Chapter 4

Procurement and Supply Management

Chapter 4

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.

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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Chapter 4

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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Chapter 4

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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Chapter 4

Materials Management:

Procurement

Importance Contributes to the competitive advantage of the firm Significant portion of the logistics costs

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Management of Business Logistics, 7th Ed.

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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Management of Business Logistics, 7th Ed.

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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Chapter 4

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 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 it right the first time.

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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 users requirements. 4. Evaluate the effectiveness of the procurement process Were the users 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 firms 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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Chapter 4

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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Chapter 4

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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Chapter 4

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 products size, weight, density and shape
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Chapter 4

Materials Management: Other

Materials Management Activities

Warehousing Type of facilities required Production Planning and Control Coordinating product supply with product demand
Chapter 4

Transportation Vendor control Modal choice Rush shipments Inspection Damage claims

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Figure 4-7 Overview of Production

Planning and Control

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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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Chapter 4

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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Chapter 4

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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Chapter 4

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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Chapter 4

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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Chapter 4

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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Chapter 4

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
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