1

Supplier Base

• ‘Supplier Base’ is all the vendors that supply a given purchaser.

• Supplier bases are often described in terms of their size of range (broad, narrow, single source), location (local, national, international) and characteristics (eg diversified or specialized).

2

Multi Sourcing

• Having more potential suppliers of a given item or category of purchases, per-qualified and approved as being able to meet the buyer’s requirements can be defined as Multiple Sourcing Arrangements.

3

Advantages of multiple sourcing arrangements

• Buyer can avoid supply shortages or disruptions, or unforeseen peaks in demand, or a supplier failure.

• Buyer can take advantage of the best available price, trading terms, quality, innovation and flexibility on offer at any given time.

4

Disadvantages of multiple sourcing arrangements

• They can lead to unnecessarily high procurement costs

• They fail to exploit the value-adding and competitive potential of concentrating on more collaborative relationships with fewer suppliers

• They can lead to waste, by retaining suppliers who cannot (or can no longer) meet the firm’s requirements, or are otherwise not often used

5

Supplier Base Optimisation

• Supplier base optimisation (or rationalisation) is concerned with determining roughly how many suppliers the buying firm wants to do business with.

• Optimising the range of supply base enables the firm to:• Avoid the drawbacks and inefficiencies of multiple

sourcing.• Leverage the potential of closer, long-term,

collaborative relationships with a few suppliers.• Maintain the security of supply.

6

Risks for a very narrow Supplier Base

• Over-dependence on a few suppliers.• Supply disruption.• The loss of preferred suppliers’ goodwill and co-operation.• Preferred suppliers growing complacent.• Being ‘locked in’ to long-term relationship and co-

investment with suppliers.• Missing out on seeking or utilising new or more

competitive suppliers in the wider supply market.

7

Single sourcing

• When only supplier is selected for the development of closer partnership relationship relations or an ‘exclusively supply’ contract then it is called Single Sourcing.

• Such an arrangements might be suitable for procurements for which the buyer hopes to gain supplier commitment and co-investment (eg for strategic or critical item) or preferential treatment (eg on price for leverage item), by offering the supplier exclusively.

8

Dual sourcing

• An arrangement where organisations share supply between two suppliers is called dual sourcing.

• This approach enables the buyer to maximise the advantage of narrow supply-while managing the risks of over-dependency on a single supplier.

9

Consideration for Single sourcing

• The total requirement is too small to justify splitting orders among several suppliers

• One supplier is so far ahead of others in terms of reputation, quality, price etc that it would make no sense to use anyone else

• Expensive set-up costs (eg tooling or systems integration) are required to enable supply

• The requirement is subject to supply risk, or in short supply

10

Partnership sourcing

• Both single sourcing and dual sourcing enable buyers to focus on developing more collaborative value adding relationships, committed long-term relationships.

• Single sourcing and dual sourcing are generally accompanied by a strong emphasis on mutual commitment, co-investment and relationship building, and sometimes called a ‘partnership’ or ‘partnership sourcing’.

11

Where Partnership sourcing might be beneficial

• Where the customer has a high spend with the supplier

• Where the customer faces high risk, in the sense that the continual supply of the product or service is vital to the buyer’s operations

• Where the product supplied is technically complex, calling for advanced technical knowledge by the supplier and where the cost of switching to a new supplier would be high

• ‘High hassle’ supplier relationships, where the product supplied is vital to the buyer’s operations and is technically complex

• Where the supply market for the product is fast-changing, so that an up-to-date knowledge of technological or legislative changes in the market is essential

• In a restricted supply market, where there are few competent and reliable supplier firms

12

Why Partnership Sourcing

• Achieve competitive advantage

• Focus on core business competencies

• Reduce supply costs

• Reduce product lifecycles

• Supplier rationalization exercise

13

Key characteristics of Partnership Sourcing

• Cultural compatibility between the partners.

• A high level of trust, knowledge sharing and openness between customer and supplier.

• Mutual acceptance of the concept of win-win within the supply chain.

• Relevant expertise, resources or competencies in complementary areas.

• Clear joint objectives and meaningful performance measures for assessing supply chain performance.

• A total quality management philosophy.

• The use of cross-functional teams to enhance co-ordination. • A high level degree of systems integration.

14

Partnering

ADVANTAGES FOR THE BUYER DISADVANTAGES FOR THE BUYER

Greater stability of supply and supply prices Risk of complacency re cost/quality

Sharing of risk and investment Less flexibility to change suppliers at need

Better supplier motivation and responsiveness Possible risk to confidentiality

Cost savings from reduced supplier base, collaborative cost reduction

May be locked into relationship with an incompatible or inflexible supplier

Access to supplier’s technology and expertise Restricted in EU public sector procurement directives

Joint planning and information sharing, supporting capacity planning and efficiency

May be locked into relationship, despite supply market changes and opportunities

Ability to plan long-term improvements Costs of relationship management

More attention to relationship management: eg access to an account manager

Mutual dependency may create loss of flexibility and control

15

Partnering ADVANTAGES FOR THE SUPPLIER DISADVANTAGES FOR THE SUPPLIER

Greater stability and volume of business, enabling investment in business development

May be locked into relationship with an incompatible or inflexible customer

Working with customers, enabling improved service, learning and development

Gains/risks may not be fairly shared in the partnership (depending on power balance)

Joint planning and information sharing, supporting capacity planning and efficiency

Risk of customer exploiting transparency (eg on costings, to force prices down)

Sharing of risk and investment Investment in relationship management

Cost savings from efficiency, collaborative cost reduction, payment on time

Dependency on customer may create loss of flexibility and control

Access to customer’s technology and expertise Restricted by EU public sector procurement directives

More attention to relationship management: eg access to a vendor manager

May be locked into relationship, despite market changes and opportunities

16

Sole Sourcing

• Sole sourcing refers to a situation in which there is only one supplier available in the supply market for a given procurement.

