Unit 3

Sourcing
 Procurement Strategies
➢ Supplier relationship management (SRM)
• In the management and maintenance of relationships between a buyer and supplier, Supplier relationship
management connects the supply chain and key suppliers with the strategic interest of the organization
• A well-designed SRM program can help companies increase their collaboration and identify the right kind of
suppliers suited to their business, product, and beliefs. It can also help to improve cost optimization, top-line
growth, supplier innovation, and process improvements
• SRM includes the following-
✓ Building trust and collaboration with suppliers
✓ Communicating openly and honestly
✓ Providing timely feedback
✓ Recognizing and rewarding supplier performance
➢ Strategic sourcing- Strategic sourcing is a long-term process seeking to create the best value possible while
looking at the Total cost of ownership. It requires a continuous re-evaluation of sourcing activities, analysis of
markets, and recognition of the organization’s goals. With strategic sourcing, organizations can develop a
flexible and agile system that adds to the overall value and long-term goals of the organization
➢ Supply Base Rationalization- Determine best values & the appropriate number of suppliers for all commodities
➢ Supplier diversity- Supplier diversity is crucial to drive innovation, expand into new markets, and increase
competitive advantage, greater inclusion, and further sustainability efforts. It can drive economic growth and
job creation especially for communities often overlooked
➢ Strategic negotiation- Building on supplier diversity and SRM, strategic negotiation builds strategic
relationships with suppliers & stakeholders to create a win-win situation & organizations can benefit from cost
optimization and collaboration impacting the overall experience like payment, delivery, after-sales service, etc.
➢ Identifying and Eliminating Waste- With value stream mapping, identify the waste in the procurement
process, such as excess inventory, overproduction, process duplication, etc. Apply lean principles to minimize
lead time and eliminate activities that add no value resulting in cost optimization
➢ Risk management- Risk management includes identifying and assessing risks, developing contingency plans,
and establishing risk-sharing arrangements with suppliers. By implementing an effective risk management
strategy, organizations can make better and more informed decisions, reduce disruption, increase resilience,
improve supplier relationships, and better compliance
➢ Innovation Strategies- Innovation stimulates the growth of an organization. Collaborate with suppliers on
new product development, and explore emerging technologies to drive greater efficiencies, cost reductions,
risk management, compliance, sustainability, and real-time visibility
➢ Continuous improvement- Taking a continuous improvement approach to procurement ensures that
processes, strategies, and technologies evolve and adapt to changing market and business needs resulting in
cost savings, risk mitigation and compliance, operational efficiency, and continuous innovation
➢ Sustainability- Green purchasing is a strategy that focuses on buying goods and services with minimal
environmental impact. This can include products made from recycled materials, low emissions, or energy-
efficient products. The benefits of sustainability include improved reputation, reduced emissions,
employees’ well-being, and the support of local communities
➢ Global sourcing- Global sourcing involves buying goods or services from suppliers around the world. This can
be a good option for businesses that want to find the best possible purchase price. It also helps companies
mitigate risks by diversifying their supplier base, tapping into new markets, and finding innovative products
➢ Total quality management- Total quality management ensures that all products and services meet the
highest possible standards. This can include setting quality standards, conducting inspections, and
implementing quality control measures
Six essential strategies for sustainable procurement
Case Study- Apple
• As one of the most successful companies in the world, Apple has had to develop an effective procurement strategy to
keep up with demand and maintain a high level of quality control
• Apple's procurement strategy is based on three key pillars: relationships, flexibility, and cost
✓ Relationships: Apple has built strong relationships with its suppliers over the years. This has allowed them to
negotiate better terms and get early access to new products and technology
✓ Flexibility: Apple is willing to switch suppliers if it means getting a better deal or product. This gives them more
negotiating power and allows them to be selective about who they work with
✓ Cost: Apple is always looking for ways to reduce costs. They have a team of dedicated negotiators who are experts at
negotiating for lower prices
 Supplier Evaluation & Selection
• Supplier evaluation not only enables the organization to know the performance of suppliers, but also gives an
indication of the ability of the firm itself to gain competitive advantage concerning price, quality, lead time, service, etc.
• Evaluation is an effective tool for correcting supplier limitations, provides supplier feedback regarding strengths and
areas for improvement, keeps the supplier informed of the firm’s goals and expectations, and of how the firm perceives
the supplier to be performing against those goals and expectations

