The Strategic Sourcing Plan Discovering Potential Suppliers Evaluating Potential Suppliers Selecting Suppliers Bidding Versus Negotiation Reverse Auctions Two-Step Bidding/Negotiation The Solicitation Weighted-Factor Analysis Responsibility for Source Selection Developing Suppliers Managing Suppliers The Strategic Sourcing Plan Discovering Potential Suppliers Evaluating Potential Suppliers Selecting Suppliers Bidding Versus Negotiation Reverse Auctions Two-Step Bidding/Negotiation The Solicitation Weighted-Factor Analysis Responsibility for Source Selection Developing Suppliers Managing Suppliers

1. 11-1
Chapter 11
Sourcing

2. 11-2
Key Concepts
• The Strategic Sourcing Plan
• Discovering Potential Suppliers
• Evaluating Potential Suppliers
• Selecting Suppliers
» Bidding Versus Negotiation
» Reverse Auctions
» Two-Step Bidding/Negotiation
» The Solicitation
» Weighted-Factor Analysis
» Responsibility for Source Selection
• Developing Suppliers
• Managing Suppliers

3. 11-3
Key Concepts
• Additional Strategic Issues
» Early Supplier Involvement
» Supply Base Reduction
» Single Versus Multiple Sourcing
» Share of Supplier’s Capacity
» Local, National and International Sourcing
» Manufacturer or Distributor
» “Green” Supply Management
» Minority- And Women-Owned Business
Enterprises
» Ethical Considerations
» Reciprocity

4. 11-4
The Strategic Sourcing Plan
• World class Supply Management requires
supply management to develop a strategic
sourcing plan that details how supply
management will discover, evaluate,
select, develop and manage a viable
supplier base

5. 11-5
Strategic Sourcing Plan Stages
Figure 11-1

6. 11-6
Discovery
• Supplier Web Sites
• Supplier Information
Files
• Supplier Catalogs
• Trade Registers &
Directories
• Trade Journals
• Phone Directories
• Filing of Mailing
Pieces
• Sales Personnel
• Trade Shows
• Company Personnel
• Other Supply
Management
Departments
• Professional
Organizations

7. 11-7
Evaluating Potential Suppliers
• Supplier Surveys
• Financial Condition Analysis
• Third Party Evaluators
• Evaluation Conference
• Facility Visits
• Quality Capability Analysis
• Capacity Capability Analysis
• Management Capability Analysis
• Service Capability Analysis
• Flexibility Capability Analysis
• Information Technology Capability Analysis

8. 11-8
Selecting Suppliers
• Bidding Versus Negotiation
• Reverse Auctions
• Two-Step Bidding/Negotiation
• The Solicitation
• Weighted-Factor Analysis
• Responsibility for Source Selection

9. 11-9
Bidding versus Negotiation
• Few topics generate more passionate
discussions than bidding versus
negotiation
• The selection of bidding or negotiation
should be decided by using objective
criteria, a total cost perspective and sound
supply management logic

10. 11-10
Prerequisites to Bidding
• Dollar value must be large
• Specifications must be clear
• Market must consist of an adequate
number of sellers
• Sellers must be qualified and want the
contract
• Time available must be sufficient

11. 11-11
Conditions Demanding Negotiation
• Impossible to estimate costs with a high
degree of certainty
• Price is not the only important variable
• Purchasing firm anticipates a need to
make changes in the specification
• Special tooling of setup costs are major
factors

12. 11-12
Even if the previous list is met…
here are two arguments for Negotiation
• The negotiation process is far more likely
to lead to a complete understanding of all
issues of the procurement
• Competitive bidding tends to result in
sacrifices in product quality, development
efforts, and other vital services

13. 11-13
Reverse Auctions
In contrast to competitive bidding, reverse
auctions produce “real-time” interaction.
Though effective for achieving cost savings,
reverse auctions are not appropriate for all
situations.
Reverse bid process can have an adverse
affect on long-term relationships.

14. 11-14
Two-Step Bidding/Negotiation
• Used in situations where inadequate
specifications preclude the initial use of
traditional competitive bidding
• The two steps are:
» Step 1: Technical Proposals
– IFBs for Step 2 are sent only to those sellers who
submitted acceptable technical proposals
» Step 2: Price Bidding

15. 11-15
The Solicitation
• IFB
• RFP
• Item description
• Info on quantities
• Delivery schedules
• Special terms and conditions
• Standard terms and conditions

16. 11-16
Weighted Factor Analysis
• Steps to developing
» Develop factors to serve as criteria
» Develop sub-factors or performance factors
» Develop a scoring factor
» Score or evaluate the supplier

17. 11-17
Developing Suppliers
• Development of suppliers is one of the
greatest untapped frontiers in supply
chain management
• Even suppliers recognized as the “best of
the best” require investment on the part of
the buying firm to realize the full benefit of
the collaborative relationship
• This important topic is addressed in detail
in the chapter on Supplier Development

18. 11-18
Managing Suppliers
• Managers must ensure the suppliers
perform as required.
• Suppliers must meet the firm’s long-term
needs.
• If suppliers are unlikely to meet future
requirements the firm may:
» Assist with financing / technological
assistance.
» Develop new sources.
» Be required to develop the capability
internally.

