Future Development in Global Sourcing and Logistics 26. 09. 2011 - 27. 09. 2011 Professor Dr. h. c. Ulli Arnold University of Stuttgart ulli. arnold@bwi. uni-stuttgart. de Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 1
Agenda 1. The Concept of Global Sourcing 2. Barriers to Worldwide Sourcing 3. Organisational Buying Behaviour 4. Global Sourcing Analysis 5. Organisation of Global Sourcing 6. Sourcing Strategies 7. Vertical and Horizontal Cooperation 8. Sourcing Processes 9. Controlling of Procurement 10. Logistics as an Enabler 11. Supply Chain Management Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 2
Chapter 1 The Concept of Global Sourcing Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 3
1. Global mega trends Corporate Social Responsibility will be of greater importance as organizations face changes Increase of in consumption patterns with environmental regards to green, social and social and health responsibility Demographic change will be highly impact availability of skilled and also low cost labor Information technologies and innovations will become a key success factor Fundamental market changes will be more frequent and access to raw materials will become more critical Demand in traditional industries (and mature markets) will slow down, but developing markets will experience strong growth Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 4
1. Structure and development of the world trade capacity 2000 - 2006 (Source: WTO, International Trade Statistics 2007) Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 5
1. Structure and development of the world trade capacity World trade flows Selected intra- and inter-regional merchandise trade flows, 2006 (Source: WTO, International Trade Statistics 2007) Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 6
1. Structure and development of the world trade capacity World exports of goods (detailed), 2000 -2006 Logarithmic scale (Source: WTO, International Trade Statistics 2007) Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 7
1. Structure and development of the world trade capacity World exports of goods and commercial services, 2000 -2006 World commercial services exports by category, 2000 and 2006 (Source: WTO, International Trade Statistics 2007) Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 8
1. Sourcing Tasks in International Business Activities Domestic Production Indirect Imports Overseas Production Direct Imports Direct Investment No Direct Investment Joint Venture Licensing (Sourcing Consulting) Contract Production (Supply) Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Management Contract (Sourcing) Own Production International Production Coordination Slide 9
1. Global Sourcing - Definition • What is Global Sourcing? The business process of identifying, evaluating, negotiating and configuring supply chains across multiple suppliers and geographies • Common reasons for Global Sourcing – Reducing overall cost structure – Availability of new technology and capacity. Often domestic suppliers lack capacity and / or are not making the necessary investments to stay competetive – Establishing alternative sources of supply- reduced risk – Access to new designs or specialized intellectual capital – Superior quality. This is typically due to supplier investment in technology and capacity to attract global businesses Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 10
Chapter 2 Barriers to Worldwide Sourcing Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 11
2. Barriers to World Wide Sourcing Economical barriers e. g. Tarriffs, duties, hidden costs Political conditions e. g. Legal system, political stability, protectionism etc. Cultural conditions e. g. flexibility, values, openness etc. Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 12
2. Barriers to World Wide Sourcing (economical) total cost in international purchasing is also called landed costs international purchasing may include many additional cost components compared with domestic purchasing: o o o Packaging Transportation Duties/ Tarifs Insurance premiums Payment terms Fees and commissions o o o Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Port terminal and handling fees Custom broker fees Taxes Communication costs Payment and currency fees Inventory carring costs Slide 13
2. Barriers to World Wide Sourcing (political) Trade and currency policy State/ Suprastates foreign trade regimes a) Contractual trade barrier: Duty, dues fiscal policy to suppress foreign provider b) Non-contractual barriers : - building specifications - terms of use - national safety regulations - ecological demand c) Currency control: Contrary: complete convertibility of the currency d) Laws/restrictions: - Kriegswaffenkontrollgesetz e) Industrial policy - grants - risk taking Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement - Narcotics law - export promotions Slide 14
2. Barriers to World Wide Sourcing (political) Free trade zones ordered by regions (members) Africa : Middle East: 1. Communaute Economique de l´Afrique de l´Quest (7) 13. The Arab Common Market (7) 2. Communaute Economique de Pays des Grans Lacs (3) 14. Economic Cooperation Organization (3) 3. Economic Community of West African States (16) 15. Gulf Cooperation Council (6) 4. Indian Ocean Commission (5) 5. Mano River Union (3) North and South america: 6. Preferential Trade Area for Eastern and Southern Africa (18) 16. North America Free Trade Area (NAFTA) (3) 7. Southern African Customs Union (4) 17. Andean Pact (5) 8. Southern African Development Coordination Conference (10) 18. Central American Common Market (5) 9. Union Douaniere et Economique de l´Afrique Centrale (6) 19. Caribbean Community (13) 20. Mercosur (4) Asia und Pacific: 10. Australia-New Zealand Closer Economic Relations Trade Agreement (2) 11. Association of South Asian Nations (ASEAN) (5) 12. Asiatic Pacific Economic Cooperation (APEC) (18) Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 15
