MS3124

GLOBAL SUPPLY CHAIN

MANAGEMENT

LECTURE 4 – PROCUREMENT &

PRODUCTION

SANDY WONG

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 AGENDA

• Procurement objectives
• Total cost of ownership
• Alternative procurement
strategies
• Procurement Strategy
Portfolio & Matrix
• Production process types
& strategies

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 PURCHASING
VS Procurement

PROCUREMENT Purchasing

Purchasing
• Process of ordering and receiving goods and services
such as request, approval, create purchase order and
good receipts.
• A subset of procurement process.
Procurement
• Processes to establish fundamental requirements,
sourcing activities such as market research, vendor
evaluation and contract negotiation.
• Also include purchasing activities required to order and
receive goods. 3
 PURCHASING PERSPECTIVE

Historically perceived as just a buying function

for manufacturing and repair materials and
supplies.
• Get the lowest price for acceptable quality.
• Transactional focus – get the best possible “deal” now
but not focused on future transactions.
• Purchasing simply responded to demands of production
group.

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 PROCUREMENT PERSPECTIVE

Capability to implement strategies from its

supply base:
• Procurement looks up and down the entire supply chain
for impacts and opportunities.
• Focuses on building relationships with suppliers and
downstream customers.
• Outsourcing includes more than just purchasing raw
materials and parts.
• Also finding alternate sources for manufactured products or
services to help manage demand.

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 PROCUREMENT AS STRATEGIC
ACTIVITY

Important factors of Procurement

•Purchased goods and services are the
largest cost elements for most firms.
•Growing emphasis of outsourcing.
PROCUREMENT OBJECTIVES

• Ensuring continuous supply

• Minimizing inventory investment
• Quality improvement of supply
• Supplier development
• Supplier selection
• Building supplier relationships
• Supplier continuous improvement
• Access technology and innovation
• Lowest total cost of ownership

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TOTAL COST OF OWNERSHIP

Figure 4.1 Major Categories for the components of Total Cost of Ownership
PROCUREMENT STRATEGIES

Insourcing Outsourcing

Make decision vs Buy decision

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 ALTERNATIVE PROCUREMENT STRATEGIES
1. User buy
• Allow users in a firm to determine and execute their own
purchase
2. Volume consolidation
• Reduce no. of suppliers
• Maintain multiple sources to reduce buyer’s dependence
3. Supplier operational integration (see slide #11)
• Building partnerships
• Sharing information and knowledge
• Identifying linked processes and shared opportunities for
improvement
4. Value management (see slide #12)
• More intensive supplier integration;
• Value engineering – involving suppliers early in product
design (e.g. closely examine material and components
• Reduce complexity & TCO 10
 SUPPLIER OPERATIONAL
INTEGRATION
• Primary objective: cut waste, reduce cost, and
develop a relationship that allows both buyer
and seller to achieve mutual improvements.
• Integration can take many forms:
• Buyer providing detailed sales information to supplier
• Buyers and suppliers working together to redesign linked
processes
• Eliminating duplicated activities performed by both the
buyer and supplier
• Incremental savings of 5% to 25% over the
benefits of volume consolidation
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 VALUE MANAGEMENT
Through early supplier involvement in product
design.

Figure 4.2 Flexibility and Cost of Design Changes

THE SOURCING PROCESS

Adopted from Coyle 9th Ed Chapter 13, Figure 13.2 13

 PROCUREMENT STRATEGY PORTFOLIO
Routine purchases (Generics)
• Low spending & very little supply risk
• No impact on operational performance (e.g. office supplies)
Leverage purchases (Commodities)
• High spending but very little supply risk
• Generally commodities with many alternative sources of supply
(Common medicines e.g. paracetamol)
Bottleneck purchases (Distinctives)
• Low spending but high supply risk if unavailability
• Usually only available from a small number of suppliers.
(orphan drugs; flu vaccines)
Critical purchases (Criticals)
• High spending & high supply risk
• Strategic products and services (e.g. specialized medical
equipment)
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PROCUREMENT STRATEGY MATRIX
Bottleneck Purchases Critical Purchases
High
(Distinctives) (Criticals)
Maintain multiple suppliers Involve suppliers early in
and long term contracts product design
Supplier operational Value management
integration
Level of
Supply
Risk Routine Purchases Leverage Purchases
(Generics) (Commodities)
Reduce Buying Effort to Consolidate purchases to a
reduce costs limited number of suppliers
User Buy for procurement savings
Low
Volume Consolidation

