DPL50174 Procurement in Logistics And Supply Chain

https://pmjbedumy.sharepoint.com/sites/eLearningPMJB HAZLIN BINTI JAMARI THE HANDBOOK OF WBL DIPLOMA IN LOGISTICS AND SUPPLY CHAIN MALAYSIA POLYTECHNIC STUDENTS DPL50174 PROCUREMENT IN LOGISTICS AND SUPPLY CHAIN

DPL50174 PROCUREMENT IN LOGISTICS AND SUPPLY CHAIN A guide for Malaysia Polytechnic Students HAZLIN BINTI JAMARI Penerbit PMJB Press POLITEKNIK METrO JOHOR BAHRU 2023

DPL50174 PROCUREMENT IN LOGISTICS AND SUPPLY CHAIN FIRST PUBLISHED 2023 AUTHOR HAZLIN BINTI JAMARI EDITOR HAZLIN BINTI JAMARI (Format, Content, Layout) SITI FAEZAH AHMAD SAZALI (Language) POLITEKNIK METrO JOHOR BAHRU Published and printed by: Academic Department Politeknik METrO Johor Bahru No 64 Jalan Suria 19, Taman Putera 81100 Johor Bahru, Johor www.pmjb.edu.my DPL50174 PROCUREMENT IN LOGISTICS AND SUPPLY CHAIN @2023 Politeknik METrO Johor Bahru Contents of this material are subject to change without notice. The companies, names and data used herein are fictitous unless otherwise specified. No part of this material may be reproduced or transmitted in any form by any means, electronics or mechanical, for any purpose, without the written permission from Politeknik METrO Johor Bahru

SYNOPSIS The objective of this book to provide source of information and knowledge especially for students who enrolled for DPL50174 Procurement in Logistics And Supply Chain who may require information for any topic relevant to them. This book entirely based on the Polytechnic MOHE syllabus for WBL Diploma in Logistics and Supply Chain. PROCUREMENT IN LOGISTICS AND SUPPLY CHAIN provides knowledge and skills to meet the challenges of the procurement process. Procurement strategic process consist activities on researching, negotiation and planning, this includes identifying a specific product or service requirement and the steps on how a business finds new or existing suppliers, builds supplier relationships and arranging payment, measures cost savings, minimizes risk and is pre-dominantly focused on value and return on investment. We welcome any constructive suggestions and comments from lecturers and students. Such feedback is given careful consideration and very helpful for future improvements.

ABOUT THE AUTHOR HAZLIN BINTI JAMARI BBA Hons (Operations Management), UiTM Msc in Tourism Planning, UTM Certified in Halal Logistics And Supply Chain

TABLE OF CONTENTS __________________________________________________________ SYNOPSIS ABOUT THE AUTHOR TABLE OF CONTENTS LIST OF FIGURES & TABLES 1.0 INTRODUCTION TO PROCUREMENT 01 Summary 07 Exercise 08 Answer 09 Discussion Questions 11 Answer 12 2.0 PROCUREMENT PROCEDURES 13 Summary 17 Exercise 19 Answer 20 Discussion Questions 21 Answer 22 3.0 SOURCING IN PROCUREMENT 23 Summary 29 Exercise 30 Answer 31 Discussion Questions 33 Answer 34 4.0 PROCUREMENT NEGOTIATION 39 Summary 44 Exercise 45 Answer 46 Discussion Questions 48 Answer 49 5.0 PRICING DETERMINATION 53 Summary 61 Exercise 62 Answer 63 Discussion Questions 64 Answer 65 DPL50174 PROCUREMENT IN LOGISTICS AND SUPPLY CHAIN T A B L E O F C O N T E N T S

6.0 MANAGING QUALITY 68 Summary 71 Exercise 72 Answer 73 Discussion Questions 74 Answer 75 7.0 PROCUREMENT WITH ETHICS AND SOCIAL RESPONSIBILITY 76 Summary 80 Exercise 81 Answer 82 Discussion Questions 83 Answer 84 BIBLIOGRAPHY 85 EXAM QUESTION 86 ANSWER 88 DPL50174 PROCUREMENT IN LOGISTICS AND SUPPLY CHAIN T A B L E O F C O N T E N T S

