1. Week Seven Lesson Procurement and Supply Management
SCM 652
UNCG
Nemiah E. Bryant
Spring Semester 2013

2. Six Key Business Functions (Supply Management’s Role in Business)
Creation, the idea or design function, frequently based on research and development
Finance, the capital acquisition, financial planning and control function
Personnel, the human resources and labor relations function
Supply, the acquisition of required materials, services, and equipment
Conversion, the transformation of materials into economic goods and services
Distribution, the marketing and selling of goods and services produced
1-2

3. Corporate Supply Challenges
Increased outsourcing places great reliance on suppliers to respond to end-customer needs
Greater dependence on suppliers for design and build responsibilities for complete subassemblies and subsystems
Increased global competition
Development of new product technologies
Evolving information systems
Trend to single sourcing with fewer key suppliers and strategic supplier relationships

4. Corporate Supply Opportunities
Identify opportunities to reduce unit costs for products and services
Identify opportunities to increase revenue
Implement supply initiatives to improve customer satisfaction
Reduce total costs of ownership
Improve efficiency and effectiveness of the supply process
Maximize value from suppliers
Work with key supplier to provide product and service innovations

5. Supply Management A Five Stage Process
Identification of item or service required
Identification of best supplier
Establishment of a fair and reasonable price
Creation of an enforceable agreement
Management of the relationship
Supply Management utilizes Strategic Sourcing
1-5

6. Strategic Sourcing
Strategic sourcing is understanding the markets you're purchasing from inside and out…
…and learning from your own organization and your suppliers' organizational processes,…
…working as a mediator between suppliers and your organization,…
…and capturing information and using it to improve relationships.
Strategic sourcing requires two-way continuous improvement process work from each organization
1-6

7. Four Principles of Strategic Sourcing
Define the total value of the relationship between purchaser and suppler,
Develop solutions based on a deep understanding of the supplier's economics and business dynamics,
Use differentiated purchasing tactics in order to optimize the economic relationship for both purchaser and suppliers, and
Imbed the required changes in the organization so the purchaser achieves not only a near-term measurable performance improvement but also the ability to continuously improve
1-7

8. Increasing Importance of Purchased Materials
The Five Ms of Business: Machines, Man/Womanpower, Material, Money, Management
Materials costs have increased
As a percentage of the cost of goods sold
Labor costs have decreased
Machine power has replaced much of human (and horse) labor over the last 150 years
The result?
Materials costs are increasingly the focus of management
1-8

9. The Evolution of the Supply Function
The Handling of Railway Supplies – Their Purchase and Disposition
Published in 1887
Attention in first half of 1900s to reliable access to supply of raw materials, supplies and services
Two vexing problems in the decade of the 1970s put senior management attention on the supply function:
international shortage of basic raw materials
price inflation

10. The Evolution of the Supply Function
By 1990s firms faced challenges of global “supply chains” and an increased reliance on suppliers
Outsourcing has led to increased reliance on suppliers for key components and services
Technological developments in the early 21st century provides expectations for supply chain integration, lower transaction costs and faster response times.
New challenges in the areas sustainability, globalization, supply chain security and risk management

11. The Evolution of the Supply Function
early
21st century
early
1900s
Strategic orientation
Global supply chains
Executive level leadership
Key challenges: Sustainability, security, globalization, risk management
Clerical and tactical
Focus on policies and procedures
Key challenges: availability of supply and cost management

12. Evolution of the Supply Chain
Pre 1939
2010-Future
Clerical
World War II
Managerial emphasis
Purchasing strategy
Integration into corporate strategy
Integrated supply networks and information technology
Sustainability, security, globalization, risk management

13. Supply Management and the Bottom Line
Purchased items account for a large percentage of the cost of goods sold.
Outsourcing allows firms to focus on their core competencies.
Organizations outsource when they decide to purchase something they had been making in-house.
A dollar saved in materials cost is usually considered a dollar increase in profit
1-13

14. Supply Management’s Impact on Net Income and the Bottom Line
Increased Sales:
Faster to Market
Improved Quality
Pricing Flexibility
Innovation
Lower Total Cost:
Acquisition Cost
Processing Cost
Quality Cost
Downtime Cost
Risk Cost
Cycle Time Cost
Conversion Cost
Non-value Added Cost
Supply Chain Cost
Post Ownership Cost
1-14

15. Purchasing’s Operational and Strategic Contributions
1. Supply Contribution
Operational
Strategic
Trouble Prevention
Opportunity Maximization

16. Purchasing’s Operational and Strategic Contributions
2. Supply Contribution
Direct
Indirect
Enhancing Performance
of others
Bottom-Line Impact

