1.1 Identify the sourcing process in relation to procurement Flashcards
Broadly, what does sourcing involve?
Sourcing involves establishing, evaluating, and engaging with suppliers to achieve the best value for money when purchasing goods.
Define sourcing
Sourcing is part of procurement strategy where procurement professionals aim to find suitable organisations to become the suppliers of products and services.
What are the two types of sourcing?
Tactical and strategic.
Tactical sourcing
Low level for low risk or routine items. E.g. high profit, low risk, short term projects and transactional relationships.
Strategic sourcing
High level sourcing for core products or services. E.g. high profit, high risk items, long-term projects and collaborative relationships.
Which factors represent value for money when sourcing?
Price
Delivery (e.g. lead time)
Quality (fit for purpose and meets spec.)
Ethics (suppliers following ethical codes of practice)
Sustainability (working + promoting sustainability)
Availability (must be available at competitive price)
Define new buy
A brand new requirement - the first time the product/service has been sourced.
Define modified re-buy
A product/service that has been sourced before but requires a slight change prior to sourcing again.
Define lead time
The amount of time from placing the order to the goods/services being delivered
Define straight re-buy
Exactly the same product/service as sourced previously.
Novac and Simco’s 11-stage sourcing process (1991)
1 - Identify needs 2 - Define user requirements 3 - Decide whether to make or buy 4 - Identify purchase type (new buy, modified re-buy, straight re-buy) 5 - Carry out market analysis 6 - Identify potential suppliers 7 - Pre-screen suppliers and create a shortlist 8 - Evaluate shortlisted suppliers 9 - Supplier selection 10 - Final product or service delivered 11 - Evaluate supplier selection
Outsourcing
Contracting an external supplier to manage and run a function that was previously handled in-house.
Reasons for outsourcing
Financial (e.g. keeping overheads effective + obtain value for money)
Technology (reduce need to invest in new machinery)
Resource (avoiding need to recruit more staff/invest in training)
Skillset (enabling an organisation to focus on core activities)
Reduce risk (moving requirements for managed services to another business).
Core activities
Activities that are key to an organisation’s success.
Key benefits of outsourcing
Cost benefits and reduced risk.
Activities not normally outsourced.
Core activities.
What stage of Novac and Simco is the concept of make or buy?
Stage 3. It is also founds within the CIPS procurement cycle (Market Commodity and Options).
Make or buy decision
The make or buy decision is whether to manufacture a product or provide a service in-house, or to source it from an external supplier.
Assets
Items of value owned by an organisation, which can be used to meet debts.
Economies of scale
Saving costs by increasing the levels of production.
Factors when thinking about make or buy decision
Product/service
Organisation’s current position
Current market situation
Amount of competition
What should you consider during the make or buy decision?
The product/service and control of this
Current capacity
Current market situation
Amount of competition (buying power and negotiation)
What does Porter’s Five Forces examine?
Rivalry among existing competitors
Advantages of ‘make’ decision
- Organisation self sufficient
- Enhanced control
- Improved quality control
- Workforce stability
- Supply continuity
- Reduced risk
- Economies of scale
- Easier to amend
Advantages of ‘buy’ decision
- Specialised knowledge
- Tech advancements available
- Small volumes not cost effective
- Cheaper to buy
- May not have machinery required for make
- Economies of scale
- No capacity in-house
- Less inventory
- Reduced overheads
Costs associated with all forms of sourcing
- Procurement professional’s salary
- Resources like computers and phones
- Training
- Development of policies and procedures
- Time
How to identify where a product sits in relation to impact on profit and supply risk
Kraljic matrix.
Kraljic matrix
Supply risk vs. profit matrix
Kraljic non-critical category
Low profit impact, low supply risk. Tactical procurement style, arms-length relationship.
Bottleneck
A specific stage in a process which slows down the flow of production and limits the overall output rate.
Kraljic leverage category
High profit impact, low supply risk, tactical procurement style, transactional relationship
Kraljic Strategic category
High profit impact, high supply risk, strategic procurement style, collaborative relationship
Kralkic Bottleneck category
Low profit impact, high supply risk. Tactical procurement style, closer tactical relationship.
The four categories of products or services according to Kraljic
- Non-critical
- Leverage
- Strategic
- Bottleneck
What can organisasations decide after categorising products/services according to Kraljic’s matrix?
Make a decision about whether the need requires a tactical or strategic approach.
What is the importance of a strategic item to organisations?
Need to spend time/resources to ensure the right supplier is awarded the contract and that supply is continuous.
Key costs of outsourcing
- Identifying if outsourcing a practical option.
- Evaluating, selecting and awarding the contract to suppliers.
- Management of outsourced contract.
