Introduction to Logistics & Supply

Chain Management

Module 3: Procurement Functions in Supply Chain

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 Outline
• What is Sourcing?
• Strategic Sourcing
• Sourcing Process
• Purchasing Activities
• Managing Sourcing and Procurement Process
• Procurement Price
• Total Ownership Cost

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Complexity and sourcing

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Purchasing vs. Procurement vs. Strategic Sourcing

Purchasing is an activity that follows conduct of a formal sourcing

process, while procurement and strategic sourcing are best described
as processes.

 Managing procurement priorities such that they are

Strategic well-aligned with goals and objectives of the supply
Sourcing chain and of the overall organization.

 Managing a broad range of activities within the

Procurement procurement process (e.g. supplier selection, price
negotiation, contract management, supplier
performance management) to buy goods or service.

Purchasing/  Managing a firm’s acquisition procedures and

Buying standards, involving largely transactional activity of
the buying of products & services.

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Procurement

Procurement is an organizational capability that ensures the firm is

positioned to implement its strategies with support from its supply base.
 Procurement looks up and down the entire supply chain for impacts and
opportunities. (Goods and service account for 55 cents of every sales dollars).
 Focuses on building relationships with suppliers and downstream
customers.
 Involvement with outsourcing includes finding alternate sources for
manufactured products or services to help manage demand.

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Procurement focuses on several issues related to the firms’

supply base

 Ensuring continuous supply

 Minimizing inventory investment
 Quality improvement of supply
 Supplier development
 Supplier selection
 Building supplier relationships
 Supplier continuous improvement
 Lowest total cost of ownership
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Importance of Procurement

• Several factors have elevated the importance

of procurement to the firm
• Purchased goods and services are among
the largest cost elements for most firms
• The growing emphasis of outsourcing has
expanded the supply base of organizations.
This added complexity requires more
management attention on the organizational
interfaces with suppliers.
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Main Stages in the Procurement Process

Needs identification
and defining
specifications

Vendor pre-selection

Tender evaluation
and vendor
selection
Vendor control
and contract
management
Close procurement
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Purchasing perspective

Purchasing was historically perceived as just a buying function

for manufacturing and repair materials and supplies
 Purchasing agent tried to get lowest price possible for acceptable quality
 Transactional focus led to getting the best possible “deal” today, Did not
focus on future transactions
 No concept of supply chain, purchasing seldom looked beyond the first-tier
supplier
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Types of purchasing activity and quadrant

technique
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Three types of purchasing activity

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Types and Importance of Purchases –
The Quadrant Technique
Not all items /services purchased are of equal importance, requiring varying procurement strategies
based on their value and risk.

Distinctives/ Bottleneck items Criticals/Strategic items

High (ensure supply) (form partnership)
• Engineered Items  Unique Items
 Items Critical to Final Product
• Specialised ingredient
Risk

Generics/Non-critical items Commodities/Leverage items

(simplify or automate) (minimise cost)
Low
 Basic Production Items
 Office Supplies
 Basic Packaging
 MRO Items
 Logistics Services
High
Low
Value/Profit Potential

Kraljic’s supply matrix

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Kraljic’s Supply Matrix/ Quadrants

Top right quadrant (critical items):

• Strategic items where supply risk and impact on profit are high
• Highest impact on customer experience
• Price is a large portion of the system cost
• Typically have a single supplier
• Focus on long-term partnerships with suppliers

Bottom right quadrant (commodities):

• Items with high impact on profit

• Low supply risk (leverage items)
• Many suppliers
• Small percentage of cost savings will have a large impact on bottom line
• Focus on cost reduction by competition between suppliers

Source: Simchi –Levi 2008 13

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Kraljic’s Supply Matrix

Top left quadrant (distinctive items):

• High supply risk but low profit impact items.

