NMIMS

PROCUREMENT MANAGEMENT
APPLICABLE FOR JUNE 2022 EXAMINATIONS

1. A large nationally dispersed firm wishes to select a new warehousing services

provider amongst several contenders. Prepare a detailed list of background information
and performance indicators/metrics that you would seek from all prospective service
providers to assist in your vendor assessment and selection.

Answer:

Large organisations procure materials through the purchasing process. This process creates a
major link between an organisation and its suppliers or vendors. Purchasing is a process of
acquiring all the materials, which an organisation needs, in exchange for funds. This is an
important function because every organisation needs materials and the purchasing process
organises the supply of these materials. Thus, the purchasing process forms an important link
between organisations. In large organisations, the professional buyers (executives from
purchase department) who are well versed with selecting product lines, familiar with the
contract law, shipping and shipping regulation, are involved in negotiation with the suppliers.
These buyers also work with the engineering unit (prepares specifications), the operations
unit (receives and use the materials), the accounting unit (processes invoices) and other units
of the organisation.

Supplier or service provider selection is the process of identifying, evaluating and contracting
suppliers or service providers. Today, organisations spend more than half their revenues in
purchasing goods and services. Hence, an organisation’s success is highly dependent on its
suppliers. This has also increased the importance of the role of the procurement manager
within organisations. A cross-functional team of representatives from different sectors of an
organisation must define the supplier selection criteria for a particular product or service
category. For example, in a manufacturing company, cross-functional team could include
representatives from purchasing, quality, engineering, marketing and production. The cross
functional team must include members having technical knowledge of the product or service
to be purchased, and representatives of the department that uses the purchased item.
Criteria for service provider selection based on Dickson’s study:

Quality: Ability of supplier to meet quality specifications consistently

Delivery: Ability of suppliers to meet delivery schedules. When you are working with any
supplier, it is very important they supplier makes timely delivery so that the business
processes will be smoothen.
Performance history: Past Performance of each supplier.
Warranty and claim policies: Warranty policies provided by each supplier and claims
performance.
Production facilities and capacity: Production facility and capacity of each supplier.
Price: Includes the net price (discounts and freight charges)
Technical capability: Research and development capabilities and adaptation of technology.
Financial position: Credit rating of each supplier
Procedural compliance: Compliance with procedure (affiliation to international standards
like ISO, and so on)
Communication system: Efficiency of the communication systems.
Reputation and position in industry: Includes market leadership and reputation.
Desire for business: Interest for business shown by the supplier.
Management and organisation: The dedication of the management and organisational
capabilities of each supplier.
Operating controls: Efficiency of operational control and management.
Repair service: Repair services that are likely to be given by each supplier.
Attitude: Attitude towards your organisation by the supplier
Impression: Impression made by each supplier (personal contact)
Packaging ability: Ability to meet specified packaging requirements
Labour relations record: The labour relation record of each supplier
Geographical location: Proximity and location of the supplier
Amount of past business: Quantum of business done in the past with each supplier
Training aids: Availability of training aids and on the job training courses
Reciprocal arrangements: Future purchases from the supplier and possibility of supplying
something in return to that company

Steps to select the suppliers/service providers:

Supplier identification: Supplier identification is a costly and time-consuming process.
Hence, organisations need to maintain a long-term base of qualified suppliers. In the
competitive world of today, it is important to not only nurture existing suppliers but also
identify new suppliers.

Screening of suppliers: Organisations need to verify the ability of the suppliers in meeting
the various requirements of the organisation. Any non-performance by the supplier can have
a great impact on the organisation.

Supplier evaluation: Organisations may use multiple criteria to select suppliers. For
example, organisations which use a just-in-time manufacturing plant may prefer suppliers
who have shorter lead times. Organisations that use highly technical processes may prefer
suppliers who can deliver the best technology.

Common supplier selection criteria:

Most organisations rate suppliers on price, quality and delivery. The suppliers are generally
selected using the following criteria:
 Prior experience and performance with the product/service to be purchased.
 Level of sophistication of the quality system and ability to meet regulatory or quality
standards (for example, ISO 9001, QS-9000).
 Capability to meet current and potential capacity requirements within the desired
delivery schedule.
 Financial stability.
 Availability of technical support and willingness to partner in developing a long-term
relationship.
 Total cost of the supplier including material costs, communication costs, inventory
costs, etc.
 The supplier's ability to scale up operations to improve business performance.

Negotiation process: In the negotiation process, the organisations try to obtain favourable
terms from the suppliers and vice-versa. Negotiation process can be a take-it-or-leave-it
approach, a competitive tendering approach or a bargaining approach.
Supplier contracting: In the final step of the supplier selection process, the organisation
awards the contract to a selected supplier or a group of suppliers. Organisations may choose
sole-award contracting if they determine that a single supplier can best meet their
requirements. Organisations generally use sole award contracting when they are dealing with
intellectual proprietary items. Organisations may opt for multiple-award contracting in order
to mitigate risks.

