Elements of Supply Chain Mgt

1. Procurement
 Outline
• Introduction to Procurement
• Procurement Vs. Purchasing
• INCOTERMS
• Procurement Management Process
– Procurement Simulation
– Landed Cost Analysis
 Procurement

“Procurement is the business management

function that ensures identification, sourcing,
access and management of the external
resources that an organization needs or may
need to fulfill its strategic objectives”.

CIPS Definition 2012

 Procurement Purview
• One of the difficulties in defining the term
‘procurement’ is that it does not deal with a
single action or process.
• Procurement covers the complete range of
events from the identification of a need for a
good or service through to its disposal or
cessation.
 Procurement Purview
Procurement includes activities and events before
and after the signing of a contract as well as the
general management activities associated with a
range of contracts:
– pre-contract activities such as planning, needs
identification and analysis, and sourcing,
– post-contract activities such as contract management,
supply chain management and disposal, and
– general activities such as corporate governance,
supplier relationship management, risk management
and regulatory compliance.
How is Procurement Management beneficial for
Organizations?
 Benefits of Procurement

Procurement delivers a range of benefits. It not

only seeks to reduce costs and to ensure supply,
it also supports strategic organizational
objectives such as market expansion and
product innovation.
 Benefits of Procurement
Seven core benefits of procurement:
– Security of supply
– Lower costs
– Reduced risk
– Improved quality
– Greater added value
– Increased efficiency
– Innovation.
 Procurement Vs. Purchasing
The term “Purchasing” refers to the process of
ordering and receiving goods and services. It is a
subset of the wider procurement process.
Generally, purchasing refers to the process
involved in ordering goods such as request,
approval, and creation of a purchase order & the
receipt of goods.
 INCOTERM
S
• International Commercial Terms
– First published in 1936 by International Chamber
of Commerce
– Revised 7 times
– Current version (“Incoterms 2020”), which became
effective on January 1, 2020. (Note: Contrast with 2010
shared as separate lecture)
– However, majority Businesses are still following
INCOTERMS 2010 which had become effective January
2011
WHY DO WE NEED ICOTERMS?
 WHY DO WE NEED ICOTERMS?
Incoterms are standardized terms used in
international trade to clearly define the seller’s
and buyer’s obligations as part of a contract.
They help;
– Reduce complexity created by International
Trade.
– & in assignment of Cost, Risk, & Responsibility.
 Purpose
• Simplify some terms of an international sales
agreement
• What do Incoterms not do?
– Take the place of a sales agreement or terms and
conditions
– Supply all terms for an international sale
• Not for service contracts
• Do not determine transfer of title
• Do not determine breach of contract or remedies
• Do not protect parties from their own risk of loss
• Do not cover goods before or after delivery
 Purpose
• Apply to contract of sale
– Not contract of carriage
– Not contract of insurance
– Not documents related to financing
– Even if those documents and the Incoterm Rule
chosen have some implications for one another
 Purpose
Costs & Responsibilities
– Packaging
– Loading Charges
– Delivery to Port/Place
– Export Duty & Taxes
– Origin Terminal Charges
– Loading on to Carriage
– Carriage Charges
– Insurance
– Destination Terminal
Charges
– Delivery to Destination
– Import Duties & Taxes
 Rules for any mode of
transport
• Ex Works (EXW)
• Free Carrier (FCA)
• Carriage Paid To (CPT)
• Carriage and Insurance Paid To (CIP)
• Delivered at Terminal (DAT)
• Delivered at Place (DAP)
• Delivered Duty Paid (DDP)
 Rules for Sea and Inland
Waterway Transport
• Free Alongside Ship (FAS)
• Free On Board (FOB)
• Cost and Freight (CFR)
• Cost Insurance and Freight
(CIF)
INCOTERMS 2010
‘Foreign Exchange Manual’ SBP & INCOTERM
Restrictions!
 Procurement Management
Project procurement management includes the
following processes for acquiring goods and
services from outside the project organization:
– Procurement planning: determining what to procure and when.
– Solicitation planning: documenting product requirements and
identifying potential sources.
– Solicitation: obtaining quotations, bids, offers, or proposals as
appropriate.
– Source selection: choosing from among potential vendors.
– Contract administration: managing the relationship with the
vendor.
– Contract close-out: completion and settlement of the
contract.
 Procurement Management
The figure below summarises the major
processes involved in procurement
management, and identifies important
milestones associated with each stage.
What is the starting point of Procurement?
– When a need arises.
– Or through Requirement Planning
 Requirement Planning
Material Requirements Planning
MRP, was developed in the 1970s to help manufacturing
companies better manage their procurement of material
to support manufacturing operations. MRP systems
translate the master production schedule into
component- and raw material-level demand by splitting
the top level assembly into the individual parts and
quantities called for on the bill of materials, which reports
to that assembly, and directs the purchasing group when
to buy them based on the component lead time which is
loaded in the MRP system.
 MRP Vs. MRP II
Manufacturing Resource Planning, or MRPII, goes several
steps beyond MRP.

