Module One Procurement and Supply Management UNCG SCM

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Module One Procurement and Supply Management UNCG - SCM Curriculum Dr. Larry Taube

Module One Procurement and Supply Management UNCG - SCM Curriculum Dr. Larry Taube

Six Key Business Functions (Supply Management’s Role in Business) 1. Creation, the idea or

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 -2

Corporate Supply Challenges • Increased outsourcing places great reliance on suppliers to respond to

Corporate Supply Challenges • Increased outsourcing places great reliance on suppliers to respond to end-customer needs • Greater dependence on suppliers for design and build responsibilities for complete subassemblies and subsystems • Increased global competition • Development of new product technologies • Evolving information systems • Trend to single sourcing with fewer key suppliers and strategic supplier relationships

Corporate Supply Opportunities • Identify opportunities to reduce unit costs for products and services

Corporate Supply Opportunities • Identify opportunities to reduce unit costs for products and services • Identify opportunities to increase revenue • Implement supply initiatives to improve customer satisfaction • Reduce total costs of ownership • Improve efficiency and effectiveness of the supply process • Maximize value from suppliers • Work with key supplier to provide product and service innovations

Supply Management • A Five Stage Process – Identification of item or service required

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 • VS: See Purchasing Process & Procurement Process Videos from Module One! • Supply Management utilizes Strategic Sourcing 1 -5

Strategic Sourcing • Strategic sourcing is understanding the markets you're purchasing from inside and

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 -6

Four Principles of Strategic Sourcing 1. Define the total value of the relationship between

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. 5. VS: See Purchasing Strategy Cube Video in Module 1! 1 -7

Increasing Importance of Purchased Materials • The Five Ms of Business: Machines, Man/Womanpower, Material,

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 -8

The Evolution of the Supply Function • The Handling of Railway Supplies – Their

The Evolution of the Supply Function • The Handling of Railway Supplies – Their Purchase and Disposition – Published in 1887 • Attention in first half of 1900 s to reliable access to supply of raw materials, supplies and services • Two vexing problems in the decade of the 1970 s put senior management attention on the supply function: – international shortage of basic raw materials – price inflation

The Evolution of the Supply Function • By 1990 s firms faced challenges of

The Evolution of the Supply Function • By 1990 s 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 21 st century provides expectations for supply chain integration, lower transaction costs and faster response times. – New challenges in the areas sustainability, globalization, supply chain security and risk management

The Evolution of the Supply Function early 1900 s ● Clerical and tactical ●

The Evolution of the Supply Function early 1900 s ● Clerical and tactical ● Focus on policies and procedures ● Key challenges: availability of supply and cost management early 21 st century ● Strategic orientation ● Global supply chains ● Executive level leadership ● Key challenges: Sustainability, security, globalization, risk management

Evolution of the Supply Chain Pre 1939 1940 -49 1950 -69 1970 -89 1990

Evolution of the Supply Chain Pre 1939 1940 -49 1950 -69 1970 -89 1990 -1999 2000 -2010 -Future Clerical World War II Managerial emphasis Purchasing strategy Integration into corporate strategy Integrated supply networks and information technology Sustainability, security, globalization, risk management

Supply Management & Bottom Line • Purchased items account for a large percentage of

Supply Management & 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 inhouse. • A dollar saved in materials cost is usually considered a dollar increase in profit 1 -13

Supply Management’s Impact on Net Income and the Bottom Line Increased Sales: • Faster

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 1 -14

Purchasing’s Operational and Strategic Contributions 1. Supply Contribution Operational Trouble Prevention Strategic Opportunity Maximization

Purchasing’s Operational and Strategic Contributions 1. Supply Contribution Operational Trouble Prevention Strategic Opportunity Maximization

Purchasing’s Operational and Strategic Contributions 2. Supply Contribution Direct Bottom-Line Impact Indirect Enhancing Performance

Purchasing’s Operational and Strategic Contributions 2. Supply Contribution Direct Bottom-Line Impact Indirect Enhancing Performance of others

Purchasing’s Operational and Strategic Contributions 3. Supply Contribution Negative Operationally deficient Strategically deficient Directly

Purchasing’s Operational and Strategic Contributions 3. Supply Contribution Negative Operationally deficient Strategically deficient Directly deficient Indirectly deficient Neutral Operationally acceptable Strategically deficient Directly acceptable Indirectly deficient Positive Operationally acceptable Strategically acceptable Directly acceptable Indirectly acceptable

