PuSm - Lecture 11 - Chapter 11 - Slides - Online

Graz University of Technology
1 Institute of Business Economics and Industrial Sociology

Industrial Marketing, Purchasing and Supply Management (IMPS)
Assoc. Prof. Priv.-Doz. Dipl.-Ing. Dipl.-Ing. Dr.techn. Bernd M. Zunk
Purchasing and Supply Management

Lecture 11.
Purchasing, logistics and supply chain management
Prof. Dr. Bernd M. Zunk
Course no. 373.551, 4.5 ECTS, Lecture
Winter Semester 2020/21 (Online)
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk
www.bwl.tugraz.at
For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
2 Learning objectives
After this lecture you should understand the following:

• The definition of supply chain management and the
basic supply chain concepts.
• The most important steps in the materials planning cycle.
• How supply chain activities can be structured within
organizations.
• Characteristics of just-in-time scheduling and
purchasing.
• The most important elements of a purchasing
information system.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
3 Introduction: Case Study – Li & Fung
*Note:
The full text of this case study you may find in the primary literature for this
course, the textbook “Purchasing and Supply Management“ written by Arjan
van Weele (2018), 7th edition, p. 252.
4 Introduction: Case Study – Li & Fung (remarks)
The introductory case demonstrates that …

• … the success factors for effective supply chain management are a
strong position in the customer-supplier network, advanced IT support
and “creative” entrepreneurship (i.e. linking customer networks
directly to supplier networks).
• … the key element of the business is NOT the price that Li & Fung
offers to its customers, but rather the integrated value proposition for
the design, purchasing and logistics for a complete line of products.
• … Li & Fung acts as a supply chain integrator that fulfil the role of a
“supply chain director” due to their superior logistics and financial
information systems (specific knowledge about various industries).
• … of course, the business model is erosive as – thanks to the
globalized world – the presence of the Internet and Western
companies in China, “industry knowledge” (= the “rare asset” Li &
Fung provide) is becoming a commodity and much better accessible.
The remarks on the introductory case study refer to: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, pp. 252-257.
5 Definitions and concepts (1/2)
• Physical distribution relates to the way in which finished products are

distributed by the company to its customers (outgoing materials flow).
• Logistics covers activities needed to optimize the goods flows from
suppliers to the point of consumption within the company itself
(incoming materials flow).
• Materials management includes all materials related activities aimed
at optimizing incoming materials flows from suppliers to production.
• Logistics management encompasses all materials flows, from the
flows of purchased materials into a facility, through the manufacturing
process, and out to the customer.
• Supply chain management (SCM) is the management of connected
series of activities which is concerned with planning, coordinating and
controlling material, parts, and finished goods from suppliers up to its
customers; they may have divergent, linear and convergent structures.
• Purchasing and Supply management can be seen as an integrated
part of SCM.
6 Definitions and concepts (2/2)
7 Definitions and concepts: Supply chain structures (Overview)
*Note:
The full text of this memo you may find in the primary literature for this course,
the textbook “Purchasing and Supply Management“ written by Arjan van Weele
(2018), 7th edition, pp. 255-257.
8 Definitions and concepts: Supply chain structures (1/4)
The external structure on a macro level (…“number of stages”)
Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 256.
Supply chain structure (…“location of the link in the supply chain”)
Diverging materials flow:
The finished product of one
link is the main or sole input
for the next production stage
of various other industry
columns. This applies to
industries which process raw
materials.
Linear materials flow:
The finished product of one
link is the main or sole input
for the subsequent link.
Converging materials flow:
Various finished products of
links of various supply chains
are the input for the next link.
This situation is found in
companies with assembly-
oriented production.
External factors, market structure and economic theory
• External factors (e.g. number of suppliers, market structure) are
relevant because they determine the market structure and therefore,
the degree of availability of a certain product. External factors can not
be influenced by individual companies.
• Market structure is defined as the total set of conditions in which a
company sells its products, with special attention to the number of
parties in the market and the nature of the product being traded.
• Economic theory uses a number of constructs to explain the
relationship between demand, supply and market price. It
distinguishes between various market structures such as:
– Pure competition
– Monopolistic competition
– Oligopoly
– Monopoly
11 Definitions and concepts: Supply chain structures (3/4-1)
Market structure (1/2)
• Pure (Perfect) competition.
This is characterized by a large number of buyers
and sellers. Neither the individual supplier nor the
individual buyer can influence the price of the product.
Price is the result of the balance between supply and demand.
• Monopolistic competition.
This market structure is characterized by a large number of buyers
versus a large number of suppliers. Through product differentiation
each supplier wants to make his or her product offering stand out vis-
a-vis its competitors. This provides the supplier with some room to
manipulate prices, within a given bandwidth.
12 Definitions and concepts: Supply chain structures (3/4-2)
Market structure (2/2)
• Oligopoly.
An oligopoly is a market type characterized by a
large number of buyers versus a limited number of suppliers and a
limited product differentiation. Usually, there are important entry
barriers for new competitors. Depending on the situation, the
market price can be set by a market or price-Ieader, or arranged
through some form of price arrangements (cartels).
• Monopoly.
A monopoly is characterized by the presence of only one supplier
of the product in question. Substitutes are (virtually) absent. This
enables the monopolist to pursue their own pricing policy.
Monopolies emerge when the entire supply of raw materials or a
particular manufacturing process or technology is owned by just
one producer or manufacturer, excluding others by means of
contracts or patents (e.g. oil concessions, diamonds, IT solutions).
13 Materials requirements planning
• Materials requirements planning (MRP) starts in the sales