Objective of Supplier Evaluation Importance of Supplier Evaluation and Selection

Reduce Purchase Risk and Maximize overall • For sound selection decision
value to the Purchaser • Long term agreements
• Willingness of switching is diminished

Supplier Selection & Evaluation Process

 Sources of Information

Scenarios Requiring Supplier Evaluation and Selection Decisions

During new product development
Due to poor existing supplier performance
At the end of an existing contract
Buying new equipment
Expanding into new markets or product lines
Receiving internal user requisitions
Facing countertrade requirements
During outsourcing
Consolidating volumes
When current suppliers have insufficient capacity
Reducing supply base size
Selection of Suppliers
This is the process where the organization identifies potential suppliers for specified supplies, services or equipment
These suppliers' credentials and history are analyzed, with the products or services they offer
Purchasing managers research potential bidders obtaining information on the organizations and products from media
sources and their industry contacts
This selection process can include or exclude international suppliers depending on organizational goals and criteria

Developing Supplier Evaluation and Selection Survey

1. Identify supplier evaluation categories
2. Assign weight to each evaluation category
3. Identify and weigh subcategories
4. Define scoring system for categories and subcategories
5. Evaluate supplier directly
6. Review evaluation results and make selection decision
7. Review and improve supplier performance continuously
Key Suppliers Evaluation Criteria
Initial Supplier Evaluation
 Vendor Rating
Vendor rating system is an asset and valuable tool for making purchase decisions and also providing feedback to
suppliers with low ratings to encourage improvement in their performance
Vendors or suppliers are given status, or title according to their attainment of some level of performance, such as
delivery, lead time, quality, price, or some combination of variables
It may take the form of a hierarchical ranking from poor to excellent, Awards system or certification through vendor rating
Decisions on whether to continue long-term relationships or discontinue or blacklist existing suppliers can be arrived at
objectively
Objectives
To help the buyer in future selection and subsequent negotiation
To provide the buyer with important information which he can act upon for any corrective measure
To reduce sourcing risk and maximize value to the buyer
Advantages of Vendor Rating
Helping minimize subjectivity in judgment and make it possible to consider all relevant criteria in assessing suppliers
Providing feedback from all areas in one package
Facilitating better communication with vendors
Providing overall control of the vendor base
Requiring specific action to correct identified performance weaknesses
Establishing continuous review standards for vendors, thus ensuring continuous improvement of vendor performance
How are vendors rated?
Vendors are rated based on various characteristics: Timely delivery, Quality, Price, Others factors such as Supplying useful
market information or meeting emergency order
Common Supplier Performance-Based Evaluation Systems
• The guiding factors in determining which system is best are ease of implementation and overall reliability of the system
➢ Categorical Method- The categorical method involves categorizing each supplier’s performance in specific areas
defined by a list of relevant performance variables like “good,” “neutral/average,” and “unsatisfactory”

➢ Linear Averaging- The linear averaging method is probably the most commonly used evaluation method. Specific
quantitative performance factors are used to evaluate supplier performance. The first step is to assign appropriate
weights to each performance factor, such that the total weights of each factor add up to 100. For example, quality
might be assigned a weight of 50, service a weight of 35, and price a weight of 15
➢ Cost-Ratio Method- The cost-ratio method evaluates supplier performance by using standard cost analysis. The total
cost of each purchase is calculated as its selling price plus the buyer’s internal operating costs associated with the
quality, delivery, and service elements of the purchase. Total cost-of-ownership rating- It includes five performance
factors: quality (maximum of 30 points), delivery (25), technology (20), price (15), and service (10). A perfect supplier
would receive a score of 1.00
o A score of 1.20, for instance, means that for every dollar the company spends with that supplier, it spends another 20
cents on everything from line downtime to added service costs
o The higher the ratio of costs to shipment, the lower the rating applied to the supplier
➢ Weighted Point Model
• Flexible system, Allows supplier ranking, Moderate implementation costs, Combines qualitative & quantitative
factors into a single system

