Basics of Procurement Management

Chapter Two: Key Procurement Issues Contents:

2.1. Outsourcing

2.2. Quality management

2.3. Inventory management

2.4. Lead time

2.5. Strategic sourcing

2.6. Negotiations

2.1. Outsourcing

Outsourcing is the operation of shifting a transaction to external supplier domestically or

internationally with a long term contract with good relationship between the two partners. The
Outsourcing Institute has defined outsourcing as: „The strategic use of outside resources to
perform activities traditionally handled by internal staff and resources.‟ Outsourcing is a strategy
by which an organization contracts out major functions to specialize and efficient service
providers who become valued business partners. Outsourcing is one of the best ideas that allow
many companies to focus on „what they do best‟ and outsourcing „what others can do better,
faster, cheaper, and higher quality‟. This will help reduce costs and gain efficiencies by
leveraging the talent, technology, and expertise of third party vendors. Outsourcing is not a
synonym for procurement rather than concerned with the external provision of functional
activity, and therefore outsourcing decisions are strategic in nature. They impact upon the nature
and scope of the organisation. As such they are not taken at the operational level, but involve top
management, and the consideration of a great variety of variables such as:

 Do we have candidate functions for outsourcing?

 How do we select? How do we assess ourselves?
 Who are the potential providers?
 How do we assess them?
 What sort of relationship will we form?

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Basics of Procurement Management

 How will we manage it?

 How do we ensure efficiency?

Outsourcing is, essentially, the contracting out of non-core activities. That is not to say that the
activities are unimportant, rather they are supportive activities of the business. Business
development would depend on a corporation’s ability to identify, to cultivate and to use its core
competences. These were prophetic words. Many organisations, large and small, in both
manufacturing and service operations, have invested, and continue to invest, great effort in
attempting to do just this. The fundamental questions of „What business are we in? ‟ and „What
business do we want to be in? ‟ are at the root of corporate strategy. No commercial or public
sector concern can undertake all the production of goods and services necessary to the business,
and decisions of a strategic nature will need to be taken and adopted as a matter of policy for the
concern in question. Decisions as to which classes of goods and services to outsource and, if
partial outsourcing is to be pursued, what the proportions should be are core issues which in
many respects actually define the business. Major issues of investment, location, planning and
direction are, to a large extent, dependent on the make/do-or-buy decision. These strategic
decisions will be informed by many considerations, among them:

 Financial constraints; If we cannot invest in everything connected with supplying the needs of
our organisation, which factors do we invest in and which do we outsource?

 Which of our capabilities provide competitive advantage? Should we outsource those that do
not?

The main driver of outsourcing is the need for focused competitiveness:

 Outsource where others can do it better.

 Outsource to focus on core business.
 Outsource to reduce cost base.

Why outsource?

There are many considerations that might influence an organisation, such as:

 External supplier has better capability.

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Basics of Procurement Management

 Freeing resources for other purposes.

 Reduction in operating costs.
 Infusion of cash by selling asset to provider.
 Reducing or spreading risk.
 Lack of internal resource.
 Desire to focus more tightly on core business.
 Economies of scale.

Most important contributors to success

 Activity well defined.

 Roles and responsibilities of all parties clear.
 Good relationship with supplier.
 High quality of supplier.
 Effective contract management/monitoring

2.1.1. Outsourcing methodologies

Outsourcing decisions are rarely taken within a thoroughly strategic perspective, with many
firms adopting short-term solutions for cost reductions.

Many companies have no formal outsourcing process, and make short-term decisions based on
reduction of head count and costs, rather than managing the risks and securing added value and
continuous improvement. In this section we highlight frameworks or methodologies for effective
outsourcing strategies, all of which are examining risks at each stage of the process in terms of a
decision tree approach, allowing companies to consider the full implications of their actions.

This very useful model allows companies to assess the risks of outsourcing in terms of non-
core/core competences and the criticality of the activity. Companies must have a clear
understanding of what business they are in, how value is sustained and, therefore, what activities
are non-core and low risk in terms of outsourcing.

