Procurement and Materials Management

Procurement And
Materials Management
Procurement And
It Is Not Always
Economical For The
Companies To Make
All The Materials Used
In Manufacturing.
Some Items Are
Procured From Others,
And Some Are
Produced In The
Company.
Procurement And
Some Reasons For Making:

Lower Production Cost
Unreliable Or Unsuitable Suppliers
Assure Adequate Supply (Quantity)
Utilize Surplus Labor Capacity
Obtain Desired Quality
Protect Special Design Or Quality
Procurement And
Some Reasons For Buying:

Lower Acquisition Cost
Inadequate Capacity
Reduce Inventory Costs
Ensure Alternative Sources Of Supply
Item Is Protected By A Patent Or
Trade License
Procurement And
Choosing Between Making or
Buying An Item Is Largely
Dependent On The Vertical
Integration Strategy Of A
Company.
Procurement And
By Vertical Integration, We Mean

Developing The Ability To Produce
Goods Or Services that are
Previously Purchased.
It Can Take The Form Of Forward Or
Backward Integration:
Procurement And
Procurement And
Because Purchased Items Represent A

Large Part Of The Costs, Many
Organizations Find Interest In Vertical
Integration.
For example, Murat Ticaret Originally
Produces Cable. Then It Started
Producing Cable Cords For Automobiles
(Otosan, Dodge, Otoyol, Etc.)
Procurement And
Vertical Integration Is
Adventageous When The
Organization Has Large Market
Share.
Backward Integration May Be
Dangerous For Firms In Industries
Undergoing Rapid Technological
Changes.
Purpose Of Materials Management

Is To Obtain Efficiency Of
Operations Through Integration Of
1) Material Acquisition, 2) Material
Movement, and 3) Material
Storage.
When
Transportation And
Inventory Costs
Are Substantial,
A Focus On
Materials
Management Is
Appropriate.
Some Basic Functions Of Materials

Management:
Shipping
Purchasing
Warehousing (Raw Material, Wip,
End Material)
Order Processing
Production And Inventory Control
One of the major
issues that
materials
managers might
encounter is the
method of
Procurement.
Procurement method is the way of
ordering material.
Some of the new developments in
this area include:
1) Electronic Ordering
2) Stockless Purchasing
3) Standardization, and
4) Just in Time Purchasing.
Electronic Ordering
Electronic Ordering Reduce Paper

Transactions.
Paper Transactions Include Purchase
Order, Receiving Document, Authorization
To Pay, Etc.
Transactions Between Firms Are
Increasingly Done Via Electronic Data
Interchange (EDI).
EDI Is A Standardized Data Transmittal
Format For Computerized
Communications Between Organizations.
Electronic Ordering
It Provides Data Transfer For Any

Business Application, Including
Purchasing.
For Example, Data For A Purchase
Order (Such As Order Date, Due
Date, Quantity, Part Number, Order
Number, Address, Etc.) Are Fitted
Into Standard EDI Format.
Electronic Ordering
The Data Are Then Sent From One

Computer To Another By Phone Line
(Internet)
A Computer Program Is Used To Read
Those Data Into The Receiving
Companys Files.
Electronic Ordering Also Speeds Up
The Traditionally Long Procurement
Time.
Stockless Purchasing
This Means That The Supplier

Maintains The Inventory For The
Purchaser.
Here, The Cost Of Stocking
Inventory Has Been Temporarily
Transferred From The Purchaser To
The Supplier.
Stockless Purchasing
Consignment Inventories (Konsinye,

To Be Discussed Later) Are A Related
Option.
If The Supplier Can Maintain The
Stocks For A Variety Of Customers
Who Use Same Products, Then There
May Be Net Savings In This Option.
Otherwise, Purchasing Costs May Go
Up.
Standardization
Rather Than Obtaining A Variety Of

Components Similar In Labeling,
Coloring, Packaging, Etc. The Purchasing
Agent Should Try To Have Those
Components Standardized.
For Every Component That Is
Standardized,
There Is One Less Invoice, One Less
Item To Be Inventoried, Etc.
Just In Time Purchasing
Just In Time (Jit)

