Management of Business Logistics

Procurement and Supply

4
Management
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Chapter 4 Management of Business Logistics 2

Expected learning outcomes
After studying this chapter, students would be able to

n Explain the role and nature of procurement and supply

management in a supply chain context.
n Explain the different types of inbound systems.
n Discuss the major materials management activities.
n Explain the procurement process.
n Explain the risk/value technique for determining purchased item
importance.
n Identify the four steps necessary for effective procurement.
n Explain the criteria for evaluating vendors.

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Inbound Logistics along the SC
n Each firm in the food supply chain graphic in Figure 4-1 has
important differences in their inbound logistics systems.
n Mining firm
n Steel firm
n Container firm
n Food firm
n Retail outlet
n Individual firm complexity

Figure 4-1: A Food Supply Chain

Chapter 4 Management of Business Logistics 4

Materials Management: Procurement
n Importance
n Contributes to the competitive advantage of

the firm
n Significant portion of the logistics costs

Chapter 4 Management of Business Logistics 5

Definitions: Purchasing vs. Procurement vs. sourcing

n Purchasing
n This function is responsible for managing an
organization’s acquisition procedures and
standards.
n In a business setting this is a largely transactional
activity that consists of the buying of products and
services.
n This is facilitated by the placement and processing
of a purchase order.

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Definitions
n Procurement:

n This refers to managing a broad range of processes that

are associated with an organization’s need to procure goods
and services that are needed throughout the supply chain and
the overall organization.

n Examples of activities within the procurement process include

product/service sourcing, supplier selection, price negotiation,
contract management, transaction management, and supplier
performance management.

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Definitions
n Strategic sourcing:

n This is a significantly broader process than procurement,

n it represents a very useful means to make sure that

procurement priorities are well-aligned with goals and
objectives of the supply chain and of the overall organization.

n Also, reliance on a capable strategic sourcing process

facilitates the objective of achieving alignment and
collaboration among the supply chain and other areas of the
organization such as marketing, manufacturing, R&D, etc.

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Strategic sourcing

Chapter 4 Management of Business Logistics 9

Strategic sourcing

Chapter 4 Management of Business Logistics 10

Materials Management: Procurement
n Procurement Activities
n Identify or reevaluate needs

n Define and evaluate user requirements

n Decide whether to make or buy

n Identify the type of purchase

n Conduct a market analysis

n Identify all possible suppliers

n Prescreen all possible sources

n Evaluate the remaining supplier base

n Choose a supplier

n Receive delivery of the product or service

n Make a post purchase performance evaluation

Chapter 4 Management of Business Logistics 11

Figure 4-2 Procurement Process

Chapter 4 Management of Business Logistics 12

Materials Management: Importance of Item and
Service Purchased
n Products and services purchased by a company are
not all the same.

n Some are more important than others and require

greater procurement attention.

n 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.

Chapter 4 Management of Business Logistics 13

Materials Management:
Importance of Item and Service Purchased

n There are four possible combinations in

the quadrant techniques model:
n Generics --- low risk, low value

n Commodities --- low risk, high value

n Distinctives --- high risk, low value

n Criticals --- high risk, high value

n Figure 4-3 illustrates the relationships in

the quadrant technique model.

Chapter 4 Management of Business Logistics 14

Figure 4-3
Item Procurement Importance Matrix

Profit potential

Chapter 4 Management of Business Logistics 15

KRALJIC MATRIX

Chapter 4 Management of Business Logistics 16

Materials Management:
Managing the Procurement Process in 4 Steps

1. Determine the type of purchase

n Capital goods
n Rebuy

n Maintenance, repair, Operations (MRO)

Chapter 4 Management of Business Logistics 17

Materials Management: Managing
the Procurement Process in 4 Steps
2. Identify the type of purchase
n Determine the necessary levels of
investment of time and information.
n 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
n Do those activities that are necessary to
effectively make a purchase and satisfy the
user’s requirements.
4. Evaluate the effectiveness of the
procurement process
n Were the user’s needs satisfied?

n Was the investment necessary?

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Materials Management: Managing the
Procurement Process
n Supplier/Vendor Evaluation and Relationships

n Maintaining a healthy vendor relationship is a critical

part of a successful supply chain.

n Developing a true partnership relationship with a

firm’s vendors grows more important as the number
of vendors shrinks and/or the vendors are being
sought by other competing supply chains.

n TQM begins with the vendors.

