Topic 1 : Introduction to sourcing
Definition of sourcing
Sourcing is the process of identifying, selecting and developing suppliers.
The definition of sourcing can be simple or much more complex, the simple definition is “the process involved in identifying potential suppliers, conducting negotiations with them to and then signing purchasing agreements with them to provide goods/or services that meet your company’s needs”
Sourcing generally refers to those decisions determining how components will be supplied for
production and which production units will serve which particular markets. Multinational firms have been pursuing integrated sourcing to a greater extent than before because such an operation allows them to exploit their competitive advantages (Kotabe and Murray, 1990). Sourcing can, next to the above, be defined as ‘the reorganization of tasks, functions and services of an organization, whereby the more effective managing of organizational and operational processes is the main issue (Huibers and Schut, 2006).
Huibers and Schut (2006) also state that ‘with sourcing, organizations can manage their
operational and organizational processes more effectively’. This can be done internally,
externally, national or international. Sourcing can be done by concentration of activities, by transferring the execution of services or processes to an external party or by the transferring business activities abroad. In other words sourcing can have many forms depending on the organization it is applied to.
Types of suppliers
- Suppliers of manufacturer brand: These kinds of suppliers are responsible for developing the merchandise and establishing an image for the brand. In some cases, the manufacturer will use its name as part of the brand name for a specific product.
- Suppliers of private-label brands: In this case retailer /buyers develop specifications for the merchandise and then contract with a supplier to manufacture it. The retailer is given the mandate to promote the brand but not the manufacturer.
- Supplier of licensed brands: This applies whereby the owner of a well-known brand name (the licensor) contracts with licensee to develop, produce and sell the branded merchandise.
- Suppliers of generic products: This involves suppliers of unbranded, unadvertised merchandise found mainly in grocery and discount stores.
Three of the main sourcing options that can be applicable for organizations to enhance their competitive advantage are:
- Internal sourcing (in sourcing).
- Local sourcing
- Global sourcing is a term used to describe practice of sourcing from the global market for goods and services a cross geographical, political boundaries. Global sourcing often aim to exploit global efficiencies in the delivery of a product poor service. Some of these efficiencies include:
low cost, skilled lab our, low cost of raw material and other economic factors like tax or low trade tariffs.
Global sourcing is sourcing products and some times services irrespective of national
boundaries, For example it is particularly popular in European Economic countries in Europe and Asia. The rise of Chinese and Indian manufacturing capabilities has meant that sourcing from these countries has greatly increased in the past few years. This is because purchasing companies are seeking lower labor and production cost.
Considerations of source selection
- Flexibility of the supplier:
- The degree of service provision
- Effectiveness/efficiency of the supplier
- Reliability of the supplier
- Delivery capability
- Technical support by the supplier
- Supplier’s capacity
- Financial clout
- Integrity of the supplier
- SOURCES OF INFORMATION RELATING TO POTENTIAL SUPPLIERS ENCOMPASS:
- Catalogue: This is a booklet containing details of items for sale by the supplier. They contain valuable technical information and format of presentation is simple.
- Trade directories: These contain new product requirements, special/occasional requirements and emergency items.
- Yellow pages: Entail a classified telephone directory, often printed on yellow paper that lists subscribers by the business or service provided.
- Sales persons: They can provide useful service information regarding suppliers
- Exhibition: This is a public display of products/services and it offers a great opportunity to talk with a number of potential suppliers in the same place at the same time.
- Trade Journals: This is a periodical containing new developments, discussions etc concerning a trade or profession.
- Business advisers: Local business-support organisations, such as chambers of commerce or Enterprise Agencies often point out prospective suppliers to deal with.
- Professional peers: This entail informal exchange of information between buyers
- Information provided by prospective suppliers
- Internet search engines
- Local press both printed and electronic
- Mobile marketing platform
1.2 Sourcing levels
1.2.1 Strategic sourcing
Sourcing is one of the latest trends in organizational strategy; it can generate lower cost and higher quality. However in order to realizing it good configuration and coordination to choose between different sourcing options is necessary.
Therefore, sourcing strategy can be defined as “The directions, scope and timeframe an
organization gives to the arrangement and grouping of tasks. It’s concerned with top-level, longer-term decision relating to high-profit, high supply risk strategic items and low-profit.
Formulating a strategy depends not only on external factors but also on stakeholders, resources and process in other words;
the following three factors play a role in the strategy formulation for operations:
- Factors related to internal process.
- Factors related to external process
- Humans participating in processing the strategy.
Strategic sourcing is concerned with the formulation of:
- · Long-term purchasing policies
- · The supplier base
- · Partnership sourcing
- · Reciprocal and intra-company trading
- · Globalization and countertrade
- · Purchase of capital equipments
- · Ethical issues.
In transactional sourcing, purchasing is viewed as a function concerned with the placement of orders but in strategic sourcing, purchasing is viewed as a knowledge-based activity concerned with the total cost of ownership rather than the price paid per item with the optional mix relationship to provide competitive advantage.
