Sourcing Materials and Services PDF

Chapter 5 Sourcing materials and services Lesson 1 (24 July 2024) What type of a buyer are you? 2 What is the first question you ask yourself or that pops into your mind before you purchase something? Durability...

Chapter 5 Sourcing materials and services Lesson 1 (24 July 2024) What type of a buyer are you? 2 What is the first question you ask yourself or that pops into your mind before you purchase something? Durability 3   Distinguish nature and role of Purchasing, Procurement, and Strategic Sourcing in a supply chain context  Consider the importance of the types of items and services purchased to the sourcing and procurement processes  Understand the financial impact of Procurement decisions on a company After completing this Chapter, you  Understand the Strategic Sourcing process (The Methodology) should be able to  Recognize strategic sourcing’s core principles and unique aspects do thefollowing:  Appreciate the importance of companies having effective relationships with suppliers and understand the value of supplier organizations having certain certifications and registrations  Examine the issue of procurement price and the relevance of total landed cost (TLC) and total cost of ownership (TCO)  Understand the buy / make decision and how this is different to outsourcing 4 People often use the term purchasing, procurement & sourcing as synonyms   On average, external spend is 85% of total costs (Source: McKinsey, 2013.... Procurement 20/20)  Purchasing, procurement, and strategic sourcing are receiving considerable attention as organizations try to improve the overall efficiency and effectiveness of their supply chains Role and Nature Purchasing: Procurement: Strategic Sourcing: The transactional function Refers to the process of Essentially, the strategic of buying products and managing a broad range of sourcing process is broader services processes that are and more comprehensive associated with a than the procurement company’s need to procure process and it’s determined goods and services that are to obtain goods and required to manufacture a services that are of the best product (direct) or to value for the company and operate the organization advance the goals and (indirect) objectives. Purchasing vs. Procurement vs. Strategic Sourcing Purchasing is an activity that follows conduct of a formal sourcing process, while procurement and strategic sourcing are best described as processes.  Managing procurement priorities such that Strategic they are well-aligned with goals and Sourcing objectives of the supply chain and of the overall organization.  Managing a broad range of activities within the procurement process (e.g. supplier Procurement selection, price negotiation, contract management, supplier performance management).  Managing a firm’s acquisition procedures and Purchasing standards, involving largely transactional activity of the buying of products & services. © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 7 Interrelation between them Procurement Managing a broad range of processes associated with buying goods and services relating to the companies needs   Improve competitive position of the business Focus on contributing to the business objectives and strategy. Exploit opportunities to enhance revenue, asset utilization, reduce costs, gain access to innovative technologies, etc.  Provide uninterrupted flow of goods / services Continuous flow is needed to support business activities. Stock-outs can be Objectives of very costly due to lost production, unhappy customers. Procurement &  Minimise inventory investment and loss of revenue Strategic sourcing Optimal inventory levels need to be determined and fine-tuned. Cost of additional inventory vs. Stock-out situations.  Maintain and improve quality A certain level of quality needs to be maintained. Procurement processes are responsible to make sure all products or services procured, meet the minimum quality requirements. Source: Chartered Institute of Procurement and Supply (CIPS), 2014   Find / develop best-in-class suppliers Find suppliers that link in with your business strategy, and develop continuous improvement programs with the suppliers  Standardise (where appropriate) inputs and processes Continuous focus leads to savings in bulk purchases, lower inventory, lower risks and administration costs Objectives of Procurement &  Aim for lowest total cost of ownership (TCO) Strategic sourcing Not only the purchase price... but the total cost of ownership. For example: Quality levels, salvage value, durability of the goods, warranties, etc.  