17. Purchasing’s Operational and Strategic Contributions
3. Supply Contribution
Negative
Neutral
Positive
Operationally deficient
Strategically deficient
Directly deficient
Indirectly deficient
Operationally acceptable
Strategically acceptable
Directly acceptable
Indirectly acceptable
Operationally acceptable
Strategically deficient
Directly acceptable
Indirectly deficient

18. Characteristics of an Integrated Strategic Procurement and Sourcing Function
Executive Leadership
Executive committee support for integration across company and strategic business unit corporate plans
Strategic Positioning
External/internal customer focus
Matrix management
High-level positioning - second, third or fourth levels
Functional Leadership
Company-wide customer-focused leadership
Establish integrated visions workers at results and processes
Drives supply base/supplier management strategies company-wide
Integration
Cross-functional, cross-location teaming
Part of the technology, manufacturing and SBU planning process

19. Characteristics of an Integrated Strategic Procurement and Sourcing Function
Supplier Management
Focused on supplier development
Joint performance improvement efforts
Value focused
Total cost improvement
Supplier benchmarking
Supply Base Strategy
Quality driven
Design standardization
Concurrent engineering
Supply base optimization
Commercial strategy emerging
Systems
Global databases
Historical performance data
Strategic
EDI, Internet, EFT, CAD, CAM
Measurement
Customer orientation
Total value/cost focused
Benchmarking with best in class

20. Ensuring continuous supply Minimizing inventory investment
Procurement focuses on several issues related to the firms’ supply base (pp )
Ensuring continuous supply
Minimizing inventory investment
Quality improvement of supply
Supplier development
Supplier selection
Building supplier relationships
Supplier continuous improvement
Lowest total cost of ownership

21. The Opportunities for Contribution of the Supply Function
Profit-leverage effect
Return-on-assets effect
Information source
Effect on efficiency
Effect on competitive position and customer satisfaction
Effect on organizational risk
Effect on image
Training ground
Management strategy and social policy

22. Supply Management and Return on Investment
Labor
$700,000
Materials
$2,300,000
Overhead
$800,000
Operating cost elements
Other costs
$800,000
Sales
$5,000,000
Cost of
Goods Sold
$3,800,000
Minus
Sales
$5,000,000
Net income
$400,000
Divided by
What if we
decrease
materials cost
by 5%?
(or $115,000)
Profit
margin 8%
Asset turnover
rate
1.25
Multiply
($515,000)
(10.3%)
($2,185,000)
($3,685,000)
Plus
Return on
Investments
10.0%
(13.0%)
Cash
$300,000
Account
receivable
Inventories
$500,000
Assets
Total assets
$4,000,000
Sales
$5,000,000
Divided by
($475,000)
Fixed assets
$2,900,000
Current assets
$1,100,000
Plus
($1,075,000)
(1.26)
($3,975,000)

23. The Impact on ROI of Reducing Materials Costs vs. Increasing Sales
If the same profit increase were to be generated by increasing sales, what sales increase would be required?
At the existing 8% profit margin, the following calculation provides the answer…
Profit increase = new sales X .08
$115,000 = new sales X .08
new sales = $1,437,500
1-23

24. Supply Strategy Interpreted in Organizational Strategy
Objectives
Organizational
Objectives
Supply
Strategy
Organizational
Strategy

25. Supply Strategy Links Current and Future Markets to Current and Future Needs

26. Key Strategy Questions for Supply
How can supply and the supply chain contribute effectively to organizational objectives and strategy?
AND
How can the organizational objectives and strategy properly reflect the contribution and opportunities offered in the supply chain?

27. The Integrated Supply Chain Framework

28. Vertical Integration vs. Virtual Integration

29. Importance of Logistics – Porter’s Value Chain Model

30. An Organization Must Approach Strategic Planning on Three Levels
Corporate: Decisions and plans that answer the questions of what business are we in? and, how will we allocate resources among these businesses?
Unit: Decisions mold the plans of a particular business unit, as necessary to contribute to corporate strategy.
Function: Plans concern the “how” of each functional area’s contribution to the business strategy and involve the allocation of internal resources.

31. Key Concepts Purchasing Place within the Organization
Where is Purchasing on the Organizational Chart? How it affects their performance.
Tactical vs. Strategic Responsibilities
Where is the focus?
Centralized vs. Decentralized
Who has the authority to make the buy decisions?
A Materials Management Structure
Use of Cross-functional Teams

32. Organizing Logistics within the Firm
Two key organizational logistics topics
Organizational structure
Organizational design
It probably best to first describe how most corporations are run. This is different than a small business. Most corporations are ultimately controlled by a board of directors. This board then hires the people it wants to run the company. Normally the top person running the company is called the CEO or chief executive Officer. This person then hires top people to run the different functions of the company. For example, there is a CFO (Chief financial officer), a CIO (chief information officer), COO (Chief operating officer), etc. This is why the top levels in organizations are often called the C-level of management. From this point down is where the functions of Marketing, Sales, Finance, Production, Human resources, and Logistics reside. (There can be more functions than this).
4-6

