Strategic Sourcing and Procurement Management

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Questions and Answers

What are the key benefits of developing best-in-class suppliers?

Developing best-in-class suppliers leads to improved alignment with business strategy and promotes continuous improvement.

What does TCO stand for and why is it important in procurement?

TCO stands for Total Cost of Ownership, and it is important because it encompasses not only the purchase price but also factors like quality, durability, and warranties.

How do standardized inputs and processes contribute to cost savings in procurement?

Standardized inputs and processes allow for bulk purchasing, which lowers inventory costs and reduces administrative risks.

Explain the role of communication in procurement management.

Communication in procurement management is essential for maintaining effective relationships with suppliers and coordinating with internal departments. Signup and view all the answers

Why is it recommended to use Purchase Orders (POs) instead of emails in procurement?

Using Purchase Orders provides a formal and organized method of procurement that tracks orders accurately, reducing reliance on emails and saved receipts. Signup and view all the answers

What is the primary focus of strategic sourcing beyond simply acquisition cost?

Evaluating the total cost of ownership and the value of the supplier relationship. Signup and view all the answers

How should individual spend categories be handled according to the core principles of strategic sourcing?

They need customized sourcing strategies. Signup and view all the answers

What role does continuous improvement play in strategic sourcing?

It drives collaboration and enhances relationships between the organization and its suppliers. Signup and view all the answers

What are the four quadrants outlined in the sourcing strategy?

Distinctives, Generics, Criticals, and Commodities. Signup and view all the answers

Describe the significance of assessing requirements and specifications in the sourcing process.

They must be thoroughly assessed and rationalized to ensure effective sourcing. Signup and view all the answers

What does 'working as a mediator' involve in the context of strategic sourcing?

It involves facilitating communication and collaboration between suppliers and the organization. Signup and view all the answers

What type of improvements does strategic sourcing seek through its processes?

It seeks win-win situations through two-way continuous improvement. Signup and view all the answers

Why is it important to capture and use information in strategic sourcing?

It improves relationships and informs better sourcing decisions. Signup and view all the answers

What is the primary goal of the onboarding and transitioning step in the strategic sourcing methodology?

The primary goal is to ensure smooth integration of new suppliers and processes into the organization. Signup and view all the answers

How does the sourcing strategy implementation step contribute to managing supplier performance?

It includes developing a savings tracking system and monitoring contract compliance to address issues of maverick buying. Signup and view all the answers

What are the key deliverables expected from the onboarding and transitioning step?

Key deliverables include supplier contracts, transition plans, and data collection. Signup and view all the answers

What role does benchmarking play in the strategic sourcing methodology?

Benchmarking is used to compare the supply market on an ongoing basis to ensure competitive pricing and service. Signup and view all the answers

During the assess supply market step, what should an organization focus on regarding contract compliance?

The organization should monitor contract compliance and address any instances of maverick buying. Signup and view all the answers

What is one key activity involved in profiling spend within the strategic sourcing methodology?

Establishing a supplier/enterprise process improvement team is a key activity. Signup and view all the answers

What outcomes are expected from the collaborative process improvement step?

Outcomes include ongoing savings tracking and continuous improvement in supplier performance. Signup and view all the answers

How does conducting training on new processes assist in the onboarding of suppliers?

Training helps suppliers understand the new processes, ensuring they can comply with expectations and deliver effectively. Signup and view all the answers

What are the three main components of Total Cost of Ownership (TCO)?

Acquisition costs, ownership costs, and post-ownership costs. Signup and view all the answers

Name two examples of post-ownership costs.

Environmental costs and warranty costs. Signup and view all the answers

How do ownership costs affect the total cost of a product over its lifecycle?

Ownership costs, such as maintenance and downtime costs, add to the total cost by accounting for expenses incurred during the use of the product. Signup and view all the answers

Explain the importance of considering acquisition costs in TCO analysis.

Acquisition costs, including purchase price and planning costs, are crucial as they represent the initial financial commitment and foundational expenses for obtaining a product. Signup and view all the answers

What is the significance of understanding customer dissatisfaction costs in TCO?

Understanding customer dissatisfaction costs helps businesses quantify the potential loss of revenue and reputation due to product failures or poor service. Signup and view all the answers

What is Total Cost Ownership (TCO) primarily focused on?

TCO focuses on the comprehensive costs associated with the purchase, use, and disposal of a product. Signup and view all the answers

How do life-cycle costs contribute to Total Cost Ownership?

Life-cycle costs capture all expenses involved from acquisition through to disposal, providing a complete view of TCO. Signup and view all the answers

What role do strategic sourcing costs play in TCO analysis?

Strategic sourcing costs influence the overall purchasing decisions and can impact long-term supplier relationships and pricing. Signup and view all the answers

How are quality costs related to TCO?

Quality costs are associated with ensuring products meet requirements and can impact both operational efficiency and customer satisfaction. Signup and view all the answers

What is the significance of inventory management costs in TCO?

Inventory management costs include holding, ordering, and stock-out costs, affecting the efficiency of supply chain operations. Signup and view all the answers

Define transaction costs in the context of TCO.

