Procurement

Mohsin Jat, PhD

Office: OM 2201G
Department of Management, International Business, Information and Supply Chain
Bob Gaglardi School of Business & Economics | Thompson Rivers University
mjat@tru.ca
Sourcing
Activities and processes required to purchase goods and services
from suppliers

2
Impact of Sourcing on the Organization
Operational Impact
– Right materials, right quantities, right place, right time
– Optimal inventory balance
Financial Impact
– Sourcing spends 50% - 90% of revenue in most manufacturing organizations
Strategic Impact
– Support organization’s strategic direction
Risk Mitigation
– Minimize supply disruptions and protect reputation
– Ensure suppliers meet performance standards
Information Impact
– Collect information on prices, suppliers, goods, new products and
technologies

3
Profit-Leveraging Effect

4
Return on Assets (ROA) Effect

5
Sourcing Process
1. Supplier Selection
– Existing vs. New Suppliers
– Request for Quotation (RFQ), Request for Proposal (RFP),
Request for Bid (RFB)
• Very detailed documents with specific requirements and
firm deadlines

2. Negotiate Contracts

3. Manage Process of Acquisition

6
Supply Base
Number of suppliers that a firm uses to acquire its materials,
services, supplies, and equipment

Reasons Favouring a Reasons Favouring

Single Supplier Multiple Suppliers

 To establish a good relationship  Need capacity

 Less quality variability
 Lower cost
 Transportation economies
 Proprietary product or process
 Volume too small to split
 Spread risk of supply interruption
 Create competition
 Import Limits

7
Factors to Consider when Selecting a Supplier

Quality and quality assurance

Flexibility

Location

Price

Reputation and stability

Lead times and reliability

Other customers

Service after sale

8
Supplier Evaluation – Scorecard
E.G. Supplier Scorecard Used for the XYZ Company

Performance Measure Rating x Weight = Final Value

Technology 80 0.10 8.00
Quality 90 0.25 22.50
Responsiveness 95 0.15 14.25
Delivery 90 0.15 13.50
Cost 80 0.15 12.00
Environmental 90 0.05 4.50
Business 90 0.15 13.50
Total score 1.00 88.25

9
Outsourcing

Companies may outsource to:

– Access technical skills
– Lower costs
– Free themselves of doing non-core activities
– Two Key Dimensions:
• Scope
– Degree of responsibility assigned to
the supplier
• Criticality
– Importance of the outsourced
activities

10
The Make or Buy Decision
Make-or-Buy Break-Even Analysis

$5,500
$100,000

11
Bidding or Negotiation?
Sourcing function determines how to award contracts

Two primary methods:

1. Competitive Bidding
– Awards business to the most qualified bidder
– Most efficient for purchasing standard items

2. Negotiation
– Communication process between two parties that attempts to reach a
mutual agreement
– Best when working with suppliers on factors beyond the purchase

12