MNP 2601 Purchasing Management
Chapter 4: Purchasing and supply policies and
strategies
Strategic sourcing pertains to all issues of strategic importance in the supply of materials and services to
modern organizations
Can also be regarded as a strategic management process whereby commodities and suppliers are analysed
and relationships are formed and managed according to best practice and appropriate strategies.
The process of strategic sourcing
Consists of a process containing the following steps:
Building the team
Conducting market research
Developing a strategy
Negotiating a contract
Managing supplier relationships
See figure 4.1 on Page 60 of the text book
Build the team
The strategic sourcing process starts with the building of a multi-functional team who will act a category
teams for the sourcing of certain category items.
A team may consist of a purchasing manager, an operations manager and information systems manager etc
Conduct market research
Conduct market research on the suppliers.
Make a spend analysis of the total expenditure for each commodity and supplier and the spending on the
commodity as a percentage of total spending.
Data should be connected and transformed into a comprehensible format to use strategy development and
decisions.
Develop a strategy
The information gathered must be structured into a format which makes it possible for the team to develop a
strategy for Similar commodities.
The portfolio analysis matrix or strategic sourcing matrix can be applied to bring structure. With this matrix
the total spending is divided into different categories according to the risks involved in the supply of the
commodity, The number of suppliers in the market and the amount spent on a commodity.
The total spending can be divided into the categories:
Routine
Leverage
Bottle neck
Critical
See figure 4.2 on page 61 of the textbook
1
, Routine items - in arms length relationship is applicable. Decisions are made on lower levels and without
much effort to search for suppliers.
Leverage items – or large amount is spent the supply risk is low.i.e. computer hardware
Bottle neck items – amount spent is no better risks are high because:
substitution of products is difficult
specific missions and manufacturing are complex
The commodity has a big impact on the operations
The market is monopolistic with high barriers for competition
The situation is geographically and politically complex
Critical items – large amounts are spent and the risks of availability are high due to difficulty in substitution.
Negotiate a contract
The contract is negotiated with the identified suppliers and the strategy is implemented in terms of time
lines, resources and accountability.
Manage supplier relationships
The basis for managing a relationship should be the performance evaluation of suppliers.
Outsourcing: to make or buy
Traditionally, large organizations tend to choose the make option. This lead to backward integration, large
organizations and ownership of a large group of manufacturing plants. Purchases involved mainly raw
materials that were processed in the enterprise.
Outsourcing is described as the process of purchasing goods and services on specification from an external
supplier.
It can involve the transfer of an entire business function to supplier or may lead to the transfer of some
activities associated with the function.
Co-sourcing consists of a partial outsourcing of functions and activities.
Outsourcing can involve the transfer of both people and physical assets to the supplier. A term often used in
the context of outsourcing and insourcing is vertical integration or Vertical disintegration (Concerned with the
decision on whether to perform an activity internally or source it from outside)
In sourcing is vertical disintegration
Backward Disintegration refers to activities on the supply side and forward disintegration to the distribution
side of an organizations supply chain.
Major characteristics of outsourcing are:
Activities that were initially performed in house being transferred to an external party
Assets going over to that external party
Existence of an extended relationship between the parties over a longer period
Exposure of the buyer to both cost and risk profile transfer
Certain trends in the business world made outsourcing popular:
Efforts to make enterprises leaner
Narrowing the supply base to limited number of suppliers
Pressure to be Internationally competitive
Organization specializing in a limited number of products and technologies
Emphasis on quality, delivery times and technology
Pressure to get to technology developments
And lack of skills, knowledge or capacity
Pressure on organisations to deliver excellent customer service
Rationale for outsourcing
Tactical reasons are to:
2
Chapter 4: Purchasing and supply policies and
strategies
Strategic sourcing pertains to all issues of strategic importance in the supply of materials and services to
modern organizations
Can also be regarded as a strategic management process whereby commodities and suppliers are analysed
and relationships are formed and managed according to best practice and appropriate strategies.
The process of strategic sourcing
Consists of a process containing the following steps:
Building the team
Conducting market research
Developing a strategy
Negotiating a contract
Managing supplier relationships
See figure 4.1 on Page 60 of the text book
Build the team
The strategic sourcing process starts with the building of a multi-functional team who will act a category
teams for the sourcing of certain category items.
A team may consist of a purchasing manager, an operations manager and information systems manager etc
Conduct market research
Conduct market research on the suppliers.
Make a spend analysis of the total expenditure for each commodity and supplier and the spending on the
commodity as a percentage of total spending.
Data should be connected and transformed into a comprehensible format to use strategy development and
decisions.
Develop a strategy
The information gathered must be structured into a format which makes it possible for the team to develop a
strategy for Similar commodities.
The portfolio analysis matrix or strategic sourcing matrix can be applied to bring structure. With this matrix
the total spending is divided into different categories according to the risks involved in the supply of the
commodity, The number of suppliers in the market and the amount spent on a commodity.
The total spending can be divided into the categories:
Routine
Leverage
Bottle neck
Critical
See figure 4.2 on page 61 of the textbook
1
, Routine items - in arms length relationship is applicable. Decisions are made on lower levels and without
much effort to search for suppliers.
Leverage items – or large amount is spent the supply risk is low.i.e. computer hardware
Bottle neck items – amount spent is no better risks are high because:
substitution of products is difficult
specific missions and manufacturing are complex
The commodity has a big impact on the operations
The market is monopolistic with high barriers for competition
The situation is geographically and politically complex
Critical items – large amounts are spent and the risks of availability are high due to difficulty in substitution.
Negotiate a contract
The contract is negotiated with the identified suppliers and the strategy is implemented in terms of time
lines, resources and accountability.
Manage supplier relationships
The basis for managing a relationship should be the performance evaluation of suppliers.
Outsourcing: to make or buy
Traditionally, large organizations tend to choose the make option. This lead to backward integration, large
organizations and ownership of a large group of manufacturing plants. Purchases involved mainly raw
materials that were processed in the enterprise.
Outsourcing is described as the process of purchasing goods and services on specification from an external
supplier.
It can involve the transfer of an entire business function to supplier or may lead to the transfer of some
activities associated with the function.
Co-sourcing consists of a partial outsourcing of functions and activities.
Outsourcing can involve the transfer of both people and physical assets to the supplier. A term often used in
the context of outsourcing and insourcing is vertical integration or Vertical disintegration (Concerned with the
decision on whether to perform an activity internally or source it from outside)
In sourcing is vertical disintegration
Backward Disintegration refers to activities on the supply side and forward disintegration to the distribution
side of an organizations supply chain.
Major characteristics of outsourcing are:
Activities that were initially performed in house being transferred to an external party
Assets going over to that external party
Existence of an extended relationship between the parties over a longer period
Exposure of the buyer to both cost and risk profile transfer
Certain trends in the business world made outsourcing popular:
Efforts to make enterprises leaner
Narrowing the supply base to limited number of suppliers
Pressure to be Internationally competitive
Organization specializing in a limited number of products and technologies
Emphasis on quality, delivery times and technology
Pressure to get to technology developments
And lack of skills, knowledge or capacity
Pressure on organisations to deliver excellent customer service
Rationale for outsourcing
Tactical reasons are to:
2
