procurement and supply management

Chapter 4 1

Chapter 4

Procurement and Supply Management

Chapter 4Management of Business Logistics, 7th

Ed. 2

Learning Objectives Understand the role and nature of

procurement and supply management in a supply chain context.

Explain the different types of inbound systems.

Discuss the major materials management activities.


Ed. 3

Learning Objectives Understand the procurement process. Explain the risk/value technique for

determining purchased item importance. Identify the four steps necessary for

effective procurement. Explain the criteria for evaluating

vendors. Examine the role of E-commerce in the

procurement process.


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Inbound Logistics along the Supply Chain Each firm in the food system supply chain

graphic in Figure 4-1 has important differences in their inbound logistics systems. Mining firm Steel firm Container firm Food firm Retail outlet Individual firm complexity


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Figure 4-1 A Food System Supply Chain


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Table 4-1 Industry Supply Chain Logistics Emphasis


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Materials Management Definition - Materials management is the

planning and control of the flow of materials that are part of the inbound logistics system.

Materials Management Activities Procurement Warehousing, production planning, inbound

transportation, receiving, materials quality control, inventory mgmt., etc.

Importance of Item and Service Purchased The Special Case of Procurement Price


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Materials Management: Procurement Importance

Contributes to the competitive advantage of the firm

Significant portion of the logistics costs


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Materials Management: Procurement Definition of Procurement Activities

Identify or reevaluate needs Define and evaluate user

requirements Decide whether to make or buy Identify the type of purchase Conduct a market analysis Identify all possible suppliers


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Materials Management: Procurement Definition of Procurement

Activities… Prescreen all possible sources Evaluate the remaining supplier base Choose a supplier Receive delivery of the product or

service Make a post purchase performance

evaluation


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Figure 4-2 Procurement Process


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Materials Management: Importance of Item and Service Purchased Products and services purchased by a

company are not all the same. Some are more important than others

and require greater procurement attention.

The quadrant technique enables the supply chain manager to assess the relative importance of each item based on the degree of perceived value and risk.


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Materials Management: Importance of Item and Service Purchased There are four possible combinations

in the quadrant techniques model: Generics --- low risk, low value Commodities --- low risk, high value Distinctives --- high risk, low value Criticals --- high risk, high value

Figure 4-3 illustrates the relationships in the quadrant technique model.


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Figure 4-3 Item Procurement Importance Matrix


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Materials Management: Managing the Procurement Process in 4 Steps

1. Determine the type of purchase

New Straight rebuy Modified rebuy


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Materials Management: Managing the Procurement Process in 4 Steps2. Identify the type of purchase

Determine the necessary levels of investment of time and information.

The more complex the purchase, the more time needs to be spent and more information needs to be gathered to get it right the first time.


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Materials Management: Managing the Procurement Process in 4 Steps3. Perform the procurement process

Do those activities that are necessary to effectively make a purchase and satisfy the user’s requirements.

4. Evaluate the effectiveness of the procurement process Were the user’s needs satisfied? Was the investment necessary?


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Materials Management: Managing the Procurement Process Supplier/Vendor Evaluation and

Relationships Maintaining a healthy vendor relationship

is a critical part of a successful supply chain.

Developing a true partnership relationship with a firm’s vendors grows more important as the number of vendors shrinks and/or the vendors are being sought by other competing supply chains.

TQM begins with the vendors.


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Materials Management: Managing the Procurement Process Vendor Selection Criteria

Quality Reliability Capability Financial Miscellaneous Other Qualities Vendor Location Factor Importance Will Vary


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Figure 4-4 Overview of Vendor Selection Criteria


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Materials Management: The Special Case of Procurement Price Sources of Price

Commodity markets Price lists Price quotations Negotiation


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Figure 4-5 Hierarchy of Price Measurement Approaches


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Materials Management: The Special Case of Procurement Price Types of Costs

Traditional basic input costs - primary product price

Direct transaction costs - all other related costs of detecting and transmitting information to suppliers (e.g., EDI)

Supply relational costs - costs of maintaining relationships with suppliers


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Figure 4-6 Total Procurement Price


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Materials Management: The Special Case of Procurement Price Other types of Costs

Landed costs - actual transport costs + sales terms

Quality costs/factors - do the goods conform to standard?


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Materials Management: The Special Case of Procurement Price Other types of Costs

Operations/logistics costs Receiving and make-ready costs Lot size costs Production costs Other logistics costs affected by

product’s size, weight, density and shape


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Materials Management: Other Materials Management Activities

Warehousing Type of facilities

required Production

Planning and Control Coordinating

product supply with product demand

Transportation Vendor control Modal choice Rush shipments Inspection Damage claims


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Materials Management: Other Materials Management Activities Quality Control

Quality standards did customer receive what was

ordered? Quality implications

GIGO concept Sample inspection

statistical QC from vendor to assure 100% quality


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Materials Management: Other Materials Management Activities Salvage and Scrap Disposal

Value of scrap may be income to the firm.

Disposal must adhere to environmental regulations.


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Electronic Procurement Business-to business (B2B) purchases are

estimated to be $1.3 to $2.0 trillion by 20036.

Former uses of electronic data interchange (EDI) were costly and required special technology to implement have given way to the publicly available Internet.

This has opened the door to increased applications of E-commerce techniques to procurement.


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Electronic Procurement Common uses of E-commerce

Research vendor and product information

Electronic check of available stock Price negotiation Order products or services Check on the status of an order Issue invoice and receive payment


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Figure 4-8 Advantages of Electronic Procurement


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Electronic Procurement Advantages of E-commerce outlined

in Figure 4-8. Disadvantages

Security of electronic messages Lack of face-to-face contact Other technological concerns

Standard protocols System reliability


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Four Basic Types of E-commerce Models7

Sell-side system Administered by the seller Usually free to the buyer

Electronic marketplace Administered by a third party Collection of electronic catalogs One-stop sourcing for buyers


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Types of E-commerce Models Buy-side system

Administered by the buyer Pre-approves vendor access Expensive and usually the domain of

large companies On-line trading community

Maintained by a third party Used by multiple buyers and sellers

Chapter 4 36

Chapter 4:Summary and Review

QuestionsStudents should review their knowledge of the chapter by

checking out the Summary and Study Questions for Chapter 4.

This is the last slide for Chapter 4

procurement and supply management

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