Achieve co-operative, productive internal relationships You need to work and coordinate with the other departments in the business  Accomplish Procurement objectives efficiently Achieve Procurement objectives at the lowest operating costs Source: Chartered Institute of Procurement and Supply (CIPS), 2014   Procurement Management is the function responsible for the interface/link with suppliers Relationship Communication Management How would we get this done?   Procurement Management is the function responsible for the interface/link with suppliers Communication Relationship Management How would we get this done? Using Purchase orders (PO’s) especially those generated by an e-procurement software system is critical, regardless of the size of your organisation. Don’t rely on emails and simply save receipts. The procurement process (1.) Generating a purchase order (2.) Receiving purchase order acknowledgment from supplier (3.) Ensure goods are received (The Rights) –proof would be the delivery note (4.) Invoice accordingly (5.) Pay supplier  Obtaining goods which are of satisfactory quality and fit for their Securing all of the above at a purpose Quality price which is reasonable, fair, competitive and affordable Obtaining goods in sufficient quantity to Price Quantity meet demand and The Five Rights of maintain service levels while minimising Procurement excess stock holding Securing delivery of goods at the right time to meet demand, but not so early Time Place as to incur unnecessary inventory costs Having goods delivered to the appropriate delivery point, packaged and transported in such a way as to secure their safe arrival in good condition Source: Chartered Institute of Procurement and Supply (CIPS), 2014 THANK YOU Chuma Lalendle [email protected] Procurement & Sourcing continued.. Lesson 2 (26 July 2024)  Selecting vendors Establishing Payment Terms Sourcing Activities Involve Strategic Vetting Selection & Negotiation of Contracts   The Procurement function is a support function of the business  Relationship to top management  Relationship to production/ operations/Logistics management State possible reasons  Relationship to Marketing/Sales Intra-firm  Relationship to financial why procurement has Management management relation with the different Relations  Relationship to Technical management like Information teams in the statements Management and on the left Engineering  Relation to Safety and Environmental management teams  Relationship to Human by the Procurement department. Resources management 3  Procurement is concerned with acquiring (procuring) all goods and services that is vital to an organisation. Office supplies Raw materials Packaging  Three Types of Purchasing Categories 3 May represent a long-term investment Items that are needed for May require significant financial planning the continuing operation Maintenance, Capital E.g Facilities and equipment of the company and its supply chain activities Repair, Goods Operations (MRO) Types of Buys 1 Rebuy 2  Standard  Modifed Repeat purchases that may either be identical to historical purchases (standard) or some variation thereof (modified). © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 5  Types and Importance of Purchases – The Quadrant Technique (Kraljic Model) Not all items /services purchased are of equal importance, requiring varying procurement strategies based on their value and risk. Distinctives Criticals High  Engineered Items  Unique Items Risk  Limited supply or high  Items Critical to Final procurement cost Product  Non unique Item Generics Commodities Low  Office Supplies  Basic Production Items Risk  MRO Items  Basic Packaging or raw material  Logistics Services Low Value or Profit Potential High Value or Profit Potential Source: Figure 5.3 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6   The products and services purchased are not all the same and some are more important and require greater procurement attention Item  The quadrant technique enables the supply chain manager to assess the Procurement importance of each product or service being purchased Importance  The quadrant technique utilizes a two-by-two matrix to determine a procured Matrix item’s relative importance on the basis of value and risk  The criteria used to determine importance are value or profit potential and risk or uniqueness 7 Item  The value criterion examines product or service features that enhance profits for the final product and the firm’s ability to maintain a competitive advantage Procurement in the marketplace Importance  Risk reflects the chance of failure, non-acceptance in the