Chapter 5: Inbound Logistics

Engr. Darlene Gayle D. Dela Fuente, MSEM, CLSSGB

Department of Industrial Engineering
IE 420
Inbound • The way materials and other goods are brought into a company.
• Includes the steps to order, receive, store, transport and manage

Logistics
incoming supplies.
• focuses on the supply part of the supply-demand equation.
• refers to the transportation, storage, and
receiving of goods into a business.
• It relates to goods procurement for office use
or the production unit.

Inbound Logistics
Inbound vs
Outbound?
Inbound vs Outbound Logistics

Inbound Logistics Outbound Logistics

• Includes receiving of raw material or supplies
from a supplier to an inbound warehouse
• Focuses on supply
• The flow of material is from suppliers,
manufacturers, or distributors to a retailer, brand,
or 3PL provider
• Activities involved are material sourcing, material
management, and warehouse receiving
• Involves interaction between supplier and the
company.
• Includes delivery of finished products to end-
customer
• Focuses on demand
• The flow of material/goods from a company,
brand, or retailer to customers
• Processes involved are shipping, delivery, and
customer service
• Involves communication between the company
and end-customers
 Processes involved in Inbound Logistics Services

Finding out Placing an Deciding the Unloading Moving the

Sourcing & Procurement

Purchasing or Ordering

Receiving

Material Management
Transportation
potential order of the mode of trucks ad received
suppliers, goods or raw transportation receiving the material
getting price material that and discussing ordered within the
quotes, and the company price and material, and facility
managing requires. route with the ensuring its
suppliers third-party quantity and
carrier. quality.
 Processes involved in Inbound Logistics Services

Storing the Keep track of Sending Bringing the

Inventory Management
Storing and Warehousing

Reverse logistics
Distribution and Tracking
material in the the inventory. material or raw material of
right conditions goods to the goods back to
before distributors and the facility in
transporting it tracking them case of defects,
to the in real time delivery issues,
manufacturer. repair and
other problems
Advantages of Inbound Logistics

Predictable Superior Timely and

raw material product cost-
cost quality controlled
deliveries

Lower Improved Stronger

shipping and inventory vendor
receiving costs management relationships
Challenges in
Inbound Logistics
• Shipping inefficiencies
• Lack of information on the
shipment
• Improper management of
deliveries and receiving
• Inability to process returns
• Communication gap with suppliers
• High inbound transportation cost
• Fluctuations in supply and
demand
 IDENTIFY YOUR CURRENT MAINTAIN A STRONG BUILD STRATEGIES TO USE A TRANSPORT
PROCESSES AND EVALUATE RELATIONSHIP WITH ADDRESS INEFFICIENCIES MANAGEMENT SYSTEM.
YOUR REQUIREMENTS. SUPPLIERS

How to Optimize Inbound Logistics?

 INCOTERMS

The word INCOTERM is an abbreviation for International Commercial Terms.

Provide a common set of rules used for defining the responsibilities of sellers and buyers in the delivery
of goods under sales contracts. They are widely used in international commercial transactions.

INCOTERM rules are standard sets of trading terms and conditions designed to assist traders when goods
are sold and transported.

Prevent confusion in foreign trade contracts by clarifying the obligations of buyers and sellers.
INCOTERM Rule specifies

• the obligations of each party

(e.g. who is responsible for
services such as transport;
import and export clearance
etc.
• the point in the journey
where risk transfers from the
seller to the buyer.
Understanding the INCOTERM

• The International Chamber of Commerce

(ICC) developed Incoterms in 1936 and
updated them periodically to conform to
changing trade practices.
• To promote open markets and ensure global
economic prosperity through trade.
• the ICC established rules are commonly used
by buyers and sellers as a regular part of
trade transactions.
• Incoterms provide a universal set of rules
and guidelines that help facilitate trade. In
essence, they provide a common language
traders can use to set the terms for their
trades.
Importance of Incoterms

• Set international rules for commonly

used terms in foreign trade.
• Define the obligations of both parties
involved in the transaction
• Determine the distribution and
transfer of risks regarding the goods
delivered from the seller and buyer.
• State the clear sharing of expenses
between the parties during transport.
11 Incoterms
 Incoterms®2020 Rules Responsibility Quick Reference Guide

a
a IncoDocs

Freight Collect Terms Freight Prepaid Terms

Groups el seein a Sea and Inland Waterway Transport Any Mode or Modes of Transport

Inc ote rm
| EXW_| FCA | FAS | FOB | CFR | CIF_| CPT | CIP | DAP | DPU | DDP_
Ex Works Free Carrier Free Free On Cost and Cost Carriage Paid} Carriage & Delivered at Delivered at Delivered
(Place) (Place) Alongside | Board (Port) | Freight (Port)| Insurance & | To(Place) }!nsurance Paid} Place (Place) [Place Unloaded] Duty Paid
Ship (Port) Freight (Port) to (Place) (Place) (Place)

Obligations & Charges:

Export Packaging Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller

Loading Charges Buyer Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller

Buyer Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller

Serb tap boos

Customs Clearance
Buyer Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller
CO hmnee Buyer Buyer Seller Seller Seller Seller Seller Seller Seller Seller Seller

Loading on Carriage Buyer Buyer Buyer Seller Seller Seller Seller Seller Seller Seller Seller

Carriage Charges Buyer Buyer Buyer Buyer Seller Seller Seller Seller Seller Seller Seller

| Insurance Negotiable Negotiable Negotiable Negotiable Negotiable *Seller Negotiable “Seller Negotiable Negotiable Negotiable

Buyer Buyer Buyer Buyer Buyer Buyer Seller Seller Seller Seller Seller
Delivery to
Destination Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Seller Seller Seller
Unloading at
Destination Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Seller Buyer
Import Duty, Taxes &
Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Seller
Customs Clearance
*CIF requires at least an insurance with the minimum cover of the Institute Cargo Clause (C) (Number of listed risks, subject to itemized exclusions)
<a **CIP now requires at least an insurance with the minimum cover of the Institute Cargo Clause (A) (All risk, subject to itemized exclusions)
. Y Tatere) Docs Create your Sales & Shipping Documents at www.incodocs.com —CoPyright ©2020 IncoSolutions Pty Ltd. All Rights Reserved.
This is general information for guidance purposes only. IncoSolutions Pty Ltd is not responsible for these contents nor do the contents listed above contain all
details. For a full and complete description, refer to the fullversionof Incoterms 2820 by the International Chamber of Commerce at the ICC website.
Transportation Definitions
• Pre-carriage - inland transportation on the
seller’s side --*empty container.
 Domestic: from the place where the
shipment starts to any subsequent
transportation carriage.
 International: from the place where the
shipment starts to the departure point on
the seller’s side.
• Main Carriage
 Domestic: subsequent transportation
beyond pre-carriage.
 International: transportation from the
point of departure on the seller’s side to
the arrival point on the buyer’s side.
Transportation Definitions
• On-carriage - *full container-unpacking
 Domestic: subsequent transportation
beyond the main carriage.
 International: transportation from the arrival
point on the buyer’s side.
• Door-to-Door – Contract of carriage that includes
pre-carriage, main carriage, and on-carriage by
the same carrier.
• Door-to-(Air)Port – Contact of carriage including
pre-carriage and main carriage to airport or ocean
port or truck terminal port or rail port.
• (Air)Port-to-(Air)Port – contract of carriage for
main carriage only
• (Air)Port-to-Door – Contract of carriage including
main and on-carriage
 SHIPMENT CONTRACT – ARRIVAL CONTRACT –
Contracts

SALES/PURCHASE CONTRACT SALES/PURCHASE CONTRACT

WHERE THE SELLER’S WHERE SELLER’S RESPONSIBILITY
RESPONSIBILITY ENDS WHEN ENDS WHEN GOODS HAVE
GOODS ARE HANDED OVER TO ARRIVED AT AGREED PLACE
THE FIRST CARRIER.
 • Can be used for any transport mode, or where there is
more than one transport mode.
• the seller delivers when it places the goods at the
disposal of the buyer at the seller’s premises or
another named place (ie. works, factory, warehouse,
etc.).

Ex-Works
(EXW)
 EXW
This rule places minimum responsibility on the seller, who merely has to
make the goods available, suitably packaged, at the specified place,
usually the seller’s factory or depot.

In many cross-border transactions, this rule can present practical

difficulties.

Specifically, the exporter may still need to be involved in export reporting

and clearance processes, and cannot realistically leave these to the buyer.
 • Can be used for any transport mode, or where
there is more than one transport mode.
Free Carrier (FCA) • A very flexible rule that is suitable for all
situations where the buyer arranges the main
carriage.
FCA

• Seller arranges pre-carriage

from seller’s depot to the
named place, which can be a
terminal or transport hub,
forwarder’s warehouse etc.
Delivery and transfer of risk
takes place when the truck or
other vehicle arrives at this
place, ready for unloading – in
other words, the carrier is
responsible for unloading the
goods.
• Where the named place is the
seller’s premises, then the seller
is responsible for loading the
goods onto the truck etc.
Free Alongside Ship (FAS)

• Use of this rule is restricted to goods

transported by sea or inland
waterway.
• In practice it should be used for
situations where the seller has direct
access to the vessel for loading, e.g.
bulk cargo or non-containerized
goods.
• For containerized goods, consider
“Free Carrier FCA” instead.
• Seller delivers goods, cleared for
export, alongside the vessel at a
named port, at which point risk
transfers to the buyer.
• The buyer is responsible for loading
the goods and all costs thereafter.
Free on Board • Use of this rule is restricted to goods transported
by sea or inland waterway.

