Power Point Slides for Chapter 17

PURCHASING & SUPPLY CHAIN MANAGEMENT, 4e

Purchasing Services

Chapter 17

CENGAGE LEARNING

Monczka – Handfield – Giunipero – Patterson

Chapter Overview

 Transportation management

 Outsourcing logistics to third-party logistics providers

 Purchasing services and indirect items

 Sourcing professional services

 Service supply chain challenges

Purchasing & Supply Chain Management, 4e

2

Indirect Spending

 The sum of all purchased goods and services that are not a direct part of products or services delivered to the customer

 May equal > 50% of an organization’s total purchases

 Often not procured by supply management


3

Logistics Defined

 That part of supply chain management that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customers’ requirements


4

Transportation Management

 Inbound logistics

 Intra-organizational movements

 Outbound logistics

 Recovery and recycling (or reverse logistics)


5

Logistics Transportation Links

Inbound

Logistics

Outbound

Logistics

Suppliers

Intraorganizational

Movement

Customers

Reverse

Logistics

6

Inbound Logistics

 All inbound shipments moving from supplier to buyer facilities

 Often included in sourcing negotiations

 Can be a substantial part of contractual terms


7

Intra-Organizational Movements

 Movement of materials between production facilities

 Movement in and out of intermediary storage facilities

 May be moved via private fleet

 Increasingly reduced using JIT and lean production techniques


8

Outbound Logistics

 Link between a organization and its customers

 Historically called physical distribution

 Since deregulation, increasing involvement by supply management


9

Reverse Logistics

 Need to find innovative ways of recovering and recycling of products to minimize environmental impact

 May also include shipment of repairable items for refurbishment

 Often not a priority


10

Transportation Deregulation

 Began in 1970s and 1980s

 Designed to open economic competition

 Encouraged an increased supply management role in procurement and management of transportation services


11

Major Deregulation Legislation

 Air Cargo

Deregulation Act

(1977)

 Air Passenger

Deregulation Act

(1978)

 Negotiated Rates

Act (1993)

 Motor Carrier Act

(1980)







Staggers Rail Act

(1980)

 Transportation

Industry Regulation

Reform Act (1994)

ICC Termination Act

(1995)

Ocean Shipping

Reform Act (1998)


12

Effects of Deregulation

 Increased marketplace competition

 Reduced economic regulation

 Allowed negotiation of lower transportation rates and higher service levels with individual carriers

 Significantly reduced carrier profit margins

 New sense of carrier competition


13

Managing Transportation Services

 Transportation is a major cost center

 Logistics expenses are second only to material costs in terms of impact

 Transportation affects

 Production and scheduling systems

 Inventory levels

 Inventory carrying costs

 Customer order management


14

A New Role for Supply Management

 More active in sourcing most, if not all, transportation services, not just inbound logistics

 Carrier selection

 3PL provider selection

 Negotiate long-term freight agreements

 Evaluate carrier performance


15

A New Role for Supply Management

 Arrange pickups and deliveries

 Processing damage and loss claims

 Tracing and expediting shipments

 Coordinating interplant and outbound movements

 Auditing freight bills for accuracy

 Determining plant and warehouse locations


16

Transportation Strategy Development

Determine point of control

Evaluate intermediary performance

Identify relevant performance variables

Select mode

Private carrier

Select carrier

Negotiate rates and service levels

Evaluate carrier performance

Evaluate externally controlled delivery


17

Controlling Shipments

 FOB Origin

 FOB destination

 Preapproved or otherwise acceptable carrier list

 Third party broker or intermediary

 Consolidation with other small shipments

 Value-added services


18

Domestic Shipping Terms

 FOB Origin

 Buyer controls or directs shipment

 Buyer assumes title and risk of loss at seller’s shipping point

 Seller has following UCC responsibilities

 Put goods in possession of carrier

 Make a proper contract for transportation

 Obtain and deliver documents to buyer

 Promptly notify shipper of shipment


19

Domestic Shipping Terms

 FOB Destination

 Seller is required at own risk and expense to transport goods

 Seller assumes title to goods and risk of loss until satisfactory delivery to buyer’s facility


20

Performance Variables

Performance

Measure

Description

Total cost

Speed

Reliability

Capability

Accessibility

In addition to fees charged, includes extra inventory, warehousing, buffer stock, and international fees (broker’s fees, customs,, etc.)

