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APICS Operations Management Body of Knowledge Framework, Third Edition

3.9 Strategic sourcing

Strategic sourcing is a comprehensive approach for locating and sourcing key material suppliers. This often includes the business process of analyzing the total cost associated with procuring an item or service. There is a focus on developing and maintaining long-term relationships with trading partners who can help the purchaser meet profitability and customer satisfaction goals. From an information technology applications perspective, strategic sourcing includes the automation of processes such as request for quote, request for proposal, electronic auctioning, business-to-business commerce, and contract management.

3.9.1 Purchasing cycle

The purchasing cycle is the length of time from when need for an item is determined to when the item is sourced, purchased, and delivered. The purchasing cycle consists of need identification, supplier selection (including development of standards for order qualifiers and order winners), price determination and negotiation, purchase order preparation, following up and checking on purchase status, acceptance and receipt of items, and payment of invoices.

Supplier selection. The process of selecting the best source for a commodity or service is a critical function of the purchasing or acquisitions department. For most common items, the purchasing office maintains a list of approved, qualified suppliers. For new items or for items without a qualified supplier, the purchasing office must conduct a decision analysis.

Part of maintaining a supplier database includes preparing reviews and supplier scorecards. Decision analysis models can be used to choose potential suppliers, as deciding on the right mix of suppliers and how orders will be allocated is an important aspect of supplier selection. Supplier selection may be limited to a sole source for some critical or proprietary components.

Processes and models. Multiple-criteria decision-making models are used when there is more than one criterion for critical decisions. These models may incorporate a number of factors, such as price, quality, delivery standards, and evaluations of past performance. A successful model may include a trade-off analysis between the established criteria. The analytical hierarchy procedure is a useful model when making supplier selection decisions.

3.9.2 Global partners

Global and extended supply chains create the need for international partners, especially in developing markets. A global partner may be a supplier of raw materials or components, an intermediary, a customs broker, or a retailing partner. Laws and regulations specific to a country may dictate how a global partner may enter the marketplace. Partnering usually is an indication of a long-term commitment based on mutual trust and a shared vision.

3.9.3 Supplier relationship management (SRM)

SRM is a comprehensive approach to managing how an enterprise interacts with the organizations that supply its goods and services. The goal of SRM is to streamline the processes between an enterprise and its suppliers. SRM often is associated with automating procure-to-pay business processes, evaluating supplier performance, exchanging information with suppliers, and supplier certification. E-procurement systems also are part of the SRM family of applications.

Third-party logistics (3PL) partnering. This occurs when a third party provides product delivery services and offers additional supply chain expertise. A 3PL company is an entity that manages all or part of another company's inbound and outbound freight operations. This partnering between a manufacturer or supplier and a 3PL provider is a result of a trade-off analysis of cost and quality of service. It usually is the result of a review of the manufacturer or supplier's core competency and acknowledging that another company can provide the same or better service for less cost.

Supplier scorecard. Supplier scorecards are used to certify quality suppliers and negotiate prices on purchase orders. The purpose of a supplier scorecard is to evaluate the quality of the supplier's products, the timeliness of its deliveries and delivery cycle times, the number of returns or defective products, and customer complaints, among other variables. The supplier scorecard ties the company's short- and long-term goals to the supplier's performance and enables the company to rank suppliers, which may impact the allocation of orders. The scorecard is developed between the customer and the supplier with a mutually agreed-upon set of metrics.

Co-design and execution. Co-design and execution is the cooperation of customers and suppliers in the design of the distribution system in order to meet the needs of the customer, simplify delivery systems, and take advantage of throughput from the supplier to the customer. The process engages suppliers and customers in the design of the product or service, fully utilizing input and support from all facets of the supply chain.

Collaborative planning, forecasting, and replenishment (CPFR). CPFR is a process in which trading partners jointly plan key supply chain activities, from production and delivery of raw materials to producers and final products to end customers. CPFR encompasses the functions of business planning, sales forecasting, and operations required to replenish raw materials and finished goods. CPFR is an industry standard endorsed by the Voluntary Interindustry Commerce Solutions Association (VICS). (See section 5.11.)

3.9.4 Risk management

See section 3.3.

3.9.5 Sourcing

Sourcing is the process of selecting a company to provide a specific good or service. Sourcing often is associated with purchasing.

Single sourcing. Single sourcing is a method in which a purchased part is supplied by only one supplier. Traditional manufacturers usually use at least two suppliers for each component they purchase to ensure continuity of supply and to foster price competition between suppliers. A Just-In-Time manufacturer frequently has only one supplier for a specific part so that closer relationships can be established with a smaller number of suppliers. The disadvantage of single sourcing is the increased risk if the single source goes out of business or is unable to meet surges in demand.

Dual or multiple sourcing. These are methods of sourcing that use a few suppliers for the same products or services. The advantage of multiple sourcing is the flexibility and redundancy of support from multiple suppliers, coupled with the ability to use multiple sources to meet demand surges.

Sole source. The term sole source describes a situation where the supply of a product is available from only one organization. In these cases, barriers such as patents preclude other suppliers from offering the product.