FIGURES & TABLE __________________________________________________________ Figure 1 Summary of Procurement Activities 07 Figure 2 Examples of General Motors Procurement Procedures 14 Figure 3 Steps in Organize Procurement Activity 14 Figure 4 Procurement Cycle 15 Figure 5 Ethical And Sustainable Framework 26 Figure 6: Basic concepts and definitions of negotiation 40 Figure 7: Alternative ways of Establishing Agreements 40 Figure 8: 3 Distinct Phases of Negotiation 41 Figure 9: Negotiation Strategies/Outcomes 41 Figure 10: Competitive Bidding 57 Figure 11: Reason Quality in the Purchasing Process 71 Figure 12: Characteristics of Ethical And Social Responsibility in Procurement 77 Table 1 Objectives of Procurement Department 03 Table 2 Steps in Procurement 16 Table 3 Illustration in Procurement Flow 1 17 Table 4 Illustration in Procurement Flow 2 17 Table 5 Illustration in Procurement Flow 3 18 Table 6 Ethical Policies 25 Table 7: Negotiation Strategies/Outcomes in Goal Pursuit, Relationships and Primary Motivataion 42 Table 8: Negotiation Strategies / Outcomes In Trust and Openness, And Remedy for Breakdown 42 Table 9: Procurement Negotiation (A Preparation Checklist) 43 Table 10: Sample Of Procurement Negotiation Checklist 43 Table 11: Sample Of Procurement Negotiation Checklist 44 Table 12: Quality in the Purchasing Process 70 DPL50174 PROCUREMENT IN LOGISTICS AND SUPPLY CHAIN F I G U R E S & T A B L E S

Chapter 1 Introduction to Procurement After reading this chapter, you should be able to: 1 Discuss the concepts in procurement in logistics and supply chain - Explains procurement - Recognize techniques of procurement Page 01

What Is Procurement and Logistics Management? Procurement is the acquisition of goods, services or works from an external. It is favourable that the goods and services are appropriate and procured at the best possible cost to meet the needs of the acquirer in terms of quality and quantity, time, and location. Terbaik adalah perolehan barangan, perkhidmatan atau kerjakerja daripada sumber luaran. Terbaik adalah barangan dan perkhidmatan yang sesuai diperolehi pada kos yang terbaik untuk memenuhi keperluan pembeli dari segi kualiti dan kuantiti, masa dan lokasi. You know what procurement as well as logistics is, but what you may wonder about is how important these are from the perspective of a business organisation. We first define “procurement” . It is the manner by which you procurement and logistics management acquire the needed goods and services. The qualification of this does not end there because when you procure, you see to it that you get the needed goods and services at the best cost, cheapest if possible. Next we go to the meaning of logistics. The word can be defined in different contexts but for this discussion, we take it from the view point of a business environment. Logistics is a framework of business planning so that the materials, services, capital and information assets are properly managed. CONCEPT AND DEFINITIONS Chapter 1 Page 02

No Objectives Explanation 1. Continuous Supply Stockouts of raw materials or components parts can shut down or force a change in production plans, resulting in unexpected cost. Downtime due to production stoppage increases operating costs and may result in an inability to provide finished goods as promised to customers. Imagine the impact if an automobile assembly line had all parts except tyres. One of the core objectives of procurement is to ensure that a continuous supply of materials, parts and components is available to certain manufacturing operations. 2. Minimize Inventory Investment In the past, downtime due to material shortages was minimized by maintaining large inventories of materials and components to protect against potential disruption in supply. However, maintaining inventory is expensive and requires scarce capital. One goal of procurement is to maintain supply continuity with the minimum inventory investment possible. This requires balancing the costs of carrying material against the possibility of a production stopage. The ideal, of course, is to have needed materials arrive just at the moment they are scheduled to be used in the production process, in other words, just-in-time (JIT). 3. Quality Improvement Procurement is critical to the quality requirements of every organization. The quality of finished goods and services is dependent upon the quality of the materials and components used. If poor-quality components and materials are used, then the final product likely will not meet customer quality standards. Thus, both a firm and its suppliers need to be likely committed to a continuous quality improvement initiative. 4. Supplier Development In final analysis, successful procurement depends on locating or developing suppliers, analyzing their capabilities, and selecting and working with those suppliers to achieve continuous improvement. Developing good supply relationships with firms that are committed to the buying organization’s success is critical in supplier development. It is important to develop close relationships with those suppliers in order to share information and resources to achieve better results. For example, a manufacturer might share a production schedule with key suppliers, which in turn allows them to better meet the buyer’s. delivery requirements. A retailer might share point-of-sale information and promotional plans to help suppliers meet quantity requirements at specific times. This perspective on effective procurement stands in stark contrast to the traditional focus on price alone, which inherently created adversarial relationships between a firm and its suppliers. 5. Access Technology and Innovation Firms look to suppliers as sources of innovation and new technology to aid in the design of new products and the improvement of existing ones. For example, Procter & Gamble has openly stated its goal of having 50 percent of its product and process innovation come from sources outside the company. The firm uses its procurement organization as a major source of outreach to suppliers for that innovation. One example of success is provided by the development and introduction of a new product, the Mr. Clean Magic Eraser. The technology for this product was developed and provided to P& G by a major supplier, BASF chemicals. WHAT ARE THE OBJECTIVES OF PROCUREMENT DEPARTMENT? Page 03 Chapter 1 Table 1: Objective of Procurement Department

