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JOMO KENYATTA UNIVERSITY

OF
AGRICULTURE & TECHNOLOGY

SCHOOL OF OPEN, DISTANCE &


eLEARNING
IN COLLABORATION WITH
SCHOOL OF HUMAN RESOURCE
MANAGEMENT

DEPARTMENT OF COMMERCE

HBC 2214 PROCUREMENT AND LOGISTICS MANAGEMENT

P.O. Box 62000, 00200


Nairobi, Kenya
HBC 2214: PROCUREMENT AND LOGISTICS MANAGEMENT
Course description
Overview of procurement management; supplier selection, appraisal and evalua-
tion; supplier relationship management; procurement negotiation; relationship be-
tween procurement and other departments in the organization; current issues in
procurement management; overview of logistics management; inventory manage-
ment in logistics; storage management; transport management; IT as an enabler of
logistics competitiveness.

Course aims
The primary objective of this course is to impart knowledge and skill to partici-
pants to facilitate the creation of a firm professional foundation in procurement and
logistics management.

Instruction methodology
Lectures and tutorials, Case studies, Journal articles, and group discussions

Course Text Books


1. Lysons K. and Farrington, B (2006). “Purchasing and Supply Chain Manage-
ment” .7th Edition–The Chartered Institute of Purchasing and Supply Prac-
tice Hall

2. Ross; David Frederick (2008) “The Intimate Supply Chain –Leveraging and
Supply Chain to Manage the Customer Experience”. CRS Press. Atlanta.

3. Ayers; James B (2009), “Supply Chain Project Management” 2nd Edition.


CRS Press. Atlanta.

4. Aiello; Joseph L (2008) “Rightsizing Inventory” Auerbach Publications. At-


lanta GA.

5. Kumar; Sameer and Zander Mathew, (2007) “Supply Chain Cost Control
Using Activity Based Management”. Auerbach Publications. Atlanta GA.

6. Chase, Aquilano, Jacobs, and Agarwal (2008).Operations Management for


Competitive Advantage. 11th Edition. Tata McGraw-Hill

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7. John Fernie and Leigh Sparks (2009). “Logistics and Retail Management-
Emerging Issues and New Challenges in Retail Supply Chain” 3rd Edition,
Kogan Page Limited. London.

8. Ayers B. J and Odegaard A. M. (2008) “Retail Supply Chain Management”.


Auberbach Publications. Boca Rotan FL.

Assessment information
The module will be assessed as follows;

1. 20% Assignments

2. 10% CAT

3. 70% main EXAM to be administered at JKUAT main campus or one of the


approved centers

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Contents

1 Overview of procurement 1
1.1 Difference between Public procurement and Private procurement . . 1
1.2 The Procurement process . . . . . . . . . . . . . . . . . . . . . . . 2
1.3 Cost and Price Analysis in Procurement Process . . . . . . . . . . . 3
1.3.1 Cost analysis . . . . . . . . . . . . . . . . . . . . . . . . . 3
• Reducing costs of small orders emerging orders
and routine items: . . . . . . . . . . . . . . . . . 4
1.3.2 Price analysis . . . . . . . . . . . . . . . . . . . . . . . . . 5
• Advantages of price analysis: . . . . . . . . . . . 5

2 Supplier selection; appraisal and evaluation 8


2.1 Supplier Appraisal . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.2 What should be appraised? . . . . . . . . . . . . . . . . . . . . . . 9
2.2.1 Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.2.2 Production capacity . . . . . . . . . . . . . . . . . . . . . . 10
2.2.3 Human resources . . . . . . . . . . . . . . . . . . . . . . . 10
2.2.4 Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.2.5 Performance . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.3 Environmental and ethical factors . . . . . . . . . . . . . . . . . . . 12
2.4 Information technology . . . . . . . . . . . . . . . . . . . . . . . . 13
2.4.1 Checklist for supplier visits . . . . . . . . . . . . . . . . . . 13
2.4.2 Supplier Assessment Methods . . . . . . . . . . . . . . . . 14
• Supplier appraisal . . . . . . . . . . . . . . . . . 14
2.5 Vendor Rating . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.5.1 Objective supplier rating method: . . . . . . . . . . . . . . 16
2.6 Early supplier involvement (ESI) . . . . . . . . . . . . . . . . . . . 16
2.6.1 Advantages of Early Supplier Involvement . . . . . . . . . 17

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CONTENTS CONTENTS

2.6.2 The disadvantages and problems of early supplier involvement 17


2.6.3 Factors to consider or point out when developing Early sup-
plier involvement . . . . . . . . . . . . . . . . . . . . . . . 18
2.7 Evaluating supplier performance . . . . . . . . . . . . . . . . . . . 18
2.8 The ten cs of effective supplier evaluation . . . . . . . . . . . . . . 19

3 Supplier relationship management 21


3.1 Building long-term relationships with suppliers: . . . . . . . . . . . 21
3.2 Procurement relationships . . . . . . . . . . . . . . . . . . . . . . . 22
3.3 Guidelines for successful supplier relationship management . . . . . 23
3.3.1 Here are some of those principles, starting with a simple
definition: . . . . . . . . . . . . . . . . . . . . . . . . . . 23

4 Procurement negotiations 27
4.1 Definition and objective of negotiation . . . . . . . . . . . . . . . . 27
4.2 Objectives of negotiation for procurement. . . . . . . . . . . . . . 27
4.3 Styles and approaches of negotiation . . . . . . . . . . . . . . . . . 28
4.4 Negotiation Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
4.4.1 Determining bargaining strengths: . . . . . . . . . . . . . . 29
4.4.2 Negotiation strategies, Techniques and ploys . . . . . . . . 31
4.4.3 Phases / Stages of negotiation . . . . . . . . . . . . . . . . 32
• Preparation stage: . . . . . . . . . . . . . . . . . 32
• Introduction Stage . . . . . . . . . . . . . . . . . 32
• Discussion stage / Debating stage . . . . . . . . . 33
• Bargaining Stage . . . . . . . . . . . . . . . . . 33
• Agreement stage / Conclusion of negotiations . . . 33
• Post – Negotiation Stage: . . . . . . . . . . . . . 33
4.4.4 Elements of an effective negotiation . . . . . . . . . . . . . 33

5 Relationship between the purchasing and other departments 36


5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
5.2 Purchasing and finance/accounts department: . . . . . . . . . . . . 36
5.3 Purchasing and design department: . . . . . . . . . . . . . . . . . 37
5.4 Purchasing and production (User department) . . . . . . . . . . . . 37
5.5 Purchasing and human resource development: . . . . . . . . . . . . 37

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CONTENTS CONTENTS

5.6 Purchasing and marketing: . . . . . . . . . . . . . . . . . . . . . . 38


5.7 Purchasing and information technology department (IT): . . . . . . 38

6 Current issues in procurement management 40


6.1 Information Technology . . . . . . . . . . . . . . . . . . . . . . . 40
6.1.1 E- Procurement . . . . . . . . . . . . . . . . . . . . . . . . 40
6.1.2 Main advantages of e-procurement: . . . . . . . . . . . . . 40
6.1.3 There are seven main types of e-procurement: . . . . . . . 41
6.2 Electronic data interchange . . . . . . . . . . . . . . . . . . . . . . 42
6.2.1 Development of the EDI . . . . . . . . . . . . . . . . . . . 42
6.2.2 Advantages of EDI . . . . . . . . . . . . . . . . . . . . . . 42
6.3 Enterprise resource planning (ERP) . . . . . . . . . . . . . . . . . . 42
6.3.1 Advantages of Enterprise resource planning: . . . . . . . . 43
6.3.2 Disadvantages of enterprise resource planning: . . . . . . . 43
6.4 Application of IT in decision making . . . . . . . . . . . . . . . . . 44
6.5 Ethics –Professional Behavior . . . . . . . . . . . . . . . . . . . . 45
6.5.1 Ethical standards: . . . . . . . . . . . . . . . . . . . . . . 45
6.6 Purchasing and fraud management . . . . . . . . . . . . . . . . . . 46
6.6.1 Examples of supplies-related fraud: . . . . . . . . . . . . . 46
6.6.2 Prevention of fraud . . . . . . . . . . . . . . . . . . . . . . 47
6.6.3 Ethical issues in purchasing: . . . . . . . . . . . . . . . . . 47

7 Overview of logistics management 50


7.1 Definition of Logistics . . . . . . . . . . . . . . . . . . . . . . . . 50
7.2 Importance of logistics . . . . . . . . . . . . . . . . . . . . . . . . 51
7.2.1 Logistics System . . . . . . . . . . . . . . . . . . . . . . . 51
7.2.2 Logistics Cycle: Organizing Logistics System Activities . . 52
7.2.3 Inbound and outbound logistics . . . . . . . . . . . . . . . . 53

8 Inventory management 56
8.1 Accounting & Documentation of inventory . . . . . . . . . . . . . . 56
8.2 Direct delivery to users or central storages . . . . . . . . . . . . . . 56
8.3 Lead time of Receipt accounting . . . . . . . . . . . . . . . . . . . 57
8.4 Storage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
8.4.1 Inventory management . . . . . . . . . . . . . . . . . . . . 59

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CONTENTS CONTENTS

8.4.2 Matching Supply with Demand . . . . . . . . . . . . . . . . 59


8.4.3 Objective of inventory management . . . . . . . . . . . . . 59
8.4.4 Reasons of keeping inventory . . . . . . . . . . . . . . . . . 60
8.5 Economic factors affecting the stock management/stock holding pol-
icy: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
8.5.1 Acquisition costs: . . . . . . . . . . . . . . . . . . . . . . . 61
8.5.2 Holding costs: . . . . . . . . . . . . . . . . . . . . . . . . 61
8.5.3 Cost of stock outs: . . . . . . . . . . . . . . . . . . . . . . 62
8.6 Forecasting techniques in relation to demand and lead time . . . . . 62
8.6.1 Levels of forecasting: . . . . . . . . . . . . . . . . . . . . . 62
8.6.2 Methods of Forecasting demand . . . . . . . . . . . . . . . 63
• Example of exponentially weighted average: . . . 63
• Independent demand situations and the use of fixed
order quantity and periodic review systems: . . . . 64
8.6.3 Advantages and disadvantages of fixed order quantity and
periodic review systems: . . . . . . . . . . . . . . . . . . . 65
• Fixed order quantity . . . . . . . . . . . . . . . . 65
• Periodic review: . . . . . . . . . . . . . . . . . . 66
8.6.4 Techniques for dealing with dependent demand (MRP 1),
(MRP 11), (DRP) . . . . . . . . . . . . . . . . . . . . . . . 66
• Material requirement planning (MRP1): . . . . . 67
• Material resource planning (MRP 11): . . . . . . 67
• Distribution requirements planning (DRP): . . . . 68
• Pull system-Kanban and JIT inventory philoso-
phy: . . . . . . . . . . . . . . . . . . . . . . . . 68
8.6.5 Benefits of Just-in-time: . . . . . . . . . . . . . . . . . . . 69
• Coping with uncertainties in achieving required
service levels- timing of issues: . . . . . . . . . . 70

9 Transport management 72
9.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
9.1.1 Achieving competitive transportation in logistics . . . . . . 73
9.1.2 Network Routing Optimization . . . . . . . . . . . . . . . 74
9.1.3 Customer Delivery Requirements . . . . . . . . . . . . . . 76

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CONTENTS CONTENTS

• Product Availability . . . . . . . . . . . . . . . . 76
9.1.4 Routing Decisions and the Cost of Doing Business . . . . . 76
9.1.5 Network Routes, Equipment Availability, and LSPs . . . . . 76
9.1.6 Shipping and Receiving Facility Constraints . . . . . . . . 77
9.1.7 International Transportation . . . . . . . . . . . . . . . . . 77
9.1.8 Transporting Dangerous Goods . . . . . . . . . . . . . . . 77
• Freight Costs . . . . . . . . . . . . . . . . . . . . 77

10 Information technology as a logistics competitive enabler 80


10.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

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HBC 2214 Procurement and Logistics Management

LESSON 1
Overview of procurement

Lesson outcome
At the end of the lesson, students should be able to;

1. Show an understanding of procurement and the procurement process

2. Distinguish between private and public procurement

3. Be able to undertake cost and price analysis in a procurement process

Procurement is defined as the acquisition by purchase, rental, lease, hire purchase,


license, tenancy, franchise, or by any other contractual or legal means of any type
of works, services or goods including livestock or any combination.

1.1. Difference between Public procurement and Private procurement


By their very nature public and private sector businesses are very different organi-
zations operating to fulfill different objectives. While public sector businesses are
under a mandate to operate efficiently their primary objective is public good since
they utilize public funds. Conversely private enterprises generally exist to generate
a profit and return for shareholders. Both public sector and private sector procure-
ment professionals share similar demands, constraints and responsibilities such as
proving value for money, being accountable for spending decisions and adherence
to procurement and financial policies. However there are several key distinctions
procurement professionals identify between working in public and private enter-
prise which this article will explore.

• Agility
Procurement professionals working in the private sector often must be more
agile and able to respond to change quickly.

• A focus on the bottom line


As private enterprises focus on generating profit, procurement professionals
often are constrained by meeting cost reduction targets.