2. Barriers to World Wide Sourcing (political) Free trade zones in Africa (Source: unctad. org) Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 16
2. Barriers to World Wide Sourcing (cultural) Transparency International – Corruption Perception Index 2009 (1) Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 17
2. Barriers to World Wide Sourcing (cultural) Transparency International – Corruption Perception Index 2009 (2) The Corruption Perception Index(CPI) is published since 1995. In the CPI every country is classified for their degree of corruption, percieved by the governement and civil service. The CPI is based on several surveys and research from different independent institutions. (Source: www. transparency. ch) Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 18
Chapter 3 Organisational Buying Behaviour Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 19
3. Organisational Buying Behaviour N Environment Characteristics of the procuring organization Purchase type Organizational procurement process Buying Center/ Buying Network Selling Center/ Selling Network A K Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 20
3. Organisational Buying Behaviour • • Multi-personality Problem-solving and decision-making process Active information behavior Intensive personal interactions Organizational purchasing behavior takes place in a multi-personal problem-solving and decision-making process that is characterized by interactive information and behavior through frequent interactions. Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 21
3. Buying Center Concepts Buying-Center: Theoretical summary of the decision making unit The idea of the Buying-Center Problem-oriented group of interacting members within an organisation, the group is established for purchasing an industrial good. The Buying-Center is often institutionally established in „investement comissions“ Problem for suppliers: Who is involved at which time and with which part in decisions (identification according to persons/ roles / functions)? The range (number of participants) and the structure cannot be defined precisely. Marketingimplication for the provider: Analysing the range and structure of the Buying-Center. Source: Backhaus/Voeth, 2007, S. 46 -75 Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 22
3. Buying Center Concept (Webster/Wind) Buyer Decider Purchase decision User Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Gatekeeper Influencer Slide 23
3. Buying Center Concept (Extension according to Bonoma) • The rolemodel is widened by Bonoma with the role of an initiator • Witte`s promoter-/ opponent-model – Subject- and powerpromoter – Subject- and poweropponent - Promoter-Team Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 24
3. Structure of power and behaviour in buying-centers Promoters Opponents Handicap and delay decision processes Promote and influence the purchasing process Differentiation into : Power opponents Knowledge opponents Differentaiotion into: -Subject promoters -Power promoters Buying-Center Decision behaviour Information behaviour Risk behaviour steers decision behaviour Types of information treatment: 1. Decision oriented 2. Fact oriented 3. Security oriented 1. Facts-reactor 2. Image-reactor 3. Neutral reactor Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Types of information serach behaviour: 1. literal-scientifical 2. Objectiveevaluative 3. Spontaneous/ passive Slide 25
3. The promoters and opponnents model Sources of power Power promoter • High hierarchic position • • • Subject promoter • Competence of experts • • Process promoter • • Organisational skills Internal organisational potentials of communication Barriers Performance • • Provides organisational resources Defines goals Grants incentives Sanctions actors Blocks opponents • • Will barriers Hierarchy barrierrs Evaluates new und complex problems Evaluates und develops solutions Realises solutions Initiates and promotes specific subject didactic processes • Subject oriented skill barriers Collects, filters, translates • and interprets informations und forwards them to according actors Promotes communication relationship und coalitions among actors Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Organisational and administrative barriers Slide 26
Chapter 4 Global Sourcing Analysis Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 27
4. Selection of sourcing countries Portfolio approach All considered markets are being evaluated for their market attractiveness and market barriers. Afterwards a matrixstructure is beeing setup. Based on that structure four market types can be differentiated. Market attractiveness Target markets Promising markets Occasional markets No Go markets high low high Market barriers (Source: Backhaus et al. , 2003, S. 124 -125) Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 28
4. Selection of sourcing countries Portfolio approach (Source: Albaum/ Duerr/ Strandskov, 2005, S. 188) Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 29