Moreover, it indicates the importance of assessing the supply market; it is imperative that we
select suppliers/providers who have more specialist knowledge in order that they can provide

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superior levels of service and continuous improvement. If the market is not sufficiently
„mature‟, in that there are many providers but there is a lack of a sufficient level of competence,
then clearly it may not be appropriate to outsource at this stage.

Supplier management in the form of effective contract management and performance

monitoring with appropriate partnership/collaborative approaches is imperative if benefits of
outsourcing are to be realized.

Finally, the re-tender or return to in-house decision must be managed effectively since badly
managed termination of provision can cause interruptions in service levels and an unprofessional
reputation in the marketplace.

A second outsourcing framework is provided by McIvor (2000), again in the form of a decision
tree involving four key stages.

Stage 1: Define core activities

It is essential to distinguish between non-core and core activities (those adding value to the
customer and therefore key sources of competitive advantage).

Stage 2: Evaluate relevant value chain activities

This involves analysing the competence of the company compared to those of the potential
providers, comparing the ability to add value and the implications for the total cost of ownership.

Activities for which the company has neither a strategic need nor special capabilities can be
outsourced to more competent providers who have a lower cost base.

Stage 3: Total cost analysis

At this stage, if after analysis of total costs the company is more capable than the external
sources, it should retain in-house capability. If a number of capable suppliers exist, move to the
final stage.

Stage 4: Relationship analysis

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At this stage companies are attempting to select suppliers who have the ability to initiate and
develop suitable relationships that will add value and provide continuous improvements. If no
suppliers are suitable, then again the risk is too high and therefore the decision should be to
retain in-house capability. If companies follow such an approach, they will manage the risks
associated with outsourcing more successfully.

In summary, if companies adopt formal strategic thinking such as outlined in these frameworks,
it is likely that the percentage of successful outsourced contracts reported would increase
dramatically.

2.1.3. Advantages and disadvantages of outsourcing

Appropriate outsourcing has a paramount importance including:

 Expertise and fast delivery: Most of the times tasks or projects are outsourced to others who
specialize in the particular field. The outsourced vendors must have specific equipment and
technical expertise, most of the times better than the ones at the outsourcing organization. This
means the tasks should be completed faster and with better quality and prompt delivery.

 The ability to concentrate on core process rather than the supporting ones: Outsourcing
the supporting processes allows the organization more time to focus on company’s core business
process or job assignment.

 Risk-sharing: Outsourcing certain components of many company’s business process that

helps the organization to shift certain responsibilities to the outsourced vendor. The outsourced
must have ability to plan your risk-mitigating factors better.

 Reduced cost such as Set up cost, Operational and Recruitment costs: Outsourcing
reduces the need to hire individuals in-house; hence recruitment and operational costs can be
minimized to a great extent. Therefore, the time and many costs can be safe and focus on
something else.

 Save on infrastructure and technology: The outsourcing partner takes the responsibility of
the business process so the outsourcing eliminates the need for investment in infrastructure.

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Even though, outsourcing has a paramount importance, it has also disadvantages including the
following:

 Risk of exposing confidential data and technology: Whenever an organization outsources

HR, Payroll and Recruitment services, it involves a risk of exposing confidential company
information as well as technology to a third-party. For example, if you allow outsourcing, soon
there is going to be imitation of the outsourcing organization products.

 Many Hidden costs: In general, the concept of outsourcing is costeffective but at times the
hidden costs involved in signing a contract while signing a contract across international
boundaries may pose a serious threat.

 Social cost in terms of job losses

 Increased monitoring cost
 Loss of loyal employees

 Lack of customer focus: An outsourced vendor may have to serve many companies and
multiple organizations at a time. Therefore, they may lack a complete focus on your
organization’s tasks and job assignment.

2.2. Quality management

What is quality?

