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PROCUREMENT : PROCESS AND STRATEGIES

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Make Versus Buy


Primary activities : Inbound logistics ,

operations , outbound logistics , sales and services.

Secondary activities : Procurement ,

Technology development , Human resource management and Firm infrastructure management .


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Identifying core processes


Business process root

Three core high level process include : CRM, Product innovation and SCM HP focuses on PI , NIKE focuses on CRM, DELL on SCM Core process retain within the company must be ensuring strategic power in the chain. Example ; IBM even though the strategic point in product development became the peripheral due to Microsoft and Intel

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The product architecture root

Focus is on sub-system and components of the product. Car Subsystem: Engine, Chassis, Transmission Engine Sub system: power cylinder, fuel system and engine electronics A sub system is strategic if it involves technologies that change rapidly and impact the product on attributes that are important to the customer Sub system internal helps to offer differentiated products and can avoid being commoditized.

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All those components where the

firm is technologically ahead of potential suppliers or can hope to achieve leadership position with some investments are kept internal to the firm.
Eg. Tatamoters buys diesel engine
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technology from fiat.

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Market V/S Hierarchy


The make v/s buy decision is also known as

market v\s hierarchy decision.

Factors involve in this decision are:


Economies of scale Agency cost Transaction cost

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Economies of scale
A vertically integrated firm produces only for

its internal need , while and external supplier firm can aggregate demands of many potential buyers and there by enjoy use economies of scale.

Four major sources of ES


Higher volumes allows a firm to spread its fixed cost over a large volume of operation . Higher volume allows a firm to choose more efficient technology . Pulling of buffer capacities and inventories ,example ; Maruti cars and Kurlons mattresses.

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In general marginal benefit of a buy decision

starts coming down if a firm has a large volume of operation so the multiproduct firm may benefit from vertically integrated operations than buying it from other sources .

Third parties will offer services at lower cost , provided there is enough competition in the supplier market .

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Transaction cost
These are cost involves in using market

mechanism , which can be avoided if those relevant activities are brought in house .

It comprises of :
Search and information cost Bargaining and contracting cost Policing and enforcement cost Cost incurred because of loss of control.

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Agency cost
The cost involve in control and coordination of

internal supply is term as AGENCY COST.

Agency problem comes up while

understanding how aligned are two or more functions in house. For Example Marketing Department (principle)and IT Department (Agent)
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Relationship-Specific Assets
transaction

An Investment made to support a given Suppliers Investment in specialized assets

improves efficiency of transactions and cost reduction of the firm.


Specialized assets could be physical assets or

human capital
Example Wal-mart has made RFID compulsory

for its top 100 suppliers since 2005 onwards.

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Tapered Integration
Mixture of market and Vertical Integration Part of requirement in-house and procures the

rest from the market


Example Pizza Hut

ADVANTAGES
Better understanding of industry cost

structure
Negotiate better deal Benchmark the industry process to motivate 6/6/12

Collaborative Relationship

Supplier is an extension of the firm Treats the suppliers as strategic Partner Firm does not change its partner every year. Needs to ensure supplier works on innovation Supplier does not become complacent Example : Toyota, KIERSTU System

Disadvantage ?
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Disadvantages of Outsourcing

Poor Coordination between the two parties Slows down the speed of Response: Bharti

could not launch the much awaited EDGE (Enhanced data rate for Global Evolution) in 2004, due to suppliers late response.

Leakage of Strategic Information

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Sourcing Strategy for 4 types of Product


Portfolio approach developed by Kraljic

classifies item based on


Importance of item in terms of value of purchase Supply risk in the market( no of suppliers in the market & demand-supply gap) Packaging and transport service markets low risk item Diesel engine, fuel system, technology items represent high risk supply category

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HIG H ITEM Profit Impact

LEVERAGE

STRATEGIC ITEM Strategic Alliance

Competitive Bidding

LO W

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ROUTINE BOTTLENECK PRODUCTS PRODUCT LOW HIGH Supply Risk

Leverage Product
Represents high percentage of the profit of

the buyer and for which there are many suppliers available.

