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MODULE-4

By:By:

LAKSHMI NARAYANA REDDY.KLAKSHMI NARAYANA REDDY.K

Sourcing and Pricing

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MODULE-4

Sourcing and Pricing.

Sourcing In-house or Outsource 3rd and 4th

PLs supplier scoring and assessment, selection design collaboration procurement process

sourcing planning and analysis.

PricingPricing and and revenuerevenue managementmanagement for multiple

customers, perishable products, seasona

demand, bulk and spot contracts.

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Sourcing is the set of business processes required topurchasegoods and services.

Purchasing or procurement is the process by which

companies acquire raw materials, P&S other resources fromsuppliers to execute their operations.

SourcingSourcing processesprocesses includeinclude: Supplier scoring and assessment

Supplier selection and contract negotiation

Design collaboration

Procurement

Sourcing planning and analysis

The Role of Sourcing in a Supply ChainThe Role of Sourcing in a Supply Chain

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Supplier scoringSupplier scoring

andand

assessmentassessment

Supplier selectionSupplier selection

andand

contract negotiationcontract negotiation

Design

collaboration

Procurement Design

collaboration

Sourcing processesSourcing processes

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1. Supplier Scoring and Assessment

Supplier performance should be compared on the basisof the suppliers impact on total cost.

It is used to rate the suppliers performance.

Many firms uses price has traditionally been the onlydimension that supplier have been compared on.

There are several other factors besides purchase price

that influence total cost.

In addition to the price the firm will consider the

following factors:

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SupplierSupplier AssessmentAssessment FactorsFactors

ReplenishmentReplenishment LeadLeadTimeTime

OnOn--TimeTime PerformancePerformance

SupplySupply FlexibilityFlexibility

DeliveryDelivery FrequencyFrequency // MinimumMinimum LotLot SizeSize SupplySupply QualityQuality

InboundInboundTransportationTransportation CostCost

PricingTermsPricingTerms

Information Coordination CapabilityInformation Coordination Capability

Design Collaboration CapabilityDesign Collaboration Capability

Exchange Rates, Taxes, DutiesExchange Rates, Taxes, Duties

Supplier ViabilitySupplier Viability

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2. Supplier Selection2. Supplier Selection-- AuctionsAuctions

and Negotiationsand Negotiations It uses the O/P from supplier scoring & assessment to

identify the appropriate suppliers.

A supply contracts are negotiated with the suppliers.

Supplier selection can be performed through competitivebids, reverse auctions, and direct negotiations.

Supplier evaluation is based on total cost of using a

supplier.A good contract should A/C for all factors that impact

SC performance & should be designed to increase SC

profits in a way that benefits both suppliers & buyers.

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There are4 concepts the managerThere are4 concepts the manager

designing a S C contractsdesigning a S C contracts

ContractsContracts for for ProductProduct Availability Availability ananSupplySupply ChainChain ProfitsProfits::

ContractsContracts toto CoordinateCoordinate SupplySupply ChainChainCostsCosts

ContractsContracts toto IncreaseIncrease AgentAgent EffortEffort

ContractsContracts toto Induce Induce PerformancePerformanceImprovementImprovement::

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1.Contracts for Product Availability and Supply Chain1.Contracts for Product Availability and Supply Chain

Profits:Profits:

ManyMany shortcomingsshortcomings inin supplysupply chainchain performanceperformance occuroccurbecausebecause thethe buyerbuyer and and suppliersupplier areare separateseparateorganizationsorganizations andand eacheach triestries toto optimizeoptimize itsits ownown profitprofit..

TotalTotal supplysupply chainchain profitsprofits mightmight thereforetherefore bebe lowerlower thanthanifif thethe supplysupply chainchain coordinated coordinated actionsactions toto havehave aacommoncommon objectiveobjective of of maximizingmaximizing total total supplysupply chainchain

profitsprofits..

AnAn approachapproach toto dealingdealing withwith thisthis problemproblem isis toto designdesign aacontractcontract thatthat encouragesencourages aa buyerbuyer toto purchasepurchase moremore andandincreaseincrease thethe levellevel ofof productproduct availabilityavailability..

