Sourcing

Strategic sourcing

 An approach to supply chain management that allows an organization to leverage its

purchasing power through identification of sourcing strategies that are based on a holistic
and complete view of organization resources
1. Strategic sourcing consists of the following
2. Strategic procurement
3. Supplier relationship management
4. Supplier development
5. Information sharing and support
6. aligning procurement to organization needs
7. incorporating of operational factors such as cost quality and delivery at local level
8. making decsions on outsourcing offshoring local and global sourcing
9. assessing supplier capabilities in the context of –quality management capabilities, culture,
process management capabilities and responsiveness

What is strategic procurement?

Strategic procurement is a long-term, proactive approach to planning, sourcing, and managing

goods and services to achieve an organization's strategic goals, focusing on building strong
supplier relationships and optimizing the supply chain for value and risk reduction.

The sourcing process

 It is used to invite suppliers to make state their interests to supply goods and services
 It involves engaging the market with the aim of achievement of complettive advantage

Typical sourcing life cycle

a. Identify need
 b. Identify supplier
c. Communicate with supplier
d. Logistics management
e. Liaison
f. Negotiation

Aspect Explanation
Identify needs  Define organization needs
 Translate needs to requirements
 Demand forecasting
 Identify geographical distribution of need
 Identify people at greatest risk of needing services
 Identify gap between met and unmet needs
 Ensure needs are communicated in a clear manner

Market assessment and  Develop a sourcing strategy that will best meet
source strategy organization needs
 Assess the criticality of the item
 Assess the cost of the item
 Assess the characteristics of the external market
using tools such as porters five forces
Communicate with The communication method selected will be determined by
suppliers the following factors
 Value of the goods and services
 Length of the contract
 Nature and complexity of goods and services
 Size of the market
The communication tool which can be used are-PQQ
NEGOTIATE and  Use the whole stages of negotiation –at a point test
implement contracting supplier understanding and assumptions
strategy
  Determine objectives and outcome
 Determine the BAtna
 Ensure achievement of value for money
 Ensure the contract delivery will align to market
conditions –responsiveness
Liaison with suppliers and  Management of risk
logistics  Management of relationship
 Contract and performance management

Summary of sourcing methods and strategies

Method /strategy Descriptor

Global sourcing  It is undertaken by global multinationals with multiple
operations overseas
 It is a strategic approach to integrating and coordinating
materials items and process designs and technologies and
suppliers spread across the world with the aim of
achievement of competitive advantage
 It is also about development of global supplychain network
 The centralized procurement function is in charge of global
sourcing through corporate standardization ,benchmarking
and delivery of economies of scale
Why global sourcing
-increase number of suppliers
-Non availability of raw materials at home
-Access to lower costs
-Access to better technology

International sourcing Buying goods and services abroad

Low cost country Organizations decides to purchase goods from a low cost location
sourcing
Local sourcing Sourcing within a country boarder
Regional sourcing Sourcing from an economic block
Single sourcing Dependency on one supplier
Mult sourcing Several sources of supply
Outsourcing Contracting a third party to deliver goods and services which
initiation where provided internally

Key objectives of outsourcing

 Make organization more flexible and adaptable

 Make organization focus on core functions
 Reduce manufacturing costs
 Improve quality
 Reduce supplier management costs
 Increase customer service

Create long term partnership

Summarise the following

1. Risks of global sourcing

2. Critical steps for low cost sourcing
3. Process of outsourcing
4. Risk of outsourcing
5. Merits and demerits of outsourcing
 Risks of global sourcing

1. extra lead time

2. Challenges in supplier management
3. Higher risk of disruption
4. Security risks and political instabilities of countries exposing organization to disruptions
5. Quality management risk –lack of visibility on the quality management process leading to
cutting corners on quality –poorly defined specifications due to use of different languages-
communication and misunderstanding
6. Cost related risk –hidden cost of global sourcing

Global sourcing activities expose the weaknesses of an organization standard sourcing

process highlighted below

1. Poor procurement process preparation risk –the try it and see altitude
2. Communication handles –caused by language differences –fewer face to face
meetings and effectives of time difference during contract communications-there is a
problem in defining quality standards and performance expectations
3. Total landed costs –the need to add extra storage costs ,and effects of longer lead
times when summing up the total landed costs

Critical steps for low cost sourcing

 In order to ensure low cost sourcing succeeds it is important to consider the following
critical steps in order to leverage costs arbitrate
 Cost arbitrage" refers to a financial strategy where an investor exploits temporary price
differences for the same asset in different markets, buying it where it's cheaper and
selling it where it's more expensive, aiming for a profit by taking advantage of the cost
difference.
 Compare the low price offered against the following costs
-import and export taxes
-additional transportation costs
 -other indirect cost such as consultancy cost and auditing fees

 Consideration of stock levels as compared lead times-consideration of the level of stock

to be held
 Impact of poor performance by suppliers they are not able to meet service levels ;;leading
to catastrophic failure
 Ensure satisfaction quality and fitness for purpose by avoiding over and under
specification as well as ensuring reworking doesn’t occur

Outsourcing

1. Process of outsourcing

Outsourcing is entrusting a third party organization to perform activities previously done in-
house

