2. Chapter 13 Research and Metrics.

3. 13 - 3 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Ingredients of Effective Buying Effective Purchasing Decisions Our estimated requirements (usage) Competing demand Raw material availability Price history and forecasts Cost to make (in-house supplier) Alternative manufacturing methods Technological change Supplier capabilities and strategy Supplier expansion plans Supplier pricing methods Quality considerations Competitive environment Innovation in transportation, handling and distribution Government regulations and controls (current and projected) Systems for processing purchasing information

4. 13 - 4 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Conditions Necessary for Effective Cross-Functional Teams Team members are carefully selected to ensure that each really has something to contribute Strong leadership Specific objectives and expectations, communicated to each team member Each team member’s normal job responsibilities are rearranged to provide necessary time and resources Performance evaluation and reward systems foster team participation and overall team performance

5. 13 - 5 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Criteria for Deciding Where to Direct Research Efforts Value of product or service - top dollar Product profitability - red dollar Price/cost characteristics Availability Quality Data flows

6. 13 - 6 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Purchasing Research What is Acquired - value analysis - commodity studies From Whom - supply base analysis

7. 13 - 7 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Value Analysis Value analysis compares the function performed by the purchased item with the cost in an attempt to find a lower cost alternative Value analysis is done on purchased items used in the ongoing production process -Value engineering looks are cost saving possibilities in the design stage

8. 13 - 8 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Possible Value Analysis Research Topics Investment recovery Lease or buy Make or buy and continue making or outsource Packaging Specification Standardization Substitution Supplier switching

9. 13 - 9 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Commodity Studies Should provide the basis for making sound procurement decisions Should present purchasing management and top management with information concerning future supply and price of purchase items

10. 13 - 10 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Major Areas in a Commodity Study Current and future status of our company as a buyer Production process alternatives Uses of the item Demand Supply Price Strategy to reduce cost and/or ensure supply

11. 13 - 11 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Topics in Supplier Research Analysis of financial capacity Analysis of production facilities Finding new supply source Supplier cost analysis Single sourcing Supplier-purchased material quality assurance Supplier attitude survey Supplier performance evaluation Supplier sales strategy Countertrade

12. 13 - 12 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Four Common Purchasing Budgets Materials (operations) purchase budget MRO Budget Capital Budget Administrative Budget

13. 13 - 13 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Common Purchasing Activity Reports Total dollar volume of purchases Total dollars spent for department operating expenses Total number of purchase orders issued These figure are sometimes related to each other by calculating average figures and percentages, such as: -average dollar cost of purchase orders written -operating costs as a percentage of total dollar volume purchases - operating costs as a percentage of total dollar volume of sales

14. 13 - 14 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Major Sections for Purchasing Operating Reports 1.Market and economic conditions and price performance 2.Inventory investment changes 3.Purchasing operations and effectiveness 4.Operations affecting administration and financial activities

15. 13 - 15 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Four Types of Performance Measurement Systems 1.Efficiency-oriented -Emphasizes cost and departmental operating efficiency 2.Effectiveness-oriented -Measure of direct and indirect contributions of supply 3.Multiple objectives -Considers both efficiency and effectiveness measures 4.Naïve -No goals, objectives, or pre-set performance measures -Supply managers told that an appraisal will be made of their performance

16. 13 - 16 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Problem Areas in Purchasing Performance Measurement There are no industry-wide standards of functional performance A lack of management information systems support Differences in the scope and sophistication of supply -Even within the same firm -Operational versus strategic An historical focus on functional goals without linkages to the corporate goal-setting process

17. 13 - 17 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 12 Guidelines for Establishing a Purchasing Measurement System 1.Measures need to be designed for use at a point in time 2.Each organization has specific measurement needs at a given point in time 3.Measures should address financial results, supplier performance, computer systems and internal practices and policies 4.Measures must change frequently 5.Trend analysis is often useful 6.Measures should not be overdone or underutilized

18. 13 - 18 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 12 Guidelines for Establishing a Purchasing Measurement System 7.Measures are only tools 8.Benchmarking is a source of new ideas and measures 9.Senior management must see value in the measures used 10.Measures can show the effectiveness of purchasing and identify areas needing improvement 11.Ensure the credibility of measures 12.Continuous improvement in purchasing depends on measurement