Lecture 8 (Development of Supply Baase)

PURCHASING & SUPPLY CHAIN MANAGEMENT, 5e
Supplier Management
and Development
Chapter 9
© 2012 Cengage Learning. All rights reserved. May

not be scanned, copied or duplicated, or posted to
a publically accessible website, in whole or in part. SOUTH-WESTERN CENGAGE LEARNING
Rationalization and Optimization
 Determining optimal number and
quality of suppliers in supply base
 Rationalization
 Analysis of how many and which suppliers
to maintain
 Optimization
 Analysis to ensure that only most capable
suppliers are kept
 Should be a continuous process
2
a publically accessible website, in whole or in part. Purchasing & Supply Chain Management, 5e
Rationalization and Optimization
 Requires supplier evaluation and
measurement system
 Usually results in net reduction of
suppliers
 However, may result in adding new
suppliers in some spend categories
 Key is to determine the “right” number
of suppliers, not to just arbitrarily
reduce the number
3
Rationalization
and Optimization Activities
 Development of supplier evaluation and
measurement systems
 Elimination of marginal and small
volume suppliers
 Replacement of “good” suppliers with
“better” ones
 Initiation of supplier development
activities to improve performance
 Global search for world-class suppliers
4
Advantages
 Buying from world-class suppliers

 Use of full-service suppliers
 Reduction of supply base risk
 Lower supply base administrative costs
 Lower total product cost
 Ability to pursue complex supply
management strategies

5
Buying from World-Class Suppliers
 Concentrate on closer relationships

with smaller core of better performing
suppliers
 Fewer quality and delivery problems
 Access to leading-edge technologies
 Opportunities to collaborate
 Lower total product cost

6
Use of Full-Service Suppliers
 Remaining suppliers are often larger in

size and offer more capabilities
 Offer range of value-adding services
 Provides greater access to supplier’s
engineering, R&D, design, testing,
production, service, and tooling
capabilities
 Allows outsourcing of integrated items
7
Reduction of Supply Base Risk
 Supply base risk defined

 “Magnitude of exposure to financial loss
or operational disruption and stems from
uncertainty”
 Need for carefully selected and
qualified suppliers
 Can actually reduce overall risk
 Results in reduced variability and more
consistent quality
8
Lower Administrative Costs
 Greater information sharing

 Formalized communication processes
 Fewer problem-related interactions with
suppliers
 Joint problem-solving

9
Lower Total Product Cost
 Lower variability in quality and delivery

 Greater production volumes spread
among fewer suppliers
 Supplier’s fixed costs spread out over
greater volumes
 Provides incentive for supplier process
improvement
 Economies of scale and scope
10
Ability to Pursue Complex Supply
Management Strategies
 Supplier development
 Early supplier design involvement
 Just-in-time sourcing
 Development of cost-based pricing
agreements

11
Possible Risks of Maintaining
Fewer Suppliers
 Supplier dependency
 Absence of competition
 Supply disruption
 Overaggressive supply reduction

12
Supplier Dependency
 Overly dependent on buyer for its

economic survival
 Lack of financial viability if purchase
volumes are reduced
 Unhealthy dependence

13
Absence of Competition
 Supplier may hold buyer “hostage”

 Unduly raising prices
 Becoming too complacent in its
performance
 Higher switching costs
 Requires careful selection and
evaluation
 Need for equitable contracts
14
Supply Disruption
 Loss of continuous flow of materials

 Need for multiple production facilities
from a single supplier
 Select suppliers with multiple or
redundant capabilities (cross-sourcing)
 Primary and secondary suppliers

15
Overaggressive Supplier Reduction
 Can result in inadequate supplier

capacity if demand increases
 May cut otherwise qualified suppliers
out of supply base
 May need to identify and qualify new
replacement suppliers

16

Lecture 8 (Development of Supply Baase)

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PURCHASING & SUPPLY CHAIN MANAGEMENT, 5e

© 2012 Cengage Learning. All rights reserved. May

 Buying from world-class suppliers

© 2012 Cengage Learning. All rights reserved. May

 Concentrate on closer relationships

© 2012 Cengage Learning. All rights reserved. May

 Remaining suppliers are often larger in

 Supply base risk defined

 Greater information sharing

© 2012 Cengage Learning. All rights reserved. May

 Lower variability in quality and delivery

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

 Overly dependent on buyer for its

© 2012 Cengage Learning. All rights reserved. May

 Supplier may hold buyer “hostage”

 Loss of continuous flow of materials

© 2012 Cengage Learning. All rights reserved. May

 Can result in inadequate supplier

© 2012 Cengage Learning. All rights reserved. May

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