LOGISTICS AND

SUPPLY CHAIN MANAGEMENT

Lecturer: Ho Trung Thao (thao.hotrung@hoasen.edu.vn)
 Chapter 10
Procurement

2
 Aims of this chapter

• DEFINE the role of procurement

• APPRECIATE the importance of procurement in the supply
chain
• CHOOSE an appropriate supplier
• DISCUSS the steps in a procurement cycle
• DESCRIBE e-procurement and its advantages
• TALK about different arrangements for purchasing
 Content

1. Definition 3. Procurement cycle

o Purchasing and procurement o Steps in the cycle
o Importance of procurement
o E-procurement
o Aims of procurement
o Monitoring supplier performance
o Organisation of procurement
2. Choosing suppliers
4. Types of purchase
o Qualified suppliers
o Different approaches for different products
o Number of suppliers
o Terms and conditions
o Monitoring supplier performance

Purchasing : Mua hàng; Procurement : quản trị mua hàng

Qualified supplier : nhà cung cấp đủ điều kiện Supplier performance: sự thực hiện của nhà cung cấp
Term and condition: điều khoản và điều kiện
1. Definitions
2. Choosing Suppliers
3. Procurement cycle
4. Types of purchase
 Purchasing and procurement

 PURCHASING gives a mechanism for initiating and

controlling the flow of materials through the supply chain.

 PROCUREMENT is responsible for acquiring all the

materials needs by an organization.
It consists of all the related activities needed to get goods,
services and any other materials from suppliers into an
organization
 Example: purchasing rental, contracting, selecting suppliers, negotiating,
agreeing terms, expediting, monitor supplier performance, arranging
delivery, organizing transport, checking arrival, clearing payment,…

mechanism: cơ chế
initiate (v.): bắt đầu, khởi đầu
acquire (v.): đạt được
 Importance of procurement

a. A broad view
An essential link between organizations in the supply chain

A mechanism for coordinating the flow of materials between customers and

suppliers

b. A limited view
An essential function within every organization that is responsible for
organize a supply of material

(Example: bad procurement => wrong material, wrong quantities, wrong

time…etc)

Responsible for a lot of expenditure (chi tiêu)

coordinate (v.) : điều phối
expenditure (n.): chi tiêu
Example: Last year Wiesiek Limited had total sales of £108 million. Their
direct costs were 58 million for materials, £ 27 million for employees and £12
million for overheads. What is the effect of reducing the cost of materials by
1%? If materials costs are not reduced, how much would sales have to increase,
or overheads fall, to get the same effect?

Answer
Profit’s last year = 108 – (58 + 27 + 12) = £ 11 million
At this year,
Cost of materials drops by 1% = 58 × 0.99 = £ 57.42 million
Profit = 108 – (57.42 + 27 + 12) = £ 11.58 million
⇒Profit increases 5.3% or profit as a percentage of sales rises from 10.2% to
10.7%
If materials costs do not change, and assuming that other costs remain the
same proportion of sales value, then sales would have to rise by 5.3% to £114
million to get the same increase in profit
To get the same extra profit the fixed costs would have to fall by £0.58
million or 4.8%
 Aims of procurement
The overall aim of procurement is to guarantee that an organization has
a reliable supply of materials
• Organizing a reliable and uninterrupted flow of materials into an organization
• Working closely with user departments, developing relationships and understanding
their needs
• Finding good suppliers, working closely with them and developing beneficial
relationships
• Buying the right materials and making sure that they have acceptable quality, arrive at
the time and place needed, and meet any other requirements
• Negotiating good prices and conditions
• Keeping stocks low, considering inventory policies, investment, standard and readily
available materials, and so on
• Moving materials quickly through the supply chain, expediting deliveries when
necessary
• Keeping abreast of conditions, including pending price increases, scarcities, new
products, and so on.

to keep abreast of (with): theo kịp

Aims of procurement
Aims of procurement
 Organization of procurement

Depends on the type and size of the organization.

• A small organization: a single buyer might be
responsible for all purchases, policy and
administration.
• A medium-sized organization: might have a
department with buyers, expeditors, storekeepers,
and clerks.
• A large organization: might have hundreds of
people coordinating huge amounts of purchases.

