Chapter 8 Outsourcing, Supplier Relations, and Supply Chain Management

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Chapter 8Outsourcing, Supplier Relations, and
Supply Chain Management

• Gord Alsop
• Richard Chitty
• Meghan Cushing
• Alyson Gausby
• Seth Jutzi

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Agenda

• Decision to Make or Buy Richard
• Outsourcing Alyson
• Purchaser-Supplier Relations Gord
• Partnerships and Strategic Alliances Seth
• Reverse Marketing / Supplier Development / SCM
  Meghan
• Case Peron Metal Fabricating Inc.

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The Decision to Make or Buy

• It is becoming more common for firms to outsource
  activities previously done in-house
• This increases the firms flexibility allowing
  them to focus on their core activities

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Reasons to Make

• Small quantities
• Unusual quality requirements
• Preserve technological secrets
• Obtain lower cost
• Minimize idle equipment
• Avoid sole-source dependency
• Pride

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Reasons to Buy

• Lack administrative or technical experience in
  production
• Reputation of suppliers
• More flexibility of sources and substitutes
• Hard to reverse decisions if you decide to make
• Acquisition requires less overhead

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Gray Zone in Make or Buy

• Range of options where not every situation leads
  to a 100 make or 100 buy option
• This may be useful when testing new products
• There is no commitment to make or buy

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Subcontracting

• Subcontracting occurs when primary contractors
  contract part of their work to other contractors
• ie. Construction, aerospace
• Beneficial when orders take a long period of
  time, are extremely costly, or when work is
  difficult to define

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Outsourcing

• To Make or not to Make?
• Gained prominence in 90s
• Public and Private Orgs outsourcing wide range of
  functions
• IS
• Mail Rooms
• Corporate Travel
• Logistics

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Why Outsource?
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Risks

• Loss of control
• Higher exit barriers
• Exposure to supplier risks
• Unexpected fees
• Conversion costs
• Supply restraints
• Unions

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Outsourcing Purchasing

• Little outsourcing of Supply Activities
• Logistics tasks and functions widely outsourced
• Decision Making
• Matrix
• Flowchart
• Supply managers- add value to decision

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Trends Impacting Supply Management Strategy

• Globalization
• IT
• External customer focus
• Product/Process technology
• Increasing job complexity
• Environmental/Legal issues
• Reengineering

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The Matching GameTo Make or to Buy
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Purchaser-Supplier Relations

• Driving force in the trend toward use of the term
  supply management
• Buyer-Supplier goodwill should be cultivated
• Progressive companies measure supplier goodwill
  on a regular basis

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Purchaser-Supplier Satisfaction Model
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Tools and Techniques for Moving Positions

• Crunch Tools Negative measures to shift
  satisfaction levels
• Complete severance of purchases without advanced
  notice
• Refusal to pay bills
• Refusal to accept shipments
• Use or threat of legal action
• Stroking Techniques Positive measures to shift
  satisfaction level
• Long-run commitment contracts
• Sharing of internal information
• Evidence of willingness to work toward changed
  behaviour in purchasing organization
• Rapid positive response to requests from
  suppliers

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Purchaser-Supplier Relationship Management

• Framework underlines need for extensive
  communications for both parties
• Requires substantial coordination work inside
  purchasers organization
• Team approach to long-term supplier relations
  only reasonable option
• Immediate, concerted action needs to be taken
  when either side sees problems or opportunities
• Sellers and purchasers personnel need to
  understand own organizations as well as others
  well
• Suppliers also need to develop effective working
  relationships internally

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Types of Suppliers

• Unacceptable suppliers
• Acceptable suppliers
• Good suppliers
• Preferred suppliers
• Exceptional suppliers

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Single Source Relationships Must Add Value

• Beware of
• Excessive charges
• Low quality
• Poor delivery
• Lack of continuing improvement programs
• Value is ultimate long-term like cycle costs and
  benefits.

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Buyer-Supplier Relationship

• Traditional
• Lowest price
• Specification-driven
• Short term, reacts to market
• Trouble avoidance
• Purchasings responsibility
• Tactical
• Little sharing of information on both sides

• Partnership
• Total cost of ownership
• End customer-driven
• Long term
• Opportunity maximization
• Cross-functional teams and top management
  involvement
• Strategic
• Both supplier and buyer share short and long term
  plans
• Share risk and opportunity
• Standardization
• Joint ventures
• Share data

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The Developmental Path to Partnership
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Partnering Strategies and Outcomes

• Strategies
• Decreased average delivery lot size
• Decreased total number or suppliers
• Decreased number of sources used per purchased
  item
• Increased average contract / agreement length
• Increased average frequency of delivery to the
  plant
• Increased supplier involvement in quality
  certification programs

• Outcomes
• Improved quality of the suppliers operations /
  processes
• Improved quality of incoming goods
• Decreased suppliers total cost
• Decreased buying organizations total cost
• Improved suppliers ability to handle
  buyer-initiated changes to the agreed-to delivery
  date
• Improved buyers ability to handle
  supplier-initiated changes to the agreed-to
  delivery date

