Chapter 4

Supply
Processes and
Technology

Copyright © 2011 by The McGraw-Hill Companies, Inc., All Rights

McGraw-Hill/Irwin Reserved.
 Key questions for Supply chain
decision maker
How can we:
 Handle lower-value purchases more efficiently?

 Streamline the process so that supply managers are

more involved in the earlier stages?

 Communicate more effectively with our internal

business partners?

Copyright © 2011 by The McGraw-Hill Companies, Inc., All Rights

McGraw-Hill/Irwin Reserved.
 INTRODUCTION
 Purchases represent 50-70% of costs of
manufacturing
 30-40% for service firms
 What processes will be most effective and efficient?
 One-time or repetitive purchase
 Part of a short-term / long term contract?
 How are volumes, specifications and shipping
schedules communicated?
 How will prices be communicated
 How will payment be made?

Copyright © 2011 by The McGraw-Hill Companies, Inc., All Rights

McGraw-Hill/Irwin Reserved.
 4-4

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
 The process is closely tied to all other business
processes and the external environment
 4-5

Essential Steps in the

Purchasing Process
1. Recognition of need
2. Description of need
3. Identification and analysis of possible sources of supply
4. Supplier selection and determination of terms
5. Preparation and placement of the purchase order
6. Follow-up and/or expedite the order
7. Receipt and inspection of goods
8. Invoice clearing and payment
9. Maintenance of records and relationships
 4-6

A Sample Sourcing Process

Flowchart
 4-7

Some Possible Methods for

Reducing Small Order Transaction Costs
 VMSStockless 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
 4-8

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
 4-9

Internal Information Flows to Purchasing

sales
forecasting engineering
production control planning

new products production

inventory control budgeting

Purchasing

quality control financial control

receiving legal accounting

 4 - 10

External Information Flows to

Purchasing
general
sources market product
of conditions information
supply new product
information
suppliers’ capacity
transportation
Purchasing availability
suppliers’
production rates transportation rates
labor conditions sales and prices and
use taxes, discounts
customs
 4 - 11

Internal Information Flows from

Purchasing
General
Management Product
Engineering
Development
Source, product, Economic Product and
price information conditions price information

Production
Competitive
conditions
Marketing
Product availability,
lead time, price
and quality
Purchasing
Budget
commitments
Contracts
Costs, prices
Legal Orders adjustments Finance
placed

Stores Accounting
 4 - 12

Information systems and the

supply process

 Technology tools available to improve process

efficiency and effectiveness. Enable process in two
ways:
• They make data more transparent, accurate and
accessible to decision makers
• They relieve supply decision makers of lower-value
adding tasks, allowing them to focus on higher-value
adding tasks, spend categories and internal & external
relationships.
 4 - 13

Potential Benefits of Information

Systems Technology

 Cost reduction and efficiency gains

 Data accessibility
 Speedier communication
 Dedicate resources to strategic issues
 Data accuracy
 Systems integration
 Monetary control
 4 - 14

Information Systems
 4 - 15

Types of systems
 ERP systems (extension of MRP systems)
 Cloud computing and the supply chain (provide
access to software applications, which provides the
advantages of cost-effectiveness and flexibility - )
 Electronic procurement systems (module in ERP
system)
 Streamlining the receiving, invoicing and payment
process
 Electronic or Online catalogues
 Online auctions
 4 - 16

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
 4 - 17

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.
 4 - 18

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.
 4 - 19

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.
 4 - 20

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.
 4 - 21

Key Questions When Adopting

New 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?
 4 - 22

Policy and Procedure Manual

 Common topics:
• Authority to requisition
• Competitive bidding
• Approved suppliers
• Supplier contracts and commitments
• Authority to question specificitions
• Purchases for employees
• Gifts
• Blanker orders
• Confidential data, Rush others etc.etc.
• See page 107 of your textbook.