Unit I Part 2

Introduction to Supply Chain Management (SCM): Concept of SCM Components Features Strategic issues in SCM, The
Supply Chain Revolution-Customer focus in SCM , Demand planning, Purchase Planning Make or Buy decision indigenous
and global sourcing, Development and Management of suppliers Legal aspect of Buying Cost managementNegotiating for purchasing and sub contracting Purchase insurance Evaluation of Purchase performance.

INDIGENOUS AND GLOBAL SOURCING

Domestic Purchase, International Purchase, Global Sourcing
GLOBAL SOURCING
Def 1 : Is the process of identifying, developing and utilizing the best source of supply for a firm
regardless of its location.
Def 2 : Global sourcing involves proactively integrating and coordinating

common items and materials

Processes. Design, Technologies and

Suppliers

Across world wide

Purchasing

Engineering and

Operating

Locations.

Difference between Domestic Purchase and International purchase

Characteristic that differentiates International purchase from domestic purchase are
1. Increased Scope of purchases The variety and assortment of items available for
purchase is many times more than indigenous purchase
2. Increase Purchasing Risks Risks associated with buying from world wide is many time
more due to political, legal and geographic differences of the sourcing locations
3. Decrease in Purchase Price International purchase very often has low cost advantages
which domestic purchase may not be able to offer.
4. Need for systematic supplier selection Cultural differences, attitude towards quality,
misunderstanding, language barriers etc between the buying and selling firms can cause a
lot of performance issues and costly mistakes. Hence supplier selection becomes much
more critical in case of international purchase than indigenous purchases.

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GLOBAL SOURCING VS INTERNATIONAL PURCHASING

International Purchasing is a function within Global sourcing where product is imported for sale
within a country and there is very little involvement with the company supplying the product. It
is very similar yet more difficult than domestic purchase.
Global Sourcing on the other hand is much more complex and involves the following activities
like

Identifying the opportunities to lower price, improve qualities, and gain efficiencies on a
world wide basisCA.

Global sourcing is very complex in nature as it aims to integrate the purchase function as
a vital one.

SIGNIFICANCE OF GLOBAL SOURCING

Why should firms look at Global sourcing as a strategic initiative?
Firms should consider global sourcing because it
1. Offers low cost advantage
2. Enables the firms to exploit the rising capabilities and sophistication of global suppliers
and gain competitive advantages.
3. Enables the firms to utilize the favourable attitudes of Governments and state head of
various countries.
4. Provides a firm footing in the supplier countries which would help in the marketing of the
firms product in these emerging markets.
Apart from the above the benefits that accrue to the firm venturing into global sourcing are

Access to higher quality products

Access to superior technology

Enhanced competitive positions

Increased number of suppliers

Better customer and delivery service

Help meet counter trade obligations.

LEVELS OF GLOBAL SOURCING

Global sourcing is a continuum extending from firms pursuing only domestic purchase to fullfledged global sourcing firms. Monzcka and Trent have identified Five levels of world wide
sourcing. They are
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LEVEL 1 Base case of engaging exclusively in domestic purchases only.

LEVEL 2 International purchasing done on a reactive basis. Meaning international

purchase done only if it is absolutely needed.

LEVEL 3 International sourcing is treated more strategically. International purchasing

is part of the sourcing strategy.

LEVEL 4 -

International sourcing strategies integrated across global locations.

Purchasing, manufacturing selling locations integrated across the globe.

LEVEL 5- This is the highest level of global sourcing with integration at world wide
locations and the functional Groups.

RISKS OF GLOBAL SOURCING

In addition to the risks associated with outsourcing, global sourcing entails a few additional risks
listed below.
1. Security risk Insecurity in business can be due to any of the following reasons
a. Lack of government support
b. Unorthodox country laws
c. Cultural differences
d. Political instability.
2. Quality Risk Bargain price may lead to huge quality compromises not bargained for.
3. Intellectual Property Risk- Risk of leakage of sensitive information, knowledge or
patents.
4. Other Risks caused by
a. Language barriers
b. Cultural differences.
c. Lack of proper infrastructure.
GLOBAL SOURCING IS NOT RECOMMENDED IF
1. Product lead time is short.
2. The supplier is responsible for after sales service
3. Product has short life cycle or has sophisticated design engineering.
4. Demand for the product is highly variable
5. The Risks ( Political, Economic, Social) outweigh the benefits.
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6. Emerging supply base in not mature enough or needs a lot of supervision.

