1. Supply Management
Chapter 7

2. Chapter Objectives Be able to:
Identify and describe the various steps of the strategic sourcing process.
Perform and interpret the results of a simple spend analysis.
Use portfolio analysis to identify the appropriate sourcing strategy for a particular good or service.
Describe the rationale for outsourcing and discuss when it is appropriate.
Perform a simple total cost analysis.
Show how multicriteria decision models can be used to evaluate suppliers and interpret the results.
Understand when negotiations should be used and the purpose of contracts.
Describe the major steps of the procure-to-pay cycle.
Discuss some of the longer-term trends in supply management and why they are important.

3. Supply Management
Supply Management – The broad set of activities carried out by organizations to analyze sourcing opportunities, develop sourcing strategies, select suppliers, and carry out all the activities required to procure goods and services.

4. Why is Supply Management critical?
Global Sourcing
Competition against global competitors and their supply chains.
Advances in information systems have helped.

5. Why is Supply Management critical?
Financial Impact
Table 7.1

6. Why is Supply Management critical?
Financial Impact
Cost of goods sold – The purchased cost of goods from outside suppliers.
Merchandise inventory – A balance sheet item that shows the amount a company paid for the inventory it has on hand at a particular point in time.
Profit margin – The ratio of earnings to sales for a given time period.
Return on assets (ROA) – A measure of financial performance defined as Earnings/Total Assets

7. Profit Leverage – Example 7.1
Financial Impact
Selected Financial Data for Target Corporation
Table 7.2
Profit Margin = 100% X ($4,629 / $65,786) = 7%
Return on Assets = 100% X (4,629 / $17,213) = 26.9%

8. Profit Leverage – Example 7.1
Financial Impact
Every dollar saved in purchasing lowers COGS by $1 and increases pretax profit by $1.
Profit leverage effect – A term used to describe the effect of $1 in cost savings increasing pretax profits by $1 and a $1 increase in sales increasing pretax profits only by $1 multiplied by the pretax profit margin.
Every dollar saved in purchasing lowers the merchandise inventory figure – and as a result, total assets – by $1.

9. Profit Leverage – Example 7.1
3% purchasing reduction in COGS
Earnings and Expenses Current Reflecting Savings
Sales $65,786 $65,786
COGS $45,725 $44,353
Pretax earnings $4,629 $6,001
Selected Balance Sheet Items
Merchandise inventory $7,596 $7,368
Total assets $17, $16,985
Pretax earnings increase by $1372 (30%)
ROA increases from 26.9% to 35.3%

10. Why is Supply Management critical?
Performance Impact
Purchased goods can have a major effect on other dimensions such as quality and delivery performance.

11. Performance Impact – Example 7.2
Sourcing dialysis machine valves

12. Performance Impact – Example 7.2
Effect of defective dialysis machine
Interruption in patient treatment
Rescheduling difficulties
Reduction in the effective capacity for dialysis
Possible medical emergencies Estimated cost of a failed valve = $1,000

13. Performance Impact – Example 7.2
Sourcing 50 dialysis machine valves (Total Costs)

14. The Strategic Sourcing Process
Figure 7.1

15. Assess Opportunities
Spend Analysis – The application of quantitative techniques to purchasing data in an effort to better understand spending patterns and identify opportunities for improvement.

16. Assess Opportunities – Example 7.3
Examine the trends and impact of spending.
Table 7.3
Figure 7.2

17. Profile Internally and Externally
Two approaches to creating profiles:
Category profile – An approach to understand all aspects of a particular sourcing category that could ultimately have an impact on the sourcing strategy.
Industry Analysis – An approach to provide a more detailed understanding of the characteristics of the external supply base.

18. Develop the Sourcing Strategy
The Make-or-Buy Decision
A high-level, often strategic, decision regarding which products or services will be provided internally and which will be provided by external supply chain partners.
Insourcing – The use of resources within the firm to provide products or services.
Outsourcing – The use of supply chain partners to provide products or services.

19. Develop the Sourcing Strategy
Advantages and Disadvantages of Insourcing and Outsourcing
Table 7.6

20. Develop the Sourcing Strategy
Factors that affect the decision to Insource or Outsource.
Table 7.7

21. Develop the Sourcing Strategy
Total cost analysis – A process by which a firm seeks to identify and quantify all of the major costs associated with various sourcing options.
Direct costs – Costs tied directly to the level of operations or supply chain activities.
Indirect costs – Costs that are not tied directly to the level of operations or supply chain activity.