Characteristics of an Integrated Strategic Procurement and Sourcing Function Executive Leadership • Executive committee

Characteristics of an Integrated Strategic Procurement and Sourcing Function Executive Leadership • Executive committee support for integration across company and strategic business unit corporate plans Functional Leadership ● Company-wide customer-focused leadership ● Establish integrated visions workers at results and processes ● Drives supply base/supplier management strategies companywide Strategic Positioning ● External/internal customer focus ● Matrix management ● High-level positioning - second, third or fourth levels Integration ● Cross-functional, cross-location teaming ● Part of the technology, manufacturing and SBU planning process

Characteristics of an Integrated Strategic Procurement and Sourcing Function • • • Supply Base

Characteristics of an Integrated Strategic Procurement and Sourcing Function • • • Supply Base Strategy Quality driven Design standardization Concurrent engineering Supply base optimization Commercial strategy emerging Measurement ● Customer orientation ● Total value/cost focused ● Benchmarking with best in class Supplier Management ● 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

Procurement focuses on several issues related to the firms’ supply base (pp. 82 -83)

Procurement focuses on several issues related to the firms’ supply base (pp. 82 -83) • • Ensuring continuous supply Minimizing inventory investment Quality improvement of supply Supplier development – Supplier selection – Building supplier relationships – Supplier continuous improvement • Lowest total cost of ownership

The Opportunities for Contribution of the Supply Function • • • VS: See Supply

The Opportunities for Contribution of the Supply Function • • • VS: See Supply Chain Risk and Value Analysis Video Return-on-assets effect Information source Effect on efficiency Effect on competitive position and customer satisfaction Effect on organizational risk Effect on image Training ground Management strategy and social policy

Supply Management and Return on Investment Operating cost elements Labor $700, 000 Sales $5,

Supply Management and Return on Investment Operating cost elements Labor $700, 000 Sales $5, 000 Minus Materials $2, 300, 000 ($2, 185, 000) Overhead $800, 000 Cost of Goods Sold $3, 800, 000 ($3, 685, 000) Plus Net income $400, 000 ($515, 000) Divided by Sales $5, 000 Profit margin 8% (10. 3%) Other costs $800, 000 Multiply Return on Investments 10. 0% (13. 0%) Inventories $500, 000 Assets What if we decrease materials cost by 5%? (or $115, 000) Sales $5, 000 ($475, 000) Account receivable $300, 000 Current assets $1, 100, 000 Divided by ($1, 075, 000) Plus Total assets $4, 000 Cash $300, 000 Fixed assets $2, 900, 000 ($3, 975, 000) Asset turnover rate 1. 25 (1. 26)

The Impact on ROI of Reducing Materials Costs vs. Increasing Sales • If the

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 (a 28% increase in sales) 1 -23

Supply Strategy Interpreted in Organizational Strategy Supply Objectives Organizational Objectives Supply Strategy Organizational Strategy

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

Supply Strategy Links Current and Future Markets to Current and Future Needs Current Needs Future Needs Current Markets Future Markets

Key Strategy Questions for Supply 1. How can supply and the supply chain contribute

Key Strategy Questions for Supply 1. How can supply and the supply chain contribute effectively to organizational objectives and strategy? AND 2. How can the organizational objectives and strategy properly reflect the contribution and opportunities offered in the supply chain?

The Integrated Supply Chain Framework

The Integrated Supply Chain Framework

Vertical Integration vs. Virtual Integration

Vertical Integration vs. Virtual Integration

Importance of Logistics – Porter’s Value Chain Model

Importance of Logistics – Porter’s Value Chain Model

An Organization Must Approach Strategic Planning on Three Levels • Corporate: Decisions and plans

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 Concepts • Purchasing Place within the Organization – Where is Purchasing on the

Key Concepts • Purchasing Place within the Organization – Where is Purchasing on the Organizational Chart? How it affects their performance. • Tactical vs. Strategic Responsibilities – Where is the focus? • Centralized vs. Decentralized – Who has the authority to make the buy decisions? • A Materials Management Structure • Use of Cross-functional Teams

Organizing Logistics within the Firm • Two key organizational logistics topics – Organizational structure

Organizing Logistics within the Firm • Two key organizational logistics topics – Organizational structure – Organizational design 4 -6

