SOURCING NOTES
Introduction
A source is a place from which something comes from or is obtained from.
Sourcing is therefore a process of determination and selection of places/firms
from with to acquire materials or services.
Sourcing levels
- Strategic sourcing
This is the process of creating a vale adding (or optional) mix of
supply relationships to provide a competitive advantage. It is
concerned with to-level, long term decisions relating to
high-profit, high-supply-risk strategic items and low-profit,
highsupply-risk both neck items. It is concerned with promotion of
long-term policies relating to core competences, strategic make or
buy decisions, partnerships sourcing, purchase of capital
equipments, ethical issues etc. - Tactical and operational sourcing
It is concerned with lower level decisions to high-profit, low-risk
non-critical items. It also involves short term adaptive decisions
as to how and from where specific supplier requirements are to be
met. As such suggestions may be made to top management regarding
temporary tactical deviations from strategic decisions e.g. in light
of supplier failure or reversed conditions of stock.
Sourcing Considerations
- Sourcing information
- Sourcing strategies, tactics and sourcing decisions
Sourcing Information
Sourcing information relates to:
- Analysis of market conditions
- Directives
- Suppliers sources
- Suppliers assessment
- Supplier performance rating.
Analysis of Market Conditions
Why is this necessary?
- Helps in forecasting the long term demand of products.
- Assist in forecasting price trends of terms.
- Indicates what alternative goods and supply sources are available.
- Provides guidance on security of supply sources.
Sources of information relating to market conditions
- Primary data i.e. field research, company data e.g. on market shares
etc. - Secondary data i.e. statistical data and report issued by external
organization e.g. government sources such as census and gazette
notices, non-government sources such as professional organizations
e.g. KAM
Directives
A directive is a general instruction. Typical directives relating to
sourcing are to be issued by central and local governments, the European
Union and companies. Mainly such directives are issued with regard to;
- Health and safety issues
- Establishment of common procedures
- Competition
- Equal opportunities for all EU suppliers
- Companies top management also issues directives regarding inter
company relations, reciprocal trading, etc for strategic reasons or
otherwise.
Supply sources
Sources of information relating to supply sources are: catalogues, trade
directories, database, sales persons, exhibitions, trade journals,
yellow pages, informal exchange of information between buyers,
information provided by prospective suppliers
etc. Buyers may require prospective supplier’s fill questionnaires with
the following subheadings to gain information from them:
- General-firm names, address, turnover etc
- Personnel-name of directors and responsibilities, no of workers and
shop area covered - experience-products or services offered, previous orders placed, etc
- facilities-major plants and equipments, communications facilities etc
Supplier assessment and appraisal
Supplier appraisal may arise when:
- A prospective vendor applies to be placed on the buyers approved list
- Buyers wishes to assure him/herself that a supplier can meet
requirements reliably - Items to be purchased are of critical importance
- It is intended to adopt a policy of single sourcing based on
partnership purchasing
Supplier appraisal can be undertaken through:
Desk research- this uses published or unpublished data already existing
e.g. company reports, balance sheet reports strike records etc
Field research- this will help additional data on technical production,
management capacities etc. Field research is undertaken during visits to
suppliers in order to ensure that important questions are not
overlooked. A check list is invaluable during supplier visits; the check
list should include the following
Personal attitudes:- Atmosphere of harmony among good workers; Degree of
interest to customer service; Degree of energy displayed in getting work
done; Use of man power- economical or extravagant.
Adequacy and ease of production equipment:- Modern or antiquated; Well
care for by operators or neglected; Sufficient capacity to produce
desired quantities; Technology know how of supervisory personnel.
Means of controlling quality:- Frequency of inspection during the
product cycle; Employment of such techniques as statistical quality control
House keeping:- Is the plant orderly and clean
Competence of technical staff:- Knowledge of latest materials, tools and
processes related to products and anticipated developments in their
industry Competence of management
Supplier Performance Rating
The purpose supplier performance rating is to:
- Evaluate performance with respect to such factors as price, quality
delivery service etc - Provide objective information on which judgment can be based
relating to source selection. - Assist the buyer with information on areas where the supplier can
improve.
Types of rating
- Subjective rating
Subjective ratings have to do with the buyer’s personal impression of
the supplier. Subjective ratings have a tendency to be biased since they
may be based on irrelevant impression or estimate of the supplier. - Quantitative rating
These have to do with actual data analysis. It aims to remedy
deficiencies of subjective rating.
Categories under which suppliers are assessed and ranked
- Quality- Declared/undeclared Non-conformance, Responsiveness,
Administration - Delivery- Areas, Promise credibility, Early delivery, Responsiveness.
