1. Lecture 15 Purchasing and Supply Chain
Books
Introduction to Materials Management, Sixth Edition, J. R. Tony Arnold, P.E., CFPIM, CIRM, Fleming College, Emeritus, Stephen N. Chapman, Ph.D., CFPIM, North Carolina State University, Lloyd M. Clive, P.E., CFPIM, Fleming College
Operations Management for Competitive Advantage, 11th Edition, by Chase, Jacobs, and Aquilano, 2005, N.Y.: McGraw-Hill/Irwin.
Operations Management, 11/E, Jay Heizer, Texas Lutheran University, Barry Render, Graduate School of Business, Rollins College, Prentice Hall

2. Objectives Purchasing overview Purchasing cycle Purchasing function
Make or buy decision
Purchasing techniques
JIT purchasing
Supply chain management
Outsourcing
Ethics in Supply chain

3. Purchasing Overview Purchasing The acquisition of goods and services.
Purchasing Activity
Helps identify the products and services that can be best obtained externally; and
Develops, evaluates, and determines the best supplier, price, and delivery for those products and services.

4. Purchasing Objectives
Obtaining goods and services of the required quality and quantity.
Obtaining goods and services at the lowest cost.
Ensuring the best possible service and prompt delivery by the supplier.
Developing and maintaining good supplier relations and developing potential suppliers.

5. Purchasing Functions
Determining purchasing specifications: quality, quantity, delivery
Selecting suppliers
Negotiating terms and conditions of purchase
Issuing and administering purchase orders

6. Purchasing Cycle Receiving and analyzing purchase req’s.
Selecting suppliers
Determining the right price
Issuing purchase orders
Following up to assure delivery dates are met
Receiving and accepting goods
Approving supplier’s invoice for payment

7. The Typical Procurement Cycle
Order Cycle
(one to three weeks)
Order Request
Verification by inventory control
Purchasing researches suppliers, obtains quotes, etc.
Signatures obtained
Order mailed
Supplier Cycle
(one to many weeks)
Supplier receives and
enters order
Supplier manufactures
or “picks” order
Supplier ships order
Receiving Cycle
(one week)
Receiving
Incoming inspection
Inventory control receives
order, updates records,
and notifies department

8. Purchasing Terminology
Purchasing Agent
Has legal authority to execute contracts on behalf of the firm.
Make or Buy Decision
Choosing products and services that can be advantageously obtained externally or produced internally depending on which is best for the company.
Vertical Integration
Developing the ability to produce goods or services previously purchased, or actually buying a supplier or a distributor.

9. Make-or-Buy Decisions
Maintain core competence
Lower production cost
Unsuitable suppliers
Assure adequate supply (quantity or delivery)
Utilize surplus labor or facilities
Obtain desired quality
Remove supplier collusion
Obtain unique item that would entail a prohibitive commitment for a supplier
Protect personnel from a layoff
Protect proprietary design or quality
Increase or maintain size of company
Reasons for Making

10. Make-or-Buy Decisions
Frees management to deal with its core competence
Lower acquisition cost
Preserve supplier commitment
Obtain technical or management ability
Inadequate capacity
Reduce inventory costs
Ensure alternative sources
Inadequate managerial or technical resources
Reciprocity
Item is protected by a patent or trade secret
Reasons for Buying

11. Make/Buy Considerations
Reasons for Making Reasons for Buying
Lower production cost
Unsuitable suppliers
Assure adequate supply
Utilize surplus labor and make a marginal contribution
Obtain desired quantity
Remove supplier collusion
Obtain a unique item that would entail a prohibitive commitment from the supplier
Lower acquisition cost
Preserve supplier commitment
Inadequate capacity
Reduce inventory costs
Ensure flexibility and alternate source of supply
Product improvements may be difficulty because it is a sideline

12. Purchasing Terminology
Keiretsu
The Japanese word to describe a company coalition with long-term contracts with the firm; members of the Keiretsu function much like partners would.

