SCM – Unit - 3

Dr Rajesh Ranganathan
Professor
C.I.T
Topics of discussion

Procurement process
Sourcing
3PL & 4PL
Supplier selection & assessment
Order timing decisions
Forecast error distribution

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Evolution of purchasing

Early years 1850 – 1900(textile & Pennsylvania)

Purchasing fundamentals (00 – 39)(vital war 1 mtls)
War years (40 – 46)(purchasing in syllabi)
Quite years (47 – 60) (GE in purchasing)
Materials management age (60 – 70)(Vietnam war)
Global era (70 – 99)(International data transfer)
Integrated SCM (beyond 2000)

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Procurement process

Purchasing

Sourcing
Procurement

Traditional E-procurement

Payment
Receive
Order
Authorise
Select &
requistion

4
Procurement process

5
Procurement process

Balance in supply & demand

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Procurement process

Purchasing of goods

Direct
Indirect

Information visibility with supplier

Supplier capability to manufacturing

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Procurement process

high

Critical items Strategic

(long lead items (
times) electronic
items)
Critical

Bulk
General items purchase
(indirect items) (Chemical
packaging)

low high
Value / cost
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Purchase requisition
Purchase requisition flow
Purchase order

No existing supplier
Evaluate supplier
Purchase process
Receiving process
Request for quotation
Purchasing communication flow link
Procurement Process

Purchasing = Procurement
Outsourcing (operation by others)
Dell : Inhouse retailing
P&G : Outsource retailing
Motorola: Outsource in Latin America
America

Offshore (production)

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Sourcing

Value of Total cost in

SC profitability = The - bringing the product
Product to the customer

Outsourcing
is profitable

SC profitability = Value of the product – TC in

getting the product

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Sourcing

Supplier Supplier
Design Sourcing
Scoring & Selection & Procurement
Collaboration Planning
assessment Contract
& analysis
negotiation

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Sourcing
Supplier

Supplier Supplier
Design Sourcing
Scoring & Selection & Procurement
Collaboration Planning
assessment Contract
& analysis
negotiation

Spending
80% cost in Manufacturer pattern
Output
design

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Sourcing

Benefits of effective sourcing

- better economies of scale
- efficient design collaboration
- products easier to mfg & distribute
- improves co-ordination
- improves forecasting & planning
- firms can achieve lower purchase price

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Sourcing

Supplier Supplier
Design Sourcing
Scoring & Selection & Procurement
Collaboration Planning
assessment Contract
& analysis
negotiation

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Supplier scoring & assessment

Performance rating parameters

Replenishment lead time (higher LT higher inventory - frequency)
On time performance (LT variability)
Minimum lot size (cycle inventory)
Supply quality
Pricing terms
- before payment
- Qty discount
- Payment after delivery

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Supplier scoring & assessment

Inbound transportation cost

Supply flexibility
Information co-ordination capability (bullwhip effect)

Design collaboration
Exchange rates, tax & duties – currency
fluctuations
Supplier viability (Long term commitment).

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Inhouse or Outsource ?

Inhouse
Manufacture Outsource

SC profitability Risk involved in using

3rd party

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SC profitability increase using 3rd party

If they increase value for

customer
Decrease SC cost for the firm

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SC profitability increase using 3rd party

Factors
1. Capacity aggregation
Magna Steyr
BMW – X3
Mercedes – G class
Chrysler – Grand Cherokee

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SC profitability increase using 3rd party

Factors
2. Inventory aggregation

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SC profitability increase using 3rd party

Factors
3. Transport aggregation
Fedex
4. Transport aggregation by storage intermediatery

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SC profitability increase using 3rd party

Factors
5. Warehouse aggregation (safexpress from warehouse to retailers)
6. Procurement aggregation (small electronic companies)
7. Information aggregation (e-bags, venndigital)
8. Receivables aggregation (reverse logistics)
- 3G phones
- Dell laptops
- HP laptops
- iphones
9. Relationship aggregation (BEA)
10. Lower cost higher quality (low labour cost)
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Inhouse or Outsource ?

Inhouse
Manufacture Outsource

SC profitability Risk involved in using

3rd party

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Risk of using 3rd parties

Process is broken
Outsource a fnt & not in control – Fedex delivers not knowing about happenings

Under estimating the cost of co-ordination

Nike & i2 inventory $100 million 2000

reduced customer / supplier contact

loss of internal capability & 3rd party power
Leakage of sensitive data & information
Ineffective contracts

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Distribution

3PL
Fedex

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Distribution

4PL
“Menlo” for “Home life furnishings” retail chain

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Economic Ordering Quantity – Unit 2

Publication of
EOQ is the level of inventory that minimizes the total
International
inventory holding costs and ordering costs.
Journal on
Underlying Modeling
assumptions
• The
&ordering cost is constant.
Simulation
• The rate of demand is constant
• The lead time is fixed
• The purchase price of the item is constant i.e no discount is available
• The replenishment is made instantaneously, the whole batch is
delivered at once.

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Economic Ordering Quantity Unit 2

Cost Total cost

Publication of Holding cost
International
Journal on Modeling
& Simulation Order cost
Material cost

Lot size

Q = Lot or batch size

D = Annual demand of the product
S = Fixed cost per order
C = Cost per unit
h = holding cost per year as fraction of product cost
H (holding cost ) = hC 35
Economic Ordering Quantity Unit 2

Lot, or batch size: quantity that a supply chain stage

Publication
either produces or of
orders at a given time
CycleInternational
inventory: average inventory that builds up in the
supply chain because a supply chain stage either produces
Journal
or oninModeling
purchases lots that are larger than those demanded
by the&customer
Simulation
Cycle inventory = (Q*)/2 (depends directly on lot size)
Average flow time = Avg inventory / Avg flow rate
Average flow time from cycle inventory = (Q*)/(2D)

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Economic Ordering Quantity Unit 2

Publication of
H  hC
International
2 DS
Journal on Modeling
Q* 
& Simulation
H
DH
n* 
2S
Q* = EOQ,
n* = Optimal ordering frequency 37
Economic Ordering Quantity Unit 2

Publication of
Annual demand = D
International
Number of orders per year = D/Q
Journal on Modeling
Annual material cost = CD
& Simulation
Annual order cost = (D/Q*)S
Annual holding cost = (Q*/2)H = (Q*/2)hC
Total annual cost = TC = CD + (D/Q*)S +
(Q*/2)hC

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Order timing decisions

Publication of
International
Journal on Modeling
& Simulation

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Order timing decisions

Inventory levels are frequently monitored (assuming)

At ROP a replenishment order of fixed qty is issued
Fixing of ROP
- Demand rate
- LT
- Uncertainty in demand
- Management policy
Lack of uncertainty in demand & LT leads to no safety
stock

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Supplier selection & assessment

Self study topics

Probability of stockout criterion
Forecast error distribution
Time period correction factor
– Vollmann – pg 156

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Supplier selection & assessment

Self study topics

Auctions – Negotiations
Contracts
- Buy back contract
- Revenue contract
- Quantity & flexibility contract

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Deciding ROP

Qty 5 Units

Time

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Deciding ROP

ROP
Qty 5 Units ?

Time

Always greater than average demand

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Deciding ROP

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Determining safety stock

The probability of SO in any given

replenishment order cycle
The desired level of customer service in
satisfying product demand
- Avg no of stock outs in a replenishment

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Time period correction factor

Variation in demand
Variation in LT’s

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Forecast error distribution

Mean Absolute Deviation (MAD)

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