Procurement Candidate Manual SS Online

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Strategic S U P P LY C H A I N M A N A G E M E N T
Leadership Program
Module
Procurement and Supply Management
C A N D I D AT E M A N U A L : S E L F - S T U D Y
Professionals in Supply Chain Management
Enhanced. Exceptional.
P u r c h a s i n g M a n a g e m e n t A s s o c i a t i o n o f C a n a d a
Module Two
Strategic Supply Chain Management Leadership Program Procurement and Supply Management
Strategic Supply Chain Management Leadership Program
Module Two
Procurement and Supply

Management
Candidate Manual
(Self Study)
Copyright © 2007 Purchasing Management Association of Canada. (Rel. 1) Revised October 2009.
No part of this material in this manual may be reproduced without the prior written consent of the
Purchasing Management Association of Canada. 777 Bay Street, Suite 2701, P.O. Box 112, Toronto,
Ontario M5G 2C8 Tel: (416) 977-7111 Fax: (416) 977-8886 Web Site: www.pmac.ca.
Use of this material is restricted to PMAC and its Provincial/Territorial Institutes for the express purpose of
delivering the Strategic Supply Chain Management Leadership Program. No other use is authorized, express
or implied. This material must be used in its entirety.
© Purchasing Management Association of Canada i

Module Two
Table of Contents
Information and Overview………………………………………………….…IO – 1

General Information…………………………………………………….. …IO – 2
Module Overview……………………………………………………….. …IO – 5
Module Materials………………………………………………………........IO – 8
Module Readings……………………………………………………….... ...IO – 9
Session and Reading Summary…………………………………………. …IO – 14
Candidate Evaluation……………………………………………………......IO – 17
Module Evaluation………………………………………………………. .....IO – 24
Session One – Tactical and Strategic Procurement…………………..…………S1 – 1
Session Two – Procurement Processes…………………………….……..……..S2 – 1
Session Three – Competitive Bidding and Negotiation…………..………..……S3 – 1
Session Four – Procurement and Supply Management Organization……..…….S4 – 1
Session Five – Make or Buy…………………………………………..………....S5 – 1
Session Six – Price and Cost Analysis………………………………….………...S6 – 1
Session Seven – Quality and Inventory…………………………………………..S7 – 1
Session Eight – Supplier Selection…………………………….…………………S8 – 1
Session Nine – Supplier Development and Certification…………..…………….S9 – 1
Session Ten – Services Procurement…………………………………………….S10 – 1
Session Eleven – E-Procurement………………………………………………...S11 – 1
Session Twelve – Involving Users and Suppliers………………………………..S12 – 1
Session Thirteen – Module Ending Examination………………………………...S13 – 1
Appendix: Fabritek, 1992 Sample Case and Report (see News section of community)
Appendix: PowerPoint Slides
© Purchasing Management Association of Canada ii

Introduction and
Overview
¾ General Information
¾ Module Overview
¾ Module Readings
¾ Schedule & Reading Summary
¾ Candidate Evaluation
¾ Module Evaluation
© Purchasing Management Association of Canada IO - 1

Module Two
General Information
About the The Strategic Supply Chain Management Leadership Program is PMAC’s C.P.P.
Program Accreditation Program that has been redesigned and enhanced for 2007. This new
Program is competency based and takes an integrated approach, shifting the focus of
the profession from purchasing to strategic supply chain management in order to
meet the evolving needs of the marketplace.
The new C.P.P Accreditation Program is the most comprehensive program available
in Canada, balanced to deliver advanced supply chain management knowledge and
high-level business skills. The education component of the Program consists of eight
modules which cover the foundational knowledge of supply chain management and
six interactive workshops which address higher-level business skills.
The Program is designed so that learning can be applied immediately in the

workplace. This allows candidates to demonstrate their increased knowledge and
value to their organizations as they progress through the program.
Program As stated above, there are eight modules which will be delivered over a 36-month
Modules period. There are four modules that are 13 sessions in duration and four modules that
are seven sessions in duration. This is the second module of the Program –
Procurement and Supply Management, a 13-session module. Below is a listing of all
the modules so that candidates can see how they are progressing in the program and
what they have to look forward to in the coming months.
Module Title
13-Session Modules
1 Supply Chain Management
2 Procurement and Supply Management
3 Logistics and Transportation
4 Operations and Process Management
7-Session Modules
5 Knowledge Management
6 Global Sourcing
7 Supply Chain Management for the Public Sector
8 Supply Chain Management for Services, Capital Goods and Major Projects

Module Two
General Information, continued
Program PMAC’s philosophy for all of its modules and interactive workshops is that candidates
Philosophy learn by doing. Candidates who work thoroughly through the material to develop a
good understanding of concepts and principles presented, and complete all the assigned
readings, framework questions and assignments should have no trouble successfully
completing the Program.
Memorization of the materials is not as important as is:
• careful preparation
• being able to fully grasp the ideas and concepts presented, and
• knowing where to go for the appropriate reference material.
It is expected that candidates will be able to apply the appropriate concepts or
techniques to the correct problem or decision at the right time.
Workload As a general rule, candidates should expect to spend an average of 10 hours of

preparation time for each session. Some sessions will require less work, while others
may require more.
Please note that the amount of time spent on each session will be influenced by present
knowledge and experience, as well such factors as reading skills and comprehension
skills.
Schedule This module has twelve sessions and a final exam session.
Candidates will receive a session schedule upon enrollment in the module. The session
schedule includes the following information:
- Assignment due dates
- Assignment submission instructions
- Information on the final exam
- Information on marking
Candidates who have not received this information should contact their local provincial
or territorial institute.

Module Two
General Information, continued
Candidate In order to be successful in this module it is important for all candidates to do the
Responsibilities required work for each session. Candidates who do all the required work are prepared
for writing the case report in the module exam.
Many different assignments and learning activities are provided in this module in order
to increase and reinforce transfer of knowledge. To ensure success candidates are
expected to:
• Do all the required readings for each session prior to completing the assignments
• Read and prepare the assignments for submission, following the instructions provided
• Through assignments, contribute relevant and timely information that will enhance
learning
• Assume a strategic point-of-view when doing all readings and assignments

Module Two
Module Overview
Introduction Procurement is the process of acquiring goods and services by organizations.

Traditionally procurement has not been thought of in a strategic sense. As the share of
production that is purchased goods has risen, so has the importance of procurement.
Procurement is now one of the key strategic elements of an organization. The goal of
this module is for candidates to better understand the strategic role of procurement, as
well as tactical approaches that support the strategy.
About this The focus of this module is on matters of strategic and tactical importance in
Module procurement. The module starts with a discussion of strategic and tactical procurement,
and goes on to consider key processes that support an organization’s strategic
procurement goals. A comprehensive procurement strategy backed up by solid
procurement tactics supports an organization’s goal of providing customers with highly
valued products. Specific tactical matters are considered along the way.
The sessions in this module are inter-related. Tactical and strategic purchasing delves
into procurement processes (session 2), which leads to an examination of relationships
and teams (session 4), and an exploration of the core competencies of the organization
including make or buy decisions (session 5), price and cost analysis (session 6), supplier
selection (session 8), and e-procurement (session 11). The cases examined in this
module further apply the concepts and tools learned throughout the module.
The module has a reading list with diverse but important topics. The articles provided
are often theoretical, and explain complex methodologies. It is important when reading
to focus on how the methodologies presented are applied. Avoid spending too much
time on the theories themselves. Focus on the introductions, management implications
and conclusions in the articles. Information gathered in readings can be applied to the
activities and case analyses.

Module Two
Module Overview, continued
Module Upon completion of this module candidates should be able to:

Objectives
• Analyze case studies, and write case reports.
• Understand the elements of procurement strategy.
• Develop procurement strategy.
• Develop and apply tactics that support procurement strategy including those
related to processes, organization, supplier selection and relationships, decision
making, and technology.
• Analyze, or direct others in the analysis of make or buy decisions, price, cost,
quality, inventory, and total cost of ownership.
• Apply, or direct others in the application of tools to evaluate suppliers, and

produce statements of work.

Module Two
Module Overview, continued
Module and This module consists of thirteen sessions. Each session’s workload is equivalent to that
Session of a three-hour instructor-led class. The module objectives are covered in sessions one
Organization to twelve and the module ending examination is administered during session thirteen (a
four-hour exam). This self-study module contains the equivalent workload and content
as the instructor-led thirteen-week module.
Candidates will receive the following materials:
1. Candidate Manual (this manual): the guide for the module
2. Readings and Cases Manual: articles and cases for this module
3. Session Schedule: assignment due dates and instructions for submission
Each session of this manual will contain the following sections as required:
• Agenda – a guide to each session’s format and content
• What You Already Know - a brief statement linking information in the session to any
previous session (or to the candidate’s experience).
• Overview – a brief description of the contents of the session
• Objectives – a description of what candidates are expected to learn from the session
• Required Reading – reading assignments for the session
• Case Preparation – indicates the cases to be prepared for written reports
• Framework Questions – questions for framing each case analysis and report
• Exercises – instructions for preparing and submitting exercises
• Self-Assessment Activities – exercises to reinforce knowledge
• Session Notes – notes on the specific concepts or issues covered in the session
Learning Candidates will achieve learning in this module through the following learning
Activities activities:
• Readings
• Case study preparation
• Written case reports
• Exercises
• Self-assessment activities

Module Two
Module Materials
Module Materials included in this manual:

Materials
The Introduction and Overview – contain the following:
− General information and module overview
− Information on readings and materials
− Information on assignments
− Guidelines for candidate evaluation
Each Session contains the following –

− Agenda for the session (the order of material and assignments in the session)
− Readings, cases and assignment instructions
− Session notes on the content and purpose of the session
The Appendices contains –

− Sample case and sample case report: Fabritek, 1992
− Printouts of the PowerPoint slides (from the Instructor-led version of the module)
Materials included in the Readings and Cases manual:

− Articles and cases
Information included in the Session Schedule:

− Assignment due dates
− Assignment submission instructions
− Information on the final exam
− Information on marking
Materials available on the Internet:

− PMAC Code of Ethics (www.pmac.ca)

Module Two
Module Readings
Module The readings for this module are drawn from business, professional and academic
Readings publications. Each reading is assigned a letter which is used in the Session Schedule
and Reading Summary (see the following section) for your easy reference. They are as
follows:
A. Burt, Dobler and Starling (2003). World Class Supply Management, 7th edition,
McGraw-Hill Irwin, New York.
A1. Pages 239-246, 250-251

A2. Pages 41-49
A3. Pages 104-117
A4. Pages 304-315
A5. Pages 405-407, 409-411, 413-419, 426-430
A6. Pages 147-155
B. Leenders, Johnson, Flynn and Fearon, (2006) Purchasing and Supply

Management, 13th Edition, McGraw-Hill Irwin, New York. Pages 59-77.
C. Ritzman, Krajewski, Malhotra and Klassen (2007). Foundations of Operations

Management, 2nd Canadian Edition, Pearson Canada Inc., Toronto. p.283-290, 305-6.
D. Cavinato, Joseph, L. Fitting Purchasing to the Five Stages of Strategic

Management. European Journal of Purchasing and Supply. #5, Issue 2. 1999. Pages
75-83.
E. Heath, Stanley. Tackling Spend Analysis. Contract Management. January 2006.

Pages 40-45.
F. Zsidisin, George A. A Grounded Definition of Supply Risk. Journal of

Purchasing and Supply Management. 2003. Pages 217-224.
G. Wheeler, Michael (date). Negotiation Analysis: An Introduction. Harvard

Business School. 9-801-156.
H. Johnson and Leenders. The Supply Organizational Structure Dilemma. Journal

of Supply Management, Summer 2001. Pages 4-11.
I. Prahalad, C. K. and Hamel, Gary. The Core Competence of the Corporation.

Harvard Business Review. May-June, 1990.
J. Ellram, Lisa. Total Cost of Ownership: Elements and Implementation. National

Association of Purchasing Management. October, 1993. Pages 3-11.

Module Two
Module Readings, continued
Module K. Stuart, F. Ian and Mueller, P. Jr. Total Quality Management and Supplier
Readings, Partnerships: A Case Study. International Journal of Purchasing and Materials
continued Management. Winter, 1994, Pages 14-20.
L. Genna, Albert. How do you find the right quality wavelength? Purchasing. Jan
16, 1997. Pages 45-46.
M. Wilson, Elizabeth J. The Relative Importance of Supplier Selection: Review

and Update. International Journal of Purchasing and Materials Management.
Summer, 1994. Pages 35-41.
N. Smytka, Daniel L and Clemens, Michael W. Total Cost Supplier Selection: A

Case Study. International Journal of Purchasing and Materials Management. Winter,
1993, Pages 42-49.
O. Cruz, Clarissa. Purchasing Pros Search for the Perfect Number of Suppliers.
Purchasing. July 11, 1996, Pages 28 and 29.
P. Carter, Phillip L., Monczka, Robert M., and Mosconi, Trish. Strategic
Performance Measurement for Purchasing and Supply. CAPS: Center for
Strategic Supply Research, 2005, Pages 10-27.
Q. Krause, Daniel D. Supplier Development: Current Practices and Outcomes.

International Journal of Purchasing and Materials Management. Spring, 1997. Pages
12-19.
R. Lockhart, Marsetta and Ettkin, Lawrence. Vendor Certification: Seven Steps to a

Better Product. Production and Inventory Management Journal. First Quarter 1993.
Pages 65-69.
S. Park, Hong Y., Reddy, S., C. Shin, G.-C. and Eckerle, C., Impact of Supplier
Certification Program on U.S. Firms. European Journal of Purchasing and Supply
Management. Volume 2, 1996. Pages 107-118.
T. Sharland, Alex, Eltantawy, Reham, A. and Giunipero, Larry C. The Impact of

Cycle Time on Supplier Performance and Subsequent Performance Outcomes.
Journal of Supply Chain Management. Summer, 2003. Pages 4-12.
U. Ellram, Lisa M., Tate, Wendy L. and Billington, Carey. Understanding and
Managing the Services Supply Chain. Journal of Supply Management. Nov. 2004
Pages 17-32.

Module Two
Module V. Smeltzer, Larry R. And Ogden, Jeffrey A. Purchasing Professionals Perceived

Readings, Differences Between Purchasing Materials and Purchasing Services. Journal of
continued Supply Chain Management, Winter 2002. Pages 54-70.
W. Service Level Agreements: Guidelines for Public Sector Organizations. New

South Wales Premier’s Department, 1999.
X. Porter, Anne Millen. A purchasing manager’s guide to the e-procurement

galaxy. Purchasing. September 21, 2000. Pages S72 to S88.
Y. Anonymous Author. Consultant’s Top 12 e-procurement tips. Purchasing.

November 16, 2000. Pages 79 to 88.
Z. Clark, Chris. Five Auction Steps. Purchasing. June 21, 2001. Pages 24 to 26.
AA. Manciagli, Dana. A Supplier’s View. Purchasing June 21, 2001. Page 26.
AB. Atkinson, William. IT Firm uses reverse auction for big contract labour buy.
Purchasing, December 22, 2000. Pages 97 to 99.
AC. Palmer. Richard J., Green, Leland D., and Ventura, Marie T. Are Corporate
Procurement Cards for You? Management Accounting. September 1996. Pages 22-
27.
AD. Carbone, James. To save more distribute more cards study says. Purchasing.
May 18, 2006. Page 29.
AE. Gibley, Tracy. A guide to purchasing card success: overcoming 8 key

hurdles. Treasury Management Association Journal. July/August 1999. Pages 47-50.
AF. Waller, M, Johnson, M.E., and Davis.D., Vendor Managed Inventory in Retail
Supply Chains, Journal of Business Logistics, #20, 1999. Page 183-187.
AG. Dixon, Lance. JIT II: A New Approach to Supply Management. Center for
Quality Management Journal. August 1992. Pages 15-19.
AH. Pragman, Claudia, H. JIT II: A Purchasing Concept For Reducing Lead
Times IN Time-Based Competition. Business Horizons. July-August 1996. Pages
54-58.

Module Two
Module
Readings, Case Studies
continued
• Blozis Company. Purchasing Agents Association of Connecticut. Inc.
(Session 2)
• De Havilland Incorporated. Richard Ivey School of Business. #9A95B037.

(Session 3)
• Frich Turbo Engine Company. Harbridge House Inc. (Session 6)
• Placido Engine Company. Burt Dobler and Starling. World Class Supply
Management. (Session 7)
• Platinum Box. Satyatas Consulting. (Session 8)
• Fisher and Paykel Limited. Richard Ivey School of Business #9A97D015.

(Session 9)
• Boeing Australia Limited: Assessing the Merits of Implementing a

Sophisticated e-Procurement System. #HKU271. Centre for Asian Business
Cases. (Session 11)

Module Two
Supplementary These are a selection of additional references on business mathematics that candidates
Readings and may find useful. These are not required readings for the module. Note that Wikipedia
Websites provides information on various subjects. The web links below are suggested reading
if you feel you need to review business mathematics and accounting. Also provided
are some sites that describe some of the terminology and tools used in this module.
• Financial Analysis definitions and terms:

http://en.wikipedia.org/wiki/Financial_analysis
• Financial Statements definition and terms:

http://en.wikipedia.org/wiki/Financial_statements
• Holding Costs definition:

http://en.wikipedia.org/wiki/Holding_cost
• Inventory definitions and terms:

http://en.wikipedia.org/wiki/Inventory (then go to Business Inventory)
• Return on Investment definition:

http://en.wikipedia.org/wiki/Return_on_Investment
• Strategic Profit Model Tool (a walk-through of the SPM):

http://www.ism.ws/ismapps/cavinato/strat1.cfm
• Cycle Time Reduction: a Worksheet for the Construction Industry

http://www.toolbase.org/PDF/BestPractices/day_worth_worksheet.pdf

Module Two
Session and Reading Summary
Introduction The table below provides a summary of all the readings, topics and activities in this
module for easy reference. A more detailed listing of the readings can be found on the
preceding pages.
Session Topics and Activities Readings
Tactical and Strategic Procurement

• Procurement and Supply Management
• Strategic Stages of Purchasing
• Tactical and Strategic Procurement
1 • Spend Analysis / Procurement Risk D,E,F
• Cavinato’s 5 Stages of Strategic Management
• Self-assessment activity: (not marked) Spend Analysis
• Individual exercise: (marked – 5%) Goods Spend Analysis at Your
Organization
Procurement Processes
• Steps in the Procurement Process
2 • Importance of Description of Needs & Specifications B, A1
• Types of Specifications & Specification Development
• Potential Problems
• Individual Written Case Report: (marked – 5%) Blozis Company
Competitive Bidding and Negotiation

• Factors related to choice of competitive bidding
• Types of bids
3 • Factors related to choice of negotiation. G
• Objectives of negotiation & steps in negotiation
• Individual Written Case Report: (marked – 10%) De Havilland Inc.:
Applying Negotiation Analysis
Procurement and Supply Management Organization
• Internal procurement relationships
• Financial leverage effect
A2,
• Cross functional teams
4 H,
• Organizing - centralized, decentralized and hybrid
A3
• Self-assessment activity: (not marked) Financial Leverage Effect
• Individual exercise: (marked - 5%) Centralization versus
Decentralization

Module Two
Session and Reading Summary, continued

Make or Buy
• Make or buy at the strategic and tactical level
A4,
5 • Total cost of ownership: elements, benefits and implementation
I, J
• Individual Written Case Report: (marked – 5%) Make or Buy and
Total Cost of Ownership: Happyland Construction
Price and Cost Analysis

• What is the Right Price?
• Price Assessment
• Market Conditions - Procurement A5
6
• Leverage / Cost Analysis / Types of Costs / Profit
• Learning Curves
• Individual Written Case Report: (marked 5%) Frich Turbo Engine
Co. & Price Analysis
Quality and Inventory

• Factors Affecting Long Term Quality
• Total Quality Management
• Quality Training for Procurement Staff
• Purposes of Inventory A6,
7 • Forecasting Demand C, K, L
• Inventory Models & Inventory Relationships
• Self-assessment Activity: (not marked) Placido Engine Company
• Individual exercise: (marked – 5%) ISO 9001:2000 and Your
Organization
Supplier Selection
• Sourcing: Finding Suppliers
• Weighted Evaluation Systems & Product Attribute Considerations
• Total Cost Approach
8 M, N, O
• Single versus Multiple Sourcing & The Perfect Number of Suppliers
• Individual exercise: (marked – 5%) Un-weighted Supplier
Evaluation Matrix: Platinum Box
• Individual Written Case Report: (marked – 5%) Platinum Box

Module Two
Session and Reading Summary, continued

Supplier Development and Certification
• Procurement performance monitoring
• Approaches to supplier development
• Objectives of supplier certification & Benefits of certification P,Q,R,
9
• Steps in supplier certification S,T
• Product development cycle times and supplier performance
• Individual exercise: (marked – 5%) Supplier Certification
• Self-assessment activity: (not marked) Fisher and Paykel Ltd.
Services Procurement
• Services are different
• Procurement involvement: Services are the same
• Services spend analysis
• Specification: Statements of Work & Service Level
10 U,V,W
Agreements
• Individual exercise: (marked – 5%) Services Spend Analysis
for Your Organization
• Individual exercise: (marked – 5%) Services Procurement –
Statement of Work
e-procurement
• Forms of e-procurement
• Pros and cons of e-procurement X,Y,Z,
11 • e-procurement knowledge areas / Implementing e-procurement AA, AB,
• Reverse auctions AC
• Individual Written Case Report: (marked – 10%) Boeing
Australia Limited
Involving Users and Suppliers

• P-Cards: Benefits
• P- Cards: Considerations in Implementation AD, AE,
12
• Vendor ( Supplier) Managed Inventory AF,AG,AH
• Just in Time II
• Wrap up
Module Ending Examination

13
• Case Analysis and Written Case Report (marked – 25%)

Module Two
Candidate Evaluation
Introduction Candidates will be evaluated on individual performance using a variety of methods.

These include exercises, activities, written case reports and a module ending
examination. Below is a breakdown of the mark allocation, as well as a description of
each evaluation method.
Mark The following table shows the allocation of marks for the different methods of
Allocation evaluation used in this module.
Individual
Exercises (7) 35%
Written Case Reports (6) 40%
Module Ending Examination 25%
Individual Total 100%
Exercises There are a total of seven marked exercises. These exercises are in various forms.
Generally, the exercises require candidates to apply the concepts and tools learned in
the session to their own organizations. Each of the marked exercises will be worth 5
percent of the candidate’s total mark.
The seven marked individual exercises are:
1. Goods Spend Analysis (session 1)

2. Centralization versus Decentralization (session 4)
3. ISO 9001:2000 and Your Organization (session 7)
4. Un-weighted Supplier Evaluation Matrix: Platinum Box (session 8)
5. Supplier Certification (session 9)
6. Services Spend Analysis for Your Organization (session 10)
7. Services Procurement: Statement of Work (session 10)
Please see the Exercise section of each session for detailed exercise instructions.
Candidates are provided with a separate session schedule with assignment due dates
upon course enrolment. This schedule will indicate when each exercise is due.

Module Two
Candidate Evaluation, continued
Case There are six cases to prepare as written case reports.

Preparation
The following are quick tips for reading case studies prior to writing case analyses:
1. Read the opening and closing paragraphs to identify issue(s) and challenges.
2. Examine tables and figures in the exhibits to determine what information is
useful in the decision-making process.
3. Examine the headings in the case to determine what information is available
for analysis.
4. Review the framework questions provided in each session of this module.
5. Read the first sentence of each paragraph, scanning for decisions made and
alternatives available.
6. Read closely, highlight issues, and make notes to gain a full understanding
of the case.
7. Decide what you would do if you were the decision maker in the case.
Written Case The six cases to be submitted as written case reports are:
Reports: an
Introduction 1. Blozis Company (session 2, worth 5%)
2. De Havilland Inc.: Applying Negotiation Analysis (session 3, worth 10%)
3. Make or Buy and Total Cost of Ownership: Happyland Construction
(session 5, worth 5%)
4. Frich Turbo Engine Co. & Price Analysis (session 6, worth 5%)
5. Platinum Box (session 8, worth 5%)
6. Boeing Australia Limited (session 11, worth 10%)
For specific instructions on each case, refer to the session in which the case report
occurs. Candidates will be evaluated on their ability to analyze and present information
according to the Written Case Report Guidelines (see next section).
When writing the paper connecting threads between thoughts must be present. For
example issues, analysis, recommendations and implementation must flow from each
other. Ideally all recommendation(s) will fall in line with the identified strategy. The
main recommendation(s) should be aimed at fixing the system not the symptoms.
The following section outlines the requirements for a case report. For further reference,
A sample case, Fabritek, 1992, and a sample case report marking sheet have been
provided in the Appendix for your reference. This case represents an example of how a
response will be graded by applying the marking structure, it’s is not a sample of a
model response.

Module Two
Written Case In general, the objectives of a case analysis are:

Reports: an • to discover the issues in the case
Introduction • to determine the criteria for making a decision
(continued) • to analyze the options available (if applicable)
• to decide the best plan of action
• to present your findings in a written report
Each of the cases present a procurement situation in which a decision must be made in a
particular context, and in light of a number of tradeoffs and alternatives. While there are
no right answers to a case, there are definite approaches that address the issues and
recognize the trade-offs involved.
For each of the cases there will be framework questions. These questions aid in
discovering the important aspects of the case, and guide the preparation of the written
case report. Candidates should be prepared to address these questions in the written
report itself. It is important for the candidate to adopt the role of decision maker, and to
address the real issues: "What should be done and why?", and “How do I plan to resolve
the situation?”
Candidates are provided with a separate session schedule with assignment due dates
upon course enrolment. This schedule will indicate when each case report is due.

Module Two
Written Case The written case reports should follow these guidelines:
Reports
Audience: You will normally be writing your report to a specific person. Assume this
person is already familiar with the facts of the case. Do not simply repeat the facts.
Rather, use them, as required, to support your position.
Style: Your report must be typed and double spaced. It must have at least 2.5 cm
margins on all edges; and, it must be printed on white paper, complete with page
numbers. Write in complete sentences. Do not use point form, except when providing a
coherent list in a wider context. Resist the temptation to use too many new "tools" (e.g.,
clip art, colour printing). Black-on-white is all that is required.
Font: The minimum acceptable font is 12-point for the report and 10-point for exhibits.
Length: You are limited to a maximum of 1500 words; this does not include the title
page, executive summary, key assumptions, or exhibits. You may have a maximum of
three pages of exhibits.
Major Components: The major components of your report should contain all of the
elements associated with this structure but do not necessarily have to follow the exact
format :
Executive Summary
I. Process Elements
II. List of issues with impact analysis
III. Environmental and Root Cause Analysis
IV. Alternatives or Options
V. Recommendation(s) and Implementation
VI. Monitor and Control
VII. Judgement and Integration
VIII. Written Communication: Format, Language and Style
b. Exhibits and/or Appendixes (if applicable)
Title Page: This is a separate page that contains the name of the case, the module title,
your marker’s name, your name and candidate number, and the date you submitted the
report.
Executive Summary: This is on a separate page, along with any key assumptions you
have made. The executive summary is a short paragraph, consisting of your decision
and the major elements and implications of your action plan. Begin with "My decision is
to . . ." (You are required to make a decision to receive a mark for the report). The
reader should be able to read your executive summary and understand the direction to be
taken in implementing your decision. Do not outline background information or present
your analysis in this section.

Module Two
Written Case Process Elements: Are all of the process elements in place? Does your response
Reports include all of the elements? A sample of the type of content that should be included
(continued) in this section is noted below and further detailed in the individual areas.
• Statement of Operating Environment (including assumptions)
• Statement of Strategic intention
• Issue Identification
• Analysis of issue
• Alternatives with Pro/Con analysis
• Decision criteria / desired outcome
• Recommendations
• Implementation
List of Issue(s) with Impact Analysis: As the decision maker in the case, explain
what you see as the main issue(s) to be addressed. Feel free to write in the first
person. Explain, with reference to the data of the case, why the issue is important
and/or sensitive. Demonstrate how the external and internal environments faced by
the organization influence the issue. Identify one main issue – or just a few issues –
not a long list of issues.
Environmental and Root Cause Analysis: Your analysis should consist of

outlining why your decision best addresses the issue(s) you have identified. Your
analysis should flow logically, and rely on the facts of the case, and the criteria you
have identified. A good analysis will consist of both qualitative and quantitative
evidence. Quantitative (i.e. numerical) data more than a few lines long should be
placed in an exhibit. Then, in the body of the report, be sure to explain the
importance of the exhibit. Do not expect the reader to scan the exhibit for meaning.
Alternatives and/or Options

You are not required to present and analyze multiple alternatives. Many cases do not
have mutually exclusive alternatives. Rather, they consist of complex problems, all
of which may require attention (e.g., quality problems, supplier problems, employee
problems, competitive problems, and etc.). Your analysis should argue for your
chosen direction for any or all of these problems and include a pro/con analysis with
quantitative support. However, some cases clearly require an analysis of mutually
exclusive alternatives (e.g., purchase an automated line or hire more manual labour).
For these cases, you should present and analyze the alternatives.

Module Two
Written Case Recommendation and Implementation: Based on your analysis of the options,
Reports state what you would do (recommendation); then, outline the specific steps to be
(continued) taken (implementation). Your analysis has explained why you made the decision,
now provide the short- and long-term implementation details (who, what, where,
when, and how). Set priorities or a timeline for a specific action, where applicable.
Then, explain how you intend other stakeholders to buy into your decision; and how
you intend to deal with any negative consequences of your decision; and how you
intend to protect yourself from critical changes in the environment. The acid test is
this: could your action plan be implemented without further study? (For example, an
action plan is not complete if it recommends that a consultant or other expert
determine the details of how to implement the decision.)
Monitor and Control: State, where feasible, the method(s) you will use to
determine if your recommendation and implementation plans are working. Some
examples are use of budgets, regularly scheduled meetings, or scheduled reviews.
The approach you use will depend on the nature of the recommendation.
Exhibits: Exhibits may be used for such things as drawing process flow diagrams or
showing detailed calculations. Remember that the report should stand alone; the
exhibits provide supporting information only. An exhibit should be used when there
are more than a few lines of quantitative material in the body of the report.
Judgement and Integration: Pay close attention to the logic, structure and clarity
of the analysis. Is there a connecting thread or a sequence in the analysis or is it a
potpourri or hodgepodge of ideas and calculations? How well have knowledge and
concepts learned throughout the SSCMLP (concepts such as controls and
procedures to be addressed, spending authority, information systems to facilitate
data transfer, role and accountability of Supply Chain Management in
organizational structure) been integrated?
Written Communication: Format, Language and Style: A report should contain

titles, sentences and point form lists. It should demonstrate a professionl tone and be
free of spelling and grammatical errors.

Module Two
Written Case Grading: The case studies will be graded as indicated in the below sample worksheet.
Report Each section will carry an approximate weighting as indicated below. A completed is
(continued) sample is available in the Appendix of the manual.
CASE ANALYSIS MARKS MARK

AVAILBLE
I. PROCESS ELEMENTS 10
II. LIST ISSUES WITH IMPACT ANALYSIS 10
III.ENVIRONMENTAL AND ROOT CASE ANALYSIS 20
IV. ALTERNATIVES AND/OR OPTIONS 15
V. RECOMMENDATIONS 5
VI. IMPLEMENTATION 10
VII. MONITOR AND CONTROL 10
OVERALL
JUDGEMENT AND INTERGRATION 10
WRITTEN ICOMMUNICATION: FORMAT 5
WRITTEN COMMUNIATION: LANGUGE AND STYLE 5
CASE TOTAL 100

Module Two
RACI Model The RACI model is tool used to identify roles and responsibilities of individuals and
Overview is often used by organizations when dealing with change management. The tool
applies a responsibility assignment methodology that works by assigning a level of
accountability to individuals. This model is an important strategic tool to use both
when creating and presenting a procurement plan of action.
RACI Model The roles within the model consist of:
R= Responsible, the person who is responsible for the problem/decision/plan

A= Accountable, the person who must sign-off or approve a decision/plan
C= Consulted- the person who provides required information
I= Informed- this person typically needs to be informed of a decision/plan
The model is typically accompanied by a chart as illustrated below.
Finance IT Legal HR
Supplier A C R I
Selection
Contract R I A C
Approval
The model should be applied as you work through the various stages of your
proposal to ensure that you have incorporated both internally and externally
(vendor), the various people, departments and factors that should play a role in your
assessment and final recommendation.

Module Two
Self-Assessment Candidates will have the opportunity to review, test and reinforce their knowledge
Activities through self-assessment activities. These activities are not marked. Generally, the
activities require candidates to apply the concepts and tools learned in the session to
their own organizations, or to a case study. Candidates are strongly encouraged to
complete the self-assessment activities, as these activities provide further coverage of
the module content.
The self-assessment activities are:

1. Spend Analysis (session 1)
2. Financial Leverage Effect (session 4)
3. Placido Engine Company (session 7)
4. Fisher and Paykel Ltd. (session 9)
Module Ending A four-hour module ending examination consisting of a case analysis will be
Examination administered during the final session (session 13) of this module. This examination is
worth 25% of the total mark for the module.
The candidate must arrange for exam invigilation through their provincial or territorial
Institute.

Module Two
Module Evaluation
Module At the end of the module, candidates are required to submit an evaluation form for this
Evaluation module, rating the module content and format.
Form
To obtain the evaluation form, please access the PMAC site at http://www.pmac.ca.
Then, click on the Education tab.
Then, on the right-hand menu, click on New Accreditation Program
The evaluation form will be in this menu.
Please print the form, complete it, and mail it to the following address:
Purchasing Management Association of Canada
777 Bay Street, Suite 2701
P.O. Box 112
Toronto, Ontario
M5G 2C8
Email: info@pmac.ca

Session One
Z Procurement and Supply Management

Z “Strategic” Stages of Purchasing
Z Tactical and Strategic Procurement
Z Spend Analysis
Z Procurement risk
Z Strategic Management
© Purchasing Management Association of Canada S1 - 1

Module Two
Agenda for Session 1
Activity Directions
Module Overview Read the Introduction and Overview chapter to understand the
objectives for this module, and the methods of evaluation used
Overview of module, objectives for in this module.
module, and methods for candidate
evaluation.
Session Overview and Objectives Read What You Already Know, the Session Overview and the
Objectives found in this session.
Objectives, and a brief overview of the
session. Review the PowerPoint slides for this session (see the Appendix
of this manual. These slides are from the instructor-led version
of this module.)
Session Notes: Strategic vs. Tactical Read the session notes for this section.
Procurement
Here are the key teaching points:
Resources: • Evolution of procurement.
- Session Notes in this session • Modern perspective on procurement.
• Difference between strategy and tactics.
• Alignment of strategy and tactics with corporate level.
• Procurement is strategic, but uses tactics to meet the
strategic purpose.
Session Notes: Cavinato’s 5 Stages of Read the Cavinato article (see the Readings and Cases Manual).
Strategic Procurement A summary of Cavinato’s 5 stages is in the session notes.
Resources: Here are the key teaching points:

- Cavinato, Joseph, L. Fitting • Review the differences in the stages.
Purchasing to the Five Stages of • Determine which of Cavinato’s stages your organization is
Strategic Management. in.
- Session notes • Recommend how your organization can move from a lower
stage to a higher stage.
• (If possible, provide your own examples of organizations in
each of the stages.)

Module Two
Agenda for Session 1, continued
Activity Directions
Session Notes: Spend Analysis Read the resources for this section.
Resources: Key teaching points:

- Heath, Stanley. Tackling Spend • Defines spend analysis, and direct and indirect spend.
Analysis • Monitor both $ and number of spends.
- Session notes • Review Heath’s triggers.
• Review opportunities from spend analysis and barriers to
spend analysis.
• Spend can support strategic goals of organization.
Self-assessment Activity: Spend Read and complete the self-assessment activity in this session.
Analysis (not marked)
Resources:
- Session Notes and readings in this
session
Self-assessment Activity Evaluation When you are finished the self-assessment activity, review the
Self-assessment Evaluation section in this session.
Here are the key teaching points for the activity:

• To reflect on spend analysis in your organization.
• To develop a lists of benefits and constraints to spend
analysis.
Individual Exercise: Goods Spend Read the requirements and complete the exercise in this
Analysis at Your Organization session.
(marked – 5%)
Submit the exercise for evaluation. Refer to the Session
Schedule provided for submission instructions.
Session Notes: Defining Supply Risk Read the resources for this section.

- Zsidisin. A Grounded Definition of • Definition of supply risk.
Supply Risk • Sources of supply risk.
- Session notes • Importance of supply risk.

Module Two
Review of Written Case Report Review the Written Case Reports section of the Introduction
requirements and Overview chapter.
Review the requirements for the cases in sessions 3, 8 and 11.
The purpose of this activity is to prepare you for the cases by

giving you a preview of the requirements for each case.
If you have any questions about case preparation or writing

case reports, please contact your marker.
Session Wrap Up Review this session’s objectives. View the topics and
activities for the next session.

Module Two
What You In Module 1, the focus was on supply chain management and relationship management
Already Know between and within organizations to achieve organizational goals. In this module the
focus is on a specific aspect of supply chain management – strategic procurement.
Strategic procurement is the driver of the supply chain. It is through strategic
procurement that the buying organization manages its supply chain. The field and
practice of strategic procurement includes entering into arrangements with various
suppliers including goods and service providers, logistics firms, information
consultants (such as technology consultants or legal counsel), and asset disposal
providers.
Overview In this session candidates will be introduced to some of the underlying concepts of
strategic procurement. It is important to remember that effective procurement is
strategic, and that strategic procurement is the examination and formulation of all
procurement activities and policies in alignment with the goals of the organization.
This is the link between procurement and supply chain management: procurement that
aligns with the goals of supply management at the organization, and with the
organization’s goals as a whole. Strategic procurement drives the whole supply chain.
In effect, strategic procurement “owns” the chain.
Even at the strategic level (i.e. answering the questions “why” and “where”),
procurement has tactical elements (i.e. answering the question “how”). As a warm up
to this module, candidates should assess the situation in their own organization. The
session examines some fundamental and strategic aspects of purchasing using
Cavinato’s five stages of strategic management. Cavinato lists a large number of
criteria for each stage of strategic management. For the purposes of this module, these
criteria have been distilled down to a more manageable number.
Then, the session examines spend analysis, which is a key tactical method for
facilitating strategy. Spend and indirect spend are defined, as are opportunities and
constraints to spend analysis. Using Heath’s approach, candidates are introduced to
dimensions of spend, as well as triggers for spending. Candidates are required to
perform an individual (marked) exercise on spend analysis.
The final part of the session considers procurement risk. Procurement risks are
important considerations in weighing strategies. There are also other risks to consider
in formulating procurement policies. Zsidisin’s definition of supply risk is examined.

Module Two
Tactical and Strategic Procurement, continued
Objectives Upon completion of this session candidates should be able to:
1. Describe the relationship between procurement and supply chain management.

2. Describe the relationship between tactical and strategic procurement
3. Describe and differentiate the five stages of strategic procurement management.
4. Define spend analysis including direct and indirect spend.
5. Understand why spend analysis is an important strategic purchasing function.
6. Prepare a goods spend analysis at their organization.
7. Recognize the opportunities from and barriers to spend analysis.
8. Identify types of supply risk.
Required Read the following:

Reading • Cavinato, Joseph, L. Fitting Purchasing to the Five Stages of Strategic
Management. European Journal of Purchasing and Supply. #5, Issue 2. 1999.
Pages 75-83.
• Heath, Stanley. Tackling Spend Analysis. Contract Management. January

2006. Pages 40-45.
• Zsidisin, George A. A grounded definition of supply risk. Journal of

Purchasing and Supply Management. 2003. Pages 217-224.
Framework Framework questions help you focus on the issues presented in the session. Answer
Questions the following questions as you complete the readings and activities in this session.
1. Where is your organization with respect to strategic purchasing? Is it tactical or

strategic? Is it both?
2. Is your organization acquiring greater strategic skills in its purchasing?
3. How will your organization move to become more strategic?
4. Does your organization use spend analysis?
5. What are the benefits and constraints to performing a spend analysis in your
organization?
6. What is an example in your organization of direct spend? Indirect spend?
7. Why is spend analysis important in your organization?
8. What are the supply risks in your organization?
9. How might you manage supply risks in your organization?

Module Two
Self-assessment Goods Spend Analysis (not marked)

Activity
After completing the readings, answer the following questions:
1. Does your organization perform spend analysis?
2. What is an example in your organization of direct spend? Indirect spend?
3. What are the benefits and constraints to performing a spend analysis in your
organization?
4. Why is spend analysis important in your organization?
This activity is not submitted for evaluation. See below for instructions on self-
evaluating this activity.