7. Product gaseous in nature and does not properly fit in containers
8. Product portfolio is too complex.
9. Time is too short to bring the supplier up in the learning curve.
10. Intellectual property must be protected.

FRAME WORK FOR ANALYSING THE COSTS ASSOCIATED WITH GLOBAL

SOURCING

LOGISTICS

TOTAL COST
OF OWNERSHIP

PURCHASE
COST

INLAND
OCEAN
TRANSFER
CHARGES

CUSTOM S
DUTY &
FEES

TAXES AND
TAX
INCENTIVES

_
+

OTHER COSTS

COST O QUALITY CHANGES

ADDITIONAL SAFETY STOCK
SUPPLIR DEVELOPMENT & CERTIFICATION
CURRENCY EXCHANGE RATE

*****************************************************************************
ADDITIONAL INFORMATION ( NOT IN SYLLABUS INCLUDED FOR GK)
In International trade there is lot of importance to documentations. Documentation required for
Shipping, payments through bank etc are to be meticulously followed. A lot of terms and usages
are used in the Documents that facilitate international trade. These terms are standardized ( have
same meaning through out the world) to overcome the language, cultural barriers and
misunderstandings that can arise between firms from two different countries. Bill of lading,
Certificate of origin, Letter Of Intent, LC or letter of credit, Packing Slip, Packing labels,
Shipping marks, Warning messages, Incoterms, HS code, ISO standard for cargo handling etc.

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Two very important terms are introduced here in this reading material they are the HS code and
the incoterms
HS Code : Harmonized Commodity and Coding system is an internationally harmonized system
of naming and coding internationally traded products. This system was developed by the World
Customs Organization ( WCO ) formerly customs cooperation council an independent
organization with over 170 member countries. The coding system facilitates easy identification
of products and easy fixation of the duties. The tariff rates may be different for different
countries but all countries follow the same standard code and name for the same product.
Example of HS codes for Lentil ( Parippu / Dal)
Country

Turkey

USA

Canada

Hs Code

0713.40

0713.40

0713.40

Seeds for sowing

0713.40.00.00.11

0713.40.10.00

0713.40.00.10

Green

0713.40.00.00.12

0713.40.10.10

0713.40.00.91

Red

0713.40.00.00.13

0713.40.10.30

0713.40.00.92

Other

0713.40.00.00.19

0713.40.10.80

0713.40.00.99

Countries have the freedom to add the last few digits .

INCOTERMS
International commercial terms or Incoterms, are a set of three letter standard trade terms most
commonly used in International contracts for the sale of goods. Currently there are 11 terms
WHAT INCOTERMS DO - INCOTERMS inform the sales contract by defining the respective
obligations, costs and risks involved in the delivery of goods from the Seller to the Buyer.
WHAT INCOTERMS DO NOT DO - INCOTERMS by themselves DO NOT:

Constitute a contract;

Supersede the law governing the contract;

Define where title transfers; nor,

Address the price payable, currency or credit terms.

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Examples of Incoterms are

EXW - EX WORKS (... named place of delivery)

The Seller's only responsibility is to make the goods available at the Seller's premises.
The Buyer bears full costs and risks of moving the goods from there to destination.

DAP - DELIVERED AT PLACE (... named place of destination)

The Seller delivers when the goods are placed at the Buyer's disposal on the arriving
means of transport ready for unloading at the names place of destination. The Seller bears
all risks involved in bringing the goods to the named place.

FOB - FREE ON BOARD (... named port of shipment)

The Seller delivers the goods on board the ship and clears the goods for export. From that
point, the Buyer bears all costs and risks of loss or damage

CIF - COST INSURANCE AND FREIGHT (... named port of destination)

The Seller clears the goods for export and pays the costs of moving the goods to the port
of destination. The Buyer bears all risks of loss or damage. The Seller, however,
purchases the cargo insurance.

