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PROCUREMENT AND OUTSOURCING STRATEGIES Presented by:  

Jearnmaneengam Amornsak Kuhirunyarat Wongwanida Jullasing Phanu


Objective • To understand the important roles and key issues involved in outsourcing and procurement processes • To be able to apply outsourcing and procurement strategies • To realize the impact of E-Markets in EProcurement Procurement and Outsourcing, Supply Chain Management, Prof. Presented by Jearnmaneengam Amornsak Tsao, De-bi

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Outline • Outsourcing – Outsourcing Benefits and Risks – Framework for Buy/ Make Decisions

Case Study : FreeMarkets OnLine, Inc. • E-Procurement and E-Market 

– Framework for E-Procurement

• Conclusion

Procurement and Outsourcing, Supply Chain Management, Prof. Presented by Jearnmaneengam Amornsak Tsao, De-bi

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Outline • Outsourcing – Outsourcing Benefits and Risks – Framework for Buy/ Make Decisions

Case Study : FreeMarkets OnLine, Inc. • E-Procurement and E-Market 

– Framework for E-Procurement

• Conclusion

Procurement and Outsourcing, Supply Chain Management, Prof. Presented by Jearnmaneengam Amornsak Tsao, De-bi

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Outsourcing Introduction • Outsourcing components have increased progressively over the years • Increasing the profit by reducing the cost

Procurement and Outsourcing, Supply Chain Management, Prof. Presented by Jearnmaneengam Amornsak Tsao, De-bi

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Outline • Outsourcing – Outsourcing Benefits and Risks – Framework for Buy/ Make Decisions

Case Study : FreeMarkets OnLine, Inc. • E-Procurement and E-Market 

– Framework for E-Procurement

• Conclusion

Procurement and Outsourcing, Supply Chain Management, Prof. Presented by Jearnmaneengam Amornsak Tsao, De-bi

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Outsourcing - Benefits and Risks The benefits of using outsource • Economies of scale – Aggregation of many orders reduces costs, both in purchasing and in manufacturing

• Risk pooling

Aggregation of the demand – Demand uncertainty transferred to the suppliers across locations likes the (CEM) – Suppliers reduce uncertainty through this effect higher demand is • Reduce capital investment compensated with the lower to reduce – Capital investment transferred to suppliers. the variable of demand Procurement and Outsourcing, Supply Chain Management, Prof. Presented by Jearnmaneengam Amornsak Tsao, De-bi

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Outsourcing - Benefits and Risks The benefits of using outsource (Continued) • Focus on core competency – Buyer can focus on its core strength – Allows buyer to differentiate from its competitors

• Increased flexibility – The ability to better react to changes in customer demand – The ability to use the supplier’s technical knowledge – Critical in the industries: • High-tech products where technologies change very frequently • Fashion products which have a short life cycle Procurement and Outsourcing, Supply Chain Management, Prof. Presented by Jearnmaneengam Amornsak Tsao, De-bi

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Outsourcing - Benefits and Risks Outsourcing risks • Loss of competitive knowledge – Critical components to suppliers may open up opportunities for competitors – Implies that companies lose their ability to introduce new designs – Using many outsourcing suppliers may obstructive the development innovations of the organization Procurement and Outsourcing, Supply Chain Management, Prof. Presented by Jearnmaneengam Amornsak Tsao, De-bi

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Outsourcing - Benefits and Risks Outsourcing risks (Continued) • Conflicting objectives – Demand Issues • In a good economy – Demand is high – buyers require to make long-term commitments about ordering

• In a slow economy – Long-term commitments entail huge financial risks for the buyers

– Product design issues • Buyers would like to solve design problems as fast as possible • Suppliers focus on cost reduction Procurement and Outsourcing, Supply Chain Management, Prof. Presented by Jearnmaneengam Amornsak Tsao, De-bi

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Outline • Outsourcing – Outsourcing Benefits and Risks – Framework for Buy/ Make Decisions

Case Study : FreeMarkets OnLine, Inc. • E-Procurement and E-Market 

– Framework for E-Procurement

• Conclusion

Procurement and Outsourcing, Supply Chain Management, Prof. Presented by Kuhirunyarat Wongwanida Tsao, De-bi

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Outsourcing - Framework • Manufacture or outsource ? Analyzing the core of the business is needed – Dependency on capacity • The firm has the knowledge and the skill

– Dependency on knowledge • The firm has the knowledge and the skill, but can not effort to manufacturing

