PROCUREMENT AND

SUPPLY MANAGEMENT
CHAPTER 5
MATERIAL MANAGEMENT
Materials management is the planning and control
of the flow of materials that are part of the
inbound logistics system.
Materials Management Activities
Procurement

Importance of Item and Service Purchased

The Special Case of Procurement Price

Other Materials Management Activities

Materials Management:
Procurement
Importance
Contributes to the competitive advantage of the firm
Significant portion of the logistics costs
 Definition of Procurement Activities
Identify or reevaluate needs
Define and evaluate user requirements
Decide whether to make or buy
Identify the type of purchase
Conduct a market analysis
Identify all possible suppliers
Prescreen all possible source
Evaluate the remaining supplier base
Choose a supplier
Receive delivery of the product or service
Make a post purchase performance
evaluation
PROCUREMENT PROCESS
Materials Management: Importance
of Item and Service Purchased
Products and services purchased by a company are
not all the same.
Some are more important than others and require
greater procurement attention.
The quadrant technique enables the supply chain
manager to assess the relative importance of each
item based on the degree of perceived value and
risk.
 There are four possible combinations in the
quadrant techniques model:
Generics --- low risk, low value
Commodities --- low risk, high value

Distinctives --- high risk, low value

Criticals --- high risk, high value

Figure 4-3 illustrates the relationships in the

quadrant technique model.
Figure 4-3
Item Procurement Importance Matrix
Materials Management: Managing
the Procurement Process in 4 Steps
1. Determine the type of purchase
New

Straightrebuy
Modified rebuy
2. Identify the type of purchase
Determine the necessary levels of investment of time
and information.
The more complex the purchase, the more time needs to
be spent and more information needs to be gathered
to get it right the first time.
3. Perform the procurement process
Do those activities that are necessary to effectively
make a purchase and satisfy the users requirements.
4. Evaluate the effectiveness of the procurement
process
Were the users needs satisfied?
Was the investment necessary?
 Materials Management: Managing
the Procurement Process
Supplier/Vendor Evaluation and Relationships
Maintaining a healthy vendor relationship is a critical
part of a successful supply chain.
Developing a true partnership relationship with a firms
vendors grows more important as the number of
vendors shrinks and/or the vendors are being sought by
other competing supply chains.
TQM begins with the vendors.
 Vendor Selection Criteria
Quality

Reliability

Capability

Financial

Miscellaneous Other Qualities

Vendor Location

Factor Importance Will Vary

Overview of Vendor Selection Criteria
 Materials Management: The
Special Case of Procurement Price
Sources of Price
Commodity markets
Price lists
Price quotations

Negotiation
 Hierarchy of Price
Measurement Approaches
 Types of Costs
Traditional basic input costs primary product price
Direct transaction costs - all other related costs of
detecting and transmitting information to suppliers (e.g.,
EDI)
Supply relational costs - costs of maintaining
relationships with suppliers
Total Procurement Price
 Other types of Costs
Landed costs - actual transport costs + sales terms
Quality costs/factors - do the goods conform to
standard?
Overview of Production Planning and
Control
 Other types of Costs
Operations/logistics costs
Receiving and make-ready costs

Lot size costs

Production costs

Other logistics costs affected by products size, weight,

density and shape
 Materials Management: Other
Materials Management Activities

Warehousing Transportation
Type of facilities Vendor control
required Modal choice
Production Planning Rush shipments
and Control Inspection
Coordinating product Damage claims
supply with product
demand
 Quality Control
Quality standards
did customer receive what was ordered?
Quality implications
GIGO concept
Sample inspection
statistical QC from vendor to assure 100% quality
 Salvage and Scrap Disposal
Value of scrap may be income to the firm.
Disposal must adhere to environmental regulations.
Electronic Procurement
Common uses of E-commerce
Research vendor and product information
Electronic check of available stock

Price negotiation

Order products or services

Check on the status of an order

Issue invoice and receive payment

Advantages of Electronic Procurement
 Disadvantages
Security of electronic messages
Lack of face-to-face contact

Other technological concerns

Standard protocols
System reliability
 Four Basic Types of E-commerce
Models
Sell-side system
Administered by the seller
Usually free to the buyer

Electronic marketplace
Administered by a third party
Collection of electronic catalogs

One-stop sourcing for buyers

 Buy-side system
Administered by the buyer
Pre-approves vendor access

Expensive and usually the domain of large companies

On-line trading community

Maintained by a third party
Used by multiple buyers and sellers