LOGISTICS MANAGEMENT { V Semester}

UNIT-2 PROCUREMENT

INTRODUCTION TO PROCUREMENT:

 Procurement is the process of finding and agreeing to terms, and acquiring goods,
services, or works from an external source, often via a tendering or competitive
bidding process.
 Procurement generally involves making buying decisions under conditions of
scarcity. If sound data is available, it is good practice to make use of economic
analysis methods such as cost-benefit analysis or cost-utility analysis.
 Procurement involves used to ensure the buyer receives goods, services, or works at
the best possible price when aspects such as quality, quantity, time, and location are
compared.
 Corporations and public bodies often define processes intended to promote fair and
open competition for their business while minimizing risks such as exposure to fraud
and collusion.
 Almost all purchasing decisions include factors such as delivery and handling,
marginal benefit, and price fluctuations.
PROCUREMENT PROCESS:
1) Identification of need and requirements analysis is an internal step that involves an
understanding of business objectives by establishing a short term strategy (three to
five years) for overall spend category followed by defining the technical direction
and requirements.
2) External macro-level market analysis: Once an organization understands its
requirements, it should look outward to assess the overall marketplace. A key part of
a market analysis is understanding the overall competitiveness of the marketplace
and trends that are likely to impact the organization.
3) Cost analysis is the accumulation, examination and manipulation of cost data for
comparisons and projections. A cost analysis is important to help an organization
make a make-buy decision.
4) Supplier identification includes identifying particular suppliers that can provide the
required product or services. There are many sources to search for potential
suppliers. One good source is trade shows. Modern procurement software often
incorporates a supplier catalogue for standardized goods and services.
5) Non-disclosure agreement (NDA): It is quite normal to request vendors to sign an
NDA prior to engaging with them. This protects the organisation where sensitive
information is shared with multiple potential vendors ahead of releasing detailed
requirements which often point to strategic decisions a firm has taken.

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6) Supplier communication: When one or more suitable suppliers have been identified, an
organization will typically conduct a competitive bidding process. Organizations can use
a variety of competitive bidding methods including requests for quotation, requests for
proposals, requests for information, requests for tender, request for solution or a
request for partnership. Some institutions choose to use a notification service in order to
raise the competition for the chosen opportunity. These systems can either be direct
from their e-tendering software, or as a re-packaged notification from an external
system.
7) Negotiations and contracting: Negotiations are undertaken that often include price,
availability, customization, and delivery schedules. The details are outlined in a purchase
order or more formal contract.
8) Logistics and performance management: Supplier preparation, expediting, shipment,
delivery, and payment for the product/service are completed, based on contract terms.
Installation and training may also be included. An organization should evaluate the
performance of the product/service as they are consumed. A supplier scorecard is a
popular tool for this purpose.
9) Supplier management and liaison: Organizations that have more strategic goods or
services that require ongoing interfaces with a supplier will use a supplier relationship
management process. Strategic outsourcing relationships should set up formal
governance processes.

BENEFITS OF PROCUREMENT :
1) Improved Spend Visibility and Lower Costs: Using digital procurement technology
allows you to structure your spend across suppliers, and allows everything to be
tracked in a central location. Not only does this allow you to leverage volume to
reduce your costs, but spend analytics makes it easier to find cost reduction
opportunities continuously.
2) Global Procurement: Because procurement tools support multiple currencies,
languages, and logistics choices, your company has the ability to easily source goods
and services from anywhere in the world. Using internet-based procurement
applications connects you to suppliers worldwide, giving you a wider variety of
products, services, and suppliers to choose from.
3) Better Operational Performance Because e-procurement technology solutions allow
many internal processes to be automated, including supplier evaluation and
purchase order tracking, your company can operate more effectively and efficiently.
The more you can do without human intervention, the less room for potentially
costly error. And, the more you can do without a human, the more time the humans
have to focus on the tasks that cannot be automated, such as strategic sourcing or
contract management.
4) Standardized Workflow: Using electronic procurement technology produces a
system that standardizes workflows and reduces the need to deviate from the
process, creating more process efficiency.

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 5) Simplified Processes: Procurement technology allows for electronic document
storage, which simplifies a number of processes. Engagement turnaround time is
decreased because reusable templates are easily accessible. Contracts and orders
are also stored in the system, so it takes less time to find older documents. This
speeds up contract compliance checks and reduces the potential for error.

6) Improved Data Accuracy: Data processes are streamlined when handled

electronically, thereby reducing the chance of error. Your document repository is
easily accessed to ensure contract compliance, to reduce data inaccuracy.

7) Internal Integration: Because an electronic purchasing system can be implemented

throughout your organization, internal departments can more effectively collaborate
when and where they need to, and reduce, or even eliminate asymmetrical
information.

