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PART II
ANSWERS TO END-OF-CHAPTER QUESTIONS
CHAPTER 6: PROCUREMENT
6-1. What is procurement? What is its relevance to logistics?
Procurement refers to the raw materials, component parts, and supplies bought from outside
organizations to support a company’s operations. It is closely related to logistics because acquired
6-2. Contrast procurement’s historical focus to its more strategic orientation today.
Procurement’s historical focus in many organizations was to achieve the lowest possible cost from
potential suppliers. Oftentimes these suppliers were pitted against each other in “cutthroat” competition
involving three- or six-month arm’s-length contracts awarded to the lowest bidder. Once this lowest
6-3. Discuss the benefits and potential challenges of using electronic procurement cards.
Electronic procurement cards (p-cards) can benefit organizations in several ways, one of which is a
reduction in the number of invoices. In addition, these p-cards allow employees to make purchases in a
matter of minutes, as opposed to days, and p-cards generally allow suppliers to be paid in a more timely
6-4. Discuss three potential procurement objectives.
The text provides five potential procurement objectives that could be discussed. They are supporting
organizational goals and objectives; managing the purchasing process effectively and efficiently;
6-5. Name and describe the steps in the supplier selection and evaluation process.
Identify the need for supply can arise from the end of an existing supply agreement or the
development of a new product. Situation analysis looks at both the internal and external
environment within which the supply decision is to be made. Identify and evaluate potential
6-6. Distinguish between a single sourcing approach and a multiple sourcing approach.
A single sourcing approach consolidates purchase volume with a single supplier in the hopes of
enjoying lower costs per unit and increased cooperation and communication in the supply relationship.
6-7. What are the two primary approaches for evaluating suppliers? How do they differ?
There are two primary approaches for evaluating suppliers: process based and performance based. A
process-based evaluation is an assessment of the supplier’s service and/or production process (typically
6-8. Discuss the factors that make supplier selection and evaluation difficult.
First, supplier selection and evaluation generally involve multiple criteria, and these criteria can vary
both in number and importance depending on the particular situation. Second, because some vendor
6-9. Distinguish between supplier audits and supplier scorecards. When should each be used?
A supplier audit usually involves an onsite visit to a supplier’s facility, with the goal being to gain a
deeper knowledge of the supplier. By contrast, supplier scorecards report information about a
6-10. Describe Kraljic’s Portfolio Matrix. What are the four categories of this segmentation approach?
Kraljic’s Portfolio Matrix is used by many managers to classify corporate purchases in terms of their
importance and supply complexity, with the goal of minimizing supply vulnerability and getting the
6-11. Define supplier development, and explain why it is becoming more prominent in some
organizations.
Supplier development (reverse marketing) refers to aggressive procurement not normally encountered
in supplier selection and can include a purchaser initiating contact with a supplier, as well as a
6-12. What are the components of the global sourcing development model presented in this chapter?
Planning, specification, evaluation, relationship management, transportation and holding costs,
implementation, and monitoring and improvements make up the components of the global sourcing
development model presented in this chapter.
6-13. What are some of the challenges of implementing a global sourcing strategy?
In terms of the challenges of implementing a global sourcing strategy, as organizations continue to
expand their supply bases, many are realizing that hidden cost factors are affecting the level of benefits
6-14. Pick, and discuss, two components of the global sourcing development model presented in this
chapter.
Any two components listed in the answer to Question 6-12 could be discussed.
6-15. What is total cost of ownership and why is it important to consider?
When taking a total cost of ownership (TCO) approach, firms consider all the costs that can be assigned
to the acquisition, use, and maintenance of a purchase. With respect to global sourcing, the logistics
6-16. Why are some firms considering near-sourcing?
Near-sourcing refers to procuring products from suppliers closer to one’s own facilities. Firms are
considering near-sourcing because of rising transportation and energy costs, growing desires to be able
to quickly adapt to changing market trends, and risk and sustainability concerns.
