Chapter 41 Purchasing and Supply Management Dr. Stephen H. Russell Goddard School of Business and Economics Weber State University

2 Course Introduction Me You Syllabus

Chapter 43 Chapter 1 Introduction to Purchasing and Supply Management

4 Types of Purchasing Retail Buying Industrial Buying* Buying for Institutions Public Sector Purchasing

5 Categories of Industrial Purchases Raw Materials Components and subassemblies Finished products MRO supplies Packaging materials Services Capital assets Transportation Direct Materials

6 The Logistics Model Manufacturing Firm Warehouse Distribution Centers SuppliersRetail Stores

7 The Logistics Model Manufacturing Firm Warehouse Distribution Centers SuppliersRetail Stores Inbound LogisticsOutbound Logistics

8 Mother Earth to consumer... A Supply Chain

9 Place Utility Form Utility Time Utility

10 Mother Earth to consumer... A Supply Chain Materials and products Information

11 Mother Earth to consumer... A Supply Chain Materials and products Information A supply chain is the integration of sequentially-related firms’ inbound and outbound logistics, together with operations (manufacturing and service), and supporting information systems.

12 Understanding Terms Supply Chain Logistics Inbound Logistics or Materials Management Purchasing or Procurement }

13 Understanding Terms Supply Chain Logistics Inbound Logistics or Materials Management Purchasing or Procurement } Enhanced becomes Supply Management—also called Strategic Sourcing

14 Understanding Terms Purchasing Procurement Supply Management (also called Strategic Sourcing) Materials Management Supply Chain Management

15 Supply Management as compared to Purchasing Supply Management is Purchasing + EPI + ESI + CFT + Supplier development + Long-term contracts with world-class suppliers Under supply management, partnerships (or strategic alliances) based on mutual trust are formed with key suppliers and these suppliers are viewed as extensions of the firm.

16 Materials Management Definition - Materials management is the planning and control of the flow and stock of materials to support production. Materials Management Activities Materials planning and scheduling Purchasing Transportation Warehousing Inventory control Salvage and scrap disposal

17 Materials Management Definition - Materials management is the planning and control of the flow and stock of materials to support production. Materials Management Activities Materials planning and scheduling Supply Management Transportation Warehousing Inventory control Salvage and scrap disposal

18 Materials Management Definition - Materials management is the planning and control of the flow and stock of materials to support production. Materials Management Activities Materials planning and scheduling Strategic Sourcing Transportation Warehousing Inventory control Salvage and scrap disposal

19 Materials Management Definition - Materials management is Inbound Logistics. on Materials Management Activities Materials planning and scheduling Supply Management Transportation Warehousing Inventory control Salvage and scrap disposal

20 Course Theme Cost Quality Sales Profits Product development time Technologies and innovation Customer service Competitive advantage Supply management can have a major impact on organization success by influencing:

21 Requirements for a field to be classified as a Profession Scientific principles and intense preparation required of practitioners Scholarly body of literature Professional organization of high repute Certification program Requirement for continuing education Code of ethics Supply Management is clearly a profession!

22 Purchasing through the years Clerical Purchasing Arms length relationship with suppliers Adversarial: Win-Lose Price is the key factor Short term contracts; lots of supplier switching Emphasis is on competition Buyers are “paper pushers” (clerks)

23 Purchasing through the years Managerial Purchasing (1970s  ) Purchasing is now viewed, not as a cost center, but as a value contributor Supplier partnerships Long-term contracts Quality, service, and price considerations Negotiation as well as competitive bidding

24 Purchasing through the years Strategic Sourcing (Supply Management ) [2000  ] Rationalization of the supplier base Long-term strategic alliances with key suppliers Institutional trust Emphasis is not on a specific contract but on the relationship Senior Management involvement e-Technologies Relationship-specific capital investment

25 Purchasing through the years Strategic Sourcing (Supply Management) In short, Strategic Sourcing is capturing world-class suppliers and building alliances with them.

