Global Sourcing & Procurement

Global Sourcing
Global sourcing refers to seeking goods and services beyond
one’s borders, i.e., from the global market. It is a procurement
strategy in which companies try to find the most cost-efficient
place globally for manufacturing goods. According to purchasing
and procurement professionals, companies should be able to
source both inside and outside their national borders. They are
then subsequently better able to compete.
Therefore, Global sourcing is the 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.
Most companies choose a global sourcing strategy because costs
are lower abroad. Either labor costs or raw material costs are
lower. Often, both raw material costs and wages are lower.

What is Strategic Sourcing?

Strategic sourcing is a procurement process that continuously

improves and re-evaluates the purchasing activities of a business
in order to reduce costs, improved stability and provide a host of
other benefits.

What are the benefits of strategic sourcing?

Buyer benefits:

 Improved guidelines for the future – The strategic

methods let businesses gather data and make informed
choices with a better idea of the outcome, which allows them
to reassess current contracts.
  Improved relationships within the supply chain – When
businesses need to work with an extensive list of
enterprises, it allows them to improve their relationships with
all of them. Strategic sourcing can, therefore, ensure that
future procurement needs are laid out ahead of time so they
avoid situations that may harm the business financially or
otherwise.
 Better organisation – Strategic sourcing increases the
focus on long-term planning, and allows business leaders to
step away from time-consuming leadership duties so they
can place attention on more pressing challenges that could
affect them in the immediate future.
 Risk management – Close supplier relationships can help
businesses identify and resolve potential problems quickly.
For example, if a strategic supplier is having cash flow
problems, a business may advance some working capital to
allow it to continue operations.

Supplier benefits:

 Cost management – Strategic sourcing allows suppliers to

sell a significant portion of their output, so they can improve
planning and provide management with long-term cash flow
visibility.
 Greater stability – Depending on the buyer, strategic
sourcing may lead to supplier consolidation. If a retailer
chooses to use one supplier instead of several, it allows for a
greater degree of stability in the supplier’s day-to-day
operations

Benefits of global sourcing for businesses

The benefits of global sourcing operations are as follows:

Perceived Value
Today, organizations face the challenge of manufacturing
products due to the changing needs of the customers. As such,
manufacturing products while following the standards becomes a
hectic task especially for the marketers. This is the reason why
global sourcing appears. This can help businesses increase their
sales and produce high-quality products with low production
costs.

Processes are Effectively-Managed

To experience the full power of global sourcing, the processes
must be managed effectively. Sometimes, this means checking
the procurement company. The thought of outlining the sourcing
needs of a company can be troubling. However, people cannot
deny the various benefits it can provide.

Better Value for Money

As long as you work with an experienced and reliable global
sourcing partner such as Sourci, the chances of having better
value for money increase. For example, when you source
engineering components from overseas suppliers, you can save
money over the costs versus when you source them locally.
Examples are castings, machine components, pressings, welded
assemblies, and others. With the opening of the global market,
businesses can now take advantage of lower manufacturing and
labor costs. This can help your company increase your profits.
Reduction in Labor Costs
Global sourcing helps reduce labor costs. For example, one
company can save at least $100,000 on the first project. The
savings are 40 to 70% of the domestic prices.
Furthermore, companies can have access to fresh design and
research. Global sources can have specialized intellectual capital.
The new technology and capacity are readily available. Some
companies hire overseas because domestic suppliers lack
capacity. Sometimes, they are not making the necessary
investments to be competitive in the business.

High-Quality Products
When you use the services of a global sourcing company, there is
a higher chance of obtaining high-quality products. Experienced
global sourcing companies have a network of trusted partners
who makes sure that each aspect of quality control is covered.
Even with the low cost of overseas sourcing, product quality is
never compromised.

The Global Sourcing Process

The main purpose of conducting sourcing process is to be

efficient in global operations and avoiding the risks that might be
encountered. A typical sourcing process involves the following six
major steps.

