Ethical and Responsible

Sourcing

FARAI MUBEREKWA

‘NO ONE OF US IS AS SMART AS ALL OF US’

 What is sourcing?

— It is a process which involves how and where goods

and services are obtained.
— The process has to be conducted in an ethical
manner.
— Ethics are moral guidelines that state acceptable and
unacceptable behaviours.
— There is need to uphold these ethical practices when
sourcing so that we enhance our brand image, avoid
fines and penalties.
Differences between strategic and tactical sourcing

Strategic Tactical

— Top-level, high risk — lower-level, lower-risk,

routine
— Longer-term sourcing — short-term sourcing decisions.
decisions. — Tactical sourcing may
embrace routine sourcing
— Strategic sourcing may activities within clearly
also be viewed as defined parameters.
— Tactical sourcing also includes
concerned with the sourcing activities in response
overall business objective to changing internal or
external business conditions.
— Establishing business
relationships.
 Make or buy decisions

Factors to be considered when deciding whether to

make or to buy:
— Whether it is a non core or a core aspect, if it is a core
then a make option would be ideal. If non core then
buy.
— Availability of external service providers
— Availability of in-house expertise
— The capacity of the organisation
— The cost involved in making or buying
 Advantages of outsourcing

— Cost savings: the service provider may be serving a

broader market and enjoying economies.
— Access to specialist skills, a factor that can promote
innovation
— Freeing up of resources-space and staff.
— Business focus-the organisation can concentrate on
its core activities while the non core are performed
by third parties
 Disadvantages of outsourcing

— Potential loss of confidential loss and or intellectual

property
— Potential loss of in-house expertise
— Potential incompatibility challenges
— Issues with complacency
— Increased gap between the organisation and its
customers
 Explain, using examples, the following
competitive forces in supply chains

(a) Potential substitute products

— These are alternative products that serve the same purpose. Usually they
are cheaper than the ideal products. They weaken the supplier’s
bargaining power. They widen product offering. Examples include
WhatsApp v postal letter.

(b) bargaining power of suppliers

— Suppliers are powerful relative to buyers when:
— They are few in number relative to the customers or a monopoly.
— When switching costs are high
— The buyer’s spend is very low
— The buyer’s need is very urgent and when the buyer lacks knowledge of
the product
 (cont.)

(c) Bargaining power of buyers

— Buyers are powerful relative to suppliers when:
— Their spending power is high
— Their needs are not urgent
— The switching costs are very low
— They have adequate knowledge of the product
— There are many substitute products
 (cont.)

(d) Threats of new entrants

— These are potential players who seek to enter into the
market. It is because the market is attractive enough.
— Their coming in widens product offering, thereby
weakening the current players’ bargaining power.
— The organisations have to establish barriers to entry to
deter new players from entering the market, such as:
i. Differentiate product offering
ii. Reduce the production cost and make it difficult for the
new players to enter the market……
 (cont.)

(e) Competitive rivalry

— This considers the intensity of the competition.
— Competition is intense when:
i. Products are undifferentiated
ii. The rate of technological change is very slow
iii. Suppliers are many and of equal size, no one is too
dominant.
 Supplier evaluation/appraisal

Financial stability
— Check financial statements
— Invite the supplier’s finance director to present the
company position
— Use credit rating agencies such as Dun & Bradstreet

Quality
— Accreditations such as ISO 9001
— Site visits
 (cont.)

Compliance
— Tax clearance
— Health & safety
— Labour practices

Capacity
— Ability to produce work in a given time
— Check machine size
— Number of employees
Analysing the supply market is one of the key pre-
contract stages in the sourcing process.

Outline FIVE possible sources of information for

finding potential suppliers at this stage of the
sourcing process.

— Trade or industry press

— Supplier marketing communication tools-catalogues..
— Informal networking with colleagues
— Exhibitions-trade fairs….meet the buyer forums
— Printed and web-based listings of suppliers and stockists
— existing procurement database records of preferred,
approved or authorised suppliers, which have been used in
the past
 One of the examples on the relationship
spectrum is ‘single sourcing’.

