Corporate Supply Challenges Need to control unit costs Need to reduce the total cost of acquisition The increasing influence of suppliers on the purchaser’s ability to respond to end- customers needs Increased reliance on fewer suppliers Trend towards reliance on suppliers for design and build responsibilities for complete subassemblies and subsystems
The Evolution of the Supply Function The Handling of Railway Supplies – Their Purchase and Disposition ◦ Published in 1887 Attention in first half of 1900s to reliable access to supply of raw materials, supplies and services Two vexing problems in the decade of the 1970s put senior management attention on the supply function: ◦ international shortage of basic raw materials ◦ price inflation
The Evolution of the Supply Function By 1990s firms faced challenges of global “supply chains” and an increased reliance on suppliers ◦ Outsourcing has led to increased reliance on suppliers for key components and services Technological developments in the early 21st century provides expectations for supply chain integration, lower transaction costs and faster response times. ◦ The Internet and B2B e-commerce
The Evolution of the Supply Function• Clerical and tactical • Strategic orientation• Focus on policies and • Global supply procedures chains• Key challenge: • Executive level availability of supply leadership and cost • Key challenge: management Technology and the Internet early early 1900s 21st century
Evolution of the Supply ChainPre 1939 1940-49 1950-69 1970-89 1990-1999 2000-Future Managerial Purchasing Integration intoClerical World War II emphasis strategy corporate strategy Integration with supply networks and information technology
A New Competitive Environment Increased Competition changes buyer/seller balance of power Evolution of competitive environment:60’s/70’s ◦ Marketing strategies capturing loyalty. ◦ Strong engineering, design, and manufacturing functions to support market requirements. ◦ Customers needs translated into products. ◦ Need for high level quality at a reasonable cost. ◦ Need for flexibility and responsiveness.
A New Competitive Environment Concept of Supply Chain Management Emerges Evolution of competitive environment:80’s◦ Need for flexibility and responsiveness 90’s◦ Organizations realized materials and service inputs from suppliers impacted ability to meet customer needs.◦ Resulted in increased focus on supply base and purchasing.
Why Purchasing is ImportantAs companies struggle to increasecustomer value by improvingperformance, many companies areturning their attention to purchasingand to supply management.
Why Purchasing is ImportantResults of Good SupplyManagement:Potential for ProfitabilityOutsourcingImproved product and service qualityEPI/ESI
Major Logistics Activities customer service • parts and service support demand • plant and warehouse site forecasting/planning selection inventory management • purchasing logistics communications • return goods handling material handling • reverse logistics order processing • traffic and transportation packaging • warehouse storage
The Buyer/Planner Concept Combines planning and purchasing functions into one position ◦ Planners: Determine what materials are needed and when ◦ Buyers: Handle sourcing and buying Charged with responsibility for a specific line of inventory Duties may include: establishing schedules, issues and analyzes quotations, places orders, monitors supplier performance, and keeps abreast of market trends, supplier capacities and technologies.
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.”
What are Purchasing and Supply Management? Purchasing is a functional group/activity that supplies the organization with materials. It is often referred to as procurement. Supply Management is a progressive approach to managing supply base and the supply chain.
What is a Value Chain? A value chain is a sequence of business functions in which utility (usefulness) is added to products or services as they move from supplier to end customer Value chains are often viewed like a river--upstream and downstream NOTE: Value Chain discussion draws heavily from Michael Porter, Competitive Advantage--Creating and Sustaining Superior Performance
Primary and Support Activities Primary Activities Inbound logistics Includes activities associated with receiving, storing, and disseminating inputs to support the product or service, including transportation, material handling, warehousing, inventory control, vehicle scheduling, and returns to suppliers
Primary and Support Activities Primary Activities Operations Activities associated with transforming inputs into final form, such as machining, packaging, assembly, equipment maintenance, testing, printing, and facility operations
Primary and Support Activities Primary Activities Outbound logistics Includes activities associated with physically collecting, storing, and distributing a product or service to customers, such as finished goods warehousing, material handling, delivery, order processing, and scheduling
Primary and Support Activities Primary Activities Marketing and Sales Includes activities associated with providing a means to which buyers can purchase the product and inducing them to do so, such as advertising, promotion, sales force efforts, job quoting, channel selection, channel relations, and pricing
Primary and Support Activities Primary Activities Service Includes activities associated with providing service to enhance or maintain the value of the product, such as installation, repair, training, parts supply, and product adjustment
Primary and Support Activities Primary Activities In any firm, all the categories of primary activities are present to some degree and play some role Key primary activities often differ from industry to industry
Primary and Support Activities Support Activities Firm infrastructure Consists of a number of activities, including general management, planning, government affairs, finance, accounting, legal, and quality management While firm infrastructure is sometimes viewed as overhead, it can be a powerful source of competitive advantage
Primary and Support Activities Support Activities Human resource management Consists of activities involved in recruiting, hiring, training, developing, and compensating all types of personnel
Primary and Support Activities Support Activities Technology Development Includes activities typically associated with MIS, engineering, and R&D and involve activities that seek to improve product and processes.
