1. Chapter 3: Purchasing Research and Planning Strategic Planning for Purchasing Strategic planning for purchasing involves the identification of critical purchase, supply market analysis, risk assessment, and strategy development and implementation It is important to determine whether materials problems or shortages might jeopardize current or future production of new or existing products, whether materials quality can be expected to change, whether price are likely to increase or decrease, and the appropriateness of forward buying.

2. Chapter 3: Purchasing Research and Planning Strategic Planning for Purchasing Identificatio n of critical purchase Supply Market Analysis Risk Assessment Strategy Development and implementati on

3. Typical criteria to use in identifying critical purchases 1)Percentage of product cost 2)Percentage of total purchase expenditure Typical criteria to use to determine the risk in the supply market 1)Number of suppliers 2)Availability of raw material to supplier 3)Supplier cost 4)Technology trends Typical criteria to use in Risk Assessment 1)Determine the probability of best or worst conditions occurring

4. What? Quality VS Cost How much? Large VS Small Qty When? Now or Later Forward buy Where? Local, international What price? Lower, Standard Supply Strategy Development Questions  develop for predicted events

5. Chapter 3: Purchasing Cost Management Cost-Reduction Programs An effective cost-reduction program requires;  top management support  clear definition of goals,  measurement of savings  reporting on the process and its results  individual performance appraisal process A “Cost Reduction” is defined as a decrease in prior purchase price This means a cost reduction occur only when the firm is paying a lower price Cost avoidance is the amount that would have been paid less the amount actually paid

6. Per unit cost ______________________________________________________________________ Scenario 1Cost savings: Current price paid$ 20.00 New price$ 19.00 ---------- Cost saving$ 1.00 Scenario 2Cost avoidance: Current price paid$ 20.00 New price quote by supplier$ 25.00 Price obtained from alternate supplier$ 22.00 Cost savings Current price paid$ 20.00 New price quote by supplier$ 22.00 --------- Cost saving (actually a $2.00 price increase)-$ 2.00 Cost avoidance New price quoted$ 25.00 New price actually paid$ 22.00 ---------- Cost avoidance$ 3.00 Per unit cost ______________________________________________________________________ Scenario 1Cost savings: Current price paid$ 20.00 New price$ 19.00 ---------- Cost saving$ 1.00 Scenario 2Cost avoidance: Current price paid$ 20.00 New price quote by supplier$ 25.00 Price obtained from alternate supplier$ 22.00 Cost savings Current price paid$ 20.00 New price quote by supplier$ 22.00 --------- Cost saving (actually a $2.00 price increase)-$ 2.00 Cost avoidance New price quoted$ 25.00 New price actually paid$ 22.00 ---------- Cost avoidance$ 3.00 Cost Savings versus Cost Avoidance

7. Purchasing Cost Management Price Change Management It is important to work with suppliers to restrict price increase to a reasonable and equitable level Purchasing should work with the supplier to offset price increase through other improvements, such as reduced delivery lead times, better service, or other opportunities To restrict price increases, management should require price protection clauses and advance notification of 30, 60, 90 days for price increases Purchasing should determine the impact of engineering changes on product cost before it recommends making these changes

8. Determine the reason for the price change request Strategies to deal with price increases Review the price change by management Justification of the price change by suppliers Alternatives for reducing other price elements to offset the price increase Handling Price Increase Requests From Suppliers

9. Purchasing Cost Management Forward Buying versus Speculative Buying Forward buying  buy more of a product than is required for current consumption to protect the organization from anticipated shortages or to delay the impact of rising prices When using this strategy, the purchasing manager must evaluate the trade-off between inventory carrying cost increases and the risk of supply constriction or increased prices

10. Purchasing Cost Management Forward Buying versus Speculative Buying Speculative buying  purchases made not for internal consumption, but to resell at a later date for profit Speculative goods may be the same as goods purchased for consumption, but the quantities purchased will be in excess of current or future needs An example occurs in diverting of retail goods

11. Purchasing Cost Management Volume Contract Way to leverage purchase requirements over time, between various business units/ locations in the company As a result of combining purchases  can reduce purchase prices and administration costs An increase in the purchase quantity can enable suppliers to reduce their costs and prices as a result of production/ purchasing economies Cumulative volume discount  allows a buyer to combine purchase volume and getting lower prices Non-cumulative discount  the price based on the amount of each order

12. Purchasing Cost Management Stockless Purchasing Is a means of reducing material-related costs such as unit purchase price, transportation, inventory and administration Contract are arranged for a given volume of purchases over a specified period of time The objectives of stockless purchasing are to; 1.Lower inventory levels 2.Reduce the supplier base 3.Reduce administrative cost and paperwork 4.Provide for timely delivery of material directly to the user

13. Purchasing Cost Management Going beyond systems contracts is the concept of Integrated Supply Under this concept, a purchaser will combine all buys with one supplier  further reducing administrative costs

14. Chapter 4: Managing Supplier Relationship Partnership Defined A partnership is a tailored business relationship based on mutual trust, openness, shared risk and shared rewards that yields a competitive advantage, resulting in business performance greater than would be achieved by the firms individually

15. Arm’s Length Vertical Integration Joint Venture Type III Type IIType 1 Partnerships Types of Partnerships

16. Chapter 4: Managing Supplier Relationship Arm’s Length a seller typically offers standard product/ services to a wide range of customer who receive standard terms and conditions When the exchanges end, the relationship ends Type I The organization involved recognize each other as partners and on a limited basis coordinate activities and planning. The partnership usually has a short term focus and involves only one division or functional area within each organization

17. Chapter 4: Managing Supplier Relationship Type II The organizations involved progress beyond coordination of activities to integration of activities Although not expected to last “forever”, the partnerships has a long term horizon Multiple divisions and functions within the firm are involved in the partnerships Type III The organizations share a significant level of integration Each party views the other as an extension of their own firm Typically no “end date” for the partnerships exists

18. Managing Supplier Relationships The Partnerships Model Drivers Compelling reasons to partner Facilitators Supportive environmental factors that enhance partnership growth Components Joint activities and processes that build and sustain the partnership Drivers set expectation of outcomes Decision to create or adjust partnership Feedback to: Components Drivers Facilitators Outcomes The extent to which performance meets expectations

19. Managing Supplier Relationship Drivers Both parties must believe that they will receive benefits in one or more areas The primary potential benefits that drive the desire to partner include: 1.Asset/cost efficiencies 2.Customer service improvement 3.Marketing advantage 4.Profit stability Facilitators Are elements of a corporate environment that allow a partnerships to grow and strengthen Facilitator include: 1.Corporate compatibility 2.Similar managerial philosophy and techniques 3.Mutuality 4.Symmetry

20. Managing Supplier Relationship Components Are the activities and processes that management establishes and control throughout the life of partnerships Components include; planning, joint operating controls, communications, trust and commitment and financial management Outcomes And Feedback To evaluate the effectiveness of the relationship