Cha Pter 6: Procurement Methods

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Copyright© Dorling Kindersley India Pvt Ltd

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Procurement Methods
Supply Chain Management: Vinod V.Sople 1

Learning Objectives
• New paradigms in purchase management
• EOQ inventory model
• Just-in-time practice
• Vendor managed inventory
• Online procurement

Approach to Procurement
Flow – Concerned with the movement of product from supplier
to the distribution centers and ultimately to the customer. Here
comes the role of logistics operation for planning the material
flow across the distribution networks.

Flexibility – It is related to the flexibility in frequency and
volumes in delivery of the products to the customers. The role of
warehouse and production management is crucial to achieve
flexibility and backward integration.

Approach to Procurement
(Contd)
Balancing – The inventory levels have bearing on the customer
satisfaction level. Hence achieving tradeoff between customer
satisfaction and inventory level.

Integration – The supply chain efficiencies and effectiveness is
very much dependent on the integration. The inventory models
are developed for strategic fit for both forward and backward
integration.

Procurement Methods
EOQ
JIT
Inventory Cost
Procurement
Methods Inventory Turns
Profitability
VMI
e-Procurement

EOQ Model and its Relevance
Economic Order Quantity is the amount of inventory to be
ordered at one time for the purposes of minimizing total annual
inventory cost which covers holding cost, order cost and storage
cost.
Assumptions
Demand is constant
Inventory is depleted until it reaches zero level
Formula:

EOQ Model and its Relevance
(Contd)
Where,
Q* = optimal order quantity
D = annual demand quantity of the product
S = Fixed cost per order
H = annual holding cost
Relevance: Reduces inventory holding cost and price

structured way of execution

Variations on Basic EOQ Model
• Quantity discount on inventory ordered

• Fixing quantities subject to spoilage or
obsolescence
• Determining lot sizes for longer production
runs
• Safety stock calculation based on order cycle
time

Just-In-Time
"A philosophy of manufacturing based on planned elimination of
all waste and continuous improvement of productivity. It
encompasses the successful execution of all manufacturing
activities required to produce a final product, from design
engineering to delivery and including all stages of conversion
from raw material onward. The primary elements include having
only the required inventory when needed; to improve quality to
zero defects; to reduce lead time by reducing setup times, queue
lengths and lot sizes; to incrementally revise the operations
themselves; and to accomplish these things at minimum cost.“
----The American Production and Inventory Control Society (APICS)

JIT System of Procurement
Ordering just when it is needed for production.
The inventory like parts and components are ordered on
regular basis.
This reduces the work in progress capital and improves
efficiency.
The advent of Internet and supply chain software's has
enabled organizations across globe to implement it
effectively.

JIT System of Procurement
(Contd)
Advantages
Inventory reduction
Smaller production lots/ batch sizes
Transparency in movement
Resource optimization
Issues
No backup in case of error
No alternative in case of failure of delivery
Helps only during local sourcing

JIT Implications
• Inventory reduction
• Smaller production lots/batch sizes
• Quality control
• Reduced complexity
• Transparency in movement
• Flat delegation
• Waste minimization
Wastes Removal: Pre-requisite for
JIT Implementation
• Waste from overproduction
• Waste of idle time/waiting time
• Transportation waste
• Handling/motion waste
• Inventory waste
• Waste form product defects
• Processing waste
VMI Implementation Levels
• Collaboration
• Automation
• Cost Transfer

VMI and Benefits
The buyer of a product provides certain information to a
supplier of that product and the supplier takes full responsibility
for maintaining an agreed inventory of the material, usually
at the buyer's consumption location.
Advantages for Buyer Advantages for Suppliers
• Reduced inventory/increased turns • Better planning of its own inventory
• Eliminating of transaction cost replenishment needs
• Reduced administrative costs • Better capacity utilization of its plant
• Customer does not pay for the • Customer focused approach leading to
inventory until it is sold or used. competitive advantage
• Fewer stock-outs or shortages • Better planning
• Elimination in ordering errors • Reduced operating costs
• Stronger customer relationships

VMI Implementation Challenges
• Top management commitment
• Commitment of stakeholders
• Trust cannot be achieved overnight
• Technological support
• Short comings of small business
• Excess responsibility
• Ability to work as a team

Key Success Factors in VMI
Implementation
• Set, review and maintain performance goals
• All SKU’s through VMI to minimize transactions
• Ensure data accuracy
• Utilize automated replenishment system
• Organize periodic performance reviews
• Use the metrics to find cost and inefficiencies
Purchase Card
Purchasing Cards are usually issued to employees who are
expected to follow their organization’s policies and procedures
related to P-Card use, including reviewing and approving
transactions according to a set schedule.

Purchase Card (Contd)
Utility:
• To buy smarter and cut costs
• Used to buy low utilities items in smaller quantities
• Eliminates bank in transaction
• Reduces paper work
• Holds important information like sales tax data, customer
code, etc
• Vendor receives payment within short period
• No transaction cost at suppliers end
• Supplier knows the credit worthiness of customer prior the
transaction
• Minimizes risk for supplier

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Copyright© Dorling Kindersley India Pvt Ltd

Supply Chain Management: Vinod V.Sople 1

• EOQ inventory model

• Vendor managed inventory

Supply Chain Management: Vinod V.Sople 2

Supply Chain Management: Vinod V.Sople 3

Supply Chain Management: Vinod V.Sople 4

Supply Chain Management: Vinod V.Sople 5

Supply Chain Management: Vinod V.Sople 6

Relevance: Reduces inventory holding cost and price

Supply Chain Management: Vinod V.Sople 7

• Quantity discount on inventory ordered

Supply Chain Management: Vinod V.Sople 8

----The American Production and Inventory Control Society (APICS)

Supply Chain Management: Vinod V.Sople 9

Supply Chain Management: Vinod V.Sople 10

Supply Chain Management: Vinod V.Sople 11

Supply Chain Management: Vinod V.Sople 14

Supply Chain Management: Vinod V.Sople 15

Supply Chain Management: Vinod V.Sople 16

Supply Chain Management: Vinod V.Sople 18

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