Chapter 41 Purchasing and Supply Management Dr. Stephen H. Russell Goddard School of Business and...

Chapter 4 1

Purchasing and Supply

Management

Dr. Stephen H. Russell

Goddard School of Business and Economics

Weber State University

2

Course Introduction

Me You Syllabus

Chapter 4 3

Chapter 1

Introduction to Purchasingand Supply Management

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Types of Purchasing

Retail Buying Industrial Buying* Buying for Institutions Public Sector Purchasing

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Categories of Industrial Purchases

• Raw Materials

• Components and subassemblies

• Finished products

• MRO supplies

• Packaging materials

• Services

• Capital assets

• Transportation

Direct Materials

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The Logistics Model

Manufacturing

Firm

Warehouse

Distribution

Centers

Suppliers Retail Stores

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The Logistics Model

Manufacturing FirmWarehous

e

Distribution

Centers

Suppliers Retail Stores

Inbound Logistics Outbound Logistics

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Mother Earth to consumer . . .A Supply Chain

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Place Utility

Form Utility

Time Utility

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Materials and products

Information

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Materials and products

Information

A supply chain is the integration of sequentially-related firms’ inbound and outbound logistics, together with operations (manufacturing and service), and supporting information systems.

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Understanding Terms

Supply Chain

Logistics Inbound Logistics or

Materials Management

Purchasing or Procurement}

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Understanding Terms

Supply Chain

Logistics Inbound Logistics or

Materials Management

Purchasing or Procurement} Enhanced

becomesSupply Management—also called Strategic Sourcing

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Understanding Terms

Purchasing Procurement Supply Management (also called

Strategic Sourcing) Materials Management Supply Chain Management

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Supply Management as compared to Purchasing

Supply Management is Purchasing +

EPI + ESI + CFT + Supplier development + Long-term contracts with world-class suppliers

Under supply management, partnerships (or strategic alliances) based on mutual trust are formed with key suppliers and these suppliers are viewed as extensions of the firm.

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Materials Management Definition - Materials management is the

planning and control of the flow and stock of materials to support production.

Materials Management Activities Materials planning and scheduling Purchasing Transportation Warehousing Inventory control Salvage and scrap disposal

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Materials Management Activities Materials planning and scheduling Supply Management Transportation Warehousing Inventory control Salvage and scrap disposal

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Materials Management Activities Materials planning and scheduling Strategic Sourcing Transportation Warehousing Inventory control Salvage and scrap disposal

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Materials Management Definition - Materials management is

Inbound Logistics. on Materials Management Activities

Materials planning and scheduling Supply Management Transportation Warehousing Inventory control Salvage and scrap disposal

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Course Theme

Cost Quality Sales Profits Product

development time

Technologies and innovation

Customer service Competitive

advantage

Supply management can have a major impact on organization success by influencing:

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Requirements for a field to be classified as a Profession Scientific principles and intense preparation

required of practitioners Scholarly body of literature Professional organization of high repute Certification program Requirement for continuing education Code of ethics

Supply Management is clearly a profession!

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Purchasing through the years

Clerical Purchasing Arms length relationship with suppliers Adversarial: Win-Lose Price is the key factor Short term contracts; lots of supplier

switching Emphasis is on competition Buyers are “paper pushers” (clerks)

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Managerial Purchasing (1970s ) Purchasing is now viewed, not as a cost

center, but as a value contributor Supplier partnerships Long-term contracts Quality, service, and price considerations Negotiation as well as competitive bidding

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Purchasing through the years Strategic Sourcing (Supply Management)

[2000 ] Rationalization of the supplier base Long-term strategic alliances with key suppliers Institutional trust Emphasis is not on a specific contract but on the

relationship Senior Management involvement e-Technologies Relationship-specific capital investment

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Strategic Sourcing (Supply Management)

In short, Strategic Sourcing is capturing world-class suppliers and building alliances with them.