Organizational Structures • The Materials Management Organization Materials Manager Production Control Inventory Control Purchasing

Organizational Structures • The Materials Management Organization Materials Manager Production Control Inventory Control Purchasing Transportation Warehousing

Organizational Structure for Logistics • Two basic organizational structures are: – Fragmented logistics structure

Organizational Structure for Logistics • Two basic organizational structures are: – Fragmented logistics structure • Logistics activities are managed in multiple departments throughout an organization – Unified logistics structure • Multiple logistics activities are combined into and managed as a single department 4 -7

Organizational Structure for Logistics • Two basic organizational structures for logistics departments are: –

Organizational Structure for Logistics • Two basic organizational structures for logistics departments are: – Centralized logistics organization • Company maintains a single logistics department that administers the related activities for the entire company from the home office – Decentralized logistics organization • Logistics-related decisions are made separately at the divisional or product group level and often in different geographic regions 4 -8

Benefits of Centralized Authority • • • Reduction of duplication of effort Leveraging of

Benefits of Centralized Authority • • • Reduction of duplication of effort Leveraging of volume purchases Consolidation of requirements Transportation savings Individual specialization Reduction of suppliers’ costs Improved inventory control Lower administration costs Centralized control Reduction in costs of services

Benefits of Decentralization • Specialty buyers can evolve • Faster response time for multiple

Benefits of Decentralization • Specialty buyers can evolve • Faster response time for multiple locations • Better understanding of location’s requirements. • More efficient buying of low dollar, odd buys.

Figure 4 -1: Becton Dickinson’s Worldwide Sources 4 -38

Figure 4 -1: Becton Dickinson’s Worldwide Sources 4 -38

Organizational Structure for Logistics • Job title or corporate rank – Leading edge organizations

Organizational Structure for Logistics • Job title or corporate rank – Leading edge organizations tend to head the logistics department by senior-level personnel – Generally excluded from holding a “C-level” position 4 -10

Organizational Design for Logistics • Three primary types of organizational design include: – Hierarchical

Organizational Design for Logistics • Three primary types of organizational design include: – Hierarchical (functional) • Top-down flow – Matrix • Cross-functional responsibilities – Network • Process philosophy focused on combing tasks into value-creating products and activities 4 -40

Organizational Design for Logistics • Network organizational design is exhibited in terms of: –

Organizational Design for Logistics • Network organizational design is exhibited in terms of: – Relevancy – Responsiveness – Flexibility 4 -41

Internal Interfaces of the Supply Management Function s st g nfi Timing Quantities Material

Internal Interfaces of the Supply Management Function s st g nfi Timing Quantities Material Control Supply Mgmt Sch ion p edu lans les av ai la bi lit y Suppliers uc tq ua lit Qu alit y y re qu ire m ma p en t s Source approval Inspection Quality ure ed c pro ion ty t i l a ec Qu Insp Marketing SCM 602 ts in a pl m Manufacturing Distribution ct Make or buy uct du od s Pro d Pr o Specs. V. A. t ura e ag Supplier capabilities Co ion n ma nt me Estimates Fo Customers Pr Engineering ca re requirements Customer Marketing y lit co a Qu 3 -42

Procurement strategies • Volume consolidation – Reducing total number of suppliers while minimizing risk

Procurement strategies • Volume consolidation – Reducing total number of suppliers while minimizing risk • Supplier operational integration – Building partnerships – Sharing information and knowledge – Identifying linked processes and shared opportunities for improvement • Value management extends beyond buyer-seller operations – Involving the supplier early in product design – Reducing complexity – Value engineering

Supply Strategy Questions • Who – Centralized or decentralized – Quality of staff –

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 • What – Make or buy – Standard versus special •

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 • Where – Local, regional – Domestic, international – Large versus

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 • Why? – Objectives congruent – Market reasons – Internal reasons

Supply Strategy Questions • Why? – Objectives congruent – Market reasons – Internal reasons 1) Outside supply 2) Inside supply

Supply Strategy Questions • How – Systems and procedures – Computerization – Negotiations –

Supply Strategy Questions • How – Systems and procedures – Computerization – Negotiations – Competitive bids – Fixed bids – Blanket orders/open orders – Group buying • • • MRP Long-term contracts Ethics Aggressive or passive Purchasing research Value analysis