This document discusses the strategic implementation of procurement processes. It begins by establishing that effective procurement requires sound business practices to maximize organizational value through acquiring goods and services. The document then discusses factors like competition and technology that impact procurement strategies. It provides examples of companies that struggled or succeeded by effectively aligning their corporate and procurement strategies. Finally, it discusses developing procurement capabilities that strategically fit customer needs and demands while considering uncertainties. The key is finding the right balance between responsiveness and efficiency.

1. A Strategic Implementation Process
1-1

2.  Effective procurement requires the utilization
of sound business practices that maximize
value to the organization through the
acquisition of goods and services (Sollish &
Semanik, 2012, p. 1).

3. • Product supply management is nothing but
Procurement Strategy, which is integral to corporate
strategy.
• A corporation’s corporate strategy and procurement
strategy must fit with each other or otherwise, both
will fail.
• We will discuss the strategic decision making
issues of procurement and also how managers make
decisions related to both corporate and procurement
strategy.
• The discussions should facilitate understanding of
the issues of strategic implementation.
1-3

4.  Fierce competition
 Introduction of products with shorter and
shorter life cycles
 Heightened expectations of customer
 Continuing advances in communications and
transportation technologies (e.g. mobile
communication, Internet, overnight delivery)
1-4

5.  It is estimated that the grocery industry could
save $30 billion (10% of its operating cost) by
using effective logistics strategies.
 Compaq computer estimates it lost $500 million
to $1 billion in sales because its laptops and
desktops were not available when and where
customers were ready to buy them (Compaq
does not exist anymore).
1-5

6.  JIT, TQM, lean mfg. techniques have reduced
manufacturing costs as much as they could.
 One area that yet requires improvement:
Inventory Procurement. See the following
examples:
 It takes a typical box of cereal more than 3 months to
get from factory to supermarket.
 It takes a new car (on average) 15 days to travel from
factory to dealership.
1-6

7.  In 10 years, Wal-Mart transformed itself by
changing its logistics system. It has the highest
sales per square foot, inventory turnover and
operating profit of any discount retailer.
 Dell Computer has outperformed the
competition in terms of shareholder value
growth over the eight years period, 1988-1996,
by over 3,000%
1-7

8.  All stages and parties involved, directly or
indirectly, in fulfilling a customer request
 Internally, the procurement process includes all
functions involved in fulfilling a customer
request (product development, marketing,
operations, distribution, finance, customer
service).
 Externally, it includes the suppliers, vendors,
manufacturers, transportation, and
distributors, that exist to transform raw
materials to final products and supply those
products to customers.
1-8

9. A procurement or a supply example
The following example illustrates how a simple box
of cereal travels through a retail store that involves
so many parties and contractual arrangements,
hence why each one must function effectively to
make the process efficient.
1-9

10. Timber Paper Tenneco
Company Manufacturer Packaging
P&G or other
Wal- Mart Customer
Manufacturer
Corn Plastic
manufacturer Producer
1-10

11.  Primary purpose is satisfying customer needs.
 Maximizing the overall value created
 Value, measured monetarily, refers to: the difference
between what the final product is worth to the
customer (price the customer is willing to pay) and the
effort, collectively, the procurement chain expends in
filling the customer’s request (the collective costs)
 Therefore, procurement profitability would be: the
difference between revenue generated from the
customer and the overall cost across the entire
Procurement chain.
1-11

12. While managing procurement process is important for
managing costs and profits and delivering value to the
customer, it is not easy to do.
It requires understanding, cooperation, coordination, and
information sharing among several trading partners – both
internal and external.
And, given that there are so many parties involved, it is
indeed a formidable task to make all of them work towards a
common objective.
1-12

13.  Procurement chain network is often very
complex
 Procurement chain partners have
conflicting objectives.
 Consequently, making everyone to agree
is not an easy task.
1-13

14. 1. Purchasing wants
• Stable volume requirements
• Flexible delivery time
• Little variation in mix
• Large quantities Think why some of these
2. Manufacturing wants objectives are conflicting.
• Long run production
• High quality
• High productivity
• Low production cost
1-14