33. Organizational Structures
The Materials Management Organization
Materials Manager
Production Control
Inventory Control
Purchasing
Transportation
Warehousing

34. Organizational Structure for Logistics
Two basic organizational structures are:
Fragmented logistics structure
Logistics activities are managed in multiple departments throughout an organization
Unified logistics structure
Multiple logistics activities are combined into and managed as a single department
For Logistics, the function can be managed as one department (Unified) or as a piece of multiple departments (Fragmented)
4-7

35. Organizational Structure for Logistics
Two basic organizational structures for logistics departments are:
Centralized logistics organization
Company maintains a single logistics department that administers the related activities for the entire company from the home office
Decentralized logistics organization
Logistics-related decisions are made separately at the divisional or product group level and often in different geographic regions
For a Unified structure, Logistics can be Centralized into one place for the whole company or corporation, or dispersed throughout the company into geographic regions or into different business units (decentralized). For example, if Apple had a decentralized logistics organization, there could be one for the laptop business, one for the i-phone and i-pod businesses, one for the i-pad business, etc.
4-8

36. Benefits of Centralized Authority
Reduction of duplication of effort
Leveraging of volume purchases
Consolidation of requirements
Transportation savings
Individual specialization
Reduction of suppliers’ costs
Improved inventory control
Lower administration costs
Centralized control
Reduction in costs of services

37. Benefits of Decentralization
Specialty buyers can evolve
Faster response time for multiple locations
Better understanding of location’s requirements.
More efficient buying of low dollar, odd buys.

38. Figure 4-1: Becton Dickinson’s Worldwide Sources
This is an example of how a business can be organized and managed
4-38

39. Organizational Structure for Logistics
Job title or corporate rank
Leading edge organizations tend to head the logistics department by senior-level personnel
Generally excluded from holding a “C-level” position
Keep in mind the perspective of the book here. So far, we have talked only about companies that have Logistics as a function within the company.
In these companies Logistics senior managers are often called Supply Chain managers which includes Managing all aspects of the Supply chain as well as the Logistics activities.
There are also many, many companies whose business is Logistics. For example, Old Dominion in Thomasville, CSX Railway, and APL shipping lines.
4-10

40. Organizational Design for Logistics
Three primary types of organizational design include:
Hierarchical (functional)
Top-down flow
Matrix
Cross-functional responsibilities
Network
Process philosophy focused on combing tasks into value-creating products and activities
Hierarchical organizations reflect more of a military organization where employees tend to have one and only one manager or boss.
In a Matrix organization, employees can have multiple responsibilities to different parts of the organization and thus have two or more bosses. For example if you are the division manager of Logistics in North America, you may have one boss who is head of North America and one who is head of global logistics.
4-40

41. Organizational Design for Logistics
Network organizational design is exhibited in terms of:
Relevancy
Responsiveness
Flexibility
4-41

42. Internal Interfaces of the Supply Management Function
Marketing
Customers
requirements
Customer
Engineering
Product quality requirements
Forecasts
Estimates
Specs.
V.A.
Quality map
Configuration management
Supply
Mgmt
Material Control
Timing
Quantities
Source approval
Inspection
Quality
Production plans
Schedules
capabilities
Make
or buy
Supplier
Quality procedures
Inspection
Product availability
Manufacturing
Quality complaints
Suppliers
Distribution
Marketing
SCM602
3-42

43. Procurement strategies
Volume consolidation
Reducing total number of suppliers while minimizing risk
Supplier operational integration
Building partnerships
Sharing information and knowledge
Identifying linked processes and shared opportunities for improvement
Value management extends beyond buyer-seller operations
Involving the supplier early in product design
Reducing complexity
Value engineering

44. Supply Strategy Questions
Who
Centralized or decentralized
Quality of staff
Top management involvement
When
Now versus later
Forward buy
What Price
Premium, standard, lower
Cost-based, market-based
Lease/make/buy

45. Supply Strategy Questions
What
Make or buy
Standard versus special
Quality
Quality versus cost
Supplier involvement
How much
Large versus small quantities (inventories)

46. Supply Strategy Questions
Where
Local, regional
Domestic, international
Large versus small
Multiple versus sole source
High versus low supplier turnover
Supplier relations
Supplier certification
Supplier ownership

47. Supply Strategy Questions
Why?
Objectives congruent
Market reasons
Internal reasons
1) Outside supply
2) Inside supply

48. Supply Strategy Questions
How
Systems and procedures
Computerization
Negotiations
Competitive bids
Fixed bids
Blanket orders/open orders
Group buying
MRP
Long-term contracts
Ethics
Aggressive or passive
Purchasing research
Value analysis