Chapter 1:
What is Purchasing and
Supply Management
Jaeyoung Oh
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GSCM in our day life
What does a trip to your closet tell you about a
purchasing’s professional job?
• Newer clothes
• Medium-aged clothes
• Oldest clothes
What are your takeaways?
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…Laptop?
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Purchasing Function and Changes in
Profitability
Today
• Complexity in the fabrication has shifted upstream to the suppliers
• Industrial firms are purchasing more and more subassemblies
• The importance and profile of purchasing professionals has elevated
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Supply Professional Requirements
Resources
• Need to know “everything” about what
you are buying.
Suppliers
• Need to know who can meet your buying
needs.
Processes
• Need to know the purchasing process
inside and out.
Technologies
• Need to know how new technologies will
influence both processes and products.
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Take a Look at a Typical Supply Chain
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Purchasing’s Key Role:
Manage the Supplier-Facing (“Upstream”) Part of
the Supply Chain
Purchasing’s Key
Relationships
• What about
Tier 2
suppliers?
• Is Purchasing
also
responsible
for them?
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Stages of The Supply Chain
Source: Fawcett, Ellram, and Ogden (2007)
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SCOR Model
Plan
• Planning processes help you use resources to generate and fill
demand to meet your financial plan.
Source
• Sourcing processes help you build an effective sourcing
organization and select the “best” suppliers.
Make
• Production processes help you transform inputs into a finished
product that customers value.
Deliver
• Logistics processes help you manage inbound delivery of
materials—both inbound and outbound
Return
• Return processes help you manage the return of products—for
any reason.
Enable
• Enabling processes help you support plan-source-make-deliverreturn value creation activities.
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The Supply Chain Council SCOR Model
Plan
Source
Make
Return
Deliver
Return
Enable
Plan
Deliver
Return
Source
Make
Return
Deliver
Return
Enable
Suppliers’
Supplier
Supplier
Source
Make
Return
Deliver
Return
Enable
Your Company
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Source
Make
Return
Deliver
Return
Source
Return
Enable
Customer
Customers’
Customer
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CPFR (Collaborative Planning,
Forecasting & Replenishment)
• CPFR is a collaborative process of developing joint
forecasts and plans with supply chain partners
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Strategic business plan
Strategic Level
Supply Chain Strategy
(efficient vs. responsive)
Financial plan
Marketing plan
Production plan
Engineering plan
- Sources of funds
- Uses of funds
- Cash flows
- Projected budget
- Target market
- Competitive
focus
- Profit margin
- New products
- Product rate
- Workforce size
- R&D
- Product design
- Process design
Sales plan
actual vs. planned
(Forecasting)
Master
Production
Schedule
Operational Level
Sourcing plan
-
New suppliers
Supplier
selection
Price
negotiation
Logistics plan
-
-
Route
optimization
Transportation
Bill of Material
Rough-cut
Capacity Planning
Material
Requirement
Planning
Inventory
Suppliers
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Customers
The Seven Rights of Purchasing
Obtaining the right material
In the right quantity
Which is most
important?
At the right time
For delivery to the right place
From the right supplier
With the right service
At the right price
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Evolution of Purchasing
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Purchasing & Supply Contributions
Effect on image & social policy
As a source of information
Profit-Leverage effect
ROA effect
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Profit Leverage Effect
What is it?
Why is it so high?
• Put simply, it is the
amount of extra sales
dollars needed to
have the same impact
of $1 saved by
Purchasing’s costcutting efforts.
• Basically, $1 saved by
Purchasing is an
additional $1
operating profit. An
additional $1
increased sales only
increases profit by the
operating profit
percentage.
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Profit Leverage Effect
8%
Goes to Bottom Line
Operating Profit
$8/$100
=$0.08 operating profit per $1 sales (8%)
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$1=SalesX8%
S=$12.50
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Strategic Profit Model
Sales Revenue
-
Gross Profit
COGS
Logistics Costs
+
Sales &
Administrative
Total Op.
Expenses
+
Taxes &
Interest
Net Income
÷
Profit Margin
Sales
Revenue
x
Cash
+
Accounts
Receivable
Current
Assets
Inventory
Fixed Assets
+
+
Sales
Revenue
÷
Return
on Assets
Asset
Turnover
Total Assets
Return on assets
• A profitability ratio that provides how much profit a company is able to generate from its assets.
• It measures how efficient a company's management is in generating earnings from their economic
resources or assets on their balance sheet
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Simple Financial Statement
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Baseline Starting Position
How to reduce
COGS??
Sales Revenue
$100,000,000
-
COGS
$68,750,000
Logistics Costs
$5,000,000
+
S&A
$18,250,000
Gross Profit
$31,250,000
Total Op. Costs
$23,250,000
+
Net Income
$5,000,000
÷
Profit Margin
5.00%
Sales Revenue
$100,000,000
Taxes & Interest
$3,000,000
x
Cash
$10,000,000
+
Sales Revenue
$100,000,000
AR
$10,000,000
Current Assets
$30,000,000
Inventory
$10,000,000
Fixed Assets
$20,000,000
+
Return
on
Assets
10.00%
+
÷
Total Assets
$50,000,000
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Asset Turnover
2.0
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Practices to reduce your cost of
purchased goods
Standardize Redundant • Engineering efforts to
redesign parts
Parts
Aggregate Spend
• Take advantage of volume
buys and negotiate lower
prices
Strategic Alliance
• Supplier classification and
closer relationships by the
importance
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Impact of Reduced Cost of Purchased
Goods on ROA
Sales Revenue
$100,000,000
-
COGS
$61,875,000
Logistics Costs
$5,000,000
+
S&A
$18,250,000
Gross Profit
$38,125,000
Total Op. Costs
$23,250,000
+
Net Income
$10,500,000
÷
Profit Margin
10.50%
Sales Revenue
$100,000,000
Taxes & Interest
$4,375,000
x
Cash
$10,000,000
+
Sales Revenue
$100,000,000
AR
$10,000,000
Current Assets
$29,000,000
Inventory
$9,000,000
Fixed Assets
$20,000,000
+
Return
on
Assets
21.42%
+
÷
Total Assets
$49,000,000
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Asset Turnover
2.04
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Today’s Competitive Environment
1. Competition is increasing—and will continue to increase.
2. Markets—both resource and consumer—are increasingly
global.
3. Change happens faster as new technologies emerge, and
new rivals enter markets.
4. Customers are more empowered by readily available
information. They want it all!
5. Risks have increased, causing greater disruption, and
threatening supply lines.
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Questions?
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Discussion: The Professional Purchasing
Team
Throughout the chapter, we argued that all
organizations in every industry should invest in a
highly professional purchasing team. Unfortunately,
not everyone has bought into this vision.
• Are there companies in more desperate need of
PSM professionalism than others? Why?
• How would you convince people where you work
that the company should take a more strategic
approach to purchasing and supply management?
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