Chapter 4
Procurement and Supply
Management
Chapter 4
1

Material Management

Electronic Procurement – e-Commerce
Chapter 4
Management of Business Logistics, 7th Ed.
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Material Management
Chapter 4
Management of Business Logistics, 7th Ed.
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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.
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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
Important note: one ends with customers may serve as the other
End as vendor value
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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 management, and
salvage and scrap disposal)
1.
2.
3.
4.
Chapter 4
Procurement
Importance of Item and Service Purchased
The Special Case of Procurement Price
Other Materials Management Activities
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Materials Management:
1.Procurement


Buying goods and services for a firm, a process
of obtaining goods and services for the firm
Importance
 Contributes to the competitive advantage
of the firm
 Significant portion of the logistics costs
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Materials Management:
1.Procurement

Definition of Procurement 12 Activities
1. Identify or reevaluate needs
2. Define and evaluate user requirements
3. Decide whether to make or buy
4. Identify the type of purchase
5. Conduct a market analysis
6. Identify all possible suppliers
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Materials Management:
1.Procurement


Definition of Procurement Activities…
8. Prescreen all possible sources
9. Evaluate the remaining supplier base
10. Choose a supplier
11. Receive delivery of the product or service
12. Make a post purchase performance
evaluation
(see next slide for the flows)
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Management of Business Logistics, 7th Ed.
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Figure 4-2
1.Procurement Process
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Management of Business Logistics, 7th Ed.
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Materials Management:
2.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: 2.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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Figure 4-3
2Item Procurement Importance Matrix
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Materials Management: 2. Managing
the Procurement Process in 4 Steps

1. Determine the type of purchase
New purchase
 Straight rebuy
 Modified rebuy

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Materials Management: 2. Managing
the Procurement Process in 4 Steps

2. Identify levels of investment


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
user’s requirements.
4. Evaluate the effectiveness of the
procurement process
 Were the user’s needs satisfied?
 Was the investment necessary?
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Management of Business Logistics, 7th Ed.
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Materials Management:
2.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.
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Materials Management:
2.Managing the Procurement
Process

Vendor Selection Criteria
1.
Quality
2.
Reliability
3.
Capability
4.
Financial
5.
Miscellaneous Other Qualities
6.
Vendor Location
7.
Factor Importance Will Vary

Chapter 4
(Itemized see next slide)
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Figure 4-4
Overview of Vendor Selection Criteria
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Materials Management: 3. The
Special Case of Procurement Price
1. Sources of Price
1.
Commodity markets
2.
Price lists
3.
Price quotations
4.
Negotiation
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
General spectrum of expanding
procurement approaches to the supply
chain ---- see next slide
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Figure 4-5 Hierarchy of Price
Measurement Approaches
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
Components required to be considered
in order to obtained overall optimized
solution (see next slide)
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Figure 4-6
Total Procurement Price
See next slides
For details
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Materials Management: The
Special Case of Procurement Price
2. Types of Costs
 1. Traditional basic input costs - primary
product price
 2. Direct transaction costs - all other
related costs of detecting and transmitting
information to suppliers (e.g., EDI)
 3. Supply relational costs - costs of
maintaining relationships with suppliers
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Materials Management: The Special
Case of Procurement Price

3. Other types of Costs
 4. Landed costs actual transport costs + sales terms
 5. 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
 6. 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
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Materials Management: 4. Other
Materials Management 5 Activities
1. Warehousing
 Type of facilities
required
2. Production
Planning and
Control
 Coordinating
product supply with
product demand
(such as open air …Chapt 8)
(forecasting, see Figure 4-7)
Chapter 4
3. Transportation
 Vendor control
 Modal choice
 Rush shipments
 Inspection
 Damage claims
Management of Business Logistics, 7th Ed.
(rail, water..)
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Figure 4-7 Overview of Production
Planning and Control
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Materials Management: Other
Materials Management Activities

4. 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

5. 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
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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.
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Electronic Procurement

6 Common uses of E-commerce
1.
Research vendor and product information
2.
Electronic check of available stock
3.
Price negotiation
4.
Order products or services
5.
Check on the status of an order
6.
Issue invoice and receive payment
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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


Chapter 4
Standard protocols
System reliability
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Figure 4-8
Advantages of Electronic Procurement
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Four Basic Types of E-commerce
Models7
1. Sell-side system
 Administered by the seller
 Usually free to the buyer
(B2B)

www.officemax.com, www.globalcomputer.com,
2. Electronic marketplace
 Administered by a third party
 Collection of electronic catalogs
 One-stop sourcing for buyers

Chapter 4
www.plasticsnet.com, www.e-chemicals.com, www.metalsite.com
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Types of E-commerce Models
3. Buy-side system
 Administered by the buyer
 Pre-approves vendor access
 Expensive and usually the domain of large
companies

ERP, will discuss more later
4. On-line trading community
 Maintained by a third party
 Used by multiple buyers and sellers

www.eaby.com, www.travelocity.com, www.nte.net
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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
Chapter 4
40
End of Chapter 4 Slides
Procurement and Supply
Management
Chapter 4
41