Strategic Sourcing and

Purchasing

Plan

Source Transport Make Deliver

Prof. Dr.-Ing. Axel Werner

Dipl. Wi.-Ing. Boris Vogt
1
Boris Vogt Introduction
- Age 56
- Diploma in Business Economics and Engineering from the Technical University in
Berlin
- Major fields of study in Logistics and Marketing
- 30 years of relevant experience in global sourcing, supply chain management,
procurement & purchasing
- Wholesale, Retail & E-com in the consumer goods space with focus on apparel,
footwear, accessories and general merchandise
- OTTO Group (14 years): Top management sourcing positions in Hong Kong, China,
Taiwan, India & Thailand
- Li & Fung (14 years): Member of the Executive Board
- CEO of Li & Fung Europe with business units in Europe (France, Spain, the
Netherlands), USA and Australia.
- 2021: BVC - Boris Vogt Consulting since 2021
- 2022: Razor Group (Amazon Aggregator): SVP Procurement & Sourcing
- 2023: Teaching assignment at SRH Hamburg in Supply Chain Management
2
Strategic Sourcing and Purchasing
Part of the SCM program
Internship / Company Project/ Master Thesis
Incubator
SCM Strategy
SCM Design
International Intercultural Leadership
Management Competences
Strategic
Strategic SC Planning/ Sourcing &
Logistics Scientific Operations International Coordination Entre- Purchasing
Writing BusinessLaw preneurship

Digital SCM Systems SCM in ERP Process (SAP S4/HANA)

Business Intelligence and Big Data in SCM Operations Research
SCM Process Design and Management
Global SCM Foundations

Spring 2023 3
Strategic Sourcing and Purchasing - Contents

Lecture 1 Lecture 3.1 Local, Regional & Global Sourcing

Introduction Lecture 3.2. Supplier Evaluation & Qualification

• Sourcing & Purchasing • Supplier Evaluation

• Sourcing Aspects & Strategies • Supplier Qualification

Sourcing • Part Qualification

• Process & Functions Lecture 4

• Methods & Tools • Industrialization – The technical qualification of suppliers in the

automotive industry
• Components & Best Practices
• PPF / VDA / SMED
Lecture 2 Purchasing
• Purchasing Process & Types Lecture 5

• Purchasing Tools & Methods • Exam (3h)

• Procurement Management Systems • Possible Overflow Lecture

• Process modelling 4
 Strategic Sourcing and Purchasing
Lecture 1
Introduction 60 min (Boris)
10 min break
Exercise 1: Make or Buy 30 min (Students)
Discussion of exercise 1 15 min (All)
20 min break
Sourcing 40 min (Boris)
10 min break
Exercise 2: Sourcing & Purchasing KPI's for Companies 30 min (Students)
Discussion of exercise 2 15 min (All)
Summary – Questions and Answers 10 min (Boris)

Spring 2023 5
Exam: Presentation (graded) on a supply chain sourcing
topic (Group work)
Procurement process for a new product (T-shirt)
Describe the process to develop and install a supply chain for a new product. Explain and
differentiate between the individual phases of the procurement process: Sourcing & Purchasing.
• Product decision
• Procurement process
• Sourcing
• Supplier selection
• Negotiations and agreement
• Product and process development and acceptance

• Purchasing
• Order Placement
• Supervision of the supplier in series production
• Transport and Warehousing

6
Lecture 1
Introduction

7
Source is a key process in the supply chain
Company
Supplier Customer
Strategy
Decision

Leveraging Principles Rules KPIs Aligned with

capabilities customer
of suppliers requirements
Process

Plan

Deliver Source Make Deliver Source

Sites Equipment IT People

Resource
Purchasing Production Sales
Spring 2023 8
Strategic Sourcing & Purchasing – Introduction
Distinction of the terms
Procurement, Sourcing, and Purchasing are three related but distinct functions within
the broader field of supply chain management.
The main differences between these functions are:

• Procurement is a strategic function that involves planning and coordinating all aspects
of the acquisition process.
• Sourcing is a tactical function that focuses on selecting the best suppliers for specific
goods or services.
• Purchasing is a transactional function that involves executing the procurement plan
and acquiring goods and services in a timely and cost-effective manner.

Spring 2023 9
Strategic Sourcing & Purchasing – Introduction
Objectives

By understanding the concepts, tools, methods, and practices used in sourcing and
purchasing, and applying appropriate problem-solving approaches, organizations can:

Optimize
Supply Chains

Supply
Chain Reduce Costs
Objectives

Improve
overall
performance
Spring 2023 10
Strategic Sourcing & Purchasing – Introduction
Procurement

Procurement is the overall process of acquiring goods,

services, or works from external sources.

