IS3223_2 Key SCM Concepts_ Procurement

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IS3223: IT and Supply Chain Management

Key supply chain conceptsSourcing and Procurement

Topics

Key supply chain concepts Sourcing and procurement Market segmentation Integrating online and offline sourcing

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What is Supply Chain Management?

Supply chain management involves the coordination of physical activities that enable the delivery of products to the end customer. This value chain encompasses sourcing and procurement of raw materials, production or procurement of intermediate products, production of finished products, delivery to the end customer, and after sales support for maintenance and returns

Source: Textbook page 4

Produced with a Trial Version of PDF Annotator - www.PDFAnnotator.com

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Raw material suppliers

Manufacturing Distribution centers

Retail stores

A Typical Supply Chain

Raw materials suppliers End customers Finished Goods

ManufacturerRetailers

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Traditional Supply Chains Have Evolved…

Barriers Between Companies

Sharing of information between each party,

TOFROM

TO

Raw materials suppliers Retailers End customers Finished Goods

Manufacturer


Collaborative Supply Webs

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Raw materials suppliers Retailers

End customers Manufacturers

Simultaneous sharing of information in value networks

Effective Supply Chain Management involves handling three flows

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Flow of Products

Flow of Payments

Return of Products

Information Flow


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Scope of Supply Chain Activities: Functional View

Sourcing and procurement Manufacturing Product design Warehousing Distribution Inventory management

Purchasing Trading Production Materials Management Distribution Import / Export After sales

Common job functions / Descriptions

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Historical Development of SCM

In the 1970s, the focus was on operations performance Logistics function was simply warehouse and transportation Focus on costs of warehousing, trucking and shipping No strategic view

In the 1980s, the focus was on re-engineering Lower operating costs Reduce use of assets Integration of warehousing and transportation functions within the

company


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In the mid 1990s, globalization led to dispersed manufacturing and global sourcing How to coordinate operations in many different countries How to take a strategic overall view of operations Long-term planning became necessary Opportunities for cost reduction and efficiency improvements from

shifting business operations and better coordination

Focus on collaboration, visibility and information sharing Better matching of demand and supply (inventory reduction to

JIT)


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In the 21st century, supply chains continued to become more strategic Global supply chains Supply chain network design Total cost of operations

Supply chain disruptions from 9-11, natural disasters and SARS outbreak led to huge losses from global operations From “Just in Time” to “Just In Case” Insufficient inventory; lack of raw materials, shutdown of factories;

stoppage of transportation Planning for disruptions and emergencies in developing countries

became critical Emergence of social trends: “Green” and environmentally-friendly

supply chain And not forgeting, the impact of new technologies on supply chain

coordination


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What is a Beaver?

From the “Chronicles of Narnia” Movie, http://www.sonypictures.com/imageworks/films/narnia/index.html

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A Beaver’s Life has Analogies to Company Operation

What is the optimal mix of production, storage, and distribution?

Selecting the right place to live

Cutting down trees

Building dams

Building waterways

Finding the right branches and leaves

Storing food for winter

Where to locate the factory?

Where to source raw materials from?

How much to manufacture? What is the production

schedule?

How to distribute the products?

How much products to store?

What is a product life cycle?

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Introduction of product

Growth and expansion phase

Decline of product demand

Maturity

End of product life

Time

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Example: Recording media life cycle

Records Cassettes CDs

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Videotapes DVDs Blu-rays

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Product lifecycles in different industries

Introduction of product

Growth and expansion phase Decline of product demand

Maturity

End of product life

Stable industry

Fast changing industry

Product 1 Product 2 Product 3

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Topics


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Sourcing and Procurement

All those activities associated with:•identifying material needs•locating & selecting suppliers•negotiating business terms •monitoring supplier performance

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Goals of Purchasing

Provide an uninterrupted flow of materials, supplies & services required to operate the organization

Keep inventory investment & loss at a minimum Maintain adequate quality Find or develop competent suppliers Standardize, where possible, the items bought Purchase required items and services at lowest ultimate

price reach to potential sources

Sourcing and Procurement becomes a strategic tool to achieve competitive advantage in cost, product design, and inventory management

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Materials needsidentification Writing product

specifications

Tender / Request For Proposal (RFQ) /Request For Quotation (RFQ)

Source(s) Selection

Negotiation on terms

Goods Receipt

Continuous vendorevaluation and improvement

Typical Procurement Cycle

QualityCheck

1.

