Purchasing and Supply Management Organization

Purchasing and Supply Purchasing and Supply Management OrganizationManagement Organization

Chapter 5Chapter 5

Supply Integration Defined

Professionally managing suppliers and Professionally managing suppliers and developing close working relationships developing close working relationships with different internal groupswith different internal groups To become more closely integrated with To become more closely integrated with

other internal and external functions in other internal and external functions in order to develop capabilities that will lead order to develop capabilities that will lead to improved competitive performanceto improved competitive performance

22

Relationship Management Skills

Ability to …Ability to … Act ethicallyAct ethically Listen effectivelyListen effectively CommunicateCommunicate Use creative problem-solvingUse creative problem-solving Drive relationshipsDrive relationships

33

Customer Management

Customer ServiceProduct availability

Lead time performanceService Reliability

Customer SatisfactionMeet or exceed customer

expectations

CustomerSuccess

Assist customersin meeting objectives

How to Achieve Integration

Cross-functional teamsCross-functional teams Information systemsInformation systems Integrated performance objectives and Integrated performance objectives and

measuresmeasures Process-focused organizationsProcess-focused organizations Co-location of suppliers and customersCo-location of suppliers and customers Buyer or supplier councilsBuyer or supplier councils Steering committeeSteering committee

55

Communication Flows and Linkages(internal integration)

66

Operations

Traditional close relationship through Traditional close relationship through direct supportdirect support

Development of global operations Development of global operations strategystrategy

Sales and operations plan (S&OP)Sales and operations plan (S&OP) Often co-locatedOften co-located

77

Quality Assurance

Increasing in importanceIncreasing in importance Growing % of outsourced requirementsGrowing % of outsourced requirements Supplier quality training and Supplier quality training and

developmentdevelopment Supplier process capability studiesSupplier process capability studies Joint corrective action planningJoint corrective action planning

88

Engineering

One of most important, yet challenging, One of most important, yet challenging, linkageslinkages

Working together on joint product and Working together on joint product and process development activitiesprocess development activities

Co-locating buyer in engineeringCo-locating buyer in engineering Co-opting engineers to work in supply Co-opting engineers to work in supply

managementmanagement

99

Engineering

Looking for new sources of technologyLooking for new sources of technology Ongoing and direct communicationOngoing and direct communication Identifying, assessing, and qualifying Identifying, assessing, and qualifying

technically-capable supplierstechnically-capable suppliers Dealing with quality risks in new Dealing with quality risks in new

productsproducts Ongoing technical support and serviceOngoing technical support and service

1010

Accounting and Finance

Much communication is tactical and Much communication is tactical and electronicelectronic

Highly focused on cost reductionHighly focused on cost reduction Inbound material requirementsInbound material requirements Reconciliation of P.O.s, invoices, and Reconciliation of P.O.s, invoices, and

receiving documentsreceiving documents Purchase of capital equipmentPurchase of capital equipment

1111

Accounting and Finance

Developing timely and accurate cost Developing timely and accurate cost data on supplier performancedata on supplier performance

Provide total cost dataProvide total cost data Often basis for make-or-buy decisionsOften basis for make-or-buy decisions

1212

Marketing/Sales

Voice of the customerVoice of the customer New product ideasNew product ideas Sales forecasts Sales forecasts production plans production plans

1313

Legal

Contractual issuesContractual issues Patent ownership of new technologiesPatent ownership of new technologies Intellectual property issuesIntellectual property issues Product liability claimsProduct liability claims Antitrust issuesAntitrust issues Long term contracts with escape Long term contracts with escape

clausesclauses Supplier nonconformance issuesSupplier nonconformance issues

1414

Environmental Management,Health, and Safety

Environmental management systemEnvironmental management system Supplier sustainabilitySupplier sustainability ISO 14000ISO 14000 Hazardous waste handling and Hazardous waste handling and

transportationtransportation

Health issuesHealth issues Safety issuesSafety issues

1515

Benefits of CFT s(Cross-functional Team)