(FOB) • In practice it should be used for situations where

the seller has direct access to the vessel for
loading, e.g. bulk cargos or non-containerized
goods.
• For containerized goods, consider “Free Carrier
FCA” instead.
Carriage Paid To
(CPT)
• Can be used for any transport
mode, or where there is more
than one transport mode.
• The seller is responsible for
arranging carriage to the
named place, but not for
insuring the goods to the
named place.
CPT
Carriage and
Insurance Paid to
(CIP)
• Can be used for any
transport mode, or where
there is more than one
transport mode.
• The seller is responsible for
arranging carriage to the
named place, and also for
insuring the goods.
Cost and Freight (CFR)

• Use of this rule is restricted to goods

transported by sea or inland waterway.
• In practice it should be used for situations
where the seller has direct access to the
vessel for loading, e.g. bulk cargos or non-
containerized goods.
• For containerized goods, consider ‘Carriage
Paid To CPT’ instead.
CFR
• Seller arranges and pays for
transport to named port. Seller
delivers goods, cleared for
export, loaded on board the
vessel.
• However risk transfers from
seller to buyer once the goods
have been loaded on board,
i.e. before the main carriage
takes place.
 • Use of this rule is restricted to goods transported by sea or inland
waterway.
• In practice it should be used for situations where the seller has
direct access to the vessel for loading, e.g. bulk cargo or non-
containerized goods.
Cost • For containerized goods, consider ‘Carriage and Insurance Paid
CIP’ instead.
Insurance
and Freight
(CIF)
CIF

• Seller arranges and pays for

transport to the named port.
Seller delivers goods, cleared for
export, and loaded on board the
vessel.
• However, risk transfers from seller
to buyer once the goods have
been loaded on board, i.e. before
the main carriage takes place.
• Seller also arranges and pays for
insurance for the goods for
carriage to the named port.
Delivered at Place
Unloaded – Incoterms
2020
Delivered at Terminal (DAT) – Incoterms 2010

• Can be used for any

transport mode, or where
there is more than one
transport mode.
• The seller is responsible for
arranging carriage and for
delivering the goods,
unloaded from the arriving
means of transport, at the
named place.
 DPU
• Risk transfers from seller to buyer when the goods
have been unloaded.
• ‘Terminal’ can be any place – a quay, container
yard, warehouse or transport hub.
• The buyer is responsible for import clearance and
any applicable local taxes or import duties.
• Things to watch for:
 The place for delivery should be specified as
precisely as possible, as many ports and
transport hubs are very large.
 A useful rule, well suited to container
operations where the seller bears
responsibility for the main carriage.
Delivered at Place
(DAP)
• Can be used for any transport
mode, or where there is more than
one transport mode.
• The seller is responsible for
arranging carriage and for
delivering the goods, ready for
unloading from the arriving means
of transport, at the named place.
• Risk transfers from seller to buyer
when the goods are available for
unloading; so unloading is at the
buyer’s risk.
• The buyer is responsible for import
clearance and any applicable local
taxes or import duties.
 Delivered Duty Paid (DDP)
• Can be used for any transport mode, or where there is more than one transport mode.
• The seller is responsible for arranging carriage and delivering the goods at the named place,
cleared for import and all applicable taxes and duties paid (e.g. VAT, GST)
DDP
• Risk transfers from seller to buyer when the
goods are made available to the buyer, ready
for unloading from the arriving means of
transport
• This rule places the maximum obligation on
the seller, and is the only rule that requires
the seller to take responsibility for import
clearance and payment of taxes and/or
import duty.
• These last requirements can be highly
problematical for the seller. In some
countries, import clearance procedures are
complex and bureaucratic, and so best left to
the buyer who has local knowledge.
Classification
of Incoterms
Incoterms
20270 by the International
TRANSPORT OBLIGATIONS,
COSTS AND RISKS
Chamber of Commerce (ICC) Blue indicates seller’s Gold indicates buyer’s Green indicates mixed or shared

RULES FOR ANY MODE OR MODES OF TRANSPORT

EXW ex works CIP Carriage and Insurance Paid To

(Insert named place of
delivery) Incoterms® 2020 LH | as | a) (Insert named place of
destination) Incoterms® 2020
(ame | jn | Lh | a]

im.
COSTS >
im wh
COSTS
dag
RISKS> RISKS —>
INSURANCE
Export Import
formalities formalities
Export Import
formalities formalities

FCA Free Carrier DAP Delivered at Place

(Insert named place of
delivery) Incoterms® 2020
(Insert named place of
destination) Incoterms® 2020 [am]
A | oe | a)
fae
costs >
itole
RISKS —p-

Ex
formalities formalities

DPU Delivered at Place Unloaded

(Insert named place of
destination) Incoterms® 2020 (am | | tt | a)
Export
formalities
[Ph

CPT Carriage Paid To Export Import

formalities formalities
(Insert named place of
destination) Incoterms® 2020 (sem | wan | baa | »—}

CSEar ir
DDP bDelivered Duty Paid
im hh E_| (Insert named place of
cosTS destination) Incoterms® 2020
RISKS —>

Export
formalities
Import
formalities ile
Export my
formalities formalities
 RULES FOR SEA AND INLAND WATERWAY TRANSPORT

FAS Free Alongside Ship CFR cost and Freight (a)

(Insert named port of loading) Incoterms® 2020 (Insert named port of destination) Incoterms” 2020

a. Pee: ae esyf
COSTS >
ot
—> COSTS
RISKS > > RISKS
Import Export Import
formalities formalities formalities

FOB Free on Board CIF Cost, Insurance and Freight (a)

(Insert named port of loading) Incoterms® 2020 (Insert named port of destination) Incoterms” 2020

a ee: ae > COSTS

esgg
COSTS >
o@> COSTS
> RISKS RISKS > > RISKS
INSURANCE
Export Import
formalities formalities Export Import
formalities formalities
 CATEGORIES OF INCOTERMS-2020

* exw —» ODP

DEPARTURE MAIN
cueAlGCARRIQQE AIN
papal ¢ ARRIAHE ARRIVAL

exw (Fr)
at PLACE

CARRIAGE PAID To Jy DAP,

EX-WORES

FREE- ON CARRIAGE + COST, INSURANCE,

FREE CARRIER FREIGHT DELIVERED aT
FAS AeARD INSURANCE
PLACE
PA
¥ a UNLOACED
FAS) only Sor FREE-ALONGSIDE
3
“~

= 4 for Seo. SHIP CER [PPP

{ + Tulavol
cFR Transport COST & FREIGHT DELIVERY DUTY
PAID
 INCOTERMS* 2020 FLOWCHART—BUYER’S POINT OF VIEW INCOTERMS® 2020 CHECKLIST AND FLOWCHARTS

Are you ready to bear all Are you able to load the goods at the EXW
costs and risks from the Can you obtain the seller’s warehouse?

OKO ¢
seller’s warehouse? required export licences
and carry out all export
and transit formalities?

Do you accept all risks from the moment the goods are FCA

How ays 6
handed over to the carrier in the terminal?
Z.

(-.\ :
Are you ready to organize
L WY Do you accept the risks from the
FOB
moment the captain has received the
main carriage (including goods on board the ship?
consolidation), pay the Are the goods
freight and bear the risk Are the goods shipped by air, rail
until goods arrive at the shipped by (no ) or road, ora FAS
agreed place of
container? combination of
destination? modes? Do you accept the risks from the
moment the goods have been
presented alongside the (ocean)
vessel?
CPT (CIP)

YES
Do you accept the risks from the
moment the goods are handed over
CFR (CIF)
Are you ready to bear the Le Are the goods in the departure terminal for main

risks during transport but Are the goods shipped by air, rail carriage?

have the seller organize shipped ina (xo ) or road, ora

and pay for transport to container? combination of
the agreed place? modes?
DAP
Do you accept the risks from the
moment the goods have been placed
on board the ship?

DPU

Do you want to unload the goods from the arriving

AN aN transport at the place of destination?
Do you want to clear the a 4
goods for import in the
country of destination? DDP
Documentary Credits

A Documentary Credit Method of payment that Ensures that the exporter

(“D/C”) also known as protects both the seller receives payment
Letter of Credit (“L/C”). (exporter) and the buyer immediately after the
(importer) in a contract of goods have been sent.
sale.
Parties to Documentary Credits

• Applicant - the buyer of the goods. The importer

who requests his bank to issue a letter of credit
in favor of a named beneficiary against
tendering of certain specified documents.
 Supply the bank with complete instructions
Issue instructions for amendments, if any.
Decide on discrepancies reported by the
issuing bank to him
Arrange fur funds at the payment time.
 Parties to Documentary
Credits
• Beneficiary - the seller of goods who
receives payment under documentary
credit.
• A credit issued in favour of the
beneficiary to enable him or his agent to
obtain payment once he performed his
part of contract and submitted
stipulated documents showing
compliance with the terms and
conditions of letter of credit.
• In case of a transferable letter of credit
the credit is transferred to another party
the original beneficiary is known as first
beneficiary the person to whom the
credit is transferred is known as the
second beneficiary.
Role of Beneficiary
Parties to Documentary
Credits
• Bankers
 Issuing bank - the opening bank issues the
credit.
 Advising bank - advises the credit to the
beneficiary thereby authenticating the
genuineness of the credit.
 Confirming bank - is the one which adds its
guarantee to the credit It undertakes the
responsibility of payments negotiation
acceptance under the credit in addition to that
of the issuing bank.
 Nominated bank - the bank nominated or
authorized by the issuing bank to pay to incur a
deferred payment liability to accept drafts or to
negotiate the credit
 Reimbursing bank - the bank authorized to
honour the reimbursement claims in the
settlement of negotiation with the paying or
accepting bank
Parties to
Documentary Credits

• Insurer - The insurer has the

prime responsibility for
insuring the goods as
provided for in the credit.
• Carrier - The carrier i e the
shipping company or airline
or road transport agency is
responsible for safe arrival of
the goods at the destination.
 @ Sale Contract
Buyer Seller
(Importer) < (Exporter)

© Deliver Goods

© Examine
@ Request document @ Present O Deliver
for Credit and honour Documents Credit
or refuse

@ Present Documents
Importer’s bank <
Exporter’s bank or
(Issuing Bank or
Advising Bank
nominated bank)
© Send Credit
 Basic Types > Sight or Term/ Usance
of
> Revocable or Irrevocable
Letters of
Credit > Unconfirmed or Confirmed

