Chapter 4

Supply Processes and

Technology
Purchasing & Supply Management
Johnson
Leenders
Flynn
14th Edition

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 Learning Objectives and
Outcome
• The supply Management Process
• Strategy and Goal Alignment
• Ensuring Process Compliance
• Information Flows
• Steps in the Supply Process

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 Learning Objectives and
Outcome
• A Supply Process Flowchart
• Rush and Small – Value Orders
• Information Systems and the Supply
• Policy and Procedure Manual

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 The Supply Management Process
A Process:
A set of activities that has a beginning and an end, occurs in a specific
sequence, and has inputs and outputs
Process-orientated person: considers the flow of information, materials,
services, and capital throughout the process no matter how many functions or
departments touch it.
Functional-orientated person: considers the steps for which his/her
department is responsible.

Inputs Process Outputs

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 Need for Robust Supply Processes
1. Large number of items

2. Large dollar volume involved

3. Need for an audit trail

4. Severe consequences of poor performance

5. Potential contribution to effective organizational operations.

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 Strategy and Goal Alignment

• Vertical strategy alignment: when supply strategy at the functional or

business unit level is in sync with organizational strategy and supply
decisions contribute to the achievement of organizational goals.

• Horizontal strategy alignment: when strategy between and among

functional areas (e.g., supply, marketing, finance, etc.) is in sync.
Personnel at all level must work to align strategies and goal vertically
and horizontally to maximize organizational opportunities

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 Ensuring Process Compliance
Process compliance: The rate at which process users adhere to the dictates of the process

Maverick buying: When non-supply staff make unauthorized buying decisions, also known
as rogue buying or off-contract buying
Consequences of Maverick Buying
• Higher total cost of ownership (due to missing or badly lead negotiations and smaller
quantities) and undermine supply credibility internally and externally
• Multitude of different suppliers( multiple suppliers for the same goods and services
with disparate prices, terms and conditions )
• Missing framework agreements
The root causes of noncompliance must be identified and eliminated.
Information system may compel compliance by eliminating alternative purchasing paths,
reducing process cycle time and instilling confidence in user that delays will be minimal

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 Potential Benefits of Information
Systems Technology
• Cost reduction and efficiency gains
• Data accessibility
• Speedier communication
• Dedicate resources to strategic issues
• Data accuracy
• Systems integration
• Monetary control

Management information systems: Provide reports & information to

management to support planning, controlling, & decisions making.

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 Information Flows
There are four basic information flows involving supply.

Inward flows
1) Information from within the organization is sent to supply including statement of
need for materials and services.
2) Information from external sources is sent to supply (e.g. prices and deliveries) or
from other sources (e.g. general market conditions and import duties)

Outward flow
3) Information from within supply is sent to others within the organization. This
include the supplier pricing, market conditions and supply forecasts for cash flow
budgeting.
4) Information such as request for quotes or proposals, is sent from supply to
external sources(suppliers).

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 Internal Information Flows to Purchasing
Inward flows within the organization

sales
forecasting engineering
production control planning

new products production

inventory control
Purchasing budgeting
(supply)
quality control financial control

receiving legal accounting

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 4 - 11

External Information Flows to

Purchasing
Inward flows external sources

general
sources market product
of conditions information
supply new product
information
suppliers’ capacity
Purchasing transportation
(supply) availability
suppliers’
production rates transportation rates
sales and prices and
labor conditions
use taxes, discounts
customs
 4 - 12

Internal Information Flows from

Purchasing
Outward flow

General
Management Product
Engineering
Development
Source, product, Economic Product and
price information conditions price information

Production Purchasing Competitive Marketing

Product availability,
lead time, price
(supply) conditions

and quality
Budget
commitments
Contracts
Costs, prices
Legal Orders adjustments Finance
placed

Stores Accounting
 Essential Steps in the Purchasing Process

The supply process is basically a communication process

1. Recognition of need
2. Description of need
3. Identification and analysis of possible sources of supply
4. Supplier selection and determination of terms
5. Preparation and placement of the purchase order
6. Follow-up and/or expedite the order
7. Receipt and inspection of goods
8. Invoice clearing and payment
9. Maintenance of records and relationships

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 1-Recognition of need

• A purchasing originates when a person or a system identifies a definite

need in the organization- What, how much, and when it is needed?

(when most of the cost and quality are determined.)

• The supply department helps anticipate the needs of using departments

• Early supply and supplier involvement provides information that may lead

to coast avoidance or reduction ,faster time to market and greater

competitiveness

•
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 2-Description of need

 A Requisition is the document used to

communicate needs internally
between users/specifiers and supply
management according to established
accounting controls.
 Purchaser must do what exactly the
internal customer wants.
 Unclear or ambiguous descriptions, or
over-specified materials, services, or
quality levels will lead to unnecessary
costs

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 2-Description of need
Purposes and flow of a Requisition

Gate 1 authority Gate 2 Internal clarity Gate 3: Internal Clearance

Does the requisitioner Is the need described in a Descriptions should be

have the authority to make clear and unambiguous way? reviewed before preparing
the specified request and documentation to
at the specified budget Uniform terms or communicate externally
level? standardized commodity or with potential suppliers.
service codes should be used
to describe required
commodity or services.