Reduced time to complete tasksReduced time to complete tasks Increased innovationIncreased innovation Joint ownership of decisionsJoint ownership of decisions Enhanced communication among Enhanced communication among

functions or organizationsfunctions or organizations

1616

Benefits of CFTs

Realizing synergies by combining Realizing synergies by combining individuals and functionsindividuals and functions

Better identification and resolution of Better identification and resolution of problemsproblems

Need to build internal relationshipsNeed to build internal relationships

1717

Potential Drawbacks of CFTs

Use does not guarantee successUse does not guarantee success Team process lossTeam process loss Negative effects on individual membersNegative effects on individual members Poor team decisionsPoor team decisions

GroupthinkGroupthink Artificial consensusArtificial consensus

1818

External Integration

Supply management is face of Supply management is face of organization to its supply baseorganization to its supply base

Acts as liaison on multiple frontsActs as liaison on multiple fronts MaterialsMaterials New technologyNew technology Market informationMarket information ServicesServices

Suppliers, government, and local Suppliers, government, and local communitiescommunities

1919

External Integration

Supply management is face of Supply management is face of organization to its supply baseorganization to its supply base

Acts as liaison on multiple frontsActs as liaison on multiple fronts MaterialsMaterials New technologyNew technology Market informationMarket information ServicesServices

Suppliers, government, and local Suppliers, government, and local communitiescommunities

2020

Suppliers

Primary external linkagePrimary external linkage Maintain open and continuous Maintain open and continuous

communicationcommunication Supplier selection and managementSupplier selection and management Non-supply management should not Non-supply management should not

deal with suppliers without knowledge deal with suppliers without knowledge of supply managementof supply management

2121

Government

International countertrade issuesInternational countertrade issues Negotiation with foreign governmentsNegotiation with foreign governments Compliance with foreign laws regarding Compliance with foreign laws regarding

contracts and supplierscontracts and suppliers Negotiation with foreign governmentsNegotiation with foreign governments Consult with appropriate agencies Consult with appropriate agencies

regarding regulatory complianceregarding regulatory compliance

2222

Local Communities

Control of substantial budget which Control of substantial budget which could affect local economiescould affect local economies

May affect certain social goalsMay affect certain social goals Sourcing from local suppliersSourcing from local suppliers Awarding contracts to minority suppliersAwarding contracts to minority suppliers Ethical issuesEthical issues

2323

Collaborative Buyer-Supplier Relationships

DefinitionDefinition Process by which two or more parties Process by which two or more parties

adopt high level of purposeful cooperation adopt high level of purposeful cooperation to maintain trading relationship over timeto maintain trading relationship over time

Relationship is bilateralRelationship is bilateral Mutual commitment to futureMutual commitment to future Balanced power relationshipBalanced power relationship Procedures for managing conflictProcedures for managing conflict

2424

Advantages of Closer Relations

TrustTrust Not take advantage of each otherNot take advantage of each other Share sensitive dataShare sensitive data Early supplier involvementEarly supplier involvement

Long-term contractsLong-term contracts Incentive for supplier investment in new Incentive for supplier investment in new

plant and equipmentplant and equipment Joint development of new technology, risk-Joint development of new technology, risk-

sharing, and supplier capabilitiessharing, and supplier capabilities

2525

Obstacles to Closer Relationships

ConfidentialityConfidentiality May create a direct competitorMay create a direct competitor

Limited interest by suppliersLimited interest by suppliers Legal barriersLegal barriers

Antitrust issuesAntitrust issues

Resistance to changeResistance to change Traditional “arm’s-length” approachTraditional “arm’s-length” approach

