Sourcing Sourcing is defined as a technical activity with the purpose of identifying existing suitable products and services on the

e market and qualified suppliers available to provide those products and services. In business, the term word sourcing refers to a number of procurement practices, aimed at finding, evaluating and engaging suppliers of goods and services.

Sourcing Explanation Sourcing is a core capability of being a savvy enterprisehowever big or smalland of being a savvy consumer. The faster markets change, and the more options they offer us, the better at sourcing we all have to be. And, as consumers and enterprises, our sourcing decisions dont just impact ourselves. Heres an example: as a consumer, how do you source your music? Do you play it yourself, pay for live performances, buy CDs, listen to it on the radio, download it from the internet, or stream it live? With all of these options, and more, how do you know which choices and in which combination are the right ones for you? The pace of change in consumer behavior, in competition, and in the markets in which the enterprise is a buyer, means that sourcing has to be a continuous, agile capability, driven by a clear strategy and shrewd, value-creating investments. There are two major forms of purchasing activities that take place in an organization. Tactical Purchasing Strategic Sourcing

Tactical purchasing is simply executing routine administrative tasks (requesting quotes, placing orders, expediting, etc.) on a reactive basis, outside of the context of an enterprisewide focus, and without pursuing continuous improvement or contribution to specific senior management goals.

Strategic Sourcing is a comprehensive process aimed at obtaining maximum advantage on cost, technology, process and quality, by leveraging the companys buying power. Strategic sourcing is critical for firms practicing the principles of supply chain management. Global sourcing is a term used to describe practice of sourcing from the global market for goods and services across geopolitical boundaries. Global sourcing often aims to exploit global efficiencies in the delivery of a product or service. These efficiencies include low cost skilled labor, low cost raw material and other economic factors like tax breaks and low trade tariffs.

Supply Management Importance Producing Savings Effective supply chain management depends on material availability, purchase volume, product cost and types of materials. Materials subject to shortages and price instability present more problems to procurement professionals. Even small reductions in material costs in a company's total operating budget can impact the organization by increasing its profit margins. Purchasing and supply chain personnel must negotiate effectively to obtain materials of the highest quality at the lowest cost.

Financial Impact Table 7.1

Financial Impact Cost of goods sold The purchased cost of goods from outside suppliers. Merchandise inventory A balance sheet item that shows the amount a company paid for the inventory it has on hand at a particular point in time. Profit margin The ratio of earnings to sales for a given time period. Return on assets (ROA) A measure of financial performance defined as Earnings/Total Assets Financial Impact Selected Financial Data for Target Corporation Table 7.2

Profit Margin = 100% X ($4,629 / $65,786) = 7% Return on Assets = 100% X (4,629 / $17,213) = 26.9% Financial Impact Every dollar saved in purchasing lowers COGS by $1 and increases pretax profit by $1. o Profit leverage effect A term used to describe the effect of $1 in cost savings increasing pretax profits by $1 and a $1 increase in sales increasing pretax profits only by $1 multiplied by the pretax profit margin. Every dollar saved in purchasing lowers the merchandise inventory figure and as a result, total assets by $1.

3% purchasing reduction in COGS Earnings and Expenses Sales COGS Pretax earnings Selected Balance Sheet Items Merchandise inventory Total assets $7,596 $17,213 $7,368 $16,985 Current $65,786 $45,725 $4,629 Reflecting Savings $65,786 $44,353 $6,001

Performance Impact Purchased goods can have a major effect on other dimensions such as quality and delivery performance. Sourcing dialysis machine valves

Effect of defective dialysis machine Interruption in patient treatment Rescheduling difficulties Reduction in the effective capacity for dialysis Possible medical emergencies

Estimated cost of a failed valve = $1,000

Sourcing 50 dialysis machine valves (Total Costs)

Managing Contracts Effectively Purchasing professionals buy goods and services for resale, or purchase them to consume in the business or transform into products or services. Direct buying typically involves establishing a long-term contract between the buyer and supplier. Indirect buying involves transactions associated with repetitive purchases used in running the business. By defining the requirements for materials, analyzing the value and arranging the logistics and distribution, supply chain professionals ensure the long-term success of the entire business operation.