TheThe suppliersupplier mustmust shareshare inin somesome ofof thethe buyersbuyers demanddemand

uncertaintyuncertainty..

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Buyback ContractsBuyback Contracts AllowsAllows aa retailerretailer toto returnreturn unsoldunsold inventoryinventory upup toto aa specifiedspecified

amountamount atat anan agreedagreed uponupon priceprice..

IncreasesIncreases thethe optimaloptimal orderorder quantityquantity forfor thethe retailer,retailer, resultingresultinginin higherhigher productproduct availabilityavailability andand higherhigher profitsprofits forfor bothboth thethe

retailerretailer andand thethe suppliersupplier.. MostMost effectiveeffective forfor productsproducts withwith lowlow variablevariable cost,cost, suchsuch asas

music,music, software,software, books,books, magazines,magazines, andand newspapersnewspapers..

DownsideDownside isis thatthat buybackbuyback contractcontract resultsresults inin surplussurplus

inventoryinventory thatthat mustmust bebe disposed disposed of,of, whichwhich increasesincreases supplysupplychainchain costscosts..

CanCan alsoalso increaseincrease informationinformation distortiondistortion throughthrough thethe supplysupplychainchain becausebecause thethe supplysupply chainchain reactsreacts toto retail retail orders,orders, notnotactualactual customercustomer demanddemand..

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Revenue Sharing ContractsRevenue Sharing Contracts

TheThe buyerbuyer pays pays aa minimal minimal amountamount for for eacheach unitunit

purchasedpurchased fromfrom thethe suppliersupplier butbut sharesshares aa fractionfraction oo

thethe revenuerevenue forfor eacheach unitunit soldsold..

DecreasesDecreases thethe costcost perper unitunit chargedcharged toto thethe retailer,retailer,

whichwhich effectivelyeffectively decreasesdecreases thethe costcost ofof overstockingoverstocking..

CanCan resultresult inin supplysupply chainchain informationinformation distortion,distortion,however,however, justjust asas inin thethe casecase ofof buybackbuyback contractscontracts..

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2. Contracts to Coordinate Supply Chain Costs2. Contracts to Coordinate Supply Chain Costs

DifferencesDifferences inin costscosts atat thethe buyerbuyer andand suppliersupplier cancan leadlead totodecisionsdecisions thatthat increaseincrease totaltotal supplysupply chainchain costscosts..

ExampleExample:: ReplenishmentReplenishment orderorder sizesize placedplaced byby thethe buyerbuyer..

TheThe buyersbuyers EOQEOQ doesdoes notnot taketake intointo accountaccount thethesupplierssuppliers costscosts..

AA quantityquantity discountdiscount contractcontract maymay encourageencourage thethe buyerbuyer toto

purchasepurchase aa largerlarger quantityquantity (which(which wouldwould bebe lowerlower costscostsfor for thethe supplier),supplier), whichwhich would would resultresult inin lowerlower total totalsupplysupply chainchain costscosts..

QuantityQuantity discountsdiscounts lead lead toto informationinformation distortiondistortionbecausebecause oo orderorder batchinbatchin ..

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3. Contracts to Increase Agent Effort3. Contracts to Increase Agent Effort

ThereThere areare manymany instancesinstances inin aa supplysupply chainchain wherewhere anan agentagentactsacts onon thethe behalfbehalf ofof aa principalprincipal andand thethe agentsagents actionsactionsaffectaffect thethe rewardreward forfor thethe principalprincipal..

ExampleExample:: A A carcar dealerdealer whowho sellssells thethe carscars of of aamanufacturer,manufacturer, asas wellwell asas thosethose ofof otherother manufacturersmanufacturers..

ExamplesExamples of of contractscontracts toto increaseincrease agentagent efforteffort includeincludetwotwo--partpart tariffstariffs andand thresholdthreshold contractscontracts..

ThresholdThreshold contractscontracts increaseincrease informationinformation distortiondistortion.. ThresholdThreshold contractscontracts :: itit cancan bebe used used toto countercounter doubledouble

marginizationmarginization andand increaseincrease agentsagents effortsefforts inin SCSC..

