Chapter 16: Global Sourcing and Procurement

CHAPTER 16: GLOBAL
SOURCING AND
PROCUREMENT
LO16–1: Explain what strategic sourcing is.
LO16–2: Explain why companies outsource processes.
LO16–3: Analyze the total cost of ownership.
LO16–4: Evaluate sourcing performance.
McGraw-Hill/Irwin Copyright ©2017 McGraw-Hill Education. All rights reserved.

Strategic Sourcing
• Strategic sourcing: the development and management
of supplier relationships to acquire goods and services in
a way that aids in achieving the immediate needs of the
business
• In the past, sourcing was another name for purchasing
• As a result of globalization, sourcing implies a more
complex process suitable for products that are
strategically important
Copyright ©2017 McGraw-Hill Education. All rights reserved. 16-2

Sourcing/Purchasing Design Matrix
• Specificity: refers to how common the item is and, in a
relative sense, how many substitutes might be available
• Commonly available products can be purchased using a relatively
simple process
• Transaction Costs: the costs involved in purchasing an
item
• Contract Duration: the length of time for which the
contract has to be made for procuring an item

Sourcing/Purchasing Design Matrix
Exhibit 16.1 Copyright ©2017 McGraw-Hill Education. All rights reserved. 16-4
Strategic Sourcing Continued
• Request for proposal (RFP): used for purchasing items
that are more complex or expensive and where there may
be a number of potential vendors
• Spot purchase: one-time purchase
• Strategic alliance: long-term sourcing relationship that

involve development and continuous supply

Purchasing Process
Define
Select Contract
Specificatio Ordering Expediting Evaluation
Supplier Agreement
n
Purchase Role
Assure
Get Establish
adequate Prepare Establish order
Specification expediting Assess supplier
supplier contract routine
routine
selection
Functional Prequalification Contracting

Elements
specifications, of suppliers; expertise;

Order handling Troubleshooting Supplier rating
Technical Request for Negotiation
changes Quotation expertise
Documents
Exception Preferred
Functional Supplier report; supplier list;
specifications; selection Contract Order
Invoices; Supplier ranking
Specs control proposal
Due date listing scheme

Supplier Relationships

Developing
Deep
Relationships
with Suppliers

Increasing Variability of Orders Up the Supply Chain
The Bullwhip Effect
• Forward buying: retailers responding to a temporary price cut
by stocking up
• Bullwhip effect: phenomenon of variability magnification as we
move from the customer to the producer in the supply chain
• A slight change in consumer sales ripples backward as magnified
oscillations upstream, like the result of a flick of a bullwhip handle
• Continuous replenishment: inventory is replaced frequently,
as part of an ongoing process
• Vendor-managed inventory: when a customer actually allows
the supplier to manage an item or group of items for them
• Retailers provide demand data and current level of inventory to the
upstream firm
• The upstream firm forecasts future demand and determines how much to
supply.
Functional Products
• Functional products: the staples that people buy in a
wide range of retail outlets, such as grocery stores and
gas stations
• Product life cycle of more than two years
• Contribution margin of 5 to 20 percent
• Only 10 to 20 product variations
• An average forecast error of only 10 percent
• Lead time for make-to-order products of from six months
to one year

Innovative Products
• Innovation can enable a company to achieve higher profit
margins
• Newness of the innovative products makes demand for
them unpredictable
• Typically have a life cycle of just a few months
• Imitators quickly erode the competitive advantage that innovative
products enjoy
• Companies are forced to introduce a steady stream of newer
innovations
• The short life cycles and the great variety typical of these
products further increase unpredictability

Product and Process Uncertainty Characteristics
Supply Chain Uncertainty Framework
Uncertaint
Supply
Four Types of Supply Chain Strategies
1. Efficient supply chains: utilize strategies aimed at
creating the highest cost efficiency
2. Risk-hedging supply chains: utilize strategies aimed
at pooling and sharing resources in a supply chain to
share risk
3. Responsive supply chains: utilize strategies aimed at
being responsive and flexible
4. Agile supply chains: utilize strategies aimed at being
responsive and flexible to customer needs

Outsourcing
• Outsourcing: moving some of a firm’s internal activities
and decision responsibility to outside providers
• Allows a company to create a competitive advantage
while reducing cost
• An entire function may be outsourced, or some elements
of an activity may be outsourced, with the rest kept in-
house

Reasons to Outsource and the Resulting Benefits
A Framework for Structuring Supplier Relationships
Green Sourcing
• Being environmentally responsible has become a
business imperative
• Many firms are looking to their supply chains to deliver
“green” results
• Financial results can often be improved through going
green
• A comprehensive green sourcing effort should assess
how a company uses items that are purchased internally
• It is also important to reduce waste

Green Sourcing Process
Energy, disposal, packaging,
materials, water
Total Cost of Ownership
• Total cost of ownership
(TCO): an estimate of the
cost of an item
• Includes all the costs
related to the procurement
and use of an item,
including any related costs
in disposing of the item
• Can be applied to internal
costs or more broadly to
costs throughout the
supply chain
Measuring Sourcing Performance
• Inventory turnover: how often inventory is replaced
during the year
• Cost of goods sold: the annual cost for a company to produce the
goods or services provided to customers
• Average aggregate inventory value: the total value of all items
held in inventory
• Weeks of supply: how many weeks’ worth of inventory is

in the system at a particular point in time

Example 16.2: Inventory Turnover Calculation

Summary
• Sourcing is a term that captures the strategic nature of
purchasing in today's global and Internet-connected
marketplace
• The bullwhip effect is when changes in demand are magnified
as they move from the customer to the manufacturer
• Supply chains can be categorized based on demand and
supply uncertainty characteristics
• Four types of supply chains are identified: (1) efficient, (2) risk-hedging,
(3) responsive, and (4) agile
• Costs can generally be categorized into three areas
• (1) acquisition costs, (2) ownership costs, and (3) post-ownership costs
• Inventory turn and weeks of supply are the most common
measures to evaluate supply chain efficiency
Critical Thinking Questions
• Sometimes a company may need to purchase goods or services that
are unique, very complex, and/or extremely expensive. These would
not be routine purchases, but there may be a number of vendors that
could supply what is needed. What process would be used to
transmit the company’s needs to the available vendors, asking for a
detailed response to the needs?
• Sony Electronics produces a wide variety of electronic products for
the consumer marketplace, such as laptop computers, PlayStation
game consoles, and tablet computers. What type of products would
these be considered in the Supply Chain Uncertainty Framework?
• Which category of lifetime product costs are sometimes
overemphasized, leading to a failure to fully recognize the total cost
of ownership?

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CHAPTER 16: GLOBAL

McGraw-Hill/Irwin Copyright ©2017 McGraw-Hill Education. All rights reserved.

Copyright ©2017 McGraw-Hill Education. All rights reserved. 16-2

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• Spot purchase: one-time purchase

• Strategic alliance: long-term sourcing relationship that

Copyright ©2017 McGraw-Hill Education. All rights reserved. 16-5

Functional Prequalification Contracting

specifications, of suppliers; expertise;

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• Weeks of supply: how many weeks’ worth of inventory is

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Copyright ©2017 McGraw-Hill Education. All rights reserved. 16-26

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