Sourcing in Procurement

and Supply -2
Eight perspectives for supplier selection

• Finance
• Production capacity and facilities
• Human resources
• Quality
• Performance
• Environmental and ethical considerations
• IT development and leverage
• Organisation structure
Ray Carter’s 10 Cs for supplier selection

• Competence (or capability)

• Capacity
• Commitment
• Control
• Cash
• Consistency
• Cost
• Compatibility
• Compliance (or corporate social responsibility)
• Communication
The FACE 2 FACE model of supplier appraisal
Fixed assets Financial stability
Physical resources to meet buyer needs For continuity of supply

Ability to deliver the goods Ability to work with the buyer

Production capacity and reliability of Compatibility of culture, contacts,
delivery/quality/service willingness to co-operate

Cost Commitment to quality

Competitive total acquisition costs, Reliability of quality standards and
willingness to negotiate terms systems, willingness to improve

Efficiency Environmental/ethical factors

Use of resources, minimisation of waste Policies and practices re CSR, ethics and
environmental management
Quality and quality assurance
• Excellence
• Comparative excellence
• Fitness for purpose or use
• Conformance to requirement or specification
• Acceptable quality and value for money
Service quality – the SERVQUAL model

• Tangibles
• Reliability
• Responsiveness
• Assurance
• Empathy
ISO 9000
ISO 9000 standards identify quality management systems as comprising four
main processes:
• Management responsibility
• Resource management
• Product realisation
• Measurement, analysis and improvement
ISO14001
• An environmental policy statement
• Identification of all aspects of the organisation’s activities that could
impact on the environment
• Performance objectives and targets for environmental performance
• Implementation of an EMS to meet those objectives and targets
• Periodic auditing and review
Award criteria
• Technical criteria, which define the supplier’s ability to match or exceed
specified requirements
• Commercial criteria, which define best-value cost
Reasons for disqualification
• The personal situation of the supplier
• Financial capacity
• Technical capacity
• Professional qualifications
• In relation to contract award, only two criteria are allowable: lowest
price or ‘most economically advantageous tender’
Best value and whole life cost
Total acquisition cost includes not just the price of the items being
purchased, but also:
• Procurement costs
• Finance costs
• The costs of packaging, transporting and insuring goods for delivery
• Costs of storage and other handling, assembly or finishing required
• Costs of quality management and quality failure
• Costs of installation, maintenance and repair, staff training and so on, over the total
lifecycle of the asset
• Costs of de-commissioning, disassembly, recycling or disposal
Why suppliers may not welcome an appraisal
REASON FOR SUPPLIER’S RELUCTANCE STEPS A BUYER CAN TAKE
A particular supplier may not find the buyer’s Estimate the likely attractiveness of the business
business attractive to potential suppliers
Suppliers may have bad experiences of Emphasise that the appraisal process will be
previous appraisals carried out fairly
Suppliers may be unsure of the selection Provide full information about how the selection
process process will work
The timing of the proposed appraisal may be Ensure that suppliers have adequate time to
inconvenient prepare for the appraisal
Suppliers may believe that the process will be Ensure that the exercise is streamlined as far as
expensive and time-consuming possible
Suppliers may be wary of sharing confidential Be prepared to sign a confidentiality agreement
information
The supplier preferencing model
Small and medium enterprises (SMEs)

