Post Graduate Diploma in

Supply Chain Management

Sourcing Management

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Sourcing Management
 Strategic Sourcing Process

Approach Baseline & Strategy Decision

Gate Gate Gate

Sourcing Market
Preparation
# Analysis
Strategy # Engagement # Implementation

Internal Sourcing Go To
Preliminary Deployment
Analysis Strategy Market
Analysis

Client
Negotiations
Mobilisation Requirements

Market Business
Analysis Allocation

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Sourcing Management
 Strategic Sourcing Process

Approach Baseline & Strategy Decision

Gate Gate Gate

Sourcing Market
Preparation
# Analysis
Strategy # Engagement # Implementation

Internal Sourcing Go To
Preliminary Deployment
Analysis Strategy Market
Analysis

Client
Negotiations
Mobilisation Requirements

Market Business
Analysis Allocation

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Sourcing Management
 Strategy Phase – Purpose

• The focus of the sourcing strategy stage is on drawing insights

from the data and information from the previous stages. From
these, prioritised benefits & opportunities will be identified,
taking into account the relative bargaining power of buyer
and supplier.

• The final outcome of this stage is a sourcing strategy which

identifies the most appropriate tactics and techniques to
unlock the value of the identified opportunities and benefits.

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Sourcing Management
 Consider “Risk” and “Reward
Reward (Value) includes:
• Importance to company (total purchase $)
• Recognized opportunity for economic benefit
• High leverage opportunity in the marketplace
• non price-based, yet tangible services

Risk includes:
• Critical to our business operations
• Single supplier by choice or market circumstance
• Unique specification or capability
• 1-time issues or “crisis” requires urgent action
 Sourcing Strategy Analysis

Leverage Strategic
High
•Often products/services •Strategic to profitability and
approaching maturity or decline in operations
the product life cycle
•Few qualified supply sources
Value •Many potential sources of supply
•High impact to business
•Suppliers compete on price
Routine Bottleneck

•Low value, generic specification •There may be no alternative to

items current supplier, it may be a new
technology or the supplier may
•Many sources of supply have a monopoly
•Not business critical, potential to •Very complex specifications
Low move to full service supply

Easy Difficult
Supply Market Challenge

Strategic & Bottleneck commodities require detailed supplier evaluation

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 The Kraljic Positioning Grid

HIGH
Bottleneck Strategic
Reduce risk and exposure to Maximise supplier value-add
price increases/supply Ensure long-term availability
disruption of supply
Secure sources of supply, Focus on relationship building
search for substitutes, etc and process integration
Supply Market
Complexity
Usually a function of porters 5
forces
Non Critical Leverage
Simplify purchasing process Use competitive advantage to
to achieve efficiency reduce total costs
Reduce number of suppliers Volume used as negotiation tool
and simplify replenishment
process

LOW Business Impact HIGH

Usually a function of Pareto

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 Types of Commodities

High Value/Low Risk High Value/High Risk

High dollar, big volume Significant to your

Multiple Suppliers product/business

Value / Opportunity

Competitive differentiation

Low Value/Low Risk Low Value/High Risk

Repetitive purchases; One-time purchases;

Maintain the enterprise Quality or supply problems

Risk / Market Complexity

Each cell has quite different characteristics

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 Types of Commodities

In your groups give 5 - 10 examples of commodities

that would be in each of the areas

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 Purchasing Chessboard

• This model was developed by A T Kearney to support

companies that need to master the challenges in purchasing
and achieve significant value propositions. These challenges
include:

– Supplier consolidation
– Market consolidation
– Rising energy costs
– Increased uncertainty and volatility
– Increased consumption of resources from developing and
emerging markets
 Purchasing Chessboard – 4 Basic Strategies

Create
Competitive Bottleneck Strategic
Advantage

Exploit
Buying
Routine Leverage
Power (Non critical) (Commodity)

[Link]
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 Purchasing Chessboard – 16 Levers

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 Purchasing Chessboard – 64 Methods

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 Managing Supply Risk is a Key Role
• Most companies lack a strategic approach to supply risk
management or have metrics / procedures for assessing and
managing supply risks all at a time when supply risks are
increasing

• Under normal circumstances, insufficient risk management is

cause for concern.

