Purchasing &

Supply Chain
Management
7th edition

Chapter 17
Purchasing Services

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 Learning Objectives
By the end of this chapter, you should be able to:
• Understand the financial and operating impact of indirect spending on
company performance
• Understand the fundamentals of transportation management and how
these services can be sourced efficiently and effectively
• Understand the fundamentals and growing role of third-party logistics
providers in effective and efficient supply chain management practices
• Discuss best practices in managing indirect spending and purchasing of
services

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 Chapter Overview
• Transportation management
• Outsourcing logistics requirements to third-party logistics providers
• Purchasing services and indirect items
• Sourcing professional services

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 Transportation Management
• Inbound logistics
• Intraorganizational movements
• Outbound logistics
• Recovery and recycling
− a.k.a. reverse logistics

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 Logistics Transportation Links

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 Inbound Logistics
• All inbound shipments moving from supplier to buyer facilities
• Often included in sourcing negotiations
• Can be substantial part of contractual terms

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 Intraorganizational Movement
• Movement of materials between production facilities
• Movement in and out of intermediary storage facilities
• May be moved via private or leased fleet
• Increasingly reduced using JIT and lean production techniques

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 Outbound Logistics
• Link between organization and its customers
− Historically called physical distribution
• Since deregulation, increasing involvement by supply management

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 Reverse Logistics
• Designing and operating sustainable supply chains
• May also include shipment of repairable items for refurbishment
• Often not a priority
• Includes ancillary support materials
• Recovery, reselling, remanufacturing, and/or recycling of …
− Obsolete products
− Repairable items
− Used packaging
− Reusable shipping containers
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 Role of Core Competencies
• Outsource non-core competencies to expert third-party logistics providers
(3PLs)
− Transportation
− Logistics services
− Warehousing

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 A New Role for Supply Management (1 of 2)
• More active in sourcing most, if not all, transportation services, not just
inbound
• Carrier selection
• 3PL provider selection
• Negotiate long-term freight agreements
• Evaluate carrier performance

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 A New Role for Supply Management (2 of 2)
• Arrange pickups and deliveries
• Processing damage and loss claims
• Tracing and expediting shipments
• Coordinating inbound, interplant, and outbound movements
• Auditing freight bills for accuracy
• Determining plant and warehouse locations

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 Potential Candidates for Outsourcing
• Contract management • Supplier and carrier
• Load and routing management
optimization • Reverse logistics
• Mode selection • Loss and damage claims
• Shipment execution management
• Carrier payment • Service level reporting
• Yard and dock management • Carrier and 3PL performance
management
• Tracking and tracing services

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Transportation Strategy Development

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 Key Transportation Performance Variables
Measure Description
In addition to fees charged, includes extra inventory,
Total cost warehousing, buffer stock, and international fees (broker’s fees,
customs, etc.)
Measured as time from when shipment is released at supplier’s
Speed
facility to time of receipt at buyer’s receiving dock
Also know as fill rate; refers to ability to deliver on time; i.e.,
Reliability
percentage of deliveries made within specified time window
Refers to ability of carrier to move material, including special
Capability
materials, hazardous materials, etc.
Refers to whether carrier is capable of picking up shipment and
Accessibility
delivering it door-to-door

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 Transportation Modes
• Motor carrier
• Rail carrier
• Air carrier
• Water carrier
• Pipeline carrier
• Intermodal carrier

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 Relative Ranking of Modes
Lowest
Mode per-unit Speed Reliability Capability Accessibility
cost
Air 5 1 4 3 3

Rail 3 3 3 1 2

Pipeline 1 4 1 5 5

Motor 4 2 2 2 1
Inland
water 2 5 5 4 4

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 Carrier Selection
• Common carrier
• Contract carrier
• Private carrier
• Exempt carrier

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 Common Carrier
• Must serve the general public without discrimination based on published
rates for specific goods
− Fair and nondiscriminatory manner
• Must offer reasonable rates

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 Contract Carrier
• Does not hold itself out to serve the general public
• Serves its shipper(s) under specific, negotiated contract terms
− Also known as dedicated carrier
• Typically offers higher levels of service because of contractual
relationship

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 Private Carrier
• Manufacturer or distributor that operates own transportation equipment
− May be either owned or leased
• Offers greater control of freight
• May be utilized for daily “milk runs” in JIT environment
• Transportation may not be a core competency

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 Exempt Carrier
• Is free from any type of economic regulation by Surface Transportation
Board (STB)
• Hauls special types of commodities
• Assures supply of readily available transportation in markets where only
one-way traffic exists

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 Current Transportation Issues
• Supply chain security
• Infrastructure condition
− Larger vessels and vehicles
− Disrepair
− Air traffic control
• Traffic congestion

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 Outsourcing Logistics Services
• Select providers
• Gain access to critical and timely data
• Develop systems visibility to material shipments
• Develop closer relationships with fewer providers
• Establish companywide contracts

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 Select Third Party Logistics Providers
• Customs brokers • Local sourcing and
purchasing
• Freight brokers (air and
surface) • International trade
management and
• Warehousing and DC
compliance
operations
• Global transportation
• Packaging and export
optimization
documentation
• Supply chain planning
• Delivery services
• Export packaging services

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 An Effective Approach to 3PL Selection
• Plan
• Select
• Implement
• Improve
• Partner

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 Plan
• Define specific logistics service requirements and how they will be
measured and evaluated
• Confirm selection process
• Involve key stakeholders to ensure internal buy-in
• Remove barriers to success

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 Select
• Target best-in-class logistics service providers
• Select 3PL, consolidator, or contractor
• Negotiate mutually beneficial agreement

