Strategic Procurement and Outsourcing

Factors of Make versus Buy Decision

   

Firms volume Fixed costs associated with making Per-unit direct cost of making Per-unit landed cost from a supplier

CoB = V . LCpu and CoM = FC + (DCpu . V) Where,

CoB V LCpu CoM FC DCpu = Cost of buying = Volume = Suppliers landed cost per unit = Cost of making = Fixed costs (of making) = Direct cost per unit (of making)

Considerations in Make/buy decisions

- Economic considerations a. Investment in infrastructure required b. Limitation in product/material life. -Strategic considerations a. Long term value of the product/material b. Core business consideration c. core competencies d. Strategic vulnerabilities e. Risk of vertical integration f. Early supplier involvement g. Supervision and control needs h. Quality requirements 3 i. Environmental and other regulations.

Influence of Various Factors on Makeor-buy Decisions

S.No. Factors 1. Economies of scale and scope 2. 3. 4. 5. 6. 7. 8. Large number of suppliers Small number of suppliers Opportunism Governance cost Asset specificity Knowledge specificity Uncertainty about the future Make + + + + + Buy + + + 4

Porters 5-forces Model

New Technology

Vendor

Core Competencies

Buyer

Competitors

Strategic outsourcing Strategic sourcing is a systematic process that directs supply managers to plan, manage and develop the supply base in line with the firms strategic objectives. -It also refers to application of current best practices to achieve the full potential of integrating suppliers into the long term business processes. -Its a more broad based process involving market and commodity research, study competitors materials and technology, understanding business processes and capturing information and 6 using it to improve supplier relationships.

Steps in strategic sourcing plan

Research

Industry economics and business dynamics of purchasing teams assigned commodity

Evaluate

Sourcing strategies and suppliers capability

Structure

Suppliers relationship jointly with suppliers and developing action plans to build the required infrastructure

Implement

Strategic sourcing plan and organizing for continuous improvement

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Strategic purchasing portfolio

Kraljic Model Purchasing Portfolio Management
High Leverage Items Exploit Purchasing Power, Target Pricing
Non-critical Items

Strategic Items Long- term Supplier Partnerships, Bottleneck Items Volume Insurance

Profit Impact

Product Standardization and Efficient Processing

Low Supply Risk High

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Purchasing strategies
Leverage items
Represent high percentage of the profit of buyer. -Many suppliers are available; easy to switch suppliers. -Buyer dominated situation. -Moderate level of interdependency. Strategy Float tenders, Well formulated vendor selections, target pricing, Umbrella agreement with preferred suppliers.
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Strategic Items -have a high profit impact and crucial for product/process of the buyer. -High supply risk caused by scarcity or difficult delivery. -Balanced power between buyer and seller with high level of interdependency. Strategy -To have strategic alliances, early supplier involvement and development, -vertical integration with a long term value focus.

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Bottleneck items
-have a relatively low impact on profit. -have a high supply risk; can only be acquired from one supplier/delivery is otherwise unreliable. -Power situation is supplier dominated with a moderate level of interdependency. Recommended strategy - have a volume insurance contract. - have vendor managed inventory. - keep extra stocks and - keep looking for potential suppliers.
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Non-critical Items

-Supply risk is low ,easy to buy as

suppliers risk are many. - Have relatively low impact on profit/financial results. -Quality is standardized. -Balanced power between buyer and seller with a low level of interdependency. Recommended Strategy -Goal is to have efficient purchasing and enhance product standardization. -Reduce time and money spent in purchasing.
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Supplier Selection Process

Bidding vs. Negotiation

Prerequisites to Bidding Large enough value of specific purchase to justify expenses. Specs. must be clear to both the parties. Estimate the cost of producing the item; homework.

Market must have adequate number of technically qualified sellers; must actively want the contract.

Allowing sufficient bid-preparation time.; online bidding would compress bid preparation and submission time.