- Commercial- Cost reduction, Competitiveness, Risks sharing
Administration - Technologies- Process control, Computing links, Capital investment,
Production capacity - Management-Task, People, Delegated authority.
A vendor-rating form is designed with the above categories. The
categories may be ranked out of a possible maximum of 20 to then added
up to 100 or any other means as the firm may choose.
3.4 Sourcing Strategies and Tactics and Sourcing Decisions
The Supplier Base
This relates to the range, location and characteristic of vendors from
whom the external supply requirements of an undertaking are obtained.
Factors influencing the supply base of an enterprise include
- The core competences of an enterprise
- Make, buy, outsourcing and subcontracting decisions
- Single, multiple and partnership sourcing decision
- Tiering
- International and global sourcing
- Counter trade inter-company trading and reciprocal trade
- Miscellaneous factor, large, small and local supplies
- Core competences
Core competences are concerned with identifying particular strengths
that give a firm an advantage over competitors and areas of weakness
that need to be avoided. Finding out what the firm does best and
enterprising to others needed goods and services that they do best is
the key to strategic make or buy decisions. - Make, buy, outsourcing and subcontracting decisions
Make or buy strategies and tactics
Make or buy decisions compare the best of producing a component or
providing a service from an external supplier. There are three levels of
make or buy decisions all of which are linked to the overall
organizational strategy.
Strategic make or buy decisions
These decisions influence the firms manufacturing operation shape and
capacity by determining;
• What product to make
• What investments to make in plant and equipment
• The framework for short term tactical and component decisions.
• Development of new products.
Tactical make or buy decisions
This deal with the issue of temporary imbalance in manufacturing
capacity e.g. changes in demand may make it possible to make everything
in house.
Components make or buy decisions
Made at the design stage this decisions have to do with whether a
particular component should be made in-house on bought. Cost factor in
make or buy decisions after require the application of marginal costing
and break-even analysis
Marginal Costing- this is a principle whereby valuable costs are charged
to cost units and the fixed costs attributable to the relevant period
written off in full against the contributions for that period.
Contribution = Purchase Price minus Variable Cost per item
Other considerations in make or buy decisions
Considerations in favour of making
- Cost considerations the major elements of the cost considerations
are: Materials and labour costs; Follow on costs stemming from
quality related problem; Incremental inventory carry on costs;
Incremental factory overhead costs; Incremental management costs;
Incremental purchase costs; Incremental costs of capital - Desire to integrate plant operations
- Reproductive use of excess plant capacity to help absorb fixed costs
- Need to exert direct control over production and or quality.
- Design secrecy required
- Unreliable suppliers
- Desire to maintain a stable work force (in periods of low sales )
- Potential lead time reduction
- Exchange rate risk
- Greater purchasing power with bulk purchase of materials.
Considerations in favour of buying
- Cost considerations, (less to buy the part) major elements of the
cost considerations are: Purchase price of the part; Transportation
costs; Receiving and inspection costs; Incremental purchasing costs;
Any follow-on costs stemming from quality or service. - Suppliers research and specialized know how
- Small volume requirements
- Limited protection facilities
- Desire to maintain stable work force in periods of increasing sales.
- Desire to maintain a multiple-source policy
- Indirect managerial control considerations.
- Spread of financial risk for purchaser and vendor.
Decision Process for Make or Buy
What is Outsourcing?
This is the strategic use of resources to perform activities
traditionally handled by international staff and their resources. An
alternative definition is the buying in of components, sub-assemblers
finished products and service from outside suppliers rather
than supplying them internally. It is strategy by which an organization
outsources noncore items to specialized efficient providers.
Central to outsourcing are;
- Make or buy decisions
- Partnerships between purchasers and suppliers
What should an organization outsource?
Other things being equal enterprises should outsource non-core
activities and concentrate on its core activities. Examples of
outsourced services include: Car park management; cleaning; building
repair and maintenance; catering; security; waste
disposal; medical/welfare etc.
Examples of what not to outsource
Management strategic planning; management of finance; control of
supplies; supervision of the conformation of regulatory requirements
e.g. product liability, public safety
Types of Outsourcing
- Body shop outsourcing- management uses of outsourcing to meet
short-term requirements e.g. temporary shortage of in-house skills
to meet temporary. - Project management outsourcing- use of outsourcing for all or part
of a particular project e.g. development of new IT project - Total outsourcing- Where the outsourcing suppliers is given full
responsibility for a selected area e.g. catering; security etc.
What Are The Benefits of Outsourcing ?