It includes all activities related to identifying needs,

selecting suppliers, negotiating contracts, managing
relationships, and ensuring that goods and services are
delivered as required.

Procurement is a strategic function that involves

planning, coordination, and collaboration across
different departments and functions within an
organization.

Spring 2023 11
Procurement Stages

Spring 2023 12
Strategic Sourcing & Purchasing – Introduction
Sourcing

Sourcing is a subset of procurement that focuses on

finding and selecting the best suppliers for specific
goods or services.

Sourcing involves identifying potential suppliers,

evaluating their capabilities, negotiating prices and
terms, and selecting the best supplier(s) based on
quality, cost, delivery, and other factors.

Sourcing is typically a tactical function that is focused

on short-term goals, such as finding the best deal for a
particular product or service.

Spring 2023 13
Sourcing & Purchasing – Introduction
Strategic vs Operational Sourcing

Strategic Sourcing
Involves the identification of the most suitable suppliers for the organization's needs,
the negotiation of contracts, and the establishment of long-term relationships. The
focus is on reducing costs, improving quality, and increasing efficiency.

Operational Sourcing
is the day-to-day activities related to the procurement of goods and services, such as
placing orders and managing deliveries.

Spring 2023 14
Sourcing & Purchasing – Introduction
Purchasing

Purchasing is the process of actually buying the

goods or services that have been sourced or
procured.

It involves issuing purchase orders, tracking

deliveries, and ensuring that payments are made on
time.

Purchasing is a transactional function that is

focused on executing the procurement plan and
ensuring that goods and services are acquired in
a timely and cost-effective manner.
Spring 2023 15
Strategic Sourcing & Purchasing

Supplier Requirement Invoice/Math Identify need

management definition payment

Category
Manage
Analysis/
Contract
Strategy
SOURCING Goods/Service
Receipt
PURCHASING Purchase
Requisition

Negotiate Supplier
Contract Identification

Purchase
Approval
Order
RFI/RFQ
Spring 2023 16
Upstream vs Downstream Procurement

Contract
Management Order

Delivery
Strategic
Sourcing
Supplier
Management Receipt &
payment
Category
Management
Procurement
Management
Quality
Management
Market Specification
Understanding and needs Continued
refinements

Spring 2023 Source: Kearney – Procurement: making digital transformation- ignite Procurement 17
 Enterprise Strategy for Sourcing & Purchasing
• Aligned with overall business strategy
Define Sourcing and
• Maximize return on investment
Purchasing goals • Optimizes the resources usage

Develop supplier • Through effective communication, collaboration, and mutual trust while leveraging technology
relationships • Streamlines procurement processes

• Leverages spend analytics and market intelligence

Implement data-driven • Optimizes procurement decisions
purchasing strategies • Achieves cost savings targets
• Risk management system mechanism and compliance protocols
Establish Robust Risk • Mitigates potential supply chain disruptions
Management • Ensures ethical and sustainable sourcing practices
Evaluate & optimize
• Continuous evaluations and regular development processes
sourcing & purchasing • Stay ahead of changing market conditions, industry trends, and customer needs
practices
Conclusion:
By implementing these strategies, organizations can achieve greater efficiency, reduce costs,
and ensure a reliable and sustainable supply chain, ultimately driving long-term success and
growth. 18
Source: https://quandarycg.com/procurement-risks-and-how-to-navigate-them/
19
Sourcing and Purchasing:
Automotive, Apparel, and Food Industries

Spring 2023 20
Source: https://www.istockphoto.com/vector/artificial-intelligence-line-icon-set-gm1300712196-392954578
 Sourcing and Purchasing:
Automotive, Apparel, and Food Industries
Automotive Industry:
• Requires a high degree of precision and quality control, as
safety and reliability are critical success factors.
• Sourcing involves a complex supply chain with multiple
tiers of suppliers, requiring close collaboration and risk
management.
• Purchasing often involves long-term contracts with
suppliers to ensure stability and consistency of supply, as
well as leveraging economies of scale.
• Purchasing decisions are driven by factors such as quality,
cost, and delivery performance.

Spring 2023 21
Source: https://www.gardnerweb.com/articles/global-supply-of-automotive-fasteners-from-a-single-source
What raw materials are in our vehicles?

