Chapter 4

Procurement and
Supply
Management
Chapter 4 1
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.

Chapter 4 Management of Business Logistics, 7th Ed. 2

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.

Chapter 4 Management of Business Logistics, 7th Ed. 3

 Inbound Logistics along the
Supply Chain
 Each firm in the food system supply
chain graphic has important
differences in their inbound logistics
systems.

Chapter 4 Management of Business Logistics, 7th Ed. 4

Inbound Logistics along the
Supply Chain
 Mining firm
 Steel firm

 Container firm

 Food firm

 Retail outlet

 Individual firm complexity

Chapter 4 Management of Business Logistics, 7th Ed. 5

Figure 4-1
A Food System Supply Chain

Chapter 4 Management of Business Logistics, 7th Ed. 6

Inbound Logistics along the
Supply Chain
 Inbound Logistics
 The management of materials

from suppliers and vendors into

production processes or storage
facilities.

Chapter 4 Management of Business Logistics, 7th Ed. 7

Inbound Logistics along the
Supply Chain
 Outbound Logistics
 The process related to the

movement and storage of

products from the end of the
production line to the end user.

Chapter 4 Management of Business Logistics, 7th Ed. 8

Materials Management
 Materials management is the
planning and control of the flow
of materials that are part of the
inbound logistics system.

Chapter 4 Management of Business Logistics, 7th Ed. 9

Materials Management
 Materials Management
Activities
 Procurement

 Importance of Item and

Service Purchased

Chapter 4 Management of Business Logistics, 7th Ed. 10

Materials Management
 Materials Management
Activities
 The Special Case of

Procurement Price
 Other Materials Management

Activities

Chapter 4 Management of Business Logistics, 7th Ed. 11

Materials Management:
Procurement
 Procurement:
 The business functions of

procurement planning,
purchasing, inventory control,
traffic, receiving, incoming
inspection, and salvage
operations.
Chapter 4 Management of Business Logistics, 7th Ed. 12
Materials Management:
Procurement
 Importance
 Contributes to the competitive

advantage of the firm

 Significant portion of the logistics

costs

Chapter 4 Management of Business Logistics, 7th Ed. 13

Materials Management:
Procurement
 Definition of Procurement
Activities
 Identify or reevaluate needs

 Define and evaluate user

requirements
 Decide whether to make or buy

Chapter 4 Management of Business Logistics, 7th Ed. 14

Materials Management:
Procurement
 Definition of Procurement
Activities
 Identify the type of purchase

 Conduct a market analysis

 Identify all possible suppliers

Chapter 4 Management of Business Logistics, 7th Ed. 15

Materials Management:
Procurement
 Definition of Procurement
Activities…
 Prescreen all possible sources

 Evaluate the remaining supplier

base
 Choose a supplier

Chapter 4 Management of Business Logistics, 7th Ed. 16

Materials Management:
Procurement
 Definition of Procurement
Activities…
 Receive delivery of the product or
service
 Make a post purchase
performance evaluation

Chapter 4 Management of Business Logistics, 7th Ed. 17

Figure 4-2
Procurement Process

Chapter 4 18
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.

Chapter 4 Management of Business Logistics, 7th Ed. 19

Materials Management: Importance
of Item and Service Purchased

 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.

Chapter 4 Management of Business Logistics, 7th Ed. 20

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

Chapter 4 Management of Business Logistics, 7th Ed. 21

Materials Management: Importance
of Item and Service Purchased

 There are four possible

combinations in the quadrant
techniques model:
 Distinctives --- high risk, low
value
 Criticals --- high risk, high value

Chapter 4 Management of Business Logistics, 7th Ed. 22

Figure 4-3
Item Procurement Importance Matrix

Chapter 4 23
Materials Management: Managing
the Procurement Process in 4 Steps

 1. Determine the type of

purchase
 New

 Straight rebuy

 Modified rebuy

Chapter 4 Management of Business Logistics, 7th Ed. 24

Materials Management: Managing
the Procurement Process in 4 Steps

Straight rebuy
The process that occurs when a
consumer makes another purchase
of the identical goods in the
identical amount under the identical
terms from the identical supplier.

Chapter 4 Management of Business Logistics, 7th Ed. 25

Materials Management: Managing
the Procurement Process in 4 Steps

Modified rebuy
It is a buying situation in which an
individual or organization purchase
goods that have been purchased
previously but changes either the
supplier or some other elements of
the previous order..
Chapter 4 Management of Business Logistics, 7th Ed. 26
Materials Management: Managing
the Procurement Process in 4 Steps

 2. Identify the type of purchase

 Determine the necessary levels

of investment of time and

information.

