Supply Chain Chapter 2: Purchasing & Supply Management

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1. What is Purchas- *Purchasing (aka Sourcing)*-

ing? Obtaining merchandise, capital equipment; raw materials,
services, or maintenance, repair, and operating (MRO)
*Purchasing aka supplies in exchange for money or its equivalent
Sourcing*
*Contracting* - the term normally used for the *acquisition
*Contracting* of services*

*Supply Manage- *Supply Management* - the term used to encompass *all

ment* activities in acquiring goods and services*

2. Who is Purchas- *Merchant Buyers* -

ing? *Wholesalers, Distributors and retailers* who purchase
*completed product for resale*
*Merchant Buy-
ers* *Industrial Buyers* -
Purchase *raw materials, services, capital equipment*, &
*Industrial Buy- maintenance, repair, and operating *(MRO)* supplies to
ers* *produce another product or service*

3. The Role of Pur- 1. Ensure *uninterrupted flows of products* at the *lowest

chasing total cost*

*The primary 2. Improve *quality of the finished goods* produced

goals of purchas-
ing are to:* 3.Optimize *customer satisfaction.*

4. The Role of Pur- -Actively seeking better materials and reliable suppliers
chasing
-Working closely with strategic suppliers to improve quality
*Purchasing con- materials
tributes to these
objectives by:* -Involving suppliers and purchasing personnel in new
product design and development efforts.

5. *Profit Leverage A decrease in purchasing expenditures directly increases

Effect* profits before taxes, assuming no decrease in quality or
other costs

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6. *Return on As- Improving profit for a set of assets or reducing asset
sets (ROA) Ef- requirements to produce the profit both improve ROA
fect*
Formula: Profit/Assets

7. *Inventory Increased inventory turnovers indicates improved utiliza-

Turnover Effect* tion of space and inventory levels and reduced impact of
inventory obsolescence

Formula: COGS/Inventory

8. The Purchasing *Material Requisition*

Process
*Supplier Determination*

*Issue Purchase Order*

*Receive, Inspect, Pay*

9. Material Requisi- Identify need to acquire product or service (quantity &

tion price)

10. Supplier Deter- Identify potential suppliers. Issue:

mination (RFI, RFP, RFQ)
Select supplier
Set up supplier

11. Issue Purchase - Determine flow of information & goods.

Order - Establish terms of sale.
- State item, quantity, price

12. Receive, Inspect, - Receive product / service & invoice.

Pay - Confirm quantity, quality, performance.
- Match to invoice & pay.
<3 way match>

13. People Involved End User ->

in the Process Buyer ->
Supplier ->
Receiver ->
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End User ->
Accounts Payable

e-Procurement enables process to be automated

Simple -> Integrated

14. Advantages of - Time savings

the e-Procure- - Cost savings
ment System - Accuracy
- Real time
- Mobility
- Tracking
- Management
- Benefits to the suppliers

15. Small Value Pur- Need to *minimize processing costs* for small value pur-
chases Orders: chases:
- Procurement Credit Card
- On line catalogs
- Blanket Purchase Orders
- Accumulating Small Orders to Create a Large Order

16. Supplier Selec- - Product / process technologies

tion - Willingness to share technologies & information
- Quality
The process of - Service
selecting suppli- - Location
ers, is complex - Reliability
and should be - Order System & cycle time
based on multi- - Capacity
ple criteria: - Communication capability
- Cost

17. Supply Base
*Supply Base* - A list of suppliers that a firm uses to
acquire its materials, services, supplies, and equipment.
- Firms emphasize *long-term strategic supplier alliances*
consolidating volume into *one or fewer suppliers*, result-
ing in a *smaller supply base*

18.
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*Preferred sup- - *Early supplier involvement*- Information on the latest
pliers provide:* trends in materials, processes, or designs

- *Information* on the supply market

- *Capacity* for meeting unexpected demand

- *Cost efficiency* due to economies of scale

19. Reasons for Fa- •To establish a good relationship

voring a Single •Less quality variability
Supplier: •Lower cost
•Transportation economies
•Proprietary product or process
•Volume too small to split

20. Multiple Suppli- •Need capacity

ers: •Spread risk of supply interruption
•Create competition
•Information
•Dealing with special kinds of business

21. Reasons for Buy- *Cost advantage:* Especially for components that are
ing or Outsourc- *non-vital* to the organization's operations, suppliers may
ing have economies of scale.

*Cost Advan- *Insufficient capacity:* A firm may be at or near capac-

tage* ity and subcontracting from a supplier may make better
sense.
*Insufficient Ca-
pacity* *Lack of expertise:* Firm may not have the necessary
technology and expertise.
*Lack of Exper-
tise* *Quality:* Suppliers have better technology, process,
skilled labor, and the advantage of economy of scale.
*Quality*

22. Reasons for Mak- -Protect proprietary technology

ing -No competent supplier
-Better quality control
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-Use existing idle capacity
-Control of lead-time, transportation & warehousing cost
-Cost advantage

23. The Make-or-Buy Look at Example

Break-Even
Analysis Total Cost to Make = Total Cost to Buy

If requirement is > B-E, make

If requirement is < B-E, buy

24. Evaluate a Sup- *•More then purchase price*

plier's Total Cost
*•Evaluate all costs to procure*
-Transportation
-Payment terms
-Tooling / Set up

*•Include hidden cost estimates*

-quality
-Reliability (supply issues)
-Order processing costs

*"Total Cost of Ownership"*

25. Purchasing Or- is dependent on many factors, such as *market conditions,

ganization types of materials required, company culture*

26. Centralized Pur- purchasing department located at the *firm's corporate

chasing office* makes all the purchasing decisions.