department with drawing up a sales plan, providing an estimate of
the volume to be sold.
• Comparison of the sales plan with the available finished product
stock yields the volumes to be produced.
→ MRP is the input for the manufacturing planning and control system
consisting of:
– Master planning
Plans at the level of the product families (product groups) are
established. Customer orders, sales plan, planned stocks of finished
products as well as the production and purchasing plans are linked
together.
– Manufacturing Resources Planning (MRP-II)
Records the manufacturing resources needed to realize the master
plan. In the process it may become clear that particular production
series are not feasible because of limited production capacity.
14 Materials requirements planning: Manufacturing planning and control
system (overview)
Source: Adapted from Vollman et al. (1984), p. 25

15 Elements of a manufacturing planning and control system (1/2)
• Master production scheduling (MPS).
Translates the master plan into specific materials requirements.
MPS provides the input for calculating the net materials
requirements.
• General capacity testing.
The MPS should be tested for capacity limitations and this should
be done for all potential bottleneck capacities.
• Materials requirement planning (MRP-I).
The materials requirements planning “explodes” the requirements
from the MPS level on a weekly basis, step by step, in
accordance with the bill of materials (BOM). Note: Literature
makes a distinction between MRP-I and MRP-II:
– MRP-I stands for materials requirements planning; aims at releasing and
managing manufacturing orders and purchasing requisitions.
– MRP-II stands for manufacturing resources planning; it represents an
integrated system that controls relevant materials flows and production
capacity while also taking into account the relationship between these
materials flows and the required capacity.
16 Elements of a manufacturing planning and control system (2/2)
• Capacity requirements planning.
Conceptually comparable with materials requirements planning.
The current and planned manufacturing orders from the MRP
provide the input for the detailed production line planning.
• Order release.
Order releases change the status of the manufacturing orders from
‘planned’ to ‘released’. The decision to release is based on the
availability of the required materials and capacity.
• Priority management.
The priorities are directly derived from the MPS. Each unit receives
a priority sheet which lists all manufacturing orders for that line or
machine center.
• Capacity Management.
Waiting times per processing group have to be controlled.
Input/output reports have an important function: they compare the
realized output for a production unit against its planned output.
17 Basic logistics structures: Customer order decoupling point (CODP) –
The deciding factor for an effective logistics structure
Remarks:
→ The question of
where the CODP
(=order penetration
point - OP) should be
located in the firm’s
primary processes is
a major issue when
designing the
manufacturing and
logistics organization.
→ The answer to this
question determines
where in the process
inventories should be
located and in what
Figure 11.5 quantities.
Note:
The CODP (=OP) indicates how deeply the customer order penetrates the firms materials flow.
The OP defines from what moment on a production order becomes customer-order-specific.
18 Basic logistics structures: Five basic manufacturing and logistics
structures – “forecast-based” & “order-based” planning techniques
1. Making and  Products are manufactured and distributed to distribution
“forecast-based“
sending to points which are dispersed and located close to the
stock (MSS) customer. E.g. sweets, foods, beverages.
2. Making to  Finished products are kept in stock at the end of the
(central) stock production process and are from there shipped to
(MTS) geographically dispersed customers. E.g. dairy products.
3. Assembly to  Only systems elements, modules or subassemblies are
order in stock at the manufacturing center, whereas final
(ATO) assembly takes place based on a specific customer
“order-based“
order. E.g. cars, computers.
4. Making to order  Only raw materials and components are kept in stock.
(MTO) Every customer is a specific project. E.g. beer and
lemonade cans, basic construction materials.
5. Engineering  No stock at all. The purchase and order of materials
and making to takes place based on the specific customer order. E.g.
order (ETO) construction companies and shipyards.
19 Just-in-time management (JIT): Characteristics of JIT management
JIT
All materials and products become available at the very moment when
they are needed in the production process, not sooner and not later but
exactly on time and exactly in the right quantity.
Major objective
Continuously tackle and solve manufacturing bottlenecks within, and
interfaces between, consecutive steps in the manufacturing process.
Quality (and “cost orientation”)