• In today’s competitive and unpredictable global market

insufficient risk management should cause outright alarm for
companies.

• 80% of supply chain executives have reported recent supplier

disruptions

• Supply issues impact sales, profits, customer relations, and brand

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 Supply Disruptions Occur Due To:
• Supply market instability
• New Regulatory requirements
• Terrorist attacks
• Natural disasters
• Etc.

Other Challenges Increase Risk:

• JIT Manufacturing initiatives (Inventory management process)
• Outsourcing
• Supply base rationalization
• Low cost country sourcing etc.

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Sourcing Management
 There are Four Categories of Risk
• Supply market risks
• Supplier risks
• Regulatory risks
• Supply strategy risks

Supply Market Risks

• Supply and capacity constraints
• Changing tariffs,
• Increasing energy and material costs,
• Terrorist strikes
• Natural disasters
• Transportation price increases and delays
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 Supplier Risks
• Supplier financial and operational performance
• Enterprises must thoroughly assess new supply sources and
constantly monitor changes in suppliers’ health and
performance across the year including

– Financial (e.g., license and claims, financial stress,

– Profitability)
– Regulatory (e.g., certifications, compliance)
– Operations (e.g., capacity, lead times, quality, service
levels)

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 Regulatory Risks
• New regulatory mandates for improved financial
reporting and controls
• Environmentally responsible products
• Security screening require enterprises to more
thoroughly assess their supply management
processes, employees, and suppliers to ensure
compliance.
• Some procurement executives report that their
companies’ customers are now requiring them to
report on compliance and risk of their sub-tier
suppliers.

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 Supply Strategy Risks
• Ironically, the most widely accepted supply chain “best practices” have made
enterprises more vulnerable to supply disruption eg

• Low-cost country sourcing

• Lean and JIT inventory

• Vendor-managed inventory (VMI) and integrated supply relationships

• Supplier rationalization

• Outsourcing

• These have all driven increased efficiencies, improved responsiveness, and

lowered supply cost structures.

• However, these new strategies have also removed inventory and

redundancies from the supply chain, amplifying the impact of unanticipated
events.
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 The Procurement Risk Management Process

To manage the area of risk in procurement we can use the following four
step process:

Risk Risk Risk Response Risk Monitoring

Identification Evaluation Planning & Control

Risk Management Process

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 Risk Identification

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 Step 2 – Risk Evaluation
Once we have identified potential risks to a company we need to:
1. Evaluate the probability (exposure) of the impact
2. Evaluate the consequences of the impact
3. Prioritize the risks

Risk Risk Risk Response Risk Monitoring

Identification Evaluation Planning & Control

Risk Management Process

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 Risk Evaluation Tool – Probability

The probability of an event occurring:

•Rare – the risk will only occur in exceptional circumstances
and it is unlikely that this event will ever happen
•Unlikely – this risk could occur at some time but it is unlikely
•Possible – the risk will occur at some point but only
occasionally
•Likely – this risk will probably occur but it will not be a
regular occurrence
•Certain – this risk is expected to occur on multiple occasions,
possibly frequently

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 Risk Evaluation Tool – Consequences
The consequences of an event occurring:
•None – zero business disruption
•Minor – very limited product quality / availability issues, low risk of
customer complaints
•Moderate – broader product quality / availability issues with increased
scope for customer complaints and possibly limited media coverage
•Major – extended product quality / availability issues with increasing
numbers of complaints and broader media coverage. Reduced customer
confidence.
•Catastrophic – product quality / availability failure with serious complaints
and widespread (possibly international) media coverage. Loss of customer
confidence.

