Modern ProcurementOutlineComponents of US Corporate PurchasesThe LeverageThe LeverageThe Decisions:“Make” vs. “Buy”“Make” vs. “Buy”Advantages of OutsourcingProblems with OutsourcingThe Strategic RiskThe New Balance StoryExample: Ford CT20 ProjectSourcing ProcessThe Total System Cost ViewComplete Cost Consideratione-Procurement relies upon direct process linkages between business consumers and suppliers.e-Procurement:Main benefit:Improved Compliancee-Procurement Applications LandscapeIBM CaseThe TurnaroundWall Street Journal, Jan. 8, 2002e-ProcurementExploiting the Leverage of the WebResultsCombinatorial Auctions: The Transportation ExampleTransportation Procurement Is DifferentAnnual Procurement: What is the Issue?Current PracticeCombinatorial BiddingPackaged BidsMulti-attribute ProcurementSystem ConstraintsSystem Requirement Example: Core Carrier ProgramsSystem Requirement Example: Core Carrier ProgramsProject Activities & TimelineThe ProcessScenario Summary (Example)Realized BenefitsLessonsLessonsAny Questions?Modern ProcurementYossi SheffiMass Inst of TechCambridge, MAESD.260J/1.260J/15.770J(c) Yossi Sheffi, MIT 2OutlineRole of procurement“Make vs. buy”Strategic considerationsCase study: IBMCombinatorial procurementCase Study: Rite Aid(c) Yossi Sheffi, MIT 3Purchasing as % of Sales54%28%22%60%57%34%24%16%0%10%20%30%40%50%60%70%1993 1996%MachinaryComputer and telecomFood manufacturingTelecom services(c) Yossi Sheffi, MIT 4Components of US Corporate PurchasesFinancial10%Labor20%"Indirect" Purchases24%"Direct" Purchases46%(c) Yossi Sheffi, MIT 5RevenueCOGS - MaterialLabor & OHGross MarginOperating ExpensesNet Income (pretax)% Improvement“When the goal is boosting profits by dramatically loweringcosts, a business should look first to what it buys.”Fortune, February 20, 1995Baseline$1,000M390M275M$335M200M$135M5%$1,000M371M275M$354M200M$154M14%10%$1,000M351M275M$374M200M$174M29%15%$1,000M332M275M$393M200M$193M43%Percent cost reduction in Direct MaterialsILLUSTRATIVE EXAMPLEStrategic sourcing efforts can have a significant impact on the financial performance and shareholder value of a companyThe Leverage(c) Yossi Sheffi, MIT 6The LeverageIndustry Purchasing ManufacturingComputer 1% 5%Electrical Equipment 3% 11%Automotive 1% 4%Electronics 2% 6%Required cost reduction to achieve 20% increase in profitability:(c) Yossi Sheffi, MIT 7The Decisions:?MakeBuy?Committed amount/capacity“As needed” procurement(c) Yossi Sheffi, MIT 8“Make” vs. “Buy”From River Rouge to Resende(c) Yossi Sheffi, MIT 9“Make” vs. “Buy”From River Rouge to ResendeOverhead functionsLochpe-MaxionMeritor (Rockwell)RemonPowerTrainVDODelgaCareseInternal logisticsUnion MantenVolksWagenChasis Wheels Engines Pax Cabins Body Paint ShopAxlesVolksWagenTruck(c) Yossi Sheffi, MIT 10Advantages of Outsourcing(c) Yossi Sheffi, MIT 11Problems with Outsourcing(c) Yossi Sheffi, MIT 12The Strategic RiskCreating a competitor 1914 – The Dodge Brothers turn from a Ford engine supplier to a competitor Japanese consumer electronic industry – started with contracting for US firms for radio receivers (also adopted transistors faster) Japanese aircraft industries?Losing control of the channel to a supplier IBM in 1980 designed the PC, the manufacturing process and the value chain Contracted to Microsoft and Intel “Window Machine” and “Intel Inside”Losing control of the channel to a customer P&G and Wal-Mart => “Wal-Mart Outside”?(c) Yossi Sheffi, MIT 13The New Balance StoryA long term supplier – Horace Chang – went into business for itselfSelling NB shoes at 1/3 the wholesale price Making “bottom of the line” model and flooding the market 1stin China and then worldwide Robbing NB of revenue Damaging the brand association with high-performance athletic shoesActions: China’s Administration for Industry and Commerce (AIC) agreed to raid five factories in 2000 netting 100,000 shoes Dec 2000 filed suit in Shenzhen. Feb 2002 a judge rules against NB.NB is appealingWall Street Journal, 12/19/02(c) Yossi Sheffi, MIT 14Example: Ford CT20 ProjectFord owned 25% of Mazda and had long relationships with them (including the 1988 Probe and Festiva)In early 1990 Ford outsourced product development and relied on manufacturing help for the CT20 (platforms for the Ford Escort and mercury Tracer)Steps to limit exposure: Joint efforts limited to subcompact and compact only (Mazda’s strong suit and Ford’s weakest). Based on the 323 platform Ford staff was on site in Hiroshima to learn and trasnferknowledge Two manufacturing plants: heavy involvement of Mazda in the Hermosillo, Mexico plant; another plant in Wayne, Michigan Later the Wayne plant modified its processes based on the Hermosillo experience(c) Yossi Sheffi, MIT 15DeveloprequirementsCreateAnnualplanDevelopSourcingstrategyEvaluate& selectsuppliersProcurematerialManageSupplierrelationshipsGoals & focus for next year (by category and totals)Item requirements by category across the user baseStrategy to leverage buying power and minimize total costs by categoryTarget suppliers, negotiations and contractingSystems, procedures, & skills to support strategy and execute wellPerformance metrics, benchmarks, and improvement programsSourcing Process(c) Yossi Sheffi, MIT 16The Total System Cost ViewPurchase priceSupplier economicsSupply chain costs (e.g., transportation, carrying inventory)Buyer’s cost of acquiring and managing products and servicesQuality and reliability of product/service over the lifetime of the contractValue of product/service to internal/external customerBuyerActivities& coststructureSupplierActivities& coststructureNeedsUsagePhysical flowInformation flowcash flow(c) Yossi Sheffi, MIT 17Complete Cost ConsiderationStarting in ’98 moved purchasing overseasSevered relationships with long time suppliers who would not agree to procure in the Far EastMARKS &SPENCER(c) Yossi Sheffi, MIT 18e-Procurement relies upon direct process linkages between businessconsumers and suppliers.Traditional ProcurementeProcurementshared electronicprocesses•efficient•real-time•interactive• improvedinformationcaptureSupplierBusiness ConsumersSpecifyOrder PayDeliver HR Mfg. Mktg.CorpFinPurchasingSupply ManagementNegotiate & Manage• shift tohigher-valueactivities• costly• slow• error-pronePaper-based transactionsPurchasingBusiness ConsumersSupplierSpecify,
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