Supplier monitoring: The objectives of monitoring the supplier performance are:

 Ensuring quality - Inspection of the supplied materials assures organisations of the
quality of the incoming goods. Products with defective quality can be returned to the
suppliers.
 Containing costs - It enables controlling of non-conformance costs like costs of
inspection, costs of correcting defects, etc.

2. ‘Transportation starts from supplier as inbound logistics and ends with the customer
as outbound logistics from the manufacturer’. In view of the above statement, discuss
the importance of transportation from the origin till last mile delivery.

Answer:

Importance of transportation:

Transportation strategy plays a vital role in the overall supply chain management. It is
responsible for the physical movement of materials between points in the supply chain.
Around one third to two thirds of the expenses of enterprises’ supply chain costs are spent on
transportation. The movement of goods from one place to another within a supply chain is
known as transportation. It starts from the beginning of a supply chain and ends when the
product reaches the hands of the customer. With the increasing globalisation in supply chain
and growth of e-commerce, the importance of transportation has grown tremendously. This is
because the supply of products is now needed for distant places. And transportation decisions
in a supply chain affect the profitability and influence both facility and inventory decisions
within a supply chain. The mode of transport consists of the type of transport used. Each
mode has different characteristics, and the best in any particular circumstances depends on
the type of goods to be moved, locations, distance, value and a whole range of other criteria.

Modes of transport
Air transportation: It is one of the most efficient modes of transportation. Airlines have a
high preset rate in the usage of equipment and infrastructure. Labour and fuel are mostly
related to the movement and are independent of the amount of cargo on a flight. Ultimately,
an airline’s goal is to maximise the daily flying time of a plane and the revenue generated per
trip. Air carriers offer a very fast and expensive mode of transportation. Airlines carry a
significant amount of freight, for products where speed of delivery is more important than the
cost. In practise, this limits airfreight to fairly small amounts of expensive materials. Perhaps
the most common movements are documents and parcel delivery, with carriers such as
Federal Express, BlueDart, etc.

Surface transportation: It is another basic mode of transportation where road is the medium
of transport. This mode can be divided into truck, rail, and pipeline.

Truck
Trucks are the commonly used transportation system within a State, between States, or
sometimes across the country.

Rail
Railway services are considered as the ideal mode for carrying large, heavy, or high-density
products over long distances. This is because of the price structure and the heavy load
capability. However, transportation time by railways can be long. Therefore, railway is
suitable for time-insensitive and heavy weight shipments. For example, coal is a major part of
railway shipments.

Pipeline
Here, huge pipes are laid down (below the ground or on the ground or on sea bed) between a
manufacturing plant and a delivery point to transport fluids and gases. Pneumatic tubes are
also used, to transport solid capsules using compressed air. Any chemically stable substance
can be transported through a pipeline. Other materials which are transported through
pipelines are sewage, slurry, water, and beer.

Water transportation: It includes cargo ships, oil tankers, and so on. It is ideally suited for
carrying heavy loads at low cost. In most of the countries, it is the cheapest mode for carrying
such loads. Water transport is the slowest of all the modes of transport and significant delays
might occur at ports and terminals. Therefore, short-haul trips are difficult in water transport,
but Japan and some parts of Europe use it on a daily basis. There are basically three types of
water transport – rivers and canals (usually called inland waterways), coastal shipping
(moving materials from one port to another along the coast) and ocean transport (across the
major seas). Water transport system is limited to areas that have good infrastructure and good
economic conditions.

Intermodal transportation: It is a combination of at least two or more modes of

transportation. For example, a manufacturer using water transport to ship goods from one
country to another, and then using the road transport to get the goods to a customer. It is one
of the most important modes of transportation as it becomes essential in situations where one
mode of transportation is not enough. When there are more than two modes of transportation
involved, it is called a multimodal transportation.

Designing a transportation network is a challenging task. With so many options and factors to
consider while designing, there may be cases when you need to trade-off one factor in favour
of another. While making a decision, shippers have to consider the impact of the decision on
the inventory costs, costs of cooperating operations, processing costs, facility costs, and the
customer service provided. Shippers evaluate the different modes of transportation and the
costs involved in them before finalising. They also evaluate the revenue that maybe generated
by implementing a particular decision, without compromising on any of the aspects
mentioned.
The following trade-offs need to be considered while making transportation decisions:
 Transportation and inventory cost trade-off.
 Transportation cost and customer responsiveness trade-off.

