren%3 of t#e re%eiving %ountr3 &ut it
ma3 &e &enefi%ial to transfer t#at ris< to t#e &u3ing %om,an3 if t#e3 #ave
su,erior #e+ging %osts
'a& E&posure
ll sour%ing alternatives s#oul+ %onsi+er unre%overa&le ta7 %osts
ll strategies +evelo,e+ s#oul+ %om,re#en+ t#e afterCta7 ris<
#rofile
*ategory
e"elop
e!F./
&egotiate
%!
Manage
emand
*ontract
0ith
Supplier1s 2
Manage
Suppliers
e"elop
Strategy
Analy3e
Spend
Impro"e
Supplier1s 2
Profile
Category
Develop
eRFQ /
Negotiate
R
!a"age
De#a"$
Co"tra%t
&it'
()pplier
!a"age
()pplier
Develop
(trategy
+"aly,e
(pe"$
-#prove
()pplier
De%elop Strategy
Financial Ris%
Stru%tures involving ,rogress ,a3ments, re&ates or ot#er finan%ial

arrangements nee+ to &e assesse+ for relative ris< %om,are+ to
straig#t &u3s
%%ounting treatments of t#ese stru%tures s#oul+ &e a,,rove+ &3
finan%e &efore &usiness is %ontra%te+
;e+gingFfor2ar+ &u3ing strategies %an mitigate ris<, es,e%iall3

t#ose t#at are su,,l3C%onstraine+
Before sele%ting a sour%ing strateg3, %onsi+eration s#oul+ &e given
as to t#e relative %on%entration t#at t#is &usiness 2ill ,rovi+e to t#e
su,,l3 &ase
#eav3 %on%entration of &usiness 2it# a single su,,lier 2ill s#ift

ris< to2ar+ +isru,tion in t#e event of finan%ial +istress
#rofile
*ategory
e"elop
e!F./
&egotiate
%!
Manage
emand
*ontract
0ith
Supplier1s 2
Manage
Suppliers
e"elop
Strategy
Analy3e
Spend
Impro"e
Supplier1s 2
Profile
Category
Develop
eRFQ /
Negotiate
R
!a"age
De#a"$
Co"tra%t
&it'
()pplier
!a"age
()pplier
Develop
(trategy
+"aly,e
(pe"$
-#prove
()pplier
=evelo, Strateg3
'echnical Ris%
=ivision of res,onsi&ilities ma3 &e re:uire+ in or+er to ,rote%t te%#nologies
2#ere outsour%ing of #ig#erClevel te%#nolog3 ,ro+u%ts or servi%es is a
&usiness alternative
5o single su,,lier s#oul+ #ave <no2le+ge of all as,e%ts of t#e te%#nolog3 to
avoi+ %loning or ina,,ro,riate use or +is%losure
Te%#ni%al o&soles%en%e s#oul+ &e %onsi+ere+ in +etermining %ontra%t si>e
an+ +uration of %ertain evolving te%#nologies
Investment E&posure Options
"onsi+eration s#oul+ &e given to #o2 volume sensitive t#e su,,lierJs %ost
2ill &e as a result of t#e sour%ing re:uirement.
)ore %a,italCintensive &usinesses ma3 re:uire longerCterm agreements to
get t#e &est ,ri%e.
ris< F&enefit anal3sis of volume guarantees s#oul+ &e assesse+ to +evelo,
,otential o,tions
#rofile
*ategory
e"elop
e!F./
&egotiate
%!
Manage
emand
*ontract
0ith
Supplier1s 2
Manage
Suppliers
e"elop
Strategy
Analy3e
Spend
Impro"e
Supplier1s 2
Profile
Category
Develop
eRFQ /
Negotiate
R
!a"age
De#a"$
Co"tra%t
&it'
()pplier
!a"age
()pplier
Develop
(trategy
+"aly,e
(pe"$
-#prove
()pplier
=evelo, Strateg3
Le!al Ris%
1#en anal3>ing t#e &usiness stru%ture an+ sour%ing o,tions
%onsi+eration s#oul+ &e given as to re:uire+ in+emnifi%ations from
t#e su,,lier for t#e ,ro+u%t or servi%e ,erforme+.
To t#e e7tent t#at t#is re:uirement ma3 #ave a material effe%t on
,ri%e, ris< s#ifting or ris< mitigating alternatives s#oul+ &e +evelo,e+.

