 Process in which the supplier sends product in response to

customer orders.
 Key decisions:
 Buy/make decision process

 Supplier selection
 Subcontracting a process, such as product design or
manufacturing, to a third-party company.
 The decision to outsource is often made in the interest of
lowering firm costs, redirecting or conserving energy
directed at the competencies of a particular business, or to
make more efficient use of land, labor, capital, (information)
technology and resources.
 Industri Perbankan 100,00%

Industri Alat Berat, Mesin, dan Sarana

Transportasi (otomotif dan suku cadang) 42,86% 57,14%

Industri Farmasi & Kimia Dasar 20,00% 80,00%

Industri Telekomunikasi & 40,00% 60,00% TIDAK

Informasi Teknologi
YA
Industri Kertas
Outsource’s users 100%

Industri Jasa Pendidikan 100%

Industri Pengolahan Karet & Plastik 100%

Industri Makanan & Minuman 100%

Nirlaba 100,00%

Joint Venture 100%

Source: PPM Manajemen Research Division, Agustus 2008
BUMN 100%

TIDAK
Swasta Asing 14,29% 85,71% YA

Swasta Nasional 42,31% 57,69%

 Economies of scale
 Aggregation of multiple orders reduces costs, both in purchasing and in
manufacturing

 Risk pooling
 Demand uncertainty transferred to the suppliers
 Suppliers reduce uncertainty through the risk-pooling effect

 Reduce capital investment

 Capital investment transferred to suppliers.
 Suppliers’ higher investment shared between customers.
 Focus on core competency
 Buyer can focus on its core strength
 Allows buyer to differentiate from its competitors

 Increased flexibility
 The ability to better react to changes in customer demand
 The ability to use the supplier’s technical knowledge to accelerate product
development cycle time
 The ability to gain access to new technologies and innovation.
 Critical in certain industries:
▪ High tech where technologies change very frequently
▪ Fashion where products have a short life cycle
 Loss of competitive knowledge
 Open up opportunities for competitors
 Lose ability to introduce new designs
 Prevent the development of new insights, innovations, and solutions that
typically require cross-functional teamwork
 Product design issues
 Buyers insist on flexibility
 Suppliers focus on cost reduction
 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?
 Component Clockspeed
 How fast does the component’s technology change relative to other components
in the system?
 Competitive Position
 Does the firm have a competitive advantage producing this component?
 Capable Suppliers
 How many capable suppliers exist?
 Architecture
 How modular or integral is this element to the overall architecture of the system?
 Independent for
Dependency on Independent for
knowledge,
Product knowledge and knowledge and
dependent for
capacity capacity
capacity
Outsourcing is risky Outsourcing is an Opportunity to reduce
Modular opportunity cost through
outsourcing
Outsourcing is very Outsourcing is an Keep production
Integral risky option internal
 Impact of procurement on business performance
 2005 profit margins for Pfizer (24%), Dell (5%), Boeing (2.8%)
 Reducing procurement cost by exactly 1% of revenue would have
translated directly into bottom line, i.e., net profit.
 To achieve the same impact on net profit through higher sales
 Pfizer would need to increase its revenue by 4.17 (0.01/0.24) % , Dell by
20% and Boeing by 35.7%
 The smaller the profit margins, the more important it is to
focus on reducing procurement costs
 Functional Products Innovative Products

Product clockspeed Slow Fast

Demand Characteristics Predictable Unpredictable
Profit Margin Low High
Product Variety Low High
Average forecast error at the
Low High
time production is committed
Average stockout rate Low High
Fashion items, cosmetics, or high tech
Type of products Diapers, soup, milk
products
Appropriate supply chain
push pull
strategy
Responsiveness, maximizing service
Efficiency, cost reduction, supply chain
Procurement Focus level, order fulfillment (reducing lead
planning (minimizing total landed cost)
times and on supply flexibility)
low-cost countries, e.g., mainland China
Sourcing close to the market area
and Taiwan is appropriate
 Kraljic’s framework focuses on supply side
 Fisher’s framework focuses on finished goods and demand side
 Combine Fisher’s and Kraljic’s frameworks to derive sourcing
strategy
 4 criteria for integrated Framework
 Component forecast accuracy
 Component supply risk
 Component financial impact
 Component clockspeed
 Buyback or return contracts
 Revenue-sharing contracts
 Quantity flexibility contracts
 Sealed-bid first-price auctions: each potential supplier submit
sealed bid by a specified time then contract assigned to the
lowest bidder.
 English auctions: the auctioneer starts with price and suppliers
can make bids as long as each successive bid is lower than the
previous bid.
 Dutch auctions: the auctioneer starts with low price and then
raises it slowly until one of the suppliers agree to the contract
at that price.
 Efficient
Primary Goal Supply Demand at the lowest
cost
Product Design Strategy Maximize performance at a
minimum product cost
Pricing Strategy Lower margins because price is
a prime customer driver
Manufacturing Strategy Lower costs through high
utilization
Lead time strategy Reduce, but not at the expense
of costs
Supplier strategy Select based on cost and quality
Responsive
Respond quickly to demand
Create modularity to allow
postponement of product
differentiation
Higher margins because price is
not a prime customer driver
Maintain capacity flexibility to
buffer against demand/supply
uncertainty
Reduce aggresively, even if the
costs are significant
Select based on speed,
flexibility, reliability, and quality