Introduction to Global Supply Chain Management
Module Four:
Product Procurement &
Supplier Relationship Management
This project received $24.5M (100% of its total cost) from a grant awarded under TAACCCT, as implemented by
the U.S. Department of Labor’s Employment and Training Administration. This is an equal opportunity program
and auxiliary aids and services are available upon request to individuals with disabilities.
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Class Agenda
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Sourcing & Purchasing defined
The purchasing function
– S&OP integration & synchronization
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Key elements of Supplier
Relationship Management (SRM)
– Strategic considerations
– Operational requirements
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Analysis of the purchasing process
SRM & Key Performance Indicators
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Sourcing & Purchasing:
Buy-Side Activities In a Global Model
S
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MANUFACTURER
DISTRIBUTION
SYSTEM
MATERIALS
MANAGEMENT
DISTRIBUTION
MANAGEMENT
Buy Side
Sell Side
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Different Operating Models & Inventory Types
Influence Sourcing & Purchasing Strategies
Types of Inventory
Operating Model
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Raw materials
Components/sub-assemblies
Work In Process
Finished goods
Distribution inventory
Accessories
Spare parts
MRO
Build to stock
Build to order
Assemble to Order
Engineer to Order
Just In Time
Vendor Managed Inventories
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Global Sourcing & Purchasing Defined
“The business disciplines of sourcing and purchasing are closely linked in that they are both
related to the acquisition of goods & services that contribute to the execution of a company’s
business model.
Sourcing is a strategic function that establishes the criteria, policies and procedures for selecting
and working with both domestic, and overseas suppliers. Executed within the framework of an
integrated global supply chain, product sourcing activities include country/region/industry
analysis, structural analysis of supplier networks, single vs. multi-vendor sourcing strategies,
risk management, logistics & Customs infrastructure, government regulations & tax code, vendor
profiles, landed cost analysis, cumulative lead-times, human rights & environmental policies.
Conversely, purchasing is involved in the actual procurement of raw materials, components,
sub-assemblies, finished goods, accessories and/or service parts in quantities that are the result
of ongoing S&OP. Regardless of a company’s business model, purchasing executes on activities
that include vendor selection, quality specifications, price & quantity negotiations, terms of sale,
shipping terms, cancellation dates, last-ship dates, charge-backs, title transfer, standard
operating procedures and documentation requirements.”
Dan Gardner, April 2015
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The Integration of Purchasing
With Other S&OP Functions
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Whether a company acquires goods
through an intercompany purchase or
from an outside vendor, the
coordination of MRP with other
S&OP activities is critical to success
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Bill(s) of Material
Purchase order management
Production planning & MPS
Capacity planning
Lead time compliance
Logistics planning
Material Requirements Planning is
what drives the purchasing function
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The Global Purchasing Function &
Material Requirements Planning
Marketing
planning
Strategic
planning
Financial
planning
Resource
planning
Production
planning
Demand
management
Master
production
scheduling
Routing
file
Detailed
capacity
planning
Shop-floor
systems
Bills of
material
Detailed
material
planning
Front end
Inventory
status
data
Time-phased
requirement
(MRP) records
Material
and capacity
plans
Engine
Vendor systems
Back end
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MRP & Purchasing:
Gross-to-Net Exploding
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Gross–to-Net Exploding
– An exercise whereby the original
(gross) requirement for a product is
reduced by:
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Inventory on hand
Confirmed order receipts
Confirmed order releases
Planned order releases
Gross-to-Net Exploding must be
integrated with the raw materials
inventory management function
Integration is achieved through
process design and supply chain
software applications
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MRP & Purchasing:
Lead Time Off-Setting
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Lead time off-setting
– Orders are placed for products on a
date that “off-sets” cumulative lead
times with the desired date of receipt
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P.O. preparation/acceptance
Production time
Transportation lead time
Customs clearance
Domestics distribution
Lead time off-setting must be
integrated with the logistics function
Integration is achieved through
process design and supply chain
software applications
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MRP & Purchasing:
A Typical Inbound Supply Chain
Supplier
Origin Trucker
Origin Forwarder
International Transportation
Origin: Somewhere Overseas
CHB
U.S. transport
W&D
Order Fulfillment
Last Mile
Destination: Somewhere in the U.S.A.
