“Education in Pursuit of
Supply Chain Leadership”
dp&c Chapter 11
Chapter 11
Procurement and Supplier
Management
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dp&c Chapter 11
Learning Objectives (cont.)
• Defining today’s procurement function
• Detailing the categories of purchasing
• Detaining purchasing responsibilities and Objectives
• Describing the purchasing organization
• Exploring the components of a purchasing strategy
• Discussing supplier relationship management (SRM)
• Detailing the components of SRM
• Implementing SRM
• Managing the souring process
• Managing the purchase order cycle
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Learning Objectives
•
•
•
•
•
•
Detailing supplier performance measurements
Detailing purchasing organization performance
measurements
Reviewing the impact of e-commerce on procurement
Describing the array of B2B e-commerce functions
Reviewing the structure of the B2B e-commerce
marketplace
Reviewing the benefits of B2B e-commerce
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Chapter 11
Procurement and Supplier Management
Inventory
Defining the
Management
Basics
Procurement
Function
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Defining Purchasing
The body of integrated activities that focuses on
the purchasing of materials, supplies, and
services needed to reach organizational goals.
In a narrow sense, purchasing describes the
process of buying; in a broader context,
purchasing involves determining the need;
selecting the supplier; arriving at the appropriate
price, terms and conditions; issuing the contract
or order; and following up to ensure delivery
Purchasing Handbook
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Key Purchasing Concepts
Purchasing is a business function. The effective and efficient
management of the acquisition of goods and services is a science
and is the responsibility of professionals trained and certified in
purchasing
Purchasing is about the acquisition of goods and services. Just
about all departments in the organization will purchase goods and
services
Purchasing is about developing close supplier relationships. The
establishment of collaborative partnerships focused on information
sharing, long-term commitment to quality, mutually shared benefits,
and joint participation in product design and specification
Purchasing is about the close review of purchasing and supplier
performance. The goal is to maintain the highest levels of
purchasing on-time delivery, product quality, low cost, and
collaboration
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Range of Purchased Products
Goods purchased for consumption or conversion. Goods
consisting of raw materials, semi-finished, and finished
components that will be consumed or converted during the
manufacturing process
Goods purchased for resale. Goods that are the concern of
businesses that search and buy products for resale to
wholesalers, distributors, and retailers
Maintenance, Repair, and Operating (MRO) inventories and
services. Goods used for general operating activities, repair, or
needed services
Custom equipment and services. Goods consisting of specialty
items and services
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dp&c Chapter 11
Responsibilities of Purchasing
Supply chain
management
As today’s supply chain becomes more complex and timesensitive, purchasers must assume responsibility for the
development and management of the total supply system
Materials
management
Purchasers are responsible for activities associated with the
receipt, transportation, scheduling and planning, and
warehousing of purchased materials
Sourcing
Matching purchasing requirements with sources of supply,
ensuring continuity of supply, exploring alternative sources of
supply, and validating supplier compliance to ensure goods
and services meet or exceed buyer criteria for quality,
delivery, quantity, and price
Value
analysis
Increasing the value-added elements of the purchasing
process. Value analysis can consist of such components as
price for quality received, financing, and delivery
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Responsibilities of Purchasing (cont.)
Supplier
development
Pursuing capabilities that promote supplier partnering require
buyers to be knowledgeable of supplier capacities, resources,
product lines, delivery, and information system capabilities.
Internal
integration
Purchasing needs to be closely integrated with other
enterprise business areas, such as marketing, sales,
inventory planning, transportation, and quality management
Supplier
scheduling
By sharing the schedule of demand from MRP, reorder point
(ROP), and distribution requirements planning (DRP)
techniques, purchasing can provide detailed visibility of future
company requirements to supply chain partners, who, in turn,
can plan the necessary material and capacity resources to
support the schedule
Contracting
Development and analysis of request for quotation (RFQ);
negotiation when pricing, volume, length of contract time, or
specific designs or specifications are issues; and supplier
selection and monitoring of performance measurements
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dp&c Chapter 11
Responsibilities of Purchasing (cont.)
Cost
management
The continuous search for ways to reduce administrative
costs, purchase prices, and inventory carrying costs while
increasing value
Purchasing
and
Receiving
Responsibilities include every-day purchasing activities
associated with order preparation, order entry, order
transmission, status reporting, order receiving, quantity
checking and stock put away, invoice and discount review,
and order closeout
Performance
measurement
Monitoring the quality and delivery performance of suppliers
is an integral part of supplier "benchmarking." The ability to
measure performance is critical when evaluating the
capabilities of competing suppliers and ensuring that costs,
delivery, and collaborative targets are being attained
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dp&c Chapter 11
Objectives of Purchasing
Providing an uninterrupted flow of materials and services. The
foremost goal of the purchasing function is to ensure that the
company is not hindered by inventory and service shortages
Purchasing products competitively. purchasers must continuously
search for sources of supply that provide the best combination of
quality, price, and service relative to the enterprise's needs
Keeping inventory investment to a minimum. Effective inventory
management requires that purchasing does its part in achieving a
reasonable balance between stocking levels and the cost of
carrying inventory
Developing the supplier base. Purchasers must continually search
for ways to enhance supplier relationships by developing mutually
beneficial value-added service, quality, and training programs that
promote supplier partnerships
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Objectives of Purchasing (cont.)
Provide consistent, quality purchased materials and services.
