Logistic Assignmt

8/2/2019 Logistic Assignmt

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Institute Of Management

Studies

OutsourcingAnd Procurement

Summited By:-

Mahath MohanMBA(DM) 4sem.

Summited To:-

Prof. Piyush kendulkar


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The contracting or subcontracting of noncore activities to free

up cash, personnel, time, and facilities for activities in which acompany holds competitive advantage. Companies havingstrengths in other areas may contract out date processing ,legal ,manufacturing, marketing , or other aspects of theirbusinesses to concentrate on what they do best and thus

reduce average unit cost. Outsourcing is often an integral partof downsizing or reengineering. Also called contracting out.

Outsourcing

Definition


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Outsourcing components have increased progressively over

the years Some industries have been outsourcing for an extended

time Fashion Industry (Nike) (all manufacturing outsourced)

Electronics Industry Cisco (major suppliers across the world)

Apple (over 70% of components outsourced)


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Economies of scale Aggregation of multiple orders reduces costs, both in

purchasing and in manufacturing

Risk pooling

Demand uncertainty transferred to the suppliers

Suppliers reduce uncertainty through the risk-poolingeffect

Reduce capital investment Capital investment transferred to suppliers.

Suppliers higher investment shared between customers.

Benefits Of Outsourcing


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Focus on core competency Buyer can focus on its core strength Allows buyer to differentiate from its competitors

Increased flexibility The ability to better react to changes in customer demand The ability to use the suppliers technical knowledge to

accelerate product development cycle time The ability to gain access to new technologies and

innovation.

Critical in certain industries: High tech where technologies change very frequently Fashion where products have a short life cycle

Benefits Of Outsourcing


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Loss of Competitive Knowledge Outsourcing critical components to suppliers may open

up opportunities for competitors

Outsourcing implies that companies lose their ability to

introduce new designs based on their own agenda ratherthan the suppliers agenda

Outsourcing the manufacturing of various components todifferent suppliers may prevent the development of newinsights, innovations, and solutions that typically require

cross-functional teamwork

Risks In Outsourcing


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Conflicting Objectives Demand Issues

In a good economy Demand is high Conflict can be addressed by buyers who are willing to make long-

term commitments to purchase minimum quantities specified by acontract

In a slow economy Significant decline in demand Long-term commitments entail huge financial risks for the buyers

Product design issues Buyers insist on flexibility would like to solve design problems as

fast as possible

Suppliers focus on cost reduction implies slow responsiveness todesign changes.

Risks In Outsourcing


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PC market entry in 1981 Outsourced many components to get to market

quickly 40% market share by 1985 beating Apple as the top

PC manufacturer Other competitors like Compaq used the same

suppliers IBM tried to regain market by introducing the PS/2

line with the OS/2 system Suppliers and competitors did not follow IBM market share shrunk to 8% in 1995

Behind Compaqs 10% leading share Led to eventual sale of PC business to Lenovo

Examples of Outsourcing ProblemsIBM


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Dependency on capacity Firm has the knowledge and the skills required to produce the

component

For various reasons decides to outsource

Dependency on knowledge Firm does not have the people, skills, and knowledge required

to produce the component

Outsources in order to have access to these capabilities.

Two Main Reasons for Outsourcing


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Customer Importance How important is the component to the customer?

What is the impact of the component on customer experience?

Does the component affect customer choice?

Component Clock speed How fast does the components technology change relative to

other components in the system?

Competitive Position Does the firm have a competitive advantage producing this

component?

Capable Suppliers How many capable suppliers exist?

Architecture How modular or integral is this element to the overall architecture

of the system?

Whether to Outsource or Not ??


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Procurement

DefinitionThe process of obtaining goods and services from preparation andprocessing of a requisition through to receipt and approval of the invoicefor payment.

