Chapter 7 Supply Management

Chapter Objectives Be able to:  Discuss the rise of global sourcing and the important financial and operational performance impacts of supply management activities.  Identify and describe the various steps of the strategic sourcing process, and apply some of the more common analytical tools, including spend analysis, portfolio analysis, and total cost analysis.  Describe the major steps of the procure-to-pay cycle.  Discuss some of the longer-term trends in supply management and why they are important. Copyright © 2016 Pearson Education, Inc. 7-2

Introduction  Supply Management – The broad set of activities carried out by organizations to analyze sourcing opportunities, develop sourcing strategies, select suppliers, and carry out all the activities required to procure goods and services. Copyright © 2016 Pearson Education, Inc. 7-3

Why Supply Management Is Critical  Global Sourcing  Firms do not compete only against global competitors, but against their competitors’ supply chains.  To keep up with global competition and tap into the abilities of world-class suppliers, many companies have put in place global sourcing systems.  Advances in information systems have served as a catalyst for global sourcing efforts.  Global sourcing applies to services and business processes, as well as manufactured goods. Copyright © 2016 Pearson Education, Inc. 7-4

Why Supply Management Is Critical  Financial Impact Table 7.1 Copyright © 2016 Pearson Education, Inc. 7-5

Why Supply Management Is Critical  Financial Impact  Cost of goods sold – The purchased cost of goods from outside suppliers.  Merchandise inventory – A balance sheet item that shows the amount a company paid for the inventory it has on hand at a particular point in time.  Profit margin – The ratio of earnings to sales for a given time period.  Return on assets (ROA) – A measure of financial performance generally defined as Earnings/Total Assets Copyright © 2016 Pearson Education, Inc. 7-6

Example 7.1 – Target Corporation  Financial Impact Profit Margin = 100% X (Earnings/Sales) Return on Assets = 100% X ($4,629 / $17,213) = 26.9% Copyright © 2016 Pearson Education, Inc. Profit Margin = 100% X ($4,629 / $65,786) = 7% Return on Assets = 100% X (Earnings/Assets) 7-7

Example 7.1 – Target Corporation  Financial Impact 1.Every dollar saved in purchasing lowers COGS by $1 and increases pretax profit by $1. Profit leverage effect – A term used to describe the effect of $1 in cost savings increasing pretax profits by $1 and a $1 increase in sales increasing pretax profits only by $1 multiplied by the pretax profit margin. 2.Every dollar saved in purchasing lowers the merchandise inventory figure – and as a result, total assets – by $1. Copyright © 2016 Pearson Education, Inc. 7-8

Example 7.1 – Target Corporation 3% purchasing reduction in COGS Earnings and Expenses Current Reflecting Savings Sales$65,786$65,786 COGS $45,725$44,353 Pretax earnings$4,629 $6,001 Selected Balance Sheet Items Merchandise inventory $7,596 $7,368 Total assets $17,213 $16,985 Copyright © 2016 Pearson Education, Inc. 7-9

Why Supply Management Is Critical  Performance Impact  Cost is not the only consideration.  Purchased goods and services can have a major effect on other performance dimensions including quality and delivery performance. Copyright © 2016 Pearson Education, Inc. 7-10

The Strategic Sourcing Process  Strategic Sourcing  Identifying ways to improve long-term business performance by better understanding sourcing needs, developing long-term sourcing strategies, selecting suppliers, and managing the supply base. Copyright © 2016 Pearson Education, Inc. Figure

The Strategic Sourcing Process Step 1: Assess Opportunities  Spend Analysis - The application of quantitative techniques to purchasing data in an effort to better understand spending patterns and identify opportunities for improvement.  What categories of products or services make up the bulk of company spending?  How much are we spending with various suppliers?  What are our spending patterns like across different locations? Copyright © 2016 Pearson Education, Inc. 7-12

The Strategic Sourcing Process Step 2: Profile Internally and Externally  Two approaches to creating profiles:  Category profile –Understanding all aspects of a particular sourcing category that could ultimately have an impact on the sourcing strategy.  Industry Analysis – Profiling the major forces and trends that are impacting an industry, including pricing, competition, regulatory forces, substitution, technology changes, and supply/demand trends. Copyright © 2016 Pearson Education, Inc. 7-13

The Strategic Sourcing Process Step 3: Develop the Sourcing Strategy  The Make-or-Buy Decision - A high-level, often strategic, decision regarding which products or services will be provided internally and which will be provided by external supply chain partners.  Insourcing – The use of resources within the firm to provide products or services.  Outsourcing – The use of supply chain partners to provide products or services. Copyright © 2016 Pearson Education, Inc. 7-14

The Strategic Sourcing Process Advantages and Disadvantages of Insourcing and Outsourcing Table 7.6 Copyright © 2016 Pearson Education, Inc. 7-15