THE REASON PROCUREMENT MANAGEMENT IS A NECESSITY FOR LARGE COMPANIES Procurement management is the way companies buy the company’s economic resources and other inputs from its sources or suppliers. In large companies, there is a separate department for this purpose; small firms do not. The owners of small companies usually handle the procurement management. Bigger companies have more economic resources that include labour, land, capital and other physical sources. The need for these is in huge quantity or big volume thus necessitating more personnel for the procurement management procedure. The duties of procurement offices do not end in the purchase of economic resources because there are other functions that can be assigned to this specific department. Big companies use procurement management to enter into legal contracts that cover purchase of inputs needed in the conduct of business operations. Procurement management takes the task of hiring the members of the labour force that will convert the purchased raw materials into the company’s finished products. Procurement managers go beyond hiring of personnel for the manufacturing process but also employees for the financial team. This consists of accountants, analysts and others. Page 04 Chapter 1

What logistics management duties cover in procurement? Logistics management has a very wide area of covered duties. However, you can put together relevant functions to come up with three basic components, namely transportation, warehousing and packaging. Transportation management entails inbound and outbound transportation and fleet management. The responsibility includes fuel management and vehicle tracking systems that will prevent delivery delays and violations of government rules and laws. If you will take a closer look at the warehousing component, you will deduce that this is connected to inventory and storage management and you are right about that. Packaging may be the last part of the production process and again the logistic management team takes charge. Warehousing, its functions and types of warehouses It is easy to define warehousing as a part of the logistics management. From the title, you know that the function pertains to the responsibility of overseeing the storage of goods. Time utility is taken care of because warehousing ensures that the stored materials are released in a timely manner, when they are needed. The warehouse or warehousing performs, aside from storage, price stabilization, financing, risk bearing, grading and packing functions. A warehouse may fall under one of the three groups or types which are public warehouse, private warehouse and bonded warehouse. The types however are not limited to these three as there may be some other kinds like special commodity warehouse, institutional warehouse and cold storage or refrigerated warehouse. Being hired by a large company in procurement, logistics and warehousing management will be a rewarding job. A company needs a lot of people in these fields making bachelor in procurement and logistics management degree a means to a gratifying and fulfilling career. Here are some procurement activities but it is not limited to the below: Page 05 Chapter 1

Here are some procurement activities but it is not limited to the below: 1. Procurement Planning 2. Global / international sourcing 3. Vendor development and pre- qualifications 4. Request for quotes 5. Technical bid evaluation 6. Single source vendor or monopoly selection 7. Commercial negotiations 8. Comparison Statement 9. LOA – Letter of Award 10. Purchase order issuance 11. PO Acknowledgement 12. Notification for Unsuccessful Vendors 13. Processing advance payments for every POs 14. Organizing Kick off meetings 15. Coordination in Vendor detail engineering 16. Expediting approvals for documents and Review cycles 17. Progress monitoring 18. Expediting Manufacturing and Delivery 19. Interdepartmental Coordination’s 20. Coordination with Finance Department 21. Budget forecast on invoice payments 22. Logistics Coordination 23. Construction coordination for material deliveries 24. Commissioning coordination for OEM mobilizations 25. Vendor Performance Evaluation Page 06 Chapter 1

Page 07 Chapter 1 Figure 1: Summary of Procurement Activities SUMMARY

Page 08 Chapter 1 Exercise 25 1. Define procurement (2 marks) __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ 2. Identify FOUR (4) objectives of procurement department (4 marks) __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ 3. List with suitable example FIVE (5) activities of procurement department: (10 marks) __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ 4. Need-recognition is the first and most important step in the buying decision. Without the recognition of the need, a purchase cannot take place. Explain how each department recognizes the need before submitting the requisition form to the procurement department. (9 marks) __________________________________________________________________ __________________________________________________________________ __________________________________________________________________

