Supply Chain Management: A Logistics Perspective

11th Edition
C. John Langley Jr., Robert A. Novack,
Brian J. Gibson, John J. Coyle
 EMBA 19th Batch (Campus), Group 6

Sr. Name Roll no.

1 Ma Phyo Pa Pa Han 7

2 Mg Than Htaike 10

3 Mg Kyaw Zeyar Htun 13

4 Mg Myo Kyaw Swar Htwe 14

5 Ma Khaing Zar Lin 19

6 Ma May Thet Lwin 21

7 Ma Mya Sandar 44

8 Ma Khaing Sandar Htun 50

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Chapter 5: Sourcing Materials and Services

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Understand the role and nature of purchasing, procurement, and strategic
sourcing in a supply chain context.

Consider the importance to the sourcing and procurement processes of types of

items and services purchased.

Understand the strategic sourcing process.

Recognize principles and approaches for the effective management of sourcing

and procurement activities.

Appreciate the importance of companies having effective relationships with

suppliers and for developing meaningful processes for evaluating suppliers.

Examine the concept of total landed cost (TLC) and its value to the sourcing
process.

Be aware of contemporary advances in the areas of e-Sourcing and E-Procurement,

and appreciate the roles played by various types of e-Commerce models.
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5-1 Introduction for (LO-1)

• Logistics and supply chain managers are constantly seeking ways to

extract more value from their purchasing and procurement operations
due to factors like customer demands, global competition, and intricate
supply chains.
• The traditional focus on low-cost purchasing is no longer sufficient.
• Consequently, organizations are giving significant attention to the areas
of purchasing, procurement, and strategic sourcing as they aim to
enhance the overall efficiency and effectiveness of their supply chains

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5-1 Introduction (Cont.,)
• The terms purchasing, procurement, and strategic sourcing are often used
interchangeably, but there are distinctions among them. These definitions
aim to clarify the similarities, differences, and connections between these
terms.
• Purchasing : It involves the transactional aspect of acquiring products and
services within an organization. This function manages the procedures and
standards for acquiring goods, typically through processes like placing and
processing purchase orders. While it's an essential part of the sourcing
process, it primarily focuses on the actual buying activities.
• Procurement : It encompasses a wide range of processes related to acquiring
goods and services needed across the supply chain and the entire
organization. These processes include activities like sourcing
products/services, selecting suppliers, negotiating prices, managing
contracts, overseeing transactions, and evaluating supplier performance. In
contrast to purchasing, procurement has a broader scope and involves
various strategic and operational functions related to the acquisition of
resources. 6
5-1 Introduction (Cont.,)

• Strategic sourcing is a comprehensive process that extends

beyond procurement. Its primary purpose is to ensure that
procurement objectives align effectively with the goals and
objectives of both the supply chain and the overall organization.
A key benefit of a well-executed strategic sourcing process is
that it facilitates alignment and collaboration among different
areas of the organization, including marketing, manufacturing,
research and development, and more.
• Strategic sourcing involves a wide range of activities and
considerations that contribute to its comprehensive nature.

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5-1 Introduction (Cont.,)

• Figure 5.1 The main point is that strategic sourcing is a

multifaceted process that plays a vital role in achieving
organizational objectives and fostering collaboration among
various departments.

1. Consolidation and Leveraging of Purchasing Power

2. Emphasis on Value:
3. More Strategic Supplier Relationships
4. Attention Directed to Process Improvement
5. Enhanced Teamwork and Professionalism
6. Integration with Supply Chain Perspective

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Figure 5.2 illustrates the strategic evolution of the sourcing process,
showing a progression from traditional/tactical sourcing to strategic
sourcing and ultimately to e-enabled procurement and the integration of
sourcing with the supply chain.

