Unit –4

Prepared By:
Premendra Sahu
Asst. Professor, itm University
 Procurement
Procurement is a business management function. Procurement is essentially an acquisition of
products and services, especially for the business purpose. It covers a complete range of
activities from identifying the need of goods and services to its allotment. In a more broader
sense if we talk, Procurement involves activities like;
1)Selecting vendors
2)Establishing payment terms
3)Negotiating Contracts
4)Regulatory compliance
5)Analysis and sourcing
Thus, procurement is an umbrella term under which Purchasing is just a component. Since
procurement is an umbrella term and includes all the core business activities, it should be
considered an important corporate activity.
 PROCUREMENT PROCESS

Step 1 – Supplier identification: The first step in the SRM method is supplier identification. The company
must sort out and identify all its suppliers, to whom they paid invoices over a certain period.
Step 2 – Supplier segmentation: This is an important step. The long list of suppliers to whom invoices
have been paid must be segmented. Segmentation helps to find those suppliers that are capable of
contributing to the business strategy. Only these, limited number of suppliers are worth the time and effort
to build a close relationship and partnership, with.
Step 3 – Relationship analysis: Mainly for the top segment of suppliers classified as interesting to build a
partnership with, the company must determine the existing relationship type. This is realized by using the
supplier relationship analysis tool.
Step 4 – Relationship management: Mainly for the top segment of suppliers the existing relationship type
needs to be managed towards the ideal relationship type, which is the leverage-core relationship type.
Step 5: – Evaluation: On a regular basis the SRM results and lessons learned need to be documented
and evaluated. This will lead to a series of recommendations towards the business like integrating the top
segment suppliers for new research and development activities or proposing to restart step 2, the supplier
segmentation.
 Sourcing

Sourcing, as the name implies, is a finding a source from

where the goods and services can be procured. It is a
subsection of the procurement, where, procurement is
concerned with acquiring of goods and services, sourcing
is finding a least expensive supplier for those goods.
Since the business profits heavily rely on finding the best
source of suppliers it is considered to be the first step
taken by the business before its first sale.
 Sourcing Strategies

1)Single sourcing: A method whereby a purchased part is supplied by only one supplier.
A JIT manufacturer will frequently have only one supplier for a purchased part so that close
relationships can be established with a smaller number of suppliers. These close relationships
(and mutual interdependence) foster high quality, reliability, short lead times, and cooperative
action.
2)Multisourcing: Procurement of a good or service from more than one independent supplier.
Companies may use it sometimes to induce healthy competition between the suppliers in order
to achieve higher quality and lower price.
3)Outsourcing: The process of having suppliers provide goods and services that were
previously provided internally. Outsourcing involves substitution—the replacement of internal
capacity and production by that of the supplier.
4)Insourcing: The goods or services are developed internally.
Sourcing Procedures
 The Role of Sourcing in Supply Chain:

1)Better economies of scale can be achieved if orders within a firm are aggregated.
2)If you want to reduce the purchasing cost, your procurement transactions should be more
efficient.
3)Design collaboration can result in products that are easier to manufacture and distribute,
resulting in lower overall costs.
4)If you coordinate with suppliers, then your forecasting and planning efficiency will increase for
goods.
5)While making contracts with suppliers, the result should be such a way of sharing the risk.
The result is very excellent. It brings profits for both the supplier and the buyer.
6)If any Firm use auctions the can significantly reduce the purchase price due to competition
between vendors.
 Purchasing
Purchasing is a subset of Procurement. Though these terms are
being used interchangeably they mean different. Purchasing simply
involves buying and selling of the goods and services. Purchasing
is only restricted to receiving and making payments. Purchasing
can be best known as the transaction-oriented function of
Procurement.
 PURCHASING STRATEGIES

#1 Purchasing Strategy – Supplier Optimization

Organizations often transact with multiple suppliers spread across vast
geographies. Companies are following supplier rationalization to simplify the
purchasing process by only involving key vendors who are essential to the
company. Also, purchasing from one single supplier opens the possibility for a
volume discount.

