Chapter 4

Procurement and Supply

Management

Chapter 4

Materials Management

Definition - Materials management is the

planning and control of the flow of
materials that are part of the inbound
logistics system.
Materials Management Activities
Procurement
Importance of Item and Service
Purchased
Other Materials Management Activities

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Materials Management:
Procurement

Importance
Contributes to the competitive
advantage of the firm
Significant portion of the logistics costs
Act Vs Process of obtaining Goods &
Services
Directly affects Finished good, quality,
Customer Satisfaction & Revenues.

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Materials Management:
Procurement

Procurement Process Activities

Identify or reevaluate needs

Define and evaluate user requirements

Note or Packet, justified

Decide whether to make or buy

Identify the type of purchase
Conduct a market analysis

New or existing e.g Cash Handling Machines

Competitive, Oligopolistic, Monopolistic

Identify all possible suppliers

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Materials Management:
Procurement

Definition of Procurement Activities

Prescreen all possible sources

Evaluate the remaining supplier base

Suppliers best meet users demand/negotiable

desire

Choose a supplier

User demands and desires

Reliability, Quality, Price etc

Receive delivery of the product or service

Make a post purchase performance evaluation

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Figure 4-2
Procurement Process

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Materials Management:
Importance of Item and Service
Purchased

Products and services purchased by a

company are not all the same.
Some are more important than others
and require greater procurement
attention.
The quadrant technique enables the
supply chain manager to assess the
relative importance of each item based
on the degree of perceived value and
risk.

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Materials Management:
Importance of Item and Service
Purchased

There are four possible combinations in the

quadrant techniques model:
Generics --- low risk, low value

Commodities --- low risk, high value

E.g. Bolts, packaging, transportation

Distinctives --- high risk, low value

Not part of final product e.g. Office Supplies

Long lead time, limited suppliers, engineeritems

Criticals --- high risk, high value

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Critical for final product e.g. computer chips

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Figure 4-3
Item Procurement Importance Matrix

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Materials Management:
Managing the Procurement
Process in 4 Steps

1. Determine the type of

purchase
New
Straight rebuy
Modified rebuy

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Materials Management:
Managing the Procurement
Process in 4 Steps

2. Identify the type of

purchase

Determine the necessary levels of

investment of time and information.
The more complex the purchase, the
more time needs to be spent and
more information needs to be
gathered to get it right the first time.

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Materials Management:
Managing the Procurement
Process in 4 Steps

3. Perform the procurement process

Do those activities that are necessary
to effectively make a purchase and
satisfy the users requirements.
4. Evaluate the effectiveness of the
procurement process
Were the users needs satisfied?
Was the investment necessary?

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Materials Management:
Managing the Procurement
Process

Supplier/Vendor Evaluation and

Relationships
Maintaining a healthy vendor relationship
is a critical part of a successful supply
chain.
Developing a true partnership
relationship with a firms vendors grows
more important as the number of vendors
shrinks and/or the vendors are being
sought by other competing supply chains.
TQM begins with the vendors.

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Materials Management:
Managing the Procurement
Process

Vendor Selection Criteria

Quality
Reliability
Capability
Financial
Miscellaneous Other Qualities
Vendor Location
Factor Importance Will Vary

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Figure 4-4
Overview of Vendor Selection
Criteria

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Materials Management: The

Special Case of Procurement
Price

Sources of Price
Commodity markets

Price lists

Standard Products e.g. appliances, office supplies

Price quotations

Basic raw material e.g. Oil, grain, coal etc

To promote competition, RFQ

Negotiation

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Procedure for all sources

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Materials Management: The

Special Case of Procurement
Price

Types of Costs
Traditional basic input costs - primary
product price
Direct transaction costs - all other related
costs of detecting and transmitting
information to suppliers (e.g., EDI)
Supply relational costs - costs of
maintaining relationships with suppliers

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Travel, S education, establishment of Planning &

Operational Links
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Figure 4-6
Total Procurement Price

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Materials Management: The

Special Case of Procurement
Price

Other types of Costs

Actual transport costs + sales terms
Quality costs/factors do the goods conform to standard?

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Figure 4-7 Overview of Production

Planning and Control

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Materials Management: The

Special Case of Procurement
Price

Other types of Costs

Operations/logistics costs
Receiving and make-ready costs
Lot size costs

Production costs

Chapter 4

Affect space requirement, handling flow, unit price

Raw material quality, differing production processes,
in-transit humidity can affect production line speed,
waste, cost of production, unit price

Other logistics costs affected by

products size, weight, density and shape
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Materials Management:
Other Materials Management
Activities

Warehousing
Type of facilities
required
Production
Planning and
Control
Coordinating
product supply with
product demand
Chapter 4

Transportation
Vendor control
Modal choice
Rush shipments
Inspection
Damage claims

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Materials Management:
Other Materials Management
Activities

Quality Control
Quality standards

did customer receive what was

ordered?
Quality implications

GIGO concept
Sample inspection

statistical QC from vendor to assure

100% quality

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Materials Management:
Other Materials Management
Activities

Salvage and Scrap Disposal

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

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Electronic Procurement

Business-to business (B2B) purchases are

estimated to be $1.3 to $2.0 trillion by
20036.
Former uses of electronic data interchange
(EDI) were costly and required special
technology to implement have given way to
the publicly available Internet.
This has opened the door to increased
applications of E-commerce techniques to
procurement.

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Electronic Procurement

Common uses of E-commerce

Research vendor and product
information
Electronic check of available stock
Price negotiation
Order products or services
Check on the status of an order
Issue invoice and receive payment

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Figure 4-8
Advantages of Electronic
Procurement

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Electronic Procurement

Advantages of E-commerce outlined

in Figure 4-8.
Disadvantages
Security of electronic messages
Lack of face-to-face contact
Other technological concerns

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Standard protocols
System reliability
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Four Basic Types of Ecommerce Models7

Sell-side system
Administered by the seller
Usually free to the buyer
Electronic marketplace
Administered by a third party
Collection of electronic catalogs
One-stop sourcing for buyers

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Types of E-commerce Models

Buy-side system
Administered by the buyer
Pre-approves vendor access
Expensive and usually the domain of
large companies
On-line trading community
Maintained by a third party
Used by multiple buyers and sellers

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

This is the last slide for

Chapter 4

31

End of Chapter 4 Slides

Procurement and
Supply Management
Chapter 4

32