STUDY GUIDE Disney Case on StrategyGoals and Objectiv.docx

STUDY GUIDE
Disney Case on Strategy
Goals and Objectives
https://open.lib.umn.edu/principlesmanagement/part/chapter-6-
goals-and-objectives/
Google Case on Communications
communication-in-organizations/
Netflix Case
Motivating Employees
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Leading People and Organizations
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Caterpillar Case on Control
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Dr Babu Subbaraman
Chapter 5
Make or Buy, Insourcing, and Outsourcing

©2020 McGraw-Hill Education. All rights reserved. Authorized
only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent
of McGraw-Hill Education.
1
Key Questions Asked in Chapter 5
Should we make or buy a good or service?
If we have been making a good or service should we reverse the
decision and outsource?
If we have been buying, should we reverse the decision and
insource?
2
©2020 McGraw-Hill Education.
Make or Buy, Insourcing,
and Outsourcing Decisions
3
Reasons to Make Instead of Buy
Quantities are too small and/or no supplier is interested
Quality requirements are too exacting or special processing
methods needed

Greater assurance of supply
Preserve technological secrets and intellectual property
Lower cost
To take advantage of unused capacity
Keep our capacity utilization high and outsource the rest
Avoid supply dependency
Reduce risk
Purchase option too expensive
Distance from the closest available supplier is too great
Customer requirement
Future market potential for the product or service is expanding
Forecasts of future shortages in the market or rising prices
Management takes pride in size
Desire to control quality of customer service
4
Reasons to Buy Instead of Make
Lack of managerial or technical experience
Excess production capacity
Reduce risk
Challenges of maintaining technological leadership for noncore
activity
Outsourcing is difficult to reverse
Cost accuracy
Large number of options for sources of supply and substitutes
Insufficient volume to justify in-house production
Forecasts show great demand and/or technological uncertainty
Availability of a highly capable supplier
Flexibility and desire to stay lean
Buying may open up markets
The ability to bring a product or service to market faster
Customer preference for a particular brand

Superior supply management expertise
Opportunities to improve customer service
5
Insourcing and Outsourcing
Two ongoing questions for a cross-functional team including
supply, operations, accounting and marketing are:
(1) Which products or services are we currently buying
that we should be doing in-house?
(2) Which products and services that we are currently
doing in-house should we be buying from suppliers?
6
Reasons to Insource
The necessity argument: “We would prefer not to produce this
product or service in-house, but we really don’t have any other
options.”
The opportunity argument: “We would prefer to do this in-house
because it would give us a strategic competitive advantage.”
7
Examples of Necessity
Drivers of Insourcing
Anything that threatens assurance of supply

An existing source of supply goes out of business or drops a
product or service line and no other supplier is available
No opportunities for supplier development
A sudden massive increase in price
The purchase of a sole source by a competitor
Political events and regulatory changes
Lack of supply of a key raw material or component required for
the manufacture of the purchased product
8
Reasons to Outsource
The necessity argument: “We would prefer not to outsource this
product or service, but we really don’t have any other options.”
The opportunity argument: “We would prefer to outsource this
product or service because it would give us a strategic
competitive advantage.”
9
Deciding What Might be Outsourced
Determine strategic, critical, non-core activities
An entire function or some elements of an activity may lend
themselves to lower cost purchase and management by a third
party
Identify a function as a potential outsourcing target, break that
function into its components, determine which activities are
strategic or critical and should remain in-house, and which can
be outsourced

10
Service Triads
Increasing prevalence of service outsourcing based upon triadic
servicing arrangements
Service triads:
buyer contracts with a supplier to deliver services directly to
the buyer’s customer
examples: outsourcing help desk services, repair or installation
of customer equipment
Increasing use of performance-based contracts that focus on the
outcome rather than controlling how the service is delivered
11
Service Triads
12
Customer
Supplier
Buyer
Servicing demand and financial flows
Servicing exchange
Risks of Outsourcing
Loss of control
Exposure to supplier risks
e.g., financial, commitment to relationship, response time,
quality, service

Unexpected/unanticipated costs
Difficulty quantifying economies
Conversion costs
Supply restraints
Attention required by senior management
Possibility of being tied to obsolete technology
Concerns with long-term flexibility
13
The Outsourcing Decision
14
Is the activity strategic?
Is the activity critical to the
business but not strategic?
Create a RFP.
Gather supplier bids/proposals.
Is the supplier’s bid/proposal more
desirable than the internal option?
Could the internal option achieve
similar results?
Negotiate a contract to ensure
that expectations are realized
No
No
No
No
No

Keep the function
in-house
Keep the function
in-house
Keep the function
in-house
Keep the function
in-house
Yes
Yes
Yes
Yes
Outsourcing Supply and Logistics
Procurement of indirect or noncore spend is more likely to be
outsourced than procurement of direct or core spend
Three types of procurement outsourcing contracts: procure-to-
pay (P2P), source-to-contract (S2C), source-to-pay (S2P)
Most frequently outsourced logistics activities are transactional,
operational and repetitive
e.g., transportation, warehousing and freight forwarding
Three reasons for outsourcing logistics activities: improved
services, reduced costs, increased ability to focus on core
competencies
15

Purchasing’s Role in Outsourcing
Provide a comprehensive, competitive process
Identify opportunities for outsourcing
Aid in selection of sources
Identify potential relationship issues
Develop and negotiate contract
Monitor and manage relationship
16
Gray Zone
StayChangeMoreMake
Insource
MoreBuy
Outsource
What Product / Service to Create in What Market
Segment(s)?100% Buy100% Make
StayChangeStayChange
OutsourceInsourceGray Zone100% BuyGray Zone100%
Make100%BuyGrayZone100%MakeGrayZone
What Do We Make or Buy?
Chapter 8
Quantity and Inventory

1
Key Questions
Addressed in Chapter 8
How much to acquire?
When to acquire?
How to manage inventory effectively?
2
2
Factors Complicating Quantity Decisions
Forecasts
Purchase decisions made a long time before actual requirements
are known
Rely on forecasts of future demand, lead times, prices, and
other costs
Forecasts are rarely, if ever, perfect
Costs
Costs associated with placing orders, holding inventory, running
out of materials, and having a service unavailable when needed
3
3
Factors Complicating Quantity Decisions (cont’d)
Availability

Desired quantities may be unavailable without paying a higher
price or delivery charge
Price-Volume Relationship
Reduced prices for larger quantities versus carrying costs
Shortages
May cause serious disruptions
4
4
Time-Based Strategies
Reduce setup and cycle times
reduce costs
reduce lead times
Coordinate the flow of resources
eliminate process/system waste
ensure on-time or just-in-time arrival in economical sized
batches
5
5
Forecasting Dilemmas
Where should responsibility for forecasting future usage lie?

Should the supply management group be allowed to second-
guess sales, production, or user forecasts?
Should other supply chain members be involved in a
collaborative forecasting effort?
6
6
Forecasting Techniques: Quantitative
Use past data to predict the future
Causal models
Identify leading indicators
Chosen indicators believed to cause changes
Develop linear or multiple regression models
Time series forecasting
Assumes sales follow a repetitive pattern over time
Identify the pattern and develop a forecast
7
7
Forecasting Techniques: Qualitative
Gather opinions and use with judgment to forecast
The Delphi technique: a formal approach
Lack the rigor of quantitative techniques, but are not
necessarily any less accurate
Knowledgeable people with intimate market knowledge have a

“feel” that is hard to define but that gives good forecasting
results
8
8
Collaborative Planning, Forecasting, and Replenishment (CPRF)
Links sales and marketing processes to supply chain planning
and execution processes among trading partners to:
improve forecasts and service
reduce cost
develop effective replenishment plans
increase product availability
increase sales
reduce inventories
deliver higher service levels
9
9
Types of Demand
Dependent or derived demand:
item is part of a larger component or product, and its use is
dependent on the production schedule for the larger component
Independent demand:

Not driven by a production schedule
Usage is determined directly by customer orders, independent of
production scheduling decisions
10
10
Trade-offs
When determining lot sizes in which to make or buy cycle
inventories:
the costs of carrying extra inventory
versus
the costs of purchasing or making more frequently
Objective: minimize total costs
11
11
Fixed Order Quantity System
Event triggered: Initiates order when stock depleted to a
specific level (reorder point)
Inventory replaced in fixed amounts
Economic order quantities
12

12
Economic Order Quantity Model
where:
R = annual demand
S = set-up or order cost per order
C = delivered purchase cost
K = carrying cost percentage
therefore:
KC = unit holding cost
13
13
Economic Order Quantity Model

Annual Cost ($)
ordering costs
carrying costs
EOQ Order Size
Total carrying and order cost
CTmin
14
14
Fixed Order Quantity System
lead time (L)
ROP
cycle
stock

TIME
ROP = L × d
15
15
Safety Stock
Held because of uncertainty in supply and/or demand
Trade-off: cost of stocking out versus cost of holding inventory
Levels can be calculated using statistical techniques
e.g., take into account standard deviation of demand
16
16
Fixed Order Quantity System:
Cycle Stock, Safety Stock and Lead Time
ROP
cycle

stock
(Q)
INVENTORY
TIME
Safety
Stock
lead time (L)
17
17
Fixed Time Period Systems
Inventory on-hand counted at specific time intervals and
replenished to a desired level
The passage of time triggers reorder
18
18
Fixed Time Period System:
Cycle Stock, Safety Stock and Lead Time