8) Electronic Catalogues: By using electronic catalogues, buyers have increased

visibility into the products available for ordering, as well as the price information. As
these catalogues become more popular, suppliers are starting to offer a more
standardized product, which makes it easier for you to compare apples to apples
across suppliers and make sure you’re getting the best possible deal.

SOURCING OF MATERIALS:
 Sourcing refers to a number of procurement practices, aimed at finding , evaluating
and engaging suppliers for acquiring goods and services.
 Sourcing, also known as procurement, is the practice of locating and selecting
businesses or individuals based on set criteria.
 Sourcing is carried out in business in many different areas and for different reasons.
 One of the most common uses of sourcing is in supply chain management.
Businesses that can find the most appropriate suppliers at the lowest cost can
develop a competitive advantage.

BENEFITS FROM EFFECTIVE SOURCING :

1) Better economies of scale can be achieved if orders within a firm are

aggregated.
2) If you want to reduce the purchasing cost, your procurement transactions
should be more efficient.
3) Design collaboration can result in products that are easier to manufacture
and distribute, resulting in lower overall costs.
4) If you coordinate with suppliers, then your forecasting and planning
efficiency will increase for goods.

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 5) While making contracts with suppliers, the result should be such a way of
sharing the risk. The result is very excellent. It brings profits for both the
supplier and the buyer.
6) If any Firm use auctions the can significantly reduce the purchase price due to
competition between vendors.

TYPES OF SOURCING:
1. SINGLE SOURCING:
 Single Sourcing is a method whereby a purchased part is supplied by only one
supplier.
 Traditional manufacturers usually have at least two suppliers for each component
part they purchase to ensure continuity of supply and (more so) to foster price
competition between the suppliers.
 A just-in-time (JIT) manufacturer will frequently have only one supplier for a
purchased part so that close relationships can be established with a smaller number
of suppliers.
Pros of Single Sourcing:
1) Having a single source means there is less work involved in qualifying the source and
probably less administrative effort to be expended. This is a real advantage when
dealing with a highly technical product requiring significant engineering to qualify it
or use it.
2) Because all the volume is given to one source, the buyer has maximized their
leverage based on total quantity. The buyer should make sure that this point is
emphasized during negotiations concerning price, delivery, and so on.
3) The supplier should feel a special obligation to help the buyer in terms of availability.
Cons of Single Sourcing:
1) If there is only one source, it is more difficult for the buyer to ensure that they are
keeping their company competitive.
2) In periods of tight supply, the buyer may be at a disadvantage in being able to ask
other suppliers to accept orders.
3) Other suppliers may lose interest in trying to compete for the business if they see
that a sole-source situation is likely to persist.
4) Buyers may be facing a real risk if the single source has a catastrophic event, gets
bought by a buyer’s competitor, or has financial problems.

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 2. MULTI-SOURCING:
 Multi-sourcing is an outsourcing approach in which services are contracted to a
number of suppliers, usually in combination with some internally provided
elements of service delivery.
 Multi-sourcing provides companies lower cost options to get their product or
service developed and delivered.
 The multi-sourcing relationships must be maintained and closely monitored to
provide the best possible outcome.
 It is distinct from both the preferred supplier model and, of course, the fully in-
house model
Pros of Multi-sourcing:
1) The obvious advantage to multi-sourcing is the cost saving factor. Companies can
save money by using a product or service provided by another company.
2) The company that provides the service/product invests the time and efforts needed
to make the best possible product/service for a lower cost.
3) By using multiple companies to provide the product/service the company can shop
around for the best quality product for the lowest price.
4) That now leads into the next advantage which is that the product or service may be
produced at a higher quality standard because the company providing it specializes
in that product or service.
Cons of Multi-sourcing:
1) A disadvantage is that these multiple companies providing your product or service
must be managed and monitored.
2) Additionally when the companies are off shore this can be very time-consuming. If
problems arise with a company providing the product or service it can be very costly
and risky.

3. OUTSOURCING:
 Outsourcing means hiring a third-party to undertake a non-critical business
function to free up in-house resources.
 The main benefit of outsourcing is allowing businesses to focus on their core
business areas – firms will inevitably lack strengths in non-core business areas
and so time spent in these areas will be relatively inefficient.
 Other proposed benefits of outsourcing including avoiding uncompetitive
regulatory environments, high energy and raw material costs and internal savings
which can be redistributed into growth of the core business.
Pros of Outsourcing:
1) Outsourcing can increase company profits.
2) Outsourcing can increase economic efficiency.
3)Outsourcing can distribute jobs from developed countries to developing countries.

