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Chapter 1

Chapter 1. P rocurement 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

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Chapter 1

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  1. Chapter 1 Procurementand Supply Management

  2. 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

  3. 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.

  4. Terms used • Purchasing Management • Procurement • Supply Management • Strategic Sourcing

  5. The Evolution of the Supply Function Era 1- Early Years 1850-1900 • Definitions in books appeared • Recognition of purchasing process and contribution to profit • The growth of railways dominatedthedevelopment of purchasing • Gained departmental status as supplying department in railways • The Handling of Railway Supplies – Their Purchase and Disposition • Published in 1887 Era 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

  6. The Evolution of the Supply Function 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 management Era 6-Integrated supply chain management (beyond 2000) • Supplier relations • Supplier development-involvement • Internet and software developments-B2B commerce • Strategic importance • Integration with other functionssuch as operations, marketing etc.

  7. What organizations purchase? • Raw Materials • Semifinished products and components • Finished goods • Maintenance, repair and operating items • Production support items • Services • Capital Goods • Capital

  8. 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

  9. 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

  10. 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

  11. FINANCIAL SIGNIFICANCE OF PURCHASING • In manufacturing firms, supply area represents the largest single category of spend, ranging from50%-85%. • Carrefour purchases in 2005 from Turkey-300 million € • IKEA (from 1998 to recent) 1.4 billion $

  12. 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

  13. Sales $1 million Profit Less $50,000 Profit a Total cost Divided ($100,000) margin $950.000 by 5% Sales (900.000) b (10%) $1 million Return on Multiplied assets by 10% Sales (20.6%) $1 million Investment Divided turnover by 2 times Total c Inventory assets (2.06) $150 000 $500.000 ($135 000) ($485.000 ) a Purchases are 50% of total sales. b Figures in parentheses assume a 10% reduction in purchase prices. c Inventory is 30% of total assets. Leverage principlereturn on assets

  14. Supply Function as an Information SourceExternal Information Flows to Purchasing general market conditions product information sources of supply new product information/new technology suppliers’ capacity Purchasing transportation availability suppliers’ production rates transportation rates prices and discounts sales and use taxes, customs labor conditions

  15. planning- sales forecasting engineering production new products Purchasing in and outbound traffic inventory control quality control financial control receiving- materials handling legal accounting Supply Function as an Information SourceInternal Information Flows to Purchasing

  16. 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 buildresponsibilities for complete subassemblies and subsystems • Measurement • Purchase of non-traditional goods and services • Recognition by management

  17. Placement of Purchasing Authority Centralized, where the authority and responsibility for most supply-related functions are assigned to a corporateheadquarter. Decentralized, where authority and responsibility for supply related functions are dispersed throughout the divisional, businessor site levels. . Hybrid, where authority and responsibility are shared between a central supply organization and business units, divisions, or operating plants.

  18. 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

  19. The Essential Steps of Purchasing Process • Recognition of need • Clarify needs-description of need • Identify and select suppliers • Approval, contract and purchase order • Receive materials • Measure and manage supplier performance

  20. E-procurement activities in the process • Creating requisition • Placing purchase order • RFQ-request for quotation • Reverse auctions • Performance evaluations • Procurement spend analysis

  21. 1.RECOGNITION OF NEED • Any purchase originates with the recognition of a definite need by someone or some system in the organization. • Plannedorunplannedneeds • What the requirements of the unit are-what, how much, and when it is needed?

  22. 2. DESCRIPTION OF THE NEED • No purchasers can be expected to buy without knowing exactlywhat the external customers want. • It is essential to have an accurate description of the needrequested. • 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.

  23. 2. DESCRIPTION OF THE NEED(Cont’d) Ways of passingtheneeds • Purchase requisitions(for materials) • Statement of work (SOW) (for services)

  24. Standard Requisition • Date of requisition • Requisitionnumber • Originating department • Account to be charged/unitcosts • 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

  25. The purchasing requisition

  26. ERP Purchase requisition

  27. 3. IDENTIFY & SELECT THE SUPPLIERS 3 alternatives: 1.Make internally 2. Workwithexisting –approvedsuppliers (maverick buying-working with the unapproved suppliers/ off-contract buying) 3. Findnewsuppliers

  28. 3. IDENTIFY & SELECT THE 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

  29. RFQ • A request for quotation (RFQ) is a standard businessprocess whose purpose is to invite suppliers into a bidding process to bid on specific productsor 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.

  30. Reverse or E-Auction • Forward auction versus reverse auction • Auction run through a buyer’s web site • Describingtherequirementsthrough a website- online submission of bids • Open-can seethesummary of competingprices

  31. Reverse auction process

  32. Intermediation in Reverse Auction

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

  34. Competitivebidding is effectivewhen; • 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

  35. 4. Approval, Contract and Purchase Order • Placing on order usually involves preparation of a purchase order form • Legallybindingdocuments • Front page-allinformationaboutthepurchase(date, price, quantity,address…) • Backpage-standard legal conditions • Failure to use the proper contract may result in serious legal complications • Copiesare sent toconcernedstakeholders (users, accounting,…)

  36. 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 ‘Weagreed on termsjustsendtheitemswhenyougettheroutinemessage- a materialrelease’ • 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.

  37. 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.

  38. 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, Discrepancyreport

  39. 6. Measureandmanagesupplierperformance • maintenance of records and relationships • Supplier scorecards

  40. NICHE MARKETS – ONLINE LOGISTICS PROVIDERS • Online Freight Marketplaces • Spot market • Auction and RFQ • Exchange • Meta-marketplaces • Application Service Providers (ASPs) • Purchasing Consolidation Market • Infomediaries

  41. Niche Markets – Online Service Providers • Spot market • Auction and RFQ • Exchange • Meta-marketplaces • Application Service Providers (ASPs) • Purchasing Consolidation market • Infomediaries

  42. 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.

  43. 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.

  44. Niche Markets – Online Service Providers • Spot market • Auction and RFQ • Exchange • Meta-marketplaces • Application Service Providers (ASPs) • Purchasing Consolidation market • Infomediaries

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