Procurement Management SCM6002 With SCMPC Malaysia Nor Azmi Bin Ramli Email: [email protected] H/P No.: 0192317614Biodata  Nor Azmi Bin Ramli graduated in 1981 with a Bachelor of Science degree in Electrical and Electronics Engineering from the University of Brighton, UK.  He also holds Master degree in Business Administration from the Ohio University, USA and Master of Science degree in Logistic and Supply Chain Management from the University of Bolton, UK.  He is currently pursuing his Doctorate studies in the research area of public procurement with the Putra Business School, Malaysia in collaboration with the University of Bolton, UK. and also conducts part time lecturing with SCMP Centre.  He had served Tenaga Nasional Berhad for 31 years in various positions in areas of operation, maintenance and management in the Distribution Division and Generation Division.  His last 9 years of service with Tenaga Nasional Berhad had been in the area of procurement. He was the Head of Procurement for Generation Division and the Chief Procurement Officer for Tenage Nasional Berhad. SCM Professional Centre Sdn. Bhd. 2Biodata  His part time lecturing and tutoring experiences with SCMP Centre are as follows:. SCM Professional Centre Sdn. Bhd. 3 Position Achievements Part time lecturer & tutor Jan. 2013 - presently Conducted lecturing and tutoring sessions under SCMP Centre as follows: 1. Diploma: Universiti Teknologi Malaysia, Malaysia - Purchasing Principles (as lecturer) 2. Degree: University of Bolton, UK - Sustainable Supply Chain Strategy (as tutor) - Procurement Management (as lecturer) 3. Masters: University of Bolton, UK - Physical Supply Chain Management (as tutor) 4. Professional: - CIPS Level 4: Contexts of Procurement & Supply - CIPS Level 4: Business Needs in Procurement and Supply - CIPS Level 2: Procurement and Supply Function Biodata  He is currently pursuing on full time basis his Doctorate studies in the research area of government procurement with the UNITAR, Malaysia in collaboration with the University of Bolton, UK.  The title of his thesis is “Taxonomy of Procurement Practitioners’ Characters/Behaviours in Malaysian Government Procurement B2G Market Transactions”. . SCM Professional Centre Sdn. Bhd. 4Learning objectives  On successful completion of this module you will be expected to be able to: 1. Understand the role of procurement within a supply chain and how it contributes to overall competitiveness of an organisation. 2. Analyse procurement from various dimensions that include strategy, organisational structure, process and relationship. 3. Understand the components of a contract and the legal implications of an inter organisational relationship. 4. Critically appraise the procurement process within an organisation from the point of view of ethical, effectiveness, efficiency and environmental sustainability. SCM Professional Centre Sdn. Bhd. 5Contents 1. Philosophy: Ethical sourcing 2. The strategic significance of procurement 3. Procurement structure within an organisation 4. The generic procurement process 5. Procurement techniques 6. Supplier Management 7. Technology in procurement 8. International sourcing SCM Professional Centre Sdn. Bhd. 6Overview of Procurement Management Module SCM Professional Centre Sdn. Bhd. 7 Procurement Management Philosophy: Ethical sourcing The strategic significance of procurement Procurement structure within an organisation The generic procurement process Procurement techniques Supplier Management Technology in procurement International sourcing Final Exam Individual Assignment1. Philosophy: Ethical sourcing SCM Professional Centre Sdn. Bhd.1.1 Ethics  ‘Ethics’ are set of moral principles or values about what constitutes ‘right’ and ‘wrong’ behaviour.  Ethical issues may affect businesses and public sector organisations at three levels.  At the macro level, there are the issues of the role of business and capitalism in society: the debate about the impacts of globalisation, the exploitation of labour, the impact of industrialisation on the environment.  At the corporate level, there are the issues which face an individual organisation as it formulates strategies and policies about how it interacts with its various stakeholders.  At the individual level, there are the issues which face individuals as they act and interact within the organisation and supply chain: refusing to be party to fraud; not discriminating in the award of tenders; deciding whether to accept gifts or hospitality which might be perceived as an attempt to influence a buying decision. SCM Professional Centre Sdn. Bhd. 91.2 Principles of Procurement Ethics  Key principles of business ethics:  Integrity: Protecting the confidentiality of information where appropriate. Confidential information obtained in the course of business should not be disclosed without proper and specific authority, or unless there is a legal duty to disclose it: for example, if there is suspicion of money laundering or terrorist activity  Transparency: The provision of fair, truthful and accurate (not false or misleading) information. This makes unethical, for example, the practice of deliberately inflating estimates of order sizes in order to obtain a price that would not be offered if the true usage patterns were admitted.  Fair dealing: a temptation may be offered, for example, where a supplier or potential supplier makes an error in a quotation or invoice; where there is potential to pay late; where quotation of tender bids are sought from suppliers where there is no intention to purchase;  Honourable behaviour: Not offering or accepting gifts of inducements which may or may be perceived to influence the recipient’s decision making.  Principles and rules of conduct: Individuals should not make decisions (or divulge confidential information) for personal gain.  Certain aspects of ethics are covered by law, such as fraud, bribery and corruption, but purchasing and supply ethics go beyond legal requirements. SCM Professional Centre Sdn. Bhd. 101.3 Fraudulent Activities in Procurement  Procurement officers need to be aware of the range of activities that may be considered fraudulent and there should be clearly articulated organisational policies and rules.  Large scale fraud is often carried out by employees working in collusion with suppliers.  Kickbacks: Kickbacks were defined by Utstein Anti-Corruption Resource Centre: UACRC (2008) as the method where illegal secret payments were made as a return for a favour or a bribe and were usually calculated in the form of a percentage, a share, a cut, a commission or a payoff.  Bid rigging: Bid rigging happened when bidders colluded with one another and kept the bid amount at a pre-determined level. This intentional manipulation as done by the members of the bidding group who submitted common bids, discouraged a price war (OECD, 2007). The interested bidders would agree in advance the following details; who would submit competitive bids, at what prices, who would win and how the profits would be shared among the bidders. Sometimes, this process would involve officials, who were responsible for conducting the tender and who were willing to collaborate with the bidders in the bid-rigging fraud. SCM Professional Centre Sdn. Bhd. 111.3.1 Bid-rigging in Procurement  Some of the common red flags of bid-rigging are as follows:  Different bidders submitting similar bidding value  The winning bidder delegating or sub-contracting part of the contract to the losing bidders  Evidence of physical alteration of more than one bid  Same handwriting and information content found in the tender documents  Apparent connections between bidders (e.g., common addresses or phone numbers)  Similarities between specifications among the bidders’ and the winning contractor’s product or services SCM Professional Centre Sdn. Bhd. 121.4 Fraud theory  The theory selected to explain the mechanism of malpractice is the Cressey’s Fraud Theory Dorminey J., Fleming A. S., Mary- JoKranacher, and Riley, R. A. (2012)  This fraud theory is adopted by the International Auditing Standards Board (2009) as in the International Standard on Auditing No.240: the Auditor’s responsibilities relating to fraud in an audit of financial statements. SCM Professional Centre Sdn. Bhd. 131.4.1 Fraud Theory SCM Professional Centre Sdn. Bhd. 14 Fraud Trianglr Cressey’s Fraud Theory Rationalisation Financial Pressure Opportunity “Three conditions generally are present when fraud occurs:. Perceived pressure from a non-shareable financial problem creates the motive for the crime. Perceived opportunity is the perception (1) that a control weakness is present, and importantly, (2) that the likelihood of being caught is remote. Cressey observed that individuals who commit fraud desire to remain within their moral comfort zone. Therefore, at least internally, the fraudster seeks to justify the fraudulent action before the first fraud act The Cressey’s Fraud Theory is as depicted in Fig. below:1.5 CIPS ethical code  Specific guidance  Members must disclose any personal interest which might impinge in their work activities, or which might appear to do so in the eyes of others.  Members must respect the confidentiality of information and must not use information received for personal gain. The information they provide should be true and fair.  Members should avoid any arrangements which might prevent fair competition.  Except for small value items, business gifts should not be accepted.  Only modest hospitality should be accepted. Members should not accept hospitality which might influence a business decision, or which might appear to do so.  Any doubt on these last two points should be discussed with the individual ‘s superior. SCM Professional Centre Sdn. Bhd. 151.5.1 Dealing with suppliers  The purchaser should be fair when dealing with suppliers:  The purchaser should respect the confidentiality of information provided by the supplier. For example, tender information should be treated as confidential and kept securely. Where it is considered reasonable to reveal certain information, it should not be traceable back to the particular supplier unless the supplier has given permission. SCM Professional Centre Sdn. Bhd. 161.5.2 Dealing with suppliers  The purchaser should not mislead suppliers.  The purchaser should not engage in ‘Dutch auctions’ (i.e. where a buyer disclose Supplier A’s price to Supplier B in order to get Supplier B to beat the price, then disclosing Supplier B’s new price to Supplier A in order to get supplier A’s price down, and so on).  There should be transparency of why particular suppliers were invited to quote or tender.  There should be transparency of criteria for making supplier selection decisions.  All suppliers should be treated equally. For example, any additional information given to one supplier in response to a question on an invitation to tender or request for information should be provided to all other suppliers.  The purchaser should not unfairly pressure a supplier.  There should be integrity of how the bids were evaluated against the criteria, and the successful supplier chosen. SCM Professional Centre Sdn. Bhd. 171.5.3 Business gifts and hospitality  The giving of gifts and offers of hospitality are among the common courtesies of business dealings.  The problem for procurement practitioners is to decide when such practices amount to an attempt to induce a favourable sourcing or contract award decision, information disclosure or other favourable treatment. SCM Professional Centre Sdn. Bhd. 181.5.3 Business gifts and hospitality  Most organisations have clear rules on receiving of gifts and hospitality where this is perceived as an ethical issue:  Business gifts other than items of a very small intrinsic value such as business diaries or calendars should not be accepted.  Modest hospitality such as a business lunch is an accepted courtesy of a business relationship. However, the recipient should not allow him or herself to reach a position whereby he or she might be deemed to have been influenced in making a business decision as a consequence of accepting such hospitality.  The frequency and scale of hospitality accepted should not be significantly greater than what the purchasing company would be likely to provide in return.  When it is not easy to decide between what is and what is not acceptable in terms of gifts or hospitality, the offer should be declined or advice sought from your manager. Any non- trivial offers of gifts or hospitality should be reported to your manager. SCM Professional Centre Sdn. Bhd. 19Exercise 1: While dealing with a tender evaluation exercise yourself, you received a phone call from one of the suppliers and their Marketing Director informed you that he had made a mistake when pricing their bid. He had over- estimated the costs of scaffolding, and would now like to reduce their price by RM22,000. You noticed that this amendment would make their bid the most advantageous. Would you accept this reduction in their tendered price owing to their mistake?  What is your decision?  