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 4)Outsourcing can strengthen international ties.
Cons of Outsourcing:
1) Risk of exposing confidential data.
2)Lack of transparency.
3)Labor and environmental standards may slip.
4)It can backfire for the outsourcing company.

GLOBAL SOURCING- ISSUES AND PROBLEMS:

 Global sourcing is the practice of sourcing from the global market for goods and
services across geopolitical boundaries. Global sourcing often aims to exploit global
efficiencies in the delivery of a product or service.
 These efficiencies include low cost skilled labour, low cost raw material and other
economic factors like tax breaks and low trade tariffs.
 A large number of Information Technology projects and Services, including IS
Applications and Mobile Apps and database services are outsourced globally to
countries like India and Pakistan for more economical pricing.
 Global sourcing is often associated with a centralized procurement strategy for a
multinational, wherein a central buying organization seeks economies of scale
through corporate-wide standardization and benchmarking.
 A definition focused on this aspect of global sourcing is: "proactively integrating and
coordinating common items and materials, processes, designs, technologies, and
suppliers across worldwide purchasing, engineering, and operating locations.

ISSUES AND PROBLEMS:

Global supply for many firms is a competitive necessity. However, managing
international supply networks presents a number of challenges and firms with little or no
international experience often face obstacles or barriers when beginning global
sourcing.
1) Source location and evaluation: The key to effective supply is selecting responsive
and responsible suppliers. Internationally, this is sometimes difficult as obtaining
relevant evaluation data is both expensive and time-consuming.
2) Expediting: Because of distance, expediting an offshore firm’s
production/shipment is more difficult.
3) Political and labour problems: Depending on the country in which the supplier is
located, the risk of supply interruption due to governmental problems, e.g., change
in government or trade disputes — may be quite high.
4) Hidden costs: When comparing an offshore with a domestic source, it is easy to
ignore some of the costs in the offshore procurement. Examples include foreign
exchange premiums, finance charges, foreign taxes, import tariffs, extra safety stock
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 due to longer lead times, business travel, marine insurance, customs documentation
charges, needs for translator, etc.
5) Currency fluctuations: Most significant world exchange rates float freely and
sometimes change rather rapidly due to economic, political and psychological
factors, making the prices significantly higher or lower than at the time the
agreement was originally signed.
6) Payment methods: The method of payment often differs substantially in
international buying than in domestic buying.
7) Quality: Misunderstandings in the quality specifications and interpretations of
drawings and specifications can be quite costly due to distances and lead times
involved.
8) Warranties and claims: In the event of rejection for quality reasons, return and
replacement of items is complex and time-consuming due to distances and
transportation costs.
9) Tariffs and duties: The buyer must know which tariff schedule(s) applies and how
the duties are computed. The cost of non-compliance with import regulations can
be staggering.
10) Administration costs: Global supply requires additional documentation, mainly for
duty and customs, logistics activities, payment and financial charges.
11) Legal issues: If potential legal problems are a risk in domestic buying, they are
several times greater in international buying. Buyers must also consider carefully the
laws under which an international contract is governed.
12) Logistics and transportation: The trend towards integrated logistics on the
domestic side is mirrored by a similar move in global supply. Global buyers must
deal with more complex shipping terms than domestic buyers with respect to
shipping costs, risks and responsibilities of buyer, seller and shipper.
13) Language: Different language, dialects or terminology may result in
miscommunication. Words mean different thing in different cultures. Difficulties
arise in connection with interpretation with domestic contracts is much increased in
international contracts.
14) Communications: Global supply can involve problems with communication. These
relate to time zone differences, working days and problems with the communication
network itself.
15) Cultural and social customs: The nature and customs of individuals and business
organisations from different cultures can raise a surprising number of obstacles to
successful business relations. Problems caused by cultural misunderstandings can
lead to higher supply chain costs, e.g., pace of negotiation, relationship, time
orientation, values and decision-making style.