22. Develop the Sourcing Strategy
Insourcing and Outsourcing Costs
Table 7.8

23. Develop the Sourcing Strategy
Portfolio analysis – A structured approach used by decision makers to develop a sourcing strategy for a product or service, based on the value potential and the relative complexity or risk represented by a sourcing opportunity.

24. Develop the Sourcing Strategy
Portfolio Analysis
The Routine Quadrant – Readily available products or services (small % of total).
Electronic Data Interchange
The Leverage Quadrant – Standardized and readily available products or services (large % of total).
Preferred suppliers
The Bottleneck Quadrant – Unique or complex products or services supplied by few suppliers.
The Critical Quadrant - Unique or complex products or services supplied by few suppliers, representing large % of total.

25. Develop the Sourcing Strategy
Portfolio Analysis
High
Bottleneck
Critical
Routine
Leverage
Complexity or Risk Impact
Low
Low
High
Value Potential

26. Develop the Sourcing Strategy
Single sourcing – The buying firm depends on a single company for all or nearly all of an item or service.
Multiple sourcing – The buying firm shares its business across multiple suppliers.
Cross sourcing – Using a single supplier for a certain part or service and another supplier with the same capabilities for a similar part.
Dual sourcing – Using two suppliers for the same purchased product or service.

27. Screen Suppliers and Create Selection Criteria
Criteria to evaluate suppliers
Process and design capabilities
Management capability
Financial condition and cost structure
Longer-term relationship potential

28. Conduct Supplier Selection
Weighted-point evaluation system – An evaluation system to evaluate potential suppliers, track supplier’s performance over time, and rank current suppliers.
Method
Assign weights to performance dimensions.
Rate the performance of each supplier with regard to each dimension.
Calculate the total score.

29. Supplier Selection – Example 7.6
Summary Data for Three Possible Suppliers
Table 7.11

30. Supplier Selection – Example 7.6
Criteria Weights
WPrice = 0.3
WQuality = 0.4
WDelivery = 0.3
5 = excellent
4 = good
3 = average
2 = fair
1 = poor
Scoring Scheme

31. Supplier Selection – Example 7.6
Performance Values for Alternative Suppliers
Table 7.13

32. Supplier Selection – Example 7.6
Total Scores for Alternative Suppliers
Score Aardvark = (4 x 0.3) + (3 x 0.4) + (4 x 0.3) = 3.6
Score Beverly = (3 x 0.3) + (5 x 0.4) + (2 x 0.3) = 3.5
Score Conan = (5 x 0.3) + (1 x 0.4) + (1 x 0.3) = 2.2
Aardvark should improve their quality. Beverly Hills should improve their delivery and price. Conan is out of the running as a potential supplier.

33. Negotiate and Implement Agreements
Competitive bidding – A request for bids from suppliers with whom a buyer is willing to do business.
Request for quotation – A formal request for the suppliers to prepare bids, based on the terms and conditions set by the buyer.
Description by market grade/industry standard
Description by brand
Description by specification
Description by performance characteristics

34. Negotiate and Implement Agreements
Negotiating – A more costly, interactive approach to final supplier selection.
Negotiation is used best when:
The item is a new or technically complex item with only vague specifications.
The purchase requires agreement about a wide range of performance factors.
The buyer requires the supplier to participate in the development efforts.
The supplier cannot determine risks and costs without additional input from the buyer.

35. Negotiate and Implement Agreements
Contracting – The process of creating a detailed purchasing contract to formalize the buyer-supplier relationship.
Fixed-price contract – Stated price does not change.
Cost-based contract – Price of the good or service is tied to the cost of some other key input or economic factor.

36. The Procure-to-Pay Cycle
Ordering
Purchase order – A document that authorizes a supplier to deliver a product or service and includes the terms and conditions of the sale.
Follow-up and expediting
Receipt and inspection
Statement of work (scope of work) – Terms and conditions for a purchased service.
Settlement and payment
May be paid through Electric Funds Transfer (EFT)
Records maintenance

37. Trends in Supply Management
Sustainable Supply
Becoming more conscious of the importance of being environmentally friendly and using environmental performance in selecting suppliers.
Ensuring compliance with regulations.
Reducing packaging, promoting recycling, reducing costs.

38. Trends in Supply Management
Supply Chain Disruptions
Caused by natural disasters, economic/political events.
Cause a big threat to revenue streams.
Increased risk due to outsourcing to global suppliers.

39. Supply Management Case Study
Pagoda.com

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Printed in the United States of America.