《供应链系统设计与管理》课程授课教案（讲义）Chapter 09（Lecture 11）Procurement and Outsourcing Strategies

全英文课《DesigningandManagingSupplyChainSystem》授课教案Chapter 9 (Lecture 11) Procurement and OutsourcingStrategiesOBJECTIVES(1)Understand the roles of procurement and outsourcing in the supply chainrespectively.(2)Grasp the risks and benefits ofoutsourcing.(3)Grasp what kind of procurement strategy should a company use for individualproducts.TEACHINGCONTENT9.1IntroductionOutsourcing components have increased progressively over the years.Someindustries have been outsourcing for an extended time, such as:Fashion Industry(Nike)(all manufacturing outsourced),Electronics Industry,Cisco (major suppliersacrosstheworld),Apple (over70%ofcomponentsoutsourced)9.2Outsourcing Benefits and Risks(1)BenefitsEconomies of scale.An important objective in outsourcing is to reducemanufacturing costs through the aggregation of orders from many different buyers.Indeed,the aggregation allows suppliers to take advantage ofeconomies of scale,bothin purchasing and in manufacturing.Risk pooling.Outsourcing allows buyers to transfer demand uncertainty to theCEM.One advantage that the CEMs have is that they aggregate demand from manybuying companies and thus reduce uncertainty through the risk-pooling effect.TheCEMs can thus reduce component inventory levels while maintaining or evenincreasing service level.Reduce capital investment.Another important objective in outsourcing is totransfernot only demand uncertainty to the CEM but also capital investment.Ofcourse, the CEM can make this investment because it is implicitly shared betweenmanyof theCEM's customers.Focus on core competency. By carefully choosing what to outsource, the buyeris able to focus on its core strength, that is,the specific talent, skills,and knowledgesets that differentiate the company from its competitors and give it an advantage in theeye of the customers.For instance,Nike focuses on innovation, marketingdistribution, and sales, not on manufacturing.Increased flexibility.Here werefertothreeissues:()Theabilitytobetterreactto changes in customer demand, (ii)the ability to use the supplier's technicalknowledgetoaccelerateproductdevelopmentcycletime,and(ii)theabilityto gain

全英文课《Designing and Managin1g Supply Chain System》 授课教案 Chapter 9 (Lecture 11) Procurement and Outsourcing Strategies OBJECTIVES (1)Understand the roles of procurement and outsourcing in the supply chain respectively. (2)Grasp the risks and benefits of outsourcing. (3)Grasp what kind of procurement strategy should a company use for individual products. TEACHING CONTENT 9.1 Introduction Outsourcing components have increased progressively over the years.Some industries have been outsourcing for an extended time, such as: Fashion Industry (Nike) (all manufacturing outsourced), Electronics Industry, Cisco (major suppliers across the world), Apple (over 70% of components outsourced). 9.2 Outsourcing Benefits and Risks (1) Benefits: Economies of scale. An important objective in outsourcing is to reduce manufacturing costs through the aggregation of orders from many different buyers. Indeed, the aggregation allows suppliers to take advantage of economies of scale, both in purchasing and in manufacturing. Risk pooling. Outsourcing allows buyers to transfer demand uncertainty to the CEM. One advantage that the CEMs have is that they aggregate demand from many buying companies and thus reduce uncertainty through the risk-pooling effect. The CEMs can thus reduce component inventory levels while maintaining or even increasing service level. Reduce capital investment. Another important objective in outsourcing is to transfer not only demand uncertainty to the CEM but also capital investment. Of course, the CEM can make this investment because it is implicitly shared between many of the CEM's customers. Focus on core competency. By carefully choosing what to outsource, the buyer is able to focus on its core strength, that is, the specific talent, skills, and knowledge sets that differentiate the company from its competitors and give it an advantage in the eye of the customers. For instance, Nike focuses on innovation, marketing, distribution, and sales, not on manufacturing. Increased flexibility. Here we refer to three issues: (i) The ability to better react to changes in customer demand, (ii) the ability to use the supplier's technical knowledge to accelerate product development cycle time, and (iii) the ability to gain

