CHAPTER 11: PROCUREMENT
CHAPTER 11: PROCUREMENT
PART II
END-OF-CHAPTER QUESTIONS
CHAPTER 11: PROCUREMENT
1. What is procurement? What is its relevance to logistics?
Procurement refers to the raw materials, component parts, and supplies bought from outside organizations to support a company’s operations. It is closely related to logistics since acquired goods and services must be entered into the supply chain in the exact quantities and at the precise time they are needed.
2. Contrast procurement’s historical focus to its more strategic orientation today.
Procurement’s historical focus in many organizations was to achieve the lowest possible cost from potential suppliers. Oftentimes these suppliers were pitted against each other in “cutthroat” competition involving three- or six-month length contracts awarded to the lowest bidder. Once this lowest bidder was chosen, the billing cycle would almost immediately start again and another low bidder would get the contract for the next several months. Today procurement has a much more strategic orientation in many organizations, and a contemporary procurement manager might have responsibility for reducing cycle times, playing an integral role in product development, or generating additional revenues by collaborating with the marketing department.
3. Discuss three potential procurement objectives.
The text provides five potential procurement objectives that could be discussed. They are supporting organizational goals and objectives; managing the purchasing process effectively and efficiently; managing the supply base; developing strong relationships with other functional groups; supporting operational requirements.
4. Name and describe the steps in the supplier selection and evaluation process.
Identify the need for supply => can arise from the end of an existing supply agreement or the development of a new product. Situation analysis looks at both the internal and external environment within which the supply decision is to be made. Identify and evaluate potential suppliers delineates sources of potential information, establishes selection criteria, and assigns weights to selection criteria. Select supplier(s) is where an organization chooses one or more companies to supply the relevant products. Evaluate the decision involves comparison of expected supplier performance to actual supplier performance.
5. Discuss the factors that make supplier selection and evaluation difficult.
Supplier selection and evaluation generally involve multiple criteria and these criteria can vary both in number and importance depending on the particular situation. Second, because some vendor selection may be contradictory, it is important to understand tradeoffs between them. Third, the evolution of business practices and philosophies, such as just-in-time and supply chain management, may require new selection criteria or the reprioritiztion of existing criteria.
6. Define supplier development and explain why it is becoming more prominent in some organizations.
Supplier development (reverse marketing) refers to a degree of aggressive procurement not normally encountered in supplier selection and can include a purchaser initiating contact with a supplier, as well as a purchaser establishing prices, terms, and conditions. One reason for its growing prominence is the myriad inefficiencies associated with suppliers initiating marketing efforts towards purchasers. A second reason is that the purchaser may be aware of important events that are unknown to the supplier. Moreover, achieving competitive advantage in the supply chain is predicated on purchasers adopting a more aggressive approach so as to compel suppliers to meet the necessary requirements.
7. Why does the issue of quality in procurement represent a delicate balancing act for organizations?
If an organization buys an input of inferior quality, it runs the risk of lowering the quality of the final product. If an organization buys an input of higher quality than one’s final product, it may be paying for something that is not needed.
8. What is the role of ISO certification in quality management programs?
ISO 9000 is a set of generic standards used to document, implement, and demonstrate quality management and assurance systems. These standards are intended to help companies build quality into every core process in each department. Although ISO 9000 certification continues to become more commonplace throughout the world, it can still be a competitive advantage for some companies.
9. Describe significant benefits and drawbacks to Six Sigma programs.
The most significant benefits from Six Sigma have been reduced costs, reduced errors, and waste, and reduced cycle time, while the key drawbacks have involved overcoming business cultural barriers, investing the required resources (both human and money), and gaining top management commitment.
10. Discuss the Malcolm Baldrige National Quality Award.
The Malcolm Baldrige National Quality Award was established in the 1980s to recognize
11. How do ISO 9000 and the Baldrige Quality Award differ?
ISO 9000 essentially allows an organization to determine if it complies with its specific quality system. In contrast, the Baldrige Award is more heavily focused on the actual results from a quality system as well as on continuous improvement. The Baldrige Award also tends to be more externally focused in the sense that organizations benchmark themselves against organizations from outside their particular industry.
