TOPIC FIVE: SOURCING STRATTEGIES AND

RELATIONSHIPS
 Learning outline

Introduction
Nature of sourcing decisions
Attributes of a good supplier
Different types of sourcing
 The sourcing process
 Source location
 Sources of information on potential
suppliers
 INTRODUCTION

What is Sourcing?
Simply a process of looking for potential
suppliers, service providers, consultants or
contractors to supply goods, works or
services to your organization.
Strategic sourcing is a procurement process
that continuously improves and re-evaluates
the purchasing activities of an organization. A
supply strategy based upon joint
opportunities, mutual trust, respect and open
& honest communication between the
supplier and the customer.
 Strategic Sourcing Primary Objectives

-Reduce the costs of goods and services

-Create contractual alliances with suppliers to
support the long-term goals of the
Organization.
-Maintain and improve product quality.
-Improve business functions.
 Attributes of good suppliers

A definition of a good supplier which would be

acceptable to everybody would be difficult to
write, there are a number of attributes which
might be regarded as desirable for a typical
relationship.
The following list is given by way of suggestion
only:
• Delivers on time
• Provides consistent quality
• Gives a good price
• Has stable background
 Cont….

Provides good services back-up

Keeps promises
Provides technical support
Is responsive to our needs
Keeps the buyer informed on progress
 Different types of sourcing

• Consumable supplies
• Production materials and components
• Capital purchases ( e.g. machinery )
• Intellectual property ( e.g. software)
• Subcontracts
• Service
 Why sourcing decision

Enable the procurement decision makers to

understand longer-term goals, such as
realizing value for money and encouraging
supplier improvement, and to consider these
goals when making procurement decisions.
 Traditional sourcing process

Establishing which suppliers make or supply

the product or service
 Selecting a shortlist (say three) from those
available. Sending an enquiry to each of
those three setting out the requirements.
 Selecting the best supplier from those who
quoted by comparing the offers.
 Placing the purchase order with them,
specifying such matters as volume, schedule,
place of delivery, price and quality required.
 Strategic sourcing process
• Data collection and spend analysis
• Market Research
• The RFx process (also known as go-to-
market
• Negotiations
• Contracting
• Implementation and continuous
improvement
 The sourcing location

The location of potentially useful sources of

supply is a major responsibility of the
procurement and supply executive.
Principal reasons why the location of
suppliers might be Important:
Technical advances
Increasing 'concentration' in supply markets
Increased specialization
Market structure
 Market structure:

Monopsony : where there is a single

dominant buyer or ( market situation in which
there is only one buyer for a product )
Monopoly : where there is a single powerful
seller
Oligopoly: is the present where several
sellers co-operate to dominate the market
 Types of sourcing location

International sourcing location

I. Single seller
II. Standardized products
III. Contract extension
Local sourcing location
1. Emergency
2. Labour intensive
3. Need to promote local industries
 Sourcing approaches

Single sourcing
Dual sourcing
Multiple sourcing
Sole sourcing
Partnership sourcing
 Single sourcing

Single sourcing – The selection of one

supplier for 100% of a particular
requirement. This approach might be chosen
by organization for a products or materials
requiring high investment or where a strong
relationship is required. This can however
lead to over-dependency and supplier
complacency
 Dual sourcing

Dual sourcing – The selection of two

suppliers in order to maintain competition
and spread risk. The balance of business with
each should be considered to manage
supplier satisfaction. This approach can also
help to avoid capacity constraints whilst
maintaining high standards for quality and
technological expertise.
 Multiple sourcing

Multiple sourcing – Pre-qualification and use

of more than two suppliers to give the buyer
choice, maintain competition and manage
fluctuations in demand. Often used for less
critical and low investment products and
services. By having a number of suppliers
pre-qualified, the buyer could respond better
to urgent requirements for less critical
products and materials.
 Sole sourcing

Sole sourcing – where only one supplier can

satisfy the requirement. Usually a monopoly
supply market with high barriers to entry and
no close substitutes. This carries very high
risk for the buyer in terms of price and
security of supply. Due to the technical nature
of some of the safety materials there may
only be one approved source
 Partnership sourcing

Partnership sourcing – commitment by both

customer and supplier to a long-term relationship
based on continuous improvement. E.g. high
spend/high risk requirements, technical
complexity, and fast-moving technology. This
could also be a valid approach for the
organization to ensure that their products and
materials keep pace with latest technologies and
quality requirements.
“Only recently have people begun to recognize that
working with suppliers is just as important as
listening to customers
 Source of supplier information

Reputation.
recorded performance
online trade websites
Representatives
 colleagues/business partners
Agents
online publications
Exhibitions
 Supplier evaluation

The organization (buyer) is in a much better

position to evaluate an existing supplier,
based on his past performance than is the
case with a new supplier
Task variables which determine the choice of
supplier are traditionally stated as: quality,
quantity, timing, service, and price the
supplier is evaluated for named products or
processes as fully approved.
 Carters 10’c evaluation model

 The 10 Cs Checklist
Competency
Capacity
Consistency
Control of process
Cost/price
Commitment to quality
Cash/finances
Clean
Culture and relationships
Communications
 The contract

In any contractual relationship, among other

things, the terms and conditions of contract
need to be appropriate so as to ensure the
best achievable deal for the buying concern,
not just in the short run, and a fair deal for
the contractor. Irrespective of whether the
contract is for the provision of goods or
services,
or its complexity, the terms and conditions
should clearly indicate the rights and
obligations of both parties
 Cont…..

