sourcing materials and services
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Sourcing materialsand services
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a) Purchasing
A method used by businesses to buy products and/or services.
Manages the entire acquisition process.
Introduction
Acquisitionprocess
Requisition PurchaseorderProductreceipt Payment
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Key component of effective inventory management by
Monitor existing stock
Help companies determine what to buy, how much to buy and when to
buy
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b) Procurement
Responsible for acquiring all the materials needed by an organization
Include different types of acquisition
Types ofacquisition
Purchasing Rental Contracting Others
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Procurement
Types ofacquisition
Purchasing Rental Contracting
Selectingsuppliers Negotiating
Agreeingterms Expediting
Monitoringsupplier
performance
Arrangingdelivery
Organizingtransport
Examples of processes which takes place underprocurement
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c) Strategic sourcing
Broader and more comprehensive than the procurement process
Focuses more on supply chain impacts of procurement and purchasing
decisions
Works cross functionally within the business firm to achieve the
organizations overall business goals
Systematic and fact- based approach for optimizing an organizations
supply base and for improving the overall value proposition
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Unique Aspects of Strategic Sourcing Consolidation and Leveraging of Purchasing Power
To concentrate larger volumes of purchases into fewer suppliers or fewer purchasing transactions.
Emphasis on Value
Rather than on acquisition cost alone
More Meaningful Supplier Relationship
Strategic sourcing benefits from developing more sound business relationships with many types of suppliers.
Attention Directed to Process Improvement
Strategic sourcing does not focus solely on effective purchasing processes but it also diverts attention to the business processes
which could be improved on.
Enhanced Teamwork and Professionalism
To include suppliers and customers, as appropriate
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The Sourcing Process Strategic Evolution
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Distinctives High risk, low value Example of distinctives
- Engineered items, parts that areavailable from only a limited number ofsuppliers
Criticals High risk, high value Gives a competitive advantage
Generics Low risk, low value
Do not enter final productExamples of generics
- Maintenance, repair and operatingitems (MRO)
Commodities Low risk, high value
Examples of commodities-Basic production materials, basicpackaging, transportation services
Types and Importance of Items and ServicePurchased
R i s k
Value or Profit Potential
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Types of Purchasing Activity
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Five core principles are recognized as key drivers to achieve the desiredlevels of value :
i. Assess the total value
ii. Develop individual sourcing strategies
iii. Evaluate internal requirements
iv. Focus on supplier economics
v. Drive continuous improvement
Strategic Sourcing Methodology
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Supplier Portfolio Screening Process
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Four-step approach to managing sourcing and procurement processes
1. Determine the type of purchase
Identify the type of purchase
2. Determine the necessary levels of investment
Two major types of investments : a) Time
b) Information
Managing Sourcing and ProcurementProcesses
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3. Perform the procurement process
Include activities which are necessary for an effective purchasing process to happen and
also to ensure customer satisfaction
Procurement professionals can collect data on the time and information actually spent in
the purchasing process.
4. Evaluate the effectiveness of the strategic sourcing process
Control step. Asks two questions :- a) Were the users needs satisfied?
b) Was the investment necessary?
If the process Is deemed as ineffective Identify the cause(s) and rectify the probl
If the customer is satisfied strategic sourcing process is said to be effective and it can
serve as reference in the future.
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Reliability
- On-time delivery
- Performance history
- Warranty
Risk
- Cost risk
- Potential for supply uncerta
- Lead risk time and uncertai
Quality
- Technical specifications
- Chemical and physicalproperties
- Design
- Product life- Ease of repair
- Maintenance
- Dependability
Overview of Supplier/Vendor Selection Criteria
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Desirable quantity
- Vendor attitude
- Training aids
- Packaging
- Vendor location
Capability
- Production capability
- Technical capability
- Management
- Operating controls
- Labor relations Financial
- Price
- Financial stability
Overview of Supplier/Vendor Selection Criteria
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Vital for the successful procurement strategies
Firm utilizes smaller number of suppliers/vendors partnership/allian
with suppliers/vendors
Firm needs to ensure that the supplier can accommodate to their needs
at all times and at an optimum total acquired cost
Supplier/Vendor Evaluation and Relationship
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Firms evaluate their potential suppliers level of excel lence in terms of process management and continuous improvement .
