Purchasing and Supply Management

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• Purchasing Manager, Buyers, and Purchasing Agent • The Supply Management Process • Purchasing Dollar Responsibility • Potential for Profit • Integrated Supply Management (ISM) • Annual Inventory-Ordering-Transportation Cost • Organizing for Purchasing • Centralized versus Decentralized Purchasing • The Future Organization Concept • The Supply Management Concept

Transcript of Purchasing and Supply Management

  • 1. Purchasing and Supply Chain Managementby W.C. Benton Chapter OnePurchasing and SupplyManagement

2. Learning Objectives1. To understand the purchasing functions contribution to profitability.2. To identify the relationship between the purchasing function and other functional areas.3. To understand the evolution of the basic materials management concept.4. To differentiate between purchasing, materials management, and supply chain management.5. To explore the basic historical development of the purchasing function. 1-2 3. Learning Objectives6. To understand the relationship between the purchasing function and inventory, ordering and transportation costs.7. To learn the advantages and disadvantages of centralized purchasing organizational designs.8. To identify various purchasing organizational designs.9. To learn about purchasing careers1-3 4. Markets in Transition In certain industries, Asian manufacturers dominate theUnited States consumer market. Third-world nationscontinue to attract U.S. manufacturers seeking low wages forlaborious tasks. In addition to significant events that have impacted theworlds business environment, individual firms have had tochange radically in response to burgeoning technologies1-4 5. Background Historically, the management of materials and componentparts has been the most neglected element in the productionprocess. In the past businesses emphasized minimizing the cost ofcapital and labor. The focus on labor was logical because the industrialrevolution had generated many labor-intensivemanufacturers. Producing large standardized batches represented the normfor some manufacturers.1-5 6. Setting the Stage As a functional area within a firm, purchasing and supplymanagement grappled with the stigma of being labeled aclerical function. However, in the past 30 years, purchasing has made manystrides toward shedding this label and has emerged as aviable professional career path. 1-6 7. Setting the Stage for Change Businesses have had to change radically in response toburgeoning technologies The reality is that technology is rapidly displacing labor. During the next decade, the supply management function islikely to contribute to profits more than any other functionin the company. See the next two slides 1-7 8. Purchasing vs. Fabrication-PastRM = Raw MaterialsFG = Finished GoodsCP = Component PartsTriangle = Inventory Storage 1-8 9. Purchasing vs. Fabrication-Present RM = Raw Materials OPR 1 = Operation 1 FG = Finished Goods CP = Component Parts = Inventory Storage1-9 10. Purchasing Managers, Buyers, andPurchasing Agents Seek to obtain the highest-quality merchandise at the lowestpossible purchase cost for their employers. Purchasers buy goods and services for use by their businessorganization. Buyers typically buy items for resale. 1-10 11. Purchasers and Buyers: determine the best value, choose the appropriate suppliers negotiate the best price, and award contracts that ensure that the correct amountof the product or service is received at theappropriate time.1-11 12. Purchasers and Buyers Purchasing managers, buyers, and agents must becomeexperts on the services, materials, and products theypurchase. Purchasing managers, buyers, and purchasing agents evaluatesuppliers on the basis of price, quality, service support,availability, reliability, and selection. Once all of the necessary information on suppliers isgathered, orders are placed and contracts are awarded tothose suppliers who meet the purchasers needs. 1-12 13. Factors That Influence Changing economic and political environments, emergingtechnology versus labor, and the changing nature ofpurchasing and supply chain management as a disciplinemust influence the role of purchasing and supplymanagement .1-13 14. The Supply Management Process In most firms, functional managers within each area makeindependent decisions using similar techniques. The objective is to provide high-quality customer servicewhile minimizing the cost of producing the service. Purpose of supply management is to support thetransformation of raw materials and component parts intoshipped or inventory goods. 1-14 15. Purchasing Dollar Responsibility The cost of acquiring, storing, and moving materials is anincreasingly large portion of the cost of goods sold. Consider the dollar responsibility of one General Motorsmaterials management groups: 1.Parts and (materials) = 10 times direct labor dollars 2.Supply management expenditures = $100 billion 3.Transportation bill = $3 billion 4.Purchasing buys 97 percent of all component parts.1-15 16. Ratios Of Materials Related Costs The following are ratios of materials-related costs that aretypically cited in fabricationassembly industries, forexample, consumer durable goods. Cost of purchase = 80 percent of sales Cost of marketing (sales) = 10 percent of sales Cost of transportation = 10 percent of sales These ratios are increasing for various reasons: material shortages, increased use of synthetic materials, inflation, and thoroughly complex high-value products. 