1. Internal Need Analysis

Before searching for global suppliers and products, the

companies should investigate all aspects of the good and service
that must be supplied. The purchase or supply chain team should
firstly include individuals from various departments such as
manufacturing, finance, sales and marketing within the company
in order to review the specification and characteristics or the item
they wish to import.

In internal need analysis, the team should consider the following

factors about the product or service.
  How much is it required and for how long?
 The specification of the items or service to meet the
customer and company needs.
 Is it imported as raw materials or as components for
manufacturing?
 Is it required to be made any modification before
purchasing or selling?
 What are the import clearance requirements for the
good to be imported? Is it subject to any special import
restrictions, permits, licenses, standards and
regulations?
 Finally, the volume of goods, special packaging,
shipping and handling procedures.

2. Supplier Market Assessment

After internal analysis, the sourcing process continues with

supplier market assessment. The purpose of this assessment is
to identify the best country that provides the most cost effective
supply and lowest risk in terms of raw materials, labor cost,
exchange rates, financial conditions and transportation cost.

The most crucial point in supplier market assessment is whether

you purchase raw materials or manufactured products because
the sourcing might be limited for raw materials or the raw material
you want purchase might be produced in some current locations.

We can rank the factors that are required for market assessment
as below:

 The purpose of purchase (it can be raw material or

finished manufactured good)
 The distance of supplier’s country
 Availability of transportation modes
  Regulations and legislations about international trade
 Flexibility in local transactions.
 Customs procedures, taxes and application in the
country.

3. Supplier Information

After you decide the market, the next step is to collect information
about the suppliers in selected countries. The purpose of this step
is to compare and evaluate each supplier’s capabilities, quality
level, costs and associated risk.

Selecting suppliers is one of the most important steps in the

sourcing process because making any wrong decision among the
potential suppliers may result in significant losses. The
performance of supplier must be evaluated by visiting their
production sites and talking to other customers about their
experiences with the potential supplier.

In this step, you should gather as much information about the

supplier you are willing to work.

4. Sourcing Strategy

The sourcing strategy you are going to select depends on the

information you gather in the first three steps. You should develop
your sourcing strategy based on your goal and aim. This goal and
aim can be cost driven, risk driven or strategic driven.

Based on targeted aim and goal, companies should decide

whether they make direct purchasing or forming a strategic
partnership with selected supplier.

5. Evaluating Bids
If the decision for sourcing is a direct purchase from supplier, the
company should ask for quotation from potential suppliers in order
to make landed cost calculation.

Although many factors or conditions can be listed in quotation list,

two of them are extremely important for evaluation bids. The first
one is unit price and the second one is the payment term.

In price condition, you should ask for the price in there delivery
term; Exw, Fob and Cıf. This helps you understand and calculate
the cost of transportation and other costs associated with customs
clearance in abroad and in your home country.

In payment term, actually, it is very hard to say something about

this part because the payment term is directly related with the
industry, the product you want to purchase, the supplier’s power
in the market and the country condition.

6. Negotiating with Supplier

The negotiation process should be handled carefully and all the

terms must be analyzed and identified by two parties.

In negotiation process, there are some certain things that affect

your price negotiation:

 The volume of purchase

 Availability of discount in volume increases
 Transportation and freight cost related to imports and
are covered in the price
 Payment term
 Discount for accelerated payments

These things do not only affect your price but also affect the value
calculation of the goods.
As a purchaser, you should always take these things into
consideration while negotiating with your suppliers.

Risk associated with Sourcing Internationally and How to

Mitigate them

Many companies buy product packaging from suppliers overseas.

There are many benefits to doing so, but there also are risks,
notes Adam Brosch, director of global sourcing and custom
tooling for Berlin Packaging, a provider of packaging products and
services. In an interview, Brosch identified six major risks
associated with Global Sourcing and some ways to mitigate
them—good advice for buyers of any product, not just packaging.

1. Time differences. When your supplier is on the other side of

the world—which means they're sleeping while you're at work,
and vice versa—you can lose precious days waiting for answers
to questions. One solution is to have "feet on the street": an in-
country representative or employee who can anticipate questions
and ensure that communications with suppliers include all of the
necessary details from the start.