Chapter 4 Management of Business Logistics, 7th Ed. 27

Materials Management: Managing
the Procurement Process in 4 Steps

 2. Identify the type of purchase

 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.

Chapter 4 Management of Business Logistics, 7th Ed. 28

Materials Management: Managing
the Procurement Process in 4 Steps

 3. Perform the procurement

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

Chapter 4 Management of Business Logistics, 7th Ed. 29

Materials Management: Managing
the Procurement Process in 4 Steps

 4. Evaluate the effectiveness of

the procurement process
 Were the user’s needs satisfied?

 Was the investment necessary?

Chapter 4 Management of Business Logistics, 7th Ed. 30

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.

Chapter 4 Management of Business Logistics, 7th Ed. 31

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

Chapter 4 Management of Business Logistics, 7th Ed. 32

Materials Management: Managing
the Procurement Process
 Supplier/Vendor Evaluation and
Relationships
 TQM begins with the vendors.

Chapter 4 Management of Business Logistics, 7th Ed. 33

Materials Management: Managing
the Procurement Process

 Vendor Selection Criteria

 Quality

 Reliability

 Capability

 Financial

Chapter 4 Management of Business Logistics, 7th Ed. 34

Materials Management: Managing
the Procurement Process

 Vendor Selection Criteria

 Miscellaneous Other Qualities

 Vendor Location

 Factor Importance Will Vary

Chapter 4 Management of Business Logistics, 7th Ed. 35

Figure 4-4
Overview of Vendor Selection Criteria

Chapter 4 Management of Business Logistics, 7th Ed. 36

Vendor Selection Criteria
 Quality
 Technical specifications
 Chemical and physical properties
 Design
 Product life
 Ease of repair
 Maintenance
 Dependability
Chapter 4 Management of Business Logistics, 7th Ed. 37
Vendor Selection Criteria
 Capability
 Production capability
 Technical capability
 Management
 Operating controls
 Labor unions

Chapter 4 Management of Business Logistics, 7th Ed. 38

Vendor Selection Criteria
 Desirables Qualities
 Vendor attitude
 Training aids
 Packaging
 Vendors location
 Repair service

Chapter 4 Management of Business Logistics, 7th Ed. 39

Vendor Selection Criteria
 Reliability
 On-time delivery
 Performance history
 Warranties

Chapter 4 Management of Business Logistics, 7th Ed. 40

Vendor Selection Criteria
 Financial
 Price
 Financial stability

Chapter 4 Management of Business Logistics, 7th Ed. 41

Materials Management: The
Special Case of Procurement Price

 Sources of Price
 Commodity markets

 Price lists

 Price quotations

 Negotiation

Chapter 4 Management of Business Logistics, 7th Ed. 42

Materials Management: The
Special Case of Procurement Price

 Commodity markets
 A commodity market is a physical or
virtual marketplace for buying, selling
and trading raw or primary products.

Chapter 4 Management of Business Logistics, 7th Ed. 43

Materials Management: The
Special Case of Procurement Price

 Types of Costs
 Traditional basic input costs -

primary product price

Chapter 4 Management of Business Logistics, 7th Ed. 44

Materials Management: The
Special Case of Procurement Price

 Types of Costs
 Direct transaction costs - all other

related costs of detecting and

transmitting information to
suppliers (e.g., EDI)

Chapter 4 Management of Business Logistics, 7th Ed. 45

Materials Management: The
Special Case of Procurement Price

 Types of Costs
 Supply relational costs - costs of

maintaining relationships with

suppliers

Chapter 4 Management of Business Logistics, 7th Ed. 46

Figure 4-6
Total Procurement Price

Chapter 4 47
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?

Chapter 4 Management of Business Logistics, 7th Ed. 48

Figure 4-7 Overview of Production
Planning and Control

Chapter 4 Management of Business Logistics, 7th Ed. 49

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

Chapter 4 Management of Business Logistics, 7th Ed. 50

Materials Management: The Special
Case of Procurement Price

 Other types of Costs

 Operations/logistics costs

 Other logistics costs affected

by product’s size, weight,

density and shape

Chapter 4 Management of Business Logistics, 7th Ed. 51

 Materials Management: Other
Materials Management Activities
 Warehousing
 Type of facilities required

 Production Planning and

Control
 Coordinating product supply

with product demand

Chapter 4 Management of Business Logistics, 7th Ed. 52

 Materials Management: Other
Materials Management Activities
 Transportation
 Vendor control

 Modal choice

 Rush shipments

 Inspection

 Damage claims

Chapter 4 Management of Business Logistics, 7th Ed. 53

Materials Management: Other
Materials Management Activities
 Quality Control
 Quality standards

 did customer receive what was

ordered?
 Quality implications

 GIGO concept

Chapter 4 Management of Business Logistics, 7th Ed. 54

Materials Management: Other
Materials Management Activities
 GIGO concept
 GIGO (garbage in, garbage out) is
a concept common to computer
science and mathematics: the quality
of output is determined by the quality
of the input.

