 Back to this session on supply chain digitization the NPTEL course which is jointly taught by professor Priyanka Verma, professor Debra Bhattadas and myself professor Soshmita Narayan from the Indian Institute of Management Mumbai. So, in this session I am going to continue on the topic of supply chain strategies, but I shall focus on one particular strategy which is procurement or purchase strategy or sourcing strategy. It does not matter how we look at it they all point to an important part or important aspect of supply chain management which is sourcing and procurement. So, in the last class or in the last lecture we had already looked at an introduction to supply chain strategies, we saw how it is linked to corporate and other functional strategies. We had also looked at what is the interface between operations and finance and how that is going to drive what kind of operation strategy we are going to pick up and we saw a few examples also which demonstrated the same. In this session as I mentioned I will be looking at procurement strategies, we will begin by an understanding of what is meant by procurement strategy and an important element of procurement strategy which is the make versus buy decision that every firm is going to have followed by a discussion on a popular way of analyzing the procurement portfolio of a firm or as we say it is called the supply portfolio of a firm through the Kraljik matrix which is a framework very popularly used in supply chain management. This is very common actually in supply chain management to use frameworks to carry out analysis based upon segmentation and classification. So, we will be touching upon these aspects quite frequently during this course as well. Before we move into what is procurement strategy, we need to understand how it functions along with other dimensions of operate operation strategies. When we look at supply chain strategies there are mainly three elements to it. One is what is the design of your operations or your supply chain. In other words what kind of a supply chain are you having, how are you reaching the market place, how many facilities do you have, how many warehouses do you have, where are they located, where are your retail points, how large are these retail points, are these retail points going to be part of an organized sector for example, a retail chain or are they going to be unorganized for example, Tirana stores or street vendors or pop-up stores. What kind of warehousing are you using, are these warehouses going to stock materials for days together or are they going to have materials present in their system only for 12 hours or 8 hours, we call this as cross docking or transshipment points. Are you going to use stocking and storage systems for the purpose of feeding your manufacturing and assembly operations, we call this as line feed storage. What kind of manufacturing are you going to carry out, is it going to be distributed across the globe, are you going to carry out contract manufacturing, right. All of these parts related to investment in facilities come under the design strategy of supply chain management. So, in short we are looking at what kind of structure do we want to have for the supply chain and as we know the supply chain structure is very much related to the nature of the product that you are going to sell in the marketplace or deliver in the marketplace. There could also be several other aspects to supply chain structures and designs, one of them could be how are you going to actually position the product in the marketplace to the customer. Very common these days for an organization to look at is do you want to sell the product physically to the customer in a shop, which is what we call as brick and mortar system or are you going to deliver the product to the customer from a distant location to the point of residence of the customer, which is very common in e-commerce where you are not physically seeing the product before you make the purchase, but you are going to view it online. This is also going to have implications for the design of the supply chain of the firm. Next we have operations. You have figured out what would be the design of the supply chain. You also now need to understand how are you going to carry out the operations within the firm, right. How are you going to organize processes within the facility, where should you be carrying out assembly, where should you be carrying out storage, how should you be sequencing production within your manufacturing system, where should you be carrying out labeling, where should you be carrying out packaging, right and which product mixes are going to be managed in every facility. This comes under operations. Planning of various activities, when should you be carrying out manufacturing of certain SKUs, when should you be carrying out dispatch of products to certain locations. How are you going to organize manpower across all of this? How are you going to organize your equipment around all of this? How are you going to manage materials and inventory? All of this comes under the operation strategy of the firm because we are particularly looking at day-to-day activities that will have long-term implications for the supply chain itself. And finally, we have sourcing and procurement. You have decided what is the design of your supply chain, but how are you going to create this design? Are you going to own all your facilities or are you going to interact with other stakeholders within the value chain? Are you going to be dependent on any kind of vendors? And if so, who are these vendors going to be? How are you going to access these vendors? What are you going to actually require as a service from them? Would it be materials? Would it be raw materials? Finished goods? Packaging materials? Would it be technology? Let us say the ERP system that you are going to use in your facility or within your supply chain. This also needs to be procured from somewhere. The kind of equipment that you are going to use, let us say you are using