Strategic logistics management 2

A supply chain management approach

De Villiers G, Nieman G, Niemann W, De Villiers G, Nieman G, Niemann W

• Publisher: Van Schaik Publishers
• Year: 2017
• ISBN:
  9780627034220
• Topic: Education
• Subtopic: Higher Education

A systematic approach to managing the entire flow of materials, information, services and finance from raw materials suppliers, through factories and warehousing, to the end user. Covers operational and strategic aspects of logistics from a supply chain management perspective, focusing on the integration of all business processes that add value to the customer. Includes many practical examples and is the only case study-based South African textbook in this field. Aimed at undergraduate studies as well as graduate programmes.

19

PART
B

Supply chain elements

1. Chapter 2
   Sourcing
2. Chapter 3
   Contract management
3. Chapter 4
   Warehousing
4. Chapter 5
   Inventory
5. Chapter 6
   Operations and manufacturing
6. Chapter 7
   Reverse logistics
7. Chapter 8
   Transport
8. Chapter 9
   Customer service
9. Chapter 10
   Logistics information systems

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2

Sourcing

Gideon Nieman

Learning outcomes

After completing this chapter you should be able to

• discuss the importance of procurement objectives
• identify the different procurement objectives on different levels
• discuss the different steps in the procurement process
• explain the main criteria that should be used in selecting suppliers
• identify the new developments in procurement
• explain the role of procurement in the value chain
• explain the role of procurement in the supply chain
• discuss the portfolio approach for setting up differentiated procurement strategies
• discuss Kraljic’s classification matrix
• explain Kraljic’s procurement portfolio matrix.

2.1 Introduction

Sourcing (or procurement) is the power supply of the supply chain. Together with operations, it forms one of the two critical functions in the supply chain. The procurement process links members in the supply chain and assures the quality of suppliers in that chain. Procurement is a determinant of revenues, costs and supply chain relationships, and it supplies the goods and services that are either transformed or reshaped into saleable goods and services. The procurement function’s actions are critical to creating the goods or services that meet the basic needs of consumers, be they individuals or firms.

One problem in procurement has always been terminology. One of the issues is the difference between purchasing and procurement. The procurement process encompasses a wider range of supply activities than those included in the purchasing function. In procurement, the buyer participates more in related material activities and strategy. In essence, procurement tends to be broader and more proactive, with some focus on strategic matters, as opposed to the typical implementation of the purchasing concept (Dobler & Burt, 1996: 36).

The purpose of this chapter is to consider the objectives of procurement, and to discuss the procurement process and its role in the value and supply chain. The chapter ends by setting out strategic direction through procurement portfolio management.

2.2 Basic objectives of procurement

Dobler and Burt (1996: 41–51) believe that the objectives of procurement and supply management should be viewed from three levels:

1. The general managerial level
2. The functional and operational level
3. A detailed level at which precise strategic buying plans are formulated22

2.2.1 Objectives from a general managerial level

According to Hugo, Van Rooyen and Badenhorst (1997: 9), the objective of successful procurement is regarded as buying the right requirements in the right quantities at the right time and at the right price from the right source, and with delivery at the right place. Dobler and Burt (1996) put it more simply: procurement is the acquisition of goods and materials

• of the right quality
• from the right supplier
• in the right quantity
• at the right time
• at the right price.

This is generally referred to as “the five rights of procurement”. In practice, most procurement departments will have problems fulfilling these objectives equally, and therefore aim rather to seek a reasonable balance among them.

2.2.2 Objectives from an operational or functional perspective

The specific objectives of procurement (Hugo et al., 1997: 9) are to

• align with the vision, mission and values of the organisation
• ensure the smooth functioning of business activities by way of an adequate and uninterrupted flow of goods and/or services to the firm
• buy goods and services of the required quality competitively at the lowest possible price to ensure maximum value for money
• keep inventory losses and investment in inventory at a minimum, while taking into account safety and economic considerations
• continually find and develop alternative sources of supply
• ensure sound and lasting relations with reliable suppliers
• achieve healthy cooperation and coordination with other departments of the firm
• train, develop and maintain capable and motivated personnel
• create policies, procedures and systems that will ensure that the administrative costs of procurement are kept to a minimum.

All strategic procurement decisions are based on these functional objectives. These objectives apply in principle to all categories of buying and to all types and sizes of organisation.

2.2.3 Objectives from a buying plan perspective

The third level of objectives is developed when precise plans are made for each category of materials or services that the firm uses in its operations. These objectives are applied to fulfil the specific needs associated with each type of procurement. The precise set of objectives for each material or service typically varies, because the usage requirements, the operating conditions and the markets in which each material or service is procured usually differ.

2.3 The procurement process

When an organisation procures goods, materials or services, it needs to go through a number of consecutive steps or activities normally referred to collectively as the procurement process. The number of steps in the procurement process will differ for different organisations and procurement situations. For the purposes of this chapter, the purchasing cycle involves the following steps:

• Determining the needs and specifications
• Finding, evaluating and selecting suppliers
• Placing the order
• Following up and expediting the order
• Receiving and inspecting the goods
• Dealing with faulty consignments
• Analysing the invoice
• Closing the order

The procurement process will vary in length depending on the type of purchase. If a new product or service is purchased, all the steps in the procurement process will be followed. If it is a repeat purchase, in other words, the product or service is purchased frequently and a supplier (or suppliers) has (or have) already 23been determined, the purchasing cycle will be shorter.

Step 1: Determining the needs and specifications

The procurement process begins with the determination of a need by a user department (also referred to as the internal customer: normally a profit centre, cost centre or a b...