Procurement and Outsourcing, Supply Chain Management, Prof. Presented by Jearnmaneengam Amornsak Tsao, De-bi

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Product Architectures • Modular product – Made by combining different components • Components are independent of each other • Standard interfaces are used ( i.e. PC )

• Integral product – Made up from components whose functionalities are tightly related • Not made from off-the-shelf components • Evaluated on system performance, not on component performance ( i.e. car engines ) Procurement and Outsourcing, Supply Chain Management, Prof. Presented by Jearnmaneengam Amornsak Tsao, De-bi

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Product Architectures A Framework for Make/Buy Decisions Product

Dependency on knowledge and capacity

Independent for knowledge, dependent for capacity

Independent for knowledge and capacity

Modular

Outsourcing is risky

Outsourcing is an opportunity

Opportunity to reduce cost through outsourcing

Integral

Outsourcing is very risky

Outsourcing is an option

Keep production internal

Procurement and Outsourcing, Supply Chain Management, Prof. Presented by Jearnmaneengam Amornsak Tsao, De-bi

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Outline • Outsourcing – Outsourcing Benefits and Risks – Framework for Buy/ Make Decisions

Case Study : FreeMarkets OnLine, Inc. • E-Procurement and E-Market 

– Framework for E-Procurement

• Conclusion

Procurement and Outsourcing, Supply Chain Management, Prof. Presented by Kuhirunyarat Wongwanida Tsao, De-bi

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Changeover of outsourcing in 1990s Manufacturing Representative

Manfac. Rep. Manfac. Rep. Suppliers

Industrial Buyer

Buyers lack of expertise FreeMarkets Fragmented supply market Variation among suppliers Online Information problem for buyers to make decisions Procurement and Outsourcing, Supply Chain Management, Prof. Presented by Kuhirunyarat Wongwanida Tsao, De-bi

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FreeMarkets OnLine, Inc. • Founded in 1995 and was on the verge of breaking even in 1998. • From $75,000 investment, company achieved $6.0 millions revenue in 1998.

• An online market making firm that enabled industrial buyers to link up with their potential suppliers in a live electronic bidding. • The result: Generated over 15% in procurement costs saving for buyers.

Procurement and Outsourcing, Supply Chain Management, Prof. Presented by Kuhirunyarat Wongwanida Tsao, De-bi

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The Market-Making Process • Core Service: – To provide on-line industrial market-making services that culminated in real-time Competitive Bidding Events (CBEs); 90-mins to 2-hrs. BidWare BidWare BidServer Functions to monitor market price, submit bids, and print report.

Suppliers

Interne Interne tt

Interne Interne tt

FreeMarkets

Functions to monitor bidding, and print result report.

Buyers

Procurement and Outsourcing, Supply Chain Management, Prof. Presented by Kuhirunyarat Wongwanida Tsao, De-bi

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Framework in Market-Making Process • 5 Steps in FreeMarket Online Identify Savings

Opportunity

Prepare Total-cost RFQ*

Identify Screen, Support Suppliers

Conduct OnLine CBEs

Provide Post-Bid Support

Defining all elements of Request for Analysis expenditure and Quotations,requirements of drawings, volume Training sessions to suppliers, Collecting cost breakdown, savings for buyers submittingforecast, cost. real-time bids Screening the finalpotential suppliersuppliers analysis. with buyers and supporting RFQ to suppliers Procurement and Outsourcing, Supply Chain Management, Prof. Presented by Kuhirunyarat Wongwanida Tsao, De-bi

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What is the value to the Customers? • Buyers – Do not have to deal with manufacturers’ representatives – Access to sourcing information that is otherwise difficult/expensive to assemble – Cost Savings (up to 43%, average 15%)

• Suppliers – More opportunities to access the large industrial buyers • Especially for small or overseas suppliers

– – –

Lower sales and marketing costs Helps supplier benchmark other competitors Get the good perspective of marketplace

Procurement and Outsourcing, Supply Chain Management, Prof. Presented by Kuhirunyarat Wongwanida Tsao, De-bi

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Revenue Model • A hybrid of service fees + sales commissions – Charged buyers a monthly service fee based on the size of the market making team. • Ex. Typical project with engineering work costs $75,000/month x 2.

– Charged winning suppliers a commission fee varied by supply industry. • Ex. General case is 2.5% of purchase price.