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HBC 2214 Procurement and Logistics Management

• Number of Stakeholders
Public sector procurement professionals have a larger group of stakeholders
to report to including tax payers, members of parliament, clients and vendors.

• Bureaucracy
Working for a government organization or public enterprise entails dealing
with an increased level of red tape or rules which must be adhered to in order
to complete a task. Procurement professionals working in the public sector
have to place greater emphasis on following policy and acting transparently.
As they are acting on behalf of the government they must be seen to be acting
ethically.

1.2. The Procurement process


Procurement/ purchasing is a complicated process involving a number of interre-
lated tasks. Notably, most organizations follow diverse processes. The traditional
procurement process is as shown below

1. Identify or re-evaluate needs: In some instances, needs must be re-evaluated


because they have changed.

2. Define or evaluate user’s requirements.

3. Decide on whether to make or buy.

4. Identify type of purchase: The three types of purchases – from least amount
of time and complexity to most amount of time and complexity – are:

(a) Straight rebuy or routine purchase


(b) a modified rebuy, which requires a change to an existing supplier or
input
(c) A new buy, which results from a new user need.

5. Conduct market analysis: A source of supply can operate in a purely com-


petitive market (many suppliers), an oligopolistic market (a few large suppli-
ers) or a monopolistic market (one supplier).

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HBC 2214 Procurement and Logistics Management

6. Identify possible suppliers: This may include suppliers that the purchaser
ahs not previously used.

7. pre-screen possible suppliers: This process will reduce the number of sup-
pliers to those that can meet the purchaser’s demands.

8. Evaluate the remaining supply base: This activity is often accomplished


by means of competitive bidding.

9. Choose supplier: The choice of supplier determines the relationships that


will exist between the Purchasing and supplier organizations and how the
relationship will be structured and implemented. It will also determine how
relationships with non-selected suppliers will be maintained.

10. Deliver product / make performance service: The completion of this ac-
tivity also begins the generation of performance data to be used for the next
activity.

11. Post purchaser/make performance evaluation: The supplier’s performance


must be evaluated to determine how well the purchaser’s needs have been
met. This will provide data for future sourcing.

1.3. Cost and Price Analysis in Procurement Process


1.3.1. Cost analysis
This is the review and evaluation of actual or anticipated costs in the process of
acquisition of non standard items and services. To determine the costs, a supply
manager must compare the labour hours, material costs and overhead costs of all
competing suppliers as listed on their cost-breakdown sheets and determine reasons
for any differences focussing on three principle elements of cost: direct, indirect
(overhead) and profit. The factors that affect the costs of specific firms and individ-
ual products within any given time include:

• Capabilities of management

• Efficiency of labour- raises productivity

• Amount and quality of sub contracting

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HBC 2214 Procurement and Logistics Management

• Plant capacity and continuity of output

The supplier manager should also assess variable, fixed, total, direct and indirect
costs and determine how these costs influence prices:

1. Variable manufacturing costs: These are items of cost that vary directly and
proportionally with the production quantity of a particular product and they
include direct labour, direct materials and variable manufacturing overhead.

2. Fixed manufacturing costs: These costs do not vary with volume of pro-
duction but change over time e.g. money spent on buildings, equipments etc.

3. Semi variable or mixed manufacturing costs: These costs fall between


variable and fixed costs e.g. maintenance, utilities and postage.

4. Total production cost: This is the sum of variable, fixed and semi variable
costs.

5. Direct costs: These are costs specifically traceable. Include direct labour and
direct materials costs.

6. Indirect costs (overhead): These costs are associated with or caused by two
or more operating activities ‘jointly’ but are not traced to each of them indi-
vidually.

• Reducing costs of small orders emerging orders and routine items:


It is estimated that about 60% of the purchasing and accounts payable transactions
often represent only 5% of the total value of purchase expenditure. Low value or-
ders therefore both increase costs and hamper both purchasing and accounting pro-
ductivity. A low cost system strategy is therefore required for the efficient handling
of low value purchases. Such systems include:
Telephone orders: The buyer passes all the requirements via the telephone conver-
sation to the supplier and provides an order number.
Procurement cards: These are similar to consumer credit cards and involve a
provider such as master cards, visa etc. Such cards relieve purchasing staff from
purchase order preparation.
Petty cash purchases: Items bought are paid for at once from petty cash. The main
problem in this case is controlling the number and size of purchases.

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HBC 2214 Procurement and Logistics Management

Standing orders: Entail submission of an invoice of agreed intervals.


Blanket orders: Encompass all orders for a range of items placed with one supplier
for a specified period. User’s call off required items directly from the supplier
through telephone, fax etc and the amount due is summarized by the supplier as a
single invoice. This attribute is convenient for making bulk order to gain economies
of scale.
Electronic Data Interchange (EDI): This can include linkages for information
exchange, order payment and can be easily combined with blanket ordering.
Blank-cheque orders: In this case the blank cheque is attached to the order form
and sent to the supplier. On forwarding the goods, the supplier fills the cheque and
deposits in his accounts
Placement for own orders: The users are authorized to raise their own orders and
sent to suppliers in areas where purchasing function expertise is not required.

1.3.2. Price analysis


This is the breaking down of a quoted price into its constituent elements for the
purpose of determining the reasonableness of the proposed charge. Price analysis
can also be defined as the examination of a seller’s price proposal by comparison
with reasonable price benchmarks, without examination and evaluation of separate
elements of the costs and profit making up the price. The five tools that can be used
to conduct price analysis include:

• Analysis of competitive price proposal

• Comparison with regulated , catalogue or market prices

• The use of web-based e-procurement

• Comparisons with historical prices

• Use of the independent costs estimates

• Advantages of price analysis:


• It provides the buyer with a guide as to what he or she ought to pay

• It highlights possible mistakes in quoting in the part of the vendor ie where


the price is exceptionally low or high.

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HBC 2214 Procurement and Logistics Management

It provides a basis for subsequent negotiation that can be of benefit to both the
vendor and buyer i.e. cost reduction leading to price reduction.

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HBC 2214 Procurement and Logistics Management

Revision Questions

Example . Define procurement and clearly show all the steps in a traditional
procurement process
Solution: for revision 

E XERCISE 1.  Cost and price analysis is among the single most important factors
considered in procuring needs. Elaborate

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HBC 2214 Procurement and Logistics Management

LESSON 2
Supplier selection; appraisal and evaluation

Lesson outcome
At the end of this lesson, the students should be able to

1. Understand the various issues in supplier selection, evaluation and appraisal

2. Show clearly the importance of supplier selection and evaluation

3. Show clearly the methods and procedures in supplier appraisal and evaluation

2.1. Supplier Appraisal


Supplier appraisal may arise when a prospective vendor applies to be placed on
the buyer’s approved list or in the course of negotiation when the buyer wishes to
assure him/herself that a supplier can meet requirements reliably. Supplier appraisal
can be a time consuming and costly activity. The situations in which appraisal is
essential include:

• Where potential suppliers do not hold BS EN ISO 9000:2000;

• Purchase of strategic high profit, high risk items;

• Purchase of non-standard items;

• Expenditure on capital items, including plant, machinery and computer sys-


tems;

• For purpose of supplier development i.e. what needs to be done to bridge the
gap between the present resources and competencies of a supplier or potential
supplier and the standard required by the purchaser;

• When entering into Just-in –time (JIT) arrangements;

• When establishing e-procurement arrangements with long-term strategic sup-


pliers

• When negotiating outsourcing contracts;

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HBC 2214 Procurement and Logistics Management

• When negotiating total quality management (TQM) and quality in respect of


high profit or high risk items;

• When negotiating service level agreements.

Supplier appraisal can be undertaken by a combination of the following:

• Desk research using published or unpublished data already in existence e.g.


company’s reports, balanced sheet, strike records etc

• Field research to obtain further data of a prospective supplier by a visit to


their working environment.

2.2. What should be appraised?


Supplier’s appraisal is situational. What to appraise is related to the requirements of
the particular purchaser. All appraisals should however, evaluate potential suppliers
from the following perspectives:

2.2.1. Finance
The supplier should be financially stable to meet the holistic buyer’s requirements.
The checks recommended are:

• The assessed turnover of the enterprise over three years

• The profitability and the relationship between gross and net profits of the
enterprise over three years

• The value of capital assets, return on capital assets and return on capital em-
ployed

• The scale of borrowings and the ratio of debts to assets

• The possibility of takeover or merger affecting ability to supply.

• Whether or not the firm is tied to a small number of major customers, so


that if one or more withdrew their businesses it might cause the firm financial
difficulties.

• Whether or not the organization has sufficient capacity to fulfill the order.

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HBC 2214 Procurement and Logistics Management

2.2.2. Production capacity


This entail the limiting capability of a productive unit to produce within a stated
time period, normally expressed in terms of output units per unit of time. In ap-
praising supplier capacity, attention should be given to the following consideration:

• The maximum productive capacity in a normal working period.

• The extent to which capacity is currently over or under committed – for ex-
ample, a full order book may raise doubts about the supplier’s capacity to
take on further work or else you have to wonder if a substantial amount of
capacity is underutilized.

• How existing capacity might be expanded to meet future increased demand

• The percentage of available capacity utilized by existing major customers

• What percentage of capacity would be utilized if the potential supplier were


awarded the business of the purchaser – this can also be assessed in terms of
annual turnover, but in any case, care should be taken to avoid making the
supplier overly dependent on one or two customers.

• What systems are used for capacity planning?

2.2.3. Human resources


This involves checking information regarding the title, qualification and experience
of managerial staff, training schemes, and encouragement of teamwork and em-
powerment of employees. Information should be obtained regarding the:

• Number of people employed in manufacturing and administration

• Use of human resources – whether economical, with everyone busy, or ex-


travagant, with excess people doing little or nothing.

• Names, titles, qualifications and experience of managerial staff

• Encouragement of team work and empowerment

• Worker representation and recognized trade unions

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HBC 2214 Procurement and Logistics Management

• Days lost due to industrial disputes in each of the past five years

• Turnover of managerial and operative staff

• Workers’ attitudes to the organization and concern for meeting customers’


requirements.

2.2.4. Quality
The buyer should check critically to establish whether the supplier embraces some
of the fundamental quality attributes e.g. Total quality management (TQM); Inter-
national organisation for standardization (ISO) etc. Appraisal may require satisfac-
tory answers to such questions as the following.

• Has the supplier met the quality approval criteria of other organizations, such
as the Ford quality Awards, the Ministry of Defence, British Gas or others?

• To what extent does the supplier know about and implement the concept of
total quality management?

• What procedures are in place for the inspection and testing of purchased ma-
terials?

• What relevant test and inspection process does the supplier use?

• What statistical controls are applied regarding quality?

• Does quality control cover an evaluation of quality?

• Can the supplier guarantee that the purchaser can safety eliminate the need
for all incoming inspection/ (this is especially important for JIT deliveries.

2.2.5. Performance
The buyer should also check the track record of the supplier to establish the perfor-
mance trend. Particularly when appraising suppliers of non-standard products such
as construction projects or the installation of computer system, questions should be
asked regarding the following;

• What similar projects has the supplier already undertaken?

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HBC 2214 Procurement and Logistics Management

• What current projects are in hand?

• What are / were the distinctive features of such projects?

• What innovations might be introduced?

• What customers can the supplier cite as referees?

2.3. Environmental and ethical factors


The buyer has a duty to check fully how the supplier approaches environmental
and ethical issues. To this extent therefore, policies, and procedures in line with
environmental/ethical considerations should be critically checked. In Kenya, Na-
tional Environmental Management Authority (NEMA) provides guidelines on en-
vironmental policies and, where applicable, suppliers should be expected to have
an environmental policy and procedures for the implementation of such a policy. A
large number directives and regulations have also been issued relating to air, wa-
ter, chemicals, packaging and waste Apart from those with reference the NEMA
suitable questions to ask include the following:-

• Has responsibility for environmental management been allocated to a partic-


ular person?

• Are materials obtained, so far as possible, from sustainable soruces – such as


timber?

• What is the lifecycle cost of the suppliers’ product?

• What facilities has the supplier for waste minimization, disposal and recy-
cling?

• What energy savings, if any do the supplier’s products provide?

• What arrangements are in place for the control of dangerous substance and
nuisance?

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HBC 2214 Procurement and Logistics Management

2.4. Information technology


The buyer should check whether the prospective suppliers embrace the information
technology. Some of issues in line with IT entail, checking whether the supplier
has a website; finding out whether the suppliers procedures are automated etc. Re-
search indicates that, at the time of writing, more than a third of buyers currently
use the Internet to conduct transactions and such usage is likely to increase dramati-
cally. Additionally, the Web also supports a variety of activities, such as identifying
new sources of supply, finding product information, including products, prices and
delivery as well as tracking orders and receiving technical advice and after –sales
service. It is useful to ask mainly open-ended questions under this heading as the
replies will indicate the extent to which the supplier is exploiting the possibilities
of e-business. Here are some typical questions that might be asked:

• Does your organization have a website?

• What information does the website provide?

• What business activities does your organization process electronically?

• In what ways does your organization

– Reduce or eliminate paper transactions


– Shorten inventory
– Provide real-time information on product availability and inventory
– Provide collaborative planning?
– Integrate its supply chain?

