CLASS 4, SOURCES OF SUPPLY & PRICING

 

OUTSOURCING AND MAKE OR BUY  

 

Two Make or Buy Categories:

 

1.  Products which user does make or can now make if necessary

2.  Products for which there is presently no in-house capability to produce  

 

The organization has three choices:

 

1.  Make all of its requirement for a particular item

2.  Make none (outsource all)

3.  Make some, outsource some  

 

Factors influencing make or buy decisions:  

 

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.]

 

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Cases:

Springfield (Following pages)

Tidewater (Following pages)

 

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