Purchasing Is
Directed Toward
The Reduction Of
Waste (That Is
Present At Incoming
Inspection, Excess
Inventory and Poor
Quality) And Delay.
Just In Time Purchasing
This Waste And Delay is Present In

All Production Processes. (Not Only
In Purchasing)
Therefore, JIT Approach Can Be
Applied To All Areas Of Production.
** The Basic JIT Approach: Every
Moment Material Should Add Value.
Goals Of Just In Time

Purchasing
1- JIT Tries To Reduce All Non-ValueAdded Activities.
(If Purchasing Personnel Can Select
More Reliable Vendors, Purchased
Items Can Be Received Without
Counting, Inspection.)

Purchasing
2- Elimination Of In-Plant Inventory.
No Raw Material Inventory Is Necessary If
Materials Are Perfectly Delivered to
Where They Are Needed.
Parts Should Be Delivered In Small Lots
Directly To The Using Department As
Needed.
Elimination Of Inventory Allows Managers
To See Production Problems That Are
Hidden Behind Those Inventories.

Purchasing
3- Elimination Of In-Transit Inventory
In-Transit Inventory Is The Inventory
Flowing Between The Plant And Material
Suppliers.
It Can Be Reduced By Encouraging
Suppliers To Locate Near The Plant.
(The Shorter The Flow Of Material The
Less Inventory And The Less
Transportation Costs.)

Purchasing
Another Way To Reduce In-Transit

Inventory Is To Have Inventory On
Consignment.
Under A Consignment Arrangement The

Supplier Maintains Title To The Inventory.
But, It Locates Its Warehouse Where The
User Has Its Stockroom.

Purchasing
4- Quality And Reliability Improvement
To Obtain Improved Quality And
Reliability,
a) Vendors And Purchasers Must Have
Mutual Understanding And Trust.
b) Suppliers Long Term

Commitment To The Relationship
Should Be Increased.
Physical Distribution
Management
Products need to
be distributed to
the customers.
Management
Today, many manufacturer

companies utilize Multi-Echelon
inventory systems.
In multi-echelon inventory
systems, Products are stored at
different points, before reaching to
the customer.
Management
After manufacturing the Products,

the Manufacturer stores them in its
own warehouse.
From there, they are Transported to
regional warehouses. These
regional warehouses serve as a
distribution point for retail stores.
(figure)
Management
When the retail stores require products, They

will request them from their local warehouse.
The function of the Regional Warehouse is to
provide an Intermediate Stage in the
distribution system SO THAT manufacturer
Does Not have to deal with every single
customer.
This also means that, Customers DO NOT
have to Reach to the manufacturers plant.
Transportation
Physical distribution managers must
ALSO decide on which mode of
transport is Best to distribute
Products to the Customers.
Transportation
Available modes of transport are:
-Road transport (cars, trucks),
-Railway transport,
-Water transport (ships),
-Air transport, and
-Pipelines (oil, natural gas).
Transportation
Air transport is very expensive and

limited in Space availability.
Therefore, It is usually preferred for
small-quantity, high-value
products, which require fast
delivery (e.g., highly fragile
electronic parts).
Transportation
On the contrary, Water or Railway

transportation is slower BUT
cheaper. Therefore, they are used
for carrying Large Quantities of
raw materials (e.g., coal and iron).
Transportation
Transportation
There may be some limitations on

these modes of transport, as well.
For example, only Gas and Liquids
can be conveniently transported
by Pipelines.
Similarly, very large products (such
as building sections) would not fit
in most Aircrafts.
Transportation
However, the mode of transport is usually

