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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. Supply Planning with Suppliers
Levels of planning to ensure supply
LO5

11. 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

12. 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

13. 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

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

15. 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

16. 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