0
Example-
Let us rate two companies, A and B.
Factors considered are quality, price, and delivery.
Weights for each of the above factors is
- Quality — 60%, Price — 20% and Delivery — 20%
If we multiply each factor’s values by their weights, we can derive ratings and compare which is better.
Company A inputs:
Total quantity supplied: 10 units, total quantity accepted: 8 units, price per unit: $10, Delay in delivery 20% time
delay.
Quality rating = (8/10)X100=80%
Price rating =(10/10)X100=100%
Delivery rating = 100–20= 80%
Weighted vendor rating of company A= (80X60+100X20+80X20)=84
Company B inputs:
Total quantity supplied: 20 units, total quantity accepted: 18 units, price per unit: $16, Delay in delivery 10%
delay.
Quality rating = (18/20)X100=90%
Price rating =(10/16)X100=62.5%
Delivery rating = 100–10= 90%
Weighted supplier rating of company B= (90X60+62.5X20+90X20)=84.5
Though the price per unit of company B is more than company A, company B still wins because of overall rating is
high.
 Risk Sharing & Supply Chain performance
Risk Sharing
• Risk is the likelihood of an event happening and most often impacts the business negatively
• Examples of Supply Chain Risk
o Apple faced shortages after DRAM supplier was closed after an earthquake in Taiwan in 1999
o Toyota was forced to stop operations at all 12 of its plants following an earthquake that stopped production
of piston rings for engines provided by Riken
• Supply chain risk management is the implementation of strategies to manage both daily & exceptional risks
along the supply chain based on continuous risk assessment to reduce vulnerability & ensure continuity
• Risk Management is done through collaboration or coordination among the supply chain partners to ensure
profitability & continuity
• Risk sharing is a risk management strategy companies or individuals use to transfer risk to a third party.
Examples- Car insurance, and clauses are used in contracts involving two or more parties that agree to cover
loss if such loss may occur as described in the contract
• Individuals & companies take risks when involved in business and use risk sharing to cover the potential loss
from an uncertain event. Sharing risk decreases uncertainty & improves the stability of a business or project
• Risk sharing in a supply chain increases profits for both the supplier and the retailer
• Risk-sharing arrangements can be made by outsourcing or by diversifying risk
✓ Risk pooling through outsourcing- Demand uncertainty is transferred to the suppliers. Suppliers reduce
uncertainty through the risk-pooling effect(since they have multiple clients)
✓ By diversifying, the supply chain becomes more resilient. It can better handle and adapt to unexpected
changes, helping businesses continue their operations smoothly. Sourcing through multiple suppliers, be it
for multiple parts or one component or item, can greatly diminish supply issues
• Risk-sharing mechanisms include buybacks, revenue sharing, and quantity flexibility contracts
✓ Buyback contracts- Seller agrees to buy back unsold goods from the buyer for some agreed-upon price. This
decreases stock out, and results in surplus inventory for the supplier that must be disposed of, which
increases supply chain costs. Most effective for products with low variable cost, such as music, software,
books, magazines and newspapers so that profit margin is high, product availability is critical & consequence
of supplier’s surplus inventory is little
• Buyback by HP- HP manufactures laptops and sells to its retailer BestBuy. When a newer model is released,
HP promises to buy back the leftover laptops at $200 and HP can donate their leftovers to charity and gain
$50 in tax credit
✓ Quantity-Flexibility Contracts- Owing to product variety and technology progress, customer demands &
market prices have become highly uncertain across many industry sectors. Quantity flexibility contracts
allow the buyer in a supply chain to postpone some of his purchases to a later date and at a favorable price
after an improved forecast of the customer demand becomes available. The supplier on the other hand
benefits by having a smoother production schedule as a result
• The Quantity Flexibility (QF) contract couples the customer's commitment to purchase no less than a certain
percentage below the forecast with the supplier's guarantee to deliver up to a certain percentage above
• It is used for perishable products, fashion goods, short lifecycle products, electronic goods and PC, where
the lifecycle of these products is shortened and the speed of the information updating is quick
• QF-type contracts have been used by Toyota Motor Corporation, IBM and Compaq
✓ Revenue Sharing Contract- Revenue sharing contract is a supply chain contract in which the manufacturer
charges low wholesale price to the retailer and shares a fraction of the revenue generated by the retailer
 Supplier Selection - Auction & negotiation
Auction
• An auction in procurement is a competitive bidding process where suppliers bid to sell goods or services to a buyer.
Buyer initiates the auction by specifying the requirements & suppliers compete by submitting their best offers
• Auctions are a powerful tool in procurement, enabling organizations to achieve competitive pricing and streamline
their purchasing processes. The goal of procurement auctions is to ensure that the buyer obtains the best value for
their money while also providing a fair and transparent process for all bidders
• Key Characteristics-
✓ Competitive Bidding: Suppliers compete to offer the best price or terms
✓ Transparency: The process is open and visible to all participants
✓ Efficiency: Streamlines the procurement process by automating bid collection and evaluation
Types of Auctions in Procurement
