Untitled - CII Institute of Logistics

CHAPTER - 3
FUNDAMENTALS OF LOGISTICS
PROCUREMENT AND OUTSOURCING
Procurement is usually done in order to meet the needs of the manufacturing function or other internal
functions for which buying is made. It enables access to external markets, supplier development and
relationship management and also relationship to other functions
It is the buyers and suppliers who are usually engaged in procurement transactions, which usually
begins with the buyer receiving and paying for the order. When designing the procurement process, it is
important to consider goods that the process will be used to purchase. The two main categories of
purchased goods are direct material and indirect materials. Direct materials are components like used
to make finished goods. Indirect materials are goods used to support the operations of a firm. Indirect
materials are components used to make finished goods. Indirect materials are goods used to support
the operations of a firm. All procurement processes within a company relate to the purchase of direct
and indirect materials.
The procurement process for direct materials should focus on improving coordination and visibility with
the supplier. The procurement process for indirect materials should focus on decreasing the transaction
cost for each order. The procurement process in both cases should consolidate orders to take
advantage of economies of scale and quantity discounts.
In addition to the categorization of materials into direct and indirect, all products purchased may also be
categorized on basis of value/cost and how critical they are:
Product Categorization by Value and Criticality
High
C
R
I
T
I
C
A
L
Low
Critical items
General items
Items
Strategic items
Bulk Purchase
High
Low
VALUE/COS
CII INSTITUTE OF LOGISTICS 12
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