1. Procurement’s Impact
on Logistics
Business Marketing 880
Spring 1999
Bernard J. LaLonde
Steven Robeano

2. Objectives
• To define purchasing, procurement &
strategic sourcing
• To explain how purchasing processes impact
logistics operations & material flow
processes
• To understand the impact of improved supply
chain planning on procurement & logistics
operation

3. Logistics Impacts of Purchasing Function
• Shrink gap between demand signal &
channel actions on a continuous
basis
• Leverage front end of supply chain
(suppliers)
– process integration
– customer value focus
– JIT
• Allow integrated metrics
– time / inventory velocity
– cash to cash
– segment costing

4. Definitions:
Purchasing:
Applies to the transaction functions of buying products &
services at the lowest possible price.
Procurement:
Relates to a broader activity involving the materials
management of goods & services in addition to purchasing
transactions.
Strategic Sourcing:
Strategic sourcing takes the process further, focusing on
developing channels of supply at the lowest possible total
cost with alignment of purchasing activities to support
company business goals.

5. Types of Purchasing Activity
Capital Goods
Standard Rebuy
Types
of Buys
Modified Rebuy
Maintenance, Repair,
Operations (MRO)

6. Information Flows Related to Procurement
Quality
Accounting/ Engineering/
Finance R&D
Information Operations/
Systems Purchasing Manufacturing
Marketing
Logistics/
&
Transportation/
Sales
Warehousing
Legal
Source: Adapted from Lisa Ellram/Laura Birou, Purchasing from bottom line impact (Irwin), 1995

7. Why Focus on Procurement?
Despite the perceived risks, changing procurement
operations has significant benefits
How much is it worth to:
 Reduce cycle times by 20%?
 Limit variability in manufacturing?
 Decrease work in process inventory by more than 15%?
 Reduce out of stocks by 50%?
 Perform all purchasing transactions electronically?

8. Value Contribution to Supply Chain
Percent of value created
Industry Purchase Manufacture Distribute
Expendable
Consumer Goods 30-50% 5-10% 30-50%
(soap, shampoo)
Durable Consumer
Goods (cars, washing 50-60% 10-15% 20-30%
machines, PCs)
Heavy Manufacturing
(industrial equipment, 30-50% 30-50% 5-10%
aerospace, defense)

9. Elements of Strategic Sourcing
Reduce Global
Transaction Costs Sourcing
Joint Product Promote Vendor
Strategic
Development Scale Economies
Sourcing
Build Continuous Reengineering
Improvement Base Relationships
of Supplier & Supplier Value Added with Supplier
Development by Supplier

10. Definition: Total Cost of Ownership
Strategic Sourcing is based on the Total Cost of
Ownership (TCO) which relates to “all costs
associated with the acquisition, use &
maintenance” of a good or service.
Source: Lisa Ellram, Total Cost Modeling in Purchasing (CAPS), 1994.

11. Strategic and Operational Issues
• Supplier / Product Segmentation
• Supplier Certification
• Accelerate Material Flow
• Manufacturing Flexibility
• Increase Costing Precision

12. Measuring Inventory Productivity
Level
Velocity

13. Impact of Improved Planning
• Better production planning & coordination
with suppliers
• Reduction of raw material inventories through
smaller, just-in-time shipments
• Ability to move to vendor managed inventory
(VMI) with electronic payment
• Ability to move toward strategic alliances with
key suppliers to focus on design, quality & TCO
• Potential to move toward agile manufacturing

14. Supplier Assessment Practices
Seven point Likert scale: 1 = Extensively, 7 = Very little
Mean
Response Rank
Provide Supplier with feedback 2.34 1
evaluation results
Assess supplier’s performance 2.84 2
through formal evaluation
3.33 3
Use a supplier certification program
to certify supplier’s qualify
3.47 4
Conduct in-depth audit of supplier’s
quality processes, etc. 4.37 5
Assess suppliers performance through
informal evaluation

15. Level of Direct Involvement Activities in Supplier Firms
(Seven point Likert scale: 1 = Extensively, 7 = very little)
Mean Response Rank
Bring this supplier’s personnel to your facility 2.48 1
Site visits by your firm to the supplier’s premises 3.08 2
High-level meetings with the supplier’s upper
3.20 3
management
Planning and execution of joint cost savings 3.68 4
projects
4.22 5
Cost savings are shared with this supplier
4.35 6
Encourage the supplier to improve its suppliers.
4.77 7
Regular visits by your engineering personnel
4.78 8
Dedicated Supplier development team.
4.95 9
Allocation of your personnel 5.16 10
Training/education of the supplier’s personnel 6.54 11
Direct investment in the supplier’s operation

16. Summary of Key Messages
• Procurement is a key function which has a
major impact on total supply chain costs
• The transformation from purchasing to
strategic sourcing involves moving the
organization toward a broad supply chain
perspective & total cost of ownership focus
• Utilizing a strategic sourcing approach
provides opportunity for a company to
capture more value from its supply chain