Chosen with reference to the Relative
Importance of the following factors:
Delivery speed
Delivery dependability (reliability)
Quality deterioration
Transportation cost, and
Route flexibility.
Transportation
The following table gives a ranking

of each mode of transport based
on these factors:
(1 = Best Performance; 5 = Worst
Performance)
Transportation
Transportation
The selection of the transportation

mode will also affect other
decisions related to the
management of operations.
For example, firms may choose to
locate their facilities near to ports
or airports, or railway sidings, or
close to motorways depending on
the selected mode of transport.
Contract Terms
In any exchange between buyers and

suppliers, both sides have to agree on
Who will Pay for the transportation.
This becomes a particular issue in
international trade Where knowledge
of international trade agreements and
legislation are critical to purchasing
Successfully from other Countries.
Contract Terms
Internationally recognized shipping

terms are now in operation which
are applied to international
transportation by sea or air.
The main definitions of these terms
are as follows:
Contract Terms
Ex-works: In an ex-works contract,

the purchaser accepts full
responsibility for arranging
transportation from the suppliers
location.
Contract Terms
This involves: (1) Arranging

transportation, insurance, and
documentation to move the goods to
the required source port (air or sea),
(2) Have them loaded on to the mode
of transport, (3) Transported to, and
unloaded at the destination port, (4)
Cleared through customs and
transported to the purchasers
location.
Contract Terms
Contract Terms
More recently, purchasers and
suppliers have sub-contracted this
transportation function to
specialists such as Federal
Express.
Contract Terms
Free alongside (FAS): In this

arrangement, the supplier agrees
to deliver to the (source) port
specified by the purchaser
and is responsible for the
transportation and insurance of the
goods Until that point.
Contract Terms
However, the purchaser has to

arrange and pay for loading on to
the vessel and all onward
transportation, insurance, and
documentation.
Contract Terms
Contract Terms
Free on board (FOB): Here the

supplier pays for and arranges
loading on to the outward-bound
transportation and thereafter the
purchaser becomes responsible.
Contract Terms
Contract Terms
Cost and Freight (C&F): This is a

split responsibility arrangement in
that the supplier arranges and pays
for transportation to an agreed
point,
But the purchaser has to pay
insurance from when the goods are
loaded on board.
Contract Terms
The purchaser has to acquire any

documentation required by the
country of origin.
Once the goods have been
unloaded at the port of entry, the
purchaser is responsible for all
ongoing transportation and
insurance.
Contract Terms
Contract Terms
Cost, Insurance, and freight (CIF):

This is similar to C&F But here the
insurance during transportation is
responsibility of the supplier.
Contract Terms
Delivered: This is the opposite of

ex-works in that the supplier has
total responsibility for the goods,
their transportation, insurance,
and all documentation until they
are delivered to the purchaser.
Logistics
Logistics originated
during the Second
World War when it
related to the
movement and coordination of troops
to the required
location.
Logistics
When adopted by the business
world as a concept It referred to
the movement and coordination of
finished products.
Logistics
Logistics function manages the

total flow of products from the
plant to the customers.
As contrary to the materials
management, Logistics provides an
emphasis on physical distribution
management.
Logistics
However, These minor differences

are present because of the
backgrounds of the two groups
who have originated the concepts.
Generally, the logisticians tend to
come from marketing discipline.
Logistics
On the other hand, The materials

managers come from operations
management,
(Particularly from purchasing).
During the last twenty years, an
even broader, and statistically
significant concept emerged:
Supply Chain
Management
Logisticians have devoted little

attention to managing the chain of
supply up to the purchasing function.
And similarly, materials managers
have ignored the management of the
flow of products down to the
customers through distribution
channels.
Supply Chain
Management
On the contrary Supply Chain