Maintaining Productive Supplier Relationships Supporting a company's operations typically means providing a continuous flow of materials and services required for production. By buying competitively from diverse suppliers, purchasing professionals obtain the right amount of quality goods and services at the best price. Negotiating persuasively helps maximize the investment and establish lucrative working relationships with suppliers. By analyzing usage, purchasing professionals work with their suppliers to avoid duplication, errors and waste. Evaluating and certifying suppliers ensures that all purchases meet the established criteria on an ongoing basis.

Negotiating and Administering the Best Deals Buyers in purchasing and supply management departments perform the critically important role of negotiating the best deals. Effective purchasing professionals must know what they're

buying, how it will be used and the factors that affect quality, cost and delivery. Service and support needs must also be analyzed and discussed. By conducting thorough research and communicating effectively, purchasing professionals secure contracts that are mutually beneficial to both companies. These contribute to long-term, productive partnerships that are important to both entities.

Outsourcing A practice used by different companies to reduce costs by transferring portions of work to outside suppliers rather than completing it internally. Outsourcing is contracting with another company or person to do a

particular function. Outsourcing is the process by which a company contracts another company to provide particular services.

Drivers of Outsourcing Concentrate more on your Core Business One of the reasons for outsourcing is that your organization will be free to concentrate on your core business. By outsourcing all your non-core functions, your employees can be put to better use and you will be able to see a huge growth in your core business.

Increase in Business Another reason outsourcing is seeing a big increase in your profits, productivity, level of quality, business value, business performance and much more.

Make Faster Deliveries to Customers Another reasons for outsourcing is that you can make quicker deliveries to customers. Your outsourcing partner will be able to provide faster deliverables and you in turn will be able to make quick deliveries to your customer. Faster deliveries can also help you save on time.

Improved Customer Satisfaction With timely deliveries and high-quality services you can impress your customers. Outsourcing can help you to increase customer satisfaction and your customer loyalty as well.

Operational Expertise Access to operational best practice that would be too difficult or time consuming to develop in-house.

Cost Savings The lowering of the overall cost of the service to the business. This will involve reducing the scope, defining quality levels, re-pricing, re-negotiation, cost re-structuring.

Improve Quality Achieve a step change in quality through contracting out the service with a new Service Level Agreement.

Manage Risks of Outsourcing Outsource the Right Activities Outsourcing is a huge step, and the question of which activity to outsource is one of the most important. Company needs to be careful not to give up companys competitive advantage. Company must retain control over aspects that make company unique or define your business. If company is already a leader in price or service levels in an area, dont outsource it. While company need to have a good grasp on an element to be able to effectively manage it, its important not to change the areas of the company customers appreciate the most. Consider all Outsourcing Costs Although many times companies decide to outsource because they expect to save money, it is very unusual for actual and projected savings to match. Particularly in the first several months of a partnership, plan to save about three quarters of your projected amount, due to adjustment, time loss, and other factors.

Beginning an outsourcing relationship has costs that may not come to mind at first. For instance, when choosing the right vendor, company will lose time and may encounter fees from networking websites or other sources. Negotiating and drawing up a contract in some instances can carry legal fees, and continuing the relationship will have costs in time or possibly travel. Maintain Control over Outsourced Components Its critical for company to remain in touch with the elements of business that company is outsourcing. The best way to do this is to have staff whose sole responsibility is overseeing the relationship. These employees should be skilled managers who understand companys corporate vision well and can monitor the outsourced activity to be sure its in line. Set Clear Objectives For whatever projects company is outsourcing to become successful, company must clearly communicate exactly what company need and provide companys vendor or employees with a description of their roles. Be detailed and specific when explaining metrics to meet, quality expectations, scope, and deadlines for the project. Aim for Transparency Its important to implement transparency practices into company. Set meetings periodically once a week, once a month, or whatever makes sense for companys partnership and discuss key elements of the business and outsourced party. Write a Solid Contract This is especially important when dealing with a services vendor. Company contract determines the dynamics of companys partnership, and works in two ways. It establishes expectations at the outset of the relationship, and serves as a record to refer to from then on. A contract should outline specifics about payment, creative and other rights, expectations and roles, and outline an exit strategy. If the vendor isnt meeting companys established quality expectations during a specific time period, the contract should provide you with the option to terminate agreement.