12. What are the components of the global sourcing development model presented in this chapter?
Planning, specification, evaluation, relationship management, transportation and holding costs, implementation, and monitoring and improvements make up the components of the global sourcing development model presented in this chapter.
13. Pick and discuss two components of the global sourcing development model presented in this chapter.
Any two components listed in the answer to Question 12 could be discussed.
14. Discuss the benefits and drawbacks to electronic procurement.
Transaction benefits measure transaction benefits (e.g., reduced invoice-to-payment time), while compliance benefits focus on the savings that come from adherence to established procurement policies. Management information benefits encompass those that result from management information, customer satisfaction, and supplier satisfaction levels after implementation of electronic procurement. Price benefits are those that are given as a result of adopting e-procurement.
One concern with electronic procurement involves the security of information that is being transmitted; there is a risk that sensitive or proprietary information could end up in the wrong hands. Another concern is that electronic procurement can be impersonal in the sense that human interaction is replaced by computer transactions. Moreover, despite substantial hype about the potential benefits of electronic procurement, a recent survey discovered that only about 25% of the responding organizations mandate its use.
15. What is an online reverse auction? Why do buyers like them?
In an online reverse auction, a buyer invites bids from multiple sellers and the seller with the lowest bid is generally awarded the business. Buyers tend to like reverse auctions because they aim to generate low procurement prices and the online nature of reverse auctions allows buyers to drill down to a seller’s low price very quickly.
16. Discuss the benefits of electronic procurement cards.
Electronic procurement cards (p-cards) can benefit organizations in several ways, one of which is a reduction in the number of invoices. In addition, these cards allow employees to make purchases in a matter of minutes, as opposed to days, and procurement cards generally allow suppliers to be paid in a more timely fashion.
17. Distinguish between excess, obsolete, scrap, and waste materials.
Excess (surplus) materials refer to stock that exceeds the reasonable requirements of an organization, perhaps because of an overly optimistic demand forecast. Obsolete materials, unlike excess materials, are not likely to ever be used by the organization that purchased them. Scrap materials refer to materials that are no longer serviceable, have been discarded, or are a by-product of the production process. Waste materials refer to those that have been spoiled, broken, or otherwise rendered unfit for reuse or reclamation. Unlike scrap materials, waste materials have no economic value.
18. Should investment recovery be the responsibility of the procurement manager? If yes, why? If not, which party (parties) should be responsible for investment recovery?
The book indicates that investment recovery, which identifies opportunities to recover revenues or reduce costs associated with scrap, surplus, obsolete, and waste materials, is often the responsibility of the procurement manager. One could argue that procurement should be responsible for investment recovery because without procurement in the first place, there probably would be no scrap, surplus, obsolete, or waste material to manage. Alternatively, one could argue that since investment recovery focuses on revenues and costs, the finance department should have responsibility.
19. Name and give an example of the five dimensions of socially responsible purchasing.
Diversity => includes procurement activities associated with minority or women-owned organizations.
The environment => includes considerations such as waste reduction and the design of products for reuse or recycling.
Human rights => includes child labor laws as well as sweatshop labor.
Philanthropy => focuses on employee volunteer efforts and philanthropic contributions.
Safety => concerned with the safe transportation of purchased products as well as the safe operation of relevant facilities.
20. Discuss some of the ethical issues that are associated with procurement.
Areas of ethical concern in procurement include gift giving and receiving; bribes (money paid before an exchange) and kickbacks (money paid after an exchange); misuse of information; improper methods of knowledge acquisition; lying or misrepresentation of the truth; product quality (lack thereof); misuse of company assets, to include abuse of expense accounts; and conflicts of interest, or activity that creates a potential conflict between one’s personal interest and her or his employer’s interests.
