Benefits of Global Operations. Upgrading the Strategic Role Focus on intangible benefits. Types of Product or Service Factories

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1 1 Benefits of Global Operations Offshoring Opportunities angible Intangible educe Direct and Indirect Costs educe Capital Cost educe axes educe Logistics Costs Overcome ariff Barriers Provide Better Customer ervice pread Foreign xchange isk Build lternative upply ources Preempt Potential Competitors Learn from: Local uppliers/customers/ Competitors/Foreign esearch Centers ttract alent Globally ource: Offshoring and Beyond, ckinsey Quarterly, Changing Conditions Need to treat foreign facilities or activity centers as sources of competitive advantage rade pacts, reduction of tariffs Lower need to set up foreign factories to overcome trade barriers Increased manufacturing/service sophistication Less emphasis on low wages Pressure to create faster transfer of ideas from development to delivery Need for closer inter-functional relationships 3 Upgrading the trategic ole Focus on intangible benefits e.g. learning from local suppliers, gaining experience Cultivate competencies Improve the inside Develop external resources ake a global mandate Create a robust network Can absorb impacts of changes in the environment Plan for long-term commitment 4 Paths to Higher trategic oles 5 ypes of Product or ervice Factories Offshore product or service factory inimum setup investments, low-cost production ource product or service factory Broader strategic role, greater local control erver product or service factory et up to offset costs (taxes, duties) and risk (FOX) Contributor product or service factory eparate functions (&D), more responsibilities Outpost product or service factory Primary role: information collection Lead product or service factory Creates new processes, products, and technologies 6

2 Five hemes ourcing trategy Historical and Current Frameworks of ourcing Global Outsourcing upplier elationships upplier Development dvances in ourcing Practices and ools 8 PO ODL Firm Infrastructure (general management, accounting, finance, strategic planning) Historical and Current Frameworks in ourcing heme 1 upport ctivities Primary ctivities Inbound Logistics (raw materials handling and warehousing) Human esources anagement (recruiting, training, development) echnology Development ( & D, product and process improvement) Procurement (purchasing of raw materials, machines, supplies) Operations (machining, assembling, testing Outbound Logistics (warehousing and distribution of finished product) arketing and ales (advertising, promotion, pricing, channel relations) ervice (installation repair, parts) Profit argin ource: Porter (1980) 10 Disintegrated upply Chain Internal Integration I L Information, Product, ervice and Financial Flows INNL NPI Procurement and anufacturing Integration he Great Divide Distribution and arketing Integration N D C U O I L Information, Product, ervice and Financial Flows INNL NPI ourcing Operations Logistics N D C U O ource: Global Benchmarking and upply Chain Project - U 11 ource: Global Benchmarking and upply Chain Project - U 12

3 nterprise xtension tages of Global ourcing volution* elationship anagement I - Basic Beginnings II - oderate Development III - Limited Integration IV- Fully Integrated upply Chains I L Information, Product, ervice, Financial and Knowledge Flows UPPLI NWOK INGD NPI DIIBUIV NWOK ourcing Logistics Operations Capacity, Information, Core Competencies, Capital and Human esources N D C U O Quality/cost teams Longer -term contracts Volume leveraging upply base consolidation d hoc supplier alliances Crossfunctional sourcing teams International sourcing Cross-location sourcing teams Global sourcing Global supply trategic supplier chains with alliances external customer upplier focus development Cross-enterprise otal cost of decision making ownership Full service Parts/service suppliers standardization arly sourcing arly supplier Insourcing/ involvement outsourcing to maximize core competencies of firms throughout the supply chain ource: Global Benchmarking and upply Chain Project - U * dapted from onczka et al (2000) 14 Global Outsourcing Principles heme 2 Factors affecting Global Outsourcing Decisions Comparative dvantage- low price contracts; Hassles in manufacturing If can not be made in-house outsource Decisions are made about individual parts rather than product families 16 esult of wrong outsourcing strategy Lost Focus- Companies are trying to catch up with small manufacturers in cost and quality; Companies are manufacturing commodity products to achieve economies of scale; and rosion in capability or core competency of the company. easons for wrong outsourcing decisions Lack of coordination between different functions, inconsistent priorities and lack of accountability; anufacturers fear long contracts/relationship would increase the bargaining power of suppliers; anagers lack of focus. hey suffer from Do it all here attitude; Companies had no analytical tool to distinguishing core parts from commodities; and Capacity & Labor issues- Capacity utilization and labor efficiency

4 19 Outsourcing odel Based on the following three main principles: Focus on critical components and core competency; Outsource components where suppliers have distinct competitive advantage; and Use outsourcing to generate employee commitment and improve productivity. upplier elationships heme 3 Kieretsu complex network of Japanese firms which pursues sourcing (goods, services & finances) from within the network Characteristics of a typical kieretsu everal large firms like a major bank, trading company, chemical firm, steel unit, automobile industry etc Cross-holding, favoritism, long-term relationship & interlocking directorates volution of Kieretsu rticle compares the different approaches to Kieretsu by atsushita, Hitachi and oyota dditional article HB article on Chrysler s experience with Kieretsu Interesting updates he collapse of the powerful itsubishi Kieretsu Nissan comes out of heavy losses and survival uncertainty when Carlos Ghosn takes charge and breaks the Kieretsu model upplier Development heme 4 23