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 Segmentation – the Risk Evaluation Matrix

Certain Low Moderate High Extreme Extreme

Probability of Occurrence

Likely Low Moderate High High Extreme

Possible Low Moderate Moderate High High

Unlikely Low Low Moderate Moderate Moderate

Rare Low Low Low Low Low

None Minor Moderate Major Catastrophic

Consequence of Occurrence
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 Risk Response Planning
In this phase you define the required mitigation activities for each of the
prioritized risks to minimize the severity of impacts and probabilities, following
the four steps listed below:
1. Develop mitigation strategy
2. Plan required actions
3. Allocate resource
4. Anticipate potential obstacles to mitigation

Risk Risk Risk Response Risk Monitoring

Identification Evaluation Planning & Control

Risk Management Process

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Sourcing Management
 Contingency Action Planning Template

Low Moderate High Extreme Extreme

Cer
tain

Lik Low Moderate High High Extreme

ely
Probability of Occurrence

Pos Low Moderate Moderate High High

sibl
e

Low Low Moderate Moderate Moderate

Unli
kel
y

Low Low Low Low Low

R
a
r
e
N M Mod Majo Catastro
o i erate r phic
n n
e o
r
Consequence of Occurrence

Consequenc Responsibl
Risk No. Risk Description Probability e Risk Mitigation Strategy e
Flooding at supplier Hold reserve stock of key
0001 distribution centre Possible Major High materials. PDG
 Risk Monitoring and Control
This phase aims to use the risk response plan as a fundamental
perspective of project management. From this point onwards, risks
should be monitored and controlled as any other operational indicator.

Risk Risk Risk Response Risk Monitoring

Identification Evaluation Planning & Control

Risk Management Process

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 Risk Analysis

In your groups think of all the risks that may be

associated with your case study topic i.e. think about
the mitigation strategies that you could employ

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 Negotiation Strategy
• The purpose of this stage is to execute negotiations with the
selected suppliers using the prepared tactics and techniques.
It may be repeated a number of times.

• The outcome of this stage is to arrive at the best achievable

result, based on agreed stakeholder requirements.

• Wherever possible, e-auctions should be used in place of face

to face negotiations.

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 It Takes Two to Agree!

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Sourcing Management
 Negotiation & Supplier Selection

Negotiation Definition:

 Oxford: ‘to confer with others in order to reach a compromise or agreement’

 ‘The process by which we search for terms to obtain what we want from somebody who
wants something from us.’ - Kennedy

 Main Characteristics :
– Negotiation is structured to achieve a specific outcome, usually in the form of an agreement.
– Mutuality of wants, resolved by exchange.
– Negotiation carries with it the constant possibility of success or failure – meaning you might
not get what you want or you may fail to reach an agreement at all.

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 Preparation
Plan Do Review

Determine Construct
Establish Collate Plan the Conduct Follow On/
Style, tactics Negotiation Close Out
Team Research environment Negotiation Enforcement
& approach Plan

 Negotiation builds on work already completed by the team

 The negotiation process is built around the plan, do, review cycle
 The process is heavily weighted towards the planning stage
 Typically focus is on the ‘do’ but the ‘plan’ and ‘review’ are often ignored
 Ultimately the process assists the buyer in getting best value

Preparation is key – suppliers will always be prepared!

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 Negotiation & Supplier Selection)

Planning Negotiation:

 Establish the objectives of negotiation

 Gather facts that can have a big impact on the negotiation.
 Assess the power positions of the parties.
 Determine the points of common interest.
 Make a list of questions.
 Define your tasks.
 Decide on the composition and division of roles in your negotiation team.
 Plan your concessions.
 Agree upon the negotiating tactic to follow.
 Indicate how you plan to conclude the negotiations.

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 The Negotiation Plan
Consider the following areas and formulate them into a plan;
 Objectives – What do you want from the negotiation?

 Most Desirable Agreement (MDA) – What is your highest expectation from the
supplier? What do you expect them to offer against each objective?

 Least Acceptable Agreement (LAA) – What is your bottom line? Barring the
emergence of a better option, settling for anything less than this is not a viable business
proposition

 Best Alternative to a Negotiated Agreement (BATNA) – This is the buyer’s

contingency plan if the supplier is not willing to agree, at a minimum, to the LAA. Think about
what the alternatives might be in the event of a deadlock or unsuccessful agreement?