INVENTORY
TIME
Safety
Stock
review
period
lead
time
Q
19
19
Which System is Better?
Fixed order quantity system
Higher maintenance costs
Every transaction logged
Inventory controlled precisely
Fixed time period
Minimal record keeping
Higher average inventories to protect against stock-outs
Higher stock-out rates

Different order quantities for each cycle
Ability to batch orders with suppliers
20
20
Materials Requirement Planning (MRP)
Designed for “push” or forecast-driven systems
Based on a master production schedule:
Creates schedules identifying the specific parts and materials
required to produce end items
Determines exact numbers needed
Determines the dates when orders for those materials should be
released, based on lead times
“Get the right materials
to the right place at the right time.”
21
21
Key Inputs to MRP
Master production schedule:
when do we need it
Bill of material (BOM):
what do we need to make one end product

Inventory record:
what do we have and what do we need
22
22
Four Basic MRP Lot Sizing Rules
Lot-for-lot (L4L)
Economic order quantity (EOQ)
Least-total-cost (LTC)
Least-unit-cost (LUC)
23
23
MRP Implications for Supply
Accurate records for quantities, lead times, bills of material,
and specifications
Accurate control of inventory data
Cooperation from suppliers for on-time delivery, proper

quantities and batch sizes, exacting quality (zero defects)
May need to re-evaluate existing contracts
Long-term planning horizon
Less “slack” in the system
24
24
Capacity Requirements Planning (CRP)
Capacity = amount of work in a set amount of time
CRP translates MRP material plan into
required human and machine resources by workstation and time
bucket
compares required resources to availability
if insufficient capacity, either capacity or the master production
schedule is adjusted
feedback loop to the master production schedule; closed-loop
MRP
25
25
Demand Driven MRP
Driven by customer demand and supply chain modeling
Five key components:
strategic inventory positioning

buffer profile and levels
dynamic adjustments
demand driven planning
visible collaborative execution
26
26
Enterprise Resource Planning (ERP)
Software that integrates business systems and processes to
combine and analyze information
Links customer orders through fulfillment processes
Requires:
highly accurate information, abandoning rules of thumb, and
using common data
Opportunities:
reduced inventory levels, higher service coverage, ready access
to high-quality information, ability to replan quickly in
response to unforeseen problems
27
https://www.youtube.com/watch?v=dHIupKajJgM
27
Inventories Exist to Serve Several Potential Purposes
To provide and maintain good customer service.

To smooth the flow of goods through the production process
To provide protection against the uncertainties of supply and
demand
To obtain a reasonable utilization of people and equipment
28
28
Forms and Functions of Inventory
Functions of Inventories
Transit or pipeline inventories
Cycle inventories
Buffer or uncertainty inventories or safety stock
Anticipation or certainty inventories
Decoupling inventories
Forms of Inventories
Raw materials, purchased parts and packaging
Work-in-process (WIP)
Finished goods
MRO items
Resale items
29
29
Inventory: Types, Functions, Objectives
TYPE
FUNCTION

It takes time to move products (transit time, handling time,
delays)
Demand pattern does not equal supply pattern (goods
produced in lot sizes)
Demand pattern varies. Customer service levels must be
maintained.
Variations in demand relative to productive capacity or
significant cost advantages to holding supply in anticipation of
demand
Distribution and production efficiency gained from
independence between stages of production and distribution
OBJECTIVE
Balance in-transit inventory costs against cost of reducing
delays
Balance cost of ordering (or setup) and cost of carrying
inventory
Balance cost of carrying extra inventory against cost of
stocking out
Balance inventory costs against production costs,
transportation costs, purchase discounts, and costs of avoiding
price changes
Balance efficiency of production - distribution activities
against costs
Transit or
Pipeline
Cycle
Buffer or
Safety

Anticipation
Decoupling
30
30
Examples of Inventory Functions
31
31
Inventory Forms and Functions
FUNCTION
Transit
Cycle
Buffer
Anticipation
Decoupling
WHY
move speed/distance

make/use batch
cope with variability
smooth peak demand
reduce dependence
OPPORTUNITY
make moves faster/shorter
reduce onetime batch costs
reduce set up time
reduce variability
increase volume flexibility
coordinate/schedule
32
32
Annual Inventory Carrying Cost
Basic elements are:
capital costs
inventory service costs

storage space costs
inventory risk costs
33
33
Annual Inventory Carrying Cost
(carrying cost per year) = (average inventory value) x
(inventory carrying cost as a % of inventory value)
Average inventory value = (average inventory in units) x
(material unit cost)
CC = Q/2 x C x I, where
CC = carrying cost per year
Q = order or delivery quantity in units
C = delivered unit cost of the material
I = inventory carrying cost as % of inventory value
34
34
Inventory Costs
Ordering or purchase costs:
managerial, clerical, material, telephone, mailing, email,
accounting, transportation, inspection, and receiving costs
associated with a purchase or production order
Setup costs:
all the purchaser and supplier’s costs of setting up a production
run, including early spoilage and low production output until

standard rates are achieved, setup, employees’ wages and other
costs, machine downtime, extra tool wear, parts (and
equipment) damaged during setup
35
35
Inventory Costs
Stockout costs:
Costs of not having the required parts or materials on hand
when and where needed
Includes lost contribution on present and future lost sales,
changeover costs, substitution, rescheduling and expediting,
labor and machine idle time, lost customer and user goodwill,
penalties
Variations in delivered costs:
Costs associated with purchasing in quantities or at times when
prices or delivery costs are higher than at other quantities or
times
36
36
ABC Classification of PurchasesClass Percentage of Total
Items PurchasedPercentage of Total
Purchase DollarsA1070-80B10-2010-15C70-8010-20
37

37
Example of ABC AnalysisNumber of
ItemsPercentage
of ItemsAnnual Purchase ValuePercentage Annual Purchase
VolumeClass1,095 10.0%$21,600,000
71.1%A2,16819.95,900,00019.4B7,66070.12,900,000
9.5C10,923100%$30,400,000100%
38
38
ABC Classification of Inventory
39
39
Vendor- or Supplier-Managed Inventory (VMI/SMI)
Also called systems contracting or stockless buying
Merges ordering and inventory functions
Relies on periodic billing procedures
Nonpurchasing personnel issue order releases
Employs special catalogs

Requires suppliers to maintain minimum inventory
Normally does not specify volume
Improves inventory turnover rates
40
40
Lean Supply
A management philosophy focused on creating value for the
customer while eliminating waste or nonvalue-adding activities:
Overproduction
Waiting, time in queue
Transportation
Nonvalue-adding processes
Inventory
Motion
Costs of quality: scrap, rework, and inspection
41
41
Just-in-Time (JIT)
Providing the exact quantity needed at the precise moment it is
required
Requires capabilities of:
short production lead times
economical small batch production

flexible resources (labor, material and equipment)
exacting quality
42
42
Just-in-Time (JIT)
(cont’d)
JIT production systems strive to eliminate waste
inefficient set-up procedures, inventories
focus on all aspects of the production system: human resources,
supply, technology, and inventories
Nothing will be produced until it is needed
when a unit is sold, the system pulls a replacement unit from the
last position in the system
this process continues throughout the system
43
43
Kanban
Kanban is Japanese for “signboard”
A number of visual methods can be used
Use of kanban cards

“Pull” system based on orders from downstream customers
Most useful for high-volume parts used on a regular basis
44
44
JIT Imposed Supplier Activities
Frequent deliveries
Small lot sizes
Exacting quality
Long-term relationships/contracts
Reduced number of suppliers
45
45
JIT Implications for Supply
Reduction in number of suppliers
Reduction in supplier lead time
Improvement in supplier quality
Improvement in supplier delivery
Increased inventory turnover
Inventory reduction in total dollars
46

46
Managing Supply Chain Inventories
Impacts customer service, working capital, profitability
What inventory and where in the supply chain
IT for compatibility and to manage information flows
Operational design of physical flow of goods/services--
production and fulfillment, lead times, quality, lot sizes
Confidentiality issues
Share actual consumer demand with suppliers for production
planning, to avoid bullwhip effect, reduce costs
47
47
Determining Quantity of Services
Forecasting aggregate demand for services often more
unreliable than for goods
Multiple contacts: users, specifiers, order placers, and supplier
relationship managers
Multiple contracts at varying prices and terms with the same
supplier
Organization-wide consumption management is challenging
Difficult for suppliers to determine capacity requirements and
project utilization rates
48

48
Dimensions of Services
Degree of tangibility
Direction of the service
Production of the service
Nature of demand
Degree of standardized
Skills required
49
49
KC
RS
EOQ
2
=
TYPE EXAMPLE
Transit or
Pipeline
Cycle
load to save
ordering and
shipping (set-up) costs

card to reduce
trips for extra credit
Buffer or Safety
ered by a brewery to allow for unexpected
breakage
Seasonal or
Speculative
lunch
Decoupling
arts/hr,
assemblers work at
50 parts/hr, parts are held in operations to balance production
rates ( and
moulding is shutdown periodically).
TYPE
EXAMPLE
Transit or Pipeline
· parts on trains, forklifts, etc.
· paper forms being moved between departments
Cycle
· a retail store that orders furniture by the truckload to save
ordering and shipping (set-up) costs
· student buys $25 of credit instead of $10 for a photocopy card
to reduce trips for extra credit
Buffer or Safety