The contract might contain clauses such as the following.

An unambiguous description of the goods to be supplied
or the work required to be carried out;
The duration of the contract/specific delivery dates;
Quality standards and acceptance criteria;
Details of progress reports required, their scope and
timing;
The price or pricing mechanism, and what the price
includes;
Payment terms and a term to permit the recovery of any
money owing;
Terms relating to intellectual property rights,
confidentiality, security, publicity, right of audit;
 Cont….

Indemnity and insurance provisions;

Terms relating to compliance with legal obligations,
such as corrupt gifts and payments of commission,
unlawful discrimination, health and safety etc.;
The client’s right of termination in the event of the
supplier or contractor’s default;
The customer’s right to break the contract, with the
obligation to give written notice and pay for work
done, even in the absence of any breach on the part
of the contractor;
A term to prevent the contractor from transferring
the contract for completion by a third party;
 Cont..

A term that describes when ownership and

risk passes to the client;
A term stipulating which law governs the
contract;
Dispute resolution clause
 Make or buy decision

It is the determination whether to produce a

component internally or to buy it from the
outside supplier
The decision is based on the cost.
The cost for both the alternatives should be
calculated and the alternative with less cost
is to be chosen
 Cont

CRITERIA FOR MAKE

The product can be made cheaper by the
firm.
The finished product is being manufactured
only by limited firms
The part needs extremely close quality
control
The part can be manufactured from the
existing facilities with experienced operators
 Cont….

CRITERIA FOR BUY

High investments required for making
Does not have facilities for making.
Skilled workers not available
Demand is either temporary or seasonal
Patents or legal formalities prevent from
making the product.
 APPROACHES FOR MAKE OR BUY DECISION

The following are the approaches

Simple cost analysis
Economic analysis
Break Even Analysis
 SIMPLE COST ANALYSIS

It is concerned with finding the actual

expenditure incurred on a given product.
Finding the total value of economic resources
used to produce a product
 Example

You contract an ABC Manufacturing Company to supply

6,000 units of its MVP. This would also require 6,000 units of
a component essential for the MVP. The estimated cost of
manufacturing these 6,000 units of the necessary component
is roughly 234,000 USD. The direct material costs 10 USD
per unit, amounting to 60,000 USD for 6,000 units, and
direct labor costs of 8 USD per unit, totaling 48,000 USD.
Applied Variables Factory Overhead costs 9 USD per unit,
totaling 54,000 USD, and Applied Fixed Factory Overhead
costs 12 USD per unit totaling 72,000 USD. There is also an
additional 1.5 USD direct labor dollar at 39 USD, capping
the total costs at 234,000 USD. You can acquire the same
component for 29 USD per unit. Purchasing the component
on the open market will save………………..
 Example 2

A company has been buying a part of

machinery for TZS.IOOO/- each. It has an
extra capacity that can be used to produce
the same. The annual fixed cost of the unused
capacity is TZS 10,000,000 If the company
decided to make the product it will incur
material cost of TZS.350/- per unit, Labour
cost of TZS 300 per unit and variable
overhead cost of TZS 100/- per unit. The
future demand is estimated as 5000 units.
Which decision is profitable for the company.
 BREAK EVEN ANALYSIS

Break even analysis implies at a particular

point the total revenue = total cost.
Example
A manufacturer of TV buys TV cabinet at TZS
500 each. In case the company makes it within
the factory the fixed and variable costs would
be 400,000 and TZS 300 per cabinet
respectively. Should the manufacturer make or
buy the cabinet if the demand is 1500 TV
cabinet.
 Other aspects of sourcing

Reciprocity in Buying
In certain business situations a buyer may
give preference to a supplier who also
happens to be his customer. This relationship
is known as reciprocity. It is something like "l
buy from you if you buy from me"
 Framework contracts

According to the Public Procurement

Regulation of 2013; framework contracts
means contractual arrangement which allows
the procuring entity to procure goods,
services or works that are needed
continuously or repeatedly at an agreed price
over an agreed period of time, through a
placement of a number of orders ( Call Off
Orders).
 E-sourcing

E-sourcing means finding suppliers/service

providers using internet.
 Subcontracting

Is often viewed as a means of augmenting limited

resources and skills while enabling the contractor
to concentrate on their main area of expertise.
A main contractor in project engineering
normally assigns part of the contract work to
subcontractors, who are legally responsible to
the contractor rather than the client even when
the client has stipulated which subcontractor is
to be used.
 Auction

Auction is a public sale in which goods or

property are sold
Electronic reverse auctions (ERAs) allow
buyers to seek competitive pricing by inviting
pre-qualified suppliers to participate in a real-
time dynamic online event.
Usually the Internet-based auction begins
with the buyer posting a requirement for a
product or service on an Internet site.
 Cont….

….. The term ‘reverse’ simply refers to the

bidding process as the participating suppliers
submit successively lower-priced bids during
a specified time period
 Reading assignment

Read bout supplier developments and

supplier appraisal

Remember: A drunk friend is a liability but a

drunk girlfriend is an asset