Procurement

| May 19, 2015

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Procurement

A key element in the development of a successful partnership between a company and a supplier is the establishment of linkages. The most important linkage is information flow; companies and suppliers must communicate—about product demand, about costs, about quality, and so on—in order to coordinate their activities. To facilitate communication and the sharing of information many companies use teams. Cross-enterprise teams coordinate processes between a company and its supplier. For example, suppliers may join a company in its product-design process as on-site suppliers do at Harley-Davidson. Instead of a company designing a product and then asking a supplier if it can provide the required part or a company trying to design a product around an existing part, the supplier works with the company in the design process to ensure the most effective design possible. This form of cooperation makes use of the expertise and talents of both parties. It also ensures that quality features will be designed into the product.

Cross-enterprise teams coordinate processes between a company and supplier.

In an attempt to minimize inventory levels, companies frequently require that their suppliers provide on-demand, also referred to as direct-response, delivery to support a just-in-time (JIT) or comparable inventory system. In continuous replenishment, a company shares real-time demand and inventory data with its suppliers, and goods and services are provided as they are needed. For the supplier, these forms of delivery often mean making more frequent, partial deliveries, instead of the large-batch orders suppliers have traditionally been used to filling. While large-batch orders are easier for the supplier to manage, and less costly, they increase the customer’s inventory. They also reduce the customer’s flexibility to deal with sudden market changes because of their large investment in inventory. Every part used at Honda’s Marysville, Ohio, plant is delivered on a daily basis. Sometimes parts deliveries are required several times a day. This often requires that suppliers move their location to be close to their customer. For example, over 75% of the U.S. suppliers for Honda are within a 150-mile radius of their Marysville, Ohio, assembly plant. Each day grocers send Campbell’s Soup Company demand and inventory data at their distribution centers via electronic data interchange (EDI), which Campbell’s uses to replenish inventory of its products on a daily basis.

In addition to meeting their customers’ demands for quality, lower inventory, and prompt delivery, suppliers are also expected to help their customers lower product cost by lowering the price of its goods and services. These customer demands on its suppliers—high quality, prompt delivery, and lower prices—are potentially very costly to suppliers. Prompt delivery of products and services as they are demanded from its customers may require the supplier to maintain excessive inventories itself. These demands require the supplier to improve its own processes and make its own supply chain more efficient. Suppliers require of their own suppliers what has been required of them—high quality, lower prices, process improvement, and better delivery performance.

Outsourcing

The selection of suppliers is called sourcing; suppliers are literally the “source” of supply. Outsourcing is the act of purchasing goods and services that were originally produced in-house from an outside supplier. Outsourcing is nothing new; for decades companies have outsourced as a short-term solution to problems such as an unexpected increase in demand, breakdowns in plants and equipment, testing products, or a temporary lack of plant capacity. However, outsourcing has become a long-term strategic decision instead of simply a short-term tactical one. Companies, especially large, multinational companies, are moving more production, service, and inventory functions into the hands of suppliers. Figure 11.1 shows the three major categories of goods and services that companies tend to outsource.

Figure 11.1 Categories of Goods and Services that Companies Outsource

Many companies are outsourcing as a strategic move so that they can focus more on their core competencies, that is, what they do best. They let a supplier do what the company is not very good at and what the supplier is most competent to do. Traditionally, many companies, especially large ones, attempted to own and operate all of their sources of supply and distribution along the supply chain so that they would have direct managerial control and reduce their dependence on potentially unreliable suppliers. They also thought it was more cost effective. However, this stretched these companies’ resources thin, and they discovered they did not have the expertise to do everything well. In addition, management of unwieldy, complex supply chains was often difficult. Large inventories were kept throughout the supply chain to buffer against uncertainties and poor management practices. The recent trend toward outsourcing provides companies with greater flexibility and resources to focus on their own core competencies, and partnering relationships with suppliers provides them with control. In addition, many companies are outsourcing in countries where prices for supply are lower, such as China.

By limiting the numbers of its suppliers a company has more direct influence and control over the quality, cost, and delivery performance of a supplier if the company has a major portion of that supplier’s volume of business. The company and supplier enter into a partnership in which the supplier agrees to meet the customer’s quality standards for products and services and helps lower the customer’s costs. The company can also stipulate delivery schedules from the supplier that enables them to reduce inventory. In return, the company enters into a long-term relationship with the supplier, providing the supplier with security and stability. It may seem that all the benefits of such an arrangement are with the customer, and that is basically true. The customer dictates cost, quality, and performance to the supplier. However, the supplier passes similar demands on to its own suppliers, and in this manner the entire supply chain can become more efficient and cost effective.

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