LOGISTICS MANAGEMENT 244
SUMMARIES
CHAPTER 5
SOURCING MATERIALS AND SERVICES
,Introduction
Logistics and supply chain managers are looking for ways to drive more value
from their purchasing and procurement operations
As a result, the topics below are all receiving considerable attention as
organisations try to improve the overall efficiency and effectiveness of their
supply chains
o Purchasing
The transactional function of buying products and services
o Procurement
Refers to the process of managing a broad range of processes
that are associated with a company’s need to procure goods
and services that are required to manufacture a product or to
operate the organisation
o Strategic sourcing
This is broader and more comprehensive than the procurement
process
Focuses more on supply chain impacts of procurement and
purchasing decisions, and works cross-functionally within the
business to help achieve the organisation’s overall business
goals
It is NB to consider purchasing as an activity, while procurement and strategic
sourcing are best described as processes
Unique aspects of strategic sourcing:
,Types and Importance of Items and
Service Purchased
Some products are more NB and require greater procurement attention than
others
The quadrant technique enables the supply chain manager to assess the
importance of each product or service being purchased
o This technique utilises a two-by-two matrix to determine a procured
item’s relative importance on the basis of value and risk
o The criteria used to delineate importance are value or profit potential
and risk or uniqueness
The value criterion examines product or service features that enhance profits
for the final product and the firm’s ability to maintain a competitive advantage
in the market place
Risk reflects the chance of failure, non-acceptance in the marketplace,
delivery failures, and source non-availability
Generics
o Are low-risk, low-value items and services that typically don’t enter the
final product
o The admin and acquisition processing costs are more significant than
the purchase price of generics
o The strategic procurement thrust for generics is to streamline the
procurement process to reduce the cost associated with purchasing
generics
, Commodities
o Are items or services that are low in risk but high in value
o Basic production materials, basic packaging and transportation
services are examples of commodities that enhance the profitability of
the company but pose a low risk
o Risk is low because commodities are not unique items, and there are
many sources of supply
o Because commodities are not unique, there is little brand distinction,
and price is a significant distinguishing factor
o The procurement strategies used for commodities include volume
purchasing to reduce price and JIT systems to lower inventory
Distinctives
o High-risk, low-value items and services such as engineered items,
parts that are available from only a limited number of suppliers, or
items that have a long lead time
o A stockout of distinctives results in stopping the production line or
changing the production schedule to work around a stocked-out item
o The strategic focus for distinctives is developing a standardisation
program to eliminate or reduce the uniqueness of the distinctives,
thereby changing these items to generics
Criticals
o High-risk, high-value items that give the final product a competitive
advantage in the marketplace
o Criticals determine the customer’s ultimate cost of using the finished
product
o The procurement strategy for criticals is to strengthen their value
through the use of new technologies, simplification, close supplier
relations, and/or value-added alterations
Three types of buy situations may occur
o That of capital goods that may represent a longer-term investment for
an organisation that may require financial planning
o Re-buys, which are repeat purchases that may either be identical to
historical purchases or some variation thereof
o That of maintenance, repair, and operations items that are needed for
the continuing operation of the company and its supply chain activities
SUMMARIES
CHAPTER 5
SOURCING MATERIALS AND SERVICES
,Introduction
Logistics and supply chain managers are looking for ways to drive more value
from their purchasing and procurement operations
As a result, the topics below are all receiving considerable attention as
organisations try to improve the overall efficiency and effectiveness of their
supply chains
o Purchasing
The transactional function of buying products and services
o Procurement
Refers to the process of managing a broad range of processes
that are associated with a company’s need to procure goods
and services that are required to manufacture a product or to
operate the organisation
o Strategic sourcing
This is broader and more comprehensive than the procurement
process
Focuses more on supply chain impacts of procurement and
purchasing decisions, and works cross-functionally within the
business to help achieve the organisation’s overall business
goals
It is NB to consider purchasing as an activity, while procurement and strategic
sourcing are best described as processes
Unique aspects of strategic sourcing:
,Types and Importance of Items and
Service Purchased
Some products are more NB and require greater procurement attention than
others
The quadrant technique enables the supply chain manager to assess the
importance of each product or service being purchased
o This technique utilises a two-by-two matrix to determine a procured
item’s relative importance on the basis of value and risk
o The criteria used to delineate importance are value or profit potential
and risk or uniqueness
The value criterion examines product or service features that enhance profits
for the final product and the firm’s ability to maintain a competitive advantage
in the market place
Risk reflects the chance of failure, non-acceptance in the marketplace,
delivery failures, and source non-availability
Generics
o Are low-risk, low-value items and services that typically don’t enter the
final product
o The admin and acquisition processing costs are more significant than
the purchase price of generics
o The strategic procurement thrust for generics is to streamline the
procurement process to reduce the cost associated with purchasing
generics
, Commodities
o Are items or services that are low in risk but high in value
o Basic production materials, basic packaging and transportation
services are examples of commodities that enhance the profitability of
the company but pose a low risk
o Risk is low because commodities are not unique items, and there are
many sources of supply
o Because commodities are not unique, there is little brand distinction,
and price is a significant distinguishing factor
o The procurement strategies used for commodities include volume
purchasing to reduce price and JIT systems to lower inventory
Distinctives
o High-risk, low-value items and services such as engineered items,
parts that are available from only a limited number of suppliers, or
items that have a long lead time
o A stockout of distinctives results in stopping the production line or
changing the production schedule to work around a stocked-out item
o The strategic focus for distinctives is developing a standardisation
program to eliminate or reduce the uniqueness of the distinctives,
thereby changing these items to generics
Criticals
o High-risk, high-value items that give the final product a competitive
advantage in the marketplace
o Criticals determine the customer’s ultimate cost of using the finished
product
o The procurement strategy for criticals is to strengthen their value
through the use of new technologies, simplification, close supplier
relations, and/or value-added alterations
Three types of buy situations may occur
o That of capital goods that may represent a longer-term investment for
an organisation that may require financial planning
o Re-buys, which are repeat purchases that may either be identical to
historical purchases or some variation thereof
o That of maintenance, repair, and operations items that are needed for
the continuing operation of the company and its supply chain activities
