LECTURE NO.

02

Topics To Be Covered:

 Make v/s Buy Decision

 Strategic Sourcing

 Principles of Purchasing

 Strategic Purchasing

 Process Flow in Supply Chain Management

MAKE VS BUY DECISION:
Production units are identified mostly with their
decision to make or buy. In other words, do they
wish to produce the desired product on their own or
do they want to purchase it from the foreign market.

The Make Vs Buy decision depends on three pillars.

These pillars are:

 Business strategy
 Risks
 Economic factors

1.Business Strategy:

Business strategy, in addition to the process,

technologies or skills needed to design the product
or deliver that particular service, also engages the
importance of the company whose product or service
is being considered for outsourcing.

It’s advisable to select the in-house skills and

abilities when a product or a function plays a very
important role in improving the company’s
performance or is considered a core operation.
 2.Risk:

The second pillar under the Make Vs Buy strategy

is risks involved with any decision. The major risk
factors involved in making a product in the home
country or purchasing it from foreign countries are
quality, reliability, and predictability of outsourced
solutions or services.

When we have numerous suppliers, a single failure

in the supply chain may not be deadly. Even when
the suppliers are making parts of an item instead of
that completely furnished item, there will be errors
in manufacturing. These errors should be identified
before the products are assembled so that the faulty
item cannot be delivered to the consumer directly.

3.Economic Factor:

The third pillar in the Make vs Buy strategy is

the economic factors residing in the country that
needs to decide if to buy a product or make it on its
own. The various economic factors comprise the
effect of outsourcing on capital expenditures, return
on invested capital and return on assets, along with
the probable savings gained by outsourcing.
STRATEGIC SOURCING:

Strategic sourcing is a procurement process aimed

at the optimization of securing suppliers at the
lowest total cost. It is a common strategy among
procurement professionals who are seeking the
continual improvement of sourcing decisions.
Strategic sourcing minimizes supply chain risks and
provides transparency in pricing and profit
forecasting.

Steps of Strategic Sourcing:

There are seven steps involved in the strategic

sourcing process.

Spend Category assessment: In this first stage, the

team needs to do a complete survey on the total
expenditure. The team ensures that it acknowledges
every aspect regarding the spend category itself.

Supply market analysis: This step in the strategic

sourcing process involves analyzing supplier profiles,
including their revenue and market share to help
you make an informed supplier selection. Performing
detailed market research enables you to understand
your position in the market and will help you choose
the right sourcing strategy.
Strategy development: At this stage, it is essential
to establish your business goals, initiatives, and
relevant timelines for completing the sourcing
process.

Solicit bids: Once you’ve conducted the market

research and decided on a sourcing strategy, you’re
ready to request supplier information. This step is
known as an RFX. An RFX may be a request for
proposal (RFP), request for quotation (RFQ), or
request for information (RFI). An RFX outlines
variables such as service or product specifications,
pricing, and legal terms and conditions.

Select suppliers and finalize the contracting

process: Once you receive responses to your RFX,
shortlist suppliers who meet your minimum
requirements. If you need more information, arrange
interviews with each potential supplier. Rely on
members of your sourcing team to conduct these
interviews, so they can ask detailed, industry-
specific questions.

Communication with new supplier: Strategic

sourcing follows a general approach to supplier
management. This means that once you’ve chosen a
supplier, they should be involved in the decision-
making processes at every level of the project.
Evaluate. Once you select a supplier and add them
into the project, it’s vital to assess their performance
throughout the lifecycle of the project. This allows
you to quickly identify problems and address them
before they negatively impact the project.

PRINCIPLES OF PURCHASING:

Purchasing is in-charge of supply into the

organization. Its responsibility is to ensure the
availability of supplies such as products, facilities,
resources, and services. The classic aim of
purchasing is to secure the right products in the
right quantity and quality at the right time and the
right place but due to the increased importance of
purchasing activity, additional strategic approaches
have been developed. Purchasing activities need
integrated and long term planning. Suppliers must
be developed to become strategic partners, and
procurement markets must be developed globally.
Out of these considerations, an extended field of
action has evolved, Strategic Purchasing. This
development often leads to a division of personnel
within Purchasing according to areas of operational
and strategic areas of competence.

STRATEGIC PURCHASING:
Strategic purchasing is a practice used in many
businesses to realize the greatest amount of benefit
to the company while still effectively managing the
costs associated with the acquisition of raw
materials and operational components. Strategic
purchasing attempts to promote the most efficient
use of all materials throughout the company. The
goal of this type of purchasing is to increase the
bottom line of the company through the most careful
use of purchasing approaches and strategies.
Staying on top of current and projected needs is also
part of strategic purchasing. For example, attention
to the purchase of new software or computer
equipment takes place long before the need becomes
necessary. This allows the purchasing department to
evaluate a number of options in advance and settle
on the solution that is in the best interest of the
company without having to make snap decisions at
the last minute. This approach is particularly
important if keeping up with the latest technology is
crucial to the successful operation of the business.
Strategic purchasing also involves building
relationship between purchasers and suppliers.
Working together, it may be possible to streamline
the advance time needed to process an order with
the supplier, thus reducing the need to maintain a
larger inventory. Depending on the volume of
business done by the company with the supplier, it
may also be possible to find ways to expedite delivery
as well.
This method is all about redefining buying habits,
processes, and behaviors so that the company
enjoys the most benefit. From this perspective,
strategic purchasing is not an event, but an ongoing
process that involves the interaction of purchasing
professionals with suppliers, and the management
arm of the corporation.

SUPPLY CHAIN MANAGEMENT – PROCESS FLOW:

Supply chain management can be defined as a
systematic flow of materials, goods, and related
information among suppliers, companies, retailers,
and consumers.

TYPES OF PROCESS FLOWS:

There are three different types of flow in supply

chain management, written as follows:

1. Material flow
2. Information/Data flow
3. Money flow
Material Flow:

Material flow includes a smooth flow of an item from

the producer to the consumer. This is possible
through various warehouses among distributors,
dealers and retailers.

The main challenge is to ensure that the material

flows from inventory without any stoppage through
different points in the chain. The quicker it moves,
the better it is for the enterprise, as it minimizes the
cash cycle.

Information / Data Flow:

Information/data flow comprises the request for

quotation, purchase order, monthly schedules,
engineering change requests, quality complaints and
reports on supplier performance from customer side
to the supplier.

From the producer’s side to the consumer’s side, the

information flow consists of the presentation of the
company, offer, confirmation of purchase order,
reports on action taken on deviation, dispatch
details, report on inventory, invoices, etc. For a
successful supply chain, regular interaction is
necessary between the producer and the consumer.
Money Flow:

On the basis of the invoice raised by the producer,

the clients examine the order for correctness. If the
claims are correct, money flows from the clients to
the respective producer.