forklift trucks or are you going to use vehicles or are you going to use equipment for manufacturing and production operations? Are you going to own them? Are you going to purchase them? Are you going to hire them? How are you going to go about all of this? This is a part of what we call as the procurement strategy of the firm. And here also, we could have decisions related to the choice of vendors, whether we carry out local sourcing or global sourcing, so on and so forth. As you can see here, design, operations, procurement, sourcing are not going to be carried out independently. Each of these elements or dimensions is going to impact the other. What kind of supply chain is going to be designed is going to impact what kind of operations are going to be carried out within that supply chain. Whether you are going to carry out packaging close to the customer or close to the manufacturer, that depends upon how you have designed the supply chain. And accordingly, you are going to decide whether you require personnel for packaging near the customer or at the point of manufacturing. So, it determines what kind of operations you are going to have. Similarly, in order to improve your operations, you might want to change the design of your supply chain structure altogether. Similarly, depending upon the kind of procurement that you need to carry out, it may be possible that the sources of materials that are of interest to you for manufacturing, for assembly or even for providing a service, those materials are not available at the location of the customer. You might want to procure them from a different geography altogether. This creates a new design for the supply chain. And at the same time, you may be thinking of whether it provides any kind of advantage for the firm to look at local sources which can substitute this global source or you know remote source of the materials. Again, we can see that design and procurement are also going to be related. Similarly, in procurement, you would be having a set of operations to be carried out. You would require facilities in order to carry out the process of purchase and receiving. You would require facilities and personnel in order to handle the products. And this is going to be part of what you do in operations. You would require personnel to negotiate with the vendors, with the clients. And organizing your resources to effectively carry this out would be part of operations. So, we can see that the decisions that we take in design in operations in sourcing and procurement are again dependent on each other. And this is a common trend that we are observing when it comes to operation strategy or supply chain management. Supply chain management essentially is actually a very interdisciplinary subject. It derives insights from human resource management, manufacturing, financial management or even operations management for that matter. And hence, when we speak about managing operations today or when we speak about competition today between firms, we do not talk about competition between firms, but we talk about competition between supply chains. And having a strategy to manage your supply chain can really make a difference to the firms position within the marketplace. So, our focus right now would be on procurement and sourcing. In the next session after this, we would look at some aspect of design as well. And we would be also having lectures focusing on design that will follow the lecture that I have today. Let us look at procurement and sourcing in particular. Procurement strategies relate to the process of procurement or to the activity of procurement itself. It is a process of identifying, contracting, purchasing so on and so forth from the right supply sources. Making a good decision in procurement is very important because it is going to define a lot of other activities that are going to take place after that right. What kind of material you procure, from whom you procure, what kind of services you procure. It is going to make a difference as to what kind of final product or service you are going to create. And when we look at the process of procurement, it can be divided into stages. The first stage in procurement is in identifying the need, what kind of materials need to be procured, how much quantum is required, who wants it within the facility, who are your internal customers so to speak. And what is the value associated with it, how much has to be budgeted for it, that is the part of needs identification. Then we look at market research on sources. Every organization is constantly reviewing its procurement strategy because the market is dynamic. You could always have new suppliers coming into the marketplace, new technology is coming in the marketplace and hence it makes sense to constantly be involved in carrying out market research on new sources for even the same products. Then we have the identification and evaluation of suppliers. Once you know what is the general shortlist of suppliers that you could interact with, you would want to now look at identifying and evaluating them in order to involve them within your contracting process, within the bidding process. And that is the formal stage of procurement where you are going to invite courts, proposals, bids, etcetera from a select set of suppliers such that you are going to have a good set of options to choose from. And then we have the process of contracting. Once you have decided whom you are going to procure, how much you are going to procure from or which supplier you are going to procure from and what kind of products or services, you would then formalize this relationship through a contract. The contract could be a one time activity which means it could last just for the purpose of that period of sale. It could also continue for several months or years together depending upon the nature of product, nature of supplier and the kind of engagement we want with the vendor. Purchasing and receiving is an important part of procurement as well. The physical activity of