More Related Content Similar to SCM Chapter 4.ppt (20) More from Manoj Kumar (7) 2. © 2007 Pearson Education
Sourcing is the set of business
processes required to purchase goods
and services
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Functions Of Procurement
(Sourcing)
Consumption Management / Need Identification
Supplier Selection
Contract Negotiation
Purchasing
Contract Management
Contract Closure
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1. Consumption Management
Effective procurement begins with an understanding
of how much of what categories of products / Services
are required across the entire company as well as by
each operating unit
Better economies of scale can be achieved if
requirements are aggregated
Setting Up Expected Level of Consumptions /
requirement
Compared with actual level of consumption
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Consumption Management
Consumption above expectations is either a problem
to be corrected or it reflects inaccurate expectations
that need to be reset.
Consumption below expectations may point to an
opportunity that should be exploited or it also may
simply reflect inaccurate expectations to begin with.
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2. Supplier (Vendor) Selection
There are a number of reasons why the selection and
evaluation of suppliers are more important today than
they were in the recent past
Cost Of Material or Services
Reliability
Quality
Financial aspects
Innovation
Lead Times
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Supplier Assessment Factors
Replenishment Lead
Time
On-Time Performance
Supply Flexibility
Delivery Frequency /
Minimum Lot Size
Supply Quality
Inbound Transportation
Cost
Pricing Terms
Information
Coordination
Capability
Design Collaboration
Capability
Exchange Rates,
Taxes, Duties
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Supplier Selection
Discussion Question:
Large Pool of Suppliers VS Small Pool of Suppliers?
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Single Sourcing
Advantages:
– Lower Price due to bulk quantities
– Enabler of JIT
– More willingness in investment and commitment
– Lower administration Cost
– Easier to track down material supply
Disadvantages:
Low variety
Dependency / Risks
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Advantages Of Multiple Sources
Supply Continuity
A useful approach to ensure the reliability of supply
stream and improve supply continuity provides
alternative sources in the event of supply stoppages
Competitive Pressure
Increase the buyer’s negotiating power through the
perceived threat of being able to switch business
easily
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Disadvantages of Multiple
Sourcing
Additional Admin. Expense: Extra effort and time in
supplier management.
Short term Relationship
Frequent change of suppliers results in lack of
motivation by both sides to work together
Lower volumes of business compared to the whole
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How Many Suppliers to Use
Reasons Favoring a
Single Supplier
To establish a good
relationship
Less quality variability
Lower cost
Transportation economies
Proprietary product or
process
Volume too small to split
Reasons Favoring More
than One Supplier
Need Variety
Spread risk of supply
interruption
Create competition
Information
Single-sourcing- a risky proposition. Although trends favor
fewer sources, avoid single source.
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3. Contract Negotiation
This is where the specific items, prices, and service
levels are worked out.
The simplest negotiations are for contracts to purchase
indirect products where suppliers are selected on the
basis of lowest price
The most complex negotiations are for contracts to
purchase direct materials that must meet exacting
quality requirements and where high service levels
and technical support are needed
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4. Purchasing
These activities are the routine activities related to
issuing purchase orders for needed products.
Purchasing is normally associated with a functional
activity to acquire material / services
Purchasing VS Procurement What is the difference?
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Simple Answer
Procurement is the acquisition of goods and/or
services at the best possible TOTAL COST OF
OWNERSHIP, in the right quantity and quality, at the
right time, in the right place and from the right source
for the direct benefit or use of corporations, or
individuals.
In short
Procurement is concerned with the overall gathering
of resources to acquire goods/services, while
purchasing is the specific act of acquiring something
by paying money for it. Purchasing is little part of
procurement
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Major Categories for the Components
of Total Cost of Ownership
Pre-transaction Components
1. Identifying need
2. Investigating sources
3. Qualifying sources
4. Adding supplier to
internal systems
5. Educating :
•supplier in firm’s operations
•firm in supplier’s operations
Post-transaction Components
1. Line fallout
2. Defective finished goods
rejected before sale
3. Field failures
4. Repair/ replacement in field
5. Customer goodwill/ reputation
of firm
Transaction Components
1. Price
2.Order placement/ preparation
3. Delivery/ transportation
4. Tariffs/ duties
5. Billing/ payment
6. Inspection
7. Return of parts
8. Follow-up and correction
Total Cost of Ownership
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LC TYPES
1. Irrevocable LC. This LC cannot be cancelled or modified without
consent of the beneficiary (Seller). This LC reflects absolute liability of the
Bank (issuer) to the other party.