Management views the entire
chain as a system to be managed.
It can be defined as managing the
entire chain of raw material supply,
manufacture, assembly and
distribution to the end customer.
Supply Chain
Management
In long supply chains, it is not easy

to co-ordinate the whole chain.
This is especially true when part of
the supply chain serves two sets of
end cutomers.
Supply Chain
Management
For example, many manufacturers of
automobile components serve two
different groups of end customers:
- One group buys new cars (vehicle
market)
- The other group buys spare parts for
repair of their cars (spares market)
The spares market is also known as
aftermarket for the car components.
Supply Chain
Management
Supply Chain
Management
The Role of
Inventory, The
planning and
control priorities,
and price
negotiations will All
be different for
each chain.
Supply Chain
Management
Since the components for both
chains are produced by the same
Component Manufacturer,
Operations should be split between
the two chains, AND they should
be well managed.
Types of Relationships
in Supply Chains
12345-
Integrated Hierarchy
Semi-Hierarchy
Co-Contracting
Coordinated contracting
Coordinated revenue links
in Supply Chains
1) Integrated hierarchy means that

a firm houses all activities in the
supply chain
FROM raw material source TO
distribution of products to end
users (figure).
This is also called Full Vertical
Integration.
in Supply Chains
2) In a Semi-hierarchy organization, the

firms in the Supply Chain are owned by
the same holding Company, But they
operate as Separate Business Units.
For example, An Oil Company delegates
the following activities to the following
business units: Oil extraction, Oil
refining, Petrol Distribution, and Petrol
Retailing.
in Supply Chains
3) Co-contracting is a term used to

describe alliances between organizations
that have
Long term relationships but do not Merge
together.
They rather transfer some Equity
(ownership), technology, Information,
AND People.
Such alliances are evident in aerospace
industry (Airbus transfers technology
with others).
in Supply Chains
4) Coordinated Contracting involves a prime

contractor who employs a set of subcontractors.
For example, a building trader (or
decorator) employs a set of sub-contractors,
such as carpenters, electricians, and
bricklayers AND calls them when needed.
There is a long-standing relationship
between contractor and sub-contractors.
in Supply Chains
The contractor provides Materials

and usually take responsibility for
the planning and control of the
entire job.
But the sub-contractor provides
the necessary equipment required
for its profession.
in Supply Chains
5) The category of Coordinated

revenue links is used primarily for
Licensing and Franchising. (e.g.,
fast food chains)
in Supply Chains
It is a form of relationship that

transfers ownership to other firms
(usually smaller) while
guaranteeing an income for the
franchiser or the licensor.
in Supply Chains
In this form of contract Franchiser,

Has the property rights of the product
sets the territory in which the
franchisee can operate
sets the process specification to be
used in operations, and
monitors the performance of the
franchisee.

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Procurement And

Some Reasons For Making:

Some Reasons For Buying:

By Vertical Integration, We Mean

Because Purchased Items Represent A

Purpose Of Materials Management

Some Basic Functions Of Materials

Electronic Ordering Reduce Paper

It Provides Data Transfer For Any

The Data Are Then Sent From One

This Means That The Supplier

Consignment Inventories (Konsinye,

Rather Than Obtaining A Variety Of

Just In Time Purchasing

Just In Time (Jit)

Just In Time Purchasing

This Waste And Delay is Present In

Goals Of Just In Time

Goals Of Just In Time

Goals Of Just In Time

Goals Of Just In Time

Another Way To Reduce In-Transit

Under A Consignment Arrangement The

Goals Of Just In Time

b) Suppliers Long Term

Today, many manufacturer

After manufacturing the Products,

When the retail stores require products, They

Air transport is very expensive and

On the contrary, Water or Railway

There may be some limitations on

However, the mode of transport is usually

The following table gives a ranking

The selection of the transportation

In any exchange between buyers and

Internationally recognized shipping

Ex-works: In an ex-works contract,

This involves: (1) Arranging

Free alongside (FAS): In this

However, the purchaser has to

Free on board (FOB): Here the

Cost and Freight (C&F): This is a

The purchaser has to acquire any

Cost, Insurance, and freight (CIF):

Delivered: This is the opposite of

Logistics function manages the

However, These minor differences

On the other hand, The materials

Logisticians have devoted little

On the contrary Supply Chain

In long supply chains, it is not easy

1) Integrated hierarchy means that

2) In a Semi-hierarchy organization, the

3) Co-contracting is a term used to

4) Coordinated Contracting involves a prime

The contractor provides Materials

5) The category of Coordinated

It is a form of relationship that