Introduction

Introduction to module Assessments Source of information Activity on Negotiation skills

Text Books

Lysons, K. Farrington, B. Purchasing and Supply Chain Management by Robert M. Monczka et al. FT Prentice Hall. 4th Edition 2006

What is Procurement?

Procurement
is the acquisition of goods and/or services. It is favorable that the goods/services are appropriate and that they are procured at the best possible cost to meet the needs of the purchaser in terms of quality and quantity, time and location.

Procurement

Wider term than Purchasing Collaboration Follow ups Long Term Relationship Performance Evaluation Communication Supplier Development

Role of Procurement

Lower the companys Cost structure Improve inventory control Improve product quality and durability More competitive in the market place

Procurement Importance

Globalization Information Technology Changing production and management philosophies (JIT, LEAN, Shifting focus from volume to variety)

12 Characteristics of World Class Supplier management

by USA centre for advanced purchasing studies

Commitment to TQM Commitment to JIT Commitment to Total cycle time reduction Long range Strategic plans Supplier Relationships Strategic Cost management

Performance measurements Training and development Service excellence CSR Learning Management and leadership

Characteristics of World Class Suppliers Continuous Improvement Technology and innovation Adaptability
For a firm to reach World Class standards in serving its customers, it is vital to achieve world class standards in controlling its network of Suppliers

Labour Bought-out materials, components, etc. 38% Labour 45% Bought-out materials, components, etc. 60% 22%

Other costs 18%

Other costs 17%

Cost of manufacturing company,1979 Cost of a manufacturing company, 1979

Cost of same manufacturing company, 2004 Costs of the same manufacturing company,1979

Types of Procurement
Direct procurement and indirect procurement

TYPES

Direct procurement

Indirect procurement

Raw material and production Maintenance, Repair and Capital goods goods Operating supplies and services Quantity
Frequency Value Nature

Large
High Industry specific Operational

Low
Relatively high Low Tactical spare parts, tools

Low
Low High Strategic Crude oil storage facilities

Examples Crude oil in petroleum industry

Case Study time ! AVION, INC

Strategy & Strategic Procurement

"Strategy is the direction and scope of an organization over the long-term Strategy tells the organization how to get there

Strategy is an Action plan to achieve the mission

Level of Organizational Strategy

Corporate Strategy Business Strategy Functional/ Operational Strategy

Procurement Strategy in Different Organizations

Procurement and ZARA Two different Procurement Strategies

Procurement and Wal-Mart

Procurement and Dell

Procurement and Toyota

Procurement Strategy
Functional Products
Many suppliers Supplier selection based on cost High priority given to capacity in supplier selection Bulk buying discounts Relationship based on cost reduction

Innovative Products
Few Suppliers Supplier selection based on speed and technology High priority given to flexibility in supplier selection Many small shipments Relationship based on supplier market intelligence

Procurement Policy
Purchasing Authority Environmental policies Disposal and Waste Local or Global or Combine Purchasing E-procurement Ethical Policies

Buyer Supplier Objectives

Buyer Lower possible price Maximum payment terms Tough KPIs Small quantities buying Short lead time Supplier Highest possible price Minimum payment terms Soft KPIs Bulk Selling Long lead time

End of Topic

Purchasing and Supply Chain Organization

Case study of Harley-Davidson

To create competitive advantage through supply management efforts, we normally hear about IT Outsourcing Cost management techniques Strategic relationship But organizational Design is very important as well

Organizational design refers to the process of assessing and selecting the structure and formal system of communication, division of labor, coordination, control, authority and responsibility required to achieve organizational goals and supply management objectives

Formal Purchasing Organization Structure

Purchasings position within the organizational structure Organizing the purchasing function Placement of purchasing authority Organizing for supply chain management Using teams as part of the organizational structure Creating the organization of the future

Purchasings position within the organizational structure

Formal organizational structure shows assignment of work and authority It defines how a firm communicates and coordinate

Handout No 3: Purchasing at different Organizations

Factors affecting purchasing positions in the Organizational Hierarchy

History (from Clerks to purchasing Executives) Type of Industry Total value of Goods and Services (Honda, DaimlerChrysler spend 60 to 70% in purchasing)

To whom does purchasing Report?

