Supply Chain Management (SCM) 101: Sourcing and Procurement - Strategic Sourcing, Supplier Selection Evaluation Relationship Management

What This Is

Strategic Sourcing is the process of selecting, evaluating, and managing suppliers to meet a company's needs while minimizing costs and maximizing quality. Effective strategic sourcing is crucial in supply chain management as it directly impacts a company's bottom line, customer satisfaction, and competitiveness. For example, Amazon's strategic sourcing efforts have enabled it to maintain a high level of customer satisfaction while keeping costs low, allowing it to expand its services and products.

Key Frameworks & Formulas

• Supplier Selection Criteria (SSC): A framework used to evaluate potential suppliers based on factors such as quality, price, lead time, and reliability.
• Supplier Evaluation Matrix (SEM): A tool used to compare and prioritize suppliers based on their performance and potential.
• Total Cost of Ownership (TCO): The total cost of acquiring and owning a product or service, including costs such as purchase price, maintenance, and disposal.
• Supplier Development (SD): A process used to improve a supplier's performance and capabilities through training, mentoring, and technology transfer.
• Supplier Relationship Management (SRM): A process used to manage and maintain relationships with suppliers to ensure long-term partnerships and mutual benefits.
• Economies of Scale (EOS): The cost savings achieved by producing or purchasing large quantities of a product or service.
• Economies of Scope (EOS): The cost savings achieved by producing or purchasing a variety of products or services.
• EOQ (Economic Order Quantity): The optimal order quantity that minimizes the total cost of inventory, calculated using the formula EOQ = ?(2DS/H), where D is demand, S is setup cost, and H is holding cost.
• Safety Stock: The additional inventory held to mitigate the risk of stockouts, calculated using the formula Safety Stock = Z ×-× ?L, where Z is the Z-score,-is the standard deviation, and L is the lead time.

Step-by-Step Application

1. Conduct a supplier selection analysis: Identify potential suppliers based on SSC and SEM, and evaluate their performance and potential.
2. Develop a supplier evaluation matrix: Compare and prioritize suppliers based on their performance and potential.
3. Calculate the total cost of ownership: Determine the total cost of acquiring and owning a product or service, including costs such as purchase price, maintenance, and disposal.
4. Implement supplier development: Improve a supplier's performance and capabilities through training, mentoring, and technology transfer.
5. Establish a supplier relationship management process: Manage and maintain relationships with suppliers to ensure long-term partnerships and mutual benefits.

Common Mistakes

• Mistake: Focusing solely on price when evaluating suppliers.
• Correction: Consider multiple factors such as quality, lead time, and reliability when evaluating suppliers.
• Mistake: Not considering the total cost of ownership when making purchasing decisions.
• Correction: Calculate the total cost of ownership to ensure that the lowest purchase price does not result in higher costs in the long run.
• Mistake: Not developing a supplier relationship management process.
• Correction: Establish a process to manage and maintain relationships with suppliers to ensure long-term partnerships and mutual benefits.

Exam / Certification Tips

• Be able to explain the difference between push and pull strategies: Push strategies involve producing and stocking inventory based on forecasts, while pull strategies involve producing and stocking inventory based on customer demand.
• Understand the concept of efficient vs responsive supply chains: Efficient supply chains focus on minimizing costs, while responsive supply chains focus on meeting customer demands.
• Be familiar with Incoterms: Incoterms are international trade terms that define the responsibilities of buyers and sellers in international transactions.

Quick Practice Problem

A company is considering purchasing a product from a supplier with a lead time of 5 days and a standard deviation of 2 days. The company wants to maintain a service level of 95%. What is the safety stock required?

Answer: Safety Stock = 1.645 × 2 × ?5 = 6.4 units

Explanation: The company needs to hold additional inventory to mitigate the risk of stockouts, calculated using the safety stock formula.

Last-Minute Cram Sheet

• Supplier Selection Criteria (SSC): A framework used to evaluate potential suppliers based on factors such as quality, price, lead time, and reliability.
• Supplier Evaluation Matrix (SEM): A tool used to compare and prioritize suppliers based on their performance and potential.
• Total Cost of Ownership (TCO): The total cost of acquiring and owning a product or service, including costs such as purchase price, maintenance, and disposal.
• Supplier Development (SD): A process used to improve a supplier's performance and capabilities through training, mentoring, and technology transfer.
• Supplier Relationship Management (SRM): A process used to manage and maintain relationships with suppliers to ensure long-term partnerships and mutual benefits.
• Economies of Scale (EOS): The cost savings achieved by producing or purchasing large quantities of a product or service.
• Economies of Scope (EOS): The cost savings achieved by producing or purchasing a variety of products or services.
• EOQ (Economic Order Quantity): The optimal order quantity that minimizes the total cost of inventory, calculated using the formula EOQ = ?(2DS/H).
• Safety Stock: The additional inventory held to mitigate the risk of stockouts, calculated using the formula Safety Stock = Z ×-× ?L.
• Push vs Pull: Push strategies involve producing and stocking inventory based on forecasts, while pull strategies involve producing and stocking inventory based on customer demand.
• Efficient vs Responsive Supply Chains: Efficient supply chains focus on minimizing costs, while responsive supply chains focus on meeting customer demands.
• Incoterms: International trade terms that define the responsibilities of buyers and sellers in international transactions.