Keep the End in Mind All good things must come to an end, and hopefully companys outsourcing partnerships will end gradually and on mutual terms. However, its best to be prepared in the event of the worst for example, if demand increases drastically or a vendor goes out of business.

Sourcing Policy and Components A sourcing policy is simply the rules and regulations that are set in place to govern the process of acquiring goods and services needed by an organization to function efficiently. The exact process will seek to minimize expenses associated with the purchase of those goods and services by using such strategies as volume purchasing; the establishment of a set roster of vendors, and establishing reorder protocols that help to keep inventories low without jeopardizing the function of the operation. Both small and large companies as well as nonprofit organizations routinely make use of some sort of sourcing policy. There is no one right way to establish a sourcing policy. Factors such as the size of the business, the availability of vendors to supply necessary goods and services, and the cash flow and credit of the company will often influence the sourcing approach. The size of the company is also likely to make a difference in the formation of sourcing policy.

Components of Sourcing Policy PO processing and dispatching methods Sourcing methods and bids process Adhere to appropriate process and methodologies Guideline to settle conflict of interest Outline acceptable ethical conduct Risk management requirements Audit procedure Invoicing and payment terms Approvals/workflow Receiving and acceptance procedure

Sourcing Plan and Components The sourcing plan is the result of all planning efforts on strategic sourcing. Into this planning all sourcing events are organized and detailed with all tactical and operational information such as, the sourcing team responsible for each event, when is supposed to begin and end each RFX steps (RFI, RFP, RFQ), the requirement, specifications of all services or materials and negotiations/cost goals. The objective of sourcing plan is to manage time and quality of the all sourcing events in the strategic sourcing program. The purpose of this Plan is to describe the processes, governing procedures, roles and responsibilities, personnel (experience), and tactical steps to be used in executing the subcontracts, purchase orders and material logistics scope of the organization.

Components of Sourcing Plan Functional Owner of the Process Governing Documents, Policies and Procedures Supply Chain Management Staff Certifications Facilities and Equipment Experience Preparing Procurement Documents Subcontract Payments

Negotiation Negotiation is the art of applying influence to increase the probability of achieving a desired outcome.

Negotiating in the procurement or contract context is the process of bargaining between two or more parties to reach a mutually acceptable agreement on the final terms, conditions and specifications of what is being contracted or procured.

Planning Negotiations

1. Establish the objectives of the negotiation 2. Gather facts that can have a big impact on the negotiations 3. Asses the power position of each of the parties 4. Determine the points of common interest 5. Make a list of questions 6. Define your tasks 7. Decide on the composition and division of roles in your negotiating team 8. Plan your concessions 9. Agree upon the negotiating tactic you will follow 10. Indicate how you think you will conclude the negotiations

Tactics in Negotiations Take-it or-leave-it - One party wants to impose its terms on the other party, without concessions. Bogey - The buyer approaches the supplier in a very friendly way and comments on his proposal positively. However he lets know that, if there is to be any business, the proposal has to be slightly adjusted. Chinese crunch - Here it is declared that an agreement is possible as soon as he solves just one little problem. Auction - The buyer makes the supplier explain why they should do business together. Good guy-bad guy - Purpose of this tactic is to dim the other partys expectations about the outcome of the negotiations Russian front - You give the other party two choices. , one of them is deliberately unattractive to the other party and you force the choice of the option that you favor Deal creeps - After the deal is over and you return to base you may find a particular clause is ambiguous. You may be tempted to interpret it in your favor