Purchasing and Supply Management

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Chapter 1

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Key Issues Addressed in Chapter 1

Supply function - description and historic perspective

The Acquisition Process: Main Steps and the 5R’s

Supply Contribution

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 potential contribution of supply to organizational goals and strategies

Operational versus Strategic & Direct versus Indirect

The nature of organizations and the implications for supply

What is Supply Chain?

A Function, A set of Processes, A multitude of Activities

A Group of people, A Department, A group of Interconnected Organizations

Multiple Related Names, Taxonomies and Meanings:

Logistics, Purchasing, Procurement, SC, SCM, Value Chain, Distribution Chain, Supply Network (web)

Complex: Activities, Relations, Context

Definitions

What do we mean, what are we thinking of when we say SC?

Supply Management

“The integration of related functions to provide effective and efficient materials and services to the organization.”

“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.”

Note: The terms purchasing, procurement and supply management are used interchangeably in this text.

Definitions

Supply Chain Management

“The design and management of seamless, value-added processes across organizational boundaries to meet the real needs of the end customer.”1

Value Chain – Porter: Primary and secondary support activities that can lead to competitive advantage

--Institute for Supply Management (ISM) Glossary

Supply Chain

Marketing and

Distribution

Definitions

1Supply Chain Management Definition by Institute for Supply Management

2Value Chain - Porter

Primary and secondary support activities that can lead to competitive advantage

Supply Chain is a subset of Value Chain

The Evolution of the Supply Function

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

Historical Perspective

Transition from Tactical to Strategic position of the Supply Function

early

1900s

Today

Clerical and Tactical

Focus on Policies and Procedures

Key challenges:

Availability of supply,

Cost Management

Strategic orientation

Global supply chains

Executive level leadership

Key challenges:

Risk Management,

TCO,

Sustainability,

Security,

Globalization

Historical Perspective

5 M’s!^

Historical Perspective

Materials,

Manpower,

Machine,

Management,

Money

The 5M’s production factors are important : Materials, Manpower, Machine, Management, Money.

– understand and remember the signification, and the shift in their $ amount and % significance to organizations economics

Steps in the Procurement Process^!

Need recognition

Description: translation of that need into a commercially equivalent (specification)

Search for potential suppliers

Selection of a suitable source(s)

Agreement on order or contract details

Price!

Delivery of products and/or services

Payment of suppliers

Acquisition Process

^ 5 Major Steps:

Establish the Item,

Select the Source,

Set the Price,

Determine the terms and sign the Contract,

Manage the Relation with the supplier

Purchase Order (PO), Purchase Requisition, Receiving Report, Invoice, Payment1,^

Supplier

Purchasing

Internal department

Accounting

Receiving

Purchased

Goods

(4)

Purchase Requisition (1)

P.O. (3)

Acknowledgement

P.O. (2)

Receiving

Reports

(4’)

Purchased

Goods

(4’)

P.O. A.

(3’)

P.O. A.

(3’)

Invoice (4)

Payment (5)

P.O. A.

(3’)

Receiving

Report

(4’)

Acquisition Process

1An “ ‘ “ shows an internal “follow up” in that specific purchasing step

The 5 R’s of Purchasing!^

Right Item and/or Service

Right Quality

Right Quantity

Right Price

Right Time (some include Place and extend the statement to the right Delivery)

Some sources include the Right Source

(see the Procurement Steps)

Acquisition Process

Important

Purchasing’s Operational and Strategic Contributions

Supply Contribution

Operational

Trouble Prevention

Strategic

Opportunity Maximization

Supply Contribution

Direct

Bottom-Line Impact

Indirect

Enhance Others’ Performance

S.C. Impact on Revenue/Sales

Pricing Flexibility (more flexibility for marketing depart.)