6-17. Name, and give an example of, the five dimensions of socially responsible purchasing.
Diversity includes procurement activities associated with minority or women-owned
organizations.
The environment includes considerations such as waste reduction and the design of products
for reuse or recycling.
6-18. Discuss some of the ethical issues that are associated with procurement.
Areas of ethical concern in procurement include gift giving and receiving; bribes (money paid before
an exchange) and kickbacks (money paid after an exchange); misuse of information; improper methods
6-19. Distinguish between excess, obsolete, scrap, and waste materials.
Excess (surplus) materials refer to stock that exceeds the reasonable requirements of an organization,
perhaps because of an overly optimistic demand forecast. Obsolete materials, unlike excess materials,
are not likely to ever be used by the organization that purchased them. Scrap materials refer to
6-20. How can supply chain finance help procurement drive value for its firm?
Supply chain finance is a set of technology and finance-based processes that strives to optimize cash
flow by allowing businesses to extend their payment terms to their suppliers while simultaneously
PART III
CASE SOLUTIONS
CASE 6-1: TEMPO LTD.
Question 1: Should Terim let somebody else complete the transaction because he knows that if he
doesn’t sell to the North Koreans, somebody else will?
This question may stimulate a great deal of discussion among students. On the one hand, Terim is
contemplating a transaction involving commodities (chemicals and lumber) as well as with a country
(North Korea) with which he is not all that familiar. These aspects might argue against completing the
Question 2: What are the total costs given in the case for the option of moving via Romania?
Activity Cost (U.S. dollars)
Ocean transportation to Constantza 42,000
Suez Canal charges 3,000
Question 3: What are the total costs given in the case for the option of moving via Syria?
Activity Cost (U.S. dollars)
Ocean transportation to Latakia 33,000
Suez Canal charges 3,000
Truck 12,000
Question 4: Which option should Terim recommend? Why?
Either option can be supported. For example, the Romanian option is nearly $30,000 cheaper than the
Syrian option—thus, solely from the perspective of cost, the Romanian option might be preferred.
However, the Romanian option takes three weeks longer to complete than does the Syrian option.
Question 5: What other costs and risks are involved in these proposed transactions, including some not
mentioned in the case?
The entertainment of the North Korean officials can be viewed as both a cost and a risk. At minimum,
luxurious hotel accommodations as well as business-related dinners and receptions will not come
There is also a chance that some of the rusvet “fees” might unexpectedly increase, particularly those
associated with generating the false documents. If providers of the documentation understand the
A more general risk for these proposed transactions is the volatile political situation in the Middle East.
Students are likely to identify other costs and risks.
Question 6: Regarding the supply chain, how—if at all—should bribes be included? What functions do
they serve?
From a broad perspective, the purpose of bribes should be to facilitate the completion of international
transactions. At least two perspectives must be considered when analyzing the first part of the question.
A second perspective, practicality, understands that bribes are essential for the completion of
international transactions. Under this scenario, supply chains would need the flexibility to
accommodate situations that require a bribe. One manifestation of this flexibility could be the name
Question 7: If Terim puts together this transaction, is he acting ethically? Discuss.
The answer to this question could depend on one’s definition of ethical actions. One definition, for
example, focuses on a personal code of conduct to guide one’s actions. Another definition suggests that
Alternatively, because the Syrian routing does not appear to include any overtly illegal activities, some
might view it as ethical. Even though it includes rusvets, Terim merely would be following accepted
North Koreans could be viewed as unethical in the sense that Terim is violating his personal code of
conduct.
Question 8: What do you suggest should be done to bring moral values into the situation so that the
developing countries are somewhat in accordance with Western standards? Keep in mind that the risks
involved in such environments are much higher than the risks of conducting business in Western
markets. Also note that some cultures see bribery as a way to better distribute wealth among their
citizens.
Because this case involves organizations located in two non-Western countries, it might be culturally
insensitive to bring in moral values that are more in accordance with Western standards.