Page 09 ANSWER 1. Define procurement (2 marks) Answer Procurement is the acquisition of goods, services or works from an external. 2. Identify FOUR (4) objectives of procurement department (4 marks) Answer i. Continuous Supply ii. Minimize Inventory Investment iii. Quality Improvement iv. Supplier Development v. Access Technology and Innovation (Any 4 answers are acceptable) 3. List with suitable example FIVE (5) activities of procurement department: (10 marks) Answer • Procurement Planning • Request for quotes • Technical bid evaluation • Commercial negotiations • Expediting approvals for documents and review cycles • Construction coordination • Commissioning coordination for OEM mobilizations • Vendor Performance evaluation • Logistics Coordination Chapter 1

Page 10 ANSWER 4. Need-recognition is the first and most important step in the buying decision. Without the recognition of the need, a purchase cannot take place. Explain how each department recognizes the need before submitting the requisition form to the procurement department. (9 marks) Answer - Need-recognition is an internal decision indicating the desire to purchase goods or services for the business. - Need-recognition are essential to the procurement processes within a company. - An employee fills out a need-recognition or purchase requisition and submits it to the appropriate individuals or departments for review and approval. - Reviewers may include both the employee's line manager and the company's central procurement or purchasing department. - Once the need-recognition is approved, the business then issues a purchase order for the requested items to the appropriate vendor. -They help prevent fraud and allow management to exercise control over employee purchases. In addition, having a digital audit trail of requisition form submissions helps organizations streamline the process. -A requisition initiates the request for a specific action and also records that action for subsequent reporting needs. -For example, employees within a company would use a purchase requisition if they needed additional supplies. -A requisitions were done via paper forms, but most companies now use digital requisition processes that enable easier tracking of the process, including an accounting of relevant inventory. -These types of requisitions often times automatically update the inventory for better controls. Chapter 1

1. Which of the following is considered during the Procurement Planning Process? A. Whether to procure B. How to procure and how much to procure C. What and when to procure D. All of the above 2. From a buyer's standpoint, which of the following is true? A. Procurement planning should include consideration of potential subcontracts B. Procurement planning does not include consideration of potential subcontracts since this is the duty of the contractor C. Subcontractors are first considered during the Solicitation Process D. None of the above 3. Which of the following is true about procurement documents? A. Importing B. Exporting C. Franchise D. Investments 4. Which of the following is true about procurement documents? A. Procurement documents are used to solicit proposals from prospective sellers. B. Invitation for Bid and Request for Proposal are two examples of procurement documents C. Procurement documents should be structured to facilitate accurate and complete responses D. All the above 5. Which of the following is a potential procurement objective? A. Supporting organizational goals and objectives B. Managing the supply base C. Developing strong relationships with other functional groups D. All of the above 6. List any 4 procurement departmentactivites i. _______________________ ii. ________________________ iii. _______________________ iv. ________________________ 7. Explain THREE(3) objectives of procurement logistics and supply chain Chapter 1 Discussion questions: Page 11

Page 12 Continuous Supply Minimize Inventory Investment Quality Improvement Supplier Development Access Technology and Innovation ANSWER Answer Exercise Chapter 1 1. D 2. A 3. D 4.D 5. D 6. The procurement department activities is not limited to the below: Any 4 answers below are accepted:- 1. Procurement Planning 2. Global / international sourcing 3. Vendor development and pre- qualifications 4. Request for quotes 5. Technical bid evaluation 6. Single source vendor or monopoly selection 7. Commercial negotiations 8. Comparison Statement 9. LOA – Letter of Award 10. Purchase order issuance 11. PO Acknowledgement 12. Notification for Unsuccessful Vendors 13. Processing advance payments for every POs 14. Organizing Kick off meetings 7. Explain THREE(3) objectives of procurement logistics and supply chain. Any 4 answers below are accepted:- 1. 2. 3. 4. 5. Chapter 1

Chapter 2 Procurement Procedures After reading this chapter, you should be able to: 1 Discuss procurement procedures . - Explain the procurement order cycle standard procedure - Organize the different types of items in procurement - Recognize the implementation of eprocurement Page 13

Procurement procedures means organize procurement activity. Firms today purchase not only raw materials and basic supplies but also complex fabricated components with very high value-added content. They spin off functions to suppliers to focus internal resources on core competencies. The result is that more managerial attention must then be focused on how the organization interfaces and effectively manages its supply base. There is also a significant trend toward outsourcing of services, particularly logistics services such as transportation and warehousing. PROCUREMENT PROCEDURES Chapter 2 Page 14 FIGURE 2: EXAMPLE OF GENERAL MOTORS PROCUREMENT PROCEDURES ORGANISE PROCUREMENT ACTIVITY FIGURE 3: STEPS IN ORGANIZE PROCUREMENT ACTIVITY