Purchasing today requires buyers to explore all possible avenues to
ensure product and service quality
Developing people resources and information tools for productivity
optimization. The continuous development and training of personnel
at all levels in the purchasing function results in the creation of a
professional staff prepared to shoulder the responsibilities of
decentralized decision making, continuous search for improvement,
and the acquisition of the technical knowledge required of "worldclass" purchasing
Expanding the scope of supplier value-added services. The goal of
these functions is to reduce wastes in ordering and delivery, and
facilitating the flow of goods and information through the supply
channel
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dp&c Chapter 11
Purchasing’s Place in the Organization
President
Executive Level
VP
Marketing
VP
Finance
VP
Manufacturing
VP
Engineering
VP
Manufacturing
VP
Engineering
President
Director Level
VP
Marketing
VP
Purchasing
VP
Finance
VP
Personnel
Director
Purchasing
President
Operations Level
VP
Marketing
VP
Finance
VP
Personnel
VP
Manufacturing
VP
Engineering
Materials
Manager
Purchasing
Manager
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dp&c Chapter 11
Standard Purchasing Organization
Purchasing
Manager
Buyer
Buyer
Buyer
Buyer
Planner
Planner
Planner
Planner
Administrative Support
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Buyer/Planner Concept
Buyer Role
Planner Role
Negotiates supplier agreements
Communicates requirements schedule
Executes changes to supplier
agreements
Manages inventory investment
Explores alternate sourcing
Manages MRP planning output
Performs value analysis
Analyzes excess/obsolete inventory
Negotiates quality agreements
Reviews receiving quality rejects
Develops long-term partnerships
Works daily with suppliers
Performs supplier selection
Plans new product introduction
Negotiates lead time reduction
Reduces order and transportation costs
Involved on a exception basis
Executes day-to-day buying
Problem solving
Problem solving
Forecasts and plans inventory
Forecasts and plans inventory
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Centralized versus Decentralized Purchasing
Factors:
Firm’s overall
business strategy
Similarity of products
Total purchase
expenditure
Overall philosophy of
management
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Centralized versus Decentralized Purchasing
Centralized
Decentralized
Aggregated purchase volumes
Greater facility autonomy
Transportation economies of scale
Increased replenishment speed and
customer responsiveness
Increased buyer specialization
Effective use of local resources
Increased purchasing coordination and
control
Closer link between facility inventory
requirements and purchasing capabilities
Reduced duplication of effort
Increased local ownership
Increased synchronization of purchasing
strategies and execution
Direct linkage of purchasing with local
requirements
Improved purchasing research
Direct support for local new product
development
Efficient utilization of MRP
Utilization of order point and DRP logic
Better change management
Local focus on change management
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dp&c Chapter 11
Chapter 11
Procurement and Supplier Management
Inventoryof
Anatomy
Management
Basics
Purchasing
Strategy
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dp&c Chapter 11
Purchasing Strategy Model
Business Strategy
Step 1
Internal Environment
External Environment
Step 2
Organizational
Structure
Step 3
Inventory Strategy
Step 4
Supplier Relations
Step 5 Technology Enablers
Step 6
Continuous
Improvement
Perf ormance
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dp&c Chapter 11
Step 1 – Environmental Scanning
Activities
•
•
Internal business scanning
External business scanning
►Objective
•
Assess purchasing ability to
provide internal business and
external supply chain competitive
advantage
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Step 2 – Organizational Structure
Activities
•
•
•
Map purchasing’s organizational structure
Map employee capabilities
Map purchasing departmental practices
►Objective
•
Match purchasing organizational
capabilities to the business strategy
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Step 3 – Inventory Strategy
•
•
•
•
•
Activities
Spend analysis
New product development requirements
Financial budgets
Make/buy decision
Materials and services classification
►Objective
•
Ensure timely and cost effective
purchase of inventories
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dp&c Chapter 11
Make or Buy Decision
Degree of operational change. If the firm decides to produce inhouse, does it currently possess the equipment, personnel, and
processing experience?
Cost. What is the difference in cost to make the selected items inhouse or to purchase them from a supplier?
Production processing control. If production is performed in-house,
what is to be the level of management control over operations, and
does that expertise exist within the firm or must it be acquired from
the outside
Quality. How is quality to be measured during and after production
processing? What tools should be used and does the firm currently
have such expertise?
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Make or Buy Decision (cont.)
Risk management. Does the outsourcing of specific items pose a
competitive risk to the business? Risk is low when the business
possesses the capabilities to produce purchased products and high
when the firm surrenders control to a supply partner
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dp&c Chapter 11
Purchasing Classification Matrix
Distinctives
•
•
•
•
Risk
Criticals
High risk
Low value
Difficult to attain
Critical for
operations
•
•
•
•
Generics
•
•
•
•
High risk
High value
Unique items
Critical to final
product
Commodities
Low risk
Low value
Non-production
MRO products
•
•
•
•
•
Low risk
High value
Production item
Not unique
Volume purchasing
Value
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Step 4 – Supplier Relations
Activities
•
•
•
•
Determine level of current supplier relationships
Apply collaborative strategies to enhance relationships
Establish evaluation and certification targets
Determine roles of planners and buyers
►Objective
Develop a collaborative partnership
with supply partners
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dp&c Chapter 11
Step 5 – Technology Enablers
Activities
•
•
•
•
Determine level of current technologies
Explore technologies to link product development and
supplier capabilities
Deploy technologies to enhance RFQ, order entry,
service management, and planning functions
Establish real-time analytics and scoreboards
►Objective
Deploy technologies to enhance
supplier connectivity and
collaboration
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Step 6 – Performance and Continuous
Improvement
Activities
•
•
•
Communicate the value of continuous improvement
Establish clear performance benchmarks
Train personnel in continuous improvement and
performance management techniques
►Objective
Leverage continuous
improvement and performance
measurement techniques to
drive competitive advantage
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dp&c Chapter 11
Purchasing’s Strategic Goals
Quality
Productive
Improvement
Technology
Risk
Management
Velocity
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Strategic Sourcing Objectives
Establish close, collaborative relationships with key suppliers.
Finding and building ongoing relationships with supply partners that
account for the majority of an organization’s purchasing spend and
that provide goods or services that are critical in the production and
delivery of the final product or service
Ensure reliable quality and delivery of materials. Increasing the
availability of high quality materials and components by working
closely with suppliers’ manufacturing and delivery processes
Reduce supply risk. Creating mechanisms that reduce risks in
product and service supply arising from the actions of competitors
or problems experienced by suppliers in production or delivery
Establish a smaller, flexible, responsive supplier base. Ability to
work with a small core of suppliers that are interested in developing
deep, collaborative partnerships
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Strategic Sourcing Objectives (cont.)
