Chapter 8

Sourcing strategies and relationships

Group Members:

Mohamud Mohamed MohamudHani Abdullahi AxmedAhmed Mohamed Hassan

Chapter outlines

Introduction The nature of the sourcing decision Attributes of a good supplier Different types of sourcing Sourcing decisions The sourcing process Source location Sources of information on potential suppliers

Chapter outlines cont…..

Supplier evaluation Other aspects of sourcing Partnering Tiering of suppliers

introduction

What is Strategic Sourcing?

Strategic sourcing is a procurement process that continuously improves and re-evaluates the purchasing activities of an organization.

A supply strategy based upon joint opportunities, mutual trust, respect and open & honest communication between the supplier and the customer.

introduction

Why Strategic Supplier Relationships are Important A new supplier commences operations every minute A supplier files bankruptcy every 8 minutes A supplier ceases operations every 3 minutes A judgment is filed against a supplier every 14 seconds A supplier name change happens every 2 minutes A supplier ownership change happens every 4 hours A supplier’s risk profile changes every minute

introduction

Strategic Sourcing Primary Objectives– Reduce the costs of goods and services– Capture resulting savings.– Create contractual alliances with suppliers to support

the long-term goals of the Organization.– Maintain and improve product quality.– Improve business functions.– Optimize the total purchasing process.

introduction

Seven Steps of Strategic Sourcing Analysis Develop Commodity Team Sourcing Strategy Identify & Prequalify Suppliers Supplier Selection & Contracting Integrate Suppliers Monitor & Follow-Up

The nature of the sourcing decision

Sourcing is the process of evaluating and hiring individual businesses to supply goods and services to your business.

Procurement is the process of actually purchasing those goods and services.

Sourcing and procurement have become a bigger part of a supply manager’s job in recent years, in part because businesses keep becoming more specialized

Attributes of a good supplier

A definition of a good supplier which would be acceptable to everybody would be difficult to write, there are a number of attributes which might be regarded as desirable for a typical relationship.

The following list is given by way of suggestion only: Delivers on time Provides consistent quality Gives a good price Has stable background Provides good services back-up Keeps promises Provides technical support Is responsive to our needs Keeps the buyer informed on progress

Different types of sourcing

Different types of sourcing: Consumable supplies Production materials and components Capital purchases ( e.g. machinery ) Intellectual property ( e.g. software) Subcontracts , Service

Sourcing decisions

A procurement strategy enables decision makers to understand longer-term goals,

such as realizing value for money and encouraging supplier improvement, and to

consider these goals when making procurement decisions

Sourcing decisions cont….

The traditional approach to source decision making involves the buying organisation in:

Establishing which suppliers make or supply the product or service Selecting a shortlist (say three) from those available. Sending an enquiry to each of those three setting out the

requirements. Selecting the best supplier from those who quoted by comparing the

offers. Placing the purchase order with them, specifying such matters as

volume, schedule, place of delivery, price and quality required.

The sourcing process

strategic sourcing process Data collection and spend analysis Market Research The RFx process (also known as go-to-market) Negotiations Contracting Implementation and continuous improvement

The sourcing location

The location of potentially useful sources of supply is a major responsibility of the procurement and supply executive.

Three principal reasons why the location of suppliers might be difficult are:

Technical advances – the buyer’s needs are becoming more complex and difficult to meet, and fewer suppliers are willing or able to do so.

Increasing ‘concentration’ in supply markets - the continuing process of mergers and takeovers is leading in many industries, to a situation where there are few, very large suppliers who have less need actively to pursue business which will inevitably come their way.

Increased specialisation – specialisation among manufacturing concerns tends to lead to more ‘buy’ rather than ‘make’ decisions.

Sourcing of information on potential suppliers

When collecting and collating information on potential suppliers, the internet has revolutionised companies’ ability to locate potential suppliers.