Justify your decision with respect to the key aspects of procurement ethics as follows:  Integrity  Transparency  Fair dealing SCM Professional Centre Sdn. Bhd. 202. The strategic significance of procurement SCM Professional Centre Sdn. Bhd.2.1 What is purchasing? Classic definition of purchasing: To buy materials of the right quality, in the right quantity from the right source delivered to the right place at the right time at right price. The above definition is outmoded as it implies that purchasing is:  Reactive rather than proactive  Transactional rather than relational  Tactical rather than strategic A composite definition of purchasing: The process undertaken by organisational unit that, either as a function or as part of an integrated supply chain, is responsible for procuring or assisting users to procure, in the most efficient manner, required supplies at the right time, quality, quantity and price and the management of suppliers, thereby contributing to the competitive advantage of the enterprise and the achievement of its corporate strategy. SCM Professional Centre Sdn. Bhd. 22 Source: Lysons and Farrington (2012)2.2 Definition of procurement  The terms ‘procurement’ and ‘purchasing’ are often used interchangeably in many organisations and academic literature according to preference.  Chartered Institute of Procurement & Supply (CIPS) propose that this definition by Lysons & Farrington, can be effectively applied to the term ‘procurement’  ‘Procurement …… is the process undertaken by the organisational unit that, either as a function or as part of an integrated supply chain, is responsible for procuring or assisting users to procure, in the most efficient manner, required supplies at the right time, quality, quantity and price, and the management of suppliers, thereby contributing to the competitive advantage of the enterprise and the achievement of its corporate strategy.’  The above definition reflects the role of the procurement function is more proactive, relational, strategic and integrated. SCM Professional Centre Sdn. Bhd. 232.3 Supply chain  The concept of the supply chain is as follows:  ‘The supply chain encompasses all organisation and activities associated with the flow and transformation of goods from the raw materials stage, through to the end user, as well as the associated information flows. Material and information flows both up and down the supply chain.’  Suppliers (the firms from which we buy inputs) are said to be upstream.  Customers (the firms or individuals to whom we sell outputs) are said to be downstream. SCM Professional Centre Sdn. Bhd. 24 Forma tion (order s and Supplier’s suppliers Suppliers Firm Customer Customer’s customers Payments Information (order and schedules) Goods and services Fig. 1 Principal flows in a simple supply chainSuppliers Manufacturers Warehouses & Distribution Centers Customers Fig. 2 Supply Chain Illustration #1 SCM Professional Centre Sdn. Bhd. 25Fig. 3 Supply Chain Illustration #2 SCM Professional Centre Sdn. Bhd. 262.3.1 Supply Chain  “Clearly, the term ‘chain’ is a simplification of the complex web of suppliers, sub-assemblers, manufacturers, distributors and logistics providers who are the primary actors in managing the physical flows from womb to tomb.”  McFarlane & Sheffi (2003), The impact of automatic identification on supply chain operations. International Journal of Logistics Management, Vol. 14, No.1, p.1-17 SCM Professional Centre Sdn. Bhd. 272.4 Environmentally Sound Supply Cycle  Sustainability and other environmental considerations are important supply chain issues SCM Professional Centre Sdn. Bhd. 28 Fig. 4 Environmentally Sound Supply Cycle2.4.1 Global warming SCM Professional Centre Sdn. Bhd. 29 The greenhouse effect is a natural phenomenon based on the fact that the Earth's atmosphere acts a little like the glass of a greenhouse, allowing the heat of the Sun to enter, then capturing it. Greenhouse gases present in the atmosphere trap the infrared rays emitted by the Earth. The greater their quantity, the more the atmosphere and surface heat up. Greenhouse gases are chemical compounds in the atmosphere that trap heat there. Greenhouse gases, mainly carbon dioxide (CO2), are naturally present in the atmosphere in small quantities (less than 1%). Since start of the industrial age , humanity has been burning ever-increasing quantities of fossil fuels, whose atmospheric residues are greenhouse gases. The volume of CO2 released in this way (3 Gt a year) could, according to clinmtic models, cause +5°C of global warming by 2100. This would disrupt the Earth's climatic balance, resulting in the melting of continental glaciers and a significant rise in the level of the oceans due to thermal expansion.2.4.2 Global warming prediction SCM Professional Centre Sdn. Bhd. 30 A climatic model is a computer programme designed to reproduce the behaviour of the Earth's climate. It is used to reconstruct past climatic conditions or study future climatic developments. 2.4.3 Sustainable Development  Sustainability: Meeting the needs of the present without compromising the ability of future generations to meet their own needs’ (World Council on Economic Development, 1987). SCM Professional Centre Sdn. Bhd. 31 Scheme of sustainable development: at the confluence of three constituent parts.SCM Professional Centre Sdn. Bhd. 32 2.5 Supply Chain Management Physical Distribution Management Materials Management Supply Chain Management Information Flow Procurement Logistics Second Tier Customer First Tier Customer First Tier Supplier Second Tier Supplier End Customer Fig. 5 Terms to Describe the Management of Different Parts of the Supply Chain Physical Flow2.6 Materials management, physical distribution and logistic Fig. 5.1 Logistic management = Materials management + Physical distribution management SCM Professional Centre Sdn. Bhd. 33 Procurement (purchasing or acquisition) Material management Logistic management Inbound transport and storage of materials, inventory management (flow of inputs to production) Production management and control: forward ordering of materials; preparing schedules; quality management, and so on Storage of finished goods, inventory management and outbound transported (flow of finished goods to the customer) Physical distribution management2.6.1 Materials management, physical distribution and logistic  Material management is ‘the total of all those tasks, functions, activities and routine which concern the transfer of external materials and services into the organisation and the administration of the same until they are consumed or used in the process of production, operations or sales’ (CIPS).  Physical distribution involves activities involved in the output phase of the supply chain process: That is, the flow of goods from production to the customers: storage and handling of finished outputs, and outbound transport to intermediaries, customers or consumers.  The concept of Logistic management takes integration a step further, by integrating responsibilities for both input phase and he output phase: the flow of materials inwards to the production process and the flow of finished goods outwards to the customer. SCM Professional Centre Sdn. Bhd. 342.7 Internal supply chain  The internal supply chain describes a flow of information and other resources within – into and through – a given organisation: from inbound activities (procuring and receiving inputs), to conversion activities (transforming inputs into outputs) to outbound activities (moving outputs onward to customers).  The procurement function is part of the internal supply chain: it is served by internal suppliers and in turn serves internal customers. SCM Professional Centre Sdn. Bhd. 35 Formati on (orders and Procurement Production Storage Distribution Sales and marketing • Information (promotion plans, sales forecast, orders, inventory data) • Material (returns, goods for repair or service, goods for recycling or disposal) • Finance (payments) Fig. 6 Principal flows in a (simplified) internal supply chain • Information (capacity data, delivery schedules, payment terms) • Material (finished goods, services) • Finance2.8 Strategic role of procurement  A proactive strategic procurement operation can give an organisation it represents a competitive advantage by reducing waste in the value chain.  Fig. 7 shows the involvement of procurement at strategic, tactical and operational levels. SCM Professional Centre Sdn. Bhd. 36 Strategic Level Tactical Level Operational Level •Procurement research •Long range planning •Policy determination •Single sourcing •Post tender negotiation •Ethics • etc. •Staff development •Procurement method •cost reduction techniques •Contracting •etc. •Enquiries/quotation •Requisition handling •Price determination •Expediting • Invoice clearance •etc. Fig. 7 Procurement strategic, tactical and operational levels2.9 What does the procurement function do?  In general, the functions of procurement includes the activities as follows:  Supply market monitoring and identifying potential sources of supply  Supplier evaluation and selection  Processing procurement or stock replenishment requests  Providing input to the preparation of specifications for new purchases  Negotiating, buying and developing contracts  Expediting or contract management  Clerical and administrative tasks SCM Professional Centre Sdn. Bhd. 372.10 The scope of procurement  Organisations spends a much greater proportion of their budgets on buying goods, services and construction works.  Goods are tangible or material items, which can be consumed.  Services are actions individuals or organisations perform which confer a benefit, but do not result in the ‘ownership’ of anything.  Construction works includes projects such as the construction, alteration, repair, maintenance or demolition of buildings or structures. SCM Professional Centre Sdn. Bhd. 382.11 Classification of procurement  Direct procurement refers to a range of situations when the items procured are either for incorporation in goods for sale (eg raw materials and components purchased by a manufacturer) or for resale (e.g. the goods purchased by a retailer).  Direct procurement refers to the procurement of inputs and consumables for the primary revenue-earning activities of the enterprise.  Indirect procurement refers to the purchase of any other, ancillary items (including MRO supplies, services and other operating expenses).  Indirect procurement refers to the procurement of inputs and consumables for the support activities. SCM Professional Centre Sdn. Bhd. 392.11.1 Production materials  Materials used in manufacturing are often classified under the three headings:  Raw materials  Component assemblies  Work in progress  Failure to obtain timely and secure supply of high-quality production materials can lead to disruption in manufacturing operations, incurring significant costs. The role of procurement staff is therefore critical.  Procurement staff must bear in mind in relation to production materials:  The ‘make or buy’ decision  The need for cross-functional collaboration  The need to involve potential suppliers early in the procurement process SCM Professional Centre Sdn. Bhd. 402.11.2 Commodity procurement  Primary commodities are items that occur in nature and provide raw materials for businesses to incorporate in their products.  They include minerals such as coal and iron ore and also crops such as cotton, wheat and coffee  From the procurement viewpoint, the main challenges of sourcing commodities are:  Commodities are unequally distributed, geographically: often, involving procurement in international sourcing.  Commodities are subject to significant and unexpected fluctuations in price. SCM Professional Centre Sdn. Bhd. 412.11.3 Goods for re-sale  In businesses such as retail, wholesale and brokerage, buyers are purchasing finished goods for re-sale onwards to customers.  Retailers, wholesalers and brokers primarily buy the goods they intend to sell.  Issues such as quality control, service levels and supplier relations will be important in the procurement of goods for resale –as they are in the purchase of production materials. SCM Professional Centre Sdn. Bhd. 422.11.4 Maintenance, repair and operating (MRO) supplies  MRO supplies have been defined as ‘all goods and services (other then capital equipment) necessary to transform raw materials and components into end products’. They include such items as paint, lubricants, packing materials, cleaning products and industrial clothing.  Their absence, or defective quality, may in some cases cause costly disruption to production.  A systematic approach to inventory management should be adopted  Each item of MRO supplies must be accurately described and a comprehensive catalogue developed.  Opportunities for rationalisation should be investigated.  Stock movements must be recorded accurately, preferably on a computerised system.  Slow moving stock should be monitored with particular care. SCM Professional Centre Sdn. Bhd. 432.11.5 Capital procurements  Two main features distinguish capital goods from other items procured by an organisation.  Length of lifecycle. A capital item is one which the procuring organisation will use for a long time, usually several years.  High acquisition costs. A capital item is a large-value asset.  Typical examples of capital goods procured from external suppliers include buildings, manufacturing plant, computer hardware and vehicles. Others include certain internal projects, such as the design and installation of a new computer system. SCM Professional Centre Sdn. Bhd. 442.11.5.1 Capital procurements  Many functions are likely to have a voice in decisions about capital assets, including: engineering, user departments, top management and finance.  Procurement’s contributions are:  Performing research to identify potential vendors and to obtain relevant data about them.  Requesting quotation and evaluating bids.  