Chapter 4 1

Chapter 4
Procurement and Supply
Management
Chapter 4 Management of Business Logistics, 7
th
Ed. 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.
Chapter 4 Management of Business Logistics, 7
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Ed. 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.
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Ed. 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
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Figure 4-1
A Food System Supply Chain
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Table 4-1
Industry Supply Chain Logistics Emphasis
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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
Warehousing, production planning, inbound
transportation, receiving, materials quality control,
inventory mgmt., etc.
Importance of Item and Service Purchased
The Special Case of Procurement Price
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Materials Management:
Procurement
Importance
Contributes to the competitive advantage
of the firm
Significant portion of the logistics costs
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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

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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

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Figure 4-2
Procurement Process
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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.
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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.
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Ed. 14
Figure 4-3
Item Procurement Importance Matrix
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Materials Management: Managing
the Procurement Process in 4 Steps
1. Determine the type of purchase
New
Straight rebuy
Modified rebuy

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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.
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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
users requirements.
4. Evaluate the effectiveness of the
procurement process
Were the users needs satisfied?
Was the investment necessary?

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Ed. 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 firms 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.
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Materials Management: Managing
the Procurement Process
Vendor Selection Criteria
Quality
Reliability
Capability
Financial
Miscellaneous Other Qualities
Vendor Location
Factor Importance Will Vary
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Figure 4-4
Overview of Vendor Selection Criteria
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Materials Management: The
Special Case of Procurement Price
Sources of Price
Commodity markets
Price lists
Price quotations
Negotiation
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Figure 4-5 Hierarchy of Price
Measurement Approaches
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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

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Figure 4-6
Total Procurement Price
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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?
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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
products size, weight, density and
shape

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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

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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
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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.
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Electronic Procurement
Business-to business (B2B) purchases are
estimated to be $1.3 to $2.0 trillion by 2003
6
.
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.
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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
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Figure 4-8
Advantages of Electronic Procurement
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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

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Four Basic Types of E-commerce
Models
7

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
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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 36
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