PART III
EXAMINATION QUESTIONS
CHAPTER 11: PROCUREMENT
Multiple Choice Questions
1. ____ refers to the raw materials, component parts, and supplies bought from outside organizations to support a company’s operations.
a. Inbound logistics
b. Procurement
c. Materials management
d. Supply management
e. None of the above
(b; p. 270)
2. Procurement’s historical focus in many organizations was to ____.
a. incur minimal supply disruptions
b. use a limited number of suppliers
c. minimize loss and damage
d. achieve the lowest possible cost
(d; p. 270)
3. Procurement costs often range between ____ of an organization’s revenues.
a. 60-80%
b. 50-70%
c. 40-60%
d. 30-50%
(a; p. 270)
4. Procurement and ____ are viewed as synonymous terms.
a. materials management
b. supply management
c. purchasing
d. inbound logistics
(c; p. 270)
5. Which of the following is not a potential procurement objective?
a. supporting organizational goals and objectives
b. managing the supply base
c. developing strong relationships with other functional groups
d. supporting operational requirements
e. all are potential procurement objectives
(e; p. 271)
6. A focus on satisfying internal customers is associated with which procurement objective?
a. managing the supply base
b. supporting organizational goals and objectives
c. managing the purchasing process effectively and efficiently
d. supporting operational requirements
(d; p. 271)
7. Buying the right products, at the right price, from the right source, at the right specifications, in the right quantity, for delivery at the right time to the right internal customer is associated with which procurement objective?
a. managing the purchasing process effectively and efficiently
b. supporting operational requirements
c. supporting organizational goals and objectives
d. managing the supply base
(b; p. 271)
8. ____ looks at both the internal and external environment within which the supply decision is to be made.
a. Identify the need for supply
b. Identify suppliers
c. Situation analysis
d. Evaluate suppliers
(c; p. 271)
9. ____ is the second step of the supplier selection and evaluation process.
a. Identify need for supply
b. Select suppliers
c. Identify and evaluate possible suppliers
d. Situation analysis
(d; p. 271)
10. The text outlines a supplier selection and evaluation process that consists of ____ steps.
a. 7
b. 6
c. 5
d. 4
(c; pp. 271-272)
11. What is the final step in the supplier selection and evaluation process?
a. evaluate decision
b. implement decision
c. select suppliers
d. provide feedback
(a; p. 272)
12. Which of the following statements is false?
a. Supplier selection and evaluation generally involve multiple criteria.
b. The evolution of business practices and philosophies may require new supplier selection criteria.
c. Selecting suppliers is the final step of the supplier selection and evaluation process.
d. Some supplier selection criteria may be contradictory.
e. All are true
(c; p. 273)
13. A degree of aggressive procurement involvement not normally encountered in supplier selection refers to ____.
a. supply management
b. supplier development
c. materials management
d. physical supply
(b; p. 273)
14. Supplier development is synonymous with ____.
a. supplier selection and evaluation
b. procurement
c. materials management
d. reverse marketing
(d; p. 273)
15. Which of the following is not a reason for why purchasers are adopting a more proactive and aggressive role in the procurement process?
a. there are myriad inefficiencies associated with suppliers initiating marketing efforts towards purchasers
b. an excess number of suppliers currently exist
c. achieving competitive advantage in the supply chain
d. purchasers may be aware of important benefits that are not known to the supplier
e. all are reasons
(b; p. 273)
16. The ____ defines quality as “a subjective term for which each person has his or her own definition.”
a.
b. United Nations
c. American Society of Quality
d. International Standards Organization
(c; p. 273)
17. ____ is a set of generic standards used to document, implement, and demonstrate quality management and assurance systems.
a. ISO 9000
b. ISO 14000
c. Six Sigma
d. Quality Circle
(a; p. 274)
18. Upon achieving ISO 9000 certification, organizations can be recertified every ____ years.
a. 10
b. 7
c. 5
d. 3
(d; p. 274)
19. ____ suggests that there will be 3.4 defects, deficiencies, or errors per one million opportunities.
a. ISO 9000
b. ISO 14000
c. Six Sigma
d. Quality Assurance
(c; p. 274)
20. Reduced costs, reduced errors and waste, and reduced cycle time are benefits that are associated with ____.
a. the Malcolm Baldrige National Quality Award
b. Six Sigma
c. ISO 14000
d. ISO 9000
(b; p. 274)
21. ____ recognizes
a. Six Sigma
b. ISO 9000
c. The Malcolm Baldrige National Quality Award
d. The
(c; p. 274)
22. Which of the following is not a Baldrige Quality Award category that is evaluated for achievement and improvement?
a. customer and market focus
b. strategic planning
c. cost reduction
d. process management
e. all are relevant categories
(c; p. 275)
23. ____ essentially allows an organization to determine if it complies with its specific quality system, while ____ is more heavily focused on the actual results from a quality system as well as on continuous improvement.
