Ch01 Purchasing Supply Management

8/3/2019 Ch01 Purchasing Supply Management

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1OPRE 6371 – Purchasing & Sourcing Management

OPRE 6371 Purchasing & SourcingManagement

Welcome!




Student LearningOutcomes/Objectives

ü Know the role and function of Purchasing and Sourcingmanagement.

ü Use industry related acronyms,

vernacular, terms, processes,organization structures, jobdescriptions and customer-supplier

relationships in context and completeunderstanding .

ü Realize the importance of Purchasingand Sourcing management in modern

day business.




Student LearningOutcomes/Objectives

ü Learn the major process stepstypically involved in Purchasing andSourcing management.

ü Use basic Purchasing and Sourcing

management decision-making forproblem solving.

ü Demonstrate knowledge of insourcing,

outsourcing, make versus buy, costmanagement and negotiation.

ü Apply Supply Chain principles,techniques and knowledge to solveoperational problems and develop




Purc as ng & Supp y ManagementIntroduction

ü Textbook is 14th editionv Chapter sequence changedv Case Studies added, half of total are newv Focus on decision making in the Supply Chain

strengthened

ü Job of the Supply Manager has changedv Scope of work much more expanded role

Ø Cost containment and improvementØ Revenue enhancement

v Criteria for Supply decisions in three categoriesØ StrategicØ OperationalØ

Additional – growing in relevance, even more complex challenge»Balance sheet & income statement considerations

»Dimensions of risk, environmental and social considerations

ü Combination of theoretical and practicalv Real world scenarios reviewed in case studies




Click to edit Master subtitle style

Chapter 1Purchasing &

SupplyManagement

OPRE 6371 Purchasing & SourcingManagement




Learning Objectives – Chapter 1

ü Review the importance of Purchasing& Sourcing Management

ü Introduce terminology, supply &logistics

ü Size of organization Spend & financialsignificance

ü The nature of the organization

ü Examine Supply qualifications &associations

ü Look at challenges ahead for Supply

Managers


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Corporate Supply IncreasingImportance

ü Increased outsourcing places great relianceon suppliers to respond to end-customerneeds

ü Greater dependence on suppliers for design

and build responsibilities for completesubassemblies and subsystems

ü Increased global competition

ü Development of new product technologies

ü Evolving information systemsü Trend to single sourcing with fewer key

suppliers and strategic supplierrelationships

d i



2000’s Decade Recap – Business &Technology

ü Y2K, 9/11ü AOL / Time Warner

ü Wikopedia

üFacebook, Twitterü Ipod, Iphone

ü Enron, Worldcom

ü2008 Financial meltdownü Bernie Madoff

ü Youtube

http://www.youtube.com/results?search_

“Nothing isCertain any

”

http://www.youtube.com/results?search_query=2000%27s+decade+recap&aq=f

http://www.youtube.com/results?search_query=2000%27s+decade+recap&aq=f



Corporate Supply Opportunities

ü Identify opportunities to reduce unit costsfor products and services

ü Identify opportunities to increase revenue

ü Implement supply initiatives to improve

customer satisfactionü Reduce total costs of ownership (TCO)

ü Improve efficiency/effectiveness of thesupply process

ü Maximize value from suppliersü Work with key suppliers to provide product

and service innovations



Supply Chain Management

“The design and management of seamless and value-added processesacross organizational boundaries to

meet the real needs of the end

customer.

The development and integration of

people and technological resources arecritical to successful supply chainintegration.”*ISM definition



Supply Terminology

ü Often used interchangeably;v Purchasing, procurement, materiel, materialsmanagement, logistics, sourcing, supplymanagement, contracting, supply chainmanagement

v Subtle differences

ü Acronyms and Terms rampant;v ISM, APICS, CSCMP, JIT, DFT, P2P, VSM, CPSM,

C.P.M., CPIM, CSCP, TQM, VA, VE, ROB, T’s & C’s,PP, MM, IM, WM, SAP, BATNA, RFI, RFP, RFQ,

ECN, PO, BPO, MSA, MPA, EDI, ASN, VMI/SMI,ERP, MRP, CRP, S&OP, RFID, SOX, DFX, MRO,B2B, CPO, SBU, ESI, DMAIC, EOQ, PDCA, QFD,SPC, ISO, E2E…

v Lean, Just in Time, Six Sigma, Demand Flow,Value Stream, Value Chain, 2% 15 net 45, 3R’sof sustainability, 7 R’s of supply objectives,

