Contemporary Logistics
Twelfth Edition, Global Edition
Chapter 6
Procurement
Dr. Hassan Younis
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Learning Objectives (1 of 2)
6.1 To compare procurement, purchasing, and supply management
6.2 To review procurement objectives
6.3 To review supplier selection and evaluation approaches
6.4 To review Kraljic’s Portfolio Matrix
6.5 To establish issues associated with global procurement
6.6 To identify social and environmental aspects of sustainable
procurement
6.7 To describe the concept of supply chain finance and how it can
be used in procurement relationships
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Procurement (1 of 7)
• Refers to the process of
acquiring raw materials,
component parts, and
supplies from outside
organizations to support
a company’s operations
• Procurement costs often
range between 60 and
80 percent of an
organization’s revenues
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Procurement (2 of 7)
• Currently has a more strategic orientation in many
organizations
• Procurement manager may have responsibility for:
§ Reducing cycle times
§ Playing an integral role in product development
§ Generating additional revenues through collaboration
with the marketing department1
1John Hyatt, “The Rise and Rise of Procurement,” CFO 28, no. 4 (2012): 57–59.
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Procurement (3 of 7)
• “Procurement” and
“purchasing” are
sometimes viewed
as synonymous
terms
• Supply
management is
viewed as a
relational exchange
approach involving
a limited number of
suppliers
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Procurement (4 of 7)
• Electronic commerce
continues to bring many
changes to the
procurement discipline
including
§ Electronic procurement
o Procurement cards (p-
cards)
§ Reverse auctions
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Procurement (5 of 7)
• Procurement cards (p-cards)
§ Similar to Visa and MasterCard,
but used for an organization’s
buying needs
§ Number of authorized employees
is limited
§ Detailed statement is provided
each month
Can implement control processes that:
§ Measure usage
§ Identify procurement trends
§ Limit spending during a procurement cycle
§ Block unauthorized expenditures
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Procurement (6 of 7)
• Benefits of procurement cards (p-cards)
§ Reduction in the number of invoices
§ Firm will make one payment each month regardless
of the number of p-card holders
§ Allows employees to make purchases in minutes
versus days
§ Generally allow suppliers to be paid in a more timely
fashion
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Procurement (7 of 7)
• Challenges of procurement
cards (expansion overseas)
§ Currency differences
§ Availability of technology
§ Difference in card
acceptance
§ Cultural issues with the
program
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Procurement Objectives
• Supporting organizational goals and objectives
• Managing the purchasing process effectively and efficiently
• Managing the supply base
• Developing strong relationships with other functional groups
• Supporting operational requirements
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Supplier Selection and Evaluation (1 of 3)
• One of procurement’s most
important responsibilities
• Involves stating an
organization’s needs and
determining how well various
potential suppliers can fulfill
these needs
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Figure 6.1: Supplier Selection Framework
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Supplier Selection and Evaluation (2 of 3)
• Steps to supplier selection and evaluation
1. Identify need for supply
2. Perform situation analysis
3. Identify and evaluate possible suppliers
4. Select suppliers
o Single-source approach
o Multiple-source approach
5. Evaluate decision
o Process-based approach
o Performance-based approach
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Supplier Selection and Evaluation (3 of 3)
• Evaluate decision
§ Process-based approach
o Is an assessment of the supplier’s service and/or
production process (supplier audit)
§ Performance-based approach
o Is focused on the supplier’s actual performance on
a variety of criteria including cost and quality
o Many companies use supplier scorecards to report
performance information
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Procurement Portfolio Approach (1 of 4)
• Within the “situation analysis” step for supplier
selection and evaluation, procurement managers must
be continually aware of the supply and demand
characteristics of the:
§ Raw materials
§ Component parts
§ Purchased supplies
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Procurement Portfolio Approach (2 of 4)
• Kraljic’s Portfolio Matrix2
§ Used to classify corporate purchases in terms of their
importance and supply complexity
§ Goal is to minimize supply vulnerability and getting the
most out of the firm’s purchasing power
2
Peter Kraljic, “Purchasing Must Become Supply Management,” Harvard Business Review 61, no. 5 (1983): 109–117.
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Figure 6.2: Kralijic Portfolio Matrix
Source: Peter Kraljic, “Purchasing Must Become Supply Management.” Harvard Business Review 61, no. 5 (1983): 109–117.
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.
Figure 6.2: Kralijic Portfolio Matrix
1. Non-critical items
Non-critical items are low risk and have a low impact on
organizational profitability. The common example for this
segment is office supplies. Office supplies
2. Leverage items
Leverage items have high profitability but a low-risk factor.
Thus, buyers possess the balance of power in the
relationship and leverage this strength to gain greater
returns. Laptops
Source: Peter Kraljic, “Purchasing Must Become Supply Management.” Harvard Business Review 61, no. 5 (1983): 109–117.
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Figure 6.2: Kralijic Portfolio Matrix
3. Bottleneck items
Bottleneck items are the opposite of leverage
items. These are products with a limited source of supply.
