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Lecture 1 and 2 :

Introduction to Procurement and Supply Chain Management

Objectives:
 To understand the background of Procurement and Supply Chain
Management
 To define key Terms supply chains

 To identify the Objective of Procurement and supply chain

 To explain the Purpose and application of policy in supply chain

 
 
The 1980s: purchasing as supply chain management In the 1980s firms began to appreciate the
potential contribution of purchasing to the bottom line. Porter (1980) emphasised the
importance of purchasing in his five forces model of competitive advantage. We also began to
see the term ‘supply chain management’ emerge, first by consultants in the late 1980s and
subsequently adopted by the academic community in the 1990s. Within the profession, the
thinking of supply managers moved from one of efficiency towards effectiveness. Purchasing
strategy began to align consciously with the overall corporate and business strategies of the
firm. Advances in technology also saw the increased application of enterprise resource planning
(ERP) systems, which made supply chain optimisation feasible. Organisations were now able to
share long-term demand schedules and inventory levels throughout their entire supply chain
(at least in theory), with the aim of having inventory moving continuously through a ‘pipeline’

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and never in storage. The intense Japanese competition of the 1980s also saw manufacturing
firms shift from emphasising internal operations towards supply chain optimisation. Worldclass
manufacturing (WCM) required that the entire supply chain be world-class, necessitating a
focus on just-in-time (JIT) production and supply, supported by total quality management
(TQM) programmes. Today, continuous improvement of internal operations remains an
imperative, but will no longer lead to success if the external linkages are not up to par. Thus, a
supply chain focus is vital for the long-term well-being of any manufacturing firm. A well-known
example of such integrated supply chains is Wal-Mart. In 1996, Moore and Curry wrote that:
The 1990s: supply management and strategic decision making By the 1990s, supply chain
management (SCM) had moved away from disparate functions of logistics, transportation,
purchasing and physical distribution.
 
Today’s supply chain management goes by many terms, including: supply network
management, demand chain management, pipeline management and value-net integration.
Supply chain management has drastically changed the way purchasing deals with suppliers.
Buyers have moved towards long-term, collaborative relationships with fewer suppliers. Terms
such as supplier development, strategic cost management, collaborative relationships, shared
databases, product lifecycle sourcing and total cost of ownership (TCO) have become
commonplace.
 

 Def: Supply Chain Management is defined as:

An integrated collection of organizations that manage information, cash, and product flows
from a point of origin to a point of consumption with the goals of maximizing consumption
satisfaction and minimizing the total costs of the organizations involved.

Supply chain management

 

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Supply Chain Management (SCM) refers to the inclusion of a wide scope of suppliers and
customers into the organizational fold, integration and coordinating of uninterrupted flow of
materials, and information from the procurement of raw materials to the consumption of
finished goods

The objectives of Supply Chain Management (SCM) are to eliminate redundancies, mitigate risk,
and reduce cycle time in delivery of inventory so as to provide better customer service at
lowest total cost oportunity.
The focus has shifted from the “ROI” paradigm to the “share of the customer paradigm ,
wherein the goal is to create “customer value” leading to increased corporate responsibility by
employing modern sustainability KPI’s which don’t only focus on profitability, shareholder
value, and sustained competitive advantage, but include non-financial issues(Energy
consumption,Traffic congestion,Water consumption Security compliance,Infrastructure
simplification.

The company faces challenges when buying, moving ,selling and servicing commodities. Thus
the work of SCM is to ensure that all this happen flawlessly with minimum effort and cost so as
to help the company maximize the profit with minimum risk. The funder mental skills for the
SCM can be used not only in manufacturing of goods but also in the service industries like
hotels ,hospitals ,airline and so on.

key elements in this definition:

a. information, cash, and product flows between organizations
b. is the maximization of consumption satisfaction
c. minimizing total costs for all organizations involved in the supply chain
d. eliminate redundancies,
e. mitigate risk, and
f. reduce cycle time in delivery of inventory so as to provide better customer service at
lowest total cost opportunity.

