P.2.

1 CLASS NOTES 2019

UNIT 1 & UNIT 2

Faculty: MANAGEMENT SCIENCES

LOGISTICS
Department:

NATIONAL DIPLOMA
Course:

Title: PURCHASING CLASS NOTES

Compiled By: G M MOTHIBI

Year: 2019

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 SEMESTER 1

PURCHASING 2.1
(BBPUX2A)
MODULE PLAN

UNIT 1 & UNIT 2

P2.1 PURCHASING MANAGEMENT OVERVIEW

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 UNIT 1
SCOPE OF
PROCUREMENT

UNIT 2
UNIT 5
LOGISTIC &
SOURCING
SUPPLY CHAIN

UNIT 3
UNIT 4
ORG & SUPPLY
MATCHING SUPPLY
CHAIN
WITH DEMAND
STRUCTURES

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 UNIT 1
CHAPTER 1
THE SCOPE AND INFLUENCE OF PROCUREMENT

Mind map
• Business management • relationship
function • Performance
• to explore supply market improvement
opportunities • Investment

STRATEGIC ROLES
HOW TO DEFINE
OF
PROCUREMENT
PROCUREMENT

PROCUREMENT WORLD-CLASS
AND CHANGE PROCUREMENT

• Public sector • twelve characteristics

expenditures • three characteristics
inefficiences

1.1 HOW TO DEFINE PROCUREMENT

Procurement is the business management function that ensures identification, sourcing, access and
management of the external resources that an organization needs or may need to fulfil its strategies.
Procurement exists to explore supply market opportunities and to implement resourcing strategies
that deliver the best possible supply outcome to the organization, its stakeholders and customers.

1.2 STRATEGIC ROLES OF PROCUREMENT

1.2.3 Relationship management

The skill of managing relationships with strategic suppliers necessitates attention to, for example:
 conducting regular blame free reviews of contract performance
 a joint commitment to continuous improvement
 sharing long-term business goals
 active involvement of senior people at both organization
 negotiations based on genuine business objectives
 Provision of accurate and timely business and contract management data.

1.2.4 Continuous improvement of supplier performance

The procurement community has a strategic role to motivate suppliers to continually improve their
performance. The performance on long-term contracts can be incentivized to reward the supplier’s
investment and initiatives. The buying organization may jointly invest in new technology, providing
the supplier agrees to appropriate ownership of intellectual property and perhaps licensing upon
payment of a royalty on sales.
1.2.5 The supplier’s investment in ‘right first time’
An organization’s reputation for quality is a prime business asset. Suppliers have expert knowledge,
or should have, of the goods or services they provide. The supplier can also advice on through life
costs, maintenance support, inspection and testing and continuous improvement.
1.2.6 The supplier’s investment in inventory

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The rapid business approach to Just-in-Time has focused attention on who pays for inventory in the
supply chain pipeline. There are costs involved, including strategic warehousing facilities, distribution
network costs, danger of product changes, working capital costs and so on. The concept of
consignment stock is a proven concept in manufacturing, with some suppliers very adept at
completely satisfying the buyer’s needs for production line side stock.

1.2.7 The supplier’s investment in procurement expertise

It is a strange phenomenon that when buyers visit potential suppliers they often fail to probe the
supplier’s investment in procurement expertise when the author engages with clients engaged in a
tendering exercise and the supplier makes a presentation, it is most unlikely that there will be a
procurement specialist on their team.

1.3 PROCUREMENT AND CHANGE

There are a number of drivers influencing and demanding changes in procurement, including those
detailed in the following sections.
1.3.1 The challenge to manage escalating costs in purchasing goods and services

In the twenty-first century a number of pressures on costs manifested themselves. These includes:
cost of oil, feeding its way into supply chain, acts of terrorism, culture tensions, displacement of people
from Africa and the Middle East, tensions in the EU which lead to impact on the cost of living and wage
demand increase.
1.3.2 The public sector focus on driving out inefficiencies in public expenditure

The large amounts of spend in central and local government have often been tackled through the
aggregation of requirements. While significant improvements in procurement have been made there
remain challenges to further improve value for money.
1.3.3 The increasing trend to outsource manufacture and services

This trend has challenged procurement departments to improve their management of tender
processes, due diligence, negotiation with different cultures, managing outsourced contracts and
applying open book methodologies.
1.3.4 The recognition that procurement is a significant contributor to corporate efficiency

An example is long-range business planning which requires input on long-range costs, availability of
strategic materials and supplies, supply chain developments and trends in service delivery.
1.3.5 The positive impact of global souring

The challenge for other buyers is their ability to find excellent suppliers wherever they are in the world.
International airlines have used global sources to provided equipment and services. The challenges
for procurement include how to structure their organization.
1.3.6 The enhanced use of information technology and e-procurement

The IT revolution has impacted on procurement. E-procurement is in its relative infancy with relatively
few reverse auctions, electronic tendering and knowledge storage and gathering strategies.
1.3.7 The redressing of procurement power

Many suppliers have grown by acquisition and have assumed to themselves a power that has affected
buyer’s pricing, output allocation and other restrictive practices. The procurement profession has
been relatively unsuccessful in countering this power.
1.3.8 The challenge to outdated traditional practices

The procurement profession itself must challenge outdated traditional practices. A move from
transactional operations to strategic activities would be desirable in many organisations.

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1.4 WORLD-CLASS PROCUREMENT

The world-class manufacturing equivalent is continual and rapid improvement.