Module Two
Individual Goods Spend Analysis in Your Organization

Exercise
Describe components of a goods spend analysis for your organization. Please feel free
to use any relevant information about your organization. (All information will be
treated as confidential, and used for grading purposes only.)
This exercise is worth 5% of the overall mark for this module. It must be typed and
double spaced, with 2.5 cm margins on all edges, and be in 12-point font. This
exercise is limited to a maximum of five pages. Remember to write in complete
sentences; do not use point form, except when providing a coherent list in a wider
context.
Refer to your Session Schedule for instructions on submitting this assignment for
marking.
There are three components to the exercise that must be handed in:
1. Show the steps you would use to conduct a goods spend analysis for your
organization.
2. Describe specific key triggers and why you chose them.
3. Describe how spend analysis would fit within your current procurement strategy.
In general, you will be evaluated on the following criteria:

• Did you complete all the requirements of the assignment?
• Did you apply the appropriate concepts and tools from this session?
• Was your analysis realistic and achievable?
• Was your analysis strategic (i.e. in alignment with your organization’s
procurement strategy, and the organization’s goals in general)?
For more details on the characteristics and purposes of a goods spend analysis, refer to
the session notes and readings for this session.
General evaluation information for all exercises is available in Introduction and

Overview: Candidate Evaluation.

Module Two
Self-Assessment Activity Evaluation
Goods Spend The objectives of the activity are to familiarize the candidate with spend analysis
Analysis terminology, and to promote a strategic view of the candidate’s organization’s spend
analysis strategy. You do not have to submit this activity for marking; it is for self-
evaluation purposes only.
This activity is based on your own experience at your organization. The answers you
provide depend on your experience and position within the organization. You should
develop a list of reasons to adopt (or not adopt) spend analysis, and ways that the
adoption of spend analysis will (or won’t) benefit your organization.
If you have difficulties completing this exercise, or understanding the terminology

used, refer to the session notes and readings in the session.

Module Two
Session Notes: Tactical and Strategic Procurement
Procurement Purchasing, procurement, and supply management has been defined in a variety of ways
and Supply by a variety of practitioners. In its earliest form, purchasing was seen as a function that
Management provided the right input at the right place at the right time. This dated perspective still
holds in some organizations. A modern view of procurement is that it is process-
oriented, and concerned with the management of all supplies of an organization, giving
rise to the term “supply management.” Supplies do not necessarily mean goods supplies
such as metal, pens, paper, and the like. Supplies also mean supplies of services such as
legal advice, and auditing, actuarial and engineering services, among others.
The focus on all supplies places procurement at the leading edge of managing corporate
supply chains. Through its processes, procurement determines the following:
• what specifically is required
• who will supply it
• how it will move from its source to destination
• how its performance or progression will be monitored
• how used assets, waste, scrap and redundant supplies will be disposed of
The role of procurement has expanded to encompass the lifecycle of the good or service
being acquired.
The overall goal, i.e. the strategic goal, is to provide value to the customer. Given
the breadth of the procurement process, procurement plays a key role in relationships
with other supply chain partners, as well as with the ultimate customer.
Strategic Stages Procurement is of vital strategic interest to the organization. Procurement also provides
of Purchasing tactical services to the organization. To better understand these roles, consider strategy as
reflecting “where are we going” while tactics answer the question “how are we getting
there”. An example of strategy is to require low-cost high-quality suppliers. An example
of a tactic to achieve that strategy is to single source. Another tactic is to enter into an
alliance with a key supplier.
Strategic procurement is linked to the strategic goals of the organization. Purchasing

strategies that are incongruent with corporate goals will be unsuccessful. Consider a
situation where the corporate goal is to provide low-cost, low-quality products. Clearly a
procurement strategy that focuses on low-cost and high-quality does not fit. Thus, any
tactics derived from this procurement policy may also be at odds with the company’s
goals. In this case, it may be more appropriate to have multiple suppliers who are
competitive, as opposed to a single supplier.

Module Two
Session Notes: Tactical and Strategic Procurement, continued
Cavinato’s Five To understand where an organization is strategically placed, we can examine Cavinato’s
Stages of five stages of strategic management:
Strategic Stage 1: Basic financial planning
Management Stage 2: Forecast based planning
Stage 3: Externally oriented planning
Stage 4: Strategic management
Stage 5: Knowledge based business
The following table, abridged from Cavinato, highlights his staging with respect to
procurement.
Table 1.1 – A Summary of Cavinato’s Stages of Strategic Management
Stage Concept Concept of Concept of Range of Management Key Personal Key

of Field Strategy Supply Chain Products and Approach Skills Measures
Services
1 Buying Better price Production- MRO, office Reactive Task-oriented Financial
purchasing supplies
2 Purchasing Maintain Supplier feeding Raw materials, Reactive with Some Gap based
price production MOR , office some management
supplies planning
3 Procure- Support line Suppliers and Capital goods, Fit to rest of Managerial, Total product
ment of business suppliers’ MRO, office organization analytical, cost
suppliers to final supplies, interpersonal
product outsourcing
4 Supply Entrepreneur- Innovator to final Product design Pro-active Leadership of Total supply
ial team use and disposition in view of teams chain costs
market
5 Network Conduit and Supplier’s Unlimited Leadership Leadership, Total supply
facilitation interpreter capabilities consultant, chain costs,
through value to conduit comparative
final customer supply chain
costs
Stage 1: Basic In stage 1, an organization operates at the basic budgeting level. The major performance
Financial criterion is to conform to budget, and control is enforced by financial accounting entities
Planning within the organization. In stage 1 organizations, procurement’s role is “buyer” only.
The strategic focus is finding the lowest price for an item (or driving the item price
down). The supply chain as a whole is not considered, as procurement’s role is to buy
goods for production. Value-creation (procurement’s value proposition) is to lower costs.
Management is reactive and focuses on conformity. In stage 1 organizations,
procurement’s authority is usually restricted to buying maintenance, repair and
operational items. Management focuses on meeting the standards, not changing policy.
Performance is measured exclusively in terms of financial targets.

Module Two
Stage 2: In Cavinato’s stage 2, organizations start to develop a more sophisticated approach to

Forecast-based planning. They determine desired financial results, and then design programs to move
Planning from the current financial situation to the desired situation (i.e. they conduct a gap
analysis). Typically the future is defined as a simple trend, or extrapolated from past
experience. In stage 2 the procurement role is expanded to include minimizing future
costs with increased consideration of quality. This can be described as purchasing. The
primary focus, however, remains on costs minimization or price maintenance. The
procurement function’s value proposition is still to reduce the cost of goods and services.
Some supply chain perspective has been adopted, in that suppliers are seen as critical to
internal production. Management is focused primarily on process efficiency, and meeting
standards. Managers have authority to react to events in the marketplace, but not to
provide strategic direction for developing supply chain capabilities.
Stage 3: In stage 3, procurement begins to step into a more strategic role with a focus on
Externally- supporting lines of business. Procurement is managing a variety of supply chain
oriented activities in addition to basic acquisition. The supply chain view is holistic, from the
Planning supplier's suppliers to the final customer. At this stage, procurement becomes proactive
and the organization works with partners within the business.
Value-add is created by more integrated supplier management. The focus is on costs. To

that end, the key measurement of success is total product cost. Management skills
become less tactical and more strategic, as procurement managers work with lines of
business to deliver total products. Management skills, such as analysis, are developed.
Stage 4: In stage 4, procurement becomes strategic, and proactively creates value for the
Strategic organization in line with the strategy of the organization. The measurement of
Management procurement’s success is total supply chain costs. The supply chain from a procurement
perspective ranges from innovating with suppliers in design, through satisfaction creation
for the customer. Supply alliances become more common. Strategy focuses on
entrepreneurship as a member of development teams. Management is proactive. Team
leadership skills become important.

Module Two
Stage 5: Stage 5 organizations use procurement as the driver of value creation from all elements
Knowledge- of the supply chain through to the final customer. Strategy is viewed as being an
based Business interpreter of external and internal customer needs, and a conduit through which those
needs are met. Procurement determines which needs are viable, and how to meet those
needs. The supply chain is viewed as a network, with many other possible networks
available. Management leads the organization in strategic supply chain development.
Skills needed by procurement staff include the ability to consult, receive feedback,
analyze, and implement (i.e. to act as a conduit between the organization and its
suppliers in the best interest of the organization’s customers and overall strategy).
Spend Analysis Spend analysis provides metrics to monitor organizational spending. Without accurate
information on spending, it is difficult to manage spend tactically and even less likely
that it will be managed strategically. Spend analysis provides information regarding
what amount of funds or how many transactions are related to a particular good or
service undertaken with a particular supplier or from a group within an organization.
Without proper spend analysis, opportunities are missed.
Spend analysis consists of direct and indirect spend:

• Direct spend is for goods and services that end up in final products. An example is
sheet metal that is used to produce a car.
• Indirect spend is spending that does not end up in the final product, that is, spending
on ancillary or overhead items. An example would be the cost of flying in sales
representatives to a sales meeting to introduce a new car.
The Heath article (2006) refers to goods as commodities, and those who require spend
as customers, and those receive spend as suppliers or contractors. Heath suggests that
spend be analyzed by commodity, supplier and customer, and that ‘triggers’ be used to
select procurement enhancement opportunities. The triggers are dollar-value and
transaction-based. Suggested triggers for supplies to be considered for focus are:
• High dollar value of commodities or services

• High number of transactions for commodities or services
• High dollar value for suppliers
• High number of transaction for suppliers
• High dollar value for internal customers
• High number of transactions for internal customers
• High percentage of sole source for any of commodities, services, suppliers or
customers
• A combination of any of these

Module Two
Spend Analysis: Spend analysis can present performance-improvement opportunities.

Opportunities
and Barriers Once a trigger has been hit the potential opportunities include:
• Reducing cost through volume discounts

• Reducing cost by leveraging bargaining position
• Seeking better quality
• Seeking better responsiveness from suppliers
• Uncovering process improvements potential
• Uncovering opportunities to enter into stronger relationships
There are barriers to spend analysis in many organizations, according to Heath these
include:
• Disparate computer systems

• Data problems (incomplete, inaccurate or inconsistent information)
• Determining the appropriate classification plan for the analysis
• Resistance to change
• Inadequate resource levels
• Setting unrealistic goals in terms of number of changes that can be made at once

Module Two
Procurement All procurement involves risk. Zsidisin’s article (2003) examines supply risk in a
Risk variety of organizations to develop a definition of this risk. The analysis suggests that
supply risk emerges from two sources:
• Individual supplier failures: Cases where the supplier does not meet the
requirements
• Market characteristics: Cases where there are market shortages or a non-
competitive market
The article also considers the outcomes from procurement risk. The typical outcome is
an inability of the purchasing organization to meet its customer’s requirements. This
ranges from missed shipments to failure to meet specifications. The ultimate effect of
failing to meet customer requirements is a negative effect on profits. The author also
notes that in several cases, the effect of supply risk is the safety of ultimate customers.
Using the results of the analysis, Zsidisin proposes that supply risk be defined as:
“the probability of an incident associated with inbound supply from individual

supplier failures or the supplier market occurring, in which its outcome results
in the inability of the purchasing organization to meet customer demand or
causes threats to customer life and security”

Module Two
Session Wrap Up: Tactical and Strategic Procurement
Review Now that you have looked at tactical vs. strategic aspects of procurement, stages of
Objectives for procurement management, procurement risk, and completed activities on spend
this Session analysis, you should review the session’s objectives as restated here:
Upon completion of this session candidates should be able to:
1. Describe the relationship between procurement and supply chain management.

2. Describe the relationship between tactical and strategic procurement
3. Describe and differentiate the five stages of strategic procurement management.
4. Define spend analysis including direct and indirect spend.
5. Understand why spend analysis is an important strategic purchasing function.
6. Prepare a goods spend analysis at their organization.
7. Recognize the opportunities from and barriers to spend analysis.
8. Identify types of supply risk.
Candidates are encouraged to evaluate their learning by determining if they have

achieved the objectives for this session as stated above.
Preview Next In session 1 we explored the tactical and strategic aspects of procurement. In session
Session 2, candidates will explore the procurement process in detail, and prepare a written
case report for the Blozis Company.

Session Two
Procurement Process
Z Key steps in the procurement process

Z Description of Needs: Specifications
Z Types of Specifications
Z Specification Development
Z Potential Problems

Module Two
Activity Directions
Session Overview and Objectives Read What You Already Know, the Session Overview and
the Objectives found in this session.
Objectives and a brief overview of the
session. Review the PowerPoint slides for this session (see the
Appendix of this manual. These slides are from the
instructor-led version of this module.)
Session Notes: Steps in the Read the resources for this section.
Procurement Process
Here is the key teaching point:
Resources: • Leenders’ 10 steps in the supply process (also see
- Leenders, Johnson, Flynn and Fearon, summary in session notes).
Purchasing and Supply Management
13th Ed. (page 61)
- Session notes
Individual Reflection: Steps in Ask yourself:

Procurement Process - Which of these steps were you unaware of?
- Which steps had you not previously considered as being
related to procurement?
- Do you consider all these steps to be important?

• For procurement to be strategic it must encompass all
these steps, and be integral to the organization as a
whole.
Session Notes: Needs Recognition and Read the resources for this section.
Description (Specification)
Resources: • Describe need recognition and specification.
- Leenders, Johnson, Flynn and Fearon, • Understand the importance of the specification stage.
(pages 62 and 63).
- Session notes

Module Two
Activity Directions
Session Notes: Supplier Selection, Read the resources for this section.
Ordering, Monitoring, Receipt and
Inspection, Payment, Documentation, Here is the key teaching point:
and Relationship Management - Understand the processes: supplier selection, ordering,
monitoring, receipt and inspection, payment, documentation
Resources: and relationship management. (Some of these will be
- Leenders, Johnson, Flynn and Fearon, covered in more depth in later sessions.)
(pages 65 to 73).
- Course notes
Individual Reflection: Follow up and Provide one or more examples of follow-up and expediting
Expediting (and other steps in the from your experience.
procurement process)
Key teaching points:
• There are different levels and approaches of follow-up
and expediting.
• There are different approaches to procurement at
different organizations.
Session Notes: Types of Specifications Read the resources for this section.

- Burt, Dobler and Starling, World Class • Simple specifications: Performance, Fit and function,
Supply Management, Chapter 11 Brand or equal, Samples and grades
(Pages 239-246, 250-251) • Complex specifications: Commercial, Design,
- Session notes Engineering Drawings, Material & Method.
• Understand the benefits of standardization.
• Appropriate level of interaction interdepartmentally
needs to be considered. For simple buys this may be
small, for large buys it may be significant.
• Appropriate level of interaction between supply
organization and buying organization needs to be
considered.
• Understand the common specification problems.

Module Two
Activity Directions
Individual Case Report: Blozis Analyze the case using the Case Preparation method
(marked – 5%) described in the Introduction and Overview.
Resources: Prepare the case report according to the instructions in this

− Blozis case session. Also, use the guidelines in the Written Case
− Introduction and Overview: Written Reports section of the Introduction and Overview.
Case Reports (report guidelines)
− Session notes in this session Submit the case report for evaluation. Refer to the Session
− Framework questions in this session Schedule for submission instructions.
− Required readings for this session
− Fabritek, 1992 Sample Case and Key teaching points:
Report (Appendix) • Pay close attention to the case requirements (as stated at
the end of the case).
• Is the supply function organized properly? Is it strategic
or tactical in nature?
• How would you revise purchasing procedures at Blozis
related to: specifications, purchase orders and receipt?
• What problems are likely to occur with the
specifications as things now stand?

Module Two
What You In the last session we saw that while modern procurement focuses on strategy, there are
Already Know also tactical elements. In this session the major procurement processes are considered,
as these form the basis of tactics to meet the strategy. As specification of needs and
requirements is a critical procedural step, candidates will prepare a case study related to
a conflict in specifications (Blozis Co.). This case also encourages an analysis of the
procedural elements of purchasing, and requires a restructuring of procedures.
Overview Building on the strategic and tactical approach of the previous session, candidates will
now be introduced to the key processes of procurement. While these processes are
more tactical and operational in nature, proper attention to procedural issues results in
effective implementation of procurement strategy.
We will review 10 steps in procurement. In this session, we will focus on description

of the need or requirement. This description is called a specification. Both simple and
complex specifications are examined. The benefits of product and specification
standardization are considered. Specification development approaches are reviewed
from an organizational and a supplier-relationship perspective. This session also
considers problems that may arise in the development of specifications.
The session involves the preparation of a case (Blozis Company) in which a key
problem area is specification development. In addition, the case highlights some areas
where there may be organizational issues.
1. Describe the steps in the procurement process.

2. Understand the critical importance of needs description (specifications).
3. Display knowledge of the types of specifications.
4. Describe the broad considerations to specification development.
5. Understand potential problem areas.
6. Apply principles learned to case study.

Module Two
Procurement Processes, continued

Reading • Leenders, Johnson, Flynn and Fearon, Purchasing and Supply Management
13th Edition. McGraw Hill Irwin, Pages 59 to 77.
• Burt, Dobler and Starling, World Class Supply Management 7th Edition.
McGraw Hill Irwin, pages 239-246, 250-251.
• Blozis Company Case. Purchasing Agents Association of Connecticut Inc.
1. How are needs recognized in your organization?

2. Why is getting the specification correct the most important part of a purchasing
requirement?
3. In your organization, do you collaborate on specifications? Why? Why not?
Should you?
4. Provide an example of follow-up and expediting from your experience.
5. Describe a situation where you wished you had good documentation and it was
missing?
6. Can your organization use standard products more often?
7. What would the benefits be to your organization if you used standard products
more often?
8. Have you developed specifications that included some of these common
problems?
Blozis Company:
1. Is the supply function organized properly? Is it strategic or tactical in nature?
2. How would you revise purchasing procedures at Blozis related to:
specifications, the use of requisitions, purchase orders, receipt and delivery?
3. What problems are likely to occur with the specifications as things now stand?

Module Two
Procurement Processes, continued
Individual Blozis Company

Written Case
Report Write a case report on the Blozis Company case using the guidelines for written case
reports found in the Written Case Reports section of the Introduction and Overview.
This case report is worth 5% of your overall mark for this module. Refer to your
Session Schedule for instructions on submitting this assignment for marking.
The requirements (i.e. the problems to be solved) for the written case report are stated at
the end of the case. In addition, your case report should address the following issues:
1. Is the supply function organized properly? Is it strategic or tactical in nature?
2. Examine the purchasing procedures at Blozis related to specifications, the use of

requisitions, purchase orders, and receipt and delivery. Should these be changed?
Why or why not? If they should be changed, how?
3. What problems are likely to occur with the specifications as things now stand?
To help you prepare for the report, see the session notes in this session. For further
reference, please see the sample case, Fabritek, 1992, and the sample case report in the
Appendix.

Module Two
Session Notes: Procurement Processes
Procurement In most organizations procurement involves a sequence of activities that results in the
Processes acquisition of the required good or service. The ten steps in the sequence are:
1. Need recognition
2. Need description
3. Sourcing
4. Supplier selection
5. Ordering
6. Monitoring
7. Receipt and Inspection
8. Payment
9. Documentation
10. Relationship management
1. Need Need recognition is the process of identifying that a good or service is required and
Recognition determining the timing of the requirement. Need recognition may take place in many
parts of the organization simultaneously. For example in a manufacturing plant needs
may occur on the production floor for items such as welding rods. At the same time in
financial reporting there may be a need for audit services. The key to need recognition
from a strategic perspective is to ensure that procurement is working actively with
goods and services users, as well as with potential suppliers of those goods and
services.
2. Need Need description or specification is describing the need in sufficient detail to ensure
Description that the correct good or service is procured, in the correct quality, at the correct time,
(Specification) at the correct place. It is considered one of the most important keys to successful
procurement.
Specifications can range from simple to complex. An example of the former is copier
paper, while the latter may could include complex designs such as a computer main
board or an office tower. As need complexity increases so should the degree of
interaction between the procurement group, users and potential suppliers. The
advantage of increased procurement and supplier involvement is improved precision
of the specification, identification of a greater range of potential options, higher
quality and lower costs. Ultimately, correct specification yields higher customer
satisfaction. It is important to note the author’s comment about “mini processes that
are owned and managed by different functional areas of the organization” (Leenders,
p.63). This is quite typical and is to be avoided.

Module Two
Session Notes: Procurement Processes, continued
3. Sourcing and Sourcing and supplier selection involves three processes:

4. Supplier 1. Investigating and qualifying potential suppliers
Selection 2. Evaluating the qualifying suppliers’ bids
3. Choosing the supplier or suppliers to provide the good or service
Identification can range from looking up suppliers in phone books or on the internet to
formal requests for proposals. Evaluation can range from a simple process such as
reviewing delivered price, to consulting procurement colleagues in other organizations
for their opinions, to multi-faceted evaluative models. Once the evaluation has been
made the supplier is selected.
5. Ordering Ordering is the process of making the purchase from the supplier. Orders can range
from simple purchase orders to complex contracts. When ordering paper for a copier a
simple purchase order or purchasing card may be used. For a complex product such as
an office building, contracts would be negotiated which lay out details of the project,
performance guarantees, milestone payments, and etc.
6. Monitoring There are two components of monitoring:

1. Follow up
2. Expediting
Follow up is the process of routine contact with the supplier as to the status of the
order. This can be as simple as a regular phone call or email, to presentations by the
supplier regarding the progress of completing complex goods or services.
The greater the integration of the supplier with the buying organization, the less
activity directed to monitoring. For example if the supplier actually manages the item
such as in supplier (vendor) managed inventory, follow-up may be less frequent, or
unnecessary.
A second element of monitoring is expediting. Expediting occurs when there is an

unanticipated early requirement for the good or service or the supplier has missed a
delivery commitment. Expediting is a form of pressuring the supplier to deliver.

Module Two
7. Receipt and Receipt and inspection involves taking delivery of the good or service and checking
Inspection that it meets the specified requirement. In a manufacturing setting, receipt may be a
procedural process involving a formal “receiving” area where goods in a shipment are
matched against the order and inspected to ensure they are the correct goods in the
correct quantity. The goods are then transferred to the user departments or inventory,
along with the appropriate documentation.
Inspection may be as simple as the verification process just described or may involve
systematic quality-oriented inspection to ensure the goods fit and meet the required
performance standards. At this stage goods may be rejected and returned to the
supplier with related follow-up and corrective action required.
With services receipt and inspection also occurs; however, it is much more subtle. For
example, if a company uses consulting services to develop a strategic plan, the user
(executive) will receive the planning advice, review it and make suggestions for
changes.
8. Payment Payment is the process of clearing the invoice for the good or service and issuing
payment. Typically an indication is provided from the user (or from the receiving
department) to the accounts payable department, who will then issue full or partial
payment for the goods.
The actual process of paying for goods or services is not as important as ensuring
there is an alignment of the goals of the process with the overall corporate objectives.
An example of goal misalignment is when the corporate goal is to use suppliers as a
means of financing accounts payable (i.e. extending payment terms to their
maximum), while the procurement goal is to pay invoices quickly in order to acquire
discounts and future price reductions from suppliers.
9. Documentation Documentation includes completion of all the paperwork related to the goods and
service purchased including: bills of lading, invoices, payment requisitions, payment
registers, and more.
Documentation also includes the completion of documents related to the process used
to acquire the goods and services, i.e. How was the specification developed? Which
suppliers were contacted? How were they evaluated (and etc)? The more complex
the purchased good or service, the greater the need for accurate and clear
documentation that documents the whole procurement cycle.

Module Two
10. Relationship Relationship management is the process of managing internal and supplier
Management relationships. This may include ongoing liaison with the supplier with respect to
failures or repair and maintenance.
Specifications It is important to identify the type of specification applicable to the good or service
and being purchased, and then identify the best process to define the specification.
standardization Specifications can be simple or complex. Standardization may apply to both simple
and complex specifications.
Simple A simple specification provides a high level description of the product or service
Specifications needed. An example of a simple specification is “provide automotive batteries”.
There are five types of simple specifications:

• Performance
• Function and Fit
• Brand
• Sample
• Grade
Performance: describe what the good or service is to do.

Performance specifications are relatively easy to develop and typically result in the in
the good or service meeting a desired performance target. With a performance
specification approach, the supplier decides the process to make the supply, and
controls quality. Consequently supplier selection takes on added importance.
Function and Fit: describe how the good and service will fit and within the larger
product or service.
Function and fit involve more teamwork between the supplier and buyer as well as
within the buying organization to ensure the fit and function goals align with the
larger goals. Suppliers are often integrated into the design process.
Brand: the specification is described in terms of a “specific brand or its equal”.

The “or equal” specification is needed to ensure a reasonable level of competition
amongst potential suppliers. Often, user departments are allowed to choose amongst
the brand of equivalent products. The advantage of the brand approach is it is quick
and simple. However, branded products may be more expensive.

Module Two
Simple Samples: A sample is product designed by a potential supplier to meet the buyer’s
Specifications need. A classic example of a sample is an artist’s proof used in print work. The
(continued) problem with a sample is that it may not meet the needs of the production process or
the end user. Furthermore, samples or prototypes impose additional costs on suppliers.
A sample may be required when the good or service is highly complex. It can be an
inexpensive way to test a concept or finalize the specification of a good or service.
Grades: Grades are an agreed upon set of standards for a good. An example of a
grade is “regular unleaded gasoline”. Grades typically apply to a commodity. An
example of a specification is: a flour mill requires # 1 hard spring wheat.
Complex A complex specification provides a detailed description of the product or service. An

Specifications example is: provide automotive batteries composed of the following:
• coil construction
• 850 cold cranking amps
• a maximum weight of 4 kg
• maximum dimensions of 250 mm x 225 mm x 200mm
There are four types of complex commercial specifications:

• Commercial standards
• Design specifications
• Engineering drawings
• Material and method of manufacture
Commercial specifications are similar to grades, however, are used where the
product is not a commodity in nature. Commercial standards come with a complete
description of the product. An example is the American Petroleum Institute Standards
for motor oil.
Design Specifications: In design specification the buying organization provides a

detailed specification of the requirement. As noted previously this approach should
involve teamwork between departments in the buying organization and may involve
collaboration with suppliers.
The advantage of design specifications is the specification can be developed to

provide precisely the product or service the buying organization wants. However, it is
more costly, and requires more time and management than using commercial
specifications.

Module Two
Complex Engineering drawings: Are used either by themselves or to enhance the description
Specifications developed in a design specification. Such drawings (or blueprints) provide a detailed
(continued) view of the product required. While more costly to prepare than a design
specification, engineering drawings provide greater precision in detail, and act as a
guide to measure quality. Engineering drawings are a simple way to describe
relatively complex parts, and allow more options for sourcing, as the drawings can be
provided to a variety of possible suppliers.
Material and Method of Manufacture: In this approach the specification describes

the materials to be used and how the product is to be made. This approach limits input
from the supplier as the buying organization sets the process of manufacture.
Standardization Needs description based on grade or commercial specifications are examples of

industry standardization.
Using standardization benefits a buying organization in several ways:

• Decreased costs due to larger production runs at suppliers
• Known physical characteristics of the product (example: shear strength of a bolt)
• Lower specification costs
• Improved supplier co-ordination due to universally understood specifications
• Ability to produce a variety of products from standard parts (example: computers)
• Potentially higher quality
• Reduced inventories as the standard part may be useful for a range of activities in
the organization (example: using standard type of office paper rather than
specialized paper for copiers, printers etc.)
• Reduced inventories due to later build of the product (delayed differentiation)
• Enhanced opportunities for simplification.
Specification There are a variety of approaches used to develop specifications. As a general rule,
Development the interrelationship between internal departments should increase as the importance
and complexity of the item being acquired (or supplied) increases (see Figure 2.1).
For low complexity and important supplies, the user department may have little need
to be involved (example cleaning services) so both departmental and procurement
involvement is minimal. Conversely for an important mission critical supply,
(example: the type of beef served in a chain of high-end steak houses) the chef, the
restaurant, and the procurement department would have a high level of interaction.

Module Two
Specification Figure 2.1 – Specification Development: Department Interrelationships

Development
Level of Interaction
High
Complexity
and
Departmental Importance of
Involvement the supply
Low
Low High
Procurement
Involvement
It is important to have relationships where the department involvement and

procurement involvement are matched with respect to the complexity and importance
of the supply.
If we put aside issues to do with barriers to market, or protection of technologies,

supplier involvement should increase as the good or service specification increases.
Again, procurement and supplier involvement (i.e. internal and external involvement)
should be matched with respect to the complexity and importance of the supply to the
buying organization.
Specification In addition to the organizational challenges related to the proper level of involvement,
Problems there are a variety of common problems which may occur in specification preparation:
Lack of clarity: The specification is not precise enough in order to meet the
requirement. This may occur due to lack of bidders for the work as they do not
understand what is required, or when the work being undertaken is incorrect, resulting
in re-work.
Limiting Competition: The specification is either latently or inadvertently written in

a manner that results in only one or two possible suppliers.
Overly Restrictive: The specification seeks quality characteristics that are

unnecessary. The result is a higher than necessary cost (and possibly delivery time)
for the supply.

Module Two
Session Wrap Up: Procurement Processes
Review Now that you have looked at procurement processes and have examined a case to do
Objectives for with specifications, you should review the session’s objectives as restated here:
this Session
1. Describe the steps in the procurement process.

2. Understand the critical importance of needs description (specifications).
3. Display knowledge of the types of specifications.
4. Describe the broad considerations to specification development.
6. Apply principles learned to case study.

Preview Next In session 2 we explored the procurement process. In session 3, candidates will
Session explore competitive bidding and negotiations, and prepare a written case report for De
Havilland Inc.

Session Three
Z Conditions for Competitive Bidding

Z Types of Competitive Bids
Z Conditions for Negotiation
Z Steps in Negotiation

Module Two
Activity Directions
Session Notes: Competitive Bidding Read the resources for this section.

- Session slides • Resources define competitive bidding, and reflect on
- Session notes factors that indicate when competitive bidding applies.
• There are different types of competitive bids.
Individual Reflection: Example of Write down examples from your own experience of each
Competitive Bidding type of competitive bid.
Session Notes: Negotiation Read session notes for this section.

- Session notes • There are factors that suggest when negotiation should
be used.
• Objectives of negotiations should be clear.
• There are negotiable and non-negotiable items.
Individual Reflection: Negotiation and Provide answers to the following:

Competitive Bidding at Your
Organization 1. What is a situation in my organization where
competitive bidding was used when negotiation would
have been more appropriate?
2. What is a situation in my organization where
negotiation was used when competitive bidding would
have been more appropriate?

Module Two
Activity Directions
Session Notes: the Negotiation Process Read the resources for this section.

- Wheeler, Negotiation Analysis: an • Steps in the negotiation process.
Introduction. • The importance of adequate analysis.
- Session notes • The steps in negotiation analysis (pre-negotiations),
- Session slides and the importance of BATNAs.
Individual Reflection: Approach to Provide answers to the following:

Negotiations
1. Does my organization have a formal approach to
negotiation? Should it?
2. What would the advantages and disadvantages be of a
formal approach to negotiating?

• There are advantages and disadvantages of a formal
approach to negotiating.
Case Preparation: De Havilland – Parties, Prepare for writing the case report. First, decide what is
Value, and Barriers De Havilland’s BATNA. Then, focus on parties in the
negotiation, value of the negotiations, and barriers to
negotiation.
Review the PowerPoint slides as required. (There are

several slides on De Havilland.)

• You should determine a BATNA for De Havilland.
• Parties to negotiations may not always be the
obvious ones.
• Analysis of who are the parties, and what are the
values and barriers to negotiation in the case will
prepare you to write the case report.

Module Two
Activity Directions
Case Preparation: Power Relationships Determine the power relationships that exist in the De
and Ethics in the De Havilland Case Havilland case. Also, list the ethical issues that arise
before, during, and after negotiations.

• Power relationships are important to negotiations.
• Candidates need to consider ethical issues when
negotiating.
• You may want to refer candidates to PMAC’s
ethics, values and code of conduct (see:
www.pmac.ca )
Individual Case Report: De Havilland Analyze the case using the Case Preparation method
(marked – 10%) described in the Introduction and Overview.
Resources: Prepare the case report according to the instructions in

− De Havilland Inc. case this session. Also, use the guidelines in the Written
− Introduction and Overview: Written Case Reports section of the Introduction and Overview.
Case Reports (report guidelines)
− Session notes in this session Submit the case report for evaluation. Refer to the
− PowerPoint slides for this session Session Schedule for submission instructions.
− Framework questions in this session
− Required readings for this session Here are the key teaching points:
− Fabritek, 1992 Sample Case and Report • Write your report as if you are presenting the best
(Appendix) approach to negotiations for De Havilland.
• Pay close attention to the stages of negotiation
(BATNA, analysis, values and beliefs, etc.).
• Who are all the interested parties?
• Form your recommendations for conducting
negotiations.
• Anticipate problems that may arise during
negotiations.

Module Two
What You In this session, candidates are introduced to concepts related to competitive bidding
Already Know and negotiation. Competitive bidding is a method to source suppliers. Negotiation is an
approach to acquire the good or service at a fair and reasonable price. Negotiation
impacts the ordering and payment processes reviewed in session 2, as well as price and
supplier relationships, which are topics in later sessions.
Overview In this session the focus is on competitive bidding and negotiation. Competitive
bidding and negotiation are considered unique approaches to acquiring a product or
service. The criteria that support choosing one or the other are reviewed. Common
types of competitive bids are considered.
A significant emphasis of the session is negotiation. Objectives, negotiable items and

steps in negotiation are reviewed. The analysis phase of negotiation is of critical
importance. This session provides a framework for negotiation analysis, including
important elements of negotiation such as BATNA (Best Alternative to a Negotiated
Agreement), negotiating parties and their interests and values, barriers to negotiation,
power relationships, and ethics in negotiation.
Candidates analyze a case study, De Havilland Inc., to become better equipped to

perform negotiation analysis. Negotiation is covered in greater detail in the four day
Negotiation Skills workshop.

Module Two
Competitive Bidding and Negotiation, continued
1. Understand the factors that suggest bidding is more appropriate than negotiation and
vice versa.
2. Determine whether negotiation or bidding is more suited to a particular situation.
3. Describe types of bids.
4. State the objectives of a negotiation.
5. Define the keys steps in negotiations.
6. Prepare a negotiating plan.

Reading
• Wheeler, Michael. Negotiation Analysis: An Introduction, Harvard
Business School 9-801-156
• De Havilland Incorporated case. Richard Ivey School of Business.
#9A95B037
1. What are some of the methods of competitive bidding that I am familiar with?
2. Does my organization have a formal approach to negotiation? Should it?
3. What would the advantages and disadvantages be of a formal approach to
negotiating?
De Havilland Inc.:
1. What are some possible BATNAs for De Havilland? For Marton?
2. Who are the parties and what were their interests/objectives?
3. What is the potential value to be created?
4. What are some potential barriers to success?
5. What are the power relationships between De Havilland and Marton?
6. What are some possible ethical considerations?

Module Two
Competitive Bidding and Negotiation, continued
Individual De Havilland Inc.

Written Case
Report Write a case report on the De Havilland case using the guidelines for written case
The requirement for the written case report is: considering the following questions, as
Kim Tomar, write a report stating the issues, criteria, analysis and plan of action (i.e.
recommendations) to De Havilland’s Source Selection Board.
1. What are some possible BATNAs for De Havilland? For Marton?

2. Who are the parties and what were their interests/objectives?
3. What is the potential value to be created?
4. What are some potential barriers to success?
5. What are the power relationships between De Havilland and Marton
6. What are some possible ethical considerations?
Appendix.

Module Two
Session Notes: Competitive Bidding and Negotiation
Conditions Competitive bidding is when an open offer is made to potential bidders to respond to a
for specification. When the offer is widely distributed, perhaps through a newspaper or on the
Competitive internet, it also provides an opportunity to identify previously unknown suppliers.
Bidding Therefore, it is also a method of identifying potential new sources.
Competitive bidding is appropriate in the following circumstances.
Significant Contract:
The amount of the contract put out to bid must be significant enough to warrant the effort
on the supplier’s part to bid on the contract. For example it may be appropriate for a small
company to put a contract for a new office building to bid. However if the company uses
one case of pens a year, it would be inappropriate to put that requirement to bid.
Clear Specification:
The specification must be clear to both the buying organization and potential supplier. If
the specification is imprecise or ill defined, two problems may occur:
• The number of bids is minimal as few suppliers wish to take a chance on providing
the product or service.
• The bids that arrive may not be comparable due to bidders interpreting the
requirement differently.
Often the buying company may have a time period where bidders are allowed to ask
questions about the product or service. These questions and answers are typically made
available to all bidders.
Supplier Diversity:
There must be enough sellers in the market to prevent collusion or bid allocation.
Collusion occurs where bidders gang up to provide a consistent price. Bid allocation
occurs where bidders determine which organizations will bid, or alternately which
organization will have the lowest price.
Supplier Ability:
There must be suppliers that are qualified and able to provide the product or service. If
there are no qualified suppliers, the best potential supplier is chosen, and the buying
organization enters negotiation with the supplier to qualify them. Even if there are
qualified suppliers they may not want to bid on the work. Bidders must be qualified and
willing in order for competitive bidding to apply.
Appropriate Length of Tender:

Sufficient time is allowed for potential suppliers to review the specification, ask questions
(if allowed) and to prepare a proper bid. The more complex the specification, the greater
the length of time to tender.

Module Two
Session Notes: Competitive Bidding and Negotiation, cont.
Types of In practice there are many variants of competitive bidding. The typical or most common
Competitive types are as follow:
Bids
Request for quotation (RFQ). Provides a clear requirement and asks organizations to bid
with a firm price to provide the product or service. A typical example is for a grade or
commercial standard.
Request for information (RFI) An approach to pre-qualify organizations who then may
be asked to provide a quotation for the product or service. Typically the buying
organization provides the requirement and seeks organizations to provide information
related to their willingness and ability to provide the product or service.
Request for Proposal (RFP). Typically identifies the requirement and asks suppliers to
propose a solution along with the price for that solution. These are used for more complex
purchases such as office space requirements or custom built software.
Reverse auction. In a reverse auction the buyer provides the requirement to a group of
potential suppliers. In the auction the suppliers bid prices down in order to receive the
contract to provide the product or service. Typically these are conducted over the internet.
Auction (or Forward Auction). The purchaser bids against other bidders for the supply
of the product or service.
Negotiation Negotiation typically occurs where the buying organization has selected a supplying
and Bidding organization with whom they wish to conduct business.
At times negotiation may become a secondary part of the competitive bidding process;
however, caution should be considered in this approach as it undermines the purpose of
RFPs and RFQs.
For instance, if the bid in the RFP or RFQ is negotiable, then what is the price the vendor
should provide: their best price, or a higher price to be negotiated once the RFP or RFQ is
accepted?
Negotiation in combination with bidding may occur where an RFI has been used, or where
the request is for technical proposals. In either case price should be absent from the bid
requirement.

Module Two
When is Negotiation is applicable in cases where the conditions for competitive biding are not met.
Negotiation
Applicable? Negotiation is also applicable where:
• Costs and risk are hard to estimate. An example is the development of new specialized
software for a company. Typically this occurs where technical proposals have been
submitted.
• Price (or cost) is not the most important decision variable. In cases where factors such
as quality, delivery assurance or intangibles (such as brand alliance) are important
then negotiations with the supplier are required.
• The specification will likely change.
• Special needs are important and a significant component of costs. Through negotiation
the fair value and responsibility for costs can be determined.
• Supplier involvement is important, particularly early on.
• There are long lead times so product development and improvement can occur as part
of the work.
The objectives of negotiation relate to these conditions. A significant, but not necessarily
the most important, objective of negotiation is to obtain a fair and reasonable price. The
price must be acceptable to the buyer and supplier. A specified quality level or a goal of
continuous quality improvement may be a negotiating objective. Negotiation may also be
used to ensure a specified level of performance, for example, with respect to delivery
times. In certain cases an objective may be to ensure greater co-operation from the
supplier or to have more control. Finally negotiation may be useful in building a long term
relationship with the supplier, as it starts to consolidate the relationship between the
buying and selling organization.
What Can Be The old saying is that everything is negotiable. Typically items that are negotiable fall into
Negotiated five groupings: price, transportation, supply, support and quality.
Price: negotiation focuses on obtaining a fair and reasonable price for the overall
purchase. Within that goal, the buyer may wish to negotiate discounts. These could be in
the form of a straight volume discount per order, to cumulative discounts over a range of
orders. Payment terms may also be negotiable. This could include interest charged on
overdue accounts, to payment schedules.
Transportation: negotiation may focus on an item such as a carrier preference, terms

related to shipments such as whether it is FOB (Free on Board) origin or FOB destination.
It may include an option to have the good or service delivered to multiple points or
alternately diverted from one point to another.