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Procurement:
This refers to all activities required in order to obtain the product from the supplier and get it to
the place where it is actually used. It encompasses the purchasing function, store, traffic and
transportation, incoming inspection, and quality control and assurance.
Another definition might be that procurement is purchasing, contracting, and logistics, wherein
logistics is taken to be inventory control, warehousing,transport, quality assurance, and control.

The Function of Procurement Department

 
1) Market research for new materials and development of new source of supply.
2) Follow-up with suppliers to ensure proper delivery.
3) Quality assurance in respect of supplies made by vendors, (this includes supplier education,
visiting thevendor’s factor to ensure in-process quality assurance).
4) Inspection of materials for quality in order to that the specifications are complied with.
5) Development of proper and streamlined systems and procedures relating to the purchasing
function to ensure that work is carried out efficiently and at the lowest reasonable operating
cost.
6) Co-ordination with in other functions with the materials department like transportation,
receiving, store-keeping, inventory control, accounting etc.
7) Co-ordination with the production, sales and finance departments regarding alteration in
production schedules or delivery rates, or changes in materials, product or packaging
specification.

 Definition:
purchasing is the process by which a company (or other organisation) contracts with third
parties to obtain goods and services required
to fulfil its business objectives in the most timely and cost-effective manner.

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Purchasing has two main purposes:

 to purchase for resale and
 to purchase for consumption or for conversion
 
 

Objective of Procurement

1)To support company operations with an uninterrupted flow of materials and services. This is
the most fundamental of all the purchasing and supply objectives. In a logical sense, this is a key
reason for the existence of the department.

 
2) To buy competitively and wisely. Buying competitively keeps the buyers on the edge of the
companies’ activities. Buyers should know what’s going on in the outside world. They must
keep abreast of the forces of demand and supply that regulate price and material availability.
They must be aware of the best practices and the latest developments and ultimately buying to
the company’s best advantage.
 
3) To keep inventory investment and inventory losses at a practical minimum. The purchasing
job is to achieve a reasonable balance between the required level of inventory to support
operations and the cost of carrying the inventory.
 
4) To develop effective and reliable sources of supply.
 
5) To develop good relationships with the supplier’s community and continuing relationships
with active suppliers.Good relationship with suppliers is imperative, and good relationships
with potential suppliers are invaluable.

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(Relationships BUILDING IS VERY CRITICAL,ANY ORGANIZATION HAS A NETWORK OS SUPPLIERS

AND THEY ARE Central component of successful supply chain management) planning, steering
and controlling of the whole flow of materials and services in a network of collaborating
companies.
 
The achievement of the objective number 4 above, on a continuing basis, is virtually impossible
if mutually satisfactory continuing relationships are not maintained.
 
6) To maintain sound co-operative relationships with other departments, providing information
and advice as necessary to ensure the effective operation of the organisation as a whole.
 
7) To develop staff, policies, procedures and organisation to ensure the achievement of the
foregoing objectives.
 

Advantages of Effective Procurement

 Deriving from the above objectives, we might identify the following as being the principal
benefits to be gained from the effective management of the procurement process:
(1) Lower prices of materials and items used (2) Faster inventory turnover
(3) Continuity of supply (4) Reduced replenishment lead times
(5) Reduced transportation cost
(6) Reduced materials obsolescence
(7) Improved vendor relationships
(8) Better control of quality
(9) Effective administration and immunisation of organisation effort
(10)Maintenance of adequate records and provision of information for the operations
managers.
 

Why is Procurement Important

 

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1. Major area of cost saving

 
In the manufacturing sector the percentage of purchases to sales averages 55%.This means that
for every Shilling of revenue collected on goods and services sales,more than half goes back to
suppliers. It is not difficult to see why purchasing is clearly a major area for cost savings.
However, savings come in different forms; the traditional approach is to bargain hard for price
reductions.
 
A newer approach is to build relations with suppliers to jointly pull costs out of the product or
service. Furthermore, many features that make their way into final products originate with
suppliers. The supply base is an important part of the supply chain.
 
Exp:
OUT of score of 500, Toyota was first with an index score of 399, while General Motors was last
with a score of 144. The superior management of supplier relationships has helped give
Japanese automobile producers a cost advantage over many outmobile manufacturers .
 

