Strategic Procurement

Sourcing
&
Process Management
 Changing Aspects of Business
• Competition Basis
»Price
»Quality
»Service
»Delivery
»Technology
»Speed/Time
»Value Addition
 Five Stages for Improvement

Fire Fighting – Crisis management

Push Effect – Supply driven, speculative
Pull Effect – Demand driven, reactive
Just In Time – SCM, optimization
Zero Inventory – Triggers driven

Costs down, Value up, Lead time down

Product & Volume flexibility up
3
 Effective strategic sourcing

To produce the best products

world-wide, you need more than
ideas, design and specifications.
You need to choose the
very best suppliers

• Your products are only as strong as your

weakest supplier
 Supplier’s quality & capability depends on
• Technology
• Plant & Machinery
• Quality control system
• Technical man-power
• Source of raw material
• Financial health
• Management
 Strategic considerations in sourcing
• Does it have a value analysis programme ?
• Where does it have a service organization that is
available to the purchaser?
• Repair parts available locally? At short notice?
• Will it provide design data and mfg drg etc for
parts when it goes out of production?
• Does it specialize in your type of equipment?
• Does it have a prescribed schedule for service
calls?
 Vendor evaluation- Categorical plan

• Under this plan, Purchasing, User Dept, Q. C.

and Engineering keep record of evaluation of
each major supplier
• In a meeting, each supplier is assigned an
overall group evaluation, usually expressed in
categorical terms, such as “preferred”, “neutral”,
or “unsatisfactory”
• It is non-quantitative, but easy to administer.
This is helpful while selecting sources for LTE
 Vendor development
• Vendor development is a continuous
undertaking. It is achieved though:
• Providing technical guidance to the vendor.
• Providing financial assistance to the vendor
• Giving them educational order to start with.
• Giving assurance regarding long-term business
should they develop the item
 Sourcing
• The term Sourcing refers to Procurement practice
– Which is aimed at finding, evaluating and engaging
suppliers of goods and services
– As against Procurement which essentially is the
acquisition of goods or services

• Sourcing is the way an organization acquires its

needed goods and services in such an integrated
manner that functional and hierarchical organizational
boundaries are permeated.

• Sourcing is the process of finding and subsequently

managing a source for the input of production
 Strategic Sourcing
• The overall Goals of strategic sourcing
– To achieve large and sustainable cost
reductions,
– Long-term supply stability and
– Minimization of supply risk
– Improve quality
– Reduce cost
• Benchmarking
 Drivers of Strategic Sourcing
• Reduce cost
• Reduce cycle time
• Improve quality over time
• Achieve long term financial performance.
• Increase no. of local/global options
• Increase customer focus
• Deliver more innovative products/services
more frequently & cheaper than competitors
 Developing Strategic Sourcing
• Successful sourcing strategies are different for
– Functional products and
– Innovative products
• Functional product : are commonly
– Low profit margins with
– Relatively stable demands and
– High levels of competition
• Innovative products : are characterized by
– Short product life cycle,
– Volatile demand,
– High profit margin, and
– Relatively less competitive
 Strategic Sourcing
• Key supplier selection is conducted by
– cross functional team having
• purchasing staff,
• primary user,
• product designer, and
• manufacturing personal
Developing Strategic Sourcing
Step 1 Identify Supplier

Step 2 Set Goals For Improving Capabilities

Step 3 Implement Work Plan

Step 4 Monitor Progress & Adjust The Work Plans

 Strategic Sourcing Goal Tools
• Benchmarking
• Brainstorming
• SWOT Analysis
• Customer Focus
• Value Analysis
• Quality improvement
• Cost Reduction, Target costing
• Market complexity Vs Risk/Impact
– Non-critical, Bottleneck, Leverage, Strategic
 Procurement Performance
Assessment - KPI’s
• Procurement Operating Costs as a Percentage of
Spend procurement department's cost efficiency
• On-Time Supplier Deliveries gets when needed
• Supplier Defect Rate measures the quality of
purchases made
• Customer Satisfaction ability to satisfy its internal
customers
• Procurement Cycle Time measures the productivity
• Supplier Idea Implementation leveraging the intellect
in the supply base
 Push / Pull View
• Push Process (Supply Driven, Ready-made)
• Demand is forecast but not known at the time of execution
of the process
• Speculative Processes
• Pull Process (Demand Driven, Tailor-made)
• Definite customer demand precedes execution of the
process
• Reactive Processes
• Push/Pull Mix (Boundary)
• Separates Push processes from Pull processes
• Significant for supply chain performance
• For achieving acceptable delivery Lead Time
• Enables achieving cost efficiency
23-Dec-19 SCM 17
Postponement:
Bringing Push/Pull Boundary nearer to Customer

The final customisation/ finishing of the product

is delayed until actual customer is identified:
 A more generic inventory with a less stock variation
is possible

 Forecasting becomes easier as the product basis is

generic and interchangeable (standard items)

 Enables providing Customised products at low cost &

fast speed

 Individual or regional designs are based on certain

common components & design
 Just-in-time procurement

• JIT requires virtually defect-free material / parts

• Assess supplier’s capability and willingness to
meet your quality requirements and delivery
schedule requirements.
• Establish a long term contract
• Provide technical guidance to the supplier
• Monitor the contract closely
 Conventional system