a. ISO 9000; Six Sigma
b. ISO 9000; Baldrige Award
c. Baldrige Award; ISO 9000
d. Six Sigma; Baldrige Award
(b; p. 275)
24. Which of the following is false?
a. In the factor-input strategy, an organization is seeking low costs or high-quality sources of supply.
b. Global procurement refers to buying components and inputs anywhere in the world.
c. Planning is the first step in global procurement.
d. Global procurement is driven by the factor-input and the market-access strategies.
e. All are true
(e; p. 275)
25. What is the first step in a global sourcing development model?
a. specification
b. situation analysis
c. problem recognition
d. planning
(d; p. 275)
26. ____ is often a major shortcoming to many global procurement plans.
a. Implementation
b. Evaluation
c. Specification
d. Monitoring and improving
(a; p. 276)
27. Which of the following is not a type of benefit that can come from electronic procurement?
a. management information
b. transaction
c. price
d. compliance
e. all are benefits
(e; p. 276)
28. ____ benefits focus on the savings that come from adherence to established procurement policies.
a. Transactional
b. Compliance
c. Management information
d. Price
(b; p. 276)
29. ____ refers to employees who do not follow company guidelines about which suppliers to use in a particular situation.
a. Irresponsible procurement
b. Recalcitrant spending
c. Maverick spending
d. Unauthorized procurement
(c; p. 276)
30. A recent survey indicated that about ____ of responding companies mandate the use of electronic procurement.
a. 15%
b. 25%
c. 40%
d. 50%
(b; pp. 276-277)
31. Which of the following is false?
a. Electronic procurement has facilitated online reverse auctions.
b. Buyers like reverse auctions because they aim to generate low procurement prices.
c. In reverse auctions a buyer invites bids from multiple sellers.
d. The low(est) bid must be accepted in reverse auctions.
e. All are true
(d; p. 277)
32. ____ materials refer to stock that exceeds the reasonable requirements of an organization.
a. Waste
b. Obsolete
c. Scrap
d. Excess
(d; p. 278)
33. ____ materials are materials that are no longer serviceable, have been discarded, or are a by-product of the production process.
a. Excess
b. Scrap
c. Obsolete
d. Waste
(b; p. 278)
34. ____ materials have no economic value.
a. Waste
b. Scrap
c. Obsolete
d. Excess
(a; p. 278)
35. Research suggests that socially responsible procurement consists of ____ dimensions.
a. two
b. three
c. five
d. seven
(c; p. 279)
True-False Questions
1. Procurement refers to the raw materials, component parts, and supplies bought from outside organizations to support a company’s operations. (True; p. 270)
2. Procurement’s costs often range between 40-60% of an organization’s revenues. (False; p. 270)
3. Procurement’s historical focus in many organizations was to minimize the total number of outside suppliers. (False; p. 270)
4. Procurement and purchasing are viewed as synonymous terms. (True; p. 270)
5. Supporting organizational goals and objectives means that procurement’s focus is on satisfying internal customers. (False; p. 271)
6. First and foremost, procurement’s objectives must manage the purchasing process effectively and efficiently. (False; p. 271)
7. The first step in supplier selection and evaluation is situation analysis. (False; p. 271)
8. Trade shows, trade publications, and the Internet can be used to identify possible suppliers. (True; pp. 271-272)
9. The final step of the supplier selection process is to evaluate the decision. (True; p. 272)
10. Supplier selection and evaluation generally involve multiple criteria. (True; p. 273 )
11. Supply management refers to a degree of aggressive procurement not normally encountered in supplier selection. (False; p. 273)
12. Supplier development is synonymous with reverse marketing. (True; p. 273)
13. One reason for the growth of the supplier development concept is that achieving competitive advantage in the supply chain is predicated on purchasers adopting a more aggressive approach. (True; p. 273)
14. An excessive number of suppliers is one reason why purchasers are adopting a more proactive and aggressive role in the procurement process. (False; p. 273)
15. The International Standards Organization defines quality as a subjective term for which each person has his or her own definition. (False; p. 273)
16. ISO 9000 is a set of generic standards used to document, implement, and demonstrate quality management and assurance systems. (True; p. 274)
17. After achieving ISO 9000 certification, organizations can be recertified every three years. (True; p. 274)
18. ISO 14000 suggests that there will be 3.4 defects, deficiencies, or errors per one million opportunities. (False; p. 274)
19. Reduced costs and reduced cycle times are two benefits associated with Six Sigma. (True; p. 274)
