Procurement and Supply Management

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Procurement and Supply Management

• Henry C. Co
• Technology and Operations Management,
• California Polytechnic and State University
• Read Coyle, et al, Supply Chain Management A
  Logistics Perspective, Ch. 4

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• Materials are any commodities used directly or
  indirectly in producing a product or service.
• Raw materials, component parts, assemblies, and
  supplies
• A supply chain is the way materials flow through
  different organizations from the raw material
  supplier to the finished goods consumer.

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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.
• Over-investment ties up capacity and financial
  resources inventory carrying cost,
  obsolescence, etc.
• Insufficient/late availability causes idle
  personnel or equipment when components ran out
  lost sales/customer-goodwill if items are
  out-of-stock.

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Materials Management Activities

• Procurement
• Inbound traffic, Receiving, Incoming inspection
• Production and Inventory control
• In-plant storage and Material handling
• Packaging and shipping
• Outgoing inspection, Outbound traffic, Outside
  warehousing
• Distribution

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Procurement

• Contributes to the competitive advantage of the
  firm
• Tremendous impact of material costs on profit
  60-70 of sales dollar paid to material suppliers
• Significant portion of the logistics costs
• Popularity of JIT manufacturing -- supply
  deliveries must be exact in timing, quantity, and
  quality
• Increasing global competition -- more competition
  for scarce resources, and geographically
  stretched-out supply chain

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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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Procurement Process
Figure 4-2 Coyle, et al, Supply Chain
Management A Logistics Perspective
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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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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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Item Procurement Importance Matrix
Figure 4-3 Coyle, et al, Supply Chain
Management A Logistics Perspective
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Purchasing Process
From any department, to purchasing
Material Requisition
From purchasing, to potential suppliers
Request for Quotations
Based on quality, price, lead time, dependability
Select Best Supplier
From purchasing, to selected supplier
Purchase Order
From supplier, to receiving, quality control,
warehouse
Receive/Inspect Goods
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Roles and Responsibilities
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Purchasers Duties

• Know the market for their commodities
  ascertaining price
• Understand the laws (tax, contract, patent)
• Process purchase requisitions and quotation
  requests
• Make supplier selections
• Negotiate prices and conditions of sale
• Place, follow-up, expedite on purchase orders
• Supplier relations
• Maintain ethical behavior

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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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Vendor Selection Criteria

• Quality
• Reliability
• Capability
• Financial
• Miscellaneous Other Qualities
• Vendor Location
• Factor Importance Will Vary

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Overview of Vendor Selection Criteria
Figure 4-4 Coyle, et al, Supply Chain
Management A Logistics Perspective
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Sources of Price

• Commodity markets
• Price lists
• Price quotations
• Negotiation

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Hierarchy of Price Measurement Approaches
Figure 4-5 Coyle, et al, Supply Chain
Management A Logistics Perspective
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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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Total Procurement Price
Figure 4-6 Coyle, et al, Supply Chain
Management A Logistics Perspective
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Other types of Costs

• Landed costs -
  actual transport costs sales terms
• Quality costs/factors -
  do the goods conform to standard?

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Production Planning and Control
Figure 4-7 Coyle, et al, Supply Chain
Management A Logistics Perspective
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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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Central Purchasing
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Advantages of Centralized Purchasing

• Buy in large quantities ? better prices
• More clout with suppliers ? greater supply
  continuity
• Larger purchasing department ? buyer
  specialization
• Combine small orders ? less order cost
  duplication
• Combine shipments ? lower transportation costs
• Better overall control

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Make vs. Buy

• Economic considerations use break-even analysis
• Many less economic considerations

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Less Economic Considerations

• Availability of funds and skilled personnel
• Availability and volume of supply from others
• Desire for alternative sources of supply
• Employee preferences and stability concerns
• Desire to develop RD facilities

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• Need to control trade secrets
• Desire to expand into new product line
• Need to control delivery lead times
• Impact upon production flexibility
• Need to control quality or reliability
• Goodwill and reciprocity impact on Customers.