Organising and managing discussions and negotiations with suppliers, and finalising agreed terms and conditions.  Awarding the contract and placing the order.  Checking supplier’s compliance with agreed terms SCM Professional Centre Sdn. Bhd. 452.11.6 Service procurement  A service has been defined as ‘any activity or benefit that one party can offer to another that is essentially intangible and does not result in the ownership or anything’ (Philip Kotler)  Some of the most common services utilised by business organisations include: banking, consultancy, advertising and design, catering, cleaning, security, maintenance, warehousing, transport/distribution and IT support.  Key performance indicators (KPIs) can be drawn up to suit the needs of a particular service contract. KPIs are agreed, specific measures of the performance of a unit or organisation, against which progress and performance can be evaluated.  Where possible, such goals will be quantitative: that is, numerical or statistical.  Some targets, however, will be more qualitative: that is, subjective an pertaining to qualities or attributes that cannot readily be quantified.  Outsourcing may be defined as the process whereby an organisation delegates non-core tasks, under contract, to external service providers, on long-term relational basis. Clearly a major reason for outsourcing is the possibility that it will be cheaper to procure the services from external providers than to perform them in-house. SCM Professional Centre Sdn. Bhd. 46 Some benefits of outsourcing procurement:  The freeing up of resources  The ability to draw on procurement knowledge, experience, expertise, contacts, systems and technology  The potential for third party purchasers to aggregate demand and consolidate orders for different clients  The re-focusing of remaining internal procurement staff on strategic issues  Greater flexibility to adjust to peaks and troughs of demand for procurement activity  Risk and costs associated with outsourcing procurement functions:  The organisation loses a critical commercial skill and knowledge base  The organisation may lose control over vital data and intellectual property  An additional management layer is needed to manage the outsource provider SCM Professional Centre Sdn. Bhd. 47 2.11.6.1 Outsourcing procurement operations Most organisations need to hold a certain level of stock of items to meet customers needs and production requirements. However, there are costs associated with holding stocks (eg cost of capital tied up in stock, the cost of storage space and insurance, the cost of stock wastage due to deterioration or obsolescence, and so on)  To minimise the costs of stockholding, a number of techniques have emerged in stock procurement  Use of economic order quantities  Improving the process of demand forecasting  Use of vendor managed inventory  Use of management information systems to support inventory management SCM Professional Centre Sdn. Bhd. 48 2.12 Stock and non-stock policy2.12 Stock and non-stock policy  Non stock procurement dominate in sectors such as construction, where most of the organisation’s output consist of ‘products’ made in direct response to customers orders. Non-stock procurement is also a feature of just in time (JIT) manufacturing and supply environment.  Stock to order is a non-stock procurement policy whereby the organisation only procure materials as required to fulfil orders received from customers  Stock to forecast policy is based on forecasting or estimating demand for finished products (for sale to customers) and for supplies (for operations) and planning inventory quantities and timing on this basis.  Stock for inventory policy is where items are procured and placed into storage in advance of future need or demand.  Perishable goods are those that are subject to deterioration overtime: once they have deteriorated, they are no longer fit for their intended purpose. SCM Professional Centre Sdn. Bhd. 492.13 The operational objectives of procurement  Some of the typical objectives of procurement operations are:  Adding value  Achieving the ‘five rights’ of procurement  Achieving value for money SCM Professional Centre Sdn. Bhd. 502.13.1 Added value  Value can be seen simply as the ‘worth’ of the product or service, which may be measured in two ways: what it costs the organisation to produce or provide, and what customers are willing to pay for it.  An organisation creates value: by performing its activities more effectively or efficiently then its competitors.  Customers purchase value: by comparing an organisation’s products and services with those of its competitors.  The term ‘added value’ essentially refer to the addition of greater value or worth to a product or service, as a result of all the processes that support its production and delivery to the customers (design, production, marketing, customer service, distribution, maintenance). SCM Professional Centre Sdn. Bhd. 51i) Porter’s value change SCM Professional Centre Sdn. Bhd. 52 Lysons, K. & Farrington, B. (2012) Purchasing and supply chain management 8th Edition Pearson Education Limited F Firm infrastructure (General management, accounting, finance, strategic planning, IT System) Human resource management (Recruiting, training, development) Technology development (Research and development, product and process improvement) Procurement (Purchasing of raw materials, machines, suppliers) Inbound logistic (Raw materials, handling and warehousing) Operations (machining, assembling, testing) Marketing and sales (Advertising, promotion, pricing, relationship) Outbound logistic (Warehousing and distribution of finished products) Services (Installations, repairs, spares) Primary activities Support activities Fig. 8 Porter’s value changei) Porter’s value change  Primary activities are grouped into five areas: Inbound logistic, Operations, Outbound logistic, Marketing & sales and Services.  Primary activities are concerned with bringing resources into the organisation, transforming them by means of a ‘production’ process, moving finished products to customers, and marketing them.  Secondary, or support activities operate across the primary activities, as in the case of procurement where at each stage items are acquired to aid the primary functions. They include Firm infrastructure, Human resource management, Technology development and Procurement.  Secondary activities are concerned with supporting the primary business function.  Each activity within a value chain provides inputs which, after processing, constitute added value to the output.  Activities within the value chain are interdependent but the ‘linkages’ require co-ordination in order to optimise the flow of value.  The procurement function can contribute significantly to the later form of value addition by streamlining procurement operations and developing a well-managed supply chain to minimise waste and costs. SCM Professional Centre Sdn. Bhd. 532.13.2 Achieving the ‘five rights’ of procurement  One objective of procurement is to obtain the ‘inputs’ required by an organisation for its operations.  The primary role of a procurement function is therefore to provide the ‘right’ input for the organisation’s processes. The ‘right’ inputs are traditionally described as:  Inputs of the right quality  Delivered in the right quantity  At the right time  To the right place  For the right price  These are often called the five rights of procurement. SCM Professional Centre Sdn. Bhd. 542.13.2.1 The ‘Right Supplier’  It is especially worth noting that the five rights formula doesn't include 'the right supplier‘  The 'right supplier' is one who can deliver the right quantity and quality to the right place at the right time at the right price.  However, there may be other considerations, in the choice of supplier, such as  the supplier's compatibility with the buying organisation;  its credibility and reliability;  its potential for innovation and development;  its willingness to commit to continuous improvement and relationship development;  its ethical and environmental performance; and so on. SCM Professional Centre Sdn. Bhd. 55i) The right quality  Description:  Obtain goods which are of satisfactory quality and fit for their purpose (suited to internal and external customer’s need), by:  Accurate specification of requirement and quality standards  Supplier and buyer-side quality management  Importance:  If not achieved  Stock may have to be rejected or scrapped  Production machinery may be damaged  Finished products may be defective and may have to scrapped or re-worked  Defective products may reach customers, resulting in recall, returns, compensation claims, lost goodwill, damaged reputation  The firm will incur high costs SCM Professional Centre Sdn. Bhd. 56Fig. 9 Costs of quality SCM Professional Centre Sdn. Bhd. 57 Quality-related costs Cost of ensuring and assuring quality Prevention cost Cost incurred to reduce appraisal cost to a minimum Appraisal cost cost incurred (eg inspection and testing) in ascertaining conformance to quality requirements Loss incurred when quality is not achieve Internal failure cost Cost arising from inadequate quality discovered before transfer of ownership to purchaser External failure cost Cost arising from inadequate quality discovered after transfer of ownership (eg complaints, warranty claims, recall cost)ii) The right quantity  Description:  Obtaining goods in sufficient quantity to meet demand and maintain service levels while minimising excess stock holding (which incur costs and risks), by:  Demand forecasting  Inventory management  Stock replenishment systems  Importance:  If not achieved  Insufficient stock may be held to meet demand: Stockout may cause bottleneck or shutdown in production; costs of idle time; late delivery to customers; lost credibility, goodwill and sales  Excess stock may be ordered and/or held: tying up capital in ‘idle’ stock; wasting storage space; risking deterioration, theft or damage; risking obsolescence or disuse; incurring ‘holding cost’ SCM Professional Centre Sdn. Bhd. 58iii) The right place  Description:  Having goods delivered to the appropriate delivery point, packaged and transported in such a way as to secure their safe arrival in good condition, by:  Distribution planning  Transport planning  Packaging  Importance:  If not achieved  Goods may be delivered to the wrong place, creating delay and correction costs  Goods may e subject to unnecessary transport and handling (and related costs)  Goods may be damaged, contaminated or stolen in transit  Transport may cause unnecessary environmental damage SCM Professional Centre Sdn. Bhd. 59Modes of Transportation  Supply chain use a combination of the following modes of transportation  Rail  Truck  Air  Package carriers  Water  Intermodal  Pipeline  SCM Professional Centre Sdn. Bhd. 60Fig. 10 Transportation SCM Professional Centre Sdn. Bhd. 61  Rail  low-value, high-density, bulk products, raw materials, intermodal containers  not as economical for small loads, slower, less flexible than trucking  Trucking  main mode of freight transport in U.S.  small loads, point-to-point service, flexible  More reliable, less damage than rails; more expensive than rails for long distanceFig. 11 Transportation SCM Professional Centre Sdn. Bhd. 62 Air  most expensive and fastest, mode of freight transport  lightweight, small packages <500 lbs  high-value, perishable and critical goods  less theft Package carriers  small packages  fast and reliable  increased with e-Business  primary shipping mode for Internet companiesFig. 12 Transportation SCM Professional Centre Sdn. Bhd. 63  Water  low-cost shipping mode  primary means of international shipping  U.S. waterways  slowest shipping mode  Intermodal  combines several modes of shipping- truck, water and rail  key component is containers  Pipeline  transport oil and products in liquid form  high capital cost, economical use  long life and low operating costiv) The right time  Description:  Securing delivery of goods at the right time to meet demand, but not so early as to incur unnecessary inventory costs by:  Demand management  Supplier management  Importance:  If not achieved  Goods may be too late, causing production bottleneck (and associated costs) and/or delays in delivery to customers (with costs of damages, lost business)  Goods may be too early, causing undue risks and costs of holding inventory SCM Professional Centre Sdn. Bhd. 64Understanding Lead Times  The expression 'lead time' has a number of different meanings, and it is important for users and purchasers to understand the true or total length of the lead time to obtain goods.  Internal lead time is the elapsed time between identifying the need for a product or service, and issue of a complete purchase order. This will include preparing the specification, identifying suitable suppliers, the enquiry/quotation process, and finally selecting the supplier and agreeing the contract.  External lead time is the elapsed time between the supplier receiving the purchase order, and completing the purchase order – which is often delivery of a product or service. This is often referred to as the supplier’s delivery time.  