Measured as time from when the shipment is released at the supplier’s facility to the time of receipt at buyer’s receiving dock

Also know as fill rate; refers to ability to deliver on time; i.e., percentage of deliveries made within the specified time window

Refers to the ability of the carrier to move the material, including special materials, hazardous materials, etc.

Refers to whether the carrier is capable of picking up the shipment and delivering it door-to-door


21

Capability

 Does the carrier or mode have the physical ability to transport an item?

 Does the carrier have the proper equipment in the right location?

 Does the carrier have the equipment and resources to transport multiple, frequent shipments for a specified traffic lane?


22

Transportation Modes

 Motor carrier

 Rail carrier

 Air carrier

 Water carrier

 Pipeline carrier


23

Motor Carrier Advantages

 Direct door-to-door service

 Ideal for lower volume shipments involving multiple shippers and consignees, i.e., LTL shipments

 Good speed and reliability, especially for truckload shipments


24

Motor Carrier Disadvantages

 Relatively higher cost on a volume basis

 Limited ability to transport bulk commodities

 Minimal economies of scale

 Higher variable costs

 Subject to seasonal weather and infrastructure conditions


25

Rail Carrier Advantages

 Capable of hauling a wide range of goods

 Most freight consists of large quantities of bulk commodities

 Relatively low cost on a per-pound basis

 Low variable cost

 Excellent economies of scale


26

Rail Carrier Disadvantages

 Comparatively high fixed costs

 Limited accessibility without using motor carrier for pickup and delivery

 Limited door-to-door service

 Long in-transit and handling times

 Multiple switches and handling required


27

Air Carrier Advantages

 Quickly satisfy emergency requirements

 Can support JIT inventory and manufacturing requirements

 High level of competition helps hold down prices and increase service levels


28

Air Carrier Disadvantages

 High cost per pound

 Limited amounts and types of freight

 Fuselage shape limits container size and shape

 High variable-to-fixed cost ratio

 Requires combination with motor carrier for pickup and delivery for direct door-to-door movements


29

Water Carrier Advantages

 Can handle very large quantities of bulk commodities and raw materials

 Relatively low cost per pound


30

Water Carrier Disadvantages

 Limited shipping and receiving points

 Seasonal limitations on inland waterways

 Slow speed

 Potential for natural disasters

 Typically requires motor or rail carrier for pickup and delivery


31

Pipeline Carrier Advantages

 Low cost transportation for liquid petroleum products

 Can handle very quantities of product

 Low variable cost

 Highly reliable

 Not affected by weather conditions


32

Pipeline Carrier Disadvantages

 Extremely slow

 High fixed cost

 Fixed routes and rights-of-way


33

Intermodal Transportation

 Utilizes inherent advantages of different modes of transportation for a single shipment

 Often uses containers

 Can be complex with different carriers involved

 Many carriers now offer one-stop shopping with single bill of lading and unified freight bill


34

Relative Ranking of Modes

Air

Rail

Pipeline

Motor

Inland water

Lowest per-unit cost

5

3

1

4

2

Speed Reliability Capability Accessibility

4

2

1

3

5

4

3

1

2

5

3

1

5

2

4

5

1

3

2

4


35

Carrier Selection

 Common carrier

 Contract carrier

 Private carrier

 Exempt carrier

 Other options


36

Common Carrier

 Must serve the general public without discrimination based on published rates for specific goods

 Must offer reasonable rates


37

Contract Carrier

 Does not hold itself out to serve the general public

 Serves its shippers under specific, negotiated contract terms

 Also known as a dedicated carrier

 Typically offers higher levels of service because of the contractual relationship