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Conditions suited for Negotiation

1.High technology requirements with items requiring long time to develop and produce. 2. Special tooling or set-ups may be required. 3. Conditions of economic uncertainty. 4. Price is not the only factor; quality ,schedule & service may also be important. 5.Buying firm anticipates a change in standard spec or some aspect of the purchasing contract.

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Two stage bidding/negotiation

1.Used when technical capabilities for certain specs for products/processes/material/services are not known/ are inadequate. 2. FIRST STAGE; bids requested for only for technical proposals without any prices. 3. SECOND STAGE; Requests for quotation (RFQ) is sent for those bidders whose first bid is found acceptable. 4. Selection of vendor is finally on the basis of determination of lowest price(i) Solely on the basis of lowest price (L-1 bidder) and/or (ii) The price quoted may be used as a beginning point for negotiations.
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Bid -Price dynamics

1.However, if the buyer gains a reputation for negotiating with the L-1 bidder after bids are opened, future bidders would tend not to offer their best (lowest) prices initially, believing that they might do better in subsequent negotiations. They would hence submit a bid price that is just low enough to be included in negotiations. 2. When any of the pre-requisites to competitive bidding is not satisfied, the negotiation process should be employed to select sources to arrive at a price.
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Supplier Rating System Performance variables

 

Delivery performance Quality performance Price competitiveness Cost reduction

Frequency and Use of Performance Measurement Data Continuous Performance Measurement

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Supplier Rating System-Weighted Point System The weighted score or Vendor performance measure (VPM), is obtained as: VPM =ni = 1Wi Si where ( i =number of performance category factors) W = weightages assigned to each factor and S = score of vendor an a scale, say 1 to 5

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Weighted Point System

Performance Category Quality Delivery Price / cost competitiveness Subjective Factors Inbound shipment quality Quality improvement On time delay Quantity as ordered  Net adjusted price/ real cost compared to other suppliers feasible  Number of feasible cost reduction ideas submitted  Response time  Problem resolution time  Technical ability to service and maintain  Support is new product part development

Service factors

Total rating/ Aggregated Vendor Performance Measure (VPM) Supplier Performance Index = Purchase price + Cost of non performance in any category

Purchase Cost
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Process of Supplier Development

            Identify and review performance gap. Detailing out as to how the project will be approached and implemented Work to achieve mutual agreement on project focus deliverables. Identify processes that result in waste. Compare performance gaps with the desired goals. Establish project metrics and metrics baselines of the metrics selected. Gather and analyze data about the past and present performance and the costs and resources availability including capacity and capability. Develop improvement strategies. Develop implementation or action plans. Calculate the return on investment. Create and review a proposal with the suppliers management. Execute the action or improvement plan for supplier development.
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A generic process for supplier development project

Initiate project

Map and measuring

Develop process

Achieve result

Control process

Recognize team Source: Burt, Dobler, and Starling, 2003, based on a presentation by Butterfield, 2001
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The element of e-procurement system

Tactical procurement process Operational procurement process

Transactions Direct spend Indirect spend

e-sourcing

e-tendering

e-reserve auctioning

Web-based ERP

e-ordering Information e-ordering

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A generalized procedural model for value analysis

Information Phase
1. Define and price the function 2. Obtain and interpret all the facts what is it? what does it do? what does it cost? how else can the job be done? at what cost?
is this better then that?

Speculation Phase Analysis Phase

1. Generate new ideas 2. Determine alternative solutions 1. Determine and compare feasibility 2. Determine and compare suitability 3. Determine and compare cost

how much better? why?

Decision and Action phase Evaluation Phase

1.Review key alternatives with all departments and suppliers concerned 2. Select a best alternative 3. Get departmental and marginal approvals 4. Prepare new specifications

1. Audit effectiveness of the selection 2. Use operating experience to effect further improvement
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Source: Burt, Dobler, and Starling (2006)

Elements of Supplier Quality Assurance Programme

- Production Capacity/Capability Analysis - Product/Process Quality - Procurement of Materials and Components - Facilities of Production and Inspection - Instructions and Documentation at work stations - Training and Qualification of operators - Maintenance of Equipment and Facilities - Traceability and packaging - Logistics and Production Management

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