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Types of Supplier Relationships

• Transactional—emphasis is on price

• Partnership—supplier is viewed as a resource

• Strategic Alliance—supplier is critical to the success of the firm and is viewed as a part of the business enterprise

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Trust levels

Trust

Transactional

Partnership

Strategic Alliance

Personal Trust

Institutional Trust

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Which type of relationship is appropriate? Many suppliers of a not-very-differentiated material?

T Short-term need for a material or service? T Long-term requirement for a professional service from

a capable supplier? P Found a world-class supplier interested in a mutually

beneficial long-term contract? P or A See potential to develop a supplier into a highly

capable source? P Do you require a great deal of flexibility or

responsiveness from a supplier? P or A Is a material critical to your business? Is a supplier

strategic to your business? A

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Why Purchasing is Important

Materials is a logical cost-reduction area Value-added contributions Purchasing as a profit producer Profit-Leverage Effect Return on Investment Effect

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Materials is a logical cost-reduction area

Purchased materials: the biggest element of cost in manufacturing industries

Materials/Sales Revenue

Manufacturing Industries 55%

Services Industries 30%

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Industry Materials/Sales RevenuePetroleum 76%Automobile 70%Wood Products 61%Textile Mills 59%Food Manufacturing 59%Machinery 50%Electrical Equipment 49%Computers and electronics 44%

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Cost Quality Sales Profits Product

development time

Technologies and innovation

Customer service Competetive

advantage

Value-added contributions

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Purchasing as a profit producer

Profit = Revenues - Cost

1. Purchasing’s impact on revenues

2. Purchasing’s impact on costs

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Profit-Leverage Effect

A $100,000 increase in sales generates an $8,000 increase in profits (assuming an 8% margin)

A $100,000 reduction in material costs will generate a $100,000 increase in profits.

A $1,250,000 increase in sales generates the same increase in profits as a $100,000 reduction in materials costs (in this example)

THEREFORE, in this example, the Profit-Leverage Effect is . . .

5.12000,100$

000,250,1$

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Return on Investment Effect

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Return on Investment Effect

Profit Margin X Asset T.O. Ratio = ROI

ROIAssets Total

SalesX

Sales

IncomeNet

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Return on Investment Example

16.000,500$

000,000,1$

000,000,1$

000,80$X

1.

2. Assume: Material costs are 50% of Sales Revenue; Inventory is $150,000 of the $500,000 in total assets.

Further assume that Supply Management has been able to obtain a 10% reduction in material costs. This means that money tied up in inventory will drop to $135,000 and that Net income increases by 10% of 50% of $1,000,000.

ROIAssets Total

SalesX

Sales

IncomeNet

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Return on Investment Example

16.000,500$

000,000,1$

000,000,1$

000,80$X

268.000,485$000,000,1$

000,000,1$000,130$ X

A 10% reduction in materials costs increases ROI by 67.5%, in this example

1.

2.

ROIAssets Total

SalesX

Sales

IncomeNet

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Four Enablers of Excellent Supply Management

Capable Human Resources

Proper Organizational Design

IT Performance Measurement

•Team skills

•Manage Relationships

•Cost Mgt Tech

•E-commerce

•Negotiation skills

•Contract management experience

• Other

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•Team skills


•Cost Mgt Tech

•E-commerce



• Other

•Centralized

•Decentralized

•Purchasing Councils

•Co-location of buyers with users

•CFTs

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•Team skills


•Cost Mgt Tech

•E-commerce



• Other

•Centralized

•Decentralized



•CFTs

•Requirements Planning

•B2B

•Inventory visibility

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•Team skills


•Cost Mgt Tech

•E-commerce



• Other

•Centralized

•Decentralized



•CFTs

•Requirements Planning

•B2B

•Inventory visibility

•Suppliers

•Supply Management function

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Let’s move on . . .

Chapter 41 Purchasing and Supply Management Dr. Stephen H. Russell Goddard School of Business and...

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