Total lead time is the elapsed time between identifying the need for a product or service, and the supplier completing the purchase order. It is therefore the sum of internal and external lead time as defined above, plus any time lag between the purchase order being issued by the buyer, and received by the supplier. SCM Professional Centre Sdn. Bhd. 65SCM Professional Centre Sdn. Bhd. 66 Fig. 13 Different perceptions of lead time Origin of need Requisition Order sent Order received Manufacture commenced Manufacture completed Dispatch Receipt In user’s possession Use of consumption ‘True’ lead time User’s lead time Purchasing lead time Supplier’s lead time Manufacturer’s lead time Internal lead time External lead time Total lead timev) The right price  Description:  Securing all of the above at a price which is reasonable, fair, competitive and affordable. Ideally, minimising procurement costs in order to maximise profit, by:  Price analysis: the process of seeking to determine if the price offered is a fair and appropriate price for the goods.  Supplier cost analysis: a more specialised technique, often used to support price negotiations where the supplier justifies its price by the need to cover its costs.  Importance:  If not achieved  Supplier will be free to charge what they like, without check  Supplier profit margins will be ‘squeezed’ unfairly, leading to insecurity of supply  Materials and supply costs will rise  Profits will fall – or prices charged to customers will have to rise (losing sales)  There will be less profit to motivate shareholders and reinvest in the business SCM Professional Centre Sdn. Bhd. 67Understanding costs  It is important to distinguish clearly between 'price' and 'cost'  Price, is what a supplier charges for a package of benefits offered to a purchaser.  Cost is what the purchasing organisation pays to acquire and utilise the goods purchased.  The supplier also has costs: the finance and resources it expends in producing and providing goods and services.  A purchaser cannot routinely expect the (purchase) price of goods to be the same as their cost (of production) - otherwise, the supplier would not make a profit, and would be unlikely to survive. SCM Professional Centre Sdn. Bhd. 68The link between cost and price  It is often convenient to indicate the profitability of a particular business, or a particular product, by expressing the profit as a percentage.  We may choose to express the profit as a percentage of total costs, or as a percentage of selling price.  When we express the profit element as a percentage of cost, we refer to it as a mark-up. Example: the mark-up is 25% on cost (because $20 is 25% of $80).  When we express the profit element as a percentage of selling price, we refer to it as a margin. Example: the margin is 20% on selling price (because $20 is 20% of $100).  The price at which a supplier provides a product can be called the selling price (if viewed from the supplier's perspective) or the purchase cost (if viewed from the purchaser's perspective).  The supplier himself must buy supplies to use in the production of his product or service and also to run his business generally (eg administration costs). SCM Professional Centre Sdn. Bhd. 69Fig. 14 Supplier’s Profit SCM Professional Centre Sdn. Bhd. 70 = + + + Supplier’s Material Cost Selling Price Supplier’s Labour Cost Supplier’s Overhead Allocation Supplier’s Profit Supplier’s Profit can be expressed as follows: • Mark-up: Percentage of costs – (20/80) x 100% = 25% • Margin: Percentage of selling price – (20/100) x 100 = 20% RM80 RM20 RM100Price  Sales price The 'right price' for the supplier to charge (the right selling price) will be:  A price which 'the market will bear': that is, a price that the market or a particular purchaser will be willing to pay  A price which allows the supplier to win business, in competition with other suppliers (according to how badly it needs the business, and the prices being charged by its competitors)  A price which allows the supplier at least to cover its costs, and ideally to make a healthy profit which will allow it to survive in business and to invest in growth. SCM Professional Centre Sdn. Bhd. 71Price  Purchase price The 'right price' for the purchaser to pay (the right purchase price) will be:  A price which the purchaser can afford: allowing it to control its costs of production and make a profit on sale of its own goods or services  A price which appears fair and reasonable, or represents value for money, for the total package of benefits being purchased  A price which gives the purchaser a cost or quality advantage over its competitors, enabling to compete more effectively in its own market SCM Professional Centre Sdn. Bhd. 72Purchasing price and total cost of ownership  The 'right price' is one which represents value for money for the 'total package of benefits' being purchased.  There is a vital difference between the purchase price of an article and its total acquisition cost or total cost of ownership.  Total acquisition cost includes not just the price of the items being purchased, but also:  Various transaction costs, such as taxes, foreign exchange rate costs and the cost of drawing up contracts  Finance costs (if capital has to be borrowed to pay for the purchase, say)  The costs of packaging, transporting and insuring the goods for delivery  Costs of storage and other handling, assembly or finishing required  Costs of quality (inspection, re-work or rejection, lost sales, compensation of customers etc)  Costs of installation, maintenance and repair (where relevant, eg for equipment purchases),  staff training and so on, over the lifetime of the purchase. SCM Professional Centre Sdn. Bhd. 73Fig. 15 The price-cost iceberg  Current thinking emphasises the ‘total cost of ownership’ (TCO), ‘total acquisition costs’ (TAC) or ‘total life cycle costs’, including:  Pre-acquisition costs  Acquisition costs  Operating costs  Maintenance costs  Downtime costs  End of life costs SCM Professional Centre Sdn. Bhd. 74 Price Defects Inventory Repair Training Consumables Delivery Support Delay Inspection Handling costs Maintenance Disposal The price-cost iceberg, ‘Fig. 16 The cost equation SCM Professional Centre Sdn. Bhd. 75 = + + + Cost of Acquisition Cost of Operation Cost of Disposal Total cost of Ownership Purchase Pricevi) Trade-off between the five rights  The five rights are interdependent and interlink. Sometimes you can’t get one without the other, and sometimes you can’t get both at the same time.  If you don’t get the right quality, you aren’t getting the right quantity (because some items will be rejected or scrapped). At the same time (because delays will be caused by inspections and reworks), or the right price (because poor quality does not represent value for money, and incur costs).  The concepts of right quantity and right time are highly interdependent. You can have large quantities delivered early, in order to be sure to have sufficient items in stock or you can have small ‘top up’ quantities delivered late, when you have a more accurate idea of demand (or even in response to demand, in a just in time system).  There is always a trade-off between the right price and other rights. Higher quality specifications cost more, as do short lead times (or ‘urgent’ orders) and complex delivery requirements (eg multiple deliveries)  Quantity is a more complex trade-off. In terms of acquisition costs, frequent small orders may actually cost more (because of the extra transaction and transport costs) than fewer, large orders (subject to bulk discounts). However, fewer, large orders will incur higher stock holding costs (such as storage and insurance). SCM Professional Centre Sdn. Bhd. 762.13.3 Achieving value for money  Cost reduction is not the only or even the most important function of a procurement function.  There is a delicate balance between ‘the right price’ and the other four ‘rights’ of procurement.  The overall objective can still be stated in terms of improving the profitability of the business, but ‘profit’ in this sense means any benefit, and particularly long-term benefits, accruing to the organisation.  Obtaining value for money means not paying too much for the total package of value (quality and service) you are getting.  It also means not paying too little: a very low price may reflect a supplier’s desire to win you business – but it may also result in corner cutting on quality somewhere along the line. SCM Professional Centre Sdn. Bhd. 772.13.3.1 What is the 'right price'?  So what does it mean to buy at the 'right' price?  The purchasing firm will be seeking to make a profit.  It may also be seeking specifically to control or reduce its costs - and may expect the purchasing function to play a major part in this by reducing the cost of obtaining materials, good and services.  So the 'right' price may simply be the lowest price available.  The 'right' price will therefore be the best or lowest price available, consistent with ensuring the right quality, quantity, timing; and delivery.  what the purchaser is after is value for money - not just a 'cheap‘ price. SCM Professional Centre Sdn. Bhd. 78Value can therefore be increased as follows: Value = Function + Quality Cost Cost reduction approach Function increase approach Compound approach Expand growth approach 2.13.3.2 Definition of value SCM Professional Centre Sdn. Bhd. 792.13.3.3 Achieving value for money  A number of procurement techniques can be used to obtain value for money.  To use value analysis to eliminate non-essential features  Challenging user-generated specifications, to minimise variety, stock proliferation and over specification.  Proactive sourcing  Consolidate demand  Adopting whole life costing methodology  Eliminating or reducing inventory and other non-value adding ‘waste’  Using IT systems to make procurement processes more efficient  International sourcing SCM Professional Centre Sdn. Bhd. 803. Procurement structure within an organisation SCM Professional Centre Sdn. Bhd.3.1 Structuring procurement operations  Factors influencing the design of a procurement function:  The size, nature and role of the procurement task in the organisation  The alignment with corporate structure and strategy  The structure and environment with which procurement operates  The strategic objectives of the procurement function  An important organisational issue is the extent to which procurement responsibilities should be centralised or decentralised.  In service firms, in particular, it is common to find that procurement is carried out by users or budget-holders, rather than by procurement specialist.  It may not always be feasible to centralise procurement operations.  If various division use and procure different materials from external supply market.  If strategic business units or operational sites are widely dispersed geographically. In such cases, there can be a need for a ‘local’ procurement presence SCM Professional Centre Sdn. Bhd. 823.2 Structuring procurement operations SCM Professional Centre Sdn. Bhd. 83 Fig 17 Centralised/decentralised organisation Business Unit 1 Ind. SS Dir. Business Unit 2 Ind. SS Dir. Business Units/ Regions Shared Services Indirect Direct Central Procurement Business Unit Heads Centralised organisation Decentralised organisation3.3 Centralised and decentralised procurement  Advantages of centralised procurement:  Specialisation of procurement staff  Potential for the consolidation of requirements  Greater co-ordination of procurement activities  Greater standardisation of specification  More effective control of procurement activity  Avoidance of conflict between business division  Access to specialist skills, contacts and resources  Advantages of decentralised procurement:  Better communication and coordination between procurement and operating departments, benefiting from user expertise and minimising ‘maverick’ buying by users  Customer focus  Quicker response to operational and user needs and environmental changes  Knowledge of, and relationships with, locally based suppliers  Smaller purchase quantities  Accountability: divisional managers can be held accountable for performance only if they have genuine control over operations  Free central procurement units to focus on higher-level, value–adding tasks SCM Professional Centre Sdn. Bhd. 843.3.1 Centralised procurement: a shared services approach  Shared services are support functions used by many different departments within a large organisation.  A shared service unit (SSU) is a dedicated provider of such services to internal users.  The SSU is responsible for managing costs, quality and timeliness of its services.  