1DPS 304 : Sourcing Strategies & Policies The process of identifying, selecting & developing suppliersCan be done at tactical & operational or strategic levels
2Sourcing Strategies & Policies Tactical & Operational SourcingConcerned with lower-level decisions relating to high-profit, low-risk, non-critical itemsAlso concerned with short-term adaptive decisions as to how and from where specific supplier requirements are to be met.
3Sourcing Strategies & Policies Strategic SourcingConcerned with top-level, longer-term decisions relating to high-profit, high supply risk strategic items and low-profit, high supply risk bottleneck products and servicesConcerned with the formulation of long-term purchasing policies, the supplier base, partnership sourcing, reciprocal & intra-company trading, globalisation & countertrade, the purchase of capital equipment & ethical issues.Procurement is viewed as a knowledge-based activity concerned with the total cost of ownership leading to business competitive advantage
4Sourcing Strategies & Policies Comparison of Tactical & Strategic SourcingTactical Sourcing EnvironmentStrategic Sourcing EnvironmentClearly defined requirements & specificationsDevelopment of a deep understanding of requirements – value analysis and engineering to identify operational value & trade-offsOpen bid process with little or no ability for suppliers to offer alternative designs specifications – purchase price focusDevelopment of a deep understanding of supply industry, product & service offerings & performance drivers of key suppliers
5Sourcing Process Needs change Straight rebuy or routine purchase Novack & Simco presented 11-stage processStage 1 : identify or re-evaluate needsNeeds changeStage 2: define or evaluate users requirementsStage 3: decide to make or buyStage 4: identify type of purchaseStraight rebuy or routine purchaseA modified rebuy – change supplier or inputA new buy which results from new user need
6Reduce suppliers to few who can meet demands Sourcing Process Novack & Simco presented 11-stage processStage 5 : Conduct market analysisa source of supply can operate in a purely competitive market (many suppliers), an oligopolistic market (a few large suppliers) or monopolisticStage 6: identify possible suppliersinclude suppliers you had not previously consideredStage 7: pre-screen suppliers ( done through expression of interest or prequalification sessions)Reduce suppliers to few who can meet demands
7Sourcing Process Novack & Simco presented 11-stage process Stage 8 : Evaluate the remaining supply baseAccomplished by means of competitive biddingStage 9: Choose supplierChoice determines the relationship that will exist between the purchasing & supplier organizations & how the relationships will be structured and implemented.Also determines how relationships with non-selected suppliers will be maintained
8Sourcing Process Novack & Simco presented 11-stage process Stage 10 : Deliver product/perform serviceGenerate data for supplier performance evaluationStage 11: Post purchase/make performance evaluationSupplier’s performance must be evaluated to determine how well the purchaser’s needs have been metProvides data for future sourcing
9Sourcing Information Areas of sourcing information Analysis of market conditionsDirectivesE-sourcingLocating Supplier SourcesSupplier assessmentSupplier Performance rating
10Sourcing Information Analysis of market conditions Market – a place where goods & service are bought & sold, large groups of buyers & sellers of wide classes of goods eg electronics market, demand & supply of a single class of community, eg the cement market, the general economic conditions relating to the supply of goods & services at a particular timeDistinguish between buyer’s & seller’s market
11Sourcing Information Market analysis Move beyond an expert expediter to a strategic procurerUse business intelligence to analyse purchasing environment - identify strengths, weaknesses, opportunities & threats that impact supplies
12Sourcing Information Why market analysis? Helps in forecasting long-term demand for the productAssists in forecasting the price trends of bought-out items & how material costs are likely to affect production costs & selling pricesIndicates what alternative goods and supply sources are available eg may be cheaper to buy abroadGives guidance on the security of supply sources which is of importance to sensitive commodities sourced abroad
13Sourcing Information Why market analysis? Information relating to pay trends, commodity prices, political factors etc can aid in deciding sourcing strategy eg, forward buying, stock-piling or hand-to-mouth
14Sourcing Information Sources of Information for market analysis Primary data – observation, analysis of internal records eg sales trends, visit to suppliers, questionnairesSecondary data – statistics & external reportsInternational sources - trade associationsGovt sourcesNon govt sources eg CIPS, KISMThe press – economist, business dailyEconomic forecasts
15Supplier appraisalRefers to analyzing a prospective vendor for inclusion in the buyer’s approved list.Lysons states that appraisal is necessary in the following situations;When potential supplier is not certified eg ISO 9000:2000Purchase of strategic high-profit, high-risk itemsPurchase of non-standard itemsPlacing of construction and similar contractsWhen entering into JIT arrangementsWhen engaging in global sourcing