 Supplier’s Expectations – What is the most desirable outcome for the supplier? Collate
internal intelligence on previous dealings with the supplier and assess the type of relationship
they hold with the company.

Agree the areas you are NOT prepared to compromise on and stick to them

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 Negotiation & Supplier Selection)

What is BATNA (Best Alternative to a Negotiated Agreement):

 Better way of deciding when to say ‘no’

 The BATNA represents the limit of your negotiation range.
 In contrast to a bottom line, a BATNA is not interested in the objectives of a negotiation, but
rather to determine the course of action if an agreement is not reached within a certain time
frame. As a gauge against which an agreement is measured, it prohibits a negotiator from
accepting an unfavorable agreement or one that is not in their best interests because it
provides a better option outside the negotiation.
 Since BATNA is the alternative to what a negotiated agreement would be otherwise, it
permits far greater flexibility and allows much more room for innovation than a
predetermined bottom line.
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 Negotiation & Supplier Selection)

What is BATNA (Best Alternative to a Negotiated Agreement) (Contd):

 When a negotiator has a strong BATNA, they also have more power because they possess
an attractive alternative that they could resort to if an acceptable agreement is not achieved.
 A well conceived and clearly defined BATNA gives a negotiator the advantage to break off
the negotiation if it becomes clear that a beneficial outcome is not possible. The negotiator
would then know the consequences should the negotiation fail. The 'willingness' of a
negotiator to break off a negotiation allows the negotiator to adopt a more firm and forceful
stance when proposing ideas and interests as the basis for an agreement.
Two objectives:
 To protect you against making an agreement you should reject
 To help you make the most use of your assets.
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 Negotiation Approach

HIGH
Low Value/High Risk High Value/High Risk
Risk / Market Complexity

“Win - Win” “Collaborative”

Bottleneck Strategic

Low Value/Low Risk High Value/Low Risk

“Power Negotiator” “Win - Win”

Commodity Leverage

LOW HIGH
Reward / Opportunity $$$

Each cell identifies a different potential strategy

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 Choose the Right Negotiation Style
• Positional Bargaining Style: Traditional “Win-Lose” approach.
Goal and objective is to assure that one party of the
negotiation gains an advantage over the other.
• Power Negotiator Style: Create strength through the leverage
(size, influence, volume) of the company and use this to
influence the results of the negotiation.
• Win - Win Style: The objective is to negotiate an agreement
where both parties walk away from the negotiation with a deal
that is good for both the supplier and company.
• Collaborative Style: Negotiator provides the Supplier the facts
and information attempting to drive towards a strategic
objective.

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 Negotiation – Guiding Principles
• All offers must be conditional
– A good negotiator never concedes anything at all unless they can get a concession in
return
• Effective negotiators never think on their feet
– Proposals can come quickly but an effective negotiator will take time to consider the
proposal
• Effective negotiators are capable of strict self-discipline
– Although we all think we have it few actually do!
• Effective Negotiators give a considerable amount of time to planning, test assumptions and
sustain high aspirational levels throughout the negotiation
• Effective negotiators take control of the negotiation before it begins
– It is more difficult to take control once the negotiation has begun
• Effective negotiators create room to maneuver
– Use an opening position and use a range of issues both critical and trivial
• Effective negotiators are seldom the first to move
– When they do they move fewer times than the other party and in ever decreasing
amounts

Always change any rules, structures, policies, time scales or conditions presented
if it is in your interest
 Negotiation & Supplier Selection)

Some alternatives to negotiation are:

• Persuade. Encourage the other side to accept the merits of a

particular case with no concessions from yourself.

• Give In. Accept totally what the other side offers.

• Coerce. Insist that the other side meets your demands ‘or else’.

• Problem solve. Remove the difference, so there is no need to

negotiate.