Closely integrate supplier input to product development and
innovation. Establishing a collaborative and participative
environment where suppliers provide critical core competencies that
enables the buying organization to pursue product development
and innovation far ahead of the competition
Reduce external spending. Establishing long-term contracts locking
in price and transportation costs
Use of targeted outsourcing. To internally focus on core
competencies, companies outsource non-core, non-critical
functions to entities that have established strength in these
functions
Reduce transaction costs. Use of computerized tools, to facilitate
supplier and product sourcing, order generation, follow-up,
receiving, and payment
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dp&c Chapter 11
Chapter 11
Procurement and Supplier Management
Inventory
Supplier
Management
Basics
Relationship
Management
11-32
dp&c Chapter 11
Range of Supplier Relationships
Compatibility of interests
Mutual need
Openness
Tactical relationships
Transactional
Ongoing
relationship
Trust
Collaborative relationships
Certified
suppliers
Lower value-added relationships
Partnership
Strategic
alliances
Higher value-added relationships
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dp&c Chapter 11
SRM Definition
A comprehensive approach to managing
an enterprise’s interactions with the
organizations that supply the goods and
services the enterprise uses. The goal of
SRM is to streamline and make more
effective the processes between an
enterprise and its suppliers
APICS Dictionary
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dp&c Chapter 11
Traditional Purchasing Vs. SRM
Traditional Approach
SRM Partnerships
Adversarial relationships
Collaborative partnerships
Many competing suppliers
Small core of supply partners
Contracts focused on price
Contracts focused on mutual benefits
Product information is proprietary
Collaborative sharing of information
Evaluation by bid
Evaluation by commitment to
partnership and joint participation
Supplier excluded from the design
process
Functional teams using real-time
communication of designs and
specifications
Process improvements intermittent
and unilateral
Close on line linkages for continuous
design improvement
Quality defects reside with the supplier Mutual responsibility for total quality
Buyer determines response to
marketplace changes
Collaborative supply team work
together to adapt to changing markets
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SRM Marketplace Realities
Increasing requirements for supply chain collaboration. As
businesses continue to turn toward outsourcing, a deepening of
partnering relationships and mutual dependencies in all
industries is fundamental to continuous improvement strategies,
total cost management, and competitive advantage
Changing nature of the marketplace. The dominance of the
customer, shortening product life cycles, demands for
configurable products, shrinking lead times, global competition,
participative product design, and other issues have altered
forever the nature of sourcing and purchasing management and
highlighted the importance of supply chain collaboration
Changing business infrastructures. Today’s enterprise is
characterized by extreme agility and scalability while being
customer-centric, collaborative, digitally-enabled, and capable of
reliable, convenient, and fast-flow delivery
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SRM Marketplace Realities (cont.)
Increased demand for cost control, quality, and innovation.
Buyers are now more than ever concerned about traditional
purchasing values such as quality and reliability
Increased demand for risk sharing. True business partnerships
mean that the need for trust and risk sharing be a serious
component in any collaborative relationship
Enabling power of Internet technologies. The ‘Internet age’ has
opened new and exciting doors that have provided supply chain
partners with the ability to closely integrate demand and
replenishment in ways impossible only a few years ago
Focus on continuous improvement. At the core of supplier
management can be found a strong commitment to the joint
pursuit of continuous improvement as a dynamic process rather
than a static business principle
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What is Supplier Relationship Management
What is SMR?
A comprehensive approach to managing an enterprise’s
interactions with the organizations that supply the goods and
services the enterprise uses.
Collaboration
Demands of the marketplace require close
collaboration between buyer and seller
Expand value
creation
SRM enables buyers and sellers to expand the
value they provide to the marketplace
Expand core
competencies
SMR enables buyers and sellers to utilize each
other’s core competencies to expand
capabilities and capacities
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Components of SRM
Strategic
Sourcing
Customercentric
operations
SRM
11-39
Enabling
Technologies
dp&c Chapter 11
Benefits of SRM
Add value to products
Enable strategic growth
Increase market access
Strengthen operations
Increase organizational expertise
Build organization skills
Enhance financial strength
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dp&c Chapter 11
Benefits of SRM (cont.)
Enable easier supplier segmentation
Design effective performance measurements
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dp&c Chapter 11
Implementing SRM
Step 1
Define the
SRM
Strategy
Review
current
corporate,
manufacturing,
and
sourcing
strategies
Step 2
Step 3
Develop
Criteria and
Enroll Partners
Identify
criteria to
be used in
selecting
suppliers.
Enroll
potential
SRM
suppliers
Prepare
Partners
Firm SRM
partnership
by
negotiating a
mutually
beneficial
PSA. Establish
communications
methods
Step 4
Conduct
Pilot
Design pilot
for a discrete
portion of the
organization’s
business or
by period of
time
11-42
Step 5
Step 6
Implement
Full
Program
Revise PSA as
necessary
and
implement
SRM
partnership
program
Monitor
and
Improve
Establish
framework of
metrics to
ensure
compliance
to PSA. Focus
on
collaboration
goals
achieving
common
goals
dp&c Chapter 11
Chapter 11
Procurement and Supplier Management
Inventory
Managing the
Management Basics
Sourcing Process
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dp&c Chapter 11
Defining Sourcing
The body of integrated activities that focuses on
the purchase of materials, supplies, and services
needed to reach the firm’s strategic goals. In a
narrow sense, sourcing describes the process of
buying; in a broader context, sourcing involves
determining the need; selecting the supplier;
arriving at the appropriate price, terms, and
conditions; drafting the contract; and growing
mutually beneficial supplier relationships
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Sourcing Objectives
Establish close, collaborative relationships with
key suppliers
Ensure reliable quality and delivery of materials
Reduce supply risks
Establish a smaller, more flexible, more responsive
supplier base
Closely integrate supplier input to product
development and innovation
Reduce external spending
Reduce transaction costs
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dp&c Chapter 11
Sourcing Process Steps
Step 1
Make-or-Buy
Decision,
Outsourcing
Make the
insource
versus
outsource
decision
Step 2
Step 3
Step 4
Step 5
Commodity
and Supplier
Spend
Analysis
Supplier
Scoring,
Assessment,
and
Selection
Pricing,
Negotiation,
and
Contracting
Begin
Procurement
Activities
Conduct spend
analysis; rank
commodities
and suppliers
by volume and
monetary
value; create
bid (proposal)
Score and
assess supplier
performance,
capabilities,
costs, flexibility,
and viability.
