Chapter 2: Sourcing requirements from suppliers

 

Types of sourcing options:

• Multiple sourcing: using 3 or more suppliers
• Dual sourcing
• Single sourcing

Don’t confuse single sourcing with sole sourcing: sole sourcing is when there’s only one supplier in the market, whereas single sourcing is simply choosing a single supplier directly.

Single and dual sourcing comes with a strong relationship and level of trust. This is sometimes called ‘partnership sourcing’. Single sourcing is generally more strategic, whereas multiple sourcing is more tactical.

Tendering. 5 criteria that needs to be met for competitive bidding to be used:

• Value of contract should be high enough to justify time and cost of a full tendering process
• Specifications should be clear
• Adequate/sufficient number of bidders in the market
• Suppliers should be technically competent
• Sufficient time to carry out tendering

3 types of tendering:

• Open tendering: bidding process open to any supplier
• Restricted tendering: process limited to pre-approved suppliers
• Negotiated tendering: small number of suppliers. Straight into contract negotiations with each of them, instead of issuing ITTs and receiving bids

Types of negotiations:

·       ‘Win-lose’: one side wins at the expense of the other. Zero sum because they cancel each other out

·       ‘Win-win’: cooperation eliminates waste and leads to performance improvement

·       Compromise: a win-lose approach usually leads to compromise

Types of negotiating styles:

·       Competitive dialogue: win-lose approach taken

·       Collaborative: both sides take a win-win approach

·       Compromise: negotiator sets out from the start seeking a compromise that both sides will accept

·       Accommodating: negotiator doesn’t want to annoy the other, so accepts ‘losing’

Stages in negotiations

1. Preparation
2. Exchange of information
3. Bargaining
4. Reaching agreement

Types of relationships with suppliers:

·       Spot buying: one-off procurements

·       Regular trading: repeat business with a supplier

·       Framework agreement/call-off contracts: agreed terms with a supplier, and call-offs issued during the framework period

·       Single sourcing: exclusive with one supplier

 

Supplier selection criteria

Quality: will contain different dimensions for buyers, such as excellence, comparison to the market, fitness for purpose.

·       Quality control: systems for detection and correction of defects

·       Quality assurance: systems for prevention of defects

Quality management system (QMS): a set of processes for systematic quality assurance. Certifications such as ISO 9001 quality management standard can help with this.

Total quality management (TQM) is where quality expectations are applied to all resources and relationships, internally and within a company’s full supply chain. I.e. continuous improvement.

ESG: comprises environmental, social and governance.

·       Environmental: things like compliance with environmental laws, level of pollution, environmental policies

·       Sustainability: meeting needs of the present without compromising the ability of future generations to do the same. The 3Ps: Profit, People and Planet are useful.

·       Governance: maintaining fairness, things like rooting out corruption.

 

Technical capabilities

Refers to ability to fulfil buyer’s current and future requirements. E.g. innovation, kind of item produced, production capacity etc.

Systems capabilities

Supplier’s operating system may need to be compatible with the buyer’s systems, or simply need to function effectively. E.g. IT systems, logistics, order processing etc.

Financial capabilities

Suppliers need to maintain their finances and be stable. Credit rating agencies may assess creditworthiness of corporate bonds, which may be an indication of financial stability.

Financial stability is important so that buyers get stable flows of supply. Supplier appraisals (due diligence) will need to explore this.

Financial statements (covered later) are a good source of information.

Value for money: the 3Es are often referred to here.

·       Economy: minimising cost of resources

·       Efficiency: improved operational efficiency

·       Effectiveness: meeting buyer’s objectives

 

Commonly used indices of economic data:

·       Country indexes e.g. GDP

·       Consumer price index (CPI)

·       Producer price index (PPI): useful for procurement to monitor changes in producer prices

·       Commodity price indices

·       Purchasing Managers’ Index (PMI): expectations of purchasing managers

 

Commodity prices are volatile. One feature of commodities is that they have spot and forward prices:

·       Spot prices: today’s price

·       Forward prices: futures contracts are sold for a commodity. These mean delivery at various later dates e.g. 3 months, 1 year. Futures prices are the prices for delivery in these future periods

 

Analysing potential sales:

·       Sales forecasts: expected volume of sales will feed into expected amount of purchases, and suitable levels of inventory

·       Potential sales: volume of sales that might be achievable. This is a longer-term planning process, based on possible market share, market potential etc

o   Market potential x Market share (%) = Sales potential

 

RFIs: Requests for information

RFIs aren’t a promise by buyer to award contracts.

·       They don’t ask suppliers to submit a quote or tender

·       It’s not detailed engagement with supplier

·       Questions are high level and answers are brief

PQQs (Prequalification questionnaires) could be used after RFIs, or as the first step itself. PQQs are more detailed, and identify which suppliers will be invited to submit quotes/tenders.

RFQs (Requests for quotations) is supplier selection based on price. Will generally be lower complexity procurements where lowest price wins.

RFPs (Requests for proposals) are similar to ITTs, but for lower complexity. They ask suppliers to submit proposals that will be evaluated on price as well as other criteria.

RFIs, RFQs and RFPs are sometimes collectively referred to as RFXs.

 

Financial statements

Profit and loss accounts

·       Will differ between sectors: manufacturing companies report gross profit (sales – manufacturing cost of sales). Service companies don’t have manufacturing costs, and just use operating expenses in costs list

Balance sheet

·       It’s a statement of financial position, with three main elements:

o   Assets

o   Liabilities

o   Equity (capital of shareholders)

·       Assets = liabilities + owners’ capital

Cashflow statement

·       Shows where company got cash during FY, how it spent and net cashflow

·       Three main categories of cashflow:

o   Cashflow from company operations

o   Cashflow from purchase or sale of investments e.g. assets

o   Cashflow from financial transactions e.g. borrowing, repayments

 

Financial ratios: profitability

Gross profit margin: ratio of gross profit to sales revenue as %

Net profit margin: ratio of net profit to sales revenue as %

Financial ratios: liquidity

Cash ratio: ratio of cash to current liabilities

Current ratio: ratio of current assets to current liabilities

Quick ratio / acid test ratio: ratio of current assets excluding inventory to current liabilities (safe level is ratio higher than 1)

Financial ratios: gearing

Gearing / leverage ratio: ratio of borrowings to equity capital, as %

Financial ratios: return on investment

Return on shareholders’ capital: net profit / equity capital, as %

Overall return on total capital: operating profit / total assets, as %

 

Examples of aspects of added value:

·       Financial

·       Quality

·       Speed of delivery

·       ESG

 

Product standards and safety standards

Safety standards: compulsory standards on certain products to remove safety risks.

Product standards: technical standards that are voluntary. Two main types of voluntary product standards:

·       Technical standards: technical specifications to ensure a certain quality

·       Management system standards: a framework to manage processes

Products standards organisations develop and amend product technical standards. E.g. British Standards Institution (BSI), International Organization for Standardization (ISO).