Integral Logistics Management — Operations Management and Supply Chain Management Within and Across Companies

2.2.1 Overview on Strategic Procurement

Intended learning outcomes: Disclose the supplier structure follows the product structure. Differentiate between direct material, indirect material, commodities, and various demand patterns. Describe various traditional procurement strategies.



Procurement strategies in supply chains differ from those in simple trade relations in that the manufacturer attempts to realize a supplier structure that follows the product structure (see Figure 1.2.2.2). From the viewpoint of the end product manufacturer, the suppliers are arranged accordingly in tiers. Figure 2.2.1.1 shows an example of this for end product A.

Fig. 2.2.1.1        Procurement strategy in a supply chain: the supplier structure follows the product structure.

  • The original equipment manufacturer (OEM) produces the finished product, or end product (in the example, product A), and sells it to the consumer.
  • First-tier suppliers, or modular or system suppliers, are responsi­ble for several structure levels that together yield an assembly ready for final assembly, and supply this directly to the assembly line of the original equipment manufacturer. In automobile manufactu­ring, for instance, this can be complete car door modules or instrument panels. In the example in Figure 2.2.1.1, assembly B is this kind of module or system.[note 202]
  • Second-tier suppliers, or semifinished good suppliers, supply simple semifinished goods, both to the OEM and also to the system suppliers. In the example in Figure 2.2.1.1, assembly D is a semifinished good.
  • Raw materials, standard parts, and maintenance, replenishment, and operating (MRO) suppliers supply these items both to OEM and also to the system and second tier suppli­ers. In the example in Figure 2.2.1.1, these are items 1, 2, 3, 4, and 5.

Procurement strategies in the supply chain are generally different for each of these levels of suppliers. The companies involved in such a channel of distribution[note 203] form customer-supplier links. With the exception of the end user, each customer is also a supplier within the supply chain.

The procurement strategies also differ dependent on the logistics characteristics of the goods that flow from supplier to customer.

  • Direct material is material procured that becomes a part of the product or is required for the execution of an order. Typically, direct material includes components, documents, receipts, proofs, or similar materials but also, in the broadest sense, external operations. As a rule of thumb, direct material is material that would not be procured if there were no production or selling.[note 204]
  • Indirect material is all material that is not direct material. More specifically, indirect material includes all material that must be procured to maintain company performance and efficiency, e.g., MRO materials.
  • Commodities are entirely standard and can come from a sufficient variety of sources.Custom semifinished goods are manufactured to spec. Printed circuit boards and injection-molded plastic pieces are good examples.
  • Demand pattern: Items have continuous demand if demand is approximately the same in every observation period. Items have discontinuous demandif many observation periods with no or very little demand are interrupted by few periods with large, for example, 10-times-higher demand, without recognizable regularity.

The following is a list of some of the frequently mentioned traditional procurement strategies. Combinations of these can also appear.

Multiple sourcing or multisourcing refers to the search for the greatest number of sources of a service. This strategy reduces the risk of too great a dependency on another company. This is a common strategy in traditional market-oriented relations. 

Single sourcing refers to the search for one single source of a certain service, such as a single-source supplier, i.e., a unique supplier per item or family of items. This strategy lowers transaction costs and speeds up order processing; it becomes imperative if short lead times are important.

Dual sourcing plans for two suppliers for an item or an item family. This strategy can reduce the risk of disruption in production due to delivery difficulties on the part of the supplier, while retaining most of the advantages of single sourcing.

Sole sourcing refers to the situation where the supply of a product is available from only one supplier. Usually barriers such as patents preclude other suppliers from offering the product.

With modular or system suppliers, we also speak of modular sourcing or system sourcing. Here the buyer has the advantage of not having to assemble a great number of parts and components from various suppliers that have no contact with each other. The task of technical coordination and procurement of the required components is taken over by the modular or system supplier.

Global sourcing refers to the search for the best source worldwide of a particular service. This sourcing strategy may be necessary with products and processes involving high technology.

Local sourcing is the search for local sources of a certain service. Intensive cooperation entailing personal meetings or large transports may require this strategy.

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Course section 2.2: Subsections and their intended learning outcomes

  • 2.2 Strategic Procurement

    Intended learning outcomes: Produce an overview on strategic procurement. Differentiate between traditional market-oriented relationship and Customer-Supplier Partnership. Describe strategic procurement portfolios. Explain strategic selection of suppliers. Present basics of supplier relationship management and e-procurement solutions.

  • 2.2.1 Overview on Strategic Procurement

    Intended learning outcomes: Disclose the supplier structure follows the product structure. Differentiate between direct material, indirect material, commodities, and various demand patterns. Describe various traditional procurement strategies.

  • 2.2.2 Traditional Market-Oriented Relationship Compared with Customer-Supplier Partnership

    Intended learning outcomes: Present target area strategies for the traditional market-oriented relationship, and disclose possible supply chain risks entailed. Identify the concept of customer-supplier partnership and disclose adequate target area strategies, and disclose possible supply chain risks entailed.

  • 2.2.3 Strategic Procurement Portfolios

    Intended learning outcomes: Explain the supplier portfolio describing the degree of mutual dependence between buyer and supplier. Present procurement strategies for material groups in dependency on their logistics characteristics.

  • 2.2.4 Strategic Selection of Suppliers

    Intended learning outcomes: Describe possible supplier-evaluation criteria for each target area. Explain the score and the gap method for supplier evaluation, using an example with two suppliers. Disclose possible supply chain risks risks entailed using these methods.

  • 2.2.5 Basics of Supplier Relationship Management and E-Procurement Solutions

    Intended learning outcomes: Produce an overview on several categories of e-procurement solutions. Describe various classifications of an electronic marketplace according to the institutional provider, the degree of “openness”, and the range.