- Trees management time
- Reduced staff costs
- Increased flexibility
- Cost certainty
- Reduction in staff management problems
- Improved consistency of service
- Reduced capital requirements
- Reduced risk
Problems of Outsourcing
- Redundancy costs
- Quality of service maintenance problems
- Long term commitment absent
- Over dependence on suppliers
- Lack of suppliers flexibility
- Lack of management skills to control suppliers
- Possible loss of competitive advantage particularly in the loss of
skills and expertise of staff - Insufficient internal investment and the passing of knowledge and
expertise to the supplier who may sieve the initiative.
What is Tiering
This is an aspect of lean supply which is defined as a state of business
in which there is dynamic competition and collaboration of equals is the
supply chain, aimed at adding value at minimum total cost, while
maximizing end customer service and product
quality. Lean thinking aims at eliminating waste such as spoiled
production, unnecessary processing steps, uneconomic inventors etc.
Tiering will therefore involve collaboration of several levels of
suppliers to as tiers.
Example
The main feature of supply relationships between the car producers
(called assemblers) and their suppliers are:
- Purchase of whole components from sub-assemblers e.g. seats rather
than constituent parts from first tier suppliers. - First tier suppliers have teams of second tier suppliers who may
engage third or even fourth tier suppliers. Second and other tier
companies make individual parts to drawings supplier by first-tier
companies.
Reasons for Tiering
- Assemble may require first tier suppliers to integrate diverse
technologies not possessed by one organization. - Some components required for systems are very specialized and this
made by a small number of large firms e.g. electronic chips. - Third level of sub-contracted work is simple and low value added.
Consequences of Tiering
- High degree of shared design employing the skills and knowledge of
both customers and suppliers. - High degree of supplier innovation in both products and process.
- Close long term relationship btw network members involving a high
level of level of trust, profit sharing and openness. - Use of rigorous grading systems to give way to suppliers self
certification. - High degree of supplier co – ordination by the customer company at
each level of the tiered structure.
International Sourcing
International, multinational and foreign sourcing are defined as buying
outside the firm’s country of manufacture in a way that does not
co-ordinate requirements among world-wide business units of a single
firm. Strategic global sourcing is defined as the integration and
co-ordination of purchasing requirements among world-wide business
units, looking at common items, process technologies and suppliers.
Why source internationally?
- Intense international competition
- Pressure to reduce costs
- Need for manufacturing flexibility
- Ever changing technology (reduction in cost and increase in quality)
- Domestic non-availability (not found within the country.
- Insufficient domestic capacity to meet demand (locally products
goods are not enough) - Insurance- to ensure continuity of supply.
- Competitiveness of oversees sources e.g. lower prices.
- Reciprocal trading and counter trade due to policy reasons or
government pressures ( so as to an export orders) - To obtain penetration of a growth market.
Problems in international sourcing
- Contact with suppliers is more difficult.
- Longer negotiation time
- Currency difficulties
- Legal difficulties (rules and regulations)
- Redress of complaints (jurisdiction issues)
- Delays in delivery due to weather, dock strikes etc
- Appointment of agents
Supply Partnerships
Many favour establishment of long term relationships between buying and
supplying firms. A supply partnership is a collaborative relationship
between buyer and seller which recognize some degree of interdependence
circle co-operation on a specific project or for a specific purchase
agreement. It calls for sharing of forecasted demand and cost data and
must contain as element of trust and respect.
Areas that may require partnership sourcing
- Technically complex components where costs of switching could be
prohibitive. - Areas where knowing future technology or trend is critical
- Restricted markets with few reliable or competent suppliers, closer
links with suppliers may improve security
Forming successful partnerships requires the following
- Determination common objectives
- Consistency of procedures in the development of the supply chain.
- Gradual integration of functions on the road forwards high level
strategic intervention
Problem of Partnership Sourcing
- Termination of relationships- aim should be amicably
- Over-dependence on the supplier
- Confidentiality- where the supplier is also a competitor’s supplier.
- Complacency- To avoid this regular meetings of multi-functional
buying team to review competitiveness - Attitudes- Require retraining of adversarial buyers and sales force
to adjust to new philosophy. - Contractual- Agreements should be letters of interest which are
updated depending on forecasts.
Reciprocal Trade
Reciprocity is defined as mutual concession of advantages or privileges
as forming basis of commercial relations
Types of reciprocity
- External- suppliers and buyers have no relation
- Internal- suppliers and buys are members of the same group.
Types of external reciprocity
- Two-way reciprocity e.g. firestone agrees to buy forklifts from
caterpillar on condition that caterpillar buys types from firestone. - Multi-reciprocity – e.g. A- (a building contractor) agrees to buy
from B- (a block maker) on condition that B buys from C- (a cement
maker) who is a substantial customer to A.