n anal3sis of t#e su,,liers a&ilit3 to stan+ &e#in+ t#e in+emnit3
s#oul+ &e %onsi+ere+. re:uirement for insuran%e ma3 &e ,art of
t#e anal3sis.
"are s#oul+ &e ta<en in t#e %ontra%ting ,#ase to &e %ertain t#at t#e
legal entit3 2e are %ontra%ting 2it# is not a s#ell 2it# limite+ assets.
In all %ases ,ossi&le, t#e %ontra%t s#oul+ &e &in+ing on t#e #ig#est
stru%tural level of o2ners#i, of t#e su,,lier.
#rofile
*ategory
e"elop
e!F./
&egotiate
%!
Manage
emand
*ontract
0ith
Supplier1s 2
Manage
Suppliers
e"elop
Strategy
Analy3e
Spend
Impro"e
Supplier1s 2
Profile
Category
Develop
eRFQ /
Negotiate
R
!a"age
De#a"$
Co"tra%t
&it'
()pplier
!a"age
()pplier
Develop
(trategy
+"aly,e
(pe"$
-#prove
()pplier
De%elop Strategy
Ma%e 8s> Buy Ris%
Strategies nee+ to %om,re#en+ an3 effe%t t#at future volume
%#anges +ue to gro2t# or ,ro+u%t life %3%le mig#t #ave on t#e
+e%ision to &u3 versus ma<e or vi%e versa.
T#e &usiness %ase for ma<ing a ,ro+u%t or +evelo,ing selfC
suffi%ien%3 for servi%es ma3 &e%ome stronger at in%reasingl3 #ig#er
volumes.
T#e ris< of te%#nologi%al o&soles%en%e 2ill effe%t t#e +e%ision to
ma<e or invest in selfCsuffi%ien%3.
T#e anal3sis of t#e tra+e off &et2een fle7i&ilit3 an+ ,ri%e s#oul+ &e
,art of t#e strateg3 +e%ision.
#rofile
*ategory
e"elop
e!F./
&egotiate
%!
Manage
emand
*ontract
0ith
Supplier1s 2
Manage
Suppliers
e"elop
Strategy
Analy3e
Spend
Impro"e
Supplier1s 2
Profile
Category
Develop
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Negotiate
R
!a"age
De#a"$
Co"tra%t
&it'
()pplier
!a"age
()pplier
Develop
(trategy
+"aly,e
(pe"$
-#prove
()pplier
De%elop Strategy
Offshore vs> Onshore Ris%
Sour%ing strategies nee+ to ta<e into %onsi+eration total %ost of offCs#ore
vs. onCs#ore as 2ell as t#e in#erent ris<s su%# as logisti%s, %ultural
+ifferen%es, et%.
1#en %onsi+ering offCs#ore, :ualit3 management s#oul+ &e %onsi+ere+ a
ris< if t#ere is not a ,roa%tive ,lan to manage issues as t#e3 arise
In or+er to minimi>e ris<, t#ere %oul+ &e a small 2are#ouse ,ut in ,la%e
%lose to t#e &u3ing ,lant, #o2ever, it nee+s to &e manage+ %losel3 to
avoi+ o&soles%en%e +ue to engineering %#anges
1#en loo<ing at total %ost as ,art of t#e strateg3 +evelo,ment, it is
im,ortant to %onsi+er t#e Hu,CfrontI %osts su%# as tri,s to t#e su,,liersJ
lo%ations to %om,lete au+its an+ a%tual #istori%al %osts su%# as e7,e+ite+
freig#t %osts
#rofile
*ategory
e"elop
e!F./
&egotiate
%!
Manage
emand
*ontract
0ith
Supplier1s 2
Manage
Suppliers
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Strategy
Analy3e
Spend
Impro"e
Supplier1s 2
Profile
Category
Develop
eRFQ /
Negotiate
R
!a"age
De#a"$
Co"tra%t
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If t#e strateg3 +i%tates t#at it is &etter to %reate

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s#oul+ &e onCs#ore, offCs#ore, or nearCs#ore
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t#at t#e rig#t +e%isions are &eing ma+e
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in%rease+ inventor3 levels are all &eginning ste,s of mitigating ris<
soli+ ris< management infrastru%ture s#oul+ &e +evelo,e+ in t#e regions in
or+er to :ui%<l3 mitigate an+ &uil+ %ontingen%3 ,lans if a +isru,tion o%%urs
T#e organi>ation s#oul+ esta&lis# a geogra,#i%all3 +istri&ute+ su,,l3 &ase
t#at meets t#e nee+s of itJs organi>ational goals
?uestions4
T;5G M*A

'ori Sis<, ".P.).
Su,,l3 "#ain Strategist, ;P
'oriSis<N#otmail.%om
"he Minto Principle
Presentation "echni*ues
Factors
- Environment
- Industry
- Customer
- Competitor=s "osition
Implications
- SBO'5 8alue Chain5 :
Financial nalysis
Strate!y
- Mission5 3oals5
Ma@or Initiatives
'actics
- O$@ectives : Measures
Bhat=s !oin! onC
Current Situation #esired SituationC
F
I
S
'
Complication/?uestion
How do we get from current to
desired?
"roposed Solution 6ith
Supportin! 7ypotheses
Te way to get tere!
8alue Opportunities
Focused
Benefits
Measura$le
Pro+lem Definition
)>
7o6 do 6e
!et from current
situation to the
desired situationC
C
->
Is it the ri!ht
solutionC
D>
7o6 do 6e
implement
the solutionC
Solution
(>
Bhat is the $est
alternativeC
lternative .
lternative ,
lternative )
.>#o 6e have a
pro$lem5 and if
so5 ho6 should
6e respondC
,>Bhat should $e
our o$@ectives
and strate!yC
C C
E>Be had a solution>
It did not 6or%>
Bhat should 6e
doC
Solution
did not 6or%
C
F "ypes of Pro+lems and @uestions
4alue >pportunities 1&amples
Hro:th
1&panding commercial internet ser%ices to

residential customers :ill ena+le the
telecommunications company to gro: an
additional /B o%er the ne&t , years
'continued(
'continued(
1fficiency
Implementing a shared ser%ices

organi7ation :ill reduce total +ac! office
headcount +y ,/ "1s resulting in
recurring annual sa%ings of E)M
'continued(
'continued(
Capital Management
5 shared ser%ices product de%elopment

center for a cash rich electronics firm to
use :ith its suppliers :ill pro%ide the
electronics firm a .<B $>I
Pyramid Communication 3or!sheet
Situation Complication Solution
"nderstanding of te
situation
#ro$lem%s& or issue%s&
emerging from te
current situation
'nswers complication
and gets to teir desired
situation
'his is the conte&t for
framin! the pro$lem
opportunities
8ie6ed from their point

of vie6
Consider internal and

e&ternal factors
Consider the follo6in!
perspectivesF
CEO5 COO5 CFO5 CIO
Board
Customers
Industry/Mar%et
Competition
Re!ulatory Environment
Employees
Financial Resources
and Constraints
Information Systems
Infrastructure
Build your response