1.3 Sourcing cycle
As seen in the explanation of sourcing and the many investigations that are done on sourcing, which by far not cover all issues related, sourcing can be classified as complex. To keep some overview in this complex process, sourcing can be approached as a structured process; from formulating the sourcing strategy to evaluating the daily processes that are connected. Clearly explaining sourcing, six steps can be identified, which together are the ‘sourcing life cycle’
- In the first step, sourcing approach, the possible sourcing project needs to be clearly aligned
with the business strategy to aid effective decision-making throughout the project lifecycle. This strategic alignment should assist in ensuring that the required sourcing benefits are achieved and that any risks to realizing outsourcing benefits are effectively managed. The main aspects that need to be done at this stage are, the development of a sourcing strategy that considers the various sourcing options; the development of a business case examining the reasons for and benefits for sourcing; the consideration of other factors, such as proposed staffing models and outsourcing locations; and identification of critical success factors for the project.
- In step two of the life cycle model, the sourcing preparation phase , the detailed planning occurs. During this stage, the objectives of the sourcing project are identified; the risks and constraints are identified and plans put in place to mitigate these risks; and the business processes that are to be affected by the sourcing project are documented. In short this means that during the second step, the future operating model is defined and a project plan is developed.
- Sourcing selection, which is the third step, involves detailed processes surrounding analysis, selecting the most suitable supplier. In this step also the structure-selection process is performed.
- Step four transition management, which is the process of moving from the current state to the complete implementation of the outsourcing solution. It involves transition of people, process and technology. This step includes risk, change management and implementation plans of the project.
- Step five during the delivery management phase , ongoing delivery of the sourced service occurs. The tasks performed in this step depend upon the services that have been outsourced. However, a number of key processes, like service level-, financial-, capacity-management and service continuity are generally performed.
- The last step of the sourcing life cycle, the service evolution phase , refers to those tasks that are intended to improve or evolve the level of service that is provided, including the exit process. In short this step involves process performance improvement.
Strategic sourcing is an institutional procurement process that continuously improves and re-evaluates the purchasing activities of a company. In a production environment, it is often considered one component of supply chain management. Strategic sourcing techniques are also applied to nontraditional areas such as servicurcing process were defined, in 1994, as:
- Assessment of a company’s current spending (what is bought, where, at what prices?).
- Assessment of the supply market (who offers what?).
- Total cost analyses (how much does it cost to provide those goods or services?).
- Identification of suitable suppliers.
- Development of a sourcing strategy (where to purchase, considering demand and supply situations, while minimizing risk and costs).
- Negotiation with suppliers (products, service levels, prices, geographical coverage, Payment Terms, etc.).
- Implementation of new supply structure.
- Track results and restart assessment (Continuous cycle)
Note that while the modernized process combines the market assessment and cost analyses steps of the older model into a single “market research” step, and the supplier identification and sourcing strategy development steps into a single “go-to-market” step, negotiation has split into “negotiation” and “contracting”. This is due to the heightened importance of market intelligence in modern strategic sourcing, and its ability to deliver value by improving both pricing and contract terms when leveraged against the identified suppliers.
Note also that, while both descriptions of the sourcing process are accurate to some extent, there is no standard set of steps and procedures. As strategic sourcing is put in place and practiced over time, many large, sophisticated organizations will modify the process to better meet their individual corporate needs.
- Driven by specifier, requisition needs
- Often buying a solution rather than solving a need
- Buying what the market has to offer
- A function
- Management, a passive role
- Driven by business needs
- Solving a business need
- Influencing the market to meet the need
- A x-functional process
- Management, an active role
TOPIC 4: ALTERNATIVE PROCUREMENT PROCEDURES
- Restricted Tendering
When Restricted Tendering May Be Used
A procuring entity may engage in procurement by means of restricted tendering in such manner as may be prescribed.
A procuring entity may use restricted tendering if the following conditions are satisfied –
Competition for contract, because of the complex or specialized nature of the goods, works or services is limited to prequalified contractors
- The time and cost required to examine and evaluate a large number of tenders would be disproportionate to the value of the goods, works or services to be procured
- There are only a few known suppliers of the goods, works or services as may be prescribed in the regulations.
- Direct Procurement When Direct Procurement May Be Used
A procuring entity may use direct procurement as allowed as long as the purpose is not to avoid competition.
A procuring entity may use direct procurement if the following are satisfied –
- There is only one person who can supply t goods, works or services being procured; and
- There is no reasonable alternative or for the goods, works or services.
A procuring entity may use direct procurement the following are satisfied.
- There is an urgent need for the goods, works services being procured.
- Because of the urgency the other available methods of procurement are impractical.
- The circumstances that gave rise to the urgency were not foreseeable and were not the result of dilatory conduct on the part of the procuring entity.
The following shall apply with respect to procurement:
- The procuring entity may negotiate with a person for the supply of the goods, works or services being procured;
- The procuring entity shall not use direct procurement in a discriminatory manner; and
- The resulting contract must be in writing and signed by both parties.