Advantages of reciprocity
- Both buyer and supplier benefit from exchange of orders.
- Greater understanding of mutual problems thereby increasing goodwill.
- Elimination of intermediaries and marketing costs.
Disadvantages of reciprocity
- Costs may rise due to reduced competitive position
- Marketing efforts may become slack.
- Disputes may once where volumes are unequal
- Opportunity to buy cheaper , better quality alternatives may be derived
- Difficulties may once in finding alternative suppliers during
emergencies. - In practice it’s difficult to terminate reciprocity amicability.
What is Countertrade ?
This is a form of international reciprocity in which an order is placed
by a purchaser with a supplier in another country on condition that
goods to an equal or specified value are sold in the opposite direction
Forms of Counter Trade
- Barter/swaps- Simultaneous exchange of goods or services (no cash)
- Counter purchase- Y sells to country X with the understanding that a
percentage of the sales proceeds are to be uses on importing goods
from country X in cash - Buy-back/compensation- Exporter agrees to accept full or partial
payment in products by the importer. - Switch trading- Country X sells goods to country Y, Y credits X with
the value of goods that it can buy from Y, but X not willing to buy
from Y sells the credit to a third party trading house at a discount
. The trading house sells the credits at a profit to any country
wishing to buy goods from Y. Switch trading is used to overcome an
imbalance of money by a trading partner - Offset- similar to counter purchase only that a percentage of the
exchange can be in barter.
Purchasing can play a major part in countertrade by;
- Identifying low-cost sources of supply for counter trade exploitation.
- Provision of negotiating expertise in counter trade arrangements
- Ensuring quality of goods in counter trade.
- Finding internal uses of counter trade partnerships
Advantages of countertrade
- Avoid exchange controls
- Promotes trade with countries with inconvertible currencies
- Reduces exchange risks of unstable currencies
- Enables entry to new or formerly closed markets.
- Reduces foreign protectionism.
- Finds valuable outlets for declining products.
Disadvantages of counter trade
- Negotiations of counter trade takes long
- Additional expenses erg brokerages fees.
- There may be difficulties in quality
- Pricing problems.
Intra-Company Trading
This applies to large enterprises and conglomerate where the possibility
arises of buying certain materials from a member of the group e.g.
U.D.V. a member of E.A.B. may source bottles from Central Glass
Industries also a member of E.A.B. In intracompany trading the policy is
to support internal suppliers to the fullest extent and to develop
product and service quality to the same standards as those available in
the external market.
Subcontracting
Common in construction industry the client hands over performance of
sections of the contract to other parties who will be responsible to the
client while the overall contract performance remains with the client.
Reasons fro subcontracting include:
- Over-loading of machinery or labour
- To ensure completion of work on time
- Lack of specialist machinery or specialist know-how
- To avoid acquiring long-term capacity when future demand is uncertain.
- Subcontracting is cheaper.
3.7 Local Suppliers
What is local is determined bearing in mind the ease of transportation
and communication. Advantages of using local suppliers
- Closer co-operation based on personal relationships is facilitated
- Social responsibility-“ Supporting local industries” is shown
- Reduced transport costs
- Improved availability is emergency situations
- Development of subsidiary industries is encouraged
- Deciding whether to use small or large suppliers
Advantages for small suppliers
- Closer attention to buyers requirements
- Relationships especially at executive level more personal
- Special assistance requests from buyers is more rapid
Note: Governments discourage anticompetitive practices that can
force small enterprises out of business e.g. delayed payments.
Advantages of large suppliers
- Reserve capacity to cope with extra work and cope with emergencies
- Special facilities and knowledge can be made available to the buyers
- There is less danger of supplier becoming too reliant on the buyers
business
3.8 Factors in Deciding Where to Buy
General considerations
- Current and projected level of business for the item
- Have we sourced the item before?
- Within what time scale is the item required? etc
Strategic considerations
- What source will offer greatest competitive advantage in price,
quality security if supply? etc - Does the source offer possibilities of joint product development
reciprocal or counter trade? etc - What relationships does the supplier have with our competitors?
- What risk factors are attached to the purchase?
Product factors
- Is special tooling required?
- Is the product special or standardized?
- In what cost size is the product manufactured?
Supplier factors
- Performance on delivery, quality etc
- Size
Willingness to share risk etc
Personal factors
This relates to psychological and behavioral aspects of those involved
in making buying decisions in the firm such as:
- Background- education, job orientation
- Satisfaction with past purchase, time pressure, risk etc
