Executive summary

Supply chain management (SCM) is the collection of organizational resources and processes needed in making and delivering goods and services to end users.  SCM is a vital aspect for any organization to meeting the needs of its customers. Sourcing entails the diverse strategies and approaches that firms use to procure various supplies used to produce goods and services for users. It has emerged as a critical aspect of contemporary businesses. In addition, sourcing has evolved as a significant success factor in the dynamic procurement models that corporations use. Success in sourcing by firms depends on technology, people, and processes in the supply chain management (SCM) systems. However, this alone cannot actualize supplies’ objectives with the vision and strategy to guide the procurement activities. Therefore, it is imperative for companies to understand the essence of strategic sourcing and category management of different sourcing approaches. Organizations should also be open to the challenges that concern the implementation, planning, and management of resources, the skill sets required, and complexity in the long term procurement strategy.

Accordingly, this analysis reviews the sourcing approaches and looks at how various organizations use them to leverage their competitive advantages in procuring products and services. Mainly, it has focused on the supply chain management function of organizations, specifically narrowed it to sourcing essentials, various sourcing approaches, suppliers’ appraisal, and checklist for a competitive tendering approach. The literature used to compile this analysis is based on secondary sources and documented information about the topic under discussion.

 

 

Introduction

A supply chain is a collection of resources and processes required in making and delivering products and services to the final customers.  Therefore, the supply chain is a vital aspect of every organization in satisfying end-user needs. Because of this importance, organizations have introduced supply chain management functions responsible for managing their supplies’ needs. Accordingly, supply chain management is the administration of the way goods and services flow into and out of the company. It includes the processes that firms use to transform their raw materials into financial products or the production of services.  The effective operations at the supply chain management function of organizations require active streamlining of activities both inbound and outbound to maximize on the value derived for customers while making the firm to gain competitive advantages in the marketplace. A typical supply chain management system includes players such as component manufacturers, subcomponent manufacturers, retailers, wholesalers, manufacturing and assemblage plants, logistics providers, users, and end users or customers. Mainly, the general performance of the supply chain management system is driven by its operations, design, and capacity among other aspects. The size and location of facilities, how various aspects of the system are managed, transportation, human resource management, distribution and logistics management as well as the sourcing of products and services determine the performance.

The main segments of a supply chain management system include production, distribution, and purchasing. They operate to satisfy the interests of suppliers and customers. In typical organizations, supply chain management activities occur at various levels, including upstream, midstream, and downstream (Sarker 83). All activities at these levels work together to enhance the performance of the supply chain management system of firms.

Sourcing Essentials

Sourcing or tendering entails the various processes that organizations use to acquire different products and services used in the production process. When sourcing or tendering, the human resources and the procurement function of the organization work together with users of procured supplies. They also connect with the management concerning the budgetary provisions to give value for money for the supplies purchased. For organizations engaged in long-term and large scale procurement of goods and services, the supply chain management systems use strategic sourcing. Through this approach, they employ a proven and well-established methodology to manage their large-scale, medium, or long-term purchasing activities. SCM also seeks to help companies leverage on two capacities through this method. The first one is developing and enhancing organizational learning of sourcing approaches and using them to identify optimal solutions that give the firm value for its money for all its purchasing activities. Therefore, through strategic sourcing, organizations develop collaborative and organized sourcing methods that they use to leverage the targeted purchasing locations. Moreover, they can select suppliers who are best suited and valuable to the supply-customer interface.

Accordingly, the sourcing function of supply chain management uses Category Management (CM). CM is an SCM function that focuses on the management of sourcing contracts to ensure that the negotiated contract benefits are achieved. In turn, it helps the firm to realize a year-on-year improvement of its contract benefits. To leverage the benefits of the various sourcing approaches used in organizations fully, relationship management with suppliers is an essential component and a strategic mover of procurement activities. Hence, through strategic sourcing, companies evaluate their current and anticipated sourcing opportunities. They also assess the relevance of the sourcing approach they use based on their long term goals, the business environment, and the objectives of their supply chain management system.

Firms do what is referred to as strategic sourcing to sustain the sourcing of various supplies required for the production of goods and services. They accrue many advantages that include reduced costs and cycle times for the delivery of different supplies. The companies also improve the quality of their manufacture of goods and services which sustains their long-term financial performance. Strategic sourcing also enhances the competitiveness of a firm (Morana 53). Furthermore, it increases customer focus, reduces the costs associated with materials, and globalization. It also enables the organization to deliver products and services that are more innovative and cheaply acquired compared to competitors.

Sourcing process

Sourcing in organizations is done through various processes explained as follows:

Specification Development

This process entails the identification of what the users of products and services that need to be purchased require. As a buyer, organizations seek to ensure that supplies they buy meet the set standards and quality. The main objectives of developing specifications are to safeguard the firm’s needs in a competitive market when tenders are negotiated at a later stage. Another goal would be to reduce costs. The development of specifications also goes through various processes, including the following. The firm assesses its needs, what is available in the markets, develop specifications, and define the winning criteria.

