Introduction to Sourcing in

procurement and supply

 The typical procurement cycle
Need identification (Requisition or bill of materials)
Define the need (specification)
Develop contract terms
Source the market (identify potential suppliers
Appraise suppliers
Invite quotations or tenders
Analyse quotations and select most promising supplier
Negotiate best value
Award the contract
Contract/supplier management (monitor, review and maintain performance)
CONT’D
 Sourcing is basically that part of the procurement process that
is concerned with ‘how and where services or products are
obtained’ (CIPS).

 Lysons and Farrington (Purchasing and Supply Chain

Management) define it as ‘the process of identifying, selecting
and developing suppliers’.
A generic procurement cycle
 Pre and post contract award stages
• Pre contract award stages include, Need identification (Requisition or
bill of materials), Define the need (specification), Develop contract
terms, Source the market (identify potential suppliers), Appraise
suppliers, Invite quotations or tenders, Analyse quotations and select
most promising supplier, Negotiate best value.

• Post-contract-award stages include activities such as expediting,

payment, contract or supplier management, ongoing asset
management and post contract learning.
 Auditing and appraisal of suppliers
• Some processes such as the auditing and appraisal of suppliers
happen both pre-and post-contract award.

• Supplier appraisal (evaluating the capability of potential suppliers, in

the pre-contract sourcing stage).

• Supplier performance appraisal or vendor rating (evaluating the

performance of actual suppliers or vendors, in post-contract
performance stage).
The sourcing process
Identification and analysis of requirements

Sourcing plan

Market analysis

Pre-qualification of suppliers

Evaluating supply offers and options

Creation of contract or relationship

 The sourcing process
• Identification of the requirements: This may take the form of
purchase requisition from user department, a stock replenishment
requisition from inventory control, or a more complex process of
requirement definition via early buyer or supplier involvement in a
design and development project.

• Sourcing plan: Make or buy decisions and the identification of the

type of purchase (straight re-buy, modified re-buy or new buy),
together with sourcing policies (single or multiple sourcing, local or
international sourcing).
 The sourcing process cont’d
• Market analysis:
• Purchasing research into product and supply markets will be used to
forecast long term demand for the product, to gauge market prices and
forecast price trends of bought-out items and materials, to identify a
range of potential supply sources, to assess the security or risk of
various supply sources, and evaluate environmental factors impacting
on sourcing decisions.

• Pre-qualifications of suppliers:
• This involves key establishing key criteria for supplier suitability, in the
light of strategic sourcing objectives, pre-screening potential suppliers to
identify those who can meet the organisation’s demands and standards.
 The sourcing process cont’d
• Evaluating supply offers and options:
• This is where the offerings of pre-qualified suppliers may be evaluated
in various ways by obtaining quotations, conducting formal and
informal tender exercises, or entering into negotiations with one or
more suppliers. The winning supplier is selected for the contract.

• Creation of contract or relationship:

• A purchase order, contract, framework agreement or other form of
legal relationship is formulated, to define the terms of sale and
purchase agreement.
 Tactical and operational sourcing
Tactical and operational sourcing processes are concerned with;
• Lower-level decisions relating to low profit, low risk and routine items.
• The formulation of short-range decisions as to how specific supply
requirements are to be met, in changing or temporary conditions in
the organisation or supply market (eg. Supplier failure, supplier
disruption or fluctuations in demand)
• Clearly defined requirements and specification, and transactional
sourcing decisions based mainly on open bidding and purchase price.
 Strategic sourcing

• Strategic sourcing is the process that identifies the

spending profile of a business and its suppliers.
• This ensures the organization’s requirements and
that of the suppliers are aligned.
• Strategic sourcing is a process that constantly re-
evaluates and enhances a business’ buying activities
Cont’d
Strategic sourcing processes are concerned with:
• Top-level, longer-term decisions relating to items with high profit and
supply risk.
• The formulation of long-range, high level decisions eg. About
procurement policies, the supplier base, supply chain relationships,
the purchase of capital equipment and ethical and sustainability
issues
• Developing a deep understanding of requirements and of the supply
market and individual supplier drivers and capabilities.
 Different purchase contexts
• Straight re-buy of items already sourced from a supplier, for example,
it will not be necessary to establish a specification, survey and source
the market, invite quotations and select a supplier.

