Strategic Sourcing and Negotiations Skills

EMBA Program Special Assignment

on

Case studies on the sourcing hub concept by Anupam Agarwal, Arnoud De Meyer, Luk N. Van Wassenhove

Submitted by:

Haris Naved Ahmed, ERP 08708, MBA Evening, IBA

Syed Yawar Imam, ERP 08708, MBA Evening, IBA

Haris Naved AhmedERP08708

Syed Yawar ImamERP08709

About the Paper

• This paper that I have analyzed is about a concept

called the Sourcing Hub. It helps us revisit certain

concepts of Sourcing and Supply chain management.

The primary purpose of this research is to integrate

information on upstream Raw Material suppliers so as

to add value to the Supply chain.

What Exactly is a Sourcing Hub?

• “The sourcing hub is an upstream entity in supply

chains, focused on developing collaborative

relationships with an OEM's suppliers and

suppliers' RM suppliers.”

• The hub can be deployed as a physical department

or unit within an OEM's organizational structure

Research Methodology and Results

• For many companies, raw material is a huge part of the cost, there are lot of companies that source theirraw materials from different suppliers but again this kind of sourcing fails to recognize the commonpool of suppliers of raw materials which are actually upstream.

• A sourcing hub tries to integrate all these suppliers in terms of commonalities that they provide to anyOEM.

• The Methodology that the authors have followed is a case by case analysis to understand the sourcingprocess in different companies. They have earmarked four companies for study namely

1. DMV in Germany,

2. TMV in India,

3. TDV in South Korea

4. BKI in France

Research Methodology and Results

• Of these, the first three firms are automotive OEMs while BKI is automotive brakes supplier. Thechoice of companies has also been made after careful analysis taking into consideration that thecompanies are from different countries and also there are two firms (BKI and DMV) that are inthe process of considering the implementation of a sourcing hub, one firm that is nowimplementing the Sourcing hub concept (TMV), and another firm that has already implemented it(TDV). If we look into Table 3, we can observe that there are two different flanges that are madeof the same material SS41. Hence, the information regarding all such commonalities is tapped if asourcing hub is made.

• There were also two perspectives that were taken under consideration as follows :

• Complexity perspective: Firms should gain visibility over their supply network and attempt to gain some form of control over it as it is very complex.

• Outsourcing /simplification perspective: Managing the network is complex and unrelated to the core focus of the firm, then outsourcing should be way out.

• They had made a questionnaire that tried to

gather the required information. They visited

the four companies and presented a

questionnaire to the different people who are

responsible for sourcing. The questioning is

usually preceded by an Information exchange

and an assurance for confidentiality.

Research Methodology and Results

Research Methodology and Results

• The different types of information gathered during the survey follows a sequence that can be best

described as shown:

BOM based Raw MaterialSourcing Knowledge:

1. Creation and access of BOM

2. Raw material determinationand usage

3. The effect of design andquality on raw materials

RM Sourcing network:

1. Information on the majorsuppliers of these raw materials2. Probing questions onRelationship with raw materialsuppliers

Sourcing costs and financing:

1. Assessing Involvement insourcing of Raw Materials

2. Finding out the decisionsdepending on RM supply

3. Financial Aspects, workingcapital etc.

Propositions

After this information is obtained they analyze individual scenarios that can happen in a company on a

case on case basis and they make the 2 propositions taking into consideration the 2 perspectives which

were mentioned earlier. The propositions made are as follows:

Proposition A: As uncertainty increases, developing BOM‐based sourcing details of RM by working with

RM suppliers for components sourced from 1st tier suppliers can help decrease design‐, sourcing‐, and

manufacturing‐related complexity for the focal firms, the 1st tier suppliers, and the RM supplier.

Proposition B: As the number of RM suppliers decreases and the RM content in the cost of goods sold

increases, the opportunity for value addition in upstream supply chain by (i) direct purchasing of RM, (ii)

sharing demand information with 1st tier and RM suppliers, and (iii) production related information for

the focal firms, the 1st tier suppliers, and the RM supplier, increases.