22
Source: https://www.linkedin.com/pulse/which-raw-materials-our-vehicles-pascale-wauters/
 Sourcing and Purchasing:
Automotive, Apparel, and Food Industries
Apparel Industry:
• Focuses on fashion trends and consumer preferences,
requiring agile and responsive sourcing strategies.

• Sourcing often involves global supply chains with

significant labor and sustainability considerations,
requiring ethical and responsible sourcing practices.

• Purchasing is driven by fashion trends, seasonality, and

demand fluctuations, requiring flexibility and
responsiveness in vendor selection and negotiation.

• Pricing and terms are often negotiated on a per-order

basis.

Spring 2023 23
 Sourcing and Purchasing:
Automotive, Apparel, and Food Industries
Food Industry:
• Requires strict adherence to regulatory requirements and
safety standards, as well as managing perishable goods
and fluctuating demand.

• Sourcing often involves a combination of domestic and

international suppliers, requiring rigorous quality control
and traceability.

• Purchasing decisions are driven by quality, safety, and

cost considerations, as well as compliance with
regulatory requirements.

• Contracts may be short-term or long-term, depending on

factors such as supplier reliability and product demand.
24
 Sourcing and Purchasing:
Automotive, Apparel, and Food Industries
PRODUCTION VALUE OF GERMAN FOOD INDUSTRY IN
2018
Source: https://www.gtai.de/en/invest/industries/consumer-industries/food-beverages
Production value of German food industry in 2018

PASTA

FISH PRODUCTS

SUGER

SEASONING AND SOUCES

COFFEE AND TEA

EDIBLE OIL & FATS

MILL PRODUCTS, STRACH

NO-ALC BEVERAGES

CONVENIENCE FOODS AND OTHERS

PROCESSED FRUITS AND VEGETABLES

ALC BEVERAGES

CONFECTIONERY

BAKED GOODS

DAIRY

MEAT
Spring 2023 25
0,00% 5,00% 10,00% 15,00% 20,00% 25,00%
 Sourcing and Purchasing:
Automotive, Apparel, and Food Industries
Conclusion:
The sourcing and purchasing practices in the Automotive, Apparel, and Food Industries differ
significantly based on industry-specific factors.
Understanding these differences is critical to effective supply chain management and overall
business success.

Spring 2023 26
Sourcing & Purchasing
Existing Products vs New Products

Spring 2023 27
Source: https://www.certitrek.com/nlpa/news/purchasing-articles/sourcing-intelligence/
 Sourcing & Purchasing
Existing Products vs New Products

Existing Products:
• Sourcing and purchasing existing products involve identifying
Identifying vendors with a
vendors with a proven track record of supplying quality products
proven track record that meet the organization's needs.

• Purchasing existing products typically involves negotiating pricing

Negotiating pricing and
and terms with established suppliers, leveraging existing
terms relationships and volume discounts.

• Risk in sourcing and purchasing existing products is primarily

Risk in sourcing and
focused on supply chain disruptions, quality control, and pricing
purchasing volatility.
Spring 2023 28
 Sourcing & Purchasing
Existing Products vs New Products
New Products:
• Market research
Extensive evaluation
• Testing
Process
• Vendor selection based on specific product criteria

• Terms around product development

Extensive negotiation with
• Intellectual property
vendors
• Exclusivity

Risk in sourcing and • Uncertainty around product development

purchasing • Market demand and competitive pressures.

Spring 2023 29
Sourcing & Purchasing
Existing Products vs New Products

While both sourcing and purchasing existing

and new products require careful evaluation
and decision-making, the process for new
Conclusion products involves more extensive research
and negotiation, as well as a greater degree
of risk

Spring 2023 30
Buying from Suppliers
Known vs New suppliers

Known
Suppliers

New
Suppliers

Spring 2023 31
 Buying from Suppliers
Known Suppliers
Level of • The organization has established relationship with the vendor
familiarity and
trust • Familiar with the supplier's quality, reliability, and pricing

• Volume discounts and other pricing advantages

Established • Shorter lead times
supply chain
relationships • Overly reliant on suppliers
• Lack of flexibility

Higher degree
of quality • Familiar with the supplier's production process and quality standards
control and • Complacency and a lack of innovation
consistency
Spring 2023 32
 Buying from Suppliers
New Suppliers
• Potential for innovation, cost savings, and access to new markets.
Benefits &
• Limited knowledge of the supplier's capabilities.
Risks
• A higher degree of risk involved.