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SUPPLY STRATEGIES
n Many Suppliers
n Few Suppliers
n Vertical integration
n Joint venture
n Keiretsu networks

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Strategic Sourcing Process

Chapter 4 Management of Business Logistics 22

Principles guiding strategic sourcing process
n Assess the total value: Emphasis must go beyond acquisition
cost and evaluate total cost of ownership and the value of the
supplier relationship.
n Develop individual sourcing strategies: Individual spend
categories need customized sourcing strategies.
n Evaluate internal requirements: Requirements and
specifications must be thoroughly assessed and rationalized as
part of the sourcing process.
n Focus on supplier economics: Suppliers’ economics must be
understood before identifying buying tactics such as volume
leveraging, price unbundling, or price adjustment mechanisms
n Drive continuous improvement: Strategic sourcing initiatives
should be a subset of the continuous improvement process for the
procurement and sourcing organizations.

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Supplier portfolio screening process

Chapter 4 Management of Business Logistics 24

Vendor Selection Criteria

n Vendor Selection Criteria

n Quality

n Reliability

n Capability

n Financial

n Miscellaneous Other Qualities

n Risk

n Sustainability

n Factor Importance Will Vary

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Supplier selection criteria

Chapter 4 Management of Business Logistics 26

Total landed cost (TLC)
TLC represents the sum of all costs associated with making and
delivering products to the point where they are needed

Chapter 4 Management of Business Logistics 27

Total landed cost (TLC)

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Hierarchy of Price Measurement
Approaches

Chapter 4 Management of Business Logistics 29

Materials Management: The
Special Case of Procurement Price
n Types of Costs
n Traditional basic input costs - primary

product price
n Direct transaction costs - all other related

costs of detecting and transmitting

information to suppliers (e.g., EDI)
n Supply relational costs - costs of maintaining

relationships with suppliers

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Figure 4-6
Total Procurement Price

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Materials Management: The Special
Case of Procurement Price
n Other types of Costs
n Operations/logistics costs

n Receiving and make-ready costs

n Lot size costs

n Production costs

n Other logistics costs affected by product’s

size, weight, density and shape

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Materials Management: Other
Materials Management Activities
n Warehousing n Transportation
n Type of facilities n Vendor control

required n Modal choice

n Production Planning n Rush shipments

and Control n Inspection
n Coordinating
n Damage claims
product supply with
product demand

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Materials Management: Other
Materials Management Activities
n Quality Control
n Quality standards

n did customer receive what was ordered?

n Quality implications

n GIGO concept

n Sample inspection

n statistical QC from vendor to assure 100%

quality

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Materials Management: Other
Materials Management Activities
n Salvage and Scrap Disposal
n Value of scrap may be income to the firm.

n Disposal must adhere to environmental

regulations.

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e-Sourcing and e-Procurement
n e-procurement and e-sourcing: refer to the use
of electronic capabilities to conduct activities
and processes relating to procurement and
sourcing.
n Figure 5.10 provides a number of common
functionalities that relate to e-procurement and
e-sourcing

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e-Sourcing and e-Procurement

Chapter 4 Management of Business Logistics 37

e-Sourcing and e-Procurement

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E-commerce Models
n Sell-side system
n Administered by the seller

n Usually free to the buyer

n Electronic marketplace
n Administered by a third party

n Collection of electronic catalogs

n One-stop sourcing for buyers

n Buy-side system
n Administered by the buyer

n Pre-approves vendor access

n Expensive and usually the domain of large companies

n On-line trading community

n Maintained by a third party

n Used by multiple buyers and sellers

Chapter 4 Management of Business Logistics 39

Summary
n Expertise in the areas of purchasing, procurement, and strategic
sourcing is essential to the success of supply chain management.
n Different procurement and sourcing strategies are related to the
risk and value or profit potential from needed products and
services.
n Keys to effective management of the procurement and sourcing
processes include determining the type of purchase, determining
the necessary levels of investment, performing the procurement
process, and evaluating the effectiveness of the process.
n A number of key factors should be considered in the supplier
selection and evaluation process.
n Understanding the concept of TLC will be a highly-valuable
element of the overall procurement process.
n E-sourcing and e-procurement practices and technologies are
helping to enhance the effectiveness and efficiency of traditional
buying processes
Chapter 4 Management of Business Logistics 40
End of Chapter 4 Slides
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Chapter 4 Management of Business Logistics 42