Week 3 procurement & supplier focus

Procurement and Supplier Focus
International Business
Liam Fassam

Procurement & Supplier focus
Procurement and supplier focus is the third
building block of supply chain management.
Procurement includes:
• Purchasing raw materials and packaging
• Contracting out utilities and maintenance
• Hiring contract or casual labour
• Selecting approved or dedicated suppliers
• Outsourcing
• Use of professional services
International Business - 'Procurement &
Supplier Focus' - Liam Fassam
2

The historical view of purchasing
The Industrial Marketing and Purchasing Group (IMP) in the
1970s developed a dynamic model of buyer–supplier
relationships in industrial markets (the interaction model) and
illustrated its applicability through comparative studies of
buyer–supplier relationships within and across a number of
European countries (France, Germany, Italy, Sweden, UK).
The main conclusion of these pan-European studies was that
buying and selling in industrial markets could not be
understood as a series of discrete and serially independent
transactions. Instead, transactions could only be examined as
episodes in often long-standing and complex relationships
between the buying and selling organization (IMP, 2007).
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What is procurement
Procurement or buying is the act of purchasing.
The purchasing /procurement department is often
seen as a less than glamorous department,
something that buys things as cheaply as possible
to meet specifications set by more glamorous and
important departments such as Marketing and
Operations.
However, as Porter found purchasing is a key
activity in determining the competitive advantage
of an organization (Porter, 1985).
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What is procurement
Lysons and Farrington (2006) rather simplistically say the
purchasing process consists of a chain of processes:
• Receive requisition
• Solicit quotations
• Vendor selection
• Negotiate with suppliers
• Place order
• Receive supplies
• Make payment
Important - setting specifications, inspection and quality
assurance are all included in the overall process.
5

Procurement more than simple
Purchasing is more than looking for the right product at
the right price and at the right time.
A world class company will be aiming to build alliances
and long-term relationships with key suppliers.
Ideally key suppliers to an organization will be involved in
design and development of new product and services.
They will be able to provide advice on new technology
and methods, they can suggest alternative materials, they
will observe and report market trends, and in short they
will become an additional source of market intelligence.
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Requisition, vendor selection, negotiation, placing an order
• Possible suppliers will be identified: Identification of suppliers includes
gaining intelligence on their reputation and financial stability. There is
no point dealing with an organization that might not be in business in
the next few months. Ideally we will be aiming to build up a long-term
relationship.
• Seek quotations: Provide to a short list of suppliers, details of
specification, quantities and dates. At this stage it might not be wise to
be too forthcoming as to the purpose of the purchase. We do not want
to be providing too much information in the market place which could
help our competitors.
• Quotations: It will be received and a decision made as to who our first
preference is.
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• Negotiations entered into: At this stage we can provide more detail as
to what the product will be used for and seek advice from the supplier.
If the product is going to be repeatedly used and ordered and or is an
important item such as a new piece of expensive equipment, and we
are seeking a long-term relationship the cementing of a relationship
can be more important than a contract written in legalize. McDonalds
claim that with their key suppliers a shake of the hand is more
important than a contract.
• Ongoing re-orders: For fast-moving consumer goods, such as in
supermarkets ideally re-orders will be automatically triggered at point
of sale, once stock levels drop to a predetermined level. For details of
bar coding and point of sale re-ordering systems (e-procurement)
• Ordering: Each order will have an order number. The importance of
order numbers are explained in the following section of this chapter.
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Requisition, vendor selection, negotiation, placing an order

Purchasing ethics, fraud and environmental issues
Values
Members will operate and conduct their decisions and actions based on the
following values:
Honesty/Integrity
• Maintaining an unimpeachable standard of integrity in all their business
relationships both inside and outside the organizations in which they are
employed.
Professionalism
• Fostering the highest standards of professional competence amongst
those for whom they are responsible.
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Purchasing ethics, fraud and environmental issues
Responsible Management
• Optimizing the use of resources for which they are
responsible so as to provide the maximum benefit to their
employers.
Serving the Public Interest
• Not using their authority of office for personal
benefit, rejecting and denouncing any business practice that is
improper.
Conformity to the Laws
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Norms of ethical behaviour
• To consider first, the interest of one’s organization in all transactions
and to carry out and believe in its established policies.
• To be receptive to competent counsel from one’s colleagues and be
guided by such counsel without impairing the responsibility of one’s
office.
• To buy without prejudice, seeking to obtain the maximum value for
each dollar of expenditure.
• To strive for increased knowledge of the materials and processes of
manufacture, and to establish practical procedures for the
performance of one’s responsibilities.
• To participate in professional development programs so that one’s
purchasing knowledge and performance are enhanced.
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Norms of ethical behaviour
• To subscribe to and work for honesty in buying and selling and to
denounce all forms of improper business practice.
• To accord a prompt and courteous reception to all who call on a
legitimate business mission.
• To abide by and to encourage others to practice the Professional
Code of Ethics of the Purchasing Management Association of
Canada and its affiliated Institutes and Corporation.
• To counsel and assist fellow purchasers in the performance of their
duties.
• To cooperate with all organizations and individuals engaged in
activities which enhance the development and standing of
purchasing and materials management.
12

