To Make or to Buy?

What is a Business? A business defines as an organization that provides goods and services in exchange for money.  Different companies offer different set of goods and services i.e. Apple, they offer products such as Iphone, Macbook, Ipad while Financial institution, they offer goods and services like insurance policy, claims, investment etc.

An Organization should have their core competency in a field and that is why they can make business out of it. These so called “Core Competency” could be a specialized component that most Organizations need in their product or services that they are expert in.

So for an Organization, they would usually look into their processes, identify them and go into a Make-or-Buy Decision.

So what is a Make-or-Buy Decision?? It is an act or an action to make a decision between making the product/services in house and engaging an external party for the goods/services. And in other words for Buy Decision, we called it as Outsourcing.

Make-or-Buy Decision is also normally used in different aspects i.e. the Company is developing a product or part, Major modification of a product or part, supplier is giving a lot of trouble causing disruption, change of demand etc.

What are the advantages to make on our own or to buy from supplier?

‘Make’ Decision

·         It is cheaper to make the part than buying from a third party

·         You get to control the quality of the part, outsourcing you have no control at all.

·         You may only require a very small amount, it is costly to outsource to a third party.

·         Very critical and sensitive part which is company’s survival

·         Sometimes, you are unable to find capable suppliers or unreliable ones for the jobs.

‘Buy’ Decision

·         Supplier is the expertise in this field area than you are

·         The part may not be a critical part for company survival and it does not align with company’s strategic goals

·         No headache on over stocking issue result in storage space, holding cost.

·         You do not have the capacity to make in house

Two considerable points that most Organizations pointed out when they make a decision to make-or-buy are the whether they have the capacity to produce in house and cost expenses that they will incur.

The economy is growing every year and so does the raw materials and services. For Cost, one need to consider more not just the present value and it should be in long term i.e. the lifespan of the parts. This would give one a more accurate analysis when you do a make-or-buy decision.

Below are some considerations you need to factor in each decision:

‘Make’ Decision Analysis – inventory holding cost, overhead cost, purchasing cost, investment cost etc.

‘Buy’ Decision Analysis – Transportation costs, Part pricing, Quality concern etc.

So should I make my part in house or buy it from a competent supplier? How do I determine which decision I should go with?

Look back at you company goals and ask yourself, does it align with my company’s direction, how does the company want to progress down the road, understand all the plan and direction set by the Management.

Cheers!

Understanding Incoterms®

Being a Procurement Professional, Buyer or Purchaser, it is good to understand International Commercial Term, in short we called it Incoterms® as this could helps us make a better decision in procuring materials especially from international market. Below is a sample of the Incoterms® reference chart which we would be referring to.

                                   


What is Incoterms®?

So what is Incoterms®? They are guidelines that helps define the roles and responsibility of each individual party (sellers or buyers) for any good delivery under a sale agreement for dosemtic or international.

International Chamber of Commerce, in short ICC, first introduce Incoterms® in 1936 and today, it has been widely used by all companies for their trade.

What are Incoterms® used for?

Incoterms® allows one parties to clarify and understand what roles and responsibilities that they play a part in a sales agreement i.e transportation cost, liability concern such as who bear the risk before, during and after etc.

The implement of Incoterms® significantly help to reduce misunderstanding between parties and this has greatly reduce any dispute among them.

As said earlier, Incoterms® was first introduced in 1936 and the last revision was made in September 2010 and took effective on January 1st, 2011. Earlier Incoterms® still can be used but you need to specify clearly in any agreement to avoid any dispute. I would recommend to use the latest version since i would say almost all industries know about the changes and would have made appropriate changes.


Which Incoterms® to use for your trade?

In Incoterms® 2010, it was now being more organized, categorizing them into 2 main categories via mode of transport, allowing one to refer easier and correctly.

Group 1 - the following terms are applicable to any mode of transport i.e. Sea, Land or Air

• EXW Ex Works
• FCA Free Carrier
• CPT Carriage Paid To
• CIP Carriage and Insurance Paid To
• DAT Delivered at Terminal
• DAP Delivered at Place
• DDP Delivered Duty Paid

Group 2 - the following terms are only applicable to waterway mode i.e. by ocean

• FAS Free Alongside Ship
• FOB Free on Board
• CFR Cost and Freight
• CIF Cost, Insurance, and Freight

With the helps of these Incoterms®, you can consider the risks and benefits or different term in your business case analysis when you are doing sourcing internationally. Usually for international market, supplier would usually for for EXW, FOB term as they do not want to be liable for any issue arise after hand changes i.e. no need to worry about cargo damage, loss of shipment. However, using such term, the price will tend to be better than other term like CIF, DAP where supplier need to ensure goods are delivered to you at their cost, any issues arises and they are liable.

