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SOURCING MANAGEMENT

Sourcing: – the process of identifying, selecting and


developing suppliers
• Strategic
• Tactical/operational
Sourcing Management: Managing procurement process
and collaboration with suppliers manufacturing process
to achieve sourcing goal as well as the goal of supply
chain management.
Sourcing
 Strategic Sourcing: A structured process which optimizes the supply
base while reducing Total Cost of Ownership (TCO) and improving
delivery mission. Strategic Sourcing solutions are based on a robust
analysis of spending patterns, the clear definition of business needs
and requirements, and the alignment of firm needs with supply market
capabilities and commercial best practices.
 Tactical and Operational Sourcing: Tactical and operational
sourcing is concerned with low-level procurement decisions that may
relate to low-risk, non-critical items and services. Tactical sourcing is
also concerned with short-term adaptive decisions as to how and from
where specific requirements are to be met.
Strategic Sourcing
 A sourcing strategy is a process, not an isolated decision. It continuously
 balances internal and external activities, services and know-how
 aligns business strategy, business processes and ‘product’ requirements
 balances the results that must be achieved and the future options available.
 Strategic sourcing is concerned with top-level, longer-term decisions
relating to high profit, high supply risk strategic items and low-profit,
high supply risk bottleneck products and services. It is also concerned
with the formulation of long-term procurement policies, the supplier
base, partnership sourcing, reciprocal and intra-company trading,
globalization and countertrade, and the procurement of capital
equipment and ethical issues.
Strategic Sourcing
 Strategic sourcing is a complicated process involving a number of
interrelated tasks. The process cannot be managed solely by
procurement. Depending on the organization, it may, for example,
involve, design, finance, manufacturing/service delivery, quality
management, environmental and health and safety
 Seven phases of strategic sourcing process
 Phase 1: Review of current status and business planning
 Phase 2: Facets of strategic sourcing process plan
 Phase 3: Research, data acquisition and business analysis
 Phase 4: Conclusions reached from Phase 3
 Phase 5: Supplier selection, mobilization and relationship management
 Phase 6: Implementation
 Phase 7: Report and measure performance and deliver continuous improvement
Sourcing Information
 Sourcing information can be divided into several areas.

 Areas of sourcing information


Analysis of market conditions
Directives

E-sourcing

Locating supplier sources


Supplier assessment
Supplier performance rating
Market and Analysis of Market Conditions
 What is a market?
 The term ‘market’ can mean:
■ a place where goods and services are bought and sold – for example, the
European Union is a market created by agreement between the participating
countries to reduce barriers to the internal movement of labor and capital
■ large groups of buyers and sellers of wide classes of goods, such as the
consumer goods market, the equipment market and so on
■ demand and supply of a single class of community, such as the steel market,
the cotton market
■ the general economic conditions relating to the supply of goods and services
applying at a particular time – of special importance to procurement is the
distinction between a buyer’s and a seller’s market.
Analysis of Market Conditions

 Why is the analysis of market conditions important to


sourcing?
 Strategicprocurement involves using business intelligence to
analyze the supply chain environment and make appropriate
decisions and recommendations. Only on the basis of
intelligence can strengths, weaknesses, opportunities and
threats that impact supplies be evaluated. Business
intelligence also provides information on how the
organization – and procurement as an activity within the
business – is performing relative to competitors.
Analysis of Market Conditions
 Analysis of market conditions as an aspect of business intelligence is useful for the
following reasons:
 it helps in forecasting the long-term demand for the product, of which bought-out
materials, components and assemblies are part, so it also has an interest in market research
 It assists in forecasting the price trends of bought-out items and how material costs are
likely to affect production costs and selling prices, so, for example, the need for cheaper
prices may influence sourcing decisions
 it indicates what alternative goods and supply sources are available – it might be more
economical to source items from abroad
 It gives guidance on the security of supply sources, which is particularly important with
sensitive commodities sourced offshore
 Information relating to pay trends, commodity prices, political factors and the like can
assist in deciding whether to adopt a strategy of forward buying and stockpiling or hand-to-
mouth buying and minimum stocks.
 What sources of information relating to market conditions are available?
Directives
A ‘directive’ is a general instruction. Typical
directives relating to sourcing include those
issued by the business group countries (EU),
government, authority and companies.
 NAFTA, EU, ASEAN Directives
 Government Directives
 Association’s Directives
 Company’s Directives
E-sourcing
 E-sourcing is defined by the CIPS as: using the Internet to
make decisions and form strategies regarding how and where
services or products are obtained.
 E-procurement, e-marketplaces, e-catalogues, e-auctions, etc.
 E-sourcing allows research, design and procurement
personnel to find parts, components and sub-assemblies
for prototypes and subsequent production models.
 The difference between e-sourcing and e-procurement is
that, in e-sourcing, decisions are made on the basis of
functionality and characteristics, not purely on the basis
of product and price.
Locating Suppliers
 Suppliers can be located by checking a wide range of sources.
 Thisprocess has been made faster and easier by the World
Wide Web.
 There are many sources for locating suppliers, including:
 Different websites
 Foreign Embassies and High Commissions
 Trade Associations
 other procurement specialists by networking
 Salespeople

