Chapter 1: Procurement Risks

1. Procurement Responsibilities and Process

a) Objectives
❖ Spend corporate funds wisely.
❖ Operate in a professional manner.
❖ Practice the 7Rs of purchasing: material, quantity, quality, time, place, price, supplier
❖ Practice the highest level of ethical standards to ensure confidence among all parties
b) Type of activities
❖ Operational:
➢ Activities:
■ Ordering process: Maintaining purchase records, price records, inventory
consumption records, suppliers records and catalog and specifications
■ Expediting activities related to released orders: checking requisitions, calling
suppliers, negotiation with suppliers
■ Invoice verification and payment
■ Troubleshooting
■ Monitoring and evaluation of supplier performance
➢ Impact: Short-term impact
❖ Tactical:
➢ Activities:
■ Agreement on corporate and/or annual supplier agreements
■ Material managements such as maintaining minimum stock, inventory balance
and turnover, making periodic reports of commitments, disposing of scrap and
obsolete and surplus materials
■ Preparing and developing value analysis programs
■ Adopting and conducting quality certification programs for suppliers
■ Selection and contracting of suppliers in general
■ Programs aimed at supply-base reduction
➢ Impact: Medium-term impact
❖ Strategic:
➢ Activities:
■ Adopting a supplier strategy based on multi-versus single sourcing
■ Major investments
 ■ Deciding on financial participation in suppliers (backward integration)
■ Formulating policies concerning transfer pricing and intercompany supplies
■ Formulating policies on reciprocal arrangements, countertrade, etc.
➢ Impact: Long-term impact
2. Reasons for Global Procurement
❖ to obtain some form of competitive advantage
❖ changes in the business environment
➢ Intense international competitions
➢ Pressure to reduce cost
➢ The need for manufacturing flexibility
➢ The need for shorter product development life cycle
➢ Stringent quality standards
➢ Changing technology
3. Factors contributing to Procurement Risk
1) Operation: Lead time variable
a) Supplier manufacturing lead time: Time to manufacture the goods
b) Logistics lead time:
❖ Time between recognition of need for an order and the receipt of goods
❖ Include order preparation time, queue time, processing time, move or transportation
time, receiving and inspection time
2) Quality:
❖ The specifications must be not be ambiguous
❖ The manner of specifying materials depends on the kinds of material ordered
3) Culture:

The differences in the customary beliefs, social forms and material traits of a racial, religious
or social group

4) Customs Duties and Tax

❖ Import Duties and Value Added Tax
➢ Depends on type of products-protection by importing or exporting countries
➢ Dutiable goods in Spore: liquors, tobacco products, motor vehicles and petroleum
products.
❖ Anti-dumping Duties:

Duty impose to seller when sellers sell the product less than their fair market value
 5) Foreign Exchange Risk

Transaction risk: This is the risk that a company faces when it's buying a product from a
company located in another country. The price of the product will be denominated in the selling
company's currency. If the selling company's currency were to appreciate versus the buying
company's currency then the company doing the buying will have to make a larger payment in
its base currency to meet the contracted price.

Translation risk: A parent company owning a subsidiary in another country could face losses
when the subsidiary's financial statements, which will be denominated in that country's currency,
have to be translated back to the parent company's currency.

Economic risk: Also called forecast risk, refers to when a company’s market value is
continuously impacted by an unavoidable exposure to currency fluctuations.

Contingent risk: A firm has contingent risk when bidding for foreign projects, negotiating other
contracts, or handling direct foreign investments. Such a risk arises from the potential of a firm
to suddenly face a transactional or economic foreign-exchange risk contingent on the outcome
of some contract or negotiation.

6) Other risks

Legal Environment: RoHS, WEEE

Nationalistic Attitude

Political Climate: Wars and Conflict, Terrorism/Sabotage

4. Ways to Minimize/ Eliminate Risks

❖ Formal contract
❖ Terms of Delivery – use proper Incoterms
❖ Buying Marine Insurance
❖ Understand the Documentations and Customs Procedures
❖ Backup - Contingency Planning
➢ Inventory
➢ Alternative source of supplies
❖ Suppliers Validation and Quality Control
❖ Setting International Procurement Office
Chapter 2: Global Organizational Structure
Purchasing organizations can be categorized as Centralize in one extreme and Decentralized
in another extreme. Each structure has its advantages and disadvantages.