Quality is a word with several meanings and connotations. For example, it can mean excellence,
as in „this is a quality product‟, or it can be thought of as the extent to which a product or service
achieves customer satisfaction.

Quality can be defined in many ways. However, for the purposes of our context it might
appropriately be defined or specified as; the whole set of features and characteristics of a product
or service that are relevant to meeting requirements. „Quality‟ is simply „fitness for purpose‟, or
„suitability‟. The British Standards Institution (BSI) has defined quality as „the totality of
features and characteristics of a product or service that bear on its ability to satisfy a given need‟.

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Basics of Procurement Management

Performance quality and conformance quality

Supplies staffs are concerned with quality from two points of view:

1. Quality of design or specification. Have we specified the right material for the job, and have
we communicated our requirement to the supplier in a clear and unambiguous way? This is
performance quality. A good specification must include all the right information to enable them
to cost up goods or services accurately so a customer can compare bids on a like for like basis.
Your specification mustn't mislead suppliers or give them false expectations

2. Conformance quality. Has the supplier provided material in accordance with the

specification? We usually establish the answer to this question by inspection. Conformance

Specification defines requirements when the buyer specifies what they want, how they want it,
and the supplier has to meet these specifications

2.2.1. Quality control and quality assurance

Inspection activities can be classified as quality control processes, along with the other activities
that involve monitoring to ensure that defectives (or potential defectives) are spotted. Quality
assurance can be contrasted with control in that assurance includes all the activities connected
with the attainment of quality, such as:

 Design, including proving and testing specification,

 Which must be clear and unambiguous?
 Assessment of suppliers, to ensure that they can perform
 Motivation of all concerned
 Education and training of supplies staff
 Inspection and testing
 Feedback to ensure that all measures are effective

The following are a few differences between the quality assurance and quality control processes:

 Quality assurance is a proactive process and it emphasizes planning, documenting, and

finalizing the guidelines that will be necessary to assure the quality. Quality control functions

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start once the project work has begun and it is a reactive approach and helps you find defects in
deliverables.

 Quality assurance focuses on defect prevention and quality control focuses on defect
identification.

 In quality assurance, you check if the plan was efficient to avoid any anticipated defect. In
quality control, you try to find defects and correct them while making the product.

 Quality assurance is a process based approach (processes managing quality) while quality
control is a product based approach (verify the quality of the product).

2.2.2. Total quality management (TQM)

The „total quality‟ philosophy takes matters a stage further, and is based on the active
involvement of all concerned. Attention is paid to systems procedures and processes rather than
the focus being on the good or service being supplied. Total quality in the supply chain would
mean that suppliers, as well as customers and the company’s own workforce, would be involved
in determining quality. Inspection and supplier assessment are superseded by a shared approach
to the elimination of defective work, with the emphasis on prevention rather than detection and
cure. Key ideas associated with TQM as a policy are „teamwork‟, „involvement‟ and processes.

2.3. Inventory management

Inventory is a term used to describe:

 All the goods and materials held by an organisation for sale or use

 A list of items held in stock.

 Inventory means all the materials, parts, supplies, expense tools and in process or finished
products recorded on the books by an organization and kept in its stocks, warehouses or plants
for some period of time.

 An alternative definition is: Materials in a supply chain or in a segment of a supply chain,

expressed in quantities, locations and/or values (synonym stock).

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Holding inventory costs money, and therefore reduces profitability. That inventory is designed to
support production and service operations. Some level of inventory is essential in order to
provide continuity of service and to avoid costly downtime and service disruption and non-
availability, but inventory reduction and, therefore, the release of cash and reduced operating
costs remain essential concerns of inventory management.

Why do we carry stock? The reasons include:

 Meet variation in production demand: Production plan changes in response to the sales,
estimates, orders and stocking patterns. Holding inventories at a nearby warehouse helps issue
the required quantity and item to production just in time.

 Cater to cyclical and seasonal demand: Market demand and supplies are seasonal depending
upon various factors like seasons; festivals etc. Firms stock up raw materials and hold
inventories to be able to increase production and rush supplies to the market to meet the
increased demand.