 exhibitions and trade shows


 trade journals
Assessing Suppliers
 When to assess suppliers?
 Supplierassessment will arise when a prospective supplier
applies to be placed on the buyer’s approved list, responds to
the buyer’s request to pre-qualify for a forthcoming tender
process or where the buyer decides to conduct soft market
testing and due diligence.
 Thepurpose of all these is to assure the buying organization
that the prospective supplier can, reliably, meet the quality,
operational, technical, financial and commercial requirements.
Assessing Suppliers
 What should be assessed?
 Supplier appraisal is situational. What to appraise is related to the requirements
of the particular purchaser. All appraisals should, however, evaluate potential
suppliers from the following perspectives:
 finance
 insurance
 productive capacity and facilities/service support capability
 Quality
 health and safety
 environmental management
 existing contracts held and performance
 organizational structure and key personnel – resources
 sub-contracting – proposed actions
 procurement capability and supply chain management.
 This information is gathered by issuing a Pre-Qualification Questionnaire.
Approval of Supplier
 Supplier approval is the recognition, following a process of appraisal,
that a particular supplier can meet the standards and requirements of
the specific procurement. The approval may be for a one-off
transaction or enable the supplier to become an approved supplier.
 There are three important aspects of approved supplier lists:
 1 the current emphasis is on having a small supplier base and so additions to an approved
list must be carefully controlled
 2 the supplier’s application to be placed on an approved list should be considered fairly
and, as far as possible with the minimum of bureaucracy
 3 Principles of transparency, equality of treatment, proportionality and mutual
recognition in directives. In this context, Framework Agreements represent an approved
list.
 Approval should be decided by a cross-functional team that may give various levels
of approval, such as A for unconditional, B for conditional subject to the potential
supplier meeting prescribed conditions or C for unsuitable for approval.
Approval of Supplier

Approved suppliers may also be graded as


following categories:
1 partnership
2 preferred
3 approved suppliers
4 confirmed suppliers
5 one-off supplier
Evaluating supplier performance
 Why evaluate supplier performance?
 Thereare various reasons for the evaluation of
procurement performance being important.
■ Evaluation can significantly improve supplier performance.
■ Evaluation assists in deciding with which suppliers a specific
purchase order/contract should be placed.
■ Evaluation provides suppliers with an incentive for continuous
improvement and prevents performance ‘slippage’.
■ Evaluation can assist in decisions regarding how to distribute
the spend for an item among several suppliers to better manage
risk.
Evaluating supplier performance
 The seven Cs of effective supplier evaluation
 1 Competency of the supplier to undertake the tasks required
 2 Capacity of the supplier to meet the purchaser’s total needs
 3 Commitment of the supplier to the customer in terms of quality, cost driving
and service
 4 Control systems in relation to inventory, costs, budgets, people and
information
 5 Cash resources and financial stability ensuring that the selected supplier is
financially sound and is able to continue in business into the foreseeable future
 6 Cost commensurate with quality and service
 7 Consistency the ability of the supplier to deliver consistently and, where
possible, improve levels of quality and service.
Sourcing Process
1. Identifying or re-evaluate needs
2. Evaluate users’ requirements
3. Decide Make or buy
4. Identify type of purchase
5. Conduct market analysis
6. Identify possible suppliers
Sourcing Process
7. Pre-screen possible suppliers
8. Contact and Evaluate remaining
suppliers base
9. Choose suppliers
10. Deliver products/perform service
11. Post purchase/make performance
evaluation
Make or Buy
Reasons for Making
 There are number of reasons a company would
consider when it comes to making in-house.
Following are a few:
Cost concerns
Desire to expand the manufacturing focus
Need of direct control over the product
Make or Buy

Reasons for Making (continued)


Intellectualproperty concerns
Quality control concerns
Supplier unreliability
Lack of competent suppliers
Volume too small to get a supplier
attracted
Make or Buy

Reasons for Making (continued)


Reduction of logistic costs (shipping
etc.)
To maintain a backup source
Political and Environmental
Organizational Pride
Make or Buy

Situations to be considered for


making
ProductLife Cycle
Economies of Scale
Demand and Break-even point
Cost
Product Life Cycle
Product Life Cycle
Economies-diseconomies of scale
Graph: Cost - Volume
Economies-diseconomies of scale
Graph: Cost - Volume
Break – Even Analysis
Make or Buy
Reasons for Buying
Following are some of the reasons companies
may consider when it comes to buying from a
supplier:
Lack of technical experience
Supplier's expertise on the technical
areas and the domain
Cost considerations
Make or Buy

Reasons for Buying (continued)


Need of small volume
Insufficient capacity to produce in-
house
Brand preferences
Strategic partnerships
Sourcing Information
1. Analysis of market conditions
2. Directives
3. E-sourcing
4. Locating supplier sources
5. Supplier assessment
6. Supplier performance rating