INTRODUCTION
Strategic sourcing could be defined as a systematic and organized approach for effective optimization of organization’s supply base and eventually works to enhance the overall value proposition of the organization. In simpler term, sourcing is an activity that involves processes to acquire the best product/service at the best value continuously. The objective of sourcing is to reduce the cost of products and services while maintaining the quality of the products. In addition, some of the other prominent objectives of sourcing are to enhance the relationship between the organization and the suppliers, leveraging the organization’s spending, to understand the category buying along with management of processes in order to take advantage of opportunities (Stadtler, 2005).
(University of Michigan, n.d.)
The use of sourcing provides the organization with several advantages and benefits. Some of the most prominent benefits associated with the use of sourcing include cost savings, increase quality, and standardize pricing, increase in operational efficiency, access to new suppliers and creation of relationship with old and loyal suppliers in the market as shown in the image below:
(University of Michigan, n.d.)
The purpose of this assignment is to evaluate the sourcing and supply strategies that could help the organization to enhance its value proposition in the market along with other opportunities. In order to do so, the study would focus on the identification of purchasing and procurement activities. Furthermore, this study would also highlight the process involved in the selection of suppliers as well as managing and maintaining relationship with the suppliers in the market. Sourcing process and supply management process would remain the highlight of this study as it would help to identify and evaluate the steps involved in the process. In addition, the future trends in purchasing and supply management would also be discussed to provide the reader with insight regarding the improvement and developments in this particular field. The trends that would be discussed include lean procurement, green purchasing and supply chain management along with e-procurement (Fugate, Sahin, & Mentzer, 2006).
PURCHASING AND PROCUREMENT (BASIS OF SUPPLY CHAIN)
The term purchasing is a systematic process that involves ordering and receiving goods and services in the market. The aim of such purchasing is the accomplishment of organizational goals and objectives. In short, purchasing is a specific act to acquire something by paying equivalent amount of money which makes this process a form of the procurement. The activities involved in the purchasing process includes identification of needs, investigation and selection of suppliers, preparation and issuance of purchase order, follow up of order, inspection of materials, audit of invoices and authorization of payment and finally the closing of order (Gundlach, Bolumole, Eltantawy, and Frankel, 2006).
On the other hand, procurement is the management’s function that focuses highly on ensuring the management of external resources through which the organization could achieve its strategic objectives (CIPS, 2007). Similarly, this process could be defined as a process that provides the organization with opportunities regarding supply market and the implementation of resourcing strategies through which the organization could deliver best possible supply outcome to the organization, its stakeholders and the customers. The activities involved in procurement are pre-contract activities such as planning, need identification, analysis and sourcing; post-contract activities such as contract management, supply chain management and disposal; and general activities such as corporate governance, management of the overall relationship with the suppliers, management of uncertainty and risk involved, and regulatory compliance.
According to CIPS (2007), some of the identified benefits of procurement include:
- Security of supply,
- Improved and enhanced quality,
- Lower and reduced costs,
- Reduced and avoided risks,
- Increased and enhanced efficiency and
- Innovation
The terms purchasing and procurement are similar as both the processes include activities to acquire goods and services offered from the suppliers in order to execute organization’s operations.
Similarly, sourcing also plays an essential role in supply chain. Sourcing includes set of business processes required for the purchasing of goods and services. Furthermore, the term sourcing refers to the value added process of selecting suppliers that could benefit the organization most along with the cooperation scheme supported by advanced analytical and marketing intelligence, supplier performance information along with well developed strategy (Simchi-Levi, Kaminsky, & Simchi-levi, 2007).
SUPPLIER SELECTION AND SUPPLIER RELATIONSHIP MANAGEMENT
Once the organization decides to either outsource its processes or perform it in-house, the processes include selection of suppliers, design of supplier contracts, product design collaboration, procurement of material and services and evaluation of supplier’s performance. Before an organization select suppliers, it must first decide regarding the number of suppliers to use i.e. single sourcing or multiple suppliers (Day, 2002).
Some of the methods to select suppliers for the organization include (Beil, 2009):
Identifying Potential Suppliers
For an organization to survive in this competitive environment, it is essential to explore new opportunities available for the organization in the economy such a new suppliers. New suppliers in the market are quite essential for an organization due to the technology or processes that provide them with an opportunity to reduce production cost or these new suppliers might have structural cost advantage of existing suppliers in the market. In addition, it has also been identified that new suppliers in the market helps organization to enhance their competitive edge by eliminating supply disruption (Cox, 1996).
