Chapter 1 Procurement and Supply Management. Major Logistics Activities customer service demand...

Chapter 1Procurement

and Supply Management

Major Logistics Activities

• customer service• demand

forecasting/planning• inventory management• logistics communications• material handling• order processing• packaging

• parts and service support• plant and warehouse site

selection• procurement• reverse logistics• traffic and transportation• warehouse storage

Scope of procurement

Performing activities such as

• supplier identification and selection,• buying,• negotiation and contracting,• supply market research and trend monitoring,• supplier measurement and improvement, • purchasing systems development,• supplier relationship management,• maintaining quality in order to deliver maximum value to the organization and to create

competitive advantage.

Terms used

• Purchasing Management• Procurement• Supply Management• Strategic Sourcing

The Evolution of the Supply FunctionEra 1- Early Years 1850-1900• Definitions in books appeared• Recognition of purchasing process and contribution to profit• The growth of railways dominated the development of purchasing• Gained departmental status as supplying department in railways• The Handling of Railway Supplies – Their Purchase and Disposition

– Published in 1887Era 2-Growth of Purchasing Fundamentals (1901-1946)• Impact of World War I –II• Development of basic purchasing procedures and ideas• Industrial purchasing function Era 3- Quiet Years (1947-mid 1960s)• Internal purchasing developments Ford Company and General Electric• Growing industrial market, stable competition and abundant material

–decreased the interest in purchasing

Era 4- Materials Management Comes of Age (mid 1960s-late 1970s)• Purchasing, inventory, receiving combined and take the name of materials

management• Material supply problems related to oil shortages and embargoes

Era 5- Global Era (Late 1970s-1999)• High competition• Global firms emerged• Effect of technology (data networks, intranets)• Supply chain managementEra 6-Integrated supply chain management (beyond 2000)• Supplier relations• Supplier development-involvement• Internet and software developments-B2B commerce• Strategic importance • Integration with other functions such as operations, marketing etc.

The Evolution of the Supply Function

What organizations purchase?

• Raw Materials• Semifinished products and components

• Finished goods• Maintenance, repair and operating items

• Production support items• Services

• Capital Goods• Capital

Objectives of the Procurement Function

• Provide an uninterrupted flow of materials, supplies and services required to operate the organization

• Keep inventory investment and loss at a minimum• Maintain and improve quality• Find or develop competent suppliers• Standardize, where possible, the items bought• Purchase required items and services at lowest total

cost of ownership

Objectives of the Procurement Function

• Achieve harmonious, productive working relationships with other functional areas within the organization

• Accomplish the purchasing goals at the lowest possible level of administrative costs

• Improve the organization’s competitive position

The Differences Between Commercial and Consumer Acquisition

• Number of suppliers• Power of influence the price• Final consumer-industrial

• Large volumes• Special expertise• Special discounts• Impulse buying• Cost of failure

FINANCIAL SIGNIFICANCE OF PURCHASING

• In manufacturing firms, supply area represents the largest single category of spend, ranging from 50%-

85%.

• Carrefour purchases in 2005 from Turkey-300 million €• IKEA (from 1998 to recent) 1.4 billion $

Direct & Indirect Contributions of the Purchasing/Supply Function

• Profit-leverage effect• Return-on-assets effect• Inventory reductions• Information source• Effect on efficiency• Effect on competitive position and customer satisfaction• Effect on image• Enhancing performance of other departments and supply

chain • Ideas from suppliers may result in improved design, lower

manufacturing cost…• Impact on strategic goals and objectives

Leverage principlereturn on assets

Sales$1 million

Total costa

$950.000

Profit$50,000

Sales$1 million

Dividedby

Profitmargin

5%

Less

Sales$1 million

Returnon

assets10%

Investmentturnover2 timesTotal

assets$500.000

Dividedby

Inventoryc

$150 000

Multipliedby

(900.000) b

($100,000)

(10%)

(20.6%)

(2.06)

($485.000 )($135 000)

aPurchases are 50% of total sales.bFigures in parentheses assume a 10% reduction in purchase prices.cInventory is 30% of total assets.

