Chapter outlines
Introduction The nature of the sourcing decision Attributes of a good supplier Different types of sourcing Sourcing decisions The sourcing process Source location Sources of information on potential suppliers
Chapter outlines cont…..
Supplier evaluation Other aspects of sourcing Partnering Tiering of suppliers
introduction
What is Strategic Sourcing?
Strategic sourcing is a procurement process that continuously improves and re-evaluates the purchasing activities of an organization.
A supply strategy based upon joint opportunities, mutual trust, respect and open & honest communication between the supplier and the customer.
introduction
Why Strategic Supplier Relationships are Important A new supplier commences operations every minute A supplier files bankruptcy every 8 minutes A supplier ceases operations every 3 minutes A judgment is filed against a supplier every 14 seconds A supplier name change happens every 2 minutes A supplier ownership change happens every 4 hours A supplier’s risk profile changes every minute
introduction
Strategic Sourcing Primary Objectives– Reduce the costs of goods and services– Capture resulting savings.– Create contractual alliances with suppliers to support
the long-term goals of the Organization.– Maintain and improve product quality.– Improve business functions.– Optimize the total purchasing process.
introduction
Seven Steps of Strategic Sourcing Analysis Develop Commodity Team Sourcing Strategy Identify & Prequalify Suppliers Supplier Selection & Contracting Integrate Suppliers Monitor & Follow-Up
The nature of the sourcing decision
Sourcing is the process of evaluating and hiring individual businesses to supply goods and services to your business.
Procurement is the process of actually purchasing those goods and services.
Sourcing and procurement have become a bigger part of a supply manager’s job in recent years, in part because businesses keep becoming more specialized
Attributes of a good supplier
A definition of a good supplier which would be acceptable to everybody would be difficult to write, there are a number of attributes which might be regarded as desirable for a typical relationship.
The following list is given by way of suggestion only: Delivers on time Provides consistent quality Gives a good price Has stable background Provides good services back-up Keeps promises Provides technical support Is responsive to our needs Keeps the buyer informed on progress
Different types of sourcing
Different types of sourcing: Consumable supplies Production materials and components Capital purchases ( e.g. machinery ) Intellectual property ( e.g. software) Subcontracts , Service
Sourcing decisions
A procurement strategy enables decision makers to understand longer-term goals,
such as realizing value for money and encouraging supplier improvement, and to
consider these goals when making procurement decisions
Sourcing decisions cont….
The traditional approach to source decision making involves the buying organisation in:
Establishing which suppliers make or supply the product or service Selecting a shortlist (say three) from those available. Sending an enquiry to each of those three setting out the
requirements. Selecting the best supplier from those who quoted by comparing the
offers. Placing the purchase order with them, specifying such matters as
volume, schedule, place of delivery, price and quality required.
The sourcing process
strategic sourcing process Data collection and spend analysis Market Research The RFx process (also known as go-to-market) Negotiations Contracting Implementation and continuous improvement
The sourcing location
The location of potentially useful sources of supply is a major responsibility of the procurement and supply executive.
Three principal reasons why the location of suppliers might be difficult are:
Technical advances – the buyer’s needs are becoming more complex and difficult to meet, and fewer suppliers are willing or able to do so.
Increasing ‘concentration’ in supply markets - the continuing process of mergers and takeovers is leading in many industries, to a situation where there are few, very large suppliers who have less need actively to pursue business which will inevitably come their way.
Increased specialisation – specialisation among manufacturing concerns tends to lead to more ‘buy’ rather than ‘make’ decisions.
Sourcing of information on potential suppliers
When collecting and collating information on potential suppliers, the internet has revolutionised companies’ ability to locate potential suppliers.