38

Private Carrier

 Manufacturer or distributor who operates its own transportation equipment

 May be either owned or leased

 Offers greater control of freight

 May be utilized for “milk runs” in a JIT environment

 May not be a core competency


39

Exempt Carrier

 Free from any type of economic regulation

 Haul special types of commodities

 Assures supply of readily available transportation in markets where only one-way traffic is prevalent


40

Transportation Negotiation

 Carrier’s service performance guarantees with penalties and rewards based on actual performance

 Shipper’s commitment of a minimum amount of freight volume

 How the parties handle freight loss and damage claims

 Type of quantity of equipment


41

Transportation Negotiation

 Frequency and timing of shipments

 Establishment of information-sharing systems

 Freight rates and discounts

 Creative and innovative joint cost reduction


42

Performance-Based Logistics

 Collaborative business model based on meeting the mutual interests of both the buyer and logistics service provider

 Seeks to drive logistics service provider performance by the buyer’s preferred outcomes, not by transaction

 Looks in terms of provider value-added and overall systems cost


43


 Logistics service provider is compensated on how well it enables the buyer to achieve its preferred outcomes

 Both parties must agree on explicit outcomes, goals, and objectives and how the provider can help achieve them


44


 Buyer’s goals and objectives

 Development of key performance variables

 Development of timely, accurate, and cost-effective performance metrics

 Performance may be difficult to define


45

Effective PBL Systems

 Commitment to mutual collaboration and alignment of interests

 Creation of a win-win environment focused on value-added by the provider

 Development of a sound sourcing strategy

 Application of an effective checks and balances system


46

Outsourcing Logistics Services

 Select providers

 Gain access to critical and timely data

 Develop systems visibility to material shipments

 Develop closer relationships with fewer providers

 Establish company-wide contracts


47

Select Providers

 Customs brokers

 Freight brokers (air and surface)

 Warehousing and

DC operations

 Packaging and export documentation

 Delivery services





Local sourcing and purchasing

 International trade management

 Global transportation optimization

Supply chain planning


48

An Effective Approach to Selection

 Plan

 Select

 Implement

 Improve

 Partner


49

Plan

 Define specific logistics service requirements and how they will be measured and evaluated

 Confirm the selection process

 Involve key players to ensure internal buy-in

 Remove barriers to success


50

Select

 Target best-in-class logistics service providers

 Select 3PL or contractor

 Negotiate mutually beneficial agreement


51

Implement

 Share supply chain information to deliver superior value

 Build relationships

 Work jointly to resolve start-up issues


52

Improve

 Exchange performance measurements to identify improvement opportunities

 Encourage cross-organization training and project activities


53

Partner

 Develop supply chain alliances to agree to tradeoffs and share risks

 Involve 3PL partners in joint strategic planning and decision making


54

3PL Advantages

 Economies of scale and increased flexibility

 Improve service performance levels

 Release capital from sale of assets

 Release running costs

 Concentrate on core business activities


55

3PL Disadvantages

 Relinquish control, ownership, and expertise

 Loss of integration between sales and supply

 Changeover costs and operational problems

 Loss of dedicated in-house staff

 Sacrifice key service differentiation


56

Types of 3PL Services

 Merchandising

 Marshalling

 Postponement

 Installation profit

 Cross-docking

 Transport

 Finished goods pull expediting

 Inventory control

 Vendor-managed inventory

 Export packaging

 Spares (returns and repairs)

 Reverse flow


57

Access to Critical and Timely Data

 Number of carriers providing inbound, intra-organizational, and outbound transportation services