The Strategic Sourcing Process Factors that Affect the Decision to Insource or Outsource Table 7.7 Copyright © 2016 Pearson Education, Inc. 7-16

The Strategic Sourcing Process Step 3: Develop the Sourcing Strategy  Total cost analysis – A process by which a firm seeks to identify and quantify all of the major costs associated with various sourcing options.  Direct costs – Costs tied directly to the level of operations or supply chain activities.  Indirect costs – Costs that are not tied directly to the level of operations or supply chain activity. Copyright © 2016 Pearson Education, Inc. 7-17

The Strategic Sourcing Process Insourcing and Outsourcing Costs Table 7.8 Copyright © 2016 Pearson Education, Inc. 7-18

The Strategic Sourcing Process Step 3: Develop the Sourcing Strategy  Portfolio analysis – A structured approach used by decision makers to develop a sourcing strategy for a product or service, based on the value potential and the relative complexity or risk represented by a sourcing opportunity.  The Routine Quadrant – Readily available products or services representing a relatively small portion of a firm’s purchasing expenditures.  The Leverage Quadrant – Standardized and readily available products or services representing a significant portion of spend.  The Bottleneck Quadrant – Products or services with unique or complex requirements that can be met only by a few potential suppliers.  The Critical Quadrant – Products or service with unique or complex requirements coupled with a limited supply base. Copyright © 2016 Pearson Education, Inc. 7-19

The Strategic Sourcing Process Step 3: Develop the Sourcing Strategy  Single sourcing – The buying firm depends on a single company for all or nearly all of a particular item or service.  Multiple sourcing – The buying firm shares its business across multiple suppliers.  Cross sourcing – The buying firm uses a single supplier for one particular part or service and another supplier with the same capabilities for a different part or service.  Dual sourcing – The buying firm uses two suppliers for the same purchased product or service. Copyright © 2016 Pearson Education, Inc. 7-20

The Strategic Sourcing Process Step 4: Screen Suppliers and Create Selection Criteria  Qualitative criteria to evaluate suppliers include:  Process and design capabilities  Management capability  Financial condition and cost structure  Longer-term relationship potential Copyright © 2016 Pearson Education, Inc. 7-21

The Strategic Sourcing Process Step 5: Conduct Supplier Selection  Weighted-point evaluation system  Assign weights to performance dimensions.  Rate the performance of each supplier with regard to each dimension.  Calculate the total score. Copyright © 2016 Pearson Education, Inc. 7-22

The Strategic Sourcing Process Step 5: Conduct Supplier Selection  Weighted-point evaluation system Copyright © 2016 Pearson Education, Inc. 7-23

The Strategic Sourcing Process Step 6: Negotiate and Implement Agreements  Competitive bidding – A request for bids from suppliers with whom a buyer is willing to do business.  Request for quotation – A formal request for the suppliers to prepare bids, based on the terms and conditions set by the buyer. Description by market grade/industry standard Description by brand Description by specification Description by performance characteristics Copyright © 2016 Pearson Education, Inc. 7-24

The Strategic Sourcing Process Step 6: Negotiate and Implement Agreements  Negotiating – A more costly, interactive approach to final supplier selection. This is used best when:  The item is a new or technically complex item with only vague specifications.  The purchase requires agreement about a wide range of performance factors  The buyer requires the supplier to participate in the development efforts.  The supplier cannot determine risks and costs without additional input from the buyer. Copyright © 2016 Pearson Education, Inc. 7-25

The Strategic Sourcing Process Step 6: Negotiate and Implement Agreements  Contracting – The process of creating a detailed purchasing contract to formalize the buyer-supplier relationship.  Fixed-price contract – Stated price does not change.  Cost-based contract – Price of the good or service is tied to the cost of some other key input(s) or other economic factors. Copyright © 2016 Pearson Education, Inc. 7-26

The Procure-To-Pay Cycle  Ordering  Purchase order – A document that authorizes a supplier to deliver a product or service and often includes key terms and conditions such as price, delivery, and quality requirements.  Follow-Up and Expediting  Receipt and Inspection  Statement of work (scope of work) – Terms and conditions for a purchased service that indicate, among other things, what services will be performed and how the service provider will be evaluated.  Settlement and Payment  May be paid through Electric Funds Transfer (EFT)  Records Maintenance Copyright © 2016 Pearson Education, Inc. 7-27

Trends in Supply Management  Sustainable Supply  Becoming more conscious of the importance of being environmentally friendly and using environmental performance in selecting suppliers.  Ensuring compliance with regulations.  Reducing packaging, promoting recycling, and reducing costs while being good for the environment. Copyright © 2016 Pearson Education, Inc. 7-28

Trends in Supply Management  Supply Chain Disruptions  Caused by natural disasters, economic or political events.  Cause a big threat to revenue streams.  Lead to increased risk due to outsourcing to global suppliers. Copyright © 2016 Pearson Education, Inc. 7-29