234

15 Procurement
and supply

Introduction
Procurement and supply is one of the key links in the supply chain and as such can have a sig-
ni cant in uence on the overall success of the organization. Ensuring that there are su cient
supplies of raw materials at the right price, of the required quality, in the right place and at the
right time is obviously crucial to any manufacturing plant. So important is this process that
over the years many organizations have developed large departments to deal with the sheer
weight of supplier transactions. Recently, however, many companies have been reducing the
number of suppliers they deal with in order to reduce the cost of these transactions.
In addition to supplier reduction programmes, many companies have tried to move away
from the traditional adversarial relationship with suppliers and towards a more partnership-
based approach. is style of relationship recognizes that both parties need to make a pro t to
survive but that there may be areas where, through cooperation, real cost may be removed
from the supply chain and competitive advantage gained by working together.
Of course, procurement is not just about raw materials. e following may also need to be
acquired:
utilities – gas, water, electricity and telephones;
fuel – diesel, petrol and heating fuel;
capital assets – machinery, vehicles and buildings;
corporate travel and hotels;
stationery;
consultancy;
outsourced services – distribution contracts, IT services, etc;
IT equipment – hardware, so ware and support.
Very large sums of money are involved in the above areas of purchasing, with di erent emphasis
placed on different elements depending on the business of the organization concerned.
 Procurement and Supply 235

For a transport company, fuel may represent as much as 35 per cent of the total operating budget,
but for a manufacturing plant the major cost may be in the plant running costs. ese costs
need to be carefully managed, but the rst step is to determine some purchasing objectives.
Managing suppliers is another crucial aspect of procurement. ‘How many suppliers should we
have?’, ‘How will we assess their performance?’ and ‘Should we make or buy this component?’
are all key questions that need to be answered if a procurement strategy is to work to the
bene t of the business.
Over the last decade many companies have invested in both hardware and so ware to facilitate
the use of e-procurement, which may be de ned as: the electronic integration and management
of all procurement activities including purchase request, authorization, ordering, delivery and
payment between a purchaser and a supplier.
Procurement is a very large subject. e objective in this chapter is only to highlight the key areas.

The procurement cycle

A typical procurement cycle progresses sequentially through the list below:
1. e identi cation of the need to procure a good or service.
2. Production of a requisition document that needs to be approved and passed to the
procurement department.
3. A request for quotation (RFQ) is sent to a selection of suppliers.
4. Suppliers respond with prices and a period of negotiation may be entered into.
5. A supplier is selected and a purchase order (PO) is raised, which records the details
of agreed price, delivery terms and place, and items or services to be provided.
6. e PO is signed and authorized by a manager. It is then sent to the supplier.
7. e goods or services are delivered and inspected.
8. e supplier sends an invoice.
9. e invoice is approved and paid or held pending resolution of any discrepancies found.
10. e procurement department assesses the performance of the supplier based on quality,
timeliness, price and the completeness of the order. is is known as post-contract
review.
Di erent organizations may structure the cycle slightly di erently or call the stages by di erent
names. e scope and scale of the purchase will dictate how much attention it receives. Most
of the steps listed above could be completed online, especially for routine and repeat orders.
Large capital purchases would require some of the stages to be quite complex. It is important
to understand that the technical speci cations need to be approved by technical specialists.
is is not a job for the procurement people.
236 Procurement and Inventory Decisions

Authorization of purchase orders and therefore expenditure should not be in the hands of
the purchasers. To ensure integrity of the process these roles and responsibilities need to be
separated. e purchasers will do the job of selection and negotiation but the nal authority to
spend company money should not be theirs.

The scope of procurement

Modern procurement departments aim to:
align their objectives with those of the organization rather than simply optimizing the
performance of the function;
exploit modern e-procurement techniques to reduce the cycle time for processing
orders as well as reducing transaction costs;
use the internet to identify new sources of raw materials and suppliers of goods and
services;
get involved early in the process of new product or service design;
source and organize globally if the scope and scale of the organization needs this;
build partnerships with crucial suppliers while utilizing online catalogues or purchase
cards for routine purchases;
seek value-for-money deals rather than simply buying the cheapest;
reduce inventory carrying costs through intelligent acquisition such as vendor-managed
inventory;
adhere to the 3 E’s: economies – spending less; e ciencies – spending well; and e ec-
tiveness – spending wisely;
enhance the competitiveness of the company.