13. Supplier Relations Three aspects of supplier relations
Supplier Evaluation - Involves finding potential suppliers and determining the likelihood of their becoming good partners.
Supplier Development - May include everything from training, to engineering and production help, to formats for electronic transfer.
Negotiations - Are of three classic types: cost-based model, market-based price model, and competitive bidding.

14. Sourcing Sole sourcing implies that only one supplier is available.
Multiple sourcing is the use of more than one supplier for an item.
Single sourcing is the selection of one item for an item when several sources are available.

15. Factors in Selecting Suppliers
Technical ability
Manufacturing capability
Reliability
After-sales service
Supplier location
Price
Other considerations

16. Supplier Relations
The supplier should be treated as an extension of the company.
Long-term, close relationships with a few suppliers is best for many critical products.
The supplier should be committed to helping the purchaser improve its product and win orders.
Suppliers can also be a source of ideas about new technology, materials, and processes.
A good supplier relationship is like a marriage.

17. Supplier Relations
The following characteristics have been proven to be present in good relationships.
Commitment
Communication
Working through change / improvement
Principles centered relationship
Spending time together
Appreciation / recognition / feedback

18. Supplier Relations Negotiation Strategies
Cost-Based Model - Requires the supplier to open its books so that the purchaser can determine actual costs.
Market-Based Price Model - Based on a published price or index such as exists for many metal and paper suppliers.
Competitive Bidding - Appropriate where suppliers are not willing to discuss cost or where near perfect markets do not exist.

19. Negotiations and Product Type
Commodities: Contracts for future prices.
Standard Products: May negotiate large purchases.
Items of Small Value: Minimize cost of ordering. Negotiate ordering system.
Made-to-order items: Can be negotiated.

20. Purchasing Techniques
Blanket orders
Invoiceless purchasing
Electronic ordering and funds transfer
Electronic data interchange (EDI)
Stockless purchasing
Standardization

21. Purchasing Techniques
Blanket Orders
A contract to purchase certain items from a vendor, although they all may not be delivered until requested by the purchaser.
Invoice-less Purchasing
Appropriate where substantial trust exists between the purchaser and supplier and deliveries are made on a regular basis and are easily verifiable.

22. Purchasing Techniques
Electronic Ordering and Fund Transfer
Reduces cost by reducing paperwork; also increases the speed of ordering.
Stockless Purchasing
Developing with the supplier, a means of reducing inventory costs by the supplier holding inventory.
Standardization
A technique for reducing purchases for specialized items when in fact a very similar standard product is commercially available.

23. Supplier Concerns in Just-in-Time Purchasing
Desire for Diversification.
Supplier is concerned about all business stemming from single customer.
Poor Customer Scheduling.
Supplier is concerned that customer will not be able to develop smooth, consistent schedule.
Engineering Changes.
Supplier is concerned that customer will promulgate frequent engineering changes with inadequate lead time.

24. Supplier Concerns in Just-in-Time Purchasing
Quality Assurance.
Supplier may consider production with zero defects unrealistic.
Small Lot Sizes.
Many suppliers are unaccustomed to working with small lot sizes.
Proximity.
Delivery of small lot sizes over long distances may not be economical.

25. The Supply Chain’s Strategic Importance
Supply chain management is the integration of the activities that procure materials and services, transform them into intermediate goods and the final product, and deliver them to customers
Competition is no longer between companies; it is between supply chains

26. Supply Chain Management
Important activities include determining
Transportation vendors
Credit and cash transfers
Suppliers
Distributors
Accounts payable and receivable
Warehousing and inventory
Order fulfillment
Sharing customer, forecasting, and production information

27. A Supply Chain for Beer

28. Global Supply Chain Issues
Supply chains in a global environment must be able to
React to sudden changes in parts availability, distribution, or shipping channels, import duties, and currency rates
Use the latest computer and transmission technologies to schedule and manage the shipment of parts in and finished products out
Staff with local specialists who handle duties, freight, customs and political issues