Module Two
What Can Be Supply factors relate to the actual good itself. The lead time between order and delivery
Negotiated may be negotiated or alternately the delivery dates. Options to expand the requirement or
(continued) cancel the requirement (along with penalties) may be included. For large projects such as
capital projects, bonds may be required as part of the supply agreement. In the ultimate
case, the buying organization may wish to limit their involvement with the particular
supply, moving to supply (or vendor) managed inventory.
Support is a variety of activities that improve productivity related to the good or service.
For a new software system, support might include training and the ability to call the
developer when problems arise. Support may involve the warranty provided on the good
or service. For industrial machines it may include either spare parts or an agreement on the
time frame in which spares will be available.
Quality is also subject to negotiation. Quality negotiations may include anything from
what the performance requirements for the good or service are, to how those are to be
measured, through to a system of continuous improvement.
The The most important part of negotiations is to develop a negotiation plan. A standard
Negotiation negotiating plan will consist of five basic steps:
Plan • Selecting the team and team leader
• Analysis
• Mock negotiations
• Negotiations.
• Post Negotiation
Depending on the value or importance of the product or service being negotiated, the
effort put into each step should be adjusted. It is not appropriate to have a large full
empowered team for negotiating small items ( for example, office supplies) and
conversely it is not appropriate to have a small underpowered team to negotiate large
value items (for example, engine assemblies for a new vehicle).
Teams The first step is to establish the team and team leader. Team size may vary depending on
the importance of the item. For small importance items it may only require staff of the
supply department. For significant items it may include members from finance, marketing
engineering and procurement. The key is to involve areas with a significant interest in the
outcome of the negotiations. Typically the team leader is from the procurement area.
Within the team there should be several clear cut rules for the negation phase, such as:
there is only one spokesperson. Internal disagreements are aired outside the negotiation.

Module Two
Wheeler’s Six According to Wheeler there are six steps in the analysis phase and 1 additional
Steps of consideration. The six steps are:
Negotiation
Analysis • BATNA: What to do in the event an agreement is not reached?
• Identification of the parties.
• Assessing the interests of the parties and their priorities.
• Determining the value that will be created and how it will be distributed.
• Identifying barriers to success.
• Considering the effect of power relationships.
In addition to these steps, an important consideration is the ethical issues related to the
negotiation.
BATNAs (Best Alternative to a Negotiated Agreement). Of critical importance in

negotiations is the BATNA for the procuring organization. BATNA reflect the “walk-
away” position of the organization. When developing a BATNA, creativity of the team is
employed. A BATNA need not be the simple effect of rejecting a seller’s offer. It may
include possibilities such as alternate products, alternate suppliers etc. In addition to their
own BATNA, a procurement team should attempt to define a BATNA for the supplier. In
complex negotiations, a BATNA may be developed for each component of the entire buy.
Identification of the Parties. The members of the other negotiating group are not
necessarily the key parties to the negotiation. When preparing to negotiate identify who
the key parties are for both the current negotiation and for a BATNA.
Assessing the interests of the parties and their priorities. In this phase, the objectives
regarding the key BATNAs of the buyer, seller and potential other parties are defined.
Suppose the negotiation is for a new office tower. The buyer of the building may have
objectives related to price, operating cost, esthetics, and environmental impact. The seller
may have objectives related to profit, creating a landmark (reputation) and relationship to
the local community. A further party may be the City itself who wants to use the building
as an anchor for redevelopment. In preparing for negotiation, all these parties’ interests
should be analyzed and potential BATNA reviewed.

Module Two
Wheeler’s Six Determining the value that will be created and how it will be distributed. In this stage
Steps of the value proposition is considered. In terms of sequence the first goal is to create value,
Negotiation the second is to obtain an appropriate share of the value.
Analysis
(continued) Identifying barriers to success. Even if there is a value to be captured by both parties,
this does not necessarily mean that an agreement will be reached. Barriers occur in a
variety of areas. Strategic barriers occur where the parties overstate their positions. This
may in the worse case scenario result in a position where the party is locked into their
position, making agreement difficult if not impossible. Interpersonal relationships are a
factor in negotiations as trust breaks down. Institutional barriers may affect negotiations.
Considering the building example above, the two parties may agree, but local regulations
may prevent the agreed upon position being implemented.
Considering the effect of power relationships. The power relationships do not

necessarily reflect the divergent sizes of the organizations. For example, a large company
may have little power over a small company that holds a patent on a unique process.
Power relationships are situational and vary between negotiations. Power can be
influenced a number of ways. The first is through a change in the parties. A second is a
modification of timeframes as a means to apply “pressure”. The strength of the analysis
can affect power. The better the preparation, the greater the power in the negotiation.
Similarly the more activity put into the first three steps of negotiation (the preparation
phase) the greater the power.
Related to these analytical steps is the matter of ethics. Ethics are the principles of
conduct governing an individual or a profession. Ethics enter into negotiations in a variety
of ways. A series of ethical question should be considered in the preparatory phase of the
negotiation. Some of these may include:
• Do we wish to overplay our position? Why?

• Are we concerned with the effect of our position on bystanders?
• Is it in our best interest to extract many concessions from the supplier? And, how
many concessions are too many?

Module Two
Negotiation Mock Negotiations (Pre Negotiation)

Phases
Mock negotiations provide a run through of the negotiations where the negotiating team
works with a group simulating the selling group. The objective is to test the analysis, test
positions on each point of the negotiation and to test the approach.
Negotiations
Is the process of reaching an agreement with another party.
In their text, Lysons and Farrington (2005) describe 5 stages within a successful
negotiation:
• The first stage is introductions, agreement on the agenda and rules of procedure.
• Stage 2 involves clarifying the issues that the negotiation will address.
• Stage 3 results in goal alignment between the parties. The goals to be achieved will be
agreed upon. Some movement from positions related to the initial definition of the
issues can be expected.
• The fourth stage is removal of impediments to reaching common goals.
• The final stage is drafting of the agreement and ending the negotiation.
Post Negotiation
In this phase the i’s are dotted and t’s crossed in the agreement, perhaps with the help of
legal counsel. During this phase the negotiating team documents the negotiation process
and conducts debriefing sessions on the negotiation process.

Module Two
Session Wrap Up: Competitive Bidding and Negotiation
Review Now that you have looked at the criteria for competitive bidding and negotiation, and
Objectives for have recommended a course of action for De Havilland Inc., you should review the
this Session session’s objectives as restated here:
1. Understand the factors that suggest bidding is more appropriate than negotiation
and vice versa.
2. Determine whether negotiation or bidding is more suited to a particular situation.
6. Prepare a negotiating plan.

Preview Next In session 3 we explored bidding and negotiations. In session 4, candidates will
Session explore managing procurement and the financial leverage effect, and prepare an
exercise on centralization vs. decentralization.

Session Four

Organization
Z Internal Procurement Relationships

Z Financial Leverage Effect
Z Cross Functional Teams
Z Organizations: Centralized, Decentralized, and Hybrid

Module Two
Activity Directions
Session Overview and Objectives Read What You Already Know, the Session Overview and the
Appendix of this manual. These slides are from the instructor-
led version of this module.)
Session Notes: Internal Procurement Read the resources for this section.
Relationships
Resources: • Procurement interactions with different business units.
- Burt, Dobler and Starling, World • The types of interactions are different.
Class Supply Management, (Pages 41 • The importance of internal relationship management.
to 49)
- Session notes
Individual Reflection: Procurement Reflect on the following:

Relationships
What department in your organization do you have working
relationships with on a day to day basis as it relates to
procurement?
What is the condition of those relationships? Why are the

relationships good or bad?

• There are many groups in organizations that procurement
should be working with.
• Relationships are facilitated by a common goals, positive
attitudes and open communication

Module Two
Activity Directions
Session Notes: Financial Leverage The financial leverage effect may be difficult to approach.
Effect Review the example of the financial leverage effect provided in
the session notes. Also, review the different example provided in
Resources: the session slides.
- Session notes
• There is synergy between financial objectives and
procurement objectives
• There is an important relationship with finance
• The financial leverage effect is a way to empower
procurement
Self-assessment Activity: Financial Read and complete the self-assessment activity in this session.
Leverage Effect
(not marked)
Self-assessment Activity When you are finished the self-assessment activity, review the
Evaluation Self-assessment Evaluation section in this session.
Here are the key teaching points for the activity:

• To understand the dynamic relationship between procurement
and finance.
• Candidates should be able to calculate the various financial
leverage ratios, and know how to apply them.
• Understand the power of financial leverage to achieve
procurement and corporate goals.
Session Notes: Cross-functional Read the resources for this section.

Teams
Resources • Emphasize the benefits of cross functional teams.
- Burt, Dobler and Starling, World • Determine success factors for cross functional teams.
Class Supply Management (pages
103 to 117)
- Session Notes

Module Two
Activity Directions
Session Notes: Read the resources for this section.
Procurement Org.
Structures Here are the key teaching points:
• Types of procurement organization structures
Resources: • Advantages and disadvantages of each
- Johnson and Leenders. • The key factors that guide procurement organization structure (Johnson
The Supply Organizational and Leenders)
Dilemma • Effect of organizational change on procurement
- Session notes
Individual Exercise: Read the requirements and complete the exercise in this session.
Centralization vs.
Decentralization Submit the exercise for evaluation. Refer to the Session Schedule provided for
(marked – 5%) submission instructions.
Session Wrap Up Review this session’s objectives. View the topics and activities for the next
session.

Module Two
Procurement and Supply Management Organization
What You The previous session reviewed the concepts of specifications, bidding and negotiation.
Already Know This session builds further on internal supply relationships and cross functional teams.
Overall corporate strategy from the top level down is reviewed, and the issue of
centralized versus decentralized procurement is examined.
Overview Who do procurement team members meet with? Why? The first part of this session
deals with these issues. Overall the goal of procurement is to have healthy, open
relationships directed toward corporate strategic goals with all relevant parties in the
organization. This session also provides the candidate with an overview of the
significant leverage effect that procurement may have on financial results.
A desirable approach to working with other departments is to use cross functional

teams. In this session the benefits, problems and critical success factors for cross
functional teams are considered. Then, the ways that procurement can be organized;
centralized, decentralized or a combination of both (hybrid) will be addressed. The
related reading suggests the form of organization is not merely a matter of weighing the
advantages and disadvantages of centralization or decentralization. More important is
the strategic environment in which the corporation operates.
1. Identify the relationships between procurement and other functional areas of an

organization.
2. Describe the reasons for/benefits of using of cross functional purchasing teams.
3. Review the problems in using cross functional teams.
4. Understand the critical success factors for cross functional teams.
5. Describe range of options for organizing procurement.
6. Assess the options for the organization of procurement in an organization.

Module Two
Procurement and Supply Management Organization, cont.

Reading
• Burt, Dobler and Starling , World Class Supply Management, Pages 41 to
49.
• Johnson and Leenders. The Supply Organizational Structure Dilemma.
• Burt, Dobler and Starling, World Class Supply Management, Pages 104 to
117.
1. What department in your organization do you have working relationships with on

a day to day basis as it relates to procurement?
2. What is the condition of those relationships?
3. Should your organization work using cross functional teams? What could the
problems be?
4. What is the purchasing model for your organization?
5. When did it last change? Why?
6. Should it be more centralized or more decentralized? Why?
7. How might it change in the next 5 years? Why?

Module Two
Self-assessment Calculate the financial leverage effect at Tricorp, using the following information.
Activity
You are the Director of Strategic Procurement with Tricorp, a company that
(not marked)
manufacturers aftermarket automotive sheet metal. At the latest strategic planning
session there was concern over the slow deterioration of Tricorp’s shares. Some
investment analysts had been commenting that the return on assets was lower relative to
other automotive suppliers. As part of the strategic commitment you agreed to review
procurement costs with your team. You assign Eric Morales, a PMAC certified CPP to
see if there is a way to cut costs of materials.
Tricorp’s Income statement and balance sheet are as follows.
Income Statement (partial)
Sales: $75,000,000
Sheet metal: $20,000,000

Dies: $ 5,000,000
Total Material $25,000,000
Forming Labour $10,000,000

Polishing Labour $15,000,000
Total labour: $25,000,000
Overhead: $18,000,000
Cost of goods sold $68,000,000
Balance Sheet (partial)
Inventory: $7,000,000
Cash: $5,000,000
Accounts Receivable: $7,000,000
Total Current Assets $19,000,000
Fixed Assets $19,000,000
Total Assets $38,000,000
Eric comes up with two options. The first is a decrease in sheet metal costs of
$2,000,000. The second is a decrease in the cost of dies of $1,000,000. What is the
effect of each option on the ROA for Tricorp?

Module Two
Individual Centralization vs. Decentralization

Exercise
double spaced, with 2.5 cm margins on all edges, and be in 12-point font. This exercise
is limited to a maximum of five pages. Remember to write in complete sentences; do
not use point form, except when providing a coherent list in a wider context.
marking.
The requirements for the exercise are:
1. Select one organization that uses centralized purchasing. This could be your current
organization, or a previous organization. (If you do not have an example from your
own experience, please feel free to use the cases in this module.) Prepare a written
report of the changes if any that could be made toward decentralization. Justify
keeping the status quo or the changes.
2. Select one organization that uses decentralized purchasing. This could be your
current organization, or a previous organization. (If you do not have an example
from your own experience, please feel free to use the cases in this module.)
Prepare a written report of changes if any that could be made toward centralization.
Justify keeping the status quo or the changes.

• Did you apply the appropriate concepts and tools from this session?
• Are the recommendations realistic and achievable?
• Is the analysis strategic (i.e. in alignment with the organization’s procurement
strategy, and the organization’s goals in general)?
For more details on centralization and decentralization, refer to the session notes and
readings for this session.


Module Two
Solution Tricorp. – Financial Leverage Effect Calculations*
Partial Income Statement
Before After
option 1 option 2
Sales $75,000,000 $75,000,000 $75,000,000
Sheet Metal $20,000,000 $18,000,000 $20,000,000

Dies $5,000,000 $5,000,000 $4,000,000
Total Materials $25,000,000 $23,000,000 $24,000,000
Forming labour $10,000,000 $10,000,000 $10,000,000

Polishing labour $15,000,000 $15,000,000 $15,000,000
Total Labour $25,000,000 $25,000,000 $25,000,000
Overhead $18,000,000 $18,000,000 $18,000,000
Cost of Goods Sold $68,000,000 $66,000,000 $67,000,000
Gross Profit $7,000,000 $9,000,000 $8,000,000
Profit Margin 9.3% 12.0% 10.7%
Partial Balance Sheet
Inventory $7,000,000 $6,440,000 $6,720,000

Cash $5,000,000 $5,000,000 $5,000,000
Accounts Receivable $7,000,000 $7,000,000 $7,000,000
Total current Assets $19,000,000 $18,440,000 $18,720,000
Fixed Assets $19,000,000 $10,000,000 $10,000,000
Total Assets $38,000,000 $28,440,000 $28,720,000
Asset turnover 2.0 2.6 2.6
Return on Assets 18.4% 31.6% 27.9%
*Note person in charge of unit: the 560 000 $ (be 8% of 7 MM $) and the 280 000 $ (be 4% of 7 MM $) are the same percentages that those of
the reduction of the cost of the matters. Hypothesis of the designer = there is a direct link between these two elements. In practice, it arrives
often that the matrix cost (equipment) is absorbed.

Module Two
Session Notes: Procurement and SM Organization
Procurement Procurement should be a central hub for departments within an organization. The
Internal procurement as a hub perspective assures that procurement is involved in the many
Relationships areas where it can provide a positive effect. Procurement should be aware, and in
contact with, the many parts of the organization that may affect procurement
processes.
Typical organizational relationships are as follows:
Production. It is through procurement that goods and services are made available for
production. Examples include raw materials for transformation such as paper in a print
plant, to call centre services for a software producer. At the same time procurement
relies on production. Production requirements and schedules provide inputs into the
procurement cycle. Without these, supply shortages and excesses may occur resulting
in production downtime, or excess resources being tied up in inventory.
Design. Design or engineering has a relationship with purchasing in a variety of

ways. Often design is the initiator of a need, and a key developer of the specification.
As we saw in the earlier case, a failure in liaison between design and procurement can
have undesirable consequences, through extra product costs, as well as imbalances in
internal relationships.
Finance. Procurement works with finance, in terms of payment for goods and services
purchased. The goal is alignment of finance’s requirements with benefits that
procurement can negotiate with suppliers. At the same time procurement can provide
substantial financial leverage benefits for a corporation.
Marketing. Sales forecasts drive the production schedule in most organizations and
consequently drive supply requirements. At the same time, procurement is an
important focal point in the provision of goods and services for the organization to
market. Through procurement, costs and price is affected, as is quality and
availability.
Information technology. Information technology is an enabler of many advanced

procurement activities, such as spend analysis and e-commerce. At the same time
procurement is an influencer of information technology, through its functions.
Procurement works with information technology in terms of goods and services
acquired. (Module 1: Supply Chain Management examined technology in the supply
chain, and focused on information requirements determination.)

Module Two
Session Notes: Procurement and SM Organization, continued
Procurement Legal. Many procurement agreements, especially for large capital items, may be quite
Internal complex. Accordingly, legal counsel may be involved. From time to time
Relationships relationships with suppliers may fail, due to a variety of reasons. The result may be
(continued) legal and procurement working together to resolve the issues.
Supply Chain Managers. Depending on the degree of integration of supply chain

management within procurement, the degree of involvement may range from simply
advising supply chain managers as to requirements to an active role in managing all
aspects of the supply chain.
The Leverage Better procurement management has a powerful effect on financial results. Consider
Effect of an organization with the following Income Statement and Balance Sheet.
Improved
Procurement on
Financial Results Income Statement (partial)
Sales: $60,000,000
Material: $35,000,000
Labour: $15,000,000
Overhead: $ 5,000,000
Cost of Goods Sold: $55,000,000
Gross Profit $5,000,000
Balance Sheet (partial)
Inventory: $5,000,000
Cash: $3,000,000
Accounts
Receivable: $2,500,000
Total Current Assets: $10,500,000
Land: $10,000,000
Building: $21,000,000
Total Fixed Assets: $31,000,000
Total Assets: $41,500,000

Module Two
The Leverage The profit margin (PM) in this example is 8.33%

Effect of ($5,000,000/$60,000,000)
Improved
Procurement on The asset turnover (AT) in this case is 1.45
Financial Results (sales/total assets = $60,000,000/$41,500,000)
(continued)
The return on assets (ROA) is 12.08%
(8.33% x 1.45)
Suppose through strategic procurement activities the costs of material are reduced by
10% to $31,500,000.
The cost of goods sold decrease to $51,500,000.

Inventory also decreases by 10% to $4,500,000.
The effects are:

Profits increase by $3,500,000 to $8,500,000
The PM increases to 14.17% ($8,500,000/$60,000,000)
Current assets decrease to $10,000,000
Total assets decrease to $41,000,000
AT increases to 1.46 ($60,000,000/$41,000,000)
ROA becomes 20.69% (14.17% x 1.46)
Cross Functional Cross functional teams are teams directed towards a common goal that use resources
Teams: across the organization. In procurement, the goal might be the acquisition of a new
Benefits service such as technology support or a component for a new product such as a jet
engine assembly for a new airplane. Cross functional teams are becoming more
common-place. Some of the reasons for, and benefits of cross functional teams are:
• The realization that procurement is strategic and has a significant financial
impact
• Teams yield better results than individual activity
• The ability to cut timelines (provided the team performs effectively)
• They improve cross organizational communication and use of information
• The increasingly complicated nature of products and the inputs to products
(global supply chains, high quality requirements)
• They improve the ability of an organization to deal with these complex
issues and products
• Greater creativity and brainstorming

Module Two
Cross Functional The use of cross functional teams is not without problems. Some of these are:
Teams:
Problems • Role conflicts for team members between their individual and team duties
• Excessive workloads for some team members
• Ineffective reward mechanisms for team players
• Loss of knowledge: team members may devote more time to teamwork and
less time understanding the specifics of their subject area
• Cost of training and retraining team members
Cross Functional There are a number of critical success factors for successful cross functional team
Teams: deployment:
Critical Success • Executive sponsorship is a necessity. In order for resources to be freed to the
Factors team, senior management must release time of those resources. Through
executive sponsorship, the resources are made available. Issues and
developments within the teams can be brought forward at a senior level as
necessary.
• Effective leadership as a second success factor. While there are many qualities
that go into successful leadership, generally effective team leaders are non
autocratic, communicators who focus on team dynamics and team goals. Such
leaders gain power through their ability to build consensus. They do not attain
their stature in the team through their formal organizational hierarchical
position. For the team to work effectively, the right people must be on the team.
Are all the areas with vested interest represented? Are the members of the team
competent? Do they want to be on and contribute to the team? Do they have the
ability to adapt to the requirements of the team?
• Once a group of team members has been selected, the members will need
training in order to effectively reach the team goal. Training can range from
group dynamics through effective communications to specific technical skills to
work on the project.
• Finally for a team to be successful it will need resources to undertake the work.
Resources include rooms, technologies and materials to support the team effort.
It also includes sufficient time to undertake the work.

Module Two
Ways of Most of the literature related to supply management suggests there are three models
Organizing for organizing procurement:
Procurement • The centralized structure approach creates a central procurement organization for
all locations and divisions of the organization.
• In a decentralized approach procurement activities are disbursed throughout the
organization.
• Hybrids are a combination of the two, where certain activities are managed by a
central procurement function while others are distributed throughout the
organization.
There are advantages and disadvantages to each type of organization.
Centralized - Advantages
• Can achieve cost savings
• Reduces supplier costs as they have to deal with only one part of the buying
organization
• Procurement staff can specialize
• Simpler co-ordination and control
• Easier to develop a strategic view
Centralized – Disadvantages
• May work against teamwork approach
• Potential for too much control
• Isolation from business units
• Positions may become too specialty focused and this can disenfranchise staff
Decentralized – Advantages
• Speedier response for business units
• Creates more incentive to use local supply good local PR
• Results in wider job authority potential a staff motivator
Decentralized – Disadvantages
• Loss of volume opportunities
• Communication may be more difficult
• May lack strategic view as focus is on operational needs of the business unit
• Will have inconsistencies between business units in terms of goods and
services

Module Two
The Hybrid The hybrid approach is an attempt to capture the advantages of centralization and
Approach and decentralization without the related disadvantages. In the hybrid structure, the central
Trends in areas role may be the co-ordination of activities across units (for example sources,
Procurement policies, procedures) in keeping with overall corporate strategy. At the business unit
Organization level the actual procurement occurs. Alternately, the central group may be responsible
for “strategic” purchases, while the business units are responsible for operational
purchases.
Large multi-unit organizations tend to migrate from one approach to the other over
time. The Johnson and Leenders article shows that while the advantages and
disadvantages of centralized versus decentralized structures may be a partial
consideration in the how procurement is organized, there are larger overarching
considerations.
The analysis indicates that it is external environmental factors such as costs and
market dynamics that drive the changes, since these factors also drive corporate
strategic initiatives. As these initiatives cause changes in the corporate organizational
structure the procurement area adapts to the new organizational structure. Within this
paradigm of change major influencers, generally from the Chief Executive Office
affect the change. At the same time, moderators affect the pace and type of change.
Moderators range from external consultants to business unit managers.
Johnson and Leenders also suggest that the shift in the procurement organization had
substantial effects on the procurement function:
• Typically the Chief Purchasing Officer (CPO) was responsible for the re-
alignment, and it was often necessary to change the CPO.
• Second, the implementation phase caused a significant stress for staff of the
procurement organization.
• Third, establishing a shared services organization which charged for its services
was often a common tactic to procurement reorganization where centralization
occurred, as well as where decentralization occurred.
• Finally where the organization was moving toward centralization issues arose
with the skills of staff, as there may not have been sufficient numbers of senior or
even middle-level staff to effectively resource the new central organization.

Module Two
Session Wrap Up: Procurement and SM Organization
Review Now that you have looked at the management of procurement, and have analyzed
Objectives for centralized vs. decentralized operations, you should review the session’s objectives as
this Session restated here:
1. Identify the relationships between procurement and other functional areas of an

organization.
2. Describe the reasons for/benefits of using of cross functional purchasing teams.
3. Review the problems in using cross functional teams.
4. Understand the critical success factors for cross functional teams.
5. Describe range of options for organizing procurement.
6. Assess the options for the organization of procurement in an organization.

Preview Next In session 4 we explored procurement and supply management. In session 5,

Session candidates will explore make or buy analysis, and prepare a case on total cost of
ownership.

Session Five
Make or Buy
Z Make or Buy
Z Core Competencies
Z Core Products
Z Total Cost of Ownership: Elements
Z Total Cost of Ownership: Benefits
Z Total Cost of Ownership: Implementation

Module Two
Activity Directions
Session Overview and Read What You Already Know, the Session Overview and the Objectives
Objectives and a brief Review the PowerPoint slides for this session (see the Appendix of this
overview of the session. manual. These slides are from the instructor-led version of this module.)
Individual Reflection: Reflect on the following:

Make or Buy Decision at 1. Does your organization deploy make or buy analysis? Why? Why not?
Your Organization 2. In your organization have you considered the strategic level factors
related to make or buy?

- Burt, Dobler and Starling, • Difference in characteristics of make or buy organizations versus non
World Class Supply make or buy (this analysis happens in more strategic organizations).
Management Pgs. 304-315 • What factors would need to change for those organizations who do
- Session notes not use make or buy analysis?
Session Notes: Introduction Read the resources for this section.
to Total Cost of Ownership
• Readings reinforce strategic level issues, particularly supplier
Resources: dependence.
- Burt, Dobler and Starling, • Readings explore tactical level issues.
World Class Supply Mgmt, • Production capacity and qualitative factors are important to make or
Pgs 304 to 315 buy analysis.
- Session notes
Session Notes: Core Read the resources for this section.

Competencies of the
Organization Here are the key teaching points:
• Understand what a core competency is. Review the examples from
Resources: the reading and the session notes.
- Prahalad, C. K. and Hamel, • Differentiate between core competencies, core products and end
Gary. The Core products.
Competence of the • Note the importance of core competency in the make or buy decision.
Corporation.
- Session notes

Module Two
Activity Directions
Individual Reflection: Core Reflect on the following questions:
Competencies at Your 1. Does your organization have core competencies? What are they?
Organization 2. What are your organization’s core products? Do they flow from the
core competencies?

- Session notes • Understand what a core competency is by applying it to your
organization.
• Understand the difference between core competencies and core
products at your organization.
Session Notes: Components Read the resources for this section.
of TCO
• Review the different components of total cost of ownership (use
Resources: information from article)
- Ellram, Lisa. Total Cost of • Highlight differences in pre-transaction, transaction, and post-
Ownership: Elements and transaction costs
Implementation
- Course notes
Individual Reflection: Reflect on the following questions:

Benefits of TCO 1. Do you use total cost of ownership in your organization?
2. What are the pros and cons of using total cost of ownership in your
Resources: organization?
- Ellram, Lisa. Total Cost of
Ownership: Elements and
Implementation
- Session notes

Module Two
Activity Directions
Session Notes: Calculating Read the resources for this section.
TCO
Resources - Learn to calculate present value.
- Session Notes - Perform the steps in total cost of ownership analysis.
- Examples in session notes - Apply total cost of ownership analysis to your organization, or to the
- Examples in PowerPoint examples provided (i.e. determine what the numbers really mean).
slides
Individual Case Report: Analyze the case using the Case Preparation method described in the
Make or Buy and TCO – Introduction and Overview.
Happyland Construction
(marked – 5%) Prepare the case report according to the instructions in this session. Also,
use the guidelines in the Written Case Reports section of the
Resources: Introduction and Overview.
− Happyland case
− Introduction and Submit the case report for evaluation. Refer to the Session Schedule for
Overview: Written submission instructions.
Case Reports (report
guidelines) Here are the key teaching points:
− Session notes in this • Apply the total cost of ownership in a make of buy decision.
session • Examine the qualitative factors in a make or buy decision.
− PowerPoint slides for • Calculate TCO correctly – this will ensure you have the information
this session you need to make the decision.
− Framework questions in • Provide your recommendations.
this session
− Required readings for
this session
− Fabritek, 1992 Sample
Case and Report
(Appendix)
Session Wrap Up Review this session’s objectives. View the topics and activities for the
next session.

Module Two
Make or Buy
What You An important strategic and tactical decision is whether to make or buy a particular
Already Know product or service. Make or buy depends on procurement processes such as
specification, sourcing, competitive bidding and negotiation (see session 3). If buy is
the dominant focus of the organization, this will have ramifications on the organization
design and supply relationships. You may already have faced these kinds of decisions
at your organization. This session will explore the issues and strategies behind make or
buy decisions.
Overview Make or buy has both strategic and tactical elements. At the strategic level, make or
buy depends on two significant factors: the core competencies of the organization and
the threat of supplier dependence. At the tactical level cost is the significant issue in the
decision. The appropriate method to assess cost is through the life cycle approach
where all costs (pre-transaction, transaction and post-transaction) are considered. The
make or buy decision is also influenced by tactical issues such as production
availability of capacity and qualitative factors (e.g. raw material quality).
The life cycle approach or total cost of ownership is a critical element of make or buy.
Since the decisions involved in determining total costs of ownership are for products
and services that are used over a period of time, discounted cash flow analysis is an
important part of calculating total cost of ownership.

1 Describe the factors (quantitative and qualitative) that enter into the make or buy
decision.
2. Explain the concept of core competency.
3. Describe the role of core competencies in creating competitive advantage.
4. Identify core competencies of an organization.
5. Describe the benefits of the total cost of ownership approach.
6. Conduct a total cost of ownership analysis for a product or service used in an
organization.
7. Use total cost of ownership to support a make or buy decision.

Module Two
Make or Buy, continued

Reading
Burt, Dobler and Starling, World Class Supply Management 7th Edition, Pages 304-
315.
Prahalad, C. K. and Hamel, Gary. The Core Competence of the Corporation.

Harvard Business Review. May-June, 1990.
Ellram, Lisa. Total Cost of Ownership: Elements and Implementation
1. Does your organization deploy make or buy analysis? Why? Why not?
2. In your organization have you considered the strategic level factors related to
make or buy?
3. Is your organization organized on a strategic business unit or core competence
basis?
4. Does your organization have core competencies? What are they?
5. What are your organization’s core products? Do they flow from the core
competencies?
6. Do you use total cost of ownership in your organization?
7. What are the pros and cons of using total cost of ownership in your organization?
Introduction to Happyland Construction

Case Report
Write a case report on the Happyland Construction case using the guidelines for written
case reports found in the Written Case Reports section of the Introduction and
Overview.
The requirements for the written case report are stated below.
Appendix.

Module Two
Individual Happyland Construction – Case and Requirements

Written Case
Report Happyland Construction Inc. is an engineering firm involved in design and construction
of oil shale plants. It is building a plant in Blissful Valley which is part of Mirth County,
in the province of Giggle. Happyland is a world leader in designing shale oil plants and
has about 100 employees working on site. Sid Joyous who is the Chief Purchasing
Officer for Happyland has been advised that a new crane has to be used on the site - the
GargantuLift 6000 by Mega Corporation. It has been recommended by a team of crane
operators, finance staff, purchasing and site management. Sid Joyous is discussing the
matter with Bill Hoppedup the Chief Financial Officer.
The conversation goes like this:
Bill: I see that the GargantuLift 6000 is being recommended, what sort of
financial analysis has been done to date?
Sid: We have examined both the purchase price and cost information for the
GargantuLift, and the team is quite confident it is a best buy for the work we
need to do.
Bill: What about costs such as defining the requirement and investigating
alternate sources?
Sid: We did a lot of prior research working with mine production staff and
engineering. We also spent considerable time finding alternate supplies. Mega
Corp appears to be the best source.
Bill: What did all that internal time and effort amount to?
Sid: About $500,000.
Bill: Any other financial analyses planned?
Sid: We expect to do a total cost of ownership study. Betty Jolly who works in
my area will be doing the analysis. She sent the following by email this morning
knowing you and I would be meeting:
Purchase Cost: $11,000,000

Travel and Related Costs in Assessing Cranes
and Making Recommendation: $150,000
Initial Training for 2 crane operators: $20,000
Yearly Maintenance:$50,000
Major Overhaul in 5 years: $400,000
Annual operating costs (excluding operators): $100,000
Annual wages and benefits operators): $200,000
Disposal Value at the end of Year 10: $500,000
Useful life: 10 years

Module Two
Individual Bill: That looks good but do not forget we depreciate our capital assets over 5
Written Case years using a straight line approach, and use a discount rate of 5%. When Betty
Report is finished, let’s sit down with Kerry Contented the CEO and go over the
(continued) analysis.
The next day Sid and Betty meet with Bill (CFO) and Kerry (CEO).
Bill: Your analysis is very thorough, good work.

Sid: We have only one more thing to do. I am wondering if we can simply
subcontract for use of the GargantuLift. Perhaps this is cheaper.
Kerry: Yes let’s investigate that as well.
Betty: Okay I will do a comparison of the make analysis I just did with a buy
analysis.
Betty investigates and finds that Digger Construction will supply a GargantuLift to
Happyland for $1,500,000 yearly payable at the end of the year for the next 10 years.
Digger will be responsible for all maintenance, operating and decommissioning at the
end of 10 years. Happyland will provide the operators.
Requirements:
1. Prepare Betty’s original make analysis (as best you can).
2. Then, prepare the buy analysis Sid has promised.
3. Compare both make and buy analyses. What is the best choice?
4. What are the qualitative factors that should be considered?

Module Two
Session Notes: Make or Buy
Make or Buy Make or buy involves decisions related to producing a good or service in house or buying
Decisions the good or service. There are two levels to the make or buy decision - strategic decisions
and tactical decisions.
Strategic Level Decisions
The following need to be considered at the strategic level:
Core competencies: The make or buy should be consistent with the core competencies of
the organization. Organizations should consider carefully before outsourcing any activity
that is a core organizational competency (e.g. if the organization is a specialty
manufacturer or service provider).
Supplier dependence: The make or buy decision should consider the potential that the
supplier may attain sufficient power that they are able to dictate future arrangements with
the organization. This would put the organization in a position of dependence on a single
supplier, and affect the critical operations of the organization.
Tactical Level Decisions
The following need to be considered at the tactical level:
Total cost of ownership: The approach (either to make or buy) should reflect the lowest
total cost of ownership. Total cost of ownership is ownership over time, and any
calculation of total cost of ownership must also account for the time value of money
(discounted cash flow analysis).
Production capability: Production capability refers to the availability of capacity to

produce the product or service, the amount of control need over the product or service,
and the quality requirement for the product or service.
If there is limited available production capacity (or other production can not be shifted to
increase production capacity for the product or service) a buy decision should be seriously
considered.
If the critical nature of the component increases or there are concerns with potential
supply disruptions, a make decision should be seriously considered.
The make or buy decision is also affected by the quality of inputs available from suppliers.

Module Two
Session Notes: Make or Buy, continued
Make or Buy Qualitative factors and intangibles

Decisions
(continued) There are a variety of factors that may either support a make or buy decision.
Some of the quality (and intangible) factors that support a buy decision are:
• The supplier’s research knowledge and experience is of great benefit

• The product or service is a good candidate for multiple sourcing
• The product or service is minimally affected by irreversibility issues. For
example: unions, local media, or any external pressure that would make it difficult
to reverse the make or buy decision
• Suppliers can provide tight (and accurate) cost estimates
• The product or service is required in low volumes, and suppliers are available who
want to perform the work
• The organization has a desire to be seen as a lean organization
• There are unexpected sales which increase volume, and require that you add
capacity quickly
Some of the quality (and intangible) factors that support a make decision are:
• The quantities are too small to contract to suppliers (no economy of scale)
• Making the product or service allows for greater organizational integration (e.g.
economy of scale is achieved through assembly of many different products at the
same plant)
• Potential suppliers in the current market are considered unreliable
• Management believes that there will be shortages in the future, and that the
organization must make the product or service to assure supply
• There is local political pressure, or union pressure to maintain a stable workforce
(the organization may be experiencing declining orders for other products or
services)
• Management requires the organization to maintain or increase control over the
product line

Module Two
Core Prahalad and Hamel (1990) provide a variety of elements that define an
Competencies organization’s core competency:
• The competency reflects the learning of the organization, i.e. it is human

capital oriented.
• The competency reflects a commitment to communication and working across

organizational boundaries.
• The competency improves/grows with use (i.e. naturally develops along with
the organization).
• The competency is a driver of new business development.
• The competency allows for diversification (different products and businesses

development).
• The competency tends to be hidden or ingrained in the organization. It is not

immediately observable when examining the organization and its products or
services.
Prahalad and Hamel suggest that the following three criteria must be satisfied for an
activity to be a core competence:
• The activity must provide access to a wide variety of markets.
• The activity must provide a benefit to the end product consumer (i.e. be
strategic to the company in that it delivers value to the customer).
• The activity should be difficult for competitors to imitate.

Module Two
Competitive Competitive advantage is the fostering of core competency to strategically grow the
Advantage business.
Core competencies flow across business units and are not unique to any single
division. For example, a core competency would be a research company having
specialized knowledge in the mathematical theory and applications of statistics to risk
assessment. In this organization, mathematical theory and application of statistics is
not the domain of a specific business unit. There may be a software unit, a corporate
training unit and an education unit all using this same core competency, and perhaps
other core competencies.
Core products are the products arising from the core competency. Suppose the core
competency of the research organization above is deployed in a risk measurement
model for investments. This core product might be sold directly to investment
managers, but the organization may also chose to market the algorithm to other risk
management software providers that sell to investment managers.
End products are the outputs of business units. In the example above this may be the
software sold by the company’s software unit.
From a strategic perspective, organizations must find their core competencies and use
those as drivers for growth and profitability (i.e. to foster their competitive
advantage).
Total Cost of The Ellram article (1993) provides a detailed discussion of the total cost of ownership
Ownership methodology.
The total cost of ownership includes the purchase price, but that is only one of the
costs that should be considered in procuring a product or service. In addition to the
price, there are costs that occur prior to procuring the item and costs that occur after
procuring the item. Total cost of ownership is all these costs combined. Since the
costs before and subsequent to the buy are considered, the costs are often referred to
as the total life cycle costs. These life cycle costs are particularly evident in capital
goods purchases.
Ellram uses a framework that consists of three costs categories – pretransaction,

transaction and posttransaction.

Module Two
Pretransaction Pretransaction costs are all the costs that occur prior to the good or service being
Costs delivered. Typical costs components in the pretransaction phase include:
• Need recognition
• Need description
• Sourcing
• Supplier selection
Within sourcing are costs of finding sources, evaluating them (qualifying) and adding
them to the list of approved suppliers (administrative costs).
Pretransaction costs may also include initial components of relationship management

such as the education of suppliers and the buying organization in each other’s
operations.
Transaction Transaction costs are the costs that occur after supplier selection, and up to the point
Costs the product or service is delivered to the organization. These costs include:
• Ordering
• Monitoring
• Receipt and inspection
• Payment
• Documentation
Ellram specifically notes price as a transaction cost. Price is often a link between pre
transaction and transaction costs as price is typically a major consideration in supplier
selection.
Duties and tariffs also are typically included in price assessment. Ellram is somewhat
unclear with respect to payment and documentation as components of the transaction
cost, nevertheless, these costs are elements of the product or service life cycle costs.

Module Two
Posttransaction Posttransaction cost analysis is often the most significant contribution that the total
Costs cost of ownership approach adds to procurement decision making. In the previous
review of procurement processes (session 2), the identifiable posttransaction process
was relationship management. Over the life cycle of the product, there are a variety of
additional costs that should be considered:
• Relationship costs with the supplier

• Maintenance costs
• Repair costs
• Lost production costs
• Customer goodwill costs
• Decommissioning, disposal and recycling costs
Many of these post-transaction costs can occur years after the initial acquisition.
Post-transaction costs must be analyzed and quantified. They must reflect actual
expenditures or expected losses. Items that are accounting costs, such as depreciation,
are excluded (i.e. paper-based costs with no real cash outlay).
Total Cost of According to Ellram, total cost of ownership provides the following benefits:
Ownership:
Benefits Performance Measurement
• Good framework to evaluate suppliers

• Concrete way to measure results of quality improvement efforts
• Excellent tool for benchmarking
Decision Making
• Forces purchasing to quantify tradeoffs

• Good basis for making supplier selection decisions
• More informed decision making
• Creates a structured problem-solving environment
Communication
• Excellent communication vehicle between an organization and its suppliers

• Involves other functions in purchasing decisions

Module Two
Total Cost of Insight/Understanding

Ownership:
Benefits • Provides excellent data for trend analysis on costs
(continued) • Provides excellent data for comparing supplier performance
• Provides excellent data for negotiations
• Provides critical data for target pricing
• Requires purchasing to develop an awareness of most significant nonprice
factors that contribute to TCO
• Improves long-term strategy by focusing on the “big picture”
Support Continuous Improvement
• Identifies where suppliers should focus improvement efforts, i.e. drives

suppliers to work on the “right thing”
• Identifies cost savings opportunities
• Forces a organization to look at internal issues - how their own
requirements/specifications may actually increase costs
• Encourages professional growth in purchasing personnel by broadening their
perspective
Total Cost of Implementation of total cost of ownership analysis may be difficult as it has extensive
Ownership: data requirements. Spend analysis may provide a variety of detail for the transaction
Implementation phase but is unlikely to provide pretransaction or posttransaction information. Issues
that must be addressed when moving to a total cost of ownership approach are:
• Refocus: move from simple price analysis to long term cost analysis
• Determination of when to use total cost of ownership, i.e. only for capital
projects, or for all manufacturing components, or for some of both
• Data will need to be developed, stored, and maintained
• Will TCO analysis be rolled out for all applicable situations, or pilot tested
first?
For total cost of ownership analysis it is essential to understand the concept of

discounted cash flow. Some of the costs will occur in the current time period while
others will occur in the future. In order to derive a comparison, the future costs
must be discounted for the current time frame (i.e. the current value of future
money). The discount rate that is applied is often called the internal rate of return, and
may derived from a variety of sources, such as the organization’s costs to borrow
money or the average risk-adjusted return on the organization’s stock or shares.