Receiving Srores
Inspection

Receiving of Finished
•Materials Final Goods
•Parts Assembly Inventory
•Components
 Just In Time System (JIT)

Receiving of Finished
•Materials Final Goods
•Parts Assembly Inventory
•Components

• This is primarily for high value i.e. ‘A’ items

• Deliveries are scheduled once or twice a week
• Inventory is maintained at absolutely minimal level
 What is EOQ

The EOQ concept holds that the

appropriate quantity to order is the
one that tends to minimise all the
costs associated with the order-
Carrying costs, acquisition cost and
cost of the material itself.
 EOQ Graph

TC
ANNUAL INCREMENTAL COSTS

OC=ICC
ICC

EOQ
OC

ORDER QUANTITY
 Inventory Model

A – Annual consumption in units.

s – Ordering cost per order
I – ICC as % of value of average inv.
p– Unit price of the item
Let Q be the EOQ in units.
Then average inventory = Q/2 units
No. of orders = A/Q
Inventory carrying cost = Q/2xp x I
Ordering Cost = A/Q x s
EOQ : ICC = OC
Q/2xp x I = A/Q x s
 Inventory Model

Solve the equation : pQ/2 x I = A/Q x s

pQI = As Exercise:
Annual Consumption of the item --20000Units
2 Q
Cost of Ordering --Rs10000
Inventory Carrying Cost --10%
Q2 = 2As Unit Price of the item --Rs1000
Ip
EOQ = ?
Q = 2As
Ip
 Use EOQ concept in purchasing

• Purchaser should also considerer this concept

from Supplier’s point of view while determining
ordering lot sizes on long term contracts.
• This will reduce supplier’s costs and will enable
them to offer lower prices
 Structuring the Drivers: A Framework

Competitive Strategy

Supply Chain Strategy

Efficiency Responsiveness

Inventory Transportation Facilities Information

23-Dec-19 SCM 27
 Drivers
Inventory
Raw materials, work in process,
finished goods in S-C
Inventory Policies have dramatic
impact on supply chain efficiency &
responsiveness
Retailer’s Choice:
High Stocks: High Responsiveness
Low Stocks: High Efficiency

A trade off
 Drivers
 Transportation
 Entails moving inventory in a supply chain
 Transportation choice seriously affects the
responsiveness & efficiency of the supply
chain
 Dispatch a 100 Kg parcel by Air from DEL to
Mumbai, highly responsive mode of
transport
 Send the parcel by Train, highly efficient
mode
 A trade off

23-Dec-19 SCM 29
 Drivers
• Facilities
 Places where inventory is stored or assembled
or fabricated
 Two major types:
Production sites;
Storage sites
 Decisions regarding location, capacities &
flexibilities have significant impact on S-C’s
performance
 High responsiveness Auto Parts Distributor vs
High efficiency Auto Parts Distributor
23-Dec-19 SCM 30
 Drivers
 Information : The biggest driver
Consists of data & analysis, regarding inventory,
transportation, facilities & customers, throughout S-C
PoS data Demand Means to fulfill demand
 With information on customer demand pattern:
One can produce and stock in advance: Higher
responsiveness.
More accurate quantity forecast, produce only the
right quantity, economy of scale: Higher efficiency
Also helps selection of economic transport and
still achieving high service level (Efficiency &
responsiveness)
23-Dec-19 SCM 31
 Historical and Current Perspective

• In the past there well defined and rigid

boundaries between organizations
• JIT viewed suppliers as partners
- mutual analysis for cost reduction
- mutual product design
- greatly reduced inventory
- improved communications (Internet,Data)
 Elements of JIT
• Pull production concept
• Flexible resources
• Cellular manufacturing
• Kanban production control
• Small-lot production
• Quick setups
• High quality focus
• Supplier networks
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 Synonyms for JIT

• Continuous flow of manufacturing

• Zero inventory
• Keep moving material for manufacture
• Time bases competitiveness
• Synchronous manufacturing
 JIT Stages

• JIT techniques are classified into Two stages:

• Stage 1: The stage 1 techniques are concerned with

preparing the plant for flow, flexibility, short lead time
and high quality. They may be said to be the
prerequisites for JIT.

• Stage 2: The stage 2 set of techniques generally build on

stage 1 set, and comprise those techniques allows
operations to run in JIT manner, that is with short
(Zero?) lead time and little (Zero?) waste.
 JIT Stage 1
Maintenance Quality
Focus
Design (TPM) (TQM) Prepare
the plant
for
Flexibility,
Low Cost,
Short Lead
Time and
High
Small Layout Setup Time People Quality
Machines and GT Reduction Preparation
 JIT Stage 2

Total People Enforced

Visibility Process Data
Involvement Improvement
Collection

Produce
with Zero
lead time
and No
waste

Flow Inventory Buffer and Lot Size Supplier and

Scheduling Control Reduction Customer
Partnerships
 JIT
1. People Involvement
2. Visibility to all involved
3. Process data collection
4. Continuous Improvement
5. Flow scheduling
6. Lot size and buffer reduction
7. Inventory Control over network
8. Suppliers partnership
 Can we
• Adopt certain principles for
enhanced efficiency and optimized
working of Public procurement
systems
• Basic principles are same
• Important to work with people with
visibility, transparency, continuous
improvements
Thank you