Procurement 101: Explanation on Commodities (Are computer chips still commodities? I think it depends on how you buy them). Companies are outsourcing commodities to increase value. Value is lowering costs & improving performance (e.g., quality, service, & flexibility). A commodity is defined as being something for which several qualified suppliers exist. Typically, buying organizations will use several rounds of the competitive bidding process to pick a low cost supplier. Buying organizations will send out RFQs to get bids from suppliers. RFQ stands for a Request for Quotation. In other words, please give us a quote for this business.
However, the data seems to indicate several iterations of the competitive bidding process does not get you the lowest price. Why? Suppliers pad their quotes from beginning to end because they know you will play this game. Data indicates that the most effective way to get the lowest bid is to tell suppliers that they will only have once chance to bid/quote on the business. If they really believe that, then they will deliver their best quote the first time around (because it is the only time). However, very few companies actually make bidding a one shot deal. Most companies are too greedy and are not convinced that the one time only cycle works.
Another problem with competitive bidding is that you are just trying to get suppliers to low ball each other & that means you are just messing with their profit margins. If you have a current supplier that charges $1.00 per part, and it costs them $.90 to make it, they have about a 10% margin. If you have them rebid and rebid and rebid on the business, & then they agree to $.93 per part, you are indeed paying less per part, but you have reduced the supplier’s margin down to nothing. Heaven forbid that you as a buying organization just sit down with your supplier & help them reduce their direct costs (e.g., labor & material). Most of their costs are coming from labor and material which means there are probably some really big cost savings ideas there. What if you could cut their direct costs by 30% & then you tell them you can still keep your 10% margin? That supplier would say thank you so much because their margins do not change, they are just more cost competitive and probably end up getting more business because of it (& you now pay around $.70 per part).
Another note. We talked about how some companies are going beyond just outsourcing commodities to also outsourcing core/strategic parts. It can be done effectively. Chrysler has mastered it. They use things like co-location, long-term contracts, and legally they establish joint ownership of all design and mfg capabilities developed. However, with core stuff there might only be 1, 2, or 3 suppliers to choose from. For rest of lecture, see:
Tips/advice from this college professor (aka, educated idiot):
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2. Learn the job saving technology.
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Are computer chips a commodity? Maybe a commodity in short supply? So, is it really a commodity?
The semi-conductor supply chain arguably powers the entire global economy (certainly the digital economy). This was a great interview about a complicated far reaching topic, but I needed help visualizing it and this one really helped (sometimes I need pictures):
“The millions of digital devices we use, from smartphones to electric cars, computers, robotics, and the businesses they enable, only function thanks to the intricate chips built on semiconductors. By some estimates, up to 22.5% of global GDP is made up by the global digital economy.”
How should companies use competitive bidding?
Assume a supplier estimates the following costs on an RFQ
ROI and Your Core Competency (i.e., SCM?)
To stay competitive, companies are forced to outsource commodities and focus on their core competency
The primary elements for sourcing a supply partner
What does it mean to be hollow? Sourcing Strategy matters!
The most reprinted article in the Harvard Business Review: The “Core Competence” Article
You have every legal right to say you want a “cost breakdown”
How SCM managers “prepare” to negotiate price increases. https://lnkd.in/gVrdpuer
Recent observations & career advice (videos/podcasts):