Chapter 41 Procurement and Supply Management

Chapter 4Management of Business Logistics, 7 th Ed.2 Learning Objectives Understand the role and nature of procurement and supply management in a supply chain context. Explain the different types of inbound systems. Discuss the major materials management activities.

Chapter 4Management of Business Logistics, 7 th Ed.3 Learning Objectives Understand the procurement process. Explain the risk/value technique for determining purchased item importance. Identify the four steps necessary for effective procurement. Explain the criteria for evaluating vendors. Examine the role of E-commerce in the procurement process.

Chapter 4Management of Business Logistics, 7 th Ed.4 Inbound Logistics along the Supply Chain Each firm in the food system supply chain graphic in Figure 4-1 has important differences in their inbound logistics systems. Mining firm Steel firm Container firm Food firm Retail outlet Individual firm complexity

Chapter 4Management of Business Logistics, 7 th Ed.5 Figure 4-1 A Food System Supply Chain

Chapter 4Management of Business Logistics, 7 th Ed.6 Table 4-1 Industry Supply Chain Logistics Emphasis

Chapter 4Management of Business Logistics, 7 th Ed.7 Materials Management Definition - Materials management is the planning and control of the flow of materials that are part of the inbound logistics system. Materials Management Activities Procurement Importance of Item and Service Purchased The Special Case of Procurement Price Other Materials Management Activities

Chapter 4Management of Business Logistics, 7 th Ed.8 Materials Management: Procurement Importance Contributes to the competitive advantage of the firm Significant portion of the logistics costs

Chapter 4Management of Business Logistics, 7 th Ed.9 Materials Management: Procurement Definition of Procurement Activities Identify or reevaluate needs Define and evaluate user requirements Decide whether to make or buy Identify the type of purchase Conduct a market analysis Identify all possible suppliers

Chapter 4Management of Business Logistics, 7 th Ed.10 Materials Management: Procurement Definition of Procurement Activities… Prescreen all possible sources Evaluate the remaining supplier base Choose a supplier Receive delivery of the product or service Make a post purchase performance evaluation

Chapter 4Management of Business Logistics, 7 th Ed.11 Figure 4-2 Procurement Process

Chapter 4Management of Business Logistics, 7 th Ed.12 Materials Management: Importance of Item and Service Purchased Products and services purchased by a company are not all the same. Some are more important than others and require greater procurement attention. 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 4Management of Business Logistics, 7 th Ed.13 Materials Management: Importance of Item and Service Purchased There are four possible combinations in the quadrant techniques model: Generics --- low risk, low value Commodities --- low risk, high value Distinctives --- high risk, low value Criticals --- high risk, high value Figure 4-3 illustrates the relationships in the quadrant technique model.

Chapter 4Management of Business Logistics, 7 th Ed.14 Figure 4-3 Item Procurement Importance Matrix

Chapter 4Management of Business Logistics, 7 th Ed.15 Materials Management: Managing the Procurement Process in 4 Steps 1. Determine the type of purchase New Straight rebuy Modified rebuy

Chapter 4Management of Business Logistics, 7 th Ed.16 Materials Management: Managing the Procurement Process in 4 Steps 2. Identify the type of purchase Determine the necessary levels of investment of time and information. 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.

Chapter 4Management of Business Logistics, 7 th Ed.17 Materials Management: Managing the Procurement Process in 4 Steps 3. Perform the procurement process 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 Were the user’s needs satisfied? Was the investment necessary?

Chapter 4Management of Business Logistics, 7 th Ed.18 Materials Management: Managing the Procurement Process Supplier/Vendor Evaluation and Relationships Maintaining a healthy vendor relationship is a critical part of a successful supply chain. 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. TQM begins with the vendors.