DEVELOPMENT AND MANAGEMENT OF SUPPLIERS

The term supplier and contractor needs to be clearly understood. Supplier is a provider of
product or services available in the market to an extensive clientele in large quantities whereas
Contractor is the provider of a customized product or a service not readily available in the market
to one customer in small quantities.
SUPPLIER MANAGEMENT
Is an ongoing process that minimizes the risk associated with the purchasing goods, materials
and services. As a prime source of competitive advantage suppliers should be selected on sound
commercial principles that recognises amongst other factors, the quality of the goods, materials
and services offered, relevant experience and reputation, financial stability and the ability to
deliver on time. Supplier management consists of 3 key elements

Vendor selection
Vendor rating - Performance evaluation of supplier Vendor development
Supplier relationship.

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VENDOR SELECTION
Conventionally, one of the major criteria for selection of a potential vendor was cost of product
or service in question. Nowadays apart from costs, there are several other dimensions, such as
flexibility, quick response, technological competency, process integration, vendor history and
financial position and value added services that have become very critical from supply chain
perspective.
Vendor selection steps
Business
assessment

need

Source

Business

discovery

invitation

proposal

Evaluation and

Selection

Negotiation

vendor

of

1. Business Need Assesment: Vendor selection process starts with assessment of the
business needs of the corporate enterprise specifying reasons for outsourcing instead of
starting to produce it in house. Firms need to conduct a strategic analysis of various
aspects of vendor core competencies in terms of skills and processes that form the basis
of their success and competitive advantage in the market place.
2. Source Discovery : Identification or Discovery of potential vendor who can supply a
particular product item or service. Some of the sources from which a potential vendor list
can be prepared are
Vendor websites
Vendor data base
Supplier catalog
Trade directories, Journals and magazines
Trade shows and exhibitions
Sales personnel and professional bodies.
3. Business proposal Invitation: Taking into consideration the business needs and the
possible sources of supply, a preliminary assessment is undertaken to identify potential
vendors, largely on the basis of their location and strategic capabilities. A request to
submit business proposal is send to the shortlisted vendors.
4. Evaluation and Negotiation: While evaluating the proposal submitted by the vendors
firms should concentrate on various aspects like
a. Solid understanding of the market
b. Present client base
c. Technological expertise
d. Production capacity and facility
e. Financial position
f. Quality sensitiveness
g. Information and communication technologies capability
h. Managerial and professional acumen
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Negotiation : Negotiation is one of the most important as well as one of the most
interesting and challenging sourcing activities and aspect of the supply chain
management of the firm. Negotiation is a pervasive process in which people ultimately
attempt to reach a joint decision on matters of common concern in situations in which
there is initial disagreements. From supply chain point of view negotiation is an
interactive process between two or more parties. Before starting negotiation with a
potential vendor, it is important to determine

The goals and objectives of negotiation

Negotiator must have authority, expertise and knowledge to conduct and conclude
an agreement out of negotiation
Availability of all information required in the negotiation and
Sound preparation for the success of negotiation.

Clayton proposed a ten step approach for successful negotiation, which are
1. Establish the objectives of the negotiation for yourself
2. Gather facts that can have a big impact on the negotiation.
3. Assess the power position of each of the parties
4. Determine the points of common interest
5. Make a list of questions
6. Define your tasks
7. Decide on the composition and division of role in your negotiating team.
8. Plan your concessions
9. Agree upon negotiating tactics you would follow
10. Indicate how you think you will conclude the negotiations.
Normally, in most negotiation process, commercial picture along with long-term business
prospect are two major decision factors.
5. Selection of Vendor: In this final stage one or more potential vendors are selected through
comprehensive evaluation and selection process. At this stage the negotiation team or the
supply chain manager now invite potential vendor to have business with the firm.

VENDOR RATING
Vendor rating is the result of a formal vendor evaluation system. Vendors or suppliers are given
standing, status, or title according to their attainment of some level of performance, such as
delivery, lead time, quality, price, or some combination of variables. The motivation for the
establishment of such a rating system is part of the effort of manufacturers and service firms to
ensure that the desired characteristics of a purchased product or service is built in and not
determined later by some after-the-fact indicator. The vendor rating may take the form of a
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hierarchical ranking from poor to excellent and whatever rankings the firm chooses to insert in
between the two. For some firms, the vendor rating may come in the form of some sort of award
system or as some variation of certification. Much of this attention to vender rating is a direct
result of the widespread implementation of the just-in-time concept in the United States and its
focus on the critical role of the buyer-supplier relationship.
Most firms want vendors that will produce all of the products and services defect-free and
deliver them just in time (or as close to this ideal as reasonably possible). Some type of vehicle is
needed to determine which supplying firms are capable of coming satisfactorily close to this and
thus to be retained as current suppliers. One such vehicle is the vendor rating.