 Economies of scale in procurement: Buying raw materials in larger lot and holding
inventory is found to be cheaper for the company than buying frequent small lots. In such cases
one buys in bulk and holds inventories at the plant warehouse.

 Take advantage of price increase and quantity discounts: If there is a price increase
expected few months down the line due to changes in demand and supply in the national or
international market, impact of taxes and budgets etc., the company’s tend to buy raw materials
in advance and hold stocks as a hedge against increased costs. Companies resort to buying in
bulk and holding raw material inventories to take advantage of the quantity discounts offered by
the supplier. In such cases the savings on account of the discount enjoyed would be substantially
higher that of inventory carrying cost.

 Reduce transit cost and transit times: In case of raw materials being imported from a
foreign country or from a faraway vendor within the country, one can save a lot in terms of
transportation cost buy buying in bulk and transporting as a container load or a full truck load.
Part shipments can be costlier. In terms of transit time too, transit time for full container
shipment or a full truck load is direct and faster unlike part shipment load where the freight

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forwarder waits for other loads to fill the container which can take several weeks. There could be
a lot of factors resulting in shipping delays and transportation too, which can hamper the supply
chain forcing companies to hold safety stock of raw material inventories.

 Long lead and high demand items need to be held in inventory: Often raw material
supplies from vendors have long lead running into several months. Coupled with this if the
particular item is in high demand and short supply one can expect disruption of supplies. In such
cases it is safer to hold inventories and have control.

2.3.1. Stock control

Every organisation holds some things in stock. Inventory control is the technique of maintaining
store-keeping items at the desired level, whether they are raw materials, goods in process or
finished products. It could be also defined as the policies and procedures that systematically
determine and regulate which things are kept in stock and what quantities of them are stocked.
For each item stocked, decisions are needed as to the size of the requirement, the time at which
further supplies should be ordered, and the quantity that should be ordered.

The function of stock control is to calculate what quantities are needed and when they are needed
to meet requirements for stock or for production. Inventory control keeps track of inventories. It
is observed that “too much”, “too little” or badly balanced inventories are all to be avoided
because they cost too much on many counts.

Carrying stock is expensive, and it is accepted that many organisations carry too much stock. A
continuing drive to reduce stock without reducing service is needed to combat the natural
tendency of stock to increase.

Constructive approaches to stock reduction include:

 arranging for things to be made and delivered just in time, instead of stockpiling just in
case a need arises
 devising ways to reduce ordering costs, set-up costs and lead times so that optimum
quantities are smaller
 Making forecasts more accurate, ensuring that records are right, and better planning.

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Stock classification system – Pareto law, ABC analysis, 80/20 rule

Many organisations have assumed that all stocks are the same. In any inventory that contains
more than one stocked item, some items will be more important than others. Some may, for
example, have a very high usage rate, so that if they ran out, many customers would be
disappointed. Alternatively, other items may be of a particularly high value, so excessively high
inventory would be particularly expensive. One common way of establishing these differences is
to rank the items of stock by their usage value. Items with a particularly high rate of usage
should need very close control, while those that have low value and low usage won’t need so
much attention.

With the aid of a simple example we will see how the technique works using arbitrary
minimum–maximum levels of stock for „A‟, „B‟ and „C‟ class items. It also illustrates how the
technique can be used for evaluating the overall inventory value, which can be anticipated for
different planned levels of minimum–maximum stock cover chosen for each of the A, B and C
categories. An ABC-based policy can be used to determine and control stocks based on the value
and usage of each item.

Generally, a relatively small proportion of the total items contained in an inventory will account
for a large proportion of the total inventory value. This phenomenon is known as the Pareto law
(named after Vilfredo Pareto, who founded the principle) and is often referred to as the 80/20
rule. It is called this because, typically, 80 per cent of an organization’s inventory value will be
accounted for by only 20 per cent of stock items. Put the other way, 80 per cent of the total
quantity of stock will account for only 20 per cent of the total value of all stocks. About 20 per
cent of the population own 80 per cent of the nation’s wealth. About 20 per cent of employees
cause 80 per cent of problems. About 20 per cent of items account for 80 per cent of a firm‟s
expenditure. The two terms „Pareto analysis‟ and „ABC analysis‟ are used interchangeably.

