Procurement Sourcing PDF

Procurement
Academy
Assessment . Development Plans . E-learning . Coaching

Course notes
High Impact: E-Learning
Sourcing
Contents

1. Contribution of procurement
2. Procurement processes
3. Needs assessment – definitions
4. Needs assessment – “make-or-buy” analysis
5. Needs assessment – developing specifications
6. Market analysis
7. Portfolio analysis
8. Supplier relationship analysis
9. Risk management
10.Supplier selection
11.Contracting
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Preface
Globalisation increases competition as consumers continuously demand newer, better and cheaper
products and services, making it challenging for companies to stay in business.
These challenges mean companies have to adapt their strategies and business processes so they can
cope with a highly competitive and changing business environment.
Four market trends: There are four market trends a product or service, called item, goes through in this
highly competitive market, they are:(1) an increase in the number of items; (2) a reduction in the life
cycle; (3) a reduction in the time items are brought to market and (4) an increase in complexity.
To cope with the market trends of ever faster, better and cheaper, companies are moving towards an
integrated supply chain. A smooth collaboration between all entities, including suppliers, is of vital
importance and allows the company to be competitive. In fact, the faster, the better and the cheaper an
organisation wants to deliver products and services the more integrated and cooperative the supply
chain should be.
Value chain: The supply chain may vary from business to business. However, many companies have
adopted the ‘Porter’ integrated supply chain, also called the value chain. The value chain is split into two
activities, the primary and the secondary activities.
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The primary activities involve three main groups: buy, add value and sell. The buy group consists of the
inbound logistics where the purchased items are received, stored and handled, as well as the
procurement activities. Buyers purchase the materials and the assets such as machinery and office
equipment.
The secondary activities such as human resource management and financial management support the
primary activities. These secondary activities are either directed towards supporting one of the primary
activities or towards the whole group of primary activities.

1. Contribution of procurement
Within the value chain, procurement plays an important role in both the primary and the secondary
activities. Procurement needs to meet the requirements associated within bound logistics and closely
related to operations. In addition, procurement is associated with supplying goods and services for the
secondary activities, for example purchasing technical equipment for Research and Development.
1.1. RONA: Return on net assets, RONA, is a financial measure that helps to express the relationship
between profit, sales, expenses and total assets. RONA demonstrates how a company generates profit.
For example the impact of cost reductions, sales increases and inventory reductions are measured by
RONA.
Example: a company generates 400 million sales. When deducting sales from the cost of goods sold and
the total expenses the net profit is20 million (5%). The total assets, such as inventory and accounts
receivable represent a value of 250 million. Sales divided by total assets equals 1.60 turns. RONA is
expressed by multiplying the 5% net profit by the 1.6 turns, which is equal to 8%.
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When sales increase by 3%, to 412 million, cost of goods sold will increase respectively by 3% to 258
million. As a result profit increases to 24 million or 5.8%. RONA increases from 8 to 9.3%. When the
procurement department is able to reduce costs by 3%, the cost of goods sold moves from 250 to 243
million. As a result, the net profit jumps from 5 to 7% and RONA from 8 to 11%. You can clearly see the
impact procurement has, 3% less costs has a bigger impact on RONA than 3% more sales.
On top of realizing cost reductions, buyers also have to improve RONA by reducing inventory. For
example inventory moves from 100 to 90 million as a result of increased supplier delivery frequencies,
negotiated by the buyer, the total assets become 240 million and the turns move from 1.60 to 1.66. As a
result RONA becomes 11.6%.
The goal of each company is to reach more sales at lesser costs by using fewer assets. Buyers contribute
to this goal by keeping inventory levels low and by reducing costs and expenses.

2. Procurement processes
The procurement process for a one-time purchase, like a project, is best visualized by a circle. On the
right side are the upstream activities, from needs assessment to supplier selection and contract
signature. On the left side are the downstream activities. For on-going purchases, also called recurrent
purchases, the procurement process is best visualized by a figure “eight”, with two closed-loops, an
upstream loop and a downstream loop.

The upstream activities are the activities before the contract gets finalised e.g. needs assessment,
market analysis and supplier selection make up the upstream loop. The upstream process is called
sourcing.
The downstream activities are all activities after the contract gets signed, for example the order
fulfilment, invoice payment and the supplier performance measurements. The downstream process is
known as, operational procurement.
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The circular patterns of the two procurement loops imply that the procurement processes are
continuous processes. The downstream activities will provide input for the upstream activities and vice
versa.
2.1. Operational procurement: The order and delivery process step consists of all tasks that convert the
requests from internal customers into purchase orders, which are then sent to suppliers. Once the order
is received, the payment of the invoice can take place.
The supplier performance step consists of the formal and systematic tasks to monitor and evaluate
supplier performances. Buyers normally measure quality, availability and delivery performances on top
of cost. The ability to exceed customer expectations is realized within the quality management step of
the operational procurement process.
Amongst others, cost management, quality improvement, reduction of lead times, improvement of the
delivery, and reliability of suppliers are all tasks part of the continuous improvement step.
Optimisation and computerisation of the operational procurement processes is very important. This
enables organisations to focus their available resources on the more value adding sourcing activities.
Buyers should spend most of their time on the sourcing process steps and tasks, to contribute to the
results of their companies.

3. Needs assessment - definitions
The sourcing process starts with the assessment of the needs. During this step, the buyer questions the
internal customer who needs a product or service to be purchased. He may ask, for example, the
following questions:
(1) What kind of product or service needs to be delivered?
(2) When are the products or services required?
(3) What are the requested functionalities?
Then the buyer explores how the market can best match these needs. This will result in a set of
specifications that are transparent and clear to the buyer, the internal customer and the supply market.
It is the buyers’ responsibility to challenge the specifications in such a way that the total cost, quality
and service levels on both the supplier side and at his company side, improve.
3.1. Internal customers: The internal customer is the person within the buyers’ organisation who has
the need to purchase goods or services. Internal customers can be anywhere in the organisation. In each
activity of the value chain internal customers have purchase needs in order to perform and add more
value to the complete supply chain.
3.2. Needs classification: Seen from outside the value chain, from the end-product position, needs can
be classified into direct and indirect spend. Direct spend are products or services absorbed by the end-
product. Indirect spend, such as office supplies, will never become part of the end-product.
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Seen from inside the value chain, from the sourcing & procurement activity position needs can be
classified in several groups, as follows:
Raw materials: are materials that have undergone no or minimal changes. They represent the
basis materials for the complete supply chain.
Semi-finished products: have already been processed once or more and will be processed
further at a later stage within the complete supply chain.
Components: do not undergo anymore physical changes within the supply chain. They are built
into an end-product and are still recognizable in the end-product itself.
Supplementary materials: are not physically absorbed by the end-product.
Maintenance, repair and operating materials (MRO): are indirect consumable items. These
items are required by the facilities management staff for running the organisation.
Services: are activities executed by external, third, parties on a contract basis. These services
can range from providing cleaning services to having a new production facility up and running.
Finished products: or re-sales products include all purchased products to be resold, possibly
together with their own created end-products.
Production support items: include the materials required to pack and ship final products.
Investment goods or capital equipment: are products which are not consumed immediately,
but whose value has depreciated over a period of time.