from the point of vie6 ofF
"9*
97e%utive
S,onsorFBu3er
#ocument insi!hts and

conclusions
#ocument ctions/
'imeta$le/ 2r!ency
1#at t#e %om,an3

nee+s
to +o an+ 2#en
#ocument 6hat your team

6ould do
"rovide evidence as to 6hy

this the ri!ht alternative
Cost
Reduction
Bor%in! Capital
Efficiency
Fi&ed Capital
Efficiency
Revenue
Enhancement
'a&
MinimiAation
Enterprise
Mar%et 8alue
Time
9
E
F
S
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"ARR95T I5ITITIE9S
total %ost management
8lo&al sour%ing
llian%es
Su,,l3 &ase
stru%ture
*utsour%ing
S#are+ servi%es
Inventor3 management
%%ounts ,a3a&le management
Time to mar<et
Su,,lier innovation
Su,,l3 availa&ilit3
Le"ers of Mar)et 5alue
$iding the Hlo+ali7ation 3a%e
Presented +y
Lori Sis!, CPM
Ie:lett Pac!ard
Sponsored +y 3omen In Leadership Hroup
5genda
Introduction
>%er%ie:
1conomic actors
Internal Impacts
$is! %s. $e:ard
"otal Cost 5nalysis
1na+lers
Conclusions
Introduction
Lori Sis!, C.P.M.
>%er ,< years of ConsultingGIndustry glo+al supply chain e&perience in automoti%e,
aerospace, and home +uilding industries
ocus on sa%ing companies money and increase efficiencies in +usiness processes
Career has +een +uilt from se%eral different companies2 Ma7da, "$3, 1rnst O Toung
Consulting 'Lucas 5erospace, leming oods, Co%isint(, Delphi, IP 'HM, 5merican
1&press(
MB5 and BSB5 from Bo:ling Hreen State ;ni%ersity
ISM former Metro Detroit President, 3omen In Leadership Chairperson
Spea!er for ISM, 5PICS, PanIellenic Logistics and Supply Chain Institute, S5PICS
North America: Primary - Mexico/South America
Secondary - Eastern Europe or Asia
Western Europe: Primary - Eastern Europe
Secondary - Asia or Mexico/South America
Pacific Rim: Primary - Asia
Secondary - Eastern Europe or Mexico/South America
+$ere "$ould +e
"ource0
Regionali>ation
$e%erse Hlo+ali7ation=
Changes that ha%e occurred o%er the past fe: years
Less dominant la+or costs
5s technology progresses and producti%ity impro%ements dri%e do:n la+or
hours re*uired in many processes
Increased infrastructure de%elopment
De%eloping countries in%esting more in education and infrastructure,
companies can no: source confidently in any hemisphere
ocus on supply chain ris!s
?atural disasters, %olatility of fuel prices, performance of supply chain
partners, and financial sta+ility of organi7ations seem to +e the +iggest ris!s
?eed for more fle&i+ility
"here needs to +e a %ery *uic! response to the changing economic conditions
and demand +y the supply chain
Ia%e created many companies to mo%e to:ards regional or hemispheric sourcing
1conomic actors
inancial
4olatility of commodities such as fuel
La+or costs increasing glo+ally
Logistics costs increasingly important
Language comple&ities
Capacity in shipping industry
"a&es
Heopolitics
ocus on energy
Internal Impacts
Colla+orati%e cross#functional effort to2

Ma&imi7e supply assurance
$educe o%erall costs
Identify hidden costs
$e%ie: of pre%ious sourcing decisions
Material sourcing strategy considerations

Source in LCC at lo:er cost or source regionally=
Can LCC supplier utili7e regional logistics hu+ to minimi7e ris!=
LCC may ha%e / :ee!s in transit or airfreight
LCC may +e lo:er cost +ut to source regionally may +e less ris! and lo:er logistics costs
"otal Cost 5nalysis

"otal Cost of >:nership
T3,i%al %osts in%lu+e+ in a manufa%turing T"* mo+elL

=esign "osts
Ra2 )aterial
Pur%#ase+ Parts
=ire%t an+ In+ire%t 'a&or
6ringe Benefits
)a%#ines "osts su%# as +e,re%iation, interest, insuran%e, utilities
Selling, 8eneral, an+ +ministrative "osts
Profit
%:uisition "osts
=uties, fees, ta7es
Asage "osts
9n+ of 'ife "osts
9nsure t#at 3our T"* mo+el in%lu+es t#e follo2ing ris<sL

International freig#t
'a%< of logisti%s infrastru%ture 2#i%# +rives %ost
In%rease+ inventor3 %arr3ing %osts
'ost salesF%osts +ue to unrelia&le sour%e of su,,l3
"ost of :ualit3
;i++en %osts generate+ &3 ,oor %ommuni%ation an+ management misun+erstan+ings
++itional %osts +ue to offCs#oring
"otal Cost 5nalysis
"a!e another loo!2
Logistics Costs#
1&pedited Shipments
$epac!ing at :arehouses
1%aluate for types of shipment 'container, truc!, rail, L"L, parcel(
1%aluate customs fees# fi&ed fee for all shipments :hether a container is a load or a
parcel.
5dditional In%entory Dri%en Costs to 1%aluate2
Price Protection and returns for channel in%entory
Can too much channel in%entory delay ?e: Product Introductions=
Material de%aluation and >+solescence Costs
1ngineering Change costs :ith / :ee!s of incoming material
;nderstand the cost dri%ers
6une 789 :;;8
1
-1.Total "ost of *2ners#i, )o+elsL n
97,lorator3 Stu+3, The Journal of Supply
Chain Management "o,3rig#t O ugust !00!,
&3 t#e Institute of Su,,l3 )anagement, In%.,
Bru%e 8. 6errin, Ri%#ar+ 9. Plan<
$is! %s. $e:ard
Supply Chain $is! Categories
Influence, Alignment, Information Sharing
Quality, Delivery, Capacity, Cost
Turnover, Union Issues
Market Power, Information Visibility Concentration,
Disruption Potential
Size, Asset Utilization, Capitalization, Profitability
Social Responsibility
Ionda of 5merica
Supplier Management 1%aluation
Source: Honda
Ionda of 5merica
Supplier Management Process
Source: Honda
Ionda of 5merica
Supplier Management Message
Source: Honda
#emand Forecast
0
?1 ?! ?$ ?4
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page 7:<
$is! Management 5pproach2
;ncertainty is measured using
forecast scenarios for demand, price, O a%aila+ility
vaila$ility Forecast
0%
!0%
40%
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80%
100%
1!0%
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;ig# vaila&ilit3 Base vaila&ilit3 'o2 vaila&ilit3
HPHorizon build demand
scenarios from historical
data
Component "rice Forecast
?1 ?! ?$ ?4
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r
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e
;ig# Pri%e Base Pri%e 'o2 Pri%e
$esults of Supply Chain $is! Management implementation at IP
Direct materials quantity commitments
HP total materials
spend in PRM
contracts
Realized Savings
Program
life
>$1B+
>$75M
Indirect materials quantity commitments
Commodity
Cost
Savings
Commit-
ment
Custom ASIC 12% 12 mo
Scanner assy. % 12 mo
!las" memory #% $ mo
%arts for re&air '
refurbis"ment
(% ) mo
*ard dis+ dri,es 2.)% ) mo
-RAM . / 1.% )0$ mo
Average 6%
Commodity
Cost
Savings
Commit-
ment
1nergy 2#% 12 mo
$efining a Spend#>riented rame:or! to
Supply Chain $is! %s. Business Impact
'everage Strategi%
Ta%ti%al
Bottlene%<
Supply market complexity
S
p
e
n
d
Reduce structural
risk factors
I
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I
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t
Extended supply chain complexity
(i.e., probability of adverse risk event)
From spend segmentation To understanding risk vs. reward
Source: 2008 The Hackett Group
129
Discuss ho: your organi7ation is riding the glo+ali7ation :a%e2
Ias changed its direction on glo+ali7ation
Manage ris! %s. re:ard
$e%ie: "otal Cost of >:nership
Colla+orates across the organi7ation on sourcing decisions
Ias managed the economic factors and :hich ones ha%e had the largest
impact to your organi7ation and ho: ha%e you mitigated the ris!
Discuss :hat you can ta!e +ac! to your organi7ation