St d d St i th P t



Standard Steps in the ProcurementProcess

1. Recognition of need2. Translation of that need into acommercially equivalent description

3. Search for potential suppliers

4. Selection of a suitable source

5. Agreement on order or contractdetails

6. Delivery of the products or services

7. Payment of suppliers



Further Responsibilities of Supply

üReceiving, inspection, warehousing,inventory control, materials handling,packaging, scheduling, inbound andoutbound transportation, traffic, and

disposalü Customer order fulfillment, customer

satisfaction

ü These extensions led to the termSupply Chain Management



OPRE 6371 – Purchasing & Sourcing Management

What is Supply Chain Management?

ü http://www.youtube.com/watch?v=Mi1QBxVjZ

ü Let’s take a bottle of water to market….v Simple product

http://www.youtube.com/watch?v=Mi1QBxVjZAw

http://www.youtube.com/watch?v=Mi1QBxVjZAw




Supply and Logistics

ü Institute of Supply Management, ISM = oldNational Association of PurchasingManagement, NAPM

ü Council of Supply Chain ManagementProfessionals, CSCMP = old Council of Logistics Management, CLM

ü “Logistics management is that part of SCM

that plans, implements and controls theefficient, effective forward and reverse flowand storage of goods, services, and relatedinformation between the point of origin and

the point of consumption in order to meetcustomers re uirements.”




Major Logistics Activities

ü Customer service

ü Demand

forecasting/planning

ü Inventorymanagement

ü Logistics

communicationsü Material handlingü Order processingü Packaging

ü Parts and service

supportü Plant and

warehouse

site selectionü Purchasingü Return goods

handling

ü Reverse logisticsü Traffic and

transportationü Warehouse storage

Th E l ti f th S l




The Evolution of the SupplyFunction

ü The Handling of Railway Supplies – Their Purchase and Disposition

v Published in 1887

ü Attention in first half of 1900s to

reliable access to supply of rawmaterials, supplies and services

ü Two vexing problems in the decade of

the 1970s put senior managementattention on the supply function:v international shortage of basic raw materialsv price inflation

The Evolution of the Supply





üBy 1990s firms faced challenges of global “supply chains” and anincreased reliance on suppliers

v Outsourcing has led to increased reliance onsuppliers for key components and services

ü Technological developments in theearly 21st century providesexpectations for supply chain

integration, lower transaction costsand faster response times.

v New challenges in the areas sustainability,globalization, supply chain security and riskmanagement

The Evolution of the Supply





early

1900s

early21st

century

ü Clerical and tacticalü Focus on policies and

proceduresü Key challenges:

availability of supply

and cost management

ü Strategic orientationü Global supply chainsü Executive level

leadershipü Key challenges:

Sustainability,security, globalization,risk management




Evolution of the Supply Chain

Pre 1939 1940-49 1950-69 1970-89 1990-1999

2000-2010

2010-Future

Clerical World War II Managerialemphasis

Purchasingstrategy

Integrationinto

corporatestrategyIntegrated supply

Networks andInformationtechnology

Sustainability,security,

globalization, risk

management




1950’s office




2010 Office




StrategicProcurement and Sourcing Function

Executive Leadershipü Executive committee

support for integrationacross company andstrategic business unitcorporate plans

Strategic Positioningü External/internal customer

focusü Matrix managementü High-level positioning -

second, third or fourth

levelsFunctional Leadershipü Company-wide customer-

focused leadershipü Establish integrated

visions workers at resultsand processes

ü Drives supplybase/suppliermanagement strategiescompany-wide

Integrationü Cross-functional, cross-

location teamingü Part of the technology,

manufacturing and SBU

planning process




StrategicProcurement and Sourcing Function

Supply Base Strategyü Quality drivenü Design standardizationü Concurrent engineeringü Supply base optimizationü Commercial strategy

emerging

Supplier Management

ü Focused on supplierdevelopment

ü Joint performance improvementefforts

ü Value focused

ü Total cost improvementü Supplier benchmarking

Measurementü Customer orientation

ü Total value/cost focusedü Benchmarking with best inclass

Systemsü Global databasesü Historical performance

dataü Strategicü EDI, Internet, EFT, CAD,

CAM




Spend & Spend Management

ü Spend is the sum total a companyuses to buy goods and servicesneeded to run the business

ü Spend management is the way in

which companies control and optimizethe money they spend. It involvescutting operating and other costs

associated with doing business. Thesecosts typically show up as "operatingcosts" or SG&A (Selling, General andAdministrative) costs, but can also be

found in other areas and in other




Spend Management

ü Spend Management is meant torepresent a holistic view of theactivities involved in the "source-to-settle" or “procure-to-pay” process.