3.3. Capturing the need: Within the industry, for many sourcing & procurement teams it is a big
challenge to get a clear picture of the variety of goods and services needed by their internal customers,
who are spread over the complete value chain. For many organisations it is even a bigger challenge to
engage internal customers to express their needs and involve a professional buyer within the supplier
selection process. In many organisations many goods and services are purchased without involvement
of the sourcing & procurement staff. This exposes the organisation, creates non-compliance and on top
of that, the costs are soaring.
Procurement staff has to help identify the needs of their organisations, by implementing systems,
procedures, processes and most of all by creating a sound relationship with their internal customers.
In a good working value chain organisation, all the needs will flow through the hands of the sourcing &
procurement staff. It will reduce the companies’ exposure, increase compliance and reduce the total
cost significantly.
3.4. Purchase requisitions: A purchase requisition is a way for communicating needs within an
organisation.
A requisition generally contains:

- the description of the required goods or services,
- the quantities,
- the expected delivery dates,
- the budget account to be charged,
- the date of the requisition, to start the time tracking,
- the authorised signatures, from the internal customer and the budget holder.
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The purchase requisition may contain all information, like price and supplier, for routine and off-the-
shelf items. For high value and/or high supply risk items the requisition is analysed by the buyer to start
developing the specifications, the next task within the sourcing process.
Nowadays more and more requisitions are generated through e-Procurement systems. The internal
customer expresses his need directly via the IT system. Once approved, the requisition can be
transformed directly into a purchase order or a sourcing process, also called tendering process, can be
executed. In case of high value and high risk requisitions the complete sourcing process will be
executed.

4. Needs assessment – “make-or-buy” analysis
Make-or-buy decisions are sometimes confused with in-and-outsourcing decisions. Outsourcing means
that a company divests itself of its resources to fulfil a particular activity and contracts the activity to an
external, third party. These decisions are taken by management.
Compared to the in-and-outsourcing decision, the make-or-buy decision itself is a more tactical
consideration, whether to buy certain components or services or to provide them internally. These
decisions are taken by the buyers and the stakeholders.
Make-or-buy decisions require an in-depth analysis of the pros and cons to determine the potential
benefits. It is one of the most critical sourcing decisions.
4.1. Factors: Factors that force an organisation to consider the make-or-buy decision are:
(a) New product development. Many organisations have a procedure in place whereby the
make-or-buy decision is made for the introduction of new products. Organisations should
involve the procurement department at a very early stage of the decision-making process. This
is to make sure that the delivery of essential components by the supplier is guaranteed.
(b) Supplier performance. If an organisation is not satisfied with the current supplier
performances, it can start looking for alternative solutions internally, make, or externally, buy.
(c) Changing demand. An increase or decrease in demand may require reconsidering the make-
or-buy decision. When produced in-house, an increase in demand can lead to capacity
constraints. This can be solved by a buy decision, to subcontract partially the activity.
(d) Cost control. In times of economic recession and increasing competition, issues like cost
control and expenditure cuts are areas that require attention. Under the pressure of these
conditions, organisations are always willing to consider potential savings seriously. And
therefore they need to consider make-or-buy decisions.

4.2. Involved parties: Who should be involved in the make-or-buy analysis and decision process is
determined by two factors, the item complexity and the commercial uncertainty.
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The complexity can be low or high. For example, low complexity can be a standard product, technically
simple, or an existing product, easy to install or it may be that there are no after sales service required.
Whereas high product complexity can be a customized product, complex technology involved, a new
product, difficult to install the product or may be that after-sales services are required.
Secondly commercial uncertainty can be low or high. For instance, low commercial uncertainty can be
limited investment, small order size, short-term impact, no organisational adaptation required or low
impact on the financial results. Whereas high commercial uncertainty, this may involve high investment,
large order size, long term impact, extensive organisational adaptation required, or may be that there is
high impact on the financial results.
Generally, the more impact the make-or-buy decision has on the organisation, the more cross-entity
staff will be involved in the decision making process.
4.3. Cost comparison: The Make-or-Buy analysis includes total cost of ownership comparison between
both the make and the buy scenario. All the costs involved, regardless of where they occur in each of the
scenarios, are taken into consideration during the total cost of ownership comparison. It is often easier
to determine the costs involved within the buy scenario, because many cost elements are included in
the purchase price. Most often, the only additional costs that have to be added are administrative,
inbound transportation, inspection and receipt costs. The cost components that determine the make
scenario are the operating expenses, like: direct labour, direct material, overhead, training costs etc...
There are two steps during the make-or-buy cost analysis. First conduct total costs of ownership analysis
for both the buy and make scenarios. Secondly compare the total cost of ownership values, which will
lead to the final decision making step. A summary of different cost components is given in the below
table.

The difference in total cost between the make-or-buy scenarios indicates the profitability of one
scenario against the other.
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4.4. Decision making: Once the total cost comparison is realized, the decision making criteria needs to
be taken into account. The profitability determines the monetary criteria. At the other hand there are
questions like: what are the company’s core competencies; how do you quantify the possible impact of
the buy scenario on personnel in terms of transforming people to perform a different job, or laying-off
because of overcapacity. They define the non-monetary criteria. The non-monetary criteria include the
company, personnel, the product and operations. The monetary criteria focuses on the profitability
aspect. It shows that the make-or-buy decision is not always a rational decision, and that even non-
rational, sometimes even emotional, aspects can determine the decision making.
The following criteria should be reviewed when making a “make-or-buy” decision:

The additional requirements for the “make” scenario need to be evaluated. The lead time of the
potential suppliers who can provide the “buy” scenario have to be reviewed. Waste difference needs to
be evaluated between the two scenarios. The total cost of ownership comparison between the two
scenarios indicates the scenario that delivers higher profitability.