16Supplier appraisalWhen establishing e-procurement arrangements with long-term strategic suppliersWhen negotiating outsourcing contractsBefore agreeing to a subcontract with a main supplier in relation to important companiesWhen negotiating service-level agreements
17Supplier appraisal What should be appraised? Finance Production capacity & facilitiesHuman ResourcesQualityPerformanceEnvironmental & ethical considerationsITOrgnaizational structure
18Obtaining Information for Supplier appraisal Appraisal QuestionnairesSupplier visitsPersonal attitudesMeans of controlling qualityHousekeepingCompetence of technical staffTechnological knowhow of supervisory personnelAdequacy & care of production equipment
19Supplier approvalRecognition that following a process of appraisal, that a particular supplier is able to meet the standards & requirements of the particular buyerApproved suppliers may be graded into;PartnersPreferredApproved suppliersConfirmed supplierOne-off supplier
20Policy Issues in Sourcing The supplier baseOutsourcing or make-or-buySubcontractingPartneringReciprocityIntra-company tradingLocal suppliersPurchasing consortia
21How to achieve an efficient supply system Supplier SelectionHow to achieve an efficient supply systemHave Long-term relationships with suppliersStart preferred vendor programs by having limited number of suppliersWork together to minimize delays and handlingAlign incentives (to minimize total system costs)Use total purchasing power as bargaining tool to obtain favourable long term contracts, don’t put every order out to bidConsider total system costs in making purchasing decisions
22Guidelines in selecting a Supplier Partner 1. Senior management attitudes2. Progressive management3. Motivation to improve continuously4. Focus on the final customer5. Company wide quality management6. Ability to add value7. Supplier performance history
23Guidelines in selecting a Supplier Partner Just-in-time deliverySupplier locationFinancial stabilityTechnical expertise and equipmentResearch and developmentProduction facilitiesLean facilities
24Evaluating Supplier Performance Why Evaluate?Assists decision making on retaining or removing a supplier from an approved listKnow which supplier specific order should be placedProvide suppliers with an incentive for CI and prevent performance slippageMake decision on distributing spend for an item among several suppliers to better manage risk
25What to Evaluate (KPI’s)! Quality & Process controlCIFacilitiesCustomer relationshipDelivery e.g timeFinancial stabilityCertificationPrice
2610 Cs of Effective Supplier Evaluation Competency – to undertake the tasks requiredCapacity – to meet the purchaser’s total needsCommitment to quality, cost reduction and serviceControl systems – inventory, costs, people, budgetCash resources and financial stabilityCost commensurate with quality and service
2710 Cs of Effective Supplier Evaluation Consistency & where possible improve levels of quality & serviceCulture – suppliers and purchasers should share similar valuesClean suppliers & products – satisfy legislative & other environmental requirementsCommunication – send & receive information electronically
28Green Procurement & Supplier Selection is also known as Affirmative Procurement. This is referred to as the purchase products and services which are environmentally friendly. The products or services purchased should have a lower impact on the environment over their whole life cycle than the standard equivalent
29Green ProcurementThe Green Procurement entails program elements which include:Recycled content productsEnergy Efficient products and energy efficient standby power devicesAlternative fuel vehicles, alternative fuels, and fuel efficient vehicles
31Green Procurement Advantages of Green Procurement Economic benefits Green procurement enables organizations reduce handling expenses and risks associated with waste disposal by reducing supplier-generated wastes and surpluses.It helps organizations to achieve competitive advantage through innovation. Efficient production may be enhanced through suppliers’ use of cleaner technologies, process innovation, and waste reduction.
32Green Procurement Economic benefits Economic benefitsIt leads to improved public image. Greening its suppliers can contribute to a company’s overall reputation among customers, investors, employees, and other stakeholders
33Green Procurement Steps to implement a Green Procurement Program in the private sectorResearch company procurement policies. Find out if and to what extent your company’s procurement policies give price preference to environmentally preferable products.Define your terms. Many people don’t have a specific understanding of common phrases such as “environmentally preferable purchasing.”Screen suppliers and subcontractors. Survey them on specific Environmental Health and Safety practices and use a point scale to judge their responses.
34Green Procurement Encourage or require suppliers to implement environmental management systems. Provide suppliers with "blacklists" of undesirable chemicals or other materials.Collaborate on an action plan. Involve suppliers early and often in product, process, and strategic decisions that impact them. Add suppliers to planning teams to implement design for environment initiatives.Choose green products. Purchase raw materials that contain fewer toxic ingredients, are recyclable, or utilize recycled materials.