 Total expenditures by carrier and mode

 Number of suppliers shipping material, i.e. number of shipping points

 Volume and costs associated with shipments by supplier


58

Access to Critical and Timely Data

 Breakdown of volumes by commodity or type of material

 Performance statistics and ratings for individual carriers

 Percentage of shipments by FOB origin vs. FOB destination


59

Shipment Visibility

 Up-to-the-minute shipment status

 Electronic communication between carrier and buyer

 Global positioning systems

 Electronic customs clearance

 Event-based systems


60

Closer Relationships

 Reduction in the number of 3PLs used

 Improved service and greater benefits

 Selection of highly qualified 3PLs


61

Companywide Contracts

 Substantial service improvements

 Leveraged purchase volumes for lower prices

 Use of full-service carriers


62

Services and Indirect Items

Category

Direct

% of Total

Revenue

18%

9%

% of Total

Purchases

44%

23% Indirect

Services ** 11%

** expected to grow by 13% over next 5 years


30%

63

Indirect Spend Issues

 Growth of the services sector

 Increasing cost pressure

 Decentralized nature of the spend

 Wide variety of goods and services sourced

 How to allocate as overhead

 Often hidden in the price of direct materials and services


64

Internal Methods of Managing

 Data collection and consolidation

 Restructuring to establish accountability

 Automating the requisition/sourcing process

 Standardization


65

Data Collection and Consolidation

 Different units purchasing the same goods from the same suppliers at different prices

 Expenses may be coded differently for accounting purposes between divisions

 Spend is often decentralized and not conducted by supply management


66

Restructuring

 Setting up accountability for indirect spend

 Based on thorough data analysis

 Designed to prevent maverick spend

 Purchases from unauthorized sources

 Defined chain of command and oversight


67

Automation

 Electronic requisitioning

 Automated routing, approval, and purchase order or release creation

 Automated checking of receipts against invoice and PO or release

 Electronic transfer of funds


68

Standardization

 E-catalogs

 Limits access to non-approved sources

 Allows aggregation of indirect spend across the organization

 All off-catalog purchases must be reviewed and approved by an executive-level manager


69

External Methods of Managing

 Reverse auctions

 Consortiums

 Supply management outsourcing


70

Reverse Auctions

 An increasing trend

 Allows buyers and suppliers to communicate in real time from anywhere in the world via the Internet

 Can easily see savings of 10 - 20%

 Some buyers question the technique’s sustainability over time


71

Consortiums

 Pooled buying power from different organizations to create volume leverage

 Now a source of revenue by companies offering these services

 Challenge is determining what purchases can be leveraged

 Best operated by a third party entity


72

Supply Management Outsourcing

 Allow other firms to manage an organization’s indirect spend

 Need for high levels of trust


73

Enabling Tactics and Strategies

 Zero-based budgeting

 Prebudget savings

 Organizational structure

 Integrating accounts payable into supply management

 Power spenders


74

Enabling Tactics and Strategies

 Supplier managed e-catalogs

 Commodity coding for indirect spend

 One commodity team assigned to large suppliers

 Outsourcing indirect sourcing


75

Commodity Coding

 Need for accurate data coding to identify actual spend levels

 May be coded into different expense categories

 Sometimes coded to a generic account such as “Freight In”

 Don’t rely on supplier coding accuracy

 Multiple ship to and bill to addresses


76

Service Supply Chain Challenges

 Imprecise and unclear specifications

 Not having a well-thought-out and thoroughly defined set of performance and outcome expectations

 Determining satisfactory progress

 Scope creep

 Not defining what constitutes completion or level of effort


77

Conclusions

 Link transportation, logistics, and other service activities directly to corporate strategy

 Organize transportation, logistics, and indirect spending under a single executive

 Expand and use the power of technology to capture spend data


78

Conclusions

 Establish executive buy-in, especially from the CFO

 Tie cost savings directly to actual spending

 Form partnerships or alliances with fewer providers and leverage the spend

 Measure transportation, logistics, and service provider performance


79

Conclusions

 Establish benchmarks and regularly review performance

 Establish project scope upfront and routinely follow up on progress

 Review and re-evaluate indirect procurement strategies periodically

 User requirements and expectations

 Cost targets


80

Power Point Slides for Chapter 17

Purchasing Services

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