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 3-Description of need

Requisition

Standard Traveling Bill of Stores/Inventory

requisition Requisition materials(BOM) Requisition

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 Description of need
Type of Requisitions
1-Standard Requisitions: common document used to request supply of
goods or services.
1. Date
2. Number (identification)
3. Originating
4. Account to be charged
5. Complete description of materials or service desired and
quantity
6. Date materials or service needed.
7. Any special shipping or service-delivery instructions.
8. Signature of authorized requisitioner
2-Traveling Requisition Innovation used for recurring requirements & standard
parts to reduce operating expenses.
(in a manual purchasing process )
3-Bill of materials(BOM): includes all materials and parts, including allowance for
Simplifies the requisitioning process for scrap, to make one end unit,
frequently needed line items in
organizations that make a standard item
for example one two-slice toaster
over a relatively long period of time.

4-Stores/Inventory Requisition: a material requisition from inventory or the transfer of

surplus stock from another department or division
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 3-Identification of Potential Sources
Supplier selection constitutes an important part of the supply function. It involves:
1. Identifying potential qualified sources.

2. Assessing the probability that a purchase agreement would result in on-time delivery of
satisfactory product/service with appropriate before and after sale service at lowest total cost
of ownership.
3-Issue an RFx:
options for soliciting business from potential suppliers
Request for x, where x may be Information (RFI), quotation (RFQ), Proposal (RFP) or bid (RFB).

1) Request for information (RFI)

2) Request for quotation (RFQ)
3)Request for proposal (RFP)
4)Request for bid (RFB)

 The three types of solicitations are (1) request for quotation (RFQ), request for proposal
(RFP), and request or invitation for bid (RFB or IFB)

 A request for information ( RFI) Is NOT a solicitation; a solicitation may follow after
information has been received. There is no such thing as a request for price or a request for
confirmation.)

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 3-Identification of Potential Sources

Request for
solicitations
Request or
Request for Request for
invitation for
quotation (RFQ) proposal (RFP)
bid (RFB or IFB

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 identification of potential source
Issue an RFx
issued to gather information about potential suppliers'
1. Request for information (RFI) products and services.
An RFI is NOT a solicitation for business or an offer to do
business.

2. Request for quotation (RFQ) a price comparison tools that is issued when there is a clear
(the price is really the main and unambiguous description of the need, for example a
decision point) grade of material, a stock-keeping unit (SKU), or other
commonly accepted terminology

3. Request for proposal (RFP) used for more complex requirements where price is only one
of several key decision factors, and bidders are invited to use
their expertise to develop and propose one or more
solutions.

Request or invitation for bid used in a competitive bid process with or without the
(RFB or IFB): opportunity to negotiate after bid receipt.

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 4-Supplier selection and determination of terms

• Supplier Selection & Determination of Terms

• Analysis & selection of the supplier lead to
order placement. Applicable tools range from a
simple bid analysis form to complex
negotiations.

Reading

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 5-Preparation and placement of the
purchase order
Must Know:
 A purchase order is used unless the supplier’s sales agreement or a release against a

blanket order is used instead.

(Note :Blanket & Open-End Purchase Orders :

covers a variety of items such as maintenance, repair and operating (MRO) supplies and

production line requirements, and reduces costs by reducing the number of purchase orders

issued)

 Failure to use the proper contract form may result in serious legal complications or

improper documentation.

 Even where an order is placed by telephone a confirming written order should follow.

 All companies have purchase order.

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 5-Preparation and placement of the purchase order
1. -Purchase order (PO): Buyer-generated document that authorizes a purchase
transaction

2. Blanket purchase order: covers a variety of items such as maintenance, repair and
operating (MRO) supplies and production line requirements, and reduces costs by
reducing the number of purchase orders issued
3. Open-end purchase order: allows for additional items and/or extension of time.
4. Blank check purchase order: a signed, blank check is sent to the supplier along with
the PO, the supplier ships the full order, completes the check, and deposits it

5. -Procurement card (also called a corporate purchasing card, purchasing card, or a P-

card): a credit card provided to internal customers to purchase directly from
established suppliers for low-dollar-value, high volume goods and services.

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 Purchase Order
Format
The essential requirements are:
The serial number, date of issue,
name and address of the supplier,
the quantity and description, date
of delivery, shipping directions,
price, terms of payment, and
conditions governing the order.