4. Selection of sourcing countries BERI-Index (1) Business Environment Risk Information (BERI) • Established 1966; Headquarters in Friday Harbor, State of Washington, U. S. A • Evaluates country specific risks in a multidimensional model • One year and five year forecast • Examines 50 countries • Two simultaneous panels examining political and economic conditions (Source: www. beri. com, 2010) Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 30
4. Selection of sourcing countries BERI-Index (2) Final Evaluation consists of the aggregation of three subindizes: BERI Operation Risk Index PRI Political Risk Index R-Factor Remittance & Repatriation Factor (Source: www. beri. com/brs. asp, 2010) Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 31
Chapter 5 Organisation of Global Sourcing Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 32
5. Centralization vs. decentralization Structural alternatives in an overview: Realizing supply economies of scale, economies of process, economies of information Degree of centralization high supply economies of process and information supply economies of scale hierarchical coordination centralized structure mix of centralized and decentralized (lagrest $ volume centralized) hybrid coordination mix of centralized and decentralized (lagrest $ volume decentralized) market coordination decentralized structure low Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement high Homogeneity of demand Slide 33
5. International Purchasing Offices What do International Purchasing Offices (IPOs) do to support international purchasing o o o o o Identify foreign suppliers Solicit quotes Expedite and trace shipments Negotiate supply contracts Obtain product samples Manage technical problems Represent the buying firm to the suppliers Manage countertrade Perform site visits Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 34
5. Determinants of the International Purchasing System (IPS) Independent Dependent Situational Factors Level of IPS Complexity of Business Environment Extent of International Supply Base/Program Dynamics in Purchasing Environment Value-Adding Services Provided by International Suppliers Importance of International Purchasing Worldwide Information Systems Lack of Alternative Source E-Commerce International Purchasing Motives Capabilities of Purchasing Personnel Cost Driven Non-cost Driven Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 35
5. Structural Relationship in a Strategic Network Ultimate Customers Distributor Partners Logistic Partners Sourcing Firm Logistics Partners Suppliers‘ Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 36
5. Structure of a virtual organization Designer Producer Virtual Organization Supplier Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Marketer Slide 37
5. Lead Buyer Strategy: Example BASF Lead buyer system for Product Focus Groups n Lead Buyer coordinates product / product group r ye u B m ad ste Le Sy n Supported by Regional Buyers (Source: Britt, 2011) n Each product / product group with dedicated strategy Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 38
5. Procurement Hubs: Example BASF Procurement hubs for non-focus products n Decentralized / delegated products Pr oc ur Hu em bs en t n Local demand n Local hub buyer responsible for procurement Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement (Source: Britt, 2011) Slide 39
Chapter 6 Sourcing Strategies Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 40
6. Sourcing Strategies: Tasks of Procurement (Source: Arnold 1997) Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 41
6. Sourcing Strategies: Sourcing-Toolbox Supply Strategy as a Combination of Sourcing Concepts (Source: Arnold 1997) Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 42
6. Sourcing Strategies Different origins of specificity (see Williamson 1989) Input specificity • site specificity • physical asset specificity • human asset specificity • dedicated asset specificity • brand name specificity • time specificity ………………………………. • information specificity (UA) • Process specificity (release process including quality management) • selected supplier specificity / relationship related specificity Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 43
6. Sourcing Strategies Transaction costs consist of • Coordinating costs • Control costs • Opportunity costs ex ante transaction costs ex post transaction costs Transaction costs define different governance modes (between markets, hierarchy and hybrid forms). Specificity and strategic value are the main factors which define the characteristic of a transaction. Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 44
6. Sourcing Strategies How can be achieved completeness of contracts between buyer and supplier? explanation by agency theory Complete means: All possible elements which influence the relationship between benefits and costs are clearly defined and operationalized. Information problems cause A. Ex ante: • Hidden characteristics Problem: the well performing suppliers will be ignored (≙ adverse selection) B. Ex post: • hidden action moral hazard • hidden information • hidden intention • hold up Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 45
6. Sourcing Strategies How to solve information problems? • signalling (supplier´s activity) (e. g. open book policy) • screening (buyer´s activity) (e. g. auditing) • self selection (offering hidden infromation by choosing specific contract modalities) • incentive driven contract elements to stimulate convergence of interests Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 46
6. Sourcing Strategies (Source: Krause/Handfield, 2000) Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 47
