Week 3 procurement & supplier focus


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International production and logistics; Procurement and supplier focus

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Week 3 procurement & supplier focus

  1. 1. Procurement and Supplier FocusInternational BusinessLiam Fassam
  2. 2. Procurement & Supplier focusProcurement and supplier focus is the thirdbuilding block of supply chain management.Procurement includes:• Purchasing raw materials and packaging• Contracting out utilities and maintenance• Hiring contract or casual labour• Selecting approved or dedicated suppliers• Outsourcing• Use of professional servicesInternational Business - Procurement &Supplier Focus - Liam Fassam2
  3. 3. The historical view of purchasingThe Industrial Marketing and Purchasing Group (IMP) in the1970s developed a dynamic model of buyer–supplierrelationships in industrial markets (the interaction model) andillustrated its applicability through comparative studies ofbuyer–supplier relationships within and across a number ofEuropean countries (France, Germany, Italy, Sweden, UK).The main conclusion of these pan-European studies was thatbuying and selling in industrial markets could not beunderstood as a series of discrete and serially independenttransactions. Instead, transactions could only be examined asepisodes in often long-standing and complex relationshipsbetween the buying and selling organization (IMP, 2007).International Business - Procurement &Supplier Focus - Liam Fassam3
  4. 4. What is procurementProcurement or buying is the act of purchasing.The purchasing /procurement department is oftenseen as a less than glamorous department,something that buys things as cheaply as possibleto meet specifications set by more glamorous andimportant departments such as Marketing andOperations.However, as Porter found purchasing is a keyactivity in determining the competitive advantageof an organization (Porter, 1985).International Business - Procurement &Supplier Focus - Liam Fassam4
  5. 5. What is procurementLysons and Farrington (2006) rather simplistically say thepurchasing process consists of a chain of processes:• Receive requisition• Solicit quotations• Vendor selection• Negotiate with suppliers• Place order• Receive supplies• Make paymentImportant - setting specifications, inspection and qualityassurance are all included in the overall process.International Business - Procurement &Supplier Focus - Liam Fassam5
  6. 6. Procurement more than simplePurchasing is more than looking for the right product atthe right price and at the right time.A world class company will be aiming to build alliancesand long-term relationships with key suppliers.Ideally key suppliers to an organization will be involved indesign and development of new product and services.They will be able to provide advice on new technologyand methods, they can suggest alternative materials, theywill observe and report market trends, and in short theywill become an additional source of market intelligence.International Business - Procurement &Supplier Focus - Liam Fassam6
  7. 7. Requisition, vendor selection, negotiation, placing an order• Possible suppliers will be identified: Identification of suppliers includesgaining intelligence on their reputation and financial stability. There isno point dealing with an organization that might not be in business inthe next few months. Ideally we will be aiming to build up a long-termrelationship.• Seek quotations: Provide to a short list of suppliers, details ofspecification, quantities and dates. At this stage it might not be wise tobe too forthcoming as to the purpose of the purchase. We do not wantto be providing too much information in the market place which couldhelp our competitors.• Quotations: It will be received and a decision made as to who our firstpreference is.International Business - Procurement &Supplier Focus - Liam Fassam7
  8. 8. • Negotiations entered into: At this stage we can provide more detail asto what the product will be used for and seek advice from the supplier.If the product is going to be repeatedly used and ordered and or is animportant item such as a new piece of expensive equipment, and weare seeking a long-term relationship the cementing of a relationshipcan be more important than a contract written in legalize. McDonaldsclaim that with their key suppliers a shake of the hand is moreimportant than a contract.• Ongoing re-orders: For fast-moving consumer goods, such as insupermarkets ideally re-orders will be automatically triggered at pointof sale, once stock levels drop to a predetermined level. For details ofbar coding and point of sale re-ordering systems (e-procurement)• Ordering: Each order will have an order number. The importance oforder numbers are explained in the following section of this chapter.International Business - Procurement &Supplier Focus - Liam Fassam8Requisition, vendor selection, negotiation, placing an order
