Procurement and Vendor Management

UNIT: IV
Aligning Inventory Objectives with Procurement
Agenda of the class

 Objective of purchasing management

 Role of purchasing in supporting
inventory objectives
 Hedging vs forward buying
 Managing price fluctuation and
volatility in international finance
 Payment modes
 Matching supply with customer demand
 Managing inward logistics
Objective of purchasing management at strategic in alignment of
materials management

Lowering cost
Reduce risk and ensure the security of supply
Long-Term Relationships with Suppliers
Improve quality
Pursue innovation
Continuous Evaluation of Purchasing
Information Technology System Integration
 Purchasing
A purchasing department or procurement department in a company is an organizational unit
that fulfills these responsibilities. So, let’s explore the process of purchasing and how a
purchasing department works.

Purchasing is the process of buying or acquiring goods and services to make supply chain
management more efficient. Goods, materials, and equipment procured in this process play a
key role in improving the quality of products/services produced by the organization.
Ultimately, the purchasing process impacts the product quality and helps in optimizing costs
in the value chain.
 What is a Purchasing Department?

• The purchasing department of a company is responsible for procuring the goods, raw
materials & services required to operate the organization effectively.

• Now, every organization has its specific needs when it comes to the sourcing and
procurement of equipment, raw materials, and services. These needs define the purchasing
process and how its purchasing department functions.

• Based on these needs, an organization sets the purchasing department’s responsibilities and
streamlines its procurement plans to guard against demand-supply hurdles. Let’s understand
the role of a purchasing department in this process.

• The role itself is a broad one, covering such areas as market analysis, negotiations with
suppliers and producers, transport, storage options, procurement technologies and order times
to ensure that goods are bought as economically and time-efficiently as possible. Specific
Identifying requirements for goods, materials and services.
Identifying reliable suppliers.
Price negotiations.
Comparison of delivery terms.
Establishing order quantities.
Writing requests for bids and awarding supply contracts.
Coordinating delivery with the warehouse against storage capacities.
Product testing and quality control.
Managing budgets and payments.
 Strategic Vs. Operational Role of the Purchase Department

Strategic purchasing is responsible for planning all the high-level tasks and decisions that go
hand in hand with procurement. In this role, the purchase department will set the overall
direction of procurement based on the company's needs and goals, evaluate suppliers and
develop long-term relationships across the supply chain. The objective is to source goods as
economically as possible whilst ensuring the lowest possible risk to the business. This might
include decisions about whether the products or components are manufactured in-house or
purchased from external suppliers.

Operational purchasing, also known as tactical purchasing, takes care of the administrative
aspects of purchasing. It's a short-term, transactional role which focuses on repeat ordering,
receiving inventory and invoice payments as well as the handling of returns and complaints.
With its operational hat on, the purchasing department will be more concerned with keeping
the production line running than with understanding supplier capabilities or supporting the
company's long-term needs.
Hedging: It is a technique used to reduce the risk of a financial asset. A risk is
an uncertainty of not knowing the future outcome. When a financial asset is
hedged, it provides a certainty of what its value will be at a future date. Hedging
instruments can take the following two forms.

Exchange Traded Instruments

Exchange traded financial products are standardized instruments that only trade
in organized exchanges in standardized investment sizes. They cannot be tailor-
made according to the requirements of any two parties

Over the Counter Instruments (OTC)

In contrast, over the counter agreements can materialize at the absence of a
structured exchange thus can be arranged to fit the requirements of any two
parties.
What is a Forward Contract?
A forward contract is a contract between two parties to buy or sell an asset at a specified price on a
future date.

E.g., Company A is a commercial organization and intends to purchase 600 barrels from oil from
Company B, who is an oil exporter in another six months. Since the oil prices are continuously
fluctuating, A decides to enter into a forward contract to eliminate the uncertainty. As a result, the two
parties enter into an agreement where B will sell the 600 oil barrels for a price of $175 per barrel.

