Lecture supply chain management chapter 3 sourcing and procurement

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CHAPTER 3: SOURCING AND PROCUREMENT
MsC. Bui Thi Bich Lien
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Contents
1

vIntroduction (Definitions, function)

2

vSourcing

3

vSourcing process Steps

4

vOutsourcing

5

vCase Studies

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Course book and support materials

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vAlan Harrison and et. (2014), Logistics
management and strategy competing through the
supply chain (fifth edition), Pearson, (course book)
chapter 9-pp.353-387
vArnold J.R. Tony et al. (2008), Introduction to
materials management (sixth edition), Pearson,
chapter 7, pp.191-215
vMichael Hugos (2003), Essentials of Supply Chain
Management, John Wiley and Sons Inc. chapter 2:
pp.43-76

Learning Objectives

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vGain the concept of sourcing, purchasing
and procurement
vApply the principles of the drivers of
procurement value
vUse the procurement core-processes
vApproach the management of the supply
base

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Terminologies

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1. Purchasing
2. Procurement
3. Sourcing
4. Vendor
5. Supplier relationship management (SRM)

Procurement vs. purchasing

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vProcurement:
vSourcing:
vPurchasing:
vSource: Douglas M. Lambert et al (2001):
Strategic logistics management. McGraw-Hill

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1. Definition

vPurchasing: is the function of procuring
materials,
supplies,
and
services,
maintaining purchase order priorities,
managing supplier relationships, and
ensuring high levels of performance to
achieve quality, delivery and cost
objectives

Categories of purchasing
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Categories
Resale

2

Conversion

3

MRO support

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Industries
Distributors
Retailers
Wholesalers
Manufacturers
Channel
Postponement
All Organization

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Detailed Purchasing Responsibilities

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vProvide an uninterrupted flow of materials
and services
vPurchasing products competitively
vKeeping inventory investment to a minimum
vProviding consistent, quality purchased
materials and services
vDeveloping the supplier base
vDeveloping people resources and
information tools for productivity optimization

Purchasing objectives

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Some basic functions:
Determining purchasing specifications: right
quality, right quantity, and right delivery (time and
place).
- Selecting supplier (right source)
- Negotiating terms and conditions of purchase (right
price)
- Issuing and administration of purchase orders.

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Definition of sourcing

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vThe body of integrated activities that
focuses on the purchase of materials,
supplies, and services needed to reach
the firm’s strategic goals. In a narrow
sense, sourcing describes the process of
buying, in a broader context, sourcing
involves determining the need, selecting
the supplier, arriving at the appropriate

price, terms, and conditions, drafting the
contract, and growing mutually beneficial
supplier relationships

Definition of procurement

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vProcurement is the process of getting the
goods and/or services your company
needs to fulfill its business model. Some of
the tasks involved in procurement include
developing standards of quality, financing
purchases, negotiating price, buying
goods, inventory control and disposal of
waste products like packaging.

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Function of Procurement

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vFive main activity
categories:
§ Purchasing
§ Consumption

management
§ Vendor Selection
§ Contract Negotiation
§ Contract
Management

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2. Sourcing

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Sourcing strategy in Supply chain
The role and the importance of sourcing
Viewpoints and development process of SM
Sourcing Strategy
Basic factors to determine sourcing strategy

Outsourcing in Supply chain
Definition, advantages and risks
Basic factors to make outsource decision
Partner choice process
Logistics service outsource

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Strategic Sourcing

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vA comprehensive approach for locating
and sourcing key material suppliers, which
often includes the business process of
analyzing total spend for material spend
categories. There is a focus on the
development of long-term relationships
with trading partners who can help the
purchaser meet profitability and customer
satisfaction goals.

Strategic sourcing Objectives

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vEstablish close, collaborative relationships with
key suppliers
vEnsure reliable quality and delivery of materials
vReduce supply risks
vEstablish a smaller, more flexible, more
responsive supplier base

vClosely integrate supplier input to product
development and innovation
vReduce external spending
vReduce transaction costs

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Why sourcing is very important? LOGO
Suitable cost cutting centre
Ensuring smooth and continuous production
line and business
Intra-corporate interaction center

“Door” role

Supp
- liers

Sourcing

R&D, Design
Manufacture
Finance
Quality
management

Custo

-mers

Why sourcing is very important? LOGO
Industries

Percent of material
cost in cost of good
sold

Average
Petrochemical industry
Transport
Car manufacture
Wood industry
Food processing
Paper industry
Electronic equipment
PC, Electronic device

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DEVELOPMENT PROCESS OF SOURCING MANAGEMENT

• Meet
the

highest
requirement
of
customers
with
the
lowest cost
• Relationship Building
• Lowest Total Cost

• Lowest Unit cost

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DEVELOPMENT PROCESS OF SOURCING MANAGEMENT

Purchasing (Operational)
Meet the requirement of Production and business
department
Finding the lowest price source
Order and giving detailed product requirements
Implement contracts and solve problems
Statistics and follow the data
Deploy and control
Easy to change suppliers
Support from IT

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DEVELOPMENT PROCESS OF SOURCING MANAGEMENT

Procurement (Tactical)

• Conduct in-depth researches
• Material searching and
having substitute plan
• Finding the lowest total cost:
• Procurement, inventory,
transport cost.
• Choosing, negotiating with suppliers
• Ensuring the continuous, regular sources
• Building the relationship with suppliers

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DEVELOPMENT PROCESS OF SOURCING MANAGEMENT

Supply Chain Management
(Strategic)
• Building close and positive relationships
with suppliers
• Finding the opportunities and threats in the
sourcing market
• Participate actively in the strategic
planning process
• Finding ways to enhance value from

supply relationships:
• Suppliers join in design,
manufacturing process.
• Reduce the complication in
sourcing
• Sharing information and
opportunities