Deployment of the Sourcing Hub

• The hub has sourcing individuals working full‐time on the related transactions, including logistics and negotiations

and also has the support of other departments such as finance, IT, and others who are working part time in the hub.

• There are two types of costs involved in deploying the sourcing hub-‐ startup and ongoing.

• The startup cost relates to the detailing of raw material at the component level and establishing a material database so

that the raw material supply is streamlined.

• The raw material level details at the component bill of material level are normally not a part of the day‐to‐day

operations at other OEMs.

• In order to develop such a database, the OEM has to collate accurate raw material information, such as grades,

weights and sources of material, for each component.

• The hub has sourcing individuals working full‐time on the related transactions, including logistics and negotiations

and also has the support of other departments such as finance, IT, and others who are working part time in the hub.

Research Findings and Implications to the Industry

Eliminates the Bull whip effect

The bullwhip effect can be explained as an

occurrence detected by the supply chain where orders

sent to the manufacturer and supplier create larger

variance then the sales to the end customer. These

irregular orders in the lower part of the supply chain

develop to be more distinct higher up in the supply

chain. This variance can interrupt the smoothness of

the supply chain process as each link in the supply

chain will over or underestimate the product demand

resulting in exaggerated fluctuations.

Research Findings and Implications to the Industry

• The information obtained via survey is used for

detailing the upstream Raw Material sourcing

network, including all suppliers' suppliers.

• This information is shared to these stakeholders

about current and immediate future production,

about market demand, and new products.

• This is a major step in trying to eliminate the Bull

whip effect which may arise out of Information

asymmetry.

Collaborative design

• To start with, there would be interaction with the design and technical departments for sharingknowledge on available technologies and Raw Material available from suppliers in order to helpimprove design and development of current and new products.

• This leads to collaborative design so that the suppliers know what kind of materials to procure andstore.

• At the same time the OEMs can leverage upon the knowledge of the suppliers to understand the rightkind of material needed for any application.

• It also provides vital information while entering new markets.

• Suppose a material needs some processing to be done, then the supplier can schedule can processaccordingly. This gives rise to Concurrent Engineering.

• Here by direct sourcing from the Raw materials the intermediate costs of the immediate suppliers iseliminated thereby bringing about cost savings.

Reducing Ordering Costs

• We all know that Economic Order Quantity is =

√(2DS/H). So the EOQ can be brought down by

reducing the value of the ordering cost.

• In its sourcing hub, TDV manages complete

transactions for RM sourcing via an online

web‐based system.

• Hence this type of a system though different from an

e- procurement system would help in bringing down

the ordering costs considerably.

Single Supplier Concept

• As we can see this concept of sourcing hub would

bring about the optimization of network of suppliers

thereby reducing the dependency on suppliers. If we

look into table 5, we can observe since the sourcing

Hub is implemented, though there are 23 different

suppliers, there is only one raw material supplier.

Limitations of this Research

Restriction to Automobile Industries:

• This research is restricted only to Automobile

Industries and hence the suitability of this concept

for other industries cannot be justified. For example

in Industries which have Job Shop production, every

job is a new variety and hence optimizing the

requirement of Raw Materials is difficult.

Limitations of this Research

Increased dependency:

In this case becoming increasingly dependent on one Raw material

supplier would put the firm in a tough spot because of the following

two reasons:

• 1. The Firm may be in financial trouble or may not be able to

supply goods due to some calamity.

• 2. The firm may place restrictions or become demanding as it is

the sole supplier or one among the few suppliers for the OEM.

Limitations of this Research

Transfer of Technology:

• Working closely to the OEM makes the supplier come to know

about technologies /processes that may be strategic or critical to

the company in which case there may be a breach of trust or the

Raw material supplier can come up as a new competitor.

Limitations of this Research

Imported Components/Cycle time:

• In defense and space applications, there are some specific

requirements of the process which requires greater precision and

hence they are imported. This concept cannot be tried in those

cases. Also the cycle time must be considered and if purchasing

the parts is economic, we should go for purchasing them directly.