Procurement procedures means organize procurement activity. Firms today purchase not only raw materials and basic supplies but also complex fabricated components with very high value-added content. They spin off functions to suppliers to focus internal resources on core competencies. The result is that more managerial attention must then be focused on how the organization interfaces and effectively manages its supply base. There is also a significant trend toward outsourcing of services, particularly logistics services such as transportation and warehousing. DIFFERENT TYPES OF PROCUREMENT ITEM Chapter 2 Page 15 FIGURE 4: PROCUREMENT CYCLE Strategic Sourcing Cycle •Information on dollars spent and dollars that will be spent feeds the sourcing process (the circle on the left). •This information on the past, present and future gives buyers valuable feedback on the success of their current sourcing strategy. •It helps them to identify sourcing opportunities and set the right priorities. •Combined with data on the performance of current suppliers, buyers can develop a more effective sourcing strategy. Procurement Order Cycle •Spend information originates from the purchase-to-pay process (the circle on the right). Data is captured during the requisitioning to payment process, in particular when status changes occur (e.g. approval of requisition, receiving goods or services, and invoice settlement).

Contract Management • Contract management (the circle in the middle) connects the two cycles. • It’s important that the identified benefits (left circle) are captured in the contract (middle circle) and actually end up in the pocket of the organization itself (right circle). • Spend information enables an organization to track benefits and provides the visibility needed for compliance monitoring. 8 STEPS IN A PROCUREMENT CYCLE Chapter 2 Page 16 TABLE 2: STEPS IN PROCUREMENT

Chapter 2 Page 17 TABLE 3: ILLUSTRATION IN PROCUREMENT FLOW 1 TABLE 4 : ILLUSTRATION IN PROCUREMENT FLOW 2 SUMMARY

Chapter 2 Page 18 TABLE 5: ILLUSTRATION IN PROCUREMENT FLOW 3 SUMMARY

Page 19 Chapter 2 Exercise 13 1. Give FOUR (4) benefits of procurement procedure: (4 marks) __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ 2. Explain THREE (3) activities of organizing procurement (9 marks) __________________________________________________________________ __________________________________________________________________ __________________________________________________________________

Page 20 Chapter 2 Answer 13 1. Give FOUR (4) benefits of procurement procedure: (4 marks) Answer: 1. Can identify requisition material, determine supplier, prepare a purchase order 2. Can determine to follow up and expedite delivery 3. Can identify receive and handle invoice, determine issue payment, prepared report on payment 4. Lowered costs. 5. Increased resource availability. 6 Improved transparency & efficiency. 7. Reduced supplier risk. 8. Bolstered supply resiliency. 9. Freedom to Innovate. 2. Explain THREE (3) activities of organizing procurement (9 marks) Answer Any 3 activities with explanation are acceptable Lowered costs. Increased resource availability. Improved transparency & efficiency. Reduced supplier risk. Bolstered supply resiliency. Freedom to Innovate.

1. Explain EIGHT (8) steps in procurement cycle: 2. Illustrate the flow of procurement order standard procedure which consist of EIGHT (8) steps. Chapter 2 Discussion questions: Page 21

1. Explain EIGHT (8) steps in procurement cycle: Answer 1. Identify need request purchase 2. Receive request process request quotations 3. Receive request process send quotation 4. Receive quotation discuss and process send purchase order 5. Receive order process ship goods and invoice 6. Receive and check transfer 7. receive and check authorize payment 8. Arrange payment to receive payment 2. Illustrate the flow of procurement order standard procedure which consist of EIGHT (8) steps. Answer Chapter 2 Answer Page 22

Chapter 3 Sourcing In Procurement Organize sourcing in procurement Explain management of supplier After reading this chapter, you should be able to: Apply organization sourcing in procurement Page 23

Improve quality & long-term financial performance Reduce costs & delivery cycle times Increase number of global competitors Increase customer focus Reduce high costs of globalization & materials, Deliver more innovative products more frequently & SOURCING IN PROCUREMENT Sourcing -all of firm’s activities used to manage external resources Strategic sourcing -managing the firm’s external resources to support firm’s long term goals. Drivers of Strategic Sourcing cheaply than competitors Business Ethics -the application of ethical principles to business Corporate Social Responsibility -is the practice of business ethics Ethical Sourcing -is that which attempts to take into account the public consequences of organizational buying or bring about positive social change through organizational buying behavior Page 24 Chapter 3

