Chapter 4

Ethical and
Sustainable
Sourcing

Prepared by Mark A. Jacobs, PhD

2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.

LEARNING OBJECTIVES
You should be able to
Describe the difference between purchasing and
strategic sourcing
Describe how strategic sourcing plans are developed and
implemented
Define and describe the terms green sourcing, VMI, JIT
II, in-sourcing, co-sourcing, and co-managed inventories
Describe sourcings role in managing key supplier
relationships

2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

LEARNING OBJECTIVES
(Continued)

You should be able to

Describe the performance criteria used in assessing
suppliers.
Describe how strategic supplier relationships can impact
the firm.
Describe how a reverse auction works.
Understand the importance of sharing the benefits of
strategic partnerships.
Understand the strategic role played by the purchasing
function in developing & improving the supply chain.
2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CHAPTER OUTLINE
Introduction

Ethical and Sustainable Sourcing

Developing Ethical and Sustainable Sourcing Strategies
Supply Base Rationalization Programs
Ethical and Sustainable Supplier Certification Programs
Outsourcing Products & Services
Early Supplier Involvement
Strategic Alliance Development

2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CHAPTER OUTLINE

(Continued)

Use of e-Procurement Systems

Rewarding Supplier Performance
Benchmarking Successful Sourcing Practices
Using Third-Party Supply Chain Management Services

Assessing & Improving the Firms Sourcing Function

2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Introduction
Sourcing - all of firms activities used to manage
external resources.

Strategic sourcing - managing the firms external

resources to support firms long term goals.

Drivers of Strategic Sourcing

Reduce costs & delivery cycle times

Improve quality & long-term financial performance
Increase number of global competitors
Increase customer focus
Reduce high costs of globalization & materials,
Deliver more innovative products more frequently &
cheaply than competitors

Ethical and Sustainable

Sourcing Strategies
Business Ethics is the application of ethical
principles to business

Corporate Social Responsibility is the practice

of business ethics

Ethical Sourcing is that which attempts to take into

account the public consequences of organizational
buying or bring about positive social change through
organizational buying behavior

Ethical and Sustainable

Sourcing Strategies
(Continued)

Ethical Policies should include

Determining where all purchased goods originated
and the manner in which they were made
Knowledge of the suppliers workplace principles
Inclusion of ethics as a performance rating
Independent verification of vendor compliance
Report of supplier compliance to stakeholders
Provision of detailed ethical sourcing expectations to
suppliers

Ethical and Sustainable

Sourcing Strategies
(Continued)

Sustainable Sourcing
Green purchasing is aimed at ensuring products or
materials meet environmental objectives e.g. waste
reduction, reuse and recycling
Sustainability is the ability to meet current needs of
the supply chain without hindering the ability to meet
future needs in terms of economic, environmental,
and social challenges
Considers worker safety, wages, working conditions, human
rights

Ethical and Sustainable

Sourcing Strategies
(Continued)

Sustainable Sourcing should seek to

Grow revenues
New sustainable product introduction

Reduce costs
Increase resource efficiencies

Manage risk
Link brand to social consciousness of consumer

Build intangible assets

Build social and environmental responsibility

Ethical and Sustainable

Sourcing Strategies
(Continued)

Functional Products - MRO items & other

commonly low profit margins with relatively stable
demands & high levels of competition

Innovative Products - characterized by short

product life cycles, volatile demand, high profit
margins, & relatively less competition

Ethical and Sustainable

Sourcing Strategies
(Continued)

Framework for ethical and sustainable

sourcing strategy development
Step 1 Establish corporate ethical and sustainable sourcing
strategies
Step 2 Train purchasing staff and implement policies
Step 3 Prioritize items based upon ethical and sustainability
opportunities and ease of implementation
Step 4 Develop performance measurement system
Step 5 Monitor progress and make improvements. Increase
use of green and fair trade products
Step 6 Expand focus to include other departments

Ethical and Sustainable

Sourcing Strategies
(Continued)

Ethical and Sustainable Framework

Step 1:
Establish
policies

Step 2: Train and

implement

Step 3:
Prioritize
opportunities

Step 4: Develop
performance
measurement
systems

Step 5: Monitor
progress and
make
improvements

Step 6: Expand
focus to other
departments

Supply Base
Rationalization
Programs
Supply base
rationalization (AKA supply base
reduction or supply base optimization) is often
the initial supply chain management effort
Buyer-supplier partnerships are easier with a
rationalized supply base & result in
Reduced purchase prices
Fewer supplier management problems
Closer & more frequent interaction between buyer &
supplier
Greater levels of quality & delivery reliability

Ethical and
Sustainable Supplier
Programs
SupplierCertification
certification programs
are used to
identify strategic supplier alliance candidates
Firms use in-house formal certification programs,
& most require ISO 9000 / 14000 or similar
certifications as part of the certification process
Buyers can monitor quality assurance methods &
specify the type of acceptance sampling &
statistical process control methods used

Outsourcing Products
and Services
Outsourcing allows a firm to

Concentrate on core capabilities

Reduce staffing levels
Accelerate reengineering efforts
Reduce management problems
Improve manufacturing flexibility.

Risks associated with outsourcing, include

Loss of control
Production decisions & intellectual property

Increased reliance on suppliers

Increased need for supplier management

Outsourcing Products
and Services
(Continued)

In-sourcing (backsourcing)
Reverting to in-house production when quality, delivery,
and services do not meet expectations

Co-sourcing (selective sourcing)

The sharing of a process or function between internal
staff and an external provider & provides flexibility to
decide what areas to outsource, when, and for how
long.

