Chapter 4

Procurement and Supply

Management

Chapter 4 1
Inbound Logistics along the
Supply Chain
 Each firm in the food system supply chain
graphic in Figure 4-1 has important
differences in their inbound logistics systems.
 Mining firm
 Steel firm
 Container firm
 Food firm
 Retail outlet
 Individual firm complexity

Chapter 4 Management of Business Logistics, 7th Ed. 2

Table 4-1
Industry Supply Chain Logistics Emphasis

Chapter 4 Management of Business Logistics, 7th Ed. 3

Materials Management
 Definition - Materials management is the
planning and control of the flow of materials
that are part of the inbound logistics system.
 Materials Management Activities
 Procurement

 Importance of Item and Service Purchased

 The Special Case of Procurement Price

 Other Materials Management Activities

Chapter 4 Management of Business Logistics, 7th Ed. 4

Materials Management:
Procurement
 Importance
 Contributes to the competitive advantage

of the firm
 Significant portion of the logistics costs

Chapter 4 Management of Business Logistics, 7th Ed. 5

Materials Management:
Procurement
 Definition of Procurement Activities
 Identify or reevaluate needs

 Define and evaluate user requirements

 Decide whether to make or buy

 Identify the type of purchase

 Conduct a market analysis

 Identify all possible suppliers

Chapter 4 Management of Business Logistics, 7th Ed. 6

Materials Management:
Procurement
 Definition of Procurement Activities…
 Prescreen all possible sources

 Evaluate the remaining supplier base

 Choose a supplier

 Receive delivery of the product or service

 Make a post purchase performance

evaluation

Chapter 4 Management of Business Logistics, 7th Ed. 7

Figure 4-2
Procurement Process

Chapter 4 Management of Business Logistics, 7th Ed. 8

Materials Management: Importance
of Item and Service Purchased
 Products and services purchased by a
company are not all the same.
 Some are more important than others and
require greater procurement attention.
 The quadrant technique enables the supply
chain manager to assess the relative
importance of each item based on the degree
of perceived value and risk.

Chapter 4 Management of Business Logistics, 7th Ed. 9

Materials Management: Importance
of Item and Service Purchased
 There are four possible combinations in
the quadrant techniques model:
 Generics --- low risk, low value

 Commodities --- low risk, high value

 Distinctives --- high risk, low value

 Criticals --- high risk, high value

 Figure 4-3 illustrates the relationships in

the quadrant technique model.
Chapter 4 Management of Business Logistics, 7th Ed. 10
Figure 4-3
Item Procurement Importance Matrix

Chapter 4 Management of Business Logistics, 7th Ed. 11

Materials Management: Managing the
Procurement Process in 4 Steps
 1. Determine the type of purchase
 New
 Straight rebuy

 Modified rebuy

Chapter 4 Management of Business Logistics, 7th Ed. 12

Materials Management: Managing the
Procurement Process in 4 Steps
 2. Identify the type of purchase
 Determine the necessary levels of
investment of time and information.
 The more complex the purchase, the more
time needs to be spent and more
information needs to be gathered to get it
right the first time.

Chapter 4 Management of Business Logistics, 7th Ed. 13

Materials Management: Managing the
Procurement Process in 4 Steps
 3. Perform the procurement process
 Do those activities that are necessary to

effectively make a purchase and satisfy the

user’s requirements.
 4. Evaluate the effectiveness of the
procurement process
 Were the user’s needs satisfied?

 Was the investment necessary?

Chapter 4 Management of Business Logistics, 7th Ed. 14

Materials Management: Managing
the Procurement Process
 Supplier/Vendor Evaluation and
Relationships
 Maintaining a healthy vendor relationship is

a critical part of a successful supply chain.

 Developing a true partnership relationship

with a firm’s vendors grows more

important as the number of vendors
shrinks and/or the vendors are being
sought by other competing supply chains.
 TQM begins with the vendors.

