In one of my previous summaries, I talked about Outsourcing and Subcontracting. In this article, I’m going to help you understand what Source Selection means and all it entails. So, if you are still mixing up these concepts (Outsourcing, Subcontracting, and Source Selection) kindly leave a comment below.
Source selection or Sourcing refers to a number of procurement practices aimed at finding, selecting and evaluating of a supplier of goods and services. This practices must be well supported by advanced analytics and market intelligence, supplier performance information and well-developed strategy.
The information regarding a local or foreign supplier can be known through advertisement, trade journals, professional association, online database, trade fair, company purchase records, chamber of commerce, foreign embassies, distributors, etc.
Factors To Be Considered In Supplier Selection?
Some of the factors to be considered while selecting a supplier or are:
- Supplier Market Assessment: A Market is a place where buyers and sellers come in contact with each other directly or indirectly to buy or sell goods. The supplier market assessment needs to be considered when sourcing for a good supplier. This assessment includes the supplier reputation, timely delivery, supplying of right quality of materials, etc.
- Product Level: This factor includes inspecting and checking the quality of product to supply by the supplier. If the product to be bought is generally in terms of quality and maximum satisfaction then the buyers can be considered to purchase from this supplier.
- Price Agreement: This is one major factor that buyers need to take into consideration before deciding the right supplier. The amount to be paid by both parties must be favourable and the supplier must be ready to provide credit or trade discounts whenever the buyers want to purchase in larger quantities.
- Technical Ability: The supplier must have the technical ability to supply the product that is needed by the organisation. He must also be able to assist and improve product improvement that will enhance or reduce the cost of the buyer’s product.
- Manufacturing Capability: The supplier manufacturing facilities must be able to supply the quantity required and he or she must deliver at the right time.
- Reliability: In selecting a supplier, it is desirable to pick one that is reputable, stable, and financially strong. Companies that want to remain in business for a long period of time must ensure that the supplier selected is trustworthy and financially strong enough to stay in business.
- After-Sales Service: If the product is of technical nature or likely to need replacement parts or technical support, the supplier must have a good after-sales service. This should include a good service organization and inventory of service parts.
- Supplier Location: The supplier must be located near the organisation or the buyer. A closer location helps shorten delivery time and in case of emergency, he can delivery quickly.
- Quick Response: The world of business is highly unstable and often the gap between demand and supply can be hard to predict. The supplier must have the ability to meet such a contingency event whenever the need arises.
- Other Considerations: Sometimes other factors such as credit terms, reciprocal business and willingness of the supplier to supply inventory for the buyer should be considered.
Factors Suppliers Consider To Determine The Right Price Of Materials.
The factors influencing or determining the right price of materials are:
- Location: This is one of the major factors that need to be considered by the supplier when setting the price of materials. Suppliers take a look at the distance of which the goods have to be transferred from the point of production to the point of consumption. This factor helps supplier to know the appropriate price to be set on the goods to be supplied to the final consumer(s).
- Size of Order: The size of the firms or individual demand for a particular product will help the supplier to set the right price. Whenever a firm buys raw materials in larger quantities, such firm is entitled to trade discount from the supplier thereby reducing the cost of items to be purchased. In order words, the larger the size of an order, the more the price is reduced.
- Market Competition: In a market, there are numbers of products or materials that have been offered by other competitors in the same market. Therefore, suppliers have to take into account what other competitors are doing in term of their pricing decisions before setting the price for a product.
- Cost of Production: Costs are those overhead costs, that the suppliers or manufacturers incurred in course of converting the raw materials into finished products. In this case, costs set the floor for the price that the suppliers can change for goods to be purchased by the buyers.
- Economic Factors: The economic situations of one’s environment needs to be considered when setting the price for materials e.g. inflation, interest rates, etc. because it affects pricing decisions. In this case, suppliers need to determine the economic factors in which they are operating before setting the right price for their products.
- Political and Legal Factors: Political and legal framework greatly affect pricing decisions. Producers or suppliers must set the price of materials based on the existing laws, rules and regulations that are being enforced by the government of that country.
- Taxation: Also, the government imposes taxes on the manufacturers or suppliers. If the supplier is paying high taxes then the price of material will also be at a higher price.