We can use Pareto analysis to focus on the more important items of stock in terms of their usage
value.

If the ABC analysis is undertaken on a product value basis, the following purchasing/stocking
situation may apply in a manufacturing company:

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 ‘A’ items: high-value items, few lines, low stock holding needing continuity in supply/ JIT or
periodic review replenishment system. Bulk chemicals are examples here. Although such items
may represent only about 15% of the total inventory items, they represent 70 to 80% of the total
dollar usage. These items (by value) are tightly controlled, with orders only for known
requirements. Continual accurate records/progressing with less than two weeks‟ safety stock
being held.

 ‘B’ items: medium-value items, medium lines minimum–maximum or continuous review

replenishment system with supplier weekly check on stock/reorder. An example could be
protective paints. These items may represent 30% of inventory items and 15 to 25% of the total
value. B items are moderately controlled, with ordering against forecast based on historic
demand. Safety stocks of 6–8 weeks were held.

 ‘C’ items: low volume, many lines, low-value items. These items may represent 5% of the
annual dollar volume but about 55% of the total inventory items. C items are at a lower control
level, with larger levels of safety stocks around12 weeks.

Clearly, here the high-valued items have minimal stock levels and this lowers the costs to the
business. Essentially, the role of the stock controller is to achieve a balance. Too little stock and
the organisation will suffer from delayed production, poor customer service or lack of ability to
respond to new requirements; too much stock and the funds of the organisation will be tied up,
thus impairing opportunities to invest or spend elsewhere.

Inventory (stock) as waste

Influential thinkers in supply chain management have suggested that inventory is waste, and
should be avoided wherever possible. The reasons behind this view are that stocks of materials
can adversely impact any organisation because they:

 tie up capital
 impair cash flow
 impair flexibility
 need to be stored (at a cost)
 need to be handled (at a cost)

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Basics of Procurement Management

 need to be managed (at a cost)

 are at risk of loss through fire, theft and many other possible misfortunes
 Usually depreciate in value.

2.4. Lead time

The recognition of „time‟ as a key variable, and the need to minimize time as waste in the supply
chain, has led to an increased degree of concern with time and responsiveness in recent years.
Attention is being paid to the benefits that might arise from increasing responsiveness at all
stages.

Time and competitive advantage

In the past, price was paramount as an influence on the buying decision. Price is still important,
but a major determinant of choice of supplier or brand is the cost of time. The cost of time is
simply the additional costs that a customer must bear while waiting for delivery or seeking out
alternatives.

If a company is seeking competitive advantage by becoming better able to respond to customer

needs as they arise, it follows that the company will require a greater degree of responsiveness
from its own suppliers. While it might be argued that the possession of appropriate inventories
might facilitate the same degree of „responsiveness‟, it is unlikely that an organisation can carry
the high levels of stock that such a policy would call for, yet still remain price competitive.

On-time delivery

The achievement of delivery on time is a standard procurement objective. If goods and material
arrive late or work is not completed at the right time, sales may be lost, production halted, and
damages clauses may be invoked by dissatisfied customers. In addition, most organisations
regard cash as committed once an order has been placed; failure to achieve supply on time may
slow down the cash-to-cash cycle, thus reducing the organization’s efficiency or profitability.

Buyers are blamed, sometimes rightly, by user department colleagues if suppliers fail to deliver
on time. To obtain on-time delivery, however, it is vital to ensure that user departments know
what lead times apply, and any other necessary information. However, measures of this kind are

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not enough. Procurement has a practical role in supply markets, convincing suppliers that they
must deliver as and when agreed.