marketplace, delivery Matrix failures and source non-availability 8   Generics are 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) are examples of generics  The administrative and acquisition processing costs are more significant than the Types and purchase price of generics, and, for some generics, the administration and processing costs may exceed the price paid for the item or service Importance of Items and  Commodities are items or services that are low in risk but high in value. Basic Service production materials (bolts), basic packaging (exterior box), and transportation services are examples of commodities that enhance the profitability of the Purchased company but pose a low risk 9   Distinctives are 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 Types and  Criticals are high-risk, high-value items that give the final product a Importance of competitive advantage in the marketplace Items and Service Purchased 10  Types and Importance of Purchases – The Quadrant Technique Not all items /services purchased are of equal importance, requiring varying procurement strategies based on their value and risk. Distinctives Criticals High  Engineered Items  Unique Items Risk  Limited supply or high procurement cost  Items Critical to Final  Non unique Item Product Generics Commodities Low  Office Supplies  Basic Production Items Risk  MRO Items  Basic Packaging  Logistics Services Low Value or Profit Potential High Value or Profit Potential Source: Figure 5.3 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 11  Link the picture to the right quadrant Distinctives (High risk & Low value) Generics (Low risk & Low value) Criticals (High risk & High value) Commodities (Low risk & High value)  Link the picture to the right quadrant Distinctives (High risk & Low value) Generics (Low risk & Low value) Criticals (High risk & High value) Commodities (Low risk & High value) THANK YOU Chuma Lalendle [email protected] Strategic Sourcing Lesson 3 (30 July2024)   Strategic sourcing needs understanding of the markets you're purchasing from inside and out … Strategic  … and learning from your own organization and your suppliers' organizational Sourcing processes, …  …working as a mediator between suppliers and your organization, …  … capturing information and using it to improve relationships.  Strategic sourcing requires two-way continuous improvement process work from each organization  Looks for win-win situations Source: Burt. D, Petcavage, S, Pinkerton R. Eight Edition Strategic Sourcing – Five Core Principles 1 Emphasis beyond acquisition cost, evaluating total cost of ownership and the 5 value of the supplier relationship. Drive Assess continuous improvement total value 2 Individual spend categories need 1 customized sourcing strategies. 4 Develop 3 Requirements and specifications Focus on individual thoroughly assessed and rationalized as supplier sourcing part of the sourcing process. economics strategies Evaluate 4 Suppliers’ economics understood before internal 2 identifying buying tactics (volume leveraging, price unbundling (e.g. flight 3 requirements ticket), price adjustment (discounts)). 5 Strategic sourcing initiatives as subset of continuous improvement process for procurement and sourcing organizations. © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3 Price unbundling   Definition: A systematic and fact‐based approach for optimizing an organization’s supply base and improving the overall value proposition What it is What it’s NOT Focused on the TCO incorporating customer Focused ONLY on cost needs, organizational goals, and market conditions Strategic Getting the best product / service at the best Getting the cheapest product / service Sourcing – What value it is and not Driven by a rigorous and collaborative Ad‐hoc activities involving only approach purchasing Addresses all levers for savings and building Focused on “beating up suppliers” relationships Decisions based on fact analysis and market Decisions on opinion or preference, intelligence unjustified, or complacency A continuous process A one‐time project or decision  Unique Aspects of Strategic Sourcing Consolidation and leveraging of 1 purchasing power 2 Emphasis on value 3 More meaningful supplier relationships Attention directed to process 4 improvement 5 Enhanced teamwork and professionalism Images courtesy of HRPeople © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6 5 unique aspects of Strategic sourcing  A four-step approach can be used and adapted to a firm’s particular needs. To maximize effectiveness, the following steps may be considered: 1. Determine the type of purchase Managing Sourcing and 2. Determine investment Procurement level Processes 3. Perform procurement process Were the user’s needs satisfied? Was the investment 4. Evaluate necessary? effectiveness How did we improve the value and position of the firm?  