Purchasing and Outsourcing

SUPPLY CHAIN
MANAGEMENT
PURCHASING AND OUTSOURSING
Reporters:
Bajado, Dannah Lyn
Ocampo, John Arthur
Torlao, Mark Ken
Yadao, Rhoel
Building the
Supply Base
1
For those goods and services, a firm buy, suppliers, also
known as vendors, must be selected and actively
managed. Supplier selection considers numerous
factors, such as strategic fit, supplier competence,
delivery, and quality performance. Because a firm may
have some competence in all areas and may have
exceptional competence in only a few, selection can be
challenging. Procurement policies also need to be
established. Those might address issues such as
percent of business done with any one supplier or with
minority businesses.
Four-Stage Process for Supplier Selection
Supplier Evaluation
The first stage of supplier selection, supplier evaluation,
involves finding potential suppliers and determining the
likelihood of their becoming good suppliers. If good
suppliers are not selected, then all other supply chain
efforts are wasted.
• Supplier Certification
International quality certifications such as ISO 9000 and ISO 14000 are
designed to provide an external verification that a firm follows sound
quality management and environmental management standards. Buying
firms can use such certifications to pre-qualify potential suppliers.
A certification process often involves three steps:
QULIFICATION EDUCATION CERTIFICATION PERFORMANCE

PROCESS
Supplier Development
The buyer makes sure the supplier has an appreciation of
quality requirements, product specifications, schedules and
delivery, and procurement policies. Supplier development may
include everything from training, to engineering and production
help, to procedures for information transfer.
Negotiations
Although the prices that consumers pay are often inflexible (printed on the
price tag, listed in the catalog, etc.), a significant number of final prices paid
in business-to-business transactions are negotiated. In addition to the price
itself, several other aspects of the full product “package” must be
determined. These may include credit and delivery terms, quality standards,
and cooperative advertising agreements.
Three Classic Types of Negotiation Strategies:
Cost-Based Price Model
The cost-based price model requires that the supplier open its
books to the purchaser. The contract price is then based on time
and materials or on a fixed cost with an escalation clause to
accommodate changes in the vendor’s labor and materials cost.
Market-Based Price Model

In the market-based price model, price is based on a published,
auction, or index price. Many commodities (agricultural
products, paper, metal, etc.) are priced this way. Paperboard
prices, for instance, are available via the Official Board Markets
weekly publication (www.advanstar.com).
Competitive Bidding
When suppliers are not willing to discuss costs or where near perfect
markets do not exist, competitive bidding is often appropriate.
Competitive bidding is the typical policy in many firms for the
majority of their purchases. Bidding policies usually require that the
purchasing agent have several potential suppliers and quotations
from each.
Contracting
Supply chain partners often develop contracts to spell out terms of the
relationship. Contracts are designed to share risks, share benefits, and
create incentive structures to encourage supply chain members to adopt
policies that are optimal for the entire chain. The idea is to make the total
pie (of supply chain profits) bigger and then divide the bigger pie among all
participants. The goal is collaboration. Some common features of contracts
include quantity discounts (lower prices for larger orders), buybacks
(common in the magazine and book business where there is a buyback of
unsold units), and revenue sharing (where both partners share the risk of
uncertainty by sharing revenue).
Centralized Purchasing
Companies with multiple facilities (e.g., multiple manufacturing plants or multiple retail outlets)
must determine which items to purchase centrally and which to allow local sites to purchase for
themselves. Unmonitored decentralized purchasing can create havoc.
Important cost, efficiency, and “single-voice” benefits often accrue from a centralized purchasing
function. Typical benefits include:
Leverage purchase volume for better pricing

Devote more resources to the supplier
Develop specialized staff expertise selection and negotiation process
Reduce the duplication of tasks

Develop stronger supplier relationships
Promote standardization
Maintain professional control over the
purchasing process
E-Procurement
E-procurement speeds purchasing, reduces costs, and integrates the

supply chain. It reduces the traditional barrage of paperwork and, at the
same time, provides purchasing personnel with an extensive database of
supplier, delivery, and quality data.
Online Catalogs and Exchanges Purchase of standard items is often

accomplished via online catalogs. Such catalogs support cost comparisons and
incorporate voice and video clips, making the process efficient for both buyers
and sellers. Online exchanges are typically industry-specific Internet sites that
bring buyers and sellers together.
Online Auctions
In addition to catalogs, some suppliers and buyers have established

online auction sites. Operations managers find online auctions a fertile
area for disposing of excess raw material and discontinued or excess
inventory. Online auctions lower entry barriers, encourage sellers to join,
and simultaneously increase the potential number of buyers.
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SUPPLY CHAIN

QULIFICATION EDUCATION CERTIFICATION PERFORMANCE

Market-Based Price Model

Leverage purchase volume for better pricing

Reduce the duplication of tasks

E-procurement speeds purchasing, reduces costs, and integrates the

Online Catalogs and Exchanges Purchase of standard items is often

In addition to catalogs, some suppliers and buyers have established

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