• The market may be dominated by a single supplier: a market structure known as a monopoly.

17

Conditions for a monopoly

• Only one supplier of the good or service exists in the supply market.

• There are high ‘barriers to entry’, preventing other competing firms from entering the market.

• There are no close substitutes for the good or service available.

18

Different approaches to letting purchase contracts

• Framework Agreement.• Catalogue Purchasing from pre-approved suppliers.• Request for Quotation (RFQ)• Request for Information (RFI)• Request for Proposal (RFP)

19

Tendering Procedures

• Open procedures• Selective or restricted procedures• Restricted open procedures• Negotiated procedures

20

The use of competitive bidding

FIVE CRITERIA FOR THE USE OF COMPETITIVE BIDDING

FOUR SITUATIONS IN WHICH COMPETITIVE BIDDING SHOULD NOT BE USED

The value of the procurement should be high enough to justify the expense of the process

It is impossible to estimate production costs accurately

The specifications must be clear and the potential suppliers must have a clear idea of the costs involved in fulfilling the contract

Price is not the only or most important criterion in the award of the contract

There must be an adequate number of potential suppliers in the market

Changes to specification are likely as the contract progresses

The potential suppliers must be both technically qualified and keen to win the business

Special tooling or set-up costs are major factors in the requirement

There must be sufficient time available for the procedure to be carried out

21

Intra-company trading

• Intra-company trading refers to commercial relationships between entities which are part of the same organisation.

• One company, division or strategic business unit (SBU) in a large enterprise or conglomerate (eg a group of companies) may supply goods or service to another.

22

Purpose behind Intra-company trading

• To support capacity utilisation in the supplying entity or unit

• To help the supplying entity or unit to cover its fixed costs in times of recession and low external orders.

• To support the profitability of the supplying unit or entity.

• To support the profitability of the group as a whole.

23

Other aspects of sourcing policy and stategy

Make/do or buy decision depend on a range of strategic and operational factors.

'Make-Or-Buy Decision' The act of choosing between manufacturing a product in-house or purchasing it from an external supplier. In a make-or-buy decision, the two most important factors to consider are cost and availability of production capacity.

24

Other aspects of sourcing policy and stategy

Factors favoring in-house manufactureWish to integrate plant operationsNeed for direct control over manufacturing and/or qualityCost considerations (costs less to make the part)Improved quality controlNo competent suppliers and/or unreliable suppliersQuantity too little to interest a supplierDesign secrecy is necessary to protect proprietary technologyProductive utilization of excess plant capacity to assist with absorbing fixed overhead (utilizing existing idle capacity)Wish to keep up a stable workforce (in times when there are declining sales)Greater guarantee of continual supply

25

Other aspects of sourcing policy and stategy

Factors favoring purchase from outside

Suppliers’ specialized know-how and research are more than that of the buyerLack of expertiseSmall-volume needsCost aspects (costs less to purchase the item)Item not necessary to the firm’s strategyLimited facilities for a manufacture or inadequate capacity

26

Outsourcing and subcontracting

Outsourcing is an allocation of specific business processes to a specialist external service provider. Most of the times an organization cannot handle all aspects of a business process internally. Additionally some processes are temporary and the organization does not intend to hire in-house professionals to perform the tasks. Once the task is outsourced to the service provider, he will take the responsibility of carrying out the tasks and maintaining the organization’s assets.

A subcontractor is a person who is hired by a prime contractor or main contractor to perform a specific task as part of the overall project and is normally paid for services provided to the project by the originating general contractor.

27

OutsourcingADVANTAGES DISADVANTAGESSupports organisational rationalisation and downsizing Potentially higher cost of services, contracting and

management

Allows focused investment of managerial, staff and other resources on the organisation’s core activities and competencies

Difficulty of ensuring service quality and consistency and corporate social responsibility

Gives access to specialist expertise, technologies and resources of contractors

Potential loss of in-house expertise, knowledge, contacts or technologies in the service area

Access to economies of scale Potential loss of control over areas of performance and risk

Adds competitive performance incentives, where internal service providers may be complacent

Added distance from the customer or end-user, by having an intermediary service provider

Risks of ‘lock in’ to an incompatible or under-performing relationship: cultural or ethical incompatibility; relationship management difficulties; contractor complacency etc.

Risks of loss of control over confidential data and intellectual property

28

Other aspects of sourcing policy and stategy

local and international sourcing.

Consortium buying.

29

Supplier switching

RISKS OF SUPPLIER SWITCHING COSTS OF SUPPLIER SWITCHING

The new supplier may fail to perform Identifying and qualifying new suppliers

Process incompatibility Initiating and administering tendering exercises

Cultural/inter-personal incompatibility Settlement of not-yet-delivered items from old supplier

Loss of knowledge Change of internal systems and processes

Learning curve Familiarising and training the new supplier

Exposure to new and unfamiliar supply risks Contract development and contract management

Exposure of intellectual property, confidential data

Risk mitigation measures and corrective measures

Problems of adversarial hand-over from the old supplier to the new