Usually a mixed organizational form (hybrid) is chosen

1. Organizational structure within Purchasing:

Structures for multi-unit companies

● Decentralized purchasing: Business Unit purchasing is responsible for all purchasing

decisions
● Centralized purchasing: central purchasing department is responsible for all strategic
and tactical purchasing decisions
● Line/staff organization: both corporate purchasing and BU purchasing exist next to each
other and divide responsibilities and activities
● Hybrid structure: combination of the previous three structures aimed at combining
common requirements across operating units. There are different forms of pooling:
Voluntary coordination, Lead buyership and Lead design concept.
● Cross-functional sourcing teams: contracting is done centrally by a commodity team.
However, all operational purchasing activities are decentralized
2. Compare CENTRALIZED vs. DECENTRALIZED purchasing:
● Commonality of purchasing requirements
● Geographic location
● Supply market structure
● Savings potential
● Expertise required
● Price fluctuations
● Customer demands

Advantages Disadvantages

Centralized 1. Economies of Scale 1. Narrow specialization and job boredom

Improving purchasing strength in 2. Need to coordinate with different
negotiation and facilitating supplier departments to standardize purchase
relationships across the various function units
2. Avoidance of price anomalies 3. Slower response as consolidation may
between group take place in the entire organization
 Competition between groups for materials 4. Smaller suppliers may lose out in
in short supply centralization purchase as they may not
3. Better overall stock management be able to supply the high quantity
and material utilization required by the entire organization.
4. Economies of staffing and clerical
procedures
uniformity in procedures, forms,
standards and specifications

Decentralized 1. Stronger customer orientation 1. Dispersed purchasing power, lack of

towards internal user economies of scale
2. Less bureaucratic purchasing 2. No uniform way of handling towards
procedures/higher operational suppliers
flexibility 3. Scattered supply market research
3. Direct responsibility of operating 4. Limited possibilities for building up
companies specific expertise on purchasing,
4. Less friction costs due to supply markets and components
coordination 5. Different commercial purchasing
5. Direct communication with suppliers conditions among different operating
companies

3. Cross Functional Sourcing Teams:

Cross-Functional Sourcing Teams is a cross-functional sourcing team consisting of personnel

from at least three functions brought together to achieve a purchasing-or material-related
assignment.

● Develop cost-reduction strategies

● Evaluate and select suppliers
● Support sourcing requirements for items with production specifications
● Support sourcing requirements during new product
● Perform suppliers development activities
● Support new product design
● Perform value analysis activities
● Develop local sourcing strategies

Why?

● More involvement of procurement in strategic decisions

● Holistic approach to flexible “supply chain”
● Different teams may make better use of the vastly increased information availability and
ability to communicate effectively with IT tools
 ● The proliferation of IT systems such as ERP, MRP and SRM systems
● The recognition that it is impossible for one or two departments to make assessments
and decisions.

Barriers:

● Cost of supporting from each plant/division

● Lack of Support from Senior Management
● Conflict of Interest between plant or division Management
● Shortage of Manpower

Critical Success Factors:

● Higher levels of internal and external decision- making authority

● Participation of suppliers when required
● Effective team leadership and reward systems
● Availability of key organizational resources
● Higher levels of effort put forth on team assignments
4. Future of Purchasing Organization:

Purchasing structures appear to vary to a great extent among companies. This is due to the
different views which top-managers hold towards purchasing and supply.

When analyzing the scope, tasks, responsibilities and authority of the purchasing function, we
differentiated between the strategic level, the tactical level and the operational level.

Purchasing structures appear to be highly volatile: a period of centralized purchasing is often

followed by a change to the other way around.

The future outlook is that the majority of significant dollar-valued purchases will continue to be
centralized.

This trend also will be the result of:

● increased computer-based management information systems

● As firms become lean, centralized purchasing will become a focus

Purchasing will be based on long term agreement.

Most of these companies have global procurement hub servicing their factories located at
different parts of the world

Example of Cross-functional, Centralized & Decentralized Procurement:

Example of Cross-functional Procurement:

Market research services: Nielsen, Kantar, IPSOS

Example of Centralized Procurement:

McCormick & Company is an American food company that manufactures, markets, and
distributes spices, seasoning mixes, condiments, and other flavoring products to retail outlets,
food manufacturers, and foodservice businesses.

● Since 2012, McCormick & Company redesigned its procurement department to tap into the
company's global growth strategy and create a more holistic approach to company growth.
The company did this by centralizing its procurement division in a top-down fashion.
● To reduce costs and improve productivity, McCormick arranged for the regional
procurement teams to report to a global department head, and centralized the procurement
spending.
● By fleshing out the department with more positions to help coordinate this new global
procurement effort, McCormick's improved costs by 250%.