• Modified re-buy in that some of the requirements have changed, it

may be necessary to re-specify the need or re-negotiate the contract
but same supplier may be used. Or vice versa.

• New buys are more likely to conform to the full sourcing process, with
rigorous market survey, supplier pre-qualification and competitive
approaches to contract award.
 Prioritising sourcing exercises
• Vilfred Pareto proposed that In any series of elements to be controlled, a
selected small factor in terms of number of elements (20%) almost always
account for a large factor in terms of effort (80%).

• The pareto principle (80/20 rule) is a useful technique for identifying the
activities that will leverage your time, effort and resources for the biggest
benefits In a sourcing context, the pareto principle can be interpreted as
80% of spend, risk or value residing in 20% of supplies or suppliers.

• It can be used to separate the critical few supplier (who supply important
high value, high usage items which can only be sourced from a limited
supply market) from the trivial many (who supply routine, low value
supplies which can easily be sourced anywhere).
 Kraljic’s procurement positioning matrix
• Peter Kraljic developed a procurement positioning matrix that seeks to
map;

• The importance to the organisation of the items being purchased (eg.

the organisation’s annual expenditure on the item, and its profit
potential) against

• The complexity of the supply market (related to factors such as the

difficulty of sourcing the item, the vulnerability of the buyer to supply
or supplier failure, and the relative power of buyer and supplier in the
market).
Kraljic’s Matrix
The Kraljic procurement positioning matrix
 Kraljic’s procurement positioning matrix Cont’d
• Bottleneck items: Products that can be acquired from a limited source of supply
or where there is high degree of supply risk.

• Strategic Items: Products that are crucial to the firm and are characterised by
high value and high supply risk.

• Routine Items: Products that are easy to acquire and also have a relatively low
impact in the event of non-delivery.

• Leverage items: Products that are easy to buy and which could result in
significant cost savings due to high volume/values, thus greatly impacting
contribution to the bottom line.
Sources of information on potential supplier

• The buyer’s own database of existing and past suppliers.

• Formal requests for information (FRI).

• Marketing communications of potential suppliers eg. Adverts, direct mail,

brochures and catalogues.

• Internet search for websites.

• Online market exchanges, auction sites and supplier/buyer forums

Sources of information on potential supplier Cont’d
• Published listing of suppliers and stockists general directories (eg. Yellow pages and
specialist trade /industry directories and registers.

• Trade /industry press ( newspapers, magazines, journals and bulletins)

• Trade fairs, exhibitions and conferences.

• Organisations promoting trade such as AGI, GIPC, Embassies, and chamber of commerce.

• Informal networking and information exchange with colleagues and other purchasing
professionals
 Stakeholders in the sourcing process

• The users of the items being sourced

• The finance function

• The product or service design, development or engineering function

• Potential suppliers, who may have resources or expertise to

contribute to design and specification.
Dobler and Burt‘s four approaches to involving stakeholders in design, specification and sourcing processes.

• Early buyer involvement (EBI): Management recognises from the

onset that purchasing contacts and disciplines are important in
product development. Purchasing specialists are involved in the
product developing team, on an advisory or full time basis.

• Formal committee approach. Management recognises from the

outset that preparing a specification is a matter of reconciling
conflicting objectives. They therefore appoint a committee with
members representing each key stakeholder: design, engineering,
production, marketing, quality management and procurement.
Dobler and Burt‘s four approaches to involving stakeholders
in design, specification and sourcing processes Cont’d.

• Informal approach. Management emphasises the responsibility of all

departments to consider both commercial and engineering factors.
Buyers are encouraged to challenge the assumptions of users and to
suggest alternative methods and materials for consideration.

• Purchasing co-ordinator approach: A formalisation of the informal

approach, with purchasing staff designated as ‘liaison officers’ to co-
ordinate the required communication.
 Early supplier Involvement (ESI)
• Early supplier involvement (ESI) is that organisations should involve
suppliers at an early stage in the product or service development and
innovation process; ideally as early as conceptual design stage,
although this is not always practical.