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4.Contracts to Induce

Performance Improvement A buyer may want performance improvement from a

supplier who otherwise would have little incentive to do

so.

A shared savings contract provides the supplier with a

fraction of the savings that result from the performance

improvement.

Particularly effective where the benefit from

improvement accrues primarily to the buyer, but where

the effort for the improvement comes primarily from the

supplier.

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Contracts for Product Availability and Supply Chain Profits:

Buyback Contracts: supplier returns unsold inventory uptoa specified amount at an agreed upon price.

Revenue-Sharing Contracts: in this buyer pays a minimalamount for each unit purchased from supplier but shares a

fraction of revenue for each unit sold.

Quantity Flexibility Contracts: it allows the buyers to

modify the orders as demand visibility to increase closer tothe point of sale.

Contracts to Coordinate Supply Chain Costs

Contracts to Increase Agent Effort: Threshold Contracts: it

can be used to counter double marginization and increaseagents efforts in SC.

Contracts to Induce Performance Improvement: Sharedsavings Contracts: are effective in aligning supplier & buyer

incentives.

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3.Design Collaboration

ItIt allowsallows thethe supplierssuppliers && thethe manufacturermanufacturer toto workwork togethertogether whenwhen

designingdesigning forfor thethe finalfinal productproduct..

5050--7070percentpercent ofof spendingspending atat aa manufacturermanufacturer isis throughthrough procurementprocurement..

8080 percent percent of of thethe costcost of of aa purchased purchased partpart isis fixed fixed inin thethe designdesignphasephase..

DesignDesign collaborationcollaboration withwith supplierssuppliers cancan resultresult inin reduced reduced cost,cost,

improvedimproved quality,quality, andand decreaseddecreased timetime toto marketmarket

ImportantImportant toto employemploy designdesign for for logistics,logistics, designdesign forfor

manufacturabilitymanufacturability..

ManufacturersManufacturers mustmust becomebecome effectiveeffective designdesign coordinatorscoordinators

throughoutthroughout thethe supplysupply chainchain..

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4.The Procurement Process4.The Procurement Process TheThe processprocess inin whichwhich thethe suppliersupplier sendssends productproduct inin responseresponse toto ordersorders

placedplaced byby thethe buyerbuyer.. GoalGoal isis toto enableenable ordersorders toto bebe placedplaced andand delivereddelivered onon scheduleschedule atat thethe

lowestlowest possiblepossible overalloverall costcost..

TwoTwo mainmain categoriescategories ofof purchasedpurchased goodsgoods::

DirectDirect materialsmaterials:: componentscomponents usedused toto makemake finishedfinished goodsgoods IndirectIndirect materialsmaterials:: goodsgoods usedused toto supportsupport thethe operationsoperations ofof aa firmfirm

DifferencesDifferences betweenbetween directdirect andand indirectindirect materialsmaterials

FocusFocus forfor directdirect materialsmaterials shouldshould bebe onon improvingimproving coordinationcoordination andand

visibilityvisibility withwith suppliersupplier.. FocusFocus forfor indirectindirect materialsmaterials shouldshould bebe onon decreasingdecreasing thethe transactiontransaction

costcost forfor eacheach orderorder..

ProcurementProcurement for for bothboth should should consolidateconsolidate ordersorders wherewhere possible possible toto

taketake advantageadvantage ofof economieseconomies ofof scalescale andand quantityquantity discountsdiscounts..

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5. Sourcing Planning and5. Sourcing Planning and

AnalysisAnalysis AA firm firm should should periodicallyperiodically analyzeanalyze itsits procurementprocurement spendingspending and and

suppliersupplier performanceperformance andand useuse thisthis analysisanalysis asas anan inputinput forfor futurefuture

sourcingsourcing decisionsdecisions..

ProcurementProcurement spendingspending should should bebe analyzedanalyzed byby partpart andand suppliersupplier totoensureensure appropriateappropriate economieseconomies ofof scalescale..

SupplierSupplier performanceperformance analysisanalysis shouldshould bebe usedused toto buildbuild aa portfolioportfolio ofof

supplierssuppliers withwith complementarycomplementary strengthsstrengths..