• Bottleneck components
• Do not contribute a large portion of the product cost
• Suppliers have power position
• Ensure continuous supply, even possibly at a premium cost
• Focus on long-term contracts or by carrying stock (or both)

Bottom left quadrant (generic or non-critical items):

• Non-critical items
• Simplify and automate the procurement process as much as possible
• Use a decentralized procurement policy with no formal requisition and
approval process
• Blanket purchasing order canbe used

Source: Simchi –Levi 2008 14

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Blanket purchase order

 Usually effective for 6 months to 1 year
 Used for routine purchases of item or family of items
 Release materials as needed vs. issuing new P.O. each time
 P.O. remains open during specified term
 Importance of escape clause

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Learning activities-
Using the value and risk quadrant and
select the appropriate ‘quadrant’ (KRALJIC’s matrix) and strategy for the following products:

 White board marker

 Exterior packaging box
Distinctives Criticals
Hig
 Screw driver h
Ris
 Computer chip k

 Masking tape
 Computer CPU
Generics Commodities
 Singapore Post delivery service Low
 Ris
Mosaic tiles k
 Stone
Low Value or Profit High Value or Profit
Potential Potential

Match the following strategies:

• Focus on long-term partnerships with suppliers (critical)
• Focus on cost reduction by competition between suppliers (commodities)
• Focus on long-term contracts or by carrying stock (or both) (distinctives)
• Simplify and automate the procurement process
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Strategic Sourcing
Strategic Sourcing Process

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 Strategic Sourcing Process
Step 1: Develop Strategic Plan
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• Create cross-functional planning

committee
• Identify key members of sourcing
team
• Agree on scope of sourcing
processes

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 Strategic Sourcing Process
Step 2: Understand Spend

o Refine understanding of sourcing needs of

process-owners, with the nature of the
requirement being represented by some type
of measurable criteria
o Perform spend analysis to:
o Understand spend by supplier, category, and
internal user
o Profile current sourcing approaches and areas for
improvement
o Address issues of make vs. buy

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 Strategic Sourcing (1 of 2)
Steps 3–5: Supplier Portfolio Screening
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Initial Supplier Research and Screening (Market

Analysis & Alternative Supplier Evaluation)

Request for Information (RFI)

Request for Proposal (RFP)

Supplier Site Visits

Supplier Selection

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 Strategic Sourcing (2 of 2)
Steps 3–5: Supplier Portfolio Screening
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 Strategic Sourcing Process
Step 6: Onboarding and Transitioning
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• Finalize understandings and

agreements with suppliers
• Create management processes for new
suppliers
• Conduct transition and onboarding
processes

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 Strategic Sourcing Process
Step 7: Collaborative Process Improvement

• Regular feedback and communications

• Analyze net savings and compare with goals
and objectives
• Process improvement for both suppliers
and customers

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Total Landed Cost (TLC)- strategic

sourcing principle
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Total Landed Cost (TLC)

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TLC Example: Cost Comparisons of Alternative Sourcing Options

Country of
Destination Country – Switzerland Origin

Price Components – all prices in Euros China Vietnam EU

Net purchasing price for a specific volume of the product from 3 different suppliers 10,000 8,000 12,000

Total transportation cost to Switzerland (Ocean freight from China/Vietnam – Road 4,000 6,000 1,200
freight within Europe)

Customs according trade agreement 1,000 1,500 n.a.

VAT (Switzerland 7.6%) based on value of goods 1,140 1,178 1,003

Total Landed Cost 16,140 16,678 14,203

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Learning activities- Case discussion

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Source: Coyle, J.J., Langley Jr.,

C.J., Novack, R.A., and Gibson, B.J.
(2017), Supply Chain Management:
A Logistics Perspective, 10th ed., South-
Western, Cengage Learning.
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Refer to the Alligator, Inc. Case from the recommended textbook and discuss the following
questions

1. Develop a supply chain network diagram for Gators.

2. What are the implications of less-than-perfect demand forecasts for Alligator
products, including GatorsTM, and what should be done to mitigate this?
3. What are the potential supply risks? What are the impacts of these risks on
the supply chain performance?
4. Using Kraljic’s matrix, locate supplies of Gators and discuss procurement
strategy.
5. What elements of the strategic sourcing process do you feel are the top
candidates for improvement at Alligator, and why?
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Case study: Alligator Inc.