On the other hand, the organization must screen the potential suppliers to avoid dire outcomes such as non-performance of suppliers. The primary objective of this screening process is to avoid providing suppliers with contracts that are consistently non-performers such as late-delivery, non-delivery or delivery of faulty goods. The suppliers screening process involves the following aspects (Beil, 2009):
- Reference Checks
- Financial Status Checks
- Surge Capacity Availability
- Indications of Supplier Quality
- Ability to Meet Specifications
Information Request to Suppliers
Once the organization is provided with sufficient potential suppliers, the next step in supplier selection is to request the suppliers to provide sufficient information regarding their goods and services. The three types of requests made to suppliers include (Beil, 2009):
- Request for Information (RFI)
Such type of request is made when the organization aims to seek market intelligence regarding the alternatives available to meet the organization’s needs. With such a request, the organization does not provide information regarding its intention to award a contract.
- Request for Proposal (RFP)
Such type of proposal is issued by the organization when all the information regarding the suppliers’ performance is gained. The RFP contains information regarding the performance requirements that the organization needs fulfilled by the supplier. In response, the supplier provides sufficient information regarding how they would satisfy the organization’s performance requirements along with the price to accept to do so.
- Request for Quote (RFQ)
This is the last request that would make the potential supplier a part of the organization. This request is issued when the organization is fully satisfied with the information provided by the supplier in order to satisfy the organization in terms of goods and services.
Contract Terms
The information provided by the suppliers to the organizations mentioned above are the basis on behalf of which an organization designs formal contractual terms. This contract specifies the roles and duties of the suppliers and the method of payment through which the suppliers would be paid by the organization. The contract designed by the organization to enhance their relationship with the supplier specifies the number of payments along with the arrangements regarding the non-payment. Few common types of contract terms are indicated below to identify contract terms considered by the organization during negotiations and awarding contracts (Beil, 2009).
Payment Terms
In a fixed price contract, the organization specifies the price terms with the supplier. In simpler words, it means that these terms are related to the price that would be paid to the suppliers for their services and accomplishment of desired tasks and roles. In this type of contract the suppliers are paid regardless of the actual cost to execute its obligation towards the organization. On the other hand, cost plus contract determines the amount that would be paid to the suppliers for their execution of tasks and roles. Under this contract, the supplier receives a fixed percentage of total cost (Handfield and Nichols, 1999).
Non-Payment Terms
The non-payment term indicates all the information necessary for the supplier to execute its tasks and duties. The details include delivery quantities, delivery frequencies, location of the delivery, level of service, quality level along with the duration of the contract (Beil, 2009).
Negotiation Process
Before awarding the contract to the supplier by the organization, both the organizations have to go through this stage i.e. negotiation, where the organization considers all the aspects of the supplier as well as the contract term (i.e. price). In order to create relationship between the organization and suppliers, both attempt to induce favorable terms for one another. The negotiation process could be regarded as a zero-sum game where the organization is benefited along with the suppliers as the organization gains what the supplier gives up and supplier gains what the organization gives up (Beil, 2009).
Supplier Evaluation and Contract Award
This is the stage where the organization decides regarding the winner of contract based on several aspects of the suppliers. Supplier evaluation could be termed as a process by which the suppliers are ranked by the organization and based on these ranks; the organization awards the contract to the suppliers that could help the organization to accomplish its goals and objectives in both short and long term. Finally providing the supplier with contract means that the organization could monitor the performance of the suppliers in the market and based on this particular performance, the organization determines to either continue to contract or eliminate it and find some other potential suppliers to help the organization accomplish its goals and objectives in the market (Beil, 2009).
Supplier Relationship Management
The goal of supplier relationship management is to achieve the desired goals and objectives of the organization in the most effective and cost efficient manner which ultimately leads to the increase in client’s satisfaction level. For the relationship between the organization and the suppliers to work effectively, it has been indicated several times that the organization should work towards improving mutual understanding with the suppliers rather than focusing on buying the suppliers to work for the organization. As the supplier relationship management is a virtuous cycle, it focuses upon mutual understanding between the suppliers and the organization along with creation of valuable options, improvement of trust and communication and sharing of information regarding the interests of the parties (Hines et al., 2000).
(Black, 2005)
SOURCING PROCESS AND SUPPLY MANAGEMENT PROCESS
Strategic sourcing is a systematic approach used by organizations to improve its overall value proposition as well as an approach to optimize the organization’s supply base. It is a continuous process to achieve the best products and services offered in the market at the best value (University of Michigan, n.d ).
The sourcing process includes the following steps:
(Clegg and Montgomery, 2005)
Step 1: Profile the Category
The first step in sourcing process is regarding the category and commodities presented in it. This step focuses highly on the identification of quantities used, types and sizes in the market.
Step 2: Supply Market Analysis
The second step in the sourcing process is the identification new global and local suppliers in the market that could help to achieve desired results. This step focuses highly on the suppliers and the risks and opportunities provided by them.
Step 3: Develop Strategy
The entire focus of this step is to develop a strategy that could help the organization to minimize its risk. The important questions that must be considered in this step are regarding the current suppliers, the competitiveness level in the market and the availability of new suppliers.
Step 4: Select Sourcing Process
The most commonly used process for sourcing includes the use of RFP that provides the organization with relevant information regarding the suppliers.