• This contrasts with the traditional approach, whereby the supplier

merely provides feedback on a completed design specification.
 Areas where supplier expertise can benefit buyer
• Material specifications
• Tolerances
• Standards
• Standardisation and variety reduction
• Economic order sizes to reduce costs
• Packaging and transportation requirements for product
• Inventory levels (taking into account lead times)
• Potential changes required in the supplier’s manufacturing
 Benefits to be gained from ESI
Short-term
• More accurate and achievable technical specifications
• Improved product quality
• Reduction in development time
• Reduction in development and product costs

Long-term
• It can be a catalyst for long term partnership relationships with excellent
suppliers
• It can also improve the buyers understanding about technical
developments in the supply market.
 Potential drawbacks of ESI
Product or service designed around supplier’s capabilities, which may
limit or lock the buyer in a supply relationship. This becomes a
problem if the supplier becomes complacent and ceases to deliver the
quality or innovation he/she once did- if market developments
present better alternatives.

It may also pose confidentiality and security issues (eg. Risk of
leakage of product plans to competitors)
 Supplier appraisal and pre-qualification
• Pre-qualification is the definition and assessment of criteria for supplier
‘suitability’, so that only pre-screened suppliers with certain minimum standards
of capability, capacity and compatibility are invited or considered for
participation in a given sourcing process.

Pre-qualification involve two basic processes

• The development of objective evaluation criteria by which potential suppliers’
suitability will be appraised.

• The screening of potential suppliers against the defined criteria.

Supplier appraisal and pre-qualification Cont’d

• The purpose of supplier appraisal, evaluation or pre-qualification is to

ensure that potential supplier will be able to perform any contract or
tender that is awarded, to the required standard.

• Such a process adds value by avoiding the wasted cost, time, effort
and embarrassment of awarding a contract (on the basis of lowest
price) to a tenderer who subsequently turns out to lack capacity or
technical capability to handle the work.
 CIPS recommended four stage approach to assessing suppliers

• Plan and prepare: This could include checking internal policies on supplier selection; checking existing
feedback on known suppliers; deciding on the scope of the assessment, depending on the criticality of
the proposed procurement; and planning the research and appraisal approach to be used.

• Action and individual assessment: ie. Accessing available secondary sources of supplier information
and implementing appropriate direct assessment methods (such as site visits, capability surveys, output
sampling or reference checking).

• Evaluate and report results.

• Recommend and feedback: The results of the process should be a recommendation on which
supplier(s) to adopt, and feedback to unsuccessful suppliers on how they can become more
competitive, or qualify for contracts, in future.
 What should be appraised?
PURCHASING AND SUPPLY PURCHASING PRINCIPLES AND PURCHASING AND SUPPLY
MANAGEMENT (LYSONS AND MANAGEMENT (BAILY, FARMER, MANAGEMENT (DOBLER AND
FARRINGTON) JESSOP AND JONES) BURT)

Personal attitudes Task variables, such as quality, Results of preliminary survey

service and price

Adequacy and care of production Financial stability Financial stability

equipment

Means of controlling quality Good management Good management

House keeping Results of site visits Results of site visits

Competence of technical staff Ability to support electronic data Quality service

interchange

Competence of management Just in time capabilities Just in time capabilities

 Ray Carter’s 10Cs of supplier appraisal

Ray Carter this model in 1995 as a means of appraising potential suppliers

during the sourcing process. The original framework only had 7Cs, but the
remaining three were subsequently added over time through
peer/colleague intervention.

• Competence (Capability) of the supplier to fulfil the contract: whether it

can produce the kings of items, or deliver the kind of services required;
what management, innovation, design or other relevant capabilities it
has.

• Capacity of the supplier to meet the buying organisation’s current and

future needs; eg. How much volume the supplier will be able to handle
(its production capacity); and how effectively managed its own supply
chain is.
 Ray Carter’s 10Cs of supplier appraisal Cont’d

• Commitment of the supplier to key values such as quality, service or

cost management-and to a longer term relationship with the buying
organisation.

• Control systems in place to for monitoring and managing resources and

risks; eg. Willingness to comply with procedures, rules or systems
required by the buyer; quality or environmental management systems;
financial controls; and risk management systems.

• Cash resources to ensure financial status and stability of the supplier;

its profitability, cash flow position, the assets it owns, the debt it owes,
how its costs are structured and allocated, and its overall financial
health.
 Ray Carter’s 10Cs of supplier appraisal Cont’d
• Consistency in delivering and improving levels of quality and service; eg track
record of reliability.

• Cost: price, whole life costs and value for money offered by the supplier.

• Compatibility of supplier with the buying organisation; both cultural (in terms
of values, ethics work approach and management style) and technological (in
terms of processes, organisation and IT systems).