2626

P/SM Organizational Structure:Influences and Direction

2727

Trends DrivingTrends DrivingP/SM StructureP/SM Structure

Strategies and Strategies and ObjectivesObjectives

OrganizationalOrganizationalDesignDesign

• Cost containment

• Risk management

• Globalization

• Technology

• Collaboration

• Customer intimacy

• Increased P/SM

responsibilities

• Increased P/SM skills

•Support organization

strategies

•Manage cost/price

•Supplier relationships

•Supplier integration

•Supplier innovation

•Manage global supply base

•Centralized/Center-led•Decentralized

OrganizationalOrganizationalEnablersEnablers

•Business unit leaders•Global buying groups•Strategic sourcing groups•Lead division buying•Consortiums and GPOs•e-sourcing/ERP suites

Business UnitBusiness UnitEnablersEnablers

•CFTs•e-sourcing/ERP suites

Organizational Structure

Location of formal power for Location of formal power for purchasing decisionspurchasing decisions

Division of purchasing tasks and Division of purchasing tasks and activitiesactivities

Scope of jobs in supply management Scope of jobs in supply management functionfunction

2828

Organizational Structure

Patterns of communication and Patterns of communication and workflowworkflow

Relative job satisfaction of P/SM Relative job satisfaction of P/SM employeesemployees

Overall effectiveness of P/SM in Overall effectiveness of P/SM in meeting its goals and objectivesmeeting its goals and objectives

2929

Centralization vs. Decentralization

CentralizedCentralized Chief purchasing officer has authority for Chief purchasing officer has authority for

majority of purchase expendituresmajority of purchase expenditures

Center-ledCenter-led Centralized approach for common items and Centralized approach for common items and

decentralized approach for unique onesdecentralized approach for unique ones

DecentralizedDecentralized Divisional, business unit, or site levels have Divisional, business unit, or site levels have

authority for majority of purchase authority for majority of purchase expendituresexpenditures

3030

Drivers of Organization Structure (Authority)

Firm’s overall business strategyFirm’s overall business strategy Responsiveness Responsiveness decentralized decentralized Efficiency Efficiency centralized centralized

Similarity of purchasesSimilarity of purchases Similar Similar centralized centralized Dissimilar Dissimilar decentralized decentralized

3131

Drivers of Organization Structure

Total purchase dollar expendituresTotal purchase dollar expenditures Small Small decentralized decentralized Large Large centralized centralized Role of e-sourcing softwareRole of e-sourcing software

Overall philosophy of managementOverall philosophy of management Highly controlled Highly controlled centralized centralized Less control Less control decentralized decentralized

3232

Advantages of Centralization

Leverage purchase volumesLeverage purchase volumes Reduced duplication of supply Reduced duplication of supply

management effortmanagement effort Coordination of purchasing strategies Coordination of purchasing strategies

and plansand plans

3333

Advantages of Centralization

Coordination and management of Coordination and management of company-wide purchasing systemscompany-wide purchasing systems

Development of specialized expertiseDevelopment of specialized expertise Meet corporate goals and manage Meet corporate goals and manage

company-wide changecompany-wide change

3434

Advantages of Decentralization

Speed and responsivenessSpeed and responsiveness Understanding unique operational Understanding unique operational

requirementsrequirements New product development supportNew product development support Ownership of decisions affecting Ownership of decisions affecting

purchasespurchases

3535

Organizational Mechanisms to Enable Center-Led Structure

3636


Strategic sourcing groupsStrategic sourcing groups Often located by sourcing regionOften located by sourcing region Use of a common ERP system for spend Use of a common ERP system for spend

managementmanagement

Lead division buyingLead division buying Largest using division takes lead in Largest using division takes lead in

contracting for common itemscontracting for common items

3737


Business unit leadersBusiness unit leaders Located at corporate headquartersLocated at corporate headquarters Interface with business unit CFTsInterface with business unit CFTs Provide expertise and inputProvide expertise and input

Global sourcing councilsGlobal sourcing councils Worldwide commodity sourcing teamsWorldwide commodity sourcing teams Global coordination for key itemsGlobal coordination for key items

