Hello everyone. This is Dr. Zhao. In this video, you will learn sourcing intelligence. Specifically how to set supplier selection criteria. To succeed in sourcing, you must first know about yourself, such as your needs and goals, and determine supplier selection criteria accordingly. You must also know about the suppliers by market intelligence, bargain power analysis, and supplier analysis, to be discussed later. Sourcing intelligence is all about research on yourself and your suppliers. The objective of sourcing intelligence is to identify and select the right suppliers and their offerings. Support better negotiation and bargaining with the suppliers, in the process of new supplier development and new products and services procurement. Quoting and slightly modifying an ancient Chinese proverb, "Knowing yourself and your suppliers, you will never lose a bargain." The ideas and methodologies can be best demonstrated by an example, iPhone's global supply chain, iPhone's manufacturing activities are completely outsourced. Among the suppliers, Samsung Electronics played an important role in CPU and flash memory. A great sourcing led to fabulous results. In the case of iPhone, Apple's profit accounts for 56 percent of the revenue. While Korea's profit, mainly Samsung Electronics is 4.7 percent. China's labor cost for assembly is only 1.8 percent. Meager profits drove Samsung downstream to compete heads on with Apple. For Apple, the question is, how to continue the success? Apple must decide whether to continue using Samsung as a supplier for critical components such as CPU and memory, or find new suppliers. Meanwhile, the supplying market is changing constantly with many new suppliers emerging. The question is, how to do it right for this year? To answer this question for Apple, we must first understand Apple's needs and goals and set supplier selection criteria accordingly. We should use the methodologies of enterprise ranking, industry trend, and competition positioning to understand Apple's strengths and weaknesses and thus the firm's strategic objectives and priorities. Let us first get an overview on IT industry for the US, Korea, Japan, and Taiwan in fiscal year 2020. Looking at the 20 largest IT companies, it is interesting to note that 15 of them are hardware-based companies, and only five are software or IT services focused. Apple and Samsung are the top two companies in total revenue. However, Samsung Electronics is much more diversified than Apple, because it is involved in consumer electronics, household appliances, technology hardware, and semiconductors and so on. Let us look specifically at technology hardware and peripherals sub industry, which includes providers of smartphones like Apple. The industry trend analysis shows that up to the fiscal year of 2020, this sub industry is increasing and stable in the US. Comparing US, Korea, and Japan. US is the largest in both revenue and profits. Korea has the most fluctuated profits, and Japan is the smallest in both revenue and profit. However, US has the lowest proportion of profitable enterprises. That is the highest percentage of companies losing money. Looking at the Standard and Poor's 500 US IT companies, including both hardware and software companies, Apple is leading the way in the total revenue, but not in the profit, because it's operating profit margin is clearly lower than Microsoft, Facebook, and many other IT firms. Looking at the profitability from a different angle, that is operating profit versus total cost. We can make the observation more clearer. Apple spend twice as much as Microsoft in fiscal year 2020. But it had a newer operating profit in dollar value. That is, Microsoft made more money with less cost in the year 2020. We also note that Google is below the average level. Looking into the revenue breakdown of the technological hardware and peripherals sub industry, and comparing a few companies such as Apple, Dell, and HP, we can understand their cost structure and sourcing objectives a lot better. We can see that the industry average cost of goods sold accounts for 66 percent of the revenue. With 62 percent, Apple is doing better than the industry average, but its cost of goods sold, especially purchasing cost, as Apple does little manufacturing by itself, is still the major cost driver. In comparison, HP has a more urgent need to work on its sourcing and manufacturing, as its cost of goods sold is more than 80 percent of the revenue. The main issue of Dell is its sales general and administrative cost, which is almost twice as much as the industry average. Dell's cost of goods sold is also on the high side. Dell needs to work on both cost of goods sold and sales general and administrative cost. To avoid stock-outs and revenue loss, Apple also needs flexibility and responsiveness from the suppliers so they can quickly scale up their production according to Apple's demands. In general, sourcing critical components requires supplier's continuity, capability, and cost. Sourcing leverage items requires cost and quality, and sourcing bottleneck items requires capability and continuity. Thus, for CPU and memory, clearly critical items, Apple need suppliers that are capable, inexpensive, financially robust, and responsive. In summary, CPU supplier selection criteria for iPhone should have the following four aspects. First, regarding capability, the supplier should be innovative, technologically capable, and has sufficient manufacturing capacity and quality. Second regarding cost, the supplier should offer good price to Apple, and despite this price, it can still make a good profit, so it can sustain that good price. In addition, it will be ideal if Apple also has more bargaining power than the supplier. Thirdly regarding continuity, the supplier should have a rock solid financial health and can be flexible and responsive to demands. Finally, the supplier should not leak sensitive information, such as trade secrets or become a potential competitor.
