CHAPTER 3

SOURCING IN PROCUREMENT
Course Learning Outcomes 1

 Examine fundamental concept, procedure and sourcing of procurement in

logistics and supply chain area. (C3, PLO 1, CLS 1)

Assessment
 Quiz 2

Notes
C3 : Application
PLO 1 : Apply fundamental principles of logistics and supply chain management and other related area.
CLS 1 : Knowledge and Understanding
Objective of this chapter
3.1 Examine sourcing in procurement
 Identify attributes of a good supplier
 Define sourcing process
 Explain different types of suppliers
 Compare single versus multiple sourcing
 Identify supplier evaluation factor
a)Cost or Price
b)Quality
c)Delivery
Objective of this chapter
3.1 Examine sourcing in procurement
 Differentiate supplier evaluation methods
a)Categorical method
b)Weighted method
c)Cost ratio method
Why Need Good Supplier?

 Getting the best suppliers for your business is key to achieving a strong supply chain and eventually, good

profit margins.

 The choice of your suppliers determines the success of your business significantly.

 Choose the wrong supplier and you could face shipping delays, poor quality and product returns.

Which you should consider as you identify

potential suppliers and then narrow down your
shortlist. Considering these supplier attributes
will help you choose the right supplier and build a
more effective supply chain.
Attributes/Characteristics of a Good Supplier

Production capabilities
Accountability for quality issues

⮚Admitting to a mistake can be difficult. ⮚Most importers understand the importance of

looking for suppliers who can actually manufacture
⮚But when your goods are on the line, working with the product they want.
a quality supplier that takes responsibility for their
half of a deal can make a world of difference. ⮚In fact, many importers focus so much on
production capabilities of a prospective supplier
⮚That’s why accountability for quality issues tops that they overlook other vital considerations.
the list of characteristics of a good supplier.
⮚A quality supplier should be able to consistently
⮚A supplier with accountability will take manufacture a product that meets your
responsibility for the quality problem and work requirements.
forward to address it quickly.
⮚The only reliable way to verify a supplier’s
⮚They might offer to remove the untrimmed production capabilities is to visit the supplier,
threads and implement stricter quality controls or either personally or through a third-party agent.
revise work instructions to prevent the same
defect from appearing in future production runs. ⮚should ideally audit your suppliers and review
product samples before mass production.
Attributes/Characteristics of a Good Supplier
Production capabilities
Accountability for quality issues

⮚Admitting to a mistake can be difficult. ⮚Most importers understand the importance of

looking for suppliers who can actually manufacture
⮚But when your goods are on the line, working with the product they want.
a quality supplier that takes responsibility for their
half of a deal can make a world of difference. ⮚In fact, many importers focus so much on
production capabilities of a prospective supplier
⮚That’s why accountability for quality issues tops that they overlook other vital considerations.
the list of characteristics of a good supplier.
⮚A quality supplier should be able to consistently
⮚A supplier with accountability will take manufacture a product that meets your
responsibility for the quality problem and work requirements.
forward to address it quickly.
⮚The only reliable way to verify a supplier’s
⮚They might offer to remove the untrimmed production capabilities is to visit the supplier,
threads and implement stricter quality controls or either personally or through a third-party agent.
revise work instructions to prevent the same
defect from appearing in future production runs. ⮚should ideally audit your suppliers and review
product samples before mass production.
Attributes/Characteristics of a Good Supplier
Ease of communication Ethical compliance

⮚Language and cultural barriers can present real ⮚Ethical sourcing has made its way into the
challenges for importers looking for suppliers spotlight. As larger brands have made headlines in
overseas. recent years for social compliance violations in
⮚benefit greatly from working with a supplier that’s their supply chain, countries have taken steps to
easy to communicate with. outlaw goods made with forced labor.
⮚Effective communication can prevent a variety of
problems ranging from production delays to
product nonconformities.
Attributes/Characteristics of a Good Supplier
Availability Training and Education

