Sourcing is the set of business processes required to purchase goods and services

Functions Of Procurement (Sourcing)

Consumption Management Supplier Selection Contract Negotiation Purchasing Contract Management Contract Closure

1. Consumption Management

Effective procurement begins with an understanding of how much of what categories of products / Services are required across the entire company as well as by each operating unit

Better economies of scale can be achieved if requirements are aggregated

Setting Up Expected Level of Consumptions / requirement Compared with actual level of consumption

Consumption Management

Consumption above expectations is either a problem to be corrected or it reflects inaccurate expectations that need to be reset. Consumption below expectations may point to an opportunity that should be exploited or it also may simply reflect inaccurate expectations to begin with.

2. Supplier (Vendor) Selection

There are a number of reasons why the selection and evaluation of suppliers are more important today than they were in the recent past Cost Of Material or Services Reliability Quality Financial aspects Innovation Lead Times

Supplier Assessment Factors

Replenishment Lead Time On-Time Performance Supply Flexibility Delivery Frequency / Minimum Lot Size Supply Quality Inbound Transportation Cost

Pricing Terms Information Coordination Capability Design Collaboration Capability Exchange Rates, Taxes, Duties

Supplier Assessment Matrix

Supplier Selection
Discussion Question: Large Pool of Suppliers VS Small Pool of Suppliers?

Single Sourcing

Advantages:
Lower Price due to bulk quantities Enabler of JIT More willingness in investment and commitment Lower administration Cost Easier to track down material supply

Disadvantages: Low variety Dependency / Risks

Advantages Of Multiple Sources

Supply Continuity A useful approach to ensure the reliability of supply stream and improve supply continuity provides alternative sources in the event of supply stoppages Competitive Pressure Increase the buyers negotiating power through the perceived threat of being able to switch business easily

Disadvantages of Multiple Sourcing

Additional Admin. Expense: Extra effort and time in supplier management. Short term Relationship Frequent change of suppliers results in lack of motivation by both sides to work together Lower volumes of business compared to the whole

How Many Suppliers to Use

Single-sourcing- a risky proposition. Although trends favor fewer sources, avoid single source.

Reasons Favoring a Single Supplier

Reasons Favoring More than One Supplier

To establish a good relationship Less quality variability Lower cost Transportation economies Proprietary product or process Volume too small to split

Need Variety Spread risk of supply interruption Create competition Information

3. Contract Negotiation

This is where the specific items, prices, and service levels are worked out. The simplest negotiations are for contracts to purchase indirect products where suppliers are selected on the basis of lowest price The most complex negotiations are for contracts to purchase direct materials that must meet exacting quality requirements and where high service levels and technical support are needed

4. Purchasing

These activities are the routine activities related to issuing purchase orders for needed products. Purchasing is normally associated with a functional activity to acquire material / services

Purchasing VS Procurement What is the difference?

Simple Answer

Procurement is the acquisition of goods and/or services at the best possible TOTAL COST OF OWNERSHIP, in the right quantity and quality, at the right time, in the right place and from the right source for the direct benefit or use of corporations, or individuals. In short Procurement is concerned with the overall gathering of resources to acquire goods/services, while purchasing is the specific act of acquiring something by paying money for it. Purchasing is little part of procurement

Major Categories for the Components of Total Cost of Ownership

Total Cost of Ownership

Pre-transaction Components 1. Identifying need 2. Investigating sources 3. Qualifying sources 4. Adding supplier to internal systems 5. Educating : supplier in firms operations firm in suppliers operations

Transaction Components 1. Price 2.Order placement/ preparation 3. Delivery/ transportation 4. Tariffs/ duties 5. Billing/ payment 6. Inspection 7. Return of parts 8. Follow-up and correction

Post-transaction Components 1. Line fallout 2. Defective finished goods rejected before sale 3. Field failures 4. Repair/ replacement in field 5. Customer goodwill/ reputation of firm

Purchasing vs. Procurement (contd)

Purchasing Mentality
One contract at a time Win-lose Immediate returns Secretive Current needs can be met Lowest purchase price Multiple suppliers Infrequent interaction Criticism Buyer-sales relationship Safety in numbers Quality inspected Inventory as safeguard

Procurement Mentality
Continual Improvement Win-win Long-term perspective Trusting Strategic fit exists Total cost of ownership Supply-base reduction Frequent interaction Constructive evaluations Cross-functional relationship Safety in knowledge Quality at source Information as safeguard

Discussion Question:

Centralized VS Decentralized Purchasing

Purchasing: Centralized vs. Decentralized

Purchasing in any organization dependent on many factors, such as market conditions & types of materials required.

Centralized Purchasing- purchasing department

located at the firms corporate office makes all the purchasing decisions.

Decentralized Purchasing- individual, local

purchasing departments, such as plant level, make their own purchasing decisions.

Purchasing: Centralized vs. Decentralized

Advantages

Advantages-

Centralization
Concentrated volumeleveraging purchase volume Avoid duplication Specialization Lower transportation costs No competition within units Common supply base

Decentralization

Closer knowledge of requirements Local sourcing Less bureaucracy

Contract administration ensures that the sellers performance meets contractual requirements Contracts are legal relationships, so it is important that legal and contracting professionals be involved in writing and administering contracts Many project managers ignore contractual issues, which can result in serious problems

5. Contract Administration

Suggestions on Change Control for Contracts

Changes to any part of the project need to be reviewed, approved, and documented by the same people in the same way that the original part of the plan was approved Evaluation of any change should include an impact analysis. How will the change affect the scope, time, cost, and quality of the goods or services being provided? Changes must be documented in writing. Project team members should also document all important meetings and telephone phone calls

6. Contract Close-out

Contract close-out includes

product verification to determine if all work was completed correctly and satisfactorily administrative activities to update records to reflect final results archiving information for future use

Procurement audits identify lessons learned in the procurement process

E-Procurement

Internet has grown and evolved, more and more companies have become involved in e-business. Definition: E-Procurement is the business to business (B2B) purchasing of goods and services through the Internet.

E-Business & Supply Chain Management

One of the most important impacts of the Internet and e-business in supply chain management is the availability of instantaneous information. Information like pricing, location of materials, status of shipments, and availability of parts throughout the supply chain.

E-Business & Supply Chain Management

Package carriers such as FedEx, UPS, Time Matters, DHL, TCS experienced substantial increase in the number of packages they deliver for companies due to the growth of e-business

e-Procurement
Advantages of the e-Procurement System Time savings Cost savings Accuracy Real time Trackability Management

E-Commerce

E-commerce uses advanced technology to assist business transactions in a web-based environment and facilitates the transaction of information flow and fund flow. E-commerce involves business-to-business transaction (B2B) such as Covisint, business-to- Customer transaction such as Amazon.com (B2C), customer-to-business transaction (C2B) such as priceline.com, and customer-to-customer transaction (C2C) such as e-Bay auction.