It employ its own dedicated resources, and usually has contracted agreements with internal customers based on service level agreement. SCM Professional Centre Sdn. Bhd. 853.4 Structure of centralised procurement  The way in which procurement tasks are divided among members of staff in a dedicated unit (or department) depends mainly on size:  Organisation of a small procurement department  Organisation of a medium-size procurement department  Organisation of a large procurement department SCM Professional Centre Sdn. Bhd. 86i) Structure of centralised procurement Fig. 18 Organisation of a small procurement department SCM Professional Centre Sdn. Bhd. 87 Buyer Assistant buyer Inventory control clerk General clerkii) Structure of centralised procurement Fig. 19 Organisation of a medium-size procurement department SCM Professional Centre Sdn. Bhd. 88 Chief buyer Buyer 1Chief buyer Clerical staff Buyer 2 Buyer 3 Material controller Inventory clerk Secretaryiii) Structure of centralised procurement Fig. 20 Organisation of a large procurement department SCM Professional Centre Sdn. Bhd. 89 Supplies manager Purchasing manager Buying Group 1 Buying Group 2 Inventory control manager Administratio n manager Order preparation Supplier record Research System Secretary Inventory Control Group 1 Inventory Control Group 2Hybrid Structures  A mixed of centralised and decentralised procurement is common in practice. Typical division of roles between local and central procurement functions is shown in Table SCM Professional Centre Sdn. Bhd. 90 Local Procurement Function Centralised Procurement Function Small order items Determination of major procurement and supply chain policies. Items used only by the local division Preparation of standard specifications Emergency procurements to avoid disruption to production Negotiation of bulk contracts for a number of divisions. Items sourced from local suppliers Procurement of capital assets Procurement capability development e.g. training and development. Procurement researchHybrid Structures  A number of specific hybrid models and approaches have been developed. One of which is Centre-led action network (CLAN) SCM Professional Centre Sdn. Bhd. 91 Central Procurement Direct Indirect & Shared Services Business Unit 1 Business Unit 2 Business Unit Head Business Unit Head Regions/ Locations Regions/ LocationsHybrid Structures SCM Professional Centre Sdn. Bhd. 92  Procurement staff are mainly located in different business units. They report primarily to local management of their business unit, with secondary responsibility to small procurement centre which is generally located at corporate head office.  The role of procurement centre is to lead and co-ordinate the network of local buyers, by formulating policy, setting standards and encouraging best practice.  Advantage of CLAN is that procurement is identified closely with local needs and can react swiftly to business needs. But the disadvantage is a potential loss of leverage ( as in all decentralised models) and constant effort is required from the centre to drive co-operative activity.4. The generic procurement process SCM Professional Centre Sdn. Bhd.4.1 Overview of procurement process  A generic procurement process comprises of all of the procurement activities that typically take place from the initial identification of a need to the final satisfaction of that need, in a simplified chronological sequence.  It is also possible to view procurement activity as a ‘cycle’ or continuous loop, because further needs will constantly emerge, requiring ongoing repetition of the procurement process. SCM Professional Centre Sdn. Bhd. 944.1.1 A generic procurement cycle SCM Professional Centre Sdn. Bhd. 95 Define the need Specification Develop contract terms Source the market Identify potential suppliers Appraise suppliers Invite quotations or tenders Request for quotation (RFQ) or invitation to tender Analyse quotations and select most promising supplier Negotiate best value Award the contract Contract/supplier management Monitor, review and maintain performance Identify the need Requisition or bill of materials Fig. 21 A generic procurement cycle4.1.2 Different procurement situations  Not every procurement will follow every stage of this generic process  If a procurement is a straight re-buy of items already sourced from a supplier, for example, it will not be necessary to establish a specification etc.  It is a modified re-buy, in that some of the requirement has changed, the same supplier may still be used.  New buys are more likely to conform to the full procurement process. SCM Professional Centre Sdn. Bhd. 964.1.3 Pre contract award and post award stages  A procurement process incorporates both:  Pre contract stages include identification and definition of need, procurement planning, development of the contract, market survey and engagement, appraisal and selection of suppliers, receipt and evaluation of offers.  Post contract award stages, including activities such as expediting, payment, contract or supplier management, ongoing asset management and post-contract ‘lesson’ learning.  It also helps to distinguish between terms such ‘sourcing’ and purchasing’, which are often differentiated in the design of e- procurement system.  Sourcing is the part of the process concern with ‘how and where services or products are obtained’.  Purchasing generally refers to post-contract transaction aspects such as ordering, receipting and payment. (This is sometimes called the purchase-to-pay cycle of P2P cycle.) SCM Professional Centre Sdn. Bhd. 974.1.4 Identifying and defining needs  Before any procurement exercise or transaction can begin there must be a need and this need must be notified to the procurement function.  The normal procedure would be for the department concerned to issue a requisition.  If the organisation operates a materials requirements planning (MRP) system, the identification of the need may instead be signalled by a ‘bill of materials’ (BOM). SCM Professional Centre Sdn. Bhd. 984.1.5 Identifying and defining needs  Two main types of specification: Conformance specification and performance specification.  With a conformance specification, the buyer details exactly what the required product, part or material must consist of.  It is the supplier task simply to conform to the description provided by the buyer.  A performance (or functional specification) is a relatively brief document (compared to conformance specification), in which the buyer describes what it expects a part to or material to be able to achieve, in terms of its functions it will perform, the level of performance it should reach, and any relevant input parameters and operating conditions.  It is up to the supplier to furnish a product which will satisfy these requirements. SCM Professional Centre Sdn. Bhd. 994.1.6 Developing contract terms  The role of the contract is to set out the roles, rights and obligations of both parties in a transaction or relationship.  A contract implies an intention to ‘enter into legal relations’: that is, both parties agree to be legally bound by the specified roles and responsibilities.  Contract terms are statements by the parties to the contract as to what they understand their rights and obligations to be under the contract. They define the content of the ‘offer’ (or counter-offer) which become binding once accepted by the other party. Contract terms define both parties ‘right and obligations, and it is important that there should be genuine and specific agreement on what these are, from the outset.  Terms can be expressly or explicitly inserted into a contract by either or both of the parties (express terms) or can be implied or assumed to be included in the contract (implied terms) because they are a recognised part of common law or statute. SCM Professional Centre Sdn. Bhd. 1004.1.6.1 Developing contract terms  Express terms are clearly stated and recognised in the contract between the parties. The most common examples of express terms would be where the parties specify price, delivery dates, how carriage and insurance costs will be shared and so on.  Another example is an exclusion or exemption clause, which states that one party will not be liable for some specified breach of contract or force majeure clause which specifies special circumstances in which a party will not be liable for failure to fulfil its contract obligations.  Implied terms are terms which are assumed to exist by virtue of common law and therefore form part of the contract whether or not they are mentioned within it. For example the the Malaysian Sales of Goods Act 1957 (Revised 1989) implies certain terms - such as the buyer’s right to expect goods supplied to be of satisfactory quality and fit for purpose - into all contracts for the sale of goods. SCM Professional Centre Sdn. Bhd. 101Exercise 2: Listed below are 2 cases of either express terms or implied terms in a contract  Case 1: Ordering a burger at a restaurant, the restaurant will fill your order (i.e. serve you whatever you order). The cashier then as for payment  Case 2: X writes a letter to Y, I offer to sell my car for RM 100000 to you. Y send a letter to Y, I am ready to buy your car for RM 100000. For each case, answer the questions as follows: 1. Is the contract expressed or implied? 2. Justify your response and explain the expected responsibilities of parties involve. SCM Professional Centre Sdn. Bhd. 1024.1.6.2 Developing contract terms  Usually, each term of a contract can be classified as either a ‘condition’ or a ‘warranty’  A condition is a vital term of the contract, breach of which may be treated by the innocent party as a substantial failure to perform a basic element of the agreement. In such case the innocent party has the option of treating the contract as ended and claiming damages for any loss suffered.  A warranty is a less important term which is incidental to the main purpose of the contract. Breach of a warranty does not constitute a substantial failure of performance, so the whole agreement need not collapse: the innocent party may claim damages for the breach, but cannot ‘repudiate’ (reject).  Service Level Agreements (SLAs) are formal statements of performance requirements, specifying the exact nature and level of service to be provided by a service supplier.  The main purpose of a service level agreement is to define the customer’s service level needs and secure the commitment of the supplier to meeting those needs. SCM Professional Centre Sdn. Bhd. 103Exercise 3:  Case No. 1  You bought a boat for RM400,000 with a guarantee of good condition for up to 6 month under normal ware and tear.  The first day you went sailing the boat sunk.  You complained to the seller and demanded for refund. 1. State the type of contract provision. 2. Explain and justify the rights of the buyer and the responsibility of the seller. SCM Professional Centre Sdn. Bhd. 1044.1.7 Supplier selection  Surveying the market means identifying or locating suppliers that may potentially be able to supply the requirement.  A formal, systematic approach to information gathering about the supplier may be required.  This is variously known as ‘supplier appraisal’, ‘supplier evaluation’, ‘supplier quality assessment’ of ‘supplier pre-qualification’.  The purpose of supplier appraisal or pre-qualification is to ensure that a potential supplier will be able to perform any contract or tender that it is awarded, to the required standard. In addition, having a list of pre- qualified suppliers reduces the investigations needed for individual tender and purchases. SCM Professional Centre Sdn. Bhd. 1054.1.7.1 Supplier selection  Once a shortlist of potential suppliers have been identified, the buyer may use a more resource-intensive method such as a supplier audit or site visit or capability survey.  These methods require visits to the supplier’s premises by cross- functional appraisal team which share responsibility for the decision to approve or reject the supplier on the the basis of their observations.  Following the appraisal process, one or more suppliers may be officially recognised as being able to meet the standards and requirements of the particular buyer, and therefore eligible for invitations to quote or tender for contracts: this is known as supplier approval. SCM Professional Centre Sdn. Bhd. 1064.1.8 Contract award  The organisation may have negotiated a framework agreement or ‘standing contract’ with a supplier, to meet a requirement of a certain type.  There may be only one available supplier, or the organisation may have negotiated a preferred supplier or sole supplier agreement with a dependable supply partner.  The organisation may send an ‘enquiry’ or request for quotation to one or more shortlisted suppliers. The RFQ will set out the details of the requirement and will then invite the supplier(s) to submit a proposal and price (a ‘quotation’) for the contract.  An organisation may prefer to use a competitive bidding or tendering procedure, in which pre-qualified suppliers are issued with an invitation to tender (ITT), or an invitation to bid for a contract, with the buyer intending to choose the supplier submitting the best proposal or lowest price. SCM Professional Centre Sdn. Bhd. 1074.1.8.1 Contract award  Tendering is simply the process by which suppliers are invited to put themselves forward (or ‘bid’) for a contract. There are two main approaches to this.  Selective tendering  Open tendering  In the public sector, open competitive tendering is compulsory for contracts above a certain value threshold, in order to stimulate fair and open competition.  The general principle is that the successful tender will be the lowest price or the ‘most economically advantageous tender’ (on whatever value criteria have been specified).  The evaluation team may need to analyse whether and how effective each bid meets the requirements of a performance or functional specification.  There may be considerable variety in the total solution ‘package’ being offered by bids: one may be more attractive (innovative, environmentally friendly, risk- reducing, value-adding) than another-even if price tells against it. SCM Professional Centre Sdn. Bhd. 1084.1.8.2 Contract award  Negotiation may be the main approach by which contract terms are arrived at, or may be used in support of tendering.  The process is summed up by Gennard and Judge as one of:  Purposeful persuasion: each party tries to persuade the other to accept its case or see its viewpoint and  Constructive compromise: both parties accept the need to move closer to each other’s position, identifying areas of common ground where there is room for concessions.  