Explain TWO potential advantages and TWO potential

disadvantages associated with this approach.
An approach where there are many suppliers for the product
but the buyer chooses only one supplier
Advantages
— The buyer can aggregate its demand on a single supplier and enjoy
price discounts.
— A narrow supplier base can reduce the cost of relationship
management
Disadvantages
— Overdependence on a single supplier may be dangerous to the buyer
— It is uncompetitive, a factor that stifles innovation
— Incompatibility challenges-this has a tendency of robbing the org of
potential value offered elsewhere.
Discuss TWO sources of financial information that an org could
use in supplier selection

— published financial statements

— secondary data from business press
— websites or research agencies
— credit rating agencies
— presentations from suppliers’ financial directors
— networking with other buyers.
 Suggest and justify TWO financial performance ratios that
could help orgs with supplier financial appraisal

profitability ratios such as :

— net profit/sales
— gross profit /sales
— ROCE (return on capital employed)
— or return on assets.
These ratios would help the buyer to measure the
extent to which the potential suppliers have traded
profitably, and how effectively their sales are able to
cover their costs.
 Liquidity ratios

These ratios would help the buyer determine the

extent to which the supplier has sufficient liquidity or
assets to meet its liabilities in the short or long term.
— current ratio=current assets/current liabilities.
Current assets would typically consist of debtors,
cash and stock, while current liabilities consist of
trade creditors and short term bank loans (including
overdraft). A viable supplier would have a current
ratio greater than 1:1
 Quick ratio/acid test ratio

— quick (acid test)=current assets-inventory/current

liabilities. The ideal ratio=1. we less inventory
because it is the least liquid asset, it is difficult to
convert it into cash quickly to cover the liabilities
— Stock is removed from the formula, because it might
be difficult to quickly realise (turn into cash), or may
not be realised at its full value. The acid test ratio
should be greater than 1:1, an indicator that the
supplier can readily settle its current liabilities from
its cash and debtors.
 Gearing ratios

— These indicate whether the org depends on debt or

borrowed funds. A highly geared org depends on
debt while a lowly geared org depends on equity.
— Anything above 50%=highly geared
— Anything below 50%=lowly geared
— A highly geared org has a faster growth rate but
serious commitments to repay the loans, while a
lowly geared has less commitments but can have a
slow growth rate.
— Long term loans/shares + reserves
 Financial statements

The Balance Sheet

It shows long/short-term assets and liabilities which
should give a picture of the value/size of a supplier’s
business. A comparison of assets with liabilities will reveal
the suppliers’ liquidity/solvency –ability to meet financial
obligations and continue trading in the short term (current
or quick ratio) and long term (gearing ratio).
The balance sheet data can also be used in assessing the
suppliers’ management capability by calculating efficiency
and working capital ratios (asset turnover; stock turnover;
debt collection/payment period); and supplier
attractiveness/optimism by calculating investment ratios
(dividend per share, earnings per share, P/E ratio etc).
 The Profit and Loss Account / income
statement

— It shows income/revenue, expenditure and the

resultant profit/loss – a reflection of the supplier’s
financial success and trading proficiency (by
calculating profitability ratios). A supplier that is not
generating sufficient profit to fund its operations
would be too risky to engage. Profitability ratios
would also help in negotiating lower prices with a
supplier who shows high profits as this provides
greater flexibility. It is important to look at trend
data over a number of years to determine
explanations for the profitability as figures of a single
financial year are less indicative of reality.
 Cash Flow statement

— The Cash Flow Statement is a useful supplementary

statement since profitability is not/does not always
equal to liquidity. A weak cash (in/out) position will
financially destabilise a supplier (regardless of its
Profit and Loss Statement). The Cash Flow
Statement will give an indication of a supplier’s cash
position and ability to support day-to-day operations.
 Suggest FOUR selection criteria that LOCOG’s procurement function
might have used when identifying appropriate external suppliers

— Production capacity –whether the potential supplier

has the resources and flexibility to meet the volume
of products or services needed by LOCOG in the
short term and in the long term.
— Technical capability - whether the potential supplier
has suitable plant/machinery and knowhow/skills to
meet LOCOG’s current requirement, and the ability
or versatility to adapt to changes in customer
requirements.
 (Cont.)