2. Assurance of quality in products and services

Purchasing and supply management also has a major impact on product and service quality.
In many cases, companies are seeking to increase the proportion of parts, components, and
services they outsource in order to concentrate on their own areas of specialization and
competence
 

3. Company Gains Competitive advantage

This further increases the importance of the relationships between purchasing, external
suppliers, and quality. poor choices of suppliers can tarnish a firm's reputation.
focus on effective purchasing has become a critical way to gain competitive advantage

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Procurement
According to Compton and Jessop procurement is “the obtaining by various means (e.g., loan,
transfer, hire purchase) of supplies and services with or without consideration.
 ” Van Weele and Rozemeijer (1996, p.22)
defined procurement as including “all activities required in order to obtain the product from
the supplier and get it to the place where it is actually used. It encompasses the purchasing
function, store, traffic and transportation, incoming inspection, and quality control and
assurance.
Another definition might be that procurement is purchasing, contracting, and logistics, wherein
logistics is taken to be inventory control, warehousing,transport, quality assurance, and control.

Often the term procurement is used, especially where government purchasing

is involved.
 
Procurement has two main purposes:
 to purchase for resale and
 to purchase for consumption or for conversion
 
For example , Merchants and speculators purchase for resale, and their task is knowing the final
market for commodities so that, almost regardless of the cost of purchase, the on-sale can be
made at a profit. Supermarkets.
Purchasing for consumption or for conversion requires a far more difficult decision. First, it is
often a long-term decision (e.g., the decision to use solar or wind as a source of energy).
 Exp,Government projects
The clear definition of purchasing is given by Elliott-Shircore and Steele (1985), who stated that
purchasing is the process by which a company (or other organisation) contracts with third

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parties to obtain goods and services required to fulfil its business objectives in the most timely
and cost-effective manner.
 
The terms purchasing and procurement are often used interchangeably; however, there
might be a distinction in that purchasing is more concerned with establishing and managing a
commercial relationship,whereas procurement is also concerned with the more physical
material or service delivery control aspects after the contract has been let or the order
placed.

 Purchasing and Supply Management

 
We need to recognize the differences between purchasing and supply management.Purchasing
is a functional group (i.e., a formal entity on the organizational chart) as well as a functional
activity (i.e., buying goods and services).
 
The purchasing group performs many activities to ensure it delivers maximum value to the
organization.
Examples include supplier identification and selection, buying, negotiation and contracting,
supply market research, supplier measurement and improvement, and purchasing systems
development. Purchasing has been referred to as doing “the five rights”: getting the right
quality, in the right quantity, at the right time, for the right price, from the right source.
 

 
Supply management is not just a new name for purchasing but a more inclusive concept. We
feel supply management is a strategic approach to planning for and acquiring the organization’s
current and future needs through effectively managing the supply base, utilizing a process
orientation in conjunction with cross-functional teams (CFTs) to achieve the organizational
mission.
 

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Similar to our definition, the Institute for Supply Management defines supply management as
the identification, acquisition, access, positioning, and management of resources and related
capabilities an organization needs or potentially needs in the attainment of its strategic
objectives.

Supply Chain Management

A supply chain has been defined as “a network of facilities that procure raw materials,
transform them into intermediate goods and then final products, and deliver the products to
customers through a distribution system.”
 
The management of such a network requires mastery of optimization logistics, or the specific
quantity of a good needed at a particular time and price. Clearly, relationships with suppliers
that make up these networks are a central component of successful supply chain management.
 
Supply Chain Management (SCM) is the broadest term mentioned so far. It includes all of the
above and is defined as the planning, steering and controlling of the whole flow of materials
and services in a network of collaborating companies.
 
The Institute for Supply Management defines supply management as the identification,
acquisition, access, positioning, and management of resources and related capabilities an
organization needs or potentially needs in the attainment of its strategic objectives
 
 
Exhibit 1.1 depicts the key elements in our definition of supply management.
 

