SSCM NOTES CH6

• Strategic supply chain management & Logistics

  Planning demand
• Procurement


  A function that spans across departments, one of the elements of SCM primarily focusing on the sourcing of goods and services within the supply value chain
• Procurement

  • Manages a broad range of activities associated with satisfying the organisation's need and focuses on strategic products and services e.g. TCO, Supplier R/S, Contract management
  • Found in departments like transportation, warehousing and packaging
  • Plays a key strategic part in the success of an organisation
  • If right materials are not available at the right time production processes are disrupted leading to downtime costs and delayed or lost customer orders
• Difference between purchasing and procurement

  Procurement includes purchasing
• Nature of procurement

  • All members of the supply chain are linked to one another through procurement
  • Staff managing Procurement must plan, organize, lead and control all activities related to understanding customer requirements, procuring related goods and services
  • Customers can be internal customers/stakeholders within the organisation or external customers
  • In addition to purchasing goods and services, the procurement function is responsible for transportation, warehousing and packaging of goods ordered and received
  • Procurement objectives are of strategic importance to the supply chain and aligned to organizational overall objectives
• Strategic importance of procurement

  • As competition increases, purchasing and supply chain management are being recognized as key drivers of business success
  • Procurement can significantly affect the profitability of a business
  • The multiplier effect of purchasing cost saving
  • Procurement integrates across the supply chain and business functions
• Profit-leverage effect


  A relatively small saving in the purchasing price can equal a relatively large increase in the organisation's operating profit
• Multiplier effect


  The additional sales that would be required to have the same impact on profits as a reduction in purchasing costs
• Multiplier effect


  • Reducing purchasing costs has a multiplier effect in terms of its impact on organisational profitability as compared to sales
  • The impact that changes in monetary supply can have on economic activity and effect to business and individual
• Purchasing process/purchasing cycle


  Key aims of the purchasing function is to have the right goods/services at right price, in the right quantity, of the right quantity, at the right place, at the right time from the right supplier using the right supply chain (7Rs now 8Rs)
• Purchasing process


  1. Developing and describing a need

  2. Choosing a supplier or suppliers

  3. Finding out about prices and availability

  4. Placing an order

  5. Following up and expediting

  6. Receiving, inspecting and distributing the goods

  7. Handling errors and rejections

  8. Analysis the invoice and making payment

  9. Closing the order and maintaining files and records
• Step 1: Developing and describing a need


  • The purchasing cycle begins once the need for items e.g. raw materials, components, sub-assemblies, finished goods has been identified by user department
  • The need is then communicated to purchasing dept using a requisition, which a bill of materials used in conjunction with MRP Systems, scope of work/specification
  • Use Traveling purchase requisitions and/or bar codes, Forecasts and customer orders, Reorder point system, Stock checks, Cross-functional sourcing teams & Description to communicate to Pur/Dept
  • MRP systems or software are used to forecast, when to place the order how much
  • Current and Historic usage can be used to estimate demand
• Step 2: Choosing a supplier/s


  • Choosing the right supplier is the core activity of the purchasing function
  • The choice of supplier will depend on the type of product, whether it is a standard item, the extent of specialised materials needed, strategic importance of the item, and whether there is an existing contract
  • The overall objective of purchasing will be based on the organisation's overall objectives and strategy
  • Important decisions have to be made in terms of supplier strategy, such as how many suppliers are needed, whether to build partnerships or use competitive bidding, and whether to source locally or globally
• Step 2: Choosing a supplier/s (cont.)

  • Key factors considered when choosing a supplier include financial stability, capability to deliver required quantity and quality, support services offered, and Broad-based black economic empowerment (B-BBEE) status
• Step 3: Finding out about prices and availability

  • Purchasing department may already have a list of standard prices known as price list or catalogue
  • If the prices of an approved supplier are too high and supplier not willing to negotiate or required items not available within the timeframe, then purchasing dept will need to find alternative suppliers
• Suppliers


  The number of suppliers needed per category of item purchased
• Supply chain strategy


  Requires supplier relationships that are built on partnerships or competitive bidding
• Purchases


  Some must be sourced locally and some must be sourced globally
• Purchasing process - Step 2: Choosing a supplier/s


  Some key factors the purchasing dept may consider:

  Financial stability of the supplier, aiming to award orders to suppliers who are in good financial standing

  The capability of the supplier to deliver the required quantity and quality of goods or services purchased

  Support services offered by the supplier, such as installation services, training, repair and maintenance services

  The Broad-based black economic empowerment (B-BBEE) status of the supplier in Southern African countries
• Purchasing process - Step 3: Finding out about prices and availability

  Placing an order with an already approved supplier the purchasing department may already have a list of standard prices known as price list, catalogue

  If the prices of an approved supplier are too high and supplier not willing to negotiate or required items not available within the timeframe, then purchasing dept will need to find another supplier

  If a large volume of material is ordered, Purchasing dept can be given discounts, negotiate lower unit price if buying in bulk from same supplier
• Purchasing process - Step 4: Placing the order