Institutionali7e a ris! management programGprocess
$e#analy7e past sourcing decisions :ith ne: information
$e%ie: cost dri%ers J ha%e they changed=
>ther ideas=
?et:or!ing
5utomate Supply Chain
Define the end#to#end transaction G process
Consolidate, standardi7e and automate the defined transaction G process :hene%er possi+le
Identify, optimi7e and Gor transform the transactions G processes that cannot +e automated
'e.g., mo%e processing off#shore(
Centers of 1&cellence
Create a :inning +est#shore location strategy
Determine :hat strategies should +e glo+al %s. regional and :hich acti%ities need to +e
centrali7ed %s. decentrali7ed
Spend 5nalytics
Perform spend analytics on a glo+al +asis using tools that can pro%ide multiple dimensions to
support the identification of ne: sourcing and sa%ings opportunities
"ransaction Management
5cti%ely manage compliance and demand management policies and procedures across the
end#to#end supply chain through SL5s and KPIs
1na+lers
1na+lers
Supply Chain 5nalytics
"otal Landed Costs# including all transportation costs, customs9
Supply Chain ?et:or! Design and Modeling and >ptimi7ation "ools# 3hat#If
Modeling to loo! for the most efficient cost and ser%ice le%els
Supply Chain 4isi+ility
Loo! +oth upstream and do:nstream and gi%ing critical suppliers do:nstream %ie:
5utomated 5lerts and ?otifications to Supply Chain 1%ents# more efficient
BuyersGPlanners
Cross unctional Supply Chain Dash+oard
Minimi7e the effect of Silos
Sales and >perations Planning Process# Metrics +ac! to e&ecuting the plan
Supply Chain 4isi+ility >perational
Impro%ements
7==
Aberdeen Group 2009
Benefits to SC 4isi+ility
In%entory $eductions2
Companies that are Best in Class in In%entory Management are 2.4 times
as li!ely to ha%e implemented SC 4isi+ility. Customer Ser%ice Le%els are at
M0B and In%entory Le%els ha%e +een reduce +y up to -<B since ,<<..
Cycle "imes2
Companies :ith SC 4isi+ility are 3 times as li!ely to ha%e a faster order to
fulfillment as companies :ith plans for an SC 4isi+ility implementation.
>n#"ime Deli%eries2
Companies that trac! more than A<B of domestic shipments are 2 times as
li!ely to ha%e an on#time deli%ery rate of M/B or higher.
7=>
Aberdeen Group 2006
"he Supply Chain Dash+oard#
"he !ey to an Integrated Supply Chain >rgani7ation
7=?
$e%enue 1BI"D5 In%entory "urns
#-<B
#,<B
#)<B
<B
)<B
,<B
-<B
.<B
Integrated Supply Chain
Structure and Metrics
unctional >rgani7ation
P
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2
0
0
3
-
2
0
0
5
Having End-to-End Supply Chain Visibility and Span of
Control Enables the Business to Make Quick Resource Trade-
Offs to Respond to Changing Market Need
Supply Chain Executive Board 2006
3hat does tomorro: +ring=
uture "rends of >rgani7ations
Soint %entures :ill increase
4ie: suppliers as e&ternal resources of inno%ation
Lin!age of sales to purchasing
Demand dri%en supply chains
Integration across supply chain
Impro%ement of supplier relationships
$ethin!ing of out#source %s. in#source and near#shoring %s. off#shoring
$is! management formal programs to secure continuity of supply
Colla+oration :ith suppliers in the Product Lifecycle Management process
Increased reliance on outsourced logistics
4isi+ility and tracea+ility of products has +ecome increasingly important
Conclusions
1conomic factors :ill dri%e many companies direction for
glo+ali7ation
5s companies KrestudyL total cost, there may +e opportunity to
source regionally and reduce cost
1nsure that one has a supply management ris! program that
proacti%ely alerts the organi7ation :hen ris! +ecomes too high and
ho: to act upon it
;nderstand the cost dri%ers in order to ma!e effecti%e and optimal
sourcing decisions
"rends :ill continue that :ill encourage companies to continually
re%ie: Kre%erse glo+ali7ationL
Key Concepts
Hlo+al Management Perspecti%e
uture of Hlo+al Supply Management
Stages to Hlo+al Supply Management
$easons for Hlo+al Sourcing
Potential Pro+lems
@uestions Before Hoing Hlo+al
Supply Channels
Hlo+al "rade Intermediaries
International Procurement >ffices

Key Concepts
Direct Suppliers
1liminating Intermediaries
Identifying Direct Suppliers

@ualifying Direct Suppliers
Preparing for Direct $elations
"he Initial Meeting
Currency 5nd Payment Issues
1&change $ates
Payments
Letters of Credit
Key Concepts
Countertrade
Supply Management8s $ole
Creati%e Countertrade
Political 5nd 1conomic 5lliances
1uropean ;nion
?orth 5merican ree "rade 5greement
M1$C>S;$
5ssociation of Southeast 5sian ?ations
5sia Pacific 1conomic Cooperation

Hlo+al Management Perspecti%e
$easons for Hlo+al Sourcing
Potential Pro+lems

3orld financial mar!ets are closely lin!ed through ,.#hour

trading
International +usiness is no longer limited to large

multinational corporations
e:er mar!etplace differences e&ist

K3esterni7ationL of glo+al consumer mar!ets is occurring at a
rapid rate
Manufacturing firms in Kde%elopingL countries ha%e

impro%ed their capa+ilities
Producti%ity and *uality is dramatically impro%ing :orld:ide

C5PS Study
K9much has happened to change the :orld of +usiness and

supply management ### more to come.
9the main reason for glo+al sourcing is to reduce costs.