Types of > Red Clause Letter of Credit

Special Types ;
Letter of of
Letters of
> Transferable Letter of Credit

> Back-to-Back Letter of Credit

Credit Credit
>» Deferred Payment Letter of Credit
iEduNote.com

Other Pes > Standby Letters of Credit

O
Letters of > Uniform Customs and Practice for
Credit Documentary Credits (UCP)
 General Documents under
Documentary Credits

Commercial Packing list Bill of lading Certificate of

invoice and other Origin
transport

Inspection Bill of Insurance

certificate Exchange Documents
Q&A
Chapter 3: Procurement Strategies
Engr. Darlene Gayle D. Dela Fuente, MSEM, CLSSGB
Department of Industrial Engineering
IE 420
Learning outcomes:
1. Interpret and analyze various SCM reports related to procurement activities.
2. Relate their importance in SCM processes.
 • Supply market analysis assists
procurement planning and the ongoing
management of supply arrangements by
identifying the following:
➢ Structure of the market
➢ Market behavior
➢ Barriers to market entry
➢ Environmental factors
➢ Ethical considerations
➢ The buyers value in the market

Analyzing the Supply Chain Market

5 Steps of Supply
Chain Market
Analysis
Define your objectives, scope,
and commodity profile

➢ Develop key insights to drive better business

decisions and improve your competitive position.
➢ Understand the scope of your project.
➢ Develop a clear understanding of the profile of the
commodity that you will research
Research the market • understand how pricing
and pricing structure for
your commodity
works for the goods or
services you are interested
in (e.g. material costs, labor
costs, transportation costs,
utilities, overhead).
➢ Is the commodity’s
availability influenced by
the time of year?
➢By geopolitical events?
➢ By new laws coming
into effect?
Conduct in depth
supplier analysis
Identify the main players in your market and
research them thoroughly.

Do some digging into their financial background.

Research any lawsuits or other risky situations

they may be up against.

Create a SWOT Analysis to make it easier to

compare suppliers against one another.
Identify key market
indicators
• Economic indicators – pricing
trends, inflation rates, and
production rates.
• Pricing indices – Consumer
pricing index (CPI), Producers
Pricing Index (PPI),
Import/Export Price indices.
• Employment indicators –
unemployment claims,
percentage of workforce fully
employed.
• Production measurements –
Gross Domestic Product (GDP),
Industrial production rates, and
capacity utilization rates.
Compile your findings and
outline final recommendations

• Keep in mind the context and culture of your

organization.
• It can enhance the business aspects:
➢ Gain competitive advantage
➢ Reduce risk in your supply chain, and
➢ Strengthen the financial position.
 Spend data (aka procurement spend data) – information
dealing with a company’s expenditures on goods and
services purchased from external suppliers.

Spend data management – process of collecting, sorting,

Key Terms and managing that spend data.

and
Definitions Spend analytics – the process of collecting, cleansing,
classifying, and analyzing spending data through either
dedicated software or one-off spend cubes.

Spend analysis – practice of analyzing spending data to

decrease costs, increase efficiency, or improve supplier
relationships
 Spend Management
• is how companies control and optimize the money they
spend. It involves cutting operating and other costs
associated with doing business.
• Even though the money is spent for goods or services such
as:
➢ direct inputs (raw materials used to manufacture the
products)
➢ indirect material (administrative supplies that do not
go to finished products)
➢ Or services (contractual labor, project-based,
outsourced, etc.)
• A company needs a mechanism not only to save money but
control costs.
Why spend management
1S

Accurate and centralized financial data for spending insights

More real-time spend visibility

Improving cash flow

Recognizing saving opportunities

Clear spending policies lead to increased productivity

Better sourcing opportunities

Better risk management

Meant to represent a
holistic view of the
activities involved in
the “source-to-settle”
process.

Spend
Management
Spend Management
Systems
• Utilizing new tools to help monitor and
control spending activity and to create an
integrated process.
➢ e-sourcing – web-based systems to
collect and compare information
➢ e-procurement – a digital transaction
process that involves using the
internet to buy and sell goods and
services
➢ e-spend analytics – to gain insight
into how much money is being spent
on what types of services or products.
How Spend
Management
improves
Procurement?
How Spend Management
improves Procurement

Better sourcing Increased

opportunities process
efficiency

More spend Better risk

visibility management
How Spend Management
saves money
 refers to the purchase of goods or
services outside the scope of the
Decreasing defined spending policy.
“maverick”
spending Process whereby requestors buy
items or services that are outside
the preferred process.
M9 Common Excuses For Maverick Spending
It’s just a small Do | really have We're bailing water
purchase to fill out a in a bottomless
form for this? canoe.

Management only Our contracts

cares about the are a mess.

£4229
big buys.
MW 7 Ways To Avoid Maverick Spend

OOO ey] 6G
Perform Spend Get Everyone Use E-Procurement Centralize Your
Analysis on Board Software and Contract
Automation Management

a BBE
im Be | INS]

Define a Policy Create an Limit Who Can

for Small E-Catalog for Make Purchases
Purchases Preferred Suppliers
 S Strategies for Identifying and
Controlling Maverick Spending
Identify maverick
spending
using spend analysis Review and
implement clear
procurement policies Simplify the
approval process

Introduce automation and utilize

Improve your P2P strategic sourcing initiatives
(Procure-to-Pay) cycle
Increase of spend
economies of scale
• By directing more spending toward a
particular supplier, a company can
negotiate more favorable pricing based on
how much money it spends with that
supplier in a given year.
• By consolidating this “spend,” and directing
it toward one or a few suppliers,
companies can get bigger discounts.
 Increase process
efficiency

• Automation improves the efficiency of

paper-based and manual processes.
• Process savings can be measured:
➢ how long it takes to process a PO.
➢ how many individuals need to
touch the PO before it can be sent.
➢ how long it takes to reconcile and
pay the supplier.
Increase procurement efficiency
Involves using e-sourcing tools for
bidding and contract award
process.
This SCM tools also help to
develop product requirements
that can be sent to the suppliers,
which is typically called as
“Request for Proposal.”
Developing
Supply
Strategy
Make-or-Buy Decision
Outsourcing

Buying goods or
services from
outside sources
rather than
making or
providing them
in-house
Reasons for Make-or-Buy
◦ Reasons for Making ◦ Reasons for Buying
➢ Lower production cost ➢ Lower acquisition cost
➢ Unsuitable suppliers ➢ Preserve supplier commitment
➢ Assure adequate supply (quantity or ➢ Obtain technical or management ability
delivery) ➢ Inadequate capacity
➢ Utilize surplus labor or facilities and make a ➢ Reduce inventory costs
marginal contribution
➢ Ensure alternative sources
➢ Obtain desired quality
➢ Inadequate managerial or technical
➢ Remove supplier collusion resources
➢ Obtain unique item that would entail a ➢ Reciprocity
prohibitive commitment for a supplier
➢ Item is protected by a patent or trade
➢ Maintain organizational talents and protect secret
personnel from a layoff
➢ Frees management to deal with its primary
➢ Protect proprietary design or quality business
➢ Increase or maintain size of the company
(management prerogative)
 Net Income
Make Buy Increase
(Decrease)
Direct materials $50,000 $0 $50,000
Direct labor 75,000 0 75,000
Variable manufacturing costs 40,000 0 40,000
Fixed manufacturing costs 60,000 10,000
Purchase price (25,000 x $8) (200,000)
Total annual cost $(25,000)

Unavoidable fixed costs

@ Must absorb at least $50,000 of fixed costs under either option.

 Alternative 1 Alternative 2 Differential
(make internally) (buy from outside) Amount Alternative 1 Is
Variable costs
Cost to buy from outside S 0 $1,200,0002 = $(1,200,000) Lower
Direct materials 800,000 — 0 = 800,000 Higher
Direct labor 200,000 — 0 = 200,000 Higher
Manufacturing overhead 100,000 — 0 = 100,000 Higher
Fixed costs
Factory and equipment lease 180,000 180,000 = 0
Factory insurance 60,000 — 0 = 60,000 Higher
Supervisors’ salary 70,000 — 0 = 70,000 Higher
Total production costs $1,410,000 — $ 1,380,000 = S$ 30,000 Higher
Identification
and Selection of
Suppliers

• The process of
selecting a group of
competent suppliers
for important
materials, components,
and services that can
impact the firm’s
competitive advantage
is a complex one.
 Managing and improving supplier
relationships and capabilities

• Develop the right capabilities for developing

long-term relationships with their suppliers.
• Important to conduct a thorough investigation
of the supplier’s competencies and core
competencies.
Monitoring and
Rewarding Supplier
Performance
• Identify Suppliers with exceptional
performance.
• Supplier evaluation and certification
processes must be in place so that
organizations can identify their best and
most reliable suppliers.
• Provide frequent feedback on Supplier
performance can help organizations to
avoid major surprises and maintain good
relationships.
Supplier Performance Management KPI Dashboards
This slide covers supplier performance management KPI dashboards along with metrics such as suppliers availability, supplier ratings, suppliers defence rate andtype etc.