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JIT Purchasing
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JIT Purchasing

• Cooperative, not adversarial relationships
• Longer-term relationships, fewer suppliers
• Delivery and quality enters into selecting a
  supplier
• JIT in suppliers operation
• Suppliers nearby
• Shipments delivered directly to production line
• Deliveries in small, standard-size, returnable
  containers
• Minimum of paperwork

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• Materials are purchased in small quantities with
  frequent deliveries to support smooth material
  flow
• High transportation cost purchases are made
  from local suppliers
• Suppliers take responsibilities for quality
• Collaborative product development
• Suppliers encouraged to innovate
• Less rigid specification given to suppliers

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• Support smooth material flow
• small quantities.
• frequent deliveries.
• High transportation cost use local suppliers.
• Empowerment responsible for quality.
• Collaborative product development
• Less rigid specification encouraged to innovate.

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Benefits

• Improved inventory control.
• Reduced buffer inventory.
• Reduced storage space requirement.
• Reduced material handling.
• Reduced waste and spoilage.
• Improved product development.

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JIT Purchasing at Toyota
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• Typical car more than 10,000 parts.
• Usual Practice
• Award bid on price, AQL, delivery.
• Short term relationship.
• Cyclical market bid and cancel contracts.
• Escalation clause for follow-on business,
  replacement parts, cost adjustment later.

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Toyota

• Supply Pyramid
• Fewer suppliers (300 versus 1,000-2,500) based
  on past relationships.
• Pyramid of suppliers
• 1st-tier suppliers for whole component.
• 2nd-tier for fabricating parts, etc.
• Supplier associations cooperation,
  dissemination of SPC, TQC, VA/VE, and CAD/CAM.

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• Supplier Associations
• Kanto Kyohokai ( 62 first-tier suppliers), Tokai
  Kyohokai (136), Kansai Kyohokai (25).
• Second-tier supplier associations Denso
  Kyoryokukai at Nippondenso.
• Toyota owns 22 of Nippondenso, 14 of Toyoda
  Gosei, 12 of Aishin Seiki, 19 of Koito.
• First-tier suppliers also own equity in each
  other/ Toyota provides loans.

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• First-Tier Suppliers
• Resident engineers work with suppliers.
• Performance specifications to develop a steering
  system, braking system, or electrical system,
  etc.
• Brakes that could stop a 2200 pound car running
  at 60 miles/hour in 200 feet, 10 times in
  succession without fading/ brake must fit in a
  space 6"x8"x10", and cost 40/set.

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Shared Destiny

• Share propriety information about cost and
  production techniques with suppliers.
• Design within target price while allowing
  reasonable profits for both buyer and supplier.
• Share benefits of cost savings from joint kaizen
  activities and let suppliers keep savings from
  supplier-derived kaizen activities Kanban
  system no inspection.
• Production smoothing (Heijunka).

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E 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

• 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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Advantages of Electronic Procurement
Figure 4-8 Coyle, et al, Supply Chain
Management A Logistics Perspective
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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 Models7

• 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

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Types of e-Procurement

• Web-based ERP (Electronic Resource Planning)
  Creating and approving purchasing requisitions,
  placing purchase orders and receiving goods and
  services by using a software system based on
  Internet technology.
• e-MRO (Maintenance, Repair and Operating) The
  same as web-based ERP except that the goods and
  services ordered are non-product related MRO
  supplies.
• e-sourcing Identifying new suppliers for a
  specific category of purchasing requirements
  using Internet technology.
• e-tendering Sending requests for information and
  prices to suppliers and receiving the responses
  of suppliers using Internet technology.
• e-reverse auctioning Using Internet technology
  to buy goods and services from a number of known
  or unknown suppliers.
• e-informing Gathering and distributing
  purchasing information both from and to internal
  and external parties using Internet technology.

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e-Procurement Vocabulary

• RFI request for Information.
• RFP request for Proposal
• RFQ request for Quotation
• RFx the above three together.

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Other Materials Management Activities
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• 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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• 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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• Salvage and Scrap Disposal
• Value of scrap may be income to the firm.
• Disposal must adhere to environmental regulations.