Market Assessment

When sourcing for supplies, assessing the market is an essential step. It gives the firm the ability to get a clear picture of the requirements of the business. In effect, it will set the ground for the company to invite suppliers for them to quote for the business formally. The request for quotations includes requests for information whereby the firm uses this opportunity to pre-qualify a list of supplies that it can contract to supply the required supplies. Through such a request, the firm receives information about the capacity of the potential suppliers to deliver when contracted. Another essential market assessment step is that of requesting for quotations (Sarkar 37).  In turn, it guides the firm to determine the market factors that relate to the supplies required.

Negotiation

Negotiation is an essential stage in the sourcing process. Such a process helps the company to analyze various offers given to it before selecting the most competitive one to negotiate a supply contact with. During this process, the firm seeks to clarify different terms of its proposal for supplies’ contract as well as getting an additional value that is beyond what the potential supplier is proposing. The additional value may range from price benefits, improved terms of payment, and high-quality products and services among others (Sarkar 42). After negotiations are completed, the best deal is sealed with the most suited supply. During the bargaining, the sourcing firms seek to get price concessions offers. As they get these offers, they build competition, analyze all the quotations given with the aim of reaching a likely target for supplying.

Contract Discussion

Contract discussion is the analysis of various terms and conditions that govern the delivery and payment of the purchased supplies. After completing the contract discussion, it sets the ground for organizations to prepare a formal contract with the identified supplier (Sarkar 45). In turn, it further limits the exposure of the company to rigors of supplies’ management.

Sourcing Approaches

Competitive Tendering

Competitive tendering is a sourcing process whereby the firm acquires its goods and services by selecting the best and most suitable supplier from a list of eligible ones. Usually, this process is done after evaluating potential suppliers and their ability to deliver the required supplies. The aim is to optimize the benefits that accrue to the procuring organization. The primary goals of the procuring organizations are to receive total value for money spent on supplies by obtaining the best quality products in the least available price (Sarkar 80).  Other considerations include lead times, shipping, and efficiency.

The above sourcing approach enables organizations to achieve honest and open competitive bids that result in supply contracts free from any form of fraud and favoritism. Mainly, a competitive tendering approach is used by scaffolding job contracts because it accrues many benefits to the firm. The method is suitable for the organization in its procurement of professional products and services. Through competitive tendering, the firm receives the best offer in the market. The approach is also suitable for the company as it gives it all the required supplies and does not necessarily give bidders competitive advantages over each other. It implies that the approach is fair and objective to bidders, reducing the challenges associated with contracting suppliers (Sarkar 83). Therefore, as a private organization, competitive bidding is the most applicable method for a scaffolding job contracts corporation.

Sole Source Tendering

Sole source tendering entails contracts entered with organizations without having to go through competitive bidding processes. Mainly, sole sourcing is based on justifications that the identified supplier is the only one that can fulfill the supply requirements of the organization.  For example, Etisalat which is a local Telecommunication Company in the United Arab Emirates uses this approach. Though states do not allow non-competitive purchasing, this sourcing process is permitted for use by public entities where competitive bidding is not feasible. Other exemptions include firms whose supply sources have limited suppliers. The approach is also allowed where the supplies required have no other reasonable alternative sources existing in the market. It is also permitted when only one supplier meets the needs of the user organization. Finally, firms that offer public utility products and services just like Etisalat Corporation use this method.

The use of sole source tendering is ideal for Etisalat Corporation because it procures goods and services used to maintain its systems. They include updates, replacement of parts, and additional licenses. Other needs include laboratory equipment and information technology. The other reasons the company uses this approach are the unique nature of its supplies’ needs, compatibility by agency requirements like public safety, limited systems, professional experts, and product availability limited to specific suppliers.

Single Source Tendering

Single source purchasing involves buying goods and services from one selected supplier even when many vendors in the market offer similar products and services.  A firm called DUCAB uses this sourcing approach to purchase electric cables.  The method is non-competitive, and companies use it in exceptional circumstances. For example, the Electric Cables Company requires to procure supplies using this approach to maintain the quality of its products and services. For that reason, they give an opportunity to a firm that qualifies to maintain that quality to supply the required products and services. The company also uses the approach to continue the previous or additional works that it cannot purchase from other suppliers may be due to compatibility issues, patents, and exclusive rights. Therefore, this approach has many competitive advantages over the use of competitive bidding. Other benefits include the fact that the total costs of procuring from other entities may be within the thresholds of this sourcing approach. The firm may also prefer this method because the selected source may be having related items which are easy to obtain from the same supplier. The regulatory framework that guides the procurement strategy of the company may contemplate using this sourcing approach  (Dickersbach 77).  A firm that has conducted rigorous approval processes for suppliers, making it expensive to use other sourcing approaches may opt for such a method.

