What is a Supply Chain?

A supply chain is the network of all parties who perform

a sequence of activities in producing and moving
physical goods or services from point of origin to point of
consumption
Includes manufacturers, suppliers, transporters,
warehouse owners, retailers, and customers
Within each company, the supply chain includes all
functions involved in fulfilling a customer request
(product development, marketing, operations,
distribution, finance, customer service)

A picture is better than 1000 words!

How many words would be better than 3
pictures?
- A supply chain consists of
Supplier

Manufacturer

Distributor

Upstream

Retailer

Customer

Downstream

- aims to Match Supply and Demand,

profitably for products and services
SUPPLY SIDE

DEMAND SIDE

- achieves

The right

Product

+ + + + +

The right

The right

The right

The right

The right

Higher

Price

Store

Quantity

Customer

Time

Profits

THE SUPPLY CHAIN

Supply Chain Management

Supply Chain Management is primarily
concerned with the efficient integration of
suppliers, factories, warehouses and stores so
that merchandise is produced and distributed in
the right quantities to the right locations and at
the right time, so as to minimize total system
cost subject to satisfying service requirements
Simchi-Levi

Flows in a Supply Chain

Information

Product

Customer

SUPPLIER

Funds

Logistics Management
Part of supply chain management that
plans, implements, and controls the
efficient, effective forward and reverse flow
and storage of goods, services, and
related information between the point of
origin and the point of consumption in
order to meet customers requirements.

Why is SCM Important?

Drives operational strategy
SCM offers opportunity for differentiation
Product differentiation (Dell)
Cost reduction (Big Bazaar or Walmart)

At the firm level, SCM impacts

COST (for many products, 20-40% of the total product
costs are controllable logistics costs)
SERVICE (for many products, availability of inventory,
speed of delivery are critical to customer satisfaction)

Why is SCM Difficult?

Uncertainty is inherent to every supply chain
Travel times of goods
Breakdowns of machines and vehicles
Raw material / parts availability
Weather, natural catastrophe (Tsunami), war
Local politics, labor strikes, border issues
Environmental conditions
Price increase of petrol leads to low sales for
petrol cars
Unforeseen situations like fire in the factory

Objectives of Supply Chain

Maximize supply chain surplus
Difference between what the final product is
worth to the customer and the total costs of all
supply chain activities involved in brining the
product to the customer

The supply chain surplus is the total size

of the pie that all supply chin participants
get to share

Decision Phases of a Supply Chain

Supply chain strategy or design
Supply chain planning
Supply chain operation

Decision Phases in a Supply Chain

Supply chain design
Time Frame: Several Years

Chains configuration
In-house production or outsourcing
Processes at each stage
Location and capacities of warehouses
Modes of transportation
Type of information system to be used

Decision Phases in a Supply Chain

Supply Chain Planning
Time Frame: Quarter to a Year

Forecast for next year

Markets to be served
Which markets will be served from which factories
Inventory policies
Price promotions

Decision Phases in a Supply Chain

Supply Chain Operation
Time frame: Weekly or daily
Attend specific orders in best possible manner
Allocate resources, set dates, decide shipping
mode and so on

Supply Chain: The Magnitude

Some estimates for India
Logistics spent: INR 2,40,000 crores
Share of GDP: 13% of GDP*
Major elements are (% of total)
Transportation..35
Inventories25
Packaging.11
Handling and warehousing..9
Others and Losses..14
* Developed nations 10% of GDP
Source: CMIE, as reported by ETIG, 2002

Supply Chain Drivers and

Metrics

Objectives of Supply Chain

Responsiveness
Ability of the supply chain to respond
purposefully and within a time scale to
customers requirements of change

Efficiency
Focus on cost reduction and no resource is
wasted on non-value added activities

Drivers (or Factors) of Supply

Chain Performance
Facilities
places where inventory is stored, assembled, or
fabricated
production sites and storage sites
Inventory
raw materials, WIP, finished goods within a supply
chain
inventory policies
Transportation
moving inventory from point to point in a supply chain
combinations of transportation modes and routes

Drivers (or Factors) of Supply

Chain Performance
Information
data and analysis regarding inventory, transportation,
facilities throughout the supply chain
potentially the biggest driver of supply chain
performance
Sourcing
functions a firm performs and functions that are
outsourced
Pricing
Process by which a firm decides how much to charge
customers for its goods and services

