Procurement and Supply

Chain Management

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Integration of supply chain activities
1962 1982 2002
Fragmentation Evolving Integration Total Integration

Demand Forecasting
Purchasing
Requirement Planning
Production Planning
Manufacturing Inventory
Warehousing Materials Management
Materials Handling Logistics
Industrial packaging Physical Distribution
Finished goods Inventory
Distribution Planning
Order Processing
Transportation
Customer Services
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Procurement, materials management and
logistics
• Materials Management (MM) – ‘the total of all those tasks, functions, activities and routines
which concern the transfer of external materials and services into the organization and the
administration of the same until they are consumed or used in the process of production,
operations or sales’
• MM may therefore include key activities (Zenz, Purchasing & MM):
• Materials and inventory planning
• Procurement of necessary materials, parts and supplies
• Storage and inventory management
• Production control
• Physical distribution
• Warehousing and storage
• Transport or distribution planning
• Materials handling
• Inventory management and control
• Transportation and delivery

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 Logistics
• Logistics management – ‘the process of planning, implementing and controlling the efficient, effective
flow and storage of raw materials, in-process inventory, finished goods, services, and related information
from point of origin to point of consumption… for the purpose of conforming to customer requirements.
(Coyle, Bardi and Langley, The Management of Business Logistics)

Procurement (purchasing or
acquisition)
Materials
Inbound transport and storage of Management
materials, inventory management
(flow of inputs to production)
Production management and
control: forward ordering of Logistics Management
materials; preparing schedules;
quality management, and so on
Storage of finished goods, Physical distribution
inventory management and management
outbound transport (flow of
finished goods to the customers)
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Supply chain integration
Increasing supply chain integration: The changing focus of purchasing as it evolves from a purely
clerical routine activity to a commercial stage in which the emphasis is on cost savings and finally a
proactive strategic function concerned with materials or logistics management

• Clerical (transactional) – purchasing is considered as a low-ranking routine function

• Commercial – the focus shifts to price/cost savings
• Strategic (proactive) – the focus is on effective contribution to competitive advantage

Information System development allows further integration

• Independence – procurement has it is own guidelines

• Dependence – dovetails with other functions via consultation and reporting
• Business integration – systematically integrates with other functions for tactical decisions
• Chain Integration – securing systematic co-operation and information sharing across the supply chain

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Supply chains and networks
• The supply chain encompasses all organizations and activities associated with the flow and
transformation of goods from the raw materials stage, through to the end user, as well as the
associated information flows. Material and information flows up and down the supply chain.
(Handfield & Nichols, Supply Chain Redesign)

• The supply chain includes all those involved in organizing and converting materials through the
input stages (raw materials), conversion phase (work in progress) and outputs (finished products).
The cycle is often repeated several times in the journey from the individual producer to the
ultimate customer, as one organization’s finished good is another’s input

• A supply chain is ‘that network of organizations that ate involved, through upstream and
downstream linkages, in the different processes and activities that produce value in the form of
products and services in the hand of ultimate customer

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 Principal flows in a supply chain
SUPPLIER’S SUPPLIER FIRM CUSTOMER CUSTOMER’S
SUPPLIERS CUSTOMER
Upstream - Supplier
Information (orders and schedules) to the organization
Downstream - The
Goods and services organization to the
customer
Payments

Immediate or first-tier Focal Firm Immediate customer

Dyadic supply relationships
Supplier (seller or inputs) (buyer of outputs)

Inter-business supply chains

• Working together – each player contributes value at its stage of the sequence of activities
• Dependency and collaboration – each link is essential to the completeness and strength
• Importance of ‘linkages’ – the value is added not just by each element in the chain, but by the quality of the
relationship
• It is continuous and non directional – flows forwards and backwards 7
 Internal supply chains
Procurement Production Storage Distribution Sales and
Marketing
• Information (promotion plans, sales forecasts, orders, inventory data)
• Materials (returns, goods for repair or service, goods for recycling or disposal)
• Finance (payments)

