locating and developing sources of supply & types of competition.

LECTURE 5
LOCATING AND DEVELOPING SOURCES OF SUPPLY &
TYPES OF COMPETITION

LOCATING AND DEVELOPING SOURCES OF SUPPLY
 Sourcing
 (a) Local, Domestic, or International
(i) Duties
(ii) Shipping
(iii) Inventory
(iv) Documentation
 (b) Size
 (c) Original Manufacturer or Distributor

LOCATING AND DEVELOPING SOURCES OF
SUPPLY
LOCATING SOURCES OF SUPPLY
Sourcing, the identiﬁcation, evaluation, and
development of potential suppliers, is the fundamental
strategic role of the procurement .
 The nature of the source from which the purchase is made
can vary widely and be dependent on the nature of the
purchase, the nature of the industry in which the purchase is
being made, and the size of the purchase.
 The procurement professional must develop an
understanding of how various supplier types can affect
sourcing decisions.
 The buyer should also be concerned with the size of the
supplier;
 The buyer should also determine whether the organization
should use a distributor or a manufacturer.

(a) LOCAL, DOMESTIC, OR INTERNATIONAL.
 A local supplier, for example, may feel a greater obligation to
maintain higher levels of service because it shares the same
community as the buyer. And buying organizations may
have the same preference for supporting other members of
the immediate community.
 Local suppliers, too, can frequently provide faster response
time as well as lower freight costs.
 The buying organization can develop greater competition
simply by expanding the geographical range of its sourcing
to national sources that may provide better pricing and wider
choices.

 Similarly, there are numerous trade-offs to consider when
making a decision to source domestically or internationally.
 Communications and delivery are more reliable with
domestic sources, whereas international sources can
usually provide lower prices due to reduced labor costs.
 There are also payment methods to consider when
evaluating offshore or domestic sources. Commonly, sellers
will want overseas buyers to guarantee payment through
some form of bank document, such as a letter of credit (LC).

 An LC usually contains provisions triggering an automatic
payment from the buyer’s bank upon documented proof of
shipment or at some specific predetermined time intervals.
 This can be a relatively costly process and can tie up cash
or credit lines for an inordinate period of time.
 In addition, considerations regarding additional risks due to
fluctuations in currency exchange rates must also be taken
into account when purchasing internationally, and long-term
contracts often contain a clause that adjusts the selling price
based on any significant change in the exchange rate at the
time of delivery.

 Finally, you should also take into account logistical issues
such as customs duties, taxes, tariffs, and added shipping
costs.

 Duties. Most governments charge taxes for the import and
export of certain types of goods.
 Shipping. The procurement professional has to consider
the additional costs of shipping as well as the potential
delays and risks of conducting business along an extended
supply chain when making a decision to source overseas.
Goods that are sensitive to environmental conditions or are
needed in a reliable and timely manner are often shipped by
air since the alternative, ocean freight, can be very slow.

 (iii) Inventory. Longer supply chains typically require higher
levels of inventory to buffer the long lead times and potential
ﬂuctuations in demand. The longer pipeline may also
contain several weeks of inventory in various stages of
manufacture or shipment if it is a regularly used product.

 (iv) Documentation. Goods traveling across international
borders often require special documentation and licenses or
must comply with certain restrictions. The most common of
these include export and import licenses, commercial
invoices, certiﬁcates of origin, insurance certiﬁcates, and
international bills of lading. The Convention on Contracts for
the International Sale of Goods (CISG) establishes uniform
regulations in an attempt to standardize the rules governing
international commerce but has not yet found universal
acceptance. The United Nations Commission on
International Trade Law (UNCITRAL)

(b) SIZE.
 As a procurement professional, you should consider the size
of the organizations you are sourcing from before making a
ﬁnal decision to choose a speciﬁc source.
 Smaller-sized organizations often have a greater incentive
to provide more customized and personalized service than
larger ones since they rely more heavily on individual
accounts.
 Larger organizations, however, may have greater technical
resources and may be better able to respond to wide swings
in demand.