2.4.1. Checklist for supplier visits


The following checklist indicates areas which warrant particular attention by pro-
curement staff when making appraisal visits to potential suppliers:

• Personal attitudes: An observant visitor can sense the attitudes of the sup-
plier’s employees towards their work and this provides an indication of the
likely quality of their output and service dependability.

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HBC 2214 Procurement and Logistics Management

• Adequacy and care of production equipment: This entail close observation of


the equipment in a plant

• Technological know-how of supervisory personnel: Conversation with super-


visors will indicate their technical knowledge and their ability to control and
improve the operations of processes under their supervision.

• Means of controlling quality: Observation of the inspection methods will


indicate their adequacy to ensure the specified quality of the product.

• Housekeeping: A plant which is orderly and clean in its general appearance


indicates careful planning and control by management.

• Competence of technical staff: Conversation with design, research staffs in-


dicate their knowledge of the latest materials, tools and processes relating to
their products and on anticipated developments in their industry.

• Competence of management: All the above areas are, in essence a reflection


of management and therefore indicate its quality.

2.4.2. Supplier Assessment Methods


There are two main approaches used in selecting suppliers:

• Supplier appraisal – used to select potential / new suppliers

• Vendor rating – used to assess already performing suppliers.

• Supplier appraisal
This is the assessment of the potential suppliers so as to be used as on of the com-
pany’s suppliers. Thus, the concern is with the selection of the next suppliers. The
main techniques used in supplier appraisal are:

1. Desk research
This is where an analysis of the supplier’s document is done. The documents
include: Balance sheet, profit and loss account, organization chart etc. This
analysis is done by use of statistical tools and ratio analysis. This enables the
buyer to make an informed judgment on the potential of the supplier to be.

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HBC 2214 Procurement and Logistics Management

2. Field research / Capacity survey:

(a) Effectiveness of production systems.


(b) Quality assurance systems
(c) Cost control systems
(d) Appropriateness of the equipments
(e) Attitudes and stability of management.
(f) Competence of technical staff
(g) Morale of workforce which indicates quality of service expected.
(h) Employee relations – in accordance of strikes, communication between
managers and subordinates, past major customers and reputation of the
organization
(i) How the company handles environmental and human rights issues.

Once the new suppliers have been selected, constant monitoring and feedback is
required to either improve their performance or eliminate the non-performing ones.

2.5. Vendor Rating


It is the assessment of already performing suppliers so as to improve their perfor-
mance or replace them. The two techniques used in vendor rating are:

• Subjective supplier rating method.

• Objective supplier rating method.

Subjective supplier rating method: A purchasing officer is appointed to observe on


how well or badly the suppliers are performing and then judge each supplier. It
is subjective because different individuals have different value judgments. Advan-
tages:

1. It is cheap to carry out as only one observer is used and there are no records
kept.

2. Is a good method to eliminate obvious shortcomings.

Disadvantages

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HBC 2214 Procurement and Logistics Management

1. Not factual therefore personal liker and dislikes may be used by the observer.

2. Not accurate

3. It is susceptible to bribery thus the company may receive low quality items

4. No records are kept in case they may be needed for future reference.

2.5.1. Objective supplier rating method:


Marks are allotted to each of the factors that determine a good supplier each time a
supplier performs. These factors include: Right price, right time, right quality, right
quantity, service given to the buyer, cost reduction effort, management capability.
The marks are the compiled at the end of a given period and used to come up with
a conclusion in respect to each supplier.
Advantages:

1. The method is more accurate than subjective.

2. Avoids complaints / disputes as it is based on facts

3. Minimizes incidences of bribery

4. Ensures high quality goods are delivered.

5. Reference in form of records is kept in case the procurement / purchasing


officer leaves office.

Disadvantages:

1. Record keeping can be expensive.

2. The method is time consuming.

2.6. Early supplier involvement (ESI)


ESI is an approach in supply management to bring the expertise and collabora-
tive synergy of suppliers into the design process. ESI seeks to find “win – win”
opportunities in developing alternatives and improvements to materials, services,
technology, specifications and tolerances, standards, order quantities and lead time,
processes, packaging, transportation, redesigns, assembly changes, design cycle

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HBC 2214 Procurement and Logistics Management

time, and inventory reductions. Today, early supplier involvement (ESI) is an im-
portant accepted way of life at many proactive firms and a requirement for world
class supply management. The suppliers are carefully prequalified to ensure that
they posses both the desired technology and the right management capability. The
technological benefits of early supplier involvement can be obtained, with due con-
sideration to the commercial aspects of the relationship – i.e. mutual benefits. ESI
helps in developing trust and communication between suppliers between suppliers
and the buying firm. ESI normally, but not always, results in the selection process
of a single source of supply. At most progressive companies, this selection process
is the result of intensive competition between two or three carefully prequaified po-
tential suppliers. The company selected becomes the single or primary source of
supply for the life of the item using the material. ESI is critical in reducing the cost
of production, improving quality and preventing costly delays.

2.6.1. Advantages of Early Supplier Involvement


The advantages of ESI in product development may be briefly summarized as:

1. Improved product specification

2. Enhanced quality

3. Lower development costs

4. Access to new technologies a head of competitors’

5. Joint problem-solving

6. Interchanging of knowledge and information

7. Improved manufacturability of products

8. Reduced concept-to-customer development.

2.6.2. The disadvantages and problems of early supplier involvement


The disadvantages and problems of ESI have been summarized as follows:

1. There is fear of leakage of vital information

2. Loss of control or ownership.

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HBC 2214 Procurement and Logistics Management

3. There is longer development lead-time

4. There are conflicts due to different aims and objectives

5. Collaborators could end up being competitors.

2.6.3. Factors to consider or point out when developing Early supplier involve-
ment
• Degree of responsibility for design

• Specific responsibilities on the on the requirement selling process

• When to involve the supplier in the process

• Intercompany communication

• Intellectual property agreement

• Supplier membership on the project team and alignment of objectives with


regards to outcome.

2.7. Evaluating supplier performance


There are various reasons for evaluation of purchasing performance. Evaluation can
significantly improve supplies performance. Properly done, supplier performance
management can provide answers to questions such as the following:

• Who are the highest – quality suppliers?

• How can relationships with the best suppliers be enhanced?

• How can suppliers performance be incorporated into total cost analysis?

• How can buyers ensure that suppliers live up to what they promised?

• How can feedback be shared based on experience with a supplier?

• How can buyers ensure those suppliers’ problems be tracked and fixed?

– Evaluation assists decision making regarding when a supplier is retained


or removed from an approved list.

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HBC 2214 Procurement and Logistics Management

– Evaluation assists in deciding with which suppliers a specific order should


be placed; Evaluation provides suppliers with an incentive for continu-
ous improvement and prevents performance ‘slippage’.
– Evaluation can assist in decisions regarding how to distribute the spend
for an item among several suppliers to better manage risk.

2.8. The ten cs of effective supplier evaluation


Many of the aspects of supplier appraisal are neatly summarized by carter as the
‘ten cs of supplier evaluating’

• Competency of the supplier to undertake the task required

• Capacity of the supplier to meet the purchaser’s total needs

• Commitment to the supplier to the customer in the term of quality, cost driv-
ing and service

• Control system in relation to inventory,cost,budgets,people and information

• Cash resources and financial stability ensuring that the selected supplier
is financially sound and is able to continue in business into the foreseeable
future

• Cost commensurate with quality and services

• Consistency the ability of the supplier to deliver consistently and, where pos-
sible, improve levels of quality and service.

• Culture

• Clean-i.e. environment

• Communication –the role of information technology

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Revision Questions

Example . What situations necessitate supplier appraisal


Solution: for revision 

E XERCISE 2.  Potential suppliers are evaluated from a number of perspectives.


Discuss these perspectives
E XERCISE 3.  Elaborate the two main approaches used in supplier selection
E XERCISE 4.  Vendor rating can be done using two main techniques. elaborate

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HBC 2214 Procurement and Logistics Management

LESSON 3
Supplier relationship management

Lesson outcomes
At the end of this lesson, the student should:

1. Understand the importance of supplier relationship management

2. Show an understanding of different supplier relationships

3. Show an understand of factors affecting supplier relationship

3.1. Building long-term relationships with suppliers:


The longer a buyer stays with a supplier, the more they are likely to treat it as
a preferred supplier. The trend towards buyers seeking to reduce their supplier
base and the move towards single sourcing is becoming important for long term
relationships. The benefits of such an approach include:

• Improved quality

• Innovation sharing

• Reduced costs

• Integrated scheduling of production and deliveries.

Building relationship with suppliers is becoming an explicit part of the procurement


strategy for both small and big companies. Challenges like globalization, rapid
product development, advances in production technologies, cost reduction, bub-
bling issues like trimming supply base, just-in-time, mass customization, lean man-
ufacturing, core competence-based on make or buy procurement strategies have led
procurement managers to think radically in a different way to deal with future pro-
curement strategies. The result has been to improve the role of buyer-supplier rela-
tionship in competitive equation. Establishing long-term relationships with capable
suppliers and working closely with them over time to achieve high levels of quality
and productivity involves communicating intentions and expectations clearly, defin-
ing measures of success, obtaining regular feedback, and implementing corrective
action plans to improve performance.

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HBC 2214 Procurement and Logistics Management

The distinct success factors for buyer-supplier relationship encompass: attitude,


commitments, trust, communication, coordination, motivation, conflict man-
agement, participation, culture change and most importantly continuous im-
provement.

3.2. Procurement relationships


Procurement relationship can be expressed in the following ways:

1. Partnership sourcing

2. Reciprocal trading

3. Counter trade

4. Intra company trading

5. Sub-contracting

• Partnership sourcing: This is a commitment to both customers and sup-


pliers, regardless of size to a long-term relationship based on clear mutually
agreed objectives to strive for world class capability. Partnership sourcing
seeks to make improvements in areas such as: design, quality, delivery and
completion times, production costs, operating costs, stocks levels cash flow
etc.

• Reciprocal trading: This is a mutual exchange of buyer’s and supplier’s


products of advantages/privileges in commercial relations. It is selling through
the order book when a policy is adopted of giving preferences to those sup-
pliers who are also customers of the buying company.

• Counter trade: This is a form of international reciprocal trade in which an


order is placed by a purchaser to a supplier in another country on condition
that goods of equal proportions will be sold in the opposite directions. The
types of counter trade entail: Barter or Swap, counter purchase, Buy back,
Switch trade and offset trade.

• Intra-company trade: This applies to large enterprise and conglomerates


where the possibility of buying certain materials from each group is made

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HBC 2214 Procurement and Logistics Management

possible. The policy guideline may direct buyers to purchase specified items
exclusively from group members regardless of the price, obtain quotations
from group members which are evaluated against those of external suppliers
with the order being placed with the most competitive source whether internal
or external.

• Sub-contracting: Sub-contracting entail means of augmenting limited re-


sources and skills while enabling the contractor to concentrate on their main
area of expertise. Sub-contracting relieves the main contractor of some du-
ties and therefore being in a position to concentrate on supervision. Also
sub-contracting reduces cost on the part of main contractor as well as attract-
ing highly qualified and experienced experts to do the job. To this extent
therefore both the main contractor and the sub-contractor should embrace a
good relationship to ensure smooth flow of the underlined activities.

3.3. Guidelines for successful supplier relationship management


Boeing’s Dreamliner lithium battery fiasco caused worldwide groundings of aircraft
whilst the company threw all resources at solving the problem, getting planes flying
again, and rebuilding trust in the brand. This is adramatic examples of a failure to
control supply chain quality, and of inadequate supplier management. Despite an
increasing number of organisations embracing supplier relationship management
(SRM) in recent years, most implement programs with insufficient skills and capa-
bilities at their disposal, and a lack of understanding of the capacity or bandwidth
required to assure sustained success.
A number of general principles (axioms, if you like) have emerged that procurement
leaders find useful when it comes to understanding, promoting and implementing
SRM in their organisations. They represent a reality-check on what may be possible
in the specific business, supply market, and key relationships the practitioner is
required to manage.

3.3.1. Here are some of those principles, starting with a simple definition:
1. SRM is the systematic creation and capture of post-contract value from
key business relationships;

2. It requires recognition that ‘relationships’ are not an end in themselves.

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HBC 2214 Procurement and Logistics Management

Successful relationships are an outcome and, for the buyer, that outcome can
be measured in value terms, hence the recent vogue of talking about ‘supplier
value management’;

3. It is mostly about collaboration with strategic suppliers, but can still be adver-
sarial. The business must be able to flex its application of SRM appropriate
to the criticality of the specific supplier relationship;

4. SRM needs to be completely integrated with strategic sourcing / category


management processes. It‘s not something you design after the contract is
signed;

5. It requires a detailed analysis of the specific supplier relationship, before the


strategy can be determined; one size certainly does not fit all;

6. It is about aligning the whole enterprise around the task of managing a spe-
cific supplier based on a clearly documented relationship strategy;

7. SRM is not a soft option in engaging with suppliers. It’s demanding and
process-focused. It’s a lot more about how the organization systematically
plans, than it is about an ’interpersonal’ skill set of the procurement person
or relationship manager;

8. SRM does not necessarily mean ‘win-win’; although contracts must be struc-
tured to ensure each party enthusiastically implements the agreement;

9. It is as much about driving-up day-to-day operational performance as in-


novation and joint value creation. Many leaders get excited about senior ex-
ecutive contact and alliance potential. The most successful organizations rec-
ognize that the basics are the foundation of everything that can be achieved
in the relationship and so focus on the essentials;

10. To get started in an SRM program, it always best to successfully implement


a small number of SRM pilot projects, rather than go for the ‘big bang’.
If you choose the latter you’ll quickly find your resources spread too thinly,
and leaders and stakeholders will become frustrated by your lack of business
impact.

