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Chapter 13

Procurement and Supply Management

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.

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.
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Inbound Logistics along the Supply Chain




Each firm in the food system supply chain graphic in Figure 13-1 has important differences in their inbound logistics systems.
     

Mining firm Steel firm Container firm Food firm Retail outlet Individual firm complexity
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Figure 13-1 A Food System Supply Chain

Table 13-1 Industry Supply Chain Logistics Emphasis

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
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Materials Management: Procurement




Importance  Contributes to the competitive advantage of the firm  Significant portion of the logistics costs

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

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

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Figure 13-2 Procurement Process

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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.

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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 13-3 illustrates the relationships in the quadrant technique model.
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Figure 13-3 Item Procurement Importance Matrix

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Materials Management: Managing the Procurement Process in 4 Steps




1. Determine the type of purchase


New  Straight rebuy  Modified rebuy


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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.

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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?

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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.
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Materials Management: Managing the Procurement Process




Vendor Selection Criteria  Quality  Reliability  Capability  Financial  Miscellaneous Other Qualities  Vendor Location  Factor Importance Will Vary
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Figure 13-4 Overview of Vendor Selection Criteria

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Materials Management: The


Special Case of Procurement Price


Sources of Price  Commodity markets  Price lists  Price quotations  Negotiation

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Figure 13-5 Hierarchy of Price Measurement Approaches

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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
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Figure 13-6 Total Procurement Price

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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?

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Figure 13-7 Overview of Production Planning and Control

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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

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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

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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
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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.

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Electronic Procurement


Business-to business (B2B) purchases are estimated to be $1.3 to $2.0 trillion by 20036. 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.
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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

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Figure 13-8 Advantages of Electronic Procurement

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Electronic Procurement


Advantages of E-commerce outlined in Figure 13-8. Disadvantages  Security of electronic messages  Lack of face-to-face contact  Other technological concerns
 

Standard protocols System reliability


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Four Basic Types of E-commerce Models7




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

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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
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Chapter 13: Summary and Review Questions


Students should review their knowledge of the chapter by checking out the Summary and Study Questions for Chapter 13.
This is the last slide for Chapter 13
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End of Chapter 13 Slides Procurement and Supply Management


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