procuring, clearing payments, all of this are also an important part of procurement. And having the right kind of systems over here is important in order to have an effective procurement strategy. As I have already mentioned, it impacts supply chain management because procurement impacts financial performance of the firm directly. So, the cost of goods sold, the kind of assets you are going to purchase, all of these are going to be linked to how well you have procured from your vendor or from your supplier, how well you identified the vendors or the suppliers. And hence when we talk about supply chain strategy, procurement is a very, very important lever in a firm. In supply chain management, very often we see very lucrative roles actually emerge in the domain of sourcing and procurement across MNCs. It can be a very, very competitive role or position within the firm as well. And as I mentioned, effective procurement can produce very long-term benefits because it could provide good buyer supplier relationships. So, you develop a very good understanding with the vendors as to what you require. And it helps in standardizing a lot of requirements in terms of, let us say the product design, quantum and it can help standardize the expectations that you have. So, over the long term, this accrues benefits because you do not have unnecessary repeated negotiations with your vendor. It can also help in streamlining the inter-organizational processes. The ease with which you procure is going to streamline your supply chain even better. The first step in procurement or the first step before procurement I would say is the make or buy decision. In make or buy decision, we are interested in knowing whether a firm should first of all make its products or services or should it get into the procurement procedure or to purchase in other words. This is what we call as a make or buy decision and before we even think about developing a procurement strategy, we need to identify what is our position on this particular decision. Now, why would a firm make its products or services? Every firm likes to have some kind of leadership position within the market right and hence it is very very attractive to make its own products to deliver its own services because it then differentiates that particular firm from other competitors in the market and hence it is very attractive to do so. So, if a firm were to look at making its own products and services to be delivered to customers, it would be inclined to do so if there is something unique and can provide a competitive edge for the firm something more attractive than that would obviously be that if the cost of making with your practices is actually lower than what is happening in the marketplace. This could be because of the technologies that you have devised some kind of processes that you have designed that can actually help lower the cost of making the products or components in house and if it is easier to deploy your internal resources like your employee and your equipment, you can quickly operate them then it is very attractive to make the products on your own or make the services on your own. In other words, you might want to provide the service of let us say a call center to your customer on your own because it provides ease of communication between you and your client quickly. But on the other hand, you need to think whether it is easy to deploy resources, whether the cost of doing so is also beneficial or worth it. A very large attraction for making products and services in house is the fact that you would have more control on this process and if it is made in house and if you have developed these capabilities over a period of time, this can again accrue benefits over a period of time for the organization and also develop standard structures and procedures in order to make the products or services in house. So, these are all the benefits which we can actually see in terms of the make decision. On the other hand then why should a company look at procurement? Procurement has huge amount of attractions. One is you might not be looking at making a very unique product, but you might be looking at providing a unique service and dealing with the right kind of stakeholders within the supply chain, forming good relationships with the right kind of stakeholders within the supply chain can effectively create a combination that can provide you a competitive edge. The second very important aspect is you do not need to reinvent the wheel. If you were to make the products or services and you are new to the market, you would not have enough knowledge in order to lower your costs in order to create the perfect design at the very beginning itself. You can instead depend upon existing resources within the market such as other vendors who have done this for other clients and in fact, not only that they would also be having access to markets that can give you a jump start when you have started entering the marketplace. If your vendors can be reliably and easily deployed readily available in the market, it is attractive again to purchase. If the cost of purchasing is again lower than making in house, this is again going to be extremely attractive for you to look at purchase as an option for products or services that you make. Maybe not the full product, but some part of it at least. For example, you might want to outsource packaging of your products because it is going to be carried out at a lower cost by a third party rather than being done in house. Lastly, if you were to look at purchase as an option, we would be interested in doing so because vendors have worked with other clients. So, they have developed their capabilities over a period of time and those capabilities might be much better than what you have as a firm. Your core competency may be in the design aspect of the product, but not so much in the manufacturing or assembly aspects of the product. The vendors have done this many a time for different kinds of clients. So, for example, if you are in the