Supply Chain Sourcing

1) Purchasing –
a) Purchasing generally refers to the activity of buying goods and services . Purchasing, in
general, makes up a huge part of companies' cost. For example, service companies
spend up to 40% on purchasing, and manufacturers spend upto 70%.
b) Direct materials are those materials and supplies that are consumed during the
manufacture of a product (for ex. leather in a shoe factory) while indirect goods are
materials used in manufacturing processes that cannot be traced to an individual
product or job (for ex. safety gear, cleaning supplies).
c) Finally, there are capital goods, which includes purchase of the land, cost of building the
factory, and cost of buying machinery.
d) A company should able to manage costs and ensure continuity of their supply of raw
materials, if they want to be successful.
e) In order to have a streamlined process five different phases must be observed:
i) Processing purchase order – This lets the supplier know that we want the items from
them and they will initiate the sale on their part.
ii) Receiving and monitoring advanced shipping notice – This tells us about the
expected arrival date and we monitor the goods throughout transit.
iii) Confirming receipt of goods – We confirm we have received the goods.
iv) Processing the invoice
v) Payment to the supplier – We’re paying the supplier and closing the purchasing loop
f) 11 rights – We're looking to buy the right material, at the right quantity, at the right
quality, from the right source, at the right price. These products should be delivered at
the right time, to the right location, with the right transportation mode, at the right level
of service. And finally, all of this has to be managed with the right contract and the right
length of payment terms.

2) Procurement –
a) Procurement department’s role is to carry out purchasing process’ 5 tactical phases and
to also go out and collaborate, not only with suppliers but also internally, with logistics
around the movement and storage of items, with manufacturing about the building of
products and be informed by planning and how we see the business moving forward.
b) A procurement department's value add is that it centralizes all activities that revolve
around suppliers and it manages those relationships with suppliers proactively. Rather
than different people throughout the organization going out and finding their own
supplier, and talking to them, and buying from them, we have the purchasing
department doing it in a centralized manner.
 c) The dept. is able to get the most out of those relationships, and create economies of
scale when purchasing which not only helps the suppliers have a better view of sales,
but it also helps the buying organization get a better price.
d) Most organizations view the dept's role as managing cost. However, when we talk about
cost it doesn't just come down to negotiations over price, we also settle the other
service and quality issues.
e) For ex., we can also achieve lower prices by offering volume commitments. The seller
can sell more and we reduce cost per item.
f) In addition to price, quality and service, there's also other issues such as risk. There's a
lot of risk in the supplier not delivering and we should be able to manage those risks.
g) Another aspect is sustainability. No company can be truly sustainable if their inputs are
not sustainable. Some companies like Patagonia ensure that their suppliers have the
same high standard of sustainability as themselves.
h) Another example is the social aspect. Some companies use only those suppliers that
have good labor standards, treat people equitably or want to have vibrant communities.
i) Lastly, economic, because the economy is still one of the foundational three triple
bottom line aspects. We want to have suppliers that are financially viable and that have
the ability to exist long into the future.
j) So therefore, from a sustainable perspective we don't want to just negotiate hard with
them over price. We want them to be able to make a good living.
k) A procurement department has to take significant steps to ensure continuity of supply,
so risk management is one of the foundational pieces that we have to pay very close
attention to. There are three types of risks:
i) Service levels should not fluctuate a lot. We need to have processing in place that
ensures that our suppliers deliver the service level that they promised.
ii) Catastrophic events – A company really needs to pay a lot of attention to how they 
are exposed to risk and properly mitigate that risk.
iii) We have to be able to protect ourselves against a supplier going out of business, so
we need to be able to monitor a supplier’s health from a financial perspective, and
take corrective action before it affects our business.
l) While some of these risks can be managed by buying insurance. However, a lot cannot
be insured against. So, we need to have management practices in place that protect us
against those risks.

3) Supply Management –
a) Supply management refers to a more strategic view of relationships with suppliers. The
idea behind it is that we are targeting and segmenting different categories of suppliers.
Those different categories will receive different levels of attention from management.
b) The way we structure those relationships will be very differently depending on the
category that a supplier goes into. We can categorize suppliers by using Kraljic matrix.
c) We need to look at the following aspects –
i) We look at all our goods and services, and classify them in terms of profit impact and
supply risk.
ii) We look at the supply market and analyze it.
iii) We then determine your strategic positioning within that broader framework of the
supply market and the good and services we buy.
iv) We develop action plans and strategies to best take advantage of your position
relative to your suppliers.
d) Kraljic matrix - The Kraljic Matrix is built on two aspects – profit impact and supply risk.
So as we put together the matrix visually, we have profit impact on the vertical and
supply risk on the horizontal :
i) Strategic suppliers - High profit impact and high supply risk –
 The strategic supplier category is of the highest importance for an organization.
Those are the suppliers that can really make or break your business. So, our goals
are not going to be just to drive down cost. We have to create win-win rather
than competitive situations for our benefit and the benefit of our suppliers.
 We can not go into these types of discussions with strategic suppliers saying that
if this doesn't happen, I am going to walk away. Strategic supply relationships are
meant to be long-term.
 We are also trying to strive for additional innovation. Suppliers may have
innovation capabilities that they can leverage with us. We're going to use them to
both benefit and drive additional sales by coming up with brand new products.
 We are going to try to mitigate risk by implementing tighter integration, almost
working as one company.
 Very few suppliers are going to fit into that category but they're very important
to our business and vice-versa. So, we are going to use all the resources that are
required for managing this relationship.
ii) Bottleneck suppliers - Low profit impact and high supply risk –
 Our goal is to manage the risk by having multiple suppliers. We want to have
diversity of supply because if one supplier may fail, we have others to step in at a
moment's notice.
 We also want very tight control on service level. You want to know as much as
possible about what's going on with that supplier so you can manage that risk as
we cannot afford a supply disruption
iii) Leverage suppliers - High profit impact and low supply risk –
 Our goal will be to get as much cost out of buying products with these suppliers
as possible. We focus in on obtaining the best price, best quality and best service
by negotiating hard.
  We may also offer a supplier higher volume in exchange for better prices.
 We don't have to worry about risk because that's not much of a concern.
iv) Noncritical suppliers - Low profit impact and low supply risk –
 These are very small suppliers, we don't buy a lot from them and they don't really
affect our business. So, our overall goal with those suppliers is that want to
simplify the process as much as possible.
 We don't want to spend much time or money or resources on managing these
suppliers.
 We want to streamline the process and try to automate it as much as possible.
This is because that complexity is going to hinder doing well in the other three
categories that are much more important.

4) Make vs Buy –
a)