Example of Decentralized Procurement:

Most Multinational Corporations adopt decentralized procurement. Nestlé - Nestle operates in

more than 100 countries and has subsidiaries and factories around the world.

Our people in Japan are doing many things in many different, very creative ways and we have
very interesting growth in Japan. Growth is conditioned by the market environment, but so much
in your hands," said Bulcke.

"We are decentralized, so we give them power," said Bulcke. "You cannot organize Japan from
here, in Lake Geneva. You have to be there. You have to live the culture from day to day."
Chapter 3: Global Operation
Success factors in Global Procurement Operations:

● Early Suppliers Involvement (ESI)

● Build a strong supplier base
● Implement benchmarking
● Explore outsourcing option
1. Early Suppliers Involvement (ESI) - Purchasing Role in Product
Development
a) Benefits of ESI
❖ Opportunity to Review the design specifications
❖ Define the product
➢ Design Tolerances
➢ Components Standardization
➢ Increase the accuracy of product costing
➢ Improve initial product quality
❖ Develop Alternatives
➢ Optimum Order Sizes
➢ Process Changes in supplier’s manufacturing-early
➢ Preparations
➢ Packaging- Finished goods
➢ Inventory storage
❖ Reduce new product material costs
❖ Reduce time-to-market cycles for new products → capture greater market share and profit
margins for being an early mover
b) How to ensure that suppliers do not take advantage of you?

Control Measures

❖ Make cost data sharing mandatory

❖ Scrutinize overhead calculations
❖ Analyze all assumptions of suppliers costing
❖ Agree on the right pricing terms; based on cost plus and volume based
❖ Get agreement to Audit suppliers books and compare estimated versus actual
2. Build a strong supplier base
 a. Benefits of Good Suppliers Base
❖ Assist with product developments
❖ Inputs for Value Analysis ( eliminate waste)
❖ Prepare for Timely delivery of the desired level of quality
❖ Facilitate the buyer’s efforts to gain superior performance, extra service
❖ Cooperation on cost reduction
❖ Willingness to share in new processes and procedures
b. How to build strong suppliers base
❖ Strong development and maintenance of supplier base
➢ Supplier screening
➢ Supplier qualification (pre and post)
➢ Supplier evaluation process
❖ Maintaining strong supplier goodwill
➢ Allows buyer and seller to learn the intricacies of each other operations
➢ Supplier able to reduce direct selling costs
■ Better understanding of each other manufacturing process
■ Inventory holdings
■ Receiving and overall operational needs
❖ Partnership - collaborative relationship
➢ Must have some degree of interdependence, cooperation, trust and respect
➢ Sharing of information - cost, forecasted demand, RnD
➢ Encourage and willing to invest research
➢ Invest in new equipment, training, and appropriate MIS system
3. Implement benchmarking

Benchmarking is the process of comparing one's business processes and performance metrics
to industry bests and/or best practices from other industries.

Dimensions typically measured are quality, time, and cost. Improvements from learning mean
doing things better, faster, and cheaper.

a. Types of benchmarking:
● Process benchmarking - Focus on business processes with a goal of identifying and
observing the best practices from one or more benchmark firms.
● Functional benchmarking - to improve the operation of that particular function. Complex
functions such as Human Resources, Finance and Accounting and Information and
 Communication Technology are unlikely to be directly comparable in cost and
efficiency terms and may need to be disaggregated into processes to make a valid
comparison.
● Best-in-class benchmarking - involves studying the leading competitor or the company
that best carries out a specific function.
● Financial benchmarking - comparing the results in an effort to assess your overall
competitiveness and productivity.
● Performance benchmarking - allows the initiator firm to assess their competitive position
by comparing products and services with those of target firms.
b. Types of activities that can be benchmark:
● Internal processes, performance and people: How many steps to complete a job (ex
order response/ change)
● The performance of a machine e.g. rpm: How many people needed in a purchasing
department (PO value/staff)
● Competitive activities, within a similar industry or business: Efficiency and effectiveness
of a warehouse to deliver goods to customer from order date
● Functional activities (yield rate, incoming quality, defects): Speed in exchange of goods
(time taken)
c. Success & Non-success factors in benchmarking:

Success factors Non-success factors

1. Dollar Value of the specific purchase must 1. Cost unable to estimate: Defense industry
be large as compared to the exercise building new equipment
2. Product must be clear specification or 2. Price is not the only important criteria:
service is explicitly clear to buyer and Quality or service is of equal importance
seller 3. Purchasing anticipation change in
3. Market must consist of adequate number specification: R & D Works
of sellers 4. Special Tooling or set-up Cost are major
4. Sellers must be technically qualified and factors
activity want the contract
5. Sufficient time for sellers to evaluate bids

d. Benchmarking process:

Phase 1:

Decides what to benchmark

Collects and analyses data – current situation

Evaluates a monitor process on a continual basis

Gathers purchasing performance benchmarking reports from selected companies

Phase 2:

Identify the “best-in-class”

“Best-In-Class” must be of compatible organization (e.g. a bank’s purchasing management will

want to compare other bank’s practice)

Phase 3:

Visits to best practices sites.