2. Language barriers. Suppliers may not be fluent in your

language, and they may not be comfortable asking for
explanations multiple times, says Brosch, who has worked in
China. To prevent misunderstandings, follow up discussions with
written confirmation of what was agreed. For some
communications, Berlin uses templates, so information is always
presented in a consistent way. Brosch also suggests having
important documents professionally translated, and then sending
suppliers both the original and the translation.

3. Quality expectations. If you rely solely on overseas suppliers

to determine that quality standards have been met, you won't
know about any problems until after orders arrive. One way to
prevent that is to conduct quality inspections before the packaging
leaves the country of origin. Another is to train suppliers in how to
comply with your quality standards—for example, by teaching
them the quality-control methodology you want them to use, and
by holding them accountable for following it.

4. Compliance issues. Suppliers' failure to comply with social

responsibility, quality, environmental, and safety standards can be
detrimental to your company's relationships with customers. Make
sure suppliers understand both the standards and your
expectations, and give them a reasonable period to come into
compliance. Regular audits of major suppliers are a must; in
some cases it may be worth hiring a neutral auditor to verify that
proper practices are being followed.

5. Production scheduling. When an order is late, you may have

to pay a penalty to your customer or ship by air instead of by
ocean. Understanding lead times—not just for finished product
but also for critical components and raw materials—can help you
anticipate and avoid costly delays. To prevent shortages, Berlin
sometimes pre-buys packaging that incorporates raw materials
with long lead times, Brosch says. He also suggests identifying
alternatives like paying for overtime and working with a backup
supplier that could alleviate bottlenecks.

6. Logistics. Things can and do go wrong between the time a

shipment leaves a factory and when it arrives at it destination.
Make sure your supplier has a Plan B in case of loss, delay, or
damage, and that everybody understands the Incoterms terms of
sale that govern each party's responsibilities. Having a good
logistics partner that offers a number of service options is helpful,
too. Brosch also urges earning security certifications from
customs authorities at origin and destination to reduce the
likelihood of time-consuming cargo inspections.

Outsourcing
Outsourcing is the act of moving some of a firm’s internal
activities and decision responsibility to outside providers. The
terms of the agreement are established in a contract. Outsourcing
goes beyond the more common purchasing and consulting
contracts because not only are the activities transferred, but also
resources that make the activities occur, including people,
facilities, equipment, technology, and other assets, are
transferred. The responsibilities for making decisions over certain
elements of the activities are transferred as well. Taking complete
responsibility for this is a specialty of contract manufacturers such
as Flextronics.
The reasons why a company decides to outsource can vary
greatly. Outsourcing allows a firm to focus on activities that
represent its core competencies. Thus, the company can create a
competitive advantage while reducing cost. An entire function
may be outsourced, or some elements of an activity may be
outsourced, with the rest kept in-house. For example, some of the
elements of information technology may be strategic, some may
be critical, and some may be performed less expensively by a
third party. Identifying a function as a potential outsourcing target,
and then breaking that function into its components, allows
decision makers to determine which activities are strategic or
critical and should remain in-house and which can be outsourced
like commodities.
Logistics Outsourcing
There has been dramatic growth in outsourcing in the logistics
area. Logistics is a term that refers to the management functions
that support the complete cycle of material flow: from the
purchase and internal control of production materials; to the
 planning and control of work-inprocess; to the purchasing,
shipping, and distribution of the finished product. The emphasis
on lean inventory means there is less room for error in deliveries.
Trucking companies such as Ryder have started adding the
logistics aspect to their businesses—changing from merely
moving goods from point A to point B, to managing all or part of
all shipments over a longer period, typically three years, and
replacing the shipper’s employees with their own. Logistics
companies now have complex computer tracking technology that
reduces the risk in transportation and allows the logistics
company to add more value to the firm than it could if the function
were performed in-house. Third-party logistics providers track
freight using electronic data interchange technology and a
satellite system to tell customers exactly where its drivers are and
when deliveries will be made. Such technology is critical in some
environments where the delivery window may be only 30 minutes
long.

