Procurement Strategies Procurement as CA; Who are your vendors? What to outsource?

Supply Chain Network

1. Procurement suppliers, outsourcing 2. Transformation -Postponement -Inventory decisions 3. Distribution -types of supply chains - channels

Purchase Strategies Product Portfolio

1.

2.
3. 4. 5. 6. 7.

Strategic products Buyer dominated Supplier dominated Balanced Leveraged Bottleneck Routine

Strategic Products:
1.

2.
3. 4.

5.
6. 7. 8.

High volume Customer specifications High share of cost in the end product Cannot be changed in the short term Knowledge orientation- high technology Skills orientation- experience Need development time for alternates Sensitive to the performance of the product (Examples: chips in electronic products, lubricants, stampings, forgings, cryogenics)

Procurement Strategies Strategic Products

Alliances, Long term contracts and collaborations Require a close cooperation and trust between the supplier and buyer, so that costs, quality, process improvement can be monitored closely. A thorough search of the supplier is required after checking on systems, financial stability, development potential, trustworthiness and reliability Suppliers are partners in business Solutions are in Alliances, collaborations, close relations.

Buyer dominated
1.

2.
3. 4. 5.

Buyer dictates terms to suppliers Suppliers have got to meet the requirements of quantity, quality, delivery as demanded by the buyer The relationship is one sided Suppliers business is sustained only as long as buyer stays Suppliers expertise gets constrained by the buyer

Example: parts, components as demanded by car, fan, OEM manufacturers( appliances, white goods, soaps, detergents)

Procurement Strategies Buyer dominated

Renegotiate contracts; Keep the pressure on; Pare down suppliers 1. Continuous search to enlarge such items 2. Opportunity to bring down price of your product 3. Offer help, technology, process engineering to improve productivity and bring down costs 4. Require close interaction, relationship with suppliers

Supplier dominated
1.

2.
3. 4. 5.

Technology and expertise is with the supplier Supplier is a larger party Supplier insists on supply of both products and services related to the product Supplier locks the buyer and buyer is left with no choice Relationship of dependency between supplier and customer is in hands of supplier Example: Computer manufacturers, battery for inverters, bearing manufacturers ,high quality products, branded productsCoke/Pepsi

Procurement Strategies: Supplier dominated

Quantity discounts; Forward trading; Mixed buying strategy 1. Buy when season demand is low 2. Book orders of large quantities to take advantage of discounts 3. Motivate alternate sources through technology, investments 4. Require relationship at highest levels 5. Long term contracts

Balanced segment
No one dominates 2. Each has its own strengths of technology or specialization 3. Both have mutual interest to keep relations 4. Both benefit in business Example: paint manufacturers, transporters, tyre manufacturers
1.

Procurement Strategies Balanced segment

Periodic contracts 1. Spread out 2. Alliances on equal terms 3. Open cost system 4. Risk sharing 5. Benefit sharing 6. VMI

Leveraged Products
1.

2.

3.
4. 5. 6.

Standard products (raw materials, as steel items, normal grade castings, standard products: lights, fans, fittings) Available from many suppliers Represent large share of the end product cost Normally supply exceeds demand Available ex-stock or at low delivery time Customer determines price

Procurement Strategies: Leveraged Products

Competitive Bidding Relationship -Leveraged products require tendering; -Based on economics, suppliers can be changed -No long term contracts needed as a rule -Annual reviews and spot purchases -Negotiations with preferred suppliers -Continuous market research to locate savings -Aggressive sourcing as buyer has choice

Bottleneck Products
Limited value in terms of money, but vulnerable in regard to supply or acceptable quality 2. Limited suppliers, often only one 3. Supplier dominates in relationship 4. Patented products 5. Top quality that cannot be replicated Examples: Greases, certain alloy steels, spares
1.

Procurement Strategies: Bottleneck products

1.

2.

3.

4.
5.

Continuity (of supplies) Relationship Agreement to keep stock at supplier or at your own even at additional cost Continuous search for alternate products or designs Contingency plans in case failure occurs Risk Management (in event of failure) Create safety stocks

Routine Products
Few technical problems 2. Low value few commercial problems 3. Many alternate suppliers; brand not a necessity 4. Small value 5. More time is lost in administrative jobs to procure 6. Do not require great attention or necessity to develop relationship with a supplier Examples: Hardware, consumables, stationary, standard parts available off the shelf in the market from many suppliers.
1.