Awarding contract; the contract should now be formally recognised by issue the relevant contract documentation.  Typically, the components for the actual contract will be the specification and/or invitation to tender, the supplier’s written proposal, plus any terms or modifications which may have been agreed in negotiation. SCM Professional Centre Sdn. Bhd. 1094.1.9 Contract management  Once the contract has been awarded, a new ’cycle’ of activity is required to follow it through to completion.  This is called the purchase-to-pay or P2P cycle. SCM Professional Centre Sdn. Bhd. 110 Pp Purchase order Order acknowledgement Invoice Payment Advice note Expediting SUPPLIER BUYER Sales Fulfilment/operation Account Account Goods inward Procurement Goods received note Fig. 22 Purchase-to-pay activities4.1.9.1 Contract management  For simple procurement, which do not require a negotiated contract, the buyer may make out a purchase order: in most cases, a standard form (printed or electronic).  The effect of the form will, however, be to create a legally binding contract so it usually contains the firm’s standard legal terms and conditions of purchase.  There will often be a need to follow-up, chase or expedite an order.  When an order is ready for delivery a number of routines usually follow in a defined procedure:  The supplier sends an advice note to the buyer with delivery of goods, to notify the buyer of the content and time of delivery.  The goods inward department of buying organisation receive and inspect goods which must correspond to what was ordered.  The goods inward department sends a good received note (GRN) to the procurement and accounts function, to indicate the goods have arrived.  The supplier will in due course send an invoice or request for payment to the buyer. SCM Professional Centre Sdn. Bhd. 1114.1.9.2 Contract management  Contract management is the process designed to ensure that both parties meet their obligations, and that the intended outcome of a contract are delivered.  It also involves building and maintaining a good working relationship between buyer and supplier, continuing through the life of a contract. SCM Professional Centre Sdn. Bhd. 1125. Supplier Management SCM Professional Centre Sdn. Bhd.5.1 Supplier Management  The term supplier relationship management is often used interchangeably with the term ‘supplier management’.  The definition of supplier management is ‘That aspect of purchasing or procurement which is concerned with rationalising the supplier base and selecting, co-ordinating, appraising the performance of and developing the potential of suppliers and where appropriate, building long term collaborative relationships’ (Lysons & Farrington) SCM Professional Centre Sdn. Bhd. 1145.2 The relationship spectrum  Commercial relationships may vary widely in the extend of their ‘closeness’.  Relationship ‘spectrum’ extends from one-off arm’s length transactions at one end to long-term collaborative partnerships at the other. SCM Professional Centre Sdn. Bhd. 115 COMPETITIVE COLLABORATIVE Adversarial Amr’s length Transactional Closer tactical Single-source Outsourcing Strategic alliance Partnership Co-destiny Fig. 23 The relationship spectrumFig. 24 The relationship spectrum explained SCM Professional Centre Sdn. Bhd. 116 Relationship type Characteristics Adversarial Buyer and supplier are opponents or competitors, each striving to obtain advantage at the other’s expense. Arm’s length A distant, impersonal relationship where the buyer does not need close, frequent or collaborative access to the supplier. Transactional More regular dealings may be established with a supplier, but are still seen in terms of multi-source, one-off commercial transactions rather than relationship. Closer tactical The buyer wants to secure quality and continuity of supply in addition to cost efficiency, and therefore seeks to foster a degree of mutual commitment and collaboration. Single-sourced Supply continuity and quality are a key priority for the buyer, so it seeks to increase its control by securing the commitment and collaboration of a single, highly trusted supplier. Outsourcing An organisation selects an external supplier to provide goods or service previously produced in- house. Strategic alliance Two (or more) organisations identify selected areas in which they can collaborate to deliver a joint offering. Partnership Buyer and supplier agree to collaborate closely for long term, sharing information and ideas for development. Co-destiny An even closer relationship, in which buyer and supplier link their businesses together strategically for long-term mutual benefit5.3 ‘Spectrum’ of supplier relationship  From the broad ‘spectrum’ of supplier relationships, a buyer may seek with its suppliers, from one-off transactions to close partnership relations.  These approaches may cover:  Spot buying: making one off procurements to meet requirements as they arise, taking advantage of the best available terms at that time.  Regular trading: giving repeat business to a group of preferred suppliers.  Fixed or call-off contract, framework agreements or blanket ordering: establishing agreed terms of supply with suppliers for a defined period.  Single sourcing: giving exclusivity to one preferred supplier – implying a high degree of trust and commitment.  Strategic alliance: agreement to work together with a supplier for long-term mutual advantage in a particular area.  Partnership: agreement to work closely together long-term, and on a range of issues, for collaborative problem-solving and development. SCM Professional Centre Sdn. Bhd. 1175.4 Beyond contract award: supplier relationship  We might call ‘the right supplier’ the sixth right of purchasing and ‘the right relationship’ the seventh’.  Some reliable suppliers will be used again and again for ongoing requirements: the buyer may decide not to go through the sourcing stages of the procurement process for each contract, but instead may choose to develop a relationship with a preferred or even a sole supplier for certain type of procurement. SCM Professional Centre Sdn. Bhd. 1185.5 Buyer’s responsibility  After the sourcing, selecting and contracting of suppliers, therefore it remains the buyer’s responsibility:  To maintain regular contact with the suppliers, to check on progress and ensure that any issues or problems are discussed.  To monitor the supplier’s performance against the agreed terms and standards, to ensure that they are being fulfilled.  To motivate the supplier. The supplier should in any case be motivated by the thought of not gaining repeat business if performance is poor, but this is somewhat negative incentive. More positively, buyer may introduce systems of recognition for suppliers who consistently high performance.  To work with the supplier to solve any performance problem. Buyers should be ready to accept that their own firm’s success depends on the supplier ability to perform: the process of supporting suppliers in performing well is referred to as ‘supplier development’.  To work with the supplier to resolve any relationship problems or dispute – ideally, without the cost and damaged relationship arising from taking matters to court. SCM Professional Centre Sdn. Bhd. 1195.5.1 Buyer’s responsibility  ‘Supplier performance appraisal or vendor rating is the measurement of supplier performance using agreed criteria.  There are two basic approaches to vendor rating. One common approach is based on the use of supplier performance evaluation form: a checklist of key performance factors, against which supplier managers assess the supplier’s performance.  Another approach is the factor rating method, which gives a numerical score for each key assessment factor.  Supplier development may be defined as: ‘Any activity that a buyer undertakes to improve a supplier’s performance and/or capabilities to meet the buyer’s short-term or long-term supply needs’.  Hartley & Choi identify two overall objectives for organisations engaging in supply development programmes.  Raising supplier competence to a specified level (eg in terms of reduced costs, or improved quality or delivery performance).  Supporting suppliers in self-sustaining required performance standards, through a process of continuous improvement. SCM Professional Centre Sdn. Bhd. 1206. Procurement Techniques SCM Professional Centre Sdn. Bhd.6.1 Inventory Management  The system whereby the level of supplies in stock is regulated to maintain quantities required without stock excess or stock deficiencies, or as required by company stock control policies.  Use appropriate control techniques and systems to manage day to day transactions  ABC Analysis/ Pareto Analysis  Kraljic  Fixed order quantity: Action level approach (Min / Max Order)  Economic Order Quantity (EOQ)  Vendor Manage Inventory (VMI)  Consignment Stock  MRP  ERP SCM Professional Centre Sdn. Bhd. 1226.2 Segmenting external expenditure  Segmentation is an approach to analysing expenditure with external suppliers by categorising the procurement portfolio (items procured) or suppliers according to their priority, value or importance to the organisation. The segment to which a procurement or supplier is allocated determines the procurement resources and approaches that will be used in each case. SCM Professional Centre Sdn. Bhd. 1236.2.1 ABC analysis /PARETO  Pareto formulated the proposition that ‘ In any series of elements to be controlled, a selected small factor in terms of number of elements (20%) almost always accounts for a large factor in terms of effort (80%)’. This provides a useful technique for identifying the activities that will leverage your time, effort and resources for the biggest benefits. SCM Professional Centre Sdn. Bhd. 124 % of items % value of annual usage Class A items About 20% About 80% Close day to day control Class B items About 30% About 15% Regular review Class C items About 50% About 5% Infrequent review Fig. 25 ABC AnalysisKEY CATEGORIES FOR ANALYZED PROCUREMENT SPEND FY2007/08 12 17 18 20 23 26 28 33 38 43 99 140 141 149 160 175 183 321 716 776 901 0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 3,500,000 4,000,000 4,500,000 Cables & conductor Transmission Project Other Transformer & oil Distribution Project Meter & Accs Gen. Spares & Repairs Switchgears SS ACCS Gen. Project Cable Joint, term & Accs SCADA & Telecommunication Transmission Spare & Repair Feeder Pillar & Distribution Board Spun Pole Oh Accs & hardware St. Lighting & Accs Maintenance - Distribution Comp & IT Services Vehicle, Genset, Transportation & Civil Work & Services RM Million No. of Suppliers 2 21 2 121 5 25 33 186 9 16 9 1 106 10 3 9 2 15 10 6 22 Fig. 26 ABC Analysis: Example  Analysed procurement spend is RM 4.1Billion  On projects, Transmission projects contributed RM776million (19 per cent), Distribution projects RM183million (5 per cent) and Generation project RM140million (3 per cent). SCM Professional Centre Sdn. Bhd. 1256.2.2 The Kraljic portfolio procurement model  Kraljic developed a tool of analysis that seeks to map two factors:  The importance to the organisation of the item being purchased  The complexity of the supply market  At the strategic level, the Kraljic matrix is used to examine an organisation’s procurement portfolio and its exposure to risk from supply disruption. SCM Professional Centre Sdn. Bhd. 126 Fig. 27 The Kraljic portfolio purchasing modelExercise 4:  A landscaping company XYZ Sdn. Bhd. has 5 numbers of nurseries. XYZ Sdn. Bhd. is setting up an inventory unit to manage essential items for running of these nurseries. The major items are as listed below:  Flower pots (plastic and porcelain)  Flower pots (imported porcelain with intricate design)  Fertiliser (organic)  Fertiliser (specially formulated)  Flowers (local)  Exotic flowers (imported)  Assortment of gardening equipment (local make)  Soil and black earth  Draw a Kraljic portfolio purchasing model and classify all the eight types of spare parts mentioned above SCM Professional Centre Sdn. Bhd. 1276.2.2.1 Mode of Procurement Depends on the supply risk & importance of procurement:  Quotation: Non-critical items  Open tender: Leverage items  Selective tender: Bottleneck items  Direct negotiation: Strategic items SCM Professional Centre Sdn. Bhd. 128Fig. 28 Mode of Procurement SCM Professional Centre Sdn. Bhd. 129 S1 T1 T2 T3 S2 T4 T5 T6 T7 S3 T8 Open tender Selective tender S1 S2 S3 S - Source of supply T - Tenderer Purchaser PurchaserT1 T2 T3 S1 T4 T5 T6 T7 Open tender S - Source of supply T - Tenderer This situation to be avoided Purchaser Fig. 29 Mode of Procurement SCM Professional Centre Sdn. Bhd. 130T1 T2 T3 S1 T4 T5 T6 T7 Open tender S - Source of supply T - Tenderer T1 T2 T3 S1 T4 T5 T6 T7 Open tender Middleman ‘Cartel Trading’ What can be worst than this !!! Under this situation, we can expect for the price quoted, Sky is the limit. Purchaser Purchaser Fig. 30 Mode of Procurement SCM Professional Centre Sdn. Bhd. 131S1 Direct Negotiation Purchaser Fig. 31 Mode of Procurement SCM Professional Centre Sdn. Bhd. 1326.3 Fixed order quantity  In a fixed order quantity system (or ‘re-order point’ system), stock of an item is replenished with a predetermined quantity when inventory falls to a predetermined minimum level (the re-order level or ROL). SCM Professional Centre Sdn. Bhd. 133 Time Stock level Reorder point Lead Time for delivery Maximum stock Reorder level Safety stock level Fixed order quantity Fig 32 Fixed order quantity system6.4 Economic Order Quantity (EOQ)  Economic Order Quantity (EOQ) is the optimal ordering quantity for an item of stock that minimise cost. SCM Professional Centre Sdn. Bhd. 134 ITC 0 50 100 150 200 250 300 350 400 Order quantity Total cost Holding costs Ordering costs 200 400 Cost (RM) C x I D x S EOQ 2 = D = Annual anticipated demand S = Order cost per order C = Cost of the item I = Annual carrying cost interest rate Fig. 33 Graphical representation of the EOQ6.4.1 Some Assumptions of EOQ  Demand over the period (e.g., a year) is given, and remains unchanged  Price, including transport cost, does not change with order size and remains constant throughout the year  Order processing costs and stock holding costs are traceable, and remain constant While EOQs are not applicable to every inventory situation, they should be considered for repetitive purchasing situations SCM Professional Centre Sdn. Bhd. 1356.4.2 Worked example of basic EOQ  Assume the following figures:  Annual demand = 15000 units  Unit cost per item = RM10  Cost per order = RM50  Carrying cost interest rate = 20% SCM Professional Centre Sdn. Bhd. 136 C x I D x S EOQ 2 = 10 x 0.20 X 1500 x 50 2 = = 274 In practice, the EOQ would be increased to 300 items ordered five times yearly.6.5 Vendor managed inventory  Vendor managed inventory (VMI) is a technique in which inventory replacement decisions are centralised with upstream manufacturers or distributors.  