Supply Chain Management Principles LB 2: Supply Management and Procurement Overview

LB Objectives Recognize the importance of procurement Describe the procurement process Understand the application of a weighted scorecard List key procurement terms Understand different types of buyer-seller relationships Define the concept of strategic sourcing Understand the importance of the total cost of ownership LO1

Procurement Overview Procurement is responsible for buying or procuring goods and services. It involves the planning, negotiation and administration associated with the placement of purchase orders with suppliers It receives requirements or MRP (purchase requisitions) from the demand plan Purchasing is the act of buying LO2

Procurement Process The procurement process encompasses: Receiving requirements from MRP via purchase requisitions Sourcing, or finding suitable suppliers Obtaining pricing or delivery data via requests for quotes (RFQ) and requests for pricing (RFP) Conducting negotiations with suppliers as necessary Creating weighted scorecards to justify awards Placing purchase orders Tracking and expediting purchase orders Processing supplier invoices (payments) LO1

Procurement Adds Value Procurement is now viewed as a strategic business function. Low-cost suppliers are no longer primary targets Today, procurement makes award based on best value Best value includes: Price, Delivery, Quality, Supplier Reputation, & Environmental Factors Supplier Relationship Management with suppliers as real partners and an extension of the organization Depending on the size of the company, procurement may be managed by a Chief Procurement Officer or a Senior VP of procurement LO1

Strategic Sourcing Strategic sourcing describes a win-win relationship that will continue to improve and expand between buyer and seller Strategic sourcing techniques include: Supplier base consolidation – Helps achieve improved relationship and communication Spend leveraging – Providing a smaller segment of suppliers with a higher percentage of orders to enhance pricing discounts and expedite deliveries Periodic symposiums or conferences – to communicate annual operating plans and other business initiatives LO2

The Total Cost of Ownership Measures all costs associated with planning & procurement, making the award, and other post-award processes Costs in the procurement process occur as follows: Before the transaction – Processing requisitions, obtaining proposals, negotiating, and drafting legal contracts During the transaction – price of item or service, transportation, & inspection After the transaction – storing the item, returning defective products, and maintaining the items. LO2

Procurement: To Make or Buy Make: Source items within the company Buy: Purchase outside the company Advantages of buying: Resources can be invested elsewhere Better quality from vendor Might be inexpensive due to economies of scale Companies rarely have the resources to excel in everything, therefore they outsource and purchase complex goods and services from suppliers with expertise LO3

Supply Planning with Suppliers Ensuring the availability of supplies requires three levels of planning: Long-term planning – Strategic supply plan – rationalizing major capital expenditures. Typically have long delivery times (3+ years) and often require supplier design input Mid-term planning – Production plan – One to two year plan and needs supplier input Short-term planning – MPS (Master Production Schedule) – Parts that can be readily obtained. The planning period ranges from a few weeks to a year In general, procurement department should involve suppliers when planning purchases. Suppliers need time to plan factory layouts, machinery orientation, and labor LO1

Supply Planning with Suppliers Levels of planning to ensure supply LO5

Supplier Evaluation and Approval Procurement department locate, evaluate and approve suitable suppliers and often use a team of internal experts to evaluate awards based on: Suitability – Assurance of alignment Reputation – Ethical, social, & environmental commitments Capability – Quality, reliability, size, adaptability, flexibility Stability – Financial strength and historical performance Location – Proximity to transportation services Certifications – Adherence to legal, local, state, and national requirements LO5

RFQ’s & RFP’s After a supplier has been approved and documented in the company’s database, RFQ’s (Request for Quote) and/or RFP’s (Request for Price) can be issued for specific purchases Purchase requisitions are issued from the MRP system RFP’s – Used for simple procurements in which pricing and delivery inputs are required RFQ’s – Used when many inputs beyond pricing and delivery information are required

Weighted Scorecard Weighted Scorecard is an objective method that allows independent criteria evaluation of supplier inputs The criteria is what is most important to the company Each criteria is assigned a value based on its importance to the organization

Awarding the purchase orders When prices are deemed to high for all suppliers, negotiations are triggered to reach formal agreement with the supplier

Awarding Purchase Orders The Buyer or Procurement specialist places the order and ensures that the required elements in the negotiations are included. Elements to consider include: Definition of terms: Freight, legal, payment, & discounts Clear identification of products (engineering designs, sketches) Quantities Final pricing Shipping directions e.g, ship-after, ship-by, or arrival dates

Awarding Purchase Orders Purchase orders are binding contracts that become the suppliers sales orders. They are submitted electronically and must be accurate Purchasing department tracks progress Expediters and procurement specialists communicate with suppliers re: delivery dates Buyers resolve issues regarding original order as needed Buyers and procurement specialists administer the overall purchase order making sure information is accurate for open orders, cancelled orders, changed orders, & back orders