Purchasing Purchasing – is the buying of goods and services described as a transactional function/activity of buying. Procurement Summary Procurement – follows a process and deals with more activities like, strategic vetting, negotiation and building supplier relationships. Strategic Sourcing Strategic sourcing – Forms long term mutually beneficial strategic partnerships, invests in suppliers where necessary puts a lot more time and energy into the function of buying to be able to get the best value out.  Sourcing Materials Video Video link- https://youtu.be/SRq-U1m2dwg  Questions on Planning and  Does SUBWAY utilise strategic sourcing methods or traditional purchasing sourcing of methods? materials for the  Which unique aspects of strategic sourcing does SUBWAY currently make use SUBWAY case: of?  What are the dangers of buying ingredients at the lowest cost in this case?  Is the buying strategy of SUBWAY?  Centralised or Decentralised SUBWAY Footlong https://www.youtu NOTE: The video is available on SUNLearn in the section be.com/watch?v=S additional material Rq-U1m2dwg  What should be considered when The Strategic evaluating and selecting suppliers Sourcing Plan Selection criteria Quality TQM Six sigma ISO 9000 Early supplier involvement (ESI) Supplier Selection Checking and ensuring performance TLC & TCO Source: Burt. D, Petcavage, S, Pinkerton R. Eight Edition Practical exercise to be done on Monday (5 Aug) (Supplier selection) Supplier Selection Quality Reliability Risk Desirable Finances Capabilities qualities Criteria Sustainability ANY QUESTIONS? THANK YOU Chuma Lalendle [email protected] Strategic Sourcing Methodology Lesson 4 (31 July2024) 1 Strategic Seven key steps are included in the overall strategic sourcing Sourcing methodology, as proposed in the textbook (Coyle 11e) Methodology Step 1: Develop Strategic Plan Step 2: Understand Spend Step 3: Evaluate Supply Sources Step 4: Finalize Sourcing Strategy Step 5: Implement Sourcing Strategy Step 6: Onboarding and Transitioning High-level insight Step 7: Collaborative Process Improvement Deliverables Duration Activities /Outcome  1. Develop Strategic Plan  Duration: 2 weeks Strategic  Key activities: Sourcing  Create a cross-functional planning group Methodology  Assemble and train strategic sourcing team  Develop team charter  Identify stakeholders  Document size of buy  Develop category work plans  Communicate team scope  Key deliverables and outcomes: STEP 1 – Develop  Project charter Strategic Plan  Project kick-off  Communications  1. Develop Strategic Plan  Duration: 2-3 weeks Strategic  Key activities: Sourcing 2. Understand Spend  Identify demand drivers Methodology  Review, align and standardise specifications  Review customer requirements, issues and risks  Assess purchasing process effectiveness  Identify process improvement opportunities  Key deliverables and outcomes:  Spend analysis  Spec review STEP 2 –  Total cost model Understand spend Identify or re- Define and evaluate Decide whether to evaluate needs use requirements make or buy  1. Develop Strategic Plan  Duration: 4-8 weeks Strategic  Key activities: Sourcing 2. Understand  Identify all potential sources of supply Spend (search as extensively as possible – current and new Methodology suppliers, both local and international) 3. Evaluate Supply  Evaluate supply market/industry and economy Sources (understand the type of market, how the market works, what drives costs, what influences service)  Identify all viable sources of supply (new & old, must have vs. nice to have) Extensive analysis of market,  Perform supplier assessments suppliers, prices,  Perform supplier comparisons STEP 3 – opportunities for  Identify supplier opportunities Evaluate Supply consolidated purchases, create  Key deliverables and outcomes: Sources leverage and  Supplier listing “modernisation“  Request for information (RFI) of relationships  1. Develop Strategic Plan  Duration: 2-4 weeks 2. Understand  Key activities: Strategic Spend  Reconfirm scope and desired outcomes Sourcing  Identify key leverage points and improvement Methodology 3. Evaluate Supply opportunities Sources  Develop sourcing strategy  Develop quote process and package (RFQ and RFP) 4. Develop Sourcing Strategy  Determine decision criteria  Define negotiation strategy  Communicate strategies STEP 4 – Finalize  Key deliverables