5 25 teps to ffective upplier Development Identify critical commodities Identify critical suppliers Form a cross-functional team (internally) eet with suppliers top management Identify key projects Define details of projects onitor status and modify strategies Pitfalls Based on 200 companies with 83 actually responding in a variety of industries. Pitfalls generally occur in the last 3 or 4 steps. hree types of pitfalls upplier-specific Buyer-specific Buyer-supplier interface 26 Key ourcing Processes and ssociative ools dvances in ourcing : Practices and ools heme 5 upplier coring nd ssessment upplier election nd Contract Negotiation Design Collaboration Procurement ourcing Planning nd nalysis upplier corecards otal Cost of Ownership arget Costing -catalogs pend nalysis Value nalysis/ Online market places upplier elationship Value ngg. everse auctions anagement () 28 ourcing Processes upplier coring and ssessment upplier election and Contracts Design Collaboration he Procurement Process ourcing Planning and nalysis he ole of ourcing in a upply Chain ourcing is the set of business processes required to purchase goods and services ourcing processes include: upplier scoring and assessment upplier selection and contract negotiation Design collaboration Procurement ourcing planning and analysis 29 30

6 31 Benefits of ffective ourcing Decisions Better economies of scale can be achieved if orders are aggregated ore efficient procurement transactions can significantly reduce the overall cost of purchasing Design collaboration can result in products that are easier to manufacture and distribute, resulting in lower overall costs Good procurement processes can facilitate coordination with suppliers ppropriate supplier contracts can allow for the sharing of risk Firms can achieve a lower purchase price by increasing competition through the use of auctions upplier coring and ssessment upplier performance should be compared on the basis of the supplier s impact on total cost here are several other factors besides purchase price that influence total cost 32 upplier ssessment Factors upplier coring and ssessment eplenishment Lead ime On-ime Performance upply Flexibility Delivery Frequency / inimum Lot ize upply Quality Inbound ransportation Cost Pricing erms Information Coordination Capability Design Collaboration Capability xchange ates, axes, Duties upplier Viability 33 upplier corecard etalcraft Used in the sourcing module of IBU 736 everal local companies use this tool Bose onoco otal Cost of Ownership UC project Class of upplier election ingle vs. ultiple sourcing ingle sourcing facilitates asset sharing, relationship building and commitment Downside is highly risky ultiple sourcing promotes competition Downside is promotes opportunism among suppliers xample : Lopez era in G corecards aises the objectivity level of assessment Promotes benchmarking Dynamic/eal time assessment Communication tool 35 upply Chain Contracts Contracts to increase product availability Incentives to stock Contracts to coordinate supply chain costs Forecasting/Planning (CPF) Contracts to induce performance improvement sset pecificity, hared savings, Liberal credit terms Comment: Government agencies tend to be experts in contract definition and stipulation; (xample: UC sourcing projects) 36

7 37 Design Collaboration percent of spending at a manufacturer is through procurement 80 percent of the cost of a purchased part is fixed in the design phase Design collaboration with suppliers can result in reduced cost, improved quality, and decreased time to market Important to employ design for logistics, design for manufacturability anufacturers must become effective design coordinators throughout the supply chain he Procurement Process he process in which the supplier sends product in response to orders placed by the buyer Goal is to enable orders to be placed and delivered on schedule at the lowest possible overall cost wo main categories of purchased goods: Direct materials: components used to make finished goods Indirect materials: goods used to support the operations of a firm Differences between direct and indirect materials 38 Classification of Purchased Items he Procurement Process Direct aterials Indirect aterials Use Production aintenance, repair, and support operations ccounting Cost of Goods G& old Impact on Production ny delay will delay production Less direct impact Processing Cost Low High elative to Value of ransaction Number of ransactions Low High ee ecent tudy on Indirect pend by CP 39 Focus for direct materials should be on improving coordination and visibility with supplier Focus for indirect materials should be on decreasing the transaction cost for each order Procurement for both should consolidate orders where possible to take advantage of economies of scale and quantity discounts 40 Product Categorization by Value and Criticality High Criticality Low Low Critical Items General Items Value/Cost trategic Items Bulk Purchase Items High ourcing Planning and nalysis firm should periodically analyze its procurement spending and supplier performance and use this analysis as an input for future sourcing decisions Procurement spending should be analyzed by part and supplier to ensure appropriate economies of scale upplier performance analysis should be used to build a portfolio of suppliers with complementary strengths Cheaper but lower performing suppliers should be used to supply base demand Higher performing but more expensive suppliers should be used to buffer against variation in demand and supply from the other source 41 42

8 43 ourcing Planning and nalysis ggregate the spending Build a supplier portfolio llocate demand to suppliers nabling tool: upplier elationship anagement () module xample: Boeing s use of for parts commonality consolidation and sourcing aking ourcing Decisions in Practice Use multifunction teams nsure appropriate coordination across regions and business units lways evaluate the total cost of ownership Build long-term relationships with key suppliers 44