Setting the procurement objectives

When setting procurement objectives, consideration should be given to the following:
whether to make yourself or buy from a supplier;
ensuring the continuing supply of raw materials and other supplies;
vendor-managed inventory (VMI);
the quality and number of suppliers;
standardization and product speci cation;
the price;
 Procurement and Supply 237

the origin of the supplies;

the method of supply, eg JIT-style deliveries;
the mode of transport used;
a hierarchy of importance, eg key raw materials would have precedence over o ce
stationery.

Ensuring the supply of raw materials

Clearly, without an assured ow of raw materials into a manufacturing plant serious problems
will ensue. ese could take the form of plant stoppages, which will be enormously expensive.
If expensive plant, machinery and labour are standing idle then costs may be incurred at
an alarming rate. Not only will cost be incurred, but customers may be let down, as goods are
not available for delivery at the appropriate time.
With this in mind, procurement management can adopt several policies to ensure that
supplies are always in the right place at the right time:
e manufacturer could purchase the supplying company. is used to be common in
vertically integrated organizations.
Su cient safety stocks may be held at the manufacturing plant to cover such eventua-
lities. ese stocks would attract inventory carrying costs, but the alternative may
justify this investment.
A manufacturer may insist on the co-location of the supplier next to or close to the
plant itself.
Where commodities such as wheat or crude oil are concerned, then options to buy
certain quantities may be negotiated in advance.
A manufacturer may develop very close relationships with suppliers, for example
through a system of quality-assured suppliers or vendor-managed inventory.
Take advantage of opportunities to purchase supplies at unusually low prices. However,
such purchases must be weighed in the light of the additional inventory carrying costs
that may be incurred. Such additional costs could exceed the savings accrued from the
opportunity purchase.

Vendor-managed inventory (VMI)

Where VMI is used, the vendor takes responsibility for the inventory held in the client’s
premises. e vendor monitors inventory levels and organizes replenishment. Ownership
of the inventory passes to the client when the inventory is utilized. For VMI to be e ective,
the management of information is crucial. Vendor and client will have linked computer
systems, o en using electronic data interchange (EDI). is allows the vendor to monitor
238 Procurement and Inventory Decisions

inventory levels and for purchase orders and invoices to be e ectively transmitted between the
partners.
e main advantage of VMI is that the overall level of inventory in the client’s warehouse can
be reduced. e vendor is able to schedule deliveries e ciently, as it has better visibility of the
client’s requirements, and can incorporate these requirements at an early stage into production
schedules. For the process to work, there needs to be high levels of trust between the two partners.
is is o en derived from the cultural compatibility of the companies involved. e partners’
IT systems also need to be compatible.
Where the client retains an element of involvement in managing the vendor’s inventory,
this is referred to as co-managed inventory (CMI).

The quality of supplies

Ensuring that the goods and services purchased are of the right quality is important in that
substandard supplies cause waste and a variety of problems:
If the goods are unusable then their presence has created a shortage in the required
quantity, which in JIT environments may be crucial.
Substandard goods will need to be stored awaiting collection. is could be a problem
if storage at the receipt stage is restricted.
ey will incur transaction costs, as paperwork and time will be involved in rectifying
the error.
ey will undermine con dence in the supplier and the supply process.
Insisting on suppliers having quality management systems in place can help avoid these
problems, as can extrinsic audits of suppliers’ premises. ese audits may be carried out by
the company’s quality auditors. Supplier assessment programmes will help highlight the
main o enders.
e cost of poor quality may be broadly divided into two categories namely: the cost of
conformance and the cost of non-conformance. e cost of conformance may be further
subdivided into the cost of appraisal and the cost of prevention. Examples of appraisal costs
include the costs of inspection and testing. Examples of prevention costs include training,
right- rst-time campaigns, and product design costs. e cost of non-conformance may also
be further subdivided into the internal costs and external costs of non-conformance. Internal
costs of non-conformance include scrap and re-work as well as lost production time. External
costs of quality failure include lost customer con dence and therefore future sales, returned
goods and product liability costs.
e ideal situation would be for a ve-star supplier to ship-to-stock. is would save a lot of
inspection costs but could only be predicated on a superb quality record of the supplier in
question. Such a supplier is likely to have achieved a ‘partnership’ status with the company.
 Procurement and Supply 239

