3.

Sourcing /
Procurement
Ch 2 + readings

ADE Business Communication Page 1

Spring 2023
Objectives – Be able to understand and apply the following concepts

3.1 –Sourcing and Purchasing Negotiations:

- Procurement steps
a.i) Internal Analysis,
a.ii) External Analysis
a.iii) Vendor Selection
a.iv) Sourcing Execution

- Negotiations strategies
- Contract Development
a.iv) Sourcing Execution / Sign Agreement
a.v) Implementation / Contract Management

- Consumption and Contract Management

- Contract content
 Four Categories

1. Plan
2. Source
3. Make
4. Deliver
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 PLAN
Demand Forecasting
Product Pricing
Inventory
Management

DELIVER SOURCE
Order
Procurement
Managemenet
Credit &
Deivery Scheduling
Collections
Return Processing

MAKE
Product Design
Production Scheduling
Facility Management

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 Purchasing

Activity related to get: the right product at the right

time in the right quantity and quality.

1) Direct materials- used in the products sold to

customers

2) Indirect materials- used for daily operations

(MRO) – maintenance, repair and operations

3) Services in general

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 a.I) Internal Analysis,
a) PROCUREMENT: a.II) External Analysis
a.III)Strategy Development
a.IV) Sourcing Execution
a.V) Implementation / Contract
Management

Sourcing Process (General):

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The 5 step sourcing process *
 a.I) Internal Analysis
Pre-negotiation

• Understand needs (BOM, Inventory,

demand, deliveries, number of sites, etc.)
• Understand past actions & results.
• Understand different cost components
and real final cost.

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 a.II-III) External Analysis - Vendor
Identifcation
• Understand the industry through various
tools, i.e. Porter Analysis

• Search and meet with those vendors that

could be a good fit with our business.
✓ A detailed & clear criteria needs to be agreed
amongh different functions in the organization

• Audit vendors together with the technical

group

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 a.iii) Vendor Identification- Audit suppliers
Supplier Information
When was the company formed?
What were their total sales last year?
What has been the sales growth/decline
over the last 3 years?
How many employees do they have?
Do they have a parent company?
Is it a public or private company?
If Private, are there silent partners?
What is their market share?
What are their capabilities in other
regions?
Management Profile:
Background
Reward System
Profit driven? Quality driven?
Their Management view of our firm
What's the business strategy of the
supplier?
What are their core competencies?
Why are they producing this material?
What other business do they do with our
firm?
What is their history with our firm (in this
market and others)?
Who are their top 5 customers?
The total % of sales of this 5 customers
over the last year
How big is their R&D?

Product Information
Where are the manufacturing facilities for
this product?
How is this product made?
What are the major cost drivers?
Where are they vertically integrated?
Raw Materials Cost
Labor Cost
Converting Expense
Is Specialized Equipment used
Overall Demand of this product
LR-2017
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significantly over time?
10
 Porter Analysis for Industry Analysis

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 a.III) Vendor Identification/ Selection

• Understand needs (Inventory, New projects, Service

levels, business strategy, etc.)

• Decide & Align the Sourcing Strategy-

- How many suppliers
- Want to leverage business?
- Define most important factors beyond price i.e. IT,
special xx, inventory management, (weight them)

• Understand past actions & results (Deliveries on time,

quality, innovation, costumer sercive etc)

• Get to know the players in the industry

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Just Go with It (2011) Movie CLIP
#4 - The Negotiation - YouTube
 a.IV) Sourcing Execution
Pre-negotiation

- Clearly define:

• Deliverables (What & how much)

• Negotiable items (What)
• IT, Logistics, On time information, Customer
Service, inventory management….
• Tactics of negotiations
• Walk away situations
• BATNA

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 a.IV) Sourcing execution

• Decide on the Sourcing tool to select vendors:

• RFP (Request for proposal)/ RFI, Inquiry or Bid

• Pure negotiation
• Open Auction
• E- Auction
• A Combination of 2 tools
• Define how will suppliers be compared among price
and other elements– weight method, TCO, etc.
• Evaluate either savings or cost impact

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 a.IV- a.V) Sourcing Execution –
Contract/ Agreement development
Is about:
- Exchange of requirements (price, volume, delivery
terms, payment terms, volume discounts, exchange-
rate, volume flexibility, fixed vs. variable price,
quality, order size, IM, invoicing, future business,
exclusivity, MOQ, patents, connectivity, etc)
- Trade-offs

- Resolving differences

- Reaching common ground

- Building and maintaining a business relationship

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 Negotiation & TCO (total cost of
ownership)
Compute and weight possible cost of

