kurbi somalia [horizon international university ]

1. Chapter 8
Sourcing strategies and
relationships

2. Group Members:
Mohamud Mohamed Mohamud
Hani Abdullahi Axmed
Ahmed Mohamed Hassan

3. Chapter outlines
 Introduction
 The nature of the sourcing decision
 Attributes of a good supplier
 Different types of sourcing
 Sourcing decisions
 The sourcing process
 Source location
 Sources of information on potential suppliers

4. Chapter outlines cont…..
 Supplier evaluation
 Other aspects of sourcing
 Partnering
 Tiering of suppliers

5. introduction
What is Strategic Sourcing?
Strategic sourcing is a procurement process
that continuously improves and re-evaluates
the purchasing activities of an organization.
A supply strategy based upon joint
opportunities, mutual trust, respect and open &
honest communication between the supplier
and the customer.

6. introduction
Why Strategic Supplier Relationships are Important
 A new supplier commences operations every minute
 A supplier files bankruptcy every 8 minutes
 A supplier ceases operations every 3 minutes
 A judgment is filed against a supplier every 14 seconds
 A supplier name change happens every 2 minutes
 A supplier ownership change happens every 4 hours
 A supplier’s risk profile changes every minute

7. introduction
 Strategic Sourcing Primary Objectives
– Reduce the costs of goods and services
– Capture resulting savings.
– Create contractual alliances with suppliers to support
the long-term goals of the Organization.
– Maintain and improve product quality.
– Improve business functions.
– Optimize the total purchasing process.

8. introduction
Seven Steps of Strategic Sourcing
 Analysis
 Develop Commodity Team
 Sourcing Strategy
 Identify & Prequalify Suppliers
 Supplier Selection & Contracting
 Integrate Suppliers
 Monitor & Follow-Up

9. The nature of the sourcing decision
Sourcing is the process of evaluating and hiring
individual businesses to supply goods and
services to your business.
Procurement is the process of actually
purchasing those goods and services.
Sourcing and procurement have become a
bigger part of a supply manager’s job in recent
years, in part because businesses keep
becoming more specialized

10. Attributes of a good supplier
A definition of a good supplier which would be acceptable to
everybody would be difficult to write, there are a number of attributes
which might be regarded as desirable for a typical relationship.
The following list is given by way of suggestion only:
 Delivers on time
 Provides consistent quality
 Gives a good price
 Has stable background
 Provides good services back-up
 Keeps promises
 Provides technical support
 Is responsive to our needs
 Keeps the buyer informed on progress

11. Different types of sourcing
Different types of sourcing:
 Consumable supplies
 Production materials and components
 Capital purchases ( e.g. machinery )
 Intellectual property ( e.g. software)
 Subcontracts ,
 Service

12. Sourcing decisions
A procurement strategy enables decision
makers to understand longer-term goals,
such as realizing value for money and
encouraging supplier improvement, and to
consider these goals when making procurement
decisions

13. Sourcing decisions cont….
The traditional approach to source decision making involves the buying
organisation in:
 Establishing which suppliers make or supply the product or service
 Selecting a shortlist (say three) from those available.
 Sending an enquiry to each of those three setting out the
requirements.
 Selecting the best supplier from those who quoted by comparing the
offers.
 Placing the purchase order with them, specifying such matters as
volume, schedule, place of delivery, price and quality required.

14. The sourcing process
strategic sourcing process
 Data collection and spend analysis
 Market Research
 The RFx process (also known as go-to-market)
 Negotiations
 Contracting
 Implementation and continuous improvement

15. The sourcing location
 The location of potentially useful sources of supply is a major
responsibility of the procurement and supply executive.
 Three principal reasons why the location of suppliers might be
difficult are:
 Technical advances – the buyer’s needs are becoming more
complex and difficult to meet, and fewer suppliers are willing or able
to do so.
 Increasing ‘concentration’ in supply markets - the continuing process
of mergers and takeovers is leading in many industries, to a situation
where there are few, very large suppliers who have less need
actively to pursue business which will inevitably come their way.
 Increased specialisation – specialisation among manufacturing
concerns tends to lead to more ‘buy’ rather than ‘make’ decisions.

