Introduction

For a single company, its logistics system can be divided into:

Inbound logistics - material management and procurement Outbound logistics - customer service and channels of distribution

Procurement and Supply Management

(Chapter 13 of Langley et al., 2009)

This chapter focuses on inbound side. Inbound and outbound share common activities or processes. Both, inbound and outbound, involve decisions related to:
transportation, warehousing, materials handling, inventory management and control, packaging, etc.
2

Shinawatra University (SIU)

Shinawatra University (SIU)

Inbound Logistics along the Supply Chain

A supply chain made up of a series of individual companies that have important differences in the inbound systems of each company. Below graphic is an example of each firm in a food system supply chain and value being added along the supply chain. Mining firm (coal mine) Steel mill Container plant Food processor Store, Retailer Customer

Industry Supply Chain Logistics Emphasis

INDUSTRY
Extractive (e.g. Mining) Manufacturing Channel intermediary Retailer E-tailer End user

SUPPLY CHAIN LOGISTICS EMPHASIS

One-way; outbound Two-way; inbound and outbound Two-way; inbound and outbound Two-way; inbound and outbound Two-way; inbound and outbound One-way; inbound

A Food System Supply Chain

Shinawatra University (SIU)

Shinawatra University (SIU)

Materials Management
Materials management is the planning and controlling of the flow of materials that are part of the inbound logistics system. The outbound logistics system is usually called physical distribution Materials management activities:
procurement, warehousing, production planning and control, inbound transportation, receiving, materials quality control, inventory management and control, salvage and scrap disposal.
5

Procurement
Definition of Procurement
Narrow perspective: the act of buying goods and services for the firm. Broader perspective: the process of obtaining goods and services for the firm.

Importance
Contributes to the competitive advantage of the firm Link members in the supply chain Assure the quality of suppliers in the chain Significant portion of the logistics costs

Shinawatra University (SIU)

Shinawatra University (SIU)

Procurement
11 Activities in Procurement Process
Identify or re-evaluate needs Define and evaluate user requirements Decide whether to make or buy Identify the type of purchase (new buy, straight rebuy, or modified rebuy) 5. Conduct a market analysis Competitive market (many suppliers) Oligopolistic market (a few large suppliers) Monopoly market (one supplier) 6. Identify all possible suppliers 7. Pre-screen all possible sources. Need to differentiate demands and desires Demands: characteristics that are critical to the user. Desires: are not critical and are negotiable. 8. Evaluate the remaining supplier base 9. Choose a supplier 10. Receive delivery of the product or service 11. Make a post purchase performance evaluation
Shinawatra University (SIU)
7

Needs analysis

1. 2. 3. 4.

Procurement Process
Competitive market (many suppliers) Oligopoly market (a few large suppliers) Monopoly market (one supplier)

1 2 3

-Identify needs -User requirements Make or buy decision Buy Make Buy some components

Purchase type -New buy -Straight rebuy -Modified rebuy Select vendor

Need to differentiate demands and desires Demands: characteristics that are critical to the user. Desires: are not critical and are negotiable. Evaluate supplier performance 11

5 6 7 8 9 10

-Market analysis -Potential vendors -Prescreen potential sources -Evaluate remaining sources -Choose vendor Product or service delivery

Post-purchase performance evaluation

Importance of Item and Service Purchased

Products and services purchased by a company are not all the same. Some are more important than others and require greater procurement attention,
such as computer chip vs. paper clip.

Item Procurement Importance Matrix

Risk reflects the chance of failure (to serve customers), nonacceptance in the marketplace, delivery failures, and source nonavailability.

DISTINCTIVES

CRITICALS
High risk, high value - Unique items - Items critical to final product

Risk or Uniqueness

High risk, low value -Engineered items (e.g. machines unique parts)

GENERICS
Low risk, low value - Office supplies - MRO items
(MRO: Maintenance, Repair, and Operating)

COMMODITIES
Low risk, high value - Basic production items - Basic packaging

The quadrant technique enables the supply chain manager to assess the relative importance of each item based on the degree of perceived value and risk. There are four possible combinations in the quadrant technique model, as shown in the next slide.

Value or Profit Potential

Shinawatra University (SIU)
9 competitive advantage

Value: Product/Service features that enhance profits for the final product and can maintain a

Managing the Procurement Process

Four steps approach for managing the procurement process to maximize effectiveness
1. Determine the type of purchase 2. Determine the necessary levels of investment 3. Perform the procurement process 4. Evaluate the effectiveness of the procurement process

Managing the Procurement Process

2. Determine the necessary levels of investment
Investment of time and information. The more complex the purchase, the more time and more information needs to get it right the first time.

3. Perform the procurement process

Perform activities necessary to effectively make a purchase and satisfy the users requirements. Collect data on the time and information actually used in a specific purchase.