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The Clock Game
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Reverse Marketing/Supplier Development

• When no suitable supplier exists, purchaser must
  create one
• For Reverse Marketing the purchaser often
  approaches the supplier
• Persuades supplier to accept order, not other way
  around
• Only alternative other than making part in-house

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Purchaser Initiative

• Purchaser may quote prices, terms, and conditions
• High payoffs for suppliers, hence supplier
  development
• Can apply to suppliers of all sizes

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Reasons for Reverse Marketing

• Deficiencies in normal industrial marketing
• Neither party is often fully aware of all
  opportunities because of lack of aggressiveness
  by salesperson or lack of inquisitiveness by
  purchaser
• Certain product lines receive more attention and
  lag time may exist between time product is
  introduced and time purchaser is informed
• Purchaser aggressiveness ensures future supply

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Three Outside Sources Driving Reverse Marketing

• Technological New products, materials and
  processes
• Increase in International Trade Development of
  foreign sources of supply
• Competitive Advantage in Supply Chain

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Supply Chain Management

• Managing the entire flow of information,
  materials and services from raw materials to
  final consumer
• SCM different from supply management which
  focuses only on relationships

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Characteristics of SCM

• Info sharing and monitoring
• Inventory Management
• Evaluations of costs
• Joint planning over long-term
• Coordination over all levels of business and
  management
• Leadership and Sharing in risk and return
  necessary

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Goals of SCM

• Reduce uncertainty and risk
• Improve inventory levels, cycle time, processes
  and service levels
• Primary focus of SCM Optimization

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SCM Implementation

• Extremely difficult and complex
• Supply Network
• Diminishing leverage of purchaser

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Secret X
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Case 8-2 Paron Metal Fabricating Inc.
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Case 8-2 Paron Metal Fabricating Inc.

• Summary
• Donald Mines- Materials Manager
• Considering Proposal to outsource manufacturing
  of outrigger brackets
• Company- 3 divisions- operate separately
• Trailer
• Sandblast/ Paint
• Metal fabricating

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• Manufacture 40 trailers/ yr
• 2/3 November- April
• Outrigger secures containers
• Comprised of 4 parts
• Solicited quotes from 3 local companies
• Lowest bid 108.20- Mayes Steel

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Outsourcing Decision

• Solicited quotes from 3 local companies
• Lowest bid 108.20- Mayes Steel

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Problem Statement

• Should Donald Mines chose to outsource all, some
  or none of the production of outrigger brackets?

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Alternatives

• Make outrigger brackets in-house
• Buy outrigger brackets from Mayes
• Make parts T-75 and T-77 in-house and buy T-67,
  T-69, T-70 from Mayes

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Alternative Comparison
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Showcase Showdown
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Alternative Comparison
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To Buy Costs

• November to April
• Demand 800213 534
• EOQ 61
• P (20534)/125 85
• TC 59,095.38

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To Buy Costs

• May to October
• Demand 266
• EOQ 43
• P 43
• TC 29,710.42
• Yearly cost 88,805.80

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Benefits and Risks of Buying

• Benefits for buying
• Reduce and control operational costs
• Improve company focus
• Gain access to world-class capabilities
• Allow firm to focus on core competencies

• Risks of buying
• Loss of control
• Higher exit barriers
• Exposure to supplier risks
• Unexpected fees or extra use charges

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To Make Costs

• Annually
• TC (8001501.2) FC
• 172,915.20

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Benefits and Risks of Making

• Benefits for making
• Minimize idle equipment
• Avoid sole source dependency
• Maintain control over quality
• Maintain control over supply

• Risks of making
• May lose option to outsource in the future
• May divert attention from core competencies
• Increased operational costs
• Lose access to world-class capabilities

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Hybrid Costs

• Assumption
• Order costs 15 per piece
• Lead time stays the same
• Fixed Costs 20

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Hybrid Costs

• To buy T-67, T-69 and T-70 from November to April
• Demand 534
• EOQ 57
• P 85
• TC 40,413.35

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Hybrid Costs

• To buy T-67, T-69 and T-70 from May to October
• Demand 266
• EOQ 40
• P 43
• TC 20,306.25

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Hybrid Costs

• To make T-75 and T-77 annually
• Demand 800
• TC 31,684.80
• Total costs for all parts for the year
• 92,404.40

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Yes
Is outrigger manufacturing strategic?
Keep in-house
Yes
Is outrigger manufacturing critical to the
business but not strategic?
Keep in-house
Evaluate Mayes Proposal
Is Mayes proposal more desirable than Parons?
No
Keep in-house
Yes
Could Peron achieve similar results without
supplier assistance?
Keep in-house
Negotiate contract to ensure expectations are
realized
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Solution

• Buy/Outsource
• Chart points to buying as best option
• Decision is cost effective
• Not a value-added service
• Allows alternate uses for facility capacities
• Requires less overhead

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Thank you for listening

• Any questions or comments?