Each participant can judge how best to use reports within the company

4. Explore outsourcing option

a. Forms of Outsourcing Services

LABOR OUTSOURCING MIXED OUTSOURCING COMPLETE OUTSOURCING

Contractor Employees Employees, Materials, Employees, Materials,

provides Process & Systems, Tech & Process & Systems, Tech &
Equipment, Facilities, Equipment, Facilities,
Management/ Supervision Management/ Supervision
Host firm Employees, Materials, Employees, Materials, Program management
provides Process & Systems, Process & Systems, Tech &
Tech & Equipment, Equipment, Facilities,
Facilities, Management/ Management/ Supervision
Supervision

b. Advantages & Disadvantages of Outsource

Advantages Disadvantages

Freeing up of cash: investments can Increased dependence on suppliers

be concentrated on core activities
Optimal usage of knowledge, Continuous follow-up and monitoring of
equipment and experience of third the supplier relationship necessary
party

Increased flexibility: fluctuations in Risks of communication and organizational

the workload can more easily be problems during the transfer of activities to a
absorbed third party
Outsourcing leads to easier and Risks of leakage of confidential information
more focused primary processes
in the organization

Input through an independent party’s Performance incentives and penalties

point of view which reduces the risks of
introvert short-sightedness in the
organization

Risk of losing essential strategic knowledge

c. Why should we outsource?

Strategic reasons Tactical reasons

● Reduce control costs and operating costs

● Improve company focus
● Free up internal resources
● Gain access to world class capabilities ● Receive an important cash infusion
● Improve performance
● Get access to resources that are not
● Ability to manage functions that are out of
available internally control
● Accelerate reengineering benefits
● Improve customer satisfaction
● Increase flexibility
● Sharing risks

d. Types of outsourcing?

Offshoring Offshoring relates to the commissioning of work to a provider in a low

cost country. In many cases offshoring is concerned with outsourcing of
(IT) services

Partial only a part of an integrated function is outsourced. The coordination of

outsourcing the function and activities still lies with the client (the buyer). Here a
major problem is of course how to demarcate the responsibility between
the parties involved.

Turnkey applies when the responsibility for the execution of the entire function
outsourcing (or activities) lies with the external provider. This includes not only the
execution of the activities, but also the coordination of these activities.
 Advantages Disadvantages

Turnkey Buyer has minimal The buyer has limited influence

outsourcing responsibility for on the determination of the price
outsourced processes and little insight in cost structure
of provider
Buyer doesn’t need to have Buyer has limited influence on the
experience with similar staff, technology and materials used
projects and their quality
The project generally goes smooth Large dependence of buyer on
for the buyer provider resulting in high
commercial, technical and
performance risks
Partial The buyer has more influence Buyer is required to have
outsourcing on prices, rates and costs knowledge of the separate
parts of the outsourced
function/ activities

The buyer has more influence on The buyer is required to have the
the staff, technology and organizational capabilities to
materials used and their quality coordinate and integrate the
outsourced function / activities
Specific advantages can Communication and
result in cost reductions coordination problems between
parties involved can be a cause
of delay and disappointment

e. The outsourcing process

STRATEGIC PHASE:

● Motives for outsourcing

○ Focus on core competences
○ Focus on cost efficiency/ effectiveness
 ○ Focus on service
● Which activities or functions are outsourced
○ Transaction cost approach
○ Core competence approach
● Qualifications of the supplier
○ Technical and managerial qualities to achieve demanded level of performance

THE TRANSITION PHASE

● Contract Negotiation
○ Contract forms a legal basis for relationship
○ Contracts depends on characteristics of outsourced activity
○ The contract type has a great impact on the success of the joint operation
● Project Execution and Transfer
○ Outsourcing transition can be very complex
○ The transfer should be conducted using project management principles
○ Test phase before going ‘life

THE OPERATIONAL PHASE

The outsourcing will deliver its expected results.

