1. 1 Chapter 1 Introduction To Purchasing IDIS 424 Spring 2004

2. 2 Purchasing Value-added function Reduced transaction costs Increasing participation in all types of purchases Market intelligence “External manufacturing management” Ability to leverage supply base capabilities Significant player in strategic cost management Moving towards “relationship management” role

3. 3 Order Processing / Customer Service Entering orders Check customer’s credit Fill the order Factors: Order processing time Manufacturing time Transit time Post-transaction service Warranty service Maintenance and field service

4. 4 What is a Value Chain? A value chain is a sequence of business functions in which utility (usefulness) is added to products or services as they move from supplier to end customer Value chains are often viewed like a river--upstream and downstream All firms have value chains Value chains are comprised of interrelated activities called primary and support activities How firms configure their value chains can provide competitive advantage (or disadvantage) Value Chain discussion draws heavily from Michael Porter, Competitive Advantage-- Creating and Sustaining Superior Performance

5. 5 The Value Chain of the Firm Industry Forces: Bargaining power of suppliers Bargaining power of buyers Threat of new entrants Threat of substitutes Rivalry among existing firms Macro Forces: Economic/financial Legal/regulatory Labor markets Social objective and pressures Global trends and forces Inbound Logistics Inbound Logistics Operations Outbound Logistics Outbound Logistics Marketing and Sales Marketing and Sales Service Primary Activities Support Activities Firm Infrastructure (Finance, Accounting, Law, General Management) Human Resource Management Technology Development Procurement Materials/Supply Management Physical Distribution/Channel Management Value Chain/Total Supply Chain-Logistics Management CustomersSuppliers S2 S3 C2 C3 Materials and ServicesInformation += Supply Chain Management

6. 6 What is Value Chain Integration? Value chain integration involves bringing together different groups, functions, or organizations, either formally or informally, physically or by information technology, to work jointly and often concurrently on a common business-related assignment purpose

7. 7 Horizontal Integration Examples of how firms integrate across the value chain-- Committees/groups/teams Shared and linked information systems Integrated performance goals/objectives/measures Through the strategy development process Co-location of personnel within and between the organization Via a process orientation Promote informal or ad hoc exchange of information Shared risk and reward projects

8. 8 Primary Value Chain Activities Primary Activities Inbound logistics Includes activities associated with receiving, storing, and disseminating inputs to support the product or service, including transportation, material handling, warehousing, inventory control, vehicle scheduling, and returns to suppliers Operations Activities associated with transforming inputs into final form, such as machining, packaging, assembly, equipment maintenance, testing, printing, and facility operations

9. 9 Primary Value Chain Activities Primary Activities Outbound logistics Includes activities associated with physically collecting, storing, and distributing a product or service to customers, such as finished goods warehousing, material handling, delivery, order processing, and scheduling Marketing and Sales Includes activities associated with providing a means to which buyers can purchase the product and inducing them to do so, such as advertising, promotion, sales force efforts, job quoting, channel selection, channel relations, and pricing

10. 10 Primary Value Chain Activities Primary Activities Service Includes activities associated with providing service to enhance or maintain the value of the product, such as installation, repair, training, parts supply, and product adjustment

11. 11 Primary Value Chain Activities Primary Activities In any firm, all the categories of primary activities are present to some degree and play some role Key primary activities often differ from industry to industry What are the key primary activities for— Banking? Restaurant? Steel producer? High speed copier manufacturer? Distributor? PC manufacturer?

12. 12 Value Chain Support Activities Support Activities Firm infrastructure Consists of a number of activities, including general management, planning, government affairs, finance, accounting, legal, and quality management While firm infrastructure is sometimes viewed as overhead, it can be a powerful source of competitive advantage Human resource management Consists of activities involved in recruiting, hiring, training, developing, and compensating all types of personnel

13. 13 Value Chain Support Activities Support Activities Technology Development Includes activities typically associated with MIS, engineering, and R&D and involve activities that seek to improve product and processes. New product and process development are primary concerns of technology development support activities

14. 14 Value Chain Support Activities Support Activities Procurement Involves activities associated with identifying, evaluating, selecting, managing, and developing sources of supply Though purchased inputs are commonly associated with primary activities, purchased inputs are present in every value activity, including support activities. Examples-- Supplies Travel services Media

15. 15 Value Chain Support Activities What Value Chain Activities Become Involved with the Following Processes or Tasks? Purchasing a new piece of capital equipment Locating and building a new facility Developing new products and processes Delivering products to customers Developing information systems that transmit material releases directly to supplier scheduling systems Improving supplier performance capabilities

16. 16 Value Chain Support Activities What Value Chain Activities Become Involved with the Following Processes or Tasks? Designing channels of distribution Establishing a management training program Preparing annual financial reports Determining customer order promise dates Developing a performance measurement system Determining the price of a product or service