[MCC5412] FOOD SUPPLY CHAIN MANAGEMENT

LECTURE 3: FOOD SOURCING & PROCUREMENT I

LECTURE LEARNING OUTCOMES

 Upon completing this lecture, you should be able to:

 discern various kinds of sourcing strategies
 explain & apply the purchase portfolio model
 recognize the motives for sourcing commodity worldwide
 state & elaborate the supplier selection process & its purpose
 devise an assessment tool for supplier evaluation

2
SOURCING STRATEGIES

Identification of potential sources for a new need/requirement

SOURCING STRATEGIES

 Sourcing strategy
 It identifies for a certain category from how many suppliers to buy, what type of relationship to pursue, contract duration,
type of contract to negotiate for, & whether to source locally, regionally or globally (Van Weele, 2018)
 Scope of sourcing strategy
 An overall sourcing strategy is made up of sub-strategies that can be grouped together into six categories
 Assurance-of-supply strategies
 Cost-reduction strategies
 Supply chain support strategies
 Environmental-change strategies
 Competitive-edge strategies
 Risk-management strategies
4
 SOURCING STRATEGIES

 Kraljic’s purchasing portfolio

 A matrix indicating for quadrants, represented four basic supply strategies, based upon financial impact & supply risk
represented by a specific product category (Van Weele, 2018)

Kraljic’s purchasing portfolio (Kraljic,

1983) 5
SOURCING STRATEGIES

 Product categories in the Kraljic Matrix

 Non-critical items
 Components that have a low impact on the company & that are found in abundance &/or in low-risk markets, e.g. salt & pepper, etc.
 The goal should be to maximize efficiency of the procurement process to reduce the administrative burden, for example by delegating
purchasing to local managers, or using catalogs

 Leverage items
 Components that are important for the company but sourced from low-risk markets with an abundant supply, e.g. vegetable & meat, etc.
 The optimal management of these purchase categories is essential to ensure a satisfactory business result
 The company tends to make the most of its bargaining power & the abundance of the offer with frequent negotiations

6
SOURCING STRATEGIES

 Product categories in the Kraljic Matrix (cont’d)

 Bottleneck items
 Components with a low business impact in economic terms but where supply continuity is at risk, e.g. live seafood, etc.
 The management of these components should be aimed at creating relationships of collaboration in the medium-long term between
customer & supplier to guarantee the supply, with less emphasis on the cost

 Strategic items
 Components that are important for the company both in terms of economic impact & for supply conditions from complex &/or risky
markets, e.g. signature sauce & stock, etc.
 The horizon is medium-long term with a continuous monitoring of the economic situation of the market, technical evolution, evaluation
of ‘make-or-buy’, creation of alternatives & development of stable relationships & maximum collaboration with the suppliers

7
SOURCING STRATEGIES

 The three purchasing strategies of the Kraljic Matrix

 Exploit
 Make the most of your high buying power to secure lucrative prices & long-term contracts from the suppliers, so that you can reduce the
supply risk involved in these important items of purchase
 It is also possible to make on the spot purchase of individual batches of the item if a particular supplier offers you a good deal that will
add to the overall profitability of the company

 Balance
 Take a middle way between the exploitation approach & the diversification approach depending on the merit of the situation

 Diversity
 Reduce the risks involved by looking out for the alternative suppliers or alternative products in the market

8
SOURCING STRATEGIES

 Developing a sourcing strategy

 Single sourcing: It means that a company only uses on
supplier for a certain item, despite other suppliers being
available on the market
 Multiple sourcing: It means that for every item, several
alternative suppliers are used simultaneously & parallel
 Variants of single & multiple sourcing
 Single group sourcing: Not only single item is purchased
from a single supplier, but an entire group of items with
similar characteristics
 Dual sourcing: The strategy involves using two parallel
suppliers for each item
Single sourcing & multiple sourcing as a function 9

of specificity (Jonsson, 2008)

SOURCING STRATEGIES

Single Sourcing Multiple Sourcing

Product quality ✓ 
Delivery variation ✓ 
Risk of supply disruption  ✓
Partnership relation ✓ 
Collaborative product development ✓ 
Price  ✓
Costs for supplier relations  ✓

Some benefits & drawbacks of single sourcing & multiple sourcing (Jonsson, 2008)
10
SOURCING STRATEGIES

