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Procurement and Supply Management

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Title: Procurement and Supply Management


1
Chapter 4
  • Procurement and Supply Management

2
  • Material Management
  • Electronic Procurement e-Commerce

3
Material Management
4
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

5
Figure 4-1 A Food System Supply Chain
Important note one ends with customers may
serve as the other End as vendor value
6
Table 4-1 Industry Supply Chain Logistics
Emphasis
7
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

8
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

9
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

10
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)

11
Figure 4-2 1.Procurement Process
12
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.

13
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.

14
Figure 4-3 2Item Procurement Importance Matrix
15
Materials Management 2. Managing the Procurement
Process in 4 Steps
  • 1. Determine the type of purchase
  • New purchase
  • Straight rebuy
  • Modified rebuy

16
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.

17
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?

18
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.

19
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)

20
Figure 4-4 Overview of Vendor Selection Criteria
21
Materials Management 3. The Special Case of
Procurement Price
  • 1. Sources of Price
  • Commodity markets
  • Price lists
  • Price quotations
  • Negotiation

22
  • General spectrum of expanding procurement
    approaches to the supply chain ---- see next slide

23
Figure 4-5 Hierarchy of Price Measurement
Approaches
24
  • Components required to be considered in order to
    obtained overall optimized solution (see next
    slide)

25
Figure 4-6 Total Procurement Price
See next slides For details
26
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

27
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?

28
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

29
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

30
Figure 4-7 Overview of Production Planning and
Control
31
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

32
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.

33
Electronic Procurement
34
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.

35
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

36
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

37
Figure 4-8 Advantages of Electronic Procurement
38
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

39
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

40
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

41
End of Chapter 4 Slides
  • Procurement and Supply Management
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