Criteria for evaluation

Vendor performance is usually evaluated in the areas of pricing, quality, delivery, and service.
Each area has a number of factors that some firms deem critical to successful vendor
performance.
Pricing factors include the following:

Competitive pricing. The prices paid should be comparable to those of vendors providing
similar product and services. Quote requests should compare favorably to other vendors.
Price stability. Prices should be reasonably stable over time.
Price accuracy. There should be a low number of variances from purchase-order prices on
invoiced received.
Advance notice of price changes. The vendor should provide adequate advance notice of
price changes.
Sensitive to costs. The vendor should demonstrate respect for the customer firm's bottom
line and show an understanding of its needs. Possible cost savings could be suggested.
The vendor should also exhibit knowledge of the market and share this insight with the
buying firm.
Billing. Are vendor invoices are accurate? The average length of time to receive credit
memos should be reasonable. Estimates should not vary significantly from the final
invoice. Effective vendor bills are timely and easy to read and understand.

Quality factors include:

Compliance with purchase order. The vendor should comply with terms and conditions as
stated in the purchase order. Does the vendor show an understanding of the customer
firm's expectations?

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Conformity to specifications. The product or service must conform to the specifications

identified in the request for proposal and purchase order. Does the product perform as
expected?
Reliability. Is the rate of product failure within reasonable limits?
Reliability of repairs. Is all repair and rework acceptable?
Durability. Is the time until replacement is necessary reasonable?
Support. Is quality support available from the vendor? Immediate response to and
resolution of the problem is desirable.
Warranty. The length and provisions of warranty protection offered should be reasonable.
Are warranty problems resolved in a timely manner?
State-of-the-art product/service. Does the vendor offer products and services that are
consistent with the industry state-of-the-art? The vendor should consistently refresh
product life by adding enhancements. It should also work with the buying firm in new
product development.

Delivery factors include the following:

Time. Does the vendor deliver products and services on time; is the actual receipt date on
or close to the promised date? Does the promised date correspond to the vendor's
published lead times? Also, are requests for information, proposals, and quotes swiftly
answered?
Quantity. Does the vendor deliver the correct items or services in the contracted quantity?
Lead time. Is the average time for delivery comparable to that of other vendors for similar
products and services?
Packaging. Packaging should be sturdy, suitable, properly marked, and undamaged.
Pallets should be the proper size with no overhang.
Documentation. Does the vendor furnish proper documents (packing slips, invoices,
technical manual, etc.) with correct material codes and proper purchase order numbers?
Emergency delivery. Does the vendor demonstrate extra effort to meet requirements
when an emergency delivery is requested?

Finally, these are service factors to consider:

Good vendor representatives have sincere desire to serve. Vendor reps display courteous
and professional approach, and handle complaints effectively. The vendor should also
provide up-to-date catalogs, price information, and technical information. Does the
vendor act as the buying firm's advocate within the supplying firm?
Inside sales. Inside sales should display knowledge of buying firms needs. It should also
be helpful with customer inquiries involving order confirmation, shipping schedules,
shipping discrepancies, and invoice errors.

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Technical support. Does the vendor provide technical support for maintenance, repair,
and installation situations? Does it provide technical instructions, documentation, general
information? Are support personnel courteous, professional, and knowledgeable? The
vendor should provide training on the effective use of its products or services.
Emergency support. Does the vendor provide emergency support for repair or
replacement of a failed product.
Problem resolution. The vendor should respond in a timely manner to resolve problems.
An excellent vendor provides follow-up on status of problem correction.

