1. McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

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4. Chapter 1 The Progression to Professional Supply Management 1-4

5. Key Concepts Purchasing, Supply Management, and Supply Chain Management Defined »Increasing Importance of Purchased Materials. Supply Management’s Impact on the Bottom Line »Increased Sales »Faster to Market or Time-Based Competition Supply Management and Return on Investment The Progression to Proactive Supply Management 1-5

6. What Is a Profession? A calling requiring specialized knowledge and often long and intensive preparation including instruction in skills and methods as well as in the scientific, historical, or scholarly principles underlying such skills and methods, maintaining by force of organization or concerted opinion high standards of achievement and conduct, and committing its members to continued study and to a kind of work which has for its prime purpose the rendering of a public service. (Source: Webster's Third International Edition) 1-6

7. Purchasing: A Dynamic Profession Is purchasing a profession? Do the required skills have a historic foundation? Does the supply management profession render a public service? Is the profession undergoing changes? 1-7

8. Six Key Business Functions ( Supply Management’s Role in Business) 1.Creation, the idea or design function, frequently based on research and development 2.Finance, the capital acquisition, financial planning and control function 3.Personnel, the human resources and labor relations function 4.Supply, the acquisition of required materials, services, and equipment 5.Conversion, the transformation of materials into economic goods and services 6.Distribution, the marketing and selling of goods and services produced 1-8

9. Evolution of Purchasing Function Purchasing: a Dynamic Profession Origins of Purchasing and Supply Management Transition to Supply Management »Wider in Scope »Value-Adding Benefits »Strategic Focus Value ‑ Adding Benefits Strategic Focus 1-9

10. 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 1-10

11. 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 1-11

12. Four Principles of Strategic Sourcing 1.Define the total value of the relationship between purchaser and suppler, 2.Develop solutions based on a deep understanding of the supplier's economics and business dynamics, 3.Use differentiated purchasing tactics in order to optimize the economic relationship for both purchaser and suppliers, and 4.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 1-12

13. Four Step Process of Implementation Research the industry economics and dynamics of the team's assigned commodity; Evaluate sourcing strategies and suppliers' capabilities; Structure the supply relationship jointly with suppliers and develop action plans to build the required infrastructure; Implement the plan and organize for continuous improvement 1-13

14. 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 1-14

15. Power Source Relationships: The Reduction of Labor Content in Products Figure 1-1 185019001950 2% 50% 98% Machine Power Horse and Human Key 1-15

16. 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 1-16

17. 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 Figure 1-2 1-17

18. Return on Investments 10.0% Total assets $4,000,000 Sales $5,000,000 Divided by Profit margin 8% Asset turnover rate 1.25 Multiply Cash $300,000 Account receivable $300,000 Inventories $500,000 Assets Labor $700,000 Materials $2,300,000 Overhead $800,000 Operating cost elements ($515,000) ($3,685,000)($2,185,000) (10.3%) (1.26) ($3,975,000) ($1,075,000) ($475,000) (13.0%) What if we decrease materials cost by 5%? (or $115,000) Sales $5,000,000 Net income $400,000 Divided by Fixed assets $2,900,000 Current assets $1,100,000 Plus Other costs $800,000 Sales $5,000,000 Cost of Goods Sold $3,800,000 Minus Plus Supply Management and Return on Investment Figure 1-3 1-18

19. 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 1-19

20. The Impact on ROI of Reducing Materials Costs vs. Increasing Sales therefore….. ($1,437,500 / $5,000,000) X 100 = 28.8% or a sales increase of 28.8% is required to match the profit increase generated by a 5% reduction in materials cost 1-20

21. A Definition of Supply Chain Management Supply Chain Management is a set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses, and stores,… …so that merchandise is produced and distributed at the right quantities, to the right locations, and at the right time,… …in order to minimize system wide costs …while satisfying service level requirements. 1-21 Source: Simchi-Levi, Kaminsky, and Simchi-Levi, Designing and Managing the Supply Chain, Irwin, McGraw-Hill, 2000.

22. The Supply Chain Mother Earth Original Equipment Manufacturers (OEM) Extractors Miners Harvesters Converters (suppliers) Figure 1-4 Materials and Service Information/Funds/Relationships 1-22

23. The Value Chain Mother Earth Original Equipment Manufacturers (OEM) Extractors Miners Harvesters Converters (suppliers) Marketers Distributors End Customer (the source of funds) Figure 1-5 Materials and Service Information/Funds/Relationships 1-23

24. The Supply and Value Networks Flexible virtual systems linked by communication systems and alliances. Simultaneous activities. Focus is on the ultimate customer to deliver: »Value creation through innovation »Value delivery through order fulfillment »Value maintenance through after sales service 1-24

25. The Extended Enterprise When a group or network of firms collaborate in partnership (alliance) fashion, this is sometimes referred to as a strategic network, virtual corporation, or extended enterprise When the group of firms view each other as partners and collaborate effectively for the good of the larger group, then they leave established an extended enterprise characterized by virtual integration 1-25

26. Implementing Strategic SCM Figure 1.6 1-26

27. Concluding Remarks Purchasing is the foundation of Supply Management and a basic activity common to all organizations. Effective Supply Management has an overwhelming impact on the firm’s bottom line giving organizations a competitive edge. Supply Management provides tremendous career opportunities 1-27