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Supply chain management is arguably the holistic approach, and the holistic approach is what
we need to take to create a world class culture. The supply chain needs to be sustainable, but
what is the sustainable supply chain?
 

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Supply Chains and Value Chains

supply chains are composed of interrelated activities that are internal and external to a firm.
These activities are diverse in their scope; the participants who support them are often located
across geographic boundaries and often come from diverse
cultures.
Supply chains include every company that comes into contact with a particular product. For
example, the supply chain for most products will encompass all the companies; manufacturing
parts for the product, assembling it, delivering it and selling it
 
 

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Screen clipping taken: 2/1/2015, 8:54 PM
 
 
 
 
The Value Chain
A value chain identifies activities, functions and business processes that have to be performed
in the designing, producing, marketing, delivering and supporting a product or service.
 
The strategy making lesson of the value chain is that increased rganisational competitiveness
entrails oncentrating resources on those activities where the organisation can gain dominating
expertise to serve its target customers.
 
 

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Supply chain Policy and Procedures

Def:
Policy refers to the set of purposes, principles, and rules of action that guide an organization.

The following characteristics apply to effective policies:

• Action oriented
• Relevant
• Concise
• Unambiguous/well understood

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• Timely and current

Purpose and application

 
This Purchasing Policy applies to internal and external stakeholders and binds all directors,
managers and employees of the organisation in any situation where they are involved in a
purchasing process, whether as requisitoners or specifiers, purchasers or negotiators, or those
who validate or authorise payment.
 

Policy objectives
• legal
• accountable and auditable
• ethically, environmentally and socially responsible
• economically effective
 
Legality
Purchasing and contracting activity should fully respect and comply with:
• All applicable of the laws and regulations -for example treaties and agreements to which the
Kenya government is party (including, for example, any United Nations-approved trade sanction
 
• The relevant laws, regulations and so on of other territories in which organisations operate, to
which we supply, or from which we source
 
Note: this includes not only those laws directly applicable to the buying and selling of goods and
services - it includes amongst others the laws on:

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• taxation – the purchasing department will not be a party to the evasion of income, sales,
corporate, value added or other taxes, customs duties, or other charges, either by P&SM
Professionals, their customers, or their suppliers
• environmental regulations
• employment, health and safety
• corruption
 

Accountability and Auditability

The organisation should maintain systems whether manual or electronic, that that can track
the following
• the originator of the requirement
• the purpose for which the requisition was made
• the route by which the requisition was approved
• the methods adopted in accordance with the Procedures (for example Requests for
Quotation, Tender documents and so on)
• the source of supply
• the compliance with the requirement as specified in the contract

Economic effectiveness
 
• the desired outcome is that of greatest value gained at lowest total cost.
 
• at lowest total cost the full anticipated life span of the goods or services is taken into
account, including such factors as maintenance, servicing, reliability costs, and costs of ultimate
disposal where this organisation may be responsible for them.
• value should be approximately, to such factors as sustainability, environmental and social
benefits and of in addition to the total cost of acquisition or ownership, it is policy to reduce
where possi-ble the administrative cost of acquiring and owning goods and services. Selection
of the most appropriate proced improving the competi-tiveness of the supplier base
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 Ethically, environmentally and socially responsible

 Four categories of purchasing policy:

a) Policies defining social and minority business -

In the long run it is the buying firm best interest to use its power to support social and minority
business objectives. This may include supporting and developing
local sources of supply or awarding business to qualified minority suppliers.

Supporting Minority Business Suppliers

Supporting minority suppliers is not only the right thing to do, it is also the smart
thing to do.

As the nature of Kenya’s demographics and workforce continually

changes, organizations will need to hire and train people with multicultural backgrounds
and promote relationships with suppliers and customers from diverse backgrounds.

At the same time, it is important to recognize that minority suppliers are a

special class of supplier. They face many problems that are unique to their
special status, while also facing many of the same problems that confront nonminority
suppliers.

Several factors lie at the core of these problems which may lead to over-reliance on large
customer firms.
lack of access to capital;
large firms’ efforts to optimize their supply bases;
inability to attract qualified managers and other professionals; and

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minority suppliers’ relatively small size,

A minority business supplier is a business that is in operation which may be owned partially or
fully owned by an individual classified as a minority by the constitution for example A person
with physical challenges, youth, marginalized communities, women and so on …...