Primary and Support Activities Support Activities Technology Development New product and process development are primary concerns of technology development support activities
Primary and Support Activities Support Activities ◦ Procurement • Involves activities associated with identifying, evaluating, selecting, managing, and developing sources of supply
Primary and Support Activities Support Activities ◦ Procurement Though purchased inputs are commonly associated with primary activities, purchased inputs are present in every value activity, including support activities.
Primary and Support Activities Support Activities -Procurement Examples: Supplies Travel services Media
What is Value Chain Integration? Value chain integration involves bringing together different groups, functions, or organizations, either formally or informally, physically or by information technology, to work jointly and often concurrently on a common business-related assignment purpose
Horizontal Integration Across the Value Chain Examples of how firms integrate across the value chain-- ◦ Committees/groups/teams ◦ Shared and linked information systems ◦ Integrated performance goals/objectives/measures ◦ Strategy development process
Horizontal Integration Across the Value Chain Examples of how firms integrate across the value chain— ◦ Co-location of personnel within and between the organization ◦ Through a process orientation ◦ Informal or ad hoc exchange of information ◦ Shared risk and reward projects
The Opportunities for Contribution of the Purchasing/Supply Function Profit-leverage effect Return-on-assets effect Information source Effect on efficiency Effect on competitive position and customer satisfaction Effect on image Training ground Management strategy and social policy
Characteristics of an Integrated Strategic Procurement and Sourcing Function Executive Leadership Strategic Positioning Executive committee support • External/internal customer focus for integration across • Matrix management company and strategic • High-level positioning - second, third business unit corporate plans or fourth levels Functional Leadership Integration• Company-wide customer- • Cross-functional, cross- focused leadership location teaming• Establish integrated visions • Part of the technology, workers at results and manufacturing and SBU processes planning process• Drives supply base/supplier management strategies company-wide
Characteristics of an Integrated Strategic Procurement and Sourcing Function Supply Base Strategy Supplier Management Quality driven • Focused on supplier development • Joint performance improvement efforts Design standardization • Value focused Concurrent engineering • Total cost improvement Supply base optimization • Supplier benchmarking Commercial strategy emerging Measurement Systems• Customer orientation • Global databases• Total value/cost focused • Historical performance data• Benchmarking with best in • Strategic class • EDI, Internet, EFT, CAD, CAM
Four Pillars of Purchasing and Supply Chain Management Strategies
Professionalism in Purchasing New assignments Education College recruitment Training programs Salary levels Professional associations
Challenges Facing Purchasing B2B e-commerce Supply chain management Measurement Purchase of non-traditional goods and services Contribution to corporate strategy Recognition by senior management
Purchasing Objectives “What makes a department world-class?” Objective 1: Support Operational Requirements ◦ Uninterrupted flow of high-quality material. Objective 2: Manage the Purchasing Process Efficiently and Effectively ◦ Limited resources necessitate best use of resources.
Purchasing Objectives“What makes a department world-class?” Objective 3: Supply Base Management ◦ Develop reliable, high-quality sources of supply. Objective 4: Develop Strong Relationships with Other Functional Groups ◦ Strong cross-functional relationships must exist internally.