REASONS TO OUTSOURCE AND THE RESULTING

BENEFITS

REASONS TO OUTSOURCE AND THE RESULTING BENEFITS

N Financially Improvement- Organizationally
o Driven Reasons Driven Reasons Driven Reasons
Improve return on
assets by reducing
inventory and Improve quality and Improve
selling productivity. effectiveness by
unnecessary focusing on what
1 assets. the firm does best
Increase flexibility
Generate cash by to meet changing
selling low-return demand for
entities. products and
2 Shorten cycle time services
Gain access to Obtain expertise, Increase product
new markets, skills, and and service value
particularly in technologies that are by improving
developing not otherwise response to
3 countries available customer needs
Reduce costs
through a lower Improve risk
4 cost structure. management
Improve credibility
and image by
Turn fixed costs associating with
5 into variable costs superior providers

What is Procurement?
Procurement is the term used to refer to the process or the act of
sourcing or obtaining services or goods for a business. Some
businesses use the term procurement only to refer to the actual
buying while others refer to the entire process that leads up to the
purchase as procurement.
The word procurement is used to refer to buying for a business
and is customarily performed on a large scale. Procurement
involves two companies; the buyer and the seller. But it is the act
of buying that is labeled procurement and not the activities of the
seller.

Procurement is usually a part of the input to a company that then

uses the goods or services procured in the making of their own
final product. This makes it a very vital function of any business. It
is important to the success of the buyer’s business to procure the
best quality of goods or services procured at the most competitive
rates.

On the surface, procurement might come across as a simple

process. But it is often highly competitive with great care and
attention paid to each step.

Procurement Activities

The activities that procurement entails include:

 Vendor Selection
 Payment Negotiation
 Strategic Vetting
 Final Selection
 Contract Negotiation
 Final Purchase

What is the procurement process?

The procurement process refers to the identification and
implementation of certain steps by businesses or Company to
ensure they can acquire goods and services to meet their
requirements and achieve their objectives. A procurement
process is important because it has a direct impact on how much
a business can save. When businesses assess the procurement
process regularly, then it ensures their goals are being met.
Changes can be made to the process when it is not working as
planned or when problems crop up for the business. As the
procurement’s main aim is to boost efficiency, businesses must
ensure they are deriving maximum value from their process.

The procurement process isn’t the same for all businesses

because it can vary according to needs. Each business has its
own set of needs and so it will have a different procurement
process compared to another business which has different
requirements.

Stages of Procurement
The actual steps involved in procurement are as follows:

 Identification of Requirement
 Determination of the Specifics of the Requirement
 Sourcing
 Negotiation and Finalization of Price and Terms
 Purchase Requisition and Order
 Delivery of the Purchase Order
 Expediting
 Product/Service Supply And Inspection
 Payment Process
 Record Keeping And Review

1. Identification of Requirement

The first step in buying something is recognizing that there is a

need for it. This could be identifying the need to buy a new item or
reordering something when it is required or falls below a certain
threshold of stock. This might involve a requisition process in
most businesses. It is important that all the stakeholders be
consulted at this stage to prevent issues later on in the
procurement process.
2. Determination Of The Specifics Of The Requirement

When it has been identified that there is a need, the exact

specifics of the product or service that is required is to be decided
upon. This would include technical specifications or part numbers.
If the item is not one that has been previously procured this list of
specifics is generated with concurrence from all the technical
people involved. Detailed specifics with proper consultation with
all the departments involved will prevent expensive mistakes from
happening further down the procurement process.

3. Sourcing

Once it is determined that a specific item or service is to be

bought, the procurement team has to then do the research
required to determine the various sources that supply it. For
repeat orders, there will usually be a pre-existing vendor list. For a
new item, the process of identifying and then vetting vendors is
longer. It is faster to work with a pre-existing vendor who has
already been determined to be a good supplier. New suppliers will
need to be thoroughly investigated to determine their reputation,
speed, quality, reliability, and prices.