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 Guiding Principles (Cont.)
Human Nature: Power:
– Become students of human
nature - especially understand – Put on your poker face and
human weaknesses - to don't show your emotions.
understand the players in the
negotiation process. Home field:
– Negotiate on your home field.
80/20:
– Spend 80 percent of the time Goals/Objectives:
listening and only 20 percent – Don't lose sight of your goals
talking. and objectives.
Issues vs. People: No Contest:
– Separate the issues from the – Don't think of negotiations as a
people. contest.
Control: Yes/No:
– Control the negotiation through – Never say yes to the first offer,
questions. don’t be afraid to say “NO!”
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 Negotiation & Supplier Selection)

Factors affecting Buyer’s Negotiating Position:

 Material cost sensitivity: Refers to the emphasis the buying firm places on reducing the
total cost of its purchases.
 Uniqueness of the buying firm’s specification: The extent to which the
products/components that are designed and manufactured Solely for a particular buying firm
and require the use of special manufacturing materials, processes, and/or equipment for their
production.
 Supplier Competition:. Supplier competition is a characteristic of the purchase situation
and is defined as the degree to which several qualified vendors have a strong interest in
receiving the purchase contract.
 Buyer’s Cooperation orientation:. Maximizing the benefits subject to providing suppliers a
fair return (versus the goal of unrestricted maximization of benefits irrespective of the effects
on suppliers).
 Buyer’s preparedness:. Buyer’s availability of negotiation-relevant information and
preparation in terms of structured planning of the objectives, settlement range etc.

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 Negotiation & Supplier Selection)

 Negotiations Best Practices:

 Don’t bargain over positions
 Separate the people from the problems
 Focus on interests, not position
 Invent options for mutual gain
 Insist on using objective criteria; Fair standard, fair procedures and
principles
 Develop your BATNA (Best Alternative to a Negotiated Agreement)

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 Negotiation Tactics
 Take-it or leave-it: One party makes the call without any concessions. Not in line with
negotiation principles but used as a tactic.
 Bogey: The buyer approaches the supplier in a friendly way and proposed to adjust
the offer to a specific need. Example: There is an agreement about the price, but the
buyer then informs the seller that transportation is the latter’s responsibility.
 Chinese Crunch: Supplier is informed that the agreement is possible, if he solves just
one little problem. Tactic is just to sink the agreement and then ask for an additional
service.
 Dutch Auction: Buyer makes the supplier explain why they should do business
together. Lot of information obtained without efforts.
 Good guy- bad guy: The purpose of this tactic is to dim the other party’s expectation.
 Russian Front: Two choices are offered, of which one is so bad that you choose the
second, less awful, option

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 Negotiation Tactics
• The no win situation: They present you with only two options, one being so bad
that you agree to the other – don’t accept either option

• Wipe their proposal off the table without saying no: Agree to their outrageous
offer providing they meet your condition which should be equally ridiculous .

• Trojan Horse: Beware of Greeks bearing gifts – be wary of the offer that is too good
to refuse, look for hidden problems or disadvantages e.g. the seller gratefully
accepts a fixed price for 12 months then the market price suddenly falls!

• Split the Difference: This is very “accommodating”. Most people believe if both
parties give equal amounts that they have given equally, but have they really?

• Higher Authority: If you can reduce the price by 3% I am sure I can get my boss to
agree to the go ahead

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Sourcing Management
 Negotiation Tactics (Cont.)

• Physically disturb them: Using a variety or physical (no violent) means to

throw the other party off balance e.g. change normal seating pattern, sit to
close to them, lean across the table – invade their territory

• Silence: Use silence don’t be used by it! Many people faced by silence will
go on offering concessions

• Guilty Party: Make the others feel guilty by suggesting that they are
breaking some code or agreement

• Good guy/Bag Guy: This is a tactic for team negotiations – one member
makes a very high demand another takes over and has a more reasonable
attitude

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Sourcing Management
 Listening is Vital Bad Listener
– Works out their own position while you
are talking
– Cant wait for you to stop talking before
butting in
Effective Listener – Seems to be agreeing too easily with
everything you say
– Determines what is being said – Has wandering eyes and inconsistent
– Determines what is not being said body language