· extra shirts ordered for unanticipated demand by a retailer
· extra bottles ordered by a brewery to allow for unexpected
breakage
Seasonal or Speculative
· air conditioners produced and stored during winter
· sandwiches assembled during the morning and stored for lunch
Decoupling
· plastic moulding machine produces at 100 parts/hr, assemblers
work at 50 parts/hr, parts are held in operations to balance
production rates ( and moulding is shutdown periodically).
Chapter 7
Quality
1
Key Questions
How do we assure quality?
How do we know that what we ordered meets expectations?
2

2
Market Niches for Quality
3
Quality
Better than
Competitors
Lower than
Competitors
Same as
Competitors
3
The Transformation and
Value-Added Chain
4
Customer
Converter
Supplier
Customer
Supplier
Converter
Converter
Customer
Supplier

4
What is Quality?
Often used to describe:
Function
Suitability
Reliability
Conformance with specifications
Satisfaction with actual performance
Best buy
5
5
Eight Dimensions of Quality
Performance: The primary function of the product or service
Features: The bells and whistles.
Reliability: The probability of failure within a specified time
period.
Durability: The life expectancy.
Conformance: The meeting of specifications.
Serviceability: The maintainability and ease of fixing.
Aesthetics: The look, smell, feel, and sound.
Perceived quality: The image in the eyes of the customer.
6
Professor David Garvin, Harvard Business School

6
The Traditional View of
Quality-Cost Trade-off
7
7
The Current View of the
Quality-Cost Trade-off
8
8
Five Major Cost of Quality Categories
Prevention costs
Appraisal costs

Internal failure costs
External failure costs
Morale costs
9
9
Lean
A management philosophy focused on maximizing customer
value while minimizing waste
Waste, or “muda,” comes in seven forms:
Overproduction
Waiting
Transportation
Nonvalue-adding processes
Inventory
Motion
Costs of quality (scrap, rework, and inspection)
10
10
Value Streams
A series of steps executed in the right way and at the right time
to create value for the customer.

Each step must be:
valuable to the customer
capable (gets the exact same result every time)
available (it can be performed whenever needed)
adequate (capacity to perform it exactly when needed)
flexible (can respond rapidly to changing customer desires
without creating inefficiencies)
11
11
Lean and Value Streams
Goal: Optimize the flow of products and services through value
streams that flow internally across technologies, assets, and
departments to customers and externally with supply chain
partners
“Pull” system versus “push” system
12
12
Total Quality Management (TQM)
A philosophy and system of management focused on long-term
success through customer satisfaction.
Quality integrated throughout the organization’s activities
Employee commitment to continuous improvement
Suppliers are partners in the TQM process

Uses tools including continuous improvement or kaizen, quality
function deployment (QFD), and statistical process control
(SPC) to achieve performance improvements
13
13
Kaizen
Relentless pursuit of product and process improvement through
a series of small, progressive steps
Follows a well-defined and structured approach
plan–do–check–act (the Deming Wheel)
Incorporates problem-solving tools
Pareto analysis, histograms, scatter diagrams, check sheets,
fishbone diagrams, control charts, run charts, and process flow
diagrams
14
14
Quality Function Deployment (QFD)
QFD is a process, supported by a set of tools, to translate
customer requirements, or “voice of the customer” (VOC), into
specifications.
Helps to understand what value represents to the customer and
provides direction

Across-functional activity, involving input from operations,
marketing/sales, engineering, accounting/ finance, and supply.
Can be applied to both products and services.
15
15
The Potential Role of Supply in QFD
Product planning - Provide expertise in analyzing customer
requirements and generating a list of new product ideas
Parts deployment - Provide alternative design concepts and
estimate the manufacturing costs of various parts
Process planning - Determine supplier process constraints
Production planning - Help develop performance measurement
criteria for production planning
16
16
Six Sigma
Philosophy that work is processes that can be defined,
measured, analyzed, improved and controlled (DMAIC)
Six sigma quality (6 σ) represents 3.4 defects per million
opportunities
six standard deviations are very close to zero defects and

correspond to a Cpk value of 2.0
Uses a set of tools, such as SPC, control charts and
flowcharting, to drive process improvements.
Well-defined projects with measurable goals:
e.g., cost reduction or profit increase through improvements in
cycle time, delivery, safety, etc.
Team members have training in statistics
Applies to manufacturing and to services
17
17
Statistical Process Control (SPC)
A technique that involves testing a random sample of output
from a process in order to detect if nonrandom changes in the
process are occurring
Causes of variation: Common causes and special or nonrandom,
assignable causes
Process capability: ability of the process to meet specifications
consistently
18
18
Assuring Supplier Quality

Through SPC
Buyer establishes required quality specifications
Supplier determines process capability
a. Identify common or chance causes of variation
b. Identify special or assignable causes of variation
c. Eliminate special causes
Compare buyer’s quality requirements to the supplier’s process
capability
Make necessary adjustments
a. Negotiate process improvements with supplier
b. Seek an alternate supplier
19
19
Control Chart
20
20
Control Chart
UCL 3.3000000000000002E-2 3.3000000000000002E-2
3.3000000000000002E-2 3.3000000000000002E-2
3.3000000000000002E-2 3.3000000000000002E-2
3.3000000000000002E-2 3.3000000000000002E-2
3.3000000000000002E-2 3.3000000000000002E-2 LCL
2.9000000000000001E-2 2.9000000000000001E-2
2.9000000000000001E-2 2.9000000000000001E-2
2.9000000000000001E-2 2.9000000000000001E-2

2.9000000000000001E-2 2.9000000000000001E-2
2.9000000000000001E-2 2.9000000000000001E-2 Sample
3.091E-2 3.1329999999999997E-2
3.1109999999999999E-2 3.1379999999999998E-2 3.074E-
2 3.0849999999999999E-2 3.134E-2 3.066E-2
3.0800000000000001E-2 3.143E-2 Average
3.1054999999999999E-2 3.1054999999999999E-2 3.1
054999999999999E-2 3.1054999999999999E-2
3.1054999999999999E-2 3.1054999999999999E-2
3.1054999999999999E-2 3.1054999999999999E-2
3.1054999999999999E-2 3.1054999999999999E-2
Sample Number
Dimensions of Service Quality Evaluation
Reliability: Ability to perform the promised service dependably
and accurately
Responsiveness: Willingness to help customers and provide
prompt service
Assurance: Knowledge and courtesy of employees and their
ability to inspire trust and confidence
Empathy: Caring, individualized attention the firm provides its
customers
Tangibles: Appearance of physical facilities, equipment and
appearance of personnel
Source: Parasuraman, A., “Finding Service Gaps in the Age of
e-Commerce,” IESE Insight, Second Quarter 2013, Issue 17, pp.
30–37.
21

21
A Framework for Analyzing Services
Value of the service
high, medium low
Pareto/ABC analysis
Degree of repetitiveness
repetitive versus unique
Degree of tangibility
low versus high
Direction of the service
directed towards people or assets
22
22
A Framework for Analyzing Services
(cont’d)
Production of the service
People, equipment or people and equipment
Skill level of people
Nature of demand
Continuous, periodic or discrete
Nature of service delivery
Location, time
Degree of standardization
Standard or customized
Skills required for the service
Skilled, unskilled

Estimated costs vs. estimated benefits
23
23
ISO Quality Standards
ISO has adopted a common “high level structure” (HLS) for its
management systems standards
Ten sections: scope, normative references, terms and
conditions, context of the organization, leadership, planning,
support, operation, performance evaluation, and improvement.
ISO 9001: 2015
Provides a set of standardized requirements for a quality
management system, regardless of what the user organization
does, its size, or whether it is in the private or public sector.
defines the requirements a quality system must meet, but does
not dictate how they should be met, leaving scope and
flexibility for implementation.
ISO 14001: 2015
Sets the requirements for an effective environmental
management system.
Similar to ISO 9001, it is suitable for organizations of all types
and sizes.
24

24
Quality Awards
Deming Prize
Established in Japan in 1950 to honor Dr. W. Edward Deming’s
contribution to the quality field
Given annually to recognize both individuals for their
contributions to the field of TQM and businesses that have
successfully implemented TQM.
Non-Japanese companies now eligible
Malcolm Baldrige National Quality Award
Annual award that recognizes U.S. organizations in
manufacturing, service, small business, health care, education,
and nonprofit
Evaluates both quality management programs and achievement
of results, with heavy emphasis on organization-wide financial
performance.
25
25
Chapter 4
Supply Processes and Technology

Key Question Addressed in Chapter 4
Which process or processes will be most effective and efficient
to support the exchange of money (the buyer’s responsibility)
for goods and services (the supplier’s responsibility)?
2
Reasons to Develop Robust Supply Processes
Large number of items
Large dollar volume involved
Need for an audit trail
Severe consequences of poor performance
Potential contribution to effective organizational operations
inherent in the function
3
3
Strategy and Goal Alignment
“Where, when, and how can supply personnel contribute to
short- and long-term goals and strategies of the organization?”
Vertical alignment:
supply strategy and goals at the functional or business unit level
aligned with organizational strategy
Horizontal alignment:
supply strategy and goal alignment with other functional areas