CheaperCheaper butbut lowerlower performingperforming supplierssuppliers shouldshould bebe usedused toto supplysupplybasebase demanddemand

HigherHigher performingperforming butbut moremore expensiveexpensive supplierssuppliers shouldshould bebe usedused toto

bufferbuffer againstagainst variationvariation inin demand demand and and supplysupply fromfrom thethe otherother

sourcesource

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Benefits ofEffective Sourcing DecisionsBenefits ofEffective Sourcing Decisions

Better economies of scale can be achieved if orders areaggregated.

More efficient procurement transactions can significantlyreduce the overall cost of purchasing.

Design collaboration can result in products that are easier tomanufacture and distribute, resulting in lower overall costs.

Good procurement processes can facilitate coordination with

suppliers. Appropriate supplier contracts can allow for the sharing of

risk.

Firms can achieve a lower purchase price by increasingcompetition through the use of auctions.

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Making Sourcing Decisions in PracticeMaking Sourcing Decisions in Practice

Use multifunction teams.

Ensure appropriate coordination across regions

and business units.Always evaluate the total cost of ownership.

Build long-term relationships with keysuppliers.

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In house orOut sourceIn house orOut source

ThereThere areare manymany firms firms whichwhich perform perform logisticalogistical

worksworks onon behalf behalf of of theirtheir customerscustomers suchsuch asas

transportationtransportation carrierscarriers oror warehousewarehouse firmsfirms..

TheThe modernmodern trendtrend inin LSMLSM isis logisticlogistic outsourcingoutsourcing..

ThereThere areare22majormajor examplesexamples::

1.1. ThirdThird partyparty logisticslogistics..2.2. FourthFourth partyparty logisticslogistics..

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Third party logistics

33PLsPLs areare externalexternal supplierssuppliers thatthat performperform allall oror partpart

ofof aa companyscompanys logisticslogistics functions,functions, includingincluding::

TransportationTransportationWarehousingWarehousing

DistributionDistribution

FinancialFinancial servicesservices

TermsTerms contractcontract logisticslogistics and and outsourcingoutsourcing areare

sometimessometimes usedused inin placeplace ofof 33PLPL..

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WhyUse3PL?WhyUse3PL?

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3PL Providers

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Shippers Using More than Five 3PLsShippers Using More than Five 3PLs

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TypesTypes ofof 33PLPL ProvidersProviders

TransportationTransportation--BasedBased:: ServicesServices extendextend beyondbeyond transportationtransportation toto offeroffer aa

comprehensivecomprehensive setset ofof logisticslogistics offeringsofferings.. LeveragedLeveraged 33PLsPLs useuse assetsassets ofof otherother firmsfirms..

NonNon leveraged leveraged 33PLsPLs useuse assetsassets belongingbelonging solelysolely toto thethe parentparentfirmfirm..

Ryder,Ryder, SchneiderSchneider Logistics,Logistics, FedExFedEx Logistics,Logistics, andandUPSUPS LogisticsLogisticsareare examplesexamples ofof 33PLsPLs..

Warehouse/DistributionWarehouse/Distribution--BasedBased:: Warehouse/DistributionWarehouse/Distribution--BasedBased

Many,Many, butbut notnot all,all, havehave formerformer warehousewarehouse and/orand/or distributiondistributionexperienceexperience..

TransitionTransition toto integratedintegrated logisticslogistics hashas beenbeen lessless complexcomplex thanthan forforthethe transportationtransportation basedbased providersproviders..

DSCDSC Logistics,Logistics, USCO,USCO, Exel,Exel, CaterpillarCaterpillar Logistics,Logistics, andand IBMIBM areare

examplesexamples ofof warehouse/distributionwarehouse/distribution--basedbased 33PLsPLs..

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Forwarder-Based: Essentially very independent middlemenextending forwarder roles.

Non-asset owners that capably provide a wide range of logistics

services. AEI, Kuehne & Nagle, Fritz, Circle, C. H. Robinson, and theHubGroup are examples of forwarder-based 3PLs.