5. Needs assessment – developing specifications
Developing specifications is the final task of the sourcing need assessment step. Specifications describe
the characteristics by performance, drawings, commercial standards and technical standards. Providing
clear, meaningful and acceptable specifications that describe the requirements and expectations is very
important. There are two types:
Technical specifications: describe the technical characteristics of the product or service. They
indicate in detail the direction that the purchase solution should take.
Functional specifications: describe the functions that the product or service must perform for
the user.
The definition logistic and maintenance specifications can also be found in literature. They describe how
the product or service should be delivered. They indicate the conditions in which the product will be
processed, how the equipment has to operate, how the maintenance and after-sales service has to be
performed. The logistic and maintenance specifications can be described in a technical or functional
way.
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5.1. Challenges: At least half of the quality problems between buyers and suppliers are caused by poor
specifications, for which the buying company is responsible. Often specifications are vague or arbitrary.
Suppliers are seldom consulted on specifications. Most suppliers are afraid to challenge specifications
for fear of losing the business. By eliminating capricious specifications, poor supplier quality is
eliminated. Often the requirements as indicated in the specification documents do not even match the
reality, the real need.
Very often organisations are confronted with over-specifications. Over-specification can be avoided by
integrating the supply chain entities, by creating a truly working value chain organisation. This will
improve communication. It will harmonize the relationship between the entities and create a sound
relationship between the stakeholders. Using functional specifications lowers the chances of over-
specification.
5.2. Impact: A buyer and his internal customers manage the translation of needs into a set of clear
specifications, which the suppliers will use to make their offers. When developing specifications, buyers
should focus on safeguarding a competitive market and reducing total cost, including future
improvements on service and quality. The buyer should challenge the internal customers to optimise the
specifications. As a result the total cost, quality and service will improve.
When running a sourcing process, the potential to save money is highest at the specifications stage. In
fact, the savings can be ten times higher than what could be achieved in a face-to-face negotiation.
However, it is not just about simplifying all specifications. It is about finding a consensus with the
internal customers as well as the balance between cost, quality and service.

Apart from reducing the overall costs, buyers should also ensure a competitive market. In fact, the more
the specifications are open and unrestrictive, the more suppliers will be able to make an offer, which
obviously, means increased competition, and ultimately a lower price.
The buyer also has to make sure that specifications do not favour any brand or any supplier.
Once the requirements are clearly defined, the buyer explores how the market can best match them.
This will result in a set of specifications that are transparent and clear to the buyer, the internal
customers and the potential suppliers.
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5.3. Best practices: When developing specifications the buyer starts assessing the internal customer’s
needs. The "terms of understanding" can be used to guide the buyer. The "terms of understanding" is a
simple one-page check-list mentioning the major elements of the upcoming supplier selection activity,
for example: description of the internal customer needs, cost estimation, involved stakeholders and
milestones.

To assess the needs, the buyer could use the 5W in the bed method. This represents reviewing the
questions what, where, when, why, who and how much. The buyer then populates the gathered
information in the "terms of understanding" check-list.
Suppliers love being consulted during the specifications stage as it helps them to build a relationship
with the buying organisation. The buyer will receive lots of help from suppliers, but they may try to
influence the specifications into their advantage. As a buyer, it is your responsibility to ensure a fair
treatment. To ensure objective and supplier-neutral specifications, the buyer should have discussions
with at least two suppliers and should not start to negotiate with the suppliers at this stage. The buyer
should be careful not to disclose information that might favour a specific supplier. Therefore he should
keep his questions as generic as possible. In consultation with the internal customers, the buyer should
prepare a list of questions before talking to potential suppliers. And stick to that list for all suppliers.
When approaching a supplier, clearly state that you are in a market consultation phase and that you are
gathering information to write the specifications document. Mention that all collected information will
be made public and will be shared with the other potential suppliers. It is also good practice to consult
your current supplier at this phase.

6. Market analysis
Within the sourcing process market analysis comes right after assessing the needs. Market analysis
refers to the collection and analysis of supply market data. Amongst others the data can be collected
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from reports and published statistics. The aim of supply market analysis is to gain insight into the
investments to be made, the risks involved and the capabilities of potential suppliers. For some strategic
purchases market analysis can become an on-going process for the buyer as he should continuously be
informed about the changes and developments in the specific supply market.
Market analysis is realized by executing five tasks. First the objectives are determined. Next the cost
versus benefit is reviewed. The third task is the creation of the research plan. During the fourth task the
desk and field research is executed. The final task is the evaluation and recording of the obtained data
and results.

6.1. Determine objectives: Market analysis starts with determining the objectives. Questions such as:
what does the buyer wants to know, in how much detail, and for what reasons; will define the
objectives. The reasons for conducting a market analysis can be, amongst others: to continuously
develop new technologies, to detect the dynamics inside the supply market and to find potential
suppliers when a new need is created.
6.2. Cost-benefit review: Once the objectives are defined the cost-benefit review takes place. Questions
such as: what kind of information is required, what information is already available, do the costs of the
analysis weigh up against the benefits; are guiding that review.
6.3. Research plan: Research can be carried out at three levels.

(1) Macro-economic level
(2) Meso-economic level
(3) Micro-economic level
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The first level is at macro-economic level. The countries being part of the research are identified. What
do we want to know about these countries in which we may find potential suppliers? What are the
reasons for deciding whether or not to search for suppliers in a specific country? The answers to these
questions will be found within exchange rates, political stability, transportation costs or wages applied
to the exporting country. The macro-economic research focuses often on factors that determine the
wealth of a certain economy within a country. Data on macro-economic factors can often be found in
governmental reports.
The second level is at meso-economic level. The buyer is researching within a specific industry. Sources
include the press, directories, published reports and trade associations’ output. They publish
information such as the productivity within the industry.
The third level is at micro-economic level. The buyer conducts research to increase knowledge about a
specific product or even a specific supplier. This type of market research is important when buying an
item for the first time, when a buyer wants to gather in-depth information about a specific supplier and
when a buyer wants to search for additional suppliers. For example Micro-economic level research is
realized to find the financial stability of a supplier and to find the cost breakdown for a specific item.
While developing a research plan, the required information should be specified in detail. It enables the
buyer to search for the relevant data. Also, the research plan should include a timetable and an estimate
of the required effort.
6.4. Desk research: A third party gathers data from a primary or a secondary source. A primary source is
the original, data-generating source. A secondary source does not directly generate the original data,
but rather takes the data from a primary or another secondary source.
Data obtained via desk research represent internal or external secondary source data. Some examples of
the internal secondary source data are former supply market analysis reports, cost calculations, supplier
visit reports or supplier performance measurement reports. Some examples of the external secondary
source data are periodicals, statistical sources, annual reports and publications in public domains.
In general, desk research is easy to conduct and does not require as much work. However, you must be
careful since secondary data has been collected by someone else rather than coming directly from the
original source. The data may be a compilation of records or the result from surveys that have been
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conducted by other companies or people. Some limitations of secondary data may involve problems of
accuracy and purpose of publication.
6.5. Field research – trade fairs: Field research is the collection, analysis and interpretation of
information from a buyer’s own investigation. This may be in the form of a questionnaire. Information
collection can also come from visits, for example supplier site and trade fair visits. Visiting trade fairs is a
method of field research used by buyers. It provides an insight into new market developments. It also
enables the buyer to get in contact with new potential suppliers.
The trade fair visits must follow a three-step approach:

Step 1: Preparing for the visit. To prepare for trade fair visits, buyers can request information
from their current suppliers. They can also request a trade fair catalogue and make a selection
of what they want to visit. The buyer can even make appointments in advance with companies
that are present at the fair. Trade fairs are usually announced in specialized literature.
Step 2: Visit the trade fair. In order to make the trade fair visit effective, the buyer needs to
make notes during the visit. He can take pictures to facilitate explanations at a later stage. He
also has to pay attention to new potential suppliers and to establish first contacts. He can also
tape his conversations in order to be able to refer back to them. In addition, he should visit his
current suppliers.
Step 3: Follow-up work. The buyer should spend time after the visit on reconsidering his
findings. The buyer should create a visit report by using the notes he made during the visit. He
can hand over the report to his management and to the internal customers.
6.6. Field research – supplier visits: Supplier visits are another type of field research. When a buyer
visits a supplier, he has to prepare well and has to ensure a proper follow-up is organised. The buyer
should define the goals for the visit, including the best person to talk to for each subject. In addition, the
buyer creates a checklist of subjects that he wants to discuss during the supplier visit. The material flow
diagram can be used. It enables buyers to visualize the added values and to detect the cost components.
By using this method and by talking to several people at the supplier side he is able to identify the cost
drivers.
6.7. Field research – questionnaires – RFI: A Request for Information, RFI, is a questionnaire to be filled
out by potential suppliers. It enables the buyer to judge if the supplier is promising and has a chance to
win the business. An RFI is especially useful if the buyer does not know the supply market very well. It
can also be used to cut down on the number of potential suppliers. Upfront the buyer establishes a
potential supplier long list. From the desk research and the trade fair visits the buyer lists all valuable
potential suppliers to be invited to the RFI. Questions like company information, contact persons, ISO
certifications, financial information, technical capabilities, cost breakdowns, skills and classification of
the employees, customer references and so on are examples of questions from the RFI. It is a good
practice to provide the specifications and the selection criteria along the RFI to the potential suppliers.
The buyer should request proposals, ideas and a confirmation the suppliers can match the
requirements.
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Nowadays companies use eSourcing technologies to publish RFI’s. Suppliers are answering the
questionnaire online. Using eSourcing technologies for the RFI is a good practice. It forces suppliers to
respect the timing and to respond to the questionnaires in the same way. Another advantage of using
eSourcing tools is that buyers can even integrate automatic scoring of the RFI answers against the
selection criteria, which facilitates comparison of the answers.
Low cost is the primary advantage of using questionnaires. The second advantage is that any influence
on the respondents’ answers due to the interviewer’s appearance or voice quality is avoided. There is
less pressure for an immediate response from the participants. Also, the respondents feel anonymous
while answering questionnaires, which can make the responses more reliable. However, the response
rate, the accuracy and the completeness of responses can be poor because of lack of motivation of the
respondents. This can have an effect on the quality of the responses.
6.8. Field research – interviews: Personal interviews are a costly way to collect data. However, personal
interviews enable the interviewer to notice and correct the respondent’s misunderstanding. This
method also allows the interviewer to clarify vague responses and to answer questions so that complete
and meaningful data is obtained. Moreover, the interviewer can control the order in which the
respondent receives the questions.
Telephone interviews are less costly than personal interviews. Telephone interviews allow a high
response rate and do not impose limits on the interview length. However, some questions are difficult
to ask on the phone due to complexity or sensitivity. Also, the interviewer does not have visual cues that
a misunderstanding has occurred. It is good practice to realize interviews once the RFI responses have
been received. It enables the buyer to check the answers and clarify uncertainties. It will help the buyer
to realize a better scoring of the potential suppliers and to select step by step the most promising
potential suppliers.
6.9. Evaluation and recording: All the collected information from the desk research and the field
research has to be evaluated. This is also called supplier appraisal. It is a technique used to identify the
most promising potential suppliers, by identifying those criteria that will ensure an objective evaluation
with respect to the business requirements. It can also be used to monitor existing suppliers’ capabilities,
capacity, and commitment to meet the organisation’s requirements.
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A supplier appraisal process consists of two stages:
Stage 1: pre-screening
This represents an initial review. At this stage the buyer reviews basic information such as
references and the deal breakers.
Stage 2: main appraisal stage
The main appraisal stage allows the comparison of potential and existing suppliers. A buyer, in
some cases even a team, scores the answers against the selection criteria. Values are given to
each of the answers. There is not one unique approach but only best practices on how to
perform potential supplier appraisals.

All gathered information needs to be validated and recorded in reports and communicated to internal
clients.

7. Portfolio analysis
Using the portfolio analysis method is the third step of the sourcing process. Depending on the supply
market and the authority of the buying company, suppliers behave differently. Therefore, a buyer needs
to use different sourcing strategies.

The first step in conducting portfolio analysis is to classify groups of items, categories or sub-categories
according to their purchase value. A buyer must decide whether the category has high or low purchase
value relative to other categories for a particular organization. The main factor in purchase value is
spend. Categories that have high spend relative to other categories have high purchase value. High
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spend categories will either be placed in the Leverage or Strategic quadrants of portfolio analysis.
Another factor that affects purchase value is impact on profit. For example, buying active product
ingredients for pharmaceutical drugs may involve relatively low spend, but they have a high impact on
profit. Therefore, in a small number of cases, profit impact may affect the purchase value of a category.

One of the conclusions of research carried out by Mr. Kraljic was that purchase value alone is not
sufficient for proper differentiation. Kraljic included a second dimension, supply risk. Portfolio analysis
involves positioning a category based on these two factors. Portfolio Analysis is also called the Kraljic
matrix. The matrix consists of four quadrants: routine, leverage, strategic and bottleneck.

7.1. Purchase Value: Purchase value is the starting point for any buyer to differentiate products and
services. Differentiation between categories is necessary because not all items require the same
attention. You should consider whether a category, or group of items, has higher than average spend
relative to other categories or lower than average spend.

Impact on profits can also have an impact on a category’s purchase value. If a category is very critical to
the organization’s profitability relative to other items, then it could be considered a high purchase value
item even if spend in that category is low.

This differentiation facilitates the process for determining priorities. For example, all else being equal,
less attention should be given to low purchase value categories.

7.2. Supply risk: The supply risk can be broadly defined as failure of supply. It takes into account the
impact in case the supply flow fails and the likelihood the failure takes place. It is often expressed by a
figure from zero to nine; with nine the highest supply risk. The main supply risk factors are the number
of available suppliers in the market and the complexity of the specifications. These factors affect the
supply market or are affected by the supply market. The conclusion is that factors like availability and
complexity determine the procurement strategy. Buyers have to take the risks into account and foresee
any likely issue that may endanger the operations activity. The bottom line is the question of how many
suppliers are available in the market who can deliver according to the specifications. A rule of thumb is
that when only four or less suppliers are available, the supply risk is considered very high, please see
figure 9.
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7.3. Kraljic matrix: The Kraljic matrix is the most commonly used portfolio analysis by buyers.

