session 2 - procurement

8/13/2019 Session 2 - Procurement

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Session 2

Principles of Supply Chain Management:

A Balanced Approach


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Course Outline

2009 South-Western, a division of Cengage Learning 2

Session

No

Topic Description/ Reading(s)

1Introduction to

SCM

Definition, Scope, Element of SCM,

Future Trends in SCM

Reading : Text Book, Chapter 1 (pg.

2-20)

2 ProcurementManagement

Role of Purchasing in org,

Purchasing process, e-procurement,

Sourcing DecisionsMake or Buy,Supplier Selection

Reading : Text Book , Chapter2

(pg. 32-55)


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Review

What is a Supply Chain?

All stages involved, directly or indirectly, in fulfillinga customer request.

Includes manufacturers, suppliers, transporters,

warehouses, retailers, and customers.

Within each company, the supply chain includes

all functions involved in fulfilling a customer

request (product development, marketing,

operations, distribution, finance, customer

service).

Contd


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What is a Supply Chain?

Customer is an integral part of the supply chain

Includes movement of products from suppliers to

manufacturers to distributors, and information, funds,

and products in both directions.

May be more accurate to use the term supply

networkor supply web.

Typical supply chain stages: customers, retailers,

distributors, manufacturers, suppliers.

All stages may not be present in all supply chains

(e.g., no retailer or distributor for Dell).


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Supply Chain and the Flows therein

5Source: Mentzer 2001

Supplier 1

Supplier 3

Supplier 2

Inventory

Inventory

Forecasting and

scheduling information

Cash flow

Order flow

Product returns/Empty bins

Manufacturer

(The focal firm)Inventory

Inventory

Customer 1

Customer 2

Distributor 1

Customer 3

Credit flow

Materials flow


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Objectives of Supply Chain

Profitability

Reliability

Flexibility/Agility

Responsiveness

Turnover Rate

Communication and Coordination

6


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The Objective of a Supply Chain

Maximize overall value created

Supply chain surplus =

Customer value Supply chain cost


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Process View of a Supply Chain

Cycle view: processes in a supply chainare divided into a series of cycles, eachperformed at the interfaces between twosuccessive supply chain stages.

Push/Pull view: processes in a supplychain are divided into two categoriesdepending on whether they are executedin response to a customer order (pull) or in

anticipation of a customer order (push).


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Cycle View of Supply Chain

Processes


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Cycle View of Supply Chain

Processes


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Push/Pull View of Supply Chains


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Push/Pull View of Supply Chain

Processes

Supply chain processes fall into one of twocategories depending on the timing of their

execution relative to customer demand.

Pull: Here execution is initiated in response to a

customer order (reactive).

Push: Here execution is initiated in anticipation of

customer orders (speculative).

Push/pull boundary separates push processes from

pull processes.

Contd


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Push/Pull View of Supply Chain

Processes

Useful in considering strategic decisions relating to

supply chain design more global view of how

supply chain processes relate to customer orders.

Can combine the push/pull and cycle views

Make to StockLL Bean

Build to order - Dell

The relative proportion of push and pull processes

can have an impact on supply chain performance.


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Push/Pull ViewL.L. Bean


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Push/Pull ViewDell


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PURCHASING



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Introduction

Purchasing-

Obtaining merchandise, capitalequipment; raw materials, services, ormaintenance, repair, and operating(MRO)supplies in exchange for money or

its equivalentMerchant Buyers-

Wholesalers and retailers who purchasefor resale

Industr ia l Buyers-

Purchase raw materials for conversion,services, capital equipment, & MROsupplies


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A Brief History of Purchasing

Terms

Purchasing - key business function foracquiring materials, services, & equipment

Contracting- termoften used for theacquisition of services

Supply Management- a newer term thatencompasses all acquisition activities

Institute of Supply management definedsupply management as the Identification,

acquisition, access, positioning, andmanagement of resources anorganization needs or potentially needs inthe attainment of its strategic objectives.