Long Term Price Agreement Contract/Tendering (LTA)

Long term agreements tendering includes purchasing contracts whereby the procurement entity enters into agreements with a supplying entity for a long period. The approach is suitable for labor-intensive and high technology, equipment, and machinery for stationary items. Mainly, this method is effective and productive when organizations plan and procure capital goods and services. The approach makes it possible for them to lock in prices for the materials procured from a given supplier which enables the buyer to apportion the available funds for the remaining cost of the supplies. The strategy also assists firms in evading the vagaries of unpleasant surprises in the market such as an increase in prices. It also allows the buyer to predetermine cost, especially when they feel that suppliers are at risk of increasing the prices of products. Moreover, this approach ensures that both parties engaged in such contracts feel secure as a matter of going concern. In addition, it eliminates the chances of the organization issuing tenders again or renegotiate the tendering contracts. The approach also reduces the number of issues for the procurement entity such as administrative exercises and logistics processes. In this arrangement, both parties feel secure as long as the contract caters for their mutual interests. For the procuring firm, the prospect of uncertainty under new suppliers is eliminated. Indeed, long term price agreement contracts offer many opportunities for procuring entities to build and sustain better relationships. It guarantees increased interaction during a long period which also fosters good faith and trust which form the bases of strategic partnerships in the future. Conversely, for the buying entities, they have enough time to concentrate on improving the performance of their supplies, enhancing their effectiveness (Carlsson 105). Further, this approach gives both parties the ability to look for areas to consolidate along the existing products and services. They can potentially add new products and service offerings. The procuring entities are saved from handling and storage costs.

Supplier Appraisal Checklist

Supplier appraisal is the assessment capability of the potential supplier to meet the quality, price, and delivery needs among other factors embodied in the procurement contract. The significance of appraising suppliers is its significance in supplier management and strategic sourcing. These aspects are the ultimate objectives for all procuring entities in their quest to realize competitive advantages (Sarkar 30). In turn, it will enable the firm to select only suppliers who can meet the category of purchases the company requires. Appraising suppliers start with specifications that all potential suppliers need to know and the criteria used to evaluate them.

Supplier Appraisal Checklist for Competitive Tendering

In competitive tendering, two options are given for appraisal. They include technical and financial offers. Each of these alternatives is then awarded based on points for which potential suppliers are awarded depending on how good or bad they are

Technical appraisal (50 points)

Experience

Companies use this parameter to evaluate how good or bad a supplier is in terms of servicing works or supplies in their area of supplying.

Staff and Equipment

While appraising this checklist, the procuring entity looks at the suitability of personnel and equipment by the potential supplier to meet the quality and other supply specifications such as pricing, quantity and delivery timelines.

Work programs

Contractors who can deliver supply needs within the specified timelines are given the highest points.

Contractor Location 

Depending on the location of the contractor, the procuring entity can appraise his or her ability to mobilize resources and deliver products on time. Contractors who are nearest to the organization are given the highest points.

Financial appraisal (50 points)

It evaluates the ability of the potential contractor to finance bids ones awarded the contract.

Evaluation of Bids

Evaluation of bids goes through the following steps:

Step 1: Receiving Bids

The above step is done when contractors take bids after paying a required non-refundable fee. The proposals are received within a set deadline advertised to all potential contractors.

Step 2: Opening bids

It is done at a specified time and under the supervision of the procurement function board or representatives.

Step 3: Review of documentation

The board opens the various bids and reviews the information to select the most suitable contractor. At this stage, some suitable contractors are pre-qualified.

Step 4: Technical evaluation

Technical evaluation appraises the suppliers basing on the aspects discussed above.

Step 5: Financial evaluation

Looks at the financial muscles of potential suppliers

Assessment of the best combined offer

After appraising the bids, the best of them all is selected

Awarding the contract

The stage involves signing the necessary documentation. Both entities should accept terms and conditions for supplies (Sarkar 34). They should commit to satisfy their contractual obligations.

Conclusion

The supply chain management function is one of the most critical tasks in contemporary organizations. SCM integrates, coordinates, aligns, and manages organizational resources. Through all these functions, the firm manages various activities to leverage its competitive advantages. Accordingly, this analysis evaluates the different sourcing approaches that contemporary organizations employ and how they applied them to meet their sourcing needs. The study looked at four sourcing approaches: competitive sourcing, sole source tendering, single source tendering, and long term price agreement contract or Tendering. It also outlined the supplier appraisal checklist for competitive tendering.

 

References

Carlsson, Magnus. Strategic Sourcing and Category Management: Lessons Learned in Ikea. , 2015. Internet resource.

Dickersbach, Jörg T. Supply Chain Management with Apo: Structures, Modelling Approaches, and Implementation of Mysap Scm 4.1. Berlin: Springer, 2006. Internet resource.

Morana, J?lle. Sustainable Supply Chain Management. Wiley-ISTE, 2013. Internet resource.

Sarkar, Suman. The Supply Chain Revolution: Innovative Sourcing and Logistics for a Fiercely Competitive World. , 2017. Print.