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 E-PROCUREMENT:
 In layman’s term, e-procurement is nothing but electronic data transfer to support
operational, tactical and strategic procurement.
 E-procurement has been existence for long time in one form or the other earlier it
was done through electronic data interchange. In today’s environment, most of the
e-procurement is done through the Internet.
 Traditionally, procurement of supplies and material was done through paper, which
slowly migrated to usage of an electronic medium for order printing and storing.
With the advent of the Internet e-commerce flourished, and procurement was done
through email and websites.
 As the Internet technology evolved e-catalogue came in the forefront thus
traditional procurement was getting done through the Internet. In the current
market with data security and advanced tools whole process of e-procurement is
done through the Internet.
 A traditional procurement process starts with phase requirement definition,
sourcing, solicitation, evaluation, contracting and contract management. In the
internet based this steps are replaced by e-sourcing, e-tendering, e-reverse auction,
e-ordering and web based ERP.
Procurement as a Function
 Procurement departments are found in most of the organization. There are
responsible for purchase of raw material, office supplies, office equipment, facility
maintenance, etc. It is important for them to know and understand the e-
procurement concept so that they can add efficiency and effectiveness to the whole
process.
 Procurement managers must have complete understanding of various e-
procurement applications. He must be able to identify processes, which can make
procurement effective. He should have understanding of e-procurement benefit. He
should understand risk associated with e-procurement implementation.
E-procurement Tools and Application
There are several tools and application which fall under e-procurement some of them
are as follows:
1) Electronic data interchange system: Procurement messages are exchange between
computers of two separate organizations. Message is exchange in batch and can be
easily transmitted and stored. EDI is mostly used for order transmission, order
confirmation, logistic information and order invoicing.
2) Enterprise resource planning system have separate module to handle the
procurement function.
3) Internet based tools and resources help in the process of procurement. Some of the
common applications are email, internet based EDI, XML based data exchange via
the internet etc. Internet provides tools for e-sourcing, e-tendering, e-auctioning, e-
ordering and e-catalogue.
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 4) E-sourcing tool is used to identify potential suppliers during the selection phase. E-
tendering tool is used to send out tenders with procurement requirements, supply
schedule, contracting terms, etc.
5) E-auctioning tools bring together potential supplier identified during selection phase
under one umbrella to undertake auctioning process. E-auctioning tools operate
under two separate mechanism, upward price mechanism for selling organization
and downward price mechanism for the buying organization. A web-based ERP tool
is used for product-related purchases, is exclusively used by the procurement
department, and falls under a planned process.
E-procurement Benefits:
 The cost incurred on goods and services associated with production.
 The cost incurred on procurement process such as ordering, administrative support
etc.
 The cost incurred on specification formulation, supplier selection etc.
 The cost benefit in establishing relationship with suppliers.
 It promotes transparency in the process and therefore improves accountability.

GROUP PURCHASING ORGANISATIONS:

 Group purchasing is a principal strategy by which companies in many sectors (e.g.
healthcare, food and groceries, industrial manufacturing) achieve cost containment,
improve the quality of goods purchased and allow staff to focus their efforts on
other activities.
 Group purchasing is a process that allows several individuals or businesses to come
together for the purpose of purchasing various types of goods and services at
discounted rates.
 A group purchasing organisation is a collection of companies that aims to optimise
the shared purchases of its members. They pool their purchases in order to benefit
from favourable conditions (price, payment terms, delivery etc.), thanks to their
combined purchasing power.
 This strategy is particularly suited to small and medium-sized businesses, small and
medium-sized industries or even very small businesses, as this system gives them a
degree of influence over their suppliers.
 Group purchasing is used in many industries to purchase raw materials and supplies,
but it is common practice in the grocery industry, health care, electronics, industrial
manufacturing and agricultural industries. In recent years, group purchasing has
begun to take root in the nonprofit community.
 Group purchasing amongst nonprofits is still relatively new, but is quickly becoming
common place as nonprofits aim to find ways to reduce overhead expenses.

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 Types of group purchasing organisations:
1) Vertical-market group purchasing organisation: These are dedicated to a single
industry (food, automotive etc.).
2) Horizontal-market group purchasing organisation: Member companies come from
different business backgrounds but purchase the same types of products or services.
3) Master Buyer" groups: These group purchasing organisations have agreements in
place with a variety of suppliers and allow member companies, from different
industries, to use these agreements to make purchases.
Benefits of joining a Group Purchasing Organisation:
1) Item Level Savings: While an individual company may find a decent amount of
savings on their own, it shadows in comparison to the savings one can gain by joining
a GPO. Group purchasing organizations combine the purchasing power of different
businesses to negotiate better discounts that result in an item level price not
attainable by most single companies.
2) Free Membership: Not all group purchasing organizations provide free membership,
so finding one that does is an advantage. It not only benefits the member, but it also
benefits the GPO to have free memberships; supply partners are willing to extend
discounts and additional service levels to gain access to a GPO with a large network
of members. When considering a GPO, look for one with free membership, a broad
range of supply partners and substantial buying power.
3) Direct Relationship with Suppliers: Joining a GPO does not mean your connection
with the supplier will be severed. GPO members will still receive deliveries straight
from the supplier, the member will still be able to call on the supplier if any problems
arise and still have the opportunity to meet in person to conduct account reviews.
4) Category Management / On-going Support : GPOs offer category management
which provides aid in identifying and realizing savings throughout the tenure of an
agreement. A GPO will keep its members current on offerings or service
enhancements by having frequent reviews with suppliers to understand new services
and approaches the supplier may be taking. However, while many buyers utilize
GPOs to reduce the strain on themselves, GPOs are not meant to act as artificial
barriers between the supplier and buyer.
5) Networking: The organizations that will benefit the most from a GPO are those that
understand and welcome collaboration. When bringing together many different
professionals, organizations are able to share best practices and exchange
information. Bringing together different professionals in multiple industries with
similar challenges and spends, allows members the opportunity to exchange
sourcing tips, recent experiences and even horror stories with a group of peers.
6) Lower Purchasing Risk and Quality Service: GPOs strive for longevity when it
comes to keeping members; because of this, the pressure to support the member is
immense. In order to give members the best quality in suppliers. GPOs subject
potential suppliers to a full vetting process which ensures the credibility and value of
the supplier, in return the members have a lower purchasing risk. Group Purchasing
Organization (GPO)