Make supplier
selection
Review pricing,
negotiate
terms, and
finalize
contracts for
buy
11-46
Buyers begun
procurement
activities;
ongoing contract
review;
performance
measurement
dp&c Chapter 11
Make or Buy Decision Criteria
Cost
Strategic Items
Availability of
Production Capacity
Will it be cheaper to make the item or to
outsource it to a supplier?
Are items closely linked to the firm’s
core competencies or are critical to the
customer strategy?
Can the item be made cost effectively
with current processes?
Quality
How are processing activities, costs,
quality, and expertise to be managed
inside and outside the firm?
How is quality to be managed and does
the firm have the required expertise?
Risk
Is the product and/or process
proprietary and can it be outsourced?
Control
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dp&c Chapter 11
Exercise 11.1 Cost Avoidance Analysis
Item Cost Data - manufactured
Forecast/units
Purchase Price Proposal/unit
Materials/Components
Direct Labor
Variable Factory Overhead
Fixed Factory Overhead
Total Cost of Goods
Unit Cost
$
$
$
$
$
$
$
10,000
4.50
9,000
12,000
5,000
24,000
50,000
5.00
Step 1: Review possible outsourced price
Total quantity supplied: 10,000 units
Total price: US$45,000
Unit price: US$4.50
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dp&c Chapter 11
Exercise 11.1 Cost Avoidance Analysis (cont.)
Step 2: Determine cost avoidance percents
Variable Factory Overhead
Fixed Factory Overhead
80.0%
75.0%
Step 3: Calculate costs avoided if purchased
Materials/Components
Direct Labor
Variable Factory Overhead
Fixed Factory Overhead
Total Cost of Goods
$
9,000
$
12,000
$
4,000.0
$ 18,000.0
$
43,000
Variable factory overhead: US$5,000 x 80% = US$4,000
Fixed factory overhead: US$24,000 x 75% = US$18,000
Total cost: US$9,000 + 12,000 + 4,000 + 18,000 = US$43,000
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Exercise 11.1 Cost Avoidance Analysis (cont.)
Step 4: Determine cost avoided
Cost Not Avoided
Plus Cost to Purchase
Total Cost to Purchase
Variance to Purchase
$
$
$
$
7,000
45,000
52,000
(2,000)
Cost not avoided: US$50,000 – 43,000 = US$7,000
Plus cost to purchase: US$4.50 x 10,000 units = US$45,000
Total cost to purchase: US$7,000 + 45,000 = US$52,000
Variance to purchase: US$50,000 – 52,000 = (US$2,000)
11-50
dp&c Chapter 11
Considerations Influencing Make or Buy
Considerations Favoring Make
Considerations Favoring Buy
Less expensive to produce item
Special supplier competencies and
research capabilities
Desire to integrate plant operations
Less expensive to buy item
Productive use of excess plant
capacity
Small-volume requirements
Maintain direct control over item
and/or the production process
Constrained internal capacities
Guard proprietary design
Option to maintain a make-or-buy
strategy
Lack of competent or cost-effective
supplier
Reduction in inventory and
managerial costs
Desire to maintain stable workforce
in a period of declining sales
Desire to maintain stable workforce
in a period of increasing sales
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Spend Analysis – Key Questions
What products and services did the organization purchase by
value and volume during the previous year? Answering this
question enables the organization to determine the total value of
money spent on goods and services
Which products and services are strategic and which are tactical
buys? Answering this question enables buyers to separate
critical and non-critical products and suppliers by value and
volume
Did the business receive full value for the products and services
purchased? Answering this question enables financial managers
to certify the value of purchased goods necessary to meet
accountability requirements specified by contract compliance
and external bodies such as Sarbanes-Oxley Act (SOX) and the
Securities and Exchange Commission (SEC)
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Spend Analysis – Key Questions (cont.)
Which suppliers received the majority of the firm’s spend?
Answering this question enables buyers to determine by product,
volume, and financial value the top suppliers to the organization
What opportunities can be pursued for supplier reduction,
combining purchases from across the enterprise, standardizing
products, and leveraging market conditions? Answering this
question enables procurement to accurately ascertain how well
suppliers met item requirements and specifications and to
assess opportunities for improvement of procurement processes
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Chart of Spend by Commodity Category
$160 M
$140 M
Total Annual Spend
$120 M
$100 M
$80 M
$60 M
$40 M
$20 M
$10 M
$5M
$1M
Commodity Category
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dp&c Chapter 11
Spend Analysis by Supplier, Category, annual
Spend, and Percent
Supplier
Fourt Electronics
Camden Supply Co.