A 2001 article in Supply Management notes that while pricing, quality, delivery, and service are
suitable for supplies that are not essential to the continued success of the buying firm, a more
comprehensive approach is needed for suppliers that are critical to the success of the firm's
strategy or competitive advantage. For firms that fall into the latter category performance may
need to be measured by the following 7 C's.
1. Competency- Managerial, technical, administrative, and professional competence of the
supplying firm.
2. Capacity- Supplier's ability to meet physical, intellectual and financial requirements.
3. Commitment- Supplier's willingness to commit physical, intellectual and financial
resources.
4. Control- Effective management control and information systems.
5. Cash resources- Financial resources and stability of the supplier. Profit, ROI, ROE, assetturnover ratio.
6. Cost - Total acquisition cost, not just price.
7. Consistency- Supplier's ability to exhibit quality and reliability over time.
If two or more firms supply the same or similar products or services, a standard set of criteria can
apply to the vendor's performance evaluation. However, for different types of firms or firms
supplying different products or services, standardized evaluation criteria may not be valid. In this
case, the buying firm will have to adjust its criteria for the individual vendor. For example,
Honda of America adjusts its performance criteria to account for the impact of supplier problems
on consumer satisfaction or safety. A supplier of brakes would be held to a stricter standard than
a supplier of radio knobs.

Benefits
Benefits of vendor rating systems include:

Helping minimize subjectivity in judgment and make it possible to consider all relevant
criteria in assessing suppliers.
Providing feedback from all areas in one package.
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Facilitating better communication with vendors.

Providing overall control of the vendor base.
Requiring specific action to correct identified performance weaknesses.
Establishing continuous review standards for vendors, thus ensuring continuous
improvement of vendor performance.
Building vendor partnerships, especially with suppliers having strategic links.
Developing a performance-based culture.

Vendor ratings systems provide a process for measuring those factors that add value to the
buying firm through value addition or decreased cost. The process will continually evolve and
the criteria will change to meet current issues and concerns.
For example, some feel that supplier evaluation must now reflect the strategic direction of the
buying company's environmental initiatives. As a result, some firms have recently developed
supplier evaluation systems that place significant weight on environmental criteria. It would
seem that the concept will remain valid for some time.
LEGAL ASPECTS OF BUYING
The purchase or sale of goods is governed by the laws of each country, ie the law of contract, the
sale of goods act, the law relating to carriage and to some extent the law of insurance. The
transaction of purchase is a sort of contract and should satisfy the following requirement

Legal capacity of parties- The persons performing the buying and selling should have the
legal capacity to enter into contracts.

Legality of subject matter- The transaction should not be illegal or opposed to public
policy such as buying at prices higher than those fixed by the government, buying from
unlawful sources etc. similarly an agreement to do an illegal act is void.

Offer and Acceptance- In contract to buy or s

PAell there should be an offer to buy or sell and the acceptance of such offer. They are
complete when a) a quotation is accepted and communicated.

Consideration- an important requirement of contract is consideration. A contract by

which only the seller is obliged to supply certain goods is not enforceable. There should
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be corresponding agreement on the part of the buyer to pay certain consideration, which
here is the price.
Other important aspects are

Authority The persons authorized to sign the orders and the extent of their authority
should be specified by the management.

Employers liability- The commitments of the purchasing agent are binding on his
employers.

Signature- In signing purchase order the purchasing agent should make it clear that
he is acting on behalf of his company by prefixing the word For to the name of the
company.

Personal responsibility- The purchasing agent will be liable for any loss which his
firm may sustain if he has acted outside the scope of the authority given to him either
expressed or implied.

Delivery date- A deliver y date is essential if the buyer wishes to retain the right to
cancel the order for delay in delivery. If no delivery date is fixed the seller is bound
to deliver them only within a reasonable time.

Place of delivery- The rule is that unless there is an agreement to the contrary, the
delivery is to be taken at the place at which the goods are at the time of sale or at
which they are manufactured.

Mode of despatch- Unless other wise instructed by the buyer, the seller may make
his own arrangements on behalf of the buyer for transport of the goods buty the seller
must ensure that the mode of despatch is satisfactory for the type of goods to be sent
and is the one usually adopted by similar dealers.
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Title of goods- Generally the title passes when the parties to the contract intend it to
pass. If the intention cannot be determined , the normal rules which are given below
are applicable.
o If the delivery is actual, the title passes at the time of delivery. If goods are
sent through a carrier such as a steamer, railways, road transport etc if the
documents of title are raised in favour of the buyer ie if the buyer is the
Aconsignee, generally the title passes as soon as the goods are handed over to
the carrier and a clean bill of lading or railway receipt is obtained.