9glo+al sourcing resulting in cost reductions of )MB and a
total cost#of#o:nership reduction of ),B.
KChina, India, 1astern 1urope and Bra7il :ill continue to gain

importance as sources of supply o%er ne&t fi%e years9
9sourcing from ;.S., Canadian and 3estern 1uropean

mar!ets :ill decline.L
Industry "rends and Business 1n%ironment
Iyper competiti%e +usiness
en%ironment :ith Cost G Core Competency
Pressure
Supply chain cost pressures 'sourcing,

manufacturing, transportation(,
Commoditi7ation of components,
1fficient management of :or!ing capital
Com&le23 distributed multi0tiered su&&ly
c"ain networ+s3 dis&ersed across t"e
globe
Iuge amounts of disaggregated

demand and supply data, ina+ility to
monitor the e&tended supply chain
!aster &ace of inno,ation3 and !aster
time0to0mar+et
Io: to impro%e the inno%ation cycle

and hit the narro: :indo: of
opportunity, through a more responsi%e
and timely decision ma!ing, across the
glo+al supply chain
S"orter &roduct life0cycle and 4uic+
&roduct obsolescence
1%er decreasing product lifecycles can

result in rapid mar!et price erosion and
in%entory ris!s
*ig"er e2&ectation of customer ser,ice
le,els
Io: to esta+lish deeper colla+oration

:ith suppliers, enhancing supplier
management, and achie%e >"I
targets consistently
Business Pain Points
I-C To& Ten Su&&ly C"ain %redictions
). Dri%e out unnecessary complication through segmentation, simplification, and the use of more practical
analytics.
,. BI and analytics tools that ena+le manufacturers to impro%e decision ma!ing at the strategic, tactical,
and operational le%els.
-. Impro%e supply side responsi%eness to demand side changes
.. Supply chain %isi+ility :ill clim+ on the I" application priority list to dri%e +oth cost sa%ings and impro%ed
ser%ice le%els.
/. "otal cost, supply chain organi7ations :ill gain a ne: appreciation for shortening lead times through
profita+le pro&imity sourcing strategies.
0. Continue to dri%e outsourcing of operations, +ut :ill also +ring a more enlightened perspecti%e to SaaS
and Qs!ills resourcing.K
F. Supply chain moderni7ation to dri%e fulfillment e&cellence through transportation, :arehouse, and la+or
management tools.
A. Impro%e information sharing and support more organic colla+orati%e processes across the e&tended
supply chain.
M. ;sing the cloud to le%el#set technology capa+ilities, :ith focus on aligning :ith the Qcloc! speedQ of the
supply chain.
)<. Incorporate mo+ility applications and smart de%ices into the supply chain :hile +alancing I"
management concerns :ith employee enthusiasm.
"he Issues
).0
6/27/14
Testerday "oday
I can loo! at 3IP +y :al!ing the plant floor

and $a: Materials In%entory :as in the
:arehouse.
Logistics Costs :as not a concern
I !ne: my production +ottlenec!s and could

schedule around the +ottlenec!
Planning :as monthly
le&i+ility :as Sust#In#Case In%entory
Le%eraging spend across the company :as

not an issue
1ngineering Change >rders :ere managed

in the plant# Mfg 1ngr, Production Control
and Purchasing
I ha%e $a: Materials, 3IP, and HI in multiple plants

and su+contractors and In#"ransit
I spend more on logistics than direct la+or in some

product lines
"he production +ottlenec! can +e at an outsourced

manufacturer
Planning Cycle is :ee!ly or is still monthly :ith daily

updates
1C>s must +e managed across the supply chain#

multi#tiers in the supply chain, outsourced assem+ly
and test and others.
Customers are re*uiring 4endor Managed In%entory
Information on parts, supply chain e%ents, supply

chain costs, customers and suppliers is critical to
+usiness performance
Stage >ne2 International Purchasing

