The document discusses key concepts related to sourcing and purchasing in supply chain management. It defines sourcing as choosing who will perform supply chain activities, and purchasing/procurement as acquiring materials and resources from suppliers. Important sourcing decisions include whether to perform activities in-house or outsource them, how third parties can increase supply chain surplus, and factors to consider for make-or-buy decisions. Outsourcing is meaningful if a third party can raise surplus more than keeping activities in-house. Risks of outsourcing include increased coordination costs and loss of visibility or control.

1. Sourcing

2. Sourcing &
Purchasing
• Sourcing is the choice of who will
perform a particular supply chain activity
such as production, storage,
transportation, or the management of
information. Hence sourcing is the entire
set of business processes required to
purchase goods and services.
• Managers must first decide whether each
task will be performed by a responsive or
efficient source and then whether the
source will be internal to the company or
a third party
• Purchasing/Procurement is the process
by which companies acquire raw
materials, components, products,
services, or other resources from
suppliers to execute their operations.

3. Role in
the
Supply
Chain
• Sourcing decisions should be made to
increase the size of the total surplus to be
shared across the supply chain.
• Outsourcing to a third party is meaningful if
the third party raises the supply chain surplus
more than the firm can on its own.
• A firm should keep a supply chain function in-
house if the third party cannot increase the
supply chain surplus or if the risk associated
with outsourcing is significant
https://www.youtube.com/watch?v=s8dkMmq
5aiI
ZARA

4. Components
of Sourcing
Decisions
• In-House or Outsource :
The most significant sourcing decision for a
firm is whether to perform a task in-house or
outsource it to a third party.
Use In-house Sourcing- if the third party cannot increase the supply
chain surplus or if the risk associated with outsourcing is significant.
Use Outsourcing to a third party -if the third party raises the supply
chain surplus more than the firm can on its own.
For transportation function , managers must
decide whether to outsource all of it,
outsource only the responsive component,
or outsource only the efficient component.

5. Cont..
Supplier Selection –
Managers must decide on the number of suppliers
they will have for a particular activity. They must
then identify the criteria along which suppliers will
be evaluated and how they will be selected.
Procurement :
Procurement is the process of obtaining goods and
services within a supply chain.
Ex- Firm should set up procurement for direct materials to
ensure good coordination between the supplier and buyer.
While the procurement of MRO products should be
structured to ensure that transaction costs are low.

6. • W.W. Grainger outsources
package delivery to a third
party because it is very
expensive to build this
capability in-house.
• Grainger owns and operates
its warehouses because there
is sufficient scale to justify
this choice.
• Sourcing decisions should aim
to provide the appropriate
level of responsiveness at the
lowest cost.

7. Outsourcing
• Outsourcing is the delegation of
tasks or jobs from internal
production to an external entity ie.
(a sub- contractor).
• Outsourcing to a third party is meaningful if the third
party raises the supply chain surplus more than the
firm can on its own.
7

8. Offshoring
• The moving of various
operations of a company
to another country for
reasons such as lower
labour costs or more
favourable economic
conditions in that other
country.

9. Near-Shoring & Insourcing
• Near-shoring
Near-shoring is a form of offshoring, used to refer to the
practice of getting work done or service performed by
people in neighboring countries.
• Insourcing
The act of bringing together a function that was
performed outside the organization (outsourced) to being
performed inside the organization is called insourcing.
9

10. Make or
Buy:
Factors to
be
considered
• Available capacity
• Expertise
• Quality consideration
• Nature of demand
• Cost
• Risk
10

11. When to make
• Higher purchase price
• Assurance of timely delivery
• Availability of the required facilities and capacities
in-house.
• Better control of quality
• Need to preserve trade secrets and design secrets.
• Savings on transportation costs
11

12. When to
buy
• Lesser purchase price
• Demand is low, investment in infrastructure is not
justified.
• Ability of the supplier to supply the item at lower
cost, higher quality and faster delivery.
• Suppliers hold a patent
• Opportunity cost of producing is much higher
• No problem of trade secrets or design secrets
• Not enough capacity
• No long term requirement of the item.
12