➢ Forward Auctions- Sellers list items for sale, and buyers bid competitively to purchase them. The highest bid wins.
Example: A company auctioning surplus inventory to the highest bidder
➢ Reverse Auctions- Buyers specify their requirements, and suppliers compete to offer the lowest price. The lowest
bid wins. Companies and governments can use reverse auctions to encourage competition and lower the cost of an
item or service they require
➢ E-Auction- An e-Auction is a transaction between buyers and suppliers in an online marketplace. It enables
suppliers to compete online for contracts based on public specifications and can take place between businesses,
consumers, or consumers and businesses
• Online reverse auctions are commonly used by procurement professionals seeking the best value deal through
competitive supplier bidding. Example- The U.S. Department of Defense posts its requirements asking for potential
vendors when it needs a particular product or service, say, 50 fighter jets
Benefits of Auction
✓ Cost Savings: Encourages competitive pricing, leading to reduced
procurement costs
✓ Transparency: Ensures a fair and open bidding process
✓ Market Insight: Provides valuable data on supplier pricing and
market conditions
✓ Supplier Engagement: Increases the pool of potential suppliers,
enhancing competition and innovation
✓ Efficiency: Speeds up the procurement process by automating bid
collection and evaluation
Auction or Negotiation?
• Prerequisites to Auction
✓ The Dollar value must be large
✓ Specifications must be clear
✓ Market must consist of an adequate number of sellers
✓ Sellers must be qualified and want the contract
✓ Time available must be sufficient
• If any of these are not true, then negotiation is the best choice
• Negotiation is back-and-forth communication between the buyer
and the seller designed to reach an agreement when they have
some interests that are shared and others that are opposed. This
can involve negotiating different terms with an existing supplier when a contract is renewed, or discussing
terms from scratch with a brand-new vendor
 Warehousing
• Warehousing refers to the activities involving the storage and preservation of goods on a large scale in a
systematic & orderly manner and making them available conveniently when needed
• It creates time utility by bridging the time gap between production & consumption of goods
• Warehouses are crucial components of most modern supply chains and physical distribution involved in
various stages of the sourcing, production, and distribution of goods- handling of raw materials and work-
in-progress through to finished products
Warehousing Functions
✓ Receiving- Physical unloading of incoming transport, checking against purchase orders, unpacking, quality
checks & recording
✓ Reserve storage- It holds the bulk of warehouse inventory in identifiable locations
✓ Order picking- When an order is received from a customer, goods need to be retrieved from the
warehouse in the correct quantity & time to meet the required service level
✓ Sortation- For small sizes of order, it is sometimes appropriate to batch several orders together and treat them as
‘one’ order for picking purposes. In this case, the picked batch will have to be sorted down to individual
orders before dispatch
✓ Collation and added value services- Goods need to be collated into complete customer orders ready for
dispatch. Goods can be picked into the dispatch containers (e.g. cartons) or assembled or packed together
after picking
✓ Marshalling and dispatch- The goods are then marshalled into vehicle loads & loaded onto the vehicles
Significance of Warehouse in SCM
• The prime objective of most warehouses is to facilitate the movement of goods through the supply chain to
the end consumers. Warehousing makes sure that your products are at the right place at the right time
• Inventory is often beneficial to smooth variations between supply & demand
• Warehousing enables you to store, ship, and distribute goods from one single location. This makes it easy for
you to track and manage your inventory efficiently. It can reduce transportation costs, increase flexibility, and
reduce staffing needs
• Warehouse operations enable businesses to optimize
inventory management, minimize costs, and improve customer service
• It helps businesses track, measure & update inventories providing
them with real-time insights on stock-outs & underselling products
• Warehouse facilitates Regular supply, Quality, Price stabilization,
Seasonal products, Perishable goods, Continuous production, Large-
scale production, Quick supply, Protection and preservation of goods,
facilitating the sale of goods, etc.
• Warehouse plays an important role in transportation
consolidation, product mixing & smoothing operations
• An important goal in warehousing is to maximize
flexibility. Respond to ever-changing customer
demand- Product assortments, Shipment sequencing,
Value-added services (just-in-time packaging,
assembly, product customization, customer collection
services, kitting and special packaging)
Elements and Principles of Warehouse Design
• Warehouses need to be designed & operated in line with the specific requirements of the supply chain as a
whole. The design or layout of the warehouse is the process of distribution of both the external & internal
space of the facility drawn on a plan
• The following Principles can help design an efficient layout and streamline warehouse operations, utilize
warehouse space better, boost productivity, and improve order fulfillment rates-
✓ Budget Considerations
✓ Space Available- Allocate maximum space for storage and inventory processing purpose while minimizing
space for office areas, empty pallets, charging stations, etc.
✓ Product rotation- Check how often in a given period types of goods have to be replaced in the inventory