4
Information Flows
Inward flows
information from within the organization sent to supply
information from external sources sent to supply
Outward flows
information from within supply sent to others within the
organization
information sent from supply to external sources
5
Steps in the Supply Process
Recognition of need
Description of need
Identification and analysis of possible sources of supply
Supplier selection and determination of terms
Preparation and placement of the purchase order
Follow-up and/or expedite the order
Receipt and inspection of goods
Invoice clearing and payment
Maintenance of records and relationships
6
Step 1: Recognition of Need
A person or a system identifies a definite need in the

organization—what, how much, and when needed
The greatest opportunity to affect value is when needs are
recognized (step 1) and described – e.g., product conception and
design (step 2)
Supply and supplier(s) can contribute more in these steps than
later in the acquisition process
7
Step 2: Description of Need
Needs should be driven by external customers.
External customer needs → Internal customers → Purchasers →
Potential suppliers
An accurate description of the need (good, service, or
combination) is essential
Unclear or ambiguous descriptions, or over-specified materials,
services, or quality = unnecessary costs
Supply management and the internal customer or cross-
functional sourcing team share responsibility for accurate
descriptions
8
A Requisition
A gatekeeping tool to manage the flow of information through
three gates:
(1) authority: Does the requisitioner have the authority to

make the specified request at the specified budget level?
(2) internal clarity: Is the need described in a clear and
unambiguous way?
(3) internal clearance: Is the description ready for
communicating externally with potential suppliers?
9
Information Needed for Requisitions
Date
Number (identification)
Originating department
Account number
Complete description of material or service and quantity
Date material or service needed
Any special shipping or service-delivery instructions
Signature of authorized requisitioner
10
Issue an RFx
One optional communication tool that is NOT a solicitation for
business:
(1) request for information (RFI)
Three options for soliciting business:
(1) request for quotation (RFQ)
(2) request for proposal (RFP)

(3) request or invitation for bid (RFB or IFB)
11
Step 4: Supplier Selection and Determination of Terms
Analysis of qualified potential sources, source selection, and
determination of terms
Applicable tools range from a simple bid analysis form to
complex negotiations
12
Step 5: Preparation and Placement of Purchase Order
Several order placement tools available:
A purchase order
The supplier’s sales agreement
A release against a blanket order
Failure to use the proper contract form may result in legal
complications or improper documentation
13
Step 6: Follow-up and Expediting
Follow-up: routine order tracking to ensure the supplier can
meet delivery promises
Expediting: the application of pressure on a supplier to meet the

original delivery promise, to deliver ahead of schedule, or to
speed up delivery of a delay
Expediting:
may be caused by poor planning inside the buying or the selling
organization
may indicate the need for process improvements.
14
Step 7: Receipt and Inspection
The prime purposes of receiving are to:
1. Confirm receipt of order
2. Confirm shipment arrived in good condition
3. Ensure quantity ordered has been received
4. Forward shipment to proper destination (storage,
inspection, or use)
5. Ensure proper documentation is registered and
accessible to appropriate parties
15
Eliminate or Reduce Inspection
One goal of supply management is to ensure that quality is built
in:
internally during the design stage and
externally in the suppliers’ processes
When quality is assured, incoming inspection can be eliminated

16
Step 8: Invoice Clearing and Payment
An invoice is a claim against the buying organization
Payment for services may vary from payment for goods.
Invoice clearance procedures are not uniform
Checks and audits of invoices are based on cost-benefit analysis
17
Aligning Supply and Accounts Payable
Often, payment terms are not met to improve working capital
utilization and conserve cash
Root causes of late payment:
Slow cycle time in the accounts payable process
Conflict between finance and supply policy
Information systems and electronic fund transfers (EFT) may
shorten cycle times
Having accounts payable part of the supply department can help
to align processes
18
Improving the Procure-to-Pay Process
Procure-to-pay (P2P) is a term used to describe the steps in the
purchasing process from issuance of the purchase order (step 5)
to payment of the invoice (step 8).
Focuses on the transactional steps in the supply chain that

control the flow of information, delivery of materials and
services, and financial transactions.
Making this process as seamless as possible can reduce order
cycle times, decrease administrative costs, and improve the
satisfaction of internal customers and suppliers.
19
Step 9: Maintenance of Records and Relationships
Update records based on legal requirements, accounting
standards, company policy, and judgment
Some records can be stored electronically, which simplifies
management of purchasing documents.
Update supplier performance scorecards
Link data to future decisions
20
A Sample Sourcing Process and Flowchart
21
Strategic versus Nonstrategic Spend
Strategic spend: goods or services critical to the mission of the
organization
Typically high-spend products or services (e.g., “A” items)
Can be low dollar value purchases if they critical to the
organization

Nonstrategic (non-mission critical) spend
Usually low-spend products and service (e.g., “B” and “C”
items
Dollar value and repetitiveness drive decisions
Establish a small dollar threshold
Prequalify suppliers
Use efficient order placement tools
22
Effectiveness Tools that Optimize Strategic Spend
Goal: Assure continuous availability at the lowest total cost of
ownership
A cross-functional sourcing team, especially during need
recognition and description steps
Early supply and supplier involvement (ESI)
Use information management tools that enable communication
and support decision making
Apply time, money, people and other resources
Favor effectiveness over efficiency
23
Efficiency Tools the Reduce
Transaction Costs
Stockless buying and systems contracts
Procurement cards (P-cards)
Blanket P.O.s
EDI- and Internet-based systems
Online reverse auctions
Changing authority levels and bidding practices
Single sourcing

Outsourcing small value order processing
Standardization
Batch orders
Set requisition schedule
Invoiceless payments
Users pay directly
24
Internal Information Flows to Purchasing
25
Purchasing
engineering
planning
production
budgeting
financial control
accounting
legal
receiving
quality control
inventory control
new products
production control
sales
forecasting

External Information Flows to Purchasing
26
Purchasing
sources of
supply
suppliers’ capacity
suppliers’
production rates
labor conditions
prices and
discounts
transportation
availability
new product
information
product
information

general
market
conditions
sales and
use taxes,
customs
Internal Informational
Flows from Purchasing
27
Purchasing
Product
Development
Marketing
Finance
Accounting
Engineering
Economic
conditions
Product and
price information
Competitive
conditions
Budget

commitments
Costs, prices
adjustments
Orders
placed
Contracts
Source, product,
price information
Product availability,
lead time, price
and quality
General
Management
Stores
Legal
Production
Potential Benefits of Information Systems Technology
Cost reduction and efficiency gains
Data accessibility
Speedier communication
Dedicate resources to strategic issues
Data accuracy
Systems integration
Monetary control
28
Technology-Driven
Efficiency and Effectiveness

Process effectiveness:
make data more transparent, accurate, and accessible to decision
makers
relieves supply decision-makers of low value-adding tasks
Process efficiency:
Automation of tasks reduces costs and improves cycle times
29
Information Systems and
Technology used in Supply
ERP systems
Cloud computing
Electronic procurement systems
Electronic or online catalogs
EDI
Marketplaces
Online auctions
Radio frequency identification (RFID)
30
Enterprise Resource
Planning (ERP) Systems
A suite of applications using a common data management
system
Integrates functions within the organization and facilitates
connection to supply chain stakeholders
Allows users to share information internally and externally in
real time
Reduces opportunities for errors in transaction processes by

eliminating dispersed organizational information systems
31
Cloud Computing
“…a model for enabling ubiquitous, convenient, on-demand
network access to a shared pool of configurable computing
resources (e.g., networks, servers, storage, applications, and
services) that can be rapidly provisioned and released with
minimal management effort or service provider interaction.”
---The National Institute of Standards and Technology
(NIST)
32
https://www.youtube.com/watch?v=94PO2-TL4Vs
Cloud, CBS
Types of Cloud Computing
Private (operated for a single organization, managed internally
or by a third party)
Public (operated over a network for general public use)
Community (operated for specific organizations, managed
internally or by a third party)
Hybrid (some combination of private, community, and/or
public)
33
Elements of Cloud Computing
Relevant to Supply

Software as a Service (SaaS):
Applications that reside in the cloud
Users rent on a pay-for-use basis
Platform as a Service (PaaS):
Software development technologies
Allow users to create customized processes or tools
Infrastructure as a Service (IaaS):
Shared server capacity
Permits sharing of computing power and storage
Accessed as needed on a pay-for-use basis
34
Electronic Procurement Systems
An applications software package
Allows requisitioning, authorizing, ordering, receiving,
invoicing, and paying for goods and services through the
Internet
Frequently a module in the company’s ERP system
35
Electronic or Online Catalogs
A digitized version of a supplier’s catalog
Buyers use a web browser to view information about supplier’s
products and/or services
Product e-catalogs include:
product specification data -- describe the products and are the
same for all buyers
transaction data -- prices, shipping, billing addresses, and
quantity discounts customized to each buyer
36

Electronic Data Interchange (EDI)
Allows computer-to-computer exchange of business documents
e.g., purchase orders, shipping schedules and notifications, and
invoices
Widely adopted in manufacturing, retail and transportation
37
Benefits of EDI
Provides secure transmission and fast turnaround of large
amounts of data
Greater accuracy internally and with trading partners
Shorter process cycle time that may help to lower inventory
Provides electronic logs and audit trails
Reduces administrative costs
38
Private Marketplaces: Extranets
A private intranet that is extended to authorized users outside
the company
Improves supply chain coordination and information sharing
with key business partners
a web-based interface for suppliers to link into a customer’s
systems, and vice versa, to perform activities, such as checking
inventory levels, tracking the status of invoices, or submitting

quotes
Example: Walmart’s RetailLink
39
Private Marketplaces: Intranets
A private, secure internal Internet accessible to authorized users
only; may be linked to ERP system
Communicate information and facilitate employee collaboration
May display supplier catalogs, list of approved suppliers, and
supply policies
Enhances supply processes by allowing employees to place
orders via web browsers, approve and confirm purchases, and
generate POs
Advantages: lowers transaction costs and reduces process cycle
times
40
Types of Online Auctions
Open offer auctions
Suppliers select items, see competitive offers, and enter offers
up until a specified closing time.
Names not disclosed to other bidders
Private offer auctions
The buyer offers a target price and quantity
Suppliers enter offer(s) by a specific time
The buyer evaluates and posts a status level: Accepted; closed;
best and final offer (BAFO); open
Posted price auctions
Buyer posts price and accepts first supplier to meet price
Reverse auctions