furniture business or in the jewelry business, you would be very good at designing the jewelry and designing the furniture, including the engineering aspects of it. But the vendor has the practical experience of machining of carrying out those very fine level activities required for making the product. And since they have this experience, they would also have developed good control on the processes, relationships with other vendors from whom they can out you know source materials, etc. and day to day operations as well. And in other words, they are taking away too many transactions that you would otherwise require to do. So, the first and foremost decision that a company needs to do before entering into a procurement strategy is to decide which products which components with services it needs to make, which products which components with services it needs to purchase. Once it is decided, then it can go ahead with the procurement strategy design for the products and items that it needs to purchase. So, when we look at this particular idea of purchasing or procurement, we know that it relates to the management of assets management of inventory, which is a critical part of the financial performance of the firm. Not only that, we have seen that it can define good relationships within the supply chain, which can ultimately result in good value addition for the customer. And for other clients that the firm is going to have, it can also improve the marketplace in general because the vendors and other suppliers would get expertise from a variety of clients such as manufacturers, third party logistics operators, retailers, so on and so forth, who would be dependent upon these vendors to carry out a variety of activities. And supply chain management very importantly is going to be related to how effectively this decision is taken. In fact, the very concept of outsourcing is very much ingrained in supply chain management. Effective outsourcing is very critical and key to managing strong and resilient supply chains. If we see the trend nowadays, it is very rare to find companies that try to do it all. They are mostly looking at identifying relationships with other clients and other vendors to whom they can outsource their products to or services to and their core competence would then be bringing together all these elements such that a good value proposition is actually given to the end customer. So, as a result before we get into procurement strategies, we need to first make a very good decision on the make versus buy strategy. I will give a brief idea on the procurement strategy in terms of supply portfolio, which is our next topic. In this particular discussion, I am going to be looking at Kralgic Matrix, which is a very popular framework used to understand supply portfolios. In the supply portfolios, what exactly are supply portfolios? We have supply portfolios that represent an amalgamation of products and services that the firm procures. Remember, the supply portfolio is not about the vendors or the suppliers from whom this firm is procuring, but the products or services itself that the firm procures. These products and elements will then be put together in order to create the final business offering by the firm to its customer. So, it could be procuring raw materials, it could be procuring certain services. At the end of the day, the firm is going to combine all of this to create the final product or the final service to be given to the end consumer. What is beneficial is, since a lot of procurement is happening, it would be beneficial to look at what is the comparison of these products and services with each other, because it will help assess what we are currently doing as a procurement strategy. So, it helps assess the as is process and it helps identify what should be the strategy going forward. So, creating supply portfolios is actually very important in this regard. In this case, the cryologic matrix is actually a very popular example of supply portfolio creation. And the matrix is actually a framework, it is not something which is like a theory, but it is actually a popular framework which is used to compare efforts involved in managing procurement of various products and services in the supply portfolio of the firm. The cryologic matrix was proposed by Peter Crylogic in a very famous article called Purchasing Must Become Supply Management, which was published in Harvard Business Review in the 1980s. Hence, this framework has been there for quite a few decades now and it is popularly used in different variants across firms and also in different different flavors of it exist even in demand side management as well. In the cryologic matrix, we carry out the first step which is called segmentation and in the segmentation process what we do is we are going to segment products and services which were procured basically on two dimensions namely profit impact and supply risk. These are the two dimensions used for segmentation. The profit impact could be related to measures such as the total cost of purchase. For example, how much proportion of the total value of purchase is contributed by product A, product B, product C. It could also be related to what is the perceived impact on profitability by procuring this product or service. In order to do this spend analysis can be carried out, ABC analysis or VED analysis can be used to segment the items in terms of profit impact. And finally, we have supply risk where we are looking at what is the risk impact of what we have procured. These measures could include the relative location of suppliers, further is the location, higher is the risk. How many suppliers do we have? More is the number of suppliers we have for the product, lower is the risk. What is the nature of perishability of the product, higher perishability is going to increase the risk so on and so forth. So, in the next lecture we are now going to look at how we can develop the cryologic matrix and with that how we can define the procurement strategy. Thank you very much.