Financial-Based: Provide freight payment and auditing, costaccounting and control, and tools for monitoring, booking, tracking,tracing, and managing inventory.

Cass Information Systems, CTC, GE Information Services, andFleetBoston are examples of financial-based 3PLs.

Information-Based: Significant growth and development in thisalternative category of Internet-based, business-to-business,electronic markets for transportation and logistics services.

Transplace and Nistevo are examples of information-based 3PLs

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Fourth party logistics A A fourthfourth--party party logisticslogistics providerprovider integratesintegrates thethe resourcesresources of of

producers,producers, retailersretailers andand thirdthird--partyparty logisticslogistics providersproviders inin viewview totobuildbuild aa systemsystem--widewide improvementimprovement inin supplysupply chainchain managementmanagement..TheyThey areare nonnon--assetasset based based meaningmeaning thatthat theythey mainlymainly provideprovideorganizationalorganizational expertiseexpertise..

ItIt isis anan emergingemerging trend trend inin SCMSCM inin whichwhich aa customercustomer firmfirmoutsourceoutsource thethe entireentire setset ofof logisticslogistics && SCSC activitiesactivities toto aa singlesinglelogisticslogistics provider provider firm firm whichwhich will will actact asas aa singlesingle point point of ofcontactcontact forfor allall theirtheir vendors,vendors, serviceservice providersproviders && customerscustomers withwithregardsregards toto anyany logisticslogistics need need inin orderorder toto provide provide aa overall overallmaximummaximum benefitsbenefits..

ItIt isis SCSC integratorintegrator thatthat assemblesassembles && managesmanages thethe resources,resources,capabilitiescapabilities && technologytechnology ofof itsits ownown organizationorganization withwith thosethose ofofcomplementarycomplementary serviceservice providersproviders toto deliverdeliver aa comprehensivecomprehensive SCSCsolutionsolution..

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Pricing and Revenue Management in thePricing and Revenue Management in the

Supply ChainSupply Chain

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The Role of RevenueManagement inThe Role of RevenueManagement in

the Supply Chainthe Supply Chain RevenueRevenue managementmanagement isis thethe useuse of of pricing pricing toto increaseincrease thethe

profitprofit generatedgenerated fromfrom aa limitedlimited supplysupply ofof supplysupply chainchain assetsassets..

SupplySupply assetsassets existexist inin twotwo formsforms:: capacitycapacity andand inventoryinventory..

1.1. CapacityCapacity assetsassets:: SCSC existsexists for for production,production, transportationtransportation &&storagestorage..

2.2. InventoryInventory AssetsAssets:: ExistsExists throughoutthroughout thethe SCSC && areare carriedcarried trytrytoto improveimprove productproduct availabilityavailability..

RevenueRevenue managementmanagement maymay alsoalso bebe defined defined asas thethe useuse of ofdifferentialdifferential pricingpricing basedbased onon customercustomer segment,segment, timetime of of use,use,andand productproduct oror capacitycapacity availabilityavailability toto increaseincrease supplysupply chainchainprofitsprofits..

MostMost commoncommon exampleexample isis probablyprobably inin airlineairline pricingpricing..

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RR MM adjustsadjusts thethe pricingpricing && availableavailable supplysupply ofof assetsassets totomaximizemaximize profitsprofits..

RR MM cancan bebe aa powerfulpowerful tooltool forfor everyevery ownerowner ofof assetsassets inin aa

SCSC.. RR MM hashas itsits ownown scopescope::

TheThe valuevalue of of thethe product product variesvaries inin differentdifferent marketmarketsegmentssegments (Example(Example:: airlineairline seats)seats)..

TheThe productproduct isis highlyhighly perishableperishable oror productproduct wastewaste occursoccurs(Example(Example:: fashionfashion andand seasonalseasonal apparel)apparel)..

DemandDemand hashas seasonal seasonal and and otherother peaks peaks (Example(Example::productsproducts orderedordered atat AmazonAmazon..com)com)..