Product specification
An important method of avoiding purchasing substandard supplies is the development of
product speci cations. If vendors are given very clear and precise instructions about what is
being ordered, this will go a long way to avoiding costly misunderstandings. is is espe-
cially true where there are many di erent options associated with components of a product.
For example, when purchasing a car the same model may be o ered for sale with di erent
types of engine, gearbox, paintwork and interior trim. It is important that the choices made
are clearly communicated in writing to the vendor in the form of a request for quotation
(RFQ). Product speci cations should also be included in the purchase order when it is issued
to the supplier.
One extremely e ective method of both reducing suppliers and ensuring consistent accurate
speci cations is to adopt a system of standardization for certain products. It should also
contribute to a reduction in the procurement transaction costs as buyers will simply access
standard speci cations and signal to the supplier that a repeat order is required. If the process
of standardization is widespread then it will also have the bene cial e ect of reducing the
inventory of spare parts required.

The price
is is the area that most people associate with the purchasing process. e price will be deter-
mined by certain factors:
e relative negotiating skills of the purchasing and selling team.
e relative power of the supplier or buyer in the marketplace. Where there are many
suppliers, the buyer’s position will be strong. e converse is also true in that where
there are many buyers and few suppliers then it follows that the supplier will be strong.
e quality of the goods in question.
Detailed knowledge of the product being purchased. For example, when multiple
retailers purchase commodities such as our they will have familiarized themselves
with the costs of wheat and production before entering any negotiation.
How much of the product is generally available for purchase. In other words, if the
product is scarce then prices tend to be higher as purchasers pay higher and higher
prices for the goods. e opposite is true when the product is plentiful.
e distance the goods have to travel from their point of origin to the delivery point.
Associated with this is the mode of transport used. e cost of transporting the raw
materials may represent a large part of the purchase price.
If the goods are being purchased by a buying group, then prices should be lower.
A buying group is a number of companies grouped together in order to pool their
buying power.
240 Procurement and Inventory Decisions

If the product speci cation can be de ned precisely, then prices can be assessed on a like-for-like
basis between suppliers. Discounts may be obtained from suppliers in various ways:
By o ering prompt payment.
Increasing the quantity ordered. As a general rule, the unit price of the item will go
down as the quantity ordered increases.
rough the fact that your company may be a crucial company to the supplier.
rough special or promotional o ers, eg if the goods being supplied are at the end of
their product life cycle.

The origin of the supplies

In recent years many large organizations have decided to source their supplies o shore. e
logic for this trend is that in some parts of the world, such as China and India, the costs of
labour and production are very low. Companies can therefore potentially gain a signi cant
competitive advantage by o shore sourcing. However, a number of factors need to be taken
into account. If the goods have to travel halfway around the globe then not only will the transport
costs be high but the lead times to delivery may be unacceptably long. e price paid for the
goods at origin may be low but the landed cost will include a proportion of the transport costs,
any duties or taxes paid and handling charges. It will be the landed cost of the item that will be
recorded in the company’s inventory as the nance department seek to correctly apportion
the full cost of acquisition.
In addition, pipeline inventory will be increased if sea transport is used. is can have the e ect
of impeding market responsiveness due to the long replenishment lead times. ere are inherent
problems with regard to dealing with di erent country’s cultures. Further to this, the docu-
mentation associated with international sourcing is diverse and complicated. Dealing with
di erent cultures and international documentation requires specialist knowledge and expertise.
It is also the case that not all parts of the world enjoy political stability. If supplies are inter-
rupted for unspeci ed periods of time by political strife then a company could be in dire
trouble if it does not have an alternative source of raw materials. Important decisions must be
made with these factors in mind.

