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CHAPTER TWO
Objectives and Organization for Effective Purchasing and Supply Management
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2-3
Goals of the Purchasing Function • Provide an uninterrupted flow of materials, supplies and services required to operate the organization • Keep inventory investment and loss at a minimum • Maintain and improve quality • Find or develop competent suppliers • Standardize, where possible, the items bought • Purchase required items and services at lowest cost
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2-4
Goals of the Purchasing Function • Achieve harmonious, productive working relationships with other functional areas within the organization • Accomplish the purchasing objectives at the lowest possible level of administrative costs • Improve the organization’s competitive position
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2-5
Purchasing’s Prime Decision Authority • Select the supplier • Use whichever pricing method is appropriate • Question the specifications • Monitor contacts with potential suppliers
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Various Titles of the Chief Purchasing Officer • Director of Purchasing • VP of Purchasing • Manager of Purchasing • VP of Materials Management • Materials Manager
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Purchasing Reporting Relationships Position to Whom the CPO Reports
1988 %
1995 %
16%
16
Executive VP
19
15
Senior VP/Group VP
*
19
Financial VP
7
10
Manufacturing/Operations VP
24
15
Materials/Logistics VP
8
7
Engineering VP
1
1
Administrative VP
13
9
Other (many of whom were VPs)
12
8
President
* category not identified in study McGraw-Hill/Irwin
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Functions that Report to Purchasing: CAPS Study Function
1988 %
1995 %
Scrap/surplus disposal
57
63
Materials and purchasing research
*
60
Inbound traffic
40
51
Stores/warehousing
34
41
Inventory control
37
41
Material planning
*
40
Outbound traffic
31
39
* category not identified in study McGraw-Hill/Irwin
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Purchasing Activities • • • • • • • • •
Purchasing/buying Purchasing research Inventory control Transportation Environmental and investment recovery/disposal Forecasting and planning Outsourcing and subcontracting Nonproduction/nontraditional purchases Supply chain management
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2-10
Typical Purchasing Organization Structure - Medium Sized Company Director of Purchasing
Commodity Manager
Commodity Manager
Manager Administration and Processes
Buyer
Buyer
Manager e-Purchasing
Buyer
Buyer
Manager p-cards Manager Purchasing Research
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Materials Manager
Stores/ Warehouse Manager Receiving Inspection Manager Manager Transportation
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2-11
Potential Advantages and Disadvantages of Centralization Advantages • greater buying specialization
Disadvantages
• ability to pay for talent • consolidation of requirements - clout
• • • •
• coordination of policies and procedures • effective planning and research
• •
• common suppliers
•
• proximity to major organizational decision makers • • • critical mass • • firm brand recognition and stature • reporting line - power • strategic focus • cost of purchasing low McGraw-Hill/Irwin
• • •
narrow specification and job boredom lack of job flexibility corporate staff appears excessive tendency to minimize legitimate differences in requirements lack of recognition of unique needs focus on corporate requirements, not on business unit strategic requirements even common suppliers behave differently in geographic and market segments distance from users tendency to create organizational silos customer segments require adaptability to unique situations top management not able to spend time on suppliers lack of business unit focus high visibility of purchasing costs
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Potential Advantages and Disadvantages of Decentralization Advantages • easier coordination/communication with operating department • speed of response • effective use of local sources
• business unit autonomy
• • • • •
reporting line simplicity undivided authority and responsibility suits purchasing personnel preference broad job definition geographical, cultural, political, environmental, social, language, currency appropriateness • hide cost of supply McGraw-Hill/Irwin
Disadvantages • more difficult to communicate among business units • encourages users not to plan ahead • operational versus strategic focus • too much focus on local sources - ignores better supply opportunities • no critical mass in organization for visibility/ effectiveness - “whole person syndrome” • lacks clout • suboptimization • business unit preferences not congruent with corporate preferences • small differences magnified • reporting at low level in organization • limits functional advancement opportunities • ignores larger organizational considerations • limited expertise for requirements • lack of standardization • cost of supply relatively high © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.
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Potential Advantages of the Hybrid Structure Centralized
Disadvantages
Decentralized
Advantages
Advantages
Disadvantages
Hybrid structure McGraw-Hill/Irwin
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Purchasing and Supply Teams • • • • • • • •
Cross-functional teams Teams with suppliers Teams with customers Teams with suppliers and customers Supplier councils - key suppliers Purchasing councils - purchasing personnel only Commodity management teams Consortiums
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Team Leader Responsibilities • Work with the team to establish and commit to performance goals • Secure individual member involvement and commitment • Manage internal team conflict • Help maintain team focus and direction • Secure required organizational resources
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Team Leader Responsibilities • Prevent team domination by a member or function • Deal with internal and external obstacles confronting the team • Coordinate multiple tasks and manage the status of team assignments • Clarify and help define each team member’s role • Provide performance feedback to members
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Keys for Successful Consortiums • Reducing total costs for the consortium members – Through lower prices, higher quality and better services • Eliminating and avoiding all real and perceived violations of anti-trust regulations • Installing sufficient safeguards to avoid real and perceived threats concerning disclosure of confidential and proprietary information
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Keys for Successful Consortiums • Mutual and equitable sharing of risks, costs and benefits to all stakeholders, including buying firms/members, suppliers and customers • Maintaining a high degree of trust and professionalism • Maintaining a strong similarity among consortium members and compatibility of needs, capabilities, philosophies and corporate cultures
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