Organizations like Beroe can help provide the necessary market

intelligence data to procurement divisions during this phase to
help them make informed decisions.
Next, the procurement department needs to investigate vendors,
request quotes for the item needed, and then select a vendor.
This is an important part of the process because reputation, cost,
speed of service, and dependability all need to be investigated
before making a final decision. The rule of thumb is to get at least
three quotes, but that’s a best practice that will need to be
determined by your organization. Approval from the relevant
levels of management will have to be obtained based on the
sourcing options and costs involved. If there is a bidding or
tendering process involved for the order, the request for proposal,
bids or tenders will have to be published.

4. Negotiation And Finalization Of Price and Terms

For direct purchases, requests for quotes will be sent to the

shortlisted vendors. The usual practice is to get a minimum of at
least three quotes before making a selection. The quote will be
examined for price and speed competitiveness. The company to
procure from will be selected not only on price but also based on
their promptness, reliability, and quality.

If there is a bidding or tendering process for the procurement, the

selection of the qualifying bids will be as per the terms and
conditions set. The selected supplier will be chosen and
announced as per the set process preferably in a highly
transparent manner. Selecting from the various bidders is a
process that should be fair and transparent to ensure that the
buyer gets the best value and quality of supply. When the
selection process is compromised, it might also compromise the
value of the goods or services supplied.

At this point, the buyer has to decide between the merits of having
a single high-volume supplier or choosing multiple suppliers.
When choosing to have a single supplier, the higher volume of
orders gives better bargaining power when negotiating rates.
However, if a single supplier is unable to fulfill an order it will
affect the entire manufacturing process. Having more than one
supplier for an item reduces the risks while giving one less room
to negotiate rates. Sometimes, multiple suppliers help to build
competition with regard to rates and quality.

5. Purchase Requisition And Order

A purchase requisition generated within the company will be

approved by the appropriate authority. This will then lead to the
generation of a purchase order with all the specifics of the order
as well as the terms and conditions. Some companies involve the
buyer in the process of generating the specifics of the order so
that both the buyer and seller understand the specifics of the
order. The specifications have to be carefully compared with the
purchase requisition as well as the supplier quote to prevent any
mistakes from being made.

6. Delivery Of The Purchase Order

The shipment notice is sent to the buyer wherever applicable. The

delivery of the purchase order depends on the practices of the
buyer and the seller. It can be in person or by fax or email. This is
also as per the specifications agreed upon by both the buyer and
the seller.

7. Expediting

This involves creating the timeline for the prompt delivery of the
requested goods or services after factoring any unforeseen
delays. It may also include information on the payment as well as
delivery schedules.

8. Product/Service Supply And Inspection

When the product or service is ready, it is supplied to the buyer. It

is the responsibility of the buyer to thoroughly inspect the supplied
items and if they match the agreed upon purchase order. The
buyer can either approve or reject it. Both of the options will
trigger actions as per the agreed-upon terms and conditions. If the
buyer takes delivery of the items it is implied that they are
accepted and the payment process starts.

9. Payment Process

For the payment to be made, the documents relating to the order

are studied. All the specifics of the original purchase order, receipt
of items and the payment request invoice are compared. If there
are any mismatches they are resolved before payment. Once
payment is approved the payment is made as per the agreed-
upon modes of payment.

10. Record Keeping And Review

Both the companies, the buyer and seller maintain their records
for their auditing and taxation processes. The entire process
should be under continual review in order to improve as well as
settle any disputes that might have arisen. Reevaluation makes
the procurement process more efficient and prevents the
recurrence of disputes.

The steps of procurement detailed above vary from business to

business but the logical flow remains the same. Efficient
procurement practices keep the flow of purchased goods and
services prompt and delay-free. It is also the responsibility of the
people involved in the process to continually keep up with
negotiations at the relevant steps to ensure that the goods and
services that are procured are of the exact requirement, highest
standards and most competitive price. Excellent record-keeping
not only helps in the auditing of the records but also in the case of
reordering the same items. The ethical selection of vendors
ensures the fair supply of high-quality items.
 Components of Procurement
The three components of procurement are:

1. People

The number of people involved in the procurement process

depends on the sale of the manufacture and procurement orders.
For a small company, procurement personnel are few in number.
For larger companies, each stage of the procurement process has
an entire team managing it. Also, when the items that are being
ordered are small value, the number of approval is smaller. But
for high value or very important procurements, the level of
approval for the purchase requisition goes higher in the
management order.