Gopal Transport
Chopra Tool & Die
Reliable Electric
ABC Electronics
Wynstar & Assoicates
Gopal Transport
UPS
Energy & Utilities
MicroSoft
DPC Research
Total Spend
Product/Service Category Annual Spend
Electronic components
Cases and frames
Shipping
Tooling
Capacitors
PCs
General Contracting
Packaging
Parcel Shipping
Energy
Software
Education
11-55
$
425,775,550
358,624,125
125,874,359
45,245,221
41,258,326
38,541,623
28,750,236
28,541,234
25,451,321
11,548,884
9,253,125
165,212
$ 1,139,029,216
Percent
37.38%
31.49%
11.05%
3.97%
3.62%
3.38%
2.52%
2.51%
2.23%
1.01%
0.81%
0.01%
dp&c Chapter 11
Creating the Bid or Proposal
Sealed bid
Bids from prospective suppliers are
“sealed”
Posted offer to buy
The bid is posted in a public biding
document or through the Internet
Reverse auctions
Suppliers can bid and rebind with the
objective of outbidding the competition
Request for
information (RFI)
Used by buyers seeking to compile a list of
suppliers or to prequalify suppliers
Request for
proposal (RFP)
Used when the detailer item or service
specification or the statement of work
(SOW) has not been finalized
Request for
quotation (RFQ)
Used to obtain price, delivery, and other
specific terms from prequalified suppliers
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Key Supplier Attributes
Quality
How closely the supplier's product matches the
buyer's specification, life of the product, ease of
repair, maintenance requirements, ease of use,
and dependability
Reliability
Measures the on-time delivery and performance
history of a supplier
Risk
Capability
Measures supply uncertainties, delivery lead time
variations, and changes in pricing
Considers the capacities of a supplier's production
facilities, technical sophistication, management
and organization abilities, and operating controls
to meet buyer quantity and quality requirements
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Key Supplier Attributes (cont.)
Financial
stability
Considers the financial stability of the supplier
Desirable
attributes
Considers special attributes possessed by the
supplier such as special equipment, location,
reputation, commitment to environmental
sustainability and lean principles, technology,
quality certification, and others
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Exercise 11-2 Supplier Rating and Scoring
Key: 1 - least favorable; 5 - most favorable
Cost attributes
Suppliers
Decision Factor
Price
Inventory Cost
Safety Cost
Transportation Cost
Total Cost Score
Rating
65%
7%
7%
21%
100%
Ability Electric
5
1
1
4
4.23
Competitive attributes
Decision Factor
Tech Competence
Reliability
Delivery Frequency
Flexibility
Quality
Pricing Terms
Design Collaboration
Supplier Viability
Total Value Score
Cum Scores
D&R Supply
3
3
3
2
2.79
Alfa Electronics
2
4
4
1
2.07
Suppliers
Rating
19.0%
8.0%
3.0%
2.0%
24.0%
1.0%
25.0%
18.0%
100%
Ability Electric
2
2
2
1
2
5
1
5
2.3
D&R Supply
4
4
3
3
4
3
3
4
3.69
Alfa Electronics
5
4
4
5
5
1
5
3
4.49
6.53
6.48
6.56
11-59
dp&c Chapter 11
Product Classification Matrix
Distinctives
•
•
•
•
Risk
Criticals
High risk
Low value
Difficult to attain
Critical for
operations
•
•
•
•
Generics
•
•
•
•
High risk
High value
Unique items
Critical to final
product
Commodities
Low risk
Low value
Non-production
MRO products
•
•
•
•
•
Low risk
High value
Production item
Not unique
Volume purchasing
Value
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dp&c Chapter 11
Exercise 11-3 Supplier Break-Even Analysis
Data Elements
Data Elements
Anticipated quantity/units
Purchase price/unit
Fixed overhead costs
Variable costs/unit
$
$
$
900
10.00
3,000
6.00
Step 1: Calculate total cost
Overhead costs plus (unit cost x anticipated quantity), or US$3,000
+ (900 units x US$6) = US$8,400
Step 2: Calculate unit cost
Total cost / anticipated quantity, or US$8,400 / 900 units = US$9.33
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dp&c Chapter 11
Exercise 11-3 Supplier Break-Even Analysis
Step 3: Calculate break-even quantity
Overhead cost / (purchase price – unit cost), or US$3,000 / (US$10
- US$6) = 750 units
Step 4: Calculate break-even revenue
purchase price x break-even quantity, or US$10 x 750 units =
US$7,500
Step 5: Calculate supplier’s expected profit
((purchase price x anticipated quantity) minus (unit cost x
anticipated quantity)) minus overhead costs, or US$10 x 900 units US$6 x 900 units - US$3,000 = US$600
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dp&c Chapter 11
Supplier Break-Even Analysis – Graphic
Target purchase price = US$10 per unit
Fixed costs = US$3,000
Variable costs = US$6 per unit
Anticipated volume = 900 units
Value
12,000
Total Revenue
Total Cost
9,000
Break-Even Point
Profit
6,000
3,000
0
Units
0
200
400
600
900
11-63
1200
1500
1800
dp&c Chapter 11
Exercise 11-4 Production/Supplier Break-Even
Analysis
Data Elements
Data Elements
Manufacturing
Selling price/unit
Production fixed costs
Production variable costs/unit
Purchasing - Supplier A Quote
$
$
$
2.00
25,000
0.50
Purchase price/unit
Fixed costs
$
$
1.65
8,000
Step 1: Calculate difference in fixed costs
Manufacturing fixed cost minus purchasing fixed cost of
(US$25,000 - US$8,000 = US$17,000)
Step 2: Calculate difference of unit costs
Purchase unit cost minus manufacturing unit cost or (US$1.65 US$0.50 = US$1.15)
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dp&c Chapter 11
Exercise 11-4 Production/Supplier Break-Even
Analysis (cont.)