Real-time, dynamic, declining price
Suppliers see the status of their bids in real time
41
When to Use Reverse Auctions
Clearly defined specifications
A competitive market with willing, qualified suppliers will to
participate
usually 3 to 6 suppliers
Knowledge of market conditions: set a reserve price
Buyer and seller competency with auction technology
Clear rules of conduct
Buyer is prepared to switch suppliers if necessary
Projected savings justify a reverse auction
42
Potential Buyer-Related
Issues with Reverse Auctions
Buyer knowingly accepts bids from suppliers with unreasonably
low prices
Buying firm submits phantom bids during the event to increase
the competition artificially
Buyer includes unqualified suppliers to increase price
competition
43

Potential Supplier-Related Issues with Reverse Auctions
Supplier collusion
Suppliers bid unrealistically low prices and attempt to
renegotiate afterwards
Suppliers “bird watch” or participate, but do not bid to collect
market intelligence. Buyer may require bids before entering the
auction to preclude this behavior
Suppliers submit bids after the auction event in an attempt to
secure the business
44
Potential Problems with
Using Online Auctions
Risk of interrupting good supplier relationships
Risk of developing a reputation for aggressive price-buying
over other considerations
Costs of running auction versus expected savings
Cost savings potential of auctions versus sourcing processes,
such as RFP/RFQ and negotiation
Significant up-front preparation and cost required compared to
determining price through an RFP/RFQ
Actual price versus bid price given unforeseen costs
45
Radio Frequency
Identification (RFID) Tags

Contain a chip and antenna that emit a signal, using energy
from a radio frequency reader, which contains information
about a container or its individual contents
Can be passive, active, or battery-assisted passive
Vary in memory, frequency, power source, and cost
The most common are passive, read-only tag
Three primary applications in the supply chain:
real-time inventory tracking
product tracking
transportation
46
Key Questions When Adopting
New Information Systems Technology
Should we be a leader or a follower?
What should be acquired through e‑commerce?
What tools should we use to acquire those items?
Who should we use as a service provider(s)?
47
Chapter 6
Need Identification and Specification

1
Key Questions
How do we determine organizational needs?
How do we translate and communicate these needs to (potential)
suppliers?
2
2
Need Identification Criteria
Strategic
e.g., mission critical, total spend, risk reduction, access to new
technology or new markets, assurance of supply in tight
markets, etc.
Traditional supply criteria
quality, quantity, delivery, price and service
Additional current criteria
financial, risk, sustainability, innovation, regulatory compliance
and transparency, and political factors
3

3
Traditional Criteria
Quality: functionality and conformance to specifications
Quantity: ability to meet demand
Delivery: on-time, as promised
Price: total cost, including payment terms
may be the “order getter” if other criteria are equal among
potential sources of supply
Service: broad category that depends on the product or service
being acquired
e.g., flexibility in order quantities and lead times, repair and
maintenance, advice, etc.
4
4
Additional Current Criteria: Financial
Improvement of the balance sheet and income statement to raise
the company’s attractiveness in the eyes of the investment
community.
any initiative that improves return on assets or investment,
raises the share price, or improves the company’s financial
ratings
revenue enhancement
working capital reduction (inventory investments, accounts
payable and accounts receivable)
cash flow improvement

5
5
Additional Current Criteria: Risk
Three categories of supply chain risk:
operational risk: the risk of interruption of the flow of goods or
services
financial risk: the risk that the price or total cost of the goods or
services acquired will change significantly
reputational risk: the risk that the reputation of the enterprise is
adversely affected by the method of acquisition or the behavior
of the supplier.
All three risks affect survival, competitiveness, and profitability
and may occur simultaneously
6
6
Additional Current Criteria: Sustainability
Sustainability includes environmental and social considerations.
Sustainability performance my comply with legal obligations
and meet values and standards of key stakeholders
e.g., employees, customers, shareholders, etc.
Supply plays a central role in the organization’s sustainability
performance
energy and water consumption in the supply chain
supplier location and methods transport affect CO2 emissions
material specifications affect resource conservation (e.g., reuse

and recycling)
methods of waste disposal
7
7
Additional Current Criteria: Innovation
Supply and supplier innovation:
How can we do better?
What can make my customer more successful?
Supply and suppliers:
suggestions to improve value improvement and reduce total cost
of ownership
open to changes in supply chain practice
8
8
Additional Criteria: Regulatory Compliance and Transparency
An extensive and growing legal and regulatory structure affects
trade
non-compliance may damage reputation and result in fines and
citations
financial scandals and new accounting standards increase
demands for greater financial transparency
long-term contracts, lease obligations, and hedge positions have
to be reported properly

9
9
Additional Current Criteria:
Political Factors
A willingness to support the government in its priorities, rather
than opposing them:
support “buy local” government initiatives
assist government training initiatives
work on government-sponsored industry panels
10
https://www.nhtsa.gov/laws-regulations/corporate-average-fuel-
economy
10
Categories of Needs
11CategoryDescriptionResaleResellers comprise retailers,
wholesalers, distributors, agents, brokers and traders.
What they can resell covers the full range of the remaining
categories.Raw and Semi-Processed MaterialsMost users of
materials are converters, such as factories, and this category
includes commodities, agricultural and industrial.Parts,
Components and PackagingAssemblers use parts and
components produced by their suppliers to create a finished
product.

Parts and components may be standard or special depending on
the decision of the designer of the finished product.
11
Categories of Needs
12CategoryDescriptionMRO and SVPEvery organization has
MRO requirements and SVP’s.
The availability of MRO suppliers is critical to maintain
continued uninterrupted operation of the office, factory,
facility, etc.
Because many MRO requirements are relatively small in dollar
value, SVP’s are also included in this category.
For SVP’s assuring availability at minimum acquisition cost is a
challenge.Capital AssetsAny requirement that accountants
classify as capital, and, therefore, an investment, becomes a
capital item.
Equipment, IT, real estate and construction are included in this
category.
Capital items can be depreciated, are often bought under a
separate budgetary allocation and may require special financing
arrangements.
12
Categories of Needs
13CategoryDescriptionServices Services are intangible and

nonmanufactured. Every organization acquires a variety of
services.OtherAnything not covered by the above categories
falls into this last one.
Major requirements could be energy and water.
This category would also include unusual and infrequent
requirements, probably better dealt with on an ad hoc or project
basis.
13
Challenges of Capital Asset Purchasing
Strategic considerations that can affect the long term
competitive position of the organization
High dollar amount for a single purchase
Infrequent purchase
Difficulty estimating the total cost
Derived demand
Impact on the environmental
Significant tax considerations
Technological change
Dedication of time and resources during start-up
Commitment to process, cost, product line and space
Coordination with existing processes and operations
14
14

Reasons for the Purchase of
Capital Assets
Capacity
Economy in operation and maintenance
Increased productivity
Improved quality
Dependability in use
Savings in time or labor costs
Durability
Safety, environmental considerations
15
15
Source Selection for
Capital Goods Purchases
Total cost of ownership (TCO) analysis
Purchase cost may only represent 20 to 60 percent of TCO
Engineering service
Presale and post-sale service
Design and R&D capabilities and costs
Legal considerations
patents, liability for lost sales, health and safety
Disposal at end of useful life
16
16

Reasons for Lack of Supply
Involvement in Service Acquisition
User expertise in specifying complex services and analyzing
potential service providers
Buying services involves a more personal relationship between
the supplier and user
Pre-deregulation, price and service delivery was essentially the
same for all service suppliers (e.g., transportation)
17
17
What Makes Services Different?
Intangible
Cannot touch it
Perishable
no inventories
Heterogeneous: the “service package”
high levels of customization
Customer participation in the service production process
Simultaneous production and consumption
Can be difficult to measure quality
18
18

Opportunity to Affect Value
19
1.
Need
recognition
2.
Description
3.
Potential
suppliers
4.
Selection
5.
Receipt
Low
Opportunity
to affect value
High
Acquisition Process Steps
19
Methods of Description
By brand
“Or Equal”
By specification
Physical or chemical characteristics
Material or method of manufacture
Performance
By engineering drawing
By miscellaneous methods

Market grades
Sample
By a combination of two or more methods
20
20
When Description by Brand is Desirable
Either the manufacturing process is secret or the item is covered
by a patent
Specifications cannot be laid down with sufficient accuracy
The quantity bought is so small
End customers or users have preferences in favor of certain
branded items
21
21
Advantages of Buying with Specification
Evidence exists that thought and careful study have been given
to the need and the ways in which it may be satisfied
A standard is established for measuring and checking materials
as supplied, preventing delay and waste that would occur with
improper materials
An opportunity exists to purchase identical requirements from a
number of different sources of supply
The potential exists for equitable competition

The seller will be responsible for performance when the buyer
specifies performance
22
22
Limitations in Using Specifications
It is practically impossible to draw adequate specifications
Specifications add to the immediate cost
Specification may not be better than a standard product
Cost increase by testing to ensure that the specs have been met
Unduly elaborate specifications discourage potential suppliers
from placing bids in response to inquiries
Unless the specifications are of the performance type, the
responsibility for the adaptability of the item to the use
intended rests wholly with the buying organization
Minimum specifications set by the buying organization may be
the maximum furnished by the supplier
23
23
Methods of Specification
Physical or chemical characteristics
Material and method of manufacture
Performance or function

Engineering drawing
Miscellaneous
market grade
sample
Some combination of two or more methods
24
24
Standardization and Simplification
Standardization: Agreement on definite sizes, design, quality, or
other aspects of the product or service.
A technical and engineering concept
Simplification: A reduction in the number of sizes, designs or
other aspects of the product or service.
A selective and commercial problem
May be applied to articles already standardized or as a step
preliminary to standardization
The challenge: Balance standardization and simplification
against suitability and uniqueness
25
25
Chapter 3
Supply Organization

1
Key Questions Addressed in Chapter 3
What are the objectives of supply?
How might supply be organized to achieve these objectives
effectively and efficiently?
What are the activities and responsibilities of supply
management?
2
2
Traditional View of Supply Objectives
Obtain the right materials/services
Meeting quality requirements
In the right quantity
For delivery at the right time and right place
From the right source (a supplier who is reliable and will meet
its commitments in a timely fashion)
With the right service (both before and after the sale)
At the right price in the short and long term.