Module Two
Total Cost of The following example shows how discounting works:

Ownership:
Discounting Billy Smith is confronted with a dilemma. He has two alternatives for his
Example organization’s new REDUCE project. The objective of REDUCE is to decrease
procurement costs by 10%.
Vendor A can provide the software for $100,000. Billy has checked with other users
of this software and discovered it fails from time to time. His colleagues tell him each
time it fails, which seems to be about 2 times per year, they expect the cost to be about
$20,000 in terms of repairs and loss of goodwill with suppliers. Annual licensing fees
are $20,000. The software is expected to have a life of 5 years at which point it will be
decommissioned. Costs at that point will be $60,000.
Vendor B can provide the software for $250,000. When checking with colleagues at
other organizations he finds this software is considered very reliable, rarely going
down. Annual licensing fees are $30,000 and decommissioning is estimated to be
$25,000. Vendor B’s software is also expected to last 5 years.
Assuminganainterest
Assuming discountraterate of 7.5%
of 7.5% what
what is is the present
the present value of: value of:
$10,000 received annually starting 1 year from now for 5 years
Year 0 1 2 3 4 5 Total
Cash $10,000 $10,000 $10,000 $10,000 $10,000
Discount Factor 0.930233 0.865333 0.804961 0.748801 0.696559
1/1.0751 1/1.0752 1/1.0753 1/1.0754 1/1.0755
Discounted Value $9,302 $8,653 $8,050 $7,488 $6,966 $40,459
Assuming a discount rate of 8% what is the present value of:

Assuming an interest rate of 8% what is the present value of
A capital cost for major maintenance, of $250,000 7 years from now

(note 7 years from now is 6 discount periods)
Year 0 1 2 3 4 5 6 Total
Cash $0 $0 $0 $0 $0 $250,000
Discount Factor 0.63017
1.086
Discounted Value $0 $0 $0 $0 $0 $157,542 $157,542

Module Two
Total Cost of In both cases, the first years’ licensing fees are included in the initial purchase price.
Ownership: Billy and his team have spent about $100,000 on developing the specification, finding
Discounting sources, qualifying them and reviewing the two bids. The organization uses a discount
Example rate of 7%. Using the total cost approach the analysis is as follows:
(continued)
Time Up to today Year 1 Year 2 Year 3 Year 4 Year 5 TOTAL
(or year 0)
Vendor A
Pretransaction $100,000
Transaction $100,000
Posttansaction $40,000 $60,000 $60,000 $60,000 $120,000
Total Cost $200,000 $40,000 $60,000 $60,000 $60,000 $120,000 $540,000
Discount factor 0.9346 0.8734 0.8163 0.7629 0.7130
Discounted value $200,000 $37,383 $52,406 $48,978 $45,774 $85,558 $470,099
Vendor B
Posttansaction $30,000 $30,000 $30,000 $55,000
Total Cost $350,000 $0 $30,000 $30,000 $30,000 $55,000 $495,000
Discount factor 0.9346 0.8734 0.8163 0.7629 0.7130
Discounted value $350,000 $0 $26,203 $24,489 $22,887 $39,214 $462,793
Discount Rate 7%
Note that if price were simply the criteria then Vendor A would be selected since the
cost is $100,000 versus $250,000. However when total cost of ownership is used
vendor B proves to be superior, at least at a 7% discount rate.
The discount rate is an important consideration. Suppose the discount rate is 15%.
Then the choice of Vendor A is superior to Vendor B as shown below:
(or year 0)
Vendor A
Posttansaction $40,000 $60,000 $60,000 $60,000 $120,000
Total Cost $200,000 $40,000 $60,000 $60,000 $60,000 $120,000 $540,000
Discount factor 0.8696 0.7561 0.6575 0.5718 0.4972
Discounted value $200,000 $34,783 $45,369 $39,451 $34,305 $59,661 $413,569
Vendor B
Posttansaction $30,000 $30,000 $30,000 $55,000
Total Cost $350,000 $0 $30,000 $30,000 $30,000 $55,000 $495,000
Discount factor 0.8696 0.7561 0.6575 0.5718 0.4972
Discounted value $350,000 $0 $22,684 $19,725 $17,153 $27,345 $436,907
Discount Rate 15%
(In this example an interest rate of about 8.5% is the crossover point).

Module Two
Session Wrap Up: Make or Buy
Review Now that you have examined make or buy analysis, and have recommended a course
Objectives for of action for Happyland Construction, you should review the session’s objectives as

1 Describe the factors (quantitative and qualitative) that enter into the make or buy
decision.
2. Explain the concept of core competency.
3. Describe the role of core competencies in creating competitive advantage.
4. Identify core competencies of an organization.
5. Describe the benefits of the total cost of ownership approach.
6. Conduct a total cost of ownership analysis for a product or service used in an
organization.
7. Use total cost of ownership to support a make or buy decision.

Preview Next In session 5 we explored total cost of ownership and the make or buy decision. In
Session session 6, candidates will explore price and cost analysis, and prepare a case report on
Frich Turbo Engine Co.

Session Six
Z What is the Right Price?

Z Price Assessment & Discounts
Z Market Conditions & Procurement Leverage
Z Cost Analysis & Types of Costs
Z Profit & Learning Curves

Module Two
Activity Directions
Session Notes: Price Read the resources for this section.

Assessment Tools
Resources: • Consider other factors in addition to price.
- Burt, Dobler and • There are different approaches to price assessments.
Starling, World Class
Supply Management
(pages 405-411)
- Session notes
Case Preparation: Frich Prepare for the Frich Turbo Engine case by answering the following
Turbo Engline questions:
Resources: 1. What factors would explain the difference between Bayfleet’s

- Frich Turbo Engine Co. Machining and Union Stamping’s?
case 2. Should Bayfleet be selected? Why or why not?
- Session notes
• Do your analysis of competitive bids.
• Factors other than price that should be included in a buy analysis.
Interactive Lecture: Read resources for this section.

Price Discounts
Resources: • There are different types of discounts.
- Burt, Dobler and • Even though a classification of discounts has been presented, there are
Starling, World Class many potential variations.
Supply Management
(pages 405-411)
- Session notes

Module Two
Activity Directions
Buyer’s Leverage 1. Provide an example of where you have buying leverage, and where
you do not have leverage (at your organization, or elsewhere).
Resource 2. What are the reasons behind the leverage, or non-leverage (i.e. why
- Session notes parties in negotiations/market situations have the advantage, and
why).

• Always consider the market situation in attempting to negotiate price.
Session Notes: Cost Data Read the resources for this section.
and Profit
Resources • Analyze the sources of cost data
- Burt, Dobler and • Analyze the types of costs
Starling, World Class • Allow for a “reasonable profit”
Supply Management • “Reasonable profit” is not based on % of cost!
(pages 413-430)
- Session notes
Reflection: Cost Data Reflect on the following three questions

1. What sources of cost data have you used?
2. What are some examples of purchases where direct and indirect costs
have been split?
3. What were some of the problems you faced, if any, in receiving
information on this split?

• Indirect and direct costs may not be important in some purchases.
• Typically, this cost data is more useful for larger purchases, strategic
buys, and ongoing sub components buys. It may not be useful for items
like maintenance, repair and operations.

Module Two
Session Notes: Learning Read the resources for this section.

Curves
Resources: • The importance of learning curves in analyzing the direct and indirect
- Burt, Dobler and costs to an organization.
Starling, World Class • Learning curves may not be useful in some cases. They are most
Supply Mgmt (pgs. 413- applicable to new goods and services being produced by the supplier.
430)
- Session notes
Frich Turbo Engine Introduction and Overview.
(marked – 5%)
Prepare the case report according to the instructions in this session. Also,
Resources: use the guidelines in the Written Case Reports section of the Introduction
− Frich Turbo case and Overview.
− Introduction and
Overview: Written Submit the case report for evaluation. Refer to the Session Schedule for
Case Reports (report submission instructions.
guidelines)
− Session notes in this Key teaching points:
session • Pay close attention to the case questions at the end of the case.
− Framework questions • Present your analysis and conclusions in case report format.
in this session
this session
− Fabritek, 1992
Sample Case and
Report (Appendix)
Session Wrap Up Review this session’s objectives. View the topics and activities for the next
session.

Module Two
What You Price assessment and cost analysis are two key tools in strategic procurement. The
Already Know selling price and the cost of goods are important considerations in total cost of
ownership, and especially in the identification of transactional costs. Thus they are
important elements of the make or buy decision, as explored in session 5.
Overview In this session candidates will explore the mechanisms of pricing and costs. You may
already be searching for a tool that provides a solution to “what is the right price” for a
good or service. The right price has a number of qualitative elements. Also, there are a
number of approaches to assessing price, including cost analysis. A key consideration
in price negotiation is procurement leverage for a given market condition.
Cost analysis is examined in detail in the second half of the session. Approaches to cost
analysis are considered, as are types of costs. The contentious issue of a “correct” level
of profit is reviewed. There is no “correct” answer to what is the right price for a
product or service, and neither is there a “correct” answer to what is the right amount
of profit. To ensure that profit aligns with other strategic procurement goals, the “right”
profit should not be based only on the cost of the product or service.
This session concludes with a review of learning curves in cost analysis.
1. Conduct a price assessment.

2. Understand that lowest price is not necessarily the best option.
3. Describe different types of discounts
4. Describe types of cost analyses.
5. Distinguish the components of direct and indirect costs.
6. Conduct a cost analysis.
7. Describe considerations with respect to supplier profit.
8. Understand, at a general level, the importance of learning curves in cost analysis.

Module Two
Price and Cost Analysis, continued

Reading
Burt, Dobler and Starling, World Class Supply Management 7th Edition, pages 405-
407, 409-411, 413-419, 426-430.
Frich Turbo Engine Company case. Harbridge House Inc.
questions the following questions as you complete the readings and activities in this session.
1. With respect to price assessment, which of the following have you used in your
organization: competitive price proposals, current price comparisons, use of web
tools, historical price comparisons and cost analysis?
2. Were there missed opportunities to use one or some of these methods?
3. What types of discounts does your organization typically receive?
4. What are some cases where your organization has procurement leverage? Where
it does not?
5. What sources of cost data has your organization used?
6. When have you been involved in a strategic supply project where direct and
indirect costs have been split?
7. What were some of the problems you faced, if any?
8. Are learning curves appropriate in your organization for some purchases? Why?

Module Two
Price and Cost Analysis, continued
Individual Frich Turbo Engine Company

Written Case
Report Write a case report on the Frich Turbo Engine Company case using the guidelines for
written case reports found in the Written Case Reports section of the Introduction and
Overview.
The requirements (i.e. the problems to be solved) for the written case report are stated at
the end of the case. Your case report should address these requirements, and present
your analysis, conclusion and recommendations in case report format.
Appendix.
A note about the case:
This is a short case related to price and cost analysis. The point of the case is to
consider the differences in costs estimates from different organizations, and why those
estimates may vary. A secondary issue is whether the bids of Bayfleet and Union were
late, and the proper process to deal with late bids (even when they are lower). There is
no “right” answer. Candidates should look beyond the cost information provided in a
bid or quotation to determine the real reasons for the variance in bids among suppliers.

Module Two
Session Notes: Price and Cost Analysis
What is the In determining price for a good or service, the rule of thumb is that the price should be
Right Price? “fair and reasonable”. A fair and reasonable price is a price that neither results in an
efficient supplier being put in financial peril, nor results in the buyer paying too much for
the good or service.
The right price is not necessarily the lowest price. In addition to price, other
considerations that relate to the procurement decision include:
• Quality
• Reliability of the supplier
• Terms and conditions (discounts, financing, transportation etc.)
• Risk – supplier, exchange rate, and logistics
As an example, consider the purchase of paper supplies for a printing plant:

• Supplier A will provide roll stock for $300 per ton and is locally based.
• Supplier B is in the U.S. Supplier B will provide an equal quantity and quality
product for $250 ton U.S.
At an exchange rate $Cdn 1.15 per $ U.S 1, judging by price alone, the purchase should be
made from the U.S. firm ($US $250 = $Cdn 287.50).
However, there may be hidden logistics issues, for example documentation and clearance
at the US/Canada border. Further there is exchange rate risk. Suppose the Canadian dollar
falls in value to $Cdn 1.22 = $US 1. Then, the paper costs more from Supplier B than
Supplier A.
Therefore these and other factors appropriate to the situation should be considered.
Price There are five tools for conducting price assessments:

Assessment
• Analysis of competitive proposals
• Price comparisons – current prices
• Price comparisons – historic prices
• Web tools
• Cost analysis

Module Two
Session Notes: Price and Cost Analysis, continued
Analysis of Assuming the procured item was submitted for competitive bidding, and that competitive
Competitive bidding was conducted fairly and appropriately, the bids can be compared to one another.
Proposals In some cases, such as government procurement, it is mandated that the lowest bid be
accepted. When lowest price is the requirement, procurement staff should ensure that the
products being supplied are standardized.
For example, Supplier A provides a bid of $10 per unit for automotive gauges, and the
gauges are mount-ready. Supplier B provides a bid of $8 per gauge but the gauges are not
mount-ready. Taking the lower bid in this case may be incorrect if it costs more than $2
during production to make the gauges from supplier B mount-ready. This example
highlights the importance of thoroughness in preparing specifications (see session 2 for a
review of specifications).
Even if bids are identical, other factors should be considered in analyzing the price. Some
questions to consider are:
• Does the selling firm have a history of trying to negotiate price changes?
• Will it help them become more dominant in the market and thereby reduce price
competition for subsequent purchases?
• Is the lowest price supplier reliable, i.e. can they commit to a delivery schedule?
(They may be cheaper in price but delivery delays will adversely affect production
costs.)
Price There are a variety of methods to compare current prices. One method is to compare
Comparisons: current prices to market prices. This is particularly relevant for commodities. For
Current Prices example lumber, gold, oil and grains are traded on commodity markets, where price
levels are highly visible (and highly volatile).
A second approach is to compare with published catalog prices. Catalogs may be widely
available either in paper format or via the internet.
In some cases the prices of goods and services are regulated. Regulated prices are
published and easily accessible.

Module Two
Price Comparison can be made to previous purchases of similar items. When such
Comparisons: comparisons are made it is useful to understand the dynamics of the industry involved.
Historic Prices
For example, a comparison of diesel fuel prices by a transit agency in 2006 with prices
from 2000 would have limited value, as oil prices are highly volatile, and have been
increasing year over year.
Often it is useful to index historic prices to new levels. Statistics Canada publishes a
variety of indexes which can be used to bring historic prices to current levels.
Using Web A variety of tools are available to make price comparison via the internet. A typical
Tools approach is membership in exchanges, where buyers can see prices from a variety of
suppliers.
Cost Analysis In cost analysis the approach taken is to determine the underlying costs of producing the
good or service, and then determine the profit. A comparison is then made to the quoted
price.
Discounts Suppliers often provide discounts from the quoted price. There are four basic types of
discounts – cash, trade, volume and seasonal discounts.
Cash discounts – are discounts that provide a lower price when prompt payment is made.
Typically they are stated along the lines of “2% 10 days, net 30”. This means a 2%
discount is available if payment is received in ten days; otherwise, the balance is due in 30
days.
Trade Discounts – are discounts made available to a certain trade, profession or industry.
For example, a plumbing company would receive a trade discount from a plumbing
supplier.
Careful analysis should be undertaken when considering trade discounts from distributors.
In some cases, the price, inclusive of discounts, from a distributor may be higher than the
price of obtaining the good directly from the manufacturer when possible. In other cases,
the price may be lower, as the distributor purchases volumes sufficient to obtain lower
prices and higher discounts from the manufacturer.

Module Two
Discounts Volume Discounts – are discounts for buying a certain quantity of goods or services.
(continued) Volume discounts may occur on a single buy. For example a shirt maker receives a 10%
discount for buying 20,000 buttons or more. Another approach to volume discounts is
when a supplier offers a discount once a certain dollar threshold is reached. For instance,
the shirt manufacturer buys buttons and cloth from the same supplier. The manufacturer
reaches a threshold of $1,000,000 worth of purchases, at which time the supplier provides
a discount of 5%. Volume discounts may also apply over a set time period. Rather than
providing a volume discount applicable to each purchase, the discount threshold may
cover a time period, such as a year.
A tactical consideration in assessing volume discounts is the impact on inbound goods

inventory. The discount must be sufficient to offset inventory holding costs, and the cost
of capital tied up in the inventory.
Seasonal Discounts – are discounts provided during seasonal cycles. For example, a
flaxseed crusher may offer discounts to paint manufacturers to clear out linseed oil
products in inventory prior to the new linseed crop becoming available.
Market Procurement managers need to consider the competitive aspects of the market in which
Conditions and they are dealing when considering price. The degree of competitiveness in markets can
Price range from perfect competition to monopoly. Where there are many competitive
Negotiation suppliers (or price taker markets) the influence of any single supplier is minimal. An
Strength example is the influence an individual farmer would have on wheat prices that a grain
(Procurement mill purchases. Where a monopoly exists there is one supplier. In this case the
Leverage) monopolist has the ability to dictate price arrangements and the purchaser has little
negotiating leverage. . Between these are markets with varying degrees of competition
ranging from monopolistically competitive markets, where branding is prevalent to
differentiate essentially similar products, to oligopolies where it relates a few sellers to a
variety of goods in a given market, and there could then be one, two or three sellers,
depending on the specific good.

Module Two
Market The following diagram highlights the issue of price negotiation in regards to the number
Conditions and of sellers.
Price
Negotiation Figure 6.1: Procurement Leverage and Sellers
Strength
(Procurement
Leverage,
continued)
Negotiating
leverage
0
Number of Sellers
Similarly the number of potential buyers influences price negotiation leverage. If there
is only one buyer, procurement managers in that buying firm have substantial leverage.
If there are many buyers, procurement managers in any particular firm will have little
leverage.
Figure 6.2: Procurement Leverage and Buyers
Negotiating
leverage
0
Number of Buyers

Module Two
Cost Analysis Cost analysis attempts to determine if the price being charged by the supplier is fair and
reasonable by examining the costs to make the product or service. Cost data can be
obtained in various ways: cost breakdown can be a requirement of a bid where bidding is
used; pricing can be obtained from other firms in the industry or from strategic partners;
or costs can be derived from cost models.
Cost breakdowns – can be required as part of a bid package. Cost breakdown is usually
stated at various quantities supplied. Procurement staff can compare these costs structures
across bids. As well, this becomes important historic documentation for future cost and
price analyses.
Other organizations – a company may have formed close strategic alliances or

partnerships with organizations which can provide cost information. Companies may also
belong to organizations that provide benchmark cost data by organization size in an
industry. These alliances provide valuable insight into the potential cost structure of
suppliers submitting price quotes. It is important, however, to consider the competitive
structure of the industry when using this data.
Cost Models – the procuring organization can attempt to determine what the costs would
be based on a model of the supplier’s potential costs structure that the procuring
organization develops internally. This model may also use benchmark data.
Types of There are two general categories of cost to be considered:

Costs
Direct costs
These are the costs directly related to the production of the product or service. Consider
the provision of an actuarial valuation for a pension fund. The direct costs of service from
a consulting actuarial firm would be the costs of the actuary’s and their assistant’s time,
plus items such as printing the reports and shipping them to the pension fund.
Indirect costs
These are costs that support production and cannot be directly attributed to the particular
product or service (often these are referred to as allocated costs, burden, or overhead). In
the example of the consulting actuarial firm to the pension fund, these costs might include
office space rent, heating, building and liability insurance, and disability plan coverage
(indirect payroll costs). These are allocated to departments, or to an individual product or
service.

Module Two
Direct Costs Direct costs are usually described in terms of direct labour and direct materials.
Direct labour is the labour used in the physical production of the product or service. For
example, consider the production of a computer. Direct labour is the labour of the
assembly line workers who put the various components (mainboard, optical drives,
memory, and etc.) into the chassis and build the computer.
Direct materials are the materials that are used in the physical production of the product.
In the case of a computer being produced, direct materials include the case, optical drive,
wiring, memory, mainboard, cooling fan, and etc.
Indirect Costs Indirect costs must also be accounted for in the price of a product in order for the
organization to remain viable (i.e. profitable) in the long term.
Typical indirect costs are:

• Overhead
• Administrative expenses
• Selling expenses
Indirect cost is usually expressed as a percent of direct labour, and is applied to the
product or service as a per unit cost.
Depending on the organization, indirect costs can be expressed in two ways:
• Indirect costs related to production. For instance, heat in the production plant,
miscellaneous production supplies, and production equipment maintenance. In this
case, the term “labour burden” is sometimes used and it may be shown as a charge per
hour much like the wage rate.
• Indirect costs that are “overhead.” These costs are “corporate” in nature, such as
administration, and are allocated as a percent of all other costs.

Module Two
Indirect Here are some figures to calculate “labour burden”:

Costs: An
Example • The total direct labour hours in a year for a particular organization are 2,000,000.
• Plant overhead costs are $20,000,000.
• Administration including selling expenses is 15% of all cost.
• Profit is 5% of all cost.
The rate, or “labour burden” are:

$20,000,000/2,000,000 = $10.00 per direct labour hour.
Total cost of a computer is $100 in direct labour based on 8 hours of direct labour, and
$200 in direct materials per unit.
The total cost excluding pure overhead and profit would be $380:
Direct materials: $200

Direct Labour: $100
Labour Burden: $80 (8 x $10.00)
Cost: $380
Overhead and profit are then added to reach the selling price:
Overhead $57 (15% of $380)

Total All Costs: $437
Profit: $22 (5% of $380 + 57)
Selling Price: $459
Indirect costs are typically quite “sticky” with respect to different levels of production,
and do not change with production level. For example, a production line may be shut
down due to reduced demand for a firm’s products. Direct labour and direct material
would become 0 during the shutdown. However, costs such as insurance, heating and rent
would not decrease, and, in any case, would never reach 0.
With fixed costs, the effect on per unit cost decreases the greater the number of units
produced. This is an important consideration in costs analysis, since a large order would
be expected to have a lower per unit cost than a small order.

Module Two
Profit What is the right level of profit that should be provided to the supplier when a purchase is
made? There is no correct answer to this question, as the right amount of profit is
contingent on a variety of factors. These include:
• The competitiveness of the industry in which the supplier operates. The more
competitive the more likely that profits are lower.
• The competitiveness of the type of supply being purchased.
• The size of the order. (On a per unit basis the profit per unit can be lower the
larger the order).
• Specialization/customization. The greater the specialization and customization of

the purchase, the greater the level of profit.
• The greater the risk related to supplying the product or service, the greater the
profit.
Profit should not be calculated on a percent of cost basis. The problem with this approach
is that an organization that is inefficient is rewarded for that inefficiency. Furthermore, the
use of the percent of cost approach is a disincentive to improve efficiency once the
purchase has been made. This is at odds with goals of long term supply relationships (to
be reviewed later in this module).
Learning In the production of goods and services, worker skill improves with the number of
Curves repetitions. The effect is a decrease in the time per unit of output. In the case of an
actuary, it may take quite a while to produce the first pension valuation report. On the
second valuation report, the time required would decrease, and so on. Similarly for a
worker installing optical drives in a computer, as the worker installs more drives, the time
to install a drive decreases. This concept is called a learning curve.
For cost analysis, learning curves are used to determine the effect of higher units of
production on the direct labour costs. As the level of production rises the cost per unit
should decrease. This should be reflected in the cost analysis.

Module Two
Session Wrap Up: Price and Cost Analysis
Review Now that you have examined price and cost decisions, and have recommended a
Objectives for course of action for Frich Turbo Engine, you should review the session’s objectives as

2. Understand that lowest price is not necessarily the best option.
3. Describe different types of discounts
5. Distinguish the components of direct and indirect costs.
7. Describe considerations with respect to supplier profit.
8. Understand, at a general level, the importance of learning curves in cost analysis.

Preview Next In session 6 we analyzed price and cost decisions. In session 7, candidates will
Session explore quality and inventory issues, and do an exercise on ISO 9001:2000 and their
organization.

Session Seven
Z Factors Affecting Long Term Quality

Z Total Quality Management
Z Quality Training for Procurement Staff
Z Purposes of Inventory
Z Forecasting Demand
Z Inventory Models
Z Inventory Relationships

Module Two
Agenda for • Factors affecting long term quality

Session 7 • Case: Placido Engine Co.
• Total quality management
• Individual exercise (marked): ISO 9001:2000 and Your Organization
• Quality training for procurement staff
• Purposes of inventory
• Forecasting demand
• Inventory models & inventory relationships
What You We have already explored price and cost in session 6. This session discusses quality,
Already Know and completes our exploration of the cost, price and quality triangle. The importance
of quality in the triangle is that price or cost should not be considered in isolation from
quality. For example, price and quality should be considered simultaneously when
determining the value provided to the ultimate customer.
Overview In this session a third dimension is added to the procurement decision: quality. The
session begins with a look at the factors that procurement influences that affect quality.
Then, we review some common total quality management system: Deming’s, Six
Sigma and ISO. Then we consider the importance of quality management training for
procurement staff.
The second part of the session focuses on inventory. Customer perception of value is
influenced by their ability to acquire the desired good or service when they want and
need it. Inventory is often the key factor in meeting this requirement. The reasons for
holding inventory are considered as are some common inventory models. Order size
decisions are often based on these inventory models. When deploying models such as
these, it is important to consider the relationship between delivery time and inventory
level, as well as the relationship between inventory level and customer service.

Module Two
Quality and Inventory, continued
1. Understand factors that affect quality.

2. Review the merits of product testing and the proposal analysis technique in assuring
quality.
3. Identify the difference between error detection and error prevention.
4. Describe some common total quality management systems.
5. Weigh the pros and cons of implementing ISO 9001: 2000 standards in your
organization.
6. Outline the benefits of a strategic purchasing organization having quality
management training.
7. Describe the purposes of inventory.
8. Use basic inventory models.
9. Outline the relationship between delivery issues and inventory.
10. Review the trade-off between inventory and customer service.

Reading
Burt, Dobler and Starling, World Class Supply Management 7th Edition, McGraw
Hill Irwin, Chapter 7, Pages 147-155.
Stuart, F. Ian and Mueller, P. Jr. Total Quality Management and Supplier
Partnerships: A Case Study. International Journal of Purchasing and Materials
Management. Winter, 1994, Pages 14-20.
Genna, Albert. How do you find the right quality wavelength? Purchasing. Jan 16,
1997. Pages 45-46.
C. Ritzman, Krajewski, Malhotra and Klassen (2007). Foundations of Operations

Management, 2nd Canadian Edition, Pearson Canada Inc., Toronto. Pages 283-290.
Placido Engine Company case. Burt Dobler and Starling. World Class Supply
Management, accompanying material.

Module Two
1. In your organization what quality issues have you experienced?

2. Refer to the four factors that determine long run quality. Which factors were (or
are) absent in your organization?
3. Do you partner with organizations as a method to improve quality? Why or why
not?
4. Are you overly dependent on inspection for quality?
5. Should your organization provide quality management training to purchasing staff?
6. Why does your organization hold inventory?
7. What inventory model or models does your organization use?
8. How does delivery affect the level of inventory your organization holds?
9. How do customer service requirements affect the level of inventory your
organization holds?
Self-Assessment Placido Engine Company

Activity
Prepare the Placido Engine Company case.
In particular, focus on the following:
• What are the basic issues in this case?

• What do you think of the relationship Placido has with its suppliers?
• Could Placido improve quality in this case?
• Provide your recommendations and plan of action.
To help you prepare the case, see the framework questions on the case in this session.
For further reference, please see Case Preparation in Introduction and Overview.
This activity is not submitted for evaluation. When you have completed the activity,
see the Self-Evaluation section in this session.

Module Two
Individual ISO 9001:2000 and Your Organization

Exercise
context.
marking.
1. Outline four reasons for your organization to become ISO 9001:2000 certified. If
ISO 9001:2000 is not applicable to your organization, outline four reasons that one of
your main suppliers should become ISO 9001:2000 certified. Provide a rationale for
each of the reasons you have outlined.
2. Describe some of the problems in implementation that are likely to occur.
3. Assuming you are responsible for the implementation, describe how you would
proceed through the certification steps.
For more details on the characteristics and purpose of ISO 9001:2000 certification,
refer to the session notes and readings for this session.
• Did you analyze your organization, or your supplier’s organization, and relate it to
the requirements and framework of ISO 9001:2000?
• Was the analysis realistic and compelling?


Module Two
Overview The objective of the Placido Engine case is to explore building in quality, as opposed to
inspecting quality in. Focus on determining and implementing the methods required to
deal with quality problems.
As in most case studies, there is no “right answer.” The following information and
questions should help you decide what you would do if you were responsible for this
situation.
Basic Issues The obvious basic issue in the case is the corrosion of the castings. However, this case
is about much more. For instance:
• Penson’s approach to dealing with the problem. Is a formal response the right
approach?
• Perhaps a less formal approach followed up with a formal ‘change request’
would be better.
• Does the supplier unilaterally have the right to change the specification, as
Penson attempts to do?
• The working relationship between Placido and the suppliers seems quite distant.
Given the importance of quality, is this appropriate?
Relationship Ask yourself how you would have responded if you were a supplier and had received
Placido Has Penson’s letter.
with its
Suppliers Placido has been heavy handed in dealing with suppliers, and, judging by the suppliers’
responses, the organization may have damaged the relationships.
(In session 9 aspects of supplier development and certification are considered.)

Module Two
Self-Assessment Activity Evaluation, continued
How Could The case provides some information on the quality process at Placido: they inspect
Placido quality into the product. When inbound goods are unsatisfactory they appear to fix them
Improve in order to preserve the production schedule.
Quality?
Ask yourself why they use inspection. What are the pros and cons of fixing supplies
that do not comply with standards? Rather than fixing the castings, what are the other
alternatives? (Hint: is Placido is the author of its own problems by fixing the castings?)
Consider alternate methods that Placido could have used. These might include:
• Clear specifications. These should be implemented properly. Why have the

specifications been changed now?
• Supplier understanding. Make sure that the supplier understands the specifications
right from the start. If lack of corrosion is so important, why were the suppliers not
knowledgeable with regard to this? Link this to the importance of specifications, as
discussion in session 2.
• Supplier selection. The next session discusses methods of supplier selection. Do
you believe that either proposal analysis or product testing was done as part of the
selection process? Which would be the better supplier selection approach in this
case?
• Monitoring. Placido did monitor, but something seems amiss. Once they started
having problems, the suppliers were not informed in a timely manner. Why? What
is the effect?

Module Two
Session Notes: Quality and Inventory
Factors That Four factors are typically considered with respect to the long run quality of supplies.
Effect Long Run These are:
Quality
• Specification quality
• Selecting suppliers that have the expertise to deliver the right quality
• Supplier understanding of the quality requirements, and supplier motivation to
deliver the required quality
• Monitoring supplier performance
Specification Procurement must work closely with the users of the supply to properly describe, i.e.
Quality specify, the quality required. The quality specified must suit the ultimate customer’s
requirements. Burt, Dobler and Starling suggest there are three ways that quality can
be specified:
• Absolute specification: quality is described in terms of grades, or in terms of

a standard specification. An example of a grade is “#1 Canola”, an example of
a standard is “15mm, grade 6 bolt.”
• Specify the need: quality is specified in terms of suitability, e.g. how well the
good or service meets the functional requirements for the process or job.
• Specify conformance: Once the good or service has been acquired, it must
meet a performance specification or standard. Inspection is often used to
enforce this.
Selecting Two typical approaches to considering quality aspects when selecting suppliers are
Suppliers product testing and proposal analysis.
• Product testing: This involves testing a vendor’s product prior to purchase.

Product testing can satisfy two procurement objectives: determining whether
a particular supplier can meet the required quality specification, and
providing a means of comparing suppliers.
• Proposal analysis: As part of their bids, suppliers are required to submit
their method for assuring quality requirements are met. If a supplier’s
proposal passes, and if the supply is of significant importance, a team of
reviewers meet with the supplier at the supplier’s site. The site inspection
focuses on quality processes and procedures at the supplier’s site.

Module Two
Session Notes: Quality and Inventory, continued
Supplier Supplier understanding is increased through:

Understanding
• A close relationship with the supplier
• The use of cross organizational teams and partnerships to increase understanding
of quality requirements
• Supplier development and certification
These are discussed in subsequent sessions.
Supplier Monitoring suppliers ensures that the goods and services received continue to meet
Monitoring the desired quality requirements.
Inspection is one method of monitoring. Inspection can be as simple as matching

orders, or as complicated as inspecting all goods and services used.
Traditionally, defect detection methods were deployed as a means to ensure quality.

The defect detection approach is to inspect the good or service after a certain stage of
production. Items that fail inspection at this stage are re-worked or scrapped. The
most significant problem with this approach is that it occurs after the work has been
done. Secondary problems are:
• Inspection activity needs to be repeated after the defect is detected and corrected
• It may result in an excessively large number of inspections
• The number of components inspected at any point of the process may be
excessively large
• The need to inspect successively more complex components may arise
An alternate approach is to focus more attention on error or defect prevention. In

this approach the goal is to identify process problems that may lead to defects prior to
production.
Total Quality There are several definitions of total quality management. Stuart and Mueller define
Management total quality management as “a system of management that has the customer
satisfaction as its primary business goal”. Other authors suggest that TQM means an
organization should manage every job and every process so that it is carried out right
the first time. Others suggest TQM focus on continuous improvement.

Module Two
Deming’s Total quality management focuses on defect prevention. A variety of methods have
Approach been adopted to implement TQM. A classic method is Dr. W. Edwards Deming’s.
Deming outlines 14 points to better quality:
1. Create constancy of purpose towards improvement

2. Adopt the new philosophy
3. Cease dependence on inspection
4. Move towards a single supplier (or improve the supply) for any one item
5. Improve constantly and forever
6. Institute training on the job
7. Institute leadership
8. Drive out fear in the workplace
9. Break down barriers between departments
10. Eliminate slogans
11. Eliminate management by objectives
12. Increase pride of workmanship
13. Institute education and self-improvement
14. Promote the idea that transformation is everyone’s job, and especially top
management’s job.
Points 3, 4, 9 and 12 have direct implications for procurement.
Six Sigma A newer approach is Six Sigma. The name Six Sigma refers to six deviations from the
Approach mean as a statistical measure for error prevention. (Deviation is expressed
mathematically as the Greek symbol for sigma: σ.)
Six Sigma has 6 core principles:
1. Customer focused
2. Fact based
3. Process oriented
4. Management is proactive
5. Collaboration is required
6. Focused on perfection / taking risks is necessary / failures are expected
All Six Sigma principles relate to procurement.

Module Two
ISO 9001:2000 Many companies use the International Standards Organization (ISO) quality
designation ISO 9001:2000. The designation covers processes used within the
organization, and does not apply to a specific product of the organization. The ISO
organization does not certify organizations. Certification is provided by third party
certifying and registering entities. For example, a printing company may choose to
use ISO quality standards. The standards would apply to its management processes,
and not to the papers it produces. When the printing company is certified, it can
represent itself as ISO 9001:2000 compliant, but not its products.
The ISO standards (refer to www.iso.org) are based on eight principles:
1. Focus on customers
2. Provide leadership
3. Involve your people
4. Use a process approach (to manage activities and resources)
5. Take a systems approach (to manage the organization)
6. Encourage continual improvement
7. Get the facts before you decide
8. Work with your suppliers (for mutual benefit)
ISO 9001:2000 ISO outlines a generic methodology to meeting the ISO 9001:2000 standards. The
Methodology steps are as follows:
1. Identify the goals you want to achieve

2. Identify what others expect of you
3. Obtain information about the ISO 9000 family
4. Apply the ISO 9000 family of standards in your management system
5. Obtain guidance on specific topics within the quality management system
6. Establish your current status, and determine the gaps between your quality
management system and the requirements of ISO 9001:2000
7. Determine the processes that are needed to supply products to your customers
8. Develop a plan to close the gaps in step 6 and to develop the processes in step 7
9. Carry out your plan
10. Undergo periodic internal assessment
11. Determine if you need to demonstrate conformance
12. If yes, undergo independent audit
13. If no, continue to improve your business

Module Two
ISO 9001:2000 Identify the goals you want to achieve

Step 1
Typical goals may be:
• Be more efficient and profitable

• Produce products and services that consistently meet customer requirements
• Achieve customer satisfaction
• Increase market share
• Maintain market share
• Improve communications and morale in the organization
• Reduce costs and liabilities
• Increase confidence in the production system
ISO 9001:2000 Identify what others expect of you

Step 2
These are the expectations of interested parties (stakeholders) such as:
• Customers and end users

• Employees
• Suppliers
• Shareholders
• Society
ISO 9001:2000 Obtain information about the ISO 9000 family

Step 3
• Acquire more detailed information re: ISO 9000:2000, ISO 9001:2000 and
ISO 9004:2000 from www.iso.org.
• Read over the requirements and certification process to determine what course
of action is appropriate for your organization.

Module Two
ISO 9001:2000 Apply the ISO 9000 family of standards in your management system
Step 4
If you are seeking certification, or if you are applying for a national quality award,
your quality management system should be in conformance with ISO 9001:2000.
• Use ISO 9001:2000 as the basis for certification

• Use ISO 9004:2000 in conjunction with your national quality award criteria to
prepare for a national quality award
ISO 9001:2000 Obtain guidance on specific topics within the quality management system
Step 5
These topic-specific standards are:
• ISO 10006 for project management

• ISO 10007 for configuration management
• ISO 10012 for measurement systems
• ISO 10013 for quality documentation
• ISO/TR 10014 for managing the economics of quality
• ISO 10015 for training
• ISO/TS 16949 for automotive suppliers
• ISO 19011 for auditing
ISO 9001:2000 Establish your current status, and determine the gaps between your quality
Step 6 management system and the requirements of ISO 9001:2000
You may self-assess, or contract the assessment, or part of the assessment to an

external organization.

Module Two
ISO 9001:2000 Determine the processes that are needed to supply products to your customers
Step 7
Review the requirements of the ISO 9001:2000 section on Product Realization to
determine how they apply or do not apply to your quality management system. The
processes to be reviewed include:
• Customer related processes

• Design and/or development
• Purchasing
• Production and service operations
• Control of measuring and monitoring devices
ISO 9001:2000 Develop a plan to close the gaps in step 6 and to develop the processes in step 7
Step 8
Identify actions needed to close the gaps. Allocate resources to perform these actions.
Assign responsibilities and establish a schedule to complete the needed actions. (ISO
9001:2000 Paragraphs 4.1 and 7.1 provide the information you will need to consider
when developing the plan.)
ISO 9001:2000 Carry out your plan

Step 9
Proceed to implement the identified actions and track the progress of your
implementation in your project schedule.
ISO 9001:2000 Undergo periodic internal assessment

Step 10
ISO 19011 provides guidance on auditing, auditor qualification and managing audit
programs.

Module Two
ISO 9001:2000 Step 11: Are you required to demonstrate conformance?

Steps 11 to 13
If yes, go to step 12.
If no, go to step 13.
You may want to, or be required to show conformance (i.e. ISO certification and
registration) for various purposes, for example:
• Contractual requirements
• Market reasons or customer preference
• Regulatory requirements
• Risk management
• To set a clear goal for your internal quality development (motivation)
Step 12: Undergo independent audit
Engage an accredited registration/certification body to perform an audit and certify

that your quality management system complies with the requirements of ISO
9001:2000.
Step 13: Continue to improve your business
Review the effectiveness and suitability of your quality management system. ISO
9004:2000 provides a methodology for improvement.

Module Two
Quality Training A significant issue related to quality and procurement is TQM (Total Quality
for Procurement Management) training for procurement staff. In many organizations TQM is part of
Staff the culture, and training in TQM systems for procurement staff is expected and
planned. In organizations where TQM is not part of the culture, or where the
procurement staff does not have access to training, there are several issues. The
article by Genna addresses quality training for procurement staff. In the article,
Genna makes the following observations and suggestions:
• Quality training of procurement staff will reduce error rates, and thereby
improve the bottom line.
• With training, procurement can effectively convey the expected quality
standards to suppliers.
• If procurement initiates its own training program, it is likely to be more
effective in creating a culture of quality management within procurement.
• The more formal the training program is, the more likely it will be effective.
• The program may be extended to suppliers as part of a supplier development
program.
• It is more difficult to implement TQM in organizations where procurement is
decentralized than where it is centralized; however, there are approaches that
will work.
• For small companies, an in-house training program is likely not cost effective;
however, procurement staff can benefit from third party courses that focus on
quality management from a procurement point of view.
Purposes of The general purpose of inventory is to provide a buffer to accommodate differences

Inventory between demand and supply. Demand and supply may be mismatched in a number of
ways:
• Demand may be higher or lower than expected during a period of time
• Demand may be different than expected for different products
• Demand may differ by location
• Supply may differ due to supply chain disruptions
• Supply may differ due to lead time uncertainties
Providing a buffer of inventory allows for better customer service. Synchronizing

inventory may be necessary to ensure that suppliers can produce lot sizes that are
economically viable. Inventory may also serve as a financial buffer during periods of
fluctuating input prices. This buffer may allow the organization bargaining room to
acquire better pricing on supplies.

