Sourcing and

Procurement Process

Dr. Aamir Rashid

Topics to be covered
Sourcing and Pricing
 Sourcing – In house or Outsource
 3rd and 4th PLs
 Supplier Scoring and Assessment
 Selection, Design Collaboration
 Procurement Process, Sourcing
Planning and Analysis
 Pricing and Revenue Management for
multiple customers, Perishable products,
seasonal demand, bulk and spot
contracts
Sourcing – In-house or Outsource
 The decision of a firm to perform its
activities internally or get those activities
done from an independent firm is known
as the make versus buy decision.
 Bharti Airtel, India’s number one private
telecom service provider announced its
decision to outsource key network
management activities, IT services and
call centre operations also

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Bharti Airtel : Outsourcing of Network
Operations
 Network Management to Ericsson, Nokia and
Siemens – Manage the existing network and
deploy and operate new base stations in the future.
 IT Management to IBM –IBM manages all IT
services (billing, CRM), operates data centres, help
desk for IT support and application development.
 Customer Service call centres to Hinduja, TMT,
Mphasis & IBM Daksh – Managing customer
service call centres for all customers except
corporate clients and high-value clients. Bharti itself
is maintaining customer service for these high-end
customers.
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Out sourcing Vs Off shoring
 Out sourcing - Owning the facilities
and giving them to third party and
getting manufactured .
-Off shoring
 Not owning any facilities, but making
others to acquire facility and getting
manufactured:

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Benefits from effective sourcing
decisions
 Better economies of scale can be achieved if orders
within a firm are aggregated.
 More efficient procurement transactions can significantly
reduce the overall cost of purchasing.
 Design collaboration can result in products that are
easier to manufacture and distribute, resulting in lower
overall costs.
 Good procurement processes can facilitate coordination
with the supplier and improve forecasting and planning.
Better coordination lowers inventories and improves the
matching of supply and demand.
 Appropriate supplier contracts can allow for the sharing
of risk, resulting in higher profits for both the supplier
and the buyer.
 Firms can achieve a lower purchase price by increasing
competition through the use of auctions.
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In-house or Outsource
The decision to outsource is based on the growth in
supply chain surplus provided by the third party
and the increase in risk incurred by using a third
party. A firm should consider outsourcing if the
growth in surplus is large with a small increase in
risk.
How do Third parties increase the Supply Chain
Surplus
Third parties increase the supply chain surplus if
they either increase value for the customer or
decrease the supply chain cost relative to a firm
performing the task in-house.
Third parties can increase the supply chain
surplus effectively if they are able to aggregate
supply chain assets or flows to a higher lev el
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than a firm itself.

 Capacity aggregation – A third party can increase
the supply chain surplus by aggregating demand
across multiple firms and gaining production
economies of scale that no single firm can on its
own. One of the reasons that Dell outsources design
and production of the processors in its PCs to Intel is
that Intel supplies many computer manufacturers
and gains economies of scale that are not available
to Dell if it designs and produces its own processors.
 Inventory Aggregation – A third party can increase
the supply chain surplus by aggregating inventories
across a large number of customers. Aggregation
allows them to significantly lower overall uncertainty
and improve economies of scale in purchasing and
transportation. They carry significantly less safety
and cycle inventory than would be required if each
customer decided to carry inventory on its own.
 Transportation Aggregation – UPS, FedEx
and a host of LTL carriers are examples of
transportation intermediaries that increase the
supply chain surplus by aggregating
transportation across a variety of shippers.
Each shipper wants to send less than the
capacity of the transportation mode. The
transportation intermediary aggregates
shipments across multiple shippers, thus
lowering the cost of each shipment below what
could be achieved by the shipper alone.
 Warehousing Aggregation – The growth in
surplus is achieved in terms of lower real estate
costs as well as lower processing costs within
the warehouse. Savings through warehousing
aggregation arise if a supplier’s warehousing
needs are small or if its needs fluctuate over
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time.
 Procurement Aggregation – A third party
increases the supply chain surplus if it
aggregates procurement for many small
buyers and facilitates economies of scale in
production and inbound transportation.
 Lower costs and higher quality – If these
benefits come from specialization and
learning, they are likely to be sustainable
over the long term. A specialized third party
that is further along the learning curve for
some supply chain activity is likely to
maintain its advantage over the long term.
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Risks of using a Third Party
 The process is broken – The biggest
problems arise when a firm outsources
supply chain functions simply because it has
lost control of the process as it will make it
worse and harder to control.
 Underestimation of the cost of
coordination – Underestimate the effort
required to coordinate activities across
multiple entities performing supply chain
tasks. This is especially true if a firm plans to
outsource specific supply chain functions to
different third parties.
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 Reduced Customer/supplier contact – A firm
may lose customer/supplier contact by
introducing an intermediary. The loss of
customer contact is particularly significant for
firms that sell directly to consumers but decide
to use a third party to either collect incoming
orders or deliver outgoing product.
 Loss of internal capability and growth in
third party power – A firm may choose to
keep a supply chain function in-house if
outsourcing will significantly increase the third
party’s power. Companies such as HP and
Motorola have moved most of their
manufacturing to contract manufacturers but
are reluctant to move either procurement or
design even though contract manufacturers
have developed both capabilities.
 Leakage of sensitive data and
information – Using a third party
requires a firm to share demand
information and in some cases
intellectual property. If the third party
also serves competitors, there is
always the danger of leakage.

