L4M4- Chapter 1- Options for sourcing requirements Flashcards
What is sourcing?
It is part of procurement strategy where the optimal organisations are identified to become suppliers of product or a service to an organisation.
What is the difference between tactical (aka operational) and strategic sourcing?
Tactical:
- Low level decision making for low risk or routine items
- High profit, low risk
- short term projects
- transactional relationship
Strategic:
- Top level decision making
- High profit, high risk
- Long term
- Collaborative
Sourcing aims to achieve the best value for money but considering multiple factors. What are examples of factors to consider?
Letters = SQEADC
Cost/Price- important but cannot be considered in silo
Delivery- e.g. lead times and freight costs fair
Quality- meet the spec
Ethics- codes of practice
Sustainability- sustainable existence and for the environment
Availability- competitive prices are irrelevant if there is no availability
What are the stages of the CIPS procurement cycle?
B - Business need
A - Market Analysis
S - Strategy development
PP - Preprocurement market testing
DD - Develop documentation
SS - Supplier selection
I - Issue tender
E - Evaluate responses
A - Contract award
R - Receipt, warehousing, logistics
P - Performance review
S - SRM
A - Asset management
What is outsourcing?
Contracting an external supplier to manage and run a function that was previously done in house.
Not everything can be outsourced
Why might outsourcing be a preferred option for procurement staff? (SIRFTR)
- Financial benefit- to effectively manage value for money within an organisation
- Technological- Suppliers have knowledge and the machinery (meaning you do not need to invest in modern equipment)
- Resource - no need to recruit additional staff or invest in training
- Skillset- supplier may have better or specialist skills
- Improved focus - organisation can look at its core roles
- reduce risk- another organisation will have this responsibility if outsourced
The make or buy decision is made at stage 2 of the procurement cycle (market analysis)- what should be considered here?
What is the product or service- do you want greater control
Current organisation capacity- dont want to negatively impact the other business units
Market situation- could you leverage economies of scale with other suppliers for example. Also consider STEEPLED analysis
Competition- power of buying organisation vs the supplier e.g. if there are no alternative suppliers then the buyer may struggle to negotiate improved costs. (competition is part of porters 5 forces)
STEEPLED is used for understanding the external forces on market analysis, what does it stand for?
S- social
T- technological
E- environmental
E- economic
P- political
L- legislative
E- Ethical
D- demographic
When might you want to make something vs decide to buy?
Make=
- Want to be self sufficient
- Have capacity
- Want greater control
- Stable workforce
- No suitable suppliers
- reduced risk
- want to amend volume/spec regularly
Buy=
- specialist knowledge required
- small volumes are not cost effective to make
- cheaper to buy in
- Do not have the required machinery to make
- no capacity
- no inventory
- want to reduce overheads
What is intracompany trading?
Business conducted within a company eg. between departments or between divisions in a global company.
Often happens when teams have individual budgets
May be a central team who purchase all of the stationary and then ‘sell’ it on to other teams internally or specialist teams who have capacity to purchase things externally that other teams do not (e.g. certain electricals)
It can mean centralised purchasing can achieve the benefit of economies of scale rather than multiple teams trying to purchase the same thing individually
Important consideration for make or buy decisions.
What are the different structures of a procurement function?
Centralised
Decentralised
SLAN
CLAN
Distributed network
What is a transfer price?
Amounts of money payable between divisions within the same organisation that have conducted business with each other. e.g. supplying labour
It is audited closely to ensure honest and fair pricing internally
There can be tax benefits to this when trading internationally so it is closely monitored by global intracompany trading (e..g moving profits to where taxes are most favourable)- however there are strict rules to avoid tax evasion
It can also benefit the recipient countries economy
What is the OECD and what do they do?
Organisation for the economic cooperation and development
Create the guidelines for transfer pricing to abide by international tax laws
What are the benefits and drawbacks of transfer pricing?
Adv:
- Can save money on tax
- Can benefit the recipients countries economy
- Entire organisations can have fixed pricing
- Helps teams with meeting their budgets
- no physical money involved
Disadv:
- Need to comply with OECD
- Where some economies will benefit, others may be negatively affected
- Local sourcing may be better than global
What is the Kraljic matrix for?
Assessing suppliers based off profit impact and supply risk
Can be:
Strategic
Bottleneck
Leverage
Routine
Bottleneck, leverage and routine are all tactical sourced areas.
What are the costs associated with outsourcing?
Procurement team time to establish if outsourcing is a practical option
Evaluating, selecting and awarding the contract
Managing the outsourced contract
Employment of external contract managers (to remove it from procurements role portfolio)
What is core and non core work?
Core work or services are integral to an organisation. They are critical and relate closely to the strategies and objectives. These should not be outsourced
Non core work or services are things that are outside of the core or primary revenue/value for the business. More likely to be outsourced
What is in the outsource matrix?
used to decide whether to outsource or keep in house
This has strategic importance on the Y axis and contribution to performance on the X axis
Eliminate- Do you need these functions?
Strategic alliance- Need a trusted partner and buyers must keep some control because these function are strategically important (but do not contribute much)
Outsource- Operational importance but low strategic importance
Retain in house- Core business functions to remain in house
What sorts of examples of functions can be outsourced?