Module Two
Forecasting Forecasting demand is a complex task. You might start with asking these six basic
Demand questions:
• What is the purpose of the inventory? This determines the level of effort required
to forecast demand. If the forecast is for a high value item subject to substantial
fluctuation, significant effort should be spent in determining demand.
• What is the time horizon: short, medium or long? The longer the time horizon the
greater the expected forecast error.
• What techniques should be used, qualitative or quantitative?
• What data is the basis of the forecast? If the historical data used is inaccurate, the
forecast will be inaccurate. If the purpose of the forecast is critical to the
organization, significant effort should be spent on assuring the data is accurate.
• How will the forecast be presented?
• How accurate was the forecasted demand? Monitoring and feedback are required
to improve future forecasts.
Approaches to forecasting include qualitative and quantitative methods. Qualitative

methods are usually based on expert opinion. Quantitative methods are usually based
on historical data (numerical analysis). These methods may be simple or complex.
Qualitative The qualitative approach to forecasting demand relies on factors such as the
Approach to predictions of internal and external experts, and customer feedback methods such as
Forecasting surveys and testing.
One approach to qualitative forecasting is the Delphi method. In this method, different
experts are asked to provide forecasts, and the average of these forecasts is used.
Where there are significant differences in the forecasts, a feedback loop is used. The
experts are contacted about the divergence, and asked to explain how and why their
forecast differs significantly.

Module Two
Quantitative Quantitative approaches usually involve the use of historical data (often described as
Approach to time series data). There are a variety of methods for using historical data, and these
Forecasting methods have different levels of sophistication.
Simple quantitative forecasting methods include simple averages, weighted averages

and exponentially weighted averages.
Moderately complex quantitative forecasting methods include linear (simple) or

multiple regression. Regression is a statistical process where demand is considered
a dependent variable, which is influenced by other variables, called independent
variables. The regression technique creates an equation between the independent
variables and the dependent variable.Once the equation is created, the forecast is
derived by using the values of the independent variables to forecast the dependent
variable.
• Linear, or simple regression is where there is one independent variable.
• Multiple regression is where there is more than one independent variable.
Regression analysis is the basis of most mathematical and statistical modeling.
Other complex methods may include advanced statistical techniques such as

econometric modeling and autoregressive integrated moving average methods. These
methods are not discussed in this module.
Inventory Models Inventory models are designed to determine the size of an order. There are three
fundamental types of models:
• Fixed Order Quantity

• Economic Order Quantity
• Periodic Review

Module Two
Fixed Order Fixed Order Quantity

Quantity
The fixed order quantity is the simplest inventory model. This model calculates the
order size based on the usage rate during the lead time period plus a buffer reserve.
Once the inventory drops to a certain level, an order is generated.
For example, a farm equipment manufacturer in Winnipeg buys hydraulic pumps in

China. The firm uses 60 pumps per day. It takes 27 days from the time the order is
initiated until the time the pumps are available on the shop floor. The lead time is
calculated as follows:
• Ordering : 1 day
• Production: 3 days
• Ocean shipping to Canada: 15 days
• Unloading and shipment to Winnipeg: 5 days
• Receipt and inspection at plant: 3 days
• Average daily request: 60 pumps per day
And, there is a buffer of 4 days. (Therefore, lead time is 31 days in total.)
The fixed order quantity is 60 x 31 = 1,860 pumps.
Suppose that the procurement group institutes a program to reduce delays in at the
plant. The result is the pumps spend only 1 day for receiving and inspection.
The fixed order quantity becomes 60 x 29 = 1,740 pumps

Module Two
Economic Order The economic order quantity model is more sophisticated and attempts to balance
Quantity order (or acquisition) costs versus carrying costs of inventory.
EOQ is typically determined as the square root of 2 x DS / CI, where:

D = Annual demand
C = Cost per item
I = Carrying cost
S = Order cost
Example
Suppose for the farm equipment manufacture in Winnipeg that it costs $400 per order
for pumps, the costs of financing inventory is 7%, and each pump is $500.
Annual demand is 15,660 pumps. (60x261 working days)
D= 15,600 pumps (60 x 261 working days)
2DS = 2 x 15,660 x $400

CI = .07 x $500
Therefore,
2DS / CI = 357,943
And, the square root of 357,943 is: 598
EQO = √2 x D x 2
CxI
EQO = √2 x 15,600 x 400

0.7 x 500
Safety Stock v = 120
Therefore, the EOQ is 598 pumps.
Every time the fixed order point is reached, 598 pumps are ordered. Notice that the
simple EOQ model does not consider additional factors such as shipment times.

Module Two
Periodic Review The previous inventory models are based on reordering at a point that inventory
Models reaches a certain level. In the periodic review model, order points are time based. At
each review a quantity is ordered to bring the inventory up to the desired level. The
order amount is dependent on the time period of the review.
The desired (or maximum) level of inventory is determined based on the following
formula:
M = W (T+L)+S
Where:
M = the desired ( or maximum) stock level

W = average rate of usage
T = the time period for review
L = the lead time
S = safety stock
In our example, the farm equipment manufacturer’s review period is 30 days, with a
desired safety stock of 300 pumps.
Using the periodic review formula, the desired inventory level is:
M = 60 pumps/day (30 days + 31 days) + 300 pumps = 3,960 pumps
Every 30 days the manufacturer would review the inventory and top it up to 3,960
pumps.
Similar to the first example if the lead time decreased to 29 days there would be an
affect on inventory. In this case the desired inventory level would be:
M = 60 (30 + 29) + 300 = 3,840 pumps.

Module Two
Inventory There are two important relationships to consider with respect to inventory. Delivery
Relationships lead time and customer service.
In the fixed order quantity and periodic review models, as delivery time increases so
does the required levels of inventory:
High
Level of
Inventory
Low
Short Long
Delivery Lead Time
Similarly, the ability to provide reliable customer service is related to inventory. The
greater the desired level of service the greater the required inventory:
High
Level of
Inventory
Low
Low High
Desired level of customer service

Module Two
Session Wrap Up: Quality and Inventory
Review Now that you have examined quality and inventory issues, and have recommended an
Objectives for implementation plan for ISO 9001:2000, you should review the session’s objectives as

2. Discuss the merits of product testing and the proposal analysis technique in
assuring quality.
3. Identify the difference between error detection and error prevention.
4. Describe some common total quality management systems.
5. Weigh the pros and cons of implementing ISO 9001: 2000 standards in your
organization.
6. Outline the benefits of a strategic purchasing organization having quality
7. Describe the purposes of inventory.
8. Use basic inventory models.
9. Outline the relationship between delivery issues and inventory.
10. Discuss the trade-off between inventory and customer service.

Preview Next In session 7 we examined quality and inventory issues. In session 8, candidates will
Session explore methods for selecting suppliers. Candidates will also perform an exercise on
supplier evaluation, and submit a written case report.

Session Eight
Supplier Selection
Z Sourcing: Finding Suppliers

Z Weighted Evaluation Systems
Z Product Attribute Considerations
Z Total Cost Approach
Z Single versus Multiple Sourcing
Z The Perfect Number of Suppliers

Module Two
Activity Directions
Individual Reflection: Develop a list of the potential sources to find suppliers. How do you
Sources of Suppliers currently find them? Should you expand your search? If so, where would
you start?
Resource:
- Session notes Here are the key teaching points:
• There are many possible sources to find suppliers.
• Find some experts at your organization, or outside your organization,
to help you develop more resources.
Session Notes: Supplier Read the resources for this section.

Evaluation Matrices
Resources: • Review the steps in developing supplier evaluation matrices.
- Session notes • Care must be taken in assigning weights to evaluation factors.
Individual Exercise: Un- Read the requirements and complete the exercise in this session.
weighted Supplier
Evaluation Matrix for Submit the exercise for evaluation. Refer to the Session Schedule
Platinum Box provided for submission instructions.
(marked – 5%)

Module Two
Activity Directions
Session Notes: Type of Read the resources for this section.
Product and Supplier
Selection Here are the key teaching points:
• Note the importance of the type of product in supplier selection
Resources: methods.
- Wilson article: The • Review and understand the components of the total costs approach.
Relative Importance of
Supplier Selection.
- Smytka article: Total Cost
Supplier Selection: A Case
Study.
- Session Notes
Session Notes: Single vs. Read the resources for this section.
Multiple Sourcing
Resources: • Note the arguments in favour of single sourcing.
- Burt Dobler and Starling, • Note the arguments in favour of multiple sourcing.
World Class Supply • Review the concept of the right number of suppliers (supplier
Management (p. 342-343) optimization).
- Cruz article: Purchasing
Pros Search for the perfect
number of suppliers.
- Session notes

Module Two
Activity Directions
Platinum Box Introduction and Overview.
(marked – 5%)
Resources: use the guidelines in the Written Case Reports section of the
− Platinum Box case Introduction and Overview.
guidelines)
− Session notes in this Key teaching points:
session • Pay close attention to the total costs, and all the information provided
− Framework questions in for evaluating the suppliers.
this session • Present your analysis and conclusions in case report format.
this session
Case and Report
(Appendix)
next session.

Module Two
Supplier Selection
What You Session 2 mentioned key procurement processes: sourcing and supplier selection. In
Already Know this session the supplier selection process is more fully developed. One approach
discussed is the common evaluative matrix approach. Another is the total cost
approach. The total cost approach builds on the total cost of ownership concept
discussed in session 5.
Overview This session considers two general models for supplier selection. The common
evaluative matrix model is discussed. Un-weighted and weighted evaluation matrices
are discussed, and activities reinforce understanding of these models.
Type of product is a key evaluative factor in the evaluative matrix model. Evaluative
criteria and their importance may differ depending on the type of product. Total cost of
ownership forms a basis for evaluating criteria; however, risk factors and desirable
characteristics of suppliers are also considered.
Supplier selection also involves deciding how many suppliers are appropriate for a
particular good or service. Single sourcing and multiple sourcing are reviewed.

Module Two
Supplier Selection, continued
1. Identify potential supply sources.

2. Produce an evaluation matrix for supplier selection.
3. Describe different types of products (routine order, procedural, performance and
political) as they affect supplier selection.
4. Connect the product type with supplier selection criteria.
5. Understand the elements of the total cost approach of selecting suppliers: risk
factors, business desirable factors, and measurable cost factors.
6. Select a supplier using the total cost of ownership approach.
7. Describe the factors that suggest an organization should use a single source for a
good or service.
8. Describe the factors that suggest an organization should use multiple sources for a
good or service.
9. Understand the difficulties in negotiating in a sole source situation.
10. Defend a single versus multiple source decision.

Reading
Wilson, Elizabeth J. The Relative Importance of Supplier Selection: Review and
Update. International Journal of Purchasing and Materials Management. Summer,
1994. Pages 35-41.
Smytka, Daniel L and Clemens, Michael W. Total Cost Supplier Selection: A Case
Study. International Journal of Purchasing and Materials Management. Winter, 1993,
Pages 42-49.
Cruz, Clarissa. Purchasing Pros Search for the perfect number of suppliers.
Purchasing. July 11, 1996, Pages 28 and 29.
Platinum Box case. Satayas Consulting. Copyright © 2007 Allister Hickson, Ph.D.
Reprinted with permission.

Module Two
1. What methods do you use to find suppliers in your organization?

2. What evaluation method does your organization use to select suppliers?
3. Does your organization have products that are routine order? Does your
organization have procedural problem products, performance problem products,
or political outlay products? Describe these products.
4. What are some of the risk factors, business desirable factors, and cost factors
your organization would consider in adopting the total cost approach?
5. For what goods and services has your organization single sourced? What were
the factors in the decision?
6. How do the power relationships change when we negotiate in a single source
situation?
7. What are the implications of reducing the number of suppliers your organization
uses?

Module Two
Individual Platinum Box: Un-Weighed Evaluation Matrix

Exercise
context.
marking.
1. Refer to the Platinum Box case and the session notes. Develop an un-weighted
evaluation matrix for each of the possible press selections in the case.
2. Rank each of the printing presses in the case according to each evaluative factor
you have chosen (i.e. complete the un-weighted evaluation matrix).
3. Assume you are responsible for implementation. Make a recommendation for

which printing press to implement. Refer to your un-weighted evaluation matrix, and
provide the rationale for your recommendation.
For more details on supplier selection and evaluation, refer to the session notes and
readings for this session.
• Did you analyze all your options? Did you provide realistic factors and rankings?
Did you complete your un-weighted evaluation matrix?
• Was the analysis realistic and compelling?
• Were the recommendations realistic, given the organization’s resources and
capabilities?


Module Two
Individual Platinum Box

Written Case
Report Write a case report on the Platinum Box case using the guidelines for written case
The requirement for the written case report is: as Jared John, write a report stating the
issues, criteria, analysis and plan of action (i.e. recommendations) to the board of
Platinum Box re: which press to use. Here are some things to consider in preparing
your report:
1. Should Platinum Box use single or multiple sources? Why, or why not?
2. If they continued to single source with JabaKing, what would the effect be on
their negotiating position?
3. What type of product is the new printing press?
4. Develop a list of evaluative factors, rankings, and weighting for each of the
options.
5. Make the supplier selection for Platinum Box using the total cost framework.
6. Remember to put yourself in the role of Jared John, and make your
recommendation(s) realistic.
Appendix.

Module Two
Session Notes: Supplier Selection
Supplier Once potential suppliers for a good or service have been identified, a supplier (or
Selection: Un- suppliers) needs to be selected. The most common model of supplier selection is to
Weighted use an evaluation matrix. When using an evaluation approach the procurement team
Evaluation (or the cross functional procurement team) should use the following general steps:
Systems
• Identify the important evaluative factors.
• Reach consensus on the important evaluative factors.
• Specify with precision the evaluative factors.
• Determine the range for the rating scale (example 1 to 5, or 1 to 10, etc.).
• Develop the definition for each rank in the rating scale.
• Perform the rankings individually.
• Discuss and develop a consensus ranking.

Module Two
Session Notes: Supplier Selection, continued
Un-weighted Table 1 below provides an example of a simple un-weighted evaluation matrix.

Evaluation
Matrix: An In this example, the following is true:
Example • The consensus agreement on important evaluative factors is the number of
engineers, related experience, manufacturing facilities and financial strength.
• The range of the rating scale for each factor is 5 to 1, with 0.25 awarded for
each point in the rating.
• A definition for each factor has been provided.
• Individual team members developed the rankings and the agreed upon
consensus rankings are shown in Table 1.
Table 1 – Un-weighted evaluation matrix

Rankings
FIRM: A B C
Criteria
Number of engineers
5 = >15 5
4 = 10-15 4
3 = 7-9
2 = 4-6 2
1 = 1-3
Related Experience
5 = worked with firm before, no issues 5
4 = worked with firm before, some issues
3 = firm has a lot of similar work, no issues 3
2 = firm has a lot of similar work, some issues 2
1 = firm has done a bit of similar work
Manufacturing facilities
5 = Firm has up to date tools and techniques
4 = Firm has about 75% up to date tools and techniques 4
3 = Firm has about 50% up to date tools and techniques 3 3
2 = Firm has about 25% up to date tools and techniques
Financial Strength
5 = Firm has a very positive financial outlook 5
4 = Firm has a positive financial outlook
3 = Firm has an average financial outlook 3 3
2 = Firm has a below average financial outlook
1 = Firm is financially weak
Average 3.75 4.25 2.5
Based on this evaluation the procurement team would select firm B.

Module Two
Weighted The simple un-weighted evaluation matrix approach does not consider that certain
Evaluation evaluative factors may be more important than other evaluative factors. Also, the
finance members of the team may consider financial strength more important than
manufacturing facilities. The production members of the team might consider
manufacturing facilities more important than financial strength. Since the evaluative
factors may have different levels of importance, a weighted evaluative matrix is
typically used. The steps in the process are as follows:
• Identify the important evaluative factors.
• Reach a consensus on the important evaluative factors.
• Specify with precision the evaluative factors.
• Reach a consensus on the weighting of each of the evaluative factors.
• Determine the range for the rating scale (example 1 to 5, or 1 to 10, etc.).
• Develop the definition for each rank in the rating scale.
• Perform the individual rankings.
• Discuss and develop a consensus ranking.

Module Two
Weighted In this example, the members of a team reach the following consensus for evaluative
Evaluation factors, as shown in Table 2 below:
Matrix: An
Example Table 2
Rankings
FIRM: A B C
Criteria
Number of engineers (35% Weight)

5= >15 5
4= 10-12 4
3= 7-9
2= 4-6 2
1 = 1-3
Related Experience (20% Weight)

1 = firm has done a bit of simialr work
Manufacturing facilities(35% Weight)

5= Firm has up to date tools and techniques
Financial Strength (10% Weight)

Weighted Average 4.05 3.95 2.45
Applying the weighted evaluative factors results in the selection of firm A.

Module Two
Supplier Wilson (1994) classifies product types in relation to procurement:

Selection:
Product • Routine order products: products where there are no questions regarding the
Attribute use of the product, or the product’s capability to perform a certain function.
Considerations • Procedural problem products: products where there are no questions
regarding the capability of the product, but there may be questions on learning
to use the product.
• Performance problem products: products where there may be questions
related to the capability of the product to perform the expected functions.
• Political problem products: products that involve large expenditures, and
may involve people from a wide range of functions in the organization.
The Wilson article shows that evaluative factors differ by product type. It also shows
that the importance of factors within product types change over time.
Routine Order The importance of evaluative factors in routine order products has changed over the
Products years:
• In 1974, quality was the second least important consideration. By 1993 it had
become the most important factor.
• In 1974 delivery was the most important factor. By 1992 it had become the least
important factor.
• In 1974 service was the least important factor and remained that way up to 1982.
Service increased marginally between 1982 and 1993.
• Price remained the second most important factor throughout the time periods.
Procedural The importance of evaluative factors in procedural problem products has also changed
Problem over the years:
Products • In 1974 and 1982 service was the least important factor. In 1993 it was the most
important factor.
• Conversely, delivery was the most important factor in 1974 and 1982. It became
the least important factor in 1993.
• Quality increased in importance from 1982 to 1993
• Price decreased in importance during the same time period.

Module Two
Performance The importance of evaluative factors in performance problem products has also
Problem changed over the years:
Products • Quality became the most important consideration for performance problem
products in 1992 increasing from a third place ranking.
• Delivery decreased from being the most important in 1974, to the least important
in 1993.
• Service also increased in importance over the years.
• Price was largely unchanged throughout the years.
Political Problem And finally, the importance of evaluative factors in political problem products has
Products also changed over the years:
• Price decreased from the most important factor in 1974 and 1982 to the least
important factor in 1993.
• Quality became the most important factor in 1993, rising from the second least
important factor in 1972.
• Delivery became slightly less important over the years.
• Service increased, from being the least important to the second most important.

Module Two
Supplier Smytka and Clemens (1993) describe a total cost approach to supplier selection using
Selection: the model developed by General Electric Wiring Devices (GEWD). In addition to
GEWD’s Total quantifiable total costs, the GEWD model employs an initial qualitative assessment
Cost Approach relating to risk factors and business desirable factors.
In applying GEWD’s total cost model, the first step is to evaluate qualitative risk
factors. If the supplier passes the risk analysis, the supplier undergoes a qualitative
assessment of business desirable factors. If the supplier passes the business desirable
factors analysis, they undergo the total cost quantitative assessment.
The GEWD total cost model has four levels, or steps:
Step 1: Risk Assessment Level
• Determine relevant risk factors

• Assign risk rankings (pass/fail)
• Decision on overall pass fail
• If pass, go to the next step
Step 2: Business Desirable Factors Level
• Determine relevant business desirable factors

• Determine scoring range
• Assign scores
• Scores should then be added
• If pass, go to the next step
Step 3: Total Cost Level
• Enumerate total costs (quantitative analysis- involves adding the result for
each potential supplier)
Step 4: Decision Level
• Decide on the supplier based on the qualitative and quantitative analyses.

Module Two
Step 1: Risk In the first step of the GEWD model, the team performs a risk assessment on the
Factors Level supplier. The following risk factors can be considered:
• Financial stability
• Labour contract matters
• Environmental issues
• Quality
• Product line fit
• Warranties
• Proprietary design
• Supplier visits
• Awareness of market conditions
• Capacity constraints
• Effect on supplier research
Each factor is rated as pass or fail (go, or no-go). If there is an overall fail, then the
supplier is excluded. If there is an overall pass, proceed to the next steps. Then this
step is repeated for each potential supplier.
Step 2: Business Business desirable factors are factors that are important in the buyer’s strategy but are
Desirable Factors not quantifiable. A list of factors for consideration are:
Level
• Delivery capability
• Productivity
• Quality and quality systems
• Other capabilities

Module Two
Step 3: Total This total cost analysis is described differently than the total cost of ownership method in
Cost Analysis session 5 (Make or Buy). It is important to note that any total cost analysis should include
pre and post transaction costs. (The risk analysis layer of this method for supplier
selection is equivalent to qualifying suppliers as described in session 5.)
Using the total cost of ownership approach introduced in session 5, we can derive a total
cost analysis for supplier selection (items in italics are the cost items from the Smytka and
Clemens article, and are fit within the total cost of ownership framework):
Pretransaction
• Need recognition
• Sourcing
Supplier visits
Transaction
• Ordering
Price with Discounts
Ordering costs
Transportation
• Monitoring
Delivery expediting
• Receipt and Inspection
Technical support (inspection mainly)
Non conformance (quality)
• Payment
• Documentation
Post transaction
• Relationship costs with the supplier
Supplier visits
• Maintenance costs
• Repair costs
• Lost production costs
Line down costs
• Customer goodwill costs
Inventory costs
Line down costs
• Decommissioning and disposal costs

Module Two
Step 4: Decision Decision level:
After suppliers pass the risk assessment, all the factors (risk, business desirable
factors, and total cost) are considered in order to reach a decision.
The lowest total costs do not necessarily trump other factors. For example, a supplier
may have the lowest total costs, but have a higher risk assessment consequently the
supplier is ruled out. Or, suppliers could have about the same total costs, but one
supplier has better business desirable factors.
Single vs. A significant strategic decision for procurement is when to single or multiple source a
Multiple good or service.
Sourcing
Single sourcing provides the opportunity to establish a tight relationship with a
preferred supplier. Some reasons for single sourcing are:
• The supplier holds exclusive rights to the good or service

• The supplier has a significant quality advantage
• Single sourcing significantly reduces internal procurement costs
• The order is small, so it makes no sense to divide it
• Reduces inventory costs, and better enables just in time approaches
• Creates an opportunity for discounts when the order size is larger
• Reduces total logistics costs as larger volumes are acquired at one time. This must
be weighed against inventory costs
• Reduce product development lead times
Multiple sourcing results in less tight relationships with suppliers. Some reasons for
multiple sourcing are:
• Keeps suppliers competitive, and providing better value

• Minimizes the risk of supplier failure (due to business closing, business disasters,
transportation failures, etc.)
• One supplier may not have sufficient capacity or skills to meet the need
• An opportunity to “test” potential suppliers
• Avoids buyer dependence on one supplier organization (or supplier gaining
leverage)

Module Two
Determining the Somewhere within the continuum from one supplier to multiple suppliers lies the
Perfect Number optimal number of suppliers for a particular good or service. The Cruz (1996) article
of Suppliers addresses supplier optimization, and some of the things an organization should
consider:
• Eighty percent of survey respondents say supplier optimization has improved

delivery performance
• Seventy eight percent say that it has reduced transaction costs
• Seventy six percent boast product cost reductions
• Sixty eight percent witnessed a positive effect on transportation expenditures
Critics of supplier optimization contend that organizations may over-optimize

suppliers and experience problems related to backup sourcing, potential delivery
failure risk, unwillingness to abandon ineffective suppliers, and limited choices for
product development.
Advocates of supplier optimization suggest instead that these problems arise from
inadequate management of supplier optimization programs, which may focus on
supplier numbers and fail to promote collaborative partnerships with suppliers.
Cruz indicates that only 54% of organizations who use supplier optimization
experience cost reductions. For those who were successful, the key is collaboration
between procurement and engineering (design). Among organizations who have
established supplier optimization programs, the common requirement is supplier
evaluation.

Module Two
Session Wrap Up: Supplier Selection
Review Now that you have examined supplier selection in detail, and have recommended a
Objectives for course of action for Platinum Box, you should review the session’s objectives as

2. Produce an evaluation matrix for supplier selection.
3. Describe different types of products (routine order, procedural, performance
and political) as they affect supplier selection.
4. Connect the product type with supplier selection criteria.
5. Understand the elements of the total cost approach of selecting suppliers: risk
factors, business desirable factors, and measurable cost factors.
6. Select a supplier using the total cost of ownership approach.
7. Describe factors that suggest an organization should use a single source for a
good or service.
8. Describe the factors that suggest an organization should use multiple sources
for a good or service.
9. Understand the difficulties in negotiating in a sole source situation.
10. Defend a single versus multiple source decision.

Preview Next In session 8 we analyzed methods for evaluating suppliers. In session 9, candidates
Session will explore the development and certification of suppliers, and do activities on
supplier certification and supplier development.

Session Nine
Z Procurement performance monitoring

Z Approaches to supplier development
Z Objectives of supplier certification
Z Benefits of certification
Z Steps in supplier certification
Z Product development cycle times and supplier
performance

Module Two
Activity Directions
Objectives and a brief overview Review the PowerPoint slides for this session (see the Appendix of this
of the session. manual. These slides are from the instructor-led version of this module.)
Session Notes: Procurement Read the resources for this section.

Performance Assessment
Resources: • Outline the key best practices in procurement performance
- Carter et al.: Strategic measurement.
Performance Measurement for • Describe the types of procurement performance measures.
Purchasing and Supply
- Session notes

Development
Resources: • Review the types of supplier development activities.
- Krause: Supplier • Supplier certification is a supplier development tool.
Development: Current Practices
and Outcomes
- Session notes

Supplier Development • What supplier development activities does your organization engage
in?
• What are the pros and cons of each?

• List the pros and cons of the supplier development plan in your
organization. Is it complete? If not, how can it be improved?

Module Two
Activity Directons
Certification
Resources: • Review objectives and benefits of certification.
- Lockhart: Vendor • Review steps to supplier certification.
Certification: Seven Steps to
a Better Product
- Park: Impact of Supplier
Certification Program on
U.S. Firms
- Session notes

Supplier Certification • Does your organization engage in supplier certification? Why or why
not?
• How has supplier certification affected your organization’s
performance, if at all?
• What problems in certification have occurred in your organization?

• Outline the problems that have occurred or may occur with supplier
certification.
Supplier Certification
(marked – 5%) Submit the exercise for evaluation. Refer to the Session Schedule
provided for submission instructions.

Module Two
Activity Directions
Self-assessment Activity: Prepare the Fisher and Paykel case by answering the following questions:
Fisher and Paykel case • Is this an attractive contract for Walton?
• What supplier development activities would you recommend in this
case?
Resources: • How do you think Walton will respond?
- Fisher and Paykel case • If Walton does not agree then what should Fisher and Paykel do?
- Session notes
• There is more than one choice of development activities.
• Suppliers may or may not agree to supplier development.
• If supplier does not agree, propose an alternate plan.
Self-assessment Activity When you are finished the self-assessment activity, review the Self-
Evaluation assessment Activity Evaluation section in this session.
Session Notes: Product Read the resources for this section.

Development Cycle Time
Resources: • Important to consider product cycle time in supplier development.
- Sharland: The Impact of • Trust and commitment is key.
Cycle Time on Supplier • Supplier certification should improve cycle time.
Performance
- Session notes
next session.

Module Two
What You In the last session, the focus was on selecting suppliers and determining the correct
Already Know number of suppliers. Before that, we examined delivery and quality. This session
assumes suppliers have been selected, and addresses how to develop and certify
suppliers. Quality and delivery are important reasons to consider supplier development.
A natural outcome of supplier development and certification is the reduction of the
supply base. The focus shifts towards closer relationships with existing supply
partners.
Overview Candidates will explore measuring the performance of an organization’s internal

procurement processes. Internal evaluation extends to the evaluation of supply
partners. Supplier development and the many potential approaches to supplier
development are discussed. One of the trends in procurement is the increase of
supplier development and certification. A step-wise model is presented for supplier
certification.
An important element to consider is how to measure a cycle. This is an important

evaluative tool for suppliers. Measuring a product’s development cycle is also a
significant benefit of supplier development activities. Candidates perform an exercise
on supplier certification. Candidates also analyze the Fisher and Paykel case, which
poses problems about how best to develop supplier competencies.

Module Two
Supplier Development and Certification, continued
1. Describe the best practices in procurement performance measurement.

2. Specify procurement performance measures for an organization.
3. Identify the many types of supplier development approaches.
4. Describe the objectives of supplier certification.
5. Discuss the benefits of supplier certification.
6. Apply the general steps in the supplier certification process.
7. Describe the use of cycle times in supplier performance management.

Reading
Carter, Phillip L., Monczka, Robert M., and Mosconi, Trish Strategic Performance
Measurement for Purchasing and Supply. CAPS: Center for Strategic Supply
Research, 2005, Pages 10-54.
Krause, Daniel D. Supplier Development: Current Practices and Outcomes.

International Journal of Purchasing and Materials Management. Spring, 1997. Pages
12-19.
Lockhart, Marsetta and Ettkin, Lawrence. Vendor Certification: Seven Steps to a

Better Product. Production and Inventory Management Journal. First Quarter 1993.
Pages 65-69.
Park, Hong Y., Reddy, S., C. Shin, G.-C. and Eckerle, C., Impact of Supplier
Certification Program on U.S. Firms. European Journal of Purchasing and Supply
Management. Volume 2, 1996. Pages 107-118.
Sharland, Alex, Eltantawy, Reham, A. and Giunpero, Larry C. The Impact of Cycle
Time on Supplier Selection and Subsequent Performance Outcomes. Journal of
Supply Chain Management. Summer, 2003. Pages 4-12.
Fisher and Paykel Limited case. Richard Ivey School of Business #9A97D015.

Module Two
1. Does your organization use strategic purchasing performance measures? If so

which ones?
2. If not, should it use them? Why?
3. What supplier development activities does your organization engage in?
4. How has supplier development affected your organization’s performance, if at all?
5. Does your organization engage in supplier certification? Why or why not?
6. How has supplier certification affected your organization’s performance, if at all?
7. What are some of the problems of certification? Have they occurred in your
organization?
8. Does your organization use cycle times for supplier evaluation? Why or why not?
Fisher and Paykel Limited

Assume you are Alan Day and you have to consider the following questions:
1. Is this an attractive order for Walton?
2. Why might Walton have had a delivery problem in November and December?
3. Is this team approach the best way to solve the problem?
4. What supplier development activities would you recommend in this case?
5. How do you think Walton will respond?
Self-assessment Prepare the Fisher and Paykel Ltd. case by focusing on the following issues:
Activity • What are the basic issues in this case?
(not marked) • What do you think of the relationships within Fisher and Paykel, and the
relationships the organization has with its suppliers?
• How can Alan Day solve the immediate problems?
To help you prepare the case, see the framework questions on the case in this session.
For further reference, please see Case Preparation in Introduction and Overview.
This activity is not submitted for evaluation. When you have completed the activity,
see the Self-Evaluation section in this session.

Module Two
Individual Supplier Certification

Exercise
double spaced, with 2.5 cm margins on all edges, and be in 12-point font. This exercise
is limited to a maximum of five pages. Remember to write in complete sentences; do
not use point form, except when providing a coherent list in a wider context.
marking.
Requirements:
• Select one supplier from your organization that you have determined is a good
candidate to undergo certification. Provide a brief explanation as to why you chose
this supplier for certification.
• Prepare a brief summary for how you would apply each of the steps in the
certification process to this supplier.
• Prepare a short written report of your findings.
• Did you pick a suitable supplier?

• Did you summarize how you would apply each step in the certification process?
• Is your certification process realistic and achievable?


Module Two
Overview The Fisher and Paykel case is used to illustrate inventory tradeoffs. Focus on
development of the supplier, potential reactions of the supplier and potential
consequences.
Consider the following in your analysis:

• Based on the requirements table F&P uses 361 (312 in New Zealand plus 49 in
Australia) evaporator covers daily.
• Assuming 300 working days per year, with a price per cover of $7, the yearly
contract is worth about $750,000.
• Therefore, this is a significant contract for Walton.
• A second consideration is the shortfall that nearly occurred in December 2004.
• F&P started working a half day overtime in November and December.
• This implies an average requirement of 361+.5(312) = 517 pads.
• This compares to the maximum capacity of 400 per day at Walton.
• It is not surprising that there was a near problem.
• A third consideration is the inadequate inventory procedures at both F&P and
Walton.
Recommended This case begs for an improvement in inventory management procedures, both at F&P
Supplier and Walton. The group approach that Alan Day has adopted is desirable. There are
Development thirteen supplier development activities discussed in the session:
Activities
1. Feedback on evaluations
2. Supplier visits at the buying organization
3. Supplier site visits
4. Verbal or written requests for improvement
5. Promising future benefits
6. Formal evaluation
7. Creating competition amongst suppliers
8. Informal supplier evaluation.
9. Promising current benefits
10. Certification
11. Recognition of supplier achievements
12. Training and education of suppliers
13. Investment in suppliers

Module Two
Suggested The key supplier development activities to focus on are 2, 3, 10, 11 and 12 (2 and 3 are
Approach already in place, it seems.)
The focus should gravitate towards certification and training and education. These are
important because they create a path for F&P and Walton to become more closely
aligned in meeting their common goals.
Recommend the use of JIT to solve the problems of shortages. JIT is covered more fully
in session 12.
Note that F&P and Walton have a good working relationship, which is evident by the
composition and openness of the team Alan Day has assembled.
How Will Given the openness of the relationship it can be expected that Walton will respond
Walton favorably to positive approaches to supplier development.
Respond?
Go through the list of potential activities, and determine what the expected response
from Walton will be to each.
In general candidates should be aware that the F&P and Walton supply issue is a joint
problem. Consequently, development activities that focus on Walton solely will result
in a negative response. Those that focus on joint activities are likely to have a positive
response. These will also result in a more secure long term relationship.

Module Two
If Walton Does If Walton does not agree to supplier development type activities, which is unlikely given
Not Agree the importance of the F&P contract, there are four possible approaches for Alan Day to
take:
1. Do nothing.
2. Improve the current system: In this alternative Walton is retained as the supplier
and practices are improved. Come up with possible improvements. Potential
solutions are better inventory control practices, greater information sharing
between F&P and Walton with respect to demand, and changes in F&P
production schedules.
3. Find another supplier. There is only one supplier (Walton in New Zealand). It
may be possible to encourage another supplier to move into this business.
Comment on the consequences of this, especially in a small place like New
Zealand. Another possibility is to source offshore. This however, would have
significant additional effects on inventory, which F&P does not have room for,
as well as costs due to transportation.
4. Produce in house. In this scenario F&P would acquire the machinery to cut the
holes in house. There are several issues with this. First, it moves F&P further
away from their core competencies, second the machine will likely be idle a
significant part of the time, finally it may have an undesirable effect on Walton.

Module Two
Session Notes: Supplier Development and Certification
Procurement Carter, Monczka and Mosconi (2005) provide a process-oriented framework for
Performance strategic supply performance monitoring. According to the article, there are eight
Monitoring: elements that constitute best practices in procurement performance monitoring:
Eight Best
Practices • Align procurement measures with corporate goals
• Establish comprehensive measures
• Set aggressive but dynamic targets
• Make the measures transparent and known
• Link them to performance-based incentive systems
• Provide the necessary resources to succeed
• Provide systems to support the measures
• Provide leadership
While the article focuses on measuring procurement an indirect outcome of

procurement monitoring is also applicable to supplier monitoring.
Procurement Using this framework, various types of measures can be deployed. The types of
Performance measures are as follows:
Monitoring
Measures • Price/cost
• Revenue
• Inventory
• Availability
• Technology, innovation and new product or process introduction
• Quality
• Workforce
• Operational
• Customer satisfaction
• Supplier

Module Two
Session Notes: Supplier Development and Certification, cont.
Price/Cost Target Price Measures

Measures
These measures are based cost reduction goals, product or service budgets, competitor
prices, or a combination of the above. The primary issue is the ability to establish a
target price. This may be particularly difficult for intermediate goods and services. If
the target price is focused on cost reductions, the rate of cost reduction may decline on
subsequent purchases. This makes it difficult to achieve dramatic target price
reductions over time.
Cost reduction
These measures usually compare current prices with the prices paid on previous
purchases. An important consideration is that market prices (particularly for
commodities) will affect the calculation of cost changes. Issues include: ensuring that
quantities used to measure the cost reduction are consistent, and that procurement
adjusts for the effect of cost increases, and that procurement applies What You
Already Know cost reductions to the factors responsible for the cost reduction.
Actual -Market price
These measures are used for products where there is a well functioning market. A
comparison is made between the relative change in market cost of the good or service
and the change in the organization’s cost for the equivalent good or service. There are
two issues with this approach: the cost of building and maintaining the internal
indices, and finding a comparable basket of goods and/or services.
Cost avoidance
These measures are designed to consider what would have happened if procurement
had not taken action.

Module Two
Guidelines for The Carter (2005) article suggests the following guidelines for target pricing and cost
Target and Cost reduction measures.
Reduction
Measures Target Pricing Guidelines
• Have a clear description of the good or service content (specification) and

budget for that good or service
• Clearly report the target prices for each item being measured
• Report by good or service
• Provide the rationale for trade-offs where specs are changed to meet target
prices
• Provide the basis for changing the program in the event projected target price
results can not be achieved
Cost Reduction Guidelines
• Specify clear rules of how these prices are determined

• Calculate current prices and relate them to prior and budgeted prices
• Include volumes purchased
• Report savings after they have occurred
• Seek independent review and validation
• Clearly identify the savings
Revenue The Carter (2005) article identifies three issues with using revenue measures:
Measures
• Revenue generation is a non-traditional view of procurement’s strategic role
• Be sure to define the effect that procurement has on revenue generation
• Account for the multiple organizational entities involved in revenue
generation, and how this relates to procurement’s role
With respect to revenue measures the authors recommend:
• Use an economic value added (EVA) approach

• Identify procurement’s contribution to EVA
• Develop an initial ‘soft’ approach for supply
• Harden the approach over time

Module Two
Inventory The greatest issue in terms of performance monitoring is a focus on singular measures
Measures of performance where multiple measures of performance are required.
Availability Availability measures expand beyond simple inventory measures. The focus is on
Measures assuring the good or service is available to the customer at the right time, in the right
quantity with the right quality. The most significant problem is handling changes in
the timing and quantity demanded by the customer.
Technology The critical issue here is measuring the effect of technology or process
Measures implementation. Tracking systems are important to determine results. As well, in
order to convince suppliers to focus attention on the need for innovation, the buying
company must focus on innovation and push innovation through to the vendor.
Technology and process improvement measures are difficult to implement.
Quality Measures Quantitative measures determine the degree of conformance or defects in goods and
services.
User surveys ask users of products their opinions of the quality of goods and services.
Quality system certification was discussed in the total quality management section
of session 7.
Workforce For successful procurement management it is useful to develop metrics related to an

Measures organization’s workforce. As noted by the Carter (2005) article, one of the most
important issues with respect to workforce information is procurement training. A
second issue is the effectiveness of the training in creating a better and more effective
workforce.

Module Two
Operational Operational measures focus on the efficiency of the procurement area as well as the
Measures degree of internal compliance with company policy. The major issue with these
measures is politically-motivated performance compliance. As only a limited number
of measures can be implemented, departments will optimize their performance with
respect to those measures. This may mean poor performance in areas which are not
subject to measurement.
Customer Measures of internal and external customer satisfaction may be used. These may
Satisfaction consist of surveys, measures of return rates, and etc.
Measures
Supplier Supplier performance measures focus on how well the supplier performed related to
Measures the good or service being acquired. We will explore this topic in more depth in this
session.
Supply base management. The most supply-based management measure is spend

analysis, which was covered in session 1.
Supply relations focus on the quality of the working relationship between

procurement and suppliers. Typically this is undertaken through supplier surveys.