3
3
Nine Goals of Supply
Improve the organization’s competitive position
Provide an uninterrupted flow of materials, supplies and
services required to operate the organization
Keep inventory investment and loss at a minimum
Maintain and improve quality
Find or develop best-in-class suppliers
Standardize, where possible, the items and services bought and
the processes used to procure them
Purchase required items and services at lowest total cost of
ownership
Achieve harmonious, productive internal relationships
Accomplish supply objectives at the lowest possible operating
costs
4
4
Typical Supply Organization Structure—Medium Sized
Company, Single Location
5

5
Structure Options for Large Organizations
Centralized: Authority and responsibility for most supply-
related functions assigned to a central organization
Hybrid: Authority and responsibility shared between a central
supply organization and business units, divisions, or operating
plants
May lean toward centralized or decentralized depending on
division of decision-making authority
Example: “center-led” organization in which strategic direction
is centralized and execution is decentralized
Decentralized: Authority and responsibility for supply-related
functions dispersed throughout the organization
6
6
Potential Advantages and Disadvantages of Centralization
7
Advantages
Strategic focus
Greater buying specialization
Ability to pay for talent
Consolidation of requirements - clout

Coordination of policies and procedures
Effective planning and research
Common suppliers
Proximity to major organizational decision makers
Critical mass
Firm brand recognition and stature
Reporting line - power
Cost of supply relatively low
Disadvantages
Lack of business unit focus
Narrow specification and job boredom
Corporate staff appears excessive
Tendency to minimize legitimate differences in requirements
Lack of recognition of unique business unit needs
Focus on corporate requirements, not on business unit strategic
requirements
Even common suppliers behave differently in geographic and
market segments
Distance from users
Tendency to create organizational silos
Customer segments require adaptability to unique situations
Top management not able to spend time on suppliers
High visibility of purchasing costs
7
Potential Advantages and Disadvantages of Decentralization
8
Advantages
Easier coordination/communication with operating department
Speed of response
Effective use of local sources

Business unit autonomy
Reporting line simplicity
Undivided authority and responsibility
Suits purchasing personnel preference
Broad job definition
Geographical, cultural, political, environmental, social,
language, currency appropriateness
Hides cost of supply
Disadvantages
Difficult to communicate among business units
Encourages users not to plan ahead
Operational versus strategic focus
Too much focus on local sources - ignores better supply
opportunities
No critical mass in organization for visibility/ effectiveness -
“whole person syndrome”
Lacks clout
Suboptimization
Business unit preferences not congruent with corporate
preferences
Small differences magnified
Reporting at low level in organization
Limits functional advancement opportunities
Ignores larger organizational considerations
Limited expertise for requirements
Lack of standardization
Cost of supply relatively high
8
Advantages and Disadvantages of Hybrid, Centralized, and
Decentralized Structures

9
Hybrid
structure
Centralized
Decentralized
Disadvantages
Disadvantages
Advantages
Advantages
9
Four Areas of Specialization in Supply
Sourcing and commodity management
Materials management
Administration
Supply research
10
10

The chief purchasing officer (CPO) can have many difference
title
V.P. of Supply
V.P. of Purchasing
V.P. of Strategic Sourcing
V.P. Supply Chain Management
Director, Global Procurement
General Manager, Supply
11
11
CPO Trends
Increasing education levels
CPOs tend to report higher in the organization than they did in
the 1980s and 1990s
CPOs are increasingly hired from outside the organization
rather than promoted from within
CPOs are increasingly hired from functional areas other than
supply
When a new CPO replaces a current CPO, the current CPO is
promoted or leaves the company for a similar position in
another firm
CPO reporting lines change every 2.5 years on average (the
typical CPO will have at least two different bosses during
tenure in the role)
The CPO role is still new in many organizations
12

12
Most Common CPO Reporting Lines
CEO
Executive Vice President
Vice President of Finance/CFO
Group Vice President
Senior Vice President
13
13
Factors that Influence Reporting Level
The amount of purchased material and services as a percentage
of total costs or total income
The nature of the products or services acquired
The extent to which supply and suppliers can provide
competitive advantage
14

14
Categories of Supply’s Roles and Responsibilities
What is acquired
Supply chain activities
Type of involvement in “what is acquired” and “supply chain
activities”
no involvement, documentary, professional and meaningful
involvement
Involvement in corporate activities
15
15
Examples of Supply Chain Activities
Purchasing/buying
Purchasing research
Inventory control
Transportation
Investment recovery/disposal
Forecasting and planning
Outsourcing and subcontracting
Nonproduction/nontraditional purchases

Supply chain management
16
16
Supply Teams
Cross-functional teams
sourcing, new product development/service development,
commodity management
Teams with suppliers
Teams with customers
Teams with suppliers and customers
Supplier councils - key suppliers
Purchasing councils - purchasing personnel only
Commodity management teams
Consortia
17
17
Key Success Factors for Teams
Supportive organizational culture, structure, and systems
A common compelling purpose, measurable goals, and feedback
for individuals and the team
Organized for customer satisfaction rather than individual
functional success

All functional areas involved in up-front planning, shared
leadership roles, and role flexibility
18
18
Key Success Factors for Teams (cont’d)
The right people (right qualifications), in the right place (on a
team that needs their skills), at the right time (when those skills
are needed)
A common, agreed-upon work approach and investment in a
high level of communication
Dedication to performance and implementation with decisions
delegated to the appropriate level
Integration of all relevant functional areas and various teams
throughout the project life cycle
19
19
Team Leader Responsibilities
Work with team to establish and commit to performance goals
Secure individual member involvement and commitment
Manage internal team conflict
Help maintain team focus and direction
Secure required organizational resources

Prevent team domination by a member or function
Deal with internal and external obstacles confronting the team
Coordinate multiple tasks and manage assignment status
Clarify and help define each team member’s role
Provide performance feedback to members
20
20
Purchasing Consortia
A form of collaborative purchasing
Used by public and private-sector organizations
Goal:
To deliver a wider range of services at a lower total costs
through price reductions through higher volume of spend,
administrative efficiencies, product and service standardization,
improved supplier management capabilities, specialization of
staff, and better customer service
21
http://www.ecommerce-digest.com/industrial-consortia.html
https://www.bestvalueschools.com/lists/5-examples-of-college-
consortiums/

21
Keys for Successful Consortia
Reduce total costs for the consortium members
lower prices, higher quality and better services
Eliminate and avoid real and perceived violations of anti-trust
regulations
Install sufficient safeguards to avoid real and perceived threats
concerning disclosure of confidential and proprietary
information
22
22
Keys for Successful Consortia
(cont’d)
Mutual and equitable sharing of risks, costs and benefits to all
stakeholders, including buying firms/members, suppliers and
customers
Maintaining a high degree of trust and professionalism
Maintaining a strong similarity among consortium members and
compatibility of needs, capabilities, philosophies and corporate
cultures
23

23
Director of
Procurement
Commodity
Manager
Buyer
Buyer
Commodity
Manager
Buyer
Buyer
Purchasing and
Materials Analyst
Manager
Administration
and Processes
Manager
Scheduling and
Planning
Inventory Control
Coordinator
Shipping/
Receiving
Manager
Transportation/
Customs Manager
Logistics Manager
Chapter 2

Supply Strategy
1
Key Questions Addressed in Chapter 2
How can supply and the supply chain contribute effectively to
organizational objectives and strategy?
How can the organizational objectives and strategy properly
reflect the contribution and opportunities offered in the supply
chain?
2
2
Three Levels of Strategic Planning
Corporate: Decisions and plans that answer:
What business are we in?
How will we allocate resources among these businesses?
Business unit: Decisions mold the plans of a particular business
unit to contribute to corporate strategy
Function: Plans concern:
How each functional area contributes to business strategy

Allocation of internal resources
3
3
Supply Strategy Interpreted in Organizational Strategy
4
Supply
Objectives
Organizational
Objectives
Supply
Strategy
Organizational
Strategy
4
Supply Strategy Links Current and Future Markets to Current
and
Future Needs
5

Current
Needs
Current
Markets
Future
Markets
Future
Needs
https://www.autonews.com/article/20150511/OEM10/305119952
/gm-to-suppliers-let-s-see-books-not-bids
5
Normal Organizational and
Supply Objectives
6
Organizational
Objectives
Survival
Growth
Financial
Environmental
Supply
Objectives
Quality
Quantity
Delivery

