Purchasing & Supply Chain Coordination

Question 1

Multi-sourcing: should we have several suppliers for a purchased product?

Answer 1

• Advantages
  
  • maintain cost competition
  • stockouts due to production or delivery problems are less likely
  • lower risk of supplier bankruptcy
  • combine local and global sourcing
• Disadvantages
  
  • lower quantity per supplier
  • quality differences between suppliers (QC harder!)
  • more coordination work for purchasing/receiving
  • higher delivery costs

Question 2

Supplier Selection Criteria

Answer 2

• Cost: price, conditions of payment etc.
• Quality: certified products, after-sales service…
• Delivery performance: short lead times, reliable delivery, flexible
• Service: Packaging, delivery on site, safety stocks
• Security: financial position, reputation

Question 3

Traditional and internet-enabled sourcing methods

Answer 3

• Traditional:
  
  • Catalogues (e.g. Office Supply)
  • Request for quotes (RFQ): one buyer, many sellers, standardized product
  • Request for proposals (RFP): one buyer, many sellers, non-standard items
• Internet-enabled:
  
  • e-Markets
  • eRFQ

Question 4

Methods of negotiation

Answer 4

• Face-to-face:
  
  • traditional
  • can take several weeks
  • iterative communication
  • Imperfect initial RFQ can be adjusted
  • With one supplier, outcome depends of buyer-supplier relationship
• Auctions:
  
  • bid submission
  • newly enabled by internet
  • communication over quote details is front-loaded
  • typically completed in swift manner!

Question 5

Types of auctions

Answer 5

• Sealed bid first-price:
  
  • bids are submitted simultaneously, without knowledge of other’s bids
  • Best bidder wins at her price
  • Ex: government procurement
• English auction:
  
  • Bidders submit bids sequentially with knowledge of previous bids
  • Best bidder wins at her price
  • Ex: Sotheby’s
• Dutch auction:
  
  • prices move automatically according to price clock (top to bottom for one seller, many buyers; bottom to top for one buyer, many sellers!)
  • First bidder to accept wins at the current price
• Vickrey auction:
  
  • bidders submit bids simultaneously without knowledge of each other’s bids
  • bidder with highest bid wins at the price of the second highes bidder

Question 6

When to use e-auctions?

Answer 6

• items can be clearly specified and translated into prices
• strong likelihood that the current price is sufficiently higher than the market price
• switching costs are acceptable
• sufficient number of qualified, competitive suppliers exist
• qualified suppliers are willing to participate in auction

Question 7

Pitfalls of auction

Answer 7

• Lowest price supplier might not be the best one
• True total cost of contract has to be considered
  
  • quality
  • warranty
  • service
  • switching costs

Question 8

Centralized purchasing pro’s and con’s

Answer 8

• Pros:
  
  • bargaining power over suppliers
  • organizational coordination on purchasing policies
  • standardized procedures
  • transparency and tight control on spending
  • single interface to suppliers
• Cons:
  
  • dissatisfied internal customers
  • inflexible purchasing procedures
  • bureaucratuc inefficiency

Question 9

The Bullwhip effect:

what is it

what causes it

solutions

Answer 9

• The variance of orders is greater than that of sales and the distortion increases as one moves upstream
• Causes:
  
  • Order synchronization: everyone orders on a monday
  • Order batching: each party orders in batches and these grow up the chain
  • Trade promotions and forward buying: customers buy at times of discount and stock up for future
  • Reactive and overreactive ordering: retailer has strong demnad for a week, orders more -> supplier thinks market is going up …
  • Shortage gaming
• Solutions:
  
  • Information sharing: what is my demand really like
  • smoothing the flow of a product: ask retailers not to all order on same day
  • eliminate pathological incentives: against shortage gaming: allocate supply according to past sales data etc.
  • Use vendor-managed inventory, quick response initiatives (cf. Walmarts retail link system)

Question 10

Two general ways of Supply Chain Coordination

Answer 10

• Via Information Sharing
  
  • EDI
  • VMI: supplier determines order size
  • Quick response: retailer makes Q choice
• Via Contracts
  
  • Buyback
  • Revenue sharing

Question 11

Coordinating the Supply Chain through Buyback Contracts

Answer 11

• Newsvendor Model:
  
  • Individual order quantities do not maximize profits
  • Publisher can determine the newsvendor’s C_o to get him to order the profit maximizing Q*

Question 12

Revenue-sharing contracts

Answer 12

• Affect the retailers overage costs
• Overall revenues increase
• When do they work?
  
  • Cost of an additional unit lower than incremental revenue per unit -> low marginal cost industries!
  • Low administration costs! -> IT industries