26 Types of Supplier Relationships Transactional—emphasis is on price Partnership—supplier is viewed as a resource Strategic Alliance—supplier is critical to the success of the firm and is viewed as a part of the business enterprise

27 Trust levels Trust TransactionalPartnershipStrategic Alliance Personal Trust Institutional Trust

28 Which type of relationship is appropriate? Many suppliers of a not-very-differentiated material? T Short-term need for a material or service? T Long-term requirement for a professional service from a capable supplier? P Found a world-class supplier interested in a mutually beneficial long-term contract? P or A See potential to develop a supplier into a highly capable source? P Do you require a great deal of flexibility or responsiveness from a supplier? P or A Is a material critical to your business? Is a supplier strategic to your business? A

29 Why Purchasing is Important Materials is a logical cost-reduction area Value-added contributions Purchasing as a profit producer Profit-Leverage Effect Return on Investment Effect

30 Why Purchasing is Important Materials is a logical cost-reduction area Purchased materials: the biggest element of cost in manufacturing industries Materials/Sales Revenue Manufacturing Industries55% Services Industries30%

31 Why Purchasing is Important IndustryMaterials/Sales Revenue Petroleum76% Automobile70% Wood Products61% Textile Mills59% Food Manufacturing59% Machinery50% Electrical Equipment49% Computers and electronics44%

32 Why Purchasing is Important Cost Quality Sales Profits Product development time Technologies and innovation Customer service Competetive advantage Value-added contributions

33 Why Purchasing is Important Purchasing as a profit producer Profit = Revenues - Cost 1. Purchasing’s impact on revenues 2. Purchasing’s impact on costs

34 Why Purchasing is Important Profit-Leverage Effect A $100,000 increase in sales generates an $8,000 increase in profits (assuming an 8% margin) A $100,000 reduction in material costs will generate a $100,000 increase in profits. A $1,250,000 increase in sales generates the same increase in profits as a $100,000 reduction in materials costs (in this example) THEREFORE, in this example, the Profit-Leverage Effect is...

35 Why Purchasing is Important Return on Investment Effect

36 Why Purchasing is Important Return on Investment Effect Profit Margin X Asset T.O. Ratio = ROI

37 Return on Investment Example 1. 2.Assume: Material costs are 50% of Sales Revenue; Inventory is $150,000 of the $500,000 in total assets. Further assume that Supply Management has been able to obtain a 10% reduction in material costs. This means that money tied up in inventory will drop to $135,000 and that Net income increases by 10% of 50% of $1,000,000.

38 Return on Investment Example A 10% reduction in materials costs increases ROI by 67.5%, in this example 1. 2.

39 Four Enablers of Excellent Supply Management Capable Human Resources Proper Organizational Design IT Performance Measurement Team skills Manage Relationships Cost Mgt Tech E-commerce Negotiation skills Contract management experience Other

40 Four Enablers of Excellent Supply Management Capable Human Resources Proper Organizational Design IT Performance Measurement Team skills Manage Relationships Cost Mgt Tech E-commerce Negotiation skills Contract management experience Other Centralized Decentralized Purchasing Councils Co-location of buyers with users CFTs

41 Four Enablers of Excellent Supply Management Capable Human Resources Proper Organizational Design IT Performance Measurement Team skills Manage Relationships Cost Mgt Tech E-commerce Negotiation skills Contract management experience Other Centralized Decentralized Purchasing Councils Co-location of buyers with users CFTs Requirements Planning B2B Inventory visibility

42 Four Enablers of Excellent Supply Management Capable Human Resources Proper Organizational Design IT Performance Measurement Team skills Manage Relationships Cost Mgt Tech E-commerce Negotiation skills Contract management experience Other Centralized Decentralized Purchasing Councils Co-location of buyers with users CFTs Requirements Planning B2B Inventory visibility Suppliers Supply Management function

43 Let’s move on...