Chapter 4 Management of Business Logistics, 7th Ed. 55

Materials Management: Other
Materials Management Activities
 Quality Control
 Sample inspection

 statistical QC from vendor to

assure 100% quality

Chapter 4 Management of Business Logistics, 7th Ed. 56

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.

Chapter 4 Management of Business Logistics, 7th Ed. 57

Electronic Procurement
 Common uses of E-commerce
 Research vendor and product

information
 Electronic check of available

stock
 Price negotiation

Chapter 4 Management of Business Logistics, 7th Ed. 58

Electronic Procurement
 Common uses of E-commerce
 Order products or services

 Check on the status of an order

 Issue invoice and receive

payment

Chapter 4 Management of Business Logistics, 7th Ed. 59

Electronic Procurement
Advantages of E-commerce
 Lower operating costs

 Reduce paperwork

 Reduce sourcing time

 Improve control over inventory

and spending

Chapter 4 Management of Business Logistics, 7th Ed. 60

Electronic Procurement
Advantages of E-commerce
 Improve procurement efficiency

 Find new supply sources

 Improve communications

 Improve personal use

 Lower cycle times

Chapter 4 Management of Business Logistics, 7th Ed. 61

Electronic Procurement
Advantages of E-commerce
 Reduce procurement prices

 Improve comparison shopping

 Reduce overall prices paid

Chapter 4 Management of Business Logistics, 7th Ed. 62

Electronic Procurement

 Disadvantages
 Security of electronic messages

 Lack of face-to-face contact

 Other technological concerns

 Standard protocols

 System reliability

Chapter 4 Management of Business Logistics, 7th Ed. 63

Four Basic Types of E-commerce
Models
 Sell-side system
 Administered by the seller

 Usually free to the buyer

 Selling product to an organization’s

customer
 Many buyers but one seller

Chapter 4 Management of Business Logistics, 7th Ed. 64

Four Basic Types of E-commerce
Models
 Electronic marketplace
 Administered by a third party

 Collection of electronic catalogs

 One-stop sourcing for buyers

Chapter 4 Management of Business Logistics, 7th Ed. 65

Types of E-commerce Models
 Buy-side system
 Administered by the buyer

 Pre-approves vendor access

 Expensive and usually the

domain of large companies

Chapter 4 Management of Business Logistics, 7th Ed. 66

Types of E-commerce Models
 Buy-side system
 Purchases from the supplier
 Transactions to procure resources

needed by an organization from its

suppliers
 Many sellers but one buyer

Chapter 4 Management of Business Logistics, 7th Ed. 67

Types of E-commerce Models
 On-line trading community
 Maintained by a third party

 Used by multiple buyers and

sellers

Chapter 4 Management of Business Logistics, 7th Ed. 68

 THANK YOU AND GOD
BLESS

TO GOD BE THE
GLORY

Chapter 4 69
Chapter 4 Management of Business Logistics, 7th Ed. 70
Electronic Procurement
 Business-to business (B2B)
purchases are estimated to be $1.3
to $2.0 trillion by 2003.

Chapter 4 Management of Business Logistics, 7th Ed. 71

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

Chapter 4 Management of Business Logistics, 7th Ed. 72

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

Chapter 4 Management of Business Logistics, 7th Ed. 73

 Chapter 4:
Summary and Review Questions

Students 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
Chapter 4 74
 End of Chapter 4 Slides

Procurement and Supply

Management

Chapter 4 75
Chapter 4 Management of Business Logistics, 7th Ed. 76
Table 4-1
Industry Supply Chain Logistics Emphasis

Chapter 4 Management of Business Logistics, 7th Ed. 77

Figure 4-5 Hierarchy of Price
Measurement Approaches

Chapter 4 Management of Business Logistics, 7th Ed. 78

Figure 4-8
Advantages of Electronic Procurement

Chapter 4 Management of Business Logistics, 7th Ed. 79