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Class # 5 – Chapter 2

Purchasing ManagementPart 2

1) What is Traditional Purchasing, Operational Procurement, Supply Management, Strategic Sourcing?

2) Why is the Procurement function of strategic importance to CEO’s and CFO’s in today’s global environment?

Strategic SourcingOperational Procurement

• Higher $ Values/Unit Costs

• Critical / Bottleneck Items

• Contracts / Agreements

• Alliances / Partnering

• Complex T’s & C’s

• Lower $ Values/ Unit Costs

• Leveraged / Non-Critical Items

• Purchase / Blanket Orders

• Arms Length Relationships

• Standard T’s & C’s

Purchasing and Supply Management

Today’s Procurement Landscape:

Operational Procurement :The acquisition of materials and services required to meet the day-to-day needs of an organization.

Cost Management: Revenue - Less Cost of Goods Sold - Less Overheads and Expenses PROFIT

Quality and Quantity

Delivery – right location, right time

Service

Risk Management

The Traditional Procurement Process

1) Purchase Requisition – the internal user’s request for material or outside services

2) For material, check available existing inventory3) Start competitive bid process – RFQ or RFP4) Evaluate bids – pricing, technical and commercial5) Possibly negotiate for improvements (large $)6) Create a Purchase Order (PO) 7) Copies of PO to internal user, accounting dept. and

the successful supplier (enables the “three way match” for payment)

5

A five step disciplined process is critical to optimizing value.

Strategic Sourcing: Using facts about required goods and services, the supplier base and the supply market, in order to determine best acquisition strategies and best suppliers available to achieve required improvements.

Demand Analysis

Supply Analysis

Sourcing Strategy

Development

Negotiations and Supplier

SelectionImplementation

1 2 3 4 5

Source: European Business School

Procurement and Supply Management CREATES ENTERPRISE VALUE IN THREE WAYS

q Flexibility andresponsiveness tomarket trends

q Improved product/service quality

q Capital utilizationq Cash velocityq Inventory managementq Cycle time reductionq Continuous improvement

q Raise productivityq Logistics efficiency

AssetManagement

RevenueGrowth

q New products andservices

q First to market /volume

q Lower purchase priceq Lower transaction

costsq Lower overhead costs

FinancialPerformance

EPS

Michigan State University Global Benchmarking Initiative

Strategic Importance

22%

17%

16%

30%

11%

11%

11%

10% Improvement in … Increased Shareholder Returns by …Pricing Increases

Purchasing Costs

Market Share

Labor

Other Expenses

Fixed Assets

Working Cap. Assets

According to a McKinsey study, after Pricing Increases, reducing Purchasing Cost is the most powerful way to increase Shareholder Returns

McKinsey Quarterly

CEO

’s S

trat

egic

Lev

ersStrategic Importance

What might a 10% material cost reduction mean to a “typical” $1 billion company?

Percent $ millions

Revenue 100% $1000

Labor 10% 100

Material 50% 500

Mfg. O/H 10% 100

Less COGS 70% 700

Less SG&A 15% 150

Profit 15% $150


What might a 10% material cost reduction mean to a “typical” $1 billion company?

Percent $ millions (10%)

Revenue 100% $1000 $1000

Labor 10% 100 100

Material 50% 500

Mfg. O/H 10% 100 100

Less COGS 70% 700

Less SG&A 15% 150 150

Profit 15% $150 $200

450

650

+33%


Supplier Relationship Management (SRM):

Companies Depend on the Success of their Suppliers

• The effects of outsourcing, off-shoring, globalization• Customer Satisfaction and Supplier Performance are linked

together as never before!• Need for Supplier Performance Measurement Systems (Ex. unacceptable, developmental, approved, preferred) • Utilize a combination of quantitative and qualitative

performance measures• Communicate results (good and bad) quickly• Pursue longer term relationships (partnerships, alliances)

for strategic purchases when appropriate


Typical Performance Measurements Metrics for Suppliers:

1) Procurement cost savings2) Quality / defects / returns3) On-time delivery4) Responsiveness / flexibility5) Process improvement / cost reductions6) Innovation / product development7) Corporate social responsibility pursuit8) Adherence to legal / ethical standards


Assignment for Next Class:

Read “How to Get Procurement Strategy Right” by

Per Segerberg (in Blackboard) and answer questions:

1. What are the key points of the article?2. Does the author’s approach make practical

sense?3. How hard would it be to implement in a

non-manufacturing environment?

Today’s Case Discussion:

“Service Purchasing at the Sunny Hotel”

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