6 core values as being critical to a successful outsourcing relationship

Core values Supporting factors

● Shared goals and objectives ● Developing a personal relationship

● Mutual dependence ● Having professional respect
● Open lines for communication ● Investment of effort by top management
● Concern for the other’s profitability ● Commitment to continuous improvement
● Mutual commitment to customer
satisfaction

f. Risk assessment of outsourcing:

In cases where trust and interpersonal relationships are not present, parties try to arrange for
dealing with these risks and uncertainties by detailed outsourcing contracts

These contracts are associated with the following kinds of risks:

● Technical risks: related to the extent to which the supplier is able to provide the
desired functionality and performance
● Commercial risk: related to the uncertainty with regard to the price we will pay and the
costs that we will incur when having outsourced our activities to the supplier
● Contractual risks: e.g. does the contract in sufficient detail describe the performance
that is expected from the supplier?
● Performance risks: related to the chance that the supplier is not capable of doing the
job he was hired for.
g. The success factors of outsourcing:
● Understanding company goals and objectives
● A strategic vision and plan
● Selecting the right vendor
● A properly structured contract
● Open communication with the individual groups involved
● Ongoing management of the relationship
● Senior executive support and involvement
● Careful attention to personnel issues
● The way the company is strategically positioned vis-à-vis its supplier. Can it still exert
some control over its supplier, or not?
Chapter 4 & 5: Global Information System Management

1. Drivers for eSCM needs

● Internal and External Strategic Integration
● Globalization and Communication
● Consistent Data Information Management
● New Business Processes ( “E”)
● Replacement of Legacy Systems
● Strategic Cost Management
2. Drivers for Computerization in Procurement:
● Provide historical purchasing trends
○ Total purchase in value and quantity
○ Types of products purchased
○ Details of past and present suppliers
○ The price paid
● Faster to set the scope for future sourcing
● Quickly identify qualified suppliers
● Quickly gather data on items to be purchased (Data Mining)
3. Main challenges of technology adoption:
● Resistance to change
● Complexity of technology
● Lack of visibility into benefits to the user
4. Computerization in eSCM & eSourcing
a. eSCM:

Enterprise Resource Planning (ERP)

Electronic Data Interchange (EDI)

Vendor Managed Inventory (VMI)

b. eSourcing:

Create the actual RFI (Request for Information), RFP (Request for Proposal), RFQ
(Request for Quotation)
 Manage actual bidding process such as date of submission, date of survey
questionnaire return

5. Enterprise Resource Planning (ERP)

ERP is a packaged business software system that processes transactions on a single software
platform and a single database

c. Main functions of ERP:

● Integrates information across all departments
● Facilitates the flow of information among the different functions and processes of an
enterprise
○ Functions: manufacturing, finance, HR
○ Processes: order entry
● Tracks a wide range of events in the enterprise in an integrated fashion
● Plans future activities based on these events
● Supports analysis of trends in these events, to improve the performance of the
enterprise
● Allow users to:
○ Input data in one location, that can be processed with other data and
accessed as informational reports in a real- time environment
○ Share common data and practices across the entire enterprise
○ Re-engineer the majority of its processes
d. Different ways to cut-over:

Type of Pros Cons Application

Cutover

Cold Turkey Less efforts to Very high risk From manual

(Direct) maintain 2 systems system

Parallel Least risky Most effort Mission critical

needed

Phase Systematic Constraint by Most common

Software (based on functions)

Pilot Allow for mistake Take longer Large organization

time (different sites)
 6. Electronic Data Interchange (EDI)

EDI is the direct computer transmission of orders and other transaction information based on
an agreed standards set. In purchasing, EDI is usually used for the electronic transmission of
orders, invoices, and payment between buyer and seller.

The main elements of an EDI system are:

● computer hardware,
● ERP software,
● EDI Translator
● Internet

Benefits of EDI:

● Reduce inventory at each node

● Gain visibility of entire supply chain to Point of Sales (POS)
● Increase inventory turns and reduce cycle times
● Reduce gap between planning and forecasting with actual demand
7. Vendor Managed Inventory (EDI)
a. Benefits of EDI:
● For both parties:
○ Reduced Data entry errors: Reduced errors due to computer to computer
communications. Speed of the processing is also improved.
○ Better Service: Both parties are interested in giving better service to the end
customer. Having the correct item in stock when the end customer needs it,
benefits all parties involved.
○ True Partnership: A true partnership means that customer and supplier would
work closer together and strengthen their ties for win-win collaborations.
● For suppliers:
○ Improved Forecast: Enabling suppliers to plan production to meet customer
demand. The goal is to have an improvement in fill rates from the manufacturer
and to the end customer. This will result in a decrease in stock-outs and a
decrease in inventory levels.
○ Improve Service Level: The overall service level is improved by having the right
product at the right time. The supplier is more focused than ever in providing
great service.
 ○ Higher Switching cost: Due to higher interactivity between Supplier and
Customer, there is a higher switching cost for the customer to change to another
supplier.
● For customers:
○ Better Inventory Management: Customers (e.g. retailers) are able to manage
their inventory level better and more efficiently.
○ Better Visibility to Stock Levels: Helps to identify priorities (replenishing for stock
or a stock-out). Before VMI, a retailer may have no visibility to the quantity and
the products that are ordered.
b. Implementation Pitfalls (Barriers/ Disadvantages) of EDI:
● Need extensive testing: long time to validate data being sent by both parties
● Acceptance by all: make sure that all employees involved in the process fully
understanding and accept this new way of doing business
● Change in customer base: any large customers, either gained or lost, must be
communicated to the manufacturer. The distributor must guide the manufacturer on how
this will affect sales.
● Effects of Over/Obsolete Stock: Both parties must agree how to deal with overstock or
obsolete stock
8. E-Sourcing models

Sell Side Buy side 3rd Party e-Marketplace

Pros ● No investment Allows the purchasing Vertical marketplace:

● Ease of access manager to manage the the products and
● The availability of sourcing cycle, track spend services are usually
huge customer and exert control over confined to particular
base contract management in a types of industry.
secure environment Example: ChemConnect.

Cons Lack of ability to track Must maintain the site Horizontal marketplaces
or control spending by uptime and periodically are broad based and
the buying organization update the site information serve multiple industries
and varying degrees of as well as training new that use common items.
security. users Example: Amazon

a. Success factors of e-Sourcing:

 ● As implementing e-sourcing and e- procurement is a tough process, companies need to
spend time and effort to ensure the support of the people involved and the compatibility
of the systems involved.
● Management should keep their investments low and control them. They should not
decide too quickly to buy a certain application. Developments go fast in this area.
● Companies should check the readiness of the suppliers before entering an e- solution
b. Dangers of e-Sourcing:
● False pricing. i.e. “What you see is NOT what you get”
● Ruin Relationship with key suppliers when organization are focusing on short term gain
● Delivery Risks
9. Auction vs. Reverse Auction

Ordinary auction (Forward auction) Reverse auction

Buyers compete to obtain a good or service Sellers compete to obtain business

The price typically increases over time and The price typically decreases over time and
the buyer that offers the highest price will be the seller that offers the lowest price will get
awarded the item. the deal.

Example:

A wants to buy 100 units with an expected price at $25/unit. There are 3 suppliers offering as
follow:

Supplier 1: $25/unit and able to supply 100 units

Supplier 2: $20/unit and able to supply only 50 units

Supplier 3: $15/unit and able to supply only 50 units

→ So, A would decide to buy 50 units from supplier 3 first, and then buy the remaining 50 units form
supplier 2.

a. Benefits of Reverse Auction

For Buyers:

● Immediate cost savings on product costs above those obtained from normal
negotiations as a result of competition
● Reduction in acquisition lead times
● Access to wider range of suppliers
 ● A global base to a wider range of suppliers
● Source of market information are enhanced
● More efficient administration of RFQs and RFPs
● Save time on seeing suppliers’ representatives due to e-process

For Suppliers:

● Transparency of communication
● Ability to obtain maximum volume of business if the supplier should so desire
● Negotiation period is drastically reduced
● Gain valuable insight into competitive environment for their product or opportunity to
enter market previously closed
● Lower marketing and sales cost
● Quick award/non-award cycle times
● Constructive feedback from buyers as to why they won or lost the business
b. Negative Impact of Reverse Auction
● Host Buyers must also provide assurances to the suppliers
● Only same class and quality suppliers will be invited
● Most incumbent suppliers will feel that loss of business is due to the fact that the lower
cost suppliers are not providing all the relevant sources, direct or indirect, which may
not be considered in the total cost calculation of the buyer.
● Requires the suppliers to undergo training which means time spent investing in reverse
auction.
● Suppliers must understand that management is committed to this tool and it is not the
just flavor of the month
c. Pre-requisites of Reverse Auction
● Dependent on specific market as well as product characteristics
● Requires significant top management support
● The probability of success depends on the volume of business
● Keep Supplier’s interest by providing feedback on rank order versus showing actual
prices
● Complexities such as the level of specification in the product to meet the standards
required by the organization need to be considered.
10. Information Visibility
a. Why - Information Visibility?
● To improve responsiveness across the supply chains
● Reduce cost, improve productivity and create greater value for the final customer in the
chain
● Software programs for business process optimization and for collaborative planning,
forecasting, and replenishment are evolving to help companies forecast and plan among
partners, manage customer relations, and improve product life cycle and maintenance.
● Traditional supply chains are rapidly evolving into “dynamic trading networks: comprised
of groups of independent business units that share planning and execution information
to satisfy demand with an immediate coordinate response.
b. Benefits of Information Visibility
● Break organizational barriers and enables sharing of mission critical information about
business activities and interaction on near-real-time basis across the supply chain
● Build visibility into the supply chain and provides people with real-time snapshot of
supply chain performance metrics
● Manage by metrics, aligns performance metrics with cross-organizational business
process and assign ownership of processes and metric to specific individuals
● Reduces the decision cycle process and allows an upstream or downstream participant
to respond to market or customer demand in hours or days not weeks or months
● Encourage decision-making collaboration and facilitates the ability to make decisions
collaboratively on the Internet bringing relevant internal and external stakeholders into
the process
● Reduces opportunity and problem resolution latency and measures and monitors
supply chain activities iteratively allowing people to quickly respond to events as they
occur
Chapter 6 & 7: Strategic Supplier - Global Alliance & Contracts