13. How Do
Third
Parties
Increase
the Supply
Chain
Surplus?
1. Capacity aggregation.
• A third party can increase the supply chain
surplus by aggregating demand across
multiple firms and gaining production
economies of scale that no single firm can on
its own.
• This is the most common reason for
outsourcing production in a supply chain. One
of the reasons that all smartphone
manufacturers outsource glass manufacturing
for their screens is that the third parties
achieve manufacturing economies that no
single smartphone manufacturer can on its
own.
• The growth in surplus from outsourcing is
highest when the needs of the firm are
significantly lower than the volumes required
to gain economies of scale.

14. Magna
Steyr
• A third party that has taken over assembly of
automobiles for several manufacturers.
• Magna Steyr designs flexible assembly lines that
can build up to five different vehicle types on a
single line. This flexible capacity allows the
company to produce a variety of low volume cars
economically.
• Magna Steyr assembled the G class for Mercedes,
the RCZ for Peugeot, and the Mini Countryman and
Mini Paceman for BMW in the same plant. In each
case, the models had relatively low demand
volume. Each firm would not have gained sufficient
economies of scale for assembling its model.
• https://www.magna.com/

15. 2. Inventory
aggregation
• A third party can increase the supply
chain surplus by aggregating
inventories across a large number of
customers.
• ex- W.W. Grainger and McMaster-Carr
MRO suppliers that provide value
primarily by aggregating inventory for
hundreds of thousands of customers.
Aggregation allows them to significantly
lower overall uncertainty and improve
economies of scale in purchasing and
transportation.

16. 3.
Transportation
aggregation by
transportation
intermediaries.
A third party may increase the surplus by
aggregating the transportation function to a
higher level than any shipper can on its own.
• UPS, FedEx
• Exel, a third-party logistics (3PL) provider for
Chrysler and Ford operated a dedicated fleet
for the distribution of spare parts for Chrysler.
In tests in Michigan and Mexico, Ford added its
own truck parts for delivery on the same fleet.
• Relatively low density of dealers in Northern
Michigan and Mexico (outside Mexico City), the
aggregation provided by Exel was a benefit for
both Ford and Chrysler.

17. 4.
Warehousing
aggregation
• A third party may increase the supply chain
surplus by aggregating warehousing needs over
several firms.
• The growth in surplus is achieved in terms of
lower real estate costs and lower processing costs
within the warehouse.
• Savings through warehousing aggregation arise if
a firm’s warehousing needs are small or if its
needs fluctuate over time.
• In either case, the intermediary with the
warehouse can exploit economies of scale in
warehouse construction and operation by
aggregating across multiple customers.
• An example is Safexpress, a third-party logistics
provider in India

18. 5.
Procurement
aggregation.
• A third party increases the supply
chain surplus if it aggregates
procurement for many small players
and facilitates economies of scale in
ordering, production, and inbound
transportation.
• Procurement aggregation is most
effective across many small buyers
• Ex-Spendedge

19. Benefits from effective sourcing decisions
• Activities performed at higher quality and lower cost.
• Better economies of scale can be achieved if orders within a
firm are aggregated.
• More efficient procurement transactions can significantly
reduce the overall cost of purchasing.
Most important for items for which a large number of low-
value transactions occur.
• Design collaboration results in easier products
manufacturing and distribution reduces - Overall costs.
Most important for components that contribute a significant
amount to product cost and value.

20. Cont…
• Facilitates coordination with the supplier and improve
forecasting and planning
Better coordination lowers inventories and improves
the matching of supply and demand.
• Appropriate sharing of risk and benefits can result in
higher profits for both the supplier and the buyer.
• Firms can achieve a lower purchase price by
increasing competition through the use of auctions.

