Procurement & Sourcing Strategy Lysons, K. Farrington, B. Purchasing and Supply Chain Management. FT Prentice Hall.

7 th Edition 2006 Procurement

is the acquisition of goods and/or services. It is favorable that the goods/services are appropriate and that they are procured at the best possible cost to meet the needs of the purchaser in terms of quality and quantity, time and location. Procurement is a Wider term thanPurchasing Collaboration Follow ups Long Term Relationship Performance Evaluation Communication Supplier Development
Role of Procurement Lower the companys Cost structure Improve inventory control Improve product quality and durability More competitive in the market place Globalization Information Technology Changing production and management philosophies (JIT, LEAN, Shifting focus from volume to variety)

Procurement Importance

12 Characteristics of World Class Supplier management (by USA centre for advanced purchasing studies) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. Commitment to TQM Commitment to JIT Commitment to Total cycle time reduction Long range Strategic plans Supplier Relationships Strategic Cost management Performance measurements Training and development Service excellence CSR Learning Management and leadership

Characteristics of World Class Suppliers

Continuous Improvement Technology and innovation Adaptability For a firm to reach World Class standards in serving its customers, it is vital to achieve world class standards in controlling its network of Suppliers

Types of Procurement Direct procurement and indirect procurement

TYPES Direct procurement

Raw material and production goods Quantity Frequency Value Nature Examples Large High Industry specific Operational Crude oil in petroleum industry Low Relatively high Low Tactical spare parts, tools

Indirect procurement
Maintenance, Repair and Operating supplies Capital goods and services Low Low High Strategic Crude oil storage facilities

Strategy & Strategic Procurement "Strategy is the direction and scope of an organization over the long-term Strategy tells the organization how to get there Strategy is an Action plan to achieve the mission

Level of Organizational Strategy Corporate Strategy Business Strategy Functional/ Operational Strategy Procurement Strategy
Functional Products Many suppliers Supplier selection based on cost High priority given to capacity in supplier selection Bulk buying discounts Relationship based on cost reduction Innovative Products Few Suppliers Supplier selection based on speed and technology High priority given to flexibility in supplier selection Many small shipments Relationship based on supplier market intelligence

Procurement & Sourcing Strategy

Strategy is the direction and scope of an organization over the long-term Strategy tells the organization how to get there Strategy is an Action plan to achieve the mission

Level of Organizational Strategy

Corporate Strategy Business Strategy Functional/ Operational Strategy

Procurement Strategy
Functional Products Many suppliers Supplier selection based on cost High priority given to capacity in supplier selection Bulk buying discounts Relationship based on cost reduction Innovative Products Few Suppliers Supplier selection based on speed and technology High priority given to flexibility in supplier selection Many small shipments Relationship based on supplier market intelligence

Procurement Policy
Purchasing Authority Environmental policies Disposal and Waste Local or Global or Combine Purchasing E-procurement Ethical Policies Buyer Supplier Objectives Buyer Lower possible price Maximum payment terms Tough KPIs Small quantities buying Short lead time Purchasing and Supply Chain Organization Supplier Highest possible price Minimum payment terms Soft KPIs Bulk Selling Long lead time

To create competitive advantage through supply management efforts, we normally hear about

IT Outsourcing Cost management techniques Strategic relationship

But organizational Design is very important as well

Organizational design refers to the process of assessing and selecting the structure and formal system of communication, division of labor, coordination, control, authority and responsibility required to achieve organizational goals and supply management objectives

Formal Purchasing Organization Structure Purchasings position within the organizational structure Organizing the purchasing function Placement of purchasing authority Organizing for supply chain management Using teams as part of the organizational structure Creating the organization of the future

Purchasings position within the organizational structure Formal organizational structure shows assignment of work and authority It defines how a firm communicates and coordinate Handout No 3: Purchasing at different Organizations

Factors affecting purchasing positions in the Organizational Hierarchy

History (from Clerks to purchasing Executives) Type of Industry Total value of Goods and Services (Honda, DaimlerChrysler spend 60 to 70% in purchasing)

To whom does purchasing Report?

1950 to 1960 Purchasing reported to second level production and operations department 1970 to 1980 In many companies, purchasing reported to senior or group vice president 1980 till present In most of the organizations, they have CPO, who report to top five Executives

Organizing the purchasing function

Specialization within Purchasing Sourcing and negotiating Purchasing research Operational support and order follow-up Administration and support (develop policies and procedures for purchasing personnel, administer and maintain purchasing information system)

Purchasing department Activities

Buying
Expediting Inventory Control Insourcing/Outsourcing Value analysis Supply Management Counter Trade (Barter System)

Placement of Purchasing Authority

Placement of purchasing authority means where an organization locates its decision-making authority. If supply executive has an authority to spend major purchasing expenditures = Centralized Purchasing If purchasing authority for the majority of expenditures at divisional, business unit or site level = Decentralized Purchasing Factors influencing Centralized or Decentralized purchasing Firms Business Strategy If strategy is to be more responsive then decentralized. Similarity of Purchases If purchases are similar then Centralized, if very different across business units then decentralized Total Dollar expenditures If physical size of purchase increase then Centralized. If geographically dispersed then decentralized Advantages of Centralized Purchasing Consolidate purchase volume Reduced Duplications of Purchasing High Visibility and easy to coordinate Developing Expertise (involved in large purchasing activities)

