3.1 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.
3. 2 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.
3.3 Sourcing Considerations
1. Sourcing information
2. 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
1. 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.
2. 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
1. 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.
2. 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.
3.5 Decision Process for Make or Buy
3.6 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.
Benefit 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.
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.
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