Early Supplier
Involvement
Early supplier involvement (ESI) highly effective

supply chain integrative techniques

- Key suppliers become more involved in the internal
operations of the firm, particularly with respect to
new product & process design, concurrent
engineering & design for manufacturability
techniques

Value engineering activities help the firm to reduce

cost, improve quality & reduce new product development

time

Early Supplier
Involvement

(Continued)

Vendor managed inventory (VMI)

Suppliers manage buyer inventories to reduce inventory
carrying costs & avoid stockouts for buyer

From the buyer-firms perspective

Supplier tracks inventories
Determines delivery schedules and order quantities
Buyer can take ownership at stocking location

From the suppliers perspective

Avoids ill-advised customer orders
Supplier decides inventory set up & shipments
Opportunity for supplier to educate customers about other
products

Early Supplier
Involvement

(Continued)

Electronic data interchange (EDI)

Allows a supplier to profile demand & determine accurate
forecasts
EDI also provides reorder point data to permit timely
deliveries

Supplier co-location or JIT II

Suppliers employee is embedded in buyers purchasing
department to forecast demand, monitor inventory & place
orders with access to sensitive files & records

Strategic Alliance
Development
Alliance development, an extension of supplier
development refers to increasing a key or
strategic suppliers capabilities.
Supplier alliances result in better market
penetration access to new technologies &
knowledge, & higher return on investment
Alliance development eventually extends to a
firms second-tier suppliers, as the firms key
suppliers begin to form their own alliances.

Negotiating Win-Win
Strategic Alliance
Agreements
Collaborative
negotiations (aka integrative

negotiations)
Both sides work together to maximize the outcome
or create a win-win result
Requires open discussions and a free-flow of
information between parties

Distributive negotiations
Refers to a process that leads to self-interested,
one-sided outcome

Steps

Negotiating Win-Win
Strategic Alliance
Description
Agreements
(Continued)

1. Build preparation
process

Gain an understanding of both parties interests;

brainstorm value-maximizing solutions; identify objective
criteria to evaluate fairness of agreement.

2. Develop
negotiation
database

Review previous negotiations to catalogue standards,

practices, precedents, metrics, creative solutions used,
and lessons learned.

3. Design
negotiation
launch process

Create an environment to work together to create a

shared vocabulary, build working relationships, and map
out a shared decision-making process.

4. Institute feedback
mechanism

Create process to provide feedback to negotiating teams

and capture lessons learned.
(Table 4.4)

Use of e-Procurement
Systems
Primary benefits of e-procurement include
Cost savings
Frees-up time to concentrate on core business
e-procurement systems
Concentrate large volumes of small purchases with
a few suppliers, using e- catalogues, available to
the organizations users.
Reverse auctions
Pre-qualified suppliers enter Web site & at predesignated time & date, try to underbid competitors,
monitoring bid prices until the session is over.

Rewarding Supplier
Performance
Rewarding suppliers provides an incentive to surpass
performance goals

Punishment is a negative reward, may be to reduce future

business; or a bill-back amount equal to the incremental costs
resulting from a late delivery or poor quality

Strategic supplier agreements can reward

suppliers by allowing

A share of the cost reductions

More business and/or longer contracts
Access to in-house training seminars & other resources
Company & public recognition

Benchmarking
Successful Sourcing
Practices
Benchmarking

Measuring what other businesses do best and

matching their performance is an effective approach to
improving supply chain performance.
Benchmarking
data regarding sourcing practices can be obtained in
any number of ways, both formal &
informal.

Resources for learning about & implementing

sourcing practices
The Center for Advanced Purchasing Studies.
Supply-Chain Council.

Using Third-Party
Supply Chain
Management
Services
Third-party
logistics (3PL)
A growing industry that involves managing a

firms sourcing or materials &/or product distribution

responsibilities

3PL providers charge a fee for services for an estimated

savings of 10 to 20% of total logistics costs; benefits
include improved service, quality, & profits for their
clients.

Vendor-managed inventory (VMI) services

One of the more popular roles of 3PL.
Lead logistics provider (LLP), aka 4PL
A primary 3PL provider; one that oversees other
3PLs

Assessing & Improving

the Firms Purchasing
Function
The purchasing
function is one of the most
value-enhancing functions in any organization
It is preferable to periodically monitor the purchasing
functions performance against set standards, goals,
and/or industry benchmarks.
Surveys or audits can be administered as selfassessments among purchasing staff as part of the
annual evaluation process.

Assessing & Improving

Firms Purchasing
Function
Skill set requirements
of purchasing professionals
(Continued)

have been changing. Purchasing personnel must today

exhibit world-class skills such as
1. Interpersonal
communication
2. Ability to make
decisions
3. Ability to work in
teams
4. Analytical skills
5. Negotiation skills

6. Customer focus
7. Ability to manage
change
8. Influencing &
persuasion skills
9. Strategic skills
10. Understanding
business conditions

Assessing & Improving

Firms Purchasing
Function
Assessment
criteria include
(Continued)

1. Participating in and
leading multifunctional
teams
2. Participate in value
engineering efforts
3. Optimize supply base
4. Create ESI initiatives
5. Utilize e-procurement

6. Further supplier
integration
7. Contribute to new
product development
8. Improve time to market
9. Initiate supplier cost
reduction programs
10. Creation of strategic
alliances