Principles of purchasing & Supplies Management

Topic 05: Supplier Evaluation and Selection

Lecturer 05: Sourcing options/strategies

Matthew Kalubanga, PhD

Ms. Isabella Izimba Kasiko
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 Lecture 05: Sourcing
Options/Strategies

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Agenda
1. Sources of information about potential suppliers
2. Supplier sourcing options / strategies
– Make-or-Buy
– Single sourcing
– Dual sourcing
– Multiple sourcing
– Local Vs Foreign (Overseas) Sourcing.

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1. Sources of information about potential
suppliers
• Sourcing services
• Supplier representatives
• Trade exhibitions
• Colleagues
• Other buyers
• Approved lists
• Recorded performance
• Trade directories
• Publications
• Professional associations
• Government bodies (departments) e.g., Bureaus of statistics, ministries etc.

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2. Sourcing options/strategies
• ‘Make-or-Buy’
• Single sourcing
• Dual sourcing
• Multiple sourcing
• Local Vs. Foreigner Suppliers

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‘Make-or-Buy’
• The ‘Make-or-Buy’ concerns whether to manufacture the product in-
house or purchase it from a third party organisation.

• With the ‘Make’ option, firms choose to manufacture their own inputs
(in-sourcing), instead of obtaining them from an external source.

• On the other hand, the ‘Buy’ option implies that inputs (or purchasing
requirements) are acquired from a source or sources outside the
organisation.

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Why to ‘make’ (or source in-house)
• Cost
• Reduction of lead-time
• Need to utilise idle resources (i.e. spare capacity concept).
• When quantities required are too small and buying them from
external parties proves more expensive
• Confidentiality
• Need to train staff, build experience and expertise

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 3 pillars of the make-or-buy decision
“the decision of in-house Versus Outsourcing should not be made without careful
analysis. Analysis should be initiated and conducted diligently and objectively”.
Strategy (Pillar 1) Establishing the strategic importance to the company of the
product or service that is being considered for outsourcing
as well as the process technologies or skills required to make
the product or deliver the service.
Risks (Pillar 2) Identifying the risks involved in terms of quality, reliability
and predictability of outsourcing compared with in-house
manufacturing or services.
Economics (Pillar 3) Determining the impact of outsourcing on capital
expenditure, return on invested capital (ROI),and return on
assets (ROA) including possible savings acquired through
25/11/2021 outsourcing. 8
‘Make-or-Buy’ decisions
…simple illustration.

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Illustrative example
• SG company purchases sails and produces sailboats. It currently produces
1,200 sailboats per year, operating at normal capacity, which is about 80% of
full capacity. SG purchases sails at $250 each, but the company is considering
using the excess capacity to manufacture the sails instead. The manufacturing
cost per sail would be $100 for direct material, $80 for direct labour and $100
for overhead. The $100 overhead is based on $78,000 of annual fixed
overhead that is allocated using normal capacity.

Required: 1) Prepare an incremental analysis

2) If SG suddenly finds an opportunity to rent out the unused
capacity of its factory for $77,000 per year, would your answer in
(1) change ?

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Answer Analysis
Part (1)
• Working: Make Buy Net Income
Direct materials =$100x 1,200 = (increase/d
$120,000 ecrease)
Direct labour = $80x1,200 = Direct Materials $ 120,000 0 $ 120,000
$96,000
Direct Labour $ 96,000 0 $ 96,000
Overheads per unit
=$78,000/1,200 =$65 Overhead $ 42,000 0 $ 42,000
Incremental =$100-$65=35 $258,000 $258,000
Variable costs =$35x1,200
=$42,000 Part (2), opportunity cost of $77,000 should be
This is the incremental cost resulting from the added, and the total cost should be $335,000
‘Make’ option. It is lower than sourcing from
25/11/2021 outside (1,200 X $250 = $ 300,000) 11
Single sourcing Vs Dual Sourcing
• Single sourcing refers to purchasing from one selected supplier, even
though there are other suppliers that provide similar products or
services.
• Single sourcing is different from sole sourcing. Sole sourcing—takes
place when only one supplier for the required item is available,
whereas with single sourcing a particular supplier is purposefully
chosen by the buying organisation, even when other suppliers are
available (Larson and Kulchitsky, 1998; Van Weele, 2010).
• Dual sourcing refers to purchasing from 2 selected suppliers, for a
similar product or service.