Advantages of Decentralized Purchasing Speed and responsiveness Understanding unique operational requirement Product development support (divisional or business unit level) Ownership Tapal v/s Lever Brothers American operation in Iran v/s Pakistan Handout No 4: Con-way appoints its first CPO Organizing for Supply Chain Management Purchasing and supply chain organization is also responsible for managing supply chain management include: Controlling material costs while improving customer service Developing an awareness of supply chain total cost tradeoffs Creating a direct link from customer to external suppliers Using Teams as part of Organizational Structure Use Teams to Evaluate and Select Suppliers Perform Demand and Supply Planning Carry out Supplier development activities Creating the Organization of Future Shifting trends from Vertical to Horizontal focus Cross functional Teams Suppliers Involvement Involvement of procurement with other departments like Operations, Engineering and Marketing etc Handout No 5: Johnson & Johnson Aligning Supply Management and Enterprise Objectives Companys leadership team define how firm will compete and succeed in Global market. They set some objectives include: What markets will the firm compete in and on what basis? What are the long-term and short-term business goals, company seek to achieve? What are the budgets and economic resource constraints and how will budgets be allocated to functional groups? Converting Supply Management Strategic Objectives into Supply management Strategy Strategic Cost Reduction Objective Material cost reduction Inventory days reduction Strategic Technology/New product development Objective Outsource non-core-competency activities Reduce product development time Strategic Supplier Reduction Objective Reduce number of Suppliers Develop close relationship with some suppliers Spend Analysis It is an annual review of firms entire set of purchases. It provide answers to the following questions: Where did business spend its money over past year? Did business receive right amount of products and services given what it paid for them (important for shareholders point of view) What suppliers received majority of the business and did they charge an accurate price? Which divisions of business spent their money on products and services that were correctly budged for? Strategic Sourcing for Assigning Contract Outsource to whom Level of relationship with outsourced supplier Benefits of Strategic Sourcing Traditional purchasing focuses on purchase price; strategic sourcing focuses on true cost to the customer For example: low cost component with more defects Low cost product with longer lead time Traditional purchasing is transactional; strategic sourcing is collaborative Traditional purchasing benefits from technology but cannot implement technology to the same degree as occurs in strategic sourcing Traditional purchasing does not increase visibility of entire supply chain the way strategic sourcing can. Strategic Relationship Strategic relationship lie in the middle of a spectrum of business relationships. At one end of the spectrum is the traditional purchasing relationship, or buy on the market while one the other end it is merger and acquisitions Types of Relationship Buy on the market

Ongoing relationship Partnership Collaboration/ Strategic Alliance Mergers and Acquisition Handout no 7 on Types of relationships Benefits of Strategic Alliances Strategic Importance If purchasing component is critical to competitive differentiation, it is better to keep it in-house. If not lies in core competency then outsource to valuable supplier. Number of Suppliers If there is very few or one supplier available for component then organization need to develop strategic alliance so that can get competitive advantage Uncertainty Frequent changes in raw material cost, quality or availability can block a business. It is better to make strategic alliance to avoid these interruptions Risks associated with Strategic Alliance Cultural and language differences Chinese can not spell Z Arabs pet word you are my brother, frist or first. Multiple currencies and fluctuations Fluctuation in one region could impact other region Different legal systems Organization must recognize legal requirements of all countries where it has alliances Security concerns Physical threats include theft and terrorism Intangible threats include information, trade secrets, customer relationship and computer crimes etc Strategic Alliances may do the following. Add value to products Reduce lead time Make better design by supplier early involvement Strengthen operations Alliances can help improve operations by lowering system costs and share resources like retailer and distributor can share warehouse with each other Increase organizational expertise Both partners can improve their operations by teaching and learning Enhance financial strength Alliances can help improve overall financial position by increasing revenue while reducing costs Examples of Alliances Third party logistics Vendor managed inventory Collaborative planning forecasting & replenishment Strategic Sourcing Process Build the Team Market Research Strategy Development Contract Negotiation Supplier Relationship Management Build the Team Team could be composed of personnel from Operations, product design, marketing, finance and purchasing If team purchasing vehicles and vehicles parts then maintenance managers should be involved. If team purchasing computers than IT people should be involved Market Research on Suppliers Meeting with different Suppliers Interviews with consultant who specializes in studying certain markets and suppliers Websites Reports (annual reports of suppliers) Publically available databases Strategy Development Define Level of relationship Define strategy for different products Supplier Evaluation

Design capability Financial condition Planning and control system (IT) Environmental regulation compliance Longer- term relationship potential Contract Negotiation After sourcing strategy has been determined and suppliers have been recommended, it is time to implement the strategy and negotiate the contract. Conduct Pilot Program Organization may decide to implement SRM in only one geographical region or with one or some products Implement full program Organization revises the PSA as necessary and implements it fully. It include regular planning and problem solving sessions with key suppliers Monitor and Improve Organization implements a framework of metrics to ensure suppliers are meeting PSAs and delivering desired impact on organizations bottom line and/or strategic goals. SRM is a dynamic process so the focus should be on continuous improvement. Managing Risk in Supply Relationship Managing risk requires performing an initial supply chain risk audit and creating action plans Understand not only direct contact but also its customers customers and suppliers suppliers Risk management must be conducted by channel master and all supply chain partners In global alliances, biggest challenges are in the area of language, etiquette and work styles, sweatshops and underage workforce utilization Managing Risk in Supply Relationship One tactic for managing risk is to ensure the qualifications of suppliers through certification like (ISO) Assignment What is ISO and what are the benefits it could deliver to both suppliers and customers 1500 words Due date is ? Suppliers Rating System Scorecards Scorecards capture quantitative and qualitative data and provide historical plan and predictive views of supplier performance. Scorecard should be sent to strategic suppliers on regular basis. Surveys Standardized surveys are sent to supply chain managers in order to gather qualitative information on the performance of suppliers