— Systems capabilities - whether the potential suppliers’ systems and

procedures are compatible with those of LOCOG, or whether the suppliers
have the willingness to comply with LOCOG’s systems and procedures.

— The quality systems – whether the potential suppliers’ quality management

methods/procedures meet the requirements of LOCOG’s specifications, e.g.
quality control, quality assurance, total quality management.

— Environmental, Sustainability and CSR policies – whether the suppliers’

policies are robust enough to protect LOCOG’s reputation and brand/image
–issues covered here include carbon footprint, greener materials, recycling;
labour and trading policies; local community initiatives; etc. (some answers
divided this point into two or three criteria and marks were awarded
appropriate to the depth of discussion).

— Financial capabilities - the potential suppliers’ financial stability issues such

as profitability, liquidity, investor attractiveness
 Documents in international trade

Certificate of origin
— These documents are used to identify where the
goods are coming from.
— It is an important international trade document that
certifies that goods in a particular export shipment
are wholly obtained, produced, manufactured or
processed in a particular country. They also serve as
a declaration by the exporter.
— The government authority or body empowered to
issue this document is usually a Chamber of
Commerce in the issuing country..
 Bill of Lading

— A bill of lading is a contract between you, the owner of

the goods, and the carrier stating what goods you’re
shipping, where the shipment is coming from, and where
it’s headed. It also serves as a receipt issued by the carrier
once your shipment is picked up.
— A bill of lading (or a waybill) can also serve as a
document of title, which allows the person holding it to
claim possession of your shipment.
— It describes the goods received for transportation, the
name of the port where they were loaded and the name of
the port where they will be unloaded.
Differences between a bill of lading and bill of
exchange

— There are a few differences between a Bill of

Exchange and a Bill of Lading. The Bill of Exchange
originates from the exporter. It is drawn by the
exporter on the importer. When the importer accepts
the bill, he is legally obligated to make payment in
accordance with the terms of the bill. On the other
hand, a Bill of Lading originates from the transporter.
It is a document evidencing receipt of goods by the
transporter. It imposes a legal obligation on the
transporter to transport the goods to the destination
specified.
 Letter of credit

— A letter of credit is essentially a financial contract

between a bank, a bank's customer and a beneficiary.
Generally issued by an importer’s bank, the letter of
credit guarantees the beneficiary will be paid once
the conditions of the letter of credit have been met.
— Letters of credit are used to minimize risk in
international trade transactions where the buyer and
the seller may not know one another.
 Example of Letter of credit

— LC
 Insurance Document

— To protect goods in transit from loss or damage from

the time they leave the exporter’s warehouse and
until they reach the importer’s warehouse, the goods
are insured by the importer. The insurance cover
must specify the value insured (such as CIF), the
risks covered, the date from which the insurance
cover is effective, and the currency in which the
insurance document is expressed.
 Invoice

— The commercial invoice is perhaps the most important

commercial document in the batch of documents for an
import / export transaction.
— The commercial invoice is used for customs clearance at
destination and its possession does not prove ownership
of the goods. It is issued by the exporter, once the sales
transaction has been confirmed, so that the buyer pays
the amount of the products and services provided. It is
also an accounting document which serves as the basis
for the application of customs duties for the passage of
goods through customs.
 Bill of exchange

— It is an agreement signed by the buyer of the goods

to pay the seller a certain sum of money on a
specified future date. Each international trade
transaction generates its own bill of exchange. The
bill is drawn by the exporter and sent to the importer.
Once the importer accepts the bill and returns it to
the exporter, the importer is legally bound to make
payment, and the bill is legal evidence of a
contractual obligation for payment. A bill of
exchange is a negotiable instrument.
 Documentary Bill

When a bill of exchange is accompanied by documents

that are generated in an international trade
transaction it is called a Documentary bill. The
documents include the commercial invoice, Bill of
Lading, warranty of title, Letter of Credit, Certificate of
origin of goods, Inspection certificate, Packing weight
list, Export declaration, Consular invoice, and the
insurance document. A warranty of title is given by the
exporter to the importer, in which the exporter attests
that the title to the goods is good and hence the
transfer is legally rightful. Usually all bills in an
international trade are documentary bills.
 Incoterms

Example
 Incoterms

— EXW - Ex Works (insert place of delivery)

— FCA - Free Carrier (Insert named place of delivery)

— CPT - Carriage Paid to (insert place of destination)

— CIP - Carriage and Insurance Paid To (insert place of destination)

— DAP - Delivered at Place (insert named place of destination)

— DPU - Delivered at Place Unloaded (insert of place of destination)

— DDP - Delivered Duty Paid (Insert place of destination).