In addition , the following points ought to be considered:
1 - Reputation. 2 – appraisal
3 – recorded performance 4 – appraisal list
5 – online catalogue library 6 – online publications
7 – online trade directories 8 – sourcing services
9 – representatives 10 – exhibitions
11 – colleagues 12 – other buyers
13 – agents 14 – organization promoting trade
Sourcing of information on potential suppliers
Sources of Supplier InformationPublished Sources Internal Sources Personal Contacts International Source
Candidate List
Formulation of Selection Criteria
Preliminary Screening
Identification of Qualified Candidates
Detailed Study
Selected Supplier
Approved Supplier List
Information fromMarket Research
Questionnaires
Financial Information
Supplier Visits
RejectedSuppliers
Elimination of Unqualified
Candidates
Non- approved Suppliers
Supplier evaluation
The organisation (buyer) is in a much better position to evaluate an existing supplier, based on his past performance than is the case with a new supplier
Task variables which determine the choice of supplier are traditionally stated as: quality, quantity, timing, service, and price
the supplier is evaluated for named products or processes as fully approved, approved, conditionally approved, or unapproved.
Supplier evaluation cont….
Variations of the checklist approach are legion, and changes and improvements are incorporated as the needs of the organisation change
Typical checklist questions are: Do they trade with our competitors Are confidential documents properly controlled? Does the buyer have technical support? How do they search the market and how often? How long have they been established? What are their investment plans?
Supplier evaluation cont….
Delivery On time
5
Earlier
4
1x delay
3
2x delay
2
More delay
1
Quality Excellent
5
Good
4
Acceptable
3
1x reclamation
2
2x reclamation
1
Price The lowest
5
Low
4
Average
3
High
2
The highest
1
Terms of payment 90 days
5
75 days
4
60 days
3
Letter of credit
2
Less then 60 days
1
A-test For all materials
5
For most materials
4
For some materials
3
In procedure
to get
2
No attest
1
Supplier evaluation cont….
Confirmation the Purchase
order Always
3
After urge
2
Never
1
Standardisation Always
3
Sometimes
2
Never
1
Services Excellent
3
Good
2
Poor
1
Packaging To specification
3
Sometimes to spec.
2
Not to specification
1
Location of supplier 0-100 km
3
101 -500 km
2
More than 500 km
1
Other aspects of sourcing
one or more suppliers?
some of the considerations which need to be evaluated are:
Effect on price Effect on security of supply Effect on supplier motivation, willingness to
oblige, design innovation Effect on market structure
Other aspects of sourcing
the captive supplier
Captive supply is a term for that part of the supply that is not owned by a company but is used by the company to maximize its own profits often at the unknowing expense of those who actually own those supplies.
Other aspects of sourcing
Reciprocity in Buying In certain business situations a buyer may give
preference to a supplier who also happens to be his customer. This relationship is known as reciprocity. It is something like "I buy from you if you buy from me"
Other aspects of sourcing
A supplier association
A supplier association is a business term which refers to a customer company bringing together a group of its suppliers on a formal and regular basis in order to achieve strategic and operational alignment.
Other aspects of sourcing
Market structure: there are three types of market structure
Monopsony : where there is a single dominant buyer or ( market situation in which there is only one buyer for a product )
Monopoly : where there is a single powerful seller
Oligopoly: is the present where several sellers co-operate to dominate the market.
Partering
Partnership source: is a commitment by customer / suppliers, regardless of size ,to a long-term relationship based on clear mutually agreed objectives to strive for would class capability and competitiveness .
Mission of partnership sourcing initiative is summarized in the statement: ‘to bring about a fundamental change in companies’
Partering
Fig. the principal characteristics of partnership sourcing
Partnership Sourcing
Opennes and trust
Clear joint objectives
Flexibility
Proactive not reactive
Total quality Management
Long term relationship
Working together
Involvement of all relevant disciplines
Top level commitment
Tiering of suppliers
At any company, there are meaningful scopes of management responsibility that should not be exceeded. Dividing responsibility over a corresponding number of tiers allows even very large firms (100,000 employees and more) to be managed efficiently. Many companies also apply a similar tiering principle to managing suppliers. Supplier tiering originated in the auto industry and can be best understood in the context of automakers’ changing priorities over the last 40 years:
Tiering of suppliersa) Established pattern of supply
Original equipment maker predisposition to make
Subcontractors making to OEM’s designs and specialisations
Material
Assem
blies
Dire
ct
supp
liers
at a
rms
leng
th
Tiering of suppliersa) Developing pattern of supply
First tier subcontractors making to OEM’s performance (outcome) specifications
First tier subcontractors manage second tier suppliers with OEM guidance
Original equipment maker predisposition to buy
Second tier suppliers usually appointed by first tier suppliers