Purchasing Objectives “What makes a department world-class?” Objective 5: Support Organizational Goals and Objectives. ◦ Purchasing must follow organizational directives. Objective 6: Develop Integrated Purchasing Strategies That Support Organizational Strategies. ◦ Purchasing’s goals must be aligned with company’s goals
Purchasing’s Span of Control What decisions does Purchasing have legitimate authority to make? ◦ Evaluate and Select Suppliers ◦ Review Specifications ◦ Act as the Primary Contact with Suppliers ◦ Determine the Method of Awarding Purchase Contracts.
Goals of the Purchasing Function 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 competent suppliers Standardize, where possible, the items bought Purchase required items and services at lowest cost
Goals of the Purchasing Function Achieve harmonious, productive working relationships with other functional areas within the organization Accomplish the purchasing objectives at the lowest possible level of administrative costs Improve the organization’s competitive position
The Purchasing CycleThe Purchasing Process as a Cycle consists of five major stages. ◦ Identify user need ◦ Evaluate potential suppliers ◦ Bid, negotiate and select supplier ◦ Purchase approval ◦ Release and receive purchase requirements ◦ Measure supplier performance
Purchasing’s Prime Decision Authority Select the supplier Use whichever pricing method is appropriate Question the specifications Monitor contacts with potential suppliers
Organizing The Purchasing Function Four major areas of specialization within the purchasing department. 1. Sourcing and Negotiating -Identifies potential suppliers. 2. Purchasing Research -Long-range material forecasts -Boundary scanning
Organizing The Purchasing Function Responsibilities and Tasks commonly performed by the purchasing function: -Buying -Expediting and Inventory Control -Transportation -Managing Countertrade Agreements
Organizing The Purchasing Function Four major areas of specialization within the purchasing department. 3. Operational Support and Order Follow-up -Expediting orders -Releasing orders 4. Administration and Support
Organizing The Purchasing Function Responsibilities and tasks commonly performed by the purchasing function. -Insourcing/ Outsourcing -Value Analysis -Purchasing Research/Material Forecasting -Strategic Supply Management -Other Responsibilities
Organizing the Purchasing FunctionSeparating Strategic and Operational Activities Manage relationships with critical suppliers Develop electronic purchasing systems Strategic Sourcing Implement company-wide best practices Activities Negotiate company-wide supply contracts Manage critical commodities
Organizing the Purchasing FunctionSeparating Strategic and Operational Activities Manage transactions with suppliers Use e-systems to obtain standard or indirect items through catalogues Operational Activities Source items that are unique to the operating unit Generate and forward material releases Provide supplier performance feedback
Various Titles of the Chief Purchasing Officer Director of Purchasing VP of Purchasing Manager of Purchasing VP of Materials Management Materials Manager
Purchasing Reporting Relationships Position to Whom the CPO Reports 1988 % 1995 %President 16% 16Executive VP 19 15Senior VP/Group VP * 19Financial VP 7 10Manufacturing/Operations VP 24 15Materials/Logistics VP 8 7Engineering VP 1 1Administrative VP 13 9Other (many of whom were VPs) 12 8
Functions that Report to Purchasing: CAPS Study T. E. Hendrics and J.A. Ogden, Chief Purchasing Officers’ Compensation Benchmarks and Demographics: A 2001 Study of Fortune 500 Companies, Tempe, AZ: Center for Advanced Purchasing Studies, 2002. Function 1988 % 1995 %Scrap/surplus disposal 57 63Materials and purchasing research * 60Inbound traffic 40 51Stores/warehousing 34 41Inventory control 37 41Material planning * 40Outbound traffic 31 39 * category not identified in study
Purchasing Activities Purchasing/buying Purchasing research Inventory control Transportation Environmental and investment recovery/disposal Forecasting and planning Outsourcing and subcontracting Nonproduction/nontraditional purchases Supply chain management
Typical Purchasing Organization Structure - Medium Sized Company Director of PurchasingCommodity Commodity Manager Materials Manager Manager Administration Manager and ProcessesBuyer Buyer Manager Stores/ e-Purchasing Warehouse ManagerBuyer Buyer Manager p-cards Receiving Inspection Manager Manager Purchasing Manager Research Transportation
Placement of Authority Decision making authority exists on a continuum:CENTRALIZED DECENTRALIZED HYBRID
