1. CHAPTER 4: Procurement

2. Overview of procurement
Procurement objectives
Procurement strategy
Supplier selection and assessment
Logistical interfaces with procurement

3. Procurement is now a strategic activity of the firm
Several factors have elevated the importance of procurement to the firm
Purchased goods and services are among the largest cost elements for most firms
The growing emphasis of outsourcing has expanded the supply base of organizations
This added complexity requires more management attention on the organizational interfaces with suppliers 2 3

4. Purchasing perspective
Purchasing was historically perceived as just a buying function for manufacturing and repair materials and supplies
Purchasing agent tried to get lowest price possible for acceptable quality
Transactional focus led to getting the best possible “deal” today
Did not focus on future transactions
No concept of Supply Chain
Purchasing seldom looked beyond the first-tier supplier
Purchasing simply responded to demands of production group

5. Purchasing perspective
Procurement is an organizational capability that ensures the firm is positioned to implement its strategies with support from its supply base
Procurement looks up and down the entire supply chain for impacts and opportunities
Goods and service account for 55 cents of every sales dollars
Focuses on building relationships with suppliers and downstream customers
Involvement with outsourcing includes more than just purchasing raw materials and parts
Also includes finding alternate sources for manufactured products or services to help manage demand

6. Procurement focuses on several issues related to the firms’ supply base
Ensuring continuous supply
Minimizing inventory investment
Quality improvement of supply
Supplier development
Supplier selection
Building supplier relationships
Supplier continuous improvement
Lowest total cost of ownership

7. Figure 4.1 - Major categories for the components of total cost of ownership

8. Procurement strategies
Insourcing vs. outsourcing
Make vs. buy decision
Alternative procurement strategies
User buy
Volume consolidation
Reducing total number of suppliers while minimizing risk
Supplier operational integration
Building partnerships
Sharing information and knowledge
Identifying linked processes and shared opportunities for improvement
Value management extends beyond buyer-seller operations
Involving the supplier early in product design
Reducing complexity
Value engineering

9. Savings potential from volume consolidation
Purchases average 55% of every sales dollar
Cost savings estimated between 5% to 15% of purchases
Potential savings is $5.5 million annually for a company with revenues of $100 million

10. Supplier operational integration
Primary objective of operational integration is to cut waste, reduce cost, and develop a relationship that allows both buyer and seller to achieve mutual improvements
Integration can take many forms
Buyer providing detailed sales information to supplier
Buyers and suppliers working together to redesign linked processes
Eliminating duplicated activities performed by both the buyer and supplier
Can provide incremental savings of 5% to 25% over the benefits of volume consolidation

11. Value management through early supplier involvement in product design
Figure 4.2 Flexibility and Cost of Design Changes

12. Procurement strategy portfolio
Routine purchases
Bottleneck purchases
Leverage purchases
Critical purchases

13. Figure 4.3 Procurement strategy matrix
High Level of Supply Risk
Bottleneck Purchases
Multiple Suppliers
Critical Purchases
Integrated with Suppliers
Low Level of Supply Risk
Routine Purchases
Reduce Buying Effort
Leverage Purchases
Concentrate Purchases
Low Value to Firm
High Value to Firm
Adapted from Robert Monczka et al., Purchasing and Supply Chain Management, 4th Edition (Mason, OH: South-Western Cengage Learning, 2009), P. 211.

14. Supplier selection and assessment
Supplier audits
Supplier development
Monitoring performance
Supplier certification
E-commerce and procurement
Electronic data interchange (EDI)
Internet

15. E-Commerce and procurement
Electronic Data Interchange (EDI) is the electronic transmission of data between a firm and its suppliers
Shares information and knowledge such as order entry, planning/scheduling, tracking, delivery, billing and payment
Internet-based communications offer several opportunities for making product information available while overcoming compatibility issues between computer systems
Electronic catalogs allow rapid access to product info, specifications, pricing and ordering
Buying exchanges allow sellers or buyers of specific goods or services to find each other on a common web site

16. Figure 4.4 Example supplier scorecard
Category
Weight
Score (100 maximum points)
Weighted Score
Correct quantities
.15 95
14.25
No defective items
.10
100
10.00
All shipments on time 80
12.00
Correct documentation
9.50
No damage
.05 90
4.50
Flexibility
8.00
Responsiveness
.20
18.00
Communication
13.50
TOTAL
1.00
89.75

17. Purchase requirement segmentation
Pareto Principle is a small percentage of items account for a large percentage of the dollars spent
For example, “A” items in ABC inventory
Purchasing processes should be tailored to the value and/or criticality of the materials needed
Segmented approach is used to prioritize resources for purchasing
The most procurement effort goes to the most critical supplies/suppliers

18. Logistics interfaces with procurement
Just-in-Time
JIT delivery
More frequent delivery of smaller quantities
Close cooperation and communication
JIT II
Integration of suppliers into manufacturing processes
Procurement of logistics services
Performance-based logistics

19. Performance based logistics interface
Initiated by US Department of Defense to purchase performance outcomes instead of individual transactions defined by product specifications
Government specifies desired outcomes and lets suppliers determine the best way to meet those requirements
Currently limited to government purchasing but business organizations are expected to adopt the practice