Supplier Ratings
1,9% §5,3% 93,5% 15,0
Defect Rate On-Time Supplies Supplier Availability Lead Time (Days)
SER(1 TO 9) a
Supplier Defect Rate Supplier Availability Lead Time (in Days)
SSI(1-10) a o—0

PAYDEX(1-100) a 74

FSS(1 -100) ee 90
V\
= DefectRate (©) DefectRate=>2.3 =— Supplier Availability © Supplier Availability = Lead Time © Lead Time>16

Delivery Time Supplier Defect Rate & Defect Type

Supplier 1 74% 18% 8% eet 4,0% 2,8% 2,4% 1,8% 0,7% 2,7%
Supplier
upplier 2 73% A 13% 14% m No Impact

AT%
Supplier 3 ®
60%
2 = /|mpact
Supplier 4 -
EF; a 25%
Supplier 5 2 m Rejected
32% 28%
Supplier 6
- Early =On Time m= Late Supplier 1 Supplier 2 Supplier 3 Supplier 4 Supplier S Supplier 6
Supplier Quality Management KPI Dashboard with Delivery Performance
This slide showcases dashboard ofsupplier performance KPis thatcan helpto analyze the performance ofindividual vendors andtake corrective actionin case of deviation. It key components are returnto supplier cost, rejection
rate, supplier quality rating and supplier delivery performance

Quality KPls MTD (Vs. Previous Month )

Return Cost Analysis
Return to Supplier Cost and Rejection Rate
Purchases in Time and Budget
14% 10%
8% 9% = 9%
75% oe sik
14%)
_
=== Rejection Rate

Supplier 1 Supplier 2 Supplier 3 Supplier 4 Supplier 5

Value Ordererd Supplier Quality Rating (TOP

$10.10M (+1%)
Supplier | Ordered (5S) Returned ($) Availability Defect rate Quality Score
Value Rejected + Supplier 1 $1.83M 0.100% 81.5% 1.86% 78.0%
$213.3k (1%) + Supplier 2 $0.50M 0.105% 82.2% 1.38% 80.4%
+ Supplier 3 $1.48M 0.117% 76.5% 1.85% 73.4%

Vendor Rejection Rate + Supplier 4 $1.438M 0.105% 80.0% 1.76% 76.3%

2.0% (-2%) . Supplier § $1.78M 0.100% 84.1% 1.04% 81.1%

Return to Vendor Costs . =

Supplier Delivery Performance KPls
$11.8k (-1%)
Supplier 5
Emergency Purchase Ratio Eh 18% Ta 74,2%
anes Supplier 4 Defect Rate “=i On-Time Supplies
1.3% (-1%) ee

Spend
‘iit
UnderSee M ea ee
nt we
Supplier 1 Glee 82,4% = > 14,0
14.3% (+6%) JE Supplier Availability =~ Jead Time (days)
Tactics to Improve your Spend
Management Process
Identify expenses
and company
spending
Centralize expense data

• Gather information about

expense sources in a central
database.
• Automation can help maintain
records of spend or you can put
all your expense data in a digital
spreadsheet
Verify data
Create spend categories
Analyze spend
data
• Conduct a detailed spend
analysis that will give you real-
time visibility into your
company’s purchasing history,
and spending patterns, and will
provide insight into supplier
benchmarking and cost
opportunities.
Forecast and planning
• Identify savings and cost
reduction initiatives.
• Data forecasting helps you
prepare for the future,
improve supplier
relationships, and provide
the insights needed to adapt
to changes in supply and
demand.
What is Spend Analysis?
Spend Analysis
• Starting point of strategic sourcing and creating the foundation
for spend visibility, compliance, and control.
• Organizes procurement information via supplier hierarchies,
commodity alignment, and spending amount, to:
➢Ascertain true category spend
➢Identify strategic sourcing opportunities through demand
aggregation and supplier rationalization
➢Identify expense reduction through increased compliance
in the form of vendor rebates, maverick spending, contract
compliance, and budget variance.
Spend Analytics vs Spend Analysis

Spend analytics is the process of Spend analysis is the practice of

collecting, cleansing, classifying, and
analyzing spend data through either
dedicated software or one-off spend
cubes. Spend analytics is the art behind
spend data management.
analyzing spend data to decrease costs,
increase efficiency, or improve supplier
relationships
 What are we
buying?

How much have we

On what terms? ‘
paid?

Spend
Analysis

Business
units

How much have we

Who is buying
bought?

Who are we buying €

from?
 General ledger
Enterprise resource information (i.e., an
planning (ERP) tools organization’s
financial data)

Data shared by
Purchase orders
suppliers
COMMON
PROCUREMENT
SPEND DATA
Risk reviews Credit ratings

Other internal
Transaction data systems and external
sources
Direct and Indirect
Procurement
Spend
• Direct spend – In procurement refers
to goods and services that are directly
related to making products (e.g. raw
materials, components, hardware, and
services related to manufacturing
processes).
• Indirect spend – In procurement refers
to the sourcing of goods and services
not directly related to the
manufacturing of products. (e.g.
marketing services, travel & lodging,
MRO, IT services, HR services, utilities,
etc.)
 Gain full Realize
visibility savings

Implement
Support
B en efits fq Ys administrative
benchmarking
O f Spen d efficiencies

a= Analysis —_..’
Improve Improve supplier
forecasting relationships

Reduce maverick
spending
 Identify Extract Cleanse

! Spend Analysis in
6 steps

'0---@----0""
Analyze Classify Enrich
Identify Data Sources

Get an overview of what spend will be covered.

You can segment your spending into different groups and, from there,
determine all the spend data sources available from your departments,
plants, and business units.

Start by identifying the areas of your business that make significant

purchases (e.g. procurement, finance, and marketing).
Data Extraction
• Capture your spend data and consolidate all
of it into one central database.
• Data is usually in different formats,
different languages, and different
currencies, so collecting it into one single
source might be challenging.
Data Cleansing

• Cleansing is about detecting inaccuracies

and removing corrupt records and
redundancies from a set of data.
• These include finding and eliminating
errors and discrepancies in descriptions
and transactions to ensure accuracy.
• You can identify which contacts in your
database are incomplete or irrelevant.
Typos are removed and missing codes are
validated and corrected for up-to-date
information.
Data Enrichment
Classification
• Grouping several suppliers of the
same parent company or
organization.
• Classification is about
harmonizing all purchasing
transactions to a single
taxonomy, enabling procurement
to gain visibility to the global
spending to make better sourcing
decisions.
 • Identify opportunities for
Data Analysis savings and other
procurement
improvements.
❑"What are the best
contract deals per
supplier?“
❑"Are buyers purchasing
from preferred
suppliers?"
5 Important KPIs for Spend Analysis
Cost saving Spend under Supplier Operational
management performance KPlis

GS KN =< Tol)

Key driver of Share of spend Leveraging Leveraging Basis for

procurement impacted by supplier procurement rewards
strategies procurement performance performance programs and
development

Spend under Contract Number of

Cost savings Cycle time
management compliance projects

Total cost of Supplier Number of

Tail spend Training hours
ownership performance suppliers

Customer
Cost avoidance Maverick spend On time delivery PO coverage
satisfactir”
Types of Spend Analysis
Tail Spend Analysis

• examines a company's spending

patterns and identifies
opportunities to reduce costs
and improve efficiency.
• Tail spend is easy to ignore, but
at a big cost. It is the place
where procurement
organizations may be leaving
money on the table and utilizing
their resources inefficiently
Supplier Spend
Analysis
• Task of identifying the
amount of spend coming
from critical vendors.
• It involves creating a
detailed spend profile for
each vendor using historical
consumption data.
Category Spend Analysis

• allows you to explore spend in a

defined spend category hierarchy.
This is useful in identifying spend
leakage issues.
Item Spend Analysis
• Refers to analyzing expenditure at
an item/ Stock Keeping Unit (SKU)
level.
• SKU is a scannable bar code, most
often seen printed on product
labels in a retail store.
• It focuses on individual purchases
by classifying each one of them to
identify what department it was for
and what supplier was used.
• This analysis gives the ability to
know whether a specific item is
being
• purchased from various suppliers,
or in several locations and at
different item prices.
 • provides excellent insights for companies to analyze
payment practices and terms within their purchase-to-
Payment Term Spend pay (P2P) processes.
• utilizes data and gives a comprehensive view that
Analysis enables you to identify unrealized discounts.
• covers the review of payment patterns to identify
practices and activities that are not done properly.
Contract Spend
Analysis
• Tells companies if they are
complying with their existing
negotiated contract terms.
• Analyzes spending with vendors
by contract to identify leakage
through non-compliant
contracts.
• It ensures that the best contract
deals per supplier have been
negotiated and that all buyers
purchase from preferred
suppliers.
Supply Positioning Model

• The model enables organizations to make informed

decisions about which procurement activities to focus
on based on risk and goals.
• Allows you to weigh the relative importance of each
one of your various purchases of goods and services
by taking account of the following factors:
❑ Level of annual expenditure on the item
❑ Impact on the Enterprise
❑ Supply opportunity and risk
Supply
Positioning
Model purposes:
1. To guide you in
prioritizing your efforts.
2. To guide you in
developing your strategy.
Kraljic Matrix
 Leverage Strategic Supply Risk
Items ltems - Availability
Numberof suppliers
Exploit purchasing Form
power and partnerships - Make-or buy opportunities
minimize cost Substitution opportunities
Storage risks
Price volatility
Non-Critical Bottleneck Probabilities of supply disruptions
Items Items

Profit Impact
Simplify Ensure supply
Volume purchased
Percentage of total purchase cost
Impact on product quality or
business growth
Supply Risk
 The Kraljic Matrix — a useful tool for creating
category strategies and defining an overall approach

BARGAINING POWER STRATEGIC CATEGORIES

Use purchasing power and Ensure long-term availability of
competitive tendering to reduce goods/services
3 price and cost Focus on collaboration and process
3> Large (relatively speaking) spend integration with supplier, or
2 volume an important lever insourcing
®os)
c
G
a)
= MAINTENANCE BOTTLENECK CATEGORIES
c
> Simplify and streamline processes Reduce the company's risk and
7)
to increase efficiency exposure to price increases/
Reduce the number of suppliers delivery disturbances
and simplify the ordering/P2P Secure existing supply chains, and
processes search for replacements

Complexity in supplier market HIGH

2:3} Ignite Procurement

E-procurement

• process of buying and selling supplies and

services over the Internet.
• opens the lines of communication
between a company and a supplier by
creating a direct link and facilitating
interactions (e.g. bids, purchase orders
and emails).
Types of e-Procurement

➢Online catalogs – provided by vendors, intermediaries, and buyer.

