Besides following a standard sourcing procedure, there are several actions companies must take to ensure that they have an efficient procurement strategy.
For each sourced good or service, companies should conduct the following activities:
- Manufacture in-house or outsource to a third party (make or buy analysis)
- Total acquisition cost analysis
- Supply-base rationalization and consolidation
- Primary and secondary sourcing
1. Make or buy analysis
In some circumstances, it might make sense for a company to manufacture a product from sourced raw materials or components. In others, companies might find it more profitable to pay another company to perform the manufacturing process and then sell the finished product.
The decision about whether to make or buy is not always an easy one. Companies must examine the following factors in order to make the most cost-effective choice:
If the goods or services are to be produced in-house, companies must consider the costs associated with labour and other capital assets. In some cases, the capital assets might be better used in some other way.
If a supplier will be manufacturing the product, companies must factor in the costs of dealing with the supplier and correcting any errors to ensure quality control.
Companies must be confident that a supplier will produce a regular supply of product and deliver it in a timely fashion. An interruption in supply of raw materials can be prohibitively expensive, because human resources and plant machinery will not be used for an indeterminate time.
Customers are also likely to select a competing brand of product if supplies are not available.
To ensure a constant supply of materials, companies can use one or more of several procurement strategies:
- The company can purchase the supplier company.
- The company can hold an amount of safety stock. This involves paying additional inventory storage costs and potential obsolescence cost, but these might be justified if there are frequent interruptions in supply.
- The company can select a supplier that is located close to the manufacturing plant to cut down on transportation times.
If the company does not have adequate production capacity, it can choose to subcontract out some or all aspects of production.
If a company does not want its competitors gaining knowledge about a proprietary product or process, it should not use external companies to produce its products.
2. Total acquisition cost (TAC) analysis
The price that a company will pay for goods or services will depend on various factors:
- The respective negotiating skills of the importer and the supplier
- The quality of the materials or service provided
- The available quantities of the product or availability of the service
- The distance goods or service personnel must travel
However, the price of supplies should not be a company’s most important consideration.
Instead, companies must consider the total acquisition cost (TAC). This takes into account the costs involved with issues such as:
- international trade documentation
- supply chain interruptions
- import fees
- fixing poor quality supplies
- making required adjustments to foreign-produced goods
- reverse logistics of handling repaired or returned items
3. Supply-base rationalization and consolidation
The more suppliers a company has, the more complex its supply chain becomes and the more expensive it is to manage.
Companies must aim to ensure the supply of goods or services while minimizing the number of suppliers, maintaining quality standards and meeting cost objectives.
Companies can help ensure the quality of supplies by insisting that suppliers implement quality-management systems, such as those of the International Organization for Standardization (ISO), and raise quality standards.
Higher standards of quality will automatically mean that some potential suppliers are not eligible for the supply chain, thus minimizing the number of suppliers.
Reducing the number of suppliers has major cost benefits for companies.
With a smaller number of suppliers, companies must purchase more from each supplier and purchase more regularly. This will usually result in a reduced purchase price.
Because each supply relationship takes time and effort to manage, fewer supplier relationships result in reduced costs. Working with fewer suppliers will also make it easier for companies to implement processes aimed at improving the supply chain.
4. Primary and secondary sourcing
In some circumstances, a company will be able to, or will have to, use a sole source for their supplies.
However, the company should always have a contingency plan in case a sole supplier becomes unreliable, is taken over by a competing company or is affected by external events.
Many companies use primary and secondary sourcing, in which a primary source is used for as long as they meet company requirements for supply, delivery and quality, and a secondary supplier is available to cover shortfalls.
When a company wants to receive bids from several suppliers, online bid-based sourcing can be used to streamline the process. Importers can put an RFP/ RFQ on an online notice board and potential suppliers can post their response confidentially.
This system reduces paperwork and speeds up the bidding process, especially when bidders are located overseas.