Ethical Policies Determining where all purchased goods originated and the manner in which they were made Knowledge of the suppliers’ workplace principles Inclusion of ethics as a performance rating Independent verification of vendor compliance Report of supplier compliance to stakeholders Provision of detailed ethical sourcing expectations to suppliers Ethical Policies should include Page 25 Chapter 3 Table 6: Ethical Policies Sustainable Sourcing Green purchasingis aimed at ensuring products or materials meet environmental objectives e.g. waste reduction, reuse and recycling Sustainability is the ability to meet current needs of the supply chain without hindering the ability to meet future needs in terms of economic, environmental, and social challenges Considers worker safety, wages, working conditions, human rights Functional Products -MRO items & other commonly low profit margins with relatively stable demands & high levels of competition Innovative Products -characterized by short product life cycles, volatile demand, high profit margins, & relatively less competition

Ethical And Sustainable Framework Page 26 Chapter 3 Figure 5: Ethical and Sustainable Framework Framework for ethical and sustainable sourcing strategy development Step 1–Establish corporate ethical and sustainable sourcing strategies Step 2–Train purchasing staff and implement policies Step 3–Prioritize items based upon ethical and sustainability opportunities and ease of implementation Step 4 –Develop performance measurement system Step 5–Monitor progress and make improvements. Increase use of green and fair trade products Step 6–Expand focus to include other departments Supply base rationalization (AKA supply base reductionor supply base optimization) is often the initial supply chain management effort Buyer-supplier partnerships are easier with a rationalized supply base & result in – Reduced purchase prices Fewer supplier management problems Closer & more frequent interaction between buyer & supplier Greater levels of quality & delivery reliability

Page 27 Chapter 3 Supplier certification programs are used to identify strategic supplier alliance candidates Firms use in-house formal certification programs, & most require ISO 9000 / 14000 or similar certifications as part of the certification process Buyers can monitor quality assurance methods & specify the type of acceptance sampling & statistical process control methods used Outsourcing allows a firm to – -Concentrate on core capabilities -Reduce staffing levels -Accelerate reengineering efforts -Reduce management problems -Improve manufacturing flexibility Risks associated with outsourcing, include – -Loss of control -Production decisions & intellectual property -Increased reliance on suppliers -Increased need for supplier management In-sourcing (backsourcing) – Reverting to in-house production when quality, delivery, and services do not meet expectations Co-sourcing (selective sourcing) – The sharing of a process or function between internal staff and an external provider & provides flexibility to decide what areas to outsource, when, and for how long. Early supplier involvement (ESI) highly effective supply chain integrative techniques

Page 28 Chapter 3 -Key suppliers become more involved in the internal operations of the firm, particularly with respect to new product & process design, concurrent engineering & design for manufacture ability techniques Value engineering activities help the firm to reduce cost, improve quality & reduce new product development time Vendor managed inventory (VMI) – Suppliers manage buyer inventories to reduce inventory carrying costs & avoid stockouts for buyer From the buyer-firm’s perspective – -Supplier tracks inventories -Determines delivery schedules and order quantities -Buyer can take ownership at stocking location From the supplier’s perspective – -Avoids ill-advised customer orders -Supplier decides inventory set up & shipments -Opportunity for supplier to educate customers about other products Electronic data interchange (EDI) -Allows a supplier to profile demand & determine accurate forecasts -EDI also provides reorder pointdata to permit timely deliveries Supplier co-location or JIT II -Supplier’s employee is embedded in buyer’s purchasing department to forecast demand, monitor inventory & place orders with access to sensitive files & records

Page 29 Chapter 3 Collaborative negotiations (integrative negotiations) Both sides work together to maximize the outcome or create a win-win result Requires open discussions and a free-flow of information between parties Distributive negotiations Refers to a process that leads to self-interested, one-sided outcome -STRATEGIC ALLIANCE DEVELOPMENT -Alliance development, an extension of supplier developmentrefers to increasing a key or strategic supplier’s capabilities. -Supplier alliances result in better market penetration access to new technologies & knowledge, & higher return on investment -Alliance development eventually extends to a firm’s second-tier suppliers, as the firm’s key suppliers begin to form their own alliances. Negotiating Win-Win Strategic Alliance Agreements 1. 2. 3. 4. 5. e-Procurement Systems Concentrate large volumes of small purchases with a few suppliers, using e-catalogues, available to the organization’s users. Primary benefits of e-procurement include – -Cost savings -Frees-up time to concentrate on core business Reverse auctions – Pre-qualified suppliers enter Web site & at pre-designated time & date, try to underbid competitors, monitoring bid prices until the session is over. SUMMARY