• A ‘micro’ enterprise is one which has fewer than 10 employees and annual
turnover of less than 2 million euros
• A ‘small’ enterprise is one which has 10–49 employees and annual turnover of
less than 10 million euros
• A ‘medium-sized’ enterprise is one which has 50–249 employees and annual
turnover of less than 50 million euros
• A ‘large-scale’ enterprise employs more than 250 employees, with annual
turnover of more than 50 million euros
Barriers to SME participation
• Not being able to find out about opportunities
• Lacking marketing resources
• Believing that the process will be complex and costly
• Lacking expertise in areas such as interpreting complex requirements
documentation or constructing good-quality proposals or tenders
• Lacking a track record of performance
• Lacking the capacity to handle large volume contracts
Ethical sourcing policies
• The promotion of fair, open and transparent competition in sourcing
• The use of sourcing policies to promote positive socio-economic goals
• The specification and sourcing of ethically produced inputs
• The selection and management of suppliers to promote ethical trading,
environmental responsibility and labour standards at all tiers of the
supply chain
• A commitment to supporting the improvement of working terms and
conditions (labour standards) throughout the supply chain
• A commitment to supporting sustainable profit-taking by suppliers and
to ensuring that fair prices are paid to suppliers back through the
supply chain
• Adherence to the ethical frameworks and codes of conduct of relevant
bodies
• A commitment to compliance with all relevant laws and regulations
The Ethical Trading Initiative (ETI)
1. Employment is freely chosen
2. Freedom of association and the right to collective bargaining are respected
3. Working conditions are safe and hygienic
4. Child labour shall not be used
5. Living wages are paid
6. Working hours are not excessive
7. No discrimination is practised
8. Regular employment is provided
9. No harsh or inhumane treatment is allowed
Basic ethical sourcing principles
• Creating opportunities for economically disadvantaged producers
• Integrity
• Capability building
• Fair payment
• Working conditions
• Gender equity and children’s rights
• The environment
Procurement codes of ethics
• Members must disclose any personal interest
• Members must respect the confidentiality of information
• Members should avoid any arrangements which might prevent fair
competition
• Except for small-value items, business gifts should not be accepted
• Only modest hospitality should be accepted
• Any doubt on these last two points should be discussed with the
individual’s superior
Supplier tiering
All manufacturing performed by top-level purchaser:
Supplier tiering
Top-level purchaser outsources most manufacturing:
Supply chain networks
Seeing the supply chain as a network is helpful for a number of reasons:

• It is a more strategic model for mapping and analysing supply chain relationships
• It raises the possibility of a wider range of collaborations which may offer mutual
advantages
• It recognises the potential of ‘extended enterprises’ and virtual organisations
• It recognises that extended enterprises may overlap
Analysing financial stability
Examples of the kind of thing you might be looking for include signs that an
organisation:
• Is not making much profit, is experiencing falling profit margins, or is making a loss
• Is not managing its cashflow, or is experiencing a strong cash ‘drain’ from the
business
• Has more loan capital (borrowed from lenders) than share capital (invested by
owners)
Additional signs of financial difficulty

• Rapid deterioration in delivery and quality performance

• Senior managers leaving the business within a short period of time
• Changes in the auditors and bankers of the firm
• Adverse press reports
• Very slow responses to requests for information
• Problems in the supply chain (and/or changes in subcontractors)
• Chasing payment before it is due
Ratio analysis
• Profitability ratios
• Liquidity ratios
• Efficiency ratios
• Investment ratios
Statements contained in
the published accounts
• A balance sheet
• A profit and loss account
• A cashflow statement
• A five-year summary
• A chairman’s statement
Profitability
• Profit means that the business has covered its costs and is not ‘bleeding’
money in losses
• Profit belongs to the owners or shareholders of the business, as a return
on their investment
• Profits which are not paid to shareholders (‘retained profits’) are
available for reinvestment in the development of the business
Gearing
• High gearing means that there is a lot of fixed-return capital in the
overall financial structure of the company, which may be a risk factor in
the long term
• Low gearing means that the company is relying mainly on equity capital
(with no expectations of fixed returns), and should therefore have less
difficulty in weathering difficult years
Ratio analysis
• Profitability ratios
measuring the extent to which the business has traded profitably
• Liquidity and gearing ratios
measuring the extent to which the business has liquid assets sufficient to meet its short-term and
long-term liabilities
• Investment ratios
measuring the strength and consistency of returns on investment delivered to shareholders and
other investors
Gross profit percentage
Net profit percentage
Return on capital employed (ROCE)
Return on assets
Short-term liquidity ratios
Simple gearing ratio
Asset turnover
Stock turnover ratio
Debt collection period
Investment ratios
Investment ratios