Sourcing process
Sourcing • The process of identifying, selecting and
developing suppliers• Tactical and operational sourcing
– Low level decision, short term: non-critical, high-profit, low risk
– E.g. “To buy” decision may be reversed due to supplier failure or work shortage
• Strategic sourcing– Top-level decision, long term: high supply risk – E.g. Partnership
The Sourcing ProgressSourcing and the Management of Suppliers
1
2
3
4
Identify needs
Define requirements
Decide to make or buy
Identify possible suppliers
Pre-screen possible sources
Evaluate remaining supply base
Choose supplier
Deliver product/perform service
5
6
7
8
9
10
11
Identify type of purchase
Conduct market analysis Post purchase performance evaluation
Sourcing is the progress of identifying, selecting and developing suppliers
The Eleven Stages of the Sourcing Process (Pg 368)
Identify type of purchase
• Three types– Straight rebuy or routine purchase– Modified rebuy– New buy
Discuss
• Examine strategies used by Paul to develop and maintain effective supplier relationship in the sourcing process
– Define sourcing process– List down the 11 stages of sourcing process and
against each stage, analyse how Paul is to develop and maintain effective supplier relationship
Make or buy
• Decision making process– Is the component core business?
– Have we design capacity?
– Have we manufacturing capability?
– Are we competitive?Figure 11.4, page 393
Make or buy
Is the component/ assembly strategic important/core business?
Is the component/ assembly strategic important/core business?
Have we design capability?
Have we design capability?
Have we manufacturing
capability?
Have we manufacturing
capability?
Are we competitive?
Are we competitive?
MakeVs
Buy
MakeVs
Buy
MakeMake BuyBuyMakeVs
Buy
MakeVs
Buy
BuyBuyMakeVs
Buy
MakeVs
Buy
BuyBuyMakeMake
Yes No Yes No Yes No Yes No Yes No Yes No Yes No Yes No
Make or buy
Cost factors - Make or buy
• Marginal costing– Example on page 394 – 395
Example 11.2, page 395 Marginal costingMaterials 90
Labour 40
Variable overheads 10
Fixed overheads 20
Works cost 160
Given:
Annual usage: 10,000
Purchase price: $156, but the capacity would be idle
30% of fixed costs is recoverable if component is bought
Make Buy Difference
Variable costs (90+40+10) 140 156 16
Variable costs x Volume 1,400,000 1,560,000
Fixed costs (30% x 20 x 10k) 60,000 60,000
1,460,000 1,620,000 160,000
Total cost of purchase = total cost of makingPurchase price x OQ = Total fixed cost + Variable costs x OQOQ (Purchase price - Variable costs) = Total fixed costOQ = Total fixed cost / (Purchase price - Variable cost) OQ = F / (P - V)
– Example 11.4 (Pg 397)
Breakeven analysis
Variable FixedMaterials 90 90 Labour 40 40 Variable overheads 10 10 Fixed overheads 20 20
160 140 20
Give: Annual usage 10,000 itemsPurchase price: $15630% recoverable of fixed cost if purchase outside
Break even point:F/(P-V) = (30%x$20x10,000)/$156-$140) = 3,750 units
F: fixed cost, P=Purchase price, V=Variable cost per unitIf >3750 items -> makingIf <3750 items -> buying
Other factors – make or buy
• Quantity factors– In favour of making - E.g. Use up idle capacity – In favour of buying – E.g. Too small quantity
• Qualitative factors – In favour of making
• E.g. Maintain secrecy
– In favour of buying• E.g. Spread financial risks (Page 397 – 398)
Discuss
• Recommend make-or-buy decisions to Paul for ‘DimS’
NPV
Make per unit US$
Direct labour 40
Inventory storage 25
Factory overheads 15
Capital equipment 30
Cost per unit 110
Make per unit US$
Direct labour 40
Inventory storage 25
Factory overheads 15
Capital equipment 30
Cost per unit 110
Make Buy Difference
Cost per unit $110 $80 $30
Cost × volume (100,000 pieces) $11,000,000 $8,000,000 $3,000,000
Make Buy Difference
Cost per unit $110 $80 $30
Cost × volume (100,000 pieces) $11,000,000 $8,000,000 $3,000,000