2. Process

The procurement process should be well designed and organized

in order for it to function efficiently. When there is a disorganized
procurement department, it leads to inefficiencies and
inconsistencies in the entire process that can cause delays and
problems with the purchases as well as the payments for the
same. Transparency in the process ensures that there is no
corruption or manipulation at any stage.

3. Paperwork or Records

Record keeping at every step of the process of procurement is

very important. Though almost all the steps of the process are
digitized, the efficient recording of all information at each stage
and the coordination and comparison of all the relevant records at
each stage is important for both the buyer as well as the seller.

Procurement Vs Purchasing
While procurement and purchasing overlap in certain instances,
they are often thought to be the same by many people. This is not
the case because their goals, what they define, their processes,
and what they focus on are entirely different from one another. Let
us take a look at the key differences between procurement and
purchasing.

On one hand, procurement is defined as the set of processes

such as selection, identification, and acquiring of goods and
services from vendors through a range of different processes.
These processes for acquiring include the tendering process and
direct purchase.

The procurement process involves ensuring that the goods and

services are received on or before time and that the correct
amount of goods and services has been delivered to the business
as specified in the Purchasing Order (PO). However, purchasing
focuses on acquiring goods and services which are needed by an
organization and doesn’t focus on the other aspects like
procurement.

Procurement is a larger term that encompasses purchasing. That

is, purchasing is a part of procurement.

The steps involved in both of these processes differ from each

other. Procurement involves first identifying the business
requirement, then authorizing purchase request, approving the
request, and then identifying vendors. Then making inquiries and
finding out about the quotations specified by the supplier and
negotiating. Procurement also involves selecting the supplier
carefully and then receiving goods to ensure they are of the
quality expected and storing invoices for future reference after
three-way matching. Then procurement’s last stage involves
paying the supplier. Purchasing is much simpler as it involves less
number of steps. The steps include PO acknowledgment,
receiving goods and inspecting them, invoice storing, ensuring the
invoice is legitimate and paying the supplier.

Procurement is considered a strategic function whereas

purchasing is called a tactical function. This is because
procurement starts from the moment a need is identified by the
business and ends when the supplier has been paid for the
delivery of goods. It involves steps such as taking the time and
evaluating the various suppliers before ordering from that
supplier. Moreover, it involves ensuring the maximum value
comes from the contracts that have been created. Purchasing, on
the other hand, consists of only the transactional aspect because
it only focuses on the purchase of the goods and services
required by the business. It does not involve complexities like
procurement which is thorough in its function.

The procurement function is required to fulfill the needs of a

business. It involves first spotting that there is a need and then
ensuring that those needs are fulfilled in the best way possible. It
takes into account the entire picture from start to finish so those
needs are fulfilled. Hence, procurement can be defined as a
function that takes the proactive approach because it ensures that
problems are avoided from the start. Purchasing is quite different
in this regard because it takes a reactive approach. When there is
a need then it satisfies those requirements of the business. It can
be said that purchasing is about activities and tasks that are
accomplished to commit expenditure for a business.

Procurement focuses on evaluating risks before they become

bigger and cause problems to the supply chain and the rest of the
business functions. This risk mitigation ensures that potential
problems are resolved before they get worse. For example, when
choosing vendors in procurement, the risks associated with the
various vendors, and proper evaluation is done. Moreover,
procurement involves assessing various risks such as data
security risks and operational risks. Purchasing does not focus on
risks or elimination of risks like procurement and so it differs from
it in this area too. Purchasing takes a transactional approach and
so it does not focus on risk evaluation and mitigation.

The goals of each function are different and what they accomplish
is different as a result. The goal of procurement is to ensure that
value is created in the process and the total cost of ownership is
thought about. On the other hand, purchasing is more basic in
nature because it focuses on the cost of the order and how to get
the best price. It can be said that procurement is ongoing because
the people associated with it focus on ensuring the proper
supplier relationships are maintained and other processes are
continually assessed. However, the purchase is not ongoing like
procurement because once the goods and services are acquired,
that is the end of procurement.

