1. 1 BM_M0050/GSLM 54700 Purchasing and Supply Management

2. 2 Outline What to Teach and How to Teach House-keeping Issues Importance of Purchasing and Supply Management observations from news observations from Industrial Statistics observations from Business Operations observations from Companies An Overview of Purchasing factors, process, types, levels and issues Evolution of Purchasing and SCM

3. 3 What and How to Teach? introduce purchasing and supply management processes, modes, and interactions among various players in a supply chain illustrate with industrial cases and practices stimulate students to think about subtleties and to ask questions instead of feeding facts

4. 4 House-keeping Issues

5. 5 House-Keeping Issues Course Webpage Course Outline

6. 6 Importance of Purchasing and Supply Management Observations from News

7. 7 Meaty and Spicy Positions Suppose that you ask a person working in High-Tech: Which position in a company (1) is most likely to a pay a crucial role, to some extent meaty and spicy (2) has most confidence from the boss, and (3) most commanding in interaction with outside

8. 8 Meaty and Spicy Positions according to 1369 p44-46 80% to 90% of persons working in High-Tech would say that the position is purchasing a key person in a procurement committee detained for allegedly bribery of NT$100mill a key person in a procurement committee detained for allegedly bribery of NT$100mill legal income (stock, salary, and bonus) in 15 years: NT$600 mill

9. 9 Importance of Purchasing and Supply Management Observations from Industrial Statistics

10. 10 Simple Question Total Cost of Material / Value of Shipments = ???

11. 11 Importance * of Purchasing and Supply Management Manufacturing Sector of US 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 A/B (%)Total Value of Shipments (B) (US$ mill) Total Cost of Material (A) (US$ mill) * 2007 GDP of Taiwan (2012) US$ 467 billion 2,912,228 2,878,164 3,004,800 3,127,620 3,348,019 3,594,359 3,715,428 3,834,700 3,899,809 4,031,884 4,208,582 3,967,698 3,914,623 4,015,080 4,265,784 54.1% 53.2% 52.3% 52.7% 52.4% 52.8% 53.2% 52.7% 51.9% 51.7% 53.4% 53.1% 51.7% 52.1% 52.7% 1,574,617 1,531,221 1,571,773 1,647,492 1,752,735 1,897,570 1,975,362 2,020,476 2,024,080 2,084,316 2,245,839 2,105,337 2,023,312 2,091,585 2,247,844

12. 12 Importance * of Purchasing and Supply Management Miscellaneous mfg 339 Furniture & related product mfg 337 Transportation equipment mfg 336 Electrical equipment, appliance, & component mfg 335 Computer & electronic mfg 334 Machinery mfg 333 Fabricated metal product mfg 332 Primary metal mfg 331 Non-iron metal product mfg 327 Plastics & rubber product mfg 326 Chemical mfg 325 Petroleum & coal product mfg 324 Printing & related support activities 323 Paper mfg 322 Wood product mfg 321 Leather & allied product mfg 316 Apparel mfg 315 Textile product mills 314 Textile mills 313 Beverage & tobacco product mfg 312 Food mfg 311 A/B (%) Total Value of Shipments (B) (US$ mill) Total Cost of Material (A) (US$ mill) Industrial Sectors NAICS * 2007

13. 13 Questions heaviest in % of mat. cost industrial sector = material / sales = % 2nd heaviest in % of mat. cost industrial sector = material / sales = % lightest in % of mat. cost industrial sector = material / sales = % 2nd lightest in % mat. cost industrial sector = material / sales = % largest in sales industrial sector = value of shipments = 2nd largest in sales industrial sector = value of shipments = smallest in sales industrial sector = value of shipments = 2nd smallest in sales industrial sector = value of shipments =

14. 14 Importance * of Purchasing and Supply Management Miscellaneous mfg 339 Furniture & related product mfg 337 Transportation equipment mfg 336 Electrical equipment, appliance, & component mfg 335 Computer & electronic mfg 334 Machinery mfg 333 Fabricated metal product mfg 332 Primary metal mfg 331 Non-iron metal product mfg 327 Plastics & rubber product mfg 326 Chemical mfg 325 Petroleum & coal product mfg 324 Printing & related support activities 323 Paper mfg 322 Wood product mfg 321 Leather & allied product mfg 316 Apparel mfg 315 Textile product mills 314 Textile mills 313 Beverage & tobacco product mfg 312 Food mfg 311 A/B (%) Total Value of Shipments (B) (US$ mill) Total Cost of Material (A) (US$ mill) Industrial Sectors NAICS * 2007 91.0%312,884253,339 61.3%666,502408,310 36.2%112,27040,658 38.7% 93,19336,112 44.9%528,215237,304 52.3% 5,7563,013 43.8% 80,15335,091 41.1%361,937148,580 49.1% 33,49516,451 55.6% 33,25418,481 59.0% 40,25723,742 56.4%511,450288,359 50.7%269,203136,580 45.2%259,875117,544 50.2%182,54791,629 60.6%178,995108,551 53.0%153,96980,087 49.7%104,24451,798 58.3%103,42060,264 42.4%101,86943,202 36.8%132,28748,734 52.7%4,265,7842,247,844