and outcomes:  Sourcing strategy sourcing strategy  Request for proposal (“RFP”)   A Request for Information (RFI) is used when you think you know what you want but need more information from the suppliers. It will typically be followed by an RFQ or RFP What's the difference  A Request for Quote (RFQ) or Request for Proposal (RFP):  Commonly used when you know what you want but need information on between an RFI, how vendors would meet your requirements and/or how much it will cost an RFP and an  Used when you know you have a problem, but don’t know how you want to RFQ? solve it  All three are formal processes and have strict procurement rules for content, timeline and vendor responses  Figure 5-6 provides an overview of the supplier portfolio screening process Supplier Portfolio Screening Process Supplier Selection Criteria Steps 3-5 Source: C. John Langley Jr., Ph.D. Used with permission  1. Project Planning and Kickoff Strategic  Duration: 6-12 weeks Sourcing 2. Profile Spend  Key activities: Methodology  Mange competitive bidding process 3. Assess Supply  Compile and analyse responses Market  Prepare for negotiations  Manage negotiations process 4. Develop  Identify recommended supplier(s) Sourcing Strategy  Gain agreement on recommendation 5. Implement  Obtain final approvals Sourcing Strategy  Award contract STEP 5 –  Key deliverables and outcomes: Implement  Supplier selection sourcing strategy  Supplier letter of agreements  1. Project Planning and Kickoff  Duration: 3-4 weeks  Key activities: Strategic  Communication, rationale, and benefits to appropriate 2. Profile Spend Sourcing parties Methodology  Finalise contractual agreements 3. Assess Supply  Plan the transition to new processes and supplier Market relationships  Internal transition 4. Develop Sourcing Strategy  Supplier transition  Manage the transition process 5. Implement  Develop savings tracking system Sourcing Strategy STEP 6 –  Conduct training on new processes Onboarding and 6. Onboarding and  Key deliverables and outcomes: Transitioning Transitioning  Supplier contracts  Transition plans  Data collection  1. Project Planning and Kickoff  Duration: Ongoing Strategic 2. Profile Spend Sourcing  Key activities:  Establish a supplier/enterprise process improvement Methodology team 3. Assess Supply Market  Implement savings tracking system and reporting  Monitor contract compliance and address maverick 4. Develop buying (unwelcomed buying behaviour) Sourcing Strategy  Benchmark the supply market on an ongoing basis  Monitor supplier performance and provide feedback to STEP 7 – 5. Implement supplier(s) Sourcing Strategy Collaborative  Key deliverables and outcomes: Process 6. Onboarding and  Savings tracking Improvement Transitioning  Ongoing/continuous improvement 7. Collaborative Process Improvement  Outline of the seven steps of the strategic sourcing methodology Strategic Sourcing Methodology Summary Source: Adapted from Adjoining Consulting, LLC. THANK YOU Chuma Lalendle [email protected] Supplier Selection Lesson 5 (04 July 2023)  What should be considered when The Strategic evaluating and selecting suppliers Sourcing Plan Selection criteria Quality TQM Six sigma ISO 9000 Early supplier involvement (ESI) Supplier Selection Source: Burt. D, Petcavage, S, Pinkerton R. Eight Edition The Strategic  World class companies requires Procurement Sourcing Plan Management to develop a strategic sourcing plan that details how Procurement Management will discover, evaluate, select, develop and manage a viable supplier base  Done subsequent to the firm deciding whether material or service should be outsourced  It is critical to obtain company wide support and financial backing from the CEO Supplier Selection Source: Burt. D, Petcavage, S, Pinkerton R. Eight Edition  ▪ Strategic priorities (e.g. for innovation, quality, supply chain integration, corporate social responsibility, or leadership) ▪ Particular process requirements (e.g. for reverse logistics capability, late Evaluating customization and agile supply, lean or cost-efficient supply, or IT systems compatibility) Considerations ▪ Any identified risk factors in the sourcing situation (e.g. international delivery problems, very low quality and engineering tolerances, high regulatory intervention or reputational risk arising from ethics consumers are aware of) ▪ Internal requirement (e.g. prioritising price, or quality, or speed of delivery, according to the nature of business need) ▪ Different supply relationships (e.g. more rigorous criteria on issues such as financial stability, compatibility and corporate social responsibility for