Components of Facilities Decisions

Role
A
Flexible (process many types of products)
Dedicated (process few types of products)
Combination of both

Location
Centralize: To gain economies of scale
Decentralize: More responsive by being closer to customer

Capacity
Excess capacity: allows flexibility to respond to wide swings in
demand but it costs money, decreases efficiency
Less capacity: High utilization, efficient, but less responsive to
demands

Tradeoff: responsiveness vs. efficiency

In Sum - Facilities
Multiple plants, flexible plants: More
responsiveness
Single plant, dedicated plant: Higher
efficiency, lower responsiveness
Facility-related metrics
Capacity, utilization, theoretical flow time (no
delays), actual flow time, Idle time, quality
losses etc.

Inventory
Exists in the supply chain because of mismatch between
supply and demand
Intentional for a steel manufacturer to gain economies
of scale
Intentional at a retail store where inventory in held in
anticipation of customer demand
Inventory has a significant impact on material flow time
in the supply chain (Littles Law)
Material Flow time = Avg Inv / Avg flow rate
= Q/2D

Inventory
Held in the supply chain in the form of
Raw materials
WIP
Finished goods

Inventory: Role in Competitive

Strategy
If responsiveness is a strategic competitive
priority, a firm can locate larger amounts of
inventory closer to customers
If cost is more important, inventory can be
reduced to make the firm more efficient
Trade-off
Responsiveness: more inventory
Efficiency: less inventory

In Sum - Inventory
Keep high levels of inventory close to customers :
Responsiveness
Keep low levels of inventory (centralized stocking):
Higher efficiency
Inventory-related metrics
Inventory turns, days in inventory
Cash-to-cash cycle
Fill-rate

Components of Transportation
Decisions
Choice of Transportation Mode
Manner in which material to be moved from one
location in the supply chain network to another
Air, Truck, Rail, Sea, pipeline, internet (information)

Transportation
Faster modes of transportation: Higher speed, higher
transport cost, higher responsiveness, but lower
inventory holding cost
Slower modes of transportation: Lower cost, higher
efficiency, but lower responsiveness

Inventory-related metrics
Average inbound transport cost
Average outbound transportation cost
Fraction transported by mode

Information Role in Supply Chain

Connection between various stages of
supply chain
Crucial to the daily operations of each
stage in supply chain
Scheduling in factory
Warehouse management

Information
Investing in information vastly improves
the supply chains performance on both
dimensions
Responsiveness and efficiency

Information-related metrics
Forecast horizon
Frequency of update
Forecast error

Sourcing
Business processes required to purchase
goods and services
Sourcing
In-House or Outsource
Driven in part by total supply chain profit

Sourcing
Sourcing decisions are important because
they affect
Efficiency
Third parties are able to achieve better economies of scale
due to their lower cost structure
Third party located far away: increases efficiency but
decreases responsiveness (Example: sourcing from China)

Responsiveness
Keep in-house to have better control or give to contract
manufacturers who are competent and cost effective

In Sum - Sourcing
Third party sourcing is meaningful when the third party
raises supply chain profits more than the firm can by its
own
In contrast, a firm should keep a supply-chain function
in-house if the third party cannot increase supply chain
profits or if the risk associated with sourcing is significant
Sourcing-related metrics

Days payable outstanding

Average purchase price
Range of purchase price
Average purchase quantity
Supplier reliability

Pricing: Role in
the Supply Chain
Pricing determines the amount to charge
customers in a supply chain
Pricing strategies can be used to match
demand and supply

Key Components of Pricing

Decisions
Pricing and Economies of Scale
Everyday Low Pricing Versus High-Low Pricing
Costco charges low fixed price: stable demand
Other supermarkets change prices: demand changes
accordingly

Fixed Pricing versus Menu Pricing that changes

with some attributes (response time or location
of delivery)
Amazon (shipping rates changes based on time
required for delivery)

Overall Trade-off: Increase firms profit

In Sum - Pricing
Differential pricing Highly responsive
Everyday low pricing More efficient
Pricing-related metrics
Profit margin
Days sales outstanding
Average sale price
Average order size
Range of sale price