Client
How MRP Software Helps To Manage
The Purchasing Function
Item: ABC
Order Qty: 1,000
Lead Time: 8 weeks
Time Bucket (week)
Gross Requirements
Scheduled Receipts
Projected Available
Net Requirements
Planned Order Receipt
Planned Order Release
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Based on upstream S&OP activities, MRP software nets, offsets, explodes
requirements and creates Planned Order Releases. It is the purchasing function that
manages the process of converting Planned Releases into Planned Order Receipts
and ultimately, into Scheduled Receipts. Integral to that process is the placement
of system-driven purchase orders on vendors, as well as making adjustments to
to those P.O.’s as new demand information becomes available.
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Product Procurement & SRM:
Strategic Sourcing Considerations
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Product Procurement & SRM:
Complexity & Risk
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Many companies buy hundreds (if not
thousands) of different products in
overseas markets
To purchase that many products a
firm has to deal with hundreds of
active and potential vendors
Suppliers can be spread across
multiple regions and dozens of
countries
Vendors have to be vetted and
qualified prior to working with them
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Product Procurement & SRM:
Complexity & Risk
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Detailed purchase agreements must
be negotiated with each supplier
Vendors must be able to work with
other supply chain players
Detailed Standard Operating
Procedures (SOP’s) have to be crafted
with each supplier
The vendor has to be able to execute
Ideally, cloud-based software helps to
manage the relationship
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Product Procurement & SRM:
Strategic Sourcing Considerations
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Macro-economic profile
(region/country)
Industry-specific eco-system
Government stability
Human rights & environmental issues
Proximity to other supply chain
players (Tier I, II, III suppliers,
customers, ports/airports, 3PL’s etc.)
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Product Procurement & SRM:
Strategic Sourcing Considerations
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Utilities infrastructure (water, power,
et al)
I.T. infrastructure
Tax structure
Demographics
Education level
Single source or multi-source strategy
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Product Procurement & SRM:
Strategic Sourcing Considerations
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Intra-company or third party sourcing
Vendor profile & qualifications
Labor costs
Unit costs
Landed costs
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Product Procurement & SRM:
Strategic Sourcing Considerations
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Logistics infrastructure
Supply chain risk profile
Free Trade Agreements
Preferential Duty Programs
Customs regulations
Lead-times
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The Purchasing Function:
Key Considerations in Vendor Selection
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Ownership structure
Financial stability
Product portfolio
Existing portfolio of clients
Technical (engineering) capabilities
Location(s)
– Possible countries of origin
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The Purchasing Function:
Key Considerations in Vendor Selection
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Number of employees
Physical plant
Production capacity
Product quality programs
– Lean Manufacturing
– Six Sigma
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Use of Standard Operating
Procedures (SOP’s)
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The Purchasing Function:
Key Considerations in Vendor Selection
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Cost structure (unit cost)
Demonstrated S&OP capabilities
– MPS, MRP, Capacity Planning
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Supply chain software & visibility
tools
Knowledge of global trade
– Shipping, documentation &
compliance
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The Purchasing Function:
Key Considerations in Vendor Selection
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Respect for patents, trademarks &
intellectual property
Human rights compliance
Green vendor initiatives
Key Performance Indicators
– Product quality, quantities, logistics,
billing, rejections/returns, et al
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The Purchasing Function:
Contractual Clauses
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Product specifications
Merchandise description
Quality, grade, size & condition
Quantities & weights
Price
Currency of sale
Payment terms
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The Purchasing Function:
Contractual Clauses
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Product warranties & returns
Substitution
Incoterms® 2010 rule
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Mode of transport
Lead-time
Last ship date
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The Purchasing Function:
Contractual Clauses
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Order cancellation date
Charge backs
Documentation requirements
Dispute resolution
Applicable law
Severability
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The Purchasing Process:
Alignment, Integration & Synchronization
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Purchasing Example:
Build-to-Order Model
Origin Country
Suppliers
• Buyer places P.O. on
vendor
• Vendor acknowledges
receipt of P.O.