➢For goods and products - RFQ, Bid packaging.
▪ Databases of vendor, delivery, and quality for rapid supplier selection for
obtaining quotes.
➢For services, Request for Proposals (RFP) and Request for Information (RFI).
▪ For contract technical services, proposals submitted in response to RFP
are generally in two parts: technical and cost.
 >
Transparent & Efficient Improve Negotiation Increase Supplier reach Reduce Pu cha se
Procurement Leverage Cycle Time
Q&A
Greening
the Supply
Chain
Engr. Darlene Gayle D. Dela Fuente, MSEM, CLSSGB
Department of Industrial Engineering
IE 420
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 Greening the
Supply Chain
• is a set of green management practices to
help organizations operate more
sustainably and efficiently.
• Greening the Supply Chain initiatives are
part of the process of implementing a
sustainable development plan.
1. achieving improved HSE performance,
2. increasing efficiencies in the use of energy, water, or other natural
resources.
3. reducing the environmental and societal impact of business operations.
4. Expanding economic and quality of life-enhancing opportunities that
result from the company’s business activities
Greening the Supply Chain
• Applying common environmental and related
standards and programs across the parent
company and its suppliers, taking into
consideration local legal frameworks and culture.
• Extending management system implementation
to ensure greater accountability of supplier
performance on health, environment, safety,
resource consumption, and social.
• Examining opportunities for business process
redesign or innovation, materials substitution, or
product design.
• Adopting specific performance goals and metrics
to evaluate the performance of specific suppliers
over time.
• Developing partnerships
Corporations must also improve their
performance in a range of other
measures including:
Sales
• human rights,
• wage rates
I.T Logistics
• Anti-corruption initiatives
• Environmental compliance, etc.
GSCM
Suppliers
Initiatives

Production Finance

HR
Why is there a need
for GSCM
• Increase Environmental Constraints due
to Global Warming
• Corporate Social Responsibility (CSR)
• Beneficial for Organization
• Eco-friendly
• Increasing Environmental awareness
among stakeholders
• Evolving Consumer and Client Demand
• Response in increasing fuel prices
Benefits of
GSCM
Mitigating risks to
the business

Goal: Reduced risks to the

business from current
environmental, health and
safety factors, or responding to
expectations of future controls
on carbon emissions or other
substances.
Reducing costs
Goal: improve the efficiencies of a variety of
operating processes due to the rising cost of
energy.
• research and development priorities;
• building design and maintenance;
• manufacturing process design and
operations;
• heating, ventilation and air conditioning
systems;
• refrigeration;
• storage facilities;
• vehicle fleet maintenance and purchasing;
• procurement;
• materials and product distribution; and
• materials recycling and reuse.
Motivating better performing suppliers
Goal: sustained, mutually advantageous, partnership.
Preserving Business Continuity
• Business continuity is an organization's ability to maintain critical
functions in emergencies.
• Business continuity plans (BCPs) establishes protocols and creates
prevention and recovery systems in case of a cyber-attack or natural
disaster.
Enhancing market access
and strategic degrees of
freedom
• Businesses should not compete with
the resources in the community.
• Companies that do not reconcile their
business strategy with societal
objectives increase the risk that they
will become the focus of increasing
societal conflict and political action.
Drivers of GSCM

1. Government rules and

legislation.
2. Green image and competitive
advantage.
3. Public pressure and customer
awareness.
4. Social and environmental
responsibility.
5. Economic benefit.
Barriers of GSCM
Implementation:
1. Lack of government regulations and
support systems
2. Lack of knowledge and experience
3. The cost of implementing green
supply chains
4. Lack of top management support
5. Technology
 Application of Green Supply Chain within the IR 4.0
Collection and
Ecological Footprint —,
Transfer Trucks
Green Supply Chain

, AN
a ae ad
+ Established either by kind of waste
yy as. sé Rives
transferred or by size.
- Active RFID systems track their
movements and locations.
* Optimization Algorithms are used.
* Helps in reducing GHG emissions.
(Resou a) (Costes )
Smart Containers
Data Management

.*
Local Composting

* Included within Cyber-Physical Waste

+ It can be connected to Data
Management.
* Shows the available space for
waste and time required to
complete the transformation into
compost.
Collection system.
* Stores data and deals directly with all * With IR 4.0, sensor installation detects
the system parts. the amount of goods/wastes inside the
* Data regarding delivery time, quantity, container.
collection trucks, transportation, records * With RFID technology containers send
of surveillance cameras are stored. live data directly to the information
* loT enables the connectivity between collection system.
the interconnected devices. RFID- Radio Frequency
identification
GHG- Green House Gases
Environmentally Preferred
Purchasing (EPP)
• Aka “Green Purchasing,” refers to
the procurement of products and
services that have a lesser or
reduced effect on human health
and the environment when
compared with competing
products or services that serve
the same purpose.
 Life Cycle Analysis
• The comprehensive examination of a
product’s environmental and economic
effects throughout its lifetime, including
new material extraction, transportation,
manufacturing, use, and disposal.
Practicable

• Satisfactory in performance
and available at a fair and
reasonable price
Post-consumer
Content
• The percentage of materials
collected from end users
and recycled into the new
product.
 RE-USE VS.RECYCLING
RECYCLE: REUSE:

BREAK DOWN COLLECT AND

LEAS BOX IN TO REUSE THIS BOX
PULP AND MAKE BEFORE IT EVER
A NEW BOx. BECOMES WASTE.
 What is
Environmental
Management
System (EMS)?
 EMS

a set of processes and practices that enable an organization to reduce its environmental
impacts and increase its operating efficiency.

Environmental management systems (EMS) help companies create policies to comply

with government regulations in the ISO 14001 standard.

ISO has also developed ISO 14031 an environmental performance evaluation tool which
enables organizations to measure, evaluate and communicate their environmental
performance using key performance indicators (KPIs), based on reliable and verifiable
information.
Green IK
Element
PLAN
Collectively plan
an environmental
action

ACT NN DO
Take actionbased _ a Carry out the
onthe findings — planned action

Te” J
CHECK
Review and analyse
performance of
action
Chapter 2: Purchasing
Organizations in the
Enterprise
Engr. Darlene Gayle D. Dela Fuente, MSEM, CLSSGB
Department of Industrial Engineering
IE 420
Learning outcomes

1
1 2 3 4 5 6 7 8 9
0

Describe Identify the Identify Describe Describe Identify the Describe Identify Recognize Construct
the role of difference and define the critical how key the how the and a vendor
procureme s between the four success purchasing functions difference performan describe rating
nt in the traditional stages of factors is a key of s between ce of the the types system
supply purchasing purchasing (CSFs) participant purchasing the make- purchasing of when
chain and sophisticat needed in in or-buy function purchasing making an
contempor ion the integrating decision can be strategies important
ary purchasing the and the measured purchase
purchasing function members outsourcin
of a supply g decision
chain
What is the difference
between Procurement
and Purchasing?
MW Differences Between Procurement and Purchasing

PROCUREMENT PURCHASING
The strategy around buying goods and services The act of buying goods and services

Considers the business implications of what happens before Only considers the business implications of
and after the purchase the purchase

Focuses on price, value, supplier capabilities, and more Focuses on price

Ensures that all purchases fulfill long-term business needs Ensures a purchase meets an immediate need

Includes strategic sourcing, vendor management, and Includes ordering, fulfillment,

logistics in addition to ordering, fulfillment, and payment and payment

A proactive strategy to ensure the organization has the A reactive response to fill a request to purchase
goods and services it needs goods and services

Builds a relationship with vendors Purely transactional

PLANERGY™
 Role of • Procurement – The business functions of
procurement planning, purchasing, inventory

Procurement in
control, traffic, receiving, incoming inspection,
and salvage operations.

Supply Chain
• Purchasing – a term used in industry and
management to denote the function of and the
responsibility for procuring materials, supplies,
and services.
• Buyer – an individual whose functions may
include supplier selection, negotiation, order
placement, supplier follow-up, measurement
and control of supplier performance, value
analysis, and evaluation of new materials and
processes.
• Product - Any good or service produced for
sale, barter, or internal use.
The Supply Chain receives
so much attention because
Purchasing is the most
costly activity in most firms
Purchasing
◦ is critical to supply chain efficiency because it is the job of purchasing to
❖Select suppliers
❖Establish mutually beneficial relationships with them
◦ its goal is to develop and implement purchasing plans for products and
services that support operations strategies.
◦ Among its duties are:
❖Identifying sources of supply
❖Negotiating contracts
❖Maintaining a database of suppliers
❖Obtaining goods & and services that meet or exceed operations requirements in a timely
and cost-efficient manner
❖Managing suppliers
Purchasing Parameters
(7Rs)
• Buying the material at the right price
• Buying the material of the right quality
• In the right quantity
• At the right time
• From the right source
• At the right place
• With the right mode of transport
Roles of Purchasing
Value Analysis - examination of the function of purchased parts and materials to reduce cost
and/or improve performance.

Make or Buy - choosing between producing a component or a service in-house or

advantageously purchasing it from an outside source

Vendor Selection – a decision regarding whom to buy materials from, considering numerous
factors, such as inventory and transportation costs, availability of supply, delivery
performance, and quality of suppliers.

Supplier Management – includes vendor analysis, supplier audits, supplier certification,

supplier relationships and supplier partnerships
Cost & Quality of goods Cost & Quality of goods Effective
and services and services Purchasing
SOLD PURCHASED Strategy
 What normally are the
items requested by
respective departments ?
What will the respective
departments do if they want
to replenish stocks or
supplies?
 What would the buyer
(purchasing staff) do
after receiving the MRF?
If you are the buyer, where will you procure
the items requested through MRF?
What will be your
considerations in choosing
a supplier?