✓ Desired stock level
✓ Accessibility- Ensure easy accessibility to all the areas and products in the facility while conveniently
locating and picking items without moving other products. This can enhance productivity and orders can be
fulfilled at a faster rate
✓ Handling Equipment & Machinery- Different types and quantity of equipment used in the warehouse- lifting
& packing tools, pallet racks, or conveyors, can influence the layout design
✓ Most effective storage system- Identify product needs before investing in the industrial racking to be
installed in the warehouse. Is it a light or heavy load? Is it a perishable or non-perishable product? Will the
load be stored on pallets or in boxes? Is product rotation high or low? Flexibility required?
✓ Throughput- Throughput is the number of products processed and moved through various warehouse
processes such as receiving, put away, storage, picking, packing, and shipping. Ensure an efficient flow of
goods and accommodate the necessary equipment for your warehouse
✓ Product-Mix Considerations- Analyze each product in terms of annual sales, stability of demand, weight &
packaging
➢ Warehouse Handling & Storage- Handling must optimize movement continuity and efficiency. Storage plans
should make product velocity a major factor- how fast the goods move, Weight/Special Characteristics- how
large rack or bin storage
➢ Flow- Consider the uninterrupted flow of goods, personnel, and equipment in the design layout for the
smooth functioning of the warehouse. The interior area of the warehouse can have a U-flow, T-Flow or
Straight-line flow layout
Storage plan based on product
✓ U-flow layout: The same end of the facility takes care of both movement velocity
receiving and shipping the goods with the inflow and outflow in
the same direction. It optimizes the routes of the handling
equipment & provides more flexibility for future modifications
✓ T-flow warehouse design: Receiving and shipping are located
on the same side, but the outflow and inflow are at opposite
ends because the bays are not oriented in the same direction
✓ Straight-line flow layout: The loading bay and the unloading
bay are the areas furthest apart from each other in the whole
warehouse, with the rest of the areas located between them
➢ Safety and maintenance issues- Accident prevention, Environmental protection, Maintenance
➢ No. of Personnel
➢ Local Authority Guidelines
➢ The following areas must be perfectly defined when designing a layout- Loading and unloading
areas, Reception area, Storage area, Picking area(preparing orders), Dispatch area, Service
areas(general and management area)
What objectives should the warehouse design fulfill?
✓ Optimization of the warehouse space to achieve an efficient operation that will result in minimum
investment for maximum potential productivity
✓ Eliminate all processes that do not add value to the product or goods
✓ Enable stock management suited to the characteristics of the warehouse & the products themselves
✓ Achieve not only a viable but also a profitable stock rotation rate for the company
✓ Facilitate access and control of the stored units
✓ Improve the flow of information on materials and people for optimization of material and human
resources
✓ Provide flexibility in case of possible structural changes of a spatial or organizational nature
Warehouse management systems
• A warehouse Management system is software and processes that empower SCM operations and allow
organizations to control and manage warehouse operations of goods or materials until they go out
• WMS optimizes all operations of warehousing. They integrate procedures & software support to
standardize storage and handling work procedures
• Warehouse management systems have made many warehouse activities faster for people to perform and
generate efficiencies to reduce labor-intensiveness. WMS solutions serve to support & enhance order
selection, stock location, inventory management, material handling, zero-defect delivery & productivity
measurement
Functions of WMS-
✓ Planning function: order management,
transportation planning, information
flow management, inventory
management, labor planning & dock
area management
✓ Execution function: receiving, put-away,
picking & shipping
Benefits of WMS
✓ Improved customer service
✓ Accurate stock records as well as stock location
records
✓ Efficient use of staff, usage of storage capacity &
equipment utilization
✓ Stock replenishment & rotation
✓ Verification of stock location and of picking
quantities
✓ Low stock-outs
✓ Visibility of inventory
✓ Routine performance and status report
How Alibaba Got Consumers to Love Grocery
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Inside Alibaba's smart warehouse staffed by robots
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Inside A Warehouse Where Thousands Of Robots
Pack Groceries
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Types of Material Handling Equipment
 Material Handling Equipment Safety and Security
Factors contributing to injuries
• Weight and bulkiness of objects
• Bending, twisting, turning movements
• Examples of events or exposures leading to injuries: Contact with objects and equipment/Transportation
incidents/ Exposure to harmful substances or environment/Falls, slips, trips, or loss of balance/Repetitive
motion/Overexertion
Hazards
• Improper operation of equipment
• Accumulated materials or clutter
• Unsafe conditions of materials or containers
• Flammability or toxicity of some material
• Binding ties or other devices that secure bundles or bound materials
• Falling objects
• Lifting, pushing, pulling, or otherwise manually moving large, heavy items
• Improperly stacked materials
• Struck-by or caught-in/-between hazard