- REQUEST FOR PROPOSALS
When request for proposals may be used
A procuring entity may use a request for proposals for procurement if:
- The procurement is of services or a combination of goods and services
- The services to be procured are advisory or otherwise of a predominately intellectual nature. Subject to any prescribed restrictions, a procuring entity may use a request for proposals for procurement if the procuring entity would be allowed to use another alternative procurement procedure for that procurement under
Notice inviting expressions of interest
The procuring entity shall prepare a notice inviting interested persons to submit expressions of interest.
The notice inviting expressions of interest shall set out the following
- The name and address of the procuring entity.
- A brief description of the services being procured and, if applicable, the goods being procured.
- The qualifications necessary to be invited to submit a proposal.
- An explanation of where and when expressions of interest must be submitted.
The procuring entity shall advertise the notice inviting expressions of interest in at least two daily newspapers of nation-wide circulation.
Terms of reference The procuring entity shall prepare terms of reference that set out the following –
- The specific requirements prepared under section relating to the services
- if applicable, the goods being procured and the time limit for delivery or completion
Determination of qualified persons
After the deadline for submitting expressions of interest the procuring entity shall examine each expression of interest to determine if the person submitting it is qualified to be invited to submit a proposal in accordance with the notice inviting expressions of interest.
Request for proposals to qualified persons
The procuring entity shall give each person who it determines is qualified to be invited to submit a proposal a request for proposals and a copy of the terms of reference. The request for proposals shall set out the following:
- The name and address of the procuring entity.
- The general and specific conditions to which the contract will be subject.
- Instructions for the preparation and submission of proposals which shall require that a proposal include a technical proposal and a financial proposal.
- An explanation of where and when proposals must be submitted.
EVALUATION OF PROPOSALS
The procuring entity shall examine the proposals received in accordance with the request for proposals.
For each proposal, the procuring entity shall evaluate the technical proposal to determine if it is responsive and, if it is, the procuring entity shall assign a score to the technical proposal, in accordance with the procedures and criteria set out in the request for proposals.
- For each proposal that is determined, under subsection (2), to be responsive, the procuring entity shall evaluate and assign a score to the financial proposal, in accordance with the procedures and criteria set out in the request for proposals.
- If the request for proposals provides for additional methods of evaluation, the procuring entity shall conduct such methods in accordance with the procedures and criteria set out in the request for proposals.
- The successful proposal shall be the responsive proposal with the highest score determined by the procuring entity by combining, for each proposal, in accordance with the procedures and criteria set out in the request for proposals, the scores assigned to the technical and financial proposals and the results of any additional methods of evaluation
- REQUEST FOR QUOTATIONS When may it be used?
A procuring entity may use quotations for procurement if:
- Use a request for the procurement is for goods that are readily available and for which there is an established market,
- The estimated value of the goods being procured is less than or equal to the prescribed maximum value for using requests for quotations.
This section sets out the procedure for a procurement using a request for quotations.
The procuring entity shall prepare a request for quotations that sets out the following:
- The name and address of the procuring entity.
- The specific requirements prepared under relating to the goods being procured.
- An explanation of where and when quotations must be submitted.
- Anything else required under this Act or the regulations to be set out in the request for quotations.
The procuring entity shall deal with the request for quotations in accordance with the following:
- The procuring entity shall give the request to such persons as the procuring entity determines;
- The request must be given to as many persons as necessary to ensure effective competition and must be given to at least three persons, unless that is not possible;
- The procuring entity shall give the request to each person early enough so that the person has adequate time to prepare a quotation.
The successful quotation shall be the quotation with the lowest price that meets the requirements set out in the request for quotations. The following shall apply with respect to the contract resulting from procurement by a request for quotations:
- The procuring entity shall place a purchase order with the person submitting the successful quotation.
- The person submitting the successful quotation shall confirm the purchase order in writing.
If there will not be effective competition unless foreign persons participate, the following shall apply:
- The request for quotations must be in English.
- The technical requirements must, to the extent compatible with requirements under Kenyan law, be based on international standards or standards widely used in international trade.
- A person submitting a quotation may, in quoting prices or providing security, use a currency that is widely used in international trade and that the request for quotations specifically allows to be used.
- Any general and specific conditions to which the contract will be subject must be of a kind generally used in international trade.
F: LOW-VALUE PROCUREMENTS
When may be used
A procuring entity may use a low-value procurement procedure if:
- The estimated value of the goods, works or services being procured are less than or equal to the prescribed maximum value for that low-value procurement procedure.
- Any other prescribed conditions for the use of the low-value procurement procedure are satisfied.
A regulation prescribing a maximum value for a low-value procurement procedure or prescribing conditions for the use of such a procedure may prescribe different values or conditions for different classes of public entities or different classes of goods, works or services being procured.
The procedure for low-value procurement shall be as prescribed.
A regulation prescribing a low-value procurement procedure may:
- Prescribe different procedures for different classes of public entities or different classes of goods, works or services being procured.
- Exempt the procedure from the application of a provision of Part IV or vary the
Application of such a provision to the procedure.