Cost, Quality, Demand, Price, Sourcing
Production facilities, - Suppliers- regional ,
locally
Demand locations, and Uni Park, PA
Contract manufacturing, - Manufacturers – Spain
Raw materials, Spain, China, Brazil
Custom fit orthotics,
Better coordination - Retails –Global US Shenzen Global
Share of information (use of IT, POS), market
Seasonal variation, Sourcing
Bryson Wilde – Senior VP SC, Brasilia
Check- value and profit margin
Molly Walters – Chief Inf officer (value increase profit and
Anna Walters - consultant Alligator Supply Chain (GratorsTM)
competitiveness) and risk
(supplier risks, chances of
product failure , delivery failure) Strategic sourcing process
Most demand forecasts are
less-than-perfect, and so Strategic sourcing
this situation is not unique to
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Develop Strategic Plan √
- A broader process than procurement
GatorsTM. Referring to the 2 Understand Spend
quadrant technique, it - Ensure procurement priorities are well-
appears that GatorsTM would aligned with goals and objectives of
3 Evaluate Supply Sources
√
be described as a high-profit
product. Also likely is that
the supply chain and of the overall 4 Finalize Sourcing Strategy √
risk would be somewhat low organisation 5 Implement Sourcing Strategy
in the short term and - Ensure collaboration with supply chain
6 Onboarding and Transitioning
possibly higher in the long- actors and other functional areas of
term. Risk of sourcing
custom fit orthotics is high!
org 7 Collaborative Process Improvement √
- Consider total landed cost
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Activities related to assignment 2

 Group formation
 Group size: maximum four - five members
 Groups are required to write up a formal report (max 4000 words
+/10%) (excluding table of contents, references and appendix)
 Details of assessment 2 can be obtained from Canvas

Brief overview of the assessment

Decide a commodity supply chain to investigate for the group assessment
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Group formation for assessment 2

 Find who can work with you to start and complete the
assignment on time, within the scope and expected quality. After forming the group,
 Conduct the group formation: interchange contact information
 self introduction, and use Canvas to Register
group
 objective of the group,
 how the group work will be conducted 1. Log into Canvas
 communicate plan 2. Click People
3. Sign up to a blank group of your
 set group norms,
tutorial session
 set conflict resolution plan etc.
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Work with your team

 Know as a team what is the scope of the assessment 2

 Plan your research: Plan your research project with the team and
distribute the workload (what to do, who will do what and when) and
discuss your progress with the teacher in every week tutorial.
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Assignment activities

• First step: Selecting a product of a company

How to do that? Follow the steps.

1. Think about the supply chain as you are comfortable with. It has to be
a company and a supply chain together for example, if you choose
FairPrice as a retailer choose a product such as ‘Bread’, or ‘Milk’
supply chain.
2. Think about your assignment: again a combination of company and
product and makes a supply chain- brainstorm and list few ideas.
Choose among one of them after considering further issues.
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Group assignment activities

Introduction: Product and Company information

• Do not simply provide information that has in their website, rather make it as an
useful information for you.

For example, if you choose a supply chain of a sports product- why do you think
that it is important to investigate the sports product supply chain? Any unique
feature of sports product supply chains that you are investigating?

• Market outlook of the company and supply chain: Not simply facts and figures.
Identify and mention core competencies that you will discuss in next sections.

4/01/2024
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Assignment activities
Description of the supply chain
Start working on mapping the supply chain

Consider developing network flow diagram that represents the supply

chain/logistics activities of the chosen product.

How to do that? Follow the steps.

 Identify who are the actors in the supply chain ( suppliers, manufacturers, retailers, distributors).

 Denote the upstream and downstream part of the supply chain.

 Provide geography of the supply chain network operations.

In your report- don’t forget to discuss /explain the key aspects of the supply
chain (product flow, information flow, cash flow, possible risks and complexity).