2Chapter 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.
3Supply ManagementSupply 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.
4Why is Supply Management critical? Global SourcingCompetition against global competitors and their supply chains.Advances in information systems have helped.
5Why is Supply Management critical? Financial ImpactTable 7.1
6Why is Supply Management critical? Financial ImpactCost 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
7Profit Leverage – Example 7.1 Financial ImpactSelected Financial Data for Target CorporationTable 7.2Profit Margin = 100% X ($4,629 / $65,786) = 7%Return on Assets = 100% X (4,629 / $17,213) = 26.9%
8Profit Leverage – Example 7.1 Financial ImpactEvery 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.
9Profit Leverage – Example 7.1 3% purchasing reduction in COGSEarnings and Expenses Current Reflecting SavingsSales $65,786 $65,786COGS $45,725 $44,353Pretax earnings $4,629 $6,001Selected Balance Sheet ItemsMerchandise inventory $7,596 $7,368Total assets $17, $16,985Pretax earnings increase by $1372 (30%)ROA increases from 26.9% to 35.3%
10Why is Supply Management critical? Performance ImpactPurchased goods can have a major effect on other dimensions such as quality and delivery performance.
11Performance Impact – Example 7.2 Sourcing dialysis machine valves
12Performance Impact – Example 7.2 Effect of defective dialysis machineInterruption in patient treatmentRescheduling difficultiesReduction in the effective capacity for dialysisPossible medical emergencies Estimated cost of a failed valve = $1,000
15Assess OpportunitiesSpend Analysis – The application of quantitative techniques to purchasing data in an effort to better understand spending patterns and identify opportunities for improvement.
16Assess Opportunities – Example 7.3 Examine the trends and impact of spending.Table 7.3Figure 7.2
17Profile 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.
18Develop the Sourcing Strategy The Make-or-Buy DecisionA 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.
19Develop the Sourcing Strategy Advantages and Disadvantages of Insourcing and OutsourcingTable 7.6
20Develop the Sourcing Strategy Factors that affect the decision to Insource or Outsource.Table 7.7
21Develop 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.
22Develop the Sourcing Strategy Insourcing and Outsourcing CostsTable 7.8
23Develop 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.
24Develop the Sourcing Strategy Portfolio AnalysisThe Routine Quadrant – Readily available products or services (small % of total).Electronic Data InterchangeThe Leverage Quadrant – Standardized and readily available products or services (large % of total).Preferred suppliersThe 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.
25Develop the Sourcing Strategy Portfolio AnalysisHighBottleneckCriticalRoutineLeverageComplexity or Risk ImpactLowLowHighValue Potential
26Develop 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.
27Screen Suppliers and Create Selection Criteria Criteria to evaluate suppliersProcess and design capabilitiesManagement capabilityFinancial condition and cost structureLonger-term relationship potential
28Conduct Supplier Selection Weighted-point evaluation system – An evaluation system to evaluate potential suppliers, track supplier’s performance over time, and rank current suppliers.MethodAssign weights to performance dimensions.Rate the performance of each supplier with regard to each dimension.Calculate the total score.
29Supplier Selection – Example 7.6 Summary Data for Three Possible SuppliersTable 7.11
31Supplier Selection – Example 7.6 Performance Values for Alternative SuppliersTable 7.13
32Supplier Selection – Example 7.6 Total Scores for Alternative SuppliersScore Aardvark = (4 x 0.3) + (3 x 0.4) + (4 x 0.3) = 3.6Score Beverly = (3 x 0.3) + (5 x 0.4) + (2 x 0.3) = 3.5Score Conan = (5 x 0.3) + (1 x 0.4) + (1 x 0.3) = 2.2Aardvark should improve their quality. Beverly Hills should improve their delivery and price. Conan is out of the running as a potential supplier.
33Negotiate 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 standardDescription by brandDescription by specificationDescription by performance characteristics
34Negotiate 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.
35Negotiate 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.
36The Procure-to-Pay Cycle OrderingPurchase 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 expeditingReceipt and inspectionStatement of work (scope of work) – Terms and conditions for a purchased service.Settlement and paymentMay be paid through Electric Funds Transfer (EFT)Records maintenance
37Trends in Supply Management Sustainable SupplyBecoming 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.
38Trends in Supply Management Supply Chain DisruptionsCaused by natural disasters, economic/political events.Cause a big threat to revenue streams.Increased risk due to outsourcing to global suppliers.
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