15. 15 Comments Petroleum & Coal Product Mfg Petroleum & Coal Product Mfg sales: US$312.884 billion mat. / sales = 91.0% Beverage & tobacco product mfg Beverage sales: US$112.27 billion mat. / sales = 36.2% differences in modes of operations procurement price fluctuation common in real life, e.g., paper pulp, DRAM, TFT-LCD …paper pulp DRAMTFT-LCD

16. 16 Importance of Purchasing and Supply Management Observations from Business Operations

17. 17 Importance of Purchasing and Supply Management assumption: linear changes of sales and cost w.r.t. the production quantity how to increase profit? $10Profit $40 Others $50 Material Cost $100Sales sales? price? cost? 10% increase in sales $11Profit $44 Others $55 Material Cost $110Sales 10% increase in profit $20Profit $40 Others $50 Material Cost $110Sales 100% increase in profit 10% increase in price with 30% decrease in demand $14Profit $28 Others $35 Material Cost $77Sales 40% increase in profit 10% increase in price without change in demand $12.5Profit $40 Others $47.5 Material Cost $100Sales 25% increase in profit 5% decrease in material cost

18. 18 Questions which is a good way to increase profit? is it always possible to raise price?possible to raise price is it always possible to reduce material cost? in general how can cost be reduced continuously?

19. 19 Importance of Purchasing and Supply Management Observations from Companies

20. 20 Which Company is Stronger? Company A: 1891 stores, average revenue US$7.25 mill per store, total revenue ~ US$13.7 billion Company B: 229 stores, each store earning about half as that of Company A, total revenue ~ US$ 0.83 billion statistic taken around 1979 23 years later Company A filed for Chapter 11 Company B became one of the most successful companies in the world Company A: K Mart; Company B: Wal-Mart main reason: Wal-Mart has one of the best skills in supply management

21. 21 Another Strong Company consecutively 15 years best seller among competitors in country 18% market share, largest in country sales ~ NT$ 46 billion prestigious national award of science and technology rigorous and rigid quality control procedures aired nationwide 2008 Sept: news of unsafe products 2008 Dec: declared for bankruptcy reasons: excessive unhealthy ingredient turning into poisonous

22. 22 Another Strong Company Sanlu Group in Shijiazhuang selling milk powder melamine 66% nitrogen by mass industrial usage, e.g., fabrication of fire retarding material causing kidney damage by forming round, yellow crystal in kidney safety limits: EU 0.2 mg/kg of body; Canada, WHO 0.2 mg/kg of body; US 0.063 mg/day 300,000 infants babies affected, at least 6 dead of problems caused by melamine in the milk powder Consequences: more than the failure of a company ….

23. 23 An Overview of Purchasing Factors, Process, Types, Levels and Issues

24. 24 Factors Affecting Operations and Modes of Purchasing Personnel type of industry Coca Cola vs. Formosa Petrochemical Corporation size of company Walmart vs. a corner store position in a supply chain a supplier, a wholesaler, a distributor, a retailer type of product capital equipment, spare parts, consumables, … position in a company a VP vs. a clerk …

25. 25 Types of Products for self-consumption capital equipment, e.g., machinery spare parts, maintenance service, consumables for production processes or customers raw material semi-finished products and components finished products, e.g., Carrefour, a retail channel, or Li & Fung, a trader services, e.g., transportation and third-party purchasing production support items

26. 26 Aspects to Consider in a Transaction main aspects: supplier, time, price, quantity, quality means to align incentives by various contract mechanisms

27. 27 A Typical Purchasing Process needs identification from needs, requirement, forecast, planning, and new product development requisition raised by an unit (a person) with iterative discussion between purchasing and the requesting unit setting the specification request for quotation supplier identification and selection contract negotiation issuing a purchase order (PO) upon agreement on negotiation following up the PO receipt, including checking and following up invoice settlement payment record maintenance

28. 28 Strategic Level Issues of purchasing from purchasing to procurement and eventually to supply management value analysis material, supplier, market analysis new product development continuous measurement and management of suppliers performance development of supplier relationship continuous improvement of the procurement process supporting organizational goals and objectives development of integrated purchasing strategies …

29. 29 Evolution of Purchasing and SCM in USA

30. 30 Evolution of Purchasing and SCM in USA events and phenomena: consequences background and trend: driving forces any idea about the timeline of the following events (some major, some minor): Collapse of Communism in Eastern Europe, Completion of Transcontinental Railway, Disintegration of USSR, Industrial Revolution, Iranian Revolution, Iran–Iraq War, Vietnam War, Oil and energy crises, Oil Embargo, $1.5 billion federal bailout of Chrysler, Open-Door of China, Trouble of US automobile industry, US Civil War, Watt steam engine, WWI, WW II