• Vendor uploads P.O.
in system
• Vendor executes MRP
• Supplier acquires net
raw materials
requirements
• Completes production
process
• Supplier prepares
commercial
documentation
In Transit
Consolidation
Center
Destination Country
De-Consolidation
Center
Customer
DC
Stores
• Vendor notifies 3PL
and buyer of cargo
readiness
• 3PL picks up cargo &
documentation
• 3PL prepares shipment
for export
• 3PL makes booking
with SS Line
• 3PL executes export
• 3PL send ASN to
buyer
• Goods are shipped
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Purchase Order Flowchart Example:
Hong Kong to Warsaw
Warsaw
Buyer
Truck
Delivery
Destination
Customs
Destination
3PL
Airl
ine
Hong Kong
Origin
Trucker
Origin
Customs
Supplier
Origin
3PL
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Purchase Order Process Flowchart:
Purchasing agent
isssues P.O.
to buyer
Begin
Buyer’s system
generates
Planned Order
Release (P.O.R.)
Supplier
acknowledges
reciept of P.O.
Purchasing agent
reviews P.O.R.
Changes
required?
Yes
Negotiate
changes
No
Changes
required?
Yes
Make
changes
No
Vendor inputs
P.O. information,
S&OP updated
No
End
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Purchasing & The “Documentation Trail”
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The Documentation Trail is a
metaphor that symbolizes the source,
creation, use and filing of all
documents associated with an
international transaction
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Sales contract
Purchase orders
Commercial invoice
Packing list
Forwarder’s cargo receipt
Ocean bill of lading
Airway bill
Insurance certificate
Certificate of origin
Phytosanitary certs
Letter of credit
Principles That Support
The “Documentation Trail”
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All information found in export
documents should be born of the
original contract or agreement
One person’s sale is another person’s
purchase
One person’s export becomes
another’s import
Different entities in the supply chain
use the same information and
documents for different reasons
– Customs may use a commercial
invoice for product classification
purposes, while a bank uses it for
paying on a letter of credit
Principles That Support
The “Documentation Trail”
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For all of these reasons, all documents
have to adhere to “The 3 C’s of
Documentation”
– Complete
– Consistent
– Correct
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The smallest of errors can stop a
supply chain in its tracks
– The devil is in the details (and so are
the dollars)
Document Example:
Purchase Order
Document Example:
Commercial Invoice
Document Example:
Airway Bill
Product Procurement & SRM:
Developing Key Performance Indicators
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Key Performance Indicators (KPI’s)
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Key Performance Indicators are
measurement tools used to quantify
performance in specific areas
KPI’s should be aligned with the
strategic goals of the company
The use of KPI’s can be internal
and/or external (vendors, etc.)
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Key Performance Indicators (KPI’s)
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KPI’s should be used to measure
overall supply chain performance
– Buy-Side, Sell-Side, Finance,
Customer Service, et al
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KPI’s should be evaluated in periodic
business reviews
KPI’s can be used as part of a
“Supplier Certification” Program
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KPI’s for Measuring Supplier Performance
(Period-Specific)
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Total dollar spend by vendor
Landed cost: budget vs. actual
– Total
– By SKU or part number
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Number of purchase orders issued
Number of SKU’s or part numbers by
vendor
Dollar value by SKU or part number
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KPI’s for Measuring Supplier Performance
(Period-Specific)
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Number of incomplete P.O.’s (missing
items)
Over/under quantities
Incorrect merchandise
Defective merchandise
Damaged merchandise
Number/value of insurance claims
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KPI’s for Measuring Supplier Performance
(Period-Specific)
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Number of changed purchase orders
Instances of late shipments
Instances of early shipments
Number of cancelled orders
Products on backorder
Dollar value of backorders
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KPI’s for Measuring Supplier Performance
(Period-Specific)
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Number of rejected purchase orders
Missing documents
Incorrect prices on invoice
Errors on commercial documentation
Missed sailings/flights
Number of expedited shipments
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KPI’s for Measuring Supplier Performance
(Period-Specific)
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Air freight expense for expedited
shipments
Number of charge-backs
Reason for charge-backs
Dollar value of charge-backs
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End of Module Four
Congratulations!!!