To obtain delivery on time is to decide firmly and precisely what is required and when it is
required, and in achieving on-time delivery is to ensure that suppliers know and are fully aware
that on-time delivery is an important element in their marketing mix.

Lead-time variability

A crucial aspect when examining lead time is variability. When lead times are looked at
realistically, a range of times will be found; for example, from 2 to 8 days. This range represents
the variability of lead time. Average calculations are of little practical assistance and can be
dangerous if used for planning and decision making.

It is this variability that so often represents the uncertainty found in the supply chain. This is
traditionally dealt with by holding safety stocks to cover against the uncertainty.

The following are some ways to consider reducing lead-time variability:

1. Demand lead time variability:

 Predictable known orders/size/make-up
 Predictable order times
 Data accuracy on what customers’ want/when/price
 is it the real end users‟ demand or has it been institutionalized by passing through and
influenced by internal and/or external supply chain players who do not communicate with
each other efficiently?
2. Supply lead time variability:
 Predictable known lead time
 Get correct quantity first time
 Get correct quality first time
 Data accuracy on what is supplied/price.

The importance of lead-time variability in inventory can be seen in the expression „uncertainty is
the mother of inventory‟. The length of lead time is of secondary importance to the variability

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and uncertainty in the lead time. Fixed reliable lead times are more important than the length of
the lead time.

2.5. Strategic sourcing

For every company the basic goal is to survive and grow by value addition of some inputs into
something more useful. This input can be tangible ones like raw materials or employees, or
intangible, like information or skills. All these originate from some source and this is where
sourcing activities come into play

What Is Sourcing?

Sourcing is the group of procurement activities related to identifying and assessing potential
suppliers; and selecting and managing suppliers to ensure best value for your company. Before
you can procure materials from your suppliers, you must first find and vet those suppliers. When
you have an effective sourcing process, you’ll find reliable, affordable, and quality suppliers to
provide the goods you need.

This might also include screening for compliance with your company policies, such as your ESG
procurement strategy. Due diligence here makes the overall procurement function more
streamlined and efficient.

Sourcing is a balancing act between quality and affordability. The less you can spend on
materials, the more profit your business can earn. But, if you are too cheap and buy shoddy
materials, your product becomes worse. Your customers want quality, too!

Sourcing includes requesting quotes, obtaining vendor information, determining lead time,
setting up contracts, pricing, minimum order quantities, and more. This is done one time for each
supplier except when updating pricing information. Sourcing teams are always busy because it’s
important to have backup suppliers in case one falls through.

During sourcing, you must assess your purchasing needs, map out a plan, conduct market
research, and identify potential suppliers. After that, you’ll then evaluate the suppliers and
choose the most suitable one for your needs. Repeat the process for all other purchasing needs
until you have suppliers for everything.

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Basics of Procurement Management

Procurement is the overall process of getting the materials you need. Sourcing is finding and
vetting the suppliers of those materials. Sourcing is the part of the procurement process that
happens before purchasing can take place.

What Is the Difference between Sourcing and Procurement?

The main difference between sourcing and procurement is that sourcing focuses purely on
suppliers, while procurement also focuses on purchasing. Sourcing is a subset of the procurement
process and happens before a company makes purchases.

Sourcing teams analyze supplier lists and performance while paying close attention to the risk
each supplier poses. Sourcing is most concerned with how to get products that meet all business
needs—time, quality, location, and quantity—at the best price.

Procurement is a larger process that begins with sourcing and goes all the way through payment
and supplier relationship management.

It seeks to maximize value through the entire procure-to-pay process, maintain relationships with
the best suppliers, and minimize risk throughout the supply chain.

Sourcing

 Focuses on finding and vetting suppliers

 Ensures suppliers are identified to fulfill business needs
 Evaluates supplier and supply chain risks

Procurement

 Focuses on the entire procure-to-pay process

 Ensures the business gets what it needs to operate
 Manages internal and external risks and relationships

What Is Strategic Sourcing?

