Supply Chain Management

Lecture 2
Purchasing and Supply Management

1
 Agenda
• Overview of Enterprise Resource Planning
(ERP)
• Purchasing Process
• Supplier Selection and Supply Base
• Supplier Development
• Supplier integration
The Development of Enterprise Resource Planning (ERP)
Increasing impact on the whole supply

Web-integrated enterprise resource

planning (collaborative commerce,
c-commerce)

Enterprise resource
planning (ERP)
network

Manufacturing resource
planning (MRP II)

Material
requirements
planning (MRP)

Increasing integration of information systems

ERP integrates several systems
Senior management and stakeholders

Strategic
reporting
applications Sales and
Financial
applications marketing
applications

Front-office staff
Back-office staff

Customers
Customers
Suppliers

Delivery and
Operations Integrated logistics
applications database applications

Purchasing and Service

supply applications
applications
HRM applications

Employees Employees
Figure 14.3 ERP integrates information from all parts of the organization
The benefits of ERP

 Because software communicates across all functions, there

is absolute visibility of what is happening in all parts of the
business.
 The discipline of forcing business process-based changes
is an effective mechanism for making all parts of the
business more efficient.

 There is a better ‘sense of control’ of operations that will

form the basis for continuous improvement.

 It enables far more sophisticated communication with

customers, suppliers and other business partners.

 It is capable of integrating whole supply chains including

suppliers’ suppliers and customers’ customers.
Materials requirements planning (MRP) schematic

Master
Customer Forecast
production
orders demand
schedule

Materials
Bills of Inventory
requirements
materials records
planning

Purchase Materials plans Works orders

orders
The process of MRP

Explode the master production schedule.

Identify what parts and assemblies are required.

Check whether the required parts and assemblies are available.

For every part or assembly that is required, but not available, identify
when work needs to be started for it to be made available by its due
date.

Generate the appropriate works and purchase orders.

Repeat the process for the next level of the bill of materials.
 Purchasing Career
– Pay Compared with Other Functions

Chartered Institute of Purchasing & Supply, 2014

 The Role of Purchasing
“… the cost of purchased materials is approximately 54 percent of the
value of shipments for manufacturers. ”

Purchased goods and services as a percentage of cost of goods sold

Source: Van Weele, Purchasing and Supply Chain Management, Cengage, 2014

Remarks: Capex = capital expenditure

The Role of Purchasing Cont.
Ensure
uninterrupted
flows of raw
materials
Cost
Reduction
and Quality
Improvemen
t
Customer
Satisfaction;
Profitability

Innovation

Competitive
advantages

11
 The Role of Purchasing (Cont.)

Purchasing contributes to these objectives by

– Actively seeking better materials and reliable suppliers
– Working closely with the strategic suppliers to improve
quality of materials
– Involving suppliers and purchasing personnel in new
product design and development efforts.

12
What is a purchasing process?
 The Purchasing Process – Manual Purchasing
(Continued)

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14
The Purchasing Process – Manual Purchasing
(Continued)

 Free On Board : the point at which a

seller is no longer responsible for
shipping cost.

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

15
 The Purchasing Process – Manual Purchasing

Suppliers Purchasing Storage/Warehouse Users/Requisition Accounting

START
Materials Materials
Requisition Materials Requisition
No
MR 1 Available? MR 1
MR 2 MR 2
MR 3
Yes

Issue PO
Materials
Requisition
Purchase Purchase MR 1
Order Order MR 2
PO 1 PO 1 Accounting
PO 2 PO 2
PO 3 MR 2 Information
MR File Issue for charging the
PO 4
Materials
Materials + appropriate
department
DO 3
DO 2

Delivery PO File
Order PO 3
DO 1 MR File
DO 2

MR 2

Ship
Materials
MR 2
DO 2 + Accounts Payable
PO 2
Materials Materials +
PO 2
Delivery
Order Delivery
DO 1 Order
DO 1
INV 2

Invoice
INV 1 Invoice
INV 1

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
16
 Roles of 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, resulting in a smaller supply base

17
 Roles of Supply Base
Preferred suppliers provide:
• Product and process technology and expertise to support buyer’s
operations, particularly new product development and value analysis