全英文课《DesigningandManagingSupplyChainSystem》授课教案access to new technologies and innovation.These are critical issues in industrieswheretechnologies change very frequently,for example,high-tech, or when productshave a short life cycle,for example, fashion products.(2) RisksLoss of competitive knowledge.Outsourcing critical components to suppliersmay open up opportunities for competitors.Similarly,outsourcing implies thatcompanies lose their ability to introduce new designs based on their own agendarather than the supplier's agenda. Finally,outsourcing the manufacturing of variouscomponents to different suppliers may prevent the development of new insightsinnovations, and solutions that typically require cross-functional teamwork.Conflicting objectives. Suppliers and buyers typically have different andconflictingobjectives.For instance,increasedflexibilityisa key objectivewhenbuyers outsource the manufacturing of various components.This implies an ability tobetter match supply and demand by adjustingproduction rates as neededUnfortunately, this objective is in direct conflict with the suppliers' objectives oflong-term,firm,and stable commitmentfrom thebuyer.Indeed, this is an importantissuefor suppliers since.unlikethe buyers.their profit margins are relatively smaland, hence, they have to focus on cost reduction rather than flexibility9.3FrameworkforMake/BuyDecisions9.3.1Two MainReasons forOutsourcingTo introduce the framework, they classify the reasons for outsourcing into twomajor categories:Dependency on capacity.In this case, the firm has theknowledge and the skillsrequired to produce the component but for various reasons decides to outsource.Dependency on knowledge.In this type of dependency,the company does nothave the people, skills, and knowledge required to produce the component andoutsources in order to have access to these capabilities. Of course, the company has tohave the knowledge and skills to evaluate customer needs and convert these into keyrequirements and characteristics that the component should have.9.3.2ProductArchitecturesThe definition of modularproducts implies:·Components are independent of each other..Components are interchangeable.·Standard interfacesareused.·A component can be designed or upgraded with little or no regard to othercomponents.·CustomerpreferencedeterminestheproductconfigurationAn integral product, on the other hand, is a product made up from componentswhosefunctionalitiesaretightlyrelated.Thus.Integral products are not madefrom off-the-shelfcomponents.Integral products are designed as a system by taking a top-down designapproach

全英文课《Designing and Managin2g Supply Chain System》 授课教案 access to new technologies and innovation. These are critical issues in industries where technologies change very frequently, for example, high-tech, or when products have a short life cycle, for example, fashion products. (2) Risks Loss of competitive knowledge. Outsourcing critical components to suppliers may open up opportunities for competitors. Similarly, outsourcing implies that companies lose their ability to introduce new designs based on their own agenda rather than the supplier's agenda. Finally, outsourcing the manufacturing of various components to different suppliers may prevent the development of new insights, innovations, and solutions that typically require cross-functional teamwork. Conflicting objectives. Suppliers and buyers typically have different and conflicting objectives. For instance, increased flexibility is a key objective when buyers outsource the manufacturing of various components. This implies an ability to better match supply and demand by adjusting production rates as needed. Unfortunately, this objective is in direct conflict with the suppliers' objectives of long-term, firm, and stable commitment from the buyer. Indeed, this is an important issue for suppliers since, unlike the buyers, their profit margins are relatively small and, hence, they have to focus on cost reduction rather than flexibility. 9.3 Framework for Make/Buy Decisions 9.3.1 Two Main Reasons for Outsourcing To introduce the framework, they classify the reasons for outsourcing into two major categories: Dependency on capacity. In this case, the firm has the knowledge and the skills required to produce the component but for various reasons decides to outsource. Dependency on knowledge. In this type of dependency, the company does not have the people, skills, and knowledge required to produce the component and outsources in order to have access to these capabilities. Of course, the company has to have the knowledge and skills to evaluate customer needs and convert these into key requirements and characteristics that the component should have. 9.3.2 Product Architectures The definition of modular products implies: • Components are independent of each other. • Components are interchangeable. • Standard interfaces are used. • A component can be designed or upgraded with little or no regard to other components. • Customer preference determines the product configuration. An integral product, on the other hand, is a product made up from components whose functionalities are tightly related. Thus, • Integral products are not made from off-the-shelf components. • Integral products are designed as a system by taking a top-down design approach