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 7) Savings Beyond Price : Though a GPO’s main goal is to get members the most
products for the most savings, that should never be a reason to ignore quality. The
modern GPO encourages members to work with suppliers to identify qualitative –
not just quantitative – improvements that will give them the best-in-class service. A
GPO goes beyond initial savings and considers total cost of ownership, this can help
with inventory reductions and process improvements.
8) Varying Services: There are many more services available depending on the GPO
you decide to join. These services range from supply chain consulting, ecommerce
solutions, to benchmarking, safety initiatives, revenue management, and technology
assessments. Some less common offered services include: materials management
consulting, materials management outsourcing, and revenue management.

AUCTIONS:
 An auction is usually a process of buying and selling goods or services by offering
them up for bid, taking bids, and then selling the item to the highest bidder or
buying the item from the lowest bidder. Some exceptions to this definition exist and
are described in the section about different types.
 The open ascending price auction is arguably the most common form of auction in
use throughout history. Participants bid openly against one another, with each
subsequent bid required to be higher than the previous bid.
 An auctioneer may announce prices, bidders may call out their bids themselves or
have a proxy call out a bid on their behalf, or bids may be submitted electronically
with the highest current bid publicly displayed.
 Auctions were and are applied for trade in diverse contexts. These contexts are
antiques, paintings, rare collectibles, expensive wines, commodities, livestock, radio
spectrum, used cars, even emission trading and many more.
TYPES OF AUTIONS:
1) Online auction (or also electronic auction or e-auction or eAuction) is an auction
which is held over the internet. Like auctions in general, online auctions come in a
variety of types like ascending English auctions, descending Dutch auctions, first-
price sealed-bid, Vickrey auctions and others, which are sometimes not mutually
exclusive.
2) Minimum Bid Auctions begin at a minimum price established by the seller. Bidding
must begin at least at that minimum before there can eventually be a sale. The
minimum bid is published and announced by the auctioneer at the start of bidding
for that particular property. These auctions offer a certain level of safety to the seller
but are not usually as attractive to buyers as an Absolute Auction.

3) Reserve Auction allows the seller to accept, reject or counter the “winning” bid, for
any reason. Sellers typically make this decision before the auction event ends. This

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 gives sellers protection so their properties will not be sold below what they consider
acceptable. However, sellers should be aware that Reserve Auctions typically
generate the least amount of interest among potential buyers, because buyers know
their "winning" bid can ultimately be rejected.

4) Sealed Bid Auction bidders privately submit their one best offer, in writing and in a
sealed envelope. The bids are opened privately by the auctioneer and seller who do
not reveal the bids to any of the participants. The seller can take one of the following
courses of action: Accept the highest or best bid; reject all bids and call for a “Best
and Final” bid from the two highest bidders, or just commence serious negotiations
with all the identified bidders. Sealed Bid Auctions are often used for properties that
do not have a broad market or appeal. Furthermore, keeping the bids private helps
ensure that if all bids are too low for any of them to be accepted by the seller, the
property will not become stigmatized by having a perceived low value in the
marketplace.

REVERSE AUTIONS:
 A reverse auction is a type of auction in which sellers bid for the prices at which they
are willing to sell their goods and services. In a regular auction, a seller puts up an
item and buyers place bids until the close of the auction, at which time the item goes
to the highest bidder.
 In a reverse auction, the buyer puts up a request for a required good or service.
Sellers then place bids for the amount they are willing to be paid for the good or
service, and at the end of the auction the seller with the lowest amount wins.
 Reverse auctions gained popularity with the emergence of internet-based online
auction tools that enabled multiple sellers to connect with a buyer on a real-time
basis.
 Today, reverse auctions are used by large corporations and government entities as a
competitive procurement method for raw materials, supplies, and services like
accounting and customer service.
 It is important to note that the reverse auction does not work for every good or
service. Goods and services that can be provided by only a few sellers are not
necessarily ideal for reverse auctions.
 In other words, a reverse auction works only when there are many sellers who offer
similar goods and services to ensure the integrity of a competitive process.
 In addition, there could be a tendency to focus on the lowest bids by sellers with less
regard for the quality of the goods or services.
 The adage, "cheap for a reason," has the potential to apply in such instances where
a buyer suffers from the sub-optimal quality of the lowest-priced set of goods or
services purchased through a reverse auction. Last but not least, a buyer must be
thorough in communicating all the specifications to the auction participants or else it
may end up with a winning bid that does not capture all of the sought-after
attributes.