The aim of VMI is to enable manufacturers or distributor to eliminate the need for customers to reorder, reduce or exclude inventory and obviate stock out.  With VMI, customers no longer ‘pull’ inventory from suppliers. Rather, inventory is automatically ‘pushed’ to customers as suppliers check customers’ inventories and respond to previously agreed stock level.  VMI can also relieve customer of much of the expense of ordering and stocking low value MRO items.  Acronyms for VMI include:  Continuous replenishment programs (CRP)  Supplier-assisted inventory management (SAIM)  Supplier-assisted inventory replenishment (SAIR)  Efficient consumer response (ECR) SCM Professional Centre Sdn. Bhd. 1376.5.1 Implementing VMI SCM Professional Centre Sdn. Bhd. 138 Step 1: The customer sends information on items sold to the distributor. This information may be collected by barcoding and scanning technology and transmitted to the distributor by EDI or the internet Step 2: The distributor process the information and forwards an acknowledgement to the customer giving details of the quantities and descriptions of the products to be delivered, delivery date and destination, and releases the goods. Step 3: The distributor collects details of all the customers’ orders, which are consolidated and send daily to the manufacturers via EDI or the internet. Step 4: The manufacturer replenishes the distributor’s stock. Step 5:The distributor invoices the customer, who remits payment. C U S T O M E R D I S T R I B U T O R M A N U F A C T E R E R 3 4 3 5 2 1 5 Fig. 34 Simple model of VMI6.6 Consignment stock  The key principal of consignment stock is that the supplier puts the stock into the buyer warehouse and the supplier is paid not at a time based on when the buyer receives the goods, but when the goods are used within the plant (such as MRO items) or sold to the buyer’s own customers – for example, reels of paper bags to put sugar in.  Payment terms, like all things, are negotiable, so the buyer can still pay 30 days after use.  We can see what’s in it for buyers. They pay later and have the stock available to use.  But what is it for the seller? With stock in the buyer’s warehouse, the seller has certainty of supply and demand turnover – its goods are with the customer and a sale is almost guaranteed.  For suppliers, this is much better than the goods sitting in their own warehouse with no potential customer. SCM Professional Centre Sdn. Bhd. 1397. Technology in procurement SCM Professional Centre Sdn. Bhd.7.1 Electronic systems in the procurement process  Information and communication technology (ICT) has radically changed the way we do business.  Dramatically increasing the speed of communication and information processing  Offering wider access to knowledge and information, especially from global sources  Facilitating 24-hour, 7-day, global business  Supporting paperless communications  Creating ‘virtual’ relationships, teams and organisations  The internet is a worldwide computer network allowing computers to communicate via telecommunications links.  The term e-commerce (short for electronic commerce)  Refers to business transactions carried out online via ICT – usually the internet.  E-commerce has facilitated direct marketing, linking customers directly with suppliers. It is a means of automating business transactions and workflows. SCM Professional Centre Sdn. Bhd. 1417.1.1 Electronic systems in the procurement process  The most obvious way in which the internet has supported the growth of e-commerce and specifically e-procurement is in providing information.  By accessing a portal the purchaser can view an entire information centre on all types of product from all suppliers who have access to the portal, with prices, specifications, stock levels and delivery times. SCM Professional Centre Sdn. Bhd. 1427.1.2 Electronic systems in the procurement process  For a procurement function, the internet has also provided other benefits.  Wider choice of suppliers, including global and small suppliers, via the internet  Saving in procurement costs, through electronic communication, greater accuracy and electronic transaction processing  Support for low inventory and efficient stock turnover due to the speed or responsiveness of the system  Improved supply chain relationships and condition, arising from data-sharing SCM Professional Centre Sdn. Bhd. 1437.1.3 Electronic systems in the procurement process  CIPS defines e-purchasing as ‘the combined use of information and communication technology through electronic means to enhance external and internal purchasing and supply management processes.’  In CIPS terminology, however, e-procurement specifically addresses the ‘purchase-to-pay’ stage of the purchasing cycle: the stage from when a purchase has been approved to the receipt of the product, and through to the payment of the product.  The term ‘e-sourcing’ refers to the earlier stages in the process, when a need is identified and requisitioned, the market is surveyed, suppliers are appraised and pre-qualified, and relationships with suppliers are set up. SCM Professional Centre Sdn. Bhd. 1447.1.4 Electronic systems in the procurement process SCM Professional Centre Sdn. Bhd. 145 Knowledge Specification RFQ/Tender Negotiation and evaluation Contract Payment Receive Order Authorise Select and requisition E-Procurement E-Sourcing Fig. 35 The e-purchasing process7.1.4.1 E-requisition  Electronic requisition is designed to simplify the process whereby the procurement function captures requisitions from users, and provides information about both the requisitioner and the requirement.  The database contains records of all materials and parts, code numbers, descriptions, usage records and current stock balance-as well as prices of recent requisitions and suppliers details. Stock levels are automatically updated.  Electronic point of sale (EPOS) devices involved the use of barcoding and radio frequency identification (RFID) tagging to record sales at point-of-sale-terminals, which are linked to IT systems  EPOS can be connected to inventory management systems, to trigger automatic stock requisition and replenishment. .  EPOS can also be used to track product sales, stock availability and location, and the location of deliveries (using global positioning systems or GPS technology). SCM Professional Centre Sdn. Bhd. 1467.1.4.2 E-sourcing  E-sourcing is defined as ‘using the internet to make decisions and form strategies regarding how and where services or products are obtained’: in other words, using electronic tools for the pre-contract or ‘sourcing’ part of the procurement cycle.  The range of e-sourcing tools may be available to the procurement function.  E-catalogue:  Supplier portals and market exchanges  E-tendering  E-auctions  Online supplier evaluation data SCM Professional Centre Sdn. Bhd. 1477.1.4.3 E-sourcing  E-catalogue: suppliers exhibit their products in electronic catalogues, which can be viewed online or downloaded by potential purchasers  Supplier portals and market exchanges: sites where multiple buyers and sellers share information about requirements and offering  E-tendering: using e-RFQs (electronic requests for quotation) and specifications posted inline or emailed to potential suppliers. Bids can also be received and evaluated electronically against pre-set criteria.  E-auctions: conducted online using the buyer’s or seller’s website, or third party auction sites. In an auction, suppliers offer goods online, and potential buyers bid competitively.  In a reverse auction, the buyer specify its requirements, and suppliers submit competitive quotes. All bids are open, so suppliers may lower their prices competitively during the auction. At the end of the bidding period, the lowest bid compliant with the specification wins.  Online supplier evaluation data: third party reports, customer feedback, registers and directories of approved or accredited suppliers, benchmarking reports, market intelligence tools and so on. SCM Professional Centre Sdn. Bhd. 1487.1.4.4 E-ordering  An online catalogue or e-catalogue is the web base equivalent of a supplier’s printed catalogue, providing product specifications and cost information.  Electronic contracts (e-contracting) can be created and transmitted to suppliers SCM Professional Centre Sdn. Bhd. 1497.1.4.5 E-P2P  The term ‘e-procurement’ is sometimes used to refer to the stage which follows e-sourcing: the application of information and communication technology specially to the purchase-to-pay part of the purchasing cycle. SCM Professional Centre Sdn. Bhd. 1507.1.4.6 E-payment  An electronic invoice entered on the system is automatically matched with the referenced purchase order and goods received data, so that it can be immediately passed for payment.  Evaluated receipt settlement also called ‘self billing’ or ‘payment on receipt’ removes the need for a supplier to submit a hard copy invoice. Acceptance of the goods, or confirmed delivery of service, triggers the generation of receipt documentation and payment of the agreed amount for the goods or service received.  Electronic funds transfer (EFT) is the process of transferring monies between bank accounts using electronic means.  Many company now use purchasing cards or corporate charge cards, which are issued to staff who regularly make discretionary, ad hoc or low-value procurement. This presents an efficient alternative to manual ‘petty cash’ systems, or the processing of multiple small-transaction invoices. SCM Professional Centre Sdn. Bhd. 1517.2 Enabling Technologies  Material Requirement Planning (MRP)  Enterprise Resource Planning (ERP)  Radio Frequency Identification (RFID)  Bar Coding SCM Professional Centre Sdn. Bhd. 1527.2.1 MRP  MRP is a technique that assists in the detailed planning of production and has the following characteristic:  It is geared specifically to assembly operations  It is a dependent demand technique  It is a computer-based information system  MRP enables items/batches to be tracked throughout the entire manufacturing process and assists purchasing and control departments to move the right supplies at the right time to manufacturing or distribution point. SCM Professional Centre Sdn. Bhd. 1537.2.1.1 Essential Elements of an MRP System SCM Professional Centre Sdn. Bhd. 154 Orders Forecasts Master Production Schedules (MPS) Bill of Materials (BOM) Inventory File MRP Software Reports Secondary Exception report Planning reports Performance control reports Inventory Transaction Receipts Issues Primary Changes Order release Planned order schedules Fig. 36 MRP System7.2.1.2 MRP Input and Output  The process starts at the top level with a master production schedule (MPS).  The MPS uses the input from marketing and sales to forecast demand for quantities of the final product over a planned time horizon.  The bill of materials file (BOM) lists all the items that comprise each assembly and sub- assembly that make up the final products or end item.  The inventory file is the record of individual items of inventory and their status.  The MRP package uses the information provided by MPS, BOM and inventory files.  The primary outputs of the MRP system are: 1. Order release instructions for the placement of planned production or purchasing order 2. Rescheduling instructions notifying the need to advance of postpone open order to adjust inventory coverage to ne requirements 3. Expediting instructions that relate to overdue orders 4. Cancellation or suspension instructions relating to open orders. SCM Professional Centre Sdn. Bhd. 1557.2.1.3 MRP II  In MRP II, the production process is still driven by MPS, but additional input s are received from production control, purchasing and engineering.  The computerised system also collects data to support financial or cost accounting, marketing and human resource management.  Advantages of MRP II  It coordinates the efforts of production, engineering, purchasing, marketing and human resources to achieve a common strategy of business plan.  