• The organization can diversify its supplier base, reducing risk and
Establishing increasing competition.
new supplier
• Requires more extensive negotiations and vendor selection processes.
relationships
• Requires investment in supplier development and relationship building.

New • Bring new perspectives and ideas to the organization.

Opportunities • Leading to innovation and competitive advantages.
& Innovative • The organization may need to invest in quality control and risk
Ideas management processes to ensure supplier compliance.
Spring 2023 33
Sourcing & Purchasing
Known vs New suppliers

While buying from known suppliers provides

familiarity and established relationships,
buying from new suppliers offers potential
Conclusion for innovation and cost savings.
Understanding the trade-offs and managing
risk is critical to effective vendor selection
and overall supply chain management.

Spring 2023 34
Strategic Sourcing:
Make or Buy Decision
Costs of Making Product
Make
(In-house)
• Production costs
• Extra labor costs
• Monitoring costs
• Storage requirement costs
• Waste product disposal costs
Cost of Buying Product
Buy
(Outsourcing)
• Product purchase price
• Sales tax charge
• Shipping costs
• Inventory holding costs
• Ordering costs
Spring 2023 Source: https://theinvestorsbook.com/wp-content/uploads/2022/10/Make-or-Buy-Decision.jpg
 Sourcing Strategy
Make or Buy
Make strategy
• In-house production of goods or services using the
In-house production
organization's own resources and capabilities.

Control over the production • Allowing for customization, quality control, and protection of
process intellectual property.

• Requires significant investment in equipment, technology, and

Significant investment talent development, as well as ongoing maintenance and
upgrades.

Organizations with a high • Suitable for organizations with a high degree of control over
degree of control their production process, where differentiation, quality, and
intellectual property protection are critical success factors.
Spring 2023 36
 Sourcing Strategy
Make or Buy
Buy strategy
Procurement of goods or • From external suppliers, leveraging their expertise, resources,
services and economies of scale.

• Requires effective vendor selection, negotiation, and

Vendor selection management to ensure quality, reliability, and competitive
pricing.
• By leveraging external suppliers' expertise, resources, and
Flexibility & cost saving economies of scale.

• Suitable for organizations with a lower degree of control over

Organizations with a lower
their production process, where cost savings, flexibility, and
degree of control
access to specialized expertise are critical success factors.
Spring 2023 37
Sourcing & Purchasing
Make or Buy

The choice between make or buy sourcing

strategies depends on various factors such as
control, cost, flexibility, and expertise, and
Conclusion organizations need to carefully evaluate
these factors when making sourcing
decisions.

Spring 2023 38
Short Break 10 min

39
 Strategic Sourcing and Purchasing
Exercise 1 Make or Buy
Case 1
For your assembly processes, you traditionally produce a certain component in house.
Your production employs 40 machines and ca. 500 workers.
Your controlling wants to outsource this component. Discuss the pros and cons.

Case 2
Your engineering department has developed a new component for your products which
will revolutionize the market and give your company a huge competitive advantage.
Will you Make or Buy this component? Explain your decision.

Students (30 min) / Discussion (15 min)

Spring 2023 40
Break 20 min

41
Lecture 1
Sourcing

42
Introduction of Sourcing Process

Sourcing is an upstream part of the supply chain: It's the process of strategically choosing the right
services and goods that a company needs to run their business.

Sourcing is also the act of buying goods, including seller selection, contract negotiation and
measuring the long-term performance of your suppliers.

Sourcing greatly impacts an organization’s operations, so establishing long-term relationships will

help companies gain a competitive advantage.

Suppliers impact a company’s operations on many levels: finances, inventory levels, quality of
goods and timely arrival.

A stable sourcing process ensures your inventory levels will meet market supply and demand.

Spring 2023 43
Sourcing Functions

Spring 2023 44
Spring 2023 45
Source: www.sourceoneinc.com | [email protected]
Strategic Sourcing Objectives

Creating efficiencies across all Save money & improve the

acquisition process, supplier Strategic sourcing focuses on the
activities within the procurement
performance, and shared gains in a collaborative
cycle to secure the best possible
relationship.
price for a product or service. minimize risk.

Establishes the parameters of

Focus on procurement Strategic sourcing is one of the
“why” and “how” companies can
assessment and organizational most crucial aspects of the
make a continuous evaluation of
needs. modern-day supply chain.
their purchase activities.