19. 11-19
Additional Strategic Issues
• Early Supplier Involvement
• Supply Base Reduction
• Single Versus Multiple Sourcing
• Share of Supplier’s Capacity
• Local, National and International Sourcing
• Manufacturer or Distributor
• “Green” Supply Management
• Minority- And Women-Owned Business
Enterprises
• Ethical Considerations
• Reciprocity

20. 11-20
Early Supplier Involvement
• Early supplier involvement (ESI) is an
approach in supply management to bring
the expertise and collaborative synergy of
suppliers into the design process
• ESI seeks to find “win-win” opportunities
• Today, early supplier involvement (ESI) is
an accepted way of life at many proactive
firms and a requirement for WCSM

21. 11-21
ESI Opportunities
• Materials
• Services
• Technology
• Specifications and
Tolerances
• Standards
• Order Quantities
• Lead Time
• Processes
• Packaging
• Transportation
• Redesigns
• Assembly Changes
• Design Cycle Time
• Inventory Reductions

22. 11-22
Reasons for Utilizing ESI
• Get supplier inputs before the design is
frozen
• Capitalize on the latest technology
• Save time since design cycles are getting
shorter
• Let the supplier know that it is part of the
team

23. 11-23
Supply Base Reduction
• Supply base reduction is achieved
through both reducing variety and
increasing consolidation
• Two benefits of supply base reduction
cited by John Deere are:
» increased leverage with suppliers
» better focus and supplier integration in
product development
• Increased leverage is also due to the
increased involvement with the suppliers
which builds goodwill and trust

24. 11-24
Considerations for Single Sourcing
• Lower total cost results from higher volume
• Quality considerations dictate
• Buyer obtains more influence with the supplier
• Lower costs to source, process, expedite, inspect
• Just-in-time requirements
• Significantly lower freight costs may result
• Special tooling is required
• Total system inventory will be reduced
• Supplier will have an improved commitment
• Improved interdependency and risk sharing result
• Time to market is critical

25. 11-25
Dual Sourcing Using the “70-30” Approach
• 70 percent of the volume is awarded to
one supplier
• 30 percent to a second supplier
• Economies of scale are obtained from the
“big supplier”
• The “little supplier” provides competition
• When the “big supplier” fails to perform
the percentages may be reversed by the
buyer

26. 11-26
Considerations for Multiple Sourcing
• Protect the buyer during bad times
• Maintain competition
• Provide a back-up source
• Meet local content requirements
• Meet customer’s volume requirements
• When the customer is a small player in the
market for a specific item
• Avoid complacency on the part of a supplier
• When the technology path is uncertain
• Suppliers tend to “leapfrog” in technology

27. 11-27
Share of Supplier’s Capacity
• Many firms try to not exceed more than 15
to 25 percent of any one supplier’s
capacity
• This issue became all too real in the early
2000s
» Many companies cancelled orders that had
long supplier lead times, which resulted in
suppliers being caught with, in some cases,
hundreds of millions of dollars of work-in-
process

28. 11-28
Local, National and International Sourcing
• The lines between local, national, and
international sourcing have become blurred in the
last 30 years
• Local source
» Firm’s headquarters and all facilities are located in the
city or region where the materials or services will be
used
• National source
» The source is headquartered within the country and has
facilities in multiple regions throughout the country
• International source
» Firm is headquartered outside of the buying firm’s
country, but this does not define the location of
operations

29. 11-29
Local Buying Advantages
• Closer cooperation between buyer and
seller is possible
• Delivery dates are more certain
• Lower prices can result from consolidated
transportation and insurance
• Shorter lead times reduce inventory
• Rush orders are filled faster
• Disputes are usually more easily resolved
• Implied social responsibilities to the
community are fulfilled

30. 11-30
National Buying Advantages
• Economies of scale
• Superior technical assistance
• Better handling of fluctuating demand
• Shortages are less likely

31. 11-31
Manufacturer or Distributor
• Potential Benefits of a Distributor over
Buying Direct from the Manufacturer
» Economy of scale
» Reduction of orders
» Reduction of paperwork
» Special services
» Technical advice
» Credit

32. 11-32
“Green” Supply Management
• Recycled materials
• Environmental issues
• Liability issues

33. 11-33
Minority- And Women-Owned Business
Enterprises
• Many forces motivate a buying firm to
ensure that MWBE businesses receive a
share of the firm’s business, such as:
» Federal and state legislation
» Set-aside quotas in government appropriations
» Actions of regulatory bodies
» Firm’s “corporate social consciousness”
» Customer base includes MWBE businesses
and their employees
» Bottom-line profitability
» Good business sense

34. 11-34
Ethical Considerations
• Conflicts of interest
» Exists when supply managers must divide
their loyalty between the firm which employs
them and another firm
» Such conflicts always should be avoided in all
source selection decisions

35. 11-35
Reciprocity
• Reciprocity exists when supply managers
give preference to suppliers that are also
customers
• It is entirely legal to buy from one’s
customers at fair market prices, without
economic threat, and without the intent of
restricting competition
• Reciprocity can become illegal when the
activity restricts competition and trade

36. 11-36
Reasons to Not Engage in Reciprocity
• Reciprocity doesn't follow sound principles of
buying and selling
• Companies may relax their competitive efforts as
a result of reduced competition
• Sales departments may develop a false sense of
security
• New customers may be hard to find because of
pre-established relationships with competitors
• Company reputations may be impaired because
of bad publicity
• Conspiracy and restraint-of-trade situations can
develop, with their attendant legal dangers

37. 11-37
Concluding Remarks
• The increase in long-term collaborative
relationships is highlighting the need to
develop strategic sourcing plans
• The plan aids in source selection by
detailing how suppliers will be discovered,
evaluated, selected, developed and
managed
• The plan should be developed in a
collaborative environment that includes all
relevant functional area representatives
and supply chain members