16. Sourcing of information on
potential suppliers
When collecting and collating information on potential suppliers, the
internet has revolutionised companies’ ability to locate potential
suppliers.
In addition , the following points ought to be considered:
1 - Reputation. 2 – appraisal
3 – recorded performance 4 – appraisal list
5 – online catalogue library 6 – online publications
7 – online trade directories 8 – sourcing services
9 – representatives 10 – exhibitions
11 – colleagues 12 – other buyers
13 – agents 14 – organization promoting trade

17. Sourcing of information on
potential suppliers
Sources of Supplier Information
Published Sources Internal Sources Personal Contacts International Source
Candidate List
Formulation of Selection Criteria
Preliminary Screening
Identification of Qualified Candidates
Detailed Study
Selected Supplier
Approved Supplier List
Information from
Market Research
Questionnaires
Financial Information
Supplier
Visits
Rejected
Suppliers
Elimination
of Unqualified
Candidates
Non-approved Suppliers

18. Supplier evaluation
The organisation (buyer) is in a much better position to evaluate an
existing supplier, based on his past performance than is the case
with a new supplier
Task variables which determine the choice of supplier are traditionally
stated as: quality, quantity, timing, service, and price
the supplier is evaluated for named products or processes as fully
approved, approved, conditionally approved, or unapproved.

19. Supplier evaluation cont….
Variations of the checklist approach are legion, and
changes and improvements are incorporated as the
needs of the organisation change
Typical checklist questions are:
 Do they trade with our competitors
 Are confidential documents properly controlled?
 Does the buyer have technical support?
 How do they search the market and how often?
 How long have they been established?
 What are their investment plans?

20. Supplier evaluation cont….
Delivery On time
5
Earlier
4
1x delay
3
2x delay
2
More delay
1
Quality Excellent
5
Good
4
Acceptable
3
1x reclamation
2
2x reclamation
1
Price The lowest
5
Low
4
Average
3
High
2
The highest
1
Terms of payment 90 days
5
75 days
4
60 days
3
Letter of credit
2
Less then 60 days
1
A-test For all materials
5
For most materials
4
For some materials
3
In procedure
to get
2
No attest
1

21. Supplier evaluation cont….
Confirmation the Purchase
order
Always
3
After urge
2
Never
1
Standardisation Always
3
Sometimes
2
Never
1
Services Excellent
3
Good
2
Poor
1
Packaging To specification
3
Sometimes to spec.
2
Not to specification
1
Location of supplier 0-100 km
3
101- 500 km
2
More than 500 km
1

22. Other aspects of sourcing
one or more suppliers?
some of the considerations which need to be
evaluated are:
 Effect on price
 Effect on security of supply
 Effect on supplier motivation, willingness to
oblige, design innovation
 Effect on market structure

23. Other aspects of sourcing
the captive supplier
Captive supply is a term for that part of the
supply that is not owned by a company but is
used by the company to maximize its
own profits often at the unknowing expense of
those who actually own those supplies.

24. Other aspects of sourcing
Reciprocity in Buying
In certain business situations a buyer may give
preference to a supplier who also happens to be
his customer. This relationship is known as
reciprocity. It is something like "I buy from you if
you buy from me"

25. Other aspects of sourcing
A supplier association
A supplier association is a business term which
refers to a customer company bringing together
a group of its suppliers on a formal and regular
basis in order to achieve strategic and
operational alignment.

26. Other aspects of sourcing
Market structure: there are three types of market
structure
 Monopsony : where there is a single dominant
buyer or ( market situation in which there is only
one buyer for a product )
 Monopoly : where there is a single powerful
seller
 Oligopoly: is the present where several sellers
co-operate to dominate the market.

27. Partering
Partnership source: is a commitment by customer / suppliers,
regardless of size ,to a long-term relationship based on clear
mutually agreed objectives to strive for would class capability and
competitiveness .
Mission of partnership sourcing initiative is summarized in the
statement: ‘to bring about a fundamental change in companies’

28. Partering
Fig. the principal characteristics of partnership sourcing
Partnership
Sourcing
Opennes and trust
Clear joint
objectives
Flexibility
Proactive not
reactive
Total quality
Management
Long term
relationship
Working together
Involvement of all
relevant disciplines
Top level
commitment

29. Tiering of suppliers
At any company, there are meaningful scopes of
management responsibility that should not be exceeded.
Dividing responsibility over a corresponding number of
tiers allows even very large firms (100,000 employees
and more) to be managed efficiently. Many companies
also apply a similar tiering principle to managing
suppliers.
Supplier tiering originated in the auto industry and can be
best understood in the context of automakers’ changing
priorities over the last 40 years:

30. Tiering of suppliers
a) Established pattern of supply
Original equipment maker
predisposition to make
Subcontractors making to
OEM’s designs and
specialisations

31. Tiering of suppliers
a) Developing pattern of supply
First tier subcontractors
making to OEM’s
performance (outcome)
specifications
First tier subcontractors
manage second tier
suppliers with OEM
guidance
Original equipment
maker predisposition to
buy
Second tier suppliers usually appointed by first tier suppliers