CHAPTER TWO

KEY PROCUREMENT ISSUES

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 2.1. Outsourcing

What Is Outsourcing?
 Outsourcing; is where a company hires an external
firm to conduct certain aspects of its business.
 In other words, one business hires another to
operate a certain part of its operations.
 Outsourcing is, essentially, the contracting out of
non-core activities.
 Its a business practice in which services or job
functions are framed out to a third party
 For instance, Apple outsources the majority of its
production to Foxconn which assembles products
such as the iPhone. 2
 Reasons for outsourcing
– Outsourcing can help businesses reduce labor costs
significantly.
– Companies can employ an outsourcing strategy to better
focus on the core aspects of the business.
– To improve efficiency and productivity because another
entity performs these smaller tasks better than the firm
itself.
– External supplier has better capability.
– External supplier has greater or more appropriate capacity.
– To faster turnaround times, increased competitiveness
within an industry, and the cutting of overall operational
costs.
– Lack of internal resource.
– Economies of scale. 3
 Advantages of Outsourcing
1. Constant Service; By outsourcing production,
particularly abroad, the firm is able to operate on a 24-
hour basis.
2. Expertise; Outsourcing firms tend to deal with more
than one business at a time. They run operations day in,
day out, working on their specific part of the process.
• As with the division of labor, they are able to really
focus on and enhance their capabilities.

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 Cont…
3. Focus on Core Competencies; As the firm doesn’t have to
focus on 100 different components within the business – it is
able to focus on factors that separate it from the competition.

 For example, Nike focuses on designing, developing, and

marketing its product, but outsources the actual manufacturing
process.

4. Low Costs; When a business outsources its production, the

other firm will have many other customers so significantly
benefits from economies of scale in that field.

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 Cont…
5. Increased Capabilities; By outsourcing, a firm not only
benefits from its partners’ expertise, but also the wealth of
resources it has available.

 For example, when Apple outsources its production to

Foxconn, it has access to factories across Europe, America,
and throughout Asia

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 Disadvantages of Outsourcing

1. Loss of Control; When outsourcing, the firm essentially

loses control over what is being produced and its quality.

2. Lower Quality; By extension of loss of control, there is

the potential for a lower quality output.

– As the firm has no direct control over what goods or

services are being produced, they may suffer from a sub-

par standard.

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 Disadvantages of Outsourcing….

3. Personnel Difficulties; Firms may outsource to partners

outside the country, or even in different regions of the

same country. What can result are language and cultural

barriers.

4. Security Risks; When outsourcing key aspects of the

business abroad, there is a potential risk to intellectual

property rights and other aspects of security.

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 Drivers Of Outsourcing

 Quality – actual capacity is temporarily insufficient to comply

with demand.

 Cost – outsourcing is a possible solution to increasing costs and

is compatible with a cost leadership strategy.

 Finance – a company has a limited investment budget.

 Core business – a core business is a primary activity that enables

an organization to generate revenues.

 Cooperation – cooperation between companies can lead to

conflict
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 2.2. Quality management
What is quality?

– Quality might be outlined by customers‟

satisfaction or the degree of satisfaction of the
customer needs.

– The composite of all the characteristics, including

performance, of an item, product or service, that
bears on its ability to satisfy stated or implied
needs.
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 Performance quality and conformance quality

• Supplies staff are concerned with quality from two points of

view:
1. Quality of design or specification. Have we specified the
right material for the job, and have we communicated our
requirement to the supplier in a clear and unambiguous way?
This is performance quality.
2. Conformance quality. Has the supplier provided material in
accordance with the specification? We usually establish the
answer to this question by inspection.

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 Quality control and quality assurance
 Quality assurance can be contrasted with control in that
assurance includes all the activities connected with the
attainment of quality, such as:

– Design, including proving and testing;

– Specification, which must be clear and unambiguous;

– Assessment of suppliers, to ensure that they can perform;

– Motivation of all concerned;

– Education and training of supplies staff;

– Inspection and testing;

– Feedback, to ensure that all measures are effective. 12

 Total quality management
 The ‘total quality’ philosophy takes matters a stage further, and

is based on the active involvement of all concerned.

 Attention is paid to systems procedures and processes rather

than the focus being on the good or service being supplied.

 Total quality in the supply chain would mean that suppliers, as

well as customers and the company’s own workforce, would be

involved in determining quality.

 Key ideas associated with TQM as a policy are ‘teamwork’,

‘involvement’ and ‘process’.

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 Inventory management

– Inventory management is a systematic approach to

sourcing, storing, and selling inventory both raw
materials (components) and finished goods (products).

– In business terms, inventory management means the

right stock, at the right levels, in the right place, at the
right time, and at the right cost as well as price.

– Inventory management is the entire process of

managing inventories from raw materials to finished
products
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 Cont…

– Inventory is a physical resource that a firm holds in stock

with the intent of selling it or transforming it into a more
valuable state.
– Inventory is the raw materials, component parts, work-
in-process, or finished products that are held at a
location in the supply chain.

– An inventory is an idle resource that possesses economic

value and kept for the purpose of future production or
sale.
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 Materials requirements planning (MRP)

– MRP is a computer based information system forwarding

and scheduling of dependent demand inventories.

– It is a production planning process that starts from the

demand for finished goods (pdt) and plans the production
step-by-step of subassemblies and parts.

