CHAPTER 12 Procurement

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin 12-2 Four Buying Situations Routine order Procedural problem Performance problem Political problem

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin 12-3 Cost trade-offs to Be Considered by the Purchasing Executive * The savings associated with volume buying include: Lower per-unit purchasing prices Lower transportation costs Lower warehouse handling costs Lower order-processing costs Lower production lot quantity costs Lower stockout costs ± The costs of carrying inventory include: Capital costs associated with the inventory investment Inventory service costs (insurance and taxes) Storage space costs Inventory risk costs Cost savings associated with volume buying * Inventory carrying costs  Source: Douglas M. Lambert and Jay U. Sterling, “Measuring Purchasing Performance,” Production and Inventory Management Review 4, no.6 (June 1984), p. 52. Reprinted with permission from P&IM Review, June Copyright 1984 by T.D.A. Publications, Inc., Hollywood, FL.

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin 12-4 Reducing Ordering Costs Results in a Smaller Economic Order Quantity Lowest total costs (EOQ) Ordering cost Total cost Size of order Inventory carrying costs Annual cost (dollars)

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin 12-5 Supplier Development Defined A systematic organizational effort to create and maintain a network of competent suppliers and to improve various supplier capabilities that are necessary for the buying organization to meet its increasing competitive challenges.

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin 12-6 Objectives of Systems Contracts and Stockless Purchasing Lower inventory levels. Reduce the number of suppliers. Reduce administrative cost and paperwork. Reduce the number of purchases of small dollar value and requisitions that purchasers have to handle. Provide the opportunity for larger dollar volumes of business to suppliers. Provide for timely delivery of material directly to user. Standardize purchase items when possible.

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin 12-7 Key Performance Measures Price effectiveness Cost savings Workload Administration and control Efficiency Vendor quality and delivery Material flow control Regulatory, societal, and environmental measures Procurement planning and research Competition Inventory Transportation

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin 12-8 Sourcing Value Chain Source:Matthew G. Anderson and Paul B. Katz, “Strategic Sourcing,” The International Journal of Logistics Management 9, no. 12 (1998), p. 7. Evaluate and select suppliers Procure materials Create annual plan Manage supplier relationships Develop requirements Item requirements by category across the user base Goals and points of focus during the next year by category and in total Systems, procedures, and skills to support strategy and execute efficiently Strategy to leverage buying power and minimize total costs by category Targeted suppliers and negotiation and contracting Performance metrics, benchmarks, and controls to ensure improvement Develop sourcing strategy

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin 12-9 Types of Relationships Source: Douglas M. Lambert, Margaret A. Emmelhainz, and John T. Gardner, “Developing and Implementing Supply Chain Partnerships,” The International Journal of Logistics Management, Volume 7, No. 2. (1996), p.2. Partnerships Arm’s length Type IType IIType III Joint venture Vertical integration

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin The Partnering Process Source: Douglas M. Lambert, Margaret A. Emmelhainz, and John T. Gardner, “Developing and Implementing Supply Chain Partnerships,” The International Journal of Logistics Management, Volume 7, No. 2. (1996). p.4 Drivers Compelling reasons to partner Facilitators Supportive environmental factors that enhance partnership growth Components Joint activities and processes that build and sustain the partnership Drivers set expectation of outcomes Decision to create or adjust partnership Feedback to: Components Drivers Facilitators Outcomes The extent to which performance meets expectations