The method of supply

Smaller, more frequent deliveries typify a JIT system of supply. Inventory carrying of raw
materials may be measured in hours only, and deliveries may even be made directly to the
production line itself. As more and more companies seek to reduce inventory carrying costs
then these types of arrangement have become more common.
e speed of processing goods received in a warehouse can be signi cantly improved if
suppliers provide the goods in the right quantities, at the allotted time, correctly labelled
 Procurement and Supply 241

and bar coded where necessary. How the raw materials are to be supplied needs to be deter-
mined and then discussed in advance with suppliers because they may not be able to meet the
necessary criteria. It will be no good insisting on bar-coded products if a supplier is unable
to comply and, if a supplier cannot comply, a buyer’s receiving operation may be severely
compromised.

The mode of transport used by suppliers

Many transport and delivery requirements need to be discussed prior to agreeing to deal with
a supplier. In the past, company procurement managers have in some instances been guilty
of making spot purchases of goods on the basis of price alone, only to discover that the
consequential cost of handling has been unreasonably high. Typical questions that need to
be answered include:
Will the goods be shipped by road, sea, rail or air?
What sort of unitization is used?
Will the goods be on pallets?
What size are the pallets?
Will the goods be stu ed loose inside containers and require considerable time and
labour cost to unload?
Should a railway siding be built to accommodate rail tra c?

The hierarchy of importance

In our visits to rms, it never ceases to amaze us how most purchasing departments
still treat a critical microchip in the rm’s key product much the same as a paperclip
purchase.
(Jack Berry, Arthur D Little Inc)

is quotation says it all really. It is vital that appropriate amounts of time and e ort are spent
on the purchases that most matter to the organization. erefore, procurement management
must ensure that purchasing is segmented accordingly. Products and services need to be
classi ed according to their criticality to the business and the value of annual purchases.
e four categories usually used are:
1. routine purchases;
2. commodities;
3. critical items;
4. strategic items.
242 Procurement and Inventory Decisions

Figure 15.1 demonstrates how purchases may be easily categorized by assessing how critical
an item may be to the organization and by calculating the annual value of purchases. A strategic
item is one that is both very critical to the business and has a high annual purchase value. At
the other end of the scale, a routine purchase is one that has a low annual purchase value and
is not critical to the business.
Once purchases have been categorized in this way, the process by which they are to be
purchased may be decided upon. Buying processes include:
online catalogues or purchase credit cards;
tendering;
a system of approved suppliers;
strategic partnerships.

Categories of purchase with the appropriate

buying process

Critical items Strategic items

Approved suppliers Strategic partnerships
Criticality
to the
Business Routine purchases Commodity purchases
Online catalogues Tendering process

Annual Purchase Value

Figure 15.1 Categories of purchase with the appropriate buying process

Figure 15.1 also shows how the appropriate buying process may be matched with a purchase
category. Online catalogues available to employees will allow them to purchase routine items
quickly and easily. is speeds up the process and limits the cost of these transactions. e
same is true for purchase credit cards.
e tendering process for high annual purchase value commodities will be appropriate where
obtaining the best price is important. A network of approved suppliers and a formal system
for approving suppliers are most appropriate where items are critical to the business but have
a low annual purchase value. Suppliers will have been able to satisfy the purchasing department
that they are able to meet certain criteria satisfactorily on a consistent basis. e criteria used
may include delivery reliability, quality of goods supplied and value for money.
Strategic partnership (see the section on partnerships later in this chapter) will be most appro-
priate where the purchase has high annual value and is critical to the business. In these cases,
it is in the interest of both purchaser and vendor to develop a strong working relationship.
 Procurement and Supply 243