Low Value to Firm High

Figure 4.3 Procurement Strategy Matrix
Adapted from Robert Monczka et al., Purchasing and Supply Chain Management, 4th Edition (Mason, OH: South-
Western Cengage Learning, 2009), P. 211.
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 LOGISTICS INTERFACES WITH
PROCUREMENT
Just-in-Time
• JIT delivery
• Focus and expand value added activities
• Reduce non value-added activities (reduce waste)
• More frequent delivery of smaller quantities
• Close cooperation and communication
• JIT II
• Integration of suppliers into manufacturing processes
• Bring suppliers’ personnel into the firm
Procurement of logistics services
• Outsourcing non-core capabilities such as
transportation, warehousing.

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 LEAN PRODUCTION

Produce
• Only the good/services that customers want
• As quickly as customers want
• With only features customers want
• With perfect quality
• In minimum possible lead time
• Without waste
• With occupational development of workers
 FOUR BASIC
PRODUCTION PROCESS TYPES
 FOUR BASIC
PRODUCTION PROCESS TYPES

1. Job Shop Production Process

2. Batch Production Process
3. Repetitive Production Process
4. Continuous Production Process
 1. JOB SHOP PROCESS

• Process low volume high customized goods

• Highly flexible production for a wide variety of
goods by using highly skilled labor
• Intermittent production process for each project
adjustment
• Frequently used for prototyping (new product
trials)
• e.g. one-of-a-kind customized machine for a
food processing plant.
 2. BATCH PROCESS

• Process moderate amount of fairly standardized

goods
• Quite flexible production for a certain product
category
• Intermittent production process for each batch with
slight adjustment
• Production volume ranging from few hundred to
few thousand pieces
• Often used to test the market potential for a certain
product before deciding on mass production
 3. REPETITIVE (LINE FLOW)
PROCESS

• Produce high volume standardized goods

• Low flexible production for a product variation
• Process equipment is highly specialized and
production lines are specifically designed for a
certain product
• Production volumes ranging from thousands to
millions of units. Unit costs are much lower
than batch production
• e.g. automobiles, computers and TVs
 4. CONTINUOUS PROCESS

• Process very large amounts of non-discrete items

• Zero flexibility in production lines and equipment
specifically for a certain item
• Labor skills range from low to high depending on
the complexity of product
• Mass production requires long commitment and
substantial investment in equipment and facilities
layout
• e.g. steel, sugar and laundry detergent
 PRODUCTION STRATEGIES
Engineer to Order (ETO)
• Products are unique and extensively customized for the specific
needs of individual customers
Make to Order (MTO)
• Relatively small quantities, but more complexity
• Requires much interaction with customer to work out design and
specification
• Usually shipped direct to customer
Assemble to Order (ATO)
• When base components are made, stocked to forecast, but
products are not assembled until customer order is received
• Manufacturing postponement practiced here
Make to Stock (MTS)
• Economies of scale, large volumes, long production runs, low
variety, and distribution channels
 CHOICE OF
PRODUCTION STRATEGY

Product Procurement Production Customer

Design Cycle Cycle Cycle Delivery Cycle

MTS
Strategy

ATO
Strategy

MTO
Strategy

ETO
Strategy

Total Cycle Experienced by Customers

Figure 6.4 Manufacturing Strategy and Performance Cycles

 PRODUCTION PROCESS TYPES
CHARACTERISTICS
Job Shop Batch Repetitive / Continuous
line flow
Types of Customized Semi- Standardized Highly
Products goods standardized goods standardized
goods goods
Process Very flexible Flexible Low flexibility Not flexible
flexibility
Production Very low Low / High Very high
Volume moderate
Unit cost High Moderate Low Very low

Labor skills High Moderate Low Low to high

Customer Very long Long Short Very short

Lead time
Production ETO/MTO ETO/MTO/ ATO/MTS MTS
Strategy ATO
 KEY TAKE AWAY

• Total cost of ownership (TCO)

• Alternative procurement strategies
• Procurement Strategy Portfolio & Matrix
• Production process types & strategies

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