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HBC 2214 Procurement and Logistics Management

Organisations that deploy SRM successfully report additional value benefits of 2%


of total spend, right through to 40+% from specific key relationships. Organisa-
tions continue to look to design and implement SRM but often make the mistake of
assuming good governance (through supplier meetings) is enough to assure success.
As you can see from what’s above, it‘s a lot more than that. Nevertheless, that po-
tential success is worth shooting for. As can be seen from those recent high-profile
examples, leaving supplier and supply chain performance to chance is no longer an
option.

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HBC 2214 Procurement and Logistics Management

Revision Questions

Example . Procurement relationship can be expressed in a number of ways.


Identify these ways
Solution: for revision 

E XERCISE 5.  Outline the success factors for buyer supplier relations.


E XERCISE 6.  Identify the guidelines for successful supplier relationship man-
agement

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HBC 2214 Procurement and Logistics Management

LESSON 4
Procurement negotiations

Lesson outcome
At the end of the lesson, the learners should

1. Show an understanding of different types of negotiation approaches and their


applicability

2. Show an understanding of the different stages of any negotiation

3. Clearly show the importance of negotiation in procurement management

4.1. Definition and objective of negotiation


Negotiation refers to the process of conferring, discussing or bargaining to reach
an agreement in business transactions. This makes negotiation a process of plan-
ning, reviewing and analyzing used by both buyers and sellers to reach acceptable
agreement or compromise. Thus, in purchasing negotiation must be used only as
decision making process for it to achieve its full value. In successful negotiations,
both sides win something – i.e. it is a win – win negotiation approach.

4.2. Objectives of negotiation for procurement.


• To obtain the quality specified.

• To obtain a fair and reasonable price.

• To get the supplier to perform the contract on time. The delivery date sched-
ule for quantity and quality specified should be realistic. It is important that
buyers negotiate delivery schedules which suppliers can realistically meet
without endangering the other requirements of the purchase.

• To exert control over the manner in which the contract is performed – defi-
ciencies in supplier performance can seriously affect and in some cases com-
pletely disrupt the operations of the buyers firm. Hence, need for buyers to
negotiate for controls which will assure compliance with the quality, quan-
tity, delivery and service terms of the contract. Control has been found to

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HBC 2214 Procurement and Logistics Management

be effective in areas such as: Man hours of effort; levels of scientific talent;
special test equipment requirements; the amounts and types of work to be
subcontracted; progress reports.

• To persuade the supplier to give maximum cooperation to the buyer’s com-


pany – reward those suppliers who perform well with future orders. Good
suppliers also expect courtesy, pleasant working relations, timely payment
and cooperation from their customers.

• To develop a sound and continuing relationship with competent suppliers:


Buyers must maintain a proper balance between their concern for a supplier’s
immediate interest and long-run performance.

• To create a long-term partnership with a highly qualified supplier.

4.3. Styles and approaches of negotiation


These can be classified as adversarial and partnership Adversarial negotiation:
Also referred to as disruptive or win – lose negotiation approach.

• Parties have competing goals

• Involves use of threats

• In case of deadlock, negotiation is terminated

• The approach is rigid

• The attitude is that of we must win, they must lose.

Partnership negotiation: Also referred to as win- win negotiation.

• Common goals emphasized upon.

• Negotiation is friendly and based on openness

• In case of a deadlock, negotiation results to further problem solving

• The approach is flexible

• The attitude is we both must win.

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Adversarial negotiation. Collaborative negotiation


The emphasis is on competing to The emphasis is on
attain goals at the adversary’s ascertaining goals held in
expense common with the other party
Strategy is based on secrecy, Strategy is based on
retention of information and low openness, sharing of
level of trust in the perceived information and high level of
adversary. trust in the perceived partner.

The desired outcomes of the The desired outcomes of the


negotiation are often negotiation are made known
misrepresented so that the so that there are no hidden
adversary does not know what the agendas and issues are
opponent really requires the clearly understood. Each
outcome of the negotiation to be. party is concerned for and
There is little concern for a has empathy with the other.
empathy with the other party.
Strategies are unpredictable, based Strategies are predictable.
on various negotiating ploys While flexible, such
designed ploys designed to strategies are aimed at
outmaneuver or throw the other reaching an agreement
acceptable to the other party.

4.4. Negotiation Cycle


This shows the cyclical nature of events in the process of negotiation – i.e.

• Get the facts

• Determine the bargaining strengths

• Set objectives

• Plan strategies / Tactics

• Negotiate

• Review performance.

4.4.1. Determining bargaining strengths:


Buyer bargaining strength is high when;

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HBC 2214 Procurement and Logistics Management

Parties use threats, bluffs and Parties refrain from threats


ultimatums with the aim of keeping and so, which are seen as
the adversary on counterproductive to the
the defensive. rational solution of perceived
problems.
There is an inflexible adherence to The approach is essentially
a fixed position that may be friendly and non-aggressive –
defended by both rational and we are in this together. This
irrational arguments. Essentially, involves downplaying
the approach is destructive. hostility and giving credit to
constructive contributions
made by either party to the
negotiations.

The unhealthy extreme of an The healthy extreme of the


adverbial approach is reached partnership approach is
when it is assumed that movement reached when it is assumed
towards one’s own goal is that whatever is good for the
facilitated by blocking measures other party to the
that prevent the other party from negotiations.
attaining the goal.
The key attitude is that of “we win, The key attitude is how can
you lose’ the respective goals of each
party be achieved so that
both win?
If an impasse occurs, the If an attitude occurs, this is
negotiation may be broken off regarded as a further problem
to be solved, possibly by the
intention of higher
management or an internal or
external mediator or arbitral.

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HBC 2214 Procurement and Logistics Management

• When suppliers are many

• When there are alternative solutions, suppliers or substitutes – i.e. BATNA


(Best alternative to a negotiated agreement)

• Cash payment

• When you are prepared or have done good research.

• When the need is not urgent.

Supplier bargaining strength is high when

• In the case of a monopolistic situations

• When the need is urgent

• When the quantity needed is large

• When the product to be supplied is unique.

4.4.2. Negotiation strategies, Techniques and ploys


Strategies / Tactics
• The order in which issues will be negotiated

• Whether to speak first or allow the opponent to open the negotiation

• What concessions to make should the need arise?

• The timing of the concession

• Issues to be linked e.g. price and quality

• What will be the opponent’s reaction to each tactic?

• What tactics the opponent is likely to adopt and how these can be countered.

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HBC 2214 Procurement and Logistics Management

Techniques
• Use of questioning techniques

• Using diversions to ease tensions e.g. going for a walk, tea break or making
a joke.

• Using positive statements.

• Being a good listener and watching body language

• Having adequate supplier background information.

Ploys / Arm-twisting / lies


Ploys are used to gain advantage over the other party. However, the other party can
use counter ploys. Ploys can also ruin long term relationships and should not be
relied on in negotiations – e.g. offering two choices of which one is so bad that you
have to choose the second; Setting unrealistic deadline to pressurize the other party
in making a quick decision.

4.4.3. Phases / Stages of negotiation


• Preparation stage:
Activities performed during the preparation stage include:

• Gathering facts about suppliers

• Setting objectives

• Determining bargaining strengths

• Planning strategies

• Preparing for alternative courses of action

• Choosing the negotiating team

• Choosing the venue

• Introduction Stage
• Involves setting agenda, rules and procedures and create a conducive envi-
ronment.

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HBC 2214 Procurement and Logistics Management

• Discussion stage / Debating stage


• Avoid interruptions

• Avoid arguments

• Avoid destructive debates

• Regularly summarize issues to avoid later confusion

• Watch and interpret body language.

• Bargaining Stage
• It involves setting terms on which to settle – e.g. price reduction by so much
percent will result in order increase by so much percent.

• Ploys can appropriately be used at this stage.

• Agreement stage / Conclusion of negotiations


• It is important to record full details of the negotiation .The minutes of the
meeting can be used to serve this purpose.

• Post – Negotiation Stage:


• It involves making a draft document which should be sent to the other party
for approval.

• Ensure that there is commitment of all relevant employees in order to make


the agreement work

• Prepare official contract based on draft agreement

• Evaluate the performance.

4.4.4. Elements of an effective negotiation


• Substance issues are satisfactorily resolved

• Working relationship are preserved or even enhanced

• The negotiation produces a wise agreement – i.e. one that is satisfactory to


both sides.

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HBC 2214 Procurement and Logistics Management

• The negotiation is efficient – i.e. it is no more time consuming or costly than


necessary

• The negotiation is harmonious – i.e. it fosters rather than inhibit good inter-
personal relationships.

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HBC 2214 Procurement and Logistics Management

Revision Questions

Example . Outline the objectives of negotiation .


Solution: for revision 

E XERCISE 7.  There are two basic approaches to negotiation. Elaborate


E XERCISE 8.  Negotiation has different phases. Identify and elaborate on these
phases

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HBC 2214 Procurement and Logistics Management

LESSON 5
Relationship between the purchasing and other departments

Lesson outcomes
• Show the importance and nature of relationship between procurement and
other departments

5.1. Introduction
Some issues on which interaction and cooperation may take place between purchas-
ing and other company departments include the following:

5.2. Purchasing and finance/accounts department:


• Finance/accounts department prepares budget allocation for goods/services
to be purchased in a given time period

• The purchase department establishes and forwards to finance/accounts de-


partment value analysis report for goods/services to be purchased

• Finance/accounts department briefs the purchasing department on issues based


on supplier payment

• Purchasing department gives accounts department information based on dam-


aged items and obsolete items

• Purchasing department gives out information based on stock movement to the


accounts department

• Purchasing/supplies department works together with accounts department dur-


ing stock taking exercise which is based on assessing the variance status of
the company’s inventory.

• Stores personnel who work under purchasing/supplies department work to-


gether with the accounts personnel when it comes to the issue of receiv-
ing goods from the supplier(s). The accounts personnel check whether the
amount indicated in the invoice correspond with the amount indicated in the
local purchase order (LPO).

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HBC 2214 Procurement and Logistics Management

5.3. Purchasing and design department:


• Preparation of specifications for purchase of materials and components

• Quality assurance or defect prevention

• Value engineering and value analysis

• Information to departments regarding availability of materials, suppliers and


costs

• Agreement of alternatives when specified materials are not available

• Creation of library of books, catalogues, journals and specifications for joint


use by the design and purchasing departments

5.4. Purchasing and production (User department)


• Preparation of material schedules to meet just in time requirements

• Ensuring that delivery schedules are maintained

• Control of inventory to meet production requirements

• Disposal of scrap and obsolete items

• Quality control or defect detection and correction

• Approval of ‘first-off samples’

• Make or buy decisions

• General involvement in such techniques and systems as optimised production


technology, computer integrated technology, materials requirement planning
(MRP) and manufacturing resource planning (MRP 2)

5.5. Purchasing and human resource development:


• Purchasing professionals give out technical expertise when prospective pur-
chasing staff is being interviewed for a job.

• Human resource personnel liaise with purchasing managers on checking the


performance of purchasing employees through job appraisal analysis.

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HBC 2214 Procurement and Logistics Management

• Human resource development relates with purchasing department when it


comes to issues of arranging training and seminars for the purchasing staff.

• Human resource development work hand in hand with purchasing depart-


ment through provision of motivational incentives for the purchasing staff.
This entail the acknowledgment of best employees through giving out awards,
presents and so on.

• Purchasing department works also with human resource development on dis-


ciplinary matters of the employees.

5.6. Purchasing and marketing:


• Provision of sales forecasts on which purchasing can base its forward plan-
ning of materials, components etc

• Ensuring that through efficient buying, purchasing contributes to the mainte-


nance of competitive prices

• Obtaining materials on time to enable marketing and production to meet


promised delivery dates to the end-customer

• Exchange of information regarding customers and suppliers

• Marketing implications on partnership sourcing

5.7. Purchasing and information technology department (IT):


Purchasing department and IT have an increasing number of interdependencies. In
some cases IT function is outsourced by the purchasing function. To this extent
therefore its performance is evaluated accordingly by the purchasing department.
Also the manager of IT works closely with purchasing manager to develop auto-
mated procedures and reports in line with purchasing. To add on that IT department
establishes computer devices to purchase and to this extent the IT manager pre-
pares purchase order requisition (POR) for such items and forwards the same to
purchasing department. On the other hand the purchasing department sources for
such devices on behalf of the IT department.

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HBC 2214 Procurement and Logistics Management

Revision Questions

Example . Relationship between other departments and procurement is vital in


ensuring efficient operations of the organization. Discuss.
Solution: for revision 

E XERCISE 9.  Show the importance and nature of relationship between procure-


ment and other departments

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HBC 2214 Procurement and Logistics Management

LESSON 6
Current issues in procurement management

Lesson outcome
At the end of the lesson, the learners should show how information technology and
ethical issues has led to changes in procurement management.