Chapter 4 Management of Business Logistics, 7th Ed. 15

Materials Management: Managing
the Procurement Process
 Vendor Selection Criteria
 Quality

 Reliability

 Capability

 Financial

 Miscellaneous Other Qualities

 Vendor Location

 Factor Importance Will Vary

Chapter 4 Management of Business Logistics, 7th Ed. 16

Figure 4-4
Overview of Vendor Selection Criteria

Chapter 4 Management of Business Logistics, 7th Ed. 17

Materials Management: The
Special Case of Procurement Price
 Sources of Price
 Commodity markets

 Price lists

 Price quotations

 Negotiation

Chapter 4 Management of Business Logistics, 7th Ed. 18

Figure 4-5 Hierarchy of Price
Measurement Approaches

Chapter 4 Management of Business Logistics, 7th Ed. 19

Materials Management: The
Special Case of Procurement Price
 Types of Costs
 Traditional basic input costs - primary

product price
 Direct transaction costs - all other related

costs of detecting and transmitting

information to suppliers (e.g., EDI)
 Supply relational costs - costs of

maintaining relationships with suppliers

Chapter 4 Management of Business Logistics, 7th Ed. 20

Figure 4-6
Total Procurement Price

Chapter 4 Management of Business Logistics, 7th Ed. 21

Materials Management: The Special
Case of Procurement Price
 Other types of Costs
 Landed costs -

actual transport costs + sales terms

 Quality costs/factors -

do the goods conform to standard?

Chapter 4 Management of Business Logistics, 7th Ed. 22

Figure 4-7 Overview of Production
Planning and Control

Chapter 4 Management of Business Logistics, 7th Ed. 23

Materials Management: The Special
Case of Procurement Price
 Other types of Costs
 Operations/logistics costs

 Receiving and make-ready costs

 Lot size costs

 Production costs

 Other logistics costs affected by

product’s size, weight, density and

shape

Chapter 4 Management of Business Logistics, 7th Ed. 24

 Materials Management: Other
Materials Management Activities
 Warehousing  Transportation
 Type of facilities  Vendor control

required  Modal choice

 Production Planning  Rush shipments

and Control  Inspection

 Coordinating
 Damage claims
product supply with
product demand

Chapter 4 Management of Business Logistics, 7th Ed. 25

Materials Management: Other
Materials Management Activities
 Quality Control
 Quality standards

 did customer receive what was ordered?

 Quality implications

 GIGO concept

 Sample inspection

 statistical QC from vendor to assure

100% quality
Chapter 4 Management of Business Logistics, 7th Ed. 26
Materials Management: Other
Materials Management Activities
 Salvage and Scrap Disposal
 Value of scrap may be income to the firm.

 Disposal must adhere to environmental

regulations.

Chapter 4 Management of Business Logistics, 7th Ed. 27

Electronic Procurement
 Business-to business (B2B) purchases are
estimated to be $1.3 to $2.0 trillion by 20036.
 Former uses of electronic data interchange
(EDI) were costly and required special
technology to implement have given way to
the publicly available Internet.
 This has opened the door to increased
applications of E-commerce techniques to
procurement.
Chapter 4 Management of Business Logistics, 7th Ed. 28
Electronic Procurement
 Common uses of E-commerce
 Research vendor and product information

 Electronic check of available stock

 Price negotiation

 Order products or services

 Check on the status of an order

 Issue invoice and receive payment

Chapter 4 Management of Business Logistics, 7th Ed. 29

Figure 4-8
Advantages of Electronic Procurement

Chapter 4 Management of Business Logistics, 7th Ed. 30

Electronic Procurement
 Advantages of E-commerce outlined in
Figure 4-8.
 Disadvantages
 Security of electronic messages

 Lack of face-to-face contact

 Other technological concerns

 Standard protocols
 System reliability

Chapter 4 Management of Business Logistics, 7th Ed. 31

Four Basic Types of E-commerce
Models7
 Sell-side system
 Administered by the seller

 Usually free to the buyer

 Electronic marketplace
 Administered by a third party

 Collection of electronic catalogs

 One-stop sourcing for buyers

Chapter 4 Management of Business Logistics, 7th Ed. 32

Types of E-commerce Models
 Buy-side system
 Administered by the buyer

 Pre-approves vendor access

 Expensive and usually the domain of large

companies
 On-line trading community
 Maintained by a third party

 Used by multiple buyers and sellers

Chapter 4 Management of Business Logistics, 7th Ed. 33

 End of Chapter 4 Slides

Procurement and Supply

Management

Chapter 4 34