Improved Quality (75% of quality problems could be traced back to defects in purchased materials)

Reduced Time to Market, Shorter Cycle Times and Lead Times (relevant for Time-Based Competition)

Customer Satisfaction and Customer Fulfillment Flexibility

Assist in becoming a Supplier of Choice (higher value offer)

Supply Contribution

S.C. Cost Impact

Product Design (70-80% of total cost of ownership is set during the product design process)

Acquisition costs (both items and services)

Processing, Quality, Conversion costs

Non-Value-Added (activities) costs

Downtime and Cycle Time1 costs

Supply Chain Costs (SC processes and activities including suppliers management)

Post Ownership Costs (waste, service, warranty)

Supply Contribution

Cycle time is the total time from the beginning to the end of your process

Profit-Leverage Effect ($ millions) !

Income Statement

Sales: $500

Purchases 300

Labor 35

Overhead 100

Gross Profit $ 65

SG&A1, Interest 40

Profit: $ 25

After 5% Spend Decrease

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

Supply Contribution

1 Selling, General and Administrative Expenses

Return-on-Assets Factors!

Sales – Total Costs (CGS + Other Costs) Total Assets (Current Assets + Fixed Assets)

Supply Contribution

Opportunities for Supply to Contribute to Organizational Success

Increase revenue

Reduce total costs of ownership

Reduce lead times through process efficiencies

Improve customer satisfaction

Identify opportunities for product/service innovations by collaborating with suppliers

Minimize financial, operational and reputational risks

Improve supply chain sustainability performance

Provide information to others in the organization in areas such as market conditions and new products and services.

Supply Contribution

SC and Organization’s Nature

Ownership (figure 1-3)

Public (Gov. – local, state, federal)

Focus on the mission of the organization

Supports the efficiency and effectiveness of the org.

Transparency & Fairness of the supply process

Social aims

Minority support

National security considerations

(mostly services)

SC and Org. Nature

SC and Organization’s Nature

Non Government Organizations – non profit

Strong social focus

Support organizational objectives

More flexibility, less restrictions (compare to gov. org.)

Could operate globally

Private (for profit, fig 1-4)

Identic to Public 1. & 2. (mission and efficiency & effectiveness)

Lower restrictions on supply process – Commerce Law (mainly)

A tool for obtaining and securing competitive advantage

Commitment to shareholders

SC and Org. Nature

Important

SC and Organization’s Nature^

What is delivered: Goods and/ or services; Industry

Batch manufactures (cars, electronics, etc.) SC. Very important

Buying goods & services (50 – 80% of revenue)

Flow industry (oil, chemicals) SC could have a smaller role

Commodity trading group is responsible for the largest % of expenditures of the organization

Service Industry: 25-35% of the revenue goes to outside $ spent

Size: Large vs. Small

Size enables and/or requires specialization

Location, number of sites affects SC organization and structure

Financial - ability to obtain “good deals”, bargain power

Reputation: Good vs not so good reputation

Ability to maintain good relations with world-class suppliers

Access to the best deals and offers

SC and Org. Nature

Factors Affecting Supply Function

Increased outsourcing places great reliance on suppliers

Greater dependence on suppliers for design and build (responsibilities for subassemblies and subsystems Boeing)

Increased global competition requires best value from suppliers for price, quality, delivery and sustainability performance

Development of new technologies

Evolving information systems

Trend to single sourcing and strategic supplier relationships

Greater importance of environmental SC and CSR

Higher focus on Risk management

Closing Remarks

Challenges Facing Supply Function

Managing growth and influence in total spend, span of supply chain activities, involvement in all supply-related decisions, and involvement in strategic corporate activities

Capturing opportunities in the supply chain

Establishing the appropriate set of measures to evaluate the contribution of supply and supply initiatives

Managing operational, financial and reputational risks

Improving supply chain sustainability performance

Integrating technologies in supply processes, including digitization, e-commerce, and artificial intelligence

Closing Remarks

Recap

Supply Chain vs Distribution Chain vs Value Chain

5 M’s

5 R’s

Process Steps (5 major Steps: Item, Source, Price, Contract, Relation)

SC Contributions

Direct vs Indirect

Operational vs Strategic

SC and Organization’s Nature

Chapter Questions: 1; 2; 4; 5; 9; 10