1. Determine the type of purchase Straight rebuy:

all of the procurement activities were completed previously (when modified or new buy) activities necessary would be 4, 9, 10, and 11. (in procurement process)

4. Evaluate the effectiveness of the procurement process

Were the users needs satisfied? Was the investment necessary? The goal is to invest only enough time and information to satisfy the users needs. If not effective, take corrective action to make sure the effectiveness in the future
Shinawatra University (SIU)
12

Modified rebuy New buy

11

Shinawatra University (SIU)

Supplier/Vendor Evaluation and Relationships

Strategy to have a smaller number of suppliers/vendors:
be an alliance or partnership.

Vendor Selection Criteria

Quality Technical specifications Chemical and physical properties Design Product life Ease of repair Maintenance Dependability Reliability On-time delivery Performance history Warranty Capability Product capability Technical capability Management Operating controls Labor relations Financial Price Financial stability Desirable qualities (not always necessary) Vendor attitude Training aids Packaging Vendor location Repair service

Quality management is requires for quality materials and parts. Maintaining a healthy vendor relationship is a critical part of a successful supply chain. Developing a true partnership because:
the number of vendors are limited and/or the vendors are being sought by other competing supply chains.
Shinawatra University (SIU)
13

Importance of factors will vary.

Shinawatra University (SIU)
14

Total Procurement Price

The Special Case of Procurement Price
TYPES OF COSTS:

Sources of Price Basic procedures to determine potential vendors prices: Commodity markets
For basic raw material such as oil, sugar, etc.

Price lists
are published price that used with standardized products such as office supplies.

Price quotations
Use for both standard and specialty items.

Basic input cost (price) + Direct transaction costs + Supplier relationship costs + Landed/Transportation costs + Quality costs + Operations/logistics costs -------------------------------------------TOTAL PROCUREMENT PRICE =========================

Basic input costs: primary product price Direct transaction costs: all other related costs of detecting and transmitting information to suppliers (e.g., EDI) Supplier relationship costs: costs of creating and maintaining relationships with suppliers Landed costs: actual transport costs + sales

terms
Quality control costs: do the goods conform to standard? Operations/logistics costs: 4 key areas
1. Receiving and make-ready costs 2. Lot-size costs: affect space requirement 3. Production costs 4. Logistics costs (affected by product size, weight, shape, etc.)

Negotiation
Useful when the other methods do not apply or have failed. Good for long term relationship
Shinawatra University (SIU)
15

Shinawatra University (SIU)

Impact to transportation (besides the landed costs), 16 handling, storage, and damage costs.

Other Materials Management Activities

Warehousing
Different from finished goods storage: Type of facilities required Value of the stored items Product perishability

Other Materials Management Activities

(contd) Material Quality Control
Define the materials quality:
Dimensions, Design specifications, Chemical or physical properties, Reliability, Ease of maintenance, Ease of use, Brand, market grade, Industry standard.

Inbound Transportation
Vendor control Less pressure to provide rush shipments than outbound

Salvage and Scrap Disposal

Value of scrap may be income to the firm. Disposal must adhere to environmental regulations.

Receiving
Actual physical receipt Compare actual and purchase order Examine for physical damage

Production Planning and Control

Coordinating product supply with product demand
Shinawatra University (SIU)
17

Does material received meet the quality standard? GIGO (Garbage In Garbage Out) concept Sample inspection - statistical quality control
18

Shinawatra University (SIU)

Electronic Procurement
Common uses of E-commerce: Search vendor and product information; Electronic check of available stock; Price negotiation; Order products or services; Check on the status of an order; Issue invoice and receive payment.

Advantages and Disadvantages of Electronic Procurement

ADVANTAGES
Lower operating costs
Reduce paper work Reduce sourcing time Improve control over inventory and spending

DISADVANTAGES
Security of electronic messages Lack of face-to-face contact, supplier relationship Other technological concerns
Standard protocols System reliability

Improve procurement efficiency

Find new supply sources Improve communications Lower cycle times

Reduce procurement prices

Improve comparison shopping Reduce overall prices paid

Shinawatra University (SIU)

19

Shinawatra University (SIU)

20

Four Basic Types of E-commerce Models

1. Sell-side system Administered by the seller Usually free to the buyer 2. Electronic marketplace Administered by a third party Collection of electronic catalogs One-stop sourcing for buyers 3. Buy-side system Administered by the buyer Pre-approves vendor access Expensive and usually the domain of large companies 4. On-line trading community Maintained by a third party Used by multiple buyers and sellers For instance: ebay.com, alibaba.com

End of Chapter

Procurement and Supply Management

Shinawatra University (SIU)

21

Shinawatra University (SIU)