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 Implement
• Share supply chain information to deliver superior value
• Build relationships
• Work jointly to resolve start-up issues

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 Improve
• Exchange performance measurements to identify improvement
opportunities
• Encourage cross-organization training and project activities

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 Partner
• Develop supply chain alliances to agree to tradeoffs and share risks
• Involve 3PL partners in joint strategic planning and decision making

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 3PL Advantages
• Economies of scale and increased flexibility
• Improve service performance levels
• Release capital from sale of assets
• Release running costs
• Concentrate on core business activities

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 3PL Disadvantages
• Relinquish control, ownership, and expertise
• Loss of integration between sales and supply
• Changeover costs and operational problems
• Loss of dedicated in-house management staff
• Sacrifice key service differentiation

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 Types of 3PL Services

• Merchandising • Finished goods pull expediting

• Marshalling • Inventory control
• Postponement • Vendor-managed inventory
• Installation test fit • Export packaging
• Cross-docking • Spares (returns and repairs)
• Transport • Reverse flow

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 Full-Service Providers
• Pick up and deliver goods
• Consolidate shipments
• Provide simplified billing
• Ship JIT from local storage points
• Handle complex overseas shipments
• Coordinate shipments with other carriers or modes
• Configure final products for direct shipment to end customers

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 Automating the Requisition/Sourcing
Process
• Electronic requisitioning
• Automated routing, approval, and purchase order or release creation
• Automated checking of receipts against invoice and P.O. or release
• Electronic transfer of funds

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 Standardization
• E-catalogs
− Limits access to non-approved sources
• Allows aggregation of indirect spend across the organization
− Volume discounts
• All off-catalog purchases must be reviewed and approved by executive-
level manager

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 External Methods of Managing
• Reverse auctions
• Purchasing consortia
• Supply management outsourcing

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 Reverse Auctions
• Allows buyers and suppliers to communicate in real time from anywhere
in the world via Internet
• Can easily generate savings of 10 – 20%
• Some buyers question the technique’s sustainability over time
− Overuse may negatively impact buyer-supplier relationships

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 Purchasing Consortia
• Pooled buying power from different organizations to create volume
leverage and price reduction
• Now source of revenue by companies offering these services
• Challenge is determining what purchases can be leveraged
• Best operated by a third party entity

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 Detailed Commodity Coding
• Need for accurate data coding to identify actual spend levels
• May be coded into different expense categories
− Sometimes coded to a generic account, such as “Freight In” or
“Freight Out”
• Don’t rely on supplier coding accuracy
• Multiple ship to and bill to addresses

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 Sourcing Professional Services (1 of 3)
• Rationalizing and optimizing supply base
• Working closely with key suppliers
• Leveraging volume across business units
• Implementing better control systems
• Developing cost savings ideas
• Determine the baseline spend

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 Sourcing Professional Services (2 of 3)
• Have a clearly defined scope
• Write good specifications
• Move to a centralized procurement structure
• Develop a centralized professional services database
• Develop sound procedure for evaluation and selection of consultants

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 Sourcing Professional Services (3 of 3)
• Optimize supply base
• Develop standardized contract
• Monitor results
• Develop policy compliance

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 Clearly Defined Scope (1 of 2)
• Avoids misunderstandings
• Provides detailed guidance to provider
− Project deliverables
− Performance metrics
− Milestones and deadlines
− Budget
• Defines rewards and penalties
• Distributes risk between parties

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 Clearly Defined Scope (2 of 2)
• How will scope changes be handled?
− Renegotiate if changes are too significant
• Includes nondisclosure agreement
• Inserts language as to whom is supposed to accomplish the work
• Who has operational control over project?

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 Writing Good Specifications
• Purchasing bears the responsibility of reviewing and verifying the product
and service descriptions it receives
• Minimize the likelihood of frequent and costly change orders
− Suppliers often make their profit on change orders
− Initial bid may be artificially low
• Final approved specifications dictate other ancillary costs required to
support or compete the project or contract

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 Limitations of Specifications
• Some requirements are difficult to adequately define
• Custom specifications may not be better than existing industry standards
• Elaborate and restrictive specifications may discourage potential service
providers from placing bids
• Minimum specifications tend to become the maximum performance
actually delivered

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 Purposes of Specifications
• Communicate what to buy
• Communicate specific requirements and/or uses to prospective providers
• Create standards for inspection/evaluation, acceptance, and quality
acceptance
• Balance user requirements, provider expectations, desired product/
service performance, and allowable costs
• Set the basis for determining total cost of ownership

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 Consultant Evaluation and Selection
• Supplier quality
• Cost competitiveness
• Potential delivery performance
• Technological capability
• Often best performed by cross-functional teams

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 Develop Standardized Contracts
• Use of contract template to ensure that all major legal issues are
addressed
− May be online
• Scope and SOW must be clearly defined
• Performance metrics
• Incentive systems
− Reward and penalty clauses
• Clause for renegotiation or termination

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 Monitor Results
• Parameters
− Quality
− Cost management
− Delivery
− Technical support
− Wavelength
• Develop feedback mechanism
• Update databases as required

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 Develop Policy Compliance
• Requisite buy-in from internal users
• Need for comprehensive and exhaustive policies and guidance
• Maintenance of best practices
• Ensure information systems and knowledge databases are kept up-to-date

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 Service Supply Chain Challenges

• Imprecise and unclear specifications

− Poorly thought-out and superficially-defined performance and outcome
expectations
• How to satisfactorily determine project progress
• Scope creep
• Not defining what constitutes “completion” or “level of effort”

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