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Catalogues Trade Journals Trade Directories Past Supplier Files Exhibition and conferences Word of mouth

Information Sources

Sales Representatives Samples Visits to Suppliers

These are more easily enabled by Internet marketplaces and websites

But physical interaction is still key to building trust and quality control

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Class Exercise: Choosing suppliers systematically What type of criteria would you use for making decisions?


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Typical Vendor Selection Criteria

Quality technical specifications design product life ease of maintenance and repair Reliability of product

Financial financial stability payment terms

Capability production capability on-time delivery availability of goods

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Terms of deal pricing leasing and discounts support and maintenance lifetime cost

Services training vendor attitude warranty

Modularity of product Open source Able to fit into existing product architecture

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Reputation Certification

Industry certifications: example ISO Government certifications: example GMP, BizSafe Government regulations: example licenses

Exclusivity / partnership Not working with competitors Sharing of information

Incentives Rebates Loyalty program Extensions of incentives to other partners (“twinning” / “code-sharing” /

network partners)

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Developing Supplier Profiles for Evaluation

Total

Bot. 20% Top 20%* * * * ** * * * ** * * * ** * * * ** * * * *

* * * * *

* * * * *

* * * * *

* * * * ** * * * *

QualityPrice Delivery scheduleDesignFinancial stabilityProduction capacityISO Certification

...

Weighting on attribute20%20%10%...

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Ranking suppliers

Total

Bot. 20% Top 20%* * * * ** * * * ** * * * ** * * * ** * * * *

* * * * *

* * * * *

QualityPrice Delivery scheduleDesignFinancial stabilityProduction capacityISO Certification

...

Weighting on attribute20%20%10%...

Ideal supplier pool•Drop•Ask for corrective action


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Strategic Sourcing Developments

Global sourcing Sourcing from larger pool of suppliers globally Gain access to more variety, better quality, or lower –price products Coordinate global sourcing with global spread of manufacturing

Demand consolidation Combine purchasing requirements across different units Standardize the use of parts and product specifications Creation of centralized purchasing office Higher volumes of purchasing make it easier to negotiate discounts

with suppliers

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Strategic Sourcing Developments

Supplier base consolidation Working with fewer suppliers, on a partnership basis Purchase more volume per supplier Easier to negotiate lower prices Ease of management of fewer suppliers

The Internet gives rise to the “Long-Tail” Broader range of products can be carried New niche markets and niche demands


Procurement Models Used by Global Companies

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Source: “2012-13 Global Chief Procurement Officer Survey”, Capgemini Consulting, assessed on http://www.capgemini.com/resource-file-access/resource/pdf/2012-13_global_chief_procurement_officer_survey.pdf

A clear majority on centralization and consolidation

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Case: Global Sourcing at Walmart Procurement Services US-based mega-retailer, started in 1962 For fiscal 2005, record revenues of US$312.4 billion and net income

of US$11.2 billion, with more than 1.6 million employees More than 3,800 stores worldwide Generates 20% revenues internationally Successful pioneer of “Everyday Low Prices” concept, known for its

low pricing and wide selection of goods


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Wal-Mart Procurement Services

Global Procurement Services is responsible for identifying new suppliers, sourcing new products, building partnerships with existing suppliers and managing the global supply chain of Wal-Mart's direct imports

Dedicated team of more than 1,600 staff Source products from more than 70 countries around the world, from

27 offices located in 23 countries Procurement Tools

Bulk purchases, and volume discounts Target pricing Benchmarking price with competitor products Benchmarking price reductions for similar products annually


Purchasing at Toyota

Global Purchasing Division based in Toyota Motor Corporation, Japan, where Purchasing Chief Officer located.

Three regional organizations – based in USA, Europe, and South East Asia Each responsible for procurement for the operations in their respective

regions Regional procurement is made up of 3 units:

Vehicle Parts and Components purchasing. Supplier Production Management (new project preparation) Projects and Strategic Planning

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Source: “A localised, collaborative supply chain – Toyota’s vision of the future?”, The Valuechain.net, May 5, 2011, accessed at http://thevaluechain.net/2011/05/05/a-localised-collaborative-supply-chain-toyotas-vision-of-the-future-an-interview-with-mark-adams-vice-president-toyota-motor-europe-purchasing/

Topics


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0

2000

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6000

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10000

12000

0 2 4 6 8 10 12

Product

Demand

Product Type

Market Demand for Products

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If we plot a graph of market demand for different products, there will be top selling products and lowest selling products, typically following an 80/20 rule: 20% of products account for 80% of sales

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Example: Market Demand for Cars in USA

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50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

No.

