Sourcing in Procurement

and Supply
Diploma in Procurement and Supply
A generic procurement cycle
The sourcing process
• Identification of the requirement
• Sourcing plan
• Market analysis
• Pre-qualification of suppliers
• Evaluating supply offers and options
• Creation of contract or relationship
Different purchase contexts
• Straight re-buy
• Modified re-buy
• New buy
The Kraljic procurement
positioning matrix
Sources of information
• The buyer’s own database of existing and past suppliers
• Formal requests for information (RFI)
• The marketing communications of potential suppliers
• Internet search
• Online market exchanges, auction sites and supplier/buyer
forums
• Published listings of suppliers and stockists
• Trade/industry press and specialist procurement journals
• Trade fairs, exhibitions and conferences
• Organisations promoting trade
• Informal networking and information exchange with
colleagues and other purchasing professionals
Supplier information database
INFORMATION ABOUT EXISTING SUPPLIERS
Contact details (including details of account managers,
where relevant)
Products and services offered
Standard or negotiated terms and conditions of trade,
including prices, rates and fees where known
Approved or preferred status of supplier
Average value and frequency of spend with each
existing supplier (used to identify key accounts)
Special capabilities (eg late customisation capability,
EDI)
Results of supplier appraisals, audits and ratings
Vendor performance history
Current systems, framework agreements and call-off
contracts in place
SOURCES OF INFORMATION
Trade registers and directories, trade/industry
exhibitions and conferences
Supplier literature, websites, corporate reports and
accounts
Supplier sales and customer service staff
Feedback from own staff, vendor managers etc
Contract and transaction files and records
Reported financial and operational results
Supplier appraisal, audit and rating reports
Testimonials or reports from other customers
Electronic performance monitoring (eg goods inwards
tracking)
Potential supplier appraisal factors
PURCHASING AND SUPPLY
CHAIN MANAGEMENT
(LYSONS AND FARRINGTON)
Personal attitudes
Adequacy and care of
production equipment
Means of controlling quality
Housekeeping
Competence of technical staff
Competence of management
PURCHASING PRINCIPLES AND
MANAGEMENT (BAILY, FARMER,
JESSOP AND JONES)
Task variables, such as quality,
service
and price
Financial stability
Good management
Results of site visits
Ability to support electronic data
interchange
Just in time capabilities
PURCHASING AND SUPPLY
MANAGEMENT (DOBLER
AND BURT)
Results of preliminary
survey
Financial stability
Good management
Results of site visits
Quality of service
Just in time capabilities
Gathering and verifying supplier
information
• Self-appraisal questionnaires
• Financial appraisal
• Checking supplier accreditations, quality awards and
policy statements
• References, recommendations, reports and testimonials
• Work sampling
• Supplier audit (also called a site visit or capability survey)
Supplier management – benefits
• The company incurs lower costs by developing a small core
group of trusted suppliers
• Quality and other problems can be ironed out progressively
• Goodwill developed with positive relationships may earn
preferential treatment or flexibility from suppliers in the event
of emergencies
• Suppliers may be more motivated to give their best
performance – and to add value through innovation, flexibility,
commitment to continuous improvement and so on
• Motivated suppliers may be willing to co-invest
• There is less risk of supplier failure or poor performance
Supplier performance evaluation
• Help identify the highest-quality and best-performing
suppliers
• Suggest how relationships with suppliers can (or need
to be) enhanced to improve their performance
• Help ensure that suppliers live up to what was
promised in their contracts
• Provide suppliers with an incentive to maintain
and/or continuously improve performance levels
• Significantly improve supplier performance
KPIs for supplier performance
SUCCESS FACTORS SAMPLE KPIS
Price • Basic purchase price (and/or price compared with other suppliers)
• Whole lifecycle cost of ownership (and/or comparison with other suppliers)
• Value and percentage cost reductions (and/or number of cost reduction initiatives proposed or
implemented)
Quality/compliance • Reject, error or wastage rates (or service failures)
• Number of customer complaints
• Adherence to quality standards (eg ISO 9000) and/or environmental and CSR standards
• and policies
Delivery • Frequency of late, incorrect or incomplete delivery
• Percentage of on time in full – OTIF – deliveries

Service/relationship • Competence, congeniality and co-operation of account managers

• Promptness in dealing with enquiries and problems
• Adherence to agreements on after-sales service

Financial stability • Ability to meet financial commitments and claims

• Ability to maintain quality and delivery

Innovation capability • Number of innovations proposed or implemented (and/or investment in research & development)
• Willingness to collaborate in cross-organisational innovation teams