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The Role of Purchasing in an

Organization

The primary goals of purchasing are:1. Ensure uninterrupted flows of raw materials at the

lowest total cost,

2. Improve quality of the finished goods produced, and

3. Optimize customer satisfaction.

Purchasing contributes to these objectives by:

Actively seeking better materials and reliablesuppliers,

Work closely with strategic suppliers to improvequality materials, and

Involving suppliers and purchasing personnel in newproduct design and development efforts.


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The Role of Purchasing in an

Organization (Cont.)

The Financial Significance of SupplyManagement

Profit-Leverage Effect

A decrease in purchasing expenditures directly

increases profits before taxes (assuming nodecrease in quality or purchasing total cost)

Return on Assets (ROA) Effect

A high ROA indicates managerial prowess ingenerating profits with lower spending (caveat- ROA

ratios vary from one industry to another)Inventory Turnover Effect

Increased inventory turnovers indicate optimalutilization of space and inventory levels, increasedsales, avoidance of inventory obsolesce


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The Purchasing Process -

Manual Purchasing (older system)

Step 1- Material Requisition/PurchaseRequisition-Stating product, quantity, anddelivery date. May originate as a planned orderreleasefrom the MRP system. Traveling requisitionused for recurring orders.

Step 2- The Request for Quotation (RFQ) -Buyeridentifies suppliers & issues a request for quotation(RFQ) for routine items or a Request for Proposal(RFP)for more demanding products. SupplierDevelopmentis used to develop suppliercapabilities.

Step 3- The Purchase Order (PO) -Is the buyersoffer & becomes a binding contract when accepted bysupplier. When initiated by the supplier on their ownterms, the document is a sales order. The UniformCommercial Code (UCC)governs transactions in theU.S., except Louisiana.


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The Purchasing Process- (Cont.)e-Procurement (Fig. 2.4)

Materials User Purchasing Department/Buyer

Prepares Materials

Requisitioninputs

information into

computer system

Materials Requisition

is transmitted

electronically to a

buyer

Buyer reviews


Extracts and merges


data into Internet

based B2B system

Assigns suppliers to

requisition on B2B

system for bidding and

specifies closing date and

other conditions

Collects and reviews bids

submitted by suppliers

through Internet based

B2B system or fax

Selects a supplier

based on quality, cost and

delivery performance,

then issues a

Purchase Order

Purchase Order is

transmitted electroni-

cally (or faxed) to the

supplier

Materials User Purchasing Department/Buyer

Prepares Materials

Requisitioninputs

information into

computer system

Prepares Materials

Requisitioninputs

information into

computer system


is transmitted

electronically to a

buyer


is transmitted

electronically to a

buyer

Buyer reviews


Buyer reviews


Extracts and merges


data into Internet

based B2B system

Extracts and merges


data into Internet

based B2B system


requisition on B2B



other conditions


requisition on B2B



other conditions




B2B system or fax




B2B system or fax

Selects a supplier



then issues a

Purchase Order

Selects a supplier



then issues a

Purchase Order

Purchase Order is



supplier

Purchase Order is



supplier


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The Purchasing Process (Cont.)e-Procurement

Advantages of the e-ProcurementSystem

Time savings

Cost savingsAccuracy

Real time

Mobility

Trackability

Management

Benefits to the suppliers


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Small Value Purchase OrdersProcessing costs for small value

purchases are minimized through: Procurement Credit Card/Corporate

Purchasing Card

Blanket or Open-End Purchase Orders

Blank Check Purchase Orders Stockless Buying or System Contracting

Petty Cash

Standardization & Simplification of Matls

& Components Accumulating Small Orders to Create a

Large Order

Using a Fixed Order Interval


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Sourcing Decisions: The

Make-or-Buy Decision

Outsourc ing- buying materials andcomponents from suppliers instead ofmaking them in-house. The trend has

moved toward outsourcing. Backward vert ical integrat ionrefers

to acquiring sources of supply

Forward vert ical integrat ionrefersto acquiring customers operations.