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5-2 Types and Importance of Items and Services Acquired for (LO-2)

Products and services acquired by a company vary in importance and, as a result,

require different approaches to purchasing, procurement, and sourcing. The relative
importance of these items can be assessed using the widely used quadrant technique,
which considers two criteria: value (profit potential) and risk (uniqueness).
Value Criterion: This criterion evaluates how product or service features can enhance
profits for the final product and maintain a competitive advantage in the marketplace.
For example, a faster computer chip or a user-friendly operating system can make a
computer more desirable, leading to increased demand and higher profits.
Risk Criterion: Risk assesses the likelihood of failure, non-acceptance in the
marketplace, delivery issues, and the availability of capable suppliers. A product or
service with higher risk poses a greater potential negative impact on the company. For
instance, a failure in a computer chip would render the computer inoperable and lead
to negative market consequences, making it a high-risk item.
The quadrant technique helps supply chain managers assess the importance of each
purchased item based on its value and risk. This assessment guides procurement
strategies, with items of higher value and risk receiving more attention and resources.
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Figure 5.3 illustrates the value-risk quadrant, which categorizes the
importance of items based on their value and risk.

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5-2 Types and Importance of Items and Services Acquired (Cont.,)

There are the categories:

Generics: These are items of low risk and low value. They typically don't have a significant
impact on the final product or the company's profitability. The focus for generics is on
streamlining procurement processes to reduce administrative costs.
Commodities: Commodities are items that have low risk but potentially high value. While they
are fundamental to the company's product, they are not unique, which means there are multiple
sources of supply. Price is a significant distinguishing factor for commodities, and procurement
strategies for these items focus on reducing costs related to freight and inventory.
Distinctives: Distinctives are items of high risk but low value. They have the potential to disrupt
production and increase procurement costs. They may have limited suppliers or long lead times.
The strategic focus for distinctives is standardization to reduce uniqueness and convert them
into generics.
Criticals: Criticals are items of high risk and high value. They provide a competitive advantage
to the final product. Procurement strategies for criticals involve innovation, technology
adoption, simplification, close supplier relations, and value-added alterations to enhance their
market value.
The value-risk quadrant categorizes items as generics, commodities, distinctives, or criticals
based on their importance, guiding procurement strategies based on the specific characteristics
of each category. 12
Figure 5.4 illustrates three primary types of buy situations that
organizations commonly encounter in procurement:

1.Capital Goods: This category involves the procurement of capital goods, which
represent longer-term investments for the organization. These purchases require
significant financial planning and consideration due to their substantial impact on
the company's operations. Capital goods can include machinery, equipment, and
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other assets that are essential for production or business activities.
5-2 Types and Importance of Items and Services Acquired (Cont.,)

Rebuys: Rebuys refer to repeat purchases of products or services. Within the rebuy category,
there are two subcategories:
Standard Rebuys: These are purchases that are identical to historical purchases.
Organizations have established suppliers and well-defined specifications for these items,
making the procurement process relatively routine.
Modified Rebuys: Modified rebuys involve purchases that are variations or modifications of
previous procurement. While they may not be entirely new, they require some changes or
adjustments to specifications, suppliers, or terms. The procurement process for modified
rebuys is typically more complex than standard rebuys.
MRO (Maintenance, Repair, and Operating) Items: MRO items are essential for the
continuous operation of the company and its supply chain activities. These items are needed
to maintain and repair equipment, facilities, and infrastructure, as well as to support daily
operational functions. While MRO items may not be directly linked to the core product or
service offerings, they are critical for ensuring uninterrupted business operations.
Organizations encounter various buy situations in procurement, ranging from long-term
investments in capital goods to repeat purchases (standard or modified rebuys) and the
procurement of MRO items that sustain ongoing operations and supply chain activities.
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5-3 Strategic Sourcing Process for (LO-3)
Strategic sourcing is a comprehensive and multifaceted process that goes beyond
traditional procurement or purchasing activities. Figure 5.5 outlines one approach to the
strategic sourcing process known as the Managing Strategic Sourcing Process (MSSP).