Potential Advantages and Disadvantages of Centralization Disadvantages Advantages • narrow specification and job boredom greater buying specialization • lack of job flexibility ability to pay for talent • corporate staff appears excessive consolidation of requirements - clout • tendency to minimize legitimate coordination of policies and procedures differences in requirements • lack of recognition of unique needs effective planning and research • focus on corporate requirements, not on common suppliers business unit strategic requirements proximity to major organizational • even common suppliers behave decision makers differently in geographic and market critical mass segments firm brand recognition and stature • distance from users reporting line - power • tendency to create organizational silos • customer segments require adaptability strategic focus to unique situations cost of purchasing low • top management not able to spend time on suppliers • lack of business unit focus • high visibility of purchasing costs
Potential Advantages and Disadvantages of Decentralization Disadvantages • more difficult to communicate among business units • encourages users not to plan ahead Advantages • operational versus strategic focus easier coordination/communication • too much focus on local sources - with operating department ignores better supply opportunities speed of response • no critical mass in organization for effective use of local sources visibility/ effectiveness - “whole person syndrome” business unit autonomy • lacks clout • suboptimization reporting line simplicity • business unit preferences not undivided authority and responsibility congruent with corporate preferences suits purchasing personnel preference • small differences magnified • reporting at low level in organization broad job definition • limits functional advancement geographical, cultural, political, opportunities environmental, social, language, currency appropriateness • ignores larger organizational considerations hide cost of supply • limited expertise for requirements • lack of standardization
Potential Advantages of the Hybrid Structure Centralized DecentralizedDisadvantages Advantages Advantages Disadvantages Hybrid structure
Placement of Purchasing Authority (Data from 172 US Firms) Highly Decentralized (1) 7.6% 2.9%Moderately Decentralized (2) 5.2% 5.2% Decentralized with some 19.2%Coordinated Procurement (3) 13.4% Decentralized with some 19.8% Controlled Procurement (4) 18.6% Currently 27.9% Moderately Centralized (5) 32.6% In 5 Years 20.3% Highly Centralized (6) 27.3% Current Average = 4.16 Expected Average = 4.55
Purchasing and Supply Teams Cross-functional teams Teams with suppliers Teams with customers Teams with suppliers and customers Supplier councils - key suppliers Purchasing councils - purchasing personnel only Commodity management teams Consortiums
Team Leader Responsibilities Work with the 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
Team Leader Responsibilities Prevent team domination by a member or function Deal with internal and external obstacles confronting the team Coordinate multiple tasks and manage the status of team assignments Clarify and help define each team member’s role Provide performance feedback to members
Keys for Successful Consortiums Reducing total costs for the consortium members ◦ Through lower prices, higher quality and better services Eliminating and avoiding all real and perceived violations of anti-trust regulations Installing sufficient safeguards to avoid real and perceived threats concerning disclosure of confidential and proprietary information
Keys for Successful Consortiums 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
Co-Locating Purchasing with Internal Customers Operations Engineering Marketing Gain insight into... Gain insight into... Gain insight into... supplier performance material specifications demand planning internal requirements requirements in cost, quality, evolving product and delivery, cycle time process technology new product ideas requirements promotions and capacity, material, and service needs new product planned demand requirements shifts Procurement Support Personnel Formally report to the procurement organizationPurchasing and Supply Chain Management, 3e Monczka,/Trent/ Handfield Thomson Learning Copyright 2005
Companies Look to Purchasing to Add Value A world-class purchasing staff must provide cost-reductions, improve supply chain quality, gain access to new sources of technology, improve cycle time, involve suppliers in product and process development, and streamline processes.