Purchasing Expeditor (Nhân Viên Theo Dõi Đơn Hàng)

 Organization of procurement

centralized purchasing: mua sắm tập trung

olocal: purchasing : mua sắm phân tán, mua sắm cục bộ
 Organization of procurement
Usually procurement is organized as a single department to get
the benefits of centralized purchasing. These benefits include:
● consolidation of all orders
for the same, and similar, materials to get quantity discounts
● coordinating associated activities
to reduce costs of transport, stockholding and administration
● eliminating duplicated effort and haphazard practices
● having a single point of contact
for suppliers and giving them consistent information and service
● developing specialized skills and improving procurement operations
● allow other people to concentrate on their own work
without diverting into purchasing
● concentrating responsibility for procurement,
making management control easier.

consolidation (n.): sự kết hợp; duplicated effort: nỗ lực trùng lắp

Haphazard (n.) : sự ngẫu nhiên, may rủi; divert (v.) : làm xao lãng
 Activities in procurement

o Identifying users’ needs for material

o Describing the material
o Deciding whether to acquire the material
o Deciding the type of purchase
o Reviewing market conditions
o Forming a long list of suppliers
o Forming a short list of suppliers
o Evaluating the short list
o Choosing the supplier
o Ordering the materials
o Recording the arrival
o Expediting: sometimes there are problems with materials or delivery, and
some follow-up actions are needed.
o Reviewing the purchase
1. Definitions
2. Choosing Suppliers
3. Procurement cycle
4. Types of purchase
 Qualified suppliers (1)
• Who can actually deliver the materials needed
• Criterion:
 are financially secure with good long-term prospects
 have the ability and capacity to supply the necessary materials
 accurately deliver the requested materials
 send materials of guaranteed high quality
 deliver reliably, on time with short lead times
 quote acceptable prices and financing arrangements
 are flexible to customers’ needs and changes
 are experienced and have expertise in their products
 have earned a good reputation
 use convenient and easy procurement systems
 have been used successfully in the past and can develop long-term relationships
expertise (n.) : thành thạo
reputation (n.) : danh tiếng
 Qualified suppliers (3)
• Cases just need little time looking at alternative suppliers:

 it is buying low value materials

 there is only one possible supplier
 there is already a successful arrangement with a supplier
 there is not enough time for extended negotiations
 the organization has a policy of selecting specific types of
supplier

• Open tender (đấu thầu công khai/ rộng rãi) widely seeking
quotations compares all the bids choose the best one
• Limited tender (đấu thầu hạn chế) : putting some qualifications on
suppliers
 Number of suppliers (1)
•m single
• Single suppliers
sourcing: purchasing each material from
•single suppliers
Advantages:
Advantages of single sourcing:
 a stronger relationship between customers and suppliers, often
formalized in alliances or partnerships
 commitment of all parties to the success of the relationship
 economies of scale and price discounts
 easier communication
 less variation in materials and their supply
 easier to keep requirements, conditions and so on, confidential

• Problem: Leaves the company vulnerable to the

performance of an individual supplier
Vulnerable (a.): có nhược điểm, có thể bị tổn thương
 Number of suppliers (2)
• Multi-sourcing: purchasing same materials from a number of competing
suppliers.

Advantages of multi-sourcing:
● competition between suppliers reduces prices
● there is less chance of disrupted supplies, as problems can be avoided by
switching suppliers
● can deal more easily with varying demands
● involving more organizations can give access to wider knowledge and
information
● is more likely to encourage innovation and improvement
● does not rely on trusting one external organization.
 Monitoring supplier performance

Most organizations monitor their suppliers to make sure that they receive
the satisfactory service  Supplier rating or vendor rating.

1st approach: Use a checklist of important factors and check that

supplier meets an acceptable standard in these.
The purpose is to monitor performance.

2nd approach: Give the supplier a score for different aspects of

performance.
However, it is hard to identify the most important factors of supplier’s
performance or lowest acceptable performance and give the right score.
1. Definitions
2. Choosing Suppliers
3. Procurement cycle
4. Types of purchase
Steps in a typical procurement cycle
Procurement cycle
Procurement cycle
Procurement cycle
Procurement cycle
 Procurement cycle

Outline of steps in a procurement cycle

 Steps in the cycle
• In reality, this kind of formal procedure is not worth when
…….making a small purchase……….
………..time…………
………..slow to make quick purchase………..
Part of procurement Average days

1. From customer placing order, to supplier receiving it 1.9

2. From supplier to receive order, to finishing administration 2.1

3. From finishing administration , to shipping order 2.2

4. From supplier shipping order, to customer receiving it 4.1

Total 10.3
 Paper-based procurement

Long time for whole procedure

Too much forms & paperwork

PROBLEMS
Too many people for processing

solution No attention to related systems

Automated
Procurement
 E-procurement
o There are two types:
 B2B

 B2C

o Growing use of the internet for procurement will change patterns of

logistics.

o E-commerce will change buying patterns, but will probably not

generate much new business.

o Organizations will have to improve customer service by.

Ex: home delivery services.