 Are the products or services you’re looking for

 Partners are expected to provide comprehensive
available on a timely basis? If the issue is building
training and education on an as-needed basis. You
materials, are the supplies readily available
can’t afford hold-ups due to inexperienced hires
through the usual sources?
or subs. Remember, we work in an industry

where only one worker enters the field for every

five that retire. On-demand training and support

is essential.
Attributes/Characteristics of a Good Supplier

Warranty Just in time delivery

How do you back your finished project? A one-year

The supplier has a good understanding with his
warranty? Five? Even 10 years? Make sure you align
customer and knows exactly how much of a product
yourself with partners that meet or exceed your
is needed and when it needs to be delivered.
standards
Definition of Sourcing
1’st : Sourcing process includes every activity that revolves around identifying and assessing potential suppliers as
well as selecting and engaging with an appropriate supplier who offers the best value.

2’nd : Sourcing is the process of selecting suppliers to provide the goods and services you need to run your
business.

Sourcing involves the following:

 Finding quality sources of goods and services
 Negotiating contracts
 Establishing payment terms
 Market research
 Testing for quality
 Considering outsourcing for goods
 Establishing standards
Definition of Sourcing
1’st : Sourcing process includes every activity that revolves around identifying and assessing potential suppliers as well as
selecting and engaging with an appropriate supplier who offers the best value.

2’nd : Sourcing is the process of selecting suppliers to provide the goods and services you need to run your business.

3’rd : Sourcing is the process of vetting, selecting, and managing suppliers who can provide the inputs an organization needs for
day-to-day running. Sourcing is tasked with carrying out research, creating and executing strategy, defining quality and quantity
metrics, and choosing suppliers that meet these criteria.

Sourcing involves the following:

 Finding quality sources of goods and services
 Negotiating contracts
 Establishing payment terms
 Market research
 Testing for quality
 Considering outsourcing for goods
 Establishing standards
What is Sourcing Process?
 Sourcing in procurement is a process of assessing, selecting, and managing suppliers to acquire the desired goods
and services from them.

 As the name suggests, sourcing focuses on creating sources through which an organization can obtain its supplies.

 Thus, it enables procurement and helps ensure the availability of necessary goods and services for a company.

 Another term that you will hear a lot when purchasing products from vendors or suppliers is strategic sourcing.

 Strategic sourcing refers to adopting various sourcing strategies and models to minimize the risks and costs while
increasing the purchase value.
What is Sourcing Process?
 The sourcing process involves:

1) Collecting data on good quality sources of goods and services

2) Negotiating contracts
3) Market research
4) Product testing for quality
5) Considering outsourcing for goods
6) Constituting standards that the company will use.
Sourcing Vs Procurement
Sourcing Procurement
Sourcing takes care of everything from finding suppliers, Procurement involves procuring goods and services
vetting & contracting them, and maintaining a healthy needed for the organization.
chain of vendors to cater to the organizational needs

Focuses on the who that makes the supplies possible Focuses on the what of supplies

Sourcing is concerned with building and managing supply Leverages supply chains to ensure a steady flow of inputs
chains and supplies to the organization.

Sourcing manages supply chains and builds alternatives Procurement is primarily concerned with running already
for resilience created supply chains.

Creates vendor and supplier relations Manages supplier relationships to procure goods

Aims at minimizing costs and building a robust supply Aims at fulfilling internal needs and gaining a competitive
chain advantage

Takes a strategic approach Includes both strategic and tactical components

Type of Sourcing

Outsourcing
Insourcing
The most practical and straightforward
This type of sourcing involves you delegating a
example would be hiring a party outside a
job to someone or a team within the company.
company to perform services or create goods
Most company leaders prefer this option when
that were traditionally performed in-house.
available because it is an excellent cost-saving
This can also be done by migrating operations
strategy that allows for on-the-ground
abroad or partnering with a domestic supplier.
monitoring of the quality of goods and services
Both back and front office functions can be
required.
outsourced.

Near-sourcing

This involves placing some of your operations

close to where your end-products are sold.
Type of Sourcing
Low-cost Country Sourcing (LCCS)
Global Sourcing
LCCS involves sourcing materials from
The world is now one giant marketplace.
countries with lower labor and production
Buying goods and services from international
costs. This type of sourcing focuses on cutting
markets across geopolitical boundaries has
down the overall operating expenses of an
become an easy process. This method has
organization. China has become the go-to
many benefits and exposes your organization
country for this sourcing method for most
to different markets
global corporations.