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Sourcing strategy

Depend on the number of suppliers

Multiple suppliers strategy
Create competitive pressure on
among suppliers
Few suppliers strategy

Some
strategies in
sourcing

Long-term partners relationship development
to meet the requirements of end users

Customers – Suppliers Alliance strategy (Keiretsu)
Suppliers become an integrated part of the
enterprise’s alliance
Vertical Integration
Have the ownership of supply source,
Strict control

Sourcing strategy

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Multiple suppliers
strategy
- Many sources for a product
- Competitive environment, low
price, good service, low risk
- Focus on price, short-term benefit
- Opposition relations, less open
- Variety of product
- Delivery at the warehouse
- Single transaction

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Sourcing strategy

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Few suppliers
strategy
- Some sources for a product
- Collaboration, long term and
stable relationship.
- Economies of scale
- Selective supply contracts
- Just in time (regular delivery)
- Small lot for each deliver
- Controlling the material at the
supplier’s sites

Sourcing strategy

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Customers –
Suppliers Alliance
strategy (Keiretsu)
- Exclusive supply contract
- Same objectives and must be
identified clearly.
- System integration
- Dependent and adaptive
- Investment and benefit sharing
- Discuss and interact regularly
Supplier plays a important role in the success of the
company, takes part in from the first stage (design the
products)

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Sourcing strategy
Number of
Suppliers and the
relationship level

Transactional
relationship

Operational
relationship

Multiple suppliers

ü Short-term relationship
ü Focus on cost, price
ü Extended arm

Tactical
relationship

Selective suppliers

Strategic
Alliances

Few Suppliers

One Supplier

ü Long-term relationship
ü Sticking, benefits for
both sides
ü Planning together
ü Senior managers
attended
ü Open communication

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Sourcing strategy
Selecting
suppliers

Request for
quotation

Detail
evaluating

Site
visit

Potential
suppliers
list

Supply
contract

RELATIONSHIP DEVELOPMENT WITH SUPPLIERS

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In order to manufacture famous brand all over the world,
you need have an idea, unique design, qualitative
specifications. However, above all you must have good
suppliers

-

Right quality
Right quantity
Right time
Good attitude
Product design and
customer service

cooperation.

Increase value and facilitate for
the manufacturing process

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RELATIONSHIP DEVELOPMENT WITH SUPPLIERS

Competitive
market

Suppliers
structure

Sourcing
Strategy

Suppliers – customers
relationship
Long-terms relationship
Supplier involvement
Team work between two
parties

IT

•
•
•

Logistics
integration

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Suppliers
success

Company
success

Interactive and sustainable relationship

RELATIONSHIP DEVELOPMENT WITH SUPPLIERS

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Factors to determine sourcing strategy
Which type of
sourcing strategies
and which

relationship are
suitable

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Depend on many
factors
Type of material need to buy
Risk level of buying decision
Power and attitude of suppliers
Procurement division capability
Ability to maintain a stable supply
without increasing risk

KRALJIC Matrix

Factors to determine sourcing strategy
•

Classify the materials
need to buy

•
•
•

The important role of
determination
Raw material cost/total
cost

Value added contribution
Profit contribution

•
•
•
•

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Exclusive level
Complicated level
Speed of technology
development
Penetration barriers

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Factors to determine sourcing strategy
High

Profit impact

Classify the
materials which
needed

Low

Leverage Items

Strategic Items

Low risk, high value
Normal material
Competitive source
Logistics service

ü
ü
ü
ü

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ü
ü
ü
ü

High risk, high value
Availability
Essential materials
Equipment, machine

Non-critical Items

Bottleneck Items

ü Low risk, high value
ü Availability and easy
to substitute
ü Indirect materials
ü Stationery

ü
ü
ü
ü

High risk, low value
Technical materials
Rare
Difficult to substitute

Supply risk

Factors to determine sourcing strategy

Earthquake
Tsunami
Nuclear incident

Profit impact

High

Stalling the global Low
automotive industry

Leverage Items

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Strategic Items

ü Tire
ü Trunk
ü Chassis

ü Assembly line
ü Engine
ü Braking system

Non-critical Items

ü Mirror
ü Battery
ü Screws

Bottleneck Items

ü Air bagel
ü Electronic chip
ü The battery
High

Low
Supply risk

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Factors to determine sourcing strategy

ü Seed
ü Foods
ü Veterinary
Medicine

Profit impact

High

Low

Leverage Items

Strategic Items

ü Using multiple
suppliers
ü Exploit the call option
ü Identify the scale and
optimized price

ü Senior decision
ü Building alliances
ü Global supplier

Bottleneck Items

Non-critical Items
ü Local Suppliers
ü Surf the price
ü Simple and
automatic process

ü Risk prevention plan
ü Supplier’s reliability
ü Cooperation
relationship
ü Accepting high price if
needed

Low
Supply risk

Factors to determine sourcing strategy

Multiple Suppliers
-

Many sources for a product
Competitive environment, low

price, good service, low risk
Price focus, short-term benefit
Opposite relationship, less open.
Variety products
Delivered at warehouse

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High

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Few Suppliers
-

One or few sources for a product
Cooperation relationship, stable, long –
terms
Take the advantage of economies of scale.
Selective sourcing contract
Regular delivery
Small shipment for one delivery
Delivered at the place which uses material

- The characteristics of sourcing market
- The capability of suppliers
- Procurement and sourcing opinions of
enterprises

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