So do take note of this portion when you negotiate for your purchase. Cheers!

To read more about Incoterms®, you can read it up at: http://www.export.gov/faq/eg_main_023922.asp

Supplier Review - Draco Printing

Sorry everyone, it has been a busy week for me in the office and when i reach home, i am already half dead. hahah.... How i wish a day has more than 48 hours rather than 24 hours.

Finally have some time to sit down, complete my 1st supplier evaluation on my blog. The objective of this is to share my view on respective suppliers, also a point of references for other fellow procurement colleagues when they conduct sourcing.

Today, the first supplier that i will be evaluating is Draco Printing Pte Ltd. 

                                   

Draco Printing specialize in Printing services, ranging from flyers, banners, poster and even packaging materials. They also supply other services like labels i.e. shipping label used by FEDEX, DHL

Cost - 16/20

The price that they quoted against other printing companies, might not be the cheapest but definately still reasonable and acceptable, as their quote come to me are competitive. Printing industry is sooooooo big, I cannot cover the entire industry. As said previously, my focus is not much on the cost as cheap does not account to quality goods/services

Supplier Capability - 23 /25

Their winning formula is Winning by Service. I met  the company owner and have a chat with him and really had to salute him. He is one boss that is very hands-on rather than desk bound. I am amazed that he can tell me what is the gsm of the artcard just by feeling it. He can also immediately provide suggestion to my requester on their queries. He does know his stuffs very well because this is his rice bowl and i guess this is prolong training and hands on experience. hahaha.

He told me that cost is very high; labor cost high and material cost also high. This high, that high and they have to face their customer with constant price reduction. So cost wise, it is hard for them to fight in because the margin is very small for printing industry so they highly focus on Service.

So in order to fight is through Service, they have their production done locally. They used to have it in Malaysia but shifted all back to Singapore so that he or his team can personally see through the production. I visited their factory and was impressed. They are willing to invest on technology, constantly keeping themselves updated with latest technology.

To be honest, my requester had high praise for them. Their quality is good, and they delivered within the short lead time - delivery the next day.

Communication - 17/20

They provided three contacts which we can liaise with in event there is any issue or concern arise, mainly the owner, his wife and their admin staff. Response time is reasonable, but sometime they may overlook on the issue but i think it is manageable. All in all,  still not bad

Quality - 30/35

As mentioned earlier, the quality of their finished goods is great, hardly any rejects happened. Occasionally there is 1 or 2 cases but they rectify it very fast, sending us replacement the next days. 

Overall, I would recommend Draco Printing. So if anyone who is looking to source for a printing company, you may like to keep them in the loop.Cheers!

Centralized or Decentralized???

In today post, we will be talking about Centralized vs Decentralized Organization Structure, what are both definition, what is their Pros and Cons, what would you go for in your own organization.

Centralized vs Decentralized not only applies to Procurement in term of decision making, it can also be applied to Supply Chain Management i.e centralized or multiple warehouses to support its customers demand.

So what does Centralized and Decentralized Organization Structure means?

In simple explanation, Centralized Organization Structure refers to one central decision maker for different Business Unit (BU) i.e. Making decision for Thailand, Singapore & China. 

While Decentralized Organization Structure means there is individual decision maker for respective BU i.e. One decision maker in Singapore, one in Thailand and One in China.

So why does one choose to centralize its organization structure while others go with decentralized structure? What are the individual benefits?

Centralized Organization Structure

·         Reduce Purchasing Cost (Bulk Purchase)

·         Consolidated Supplier Database

·         Strategic focus and improve planning

Decentralized Organization Structure

·         Better communication with internal stakeholders

·         Swift response

·         Easy managing different cultures, geographic, political, taxation etc.

*There are a long stretch of benefits; you can check it out via GOOGLE – our best friends*

However, there are some falls back for each approach such as:

Centralized Organization Structure

·         Lack of Focus i.e. Business Unit requirement

·         Communication Barrier i.e. with internal stakeholders

·         Common Supplier different behavior in term of geographic, market segments

Decentralized Organization Structure

·         Loss of better Supply opportunity

·         Lack of standardization

·         Operational against strategic focus

In this fast moving economy, more companies are now trying to shift to the new Organization Structure which is called “Hybrid” or “Center-led” approach. This approach make use of both Centralized and Decentralized approach to create a new strategic role for Procurement, leveraging on spend, sharing of knowledge and resource, process standardization to help companies sustain in this current fast growing economy.

Different Organization Structure works differently for each individual organization. Whether to go with Centralized, Decentralized or even Center-Led approach, it depends on various factors i.e. process, source of supply, geographic etc.