• The business reached breakeven point within 3 years. Procurement and Outsourcing, Supply Chain Management, Prof. Presented by Kuhirunyarat Wongwanida Tsao, De-bi

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Outline • Outsourcing – Outsourcing Benefits and Risks – Framework for Buy/ Make Decisions

Case Study : FreeMarkets OnLine, Inc. • E-Procurement and E-Market 

– Framework for E-Procurement

• Conclusion

Procurement and Outsourcing, Supply Chain Management, Prof. Presented by Kuhirunyarat Wongwanida Tsao, De-bi

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The Value Proposition • Serving as a intermediary between buyers and suppliers • Increasing the number of suppliers involved in the bidding event • Identifying, qualifying, and supporting suppliers • Conduction the bidding event • Improve supply chain efficiency Procurement and Outsourcing, Supply Chain Management, Prof. Presented by Jullasing Phanu Tsao, De-bi

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E-Market’s Drawbacks • Improper to establish long-term relationships • Problems in transaction fee paid – Both sellers and buyers resist paying – Inflexible transaction fees system

Procurement and Outsourcing, Supply Chain Management, Prof. Presented by Jullasing Phanu Tsao, De-bi

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Change in E-Market Landscape • • • •

Value-added public e-markets Private e-markets Consortia-based e-markets Content-based e-markets

Procurement and Outsourcing, Supply Chain Management, Prof. Presented by Jullasing Phanu Tsao, De-bi

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Change in E-Market Landscape • Value-added public e-markets • Private e-markets E-market offers additional value-added services such as • Consortia-based e-marketsplanning, demand inventory management, distribution forecasting etc. • Content-based e-markets

Procurement and Outsourcing, Supply Chain Management, Prof. Presented by Jullasing Phanu Tsao, De-bi

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Change in E-Market Landscape • • • •

Value-added public e-markets Private e-markets Consortia-based e-markets Content-based e-markets A private e-market belong to big manufacturers which increases the manufacturers total supply chain performances.

Wal-Mart

Dell Computers IBM

Sun Microsystems

Procurement and Outsourcing, Supply Chain Management, Prof. Presented by Jullasing Phanu Tsao, De-bi

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Change in E-Market Landscape • Value-added public e-markets • Private e-markets • Consortia-based e-markets E-Market in a specific e-markets industry, providing standard • Content-based system necessary for the specific industry Suppliers

Manufacturers

Procurement and Outsourcing, Supply Chain Management, Prof. Presented by Jullasing Phanu Tsao, De-bi

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Change in E-Market Landscape • Value-added public e-markets •E-Market Privateexpertise e-markets in miscellaneous services such as maintenancee-markets and repairing. • Consortia-based • Content-based e-markets

Procurement and Outsourcing, Supply Chain Management, Prof. Presented by Jullasing Phanu Tsao, De-bi

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Outline • Outsourcing – Outsourcing Benefits and Risks – Framework for Buy/ Make Decisions

Case Study : FreeMarkets OnLine, Inc. • E-Procurement and E-Market 

– Framework for E-Procurement

• Conclusion

Procurement and Outsourcing, Supply Chain Management, Prof. Presented by Kuhirunyarat Wongwanida Tsao, De-bi

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A Framework for E-Procurement • Types of product – Indirect materials – Strategic components – Commodity products

Procurement and Outsourcing, Supply Chain Management, Prof. Presented by Jullasing Phanu Tsao, De-bi

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A Framework for E-Procurement • Indirect material – Low risk – Content-based e-markets

• Strategic components – High risk – Private e-market or consortia-based e-market

Procurement and Outsourcing, Supply Chain Management, Prof. Presented by Jullasing Phanu Tsao, De-bi

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A Framework for E-Procurement • Commodity products – High risk – Public e-market, private e-market, or consortia-based e-market – Strategy based on inventory and price Holding Cost

Inventory Level

Manufacturers

Suppliers

Manufacturers

Suppliers

Procurement and Outsourcing, Supply Chain Management, Prof. Presented by Jullasing Phanu Tsao, De-bi

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Outline • Outsourcing – Outsourcing Benefits and Risks – Framework for Buy/ Make Decisions

Case Study : FreeMarkets OnLine, Inc. • E-Procurement and E-Market 

– Framework for E-Procurement

• Conclusion

Procurement and Outsourcing, Supply Chain Management, Prof. Presented by Kuhirunyarat Wongwanida Tsao, De-bi

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Thank You For Your Attention

SIMCHI CHAPTER 9-1  

PROCUREMENT AND OUTSOURCING STRATEGIES

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