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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...
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…
References
Aral, K., Bell, D., & Van Wassenhove, L. (no date). Total cost procurement auctions with sustainability audits to inform bid markups. University of Michigan. Retrieved December 10, 2014 from http://www-personal.umich.edu/~dbeil/ProcurementAuctions_SustAudits.pdf
Holmstrom, J., Framling, K., Kaipia, R. & Saranen, J. (2002). Collaborative planning forecasting and replenishment: new solutions needed for mass collaboration. Supply Chain Management. Vol. 7 (3) 136-145.
NZ. (2013). Total cost of ownership: An introduction to whole-of-life costing. Government Procurement Branch. Retrieved December 10, 2014 from http://www.business.govt.nz/procurement/pdf-library/agencies/guides-and-tools/guide-total-cost-ownership.pdf
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