Spot rate (rate as per today) of an oil barrel is $123. In another six months’ time, the price of an oil
barrel may be more or less than the contract value of $175 per barrel. Irrespective of the prevailing
price as at the contract execution date (spot rate at the end of the six months). B has to sell a barrel of
oil for $175 to A as per the contract.

The difference between hedging and forward contract is mainly dependent on their scope where
hedging is broader in scope as it involves many techniques while forward contract has a narrow scope.
The objective of both are similar where they attempt to mitigate the risk of a transaction that will take
place in the future. Further, the market for forward contracts is significant in volume and value,
however, since the details of forward contracts are limited to the buyer and the seller, the size of this
What is volatility?
Volatility is an investment term that describes when a market or security experiences periods
of unpredictable, and sometimes sharp, price movements.
People often think about volatility only when prices fall, however volatility can also refer to
sudden price rises too.

What causes volatility?

1. Political and economic factors
Governments play a major role in regulating industries and can impact an economy when
they make decisions on trade agreements, legislation and policy. Everything from speeches to
elections can cause reactions among investors, which influences share prices. Economic data
also plays a role, as when the economy is doing well, investors tend to react positively.
Monthly jobs reports, inflation data, consumer spending figures and quarterly GDP
calculations can all impact market performance. In contrast, if these miss market
expectations, markets may become more volatile.
2. Industry and sector factors
Specific events can cause volatility within an industry or sector. In the oil sector, for
example, a major weather event in an important oil-producing area can cause oil
prices to increase. As a result, the share price of oil distribution-related companies
may rise, as they would be expected to benefit, while the prices of those that have
high oil costs within their business may fall. Similarly, more government regulation in
a specific industry could result in stock prices falling, due to increased compliance
and employee costs that may impact future earnings growth.

3. Company performance
Volatility isn’t always market-wide and can relate to an individual company. Positive
news, such as a strong earnings report or a new product that is wowing consumers,
can make investors feel good about the business. If many investors look to buy it, this
increased demand can help to raise the share price sharply. In contrast, a product
recall, data breach or bad executive behavior can all hurt a share price, as investors
sell off their shares. Depending on how large the company is, this positive or negative
performance can also have an impact on the broader market.
 Payment modes

Cash-in-Advance
With cash-in-advance payment terms, an exporter can avoid credit risk because payment is received before
the ownership of the goods is transferred. For international sales, wire transfers and credit cards are the
most commonly used cash-in-advance options available to exporters. With the advancement of the
Internet, escrow services are becoming another cash-in-advance option for small export transactions.
However, requiring payment in advance is the least attractive option for the buyer, because it creates
unfavorable cash flow. Foreign buyers are also concerned that the goods may not be sent if payment is
made in advance. Thus, exporters who insist on this payment method as their sole manner of doing
business may lose to competitors who offer more attractive payment terms. Learn more about Cash-in-
Advance.

Letters of Credit
Letters of credit (LCs) are one of the most secure instruments available to international traders. An LC is a
commitment by a bank on behalf of the buyer that payment will be made to the exporter, provided that the
terms and conditions stated in the LC have been met, as verified through the presentation of all required
documents. The buyer establishes credit and pays his or her bank to render this service. An LC is useful
when reliable credit information about a foreign buyer is difficult to obtain, but the exporter is satisfied
with the creditworthiness of the buyer’s foreign bank. An LC also protects the buyer since no payment
Documentary Collections
A documentary collection (D/C) is a transaction whereby the exporter entrusts
the collection of the payment for a sale to its bank (remitting bank), which sends
the documents that its buyer needs to the importer’s bank (collecting bank),
with instructions to release the documents to the buyer for payment. Funds are
received from the importer and remitted to the exporter through the banks
involved in the collection in exchange for those documents. D/Cs involve using a
draft that requires the importer to pay the face amount either at sight
(document against payment) or on a specified date (document against
acceptance). The collection letter gives instructions that specify the documents
required for the transfer of title to the goods. Although banks do act as
facilitators for their clients, D/Cs offer no verification process and limited
recourse in the event of non-payment. D/Cs are generally less expensive than
LCs.
Open Account
An open account transaction is a sale where the goods are shipped and delivered before payment is due, which
in international sales is typically in 30, 60 or 90 days. Obviously, this is one of the most advantageous options to
the importer in terms of cash flow and cost, but it is consequently one of the highest risk options for an exporter.
Because of intense competition in export markets, foreign buyers often press exporters for open account terms
since the extension of credit by the seller to the buyer is more common abroad. Therefore, exporters who are
reluctant to extend credit may lose a sale to their competitors. Exporters can offer competitive open account
terms while substantially mitigating the risk of non-payment by using one or more of the appropriate trade
finance techniques covered later in this Guide. When offering open account terms, the exporter can seek extra
protection using export credit insurance.

