God, grant me the serenity to accept the things I cannot change, The courage to change the things I can, And the wisdom to know the difference. (Serenity Prayer, Reinhold Niebuhr)
Sourcing & Procurement
Procurement is the process of finding, agreeing terms and acquiring goods, services or works from an external source, often via a tendering or competitive bidding process. The process is 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 (Wikipedia).
Almost all purchasing decisions include factors such as delivery and handling, marginal benefit, and price fluctuations. Procurement generally involves making buying decisions under conditions of scarcity. If good data is available, it is good practice to make use of economic analysis methods such as cost-benefit analysis or cost-utility analysis.
The Institute of Supply Management (ISM) defines strategic sourcing as the process of identifying sources that could provide needed products or services for the acquiring organization. The term procurement used to reflect the entire purchasing process or cycle, and not just the tactical components. ISM defines procurement as an organizational function that includes specifications development, value analysis, supplier market research, negotiation, buying activities, contract administration, inventory control, traffic, receiving and stores. Purchasing refers to the major function of an organization that is responsible for acquisition of required materials, services and equipment (ISM).
Make vs Buy
The decision to make something within the firm vs buy it from someone else is a common decision in supply chain management.
Outsourcing is "an agreement in which one company contracts-out a part of existing internal activity to another company". It usually involves the contracting out of a business process (e.g. payroll processing, claims processing) and operational, and/or non-core functions (e.g. manufacturing, facility management, call center support) to another party (Wikipedia).
Companies primarily outsource to reduce certain costs, which may include peripheral or "non-core" business expenses, high taxes, high energy costs, excessive government regulation or mandates, and production or labor costs. Other reasons include:
- Reducing and controlling operating costs
- Improving company focus
- Gaining access to world-class capabilities
- Freeing internal resources for other purposes
- Streamlining or increasing efficiency for time-consuming functions
- Maximizing use of external resources
- Access to new markets
Outsourcing has its risks – suppliers may misstate their capabilities. Control and coordination are also issues in outsourcing. Coordinating flow of materials across separate organizations can be a major challenge.
Strategic Sourcing Options
- In single sourcing the buying firm depends on a single company for all or nearly all of a particular item or service.
- In multiple sourcing, the buying firm shares it its business across multiple suppliers.
- Cross sourcing is a sourcing strategy in which the company uses a single supplier for a certain part or service in one part of the business and another supplier with the same capabilities for a similar part in another area of the business. Each supplier is then awarded new business based on its performance, creating incentive for both to improve.
- Dual sourcing is a sourcing strategy in which two suppliers are used for the same purchased product or service.
Typical Procurement Life Cycle
- 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.
- 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.
- 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.
- Supplier identification includes identifying particular suppliers that can provide the required product or services. There are many sources to search for potential suppliers.
- Non-disclosure agreement (NDA): It is quite normal to request vendors to sign an NDA prior to engaging with them.
- 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. Organizations should do a risk assessment, total cost of ownership analysis and best value assessment before selecting the final suppliers/solution.
- 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.
- 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.
- 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.
Trends in Sourcing
- A steady increase in longer-term contracts (partnering)
- Decline of suppliers managed per company
- Global purchasing
- Brexit, tariffs and other trade disruptions
- Cloud based technologies and the Internet of Things (IOT)
- Corporate social responsibility