  A finalized order is legally binding, purchasing will check quantities, prices, lead times, specifications and finally placing the order

  Orders are usually placed in writing but sometimes verbally and particulars recorded

  Orders are subject to a purchasing contract, if once off then a purchase order is used

  Supplier receives the original order

  A copy of the order is made available to the receiving function for receiving & checking and inspection of goods, financial function verifying the invoice and for payment, used department to advise them that the order has been placed, P&S for follow up and expediting, and the order form will stay in the order book as a permanent record of the transaction
• Purchasing process - Step 5: Following up and expediting


  After receiving the order, the supplier will send an acknowledgement form to the purchasing dept to acknowledge the order and confirm the delivery date

  Follow up entails contacting the Supplier, and is reminded on the order and find out the reasons for any delays and determine the delivery date

  Supplier contracts often have terms and conditions governing penalties incurred for late delivery

  Purchasing dept will stop using the supplier if the supplier does not meet the deadlines

  If an organisation's relationships with its suppliers is built on partnership and a long-term, strategic approach to procurement then a solution can be found to improve supplier performance
• Purchasing process - Step 6: Receiving, inspecting and distributing goods

  The receiving dept or warehouse usually receive the items and delivery note is received from the supplier stating what order quantities have been delivered

  Delivery is checked against the delivery note whether oversupply or too little

  For materials with special specification a specialist dept will complete the inspection and compile an inspection report

  Once the goods have been inspected, the receiving dept will issue a receiving note and the user dept will confirm

  The dept receiving the items will do the internal distribution of the goods to departments along with a copy of the order
• Purchasing process - Step 7: Handling errors and rejections

  Suppliers must be informed of errors in supply

  The items rejected by inspection must be sent back to the supplier for replacement by the purchasing dept

  Communication must be done professionally to avoid damaging relationship

  Depending on the terms and conditions of the contract in some cases legal action is taken hence all documents must be kept
• Purchasing process - Step 8: Analysing the invoice and making payment


  Purchasing dept is responsibility for the final analysis of the delivery note, inspection report, original order and supplier's invoice and authorize payment

  Some of the important aspects that Purchasing dept will check are:

  1. comparing quantities received against the invoice
  2. verify calculations, price and discounts
  3. comparing the terms and conditions of the invoice against the original order

  Once the order has been delivered and finalised, payment authorisation is submitted to the finance dept

  Purchasing process ends once payment is done and supplier issued a receipt reflecting payment
• Purchasing process - Step 9: Closing the order and maintaining files and records


  The order is closed with the filing of all documents relating to the order e.g. requisitions, orders, quotations, delivery notes, receiving notes, inspection reports, invoices, payment requests

  A hard copy may be printed and filed or stored in electronic format

  Maintaining proper records for tracking of purchasing costs is done
• The key decision that an organisation must make is whether to centralise the purchase function or decentralise or adopt a hybrid
• Centralised purchasing


  All purchasing activities for the entire organisation take place in one central place
• Decentralised purchasing


  Each branch of the organisation will take care of its own purchasing activities
• Hybrid structure


  A combination of centralisation and decentralisation
• Instances where a centralised structure is most appropriate

  • A large range of mostly standardised goods or services are purchased

  The needs of different branches or business units or depts or plants are largely the same

  The greatest proportion of an organisation's purchases is made from one supplier or only a few suppliers

  The greatest proportion of an organisation's purchases is of strategic significance to the continuation of the organisation
• Instances where a decentralised structure is most appropriate


  • Purchased items are sourced locally in large volumes

  An org is made up of geographically dispersed branches or business units or depts or plans which need to make purchases from a number of local suppliers

  Different branches or business units or depts or plants perform different activities and have unique purchasing needs

  Each branch or business unit or dept or plant is considered to be a profit centre and each must have control over its own purchasing
• Instances where a hybrid structure is most appropriate

  • The procurement function has certain purchases that require centralised control, such as strategically important goods and items with a high cost price

  Certain items are best purchased locally to enable local responsive and to make use of the purchasing knowledge of each branch or business unit or dept or plant
• The 4IR is characterized by a host of technologies, including robotics, artificial intelligence (AI), virtual reality (VR), Internet of Things (IoT), Blockchain
• The 4IR is drastically changing the way that we work and live and the way in which we see the future of procurement
• Procurement of the future will increasingly incorporate and rely on technology e.g. digital currency Bitcoin, blockchain digital ledger technology, which will alter the way in which procurement is practised
• These technologies can mitigate financial and supply chain risk e.g. knowing what product is, promoting data integrity and building trust in the system through increased data security
• A procurement manager needs to continuously develop their people and advanced technological skills for future sustainable business
• Responsible purchasing and supply

  Increased commitment to reducing the org's environmental and societal impact by changing approach to how goods are purchased thus sustainable procurement
• Sustainable development


  Development that meets the needs of the present without compromising the ability of future generations to meet their own needs