 Developing a sourcing strategy (cont’d)

 Hybrid sourcing
 It is a group of supply strategies that can be described as combinations of single & multiple sourcing
 Parallel sourcing: Involves the use of multiple sourcing at the level of groups of items & single sourcing for the individual items in the groups
 Triadic sourcing: It refers to one customer company co-operating with two suppliers & forming a triad for one group of items

 Different types of sourcing

 Consumable suppliers
 Production materials & components
 Capital purchases, e.g. machinery
 Intellectual property, e.g. software
 Subcontractors
 Services 11
SOURCING STRATEGIES

 Sourcing decisions
1. Establishing which suppliers make or supply the product or service – often by referring to a buyer’s guide or industrial
directory
2. Selecting a shortlist from those available, e.g. three suppliers
3. Sending an enquiry to each of those three setting out the requirements
4. Selecting the best supplier from those who quoted by comparing the offers
5. Placing the purchase order with them specifying such matters as volume, schedule, place of delivery, price & quality required

12
SOURCING STRATEGIES

 Sources of information on potential suppliers

 Reputation
 Appraisal
 Recorded performance
 Approved lists
 Catalogue library
 Publications
 Trade directories
 Sourcing services
13
SOURCING STRATEGIES

 Sources of information on potential suppliers (cont’d)

 Representatives
 Exhibitions
 Colleagues
 Other buyers
 Agents
 Organizations promoting trade

14
GLOBAL SOURCING

 Why buy from abroad?

 Cost/price benefits
 Access to technology
 Quality
 Access to only source available
 Introduce competition to domestic suppliers
 React to buying patterns of competitors
 Establish a presence in a foreign market

15
GLOBAL SOURCING

 Problems with foreign sourcing

 Lack of understanding of international procedures
 Lack of knowledge of documentation
 Resistance to change
 Domestic market nationalism
 Longer lead times & material pipelines
 Logistical, political, & financial risks
 Lack of knowledge of foreign business practices
 Language & cultural differences
 Negotiations can be difficult
16
 Engineering changes, changes in general difficult
GLOBAL SOURCING

 Progressing to global sourcing

 Obtaining information about global sources – Where do you look for sources?
 Supplier selection issues – Don’t assume the foreign supplier can meet you
 Cultural understanding – Culture is the sum of the understandings that govern human interaction in a society
 Language & communication differences – If a supplier is using English as a second language, the buyer should be responsible
for preventing communication problems
 Logistical issues - Don’t underestimate the effects of an extended pipeline
 Legal issues - The U.S. uses common or case law, versus countries that use code or civil law
 Organizational Issues - What do International Purchasing Offices (IPOs) do to support international purchasing?
17
GLOBAL SOURCING

 Progressing to global sourcing (cont’d)

 Countertrade Requirements – International trade where buyer & seller have at least a partial exchange of goods for goods
 Barter – goods for goods
 Counterpurchase – counterpurchase of % of amount of original sale in another industry
 Offset – similar to above but in same industry
 Buy-Back – portion of output for payment of services
 Switch Trading – brokering the goods or credits for the goods through a third party

18
GLOBAL SOURCING

 Progressing to global sourcing (cont’d)

 Costs associated with global sourcing
 Unit price
 Tooling
 Packaging
 Transportation
 Insurance premiums
 Payment terms
 Fees & commissions
 Port terminal & handling fees
 Customs broker fees
19
 Taxes
GLOBAL SOURCING

 Progressing to global sourcing (cont’d)

 Managing international currency risk
 Delivery-triggered adjustment clause
 Time-triggered adjustment clause

20
EVALUATION OF VENDORS & VENDOR SELECTION

 Supplier selection process

 Step 1: Recognize need for supplier selection
 Step 2: Identify key sourcing requirements – What are you looking for in a supplier?
 Quality, Cost, Delivery Performance, & Technological Capabilities, etc.