6. Sourcing Strategies (Source: Krause/Handfield, 2000) Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 48
6. Sourcing Strategies Development of a World Class Supply Base Identify, assess and rationalize the supplier base Objective: Create a pool of potentially capable suppliers. 1 st step: Identify strategic global supply chain needs - end customers requirements - product development targets - improvement of market position and competitiveness in product lines and market areas. All these requirements directed to supplier potentials and abilities are steered by the general sourcing objectives like • cost reduction • quality / value improvement • technology road maps • business expansion plans. (Source: Krause/Handfield, 2000) Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 49
6. Sourcing Strategies Development of a World Class Supply Base 2 nd step: Search for competitive suppliers. 3 rd step: Establish controlling system for global sourcing activities: - performance metrics - supplier assessment model - tracking system for supplier performance - reporting of total cost of ownership figures establish immediate feedback to internal customers and suppliers. 4 th step: Supplier base fit Eliminate suppliers which are not able to fulfil companys requirements; identify already fully capable suppliers; identify suppliers which can be developed in the future. (Source: Krause/Handfield, 2000) Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 50
6. Sourcing Strategies Development of a World Class Supply Base Problem solving development Objective: Suppliers meet all current requirements of manufacturing and other business activities. 5 th step: On site visits to assess capabilities and potentials of suppliers by cross-functional teams - technological assessment - suppliers risk assessment - environmental risk assessment. 6 th step: Activities to eliminate suppliers deficiencies - by technical support - by management support - by financial support. (Source: Krause/Handfield, 2000) Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 51
6. Sourcing Strategies Development of a World Class Supply Base Proactive development Objective: Self-reliant global supply base with ability for continuous improvement. 7 th step: Establish open relationship through feedback and information sharing; establish appropriate communication culture for mutual understanding; provide efficient IT-systems. 8 th step: Systematic supplier development - direct involvement of supplier; avoid agency problems - incentives and rewards - warnings and penalties Maintain efforts and activities to reach self-reliance of relationship. (Source: Krause/Handfield, 2000) Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 52
6. Sourcing Strategies Development of a World Class Supply Base Integrative development Objective: Globally aligned supplier network. 9 th step: Supplier integration in new product/process development - share business plan information and technology road maps - integrate staff members, employees of suppliers (and vice versa) 10 th step: Establish performance improvement in second tier suppliers; realize concept of supply chain management upstream. 11 th step: Establish integrated supplier network: - supplier becomes responsible for supplying multiple global company sites - develop benefits by horizontal extension of supplier network. (Source: Krause/Handfield, 2000) Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 53
6. Calling a Change in the Outsourcing Market In the Real World, Outsourcing Frequently Fails to Deliver its Promise Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 54
6. Outsourcing – what is it? „Do what you can do best – outsource the rest“ „Outside Resource Using“ Strategic Approach: • Focusing on core competences („lean“) = resources view • Using of already available skills and capabilities on markets = market view • Outsourcing – Offshoring – Make or Buy Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 55
6. Potential Advantages by Outsourcing scale: External supplier can bundle, specialize, balance capacities scope: Outsourcing-Partner can provide an access to new/other markets technology expertise: Outsourcing Partner can invest in more efficient technologies – faster, more intense Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 56
6. Advantages and Disadvantages of Outsourcing Advantages Disadvantages Freeing up of cash: investments can be concentrated on core activities Increased dependence on suppliers Optimal usage of knowledge, equipment and experience of third party Continuous follow-up and monitoring of the supplier relationship necessary Increased flexibility: fluctuations in the workload can more easily be absorbed Risks of communication and organizational problems during the transfer of activities to a third party Outsourcing leads to easier and more focused primary processes in the organization Risks of leakage of confidential information Input through an independent party’s point of view Performance incentives and penalties which reduces the risks of introvert shortsightedness in the organization Risk of losing essential strategic knowledge Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 57
6. Aims of Outsourcing Fixe Kosten + Fixed Costs Gemeinkosten Indirect Costs Variable Kosten + Variable Costs Einzelkosten Direct Costs Internal Charging Complexity of Market requirements Variable Costs Direct Costs External Payments Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Splitting der Be. Splitting of darfe (Spot Buys) Requirements (Spot Buys) Bündelung + langfristige Bundling + long. Partnerschaft term Partnership Determinated Requirements Openness of Performance Profiles Slide 58