Procurement focuses on the supplier relationships whereas

purchasing doesn’t do that. In short, procurement is about the
long-term while purchasing focuses on the short-term. Maintaining
proper supplier relationships is vital for any business because it
can ensure long term savings and benefits for the business.
Procurement places emphasis on ensuring care is taken to find
the best suppliers who can meet those requirements and when a
relationship is built, procurement emphasizes ensuring it is
maintained. The purchasing function deals with the supplier base
that already exists in a business. Hence, procurement delves
deeper into ensuring they are dealing with the right suppliers who
provide excellent services and deliver goods on time.
 Five (5) Pillars of Procurement

Value

The lowest price is not always the best option for a supplier. The
procurement process should be driven by value. The buyer
should aim to get the best possible product that offers value for
money. When a buyer compromises on the quality of the input
based on the lowest cost, it has a cascading effect on the
company’s finished goods or services. Value for money should be
the uppermost factor for the selection of a supplier.

Open Competition

Creating a process of vendor selection that is bias-free and

transparent, ensures a level playing field for all suppliers. This
open competition is to the benefit of the buyer who can get the
best value for money.

Ethics and Transparency

The selection process for a vendor whether it is through direct

purchase, tenders or bids is very vulnerable to corruption. Any
unethical practices that are followed to skew the process of
vendor selection will compromise the quality and value of the
items being purchased.

Accountability and Record-Keeping

Every person at each stage of procurement should be

accountable for the decision making and process. Excellent
record-keeping practices make it easier to trace the steps of
procurement.

Equity

Ensuring a fair and uniform procurement process across all

industries provides all the players with equal and fair opportunities
to flourish.

Procurement Models
A procurement model is a series of steps that an organization or
business follows in order to procure items or services.
Procurement models also define the levels of hierarchy, control,
and decision making with regard to procurement. The finer details
of a procurement model are often unique to each company and
the business environment that they operate in.

In large organizations, there are many departments and divisions

that may or may not be spread out across geographical
boundaries. Management decisions can be centralized or
localized. Procurement models can be classified based on where
the control over the procurement process lies.

Local Procurement Model:

This procurement model is not centralized and the control and

decision making is made at the local or departmental level. The
local department or division would enjoy complete control over
procurement decisions. The logic behind this model is that it is the
local management that would better understand the exact needs
of the department. It makes the procurement model agile and with
fewer levels of bureaucracy. There is always the risk of maverick
spending decisions without taking a larger perspective into
consideration.

Centralized Procurement Model:

In the centralized procurement model, absolute control over the

procurement decisions lies with central management. There is a
centralized approval process for all procurement and the central
rules apply to all the decisions at the local level. The purpose of
such a procurement model is to have the overall budget and
spending of the business or organization in mind when making
purchase decisions. Purchase negotiations are made by
personnel who are experienced and dedicated to it. There is also
a greater price advantage when procurement is in bulk. However,
there is a risk of not meeting the exact requirements that are
unique to each local level. There are many layers of bureaucracy
that make the process cumbersome.

Hybrid Model:

Some organizations use a hybrid procurement model that has a

combination of localized and central procurement. In this model,
some purchases are centralized while others are local. This
model has the advantages of both the models and gives all the
local departments a measure of autonomy within the
organizational control. It may also be referred to as a center-led
model of procurement.
 Types Of Procurement
Direct Procurement

Direct procurement is the purchase of the input that a business

requires in order to manufacture its end product. This is the raw
material that is required usually for a manufacturing-related
business. The input cost and efficiency of direct procurement is a
vital factor in the profitability and performance of the company.
When there is a block in the process of direct procurement, it
impacts the ability of the company to manufacture its product.

Indirect Procurement

Indirect procurement is the procurement of the services or input

that are not directly used in the manufacture of the company’s
product but are essential for the day-to-day operations. It could
include office supplies or maintenance services for the equipment
that is being used for manufacturing. Blocks in indirect
procurement affect the operation of the business.