Such policies typically state that these suppliers should receive a fair and equal opportunity
to participate in the purchasing process.

The policy may outline a number of steps to achieve the policy’s objectives, including the
following:

Basic guiding of steps to achieve minority business supplier objectives

1. Set forth management’s commitment on this subject

2. Evaluate the performance of the potential of small and disadvantaged suppliers to

identify those qualifying for supplier assistance

3. Invite small and disadvantaged suppliers to bid on purchase contracts

4. Establish a minimum percentage of business to award to qualified small and

disadvantaged suppliers

5. Outline a training program to educate buyers regarding the needs of the

small and disadvantaged suppliers

b) Policies defining the role of purchasing-

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These policies often serve as a general or broad policy statement from which
more detailed or specific policies evolve

c) Policies defining the conduct of purchasing personnel-

This policy outlines the overall authority of purchasing as granted by the executive committee
while describing the limits to that authority. The policy may exclude the purchasing function
from any responsibility for purchasing real estate, medical insurance policies, or other areas
where purchasing may not have direct expertise.

d) Policies defining buyer-seller relationships

The policies that are part of buyer-seller relationships cover a wide range of issues.
Such as:
Supplier Relations
Qualification and Supplier Selection
Principles and Guidelines for Awarding Purchase Contracts
Labor or Other Difficulties at Suppliers
Other Policies Dealing with Buyer-Seller Relations

Supply chain practices in Material ordering

Material ordering cycle time has four components that supply chain practices affect directly:
(1) transmission of requirements to suppliers,
(2) suppliers’ ordering and manufacturing cycle time,
(3) delivery from suppliers, and
(4) incoming receiving and inspection.

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Perhaps the most obvious area where firms are concentrating their time-reduction
efforts is during product and process development. Major changes have occurred in
the methods and time required for developing products and processes over the past
decade, such as the use of product development teams, rapid prototyping technologies,
and computer-aided design systems shared with suppliers. As a result, average
product development cycle time has declined and is viewed as significantly important
by executive management.
 

Supply chain improvements

Companies have to invest in supply chain improvements and this is a reflection of the
company’s commitment to supply chain excellence.
Exp;
One major improvement is enterprise planning, which is aims to improve data accuracy and
integration among functions and processes, eliminating data silos (redundancy) and separate
functional plans. The goal is that when a customer calls and wants to double its order on one
disc model and cut another order in half, the order-management group will be able to commit
to the order immediately but also calculate the impact on revenue, margin, and capacity
utilization throughout the company.
 
Firms often puts in place one building block of its supply chain architecture and then monitors
how well it works out. If a better solution comes along that delivers more flexibility,
responsiveness, or value, the company doesn’t hesitate to rethink its first approach and deploy
the new solution.

REVISION QUESTIONS
1. What Are the Advantages and Disadvantages of Policies?

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2. How can an effective purchasing department affect organizational performance?

3. Discuss the concept of the internal customer. Who are purchasing’s internal customers?
4. Discuss the contributions a purchasing department can make to the corporate strategic
5. planning process?
6. Write a brief policy statement that presents a position on the need for utilizing
7. more diverse suppliers. What are the features or characteristics that your policy
8. statement should have?
9. Why is it important to include a policy that outlines the origin and scope of purchasing
10. authority? What might happen if such a policy did not exist?
11. Why should management periodically review its purchasing policies and procedures?
12. What are the potential consequences if management does not review policies
13. and procedures? How often do you think it should go through a minor or
14. major set of rewrites?
15. What are the benefits associated with a comprehensive policy and procedure manual?
16. Is there a downside to the manual’s being too comprehensive?
17. What is the difference between a supply chain and a value chain?
18. Why are more top managers recognizing the importance of purchasing/supply
management?
19. What is the difference between purchasing and supply management?
20. What is the difference between procurement and supply chain management?
21. What is the difference between a supply chain and a value chain?

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