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Single sourcing –purchaser perspective
• Advantages
• Administrative efficiency
• No need to solicit & review bids from a variety of suppliers
• Few contracts to re-negotiate & those contracts must be re-
negotiated less often
• Lower inventory costs
• Improved product quality
• Access to new technology –supplier is more willing to share its
technology & contribute to the design of new products.
• Disadvantages
• Greater supplier risks (fewer suppliers)
• Over dependency of /or suppliers.
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 Multiple sourcing
“the purchasing firm sources from several suppliers,
for the same product or service”.
Advantages Disadvantages
• Low dependency of suppliers • Cost of dealing with many
• Spreading risks suppliers (several supplier
relationships—costs of
• Encourages price competition, managing them are higher).
which provides potential for
lower purchase costs (prices).

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Local Vs. Foreign (overseas) Suppliers
• Local sourcing means obtaining products or services from external
suppliers, where the sourced suppliers are located within the same
country as the purchasing organisation’s.
• Foreign suppliers are located in another country other than the one
where the purchasing organisation is situated. Sourcing from foreign
(overseas) suppliers implies importing the purchased products, or the
service provider moving-in to the purchasing organisation’s country to
deliver the service.

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Reasons for
Local sourcing
• Cost –cheaper sources are
available locally
• Need to promote local industries
• Desired quality of materials can
be obtained locally.
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Foreign (overseas) sourcing
• Cost—foreign sources providing
cheaper sourcing options
• Need to promote international
trade relations
• Quality—better quality items
available from overseas suppliers
• Local suppliers not available, or
• Local suppliers available but with
low capacity—cannot satisfy
organisation’s sourcing
requirements.
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The End of the presentation
Thank you for your attention.

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Lecture 06: Supplier Evaluation and Selection


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Supplier selection is Step 2 in the purchasing process

Tactical purchasing function Operational purchasing function

1. 2. 3. 4. 5. 6.
Specification Selection Contracting Ordering Monitoring After-Care

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Selection
• Selection (step 2 of the purchasing process) concerns source
identification and evaluation—establishing where the production will
be obtained from.

• Supplier selection is done in two phases;

• first of all selecting all suppliers whose offers match the needs of the buyer
and secondly,
• choosing the supplier whose offer best meets the need at hand.

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 Supplier selection

Find potential
Screening
supplier
Choosing /
Identifying the
ranking
need to select
Develop potential suppliers
supplier

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The supplier selection process

Technical selection
process rests in here !!

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Selection Criteria
 Net price  Packaging ability
 Delivery  Operational controls
 Quality  Training aids
 Production  Bidding procedure
facility/capacity compliance
 Geographic location  Labour relations record
 Technical capability  Communications system
 Management/organization
 Reciprocal
 Reputation
arrangements
 Financial position
 Impression
 Performance history
 Repair service  Desire for business
 Attitude  Amount of past business
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 Warranties and claims
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 Carter’s 10 Cs for Supplier Selection
• Original 7 Cs for supplier selection were:
• Competency: all staff, all the time (requires evidence)
• Capacity: sufficient and flexible
• Commitment: to quality (quality systems)
• Control: control of process
• Cash: sufficient funds for the business
• Cost: cost/price relationships and total cost of ownership
• Consistency: consistent production of goods or services (ISO 9000).
• Three additional Cs
• Culture: compatible with similar values
• Clean: environmentally sound (conforming with legislative requirements)
• Communications: the supplier is fully integrated with information and
communication technology (ICT).
 Supplier selection criteria:
Total Cost of Ownership (TCO)
• “Understanding the true cost of buying a product from a certain supplier”

price

Production
Goods handling
Supplier handling
Storage Capital costs
Administrative
Development costs

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Scoring…………..

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Multiple criteria selection

Criteria Weight Score Weighted Score

Quality 0.40 80% (0.40X80%) =32
Delivery 0.20 70% (0.20X70%) =14
Cost (price e.g. UGX, $) 0.30 70% (0.30X70%) =21
Service 0.10 60% (0.10X60%) = 6
Total points 1.00 73

Weights should sum up to 1

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 Weighted Score –Multi-criteria selection.
Criterion Total Rank
weigh
Tender Quality Delivery Service Cost/Price ted
Score
Weight Score Weig Weig Score Weig Weig Score Weig Weig Score Weig
hted ht hted ht hted ht hted
score Score score score
TOYOTA 0.3 70% 21% 0.2 60% 12% 0.1 80% 8% 0.4 80% 32% 73% 2
NISSAN 0.3 70% 21% 0.2 70% 14% 0.1 80% 8% 0.4 90% 36% 79% 1
KIA 0.3 80% 24% 0.2 60% 12% 0.1 70% 7% 0.4 70% 28% 71% 3
Ford 0.3 60% 18% 0.2 60% 12% 0.1 65% 6.5% 0.4 80% 32% 68.5% 4

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Summary
• Sourcing options/strategy
• Supplier evaluation and selection

Next Lecture
• Supplier performance

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