108sourcing processandmakeorbuy

Sourcing process

Sourcing • The process of identifying, selecting and

developing suppliers• Tactical and operational sourcing

– Low level decision, short term: non-critical, high-profit, low risk

– E.g. “To buy” decision may be reversed due to supplier failure or work shortage

• Strategic sourcing– Top-level decision, long term: high supply risk – E.g. Partnership

The Sourcing ProgressSourcing and the Management of Suppliers

1

2

3

4

Identify needs

Define requirements

Decide to make or buy

Identify possible suppliers

Pre-screen possible sources

Evaluate remaining supply base

Choose supplier

Deliver product/perform service

5

6

7

8

9

10

11

Identify type of purchase

Conduct market analysis Post purchase performance evaluation

Sourcing is the progress of identifying, selecting and developing suppliers

The Eleven Stages of the Sourcing Process (Pg 368)

Identify type of purchase

• Three types– Straight rebuy or routine purchase– Modified rebuy– New buy

Discuss

• Examine strategies used by Paul to develop and maintain effective supplier relationship in the sourcing process

– Define sourcing process– List down the 11 stages of sourcing process and

against each stage, analyse how Paul is to develop and maintain effective supplier relationship

Make or buy

• Decision making process– Is the component core business?

– Have we design capacity?

– Have we manufacturing capability?

– Are we competitive?Figure 11.4, page 393

Make or buy

Is the component/ assembly strategic important/core business?

Is the component/ assembly strategic important/core business?

Have we design capability?

Have we design capability?

Have we manufacturing

capability?

Have we manufacturing

capability?

Are we competitive?

Are we competitive?

MakeVs

Buy

MakeVs

Buy

MakeMake BuyBuyMakeVs

Buy

MakeVs

Buy

BuyBuyMakeVs

Buy

MakeVs

Buy

BuyBuyMakeMake

Yes No Yes No Yes No Yes No Yes No Yes No Yes No Yes No

Make or buy

Cost factors - Make or buy

• Marginal costing– Example on page 394 – 395

Example 11.2, page 395 Marginal costingMaterials 90

Labour 40

Variable overheads 10

Fixed overheads 20

Works cost 160

Given:

Annual usage: 10,000

Purchase price: $156, but the capacity would be idle

30% of fixed costs is recoverable if component is bought

Make Buy Difference

Variable costs (90+40+10) 140 156 16

Variable costs x Volume 1,400,000 1,560,000

Fixed costs (30% x 20 x 10k) 60,000 60,000

1,460,000 1,620,000 160,000

Total cost of purchase = total cost of makingPurchase price x OQ = Total fixed cost + Variable costs x OQOQ (Purchase price - Variable costs) = Total fixed costOQ = Total fixed cost / (Purchase price - Variable cost) OQ = F / (P - V)

– Example 11.4 (Pg 397)

Breakeven analysis

Variable FixedMaterials 90 90 Labour 40 40 Variable overheads 10 10 Fixed overheads 20 20

160 140 20

Give: Annual usage 10,000 itemsPurchase price: $15630% recoverable of fixed cost if purchase outside

Break even point:F/(P-V) = (30%x$20x10,000)/$156-$140) = 3,750 units

F: fixed cost, P=Purchase price, V=Variable cost per unitIf >3750 items -> makingIf <3750 items -> buying

Other factors – make or buy

• Quantity factors– In favour of making - E.g. Use up idle capacity – In favour of buying – E.g. Too small quantity

• Qualitative factors – In favour of making

• E.g. Maintain secrecy

– In favour of buying• E.g. Spread financial risks (Page 397 – 398)

Discuss

• Recommend make-or-buy decisions to Paul for ‘DimS’

NPV

Make per unit US$

Direct labour 40

Inventory storage 25

Factory overheads 15

Capital equipment 30

Cost per unit 110

Make per unit US$

Direct labour 40

Inventory storage 25

Factory overheads 15

Capital equipment 30

Cost per unit 110

Make Buy Difference

Cost per unit $110 $80 $30

Cost × volume (100,000 pieces) $11,000,000 $8,000,000 $3,000,000

Make Buy Difference

Cost per unit $110 $80 $30

Cost × volume (100,000 pieces) $11,000,000 $8,000,000 $3,000,000