 E-procurement
Instant access to anywhere suppliers or
customers
Automated procurement with standard
procedures

ADVANTAGES Reduction of time needed for transaction

Reduction of costs, typically 12 – 15%

Seamless integration with suppliers info system

A business buys materials from another business

2
BASIC TYPES
A final customer buys things from a business
1. Definitions
2. Choosing Suppliers
3. Procurement cycle
4. Types of purchase
 A. Different approaches for different
products
1. procurement effort depends on the importance of materials
2. three main criteria for decision of make-or-buy
1. procurement effort depends on:
• non-critical materials (low profits with little risk in supply, need basic,
simple procedures for purchasing )

• bottleneck materials (low profits but have more risk in supply ,and need
long-term contracts with alternative sources

• strategic materials (higher profits ,possibly developing into alliances and

partnerships )
2. Three main criteria for decisions

• Financial factors – costs

• Operational factors –responsiveness, flexibility, reliability, and so on

• Strategic factors – the long-term implications of the decision for the

organization
B. Terms and conditions
1. Specific types of order
2. Some ways of setting a price for materials
3. Standard conditions in terms of shipping
1. Specific types of order
1. Purchase orders

2. Blanket orders

3. E-procurement Different ways of

saying the same
4. Contracts things because of
legal differences.
5. Sub-contracts

7. Leases and rental agreement

 1.Purchase orders: a
letter from one
organization to another,
giving details of the
materials it wants to
purchase and its
conditions of purchase
2.Blanket orders: a simple
system for cheap,
standard items such as
stationery. An organization
places a single order for all
materials that it will need
over some period, such as a
year

Blanket order: đơn đặt hàng tổng quát;

 3.E-procurement

Use Internet to simplify purchases

by replacing paper-based
procedures with electronic one. 
fast and efficient method for repeat, or
straightforward, orders.
 4
Detailed descriptions of an agreement between
an organization and the supplier with all
relevant terms and conditions.  Used for
extended services as a supply of electricity or a
specific piece of work as construction company
building a length of road.
 5

When a supplier signs a contract with an organization,

it may not do all the work itself, but prefers to pass
on some work to a sub-contractor. Then, there are two
agreements – the contract between org and
supplier, and the sub-contract between supplier
and sub-contractor.
6.Leases and Rental Agreements: present the terms and conditions of
acquiring materials. They are generally used for building or equipment
that is returned to the owner after some period of use.
 2. Four ways of setting a price for materials

1. Price lists: suppliers quote fixed prices.

Everyone pay the same fixed price in
supermarkets.

2. Special quotations: suppliers quote

appropriate prices to each customer.
(Customer submit a request for a quotation, and
supplier
returns a price and conditions that it is willing to offer.)

3. Negotiation: when there is some

flexibility in price and conditions.
Suppliers and customers negotiate
together to get the best deal for both.

4. Commodity pricing (định giá hàng hóa):

for commodities such as oil, coffee,
gold and wheat, market forces set the
going rate that is used by all suppliers.
Going rate pricing
: if a product is almost identical to competitors’ products, companies might charge the same price
:.định giá theo giá thị trường
 3. Several standard conditions in terms of shipping

• Ex-works (or factory gate): giao tại xưởng

• Free alongside (FAS) : giao dọc mạn tàu
• Free on board (FOB) : giao hàng lên tàu
• Delivered ex-ship : giao từ tàu chở hàng nơi đến
• Cost and freight (C&F) : trả cước đến bến
• Cost, insurance and freight (CIF): trả cước, bảo hiểm tới bến
• Delivered:
Common basic shipment arrangements

Ex-works:
The purchaser accepts materials ‘at the factory gate’ and takes over all
responsibility for transport, documentation, customs clearance, insurance, risk
and so on.
Common basic shipment arrangements

Free alongside:
the supplier moves materials to a specified ‘port’ and delivers them
‘alongside a ship’. The customer takes over the loading on a vessel and
movement onward.
Common basic shipment arrangements

Free on board:
the seller to deliver goods on board a vessel designated by the buyer.
The seller fulfills its obligations to deliver when the goods have passed
over the ship's rail.
Common basic shipment arrangements

Delivered ex-
ship

Delivered ex-ship:
The seller to deliver goods to a buyer at an agreed port of arrival.
The seller remains responsible for the goods until they are delivered.
Common basic shipment arrangements

CIF

Cost and freight: the seller to arrange for the carriage of goods by sea to a port of
destination, and provide the buyer with the documents necessary to obtain the goods
from the carrier. Under CFR, the seller does not have to procure marine insurance
against the risk of loss or damage to the goods during transit.
Cost, insurance and freight: include insurance against risk of loss or damage
Common basic shipment arrangements

delivered

Delivered:
when the seller is responsible for all aspects of the transport up to the delivery to the
customer.
Common basic shipment arrangements

Ex-works Free Free on Delivered Cost & Delivered

alongside board ex-ship freight
or CIF