Module Two
Approaches to Krause (1997) defines supplier development as any effort of a firm to increase the
Supplier performance and/or capabilities to meet the firm’s short and long term supply needs.
Development Supplier development effort can range from piece-meal, to fully-integrated long term
relationship with the supplier. Forms of development activities ranked in terms of
frequency 1are:
• Feedback on evaluations
• Supplier visits to the buying organization
• Supplier site visits
• Verbal or written requests for improvement
• Promising future benefits
• Formal evaluation
• Creating competition amongst suppliers
• Informal supplier evaluation
• Promising current benefits
• Certification
• Recognition of supplier achievements
• Training and education of suppliers
• Investment in suppliers
Krause also examined the effect of supplier development on supplier performance.

Substantial gains were reported with respect to defect rates, on-time delivery, order
cycle time, and percent of orders filled completely.
Krause reports on the buying organization’s view of supplier development. Using a 1

to 5 scale, where one is defined as “greatly exceeding expectations” and 5 is “fallen
far short of expectations” the indications of the success of supplier development
were:
• Has helped reduce product/service cost: 2.13

• Expect supplier to help improve our product design: 2.74
• Has contributed to increasing our product/service sales: 2.55
1
The use of 4 or more suppliers was removed from the list table.

Module Two
Objectives of One method of supplier development that has grown in importance is supplier
Supplier certification. The Park (1996) article describes the results of a study on the objectives
Certification of certification programs. Based on a survey of purchasing professionals, the
programs objectives of certification from most to least important are:
• Quality improvement
• Establish long term partnerships
• Reduce price/cost
• Improve on-time delivery
• Promote co-operation
• Reduce suppliers
• Develop technology/product development
• Other
Differences The authors also considered the differences between organizations that use supplier
between certification and those that do not. Organizations with certification tend to be:
Certifying
Organizations • Larger
and Non • Use international sources compared to local or regional sources
Certifying • Single source more often
Organizations • Have longer term contracts with suppliers
• Involve suppliers earlier in product development
• Share technology more broadly

Module Two
Benefits of The following table shows the effects of supplier certification based on the Park
Supplier (1996) study.
Certification
Objective Benefit
Improve Quality Lower rejection rates and reduced inspection costs.
Establish long term relationships Contracts length increased, supplier change frequency
decreased.
Reduce price/cost The most prevalent result is no change in price. Where
prices change, more often there is a decrease not an
increase.
Improve on-time delivery The most common effect was improved on-time
delivery, followed by no change in on-time delivery.
Promote co-operation Co-operation improved significantly.
Reduce Suppliers Significant reduction in the number of suppliers.
Develop Technology/Product In terms of technology sharing there was little
Development difference when it came to sharing technology with all
firms. With closely-linked firms there was greater
sharing of technology with certified firms. In terms of
product development, certifying firms were more likely
to involve suppliers in product development.

Module Two
Supplier Lockhart and Ettkin (1993) provide a model for supplier certification with respect to
Certification: quality. The model is applicable for any other criteria the buying organization wishes
Steps to consider. Certification is a process of examining a supplier to ensure that its goods
and services will consistently meet the needs of the buyer. Certification means a
tighter and longer-term relationship between supplier and buyer.
The steps for certification are as follows:
Commitment to a New Philosophy - The new philosophy is to change the buyer

supplier relationship to one of trust and commitment. Support for the change should
come from the highest levels of the companies engaged in the relationship.
Setting Goals and Objectives - In this step, the goals and objectives for the
certification program are established. Typically, goals include better quality with the
end result being higher customer satisfaction, speedier product development,
improved quality, cost reductions and risk mitigation.
Establishing a Certification Team - Typically a cross-functional team is used.
Involving suppliers - Early on in the process target suppliers should be invited to

participate. This helps establish trust and commitment.
Measurement (Implementation) - During this phase suppliers that wish to have a

stronger partnership with the firm are studied to determine their performance with
respect to the desired outcomes of the certification program. Techniques for
measurement include surveys, site visits and audits, inspection, and supplier self -
assessment. Once measurement has taken place, the gap between the current situation
and the desired outcome, if any, is identified.
Agreement - At this stage an agreement is reached between the buyer and supplier
concerning the responsibilities of each party with respect to the goals and objectives
of the certification.
Maintenance - In this stage the certification program is in place, and it needs to be

maintained. Areas of maintenance include accounting for changes in goals and
objectives, continuing to build the relationship with the suppliers, and problem
resolution.

Module Two
Cycle Times and Cycle time is the time from initial concept of the design for a product until the product
Supplier enters the defined market. Cycle times have become increasingly important in order to
Performance meet rapidly changing customer expectations, and to stay competitive. Consequently,
Measurement cycle times are becoming an increasingly important component of supplier
performance management.
Sharland, Eltantawy and Giunipiero (2003) provide insight into the importance of
cycle times with respect to supply. Product development cycle time is of above-
average importance in terms of supplier selection, it is also of above-average
importance in terms of supplier performance.
The authors reach the following conclusions in the study:

• Quality is the primary factor in supplier selection and evaluations.
• Cycle times are an important factor in measuring supplier performance.
• Supplier location heavily influences cycle times. The closer the supplier, the
lower the cycle time.
• Trust and commitment are important factors in reducing cycle times and
producing higher quality.

Module Two
Session Wrap Up: Supplier Development and Certification
Review Now that you have examined supplier development and certification, and have
Objectives for performed an exercise on supplier certification, you should review the session’s
this Session objectives as restated here:
1. Describe the best practices in procurement performance measurement.

2. Specify procurement performance measures for an organization.
3. Identify the many types of supplier development approaches.
4. Describe the objectives of supplier certification.
5. Discuss the benefits of supplier certification.
6. Apply the general steps in the supplier certification process.
7. Describe the use of product cycle times in supplier performance management.

Preview Next In session 9 we examined how to develop and certify chosen suppliers. In session 10,
Session candidates will explore the issues behind procuring services, and perform exercises on
spend analysis and statement of work.

Session Ten
Z Services are different

Z Procurement involvement: services are the same
Z Services spend analysis
Z Specification: statements of work
Z Specification: service level agreements

Module Two
Activity Directions
Session Notes: Services Are Read the resources for this section.
Different
Resources: • Understand the differences between services and goods procurement
- Ellram: Understanding and and contracts.
Managing the Services
Supply Chain
- Smeltzer: Purchasing
Professionals Perceived
Differences Between
Purchasing Materials and
Purchasing Services
- Session notes

Goods vs. Services • What types of services does you organization purchase?
Procurement • How are they different from goods purchases?

• List differences between services and goods procurement (in your
organization, and from the material you have read).
Session Notes: Procurement Read the resources for this section.

involvement – Services are
the same Here is the key teaching point:
• Services purchases should follow the same approach as goods, except
Resource: session notes for the differences outlined in the session notes.

Module Two
Activity Directions
Session Notes: Spend Read the resources for this section. And, review spend analysis from
Analysis session 1.

• Understand the components of spend analysis.
- Session notes (and session • Apply spend analysis to services.
1 notes)
Individual Exercise: Spend Read the requirements and complete the exercise in this session.
Analysis (marked – 5%)
Submit the exercise for evaluation. Refer to the Session Schedule
Session Notes: Components Read the resources for this section.

of Statements of Work
Resources: • Outline and familiarize yourself with the steps in preparing a
- Session notes statement of work.
Statement of Work
(marked – 5%) Submit the exercise for evaluation. Refer to the Session Schedule
Session Notes: Service Read the resources for this section.

Level Agreements
Resources: • Outline and familiarize yourself with the steps in preparing a service
- Service Level level agreement.
Agreements: Guidelines for
Public Sector
Organizations. New South
Wales
- Session notes

Module Two
Activity Directions
Individual Reflection: Prepare your own approach to a service level agreement for the service
Service Level Agreements you prepared a statement of work for.
The following should be addressed:

• Identify need and expectations
• Define service levels
• Establish performance indicators
• Determine costs and terms
• Establish agreement framework
• Establish review framework

• Candidates should become familiar with, and apply the steps in
preparing a service level agreement.
next session.

Module Two
What You Strategic and tactical issues in procurement have been examined throughout this
Already Know module. In this session, we will examine strategic and tactical issues that are unique to
services procurement. While services procurement differs from goods procurement in
some ways, services procurement involves many of the same issues.
Some of the tactical and strategic issues in services procurement are: bidding and
negotiation, organizational issues, make or buy issues, price, cost and quality issues,
supplier selection, and supplier development and certification issues.
Overview The session begins with a description of the characteristics of services that are unique.
This uniqueness however does not mean that services are excluded from normal
procurement protocols. Services fit well within the normal procurement protocol.
In this session candidates will be exposed to three important aspects of strategic

services procurement: spend analysis, statements of work, and service level
agreements.
Services spend analysis follows the same process as goods spend analysis. Using the
spend analysis concepts and tools presented in session 1, candidates will prepare a
service spend analysis in this session. In addition, we will examine statements of work
and service level agreements, as they are crucial in services procurement.

Module Two
Services Procurement, continued
1. Describe the unique aspects of services procurement.

2. Describe the tactical and strategic considerations related to services
procurement.
3. Assess the need for procurement’s involvement in services buying.
4. Conduct a services spend analysis.
5. Outline the elements of a statement of work.
6. Prepare a statement of work
7. Outline the elements of a service level agreement
8. Prepare a service level agreement.

Reading
Ellram, Lisa M., Tate, Wendy L. and Billington, Carey. Understanding and
Managing the Services Supply Chain. Journal of Supply Management. Nov. 2004
Pages 17-32.
Smeltzer, Larry R. And Ogden, Jeffrey A. Purchasing Professionals Perceived

Differences Between Purchasing Materials and Purchasing Services. Journal of
Supply Chain Management, Winter 2002. Pages 54-70
Service Level Agreements: Guidelines for Public Sector Organizations. New South
Wales Premier’s Department, 1999
1. What types of services do we buy in our organization?

2. How are they different from goods?
3. Is the procurement procedure different for services in my organization? What
are the differences?
4. If procurement is not involved or only indirectly involved in buying services,
what are the benefits of more direct involvement?
5. What steps would you take to increase involvement?
6. My organization has prepared a statement of work for…..
7. My organization has prepared a service level of agreement for…...

Module Two
Individual Services Spend Analysis for Your Organization

Exercise
(marked – 5%) This exercise is worth 5% of the overall mark for this module. It must be typed and
context.
marking.
There are three components to this exercise:
1. Choose a service that is critical to your organization. The service should be

complex, and integral to your organization. Indicate if your chosen service is a
direct or indirect spend.
2. Show the steps you would use to conduct a services spend analysis for your
organization on the chosen service. Describe specific key triggers for the services
spend analysis, and why you chose these triggers.
3. Describe how services spend analysis would fit within your current procurement
strategy. Describe the benefits and constraints (i.e. pros and cons) of services spend
analysis as it relates to your organization.

• Did you apply the appropriate concepts and tools?
• Was your analysis realistic and achievable?
• Was your analysis strategic (i.e. in alignment with your organization’s
procurement strategy, and the organization’s goals in general)?
For more details on the characteristics and purposes of a services spend analysis, refer
to the session notes and readings for this session, and for session 1.


Module Two
Individual Services Procurement: Statement of Work

Exercise
(marked – 5%) This exercise is worth 5% of the overall mark for this module. It must be typed and
context.
marking.
There are three components to this exercise:
1. For the service you analyzed in the services spend analysis exercise, outline the
steps you would take to specify a statement of work for this service.
2. Provide a rationale for each step as it relates to the service being procured and
implementation issues that may arise.
3. Prepare the statement of work so that it can be used as a basis for preparing a
service level agreement in the future.
• Did you provide all the necessary steps for a complete statement of work?
• Did you provide the rationale for each step? Including, did you anticipate
important implementation issues?
• Was your analysis relevant, realistic, and achievable?
For more details on statements of work and service level agreements, refer to the
session notes and readings for this session. General evaluation information for all
exercises is available in Introduction and Overview: Candidate Evaluation.

Module Two
Session Notes: Services Procurement
Services are Services have characteristics that make them different from goods. Services are less
Different tangible than typical goods. For example, audit services are far less tangible than an
engine assembly for a bus. Services cannot be inventoried, while many goods can be
inventoried. In most cases, you cannot store a service for later application or
production.
Smeltzer and Ogden (2002) point out that quality measurement has different
dimensions for services as compared to goods. For services, quality measurement is
often subjective (or qualitative). Using our audit example, measures such as
“thoroughness” and “support of conclusions” are quality dimensions, whereas an
engine assembly can be inspected quantitatively for performance attributes.
Services are often indirectly linked to products. Goods are often directly linked to
products. For example, an audit service may be indirectly involved in creating a bus.
An engine assembly is obviously part of the finished bus.
Services tend to be produced and consumed simultaneously. For example,

immediately after an audit is produced the results of the audit are used by the
organization. On the other hand, an engine assembly is produced independently of the
other bus parts, and may be used at a subsequent date. Note that JIT (Just in Time)
ordering and inventory reduces the time between the production and consumption of
goods.
There may be a range in the complexity of services purchased (lawn cutting is a lot
less complex than legal advice); however, service purchases are usually more complex
than goods purchases. This is a result of the characteristics of services.

Module Two
Session Notes: Services Procurement, continued
Categorizing There a variety of ways to categorize services. One system is as follows:

Services
Staff/Professional Services. These are services related to specific professional needs.
Examples are audit services, actuarial services, medical services and legal services.
Customer support services. These are services directly related to customer support.
Examples include help desks, reverse logistics providers, etc.
Information technology and communication support services. These may be

considered as either part of operational or professional services; however, information
technology is often considered as a separate category due to its importance in an
organization.
Operational Support Services. These are services related to day-to-day operations

of the organization. Examples include cleaning, yard maintenance, painting, etc.
Depending on the nature of the service, there may be substantial overlap between
operational services spend and goods spend. For example, cleaning a production
facility can also be considered an indirect spend related to the goods produced.
Tactical and Smeltzer and Ogden (2002) uncovered several important differences between goods
Strategic purchases and services purchases. For goods purchases, some important and unique
Considerations: considerations are:
Goods
• Factors that relate to the tangible nature of goods (storage, handling, etc.)
• Transportation
• Trust in continuous performance reliability
• Delivery schedule flexibility

Module Two
Tactical and For services, some important and unique considerations are:
Strategic
Considerations: • Determining target and total costs is more difficult for services
Services • Specification statements (statements of work and service level agreements)
are less robust for services, and usually more complex to prepare
• It is difficult to make quantity purchases with services
• Price negotiation is more complex for services
• Evaluating performance is more complex for services
Using a supply chain analysis approach, the Ellram (2004) article suggests that:
• Poor specifications cause poor control from a service delivery perspective and
a financial perspective.
• Service specifications are often poorly developed, since organizations have an
inability to develop appropriate internal measures of performance for the
same activities. By outsourcing them the same problem occurs.
• Moral hazard problems: a service supplier has incentive to increase the scope
of work (scope creep).
• Lack of professional management.
Additional Costs There are added costs in the services supply chain such as:
for Services
• Service suppliers use their customer’s leverage to extract lower prices from their
suppliers. These savings are not necessarily passed on to the buyer.
• Potential Additional charges for work outside the agreement.
• Suppliers withholding payments to sub-suppliers for long time periods. Sub-
suppliers build this cost into their costs, and this is passed on to the buyer.
• Billing errors may be frequent.
• Providing summary rather than detailed invoicing.
• Use of lower-skilled labour than specified in the agreement.
• Providing service below what was agreed to.
• Providing package deals so suppliers can not be easily compared.

Module Two
Services are the Similar to the procurement of goods, procurement for services should follow a
Same: standard set of steps. The steps are:
Procurement
Involvement • Need recognition
• Sourcing
• Ordering
• Monitoring
• Receipt and inspection
• Payment
• Documentation & Relationship management
Services procurement varies from goods procurement in the following ways:
• Needs description focuses on statements of work for complex services, and

service level agreements for ongoing services.
• Inspection tends to be qualitative in nature.
• Receipt tends to be by the user as opposed to a centralized entry point to a
facility.
Similar to procurement for goods, procurement should be the lead resource for service
purchases.
Services Spend Service often are indirect spend; however, where the organization making the
Analysis purchase is a customer service oriented organization, it may be direct spend. Consider
a computer manufacturer that offers phone support for the computer hardware and
software it produces. Suppose the phone support is provided by a third party call
centre. In this case, the third party provider costs are direct spend. Suppose the
manufacturer also contracted for lawn maintenance service at its headquarters. This
would be an indirect spend.
Many organizations allow services spend to occur throughout the organization with
little management from procurement. This compounds the difficulty in acquiring
spend analysis information.
Spend analysis for services should follow the approach outlined in session 1.

Module Two
Specification: One of the most fundamental weaknesses in services procurement is that

Statements of specifications fall below the standards common for goods purchases.
Work
A statement of work is the specification for a service. Normally, statements of
work focus on specific tasks that need to be accomplished. For example, an audit
statement of work details audit tasks for specific departments or processes.
Statements of work may also apply to a long-range set of tasks. For example, legal
services might be contracted for a multi-year term.
The complexity of a statement of work will depend on the complexity of the service
being acquired. Typical Content for development of the statement of work are as
follows:
• Use a team approach. (Include relevant internal parties and potential

suppliers.)
• Provide background information related to the service. What is the history of
the service in the organization? What are the problems? What is the current
status? Why is this work important?
• Outline the objectives to be achieved.
• Provide a detailed, clearly-written proactive description of the requirements.
• Describe the deliverables in precise terms.
• Describe the expected quality and timing of deliverables.
• Provide an expected delivery schedule outlining key tasks and milestones.
• Outline performance monitoring with respect to milestones and deliverables.
(This is the project management aspect of the statement of work.)
• Designate key contacts and responsibilities.
• Determine measurement factors. How will the organization know when the
service is successfully delivered?
• Provide information with respect charges, payments and cost issues.
• Describe other matters such as dispute resolution, bonds, employer liability,
legal requirements, termination, jurisdiction, etc.
Once a service supplier has been selected:
• Communicate on a regular basis with the supplier. Use the team that
developed the statement of work to engage with the supplier if appropriate.
• Monitor the plan.
• Review and approve or disapprove deliverables as required.
• Limit scope creep and change orders as required.

Module Two
Specification: Service level agreements arose from the outsourcing of information technology.
Service Level Service level agreements are a subcomponent of all outsourcing agreements, and can
Agreements arise from a statement of work. Service level agreements set the expected standard
for service quality.
The New South Wales methodology (1999) for developing service level agreements
can be applied equally in private and public sector organizations. The steps in the
process are as follow:
1. Start up: form a team of members from the service supplier and service user.
Determine the goals for the agreement. Set general parameters related to the
timeframe for the agreement.
2. Involve key players. Who will be affected by the agreement? Who has a
vested interest?
3. Identify needs and expectations.
4. Define service levels. Typically these are defined in terms of quantity, quality,
timeliness and cost.
5. Establish performance indicators. The indictors are developed from the
service level specifications.
6. Confirm mutual issues. The agreement should recognize the two-way nature
of the agreement. It should include the method of dispute resolution and the
method to refresh the agreement as time passes.
7. Determine the costs and terms of payment.
8. Agree on the framework, content and style of the SLA.
9. Establish a review framework.
10. Create and sign the agreement.

Module Two
Session Wrap Up: Services Procurement
Review Now that you have examined supplier development and certification, and have
Objectives for performed an exercise on supplier certification, you should review the session’s
1. Describe the unique aspects of services procurement.

2. Describe the tactical and strategic considerations related to services
procurement.
3. Assess the need for procurement’s involvement in services buying.
5. Outline the elements of a statement of work.
7. Outline the elements of a service level agreement
8. Prepare a service level agreement.

Preview Next In session 10 we examined how to procure services from suppliers. In session 11,
Session candidates will explore the issues behind e-procurement, and submit a written case
report.

Session Eleven
e-Procurement
Z Forms of e-procurement
Z Pros and cons of e-procurement
Z e-Procurement knowledge areas
Z Implementing e-procurement
Z Reverse auctions

Module Two
Activity Directions
Session Overview and Read What You Already Know, the Session Overview and the
Objectives Objectives found in this session.
Objectives and a brief overview Review the PowerPoint slides for this session (see the Appendix of
of the session. this manual. These slides are from the instructor-led version of this
module.)
Individual Reflection: E- Reflect on the following:
procurement Used • What forms of e-procurement do you use in your organization?
• What are the advantages and disadvantages of your e-procurement
strategy?
Session Notes: Forms of E- Read the resources for this section.

procurement
Resources:
- Session notes
Session Notes: Advantages Read the resources for this section.
and Disadvantages of
E-procurement Here is the key teaching point:
• Expand on the list of advantages and disadvantages of e-
Resources: procurement methods as outlined in the session notes.
- Session notes
E-procurement Knowledge
Areas Here is the key teaching point:
• It is important to gain an understanding of each of the key
Resources: knowledge areas.
- Porter: A purchasing
manager’s guide
- Session notes

Module Two
Activity Directions
Knowledge Level and E- • What is the knowledge level in your organization related to e-
procurement procurement?
• In which knowledge area(s) is your organization the weakest? Where
is it strong?

• Understand the importance of being knowledgeable in all areas as
part of strategy and tactics.

Implementing
E-procurement Here is the key teaching point:
• Be aware of tactical consideration in implementing e- procurement
Resources:
- Consultant’s Top 12 e-
procurement tips.
- Session notes
Individual Reflection: E- Reflect on the following:

procurement Tips • With respect to the 12 tips in e-procurement which ones has your
organization considered? Which ones has it violated?
• And, what were the consequences of any violations?
Session Notes: Reverse Read the resources for this section.

Auctions
Resources: • Understand the steps in preparing for a reverse auction.
- Clark: Five Auction Steps. • Understand the strategic and tactical issues in using reverse auctions.
- Manciagli: A Supplier’s
View.
- Atkinson: IT Firm uses
reverse auction
- Session notes

Module Two
Activity Directions
Boeing Australia Limited Introduction and Overview.
(marked – 10%)
Resources: use the guidelines in the Written Case Reports section of the
− Boeing case Introduction and Overview.
guidelines)
− Session notes in this Here are the key teaching points:
session • Are there limitations to BAL current practices? What are they?
− PowerPoint slides for • What issues need to be considered in upgrading BAL’s procurement
this session platform?
− Framework questions in • Is the company’s size important?
this session • What are the potential costs and benefits?
this session
Case and Report
(Appendix)
next session.

Module Two
e-Procurement
What You E-procurement links concepts from many of the previous sessions. E-procurement, i.e.
Already Know the procurement of goods or services electronically, and specifically over the Internet,
must be based on sound strategy. The procurement relationship issues we have studied
may be favorably or adversely affected by the implementation of e-procurement. In
some cases the supply partnership is strengthened by e-procurement (e.g. by EDI, or
electronic data interchange), while in other cases the relationship may be weakened
(e.g. by reverse auctions). For e-procurement to work an organization needs to be clear
on what is being procured, therefore, needs definition and specification is crucial.
Supplier evaluation is also an important issue, and so is the use of cross-functional
teams to implement e-procurement.
Overview This session covers the range of e-procurement activities, ranging from simple
electronic data interchange to reverse auctions. The advantages and disadvantages of e-
procurement are considered as are the knowledge areas needed to use e-procurement in
a strategic and tactical manner. Factors to be considered in implementing e-
procurement are provided. Reverse auctions, an emerging trend in e-procurement are
considered in depth. These form the basis of any e-procurement approach.
1. Describe electronic data interchange, e-catalogs, e-marketplaces and e-auctions.

2. Discuss the advantages of e-procurement.
3. Discuss the disadvantages of e-procurement.
4. Discuss the many aspects of, and potential of e-procurement for their
organization.
5. Apply the steps in reverse auctions.
6. Assess the impact of reverse auctions on total costs and supplier relations.

Module Two
e-Procurement, continued

Reading
Porter, Anne Millen. A purchasing manager’s guide to the e-procurement galaxy.
Purchasing. September 21, 2000. Pages S72 to S88.
Anonymous Author. Consultant’s Top 12 e-procurement tips. Purchasing.

November 16, 2000. Pages 79 to 88.
Clark, Chris. Five Auction Steps. Purchasing. June 21, 2001. Pages 24 to 26.
Manciagli, Dana. A Supplier’s View. Purchasing. June 21, 2001 Page 26.
Atkinson, William. IT Firm uses reverse auction for big contract labour buy.
Purchasing. December 22, 2000. Pages 97 to 99.
Boeing Australia Limited: Assessing the Merits of Implementing a Sophisticated

e-Procurement System case. #HKU271. Centre for Asian Business Cases.
1. What forms of e-procurement do you use in your organization?

2. Should you use more? What would be the advantages?
3. Should you decrease due to the disadvantages?
4. What is the knowledge level in your organization related to e-procurement?
5. In which knowledge area is it weak? Where is it strong?
6. With respect to the 12 tips in e-procurement, which ones has your organization
considered? Which ones has it violated?
Boeing Australia Limited

1. Are there limitations to BAL current practices? What are they?
2. What issues need to be considered in upgrading BAL’s procurement platform?
3. Is the company’s size important?
4. What are the potential costs and benefits?

Module Two
e-Procurement, continued
Individual Boeing Australia Limited

Written Case
Report Write a case report on the Boeing Australia case using the guidelines for written case
This case report is worth 10% of your overall mark for this module.
marking.
The requirement for the written case report is: considering the following questions,
write a report stating the issues, criteria, analysis and plan of action (i.e.
recommendations) for Boeing Australia:
1. Are there limitations to BAL current practices? What are they?

2. What issues need to be considered in upgrading BAL’s procurement platform?
3. Is the company’s size important?
4. What are the potential costs and benefits?
Appendix.

Module Two
Session Notes: e-Procurement
Forms of E-procurement is a form of e-commerce (electronic commerce and commerce over the
E-procurement Internet). E-procurement relates specifically to b2b (business to business)
relationships in the sale (from the supply side) and acquisition (from the buyer side) of
goods and services. E-procurement can take a variety of forms. These include:
• Electronic data interchange (EDI). EDI ranges from file exchange for orders
to email for routine purchases.
• EFT or electronic funds transfer is used for payments.
• E-catalogs are catalogs available electronically. They range from simple
versions of a suppliers catalogue on CD to customized catalogs for specific
types of buyers available on the Internet or an Intranet.
• E-marketplaces (also called net markets or hubs) are traditional markets
available in electronic form, i.e. on the Internet or an Intranet.
• E-auctions are auctions that take place on the Internet. E-auctions can be
forward auctions or reverse auctions.
Electronic data interchange (EDI) and Electronic Funds Transfer (EFT)
EDI is the process of exchange information and documents over computer networks.
The most wide-spread use of EDI is through e-mail. Electronic data interchange may
involve more sophisticated approaches with specific software applications. An
example is the use of a wide area network (WAN) by an automobile insurance
company to issue purchase orders for vehicle repairs to body shops. In this case, the
WAN provides a higher level of security than the Internet. Similarly the exchange of
funds between two organizations can be accomplished through electronic funds
transfer.
E-catalogs
An e-catalog might be the conversion of print material into electronic format.

Typically it starts at this simple level and progresses into a searchable catalogue, or
into a customized catalogue specific to a group of buyers often with related linked-in
information. In the case of an automobile insurer, this would be a searchable parts
catalogue for replacement parts, perhaps linked to expected repair times. Thus, when
exchange of data with body shops occurs, the purchase order for repair could include
the specific part numbers, sources and estimated repair times.

Module Two
Session Notes: e-Procurement, continued
Forms of E-marketplaces (also called Net markets/ Hubs)

E-procurement,
continued E-marketplaces are virtual markets where buyers and sellers meet for the purpose of
buying and selling goods and services. For example, an automobile insurance
company may use a net market to buy office supplies.
E-Auctions
E-auctions are a subtype within e-marketplaces. Forward auctions are auctions where
buyers enter the market to buy a good or service. Once a base price is established, the
price is driven up through buyers auctioning for the good or service.
Reverse auctions are auctions where the buyer places their requirements in the
marketplace, and suppliers bid to provide the good or service. Once the base price is
established, the price is driven down through sellers auctioning to provide the good or
service (at lower and lower prices).
Advantages and The advantages of e-procurement include:

Disadvantages of • Improvement in information sharing
E-procurement • Improved collaboration amongst corporate departments and supply partners
• Speed
• Potential for greater number of sources
• Lower costs
• Better service hours (i.e. 24/7)
• Easier to customize information and requirements
• Can facilitate global supply chains
• Can improve record keeping, monitoring and tracking
The disadvantages of e-commerce include:

• Costs and benefits may be difficult to quantify
• There may be a relatively small pool of potential people to work in the area
• Security issues
• Cost barriers to local or smaller suppliers
• If it is used to go global, then related global sourcing issues apply (border
clearance, currency exchange, and etc.)
• Resistance to change in the organization and with suppliers
• It may adversely effect existing procurement staff

Module Two
E-procurement Millen Porter (2000) outlines the seven key knowledge areas that procurement
Knowledge Areas professionals need be familiar with in terms of e-procurement. These are:
• Software
• Net markets (hubs)
• Market making technologies
• Content creation, management and aggregation
• Integration with back end systems
• Service to net markets
• Intelligent agents
Software E-procurement software allows organizations to automate procurement. Typically,

software allows access to a selected list of suppliers, and provides authorization limits
for each computer. In addition to automating manual aspects of procurement, software
may allow for data capture that facilitates spend analysis and audit.
There are 3 basic choices with respect to software:

• Installed e-procurement software
• Hosted e-procurement
• Net marketplaces
Installed software: an organization purchases software and operates it on site. This

may allow for integration with other systems, such as accounting, production and
inventory control systems. It supports spend analysis and audit processes. Installed
software provides the greatest level of security for organization-specific transactions.
The transactions occur inside the organization on the organization’s computers.
Hosted e-procurement solutions are provided by Application Service Providers

(ASPs). There are two types of ASPs. Those who use their own software products,
and those who use products from software developers. An important consideration in
choosing between types of ASPs is who is responsible in the event of failure. For
ASPs who use developed software, the chain related to failure is longer than for ASPs
who use their own software. ASPs may not be able to provide the level of data
integration available with on site installed software.
Net markets: certain websites are designated as sources for procurement. A search of
the site with a web browser is used to procure the goods or services. This approach
offers the least amount of customization, but is typically the lowest cost method.

Module Two
Net Markets Even if an organization has installed software, it may wish to participate in net
markets. Net markets operate in a hub fashion, allowing multiple information flows
simultaneously. For a procurement professional, an important consideration in net
markets is deciding the type of market that the organization wants to participate in.
Net markets can be classified in terms of two criteria: openness and focus. Openness
refers to whether the market is a public marketplace (meaning it is open to all sellers
and buyers) or a closed private marketplace. Focus refers to who leads the net market.
The market can be led from the buy side, resulting in a focus on supplier competition.
Or, the supply side can lead, resulting in competition amongst buyers.
Buyer-led or supplier-led marketplaces can be either public or private. In the

automobile insurance company example mentioned earlier, the insurance company
may participate in both types of markets. For example, it may enter a public buyer-led
market to buy office supplies. When it comes to repairs of autos, it may enter a closed
private marketplace led by the automotive trade association of the province in order to
buy auto body repair services.
The most desirable solution from an economic efficiency perspective is a neutral

market which is biased neither towards the buyer nor the seller.
In addition, net markets may be developed by a consortium of organizations or be

independent. For instance, if all automotive recyclers got together to provide a
marketplace for the insurer to buy recycled parts that would be consortium supplier-
led net market. If, on the other hand, insurers set up a market to buy recycled parts,
that would be a consortium buyer-led net market.
Market Making Market making technologies are tools to establish pricing (formerly called pricing
Technologies discovery) that result in an exchange occurring between the buyer and seller. Some
examples of market making and enabling technologies are: tools that allow for better
specifications, tools that aid in RFP and RFQ writing, decision support technology,
multi-organization collaboration technology, and auction technology.

Module Two
Content Content aggregation is the process of collecting catalogs of information and compiling
Aggregation the information at one site. Content aggregators can create additional content by
providing customized views of catalogs or product categories. There are several
important considerations with content aggregation:
• Terminology: different suppliers may describe the same product in different

ways. Therefore, aggregators may limit the set of suppliers being canvassed.
• Many aggregators: supplying organizations may not be able to provide
information to all the aggregators. Consequently, catalog services may not
include suppliers with high value goods and services, or may exclude some
providers.
• Bias toward large suppliers: smaller suppliers may not have the resources or
the recognition required to interest the aggregators.
• Complex requirements: when the good or service being acquired is complex
aggregators may not provide particularly useful information.
Integration with Systems designed to work in the e-marketplace typically do not provide data to
Back End back end systems (e.g. an organization’s financial and manufacturing systems). One
Systems approach is to revise system infrastructure to allow for integration. A second approach
is to manually populate data in the back end system (e.g. enter the transactions
generated by the e-procurement system manually into the accounting system). A third
option is a middleware solution. Middleware is software between the front end
procurement system and the back end systems that automatically converts e-
procurement transactions into a format that can be used in the back end systems.
Services to Net Millen Porter (2000) indicates that as net markets become more competitive and
Markets efficient, transaction costs will decrease to the point that market hosts will not earn
sufficient revenue from hosting. To survive, hosts will need to provide additional
value added services. Some of the services that might be offered are sourcing
research, supplier evaluation, and logistics services.
Intelligent Agents The intelligent agent refers to tools that can search many e-marketplaces. The
intelligent agent tools use a set of specifications and preliminary decision criteria to
arrive at a set of potential choices for the purchase of goods and services.

Module Two
Implementing The article entitled "Consultants’ Top 12 e-procurement tips" (2000) discusses the
E-Procurement considerations in implementing e-procurement in an organization. The twelve tips are:
Tips
1. Do something, do it soon.
2. Start with strategic sourcing. Then apply e-procurement.
3. Respect your legacy.
4. Segment the supply base and apply e-sourcing tools appropriately.
5. Start with the easy, but don’t neglect the hard.
6. Don’t underestimate the sweeping internal changes e-procurement demands.
7. Focus on delivering sustainable benefits.
8. Understand your power as a market maker.
9. Treat critical suppliers with kid gloves.
10. Benchmark the competition.
11. Remember there are no best practices established in e-procurement.
12. Bear in mind that “you ain’t seen nothing yet.”
1. Do something, do it soon.
Rather than being mired in never ending analysis on this decision, the article suggests
that organizations should move forward on e-procurement. Risk can be mitigated
through the use of ASP’s. Risk is also reduced since data format standards are
becoming more common.
2. Start with strategic sourcing. Then apply e-procurement.
Prior to implementing e-procurement, organizations need to get their procurement

house in order. This includes understanding many of the components previously
discussed in this course. When good strategic procurement processes are in effect e-
procurement provides additional benefits.
3. Respect your legacy.
Two questions related to back end or legacy systems need to be considered when
moving to e-procurement:
• How will the e-procurement system relate to the back end system?
• Should the legacy purchasing system be cleansed and mined prior to the new
system being implemented?

Module Two
Implementing 4. Segment the supply base and apply e-sourcing tools appropriately
E-Procurement
Tips, continued Apply the appropriate e-procurement tool to the type of supply. Different approaches
and degrees of effort apply depending on the good or service (e.g. office supplies vs. a
new piece of capital equipment).
5. Start with the easy, but don’t neglect the hard
In many cases e-procurement tools are applied only to simple goods and services. This
is a good starting point for e-procurement. E-procurement should move to more
sophisticated supplies.
6. Don’t underestimate the sweeping internal changes that e-procurement

demands.
E-procurement will have a significant effect on the organization. The organization

should be ready for increased centralization of procurement, new skills required for
procurement staff, possible staff displacement, and procurement becoming more of a
knowledge centre.
7. Focus on delivering sustainable benefits
Instead of focusing on short term benefits from lower prices due to enhanced sourcing
options, the real focus of e-procurement should be improving the efficiency of the
markets and supply chains in which the organization operates. This will provide the
most significant long-term benefits.
8. Understand your power as a market maker
If your organization is large enough or can form a large enough consortium, it is

possible to become the market maker. This provides an opportunity for additional
revenue streams. However, an organization must decide if this is a core competency it
wants to pursue.
9. Treat Critical Suppliers with Kid Gloves
When a supplier is critical to your business, e-procurement should be used if the

supplier is willing, and jointly involved, or, at a bare minimum, not adverse to e-
procurement. The risk is that the key suppliers may choose to no longer partner with
your organization.

Module Two
Implementing 10. Benchmark the competition

E-Procurement
Tips, continued Attempt to understand what your competitors are doing better and worse than your
organization in terms of e-procurement (and procurement strategy overall).
11. Remember there are no best practices established in e-procurement.
12. Bear in mind that you ain’t seen nothing yet.
At the time of the article (2000) there was no best approach to e-procurement. Since
that time e-procurement has continued to expand. Keep apprised of developments in
e-procurement as you implement.
Reverse A reverse auction is an electronic auction where buyers enter requirements, and
Auctions: suppliers bid to provide the required goods and services It is conducted in real-time,
Steps and bidders see the offers of competitive bidders but no the names of the other
bidders. The bidding prices move downwards as the auction progresses.
The Clark (2001) article outlines the steps in a reverse auction:
• Define the event.

• Prepare your suppliers.
• Develop item specifications and auction parameters.
• Conduct an RFQ period.
• Run the auction.
Define the event
Define the good or service that is the subject of the auction, and provide a timeline for
auction-related activities.
Prepare your suppliers
Develop a list of qualified suppliers, and attempt to obtain their buy in for the auction
process. Train the suppliers to use the tools required for the auction.

Module Two
Reverse Develop item specifications and auction parameters

Auctions:
Steps, continued As discussed earlier in the course the robustness of the specifications will directly
affect the result of the auction. Structure the auction to make it relatively simple and
easy to follow. Set up a bid question protocol. Develop the scoring system that will be
used to select the successful bidder. Hold an internal mock event to test the auction
process.
Develop a risk management strategy if there is a failure of the auction technology
Williamson identifies a number of approaches to mitigating failure including: backup

servers, backup phone systems, and etc.
Conduct an RFQ period
Allow sufficient time for bidders to review and analyze the specifications. Answer
questions in a timely manner during this phase.
Conduct the Auction
Run the auction, and provide prompt feedback to successful and unsuccessful bidders.
Reverse Reverse auctions while providing a method to elicit favourable pricing, have a number
Auctions: Issues of issues:
• Suppliers may view the auction as focusing on price and not value or quality.
They may bid using the lowest possible quality that meets the specification.
• There is opportunity for unethical behavior on the part of buyer and suppliers.
Buyers could submit phantom “low ball” bids, or include an unqualified
bidder in the auction to increase competition even though they don’t intend to
use the supplier. Suppliers could collude, and similar bids to trigger
renegotiation. Or, suppliers could participate in the event in order to gain
knowledge about their competitors.
• The auction may drive certain buyers out of the supply chain, even though
they have ongoing relationships with the buyer.
• Reverse auctions may undermine supply relationships. Existing suppliers
may be threatened by the approach. Low bidders at one reverse auction may
be different than those at another auction for the same good or service.

Module Two
Session Wrap Up: e-Procurement
Review Now that you have examined the issues involved in e-procurement, and have
Objectives for recommended a course of action for Boeing Australia, you should review the session’s
1. Describe electronic data interchange, e-catalogs, e-marketplaces and e-

auctions.
2. Discuss the advantages of e-procurement.
3. Discuss the disadvantages of e-procurement.
4. Discuss the many aspects of, and potential of e-procurement for your
organization.
6. Assess the impact of reverse auctions on total costs and supplier relations

Preview Next In session 11 we analyzed the issues and decisions behind an e-procurement strategy.
Session In session 12, candidates will explore issues involving users and suppliers, such as p-
cards, vendor managed inventory, and just in time inventory.

Session Twelve
Z P-Cards: Benefits
Z P- Cards: Considerations in Implementation
Z Vendor ( Supplier) Managed Inventory
Z Just in Time II
Z Wrap up

Module Two
Activity Directions
P-Cards
Resources: • Understand the benefits of p-card use.
- Palmer: Are Corporate Procurement • Understand the considerations related to p-card use.
Cards for You? • And, understand the implementation issues.
- Carbone: To save more distribute more
cards study says.
- Gibley: A guide to purchasing card
success: overcoming 8 key hurdles.
- Session notes
Individual Reflection: p-Cards Reflect on the following:

• Are p-cards used in your organization?
• If they are used what steps did you go through in the
implementation?
• What were the cost savings?
• What were the potential risks?

• Think about the steps in implementing p-cards.
• Determine the cost savings from p-card use
• Determine the risks in adopting p-cards.
Session Notes: VMI Read the resources for this section.

- Waller: Vendor Managed Inventory in • Understand the benefits to suppliers and buying
Retail Supply Chains organizations of vendor managed inventory.
• Review the process steps for implementing vendor
managed inventory.

Module Two
Activity Directions
Individual Reflection: VMI Reflect on the following:
• Does your organization use vendor managed inventory? Why? Why
not?
• Should your organization be using vendor managed inventory?
• What would be the benefits of vendor managed inventory for your
organization
• How would you implement VMI?

• Reflect on the use of VMI at your organization – and the costs and
benefits.
• Determine the implementation issues and risks in VMI.