6. Possible Results Effect - Relationships Outsourcing ? Competencebasis ? Futureskills ? Positive Effects, e. g. : Negative Effects, e. g. : ¦ Lower costs for knowledge ¦ Loss of competence ¦ Extension of the competence profile ¦ Decrease of performance quality ¦ Deepening of the competence profile ¦ Loss of know-how- bearer ¦ Concentration on core activities ¦ Increase of total costs for knowledge ¦Organizational development (restructuring; reengineering) ¦ Publication of confidential information Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 59
6. Possible Results Impact of a depth of added value change by inrespectively outsourcing (traditional: „make or buy“) on: - Level of the purchasing policy, the supply management and the placing activities - Capital investment; capital commitment - Number of employees; employment, capacity utilization - Processing competence - Quality - Amount and structure of costs; relation to fixed / variable costs („break-even“-Point) - Production management flexibility - Negotiation potential to external service providers - Risk structures Conclusion: Changes intervene regularly in existing structures / processes (business restructuring / reengineering) Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 60
6. Competitive Comparison Example of automobile industry comparative study from WOMACK / JONES / ROOS of MIT (Japan; USA; West-Europe) Japanese automobile-manufacturer are better, because lower depth of added value better networking with supplier therefore: - shorter product development cycles - more intensive use of JIT-supply - major market flexibility - major internal flexibility Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 61
6. Development Process of Outsourcing “Outsourcing has progressed from involving only peripheral business activities towards encompassing more critical business activities that contribute to competitive advantage. Many outsourcing failure cases have been a result of the misapplication of the concept by practitioners. ” [Mc Ivor, Ronan: The Outsourcing Process; Cambridge 2005] Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 62
Chapter 7 Vertical and Horizontal Cooperation Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 63
7. Supplier relationship as a connecting factor between the supply market and the firm supply market 2. selection 1. demand new supplier planning 3. contracting phase out 4. executing supply partner purchasing 5. evaluating firm demand purchasing 9. organising strategic plan the firm 8. sourcing strategy Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement 6. controlling 7. cost analysis Slide 64
7. Vertical and Horizontal Cooperation Definition of cooperation: constitutional features • Independence of the cooperation members is a criteria needed by law to distinguish it from a merger • Partners in the cooperation are two or more enterprises • The main interest of the cooperation is an ex ante matching of plans or a coordination of single interests, mainly in one functional part (e. g. purchasing) • The main goal of a cooperation is a better economic situation for the cooperation partners, reached by a cooperative practice Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 65
7. Vertical and Horizontal Cooperation OEM Key Suppliers System/Module Suppliers Supplier Base (components, raw materials etc. ) Vertical Global Sourcing Cooperation (Supplier Partnering) Horizontal Global Sourcing Cooperation (Cooperative Purchasing) Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 66
7. Vertical and Horizontal Cooperation Vertical Cooperation: supplier/seller-relationship • Modern sourcing concepts need cooperations • Cooperation reduces transaction costs Horizontal Cooperation: Cooperative Purchasing Planning of horizontal supply cooperations • setting goals • finding partners: the idea of a procurement fit Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 67
7. Fit Dimensions as Factors in Partner Selection Partner Management Fundamental Fit mental. Fit Strategic Fit Commitment Shared vision Agreement strategic goals Power balance Compatible business plans Mutual benefits Manageable risk Significant Potential for added value Agreement on configuration Cultural Fit Logistics Fit Pluralism Object compatibility Assimilation Transport mode compatibility Transfer Resistance Information flow compatibility Same planning horizon Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement (Source: Arnold, 1999) Slide 68
7. Economic Effect of Vertical Cooperation costs Costs of production Coordination costs Paradigm of specialization Paradigm of cooperation Specialization level Vertical cooperations have the goal to reduce the coordination costs through intensive cooperation with selected system suppliers. Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 69
7. Economic Effect of Horizontal Cooperation Purchaser Supplier Individual Demand A Total Demand Individual Demand B Economy of Scale A+B+C Individual Demand C (Electronic) Bundle Platform Mechanisms of horizontal purchasing cooperation Economies of Scale Information of Process Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 70
Chapter 8 Sourcing Processes Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 71
8. Enabling Processes for Global Sourcing Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 72