# >rgani7ations focusing on le%eraging
%olumes.
Stage ":o2 Hlo+al Sourcing J >rgani7ations

focused on glo+al opportunities.
Stage "hree2 Hlo+al Supply Management#

>rgani7ations optimi7e supply net:or!s.
Implementing Strategic SCM
Strategic Supply Management Institute and The Warren Company
Copyright 2006
12
Pro-Active To Customer Responsive to Customer Reactive to Customer Isolated from Customer
Time Focus
Performance
Metrics
Speed & Integration,
Design Supply Base
Integrated Supply Strategy
Process Innovation,
Develop Reuirements,
!ear Defect "ree Supply
Suee#e t$e %endor
Internet Auctions !ot$ing
Basis of
Competitive
Advantage
Performance
Metrics
Timeliness & &fficiency
'o( Component)*nit Cost,
+n Time Delivery
Speed, &ffectiveness, ,onitor
Supply &nvironment
Coordination & Sync$ronicity
Interconnectedness
Relations$ips & Trust
Coordination & Cost, Develop
Suppliers
T$roug$-Put
-lo.al Impact
'everage Si#e of Buyer
Po(er Dynamics Bet(een Buyer
& Seller Do t$e /o.
,oderate Integration Internal &
&0ternal Integration1 Supply ,
R&D, 'ogistics, +perations,
&ngineering, ,ar2eting,
Customer Service
Partial Internal Integration
Procurement, 'ogistics,
+perations, &ngineering 'o( Internal Integration
Procurement & 'ogistics
!o Internal Integration
Purc$asing
Integration Level &
Functional Elements
Revenue & Bottom 'ine Impacts
Increase S$are 3older %alue
Transform Innovation into %alue Improve Bottom 'ine
Some Consideration of Revenue
Impacts
Improve Bottom 'ine
!o Consideration of Revenue
Impacts +ver$ead-Cost Center
Financial Impact
Innovation
Top & Bottom 'ine
Internal Integration
4uality,
/ust In Time
Total Cost of +(ners$ip
Purc$ase Price
Timely Availa.ility,
Convenience
Value Driver
! "trategic
"uppl# C$ain Mgmt
%! Proactive
"uppl# Management
&! Transactional
Mec$anical
'! (eactive
Clerical
Burt Burt- -Lynch Supply Chain Evolution Model Lynch Supply Chain Evolution Model
)!* +orld Class !* !) %!* %!) &!* &!) '!* '!) (ating
Transactional & Colla.orative Transactional, Colla.orative, &
Alliance
Adversarial & Transactional
Personal
"upplier
(elations$ips
e-Commerce
5S$ould Cost6 Analysis
T$omas Directory,
P$one Boo2
Rolode0
*nderstand Industries, Supply
Base
*nderstand Suppliers ,no-ledge
VA(IABLE
Building to +orld Class
Note: Some Elements of an Earlier Stage are Carried as a Foundation into the next stage, while other elements may be discarded
Copyright D.N.Burt & R.P.Lynch
Pro-Active as ,ar2et
Differentiator for Customer Considered As Part of TC+ Added Cost "actor !ot Considered
Environmental
igure ).0
7@7>A
$easons for Hlo+al Purchasing
Superior @uality
Better "imeliness
Lo:er "otal Costs
More 5d%anced "echnology
Broader Supply Base
1&panded Customer Base

Potential Pro+lems
Cultural Issues
Long lead times
5dditional In%entories
Lo:er @uality
Social and La+or Pro+lems
Iigher Costs of Doing Business
Iigh >pacity
Does it *ualify as high#%olume in your industry=
Does it ha%e a long life 't:o to three years(=
Does it lend itself to repetiti%e manufacturing or

assem+ly=
Is demand for the product fairly sta+le=
5re specifications and dra:ings clear and :ell defined=
Is technology not a%aila+le domestically at a competiti%e

price and *uality=
Supply ?et:or! 1%aluation
Does sufficient engineering support e&ist to efficiently

facilitate 1C>s :hen they occur=
3ill the +uyer +e a+le to allo: sufficient time to phase out

e&isting Kin the pipelineQ in%entory=
3ill the supply managers firm ta!e the responsi+ility=
Is the firm prepared to ma!e a financial commitment for

e&pensi%e trips to the supplier=
Is management :illing to change the approach of ho:

+usiness and transactions are conducted=
Is the +uyer a:are of the en%ironment=

Supply Channels
5fter deciding to source glo+ally is to decide

:hat supply channels to use
"he lo:est price method for direct procurement
May +e infeasi+le due to total costs and limited

resources
Simplest :ay to source glo+ally is through the

use of an intermediary
Import merchants
1asiest method
Basically li!e +uying from a Kdomestic sourceL
Commission houses
5ct for e&porters a+road

Paid +y the e&porter
"hey do selling, shipping and customs details
5gents or reps
Same as Commission Iouse
1&cept, they :or! for the e&porter

Import +ro!ers
Commission paid +y sellers and +uyers
Charges fee for +ringing parties together
"rading companies
Perform all of the a+o%e

May :or! for +oth or one party
Selling, shipping, customs details
Su+sidiaries
acilitate international sales
1&ample2 Iitachi 5mericas

International Procurement >ffices
1&pands +uyers supplier +ase
5llo:s personal contact
Better understanding of local conditions
>n#site support
Staffed +y e&#patriates in the past, +ut not

necessarily true today
Direct Suppliers
"he Initial Meeting

$esults in lo:est purchase price
But, direct procurement re*uires e&tra cost

+eyond price
$e*uires !no:ledge
$e*uires in%ol%ement of the company in all

aspects of the procurement
Identify and contact !ey players at the supplier
4isit :ith the supplier8s !ey personnel
;se the meeting to pro%ide performance feed+ac!
1&plain your company8s goals and %alues
"a!e care not to appear to +e an unreasona+le
Consider the timing of your re*uest
If dealing :ith a ne: supplier, state your intention to deal

directly right from the start
Be prepared to gi%e reasons for direct +uying

Country and regional analysis
inancial condition
Cultural preparation
Interpreters
"echnical and commercial analysis
Prepare and re%ie: specifications and dra:ings
Pac! samples or photos of re*uired materials if helpful
Clearly prepare the *uality re*uirements
Identify specific scheduling re*uirements
Determine :hat B of production can +e placed offshore
Determine re*uirements for special pac!aging
Identify li!ely lead times
De%elop a clear idea of the price o+Necti%e
Briefing on Tour irm for the Supplier
Information on the rele%ant product line and related

lines
5ctual and forecasted sales %olume
Customers
Mar!et share
;nclassified corporate strategy information
5nnual reports
5n indication of :hy the +uying firm is soliciting the

potential glo+al supplier8s interest '*uality= price=(
"he Initial Meeting
Pro%ide a +riefing on your firm
Pro%ide a tour of your facility
If the initial meeting is at the suppliers facility, then tour

the suppliers facilities
Meet :ith critical personnel
Descri+e ho: and :hen the suppliers firm :ould

get paid
5l:ays remem+er that the potential supplier is

Nudging your firm at the same time
Currency and Payment Issues
Preferred method of payment is after receipt and

inspection of the goods
It may +e customary in many countries for ad%ance

payments to +e made prior to commencing :or!
Letters of credit are common in glo+al commerce
>f particular importance are2
1&change $ates
Payments
Potential Situations in the 5+sence of i&ed 1&change $ates
5ssume the +uyer is a ;nited States

company9
Case )2 Contract is for payment in foreign

currency, e&change rate mo%es against
the dollar during performance of the
contract
Case ,2 Contract is for payment in foreign

currency
Case )
Contract :as a:arded for ) million euros
$ate of e&change :as E).<< C 1ur <.0AM

1ur l,<<<,<<<
1ur .0MGE C E),./),/M<

Io:e%er, dollar strengthens to E).<< C 1u )

