This chapter discusses procurement and supply management. It explains the procurement process and important materials management activities like managing vendor relationships. There are different types of purchases and items that require varying levels of attention. The chapter also covers how electronic commerce is increasingly being used for procurement activities like researching vendors, negotiating prices, and placing orders. It outlines advantages like reduced costs but also disadvantages like security and lack of personal interaction.

1. Chapter 4
Procurement and Supply
Management

2. Learning Objectives
 Understand the role and nature of
procurement and supply management in a
supply chain context.
 Explain the different types of inbound
systems.
 Discuss the major materials management
activities.

3. Learning Objectives
 Understand the procurement process.
 Explain the risk/value technique for
determining purchased item importance.
 Identify the four steps necessary for effective
procurement.
 Explain the criteria for evaluating vendors.
 Examine the role of E-commerce in the
procurement process.

4. 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

5. Figure 4-1
A Food System Supply Chain

6. Table 4-1
Industry Supply Chain Logistics Emphasis

7. 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

8. Materials Management:
Procurement
 Importance
 Contributes to the competitive advantage
of the firm
 Significant portion of the logistics costs

9. 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

10. 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

11. Figure 4-2
Procurement Process

12. 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.

13. 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.

14. Figure 4-3
Item Procurement Importance Matrix

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

16. 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.

17. 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?

18. 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.

19. Materials Management:
Managing the Procurement
Process
 Vendor Selection Criteria
 Quality
 Reliability
 Capability
 Financial
 Miscellaneous Other Qualities
 Vendor Location
 Factor Importance Will Vary

20. Figure 4-4
Overview of Vendor Selection Criteria

21. Materials Management: The
Special Case of Procurement Price
 Sources of Price
 Commodity markets
 Price lists
 Price quotations
 Negotiation

22. Figure 4-5 Hierarchy of Price
Measurement Approaches

23. 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

24. Figure 4-6
Total Procurement Price

25. 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?

26. Figure 4-7 Overview of Production
Planning and Control

27. 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

28. Materials Management: Other
Materials Management Activities
 Warehousing
 Type of facilities
required
 Production
Planning and
Control
 Coordinating
product supply with
product demand
 Transportation
 Vendor control
 Modal choice
 Rush shipments
 Inspection
 Damage claims

29. 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

30. 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.

31. 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.

32. 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

33. Figure 4-8
Advantages of Electronic Procurement

34. 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

35. 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

36. 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

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

38. End of Chapter 4 Slides
Procurement and Supply
Management