Chapter 4 1
Purchasing and Supply
Management
Dr. Stephen H. Russell
Goddard School of Business and Economics
Weber State University
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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 FirmWarehous
e
Distribution
Centers
Suppliers Retail Stores
Inbound Logistics Outbound Logistics
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Mother Earth to consumer . . .A Supply Chain
Materials and products
Information
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
becomesSupply Management—also 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
Cost Quality Sales Profits Product
development time
Technologies and innovation
Customer service Competitive
advantage
Supply management can have a major impact on organization success by influencing:
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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
• Transactional—emphasis is on price
• Partnership—supplier is viewed as a resource
• Strategic Alliance—supplier is critical to the success of the firm and is viewed as a part of the business enterprise
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Trust levels
Trust
Transactional
Partnership
Strategic Alliance
Personal Trust
Institutional Trust
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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 RevenuePetroleum 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
Cost Quality Sales Profits Product
development time
Technologies and innovation
Customer service Competetive
advantage
Value-added contributions
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Why Purchasing is Important
Purchasing as a profit producer
Profit = Revenues - Cost
1. Purchasing’s impact on revenues
2. Purchasing’s 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 $100,000 reduction in materials costs (in this example)
THEREFORE, in this example, the Profit-Leverage Effect is . . .
5.12000,100$
000,250,1$
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Why Purchasing is Important
Return on Investment Effect
Profit Margin X Asset T.O. Ratio = ROI
ROIAssets Total
SalesX
Sales
IncomeNet
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Return on Investment Example
16.000,500$
000,000,1$
000,000,1$
000,80$X
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 $1,000,000.
ROIAssets Total
SalesX
Sales
IncomeNet
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Return on Investment Example
16.000,500$
000,000,1$
000,000,1$
000,80$X
268.000,485$000,000,1$
000,000,1$000,130$ X
A 10% reduction in materials costs increases ROI by 67.5%, in this example
1.
2.
ROIAssets Total
SalesX
Sales
IncomeNet
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Four Enablers of Excellent Supply Management
Capable Human Resources
Proper Organizational Design
IT Performance Measurement
•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
IT Performance Measurement
•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
IT Performance Measurement
•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
IT Performance Measurement
•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