This process includes spend analysis,sourcing, procurement, receiving,payment settlement and managementof accounts payable and generalledger accounts.

ü Spend Analytics is a hot button insoftware.




Spend Management

ü Whether it is the money spent ongoods or services for direct inputs (rawgoods and materials used in themanufacture of products), indirect

material (office supplies and otherexpenses that do not go into a finishedproduct), or services (temporary andcontract labor, print services, etc.), acompany needs a mechanism bywhich they are not only able to savemoney, but control costs.




Spend Management

ü In an enterprise, spend managementis managing how to spend money tobest effect in order to build productsand services. The term is intended to

encompass such processes asoutsourcing, procurement,e-procurement, and supply chainmanagement.

ü Spend Analytics offers valuableinsights into spending patterns,visibility into contract compliance,

purchasing policy compliance, and can

http://en.wikipedia.org/wiki/E-procurement

http://en.wikipedia.org/wiki/E-procurement




Profit-Leverage Effect

ü Financial impact of the corporatespend I soften illustrated in two ways;

v Profit-Leverage Effectv Return-on-Assets Effect

ü Profit-Leverage Effect = PurchasingMultiplier

ü Increase in Profit caused by a decreasein Spend

v Direct bottom line impact




Profit-Leverage Effect

ü Example:v $100M sales revenuev $60M purchase (representative 60% of Sales)v $8M profit before taxes (representative 8% net)v If $10% reduction in purchase spend thru cost

savingsØ Save $6MØ Profit increases 75% from $8M to $14MØ So, leverage factor is 75% ($8M x 1.75 = $14M or, $6M/$8M

= .75)

v To achieve $6M increase in Profit by increasing

Sales, at 8% profit margin, would require $75Mincrease in Sales, $75M x .08 = $6Mv So, a 75% increase in sales would be needed to

achieve same level of profit improvementv Which would be more likely to be achieved?




Return-on-Assets Factors

Purchasing’s Operational and




Purchasing s Operational andStrategic Contributions

1. SupplyContribution

Operational

TroublePrevention

StrategicOpportunity

Maximization







DirectBottom-Line

Impact

IndirectEnhancing

Performance

of others







NeutralOperationally

acceptableStrategically

deficientDirectly acceptableIndirectly deficient

PositiveOperationally

acceptableStrategically

acceptableDirectly acceptable

Indirectlyacceptable

NegativeOperationallydeficient

Strategicallydeficient

Directly deficientIndirectly deficient

Differences between Manufacturing




Differences between Manufacturingand Services Organizations

Manufacturingü The largest portion of

needs is generatedby customer needs.

ü The largest portion of spend with supplierswill be on directrequirements which

comprise productssold to customers.

Servicesü The largest portion

of needs is

generated by

capital, servicesand other

requirements

enablingemployees to

provide the service.

ü In retailing the

Opportunities for Contribution of




Opportunities for Contribution of the Supply Function

ü Profit-leverage effectü Return-on-assets effectü Information sourceü Effect on efficiency

ü Effect on competitive position andcustomer satisfaction

ü Effect on organizational risk

ü Effect on imageü Training groundü Management strategy and social

policy

Differentiations for Supply in Public




Differentiations for Supply in PublicOrganizations

Differentiations for Supply in




Differentiations for Supply inPrivate Organizations

Ch ll F i P h i



Challenges Facing Purchasing

ü B2B e-commerce – paperless, E2E

ü Supply chain management – addingvalue

ü Measurement – assess the benefits

ü Purchase of non-traditional goods andservices

v Benefits, real estate, insurance, energy, templabor…

ü Risk Management

ü Contribution to corporate strategyv Sustainability, green, reverse logistics, disposal

ü R iti b i t

Documents

Ch01 Purchasing Supply Management