Twelve characteristics of world-class supplier management are as follows:
 Commitment to total quality management (TQM)
 Commitment to just-in-time (JIT)
 Commitment to total cycle time reduction
 Long-range strategic plans
 Supplier relationships
 Strategic cost management
 Performance measurements
 Training and professional development
 Service excellence
 Corporate social responsibility
 Learning
 Management and leadership

Three characteristics of world-class suppliers:

 Continuous improvement
 Technology and innovation
 Adaptability

FORMATIVE ACTIVITIES 11 February-15th February 2019

Explain all elements of the following with practical examples

1.1 Define procurement
1.2 Name the skill of managing relationships with strategic suppliers
1.3 Discuss the drivers influencing and demanding changes in procurement
1.4 Explain 12 characteristics of world-class procurement

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 UNIT 2
CHAPTER 3
LOGISTICS AND SUPPLY CHAINS
MIND MAP
• What is logistic
3.1 • Materials, logistics and distribution management
3.2

• Reverse logistics
• Supply chains
3.3 • Supply chain management
3.4
3.5

• Supply chain vulnerability

3.6
• SCM & logistics
3.7 • Value chain
3.8

3.1 WHAT IS LOGISTICS?

3.1.1 Military logistics

Logistics, initially a military term dating back to the Napoleonic Wars, refers to the technique of
moving and quartering armies – that is, quartermasters’ work.

3.1.2 Non-military applications logistics

Logistics is the total management of the key operational functions in the supply chain – procurement,
production and distribution. Logistics is the process of managing both the movement and storage of
goods and materials from the source to the point of ultimate consumption and the associated
information flow.

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3.2 MATERIALS, LOGISTICS AND DISTRIBUTION MANAGEMENT

3.2.1 Materials management

Materials management is concerned with the flow of materials to and from production or
manufacturing and has been defined as: ‘’the planning, organization and control of all aspects of
inventory embracing procurement, warehousing, work-in-progress and distribution of finished goods.

3.2.2 Physical distribution management

Physical distribution management (PDM) is often considered to be concerned with the flow of goods
from the receipt of an order until the goods are delivered to the customer.

3.2.3 Some important logistics concepts

Total systems management: emphasizes a total, rather than a limited departmental viewpoint.
Trade-offs: is where an increased cost in one area is more than offset by a cost reduction in another,
so that the whole system benefits.
Cooperative planning: can work forwards to customers and backwards to suppliers
.
3.3 REVERSE LOGISTICS

Reverse logistics is defined as the process of planning, implementing and controlling the efficient, cost-
effective flow of raw materials, in process inventory, finished goods and related information from the
point of consumption to the point of origin for the purpose of recapturing value or proper disposal.

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3.4 SUPPLY CHAINS

A supply chain is that network of organizations that are involved, through upstream and downstream
linkages, in the different processes and activities that produce value in the form of products and
services in the hands of the ultimate customer or consumer.

Key characteristics of supply chain:

 Supply chains are ‘networks’ – traditionally, supply chains were loosely linked associations of
discrete businesses.
 Supply chain linkages are upstream and downstream.
 Linkages – the coordination of supply chain processes and relationships.
 Processes.
 Value.
 The ultimate customer.

3.4.2 Types of supply chains

Customer-supplier characteristics
 Concentrated chains
 Few customers but many suppliers
 Customers with demanding requirements
 EDI systems or a requirement for JIT deliveries.
 Batch manufacture chains
 Many customers and many suppliers
 Complicated relationship webs – an undertaking with which an enterprise is in contact may,
at different times, be a customer, supplier, competitor or ally.
 Retail and distribution chains
 Many customers but relatively few suppliers
 Customized methods
 Service chains
 Implements mission statement for organisations
 Virtuality
 Virtual supply chain Scope

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  Supply chain operating locally, regionally and internationally in scope.
 Complexity
 Upstream and downstream
 Purpose
 Minimizing delivery cycle time
 Products
 Value chains

3.5 SUPPLY CHAIN MANAGEMENT (SCM)

Characteristics
 A systems approach to viewing the supply chain as a whole and managing the total flow of goods
inventory from the supplier to the ultimate consumers
 A strategic orientation towards cooperative efforts to synchronise and converge intrafirm and
interfirm operational and strategic capabilities into a unified whole.
 A customer focus to create unique and individualized sources of customer’s value, leading to
customer satisfaction.

Supply chain management processes

 Customer relationship management
 Customer service management
 Demand management
 Order fulfilment
 Manufacturing flow management
 Supplier relationship management
 Product development and commercialization
 Returns management

3.5.1 SCM enablers

 Organisational infrastructure
 Technology
 Strategic alliances
 Human resource management

3.5.2 Software as an SCM enabler

Four essential supply chains requirements
 Connectivity
 Integration
 Visibility
 Responsiveness

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3.6 SUPPLY CHAIN VULNERABILITY
Supply chains are vulnerable due to both external and internal risks.
Five categories of supply chain risks
 Lack of ownership
 Chaos risks
 Decision risks
 JIT relationship risks
 Inertia risks

To the above may be added:

 Supplier base reduction
 Globalization
 Acquisitions, merger and similar alliances

Ten ways to manage supply chain risk:

 Diversification
 Stockpiling
 Redundancy
 Insurance
 Supplier selection
 Supplier development
 Contractual obligation
 Collaborative initiatives
 Rationalization of the product range
 Localized sourcing

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3.7 SCM AND LOGISTICS

The management of logistics makes possible the optimized flow and positioning of goods, materials,
information and resources of an enterprise.
The supply chain is the flow of materials through procurement, manufacture, distribution, sales and
disposal, together with the associated transport and storage.

3.8 VALUE CHAINS

FORMATIVE ACTIVITIES 25-29 February 2019

1.1 Define the following concepts

Logistics
Reverse logistics
Supply chains
Supply chain management

1.2 With the aid of a diagram explain value chain

1.3 What are the characteristics of SCM
1.4 Name Ten ways to manage supply chain risk:
1.5 Discuss Supply chain management processes

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