Fundamentals of sourcing
Let's summarise the important points covered in the Fundamentals of sourcing course.
The ever-increasing demand of consumers for newer, better and cheaper products and services has added more challenges for
companies to stay in business. These challenges mean companies have to come up with the most effective strategies and
processes to cope with a highly competitive and ever-changing environment.
We can illustrate the impact of consumers' ever increasing demand for newer, better and cheaper through four market trends.
The first market trend is an increase in the number of items. The second market trend is the decrease of the item's life cycle.
The third market trend is the increase in complexity. Finally, the fourth market trend is the reduction of the time invested into
bringing the items to market.
In order to cope with the market trends, companies are moving towards an integrated supply chain.
One effective structure implemented by many companies is the Porter integrated supply chain, also known as the value chain.
The value chain is split into two activities, the primary and the secondary activities.
The primary activities involve three main groups: buy, add value and sell.
There are the secondary activities. They support the primary activities.
Procurement plays an important role in both the primary and the secondary activities.
The Return on Net Assets or RONA also known as the Dupont model is a widely used ratio. It is a financial ratio that
demonstrates the relationship between sales, expenses, profit and total assets. In particular, RONA shows how a company
generates profit.
Procurement processes can be visualised as a figure eight with two closed loops. One is an upstream loop and the other one a
downstream loop. The upstream loop includes all the activities that take place prior to the finalisation of the contract. The
upstream process itself is also called sourcing.
Fundamentals of sourcing: Recap
Page 1
The downstream activities include all steps that must be completed in order to make sure that products are ordered and
delivered in line with the contractual agreements. The downstream process itself is also called operational procurement. The
circular patterns of the two procurement loops show that the procurement processes are continuous. The downstream activities
will provide input for the upstream activities and vice versa.
The optimisation and computerisation of the operational procurement process is very important. This enables organisations to
focus the available resources on those activities that add most value.
During the needs assessment step, the buyer talks to the internal customer, the one who required the purchase of the product
or service. This will result in a set of specifications that are transparent and clear to the buyer, the internal customer and the
supply market. It is a buyer's job to challenge these specifications in such a way that the cost on both the supplier and the
buyer side are reduced.
During the market analysis step, all the potential suppliers that can satisfy the internal stakeholders' needs are identified.
In the portfolio analysis step, we use the Kraljic matrix. Four quadrants are defined: leverage, strategic, bottleneck and
routine.
The next step is the supplier relationship analysis. In this process step, the buyer finds out which type of supplier relationship
can best fit the specified product or service. The Kraljic matrix is used to obtain a better understanding of the supplier's
behaviour. During the risk management process step, risks are being assessed. The assessment helps buyers to identify how to
deal with the risks that can emerge when purchasing from the supply market.
The next step is the supplier selection step. During this step, the buyer formally approaches the market via a request for
proposal. The internal customer participates during the final selection task, to make sure the less risky, less costly and highest
quality choice is made.
The final step is the contracting step. A contract is a legally binding agreement between the buyer and the selected supplier.
Fundamentals of sourcing: Recap
Page 2

The ever-increasing demand of consumers for newer, better and cheaper products and services.
Fundamentals of sourcing: Recap
Page 3

The impact of consumers’ ever increasing demand for newer, better and cheaper can be illustrated through four market
trends.
Fundamentals of sourcing: Recap
Page 4

The value chain is split into two activities, the primary and the secondary activities.
Fundamentals of sourcing: Recap
Page 5
Fundamentals of sourcing: Recap
Page 6

Procurement processes can be visualised as a figure eight with two closed loops.
Fundamentals of sourcing: Recap
Page 7

The upstream loop includes all the activities that take place prior to the finalisation of the contract.
Fundamentals of sourcing: Recap
Page 8

The downstream activities include all steps that must be completed in order to make sure that products are ordered and
delivered in line with the contractual agreements.
Fundamentals of sourcing: Recap
Page 9
Fundamentals of sourcing: Recap
Page 10
Fundamentals of sourcing: Recap
Page 11
Fundamentals of sourcing: Recap
Page 12
Fundamentals of sourcing: Recap
Page 13
Fundamentals of sourcing: Recap
Page 14
Fundamentals of sourcing: Recap
Page 15
Fundamentals of sourcing: Recap
Page 16
Fundamentals of sourcing: Recap
Page 17