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Chapter 4 strategic sourcing

Chapter 4
Strategic
Sourcing for
Successful SCM


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/tendering 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
Strategic Alliance Development

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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

• Assessing & Improving the Firm’s Sourcing Function

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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/ Key aims of Strategic Sourcing
 Reduce costs & delivery cycle times
 Improve quality & long-term financial performance
 Focus on ethical and sustainable sourcing

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Why need focus on
ethics, sustainability or
enviroment?
Read article on page 102 and give conclusion

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Ethical and Sustainable
Sourcing Strategies
 Business Ethics is the application of ethical
principles to business

 Corporate Social Responsibility(CSR) 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/seller 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/limit 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
 Build social and environmental responsibility

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Ethical and Sustainable
Sourcing Strategies
(Continued)

Framework for ethical and sustainable
sourcing strategy development

6 STEPS

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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


Step 1 – Establish corporate
ethical and sustainable
sourcing policies
• Verifies top management support, establish a
vision and direction
• Enforce the importance of ethical and
sustainable sourcing and reduce confusion

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Step 2 – Train purchasing staff
and implement policies
• Ensure that buyers are skilled in environmental
and social consideration in sourcing
• Ensure user and suppliers understand why and
how purchasing decision are made

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Step 3 – Prioritize items based on
ethical and sustainability
opportunities and ease of
implementation
• Allow buyer to “pick low hanging fruit” to
provide evidence for successful strategy
implementation

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Step 4 – Develop performance
measurement system
• Measurement provide accountability and a way
to improve over time
• Should be reviewed periodically

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Step 5 – Monitor progress and
make improvements. Increase
use of green and fair trade
products
• Use performance measures to identify
weakness
• Step up efforts to develop better capability in a
firms and its supply base

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Step 6 – Expand focus to include
other departments
• Use the purchasing department’s success and
influence to grow awareness in the firm and
among customers
• Communicate successes and programes to
stakeholders.

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Supply Base
Rationalization
Programs
Supply base
rationalization (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
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Strategic Alliance &
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
The use of ethical & environmental certification
is increasing

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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
 Increased need for supplier management

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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

These above activities are called value
engineering which help the firm to reduce cost,

improve quality & reduce new product development time

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Early Supplier
Involvement

(Continued)

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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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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