Chapter 4

1. Chapter 4 Supply Processes and Technology

2. Need for Robust Supply Processes Large number of items Large dollar volume involved Need for an audit trail Severe consequences of poor performance Potential contribution to effective organizational operations inherent in the function

3. Essential Steps in the Purchasing Process Recognition of need Description of need Identification and analysis of possible sources of supply Supplier selection and determination of terms Preparation and placement of the purchase order Follow-up and/or expedite the order Receipt and inspection of goods Invoice clearing and payment Maintenance of records and relationships

4. A Sample Sourcing Process Flowchart

5. Some Possible Methods forReducing Small Order Transaction Costs Stockless buy and systems contracts P-cards Blanket P.O.s EDI- and Internet-based systems Reverse auctions Changing authority levels and bidding practices Single sourcing Outsourcing small value order processing Standardization Batch orders Set requisition schedule Invoiceless payments Users pay directly

6. Information Needed for Requisitions Date Number (identification) Originating department Account number Complete description of material or service and quantity Date material or service needed Any special shipping or service-delivery instructions Signature of requisitioner

7. Internal Information Flows to Purchasing sales forecasting engineering production control planning production new products Purchasing budgeting inventory control quality control financial control receiving legal accounting

8. External Information Flows to Purchasing general market conditions product information sources of supply new product information suppliers’ capacity Purchasing transportation availability suppliers’ production rates transportation rates prices and discounts sales and use taxes, customs labor conditions

9. Internal Information Flows from Purchasing General Management Product Development Engineering Source, product, price information Economic conditions Product and price information Production Competitive conditions Marketing Purchasing Product availability, lead time, price and quality Budget commitments Contracts Costs, prices adjustments Finance Orders placed Legal Accounting Stores

10. Potential Benefits of InformationSystems Technology Cost reduction and efficiency gains Data accessibility Speedier communication Dedicate resources to strategic issues Data accuracy Systems integration Monetary control

11. Information Systems

12. Four Types of EDI Value Added Network (EDI VAN) Internet EDI or AS2 (Applicability Statement 2) Web EDI Outsourced EDI Services

13. Three Types of e-Auctions Open offer negotiations Suppliers select items for bidding and enter as many offers as they want until closing Names not disclosed to other bidders Private offer negotiations Suppliers review offers from the buying organization that includes target price and quantity Suppliers select item(s) and offer prices Status levels: accepted; closed; BAFO; open Posted price Buyer posts price and first supplier that meets price is accepted

14. When to Use Reverse Auctions Clearly defined specifications, including technological, logistical and commercial requirements. A competitive market with qualified suppliers willing to participate. Typically, at least three suppliers are required. More than six suppliers may add unnecessary costs and complexity. An understanding of the market conditions in order to set appropriate expectations for a reserve price. Buyer and seller familiarity and competency using the auction technology. Clear rules of conduct. For example, conditions for extending auction length and award criteria. The buyer is prepared to switch suppliers if necessary. The buyer believes that the projected savings justify a reverse auction.

15. Potential Buyer-Related Issues with Reverse Auctions Buyer knowingly accepts bids from suppliers with unreasonably low prices. Buying firm submits phantom bids during the event to increase the competition artificially. Buyer includes unqualified suppliers to increase price competition.

16. Potential Supplier-Related Issues with Reverse Auctions Supplier collusion. Suppliers bid unrealistically low prices and attempt to renegotiate afterwards. Suppliers “bird watch” or participate in the event but do not bid to collect market intelligence. A rule requiring bids before entering the auction may preclude this behavior. Suppliers submit bids after the auction event in an attempt to secure the business.

17. Potential Problems with Using Online Auctions The risk of interrupting good supplier relationships. The risk of developing a reputation for aggressive price-buying over other considerations. The costs of running the auction versus expected savings. The cost savings potential of auctions versus sourcing processes such as RFP/RFQ and negotiation. Significant up-front preparation and cost required compared to determining price through an RFP/RFQ. Actual price when unforeseen costs are factored in versus bid price.

18. Key Questions When AdoptingNew Information Systems Technology Should we be a leader or a follower? What should be acquired through e‑commerce? What tools should we use to acquire those items? Who should we use as a service provider? Should we enter into an alliance, and if so, what type, or work privately?