6.1. Information Technology


6.1.1. E- Procurement
This is the combined use of information and communication technology through
electronic means to enhance external and internal purchasing and supply manage-
ment processes. These tool and solutions deliver a range of options that will facili-
tate improved purchasing and supply management.
The key enabler of e-procurement is the ability for systems to communicate across
organisational boundaries. While the technology for e-procurement provides the
basic means, the main benefits derive from the resultant changes in business pro-
cedures, processes and perspectives. E-procurement is made possible by the open
standard of XML (extensible mark up language), a structured language that allows
easy identification of data types in multiple formats and can be understood across
all standard internet technologies. Adoption of XML will help organisations to
integrate applications seamlessly and exchange information with trading partners.

6.1.2. Main advantages of e-procurement:


1. Improved information flow and service through real-time market intelligence
and information. Such information includes finding the best price and qual-
ity points across a large range of suppliers through the use of marketplaces,
order status and tracking, reduced inventory levels and also better demand
forecasting.

2. Reduced transaction costs through the automation of requisitioning, purchase


order management and accounting processes by the use of internet technology
including online ordering etc.

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HBC 2214 Procurement and Logistics Management

3. Reduction of ‘maverick’ purchasing i.e. purchases made outside the organi-


sations contractual arrangements.

4. Increased speed and efficiency

5. The ability to aggregate purchasing across multiple departments or divisions


without taking away any needed individual control or introducing time wast-
ing authorisation routines.

6.1.3. There are seven main types of e-procurement:


• Web-based ERP (Enterprise Resource Planning): Creating and approv-
ing purchasing requisitions, placing purchase orders and receiving goods and
services by using a software system based on Internet technology.

• E-MRO (Maintenance, Repair and Overhaul): The same as web-based


ERP except that the goods and services ordered are non-product related MRO
supplies.

• E-sourcing: Identifying new suppliers for a specific category of purchasing


requirements using Internet technology.

• E-tendering: Sending requests for information and prices to suppliers and


receiving the responses of suppliers using Internet technology.

• E-reverse auctioning: Using Internet technology to buy goods and services


from a number of known or unknown suppliers.

• E-informing: Gathering and distributing purchasing information both from


and to internal and external parties using Internet technology.

• E-market sites: Expands on Web-based ERP to open up value chains. Buy-


ing communities can access preferred suppliers’ products and services, add
to shopping carts, create requisition, seek approval, receipt purchase orders
and process electronic invoices with integration to suppliers’ supply chains
and buyers’ financial systems.

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6.2. Electronic data interchange


6.2.1. Development of the EDI
Electronic data interchange (EDI) can be defined as the technique based on agreed
standards, which facilitates business transactions in standardized electronic form in
an automated manner directly from a computer application in one organisation to
an application in another. EDI is used to transfer electronic documents from one
computer system to another i.e. from one trading partner to another trading partner.

6.2.2. Advantages of EDI


• Provide better customer services

• EDI tends to promote long-term buyer-supplier relationships and increase


mutual trust

• The integration of functions, particularly marketing, purchasing production


and finance

• Reduction in lead times through buyers and suppliers working together in


real-time environment

• The replacement of the paper documents e.g. purchase orders, acknowledge-


ment invoices etc used by buyers and sellers in commercial transactions by
standard electronic messages conveyed between computers often without the
need for human intervention.

The limitation of EDI may arise as a result of cost and inflexibility.

6.3. Enterprise resource planning (ERP)


This is a business management system that is supported by multi-module applica-
tion software that integrates all the department’s functions of an enterprise. It is
the latest and possibly the most significant development of MRP 1 and MRP 11.
While MRP allows the manufacturers to track supplies, work in progress and the
output of finished goods to meet sales orders, ERP is applicable to all organisations
and allows managers from all functions or departments to have a consolidated view
of what is or is not taking place throughout the enterprise. Most ERP systems are

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HBC 2214 Procurement and Logistics Management

designed around a number of modules each of which can be stand-alone or can be


combined with others.

6.3.1. Advantages of Enterprise resource planning:


• Faster inventory turn-over-manufacturers and distributors may increase in-
ventory turns by tenfold and reduce inventory cost by 10 % to 40 %

• Improved customer service: In many cases an ERP system increase fill rates
to 80 % or 90 % by providing the right product in the right place at the right
time thus increasing customer satisfaction

• Better inventory accuracy, fewer audits: An ERP system can increase inven-
tory accuracy to more than 90 % while reducing the need for fewer physical
inventory audits

• Reduced set up times: ERP can reduce set up time by 25 % to 80 % by


grouping similar production jobs together with the efficient use of equipment
and minimizing down time through efficient maintenance

• Higher quality work: ERP software with a strong manufacturing component


proactively pin points quality issues providing the information required to
increase production efficiency and reduce or eliminate re-work

• Timely revenue collection and improved cash flow: ERP gives manufacturers
the power to proactively examine accounts receivable before problems occur
instead of just reacting. This improves cash-flow.

6.3.2. Disadvantages of enterprise resource planning:


• ERP implementation is difficult: This is because implementation involves a
fundamental change from a functional to a process approach to business

• ERP systems are expensive: This is especially so when the customization of


standard modules to accommodate different business process is involved

• Cost of training employees to use ERP can be high

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HBC 2214 Procurement and Logistics Management

• There may be a number of un intended consequences such as employees


stress and resistance to change and the sharing of information that was closely
guarded by departments or functions

• ERP systems tend to focus on operational decisions and have relatively weak
analytical capabilities

6.4. Application of IT in decision making


Imagine yourself being a procurement manager and you invariably deal with consis-
tent changes in market environment i.e. competition, technology, consumer habits,
government regulations etc. Evidently, this is a herculean task to accomplish. The
use of IT through decision support system (DSS) can be used to ease this kind of
impasse. Decision support system (computer based system) is designed to assist
in decision making where the decision process is relatively unstructured and only
part of the information needed is structured in advance.DSS is extensively used in
business and management. Executive dashboard and other business performance
software allow faster decision making, identification of negative trends, and better
allocation of business resources.
DSS provides managers with:

• Data, tools and models that facilitate decision making or solve the semi struc-
tured problem

• More analytical power than other systems

• Means of condensing large amount of data in format which can be analysed


by decision makers

• Ability to access and process large volume of internal and external data and
integrate it with various decision making models

• Assess ability by asking question such as: what if? Which assesses the impact
of changes made to input or output variables

• Flexibility, adaptability and quick response of decisions.

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6.5. Ethics –Professional Behavior


Determination and complex nature of ethics:
First and foremost ethics(also known as moral philosophy) is a branch of philoso-
phy which seeks to address questions about morality; that is, about concepts such
as good and bad, right and wrong, justice, and virtue. Ethics can also be defined as
rules or standards governing the conduct of a person or the members of a profession
e.g. purchasing function.

Principles of Professional Ethics


Individuals acting in a professional capacity take on an additional burden of ethical
responsibility. For example, professional associations have codes of ethics that pre-
scribe required behaviour within the context of a professional practice such as pro-
curement, medicine, law, accounting, or engineering. These written codes provide
rules of conduct and standards of behaviour based on the principles of Professional
Ethics which include:

• Impartiality; objectivity

• Openness; full disclosure

• Confidentiality

• Due diligence/duty of care

• Fidelity to professional responsibilities

• Avoiding potential or apparent conflict of interest

6.5.1. Ethical standards:


The Code of Ethics and standard of Professional Conduct are the ethical cornerstone
of many companies across the globe. They are essential to company’s mission to
lead the global investment profession and critical to maintaining the public’s trust
in the financial markets. The purchasing ethical standards are:

• all business must be conducted in the best interests of the State, avoiding any
situation which may impinge, or might be deemed to impinge, on impartial-
ity;

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• public money must be spent efficiently and effectively and in accordance with
Government policies;

• agencies must purchase without favour or prejudice and maximise value in


all transactions;

• agencies must maintain confidentiality in all dealings; and

• Government buyers involved in procurement must decline gifts, gratuities,


or any other benefits which may influence, or might be deemed to influence,
equity or impartiality.

6.6. Purchasing and fraud management


In the broadest sense, a fraud is an intentional deception made for personal gain or to
damage another individual. The specific legal definition varies by legal jurisdiction.
Fraud is a crime, and is also a civil law violation. Many hoaxes are fraudulent,
although those not made for personal gain are not technically frauds. Defrauding
people of money is presumably the most common type of fraud. Purchasing is a
function that is particularly vulnerable to fraud. Fraud is not necessary restricted to
those with the title purchasing officer but may involve anyone in direct contact with
suppliers; including engineers, works managers, sales and computer staff.

6.6.1. Examples of supplies-related fraud:


• Buyer/supplier collusion leading to approval for payment of fictitious charges.

• Presentation of false invoices-typically the offender will set up a fictitious


company with impressive stationery and invoice the purchaser for goods not
supplied.

• Re-presentation of genuine invoices that have not been cancelled at the time
the initial cheque was signed.

• Abstraction of tenders or arranging for the lowest tender to come from a de-
sired source.

• Omission of credit notes for goods returned to the supplier.

• Premature scrapping of assets in return for a ‘kickback’ from a scrap dealer.

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• Computer-based frauds which take advantages of inadequate controls or lim-


ited understanding of information technology on the part of senior manage-
ment.

Factors that can influence unethical behaviour:

• Low salaries

• Poor storage of pilferage materials

6.6.2. Prevention of fraud


The prevention of fraud in relation to supplies depends on sound internal control,
internal and external auditing and the detection of ‘give away’ signs. Control mech-
anisms of fraud encompass:

• Ensuring a separation between recording and custodian duties

• Only specified employees should have the power to requisition goods and
then only up to an authorised limit which increases with the level of authority

• Goods inward should be received in specially designated areas.

• Invoices presented for payment, a sample should be examined on a random


basis.

• Provision of external audits

• Job rotation

• Closer supervision.

• Separation of duties.

6.6.3. Ethical issues in purchasing:


Ethical life is profoundly affected by the ethics of the organisations with which we
deal and within which we operate. The ethical organisation focuses on the extent to
which it is possible for an organization to be ethical and the impact this has on its
workforce. The noticeable ethical issues based on purchasing entail:

• Honesty, truthfulness and fairness in business.

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HBC 2214 Procurement and Logistics Management

• Keeping confidential information

• Treatment of customers - e.g. internal/external customers

• Working conditions and treatment of purchasing workers

• Business practices of supply firm.

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HBC 2214 Procurement and Logistics Management

Revision Questions

Example . Payment of invoices after procurement is the last step in a procure-


ment process. Discuss
Solution: for revision 

E XERCISE 10.  Distinguish between public and private sector procurement

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HBC 2214 Procurement and Logistics Management

LESSON 7
Overview of logistics management

Lesson outcome
1. Student should clearly define logistics and the logistics cycle

2. Distinguish between inbound and outbound logistics

3. Define the logistics system and its application in supply chain management

7.1. Definition of Logistics


Over time, the profession of supply chain management has evolved to meet the
changing needs of the global supply chain. According to the Council of Supply
Chain Management Professionals (CSCMP)— “Supply chain management encom-
passes the planning and management of all activities involved in sourcing and pro-
curement. . . and all logistics management activities. Importantly, it also includes
coordination and collaboration with channel partners, which can be suppliers, in-
termediaries, third party service providers, and customers. In essence, supply chain
management integrates supply and demand management within and across compa-
nies.”
The CSCMP also defines logistics management as -
“[The] part of supply chain management that plans, implements, and controls the
efficient, effective forward and reverses flow and storage of goods, services and re-
lated information between the point of origin and the point of consumption in order
to meet customers’ requirement. . . Logistics management is an integrating func-
tion, which coordinates and optimizes all logistics activities, as well as integrates
logistics activities with other functions including marketing, sales manufacturing,
finance, and information technology.”
In other words, you can consider logistics activities as the operational component of
supply chain management, including quantification, procurement, inventory man-
agement, transportation and fleet management, and data collection and reporting.
Supply chain management includes the logistics activities plus the coordination
and collaboration of staff, levels, and functions. The supply chain includes global
manufacturers and supply and demand dynamics, but logistics tends to focus more
on specific tasks within a particular system.

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7.2. Importance of logistics


The goal of any logistics system is much larger than simply making sure a prod-
uct gets where it needs to go. Ultimately, the goal of every logistics system is
to help ensure that every customer has commodity security. Commodity security
exists when every person is able to obtain and use quality supplies whenever he
or she needs them. A properly functioning supply chain is a critical part of en-
suring commodity security—financing, policies, and commitment are also neces-
sary. Effective supply chains not only help ensure commodity security, they also
help determine the success or failure of any business. Both in business and in the
public sector, decisionmakers increasingly direct their attention to improving sup-
ply chains, because logistics improvements bring important, quantifiable benefits.
Well-functioning supply chains benefit organisations in important ways by

• increasing program impact

• enhancing quality of care

• Improving cost effectiveness and efficiency.