Vertical Integration

Involves the merging of companies at different production and/or distribution stages in the same industry.
So, when a company acquires its input supplier, it is called backward integration; it is called forward
integration when it acquires companies in its distribution chain.
Examples: Amazon, IKEA and Netflix.
Why is Sourcing Important?

• The amount of money that organization can save by selecting

Cost Saving and choosing suppliers that will offer the highest value at the
best price.

• Effective implementation of a sourcing process has its foundation

The Enhancement on the quality of the suppliers involved.
of Ideal Suppliers • Procurement teams should have on-hand supplier profiles and
understand the core capabilities of the suppliers they choose.

The Establishment
of a Long-term • When suppliers are valued and considered in various sourcing
decisions, they will feel motivated and optimize their performance
Relationship with to meet your organization’s objectives
Suppliers
Type of Suppliers
Wholesalers and Distributors Affiliate Merchants
Manufacturers and Vendors

These suppliers are companies that An affiliate merchant is a supplier

These are the companies that
buy in bulk from several that wishes to drive traffic to their
research, develop and actually
manufacturers or vendors. They website or sales of their product
produce the finished product
warehouse the goods for reselling through banner ads and links
ready for purchase.
to smaller local distributors, placed throughout a network of
Manufacturers and vendors are
wholesalers and retailers. affiliates. Merchants will normally
the source of the supply chain.
Distributors and wholesalers may pay affiliates a commission for
Distributors, wholesalers,
also supply larger quantities to every visit to the website or every
resellers and retailers who
organisations or government sales conversion.
purchase goods from
departments directly. A genuine
manufacturers and vendors
wholesale supplier will require
benefit from the cheapest prices
your VAT or Tax ID number. This
because no other companies have
distinguishes them from discount
added their margin to cost of the
retailers and resellers who market,
goods yet.
particularly online, as wholesalers.
Type of Suppliers
Franchisors Importers and exporters Independent crafts people

A franchisor is a business owner These suppliers will purchase These are normally manufacturers
and will grant a licence to an products from manufacturers in of products they have designed or
individual, which allows them to one country and either export produced on smaller unique scales
develop their own business using them to a distributor in a different of economy and will usually sell
the trademark, name, know-how country, or import them from an direct to retailers or the end
and business systems of the exporter into their country. Some consumer through agents or trade
franchisor which includes may travel abroad to buy direct shows.
suppliers and often at better from suppliers in another country.
pricing than an individual could
get themselves.
Type of Suppliers
Dropshippers Independent And Trade Show Reps

These are suppliers of products Independent craftspeople who

from single or multiple create their own pieces often sell
companies that will deliver direct their work independently or
to the buyer once they have made partner with representatives who
the purchase from your business. help sell their final product.
This can be cost effective as it Independent craftspeople are
eliminates the need for storage known for one-of-a-kind intricacy,
or display of the items for sale. along with handmade detailing.
Single Versus Multiple Sourcing

SINGLE SOURCING MULTIPLE SOURCING

Multi-sourcing is when companies

Single sourcing is when
source from multiple different
companies source their inputs
companies. For inputs, there are two
from just one supplier – each
or more different companies that
component, raw materials, and
supply the inputs.
other parts are bought exclusively
from only one firm.
Situations When Each Approach Makes Sense
Single Sourcing Multiple Sourcing

Only one potential supplier: For some inputs, there may Critical inputs: Any supply chain disruption would
be no other option than to use one supplier significantly impact your operations

Inputs are low value: The input may be so low value that High-value inputs: If a single supplier were to raise its
there is little benefit to be gained from having multiple prices, it would have a significant impact on your margins
options.