- Employment of outsourced contract managers,
Key benefits of outsourcing
- Increased expertise (specialists)
- Can focus on core activity
- Reduced/shared risk
- Lower operating costs
Core works/activities
Those that are integral to an organisation.
What can you use to help assess which functions can be considered for outsourcing?
An outsourcing decision matrix, based on Barnes (2008).
What does Barnes outsource matrix do?
Measures the strategic importance of the function/activity/product against its contribution to operational performance. The result identifies whether you should outsource or not. Strategic importance vs. op.performance contribution.
Outsourcing outcome - eliminate
Value of these functions contribute little, they may be eliminated.
Outsourcing outcome - strategic alliance
If function is strategically important but contribute little to operations, they can be trusted to a strategic partner.
Outsourcing outcome - retain
Highly strategy functions important to operational performance should remain in-house.
Outsource outcome - outsource
Functions that are operationally important but not key to strategy can be outsourced with minimal risk.
Insourcing
To bring a function of activity back in-house after previously being outsourced.
Functions frequently outsourced
IT support Social Media Catering HR Cleaning Accountancy and payroll Marketing
Supplier pre-qualification
An early process within procurement to find out if potential suppliers meet the buying organisation’s criteria on capability, capacity and financial stability.
Techniques used to prepare list of potential suppliers:
Previous knowledge Recommendations Internet research Market publications Trade shows Networking
Pre-qualification questionnaire (PQQ)
A document sent to potential suppliers to assess their suitability against the buyer’s minimum standards of performance - generally based on experience, capacity, financial standing and insurances.
What does the PQQ seek answers to?
Supplier financial stability
Supplier relevant experience and accreditations
Supplier capacity, control and commitment for the contract
Supplier following ethical and sustainable practices
Carter’s 10 Cs supplier/contractor evaluation model
- Competency
- Capacity
- Commitment
- Control
- Cash
- Cost
- Consistency
- Culture
- Clean
- Communication
Why use Carters 10 Cs model to choose potential suppliers?
To identify which meet the required criteria and make a shortlist for further in the sourcing process.
Why is it useful to appraise suppliers using a PQQ before sending ITTs or RFQs?
It removes suppliers from the list that would not add value and reduce rusk.
Risks that could affect organisations that don’t conduct PQQs or appraise
Poor quality Failed delivery Breach of contract Ethical concerns Environmental damage Stakeholder dissatisfaction Financial concerns Reputational damage
What market/envionrmental conditions can affect a supplier’s organisation?
Micro (internal) and macro (external).
Micro environment examples
Customers Competitors Intermediaries Some public Suppliers
Macro environment examples
Social Technological Economic Environmental Ethical Legal (STEEPL acronym)
Breach of contract
A situation where one party fails to deliver against the agreement made.
Request for quotation (RFQ)
An invitation to suppliers to ask them to give a quotation to supply goods and services.
Key Performance Indicator (KPI)
A measurable value that generates feedback on performance
Service Level Agreement (SLA)
An agreement to deliver and maintain an accepted or expected level of service
Qualitative
Measured in terms of quality
Quantitative
Measured in terms of quantity
How to monitor supplier management
Implementing KPIs and SLAs in the contract
How to ensure KPIs (qualitative and quantitative) are effective and generate measurable data
These should be SMART: Specific Measurable Achievable Relevant Time-bound
Non-disclosure agreement (NDA)
An agreement between two or more parties to agree not to disclose any information in relation to a project or contract
Intellectual property
An idea or creative work, which can be treated as an asset
Prototype
An early sample of a first attempt at making a product
Patent
A way of protecting intellectual property, excluding other parties from using, marketing or making products that relate to it
Risks in outsourcing
Loss of control Supplier reliance Confidentiality Quality Intellectual property Reputation Loss of expertise Inflexibility Cultural differences
Low cost countries
Countries that have a slow-growing economy and where rates of pay are significantly lower than in countries with more affluent economics
TUPE - Transfer of Undertakings (Protection of Employment)
Legislation to protect employees when outsourced contracts are moved between suppliers e.g. on renewal.
International Labour Organisation (ILO)
A United Nations organisation uniting governments, employers and workers with the common goal of improving labour standards for all. This ensures global workers are protected.
Benefits of outsourcing to developed countries
- Cost saving to the developed country
- Ability to further grow organisations due to non-core functions being outsourced
- Increased employment in developing countries
- Ethical and sustainable behaviour promoted in developing countries
When is TUPE used
TUPE is used during organisational mergers, acquisitions and outsourcing arrangements.
Who does TUPE benefit
TUPE protects employees by ensuring they keep their jobs when supplier is changed. The outsourced supplier must manage the contract with existing staff carrying out the function.
Two main advantages of TUPE
- Continuity of supply for buying organisation
- Continuity of employment for workers