Their supply risk is high, but they do not have a major
profit impact. Servers
4. Strategic items
Strategic items have high supplier risk and high-profit impact
which are crucial to any business.
These items are only represented or made by a handful of
suppliers. Ensuring an effective and predictable supplier
relationship is the key to the future of the purchases of a
company. Interactive screens
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Procurement Portfolio Approach (3 of 4)
• Supplier development (reverse marketing)
§ Refers to aggressive procurement involvement not
typically part of supplier selection
§ Can include:
o Purchaser initiating contact with supplier
o Purchaser establishing prices, terms and
conditions, and other behaviors
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Procurement Portfolio Approach (4 of 4)
• Supplier development (reverse marketing)
§ Motivation to adopt supplier development includes:
o Numerous inefficiencies associated with
suppliers initiating marketing efforts toward
purchasers
o Purchaser may be aware of important benefits
which are unknown to the supplier
o Compel suppliers to meet necessary
requirements to achieve competitive advantage
in the supply chain
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Global Procurement (Sourcing) (1 of 3)
• Refers to buying components and inputs anywhere in
the world
• Driven by:
§ Factor-input strategy (organization is seeking low-
cost or high-quality sources of supply)
§ Market access strategy (organization is sourcing in
markets where it plans to do significant business)
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Global Procurement (Sourcing) (2 of 3)
• Components of global sourcing development model:
§ Planning
§ Specification
§ Evaluation
§ Relationship management
§ Transportation and holding costs
§ Implementation
§ Monitoring and improving
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Global Procurement (Sourcing) (3 of 3)
• Challenges in establishing a successful global
sourcing strategy include understanding hidden costs
as supply bases are expanded
• Examples of hidden costs:
§ Increased costs of dealing with suppliers outside
the domestic market
§ Duty and tariff changes that occur over supply
agreement life
§ Increased inventory-related costs associated with
global supply chains
§ Rising levels of logistics cost volatility (e.g., ocean
freight rates)
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Sustainable Procurement (1 of 7)
• Refers to the integration of social and environmental
considerations into all stages of the purchasing
process
• Goal is to minimize the impact of procurement
activities on human health and the environment
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Sustainable Procurement (2 of 7)
• Social responsibility
§ Socially responsible
procurement consists of
five dimensions:
o Diversity
o The environment
o Human rights
o Philanthropy
o Safety
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Sustainable Procurement (3 of 7)
• Social responsibility
§ Ethical considerations
o “Win-at-all-costs” philosophy can exacerbate unethical
behavior
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Sustainable Procurement (4 of 7)
• Social responsibility
§ Areas of ethical concern in procurement:
o Gift giving and receiving
o Bribes and kickbacks
o Misuse of information
o Improper methods of knowledge acquisition
o Lying or misrepresentation of the truth
o Product quality (lack of)
o Misuse of company assets
o Conflicts of interest
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Sustainable Procurement (5 of 7)
• Investment recovery
§ Identifies opportunities to recover revenues or
reduce costs associated with:
o Scrap materials
o Surplus materials
o Obsolete materials
o Waste materials
§ Often the responsibility of the procurement manager
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Sustainable Procurement (6 of 7)
• Investment recovery
§ Can provide an organization the opportunity to
simultaneously do well and do good in the sense that
investment recovery:
o Increases a seller’s revenues (reduces a seller’s cost)
o While addressing selected environmental
considerations
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Sustainable Procurement (7 of 7)
• Investment recovery
§ Even the best-managed organizations generate:
o Excess (surplus)
Ø Stock materials that exceed reasonable requirements
o Obsolete
Ø Materials not likely to ever be used again
o Scrap
Ø Materials that are no longer serviceable, have been
discarded, or are a by-product of the production process
o Waste
Ø Materials that have been spoiled, broken, or otherwise
rendered unfit for further use or reclamation (have no
economic value)
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Supply Chain Finance (1 of 2)
• Refers to a set of technology and financed-based
processes that strives to optimize cash flow by:
§ Allowing businesses to extend their payment terms
to their suppliers
§ While simultaneously allowing suppliers to get paid
early
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Supply Chain Finance (2 of 2)
• Transactions between buyers and sellers are
facilitated by financial technology firms (FinTech)
• FinTech companies use cloud-based software to
optimize the connection between procurement and
accounts payable
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Key Terms (1 of 2)
• Bribes • Obsolete materials
• Excess (surplus) materials • Procurement
• FinTech • Procurement cards (p-cards)
• Global procurement • Purchasing
(sourcing)
• Investment recovery
• Kickbacks
• Kraljic’s Portfolio Matrix
• Multiple sourcing
• Near-sourcing
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Key Terms (2 of 2)
• Scrap materials • Supplier scorecards
• Single sourcing • Supply chain finance
• Strategic sourcing • Supply chain management
• Sustainable procurement • Total cost of ownership
• Supplier audit (TCO)
• Supplier development • Waste materials
(reverse marketing)
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