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5-3 Strategic Sourcing Process (Cont.,)

The strategic sourcing process involves several key steps:

1.Step 1: Develop Strategic Plan: Begin by creating a formal plan for the design and
implementation of the strategic sourcing process. Establish a cross-functional planning
group, identify key team members, and achieve consensus on the scope and design of
the initiative.
2.Step 2: Understand Spend: Develop a baseline understanding of what products and
services are being procured, their purposes, financial implications, and conduct a
formal "spend analysis" to understand spending by supplier, category, and internal
user. Refine sourcing needs and establish measurable criteria. Consider "make vs. buy"
decisions.
3.Step 3: Evaluate Supply Sources: Identify potential sources of supply through a
comprehensive market analysis, considering factors like market type and supplier
competitiveness. Identify all possible suppliers and pre-qualify them based on
capabilities. Simplify purchasing complexity and rationalize products.
4.Step 4: Finalize Sourcing Strategy: Develop a sourcing strategy that defines the
parameters of the process, including supplier selection criteria. The strategy should
consider quality, reliability, risk, capability, financial stability, desirable qualities, and
sustainability.
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5-3 Strategic Sourcing Process (Cont.,)
Step 5: Implement Sourcing Strategy: Evaluate the remaining suppliers following RFI and RFP
processes. Award contracts through competitive bidding or negotiations. Select suppliers based
on selection criteria. Determine the structure and mechanics of the buyer-supplier relationship.
Step 6: Onboarding and Transitioning: Finalize contractual agreements, plan the transition
process, and ensure product or service delivery. Create and communicate management processes
for new suppliers. Pay attention to onboarding and transitioning as it's a crucial step.
Step 7: Collaborative Process Improvement: Establish procedures for regular feedback and
communication between suppliers and customers. Evaluate supplier performance and identify
areas for improvement. Analyze net savings and compare them with goals and objectives.
Throughout these steps, it's important to note that various internal and external influences may
impact the effectiveness of each activity, including changes in marketing needs, manufacturing
processes, financial stability of suppliers, and governmental influences.
These steps collectively form a comprehensive approach to strategic sourcing, allowing
organizations to make informed decisions and achieve value in their procurement processes.

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5-3 Strategic Sourcing Process (Cont.,)
These steps are guided by five core principles driving strategic sourcing:
Assess the Total Value: Go beyond acquisition cost to evaluate the total cost of ownership
and the value of supplier relationships.
Develop Individual Sourcing Strategies: Customize sourcing strategies for different spend
categories.
Evaluate Internal Requirements: Thoroughly assess and rationalize requirements and
specifications as part of the sourcing process.
Focus on Supplier Economics: Understand suppliers' economics before applying buying
tactics such as volume leveraging or price adjustment mechanisms.
Drive Continuous Improvement: Integrate strategic sourcing initiatives into the continuous
improvement process for procurement and sourcing organizations.
Strategic sourcing is a comprehensive process involving various elements, with the MSSP
model providing a structured approach. Five core principles guide this process, emphasizing
the importance of assessing total value, customizing sourcing strategies, evaluating internal
requirements, understanding supplier economics, and continuously improving sourcing
practices.

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 Supplier Relationships
 Total landed cost (TLC)
 E-sourcing and E-procurement
 E-commerce models
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 (LO-4) Recognize principles and approaches for the effective
management of sourcing and procurement activities.

Effective management of sourcing and procurement activities is crucial

for organizations to acquire the necessary goods and services efficiently
while optimizing costs and ensuring the quality of products or services.

This learning objective aims to help individuals understand the

fundamental principles and strategies that contribute to successful
sourcing and procurement management.

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5-4 “Supplier Evaluation and Relationships”
Many successful companies have recognized the key role that sourcing and
procurement play in supply chain management and that supplier
relationships are a vital part of successful procurement strategies.

• Supplier Significance: “Good suppliers do not grow on trees”

• Building Strong Relationships: McDonald’s, Coca-Cola, Johnson
& Johnson, and BASF
• Regular Evaluation
• Corrective Actions
• Competitive Advantage Alignment

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 (LO-5) Appreciate the importance of companies having
effective relationships with suppliers and developing
meaningful processes for evaluating suppliers.

Emphasizes the significance of companies fostering strong relationships

with their suppliers.

It underscores the importance of establishing effective evaluation

processes to ensure suppliers meet expectations and contribute to the
company's success.

