Purchasing and Supply Management Organization Chapter 5

Supply Integration Defined Professionally managing suppliers and developing close working relationships with different internal groups To become more closely integrated with other internal and external functions in order to develop capabilities that will lead to improved competitive performance

Relationship Management Skills Ability to … Act ethically Listen effectively Communicate Use creative problem-solving Drive relationships

Customer Satisfaction Customer Management Customer Service Product availability Lead time performance Service Reliability Customer Satisfaction Meet or exceed customer expectations Customer Success Assist customers in meeting objectives

How to Achieve Integration Cross-functional teams Information systems Integrated performance objectives and measures Process-focused organizations Co-location of suppliers and customers Buyer or supplier councils Steering committee

Communication Flows and Linkages(internal integration) Purchasing Quality Assurance Operations Accounting and Finance Suppliers Marketing and Sales Legal and Environmental Safety Engineering

Operations Traditional close relationship through direct support Development of global operations strategy Sales and operations plan (S&OP) Often co-located

Quality Assurance Increasing in importance Growing % of outsourced requirements Supplier quality training and development Supplier process capability studies Joint corrective action planning

Engineering One of most important, yet challenging, linkages Working together on joint product and process development activities Co-locating buyer in engineering Co-opting engineers to work in supply management

Engineering Looking for new sources of technology Ongoing and direct communication Identifying, assessing, and qualifying technically-capable suppliers Dealing with quality risks in new products Ongoing technical support and service

Accounting and Finance Much communication is tactical and electronic Highly focused on cost reduction Inbound material requirements Reconciliation of P.O.s, invoices, and receiving documents Purchase of capital equipment

Accounting and Finance Developing timely and accurate cost data on supplier performance Provide total cost data Often basis for make-or-buy decisions

Marketing/Sales Voice of the customer New product ideas Sales forecasts  production plans

Legal Contractual issues Patent ownership of new technologies Intellectual property issues Product liability claims Antitrust issues Long term contracts with escape clauses Supplier nonconformance issues

Environmental Management, Health, and Safety Environmental management system Supplier sustainability ISO 14000 Hazardous waste handling and transportation Health issues Safety issues

Benefits of CFT s(Cross-functional Team) Reduced time to complete tasks Increased innovation Joint ownership of decisions Enhanced communication among functions or organizations

Benefits of CFTs Realizing synergies by combining individuals and functions Better identification and resolution of problems Need to build internal relationships

Potential Drawbacks of CFTs Use does not guarantee success Team process loss Negative effects on individual members Poor team decisions Groupthink Artificial consensus

External Integration Supply management is face of organization to its supply base Acts as liaison on multiple fronts Materials New technology Market information Services Suppliers, government, and local communities

External Integration Supply management is face of organization to its supply base Acts as liaison on multiple fronts Materials New technology Market information Services Suppliers, government, and local communities

Suppliers Primary external linkage Maintain open and continuous communication Supplier selection and management Non-supply management should not deal with suppliers without knowledge of supply management

Government International countertrade issues Negotiation with foreign governments Compliance with foreign laws regarding contracts and suppliers Consult with appropriate agencies regarding regulatory compliance

Local Communities Control of substantial budget which could affect local economies May affect certain social goals Sourcing from local suppliers Awarding contracts to minority suppliers Ethical issues

Collaborative Buyer-Supplier Relationships Definition Process by which two or more parties adopt high level of purposeful cooperation to maintain trading relationship over time Relationship is bilateral Mutual commitment to future Balanced power relationship Procedures for managing conflict

Advantages of Closer Relations Trust Not take advantage of each other Share sensitive data Early supplier involvement Long-term contracts Incentive for supplier investment in new plant and equipment Joint development of new technology, risk-sharing, and supplier capabilities

Obstacles to Closer Relationships Confidentiality May create a direct competitor Limited interest by suppliers Legal barriers Antitrust issues Resistance to change Traditional “arm’s-length” approach

P/SM Organizational Structure: Influences and Direction Trends Driving P/SM Structure Strategies and Objectives Organizational Design Cost containment Risk management Globalization Technology Collaboration Customer intimacy Increased P/SM responsibilities Increased P/SM skills Support organization strategies Manage cost/price Supplier relationships Supplier integration Supplier innovation Manage global supply base Centralized/Center-led Decentralized Enablers Business unit leaders Global buying groups Strategic sourcing groups Lead division buying Consortiums and GPOs e-sourcing/ERP suites Business Unit CFTs

Organizational Structure Location of formal power for purchasing decisions Division of purchasing tasks and activities Scope of jobs in supply management function

Organizational Structure Patterns of communication and workflow Relative job satisfaction of P/SM employees Overall effectiveness of P/SM in meeting its goals and objectives

