Chapter 4 Purchasing and Supply Policies and Strategies PDF

Welcome to session:4 LU2 Theme 2 & 3 Chapter 4: Purchasing and supply policies and strategies LSCM6221 Prudence Magabe Lecturer Learning Objectives  Describe the concept of strategic sourcing.  Describe the strategic sourcing process  Explain the concept of outsourcing.  Discuss the rationa...

Welcome to session:4 LU2 Theme 2 & 3 Chapter 4: Purchasing and supply policies and strategies LSCM6221 Prudence Magabe Lecturer Learning Objectives  Describe the concept of strategic sourcing.  Describe the strategic sourcing process  Explain the concept of outsourcing.  Discuss the rationale for outsourcing.  Discuss the advantages and disadvantages of outsourcing.  Identify the steps in the outsourcing process. INTRODUCTION STRATEGIC SOURCING  A strategic management process whereby commodities and suppliers are analysed, relationships are formed and managed according to the best practices and appropriate strategies in support of long-term organisational goals are applied 4.1THE PROCESS OF STRATEGIC SOURCING Strategic Plan and the team  A strategic plan needs to be compiled , including the scope and design of the process  Multifunctional team should be assembled that will be responsible for the process and the sourcing of certain category items or services Understand the spend  Analyse and understand the product and services that the organization purchases  Which incudes the undertanding of what products need to be procured and for what purposed  The team investigate and address the issue of make or buy Conduct Supply Market  Conducting a deeper research with regards to the suppliers, intern al requirements and the trend in the supply market place.  The type of market whether monopolistics market, oligopolistics market or pure competition market will be an indication od suppliers in the market and will determine the strategy to follow. Develop a commodity strategy  The information gathered from the supply market research can be structured using a portforlioanalysis matrixs  The total spending is divided into different categories according to risks involved in the supply of the commodity, based on the complexity of the commodity, the number of suppliers in the market and the amount spent on the commodity Pg.73  THE PROCESS OF STRATEGIC SOURCING Routine items - supply risks are low due to easy substitution possibilities and many suppliers, products are highly products and have standard specification and low amount is pent – Arm’s length relationship – Pricelists (consumable and stationery) Leverage items - Large amount is spend with low risk, computer hardware is an example – Year’s contract – E-procurement computer Bottleneck items amount spend is low but the risks are high fuel supplies is an example, manufacturing and specification are difficult, the market is monopolistic with high entry level barriers – Medium-term contract – Close relationship Critical items – large amount is spent and the risks if vailability or high due to difficulty in substitution, surgical instruments example – Strategic alliances-agreement between two companies decided to share resources  THE PROCESS OF STRATEGIC SOURCING Select suppliers and negotiate a contract - interms of company set criteria( quality, reliability, flexibility, risks, capability, financial position and sustainability - Request for Information - Request for proposal Evaluate suppliers and manage supplier relationships 4.2OUTSOURCING TO MAKE OR TO BUY  INTRODUCTION  Outsourcing:  Does not form part of the production process, but involves the provision of support services, such as: – credit management, human resource management, marketing management, purchasing management – cafeteria services, cleaning services, transport services, etc  Subcontracting:  A business practice in which a producer hires another organisation to perform part of the manufacturing process or to furnish sub- assemblies that will be incorporated into the end product RATIONALE FOR OUTSOURCING  Outsourcing originates when managers of an organization realizes that it might be economical to buy products, parts , subassemblies or services than to maintain an infrastructure to make such items or perform such services themselves  Trends(Something is developing or changing).  Selection and certification of a limited number of suppliers  Pressure to be internationally competitive  Specialising in a limited number of products and technologies  Emphasis on quality, delivery times and technology  Pressure to adapt to technology developments  A lack of skills, knowledge or capacity in certain organisations (e.g. government)  Pressure on organisations to deliver excellent customer service Strategic advantages  Cost savings  Enlarge the production/operation capacity  Limit or completely eliminate the stockpiling of raw materials/parts  React quickly to changes in market demand Disadvantages  Loss of control and skills  Loss of service provider focus  Lack of clarity  Lack of cost control  Ineffective management  Loss of confidentiality  Double outsourcing THE OUTSOURCING PROCESS 3 Phases  1. Strategic phase  2. Transition phase  3. Operational phase The phases and steps of outsourcing process End of session  Questions?? Welcome to session:4 LU2 Theme 4 Chapter 4: Purchasing and supply policies and strategies LSCM6221 Prudence Magabe Lecturer Objectives  Discuss local, national, and international suppliers.  Discuss the advantages of purchasing from a distributor.  Discuss the benefits of a concentration of purchases from one or a limited number of suppliers.  Describe the importance of supplier size.  Explain the concept of supplier development 4.3 SUPPLY POLICIES AND STRATEGIES  LOCAL, NATIONAL OR INTERNATIONAL SUPPLIERS  International suppliers  Advantages:  Technical expertise and better quality  Lower costs due to lower labour costs  Larger production capacity  A larger product range  Disadvantages:  Higher transport costs and longer lead times due to distance  More administration  Exchange rate  Political risks  Cultural factors  Working conditions of workers and labourers (e.g. child or “slave” labour)  Local suppliers  Advantages:  Low transport costs  Shorter lead times and consequently smaller inventories  Improved communication  Express orders being easier to expedite  More reliable service  Better personal relationship with suppliers  The possibility of implementing JIT systems  Contribution to well-being and development of the area  Disadvantages:  Unreasonable prices and inferior products/services  Large national suppliers  Advantages:  Lower prices due to mass production  Technical support in the form of intensive research and development support  Greater probability of continuity of supply  Improved services from local branches and depots PURCHASING FROM A DISTRIBUTOR OR MANUFACTURER  Distributor advantages  Specialised product knowledge – stock various manufacturers’ products  Wider choice of style, quality, colour, packaging.  Dispersed(different) locations make shorter lead times and better after- sales service possible  Marketing services such as transport, storage, reordering, financing and assistance with promotions and advertisements SUPPLY BASE OPTIMISATION: ONE SUPPLIER OR MORE  One or a limited number of suppliers can be beneficial when:  – A successful relationship has been built up over the long term or where there is a long-term contract  – The supplier has patent rights or unique processes  – The supplier offers outstanding quality  – Orders are too small to justify more than one supplier  – Bigger discounts or lower transport costs make it worthwhile  A number of suppliers is beneficial:  – Reduces the risk of disruptions in supply  – Long-term relationships may be established with more than one supplier  – Policy of involvement in community development when buying from small businesses  – If one supplier does not have sufficient capacity to supply the organisation’s current or future needs SIZE OF SUPPLIERS  Smaller businesses supply mainly to the local market  Large organisations are more suitable for large volumes SUPPLIER DEVELOPMENT  There are three main ways in which an organisation may become involved in the development of suppliers:  Purchases from BBBEE suppliers  Taking action when a product or service is not available  Performance appraisal of suppliers  End Of Chapter 4 LU2