Ch. 5: Sourcing Materials and Services

Three Stages in the Evolution of Strategic Sourcing

purchasing, procurement, and strategic sourcing

Purchasing

Transactional, buying products and services, sourcing process, and purchase order

Procurement

Range of processes, supplier selection, price negotiation, contract management, and supplier performance management

Strategic sourcing

Broader and more comprehensive, aligned with overall business goals, supply chain impact, and cross-function.

Quadrant technique

enables supply chain managers to assess the importance of each product or service being purchased

Risk

the chance of failure, nonacceptance in the marketplace, delivery failures, and unavailability of capable suppliers

Generics

low-risk, low-value items and services that typically do not enter the final product. Items such as office supplies and maintenance, repair, and operating items (MRO)

Commodities

items or services that are low in risk but may be higher in value than generics. Basic production materials (bolts), basic packaging (exterior box), and some transportation services

Distinctives

high-risk, low-value items and services such as engineered items, parts that are available from only a limited number of suppliers, or items that have a long lead time

Criticals

high-risk, high-value items that give the final product a competitive advantage in the marketplace. As noted earlier, the computer chip used may give the computer a unique speed that differentiates it from all competitors, in which case this unique capability is likely to increase the computer’s value to the customer

3 common types of buy situations

capital goods, rebuys, and MRO items

Capital goods

a longer-term investment for an organization that may require significant financial planning

Rebuys

repeat purchases that may either be identical to historical purchases (standard) or some variation thereof (modified)

MRO items

needed for the continuing operation of the company and its supply chain activities

Strategic Sourcing Process

1. Develop strategic plan

2. Understand spend

3. Evaluate supply sources

4. finalize sourcing strategy

5. implement sourcing strategy

6. onboarding and transitioning

7. collaborative process improvement

5 core principles to achieve desired levels of value

1. assess the total value

2. develop individual sourcing strategies

3. evaluate internal requirements

4. focus on supplier economics

5. drive continuous improvement

Request for Information

establish whether a supplier has the capabilities and interest to be considered further in the sourcing process and is potentially able to meet the customer’s business requirements

Request for Proposal

provides specific information as to what the buying company would like to source and asks potential suppliers for details as to how they would respond to the request.

Total quality management

focuses on measuring and understanding process variability and continuous improvement

Six Sigma

focus on techniques for solving problems and using statistical methods to improve processes, Six Sigma involves training experts (known as green belts and black belts) who work on solving important problems while they teach others in the company.

ISO 9000

stresses the importance of having standard processes in place to document what you do and do what you document

“Lean” processes

involves a more general commitment to eliminating wasteful practices and improving efficiency.

Reliability

On-time and in-full deliveries to customers

Risk

potentials for supply uncertainty, lead time uncertainty, and cost uncertainty.

Capability

considers potential suppliers’ production facilities and capacity, technical capability, management and organizational capabilities, and operating controls.

Financial

Financially unstable suppliers may be less dependable in terms of having adequate supplies of needed products and materials when needed by customers.

Desirable Qualities

cultural compatibility and supplier attitude; locations of key supplier facilities; packaging capabilities; repair and return services; and others such as availability of training aids, etc.

Sustainability

organizations that can demonstrate a commitment to sustainability also have successful commitments to effectiveness and efficiency of their overall businesses.

Supplier relationship management

A widely used approach to building mutually beneficial relationships with suppliers

Fundamental pillars of SRM process

1. importance of relationship

2. Communications

3. Use of business reviews

4. closeness of relationships

5. strategic plan

Total landed cost

represents the sum of all costs associated with making and delivering products to the point where they are needed

E-sourcing and E-procurement functionalities

1. industry analysis and supplier identification

2. analytical tools

3. management of RFI/RFP processes

4. Process automation

5. Online negotiations

6. Collaboration Tools

7. Logistics procurement

8. Project management

9. Knowledge management

10. contract management

Advantages of e-commerce procurement

— Lower procurement and operating costs

— Electronic invoices and payments

— Improve efficiency of sourcing and procurement

— Improve communications

— Current information and data standardization

— Easier access to more suppliers

Disadvantages of e-commerce procurement

— Cybersecurity

— Lack of face-to-face contact between the buyer and seller

— Technology-related concerns

— Education of associates

“Sell-side”

those where online businesses sell to individual companies or consumers

“Buy-side”

buyer-controlled e-procurement capabilities that facilitate electronic interactions with sellers.

B2B and B2C

refer to online businesses selling to businesses or consumers, respectively. They both are “sell-side” in that they represent sources of products and services that are available for purchase by customers.

Online marketplace

a type of e-commerce site where product or service information is provided by multiple third parties, whereas transactions are processed by the marketplace operator.

Online trading community

capability that provides buyers and sellers with a structured method for trading, bartering, or selling goods and services.