In addition , the following points ought to be considered:

1 - Reputation. 2 – appraisal

3 – recorded performance 4 – appraisal list

5 – online catalogue library 6 – online publications

7 – online trade directories 8 – sourcing services

9 – representatives 10 – exhibitions

11 – colleagues 12 – other buyers

13 – agents 14 – organization promoting trade

Sourcing of information on potential suppliers

Sources of Supplier InformationPublished Sources Internal Sources Personal Contacts International Source

Candidate List

Formulation of Selection Criteria

Preliminary Screening

Identification of Qualified Candidates

Detailed Study

Selected Supplier

Approved Supplier List

Information fromMarket Research

Questionnaires

Financial Information

Supplier Visits

RejectedSuppliers

Elimination of Unqualified

Candidates

Non- approved Suppliers

Supplier evaluation

The organisation (buyer) is in a much better position to evaluate an existing supplier, based on his past performance than is the case with a new supplier

Task variables which determine the choice of supplier are traditionally stated as: quality, quantity, timing, service, and price

the supplier is evaluated for named products or processes as fully approved, approved, conditionally approved, or unapproved.

Supplier evaluation cont….

Variations of the checklist approach are legion, and changes and improvements are incorporated as the needs of the organisation change

Typical checklist questions are: Do they trade with our competitors Are confidential documents properly controlled? Does the buyer have technical support? How do they search the market and how often? How long have they been established? What are their investment plans?

Supplier evaluation cont….

Delivery On time

5

Earlier

4

1x delay

3

2x delay

2

More delay

1

Quality Excellent

5

Good

4

Acceptable

3

1x reclamation

2

2x reclamation

1

Price The lowest

5

Low

4

Average

3

High

2

The highest

1

Terms of payment 90 days

5

75 days

4

60 days

3

Letter of credit

2

Less then 60 days

1

A-test For all materials

5

For most materials

4

For some materials

3

In procedure

to get

2

No attest

1

Supplier evaluation cont….

Confirmation the Purchase

order Always

3

After urge

2

Never

1

Standardisation Always

3

Sometimes

2

Never

1

Services Excellent

3

Good

2

Poor

1

Packaging To specification

3

Sometimes to spec.

2

Not to specification

1

Location of supplier 0-100 km

3

101 -500 km

2

More than 500 km

1

Other aspects of sourcing

one or more suppliers?

some of the considerations which need to be evaluated are:

Effect on price Effect on security of supply Effect on supplier motivation, willingness to

oblige, design innovation Effect on market structure

Other aspects of sourcing

the captive supplier

Captive supply is a term for that part of the supply that is not owned by a company but is used by the company to maximize its own profits often at the unknowing expense of those who actually own those supplies.

Other aspects of sourcing

Reciprocity in Buying In certain business situations a buyer may give

preference to a supplier who also happens to be his customer. This relationship is known as reciprocity. It is something like "I buy from you if you buy from me"

Other aspects of sourcing

A supplier association

A supplier association is a business term which refers to a customer company bringing together a group of its suppliers on a formal and regular basis in order to achieve strategic and operational alignment.

Other aspects of sourcing

Market structure: there are three types of market structure

Monopsony : where there is a single dominant buyer or ( market situation in which there is only one buyer for a product )

Monopoly : where there is a single powerful seller

Oligopoly: is the present where several sellers co-operate to dominate the market.

Partering

Partnership source: is a commitment by customer / suppliers, regardless of size ,to a long-term relationship based on clear mutually agreed objectives to strive for would class capability and competitiveness .

Mission of partnership sourcing initiative is summarized in the statement: ‘to bring about a fundamental change in companies’

Partering

Fig. the principal characteristics of partnership sourcing

Partnership Sourcing

Opennes and trust

Clear joint objectives

Flexibility

Proactive not reactive

Total quality Management

Long term relationship

Working together

Involvement of all relevant disciplines

Top level commitment

Tiering of suppliers

At any company, there are meaningful scopes of management responsibility that should not be exceeded. Dividing responsibility over a corresponding number of tiers allows even very large firms (100,000 employees and more) to be managed efficiently. Many companies also apply a similar tiering principle to managing suppliers. Supplier tiering originated in the auto industry and can be best understood in the context of automakers’ changing priorities over the last 40 years:

Tiering of suppliersa) Established pattern of supply

Original equipment maker predisposition to make

Subcontractors making to OEM’s designs and specialisations

Material

Assem

blies

Dire

ct

supp

liers

at a

rms

leng

th

Tiering of suppliersa) Developing pattern of supply

First tier subcontractors making to OEM’s performance (outcome) specifications

First tier subcontractors manage second tier suppliers with OEM guidance

Original equipment maker predisposition to buy

Second tier suppliers usually appointed by first tier suppliers