Supply Chain Management

Module 4

Role of sourcing in a supply chain Purchasing, also called procurement, is the process by which companies acquire raw materials, components, products, services or other resources from suppliers to execute their operations. Sourcing is the entire set of business process required to purchase goods and services.

Sourcing related process

Supplier scoring and Assessment

Supplier selection and Contract negotiation

Design Collaboration

Procurement

Sourcing planning and Analysis

In-House or Outsource The decision to outsource is based on the growth in supply chain surplus provided by the third party and the increase in risk incurred by using a third party. A firm should consider outsourcing if the growth in surplus is large with a small increase in risk. Performing the function in-house is preferable if the growth in surplus is small or the increase in risk is large.

How do third parties increase the supply chain surplus?

1) Capacity aggregation 2) Inventory aggregation 3) Transportation aggregation by transportation intermediaries 4) Transportation aggregation by storage intermediaries 5) Warehousing aggregation 6) Procurement aggregation 7) Information aggregation 8) Receivables aggregation 9) Relationship aggregation 10)Lower costs and higher quality

Risks of using a third party

1. 2. 3. 4. 5. 6.

The process is broken Underestimating of the cost of coordination Reduced customer/supplier contact Loss of internal capability and growth in third-party power Leakage of sensitive data and information Ineffective contacts

Third and Fourth Party Logistics providers

A third party logistics (3PL) providers performs one or more of the logistics activities relating to the flow of product, information and funds that could be performed by the firm itself. For E.g.: UPS started out as a small package carrier. Now UPS has warehousing, Information technology, international and variety of other services.

Third and Fourth Party Logistics providers

A 4PL was first defined by Andersen Consulting as an integrator that assembles the resources, capabilities and technology of its own organizations and other organizations to design, build and run comprehensive supply chain solutions.
For e.g.: Menlo Logistics manages all aspects of the supply chain for Home life, a national home furnishings retail chain. Transportation, warehousing, home delivery, product setup, repair and reverse logistics for home life

Third and Fourth Party Logistics providers

3PL It targets a function 3pl as a general manages one or more functions not all the functions.

4PL Targets management of entire process 4pl as a general contractor who manages other 3pls, truckers, forwarders, custom brokers and others

Supplier Scoring and assessment

Replenishment lead time On-Time performance Supply flexibility Delivery frequency/minimum lot size Supply quality Inbound transportation cost Pricing terms Information coordination capability Design Collaboration Exchange rates, taxes and duties Supplier viability

The Procurement Process

Once supplier have been selected, contracts are in place, and the product has been designed, the buyer and suppliers engage in procurement transactions that begin with buyer placing the order and end with the buyer receiving and paying for the order.

Differences between Direct and Indirect Materials

Direct Materials Use Accounting Impact on Production Processing cost relative to value of transaction Number of transactions Production Cost of goods sold Any delay will delay production Low Low

Indirect Materials Maintenance, repair and support operations SG&A Less direct impact High High

Product categorization by value and critically

High

Critical Items

Strategic Items

General Items
Low Low

Bulk Purchase items

High

Value/Cost

Pricing & Revenue Management for Multiple Customers

A classic example of a market with multiple customer segments is the airline industry, where business travelers are willing to pay a higher fare to travel a specific schedule, whereas leisure travelers are willing to shift their schedule to take advantage of lower fares.
The firm must solve the following two problems for pricing What price to charge each segment How to allocate limited capacity among the segments.

Revenue Management

A firm must use the following tactics effectively;

Price based on the value assigned by each segment Use of different prices for each segment Forecast at the segment level

Pricing & revenue management for perishable assets

What is perishable?
Any asset that loses its value over time is perishable, like fruits, vegetables & pharmaceuticals. Even computers and cell phones come under perishable. The revenue management tactics used for perishable assets are Vary prices dynamically over time to maximize expected revenue Overbook sales of asset to account for cancellations

Dynamic Pricing

Dynamic pricing, the tactic of varying price over time, is suitable for assets such as fashion apparel that have a clear date beyond which they lose a lot of their value.

Pricing for seasonal demand

Seasonal peaks of demand are common occurrence in many supply chains.

Pricing for bulk and spot contracts

Most firms face a market in which some customers purchase in bulk at a discount and other buy singe units or small lots at a higher price.

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