7.2.1. Logistics System


During your lifetime, you will encounter hundreds of logistics systems—in restau-
rants, stores, warehouses, and many other places. if you understand a simple exam-
ple of a logistics system, you will be able to understand almost any health logistics
system.
A restaurant is one example of a simple logistics system.
The kitchen is a storage facility; the food is held there until it is delivered to the
customer. Waiters provide the transportation; they carry the food from the kitchen
to the customer. The tables are the service delivery points, where customers sit to
order and eat the food.
For customers, a restaurant is not a logistics system; it is a place to eat. You prob-
ably never thought of a restaurant as a logistics system. Your expectations for a
restaurant, however, are directly related to logistics. What expectations do you
have when you go out to a restaurant for a meal? You may expect that the:

• restaurant will be attractive and pleasing

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• server will provide excellent customer service

• food you order will be available

• food will be served promptly

• correct order will be delivered to your table

• food will be of acceptable quality

• food will be of acceptable quantity

• cost of the meal will correspond to the value.

These customer expectations define the purpose of a logistics system—it ensures


that the right goods, in the right quantities, in the right condition, are delivered to
the right place, at the right time, for the right cost. In logistics, these rights are
called the six rights. Whether the system supplies soft drinks, vehicles, or pens;
or manages contraceptives, essential drugs, or other commodities, these six rights
always apply.

7.2.2. Logistics Cycle: Organizing Logistics System Activities


Logistics management includes a number of activities that support the six rights.
Over the years, logisticians have developed a model to illustrate the relationship
between the activities in a logistics system; they call it the logistics cycle.

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The cycle is circular, which indicates the cyclical or repetitive nature of the various
elements in the cycle. Each activity serving customers, product selection, quantifi-
cation and procurement, and inventory management depends on and is affected by
the other activities. For example, product selection is based on serving customers.
What would happen if, for a medical reason, we select a product that is not autho-
rized or registered for use in a country program? We would need to rethink our
decision and order a product that is authorized and registered for use. This deci-
sion would, in turn, affect our procurement and storage, two other activities in the
logistics cycle. The activities in the center of the logistics cycle represent the man-
agement support functions that inform and impact the other elements around the
logistics cycle.

7.2.3. Inbound and outbound logistics


Outbound logistics are the processes involved in moving products from the creating
firm to the firm’s customers. This portion of logistics is completely separate from
taking and using raw materials, otherwise known as inbound logistics. This field
relies heavily on transportation and storage of finished goods. Outbound logistics
refers to the product from the seller’s standpoint, and product may mean different
things to different people. For the most part, outbound logistics is a very simple
concept. The field is centred on two concepts, storage and transportation. The stor-
age portion of the field uses warehousing methods to keep the finished product safe
and accessible. At any moment, the product may need to move out to a customer,
so organization is key to success. While this part of the field is based on storage,
having as little product stored as possible is generally desirable, as stored materials
aren’t making any money.
The transportation portion is generally the more involved and complex part of out-
bound logistics. In this field, it is important to move the product from one place to
another in the best way possible. Factors need to be taken into account that cover
all possible scenarios in order to find the best movement methods for goods. For
example, delaying one shipment may cost the company money, but if that means it
may be combined with a larger shipment, that may end up being more efficient in
the long run This field is the opposite of inbound logistics. In that field, the primary
concern is bringing the product to the company for processing. In many ways, the
two fields operate the same way. With inbound logistics, people attempt to store as

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HBC 2214 Procurement and Logistics Management

few materials as possible to prevent over-purchasing, and they work to make sure
the raw materials arrive on time and for the smallest cost.
The similarities between the two fields are not unexpected, as one firms outbound
logistics is another firms inbound. These terms are always from the standpoint of a
specific company. If that firm purchases steel bars that it makes into cooling racks,
then the bars are inbound and the racks are outbound. When another company
purchases those racks to make into toaster ovens, the racks become inbound and the
ovens are outbound. One of the few times when this is not the case is when selling
directly to the public. In this case, final retailers have inbound products, which are
handled in the same way as any inbound logistics. As they sell the product, the
customers are not considered a direct part of the supply chain and, therefore, the
company simply has sales, rather than outbound materials.

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HBC 2214 Procurement and Logistics Management

Revision Questions

Example . Define logistics and distinguish between inbound and outbound lo-
gistics
Solution: for revision 

E XERCISE 11.  Define the term logistics cycle and clearly show what it is com-
posed of.
E XERCISE 12.  Elaborate on the six rights of logistics management

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HBC 2214 Procurement and Logistics Management

LESSON 8
Inventory management

Lesson outcomes
At the end of the lesson the learner should:

1. Be able to describe the process of accounting and documenting inventory

2. Be able to describe the process of issuing inventory

3. Be able to identify different demand types and the different techniques of


inventory control for each type of demand

4. Identify the reasons of keeping inventory

8.1. Accounting & Documentation of inventory


Once the consignments/materials are received in the Stores from the transporters/railways,
actual quantity received & the condition of the material received are further checked
in detail after unpacking the packages and matching the quantities with the suppli-
ers delivery challan and the Purchase orders. Weighment is resorted to wherever the
weight is to be ascertained. The correctness/completeness and the quality of mate-
rial received is checked as per the terms of Purchase Orders. Then the document
for receipt accounting is prepared which is known as “Goods receipt note (GRN)”
or “Stores Receipt Voucher (SRV)”. GRN/ SRV is the document through which
the received materials are taken on charge in the plant, also the document which
communicates the acceptance/ rejectionof the material supplied and a document
enabling the payment to the supplier against the supply.

8.2. Direct delivery to users or central storages


The materials against the various Purchase Orders are generally received centrally
by stores and stored after verification and accounting. However in case of cer-
tain items where there is no central facility of storage in the Stores the material is
directly transferred to the storage facility available with the user departments. Af-
ter ascertaining the quantity and the quality of such materials received at the user
departments and their certification the material receipt is accounted for by raising
GRN/SRV

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HBC 2214 Procurement and Logistics Management

8.3. Lead time of Receipt accounting


The material received from various sources are verified and accounted for in the
Stores only after which the materials can be made available for the use by the user
department and the payment to the supplier can be made or regularized. So, the
timely accounting of the receipt of the material is very important. The time taken
in accounting & taking the material on charge from the time it is received in Stores
is known as “Lead time of Receipt accounting” or “GRN/SRV lead time” .Every
plant tries to make this GRN/SRV lead time as minimum as possible to ensure
timely account of material, availability of received material for use and the timely
payment/ regularization of payment to the suppliers.

8.4. Storage
Inventory issuing After supplies have been purchased, received, and stored they are
then issued to user in the various departments. Getting the right products to the right
people at the right time can be confusing if the issuing process is not well managed.
Some facilities use multiple storage areas, such as a main one for bulk supplies
and another for daily issues. A policy should be implemented and understood by
all personnel concerning the issuing procedure. It should include how, by whom,
when and where to receive products.
To ensure that items needed are properly issued and accounted for,

1. a requisition form should be used which includes:

2. order date, issue date, ordered by and issued by, and

3. a place for the receiving person to sign and date.

To assist the stock clerk in filling the order and to determine daily cost, the following
should also appear on the form:

1. stock number ,

2. total quantity requested ,

3. Order unit ,

4. item description

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HBC 2214 Procurement and Logistics Management

5. issued to ,

6. price per unit,

7. and total cost

A requisition will not only assist the stores personnel, it will aid in inventory and
financial control. Regardless of facility size, someone must be in charge of the issu-
ing process. In facilities too small to employ a fulltime stores keeper, an employee
can be assigned responsibility for receiving products, storing and issuing them. Not
just anyone should be allowed to go to the storeroom.
For any issuing system to be effective:

• There must be controls for quantity of materials removed from storage

• Inventory removed must match the actual inventory needed for production

• The storeroom should be locked at all times

• One person is responsible for issuing supplies

• Request for supplies must be written (usually a requisition) and approved by


the supervisor before products are issued

• Only authorized personnel are allowed in the storeroom

In addition to effective issuing procedures, good inventory records are essential for
providing the manager with needed information to calculate and monitor supply
expenses. Accurate records need to be maintained:

• To provide data for cost control

• To monitor usage and control theft and pilferage

• To assist in purchasing needs

• To determine type and quantity of supplies on hand

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HBC 2214 Procurement and Logistics Management

8.4.1. Inventory management


Inventory control is the method used to maintain items in storage at desired quantity
levels. The desired level may be accomplished by various techniques. A number
of methods can be used to determine department inventory. Perpetual inventory
is the process of recording all purchases and food issues. It is a running record
of the balance on hand for each item. This type of inventory provides the stores
manager with up-to date information on product usage and the need for further
purchases. Maintaining a perpetual inventory is time consuming, and for small
facilities justification for personnel must be made. Computerized programs can
reduce the time it takes to maintain the system. The best formula for this type of
inventory system is: Running record of products on hand + add products to the
count when received.

8.4.2. Matching Supply with Demand


Inventory generally refers to the materials in stock. It is also called the idle resource
of an enterprise. Inventories represent those items which are either stocked for sale
or they are in the process of manufacturing or they are in the form of materials,
which are yet to be utilized. The interval between receiving the purchased parts and
transforming them into final products varies from industries to industries depending
upon the cycle time of manufacture. It is, therefore, necessary to hold inventories of
various kinds to act as a buffer between supply and demand for efficient operation
of the system. Thus, an effective control on inventory is a must for smooth and
efficient running of the production cycle with least interruptions.

8.4.3. Objective of inventory management


The overall objective of inventory management is to achieve satisfactory levels of
customer service while keeping inventory costs within reasonable limits. In this
context, a decision maker must make two fundamental decisions: the timing of
the order and size of orders (i.e., when to order and how much to order). The
performance of inventory management can be measured in the following terms:

• Customer satisfaction: This is measured by the number and quantity of back-


orders and/or customer complaints. If the customers’ complaints are less then
the customer satisfaction is high and vice-versa.

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HBC 2214 Procurement and Logistics Management

• Inventory turnover: This is the ratio of annual cost of goods sold to average
inventory investment. It is a widely used measure. The turnover ratio indi-
cates how many times a year the inventory is sold. The higher the ratio, the
better, because that implies more efficient use of inventory. It can be used to
compare companies in the same industry.

• Days of inventory on hand: The expected number of days of sales that can be
supplied from existing inventory. A balance is desirable: a higher number of
days might imply excess inventory, while a lower number might imply a risk
of running out of stock.

8.4.4. Reasons of keeping inventory


Notwithstanding such developments as JIT, a number of reasons may be deduced
for all organizations keeping inventory. These include wanting to;

1. Reduce the risk of supplier failure or uncertainty-safety and buffer stocks


are held to provide some protection against such contingencies as strikes,
transport breakdowns due to flood and similar factors

2. Protect against lead time uncertainties, such as where supplier’s replenish-


ment and lead times are not known with certainty

3. Meet unexpected demands or demands for customization of products

4. Smooth cyclical or seasonal demand

5. Take advantage of lots or purchase quantities in excess of what is required for


immediate consumption to take advantage of price and quantity discounts

6. Hedge against anticipated shortage and price increases, especially in times of


high inflation or as a deliberate policy of speculation

7. Ensure rapid replenishment of items in constant demand, such as maintenance


supplies and office stationery

8. Some materials appreciate in value with long storage e.g. wine, Timber etc

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HBC 2214 Procurement and Logistics Management

8.5. Economic factors affecting the stock management/stock holding policy:


The economics of stock control are determined by an analysis of the costs incurred
in obtaining and carrying inventories under the headings of acquisition costs, hold-
ing costs and costs of stock outs.

8.5.1. Acquisition costs:


Ordering costs include:
• preliminary costs, e.g. preparing the requisition, vendor selection, negotia-
tion;

• placement costs, e.g. order preparation, stationary, postage, etc;

• Post-placement costs, e.g. progressing, receipt of goods, materials, handling,


inspection, certification and payment of invoices. In practise, it is difficult to
obtain more than approximate idea of ordering costs since these vary with:

– the complexity of the order and the seniority of staff involved;


– whether order preparation is manual or computerized;
– whether repeat orders cost less than initial orders

8.5.2. Holding costs:


There are two types of holding costs:
• Cost proportional to the value of the inventory e.g. :-

– financial costs, e.g. interest on capital tied up in inventory. This may


be bank rate or more realistically the target return on capital required by
the enterprise;
– cost of insurance;
– losses in value through deterioration, obsolescence and pilfering

• Cost proportional to the physical characteristics of inventory e.g.:

– storage costs e.g. storage space, stores rates, light, heat and power
– labour costs relating to handling and inspection
– clerical costs relating to stores records and documentation

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HBC 2214 Procurement and Logistics Management

8.5.3. Cost of stock outs:


The costs of stock outs e.g. the cost of being out of inventory, comprise:

• Loss of production output;

• Costs of idle time and of fixed overheads spread over a reduced output;

• Costs of action taken to deal with the stock outs e.g. buying from a stockist
at an increased price, switching production, obtaining substitute materials;

• Loss of customer good will because of inability to supply or late delivery.

8.6. Forecasting techniques in relation to demand and lead time


Establishing the optimum and the minimum level of stock within the stores at any
given time is a major problem of many store keepers. To be able to satisfy user’s
requirements, there is need to know exactly what level of stock need to be held at
a given time and this is not easy when the period in question is a future time. To
determine the optimum level of stock to be held in stores, store keepers need to
embrace forecasting techniques.
Forecasting: This is the technique used to predict the likely levels of stock to be
required in the future undertakings of the company. Forecasting can also be defined
as a process of estimating future quantities required by a company by use of past
figures as a basis.

