Purchasing

PURCHASING
& Supply
& SUPPLY
Chain Management
CHAIN MANAGEMENT,
– 5th ed. 6e
– 2012

Introduction to
Purchasing and Supply
Chain Management
Chapter 1

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 Chapter Overview

 A new competitive business

environment
 Why purchasing is important
 Understanding the language of
purchasing and supply chain
management
 Achieving purchasing and supply chain
benefits
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 Chapter Overview

 The supply chain umbrella –

management activities
 Four enablers of purchasing and
supply chain management
 The evolution of purchasing and supply
chain management
 Looking ahead

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 A New Competitive Environment

 Increasing numbers of world class

global competitors
 Sophisticated customer base
 More performance at lower cost
 Widely available information sources
 Balance of power between buyers and
suppliers
 Greater levels of outsourcing
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 Factors Driving SCM

 Low cost and wide availability of

information
 More closely links members of a supply
chain
 Higher levels of competition in
domestic and international markets
 Requires greater quickness, agility, and
flexibility

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 Factors Driving SCM

 Customer expectations and

requirements
 Constantly changing and more demanding
 Ability of an organization’s supply
chain to identify and mitigate risk
 Minimize disruptions
 Competition is now between supply
chains, not just between companies
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 Why Purchasing Is Important
 Increasing value and savings
 Building relationships and driving
innovation
 Improving quality and reputation
 Reducing time-to-market
 Managing supplier risk
 Generating economic impact
 Contributing to competitive advantage
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 Increasing Value and Savings

 Suppliers have substantial impact on a

firm’s total cost
 Many product features originate from
suppliers
 In manufacturing, purchased content is
more than 55% of revenues
 Avoiding costs through early
involvement in product design stage
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 Building Relationships and
Driving Innovation
 Traditional approach is to bargain hard
for price reductions
 Newer approach is to conduct joint cost
reduction with suppliers
 Both buyer and supplier must benefit
 Suppliers can contribute innovative
ideas

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 Improving Quality and Reputation

 Buyer focuses on core competencies

and outsources non-core activities and
materials
 Need for ability to track materials back
up through supplier’s supply chain
 Supplier quality  product quality
 Lapses in managing supplier quality can
potentially tarnish a buyer’s reputation

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 Reducing Time-to-Market

 Include suppliers early in product

design process to take advantage of
their expertise
 Early supplier involvement can lead to
an average of 20% improvement on
material costs, material quality, and
product development times

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 Managing Supplier Risk

 Supplier risk is magnified by sourcing

strategies that emphasize global
sourcing, single sourcing, and JIT
inventory
 Need to develop business continuity
plans to mitigate risks

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 Generating Economic Impact
 The monthly ISM Report on Business® is
a closely followed national economic
indicator
 A change index
 Manufacturing and non-manufacturing
components
 > 50 means economy is expanding
 < 50 means economy is contracting

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 Contributing to Competitive
Advantage
 Growing recognition of supply
management’s contribution to firm’s
profitability
 More supply managers have earned
college degrees
 Increased number of supply managers
with certifications such as CPSM

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 Contributing to Competitive
Advantage
 Talent management
 Requires constant focus on finding,
developing, and promoting individuals
making significant contributions
 Vital to furthering supply management’s
impact on company strategies and
competitiveness

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 Language of Purchasing and SCM

 Is purchasing different from supply

management?
 Are supply chains and value chains the
same?
 What is supply chain management?
 What is an extended enterprise?

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 Purchasing

 A functional group (i.e., a formal entity

on the organization chart) as well as a
functional activity (i.e., buying goods
and services)
 a.k.a. as procurement

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 Purchasing

 Activities
 Supplier identification and selection
 Buying
 Negotiation
 Contracting
 Supply market research
 Supplier measurement and improvement
 Purchasing systems development

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 The Five Rights of Purchasing

 Getting the “right” quality

 In the “right” quantity
 At the “right” time
 For the “right” price
 From the “right” source

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 Supply Management

 A strategic approach to planning for

and acquiring the organization’s
current and future needs through
effectively managing the supply base,
utilizing a process orientation in
conjunction with cross-functional
teams to achieve the organizational
mission

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 ISM’s Definition

 The identification, acquisition, access,

positioning, and management of
resources and related capabilities an
organization needs or potentially needs
in the attainment of its strategic
objectives

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 Defining Supply Management
Strategic
Orientation

Cross
Supply Base
Functional
Management
Groups

Process-
Driven
Approach
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 Supply Management

 Strategic responsibilities
 Activities which have a major long-term
impact on firm performance
 Aligned with the overall mission and
strategies of the firm
 Managing the supply base
 Work directly with suppliers to provide
world-class performance
 A supercharged version of purchasing
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 Supply Management

 Process approach
 Identifying, evaluating, selecting,
managing, and developing suppliers to
improve performance
 Move across functional area boundaries
 Cross-functional
 Sharing information
 Suppliers as an extension of the buying
company
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 Supply Chains and Value Chains