The Make or Buy decis ion is a

strategic decision .


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Sourcing Decisions: The Make-

or-Buy Decision (Cont.)

Reasons for Buying or OutsourcingCost advantage: Especially for components

that are non-vital to the organizationsoperations, suppliers may have economiesof scale.

Insufficient capacity:A firm may be at ornear capacity and subcontractingfrom asupplier may make better sense.

Lack of expertise: Firm may not have thenecessary technology and expertise.

Quality: Suppliers have better technology,process, skilled labor, and the advantage ofeconomy of scale.



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Make-or-Buy Decision

(Cont.)Reasons for Making

Protect proprietary technology

No competent supplier

Better quality control

Use existing idle capacity

Control of lead-time

transportation, and warehousingcost

Lower cost


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The make or buy ? Example

A company has option to make or buy apart.

Annual requirement is 15000 units.

A supplier is able to supply the part at

$7 per unit. The first estimate that it cost $500 to

prepare the contract with the supplier.

To make the part, the firm must invest$25000 in equip and it costs $5 per unitto make the part



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Make-or-Buy Decision (Cont.)

The Make-or-Buy Break-Even Analysis


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Roles of Supply BaseSupply Base-list of suppliers that a firm uses to

acquire its materials, services, supplies, andequipment

Firms emphasize long-term strategic supplieralliances consolidating volume into one or fewer

suppliers, resulting in a smaller supply basePreferred suppliersprovide: Early supplier involvement- Information on the

latest trends in materials, processes, ordesigns

Information on the supply market

Capacity for meeting unexpected demand

Cost efficiency due to economies of scale


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Supplier Selection

Product andprocesstechnologies

Willingness toshare technologies& information[Early supplier

involvement (ESI)and concurrent

engineering (CE)]

Quality

Cost (Total cost ofownership or

acquisition)

Reliability OrderSystem & cycle time

Capacity

Communicationcapability

Location

Service

The process of selecting suppliers, is complexand should be based on multiple criteria:


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How Many Suppliers to Use

Reasons Favoring aSingle Supplier

To establish a good

relationship Less quality

variability

Lower cost

Transportationeconomies

Proprietary productor process

Volume too small to

split

Reasons Favoring

Multiple Suppliers

Need capacity Spread risk of supply

interruption

Create competition

Information

Dealing with specialkinds of business

Single-source - a risky proposition. Currenttrends favor fewer sources.


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Purchasing: Centralized vs.

Decentralized

Purchasing Organizationisdependent on many factors, such asmarket conditions & types of materialsrequired.

Central ized Purchasing-purchasing department located at thefirms corporate office makes all thepurchasing decisions.

Decentral ized Purchasing-individual, local purchasing departments,such as plant level, make their ownpurchasing decisions.

Purchasing: Centralized vs


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Purchasing: Centralized vs.

Decentralized (Cont.)Advantages-

Central izationConcentrated volume-

Leveraging purchase volume

Avoid duplication

Specialization

Lower transportation costsNo competition within units

Common supply base

Advantages-

Decentral ization Closer knowledge

of requirements

Local sourcing

Less bureaucracy

A hybr id purch asing organizat ion-

Decentralized-centralized (large multiunit org)-decentralized corporate and centralized at business unit Centralized-decentralized(large org w/centralized

control) centralized large national contracts at corporatelevel and decentralized items specific to business unit


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2009 So th Western a di ision of Cengage Learning 38

International

Purchasing/Global Sourcing

Reasons for Global Sourcing-Opportunity toimprove quality, cost, and delivery performance

Potential Challenges-Requires additional skillsand knowledge to deal with international

suppliers, logistics, communication, politicalenvironment, and other issues Impo rt brok er or sales agent-performs service for a fee

Imp or t merchant-buys and takes title to the goods

Trading company-imports & carries wide variety of goods

Tariff and non -tari f f barr iers-International tradeorganizations strive to reduce barriers

Countertrade- raw materials are traded for goods andservices

session 2 - procurement

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