Many suppliers available so less supply risk Easy to switch the supplier Quality is standardized Purchasing Strategy : Float tenders, targeted

pricing and umbrella agreement


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Strategic Item
Product that are crucial for the process or for

production

Scarcity of supply and difficulty in delivery Purchasing strategy: Strategic alliances, close

relationships, long term value focus

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Routine Products
These are also known as non-critical items They are easy to buy and have low impact on

the financial result.

Quality is standardized Purchasing Strategy: Reduce time and money

spent on these products by efficient processing.


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Bottleneck Item
Can only be acquired through one supplier or

their delivery is otherwise unreliable

Have low impact on the financial results Supplier dominated with moderate level of

interdependency
Purchasing strategy: Volume insurance

contract, vendor-managed inventory, keep extra stock and look for potential suppliers
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Outsourcing Off shoring Near shoring Insourcing

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Supplier Development
Supplier Development is the process in which

the firm helps to improve the suppliers capabilities so as to meet the buying firms supply needs.

The activities involved in doing this are:


Assessing suppliers operation and processes Providing incentive to motivate suppliers Encouraging healthy competition between suppliers Working directly with suppliers Providing training programmes

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Examples
In order to promote their environmental goal

of sustainability companies like B&Q, the Body Shop, and Nike offer education, technical assistance and training to their suppliers in order that they can respond better to the companies environmental requests

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Supplier Performance Gap


SPG is the Gap between what suppliers are

capable of achieving and what they currently demonstrate through their cost controls, delivery schedules, quality performance, customer responsiveness and services

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Supplier Rating System


Performance Variables
Delivery Performance Quality Performance Cost reduction

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Types of Supplier Rating System


Categorical System:

the buyer decides the performance categories and assigns rating to each selected performance category like

Quality Delivery Cost

Weighted point System: Cost Based System


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Weighted Point System


This system weighs and quantifies the score

of a performing supplier across different performance categories.


This system combines both quantitative and

Qualitative performance factors unlike categorical system n VPM= WiSi i=1 Where (i=number of performance category factor)
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W= Weightage assigned to each Factor

Cost based System


This approach quantifies the total cost of

doing business with a supplier i.e, it is based on the total cost of ownership (TCO) of a supplier.
The major decision here is to identify and

record the additional costs associated with the suppliers non-performance. Price +

Supplier Performance Index (SPI)=Purchase

performance
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Cost of non

Barriers to Supplier Development


Poor communication, feedback and general

complacency

Lack of commitment by the suppliers Hiding of the operations and materials

problems by either party


Resources limitation Always blame the supplier culture Lack of trust and sharing of information Imbalance of power in the relationship with
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the supplier.

70-30 Procurement Approach


Multiple Sourcing Single Sourcing

Multiple sourcing follows 70-30 approach


Through the award of 70 percent of the

volume to one supplier and 30 percent to a second supplier, economies of scale are obtained from the big supplier while the little supplier provides competition. Using the 706/6/12 30 strategy, when the 70 percent supplier

Benefits of Multiple Sourcing


Protect the company from shortages, strikes

and other emergencies at suppliers end source

Maintain competition and provide a back up Meet customers volume requirement Avoid complacency on the part of a single

source supplier

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Green Purchasing
It is the process of keeping the purchase

activity more eco-friendly, by using recyclable material and following the environmental standards associated with use, storage and disposal of hazardous materials anywhere in the supply chain.

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The 3Rs of Green Purchasing

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E-procurement
The B2B purchases and sale of supplies and

services through the Internet, as well as other information and networking systems, such as electronic data Interchange (EDI) and Enterprise Resource Planning (ERP) is electronic procurement.

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6-types of Eprocurement
Web Based ERP E-MRO E-Sourcing E-Tendering E-reverse Auctioning E-informing

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