The document outlines various aspects of purchasing and sourcing strategies, including the roles and responsibilities of buyers, the advantages and disadvantages of centralized and decentralized purchasing, and the sourcing strategies companies can adopt. It discusses global sourcing and low-cost country sourcing, highlighting potential drawbacks and the complexities involved. The document also addresses outsourcing versus insourcing, emphasizing the importance of maintaining core competencies in a competitive market.

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PURCHASING ORGANIZATION AND SOURCING STRATEGY
Contents
1.
Buyer’s Profile and Division of Responsibilities
2.
Centralized and Decentralized Purchasing

Centralized Purchasing

Decentralized Purchasing

Advantages of Centralized and Decentralized Purchasing

Disadvantages of Centralized and Decentralized Purchasing

Tasks in Centralized and Decentralized Purchasing
3.
Sourcing Strategies
4.
Global Sourcing

Drawbacks and issues in global sourcing
5.
Low Cost Country Sourcing (LCCS)
6.
Out Sourcing and In Sourcing

Advantages in Out Sourcing

Disadvantages of Outsourcing
Single Sourcing and Multiple Sourcing
7.
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Partnership Sourcing

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Buyer’s Profile and Division of Responsibilities
Sn
1
2
Buyer Function
Corporate Procurement
officer (CPO)
Corporate Buyer
3
Purchasing
Engineer
4
Project Buyer
5
Planners
6
MRO buyer
Responsibilities
Developing corporate purchasing strategies, systems, reporting.
Strategic commodities – large volumes, high investment projects and services.
Responsible for developing sourcing strategy for key commodities. Long planning
horizon.
New materials and components. New suppliers. Discussing specs, market research,
selection of suppliers, negotiations. Work on decentralized level. Liaisons between
purchasing and R&D.
Similar to purchasing engineer but focus on equipment and services.
Material.
Materials planning and ordering, order handling – ensuring material supply, calling off
materials against annual agreements. Vendor rating ‐ monitor and control suppliers
quality and delivery performance.
MRO supplies – management of the entire assortment of MRO items with regard to
overall performance rather than just price focused.
Centralized and Decentralized Purchasing
Centralized Purchasing

In case of similarities between multiple company locations e.g. in used technology, market conditions, purchasing problems, item
demand, etc. It is more common to occur in companies offering the same product or service in multiple locations.

Single site and relatively small size company where there are no feasible criteria for division of control and thus decentralization
would provide no benefits.
Decentralized Purchasing

Beneficial when substantial differences exist between various sites of one company.
Advantages of Centralized and Decentralized Purchasing
Centralized
Decentralized

Increased professionalism of buyers.

Purchasing department’s better contact with local
organization.

More efficient allocation of purchasing budget.

Integration with other functions; buyers are often located
together with engineering or manufacturing specialists.

Higher bargaining power.

Ability to focus on local conditions and adjust purchasing
activities accordingly.

Less orders and bigger quantities – savings
through administrative costs and economies of
Scale.

Direct and single‐point contact with suppliers.

Avoidance of competitive buying by parallel
departments.

Increased efficiency through development of
common standards and procedures.

Higher role of purchasing in corporate
hierarchy.
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Disadvantages of Centralized and Decentralized Purchasing
Centralized

Indirect contact between supplier and actual
user of the component/product.

Increased specialization can limit purchasing
function integration with other department,
losing the overall coherence requirement.

High buying power can be abused by the chase
of lower prices resulting in bankruptcy of
supplier and changers in market structure.
Decentralized

Coordination difficulties between different sites.

No clear overview of inbound material flow leading to
inefficiency.

Reduced specialization and bargaining power due to smaller
scale and scope of the function.
Tasks in Centralized and Decentralized Purchasing
Tasks in Centralized Purchasing

Development of purchasing strategies, policies and standards.

Negotiations for common, widely used items.

Stock management between sites.

Purchase of plant equipment and other strategic items.

Training.

Legal matters.

Research and information service.
Tasks in Decentralized Purchasing

Placing orders for common items.

Negotiating and contracting locally used items.
Sourcing Strategies
An institutional procurement process for continuous improvement and reevaluation of the current purchasing activities in a company.
Supplier development can also be viewed as a “strategic sourcing tool”.
Strategic Industrial Sourcing, has defined seven steps for strategic sourcing:
1. Current expenditures evaluation.
2. Supply markets evaluation.
3. Sourcing strategy development.
4. Appropriate suppliers identification.
5. Negotiations with suppliers.
6. Execution of new supply structure.
7. Results tracking and re‐evaluations.
Sourcing strategy is defined as the approach developed by the company to procure supplies, for which four elements are defined as:
“the buying policy, the number of sources, the type of source and the nature of the company supplier relationship” as shown hereunder
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Global Sourcing




Basically, existence of Global sourcing is due to supply and price differences in diverse resources.
Other benefits of global sourcing includes the learning of possible ways to do business in a potential market, acquirement of
international skills or access to resources which might not be available locally, stimulate competition through development of
alternate supplier or vendor sources, and capacity growth of the total supply.
While working with each country entails specific complexities and is unique, there are risks associated with global sourcing.
There are five key drivers shaping the global purchasing industry:
1. Politics.
2. Infrastructure.
3. Currency.
4. Climate.
5. Culture.
Drawbacks and issues in global sourcing

The alignment of the sourcing strategy and the company’s other main strategies, in cases like “just in time” (JIT) production, the
production strategy is completely in favor of local suppliers, and especially if there would be high variation in the needed supplies.

Increased transportation costs.

Possibilities of supplies interruption which can be caused by natural disasters or political problems.

Longer lead‐times and possibility for delays caused by weather problems.

Dependency on foreign sources of supply.

Hidden costs connected with cultural differences and time zones.

Financial and political risks due to changing economies.

Increased risk of intellectual property loss.

Increased monitoring costs in comparison to domestic supply.
Low Cost Country Sourcing (LCCS)


In LCCS, the company locates materials in countries with lower labor and production costs which lead to cutting operational
expenses.
New studies show shifts toward knowledge and design sourcing in high tech countries in Europe by developing countries.
Out Sourcing and In Sourcing
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

Outsourcing is purchasing goods or services from an external source.
Internal sourcing mainly aims at internal production or purchasing from a subsidiary of the organization or in a comparative
perspective, bringing activities back into the company (make or buy)
It is critical to focus on core competence in nowadays’ “fast‐moving market” and increased competition. The decision to buy is
practically made when “it is demonstrated that competing firms possess superior capabilities that leave no chance of catching up,
and/or competitors are achieving superior performance”
Advantages in Out Sourcing

Cost reduction in general resulting from economies of scale.

Specialized investments and expertise.

Possibility of greater concentration on the "core competence" while avoiding "peripheral" operations.
Disadvantages of Outsourcing

Control over the operations involved would be reduced; also, less flexibility would exist to react upon unpredictable changes in
requirements.
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Single Sourcing and Multiple Sourcing
Partnership Sourcing
While partnership sourcing is mainly defined as a sourcing practice selectively based on a single supplier providing the customer with
extensive access to the operations and management systems of the supplier over an extended pre‐arranged period, it should not be
limited to relationships that focus on single sourcing or cost reduction.
Purchasing Portfolio Model
The Kraljic Matrix: Classification of Purchase Items.
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