DEFINITION OF KEY TERMS

Specificity
Specificity refers to how common the item is and, in a relative
sense, how many substitutes might be available. For example,
blank DVD disks are commonly available from many different
vendors and would have low specificity. A custom-made envelope
that is padded and specially shaped to contain a specific item that
is to be shipped would be an example of a high-specificity item.
Commonly available products can be purchased using a relatively
simple process. For lowvolume and inexpensive items purchased
during the regular routine of work, a firm may order from an online
catalog. Often, these online catalogs are customized for a
customer. Special user identifications can be set up to authorize a
customer’s employees to purchase certain groups of items, with
limits on how much they can spend. Other items require a more
complex process.

A request for proposal (RFP) is commonly used for purchasing

items that are more complex or expensive and where there may
be a number of potential vendors. A detailed information packet
describing what is to be purchased is prepared and distributed to
potential vendors. The vendor then responds with a detailed
proposal of how the company intends to meet the terms of the
RFP. A request for bid or reverse auction is similar in terms of the
information packet needed. A major difference is how the bid
price is negotiated. In the RFP, the bid is included in the proposal,
whereas in a request for bid or reverse auction, vendors actually
bid on the item in real time and often using Internet software.

Vendor-managed inventory is when a customer actually allows

the supplier to manage the inventory policy of an item or group of
items for them. In this case, the supplier is given the freedom to
replenish the item as they see fit. Typically, there are some
constraints related to the maximum that the customer is willing to
carry, the required service levels, and other billing transaction
processes. Selecting the proper process depends on minimizing
the balance between the supplier’s delivered costs of the item
over a period of time, say a year, and the customer’s costs of
managing the inventory. This is discussed later in the chapter in
the context of the “total cost of ownership” for a purchased item.
The Bullwhip Effect
In many cases, there are adversarial relations between supply
chain partners, as well as dysfunctional industry practices such as
a reliance on price promotions. Consider the common food
industry practice of offering price promotions every January on a
product. Retailers respond to the price cut by stocking up, in
some cases buying a year’s supply—a practice the industry calls
forward buying. Nobody wins in the deal. Retailers have to pay to
carry the year’s supply, and the shipment bulge adds cost
throughout the supplier’s system. For example, the supplier plants
must go on overtime starting in October to meet the bulge.
Even the vendors that supply the manufacturing plants are
affected because they must quickly react to the large surge in raw
material requirements.
The retailer’s orders to the wholesaler display greater variability
than the end-consumer sales; the wholesaler’s orders to the
manufacturer show even more oscillations; and, finally, the
manufacturer’s orders to its suppliers are the most volatile. This
phenomenon of variability magnification as we move from the
customer to the producer in the supply chain is often referred to
as the bullwhip effect. The effect indicates a lack of
synchronization among supply chain members. Even a slight
change in consumer sales ripples backward in the form of
magnified oscillations upstream, resembling the result of a flick of
a bullwhip handle. Because the supply patterns do not match the
demand patterns, inventory accumulates at various stages, and
shortages and delays occur at others.

Supply Chain Uncertainty Framework

The supply chain uncertainty framework is designed to help
managers understand the nature of demand for their products and
then devise the supply chain that can best satisfy that demand.
Many aspects of a product’s demand are important—for example,
product life cycle, demand predictability, product variety, and
market standards for lead times and service. Products can be
categorized as either primarily functional or primarily innovative.
Because each category requires a distinctly different kind of
supply chain, the root cause of supply chain problems is a
mismatch between the type of product and type of supply chain.

Functional products
Functional Products include the staples that people buy in a wide
range of retail outlets, such as grocery stores and gas stations.
Because such products satisfy basic needs, which do not change
much over time, they have stable, predictable demand and long
life cycles. But their stability invites competition, which often leads
to low profit margins. Specific criteria for identifying functional
products include the following: product life cycle of more than two
years, contribution margin of 5 to 20 percent, only 10 to 20
product variations, an average forecast error at time of production
of only 10 percent, and a lead time for make-to-order products of
from six months to one year.