Transaction costs are expenses incurred during the buying and selling process, such as search and negotiation costs. Signup and view all the answers

What are the implications of technology costs on TCO?

Technology costs can influence efficiency, capabilities, and the quality of outputs, thereby impacting overall ownership costs. Signup and view all the answers

How do logistics costs fit into the Total Cost Ownership model?

Logistics costs encompass the expenses of transporting and storing goods, affecting both cost and service level. Signup and view all the answers

What factors contributed to the increase in external spend from 60% to 85% for companies between 1970 and 2010?

Productivity gains, outsourcing, and other efficiencies contributed to the rise in external spending. Signup and view all the answers

What are some components included in the Total Cost of Ownership (TCO)?

Components include acquisition costs, overhead costs, utilization, lifecycle costs, and spare parts. Signup and view all the answers

How did the role of supply management shift in relation to net income over the years?

Supply management has become critical in controlling and reducing costs, thereby positively impacting net income. Signup and view all the answers

Identify two types of costs that fall under overhead costs in TCO.

PROTYPING, LICENSING, STORAGE AND DISTRIBUTION, QUALITY AND INVENTORY MANAGEMENT Signup and view all the answers

What was the overall trend in external spending for S&P 500 companies from 1970 to 2010?

The trend showed a significant increase from 60% to 85% of total costs being spent externally. Signup and view all the answers

Study Notes

Chapter 5: Sourcing Materials and Services

This chapter covers sourcing materials and services.
Lesson 1 was on July 24, 2024.

What Type of Buyer Are You?

A question was posed to students about their buying type.

What Is the First Question?

The first question students consider before purchasing something was asked.
The answer given is 'purpose'.
Purpose is defined as the reason something is done, created, or exists.

After Completing This Chapter

Students should be able to distinguish between purchasing, procurement, and strategic sourcing within a supply chain context.
They should also understand the importance of procured items and services and the financial effects of procurement decisions.
Students should understand the strategic sourcing process.
Appreciation of effective supplier relationships and the value of supplier certifications and registrations are also crucial.
Understanding the Total Landed Cost (TLC) and Total Cost of Ownership (TCO) is necessary.
The buy/make decision and its contrast with outsourcing should be understood.

Purchasing, Procurement & Sourcing

The terms purchasing, procurement, and sourcing are frequently used interchangeably.
On average, external spend is 85% of an organization's total costs (Source: McKinsey, 2013).

Role and Nature of Buying

Purchasing is a transactional function- buying products and services.
Procurement is the process of managing a wide range of processes associated with obtaining company-needed goods and services.
Strategic sourcing is a comprehensive process for obtaining goods and services to gain the best value.

Purchasing vs. Procurement vs. Strategic Sourcing

Purchasing is an activity, while procurement and strategic sourcing are processes.
Strategic sourcing aligns procurement priorities with supply chain and organizational goals.
Procurement management involves handling the broad spectrum of procurement activities, such as supplier selection, pricing negotiations, and contract management.
Purchasing involves adhering to established procedures for acquiring products and services.

Interrelation between Strategic Sourcing, Procurement Operations and Vendor Management

This section provides a visual representation of how these areas interact, highlighting key steps in the process.
- Analyze spend, manage risk, create requistions.
- Define sourcing strategy, qualify suppliers, negotiate contracts.
- Manage supplier relations.

Procurement

Procurement manages a multitude of processes concerning buying goods and services aligning with company necessities.

Objectives of Procurement and Strategic Sourcing

Improve competitive position: Enhancing revenue, asset utilization and cost reductions.
Provide uninterrupted flow: Maintaining continuous supply to prevent stockouts and customer dissatisfaction.
Minimize inventory investment: Optimizing inventory levels to reduce costs.
Maintain and improve quality: Ensuring that all procured goods and services meet minimum quality requirements.
Develop and utilize Best-in-class suppliers (find suppliers that link in with your business strategy, and develop a continuous improvement program with the supplier).
Standardize (where appropriate) input and processes.
Aim for the lowest Total Cost of Ownership (TCO): considering not only purchase price but also quality, salvage value,durability, and warranties.
Achieve cooperative and quality internal relationships
Achieve Procurement objectives efficiently: minimizing operational costs.

How Would We Get This Done?

Procurement Management is the function responsible for connecting with suppliers; involving communication and relationship management.
Use e-procurement systems for purchase orders (POs), instead of emails or simply saving receipts.

The Procurement Process

Generating a Purchase Order.
Receiving Purchase Order Acknowledgment.
Ensuring Goods Receipt.
Invoicing.
Paying the Supplier.

The Five Rights of Procurement

Quality: Obtaining satisfactory quality goods fitting their purpose.
Quantity: Acquiring goods in sufficient quantities to meet demand and maintain service levels.
Price: Obtaining goods at a reasonable, fair, competitive, and affordable price.
Time: Ensuring timely delivery, as per demand.
Place: Delivering goods to the appropriate delivery point, packaged securely.

