Optimization

1
Optimization

• Where we are- started to make SCM decisions.
  First was who does a process? Now we are looking
  at how many suppliers to use if we decide to buy.
  
• How many suppliers / partners do we need for any
  given process performed in our supply chain ?
• Recent trends
• One source or many ?
• Other options- gray zones if you will

2
Trends

• One of the major trends in supply chain
  management is the reduction of supply bases, with
  good reason
• Xerox eliminated 90 of their suppliers in a year
• Boeing- from 2000 to 1200 in 5 years
• Prince tooling division
• went from 23 to 6 in less than a year
• many self selected out of program
• improvements in costs, quality, lead time, etc.

3
Supply base reduction

• Companies are seriously reducing supply bases,
  because they are now buying on total costs
• Quality more suppliers equal more variance.
• Costs hidden costs of multiple relationships
• Desire to share information
• how many close relationships can you have ?
• will suppliers share competencies any other way ?
• Time

4
Warning

• Many people assume that the ultimate number of
  suppliers / partners for a process is 1. This is
  often, but not always the case. An optimal supply
  base has the right number of suppliers, not a
  single source for everything.

5
How many suppliers ?

• There are two generic approaches to the number of
  suppliers
• Single (sole) sources. Use 1 supplier for the
  entire volume.
• sole sources differ in that they are the only
  available source
• patent protection
• Logistics
• Lean systems
• Multiple sources divide the volume of purchases
  for an item between 2 or more suppliers.

6
Single sources

• Benefits
• economies of scale
• may also apply to logistics
• variance reduction
• lower purchasing costs
• become more important to supplier
• makes JIT possible
• easier to leverage supplier capabilities

• Downside
• potential risk of supplier non-conformance
• complacency
• may not be using the best supplier
• whose fault is this ?
• may miss technological changes

7
Multiple sources

• Benefits
• competition
• not dependent on a single supplier
• more power
• flexibility to change suppliers
• access to more technology ?

• Downside
• increased purchasing costs
• potential for more inventory
• hard to develop close ties
• variance

8
Criteria for number of sources

• Importance of input
• strategic vs. tactical
• Volume
• to little to split
• to much of a supplier's capacity
• Supplier's willingness to partner
• Number of potential suppliers and substitutes
• Price sensitivity

• Location
• especially with multiple locations (services
  facilities)
• Uncertainty of supply
• Materials management costs
• inventory
• logistics
• Pace of technological change

9
A middle road dual sourcing

• Using two suppliers for an input is often a way
  to guarantee supply and competition, while still
  getting many of the benefits of a single source.
• High volume items - can still maintain economies
  of scale.
• Some companies keep some production internally
• Princes knowledge factory
• Reduces supplier control in a manageable way

10
Other options

• Maintain back-ups
• For complex projects suppliers may be paid for
  the time they spend preparing a design. That way
  even if they do not get the work they will still
  have good will towards the purchaser.
• how many times would you bid to someone who does
  not give you work ?
• Purchase some of a suppliers capacity - even if
  you end up not using it (insurance policy)

11
Getting back to SCM

• From a supply chain perspective how many sources
  will you use for most processes ? Why ?
• Total costs
• Third party logistics supplier may not be lowest
  price but it often lowest costs
• Could we use two suppliers for the same input
  because they are serving different end customers?
  (in other words separate supply chains?)
• Abbot aluminum has different forging suppliers
  for different materials for different customers

12
Optimization conclusions

• There is a general trend toward smaller supply
  bases - fewer supply chain members performing
  each process
• Multiple suppliers are a way to lower prices
• From a supply chain perspective a single supplier
  is usually in line with the concept of SCM
• We have to be careful how we define the supply
  chain when making these decisions