TheThe productproduct isis soldsold bothboth inin bulkbulk andand onon thethe spotspot marketmarket(Example(Example:: ownerowner ofof warehousewarehouse whowho cancan decidedecide whetherwhether totoleaselease thethe entireentire warehousewarehouse throughthrough longlong--termterm contractscontracts ororsavesave aa portion portion of of thethe warehousewarehouse for for useuse inin thethe spotspotmarket)market)..

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Revenue Management for MultipleRevenue Management for Multiple

Customer SegmentsCustomer Segments If a supplier serves multiple customer segments witha fixed asset, the supplier can improve revenues by

setting different prices for each segment.

Prices must be set with barriers such that the segment

willing to pay more is not able to pay the lower price.

The amount of the asset reserved for the higher pricesegment is such that the expected marginal revenue

from the higher priced segment equals the price of the

lower price segment.

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To successfully use of RM when serving

multiple customer segments , a firm must usethe following tactics:

1. Price based on the value assigned by each

segment.

2. Use different prices for each segment.

3. Forecast at the segment level.

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Revenue Management for PerishableRevenue Management for Perishable

AssetsAssetsAnyAny assetasset thatthat losesloses valuevalue overover timetime isis perishableperishable.. ExamplesExamples:: highhigh--techtech products products suchsuch asas computerscomputers andand

cellcell phones, phones, highhigh fashion fashion apparel,apparel, underutilized underutilizedcapacity,capacity, fruitsfruits andand vegetablesvegetables..

TwoTwo basicbasic approachesapproaches::

VaryVary priceprice overover timetime toto maximizemaximize expectedexpected revenuerevenue.. OverbookOverbook salessales of of thethe assetasset toto accountaccount forfor

cancellationscancellations..

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R M t SR M t S

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Revenue Management or SeasonaRevenue Management or Seasona

DemandDemand SeasonalSeasonal peakspeaks of of demand demand areare commoncommon inin manymany

supplysupply chainschains..

ExamplesExamples:: MostMost retailersretailers achieveachieve aa largelarge portionportion

ofof total total annual annual demand demand inin DecemberDecember

(Amazon(Amazon..com)com)..

OffOff--peakpeak discountingdiscounting cancan shiftshift demanddemand fromfrom peakpeaktoto nonnon--peakpeak periodsperiods..

ChargeCharge higherhigher price price duringduring peak peak periods periods and and aa

lowerlower priceprice duringduring offoff--peakpeak periodsperiods..

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Revenue Management forBulk and SpotRevenue Management forBulk and Spot

CustomersCustomers MostMost ofof firmsfirms faceface aa marketmarket wherewhere somesome customerscustomers purchasepurchase ininbilkbilk atat aa discountdiscount && othersothers buybuy singlesingle unitsunits // smallsmall lotslots atat aa

higherhigher priceprice..

MostMost consumersconsumers of of production, production, warehousing,warehousing, and and

transportationtransportation assetsassets inin aa supplysupply chainchain face face thethe problem problem of ofconstructingconstructing aa portfolioportfolio ofof longlong--termterm bulkbulk contractscontracts andand shortshort--termterm spotspot marketmarket contractscontracts..

TheThe basicbasic decisiondecision isis thethe sizesize ofof thethe bulkbulk contractcontract..

TheThe fundamentalfundamental tradetrade--offoff isis betweenbetween wastingwasting aa portionportion ofof thethelowlow--costcost bulkbulk contractcontract andand payingpaying moremore forfor thethe assetasset onon thethe spotspotmarketmarket..

GivenGiven thatthat bothboth thethe spotspot marketmarket priceprice andand thethe purchaserspurchasers needneedoror thethe assetasset areare uncertainuncertain..

U i M iU i M i

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Using Revenue Management inUsing Revenue Management in

PracticePractice Evaluate your market carefullyEvaluate your market carefully

Quantify the benefits of revenue managementQuantify the benefits of revenue management

Implement a forecasting processImplement a forecasting processApply optimization to obtain the revenueApply optimization to obtain the revenue

management decisionmanagement decision

Involve both sales and operationsInvolve both sales and operations

Understand and inform the customerUnderstand and inform the customer

Integrate supply planning with revenue managementIntegrate supply planning with revenue management

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