15. 3. Warehousing wants
• Low inventory
• Reduced transportation costs
• Quick replenishment capability
4. Customers want
Think why some of these
• Short order lead time
objectives are conflicting.
• High in stock
• Enormous variety of products
• Low prices
1-15

17.  In the 1990s, outsourcing was the focus of
many manufacturers.
Example: Nike Shoes
 Nike’s strategy: R&D on one hand and
marketing, sales, and distribution on the other.
Example 2: CISCO
 CISCO’s strategy: Focus on Internet sales;
increased productivity and save on business
expenses.
Example 3: Apple Computers
 Apple computers: outsourced most of its mfg.
2-17

18.  In 2001, Nike reported a profit shortfall due to
inventory buildup, shortage for others, and late
deliveries.
 In 2000, CISCO was forced to announce 2.25 B
write-down for obsolete inventory.
 In 1999, Apple had huge customer
dissatisfaction because of shortage of G4 chip
supplied by Motorola.
2-18

19.  In the examples, the difficulties reflect problems with
procurement chain strategies.
 Nike, CISCO, Apple have short product life cycles.
 When technologies changed, uncertainties related to
customer demand increased.
 Procurement landscape changed significantly with the
introduction of independent, private, and consortium-
based e-market places.
 With changes in procurement landscape, both problems
and opportunities also changed.
 But, Nike, CISCO, and Apple were not able to react to
these changes and formulate a new corporate and
procurement strategy.
2-19

20.  The most important requirement for sustainability
is a well-formulated corporate strategy
 A corporate strategy, in turn, requires forming sub
strategies such as product strategy, procurement
strategy, marketing strategy, and so on.
 A firm should continually evaluate its corporate
strategy and its sub strategies and ensure that they
are appropriate for a changing environment.
2-20

21.  Relative to competitors, how should my firm
satisfy customers?
 What products and services should we offer?
 Should we focus on cost or should we focus
more on service and quick response?
 How much customization should we allow on
our products?
 Compare the competitive strategies of: Lands
End and a local retailer.
2-21

22. Competitive Strategy and procurement Strategy –
The relationship
New Product Marketing & Operations Distribution Service
Development Sales
Procurement Strategy
Supplier Operations Logistics
Strategy Strategy Strategy

23.  Suppose Dell’s competitive strategy is to deliver a
product within 72 hours of receiving an order but is
product suppliers, on average take 7 days to resupply
inventory.
 Will Dell be able to accomplish its competitive strategy?
 Consider Dell’s competitive strategy on the next slide…
2-24

24.  Competitive strategy: provide a large variety of
customizable computer-related products at a
reasonable price and to let customers select from
number of configurations.
 Procurement strategy: Two possible options:
 1. Efficient procurement limiting variety and exploiting
economies of scale or
 2. High flexibility and responsiveness producing a large variety
of products.
 Dell’s procurement Strategy is No. 2: Dell focuses
on designing easily customizable products, common
platforms and components that can be assembled
quickly.
2-25

25.  Step 1: Understanding the customer and
procurement uncertainty
 Step 2: Understanding the procurement
capabilities
 Step 3: Achieve strategic fit
2-26

26.  Demand uncertainty: arises because of changing
customer needs – predicting demand for a product
or service absolutely is impossible. This is an
external factor controlled by the customer.
 Procurement chain uncertainty, in contrast, arises
because of uncertainties within a procurement
process.
 While a firm would like to meet 100% of customer
demand, it may not be able to do so because its
procurement is unable to because of multiple
reasons that were listed under procurement
uncertainty.
2-27

27.  Usually products that are less mature (electronics
& computers) have greater demand uncertainty
(unlike salt or milk).
 Forecasting demand for such products is very
difficult and usually not very accurate.
 With forecasting difficulties, matching demand
against product and services supply is difficult.
 For uncertain demand products, prices are not
steady and varies depending on demand levels.
 At the same time, a firm could earn greater margin
from uncertain demand products.
2-28