8.6.1. Levels of forecasting:


1. Short term forecast: They range between one-three months and are used to
project demand and stock levels for routine and tactical purposes e.g. pro-
duction planning.

2. Medium term forecast: They range or run for a period of not more than one
year. They are needed for budgeting and allocation of resources needed to
acquire stock.

3. Long term forecast: They run for three or more years depending on an indus-
try. They are required for strategic decision making and planning e.g. how to
allocate capital resources.

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8.6.2. Methods of Forecasting demand


Before an effective system of inventory control can be implemented it is essential
to analyze from records of usage what has been the trend of demand for a given
item of stock over an approximate period of time with a view to forecasting future
requirements. The two most common approaches are the use of moving averages
and of exponentially weighted averages. These methods can be used in respect of
any type of purchase and are not necessarily confined to stock.

• Moving averages: This method is an artificially constructed time series in


which each annual (or monthly, daily etc) figure is replaced by the aver-
age or mean of itself and values corresponding to a number of preceding
and succeeding periods. Example of calculating moving averages: The us-
age of a stock item for six successive periods was 90, 84, 100, 108, 116
and 127. If a five period moving average is required, the first term will be:
90+84+100+116/5=99.6
The average for the second term is:
84+100+108+116+127/5=107
NB: At each step, one term of the original series is dropped and another
introduced.

• Exponentially weighted average method (EWAM): This is a technique of av-


erage forecasting demand which has some accuracy by using a weighted fac-
tor of a half which is technically known as the smoothing constant. Exponen-
tial series, take the form of:
a + a (1 − a) + a (1 − a) + a (1 − a) + . . . = 1
Where a is a constant between 0 and 1. In practise, the values of 0.1 and 0.2
are most frequently used. With exponential smoothing all that is necessary is
to adjust the previous forecast by a fraction of the difference between the old
forecast and the actual demand for the previous period i.e. the new average
forecast is: a (actual demand) + (1-a) (previous average forecast)

• Example of exponentially weighted average:


The actual demand for a stock item during the month of January was 300 against
a forecast of 280. Assuming a weighing of 0.2, what will be the average demand

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forecast for February? Solution:


0.2(300) + (1 − 0.2)) (280) = 60 + 224
Forecast for February =284. By subtracting the average computed for the previous
month from that calculated for the current month we obtain the trend of demand.

• Independent demand situations and the use of fixed order quantity and pe-
riodic review systems:
• Independent demand: Independent demand arises when the demand for the
item is not dependent upon the demand for any other product or process in
an operation. Independent demand for an item is influenced by market condi-
tions and is not related to production decisions or any other item held in stock.
In manufacturing only end items that is final products sold to customers have
exclusively independent demand.

– Fixed order quantity: This is also known as continuous review system


or reorder point system. It is also termed as two-bin. This system can be
based on a manual or computer system. In each case every movement of
stock is recorded and the re-order level checked against it thus inventory
controller has information of his/her allocated or reserve stock.
∗ The ledger totals are periodically reviewed against physical stock
for accounting system. The system is used when a close control is
needed of class A items and critical materials.
∗ Visual control or 2/3 bin or automatic ordering inventory control
system: The stock of each item is stored in 2 or 3 adjacent bins.
The first bin contains the buffer stock (safety stock). The second
bin contains the quantity which goes up to reorder level and the
third bin carries the free or working stock. The bins are marked
with Red, Yellow and green respectively. The stores keeper issues
materials from the free stock bin (Green) until it is exhausted and
then switches to the second yellow bin. Once the re-ordering level
has been reached, an ordering card (Green) is passed to the stock
controller for an order to be placed. If the yellow bin is empty
before new stock arrives, the store keeper starts to issue materials
under safety stock (Red) and then sends a yellow card to the inven-
tory controller who expedites the order.

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– Periodic review systems: In this system an item’s inventory position is


reviewed periodically rather than at a fixed order point. The periods or
intervals at which stock levels are reviewed will depend on the impor-
tance of the stock item and the costs of holding that item. A variable
quantity will be ordered at each review to bring the stock level back
to maximum. Maximum stock can be determined by adding one review
period to the lead time, multiplying the sum by the average rate of usage
and adding any safety stock. This can be expressed as:

M −W (T + L) + S
Where: M= Pre-determined stock level
W= Average rate of stock usage
T= Review periods
L= Lead time
S= safety stock

8.6.3. Advantages and disadvantages of fixed order quantity and periodic re-
view systems:
• Fixed order quantity
Advantages:

• On average, stocks are lower than with periodic review systems

• Economic order quantity (EOQ) are applicable

• Enhanced responsiveness to demand fluctuations

• Appropriate for widely differing inventory categories

• Replenishment orders are automatically generated at the appropriate time by


comparison of actual stock levels against re order levels

Disadvantages:

• The re ordering system may become overloaded if many. Items of inventory


reach re order level simultaneously.

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• Random re ordering pattern due to items coming up for replenishment at


different times thus increasing ordering costs.

• Periodic review:
Advantages:

• Greater chance of eliminating of obsolete items owing to periodic to periodic


review of stock

• The purchasing load may be spread more evenly with possible economies in
placing of orders

• Large quantity discounts may be negotiated when a range of stock items are
adhered from the same supplier at the same time.

• Production economies due to more efficient production planning and lower


set-up costs may result from orders always being in the same sequence.

Disadvantages:

• On average, larger stocks are required than with fixed order point systems
since re- order quantities must provide for the period between reviews as
well as between lead times.

• Re-order quantities are not based on economic order quantity (EOQ)

• If the usage rate changes shortly after a review period, a stock out may occur
before the next review date.

• Difficulties in determining appropriate review period unless demands are rea-


sonably consistent.

8.6.4. Techniques for dealing with dependent demand (MRP 1), (MRP 11),
(DRP)
Dependent demand: An item is said to have dependent demand if the demand for
it is dependent upon the demand for another item. For instance, the demand for
tyres to be used in a car assembly plant is dependent upon the number of cars to be
produced.

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• Material requirement planning (MRP1):


This is a product- oriented computerized technique aimed at minimizing inventory
and maintaining delivery schedules. It relates the dependent requirements for the
materials and components comprising an end product to time periods known as
‘buckets’ over a planned horizon (typically of one year) on the basis of forecasts
provided by marketing and sales and other input information. While having ele-
ments common to all inventory situations, MRP 1 is most applicable where:

• The demand for items is dependent

• The demand is discontinuous that is ‘Lumpy’ and non-uniform

• In the job, batch and assembly or flow production or where all manufacturing
methods are used The aims of material requirement planning:

• To synchronize ordering and delivery of materials and components with pro-


duction requirements

• To achieve planned and controlled inventories and ensure that required items
are available at the time of usage or not much earlier

• To promote planning between the purchaser and the supplier to the advantage
of each

• To enable rapid action to be taken to overcome material or component short-


ages due to emergencies, late deliveries etc

• Material resource planning (MRP 11):


This is concerned with virtually any resource entering into production including
manpower, machines and money in addition to materials. MRP 11 is an expanded
system of MRP 1 which has to new capabilities that are first, financial interface
which provides the ability to convert operating production plans into financial terms
so that the data can be used for financial planning and control purposes of a more
general management nature, then secondly provision of a simulation of capability
that makes it possible for management to do more extensive alternative planning
work in developing the marketing and the business plans. MRP 11 is concerned to
be more comprehensive when compared with MRP 1 and many users MRP 11 as
the umbrella system while MRP 1 as the major component of MRP 11.

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• Distribution requirements planning (DRP):


This is an inventory control and scheduling technique that applies MRP principles
to distribution inventories. It may also be regarded as a method of handling stock
replenishment in a multi-echelon environment. An echelon is defined by chambers
dictionary as: a stepwise arrangement of troops, ships, planes etc. Applied to dis-
tribution the term multi-echelon means that instead of independent control of the
same item at different distribution points using EOQ formulae, the dependent de-
mand at higher echelon (e.g. a central warehouse) is derived from the requirements
of lower echelons e.g. regional and local distributions and purely merchandizing
organizations eg supermarkets.

• Pull system-Kanban and JIT inventory philosophy:


1. Kanban: Kanban in Japanese means ‘signal’, ‘sign’ or ‘ticket’. It is a sim-
ple but effective control system that helps to make JIT production work. It
also refers to an information system in which instructions relating to the type
and quality of items to be withdrawn from the preceding manufacturing pro-
cess are conveyed by a card affixed to a container. Each container holds a
predetermined quality.
There are two types of Kanban systems namely single card and double card.
Single card system use only C-Kanban (Conveyance) while in double card
system two types of cards are used. One is known as conveyance (C-Kanban)
and the other one is production (P-Kanban). In the two cards system only
standard containers may be used and they are only filled with prescribed small
quantities. Parts will only be made when P-production Kanban is received as
the authority and C-kanban control the transport or part between departments.
There is precisely one C-Kanban and one P-production per container.
The control is very precise, flexible and responsive. The system automatically
prevents the build up of unnecessary inventories. Kanban may take many
forms; it might be small area on bench or workshop flow located between
stages of production process. When an operator requires to use an item, it
is taken from the Kanban area and as a signal to the operator the item is
replenished.

2. JIT inventory philosophy: This is an inventory control philosophy whose goal

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is to maintain just enough material in just the right place at just the right time
to make just the right amount of product. For JIT to work two things must be
happening that are:

(a) all parts must arrive where they are needed, when they are needed and
in the exact quantity needed
(b) all parts that arrive must be usable parts. In achieving these require-
ments, purchasing has the following responsibilities:
i. Liaison with the design function
ii. Liaison with suppliers
iii. Investigating of the potential suppliers within reasonable proximity
of the purchaser to increase certainty of delivery and reduction of
lead time.
iv. Establishing strong, long-term relationships with suppliers in a mu-
tual effort to reduce costs and share savings
v. Establishment of an effective supplier certification programme which
ensures that quality specifications are met before components leave
the supplier so that receiving inspections are eliminated.
vi. Evaluation of supplier performance and the solving of difficulties
as an exercise in cooperation.

8.6.5. Benefits of Just-in-time:


• Quality- fast detection and correction of unsatisfactory quality and ultimately
higher quality in purchased parts

• Design- fast response to engineering change requirements

• Productivity- reduced rework, reduced inspection, reduced parts related de-


lays

• Capital requirements- reduced inventories of purchased parts, raw materi-


als, work in progress and finished goods

• Part costs- low scrap costs; low inventory carrying costs

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• Administrative efficiency: fewer suppliers, minimal expending and order


release work; simplified communications and receiving activities.

• Coping with uncertainties in achieving required service levels- timing of is-


sues:
Provision of buffer inventories:
Buffer stock (safety stock) is stock allowance that covers arrears in forecasting lead
time or the demand during lead time. Buffer inventories exist due to uncertainties
in the demand of supply unit at various points in the production system. Buffer
stock give some protection against the uncertainties of supplier performance due
to either shut downs, strikes, lead time, late deliveries etc. Buffer levels should be
determined by balancing carrying costs against stock outs.
Supplier’s contribution to controlling stock (VMI):
Vendor-managed inventory (VMI) is a JIT technique in which inventory replace-
ment decisions are centralized with upstream manufacturers or distributors. The
aim of VMI is to enable manufacturers or distributors to eliminate the need for cus-
tomers to re order, reduce or exclude inventory and obviate stock outs. With VMI
customers no longer ‘pull’ inventory from suppliers. Rather, inventory is automat-
ically ‘pushed’ to customers as suppliers check customers inventories and respond
to previously agreed stock levels

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HBC 2214 Procurement and Logistics Management

Revision Questions

Example . Describe the process of inventory accounting and documentation


Solution: for revision 

E XERCISE 13.  The current trend in stores management is to have close to zero
inventories to no inventory at all. What factors necessitate keeping inventory in the
store?
E XERCISE 14.  Describe the economic factors affecting stock management

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HBC 2214 Procurement and Logistics Management

LESSON 9
Transport management

Lesson outcomes
At the end of the lesson, the students should clearly show the importance of trans-
port in the logistics system and in enabling agility and competiveness of the supply
chain of any organization.