General Precautions to Prevent Hazards

• All persons shall strictly use helmets and safety shoes
• The load is safe and secured while lifting
• Lifted load not exceeding safe working load
• No load is unattended when power is on or the load is suspended above machinery
Overhead cranes-
• Never move a load over co-workers or allow co-workers to walk underneath
• Return the load block to its designated location after use
• Do not leave the load block low enough for someone to run into
• Never leave a suspended load unattended
• Do not leave unused slings suspended on a crane hook
• Store wall-mounted cranes against the wall
• Continuously observe equipment for any sign of problems during operation
• Don’t allow yourself to become distracted
• Operate only by a thoroughly trained and qualified worker
Tower Cranes
Slings
• Connects a crane hook to a load
• Proper selection & Inspection
• Reduce sling hazards by Lubricating, Keeping clear of loads, Avoiding
sudden movement and Not shortening with knots, bolts, or other
devices, or kink legs
Forklifts
• Main causes of injuries- Forklift overturns, Forklift striking workers on foot, Persons crushed by forklifts,
Persons falling from forklift, Illegal forklift operators- Anyone under 18 and Anyone not properly trained
• Inspection of the crane by a qualified person- Modified, repaired, or adjusted, Post-assembly, At least every
12 months, Equipment not in regular use
• Driving the forklift- Obstructed vision, Travel path, Approaching
people, Elevated platform, Seat belts, Raising/lowering forks, Safe
distance
• Elevating workers with forklift- Standing on forks, Lifting personnel
• Driving forklift on ramps- Use extreme caution, No turns,
Tilting and raising loads, Point load up the incline
• Forklift operating speed- Tip-overs, Turning, Avoiding collisions, Wet and
slippery floors, Ascending/descending, Obstructed vision
• Avoiding excess weight, Center loads, and secure to keep from shifting
to maintain the balance of weight
• Exiting the forklift- Set brake, lower forks/lifting carriage,
neutralize controls
• Riding the forklift- No passengers allowed, Exception–seat
is provided
• Avoiding struck-by/crushed-by- Don’t jump from an
overturning, Stay with the truck, hold on firmly, and lean in the
opposite direction of the overturn
• Forklift training–do not operate a forklift without proper training