Procurement and Supply Management

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Chapter 4

• Procurement and Supply Management

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• Material Management
• Electronic Procurement e-Commerce

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Material Management
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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
Important note one ends with customers may
serve as the other End as vendor value
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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 management, and
  salvage and scrap disposal)
• Procurement
• Importance of Item and Service Purchased
• The Special Case of Procurement Price
• Other Materials Management Activities

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Materials Management 1.Procurement

• Buying goods and services for a firm, a process
  of obtaining goods and services for the firm
• Importance
• Contributes to the competitive advantage of the
  firm
• Significant portion of the logistics costs

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Materials Management 1.Procurement

• Definition of Procurement 12 Activities
• 1. Identify or reevaluate needs
• 2. Define and evaluate user requirements
• 3. Decide whether to make or buy
• 4. Identify the type of purchase
• 5. Conduct a market analysis
• 6. Identify all possible suppliers

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Materials Management 1.Procurement

• Definition of Procurement Activities
• 8. Prescreen all possible sources
• 9. Evaluate the remaining supplier base
• 10. Choose a supplier
• 11. Receive delivery of the product or service
• 12. Make a post purchase performance evaluation
• (see next slide for the flows)

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Figure 4-2 1.Procurement Process
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Materials Management 2.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 2.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 2Item Procurement Importance Matrix
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Materials Management 2. Managing the Procurement
Process in 4 Steps

• 1. Determine the type of purchase
• New purchase
• Straight rebuy
• Modified rebuy

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Materials Management 2. Managing the Procurement
Process in 4 Steps

• 2. Identify levels of investment
• 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 2.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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Materials Management 2.Managing the Procurement
Process

• Vendor Selection Criteria
• Quality
• Reliability
• Capability
• Financial
• Miscellaneous Other Qualities
• Vendor Location
• Factor Importance Will Vary
• (Itemized see next slide)

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Figure 4-4 Overview of Vendor Selection Criteria
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Materials Management 3. The Special Case of
Procurement Price

• 1. Sources of Price
• Commodity markets
• Price lists
• Price quotations
• Negotiation

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• General spectrum of expanding procurement
  approaches to the supply chain ---- see next slide

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Figure 4-5 Hierarchy of Price Measurement
Approaches
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• Components required to be considered in order to
  obtained overall optimized solution (see next
  slide)

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Figure 4-6 Total Procurement Price
See next slides For details
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Materials Management The Special Case of
Procurement Price

• 2. Types of Costs
• 1. Traditional basic input costs - primary
  product price
• 2. Direct transaction costs - all other related
  costs of detecting and transmitting information
  to suppliers (e.g., EDI)
• 3. Supply relational costs - costs of maintaining
  relationships with suppliers

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Materials Management The Special Case of
Procurement Price

• 3. Other types of Costs
• 4. Landed costs -
  actual transport costs sales terms
• 5. 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
• 6. 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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Materials Management 4. Other Materials
Management 5 Activities

• 1. Warehousing
• Type of facilities required (such as open air
  Chapt 8)
• 2. Production Planning and Control (forecasting,
  see Figure 4-7)
• Coordinating product supply with product demand

• 3. Transportation
• Vendor control
• Modal choice (rail, water..)
• 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

• 4. 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

• 5. 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
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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

• 6 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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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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Figure 4-8 Advantages of Electronic Procurement
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Four Basic Types of E-commerce Models7

• 1. Sell-side system (B2B)
• Administered by the seller
• Usually free to the buyer
• www.officemax.com, www.globalcomputer.com,
• 2. Electronic marketplace
• Administered by a third party
• Collection of electronic catalogs
• One-stop sourcing for buyers
• www.plasticsnet.com, www.e-chemicals.com,
  www.metalsite.com

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Types of E-commerce Models

• 3. Buy-side system
• Administered by the buyer
• Pre-approves vendor access
• Expensive and usually the domain of large
  companies
• ERP, will discuss more later
• 4. On-line trading community
• Maintained by a third party
• Used by multiple buyers and sellers
• www.eaby.com, www.travelocity.com, www.nte.net

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Chapter 4Summary 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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End of Chapter 4 Slides

• Procurement and Supply Management