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 6-Follow-up and/or expediting

Follow-up: is routine order tracking to ensure the supplier can meet delivery
promises.
–Progress inquiries may be made by phone, e-mail, fax or in-person.
–Early notification of problems such as production scheduling, quality, or
delivery enables appropriate action.
Expediting: is the application of pressure on a supplier
1- to meet the original delivery promise,
2- to deliver a head of schedule
3- or to speed up delivery of delayed order. Threats of order cancelation or loss of
future business may be used.
Frequently, expediting is caused by poor planning inside the buying
organization.

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 7-Receipt and inspection of goods

The prime purpose of receiving are to:

1. Confirm that the order placed has actually arrived.
2. Check that the shipment arrived in good condition.
3. Ensure the quantity ordered has been received.
4. Forward the shipment to its proper destination( storage, inspection, or use)
5. Ensure that a proper documentation of the receipt is registered and accessible to
appropriate parties.

Shortages may occur because materials has been lost in transit, short-shipped, damaged
in transit.

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 8-Invoice clearing and payment
• Invoice: a claim against the buying organization

• Aligning Supply and Accounts Payable

• The payment process and the supply process should be aligned in policy and
practice
• Lack of alignment causes conflict between supply and accounting.
• Supply views suppliers as valuable contributors to the organization's success. Living
up to the terms and conditions, including payment terms, of the contract is one
indicator of the commitment to performance of both parties.
• Accounting views cash management as a primary contributor to the organization's
success.
• Paying accounts as late as possible allows the buying organization the use of its
money for a longer period of time. The perspective on suppliers may be that they
are expendable and easily replaceable.)

• Management may put account payable and supply into one department to force
goal alignment.

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 9. Maintenance of Records and Relationships

• The final step is to Update records including suppliers performance scorecards

• Electronic files or hard copies of order-related documents are stored or filed

Linking Data to Decisions

Turning data into usable knowledge

Manage Supplier Relationships

• Internal and external relationships are affected throughout the supply process
• They may be initiated ,developed, damaged ,repaired ,or ended

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 A Supply Process Flowchart
improve efficiency and effectiveness

*(SOW) Statement of Work

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 Supply terms
Maintenance Repair Operating Supply (MRO)
• A supply management term that refers to various commodities that are generally of
low value, purchased frequently and available from multiple sources.
A typical examples include fuel oil, cleaning materials, hand tools, office supplies, &
repair parts
Vendor/supplier-managed inventory (VMI/SMI): inventory management
system in which the supplier manages the inventory at the buyer's location(s); typical
for MRO items.
• Strategic Spend
Are goods or services critical to the mission of the organization.?
In this type of management, effectiveness is favored over efficiency.

• Nonstrategic Spend
Dollar value and repetitiveness drive process decisions. First, a small dollar threshold
is established and efficiency tools, especially electronic ones, are used. Second,
suppliers are pre-qualified and tools for efficient order placement are used.

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 Rush and Small – Value Orders
Small value order
A Pareto analysis of annual spend reveals that roughly 70 to 80 percent of
transactions account for only 10 to 15 percent of spend. These are C items(C-
class items are indispensable components in the production of goods.)
For some goods fall into this category it might be possible that the cost of
processing the order and delivering the goods/service may be greater than
the value of the purchasing.
(Small dollar value purchases often cost more administratively than the price
paid for the item(s).
The problem is resolved by simplifying or automating the process or
consolidating purchases to reduce the acquisition cycle time, administrative
cost and free up the buyer’s time for higher value or more critical purchasing.

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 Small value order

• An e-procurement system may be efficient and effective in removing,

completely or partially, human involvement in ordering and allow users
rather than a buyer to place orders with suppliers.

If the system reduces the number of purchase requisitions, purchase orders,

invoices and payments, the purchasing process becomes more efficient.

If the system is designed to procure from properly vetted suppliers then the
process may also be effective in getting the right quality, quantity, delivery,
price and terms.)

• Corporate purchasing cards (also called procurement cards or( P-cards) are
credit cards issued to internal customers (users) in the buying organization
to purchase low-dollar-value, high-volume goods and services.)

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 Types of Information Systems
For Supply
MIS provide reports and information to
management to support planning,
controlling, and decision making.
DSS assist in decision making , transfer
the info to utilizing techniques such as
simulations, mathematical
relationship, or other algorithms.

Automated transaction , access to

DSS, personal productivity
software, word processing,
spreadsheet, graphics and data
base managers.

Routine operation include

generating Pos, change order, RFQ,
updating supplier list.

*ESS – Executive Support System KWS-Knowledge Work System

MIS- Management Information System OAS-Office Automation System
DSS-Decision Support System TPS-Transaction Process System

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 Policy and Procedure Manual

 Policy and Procedure Manual may also contribute to the development

of an efficient and effective process.

 It is carefully prepared, detailed statement of organization, duties of

the various personnel, and procedures and data systems.

 A manual is essential for a well-conceived training program, internal

transfer, and communication about the process.

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 Questions for Review and Discussion

1. What are the steps in a robust supply management process?

2. What are the benefits of follow-up and expediting?

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