全英文课《DesigningandManagingSupplyChainSystem》授课教案.Integral products are evaluated based on system performance,not based oncomponentperformance.?Components in integral products perform multiple functions.9.3.3AFrameworkforMake/BuyDecisionsProductrIndependentforDependencyonIndependentforknowledge,knowledgeandknowledgeandcapacitydependent forcapacitycapacityModularOutsourcing isOutsourcing isOpportunitytoriskyanopportunityreducecostthroughoutsourcingOutsourcing isOutsourcing isIntegralKeepproductionveryriskyanoptioninternalThis framework considers bothmodular and integral products,and thefirm'sdependency onknowledge and capacity.For modularproducts,capturingknowledgeis important,whereashaving the production capacityin-houseis less critical.On theotherhand, if thefirm has neither knowledgenor capacity,outsourcing may be a riskystrategy as theknowledge developed by the supplier may be transferred to acompetitor's products.For integral products,capturing bothknowledge and capacityis importantaslongas it ispossibletohaveboth.This impliesthat ifthefirmhas boththeknowledgeand thecapacity,then in-houseproduction is appropriate9.3.4Hierarchical Model toDecideWhether to OutsourceorNotThehierarchical model that includesfivecriteria:1.Customer Importance.How important is the component to the customer?What is the impact of the component on customer experience? Does the componentaffect customerchoice?In short,what is thevalue customers attached to thecomponent?2.Component clockspeed.How fast does the component's technology changerelativetoother components inthe system?3.Competitive position.Does the firm have a competitive advantage producingthis component?4.Capable suppliers.Howmany capable suppliers exist?5.Architecture. How modular or integral is this element to the overallarchitecture of the system?

全英文课《Designing and Managin3g Supply Chain System》 授课教案 • Integral products are evaluated based on system performance, not based on component performance. • Components in integral products perform multiple functions. 9.3.3 A Framework for Make/Buy Decisions This framework considers both modular and integral products, and the firm's dependency on knowledge and capacity. For modular products, capturing knowledge is important, whereas having the production capacity in-house is less critical. On the other hand, if the firm has neither knowledge nor capacity, outsourcing may be a risky strategy as the knowledge developed by the supplier may be transferred to a competitor's products. For integral products, capturing both knowledge and capacity is important as long as it is possible to have both. This implies that if the firm has both the knowledge and the capacity, then in-house production is appropriate. 9.3.4 Hierarchical Model to Decide Whether to Outsource or Not The hierarchical model that includes five criteria: 1.Customer Importance.How important is the component to the customer? What is the impact of the component on customer experience? Does the component affect customer choice? In short, what is the value customers attached to the component? 2.Component clockspeed. How fast does the component's technology change relative to other components in the system? 3.Competitive position. Does the firm have a competitive advantage producing this component? 4.Capable suppliers. How many capable suppliers exist? 5.Architecture. How modular or integral is this element to the overall architecture of the system?