The first quadrant, called routine, is the low risk and low value box. It represents the majority of the
purchased items. They are seen as transactional activities. Strategies to be taken into consideration are:
usage of industry standard specifications, like ISO and DIN specifications; deployment of e-Catalogues;
supplier reduction; negotiate discounts on list prices and integration of suppliers to combine purchased
value and consolidate items with one supplier.
The second quadrant is called leverage, and is the low supply risk and high value box. It represents
purchases with high impact on profit, limited supply constraints and with generally standard
specifications. The following strategies are applicable: negotiate hard on price, take calculated risks, run
RFP’s, run eAuctions, shorter contracts, use multiple suppliers, and regularly assess the supply market
capacity.
The third quadrant, called strategic, is the high supply risk and high value box. It represents key
purchases with high impact on profit, critical availability, supply constraints and complex specifications.
The following strategies are applicable: get access to supplier’s technology and expertise, initiate joint
development, align buyer and supplier business strategies, work towards product differentiation to
ensure competitive edge, cost management and put medium and long term contracts in place.
The last quadrant called bottleneck, is the high supply risk and low value box. It represents sensitive
purchases with high vulnerability and uncertain availability. The following strategies are applicable: risk
management, developing contingency plans, use more generic specifications, seek substitutes, seek
alternative sources, consider safety stocks and consider insourcing the activity. You will not want to
negotiate hard on price in this quadrant.
Buying behavior versus market reality
One of the key uses of portfolio analysis is to determine how you can get better value from a category
by ensuring your sourcing strategy matches market reality.
One way to do this is to plot current buying behavior on the matrix. For example, if we are negotiating
hard on price, that is a tactic that works best in the Leverage quadrant. Therefore, negotiating hard on
price is a sign that we are behaving as if the category was in the Leverage quadrant.
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Next, you should plot the category according to market reality rather than how you are currently buying.
So, if you must buy from one supplier, and the category is relatively low spend, market reality indicates
that the category is in the Bottleneck quadrant.
In this example negotiating hard on price is not likely to achieve better value in the Bottleneck quadrant.
Therefore, your sourcing strategy needs to be adjusted. In Bottleneck, you should look to challenge
specifications, look for substitute products or services, etc.
Portfolio Analysis allows you to highlight differences between our organization’s behavior and market
reality. Where there are mismatches, there is an opportunity for a different strategy that will provide
better value. Value can be in the form of cost savings, but can also take other forms such as reduced
risk, a differentiated end product or other improvement in fulfilment of business needs.

8. Supplier relationship analysis
Supplier relationship analysis is the fourth step of the sourcing process. In this step, the buyer finds out
which type of relationship best fits the requirements. It is important to understand why suppliers, of
items positioned in the same portfolio quadrant, can behave differently towards their customer. It is
important for buyers to investigate how the supplier perceives the buying company. This investigation
leads to understand the mutual relationship. It enables the management of that relationship. Supplier
preference is a method used by buyers to analyse how suppliers perceive their customer.
8.1. Supplier preferences: It is important to investigate how a supplier perceives his potential customer
before the supplier selection process step starts. This can prevent bad quality and bad service
performances and avoid later disappointment.
Similar to portfolio analysis, the preferences of suppliers can be analysed by investigating two variables.
The first variable is related to money. The relative impact variable measures how much money the
supplier generates, or will generate, with the buying company in relation to its total sales. From the
moment a supplier generates 3 to 7 per cent of its total sales with one buyer, that buyer is an important
customer.
The second variable is the characteristic of attractiveness. Attractiveness is measured by the overall
perceived benefits of the buyer to the supplier. It is the sum of many factors: profitability of the buyer,
good publicity, professional attitude, promptness of payment, certainty of payment, ethical behaviour
etc... Potential growth and future development is often also a factor of attractiveness. Determining
attractiveness in the eyes of the supplier is a subjective exercise. A buyer can never get it exactly right.
The buyer performs the analysis by asking his contact people at the supplier side, during the field
research interviews and by asking the right questions during the RFI phase of the previously executed
market analysis process step. Often only the indication low or high is used to quantify attractiveness.
8.2. Supplier preferences table: The buyer positions the supplier preferences views, of their company,
inside a table. On the x-axis of the table he plots the attractiveness from low to high. On the y-axis he
20 | P a g e
plots the relative impact percentage from low to high. Four quadrants are defined: exploitable, core,
development and nuisance. Both current and potential supplier preferences views are positioned.

Supplier preferences positioned in the exploitable quadrant, represent high relative impact and low
attractiveness. Suppliers positioned in this quadrant will try to exploit the buyer.
Supplier preferences positioned in the nuisance quadrant, represent low relative impact and low
attractiveness. Suppliers positioned in this quadrant will pay little attention to the buyer. They will not
put much effort into account management. Suppliers may even want to get rid of such a buyer if they
create more problems than profit and cash.
Supplier preferences positioned in the development quadrant, represent low relative impact and high
attractiveness. Suppliers positioned in this quadrant see the buyer as an opportunity for growth and
interesting to deal with.
Supplier preferences positioned in the core quadrant, represent high relative impact and high
attractiveness. Suppliers positioned in this quadrant will be very eager to provide the buyer with high
levels of service and attention to make sure that they retain the business. Furthermore, suppliers will try
to lock in the buyer by means of, a strategic alliance, partnership, or long-term contracts.
8.3. Supplier preferences table: By combining the portfolio analysis matrix with the supplier preferences
table a buyer can define the relationship he has to manage with the specific supplier. Combining the
matrix and the table generates 16 different relationship types. Within the sourcing process the buyer
also uses this tool to select the best supplier. By performing such an analysis a buyer can avoid future
disappointment and avoid conflicts.
There are 16 different relationship types.

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1. Routine – Nuisance: The routine item and nuisance preference relation is not a good match. Neither
party has the interest or motivation to manage the business. The relationship is passive. The buyer
should look for an alternative supplier.

2. Routine – Development: The routine item and development preference relation is quite a good
match. The supplier is willing to devote time and effort to this relationship. His objective is to expand his
business and you may be the buyer that is able to increase his sales. The buyer should offer incentives.
He should also raise mutual dependence by proposing long-term contracts.

3. Routine – Exploitable: The routine item and exploitable preference relation is quite a mismatch. The
supplier sees you as an exploitable buyer. Even though you are unattractive and may perhaps cause
inconvenience to the supplier, you do represent high relative impact. To cover this inconvenience, the
supplier may consider raising prices and make frequent requests for additional business. The buyer
should manage the moderate risk, monitor prices and seek alternative suppliers.

4. Routine – Core: The routine item and core preference relation is ideal. You represent both
attractiveness and high relative impact for the supplier, this is a supplier that is willing to manage the
relationship and to deliver high services and performance levels. This kind of supplier helps you to
achieve your objective of minimizing attention within the routine quadrant. The buyer should definitely
maintain this relationship. Motivate the supplier to reduce his costs without decreasing the profit
margin and encourage him to come up with ideas for improving the efficiency of the transactional
ordering process. Also see if you can increase the volume by ordering items that this supplier is able to
deliver as well.

