Supply Chain Logistics Management Chapter 5 Procurement Manufacturing

Supply Chain Logistics Management Chapter 5: Procurement. Manufacturing Strategies Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Purchasing Vs. Procurement • Purchasing is normally associated with a functional activity • Procurement/Sourcing should be viewed as a strategic activity for the business. Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Purchasing vs. Sourcing (cont’d) Purchasing Mentality Sourcing Mentality One contract at a time Win-lose Immediate returns Secretive Current needs can be met Lowest purchase price Multiple suppliers Infrequent interaction Criticism Buyer-sales relationship Safety in numbers Quality inspected Inventory as safeguard Continual Improvement Win-win Long-term perspective Trusting Strategic fit exists Total cost of ownership Supply-base reduction Frequent interaction Constructive evaluations Cross-functional relationship Safety in knowledge Quality at source Information as safeguard Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Supplier Development Through Procurement The Marketing Viewpoint Supplier Marketing Initiative Purchaser Purchasing Response The Procurement Viewpoint Supplier Procurement Initiative Purchaser Marketing Response Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Importance of Sourcing • In the average manufacturing firm purchased goods and services account for 55% of every sales Dollar • Direct labor costs account for only about 10% of the sales dollar Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Procurement’s Potential Payoff • Beginning Position – Sales $100, 000 – Purchases(55%) 55, 000 – Labor (15%) 15, 000 – Other (22%) 22, 000 – Pre-tax profit (8%) 8, 000 Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Procurement’s Potential Payoff Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Competing through Sourcing • • • Quality Improvement Cost Reduction Lead Time Reduction Delivery/Service Improvement Technology Gain Shortened Concept-to-Customer Cycle Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

One Approach to Procurement Segmentation $ Value large Commodities Convenience & efficiency small Strategic Alliances Key Systems Supplier Technology/Knowledge Contribution large Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Sourcing Pathways (Source: Mercer Mgmt Consulting) • Volume consolidation/Supply base optimization => “Buy for less” • Supplier-buyer integration/Linked cost minimization => “Buy better’ • Value management/Optimization => “Consume better” • Sales synergy => “Sell better” Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Volume Consolidation/Supply Base Optimization (Buy for Less) • Increased supplier fixed cost utilization • Capitalize on competitive supply base structure • Leveraged buyer’s share • Enhanced negotiations and contracting skills Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Supplier-buyer Integration/ Linked Cost Minimization (Buy Better) • Improved coordination/forecast accuracy and predictability • Optimized logistical flows/value added roles (including outsourcing) • Streamlined transactional information flow • Increased and earlier supplier involvement on cost issues • Improved supplier cost productivity • Committed volumes to allow supplier investment Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Value Management/ Optimization (Consume Better) • • • Early supplier involvement in solution design Reduced complexity/simplified specifications Increased standardization Clarified response time objectives Rationalized requirements Controlled consumption rates Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Sales Synergy (Sell Better) • Total supplier integration • Integrated multi-commodity products/ services and channel portfolio • Creative risk sharing • Fully exploited capabilities and potential • Leveraged channel relationships Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Supplier Integration and Product Development Process Idea generation Assessment Concept Design Development Prototype Full Scale Operation Possible Supplier Integration Points Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Flexibility and Cost of Design Changes Idea generation Assessment Concept Development Design Prototype High Cost of Design Changes Flexibility in Design Low Time Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Pathways to Growth Level 4 Percentage Savings/Revenue Enhancement Integrated Sell Level 3 Value Buy Varies Widely Level 2 Linked Buy Level 1 Varies Widely (Plus ongoing productivity improvements) Leveraged Buy 5 -25% Level 0 User Buy 5 -15% Buy for Less Buy Better Consume Better Sell Better Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Roadblocks to Strategic Procurement • Organization and people – Not “strategic” – Limited skill to align with pathway • Processes – Adversarial relationships – Need end-to-end processes • Information systems – Need total systems cost approach • Knowledge of the possibilities Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Major Categories for the Components of Total Cost of Ownership Pretransaction Components 1. Identifying need 2. Investigating sources 3. Qualifying sources 4. Adding supplier to internal systems 5. Educating : • supplier in firm’s operations • firm in supplier’s operations Transaction Components 1. Price 2. Order placement/ preparation 3. Delivery/ transportation 4. Tariffs/ duties 5. Billing/ payment 6. Inspection 7. Return of parts 8. Follow-up and correction Posttransaction Components 1. Line fallout 2. Defective finished goods rejected before sale 3. Field failures 4. Repair/ replacement in field 5. Customer goodwill/ reputation of firm 6. Cost of repair parts 7. Cost of maintenance and repairs Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Major Trends in Procurement • Fewer sources of supply will be used • Buyers will be more concerned with final customer satisfaction • Buyers will focus on “lead supplier” relationships • Buyers will drive shorter cycle times • Design engineers and buyers will be part of sourcing teams • Global sourcing will increase • e-procurement will have a major impact-not all of it will be positive for supply chain integration – buying exchanges – auction sites Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Malcolm Baldridge Criteria and Values 1 Leadership (120 pts. ) The Leadership Category examines how your organization’s senior leaders address values and performance expectations, as well as a focus on customers and other stakeholders, empowerment, innovation, learning, and organizational directions. Also examined is how your organization addresses its responsibilities to the public and supports its key communities. 2 Strategic Planning (85 pts. ) The Strategic Planning Category examines your organization’s strategy development process, including how your organization develops strategic objectives, action plans, and related human resource plans. Also examined are how plans are deployed and how performance is tracked. 3 Customer and Market Focus (85 pts. ) The Customer and Market Focus Category examines how your organization determines requirements, expectations, and preferences of customers and markets. Also examined is how your organization builds relationships with customers and determines their satisfaction. Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Malcolm Baldridge Criteria and Values (cont. ) 4 Information and Analysis (90 pts) The Information and Analysis Category examines your organization’s performance measurement system and how your organization analyzes performance data and information. 5 Human Resources Focus (85 pts. ) The Human Resources Focus Category examines how your organization enables employees to develop and utilize their full potential, aligned with the organization’s objectives. Also examined are the organization’s efforts to build and maintain a work environment and an employee support climate conducive to performance excellence, full participation, and personal and organizational growth. 6 Process Management (85 pts. ) The Process Management Category examines the key aspects of your organization’s process management, including customer-focused design, product and service delivery, support, and supplier and partnering processes involving all work units. Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Malcolm Baldridge Criteria and Values (cont. ) 7 Business Results (450 pts) The Business Results Category examines your organization’s performance and improvement in key business areas -- customer satisfaction, product and service performance, financial and marketplace performance, human resource results, supplier and partner results, and operational performance. Also examined are performance levels relative to competitors. Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

E-Chemicals Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Cost Per Unit Total Cost of Manufacturing Total Cost Inventory/ Warehouse Manufacturing/ Procurement Transportation Quantity MTO ATO MTP Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The Mc. Graw-Hill Companies, Inc. All rights reserved.