Procurement Strategies: Routine products

Systems Contract Buying Relationship 1. Enter into arrangement with a specialized purchasing office or a trading house for entire purchase 2. Draw up a buying contract settling all rates and demand supplies when needed. 3. Senior executives do not have to waste time once a contract is arrived at 4. Delegate responsibility to lower levels

Kraljics Supply Matrix

High

Bottleneck Items
(Ensure supply, safety stocks)

Strategic Items
(Form partnerships)

and alliances
Leverage Items
( Exploit purchasing power and minimize cost)

Supply Non Critical Items Risk

( Simplify and automate)

Low

Low

Profit Impact

High

Outsourcing
Difference with purchase; Why, when and what to outsource?

What is outsourcing?
Outsourcing is the entire set of business processes required to purchase goods and services. It includes selection of suppliers, design of supplier contracts, product design collaboration, procurement of materials, and evaluation of supplier performance Outsourcing organization divests itself of its assets, infrastructure, people and competencies that it previously used

A Comparison
Attribute Term Base Basis Orders

Purchasing Short Multiple Price/Quality By purchase orders Design Own Tech. help as drawings

Outsourcing Long Single Capability Over telephones , e-mails Collaboration as Information

Motivation for Outsourcing

Low cost on account of Economies of scale: Order aggregation from several customers at supplier Risk pooling: on account of transfer of uncertainty Reduced capital investment: Through sharing of investment burden Core competency: Buyer focuses on its core competencies

Advantage of supplier expertise: Design, technical knowledge, operations, costs Access to technology: Supplier may have better know- how than your own Short capacity at buyer/to keep flow of products Cost control to maximize own revenues

Risks in Outsourcing
Loss of competitive knowledge: Competitors come to know of your strengths Dependence on supplier: Loss of motivation to innovate and to carry out value analysis and innovations Conflicting objectives: Supplier is interested to match his supply and demand (cost). Buyer on other side is interested in maximizing his flexibility and service. Wrong notions of cost and value addition are often deceptive and can lead to losses

Strausmann refers reasons as:

Losses Faulty planning Poor management controls in resource use Poor quality Wrong calculations of costs Wrong choice of technology Lack of knowledge High uncertainty of demand

Performance Objectives and Outsourcing

Performance Objectives Quality Speed Dependability Flexibility Cost

Impact on PO of Quality
In house manufacturing Easy to trace source of poor quality Quality can be poor Immediate response to market complaint Immediate steps on improvement can be planned Easy communication to inhouse employees Outsourcing Longer time to trace the sources Quality can be better Less of motivation to market complaint Needs talks and negotiations Problems in communicating poor quality in face of resistance

Impact on PO of Speed
In house manufacturing Outsourcing Faster response to customer needs Significant delays occur, as supplier tries to wait for economic batch size Limited influence

Faster changes as controls are within Internal customers receive external customers low priority predominate. Throughput cycle, longer cycle to execute productivity are better because of higher batches

Impact on PO of Dependability
In house manufacturing Easier internal communication helps Own controls help create a culture Internal customers can suffer at expense of external customers Customers can influence for a better performance Outsourcing Organizational barriers and distance inhibit communication Dependability based on culture at supplier Usually internal customers are limited Customers do not know the alliance partner

Impact on PO of Flexibility
In house manufacturing Quick response to customers as they are in contact Outsourcing Customers are not in touch

Fast communication to in-house Communication takes time employees to implement a change Response is limited by scale and Larger capacity at outsourcing scope of internal operations helps in larger flexibility

Customers prefer direct contact and assurance

There can be problems of conflicting needs of different customers.

Impact on PO of Cost
In house manufacturing Outsourcing

High cost
Margin is lost to outsourced partners

Low cost on account of economies of scale Suppliers make profits There is strong motivation to reduce the prices further Extra costs of communication may upset the cost advantage.

Customer may choose other suppliers because of high costs

Strategy on Outsourcing Toyota Mfg, System)

A company decides to outsource in two situations: 1. Dependency on Capacity: A firm has knowledge and skills, yet decides to go for outsourcing for capacity reasons 2. Dependency on Knowledge: A firm does not have people, skills and knowledge and therefore out- sources.

Dependency on Capacity & Knowledge

High

Capacity

IV ( Option for Outsourcing) I (Go internal)

III ( Very risky to outsource) II ( Outsource)

Low
Low

Knowledge

High