5. Bottleneck – Nuisance: The bottleneck item and nuisance preference relation is not a good match at
all. The supplier is not eager to provide a high level of service for the items that your organisation needs.
The buyer should offer incentives to the supplier to increase attractiveness. He should try to change the
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specification or change the supplier. The last option may be difficult as the supply risk is most probably
due to a limited number of suppliers in the market. Changing the specifications may also cause problems
due to the required engineering time, testing and releasing effort and the required investments.

6. Bottleneck – Development: The bottleneck item and development preference relation is quite a good
match. The supplier sees the buyer as a potential partner to develop business; therefore the supplier is
willing to devote time and effort to this relationship. The buyer should manage the potential risks and
try to control the supplier by raising mutual dependence. Changing suppliers will be difficult in the
bottleneck quadrant.

7. Bottleneck – Exploitable: The bottleneck item and exploitable preference relation is quite a
mismatch. This sort of match will work in the short term because you need the items, delivered by a
rather unique supplier. The supplier takes advantage of his position by exploiting you. The supplier can
force you to increase prices or accept better payment terms. For the short term the buyer should
closely monitor the price and performance levels of this supplier. You might be willing to pay small price
increases, as you need the items. For the longer-term the buyer should investigate whether he can
change the specification and move the items towards Routine box, which will increase the chance of
finding additional suppliers.

8. Bottleneck – Core: The bottleneck item and core preference relation is a good match. You need the
supply, and the supplier is very willing to deliver as you are highly valuable to him and you represent an
attractive account. The buyer should intensify the relationship to ensure that the attractiveness and
value of the business remains high. He should also make sure that a long-term relationship is assured.

9. Leverage – Nuisance: The leverage item and nuisance preference relation is not a good match. You
have many possible suppliers for what you consider to be relatively high value items, and your supplier
considers you a nuisance customer. If this supplier does not serve you well, the buyer should take
advantage of the situation for as long as it is advantageous. As long as the supplier is cheaper and his
service level is up to market standard, continue to purchase from them. For the mid-term you want a
different supplier who is more eager to do business with you and will therefore offer you a better deal.
Since there are many suppliers, you can already start the sourcing process.

10. Leverage – Development: The leverage item and development preference relation is a good match
for both buyer and supplier. You have many suppliers and the supplier sees you as attractive. Both
companies want to put an effort into the relationship and are willing to keep the relationship active. The
buyer should develop the supplier and encourage the relationship.

11. Leverage – Exploitable: The leverage item and exploitable preference relation is quite a mismatch.
You have other suppliers available and the supplier is of the opinion that he can exploit you. In other
words, this is an adversarial or a non-beneficial relationship. The parties involved have conflicting
interests in the relationship. You expect a high level of service and a good volume price, the supplier
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wants a premium price. The buyer should monitor the power balance constantly. It is important to
remain in the driving seat in this relationship. If this power balance shifts towards the supplier, you
should change supplier immediately as other suppliers will be more eager to do business with you.

12. Leverage – Core: The leverage item and core preference relation is a good match. You are attractive
to the supplier and you represent a relatively high percentage of his sales. As a buyer you should remain
attractive by constantly searching for opportunities in the relationship. On the other hand, you can drive
for your own profit as well, as you know there is a lot of competition, which means opportunities to
negotiate prices. The buyer should also look at the supplier’s processes and cost structure and seeing
where cost can be reduced. The buyer’s objective should be to get the best value-cost ratio.

13. Strategic – Nuisance: The strategic item and nuisance preference relation is not a good match. If the
supplier sees you as a nuisance customer, you are not in a good position, especially if the item you need
is considered as strategic. This means you run a very high risk for your company. There are several things
the buyer should do to change this risky situation. First of all he could increase his attractiveness to that
supplier, by means of better payment terms, by introducing this supplier to organizations in his network,
etc. That will at least shift the nuisance to the development preference box. An alternative is to develop
competition in that specific supply market, by investing in a company in such a way that this company is
able to deliver to your requirements. This move is one way of slightly reducing the supply risk. It is a shift
to the left from strategic to leverage in the portfolio matrix.

14. Strategic – Development: The strategic item and development preference relation is quite a good
match. The supplier is willing to put time and effort into the relationship because he sees you as an
opportunity to expand his own business. Of course, as the item is strategic for you, you want to invest
time and effort in the relationship as well. The buyer should keep the supplier motivated to work with
him. The buyer has to stay attractive and work closely together to further develop the business. Over
time this may mean that you become a core customer for this supplier.

15. Strategic – Exploitable: The strategic item and exploitable preference relation is not a good match. If
the supplier sees you as an exploitable customer your position is not favourable. The fact that you
represent a relatively high proportion of the supplier’s revenue gives you a slight edge, but you have to
be really cautious and keep a close eye on the supplier’s behaviour and actions, because for you this
concerns a strategic item. The buyer should seek alternatives. He should invest in a company that will be
able to compete with your current supplier. This will reduce the supply risk and affect the balance of
power with your supplier. Another option is to raise mutual dependence by increasing your own
attractiveness, for example by purchasing complete systems or by allowing the supplier to advertise
with your company name. In other words, this represents a shift to the right from exploitable to core in
the supplier preferences matrix.

16. Strategic – Core: The strategic item and core preference relation is the ideal match. Both parties see
big advantages in working closely together and perhaps in moving to a partner relationship. The buyer
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should make sure that both management teams are aligned with regard to the objectives of the partner
relationship. Management often mandates strategic alliances and you, as a buyer, are involved once the
agreement is made and the relationship must be managed.
8.4. Conclusion: Combining both the portfolio analysis matrix and the supplier preferences table is a
powerful tool for buyers. Buyers should use this tool to determine the relationship with their current
and potential suppliers. Once that relationship is defined they should define and execute actions to
improve the situation, by influencing the relative impact, attractiveness, supply-risk and purchased-
value variables.
For each Portfolio analysis quadrant the ideal relationships are those with a core and development
supplier preference. The strategies of buyers should be to manage relationships into the core or
development preference type.

9. Risk management
Risk management is the fifth step of the sourcing process. Risk is defined as an uncertainty of outcome.
Unforeseen events happen daily. Whether the results of these events are positive or negative or of high
or low importance, you have to anticipate them. A buyer should have an in-depth view of the risks, how
to minimize them or to eliminate them. Risk management includes all activities required to identify,
assess and control the risks. It is an ongoing process, as risk change constantly. Risk management should
be in place to deal quickly and effectively with risks whenever they arise.
9.1. Method: The risk management method involves 3 steps: identify, assess and control.
[1] During the identify step, risks are defined and listed.
[2] During the second assess step, the likelihood the risk materializes and its potential impact
are defined. The potential impact is also called severity.
[3] During the third control step, contingency plans are built to minimize, eliminate or handle
the risks whenever they materialize. Monitoring and communicating the contingency plans are
included in this step.