Consignment
Consignment in international trade is a variation of open account in which payment is sent to the exporter only
after the goods have been sold by the foreign distributor to the end customer. An international consignment
transaction is based on a contractual arrangement in which the foreign distributor receives, manages, and sells
the goods for the exporter who retains title to the goods until they are sold. Clearly, exporting on consignment is
very risky as the exporter is not guaranteed any payment and its goods are in a foreign country in the hands of
an independent distributor or agent. Consignment helps exporters become more competitive on the basis of
better availability and faster delivery of goods. Selling on consignment can also help exporters reduce the direct
costs of storing and managing inventory. The key to success in exporting on consignment is to partner with a
reputable and trustworthy foreign distributor or a third-party logistics provider. Appropriate insurance should be
in place to cover consigned goods in transit or in possession of a foreign distributor as well as to mitigate the
Demand Planning
• In general, demand management is the process of forecasting customer demand. Demand
planners combine data sets from historical sales, market influences, retailer or distributor
actions, and other conditions that may affect demand, such as social influences, school
schedules or weather impacts. They use this data to forecast customer demand.
• There are two types of demand planning: unconstrained and constrained. In unconstrained
demand forecasting, the planner focuses solely on raw demand potential. This means they
won’t factor in possible constraints such as capacity and cash flow. Essentially, how much
could you sell if supply wasn’t an issue. Constrained forecasting, however, does take these
factors into account, creating a more realistic approach.
• Businesses should employ both unconstrained and constrained demand planning to give
their customers the most value and keep supply costs down. When your business improves
its demand forecasting, you also reduce the amount of inventory you hold to meet service
targets, reducing costs. Bringing both together is essential in supporting executive Sales
and Operations Planning as current, and future resources as considered in relation to
demand. There are four elements of demand planning that businesses should take into
account:
Appropriate Product History: What you’ve sold in the past may indicate what you will sell
in the future. This element involves choosing the best historical period and the right
conditions but can be helpful in forecasting.

Internal Trends: Also using historical data, businesses determine trends based on another
sales pattern in the product or group of products.

External Trends: Some factors that may influence a business’s ability to meet its goals
include competition, socio-cultural factors, legal, technological changes, economy, and
political environment.

Events and Promotions: When businesses run events or promotions, there will often be an
increase in sales. Demand planning must account for this as well.
 Supply Planning
While demand planning involves forecasting customer demand, supply planning determines how a business will fulfill
that demand while still meeting its financial and service goals. Therefore, supply planning should factor in various
aspects related to inventory production and logistics. These factors may include on-hand quantities, open and planned
customer orders, minimum order quantities, lead times, production leveling, safety stocks, and demand. There are five
functions of supply chain management:

 Acquisition: This step involves purchasing raw materials needed for the final product. Purchasing supplies is
essential for manufacturing to take place and should include having visibility to your suppliers and their suppliers.
 Business Operations: This is where demand forecasting comes in. At this step, you need to know how much
product must be produced, to calculate the demand and decide how much inventory you will need.
 Transportation and Logistics: This component organizes the parts of planning, buying, manufacturing, storage,
and transportation to ensure items reach the end customer.
 Management of Resources: Here, businesses ensure that enough resources are available and optimally distributed.
 Workflow of Information: Exchanging information keeps supply chain management on track. This process ensures
a standardized system is in place across all departments.

