Sources of supply- Principles:
Review:
A firm has two categories of suppliers:
Itself and outside vendors. This
discussion assumes that the make or buy decision has been made and we are
now dealing with selection of outside sources of supply.
• Source Selection: Degree
of formality depends upon size and complexity of acquisition.
• Small Purchases ($100K in Government purchased at this time, private
industry is company specific)
• Larger Purchases (Contracts) may be:
• Negotiated (Request For Proposals - RFP)-
§
Proposals evaluated,
formal source selection
§
Technical solution,
overall value are criteria
• Sealed (Invitation For Bids - IFB)-
§
[Public] bid
opening
§
Price differentiation
is main criteria
IMPORTANCE OF AND FACTORS
TO CONSIDER IN SOURCE SELECTION:
·
Assurance of
supply/Risk assessment (History)
·
Past performance
·
Size of supplier
relative to size of order
·
Number of suppliers
(when is a single source justified? multiple sources?) [Loyalty works both
ways.]
·
Advantages accrue
to maintaining a continuing Buyer-Seller relationship
·
Consider the
concept of a "Friendly supplier"
·
How can this
help a buyer?
·
Early Supplier
Involvement
·
Partnering: A
collaboration between buyer and seller(s)
·
Advantages?
·
Disadvantages?
Traditional short-term competitive-based approaches to source selection are often offset by cost-based arguments for longer-term relationships, such as:
·
Advantages accruing
from learning curve over time
·
Supplier’s willingness
to invest in productivity enhancements
·
Supplier’s willingness
to undertake R&D to enhance products
Developing Sources:
Sometimes a satisfactory supplier must be
created
·
Private industry
does this to increase/ensure competition, thus increasing profit.
·
Government does
this to-
Expand industrial base
Promote socio-economic
programs
Buying locally has potential
advantages/disadvantages:
·
Advantages include:
Close buyer/seller cooperation
Certain
delivery dates
Lower
prices (due to transportation, etc.)
Shorter
lead times
Faster
rush order processing
Ease
of dispute resolution
·
Disadvantages: Loss of economy of scale if local
firm is small
Inadequate
technical assistance
Less
production flexibility
More
susceptible to shortages
BUYING FROM MANUFACTURER OR DISTRIBUTOR?
Consideration must be given
to distribution costs, markups, etc.
Miscellaneous considerations:
·
International
purchases (Buy American Act)
·
Environmental
"green" purchasing
·
Socio-economic
programs such as doing business with minority/women-owned firms
·
Conflicts of
interest
·
Ethics
·
Reciprocity
SOURCES OF SUPPLIER INFORMATION:
·
Internal supplier
information files
·
Supplier catalogs
(printed or electronic)
·
Trade registers/directories
·
Trade journals
·
Yellow pages
·
File of mail
advertisements
·
Sales Personnel
·
Trade show exhibits
·
Company Personnel
·
Other purchasing
departments/ purchasing associations
·
Responses to
synopsized advertisements
SEE CASE- SPRINGFIELD PURCHASES
A GARBAGE TRUCK (End of Notes)
SOURCES OF SUPPLY- PRACTICES:
Evaluating potential suppliers:
Three types of competition:
1. Price
2. Technological
3. Service
Some Considerations for
Supplier Evaluation:
·
Financial condition
·
Plant facility
·
Management
·
Service
·
Quality History
·
Delivery History
·
Ability to meet
"Just-in-Time" requirements
(Government does the above
as a pre-award survey to ascertain vendor responsibility)
POST-SELECTION ISSUES:
·
Assistance to
suppliers (financial, technical, contractual)
·
Supplier motivation
and Performance-base contracting
o
Premise is that
supplier must want to perform
o
Buyer must check
performance
o
Supplier motivation
comes in several forms:
§
Positive (continued
business through award of additional contract term, bonus or performance incentives,
maintenance of reputation, profitability)
§
Negative (loss
of business, loss of performance incentives, poor reputation, penalties)
SEE CASE- THE TIDEWATER
GAS AND ELECTRIC COMPANY (End of these notes)
PRICING PRINCIPLES
·
Competition normally
brings fullest extent of price adjustment, i.e. reduction in order to be competitive
·
Firms are to
be expected to earn a fair and reasonable profit. Profit established in relation to:
§
Supplier risk
§
Size of order
§
Level of skills
required to manufacture
§
Reliability required
§
Firm's position
relative to supply and demand
§
Degree of innovation
expected of firm
Methods of obtaining the
right price:
·
Published price
lists (asking vs. selling)
·
Competitive bidding
(IFB) is best method when:
o Dollar value of purchase is large enough to justify
o
Specifications
are clear
o
Adequate competition
exists
o
Sellers are qualified
and want to compete
o
Sufficient time
exists to solicit and evaluate bids
·
Negotiated Procurement
(RFP) used when:
·
Cost estimates
are uncertain due to development time, technological changes, economic uncertainty
·
Price is not
the only concern, quality, schedule, service also important
·
Difficult to
describe accurately in specifications
·
Complex issues
related to providing special tooling, title to design work, etc. are best
resolved through negotiation
Price Analysis vs. Cost
Analysis
Price Analysis: The examination of a seller's price without
examination and evaluation of the separate elements of the cost and profit
making up the price.
Price analysis is normally
used when [evaluating] advertised procurements.
Cost Analysis: Review and
evaluation of a seller's actual or anticipated cost data.
Types of Costs:
·
Variable costs
are those associated with performing a specific project [contract].
·
Fixed costs are
incurred simply by being in business; therefore they must be allocated to
specific contracts.
Cost Analysis is a significant
undertaking. If price analysis indicates
that the price is reasonable, cost analysis may not be needed.
Factors affecting cost:
§ Capabilities of management
§
Technology
§
Efficiency of
labor
§
Amount/quality
of subcontracting
§
Plant capacity/continuity
of output
§
Composition/reasonableness
of overhead cost
§
Price of materials
§
Costs of labor
[wages, benefits, etc.]
------------------------------
Cases:
Springfield (Following
pages)
Tidewater (Following pages)
Back to PROC 5000 Gateway Page