– Material Requirements Planning is a time phased priority-

planning technique that calculates material requirements
and schedules supply to meet demand across all products
and parts in one or more plants.
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 MRP inputs

The three major inputs of an MRP system are:-

– Master production schedule,

– Product structure records, and

– Inventory status records.

Without these basic inputs the MRP system cannot

function.

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 Cont…

 MPS: The master production schedule expresses how much of

each item is wanted and when it is wanted.

 BOM: The product structure records, also known as bill of

material records (BOM), contain information on every item or
assembly required to produce end items.

 Inventory status records: The inventory status

records contain the status of all items in inventory, including
on hand inventory and scheduled receipts.

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 The Just-In-Time concept

– Just-in-time (JIT) is a philosophy of continuous and

forced problem solving that drives out waste.

– The term JIT is used to refer to a repetitive

production system in which both the movement of
goods during production, and deliveries form
suppliers, are carefully timed so that at each step of
the process the next (usually small) batch arrives for
processing just as the preceding batch is completed.
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 Lead-time and time compression

– The time needed to prepare bids, the time required to make

an award and place an order, the time required to receive
the delivery, and the time between receipt and payment are
all defined as lead time.

– Simply, lead time is defined as the time that elapses

between the placement of an order and the receipt of the
order into inventory, lead time may influence customer
service and impact inventory costs

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 Procurement Lead-time

– Lead-time is the time from customer order to receipt by the

customer, composed of three parts, administrative,
production and logistics lead-time.

– Administrative or procurement lead-time this is the time it

takes to process a requisition to the time of contract is
executed.

– Production and logistics lead-time is the time it takes a

supplier from the time of receiving the order to the time
the goods are delivered to the customer.
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Factors that influence Procurement Lead-time

Internal factor
– Poor communication;

– Lack of experience by the procurement manager;

– Procurement delays;

– Lack of planning;

– Poor infrastructure;

– Inadequate resources;

– Lack of motivation; poor project definition etc

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 Factors that influence Procurement Lead-time...

External factors

– External factors include market environment,

– Legal environment,

– Political environment, and

– Other environmental factors.

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 Sourcing strategies and relationships
The nature of the sourcing decision
 Effective source decisions will only be made when all relevant
factors have been considered and weighted against the risks
and opportunities that apply.
Attributes of a good supplier
– Delivers on time.
– Provides consistent quality.
– Gives a good price.
– Has a stable background.
– Provides good service back-up.
– Is responsive to our needs.
– Keeps promises.
– Provides technical support.
– Keeps the buyer informed on progress. 24
 Different types of sourcing
 Before developing the present discussion it is worth recognizing
that the many implications of source decision making may vary by
the type of purchase being made. For example, among the many
different types of source decisions are:

1. Consumable supplies;

2. Production materials and components;

3. Capital purchases (e.g. machinery);

4. Intellectual property (e.g. software);

5. Subcontractors;

6. Services. 25
 Sourcing decisions
 The traditional approach to source decision making involves
the buying organization in:
1. Establishing which suppliers make or supply the product or
service often by referring to a buyer’s guide or industrial
directory;
2. Selecting a shortlist (say three) from those available;
3. Sending an enquiry to each of those three setting out the
requirements;
4. Selecting the best supplier from those who quoted by
comparing the offers; and
5. Placing the purchase order with them, specifying such
matters as volume, schedule, place of delivery, price and
quality required.
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 Sources of information on potential suppliers
 When collecting information on potential suppliers, the
Internet has revolutionized companies’ ability to locate
potential suppliers. In addition, the following points ought
to be considered:
1. Reputation. The reputation of a particular source may be
ascertained through talking to professional contacts and
colleagues.
2. Appraisal/Assessment. A detailed investigation of
potential suppliers may be carried out.
3. Recorded performance. The procurement department
may maintain records that provide information on the
past performance of suppliers who have been used.
4. Approved lists. Individual organizations may maintain
lists of companies who have been assessed and approved.
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 Conti…ed
5. Online catalogue library. Some companies keep a
special library file containing the catalogues, price lists
and other literature from potential suppliers.

6. Online publications. The general or specialist trade

press often contains information on the activities of
companies that might be potential suppliers.

7. Sourcing services. A number of agencies will provide

information to buyers about potential sources of supply
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 Negotiations
 What is negotiation?

– Negotiation is a dialogue that is supposed to create an

agreement or resolve a disagreement.

– Negotiation is a process that is developed when

negotiation counterparts (at least two), who have
interests, some of which are common and others
divergent, desire to reach an agreement.

– “Negotiating rationally means making the best

decisions to maximize our interests.”
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 Cont…
 There are a number of reasons for negotiations:
– Costs: to reduce the cost of acquisition, by achieving lower
prices.
– Value: to achieve added value such as reduced lead or cycle
times.
– Performance: to improve performance
– Conflict: to resolve conflict through reaching
understanding.
– Problem: to solve a problem by open discussion.
– Quality: to achieve optimum quality through reducing
defects.
– Agreement: to reach mutual agreement in a collaborative
style where all parties are satisfied
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 Importance of negotiation in Procurement

– Improve communication
– Build relationships
– Minimize and manage conflict
– Solve problems
– Reach agreements
– Lower costs
– Increase value
– Improve performance
– Improve quality
– Get to the “win-win”
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 THE END

THANK YOU!

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