Step 3: Calculate break even quantity
The break even quantity is determined by dividing the fixed cost by
the unit cost or (US$17,000 / US$1.15 = 14,783 (rounded))
The results of the analysis indicate that if sales volumes are less
than 14,783 units, it would be more economical to manufacture the
product in house
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Total Cost of Ownership
Purchase
price
The purchase price of the materials and components
acquired from suppliers
Acquisition
costs
The amount paid for delivery of purchased goods
and services including sourcing, administration,
freight, duties, and taxes
Product
costs
Landed
costs
End-of-life
costs
Costs for planning, engineering, materials, scrap,
downtime, opportunity costs, and technologies
used in finished goods production
Product cost plus the costs associated with
carrying inventory, warehousing, transportation,
product handling, customs, duties, environmental
sustainability, and others
Costs include salvage, obsolescence, disposal,
clean-up, project termination, and recovery
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Supplier Discounting
Trade
Promotion
Payment made to the buyer to compensate
for performing some marketing function for
the seller
Quantity
Discount
Price discount based on the quantity or
monetary value of the buyer’s purchase
Volume
Discount
Price discount resulting from supplier
production economies of scale
Seasonal
Discount
Price discount based on seasonal nature of
goods or services
Cash Discount
Cash discount determined by negotiations
relating the terms of buyer payment
11-67
dp&c Chapter 11
Exercise 11-5 Supplier Selection Comparison
Data Elements
Item Demand, Cost, and Transport Data
Weekly Demand
Inventory Carrying Cost
Customer Service Level
Standard Deviation (Demand)
Order Cost per Order
Item Weight - lbs
Associated Truck per 100 lbs
Fast Forwarder per 100 lbs, 50,000 lbs min
11-68
$
$
$
1,200
22%
97%
200
150.00
6
7.25
5.50
dp&c Chapter 11
Exercise 11-5 Supplier Selection Comparison
Three supplier cost data
Supplier Data and Assessment
Unit Cost
Annual Material Cost
Lot Size
Average Cycle Inventory
Annual Inventory Carrying Cost
Lead time/weks
Std Dev of Lead Time
Std Dev of Demand during Lead Time
Safety Inventory
Annual Cost of Safety Inventory
Orders per Year
Annual Ordering Cost
Order Weight/lbs
Order Transportation Cost
Annual Transportation Cost
$
$
$
$
$
$
$
Total Annual Cost $
Supplier 1
0.95
59,280.00
2,400
1,200
250.80
3
1
1,249.00
2,349.11
490.96
26.00
3,900.00
14,400
174.00
4,524.00
68,445.76
11-69
$
$
$
$
$
$
$
$
Supplier 2
0.98
61,152.00
10,000
5,000
1,078.00
9
3
2,163.33
4,068.78
877.23
6.24
936.00
60,000
550.00
3,432.00
67,475.23
$
$
$
$
$
$
$
$
Supplier 3
1.10
68,640.00
3,600
1,800
435.60
5
2
1,754.99
3,300.78
798.79
17.33
2,600.00
21,600
261.00
4,524.00
76,998.39
dp&c Chapter 11
Negotiating Objectives
Quality
Continuing
relations
Price
Negotiation
Objectives
Contract
length
Service
Levels
Control
Capacity/
volume
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dp&c Chapter 11
Contracting
Purchase order – PO defines nature of contract
Requirements for unspecified delivery – a “blanket” or
“standing order”
Definite quantity – contract defines a specific quantity
over a time frame, but no specific delivery dates
Fixed price – contract defines a fixed price over a time
period
Cost-based – contract requires buyer to cover a certain
level of cost
Buy-back – contract enables buyer to return unsold
goods at negotiated price
Revenue and cost sharing – contract requires buyer to
share portion of sales revenue in exchange for discounts
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Chapter 11
Procurement and Supplier Management
Inventory
Purchase Order
Management Basics
Management
11-72
dp&c Chapter 11
Purchase Order Cycle
Order
Planning
Order
Entry
Transpotation
ROP/MRP/DRP
Requirements
MRO
Requirements
Planned Order
Management
Requisitioning
PO
Release
Supplier
Sourcing
Authorization
Transportation
Decision
PO
Status
PO Confirmation
& Monitoring
PO
Receipt
PO
Receipt
Order
Closeout
Order
Close-Out
Invoice Settlement
and Payment
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Purchasing Methods
Current requirements buying. This is the most common method
for order release of production inventories. Based on a purchase
schedule developed from planning tools such as MRP and order
point, buyers will assemble a purchase order that balances
minimum lot quantities with cost elements such as quantity
discounts, carrying costs, stock out costs, and ordering costs
Forward buying. This approach utilizes medium- to long-term
inventory planning to purchase goods and services in excess of
current requirements. Normally, buyer and supplier engage in
some form of contract in which price, quantities, quality, and
delivery are agreed upon
Speculative buying. Buyers purchase goods and services far
beyond current requirements, often called hedge purchasing.
Speculative buying is used to lock in prices in anticipation of a
price increase or an impending product shortage
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dp&c Chapter 11
Purchase Order Entry
Discrete
Purchase Order
The buyer generates a single purchase order
(PO) to buy goods or services “as needed”
Online
Requisitioning
System
Employees create requisitions that are in turn
reviewed and released by the buyer into POs.
Procurement
Cards (P-cards)
Buyers use a purchasing card which is similar
to a personal credit card
Internet (B2B)
Buyers use the Internet to source, submit
requisitions, generate POs and transfer funds
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dp&c Chapter 11
Purchase Order Entry (cont.)
Automated
Ordering
Systems
Planning systems automatically generate
purchase orders (POs) through EDI, auto fax,
or the Internet
Blanket
Purchase Order
A type of PO containing a fixed quantity or
order value that extends over a contract period
Requirements
Contract
Buyer commits to purchase a fixed percentage
of requirements in exchange for quality, price,
availability, and delivery considerations
Direct-Ship
Purchase Order
Buyers purchase products through a third-party
seller, thereby skipping material handling and
shipping by the immediate supplier.
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Transportation Decision Process
Identify relevant
performance variables
Select transportation
mode
Select carrier
Negotiate rates and
service levels
Evaluate carrier
performance
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dp&c Chapter 11
Transportation Mode Performance
Cost
Frequency
Completeness
Speed
Dependability
Capability
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Receiving, Inspection, and Order Close-Out
Unloading – Unloading of the order from the carrier
Shipment verification – Verifying the receipt by
referencing the freight bill and the original order
Unpacking and inspection – Unpacking the delivery and
performing damage inspection
Unitize materials – Unitize receipt to reduce materials
handling
Hot list review – Check for existing materials backorders
Prepare receiving report – Report receipt completeness
quality, delivery, and other performance issues
Delivery of materials – Move goods to put away locations
or to requestor.