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Third and Fourth Party Logistics
Providers
 A third party logistics provider performs one
or more of the logistics activities relating to
the flow of product, information and funds
that could be performed by the firm itself.
 Traditionally, 3 PLs focused on specific
functions such as transportation,
warehousing and information technology
within the supply chain.
 Most 3PLs started out by focusing on one of
the functions in the supply chain. For eg.
UPS started out as a small package carrier.
 A third-party logistics provider
(abbreviated 3PL, or sometimes TPL) is a
firm that provides a one stop shop service to
its customers of outsourced (or "third party")
logistics services for part, or all of their supply
chain management functions.
 Third party logistics providers typically
specialize in integrated operation,
warehousing and transportation services that
can be scaled and customized to customer’s
needs based on market conditions and the
demands and delivery service requirements
for their products and materials.

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Types of 3PL
 Freight forwarders
 Courier companies
 Other companies integrating & offering
subcontracted logistics and transportation services
Hertz and Alfredsson describe two categories of 3PL
providers:
 Standard 3PL provider: This is the most basic form
of a 3PL provider. They would perform activities such
as, pick and pack, warehousing, and distribution
(business) – the most basic functions of logistics.

 Service developer: This type of 3PL provider will

offer their customers advanced value-added
services such as: tracking and tracing, cross-
docking, specific packaging, or providing a unique
security system.
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 A third-party logistics provider (3PL) is an
asset based company that offers logistics
and supply chain management services to
its customers. It commonly owns and
manages distribution centers and transport
modes. A fourth-party logistics provider
(4PL) integrates the resources of producers,
retailers and third-party logistics providers in
view to build a system-wide improvement in
supply chain management. They are non-
asset based meaning that they mainly
provide organizational expertise.
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4th Party Logistics Services (4PL)

 With the Increased globalization of SC , customers are

looking for players who can manage virtually all aspects
of their supply chain. This has led to the concept of fourth
party logistics provider.
 Anderson Consulting ( Accenture) defined 4th PL as An
integrator that assembles resources, capabilities and
technology of its own and other Organizations, to design,
build and run comprehensive SC solutions.

 3PL – targets a function, 4PL – entire

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Process
A Fourth-party logistics provider
(abbreviated 4PL), lead logistics
provider, or 4th Party Logistics provider,
is a consulting firm specialized in
logistics, transportation, and supply
chain management. Typical fourth-
party logistics providers are CPCS,
SCMO, BMT, Deloitte, Capgemini, 3t
Europe, Accenture and Geodis.

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4TH PL company examples
 Menlo logistics manages all aspects of the
supply chain for Home Life , national
home furnishing retail chain
◦ Integrates transportation, warehousing, home
delivery, product set-up, repair, and reverse
logistics.
Kuehne & Nagel AG - Swiss Freight forwarder,
served as 4th PL for Nortel Network for
outbound logistics to customers. Handles 35 to
40 forwarders, warehouse managers, truckers,
and other log functions.
Li & Fung- served Reebok, managing sourcing
and production across1000s of factories in 32
countries.
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The main factors behind the increasing role of 3PL and 4PL are:
 The international division of production associated with
globalization helped set a global network of manufacturing
activities, implying that producers and consumers tend to have
an acute geographical separation requiring complex
transportation services.
 An increasing focus of manufacturers and retailers on their core
business (known as core competencies) and sub-contracting
activities such as logistics where they have less expertise.
 Productivity gains in supply chain management in terms of costs
and reliability that can be derived from the managerial and
information technology expertise provided by 3/4PL.
 Better utilization of transportation assets and resulting economies
of scale. 3PLs can make better use of transportation assets by
balancing the needs of multiple client shippers across
transportation and distribution.

