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Strategic Sourcing. Dr. Ron Lembke Operations Management. Old View of the World. One company does all processing, from raw material through delivery. Vertical Integration. Henry Ford’s River Rouge Plant Owned forests, iron mines, rubber plantation, coal mines Ships, railroad lines

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Strategic sourcing

Strategic Sourcing

Dr. Ron Lembke

Operations Management

Old view of the world
Old View of the World

  • One company does all processing, from raw material through delivery

Vertical integration
Vertical Integration

  • Henry Ford’s River Rouge Plant

    • Owned forests, iron mines, rubber plantation, coal mines

    • Ships, railroad lines

    • Dock facilities, blast furnaces, foundries, rolling mills, stamping plants, an engine plant, glass manufacturing, a tire plant, its own power plant, and 90 miles of RR track

  • 1927 Model A Production begins

  • 15,000,000 cars in 15 years

  • 120,000 employees in WWII

Supply network view of the world
Supply Network View of the World

  • Integrated international networks of companies process, produce and distribute products.

Computer example
Computer Example

  • Wacker Siltronic makes silicon wafers:

    • buy sand

    • grow into long crystals

    • slice into thin wafers

Chip production
Chip Production

  • Chip burned in a $2b “wafer fab”

  • Wafer cut into chips and “packaged”

Cd drive
CD Drive

  • Chip stuffed onto board by Flextronics, Celestica, etc.

  • CD drive assembled by separate contract manufacturer

    • Green Printed Circuit Board from different supplier

  • CD drive, with a brand name on it, sold to Gateway

Apple and foxconn
Apple and Foxconn

  • EMS elect mfg services

  • Foxconn:

    • Shenzhen, mile square

    • 1 million workers

      • Largest private employer in China

    • 90 million iPhones

  • Global CE industry = $150b

  • Foxconn = 40% = $60b

Headline risk
Headline Risk

  • 10 hour days, crowded dorms

    • Terry Gou:Clean, affordable

    • Good food

  • 17 suicides in 10 yrs

    • ¼ rate US college students

    • 9 in March-May 2010

    • Below national average

  • HK ngo:12hr*13days iPad?

    • Counseling, outsource dorms

    • 10,000 horses galloping

Strategic sourcing1
Strategic Sourcing

  • Has to be feasible to outsource

    • Assembly line balancing – probably not a step in the middle

  • Figure out what to buy from whom

  • What do we want to accomplish?

    • More effective!

    • More efficient!

  • Continuous Process Improvement?

Outsourcing what is it
Outsourcing - What is it?

  • Transfer activities to outside providers

    • Outside providers do activities

    • Resources: people, facilities, equipment

    • Decision-making responsibility

  • OEM = Original Equipment Manufacturer

    • name on the product, does not produce

  • Flextronics/Solectron, Foxconn makes it for you

Outsourcing why do it
Outsourcing – Why do it?

  • Organizationally-driven reasons

    • Focus on what you do best

    • More flexible capacity

    • Employees: career paths

  • Improvement-driven reasons

    • Better quality & productivity, cycle time

    • Gain skills not otherwise available

    • Associate with superior providers

  • Financially-driven reasons

    • Reduce assets, improve ROA

    • Lower fixed costs

    • Cash from selling capital equip.

Make or buy decision

DIY: Lower cost

No capable suppliers

Inadequate supply

Competitive Issues

Core competencies


Low purchase cost

Lack of capacity

Want to gain skill

Reduce inv. costs

Management focus

Patent issues

Make or Buy Decision

Reasons to Make

Reasons to Buy

Other factors
Other Factors

  • Degree of coordination with other activities

  • Relationship-specific investments

  • Easy to copy technologies, or low IP (intellectual properties) protection

    • Second-tier sub-suppliers

What to not outsource
What to not Outsource

  • Core activities

    • Key to the business

    • Do not confer competitive advantage

  • Strategic activities

    • Key source of competitive advantage

  • X-box – Microsoft never considered making

    • Flextronics in Guadalajara

    • $5 / hr vs. $1 in Doumen, China

A cautionarytale
A CautionaryTale

  • In 1981, IBM ‘PC’.

  • Consumers care about hardware

  • No one cares about the software that lets them talk to the processor.

  • Outsourced the OS to whom?

Anybody heard of microsoft
Anybody heard of “Microsoft?”

  • UCSD Pascal $450

  • CP/M $175

  • MS-DOS $60

IBM: 2005 Lenovo $1.75b

MS: 2010 After Tax $18b

Outsourcing in the news
Outsourcing in the News

  • The World Is Flat

    • Bandwidth glut of dot-com boom

  • IT & telecommunications changes

    • Nobody can tell you’re calling India

  • White collar jobs – now it’s serious

    • Educated workforces

    • Call centers, programmers

  • Privacy / security concerns

Managing the supply chain
Managing the Supply Chain

  • Postponement -- withhold any modification until as long as possible. Keep product generic “vanilla”

    • HP

    • Benetton

    • Home Depot paint department

  • Channel Assembly -- have distributor assemble products from components

Hp inkjet printers
HP Inkjet Printers

  • Printers made in Vancouver, sent via ship through Panama Canal to Europe

  • Europe warehouse stocks inventory by country

    • physically different-- power supply

    • manuals different languages

    • Substitution not allowed

  • Re-supply time very long

Euro plugs
Euro Plugs

  • No standardized power supplies for Europe

  • Different power supply for every country.

Hp inkjet printers1
HP Inkjet Printers

  • Redesigned printers so that power supply added in Europe

    • Re-engineer product, power supply

    • Assembly done in a warehouse (Quality?)

    • Manuals added in Europe

    • Many expensive changes

  • Store ‘vanilla’ boxes – one pile

    • Piles of power supplies & manuals

    • Cheaper to store than printers

  • Postpone point of differentiation

  • 25% cost reduction

Hau Lee, Corey Billington, Brent Carter, Interfaces, 1993

Delayed customization
Delayed Customization


Production Storage Shipping Storage



  • Sweaters of undyed wool, dyed once demand is known

  • Dyeing LT much faster than production

  • How many undyed sweaters to make?

  • How many Red, Green, Blue, also, if this production process is cheaper, and you know you’ll sell some minimum amount?

Behr paints
Behr Paints

  • Small # of bases

  • Small # tints

  • Unlimited # combinations

  • Keep stock colors on hand?

    • How many gallons?

    • Which ones?

    • Lower labor costs

    • Higher inventory costs