ongoing, long-term supplier partnerships than for once-off, short-term price- driven transactions) Source: Chartered Institute of Procurement and Supply (CIPS), 2014 What can go wrong? Don’t receive stock on time Arrives damaged (spoilt) Not the right fit Does not met specifications Poor quality User does not like it Find a better product after purchase (wasted resources) Supplier Selection Quality Reliability Risk Desirable Finances Capabilities qualities Criteria Sustainability Mind Map summary on SunLearn https://learn.sun.ac.za/pluginfile.php/3484094/mod_resource/content/0/Supplier%20Selection%202017.pdf https://learn.sun.ac.za/pluginfile.php/3484094/mod_resou rce/content/0/Supplier%20Selection%202017.pdf  A topic of interest to many buyers of products and services is the extent to which potential suppliers have achieved excellence in terms of process management Process and continuous improvement (CI) Management →Various techniques and approaches that have been developed that address issues relating to soundness of processes, results achieved, and continuous improvement →Important to document the benefits and improvements that are likely to be created as a result of these approaches  TQM: A strategy in which entire organization focused on an examination of process variability and continuous improvement Certification &  Six Sigma: Similar to TQM its approach involves training experts who work on Regulations for solving important problems whilst they teach others in the firm (Focused on reducing errors to 3 defects per 1 million) Quality  ISO 9000: Making sure that companies have standard processes in place that they follow 3 videos on SunLearn   The plan that details how suppliers will be discovered, evaluated, selected, developed and managed should consider the type of relationship to be formed  We know the plan should be developed in a collaborative environment that includes all relevant functional area representatives from the supply chain Supplier  The increased need to develop long-term collaborative relationships highlights Evaluation and the need to develop strategic sourcing plans Relationships  Focus is required here especially when companies want to reduce the total number of their suppliers, frequently in conjunction with programs to improve TQM or efficiency e.g. JIT inventory systems  Supplier relationships are a vital part of successful procurement execution Source: Burt. D, Petcavage, S, Pinkerton R. Eight Edition   Early supplier involvement (ESI) is an approach in Procurement to bring the expertise and collaborative synergy of suppliers into the design process Developing Supplier  Today, early supplier involvement (ESI) is an accepted way of doing business at Relationships many proactive firms and a requirement for world-class Procurement  Reasons for utilizing ESI:  Get supplier inputs before the design is finalized  Capitalize on the latest technology and expertise  Save time since design cycles are getting shorter Early Supplier  Let the supplier know that it is part of the team Involvement  ESI seeks to find “win-win” opportunities Source: Burt. D, Petcavage, S, Pinkerton R. Eight Edition Supplier Management: Post awarding of contract  Is to evaluate your suppliers regularly and on a formal basis  Four questions to ask: 1) Did the supplier succeed in meeting the customer’s needs? 2) What elements of the relationship, both strategic and tactical/operational may benefit from modification and improvement? 3) Did the investments by both customer and supplier produce measurable benefits that justified the time and effort of the relationship? 4) To what extent does the customer-supplier relationship contribute to the competitive advantage of the company? ANY QUESTIONS? THANK YOU Chuma Lalendle [email protected] Procurement Price Total Landed Cost & Total Cost of Ownership Lesson 6 (06 Aug 2024)  The four generic sources of prices in procurement: Commodity Price Price lists Negotiations markets quotations TheSpecial Generic sequence of the process: Case of  Price lists are published prices that are generally used with standardized Procurement products. Price  Price quotation begins with the buyer sending potential vendors requests for quotes (RFQ / RFP)  In turn, the vendors examine the cost they will incur in filling the order including profitability  The purchaser compares the vendor’s quoted price and offer specifications with those of other vendors  Negotiation, is useful when the other methods do not apply or have failed and is particularly effective when the buyer is interested in a strategic alliance or long-term relationship 2   Traditional basic input costs TheSpecial  The primary price of the product or materials as paid by the firm Case of Procurement  Direct transaction costs Price  Costs of detecting the need for, and processing the material flow  Supplier relational costs  Costs of creating and maintaining a relationship with a supplier. 