CHAPTER 4

Rodil, Reanelle Marih

Rodriguez, Cristopher
Tito, Mariah Jessica
Vaso, Marivic
INTENDED LEARNING OUTCOMES
 To identify the right sourcing activities, negotiation, and
strategic selection of goods and services that would be
beneficial to the organization

 Discuss the role of procurement in supply management

 Differentiate between internal and external strategic

approach of procurement

 Discuss the effective execution of procurement strategy

depends on logistics and procurement links an organization
with its supplier
WHAT IS PROCUREMENT?
Procurement is the active finding, acquiring, buying
goods, services, or works from an external source often
via tendering or competitive bidding process.

 The process is used to ensure the buyers receives

goods, services or works the best possible price when
aspects such as quality, quantity, time and location
are compared.
PROCUREMENT OBJECTIVES
 The evolving focus on procurement as a key
organizational capability has simulated a new
perspective regarding its role in supply chain
management.
 PROCUREMENT OBJECTIVES
Continuous Supply
 Stockouts of raw materials or component parts can shut down or
force a change in production plans, resulting in unexpected cost.
 Downtime due to production stoppage increases operating costs
and may result in an inability to provide finished goods as
promised to customers.

Minimize Inventory Investment

 In the past, downtime due to material shortages was minimized by
maintaining large inventories of materials and components to
protect against potential disruption in supply.

Quality Improvement
 The quality of finished goods and services is dependent upon the
quality of the materials and components used.
PROCUREMENT OBJECTIVES
Supplier Development
 It is important to develop close relationships with those
suppliers in order to share information and resources to achieve
better results.

Access Technology and Innovation

 Firms look to suppliers as sources of innovation and new
technology to aid in the design of new products and the
improvement of existing ones.

Lowest Total Cost of Ownership

 Ultimately, the difference in perspective between a traditional
adversarial and more contemporary collaborative procurement
strategy can be summarized as a focus on Total Cost of
Ownership (TCO) as contrasted to a focus on purchased price.
Figure 4.1 Major Categories for the Components of Total
Cost of Ownership
PROCUREMENT STRATEGY
 Developing effective procurement strategy is a
complex process, requiring considerable analysis of
the most appropriate means to accomplish its many
different objectives.
 INSOURCING
Insourcing is a business
practice performed within
an organization's
operational infrastructure.
VERSUS OUTSOURCING
Outsourcing enlists the help
of outside organizations not
affiliated with the company
to complete specific tasks.

Insourcing / Outsourcing Decision

 A fundamental decision that must be made in every
organization relates to which products and services should be
made or performed internally by the organization itself and
which should be purchased from a supplier

Outsourcing a product or service does not mean that a company

decides to purchase from a foreign supplier; it simply means that
the firm has decided not to produce an item or service internally.
ALTERNATIVE PROCUREMENT STRATEGIES
User Buy
 The simplest approach to procurement is to allow users in the
organization to determine their own purchase needs, evaluate
sources of supply, and execute the purchasing process.

Volume Consolidation
 An important step in developing an effective procurement strategy
is volume consolidation, a procurement strategy accomplished
through reduction in the number of suppliers.
 Volume consolidation with a reduced number of suppliers provides
a number of advantages for those suppliers.
 The most obvio0us advantage of concentrating a larger volume of
purchases with a supplier is that it allows the supplier to improve
economies of scale by spreading fixed cost over a larger volume of
output.
 ALTERNATIVE PROCUREMENT STRATEGIES
Supplier Operational Integration
 Operational integration occurs when buyers and sellers begin to
integrate their processes and activities in an attempt to achieve
substantial performance improvement.
 Operational integration can result for buyers and suppliers working
together to identify processes involved in maintaining supply and
searching for ways to redesign those processes.
 Its primary objective is to cut waste, reduce cost, and develop a
relationship that allows both buyer and seller to achieve mutual
improvement.
Value Management
 It is an even more intense aspect of supplier integration going
beyond a focus on buyer-seller operations to a more comprehensive
and sustainable relationship.
 Extends beyond procurement in an organization and requires
cooperation between numerous participants, both internal and
external.
Figure 4.2 Flexibility and Cost of Design Changes
PROCUREMENT STRATEGY PORTFOLIO
 A key step in determining procurement strategies, then, is
to understand exactly what the firm is currently buying (or
planning to buy) and how is actually being spent on each
purchased item or service.