– Watches their eyes – Switches off early

– Turns everything you say to their point
– Listens for the real message being of view
given
– Tries to anticipate what you are going
– Listens for the meaning behind to say
the words – Finishes off your sentence for you
– Watches for inconsistencies in – Loses interest – unless its about
body language themselves
– Formulates what they are going – Rarely asks questions
to say, before they say it. – Rarely tries to elicit further information

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 Negotiation Deadlock
Review
– Summarize progress and common areas of agreement to date
– Take Time out
– Ask for an off the record meeting

Create
– Introduce new options which offer mutual gain
– Trade conditional concessions

Change
– Change the shape of the packages
– Change negotiator
– Change location
– Introduce a third party facilitator

Threat
– Point to the consequences of no deal
– Use time pressures to force decisions
– Restate your offer, shut up and wait
– Consider walking away

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Sourcing Management
 Sourcing Strategy – Negotiation Strategy

Negotiation Strategy Expectations

Approach
Gate
Baseline & Strategy
Gate
Decision
Gate The negotiation strategy should typically include the following
elements:
• Most Desired Agreement (MDA)
Preparation
# Analysis
Sourcing
Strategy #
Market
Engagement # Implementation • Least Acceptable Agreement (LAA)
• Best Alternative To Negotiated Agreement (BATNA)
• Negotiation Levers
Preliminary
Internal
Analysis
Value Drivers
Go To
Market
Deployment
• Supplier perspective
Analysis

Mobilisation
Client
Requirements
Sourcing
Strategy
Negotiations Tracking It is also essential to agree on roles before and during the
negotiation phase with the stakeholder and ensure information
Plan
Market
Analysis
Negotiation
Strategy
Business
Allocation is contained and channeled.

Also make sure to gather as much intelligence as possible to

Purpose ensure the negotiation strategy covers all eventualities.
The purpose of this stage is to prepare a high-
level negotiation strategy that covers the key
deliverables and constraints.

Tools / Templates
Negotiation template
Negotiation strategy
 Baseline & Strategy Gate

Baseline & Strategy Document Content

Approach
Gate
Baseline & Strategy
Gate
Decision
Gate The Baseline & Strategy approval documentation typically
includes the following :-

Sourcing Market
Analysis Phase - a summary of the key facts & figures and
Preparation
# Analysis
Strategy # Engagement # Implementation
insights drawn.
Baseline - A detailed overview of the Baselines that will be
Preliminary
Internal
Analysis
Value Drivers
Go To
Market
Deployment
used to calculate the value added by Agrega. The key focus
Analysis

need to be on validation the principle and calculation

Mobilisation
Client
Requirements
Sourcing
Strategy
Negotiations Tracking methodology, especially if not all the numbers are know at this
stage. Also precise if the spend is Opex or Capex.
Market Negotiation Business
Plan Analysis Strategy Allocation

Opportunities – a description & rationale for the prioritised

opportunities to be pursued including potential benefits.
Purpose Value Levers & Strategic Approach – a short expression of
what value lever will be used and how you will unlock the
To ensure that the Agrega management and the value: use the Purchasing Chessboard for the presentation
Partner organisation agree with the conclusions Supplier – information regarding the supply side including
drawn from the previous phases of the process, criteria to be used for supplier selection, final number of
validate de the Baselines and agree to the way suppliers required, supplier relationship required, etc.
forward expressed in the Sourcing strategy.
Market Approach & Negotiation Plan – an explanation of
Approval must be gained from both the Client how the market will be approached (e.g. RFQ, e-Auction,
organisations and the relevant Agrega Approval negotiation) and the objective of each stage.
Committee. Communication plan – an explanation of who & what will be
communicated throughout the remainder of the initiative.
Risk & Issues – a list of potential risks associated with the
initiative.
 Case Study – Sourcing Strategy

We will continue to work with the two primary case studies:

 Sourcing of a colour company.
 Event management company selection

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Sourcing Management
Q&A ???????????