What do you think are the

necessary documents for
the transaction?
How does the
supplier deliver the
items covered by
P.O.?
 Company Name SALES INVOICE
Delivery Receipt a Street Address: Date:
Company
City, ST ZIP Code: Invoice Id:
LOGO
Customer Information Phone & Email: Due Date:
GSTIN:
Name John Doe Receipt Number 002
Bill to: Ship to:
Email johndoe@noemail.com Delivery Date April 10, 2019 Name: Name:

Phone Number (123) 123-4567 Delivery Address 3383 Public Works Drive Company Name: Company Name:
Chattanooga, TN, 37421
Street Address: Street Address:
Address 3383 Public Works Drive
Chattanooga, TN, 37421 City, ST ZIP Code: City, ST ZIP Code:
Phone: Phone:
Order Details
Sales Person Ship Date Terms

Item Description Quantity Unit Price Amount

Product A 10 $50 $500

ID Description Quantity Unit Price, $ Unit Total
Product B 10 $30 $300 1 Item 1 5 500 $ 2,500.00
Product C 5 $40 $200 2 Item 2 100 30 $ 3,000.00
Product D 20 $20 $400 3 Item 3 230 80 $ 18,400.00
Product E 15 $50 $750 4 Item 4 25 1200 $ 30,000.00
Product F 10 $15 $150 S -
5
Product G 5 $50 $250
6 s -
Product H 10 $30 $300
Note: Subtotal $ 53,900.00
Received By Jane Smith Subtotal $2,850
1. Only faulty goods can be exchanged in 10 days after sale. Tax Rate 5.00%
Signature Delivery Charge 50
2. Please include the bill number in your payment notes. Sales Tax 2,695.00
Total Amount $2,900
Shipping Charge 2,500.00
If you have any query concerning this invoice, use the Total Bill $ 59,095.00
following information
2142 Coffman Alley, Bowling Green, KY, 42270
(123)1234567 - info@abcdeliv.com - www.abcdeliv.com [Phone], [e-mail]

THANK YOU FOR YOUR BUSINESS! Authorized Signatory

TYPES OF PURCHASING

Traditional Contemporary
❑RFQ based on lowest ❑Requires the buying
cost assuming that organization to become
delivery and quality are partners with its suppliers
met
 Traditional Contemporary
❑Cost ❑Supplier Evaluation
❑Quality ❑Supplier selection for long-term
Supplier ❑Delivery
relationships
❑Contract structuring and
Evaluation ❑Technical
❑Financial
negotiation
❑Supplier relationship
management (SRM)
❑Supply chain coordination and
collaboration
 Vendor Evaluation

3 Stages of • Involved in finding potential vendors and

determining the likelihood of their

Vendor becoming good suppliers

• Requires development of evaluation

Selection criteria, such as financial strength, quality,

management, technical ability, potential
for a close long-term relationship
Vendor
Development
• Ensures integration of the supplier into a
firm’s system and the appreciation by the
vendor of its: Quality requirements,
Engineering changes, Schedules and
delivery, Procurement policies, and
Payment system.
• May include from training to engineering,
production help, electronic documentation,
and communication flow
Negotiations • approaches taken by purchasing
personnel to develop contractual
relationships with suppliers
• Three Types:
– Cost-Based Price Model
– Market-Based Price Model
– Competitive Bidding
 “Negotiation is a win-lose confrontation.”
Purchasing negotiations should not be
viewed as a win-lose game; it can be a
win/win game
“The main goal is to obtain the lowest
possible price.”
It must be realized that contractors and
suppliers need a reasonable profit to
survive.
“Each negotiation is an isolated
transaction.”
Myths concerning Purchasing must work towards

Purchasing
partnering so each negotiation is a step
in developing long-term relationships
and therefore not as a one-off deal.
Critical Success Factors of Purchasing
Functionality
Availability
Cost
Quality
Match Inflow and Outflow
Reduce variances in Delivery
Increase Supplier Dependability
Reduce the Bullwhip Effect
Become an Intercompany
Find sustainable Suppliers
Given the nationwide
operations, how will you
organize the purchasing
department?
Forms of Purchasing
Department
• Centralized Purchasing -
purchase of all required goods and
services by a single department for
all the branches of the entire
company.
• Decentralized Purchasing - allows
individual stakeholders to make
purchases for their department
 ADVANTAGES DISADVANTAGES
 Overhead expense reduction  Complex management of the
company in case
 Better relationships within
Advantages the organization  organization becomes too large;
and  Advanced control  Difficulties with timely
replacement of defective
Disadvantages  Team cohesion materials;
of Centralized  Saved money  High probability of delays – often
requisitions for goods have to be
Purchasing sent from distant areas;
 Difficulties with purchasing
materials from local suppliers in
case of an emergency;
 Centralized purchasing is not
suitable, if branches are in
different geographical locations.
 ADVANTAGES DISADVANTAGES
 Benefit of time: Better  External factors
Advantages relationships within the
organization  Narrow product lines
and  Fosters better coordination  Scattered management of
information and data.
Disadvantages  Supplier diversity and use of
 Non-compliance with corporate
local alternatives
of policy and processes.
 Benefit of choice
Decentralized  Effective Control
 Risk mitigation is not always fully
supported
Purchasing
For a single location
organization, what is much
better, a centralized or
decentralized purchasing set-
up?
 Purchasing cost

ARE WE PAYING ARE WE BEING HOW DOES THE IS THE QUOTED

MORE THAN CHARGED THE CURRENT PRICE PRICE A
WHAT THE SAME AS COMPARE TO A DISCOUNTED PRICE
PRODUCT OR THE ANOTHER BUYER PRICE PAID IN THE OR A LIST PRICE?
SERVICE IS REALLY WOULD BE PAST FOR THE IS THERE ROOM
WORTH? CHARGED? SAME OR SIMILAR FOR PRICE
GOODS OR HAGGLING?
SERVICES?
 Cost Features
• Costs accrued from the unit being produced.
Direct cost
• Most direct costs are variable.
• A reduction in the supplier’s direct cost is generally worth more to
the buyer than a major
reduction in the supplier’s profit.

TRADITIONAL COSTING Indirect cost

Examples: Direct material, direct labor, and purchasing cost
• Costs incurred in the operation of a production plant or process, but
which normally cannot be related directly to any given unit of
primarily focuses on what production.
is spent in a given fiscal Examples: Rent, property taxes, equipment depreciation, data processing,
period instead of where utility, wages and salaries, and maintenance cost
and why costs incur. Fixed Cost • Costs that tend to remain the same regardless of the number of units
produced.
• Costs decrease as a cost per unit when output levels are increased.
• Incurrence of costs is a function of top-level management, not lower-
level supervisors.
Example: Land purchase and long-term leasing cost
• Costs that are expected to fluctuate in direct proportion to changes in
Variable Cost the level of operational activities such as sales and production levels.
Examples: Labor cost, hourly wage, and material cost
• Costs that tend to change in proportion to changes in the level of
Semi-variable operational activities, but not
cost in direct proportion; partially variable and partially fixed
Examples: Heat, power, light, fuel, and salaries
TOTAL COST OF OWNERSHIP
▪ is a management accounting philosophy
that includes all supply chain–related
costs expected to be incurred throughout
the entire life of the product.

➢ Acquisition cost – Costs associated

with the purchase of a product or
service.
➢ Ownership cost – Costs associated
with the ongoing use of a purchased
product or service.
➢ Post-ownership cost – Costs associated
with the disposal and quality assurance
of a product or service.
 Cost Features

Acquisition costs • Purchase price

• Planning costs (e.g., order preparation)
• Administrative costs (e.g., budgeting, bid
specifications)
• Taxes/tariffs/customs duties
• Financing costs (e.g., interest)
•
TOTAL COST OF Ownership costs Downtime costs
• Inspection costs
• Maintenance costs
OWNERSHIP •
•
Inventory carrying costs
Conversion costs
• Non-value-added costs
• Depreciation

Post-ownership costs • Disposal costs

• Clean-up costs
• Environmental compliance costs
• Repair/replacement costs
• Product liability costs
• Reverse logistics costs (e.g., product recall,
recycling costs)
• Cost of lost customer goodwill (e.g., lost sales)
ACTIVITY BASED
COSTING (ABC)
▪ is a more specific way of allocating overhead costs
based on “activities” that contribute to overhead
costs.

ABC Premise
▪ Cost objects consume activities.
▪ Activities consume resources.
▪ The consumption of resources drives costs.
▪ The understanding of cost drivers is critical for
managing overhead expenses and minimizing cost
errors
Traditional vs ABC Model

Category Traditional Costing Activity-based Costing

Principle Allocate costs. Trace costs.
Approach Aggregation for categorization. Disaggregation for details.
Objective Report costs. Manage costs
Focus “What is spent?” “How the resource is utilized.”
“How much was spent?”
Basis Volume driven. Transaction driven.
Per unit cost Same (no reflection of economies Varies.
of scale, learning curve, or
complexity).
Feature Can distort the overhead cost Enhance the visibility of
information by neglecting cost- overhead
varying activities. expenses.
Philosophy Satisfying. Optimizing.
Two-Activity ABC Model

ABC Model Traditional Costing

Overhead costs for machine setups 250 000 -
Volume of machine setups 1 000 1 000
O/h cost per setup (per batch) 250 -

Overhead costs for procurement of raw material 370 000 -

Volume of raw material used (kgs) 4 500 000 4 500 000
O/h per kg of raw material 0,08 -

Total production overheads 1 900 000 1 900 000

Assigned overheads 620 000 -
O/h allocated on machine hours 1 280 000 1 900 000
Machine hours 132 000 132 000
O/h cost per machine hour 9,70 14,39

Large Batch Example

ABC Model Traditional Costing
Machine setup costs 250 -
Production quantity in batch 16 000 16 000
O/h setup costs per unit 0,02 m=

Overhead costs per machine hour 12,50 14,39

Production volume per machine hour 50 50
Overheads per machine hour 0,25 0,29

Total Overheads per unit

in a batch of 16 000 pcs.
Life Cycle Costing
• is a cost management
technique that determines
the total discounted costs of
owning, operating,
maintaining, and disposing
of an asset over its useful
life.
• It uses a present value
method to assess the value
of an asset at the time of
purchase because not all the
operating costs incurred at
the same time.
Supplier appraisal