Centralization vs. Decentralization Centralized Chief purchasing officer has authority for majority of purchase expenditures Center-led Centralized approach for common items and decentralized approach for unique ones Decentralized Divisional, business unit, or site levels have authority for majority of purchase expenditures

Drivers of Organization Structure (Authority) Firm’s overall business strategy Responsiveness  decentralized Efficiency  centralized Similarity of purchases Similar  centralized Dissimilar  decentralized

Drivers of Organization Structure Total purchase dollar expenditures Small  decentralized Large  centralized Role of e-sourcing software Overall philosophy of management Highly controlled  centralized Less control  decentralized

Advantages of Centralization Leverage purchase volumes Reduced duplication of supply management effort Coordination of purchasing strategies and plans

Advantages of Centralization Coordination and management of company-wide purchasing systems Development of specialized expertise Meet corporate goals and manage company-wide change

Advantages of Decentralization Speed and responsiveness Understanding unique operational requirements New product development support Ownership of decisions affecting purchases

Organizational Mechanisms to Enable Center-Led Structure Center-Led Enablers Corporate Steering Committees Regional Buying Groups Business Unit Leaders Strategic Sourcing Groups Consortiums and GPOs Lead Division Buying Global Sourcing Reqmts Corporate Purchasing Councils

Organizational Mechanisms to Enable Center-Led Structure Strategic sourcing groups Often located by sourcing region Use of a common ERP system for spend management Lead division buying Largest using division takes lead in contracting for common items

Organizational Mechanisms to Enable Center-Led Structure Business unit leaders Located at corporate headquarters Interface with business unit CFTs Provide expertise and input Global sourcing councils Worldwide commodity sourcing teams Global coordination for key items

Organizational Mechanisms to Enable Center-Led Structure Regional buying groups Used when geographic concentration exists Responsible for large volume common items Corporate purchasing councils Share expertise and develop common sourcing strategies

Organizational Mechanisms to Enable Center-Led Structure Corporate steering committees Tend to be more advisory in nature than corporate purchasing councils Develop sourcing strategies Consortiums and group purchasing organizations (GPOs) Spend category expertise and contract management skills Usually within single industry

Formal Organizational Structure Details assignment of work along with authority that accomplishes those responsibilities Helps define how firm communicates and integrates decision making across groups comprising organization, i.e., coordination

To Whom Does Purchasing/Supply Management Report? Upper-level function reporting to executive vice president Mid-level function reporting to executive one level below executive vice president Lower-level function reporting at least two levels below executive vice president

P/SM as Upper-Level Function President/CEO Executive Vice President Vice President of Marketing Vice President of Finance Vice President of Purchasing Vice President of Engineering Vice President of Manufacturing

P/SM as Mid-Level Function President/CEO Executive Vice President Vice President of Marketing Vice President of Finance Vice President of Engineering Vice President of Manufacturing Director of Purchasing

P/SM as Lower-Level Function President/CEO Executive Vice President Vice President of Marketing Vice President of Finance Vice President of Engineering Vice President of Operations Director of Materials Management Purchasing Manager

Factors Affecting P/SM’s Position in the Organization’s Hierarchy History Type of industry Total value of goods and services Other factors Founding philosophy Type of purchased materials Ability to influence company’s performance

Scope of P/SM Job Function Sourcing and negotiating Market analysis and research Operational support and order follow-up Administration

P/SM Job Tasks Buying Expediting Inventory control Transportation Insourcing/ outsourcing Value analysis Purchasing research Materials forecasting Supply management Other responsibilities

Strategic vs. Tactical Purchasing Future-oriented Managing total cost Enhancing value Minimizing risks Tactical Day-to-day challenges required to meet current needs

Sourcing Activities Strategic Operational Manage relationships with critical suppliers Develop electronic purchasing systems Implement companywide best practices Negotiate companywide supply contracts Manage critical commodities Operational Manage transactions with suppliers Use e-systems to obtain standard or indirect items through catalogs Source items that are unique to operating unit Generate and forward material releases Provide supplier performance feedback

Future Trends in Organizational Design Vertical focus  horizontal focus No functional silos Commodity focus  process focus Cut across functional boundaries Flatter hierarchies Center-led structures Rotation of management across business units and functions

Future Trends in Organizational Design Co-location with internal customers Systems capability Flow of goods information and processes from suppliers to final customers Open information channels Virtual social networking

Future P/SM Organizations Vertical/Functional focus Individual decisions Closed information loops Company leverage Layered hierarchies Functional location Physical social networks Today Horizontal/Process focus Team decisions Open information flows Group leverage Flatter hierarchies Co-location Virtual social networks Tomorrow