1950 to 1960
Purchasing reported to second level production and operations department

1970 to 1980

In many companies, purchasing reported to senior or group vice president

In most of the organizations, they have CPO, who report to top five Executives

1980 till present

Organizing the purchasing function Specialization within Purchasing

Sourcing and negotiating Purchasing research Operational support and order follow-up Administration and support (develop policies and procedures for purchasing personnel, administer and maintain purchasing information system)

Purchasing department Activities

Buying Expediting Inventory Control Insourcing/Outsourcing Value analysis Supply Management Counter Trade (Barter System)

Separating Strategic and Operational Purchasing

Strategic Purchasing Activities
Manage relationship with critical suppliers Develop electronic purchasing system Implement companywide best practices Manage critical commodities Negotiate companywide supply contracts

Operational Purchasing Activities

Manage transactions with suppliers Use e-systems Source items that are unique to the operating unit Generate and forward material to operating unit Provide supplier performance feedback

Placement of Purchasing Authority

Placement of purchasing authority means where an organization locates its decision-making authority. If supply executive has an authority to spend major purchasing expenditures = Centralized Purchasing If purchasing authority for the majority of expenditures at divisional, business unit or site level = Decentralized Purchasing

Factors influencing Centralized or Decentralized purchasing

Firms Business Strategy

If strategy is to be more responsive then decentralized.

Similarity of Purchases
If purchases are similar then Centralized, if very different across business units then decentralized

Total Dollar expenditures

If physical size of purchase increase then Centralized. If geographically dispersed then decentralized

Advantages of Centralized Purchasing

Consolidate purchase volume Reduced Duplications of Purchasing High Visibility and easy to coordinate Developing Expertise (involved in large purchasing activities)

Advantages of Decentralized Purchasing

Speed and responsiveness Understanding unique operational requirement Product development support (divisional or business unit level) Ownership Tapal v/s Lever Brothers American operation in Iran v/s Pakistan

Handout No 4: Con-way appoints its first CPO

Organizing for Supply Chain Management

Purchasing and supply chain organization is also responsible for managing supply chain management include: Controlling material costs while improving customer service Developing an awareness of supply chain total cost tradeoffs Developing multifunctional expertise Creating a direct link from customer to external suppliers

Using Teams as part of Organizational Structure

Use Teams to Evaluate and Select Suppliers Perform Demand and Supply Planning Carry out Supplier development activities

Creating the Organization of Future

Shifting trends from Vertical to Horizontal focus Cross functional Teams Suppliers Involvement Involvement of procurement with other departments like Operations, Engineering and Marketing etc

Handout No 5: Johnson & Johnson

End of Topic

Supply Management & Product/Service Strategy Development

CASE STUDY OF

Boeing 787 Dreamliner

Aligning Supply Management and Enterprise Objectives

Companys leadership team define how firm will compete and succeed in Global market. They set some objectives include: What markets will the firm compete in and on what basis? What are the long-term and short-term business goals, company seek to achieve? What are the budgets and economic resource constraints and how will budgets be allocated to functional groups?

How Companies create Shareholder value

Raise Prices Increase Revenue Increase Volume

Reduce cost of Employees

Decrease Costs

Reduce cost of waste

Reduce cost of Goods or Services

Converting Supply Management Strategic Objectives into Supply management Strategy

Strategic Cost Reduction Objective Material cost reduction Inventory days reduction Strategic Technology/New product development Objective Outsource non-core-competency activities Reduce product development time Strategic Supplier Reduction Objective Reduce number of Suppliers Develop close relationship with some suppliers

Spend Analysis

It is an annual review of firms entire set of purchases. It provide answers to the following questions:
Where did business spend its money over past year? Did business receive right amount of products and services given what it paid for them (important for shareholders point of view) What suppliers received majority of the business and did they charge an accurate price? Which divisions of business spent their money on products and services that were correctly budged for?

Strategic Sourcing

Strategic Sourcing for Assigning Contract

Outsource to whom Level of relationship with outsourced supplier

Benefits of Strategic Sourcing

Traditional purchasing focuses on purchase price; strategic sourcing focuses on true cost to the customer
For example: low cost component with more defects Low cost product with longer lead time

Traditional purchasing is transactional; strategic sourcing is collaborative Traditional purchasing benefits from technology but cannot implement technology to the same degree as occurs in strategic sourcing Traditional purchasing does not increase visibility of entire supply chain the way strategic sourcing can.

Strategic Relationship

Strategic relationship lie in the middle of a spectrum of business relationships. At one end of the spectrum is the traditional purchasing relationship, or buy on the market while one the other end it is merger and acquisitions
Buy on the market Strategic relationship Merger/ Acquisition

Types of Relationship

Buy on the market Ongoing relationship Partnership Collaboration/ Strategic Alliance Mergers and Acquisition

Handout no 7 on Types of relationships

Traditional relationship versus strategic Alliance

MIS Distribution Customer service Marketing Operations finance

Sales

Buyer

MIS Distribution Customer service Marketing Operations finance

Strategic Alliance

MIS Distribution Customer service Marketing Operations finance

Sales

MIS Distribution Customer service

Buyer

Marketing Operations finance

Benefits of Strategic Alliances

Strategic Importance
If purchasing component is critical to competitive differentiation, it is better to keep it in-house. If not lies in core competency then outsource to valuable supplier.

