Purchasing and Supply Management

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Purchasing and Supply Management

• Dr. Stephen H. Russell
• Goddard School of Business and Economics
• Weber State University

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Course Introduction

• Me
• You
• Syllabus

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Chapter 1

• Introduction to Purchasing
• and Supply Management

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Types of Purchasing

• Retail Buying
• Industrial Buying
• Buying for Institutions
• Public Sector Purchasing

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Categories of Industrial Purchases

• Raw Materials
• Components and subassemblies
• Finished products
• MRO supplies
• Packaging materials
• Services
• Capital assets
• Transportation

Direct Materials
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The Logistics Model
Manufacturing Firm
Distribution Centers
Warehouse
Suppliers
Retail Stores
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The Logistics Model
Manufacturing Firm
Distribution Centers
Warehouse
Suppliers
Retail Stores
Inbound Logistics
Outbound Logistics
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Mother Earth to consumer . . .A Supply Chain

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Mother Earth to consumer . . .A Supply Chain
Place Utility
Time Utility

Form Utility
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Mother Earth to consumer . . .A Supply Chain
Information

Materials and products
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Mother Earth to consumer . . .A Supply Chain
Information

Materials and products
A supply chain is the integration of
sequentially-related firms inbound and outbound
logistics, together with operations
(manufacturing and service), and supporting
information systems.
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Understanding Terms

• Supply Chain

Logistics
Inbound Logistics or Materials Management
Purchasing or Procurement

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Understanding Terms

• Supply Chain

Logistics
Inbound Logistics or Materials Management
Purchasing or Procurement

Enhanced becomes
Supply Managementalso called Strategic Sourcing
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Understanding Terms

• Purchasing
• Procurement
• Supply Management (also called Strategic
  Sourcing)
• Materials Management
• Supply Chain Management

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Supply Management as compared to Purchasing
Supply Management is Purchasing EPI ESI
CFT Supplier development Long-term
contracts with world-class suppliers
Under supply management, partnerships (or
strategic alliances) based on mutual trust are
formed with key suppliers and these suppliers are
viewed as extensions of the firm.
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Materials Management

• Definition - Materials management is the planning
  and control of the flow and stock of materials to
  support production.
• Materials Management Activities
• Materials planning and scheduling
• Purchasing
• Transportation
• Warehousing
• Inventory control
• Salvage and scrap disposal

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Materials Management

• Definition - Materials management is the planning
  and control of the flow and stock of materials to
  support production.
• Materials Management Activities
• Materials planning and scheduling
• Supply Management
• Transportation
• Warehousing
• Inventory control
• Salvage and scrap disposal

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Materials Management

• Definition - Materials management is the planning
  and control of the flow and stock of materials to
  support production.
• Materials Management Activities
• Materials planning and scheduling
• Strategic Sourcing
• Transportation
• Warehousing
• Inventory control
• Salvage and scrap disposal

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Materials Management

• Definition - Materials management is Inbound
  Logistics. on
• Materials Management Activities
• Materials planning and scheduling
• Supply Management
• Transportation
• Warehousing
• Inventory control
• Salvage and scrap disposal

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Course Theme
Supply management can have a major impact on
organization success by influencing

• Technologies and innovation
• Customer service
• Competitive advantage

• Cost
• Quality
• Sales
• Profits
• Product development time

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Requirements for a field to be classified as a
Profession

• Scientific principles and intense preparation
  required of practitioners
• Scholarly body of literature
• Professional organization of high repute
• Certification program
• Requirement for continuing education
• Code of ethics

Supply Management is clearly a profession!
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Purchasing through the years

• Clerical Purchasing
• Arms length relationship with suppliers
• Adversarial Win-Lose
• Price is the key factor
• Short term contracts lots of supplier switching
• Emphasis is on competition
• Buyers are paper pushers (clerks)

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Purchasing through the years

• Managerial Purchasing (1970s ? )
• Purchasing is now viewed, not as a cost center,
  but as a value contributor
• Supplier partnerships
• Long-term contracts
• Quality, service, and price considerations
• Negotiation as well as competitive bidding

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Purchasing through the years

• Strategic Sourcing (Supply Management) 2000 ?
• Rationalization of the supplier base
• Long-term strategic alliances with key suppliers
• Institutional trust
• Emphasis is not on a specific contract but on the
  relationship
• Senior Management involvement
• e-Technologies
• Relationship-specific capital investment

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Purchasing through the years

• Strategic Sourcing (Supply Management)

In short, Strategic Sourcing is capturing
world-class suppliers and building alliances with
them.
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Types of Supplier Relationships

• Transactionalemphasis is on price
• Partnershipsupplier is viewed as a resource
• Strategic Alliancesupplier is critical to the
  success of the firm and is viewed as a part of
  the business enterprise

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Trust levels
Institutional Trust
Trust
Personal Trust
Transactional
Partnership
Strategic Alliance
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Which type of relationship is appropriate?