Environmental purchasing
• Environmental purchasing is a most important step in
the war against global warning and pollution.
• Sustainability and accountability for waste and
pollution cannot be ignored.
• At the very least organizations need to be aware of
environmental issues and to make their concerns and
needs known to their suppliers.
• This will begin by management establishing a
policy, communicating the policy internally, and to
their key suppliers.
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Make or buy
• Make or buy decisions: The fundamental objective
of a sourcing strategy is to determine where to
make or buy a product or service and why.
• The sourcing strategies for both manufacturing and
service organisations are discussed separately
although there are many obvious common features
between them.
• The sourcing strategy goes hand in hand with supply
chain management.
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World class manufacturing
• Depending what campy you sit in, differing
opinions exist with world class manufacturing
(WCM).
• Some people associate WCM with working
practices influenced by Japan’s ‘quality
movement’ TPS, Lean, JIT etc.
• Others understand WCM to be manufacturing
at the highest level of performance.
15

Service sector
In the service sector the sourcing strategy buzzwords such as
‘outsourcing’, ‘off-shoring’ and ‘in-sourcing’ have gained
currency.
Outsourcing is the collaboration with a partner to manage a
part of your business.
An example is IBM supplying and managing on-site the
information and technology function for Toyota. There are
distinct categories of outsourcing in the service sector:
• IT outsourcing (e.g. programming)
• Business process outsourcing (e.g. handling all administration)
• Managed services (e.g. call centres)
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What is outsourcing
A huge explosion of outsourcing can be attributed to the concept
of ‘core competence’ popularized by Hamel and Prahalad (1994).
The principle is fundamentally simple. For example, by analysing
and understanding Porter’s value chain (1985) an organization
can focus on the elements that are core to its business and
outsource others while maintaining strategic control.
The examples of successful outsourcing companies include Dell
and CISCO. Dell Computers Company has focused on its key
activity as sales and outsourced non-core functions such as
logistics and maintenance. CISCO has identified design and
network solutions as its core activity and outsourced the
manufacturing of infrastructure components.
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Porters value chain
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Rationale of outsourcing
A particular advantage of outsourcing is cash flow, flexibility and releasing
key management resources, but other benefits include external expertise
and cost savings. There are several external factors driving the growth of
outsourcing:
• The rapid change in the technology landscape, especially in information
and communication technology (ICT); external vendors are often in a
position to provide more effective solutions support in the new
technology.
• Globalisation is a strong catalyst in outsourcing by enhancing the
transparency in financial reporting, wider choice of suppliers and more
competition.
Outsourcers offering service level guarantees have a powerful proposition.
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Basu’s outsourcing matrix
• High technology/high volume: These products are suitable for own
manufacturing. It will be appropriate to invest to retain the core strength.
• High technology/low volume: When the volume is low the preferred strategy is
to ‘in-source’. This means that either the global manufacture of product is
centralized at a single site, or the capacity of high technology are utilized by
gaining orders from outside companies.
• Low technology/high volume: After a period the technological advantage of a
product reduces and it becomes a mere commodity. If the volume is high then
a supply partnership can be considered with a dedicated third-party supplier.
• Low technology/low volume: If demand is low and there are more than one
supplier available long-term supplier agreements/partnerships are not
important.
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Basu’s outsourcing matrix
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Offshoring
Off-shoring is a form of outsourced managed services where skilled
labour is cheaper. Cost savings are primary benefits. Other benefits
include time zone differences enabling 24 hour services and access to
more willing well-qualified workers to tackle boring jobs. An example is
call centres located in India serving callers (customers) in England.
There are some risks of off-shoring.
These include:
• Services going down because of telecommunication problem and
inadequate training.
• Data and physical security are in potential danger.
• Excessive foreign travel.
• The ways to minimize these risks include minimizing foreign
travel, keeping your software code and using a third-party broker.
22

In-sourcing
In-sourcing means centralizing multiple, distributed
operations into a semiautonomous unit. This is managed
separately and accountable to the business, like an
outsourcer, but remains under the organization’s control.
The advantages of in-sourcing include:
• The business maintains strategic control.
• It avoids third-party margins.
• It is reversible.
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Service level agreements (SLA)
In a service level agreement (SLA) all three words carry equal
importance. The document should define what services are to be
delivered and the levels of performance expected. It is also an
agreement between the customer and the supplier and not a
unilateral declaration. For simple functions like catering fixed price
contracts by SLAs are easy to implement. However, they are highly
limiting and inappropriate for strategic partnerships. The
agreements should include:
• Shared gains or structured incentives based on added value
beyond core services.
• Shared risks.
• Best practices, training and cost-effectiveness initiatives are
freely shared.
• Forecast data and planning processes are shared.
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E-Procurement
• EDI networks: Providing communication between a few trading
partners(buyers and sellers).
• B2E: Allowing transfer of information within an organization between
departments and employees. For example, templates of
documents, automated approvals for routine requisitions and
standardization of procedures.
• B2B: A website sometimes where business ‘meet’ to buy and sell. A closed
exchange is open only to members. An example is Compuware’s Covisint
exchange for automotive and healthcare industries, see
www.Covisint.com/ about (2007).
• B2C: An e-mail address or web page that allows customers to buy on line
(e.g. airline bookings and e-tickets).
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E-Procurement
• e-Catalogues: These provide on line and up to date
lists, photographs, sometimes video clips of
products, specifications, price, etc. Amazon is a good example
(see www.amazon.com).
• e-Auctions: Here a seller can display a product on-line and buyers
can make bids until a price is reached and a sale agreed. The bids
might be public or sealed. With sealed bids the various buyers
are in fact tendering as they cannot see what the other bids are.
• Reverse auctions: Here the buyer advises the product and
quantity they want, and suppliers complete on line by offering
lower prices. In a reverse auction it would not be regarded as
ethical for the buyer to lodge proxy bids.
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Week 3 procurement & supplier focus

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