29. How Supply Chain Decisions Impact Strategy
Low-Cost Strategy
Response Strategy
Differentiation Strategy
Supplier’s goal
Supply demand at lowest possible cost (e.g., Emerson Electric, Taco Bell)
Respond quickly to changing requirements and demand to minimize stockouts (e.g., Dell Computers)
Share market research; jointly develop products and options (e.g., Benetton)
Primary selection criteria
Select primarily for cost
Select primarily for capacity, speed, and flexibility
Select primarily for product development skills

30. How Supply Chain Decisions Impact Strategy
Low-Cost Strategy
Response Strategy
Differentiation Strategy
Process charact-eristics
Maintain high average utilization
Invest in excess capacity and flexible processes
Modular processes that lend themselves to mass customization
Inventory charact-eristics
Minimize inventory throughout the chain to hold down cost
Develop responsive system with buffer stocks positioned to ensure supply
Minimize inventory in the chain to avoid obsolescence

31. How Supply Chain Decisions Impact Strategy
Low-Cost Strategy
Response Strategy
Differentiation Strategy
Lead-time charact-eristics
Shorten lead time as long as it does not increase costs
Invest aggressively to reduce production lead time
Invest aggressively to reduce development lead time
Product-design charact-eristics
Maximize performance and minimize costs
Use product designs that lead to low setup time and rapid production ramp-up
Use modular design to postpone product differentiation as long as possible

32. Supply Chain Economics
Supply Chain Costs as a Percent of Sales
Industry
% Purchased
All industry 52
Automobile 67
Food 60
Lumber 61
Paper 55
Petroleum 79
Transportation 62

33. Supply Chain Economics
Dollars of additional sales needed to equal $1 saved through the supply chain
Percent of Sales Spent in the Supply Chain
Percent Net Profit
of Firm 30% 40% 50% 60% 70% 80% 90%
2 $2.78 $3.23 $3.85 $4.76 $6.25 $9.09 $16.67
4 $2.70 $3.13 $3.70 $4.55 $5.88 $8.33 $14.29
6 $2.63 $3.03 $3.57 $4.35 $5.56 $7.69 $12.50
8 $2.56 $2.94 $3.45 $4.17 $5.26 $7.14 $11.11
10 $2.50 $2.86 $3.33 $4.00 $5.00 $6.67 $10.00

34. Outsourcing
Transfers traditional internal activities and resources of a firm to outside vendors
Utilizes the efficiency that comes with specialization
Firms outsource information technology, accounting, legal, logistics, and production

35. Ethics in the Supply Chain
Opportunities for unethical behavior are enormous and temptations are high
Many companies have strict rules and codes of conduct that define acceptable behavior
Institute for Supply Management has developed a detailed set of principles and standards for ethical behavior

36. Principles and Standards for Ethical Supply Management Conduct
LOYALTY TO YOUR ORGANIZATION
JUSTICE TO THOSE WITH WHOM YOU DEAL
FAITH IN YOUR PROFESSION

37. Principles and Standards for Ethical Supply Management Conduct
Avoid the intent and appearance of unethical or compromising practice in relationships, actions, and communications
Demonstrate loyalty to the employer by diligently following the lawful instructions of the employer, using reasonable care and granted authority
Avoid any personal business or professional activity that would create a conflict between personal interests and the interests of the employer

38. Principles and Standards for Ethical Supply Management Conduct
Avoid soliciting or accepting money, loans, credits, or preferential discounts, and the acceptance of gifts, entertainment, favors, or services from present or potential suppliers that might influence, or appear to influence, supply management decisions
Handle confidential or proprietary information with due care and proper consideration of ethical and legal ramifications and government regulations
Promote positive supplier relationships through courtesy and impartiality
Avoid improper reciprocal agreements

39. Principles and Standards for Ethical Supply Management Conduct
Know and obey the letter and spirit of laws applicable to supply management
Encourage support for small, disadvantaged, and minority-owned businesses
Acquire and maintain professional competence
Conduct supply management activities in accordance with national and international laws, customs, and practices, your organization’s policies, and these ethical principles and standards of conduct
Enhance the stature of the supply management profession

40. End of Lecture 15