Fall – 2018 – Chapter 6: Procurement in the Supply Chain

Procurement Video Links:




I. Make or Buy

  • First decision in the procurement or supply management process
  • The choice between internal production and external sources
  • Determine cost implications of make or buy decision
    • Break Even Analysis
        • Used to swiftly discover the cost implications of a make or buy decision

A. Outsourcing


  1. Focus on core activities
  2. Cost savings
  3. Reduce capital expenditures: frees organization from investing on things that make up the bulk of a back-end process’ capital expenditure
  4. Increased flexibility: can improve an organization’s reaction to fluctuations in customer demand and changes in technology


  1. Security risk: risk of losing sensitive data
  2. Loss of management control of business functions: risking the amount of control a business has over the deliverables they outsource
  3. Quality problems
  4. Loss of focus: if the outsourcing provider is working with other customers, they may not give sufficient time to the company
  5. Hidden costs and legal problems: can occur if terms and conditions are not clear
  6. Financial risks: no control over the outsourcing provider’s financial stability
  7. Incompatible culture: different company cultures can lead to poor communication and lower productivity

B. Other Supply Chain Strategies

  1. In-Sourcing – doing operations in-house
  2. Vertical integration – used to develop the ability to produce goods or service previously purchased
    1. Forward integration – toward customer
    2. Backward integration – toward suppliers
  3. Near sourcing – production is closer to home; result of spike in energy costs (i.e. transportation)
  4. Few or Many Suppliers
    1. Many suppliers – used for commodity products where price if the driving decision factor and suppliers compete with one another
    2. Few suppliers – buyer establishes a longer-term relationship with fewer suppliers; goal: create value through economies of scale and learning curve improvements
  5. Joint Ventures – formal collaborations between two companies that reduce risk, enhance skills, or reduce costs (or combination of three).
  6. Virtual companies – rely on a variety of supplier relationships to provide services when needed; usually have efficient performance, low capital investment, flexibility, and speed

II. The Procurement Process

A. Identify and Review Requirements:

  1. Direct (production related procurement) vs indirect (non-production related procurement)
    • Direct – Generally referred to in manufacturing settings only. Direct procurement is a major focus in supply chains and directly affects the production process of manufacturing firms. Raw material and production goods.
    • Indirect – Activities concern operating resources that a company purchases to enable its operations. Comprises a wide variety of goods and services such as maintenance, repair and operating supplies to capital goods and services.

B. Establish Specifications:

  1. Must identify quantity, pricing, and functional requirements
    • Quantity: Small volume requirements, you need to find a standard item. For larger volume, it must be designed for economies of scale.
    • Price: Relating to the use of the item and the selling price of the finished product.
    • Functional: Understand what the item is expected to do per the users, includes performance and aesthetics. Example: for a can opener; how smoothly does it remove the top of cans as well as how ergonomically appealing is the design.
  2. Buyer set specifications vs standard specifications
    • If Buyer sets specifications
      1. Can become long and expensive process requiring detailed descriptions of parts, tolerances, and materials.
    • If standard specifications
      1. Set by gov’t and non gov’t agencies. Much more straightforward because they are widely known and accepted, allowing for a lower price and more adaptability to customer needs.

C. Identify and Select Suppliers:

  1. Typically involves coming up with a long list of suppliers who meet an organization’s general requirements, and then narrowing the list down to the ultimate vendor
  2. After identifying potential vendors, a request for information (RFI) is issued to them which gives a bit of background about the vendor
  3. Once down to 5-10 candidates a request for quotation (RFQ) is issued, this is a bid or quote on delivering specific products or services and will include the specifications of the items/service
  4. A factor rating method can be useful in the vendor evaluation, it identifies a criteria needed to assign weights of importance to each factor
  5. This is not necessarily how the final decision will be made however, because intangible factors can come into play
  6. Many factors other than price are important when selecting a vendor:
    • Technical ability
    • Manufacturing capability
    • Reliability
    • After-sales service
    • Location