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Example of a Reverse Auction:
Bidding for government contracts is an example of reverse auctions. In this type of
auction, governments specify requirements for the project and bidders, who are
approved contractors, to come up with a cost structure to finish the project.

SUPPLIER RELATIONSHIP MANAGEMENT(SRM):

 SRM is the systematic, enterprise-wide assessment of suppliers’ assets and
capabilities with respect to overall business strategy, determination of what
activities to engage in with different suppliers, and planning and execution of all
interactions with suppliers, in a coordinated fashion across the relationship life cycle,
to maximize the value realized through those interactions.
 The focus of SRM is to develop two-way, mutually beneficial relationships with
strategic supply partners to deliver greater levels of innovation and competitive
advantage than could be achieved by operating independently or through a
traditional, transaction purchasing arrangement.
 In many fundamental ways, SRM is analogous to customer relationship
management. Just as companies have multiple interactions over time with their
customers, so too do they interact with suppliers – negotiating contracts,
purchasing, managing logistics and delivery, collaborating on product design, etc.
 The starting point for defining SRM is a recognition that these various interactions
with suppliers are not discrete and independent – instead they are accurately and
usefully thought of as comprising a relationship, one which can and should be
managed in a coordinated fashion across functional and business unit touch-points,
and throughout the relationship life-cycle
Components of SRM:
SRM necessitates a consistency of approach and a defined set of behaviours that foster trust
over time. Effective SRM requires not only institutionalizing new ways of collaborating with
key suppliers, but also actively dismantling existing policies and practices that can impede
collaboration and limit the potential value that can be derived from key supplier
relationships.
1) Organizational structure:

While there is no one correct model for deploying SRM at an organizational level,
there are sets of structural elements that are relevant in most contexts:
(a) A formal SRM team or office at the corporate level. The purpose of such a group is to
facilitate and coordinate SRM activities across functions and business units. SRM is
inherently cross-functional, and requires a good combination of commercial,
technical and interpersonal skills. These “softer” skills around communication,
listening, influencing and managing change are critical to developing strong and
trusting working relations.

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 (b) A formal Relationship Manager or Supplier Account Manager role. Such individuals
often sit within the business unit that interacts most frequently with that supplier, or
may be filled by a category manager in the procurement function. This role can be a
full-time, dedicated positions, although relationship management responsibilities
may be part of broader roles depending on the complexity and importance of the
supplier relationship (see Supplier Segmentation).
(c) SRM managers understand their suppliers’ business and strategic goals, and are able
to see issues from the supplier’s point of view while balancing their own
organization’s requirements and priorities.
(d) An executive sponsor and, for complex, strategic supplier relationships, a cross-
functional steering committee. These individuals form a clear link between SRM
strategies and overall business strategies, serve to determine the relative
prioritization among a company’s varying goals as they impact suppliers, and act as a
dispute resolution body.

2) Governance:
The SRM office and supply chain function are typically responsible for defining the SRM
governance model, which includes a clear and jointly agreed governance framework in place
for some top-tier strategic suppliers. Effective governance should comprise not only
designation of senior executive sponsors at both customer and supplier and dedicated
relationship managers, but also a face-off model connecting personnel in engineering,
procurement, operations[disambiguation needed], quality and logistics with their supplier
counterparts; a regular cadence of operational and strategic planning and review meetings;
and well-defined escalation procedures to ensure speedy resolution of problems or conflicts
at the appropriate organizational level.

3) Joint activities:
Joint activities with suppliers might include; Supplier summits, which bring together all
strategic suppliers together to share the company’s strategy, provide feedback on its
strategic supplier relationship management program, and solicit feedback and suggestions
from key suppliers.

4) Executive-to-executive meetings:
Strategic business planning meetings, where relationship leaders and technical experts meet
to discuss joint opportunities, potential roadblocks to collaboration, activities and resources
required, and share strategies and relevant market trends. Joint business planning meetings
are often accompanied by a clear process to capture supplier ideas and innovations, direct
them to relevant stakeholders, and ensure that they are evaluated for commercial
suitability, and developed and implemented if they are deemed commercially viable.

