Chapter I:Introduction

1.1             Backgroundto the Study

Purchasingdepartments are increasingly seen as highly valued strategic contributors tothe organisation because of their ability to impact product design and quality,cost of goods sold, cycle time, and hence, the firm’s reputation,profitability, and competitive position (Wisner, Tan & Leong, 2008).

Searchingfor the right sources of supply is often seen as one of the core responsibilityof procurement and supply managers. Because this purchasing function poses agreat deal of risk and reward if effectively executed, it represents one of themost challenging of all procurement tasks.

Overthe past decades, a lot of factors have combined to drive the organisations toapproach sourcing more strategically. These factors include changing globaleconomic climate, increasing number of global competitors, demands by customersand government for organisations to become more environmentally focused, risingcost of materials and energy, and the desire to deliver new products quicklyand cheaply.

Withthese trends, the recognition that tactical sourcing will not succeed indeveloping a supply base that will yield the benefits of strategic sourcingbecame clear. Strategic sourcing takes the concept of sourcing a step furtherto go beyond just source identification and selection to include managing thefirm’s external resources in ways that support the long-term goals of the firm.Its scope includes the make-or-buy decision, supplier identification andselection, managing and improving supplier relationships and capabilities,monitoring and rewarding supplier performance, and developing supplier tiers.

Effectivestrategic sourcing decisions will only be made when all relevant factors havebeen considered and weighed against the risks and opportunities which apply.

Itwould be possible that the most important purchasing decisions is not onlyconcerned with selecting the right sources of supply; but also developing andmanaging a collaborative relationship that is beneficial to both parties in thelong run.

Ifthe correct source decision is made in a particular instance, then the buyingcompany’s need should be met perfectly. In such circumstances, it would receivethe required goods and services at all times. However, the very simplicity ofthis statement conceals the complexity of source decision making, for inarriving at the right decision, many factors have to be considered.

Strategicsourcing thus involves much more than simply picking a supplier or contractorfor each requirement in isolation. It involves continuing collaborativerelationships both with preferred and potential sources. It involves decisionson how to allocate the available business, and what terms to do business on.Development of collaborative relationships and eventually world-class supplymanagement requires concerted strategic planning.

Strategicsourcing deals with planning, designing, and building a reliable and competitivesupply base, determining the strategy for procurement, defining pricingstrategies and supply chain requirements. The strategy involves integrating ofits objectives in line with or conforming to the objectives of stakeholders inoperations, finance, marketing and distribution. Operating at this levelrequires procurement, manufacturing, and technology groups to work together toestablish the best possible supply network, and to develop optimal suppliercapabilities.

Strategicsourcing decisions are not just made based on the procurement managers’ whimsand caprices. They represent astute business judgment and thus involve theconsideration of several factors.

Profitabilityin simple terms is the ability to make profit. Profit is a function of cost minimization.Finding the best suppliers means that an organisation will be able to getgreater value, lower prices, supplier involvement in production efficiency,high quality materials, discounts, and better relationships. All combining toreduce the costs of doing business and add to the profitability of theorganization. Also, by developing strategies that will make the organizationhave fewer suppliers, purchasing costs can be reduced, saving some few coinsfor the profit.

Organisationsthat seek to acquire quality materials and services at reasonable costs orproduce quality products at affordable price must first develop strategiesthat will help find credible sources of supply of materials, equipment andservices, and build strong sustainable relationships. Sourcing is a veryimportant part of procurement manager’s job. Most supply professionals espousethe idea that the entire procurement function is string around sourcing.

Therisks of buying the wrong items, services or from the wrong supplier can havemajor impacts and ripple throughout a business. Consequences can range fromlate delivery to total service failure liability and can even affect marketcompetitiveness. In addition, if the selected suppliers cannot provideopportunities to reduce costs, improve and upgrade product/service offerings orprovide other market-facing advantages, then an organization can quickly finditself losing market share. To help solve this dilemma, businesses arebeginning to develop sourcing strategies that can create supply chain solutionsoffering insights into the optimum approach to buying. Often known as strategicsourcing, it begins the critical process and lays the foundation for creatingvalue through the purchasing process.