Passing of risk The general rule is that risk follows title and until the title or
ownership passes to the buyer the goods remain at the sellers risk.

EVALUATION OF PURCHASE PERFORMANCE

Factors influencing purchasing performance measurement
One of the most important factors that influences the way in which purchasing results are
measured, is how management looks upon the role and the importance of the purchasing
function. Four different management views are prevalent they are
Purchasing is
1. An Operational administrative activity If management view is this then purchasing
operations would be evaluated on parameters such as order backlog, purchasing lead
time, number of orders issued, adherence of existing procedures etc.
2. A Commercial activity: Management sees purchase as a savings potential activity. In
this case total savings reported by purchase, variance reports etc would be used for
evaluation of purchasing function.
3. A part of integrated logistics: Management is aware that price hunting has its
drawbacks and may lead to sub optimization. In this case management introduces targets
to buyers on quality improvement, lead time reduction and improving supplier delivery
reliability.

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4. Strategic business area; Here, purchasing is actively involved in deciding the

companys core business and reinforces the companys competitive position. It is actively
engaged in make-or-buy studies. Here management evaluates purchasing on a number of
aspects including the number of changes (often reduction) in its supply bases, number of
new suppliers being contacted and its contribution to the bottom line in terms of savings
realized.
Depending upon the prevailing view, the position of the purchasing department within the
organization structure will differ, and the measures used for purchasing performance
measurement and evaluation will differ significantly.
Significance of Purchasing Performance
Purchasing performance evaluation can
1. Lead to better decision making since it identifies variances from planned results;
these variances can be analysed to determine their causes and action can be taken
to prevent their occurrence in future.
2. Lead to better communication with other departments eg analysing the number
of invoices which need an extra check may lead to better arrangements in
payment procedures and improve mutual understanding between the purshcasing
department and administration.
3. Lead to better visibility Regular reporting of actual versus planned results
enables a buyer to verify whether his or her expectations have been realized. This
provides constructive feedback to the buyer and it also provides information to
management about individual and group effectiveness and contributes to the
recognition of the purchasing department.
4. Contribute to better motivation: Properly designed, an evaluation system can meet
the personal and motivational needs of the buyer.
Problems in measuring and evaluating Purchasing performance
1. Lack of definition Lack of proper definition
Over the years several methods have been developed in literature in order to get a
better idea of purchasing's effectiveness and efficiency. They can be broadly classified into the
following groups:
1. Budgetting methods in purchasing. A budget is a financial and/or quantitative
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statement of the policy to be pursued during a defined period of time

for the purpose of attaining a given objective. In the
purchasing area several budgets may be used e. g. for the purchased materials,
for MRO-items, and capital investments.
2. Purchasing cost savings. These refers to the extent to which the purchasing
function is able to lower total costs of purchased materials. Often a distinction is made between
cost-reduction effots and . cost-avoidance and return on-investment measures( ie improvement in
ROI based on cost-reductions obtained).
3. Ratios and indices. A ratio represents a mathematical relationship between two numerical
entities.
Ratios may be
Actual to plan ratios with regard to price, quality, delivery etc. This may be based on

historical data or

historical data + a budgeted planned increase or decrease

target forecast. ( generally used for new items)

Actual to Market ratio

Actual data to the published market data. Due to its characteristics this type of data can be used
only for a limited amount of purchasing data.
Time Comparision : These data relate the actual data to the historical data. They are
retrospective and can be used to identify improvements or deterioration in the purchase
performance.
Intercompany comparison
Intercompany comparision Ratios can be used to compare the purchasing activities with those in
other locations or other companies. However this should be done very carefully as the purchase
function priorities, functions and responsibilities may be different.
4. Purchasing reports. Information on how the purchasing function operates may be regularly
reported to top-management. These reports may be informal as well as formal.
5. Audit. The purchasing audit is a review procedure to ensure that proper procedures relative to
sound purchasing and management principles are being applied. Audits may be performed by
company expetts as well as by outside consultants.

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