Procurement & Sourcing (Continued)

Lesson 2 (July 26, 2024).
Sourcing activities involve various tasks (selection of vendors, establishing payment terms, strategic vetting, and contract negotiation).

Intra-firm Management Relations

Procurement functions are a support function within a business, maintaining relationships with various departments.
Procurement relationships are pertinent with top management, operations, logistics management, marketing/sales, financial management, technical management, engineering, safety and environmental management teams, and human resources management.

Procurement's Role

Acquiring goods and services necessary for an organization's success.

Three Types of Purchasing Categories

Rebuy: Repeat purchases that are either identical to past ones or with slight variations (standard or modified).
Maintenance, Repair, Operations (MRO): Items needed for the firm's ongoing operation.
Capital Goods: Long-term investments, such as facilities or equipment.

Types and Importance of Purchases

The Kraljic Model categorizes items based on their value and risk.
- Distinctives: High risk, low value. (Eng. Parts, specific components)
- Generics: Low risk, low value. (office supplies, routine maintenance, repair parts)
- Criticals: High risk, high value. (key elements of a product)
- Commodities: Low risk, high value. (materials, packaging, logistics support)

Item Procurement Importance Matrix

Products and services have varying importance.
The matrix evaluates products based on value and risk.

Procurement's Impact on the Bottom Line

Productivity improvements, outsourcing, and shifts in external spend have a significant effect on a company's net income.

Strategic Sourcing: What It Is and What It Isn't

Strategic sourcing is a methodical and data-driven approach to optimize an organization's supply base. -It's about Total Cost of Ownership, not just lowest price.
- Strategic Sourcing- collaborative effort.

Unique Aspects of Strategic Sourcing

Consolidation and Leveraging Purchasing Power: Combining needs to negotiate better deals.
Emphasis on Value: Evaluating total cost of ownership, not just initial cost.
More Meaningful Supplier Relationships: Developing strong partnerships improves outcomes.
Attention to Process Improvement: Refining purchasing processes boosts effectiveness.
Enhanced Teamwork and Professionalism: Cross-functional collaboration (suppliers, customers).

Managing Sourcing and Procurement Processes

To improve effectiveness, firms frequently determine the type of purchase, investment level, conduct procurement, and evaluate effectiveness.

Purchasing, Procurement, Strategic Sourcing

Purchasing: A transactional buying activity.
Procurement: A more involved process encompassing vetting, negotiation, and supplier relationships.
Strategic Sourcing: A practice incorporating long-term relationships, significant investment, and aiming for optimal value.

Strategic Sourcing Methodology

Step 1: Develop Strategic Plan: Defines scope, identifies stakeholders.
Step 2: Understanding Spend: Analyzes total spend, identifies drivers and opportunities for improvement.
Step 3: Evaluate Supply Sources: Evaluates potential suppliers and identifies opportunities to consolidate purchases.
Step 4: Develop Sourcing Strategy: Develops strategies, criteria to select suppliers.
Step 5: Implement Sourcing Strategy: Implements sourcing strategy, manages negotiations, selects suppliers.
Step 6: Onboarding and Transitioning: Aligns new suppliers with processes.
Step 7: Collaborative Process Improvement: Continuously improves the process.

Supplier Selection Criteria

Quality, Reliability, Risk, Finances, Capabilities and Sustainability are considered important selection criteria.

What Makes a Good Supplier?

Reliability, Quality, and Value are key attributes.

Supplier Selection

Evaluating and selecting suppliers.
Criteria: Selection criteria, Quality, Six Sigma, ISO 9000, Early Supplier Involvement (ESI)

Strategic Sourcing Plan- Supplier Selection

World-class companies use procurement management to develop a strategic sourcing plan focusing on supplier discovery evaluation, selection, and development.
This process often involves obtaining company-wide support for the plan, particularly in financial backing from the top executive.

Evaluating Considerations

Strategic priorities, process requirements, identified risks, and internal requirements need to be considered during procurement evaluation.
This includes considerations on the specific supply chain relationship and criticality.

What Can Go Wrong?

Delays, damaged goods, incorrect fits, poor product specifications, and user dissatisfaction are common procurement issues.

Total Landed Cost & Total Cost of Ownership

Procurement cost is only a part of the overall cost of obtaining goods or services.
Total Landed Cost (TLC) includes all costs related to the goods delivery and is part of the Total Cost of Ownership (TCO). Total Cost of Ownership (TCO) incorporates all costs throughout of a product or service lifecycle.

E-procurement and E-sourcing

E-procurement and e-sourcing use electronic tools and digital resources to support procurement functions. This includes process automation, knowledge management, logistics procurement, online negotiations, project management, and contract management.

E-commerce Business Models

Four basic e-commerce business models exist: sell-side, buy-side, electronic marketplaces, and online trading communities.

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Description

This quiz explores essential concepts in strategic sourcing and procurement management. It covers key benefits of developing suppliers, the importance of total cost of ownership (TCO), and the role of continuous improvement. Test your knowledge on effective procurement practices and communication strategies.