Managers are able to analyse the implications of their decisions, such as what if the sales forecast of marketing cannot be met by the available production capacity?  Changes can be easily factored into the system as they arise, such as rushed orders.  Cost of resources used or considered for use can be converted into money values, thus facilitating budgeting and budgetary control.  Coordination of production with , purchasing, marketing and human resources in such ways as timing of supplies deliveries using sales forecasts to determine master budgets and planning recruitment or run-down of personnel. SCM Professional Centre Sdn. Bhd. 1567.2.2 ERP  MRP allowed 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.  ERP systems are designed around a number of modules, each can be standalone or combined with others  Finance  Logistics  Manufacturing  Supplier Management  Human resources  Initially, ERP systems were enterprise-centric  Now ERP II refer to systems that facilitate collaborative commerce or c-commerce, in which a key requirement is the sharing of information outside the enterprise. SCM Professional Centre Sdn. Bhd. 1577.2.3 RFID  An RFID tag contains a silicon chip that carries an identification number and an antenna able to transmit the number to a reading device.  This means improved inventory management and replenishment practices, in turn, results in a reduction of interrupted production or lost sales due to items being out of stock. SCM Professional Centre Sdn. Bhd. 158 Fig. 37 RFID technology enables transfer of data from a tag without contact or optical scanning Fig. 38 Can be smaller than a grain of sandFig. 39 RFID Capabilities SCM Professional Centre Sdn. Bhd. 159Fig. 40 RFID Capabilities (cont.) SCM Professional Centre Sdn. Bhd. 1608. International sourcing SCM Professional Centre Sdn. Bhd.8. 1 International sourcing  Global sourcing is often used when what is meant is international sourcing/procurement.  International sourcing is procuring from another country, of the products and/or services required for the organisation. SCM Professional Centre Sdn. Bhd. 1628.2 Reasons for international sourcing  Reasons for growth in international sourcing include the following:  The purchaser may be compelled to go abroad to get what is required.  The purchaser may prefer to purchase from a foreign source which offers features not available on domestically produced goods of similar type.  Although goods of the type required are produced domestically, domestic capacity may not be enough to meet demand, so the gap has to be filled from abroad.  There are many strategic reasons for international purchases, for instance to improve supply security by having second source in another country.  It may be possible to buy equivalent goods more cheaply abroad, because of large quantities, lower wages, better productivity, better plant, or the rate of exchange  Countertrade may compel your firm to purchase abroad. SCM Professional Centre Sdn. Bhd. 1638.3 Challenges when sourcing internationally  Communication problems – These arise not just because of language difficulties, but also because of time differences between countries, and differing meanings attaching to trading terminology and technical vocabulary. It is therefore important to ensure that understanding is mutual.  Currency differences – The conversion of one currency into another does cost money for conversion to take place. The risk and uncertainty associated with the change in relative values between the exporter’s and importer’s currencies have to be taken into account and managed.  Differing legal systems – when purchasing internationally it is important to establish whether the courts of the exporter’s country, those of the importer’s, or the courts of a third country have jurisdiction in the event of a dispute. SCM Professional Centre Sdn. Bhd. 1648.3 Challenges when sourcing internationally  Payment – The international transfer of funds poses its own difficulties, and a third party, usually a bank, will probably need to be involved to facilitate this process. This service will cost money, a cost not applicable in domestic sourcing. Basically the problem is that the supplier will not wish to release their goods to the purchaser until payment has been made, or they are certain that payment will be made. It is unlikely that the purchaser will release funds until in possession of the goods, or at least a guarantee of their delivery. Because of these conflicting interests the contracting parties will usually employ the services of an intermediary, usually a bank, which will make payment only when evidenc of performance is produced. SCM Professional Centre Sdn. Bhd. 1658.4 Payment Terms SCM Professional Centre Sdn. Bhd. 166 1. Open account Low risk for Importer 2. Progress Payment 3. Letter of credit 4. Payment in advance High risk for ImporterGOODS IMPORTER EXPORTER $ This term this is also called Payment Upon Delivery to site Fig. 41 Open Account Trading 1. Exporter sends goods to Importer 2. Importer sends money to Exporter SCM Professional Centre Sdn. Bhd. 167Fig. 42 LC TRANSACTION - HOW TO GET STARTED SCM Professional Centre Sdn. Bhd. 168 IMPORTER (applicant) EXPORTER (beneficiary) IMPORTER BANK Advising Bank (3) L/C (1) Sales Contract (2) L/C APPLICATION (4) ADVICE OF L/CFig. 42.1 PAYMENT OF LC TRANSACTION SCM Professional Centre Sdn. Bhd. 169 IMPORTER (applicant) EXPORTER (beneficiary) IMPORTER BANK Exporters Bank/ Negotiating/ Confirming Bank $ (1) Sales Contract (5) Docs (8) Docs (7) Advice $ $ (6) DocumentsGOODS IMPORTER EXPORTER $ Example: Advance Payment up to 30% of purchase value to OEM only to be supported with Advance Payment Guarantee of equal amount. Fig. 43 PAYMENT IN ADVANCE 1. Importer sends exporter funds 2. Exporter then sends goods to importer SCM Professional Centre Sdn. Bhd. 1708.5 Incoterm  The International Chamber of Commerce (ICC) publishes International Commercial Terms (Incoterms).  This document is a valuable aid to negotiators in that it provides standard terminology, clarifying the responsibilities of buyer and seller in international trade.  There have been, over the years several editions of this document; the one currently in use is Incoterms 2010. SCM Professional Centre Sdn. Bhd. 1718.5.1 Classes of Incoterms  Rules for any mode of transport:  EXE Ex Works  FCA Free Carrier  CPT Carriage Paid To  DAT Delivered At Terminal  DAP Delivered At Place  DDP Delivered Duty Paid  Rules for sea and inland waterway transport:  FAS Free Alongside Ship  FOB Free On Board  CFR Cost and Freight  CIF Cost Insurance and Freight SCM Professional Centre Sdn. Bhd. 1728.5.2 Meaning of Incoterms  EXW – means the sellers only responsibility is to make the goods available at their premises. They are not responsible for loading them on vehicles provided by buyers or clearing them for export. Buyer bears the full costs and risks of taking goods from sellers’ works to their destination. This is the minimum obligation of sellers.  FCA - The ‘carriers’ are the transporters, including any freight forwarders that buyers have designated to receive the goods. Seller must have the goods, cleared for export, over to the carriers at the place indicate in the shipping terms. This can involve sellers paying for some transport from the factory to the carrier. Where delivery takes place at the seller’s premises, the seller is responsible for loading the goods on to the buyer's carrier.. However, If delivery occurs at any other place, the seller is deemed to have delivered the goods once their transport has arrived at the named place; the buyer is responsible for both unloading the goods and loading them on to their own carrier.  DDP - This means the sellers handle everything, including customs clearance to deliver the goods to the stipulated place. Since the stipulated place is usually the buyer’s own place, seller arrange and pay for every step in the process. SCM Professional Centre Sdn. Bhd. 1738.5.2 Meaning of Incoterms  FOB – This is use only for ocean or inland water transport. Once sellers place the goods, cleared for export, on board a ship at the port named in the sales contract, their obligations end. Buyers assume the risk of loss or damage to the goods once they pass the ship’s rail.  CIF – Sellers must clear the goods for export and pay the costs and freight necessary to bring them to the named destination. Seller must also buy marine insurance for the buyer. However, the buyers assume the risk of loss or damage to the goods, and any cost increases, once the goods pass the ship’s rail in the port of shipment.. SCM Professional Centre Sdn. Bhd. 1748.5.2.1 Allocations of costs to buyer/seller according to Incoterms 2010 SCM Professional Centre Sdn. Bhd. 175 2010 Export customs declaration Carriage to port of export Unloading of truck in port of export Loading on vessel in port of export Carriage (Sea/Air) to port of import Insurance Unloading in port of import Loading on truck in port of import Carriage to place of destination Import customs clearance Import taxes EXW Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer FCA Seller Seller Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer FAS Seller Seller Seller Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer FOB Seller Seller Seller Seller Buyer Buyer Buyer Buyer Buyer Buyer Buyer CPT Seller Seller Seller Seller Seller Buyer Seller Buyer/Seller Seller Buyer Buyer CFR(CNF) Seller Seller Seller Seller Seller Buyer Buyer/Seller Buyer Buyer Buyer Buyer CIF Seller Seller Seller Seller Seller Seller Buyer/Seller Buyer Buyer Buyer Buyer CIP Seller Seller Seller Seller Seller Seller Seller Buyer/Seller Seller Buyer Buyer DAT Seller Seller Seller Seller Seller Seller Seller Buyer Buyer Buyer Buyer DAP Seller Seller Seller Seller Seller Seller Seller Seller Seller Buyer Buyer DDP Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller SellerNB - DDU (2000) / DAP (2010) – Buyer bears cost for ‘duty’ (customs clearance, duty and tax) Minimum obligation for seller Seller’s Warehouse Buyer’s Warehouse Maximum obligation for seller Seller’s Warehouse Buyer’s Warehouse EXW DDP Local transport Local transport Buyer’s cost & risks Seller’s cost & risks Local transport Local transport SCM Professional Centre Sdn. Bhd. 176 Fig. 44 Comparison between EXW and DDPPort of Shipment Port of Destination Seller’s Warehouse Buyer’s Warehouse Port of Shipment Port of Destination Seller’s Warehouse Buyer’s Warehouse Carrier FOB FCA Point of delivery Point of delivery Buyer’s cost & risks Buyer’s cost & risks Local transport Local transport Seller’s cost & risks Seller’s cost & risks Local transport Local transport SCM Professional Centre Sdn. Bhd. 177 Fig. 45 Comparison between FCA and FOBCIF Port of Shipment Port of Destination Seller’s Warehouse Buyer’s Warehouse Point of delivery Agreed Point Seller’s risk Seller’s costs and freight Buyer’s risks & any additional costs after delivery Local transport Local transport SCM Professional Centre Sdn. Bhd. 178 Fig. 46 Cost Insurance and FreightThank You SCM Professional Centre Sdn. Bhd.References  Bailey, P., Farmer, D., Crocker, B., Jessop, D., Jones, D. (2008) Procurement Principles & Management, 10th edition, FT/ Prentice Hall, U.K.  CIPS (2012), Context of procurement and supply, Profex Publishing Limited, UK  CIPS (2012), Managing contracts and relationship in procurement and supply, Profex Publishing Limited, UK  Dorminey J., Fleming A. S., Kranacher M. J, and Riley, R. A. (2012), The Evolution of Fraud Theory, Accounting Education Vol. 27, No. 2, pp. 555–579  Farr, R (2008) Sustainable Supply Chain Strategy, University of Bolton, UK  Lysons, K., & Farrington, B. (2012), Purchasing & Supply Chain Management, 8th edition, FT / Prentice Hall, U.K  Othman, R., Zakaria, H., Nordin, N., Shahidan,Z. & Jusoff, K., (2010). The Malaysian Public Procurement’s Prevalent System and its Weaknesses. American Journal of Economics and Business Administration 2 (1): 6-11 SCM Professional Centre Sdn. Bhd.SCM Professional Centre Sdn. Bhd. Definitions The Oxford Dictionaries Online: Buy – obtain in exchange for payment. Procure – obtain (something), especially with care or effort.SCM Professional Centre Sdn. Bhd. What is purchasing? Classic definition of purchasing: To buy materials of the right quality, in the right quantity from the right source delivered to the right place at the right time at right price. Differences between composite and classic definition of purchasing: 1. Proactive rather than reactive 2. Relational rather than transactional 3. Strategic rather than tactical A composite definition of purchasing: The process undertaken by organisational unit that, either as a function or as part of an integrated supply chain, is responsible for procuring or assisting users to procure, in the most efficient manner, required supplies at the right time, quality, quantity and price and the management of suppliers, thereby contributing to the competitive advantage of the enterprise and the achievement of its corporate strategy.SCM Professional Centre Sdn. Bhd. 183 The Purchasing ChessboardTM 4 Basic Strategies designed to specifically support discussion between the company’s procurement department and top- management 16 levers are extremely useful in interdisciplinary discussion 64 methods that form the actual chessboard and provide an operating tool for use by procurement. The portfolio of demand power and supply power can be broken down into almost any number of fields. A.T. Kearney has introduced three structure levels.