8. Purchasing Portfolio Analysis Kraljic’s (1983) product portfolio based on two variables: 1. Purchasing’s impact on the bottom line 2. Supply risk the profit impact of a given supply item measured against criteria such as cost of materials, total cost, volume purchased measured against criteria such as short-term and long term availability, number of potential suppliers, structure of supply markets. Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 73
8. Supplier Portfolio High Strategic products n alternative sources of n critical for product’s cost price supply available n substitution possible Purchasing’s impact on financial results Leverage products n dependence on supplier Performance based partnership Competitive bidding Routine products Bottleneck products n large product variety n monopolistic market n high logistics complexity n large entry barriers n labor intensive Low Systems contracting + E-Procurement solutions Low Secure supply + search for alternatives Supply risk Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement High Slide 74
8. Supplier Portfolio High Strategic suppliers n many competitors n market leaders n commodity products Supplier impact on financial results Leverage suppliers n specific know-how Buyer dominated segment Balance of power may differ among buyer-supplier Routine suppliers Bottleneck suppliers n large supply n technology leaders n many suppliers with n few, if any, alternative suppliers dependent position Low Reduce number of suppliers Supplier Dominated segment Low Supply risk Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement High Slide 75
8. Risk Management Types of risks endogenous exogenous internal external general risks situational risks general risks task-specific risks direct way influence of customers company size management of material flow performance programme production technology information technology economic sector sociocultural sector Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement technological sector physical sector indirect way influence of competitors political sector (Source: Beschaffung Aktuell, 02/2011) Slide 76
8. Risk Management: A Process Perspective • risk awareness • risk perception • early warning system • risk screening 1 risk identification 3 risk management 4 communication 2 risk analysis; assessment Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 77
8. Risk Management: An International Perspective market risk compliance risk environmental risk global risk management transport risk price risk … Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 78
8. Risk Analysis in Global Sourcing Non-Economical Risks Political risks • Social Conflicts • Confiscation of goods • Political trade protection e. g. tariffs Administrative risks • Bureaucracy • Ineficiency of local administration Cultural risks • Language • Way of life Jurisdictional risks • enforceability of contracts Economical Risks Makro-Economical • Economic cycles • Changes in currency exchange rates Mikro-Economical • Transport and distribution risks • Contractual risks (Claim Management) Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 79
8. Risk Analysis in Global Sourcing Systematisation of currency exchange risks Exchange rate change Estimation risk) (economic risk) (transaction risk) time (Source: Büschgen, H. E. (1997), International Finance, S. 311) Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 80
8. Risk Analysis in Global Sourcing Hedging - A hedge is a position established in one market in an attempt to offset exposure to price changes or fluctuations in some opposite position with the goal of minimizing one's exposure to unwanted risk. Example: Hedging an agricultural commodity price A typical hedger might be a commercial farmer. The market values of wheat and other crops fluctuate constantly as supply and demand for them vary, with occasional large moves in either direction. Based on current prices and forecast levels at harvest time, the farmer might decide that planting wheat is a good idea one season, but the forecast prices are only that — forecasts. Once the farmer plants wheat, he is committed to it for an entire growing season. If the actual price of wheat rises greatly between planting and harvest, the farmer stands to make a lot of unexpected money, but if the actual price drops by harvest time, he could be ruined. If the farmer sells a number of wheat futures contracts equivalent to his crop size at planting time, he effectively locks in the price of wheat at that time: the contract is an agreement to deliver a certain number of bushels of wheat to a specified place on a certain date in the future for a certain fixed price. The farmer has hedged his exposure to wheat prices; he no longer cares whether the current price rises or falls, because he is guaranteed a price by the contract. He no longer needs to worry about being ruined by a low wheat price at harvest time, but he also gives up the chance at making extra money from a high wheat price at harvest times. (Source: Dichtl, E. ; Issing, O. (Hrsg. ): Vahlens Großes Wirtschaftslexikon. 2. Aufl. , München 1994, S. 906 -907 und Alisch, K. ; Winter, E. ; Arentzen, U. (Hrsg. ): Gabler-Wirtschafts-Lexikon. 16. Aufl. , Wiesbaden: 2004, S. 1381) Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 81
8. Risk Management: Example BASF (Source: Britt, 2011) Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 82
Chapter 9 Controlling of Procurement Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 83