It commonly involves (1) purchaseplanning, (2) standards determination, (3) specificationsdevelopment, (4) supplierresearch and selection, (5) value analysis,

(6) financing, (7) pricenegotiation, (8) making the purchase, (9) supplycontract administration, (10) inventory control and stores .
http://www.businessdictionary.com/definition/process.htmlhttp://www.businessdictionary.com/definition/goods-and-services.htmlhttp://www.businessdictionary.com/definition/preparation.htmlhttp://www.businessdictionary.com/definition/processing.htmlhttp://www.businessdictionary.com/definition/requisition.htmlhttp://www.businessdictionary.com/definition/receipt.htmlhttp://www.businessdictionary.com/definition/approval.htmlhttp://www.businessdictionary.com/definition/invoice.htmlhttp://www.businessdictionary.com/definition/payment.htmlhttp://www.businessdictionary.com/definition/purchase.htmlhttp://www.businessdictionary.com/definition/planning.htmlhttp://www.businessdictionary.com/definition/specification-spec.htmlhttp://www.businessdictionary.com/definition/development.htmlhttp://www.businessdictionary.com/definition/supplier.htmlhttp://www.businessdictionary.com/definition/research.htmlhttp://www.businessdictionary.com/definition/selection.htmlhttp://www.businessdictionary.com/definition/value-analysis.htmlhttp://www.businessdictionary.com/definition/financing.htmlhttp://www.businessdictionary.com/definition/labor-rate-price-variance.htmlhttp://www.businessdictionary.com/definition/negotiation.htmlhttp://www.businessdictionary.com/definition/maker.htmlhttp://www.businessdictionary.com/definition/supply.htmlhttp://www.businessdictionary.com/definition/contract-administration.htmlhttp://www.businessdictionary.com/definition/inventory-control.htmlhttp://www.businessdictionary.com/definition/stores.htmlhttp://www.businessdictionary.com/definition/stores.htmlhttp://www.businessdictionary.com/definition/inventory-control.htmlhttp://www.businessdictionary.com/definition/contract-administration.htmlhttp://www.businessdictionary.com/definition/supply.htmlhttp://www.businessdictionary.com/definition/maker.htmlhttp://www.businessdictionary.com/definition/negotiation.htmlhttp://www.businessdictionary.com/definition/labor-rate-price-variance.htmlhttp://www.businessdictionary.com/definition/financing.htmlhttp://www.businessdictionary.com/definition/value-analysis.htmlhttp://www.businessdictionary.com/definition/selection.htmlhttp://www.businessdictionary.com/definition/research.htmlhttp://www.businessdictionary.com/definition/supplier.htmlhttp://www.businessdictionary.com/definition/development.htmlhttp://www.businessdictionary.com/definition/specification-spec.htmlhttp://www.businessdictionary.com/definition/planning.htmlhttp://www.businessdictionary.com/definition/purchase.htmlhttp://www.businessdictionary.com/definition/payment.htmlhttp://www.businessdictionary.com/definition/invoice.htmlhttp://www.businessdictionary.com/definition/approval.htmlhttp://www.businessdictionary.com/definition/receipt.htmlhttp://www.businessdictionary.com/definition/requisition.htmlhttp://www.businessdictionary.com/definition/processing.htmlhttp://www.businessdictionary.com/definition/preparation.htmlhttp://www.businessdictionary.com/definition/goods-and-services.htmlhttp://www.businessdictionary.com/definition/process.html


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Depends on: type of products the firm is purchasing level of risk

uncertainty involved

Issues: How can the firm develop an effective purchasing

strategy?

What are the capabilities needed for a successfulprocurement function?

What are the drivers of effective procurement strategies? How can the firm ensure continuous supply of material

without increasing its risks?

Appropriate Strategy


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Supply Strategies have changed over the years

American automotive manufacturers 1980s: Suppliers either in the US or in Germany.

1990s: Suppliers in Mexico, Spain, and Portugal.