Supply Function as an Information SourceExternal Information Flows to Purchasing

Purchasing

generalmarket

conditionssources

ofsupply

suppliers’ capacity

suppliers’production rates

labor conditions sales anduse taxes,customs

prices anddiscounts

transportation rates

transportation availability

new productinformation/new technology

productinformation

Supply Function as an Information SourceInternal Information Flows to Purchasing

Purchasing

engineering

planning-

production

in and outbound traffic

financial control

accountinglegalreceiving-materials handling

quality control

inventory control

new products

salesforecasting

Challenges Facing Purchasing

• B2B e-commerce• Need to control unit costs• Need to reduce the total cost of acquisition• The increasing influence of suppliers on the purchaser’s ability to respond

to end-customers needs• Increased reliance on fewer suppliers

• Trend towards reliance on suppliers for design and build responsibilities

for complete subassemblies and subsystems

• Measurement

• Purchase of non-traditional goods and services

• Recognition by management

Placement of Purchasing Authority

Centralized, where the authority and responsibility for most supply-related functions are assigned to

a corporate headquarter.

Decentralized, where authority and responsibility for supply related functions are dispersed

throughout the divisional, business or site levels..

Hybrid, where authority and responsibility are shared between a central supply organization

and business units, divisions, or operating plants.

Purchasing and Supply Teams

• Cross-functional teams• Teams with suppliers• Teams with customers• Teams with suppliers and customers• Supplier councils - key suppliers• Purchasing councils - purchasing personnel

only• Consortiums

The Essential Steps of Purchasing Process

1. Recognition of need2. Clarify needs-description of need3. Identify and select suppliers4. Approval, contract and purchase order5. Receive materials6. Measure and manage supplier performance

E-procurement activities in the process

• Creating requisition• Placing purchase order• RFQ-request for quotation• Reverse auctions• Performance evaluations• Procurement spend analysis

1.RECOGNITION OF NEED

• Any purchase originates with the recognition of a definite need by someone or some system in the organization.

• Planned or unplanned needs

• What the requirements of the unit are-what, how much, and when it is needed?

2. DESCRIPTION OF THE NEED

• No purchasers can be expected to buy without knowing exactly what the external customers want.

• It is essential to have an accurate description of the need requested.

• Purchasing and the user, or the cross-functional sourcing team, share responsibility for accurately describing the item or service needed.

• If the user/buyer writes unclear or ambiguous descriptions, or over-specifies materials or quality levels, this will lead to unnecessary costs.

2. DESCRIPTION OF THE NEED(Cont’d)

Ways of passing the needs

–Purchase requisitions(for materials)–Statement of work (SOW) (for services)

Standard Requisition

– Date of requisition– Requisition number– Originating department– Account to be charged/unit costs– Complete description of material or service desired– Quantity– Date of material or service needed– Any special shipping or service-delivery instructions– Signature of authorized requisitioner

ERP Purchase requisition

3. IDENTIFY & SELECT THE SUPPLIERS

3 alternatives:

1.Make internally

2. Work with existing –approved suppliers(maverick buying-working with the unapproved

suppliers/ off-contract buying)

3. Find new suppliers

Step 1. create long list of suppliers

Step 2. shorten the list to 4-6 potential suppliers

Step 3. competitive bidding and negotiation request for quotation or proposal (RFQ) RFP or RFB

3. IDENTIFY & SELECT THE SUPPLIERS

RFQ

• A request for quotation (RFQ) is a standard business process whose purpose is to invite suppliers into a bidding process to bid on specific products or services.

Sending out a RFQ to all suppliers on the short list-description of item-quantity and date needed-delivery location-quality…etc.

• The bid does not have to mean the end of the bidding. Multiple rounds can follow or even a Reverse auction can follow to generate the best market price.

Reverse or E-Auction

• Forward auction versus reverse auction• Auction run through a buyer’s web site

• Describing the requirements through a website- online submission of bids

• Open-can see the summary of competing prices

Reverse auction process

Intermediation in Reverse Auction

Step 4. Compare the submitted quotations and select the best supplier-costs, payment terms, product details, contact person, delivery details...etc.

Competitive bidding is effective when;

• Orders are large • Specifications are clear• Market place is competitive• Enough time is available for suppliers to

evaluate and respond to the request for quotation

• The buyer does not already have a preferred supplier

4. Approval, Contract and Purchase Order

• Placing on order usually involves preparation of a purchase order form

• Legally binding documents

• Front page-all information about the purchase(date, price, quantity,address…)

• Back page-standard legal conditions

• Failure to use the proper contract may result in serious legal complications

• Copies are sent to concerned stakeholders (users, accounting,…)

Blanket and Open-End Orders

• A blanket order is defined as an order the customer makes with its supplier which contains multiple delivery dates scheduled over a period of time, sometimes at predetermined prices.