9. Controlling of Procurement What should be measured? no single index of performance no universal way of evaluating • commercial focus (price, quantity, place, service, time, cost savings) • efficiency metrics (process costs, TCO-concept) • effectiveness parameters (improve capabilities) Who should be interested? procurement management internal customers top management Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 84
9. Controlling of Procurement Purchasing Performance Key areas of procurement performance measurement Purchasing Effectivene ss Purchasing Materials costs/ prices Product / quality Materials price/cost control Materials price/cost reduction Involvement of purchasing in new Product development Purchasing and Total Quality control Adequate requisitioning Purchasing logistics Order and inventory policy Supplier delivery reliability Personnel Purchasing Efficiency Purchasing organization Management Procedures and policies Information system Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 85
9. Controlling of Procurement Examples of purchasing performance indicators Dimension Measurement aimed at C/I* Examples Purchased materials prices and costs Purchased materials cost control C Purchased materials cost reduction C Product / quality of purchased materials Early purchasing involvement in design and development Incoming inspection quality control and assurance I Purchasing logistics and supply Monitoring requisitioning Delivery reliability (quality and quantity) I/C Purchasing staff and organization Training and motivation of purchasing I staff Purchasing management quality Purchasing systems and procedures Purchasing research C Materials budgets, variance reports, price inflation, reports, purchasing turnover Purchasing cost saving and avoidances, impact on return and investment Time spent by purchasing on design and engineering projects, sampling reject rate (%) Reject rate (%), line reject rate (%), quality costs per supplier Purchasing administration lead times, order backlog (per buyer), rush orders, delivery reliability index per supplier, materials shortages, inventory turnover ratio, JIT deliveries Time and workload analysis of purchasing department, purchasing budget, purchasing and supply audit * Note: C = continuous and I = Incidental Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 86
9. Benchmarking in procurement = kind of comparison between firms to improve purchasing performance Types • business funtion oriented (e. g. outsourcing of non-core-activities) • supply process oriented (best practices in purchasing processes) • externally oriented (outside own business – outside own industry) Model for supply process benchmarking 1. 2. 3. 4. 5. 6. 7. Identification of status quo Cost information and evaluation Illustration of own deficits Checking of transfer possibilities Infrastructure investments Implementation of best practices Continuous improvement Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 87
9. Types of Benchmarking object Product benchmarking Instrument depend heavily on product structure, technology and complexity Strategy benchmarking Strategies are often incomparable because they are highly specific for one company Organization benchmarking Process benchmarking Company benchmarking Not easy to handle, because it allows Concentrates on one business function, in our case on purchasing Internal benchmarking Only possible for multibusiness unit organizations External benchmarking (same branch) Often not easy because the partners are competitors External benchmarking (different branches) Benchmarking partner Allows to gain knowledge on ways to handle business activities without the risk, that results are not transferable Business function benchmarking Benchmarking subject Focuses on structures, not on processes Ideal to identify the real best practice benchmark Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement no focus Slide 88
9. Report of Cross-Industry Standard Benchmarks (CAPS) Cross-Industry Standard Benchmarks November 2010 Utilities Chemical 1. Total spend as a percent of sales dollars………………………. . 2. Procurement operating expense as a percent of sales dollars……………. . 3. Procurement operating expense as a percent of total spend…. . …………… 4. Procurement operating expense per procurement employee………………. . 5. Procurement employees as a percent of company employees……………. 6. Total spend per procurement employee…. ………………………… 7. Managed spend per procurement employee………………………. 8. Percent of total spend managed/controlled by procurement………………. . . 9. Percent of total spend offshore………………………. . . 10. Percent of total spend onshore……………………. . . 11. Average annual spend on training per procurement employee…. ……………. 12. Cost avoidance savings as a percent of total spend…………. . ……………. . 13. Cost reduction savings as a percent of total spend…………. . ……………… 14. Percent of active suppliers accounting for 80% of total spend………. …………………. . 15. Percent of total spend with diversity suppliers………. …………………. . 16. Percent of active suppliers who are e. Procurement enabled………………. . . 17. Percent of total spend via e. Procurement……………………. . 18. Percent of total spend via e. Auctions………………………. . 19. Percent of total spend via procurement cards…………………. . 20. Percent of total spend via strategic alliances………………… 34, 36% 0, 12% 0, 64% 99. 309$ 1, 14% 20, 75$ (m) 16, 71$ (m) 85, 48% 0, 36% 99, 64% 794$ 1, 13% 1, 22% 4, 53% 12, 13% 5, 62% 0, 57% 2, 14% 19, 81% 51, 30% 0, 22% 0, 39% 111. 031$ 0, 92% 33, 43$ (m) 31, 41$ (m) 92, 29% 15, 03% 84, 97% 693$ 1, 12% 1, 50% 4, 74% Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement 24, 42% 11, 26% Slide 89