1u l,<<<,<<<
1u ).<GE C E),<<<,<<<
Case ,
Contract is for payment in foreign currency and

the e&change rate impro%es so E) C 1ur )
1ur l,<<<,<<<
1ur )GE C E),<<<,<<<

"he +uyer has reduced its costs from the initial

li!ely amount of E),./),/M< to E),<<<,<<<.<<, a
-< percent sa%ing
Payments
Simplified :hen an intermediary or IP>

used
Direct payments are more difficult
Letters of credit are usually used

5 Hlo+al component
1uropean ;nion '1;(
Common foreign policy
Single currency
Central +an!
IS> M<<<2,<<<
$educed red tape

5d%antages of the 1uro
Hreatly $educed "ransaction Costs
Increased Competition
$educed 1&change $ate $is!
Increased "rade and Capital Mo%ement

?orth 5merican ree "rade 5greement
;.S., Canada, Me&ico
>riginal Hoals of ?5"5

1limination of tariffs
$emo%e agricultural +arriers
$emo%e manufacturing +arriers
$emo%e ser%ice trade +arriers

$emo%e in%estment restrictions
Protect intellectual property rights
$esol%e en%ironmental concerns
Closing $emar!s
3ith respect to glo+al supply management,

supply professionals must learn to2
De%elop a glo+al supply management %ie:
Learn to deal :ith changing glo+al en%ironments
Deal :ith di%erse cultures effecti%ely
3or! :ithin distri+uted organi7ational structures
3or! :ith teams composed of glo+al mem+ers
Learn to communicate effecti%ely :ith cultural +eliefs

and %alues different than their o:n
5ppendi& 5
Currency $is!
Currency Issues
loating currency2
Currency not associated to the ;.S. dollar
Sta+ility of the currency is more *uestiona+le
Pegged currency2
Currency associated to the ;.S. dollar
More sta+le than floating or unpegged currency
Cost dri%en product
e: if any competitors
Supplier can set price +ased on supplier costs
Mar!et dri%en product
Prices are set on the :orld mar!et
Supplier cant sell at a higher price
Iedging
;sed to minimi7e mar!et ris!
$e*uires organi7ed commodity e&change
Mar!etplace :here commodity is +ought and sold in large

*uantities
5ddresses ris! of +uying in dollars
Protects dollar %alue of future foreign currency cash flo:
International transactions in ;.S. dollars usually cost

more since ris! is lo:ered for +uyer
Iedging
Common types of hedging
utures contracts
Hi%e a fi&ed cost for foreign currency
1ffecti%ely free7es the e&change rate
Currency options
5llo:s a +uyer to ta!e ad%antage of an increase in dollar %alue and protects
against decreases
Length of hedging
$is!s in hedging
Choosing a strategy
If dealing :ith a %olatile currency, then push for a price reduction
5dditional Slides
Common "erms in Hlo+al Supply
Management
Common "erms
Import duties 'or rates(
ad %alorem rate
Most common, a percentage of appraised %alue of the

merchandise 'such as /B(
specific rate
Specified amount per unit, such as E),<<< for a fur coat
compound rate
Com+ination of the ad %alorem and specific rates

Common "erms
Dutia+le or free of duty
HSP # Henerali7ed System of Preferences
Basically means KDuty reeL
M? # Most a%ored ?ation
Duty rates are lo:er than full rates 'statutory rates(.
Statutory $ates
ull rates for tariffs

Common "erms
5ssists
;sed in aiding the production outside of the +uying firms country and are
pro%ided +y the +uying firm
Components
Su+assem+lies or parts in imported goods
Special tooling
"ools, dies, molds, e*uipment
Design Information
$ulings on imports
3ith respect to duties, these occur after entry documents ha%e +een filed
and the entry is li*uidated
5lso # there is no guarantee that su+se*uent shipments :ill recei%e the same tariff
Common "erms
Customs +ro!ers
Ser%e as the +uying firms agent
Iandle clearance of shipments through customs
Customs in%oice
;sed to clear merchandise through customs
?ot a commercial in%oice
Supplied +y ;.S. "reasury
illed out +y the supplier

Common "erms 'Continued(
Pro forma in%oice
Commercial in%oice estimate used mainly for

+an!ing O permit needs
1na+les the firm to o+tain an import or e&change

permit
Pac!ing list
More than one may +e needed
Mo%ement order, contents, descriptions ':eights,

mar!ings, measures(
Bill of lading
$eceipt issued +y the carrier for merchandise

5 contract for shipment of merchandise
5 receipt of merchandise
Document of freight charges
List of Iandling Instructions
May contain a title
Bill of Lading "ypes

>cean +ill of lading
5ir :ay +ills
Inspection certificate
Prepared +y entity independent of the e&porter
5ssures +uyer shipment is as ordered
Certificate of origin
May +e re*uired +y customs
5 product shipped from Iong Kong may not

actually ha%e +een made there, so this is an effort
to trace product origins
"otal Cost of >:nership
"otal cost of o:nership is a philosophy for

really understanding all supply chain
related costs of doing +usiness :ith a
particular supplier for a particular good or
ser%ice 'Lisa 1llam, May )MMM(
TCO
13-186
Key Concepts
"hree Components of "otal Cost
5c*uisition Costs
>:nerships Costs
Post#>:nership Costs
Purchase Price2 But >ne Component of Cost

13-187
Key Concepts
"C>, ?et Present 4alue 5nalysis '?P4(, and

1stimated Costs
"he Importance of "otal Cost of >:nership in Supply

Management
Ser%ice Pro%iders
$etail
Manufacturing
13-188
"hree Components of "otal Cost
5c*uisition Costs
>:nerships Costs
Post#>:nership Costs
13-189
"C> Components
5c*uisition costs
Purchase price
Planning costs
@uality costs
"a&es
inancing costs
>:nership costs
Do:ntime costs
$is! costs
Cycle time costs
Con%ersion costs
?on#%alue added costs
Supply chain costs
Post#o:nership costs
1n%ironmental costs
3arranty costs
Product lia+ility costs

