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

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 managementcall 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:

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

Typical Procurement Life Cycle

Trends in Sourcing