Objectives and Organization for Effective Purchasing and Supply Management Chapter 2 Mr. Rizwan Tanveer Malik
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
Cont. • 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.
Elements of the Purchasing Process • • • • •
Identify user requirements. Evaluate need effectively and efficiently Identify suppliers. Ensure payment occurs promptly. Ascertain that the need was effectively met. • Drive continuous improvement. 4
Purchasing Process
1. User Need
YES
Purchasing card On-line catalog EDI Stock check Automated ROP
Specification Statement of work New product requirement Customer order / MRP Traveling requisition Purchase requisition
Approved Supplier?
NO YES
Small $ Amount?
NO
Complex Requirement ?
5. Release & Receive Product or Service E-procurement documents
RFI/RFQ
2. Evaluate Suppliers
NO Purchase order Blanket PO Purchase release
YES
4. Purchase approval
3a. Bid and/or negotiation
Bill of lading Packing slip Discrepancy report Kanban Acknowledgement
Supplier invoice
Match PO and invoice 5
6. Update Supplier Scorecard
3b. Supplier Selection
Payment to supplier
Input used to award future business
Purchase Requisition Flow
Major Purchasing Functional Strategy Areas 1. Assurance of supply strategies 2. Cost reduction strategies
3. Supply support strategies 4. Environmental change strategies 5. Competitive edge strategies
Strategic Purchasing Planning Process Restate organizational goals
Determine supply objectives to contribute to organizational goals Isolate factors affecting achievement of supply objectives
Identify and analyze alternatives Determine supply strategy Review implementation factors
Gain commitment and implement Evaluate
Purchasing’s Prime Decision Authority • Select the supplier. • Use whichever pricing method is appropriate.
• Question the specifications. • Monitor contacts with potential suppliers.
Various titles of the Chief Purchasing Officer • Director of Purchasing • VP of Purchasing
• Manager of Purchasing • VP of Materials Management • Materials Manager
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
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
Purchasing Activities • Purchasing/buying
• Forecasting and planning
• Purchasing research
• Outsourcing and
• Inventory control • Transportation • Environmental and investment recovery/disposal
subcontracting • Nonproduction/nontradi tional purchases
• Supply chain management
Typical Purchasing Organization Structure - Medium Sized Company Director of Purchasing
Commodity Manager
Commodity Manager
Manager Administration and Processes
Materials Manager
Buyer
Buyer
Manager e-Purchasing
Stores/ Warehouse Manager
Buyer
Buyer
Manager p-cards
Manager Purchasing Research
Receiving Inspection Manager Manager Transportation
Potential Advantages of Centralization 1. 2. 3. 4. 5. 6. 7.
greater buying specialization 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 8. critical mass 9. firm brand recognition and stature 10. reporting line - power 11. strategic focus 12. cost of purchasing low
Potential Advantages of Centralization 13. easier coordination/communication with operating department 14. speed of response 15. effective use of local sources 16. business unit autonomy 17. reporting line simplicity 18. undivided authority and responsibility 19. suits purchasing personnel preference 20. broad job definition 21. geographical, cultural, political, environmental, social, language, currency appropriateness 22. hide cost of supply
Disadvantages of Centralization 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.
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
Disadvantages of Centralization 14. More difficult to communicate among business units 15. Encourages users not to plan ahead 16. Operational versus strategic focus 17. Too much focus on local sources - ignores better supply opportunities 18. No critical mass in organization for visibility/ effectiveness “whole person syndrome� 19. Lacks clout 20. Sub optimization.
Disadvantages of Centralization 21. Business unit preferences not congruent with corporate preferences 22. Small differences magnified
23. Reporting at low level in organization 24. Limits functional advancement opportunities 25. Ignores larger organizational considerations 26. Limited expertise for requirements 27. Lack of standardization
28. Cost of supply relatively high
Hybrid Structure Centralized
Disadvantages
Decentralized
Advantages
Advantages
Hybrid structure
Disadvantages
Purchasing Objectives • Supply continuity. • Manage the purchasing process efficiently and effectively. • Develop supply base management.
• Develop strong relationships with other functional stakeholders.
Purchasing Objectives • Support organizational goals and objectives. • Develop integrated purchasing strategies that support organizational strategies.
Supply Continuity • Buy products/services at the right price. • Buy them from the right source. • Buy them at the right specification that meets users’ needs. • Buy them in the right quantity. • Arrange for delivery at the right time. • Require delivery to the right internal customer.
Manage the Purchasing Process • Determining staff levels. • Developing and adhering to budgets. • Providing professional training and growth opportunities. • Introducing procure to pay systems.
Procure to Pay Systems • Improved spending visibility. • Efficient invoicing and payment. • User satisfaction.