There are many other options that can be easily moved Long time to change supplier: If may take many months to
to: Should there be issues with your supply chain, you move to a different supplier, this can raise the power of
have some flexibility to go with another company. your suppliers.
Advantage : Single VS Multiple Sourcing?
Single Sourcing Multiple Sourcing

Partnership between buyer and suppliers allows Alternative sources of materials in case of delivery
cooperation, shared benefits and long-term relationship stoppage by a supplier.
based on high level of trust
Reduction of risk of opportunistic behaviour Reduced probability of bottlenecks due to insufficient
production capacity to meet peak demand
Large commitment of the supplier that is willing to invest Increased competition among suppliers leads to better
in new facilities or new technology. quality, price, delivery, product innovation and buyer’s
negotiation power
Lower purchase price resulting from reduced production More flexibility to react to unexpected events that could
costs, due to better knowledge of the manufacturing endanger supplier’s capacity
process by supplier and achieved economies of scale

Choosing between single and multiple sourcing based on supplier default risk: A real options approach
Nicola Costantino, Roberta Pellegrino (2009)
Disadvantages : Single VS Multiple Sourcing?
Single Sourcing Multiple Sourcing

Great dependency between the buyer and the supplier Reduced efforts by supplier to match buyer’s
requirements

Increased vulnerability of supply Higher costs for the purchasing organization (greater
number of orders, telephone calls, records, and so on)

Increased risk of supply interruption, especially for asset

specific products

Choosing between single and multiple sourcing based on supplier default risk: A real options approach
Nicola Costantino, Roberta Pellegrino (2009)
WHY Favoring :Single VS Multiple Sourcing?
Single Sourcing Multiple Sourcing

Low Cost Need Capacity

Volume to Small to Split-easy to handle and manage Spread the Risk of Supply Interruption

Owen Product or Process Purchase Create Competition

Less Quality Variability Gather Information

To Establish a Good Relationship Dealing with Special of Business

Volume too small to split-easy to handle and manage

Supplier Evaluation Factors
 Supplier evaluation is the process of assessing and approving potential suppliers through quantitative and

qualitative assessments. This is done to ensure you only work with the best-in-class suppliers available.

 There are 3 main reasons you should perform supplier evaluation:

1)For existing suppliers, it can help you uncover and remove hidden waste and costs and achieve sustainable

procurement.

2)For new suppliers, it can set a threshold that can lead to higher-quality results.

3) To avoid any difficulties related to suppliers flexibility and capability.

Supplier Evaluation Factors

Process and design • Suppliers should have up-to-date and capable products, as well as
capabilities process technologies to produce the material needed.

• Quality levels of the procurement item should be a very important

factor in supplier selection, because its directly affect the quality of
Quality and reliability the finished goods.
• Besides reliable quality levels, reliability also refers to other supplier
characteristics.

• The total cost of ownership is an important factor.

Cost • Minimized controllable indirect costs (freight, inventory, handling,
tariffs)
Supplier Evaluation Factors
• Suppliers must be able to back up their products by providing good
services when needed.
Service
• For example, when product information or warranty service is
needed, suppliers must respond on a timely basis.

• The organisation may also need to consider whether the supplier

Capacity has the capacity to fill orders to meet requirements and the ability
to fill large orders if needed.

• Geographical location is another important factor in supplier

Location selection, as it impacts delivery lead time, transportation, and
logistics costs.
Supplier Evaluation Factors
• Management’s commitment to continuous process, quality
improvement, maintain positive relationships with its workforce
Management Capability
and its willingness to develop a closer working relationship with the
buyer is important to assessing a potential supplier’s.

• Your company should ask as many questions as needed to

determine whether a supplier can handle your typical functions.
Performance • Previous experiences with similar companies, relevant recent
projects, and possible advances on current products or processes
are all valid subjects for discussion.

• You need to know that deliveries can be mad where and when you
want them.
Delivery Time
• The number of deliveries per week also one of the factors to
consider for selection.
Supplier Evaluation Factors
• Financial condition usually occurs during the evaluation process.
Financial condition and • These elements are important in determining whether the supplier will
cost structure continue to be a reliable source of supply, and that supply will not be
disrupted.

• With the current technological advancement trend organisations seek

suppliers that are willing to share their technologies and information.
Willingness to share
technologies and • Suppliers can assist in new product design and development through
early supplier involvement to ensure cost-effective design choices,
information develop alternative conceptual solutions, select the best components and
technologies, and help in design assessment.