Like any other management terms experts differ in defining strategic sourcing. Some of the
important definitions are given below:

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Basics of Procurement Management

 Carr and Smeltzer (1976), strategic sourcing consisting of processes of planning, evaluating,
implementing and controlling all sourcing activities undertaken by an organization to achieve its
long-term goals.

 Reyes-Moro et al. (2003) defined it as a sequence of actions to be performed in order to

acquire goods or services that are of strategic importance to a company.

 Banfield (1999), strategic sourcing is a management process used to systematically assess

purchasing requirements across a company and identify opportunities, both internal and external,
for total cost reductions.

Thus, strategic sourcing is a process designed to purchase the best products and best services for
the best value. It is a systematic procurement process and one component of supply chain
management by a company that continuously improves and re-evaluates its purchasing activities.
Sourcing is not a one-time effort but continues one. Hence Strategic-sourcing initiatives should
not be a set of discrete events but a continuous improvement process for the procurement
organization.

Strategic sourcing refers to adopting various sourcing strategies and models to minimize risks
and costs while increasing purchase value. Strategic sourcing considers the overall needs of a
company strategically, instead of focusing on individual sourcing requirements tactically, to
realize better value across the organization. Strategic sourcing is crucial to a company’s
development because it helps negotiate the best price and quality—directly influencing profit
margin and net income.

Like sourcing, strategic sourcing is also a part of the procurement process. It employs higher-
level strategies around sourcing to help companies optimize for better deals and higher qualities
on the goods and services they need to conduct business. Successful sourcing initiatives do much
more than just reduce prices. They also improve the quality of the products and services that
suppliers provide. Strategic sourcing still represents a significant, and largely untapped,
opportunity for many companies to improve profitability and control costs. Strategic sourcing,
effectively implemented, offers tremendous benefits.

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Basics of Procurement Management

What Are Some Benefits of Strategic Sourcing?

Strategic sourcing works to find the best suppliers, quality, and price for the goods and services
your business needs. Its benefits include:

 Long-term cost savings

 Better quality raw materials
 Stronger supply chain risk management
 Increased supply chain sustainability
 Better understanding of the market
 Increased negotiating power

Successful sourcing initiatives do much more than just reduce prices. They also improve the
quality of the products and services that suppliers provide. Strategic sourcing still represents a
significant, and largely untapped, opportunity for many companies to improve profitability and
control costs. Strategic sourcing, effectively implemented, offers tremendous benefits. It looks at
the total cost and not at the phrase price, as it consolidates the purchasing power, having
partnerships with the suppliers and aligns the work and information flow etc. using team work.

Strategic sourcing answers to the most critical risk and cost management sourcing questions like

 Who do we buy from?

 What do we buy?
 How much should we buy from whom, when, and how?
 Is the supply base configured to future needs?
 How well are our suppliers performing to the goal?
 What is the best method to buy?

Therefore, strategic sourcing is the core pivotal activity for purchasing and supply management
professionals and requires extensive knowledge and competence. Some confuses strategic
sourcing with outsourcing. Strategic sourcing basically means getting the best services and
products for the best value. Organizations outsource when they transfer the performance of

By Mastewal M. (MA)
Basics of Procurement Management

functions once administered in-house to other organizations (like software programming,

manufacturing, human resources, etc.).

Strategic Sourcing differs from traditional procurement processes in the following ways

1. Total cost, not just purchase price: it is not just about price, but quality, service, delivery
and all the aspects that make up the total costs or value. Since the purchase is not a onetime affair
but a long term one, the delivered price is decomposed into the various cost components like
storage cost, transportation cost etc. to determine the origin cost. Effort is always on to find ways
to reduce this cost which is beneficial to all concerned.

2. Consolidating purchasing power: organizations are able to consolidate purchasing power to

achieve maximum benefit from the total volume being sourced from each supplier. This further
help to reduce the ordering costs.