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Chapter 11
Procurement and Supplier Management
Supplier and
Inventory
Procurement
Management Basics
Performance
Measurement
11-80
dp&c Chapter 11
Purchasing Performance Measurement
Supplier Performance Measurement
How well the objectives, expectations, and agreements
contracted between buyer and supplier are being fulfilled
Purchasing Department Performance
How well departmental activities are being optimized in the
pursuit of value-added objectives
Continuous Improvement
How deeply buyers and suppliers are committed to
continuous purchasing improvement objectives
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Supplier Performance Measurement
Product Quality
The quality of the supplier’s goods and
services is considered the prime metric
On-Time
Delivery
Ability of the supplier to deliver on-time and
often to a specific delivery schedule
Quantity
Received
How often the PO quantity received matches
the original quantity ordered
Flexibility
Indicates how easily suppliers can
accommodate changes to orders
Price
Conformance to
Contract
Measures how competitive a suppliers price
is for goods and services
How well the supplier is meeting the terms
of the purchasing contract
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Exercise 11-6 Weighted Point Plan
Data Elements
1.
2.
3.
4.
Establish supplier performance attributes
Determine past actual performance
Determine weights for all performance attributes
Calculate values
Performance attribute
On-time delivery
Quality rejects
Current price to original price
Quoted lead time to actual lead time
Quantity received to ordered
Conformance to contract
Weight total
Weight
40
20
5
5
15
15
100
Actual perfromance
8%
5%
2%
6%
15%
9%
Overall performance
11-83
Performance value
36.80
19.00
4.90
4.70
12.75
13.65
91.80
dp&c Chapter 11
Balanced Scorecard – Example
Goal
On-time delivery
Customer Perspective
Measurement
Target
% of orders
delivered on time
% of orders
delivered delivered
without shortages
Order delivered
% of orders failing
with quality defects inspection
Orders delivered
complete
Actual
Goal
99%
97%
Purchase order
price reduction
99%
94%
99%
93%
Financial Perspective
Measurement
Target
% reduction of
price on a yearly
basis
Actual
95%
82%
Payables discounts % of payables
offered
discounts taken
98%
97%
Transportation cost % transportation
reduction
cost reduction
97%
85%
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Purchasing Organization Performance
Direct attention to main purchasing performance areas
and objectives so that performance continually improves
while objectives are being met
Improve purchasing department organizational
structure, policies, and procedures
Identify those areas where additional training and
educational efforts may be required
Provide data so that corrective action can be taken
where necessary
Improve interrelations within purchasing, between
purchasing and other business functions, and between
purchasing and the firm's suppliers
Evaluate departmental staffing requirements
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Three Levels of Performance
Departmental
functional review
Purchasing policy
and procedural
audits
Ongoing
purchasing
efficiency
Consists of a broad appraisal of the purchasing
function including policies, procedures,
personnel, and interdepartmental relations
Goal is to ascertain how well the purchasing
function matches predetermined operational
standards, and then to provide a basis for
corrective action to redirect purchasing activities
that exhibit a wide variance from allowable
performance tolerances
Designed to reveal the magnitude of purchasing
efficiency. Effective measurement on this level
requires weekly or at least monthly evaluation of
day-to-day purchasing results
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Chapter 11
Procurement and Supplier Management
Inventory
Impact
of eManagement
CommerceBasics
on
Procurement
11-87
dp&c Chapter 11
Benefits of B2B Marketplaces
Increased market supply and demand visibility
Price benefits from increased competition
Increased operational efficiencies
Enhanced customer management
Improved supply chain collaboration
Synchronized supply chain networks
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B2B e-Commerce Functions
Product
Search
Order
History Accounting
Supplier
Search
Strategic
Sourcing Procurement Financing/
Billing
Supplier
Performance
Procurement
MRP
Planning
Backbone
e-Services
Collaborative
Fulfillment
Planning
Collaborative
Design
Supplier
Database
B2B
Marketplace
EDI
Web
Processing
Integration
Services
Workflow
e-Technology
Services
Standards
Messaging
Member
Services
Reporting
Open Order
File
Internet
Product
Catalog Requisition
/RFQ
Order
Status/
Tracking
e-Order
Processing
Logistics
Interface
Security
Shopping
Tools
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PTX/
ITX
Exchange
Auctions
dp&c Chapter 11
Procurement e-Services
Supplier
search
Product
search
Strategic
sourcing
Virtual B2B marketplaces offer large communities of
buyers and sellers an online, real-time channel to reach
out to each other in an interactive mode that transcends
barriers of time and space.
B2B services provide buyers access to a wide-range of
online product and service catalogs for all types of goods
and services, including MRO and indirect materials,
production, administrative, and capital goods
Leveraging three categories of B2B applications:
decision support (Web-based spend analysis, contracts,
etc.); negotiation automation (e-RFP, e-auctions, etc.);
and value-added services (billing and settlement,
comparison shopping, pricing, logistics support, etc.)
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e-Order Processing
Product Catalog Management. Virtual storefronts consisting of
catalogs containing the most current pricing, product information,
and product specifications
Requisitioning. Facilitate the requisitioning process by integrating
product/service catalogues hosted by exchange marketplaces,
industry consortia, or third party aggregators located across the
Internet into a single “virtual” catalogue available through on-line
interfaces
RFQ. Buyers can automate the RFQ process, thereby cutting
costs and reducing cycle times and can greatly increase
marketplace competition and solicit suppliers separated by
geography and time to participate in the sourcing process
Shopping Tools. The use of software shopping agents to perform
the tasks of Internet browsing and initial gathering of and acting
on basic information is expected to expand through time
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e-Order Processing (cont.)