Incoming inspection, buffer stock and extensive quality control
procedures on incoming materials are primarily considered as “waste”.
The basic idea is to strive continuously to reduce and eliminate these
often “hidden” costs in the factory – before introducing JIT!
20 Just-in-time management (JIT): Order quantities and batch sizes (1/3)
• There are several models that can be used for optimizing the
incoming materials flow.
• One very well-known model is “Camp’s formula” which is targeting
at the calculation of the Economic Order Quantity (EOQ).
Camp’s formula
Qo = √ 2S x Co/Ci
S … fixed usage per period
Qo … order quantity
Co … costs per order
Ci … inventory carrying costs for one unit during one unit time
21 Just-in-time management (JIT): Order quantities and batch sizes (2/3) –
Towards a reduction of the economic order quantity
EOQ
EOQ is the
quantity where
the sum of
inventory costs
and ordering
costs is lowest.
22 Just-in-time management (JIT): Order quantities and batch sizes (3/3)
Conditions/assumptions of “Camp’s formula”:

– The consumption of the component at hand is fairly stable and is
evenly spread over the course of time.
– The delivery time of the product is fixed and not due to fluctuation.
– The ordering costs per order are fixed.
– The inventory carrying costs do not depend on the ordered quantity.
→ JIT basically challenges each of these assumptions. For example,

order-related costs are analyzed referring to:
 Negotiations with the supplier
 Administrative processing
 Follow-up and expediting of orders
 Incoming and quality inspections
23 Just-in-time management (JIT): Quality and zero defects
• JIT production and scheduling cannot be successfully implemented

without a zero defects philosophy!
• JIT and zero defects need to go hand-in-hand:

– Smaller batches make it necessary to detect quality defects at
an early stage.
– JIT must be supported by all functions within the company.
– Adopting JIT will take time: It took Toyota 15 years to
implement the KANBAN (note: as a form of JIT scheduling
based upon fixed volume lot delivery. When a lot is used, the
Kanban [card] will be sent to the supplier as a signal to
replenish that lot) philosophy.
24 Just-in-time management (JIT) and the purchasing function
→ Looking at the characteristics of JIT, it is clear that traditional buyers must

alter their views and policies radically in two important aspects: they should be
willing (i) to consider single-sourcing and (ii) to arrange longer-term contracts.
25 Just-in-time management (JIT): Consequences for suppliers (1/2)
• Advantages of JIT for a supplier

– Supplier is able to plan his production volume much better
because he’s informed regularly about the quantities to be
delivered.
– Administrative savings: supplier’s and customer’s production
and materials planning systems are linked through electronic
information systems (like EDI).
– Constant communication on quality and costs improvements
can lead to product and process innovation.
– Investment policy: JIT contracts are signed for a long period
of time and guarantee a certain volume and turnover over
that time period.
26 Just-in-time management (JIT): Consequences for suppliers (2/2)
• Disadvantages of JIT for a supplier