Managing Inventories in
Supply Chain

Inventory

Inventory and Inventory System

Inventory: Stock of any item held in any
organization
Inventory System: Set of policies and
controls that monitors levels of inventory
and determine what levels should be
maintained, when stock should be
replenished, and how large orders should
be

Goals in Operations w.r.t

Inventory
Carrying the right amount of inventory and
ensuring that neither overstocking nor shortages
occur is the ultimate goal of inventory
management
Keep the level of inventory in the supply chain
as low as possible
Moving the inventory, in its continually changing
form, as fast as possible through the supply
chain for delivery to the final client

What is Inventory
Management?
Inventory management encompasses
processes that ensures product availability
while reducing investment costs

Pressure for High Inventory

1. To achieve economies of scale in production
or purchase (cycle inventory)
2. To provide a buffer between successive
operations (decouple operations)
3. To protect against unanticipated events
4. To protect against price increases and take
advantage of quantity discount
5. To satisfy periods of high seasonal demand
6. Economies of scale offered by transportation
companies

Pressure for Low Inventory

Holding costs
Cost of coordinating production
Quality issue
Increased waste

Basic Inventory Control

Systems
Two types
Fixed order quantity
model (Q Model)
Also known as Perpetual
system or Continuous
inventory System
Event or quantity triggered

Fixed time period model

(P-model)
Also known as Periodic
Review System
Time Triggered

Inventory Costs

Types of costs

Ordering costs (costs associated with placing an order and

receiving inventory, independent of order size). Assigned to
entire batch
Identification of sources of supply
Price negotiation, purchase order generation
Follow-up and receipt of materials
Inspecting goods upon arrival for quality and quantity
Stationery, postage, telephone and electricity bills
Transportation costs
Set-up Costs
When a firm produces its own inventory, the cost of machine
set-up such as arranging tools, drawings, cleaning the
machine, adjusting the machine are all parts of set-up costs

Inventory Costs
Holding or Carrying costs (in warehouse)

Cost of storage facilities (rent, if rented)

Electricity
Cost of capital tied up in inventory
Material handling
Interest charges
Insurance and taxes
Pilferage, scrap, & obsolescence
Cost of personnel
Software for maintaining inventory status

Q-Model

Inventory on hand
Q

Demand Rate
Avg. Inventory
(Q/2)

R
Reorder Pt.
L
Order Placed

Time
Order Receipt

L = Lead Time
R = Reorder Point

Time

Q Model
Q opt=

2DS
H

Q answers the how much question directly

Reorder Point, R = dL

(constant demand, so no safety stock)

Where, d = average daily demand

L = Lead time in days
The square root formula is the EOQ, also referred as economic lot size

Cycle Inventory
Cycle inventory in a supply chain is due to
either production or purchases in lot sizes
that are larger than those demanded by
the customers
Cycle inventory = Lot Size / 2 or Q/2

Littles Law
Average Inventory
Average Flow time = ---------------------------------------Flow Rate (or Average demand)
The average amount of inventory in a system is equal to
the product of average demand and the average time a
unit is in the system

Fixed Time Period Model

(P-Model) or Periodic Review System
Order Qty = Avg. demand + Safety Stock - Inventory on hand

Aggregating Multiple Products in a

Single Order
To reduce lot size reduce fixed costs
(transport cost)

Single delivery coming from multiple sources

Single truck delivering to multiple retailers

Lot Sizing
Two Scenarios
1. Lot sizing for a single product (EOQ)

No aggregation: Each product manager orders his

model independently

2. Lot sizing with multiple products

Complete aggregation: The product managers

jointly order every product in each lot. In other
words, lots are ordered and delivered jointly for all
models

LOTS ARE ORDERED AND

DELIVERED JOINTLY FOR ALL
MODELS

Aggregating Multiple Products in a

Single Order
Key Point
Aggregating replenishment across products,
retailers, or suppliers in a single order allows
for a reduction in lot size for individual
products because fixed ordering costs are
now spread across multiple products,
retailers, or suppliers.