Many businesses will use supply planning software to automate inputting a demand plan and all its data into
generating a master production schedule. Then, once the supply plan is created, they will review its capacity and
impact on resources and revise it as needed.
What are the Aspects of Demand Planning?

Product Portfolio Management

Product portfolio management oversees the overall product lifecycle, beginning with the introduction
of a new product through to its end-of-life planning. In many cases, product lines are interdependent,
and understanding how new products may influence demand for other products is important to
understanding the overall product mix required to maximize market share.

Statistical Forecasting
Using historical data, statistical forecasting creates supply chain forecasts with advanced statistical
algorithms. In this area, it is important to determine the accuracy of each model, identify outliers and
exclusions and understand assumptions. Seasonal shifts (think the spurt of holiday shopping that
occurs between October and December for retailers, or the boost in yard equipment sales in spring
months) can also be assessed with statistical forecasting.

Trade Promotion Management

Trade promotion or marketing events can influence demand, especially in the retail industry. The goal
of a trade promotion is to help a brand connect with a customer, often through an in-store giveaway,
Best Practices for Demand Planning
Demand planning is a multi-step process, dependent on the right tools, information and
processes. Often, there can be unique nuances in the process, based on product positioning,
inventory needs and organizational goals, but some best practices to keep in mind include:

Implement the Right Software

There is a plethora of options when it comes to enterprise resource planning (ERP) systems,
so choosing the right one can be tricky. When considering ERP software, it’s important to
examine the ability of the tool to handle forecasting nuances as well as the provider’s
reputation, reporting capabilities, and the transparency and reliability of the forecasts it
produces.

Gather and Prepare Data

Data drives demand planning, now more than ever. Real-time visibility into inventory
movements coupled with metrics reports that paint a clear picture and data mining and
aggregation that can identify areas for improvement or reaction can help to create more agile
process modelling.
Define Process Models
Lacking a defined process for a demand planning cycle leads to chaos. Confusing process with
information that is simply a set of widely known facts around an organization is all too common,
making it difficult to hold anyone accountable, and thus hurting overall performance. For most
companies, the steps in the demand planning process go something like this:
• Preparation of data
• Initial forecasting
• Incorporation of market intelligence
• Consideration of sales goals and financial reports to reconcile bottom-up forecasts with top-
down financial and sales forecasts
• Refine a final forecast
• Performance monitoring based on real-time analytics

Implement and Monitor

Successful demand planners usually design a pilot version of the plan using historical data, or
descriptive analytics, as a basis. They also make regular adjustments and have a team of people
dedicated solely to devising the plan, implementing it, reducing error and bias, and designing
processes for execution.
Capacity Demand Matching
• Leveling capacity forces inventory to build up in anticipation of seasonal
variation in demand Level strategy.
• Carrying low levels of inventory requires capacity to vary with seasonal
variation in demand or enough capacity to cover peak demand during season
Chase strategy

Level Strategy
Chase Strategy
The Functions of Supply Planning
The function of supply planning is to meet the demand forecasts as efficiently as possible. This
requires managing all aspects of inventory production and logistics. These aspects may include
planned and received orders, the current inventory, the lead times for manufacturing the
products, minimum order quantities, chasing demand, leveling production, and managing
safety stocks.

How Integrated Business Planning Can Help Supply Planners & Demand Planners Work
Together?
Getting the supply planning department and the demand planning department to work together
efficiently can be a challenge, but integrated business planning makes it much easier. Integrated
business planning uses data and input from both departments to come up with a single plan that
both departments are working toward. This ensures that everyone is on the same page in both
their long-term and short-term objectives. Also, it establishes lines of communication between
the two departments that will be useful in various situations.
Inbound logistics: Bringing raw material or supplies from the supplier and delivering it to the
production units falls under the inbound logistics umbrella. It takes care of the procurement
and delivery of the parts or material that is needed to build the final product. Efficient
management of inbound logistics ensures that a business can make a smooth supply and
adequate stock of its best-selling or most-demanded items. On the contrary, outbound
logistics is about warehousing, packaging, transportation, and delivery of goods from the
manufacturing facility to the end customer.