D. Determine the Right Price:

  1. Although price is not the only determinant, it holds the most weight
  2. Three basic models are used as a basis for pricing:
    • Cost based– supplier makes financials available to purchaser
    • Market based– price based on published, auction, or indexed price
    • Competitive bidding– used for infrequent purchases
  3. Negotiation are mostly based on the type of product
    • Commodities– the price is determined by the market
    • Standard products– price is set by catalog listings and there is little room for negotiation
    • Small value items– companies should try to reduce ordering costs or increase volume when possible
    • Made-to-order items– prices are based on quotations from a number of sources
  4. There are two types of negotiations:
    • Distributive bargaining, there is usually a winner and a loser
    • Integrative negotiation, is more collaborative, with a goal for a win-win conclusion

E. Issue Purchase Orders

  1. The purchase order is used to buy materials between the buyer and seller. It specifically defines the price, specifications, and terms and conditions of the product or service and any other additional obligations
  2. Types of purchase orders include:
    • Discrete orders– used for a single transaction with a supplier
    • Pre-negotiated blanket– a purchase order made with a supplier containing multiple delivery dates, predetermined pricing, and is used when there is an ongoing need for consumable goods
    • Pre-negotiated vendor managed inventory (VMI)– the supplier maintains an inventory of items at the customer’s plant and the customer pay for the inventory when it is actually consumed
    • Bid and auction– speeds up purchasing, reduces costs, and integrates the supply chain
    • Corporate purchase card (pCard)– a company charge card that allows goods and services to be procured without using a traditional purchasing process

F. Follow Up and Assure Correct Delivery:

  1. Recovery plans must be developed and managed in case of delays
  2. It’s critical to understand the supplier’s production process, capacity and constraints

G. Receive and Accept the Goods:

  1. A cross-functional activity among purchasing, receiving, quality control and finance is required in order to ensure proper condition, quantity, documentation and quality parameters are met
  2. Reduce or eliminate the need for inspection
    • Barcode scanner and handheld computer to automate the process
    • Various inspection and certification processes performed by vendor

H. Approve Invoices for Payment

  1. The final step in the procurement process is approving an invoice for payment according to the terms and conditions of the purchase order.
  2. Data in the PO is matched with the package slip that was received when the product arrived.


III. Supply Chain Technologies in Procurement

  1. Robotic process automation (RPA)
    1. This is to integrate or automate the execution of repetitive, rule-based tasks or activities. Some cases, RPA can mirror human behavior and perform simple to moderate complex tasks.
    2. RPA is related to AI in that it uses artificial intelligence and machine learning capabilities in software to automate tasks that are highly predictable.
    3. They are capable of delivering cost savings, enhanced accuracy, productivity gains and increased compliance.
    4. Businesses can focus on innovation and strategic tasks.
    5. https://www.sdcexec.com/sourcing-procurement/article/12137628/technology-is-transforming-procurement-operations-heres-what-you-need-to-know
  2. 3D printing
    1. A physical object is created from a three-dimensional digital model. The printer interprets the instructions from a design file and then lays down many thin layers of a material in succession until the object itself is built.
    2. Raw materials (plastics or metal droplets that feed the printer), along with the design (the electronic file of a configuration) are key process drivers. 3D printing could potentially challenge the entire traditional procurement model.
    3. 3D printing potentially allows parts to be called on demand or call unique parts on demand.
    4. Using 3D printing to generate jet engine parts. A large 3D printer fires nanoscopic metal spheres into a substrate.
  3. Blockchain
    1. This is an automated distributed public ledger that records transactions from multiple sources in a highly secure, trusted environment. Using cryptography, networks of computers allow each participant on the network to update the ledger in a secure manner, without a central authority – thus eliminating the virtual hacking.
    2. This technology can reduce the time and cost associated with lengthy back and forth business processes and facilitate the tagging of items in supply chain without revealing sensitive data.

IV. Key Metics

  1. Price
    • Most common way most companies view and manage interactions with their suppliers
    • Only one measure of cost and only one element of assessing the attractiveness of a supplier
  2. Quality Measures
    • Parts per million defect rates
    • Service level measures such as time to respond to inquiries
    • On time delivery


V. Location/Spatial Issue Relationships in Procurement

  1. Bosch’s Inteligent Procurement Application
    • Allows stakeholders to gain visibility of purchasing trends across various dimensions
    • Reduction in contract leakages
  2. Near Sourcing Polaris Industries
    • Quicker supply/quality control
    • Protection of intellectual property
  3. Amazon’s Insourcing: Prime Now
    • Location delivery service that offers convenience to customers who need daily essentials

PowerPoint Link:


Leave a Reply

Your email address will not be published. Required fields are marked *