OptimizationTrendsSupply base reductionWarningHow many suppliers ?Single sourcesMultiple sourcesCriteria for number of sourcesA middle road: dual sourcingOther optionsGetting back to SCMOptimization conclusionsoptimization 1Optimization•Where we are- started to make SCM decisions. First was who does a process? Now we are looking at how many suppliers to use if we decide to buy. •How many suppliers / partners do we need for any given process performed in our supply chain ?•Recent trends•One source or many ?•Other options- gray zones if you willoptimization 2Trends•One of the major trends in supply chain management is the reduction of supply bases, with good reason:–Xerox eliminated 90% of their suppliers in a year–Boeing- from 2000 to 1200 in 5 years–Prince tooling division•went from 23 to 6 in less than a year•many self selected out of program•improvements in costs, quality, lead time, etc.optimization 3Supply base reduction•Companies are seriously reducing supply bases, because they are now buying on total costs:–Quality: more suppliers equal more variance. –Costs: hidden costs of multiple relationships–Desire to share information•how many close relationships can you have ?•will suppliers share competencies any other way ?–Timeoptimization 4Warning•Many people assume that the ultimate number of suppliers / partners for a process is 1. This is often, but not always the case. An optimal supply base has the right number of suppliers, not a single source for everything.optimization 5How many suppliers ?•There are two generic approaches to the number of suppliers:–Single (sole) sources. Use 1 supplier for the entire volume.•sole sources differ in that they are the only available source•patent protection •Logistics•Lean systems–Multiple sources: divide the volume of purchases for an item between 2 or more suppliers.optimization 6Single sources•Benefits–economies of scale•may also apply to logistics–variance reduction–lower purchasing costs–become more important to supplier–makes JIT possible–easier to leverage supplier capabilities•Downside–potential risk of supplier non-conformance–complacency–may not be using the best supplier•whose fault is this ?–may miss technological changesoptimization 7Multiple sources•Benefits–competition–not dependent on a single supplier–more power–flexibility to change suppliers–access to more technology ?•Downside–increased purchasing costs–potential for more inventory–hard to develop close ties–varianceoptimization 8Criteria for number of sources•Importance of input–strategic vs. tactical•Volume–to little to split–to much of a supplier's capacity•Supplier's willingness to partner•Number of potential suppliers and substitutes•Price sensitivity•Location–especially with multiple locations (services facilities)•Uncertainty of supply•Materials management costs–inventory–logistics•Pace of technological changeoptimization 9A middle road: dual sourcing•Using two suppliers for an input is often a way to guarantee supply and competition, while still getting many of the benefits of a single source.•High volume items - can still maintain economies of scale.•Some companies keep some production internally–Prince’s knowledge factory•Reduces supplier control in a manageable wayoptimization 10Other options•Maintain back-ups–For complex projects suppliers may be paid for the time they spend preparing a design. That way even if they do not get the work they will still have good will towards the purchaser.•how many times would you bid to someone who does not give you work ?–Purchase some of a supplier’s capacity - even if you end up not using it (insurance policy)optimization 11Getting back to SCM•From a supply chain perspective how many sources will you use for most processes ? Why ?•Total costs–Third party logistics supplier may not be lowest price but it often lowest costs•Could we use two suppliers for the same input because they are serving different end customers? (in other words separate supply chains?)–Abbot aluminum has different forging suppliers for different materials for different customersoptimization 12Optimization conclusions •There is a general trend toward smaller supply bases - fewer supply chain members performing each process•Multiple suppliers are a way to lower prices•From a supply chain perspective a single supplier is usually in line with the concept of SCM•We have to be careful how we define the supply chain when making these