Page 30 Chapter 3 Exercise 23 1. List FIVE (5) drivers of strategic sourcing. (5 marks) __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ 2. List FIVE (5) benefits of outsourcing. (5 marks) __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ 3. Give SEVEN (7) benefits in using e-procurement systems. (7 marks) __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ 4. Discuss e procurement (6 marks) __________________________________________________________________ __________________________________________________________________ __________________________________________________________________

Page 31 Chapter 3 Answer 23 1. List FIVE (5) drivers of strategic sourcing. (5 marks) Answer: Drivers of Strategic Sourcing i.Reduce costs & delivery cycle times ii.Improve quality & long-term financial performance iii.Increase number of global competitors iv.Increase customer focus v.Reduce high costs of globalization & materials, vi.Deliver more innovative products more frequently & cheaply than competitors 2. List FIVE (5) benefits of outsourcing. (5 marks) Answer: Outsourcing allows a firm to – - Concentrate on core capabilities - Reduce staffing levels - Accelerate reengineering efforts - Reduce management problems - Improve manufacturing flexibility

Page 32 Chapter 3 Answer 23 3. Give SEVEN (7) benefits in using e-procurement systems. (7 marks) Answer : Any 7 answers are acceptable a. Reduced Transaction Time b. Electronic catalogues c. Increased Standardisation d. Wider Spread Supplier Bases e. Simplified Global Procurement f. Increase Productivity g. Simple Configuration and Scalability h. Creation of Trading Communities i. Savings From Increased Preferred Vendor Purchasing 4. Discuss e procurement (6 marks) Answer Electronic procurement, also known as e-procurement or supplier exchange, is the process of requisitioning, ordering and purchasing goods and services online. It is a business-to-business process.

1. Discuss TWO (2) reasons of outsourcing. 2. Determine TWO( 2) barriers in implementing e procurement. 3. Discuss benefits of outsourcing . 4. Discuss risks of outsourcing. 5. Discuss Electronic Data Interchange (EDI) with:- a) Definition b) Characteristics 6. Explain FIVE (5) constraints in-sourcing and co-sourcing Chapter 3 Discussion questions: Page 33

1. Discuss TWO (2) reasons of outsourcing. Answer: Any two answers are acceptable Reduced Transaction Time Electronic catalogues Increased Standardisation Wider Spread Supplier Bases Simplified Global Procurement Increase Productivity 2. Determine TWO( 2) barriers in implementing e procurement. Answer Any 2 answers are acceptable -The biggest disadvantage of using e-procurement methods is that they can be unreliable. Electronic records may be incomplete, -Inaccurate, or tampered with, -Making it difficult to track down and verify information. -The process can be slow and cumbersome, which can delay delivery of goods or services. -Systems are vulnerable to cyberattacks, which could lead to the theft of sensitive information or the disruption of operations. Chapter 3 Answer: Page 34

3. Discuss benefits of outsourcing . Answer 1. Reduce and control operational and labor cost. This is the major reason why companies prefer to outsource. Hiring people not only requires you to pay for their salary, but also other costs like government benefits. Other costs also include providing equipment as well as the cost of on boarding a new employee. Outsourcing can help your company convert your fixed cost to variable cost that would yield a significant saving. With proper implementation, outsourcing aims to enhance the process by cutting off uneconomical expenditures so as to increase the quality of work. 2. Improve Company Focus on Core Business Process. Companies prefer outsourcing, offshore for most of the outsourced tasks are time-consuming, therefore it would affect the efficiency and effectiveness of the company. Outsource professionals can get the job done as quickly as possible and the best part is you do not have to allocate funds on equipment or facilities to provide your resources with. So you can focus more on your business. Chapter 3 Discussion questions: Page 35