20. Any organization in the world can apply for the Malcolm Baldrige Quality Award. (False; p. 274)
21. The Baldrige Award allows an organization to determine if it complies with its specific quality system. (False; p. 275)
22. Global procurement refers to buying components and inputs anywhere in the world. (True; p. 275)
23. Problem recognition is the first step in global procurement. (False; p. 275)
24. Because global sourcing increases the distance that components and inputs must be moved, managers must consider the tradeoff between transportation and holding costs. (True; p. 276)
25. Implementation is often a major shortcoming to many global procurement plans. (True; p. 276)
26. One way of evaluating electronic procurement is by categorizing benefits as hard, soft, or intangible. (True; p. 276)
27. Unauthorized spending refers to employers who do not follow company guidelines about which suppliers to use in a particular situation. (False; p. 276)
28. One concern is that electronic procurement can be impersonal in the sense that human interaction is replaced by computer transactions. (True; p. 276)
29. About 50% of the companies in a recent survey mandate the use of electronic procurement. (False; pp. 276-277)
30. In a reverse auction, the buyer must accept the lowest bid. (False; p. 277)
31. Buyers are critical of reverse auctions because their primary emphasis is low price. (False; p. 277)
32. A reduction in the number of invoices is one benefit to procurement cards. (True; p. 277)
33. Investment recovery is often the responsibility of the finance manager. (False; p. 277)
34. Excess materials refer to stock that exceeds the reasonable requirements of an organization. (True; p. 278)
35. Scrap materials are no longer serviceable, have been discarded, or are a by-product of the production process. (True; p. 278)
36. Obsolete materials have no economic value. (False; p. 278)
37. The ways that organizations manage the investment recovery for excess, obsolete, scrap, and waste materials should be influenced by the materials’ classification. (True; p. 278)
38. Socially responsible procurement refers to procurement activities that meet the ethical and discretionary responsibilities expected by society. (True; p. 279)
39. Diversity and philanthropy are two dimensions of socially responsible procurement. (True; p. 279)
40. Bribes refer to money paid after an exchange. (False; p. 279)
PART IV
CASE SOLUTIONS
CASE 11-1: EASING IRA’S IRE
Question 1: Arrange the tasks shown in Exhibit 11-A in a network or PERT chart.
A chart with three paths results. They, and their completion times, are:
A B C H I L 6.50 days
A D E F K L 6.45 days
A D G J L 8.00 days
The case does not indicate whether it is necessary to complete A before beginning B. This could be discussed in class.
Question 2: Determine the critical path. What is the least amount of time it takes between receipt of an order and its delivery to a customer?
The critical path is A D G J L and it takes 8 days.
Question 3: Considering your answers to Questions 1 and 2, what areas of activity do you think Wood should look at first, assuming she wants to reduce order processing and delivery times? Why?
She should, of course, look at the critical path because it takes the longest and is controlling. Items G and J seem like candidates.
Question 4: Now that she is a Californian ready for the race down the information superhighway, Wood wants to be able to impress Pollack in terms of her knowledge of current technology. Recently a sales representative from a warehouse equipment company called, trying to interest her in installing a “Star Wars-Robotic” order picker for the warehouse. Controlled by lasers and powered by magnetic levitation, the device can pick orders (task H) in 15 minutes, rather than 6 hours (.75 days), the current time. How valuable would such a device be for Wood? Why?
Although the “Star Wars-Robotic” order picker offers impressive time savings, it would appear to offer limited immediate advantages in the sense that overall completion time along the critical path would be unaffected.
Question 5: Another alternative is to use faster transportation. How should Wood choose between paying more for faster transportation and paying more for other improvements? Assume that her only goal is speed.
See the answer to question 3. Wood should look at all costs along the critical path. Any improvement would have to be an item on the path; and the cost of each improvement would have to be compared with the time savings it provides.
Question 6: To offset some of the costs of speeding up the system, does the PERT chart indicate where there might be some potential savings from assigning fewer people to some tasks, thereby increasing the amount of time needed to complete these tasks? If so, which tasks are likely candidates? Why?