 Step 3: Determining sourcing strategy – the sourcing will differ from requirement to requirement
 Single source vs. multiple sources
 Short-term vs. long-term contracts
 Domestic vs. foreign supplier

21
EVALUATION OF VENDORS & VENDOR SELECTION

 Supplier selection process (cont’d)

 Step 4: Identify potential supply sources
 Intensity of search differs from requirement to requirement based on capability of current supplier & strategic importance of the
requirement

 Step 5: Limit suppliers in selection pool

 Purchasers often perform a first cut or preliminary evaluation of potential suppliers to narrow the list
 Time & resources prohibit in-depth evaluation of all suppliers
 Methods to reduce suppliers in the pool
 Financial risk analysis
 Evaluation of previous performance
 Evaluation of supplier provided information
 What kind of information should we ask suppliers to provide?
22
EVALUATION OF VENDORS & VENDOR SELECTION

 Supplier selection process (cont’d)

 Step 6: Determine Method of Supplier Evaluation & Selection
 Review supplier provided information:
 Request for Proposal (RFP)
 Detailed cost breakdown information
 Supplier visits
 Use of preferred suppliers
 External or third-party information

23
EVALUATION OF VENDORS & VENDOR SELECTION

 Supplier selection process (cont’d)

 Step 6: Determine Method of Supplier Evaluation & Selection (cont’d)
 Possible areas to evaluate during a supplier visit
 Cost structure
 Delivery performance
 Quality systems & performance
 Management capability
 Workforce capability
 Supplier agility & flexibility
 Supplier’s supply chain management capabilities

24
EVALUATION OF VENDORS & VENDOR SELECTION

 Supplier selection process (cont’d)

 Step 6: Determine Method of Supplier Evaluation & Selection (cont’d)
 Possible areas to evaluate during a supplier visit (cont’d)
 Process & technological capability
 Environmental compliance
 Financial capability & stability
 Information systems capability
 Production scheduling & control systems
 Longer-term relationship potential
 Capacity
 Other?
25
EVALUATION OF VENDORS & VENDOR SELECTION

 Supplier selection process (cont’d)

 Step 7: Select supplier & reach agreement
 Competitive Bid
 Negotiations
 Weighted factor approach

26
EVALUATION OF VENDORS & VENDOR SELECTION

 Key supplier evaluation criteria

 Various performance categories considered during supplier evaluation & selection
 Criteria most evaluations rate suppliers
 Cost/price
 Quality
 Delivery

27
EVALUATION OF VENDORS & VENDOR SELECTION

 Key supplier evaluation criteria

 Other criteria that should be considered when evaluating suppliers
 Management capability
 Employee capabilities
 Supplier’s cost structure
 Total quality performance, systems, & philosophy
 Process & technological capability
 Environmental regulation compliance
 Financial stability
 Production scheduling & control systems
28
EVALUATION OF VENDORS & VENDOR SELECTION

 Key supplier evaluation criteria

 Other criteria that should be considered when evaluating suppliers (cont’d)
 e-commerce capabilities
 Supplier’s sourcing strategies, policies, & techniques
 Long-term relationship potential

29
EVALUATION OF VENDORS & VENDOR SELECTION

 Supplier evaluation tool development

1. Identify key supplier evaluation categories
2. Weigh each evaluation category
3. Identify & weigh subcategories – develop the survey
4. Define scoring system for categories & subcategories
5. Evaluate supplier directly – access/select supplier
6. Review results & make selection decision
7. Review supplier performance continuously – review performance

30
REFERENCE

 Bourlakis, M. A. & Weightman, P. W. H. (2004). Food Supply Chain Management. Blackwell Publishing: UK
 Chopra, S. (2019). Supply Chain Management: Strategy, Planning, & Operation (7th ed.). Pearson: UK
 Eastham, J. F., Sharples, L., & Ball, S. D. (2001). Food Supply Chain Management: Issues for the Hospitality & Retail
Sectors. Butterworth Heinemann: UK
 Feinstein, A. H. & Stefanelli, J. M. (2012). Purchasing: Selection & Procurement for Hospitality Industry (8th ed.). Wiley:
New Jersey.
 Johnson, F. P. (2020). Purchasing & Supply Management (6th ed.). McGraw-Hill: New York
 Jonsson, P. (2008). Logistics & Supply Chain Management. McGraw-Hill: UK
 Spears, M. C. (1999). Foodservice Procurement: Purchasing for Profit. Prentice Hall: New Jersey
 Van Weele, A. J. (2018). Purchasing & Supply Chain Managemetn (7th ed.). Cengage: UK

31
END OF LECTURE 3

32