21. CASE –BOEING OUTSOURCING

22. Risks of Using a
Third Party
1. Underestimation of the cost of
coordination.
2. Reduced customer/supplier
contact
3. Loss of internal capability and
growth in third-party power.
4. Leakage of sensitive data and
information
5. Loss of supply chain visibility.
6. Negative reputational impact.
7. The process is broken.

23. •https://www.indiamart.com/

24. First-Party Logistics & Second-Party
Logistics
1PL - First-Party Logistics
An enterprise that sends goods or products from one location to
another is a 1PL.
2PL - Second-Party Logistics
An enterprise that owns assets such as vehicles or planes to
transport products from one location to another is a 2PL.

25. Third and Fourth Party Logistics Providers
3PL - Third-Party Logistics
An enterprise which maintains management oversight, but outsources
operations of transportation and logistics to a provider who may
subcontract out some or all of the execution.
4PL - Fourth-Party Logistics
An enterprise outsources management of logistics activities as well as
the execution across the supply chain.
The 4PL provider typically offers more strategic insight and
management over the enterprise's supply chain. A manufacturer
will use a 4PL to essentially outsource its entire logistics
operations.
The CSCMP defines 4PL as follows:
• Differs from third party logistics in the following ways:
1)4PL organization is often a separate entity established as a joint venture or long-term
contract between a primary client and one or more partners
2)4PL organization acts as a single interface between the client and multiple logistics service
providers
3) All aspects (ideally) of the client’s supply chain are managed by the 4PL organization
https://www.youtube.com/watch?time_continue=433&v=9J2pTNTksno&feature=emb_logo

27. E-Procurement
31

28. E-Procurement
➢ It is a method of the purchase of goods or services
electronically and is an integral part of an overall
strategic procurement plan in the current business
environment.
➢ It includes supply chain automation and participation
in one or more market-places.
32

29. E-Procurement Process
1. Request for quotation
2. Supplier’s Offer evaluation
3. Reverse auction
4. Purchase order
6. Document status
7. Progress status
8. Payment status

31. Reverse Auction / B2C Auctions
• Type of auction in which several sellers offer their items
for bidding, and compete for the price which a buyer will
accept.
• The buyer usually has the option to accept any bid or reject
all.
https://www.youtube.com/watch?v=vdqPHgGKgjU
• Internet based process using reverse auction engine
• Bidding starts at a pre fixed start time
• Buyer fixes specifications and commercial terms, and also fixes
purchase price below which the bidders have to quote.

32. Reverse Auction in Progress
• Bidders can see each other’s prices and not the names
• Hectic bidding before closing time

33. 3 basic model of E-Procurement
1. Buyer Centric-
These models are characterized by
the adoption of software that
creates a single catalogue with
which the suppliers would deal.
Buying organization implements
the sotware, gets the catalogue
data, aggregates the data through a
single catalogue.

34. Cont..
2. Seller Centric models
These Models place the administrative
software with the seller. This model reduces
the cost for the buyer in terms of keeping the
catalogue up to date as well as delivery which
is all performed by the supplier.
3.Third Party managed (Market Place Model)
The model in which buyers and sellers make
their financial exchanges on a separate
platform.
An independent platform provides software
where catalogues are offered and various
buying capabilities are all offered on the
software program.

35. E-Procurement: Advantages
• Quick process
• Global reach
• Transparency
• Reduction in transaction cost
• Reduction in procurement cycle time

36. E-Procurement: Constraints
• Infrastructure
• Reluctance to adopt the new system
• Different time zone
• Security in transaction

37. Sourcing Processes
Sourcing Process includes
1. Selection of suppliers
2. Design of supplier contracts
3. Product design collaboration
Design collaboration to provide variety and customization,
because failure to do so can significantly raise the cost of
variety
1. Procurement of material or services
2. Evaluation of supplier performance.
Note: Before selecting suppliers, a firm must decide whether
to use single sourcing or multiple suppliers.

