Global Sourcing and Procurement

Global Sourcing
and Procurement
Chapter 16
McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. 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.
Strategic Sourcing
• 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
• Request for proposal (RFP): used for purchasing items that
are more complex or expensive and where there may be a
number of potential vendors
• Vendor-managed inventory: when a customer actually
allows the supplier to manage an item or group of items
for them
Sourcing/Purchasing Design Matrix
The Bullwhip Effect
• 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
The Bullwhip Effect
Functional Products
Functional products include the staples that people buy in
a wide range of retail outlets, such as grocery stores and
gas stations.
Lead time for

An average make-to-order
Product life Contribution Only 10 to 20
forecast error products of
cycle of more margin of 5 to product
of only 10 from six
than two years 20 percent variations
percent months to one
year
Innovative Products
Newness of the innovative products

Innovation can enable a company
makes demand for them
to achieve higher profit margins.
unpredictable.
Typically these products have a life

cycle of just a few months.
• Imitators quickly erode the competitive
The short life cycles and the great
advantage that innovative products enjoy.
• Companies are forced to introduce a steady variety typical of these products
stream of newer innovations. further increase unpredictability.
Demand and Supply Uncertainty
Uncertainty Framework
Demand Uncertainty
Low (Functional Products) High (Innovative Products)
Grocery, basic apparel, food, Fashion apparel, computers,

Low
oil, and gas popular music
(Stable Process)
Efficient supply chain Responsive supply chain
Hydroelectric power, some Telecom, High-end

High
food products computers, semiconductor
(Evolving Process)
Risk-Hedging supply chain Agile supply chain
Supply Chain Strategies
Risk-hedging supply chains: utilize

Efficient supply chains utilize strategies aimed at pooling and
strategies aimed at creating the sharing resources in a supply chain
highest cost efficiency. to share risk.
Strategy
Responsive supply chains utilize Agile supply chains utilize strategies
strategies aimed at being responsive aimed at being responsive and
and flexible. 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
Improve return on assets by reducing inventory and selling unnecessary assets
Generate cash by selling low-return entities
Financial Gain access to new markets, particularly in developing countries
Reduce costs through lower cost structure
Turn fixed costs into variable costs
Improve quality and productivity
Shorten cycle time
Improvement Obtain expertise, skills, and technologies that are otherwise unavailable
Improve risk management
Improve credibility and image by associating with superior providers
Improve effectiveness by focusing on what the firm does best
Organizational Increase flexibility to meet changing demand for products and services
Increase product and service value by improving response to customer needs

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
Total Cost of Ownership
• Total cost of ownership (TCO):
an estimate of the cost of an
item that 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
Sourcing Performance Measures
• 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
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Global Sourcing

• In the past, sourcing was another name for purchasing.

• As a result of globalization, sourcing implies a more

• Continuous replenishment: inventory is replaced

Lead time for

Newness of the innovative products

Typically these products have a life

Grocery, basic apparel, food, Fashion apparel, computers,

Hydroelectric power, some Telecom, High-end

Risk-hedging supply chains: utilize

• Allows a company to create a competitive advantage

• An entire function may be outsourced, or some

Improve effectiveness by focusing on what the firm does best

Increase product and service value by improving response to customer needs

• Can be applied to internal

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