Make or buy?
e decision to make goods or provide a service as opposed to buying it is one that is rarely
straightforward. It is not always simply a question of cost. Other issues such as the company’s
reputation or production capacity may be included in the mix. e following is a list of some
of the factors o en considered:
Cost. If the goods or services are to be provided in-house, then it is not simply the
direct costs involved that need to be considered but the wider costs, such as the oppor-
tunity cost of the capital employed. In other words, could the capital tied up in this
exercise produce a better return if invested in another activity? If the activity is to be
provided by a supplier, then the costs associated with managing the supplier and the
transaction costs (eg for processing invoices) should be included in the analysis.
Ensuring supply. As mentioned above, if goods or services are not available when
required then signi cant extra costs may be incurred. e reliability of the supplier and
the quality of its o ering is another crucial part of the decision-making process.
Production capacity. Some parts of an operation may be provided by subcontractors
because a company does not have su cient capacity within its operation to do the job
itself. is may be a very sensible approach to take in certain circumstances. A vehicle
eet, for example, should be kept working full time. erefore, it is better to have
su cient vehicles to achieve this end and subcontract any further work created by
short-term increases in demand. Of course, the opposite is true in that if a production
plant has spare capacity then it may be correct to use it rather than have it stand idle.
Competitive advantage. ere may be certain products, components or processes that
the company wishes to keep secret and so it will not allow any other company to gain
information about them. A revolutionary new product may t this situation.

Managing the suppliers

Key areas for managing suppliers include:
the choice of supplier;
supplier numbers;
supplier management – adversarial or partnership approach;
supplier appraisal and performance.

Choosing the suppliers

Choosing your suppliers will involve all the elements already discussed, but there are one
or two further points that have to be considered. Of course, this only applies in a situation
244 Procurement and Inventory Decisions

where there is a choice. ere are certain situations where no choice exists at all and one is
forced to deal with a monopoly situation.
If a partnership approach is desired then suppliers need to be able to respond to this type of
situation. ey must also be companies that are su ciently well established. Company
accounts are public information and are easily obtained. A check should be made to establish
that a company is nancially stable. It would be very unfortunate to spend time developing
a partnership only to see a new partner going into liquidation.
Another consideration is whether or not a supplier wishes to become closely involved with
a major customer. It will be necessary to share information, and the supplier may also deal
with competitors. is could place a supplier in a di cult position and it may decline the
o er of closer ties. Another fear may be that the customer could become so close that it gets
taken over.

How many suppliers?

is will obviously vary from industry to industry. e high costs associated with transactions
are driving companies into supplier reduction programmes. e suppliers who remain will
hopefully be the ones who perform best on supplier appraisals. ey will also be the ones who
have been prepared to share information and get involved in EDI to reduce the cost of pur-
chasing and who have the geographical coverage to match the client company. Increasingly,
global companies are seeking to do business with global suppliers.

Supplier management: a partnership or adversarial approach

In a traditional adversarial relationship between buyer and seller each party sees itself as being
in competition with the other. e inevitable result of this kind of relationship is that one
or other party inevitably ‘wins’ in any negotiation. is is o en referred to as a ‘win–lose’
situation. Who and why one party is successful in this sort of relationship has much to do with
the relative power that resides in one camp or the other. For example, a vendor with a rare
product that is absolutely crucial to the process of the buyer would tend to be in a more powerful
position. is would be especially true if the item on sale could not be substituted by another.
e problem with this type of association is that, because both parties are secretive and defensive,
ine ciencies in the supply chain are the result. ese usually take the form of excess bu er
stocks held by both parties, stockouts and a lower level of customer service.
e idea of seeing a supplier as a partner makes a great deal of sense from a logistics point
of view. e Toyota organization, like many other Japanese companies, has long seen its
suppliers as co-makers of the product. e Japanese system of ‘keiretsu’ epitomizes the
approach. A network of suppliers is intimately bound to the client company in a complex web
of interdependence. is type of association should be seen as a ‘win–win’ situation in which
both parties gain more from the relationship than from the adversarial style.
 Procurement and Supply 245