Chapter 4Management of Business Logistics, 7 th Ed.19 Materials Management: Managing the Procurement Process Vendor Selection Criteria Quality Reliability Capability Financial Miscellaneous Other Qualities Vendor Location Factor Importance Will Vary

Chapter 4Management of Business Logistics, 7 th Ed.20 Figure 4-4 Overview of Vendor Selection Criteria

Chapter 4Management of Business Logistics, 7 th Ed.21 Materials Management: The Special Case of Procurement Price Sources of Price Commodity markets Price lists Price quotations Negotiation

Chapter 4Management of Business Logistics, 7 th Ed.22 Figure 4-5 Hierarchy of Price Measurement Approaches

Chapter 4Management of Business Logistics, 7 th Ed.23 Materials Management: The Special Case of Procurement Price Types of Costs Traditional basic input costs - primary product price Direct transaction costs - all other related costs of detecting and transmitting information to suppliers (e.g., EDI) Supply relational costs - costs of maintaining relationships with suppliers

Chapter 4Management of Business Logistics, 7 th Ed.24 Figure 4-6 Total Procurement Price

Chapter 4Management of Business Logistics, 7 th Ed.25 Materials Management: The Special Case of Procurement Price Other types of Costs Landed costs - actual transport costs + sales terms Quality costs/factors - do the goods conform to standard?

Chapter 4Management of Business Logistics, 7 th Ed.26 Figure 4-7 Overview of Production Planning and Control

Chapter 4Management of Business Logistics, 7 th Ed.27 Materials Management: The Special Case of Procurement Price Other types of Costs Operations/logistics costs Receiving and make-ready costs Lot size costs Production costs Other logistics costs affected by product’s size, weight, density and shape

Chapter 4Management of Business Logistics, 7 th Ed.28 Materials Management: Other Materials Management Activities Warehousing Type of facilities required Production Planning and Control Coordinating product supply with product demand Transportation Vendor control Modal choice Rush shipments Inspection Damage claims

Chapter 4Management of Business Logistics, 7 th Ed.29 Materials Management: Other Materials Management Activities Quality Control Quality standards did customer receive what was ordered? Quality implications GIGO concept Sample inspection statistical QC from vendor to assure 100% quality

Chapter 4Management of Business Logistics, 7 th Ed.30 Materials Management: Other Materials Management Activities Salvage and Scrap Disposal Value of scrap may be income to the firm. Disposal must adhere to environmental regulations.

Chapter 4Management of Business Logistics, 7 th Ed.31 Electronic Procurement Business-to business (B2B) purchases are estimated to be $1.3 to $2.0 trillion by Former uses of electronic data interchange (EDI) were costly and required special technology to implement have given way to the publicly available Internet. This has opened the door to increased applications of E-commerce techniques to procurement.

Chapter 4Management of Business Logistics, 7 th Ed.32 Electronic Procurement Common uses of E-commerce Research vendor and product information Electronic check of available stock Price negotiation Order products or services Check on the status of an order Issue invoice and receive payment

Chapter 4Management of Business Logistics, 7 th Ed.33 Figure 4-8 Advantages of Electronic Procurement

Chapter 4Management of Business Logistics, 7 th Ed.34 Electronic Procurement Advantages of E-commerce outlined in Figure 4-8. Disadvantages Security of electronic messages Lack of face-to-face contact Other technological concerns Standard protocols System reliability

Chapter 4Management of Business Logistics, 7 th Ed.35 Four Basic Types of E-commerce Models 7 Sell-side system Administered by the seller Usually free to the buyer Electronic marketplace Administered by a third party Collection of electronic catalogs One-stop sourcing for buyers

Chapter 4Management of Business Logistics, 7 th Ed.36 Types of E-commerce Models Buy-side system Administered by the buyer Pre-approves vendor access Expensive and usually the domain of large companies On-line trading community Maintained by a third party Used by multiple buyers and sellers

Chapter 437 Chapter 4: Summary and Review Questions Students should review their knowledge of the chapter by checking out the Summary and Study Questions for Chapter 4. This is the last slide for Chapter 4

Chapter 438 End of Chapter 4 Slides Procurement and Supply Management