The outsourcing decision can be assessed through outsourcing decision matrix by COZ
There are two factors considered

 The Strategic importance of the function

 Contributions to Operational performance

Strategic importance –does the function directly contribute towards a competitive advantage

Operational performance-does the function impact on operational the way the organization is
running –efficiency and avoidance of disruptions-

The Strategic Contributions to Approach

importance of Operational
 the function performance

Form a strategic High Low  They are strategic

alliance revenant to the
organization
 Align their importance to
contract and relationship
management
Retain tasks high High  There are core
competences
 Outsourcing would lead
to loss of competences
Outsource Low High  To reduce cost
 Transferring risks
Eliminate Low Low  Function not important to
organization overall
strategy
 Do not make any
contributions to
organization performance

The following are some of the basic questions we need to ask before outsourcing

Risks of outsourcing

 When do we outsource
 How to support contracted outsourced organization
 Do you in-house some or do you outsource
 Do you outsource everything to one organization
 Failure to realize full benefits of outsourcing
  Too simplistic approaches in contract management
 Risk of loss of large investment against poor cash inflow

Advantages
 Greater flexibility
 Lower risk
 Improved cash flow
 Lower costs
Disadvantages
 Can select a wrong supplier
 Loss of control over process
 Intellectual property infringement

Why it may be difficult to realize full benefits of outsourcing

 Poor specification development and failure to attract innovation

 Outsourcing a poorly performing function because it is a problem to the organization
 Cost of process of supplier selection may be high
 Weak and badly written contracts
 Poor risk management strategies
 Focus on cost reduction but not added value

Factors influencing variation of benefits of outsourcing

 Comparing previous in-house operation vs outsourced function

 Comparing the way customer needs where met during in-house operations and after
outsourcing
 Comparing specification of outsourcing and the supplier selected

Process mapping
Process mapping can enable an organization answer the following questions
What is happening in a process and why
How efficient is the process
How is the process being measured?

Are there areas of waste and costs?

How can the process be continuously been improved

What are different types of process map

Process flow chart

  Process flowcharts, also known as process diagrams or flowcharts, are visual
representations that illustrate the steps, sequences, and decisions within a process, aiding
in understanding, improvement, and documentation.
 It is useful for capturing the initial details of the process before braking it down

Deployment flow charts

 Also known as a cross-functional flowchart is a visual tool used to map out the steps and
stakeholders involved in a specific process, particularly software or IT infrastructure
deployment. It helps streamline processes and improve efficiency by clearly illustrating
the flow of work and identifying responsibilities
 It shows intergration between people and departments
 It shows who is responsible for what
 It can be used to identify where there are bottlenecks
 It can highlight where there are duplications
 Interactions between people,funtions is organized into swim lanes

What are swim lanes

Provide a clear and concise representation of the process flow

 SIPOC diagrams pronounced sigh-pock

Supplier

Inputs

Process

Output

Customers
A SIPOC diagram is a visual tool used in process improvement, summarizing a process by
outlining its suppliers, inputs, process steps, outputs, and customers, often used in Six Sigma and
Lean methodologies to understand and improve processes.

Used for discussing and agreement between teams on a common language and understanding of
a process for continuous improvement

VSM-VALUE STREAM MAPPING

A value stream map (VSM) is a visual tool used in lean management to analyze and improve
processes by mapping the flow of materials and information required to deliver a product or
service, ultimately aiming to identify and eliminate waste.

It is a lean management tool that helps to visualize the steps needed to take a product from
design and development stage to customer

It shows the tasks and activities to be completed

Bottlenecks and delays can be identified and eliminated

Process mapping steps

Step Explanation
Assemble a small  Suppliers
team,  Customers
 Buyers
 Key decision maker
 Explain to them their mandate
 Guide them on mapping techniques
 Ensure their commitment
Draw up process  It should not be took details
 It should show task
 It should show decision points
 Demonstrate using color sticky notes or black board
Examine and assess  Set up series of structured questions
 Can primary questions
 Secondary questions
Plan for  Train staff
improvements and  Introduce changes
new process

Primary questions when examining and assessing the process

Purpose –what has it achieved?

Means –how was it achieved

Sequence-when was it achieved

Place –where was it achieved?

Person-who achieved it

Secondary questions when examining and assessing the process

Purpose-what else could be achieved

Means-how ealse could it be achieved

Sequence-when could it be achieved

Place –where else could it be achived

Person –who else could achieve it

Selection criteria

What should be achieved?

How should it be achieved?

When should it be achieved?

Where should it be achieved?

Who should achieve it?

Mapping a supply chain

supply chain mapping is the process of visualizing and analyzing the entire supply chain, from
raw material procurement to final delivery, to identify areas for improvement, reduce risks, and
enhance efficiency

a process that allows an organization to visualize all the steps needed to procure produce and
deliver products

it has a start and end point

Supply chain mapping steps

Step Descriptor
Who are the suppliers  Number
 Location
 Lead times
Where do material go  Amount of inventory
 How long does it remain in one place
 Does it move regularly
 What are the movement points

Where are the risks  Country location risks

 Logistics risks
What are the various  Build visibility
stages  Tiering and network structures