Price
Service
6
Three Challenges in Setting Supply Objectives and Strategies
Effective interpretation of corporate objectives and supply
objectives
The choice of the appropriate action plan or strategy to achieve
the desired objectives
The identification and feedback of supply issues to be
integrated into organizational objectives and strategies
7
7
Six Major Supply Strategy Areas
Assurance of supply
Cost reduction
Supply chain support
Environmental change
Competitive edge
Risk management
8

8
Three Categories of Supply Risk
Operational:
Risk of interruption of the flow of goods or services
Financial:
Risk that the price of the goods or services acquired will
change significantly
Reputational:
Risk that the organization’s reputation will be harmed by a
supply decision
9
9
Managing Supply Risks
Identify and classify risks
Assess impact and probability of risk event
Develop a risk management strategy
10

10
Corporate Risk Management
All organizations are exposed to supply risk and other forms of
risk
In large organizations, a corporate risk management group
headed by a risk manager or chief risk officer (CRO) assesses
total risk exposure and seeks the best ways of managing all
risks
The chief purchasing officer works with the CRO in the three
areas of supply risks
11
11
Strategic Purchasing Planning Process
12
Identify and
analyze alternatives
Determine
supply strategy
Review implementation
factors
Gain commitment
and implement

Restate
organizational goals
Determine supply
objectives to contribute
to organizational goals
Isolate factors affecting
achievement of
supply objectives
Evaluate
12
Examples of Organizational
Strategies Involving Supply
Materials management
Project management
Logistics management
Supply chain management
JIT purchasing/production
Make or buy/insource or outsource

13
13
Supply Strategy Questions
What
Make or buy/insource or outsource
Standard versus special
Quality
Quality versus cost
Supplier involvement
How much
Large versus small quantities (inventories)
14
14
Who
Centralized or decentralized
Location of staff
Top management involvement
When
Now versus later

Forward buy
What Price
Premium, standard, lower
Cost-based, market-based
Lease/make/buy
15
15
Where
Local, regional
Domestic, international
Large versus small
Multiple, single versus sole source
Current, new versus newly developed supplier
High versus low supplier turnover
Supplier certification
Supplier ownership
16
16

17
How
Systems and procedures
e-Commerce
Negotiations
Competitive bids
Fixed bids
Blanket orders/open orders
Systems contracting
Group buying
MRP
Short- or long-term contracts
Ethics
Aggressive or passive
Purchasing research
Value analysis
17
Why?
Objectives congruent operationally and strategically
Market conditions current and future
Internal reasons
Outside supply
Inside supply
18
18

Chapter 1
Purchasing and Supply Management
1
Key Issues Addressed in Chapter 1
Evolution of the supply function
The potential contribution of supply to organizational goals and
strategies
Operational versus strategic
Direct versus indirect
The profit leverage effect as a measure of supply impact on
profitability (the income statement)
The ROA effect as a measure of supply impact on asset
performance (the balance sheet)
The nature of organizations and the implications for supply
2
2
Competitive Factors Affecting Supply
Increased outsourcing places great reliance on suppliers

Greater dependence on suppliers for design and build
responsibilities for subassemblies and subsystems
Increased global competition requires best value from suppliers
for price, quality, delivery and sustainability performance
Development of new product technologies
Evolving information systems
Trend to single sourcing and strategic supplier relationships
Greater importance of supply chain environmental and social
sustainability performance
Risk management
A supply chain orientation to managing relationships with
suppliers and customers
3
3
Opportunities for Supply to Contribute to Organizational
Success
Increase revenue
Improve customer satisfaction
Reduce total costs of ownership
Reduce lead times through process efficiencies
Identify opportunities for product/service innovations by
collaborating with suppliers
Improve supply chain sustainability performance
Minimize financial, operational and reputational risks
Provide information to others in the organization in areas such
as market conditions and new products and services.
4

4
Supply Chain - SCMA
Definition
The process of strategically managing flows of goods, services,
finance and knowledge, along with relationships within and
among organizations, to realize greater economic value through:
Supporting enterprise strategic objectives
Contributing to the achievement of strategic competitiveness of
the enterprise
Contributing to the enhancement of the competitive advantage
of the enterprise
Enhancing customer satisfaction
Knowledge Areas
Supply chain management involves the integration of core areas
of knowledge (procurement, operations, logistics) and
supporting knowledge areas (marketing, finance and accounting,
human resources, knowledge management).
©McGraw-Hill Education. All rights reserved.
5
5
Difference Between Purchasing and Supply Chain Mgt
Procurement is the process of getting the goods your company
requires, while supply chain management is the extensive
infrastructure needed to get you those goods.
©McGraw-Hill Education. All rights reserved.

6
6
The Evolution of the Supply Function
Late 1800s:
The Handling of Railway Supplies – Their Purchase and
Disposition, published 1887
1900-1950s:
reliable access to supply of raw materials, supplies and services
1970s:
senior management attention on the supply function:
international shortage of basic raw materials
price inflation
7
7
The Evolution of the Supply Function
1990s:
challenges of global supply chains
increased reliance on suppliers because of outsourcing
early 21st century:
supply chain integration
lower transaction costs
faster response times

Challenges: sustainability, globalization, technological
innovations and risk management
8
8
The Evolution of the
Supply Function
9
early
1900s
Today
Clerical and tactical
Focus on policies and procedures
Key challenges:
availability of supply and cost management
Strategic orientation
Global supply chains
Executive level leadership
Key challenges: Sustainability, total cost of ownership,
security, globalization, risk management
9
The Evolution of the
Supply Function

10
Pre 1939
1940-1949
1950-1969
1970-1989
1990-1999
Clerical
Supply assurance
Managerial
emphasis
Purchasing
strategy
Integration into
corporate strategy
Integrated supply networks and information technology
sustainability, globalization, technological innovations and risk
management
2000-2010

Today
10
Supply Management
“The integration of related functions to provide effective and
efficient materials and services to the organization.”
Includes:
Operational and strategic responsibilities
In some organizations supply may have additional
responsibilities for some or all of the following: receiving,
inspection, warehousing, inventory control, materials handling,
packaging, scheduling, in/outbound transportation, and disposal
Note: The terms purchasing, procurement and supply
management are used interchangeably in this text.
11
11
Steps in the Procurement Process
(1) recognition of need
(2) translation of that need into a
commercially equivalent description

(3) search for potential suppliers
(4) selection of a suitable source(s)
(5) agreement on order or contract details
(6) delivery of products and/or services
(7) payment of suppliers
12
12
Logistics Management
“Logistics management is that part of supply chain
management that plans, implements, and controls the efficient,
effective forward and reverse flow
and storage of goods, services, and related
information between the point of origin and the
point of consumption in order to meet customers’
requirements.”
--Council of Supply Chain Management Professionals (CSCMP)
13
13
Examples of Logistics Activities
customer service
demand forecasting/planning

inventory management
logistics communications
material handling
order processing
packaging
14
parts and service support
plant and warehouse site selection
return goods handling
reverse logistics
traffic and transportation
warehouse storage
14
Supply Chain Management
“The design and management of seamless, value-added
processes across organizational boundaries to meet the real
needs of the end customer. The development and integration of
people and technological resources are critical to successful
supply chain integration.”
--Institute for Supply Management (ISM) Glossary
15
15

Characteristics of an Integrated Strategic Procurement and
Sourcing Function
16
Strategic Positioning
Integration across company and strategic business unit
corporate plans
External/internal customer focus
Functional Leadership
Executive status of the chief supply officer
Establishes integrated visions and works at results and
processes
Drives supply base/supplier management strategies company-
wide
Integration
Cross-functional, cross-location teaming
Part of the technology, manufacturing and strategic business
unit (SBU) planning process
Executive Leadership
Executive level awareness of the opportunities to use supply to
achieve strategic goals and objectives
16
Characteristics of an Integrated Strategic Procurement and
Sourcing Function (cont’d)
17
Supplier Management
Joint performance improvement efforts
Value focused
Total cost and value improvement
Supplier benchmarking

Measurement
Customer orientation
Total value/cost focused
Benchmarking with best in class
Systems
Integrated global databases and ERP systems
Historical performance data
Supply Base Strategy
Driven to achieve best value for cost, delivery and quality
Standardization
Concurrent engineering
Supply base optimization
17
Profit-Leverage Effect
($ millions)
18
Before Spend Decrease
After 5% Spend Decrease
Sales: $500
Purchases 300
Labor 35
Overhead 100
Gross Profit $ 65
SG&A, Interest 40
Profit: $ 25
Sales: $500
Purchases 285
Labor 35
Overhead 100

Gross Profit $ 80
SG&A, Interest 40
Profit: $ 40
A 5% reduction in purchase cost
creates a 60% increase in profit
18
Return-on-Assets Factors
19
19
Purchasing’s Operational and Strategic Contributions
20
1. Supply Contribution
Operational
Trouble Prevention
Strategic
Opportunity Maximization

20
21
Direct
Bottom-Line Impact
Indirect
Enhancing Performance
of Others
21
22
Negative
Operationally deficient
Strategically deficient

Directly deficient
Indirectly deficient
Neutral
Operationally acceptable
Strategically deficient
Directly acceptable
Indirectly deficient
Positive
Operationally acceptable
Strategically acceptable
Directly acceptable
Indirectly acceptable
22
Manufacturing and Services Organizations
23
Manufacturing
The largest portion of needs is generated by customer needs.
The largest portion of spend with suppliers will be on direct
requirements which comprise products sold to customers.
Service Provider
The largest portion of needs is generated by capital, services
and other requirements enabling employees to provide the
service.