31. 31 Evolution of Purchasing and SCM in USA any idea about the timeline of the following events some major, some minor Industrial Revolution (1750 – 1850) Watt steam engine (1765) US Civil War (1861 – 1865) Completion of Transcontinental Railway (5/1869) WWI (1914 – 1918) WW II (1939 – 1945) Vietnam War (1964 (?) – 1975) Oil and energy crises in 70s Embargo (10/1973 to 3/1974) Iranian Revolution (1979) Trouble of US automobile industry (late 70s) $1.5 billion federal bailout of Chrysler (1979) Open-Door of China (1979) Iran–Iraq War (9/1980 to 8/1988) Collapse of Communism in Eastern Europe (1989) Disintegration of USSR (1991) First Iraq War (1991) Second Iraq War (2003)

32. 32 Evolution of Purchasing and SCM in USA http://thegulfblog.com/tag/oil-price-graph/ Ind. Rev. Civil War completion of transcontinental railway WWI WWII Vietnam War Oil Embargo Iranian Revolution; Open door of China Trouble of US Auto. Ind. Iran-Iraq War Collapse of Communism in Eastern Europe disintegration of USSR, 1 st Iraq War 2 nd Iraq War

33. 33 GATT (General Agreement on Tariffs and Trade) & WTO (World Trade Organization) rounds of negotiation of GATT http://en.wikipedia.org/wiki/GATT

34. 34 Evolution of Purchasing and SCM in USA a result of the interaction with the economic environment and technology advancement gradually from clerical (before 1949) to mechanical (1950-1969) to proactive (1970-1989) to strategic supply management (1990 onwards)

35. 35 Evolution of Purchasing and SCM in USA 1900 1850 1940 1947 mid-1960s late 1970s 1999 Growth of Purchasing Fundamentals, 1900 – 1939 The Early Years, 1850 – 1900 The War Years, 1940 – 1946 The Quiet Years, 1947 – mid-1960s mid- 1960s – late 1970s The Global Era, Late 1970s – 1999 beyond 2000, Integrated Supply Chain Management

36. 36 Evolution of Purchasing and SCM in USA The Early Years, 1850 – 1900 definition of the purchasing process and the realization of purchasing towards company profit importance of purchasing came along with industrialization and improvement in transportation heavy material cost in heavy industry Supply Department in Pennsylvania Railroad (1866) first book on purchasing, The Handling of Railway Supplies – Their Purchase and Disposition (1887) Railroad mileage increase by groups of states Source: Chauncey Depew (ed.), One Hundred Years of American Commerce 1795-1895 p 111Chauncey Depew 18501860187018801890 New England2,5073,6604,4945,9826,831 Middle States3,2026,70510,96415,87221,536 Southern States2,0368,83811,19214,77829,209 Western States and Territories1,27611,40024,58752,58962,394 Pacific States and Territories231,6774,0809,804 Totals9,02130,62652,91493,301129,774

37. 37 Evolution of Purchasing and SCM in USA Growth of Purchasing Fundamentals, 1900 – 1939 slow growth of purchasing and gradual recognition of purchasing as a field diffusion of the importance of purchasing to non-railway fields first non-railway purchasing book, The Book on Buying (1905)

38. 38 Evolution of Purchasing and SCM in USA The War Years, 1940 – 1946 growth in importance of purchasing to secure materials during the war growth of the discipline 9 colleges with courses related to purchasing in 1933, and 49 colleges in 1945 members of the National Association of Purchasing Agents 3,400 in 1934 to 9,400 in 1945

39. 39 Evolution of Purchasing and SCM in USA The Quiet Years, 1947 – mid-1960s overshadowing of purchasing by marketing and finance due to relatively dull competition and availability of materials valuable developments in purchasing value analysis by GE Purchasing Analysis Department by Ford Motor

40. 40 Evolution of Purchasing and SCM in USA Materials Management Comes of Age, mid-1960s – late 1970s Materials Management Comes of Age, mid-1960s – late 1970s pressure in material availability unstable economic environment, e.g., Vietnam War and Oil Embargo pressure in material availability unstable economic environment, e.g., Vietnam War and Oil Embargo boom of material control concepts: materials planning and control, inventory planning and control, materials and procurement research, purchase, incoming traffic, receiving, incoming quality control, stores, materials movement, scrap and surplus disposal, … boom of material control concepts: materials planning and control, inventory planning and control, materials and procurement research, purchase, incoming traffic, receiving, incoming quality control, stores, materials movement, scrap and surplus disposal, … purchasing purchasing primarily price-base by squeezing suppliers primarily price-base by squeezing suppliers local and regional sourcing local and regional sourcing suggestion of more active role for purchasing suggestion of more active role for purchasing

41. 41 Evolution of Purchasing and SCM in USA The Global Era, Late 1970s – 1999 intensive global competition realization of the importance of the management of the process to transform raw materials to end products of customers Supply Chain Management

42. 42 Evolution of Purchasing and SCM in USA Integrated Supply Chain Management, beyond 2000 emphasis on integration and collaboration enterprisewide system and integrated internet linkage ideas such as supplier development, supplier design involvement, adoption of full-service suppliers, total cost concepts on supplier selection, long-term supplier relationship, … co-ordination and collaboration of purchasing with customer requirements, operations, logistics, finance, human resoruces, accounting, marketing, information systems

43. 43 Evolution of Purchasing and SCM what would happen in the future? oil reserve, new sources of energy, food supply, water supply ….

44. 44