38. Supplier Selection Process
The selection of suppliers is done
using a variety of mechanisms like
offline competitive bids, reverse
auctions, or direct negotiations.
Bidding vs. Negotiation
Bidding is inviting suppliers to provide
the best possible price for a defined
scope of work.
Prerequisites to Bidding
• Money value must be large enough to
justify expenses
• Specifications clear to both the parties
• Adequate no. of sellers
• Sufficient time available

39. Supplier Selection Process
Conditions Suited for Negotiation
Negotiations are formal discussions
between buyer and a supplier.
• Cost estimation is difficult
• Other than price, quality, schedule
and service also important and
negotiable
• Buying firm anticipates need to
make changes in specifications
• Tooling and set-up costs are major
factors
43

40. Supplier Selection Process
• Two-step Bidding/Negotiation
1. Technical bid
Technical Bid means a bid, or that part of a bid, which sets out the nature of
the service to be provided under the bid .
2. RFQ (Request for Quote) for Price bid
A request for quote (RFQ) /invitation for bid (IFB), is a process in which a
company solicits select suppliers and contractors to submit price quotes
and bids for the chance to fulfill certain tasks or projects.
RFQ should include the following:
1.Specific parts or products, with detailed descriptions.
2.Delivery requirements.
3.Product quantity.
4.Payment terms.
5.Selection criteria.
6.RFQ timeline and review process.
7.Terms and conditions.
8.Submission requirements.
44

41. Types of Contracts
There exits 3 contracts that increase overall profits
by making the supplier share some of the buyer’s
demand uncertainty are as follows:
1. Buyback or returns contracts
2. Revenue-sharing contracts
3. Quantity flexibility contracts

42. BUYBACK CONTRACTS
• A buyback or returns clause in a contract allows a
retailer to return unsold inventory up to a specified
amount, at an agreed-upon price.
• Buybacks encourage retailers to increase the level of
product availability
• Holding-cost subsidies-Manufacturers pay retailers a
certain amount for every unit held in inventory over a
given period.
• Price support to retailers- Many manufacturers
guarantee that in the event of prices drop, they will
also lower prices for all inventories that the retailer is
currently carrying and compensate the retailer
accordingly

43. REVENUE-SHARING CONTRACTS
• The manufacturer charges the
retailer a low wholesale price ,
and shares a fraction of the
retailer’s revenue.
• Even if no returns are allowed,
the lower wholesale price
decreases the cost to the
retailer in case of an overstock.
The retailer thus increases the
level of product availability
resulting in higher profits for
both the manufacturer and the
retailer

44. QUANTITY FLEXIBILITY CONTRACTS
• Under quantity flexibility contracts, the manufacturer
allows the retailer to change the quantity ordered (within
limits) after observing demand.
• When the supplier is selling to multiple retailers, it allows
the supplier to aggregate uncertainties across multiple
retailers and thus lower the level of excess inventory
• Quantity flexibility contracts increase the average amount
the retailer purchases and may increase total supply chain
profits when structured appropriately.

45. Kraljic’s Purchase Portfolio Model
➢ It helps purchasers understand where their
products are classified in terms of supply risk
and profit contribution.
➢To know whether the balance of power lies
with them or with their suppliers.
➢It helps to select an appropriate purchasing
strategy.
52

46. The Kraljic framework is based
on two dimensions
• Profit Impact: The strategic importance of
purchasing in terms of the value added by
product line, the percentage of raw materials in
total costs and their impact on profitability.
• Supply Risk: The complexity of the supply
market gauged by supply scarcity, pace of
technology and/or materials substitution, entry
barriers, logistics cost or complexity, and
monopoly or oligopoly conditions.