Wood should explore transferring workers from tasks not on the critical path, such as B, C, E, F, H, I, or K, and these workers should be transferred to tasks on the critical path. She could do this so long as the function from which the workers were transferred does not become part of a new critical path.
CASE 11-2: TEMPO LTD.
Question 1: Should Terim let somebody else complete the transaction because he knows that if he does not sell to the North Koreans somebody else will?
This question may stimulate a great deal of discussion among students. On the one hand, Terim is contemplating a transaction involving commodities (chemicals and lumber) as well as with a country (
Question 2: What are the total costs given in the case for the option of moving via
Activity
Cost (U.S. dollars)
Ocean transportation to Constantza
42,000
Suez Canal charges
3,000
Truck
15,000
Handling
6,250
False documents
10,211
Total
76,461
Question 3: What are the total costs given in the case for the option of moving via
Activity
Cost (U.S. dollars)
Ocean transportation to Latakia
33,000
Suez Canal charges
3,000
Truck
12,000
Handling
6,250
Rusvet
50,000
Total
104,250
Question 4: Which option should Terim recommend? Why?
Either option can be supported. For example, the Romanian option is nearly $30,000 cheaper than the Syrian option, thus solely from the perspective of cost, the Romanian option might be preferred. However, the Romanian option takes three weeks longer to complete than does the Syrian option. Moreover, the Romanian option appears to be riskier than the Syrian one in the sense that things might go awry in the redocumentation process.
Question 5: What other costs and risks are involved in these proposed transactions, including some not mentioned in the case?
The entertainment of the North Korean officials can be viewed as both a cost and a risk. At a minimum, luxurious hotel accommodations as well as business-related dinners and receptions will not come cheaply. From a risk perspective, there is a chance that the entertainment could get out of hand and generate embarrassing publicity.
There is also a chance that some of the rusvet “fees” might unexpectedly increase, particularly those associated with generating the false documents. If providers of the documentation understand the “captive” nature of the lumber shipment from
A more general risk for these proposed transactions is the volatile political situation in the Middle East. One manifestation of this volatility is through disruptions in transportation routes; traffic through the Suez Canal has periodically been influenced by the region’s political volatility—an important consideration given that the proposed lumber shipments will need to move through the Suez Canal.
Students are likely to generate other costs and risks.
Question 6: Regarding the supply chain, how—if, at all—should bribes be included? What functions do they serve?
From a broad perspective, the purpose of bribes should be to facilitate the completion of international transactions. At least two perspectives must be considered when analyzing the first part of the question. One is the legal perspective; quite simply, in some countries (such as the
A second perspective, practicality, understands that bribes are essential for the completion of international transactions. Under this scenario, supply chains would need the flexibility to accommodate situations that require a bribe. One manifestation of this flexibility could be the name assigned to a “bribe.” For example, one of the authors was not allowed to board an airplane flight to Katmandu,
Question 7: If Terim puts together this transaction, is he acting ethically? Discuss.
The answer to this question could depend on one’s definition of ethical actions. One definition, for example, focuses on a personal code of conduct to guide one’s actions. Another definition suggests that anything that is not illegal is ethical. Having said this, the Romanian routing appears questionable because of the document alterations associated with it. These document alterations are probably illegal, regardless of the country in question.
Alternatively, because the Syrian routing does not appear to include any overtly illegal activities, some might view it as ethical. Even though it includes rusvets, Terim merely would be following accepted protocol for many international transactions. Moreover, the use of
Alternatively, the case suggests that Terim is struggling with the decision to do business with the North Koreans in part because of concerns about their communist regime and support of terrorist policies. Because this may indicate that Terim has a “conscience,” any transaction involving the North Koreans could be viewed as unethical in the sense that Terim is violating his personal code of conduct.
Question 8: What do you suggest should be done to bring moral values into the situation so that the developing countries are somewhat in accordance with Western standards? Keep in mind that the risks involved in such environments are much higher than the risks of conducting business in Western markets. Also, note that some cultures see bribery as a way to better distribute wealth among their citizens.
Because this case involves organizations located in two non-Western countries, it might be culturally insensitive to bring in moral values that are more in accordance with Western standards.
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