We begin with the first chapter of the section on strategic sourcing- Chapter 11, strategic cost management. Janek and Gordon have covered important topics from this chapter in their informative presentations. Over time, the idea of what cost management should be has evolved. With the emphasis on long-term relationships, it becomes important for purchasing personnel to understand the impact of their decisions in the larger time frame. The underlying logic as to why each one of us as individuals is ready to shell out a slight premium for a more reliable product applies here too. The value a product or service carries for a customer is inversely proportional to its price. Being cognizant of this through the entire process of product/ service generation can help in reducing costs optimally thereby allowing firms to maintain margins and yet offer better value than their competitors.

Working closely with suppliers and understanding cost drivers could provide a sustainable solution to managing costs in the long term. Have a look at the white paper extract about how Honda goes about this and note the very specific actions it takes to maximize information sharing and contact time with its suppliers.

A strategic approach to cost management is closely interconnected with the product lifecycle. The Japanese innovation of target pricing illustrates this (Exhibit 11.3). Ikea- the furniture manufacturer from Sweden also follows this approach to achieve lower than industry costs. Additionally, cost management strategies are also driven by supply risk and associated product value (Exhibit 11.4).

Section 11.3 of the chapter goes over the idea of price analysis. Price is often governed by the market (and the environment) based on supply and demand. Sellers can utilize either a cost-based model or a market-driven model as possible strategies. The section goes into detail of each of the associated strategies. Over time, however, firms are moving towards cost-based models such as cost markup pricing, margin pricing, or the rate of return pricing. Section 11.4 goes into detail about these strategies and also touches on the ideas of reverse pricing (should-cost analysis), & breakeven analysis.

11.4e and 11.5 cover an example of break-even analysis and a step-by-step approach to the should-cost method. Please skim over these topics. However, I would like you to focus on 11.6- Total Cost of Ownership (TCO).

Though TCO is not new, it has been greatly influential in the development of the idea of supply chains. The TCO idea does not only consider costs over the lifetime of use of that product/ service, but also the opportunity costs associated with the purchase. This concept finds great use in our daily lives. Think about the various products that you may have purchased in addition to the services that come with them. Does it make sense to buy a car, and not buy the long-term maintenance plan? Should you buy a mobile phone outright or pay it in monthly installments to a carrier?

Section 11.7 covers some of the best practices being employed by the industry to collaboratively manage costs. I would have you focus on sections 11.7c & 11.7d as they pertain to when one would use them.

Chapter 12 covers essential tools that can be utilized for purchasing and supply chain analysisThey find ready application in your daily lives as well as in work environments. The four larger areas involve:

1. Project management tools,
2. Learning curve analysis, and
3. Value analysis and engineering, and
4. Process analysis and value stream mapping.

Though these tools are by themselves parts of other courses that you may have taken either dedicated to these specific topics or made up a portion of them, this chapter brings forward their utility in purchasing and supply management.

Section 12.2 deals with project management. A project as defined in the book consists of a series of tasks that has specific objectives, start & stop dates, and consumes resources. These resources can at times be constrained- hence the need for managing them. For purchasing and supply management, these projects could take the form of cost reduction, vendor development, improving supplier performance, implementing agile/ lean projects in sync with operations etc. Recently, the project management tools have been widely utilized in implementing boundary spanning software like ERP (Enterprise Resource Planning). Through sections 12.2a-12.2f, you are introduced to what is project management and how it revolves around the definition of project success. The various phases of a project are defined along with the different control techniques that are utilized (such as PERT /CPM). I would like you to focus on the development of a project network along with the time estimations provided in sections 12.2e and 12.2f.

Section 12. 3 deals with the idea of learning curves. As individuals get more experienced with a process, their efficiency at the process improves- i.e. lesser resources are consumed to achieve the same output. From the perspective of purchasing and procurement, understanding learning curves can be a source of cost-reductions. Learning curve effects can be derived from the work force, process improvements, and sometimes newer technologies. You would have experienced this phenomena in your daily lives as you become experts at operating new equipment at work or at home- such as using Siri on your iPhone or google assistant on your android devices. Though assumed to be universal, in some instances, using learning curves may not be appropriate. "Learning" happens over time- thus in situations with higher than usual workforce turnover, or situations without prior experience of the new process or product it becomes difficult to gather accurate cost and labor data. Sections 12.3c and d present how learning curves can be calculated and utilized.

Section 12.4 covers value analysis/ value engineering. Value analysis is closely linked to the concept of value- the lowest total cost for which a product or service fulfills it primary function in addition to satisfying customer requirements related to time, place, and quality (very similar to project goals??). Value analysis projects normally target high-cost (regardless of low/high function components) and provides a pathway for continuous performance improvement in a product. We see this in the iterative and evolutionary function improvements carried out in the design of smartphones each year. In the current iteration, firms have decided to not include chargers and headphones in order to reduce the size of the smartphone box and thus the packaging material required. They believe that this helps them meet their environmental goals (though this is one idea that I think is debatable). Section 12.4c deserves special attention when it comes to the actual process whilst 12.4b provides a checklist that you can utilize to determine potential value addition areas.

Section 12.5 goes over the idea of quantity discounts and how it can be utilized as a tool for potential cost reduction.

Section 12.6 goes over the most important tool- process mapping. Often inefficiencies creep in when managers are not cognizant of the current process being followed and are thus unable to manage it properly. Process mapping on a smaller scale and its bigger sibling- value stream mapping can help managers identify potential areas for improvement. The key goal is to identify waste in the process. This waste could take the form of excess processing and non-processing (for example storage) time. It could take the form of rework arising from quality issues too. These are explained in detail in section 12.7 where a value stream map is also illustrated (exhibit 12.10 and 12.11). Stuart, Suja, & Peter have covered some of these topics in their detailed yet succinct presentations.

Question

Please answer the following question based on your reading of Chapter 11:

• What advantage(s) do cost-based pricing strategies have over market-based pricing strategies? (1 point)

Based on your understanding of Chapter 12, please answer the question below:

• What kind of processes are good candidates for value engineering? (1 point)