Sol

d

Car Model

Source: “In‐Depth: The Year’s Best Selling Cars, Michell, Jacqueline, Forbes Dec 03, 2008, http://www.forbes.com/2008/12/03/2008‐car‐sales‐forbeslife‐cx_jm_1203cars.html

Top 10 cars

Bottom 10-cars

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0

2000

4000

6000

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10000

12000

0 2 4 6 8 10 12

Product

Demand

Product Type

In the Past We Concentrate on Top Products

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Traditional marketing emphasis

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0

2000

4000

6000

8000

10000

12000

0 2 4 6 8 10 12

Product

Demand

Product Type

The “Long Tail” of Market Demand: Capturing New Markets

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There is always some demand for a different type of product!

Traditional marketing emphasis

New markets emerge as product range increase

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Product Proliferation

“They can have any car they want as long as it’s black”Henry Ford, 1920s

Mass Production Mass Customization

“Have it your way”Burger King

Almost every consumer product out there now gives people capability to individualize, and usually there are increasing number of choices – this creates more difficulties for manufacturing and logistics

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The Rise of Global Procurement and Manufacturing Centers Based out of Asia

In Sep 2009, LG announced plans to build a new LCD factory in Guangzhou, costing around US$3b, over a period of 2 years

Samsung has set up 10 international procurement centers in China, including Shanghai, HK, Shenzhen, and Tianjin

In 2007, BMW established an International Purchasing Office out of its India headquarters at Gurgaon, with a focus on development of exports from India to the BMW Group International Production Network

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Sources: http://www.chinasourcingnews.com/2009/09/03/461601-lg-plans-new-lcd-factory-in-guangzhou/http://www1.cei.gov.cn/ce/doc/cenlx/200606141756.htmhttp://www.uniindia.com/unilive/unisite.nsf/a84d3708d90e164865256ca3002939b6/8d3f7933947449b56525756f000abf11?OpenDocument

Topics


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Case: Global Sources

HK-based, B2B online marketplace in China, connecting buyers and sellers

Trade facilitator using English language Started in 1970 and launched “Asian Sources” magazine Reports and magazines are organized by industry sector Listed on Nasdaq since 2000 Revenues of US$231.7m, and net profits of US$32.9m in 2012 Large number of quality international buyer groups, including the

world’s top 20 retailers

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Sources: http://www.corporate.globalsources.com/PROFILE/BGROUND2.HTMhttp://www.chinaimportexport.org/comparison-of-chinas-major-e-commerce-platforms/

Diversified online and offline presence

Successfully extended from physical presence to online presence

Combination of website sourcing, trade publications, and offline sourcing events such as trade expos and “Private Sourcing Events”

Revenue sources from both online and offline

Online revenues make up half of its total revenues

Revenues from exhibitions have been increasing the last three years

Print revenues are decreasing, as might be expected

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Mitigating online procurement risk

To tackle the issue of trust, set up: Pre-screening of suppliers Pre-match buyers and sellers Video meetings between buyers and suppliers Authentication of suppliers set up in 2007 working with international

certification body Bureau Veritas Combine online presence with physical presence in exhibitions and

trade shows

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Global Sources Video

http://www.youtube.com/watch?v=RB2PP10QI-k

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Case: Kozmo.com -- the problem of e-Fulfillment

Delivery after sale is challenging

Many companies have come and gone trying to crack the problem

Picture source: http://www.howwesavedthepostoffice.com/kozmo_is_currently_experien-793895.jpg

Kozmo.com

Set up in Mar 1998 Targeted at “hungry and lazy” 25 to 30 year olds in cities Value proposition: free delivery within one hour of wide array of

products Tried to go public but unable to get investor demand Went bankrupt and closed in 2001

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What would you like to buy online if you are in your dorm, delivered to you in one hour?

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Their Story

High cash infusions A lot of hype and expectations for

transforming industries Over optimistic demand projection based on

“hi-tech” cities Rapid expansion into national coverage, with

high facilities investment Unmet demand expectations

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Key Lessons Learnt

Unrealistic demand projection Over investments in warehousing facilities Over investments in state-of-the-art logistics technology

picking systems, inventory management, routing and scheduling Over-rapid expansion

Poor inventory control SKU proliferation Too much inventory per SKU

Unprofitable product sales Higher total cost of product sale than selling price of products Free delivery irregardless of order size

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What Kozmo said (after the fact)

Expand incrementally Provide incentives to use different time windows Charge for minimal orders Reduce number of line items Concentrate on fast moving, impulse buys Package common bundles of goods together Plan for selling a product profitability

Source: “Anatomy of a dotcom”, Wu, John C.,Supply Chain Management Review, November 2001

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Thank You

Documents

IS3223_2 Key SCM Concepts_ Procurement