4. Discuss risks of outsourcing. Answer 1.Loss of Control 2.Communication Barriers 3.Unforeseen and Hidden Costs 4.Difficult to Find the Perfect Vendor 5.Privacy and Security Concerns 6.Lack of Experience with Remote Teams 5. Discuss Electronic Data Interchange (EDI) with:- a) Definition Answer EDI is a set of standards that provide agreed-upon rules for sending and receiving business documents electronically. In other words, EDI is a “common language” that enables organizations with different businesses systems and processes to communicate with each other. -Allows a supplier to profile demand & determine accurate forecasts -EDI also provides reorder pointdata to permit timely deliveries b) Characteristics Answer 1.Robust, proven integration with your business system. EDI is among the highest-value integrations in your accounting systems environment because this eliminates time-consuming, error-prone manual effort that would otherwise be necessary to get orders, invoices and other EDI data in and out of the accounting system. Integrating EDI with a business system streamlines your order processing workflow for improved productivity and responsiveness to customers, while saving time and money. The more trading partners you have, the more operational costs you’ll save through EDI and ERP integration. Conversely, an EDI system that does not integrate becomes a cost of doing business that offers little value-add. Chapter 3 Discussion questions: Page 36

b) Characteristics Answer 2. A simple, seamless user experience. Business users in departments like customer service and shipping need to process EDI transactions efficiently and accurately, without having to become EDI experts. You should be able to manage EDI “by exception” so that transactions are automated unless exceptions occur. You should also be able to automatically schedule everyday tasks like importing and exporting EDI documents to and from your accounting system. More automation means faster processing and less errors—which, for suppliers and distributors, means happier customers and fewer chargebacks. 6. Explain FIVE (5) constraints in-sourcing and co-sourcing Answer 1.Outsourcing Outsourcing uses the developed workforce of an outside organization to perform tasks and also the resources of an outside organization for services and manufacturing products. Saving money on costs is typically the motivation for outsourcing work to another company. Industries such as healthcare, travel, transport, energy/utility companies, retail, and even government often rely on outsourcing to complete important projects or tasks. 2. Outsourcing enlists the help of outside organizations not affiliated with the company to complete specific tasks. Insourcing, on the other hand, is a business practice performed within an organization's operational infrastructure. The organization's control over operations and decisions will differ depending on whether the company is using outsourcing or insourcing. Chapter 3 Discussion questions: Page 37

Answer (contimue) 6. Explain FIVE (5) constraints in-sourcing and co-sourcing Answer 3. Insourcing generally places new operations and processes on-site within the organization, while outsourcing involves an outside organization that is separate from the primary organization's operations. Companies can use outsourcing to better focus on the core aspects of the business. That is, outsourcing non-core activities can improve efficiency and productivity. At the same time, outsourcing can affect jobs ranging from customer support to manufacturing, as well as technology and the back office. 4.The organization's control over operations and decisions will differ when using outsourcing and insourcing. Organizations that use outsourcing for a particular service or manufacturing process have minimal managerial control over the methods of the outside organization that was hired for the project. For instance, an organization that is known for friendly customer service does not have the ability to enforce or manage how an outside support center interacts with customers. 5. Insourcing assigns a project to a person or department within the company instead of hiring an outside person or company. It utilizes developed resources within the organization to perform tasks or to achieve a goal. For example, an organization might insource technical support for a new product because the company already has existing technical support for another product within the organization. Chapter 3 Discussion questions: Page 38

Chapter 4 Procurement Negotiation After reading this chapter, you should be able to: Examine procurement negotiation by - Explain procurement negotiation process - Present negotiation stages Page 39

SITUATIONS IN WHICH NEGOTIATIONS SHOULD BE USED 1) when it is impossible to estimate production costs accurately. 2) price is not the only or most important criterion. 3) changes to specification are likely. 4) special tooling / set up costs are major factors in the requirement. ALTERNATIVE WAYS OF ESTABLISHING AGREEMENTS Page 40 Chapter 4 BASIC CONCEPTS AND DEFINITIONS FIGURE 6: BASIC CONCEPTS AND DEFINITIONS OF NEGOTIATION FIGURE 7: ALTERNATIVE WAYS OF ESTABLISHING AGREEMENTS

NEGOTIATION STRATEGIES / OUTCOMES Page 41 Chapter 4 3 DISTINCT PHASES OF NEGOTIATION FIGURE 8: 3 DISTINCT PHASES OF NEGOTIATION FIGURE 9: NEGOTIATION STRATEGIES / OUTCOMES

NEGOTIATION STRATEGIES / OUTCOMES Page 42 Chapter 4 NEGOTIATION STRATEGIES / OUTCOMES TABLE 7: NEGOTIATION STRATEGIES / OUTCOMES IN GOAL PURSUIT, RELATIONSHIPS AND PRIMARY MOTIVATION TABLE 8: NEGOTIATION STRATEGIES / OUTCOMES IN TRUST AND OPENNESS, AND REMEDY FOR BREAKDOWN