• Can the supplier consistently provide high quality goods? A good basis for
this is to ask how long they have been working with their other clients.
Consistency • If they have long standing relationships with other clients, it is a good sign
that they can continuously deliver over time.
Supplier Evaluation Method

Method Categorical Weighted-point Cost-ratio

Characteristics • Relies on historical • Based on weighted • Relates all

record performance point identifiable
• Composite index purchasing costs to
used to make rate the supplier
comparison
Grading/Evaluation • Plus (+) • Based on highest • Quality cost, delivery,
standard • Minus(-) score services, etc.
• Neutral grades

User • Small company • Most company • Big company with

large supply base
Supplier Evaluation Method
Method Categorical Weighted-point Cost-ratio

Advantages • Easy implementation • Flexible system • Provide total cost

• Minimum data required • Allows supplier ranking approach
• Suitable for limited • Moderate implementation • Provide supplier ranking
resources organization costs analysis
• Low-cost system • Combines quality and • Great potential for long
quantity factors term improvement

Disadvantages • Least reliable • Tend to focus of unit • Cost-accounting skills

• Rarely used as it is price required
difficult to measure • Requires some computer • Complex in
• Most subjective skills implementation
assessment • High costs
• Manual assessment • Computer resources
required
Supplier Evaluation Method
 There are number of approaches being used to assist the supplier performance evaluation.

 The first step in implementing any of the techniques being discussed is to determine the attributes that should

be considered.

 A firm should focus on the attributes that it finds most important.

 Some of the attributes that can be considered are:-

Willingness to share sensitive
Quality Level On-Time Delivery Communication Skills
information

Price/Cost of Quick Response Time in Case of

Service Level Presence of certificate
Product Emergency, or Special Request

Flexibility to respond to Willingness to Change their

Correct Quantity Use of EDI
unexpected demand changes Products to Meet Your Changing
Needs
Supplier Evaluation Method
CATEGORICAL METHOD SUPPLIERS
ATTRIBUTES
B
- The buyer chooses attributes that A C
are most important to its
particular situation. Price/Cost of
+ - +
Product
- The buyer assigns either a Quality Level 0 + +
preferred (+), unsatisfactory (-), On-Time
or neutral (O) rating for each of - _ 0
Delivery
the selected attributes to every
vendor. TOTAL 0 (-)(-)(+) (+)(+)

- Then the ratings are totalled for The supplier who obtains highest score
each vendor.
will then be the best performer.
- For example, ratings resulting in
scores of two preferred (++),
one unsatisfactory (-), and one
neutral (O) would total one
positive (+).
Supplier Evaluation Method
WEIGHTED POINT METHOD

- The relevant attributes are chosen and each are assigned a weight depending on the importance to the overall performance.

- The weight for each performance category is then multiplied by the performance score that is assigned to it.

- Finally, these products are totaled to determine a final rating for each supplier.

Supplier A Supplier B
Attributes
Weight Measurement
Rating Rating × Weight Rating Rating × Weight

Price/Cost of 1 = Worst 3/5 (3/5) × 30 = 18 4/5 (4/5) × 30 = 24

30
Product 5 = Best
1 = Worst 3/5 (4/5) × 50 = 40 2/5 (4/5) × 50 = 40
Quality Level 50
5 = Best
On-Time 1 = Worst 2/5 (4/5) × 20 = 16 3/5 (4/5) × 20 = 16
20
Delivery 5 = Best
Total 100 74 80

The supplier who obtains highest score

will then be the best performer.
Supplier Evaluation Method
THE COST RATIO METHOD

- This plan compares vendors on the total cost for a specific purchase.
- Total cost includes price quotation, quality costs, delivery costs, and service costs.
- The final rating is in (RM) of net value cost.
- The net value cost is the product of the adjusted unit price and the number of units.
- The adjusted unit price incorporates three cost ratios.

1)The quality cost ratio reflects the relative cost of quality.

2)The delivery cost ratio reflects the relative cost of placing and receiving an order. It also includes a promises-kept penalty
based on a ranking of past performance of vendors.
3)The service cost-ratio reflects the technical, managerial, and field service competence of the vendor.

- All three of these plans recognize quality in the rating of vendors but the rating is not restricted to product quality.