Because risks change constantly, evaluation and capturing the lessons learned whenever the risk
materializes should be part of the risk management method.
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9.2. Identification: Risk management heavily depends on accurate risk identification. You identify risks
by asking questions like “what are the events that could disturb the flow within the supply chain?” A
common way for identifying risks is via a workshop, backed up by a checklist of common risks.
When identifying risks, two tasks should be executed:
(i) Selection of the product or service, the item, that is purchased;
(ii) List the activities in the supply chain.

Step (i): selection of the item. The portfolio analysis matrix can be used to select the item. Items that fall
under the strategic quadrant have the highest priority. Bottleneck items the second and leverage items
third priority. Finally fourth priority routine items will be selected for risk identification.
Step (ii): Activities in the supply chain. Once the item is selected, the buyer needs to figure out what
activities his supplier performs to supply the item. For strategic items, the buyer can even analyse the
complete supply chain. The material flow diagram is often used to understand the supply chain
activities. The buyer starts the analysis at the finished item, when the blades are shipped. He follows the
material flow until the raw material is reached. Like following a river upwards until its source is reached.
List all activities, like: shipping, packing, counting, controlling, etc. The distance between each activity,
number of items, cycle time, defects and so on are understood. The material flow diagram helps the
buyer find the risks, when the organisation fails to execute its contribution inside the supply chain. The
number of defects per activity is often a good starting point for potential risks identification. There is a
correlation between the number of defects and the risks. Also the more activities there are inside the
supply chain, more risks will there be. The risk identification exercise is often realized as a team within a
workshop.
9.3. Assessment: After identifying the risks, the buyer should assess them. The purpose of risk
assessment is to quantify the likelihood that risk materializes and the potential impact, also called
severity. The risk register lists all the risks per item, the blade. The likelihood is quantified from 0 to 3.
The severity is quantified in an identical way from 0 to 3.

Risk is quantified by multiplying the likelihood with the impact figures. Risk quantification can vary from
zero to nine. With nine the highest risks figure.
9.4. Control and evaluation: Contingency planning is about minimising the likelihood and minimising the
impact whenever the risk materializes. Contingency plans will be detailed for risks quantified at nine,
less detailed for risks quantified at six. For risks quantified at one, often no contingency plans will be
created. Risks quantified at lower levels are often accepted, although this may vary from business to
business.
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Risks change constantly. Monitoring and evaluating the risks regularly is important. Risk management is
an important task for buyers when managing existing suppliers. Risk management is of the utmost
importance when executing the supplier selection step. Future risks can be minimized or even
eliminated by selecting the best quality, price and service supplier. Like selecting an off shore supplier
will definitely increase the risk of unavailability.

10. Supplier selection
Supplier selection is the sixth sourcing process step. In this step the outcome from the risk, supplier
relationship, portfolio, market analysis and needs assessment steps results into the definition of the
supply strategy and the creation of the award criteria. The strategy and criteria will lead to selecting the
supplier who will be awarded the business.
Supplier selection is executed as a process in four steps: definition of the supply strategy & creation of
the award criteria, creation of the RFP document, running the RFP and finally negotiation & award.

The aim of supplier selection is to award the business to the supplier that can best achieve the
objectives as defined by the supply strategy and award criteria. However, you may want to award more
than only one supplier so that you can create competition, which ultimately results in better
performance. The extra benefits of having more suppliers versus the extra costs to manage them should
be investigated.
10.1. Supply strategy & award criteria: The supply strategy and award criteria step is realized by
executing 3 tasks: define the supply strategy, create the award criteria and finally seek approval from
stakeholders.
° Define the supply strategy. Before you enter in contact with the potential suppliers, the supply strategy
has to be defined. Based on the portfolio analysis, the ideal relationship type to engage and the
assessment of the risks, the item supply strategy is defined. An example of a supply strategy is a single
source, with a one-year contract eventually awarded to an offshore supplier.
° Create the award criteria. Award criteria are used to discriminate between the potential suppliers.
Similar to the RFI pre-selection criteria applied at the market analysis step. Companies should have a list
of criteria that may be used, to assess the offers from potential suppliers. The award criteria differ per
industry, per item type and even per country. In general the award criteria are divided into a few
categories: financial criteria, like price and total cost; availability criteria, like safety stock and distance
27 | P a g e
from shipping to delivery point; reference criteria, like ISO certifications. It is good practice to integrate
the specifications match inside the award criteria. A buyer should make a distinction between deal-
breaker and nice-to-have criteria. Deal-breaker criteria are requirements that are mandatory. If a
supplier does not comply, the supplier is eliminated.
Nice-to-have criteria are optional requirements, which could be beneficial but are not strictly required.
The best practice is to create a limited number of award criteria. If appropriate, you may give a weight.
° Seek approval from stakeholders .It is important that the buyer discusses the proposed strategy and
award criteria with his internal stakeholders and seeks their approval. Whenever a weight is applied to
the award criteria, the stakeholders should be involved to set these weights.
10.2. RFP document: An RFP document has 3 sections.

1) An introduction with a summary of your needs and a presentation of your company.
2) The bidding instructions the supplier should adhere to.
3) The specifications.

10.3. Running the RFP: Running the RFP is realized by executing 3 tasks: send the RFP document to the
suppliers, manage the questions and answers when the RFP is out in the market and finally receive as
many compliant offers as possible.
° Sending the RFP document to suppliers. Send the RFP document via e-mail, post or publish the RFP via
your eSourcing system. It is good practice to call the suppliers and introduce the RFP, as this will raise
the suppliers’ interest.
How many suppliers should receive the RFP? It depends. Consider the Gaussian curve, which displays a
supply market. There are a few suppliers that are cheap and a few suppliers that are expensive. The
majority of the suppliers are reasonably priced. According to the curve, you will end up paying higher
prices by inviting 12 green dotted suppliers than inviting only 2 blue dotted suppliers. A buyer selecting
only the red dotted suppliers might run a professional RFP but will pay a higher price, even after a tough
negotiation.
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° Manage Q&A when RFP is released. Once the RFP is released, suppliers will raise questions. This might
be via e-mail, phone or during a meeting. They range from questions on the RFP process to problems in
understanding the specifications. If you send a reply to a supplier that might be of interest to others, be
sure to send all suppliers the same information without mentioning the supplier who asked the
question. As a buyer you should guarantee all suppliers a fair and equal chance. It is good practice to
consolidate all questions and answer them at a fixed time, for example every Tuesday. It is also good
practice to mention in the RFP that questions will have to be sent via mail and only to the designated
people, which is usually a single contact person, the buyer. If the specifications change when the RFP is
released in the market, for example during a supplier meeting where questions were raised and
suggestions were proposed leading to changes in the specifications. Ensure that specification changes
are kept to a minimum when the RFP is out in the market. If it happens, make sure all suppliers receive
the same information. Allow extra response time, if needed.
° Receive compliant offers. It is in your interest to have as many good and compliant offers as possible,
because this puts you in a powerful position at the negotiation table. Hence, while running the RFP step,
it is in your interest to help the suppliers as much as you can.