Transportation and Logistics

Management

What is Logistics?
That part of the supply chain that plans,
implements, and controls the efficient,
effective forward and reverse flow and
storage of goods, services and related
information between the point of origin and
the point of consumption in order to meet
customers requirements
Council of Supply Chain management Professionals

Major Activities in Logistics

Management
Transportation management
Inventory management
Order management

Logistics Cost: The Magnitude

Some estimates for India
Logistics cost
Share of GDP: 13-14%
Logistics market by 2014: $120 billion
Major elements are (2009 estimates)

Transportation : 62%
Warehousing: 26%
Value added logistics services: 4%
Freight Forwarding: 8%
Source: Frost and Sullivan, 2010

Cross Country Logistics

Comparison
Country

China, India

Logistics Cost / GDP

Logistics activities
performed by 3rd
party/Logistics
Activities

14-20%

<10%

USA

9.9%

57%

Europe

10%

30%-40%

Japan

11.37%

80%

Indias logistics market = 3% of worlds logistics market

Indian Logistics Industry

Characteristics
Highly fragmented
Many small players
Few logistics firms have fleet size larger than 100 trucks

Multiple check posts and harassment by the enforcement agencies

Poor physical infrastructure (roads, ports, warehouses)
Shipments by roads that could be completed in 3 days in US, could take as long
as 9 days in India
Ships can wait for 5 days at a dock in India compared to little or no wait in
Europe

Poor communication (no GPS) infrastructure leading to lack of cargo

in-transit visibility
Lack of electricity
Inadequate IT infrastructure
Lack of managerial talent in key supply chain functions

What is Transportation?
Transportation refers to movement of a
product from one location to another as it
moves from beginning of a supply chain to
the customer
Major sub-function of logistics, possibly
the backbone

Transportation
Single largest element of logistics cost
Selecting mode(s) and carrier to move raw
materials, components, and finished goods
Designing the most effective way of reaching
products to geographically dispersed markets
from plants in a cost-effective manner

Major Modes of Transportation

Road
Rail
Water
Air
Pipeline
Inter-modal

Trucks
Dominant mode of transport in India
Highly fragmented industry
85% of total fleet controlled by unorganized sector
76% of the vehicles are owned by entrepreneurs who own less than 5
trucks

Very few trucks are fitted with GPS system thereby preventing
any real-time tracking of shipments
Accounts for 70% of the freight movement
Door-to-door shipment
Less capable of handling all types of freight than rail mainly due to
highway safety restrictions that limit the dimension and weight of
shipments
Most shipments must be smaller than 40 to 53 trailer and less than
8 wide and 8 tall to ensure road clearance
Offers reasonably fast and dependable delivery

Overview of Indian Infrastructure

for Transportation

Roads
National Highways (NH): 66,754 kms
2% of the road network
Carry nearly 40% of the traffic

State Highways (SH): 128,000 kms

Major district roads: 470,000 kms
Other district and rural roads: 2,650,000 kms
Total 3,319,644 kms
12% are four lanes
53% are double lanes
35% are single lane

Road conditions
Narrow, poor surface quality, congested
Average truck speed is only 30-40 km/h

The Golden Quadrilateral

5952 kms connecting Delhi-Kolkata-Chennai-Mumbai via National Highways

Two major dedicated freight corridors: North-South and East-West

Source: Planning Commission report, GOI

Rail
Ideally suited for large, heavy or high density products
over long distances. 95% of the freight carried is bulk
goods
Example: coal, steel coils, metal ores, cement, containers
Coal accounts for more than 50% of the traffic

Ideal for heavy, low-value ship shipments

Not ideal for small, time-sensitive, short distance
shipments
Major issues
Vehicle and staff scheduling
Track and terminal delays
Poor on-time performance

Air
Key issues:
Fast and most expensive mode
Appropriate for small, time-sensitive, high value
density products
Accounts for very small % of freight
High fixed costs in infrastructure
Large labour and fuel costs
In India, 10 airports handled 95% of the total
international and domestic freight (Mumbai,
Delhi, Chennai accounting 80% of freight
movement)

Water

Limited to certain geographic areas

Ocean, inland waterway system, coastal waters
Very large loads at very low cost
Slowest among all modes of transport
Significant delays occur at ports and terminals
Cheapest mode of transport
Dominant in global trade (autos, grain, apparel, etc.)
Though India has a coast line of 7517 km, none of the
ports figure in the top 10 ports of the world
Turn around time: 84 hrs compared to 7 hrs in Hong
Kong and Singapore (source: Washington post,
26.8.2011)

Water
Water transportation is used for low value
to weight ratio items like
Timber, iron ore, POL, coal, chemicals,
containers, cements, and others
For India, in 2010-2011, Iron ore constituted
(18%) of cargo traffic, coal constituted (15%)
of cargo traffic

Commodities which are bulky but low

value where the items are not required in a
hurry are most suitable for water transport
Source: Business India, July 24, 2011

International Commerce Terms

Free on Board (FOB) Port of Departure
FOB Paradip, India
Exporter is responsible for the goods until they are
placed on the ship. The importer is responsible for
them after that.