Choosing the mode of transportation

Choosing a transportation mode is both an operational decision and a planning decision.
When a shipper has to decide which carrier to select, this becomes a planning decision. When
a shipper has to decide a mode of transportation for a particular shipment, this becomes an
operational decision. Cheaper mode of transportation means the quantity involved is high,
such as railway transportation. This may not lower the total cost involved in the supply chain.
Similarly, when the quantity to be transported is less, the cost for this becomes high. If the
value-to-weight ratio of a shipment is high, reducing the inventories becomes important.
Hence, faster modes of transportation are preferred. If the value-to-weight ratio of a shipment
is low, reducing the cost of transportation becomes important. Hence, cheaper modes of
transportation are preferred. Factors such as safety and in-transit inventory costs are also
important. The performance of a supply chain can degrade if inventory costs are ignored in
transportation decisions.

3.a. ‘Procurement of capital equipment is more strategic when compared to

procurement of other equipment’. Do you agree? Comment from your perspective
citing real time example.
3.b. DMart appoints you as a purchasing manager for its FMCG. How can your
contribution to the purchasing department enhance overall organizational performance
through following e procurement strategies?

Answer:
A)
Capital equipment actually constitutes production machinery, which is used to manufacture
products. These tend to be ones that require huge capital expenditure and are supposed to be
used for many years into the future. The purchase of capital equipment is closely related with
the concept of Return on Investment(ROI).Capital materials or capital resources can be
defined as productive assets such as equipment (tools, buildings and machinery) or the
inventory as a whole itself, encompassing man-made equipment that can be used to make
other goods and services. It can thus be said that capital goods are the basic building blocks
of any business and a business cannot be properly defined as one if it does not have any
capital resources.
Capital resources add extensively to the productivity of workers and hence, of the economy
as a whole. It is the cornerstone in any strategy to increase productivity and as a result, it
occupies a central position in the process of economic growth. Accumulation of capital goods
every year greatly increases the national product or income.

Capital resource accumulation mostly makes the use of indirect methods of production
possible and thereby increases the produce of the company, the national product and is
helpful in bringing about rapid economic growth as a while. The productivity of the workers
also depends upon the amount of capital per worker, this tells us that the greater the quantity
of capital per worker, the greater the productivity and efficiency of the worker. For example,
In the manufacturing industry and other industries, machinery used to produce goods may
become obsolete or simply wear out. Upgrades to the equipment are often are needed. If these
upgrades are higher than the capitalization limit that is in place, the costs should be
depreciated over time. Similar to buildings or property, equipment upgrades are often
financed. The cost of this financing may be depreciated as well.

Evaluation and decision of capital expenditure is part of the financial decision and taken by
the finance department in collaboration with the production and purchase department. Once
the items are decided, the purchase is routed through the procurement department but in a
different set of procurement processes. For example, some items may be leased out instead of
being purchased outright. The purchase of capital equipment is generally a one-off event
unlike routine and regular purchases done so procurement of capital equipment is more
strategic when compared to procurement of other equipment.

B) In today’s fast-paced world, where technology has become a part and parcel of our life,
how can our business procedures stay behind? In other words, we all use technology to carry
out our business processes. From the local confectioner to a jewellery showroom owner,
today, everyone uses the Internet in their day-to-day business operations. Today, most
organisations use the Internet not only to expand their business but also to manage various
tasks and customers online. In simple words, e-procurement is theB2B and/or B2C sales and
purchase of supplies, goods and services through the Internet. E-procurement is also known
as supplier exchange, and these days, various tools and applications are available for pursuing
the same.
The revenue for the company hosting an E-procurement platform would depend on actual
purchase transactions and the type of revenue model adopted by it. In a B2B transaction
through an E-procurement platform, both the buyers and sellers are in need of satisfying their
business objectives. The pricing and business strategy of the host of the E-procurement
platform will depend on the dual nature of customers of the platform. Depending on the
nature of buyers and sellers, the pricing structure might involve cross-subsidies between these
two parties. Taking the example of eBay, a B2C marketplace, it does not charge buyers to
participate in an auction. However, it charges a complex tariff from suppliers.

Role of E-procurement in this situation

Savings in cost: Using E-procurement, all the activities will be streamlined and company will
be able to save some money.

Vendor management: E-procurement will also help the company to manage all the vendors,
their transactions and other matters.

Increased Productivity: Once you’ve learned the system, e-procurement is less time-
consuming than traditional procurement. Having your records stored electronically makes it
easier to submit reusable tenders. Meanwhile, use of templates means paperwork can be filled
out more quickly.

Increased Transaction Speed: E-procurement is both time-saving and efficient. As the

electronic handling of tasks supports and simplifies the purchasing process, transaction speed
is increased. Also, because of e-enabled relationships with suppliers, procurement cycle times
speed up.

Reduced Errors: Electronic paperwork is streamlined and thus easier to check for errors—
there’s no messy printing to get in the way either. Along with this, past orders are more easily
referenced, meaning there’s a greater chance that your company can compare orders to ensure
new ones are correct. Moving complex processes over to a digital environment gives you
access to electronic invoicing and purchase order features that can dramatically reduce time
spent on these tedious processes.