Various Source Or Sources Of Price Information To Buyers.
The sources of price information to buyers or organisation are:
- Catalogues: Prices that are stated are always asking prices and can be subject to trade, cash or quantity discount. Buyers can obtain information regarding the price of items to purchase by visiting supermarkets, sales outlet, etc. and then compare with the price of suppliers.
- Trade Journal: Journals are becoming more important in today’s global business. They provide regular information that the buyer can easily obtain when he or she wants to purchase a particular material from the suppliers.
- Internet: Internet is becoming another new age of price information to buyers. It has been observed that a lot of price information that is not available in printed form are now available on the internet. Internet saves time and cost of the buyer.
- Quotations: Business regularly demand quotation from the suppliers on the goods or materials to be purchased. This source of price information enables the buyers to compare and contrast between the various quotations received from different suppliers, in order to determine the right price to be paid for the goods to be purchased.
- Tendering: This involves inviting qualified suppliers to send their offers regarding the proposed materials to be purchased by the firms. Each supplier submits their tender to the firm, thereafter the firm will select and choose among the best-qualified suppliers to supply the firm with right materials at the right price.
Methods Purchasing Department Uses To Describe Needed Materials To Suppliers.
The various methods adopted by purchasing managers are:
- Description by Market Grade: The grade indicates the quality of a product. This helps the buyers or the suppliers to know the degree of product to be purchased in the market. To ensure that this happens, purchasing manager must describe the characteristics that such product possesses such as shape, size, a degree of perfection and other characteristics in which the product is going to perform.
- 2. Description by Brand Name: A brand name is usually given to a product, in order to differentiate it from other competitors’ product in the same market. This makes it easier for the supplier to identify and describe the product with a given brand name attached to it. The buyers must ensure that the described product meets the quality and standard of the organization. Especially materials, however, buyers must not be dependent upon a particular brand.
- Description by Commercial Standard: Purchasing manager can also describe the needed materials by a commercial standard. Many individual goods or products are manufactured to the required standard specification. This makes it easier for the buyer to order for a specific product by their standard specification because the level of quality, workmanship and performance are certain and known to the buyer.
- Description by Specification: Purchasing manager may describe the needed material by specification other than by brand name or commercial standard. It is usually employed when the material to be purchased is of a high standard, and they are required to perform a specific purpose or to fit a particular design or method of manufacture. In such cases, the company must prepare its own specification.
However, description by specification depends on the buyer describing in detail exactly what he wanted, in order to obtain the right item in the market. The following must exist when describing needed materials by specification: (I) Physical and Chemical properties of the materials wanted. (ii) Appearances and finish of the materials. (iii) Materials and methods of manufacture. (iv) Dimensions and tolerances, etc.
- Description by Performance Specification: This is the method of describing what an item is required to be used for rather than to rely on the supplier or manufacturer judgement or skill. This makes it easier for the producer or manufacturer to supply the needed materials because he or she is conversant with the product and required performance.
- Description by Samples: It is often said that showing sample is the easiest way for describing needed materials to suppliers, but it is usually difficult as the sample product might not be the same with the finished product in the market in terms of materials specification, workmanship, level of quality, price, performance, etc. However, when a requirement is very difficult to describe, a sample may be the best way to specify one’s need.
- Description of drawings: This method is often used by engineering department when the required materials and equipment involve many parts and configurations. In such cases, they have to draw the required materials or equipment in details in order to buy the exact items they need for operation. Description by drawing is widely used because there is no other way to describe the needed materials to the supplier.
Needs Of An Organisation.
The needs of the organization may vary from each other. However, the following are the major types of needs:
- Capital Needs: Capital refers to the amount of that is invested or used to start a business. All organization requires capital needs, in order to survive and remain in the business. Companies invest a huge amount of money on the hiring of workers, and purchases of materials needed by the business. However, the capital needs should be based on the availability of funds through budgeting and other purchasing policies.
- Production Materials: These are raw materials required by production department into a finished product. So, it is up to the organization to provide these materials, to meet the customer’s expectation and deliver the ordered goods at the right time.
- Miscellaneous Supplies: These include everything, required to operate a business other than capital needs and production materials. Examples of miscellaneous supplies include office equipment, operating materials, general supplier, etc.