  9. 9. Purchasing ethics, fraud and environmental issuesValuesMembers will operate and conduct their decisions and actions based on thefollowing values:Honesty/Integrity• Maintaining an unimpeachable standard of integrity in all their businessrelationships both inside and outside the organizations in which they areemployed.Professionalism• Fostering the highest standards of professional competence amongstthose for whom they are responsible.International Business - Procurement &Supplier Focus - Liam Fassam9
  10. 10. Purchasing ethics, fraud and environmental issuesResponsible Management• Optimizing the use of resources for which they areresponsible so as to provide the maximum benefit to theiremployers.Serving the Public Interest• Not using their authority of office for personalbenefit, rejecting and denouncing any business practice that isimproper.Conformity to the LawsInternational Business - Procurement &Supplier Focus - Liam Fassam10
  11. 11. Norms of ethical behaviour• To consider first, the interest of one’s organization in all transactionsand to carry out and believe in its established policies.• To be receptive to competent counsel from one’s colleagues and beguided by such counsel without impairing the responsibility of one’soffice.• To buy without prejudice, seeking to obtain the maximum value foreach dollar of expenditure.• To strive for increased knowledge of the materials and processes ofmanufacture, and to establish practical procedures for theperformance of one’s responsibilities.• To participate in professional development programs so that one’spurchasing knowledge and performance are enhanced.International Business - Procurement &Supplier Focus - Liam Fassam11
  12. 12. Norms of ethical behaviour• To subscribe to and work for honesty in buying and selling and todenounce all forms of improper business practice.• To accord a prompt and courteous reception to all who call on alegitimate business mission.• To abide by and to encourage others to practice the ProfessionalCode of Ethics of the Purchasing Management Association ofCanada and its affiliated Institutes and Corporation.• To counsel and assist fellow purchasers in the performance of theirduties.• To cooperate with all organizations and individuals engaged inactivities which enhance the development and standing ofpurchasing and materials management.International Business - Procurement &Supplier Focus - Liam Fassam12
  13. 13. Environmental purchasing• Environmental purchasing is a most important step inthe war against global warning and pollution.• Sustainability and accountability for waste andpollution cannot be ignored.• At the very least organizations need to be aware ofenvironmental issues and to make their concerns andneeds known to their suppliers.• This will begin by management establishing apolicy, communicating the policy internally, and totheir key suppliers.International Business - Procurement &Supplier Focus - Liam Fassam13
  14. 14. Make or buy• Make or buy decisions: The fundamental objectiveof a sourcing strategy is to determine where tomake or buy a product or service and why.• The sourcing strategies for both manufacturing andservice organisations are discussed separatelyalthough there are many obvious common featuresbetween them.• The sourcing strategy goes hand in hand with supplychain management.International Business - Procurement &Supplier Focus - Liam Fassam14
  15. 15. World class manufacturing• Depending what campy you sit in, differingopinions exist with world class manufacturing(WCM).• Some people associate WCM with workingpractices influenced by Japan’s ‘qualitymovement’ TPS, Lean, JIT etc.• Others understand WCM to be manufacturingat the highest level of performance.International Business - Procurement &Supplier Focus - Liam Fassam15
  16. 16. Service sectorIn the service sector the sourcing strategy buzzwords such as‘outsourcing’, ‘off-shoring’ and ‘in-sourcing’ have gainedcurrency.Outsourcing is the collaboration with a partner to manage apart of your business.An example is IBM supplying and managing on-site theinformation and technology function for Toyota. There aredistinct categories of outsourcing in the service sector:• IT outsourcing (e.g. programming)• Business process outsourcing (e.g. handling all administration)• Managed services (e.g. call centres)International Business - Procurement &Supplier Focus - Liam Fassam16
  17. 17. What is outsourcingA huge explosion of outsourcing can be attributed to the conceptof ‘core competence’ popularized by Hamel and Prahalad (1994).The principle is fundamentally simple. For example, by analysingand understanding Porter’s value chain (1985) an organizationcan focus on the elements that are core to its business andoutsource others while maintaining strategic control.The examples of successful outsourcing companies include Delland CISCO. Dell Computers Company has focused on its keyactivity as sales and outsourced non-core functions such aslogistics and maintenance. CISCO has identified design andnetwork solutions as its core activity and outsourced themanufacturing of infrastructure components.International Business - Procurement &Supplier Focus - Liam Fassam17
  18. 18. Porters value chainInternational Business - Procurement &Supplier Focus - Liam Fassam18