2000s: Suppliers in China

High-tech industry 1980s: Sourcing in the US

1990s: Singapore and Malaysia

2000s: Taiwan and mainland China

Challenge: Framework that helps organizations determine the

appropriate supplier footprint.

Strategy should depend on the type of product or

component purchased

Supplier Footprint


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Benefits Of Procurement

Environmental benefits:Reduction in harmful emissions and waste generation - improved air and waterqualityReduced use of natural resourcesReduced environmental impact of your operations through your supply chainMeet existing and forthcoming legislation around the climate change agenda .Support resource efficiency .Social benefits:Improvements in working conditions - labour standards, health and safetyAssist disadvantaged groups in society

Improve wage rates to those in low pay through the London Living Wage policyEconomic benefits:Improved efficiency in the public sector - more funds to invest in social andeconomic developmentImproving the efficiency and transparency of procurement procedures, structures,Financial savings.


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Other benefits:Fulfill the Government's commitment to place sustainable development at thecenter of public procurement policyMeet international obligations - for example, the EU Treaty commits membergovernments to integrate environmental protection into their policies. The Rio

Declaration requires the reduction and elimination of unsustainable patterns ofproduction and consumption. At Kyoto, the Government agreed to reducegreenhouse gas emissions by 12.5% on average for the period 2008-2012.

Benefits Of Procurement


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Sole source risk is the risk of shutting down your supply chain indefinitelybecause you have no alternative sources for certain suppliers. The best way to avoidsole source risk is to refrain from sourcing something that is only made by onesupplier (such as a highly specialized semiconductor.) If you already have solesource parts, gauge your risk by estimating how much of your revenue will beimpacted if the vendor shuts down. Those vendors with the greatest revenue impactare your largest risks. Mitigate sole source risk by tracking the financial health of

those vendors and by actively working to redesign your products so that you havealternatives.

Large customer risk is the risk many procurement organizations miss,and miss to their detriment if their organization is large! Large customer risk occurswhen your business constitutes a significant overall percentage of a vendors total

revenues at least 25% or more. When your fortunes swing, they are amplified forthese vendors. A 10% cut in spend in a category for you may result in a 40% cut incash flow for them and put them under. For this risk type, it is good to track whatpercentage your revenues are to your vendor and any time you creep over 25%,look for additional sources of supply.

Risks In Procurement


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Lengthy switch-over risk is the risk that occurs because you areworking with a single vendor and changing over to an alternative will take along time. This is different from a sole source vendor because there arealternatives. The Ariens article provides a great example of this type of risk.They were working with a single engine manufacturer for their snow blowersfor a practical reason. It would probably have been too expensive to tool upand buy from two sources. This situation occurs a lot in indirect procurementas well companies typically engage one IT help desk provider, one ERPcompany, and one construction firm for building new facilities. Again, watchingthe financial health of these vendors is key. Prioritize your risk managementefforts by estimating the potential monetary impact of failure of each lengthy

switch-over source.

RisksIn Procurement


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Functional Products Focus should be on minimizing total landed cost

unit cost transportation cost inventory holding cost

handling cost duties and taxation cost of financing

Sourcing from low-cost countries, e.g., mainland Chinaand Taiwan is appropriate

Innovative Products Focus should be on reducing lead times and on supply

flexibility. Sourcing close to the market area Short lead time may be achieved using air shipments

Procurement Strategy for the Two Types


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Outsourcing has both benefits and risks

Buy/make decisions should depend on: Whether a particular component is modular or integral Whether or not a firm has the expertise and capacity to

manufacture a particular component or product. Variety of criteria including customer importance, technology

clockspeed, competitive position, number of suppliers, andproduct architecture.

Procurement strategies vary from component tocomponent Four categories of components, strategic, leverage, bottleneck

and non-critical items Four categories important in selecting suppliers:

component forecast accuracy, clockspeed, supply risk,and financial impact.

SUMMARY


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Thank You

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Logistic Assignmt