(Think about Ocado as an example)
These are non-core activities-
IT
Catering
Maintenance
Cleaning
Marketing
Social Media
HR
Accountancy/payroll
When might you insource?
Insource is the process of bringing a function back in house that was previously outsourced
Happens if:
Outsourcing was ineffective
A period of time/ review period has elapsed
Strategy has changed
What are the risks of outsourcing?
Loss of control
Supplier reliance
Confidentiality- may need an NDA (think about ORL and M&S or ORL and WTR)
Quality
IP
Reputation (thing about 3rd party bike riders at Zoom)
Loss of technology and expertise
Inflexibility- usually have an SLA and long term agreement
International challenges- language, timezone, culture
Single source vulnerability- if you use only one supplier to outsource
What is TUPE regulation?
Transfer of undertaking, protection of employment- it is part of employment law
Protect the rights of employees where work they were employed to undertake is transferred to a new business
Way to think about this is if M&S bought ORL then the staff at ORL would still have the right to do the job/function they were hired to do.
What is the ILO and what do they do?
International labour organisation
Role is to protect global workers and ensure acceptable working conditions are maintained
Which factors may influence sourcing approaches?
Culture
Cost
Quantity of product
Category of product
Skill required
Supply & Demand
What is the difference between single, dual, sole and multiple sourcing
Single- Buying from one supplier
Sole- There is only one supplier available in the market (e.g. due to a patent)
Dual- Two suppliers responsible for supplying all the needs for an item (often critical items where there is risk of supply)
Multiple- many suppliers responsible for supply. Maybe where there is a lot of competition, but the relationship is not critical
What are the benefits and drawbacks of single supplier sourcing?
ADV:
- One supplier has all the volume so can provide economies of scale
- Can build a strong relationship and commitment and communication
- Can support innovation and NPD
- High trust
DISADV:
- Risk of failure of supply
- Price may inflate if theres no competition
- Low options
- Reliance on one supplier
What are the benefits and drawbacks of dual/multiple supply?
ADV:
- Lower risk
- Continuous supply
- Easy to drive down cost
- Wide knowledge pool
DISADV:
- Transactional relationship
- Lower supplier commitment
- No economies of scale
- No supplier loyalty/ collaboration
What are the generic steps in a tender process?
PIACI
Planning
Invitation
Award
Contract
Implementation
What are the types of approaches with tendering?
ORNCIC
Open- Widely advertised, expected lower interest from suppliers, allows any supplier to bid. Can sometimes be a pre-screening process for interest and then those suppliers are invited to ITT.
Restricted- Advertise to interested suppliers to respond with an interest. The interested suppliers fill in a PQQ to see if they meet required criteria and then the full tendering is sent. So it is a two stage process. This is where there is expected to be high interest
Negotiated- Similar start to restricted. However, it likely involves either a single supplier or a small group of capable suppliers due to a complex need. Normally, this is a supplier previously used or with a track record. However, it does lack competition so can make desired outcomes difficult. Can also foster complacency with using the same supplier.
Competitive tendering- Suppliers are invited to submit bids for a package of work. Fosters competition, less bias, understand capabilities of many suppliers, high likelihood of finding an appropriate supplier. However, if you want it to be fair it will not be fast, it could also encourage the wrong types of supplier behaviour.
Innovation partnership
Competitive procedure with negotiation
What is a negotiation and what are the 5 styles?
Communication between supplier and buyer to try and get the best value solution for the supply of goods or services
5 outcomes:
Compete- buyer wins
Collaborate- Both win
Avoid- both lose
Accommodate- supplier wins
Compromise- neither win or lose
What are the 4 stages of a negotiation? PINC
Preparation- where to negotiate, what outcome do you want, what are the styles, which issues could be raised, what is the back up plan
Information exchange- listen and present info and requirements
Negotiation/Bargaining- exchange, concessions, alternatives and terms
Closing- agreement, contract created and signed before being mobilised
What is a PQQ and when is it used?
Pre qualification questionnaire- sent to potential suppliers to find out there suitability to be included in any procurement processes
Focuses on:
Financial stability- e.g. credit ratings, financial capability
Accreditations- e.g. quality, labour standards
Capacity- e.g. enough skilled labour, available staff, transport
Ethical/sustainable practices- awareness and accreditations
What are Carters 10 C’s?
Understanding the 10 C’s will allow a procurement professional to decide suitability of a potential supplier:
Competency
Capacity
Commitment (to quality)
Cash
Cost
Consistency of delivery
Culture
Clean
Communication
Control of process
What is quality assurance?
In the specification there will be a detailed description of the quality required. Quality assurance are the systematic processes that together have the effect of preventing mistakes in the manufacture of a product or service
How can you evaluate how quality is managed by a potential supplier?
- ISO9001 accreditation
- Continuous improvement- ongoing process
- TQM- total quality management- organisation wide efforts to improve process, product and service. TQM is part of continuous improvement.
Potential suppliers can demonstrate they have robust policies in place to satisfy the requirements of quality
