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Iqra University
Airport Campus

MBA Program
Name: ASIF Assignment – 1 Reg: 10841
Procurement and Sourcing
Muhammad Zahid Malik

Important Dates
Assignment: Feb 16, 2020
Hard Copy Submission: Feb 23, 2020
Soft Copy (word file) by email (zahid.malik@iqra.edu.pk): Feb 22, 2020BY 23:00
Marks: 5.0
(NOTE: Late submission ZERO Marks)

Q# A case been argued that buying items from a single supplier has value for the customer. 2.0
1 Using below Figure-1, consider in which sector(s) buying an item from a single supplier
may apply and why? What risks are associated with single-supplier sourcing?

Figure-1
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Purchasing should be part of corporate strategy. As such, it's important that purchasers
know how to evaluate risk and maximize profits by having the right approach to
procurement.

The Kraljic Portfolio Purchasing Model helps purchasers understand where their products
are classified in terms of supply risk and profit contribution, and also know whether the
balance of power lies with them or with their suppliers. Once you know this, you can select
an appropriate purchasing strategy.

Individual buyers invariably believe that their suppliers are truly strategic (in contract to the
business-wise reality). This mis categorization creates expensive and resource-intensive
relationship that have little genuinely impact upon profitability.

Companies have adopted strategies to rationalize and consolidate their supplier base. In
many cases, the supplier rationalization programs have created a single sourcing strategy for
many commodities. This strategy has enabled companies to build stronger and more
collaborative relationships that deliver a range of benefits, including:

 Improved bargaining power to reduce costs

 Decreased effort to track supplier performance and manage relationships
 Improved innovation and design collaboration
 Improved plan synchronization and information exchange
 Improved supplier responsiveness

The strategy has been well proven and many companies have been able to gain a
competitive advantage by enhancing the capabilities of their supply chain. The realization of
cost savings has been further enhanced by another mega-trend in supply chain
management - the globalization of the supply chain and the use of low-cost country
sourcing. Though globalization has contributed significantly to cost reduction objectives, it
has extended the length of the supply chain and has made companies more susceptible to
supply chain risks. A summary of supply chain risks that companies must now manage is
presented in below.

Risks Are Associated With Single-Supplier Sourcing:

1. If there is only one source, it is more difficult for the buyer to ensure that they are
keeping their company competitive.
2. In periods of tight supply, the buyer may be at a disadvantage in being able to ask
other suppliers to accept orders.
3. Other suppliers may lose interest in trying to compete for the business if they see
that a sole-source situation is likely to persist.
4. Buyers may be facing a real risk if the single source has a catastrophic event, gets
bought by a buyer’s competitor, or has financial problems.
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Q# Consider the purchase of a new mobile phone. How would you determine the total cost 3.0
2 of ownership (TCO)? What are the costs that you might incur before the purchase (pre-
purchase), during the purchase, and after purchase (post purchase)? It is recommended
to read attached article prior to attempt the question. (THE HIDDEN COSTS OF
USING CONSUMER-GRADE MOBILE TECHNOLOGY)

To fully understand what you are paying for mobile phone, you need to evaluate the Total
Cost of Ownership (TCO), which is an estimation of all the collective expenses associated
with purchasing and operating a piece of mobile phone. The TCO will provide a way to
compare pieces of mobile phone “apples to apples.”

TOTAL COST OF OWNERSHIP FORMULA

Info graphic of total cost of ownership formula shows how TCO is determined.

Total cost components may be segmented into one of three areas:

 Pre-Transaction,
 Transaction,
 Post-Transaction.

Pre-Transaction.
When a consumer realizes the needs, he goes for an information search. He does the same,
so that he can make the right decision. He gathers the information about the following −

 Product Brands
 Products Variations
 Product Quality
 Product Alternatives.
The consumer can gather information about a product depending on his age, gender,
education and product’s price, risk and acceptance.

Transaction components include the net price paid, placing and managing the order,
transportation costs, sample reviews, invoicing, inspections, total landed costs for
international purchases, rejected product handling, and follow-up and improvements for
future orders. This also means the impact of any problem such as rejected product, late
deliveries, missing packing slips or other documents, expediting, and any activities that
ensure quality product delivery.
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Post-transaction

All the activities and experiences that follow purchase are included in the post purchase
behavior. Usually, after making a purchase, consumers experience post-purchase
dissonance. They sometimes regret their decisions made. It mainly occurs due to a large
number of alternatives available, good performance of alternatives or attractiveness of
alternatives, etc.
The marketers sometimes need to assure the consumer that the choice made by them is
the right one. The seller can mention or even highlight the important features or attributes
and benefits of the product to address and solve their concerns if any.
A high level of post-purchase dissonance is negatively related to the level of satisfaction
which the consumer draws out of product usage. To reduce post-purchase dissonance,
consumers may sometimes even return or exchange the product.
The Total Landed Cost (TLC) is part of the Transaction portion of TCO for any organization
that is sourcing materials, products, or services overseas. Some of the items that fall under
TLC are special packaging, inland transportation, export licensing and taxes, export and
import documentation, port fees at departure and arrival, wood fumigation or heat
treatment, container screening, maritime insurance, ocean or air transportation, pipeline
inventory, freight forwarding services, customs broker fees, customs review of documents,
customs duties, certifications and inspections, harbor maintenance fees, and drayage fees.

A total cost focus provides a complete picture of all of costs incurred before, during, and
after a transaction to support budgeting, informed decision making, lease versus buy
comparisons, and managing a product or service over its useful life through to and including
its afterlife and disposal. TCO allows for successful long-term financial planning and
decisions to be made on a more informed basis than just price. It also recognizes that
managing any problems will cost the organization money beyond the price paid. For
example, the purchase of equipment today includes life cycle costing, a term often used in
place of total cost of ownership when discussing the equipment buy. Life cycle costing
includes all of the costs of testing and reviewing equipment/machinery prior to final
selection; the purchase price, transporting, installing, upgrading/reconfiguring systems,
testing, and training; and any follow-up, retraining, spare parts, and ongoing maintenance.
Without good visibility of these elements, the lowest price supplier could very well end up
as the highest total cost provider!
TCO is ideally a cross-functional initiative. For success the TCO team must have the time,
funding, and senior management support for identifying the various cost components. In
addition, information resources with sound numbers are critical to providing accurate costs,
such as an organization’s transactional costs to administer a purchase order, pay an invoice,
carry inventory, receive product in, inspect product or materials, and transport goods. And
you need to be able to use that information to create a meaningful TCO.