3. Tighter supplier relationships: The limited number of suppliers used now helps in creating
partnerships and entering into mutually beneficial contracts. It helps in achieving standardization
and improvements in cost, quality and time. These relationships over time help to identify and
eliminate any redundant or superfluous costs, constraints or delays.

4. Improved teamwork and purchasing skills: strategic sourcing needs detailed information
about products, markets and the buyers and sellers‟ needs. Strategic sourcing teams include
members from logistics, transportation, operations and even suppliers, which inspire
collaboration and overcome traditional organizational barriers.

2.6. Negotiations

It is generally accepted that a key competence in a procurement executive is an ability to

negotiate. Negotiations may involve dealing with a single issue or many. They may be conducted
on a one-to-one basis or between teams of negotiators representing different interests, and may
be conducted over the telephone in a matter of minutes, or take many months to complete. It is
also worth mentioning that negotiations are not necessarily confined to the buyer–seller
relationship; buying negotiations take place on an intraorganisational basis, involving the
reconciliation of the views of supplies staff and colleagues. In this section we explore the nature
of negotiation.

By Mastewal M. (MA)
Basics of Procurement Management

There have been many attempts to define negotiation, for example, „to confer with others in
order to reach a compromise or agreement‟ (Oxford Encyclopedic English Dictionary), or „the
process by which we search for terms to obtain what we want from somebody who wants
something from us‟. The latter definition points up a key factor: that negotiation implies some
mutuality of wants, resolved by exchange. Negotiation is all about finding a way to reach an
agreement, or it is a process whereby agreement is sought.

Some alternatives to negotiation are:

 Persuade: Encourage the other side to accept the merits of a particular case with no concessions
from yourself.

 Give in: Accept totally what the other side offers.

 Coerce: Insist that the other side meets your demands „or else‟.

 Problem solve: Remove the difference, so that there is no need to negotiate.

Negotiator should develop negotiating skills for better deal. Like salesmen, buyers need to be
proficient in such skills as asking good questions, listening, interpreting trends in the negotiation,
pre-planning a negotiation and ensuring that what is agreed is implemented. They need to be
able, too, to analyze and interpret information and to be aware of the dangers of making
unwarranted assumptions. Since negotiation is an interpersonal process, they need to understand
something about human behaviour, needs and motivation: they need to develop interactive skills.

2.6.1. Phases of negotiation

Negotiation conceptually has a three-phase process,

1. Pre negotiation phase: it is the preparatory stage, the objective of negotiation is set and
strategies developed. Key considerations in preparation for negotiation:
 What do we want? This question may not be as easy to answer as we might at first
imagine. Our wants may not become crystal clear until we enter discussion with the other
side. They may, for example, include:
o a lower price
o an improved relationship

By Mastewal M. (MA)
Basics of Procurement Management

o a bigger discount
o faster delivery and/or
o changes in quality

The range of negotiable variables in most buyer–seller relationships or transactions is very wide.

 How valuable is each of our „wants‟ to us? Perhaps, for example:

o prompt delivery = high priority

o lower price = medium priority and

o quality changes = low priority

 What are my entry and exit points? Your entry point is really your „opening bid‟. Once
disclosed, you are unlikely to better it, so the bid obviously requires careful thought. The exit
point is your „walk away‟ position. It is clearly desirable that this should be identified and
understood at the preparatory phase, if only to obviate the possibility of striking a bargain which
may be regretted later.

2. The meeting phase: concerned with the process of discussion, further information collection
and analysis, and with the reaching of agreement between the parties. In some cases, agreement
may be reached in one meeting; in others the situation might necessitate further meetings to
conclude the agreement. Thus, the process of negotiation may involve several meetings. For
example, the first meeting between the parties will be concerned solely with exploratory
discussions: both sides may need to clarify the issues of the negotiation and there will always be
the need to obtain more information.

3. Post negotiation phase: involves the implementation of the agreement within and between
the organisations represented in the previous phase. Less successful negotiators pay insufficient
attention to this. It might be said that no negotiation is complete until what has been agreed is
enacted

By Mastewal M. (MA)