 Supply chain orientation

 Higher level recognition of the strategic
value of managing operational activities
and flows within and across a supply
chain
 Value chain
 Primary and secondary support activities
that can lead to competitive advantage

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 Supply Chains and Value Chains
 Supply chain
 Set of 3 or more organizations linked
directly by 1 or more of upstream or
downstream flows of products, services,
finances, and information from a source to
a customer
 Subset of the value chain

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 The Extended Value Chain
• Firm infrastructure
Support • Human resource management
Activities • Technology development
• Purchasing
Materials/Services Information/Funds/Knowledge

Customers
Suppliers

Inbound Outbound Marketing Customer

Operations
Logistics Logistics & Sales Service

Primary Activities Exhibit 1.2

Materials / Physical Distribution /

Supply Management Channel Management

Total Supply Chain / Total Logistics Management

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 Supply Chains vs. Value Chains

 Supply chain management

 Endorses a supply chain orientation and
involves proactive management of two-
way movement and coordination of goods,
services, information, and funds from raw
material through end user

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 Cereal Value Chain Example
Grain Cereal Packaged Cereal
Farmer Processor Packaging Distributor

Packaged
Cereal
Paperboard
Grocer
Exhibit 1.3
Corrugated Packaged
Box Mfr Cereal

Wood Consumer
Labels

Lumber Label Material flows

Company Mfr
Information flows

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 The Supply Chain Umbrella

 Purchasing
 Inbound transportation
 Quality control
 Demand and supply planning
 Receiving, materials handling, and
storage
 Material or inventory control

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 The Supply Chain Umbrella

 Order processing
 Production planning, scheduling, and
control
 Shipping/Warehousing/Distribution
 Outbound transportation
 Customer service

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 Enablers of Purchasing and SCM

Organizational Information
Human Resources Measurement
Design Technology

View the supply chain Centrally-led Use data from

holistically
Demand planning
visible sources
supply teams
Manage critical Order commitment, scheduling,
relationships Executive responsibility for and production management Quantify what
coordinating purchasing creates value
Analyze competitive and supply chain activities Distribution and
markets transportation scheduling Use goals that
Collocation of supply change over time
Engage in fact-based personnel with internal
Material replenishment
decision making customers Rely on benchmarking to
establish performance
Practice advanced cost Cross-functional teams targets
management to manage supply chain Reverse auctions
processes Link to business
Understand e-business Requisition to pay goals and objectives
systems Supply strategy coordination systems
and review sessions between
business units
Feature efficiency and
Analyze big data Intranets effectiveness measures

Executive buyer-supplier
council to coordinate Assign ownership
Utilize
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Webinars and podcasts and accountability
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 Capable Human Resources
 Supplier relationship management
 Total cost analysis
 Purchasing strategies
 Supplier analysis
 Competitive market analysis
 Need for close collaboration with
suppliers
 Need for close internal coordination
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 Proper Organizational Design

 Assessing and selecting structure and

formal system of communication
 Division of labor
 Coordination
 Control
 Authority
 Responsibility

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 Real-Time Collaborative
Technology Capabilities
 Supply chain planning software
 Improve forecast accuracy
 Optimize production scheduling
 Reduce working capital costs
 Shorten cycle times
 Cut transportation costs
 Improve customer service

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 Real-Time Collaborative
Technology Capabilities
 Supply chain execution software
 Obtain materials
 Manage physical flows
 Lean supply

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 Key SCM Technologies

 Capture and share real-time or near

real-time data across the supply chain
 Global positioning systems (GPS)
 Internet-based systems
 Bar codes
 Radio frequency identification devices
(RFID)

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 Right Measures and
Measurement Systems
 Roadblocks
 Too many metrics
 Debate over the correct metrics
 Constantly changing metrics
 Old data

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 Right Measures and
Measurement Systems
 Overcoming roadblocks
 Know what to measure
 Have a process in place to measure it
 Have accessibility to the right data

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 Why Is Measurement Important?

 Support fact-based decision making

 Communicate requirements throughout
the supply chain
 Improve future supplier performance
 Recognize outstanding performance
 Link critical measures to desired
business outcomes
 Determine if new initiatives are working
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 Evolution of Purchasing and SCM

 The early years

 1850 – 1900
 Growth of purchasing fundamentals
 1900 – 1939
 The war years
 1940 – 1946
 The quiet years
 1947 – Mid-1960s
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 Evolution of Purchasing and SCM

 Materials management comes of age

 Mid-1960s – Late 1970s
 The global era
 Late 1970s – 1999
 Integrated supply chain management
 The 21st century

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 Looking Ahead

 Section 2 – Purchasing Operations and

Structure
 Section 3 – Strategic Sourcing
 Section 4 – Strategic Sourcing Process
 Section 5 – Critical Supply Chain
Elements
 Section 6 – Future Directions

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