27. Decentralized *individual, local* purchasing departments, such as *plant

Pushing level*, make their own purchasing decisions.

28. Hybrid Purchas- centralize large national contracts at corporate level and
ing decentralize items specific to business unit at the local
level

29. Advantages of •Consolidate orders

Centralized •Lower transportation costs
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•Leveraging purchase volume
•Avoid duplication
•Specialization
•No competition within units
•Common supply base

30. Advantages of •Close knowledge of requirements

Decentralized •Local sourcing
•Relationships
•Less bureaucracy
•Customization

31. International *Opportunity* to evaluate quality, cost, and delivery perfor-

Purchasing/Glob- mance in different countries
al Sourcing *Challenges* - Requires skills and knowledge to deal with
international suppliers, logistics, taxes, communication,
political environment, and other issues:

*•Import broker or sales agent* - specializes in handling

the steps needed to import, performs service for a fee
*•Import merchant or Trading company* - buys the goods,
imports and sells to buyers
*•Tariff*- Tax (Duty) imposed by the government on prod-
ucts imported
*•Non-Tariff barriers to international trade* - Quotas, re-
strictions, embargos, laws, regulations

32. International - WTO is the only international organization dealing with

Trade the global rules of trade between nations.
Organizations & - Its main function is to ensure that *trade flows as smooth-
Agreements ly, predictably and freely as possible. The result is assur-
ance.*
1.*World Trade - Currently = *160 members* (Yemen - June 2014)
Organization - Based on the *multilateral trading system (WTO's agree-
(WTO)* ments) negotiated and signed by the member nations
and ratified in their parliaments.* These agreements are
the legal ground rules for international commerce. Essen-
tially they are contracts guaranteeing member countries
and their businesses important trade rights. They also

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bind those governments to keep their trade policies within
agreed limits to everybody's benefit.

33. 2.North Ameri- *2.North America Free Trade Agreement (NAFTA)*

ca Free Trade -Implemented January 1, 1994 between US, Mexico &
Agreement (NAF- Canada
TA) -Eliminated tariffs between the countries

3.European *3.European Union (EU)*

Union (EU) -Created May 9, 1950
-Act as a single market to compete with larger economies
-28 member countries
-Euro is used in 19 of the 28 EU members

34. Procurement for • *Competitive bidding* - contract is usually awarded to

Government & lowest priced responsive & responsible bidder
Non-Profit Agen-
cies • *Sealed Bids* are used to ensure fairness and are
opened in public display
Public Procure-
ment is charac- • *Performance Bonds* - incentive to fulfill contract
terized by: - *Bid or Surety Bonds*- successful bidder will accept
contract
- *Performance Bonds*- work will be on time and meet
specifications
- *Payment Bonds*- protection against 3rd party liens not
fulfilled by bidder

35. Special Rules for *Federal Acquisition Streamlining Act (1994)* removed
Government & restrictions on purchases less than $100,000. <$2,500 ->
Non-Profit Pro- no bid
curement:
*Small Business promotion* - purchases between $2,500
*Federal Acquisi- and $100,000 are reserved for small business (<100 em-
tion Streamlining ployees) and advantages are given to minority owned
Act (1994)* businesses.

*Small Business *Buy American Act (1933)* - US government purchases

promotion* and 3rd party purchases using federal funds must buy

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domestically produced good if the price is not more than
*Buy American a certain differential above the foreign good
Act (1933)*
*Green Purchases*- a variety of federal, state, and local
*Green Purchas- statutes and executive orders require environmental and
es* human health considerations when making purchases

36. General Ser- Establishes contracts for products *purchased by govern-

vices Adminis- ment agencies.* About 25% of government purchases. Go
tration (GSA) to: www.gsa.gov
Best Pricing rules

37. State and Local - WSCA (Western States Contracting Alliance)

Contracts and
buying groups - National Intergovernmental Purchasing Alliance Compa-
ny (National IPA)

- Individual state contracts

- Local government entities can use any of the above

38. *Strategic Sourc- *1.Backward vertical integration*

ing* Decisions 1.acquiring sources of supply

*Backward Verti- *2.Forward vertical integration*

cal Integration* 1.acquiring channel partner operations.
*Forward Vertical
Integration* 3. *Outsourcing* - Taking in house activities / operations
*Outsourcing* and deciding to purchase from suppliers instead. Out-
sourcing has become a key method to *reduce costs and
increase flexibility.*

39. Outsourcing Pro- - Concentrate on core capabilities

grams - Increase capabilities in the area being outsourced
- Reduce staffing levels (not just labor arbitrage)
Outsourcing al- - Accelerate reengineering efforts
lows an organiza- - Reduce risk and management dilution
tion to: - Improve flexibility.

40.
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Risks associated -Loss of control / loss of intellectual property
with Outsourcing -Increased reliance on suppliers
include: -Increased need for supplier management
-Public perception issues

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