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Operational business reviews, where individuals responsible for day-to-day management of
the relationship review progress on joint initiatives, operational performance, and risks.[9]

5) Value measurement:
SRM delivers a competitive advantage by harnessing talent and ideas from key supply
partners and translates this into product and service offerings for end customers. One tool
for monitoring performance and identifying areas for improvement is the joint, two-way
performance scorecard. A balanced scorecard includes a mixture of quantitative and
qualitative measures, including how key participants perceive the quality of the relationship.

6) Systematic collaboration:
In practice, SRM expands the scope of interaction with key suppliers beyond traditional buy-
sell transactions to encompass other joint activities which are predicated on a shift.More
disciplined and systematic, and often expanded, information sharing

7) Technology and systems:

There are myriad technological solutions which are purported to enable SRM. These
systems can be used to gather and track supplier performance data across sites, business
units, and/or regions. The benefit is a more comprehensive and objective picture of supplier
performance, which can be used to make better sourcing decisions, as well as identify and
address systemic supplier performance problems
CREATING AND MANAGING SUPPLIER RELATIONS:
1. Value mapping: Most organizations still focus primarily on cost-cutting initiatives when it
comes to SRM. Through value mapping, businesses can think beyond cost-cutting initiatives
and focus on value drivers such as revenue growth, asset utilization, and risk reduction.
Value mapping enables organizations to identify where intervention is necessary or
beneficial. A structured and strong supplier relationship management strategy will extract
the best value for everyone.
2. Top-down approach: Often, the responsibility of supplier relationship management falls
on the shoulders of procurement teams alone. Supplier relationship management strategy is
all about craftsmanship; it can never be achieved without onboarding internal stakeholders.
Just one rogue individual can collapse the whole process.

Implementation starts at the top and moves down through the ranks of managers and staff.
This top-down approach ensures that every stakeholder has a clear understanding of
potential benefits that can be derived. An effective SRM strategy aligns seamlessly with
process, people, paperwork, and the overall business strategy.

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3. Spend optimization: Strategic sourcing has reached a saturation point where the returns
are diminishing steadily for specific categories. Nearly, all ‘low-hanging fruits’ have been
picked and so extracting value through consolidation and bidding is becoming challenging.
Supplier relationship management practices like collaborative supply chain analysis, process
re-engineering, joint demand management, reduced inventory, and total cost modeling
delivers cost savings and optimizes organizational spend.
4. Risk mitigation: Organizations of all sizes experience supply chain disruption of some
magnitude due to product or service quality issues, dependency, price volatility, and more.
However, businesses that have an adequate SRM program in place can better predict and
manage those disruptions.
The types of supply risks that an organization faces depends on the corporate and
procurement frameworks used. Supplier risk segmentation can help organizations identify
risk and mitigate them effectively. Strategic tools like Kraljic Matrix and Deloitte Priority
Model can be used to segment supplier based on risks they pose and profitability they offer.
5. Positive ROI: Most procurement teams face difficulties in securing the commitment and
funding for their SRM strategy. The major reason is that they have trouble in building a
business case that establishes the financial benefits of SRM.Procurement teams can start
calculating benefits by estimating the impact of risk mitigation, value leakage due to non-
compliant contracts, and narrating compelling customer stories through case studies. By
involving the finance team from day one, procurement teams can capture the impact SRM
makes on the organization’s balance sheet.

SUPPLIER PATNERSHIP:
Supplier Partnering is a defined as a continuing relationship, between a buying firm and
supplying firm, involving a commitment over an extended time period, an exchange of
information, and acknowledgement of the risks and rewards of the relationship. The
relationship between customer and supplier should be based upon trust, dedication to
common goals and objectives, and an understanding of each party’s expectations and
values.
 Benefits of Partnering
 The benefits of partnering include:
 
(i)                Improved quality;
 (ii)              reduced cost;
 (iii)           Increased productivity;
 (iv)           Increased efficiency;
 (v)              Increased market share;
 (vi)           Increased opportunity for innovation; and
 (vii)         Continuous improvement of products / services.
 
Key Elements to Partnering
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 The three important elements to achieve the customer / supplier partnering relationship
are
 
1. Long-term commitment: Long-term commitment provides both customer and supplier
the much needed environment to achieve the planned objectives. Because to set up and
solve the problem of continuous improvement, both parties may require the sufficient time.
 2.  Trust : Mutual trust between two parties forms the basis for a strong working
relationship. Trust enables the partners to effectively combine their resources and
knowledge. It results in a ‘win-win’ situation for both partners.
 3.  Shared vision : Both the customers and suppliers have the common goal i.e., to satisfy
the end user. In order to ensure this goal, both particles should share and understand their
goals and objectives.