2. Revocable LC. This LC type can be cancelled or modified by the Bank
(issuer) at the customer's instructions without prior agreement of the
beneficiary (Seller). The Bank will not have any liabilities to the beneficiary
after revocation of the LC.
3. Stand-by LC. This LC is closer to the bank guarantee and gives more
flexible collaboration opportunity to Seller and Buyer. The Bank will
honour the LC when the Buyer fails to fulfill payment liabilities to Seller.
4. Confirmed LC. In addition to the Bank guarantee of the LC issuer, this
LC type is confirmed by the Seller's bank or any other bank. Irrespective to
the payment by the Bank issuing the LC (issuer), the Bank confirming the
LC is liable for performance of obligations.
5. Unconfirmed LC. Only the Bank issuing the LC will be liable for
payment of this LC.
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1.Definition of L/C
•A L/C is a written undertaking by the issuing bank to the
beneficiary, under which the bank will pay a sum certain in
money to the beneficiary if the beneficiary of the L/C
provides the bank with specified documents within a
prescribed time period, which all comply with the terms
and conditions of the credit.
L/C is a letter from a bank promising to pay on certain specific condition
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6. Transferable LC. This LC enables the Seller to assign part of the letter
of credit to other party(ies). This LC is especially beneficial in those cases
when the Seller is not a sole manufacturer of the goods and purchases some
parts from other parties, as it eliminates the necessity of opening several
LC's for other parties.
7. Back-to-Back LC. This LC type considers issuing the second LC on the
basis of the first letter of credit. LC is opened in favor of intermediary as per
the Buyer's instructions and on the basis of this LC and instructions of the
intermediary a new LC is opened in favor of Seller of the goods.
8. Payment at Sight LC. According to this LC, payment is made to the
seller immediately (maximum within 7 days) after the required documents
have been submitted.
9. Deferred Payment LC. According to this LC the payment to the seller is
not made when the documents are submitted, but instead at a later period
defined in the letter of credit. In most cases the payment in favor of Seller
under this LC is made upon receipt of goods by the Buyer.
10. Red Clause LC. The seller can request an advance for an agreed
amount of the LC before shipment of goods and submittal of required
documents. This red clause is so termed because it is usually printed in red
on the document to draw attention to "advance payment" term of the credit
2-22
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Documentary Credit Procedure
Buyer
(Importer)
Seller
(Exporter)
Importer’s Bank
(Issuing Bank)
Correspondent
Bank
(1) Contract of Sale
(5) Delivery of Goods
(7) Documents Presented to
issuing Bank
(3) Credit Sent to Correspondent
(6)
Documents
Presented
(4)
Letter of
Credit
Delivered
(8)
Documents
& Claim for
Payment
(2)
Request
to Provide
Credit
(9) Payment
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Incoterms for any Mode or Modes of
Transport:
EXW - Ex Works
FCA - Free Carrier
CPT - Carriage Paid To
CIP - Carriage and Insurance Paid
DAT - Delivered At Terminal (new)
DAP - Delivered At Place (new)
DDP - Delivered Duty Paid
2-25
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Incoterms for any Mode or Modes
of Transport:
2-26
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Incoterms for Sea and Inland
Waterway Transport Only:
FAS - Free Alongside Ship
FOB - Free On Board
CFR - Cost and Freight
CIF - Cost, Insurance and Freight
2-27
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Discussion Question:
Centralized VS Decentralized Purchasing
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Purchasing: Centralized vs.
Decentralized
Purchasing in any organization dependent on many factors,
such as market conditions & types of materials required.
– Centralized Purchasing- purchasing department located at the
firm’s corporate office makes all the purchasing decisions.
– Decentralized Purchasing- individual, local purchasing
departments, such as plant level, make their own purchasing
decisions.
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Purchasing: Centralized vs.
