Purchasing and Supply Chain Management by W.C. Benton Chapter One Purchasing and Supply Management McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives 1. To understand the purchasing function’s contribution to profitability. 2. To identify the relationship between the purchasing function and other functional areas. 3. To understand the evolution of the basic materials management concept. 4. To differentiate between purchasing, materials management, and supply chain management. 5. To explore the basic historical development of the purchasing function. 1-2

Learning Objectives 6. To understand the relationship between the purchasing function and inventory, ordering and transportation costs. 7. To learn the advantages and disadvantages of centralized purchasing organizational designs. 8. To identify various purchasing organizational designs. 9. To learn about purchasing careers 1-3

Markets in Transition ________________________ In certain industries, Asian manufacturers dominate the United States’ consumer market. Third-world nations continue to attract U.S. manufacturers seeking low wages for laborious tasks. ________________________ 1-4

Background ________________________ Historically, the management of materials and component parts has been the most neglected element in the production process. In the past businesses emphasized minimizing the cost of capital and labor. ________________________ 1-5

Setting the Stage ________________________ As a functional area within a firm, purchasing and supply management grappled with the stigma of being labeled a clerical function. ________________________ 1-6

Setting the Stage for Change Businesses have had to change radically in response to burgeoning technologies The reality is ______________________ During the next decade, the supply management function is likely to contribute to profits more than any other function in the company. 1-7

Purchasing vs. Fabrication-Past RM = Raw Materials FG = Finished Goods CP = Component Parts Triangle = Inventory Storage 1-8

Purchasing vs. Fabrication-Present RM = Raw Materials OPR 1 = Operation 1 FG = Finished Goods CP = Component Parts = Inventory Storage 1-9

Purchasing Managers, Buyers, and Purchasing Agents Seek to obtain ________________________. Purchasers buy goods and services ________________________ Buyers typically buy items for resale. 1-10

Purchasers and Buyers: determine the best value, choose ________________________ negotiate the best price, award contracts ________________________ 1-11

Purchasers and Buyers Purchasing managers, buyers, and agents must ________________________ Purchasing managers, buyers, and purchasing agents evaluate suppliers on the basis of ________________________ Once all of the necessary information on suppliers is gathered, orders are placed and contracts are awarded to those suppliers who meet the purchaser’s needs. 1-12

Factors That Influence Changing economic and political environments, emerging technology versus labor, and the changing nature of purchasing and supply chain management as a discipline—must influence the role of purchasing and supply management . 1-13

The Supply Management Process In most firms, ________________________ The objective is to provide ________________________ Purpose of supply management is to support the transformation of raw materials and component parts into shipped or inventory goods. 1-14

Purchasing Dollar Responsibility The cost of acquiring, storing, and moving materials is an increasingly large portion of ________________________ Consider the dollar responsibility of one General Motors’ materials management groups: 1.Parts and (materials) = 10 times direct labor dollars 2.Supply management expenditures = $100 billion 3.Transportation bill = $3 billion 4.Purchasing buys 97 percent of all component parts. 1-15

Ratios Of Materials Related Costs The following are ratios of materials-related costs that are typically cited in fabrication–assembly industries, for example, consumer durable goods. Cost of purchase = 80 percent of sales Cost of marketing (sales) = 10 percent of sales Cost of transportation = 10 percent of sales These ratios are increasing for various reasons: material shortages, increased use of synthetic materials, inflation, and thoroughly complex high-value products. 1-16

Ratios Of Materials Related Costs These ratios are increasing for various reasons: Material shortages Increased ________________________ ________________________ Complex ________________________ Where else is the potential for cost reduction and competitive advantage so great? 1-17

Potential For Profit All supply management activities ________________________ Many opportunities exist to reduce the cost of purchases. If the firm’s sales remained the same, ________________________ For each $1 reduction of material cost, ________________________ 1-18

Potential For Profit What increase in sales would be necessary to increase profit by $10,000 if material costs were not reduced? Let x be the required sales; ________________________________________________________________________________________________ 1-19

Integrated Supply Management (ISM) Achieving integration is a challenge. The decision of the purchasing manager ________________________ It is the objective of ISM to manage the related considerations. ________________________ 1-20

Integrated Supply Management (ISM) Example The significance of average inventory is that inventory cost is a function of average inventory. Inventory is an asset. ________________________ Opportunity costs as well as costs of storing, insuring, and handling are incurred when inventory exists. 1-21

Annual Inventory – Ordering Transportation Costs How can the best decision be made—one that provides the desired customer service at minimum cost? The customers are ________________________ The costs of satisfactory customer service are ________________________ 1-22

Annual Inventory – Ordering Transportation Costs The opportunity costs of poor customer service is also incomplete. Yet decisions must be made while recognizing that system wide decision criteria are ________________________ 1-23

A Developing Discipline Supply management is a developing discipline ______________________________________. Measures of customer service ______________________________________. Did the plant ship on time? Was the product on the shelf when the customer entered the shop? While important, availability is only one dimension of customer service. 1-24

A Developing Discipline. As these areas develop, ______________________________________. Standard costs to create the time and place utilities will be calculable. Budgeting for materials management activities ______________________________________. When supply management costs become ______________________________________. 1-25

Organizing for Purchasing Supply coordination involves both structure and design of the organization. In any purchasing organization, two major problems must first be considered. 1. The first issue ______________________________________. 2. The second issue is, what level of authority should the purchasing function have? ______________________________________. 1-26

CENTRALIZED VERSUS DECENTRALIZED PURCHASING 1-27

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Advantages of Centralized Purchasing Centralized purchasing results ______________________________________. If all material uses are coordinated into one major purchase, ______________________________________. Large dollar purchase quantities equals ______________________________________. 1-29

Advantages of Centralized Purchasing Centralized purchasing promotes ________________________________________________________________________. Each buyer can easily become an expert on associated buys (commodities and non-commodities) ______________________________________. Toyota, Dell, Wal-Mart, and IBM all use centralized purchasing and have in-house expertise ranging from engine parts to rental cars to office equipment to pharmaceuticals 1-30

Advantages of Centralized Purchasing Centralized purchasing enables the buying firm to do a better job monitoring various changes throughout the industry. Centralized purchasing also lends itself to periodic ______________________________________________________________________________________________________________ 1-31

Disadvantages of Centralized Purchasing High engineering _____________________________________. High need to coordinate purchased parts with ______________________________________. High need to buy from _____________________________________.. 1-32

The Future Organization Concept The future outlook is that the majority of significant dollar-valued purchases will continue to be centralized. This trend also will be the result of increased computer-based management information systems. _________________________________________________________________________________________________________________. Honda of America is an excellent example of a firm that uses centralized procurement as a competitive weapon. _____________________________________________________________________________________________________________________________________________________. 1-33

Reporting Assignment The status of the purchasing professional in an organization is determined by the capacity structure. ___________________________________________________________________________. The purchasing organizational structure also should be different for service-based firms. A Center for Advanced Purchasing (CAPs) study found that in 16 percent of the firms surveyed, purchasing managers reported directly to the president. In smaller firms, __________________________________________________________________________________________________________________. 1-34

The Supply Management Concept To summarize The supply management concept is a formal organizational concept that is involved with the flow of materials through a manufacturing firm. The functional areas affected include (1) ______________________________________. (2)  ______________________________________. (3)  ______________________________________. (4)  ______________________________________. (5)  ______________________________________. 1-35

Careers in Purchasing and Supply Management This is the best time for the next generation of managers to pursue a career in purchasing supply Supply professionals must possess a comprehensive skill set The average salary for a supply management professional is $92,165. 1-36