• While MRP stopped at the receiving dock, MRPII

incorporates the value stream all the way through the
manufacturing facility where the product is packaged
and sent to the end customer at the shipping dock.
• That value stream includes production planning,
machine capacity scheduling, demand forecasting and
analysis modules, and quality tracking tools.
• MRPII also has tools for tracking employee attendance,
labor contribution and productivity.
 Evolution to ERP
Enterprise Resource Planning. ERP is the next evolution of
the MRP system. While MRP helped companies plan
material purchases, and MRPII added in-plant scheduling
and production controls, ERP attempts to integrate the
information flow from all departments within a company:
finance, marketing, production, shipping, even human
resources.

A properly set up ERP system allows better

communication and monitoring than ever before, giving
all departments access to the exact status of a customer
order at any point in time.
 Purchase Requisition
Document generated by a user department or
storeroom-personnel to notify the Procurement
department of items it needs to order, their
quantity, and the timeframe. It may also contain
the authorization to proceed with the purchase.
Also called purchase request or requisition.
REQUIREMENT
 Sourcing
Sourcing seeks to find, evaluate and engage
suppliers to achieve cost savings and best value
for goods and services which can be done
through a tender process. Factors such as
reliability, quality, flexibility and capacity are
considered in the tendering process alongside
price.

-CIPS Definition
 Sourcing
Sourcing Events
– Profile Category/Need & Supply Market
– Identify potential Sources
– Generate & Evaluate Supplier Portfolio
– Select Suppliers & Integrate in to Supplier
Database
• Supplier Development
• Vendor Database Management
– Category Management
 Procurement Solicitation
RFI – Request for Information
An open enquiry that spans the market seeking broad data
and understanding.

RFQ – Request for Quotation

An opportunity for potential suppliers to competitively cost
the final chosen solution(s).

RFP – Request for Proposal

Sometimes based on a prior RFI; a business requirements-
based request for specific solutions to the sourcing problem.
 RFI
An RFI is a solicitation sent to a broad base of potential suppliers for
the purpose of conditioning, gathering information, preparing for an
RFP or RFQ, developing strategy, or building a database which will all
be useful in later supplier negotiations about:
– The suppliers, including: facilities, finances, attitudes, and
motivations
– The state of the supply market
– Supply market dynamics
– Trends and factors driving change
– Alternative pricing strategies
– Supplier competition
– Breadth and width of product/service offerings, by supplier
– Supplier strategic focus, business, and product plans

Vendor Response: Information Package

 RFQ
An RFQ is a solicitation sent to potential suppliers
containing in exacting detail a list or description of all
relevant parameters of the intended purchase, such as:
– Personnel skills, training level or competencies
– Part descriptions/specifications or numbers
– Quantities/Volumes
– Description or drawings
– Quality levels
– Delivery requirements
– Term of contract
– Terms and conditions
– Other value added requirements or terms
 RFP
RFP is procurement’s solicitation sent to potential
suppliers with whom a creative relationship or
partnership is being considered. Typically, the RFP
leaves all or part of the precise structure and
format of the response to the discretion of the
suppliers. In fact, the creativity and innovation that
suppliers choose to build into their proposals may
be used to distinguish one from another. Later
negotiations tend to take more time and be more
wide reaching in their impact on the buyer’s
business.
QUOTATION
S
 Source Selection
Comparative Statement
– Technical
– Commercial

Commercial Equalization
 NEXT LECTURE
• Taxation (GST, SST, & WHT)
• HS CODES
• Landed Cost Analysis
• Customs Clearing Process
– IGM & EGM
– EIF
– GD
• Payment Modes (OA, TT, CAD, LC)
• Shipping Documents
• Contracts & Contracts Management
• Procurement Closing