• Information on latest trends in materials, processes, or designs

• Information on the supply market

• Capacity for meeting unexpected demand

• Cost efficiency due to economies of scale

18
 How Many Suppliers to Use 
Reasons Favoring a Single
Supplier
• To establish a good relationship
• Less quality variability
• Lower cost
• Transportation economies
• Proprietary product or process
• Volume too small to split
Reasons Favoring Multiple
Suppliers
• Need capacity
• Spread risk of supply interruption
• Create competition
• More information
• Dealing with special kinds of
business
• Government procurement to
source from small, local or
women or minority owned
business
19
 Supplier Selection
 How do firms select among potential suppliers?

 Supplier selection requires definition and

evaluation of wide range of factors:
 ‘Hard’ factors: cost, quality, delivery….
 ‘Soft’ factors: capability, complementarity, culture….

 Some factors are more important than others:

weighting system
Total Cost of Ownership/Acquisition

Supplier
Terms

Delivery
Cost
Total cost of
Quality Currency Ownerehip
Cost Exchange
Fees
Maintenance
Ordering Cost
Other
Cost
Costs
Supplier Selection

Cost
Service Quality

Location Supplier Reliability

Selection
Product and
Capacity process
technologies
Willingness
Order to share
system & technologies
cycle time &
information

22
Supplier Evaluation – an Example (Federal Mogul)

Developmental Acceptable Preferred

(0-69) (70-90) (90-100)

SCSS – supplier cost saving suggestions

SCARs - supplier corrective action
requests
PPM – parts per milllon defectdive
Supplier Evaluation and Selection

Supplier Scorecard Used for the XYZ Company

Performance Measure Rating x Weight = Final Value
Technology 80 0.10 8.00
Quality 90 0.25 22.50
Responsiveness 95 0.15 14.25
Delivery 90 0.15 13.50
Cost 80 0.15 12.00
Environmental 90 0.05 4.50
Business 90 0.15 13.50
Total score 1.00 88.25
 IKEA ‘PAX’ Wardrobe System
 Includes wardrobe frame and set of sliding
doors
 Tempered glass represents a significant part of
the total cost and tempered glass is also heavy
and fragile
 One of two major suppliers of PAX wardrobe
doors is Swedish firm Sapa Profiler
 Fittings sourced through IKEA Components in
Slovakia and China (IKEA Components handle
contracts with preferred suppliers)
 Major changes in the sourcing setup over 2003-
2009.
 Supplier Selection Process

Initial Supplier Agree Obtain

Make
Qualification Measurement Relevant
Selection
Criteria Information
 Stage 1: Initial Qualification
 Limited resources reduces possibility of in-depth analysis
of all suppliers. Purchasers therefore often perform a
first cut of potential suppliers.

 Use measures such as:

1. Manufacturing Capabilities
Use of standards (such as ISO 9000 and 14000),
techniques (such as continuous improvement,
statistical process control and vendor managed
inventory), and systems (such as EDI or MRP)
2. Financial Viability (e.g. Dun and Bradstreet ‘Supplier
Qualifier Report)
Stage 2: Agree Measurement criteria

SPEED COST

Criteria
FLEXIBILITY QUALITY

DELIVERY
 Stage 3: Obtain relevant Information
 There are a number of methods to evaluate suppliers,
including:
1. Evaluation from supplier information: More detailed
information from Requests for Quotes (RFQs) or
Requests for Proposals (RFPs). Increasing levels of
detail, cost structures.
2. Supplier visits
3. Use of preferred suppliers: Preferred supplier lists –
possibility of increased volumes and/or new buys.
4. Third-Party Information: E.g. Dun and Bradstreet
 Stage 4: Make Selection
 Effort reflects type of product

 Use of multi criteria decision making models

 Models used to weight selection criteria and aid

selection decision making process

 Examples: Total Cost of Ownership

Analytic Hierarchy Process
Analytic Hierarchy Process (AHP)
 Commonly used method to select suppliers
 Decision making method for prioritising
alternatives when multiple criteria are
considered
 Provides methodology to rank alternatives
 Use pairwise comparisons to express the
relative importance of each criterion versus
another
AHP: An Illustrative Example
Selecting the best supplier “THE GOAL”