So what is your take on this? Should your company go for Centralized structure, Decentralized structure or Center-led structure?

you may read up on this article: http://www.mypurchasingcenter.com/purchasing/industry-articles/centralize-or-decentralize-procurement-no-longer-clear-cut-choice/

Supplier Evaluation

As per my first post, i will be doing sharing of my knowledge on procurement in this blog as well as reviewing suppliers which i have done business with throughout my career. Perhaps this could helps those sourcing for alternative supplier, giving them an alternative solution.

Each company has it own criteria in evaluating its Suppliers while for me, I will be using 4 criteria in my Supplier Evaluation. I will also be adding weightage (in %) to individual criteria depending on what i would focus more on. And in each criteria, you can further breakdown into detail on what you want measure on the Suppliers.

1. Cost - 20%
2. Supplier Capability -25%
3. Communication -20%
4. Quality -35%

1. Cost - 25%

Cost is one of the key criteria every companies will input in their evaluation. No doubt our job as Procurement Professional is to ensure the company get a good deal, cost is not much a key factor in the overall assessment. We may not selected Supplier who quoted the lowest.


2. Supplier Capability - 25%

We need to assess whether Supplier is capable to fulfill our order requirement i.e. do they still need to outsource to 3rd party, Where is their main operation, What kind of risk would we be exposing to etc, Experience in our requirement etc.


3. Communication - 20%

we need to ensure to have a proper channel for communication between the Buyer and Supplier in an event an issue arise. We do not want to be waiting to get a response and thus, affecting the company's operation. So we would usually measure on: local / global account management, responsivesness etc.


4. Quality - 35%

And lastly, QUALITY. For me, i planned a heavy weightage on the quality of the goods. I do not want to buy cheap stuff but quality is bad hence incurring additional cost which in turn may be even more (i.e. Re purchase or materials, plant shutdown, customer satisfaction level drop) when you in the first place, buy with the better quality suppliers.

After giving all the scoring to each category, tally it up and use the below chart to rate the supplier overall performance

After which, i would usually send a memo with the grading to my supplier to let them know of the evaluation we had done and how they perform. As mentioned, this review is improve our working relationship with the supplier, not a tools to eliminate them unless no choice. Usually my supplier take it positively and work with me very closely to ensure their scoring improve for the next evaluation.


So above is what i will be using to evaluate my Suppliers, how do you guys evaluated yours Suppliers? Do check out my bi-weekly supplier review ( i hope to do it bi-weekly) and hope it can help you and your company in turn of cost saving.

What is Procurement?

So what is Procurement? 

Isn't Procurement and Purchasing the same? 

Procurement & Purchasing has been used interchangeably by most companies. For some, there is no difference between them but for others, there is significant difference. To my understanding (different people have different perception), they are under the same family yet there are differences between both of them.

"Purchasing" refer to the purchase of goods and services, fulfilling organization's request. While "Procurement" does the same as what purchasing does but they do something more – overall process i.e. Planned Purchase, Specification Development, Supplier Sourcing & Evaluation, Price Negotiation etc.

I guess we can say in layman term is that Purchasing means what the company need, you just purchase while Procurement means company know what they want to buy in 2-3 month, you plan, source for quality supplier and negotiate that is to company's interest.

Over the years, thing has evolved tremendously. It is no longer just about procuring at a good price or quality materials etc. Anyone can just do the job, sourcing for cheapest source hence Procurement Professional need to do more, adding more value services i.e. creating a strong Supplier database, Building relationship internal and external stakeholders, looking at a bigger picture etc.

It is not an easy job especially managing internal and external stakeholders. I have been through this phase, NOT an easy job but once you get a hand of it, and you can do it too.

SO are you game to be a PROCUREMENT PROFESSIONAL?

Road to Procurement Career

Hello everyone, my name is KJ. I decide to start this blog to share more information about procurement (i.e case studies, definition) and also review suppliers, which you may use as a reference. Hope you all could support me. Feel free to contact me @ lifeasaprocurementprofessional@gmail.com on any information regarding about Procurement (Sharing is Caring).

About KJ

KJ will be turning 28 this year. KJ grows his passion in the Procurement field since his schooling day, trying to earn a fair bit to supplement his income. He would browse through the internet to see what kind of products is suitable to import in to Singapore and sell to earn him a decent income.

After his National Service duty, he started off as a purchasing officer with a chemical company. As a stepping stone to understand how procurement/ purchasing function in a company. In 2011,  he took up part time degree, to broaden his knowledge. While studying, he continue to work full time, to gain relevant experience and apply the knowledge he gained through studies. Eventually, he graduated from Curtin University of Technology in 2013 and obtained a Bachelor Degree in Logistic and Supply Chain Management.