CHAPTER 10
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Learning Objectives
Calculate the profit leverage effect of sourcing and explain its importance.
Recall the goals of sourcing.
Describe the advantages and disadvantages of outsourcing and offshoring.
Calculate the total cost of outsourcing and offshoring.
Describe supply base optimization.
Explain the elements of the purchasing cycle.
Analyze an example of the weighted scoring method of supplier selection.
Discuss the challenges facing purchasing.
Sourcing Definition
Strategic decisions:
– Which products/services should be outsourced?
– Which products/services should be offshored?
– How should the supply base be optimized?
Deciding if a product, part, or service should be outsourced or insourced by the firm. Establishes inputs for making products and services.
Purchasing Definition
Tactical decisions:
– Which supplier(s) should be selected?
– How should suppliers be managed?
Choosing suppliers, negotiating contracts, and managing buyer-supplier relationships.
Importance of Sourcing
Profit leverage effect
5% savings on purchased goods
54% increase in profit margin
Firm A Firm B
Sales $72,618 $72,618
Cost of goods sold (COGS) 51,278 48,714
All other costs 16,624 16,624
Pre-tax earnings $4,716 $7,280
Profit margin 6.50% 10.03%
Goals of Sourcing
Access technology and innovation
Decrease total costs
Minimize risk of quality and delivery problems
Require social responsibility and ethical behavior
Outsourcing
Advantages Disadvantages
Access to new or changing technology Risk of supply chain disruptions
Lower total costs Possible quality or delivery failures
Less investment/free up resources Risk of price increases
Scale economies in the supplier Loss of knowledge and technology related to outsourced work
Total Cost Analysis (Table 17.2)
Outsourcing
Purchase price $7.50
Transportation cost 0.45
Inventory carrying cost 0.30
Administrative cost 0.12 Administrative cost is $1,000 per month × 36 months =
$36,000 ÷ 300,000 units = $0.12 per unit
Total per unit $8.37
Insourcing
Manufacturing Costs
Direct labor $2.10
Materials 1.40
Indirect labor 0.75
Depreciation 1.33 Depreciation cost is $400,000 ÷ 300,000 units =
$1.33 per unit
Overhead 2.10
Total per unit $7.68
Offshoring – Possible Costs
Price paid
Carrying cost
Tariffs and taxes
Trips for auditing, negotiations, and product support
Pre-evaluation, supplier selection, and regulatory compliance
Preparing and administering contracts
Offshoring – Qualitative Factors
(with possible costs)
Currency changes over time
Potential costs of quality, rework, warranty and legal costs of product failures
Airfreight costs to overcome delivery or quality problems
Wage inflation over time
Loss of intellectual property
Work stoppage or supply chain disruption
Supply Base Optimization
Spend analysis
Buying what, from whom, for how much?
Total number of suppliers
Too many – complex communication and control
Too few – risk of shortages, disruptions, stoppages, prices
Single or multiple suppliers
Cross-sourcing
Dual sourcing
Preferred suppliers
Purchasing Cycle (Figure 17.1)
Purchasing Challenges
Taking on strategic role
Moving beyond cost savings
Supply chain risk management
Developing suppliers and technology
Professional role
Calculate the profit leverage effect of sourcing and explain its importance.
Recall the goals of sourcing.
Describe the advantages and disadvantages of outsourcing and offshoring.
Calculate the total cost of outsourcing and offshoring.
Describe supply base optimization.
Explain the elements of the purchasing cycle.
Analyze an example of the weighted scoring method of supplier selection.
Discuss the challenges facing purchasing.
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