 3/4PLs are more prone to implement novel supply chain

management practices requiring a higher expertise on material
flows such as transloading , crossdocking and shipment tracking.
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 Key Sourcing- Related
Processes

1. Suppliers 2. Supplier
3. Design 4. 5. Sourcing
Scoring and selection and
contract Collaboration Procurement Planning and
assessment Analysis
negotiation

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Supplier Scoring and Assessment
In addition to quoted price, the following factors must
be considered when scoring and assessing
suppliers :
 1. Replenishment Lead time
 2. On- time performance
 3. Supply Flexibility
 4. Delivery Frequency / Minimum lot size
 5. Supply Quality
 6. Inbound Transportation Cost
 7. Pricing Terms
 8. Information coordination capability
 9. Design Collaboration capability
 10. Exchange rate , Tax and Duties
 11. Supplier Viability
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When scoring and assessing suppliers , the following
factors other than quoted price must be considered:
 Replenishment Lead Time – As the replenishment
lead time from a supplier grows, the amount of
safety inventory that needs to be held by the buyer
also grows.
 On-time performance – It affects the variability of
the lead time. A reliable supplier has low variability
of lead time, whereas an unreliable supplier has
high variability. As the variability of lead time grows,
the required safety inventory at the firm grows very
rapidly.
 Supply Flexibility – Supply flexibility is the amount
of variation in order quantity that a supplier can
tolerate without letting other performance factors
deteriorate. The less flexible a supplier is, the more
lead time variability it will displaypa
ttyts
hi o
s rder quantities
 Delivery frequency/minimum lot size –
Affect the size of each replenishment lot
ordered by a firm. As the replenishment lot size
grows, the cycle inventory at the firm grows,
thus increasing the cost of holding inventory.
 Supply quality – A worsening of supply quality
increases the variability of the supply of
components available to a firm. Quality affects
the lead time taken by the supplier to complete
the replenishment order.
 Inbound transportation cost – Sourcing a
product overseas may have lower product cost
but generally incurs a higher inbound
transportation cost, which must be accounted
for when comparing suppliers.
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 Pricing terms – Include the allowable time delay
before payment has to be made and any quantity
discounts offered by the supplier. Allowable time
delays in payment to suppliers save the buyer
working capital.
 Information Coordination Capability – Affects the
ability of a firm to match supply and demand.
 Design Collaboration Capability – Good design
collaboration for manufacturability and supply chain
can also decrease required inventories and
transportation cost.
 Exchange rates, taxes and duties- Significant for a
firm with a global manufacturing and supply base.
 Supplier viability – Supplier should be around to
fulfill the promises it makes.
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Supplier Selection - Auctions and
Negotiations
A firm must decide whether to use single
sourcing or multiple suppliers. Single
sourcing guarantees the supplier sufficient
business and proper coordination is
possible if there is a single source.
Multiple sources ensures a degree of
competition and also the possibility of a
backup should a source fail to deliver.

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Selection of suppliers is done using:
1. Auctions in the supply chain
 Sealed-bid first price auction – requires each
potential supplier to submit a sealed bid for the contract
by a specified time. Contract is assigned to the lowest
bidder.
 English Auctions – The auctioneer starts with a price
and suppliers can make bids as long as each
successive bid is lower than the previous bid. The
supplier with the lowest bid receives the contract.
 Dutch Auctions – The auctioneer starts with a low
price and then raises it slowly until one of the suppliers
agrees to the contract at that price.
 Second Price Auctions – Each potential supplier
submits a bid. The contract is assigned to the lowest
bidder but at the price quoted by the second lowest
bidder.

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Basic Principles of Negotiation
Negotiation is likely to result in a positive
outcome only if the value the buyer places
on outsourcing the supply chain function to
this supplier is at least as large as the
value the supplier places on performing
the function for the buyer. The difference
between the values of the buyer and seller
is referred to as the bargaining surplus.
The goal of each negotiating party is to
capture as much of the bargaining surplus
as possible.
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