Chapter 13

Sources of Price Purchasing managers utilize four basic procedures to determine potential vendors' prices

commodity markets, price lists, price quotations, and negotiations.

quadrant technique

enables the supply chain manager to assess the importance of each product or service being purchased - Uses a two by two matrix on value and risk Generics: Low Risk, Low value - Office Supplies Commodities: Low Risk, High Value - Transportation, Packaging Distinctives: High Risk, Low value items - Available only from specific Suppliers Criticals: High Risk, High Value

Why Strategic Sourcing its different

(1) consolidation and leveraging of purchasing power—to concentrate larger volumes of purchases into fewer suppliers or fewer purchasing transactions; (2) emphasis on value—rather than acquisition cost alone; (3) more meaningful supplier relationships; (4) attention directed to process improvement; and (5) enhanced teamwork and professionalism—to include suppliers and customers, as appropriate.

three types of buy situations that may occur

- capital goods that may represent a longer-term investment for an organization that may require significant financial planning Rebuys: Identical or some variation Maintenance: Repairs operations necessary for continuing operations

Strategic sourcing

Essentially, the strategic sourcing process is broader and more comprehensive than the procurement process.

Procurement

Refers to the process of managing a broad range of processes that are associated with a company's need to procure goods and services that are required to manufacture a product (direct) or to operate the organization (indirect).

e-Commerce Models

Sell-side system: Online businesses selling to individual companies or consumers. • Electronic marketplace: Represents a seller-operated service that consists of a number of electronic catalogs from vendors within a market. • Buy-side system: This buyer-controlled e-procurement or e-commerce service is known as the buy-side system. This system is housed on the buyer's system and is administered by the buyer, who typically pre-approves the suppliers who have access to the system, and the process of the suppliers' products and services that have been pre-negotiated. • Online trading community: The final basic electronic business model is the online trading community. The online trading community is maintained by a third-party technology vendor where multiple buyers and multiple sellers in a given market can conduct business.

Seven key steps are included in the overall strategic sourcing methodology

Step 1: Project Planning and Kickoff Step 2: Profile Spend Identify or reevaluate needs Define and evaluate user requirements Decide whether to make or buy Step 3: Assess Supply Market It involves making sure that all potential sources of supply are identified and that useful mechanisms are in place for meaningful comparisons of alternative supply sources. Step 4: Develop Sourcing Strategy It is important to fully develop a sourcing strategy that defines the parameters of the process and the steps to be followed Step 5: Execute Sourcing Strategy This step begins with an evaluation of the suppliers that remain following the RFI and RFP processes and culminates in the award of a contract Step 6: Transition and Integrate This activity occurs with the first attempt by the supplier or suppliers to satisfy the user's needs. Step 7: Measure and Improve Performance This involves making a post-purchase performance evaluation.

Certifications and Registrations

TQM—represented a strategy in which entire organizations were focused on an examination of process variability and continuous improvement. • Six Sigma—is similar to TQM but involves training experts (known as green belts and black belts) who work on solving important problems while they teach others in the company. • ISO 9000—involves a third-party registration program certifying that companies are following documented processes.

Strategic Soucing Process Steps

The strategic sourcing process consists of seven steps that include project planning and kickoff, profile spend, assess supply market, develop sourcing strategy, execute sourcing strategy, transition and integrate, and measure and improve performance.

Purchasing

The transactional function of buying products and services

buyer, the total procurement price is more than just the basic purchase price

Traditional Basic Input Costs This is the primary price of the product or materials as paid by the firm Direct Transaction Costs These are the costs of detecting, transmitting the need for, and processing the material flow in order to acquire the goods. The use of blanket or systems contracting can also reduce transaction costs. These include direct ordering by users to suppliers, single consolidated billing, and user inspection and checking. Supplier Relational Costs These are the costs of creating and maintaining a relationship with a supplier. They include travel, supplier education, and the establishment of planning and operational links between purchasing and the supplier's order-entry operation, as well as other links, including ones to traffic, engineering, research, and product development in both firms. Landed Costs The inbound transportation flow includes two key cost elements: the actual transportation cost and the sales/FOB terms. Quality Costs/Factors Quality pertains to the conformance of goods to a desired specification. It includes the cost of conformance, nonconformance, appraisal, and ultimate use costs. Operations Logistics Costs These include four key areas: receiving and make-ready costs, lot-size costs, production costs and logistics costs.

key drivers to achieve the desired levels of value

• Assess the total value—Emphasis must go beyond acquisition cost and evaluate total cost of ownership and the value of the supplier relationship. • Develop individual sourcing strategies—Individual spend categories need customized sourcing strategies. • Evaluate internal requirements—Requirements and specifications must be thoroughly assessed and rationalized as part of the sourcing process. • Focus on supplier economics—Need to understand suppliers' economics before identifying buying tactics such as volume leveraging, rice unbundling, or price adjustment mechanisms. • Drive continuous improvement—Strategic sourcing initiatives should be a subset of the continuous improvement process for the overall procurement and sourcing organizations.