15 May CUSTOMER IMPORTANCE- IS THE COMPONENT IMPORTANT TO THE CUSTOMER? WHAT IS THE IMPACT?
Discussion question: What are some procurement and outsourcing strategies?
Classmates responses
Richard
In today’s society, in order for a firm to maintain its competitive edge, they must either outsource, create a procurement strategy, or a combination of both. According to the text, there is a hierarchical model to determine if a firm should outsource, or produce internally. The five criteria for determining this are:
Customer importance- Is the component important to the customer? What is the impact?
Component clockspeed- How fast does the component change in technology relative to other components in the system?
Competitive position- Does a competitive advantage exist in the firm?
Capable suppliers- How many suppliers exist?
Architecture- Is the component modular or integral to the system?
The text states that the decision to outsource a product is dependent upon a variation of criteria. For example, if a firm meets all of the above criteria, then it makes sense for that firm to produce in-house and not outsource. If a firm is not at a competitive advantage, but customer satisfaction and clockspeed is high, then the firm should look to acquire an advantage such as making acquiring a supplier, partnership, or make a capital investment to advance the business. Architecture is a little more tricky to assert. The text gives a good example of an auto manufacturer to illustrate architecture. Modularity exists more so in the electronics of a car, such as the stereo system, speakers, bluetooth receivers and in non electronic components such as tires. For example, Ford is not going to engineer a stereo and speaker system. The technology that will be used will be outsourced to other companies such as Sony.
In addition to outsourcing strategies, there are also procurement strategies. According to the text, Peter Kraljic states that a firm’s supply strategy shall be assessed based on two factors: 1) profit impact and 2) supply risk. In Mr. Kraljic’s supply matrix, there are four strategies that can help a firm with their procurement strategy. Those four strategies and implementations are:
Non-Critical Items- If a firm is experiencing low profit impact and low supply risk for non-critical items, the goal should be to simplify and automate the procurement process for the components
Bottleneck Items- When supply risk is high and profit impact is low, firms should ensure that there is adequate and continuous supply to meet demand. Long-term supply contracts can help solve some of these issues.
Strategic Items- When supply risk is high and profit impact is high, it makes sense for a firm to enter a strategic partnership to benefit both the supplier and manufacturer of the component.
Leverage Items- When supply risk is low and profit impact is high, it is best to “force competition between suppliers” to ensure cost reduction.
Reference
Simchi-Levi, D., Kaminsky, P., & Edith, S.-L. (2008). Designing and Managing the Supply Chain: Concepts, Strategies and Case Study. New York: McGraw-Hill Companies Inc.
Reply
David
today must decide on what procurement or outsourcing strategies to effectively use to produce the maximum profit within their organization. Likewise, firms must also understand when determining what strategy to implement, what risks and uncertainty will need to be considered when selecting that strategy. When a firm contracts another company’s service production, there are several procurement strategies one must choose and decide to use based on the products produced by the firm. According to Simchi-Levi et al., a firm’s supply strategy should be made based on two dimensions: (1) profit impact- determines in terms of volume purchased, percentage cost, and impact of product quality and (2) supply risk- assessed in terms availability, number of suppliers, and demand (2008). These dimensions are divided into four categories of outsourcing items in which firms can decide what outsourcing strategy approach it will implement that gives the best profitable impact. The four categories of components are known as the Kraljic’s Supply Matrix (Simchi-Levi et al., 2008), listing items in the category of strategic items-supply risk and impact on profit is high, leverage items-high impact on profit and low supply risk, bottom neck items-do not contribute a large portion of the product cost and supply is risky, and the non-critical items-items that are simplified and automated to the procurement process as much as possible. The four product categories will essentially require different procurement strategies based on what manufacture purchasing risks firms are willing to take.
In the case of outsourcing strategies, there are two frame works that classify reasons for outsourcing: (1) the dependency on capacity-knowledge and skills required to produce the component and (2) the dependency on knowledge- not having the people, skills, and knowledge required to produce the component. Within either of these frame works, firms must distinguish between two categories of products to manufacture: modular and integral products. Modular products are independent components to each other, interchangeable, and are preference to customers to determine the product configuration type. A great example of this type of product is the computer, that which consist of components customers choose how much memory, the hard drive size, the type of monitor, or software they want in his/her computer. Integral products are products made from components whose functionalities are related and can perform multiple functions however, integral products are not produced from off the counter components. For example, cars are products that include many modular components such as the stereo system, DVDs players etc. Both these categories of products provide different frame works in which firms will ultimately have to select in determining what type of outsourcing strategy to best utilize.
Reference:
Simchi-Levi, D., Kaminsky, P., & Simchi-Levi, E. 2008. Designing and Managing the Supply Chain (3rd ed.). New York, NY: McGraw-Hill.
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