 It may result in a pyramid shaped structure with a strong
hierarchy in the different links of the supply chain. The
large manufacturers at the top of the “supplier pyramid”
impose their demands ruthlessly on the often smaller first
tier suppliers.
 It takes time (and money) to deliver at zero defects or to
produce zero defects. These investments come at the
expense of the supplier.
 A supplier can become very dependent on only one
manufacturer. This can become a threat to its continuity.
27 Just-in-time management (JIT):
The supplier pyramid
Finally:
Supply chain management…
(a) … can actually be
considered as a “wholistics”
philosophy to manage the
total flow of a distribution
channel from suppliers to the
final customer.
(b) … extends the concept of
business logistics to other
tiers in the supply chain*.
(c) … integrates/utilizes JIT
as a concept aiming at the
availability of all materials
and products in production,
exactly on time in exactly the
right quantity.
*A supply chain is understood as connected series of activities
concerned with planning, co-ordinating & controlling materials, parts
and finished goods from the company’s suppliers to its customers.
28 Just-in-time management (JIT): “JIT II” – The system supplier is made
responsible for delivery planning and logistics…
29 Just-in-time management (JIT): JIT and supplier selection (1/2)
Example:
Toyota demands that their main suppliers to …
 … have production plants within a radius of 30 km.
 … base their business on open calculations.
 … arrange performance agreements on delivery in advance.
 … deliver with zero defects so that incoming inspections at
the buying firm (Toyota) can be omitted.
→ If there are no suppliers in the immediate vicinity, then Toyota

tries to …
 … do business with suppliers who are concentrated in
particular geographical areas.
 … combine transports and reduce associated costs.
30 Just-in-time management (JIT): JIT and supplier selection (2/2)
• “Quality” and “on-time delivery” are the two main criteria on which
suppliers are assessed when applying JIT purchasing.
• The following classification of suppliers is used often:

On time delivery A = excellent B = good C = inadequate
Quality delivery 1 = excellent 2 = good 3 = inadequate
→ A “C1 supplier”, for example, provides high quality, but does not always deliver on time.
At worst this can cause interruptions in the manufacturing process.
→ An “A3 supplier”, however, delivers on time, but the quality of the products is poor. This
means that incoming inspection remains a necessity, which is in conflict with the JIT
concept.
In conclusion,
• … it is argued, that the implementation of JIT principles automatically leads to
(more) single sourcing, agreeing on/closing long-term contracts and engaging
local suppliers.
• … the central issue affecting supplier selection is not so much the purchase
price, as the level of total cost (i.e. cost including the ”waste” resulting from poor
performance, safety stocks, quality and incoming inspections, and production
standstills).
31 Elements of the purchasing information system
• A study among 48 medium-sized industrial companies shows that

they had on average to manage
– 16.600 different article items or “stock keeping units” (SKUs)
– 1.155 suppliers
– 19.980 purchasing requisitions
– 18.900 orders
– 26.980 purchasing invoices
→ A solid and efficient administration is needed for the functioning
of any purchasing organization!
• Most important elements of a purchasing information system:

– Requisitioning and ordering → Introducing advanced
– Product, supplier & contract database purchasing information
– Order follow up systems and electronic
procurement solutions is
– Delivery a prerequisite for
– Invoice handling & payment improving efficiency!
32 Major elements of a purchasing information system
* Note: ERP
* Enterprise Resource Planning (ERP) systems refer to a company-wide information system for managing the company‘s operational and
support processes, its administrative processes, its human resources, its materials resources and financial resources.
33 Elements of a purchasing information system: What problems are
solved by e-procurement systems?
34 Elements of a purchasing information system: E-procurement systems
result in a significant reduction of the traditional order-to-pay cycle
5. Order
35 Co-ordination problems between purchasing and logistics
• The large amount of data to be processed, the huge differences in

the demand structure of products, problems with predictability of
expenditures etc. make clear, that production planning and materials
planning in most companies are far away from simple matters!
• Some typical problem situations between purchasing and logistics:

– Lack of well defined specifications
– Lack of standardization
– Frequent changes in materials planning
– Unreliable planning information
– Insufficient integration of purchasing in logistics management
• Co-ordination of systems may be facilitated when purchasing and

logistics activities are reported to one overall supply chain executive,
which explains the growing popularity of this function.
36 Brief summary
• The relationship between purchasing, materials planning and