Inbound vs Outbound Logistics- Key Differences

Inbound logistics
Includes receiving of raw material or supplies from a supplier to an inbound warehouse
Focuses on supply
The flow of material is from suppliers, manufacturers, or distributors to a retailer, brand, or
3PL provider
Activities involved are material sourcing, material management, and warehouse receiving
Involves interaction between supplier and the company
Outbound Logistics
Includes delivery of finished products to end-customer
Focuses on demand
The flow of material/goods is from a company, brand, or retailer to end-customers
Processes involved are shipping, delivery, and customer service
Involves communication between the company and end-customers

The Significance of Inbound Logistics

Both inbound and outbound logistics are crucial for efficient logistics management. An
efficient inbound logistics can make a business manufacture high-quality products, save big on
the various costs, and drive sales. It also contributes to minimizing the wastage of material and
ensuring the right production. Remember, any inefficiency in this first stage of the value chain
will impact all the logistics processes. In fact, you may even have to stop production or cease
your manufacturing operations. ­
Advantages of Inbound Logistics
Efficient management of inbound logistics can render a plethora of benefits to
businesses. Here are some of them-
Predictable raw material cost
Superior product quality
Timely and cost-controlled deliveries
Lower shipping and receiving costs
Improved inventory management
Stronger vendor relationships
Processes Involved in Inbound Logistics Services
Inbound logistics activities include-
Sourcing and procurement – Finding out potential suppliers, getting price quotes, and
managing suppliers
Purchasing or ordering – Placing an order of the goods or raw material the company
requires
Transportation – Deciding the mode of transport and discussing price and route with the
third-party carrier
Receiving – Unloading trucks and receiving the ordered material, and ensuring its quantity
and quality
Material management – Moving the received material within the facility
Storing and warehousing – Storing the material in the right conditions before transporting
it to the manufacturer
Inventory management – Keep track of the inventory
Distribution and tracking – Sending material or goods to the distributors and tracking
them in real-time
Reverse logistics – Bringing the raw material or goods back to the facility in case of
defects, delivery issues, repair, and other problems
What are the challenges of inbound logistics?
Shipping Inefficiencies: Shipping inefficiencies can consist of multiple things. Non-
availability of drivers, unprecedented delays due to natural calamities, vehicle breakdowns,
route diversions, and more, to name a few.

Lack of Information on Shipments: This challenge can be directly attributed to the poor
visibility of inbound logistics operations. It increases transportation risks, results in
diminishing on-time delivery volumes, increases operational costs, and more. We will talk at
length about this particular problem soon.

Improper Management of Unloading Activities: It frequently happens that manufacturing

plants see long queues of inbound trucks waiting outside gates and even boom barriers. This
causes delays in unloading and even impacts the operations of outbound delivery vehicles.

Inability to Process Returns Efficiently: A combination of manual processes and lack of

visibility further complicates the already complex returns management process. Accurately
identifying the defects and damages and efficiently chalking out a plan to send it back to its
origin or source is a daunting task.
Communication Gaps: Logistics is a summation of multiple moving parts and hence
numerous stakeholders. This triggers significant issues when it comes to keeping all
logistics stakeholders updated on delivery progress, status, delays, costs, and more.

High Inbound Transportation Costs: Rising fuel prices, unprecedented delays, and
vehicle idling, among other such factors, significantly contribute to the growing cost of
inbound transportation operations.

Fluctuations in Supply and Demand: This is perhaps one of the most critical challenges
not just in inbound logistics but overall supply chain networks, and it became a shocking
reality post the pandemic. The sheer increase in demand for online delivery of both essential
and non-essential items and the lack of supply pushes businesses to their edge. Leveraging
advanced technologies to understand demand patterns better and ensure logistics resiliency
in times of crisis are two critical areas supply chain stakeholders should focus on.
Thank You