1-16 17. Ratios Of MaterialsRelated Costs These ratios are increasing for various reasons: Material shortages Increased use of synthetic materials Inflation Complex high-value products. Where else is the potential for cost reduction and competitive advantage so great?1-17 18. Potential For Profit All supply management activities have potential for costreduction and hence increased profit. Many opportunities exist to reduce the cost of purchases. If the firms sales remained the same, the effect on profit,given the 2 percent reduction of material cost, would look likethat in Figure 1.4. For each $1 reduction of material cost, there is a $1 increasein profit. The ratio is 1:1. 1-18 19. Potential For Profit What increase in sales would be necessary to increase profitby $10,000 if material costs were not reduced? Let x be the required sales; then 0.5x is the cost of materials and 0.2x islabor cost.Sales = Variable cost + Fixed cost Profitx = 0.5x + 0.2x + 250 + (10+50)x = $1,033,3331-19 20. Integrated Supply Management (ISM) Achieving integration is a challenge. The decisions of a production-inventory control (PIC) managermay maximize utilization of production equipment, yet poorlyserve the requirements of the marketing manager. The decision of the purchasing manager affects not only thepurchasing function, but other materials functions. It is the objective of ISM to manage the relatedconsiderations. Purchasing should consider thenonpurchasing consequences of its decisions.1-20 21. Integrated Supply Management (ISM) Example The significance of average inventory is that inventorycost is a function of average inventory. Inventory is an asset. Working capital is tied up inmaterial rather than an alternative asset. Opportunity costs as well as costs of storing, insuring, and handling are incurred when inventory exists.1-21 22. Annual Inventory Ordering Transportation Costs How can the best decision be madeone that provides thedesired customer service at minimum cost? The customers are manufacturing, sales, distribution, the finalconsumer, and, of course, purchasing, which is the supplierscustomer. The costs of satisfactory customer service are only partlyidentifiable and quantifiable. 1-22 23. Annual Inventory Ordering Transportation Costs The opportunity costs of poor customerservice is also incomplete. Yet decisions mustbe made while recognizing that system widedecision criteria are 1.Multiple 2.Complex 3.Conflicting 1-23 24. A Developing Discipline Supply management is a developing discipline and anarea of management specialization. Measures of customer service are usually expressed interms of the availability of material. Did the plant ship on time? Was the product on the shelfwhen the customer entered the shop? While important, availability is only one dimension ofcustomer service.1-24 25. A Developing Discipline. As these areas develop, purchasing and distribution costaccounting will become part of the accounting-informationsystem. Standard costs to create the time and place utilitieswill be calculable. Budgeting for materials management activities will have thedetail and reliability of budgeting in manufacturing. When supply management costs become more visible, theircontrol becomes more feasible 1-25 26. Organizing for Purchasing Supply coordination involves both structure and designof the organization. In any purchasing organization, two major problemsmust first be considered. 1. The first issue has to do with where the purchasing functionshould be located in the organization. 2. The second issue is, what level of authority should thepurchasing function have? Given the evolution of outsourcing,the purchasing function is expected to gain authority in thecorporate hierarchy 1-26 27. CENTRALIZED VERSUSDECENTRALIZED PURCHASING1-27 28. 1-28 29. Advantages of Centralized Purchasing Centralized purchasing results in lower costs because of theavailability of purchase quantity discounts. If all material uses are coordinated into one major purchase,the supplier will work harder to service the buying firm. Large dollar purchase quantities equals buying power.1-29 30. Advantages of Centralized Purchasing Centralized purchasing promotes the effective use ofpurchasing professionals because it allows the materialsmanager more authority and credibility. Each buyer can easily become an expert on associated buys(commodities and non-commodities) Expertise will bedeveloped when there is a critical mass. Toyota, Dell, Wal-Mart, and IBM all use centralizedpurchasing and have in-house expertise ranging from engineparts to rental cars to office equipment to pharmaceuticals1-30 31. Advantages of Centralized Purchasing Centralized purchasing enables the buying firm to do a betterjob monitoring various changes throughout the industry. Centralized purchasing also lends itself to periodic (1) revi