9. Example: Balanced Scorecard Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 90
9. Controlling of Procurement „if you can’t measure it you can’t manage it. “ „Not everything that can be counted counts, and not everything that counts can be counted. “ [Albert Einstein (1879 - 1955), German theoretical physicist] Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 91
Chapter 10 Logistics as an Enabler Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 92
10. Case study: production network Behr Intensive cooperation on capacity, production technology and logistics USA Dayton Canton Charleston Fort Worth Webberville Spain Barcelona Montblanc Germany Mühlacker Vaihingen/Enz Pforzheim Neustadt/Donau Stuttgart France Hambach Rouffach Brazil São Paulo Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Kirchberg Mylau Lippstadt Reichenbach Meerane Czech Republic Mnichovo Hradiste India Pune South Africa Durban Pretoria Johannesburg Port Elizabeth Slide 93
10. The logistics market - study "Top 100 Logistics" logistics market: TUL-logistics: goods traffic, handling, picking and storage activities of the entire economy Coordinating-logistics: order processing, disposition, supply chain-planning costs (+ holding inventory costs) Not included: industrial production processes, which are usually associated with functions and cost responsibilities of the production; activities in the branches of retail trade, carried out by the sales staff Contract-logistics: businesses, integrating tight relationships between carriers and service providers; several logistics functions, long term relationships and a high volume of sales will be handled Market data Germany: Market volume: 200 Billion Euro Workplaces in the logistics industry: 2, 65 Mill. Inhouse logistics: 51 % Market volume service provider: 98, 5 Billion Euro Logistics cost components: 8, 3 % of gross domestic products Trends: small market growth due to rationalization effects Increase in market share of service provider Growth potential for contract logistics Quantities of goods largely constant/ transport distances increase (Source: Klaus/Hartmann/Kille 2010/2011) Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 94
10. Logistics Market Volume in Europe (Source: Klaus/Hartmann/Kille 2010/2011, p. 164) Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 95
10. Coordination in Logistics 1. Internal coordination of physical commodity flows (Adjustment of container systems, technical additives, avoiding of „breackages“ in commodity flow 2. Cross-plant coordination with suppliers and customers (Standardization of packages, process flows, means of transport) 3. Coordination of short-term production tasks and commodity flows (optimal production lots and optimal order size) - 4. Coordination on product and programme policy level (management of modularization complexity, flexible manufacturing systems) 5. Coordination in structure decisions (logistics requiremented constructions of products, recyclable design) 6. Coordination on strategic corporate planning level (coordination with competitive strategy, divisional strategies) Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 96
10. Definitions of Logistics - Logistics is responsible for regional and temporal change of goods - Information flow and product flow belong together and represent the main elements of logistic systems - Efficient and effective arrangements of logistic systems - Focusing on the requirements of customers Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 97
10. Economic Targets of Logistics System of logistics costs (Source: Pfohl 2004, p. 31) Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 98
10. Logistics Success: Costs Reduction vs. Performance Improvements Logistics Performance Logistics Success Logistics Costs Reduction of delivery time Reduction of carrying costs Improvement of delivery reliability Reduction of storage costs overall optimization Improvement of delivery condition Reduction of transportation costs Increase of delivery flexibility Reduction of order processing costs etc. Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 99
Chapter 11 Supply Chain Management Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 100
11. The Concept of Supply Chain Management Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 101
11. The Concept of Supply Chain Management Cooper/Lambert/Pagh (1997): “The integration of all key business processes across the supply chain is what we are calling supply chain management. ” Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 102
11. Supply Chain Operations Reference-Model Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 103
11. Supply Chain Planning Tools Strategic Planning Level Strategic (Supply Chain) Management Supply Chain Planning Tools Product Development Tactical Planning Level Financial Analysis Operational Level Financial Control HR Management Financial Management Supplier Management International Logistics ERP Systems Product Data Management Life-Cycle Management Procurement Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Market Analyses Production Control Cross Docking VMI Customer Management Asset Management Production Distribution Customer Service Final Customer Slide 104
11. Challenges for Supply Chain Management Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 105
11. Crossroads in Supply Chain Management Prof. Dr. h. c. Ulli Arnold, Chair for Industrial Goods Marketing and Procurement Slide 106
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