Chap 013 Global Sourcing and Procurement

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Chapter 13

global sourcing and procurement

Review and Discussion Questions

What recent changes have caused supply chain management to gain importance?

Changes include:

Competitive pressures from foreign firms.

Elevation of product quality to a very high level of importance.

International marketing and international purchasing.

Trends towards choosing sole-source suppliers and long term relationships.

Product varieties and ranges are rapidly changing, and speed of delivery to market is essential.

Product life cycles have shortened necessitating knowledge and control of inventories in the various pipelines.

Adoption of JIT production has changed supplier relationships and has also increased the focus on reducing inventories.

Trends in the legal system hold manufacturers liable for product failures, even though causes of failure may lie outside of the production system itself.

Use of EDI in purchasing.

The growth of supplier development.

With so much productive capacity and room for expansion in the United States, why would a company based in the United States choose to purchase items from foreign firm? Discuss the pros and cons.

The use of foreign firms can provide a U.S. firm more alternatives in selecting a supplier. The pros are: more choices, potentially reduced costs in the areas of materials, transportation, production, and distribution, and potentially moving closer to a foreign market. The cons are: the distance is generally increased; communications problems are increased due to distance, culture, and technology; and there may be problems with customs, government regulations, political stability, etc.

Describe the differences between functional and innovative products.

Functional products are staples that people buy in a wide range of retail outlets. Typically, they do not change much over time, have low profit margins, stable predictable demand and long life cycles. Innovative products, on the other hand, give customers additional reasons to

buy. Fashionable clothes and personal computers are examples of innovative products. Innovative products have short life cycles, high profit margins, and volatile demand.

What are characteristics of efficient, responsive, risk-hedging and agile supply chains? Can a supply chain be both efficient and responsive? Risk-hedging and agile? Why, or why not?

Efficient supply chains are designed to minimize cost that requires high utilization, minimizing inventory, and selecting vendors based primarily on cost and quality, and designing products that are produced at minimum cost. Market-responsive supply chains are designed to minimize lead time to respond to unpredictable demand, thus minimizing stockout costs and obsolete inventory costs. Risk sharing supply chains are those that share resources so that risks in the supply chain can be shared. Agile are those supply chains that are flexible while still sharing risks of shortages across the supply chain. Generally, these supply chains carry excess capacity and higher buffer stocks. Vendor in responsive supply chains would be selected for speed, flexibility, and quality. It is possible to be both efficient and responsive, and both Risk-hedging and Agile, but Exhibit 13.4 helps illustrate why supply chains are generally not both.

As a supplier, which factors would you consider about a buyer (your potential customer) to be important in setting up a long-term relationship?

The financial stability and credit worthiness of the company is of primary importance. The reputation of the company vis-à-vis their supplier is also very important. For example, is this a company that is fair with its suppliers and honors its payables in a timely fashion? Is the technological match between supplier and customer sufficient? Will delivery schedules and quantities be stable, facilitating smooth operations?

Describe how outsourcing works. Why would a firm want to outsource?

Outsourcing is the act of moving some of a firm’s internal activities and decision responsibilities to outside providers. The terms of the agreement are established in a contract. Outsourcing goes beyond the more common purchasing and consulting contracts because not only are the activities transferred, but also resources that make the activities occur are transferred. Reasons for outsourcing are listed in Exhibit 13.6. Some of the major categories from this exhibit include organizational, improvement, financial, revenue, cost, and employee driven reasons.


Demand  200,000300,000500,000
Cost of Capital0.15    
Purchase Cost Per Unit0.1 $20,000.00$30,000.00$50,000.00
Shipping/Unit0.01 $2,000.00$3,000.00$5,000.00
Inventory charge/Unit0.005 $1,000.00$1,500.00$2,500.00
Monthly charge20 $240.00$240.00$240.00
Direct Material0.05 $10,000.00$15,000.00$25,000.00
Direct Labor0.03 $6,000.00$9,000.00$15,000.00
50% Surcharge0.015 $3,000.00$4,500.00$7,500.00
Indirect Labor0.011 $2,200.00$3,300.00$5,500.00
50% Surcharge0.0055 $1,100.00$1,650.00$2,750.00
Overhead 100% DL0.03 $6,000.00$9,000.00$15,000.00
Total NPV(Make – Buy)$58,784.15    
Buy$143,226.27 $40,000.00 $24,608.70 $32,098.30 $46,519.27
Make$84,442.11  $20,208.70 $26,268.43 $37,964.99
Requirement (annual forecast)12,000.00units   
Weight22pounds per engine  
Order processing cost$125.00per order   
Inventory carry cost20%of average inventory  
Lot Size (order quantity)1,000Units – given in the case 
Unit Price$510$505   
Annual Purchase Cost$6,120,000$6,060,000   
One-Time Tooling Cost$22,000$20,000   
Orders per year1212   
Order Processing Cost$1,500$1,500   
Inventory carry cost$51,000$50,500   
Weight per load22,000    
$1.20 per 2,000 lbs. per mile$19,800$15,840   
Total Cost$6,214,300$6,147,840$66,460difference
We would prefer supplier #2.     
Required lot size for truckload1818Units (40,000 lbs. max. load/22 lbs. per engine)
Unit Price$500$505   
Annual Purchase Cost$6,000,000$6,060,000   
One-Time Tooling Cost$22,000$20,000   
Orders per year6.66.6   
Annual Order Processing Cost$825$825   
Annual Inventory carry cost$90,900$91,809   
Weight per load40,000    
Transportation (truckload)     
$0.80 per 2,000 lbs. per mile$13,200$10,560   
Total Cost$6,126,925$6,183,194$56,269difference


  • Continuing to make in-house would cost us over $58,000 more in current dollars than buying from the supplier. We should accept the bid.