JIT and JIT II
Resources: • Familiarize yourself with JIT II terminology.
- Dixon: JIT II: A New • Familiarize yourself with the conditions necessary to use JIT II.
Approach to Supply • Understand the benefits to suppliers and buyers of JIT II.
Management.
- Pragman: JIT II: A
Purchasing Concept
- Session notes
Session Wrap Up Review this session’s objectives.
and Instructions for Exam:
The module ending examination will be administered during the next
session.
Check that you have the exam case and instructions. If you have not yet
received this information, contact your Marker or your provincial or
territorial Institute.
Arrange the details for the invigilation and writing of your exam with
your provincial or territorial Institute.
The exam will be the same format as the written case report assignments.
The format is explained in the Written Case Reports section of the
Introduction and Overview.
Please see session 13 for more information about the exam.

Module Two
What You As shown in session 11, e-procurement processes may lead to closer supplier/buyer
Already Know relationships as well as increase efficiency of the procurement process. E-procurement
enables additional opportunities such as: purchasing card (p-cards), vendor managed
inventory and Just in Time II inventory systems. Enabling these technologies often
results in closer relationships with suppliers.
Overview In this session we explore the use of purchasing cards as a tactical method to reduce
procurement costs, as well as to provide additional benefits. Issues and approaches to
p-card implementation are discussed.
Two key approaches that affect buyer-supplier relationships are explored: vendor
managed inventory and Just in Time II (JIT II). The joint gains of vendor managed
inventory are considered, as well as steps in the implementation of vendor managed
inventory. Just in time inventory and JIT II are discussed. JIT II is one of the closest
supply partnerships, with the supplier’s staff working at the buying company. The
supplier’s staff has authority to transact in much the same way as the staff of the
buying company.
1. Describe the benefits available through effective use of p-cards.

2. Understand the challenges related to implementing a p-card program.
3. Estimate the savings from implementing p-cards at your organization.
4. Understand the gains to vendors (suppliers/manufacturers) and buyers possible
from vendor managed inventories.
5. Describe the benefits of a vendor managed inventory approach.
6. Develop a VMI inventory implementation plan.
7. Describe how JIT II works along with its benefits.

Module Two
Involving Users and Suppliers, continued

Reading
Palmer. Richard J., Green, Leland D., and Ventura, Marie T. Are Corporate
Procurement Cards for You? Management Accounting. September 1996. Pages 22-
27.
Carbone, James. To save more distribute more cards study says. Purchasing. May
18, 2006. Page 29.
Gibley, Tracy. A guide to purchasing card success: overcoming 8 key hurdles.

Treasury Management Association Journal. July/August 1999. Pages 47-50
Waller, M, Johnson, M.E., and Davis.D., Vendor Managed Inventory in Retail

Supply Chains. Journal of Business Logistics, #20, 1999. Page 183-187.
Dixon, Lance. JIT II: A New Approach to Supply Management. Center for Quality
Management Journal. August 1992. Pages 15-19.
Pragman, Claudia, H. JIT II: A Purchasing Concept For Reducing Lead Times in
Time-Based Competition. Business Horizons. July-August 1996. Pages 54-58.
1. Are p-cards used in your organization?

2. If they are used, what steps did you go through in the implementation?
3. What were the cost savings?
4. What were the potential risks?
5. Does your organization use vendor managed inventory? Why?
6. Should your organization be using vendor managed inventory?
7. What would be the benefits of vendor managed inventory for your
organization?
8. What steps would your organization take in implementing vendor managed
inventory?
9. What are the strategic and tactical changes I will make (or attempt to make) to
my job/department/organization?
10. What is the one most important thing I learned?

Module Two
Session Notes: Involving Users and Suppliers
P- Cards: Corporate purchasing cards, or p-cards have the following benefits:

Benefits • Speed of receiving the good or service is increased as internal purchasing steps
are reduced.
• Information is readily available for analysis and control of spend.
• Employee morale may improve as authority is delegated.
• Supplier goodwill improves as they receive payment sooner.
• Cost savings to internal processes such as finance and procurement.
• Spend can be directed to preferred suppliers.
P- Cards: In spite of these benefits there are often concerns over the use of p-cards. The most
Considerations in prevalent of these is the control issue. There is a perceived risk that employees may
Implementation use the card for inappropriate purchases.
The Palmer (1996) article suggests there are 3 considerations in implementing p-card
programs. These are:
1. Controlling p-card behavior (the risk of abuse)
2. Organizational issues
3. Integration issues
4. Implementation issues
Controlling p-card behavior
The control issue involves: who receives p-cards, what are the dollar limits and item
types allowed, and what is the documentation and approval process.
Who receives p-cards
There are a variety of options: provide them to all employees, provide them only
senior staff, provide them only to procurement employees, provide them to volume
purchasing employees, provide them only to employees who travel, and etc. The
decision on who to provide p-cards to will depend on the risk tolerance of the
organization as well as the degree of control exercised over the cards.
Dollar limits
Dollar limits may be set in a variety of ways such as: limits on spend on a particular
type of supply (or supplier), number of uses, and etc. To derive the right dollar
amount level, assess p-card spending relative to the spend under current purchasing
processes. Also, determine the level of risk the organization can tolerate.

Module Two
Session Notes: Involving Users and Suppliers, continued
P- Cards: Item types

Considerations in
Implementation, The types of items purchased using p-cards can be controlled using either internal
continued business processes or card technology. Corporate directives on suitable uses of the
card, or card issuer technology can be used (example the card will only be valid at
certain merchants) or a combination of both.
Documentation and approval
Documentation may range from attaching receipts to the monthly statements, to more
formal purchase logging systems with sign off by superiors. The system of
documentation will depend on the risk tolerance of the organization.
Other measures
These could include having staff sign an internal agreement on the use of p-cards.
Organizational considerations
The location of p-card management in an organization generally is either in the

financial department or in procurement. Some considerations are:
• Resources: availability and skill of staff.
• Linkage to strategy: if procurement and spend analysis is strategically important,
procurement should manage procurement-related activities such as p-cards.
• Users: if the p-card user base is a small group (such as traveling sales people)
management of the p-cards may reside in the individual department.
Another organizational issue is encouraging p-card use. If p-cards are not used, the
benefits are not realized. The article suggests higher charge-backs to areas that are
authorized and do not use p-cards. Another suggestion is to award bonuses based on
the number of transaction shifted to p-cards (this could have unintended consequences
if not managed carefully).

Module Two
P- Cards: Integration Issues

Considerations in
Implementation, There may be integration issues when p-cards are integrated with other procurement
continued systems. This includes data systems as well as policy systems. In some cases, data can
be integrated through EDI into the main purchasing system. In other cases, a
standalone database may be used to capture p-card transaction data. The importance of
information capture is to ensure compliance with the usage policy for p-cards.
Gibley (1999) extends the discussion with an analysis of issues that need to be
addressed during P-card implementation:
Implementation Issues
• Challenge #1: Build support across the organization: the crucial parts of the
organization should be aware, or be part of the implementation effort.
• Challenge #2: Obtain senior management support: focus on profits.
• Challenge #3: Avoid excessive controls otherwise benefits may be limited.
• Challenge #4: Allocate sufficient resources.
• Challenge #5: Hire the right administrator – a financial-oriented person with
liaison skills (internal and external to the organization).
• Challenge #6: Clearly define the goals and measures for success.
• Challenge #7: Expand the program. Roll out a pilot program and, if successful,
take the next steps.
• Challenge #8: Report successes.

Module Two
Vendor Vendor or supplier managed inventory is where the vendor controls the amount of
Managed inventory at a particular site or sites. Vendor managed inventory is a component of a
Inventory: just in time approach to inventory.
Benefits
In vendor managed inventory, the goals are to reduce costs across the chain and to
improve response time. The vendor decides when to order and how much inventory to
order. The vendor is often the owner of the inventory.
For suppliers some of the benefits of vendor managed inventory include:
• Increased partnering opportunities with key clients.

• Longer-term and more stable relationships that allow longer-term strategy.
• Smoothing of demand effect, as the vendor has greater control.
For procuring organizations vendor managed inventory provides:
• Lower inventory costs.

• Lower administrative costs.
• Potentially improved lead times.
For both suppliers and buyers, vendor managed inventory can reduce transportation
costs as the frequency of small shipments is reduced.
Vendor managed inventory also has costs and disadvantages. Suppliers can
experience increased inventory holding costs. The buying organization has a greater
risk of supplier failure, and potentially less leverage over the supplier in future
negotiations.

Module Two
Implementing The implementation of vendor managed inventory should follow a set of steps:
Vendor Managed
Inventory Gaining Support – Gaining support of senior management is critical. Only after this
step can you engage the support of the supplier or potential suppliers.
Analysis - Procurement outlines the qualitative and quantitative benefits, and costs
and risks of vendor managed inventory related to a particular supply or supplier
Negotiation - During this phase negotiation occurs with the chosen supplier(s). The
goals of the negotiation are related to the following factors: staffing for the project,
technology, and sharing of financial gains.
Development - Policies and procedures technologies and processes are developed

jointly between the buying organization and the supplying organization. Performance
goals are established.
Testing – Trials, or pilot implementations work out any implementation issues.
Implementation - Vendor managed inventory is implemented. The program is

monitored against the performance goals.
Improvement - Once implemented, the system is refined and improved.
Just In Time Just in Time, or JIT is an approach to inventory management where supplies arrive at
the desired location when they are needed. Just in time systems minimize stationary
inventory and inventory holding costs. Often, suppliers are located near the
organization. Since failure of just in time supplies can adversely affect production,
just in time systems focus on low defect (zero) in terms of the supply and delivery of
the supply.
JIT has several implications for procurement. Relationships with suppliers become
increasingly important. This results in additional emphasis on sourcing, selection,
monitoring, certification and development. Specifications must be precise with respect
to quality, quantity and timing. Procurement must also have a strong relationship with
the users of the goods.
Due to the risk of potential failures, organizations have adopted ‘just in case’
inventory. In this approach a certain amount of inventory is held either on or off site
as a buffer to JIT system failures.

Module Two
Just in Time II The strongest supplier relationships occur when an organization uses a JIT II
approach. JIT II was pioneered by the Bose Corporation and is a registered trademark.
The Dixon article (1992) outlines JIT II at Bose. In JIT II, supplier employees work
within the buying host organization. They are usually empowered to undertake
activities such as ordering goods and services, and meeting with product engineers,
design teams, and marketing staff. They have the same authority as an employee of
the host.
There are several conditions necessary for JIT II to work in an organization:
• There must already be a trust-based relationship with the supplier.

• The supplier must be very good.
• The supplier’s employee must have the same authority as an equivalent
employee of the host organization.
• There must be sufficient volume and dollar value of purchases from the
supplier to make it cost effective.
• The supplier does not work with the part of the organization where trade
secrets or sensitive information is being used.
JIT II provides a variety of benefits to the buying organization. Some of these are:
• The potential to reduce lead times and inventory levels.

• Better understanding of requirements.
• Improved ability to integrate the supplier into product development at early
stages. This improves products and costs plus reduces the product
development cycle.
• Reduced administrative costs.
• Reduced transportation costs.
For the selling organization some of the benefits are:
• The relationship will likely be long term, assuring a market for their goods.
• Improved communication (and lower error rates due to miscommunication)
with key buyers.
• Reduced transportation costs.

Module Two
Session Wrap Up: Involving Users and Suppliers
Review Now that you have examined ways to involve other users and suppliers, you should
Objectives for review the session’s objectives as restated here:
this Session
1. Describe the benefits available through effective use of p-cards.

2. Understand the challenges related to implementing a p-card program.
3. Estimate the savings from implementing p-cards at your organization.
4. Understand the gains to vendors (suppliers/manufacturers) and buyers possible
from vendor managed inventories.
5. Describe the benefits of a vendor managed inventory approach.
6. Develop a VMI inventory implementation plan.
7. Describe how JIT II works along with its benefits.

Preview Next In session 12 we explored involving users and suppliers in the management of the
Session supply chain. This is the last session before the exam.
In the exam, you will be required to analyze a case, and prepare a written case report.
The exam case and instructions will be sent to you prior to the exam. If you have not
received this information, or arranged for exam writing, contact your provincial or
For more information about the exam, see session 13.

Session Thirteen
Module Examination
Z Examination Format
Z What to Bring to the Examination
Z Final Marks

Module Two
Module Examination
Overview The final examination is the final step in successfully completing this module. This
section will provide you with information on the process involved in writing the final
examination.
Examination The final exam is four hours long, and consists of a case analysis and written case
Format report. The exam is worth 25% of your total mark for the module.
You must confirm the exact date, time, and location of the final exam with your
provincial or territorial Institute.
The exam case study and exam instructions will be available prior to the exam. If
you have not received this information, contact your Marker or your provincial or
Candidates will be expected to prepare the case study prior to the exam. Then,
candidates will write a written case report on this case during the exam.
For guidelines on preparing and writing cases, please refer to Case Preparation and
Written Case Reports in the Introduction and Overview.
Part Description Marks Time

I Case Analysis 100% 4 hours

Module Two
Module Examination, continued
What to Bring to The following items can be taken into the examination room.
the Examination
The textbook and any course materials needed for reference. Although the
examination is "open book", you should know where to look in the materials for
information. Prepare in advance by using "post-it" tabs to mark important topics
and label them.
A (quiet) calculator
A wristwatch to keep track of your time
Correction fluid or eraser to make corrections easier
A ruler and a highlighter
20+ pages of loose-leaf regular lined writing paper.
Do not bring any other pre-written materials for submission. All writing for the
case report must be done during the four hours of the exam.
Final Marks A mark of 50% is necessary to successfully complete this course.
Candidates who achieve a mark of less than 60%, but more than 50% will receive a
letter of caution.
Candidates who achieve a mark of less than 50% will be required to complete an
additional assignment. Please contact your provincial or territorial Institute to discuss.
Final marks are mailed to candidates approximately four (4) weeks after the final
examination is written. To ensure confidentiality, marks are not given over the
telephone. Also, marks are mailed only to the candidates.

Module Two
Module Evaluation
Module Candidates are required to submit an evaluation form for this module, rating the module
Evaluation content and format.
Form
To obtain the evaluation form, please access the PMAC site at http://www.pmac.ca.
Then, click on the Education tab.
Then, on the right-hand menu, click on New Accreditation Program
The evaluation form will be in this menu.
Please mail the form to:

Purchasing Management Association of Canada
777 Bay Street, Suite 2701
P.O. Box 112
Toronto, Ontario
M5G 2C8

Appendix
PowerPoint slides (Sessions 1 – 12)
© Purchasing Management Association of Canada

Module 2:
Procurement and Supply
Management
Session 1
Tactical versus Strategic
Procurement
Session Agenda
1. Procurement and supply management

2. Strategic stages of procurement
4. Tactical and strategic procurement
5. Spend analysis
6. Group exercise (not marked): Spend Analysis
7. Procurement risk
8. Individual exercise (marked): Goods Spend
Analysis in Your Organization
9. Review of Written Case Report requirements
1
Session Objectives
1. Describe the relationship between

procurement and supply chain
management.
2. Describe the relationship between tactical

and strategic procurement.
3. Describe and differentiate the five stages

of strategic management.
4. Define spend analysis including direct and

indirect spend.
Session Objectives
5. Understand why spend analysis is an

important strategic purchasing
function.
6. Prepare a goods spend analysis.
7. Opportunities and barriers to spend

analysis
8. Be able to identify the sources of

supply risk.
2
Discussion Questions
Be prepared to discuss the following questions:
Where is your organization with respect to strategic purchasing? Is it
tactical or strategic? Is it both?
Is your organization acquiring greater strategic skills in its purchasing?
How will your organization move to become more strategic?
Does your organization use spend analysis?
What are the benefits and constraints to performing a spend analysis
in your organization?
What is an example in your organization of direct spend? Indirect
spend?
Why is spend analysis important in your organization?
What are the supply risks in your organization?
How might you manage supply risks in your organization?
Procurement and Supply Chains
• Procurement has evolved from a simple “buy”

function
• Modern view:
¾ Procurement is involved with all supplies
¾ Procurement is the key to supply chain
management
¾ Procurement is proactive
¾ Procurement is customer value focused
3
Procurement and Strategy
• Procurement is strategic.
“Where are we going”
• Strategic approach to procurement must align

with Corporate strategy
• Tactical methods of procurement must support

the strategy of procurement
4
• Where is your organization with respect to

strategic purchasing? Is it tactical or strategic?
Is it both?
• Cavinato’s staging:
¾ Stage 1: Basic financial planning
¾ Stage 2: Forecast based planning
¾ Stage 3: Externally oriented planning
¾ Stage 4: Strategic management
¾ Stage 5: Knowledge based business
10
5
•Key Points of Cavinato’s staging

Stage Concept of Concept Concept of Range of Management Key Personal Key
Field of Supply Products and Approach Skills Measures
Strategy Chain Services
1 Buying Better Production- MRO, office Reactive Task oriented Financial
price purchasing supplies
2 Purchasing Maintain Supplier Raw Reactive with Some Gap based
price feeding materials, some management
production MOR , office planning
supplies
3 Procurement Support Suppliers Capital goods, Fit to rest of Managerial, Total

line of and MRO, office firm analytical, product cost
business suppliers supplies, interpersonal
suppliers to outsourcing
final
product
4 Supply Enrtepren Innovator to Product Pro-active Leadership of Total

-eurial final use design in view teams supply
team and of market chain costs
disposition
5 Network Conduit Supplier’s Unlimited Leadership Leadership, Total
facilitation and capabilities consultant, supply
interprete through conduit chain costs,
r value to comparativ
final e supply
customer chain costs
11
• Using Cavinato’s 5 stages where is your

organization staged? Why? Be prepared to
discuss.
12
6
• Spend Analysis
¾ Definition:
o Spend analysis: Metrics related to the commodities

and services purchased, the suppliers used, and the
internal customers.
o Direct spend: Metrics related to goods and services

that go in to final products
o Indirect spend: Metrics related to goods and services

that do not go in to final products
13
• Spend Analysis:
¾Heath suggests:
oThat both the $ spend and # of spends be analyzed
o That triggers be used to establish supplies for

targeting
o The analysis occur in three dimensions:

- Commodities and services
- Suppliers
- Customers
14
7
• Spend Analysis
¾ Heath’s Triggers for action:
o High dollar value of commodities or services

o High number of transactions for commodities or
services
o High dollar value for suppliers
o High number of transaction for suppliers
o High dollar value for internal customers
o High number of transactions for internal customers
o High percentage of sole source
o A combination of any of these
15
• Spend Analysis
¾ Opportunities from spend analysis
¾ Supports strategy through:

o Reducing cost through volume discounts
o Reducing cost by leveraging bargaining position
o Seeking better quality
o Seeking better responsiveness from suppliers
o Uncovering process improvements potential
o Uncovering opportunities to enter into stronger
relationships
o Increasing focus on what goods and services are
strategic
16
8
• Spend Analysis
¾ Barriers to spend analysis
o Disparate computer systems

o Data problems (incomplete, inaccurate or
inconsistent)
o Determining the appropriate classification
plan for the analysis
o Resistance to change
o Inadequate resource levels
o Setting unrealistic goals
17
• Does your organization use spend analysis?

• What are the benefits and constraints to
performing a spend analysis in your
organization?
• What is an example in your organization of
direct spend? Indirect spend?
• Why is spend analysis important in your
organization?
18
9
• Supply Risk
¾ Definition (Zsidisin):
o“the probability of an incident associated with inbound
supply from individual supplier failures or the supplier
market occurring, in which its outcome results in the
inability of the purchasing firm to meet customer
demand or causes threats to customer life and security”
19
Supply risk
• Two broad sources of supply risk:
¾ Individual supplier failures
¾ Market characteristics
20
10
• Why is supply risk important?
¾ It affects the customer
¾ It affects the organization
¾ It is “weighed” in strategic thinking
21
• What are the risks to your supplies?
22
11
• Individual Exercise - Marked
Goods Spend Analysis in Your Organization
o Show the steps you would use to conduct a goods spend

analysis for your organization.
o Describe specific key triggers and why you chose them.
o Describe how spend analysis would fit within your current

procurement strategy.
23
Written Case Report Requirements

There are two written case reports each worth 10% (sessions 3 and 11)
There is one written case report worth 5% (session 8)
• Executive Summary
• Process Elements
• List of issues with impact analysis
• Environmental and Root Cause Analysis
• Alternatives or Options
• Recommendation(s) and Implementation
• Monitor and Control
• Judgment and Integration
• Written Communication: Format, Language
and Style
• Exhibits and/or Appendixes (if applicable)
See the Introduction and Overview chapter of the

Candidate Manual for full details.
24
12
Case Report: Marking
CASE ANALYSIS MARKS MARK
AVAILBLE
I. PROCESS ELEMENTS 10
II. LIST ISSUES WITH IMPACT ANALYSIS 10
III.ENVIRONMENTAL AND ROOT CASE ANALYSIS 20
IV. ALTERNATIVES AND/OR OPTIONS 15
V. RECOMMENDATIONS 5
VI. IMPLEMENTATION 10
VII. MONITOR AND CONTROL 10
OVERALL
JUDGEMENT AND INTERGRATION 10
WRITTEN ICOMMUNICATION: FORMAT 5
WRITTEN COMMUNIATION: LANGUGE AND STYLE 5
CASE TOTAL 100
25
Session Objectives
9 Describe the relationship between

procurement and supply chain
management.
9 Describe the relationship between

tactical and strategic procurement.
9 Describe and differentiate the five stages

of strategic management.
9 Define spend analysis including direct

and indirect spend.
26
13
Session Objectives
9 Understand why spend analysis is an

important strategic purchasing
function.
9 Prepare a goods spend analysis.
9 Opportunities and barriers to spend

analysis
9 Be able to identify the sources of

supply risk.
27
14
Session 2
Session Agenda
1. Steps in the procurement process

2. Importance of description of needs
(specifications)
3. Types of specifications
4. Specification development
5. Potential problems
6. Case Discussion: Blozis Co. (if time permits)
7. Group Case Report (marked): Blozis Co.
8. Review requirements for DeHavilland case
1
Session Objectives
1. Review and understand steps in the

procurement process.
2. Understand the critical importance of needs

definition (specifications).
3. Be knowledgeable of the types of

specifications.
4. Be aware of the keys to specification

development.
Session Objectives
6. Apply principles.
2
How are needs recognized in your organization?
Why is getting the specification correct the most important part of a
purchasing requirement?
In your organization, do you collaborate on specifications? Why? Why
not? Should you?
Provide an example of follow-up and expediting from your experience.
Describe a situation where you wished you had good documentation
and it was missing?
Can your organization use standard products more often?
What would the benefits be to your organization if you used standard
products more often?
Have you developed specifications with some of the common problems?
Discussion Questions, continued

Blozis Company:
Is the supply function organized properly? Is it strategic
or tactical in nature?
How would you revise purchasing procedures at Blozis
related to: specifications, the use of requisitions,

purchase orders, receipt and delivery?
What problems are likely to occur with the specifications
as things now stand?
3
• 10 steps:
¾ Need recognition
¾ Need description (Specification)
¾ Sourcing
¾ Supplier selection
¾ Ordering
¾ Monitoring
¾ Receipt and Inspection
¾ Payment
¾ Documentation
¾ Relationship management
Which of these steps were you unaware of?
• Which of these steps were you unaware

of?
4
• Need recognition is the process of

identifying that a good or service is required
and the timing of the requirement.
• Need description or specification is

describing the need in sufficient detail to
ensure that the correct good or service is
procured, in the correct quality, at the
correct time, at the correct place.
• Why is getting the specification correct the

most important part of a purchasing
requirement?
• In your organization, do you collaborate on

specifications? Why? Why not? Should we?
10
5
• Supplier selection involves three processes.

Identifying suppliers, evaluating their bids and
making a choice of which supplier (s) will
provide the goods or services.
•Ordering is the process of making the purchase

from the supplier.
11
• Monitoring consists of follow-up and

expediting.
• Receipt and inspection involves taking delivery
of the good or service and assuring it meets the
specified requirement.
12
6
•Payment is the process of clearing the invoice

for the good or service and issuing payment.
•Documentation
•Relationship management is the process of

managing internal and supplier relationships.
13
• Provide and example of follow-up and

expediting from your experience.
14
7
• Description of the Need/Specification:
¾ Simple Specifications:
o Performance
o Fit and function
o Brand or equal
o Samples
o Grades (commodities)
15
¾ Complex Specifications:
o Commercial
o Design
o Engineering Drawings
o Material and Method
16
8
¾ Standardization:
o Think of grades and commercial specifications

o Benefits
o Can you organization benefit from greater use of

standardized products? Why or why not?
17
¾ Development: Interdepartmental Interaction

High
Complexity
and
Departmental Importance of
Low
Low High
Procurement
Involvement
18
9
¾ Development: Buyer Supplier Interaction

High
Complexity
and
Supplying firm Importance of
Low
Low High
Supplying firm
involvement
19
¾ Problem Areas
o Lack of Clarity
o Limiting Competition
o Overly Restrictive
Have you developed specifications with any of these

common problems?
20
10
• Have you developed specifications with any of

these common problems?
21
• Group Case Report: Blozis Company
¾ Is the supply function organized properly?

Is it strategic or tactical in nature?
¾ How would you revise purchasing

procedures at Blozis related to:
specifications, purchase orders and
receipt?
¾ What problems are likely to occur with the

specifications as things now stand?
22
11
Session Objectives
9 Review and understand steps in the

procurement process.
9 Understand the critical importance of needs

definition (specifications.
9 Be knowledgeable of the types of

specifications
9 Be aware of the keys to specification

development
23
Session Objectives
9 Understand potential problem areas
9 Apply principles in a case
24
12
Individual Written Case Report
DeHavilland Inc. (Session 3)

Case Report Format
¾ Title page
¾ Executive Summary
¾ Key assumptions
¾ Statement of Issues
¾ Analysis
¾ Plan of Action
¾ Exhibits (if any)
¾ See the Introduction and Overview chapter for case

format and content
¾ Case is due at the beginning of session 3
25
Discussion Questions: DeHavilland Case
¾ What are some possible BATNAs for

DeHavilland? For Marton?
¾ Who are the parties and what were their
interests/objectives?
¾ What is the potential value to be created?
¾ What are some potential barriers to success?
¾ What are the power relationships between
DeHavilland and Marton? What are some
possible ethical considerations?
26
13
Session 3
Competitive Bidding and
Negotiation
Session Agenda
1. Individual Written Case Report (marked):

DeHavilland Inc. – Applying Negotiation
Analysis
2. Review of group case discussion approach
3. Factors related to choice of competitive bidding
2. Types of bids
3. Factors related to choice of negotiation
4. Objectives of negotiation
5. Steps in negotiation
6. Case Discussion: DeHavilland Inc.
1
Session Objectives
1. Understand the factors that suggest

bidding is more appropriate than
negotiation and vice versa.
2. Determine whether negotiation or
bidding is more suited to a particular
situation.
6. Prepare a negotiating analysis.
What are some of the methods of competitive bidding
that I am familiar with?

Does my organization have a formal approach to
negotiation? Should it?

What would the advantages and disadvantages be of a
formal approach to negotiating?
2
DeHavilland Inc:
What are some possible BATNAs for DeHavilland? For
Marton?
Who are the parties and what were their
interests/objectives?
What is the potential value to be created?
What are some potential barriers to success?
What are the power relationships between DeHavilland
and Marton?
What are some possible ethical considerations?
Group Case Discussion Approach
In general, the criteria for evaluating a

candidate’s participation are based on the
objectives for a case discussion, namely, did
the candidates:
¾ Discuss the issues in the case?

¾ Determine the criteria for making a decision?
¾ Analyze the options available (if applicable)?
¾ Decide the best plan of action?
¾ Present findings to the large group (if called upon to
3
Evaluating Case Discussions
In general, your contribution to any group discussion is marked as

follows (for a total of 4 points for a given discussion):
• 0 out of 4 points means no contribution (listened only, or absent)

• 1 out of 4 points means little contribution / understanding of
objectives
• 2 out of 4 points means some contribution / understanding of
objectives
• 3 out of 4 points means a good amount of contribution /
understanding of objectives
• 4 out of 4 points means excellent contribution / understanding of
objectives / extends concepts, application and strategy
The instructor will be assessing both the quantity and quality

of your contribution to the discussions.
• Competitive bidding
¾ Is the process of soliciting proposals from multiple

sources to supply the product or service as described
in the specification.
¾ In order for bidding to work the following

conditions need to be met:
o Size of the buy must be sufficient

o Specifications need to be clear
o The market should be competitive
o There must be qualified sellers
o Sellers need sufficient time to prepare the bid
4
• Competitive bidding
¾ Some common types of competitive bids:
o Request for quotations (RFQ)

o Request for information (RFI)
o Requests for proposal (RFP)
o Reverse auctions
o Auctions
• Negotiation
¾ If the following conditions occur negotiation should

be used:
o Costs and risks are hard to estimate with any precision
o Where price is not that important. Perhaps quality is
more important.
o If the buyer expects to make spec changes
o Where there are special needs like tooling, expertise
etc
o When you want the supplier involved early on in the
work
o When there is a long lead time which allows time to
improve the product
10
5
• Negotiation
¾ Objectives:
o To obtain a fair and reasonable price
o To obtain the desired quality
o To obtain the desired performance
o To persuade the supplier to provide a high level of co-
operation
o To have more control
o To build a sound long term relationship with the
supplier
11
• Negotiation
¾ Some typical things that are negotiable:

o Price (discounts, payment terms)
o Transportation (terms, carrier, multiple delivery
points)
o Supply (lead times, delivery schedule,
expansion/cancellation options, supply held inventory)
o Support (technical assistance, spare parts, warranty,
training)
o Quality (performance compliance, test criteria
rejection procedures, reliability)
12
6
• What is a situation in my organization where

competitive bidding was used when negotiation
would have been more appropriate?
• What is a situation in my organization where

negotiation was used when competitive bidding
would have been more appropriate?
13
• Steps in the Negotiation Process
¾ Establish Team and Team Leader

¾ Analysis
¾ Mock negotiations
¾ Negotiate
¾ Post negotiations
14
7
• Analysis (Wheeler Framework)
¾ BATNAS
¾ Parties
¾ Interests
¾ Values
¾ Barriers
¾ Power
¾ Ethics
15
¾ BATNA:
o Best Alternative to a Negotiated Agreement

o What will the parties do if they do not come to
an agreement
o Course of action if no agreement (your walk
away position)
o Not necessarily a costs or price.
o Need to understand your BATNA plus assess the
BATNA of the supplier
16
8
¾ PARTIES:
o Not necessarily who you negotiate with

o Who holds sway has influence, makes the final
odecision
o Who are the parties of other options
17
¾ INTERESTS:
o Look for both obvious and hidden objectives
¾ VALUE:
o What value is created?

o How will the value be split?
o Think in terms of “win win”
18
9
¾ BARRIERS:
o What are the potential barriers?

Strategic – overplaying
Interpersonal- communication, emotions
Institutional – within the organizations, legal,
regulatory
o How can they be overcome?
19
¾ POWER:
o How you perceive your BATNA and the other party

perceives their BATNA
o Things that can change power:
Different parties
Timeframes
The strength of analysis
The strength of preparation
20
10
¾ ETHICS:
o Truth or not
o Fairness
o Economic Pressure
o Effect in bystanders
21
• Does my organization have a formal approach

to negotiation? Should it?
• What would the advantages and

disadvantages be of a formal approach to
negotiating?
22
11
• DeHavilland Inc. Case
¾ What are some possible BATNAs for DeHavilland

and Marton?
23
¾ Who are the parties and what is their interests?
24
12
¾ What is the potential value to be created?
25
¾ What are some potential barriers?
26
13
¾ What is the power relationships between

DeHavilland and Marton?
27
¾ What are some possible ethical issues?
28
14
Session Objectives
9 Understand the factors that suggest

bidding is more appropriate than
negotiation and vice versa.
9 Determine whether negotiation or
bidding is more suited to a particular
situation.
9 Describe types of bids.
9 State the objectives of a negotiation.
9 Define the keys steps in negotiations.
9 Prepare a negotiating analysis.
29
15
Session 4
Procurement and
Supply Management
Organization
Session Agenda
1. Internal procurement relationships

2. Financial leverage effect
3. Individual exercise (not marked): Financial
Leverage Effect
4. Cross functional teams
5. Organizing - centralized, decentralized and
hybrid
6. Group exercise (marked): Centralization vs.
Decentralization
1
Session Objectives
1. Identify the relationships between

procurement and other functional
areas of an organization.
2. Describe the reasons for/benefits of

using of cross functional purchasing
teams.
3. Discuss the problems in using cross

functional teams.
Session Objectives
4. Understand the critical success factors

for cross functional teams.
5. Describe range of options for

organizing procurement.
6. Assess the options for the organization

of procurement in an organization.
2
What department in your firm do you have working
relationships with on a day to day basis as it relates to
procurement?
What is the condition of those relationships?
Should your organization work using cross functional

teams? What could the problems be?
What is the prevalent purchasing model for your
organization?
When did it last change? Why?
Should it be more centralized or more decentralized? Why?
How might it change in the next 5 years? Why?

Organization
• Internal Relationships
¾ Production
¾ Design
¾ Finance
¾ Marketing
3
Organization
• Internal Relationships
¾ Information technology
¾ Legal
¾Supply chain manager

Organization
• What departments in your firm do you have

working relationships with on a day to day
basis as it relates to procurement?
• What is the condition of those relationships?
4
Organization
• Financial Leverage Effect Example
¾ A firm has the following income statement
Sales $15,000,000
Total Materials $5,000,000
Total Labour $7,000,000
Overhead $1,500,000
Cost of Goods Sold $13,500,000
Profit $1,500,000

Organization
¾ What is its profit margin?
o$ 1 500 000 / $ 15 000 000 = % 10
10
5
Organization
¾ What is the firm’s return on assets?
o 10.0x 1.3 =13%
11

Organization
¾ The same firm has the following balance

sheet
Inventory $3,000,000
Other $1,000,000
Total current Assets $4,000,000
Fixed Assets $7,500,000
Total Assets $11,500,000
12
6
Organization
¾ What is its asset turnover rate?
¾$15,000,000/$11,500,000 = 1.3
13

Organization
¾ Suppose through an improvement in procurement

costs of purchased materials decline 20%. What is the
effect on the Return on Assets?
14
7
Organization
Partial I n c o m e S t a t e m e n t
B e fo re A fte r
S a le s $ 1 5 ,0 0 0 ,0 0 0 $ 1 5 ,0 0 0 ,0 0 0
T o ta l M a te r ia ls $ 5 ,0 0 0 ,0 0 0 $ 4 ,0 0 0 ,0 0 0
T o ta l L a b o u r $ 7 ,0 0 0 ,0 0 0 $ 7 ,0 0 0 ,0 0 0
O v e rh e a d $ 1 ,5 0 0 ,0 0 0 $ 1 ,5 0 0 ,0 0 0
C o s t o f G o o d s S o ld $ 1 3 ,5 0 0 ,0 0 0 $ 1 2 ,5 0 0 ,0 0 0
Gross P r o f i t $ 1 ,5 0 0 ,0 0 0 $ 2 ,5 0 0 ,0 0 0
P r o fit M a r g in 1 0 .0 % 1 6 .7 %
Partial B a l a n c e S h e e t
In v e n t o r y $ 3 ,0 0 0 ,0 0 0 $ 2 ,4 0 0 ,0 0 0
O th e r $ 1 ,0 0 0 ,0 0 0 $ 1 ,0 0 0 ,0 0 0
T o ta l c u rre n t A s s e ts $ 4 ,0 0 0 ,0 0 0 $ 3 ,4 0 0 ,0 0 0
F ix e d A s s e ts $ 7 ,5 0 0 ,0 0 0 $ 7 ,5 0 0 ,0 0 0
T o ta l A s s e ts $ 1 1 ,5 0 0 ,0 0 0 $ 1 0 ,9 0 0 ,0 0 0
A s s e t tu rn o v e r 1 .3 1 .4
R e tu rn o n A s s e ts 1 3 .0 % 2 2 .9 %
15

Organization
• Individual exercise (not marked):
Financial Leverage Effect
¾ Financial leverage effect at Tricorp
16
8
Organization
• Cross Functional Teams
¾ Benefits/Reasons:
o Procurement is strategic
o Financial improvement
o Better results
o Cuts time
o Better communication
o Better to deal with complex products
o Higher creativity
17

Organization
• Cross Functional Teams
¾ Success factors:
o Executive sponsorship
o Effective leadership
o Right people
o Training
o Resources
18
9
Organization
• Do we use cross functional teams in my
organization?
• What worked?
• What did not work?
19

Organization
• Procurement Organization
¾ Centralized
¾ Decentralized
¾ Hybrid
20
10
Organization
¾ Centralized - Advantages
o May reduce costs
o Lower supplier costs
o Specialization
o Better co-ordination and control
o Easier to develop strategic view
21

Organization
¾ Centralized - Disadvantages
o Reduces teamwork
o Too much control
o Too specialized
o Isolation from business units
22
11
Organization
¾ Decentralized - Advantages
o Faster response to business unit needs
o Support local activities
o Wider authority better morale
23

Organization
¾ Decentralized - Disadvantages
o Higher cost lost volume discount opportunities
o Communications
o Difficult to create strategic focus
o Inconsistencies
24
12
Organization
¾ More Important Factors

o External Environment
o Major influencers approach
o Moderators influence
o Difficult to create strategic focus
o Inconsistencies
25

Organization
¾ Effect on Procurement
o CPO’s role
o Stress on staff
o Shared services approach
o Staff competency issue if shift toward centralization
26
13
Organization
Group exercise (marked):
Centralization vs. Decentralization
¾ Select one firm in your group that uses centralized

purchasing. Prepare a written discussion of changes if
any that could be made toward decentralization.
Justify keeping the status quo or the changes.
¾Select one firm in your group that uses decentralized

purchasing. Prepare a written discussion of changes if
any that could be made toward centralization. Justify
keeping the status quo or the changes.
27
Session Objectives
9 Identify the relationships between

procurement and other functional
areas of an organization.
9 Describe the reasons for/benefits of

using of cross functional purchasing
teams.
9 Discuss the problems in using cross

functional teams.
28
14
Session Objectives
9 Understand the critical success factors

for cross functional teams.
9 Describe range of options for

organizing procurement.
9 Assess the options for the

organization of procurement in an
organization.
29
15
Session 5
Make or Buy
Session Agenda
1. Make or buy at the strategic and tactical

level
2. Total cost of ownership: elements
3. Total cost of ownership: benefits
4. Total cost of ownership: implementation
5. Group exercise (marked): Make or Buy and
Total Cost of Ownership - Happyland
Construction
1
Session Objectives
1. Quantitative and qualitative factors

that enter into the make or buy
decision.
2. The concept of core competency.
3. The role of core competencies in

creating competitive advantage.
4. Factors to identify core competencies

of an organization.
Session Objectives
5. Benefits of the total cost of ownership

approach.
6. Total cost of ownership analysis for a

product or service used in an
organization.
7. Total cost of ownership as a support to

the make or buy decision.
2
Does your organization deploy make or buy analysis? Why? Why not?
In your organization have you considered the strategic level factors
related to make or buy?
Is your organization organized on a strategic business unit or core
competence basis?
Does your organization have core competencies? What are they?
What are your organization’s core products? Do they flow from the core
competencies?
Do you use total cost of ownership in your organization?
What are the pros and cons of using total cost of ownership in your
organization?
Make or Buy
• Does your organization deploy make or buy

analysis? Why? Why not?
• In your organization have you considered the

strategic level factors related to make or buy?
3
Make or Buy
• Considerations at the strategic level
¾ Core competencies
¾ Supplier dependence
Make or Buy
• Considerations at the tactical level
¾ Total cost of ownership
¾ Production capability
¾Qualitative/intangibles
4
Make or Buy
• Core Competencies
¾ Elements that define core competencies:
o human capital oriented
o grow with use
o drivers of new business development
o allow different products and business development
o tend to be hidden
Make or Buy
¾ Key to competitive advantage
¾ Three criteria must be satisfied:
o It must provide access to a wide variety of markets
o It must provide benefit to the end product consumer.
o It should be difficult for competitors to imitate.
10
5
Make or Buy
¾ Core Products
¾ End Products
11
Make or Buy
• Does your organization have core

competencies? What are they?
• What are your organization’s core products?