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5-4a “Effective Management of Strategic Suppliers”
To enhance the benefits and improve relationships with strategic suppliers are
listed below:
• Importance of Relationship
 Consider the supplier's perspective
 Seek meaningful feedback
• Effective Communications
 Communication methods
 Use modern technologies
• Business Reviews:
 Quarterly Business Reviews (QBR): These are not just routine meetings;
they are opportunities for customers and suppliers to connect, communicate,
and collaborate effectively.
• Closeness of Relationships
 Encourage close relationships for improved results but maintain objectivity.
Avoid "groupthink" that hinders creativity and individual responsibility.
• Strategic Plan: Govern the relationship with a meaningful and understandable
strategic plan, comfortable for both parties, leading to superior. 25
 (LO-6) Examine the concept of total landed cost (TLC) and
its value to the sourcing process.

This objective is about understanding the total cost involved in getting a

product from a supplier to your location.

It's not just about the purchase price; it includes things like
transportation, customs, and taxes.

Knowing the total landed cost helps in making smart decisions when
choosing where to source products and can save money in the long run.

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5-5 “Total Landed Cost (TLC)”
Total Landed Cost (TLC) is the total expense of getting a product from the
supplier to your hands, including not just the purchase price but also
shipping, taxes, customs fees, and other related costs.
Figure 5.8 Total Landed Cost (TLC)

Tangible,
Purchase/ Visible
Acquisition Cost
Cost

Life Cycle Costs

Inventory Costs
Other Logistics
Costs
Additional
Strategic Sourcing Costs Relevant
Costs of Costs
Disposition
Quality Costs
Management Costs
Technology Costs
Cost Impacts on
Other Functional Transaction Costs
Areas

Source: C. John Langley Jr., Ph.D., Penn State University.

It's crucial for businesses to consider TLC when making procurement

decisions to understand the full cost of their products. 27
5-5 “Total Landed Cost (TLC)”

Figure 5.9 Cost Comparisons of Example Sourcing Options

Destination Country—Switzerland Country of Origin

Price Components—All Prices in Euros China Vietnam EU

Net purchasing price for a specific volume of the

10,000 8,000 12,000
product from three different suppliers

Total transportation cost to Switzerland—Ocean

freight from China/Vietnam—Road freight within 4,000 6,000 1,200
Europe

Customs according to trade agreement 1,000 1,500 n.a.

VAT (Switzerland 7.6%) based on value of goods 1,140 1,178 1,003

Total Landed Cost 16,140 16,678 14,203

Source: C. John Langley Jr., Ph.D., Penn State University.

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 (LO-7) Be aware of contemporary advances in the areas of e-
Sourcing and E-Procurement, and appreciate the roles
played by various types of e-Commerce models.
Keeping up-to-date with the latest developments and technologies related
to digital sourcing (e-sourcing) and procurement (e-procurement).

Recognizing how various e-commerce models are used in the context of

sourcing and procurement.

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5-6 “E-Sourcing and E-Procurement”
The purposes of this discussion, e-Procurement and e-Sourcing will refer to
the use of electronic capabilities to conduct activities and processes relating
to procurement and sourcing.

• Digital Transformation: The impact of technology and the internet on

business.
• Consumer Trends: Growing reliance on electronic means for shopping,
tracking deliveries, and more.
• B2B E-Commerce Growth: Forrester Research predicts U.S. B2B e-
commerce to reach $1.8 trillion in 2023.
• China's Digital Powerhouse: Alibaba and JD.com leading in retail
innovation.
• Global E-Commerce Dominance: According to Euro monitor
International, E-commerce to become the world's largest retail channel
by 2022.

