Procurement - Sourcing and Buying Flashcards
SOURCING: What is Purchasing
Purchasing: The transactional function of buying products and services.
SOURCING: What is Procurement
Procurement: Refers to the process of managing a broad range of processes that are associated with a company’s need to procure goods and services that are required to manufacture a product (direct) or to operate the organization (indirect).
List 5 ways Strategic Sourcing is differing
- Consolidation and leveraging of purchasing power—to concentrate larger volumes of purchases into fewer suppliers or fewer purchasing transactions;
- Emphasis on value—rather than acquisition cost alone;
- More meaningful supplier relationships;
- Attention directed to process improvement; and
- Enhanced teamwork and professionalism— to include suppliers and customers, as appropriate
Make or Source?
Sourcing is now also commonly used to refer to buying materials or components from external suppliers. In recent years, the trend has been moving toward outsourcing combined with the creation of supply chain relationships. Traditionally firms preferred the make option.
List 4 Reasons for sourcing
1) Cost Advantage: For many firms cost is an important reason for buying or outsourcing especially for supplies and components that are non-vital to the orgs operations and competitive advantage. This is usually true for generic supplies and materials for which suppliers may the advantage of economies of scale because they supply the same item to multiple users.
Some foreign suppliers have the advantage of lower labour costs.
2) Insufficient Capacity: A firm may be running at or near capacity, making it unable to produce the components in-house. This can happen when demand grows faster than anticipated.
3) Lack of Expertise: A firm may not have the necessary technology and expertise to manufacture the item. Maintain long-term technological and economical viability for non-core activities may be affecting the firm’s ability to focus on core competencies. Suppliers may hold the patent to the process.
4) Quality: Purchased components may be superior in quality because suppliers have more advanced technologies, process, skilled labour and the advantage of economies of scale.
List 4 Reasons for making
1) Protect proprietary technology
2) No competent supplier: If suppliers do not have the technology or capability to produce a component, the firm may have no choice but to make an item in house, at least in the short term.
3) Better control qualities: If the firm is capable, the make option allows for the most direct control over the design, manufacturing process, labour and other inputs to ensure that high-quality components are built. Thus, using the make option to ensure a higher quality product is a debatable question and must be investigated thoroughly.
4) Use existing idle capacity: A short-term solution for a firm with excess idle capacity is to use the excess capacity to make some of its components. This strategy is valuable for firms that produce seasonal products.
5) Control of lead-time, transportation and warehousing cost: The make option provides greater control of lead-time and logistical costs since management controls all phases of the design, manufacturing and delivery processes.
6) Lower cost: If technology, capacity and managerial and labour skills are available, the make option may be more economical if large quantities of the component are needed on a continuing basis. Although the make option has a higher fixed cost due to initial capital investment, it has a lower variable cost because it precludes suppliers’ profits.
A value risk quadrant categorises item importance and classifies items:
o Generics are low-risk, low-value items and services. Items such as office supplies and maintenance, repair, and operating items (MRO) are examples of generics.
o Commodities are low in risk but high in value. Basic production materials (bolts), basic packaging (exterior box), and transportation services are examples of commodities that enhance the profitability of the company but pose a low risk.
o Distinctives are high-risk, low-value items and services such as engineered items, parts that are available from only a limited number of suppliers, or items that have a long lead time. The company’s customers are unaware of or do not care about the uniqueness but these products pose a threat to continued operation and/ or high procurement cost. A stockout of distinctives results in stopping the production line or changing the production schedule to work around a stocked-out item.
o Critical’s are high-risk, high-value items that give the final product a competitive advantage in the marketplace. Criticals, in part, determine the customer’s ultimate cost of using the finished product. The procurement strategy for criticals is to strengthen their value through use of new technologies, simplification, close supplier relations, and/or value-added alterations.
What are 6 qualities to look for when selecting a supplier
Reliability: Time-definite and on-time deliveries
Risk: There are many types of risks, including service reliability. Other types may include potentials for supply uncertainty, lead time uncertainty, and cost uncertainty.
Capability: This criterion considers potential suppliers’ production facilities and capacity, technical capability, management and organizational capabilities, and operating controls. These factors indicate the supplier’s ability to provide a needed quality and quantity of material in a timely manner.
Financial: In addition to price, buying firms are wise to consider the financial positions of potential suppliers. Financially unstable suppliers pose possible disruptions in a long-run continued supply of material.
Desirable Qualities: The types of concerns here may be extensive, but some of those likely to be relevant include: cultural compatibility and supplier attitude; locations of key supplier facilities; packaging capabilities; repair and return services; and others such as availability of training aids, etc.
Sustainability: This factor is “last but not least,” in the sense that a commitment to sustainability is regarded as essential in many leading supply chains.
