04-Procurement and Supply Mgmt

8/3/2019 04-Procurement and Supply Mgmt

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Chapter 4 1

Chapter 4

Procurement and Supply

Management


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Chapter 4 Management 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 managementactivities.


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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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Figure 4-1

A Food System Supply Chain


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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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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

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

Other Materials Management Activities


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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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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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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 performanceevaluation


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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 andrequire greater procurement attention.

The quadrant technique enables the supplychain manager to assess the relative

importance of each item based on the degreeof 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: Managingthe Procurement Process in 4 Steps

2. 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 itright the first time.


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Materials Management: Managingthe Procurement Process in 4 Steps

3. Perform the procurement process

Do those activities that are necessary to

effectively make a purchase and satisfy theusers requirements.

4. Evaluate the effectiveness of theprocurement process

Were the users needs satisfied? Was the investment necessary?


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Materials Management: Managingthe Procurement Process

Supplier/Vendor Evaluation andRelationships Maintaining a healthy vendor relationship is

a critical part of a successful supply chain. Developing a true partnership relationship

with a firms vendors grows moreimportant as the number of vendors

shrinks and/or the vendors are beingsought by other competing supply chains. TQM begins with the vendors.


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Materials Management: Managingthe Procurement Process

Vendor Selection Criteria

Quality

Reliability Capability

Financial

Miscellaneous Other QualitiesVendor Location

Factor Importance Will Vary


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Figure 4-4Overview of Vendor Selection Criteria


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Materials Management: TheSpecial Case of Procurement Price

Sources of Price

Commodity markets

Price lists Price quotations

Negotiation


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Figure 4-5 Hierarchy of PriceMeasurement Approaches


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Materials Management: TheSpecial Case of Procurement Price

Types of Costs

Traditional basic input costs - primary

product price Direct transaction costs - all other related

costs of detecting and transmittinginformation to suppliers (e.g., EDI)

Supply relational costs - costs ofmaintaining relationships with suppliers


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Figure 4-6Total Procurement Price


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Materials Management: The SpecialCase 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: OtherMaterials Management Activities

Warehousing

Type of facilities

required Production Planning

and Control

Coordinatingproduct supply withproduct demand

Transportation

Vendor control

Modal choice Rush shipments

Inspection

Damage claims


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Figure 4-7 Overview of ProductionPlanning and Control


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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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Salvage and Scrap Disposal

Value of scrap may be income to the firm.

Disposal must adhere to environmentalregulations.


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Electronic Procurement

Business-to business (B2B) purchases areestimated to be $1.3 to $2.0 trillion by 20036.

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

This has opened the door to increasedapplications of E-commerce techniques toprocurement.


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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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Four Basic Types of E-commerceModels7

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


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Figure 4-8Advantages of Electronic Procurement


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Advantages of E-commerce outlined inFigure 4-8.

Disadvantages Security of electronic messages

Lack of face-to-face contact

Other technological concerns Standard protocols

System reliability


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