Elements of total cost procurement and logistics in collaborative planning systems

Procurement

Total Cost of Procurement

The total cost of procurement has to factor in all of the aspects of procurement, including the cost of the input, transportation, insurance, taxes and duties, and if there are any differences between two competing inputs, those will need to be taken into account as well. For example, if one good has large packaging that means fewer can be shipped or stocked at a given time, that reduced efficiency may need to be taken into consideration. Different trade-offs and opportunity costs are often taken into consideration from a total cost of procurement perspective (Aral, Bell & van Wassenhove, n.d.).

The cost process has to examine these different elements, because an input contains a number of attributes and factors that contribute to costs. Procurement officers need to take into account the other costs that they will be responsible for, in order to drive down the overall costs of procurement. Arguably, this also will involve labor costs as well, associated with the procurement function. It is most cost effective, for example to deal with fewer suppliers, or to deal with suppliers who will work with an automated ordering system.

Another element to this total cost of procurement is the total cost of ownership -- how long will an input last? An input that lasts three years is better than an input that lasts two years, if they cost the same. Thus, the procurement officer needs to take into account the lifespan of a good when making critical purchases (NZ, 2013).

Collaborative Planning Forecasting Replenishment

The collaborative planning forecasting replenishment is a technique that has been used by companies in the retail sector, including Wal-Mart. This method begins with forecasting analytics at the retail level, estimating demand based on prior history, and regression analysis with causal factors such as weather/seasonality. When retailers are better able to understand demand conditions, their orders are not only proactive, but more accurate as well. Such forecasting reduces the need for holding high levels of inventory as well (Holmstrom, et al., 2002).

How this has been implemented at Wal-Mart is this. The company estimates demand, and does this at the individual store level. It is also able to have real time counts of all inventory. From this information, it is possible to be connected to suppliers. The supplier will receive an order when the inventory level relative to expected demand crosses through a particular threshold.

The pros of this system are evident. This system is based on stronger data and analytics, which should allow for better decision-making. With lower levels of inventory, then total procurement cost is going to be lower, because inventory holding costs will be lower. It is easier to implement just-in-time systems when suppliers and buyers are connected in this way. The fact that suppliers and buyers are so well-connected under this system also strengthens the relationship. Both parties benefit because the supplier knows that it will have that future business. with both parties being so invested in working together.

But there are downsides to this system as well. One downside from the supplier's point-of-view is that if there are lags in production, all that is really happening is that the inventory carrying costs are being shifted. The buyer might use less warehouse space, but the supplier has to have inventory on hand to deliver immediately when the order comes in. This might cause the supplier to add to its inventory. The burden is therefore shifted, not eliminated. This system works for Wal-Mart because it has the bargaining power to dictate these terms to its suppliers, but smaller retailers, even when they have the analytical capability to run this system, may not be able to make such demands of their suppliers.