The Procurement Process – Creating a Sourcing Plan

Introduction
Identify Opportunities
Analyze the Situation
Undertake Strategic Analysis
Case Study
Create a Strategic Sourcing Plan

Introduction

The Procurement Process

Business requirement for product or service

User need for product or service

Identify Opportunities

Opportunities are usually triggered by a business requirement for a product or service.

Material requirements might include:

• Equipment
• Components
• Raw materials

• Completely finished products

Service requirements might include:

• Computer programmers
• Hazardous waste handlers
• Transportation carriers

• Maintenance service providers

Users (also called internal customers) identify a need for material or service requirements, and communicate this need to purchasing.

Analyze the Situation

Situation analysis can include “Purchase Requisitions” or “Statements of Work.”

Purchase Requisitions should contain:

• Description of required material or service
• Quantity and date required
• Estimated unit cost
• Operating account to be charged
• Date of requisition (this starts the tracking cycle)
• Date required

• Authorized signature

Statements of Work (SOW) for services specify the work that is to be completed, when it is needed, and what type of service provider is required.

• Marketing may want to purchase an advertising campaign.
• R&D may need a clinical trial.

• Human resources may need to print a brochure.

Undertake Strategic Analysis

Procurement must work with the suppliers and its internal customers to analyze the process to understand where opportunities exist to eliminate waste and increase value delivery.

Supplier evaluation

In-depth evaluation is required for major purchases. It is used for non-routine supply items of higher value. It begins with a list of potential suppliers. Existing suppliers with good track records should not be ruled out.

Supplier assessment criteria

1. Equipment and facilities

• Up-to-date?

• Ability to expand in the future?

2. Processes

• Ramp-up capabilities?
• Process cycle times?
• Reliable quality control program?
• General housekeeping?
• Working conditions?

• Status of back orders?

3. Management Capabilities

• Project management skills?
• Stable, harmonious team?
• How do they view your company as a customer?
• Long-range strategic vision?

• Leadership?

4. Information Systems

• Up to date?

• Training requirements?

Supplier evaluation criteria

1. Planning and control systems

Planning and control systems include those systems that release, schedule, and control the flow of work in an organization. As we shall see in later courses, the sophistication of such systems can have a major impact on supply chain performance. Among the questions the buying firm should ask:

• Does the supplier have well-developed systems for planning material, personnel, and capacity needs? If not, why not?
• Does the supplier track key performance measures, such as throughput time, quality levels, and costs? Are these measures compared to performance objectives or standards?

• How easy is it for customers to interact with the supplier’s planning and control systems?

This last point is particularly important to organizations interested in effective supply chain management. When interaction is high, information about the customer’s needs flow easily to the supplier, and the customer can, in turn, retrieve important information from the supplier. Consider the relationship between Wal-Mart and Proctor and Gamble (P&G). When a Wal-Mart store sells a particular P&G item, the information flows directly to P&G’s planning and control systems. P&G can then plan production and schedule shipments accordingly. Furthermore, Wal-Mart can easily find out when a P&G shipment will arrive at one of its distribution warehouses, thereby allowing Wal-Mart to consolidate this shipment with others on the way to individual stores.

2. Environmental regulation compliance

The 1990s brought about a renewed awareness of the impact that industry has on the environment. The Clean Air Act of 1990 imposes large fines on producers of ozone-depleting substances and foul-smelling gases, and governments have introduced laws regarding recycling content in industrial materials. As a result, a supplier’s ability to comply with environmental regulations is becoming an important criterion for supply chain alliances. This includes, but is not limited to, the proper disposal of hazardous waste.

3. Minimum typical evaluations to consider

• Price
• Quality
• Service

• Delivery

Weighted Point Method

Using a Weighted Point evaluation system, purchasing can rank suppliers according to some of these criteria.

In this example, Supplier A has a score of 3/5 on quality, 4/5 on delivery, 2/5 on price, and 7 / 10 on service, with a total score of 63. Supplier B scores better than A on quality, not as well on delivery, but better on price and service. Given the associated weights on quality, delivery, price, and service that are important to the purchaser, the weighted scoring system suggests that Supplier B is better suited for this purchase, and should be awarded the contract.

Case Study

Using the information provided in Case Study 2, as well as the Excel spreadsheet, evaluate the following:

• Respond to your manager’s request by discussing the critical factors that you should consider when deciding whether to single source or multiple source this critical item.
• Provide your recommendation for awarding this contract using a formal weighted point supplier evaluation tool that you have developed.

• What other factors might a buyer or buying team consider when evaluating the worthiness of potential suppliers?

Create a Strategic Sourcing Plan

A strategic sourcing plan requires procurement to assess and manage the change so that the benefits of the procurement strategy are realized.

The plan must be created in a way that ensures:

• The benefits identified in the strategy are delivered in full and on time.
• Change will take place successfully and in accordance with a realistic time plan.

• Risks have been considered and the appropriate contingencies are built in to the overall plan.

What makes a good plan?

• Implementation is time-intensive and often has a high failure rate.
• Successful implementations are properly planned and communicated during the creation of the strategy, and then are actively executed and continually managed to completion.
• As the strategy is being developed, the procurement team will identify which areas of the business will be impacted, directly and indirectly.

• During implementation, measurement and attainment of results and the identification of key milestones help to ensure success.