Supplier Base

Supplier Base is all the vendors that

supply a given purchaser.
Supplier bases are often described in
terms of their size of range (broad,
narrow, single source), location (local,
national, international) and
characteristics (eg diversified or
specialized).

Multi Sourcing
Having more potential suppliers of
a given item or category of
purchases, per-qualified and
approved as being able to meet
the buyers requirements can be
defined as Multiple Sourcing
Arrangements.

Advantages of multiple
sourcing arrangements
Buyer can avoid supply shortages or
disruptions, or unforeseen peaks in
demand, or a supplier failure.
Buyer can take advantage of the
best available price, trading terms,
quality, innovation and flexibility on
offer at any given time.

Disadvantages of multiple
sourcing
arrangements
They can lead to unnecessarily high
procurement costs
They fail to exploit the value-adding and
competitive potential of concentrating
on more collaborative relationships with
fewer suppliers
They can lead to waste, by retaining
suppliers who cannot (or can no longer)
meet the firms requirements, or are
otherwise not often used

Supplier Base
Optimisation

Supplier base optimisation (or rationalisation)

is concerned with determining roughly how
many suppliers the buying firm wants to do
business with.
Optimising the range of supply base enables
the firm to:
Avoid the drawbacks and inefficiencies of
multiple sourcing.
Leverage the potential of closer, long-term,
collaborative relationships with a few
suppliers.
Maintain the security of supply.
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Risks for a very narrow

Supplier Base

Over-dependence on a few suppliers.

Supply disruption.
The loss of preferred suppliers goodwill and
co-operation.
Preferred suppliers growing complacent.
Being locked in to long-term relationship and
co-investment with suppliers.
Missing out on seeking or utilising new or more
competitive suppliers in the wider supply
market.

Single sourcing

When only supplier is selected for the

development of closer partnership relationship
relations or an exclusively supply contract
then it is called Single Sourcing.

Such an arrangements might be suitable for

procurements for which the buyer hopes to
gain supplier commitment and co-investment
(eg for strategic or critical item) or preferential
treatment (eg on price for leverage item), by
offering the supplier exclusively.

Dual sourcing

An arrangement where organisations share

supply between two suppliers is called dual
sourcing.

This approach enables the buyer to maximise

the advantage of narrow supply-while
managing the risks of over-dependency on a
single supplier.

Consideration for Single

sourcing
The total requirement is too small to
justify splitting orders among several
suppliers
One supplier is so far ahead of others in
terms of reputation, quality, price etc
that it would make no sense to use
anyone else
Expensive set-up costs (eg tooling or
systems integration) are required to
enable supply
The requirement is subject to supply
risk, or in short supply
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Partnership sourcing

Both single sourcing and dual sourcing enable

buyers to focus on developing more
collaborative value adding relationships,
committed long-term relationships.

Single sourcing and dual sourcing are

generally accompanied by a strong emphasis
on mutual commitment, co-investment and
relationship building, and sometimes called a
partnership or partnership sourcing.

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Where Partnership sourcing

might be beneficial

Where the customer has a high spend with the supplier

Where the customer faces high risk, in the sense that the continual
supply of the product or service is vital to the buyers operations

Where the product supplied is technically complex, calling for

advanced technical knowledge by the supplier and where the cost of
switching to a new supplier would be high

High hassle supplier relationships, where the product supplied is

vital to the buyers operations and is technically complex

Where the supply market for the product is fast-changing, so that an

up-to-date knowledge of technological or legislative changes in the
market is essential

In a restricted supply market, where there are few competent and

reliable supplier firms

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Why Partnership Sourcing

Achieve competitive advantage

Focus on core business competencies

Reduce supply costs

Reduce product lifecycles

Supplier rationalization exercise

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Key characteristics of
Partnership Sourcing

Cultural compatibility between the partners.

A high level of trust, knowledge sharing and openness between

customer and supplier.

Mutual acceptance of the concept of win-win within the supply chain.

Relevant expertise, resources or competencies in complementary

areas.

Clear joint objectives and meaningful performance measures for

assessing supply chain performance.

A total quality management philosophy.

The use of cross-functional teams to enhance co-ordination.

A high level degree of systems integration.

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Partnering
ADVANTAGES FOR THE BUYER

DISADVANTAGES FOR THE BUYER

Greater stability of supply and supply

prices

Risk of complacency re cost/quality

Sharing of risk and investment

Less flexibility to change suppliers at

need

Better supplier motivation and

responsiveness

Possible risk to confidentiality

Cost savings from reduced supplier

base, collaborative cost reduction

May be locked into relationship with an

incompatible or inflexible supplier

Access to suppliers technology and

expertise

Restricted in EU public sector

procurement directives

Joint planning and information sharing,

supporting capacity planning and
efficiency

May be locked into relationship,

despite supply market changes and
opportunities

Ability to plan long-term improvements

Costs of relationship management

More attention to relationship

management: eg access to an account
manager

Mutual dependency may create loss of

flexibility and control
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Partnering
ADVANTAGES FOR THE SUPPLIER

DISADVANTAGES FOR THE SUPPLIER

Greater stability and volume of

business, enabling investment in
business development

May be locked into relationship with

an incompatible or inflexible
customer

Working with customers, enabling

improved service, learning and
development

Gains/risks may not be fairly shared

in the partnership (depending on
power balance)

Joint planning and information

sharing, supporting capacity planning
and efficiency

Risk of customer exploiting

transparency (eg on costings, to
force prices down)

Sharing of risk and investment

Investment in relationship
management

Cost savings from efficiency,

collaborative cost reduction, payment
on time

Dependency on customer may create

loss of flexibility and control

Access to customers technology and

expertise

Restricted by EU public sector

procurement directives

More attention to relationship

management: eg access to a vendor
manager

May be locked into relationship,

despite market changes and
opportunities
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Sole Sourcing

Sole sourcing refers to a situation in which there

is only one supplier available in the supply
market for a given procurement.
The market may be dominated by a single
supplier: a market structure known as a
monopoly.