Number of Suppliers
If there is very few or one supplier available for component then organization need to develop strategic alliance so that can get competitive advantage

Uncertainty
Frequent changes in raw material cost, quality or availability can block a business. It is better to make strategic alliance to avoid these interruptions

Risks associated with Strategic Alliance

Cultural and language differences

Chinese can not spell Z Arabs pet word you are my brother, frist or first.

Multiple currencies and fluctuations

Fluctuation in one region could impact other region

Different legal systems

Organization must recognize legal requirements of all countries where it has alliances

Security concerns
Physical threats include theft and terrorism Intangible threats include information, trade secrets, customer relationship and computer crimes etc

Strategic Alliances may do the following.

Add value to products

Reduce lead time Make better design by supplier early involvement

Strengthen operations
Alliances can help improve operations by lowering system costs and share resources like retailer and distributor can share warehouse with each other

Increase organizational expertise

Both partners can improve their operations by teaching and learning

Enhance financial strength

Alliances can help improve overall financial position by increasing revenue while reducing costs

Examples of Alliances

Third party logistics Vendor managed inventory Collaborative planning forecasting & replenishment

Module completed till Midterm

Strategic Sourcing Process

Build the Team Market Research Strategy Development Contract Negotiation Supplier Relationship Management

Build the Team

Team could be composed of personnel from Operations, product design, marketing, finance and purchasing If team purchasing vehicles and vehicles parts then maintenance managers should be involved. If team purchasing computers than IT people should be involved

Market Research on Suppliers

Meeting with different Suppliers Interviews with consultant who specializes in studying certain markets and suppliers Websites Reports (annual reports of suppliers) Publically available databases

Strategy Development

Define Level of relationship Define strategy for different products Supplier Evaluation
Design capability Financial condition Planning and control system (IT) Environmental regulation compliance Longer- term relationship potential

Contract Negotiation

After sourcing strategy has been determined and suppliers have been recommended, it is time to implement the strategy and negotiate the contract.

Conduct Pilot Program

Organization may decide to implement SRM in only one geographical region or with one or some products

Implement full program

Organization revises the PSA as necessary and implements it fully. It include regular planning and problem solving sessions with key suppliers

Monitor and Improve

Organization implements a framework of metrics to ensure suppliers are meeting PSAs and delivering desired impact on organizations bottom line and/or strategic goals. SRM is a dynamic process so the focus should be on continuous improvement.

Managing Risk in Supply Relationship

Managing risk requires performing an initial supply chain risk audit and creating action plans Understand not only direct contact but also its customers customers and suppliers suppliers Risk management must be conducted by channel master and all supply chain partners In global alliances, biggest challenges are in the area of language, etiquette and work styles, sweatshops and underage workforce utilization

Managing Risk in Supply Relationship

One tactic for managing risk is to ensure the qualifications of suppliers through certification like (ISO)

Assignment
What is ISO and what are the benefits it could deliver to both suppliers and customers 1500 words Due date is ?

Suppliers Rating System

Scorecards
Scorecards capture quantitative and qualitative data and provide historical plan and predictive views of supplier performance. Scorecard should be sent to strategic suppliers on regular basis.

Surveys
Standardized surveys are sent to supply chain managers in order to gather qualitative information on the performance of suppliers

Supplier Rating
(Class Activity)

SRM Technology

Many businesses are moving toward the implementation of software that helps streamline connections among vendors and purchasers. SRM technology increases efficiency of processes associated with acquiring goods and services, managing inventory and processing materials.

Benefits of SRM software

SRM software work well with most existing Erp systems and help those systems to achieve full, promised potential. Software helps reduce the cycle time on sourcing projects. Instead of going through acres of RFPs and comparing wide array of quotes, software actually helps bring all of this data together into a simplified selection process. Price comparision and supplier selection could be easier by SRM softwares Software allow comapny to add past performance of vendors

Failures of SRM technology

Immense complexity of bringing supply chain optimization science into an operational environment Lack of deep implementation experience Lengthy required lead time Insufficient focus on the management of change and the delivery of real business value

Supplier Co-Location

Term often used to describe the practice of locating a supplier or multiple suppliers within a single location Example: An auto manufacturer invites multiple suppliers into a production plant. Supplier put inventory and staff on site so that each one can perform an operation on vehicles as they move along the production line. In return, the manufacturer provides the supplier with space, shelving, office equipment and computers free of charge.

Benefits

Highly integrated processes On site supplier becoming integral part of n organization Reduce capital requirement by supplier Inventory reduction by organization Lead time reduction

Supplier co-location also refers to bringing together people or groups in related roles for product and process innovations Supplier are co-located to generate ideas and design new products Co-location of suppliers allows problems to be addresses quickly as they arise in the design process and typically reduces concept to customer time

End of Topic