28.  Procurement uncertainty: The portion of
uncertainty introduced by procurement
attributes such as: production breakdowns, low
product yields, poor quality and rework,
procurement capacity is limited (because of
limited production facilities, availability of raw
materials, labor, and numerous other factors);
 Supply capability is inflexible and cannot
increase with increased product demand;
 Changes in production process could lead to
bottlenecks.
2-29

29.  Identify the needs of the customer segment
being served (retail, wholesale, discount, high-
end customers)
 Quantity of product needed in each lot (large,
small)
 Response time customers will tolerate
 Variety of products needed
 Service level required
 Price of the product
 Desired rate of innovation in the product
2-30

30.  A procurement can rarely meet all demands of
all of its customers. Why?
 How many of the following demands of
customers can we meet?
 Responding to wide range of product demands
 Meeting short lead times
 Handling a large variety of products
 Meeting high service level possible
 Where do we compromise?
2-31

31.  How responsive should a procurement be?
 Quicker response implies increased costs
(responsiveness).
 Delayed response implies lower costs
(efficient).
 Therefore, a firm must compromise between
quicker response and lower costs and strike a
balance that suits its objectives.
 See the graph.
2-32

32. Responsiveness
High
Low
Cost
High Low
2-33

33. Efficient Responsive
Primary goal Supply demand at the lowest cost Respond quickly to demand
Product design strategy Min. product cost Modularity to allow
postponement
Pricing strategy Lower margins Higher margins
Mfg strategy High utilization Capacity flexibility
Inventory strategy Minimize inventory Buffer inventory
Lead time strategy Reduce but not at expense of Aggressively reduce even if
greater cost costs are significant
Supplier selection strategy Cost and low quality Speed, flexibility, quality
Transportation strategy Greater reliance on low cost Greater reliance on responsive
modes (fast) modes

34.  Now that a firm has assessed customer needs,
demand uncertainties, and procurement chain
constraints and uncertainties, it is time to make
the two fit with each other.
 How?
 In most cases, by offering high responsiveness to
products with high demand uncertainties and strive
towards more cost efficiencies for products with low
demand uncertainties.
 Compare these two products: computers and
cheese. How are the strategic fits different?
2-35

35.  Dell proposed a competitive strategy that it
will ship ordered consumer products within 72
hours; a relatively high response rate.
 What are the factors that Dell must consider?
2-36

36.  First, Dell should be able to forecast customer
demand with some degree of accuracy
(demand uncertainty).
 Decide how much of this demand uncertainty
it can meet (e.g. we can offer 72 hours shipment
in the case of jackets and overcoats but not for
school bags (implied demand uncertainty).
 Also, note other items that Dell must
consider…
2-37

37.  Decide whether its procurement chain – from manufacturers to
trucking companies to warehouses would be able to meet its
goal of 72 hours shipment.
 Decide how much inventory Dell should carry and how much
should its procurement chain partners carry.
 How soon can Dell inform manufacturers of changing fashions
and demands?
 Ascertain the flexibility (in procurement of raw materials, mfg.
capacity, labor, etc.) that its procurement chain partners have
(or do not have)?
 Consider the cost of all of these factors and decide on the
responsiveness spectrum or the zone of fit.
 See the next slide.
2-38

38.  Two key points
 there is no right procurement chain strategy
independent of competitive strategy
 there is only a right procurement chain
strategy for a given competitive strategy
2-39

39.  Formulating corporate strategy is easier than
implementing strategy.
 Strategy implementation requires the cooperation
of both internal and external parties and
 In turn, that requires common objectives and
common benefits.
 Strategy is not an one time implementation but
something that requires constant redesign.
 Procurement or supply management is one of the
largest assets in an organization and
 The implication of managing it well has significant
consequences to an organization.

40. Sollish, F. & Semanik, J. (2012). The procurement
and supply manager’s desk reference, 2nd
edition. John Wiley & Sons, Inc. Hoboken, NJ.