Do they flow from the core competencies your
organization deploy make or buy analysis?
Why? Why not?
12
6
Make or Buy
• Total Cost of Ownership
¾ Considers all costs to do with the acquisition from

initial need recognition to ultimate disposal
¾ Three broad categories of cost:
o Pretransaction
o Transaction
o Posttransaction
¾ Uses present value (discounting) approach
13
Make or Buy
¾ Pretransaction costs:
o Need recognition
o Need description (specification)
o Sourcing
o Supplier Selection
14
7
Make or Buy
¾ Transaction costs:
o Ordering
o Monitoring
o Receipt and Inspection
o Payment
o Documentation
15
Make or Buy
¾ Benefits:
o Performance measurement
o Decision making
o Communication
o Insight/Understanding
o Supports continuous improvement
o Decommissioning and Disposal
16
8
Make or Buy
¾ Issues in Implementation:
o Refocusing
o Deciding appropriate circumstances
o Data needs
o Pilot testing versus full rollout
17
Make or Buy
• Do you use total cost of ownership in your

organization?
• What are the pros and cons of using total cost

of ownership in your organization?
18
9
Make or Buy
¾ Discounting:
o Objective is to restate future costs to today

o Example:
Assuming an interest rate of 7.5% what is the present value of:
$10,000 received annually starting 1 year from now for 5 years
Year 0 1 2 3 4 5 Total
Cash $10,000 $10,000 $10,000 $10,000 $10,000
Discount Factor 0.930233 0.865333 0.804961 0.748801 0.696559
1/1.0751 1/1.0752 1/1.0753 1/1.0754 1/1.0755
Discounted Value $9,302 $8,653 $8,050 $7,488 $6,966 $40,459
19
Make or Buy
¾ Steps:
o Determine pretransaction costs

o Determine transaction costs
o Estimate posttransaction cost by year in the future
o Total all three costs for each year
o Determine discount rate
o Discount costs in each year to today
o Total the discounted costs
o Make decision
20
10
Make or Buy
¾ Example
(or year 0)
Vendor A
Posttansaction $40,000 $60,000 $60,000 $60,000 $120,000
Total Cost $200,000 $40,000 $60,000 $60,000 $60,000 $120,000 $540,000
Discount factor 0.9346 0.8734 0.8163 0.7629 0.7130
Total Discounted value $200,000 $37,383 $52,406 $48,978 $45,774 $85,558 $470,099
Vendor B
Posttansaction $30,000 $30,000 $30,000 $55,000
Total Cost $350,000 $0 $30,000 $30,000 $30,000 $55,000 $495,000
Discount factor 0.9346 0.8734 0.8163 0.7629 0.7130
Total Discounted value $350,000 $0 $26,203 $24,489 $22,887 $39,214 $462,793
Discount Rate 7%
21
Make or Buy
¾ Example Effect of discount rate (8.5%)

(or year 0)
Vendor A
Posttansaction $40,000 $60,000 $60,000 $60,000 $120,000
Total Cost $200,000 $40,000 $60,000 $60,000 $60,000 $120,000 $540,000
Discount factor 0.9208 0.8479 0.7807 0.7189 0.6620
Total Discounted value $200,000 $36,832 $50,873 $46,845 $43,135 $79,439 $457,125
Vendor B
Posttansaction $30,000 $30,000 $30,000 $55,000
Total Cost $350,000 $0 $30,000 $30,000 $30,000 $55,000 $495,000
Discount factor 0.9208 0.8479 0.7807 0.7189 0.6620
Total Discounted value $350,000 $0 $25,437 $23,422 $21,568 $36,409 $456,836
Discount Rate 8.6%
22
11
Make or Buy
Group exercise (marked): Make or Buy and Total Cost of

Ownership - Happyland Construction
Up to Today Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 etc
(or year 0)
PreTransaction
Transaction
Post Transaction
TOTAL $0 $0 $0 $0 $0 $0 $0
Discount Factor
Discounted Cash Flow $0 $0 $0 $0 $0 $0 $0
Total Cost of Ownership $0
Discount Rate 5%
23
Session Objectives
9 Quantitative and qualitative factors

that enter into the make or buy
decision.
9 The concept of core competency.
9 The role of core competencies in

creating competitive advantage.
9 Factors to identify core competencies

of an organization.
24
12
Session Objectives
9 Benefits of the total cost of ownership

approach.
9 Total cost of ownership analysis for a

product or service used in an
organization.
9 Total cost of ownership as a support

to the make or buy decision.
25
13
Session 6
Session Agenda
1. What is the right price?

2. Price assessment
3. Case Discussion: Frich Turbo Engine Co.
4. Market conditions – procurement leverage
5. Cost Analysis & Types of costs
5. Profit
6. Learning curves
1
Session Objectives
2. Understand that lowest price is not

necessarily the best option.
3. Describe different types of discounts.
Session Objectives
5. Distinguish the components of direct

and indirect costs.
7. Describe considerations with respect to

supplier profit.
8. Understand, at a general level, the

importance of learning curves in cost
analysis.
2
With respect to price assessment, which of the following have you used in
your organization: competitive price proposals, current price comparisons,
use of web tools, historical price comparisons and cost analysis?
Were there missed opportunities to use one or some of these methods?
What types of discounts does your organization typically receive?
What are some cases where your firm has procurement leverage? Where
it does not?
What sources of cost data has your organization used?
When have you been involved in a strategic supply project where direct
and indirect costs have been split?
What were some of the problems you faced, if any?
Are learning curves appropriate in your organization for some purchases?
Why?
• What is the Right Price?
¾ Fair and Reasonable
¾ Not necessarily the lowest price
¾ Other factors to consider:
o Quality
o Reliability
o Terms and conditions
o Risk
o Other?
6
3
• Price Assessment
¾ Methods:
o Competitive proposals
o Price comparisons - current
o Price comparisons – historic
o Web tools
o Cost Analysis
Case Discussion: Frich Turbo Engine Company
¾ What factors would explain the difference

between Bayfleet’s Machining and Union
Stamping’s?
¾ Should Bayfleet be selected? Why or why not?
4
• Discounts:
¾ Cash
¾ Trade
¾ Volume
¾ Seasonal
• What types of discounts does your

organization typically receive?
10
5
• Market Conditions and Procurement Leverage
¾Supplier Side of the Market
Negotiating
leverage
0
Number of Sellers
11
• Market Conditions and Procurement Leverage
¾Buyer Side of the Market
Negotiating
leverage
0
Number of Buyers
12
6
• What are some cases where your firm has

procurement leverage? Where it does not?
13
• Cost Analysis Approaches:
¾ Cost Breakdown
¾ Other Firms
¾ Cost Models
14
7
• Types of Costs:
¾ Direct
¾ +Indirect
= Total Cost
+ Profit
= Price
15
• Type of Costs:
¾ Direct
o Direct materials
o Direct labour
¾ Indirect
o Allocated (Burden)
Production overhead
Corporate overhead
16
8
• Profit
¾ NOT TO BE BASED ON A PERCENT OF COSTS
¾ Considerations
o Competitiveness of industry
o Competitiveness of the product or service
o Size of order
o Specialization/Customization
o Risk
17
• What sources of cost data has your

organization used?
• When have you been involved in a strategic

supply project where direct and indirect
costs have been split?
• What were some of the problems you faced,

if any??
18
9
• Learning Curves
¾ Basic idea is that the more often we do

something the better our skill and the less time to
do it.
¾ Greatest impact is on new things we learn.
¾ Most relevant to major projects, assemblies etc.
19
•DeHavilland Incorporated
Referring to exhibit 5 and exhibit 3 for Marton Enterprises

for the Flap Shrouds Part 300, is a learning curve implied
in Exhibit 3? Why or why not?
20
10
Session Objectives
9 Conduct a price assessment.
9 Understand that lowest price is not

necessarily the best option.
9 Describe different types of discounts
21
Session Objectives
9 Describe types of cost analyses.
9 Distinguish the components of direct

and indirect costs.
9 Conduct a cost analysis.
9 Describe considerations with respect

to supplier profit.
9 Understand, at a general level, the

importance of learning curves in cost
analysis.
22
11
Session 7
Session Agenda
1. Factors affecting long term quality

2. Case Discussion: Placido Engine Co.
3. Total quality management
4. Individual exercise (marked): ISO 9001:2000
and Your Organization
5. Quality training for procurement staff
6. Purposes of inventory
7. Forecasting demand
8. Inventory models
9. Inventory relationships
1
Session Objectives
2. Discuss the merits of product testing

and the proposal analysis technique in
assuring quality.
3. Describe some common total quality

management systems.
Session Objectives
4. Weigh the pros and cons of

implementing ISO 9001: 2000
standards in your organization
5. Outline the benefits of a strategic

purchasing organization having quality
6. Describe the purposes of inventory
2
Session Objectives
7. Understand basic inventory models.
8. Outline the relationship between

delivery issues and inventory.
9. Discuss the trade-off between

inventory and customer service.
10. Identify the difference between error

detection and error.
In your organization what quality issues have you experienced?
Refer to the four factors the determine long run quality. Which factors
were, or are, absent at your organization?
Do you partner with firms as a method to improve quality? Why or
why not?
Are you overly dependent on inspection for quality?
Should your organization provide quality management training to
purchasing staff?
Why does your organization hold inventory?
What inventory model or models does your firm use?
How does delivery affect the level of inventory your firm holds?
How do customer service requirements affect the level of inventory
your firm holds?
3
• Four factors that affect long term quality
¾ Specification quality
¾ Selecting Suppliers
¾ Supplier Understanding
¾ Monitoring
• Specification quality
¾ Absolutely
¾ In terms of need
¾ Conformance
• Selecting Suppliers
¾ Product Testing
¾ Proposal Analysis
4
• Specification Quality
¾ Relationship with supplier
• Monitoring
¾ Defect detection
¾ Error/defect prevention
• In your organization what quality issues

have you experienced?
• With reference to the four factors the

determine long run quality which were
absent?
10
5
• What are some solutions to these problems?
• What are barriers to them?
11
Case Discussion: Placido Engine Company
¾ What are the basic issues in this case?
¾ What do you think of the relationship

Placido has with its suppliers?
¾ How could Placido improve quality in this

case?
12
6
• Do you partner with firms as a method to

improve quality? Why or why not?
13
• Total Quality Management
¾ Definition
¾ Demings
¾ Six Sigma
¾ ISO 9001:2000
14
7
• Steps in Applying ISO 9001:2000
¾ Identify the goals you want to achieve.
¾ Identify what others expect of you.
¾ Obtain information on the ISO 9000 family.
¾ Apply the ISO 9000 family of standards in your

management system.
¾ Obtain guidance on specific topics within the quality

management system.
15
¾ Establish your current status, determine the gaps

between your quality management system and the
requirements of ISO 9001:2000.
¾ Determine the processes that are needed to supply

products to your customers.
¾Develop a plan to close the gaps in these 2 steps.
¾Carry out your plan.
16
8
¾ Undergo periodic internal assessment.
¾ Do you need to demonstrate conformance?
o Yes Undergo independent audit.
o No Continue to improve your business.
17
Individual exercise (marked): ISO 9001:2000 and Your Organization
¾ For your company outline at least four reasons to become ISO

9001:2000 certified.
¾If it is not applicable to your organization, outline four reasons

that one of your main suppliers should become ISO 9001:2000
certified.
¾In either case what are some of the problems that are likely to
occur?
¾If you were responsible how would you proceed through the
steps?
18
9
• Quality Training for Procurement Staff
¾ Reduce error rates, improve bottom line.
¾ Better relate expectations to suppliers.
¾ Quality mentality within procurement.
19
• Should your organization provide quality

management training to purchasing staff?
Why? Why Not?
20
10
• Why does your company hold inventory?
• Does it hold different types of inventory for

different purposes?
21
• Demand forecasting
¾ Qualitative models:
o Experts
o Customer feedback
o Delphi
¾ Quantitative models:
o Simple
o Moderately sophisticated
o Sophisticated
22
11
• Inventory Models
¾ Fixed Order Quantity
¾ Economic Order Quantity
¾ Periodic Review
23
¾ Relationship between inventory and delivery
High
Level of
Inventory
Low
Short Long
Delivery Lead Time
24
12
¾ Relationship between inventory and customer

service
High
Level of
Inventory
Low
Low High
Desired level of customer service
25
• How does delivery affect the level of

inventory your firm holds?
• How do customer service requirements

affect the level of inventory your firm holds
26
13
Session Objectives
9 Understand factors that affect quality.
9 Discuss the merits of product testing

and the proposal analysis technique in
assuring quality.
9 Describe some common total quality

management systems.
27
Session Objectives
9 Weigh the pros and cons of

implementing ISO 9001: 2000
standards in your organization
9 Outline the benefits of a strategic

purchasing organization having quality
9 Describe the purposes of inventory
28
14
Session Objectives
9 Understand basic inventory models.
9 Outline the relationship between

delivery issues and inventory.
9 Discuss the trade-off between

inventory and customer service.
29
15
Session 8
Supplier Selection
Session Agenda
1. Individual written case report (marked):

Platinum Box
2. Sourcing
3. Weighted Evaluation Systems
4. Case Discussion: Platinum Box
5. Product Attribute Considerations
6. Total Cost Approach
7. Case Discussion: Platinum Box
(continued)
8. Single versus multiple Sourcing
1
Session Objectives
2. Produce a supplier evaluation matrix.
3. Describe different types of products.
4. Connect the product type with supplier

selection criteria.
5. Understand the elements of the total

cost approach of selecting suppliers.
Session Objectives
6. Describe factors that suggest using a

single source for a good or service.
7. Describe the factors that suggest using

multiple sources for a good or service.
8. Understand the difficulties in

negotiating in a sole source situation.
9. Defend a single versus multiple source

decision.
10. Select a supplier using the total cost

of ownership approach.
4
2
What methods do we use to find suppliers in our organization?
In selecting suppliers what type of evaluation system does your
organization use?
Does your organization have products that are routine order? Procedural
problem products? Performance problem products? Political outlay
products? What are they?
What are some of the risk, business desirable, and cost factors your
organization would consider in adopting the total cost approach?
For what goods and services has your organization single sourced?
What were the factors in the decision?
How do the power relationships change when we negotiate in a single
source situation?
What are some implications of reducing the number of suppliers your
organization uses?
Supplier Selection
• What methods do you use to find suppliers

in your organization?
3
Supplier Selection
Individual exercise (not marked): Platinum Box
1. Referring to Platinum Box, develop an unweighted

evaluation matrix for each of the possible press
selections.
2. Rank each of the presses for each evaluative factor you

have chosen.
3. Make a recommendation.
Include 5 evaluative factors in your analysis.
Supplier Selection
• Supplier Selection: Weighted Evaluations
¾ Steps:
oIdentification of the important evaluative factors
o Consensus on the important evaluative factors
o Specifying with precision the evaluative factors
o Reach consensus on the weighting of each of the

evaluative factors
o Determining the range for the rating scale
4
Supplier Selection
• Supplier Selection: Weighted Evaluations
¾ Steps:
o Developing the definition for each rank in the rating

scale
o Performing the rankings individually
o Developing a consensus ranking
Supplier Selection
• Effect of Weighting
¾ Getting the weights right is important

as it affects the selection.
Table 2
Rankings
FIRM: A B C
Criteria
5= >15 5
4= 10-12 4
3= 7-9
2= 4-6 2
1 = 1-3
Manufacturing facilities (35% Weight)
10
5
Supplier Selection
• Effect of Weighting
¾ Weights on the first 2 items change and so does the

supplier selected
Rankings
FIRM: A B C
Critirea

5= >15 5
4= 10-12 4
3= 7-9
2= 4-6 2
1 = 1-3

Manufacturing facilities (35% Weight)


11
Supplier Selection
Platinum Box Discussion
¾ Part 1
o Referring to Platinum Box, develop an agreed upon

the list of evaluative factors, rankings, and
weighting for each of the options.
12
6
Supplier Selection
• Product Types
¾ Routine Order
¾ Procedural Problem
¾ Performance Problem
¾ Political Problem
o These effect the evaluative factors selected and the

importance of those factors
13
Supplier Selection
• Supplier Selection: Total Cost Approach
¾ Steps:
o Risk Assessment Level
- Determine relevant risk factors

- Assign risk rankings (pass/fail)
- Decision on overall pass fail
- If pass go to the next two steps
14
7
Supplier Selection
¾ Steps:
o Business Desirable Factors Level
- Determine relevant business desirable factors

- Determine scoring range
- Assign scores
o Total Cost Level
- Enumerate total costs
o
15
Supplier Selection
¾ Steps:
o Decision Level
- Examine risk level (for passing firms), business

desirable factors, and total costs.
- Make decision
16
8
Supplier Selection
Platinum Box – continued
¾ Part 2
o What type of product is the new printing press?

o Make the supplier selection for Platinum Box using
the total cost framework.
o Prepare the case report
17
Supplier Selection
• Single versus Multiple Sourcing
¾ Reasons to Single Source:
o Supplier has exclusive rights

o Supplier quality advantage
o Reduce internal procurement costs
o Small order
o Inventory costs
o Discounts – larger order
o Lower logistics costs
o Faster product development
18
9
Supplier Selection
• Single versus Multiple Sourcing
¾ Reasons to Multiple Source:
o Suppliers on their toes

o Minimizes risk form supplier failure
o A single supplier may not be able to meet the need
o Test new suppliers
o Reduce potential of supplier leverage
19
Supplier Selection
• Perfect Number of Suppliers

¾ Benefits:
o Improved delivery
o Cost reduction
¾ Concerns:
o May overshoot
20
10
Supplier Selection
• Should Platinum Box use a single or mutliple

sources? Why? Why not?
• If they continued to single source with

JabaKing what would the effect be on their
negotiating position?
21
Session Objectives
9 Identify potential supply sources.
9 Produce a supplier evaluation matrix.
9 Describe different types of products.
9 Connect the product type with

supplier selection criteria.
9 Understand the elements of the total

cost approach of selecting suppliers.
22
11
Session Objectives
9 Describe factors that suggest using a

single source for a good or service.
9 Describe the factors that suggest

using multiple sources for a good or
service.
9 Understand the difficulties in

negotiating in a sole source situation.
9 Defend a single versus multiple source

decision.
23
12
Session 9
Supplier Development and
Certification
Session Agenda
1. Procurement performance monitoring

2. Supplier development
3. Objectives of supplier certification
4. Benefits of certification
5. Steps in supplier certification
6. Product development cycle times
7. Group exercise (marked): Supplier
Certification
8. Case Discussion: Fisher & Paykel
1
Session Objectives
1. Describe the best practices in

procurement performance
measurement.
2. Specify procurement performance

measures for an organization.
3. Identify the many types of supplier

development approaches.
4. Describe the benefits of supplier

development.
Session Objectives
5. Present information related to the

objectives of supplier certification.
6. Present information related to the

benefits of supplier certification.
7. Apply the general steps in the supplier

certification process.
8. Describe the use of product cycle times

in supplier performance management.
2
Does your organization use strategic purchasing performance measures? If
so which ones?
If not, should it use them? Why?
What supplier development activities does your organization engage in?
How has supplier development affected your organization’s performance, if
at all?
Does your organization engage in supplier certification? Why or why not?
How has supplier certification affected your organization’s performance, if at
all?
What are some of the problems of certification? Have they occurred in your
organization?
Does your organization use product cycle times for supplier evaluation?
Why or why not?

Fisher and Paykel Ltd.
Assume you are Alan Day and you have to consider the following
questions only:
Is this an attractive order for Walton?

Why might Walton have had a delivery problem in November and
December?
Is this team approach the best way to solve the problem?
What Supplier development activities would you recommend in this
case?
How do you think Walton will respond?
3
• Procurement Performance Evaluation
¾ 8 Elements of Best Practices:
o Align the measures with corporate goals.
o Establish comprehensive measures.
o Set aggressive dynamic targets
o Make the measures transparent and known.
¾ 8 Elements of Best Practices:
o Link targets to performance based incentives.
o Provide the necessary resources.
o Provide systems to support the measures.
o Provide leadership.
4
¾ Types of Measures
o Price/Cost
o Revenue
o Inventory
o Availability
o Technology. Innovation and New Product/Process

Introduction measures
¾ Types of Measures
o Quality
o Workforce
o Operational
o Customer satisfaction
o Supplier
10
5
• Select a firm from your group.
¾ Describe potential measures that could be

applied to measure procurement performance.
¾ Describe problems you might expect to occur as

the system is implemented.
11
• Approaches to Supplier Development
¾ Definition: “any effort of a firm to increase the

performance ad/or capabilities to meet the firm’s
short and long term supply needs”
¾ Approaches
o Evaluation feedback
o Supplier visits at buyer
o Buyer visits at supplier
o Verbal or written requests to improve
o Future benefits
o Formal evaluation
o Supplier competition
12
6
• Approaches to Supplier Development
¾Approaches
o Current benefits
o Certification
o Achievement recognition
o Training and education
o Investment
13
• Supplier Development
¾ What types of supplier development

activities does your organization engage in?
¾ What are the pros and cons of each?
14
7
• Supplier Certification
¾ Objectives
o Promote cooperation
o Reduce # of suppliers
o Develop technology/products
o Other
15
¾ Benefits
Objective Benefit
Improve Quality Lower rejection rates and reduced inspection
costs
Establish long term Contracts length increase, supplier change
relationships frequency decrease
Reduce price/cost The most prevalent result is no change in
price, where prices change, more often it is a
decrease than an increase
Improve on-time delivery The most common effect was improved on
time delivery, followed by no change in on-
time delivery.
Promote co-operation Co-operation improved significantly
16
8
¾ Benefits
Objective Benefit
Reduce Suppliers Significant reduction in the number of
suppliers
Develop In terms of technology sharing there was little
Technology/Product difference when it came to sharing technology
Development with all firms. With closely linked firms there
was greater sharing of technology with
certified firms. In terms of product
development, certifying firms were more
likely to involve suppliers in product
development.
17
• Does your organization engage in supplier

certification? Why or why not?
•How has supplier certification affected your

organization’s performance, if at all?
•What are some of the problems of certification

that have occurred in your organization?
18
9
¾ Steps
o Commitment to a new philosophy
o Setting goals and objectives
o Establishing a certification team
o Involving suppliers
19
¾ Steps
o Measurement (Implementation)
o Agreement
o Maintenance
20
10
Group exercise (marked): Supplier Certification
¾ Select an organization from your group.
¾ Prepare a brief summary of how you would apply

each of the steps in certification for one of its key
suppliers.
21
Discussion – Supplier Development:

Fisher and Paykel
¾ What supplier development activities

would you recommend in this case?
¾ How do you think Walton will respond?
22
11
• Product Development Cycle Times
¾ Conclusions:
o Quality is primary factor in selection and evaluation
o Cycle times are important
o Location influences cycle time
o Trust and commitment are important factors
23
• Product Development Cycle Times
¾ Will supplier certification improve cycle times?
24
12
Session Objectives
9 Describe the best practices in

procurement performance
measurement.
9 Specify procurement performance

measures for an organization.
9 Identify the many types of supplier

development approaches.
9 Describe the benefits of supplier

development.
25
Session Objectives
9 Present information related to the

objectives of supplier certification.
9 Present information related to the

benefits of supplier certification.
9 Apply the general steps in the

supplier certification process.
9 Describe the use product cycle times

in supplier performance management.
26
13
Session 10
Session Agenda
1. Services are different

2. Procurement involvement: services are the same
3. Services spend analysis
4. Individual exercise (not marked): Services Spend
Analysis
5. Specification: statements of work
6. Individual exercise (marked): Services
Procurement - Statement of Work
7. Specification: service level agreements
8. Review requirements for Boeing Australia case
(session 11)
1
Session Objectives
1. Describe the unique aspects of services

procurement.
2. Describe the tactical and strategic

considerations related to services
procurement.
3. Assess the need for procurement’s

involvement in services buying.
Session Objectives
5. Outline the elements of a statement of

work
7. Outline the elements

. of a service level
agreement
8. Prepare a service level agreement
2
What types of services do we buy in our organization?
How are they different from goods?
Is the procurement procedure different in my organization

for these? What are the differences?
If procurement is not involved or only indirectly involved in
buying services, what would the benefits of more direct
involvement?
What steps would you take to increase involvement?
My organization has prepared a statement of work for…..
My organization has prepared a service level of

agreement for…...
¾ Less tangible
¾ Not storable
¾ Quality measurement is different
¾ Lower traceability
¾ Produced and consumed simultaneously
¾ More complex
3
¾ Considerations relative to goods
o Target and total costs
o Specification statements weaker
o Quantity purchases
o Price negotiation
o Performance (supplier) evaluation
¾ Considerations relative to goods
o Poor specs cause poor control
o Problems with measurement when internally

produced – carries over to outsourced
o Moral hazard – scope creep
o Lack of professional management
o Added cost concerns
4
• What types of services do we buy in our

organization?
• How are they different from goods?
• Services are the same
¾ Same basic process
o Need recognition
o Need description
o Sourcing
o Supplier selection
o Ordering
o Monitoring
o Receipt and Inspection
o Payment
o Documentation
o Relationship management
Except
10
5
• Need description a little different.
• Receipt and inspection a little different.
11
•Is the procurement procedure different in my

organization for these? What are the
differences?
•If procurement is not involved or only

indirectly involved in buying services, what
would the benefits of more direct involvement?
Need description a little different.
•What steps would you take to increase

procurement’s involvement?
12
6
• Spend analysis reviewed
¾ Definition: Metrics related to the commodities and

services purchased, the suppliers used, and the
internal customers.
¾ Both the $ spend and # of spends be analyzed
¾ Triggers be used to establish supplies for targeting
¾ The analysis occur in three dimensions:
o Commodities and services
o Suppliers
o Customers
¾ 13
Spend Analysis
¾ Heath’s Triggers for action
o High dollar value of commodities or services

o High number of transactions for commodities or
services
o High dollar value for suppliers
o High number of transaction for suppliers
o High dollar value for internal customers
o High number of transactions for internal customers
o High percentage of sole source
o A combination of any of these
14
7
Spend Analysis
¾ Supports strategy through:
o Reducing cost through volume discounts

o Reducing cost by leveraging bargaining position
o Seeking better quality
o Seeking better responsiveness from suppliers
o Uncovering process improvements potential
o Uncovering opportunities to enter into stronger
relationships
o Increasing focus on what goods and services are
strategic
15
Spend Analysis
• Barriers to spend analysis
¾ Disparate computer systems

¾ Data problems (incomplete, inaccurate or
inconsistent)
¾ Determining the appropriate classification plan for
the analysis
¾ Resistance to change
¾ Inadequate resource levels
¾ Setting unrealistic goals
16
8
• Spend Analysis
¾ Same as for goods spend

¾ Issue: May be more disbursed through
organization
17
Individual exercise (not marked)

Services Spend Analysis for Your Organization
Prepare the following information:
1. Does your organization perform spend analysis for

services?
2. What is an example in your organization of direct
spend on services? Indirect spend?
3. What are the benefits and constraints to performing a
spend analysis for services in your organization?
4. Why is spend analysis for services important in your
organization?
Develop a list of benefits and constraints to services
spend analysis. Be prepared to share your findings with
the class.
18
9
Approach to Preparing Statements of Work
¾ Use a cross functional team
¾ Provide background
¾ Describe objectives
¾ Detailed, clear description of requirements
¾ Describe deliverables
¾ Describe quality and timing of deliverables
19
Approach to Preparing Statements of Work
¾ Expected delivery schedule
¾ Describe performance monitoring…project

management
¾ Key contacts and responsibilities
¾ Describe performance metrics
¾ Information related to charges, costs, payments
¾ Other matters
20
10
Individual exercise (marked): Statement of Work
For a service buy for your organization, or an organization of

your choice, prepare a statement of work. Choose a service
that can later use for a service level agreement.
o Use a cross functional team
o Provide background
o Describe objectives
o Detailed, clear description of requirements
o Describe deliverables
o Describe quality and timing of deliverables
o Expected delivery schedule
o Describe performance monitoring…project management
o Key contacts and responsibilities
o Describe performance metrics
o Information related to charges, costs, payments
o Other matters
21
• Approach to Service Level Agreements
¾ Start up
¾ Involve key players
¾ Key contacts and responsibilities
¾ Identify need and expectations
¾ Define service levels
¾ Establish performance indicators
22
11
• Approach to Service Level Agreements
¾ Confirm mutual issues
¾ Determine costs and terms
¾ Agree on agreement framework
¾ Establish review framework
¾ Create and sign agreement
23
Service Level Agreement
Prepare a service level agreement for the service that you

previously defined a statement of work for.
Undertake the following steps:
o Identify need and expectations

o Define service levels
o Establish performance indicators
o Determine costs and terms
o Establish agreement framework
o Establish review framework
24
12
Session Objectives
9 Describe the unique aspects of

services procurement.
9 Describe the tactical and strategic

considerations related to services
procurement.
9 Assess the need for procurement’s

involvement in services buying.
9 Conduct a services spend analysis.
25
Session Objectives
9 Outline the elements of a statement

of work.
9 Prepare a statement of work
9 Outline the elements

. of a service level
agreement
9 Prepare a service level agreement.
26
13
Session 11
e-Procurement
Session Agenda
1. Individual written case report: Boeing

Australia Ltd.
2. Forms of e-procurement
3. Pros and cons of e-procurement
4. e-procurement knowledge areas
5. Implementing e-procurement
6. Reverse auctions: steps
7. Reverse auctions: issues
8. Case discussion: Boeing Australia Ltd.
1
Session Objectives
1. Describe electronic data interchange,

e-catalogs, e-marketplaces and e-
auctions.
2. Discuss the advantages of e-

procurement.
3. Discuss the disadvantages of e-

procurement.
Session Objectives
4. Lead a discussion on the many aspects

of and potential of e-procurement for
your organization.
6. Assess the impact of reverse auctions

on total costs and supplier relations.
2
What forms of e-procurement do you use in your
organization?
Should you use more? What would be the advantages?
Should you decrease due to the disadvantages?
What is the knowledge level in your organization related

to e-procurement?
In which knowledge area is it weak? Where is it strong?
With respect to the 12 tips in e-procurement which ones

has your organization considered? Which ones has it
violated?

Boeing Australia Limited
Are there limitations to BAL current practices? What are
they?
What issues need to be considered in upgrading BAL’s
procurement platform?
Is the company’s size important?
What are the potential costs and benefits?
3
e-Procurement
• What forms of e-procurement do you use in

your organization?
e-Procurement
• Forms of e-procurement
¾ EDI Electronic data interchange
¾EFT or electronic funds transfer
¾ e-catalogs
¾ e-marketplaces
¾ e-auctions
4
e-Procurement
• What are the advantages and disadvantages

of e-procurement?
e-Procurement
• Advantages of e-procurement
¾ better information sharing
¾ improved collaboration
¾ speed
¾ more sources
¾ lower costs
10
5
e-Procurement
• Advantages of e-procurement
¾ better service hours
¾ customization
¾ global supply chains
¾ better monitoring, tracking
11
e-Procurement
• Disadvantages of e-procurement
¾ difficult to quantify costs and benefits
¾ small resource pool
¾ security
¾ cost barrier small/local suppliers
12
6
e-Procurement
• Disadvantages of e-procurement
¾ if for going global then global issues apply
¾ resistance to change
¾ adverse effect on procurement staff
13
e-Procurement
• Required knowledge areas
¾ Software
o Installed
o Hosted (Application Service Providers)
o Net Marketplaces
14
7
e-Procurement
¾ Net Markets
o Openness
o Focus
o Consortium or Independent
15
e-Procurement
¾ Content Aggregation
o Terminology
o Many aggregators
o Large supplier bias
o Complex requirements
16
8
e-Procurement
¾ Integration with back end systems
o Complete new infrastructure

o Manual integration
o Middleware
¾ Services to net markets
¾ Intelligent agents
¾Market Making technologies
17
e-Procurement
• Implementing e-procurement
¾ So something, do it soon
¾ Start with strategic sourcing, then apply e-

procurement
¾ Respect your legacy
¾ Segment the supply base and apply e-sourcing

tools appropriately
¾ Start with the easy, but don’t neglect the hard.
¾ Don’t underestimate the sweeping internal changes

that e-procurement demands
18
9
e-Procurement
• Implementing e-procurement
¾ Focus on delivering sustainable benefits
¾ Understand your power as a market maker
¾ Treat critical suppliers with kid gloves
¾ Benchmark the competition
¾ Remember there are no best practices established

in e-procurement
¾ Note that there are other unquantifiable risks and

issued
19
e-Procurement
• With respect to the 12 tips in e-procurement

which ones has your organization considered?
Which ones has it violated?
20
10
e-Procurement
• Reverse auctions
¾ Steps
o Define the event
o Prepare your suppliers
o Develop item specifications and auction parameters
Conduct an RFQ period
o Run the auction
21
e-Procurement
• Reverse auctions
¾ Issues
o Suppliers view it is solely on price thus affecting

quality
o Potential unethical behaviors by buyers and suppliers
o May drive long term suppliers out of the supply chain
o Adverse effect on relationship development
22
11
e-Procurement
• Discussion: Reverse Auctions
¾ For a member of your group, set up a

reverse auction for the provision of a
service.
¾ What are some of the expected cost

savings?
23
e-Procurement
• Case discussion: Boeing Australia Limited
¾ Are there limitations to BAL’s current

practices? What are they?
24
12
e-Procurement
¾ What issues need to be considered in

upgrading BAL’s procurement platform?
25
e-Procurement
¾ Is the company’s size important?
26
13
e-Procurement
¾What are the potential costs and benefits?
27
Session Objectives
9 Describe electronic data interchange,

e-catalogs, e-marketplaces and e-
auctions.
9 Discuss the advantages of e-

procurement.
9 Discuss the disadvantages of e-

procurement.
28
14
Session Objectives
9 Lead a discussion on the many aspects

of and potential of e-procurement for
your organization.
9 Apply the steps in reverse auctions.
9 Assess the impact of reverse auctions

on total costs and supplier relations.
29
15
Session 12
Session Agenda
• P-Cards: benefits
• P- Cards: considerations in implementation
• Vendor (Supplier) managed inventory
• Just in Time
• Just in Time II
• Course wrap up
• Discuss module exam requirements
1
Session Objectives
1. Describe the benefits available

through effective use of p-cards.
2. Understand the challenges related to

implementing a p-card program.
3. Estimate the savings from

implementing p-cards at your
organization
4. Understand the dual gains to vendors

(suppliers/manufacturers) and buyers
possible from vendor managed
inventories.
3
Session Objectives
5. Describe the benefits of a vendor

managed inventory approach.
6. Develop a VMI inventory

implementation plan.
7. Describe how JIT II works along with

its benefits.
2
Are p-cards used in your organization?
If they are used what steps did you go through in the implementation?
What were the cost savings?
What were the potential risks?
Does your organization use vendor managed inventory? Why?
Should your organization be using vendor managed inventory?
What would be the benefits of vendor managed inventory for your
organization?
What steps would your organization take in implementing vendor
managed inventory?
What are the strategic and tactical changes I will make (or attempt to
make) to my job/department/organization?
What is the one most important thing I learned?
• Benefits of P-cards
¾ Speed
¾ Information availability
¾ Employee morale
¾ Supplier goodwill
¾ Cost savings
¾ Directed spend to preferred suppliers
3
• Considerations in p-card implementation
1. Controlling p-card behavior
2. Organizational issues
3. Integration issues
4. Implementation issues
• Controlling p-card behavior
¾ Who
¾ Dollar limits
¾ Item types
¾ Documentation and Approval
¾ Other
4
• Organizational Issues
¾ Location of p-card management
¾ Encouraging use
• Integration Issues
¾ Into data systems
¾ Into policy systems
• Implementation Issues
¾ Challenges
o Build general support

o Obtain senior management support
o Avoid over control
o Allocate sufficient resources
o Hire the right administrator
o Define goals
o Expand program
o Report successes
10
5
• Discuss the following:
¾ Are p-cards used in your organization?
¾ If they are used what steps did you go

through in the implementation?
¾ What were the cost savings?
¾ What were the potential risks?
11
• What were the cost savings your group

identified?
¾ How would they be measured?
• What were the risks you identified
¾ How could they be mitigated?
12
6
• Vendor (Supplier) Managed Inventory
¾ Supplier Benefits:
o Partnering
o Long term relationships
o Smoothing demand
¾ Buyer Benefits:
o Lower inventory costs

o Lower administrative costs
o Potentially improved lead times
13
• Vendor (Supplier) Managed Inventory
¾ Steps in Implementation
o Analysis
o Gaining support
o Negotiation
o Development
o Testing
o Implementation
o Improvement
14
7
• Discuss the following:
¾ Does your organization use vendor

managed inventory? Why?
¾ Should your organization be using vendor

managed inventory?
¾What would be the benefits of vendor

managed inventory for your organization
15
•Vendor (supplier) managed inventory
•For a goods producing organization (a member

of your group) prepare a vendor managed
inventory implementation plan. Identify the
risks.
16
8
• JIT II
¾ Conditions to use JIT II
o Trust based relationship with supplier

o Supplier must be very good
o Supplier employee has authority
o Sufficient volume and value to make it
worthwhile
o Not in an area with trade secrets
17
• JIT II
¾ Benefits to buyer of JIT II
o Reduce lead times and inventory levels

o Better understanding of requirements
o Easier to integrate supplier into product
development
o Reduced administrative costs
o Reduced transportation costs
18
9
• JIT II
¾ Benefits to supplier of JIT II
o Creates a very long relationship

o Improved communication
o Reduced transportation costs
19
• What are the strategic and tactical changes I

will make (or attempt) to make to my
job/department/organization (as applicable)?
20
10
• What is the one most important thing I

learned?
21
Session Objectives
9 Describe the benefits available

through effective use of p-cards.
9 Understand the challenges related to

implementing a p-card program.
9 Estimate the savings from

implementing p-cards at your
organization
9 Understand the dual gains to vendors

(suppliers/manufacturers) and buyers
possible from vendor managed
inventories.
22
11
Session Objectives
9 Describe the benefits of a vendor

managed inventory approach.
9 Develop a VMI inventory

implementation plan.
9 Describe how JIT II works along with

its benefits.
23
Module 2 Exam Requirements

See session 13 in the Candidate Manual
Exam case
Exam instructions
Exam format and content (same as written case report)
24
12

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CPP SSCMLP Manual Covers 9/21/06 11:53 AM Page 1

Professionals in Supply Chain Management

Strategic Supply Chain Management Leadership Program

Procurement and Supply

© Purchasing Management Association of Canada i

Information and Overview………………………………………………….…IO – 1

Session One – Tactical and Strategic Procurement…………………..…………S1 – 1

Session Two – Procurement Processes…………………………….……..……..S2 – 1

Session Three – Competitive Bidding and Negotiation…………..………..……S3 – 1

Session Four – Procurement and Supply Management Organization……..…….S4 – 1

Session Five – Make or Buy…………………………………………..………....S5 – 1

Session Six – Price and Cost Analysis………………………………….………...S6 – 1

Session Seven – Quality and Inventory…………………………………………..S7 – 1

Session Eight – Supplier Selection…………………………….…………………S8 – 1

Session Nine – Supplier Development and Certification…………..…………….S9 – 1

Session Ten – Services Procurement…………………………………………….S10 – 1

Session Eleven – E-Procurement………………………………………………...S11 – 1

Session Twelve – Involving Users and Suppliers………………………………..S12 – 1

Session Thirteen – Module Ending Examination………………………………...S13 – 1

Appendix: PowerPoint Slides

© Purchasing Management Association of Canada ii

© Purchasing Management Association of Canada IO - 1

The Program is designed so that learning can be applied immediately in the

© Purchasing Management Association of Canada IO - 2

General Information, continued

Workload As a general rule, candidates should expect to spend an average of 10 hours of

© Purchasing Management Association of Canada IO - 3

General Information, continued

• Assume a strategic point-of-view when doing all readings and assignments

© Purchasing Management Association of Canada IO - 4

Introduction Procurement is the process of acquiring goods and services by organizations.

© Purchasing Management Association of Canada IO - 5

Module Overview, continued

Module Upon completion of this module candidates should be able to:

• Understand the elements of procurement strategy.

• Develop procurement strategy.

• Apply, or direct others in the application of tools to evaluate suppliers, and

© Purchasing Management Association of Canada IO - 6

Module Overview, continued

© Purchasing Management Association of Canada IO - 7

Module Materials included in this manual:

Each Session contains the following –

The Appendices contains –

Materials included in the Readings and Cases manual:

Information included in the Session Schedule:

Materials available on the Internet:

© Purchasing Management Association of Canada IO - 8

A1. Pages 239-246, 250-251

B. Leenders, Johnson, Flynn and Fearon, (2006) Purchasing and Supply

C. Ritzman, Krajewski, Malhotra and Klassen (2007). Foundations of Operations

D. Cavinato, Joseph, L. Fitting Purchasing to the Five Stages of Strategic

E. Heath, Stanley. Tackling Spend Analysis. Contract Management. January 2006.

F. Zsidisin, George A. A Grounded Definition of Supply Risk. Journal of

G. Wheeler, Michael (date). Negotiation Analysis: An Introduction. Harvard

H. Johnson and Leenders. The Supply Organizational Structure Dilemma. Journal

I. Prahalad, C. K. and Hamel, Gary. The Core Competence of the Corporation.

J. Ellram, Lisa. Total Cost of Ownership: Elements and Implementation. National

© Purchasing Management Association of Canada IO - 9

Module Readings, continued

M. Wilson, Elizabeth J. The Relative Importance of Supplier Selection: Review

N. Smytka, Daniel L and Clemens, Michael W. Total Cost Supplier Selection: A

Q. Krause, Daniel D. Supplier Development: Current Practices and Outcomes.

R. Lockhart, Marsetta and Ettkin, Lawrence. Vendor Certification: Seven Steps to a