Cost, Insurance, and Freight (CIF) Port of

Destination
CIF Kobe, Japan
The exporter is responsible for minimum insurance
and freight (shipping costs) to the port of destination.
It is also responsible for clearing goods for export.

Top 10 Ocean Carriers

Ocean Carrier

Rank by Capacity (2006)

A. P. Miller
Mediterrain Shipping Co

1
2

CMA CGM
Evergreen Group
Hapag-Lloyd
China Shipping
American President Lines
Hanjin/Senator
COSCO Container Line
NYK

3
4
5
6
7
8
9
10

Pipeline
High fixed cost, low variable costs
Primarily for liquid, gases, semi-solid products
crude petroleum, refined petroleum products,
natural gas, slurry (coal, iron ore, limestone,
copper)
Best for large and predictable demand
Would be used for getting crude oil to a port or
refinery, but not for getting refined gasoline to a
gasoline station
Low cost compared with other modes
Product movement by pipeline is very slow (oil
moves 1-6 metres / second)
Product moves 24 / 7

Inter-Modal Transport
Use of two or more carriers of different modes to move a
shipment to its destination
Birdyback
Airline + Truck
Fishyback
Ship + Truck
Piggyback
Rail + Truck
Container on Flatcar (transporting container on
railroad flat cars: COFC)

Inter-modal Transportation
Most common example: rail/truck
Also water/rail/truck or water/truck
Grown considerably with increased use of
containers
Increased global trade has also increased use of
inter-modal transportation
More convenient for shippers (one entity
provides the complete service)
Key issue involves the exchange of information
to facilitate transfer between different transport
modes

Relative Rankings of Transportation

Mode by Performance Measures
Mode of
Transport

Cost
(1=least)

Lot size
Delivery
Delivery
(1=smallest) time
time
(1=fastest) variability
(1=least)

Loss and
Damage
(1=least)

Rail

Road

Water

Air

Source: Ballou, 1999

Choice of Transportation Mode

The mode of transportation that results in lowest
transportation cost does not necessarily lower
total costs in the supply chain. Cheaper modes
of transportation will typically have long lead
times and larger minimum shipment quantities,
which result in higher level of inventory in the
supply chain. Modes that allow for shipping in
small quantities lower inventory levels but tend
to be more expensive

Transportation and Inventory Costs

Shippers while making transportation
decisions need to look at the transport and
inventory costs together
Faster mode of transportation
Increase transport cost, reduces safety stock
and pipeline stock in supply chain

Key Point
When selecting a mode of transportation,
managers must account for cycle, safety,
and in-transit inventory costs that result
from using each mode. Modes with high
transportation costs can be justified if they
result in significantly lower inventory costs.

Total Cost Approach to

Performance Measures
Total cost = Transport cost + Cycle stock
inventory-carrying cost + Pipeline
inventory-carrying cost + Safety-stock
inventory costs + Cost of losses and
damages

Note: If different modes of transportation result in different number of

handlings, handling cost should be incorporated in the total cost
equation presented above

Design Options for a

Transportation Network
Direct Shipment Network
Direct Shipping with Milk Runs
All shipments via Central DC (cross-docking)

Most effective when large quantities are moved

Milk Runs from Multiple Suppliers or Multiple Buyer Location

Cross-Docking

Cross Docking

3 PL
External supplier that performs all or part
of companys logistics function such as
transportation, warehousing, customs
clearance and so on.
3PL in India is still in its infancy (least
developed)

Logistics Companies - India

Warehousing Companies in India
Indo Arya House, SMG Spacers Private
Limited, OM Logistics, TNT India, Redington

Transport companies India

Associated Road Carriers (ARC), Patel
Logistics, Safex, TCI, Gati, Blue Dart, TNT
India, OM Logistics, DHL, Safe Express