1. Factors impact Global Sourcing:

Global sourcing is influenced by level of supplier intelligence received:

● Supplier discovery
● Supplier capability information
● Supplier qualification services
● Supply market intelligence
● Global sourcing strategy
● Supplier site assessments
2. Supplier Intelligence (SI) / Strategic Supplier
a. Why do we need SI?
● Good quality supplier
● On-time delivery
● Low total costs
● Innovation
● Provide market intelligence
● Provide superior service
b. What is SI?

SI is the purposeful and coordinated tracking of your ‘strategic’ suppliers, within a specific
marketplace

Your ‘strategic suppliers’ are those firms which you consider to offer goods and services
without which you cannot compete for market share

SI is all about determining what your suppliers will do before they do it. It is to gain
foreknowledge of your supplier’s plans and devise business strategy proactively

c. What is SI not?
● SI is not about stealing information from suppliers
● It is not about stealthily getting information about your suppliers
● It is not about covert operations on your suppliers
● It is not about using information to gain an ‘upper hand’
d. Sources of Supplier Information
Public

● Internet
● International and local newspapers / magazines
● Proprietary sources
● Internal employees
● Suppliers

Private: Informal network

3. Strategic Global Alliance:

a. What is Strategic Alliance/ Win-Win Theory:
● Take the same priority for benefits of both parties
● Focus on suppliers retention
● Long term and collaborative in nature
● Deeper sharing of goals, strategies and tactics
● Extensive communication, high level of trust
● Companies cultures are considered
● Reverse auction is not used
b. Examples of Strategic Alliance:
● Vendor Managed Inventory (VMI)
○ Supplier keeps and monitor inventory
○ Buyer shares sales and inventory level data
● 3rd and 4th Party logistics providers (DHL & McDonald’s)
○ Manage buyers customer services issues, global contracts, warehouse
management, value add logistics activities
○ High level of trust needed
c. Advantages to Buyer:
● Inventory reduction – Supplier Owned Inventory (SOI) and Vendor Managed Inventory
(VMI)
● Reduced paperwork with decreased administrative and switching efforts,
● Reduced acquisition costs through economies of scale
● Typically standardized prices for longer term decision
● Improved quality through collaborative product development and sourcing
● Process integration, coordination of processes, and quantity discounts.
d. Advantages to Seller:
 ● Increased long-term business
● Increased efficiencies within the seller with higher sales
● More stable customer base relationships that renewed and reinforced
4. Strategic Supplier Management
a. Motivational factors:

We have 2 motivative factors in strategic management including Punishment and Rewards.

b. Process:
● Pre – Qualification
○ Preliminary Audit
○ Plant Visit
● Supplier Selection
○ Categorical Plan
○ Weighted Point Plan
○ Cost Ratio Plan
● Post Management
○ Gantt Chart/CPM
○ Rating and Ranking Analysis
c. Success factors:
● Training for buyers and sellers
● Develop and integrated communication systems
● Trust and open communication
● Measurable and quantifiable objectives
5. How to select strategic suppliers?/ How to apply SI?