3838


Regional buying groupsRegional buying groups Used when geographic concentration Used when geographic concentration

existsexists Responsible for large volume common Responsible for large volume common

itemsitems

Corporate purchasing councilsCorporate purchasing councils Share expertise and develop common Share expertise and develop common

sourcing strategiessourcing strategies

3939


Corporate steering committeesCorporate steering committees Tend to be more advisory in nature than Tend to be more advisory in nature than

corporate purchasing councilscorporate purchasing councils Develop sourcing strategiesDevelop sourcing strategies

Consortiums and group purchasing Consortiums and group purchasing organizations (GPOs)organizations (GPOs) Spend category expertise and contract Spend category expertise and contract

management skillsmanagement skills Usually within single industryUsually within single industry

4040

Formal Organizational Structure

Details assignment of work along with Details assignment of work along with authority that accomplishes those authority that accomplishes those responsibilitiesresponsibilities

Helps define how firm communicates Helps define how firm communicates and integrates decision making across and integrates decision making across groups comprising organization, i.e., groups comprising organization, i.e., coordinationcoordination

4141

To Whom Does Purchasing/Supply Management Report?

Upper-level function reporting to Upper-level function reporting to executive vice presidentexecutive vice president

Mid-level function reporting to Mid-level function reporting to executive one level below executive executive one level below executive vice presidentvice president

Lower-level function reporting at least Lower-level function reporting at least two levels below executive vice two levels below executive vice presidentpresident

4242

P/SM as Upper-Level Function

4343

P/SM as Mid-Level Function

4444

P/SM as Lower-Level Function

4545

Factors Affecting P/SM’s Position in the Organization’s Hierarchy

HistoryHistory Type of industryType of industry Total value of goods and servicesTotal value of goods and services Other factorsOther factors

Founding philosophyFounding philosophy Type of purchased materialsType of purchased materials Ability to influence company’s Ability to influence company’s

performanceperformance

4646

Scope of P/SM Job Function

Sourcing and negotiatingSourcing and negotiating Market analysis and researchMarket analysis and research Operational support and order follow-Operational support and order follow-

upup AdministrationAdministration

4747

P/SM Job Tasks

BuyingBuying ExpeditingExpediting Inventory controlInventory control TransportationTransportation Insourcing/ Insourcing/

outsourcingoutsourcing Value analysisValue analysis

Purchasing Purchasing researchresearch

Materials Materials forecastingforecasting

Supply managementSupply management Other Other

responsibilitiesresponsibilities

4848

Strategic vs. Tactical Purchasing

StrategicStrategic Future-orientedFuture-oriented Managing total costManaging total cost Enhancing valueEnhancing value Minimizing risksMinimizing risks

TacticalTactical Day-to-day challenges required to meet Day-to-day challenges required to meet

current needscurrent needs

4949

Sourcing Activities

StrategicStrategic

• Manage relationships with critical suppliers• Develop electronic purchasing systems• Implement companywide best practices• Negotiate companywide supply contracts• Manage critical commodities

OperationalOperational

• Manage transactions with suppliers• Use e-systems to obtain standard or indirect

items through catalogs• Source items that are unique to operating

unit• Generate and forward material releases• Provide supplier performance feedback

5050

Future Trends inOrganizational Design

Vertical focus Vertical focus horizontal focus horizontal focus No functional silosNo functional silos

Commodity focus Commodity focus process focus process focus Cut across functional boundariesCut across functional boundaries

Flatter hierarchiesFlatter hierarchies Center-led structuresCenter-led structures Rotation of management across Rotation of management across

business units and functionsbusiness units and functions5151

Future Trends inOrganizational Design

Co-location with internal customersCo-location with internal customers Systems capabilitySystems capability

Flow of goods information and processes Flow of goods information and processes from suppliers to final customersfrom suppliers to final customers

Open information channelsOpen information channels Virtual social networkingVirtual social networking

5252

Future P/SM Organizations

5353

Documents

Purchasing and Supply Management Organization