MULTI-TIER SUPPLIER PARTNERSHIP:

Multi-tier supply chains are multiple single-level collaborations, meaning multiple supplier
to buyer relationships, within one supply chain. Multi-tier supply chains are becoming a key
strategic driver, to lower costs, reduce capital assets, and get products to market more
efficiently than the competition.
Multi-tier supply chain management
In order to deal with the challenges of time for synchronization and complexity in
information distribution a multi-tier supply chain management system can be established. It
helps to steer the collaboration between all involved parties by establishing a central
collaboration platform. Mostly this platform is initiated by the Original Equipment
Manufacturer (OEM) and covers several suppliers in a partnership. One distinguished chain
member has to drive the collaboration process and platform by defining processes, rules
and standards It helps to get transparency for all partners in the value chain about
demands, capacities and stock data

Build up a multi-tier supply chain

 As it is not clear at the beginning, which supplier has to sell which components to
which buyers to get a most effective and efficient way of collaboration, there are
some processes to determine that.
 First of all it is defined, that some of the partners are suppliers and buyers at the
same time. This means, such partner can receive order proposals from buyers
(downstream) and supply proposals from suppliers (upstream) concurrently. These
relations are splitted to single transactions what is called interface-to-interface
planning process
 If two partners agree on a solution, the buyer did ensure that it is possible to serve
the demand from his buyer. So the whole supply chain can be build upstream. As

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 one negotiation only affects the next one, which has to deal with given results
before, it might be to get a very inefficient chain.
 A scenario technique overcomes this problem by not fixing the best solution in an
agreement but determining what would bring with the x-best solution in the
following supply chain steps. After that the agreement will be fixed by choosing the
most efficient way.

Challenges of multi-tier supply chains:

1) Time to synchronize: If it needs two weeks to change the collaboration between
each supplier and customer, it needs two and a half months in total to bring a
changed demand through the whole supply chain of five suppliers.
2) Complexity: Products get more and more complex. Manufacturers are focusing on
core businesses more and more in the recent years. As result companies buy more
complex and customer specific components from suppliers. These suppliers produce
their components again by using complex materials from different suppliers. This
brings long and complex relationships along the whole supply network.
3) Information sharing: Changing something anywhere in the long multi-tier supply
chain leads to a lot of effort to inform all steps before and behind.
4) Costs: Dealing not only with some direct suppliers but whole and complex multi-tier
supply chain means to have a lot of effort, especially at the end of the chain.

REASONS WHY MANUFACTURERS NEED MULTI-TIER CONNECTIVITY:

1) Well-coordinated Product Launch and Wind-down: Two critical areas of focus in certain
industries such as consumer products and technology are product launch and product
retirement. In industries such as high technology where products have short lifecycles, most
profits are made in the early weeks of the product launch before competition moves in.
Coordination within the supply base is critical for ensuring that the production ramp-up
goes smoothly (and is cost effective) in preparation for a product launch.
2)Better Day-to-day Coordination of Activities to Improve Key Operating Metrics: During
on-going production, OEMs want ongoing visibility into availability of key components to
ensure smooth production. Some of these components may be in short supply (such as flash
chips in the high technology industry that may be coming from lower tier suppliers, or some
automotive components being supplied in 2011 from plants in areas affected by the
Japanese tsunami), or may be under allocation, so visibility is often very critical.
3)Better Plan Quality: One of the biggest challenges in fast-moving industries is that the
planning cycles of various constituents are misaligned and starved for information, so the
planning cycle takes a lot longer than the execution cycle of flow of actual products from
contract manufacturer to the consumer retail point. Multi-tier connectivity can accelerate

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the velocity of information flow, which not only improves the quality of information used in
the planning process, but also reduces the overall planning cycle time across the supply
chain.
4)Better Supplier Performance Tracking and Metrics: In order to measure the performance
of key suppliers (irrespective of what tiers they belong to), OEMs need to be connected to
them so they can get better quality of data that is always current. By tapping into events as
they occur (due to connectivity within the supply chain), they can measure not only ongoing
performance metrics but other information such as supplier’s flexibility and effectiveness in
executing against electronic signals (vs. phone calls) so that cost of processing within a
supply chain can be reduced. Better supplier performance information also allows them to
improve their sourcing process.
5)Reduced Supply Chain Risk: A recent McKinsey report identified that reducing supply risk
is one of the top priorities of industry executives. By improving visibility into a supplier’s
delivery plans, shipments and status changes, organizations can more closely coordinate
their activities with a supplier. This enables them to improve predictability, proactively
address issues and have more time to react faster to any surprises.

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