Spring 2023 46
 Strategic Sourcing Key Components

Spring 2023
Source: https://simfoni.com/strategic-sourcing/ 47
Strategic sourcing process

Source; https://comoroz.com/strategic-planning/

Spring 2023 48
Strategic Sourcing Process

 Analyze Your Internal Needs and The Market

 Identify Potential Suppliers

 Develop A Strategic Sourcing Strategy

 Negotiate With Suppliers

 Implement The Strategy

 Review Performance and Implement

Continuous Improvement

Spring 2023
Source: https://www.igniteprocurement.com/resources/guides/strategic-procurement-simplified
49
Strategic Sourcing Components
Total Cost of Ownership
• TCO or Total Cost of Ownership is a financial estimation that is used to determine the complete cost of a
product or service over its entire lifecycle, which includes acquisition, operation, maintenance and disposal
cost.
• The objective of considering TCO is to identify the most cost- effective option that meets the organization's
needs while also considering the total cost over its entire life span, rather than just focusing on the upfront
acquisition cost.

Partnerships & Transparent Supply Chains

• Partnerships in strategic sourcing refer to building long-term relationships with suppliers, rather than
simply engaging in transactional relationships.
• Transparent supply chains refer to the practice of providing visibility and accountability throughout the supply chain.

Spring 2023 50
Total Cost of Ownership
Do not analyze price of supplier alone
Warehouse Cost
IT Cost
SCM management cost

Planning Cost Typical Cost elements

Internal Transports • Interest rate
• License costs, operating costs
Internal Routing • Number of employees
• Number of movement, distances
Disposition • Number of transport orders, number of warehouse units
• Number of purchase orders
Purchasing • Number of purchase negotiations
• Material purchase price
Direct Material • Allocated material overheads
Production Cost

• Rework, scrap

Material Overhead

Quality & Rework Cost

Spring 2023 51
 Partnerships & Transparent Supply Chains
Incorporating partnerships and transparent supply chains in strategic sourcing can
help organizations to achieve several benefits, including:
Improved • By working collaboratively with suppliers and providing visibility throughout the supply chain,
Supplier organizations can improve supplier performance and ensure a reliable supply of high-quality
Performance products or services.

• Partnerships and transparency can help organizations to reduce costs by optimizing the supply
Reduced Costs
chain, improving supplier performance, and identifying opportunities for cost savings.

• Transparency in the supply chain can help organizations to identify and mitigate risks, such as those
Mitigated Risks
related to sustainability, compliance, and reputation.

Enhanced • By promoting ethical and sustainable practices throughout the supply chain, organizations can
Reputation enhance their reputation with customers and other stakeholders.

Overall, partnerships and transparent supply chains are essential elements in

strategic sourcing that can help organizations to achieve a more sustainable, cost-
effective, and reliable supply chain. 52
Short Break 10 min

53
Strategic Sourcing and Purchasing
Exercise 2 Sourcing & Purchasing KPI‘s for companies

What are the typical Sourcing & Purchasing KPI’s for companies?
A Sourcing & Purchasing KPI is a measurable value that tracks all relevant aspects of
obtaining or buying goods and services.

These KPI’s enable the procurement department to control and optimize the quantity,
quality, costs, timing and sourcing of purchasing processes.

Students (30 min) / Discussion (15 min)

Spring 2023 54
 Sourcing & Purchasing KPI‘s for companies
Exercise 2 Sourcing & Purchasing KPI‘s for companies

KPI Description KPI Description

Compliance Rate Suppliers fulfill rate of Co. requirements Lead Time Understand the total time to fulfill an order

Number of Suppliers Track level of dependency towards suppliers Emergency Purchase Ratio Track the number of emergency purchases

Purchase Order Cycle Time Know who to address your urgent orders to Purchases In Time & Budget Monitor purchasing time & budget

Purchase Price Variance Track standard vs actual purchasing price Cost of Purchase Order Control internal costs by each purchase

Purchase Order Coverage Monitor if invoices match to purchase order Procurement Cost Reduction Streamline the tangible costs savings

Supplier Quality Rating Analyze the quality of your suppliers Procurement Cost Avoidance Avoid potential extra costs in the future

Supplier Availability Suppliers’ capacity to respond to demand Maverick Spend Monitor your non-contracted spending

Supplier Defect Rate Evaluate your suppliers’ individual quality Spend Under Management Monitor your non-contracted spending

Vendor Rejection Rate & Costs Examine your quality management strategies Procurement ROI Determine the profitability of investments

Spring 2023 55