Criteria Attributes
Quality • Quality of products
• Warranty
• Past records on the reliability of products
• Quality certification, affidavits
• Willingness to take the corrective actions
• Willingness to accept a responsibility for defects or latent deficiencies
• Prompt replacements of rejects
Price • Competitive price
• Accurate price quotation
• No hidden costs
• Correct billing/invoicing
Delivery Services • Delivery on schedule
• Delivery per routing instructions
• Delivery without constant follow-ups
• Prompt responses to emergent and rush delivery requests
• Good packaging
• Geographical location
Supplier appraisal

Criteria Attributes
Production • Adequate facility, equipment, and know-how
capacity and • Adequate housekeeping (e.g., cleanliness, maintenance)
• Good labor-management relations
technical capability
• Skilled labor
• Technical ability to innovate
• Information technology/communication system structure
• Room for growth/expansion
Financial stability • Credit rating (e.g., Dun and Bradstreet report)
• Cash flow, liquidity, and profitability
• Bank references

Environmental • Environment-friendly initiatives/policies

compliance • ISO 14000 certification
 Supplier Selection
1 2 3 4 5

Categorical method— Weighted-point Cost-ratio method— Analytical hierarchy Multiple attribute

In this method, a method—An Each cost ratio is process (AHP) utility theory (MAUT)
purchasing manager application of the assigned to a specific method—AHP is method— its ability
is required to keep weighted-point rating, subject to suitable for to take into account
and maintain a past method requires the various performance systematically both qualitative (e.g.,
performance record assignment of an criteria (e.g., quality, selecting the most quality assurance,
of all suppliers. appropriate weight delivery, service). The desirable suppliers perceived supply risk,
to each performance lower the ratio of with respect to communication
factor. costs to shipments, multiple, confliction barriers) and
the higher the rating factors influencing quantitative factors
for the supplier. the supplier selection (e.g., quoted price)
decision. influencing supplier
selection in the
presence of risk and
uncertainty.
 Weighted Point Method
SUPPLIER A FOR PART NUMBER

Factor Weights How measured? Supplier performance Ratings

(Past 12 months)
Quality 40 1% defective, subtract 5% 0.8% defective 40[100-(0.8×5)]/100 = 38.4
Delivery 30 1 day late, subtract 1% Average 2 days late 30[100-(2×1)]/100 = 29.4
Price 20 Lowest price paid/price P46/P50 20[(46/50)×100)]/100 = 18.4
charged
Service 10 Good = 100%; Fair = 70%; Fair = 70% 10(70)/100 = 7.0

Poor = 40%
Total 100 93.2
Supplier B for Part Number
Factor Weights How measured? Supplier performance Ratings
(Past 12 months)
Quality 40 1% defective, subtract 5% 1.5% defective 40[100-(1.5×5)]/100 = 37
Delivery 30 1 day late, subtract 1% Average 3 days late 30[100-(3×1)]/100 = 29.1
Price 20 Lowest price paid/price P46/P47 20[(46/47)×100)]/100 = 19.6
charged
Service 10 Good = 100%; Fair = 70%; Poor = 40% 10(40)/100 = 4.0

Poor = 40%
Total 100 89.7
Q&A?
 CHAPTER 1:
U N D E R S TA N D I N G
S U P P LY C H A I N

ENGR. DARLENE GAYLE DELA FUENTE, MSEM, CLSSGB

DEPARTMENT OF INDUSTRIAL ENGINEERING
IE 420
 1. Define what a 5. Identify the
supply chain is current trends
2. Discuss the that link supply
importance of chain participants
supply chain
management (SCM) 6. Identify the
Learning 3. Describe the
current
developments in
outcomes evolution of supply
SCM
chains
4. Discuss how 7. Discuss the
different obstacles to
government supply chain
policies affect the integration
supply chain
LOGISTICS

VS

SUPPLY
CHAIN?
 What is Logistics?

Logistics in business means the

organized movement of products and
materials, as well as their storage and
packaging.
 W H AT
IS A
S U P P LY
CHAIN?
 Management of integrated
activities that:
What is
procure raw materials
Supply
transform those materials
chain? into intermediate goods
and final products
deliver the products
through a distribution
system
A Typical Supply Chain
 ~

Sd ee Retailer Customer

MANUFACTURING SUPPLY CHAIN wy,

(— : >
:
Eo» 62> ES > oom

> hi EE =» oo > ooo

SUPPLY AND DEMAND COMPONENTS
M///f
Automotive Supply Chain
Supply Chain Management
• The design, control, and
coordination of a supply
chain to deliver superior
customer value to the end
consumer.
Supply Chain Management
• “The management of upstream
and downstream relationships
with suppliers and customers to
deliver superior customer value
at less cost to the supply chain
as a whole.”
Supply Chain Management
• “A network of connected and
independent organizations mutually
and cooperatively working together
to control, manage and improve the
flow of materials and information
from supplier to end-users.”,
 • SCM encompasses the planning
and management of all activities
involved in sourcing and
procurement, conversion, and all
logistics management activities.
Importantly, it also includes
coordination and collaboration
with channel partners, which can
be suppliers, intermediaries, third-
party service providers, and
Supply Chain customers. In essence, supply chain
Management management integrates supply
and demand management within
and across companies.

Council of Supply Chain Management Professionals (2013)

Key difference

LOGISTICS SUPPLY CHAIN

movement, storage, and flow of
entire range of delivering products to
goods, services and information in
customers
and out the organization.

meeting customer requirements drives competitive advantage

incorporates the field of logistics and

Logistics is an activity within the
logistics is a number of sub-
supply chain
processes within SCM
LOWER INVENTORIES HIGHER GREATER AGILITY
PRODUCTIVITY
Importance
of Supply
Chain
SHORTER LEAD ENHANCED GREATER CUSTOMER
TIMES CUSTOMER SERVICE LOYALTY
Goal of Supply Chain Management
• is to link the marketplace, distribution network, manufacturing,
and procurement in a way that delivers high customer service
levels at the lowest cost.
So that the product is produced and distributed:

IN THE RIGHT TO THE RIGHT AND AT THE

QUANTITIES LOCATIONS RIGHT TIME
SCM DEV’T
MILESTONES OM
Global SCM
Emphasizing the generic basis
of the field and thus
encompassing service
SCM formed when supply
chain participants are
providers as well as The term ‘SCM (Oliver &
spread across
MASS producers. Webber, 1982) is first coined.
covers the flow of information
country boundaries.
PROD’N and material from source to
end consumer.
Henry Ford applies the concept of
continuous workflow to mass
production and develops the first
assembly line in a large-scale
industry. 19 19 19
50 65 82 ‘90s

17 19 19
76 13 75
Vertical
ECONOMIC Logistics Mngt Integration
Mfg Mngt & OR
THEORY Mfg Mngt - first used
Developed as an
a strategy that allows
expansion of ‘physical
Smith (1776) because of the increasing distribution a company to
developed the amount of attention being management’ to cover streamline its
economic theory of paid to the management of an organization's overall operations by taking
modern production factories. flow of materials direct ownership of
and advocated the various stages of its
division of labor to OR - first developed and production process
increase efficiency. provides a scientific method
for studying and devising
solutions to managerial
problems.
GLOBAL
S U P P LY
CHAIN
ISSUES
 Material Increasing
scarcity freight prices

Global Difficult
demand
Port
congestion
Supply forecasting

Chains Changing
Digital
Issues consumer
attitudes
transformation

Restructuring Inflation
Why Supply Chain Management?

NEED TO IMPROVE INCREASING LEVEL INCREASING COMPETITIVE INCREASING

OPERATIONS OF OUTSOURCING TRANSPORTATION PRESSURES GLOBALIZATION
COSTS

INCREASING COMPLEXITY OF NEED TO MANAGE

IMPORTANCE OF E- SUPPLY CHAINS INVENTORIES
COMMERCE
 Relationship Proliferation
building in of electronic
supply chains business,
Current
Trends in Rise of
Offshore
developing
Supply economies,
outsourcing,
Chain
Need for Changing
quality customer
improvement demands.
Relationship building
• Customer Relationship
Management (CRM) is a
technology used by companies to
manage all company’s
relationships and interactions with
customers.
• CRM system helps centralize,
collect, manage, and analyze
individual customer interactions
and data throughout the customer
lifecycle.
Relationship building
• Product Life Cycle (PLC) defines
the stages that a product moves
through in the marketplace as it
enters, becomes established, and
exits the marketplace.
• It is a useful tool for managers to
help them analyze and develop
strategies for their products as
they enter and exit each stage.
Electronic Business
• E-business refers to the
conduct of business
activities using the Internet
and other electronic means.
• Its purpose is to facilitate
and streamline business
processes.
• Business models: B2C, B2B,
C2C, B2G, etc.
 • Businesses in developed
countries found they could
Developing lower their operating costs
by using suppliers in
Economies emerging countries.
• This strategy had the
added benefit of providing
economic growth to the
emerging countries.
Outsourcing
• Offshore outsourcing is the
process of getting jobs done
from a far-off country that has
more resources for people
with specialized skills.
• Relocating your office jobs to
countries with lower labor
costs but equal expertise, like
the Philippines.
 • The quality of something can be
determined by comparing a set of
inherent characteristics with a set
of requirements.
• Various factors can contribute to
poor quality across the supply
chain, including the following:
Pressure on suppliers to reduce
Need for costs can lead to lower quality.
Business practices in some countries
Quality do not place a high value on quality.
Outsourcing companies may fail to
Improvement communicate quality requirements
to suppliers.
Suppliers may not have the
capability in their processes to
maintain a desired level of quality.
• The first step to responding to changing
customer demands is to understand who
your customers are, what they need, and
what they expect from you.
Decrease Response Time - one of the
many strategic benefits of a well-
Changing
managed global supply chain. The
ability to be flexible and to effectively
Customer
compete in the global marketplace
Lean Supply Chains to Reduce
Demands
Waste - businesses must look at their
product and identify ways in which it
can be made more efficiently and
sustainably.
 Bullwhip Effect