• Many suppliers of a not-very-differentiated
  material? T
• Short-term need for a material or service? T
• Long-term requirement for a professional service
  from a capable supplier? P
• Found a world-class supplier interested in a
  mutually beneficial long-term contract? P or A
• See potential to develop a supplier into a highly
  capable source? P
• Do you require a great deal of flexibility or
  responsiveness from a supplier? P or A
• Is a material critical to your business? Is a
  supplier strategic to your business? A

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Why Purchasing is Important

• Materials is a logical cost-reduction area
• Value-added contributions
• Purchasing as a profit producer
• Profit-Leverage Effect
• Return on Investment Effect

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Why Purchasing is Important

• Materials is a logical cost-reduction area

Purchased materials the biggest element of cost
in manufacturing industries
Materials/Sales Revenue Manufacturing
Industries 55 Services Industries 30
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Why Purchasing is Important

• Industry Materials/Sales Revenue
• Petroleum 76
• Automobile 70
• Wood Products 61
• Textile Mills 59
• Food Manufacturing 59
• Machinery 50
• Electrical Equipment 49
• Computers and electronics 44

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Why Purchasing is Important
Value-added contributions

• Technologies and innovation
• Customer service
• Competetive advantage

• Cost
• Quality
• Sales
• Profits
• Product development time

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Why Purchasing is Important

• Purchasing as a profit producer

Profit Revenues - Cost
1. Purchasings impact on revenues
2. Purchasings impact on costs
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Why Purchasing is Important

• Profit-Leverage Effect

A 100,000 increase in sales generates an 8,000
increase in profits (assuming an 8 margin) A
100,000 reduction in material costs will
generate a 100,000 increase in profits. A
1,250,000 increase in sales generates the same
increase in profits as a 100,000 reduction in
materials costs (in this example) THEREFORE, in
this example, the Profit-Leverage Effect is . . .
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Why Purchasing is Important

• Return on Investment Effect

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Why Purchasing is Important

• Return on Investment Effect

Profit Margin X Asset T.O. Ratio ROI
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Return on Investment Example
1.
2.
Assume Material costs are 50 of Sales Revenue
Inventory is 150,000 of the 500,000 in total
assets. Further assume that Supply Management has
been able to obtain a 10 reduction in material
costs. This means that money tied up in
inventory will drop to 135,000 and that Net
income increases by 10 of 50 of 1,000,000.
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Return on Investment
Example
1.
2.
A 10 reduction in materials costs increases ROI
by 67.5, in this example
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Four Enablers of Excellent Supply Management
Capable Human Resources
Proper Organizational Design
Performance Measurement
IT
Team skills Manage Relationships Cost Mgt
Tech E-commerce Negotiation skills Contract
management experience Other
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Four Enablers of Excellent Supply Management
Capable Human Resources
Proper Organizational Design
Performance Measurement
IT
Team skills Manage Relationships Cost Mgt
Tech E-commerce Negotiation skills Contract
management experience Other
Centralized Decentralized Purchasing
Councils Co-location of buyers with users CFTs
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Four Enablers of Excellent Supply Management
Capable Human Resources
Proper Organizational Design
Performance Measurement
IT
Team skills Manage Relationships Cost Mgt
Tech E-commerce Negotiation skills Contract
management experience Other
Centralized Decentralized Purchasing
Councils Co-location of buyers with users
CFTs
Requirements Planning B2B Inventory visibility
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Four Enablers of Excellent Supply Management
Capable Human Resources
Proper Organizational Design
Performance Measurement
IT
Team skills Manage Relationships Cost Mgt
Tech E-commerce Negotiation skills Contract
management experience Other
Centralized Decentralized Purchasing
Councils Co-location of buyers with users CFTs
Requirements Planning B2B Inventory visibility
Suppliers Supply Management function
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Lets move on . . .