The problem tells us that we sell 4,000 QUARTER pound burgers a week, therefore we sell 1,000 pounds a week, and each pound of hamburger costs $1.00. The problem also tells us that on average, the store has 350 pounds of inventory on hand. By dividing the Cost of Goods Sold by Average Aggregate Inventory Value, We can figure the Inventory Turns. This means that their inventory turns 148.6 times a year.

On average the restaurant has about a third of a week’s supply on hand.


United States300350405375
COGS (Total)280295340350
Raw Materials50405560
WIP and FG100105120150
DC Inventory    
United States25272330
Total Inventory190187218261
Inventory Turnover1.

Using the end-of-quarter inventory numbers as a substitute for the average inventory level, we have the following quarterly and annual inventory turn values. Average inventory for the annual figure is based on the average of the 4 quarterly inventory numbers.

280/190 = 1.474295/187 = 1.578340/218 = 1.560350/261 = 1.3411265/214 = 5.911

If you were given the assignment to increase inventory turnover, what would you focus on? Why?

To increase the inventory turns, a firm needs to reduce the amount of inventory or increase sales or both. To increase turns, the item most readily within our control is the amount of inventory that the firm has on hand. The raw materials, WIP, and FG inventories are the most obvious targets for reduction.

The company reported that it used 500M worth of raw material during the year. On average, how many weeks supply of the raw material are on hand at the factory?

The 500M does not come into play in this problem.

Analytics Exercise: Global Sourcing Decisions – Grainger

Evaluate the current China/Taiwan logistics costs. Assume a current total volume of 190,000 CBM and the 89% is shipped direct from the supplier plants in containers. Use the data from the case and assume that the supplier loaded containers are 85% full. Assume that consolidation centers are run at each of the four port locations. The consolidation centers only use 40’ containers and fill them to 96% capacity. Assume that it costs $480 to ship a 20’ container and $600 to ship a 40’ container. What is the total cost to get the containers to the United States? Do not include United States port costs in this part of the analysis.

Basic Data  
Total Current Volume (CBM)190,000 
Direct Ship Percentage0.89 
Direct Ship Volume (CBM)169,100 
Consolidation Center Volume20,900 
Shipping Cost Calculations  
Direct Ship by Container Type20′40′
Volume (%)21%79%
Volume (CBM)35511133589
Container Capacity Used85%85%
Consolidation Center by Container Type  
Volume (%) 100%
Volume (CBM) 20900
Container Capacity Used 96%
Container Capacity (CBM)3467
Containers Shipped1,2292,671
Shipping Cost per Container $ 480.00 $ 600.00
Shipping Costs by Container Size $ 589,920 $ 1,602,600
Total Shipping Cost $ 2,192,520  
Consolidation Center Operating Cost Calculations  
Number of Centers4 
Annual Fixed Cost per Center $ 75,000 
Total Annual Fixed Cost $ 300,000 
Variable Cost per CBM $ 4.90 
Total Annual Variable Cost $ 102,410 
Total Annual Consolidation Center Costs $ 402,410  
Total China/Taiwan Logistics Cost $ 2,594,930  

Evaluate an alternative that involves consolidating all 20’ volume and using only a single consolidation center in Shanghai/Ningbo. Assume that all the existing 20’ volume and the existing consolidation center volume is sent to this single consolidation center by suppliers. This new consolidation center volume would be packed into 40’ containers filled to 96% and shipped to the United States. The existing 40’ volume would still be shipped direct from the suppliers at 85% capacity utilization.

Basic Data  
Total Current Volume (CBM)190000 
Direct Ship Percentage0.7031 
Direct Ship Volume (CBM)133589 
Consolidation Center Volume56411 
Shipping Cost Calculations  
Direct Ship by Container Type20′40′
Volume (%)0%100%
Volume (CBM)0133589
Container Capacity Used85%85%
Consolidation Center by Container Type  
Volume (%) 100%
Volume (CBM) 56411
Container Capacity Used 96%
Container Capacity (CBM)3467
Containers Shipped03223
Shipping Cost per Container $ 480.00 $ 600.00
Shipping Costs by Container Size $ – $ 1,933,800
Total Shipping Cost $ 1,933,800  
Consolidation Center Operating Cost Calculations  
Number of Centers1 
Annual Fixed Cost per Center $ 75,000 
Total Annual Fixed Cost $ 75,000 
Variable Cost per CBM $ 1.40 
Total Annual Variable Cost $ 78,975 
Total Annual Consolidation Center Costs $ 153,975  
Total China/Taiwan Logistics Cost $ 2,087,775  

Assuming the new consolidation center has the same fixed cost as before (questionable given the increase in volume), the new approach saves $507,155 per year.

What should be done based on your analytics analysis? What have you not considered that may make your analysis invalid or that may strategically limit success? What do you think Grainger management should do?

Consolidating the 20’ volume and using only a single Consolidation Center looks very attractive from this analysis. However, there are other issues to be considered.

For one, we have not considered the increased cost to the suppliers that currently pack their own 20’ containers. These suppliers will need to bear the cost of shipping their goods to the Shanghai/Ningbo consolidation center. This cost will probably be pushed back to Grainger in the long run.

There will also be some added cost for the suppliers that currently ship to consolidation centers directly. These will all need to use the Shanghai/Ningbo now, which might not be as close as their current consolidation center.

The cost calculations also assume that the Shanghai/Ningbo center can handle the increased workload and the fixed cost will remain the same. Neither of these assumptions is guaranteed (or even likely).

We may want to seriously consider using two consolidation centers with the other being in Yantian/Hong Kong. It may be attractive to have consolidation centers in both Shanghai/Ningbo and Yantian/Hong Kong since these are the most heavily used ports. Assumptions regarding the consolidation center fixed costs would need to be tested as well.

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