#2 Purchasing Strategy – TQM Practice

Total quality management alongside supply chain management can equip
organizations with sustainable competitive advantage by improving product quality
and service, while reducing cost. A TQM strategy aims at reducing quality problems
and increasing customer satisfaction by monitoring personnel management,
process management, customer relationships, supplier relationships, product
design, quality information, and benchmarking.
 PURCHASING
STRATEGIES
#3 Purchasing Strategy – Risk Management
Organizations operate in a dynamic environment of uncertainty and complexity with
a high risk of supply chain disruption. Companies should establish a thorough risk
management process to continuously analyze and reduce these risks. An effective
risk management process helps identify factors causing supply chain disruption such
as labor disputes, capacity issues, natural disasters, incorrect forecasts and delays,
and inventory problems.
#4 Purchasing Strategy – Global Sourcing
The quest for product perfection and increasing pressures for price reduction has
prompted companies to look across the globe for their purchasing needs. Global
sourcing also provides organizations with an opportunity to source skills and
resources that are unavailable or unproductive at home; thereby, increasing their
productivity.
 PURCHASING
STRATEGIES
#5 Purchasing Strategy -Vendor Development
In a world of fierce competition, businesses are looking for multiple ways to gain a
competitive advantage that drives innovation. To do so, it is important for
organizations to look at vendors not only as sellers but also consider them as
partners to co-create innovative products or identify savings opportunity.
Organizations focusing on vendor development will eventually realize efficiency
gains sooner in the future.
#6 Purchasing Strategy -Green Purchasing
A majority of the companies are making efforts towards green procurement.
Abiding by the green purchasing standards can help organizations achieve cost-
savings, minimize supply chain risks, and enhance their brand image. Such
companies are better equipped to deal with stringent environmental laws.
PURCHASING PROCESS
 ROLE OF PURCHASING

1)Supplier Management
2)Negotiating and Administering the Best Deals
3)Cost Control
4)Legal Controls
 Coordination in Supply chain Management

Supply chain coordination improves if all stages of the chain take actions that
together increase total supply chain profits. Supply chain coordination requires
each stage of the supply chain to take into account the impact its actions have
on other stages.
A lack of coordination occurs either because different stages of the supply chain
have objectives that conflict or because information moving between stages is
delayed and distorted.
 Bullwhip Effect

Fluctuations in orders placed and demand increase as we move up the

supply chain from retailers to wholesalers to manufacturers to suppliers.
This is called as Bullwhip effect.
The Bullwhip effect distorts demand information within the supply chain,
with each stage having a different estimate of what demand looks like. The
result is a loss of supply chain coordination.
Like- P&G has observed the bullwhip effect in the supply chain for
Pampers diapers. The company found that raw material orders from P&G
to its suppliers fluctuated significantly over time. Farther down the chain,
when sales at retail stores were studied, it was found that the fluctuations,
while present, were small.
 Causes for the bullwhip effect
Forecasting updating – Multiple forecast updates by each entity in the chain leads to
significant distortions. Each member of the chain updates forecast based on orders
received at his end and not based on the demand raised by the end customer.
Order batching – Each member of the chain has his own economies of scale in
production and transportation resulting in planning practices leading to order batching.
Price fluctuations – Discounts or price promotions result in forward buying, causing
much distortion. Further frequent price changes affect the ordering pattern of the buyer
Shortage gaming – In a situation of shortages the suppliers usually resort to rationing,
which in turn provides incentives to buyers to inflate orders.
Long lead time – Long lead times increase the planning horizon of other partners in the
chain.
 The effect on Performance of Lack of
Coordination
Manufacturing Cost – Increases manufacturing cost. As a
result of the Bullwhip effect, manufacturer must satisfy a stream of
orders that is much more variable than customer demand.
Manufacturer can respond to the increased variability by either
building excess capacity or holding excess inventory, both of which
increases the manufacturing cost.
 The effect on Performance of Lack of
Coordination
Inventory Cost – Bullwhip effect increases inventory cost. To handle the
increased variability in demand, manufacturer has to carry a higher level of
inventory, than would be required in the absence of the Bullwhip effect.
Replenishment Lead Time – Increases replenishment lead times.
Increased variability makes scheduling at manufacturers much more difficult
and the available capacity and inventory cannot supply the orders coming in
. Transportation Cost – Increases transportation cost. Transportation
requirements fluctuate significantly over time and thus surplus
transportation capacity needs to be maintained to cover high demand
periods.
 The effect on Performance of Lack of
Coordination
Labor cost for shipping and receiving – Increases labor costs.
Labor requirements fluctuate with orders and thus manufacturers
have the option of either carrying excess labor capacity or varying
labor capacity, both of which increases total labor cost.
Level of product availability – Hurts the level of product
availability and result in more stockouts in the supply chain. Large
fluctuations in orders make it difficult for manufacturer to supply all
distributor and retailer orders on time.
Relationships across the Supply Chain – Has a negative
effect on performance at every stage and thus hurts the
relationships between different stages of the supply chain.
 Managerial Levers to Achieve Coordination

1) Aligning of goals and incentives

2) Improving Information Accuracy
3) Improving operational performance
4) Designing pricing strategies to stabilize orders
5) Building partnerships and trust