The Essential Steps in the Purchasing Process1. Recognition of need2. Description of need3. Determination and analysis possible sources of supply4. Determination of price and terms5. Preparation and placement of the purchase order6. Follow-up and/or expedite the order7. Receipt and inspection of goods8. Clear the invoice and pay the supplier9. Maintain records and relationships
The Purchasing Process 1. User need for Product or Service Specification YES Statement of Work Approved New product requirement Supplier? Customer order / MRP Traveling req / barcode Purchasing Card Purchase requisition On-line catalog NO Electronic Data Request for Interchange YES Small $ NO Complex YES Quote / Stock Check Amount? Requiremen Information Automated Reorder t Point ? 2. Evaluate NO Suppliers Purchase Order 4. Purchase Approval 3a. Bid and/or Blanket PO Negotiation Purchase Release 3b. Supplier Selection Bill of Lading 6. Update 5. Release and Supplier Packing Slip Supplier Receive Invoice Discrepancy Report Scorecard Input used Product or Kanban To Award Service Acknowledgement Future Match PO and Payment to Business Invoice Supplier E-Procurement Documents Purchasing & Supply Chain Management 3e, Monczka/Trent/Handfield Thomson Learning, Copyright 2005
Some Possible Methods of Reducing Small Order Transaction Costs Stockless buy and systems contracts P-cards Blanket P.O.s EDI- and Internet-based systems Reverse auctions Changing authority levels and bidding practices Single sourcing Outsourcing small value order processing Standardization Batch orders Set requisition schedule Invoice-less payments Users pay directly
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 the requisitioner
Internal Information Flows to Purchasing sales forecasting engineering production control planning new products productioninventory control budgeting Purchasing quality control financial control receiving legal accounting
External Information Flows to Purchasing general sources market product of conditions information supply new product informationsuppliers’ capacity transportation Purchasing availability suppliers’ production rates transportation rates labor conditions sales and prices and use taxes, discounts customs
Internal Information Flows from Purchasing General Management Product Engineering Development Source, product, Economic Product and price information conditions price informationProduction Competitive Marketing Product availability, conditions lead time, price and quality Purchasing Budget commitments Contracts Costs, pricesLegal Orders adjustments Finance placed Stores Accounting
When to use Competitive Bidding Conditions for Competitive Bidding: ◦ High enough volume ◦ Clear specifications ◦ Competitive marketplace ◦ Adequate time for the process ◦ If no preferred supplier exists
When is Negotiating Better? Conditions for Negotiating: ◦ When a criteria for competitive bidding is missing. ◦ When price is not the only deciding factor. ◦ When Early Supplier Involvement is needed. ◦ When supplier can’t determine risks and costs. ◦ When development and production time are lengthy.
Types of Purchases Classifications of Goods and Services: ◦ Raw Materials : petroleum, coal, lumber ◦ Semifinished Products and Components: subassemblies, semi finished products ◦ Finished Products: a complete, saleable product ◦ MRO: maintenance, repair and operating items
Types of Purchases Classifications of Goods and Services: ◦ Production Support Items: packaging materials, tapes, glues, etc. ◦ Services: payroll services, lawn care, snow removal ◦ Capital Equipment: production machinery, new manufacturing facilities ◦ Transportation and Third Party Purchasing: logistics services, management of inbound and outbound materials.
FedEx Strategic Sourcing ProcessSourcing Process Selected Activities • Confirm user requirements Profile the Sourcing • Develop category definition • Define basic characteristics Group • Understand industry and supply markets Select Sourcing Strategy • Assess bargaining position • Evaluate alternative strategies • Select appropriate approaches and techniques Generate Supplier • Identify qualified suppliers Portfolio • Determine supplier value-added capabilities • Develop supplier “short list” Select Implementation • Verify and adjust sourcing strategy Path • Develop implementation plan
FedEx Strategic Sourcing Process Sourcing Process Selected Activities • Plan negotiation strategy • Evaluate supplier proposals Negotiate and Select • Conduct negotiations with suppliers Suppliers • Recommend sourcing decision • Plan and implement transition to new suppliers relationships Operationalize • Link key processes Supplier Integration • Conduct joint process improvement activities Benchmark the • Monitor market conditions Supply Market • Assess new technology and best practices impact • Conduct benchmarking activities • Determine appropriateness forPurchasing & Supply Chain Management 3e, Monczka/Trent/Handfield reexamining categoryThomson Learning, Copyright 2005