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PURCHASING ORGANIZATION AND SOURCING STRATEGY

Contents
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Buyers Profile and Division of Responsibilities 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 Sourcing Strategies Global Sourcing

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Drawbacks and issues in global sourcing Low Cost Country Sourcing (LCCS) Out Sourcing and In Sourcing

5. 6.

Advantages in Out Sourcing Disadvantages of Outsourcing Single Sourcing and Multiple Sourcing

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Partnership Sourcing

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Buyers Profile and Division of Responsibilities

Sn 1 2 Buyer Function Corporate Procurement officer (CPO) Corporate 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.

Purchasing Engineer Project Buyer Planners

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MRO buyer

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 departments 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 singlepoint 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. 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. 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.

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 reevaluations. 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 companys 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

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 fastmoving 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 prearranged 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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