(c) ORIGINAL MANUFACTURER OR DISTRIBUTOR.
 Distributors frequently service the spot buying market and
typically maintain substantial inventories in order to better
service their clientele. As a result, they must often charge
somewhat higher prices than the original manufacturing
sources.
 The greater the volume, the more likely you are to obtain
lower prices directly from the manufacturer. However, if you
need small quantities of many different products (such as
hardware), your advantage may lie with a local stocking
distributor.

(a) OPEN COMPETITION.
 Open competition is said to exist when there are multiple
suppliers available to ﬁll your speciﬁc requirements and they
are willing to vie for your business.
 When strong competitive factors exist in the market place,
the buyer’s negotiating position is stronger, and there are
greater opportunities for gaining concessions in price as
well as in payment terms, service, and support.
 To continue to foster robust competition, the buyer will want
to avoid customization so that as many companies as
possible can easily supply the product or service and
maintain the widest possible area of source selection to
keep the number of competitors high.

(b) SOLE SOURCE.
 What if only one source is capable of meeting the buyer’s
needs? Then, you have a sole-source situation—the exact
opposite of open competition.
 Sole-source situations are often the result of a government-
created monopoly, such as a local utility, and there is little
the buyer can do to gain concessions.
 Typically, in this kind of situation there is formal oversight by
some governing body to ensure customers get fair
treatment, but beyond such public regulation, there is
sometimes little incentive on the part of the sole source to
negotiate.

(c) SINGLE SOURCE.
 A single-source situation is similar to the sole source but is a
condition created by the buying organization, either through
product customization where only one supplier is capable of
producing the product, or through some predefined
collaborative relationship that by its nature excludes
competition.
 In this case, the benefits of the relationship itself provides a
competetive advantage—such as a supplier-managed
inventory program or joint development of new technology—
that outweighs the benefits of open competition.

d) TECHNICAL OR LIMITED COMPETITION.
 Technical competition (also known as limited competition) is
created when only a limited number of suppliers are
available for a particular product due to patents or limited
production capability.
 Competition in a particular industry can also be limited to
only a few suppliers within a geographical area, commonly
due to the existence of franchises or large initial investments
required to enter the business, and the buyer can ﬁnd it
ﬁnancially impractical to extend procurement beyond the
limited area.

(e) PARTNERSHIP/JOINT VENTURE.
 Organizations will form a joint venture to create a source of
supply when none exists or to jointly share the expenses of
developing new technology.
 While not speciﬁcally limiting competition, the investing
organizations have little or no incentive to purchase outside
the bounds of this partnership because the costs of
development have already been invested and there are no
other ways to recover the investment.

(f) CO-SOURCES.
 Multiple sources are sometimes used by the same
organization, either to foster competition or because no
single supplier is capable of fulﬁlling 100 percent of the
requirements.
 Frequently, multiple sources will be maintained to reduce
the risk of interrupted supply, and there are also situations
where some percentage of the business may be set aside
for small or minority enterprise.

(g) REQUIREMENTS INTEGRATION. Sometimes
organizations will choose to combine the requirements of a
class of products or services—maintenance, repair, and
operations (MRO), for example—and source them through
one supplier.

DETERMINING CHANGING MARKETPLACE FACTORS
 (a) Economic Conditions
 (i) Market Complexity
 (ii) Nature of Competition
 (b) Technology
 (c) Performance

1.Economic Conditions
 Supply and demand continually drive prices up and
down. As economic conditions change, demand increases
or declines, generating shortages or excesses in supply at
any given time. Increased supply or decreased demand (or
combinations of both) generally lead to reduced prices.
 However, procurement professional can take advantage of
these conditions by seeking increased competition during
periods of abundant supply and declining prices when
suppliers are more anxious to seek new business or,
conversely, by locking in prices through contracts when
facing periods of shortage or inﬂationary pricing.
(i) Market Complexity
(ii) Nature of Competition