- Easiness of doing business with a supplier

- High ratio on On time delivery
- Reaction to unpredicted events
- % of rejections vs. high ratio on KPI´s and quality
- Proximity to the manufacturing sites
- Innovation support
- EDI availability
- Fixed vs. variable price

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 a.IV)Negotiation
The best outcome is a
WIN- WIN
Requires/ Implies:
• Long term relationships
• Exchanges open and large amount of information
• Share real interests

Both parties achieved or stayed close to their Most Desirables Options

(MDO)
Have a clear & executable BATNA

https://www.youtube.com/watch?v=1FeM6kp9Q80
2020. Negotiation. [online] Available at: <https://www.youtube.com/watch?v=1FeM6kp9Q80> [Accessed 11
March 2020].

To watch at home:
https://www.youtube.com/watch?v=RfTalFEeKKE
Henschel, T., 2020. The Harvard Principles Of Negotiation. [online] Available at:
<https://www.youtube.com/watch?v=RfTalFEeKKE> [Accessed 11 March 2020].

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 Negotiation
It is about:
accommodation, compromise, concession, give-and-take

• Remember, everything is negotiable. Don’t narrow a negotiation

down to just one issue. Develop as many issues or negotiable deal
points as you can.

• Crystallize your vision of the outcome. The counterpart who can

visualize the end result will most likely be the one who guides the
negotiation.

• Prepare in advance. Information is power. Obtain as much

information as possible beforehand to make sure you understand the
value of what you are negotiating.

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 a.V) Consumption Management
Involved with:
Inventory
BOM
Supplier Service Level
Sales
Future business
→ Are we as a client, ordering as committed- in
volume, timing, conditions…?
→ Is the supplier honoring commitments?

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 a.V) Contract Management

• Have a signed contract or

agreement
• Collect data about the performance
of suppliers
• Give feedback to suppliers
• Feedback should be aligned among
different functions.
• Use the outcome on further
negotiations

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 Date: February 2007
BUSINESS CONFIRMATION MESSAGE
To : Philipp Tropenfrucht AG / Iprona AG
Attn : Frédéric Letellier
From : Beatriz Barbal
Subject: Business confirmation for Pineapple NFC juice ( RMS xxxxxx)

Simplified
Dear Frederic;
We are sending you the new proposal for the subject business.
CONTRACT NO: FR1.140207.7030.SD.01

agreement
1. BUYER/SHIP TO/BILL TO FRUIVAL
ZI de la Motte
26802 PORTES les VALENCE

2. SELLER PHILIPP TROPENFRUTCHT AG

format
BLUMENRAINSTRASSE 9
09050 APPENZELL
SWITZERLAND

3. PRODUCER/ (and location) Vegetexco( Vietnam)

63-65 Ham Nghi Blvd., District 1, Ho Chi Minh city Vietnam.

→ look for 4. MATERIALS (Description of Good

or service)

5. SPECIFICATION/ QUALITY
Seller agrees to provide the following goods or services:
Pineapple NFC juice; Specification- xxxxx

Seller agrees to provide the above mentioned goods

alternate formats A Certificate of Analysis (COA) has to be filled in by the Seller and sent to the plant for every
delivery.The COA guaranteeing conformity with our specification(s) & requirements. In case of
discrepancy the supplier will absorb incurred costs associated with quality, service or delivery problems
caused by the Seller.

6. QUANTITY xxxxxx

7. PRICING €xxx €/kg DDP PORTES les VALENCE

8. PAYMENT TERM Payment terms are net 60 days from receipt of invoice.

9. CONTRACT TERM April 2007- December 2007 (approximately)

10. SHIPPING TERMS DDP PORTES les VALENCE

11. PACKAGING Aseptic drums 210kg

11. ADDITIONAL TERMS/ Deliveries are -as per schedule provided by Fruival Material Management group within the agreed
OTHERS contract term
.
We will appreciate if you would, in agreement, sign, date & return this by fax. We will keep it on record for our files.
(*)The producer is pre-approved. For to do the total qualification, please, you send the first delivery.
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Liliana Rodríguez Company name: Philipp Tropenfrucht AG / Iprona AG
Name & Signature: Frederic Letellier
 Contracts´ key clauses
• Price per XXX unit or service in an specific currency
– Currency to be used
– Delivery terms included in the price
• Volume per XXX time
• Duration of contract
• Expected Quality/ Description of product or service
• Communication channels and timing
• Payment term
• Penalization for quality/ delivery timing non conformance or damages
• Termination
• Confidentiality
• Jurisdiction

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CONCLUSION:

What have you learned?

Deliverables for Next clas:

- load missing information from role-
play.