全英文课《Designing and ManagingSupplyChain System》授课教案9.3.5Examples ofDecisionsCriteriaExample2Example3Example4Example1CustomerImportantNot importantImportantImportantImportanceSlowHighSlawClockspeedHighCompetitiveCompetitiveNo advantageNoadvantageNo advantagePositionAdvantagexXCapableKey variableSupplierstodecidestrategyXxArchitectureKeyvariable todecide strategyDECISIONInhouseOutsourceInhouse,OutsourcewithAcquiremodular,supplier,InhouseorjointPartnershipdevelapmentwith integral.9.4Procurement StrategiesFirm'ssupplystrategyshoulddependon1)profit impact:Volumepurchased/percentageof total purchased cost/impactonproductqualityorbusinessgrowth2)supplyrisk:Availability/number of suppliers/competitive demand/make-or-buy opportunities/storagerisks/substitution opportunitiesThese two dimensions give rise to Kraljic's supply matrix, see Figure 9.1, wherethe horizontal coordinate represents profit impact and the vertical coordinaterepresents supply risks.The two axes define four quadrants.High?0BottleneckItemsStrategicItems·Ensuresupply·Form partnershipsdnLeverage ItemsNon-Critical Items.Exploitpurchasing.Simplifyandpowerandminimizeautomatecost24LOWHighLowProfitImpactFigure9.1Kraljic'sSupplyMatrixThe top-right quadrantrepresents strategic itemswhere supply risk and impactonprofitarehigh.Examplesof components inthatcategoryincludecarenginesandtransmission systems.Thesearethe itemsthathave thehighest impact on customerexperienceand theirprice is a largeportionof the system cost.These are alsothecomponents thattypicallyhavea single supplier.Clearly,the most appropriate supply

全英文课《Designing and Managin4g Supply Chain System》 授课教案 9.3.5 Examples of Decisions 9.4 Procurement Strategies Firm’s supply strategy should depend on: 1) profit impact: Volume purchased/ percentage of total purchased cost/ impact on product quality or business growth 2) supply risk: Availability/number of suppliers/competitive demand/ make-or-buy opportunities/ storage risks/ substitution opportunities These two dimensions give rise to Kraljic's supply matrix, see Figure 9.1, where the horizontal coordinate represents profit impact and the vertical coordinate represents supply risks. The two axes define four quadrants. Figure 9.1 Kraljic’s Supply Matrix The top-right quadrant represents strategic items where supply risk and impact on profit are high. Examples of components in that category include car engines and transmission systems. These are the items that have the highest impact on customer experience and their price is a large portion of the system cost. These are also the components that typically have a single supplier. Clearly, the most appropriate supply

全英文课《DesigningandManaginSupplyChainSystem》授课教案strategyfortheseitemsistofocus onlong-termpartnershipswithsuppliersThe bottom-right quadrant represents items with high impact on profit but lowsupply risk, what Kraljic calls leverage items. These are items that have manysuppliers, and a small percentage of cost savings will have a large impact on thebottom line.Thus,focusingon costreduction by,forexample,forcing competitionbetween suppliers is the appropriate procurement strategy.The top-left quadrant represents high supply-risk but low profit-impact itemsThese components,referred to as bottleneck components,do not contribute alargeportion of the product cost, but their supply is risky. Thus, unlike leverage items, inthis case suppliers have a power position. For these bottleneck items, ensuringcontinuous supply, even possibly at a premium cost, is important. This can be donethrough longterm contracts or by carrying stock (or both).Finally,for noncritical items,the objective is to simplify and automate theprocurement process asmuchas possible.In this case,a decentralized procurementpolicy is appropriate,for example,a policy where authorized employees order directly,without going through a formal requisition and approval process.9.5 Supply Chain Strategy(1)Functional products are associated with slow product clockspeedpredictable demand,and lowprofit margins.Examples includediapers, soup,milk,and tires.(2)Innovative products such as fashion items, cosmetics, or high-tech productsare associated with fast product clockspeed, unpredictable demand, and high profitmargins.Table9.1Characteristics of Functional versus InnovativeProductsFunctional productsInnovativeproductsProductclockepeedSlowFastUnpredictatlePredictableDemand characteristicsLowHighProfitmarginLowHighProduct varietyAverageforecasterroratHighLowthetimeproductioniscommittedLowHighAveragestockoutrate11.3SupplierIntegration intoNewProductDevelopmentTraditionally suppliers have been selected after design of product or components.Firms often realize tremendous benefits from involving suppliers in the designprocess.Benefits include(1)adecline inpurchased material costs(2)an increase in purchased material quality(3)adecline indevelopmenttimeand cost(4)anincreaseinfinalproducttechnologylevels