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Conditions for a monopoly

Only one supplier of the good or service exists in

the supply market.
There are high barriers to entry, preventing
other competing firms from entering the market.
There are no close substitutes for the good or
service available.

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Different approaches to
letting purchase contracts
Framework Agreement.
Catalogue Purchasing from pre-approved
suppliers.
Request for Quotation (RFQ)
Request for Information (RFI)
Request for Proposal (RFP)

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Tendering Procedures

Open procedures
Selective or restricted
procedures
Restricted open
procedures
Negotiated procedures
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The use of competitive bidding

FIVE CRITERIA FOR THE USE OF
COMPETITIVE BIDDING

FOUR SITUATIONS IN WHICH

COMPETITIVE BIDDING SHOULD NOT
BE USED

The value of the procurement should

be high enough to justify the expense
of the process

It is impossible to estimate production

costs accurately

The specifications must be clear and

the potential suppliers must have a
clear idea of the costs involved in
fulfilling the contract

Price is not the only or most

important criterion in the award of the
contract

There must be an adequate number

of potential suppliers in the market

Changes to specification are likely as

the contract progresses

The potential suppliers must be both

technically qualified and keen to win
the business

Special tooling or set-up costs are

major factors in the requirement

There must be sufficient time

available for the procedure to be
carried out
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Intra-company trading

Intra-company trading refers to

commercial relationships
between entities which are part
of the same organisation.
One company, division or
strategic business unit (SBU) in a
large enterprise or conglomerate
(eg a group of companies) may
supply goods or service to
another.
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Purpose behind Intracompany trading

To support capacity utilisation in

the supplying entity or unit
To help the supplying entity or
unit to cover its fixed costs in
times of recession and low
external orders.
To support the profitability of the
supplying unit or entity.
To support the profitability of the
group as a whole.
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Other aspects of sourcing

policy and stategy
Make/do or buy decision depend on a
range of strategic and operational
factors.
'Make-Or-Buy Decision' The act of choosing between
manufacturing a product in-house or purchasing it from
an external supplier. In a make-or-buy decision, the two
most important factors to consider are cost and
availability of production capacity.

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Other aspects of sourcing

policy and stategy

Factors favoring in-house manufacture

Wish to integrate plant operations
Need for direct control over manufacturing and/or
quality
Cost considerations (costs less to make the part)
Improved quality control
No competent suppliers and/or unreliable suppliers
Quantity too little to interest a supplier
Design secrecy is necessary to protect proprietary
technology
Productive utilization of excess plant capacity to assist
with absorbing fixed overhead (utilizing existing idle
capacity)
Wish to keep up a stable workforce (in times when there
are declining sales)
Greater guarantee of continual supply
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Other aspects of sourcing

policy and stategy
Factors favoring purchase from outside
Suppliers specialized know-how and research
are more than that of the buyer
Lack of expertise
Small-volume needs
Cost aspects (costs less to purchase the item)
Item not necessary to the firms strategy
Limited facilities for a manufacture or
inadequate capacity

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Outsourcing and subcontracting

Outsourcing is an allocation of specific business processes
to a specialist external service provider. Most of the times
an organization cannot handle all aspects of a business
process internally. Additionally some processes are
temporary and the organization does not intend to hire inhouse professionals to perform the tasks. Once the task is
outsourced to the service provider, he will take the
responsibility of carrying out the tasks and maintaining the
organizations assets.
A subcontractor is a person who is hired by a prime
contractor or main contractor to perform a specific task as
part of the overall project and is normally paid for services
provided to the project by the originating general
contractor.
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Outsourcing
ADVANTAGES

DISADVANTAGES

Supports organisational rationalisation and

downsizing

Potentially higher cost of services,

contracting and management

Allows focused investment of managerial,

staff and other resources on the
organisations core activities and
competencies

Difficulty of ensuring service quality and

consistency and corporate social
responsibility

Gives access to specialist expertise,

technologies and resources of contractors

Potential loss of in-house expertise,

knowledge, contacts or technologies in the
service area

Access to economies of scale

Potential loss of control over areas of

performance and risk

Adds competitive performance incentives,

where internal service providers may be
complacent

Added distance from the customer or enduser, by having an intermediary service

provider
Risks of lock in to an incompatible or
under-performing relationship: cultural or
ethical incompatibility; relationship
management difficulties; contractor
complacency etc.
Risks of loss of control over confidential
data and intellectual property
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Other aspects of sourcing

policy and stategy

local and international sourcing.

Consortium buying.

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Supplier switching
RISKS OF SUPPLIER SWITCHING

COSTS OF SUPPLIER SWITCHING

The new supplier may fail to perform

Identifying and qualifying new

suppliers

Process incompatibility

Initiating and administering tendering

exercises

Cultural/inter-personal incompatibility

Settlement of not-yet-delivered items

from old supplier

Loss of knowledge

Change of internal systems and

processes

Learning curve

Familiarising and training the new

supplier

Exposure to new and unfamiliar supply

risks

Contract development and contract

management

Exposure of intellectual property,

confidential data

Risk mitigation measures and

corrective measures

Problems of adversarial hand-over

from the old supplier to the new
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