2. Technology
 New technology frequently generates new opportunities for capital
investment, and emerging businesses tend to spring up everywhere.
 The buyer should be sensitive to these opportunities but be able to
balance them with the need for maintaining long-term relationships that
produce value beyond price or the latest fad in technology.
 With critical supplies and services, one should always monitor the
supply base to ensure that existing sources are keeping abreast of
technology and adding improvements as necessary.
 Suppliers that do not constantly upgrade their processes to take
advantage of new technology could easily become obsolete. The buyer
should consider ways to continually monitor existing suppliers and their
technological position relative to their competitor so that ongoing
changes do not make supplier obsolete

3. Performance of Supplier must be continuously monitored

OBTAINING BIDS AND PROPOSALS
1. BIDDING GUIDELINES
2. FORMULATING THE BID OR PROPOSAL TYPE

BIDDING GUIDELINES
(a) Provide Clear Content
(b) Determine Compressible Spending
(1) Before engaging in the solicitation process, the buyer is
responsible for determining if market conditions will support a
reduction in price or an improvement in terms.
(2)Unless favorable market conditions are present,
competitive bidding will not be worthwhile.
(3) While there is no precise way to ensure this under all
conditions, benchmarking industry trends, whenever possible,
might provide some guidance

BIDDING GUIDELINES
(c) Ensure Responsive, Responsible Competition
(d) Enable Fair and Ethical Bidding
(e) Hold an Open Pre bid Conference

FORMULATING THE BID OR PROPOSAL TYPE
Commonly used Solicitation types (bids and proposals)
(a) Sealed Bid
(b) Posted Offer to Buy
(c) Automated Bidding
(d) Request for Information (RFI)
(e) Request for Proposal (RFP)
(f) Request for Quotation (RFQ)

(a) Sealed Bid
 There are two types of sealed bids that are used frequently
in procurement: open bidding and restricted bidding. The
bidding process may be open to any qualified supplier that
wishes to enter a bid. In most cases, qualification takes
place at an earlier date, and the supplier must be approved
by the time the bids are sent out.
 Or the bidding process may be open only to a specific group
of suppliers due to the requirements of a regulatory process
(e.g., minority or small business set asides) or to ensure that
sensitive information does not get into the wrong hands

(b) Posted Offer to Buy
 Government contracting requirements are often posted in a
public bidding document or online. This ensures that the
general public has open access to the process.
 In common usage, this notice is referred to as a posted offer
to buy. This process is not used by commercial
organizations

(c) Automated Bidding

(d) Request for Information (RFI)
 The request for information (RFI) is used by organizations
seeking to develop a bid list or prequalify potential suppliers.
 Generally, the RFI asks suppliers to submit general
information about their companies, such as size, ﬁnancial
performance, years in business, market position, product
lines, and a variety of other information that can determine
the supplier’s suitability for participating in some future
competitive event.
 Of the three requests we discuss in this section, the RFI is
used the least because of the advent of the Internet and
how easy it is to gather information now.

(e) Request for Proposal (RFP)
 The RFP is used when a specification or SOW has not yet
been developed, or when the buyer has a general
requirement and wants to solicit various ideas on how that
requirement can best be met.
 Included in the RFP are typical objectives of the future
contract and as much of the background behind the
requirement as is already known.
 The language of the RFP usually allows the supplier some
freedom in determining the most effective solution and often
enables the supplier to actually establish the specifications.
 Sometimes prices are requested along with the proposal,
and sometimes suppliers are specifically requested not to
submit price quotations.

(f) Request for Quotation (RFQ)
 The RFQ is used when a specification or SOW has already
been formulated and the buyer needs only to obtain price,
delivery, and other specific terms from the suppliers in order
to select the most appropriate source.
 The specifications are sent to prequalified suppliers
soliciting price and other terms and condition

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