Sourcing Chapter 6 Part 2

• Sourcing/Procurement Process


  1. Determine business buying needs and specifications

  2. Finding, evaluating and selecting suppliers

  3. Purchasing Contract

  4. Ordering

  5. Follow up and Evaluation
• Criteria for selecting suppliers


  • Financial Criteria
  • Quality
  • Capability
  • Reliability
  • Other desirable qualities
• Financial Criteria


  • Supplier's price is important as it will affect the retailer's margins (and profitability)
  • Retailers would want to avoid suppliers who are not financially stable as they may not be able to provide with a continuous supply of products
• Quality


  • Quality is as important as price
  • Quality includes performance, long lasting, free from defects, ease of use, service etc.
  • It's the retailer's purchasing objective to buy the right quality of product for their customers
  • It's the purchasing dept. responsibility to ensure that the supplier's quality is at the required level
• Capability


  • Does the potential supplier have the production, technical, management capabilities to provide you with the "right products" and at the right time and quality?
  • Do they have qualified staff and infrastructure to meet your retailer's demands?
  • Do they have the right transport, warehousing, facilities etc. to deliver goods to your retailer on time
  • Captive suppliers should be avoided
• Reliability


  • Refers to the supplier's ability to deliver the right order, 'on time, every time'
  • Buyers need to check suppliers performance history (especially with new/unheard suppliers)
  • Buyers need to check the suppliers past customers or start on trial bases with a new supplier
• Other desirable qualities


  • Suppliers attitude (are they positive, supportive, flexible etc.)
  • Supplier location (are they near to retailers-increase efficacy and effectiveness)
  • Packaging (do they have the right packaging for the retailer)
  • Is the supplier innovative or proactive?
• Criteria in choosing a supplier


  • Financial Criteria
  • Quality
  • Capability
  • Reliability
  • Other desirable qualities
• Placing the order (The Purchasing contract)


  1. Once the "best" supplier is chosen by a retailer, a contract needs to be drawn up (if it's not a once off order)

  2. This contract is legally binding between retailer and supplier

  3. Businesses in general are moving away from short term contract to longer ones (5-15years)

  4. Long term contracts also is a means to build retailer/supplier relations
• Ordering and Expediting


  1. Placing the order (all information must be correct)

  2. Supplier receives order

  3. Supplier confirms order has been received and indicates that it understood the order

  4. Payment is made to suppliers

  5. Supplier delivers goods

  6. Retailers check goods

  7. Inspection of goods (buyers must check the right type, quality and quantity and at the right price was received)

  8. Return of goods : if not meeting buyers standards (goods need to be returned if defective, damaged, poor quality)

  9. Payment of supplier's invoices
• Follow up and Evaluation


  1. Suppliers need to be evaluated in terms of their performance

  2. Have they delivered on time?

  3. Have they delivered the right quality/quantity?

  4. Are they capable in meeting the retailer's needs?

  5. Is their pricing, right?

  6. Therefore, are they efficient (relatively low cost) and effective (on time)?
• Supplier negotiations: Discounts and Delivery


  • Quantity discount
  • Cash discount
  • Promotional Discount
  • Seasonal discount
  • Trade discount
• Quantity discount


  Buyers get a discount based on the quantity purchased
• Cash discount


  Suppliers motivate buyers to pay cash, in order to receive a discount (instead of receiving payment after 30 days etc.)
• Promotional discount


  The buyer is given a discount if the buyer agrees to promote the supplier's product (e.g. in store)
• Seasonal discount


  Suppliers may try to encourage sales by offering discounts to buyers during low peak periods. E.g. air conditioner supplier will offer lower prices in winter to retailers
• Trade discount


  Are discounts offered to members in the supply chain e.g. a manufacturer may offer a supplier or wholesaler a discount for bulk purchases
• Delivery terms


  • The delivery terms define the agreements between buyer and seller regarding the way the goods are delivered
  • The point of title passage is the point at which the legal ownership changes. At this point, the risk passes from the seller to the buyer
• Delivery terms


  • Free on Board (origin)
  • Free on Board (destination)
  • Free on Board (Shipping Point)
  • Delivered pricing
• Free on Board (origin)


  • Transport is responsibility of the buyer
  • The buyer assumes responsibility for goods as soon as it leaves the supplier's warehouse
  • The buyer needs to arrange/pay their own transport and insurance
• Free on Board (destination)


  • The supplier agrees to pay all the costs for transport to the buyer
  • Buyer takes ownership when the buyer receives goods
• Free on Board (Shipping Point)


  • The supplier may agree to pay some of the costs of delivery
  • E.g. If a buyer (retailer) imports a product from a supplier/manufacturer (in China), the supplier could be responsible for transport costs of the goods to the sea port (China)
  • The buyer then pays for transport from the port (China) to the final destination - seaport in SA
• Delivered pricing


  The supplier quotes a price which includes the delivery cost