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DPS 304 : Sourcing Strategies & Policies Sourcing • 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 & Development of a deep specifications 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 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 o Straight rebuy or routine purchase o A modified rebuy – change supplier or input o A new buy which results from new user need
Sourcing Process Novack & Simco presented 11 -stage process • Stage 5 : Conduct market analysis o 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 o include suppliers you had not previously considered • Stage 7: pre-screen suppliers ( done through expression of interest or prequalification sessions) o. Reduce suppliers to few who can meet demands
Sourcing Process Novack & Simco presented 11 -stage process • Stage 8 : Evaluate the remaining supply base o. Accomplished by means of competitive bidding • Stage 9: Choose supplier o. Choice determines the relationship that will exist between the purchasing & supplier organizations & how the relationships will be structured and implemented. o. Also determines how relationships with nonselected suppliers will be maintained
Sourcing Process Novack & Simco presented 11 -stage process • Stage 10 : Deliver product/perform service o. Generate data for supplier performance evaluation • Stage 11: Post purchase/make performance evaluation o. Supplier’s performance must be evaluated to determine how well the purchaser’s needs have been met o. 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 boughtout 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 üPersonal attitudes üMeans of controlling quality üHousekeeping üCompetence of technical staff üTechnological knowhow of supervisory personnel üAdequacy & 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; üPartners üPreferred üApproved suppliers üConfirmed supplier üOne-off supplier
Policy Issues in Sourcing • The supplier base • Outsourcing or make-or-buy • Subcontracting • Partnering • Reciprocity • Intra-company trading • Local suppliers • Purchasing consortia
Supplier Selection How to achieve an efficient supply system 1. Have Long-term relationships with suppliers 2. Start preferred vendor programs by having limited number of suppliers Work together to minimize delays and handling Align incentives (to minimize total system costs) 3. Use total purchasing power as bargaining tool to obtain favourable long term contracts, don’t put every order out to bid 4. Consider total system costs in making purchasing decisions
Guidelines in selecting a Supplier Partner 1. 2. 3. 4. 5. 6. 7. Senior management attitudes Progressive management Motivation to improve continuously Focus on the final customer Company wide quality management Ability to add value Supplier performance history
Guidelines in selecting a Supplier Partner 8. Just-in-time delivery 9. Supplier location 10. Financial stability 11. Technical expertise and equipment 12. Research and development 13. Production facilities 14. Lean facilities
Evaluating Supplier Performance Why Evaluate? 1. Assists decision making on retaining or removing a supplier from an approved list 2. Know which supplier specific order should be placed 3. Provide suppliers with an incentive for CI and prevent performance slippage 4. Make decision on distributing spend for an item among several suppliers to better manage risk
What to Evaluate (KPI’s)! 1. Quality & Process control 2. CI 3. Facilities 4. Customer relationship 5. Delivery e. g time 6. Financial stability 7. Certification 8. Price
10 Cs of Effective Supplier Evaluation 1. Competency – to undertake the tasks required 2. Capacity – to meet the purchaser’s total needs 3. Commitment to quality, cost reduction and service 4. Control systems – inventory, costs, people, budget 5. Cash resources and financial stability 6. Cost commensurate with quality and service
10 Cs of Effective Supplier Evaluation Consistency & where possible improve levels of quality & service 8. Culture – suppliers and purchasers should share similar values 9. Clean suppliers & products – satisfy legislative & other environmental requirements 10. Communication – send & receive information electronically 7.
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 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.