 Spend Analysis
 Tool that identifies how much is being spent on each
type of product or service across all locations in the firm
 Important step in determining the appropriate
procurement strategy for each of the products and
services required by the buying firm.
 PROCUREMENT STRATEGY PORTFOLIO
Routine Purchases
 Items that involve a low percentage of a firm’s totally spend and
involve very little supply risk.
 Non-critical to the organization and have a little impact on its overall
performance.

Bottleneck Purchases
 Represents a unique procurement problem. While such items involve
a small percentage of a firm’s spend, supply risk is high and lack of
availability can cause significant operational problems for the buyer.

Leverage Purchases
 Involve little supply risk
 Items are generally commodities where many alternative sources of
supply exist.

Critical purchases
 Strategic items and services that involve a high level of expenditure
and are vital to the organization’s success.
 FIGURE 4.3
Procurement Strategy Matrix
High
Bottleneck Critical
Purchases Purchases
Level of Multiple Suppliers Integrate with Suppliers
Supply
Risk
Routine Leverage
Purchases Purchases
Low Reduce Buying Effort Concentrate Purchases
Low Value to Firm High
SUPPLIER SELECTION AND ASSESSMENT
Supplier Audits
 The buying organization attempts to develop a detailed
understanding of a supplier’s organization and capabilities
 Supplier audit procedures are used to document the degree to
which all of the supplier’s processes are under tight management
control.
Supplier Development
 Buying organization must invest in improving the capabilities and
performance of potential suppliers
 The development process becomes necessary when:
 The firm needs a new product that no supplier currently provides
 The firm wants a more convenient and less costly source of a
supply
 The firm wants to avoid overreliance on a single supplier
 A current supplier lacks sufficient capacity to meet the firm’s
demand
E-Commerce and Procurement
 The explosion in technology and information systems is having a
major impact on the procurement activity of most organization.
 The most common technology used in procurement is Electronic
Data Interchange (EDI) which involves the electronic
transmission of data between a firm and its suppliers.
 Another procurement application of electronic commerce is the
development of electronic catalogs wherein it allows buyers to
gain rapid access to product information, specifications, and
pricing, allowing buyers to quickly identify products and place
orders.
  The firm finds a supplier with compatible attitudes toward
quality, timeliness, or flexibility that does not currently make the
desired input
 The firm becomes dissatisfied with continuing poor performance
by current suppliers, but no other potential supplier exists

Monitoring Performance
 For ongoing supplier relationships, it is important to set formal
goals for suppliers and to measure performance against these
goals on a regular basis.
 Suppliers should receive regular feedback regarding their
performance. Many organizations uses a supplier “scorecard” for
this purpose.

Supplier certification
 A supplier that consistently meets performance standards set by
the organization may be designated as a certified supplier.
 In this instances, the buying organization may eliminate many of
the process that result in duplication of effort and wasted time in
dealing with the supplier.
LOGISTICAL INTERFACES WITH PROCUREMENT
The interface between logistics and procurement links an
organization with its suppliers and therefore has significant
implications for achieving procurement objectives.

Just-in-Time
 JIT techniques have received considerable attention and
discussion in recent years in all areas related to supply chain
management.
 The goal is to time-phase activities so that purchased material
and products arrive just at the time they are required for the
transformation process.
Procurement of Logistics Services
 Considered an “indirect spend” and has not typically received the
same strategic emphasis.
 Managing the procurement of logistics services should be given
the same strategic considerations any other category of products
and services.
Performance-Based Logistics
 New approach to dealing with suppliers which is
initiated by the U.S Department of Defense (DoD)
 PBL is used to buy what the military has traditionally
referred to as logistics support.