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PROCUREMENT
LECTURE
BASIC DEFINITIONS
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Raw materials – Basic substance in its natural,
modified, or semi-processed state, used as an input
to a production process for subsequent modification
or transformation into a finished good.
Resource – Economic or productive factor required
to accomplish an activity, or as means to undertake
an enterprise and achieve desired outcome. Three
most basic resources are land, labor, and capital;
other resources include energy, entrepreneurship,
information, know how, management, and time.
BASIC DEFINITIONS
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Supplier – Manufacturer, who uses tools and labor
to make things for sale; Processor (in
manufacturing), who converts a product from one
form to another; Packager (in manufacturing),
encloses products for distribution, storage, sale, and
use; Distributor (in business), the middleman
between the manufacturer and retailer; Wholesaler,
who sells goods or merchandise to retailers
BASIC DEFINITIONS
Supply and demand – Supply and demand is an economic model based on price, utility
and quantity in a market. It concludes that in a competitive market, price will
function to equalize the quantity demanded by consumers, and the quantity
supplied by producers, resulting in an economic equilibrium of price and quantity.
An increase in the quantity produced or supplied will typically result in a reduction
in price and vice-versa. Similarly,
an increase in the number of
workers tends to result in lower
wages and vice-versa. The model
incorporates other factors
changing equilibrium as a shift of
demand and/or supply.
The price P of a product is determined
by a balance between production at
each price (supply S) and the desires
of those with purchasing power at each
price (demand D). 2, along with a
consequent increase in price and
quantity Q sold of the product.
BASIC DEFINITIONS
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Make-or-buy – Determination of whether it is more
advantageous to make a particular item in-house,
or to buy it from a supplier. The choice involves both
qualitative (such as quality control) and quantitative
(such as the relative cost) factors.
PROCUREMENT
From the supplier to the company
The application of logistics concepts in terms of
procurement is called procurement logistics. It covers all
activities that provide a manufacturer with raw
materials, tools and operational supplies as well as with
purchase and replacement parts. In the past, the
necessary materials were primarily obtained from local
sources. Today, a company can readily obtain them
around the world thanks to global networks and the
Internet. This has an impact on logistics as well.
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PROCUREMENT
Concept and scope of procurement logistics
 Procurement is a market-linked logistics system. It forms
the link between the suppliers’ distribution logistics and
a company’s production logistics. Procurement logistics
items are goods that must be supplied to the company
as needed - e.g., raw, auxiliary and operating
materials, purchases and merchandise that the company
needs to manufacture its products. The customer is the
source warehouse or, in the case of direct supply, the
first production stage in the company.
PROCUREMENT
Optimization through system and total cost
orientation
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The system orientation used in market-linked procurement
logistics examines relationships with suppliers’ logistics
systems. One factor that must be considered is whether
efforts to reduce inventories in a company’s own supply
warehouse will require increased inventories at the supplier’s
distribution warehouse. Over the long term, this could result
in price increases for the suppliers’ products. When the
supply chain is viewed as a holistic system, it is possible to
do things like build a warehouse that is operated jointly by
the customer and supplier in order to reduce warehouse
inventories in procurement logistics.
PROCUREMENT
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Total-cost orientation is also reflected in warehouseinventory reduction. Lower inventories may result in
smaller orders and increased order frequency. This can
mean higher transport costs. In terms of supplying a
company, the interdependency between procurement
logistics and procurement strategy must be considered.
Similar to marketing instruments used in sales, the
instruments related to procurement strategy can be
broken down into four groups: product policy, terms &
conditions, communications strategy and purchasing
strategy.
PROCUREMENT
FORECASTING
Forecasting methods:
 Average,
 Moving average,
 Weighted average,
 Exponential smoothing.
Errors:
 Standard.