“THE
Quality Price Service Delivery
CRITERIA”

S1 S1 S1 S1
“THE
S2 S2 S2 S2 ALTERNATIVES”
S3 S3 S3 S3

S4 S4 S4 S4
 Case study:

‘Rolls Royce Engines

Sourcing & suppliers’
Objectives
• Make the R-R supply chain a source of mutual
competitive advantage

• Make the best choice & use of supplier capabilities

By
• Earlier supplier engagement in technology & product
development
• Creating joint strategies and coordinated development
programmes
Resulting in
• Faster technology development and deployment
• Improved supply chain relationships
 Customer needs
RR chooses to compete by focusing on
technically advanced high value-added
activities, outsourcing lower value activities
Marine

Civil Defence

Energy

Nuclear
 Understanding & integrating technology
acquisition strategy with Suppliers
RR System requirements
Partner Technology Capability
Technology or Aspiration

matching
&
RR Technology Capability
mapping
Themes for
complementary/
joint
programmes
OK for RR? OK for
SC approval? Partner?
Winning combination!
 Early supplier collaboration
contractual agreement
Non Disclosure Agreement Early Supplier Involvement Agreement (ESI)
(NDA). Post project review of supply chain solutions

TRL=7
TRL=7
TRL=6 MCRL=5
MCRL=6 TRL=8
MCRL=4
MCRL=7 TRL=9
TRL=5
-3 EIS-2
EIS
MCRL=8 TRL=9
MCRL=4
MCRL=9
Experimenta EI S
TRL=4
Developmen
l -1
MCRL=4 Pre
TRL=4 S -4 arc
h t P
Vali rod/
EIS
MCRL=3 EI Re
se dati
on
ed Mature Prod
TRL=3 pli u ction
MCRL=3 Ap
TRL=2
TRL=1 MCRL=2
IS -5+
MCRL=1 E ch a r
Rese
sic
Ba

Long-term Agreement
Capability Acquisition Agreement
Post Contract Review Board
Post Technology board decision.
decision.
 What’s in it for suppliers?
 Clarity of RR technology requirements and faster
routes to market
 Opportunity to engage in collaborative programmes
 Joint engagement with academic centres of excellence
 Routes to funding (EU, US, UK, Regional) with RR
sponsorship and engagement
 Supplier owned IP with route to market, through
product sales or license income
 Broad strategic supplier strategy engagement and
transparency in technology themes
Examples of supplier engagement
in technology and product design
and development
Examples include:

Composite cases and

blades aimed at
reduced product weight;

Creation of parts directly

from metallic powder to
optimise buy-to-fly and
reduce non-value
adding production;

Deployment of
advanced machining
technologies to address
product cost
 RR - Next Steps
 Engage in supplier strategy activities

 Mutual agreement that ‘Technology theme’ is part of

Supplier Strategy Programme

 Technology Mapping/Matching workshop – with

Commercial & Technical representation from both sides

 Negotiation of commercial vehicle & detailed Technology

roadmap and creation of background IP ‘register’

 Do programme under technical/commercial leadership

Supplier Development - Activities
• Sharing technology
• Providing performance incentives
• Promoting competition among suppliers
• Providing necessary capital
• Directly involving buyer personnel
– Training
– Process improvement
 Buyer’s Activities- How to start Supplier
Development
Supplier development
A buyer’s activities to improve a supplier’s performance and/or
capabilities based on the following approach –
1. Identify critical products & services
2. Identify critical suppliers
3. Form a cross-functional team
4. Meet with top management of supplier
5. Identify key projects
6. Define details of Agreement
7. Monitor status & modify strategies
 Reference
Further Readings:

• Chapter 2 Purchasing Management & Chapter 3 Supplier Relationship

Management - Wisner, J. D., Leong, G. K. & Tan, K. C. 2012. Supply Chain
Management: A Balanced Approach, South-Western/Cengage Learning

• Chapter 3 Supply Chain Relationships - Mangan, J. and Lalwani, C. 2016. Global

logistics and supply chain management, 3rd Edition., Hoboken : Wiley