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CHAPTER ONE
The Challenge of Purchasing and Supply Management
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Corporate Supply Challenges • Need to control unit costs • Need to reduce the total cost of acquisition • The increasing influence of suppliers on the purchaser’s ability to respond to end-customers needs • Increased reliance on fewer suppliers • Trend towards reliance on suppliers for design and build responsibilities for complete subassemblies and subsystems McGraw-Hill/Irwin
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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 – pricing inflation
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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. – The Internet and B2B e-commerce
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The Evolution of the Supply Function • Clerical and tactical • Focus on policies and procedures • Key challenge: availability of supply and cost management early 1900s McGraw-Hill/Irwin
• Strategic orientation • Global supply chains • Executive level leadership • Key challenge: Technology and the Internet early 21st century © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.
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Evolution of the Supply Chain
Pre 1939
1940-49
1950-69
1970-89
1990-1999
2000-Future
Clerical
World War II
Managerial emphasis
Purchasing strategy
Integration into corporate strategy Integration with supply networks and information technology
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The Buyer/Planner Concept • Combines planning and purchasing functions into one position – Planners: Determine what materials are needed and when – Buyers: Handle sourcing and buying
• Charged with responsibility for a specific line of inventory • Duties may include: establishing schedules, issues and analyzes quotations, places orders, monitors supplier performance, and keeps abreast of market trends, supplier capacities and technologies. McGraw-Hill/Irwin
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Major Logistics Activities • customer service • demand forecasting/planning • inventory management • logistics communications • material handling • order processing • packaging
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• parts and service support • plant and warehouse site selection • purchasing • return goods handling • reverse logistics • traffic and transportation • warehouse storage
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Supply Chain Management
“The design and management of seamless, value-added processes across organizational boundaries to meet the real needs of the end customer. The development and integration of people and technological resources are critical to successful supply chain integration.”
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Simplified One-Stage Decision Tree
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Purchasing’s Operational and Strategic Contributions
1. Supply Contribution
Operational Trouble Prevention
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Strategic Opportunity Maximization
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Purchasing’s Operational and Strategic Contributions
2. Supply Contribution
Direct Bottom-Line Impact
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Indirect Enhancing Performance of others
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Purchasing’s Operational and Strategic Contributions 3. Supply Contribution
Negative Operationally deficient Strategically deficient Directly deficient Indirectly deficient McGraw-Hill/Irwin
Neutral Operationally acceptable Strategically deficient Directly acceptable Indirectly deficient
Positive Operationally acceptable Strategically acceptable Directly acceptable Indirectly acceptable
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Return on Assets Factors
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The Opportunities for Contribution of the Purchasing/Supply Function • • • • •
Profit-leverage effect Return-on-assets effect Information source Effect on efficiency Effect on competitive position and customer satisfaction • Effect on image • Training ground • Management strategy and social policy McGraw-Hill/Irwin
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Characteristics of an Integrated Strategic Procurement and Sourcing Function Executive Leadership
Strategic Positioning
• Executive committee support for integration across company and strategic business unit corporate plans
• External/internal customer focus • Matrix management • High-level positioning - second, third or fourth levels
Functional Leadership
Integration
• Company-wide customer-focused leadership • Establish integrated visions workers at results and processes • Drives supply base/supplier management strategies companywide
• Cross-functional, cross-location teaming • Part of the technology, manufacturing and SBU planning process
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Characteristics of an Integrated Strategic Procurement and Sourcing Function Supply Base Strategy • • • • •
Quality driven Design standardization Concurrent engineering Supply base optimization Commercial strategy emerging
Supplier Management • • • • •
Measurement • Customer orientation • Total value/cost focused • Benchmarking with best in class
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Focused on supplier development Joint performance improvement efforts Value focused Total cost improvement Supplier benchmarking
Systems • • • •
Global databases Historical performance data Strategic EDI, Internet, EFT, CAD, CAM
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Professionalism in Purchasing • New assignments • Education • College recruitment • Training programs • Salary levels • Professional associations McGraw-Hill/Irwin
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Challenges Facing Purchasing • B2B e-commerce • Supply chain management • Measurement • Purchase of non-traditional goods and services • Contribution to corporate strategy • Recognition by senior management McGraw-Hill/Irwin
© 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.