• Compliance with environmental, corporate social responsibility or

sustainability standards, legislation and regulation.

• Communication efficiency to support collaboration and co-ordination in the

supply chain.
 Gathering and verifying supplier information.
• Self-appraisal questionnaires completed – although the buyer will need to
verify the truth and accuracy of supplier-compiled information.

• Financial appraisal: analysis of the supplier’s financial statements, reports and

accounts- or analyses published by credit rating companies-providing
information on the supplier’s financial status and stability; sources of financial;
efficiency; cost structure and profitability.

• Checking supplier accreditations: quality awards and policy statement, in

order to assess robustness of its management systems in areas such as quality,
environmental management and corporate social responsibility.
Gathering and verifying supplier information Cont’d
• References recommendations, reports and testimonials from existing
customers, industry analysts, trade associations, press write ups or
networking with other buyers, to assess the levels of reliability and
customer satisfaction attained by the supplier.

• Work sampling: checking out samples, prototypes or portfolios of work. This

may be done by requesting product samples; randomly sampling production
outputs as part of a site visit; making small trial orders

• Supplier audits (also known as site visit or capability survey). As this is a

more resource-intensive method of appraisal, it might be used for more in-
depth investigation of shortlisted suppliers.
 Supplier management
• It is that aspect of procurement which is concerned with rationalising
the supplier base and selecting, co-ordinating, appraising the
performance of and developing the potential of suppliers, and where
appropriate, building long-term collaborative relationships’
 Supplier management
After sourcing, selecting and contracting of suppliers, therefore, it
remains the buyer’s responsibility;

• To maintain regular contact with supplier, to check on the progress

and ensure that any issues or problems are discussed.

• To monitor the supplier’s performance against the agreed terms and

standards, to ensure that they are being fulfilled.
 Supplier management

• To motivate the supplier: Buyers may introduce systems of recognition for suppliers
who achieve consistently high performance.

• To work with the supplier to resolve any performance problems: Buyers must be ready
to accept that their own firm’s success depends on the supplier’s ability to perform. The
process of supporting suppliers to perform well is referred to as ‘supplier development’.

• To work with suppliers to resolve any relationship problems or disputes without the
costs and damaged relationships arising from taking matters to court.
 Supplier motivation
• Motivation is the process by which human beings calculate whether it
is worth expending the energy and resources required to reach a
particular goal. It is the process by which one party influences or
supports this type of calculation in another, in order to secure their
engagement and effort in pursuit of a goal.

• Buyers can motivate suppliers by offering incentives for them to

perform to the required standard, or to improve their level of service,
or to add value in some other way.
 Supplier motivation Cont’d
• Motivation can operate positively (the ‘carrot’ approach), by offering
incentives and rewards which are valued by a supplier, and therefore
make it worthwhile to put extra effort into attaining the desired
behaviour or level of performance.

• It can also operate negatively (the ‘stick’ approach), by threatening

sanctions or penalties which the supplier will think it worth the effort
to avoid, by attaining the desired behaviour or performance level.
 Vendor Rating
Vendor rating: It is the measurement of supplier performance using
agreed criteria, usually including the following;

• Price: eg. Measured value of money, market price, lowest or

competitive price, good cost management and responsible profit
margins.
• Quality: eg. Measured by key performance indicators (KPI) such as
number or proportion of defects, and quality assurance procedures.
• Delivery: eg. Measured by KPIs such as the proportion of on-time-in-
full (OTIF) deliveries, or increases or decreases in lead times for
delivery.
 Approaches to vendor rating

Supplier performance evaluation form:

• It is a check list of key performance factors, against which purchasers
assess the supplier’s performance as good, satisfactory or
unsatisfactory.
• A weighting is applied to ach factor, so that the supplier’s
performance in key performance areas, and overall, can be
summarised as good, satisfactory or unsatisfactory.
 Approaches to vendor rating Cont’d

Factor rating method

• It gives a quantified, numerical scores for each key assessment factor.
Each of the major factors is also given a weighting, according to its
importance within overall performance, and this is applied to each
score, to end up with an overall rating.
Performance factor Weighting Score Supplier rating
Price 0.4 0.94 0.376
Quality 0.4 0.97 0.388
Delivery 0.2 0.72 0.144
Overall evaluation 1.0 0.908