Step 1: Selection & Forecast plan

Create intelligence process marketplace where the buyer could:

● Have basic and initial negotiation

● Understand segments of the market
● Understand new markets
● Supplier selection, based in some typical criteria:
○ Financial issues: economic performance, financial stability
○ Organization culture and strategy issues
○ Technological issues:
 ■ Assessment of current manufacturing facilities/capabilities
■ Assessment of future manufacturing capabilities
■ Supplier’s design capabilities
■ Supplier’s speed in development
○ Other factors
■ Safety record
■ Business references
■ Supplier’s customer base
● Supplier consolidation

Step 2: Quota Tender, Negotiate, & Source Select

Use Internet quoting, e-tender, and contract management to launch reverse auction or further
detailed negotiation with lists of selected suppliers

Step 3: Global Contracts & Alliance

Apply electronic access to technical specifications as well as to the warranty management

process for long-term business relationships.

Aim Characteristics Action

Ensure ● Few major sources LT contracts, contingency

 supplies ● Few alternatives planning, strong supplier
● Probably high volume relationships, demand
● Quality critical forecasting, ZD products, price
● In regular use, availability indexation, seek market
important knowledge and product
information, frequent review,
detailed search for alternatives,
own production, VI.

Stock: buffer stocks, consignment

stocks

Secure ● One or two major sources LT contracts, contingency

supplies ● One or two alternatives planning, strong supplier
● Probably low volume relationships, demand forecasting,
● Quality is very critical - ZD products, price indexation,
require tough inspection seek market knowledge and
product information, frequent
review, detailed search for
alternatives, own production, VI.

Secure ● Low supplier’s exposure MT contracts, ZD products, price

supplies ● Low profit/value potential indexation, seek market
Strategies to minimize risks: knowledge and product
Automate, Delegate, Low information
attention
Regular review of market prices,
search for alternatives.

Secure ● Low supplier’s exposure and LT contracts, ZD products, price

profit high indexation, seek market
● profit/value potential knowledge and product
● Strategies to minimize risks: information.
Seek opportunities
● Take risks Frequent review to ensure
preservation of profit, search for
alternatives.

Step 4: Deliver & Payment

Track the performance and quality management. At the same time, use computerization in
making an order and making a payment, as well as confirmations needed during the operation
such as e-invoice, electronic change orders.

6. Supplier Evaluation

After potential suppliers have been determined and located, both qualitative evaluation and
quantitative elimination process is used. This process compares suppliers in terms of their
ability to provide the desired quality, quantity, price, and service etc.
In purchasing, quantity has a somewhat specialized meaning, referring not only to the total
amount required but also to the schedule according to which the goods must be received.

A supplier who might be able to supply the desired quantity during the specified period, but
could not supply this quantity on specified dates, would not be a satisfactory supplier.

In purchasing, price is meaningless when considered in isolation from other factors. A price is
good only if the item supplied has the desired quality and quantity and is accompanied by
sufficient useful services

Then, the measure of a supplier's value is expressed in its performance record. In recent years,
buyers have emphasized the setting of objective standards and procedures for evaluating and
comparing existing suppliers, with 3 typical evaluation methods:

● Categorical method
● Weighted Point method
● Cost-ratio method

The Categorical Method

Basically, it is a procedure whereby the buyer relies on a historical record of supplier

performance. Initially, a list of evaluation criteria are identified. The buyer then assigns a grade
to each supplier, for each criterion, based on past experience. A simple marking system of plus,
minus, and neutral grades may be used.

Evaluation lists are often provided to other departments involved, such as quality control,
engineering, production, and receiving.

In this case, B is selected

The Weighted Point Method

Weighted-point method quantifies the evaluation criteria. A number of evaluation factors can be
included, and their relative weights can be expressed in numerical terms so that a composite
performance index can be determined and supplier comparisons made.

The Cost-ratio Method

The cost-ratio method relates all identifiable purchasing costs to the value of the shipments
received from the respective suppliers.

The higher the ratio of costs to shipments, the lower the rating for that supplier.
What cost categories are used depends on the products involved. Quality, delivery, service,
price and technology are the overall categories, and respective costs are accumulated for each.

Supplier AA true cost is lowest. Although their selling price is the highest, their total cost is the
lowest.

Advantages Disadvantages

Categorical Inexpensive and requires a Rely heavily on the memory and

minimum and quick of performance judgment of the individuals providing
data the ratings, and the ratings may
become routinely performed without
much critical thought

Weighted A number of evaluation factors can

be used with relative weights
corresponding to the needs of the
firm, thereby minimizing
subjective evaluation

7. Types of contracts

Fixed Price Based –Buyer Lower risks

Firm Fixed Price

Fixed price with escalation/de-escalation ( ex Material price change)

Fixed price with redetermination ( ex.volume increase)

Fixed price with incentives ( ex.share of cost savings achieved)

Cost Based - Buyer higher risks

Cost plus incentive fee

Cost sharing

Time and material

Cost plus fixed fee