Strategic Sourcing and Procurement Management

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.