It is worth introducing a word of caution at this point. Toyota reduced its supplier base
to such an extent and was so reliant on JIT deliveries that when a re occurred at the premises
of one of its suppliers it was forced to stop its production lines in Japan for a week. At the
time, Toyota owned 22.6 per cent of the supplier, Aisin Seiki, a manufacturer of vital brake
components. e re occurred early in 1997 and brought Toyota to a standstill. is was not
an isolated incident either, because in 1995, a er the Hanshin earthquake in western Japan,
car manufacturers were cut o from some of their suppliers by the disaster. By contrast,
Honda does not have such a closely knit ‘keiretsu’ and has a policy of dual supply for all raw
materials as a hedge against just such a situation.
More recently, a er the devastating earthquake and tsunami in March 2011 in east Japan as
well as the loss of electrical power due to the problems with the nuclear power plant at
Fukushima, many manufacturers experienced substantial disruption to their supply chains.
Toyota estimated that along with Lexus it lost 220,000 units of production globally in the rst
20 days a er the earthquake happened. Subsequently, the total loss of production units
reached 670,000 globally.
ese are extreme examples and should in no way inhibit companies from building closer
ties for mutual bene t. As with all partnerships, the partner has to be selected with care, as not
all suppliers will wish either to engage in this sort of relationship or be suitable. In practice
it is usually the partner with the more power that dictates the terms of the partnership. It is
very di cult for a small company to approach a larger company with a view to instigating
such a partnership. A lack of equality in the partnership will lead to the more dominant
partner dictating terms regarding many aspects of the relationship. is phenomenon has led
some commentators to question whether a true partnership can ever exist between two
commercial parties when one partner holds most of the power. Nevertheless, clear advantages
have been documented where two companies work more on a collaborative basis than an
adversarial one.
Some prerequisites for a successful partnership will include:
compatible cultures;
high levels of trust already in place;
compatible computer systems to aid the electronic sharing of information;
the nancial stability of both parties;
a willing attitude to exploring the advantages of partnership.
In a partnership, members of equivalent departments in both organizations will meet regu-
larly to discuss areas of mutual interest. For example, new product development people from
both organizations will sit down together to see how products may be produced in such a way
as to avoid causing problems for each other. In a similar way, logistics personnel will associate
more freely. Traditionally, in the old adversarial way, only buyer and seller would meet.
246 Procurement and Inventory Decisions

rough this closer liaison, information sharing occurs for mutual bene t. Real bene ts have
been achieved by linking together computer information systems. In this way, a retailer with
an electronic point-of-sale (EPOS) system can provide the supplier with real-time data about
the current level of demand for a given product. is information can lead to real reductions
of inventory carrying in the supply chain and a reduction in stockouts. As the relationship
matures then initiatives such as VMI may be introduced. Ordering and invoicing may be
carried out via EDI, thus reducing transaction costs by the removal of expensive paper-based
systems.

Supplier appraisal and performance

e poor performance of suppliers will adversely a ect the satisfactory delivery of goods and
services to the nal customers by the purchasing company. erefore, supplier performance
must be continually monitored and poor performance communicated to them e ectively and
in a timely manner. e old computer adage of ‘garbage in, garbage out’ applies equally well
to suppliers and their performance as it does to computers. If your suppliers provide low-
quality goods for inclusion in your products then it is logical to assume that your products will
also be of a lower quality. By the same token, if they provide their products late then this will
impact your ability to deliver to the nal customer on time. is could be re ected in higher
levels of raw-material inventory needing to be carried against the uncertainty of supplier’s
delivery or, worse still, very unhappy customers due to missed delivery deadlines.
ere are many ways to assess supplier performance and whatever methods are used they will
re ect the detailed nature of the relationship between the two organizations. e quality of the
goods or services delivered, the completeness of the delivery and its timeliness form a useful
base, but much more detailed evaluations may be necessary. e basic performance measure
of ‘full loads (complete orders) on time’ is used by many.