Freight Forwarders
A-Z Logistics, APT Logistics, Cargo Channels
(P) Limited

Sourcing in Supply Chain

What is Sourcing?
Sourcing is the entire set of business
processes required to purchase goods and
services
Selection of suppliers
Design of supply contracts
Product design collaboration
Procurement of material or services
Evaluation of supplier performance

What is Purchasing?
Purchasing, also called procurement, is
the process by which firms acquire raw
materials, components, products, services,
and other resources from vendors

Outsourcing
Outsourcing results in the supply chain
function being performed by a third party

Importance of Outsourcing
Businesses have realized that efforts required to
increase profits through increasing sales were far greater
than those involved in generating equivalent returns
through reduction in procurement prices
Today 50%-80% of the spending at a manufacturer is
through procurement compared to only 20% several
decades back
Organizations procure
components, products, and even product design,
service of all types

Benefits of Using Third Parties

Capacity aggregation
Transportation aggregation
Warehousing aggregation
Procurement aggregation
Receivables aggregation

Major Risks of Using Third Party

Possibility of choosing a bad supplier

The process is broken
Underestimation of the cost of coordination
Reduced customer/supplier contact
Loss of internal capability and growth of third-party hardto-replicate expertise
Leakage of sensitive data and information with firms
competitors
Conflicting objectives
Buyer looking for flexibility to match supply and
demand / Supplier looking for economies of scale

Outsourcing Examples
Tata Motors outsources almost 80% auto component for
their cars
Procures through E-sourcing

Conducts 400 reverse auctions every year

Sources direct materials (tyres, bearings, castings,
forgings), indirect materials (lubricants, MRO),
machine tools, material handling equipment
Maruti (70%) and Ashok Leyland (80%) have similar
outsourcing practices

Apple has more than 70% of components outsourced

Multiple and Single Sources

Multiple Sources
Deal with several suppliers for
every item procured
Set-up competitive position
among suppliers
Engage in price negotiation
every time an item is procured
Withhold information, obtain
better price
Suppliers face uncertainty
about future business,
uncertainty weakens supplier
position
Benefit from their
weaknesses, confusions, and
fears

Single Source
Deal with one supplier
Avoid engaging in any
conflicts
Engage in joint cost reduction
to obtain low cost inputs
Engage in product design
Exchange relevant business
information
Suppliers informed of future
business prospects, capacity,
technology investments
Benefit from mutual
cooperation and trust

Multiple and Single Supplier

Multiple Suppliers Disadvantages

Single Supplier Disadvantages

Increases complexity
High administrative costs
Difficulty in
communication and
control

Risk of supply disruption

from
Fire, natural calamities
Purchased by a competitor
Goes out of business

Kraljics Framework
Kraljic argues that firms procurement
strategy should depend on two dimensions
Profit impact
Supply risk

Kraljic, 1983

Procurement Strategies:
Kraljics Supply Matrix

Long term contracts

Spark plugs, brake linings

Nuts, bolts, oil seals

Supply contracts
Engines, transmissions

Car seats, tyres

Steps in the Purchasing

Process
Need Identification
Receive purchase request
Estimate order size
Finalize specification

Payment, Vendor Rating

Payment authorization
Performance Rating
Vendor-record updating

Vendor Selection
Search vendors
RFQ
Negotiations

Order Acceptance
Inward goods inspection
Acceptance / rejection
Updating stocks

Order Placement
Price fixing
Dely and payment terms
PO generation

Order Receipt
Follow-up with vendor
Receipt of material as
per specification

Problems in Traditional
Procurement
Large time and effort wasted in disseminating & seeking
procurement information
Slow and laborious manual processes
Human interface at every stage - Low Value Addition
Several processes not transparent to suppliers
Scope for compromises in bid-security & confidentiality
Cartel formation suppresses competition and artificially
hikes bids
Possibility of data tampering and loss of records

E-PROCUREMENT

E-Procurement
E-procurement means procurement of goods
and services online using internet
The intention is to automate the entire
procurement process, along with tender bid
submission and payment by suppliers, in an
online web based real time environment
E-procurement can resolve many of the
constraints and delays of traditional procurement