47. Strategic Purchasing Portfolio
Profit
Impact
Supply Risk High
Low
High Leverage Items Strategic Items
Non-critical Items Bottleneck Items
Kraljic Model
Purchasing Portfolio Management

48. Leverage Items (high profit impact, low supply
risk).
➢ Represents a high percentage of profit of the
buyer
➢ Many suppliers are available
➢ Easy to switch supplier, quality is standard.
➢Buyer dominated
➢Preferred to float tenders, well formulated vendor
selection, agreement with preferred suppliers
55

49. Strategic Items (high profit impact, high supply
risk).
➢ Crucial items
➢High supply risk caused by scarcity or difficult
delivery
➢Balanced power of both with high level of
interdependency
➢Strategic alliances, close relationship, early
supplier involvement, vertical integration with a
long-term value focus
56

50. Non-critical Items (low profit impact, low supply
risk).
➢ Non- Critical items, easy to buy, low impact on
financial results, standardized
➢Balanced power with low level of
interdependency
➢Goal is to reduce time and money spent on these
products
57

51. Bottleneck Items (low profit impact, high supply
risk).
➢ Can only be acquired from one supplier or their
delivery is otherwise unreliable
➢ Have relatively low impact on the financial
results
➢Supplier dominated with a moderate level of
interdependency
➢Advisable to have a volume insurance contract
and vendor managed inventory, keep extra stocks,
look for potential suppliers
58

52. Outsourcing in the light of Porter’s 5-Forces
Model
Competitors
New
Technology
Vendor
Core
Competencies
Buyer

53. Procurement Methods
Procurement
Methods
EOQ
JIT
VMI
e-Procurement
Inventory Cost
Inventory Turns
Profitability

54. EOQ Model and its Relevance
Economic Order Quantity is the amount of
inventory to be ordered at one time for the
purposes of minimizing total annual inventory
cost which covers holding cost and ordering cost

55. Economic Order Quantity

56. Assumptions
Following assumptions are implied in the calculation:
1. Demand for the product is constant and uniform
throughout the period.
2. Lead time (time from ordering to receipt ) is
constant.
3. Price per unit of product is constant.
4. Inventory holding cost is based on average inventory.
5. Ordering costs are constant.
6. All demands for product will be satisfied.

57. EOQ Model and its Relevance
(Contd)
Formula:
Where,
Q* = optimal order quantity
D = annual demand quantity of the product
S = ordering cost
H = annual holding cost
H = C x i
C = Per unit cost
i = cost of carrying inventory as percentage

58. Just-In-Time
➢ Just-in-time (JIT) is an inventory strategy companies employ to
increase efficiency and decrease waste by receiving goods only
as they are needed in the production process, thereby
reducing inventory costs.

59. JIT System of Procurement
➢ Ordering just when it is needed for production.
➢ Stock levels kept minimum.
➢ Requires carefully planned schedule
➢ The advent of Internet and supply chain software's has
enabled organizations across globe to implement it
effectively.
➢ With the JIT adoption, companies have less stock
holding….resulting in reduction in storage space…
consequently savings on rent and insurance costs

60. JIT System of Procurement
(Contd)
Advantages
Inventory reduction
Smaller production lots/ batch sizes
Transparency in movement
Resource optimization
Issues
No backup in case of error
No alternative in case of failure of delivery
Helps only during local sourcing

61. Seven Wastes
Wastes Removal: Pre-requisite for
JIT Implementation

62. Vendor Managed Inventory
➢ A supplier takes full responsibility for maintaining
stock of products at customer’s location.
➢ It differs from traditional inventory management
as in that the customer is billed for material when
it is delivered, but in VMI when it is consumed or
issued.

63. VMI Implementation Levels
• Collaboration
• Automation
• Cost Transfer

64. VMI Implementation Challenges
• Top management commitment
• Commitment of stakeholders
• Trust cannot be achieved overnight
• Technological support
• Short comings of small business
• Excess responsibility
• Ability to work as a team

65. Key Success Factors in VMI
Implementation
• Set, review and maintain performance goals
• All SKU’s through VMI to minimize transactions
• Ensure data accuracy
• Utilize automated replenishment system
• Organize periodic performance reviews
• Use the metrics to find cost and inefficiencies

66. Thank You