  19. 19. Rationale of outsourcingA particular advantage of outsourcing is cash flow, flexibility and releasingkey management resources, but other benefits include external expertiseand cost savings. There are several external factors driving the growth ofoutsourcing:• The rapid change in the technology landscape, especially in informationand communication technology (ICT); external vendors are often in aposition to provide more effective solutions support in the newtechnology.• Globalisation is a strong catalyst in outsourcing by enhancing thetransparency in financial reporting, wider choice of suppliers and morecompetition.Outsourcers offering service level guarantees have a powerful proposition.International Business - Procurement &Supplier Focus - Liam Fassam19
  20. 20. Basu’s outsourcing matrix• High technology/high volume: These products are suitable for ownmanufacturing. It will be appropriate to invest to retain the core strength.• High technology/low volume: When the volume is low the preferred strategy isto ‘in-source’. This means that either the global manufacture of product iscentralized at a single site, or the capacity of high technology are utilized bygaining orders from outside companies.• Low technology/high volume: After a period the technological advantage of aproduct reduces and it becomes a mere commodity. If the volume is high thena supply partnership can be considered with a dedicated third-party supplier.• Low technology/low volume: If demand is low and there are more than onesupplier available long-term supplier agreements/partnerships are notimportant.International Business - Procurement &Supplier Focus - Liam Fassam20
  21. 21. Basu’s outsourcing matrixInternational Business - Procurement &Supplier Focus - Liam Fassam21
  22. 22. OffshoringOff-shoring is a form of outsourced managed services where skilledlabour is cheaper. Cost savings are primary benefits. Other benefitsinclude time zone differences enabling 24 hour services and access tomore willing well-qualified workers to tackle boring jobs. An example iscall centres located in India serving callers (customers) in England.There are some risks of off-shoring.These include:• Services going down because of telecommunication problem andinadequate training.• Data and physical security are in potential danger.• Excessive foreign travel.• The ways to minimize these risks include minimizing foreigntravel, keeping your software code and using a third-party broker.International Business - Procurement &Supplier Focus - Liam Fassam22
  23. 23. In-sourcingIn-sourcing means centralizing multiple, distributedoperations into a semiautonomous unit. This is managedseparately and accountable to the business, like anoutsourcer, but remains under the organization’s control.The advantages of in-sourcing include:• The business maintains strategic control.• It avoids third-party margins.• It is reversible.International Business - Procurement &Supplier Focus - Liam Fassam23
  24. 24. Service level agreements (SLA)In a service level agreement (SLA) all three words carry equalimportance. The document should define what services are to bedelivered and the levels of performance expected. It is also anagreement between the customer and the supplier and not aunilateral declaration. For simple functions like catering fixed pricecontracts by SLAs are easy to implement. However, they are highlylimiting and inappropriate for strategic partnerships. Theagreements should include:• Shared gains or structured incentives based on added valuebeyond core services.• Shared risks.• Best practices, training and cost-effectiveness initiatives arefreely shared.• Forecast data and planning processes are shared.International Business - Procurement &Supplier Focus - Liam Fassam24
  25. 25. E-Procurement• EDI networks: Providing communication between a few tradingpartners(buyers and sellers).• B2E: Allowing transfer of information within an organization betweendepartments and employees. For example, templates ofdocuments, automated approvals for routine requisitions andstandardization of procedures.• B2B: A website sometimes where business ‘meet’ to buy and sell. A closedexchange is open only to members. An example is Compuware’s Covisintexchange for automotive and healthcare industries, seewww.Covisint.com/ about (2007).• B2C: An e-mail address or web page that allows customers to buy on line(e.g. airline bookings and e-tickets).International Business - Procurement &Supplier Focus - Liam Fassam25
  26. 26. E-Procurement• e-Catalogues: These provide on line and up to datelists, photographs, sometimes video clips ofproducts, specifications, price, etc. Amazon is a good example(see www.amazon.com).• e-Auctions: Here a seller can display a product on-line and buyerscan make bids until a price is reached and a sale agreed. The bidsmight be public or sealed. With sealed bids the various buyersare in fact tendering as they cannot see what the other bids are.• Reverse auctions: Here the buyer advises the product andquantity they want, and suppliers complete on line by offeringlower prices. In a reverse auction it would not be regarded asethical for the buyer to lodge proxy bids.International Business - Procurement &Supplier Focus - Liam Fassam26