Auctions. Used primarily as a means to buy and sell products
whose value is difficult to determine or commodity in nature,
Internet-based auctions enabled buyers to expand beyond the
domain of niche markets to reach potential sellers across
geographic barriers and traditional industry lines
Purchase Order Generation and Tracking. Once the order
requisitioning or RFQ has been approved, a PO is generated
through a paper order or electronically via fax, EDI, or the Internet
Logistics. Today’s B2B order management functions can be
significantly enhanced by the utilization of a variety of Web-based
logistics services that can be integrated into the procurement
process. Logistics partners have the capability to offer Internet
enhanced services, such as inventory tracking, carrier selection,
supplier management, shipment management, and freight bill
management
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e-Technology Services
Web Processing. The ability to drive B2B requires a technology
focus on data access and transactions as well as optimizing
business processes. Web applications should provide for
effective and timely decision-making prior to the point when the
actual transaction is being made
Security. Security services include such components as
information boundary definition, authentication, authorization,
encryption, validation keys, and logging of attempted security
breaches
Member Services. The quest to create Web-sites that are
characterized by extreme usability, personalization, and
customization is perhaps the “holy grail” of B2B procurement.
Winning Web exchanges require marketers to ensure that
customers have, first of all, an effective personal experience, and
second, a positive emotional experience
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e-Technology Services (cont.)
Content Search and Management. The essence of e-business is
the capability of buyers and sellers to utilize knowledge-bases,
catalogs, text, graphics, and embedded files to access and
transact a broad range of products, services, and information
over the Web. Effective search requires engines that provide
access either by content or by parameter
Workflow. Workflow management provides the vehicle by which
process paths are mapped, the business rules that govern
workflow decisions, and the workflow engine receives the user’s
request and determines the next sequence of screen displays
that will match both the process and the business rules definition
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Independent Trading Exchanges (ITX)
Buyer-driven e-marketplaces provide a simple B2B model to
enable companies to facilitate internal procurement by linking,
through Internet tools, divisions, partners, or companies to an
internally maintained centralized online catalog assembled from a
number of supplier catalogs that could be accessed through a
portal linked directly to supplier websites
Vertical exchanges provide Internet trading functions for a
particular industry. These types of digital marketplaces act as
hubs servicing a single industry. These exchanges work by
aggregating a variety of industry-specific product/service
catalogues into a single Internet site or to leverage online tools
that distributors or brokers can use to tap into excess reservoirs
supplier materials and capacities and accelerate the matching of
potential buyers and sellers
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Independent Trading Exchanges ITX (cont.)
Horizontal exchanges facilitate e-business functions for
products/services common across multiple industries and can
range from simple portals to sophisticated collaboration hubs. By
providing a sort of virtual trading “hub” where multiple buyers and
sellers can be matched and conduct transactions, these Web
sites enable manufacturers, distributors, buying groups, and
service providers to develop shared marketplaces that deliver
real-time, interactive commerce services through the Internet
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Private Trading Exchanges (PTX)
This model is characterized by one-to-one collaborative
capabilities with network partners, total visibility throughout the
supply chain, seamless integration of applications, and tight
security
In this model an enterprise and its preferred suppliers would be
linked into a closed e-marketplace community with a single point
of contact, coordination, and control. Often this type of emarketplace is driven by a large market dominant company that
seeks to facilitate transactions and cut costs while also cementing
the loyalties of their own customers and suppliers
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Consortia Trading Exchanges (CTX)
Defined as a some-to-many network consisting of a few powerful
companies and their trading partners organized into a
consortium. Historically, CTXs are formed by very large
corporations in highly competitive industries such as automotive,
utilities, airlines, high-tech, and chemicals
The goal of a CTX is simple: to combine purchasing power and
supply chains in an effort to facilitate the exchange of a wide
range of common products and services through the use of Webbased tools, such as aggregation and auction, between verticallyorganized suppliers and a few large companies
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Benefits of B2B e-Commerce
Increased market supply and demand visibility. B2B emarketplaces provide buyers with an ever-widening range of
choices, an exchange point that enables the efficient matching of
buyers and product/service mixes, and a larger market for
suppliers
Price benefits from increased competition. Online buying and use
of auctions can be used to increase price competition, thereby
resulting in dramatically lower procurement costs for buyers
Increased operational efficiencies. B2B applications have the
capability to increase the automation and efficiency of
procurement processes through decreased cycle times for
supplier sourcing, order processing and management, and buying
functions
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Benefits of B2B e-Commerce (cont.)
Enhanced customer management. e-Marketplaces assist
suppliers to accumulate and utilize analytical tools that more
sharply define customer segmentation and develop new
product/service value packages that deepen and make more
visible customer sales campaigns
Improved supply chain collaboration. Today’s B2B toolsets enable
buyers and sellers to structure enhanced avenues for
collaboration for product life cycle management, marketing
campaigns, cross-channel demand and supply planning, and
logistics support
Synchronized supply chain networks. The ability of e-markets to
drive the real-time interoperability of functions anywhere in the
supply network focused on merging information and providing for
the execution of optimal choices provides supply partners with
the capability to realize strategic and operations objectives
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Benefits of B2B e-Commerce (cont.)
Enhanced customer management. e-Marketplaces assist
suppliers to accumulate and utilize analytical tools that more
sharply define customer segmentation and develop new
product/service value packages that deepen and make more
visible customer sales campaigns
Efficient payment transfer. e-Commerce greatly facilitates the
collection of payment. Often, especially in retail sales, the
payment for the goods/services occurs at the moment of
purchase either through credit card, P-card, or the use of a third
party such as PayPal
Impact on cost. Companies with B2B models will find their
technology infrastructures and call-center services dramatically
increased, while experiencing decreases in inventory through
improved supply channel cooperation, reduction in facilities costs
by centralizing or outsourcing operations, and increases in direct
or partner-based transportation
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“Education in Pursuit of
Supply Chain Leadership”
dp&c Chapter 11
Chapter 11
End of Session
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