3   Landed Costs:  InboundTransportation TheSpecial  Actual TransportationCosts Case of  Sales / INCO Terms used (Like FOB, CIF etc) Procurement  QualityCosts Price  Conformance of goods to a desired specification, including the cost of conformance, nonconformance, appraisal, and ultimate use costs  Operational Logistics Costs  Receiving and make-ready costs, lot-size costs, production costs and logistics costs 4  Purchase cost is just a fraction of the total cost to acquire a good or service. Total Procurement Price represents the sum of costs associated with a good or service. These include: Figure 13-9 indicates that the make-up of the total procurement price is more than just traditional input cost (price) Total Procurement Price Source: C. John Langley Jr., Ph.D. 5  Figure 13-8 outlines the expanding procurement approaches to the supply chain concept Hierarchy of Price Measurement Approaches Source: C. John Langley Jr., Ph.D. Used with permission 6  TLC vs. TCO vs. TPC Total Cost of  Is the total cost, inclusive of all associated Ownership costs through a products life cycle. Total Landed  This perspective brings into play all of the Cost costs associated with making and delivering products to the point where they are needed. Total  Aims to analyse the actual cost of purchasing a Procurement product or service from a given supplier, Cost beyond the basic purchase price. © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 7 TLC Example: Cost Comparisons of Alternative Sourcing Options Destination Country – Switzerland Country of Origin Price Components – all prices in Euros China Vietnam EU Net purchasing price for a specific volume of the product from 3 10,000 8,000 12,000 different suppliers Total transportation cost to Switzerland (Ocean freight from China/Vietnam – 4,000 6,000 1,200 Road freight within Europe) Customs according trade agreement 1,000 1,500 n.a. VAT (Switzerland 7.6%) based on value 1,140 1,178 1,003 of goods Total Landed Cost 16,140 16,678 14,203 Source: Figure 5.9 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 8  Total Cost Ownership (TCO) Tangible, Purchase/ Visible Acquisition Cost Cost Life-Cycle Quality Other Costs Costs Logistics Costs Inventory Costs Management Costs of Additional Costs Disposition Relevant Costs Strategic Sourcing Technology Cost Impacts on (Invisible) Costs Costs Other Functional Areas Transaction Costs Source: Figure 5.8 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9 TCO video   Total cost of ownership (TCO) is a philosophy for really understanding all supply chain related costs of doing business with a particular supplier for a particular good or service. (Lisa Ellam, May 1999)  Three Components of TotalCost  Acquisition Costs  Ownerships Costs  Post-Ownership Costs  Purchase Price: But One Component ofCost Total Costof Ownership Source: Burt. D, Petcavage, S, Pinkerton R. Eight Edition 11   Acquisition costs  Post-ownership costs  Purchase price  Environmental costs  Planning costs  Warranty costs  Quality costs  Product liability costs  Taxes  Customer dissatisfaction costs  Financing costs Total Cost of Ownership –TCO  Ownership costs Components  Downtime costs  Risk costs  Cycle time costs  Conversion costs  Maintenance costs  Supply chain costs Source: Burt. D, Petcavage, S, Pinkerton R. Eight Edition 12  Total Cost of Ownership Acquisition Overhead Utilisation Lifecycle Spare parts Sunk Costs Service Costs Costs Costs Costs Warranty Purchase Price Order Disposal R&D Training Shipping processing Bid & Award Labour Tariffs Internal support Equipment Maintenance & Duties & Taxes Quality repair Prototyping Licensing Storage and distribution Inventory management TCO Cost drivers pdf Supply Management’s Impact on Net Income and the Bottom Line ▪A combination of productivity gains, outsourcing and more has led to a sharp rise in the amount that a firm spends with external parties. In 1970, external spend was 60% of total costs. In 2010, it was an amazing 85% for S&P 500 companies, a level roughly consistent across most industry sectors.  