DCM 1B : SOURCING
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 vendors, 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 vendors
- Vendors of manufacturer brand: These kinds of vendors 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.
- Vendors of private-label brands: In this case retailer buyers develop specifications for the merchandise and then contract with a vendor to manufacture it. The retailer is given the mandate to promote the brand but not the manufacturer.
- Vendor 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.
- Vendors of generic products: This involves vendors 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.
Definition 2: Global sourcing refers to the integration and co-ordination of procurement requirements across the worldwide business units of a single firm. It also implies that a particular organisation has adopted a single sourcing strategy for its worldwide business units and that this strategy is aimed at providing a competitive advantage to business units on a global scale. In order to be competitive most firms across the globe participate in global sourcing. Additional attributes in global sourcing include quality improvements, time-to-market reductions, availability improvements and synergy creation of company resources and global partnership.
It is worthwhile to underscore the fact that the bottom line as far as global sourcing is concerned is to meet or exceed product expectations while driving down production costs and streamlining the supply chain. The proliferation of technology to some extent has boosted this approach since transactions in the contemporary business environment are done by just a click of a computers button.
Reasons for sourcing internationally:
- Competitiveness of overseas sources e.g. lower prices, improved deliveries, better quality etc
- Need for manufacturing flexibility
- Stringent quality standards
- Ever changing technology
- The buyer may prefer to buy from foreign source which offers products which have features which are not available domestically.
- Insufficient domestic capacity to meet demand to ensure continuity of suppliers owing to shortages or strikes
- Reciprocal trading and counter trade owing to policy reasons
Successful elements in sourcing abroad:
- Top management support
- Development of efficient communication skills and system
- Establishment of long term relationships with overseas suppliers
- Vast knowledge of international opportunities
- Good understanding of international rules under INCOTERMS
DIFFICULTIES IN BUYING ABROAD:
- Currency difficulties is experienced- fluctuations
- Legal difficulties incase of a dispute
- Delays in delivery
- Time required for negotiation is greatly increased
- Too much documentation e.g. bills of lading, certificate of origin customs entry form etc
- Import duties, procedures and insurance
- Communication problems
Benefits of international/global sourcing:
- Better prices
- Higher world class quality
- Improved customer service
- Improved competition position
- Increased availability of suitable suppliers
Factors to consider when planning international procurement:
The following factors generally hamper planning for international purchasing:
- International risks: These risks relate to:
- Financial factors such as currency uncertainty, financial policy uncertainty and financial effect of economic performance
- Economic factors such as performers of economic indicators etc
- Political factors such as radical changes in government composition or policies
- Operational environmental factors such as the legal structure of the country of export, the rules and procedures governing international trade.
- Logistical barriers: Long distances mean increased transport costs and long delivery times, hampering the supplier in rendering a service
- Customs regulations and duties: Import duties can disrupt prepared cost estimates at very short notice, political motives in the importing country can hamper purchases on specific foreign markets etc
Nationalism: Local source preference is a factor that influences the development of an international purchasing policy and strategy.
Considerations of source selection
- Flexibility of the vendor:
- The degree of service provision
- Effectiveness/efficiency of the vendor
- Reliability of the vendor
- Delivery capability
- Technical support by the vendor
- Vendor’s capacity
- Financial clout
- Integrity of the vendor
SOURCES OF SUPPLIER INFORMATION
This is a comprehensive process based on identifying the available prospective suppliers in the market. 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
- Press either print electronic press
METHODS OF SOURCING
- OPEN NATIONAL TENDERING
Invitation to Tender
The procuring entity/firm shall prepare an invitation to tender that sets out the following:
- The name and address of the procuring entity;
- The tender number assigned to the procurement proceedings by the procuring entity;
- A brief description of the goods works or services being procured including the time limit for delivery or completion;
- An explanation of how to obtain the tender documents, including the amount of any fee;
- An explanation of where and when tenders must be submitted and where and when the tenders will be opened; and a statement that those submitting tenders or their representatives may attend the opening of tenders.
The procuring entity/firm shall prepare tender documents in accordance with this section and the regulations. The tender documents shall contain enough information to allow fair competition among those who may wish to submit tenders.
The tender documents shall set out the following:
- The specific requirements prepared under relating to the goods, work or service being procured and the time limit for completion
- If works are being procured, relevant and bills of quantities
- The general and specific conditions to contract will be subject, including any requirement that performance security be provided before the contract is entered into
- The tender number assigned to the procurement proceedings by the procuring entity
- Instructions for the preparation and submission of tenders including;
- i) The forms for tenders
- ii) The number of copies to be with the original tender
iii) Any requirement that tender security be provided and the form and any such security
- iv) Any requirement that evidence provided of the qualification person submitting the tender
- v) An explanation of where and when tenders must be submitted, a statement that the tenders will be opened immediately after the deadline for submitting them and an explanation of where the tenders will be opened
- vi) A statement that those submitting to their representatives may attend the o tenders
vii) A statement of the period during which tenders must remain valid
viii) The procedures and criteria to be used to evaluate and compare the tenders; a statement that the procuring entity may, at any time, terminate the procurement proceedings without entering into a contract; and
Modifications to tender
- A procuring entity may amend the tender documents at any time before the deadline for submitting tenders by issuing an addendum.
- An amendment may be made on the procuring entity’s own initiative or in response to an inquiry.
- The procuring entity shall promptly provide a copy of the addendum to each person to whom the procuring entity provided copies of the tender documents.
- The addendum shall be deemed to be part of the ‘tender documents.
Advertisement of Tender
The procuring entity shall take steps reasonable to bring the invitation to tender to the attention of those who may wish to submit tenders. If the estimated value of the goods, works or services being procured is equal to, or more than the prescribed threshold for national advertising, the procuring entity shall advertise, at least twice in a newspaper of general nationwide circulation which has been regularly published for at least two years before the date of issue of the advertisement, and on its website in instances where the procuring entity has a website, the advertisement shall also be posted at any conspicuous place reserved for this purpose in the premises of procuring entity as certified by the head of procurement unit.
Time for Preparing Tenders
The time allowed for the preparation tenders must not be less than the minimum period of prescribed for the purpose of this subsection
If the tender documents are amended when the time remaining before the deadline for submitting tenders is less than one third of the time allowed for the preparation of tenders, the procuring entity shall extend the deadline as necessary to allow amendment of the tender documents to be taken in account in the preparation or amendment of tenders.
Provision of Tender Documents
The procuring entity shall provide copies of the tender documents expeditiously and in accord with the invitation to tender.
The procuring entity may charge such fees may be prescribed for copies of the tender documents.
A procuring entity may require that tender security be provided with tenders.
The procuring entity may determine the form and amount of the tender security, subject to such requirements or limits as may be prescribed.
Tender security shall be forfeited if the person submitting the tender:
Withdraws the tender after the deadline for submitting tenders but before the expiry of the period during which tenders must remain valid;
Rejects a correction of an arithmetic error
Refuses to enter into a written contract or fails to furnish any required performance security.
The procuring entity shall immediately release any tender security if :
- The procurement proceedings are terminated;
- The procuring entity determines that none of the submitted tenders is responsive; or
- A contract for the procurement is entered into.
Submission and Receipt of Tenders
A tender must be in writing, it must be signed and it must be sealed in an envelope. A tender and the envelope it is sealed in must bear the tender number assigned to the procurement proceedings by the procuring entity. A tender must be submitted before the deadline for submitting tenders and any tender received after that deadline shall be returned unopened
- 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.