Sourcing

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Ethical and Sustainable

Sourcing

Chapter 4

Prepared by Mark A. Jacobs, PhD

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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 sourcing’s role in managing key supplier relationships

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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.

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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

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CHAPTER OUTLINE

(Continued)

• Use of e-Procurement Systems

• Rewarding Supplier Performance

• Benchmarking Successful Sourcing Practices

• Using Third-Party Supply Chain Management Services

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Introduction

Sourcing

-

all of firm’s activities used to manage

external resources.

Strategic sourcing

-

managing the firm’s external

resources to support firm’s 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

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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

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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

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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

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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

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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)

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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)

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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

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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

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Ethical and Sustainable Supplier

Certification Programs

Supplier 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

&

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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

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Outsourcing Products and

Services

(Continued)

In-sourcing (backsourcing) –

R

everting to in-house production when quality, delivery, and services do not meet expectations

Co-sourcing (selective sourcing) –

T

he 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.

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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

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Vendor managed inventory (VMI) –

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

From the buyer-firm’s perspective –

 Supplier tracks inventories

 Determines delivery schedules and order quantities

 Buyer can take ownership at stocking location

From the supplier’s perspective –

 Avoids ill-advised customer orders

 Supplier decides inventory set up & shipments

 Opportunity for supplier to educate customers about other products

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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

 Supplier’s employee is embedded in buyer’s purchasing department to forecast demand, monitor inventory & place orders with access to sensitive files & records

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Strategic Alliance Development

Alliance development

, an extension of

supplier

development

refers to increasing a key or

strategic supplier’s capabilities.

Supplier alliances

result in better market

penetration access to new technologies &

knowledge, & higher return on investment

Alliance development eventually extends to a

firm’s second-tier suppliers, as the firm’s key

suppliers begin to form their own alliances.

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Negotiating Win-Win Strategic

Alliance Agreements

Collaborative negotiations (aka integrative

negotiations) –

B

oth 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 –

R

efers to a process that leads to self-interested, one-sided outcome

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Negotiating Win-Win Strategic

Alliance Agreements

(Continued)

Steps Description

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.

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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 organization’s users.

Reverse auctions –

Pre-qualified suppliers enter Web site & at

pre-designated time & date, try to underbid competitors, monitoring bid prices until the session is over.

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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

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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.

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Using Third-Party Supply Chain

Management Services

Third-party logistics (3PL)

A growing industry that i

nvolves managing a firm’s 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 –

O

ne of the more popular roles of 3PL.

Lead logistics provider (LLP), aka 4PL –

A primary 3PL provider; one that oversees other 3PL’s

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Assessing & Improving the Firm’s

Purchasing Function

The

purchasing function

is one of the most

value-enhancing functions in any organization

 It is preferable to periodically monitor the

purchasing function’s performance against set standards, goals, and/or industry benchmarks.

 Surveys or audits can be administered as

self-assessments among purchasing staff as part of the annual evaluation process.

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Assessing & Improving Firm’s

Purchasing Function

(Continued)

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

Skill set requirements of purchasing professionals

have been changing. Purchasing personnel must today exhibit world-class skills such as –

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Assessing & Improving Firm’s

Purchasing Function

(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