DPS 304 : Sourcing Strategies & Policies The process of identifying, selecting & developing suppliers Can be done at tactical & operational or strategic levels

Sourcing Strategies & Policies  Tactical & Operational Sourcing Concerned with lower-level decisions relating to high-profit, low-risk, non-critical items Also concerned with short-term adaptive decisions as to how and from where specific supplier requirements are to be met.

Sourcing Strategies & Policies  Strategic Sourcing 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 Concerned 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

Sourcing Strategies & Policies  Comparison of Tactical & Strategic Sourcing Tactical Sourcing Environment Strategic Sourcing Environment Clearly defined requirements & specifications Development of a deep understanding of requirements – value analysis and engineering to identify operational value & trade-offs Open bid process with little or no ability for suppliers to offer alternative designs specifications – purchase price focus Development of a deep understanding of supply industry, product & service offerings & performance drivers of key suppliers

Sourcing Process Needs change Straight rebuy or routine purchase  Novack & Simco presented 11-stage process Stage 1 : identify or re-evaluate needs Needs change Stage 2: define or evaluate users requirements Stage 3: decide to make or buy Stage 4: identify type of purchase Straight rebuy or routine purchase A modified rebuy – change supplier or input A new buy which results from new user need

Reduce suppliers to few who can meet demands Sourcing Process  Novack & Simco presented 11-stage process Stage 5 : Conduct market analysis a source of supply can operate in a purely competitive market (many suppliers), an oligopolistic market (a few large suppliers) or monopolistic Stage 6: identify possible suppliers include suppliers you had not previously considered Stage 7: pre-screen suppliers ( done through expression of interest or prequalification sessions) Reduce suppliers to few who can meet demands

Sourcing Process Novack & Simco presented 11-stage process Stage 8 : Evaluate the remaining supply base Accomplished by means of competitive bidding Stage 9: Choose supplier Choice 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

Sourcing Process Novack & Simco presented 11-stage process Stage 10 : Deliver product/perform service Generate data for supplier performance evaluation Stage 11: Post purchase/make performance evaluation Supplier’s performance must be evaluated to determine how well the purchaser’s needs have been met Provides data for future sourcing

Sourcing Information Areas of sourcing information Analysis of market conditions Directives E-sourcing Locating Supplier Sources Supplier assessment Supplier Performance rating

Sourcing 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 time Distinguish between buyer’s & seller’s market

Sourcing Information Market analysis Move beyond an expert expediter to a strategic procurer Use business intelligence to analyse purchasing environment - identify strengths, weaknesses, opportunities & threats that impact supplies

Sourcing Information Why market analysis? Helps in forecasting long-term demand for the product Assists in forecasting the price trends of bought-out items & how material costs are likely to affect production costs & selling prices Indicates what alternative goods and supply sources are available eg may be cheaper to buy abroad Gives guidance on the security of supply sources which is of importance to sensitive commodities sourced abroad

Sourcing 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

Sourcing Information Sources of Information for market analysis Primary data – observation, analysis of internal records eg sales trends, visit to suppliers, questionnaires Secondary data – statistics & external reports International sources - trade associations Govt sources Non govt sources eg CIPS, KISM The press – economist, business daily Economic forecasts

Supplier appraisal Refers 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 9000:2000 Purchase of strategic high-profit, high-risk items Purchase of non-standard items Placing of construction and similar contracts When entering into JIT arrangements When engaging in global sourcing

Supplier appraisal When establishing e-procurement arrangements with long-term strategic suppliers When negotiating outsourcing contracts Before agreeing to a subcontract with a main supplier in relation to important companies When negotiating service-level agreements

Supplier appraisal What should be appraised? Finance Production capacity & facilities Human Resources Quality Performance Environmental & ethical considerations IT Orgnaizational structure

Obtaining Information for Supplier appraisal Appraisal Questionnaires Supplier visits Personal attitudes Means of controlling quality Housekeeping Competence of technical staff Technological knowhow of supervisory personnel Adequacy & care of production equipment

Supplier approval Recognition that following a process of appraisal, that a particular supplier is able to meet the standards & requirements of the particular buyer Approved suppliers may be graded into; Partners Preferred Approved suppliers Confirmed supplier One-off supplier

Policy Issues in Sourcing The supplier base Outsourcing or make-or-buy Subcontracting Partnering Reciprocity Intra-company trading Local suppliers Purchasing consortia

How to achieve an efficient supply system Supplier Selection How to achieve an efficient supply system Have Long-term relationships with suppliers Start preferred vendor programs by having limited number of suppliers Work together to minimize delays and handling Align 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 bid Consider total system costs in making purchasing decisions

Guidelines in selecting a Supplier Partner 1. Senior management attitudes 2. Progressive management 3. Motivation to improve continuously 4. Focus on the final customer 5. Company wide quality management 6. Ability to add value 7. Supplier performance history

Guidelines in selecting a Supplier Partner Just-in-time delivery Supplier location Financial stability Technical expertise and equipment Research and development Production facilities Lean facilities

Evaluating Supplier Performance Why Evaluate? Assists decision making on retaining or removing a supplier from an approved list Know which supplier specific order should be placed Provide suppliers with an incentive for CI and prevent performance slippage Make decision on distributing spend for an item among several suppliers to better manage risk

What to Evaluate (KPI’s)! Quality & Process control CI Facilities Customer relationship Delivery e.g time Financial stability Certification Price

10 Cs of Effective Supplier Evaluation Competency – to undertake the tasks required Capacity – to meet the purchaser’s total needs Commitment to quality, cost reduction and service Control systems – inventory, costs, people, budget Cash resources and financial stability Cost commensurate with quality and service

10 Cs of Effective Supplier Evaluation Consistency & where possible improve levels of quality & service Culture – suppliers and purchasers should share similar values Clean suppliers & products – satisfy legislative & other environmental requirements Communication – send & receive information electronically

Green 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

Green Procurement The Green Procurement entails program elements which include: Recycled content products Energy Efficient products and energy efficient standby power devices Alternative fuel vehicles, alternative fuels, and fuel efficient vehicles

Green Procurement Bio-based products Non-ozone depleting substances Alternative fuels and fuel efficient vehicles Environmental Protection Priority Chemicals

Green 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.  

Green Procurement Economic benefits   Economic benefits It leads to improved public image. Greening its suppliers can contribute to a company’s overall reputation among customers, investors, employees, and other stakeholders 

Green Procurement  Steps to implement a Green Procurement Program in the private sector Research 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.

Green 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.