Customer dissatisfaction
costs
TCO
13-190
5c*uisition Costs
Purchase Price
Planning Costs
@uality Costs
"a&es
Customs Duties and "ariffs
$egional "rade 5greements
Income#Base Shifting
inancing Costs
13-191
>:nership Costs
Do:ntime Costs
$is! Costs
Cycle "ime Costs
Con%ersion Costs
?on#4alue 5dded Costs
Supply Chain Costs

13-192
>:nership Costs
Supply Chain Costs

orecasting
5dministration
"ransportation
In%entory
Manufacturing
Customer ser%ice
Supplier selectionGrelationships
Hlo+al sourcing
13-193
Post # >:nership Costs
1n%ironmental Costs
3arranty Costs
Product Lia+ility Costs
Customer Dissatisfaction Costs

13-194
"C>, ?et Present 4alue 5nalysis '?P4(, and 1stimated Costs
?P4 analysis is fre*uently incorporated into "C> analyses
?P4 analy7es present %alues of the initial e&penditure along

:ith the li!ely future re%enue and e&penditure streams
"he present %alue of a sum of future cash flo:s discounted

+y a re*uired rate of return
?P4 greater than 7ero suggests accepting the in%estment
?P4 less than < suggests reNecting the in%estment
?P4 C < is the point of indifference
13-195
Importance of "C> in Supply
Management
Ser%ice Pro%iders
$etail
Manufacturing
Supply ChainsGSupply ?et:or!s

13-196
Ser%ice and $etail Pro%iders
;nderstanding :hat dri%es the cost of o%erhead

e&penditures is crucial to any ser%ice +usiness
$e%enue must co%er the direct costs, material and la+or,

and o%erhead in order to generate a profit
"C> analysis of recurring material costs are often o%erloo!ed

and can yield great sa%ings
"C> analysis of the la+or +ase can reap lo:er per person costs,
greater +enefits, and impro%ed morale
"C> analysis of e*uipment purchases may help reduce the
e&penditures for maintenance and parts o%er the li%es of the
in%estments
13-197
Manufacturing
Manufacturers are concerned :ith all of the same

"C> issues as ser%ice and retail firms, :ith some
added issues
Issues that are particularly important in cost

analysis for manufacturers are2
Direct materials
Manufacturing o%erhead
1mphasis should +e placed on the %ariance

+et:een Kshould costL and actual cost.
"his should not +e confused :ith price %ariance

13-198
5cti%ity Based Costing
5 maNor pro+lem in "C> analysis of manufacturers is

accurate allocation of manufacturing o%erhead
Many manufacturers ha%e used acti%ity#+ased costing

to help impro%e cost allocation
5cti%ity#+ased costing '5BC( is a techni*ue for

accumulating cost for a gi%en cost o+Nect that
represents the total and true economic resources
re*uired or consumed +y the o+Nect
13-199
Supply ChainGSupply ?et:or!s
"C> analysis may

include the study of2
Manufactura+ility
Infrastructure
>utsource decision
5nalysis of suppliers
+eyond tier one
Structure of foreign and
domestic
tariffsGdutiesGta&es
Costs of deli%ery
oreign regulations
oreign
politicalGeconomic
sta+ility
oreign e&change ris!
LanguageGcommunicatio
n re*uirements
4olatility of end#customer
demand
In%entory carrying costs
In%entory ris!
@uality costs
13-200
Concluding $emar!s
"C> is an analytical tool and a philosophy
5ccurate estimation of total costs re*uires

a cross#functional approach
Supply management is a critical mem+er

of such a cross#functional approach
"C> is also applica+le in ones pri%ate life

ena+ling +etter decision#ma!ing
13-201

Key Concepts

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Key Concepts

Purchasing, Supply Management, and Supply Chain

Supply Managements Impact on the Bottom Line

Supply Management and $eturn on In%estment

"he Progression to Proacti%e Supply Management

Purchasing2 a Dynamic Profession

"ransition to Supply Management

5 i%e Stage Process

Identification of +est supplier

Supply Management utili7es Strategic Sourcing

Strategic sourcing is understanding the mar!ets

9and learning from your o:n organi7ation and your

9:or!ing as a mediator +et:een suppliers and your

9and capturing information and using it to impro%e

Strategic sourcing re*uires t:o#:ay continuous

"he i%e Ms of Business2 Machines, Manpo:er,

Materials costs ha%e increased

La+or costs ha%e decreased

Machine po:er has replaced much of human 'and horse(

Materials costs are increasingly the focus of management

Purchased items account for a large

>utsourcing allo:s firms to focus on

>rgani7ations outsource :hen they decide

5 dollar sa%ed in materials cost has a

If the same profit increase :ere to +e

5t the e&isting AB profit margin, the

Profit increase C ne: sales D .<A

E))/,<<< C ne: sales D .<A

ne: sales C E),.-F,/<<

'E),.-F,/<< G E/,<<<,<<<( D )<< C

or a sales increase of ,A.AB is re*uired

Supply Chain Management is a set of approaches utili7ed

9so that merchandise is produced and distri+uted at the

9in order to minimi7e system :ide costs

9:hile satisfying ser%ice le%el re*uirements.

le&i+le %irtual systems lin!ed +y

ocus is on the ultimate customer to deli%er2

4alue creation through inno%ation

4alue deli%ery through order fulfillment

4alue maintenance through after sales ser%ice

Purchasing is the foundation of Supply

1ffecti%e Supply Management has an

Supply Management has +ecome the C1>s

Supply Management pro%ides tremendous

Classification of responsi+ilities and acti%ities

Contract and $elationship Management

Strategic Planning and $esearch 3or!

ollo:#up and 1&pediting

Situations 3herein 5lliances may not +e

?e: S!ills and 5ttitudes $e*uired

1#Commerce and the K$ightL "ype of

$elationships of the uture

"he transformation from reacti%e and mechanical

Prior to the )MA<s most purchasing relationships :ere

Interaction +et:een %endor and purchasing resulted in

>ne of a series of independent deals

Costs, data and forecasts are not shared

Price is the focus of the relationship

5 minimum of purchasing time and energy is

"ransactional purchases lend themsel%es to e#

$elati%ely less purchasing time and effort

Lo:er s!ill le%els of procurement

KF0B of C1>s thin! e&ternal colla+oration