9.1. Introduction
Commercial transportation has become a very complex process. Raw materials and
parts as well as finished goods must move from point to point along a supply chain
of logistics service providers and business partners. Companies in the huge trans-
portation industry must have fast, streamlined, and profitable business processes
to satisfy their demanding customers. These processes, supported by new trans-
portation and distribution strategies, feature real-time visibility of transportation
events and integrated business and logistical activities. Transportation companies
must adapt to external trends such as deliveries tracked on the Internet, global trade,
and offshore manufacturing. Today companies are aggressively looking to expand
their ability to reach their customers profitably and efficiently beyond their existing
ecosystems. They are exploring expanding to other geographic areas, becoming
third-party logistics providers, better utilizing their own fleet, and sharing traffic
with other companies. Any of these changes truly requires the ability to be adap-
tive.
A common thread that weaves all of these capabilities together is an (adaptive sup-
ply chain network) ASCN. Adaptive business processes enable companies to sense
and respond to real-time transportation events and disruptions. An ASCN can con-
nect better with the information chain for improved collaboration with partners,
suppliers, and customers than a traditional, linear supply chain can. This connec-
tion can include cutting-edge technologies such as radio frequency identification
(RFID), wireless fidelity (Wi-Fi), global positioning system (GPS), cellular, and
ultra-wideband to provide global visibility and help managers make profitable busi-
ness decisions in real time. For example, ASCNs often facilitate pull-based material
flows, which match shipment frequency with end-user consumption. As transporta-
tion costs continue to increase, this process needs to be managed closely, because

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HBC 2214 Procurement and Logistics Management

pull-based logistics often increases the total number of shipments. This process
also requires precise inbound and outbound shipment tracking.
Transportation is fast becoming a key factor in determining the difference between
profit and loss. It is the essential link between the extraction of natural resources;
the fabrication of industrial, commercial, and consumer products; and the final dis-
tribution of goods to wholesalers, retailers, and end users. Historically, in a linear
supply chain, commercial transportation was a fairly simple activity: goods and ma-
terials were taken directly from the manufacturer to the customer. But today within
an ASCN, transportation is a complex procedure performed by a widespread, often
global network of partners and LSPs. Partnerships help shippers minimize inven-
tory and manage more sophisticated practices such as flow through and merge in
transit. This puts transportation efficiency and visibility at center stage in a com-
pany’s supply chain efforts.
In addition to being complex, transportation is a big business that has produced
a sprawling global transportation landscape. When companies navigate today’s
transportation system, they have a smaller margin for error than ever before. To
meet customer demands, companies must deliver goods to their destinations in an
economical and timely manner. To survive, companies need a transportation orga-
nization that has fast, streamlined business processes, works efficiently with net-
work partners, and makes timely, profitable decisions. Companies are responding
to these demands by focusing on improving speed, service, and flexibility while
reducing costs.

9.1.1. Achieving competitive transportation in logistics


A company seeking to achieve more efficient transportation and greater profitabil-
ity must make significant changes in the way it performs every phase of the trans-
portation process. It is important to implement new transportation and distribution
strategies to improve carrier capacity utilization in a time of constrained supply.
A company must work efficiently with network partners to take advantage of last-
minute opportunities and react in real time by having real-world visibility of trans-
portation events. The goal is to improve productivity by having process decision
support, total visibility, access to process metrics such as costs or profitability, and
performance scorecards.
An ASCN relies on a tightly integrated and transparent transportation process to

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handle many elements such as managing freight procurement, forecasting shipment


volumes, planning and executing shipments, careful handling and monitoring of
transportation spend, and having visibility to all activities through key performance
indicators (KPIs), scorecards, and other important analytical tools

9.1.2. Network Routing Optimization


Products and materials can move into and out of companies at all hours, every day,
anywhere in the world. Companies need the visibility to know when orders are be-
ing produced, stored, and shipped. For years, transportation was managed facility
by facility, and each shipment was planned independently. This method can hamper
a company’s efficiency. Leading-edge companies have moved from this model to
the service-centric approach of coordinated route planning across the enterprise that
uses resources as they move products and materials along the supply chain. This ap-
proach also entails a high level of visibility that lets companies support cost-saving
transport methods such as continuous moves, parcel zone skipping, multimode, and
merge-in-transit planning. Such visibility also enables them to prepare for the move
from cost center to profit center. One of the most important aspects of a system-
wide routing optimization solution is the ability to fully address the unique demands
of customers and suppliers when making fulfillment decisions. Companies need to
be connected to the sources of this ever-changing information when making real-
time fulfillment decisions. For example, a customer-service representative (CSR)

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must have complete visibility of fulfillment (for example, shipping options, costs,
and routing possibilities) in a single system to make the best decisions on how to
satisfy an order. Routing Guide CSRs make decisions that can impact service and
costs. They need a routing guide to determine transportation routing at the time
of order entry based on freight costs, the availability of transportation resources,
and schedules. For example, a CSR can make suggestions for increasing order
size to minimize transportation costs or identify cost options for various modes of
transportation. For rush or last-minute orders, the ability to automatically create a
shipment from an order is key in further reducing total cycle time from the time the
order is taken to the time it is loaded on the truck. Customers change orders at the
last minute, and sometimes suppliers don’t give companies total visibility into what
is arriving in the receiving area. With a network-fulfillment solution, companies
have immediate, total visibility so they can include their customers’ last-minute
changes on the next shipment or take advantage of lower-cost and continuous-move
opportunities. Routing is a highly complex decision-making process in which many
variables, including those discussed below, must be considered.

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9.1.3. Customer Delivery Requirements


Customers place many constraints that must be considered when developing a solid
network-routing plan. These include delivery appointments, equipment require-
ments, managing large orders and small parcels, special equipment such as multi
compartment trucks, special handling requirements, and ship-with orders.

• Product Availability
Understanding when and where the product will be available in an inventory-strained
environment is one of the most important elements for meeting a customer’s request
on time and at the lowest total cost. Companies must have solutions that coordinate
network-fulfillment activities seamlessly across their network. Solutions that pro-
vide total visibility of warehouses and manufacturing operations enable companies
to take advantage of efficiencies such as cross-docking and direct trailer loading.

9.1.4. Routing Decisions and the Cost of Doing Business


Transportation costs come off the bottom line, but they are a by-product of getting
products to market. These days, costs are increasing and so is demand, while supply
is decreasing. The speed of delivery is more important than ever. Taking advantage
of every opportunity to lower costs while getting the product to its destination on
time means having access to every possible routing option. This requires a sophis-
ticated planning tool that can create viable shipment plans by consolidating orders
to optimal shipment sizes, using the advantages of various transportation modes,
taking into account potential multistop and hub location options, and staying within
the constraints of the real world.

9.1.5. Network Routes, Equipment Availability, and LSPs


Making shipments from point A to point B can be simple or complex; it all depends
upon real-world constraints. Equipmentavailability constraints are becoming more
prevalent as resources are divided due to huge demand. Having a good relationship
with LSPs can help solve these problems through managed contract commitments,
automated forecasting and planning, smooth shipment-tender processes, and maxi-
mizing the use of equipment. With network routing software, companies and LSPs
can find the optimal solution to these situations.

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9.1.6. Shipping and Receiving Facility Constraints


The facilities of companies and their customers can become constrained. It is com-
mon for drive s to wait more than an hour to load or unload their vehicles due to
dock constraints. Careful planning and execution can reduce the time shipments
wait in line and help the LSP’s drivers manage their HOS. With a total view of
the network, companies can plan based on shipping and receiving capacities, ap-
pointment schedules, and delivery windows. At the same time, yard management
software can enable plan execution and equipment visibility at all times.

9.1.7. International Transportation


Shipping across borders adds another level of complexity and legal regulation.
Shipments leaving and entering the country are checked and monitored in many
ways. Letters of credit, sanctioned party lists, certificates of origin, and shipper’s
export declarations are critical pieces of information for complying with govern-
ment and financial regulations. Solutions that provide easy access to and man-
agement of these documents can help companies handle compliance regulations
efficiently. In the end, the goal is to reduce costs while maintaining a high level of
service. By considering real-world constraints, network routing minimizes delivery
backlogs and the cost of the entire transportation plan.

9.1.8. Transporting Dangerous Goods


Transporting substances and products that may be a risk to public safety has special
requirements. To fulfill the statutory requirements for shipment of dangerous goods,
it is necessary to check whether shipments containing these goods are permitted in
agreements made with the countries in which the shipments take place. Therefore
dangerous-goods checks should be centrally defined in software for environmental
health and safety. Dangerous-goods checks need to be integrated into transportation
processes and ensure that dangerous-goods master data is complete, the mode of
transport is suitable, and the dangerous goods are marked correctly.

• Freight Costs
Companies must manage the determination of freight cost for all types of ship-
ments. In many countries, almost all the freight costs are derived from negotiated
freight rates between the shipper and the LSP. These rates come in hundreds, if

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HBC 2214 Procurement and Logistics Management

not thousands, of forms and methods of calculation. Companies need the ability
to not only calculate freight costs precisely but also settle them to the correct ac-
counts. They also need the ability to calculate profitability across the enterprise or
even within a specific channel, product group, or industry. Freight costs must be
tied back to the right sales order line item, and the correct representation for each
freight cost item must appear in the general ledger. At the same time, the ability to
minimize expensive processes is a key goal.

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Revision Questions

Example . The current business environment is very dynamic. Show how trans-
port management supports supply chains to achieve competitiveness in such envi-
ronments
Solution: for revision 

E XERCISE 15.  Define network routing optimization and show its importance in
transport management

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HBC 2214 Procurement and Logistics Management

LESSON 10
Information technology as a logistics competitive enabler

Lesson outcome
The students, should at the end of this lesson, be able to identify various technolo-
gies used in the supply chain and show how IT contributes and supports Logistics
to achieve competitiveness.

10.1. Introduction
Employing information technology as a means to enhance supply chain competi-
tiveness is an ongoing challenge for both supply chain and information technology
(IT) executives. There are the perennial questions about which applications to in-
vest in, which suppliers to use and when an update is appropriate. To answer these
questions, it is important to understand the individual roles and relative contribu-
tions of supply chain IT applications. While supply chain IT applications can be
described in a number of ways, one approach categorizes them as transactional,
communication or relationship management. Table 1 lists each category and the
typical applications.
The transaction category includes the IT systems to complete the business pro-
cesses related to order management, warehouse management, transportation man-
agement, and accounting. The typical supply chain related applications include
enterprise resource planning (ERP), warehouse management systems (WMS) and
transportation management systems (TMS).These applications represent standard-
ized processes that should focus on accuracy, consistency, economies of scale and
efficiency. These systems typically involve a wide range of users within a firm, as
customer orders are transformed into cash and supplier orders are initiated and paid
for. While there are some unique characteristics, the process flows generally share
a basic structure and display substantial commonality across firms.
The communication category includes the IT systems to exchange information be-
tween firm locations, global sites and supply chain partners. As Table 1 indicates,
this includes systems such as supply chain event management (SCEM), radio fre-
quency identification (RFID) and collaborative planning, forecasting and replenish-
ment (CPFR).The primary objective of these systems is to facilitate the accurate
exchange of supply chain information between locations and supply chain partners.

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Supply chain event management is the generic name for “track and trace” abil-
ity embedded with the capability to determine and communicate to the shipper or
consignee when a shipment may not arrive on the specified delivery date. While
track and trace will let you know where the shipment is, SCEM can proactively
determine when shipments are not going to be where they are supposed to be and
make suggestions for alternative plans regardless of the global location or carrier.
While there have been independent IT firms offering such applications, the major
providers today are the integrated transportation firms such as DHL, FedEx and
United Parcel Service. However, even the global integrators experience difficulty
in tracking shipments when multiple modes or carriers are involved. The effective-
ness of such systems will continue to improve as the major providers offer more
integrated capabilities as a means to enhance their competitive advantage.
As noted in Table 1, the systems focus on accuracy, coordination, speed and visi-
bility of product and product information as it moves throughout the supply chain.
While the information content is fairly standardized, the structure and interpretation
often differs by firm or country. The result is a major challenge for firms offering
supply chain event management to provide information that allows for a common
understanding. The relationship category includes the IT systems to manage the
strategic and tactical relationships between firms and their customers. Customer
relationship management (CRM) systems can provide the information regarding
specific account requirements, history, transactions and unique characteristics.
The information contained in or extracted from a CRM allows firms to provide a
more value added offering for critical customers. Advanced planning and schedul-
ing (APS) systems facilitate balancing the supply and demand resources at a time
when firms are trying to reduce inventory and capacity resources. In general, such
systems attempt to minimize the total cost of material acquisition, production, in-
ventory carrying cost and storage in an environment where customers have ever
more precise product and timing requirements. They desire unique product offer-
ings with very specific delivery requirements. Ability to deliver critical customers
with more customized products and solutions within more precise time specification
requires more precise management of resource capacities.
Relationship systems require extensive data bases that track demand and sales char-
acteristics, related marketing tactics, supply chain resource constraints and compar-
ative resource costs. An effective relationship system must be capable of comparing

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the total cost of customer and APS alternatives and searching for the most effective
solution. While relationship systems require extensive expertise to implement and
maintain, they allow the firm (and often supply chain partners) to make their of-
fering more relevant for critical customers with better asset utilization. Firms will
continue to be challenged by decisions regarding where to make their information
technology investments to enhance their global competitiveness. While there are
still some firms (particularly small to medium sized ) that have not made the move
toward some form of ERP, most major firms have made the investment, so the use
of an integrated ERP will not likely be a competitive advantage of the future. The
SCM technology battleground today is focusing on communications and track and
trace capability.
However, since these capabilities often interface with and require the involvement
of third party providers, it is likely that these applications will become more generic
and less of a differentiator. I believe that the battle for the real competitive advan-
tage has just begun as firms (and often supply chain partners) begin to orchestrate
the resources to implement and sustain these relationship systems. While the chal-
lenges to implement transaction and communication systems have been significant,
they will be even greater for implementing relationship systems as this requires a
balanced combination of people, processes and technology in environments that
have historically been relatively independent and unstructured.

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Revision Questions

Example . Describe the process of issuing inventory and the various pitfall to
avoid in order to safeguard against corrupt practices
Solution: for revision 

E XERCISE 16.  Elaborate the two main approaches used in supplier selection

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