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PROCUREMENT LECTURE BASIC DEFINITIONS 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 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 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. 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 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 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.