Modes of E-Procurement
Electronic procurement activities could be
effected using one of the several ways or
modes given below, or a combination of
these could also be used as per need:1. e-Tendering
(https://eproc.karnataka.gov.in/eportal/index.seam#)
2. e-Auctioning : Reverse Auction
3. e-Catalogue based buying/e-Ordering
Procurement by individuals

Modes of E-Procurement
In common parlance, a basic Eprocurement application consists of
E-Tendering and E-Auctioning system

It could also encompass E-Catalogue

based buying also

Benefits of E-Procurement

Reduces cycle time of procurement

Reduce cost of procurement
Remove cartelization by supplier group
Increase transparency of the procurement
process
Almost complete elimination of paper
work for speedy and efficient functioning

How Does Reverse Auction

Work?
Suppliers are required to be pre-registered with
the auction service provider and have received
training before participation
All the vendors are notified in advance about the
start and closing time of auction
Bidders submit their price bids by remotely
logging-in from their offices
Note: To ensure that suppliers competing in the auction are
qualified, a preliminary supplier assessment is done prior to auction.
A more thorough supplier assessment is normally done on the
winning supplier after completion of the auction.

How Does Reverse Auction

Work?
Bidders identities are masked but they can
see in real time the competing prices and
could revise their bids as desired
There is no communication or negotiation
with bidders during the auction
Buyer also watches the progress of
bidding from his office

How Does Reverse Auction

Work?
In reverse auction, competition is high,
bidders get tempted to bid lower and lower
to clinch the deal, until they are unwilling
to go any further
At the conclusion, the lowest bidder
emerges as the winner of the auction

Auctions in the Supply Chain

Auctions:

Sealed-bid first-price auction

English auctions
Dutch auctions
Second-price (Vickrey) auctions

Links to auctions
http://www.ariba.com/
http://www.freemarkets.com.

Indian companies portal

http://www.indiamarkets.com/imo/
//etender.ongc.co.in
Eproc.karnataka.gov.in

Benefits of Online Reverse

Auctions to Buyers
Helps achieve significant reductions in
procurement costs on account of Dynamic
Bidding process
Access to a large number of vendors.

A tool for efficient price discovery

complementing the direct negotiation process.
Source:indiamarkets.com

Benefits of Online Auctions to

Vendors
Ensures savings in marketing costs /
distributor margins
Allows vendors to access hitherto
inaccessible buyers
Increased transparency
Facilitates flexibility in pricing decision

Source: Indiamarkets.com

Supplier Development
Supplier certification
Assesses the financial and equipment
capabilities, the quality assurance system, the
product development capabilities, operational
flexibilities, locational proximity, and the value
analysis effort of the supplier under
consideration

Vendor rating
Systematic method to evaluate suppliers
performance using data from the delivery of
items in response to purchase orders placed

Supplier Certification Programme

Value Analysis
Effort
Quality

Financial
Capability

Single Source
Certification
Program

Product
development
assistance

Equipment
Capability

Operational
flexibility

Facility
proximity

VENDOR RATING SYSTEM

(Yardstick for Measuring Performance)
Criterion

Weights

Excellent5

Very
Good - 4

Good - 3

Average 2

Below
Average 1

Quality

28

<1000 ppm

10015000
ppm

500110,000
ppm

10,00150,000

>50,001
ppm

Delivery
reliability

24

100%
schedule
adherence

1 day
after due
date

2-4 days
after due
date

5-7 days
after due
date

> 7 days
after due
date

Price

21

Base price

Upto 1%
above
base
price

2-3%
above
base price

4-5%
above
base price

>5%
above
base price

Delivery
Terms

14

Free
delivery

FOB

Only
collection
free

Chargeabl
e basis

Ex works

Payment
Terms

13

60 days

45 days

30 days

10-15
days

Immediate

Total

100

VENDOR RATING SYSTEM

Criterion

Weights

Vendor 1
Performance

Rating

Vendor 2

Factor scores

Performance

Rating

Factor
Scores

Quality

28

792 ppm

140

5400 ppm

84

Delivery
Reliability

24

1 day after
due date

96

2-4 days
after due
date

72

Price

21

2-3% above
base price

63

Up to 1%
Above base
price

84

Delivery
Terms

14

FOB

56

FOB

56

Payment
Terms

13

45 days

52

60 days

65

Total

100

Vendor
Rating

407

361

81%

72%

Supplier Performance and Their

Impact on Total Cost

THANK YOU!