• Information (capacity data, delivery schedules, payment terms)

• Materials (finished goods, services)
• Finance

Internal customer concept – suggests that any unit of a firm whose task contributes to the task of other units can
be regarded as a supplier of goods and services to those units.
The procurement function is part of internal supply chain: it is served by internal suppliers and in turn serves
internal customers
Effective procurement will make extensive use of cross-functional project teams
• Integrating the objectives
• Encouraging procurement staff to be proactive planning procurements
• Reducing resistance to procurement involvement in strategic issues
• Enhancing procurement’s role and status in the organization
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 Supply chain networks
Supplier’s E-procurement Transport Services Customer’s
supplier IT consultancy provider customer

Supplier Focal Firm Customer

Supplier’s Finance Market research Customer’s

supplier provider consultancy customer

A retail supply networks

Makers Retailers Consumers

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 Structuring supply chains
• An organization might adopt a deliberate policy of tiering its suppliers, so as to reduce the number of first tier suppliers.
• There are fewer commercial relationships to manage, to direct attention to managing key relationships
• To minimize reputational and business risk
• Procurement may be freed up to pursue a more strategic focus & contribution
• More and better supply chain improvements and innovations
• First-tier suppliers may have the expertise, technology and resources to be able to co-ordinate supply chain activities more
efficiently
• Closed loop chains (reverse logistics)
• EU directives have been introduced in the area of environmental responsibility, shifting the responsibility for disposal and
recycling of end products to producers and importers.
• Supplier base optimization
• The of this is to leverage the buying power of an organization with the smallest number of suppliers consistent with security of
supplies and the need of high-quality goods and services at competitive prices (Lysons & Farrington)
• Value adding supply chain strategies
• Value engineering – analyzing the value
• Lean supply – collaborating closely with the supply chain to eliminate and minimize the waste
• Agile supply - collaborating closely with the supply chain to increase its speed and flexibility
• Value adding negotiations and relationships – working collaboratively and constructively with supplier to continuously improve

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Structuring Supply chains
All manufacturing performed by
top-level purchaser Top level purchaser

Supplier A Supplier B Supplier C Supplier D Supplier E Supplier F

Top-level purchaser outsources

most manufacturing Top level purchaser

Supplier X Supplier Y

Supplier 1 Supplier 2 Supplier 3 Supplier 4 Supplier 5 Supplier 6

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 From procurement to supply chain
management (SCM)
Supplier Management - That aspect of purchasing or procurement which is concerned with rationalizing the
supplier base and selecting, coordinating, appraising the performance of and developing the potential of
suppliers, and where appropriate, building long-term collaborative relationship (Lysons and Farrington)

Purchasing activity Supplier management activity

Focus on non-critical (low profit, low risk) items Focus on critical/strategic items
Focus on non-critical (low profit, low risk) items Sourcing and appraising suppliers
Ordering or calling off purchases Rationalising the supplier base
Order expediting Developing supplier potential
Maintaining inventory Early supplier involvement
Receipt and storage of supplies Negotiation
Arranging payment Supplier relationships
Monitoring supplier performance
Ethical and environmental issues
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 Supply Chain Management
• Drivers for SCM (Andrea Reynolds, strategic SCM)
• Cost pressures
• Time pressures
• Reliability pressures
• Response pressures
• Transparency pressures
• Globalization pressures
• Jesperson and Skjott-Larsen suggests that a company needs careful internal
analysis of what it is seeking to achieve and if a firm has not done it will not
generally be prepared to co-operate with other supply chain participants and the
potential advantages of SCM will not accrue.

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From Procurement to Supply Chain
management
TRADITIONAL WAYS NEW WAYS
Key feature: Independence Key feature: Integration
Independent of next link Dependency
Links are protective End to end visibility
Uncertainty More certainty
Unresponsive to change Quicker response
High cost, low service High service, lower cost
Fragmented internally ‘Joined up’ structures
‘Blame’ (adversarial) culture ‘Gain’ (collaborate value-adding) culture
Competing companies Competing supply chains

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