MODULE 8 Chapter 7 Supply Management Introduction o Supply Management the broad set of activities carried out by organizations to analyze sourcing opportunities developing sourcing strategies select suppliers and carry out all the activities required to procure goods and services Why supply management is critical o Also called sourcing or purchasing o Global Sourcing Companies that were once content to purchase services and goods from local suppliers are now seeking to build relationships with world class supplier regardless of their location In order to compete globally you need to source globally Advances in information systems have served as a catalyst for global sourcing efforts An organization can maximize buying power by consolidating purchasing requirements for dozens of sites and suppliers around the world into one large order Global souring applies to services and business practices as well as manufactured goods Many firms now outsource routine business processes such as invoice processing file checking routine financial analysis call centers and IT processing to lower cost centers around the world o Financial Impact outside suppliers Cost of Goods Sold COGS the purchased cost of goods from Merchandise Inventory a balance sheet item that shows the amount a company paid for the inventory it has on hand at a particular point in time Develop the Sourcing Strategy o This is the third step in the strategic sourcing process the first two are assessing opportunities and profiling internally and externally o The make or buy decision Insourcing the use of resources within the firm to provide products or services producing some product or service internally Outsourcing the use of supply chain partners to provide products or services Make or buy Decision a high level often strategic decision regarding which products or services will be provided internally and which will be provided by external supply chain partners The decision to outsource goods or services raises a host of strategic questions What are the pros and cons or outsourcing Are there suppliers capable of meeting our needs Which supplier is the best How many suppliers should be used to ensure supply continuity maintain competition yet achieve the benefits of a solid supply relationship o Advantages and disadvantages of insourcing and outsourcing Insourcing Advantages o Gives a company a high degree of control over its operations this is particularly desirable if the company owns proprietary designs or processes o Can lower costs but only if a company enjoys the business volume necessary to achieve economies of scale o Companies should try to insource processes that are core competencies organizational strengths or abilities developed over a long period that customers find valuable and competitors find difficult or even impossible to copy Disadvantages o Can be risky because it decreases a firm s strategic flexibility o Making a product or providing a service internally often requires a company to make long term capacity requirements that cannot be easily reversed Favors Insourcing Favors Outsourcing 7 7 Factors that affect the decision to insource or outsource Environmental Uncertainty Competition in the Supplier Market Ability to monitor supplier s performance Relationship of product service to buying firm s core competencies Low Low Low High High High High Low Outsourcing Advantages 7 8 Insourcing and Outsourcing Costs Direct Costs Indirect Costs o Typically increases a firm s flexibility and access to state of the art products and processes o Less investment is required upfront in the resources needed to provide a product or service Disadvantages o Suppliers might misstate their capabilities o Their process technology might be obsolete or their performance might not meet the buyer s expectations o Control and coordination are issues Outsourcing Insourcing Price from invoice Freight Costs Purchasing Receiving Quality Control Direct Material Direct Labor Freight Costs Variable Overhead Supervision Administrative Support Supplies Maintenance Costs Equipment Depreciation Utilities Building Lease Fixed Overhead Buying firms may have to create costly safeguards to regulate the quality availability confidentiality or performance of outsourced goods o Coordinating the flow of materials across separate organizations can also be a major challenge especially when there are time zone differences language barriers and even differences in information systems o Companies risk losing key skills and technologies that are a part of their core competencies Total Cost Analysis a process by which a firm seeks to identify and quantify all of the major costs associated with various sourcing options Direct costs costs ties directly to the level of operations or supply chain activities such as the production of a good or service or transportation Indirect Costs costs that are not tied directly to the level of operations or supply chain activity Portfolio Analysis a structured approach used by decision makers to develop a sourcing strategy for a product or service based on the value potential and the relative complexity or risk represented by a sourcing opportunity the products services are assigned to one of four strategic quadrants which can help to identify the most appropriate sourcing strategy tactics and actions The Routine Quadrant The Leverage Quadrant o Products services are readily available and represent a relatively small portion of a firm s purchasing expenditures o Ex office supplies cleaning services o The sourcing strategy then becomes one of simplifying the acquisition process thereby lowering the costs associated with purchasing items in this quadrant o Electronic Data Interchange ETI an information technology that allows supply chain partners to transfer data electronically between their information systems o Products services tend to be standardized and readily available and they represent a significant portion of spend o The souring strategy focuses on leveraging a firm s spending levels to get the most favorable terms possible o Preferred Supplier a supplier that has demonstrated its performance capabilities through previous purchase contracts and therefore receives preference during the supplier selection process o A high level of service is also expected which may include such services as on site inventory management by the supplier and e purchasing o Products services have unique or complex requirements that can by