logistics has been discussed.
• Five different structures may underlie a company’s production
and logistics activities.
– Make and send to stock (MSS)
– Make to stock (MTS)
– Assemble to order (ATO)
– Make to order (MTO)
– Engineer and make to order (ETO)
• As the central element when organizing efficient manufacturing and
logistics, the customer order decoupling point has been
identified.
• Most available Enterprise Resource Planning (ERP) systems are
capable of supporting the operational as well as the transactional
purchasing activities.
37 Lecture 11: Self-assessment (Individual work)
Preliminary remark:
The aim of this exercise is to reflect on the content presented in this
lecture and to prepare for the final exam at an early stage.
Work order:
1. Answer the self-assessment questions given on the following slide(s).
2. Take approx. 15 minutes per question.
Final note: To answer/discuss/reflect on the questions on the following slide(s), please

consult the primary as well as the relevant literature of this course we have listed for you on
the TUGrazTeachCenter learning platform (see: course-detailed view -> further information ->
recommended reading). Of course, you are also welcome to use further sources.
38 Lecture 11: Self-assessment (1/2)
11.1 Supply-chain management is about managing the materials

flows, information flows and financial flows throughout the supply
chain. Discuss how “Li & Fung” in the introductory case study of this
lecture/chapter keeps control of each of these flows.
11.2 What would you consider to be the main difference between

supply chain management and value chain management?
39 Lecture 11: Self-assessment (2/2)
11.3 Supply chain management assumes that the companies

involved in the supply chain are willing to work closely together and
are willing to develop partnership relationships. How valid is this
assumption in your opinion? Under what circumstances are
companies willing to develop partnership relationships?
11.4 Some critics argue that the supply chain concept is a too
narrow view of the reality that can be observed in many industries
today. Rather, they favour a network approach since they feel this
reflects much better the interdependencies that may exist between
customers and suppliers in several sectors. What is meant by this
statement? When optimizing supplier relationships, what view do
you favour? Discuss.
40 Supplementary literature (Lecture 11)
Hoekstra, S. and Romme, J.H.J.M. (eds) (1985), Op weg naar integrale

logistieke strucuren, Deventer, The Netherlands: Kluwer.
Graz University of Technology
41 Institute of Business Economics and Industrial Sociology
Industrial Marketing, Purchasing and Supply Management (IMPS)
Assoc. Prof. Priv.-Doz. Dipl.-Ing. Dipl.-Ing. Dr.techn. Bernd M. Zunk
Purchasing and Supply Management

Lecture 11.
Purchasing, logistics and supply chain management
Prof. Dr. Bernd M. Zunk
Course no. 373.551, 4.5 ECTS, Lecture
Winter Semester 2020/21 (Online)
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk
www.bwl.tugraz.at
For use with Purchasing and Supply Chain Management 7 th Edition

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Graz University of Technology

1 Institute of Business Economics and Industrial Sociology

Purchasing and Supply Management

Prof. Dr. Bernd M. Zunk

Course no. 373.551, 4.5 ECTS, Lecture

Winter Semester 2020/21 (Online)

After this lecture you should understand the following:

The introductory case demonstrates that …

• Physical distribution relates to the way in which finished products are

• Materials requirements planning (MRP) starts in the sales

Source: Adapted from Vollman et al. (1984), p. 25

1. Making and  Products are manufactured and distributed to distribution

Quality (and “cost orientation”)

Conditions/assumptions of “Camp’s formula”:

→ JIT basically challenges each of these assumptions. For example,

• JIT production and scheduling cannot be successfully implemented

• JIT and zero defects need to go hand-in-hand:

→ Looking at the characteristics of JIT, it is clear that traditional buyers must

• Advantages of JIT for a supplier

• Disadvantages of JIT for a supplier

→ If there are no suppliers in the immediate vicinity, then Toyota

• The following classification of suppliers is used often:

• A study among 48 medium-sized industrial companies shows that

• Most important elements of a purchasing information system:

• The large amount of data to be processed, the huge differences in

• Some typical problem situations between purchasing and logistics:

• Co-ordination of systems may be facilitated when purchasing and

• The relationship between purchasing, materials planning and

Final note: To answer/discuss/reflect on the questions on the following slide(s), please

11.1 Supply-chain management is about managing the materials

11.2 What would you consider to be the main difference between

11.3 Supply chain management assumes that the companies

Hoekstra, S. and Romme, J.H.J.M. (eds) (1985), Op weg naar integrale

Purchasing and Supply Management

Prof. Dr. Bernd M. Zunk

Course no. 373.551, 4.5 ECTS, Lecture

Winter Semester 2020/21 (Online)

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