In order for them to determine their level of excel lence, three approaches have been developed.
a) Total Quality Management (TQM)
- A strategy in which whole organizations were focused on an examination of process variability and continuous improvement
- Included a goal of improving a companys quality to only three defects per mil lion through systematic incremental change in p
statistical measurement of outcomes
- Focuses on employee involvement
b) Six Sigma (6 )
- Similar to TQM but involves training experts (green belts and black belts) who work on solving important problems while they teach others in the
company
c) ISO 9000
- Ensures that companies have standard processes in place that they fol low: Document what you do and do what you document
- Involves a third party registration program certifying that companies are foll owing documented processes
Certifications and Regulations
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The Special Case of Procurement Price Four generic sources of prices in procurement situations
Sources of price
Commodity markets
Price lists
Price quotations
Negotiations
Traditional basic input costs The primary price of the products or materials as paid by the firms
Direct transaction costs Cost of detecting, transmitting the need for, and processing the material flow
Includes the process of detecting inventory need, requisitioning, preparing andtransmitting the order documentation to the supplier, receiving the acknowledgment,handling shipping documents, and receiving information about input to inventory
Supplier relational costs
Costs of creating and maintaining a relationship with a supplier
Determine potential vendors prices
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Hierarchy of Price Measurement Approaches
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Total Procurement Price (Purchaser)
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e-sourcing
Contractmanagem
ent
Requestquotations
Analyzespend
Definesourcingstrategy
Qualifysuppliers
e-Sourcing
Ensure the optimacontracts arenegotiated with su
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e-procurement
Identify
need
Createrequisition
Createpurchase
order
Shipping
Receivegoods
Paymentand
settlement
e-Procurement
Secure the optimalof goods and servi
based on thosecontracts
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Reduce procurement prices
Improve comparison shopping
Reduce overall prices paid
Lower operating costs
Reduce paperwork
Reduce sourcing time
Improve control over inventory andspending
Improve procurement and sourcingefficiency
Find new supply sources
Improve communications
Improve personnel use
Lower cycle time
Advantages of e-procurement
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Security
Vulnerability of credit card numbers transmitted over the Internet to theft
by a computer hacker
Lack of face-to-face contact between the buyer and seller
Disadvantages of e-procurement
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Four basic types of e-commerce business models used in procurement and sourcing
Sell-side system
Online businesses selling to individual companies or consumers
Electronic marketplace
Represents a seller-operated service that consists of a number of electronic catalogs from vendors within a market.
Provides a one-stop sourcing site for buyers who can examine the offerings of multiple vendors at one Internet location
Buy-side system
Buyer controlled e-procurement.
Housed on buyers system and is administered by the buyer, who typically pre -approves the suppliers who have access to the system, and proce
suppliers products and services that have been pre -negotiated
Online trading community
Maintained by third party technology vendor where multiple buyers and multiple sellers in a given market can conduct business.
e-commerce Models
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Expertise in the areas of purchasing, procurement, and strategic sourcing is essential to
the success of supply chain management.
The strategic sourcing process consists of seven steps that include project planning and
kickoff, profile spend, assess supply market, develop sourcing strategy, execute
sourcing strategy, transition and integrate, and measure and improve performance.
A number of key factors should be considered in the supplier selection and evaluationprocess, including certifications and registrations such as TQM, Six Sigma, and ISO 9000.
e-sourcing and e-procurement practices and technologies are helping to enhance the
effectiveness and efficiency of traditional buying processes.
Summary
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Thank you
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