In retailing the largest spend is focused on re-sale requirements.
23
The Opportunities for the Indirect Contribution of the Supply
Function
Reducing total costs of ownership (income statement)
Improving ROA/reduction in inventory investment (balance
sheet)
Information source
Effect on efficiency
Effect on competitive position
Effect on customer satisfaction
Effect on image
Risk management
Training ground
Management strategy and social policy
24
24
Challenges Facing Supply
Capturing opportunities in the supply chain
Establishing the appropriate set of measures to evaluate the
contribution of supply and supply initiatives
Managing financial, operational and reputational risks
Improving supply chain sustainability performance
Managing growth and influence in total spend, span of supply

chain activities, meaningful involvement in supply-related
decisions, and involvement in strategic corporate activities
Integrating the use of technologies in supply processes,
including e-commerce, digitization, and artificial intelligence
Providing effective contribution to organizational success
25
https://www.youtube.com/watch?v=ElYNhGbOTOQ
Starbucks
25
Current Event Assignment Rubric:
Content: Elaborate and detailed information relative to the
topic. Personal experience examples are encouraged.
10
Writing / Grammar: There should be no spelling mistakes. The
structure of the paper should have clear paragraphs for each
question. One-page minimum, double spaced, 12-point font, 1-
inch margins. (Papers will be marked down if they are too
short)
10
Presentation: Oral presentation is professional and clear.
Information conveyed is easily understood and organized.
Written documents are clearly written and organized to be

easily understood.
5
Total:
25
Netflix, Los Gatos, California - If you were in charge of
Netflix, what would you do?
CEO Reed Hastings started Netflix in 1997 after becoming
angry about paying Blockbuster Video $40 for a late return of
Apollo 13. Hastings and Netflix struck back with flat monthly
fees for unlimited DVDs rentals, easy home delivery and returns
via prepaid postage envelopes, and no late fees, which let
customers keep DVDs as long as they wanted. Blockbuster,
which earned up to $800 million annually from late returns, was
slow to respond and lost customers in droves.
When Blockbuster, Amazon, and Walmart started their own
mail-delivery video rentals, Hastings recognized that Netflix
was in competition with “the biggest rental company, the
biggest e-commerce company, and the biggest company,
period.” With investors expecting it to fail, Netflix’s stock price
dropped precipitously to $2.50 a share. But with an average
subscriber cost of just $4 a month compared to an average
subscriber fee of $15, Netflix, unlike its competitors, made
money from each customer. Three years later, Walmart
abandoned the business, asking Netflix to handle DVD rentals
on Walmart.com. Amazon, by contrast, entered the DVD rental
business in Great Britain, expecting that experience to prepare
it to beat Netflix in the United States But, like Walmart,

Amazon quit after four years of losses. Finally, 13 years after
Netflix’s founding, Blockbuster declared bankruptcy. With
DVDs mailed to 17 million monthly subscribers from 50
distribution centers nationwide, Netflix is now the industry
leader in DVD rentals.
However, its expertise in shipping and distributing DVDs won’t
provide a competitive advantage when streaming files over the
Internet. Indeed, Netflix’s Watch Instantly download service is
in competition with Amazon’s Video on Demand, Apple’s
iTunes, HuluPlus at Hulu.com, Time-Warner Cable’s TV
Everywhere, and DirectTV Cinema, all of which offer movie
and TV downloads. Moreover, unlike DVDs, which can be
rented without studio approval, U.S. copyright laws require
streaming rights to be purchased from TV and movie studios
before downloading content into people’s homes. And that
creates two new issues. First, does Netflix have deep enough
pockets to outbid its rivals for broad access to the studios’ TV
and movie content? Second, can it convince the studios that it is
not a direct competitor? HBO, for instance, won’t license any of
its original shows, like The Sopranos, for Netflix streaming. It
also has exclusive rights for up to eight years for content from
Twentieth Century Fox and Universal Pictures. HBO co-
president Eric Kessler says, “There is value in exclusivity.
Consumers are willing to pay a premium for high-quality,
exclusive content.” If other studio executives think this, Netflix
will not acquire the video content it needs to satisfy its
customers. Planning involves determining organizational goals
and a means for achieving them. So, how can Netflix generate
the cash it needs to pay the studios? How can it convince them
it’s not a competitor so they will agree to license their content?
Netflix must also address the significant organizational
challenges accompanying accelerated growth. Hastings
experienced the same problem in his first company, Pure
Software, where he admitted, “Management was my biggest
challenge; every year there were twice as many people and it
was trial by fire. I was underprepared for the complexities and

personalities.” With blazing growth on one hand and the
strategic challenge of obtaining studio content on the other, how
much time should he and his executive team devote directly to
hiring? Deciding where decisions will be made is a key part of
the management function of organizing. So, should he and his
executive team be directly involved, or is this something that he
should delegate? Finally, what can Netflix, which is located
near Silicon Valley, home to Google, eBay, Apple, Hewlett-
Packard, and Facebook, some of the most attractive employers
in the world, provide in the way of pay, perks, and company
culture that will attract, inspire, and motivate top talent to
achieve organizational goals?
Dr Babu Subbaraman
What Would You Do? Case Assignment, Communications -
Google Mountain View, California
Founded in 1998, Google just had its most dominant year, with
its search market share rising from 77 percent to 83 percent and
revenues jumping 25 percent. Because most of the revenue came
from search, Google is trying to diversify. But it faces intense
competition in every market.
In traditional search, Microsoft’s Bing search engine and
Facebook, which passed Google as the most popular website in
the world, pose threats as people desire more personalized and
social media-related search information. Searches for local
information, such as restaurant reviews or directions, are 20
percent of all Google searches and half of all mobile or
smartphone searches. Yet, local-related search advertising is a
weakness for Google, but a strength for Groupon, Facebook
Places, Living Social, Foursquare, and Bing. Although Google’s
Android smartphones have more market share than Apple’s
iPhone, the Android software is open source, so Google makes

no money except for built-in Google Ads and services.
Likewise, Google trails Apple and Amazon in the number of
publishers who use their software, devices (i.e., smartphones,
tablets, book readers), and online stores to sell electronic
versions of newspapers, magazines, books, music, TV shows,
and movies. Finally, Google’s Chrome web browser (13%
market share) competes with Microsoft’s Internet Explorer
(55%), Mozilla’s Firefox (22%), and Apple’s Safari (7%).
In short, Google is trying to position itself for the day when
people won’t automatically use a Google search box to find
information. Keith Woolcock, founder of 5thColumnIdeas, a
technology research firm, doubts Google is up to the task,
saying, “The problem for me as an investor is that Google looks
a little too [much] like last year's model. It’s the chicken in the
sandwich—Apple and Facebook are on the opposing sides.
Google is in the middle. Really, it looks to me as though it has
become the Microsoft of its generation: big, bad and quickly
becoming irrelevant.”
Unfortunately, you fear that Woolcock might be right, which is
why you replaced CEO, Eric Schmidt, who becomes executive
chairman. When Google started, you were CEO for three years.
But, as an introvert who prefers technology challenges to
management issues, you were relieved to hire Schmidt from Sun
Microsystems because of his extensive leadership experience.
When Schmidt became CEO, Google was much smaller and still
in start-up mode, so he focused on management and financial
systems, while you and Sergey Brin focused on technology and
product development. Google’s philosophy was to hire really
smart people and then let them do whatever they wanted. It was
the norm for Google engineers to have 20 percent of their time
to work on whatever they wanted to. And it spawned great
products like Gmail, which engineer Paul Buchheit designed in
a day and then shopped around, to get other Google engineers to
join his team. This approach worked well until Google hit
10,000 employees. But at Google’s current size, 24,000
employees, with plans to hire another 6,000, it leads to

confusion, poor coordination, and a lack of focus.
Today, Google is a much larger, more complicated company.
But the biggest problem is that paralyzing bureaucracy has
slowed the company. As technology companies grow, this
happens. IBM, Apple, Microsoft, and HP weren’t immune, and
neither is Google. In fact, the key reason you became CEO
again was to streamline decision making and communication,
and create clearer lines of responsibility and accountability. But
how do you do that in a company of 30,000 people? A related
problem is that top management is increasingly isolated from
middle- and lower-level managers and employees who are
responsible for the research and project management that is key
to Google’s success. So, what might you do to improve upward
communication within the company? Finally, what can Google
do to communicate effectively on an organization-wide basis in
an organization that has dozens of product lines and hundreds of
research projects and that will soon have 30,000 employees?
If you were the new CEO at Google, what would you do?
What Would You Do? Case Assignment- Controlling -
CATERPILLAR
Peoria, Illinois
Caterpillar dominates the construction and earth-moving
equipment industry, with $50 billion per year in revenues.
Komatsu, its next closest competitor, does $25 billion.
However, Caterpillar has not been able to master the cyclical
nature of its industry. When the heavy machinery industry
booms, no one keeps up with demand, and everyone builds new
factories and hires thousands of new employees. Indeed,
Caterpillar doubled its workforce the last time global demand
surged. But when the industry goes bust, factories are closed
and tens of thousands of employees are laid off. What kind of
dramatic swings does Caterpillar experience? A 43 percent
spike in sales in April 2004 and a 52 percent decline in

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