Technology leverage/ • Proportion of transactions carried out electronically

compatibility • Number of technology breakdowns

Overall performance • Benchmarking against other suppliers

• Commitment to continuous improvement (eg number of suggestions proposed or implemented)
Vendor rating
Factor rating method
Performance factor Weighting Score Supplier rating
Price 0.4 0.94 0.376
Quality 0.4 0.97 0.388
Delivery 0.2 0.72 0.144
Overall evaluation 1.0 0.908
Vendor rating
Disadvantages of multiple
sourcing arrangements
• They can lead to unnecessarily high procurement
costs
• They fail to exploit the value-adding and competitive
potential of concentrating on more collaborative
relationships with fewer suppliers
• They can lead to waste, by retaining suppliers who
cannot (or can no longer) meet the firm’s
requirements, or are otherwise not often used
Single sourcing may be considered
appropriate where:
• The total requirement is too small to justify splitting
orders among several suppliers
• One supplier is so far ahead of others in terms of
reputation, quality, price etc that it would make no sense
to use anyone else
• Expensive set-up costs (eg tooling or systems integration)
are required to enable supply
• The requirement is subject to supply risk, or in short
supply
Key characteristics of partnership
sourcing
• Cultural compatibility between the partners
• A high level of trust, knowledge sharing and openness
• Mutual acceptance of the concept of win-win within the supply
chain
• Relevant expertise, resources or competencies in complementary
areas
• Clear joint objectives and meaningful performance measures
• The use of cross-functional teams to enhance co-ordination, process
focus and continuous improvement
• A total quality management philosophy
• A high degree of systems integration
Partnering
ADVANTAGES FOR THE BUYER
Greater stability of supply and supply prices
Sharing of risk and investment
Better supplier motivation and responsiveness
Cost savings from reduced supplier base,
collaborative cost reduction
Access to supplier’s technology and expertise
Joint planning and information sharing,
supporting capacity planning and efficiency
Ability to plan long-term improvements
More attention to relationship management: eg
access to an account manager
DISADVANTAGES FOR THE BUYER
Risk of complacency re cost/quality
Less flexibility to change suppliers at need
Possible risk to confidentiality
May be locked into relationship with an
incompatible or inflexible supplier
Restricted in EU public sector procurement
directives
May be locked into relationship, despite supply
market changes and opportunities
Costs of relationship management
Mutual dependency may create loss of
flexibility and control
Partnering
ADVANTAGES FOR THE SUPPLIER
Greater stability and volume of business, enabling
investment in business development
Working with customers, enabling improved service,
learning and development
Joint planning and information sharing, supporting
capacity planning and efficiency
Sharing of risk and investment
Cost savings from efficiency, collaborative cost
reduction, payment on time
Access to customer’s technology and expertise
More attention to relationship management: eg access
to a vendor manager
DISADVANTAGES FOR THE SUPPLIER
May be locked into relationship with an incompatible
or inflexible customer
Gains/risks may not be fairly shared in the
partnership (depending on power balance)
Risk of customer exploiting transparency (eg on
costings, to force prices down)
Investment in relationship management
Dependency on customer may create loss of flexibility
and control
Restricted by EU public sector procurement directives
May be locked into relationship, despite market
changes and opportunities
Direct negotiation with suppliers
In a contract negotiation, the buyers’ main objectives
may be as follows.
• To obtain a fair and reasonable (or advantageous) price for the
quantity and quality of goods specified
• To get the supplier to perform the contract on time
• To exert some control over the manner in which the contract
is performed
• To persuade the supplier to give maximum co-operation to the
buyer’s company
• To develop a sound and continuing relationship with
competent suppliers
The use of competitive bidding
FIVE CRITERIA FOR THE USE OF COMPETITIVE
BIDDING
The value of the procurement should be high
enough to justify the expense of the process
The specifications must be clear and the
potential suppliers must have a clear idea of
the costs involved in fulfilling the contract
There must be an adequate number of
potential suppliers in the market
The potential suppliers must be both
technically qualified and keen to win the
business
There must be sufficient time available for the
procedure to be carried out
FOUR SITUATIONS IN WHICH COMPETITIVE
BIDDING SHOULD NOT BE USED
It is impossible to estimate production costs
accurately
Price is not the only or most important
criterion in the award of the contract
Changes to specification are likely as the
contract progresses
Special tooling or set-up costs are major
factors in the requirement
Tendering procedures
• Open procedures
• Selective or restricted procedures
• Restricted open procedures
• Negotiated procedures
Setting transfer prices
There are three main considerations for a firm when
setting the transfer price for goods:
• Goal congruence
• Performance measurement
• Maintaining divisional autonomy
Key sourcing issues in outsourcing
and subcontracting
• The need for the outsource decision to be based on clear objectives
and measurable benefits, with a rigorous cost-benefit analysis
• The need for rigorous supplier selection
• Rigorous supplier contracting
• Clear and agreed service levels, standards and key performance
indicators
• Consistent and rigorous monitoring of service delivery and quality
• Ongoing contract and supplier management
• Contract review, deriving lessons from the performance of the
contract
Outsourcing
ADVANTAGES
Supports organisational rationalisation and
downsizing
Allows focused investment of managerial, staff and
other resources on the organisation’s core activities
and competencies
Gives access to specialist expertise, technologies and
resources of contractors
Access to economies of scale
Adds competitive performance incentives, where
internal service providers may be complacent
DISADVANTAGES
Potentially higher cost of services, contracting and
management
Difficulty of ensuring service quality and consistency
and corporate social responsibility
Potential loss of in-house expertise, knowledge,
contacts or technologies in the service area
Potential loss of control over areas of performance
and risk
Added distance from the customer or end-user, by
having an intermediary service provider
Risks of ‘lock in’ to an incompatible or under-
performing relationship: cultural or ethical
incompatibility; relationship management difficulties;
contractor complacency etc.
Risks of loss of control over confidential data and
intellectual property
Local and international sourcing
BENEFITS OF INTERNATIONAL SOURCING DRAWBACKS OF INTERNATIONAL SOURCING
Availability of required materials and/or skills: Exchange rate risk, currency management
increased supply capacity and competitiveness issues etc
Competitive price and cost savings (scale High sourcing and transaction costs (risk
economies, low labour costs) management, tariff and non-tariff barriers)
Less onerous constraints and costs re Cost savings and lower standards may create
environmental and labour compliance sustainability, compliance and reputational risk
Leverages ICT systems (eg for virtual Different legal frameworks, time zones,
organisation, e-sourcing) standards, language and culture
International trade (arguably) promotes Additional risks: political, transport (lead times,
development, prosperity, international relations exposure), payment, supplier standards
etc monitoring
Public sector: compulsory to advertise contracts Environmental impacts of transport/haulage
within the EU (especially by air freight)
Local and international sourcing
BENEFITS OF LOCAL SOURCING
Investment in local community, employment,
skills etc (plus reputational and brand benefits)
Accessibility for supplier development and
contract management (eg site visits)
Supplier knowledge of local market,
sustainability issues, regulatory standards etc.
Reduced transport, payment, cultural risks and
costs
Short supply chain eg supporting JIT, fewer
environmental impacts of transport
Avoids ‘evils’ of globalisation
DRAWBACKS OF LOCAL SOURCING
Materials, skills or capabilities may not be
available locally (or may be more costly)
Ethical and reputational risks of close social ties
with suppliers, common spheres etc
Smaller suppliers: no economies of scale
(higher costs), greater dependency issues
Local sourcing policy may make local suppliers
complacent/un-competitive
Public sector: not allowed to discriminate on
basis of geography
Public sector: may not offer ‘value for money’
The ‘right relationship’
• Spot buying
• Regular trading
• Fixed or call-off contracts
• Single sourcing
• Strategic alliance
• Partnership
Supplier switching
RISKS OF SUPPLIER SWITCHING
The new supplier may fail to perform
Process incompatibility
Cultural/inter-personal incompatibility
Loss of knowledge
Learning curve
Exposure to new and unfamiliar supply risks
Exposure of intellectual property, confidential
data
Problems of adversarial hand-over from the old
supplier to the new
COSTS OF SUPPLIER SWITCHING
Identifying and qualifying new suppliers
Initiating and administering tendering exercises
Settlement of not-yet-delivered items from old
supplier
Change of internal systems and processes
Familiarising and training the new supplier
Contract development and contract
management
Risk mitigation measures and corrective
measures
Selection and contract award
Criteria used for supplier selection: Criteria used for contract award:
• Focus on whether or not
prospective suppliers are suitable,
acceptable and capable of fulfilling
requirements
• Are primarily evaluative: how
suitable, acceptable and capable is
each supplier – and is it suitable,
acceptable and capable enough for
the buyer’s needs?
• May focus beyond any particular or
immediate requirement, to the
ongoing future supply needs of the
organisation
• Focus on which supplier or bid – out
of an available pre-qualified shortlist
– is the ‘best’ or ‘winning’ option for
the specific requirement
• Are primarily comparative: which of
the shortlisted options represents a
better solution or better value than
the others?
• Focus on the immediate
requirement: the placing of a
particular contract