Note: the DPU Incoterms replaces the old DAT, with additional
requirement for the seller to unload the goods from the arriving means of
transport.
 Fraud

— It is a deliberate deception with an intention of

gaining some benefit
— It is an unethical aspect and must be avoided
Why fraud occurs?
— There is an opportunity to commit fraud
— There are assets worth stealing
— The perpetrator has a motive
— Poor internal controls
 Examples of fraud

— Financial Fraud
— Misrepresentation of goods or services
— Bribery, including Foreign Corrupt Practices Act
(FCPA) violations and kickbacks
— Sanctions violations
— Corporate identity theft
— Failure to write off debts
— Telephone fraud
 Fraud prevention techniques

— Segregation of duties
— Rotation of buyers
— Auditing
— Mandatory holiday
— Encouraging whistleblowing
— Use of E-procurement
— Use of purchasing cards
— Physical security-guards and cctv
 Bribery

— Bribery - means giving or receiving an unearned reward

to influence someone's behaviour. One common form of
bribery is a "kickback" - an unearned reward following
favourable treatment. Both are corrupt.
— Facilitation Payments - are sums of money paid to an
official to speed up or "facilitate" their actions. That's
why they are sometimes referred to as "grease" or
"speed" payments.
— Doing business with integrity avoids risk and can help to
build your company’s reputation and its commercial
success.
 Examples of bribery

— payments to get a faster or better service, for

example in clearance of goods or certifications
— payments made to gain advantage in public
procurement processes
— offering, providing or receiving gifts, entertainment
and hospitality or other items of value such as
donations, sponsorships and internships
— levels of hospitality disproportionate to a business
transaction
 Fraud

— It is a deliberate deception with an intention of

gaining some benefit
— It is an unethical aspect and must be avoided
Why fraud occurs?
— There is an opportunity to commit fraud
— There are assets worth stealing
— The perpetrator has a motive
— Poor internal controls
 Examples of fraud

— Financial Fraud
— Misrepresentation of goods or services
— Bribery, including Foreign Corrupt Practices Act
(FCPA) violations and kickbacks
— Sanctions violations
— Corporate identity theft
— Failure to write off debts
— Telephone fraud
 Fraud prevention techniques

— Segregation of duties
— Rotation of buyers
— Auditing
— Mandatory holiday
— Encouraging whistleblowing
— Use of E-procurement
— Use of purchasing cards
— Physical security-guards and cctv
 Corruption

— Corruption - is any unlawful or improper behaviour

that seeks to gain an advantage through illegitimate
means. Bribery, abuse of power, extortion, fraud,
deception, collusion, cartels, embezzlement and
money laundering are all forms of corruption.
— Even on the smallest scale, corruption is corrosive,
and just the suspicion of it can severely damage our
reputation.
— No matter what "local custom" may be, all forms of
bribery and corruption, and even the smallest
facilitation payment, are forbidden.
 Corporate social responsibility (CSR)

— Corporate social responsibility (CSR) is a company’s

commitment to manage the social, environmental and
economic effects of its operations responsibly and in line
with public expectations.
CSR activities may include:
— Company policies that insist on working with partners
who follow ethical business practices
— Reinvesting profits in health and safety or environmental
programs
— Supporting charitable organizations in the communities
where a company operates
— Promoting equal opportunities for men and women at
the executive level
 Benefits of CSR

— Companies establish good reputations

— Attract positive attention
— Save money through operational efficiency
— Minimize environmental impacts
— Attract top talent and inspire innovation.

CSR matters for companies because if the community does

not approve of how they do business, they may lose
customers or see their reputations suffer. The news media
and activist groups often watch companies closely and are
quick to publicize instances of irresponsible behaviour.