Develop Supply Base Management • Select competitive suppliers. • Identify new suppliers with high potential and build closer relationships. • Improve existing suppliers. • Develop new suppliers who are not currently competitive.
Develop Strong Internal Relationships • Internal customers as stakeholders. • Strong two-way communication. • Cross-functional coordination and collaboration. • Positive, problem-solving relationships.
Support Goals and Objectives • Congruency of functional goals with organizational goals. • Mutually-supportive, not counter-productive. • Purchasing’s substantial impact on the organization’s bottom line. • Purchasing as a strategic core competency.
Supply Market Intelligence • • • •
Monitoring supply markets and trends. Identifying critical materials and services. Supporting new product development. Developing supply options and contingency plans. • Supporting a diverse and globally competitive supply base.
Reasons for Not Being Strategic • Purchasing personnel have not historically participated in senior-level corporate planning. • Executive management has not always recognized the benefits of world-class purchasing.
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.
Key Strategy Questions 1. How can the supply function contribute effectively to organizational objectives? OR 2. How can the manager of purchasing
make sure the supply function contributes effectively to organizational objectives?
Supply Strategy Interpreted in Organizational Strategy Supply Objectives
Organizational Objectives
Supply Strategy
Organizational Strategy
Supply Strategy Links Current and Future Markets to Current and Future Needs Current Needs
Future Needs
Current Markets
Future Markets
Normal Organizational and Supply Objectives Organizational Objectives
Supply Objectives
1. Survival
1.Quality
2. Growth
2.Quantity
3. Financial
3.Delivery
4. Environmental
4.Price 5.Service
Potential Business-Strategy Contribution Areas 1. Social issues and trends 2. Government regulations and controls 3. Financial planning with suppliers 4. Product liability exposure 5. Economic trends and environment 6. Organizational changes
7. Product or service line
8. Competitive intelligence 9. Technology 10. e-Commerce 11. Investment 12. Mergers/acquisitions/ disinvestment 13. Time-based competition
Four Possible Changed Organizational Strategies Involving Purchasing 1. Materials management 2. Project management 3. Logistics management, or supply chain management 4. JIT purchasing/production
Three Ways for Supply to Contribute to Technology Strategy 1. By providing information to their own design/ process/production staff on development in technology. 2. By working with suppliers to develop new technology that can be incorporated into the buying firm’s operation. 3. By assisting to “lock-up” new, advantageous technology through exclusive agreements with suppliers.
e-Commerce Issues • Which exchanges should our company participate in? • Should our company form a B2B exchange with our competitors? • Should we demand that our suppliers conduct business with us on-line? • What software should we be committing to?
Risk in the Supply Chain 1. The risk of interruption of the flow of goods and services 2. The risk that the cost of the goods or services will be higher than expected
Managing Supply Risks 1. Identification and classification of the risks
2. Impact assessment 3. A risk strategy
Supply Strategy Questions • What – Make or buy – Standard versus special
• Quality – Quality versus cost – Supplier involvement
• How much – Large versus small quantities (inventories)
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
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
Supply Strategy Questions • How – Systems and procedures – Computerization – Negotiations – Competitive bids – Fixed bids – Blanket orders/open orders
- Blank check system - Group buying - MRP - Long-term contracts - Ethics - Aggressive or passive - Purchasing research - Value analysis
Supply Strategy Questions • Why? – Objectives congruent
– Market reasons – Internal reasons 1) outside supply 2) inside supply
Trends in Purchasing and Supply Management • Nontraditional people will be in many supply management positions • Technical entry route into purchasing
• Emphasis on total quality management and customer satisfaction • Emphasis on the process used in acquisition, rather than the transactions • Purchase of systems and services, as well as products
Trends in Purchasing and Supply Management • Strategic cost management • Design engineering and purchasing capitalize on their potential synergy • The supplier base will be reformulated • Longer term contracts • e-Commerce • Global supply management • MRO items handled by a third-party contractor
Trends in Purchasing and Supply Management • Sourcing will include the complete end product or service and be done proactively • Closer supplier relationships • Teaming • Empowerment • End-product manufacturers will focus on design and assembly • Consortiums for purchasing
Trends in Purchasing and Supply Management • Separation of strategic and tactical purchasing • Greater purchasing involvement in nontraditional purchases • Environmental purchasing • Value enhancement versus cost reductions
The Future of Supply Management 1.
Supply chain management
2.
Cycle time reductions
3.
Video communication with suppliers
4.
Integration into business strategy
5.
Outsource the procurement process
6.
Functional lines blurred or even eliminated
7.
Design for procurability
8. “Pull systems� become common in manufacturing 9. Reduction of third- and fourth tier suppliers 10. Networking of suppliers 11. Contract with two suppliers simultaneously to design and build 12. Rationalization of B2B marketplace 13. Expert systems/artificial intelligence
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
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.
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.
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.
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.