Decentralized
Advantages-
Centralization
– Concentrated volume-
leveraging purchase
volume
– Avoid duplication
– Specialization
– Lower transportation
costs
– No competition within
units
– Common supply base
Advantages-
Decentralization
– Closer knowledge of
requirements
– Local sourcing
– Less bureaucracy
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The Kraljic Portfolio Purchasing Model
The Kraljic Portfolio Purchasing Model was created
by Peter Kraljic and it first appeared in the Harvard
Business Review in 1983. Despite its age, it's a
popular and useful model used in companies
worldwide.
Its purpose is to help purchasers maximize supply
security and reduce costs, by making the most of their
purchasing power. In doing so, procurement moves
from being a transactional activity to a strategic
activity.
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Supply risk is high when the item is a scarce raw
material, when its availability could be affected
by government instability or natural disasters,
when delivery logistics are difficult and could
easily be disrupted, or when there are few
suppliers.
Profit impact is high when the item adds
significant value to the organization's output. This
could be because it makes up a high proportion of
the output (for example, raw fruit for a fruit juice
maker) or because it has a high impact on quality
(for example, the cloth used by a high-end
clothing manufacturer)
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Strategic items (high profit impact, high supply risk).
These items deserve the most attention from
purchasing managers. Options include developing
long-term supply relationships, analyzing and
managing risks regularly, planning for contingencies,
and considering making the item in-house rather than
buying it, if appropriate.
Leverage items (high profit impact, low supply risk).
Purchasing approaches to consider here include using
your full purchasing power, substituting products or
suppliers, and placing high-volume orders.
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Bottleneck items / Key Commodity Items (low profit
impact, high supply risk).
Useful approaches here include over ordering when
the item is available (lack of reliable availability is
one of the most common reasons that supply is
unreliable), and looking for ways to control vendors.
Non-critical items (low profit impact, low supply
risk).
Purchasing approaches for these items include using
standardized products, monitoring and/or optimizing
order volume, and optimizing inventory levels
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5. Contract Administration
Contract administration ensures that the seller’s
performance meets contractual requirements
Contracts are legal relationships, so it is important
that legal and contracting professionals be involved
in writing and administering contracts
Many project managers ignore contractual issues,
which can result in serious problems
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Suggestions on Change Control for
Contracts
Changes to any part of the project need to be
reviewed, approved, and documented by the same
people in the same way that the original part of the
plan was approved
Evaluation of any change should include an impact
analysis. How will the change affect the scope, time,
cost, and quality of the goods or services being
provided?
Changes must be documented in writing. Project
team members should also document all important
meetings and telephone phone calls
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6. Contract Close-out
Contract close-out includes
– product verification to determine if all work was completed
correctly and satisfactorily
– administrative activities to update records to reflect final
results
– archiving information for future use
Procurement audits identify lessons learned in the
procurement process
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E-Procurement
Internet has grown and evolved, more and more
companies have become involved in e-business.
Definition: E-Procurement is the business to business
(B2B) purchasing of goods and services through the
Internet.
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E-Business & Supply Chain
Management
One of the most important impacts of the Internet and
e-business in supply chain management is the
availability of instantaneous information. Information
like pricing, location of materials, status of shipments,
and availability of parts throughout the supply chain.
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E-Business & Supply Chain
Management
Package carriers such as FedEx, UPS, Time Matters,
DHL, TCS experienced substantial increase in the
number of packages they deliver for companies due to
the growth of e-business
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Inefficiencies of Traditional Procurement
system
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e-Procurement
Advantages of the e-Procurement System
– Time savings
– Cost savings
– Accuracy
– Real time
– Traceability
– Management
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E-Commerce
E-commerce uses advanced technology to assist
business transactions in a web-based environment and
facilitates the transaction of information flow and
fund flow. E-commerce involves business-to-business
transaction (B2B) such as Covisint, business-to-
Customer transaction such as Amazon.com (B2C),
customer-to-business transaction (C2B) such as
priceline.com, and customer-to-customer transaction
(C2C) such as e-Bay auction.
Editor's Notes 2 Procurement decisions based on total cost assessments tend to be more effective than those based only on cost of purchase and cost of maintenance and repair. Hidden costs always come back to bite you.