Increased Sales: ▪ Faster to Market ▪ Improved Quality ▪ Pricing Flexibility ▪ Innovation Supply Management’s Lower TotalCost: ▪ Acquisition Cost Impact on Net ▪ Processing Cost Income andthe ▪ Quality Cost Bottom Line ▪ Downtime Cost ▪ Risk Cost ▪ Cycle TimeCost ▪ Conversion Cost ▪ Non-value AddedCost ▪ Supply Chain Cost ▪ Post Ownership Cost Source: Burt. D, Petcavage, S, Pinkerton R. Eight Edition 17 THANK YOU Chuma Lalendle [email protected] E-procurement & e-sourcing Lesson 7 (07 Aug 2024) How many of you have needed an item but weren’t sure where they’d find it?  Electronic Data Interchange  Electronic data interchange (EDI) is the concept of businesses electronically communicating information that was traditionally communicated on paper, such as purchase orders, advance ship notices, and invoices.  Evolution of Sourcing Process 1 2 3 4 TRADITIONAL STRATEGIC E-ENABLED INTEGRATED SOURCING SOURCING PROCUREMENT SOURCING/ SUPPLY CHAIN  Tactical sourcing  Supplier  E-sourcing  Sourcing a strategic  Functional relationships  E-procurement supply chain process purchasing  Expanded, non-  E-commerce  Supply chain  Limited, known traditional supply visibility of sourcing supply base base decisions  Multiple quotes  Total cost or Total  Seamless,  Search for best Cost of integration of price Ownership sourcing and supply chain activity Source: Figure 5.2 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4 E-sourcing and E-procurement Functionality Process Knowledge automation management Logistics Analytical 4 procurement 9 Industry tools Online Contract analysis and supplier 2 negotiations 7 management identification Management Project 1 of RFI/RFP 5 management 10 processes 3 Collaboration 8 tools 6 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6  Market Definition/Description  Strategic sourcing application suites are a set of related, integrated solutions that support "upstream" procurement activities; i.e. the strategic work the procurement team does for planning, assessment and performance management  Primarily used by companies with $800 million or more in annual revenue Four primary components/capabilities: Spend analysis – software- and service-based solution for cleansing, enhancing, Strategic Sourcing classifying and analyzing spend data Application Suites E-sourcing applications – help organizations solicit and evaluate information (RFIs) and proposals (RFPs); supports "project" bidding where the outcome is a long-term agreement Contract management solutions – help organizations document and track supply agreements Supply base management (SBM) – applications help procurement organizations solicit and manage supplier information, risk and performance Source: Gartner, Magic Quadrant for Strategic Sourcing Application Suites, Published: 08 February 2017   e-Procurement and e-Sourcing → is use of electronic capabilities to conduct activities and processes relating to procurement and sourcing  Computers and the internet have created some dramatic changes in the everyday activities as well as in the business world  There has significant positive impact on purchases and procurement e-Sourcing and e-Procurement Source: World Bank  Advantages and Concerns of Electronic Procurement  Cyber-security  Lack of face-to-face contact between the buyer and seller  Technology-related concerns (lack of standard Concerns protocols, system reliability, time & money investment)  Lower operating costs (reduce paperwork & sourcing time, improve control over inventory & spending) Advantages  Improve procurement and sourcing efficiency (find new supply sources, improve communications, improve personnel use, lower cycle times)  Reduce procurement prices (improve comparison shopping, reduce overall prices paid) © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9  Four Basic Types of E-commerce Business Models Sell-side system: Online businesses selling to individual companies or consumers (B2B & B2C). Examples: Staples Can you think of any local (www.staples.com), Wal-Mart (www.walmart.com), CNET examples? (www.cnet.com) Electronic marketplace: A seller-operated service that consists of a number of electronic catalogs from suppliers within a market (one-stop sourcing site for buyers). Examples: Expedia.com (www.expedia.com), Amazon (www.amazon.com), eBay (www.ebay.com) Buy-side system: A buyer-controlled e-procurement or e-commerce service that is housed on the buyer’s system and is administered by the buyer. Example: Elemica (elemica.com) Online trading community: A system maintained by a 3rd party technology supplier where multiple buyers & sellers in a given market can conduct business. Examples: Alibaba, Priceline Images courtesy of UMeXX (United (www.priceline.com) States Mexico Market Exchange) © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10 THANK YOU Chuma Lalendle [email protected]