DHL Logbook - in cooperation with Technical University Darmstadt

Purchasing strategy The optimal procurement solution

In todays globally networked world, a company has a number of materialprocurement options. As a result, a company must think about its number of suppliers, procurement time, order size and procurement sites. Another question to be addressed is whether it makes more sense to select local suppliers or many different and sometimes widely distant ones. A company must also consider whether a supplier should use a just-in-time system or whether the companys own buffer storage system should be put in place. It is only through the use of a mature procurement strategy that such questions can be answered and opportunities optimally used.

Best purchasing from reliable sources

A special relationship exists between procurement channels and procurement logistics. One key decision that must be made in purchasing strategy involves the determination of the procurement channel - e.g., the use of direct purchasing or purchasing assistants such as buying agents or wholesalers. This decision is heavily influenced by the suppliers sales-channel strategy. As a result of the similarities between the decisions involving distribution and purchasing strategy, execution can be transferred to distribution strategy [1]. Three points need to be stressed: The problem of the number of suppliers, The problem of the procurement time, And the problem of suppliers geographic locations.

Number of suppliers
In multiple sourcing , the large number of suppliers reduces the risk of dependency. For instance, it protects against delivery failures resulting from production disruptions at individual suppliers. At the same time, however, it puts a tremendous strain on the procurement-logistics system and results in a high level of complexity. In the automotive industry, vertical integration is being constantly reduced. Sometimes, automakers install only component groups that have been preassembled by suppliers - e.g., completely assembled seats, doors and cockpits. For such component groups, the number of suppliers is frequently limited to one supplier (single sourcing ) or two suppliers (double sourcing). At the same time, reducing the number of suppliers creates the possibility of lowering coordination and logistics costs. Through cross-company planning and management, material and information streams from the supplier to the customer can be efficiently designed. For those instances where particularly close relationships with suppliers have to be established, as is the case with just-in-time delivery, a reduction in the number of suppliers is unavoidable. This is reflected in the trend toward single sourcing or double sourcing. In the process, the complexity of the procurement program can be reduced, costeffective lot sizes can be achieved, quality assurance can be simplified, and transaction costs can be cut. At the same time, there is a growing risk of becoming dependent on the suppliers [1].

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Procurement time
Another question is the timeframe in which the material is to be provided to the company from outside. Here, there are three general options [2,3]: 1. Individual procurement as needed: In terms of individual procurement, the materials are acquired only after the need arises. In this manner, warehouse costs and capital tie-up created by stored procurement articles can be kept to a minimum. But one disadvantage is that production must be put off until the material arrives. If the delivery times promised to the customer cannot be kept, downtime costs can easily rise above savings achieved through reduced capital tie-up. 2. Procurement with stock-keeping: In terms of procurement with stockkeeping, the materials are warehoused at a company for its own internal material use. As a result, the companys needs can be met within a short time. This gives the company added independence from swings in deliveries or unreliable suppliers. Stock-keeping also involves large purchases. Among other things, this results in cost savings achieved through quantity discounts. On the other hand, the capital tie-up associated with this strategy is higher as a result of the stored materials. Warehousing costs climb as well. 3. Just-in-time delivery: A customer can order a car based on his own desires and can change this order - frequently up to a week before delivery. The automaker could not offer this service without a production- or operation-synchronized supplier concept. With this supply system - just-intime concepts or just-in-sequence programs - the flow of material between supplier and customer is optimized. As a result, short run times of the material, lower capital tie-up and reduced warehouse costs are achieved. But the just-in-time concept requires extremely reliable suppliers. In addition, an intense exchange of information forms the basis of this close working relationship.

Geographic aspects
Made in China, Made in India or Made in Thailand - procurement from Asia is a much-discussed topic today. Toys, electronic equipment, clothes and other products are being increasingly produced in Asia, eastern Europe, South America and perhaps Africa in the future. This form of international procurement, frequently described as global sourcing , that is being facilitated by globalization creates new opportunities in the world market - e.g., the exploitation of price and exchange-rate benefits and of supply capacities in times of market shortages. Procurement risks resulting from such factors as strikes or geographic differences can also be avoided. On the other hand, these benefits are offset by higher transport costs, complex transport processes, longer delivery times, bigger in-transit inventories and reduced delivery reliability supplier reliability. In addition, the complexity of the information flow increases as a result of the growing number of transaction partners, meaning that coordination costs tend to rise. Fundamentally speaking, a concentration of suppliers who are located as

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closely as possible to the company is advantageous from the perspective of procurement logistics. This is because transport costs and the complexity of transport processes are considerably lower in such cases. Compared with global sourcing , the option of local sourcing offers the advantages of shorter delivery times, reduced capital tie-up and faster response in emergencies [1].

Recommended reading
Purchasing and Supply Chain Management | Quayle 2006 Logistiksysteme | Pfohl 2004 Gower Handbook of Purchasing Management | Day 2002 Strategisches Beschaffungsmanagement | Large 2006

References
[1] Logistiksysteme | Pfohl 2004 [2] Sourcing-Konzepte | Arnold 1996. In: Handwrterbuch der Produktionswirtschaft | Kern (Hrsg.) [3] Das Just-in-time-Konzept: Produktion und Zulieferung auf Abruf | Wildemann 2001

URL
http://www.dhldiscoverlogistics.com/cms/en/course/processes/procurement_logistics/purchas ing.jsp

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