380 Part Six Supply Chain Decisions Operations Leader Flextronics Manages 14,000 Suppliers Flextronics is a large electronics manufacturing company. Their primary business is making flexible or rigid printed circuit boards for customers. They design, manufacture, distribute and handle the after-market for their devices. Flextronics (now called Flex) is a global leader with 200,000 employees. They produce components for LG Electronics, Apple, Microsoft, and Ford Motor Company. The company frequently ranks high on the list of "100 Best-Managed Companies" by Industry Week. Flextronics developed an information system to manage its 14,000 global suppliers. The system is used for risk mitigation of its complex supply chain network including risks of sup- ply chain disruption and quality or delivery problems. The system can send data to touch screens in headquarters that supply chain teams watch to determine what is hap- pening across its sprawling network. SOurce: Flextronics International, Ltd, Wall Street Journal L0gistics Report, 2015 O Ron Chapple Stock/FotoSearch/Glow Images 17.7 CHALLENGES FACING PURCHASING2 1. Taking on a strategic role Purchasing is increasingly taking a strategic role. Tradi- tional purchasing has been mainly involved in reviewing and negotiating contracts and tactical order taking. More recently, purchasing is involved in strategic decisions such as outsourcing, offshoring, and supply base optimization. By doing so, purchasing adds more value than simply providing cost savings and issuing purchase orders for the organization. Purchasing has a profit leverage effect of 5 to 15 times over sales for impacting profits. Purchasing and sourcing needs to report at a high level in the organization, recognized 1or its impact and to have a strategic role. LO17.8 Discuss the challenges facing 17 purchasing. 2. Moving beyond cost savings Traditional procurement decisions are made primarily on cost savings with little weight given to other goals. A challenge is to broaden the evalu- ation measures to include goals such as reducing supply chain risk, supplier performance management, access to technology and social responsibility. This can easily be done by using the weighted scoring method of supplier selection described earlier. When this is done, the other criteria are actually given scores in the supplier selection process and not Ongoing supplier performance management is an extremely important role. One survey indicated only 50 percent of firms were conducting supplier performance management. Performance should not only be measured, but fed back to suppliers for continuous just considered as qualitative and unmeasured factors. improvement of their processes. 2 This section utilizes a survey of 585 procurement leaders from The Power of Procurement: A Global Survey Report, kpmg-institutes.com, 2013. 3. Supply chain risk management With the greater use of lean systems and supply base reduction, the risk of supply chain disruptions from man-made or natural events has increased. Procurement professionals should provide leadership in managing this risk through use of multiple suppliers, or multiple locations for a single supplier, and cross- Sourcing methods. Contracts can also include requirements for a supplier to hold specified inventory levels at a separate location to cover major disruptions while the supplier recovers. Another risk is due to selection of suppliers with subsequent quality or delivery prob- lems. This can be reduced by requiring suppliers to be certified by ISO 9000 or similar systems. When these problems do not cause supply chain disruptions, they still increase the total costs of the supplier relationship from returns, rejects and schedule changes. For important procurement relationships site visits are needed to verify supplier capabilities. 4. Developing suppliers and technology Procurement professionals should be in- volved not only in selecting suppliers, but developing suppliers of new technologies. This can be done by issuing an RFP and requiring the development of technology as part of the bidding process. Moreover, financial incentives can be built into the contract to support the winner's technology development. Information technology is taking on an increasing role in sourcing and purchasing. It can be used to automatically issue purchase orders for routine items, match invoices to receiving documents and make payments. Information technology can also link purchasing activities across locatis and around the world. Spend analysis is not possible without modern information sysiems Chapter 17 Sourcing 381 5. Professional role h the increasing importance of sourcing, purchasing has taken on a more professional roie. Furchasing professionals spend less time on clerical and buyer roles and more time on the challenging strategic issues we have discussed. Purchasing and sourcing can add more value to the business than just cost reduction. This new role is reflected by the urchasing association in the United States now called the Institute for Supply Management (SM). ISM provides education and certification for sourcing and purchasing managers and Cxecutives from manufacturing, government, nonprofit, and service organizations. di- nd as KEY POINTS AND TERMS ore on. fits. I for This chapter deals with sourcing and purchasing. The key points are: Strategic sourcing decisions are outsourcing, offshoring, and supply base optimization. Purchasing decisions are finding and selecting suppliers, contracting, and managing them. Outsourcing is defined as something you used to make which is now made by an outside supplier. Offshoring is producing a product or service in another country. Advantages of outsourcing are access to technology, scale economies of the supplier, lower cost, and less investment. Disadvantages of outsourcing are risk of supply chain disruption, possible quality or delivery failures, loss of technology and knowledge and risk of price increases. Core competence gives the firm its competitive advantage and is not outsourced. Transaction costs are associated with negotiating and managing contracts along with buying specialized assets. When transaction costs are high, the firm will tend to in- arily valu- ance ne by his is d not survey ement. inuous Source its products. lobal Total cost analysis includes not only the suppliers price, but transportation, inventory carrying, and contract administrative costs. Foreign transactions have added costs for tariffs, currency changes, wage inflation, and product support. Single sourcing to prevent supply chain disruptions. Dual sourcing provides two sources for the same can be used when there is sufficient inventory or alternate supply sources