12s-1 Purchasing and Supplier Management

Chapter 12 Supplement

Purchasing and
Supplier Management

Operations Management, Seventh Edition, by William J. Stevenson

McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
12s-2 Purchasing and Supplier Management

Purchasing

• Purchasing is responsible for obtaining

the materials, parts, and supplies and
services needed to produce a product
or provide a service.

Operations Management, Seventh Edition, by William J. Stevenson

McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
12s-3 Purchasing and Supplier Management

Goal of Purchasing
• Develop and implement purchasing
plans for products and services that
support operations strategies

Operations Management, Seventh Edition, by William J. Stevenson

McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
12s-4 Purchasing and Supplier Management

Duties of Purchasing
• Identifying sources of supply
• Negotiating contracts
• Maintaining a database of suppliers
• Obtaining goods and services
• Managing supplies

Operations Management, Seventh Edition, by William J. Stevenson

McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
12s-5 Purchasing and Supplier Management

Purchasing Interfaces

Legal

Operations Accounting

Data
Purchasing
processing

Design

Receiving
Suppliers

Operations Management, Seventh Edition, by William J. Stevenson

McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
12s-6 Purchasing and Supplier Management

Purchasing Cycle
Legal

• Requisition received Operations

Accounting
• Supplier selected
• Order is placed Data
Purchasing process-
• Monitor orders ing

• Receive orders
Design

Receiving
Suppliers

Operations Management, Seventh Edition, by William J. Stevenson

McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
12s-7 Purchasing and Supplier Management

Value Analysis vs Outsourcing

• Value analysis
– Examination of the function of purchased
parts and materials in an effort to reduce
cost and/or improve performance
• Outsourcing
– Buying goods or services from outside
sources rather than making or providing
them in-house

Operations Management, Seventh Edition, by William J. Stevenson

McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
12s-8 Purchasing and Supplier Management

Deciding Factors for Outsourcing

• Cost to make vs. cost to buy

• Stability of demand
• Quality from suppliers
• Maintaining close control
• Idle capacity available

Operations Management, Seventh Edition, by William J. Stevenson

McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
12s-9 Purchasing and Supplier Management

Deciding Factors for Outsourcing

• Lead times for each alternative

• Who has patents, expertise, etc.
• Stability of technology
• Consistency/conflict with current
operations

Operations Management, Seventh Edition, by William J. Stevenson

McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
12s-10 Purchasing and Supplier Management

Factors for Make or Buy Decisions

• Available capacity
• Expertise
• Quality considerations
• Nature of demand
• Cost
• Core elements
• Strategy

Operations Management, Seventh Edition, by William J. Stevenson

McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
12s-11 Purchasing and Supplier Management

Determining Prices

• Predetermined or fixed prices

• Competitive bidding
• Negotiated purchasing

Operations Management, Seventh Edition, by William J. Stevenson

McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
12s-12 Purchasing and Supplier Management

Determining Prices

• Published price lists

– fixed or predetermined prices
• Competitive bidding
– e.g. government purchases of standard goods or
services
• Negotiating
– win-win transaction

Operations Management, Seventh Edition, by William J. Stevenson

McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
12s-13 Purchasing and Supplier Management

Myths of Negotiated Purchasing

• Negotiation is a win-lose confrontation

• Main goal is to obtain the lowest price
• Each negotiation is an isolated
transaction

Operations Management, Seventh Edition, by William J. Stevenson

McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
12s-14 Purchasing and Supplier Management

Centralized vs Decentralized Purchasing

• Centralized purchasing
– Purchasing is handled by one special
department
• Decentralized purchasing
– Individual departments or separate
locations handle their own purchasing
requirements

Operations Management, Seventh Edition, by William J. Stevenson

McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
12s-15 Purchasing and Supplier Management

Suppliers

• Choosing suppliers
• Evaluating sources of supply
• Supplier audits
• Supplier certification
• Supplier relationships

Operations Management, Seventh Edition, by William J. Stevenson

McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
12s-16 Purchasing and Supplier Management

Factors in Choosing a Supplier

• Quality and quality assurance

• Flexibility
• Location
• Price

Operations Management, Seventh Edition, by William J. Stevenson

McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
12s-17 Purchasing and Supplier Management

Factors in Choosing a Supplier

• Product or service changes

• Reputation and financial stability
• Lead times and on-time delivery
• Other accounts

Operations Management, Seventh Edition, by William J. Stevenson

McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
12s-18 Purchasing and Supplier Management

Evaluating Sources of Supply

• Vendor analysis: Evaluating the sources

of supply in terms of price, quality,
reputation, and service

Operations Management, Seventh Edition, by William J. Stevenson

McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
12s-19 Purchasing and Supplier Management

Evaluating Sources of Supply

• Vendor analysis - evaluating the sources
of supply in terms of
– Price
– Quality
– Services
– Location
– Inventory policy
– Flexibility

Operations Management, Seventh Edition, by William J. Stevenson

McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
12s-20 Purchasing and Supplier Management

Supplier as a Partner

Aspect Partner Adversary

Number of suppliers One or a few Many; play one off
Length of Long-term others
relationship Moderately important May be brief
Low price High Major consideration
Reliability High May not be high
Openness Insured at the source Low
Quality High Buyer inspects
Volume of business Proximity may be May be - many suppliers
Location stressed for short lead Widely dispersed
times
Flexibility Relatively high Relatively low

Operations Management, Seventh Edition, by William J. Stevenson

McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
12s-21 Purchasing and Supplier Management

Supplier Partnerships
• Ideas from suppliers could lead to improved
competitiveness
– Reduce cost of making the purchase
– Reduce transportation costs
– Reduce production costs
– Improve product quality
– Improve product design
– Reduce time to market
– Improve customer satisfaction
– Reduce inventory costs
– Introduce new products or services

Operations Management, Seventh Edition, by William J. Stevenson

McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.