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5-6 E-commerce as percentage of total retail sales worldwide
from 2015 to 2027 (Cont.,)

E-commerce as share of total retail sales worldwide 2015-2027

Published by Daniela Coppola, Aug 29, 2023
Internet sales have played an increasingly significant role in retailing. In 2022, e-commerce
accounted for nearly 19 percent of retail sales worldwide. Forecasts indicate that by 2027, the
online segment will make up close to a quarter of total global retail sales.
Retail e-commerce
Online shopping has grown steadily in popularity in recent years. In 2021, global online retail
sales amounted to almost five trillion U.S. dollars, a figure expected to exceed seven trillion U.S.
dollars by 2025. 31
Sources by: https://www.statista.com/
Figure 5.10 “E-Sourcing and E-Procurement Functionality”
Functionalities Descriptions

Industry Analysis and Supplier Provides useful information on supplier industries and facilitates development of candidate
Identification supplier lists for specific commodities, geographies, and product types.
Analytical Tools Supplier selection, bid, spend, and performance management analytics.

Management of RFI/RFP Processes Electronic support for the preparation, submission, and evaluation of these repetitive
processes.

Process Automation: Provides needed automation of purchase order and of item selection from central resources
such as online catalogs.
Online Negotiations Supports real-time sourcing, e.g., through online bidding or reverse auction.

Collaboration Tools: Used to support collaborative sourcing with other functions and divisions in same
organization, with other organizations, and interaction and electronic connections with
suppliers.

Logistics Procurement Responsibility for e-Procurement of logistics services such as transportation, forwarding, etc.
Utilizes a growing number of tools and technologies, e.g., online bidding, to facilitate and
improve efficiency of logistics procurement processes.
Project Management Standardization and improvements in cost, quality, and time.

Knowledge Management Provides centralized, computerized availability of past, current, and future information
relating to purchasing and sourcing activities. Serves as knowledge resource for those who
are involved in e-Sourcing and e-Procurement.
Contract Management Fulfilling needs relating to legal contracts or agreements with suppliers.

Source: C. John Langley Jr., Ph.D., Penn State University. 32

Figure 5.11 “Advantages and Concerns of Electronic
Procurement”
This discusses various solutions and advantages related to electronic
procurement (e-Commerce) and highlights some concerns.

Figure 5.11 Advantages and Concerns of Electronic Procurement

 Advantages
 Lower operating costs
 Improve procurement and sourcing efficiency
 Reduce procurement prices
 Improve communications
 Easier access to more suppliers
 Concerns
 Cybersecurity
 Lack of face-to-face contact between the buyer and seller
 Technology-related concerns

Source: C. John Langley Jr., Ph.D., Penn State University.

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5-7 “E-Commerce Models”
E-Commerce models encompass various ways businesses buy and sell
online. These models have revolutionized the way we conduct transactions
and procure goods and services.
 Sell-Side vs. Buy-Side:
 Sell-Side: Businesses sell products or services online to other companies or consumers.
 Buy-Side: Buyers use e-Procurement systems to interact electronically with sellers.

 B2B and B2C:

B2B (Business to Business): Businesses sell to other businesses online.
B2C (Business to Consumer): Businesses sell directly to consumers online.

 Online Marketplace: Multiple third parties provide product or service info, and
transactions are handled by the marketplace operator. Examples include Amazon, eBay, and
Expedia.

 Online Trading Community: Provides a structured way for buyers and sellers to trade, barter,
or sell goods and services. Examples include eBay and Craigslist.

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5-7 “Visual Aids”

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 SUMMARY
 Expertise is Essential: Success in supply chain management relies on expertise in
purchasing, procurement, and strategic sourcing.
 Strategic Classification: Items vary in importance; classify them based on risk and value
into four categories: Generics (low risk, low value), Commodities (low risk, high value),
Distinctives (high risk, low value), and Criticals (high risk, high value).
 MSSP Focus Areas: Master Supplier Service Providers (MSSP) emphasize strategic
planning, understanding spend, evaluating supply sources, finalizing sourcing strategy,
implementing it, transitioning, onboarding, and collaborative process improvement.
 Effective Management: provide insights into sourcing and procurement management,
emphasizing the significance of supplier relationships.
 Total Landed Cost (TLC): The concept of Total Landed Cost (TLC) beyond the purchase
price, including shipping and taxes.
 e-Sourcing & e-Procurement: Discusses contemporary advances in e-sourcing, e-
procurement, and e-commerce models.
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Thank you for your attention!

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