Step 5: Negotiate and Select Suppliers
The next step in sourcing process is to negotiate the terms and regulations with the suppliers to get the most suitable supplier in the market that could eventually help the organization to achieve its desired goals and objectives in the market.
Step 6: Integrate Suppliers
The next step is regarding the implementation of the suppliers in the process. In order to effectively integrate the suppliers, the organization are provided with communication plans that could help the organization to provide relevant information to the suppliers regarding any sufficient changes made in the process.
Step 7: Benchmark Supply Market
The last but not the least step in sourcing process is the benchmarking of the supply market which eventually becomes the start of the continuous cycle which helps the organization in monitoring the performance of the suppliers which evidently helps to ensure that full value is being achieved by the organization.
Some of the crucial decisions that must be taken into consideration while making sourcing decisions include:
- Use of multifunctional teams
- Ensuring proper coordination and communication across the business unit and regions
- Evaluation of the total cost of ownership
- Building long-term relationship with the key suppliers
Along with this, all these steps can be categorized into broader five steps or phases of strategic sourcing process which are as follow:
- Process initiation
- Situation analysis
- Strategy creation
- Strategy implementation
- Supplier management
(LCRA, n.d.)
LACK OF SUPPLY CHAIN COORDINATION AND THE BULLWHIP EFFECT
It has been indicated that lack of coordination is the most common reason due to which organizations fail to accomplish their desired goals and objectives associated with the supply chain management. Most of the time, lack of coordination occurs due to either conflict of objectives or delays in information which eventually leads the organization to diminish total supply chain profits (Chopra, Meindl, Kalra, 2008).
It has been observed that due to such lack of coordination and delays in communication, many firms observed BULLWHIP EFFECTS. Due to such effect, the organization observes fluctuations in order increase due to which each stage has a different perspective regarding the demand which eventually results in loss of supply chain coordination (Chopra, Meindl, Kalra, 2008).
Bullwhip Effect has its own consequences i.e. reduction in performance due to lack of coordination. An example of such effect was observed in Proctor and Gamble’s supply chain for Pamper Diapers. Some of the effects that the organization witnessed due to BULLWHIP Effect include (Chopra, Meindl, Kalra, 2008):
- Increase in manufacturing cost in the supply chain
- Increase in inventory cost in the supply chain
- Increase in replenishment lead times in supply chain
- Significant increase in transportation cost in the supply chain
- Increase in labor cost associated with shipping and receiving in the supply chain
- Increase in stock out in the supply chain
- Negative effect on the performance of the organization’s supply chain which eventually hurts the relationships between different stages of the supply chain.
FUTURE TRENDS IN PURCHASING AND SUPPLY MANAGEMENT
Some new trends are constantly gaining importance in the world of purchasing in order to enhance the efficiency and effectiveness of the supply chain i.e. doing more with less (Partida, 2012). The concept of lean purchasing is constantly being adopted by several organizations to increase their efficiency along with growth in the bottom line. It has been indicated that with lean purchasing fewer employees would be needed to complete the designated task. This, of course, would help the organizations to reduce their staffing cost as fewer staffing members would be required. Adoption of lean in the procurement function would eliminate the unnecessary and time taking paper work from the purchasing process. In addition, such trend in supply management focuses on the elimination of staff that provides no significant value to the procurement function along with the organization (Carter & Easton, 2011; Gold, Seuring, & Beske, 2010).
Some of the identified benefits with the use of such system include (Eaton, n.d ):
- Speed and responsiveness to customers and clients
- Reduced inventories
- Reduced costs
- Improved customer satisfaction
- Source of competitive advantage
E-procurement is also another trend in the supply chain management that is constantly gaining interest of organizations in the world of supply chain (Presutti Jr, 2003). E-procurement could be regarded as a trend that focuses on selling goods and services through the internet. It has been indicated that the use of e-procurement results in the improvement of labor’s productivity which eventually contributes to a number of positive outcomes that could help the organization to enhance its profit to significant level (Puschmann & Alt, 2005).
Similarly, it has been indicated that the concept of e-procurement have been embraced by several organizations as it helps in increasing productivity along with reduction in costs to great extent. In addition, the e-procurement allows the organization to control and monitor the processes with the use of advanced technology (Butner, 2010).
CONCLUSION
In order to conclude, it could be said that Purchasing have become just like shopping due to the increasing use of procurement and purchasing facilities provided by the suppliers. With the rise of trends in supply chain management, organizations are provided with opportunities to enhance their effectiveness along with performance meanwhile, reducing the costs and delayed information in the supply management.
With the rise of supply management, it has been observed that organization faces lack of coordination in supply management which eventually leads the organization to face BULLWHIP EFFECT. The lack of coordination reduces the performance and effectiveness of the organization which eventually plays an important role in reducing the organization’s profits in the market. Similarly, the lack of coordination and delays in information leads to conflicts in different stages of supply chain which eventually increases the transportation, inventory and manufacturing cost in supply chain management.
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