10.4. Negotiation & award: Now that you received offers, the negotiation and award step is realized by
executing 5 tasks: analyse the offers, negotiation preparation, negotiation meetings, award the best
supplier and give feedback to all suppliers.

° Analyse the offers
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A careful analysis of all offers gives you the information for setting credible ‘like to achieve’ target for
the negotiation meetings. Seek the offers that best meet the requirement and search for the proposals
that offer value for money. Analyse the offers based on the defined award criteria.
° Negotiation preparation
Before the negotiation meetings start, the buyer must carefully prepare. The preparation may include:
• Establishing the current state of the market by reviewing the market analysis results.
• Understanding precisely what your own requirements are by reviewing the needs assessment and
portfolio analysis results.
• Researching the suppliers’ views to find out what their strengths and weaknesses are. This gives you
an idea of what they ‘would like to’, ‘intend to’ and ‘must’ achieve at their side. Reviewing the supplier
relationship analysis and risk assessment results will help to get this suppliers’ side picture.
• Identify the terms from the offers that require clarification. The award criteria scores and price
breakdowns will help you identify them.
Preparation is also about proper planning. Planning is where you look ahead to the negotiation
meetings, imagine how the meetings will proceed, and plan your negotiation strategy accordingly.
Planning should include:
• Opening the negotiation
• Communicating your organization's message to the supplier
• Anticipating answers to difficult questions
• Considering the agenda and eventual issues of the supplier’s salesperson
• Planning the agenda of the meeting, include time-outs
• Determining the number of negotiation rounds
While preparing the negotiation meetings, keep in mind that only few negotiations are successful in the
first round. Be aware and prepare subsequent rounds to come as close as possible to your 'Like to
achieve' target.
° Negotiation meetings
Invite only two to maximum three suppliers with the best award criteria scores at the negotiation table.
During the negotiation meetings itself, the goal is to clarify the terms of the offers and get additional
value beyond what has already been offered. This might range from a lower price, better quality,
improved payment terms, better delivery conditions etc.
Most suppliers build in a price concession in their first offer. In order to obtain this concession, you must
create competition. To get the best results at the negotiation table, you should have a minimum of one
credible alternative. A credible alternative is a supplier who is competitive, in relation to the best offer,
and who is acceptable to both you and the internal stakeholder.
Once you have selected the 2 to 3 most promising suppliers, based on the award criteria scores and you
have prepared the negotiation meeting, it is time to meet them.
- Call the supplier and propose the time for the meeting.
- Reserve a meeting room.
- Dress properly.
- Meet the supplier at the reception and accompany her or him to the meeting room.
30 | P a g e
- Be careful with visitor’s book.
- Once in the meeting room, guide the supplier to a chair and seat yourself opposite to the
supplier.
- Take only the material that is strictly necessary to the meeting room.
- Open the negotiation in a friendly way. Like ask if they found your office easily.
- Present your company and the goals for the meeting in a short and concise way.
- Set the agenda and timing for the meeting.
- As a rule of thumb, speak only for a quarter of the total time.
- Your first job - before negotiating on terms - is to understand the supplier's proposition
correctly.
- Do not compromise other supplier names.
- Don’t forget to discuss the items beyond price, like: payment terms, delivery times, guarantees,
incoterms, packaging, minimum inventory levels at supplier’s premises or consignment stock at
your premises, safety stock, using the Internet ordering portal etc.
° Award the best supplier

Now that the negotiation meetings have come to an end it is the right moment to award the winning
supplier. It is best practice that the buyer realizes the final supplier selection and business award
together with his stakeholders.
° Feedback to all suppliers

After you and the stakeholders have selected the most suitable supplier, it is time to provide feedback
to all suppliers that have not been awarded the business.
Filling out an RFP is time consuming and demands a lot of effort from a supplier. Hence it is common
courtesy to inform each supplier personally about the final decision, even if it is not in their favour.
Proper feedback gives suppliers an opportunity to improve their performances in the future.
As long as your RFP process was transparent and fair, feedback based on the deal-breaker and award
criteria should not be difficult. When providing feedback, always remain positive and start by stressing
their strong points, after which you may give a few points to improve.
If the supplier does not accept your feedback, refer and stick to the decision criteria. Make clear you
have taken the decision in consensus with the internal stakeholders. If in some rare cases the supplier
continues to refuse the decision, refer him to your superior or somebody else from senior management.

11. Contracting
The last step of the sourcing process is the contracting step. The agreements made during the previously
executed supplier selection step are now bundled into a legally binding contract.
Generally the creation of a contract is the result of the cooperation between different parties within
both organizations: the internal stakeholders, the buyer, the awarded supplier and sometimes the
organization's lawyers. Who is involved depends on the size of the organizations and the purchased item
itself.
11.1. Contract types: The 3 most commonly used contract types are:
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1. Purchase agreement. A purchase agreement is a legally binding document used by a buyer to describe
all agreements for a one-time purchase. Price and delivery terms are included.
2. Umbrella agreement. An umbrella agreement is used for repetitive purchases and is usually valid for a
certain period. It determines the framework in which a number of general conditions are mentioned.
The umbrella agreement is meant for re-use, multiple years and multiple items. Generally an umbrella
agreement does not include volume commitments. On top of the general conditions, specific item
related conditions are integrated. They are often mentioned in the contract annexes.
3. Purchase order. A purchase order is a legally binding document used by a buyer to describe all terms
and conditions for one specific purchase. A purchase order can refer to an umbrella or purchase
agreement or can exist as a stand-alone document. When it is used as a stand-alone document it is good
practice to refer to the standard purchase conditions of your company. By using a purchase order the
buyer often commits his organization to purchase a predefined quantity at the supplier.

11.2. Contract terms: A contract does not only clearly state the obligations of the supplier and buyer. It
also forms the foundation for a relationship based on mutual trust. There is no mandatory list of which
terms should be in the contract. There are, however, various terms that you will always find in a
contract. A few of these are:
• the services and goods to be provided
• the requirements to be met
• the agreed level of service, also called Service Level Agreement - SLA
• the prices and pricing mechanisms
• the incentives and penalties
• the contract validity period
• the means to measure performance, Key Performance Indicators – KPI’s
• the agreed invoicing and payment conditions
• the delivery conditions, like for example the incoterms
• probably the most important term, the applicable law, which law governs the contract?
• etc.
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After finalizing the contract is signed by both companies. Always check that the person at the supplier
side is entitled to sign.
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3. Needs assessment – definitions

4. Needs assessment – “make-or-buy” analysis

5. Needs assessment – developing specifications

8. Supplier relationship analysis

A requisition generally contains:

The following criteria should be reviewed when making a “make-or-buy” decision:

6.3. Research plan: Research can be carried out at three levels.

The trade fair visits must follow a three-step approach:

Buying behavior versus market reality

There are 16 different relationship types.

10.2. RFP document: An RFP document has 3 sections.

° Award the best supplier

° Feedback to all suppliers

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