全英文课《Designing and Managin5g Supply Chain System》 授课教案 strategy for these items is to focus on long-term partnerships with suppliers. The bottom-right quadrant represents items with high impact on profit but low supply risk, what Kraljic calls leverage items. These are items that have many suppliers, and a small percentage of cost savings will have a large impact on the bottom line. Thus, focusing on cost reduction by, for example, forcing competition between suppliers is the appropriate procurement strategy. The top-left quadrant represents high supply-risk but low profit-impact items. These components, referred to as bottleneck components, do not contribute a large portion of the product cost, but their supply is risky. Thus, unlike leverage items, in this case suppliers have a power position. For these bottleneck items, ensuring continuous supply, even possibly at a premium cost, is important. This can be done through longterm contracts or by carrying stock (or both). Finally, for noncritical items, the objective is to simplify and automate the procurement process as much as possible. In this case, a decentralized procurement policy is appropriate; for example, a policy where authorized employees order directly, without going through a formal requisition and approval process. 9.5 Supply Chain Strategy (1) Functional products are associated with slow product clockspeed, predictable demand, and low profit margins. Examples include diapers, soup, milk, and tires. (2) Innovative products such as fashion items, cosmetics, or high-tech products are associated with fast product clockspeed, unpredictable demand, and high profit margins. Table 9.1 Characteristics of Functional versus Innovative Products 11.3 Supplier Integration into New Product Development Traditionally suppliers have been selected after design of product or components. Firms often realize tremendous benefits from involving suppliers in the design process. Benefits include: (1) a decline in purchased material costs (2) an increase in purchased material quality (3) a decline in development time and cost (4) an increase in final product technology levels

全英文课《DesigningandManagingSupplyChainSystem》授课教案11.3.1The Spectrumof SupplierIntegrationNo single“appropriatelevel”ofsupplier integration.In particular,they identifyaseries ofstepsfrom least tomost supplierresponsibilityasfollows:None. The supplier is not involved in design. Materials and subassemblies aresupplied according to customer specifications and design.White box.This level of integration is informal.The buyer “consults”with thesupplier informally when designing products and specifications, although there is noformal collaboration.Grey box.This represents formal supplier integration.Collaborative teams areformed between the buyer's and the supplier's engineers, and joint developmentoccursBlack box.The buyer gives the supplier a set of interface requirements and thesupplier independently designs and develops the required component.11.3.2AppropriateLevelDepends on the SituationProcess Steps tofollow:(1)Determineinternal corecompetencies.(2)Determinecurrent andfuturenewproduct developments.(3)IdentifyexternaldevelopmentandmanufacturingneedsThese three steps help management determine what is going to be procured fromsuppliers and what levelof supplierexpertiseis appropriate.Iffutureproductshavecomponents thatrequire expertisethatthefirm does not possess,and developmentofthesecomponents canbeseparatedfrom otherphasesof productdevelopment, thentaking a black-box approach makes sense.If this separation is not possible, then itmakes more sense to usethe grey-box development.If the buyer has some designexpertise but wants to ensure that the supplier can adequately manufacture thecomponent, perhaps a white-box approach is appropriate.11.3.3Keys toSupplierIntegrationMakingtherelationshipa success:·Select suppliers and build relationships with themAlign objectives with selected suppliersWhich suppliers can be integrated?·Capabilityto participate in thedesign process·Willingness to participate in thedesign processAbilityto reach agreements on intellectual property and confidentiality issues.·Ability to commit sufficient personnel and time to the process.Co-locatingpersonnel if appropriate·Sufficient resourcesto committothesupplierintegration ProcessQUESTIONS1.Answerthefollowingquestionsabout thecaseat thebeginning ofthischapter:

全英文课《Designing and Managin6g Supply Chain System》 授课教案 11.3.1The Spectrum of Supplier Integration No single“appropriate level”of supplier integration. In particular, they identify a series of steps from least to most supplier responsibility as follows: None. The supplier is not involved in design. Materials and subassemblies are supplied according to customer specifications and design. White box. This level of integration is informal. The buyer “consults” with the supplier informally when designing products and specifications, although there is no formal collaboration. Grey box. This represents formal supplier integration. Collaborative teams are formed between the buyer's and the supplier's engineers, and joint development occurs. Black box. The buyer gives the supplier a set of interface requirements and the supplier independently designs and develops the required component. 11.3.2 Appropriate Level Depends on the Situation Process Steps to follow: (1) Determine internal core competencies. (2) Determine current and future new product developments. (3) Identify external development and manufacturing needs. These three steps help management determine what is going to be procured from suppliers and what level of supplier expertise is appropriate. If future products have components that require expertise that the firm does not possess, and development of these components can be separated from other phases of product development, then taking a black-box approach makes sense. If this separation is not possible, then it makes more sense to use the grey-box development. If the buyer has some design expertise but wants to ensure that the supplier can adequately manufacture the component, perhaps a white-box approach is appropriate. 11.3.3 Keys to Supplier Integration Making the relationship a success: • Select suppliers and build relationships with them • Align objectives with selected suppliers Which suppliers can be integrated? • Capability to participate in the design process • Willingness to participate in the design process • Ability to reach agreements on intellectual property and confidentiality issues. • Ability to commit sufficient personnel and time to the process. • Co-locating personnel if appropriate • Sufficient resources to commit to the supplier integration Process. QUESTIONS 1. Answer the following questions about the case at the beginning of this chapter:

全英文课《DesigningandManagingSupplyChainSystem》授课教案a. Describe Zara's current sourcing strategy. How is it a competitive advantageforthefirm?b. What specific challenges are a result of Zara's rapid inventory turnover? Whatportions of Zara's replenishment strategy make it easier to manage?c.Wil Zara's current sourcing strategy continue to be useful as it expands? Howshould this strategy change? What are the risks associated with this new strategy?2.Discuss the impactof theproduct life cycleon thebuy/makeframework developedinSection9.33.Apply the hierarchical model discussed in Section 9.3 to IBM's decision in the early198OstooutsourcetheproductionofmicroprocessorsforitsPCstoIntel.4.Consider a consumer product manufacturer such as Procter& Gamble.Analyzewhether the company should outsource the production of products such as shampooIs your recommendationconsistent withP&G's strategy?ifnot,explainthereasonforthedifferencebetween your strategy andwhat is done byP&G5.Discuss the appropriate sourcing strategy for a component with low customerimportance,fastclock speed,andnocompetitiveadvantage6.Apply the Kraljicmatrix model to the Cisco virtual manufacturing strategy

全英文课《Designing and Managin7g Supply Chain System》 授课教案 a. Describe Zara's current sourcing strategy. How is it a competitive advantage for the firm? b. What specific challenges are a result of Zara's rapid inventory turnover? What portions of Zara's replenishment strategy make it easier to manage? c. Will Zara's current sourcing strategy continue to be useful as it expands? How should this strategy change? What are the risks associated with this new strategy? 2. Discuss the impact of the product life cycle on the buy/make framework developed in Section 9.3. 3. Apply the hierarchical model discussed in Section 9.3 to IBM's decision in the early 1980s to outsource the production of microprocessors for its PCs to Intel. 4. Consider a consumer product manufacturer such as Procter & Gamble. Analyze whether the company should outsource the production of products such as shampoo. Is your recommendation consistent with P&G's strategy? If not, explain the reason for the difference between your strategy and what is done by P&G. 5. Discuss the appropriate sourcing strategy for a component with low customer importance, fast clock speed, and no competitive advantage. 6. Apply the Kraljic matrix model to the Cisco virtual manufacturing strategy