OCCURS WHEN DEMAND IT CAN LEAD TO EXCESS

CHANGES AT THE RETAIL INVENTORY, LOST REVENUE,
LEVEL LEAD TO LARGER AND OVERINVESTMENT IN
INVENTORY FLUCTUATIONS PRODUCTION.
AT THE WHOLESALE,
MANUFACTURER,
DISTRIBUTOR, AND SUPPLIER
LEVELS.
 • To describe how a somewhat
stable demand at the
consumer level becomes an
Bullwhip increasingly variable demand
Effect as the orders move upstream
along the supply chain.
• Four major contributors to the
bullwhip effect:
demand signal processing
a loosely controlled return
policy
order batching
price variations
 C U R R E N T
D E V E L O P M E N T S
I N
S U P P L Y
C H A I N
 Consumers now can shop wherever and
whenever they want. Cost leadership
and differentiation are two commonly
Power Has employed generic strategies to offer
value propositions (Porter 1980).
Shifted from
Manufacturers
to Retailers A cost leadership strategy, often
referred to as a low- cost strategy, seeks
to lower costs throughout the entire
business process.
 Consolidation of Small, Local, or
Regional Retailers into National Chains

MEGA RETAILER IS A COMPANY THAT LOCAL CHAINS HAVE STRUGGLED TO

SELLS A LARGE RANGE OF RETAIL
GOODS DIRECTLY TO THE PUBLIC
(E.G. WAL-MART, COSTCO, TARGET,
ETC.)
COMPETE WITH MEGA-RETAILERS, IN
WHICH MANY OF THESE HAVE SHUT
DOWN. A FEW COMPETITIVE SMALL
RETAILERS CONSOLIDATED WITH
LOCAL OR REGIONAL RETAILERS AND
EMERGED INTO NATIONAL CHAINS.
Emergence of “Killer
Category” Retailers • A large retail store (e.g. IKEA,
Decathlon, Best Buy, etc.) that has
a vast product choice and
attractive prices. It dominates over
other stores in the same product
category and drives its rivals out
of the market.
• Big-box stores’ market
penetration, pricing, and
product choice provide them with
a competitive advantage and the
ability to crowd out smaller stores.
From a Make-and-Sell Mentality to a
Sense-and-Respond Orientation

Make-and-Sell Strategy – Demand Driven Supply

developed products they Chain (DDSC) - focused
thought would be accepted in entirely on building supply
the marketplace and which chains in response to demand
they were able to produce signals - driven by customer
profitably.
Demand Driven Supply Chain
• Unpredictable, volatile,
erratic. These words perfectly
describe the supply chain of
the 21st century.
• A true DDSC can always
adapt to the changing market
conditions thereby
maintaining or reducing
inventory levels and reducing
the invasive problem of
expedited orders.
Push vs Pull Strategy
• A push strategy aims to keep
products in stock even before
the customers order them.
• A pull strategy produces
goods in accordance with the
demand of the customers.
 Efficient and Responsive Supply Chains
Efficient Supply Chains Responsive Supply Chains
Primary goal Supply demand at the lowest cost Respond quickly to demand

Product design strategy Maximize performance at a minimum Create modularity to allow postponement
product cost of product differentiation

Pricing strategy Lower margins because price is a prime Higher margins because price is not a
customer driver prime customer driver

Manufacturing strategy Lower costs through high utilization Maintain capacity flexibility to buffer
against demand/supply uncertainty

Inventory strategy Minimize inventory to lower cost Maintain buffer inventory to deal with
demand/supply uncertainty

Lead time strategy Reduce, but not at the expense of costs Reduce aggressively, even if the costs are
significant
Supplier strategy Select based on cost and quality Select based on speed, flexibility,
reliability, and quality
Porter’s Value Chain
• It is a strategic management
tool developed by Harvard
Business School professor
Michael Porter.
• In his 1985 book Competitive
Advantage, Porter explains that
a value chain is a collection of
processes that a company
performs to create value for its
consumers.
 FIRM INFRASTRUCTURE

» Company's support system and the functions that allow it to maintain operations.
» Includes all legal, administrative and accounting.

HUMAN RESOURCES MANAGEMENT

4)
wv » Hiring and retaining employees who will Fulfill business strategy, as well as help design, market, and sell the product.
— » Involve in the process of delivering the Finished product.
{=J
Uu » Asource of competitive advantage when customer purchasing a service.
<=
iJ
=
° TECHNOLOGY DEVELOPMENT
a.
a.
=)
7) » Research and development helps designing the product and improving and automating the process.
» For example, a business working towards to reduce the inventory and labor waste by implementing RFID technology in warehouse
to improve overall stock accuracy and minimize labor tasks.

PROCUREMENT

» Process of acquisition of inputs, raw materials or resources, For the Firm.

» This relates heavily to inbound logistics where company is looking to resale the goods they procure. For example in case of
an e-commerce business.

>»
INBOUND OUTBOUND MARKETING
OPERATIONS SERVICE
LOGISTICS LOGISTICS SALES
Primary Activites

This include the receiv-
ing, warehousing and
inventory control of a
company’s raw materials.
It also covers the
relationship required
Procedures required For
converting raw materials
or resources into a
Finished product or
service.
Activities and system
required to distribute
a Final product to
a consumer
Strategies to enhance
visibility and target
appropriate customers—
such as advertising,
promotion, and procing.
Activities required to
maintain products and
enhance consumer
experience after sale of
product or service.

y,
with the supplier.
 E.g. Installation,
E.g. Customer access, E.g. Branch operations, E.g. Order processing, E.g. Sales force,
Customer support,
data collection, Assembly, component warehousing, report promotion, advertising,
complaint resolution,
incoming material, fabrication preparation website
repair
storage

Financing, Planning,
Investor relations

Recruiting, training,
compensation system

Product design, process

design, market research

Services, machines,
Advertising, Data
 STARBUCKS VALUE CHAIN
Inbound Logistics
• The Starbucks value • Starbucks operates more
chain begins with buyers
purchasing high- quality
coffee beans from
primary producers in
Asia, Africa, and Latin
America. The beans are
roasted and packaged –
which adds value to their
sale price – and sent to a • Starbucks also owns a
mixture of Starbucks-
owned and third-party
distribution centers.
• Note that the
procurement process is
never outsourced to
ensure quality standards
are enforced from the
start of the chain.
PRIMARY ACTIVITIES
Operations
than 32,000 stores in 80
different countries. Stores
are either company-
owned or licensed to
other companies that
have access to desirable
retail spaces such as
those inside airports.
range of related brands
such as La Boulange,
Teavana, Ethos Water,
and Seattle Coffee Co.
Outbound Logistics
• Starbucks does not tend • Starbucks is one of the
to employ a B2B model
where other brands
distribute its products,
but a small selection of
coffee products can be
found in supermarkets.
• Most products are
transported from
warehouses and
distribution centers and
then sold in Starbucks
stores and cafés around
the world.
Marketing and Sales Services
• The company aims to
world’s most build brand loyalty
recognizable brands, through a superior in-
and for good reason. store experience. After
The company can witnessing the café
promote its brand with culture in Italy, CEO
consistent messaging Howard Schultz wanted
across social media, to bring a similar
video, television, events, experience to American
and various in-store coffee lovers.
experiences such as new • Starbucks “as a third
product sampling. place between home and
work, an extension
between people’s lives,
at a time when people
have no place to go.”
• Invests heavily in
customer service training
to add value to the chain.
STARBUCKS VALUE CHAIN
Firm Infrastructure
• This encompasses • Starbucks is well known
various departments that
are necessary to maintain
company operations,
such as finance and legal.
• Starbucks also employs
business managers in
corporate offices and
store managers in each
café to oversee the
baristas.
SECONDARY ACTIVITIES
HR Management Research & Dev’t
• Each Starbucks store
for its effective human provides unlimited
resource management. bandwidth free of charge
Employees are offered a which creates significant
range of perks, including value for casual diners
health coverage, paid and businessmen alike.
leave, retirement plans, The company also uses
subsidized university technology to ensure the
education, company taste of its coffee is
stock plans, and consistent across its
discounts on work- stores.
related transportation • The Starbucks Rewards
expenses. program app is another
example of the café chain
using technology to its
advantage.
Procurement
• As we noted earlier,
procurement for
Starbucks means
sourcing coffee beans
directly from primary
producers on several
continents. Purchasing
agents that are employed
by the company form
strategic partnerships
with each producer and
communicate the
standards they must meet
in terms of bean quality.
Key takeaways: Porter’s Value
Chain

Porter’s Value Chain Porter’s Value Chain

model is a strategic model is customer
management tool for relationship-centric and
the analysis of a is used by businesses
company’s value chain. to systematically
examine each of their
many processes for
profitability.
| Benefits of Supply Chain Integration

Better Collaboration More Flexibility

More Visibility Reduced Waste

Improved Overall
Increased Revenues
Performance

Satisfied Customer
Demand
 Customer
Analysis

Order
Purchasing/
Fulfillment
Supplier
Partnering

Integrated Inventory
Storage &
Transportation Supply Chain Management
and Control
Management

Manufacturing Demand &

Re-Manufacturing Lead Time
Assembly Management

Materials

M///f
Management
 Supply Chain
Management Drivers

Production – The Inventory - Any Transportation –

performance of change in Responsiveness
SCM is dependent inventory policies and efficiency of
on a production. can greatly affect the supply chain is
(e.g. what is the efficiency and significantly
produced, how it is responsiveness of affected by the
produced (the the supply chain choice of
manufacturing transportation
process used), and modes and routes.
when it has to be
produced.
Supply Chain Management Drivers
Information - consists of
data and analysis
Facility Location - where
regarding inventory,
inventory is stored, parts
facilities (location,
are fabricated and
capacities, etc.)
assembled into finished
transportation and
goods
customers throughout
the supply chain.

Sourcing - the right

activity of buying or
procuring the right Pricing - process by
materials in the right which a firm decides how
quantities of the right much to charge
quality, in the right customers for its goods
condition, at the right and services
time, at the right price
from the right supplier.