Expediting
Unfortunately, expediting is an uncomfortable fact of life for procurement departments. e
job of an expeditor is to chase suppliers to ensure that goods are delivered on time or that the
remnants of a part order are delivered.
It goes without saying that if there is a high level of expediting required then something
is wrong with the procurement process. Either the suppliers have been poorly selected or are
performing badly. e level of expediting is a bellwether for the health of the procurement
operation in general.
 Procurement and Supply 247

Procurement performance measures

As with all areas of management it is important to measure performance. Some key performance
measures are listed below:
the speed of converting a requisition into a purchase order;
the number of purchase orders processed in a day per person;
full loads (complete orders) delivered on time;
number of stockouts;
total cost of raising a purchase order;
prices paid against market standards;
the level of expediting;
number of complaints from internal customers;
the number of complaints from suppliers.
Of course there are many more and some that are speci c to certain industries. e above is
a representative selection.

Collaborative planning, forecasting and replenishment

As the name implies, collaborative planning, forecasting and replenishment (CPFR) is a
collaborative business process where two companies work closely together to improve the
e ciency of their supply chains. e client and the supplier will link their computer systems
to the extent that the supplier has visibility of the inventory held by the client as well as the
latest sales and forecasts for the line items involved. Information regarding promotional
activity will also be shared with the supplier.
Despite the compelling logic for adopting such an approach to e cient replenishment, take-up
has been slow. Some of the reasons for this relate to the di culties in aligning the two parties’
IT systems as well as their business processes. Fears about the security of sensitive market
information have also hampered progress. A further reason has been the practical di culties
of agreeing how to share the overall bene ts, particularly where higher costs may be incurred
by one party in the supply chain. However, some large organizations such as Procter & Gamble
have found success using this process.
A survey of 21 companies in the United States (Sliwa, 2002) reported the following bene ts of
CPFR:
improved relationship with trading partners (57 per cent);
increased service levels (38 per cent);
248 Procurement and Inventory Decisions

reduced stockoutages (38 per cent);

increased sales (38 per cent);
decreased inventory (29 per cent);
forecast accuracy (29 per cent);
improved internal communications (24 per cent);
better asset utilization (14 per cent).

Factory gate pricing

is is sometimes also referred to as purchasing on an ‘ex works’ basis. is is very o en one
area associated with the buying process that is overlooked, although in recent years it has been
more widely discussed. e cost of transporting the goods to the buyer’s facilities may hide
some extra cost that the buying company could avoid. O en companies show a remarkable
lack of interest in this area, preferring to see it as somebody else’s problem. e reality is that
some costs could be eliminated and a higher level of control over the inbound supplies may be
achieved.
If raw materials are being sourced from a variety of locations, whether it is on a national,
continental or global scale, then there may be a possibility of removing some of the associated
transport costs by employing a third party to coordinate this process. Large freight-forwarding
companies may be able to pool one company’s transport requirements with others so that
a better price is obtained.
Another way of removing cost from the inbound side of a business is to use the vehicles deli-
vering nished goods to collect from suppliers. is will allow a company to buy raw materials
at ex-works prices and utilize its delivery eet more e ectively as well. It may be possible to
have the same organization that handles nal deliveries coordinating inbound raw material
transport needs as well.

E-procurement
E-procurement may be de ned as: the electronic integration and management of all procure-
ment activities including purchase request, authorization, ordering, delivery and payment
between a purchaser and a supplier.
Procurement professionals have seen the bene ts of the widespread use of the internet and
IT systems in general. e internet has opened up a global marketplace for both consumers
and professional buyers alike. Web-based companies such as eBay have created a vast
auction site that connects buyers and sellers all over the world. Some industries have created
 Procurement and Supply 249

industry-speci c portals that facilitate the connection of suppliers and buyers. e internet
can be used not only for the purchase of certain goods but the delivery as well. For example,
so ware, music and lms may all be delivered in this way.
Other manifestations of e-procurement include:
online auctions where pre-quali ed bidders compete to win contracts or buy assets;
sending and receiving of documents such as purchase orders, bills of lading, RFQ,
invoices and delivery con rmations;
the use of online catalogues.
e portals may also be used earlier in the process for facilitating collaborative product design.
A practical example:

e European Union (EU) annual budget for 2011 was almost €142 billion. In 2010 the
European Commission published a green paper titled ‘Green Paper on expanding the
use of e-Procurement in the EU’. e Green Paper de nes e-procurement thus:

E-Procurement is a catch all term for the replacement of paper based procedures
with ICT based communications and processing throughout the procurement
chain. E-Procurement involves the introduction of electronic processes to
support the di erent phases of a procurement process – publication of tender
notices, provision of tender documents, submission of tenders, evaluation,
award, ordering, invoicing and payment.

One major motivation for pursuing the expansion of e-procurement is the cost savings
achieved by various government bodies around the EU in the recent past. Below are
some of the examples cited in the Green Paper:

e Austrian Federal Procurement Agency centralises purchases for federal

authorities through e-Procurement functionalities. In 2008 it reported savings
of €178 million against a procurement volume of €830 million. Bene ts seem to
signi cantly outweigh the annual maintenance costs of €5 million, which are
less than 3% of the savings.

In the UK, the Buying Solutions site reported in its 2008/09 annual report that it
had facilitated sales of over £5 billion, delivering £732 million in savings. e UK
also reported savings frequently exceeding 10% (and even up to 45%) through
the use of e-Auctions and recently announced plans to use e-Auctions to save the
taxpayer up to £270 million by the end of 2011.
250 Procurement and Inventory Decisions

A Portuguese study compared the best bids for public works contracted by 50 Por-
tuguese public hospitals in 2009 (using paper based systems) and 2010 (using
e-Procurement). It concluded that a cost reduction of 18% had been achieved in
2010, due to the increase in competition generated by e-Procurement.
European Commission, ‘Green Paper on expanding the use of e-Procurement in the
EU’. Brussels 18.10.2010 COM (2010) 571 nal

is practical example demonstrates the size of the potential for saving that may be made
through the implementation of e-procurement. Although this example relates to the area of
procurement in the public sector rather than the private sector, it nevertheless demonstrates
clearly what may be achieved. Costs saved in procurement are transferred immediately to the
bottom line of a company’s pro t-and-loss account.

Corruption
ere are many opportunities for corruption to rear its ugly head in the eld of procurement,
such as contracts awarded to friends or family; payments made to procurement sta to ensure
preferential treatment; invoices passed for payment when no goods or services have been
supplied; and many more.
It is important that proper checks are made when recruiting sta to procurement positions.
ere should be a system of oversight for all purchasers’ work. Roles and responsibilities need
to be separated in order to preclude corrupt practices from taking place. Managers need to be
observant about employees who seem to have some new-found wealth and about the people
who come and go in the o ces.
ere will always be corruption, but good systems and processes – with clearly delineated
roles and responsibilities – will help. Managers and senior managers need to be ever vigilant
and closely question sta about the who, what and where of certain purchases. A good discipline
for a manager is to take a selection of POs at random on a regular basis and examine them
in detail.
 Procurement and Supply 251

Summary
is chapter has highlighted the crucial role played by procurement as part of the supply
chain. e key areas covered were:
e procurement cycle and the scope of modern procurement; a practical example
of savings gained by the implementation of e-procurement in the EU was outlined.
e setting of procurement objectives with regard to ensuring supply, establishing
a hierarchy of importance, quality, product speci cations, price, origin of goods,
method of delivery and mode of transport used.
How to manage suppliers with regard to the number of suppliers and who they will be,
make or buy decisions, and whether to adopt an adversarial or a partnership approach.
A brief description of vendor-managed inventory (VMI), e-procurement, and col-
laborative planning, forecasting and replenishment (CPFR).
Supplier appraisal, expediting and procurement performance measures were explained.
Factory gate pricing and coordinating inbound and outbound transport needs to
reduce overall supply chain costs.
Corruption.