• Means ‘We agreed on terms just send the items when you get the routine message- a material release’

• The cost of issuing and handling purchase orders may be reduced when conditions permit the use of blanket or open-end orders.

• A blanket order usually covers a variety of items.

• An open-end order allows for addition of items and/or extension of time.

VENDOR MANAGED INVENTORY

• ...is a more sophisticated merging of the ordering and inventory functions than blanket contracts

• the vendor creates orders based on demand information that they receive from the customer.

• an agreement which determines inventory levels, fill rates and costs.

• EDI, VMI software package for determining order requirements as a part of an ERP suite such as SAP or be a standalone option such as products from Blue Habanero, LevelMonitor, etc.

• Calculate a reorder point for each item based on the data and any customer information such as promotions, seasonality or new items.

5. Receive Materials

• Expediting is the application of pressure on a supplier to meet the original delivery promise, to deliver ahead of schedule, or to speed up delivery of a delayed order

• Invoice, Bill of lading, Discrepancy report

6. Measure and manage supplier performance

• maintenance of records and relationships• Supplier scorecards

NICHE MARKETS – ONLINE LOGISTICS PROVIDERS

• Online Freight Marketplaces– Spot market– Auction and RFQ– Exchange– Meta-marketplaces

• Application Service Providers (ASPs)• Purchasing Consolidation Market• Infomediaries

45

• Spot market

• Auction and RFQ

• Exchange

• Meta-marketplaces

• Application Service Providers (ASPs)

• Purchasing Consolidation market

• Infomediaries

Niche Markets – Online Service Providers

46

Spot market

• Cash market & immediate delivery• When shippers have exception freight that is not covered by a

contract, they seek out the spot freight market.• Often, freight broker or other intermediary finds a carrier and

arranges transport.• Direct access to the spot freight market place through a load

board.• Matchmaking-enables manufacturers or intermediaries to find

carriers with access capacity on the equipments and routes the best suit their immediate needs.

47

Spot market in freight

• Transcations are not long-termed, terms and conditions are subject to negotiation.

• Lower priced

• DAT services (online freight matching service), 3sixty Power, 3sixtyExpress—marketplace for more than 60 million loads and trucks annually.

• Spot market

• Auction and RFQ

• Exchange




• Infomediaries


50

• Spot market

• Auction and RFQ

• Exchange




• Infomediaries


54

How Does the Freight Exchange Work?

• Members post their loads or returnloads on the site.

• These loads are then displayed on the site for all the other members to see. The loads also go out as notifications to members based in the local area of collection or who have vehicles.

• If a member is interested in a load or returnload they will contact the member who has posted the load directly.

• Payment terms and rate are agreed between both parties.

• The job is carried out, paperwork completed, job invoiced and payment made directly between the parties concerned

• All the money on the job goes to the member carrying out the load or returnload.

• Spot market

• Auction and RFQ

• Exchange




• Infomediaries


57

Meta market

• Meta Market is a web-based market centered around an event or an industry, rather than a single product.

• The web allows to match producers' desire for economies of scale, and consumers' desire for variety of choice to satisfy a set of needs.

• meta market for an entire industry (for example chemical industry) where the industry can trade excess inventory, source new suppliers and find new vendors.

58

• Spot market

• Auction and RFQ

• Exchange




• Infomediaries


60

APPLICATION SERVICE PROVIDER

• An application service provider (ASP) is a business that provides computer-based services to customers over a network.

• On-demand software or software as a service (SaaS).

• The need for ASPs has evolved from the increasing costs of specialized software

• up-to-date services, 24 x 7 technical support, physical and electronic security

61

• Spot market

• Auction and RFQ

• Exchange


• Purchasing Consolidation Market

• Infomediaries


64

• Spot market

• Auction and RFQ

• Exchange


• Co-ops

• Infomediaries


66

Chapter 1 Procurement and Supply Management. Major Logistics Activities customer service demand...

Documents

Transcript of Chapter 1 Procurement and Supply Management. Major Logistics Activities customer service demand...