1. Supply Chain Logistics Management
Chapter 5: Procurement- Manufacturing Strategies

2. Purchasing Vs. Procurement
Purchasing is normally associated with a functional activity
Procurement/Sourcing should be viewed as a strategic activity for the business.
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3. Purchasing vs. Sourcing (cont’d)
Purchasing Mentality
Sourcing Mentality
One contract at a time
Continual Improvement
Win-lose
Win-win
Immediate returns
Long-term perspective
Secretive
Trusting
Current needs can be met
Strategic fit exists
Lowest purchase price
Total cost of ownership
Multiple suppliers
Supply-base reduction
Infrequent interaction
Frequent interaction
Criticism
Constructive evaluations
Buyer-sales relationship
Cross-functional relationship
Safety in numbers
Safety in knowledge
Quality inspected
Quality at source
Inventory as safeguard
Information as safeguard
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4. Supplier Development Through Procurement
The Procurement Viewpoint
Supplier
Purchaser
Procurement Initiative
Marketing Response
Marketing Initiative
Purchasing Response
The Marketing Viewpoint
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5. Importance of Sourcing
In the average manufacturing firm purchased goods and services account for 55% of every sales Dollar
Direct labor costs account for only about 10% of the sales dollar
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6. Procurement’s Potential Payoff
Beginning Position
Sales $100,000,000
Purchases(55%) ,000,000
Labor (15%) ,000,000
Other (22%) ,000,000
Pre-tax profit (8%) ,000,000
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7. Procurement’s Potential Payoff
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8. Competing through Sourcing
Quality Improvement
Cost Reduction
Lead Time Reduction
Delivery/Service Improvement
Technology Gain
Shortened Concept-to-Customer Cycle
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9. One Approach to Procurement Segmentation
$ Value
large
Commodities
Strategic Alliances
Key Systems
Convenience &
efficiency
small
large
Supplier Technology/Knowledge Contribution
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10. Sourcing Pathways (Source: Mercer Mgmt Consulting)
Volume consolidation/Supply base optimization => “Buy for less”
Supplier-buyer integration/Linked cost minimization => “Buy better’
Value management/Optimization => “Consume better”
Sales synergy => “Sell better”
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11. Volume Consolidation/Supply Base Optimization (Buy for Less)
Increased supplier fixed cost utilization
Capitalize on competitive supply base structure
Leveraged buyer’s share
Enhanced negotiations and contracting skills
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12. Supplier-buyer Integration/ Linked Cost Minimization (Buy Better)
Improved coordination/forecast accuracy and predictability
Optimized logistical flows/value added roles (including outsourcing)
Streamlined transactional information flow
Increased and earlier supplier involvement on cost issues
Improved supplier cost productivity
Committed volumes to allow supplier investment
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13. Value Management/ Optimization (Consume Better)
Early supplier involvement in solution design
Reduced complexity/simplified specifications
Increased standardization
Clarified response time objectives
Rationalized requirements
Controlled consumption rates
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14. Sales Synergy (Sell Better)
Total supplier integration
Integrated multi-commodity products/ services and channel portfolio
Creative risk sharing
Fully exploited capabilities and potential
Leveraged channel relationships
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15. Supplier Integration and Product Development Process
Idea
generation
Assessment
Concept
Development
Design
Prototype
Full Scale
Operation
Possible Supplier Integration Points
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16. Flexibility and Cost of Design Changes
Idea
generation
Concept
Development
Assessment
Design
Prototype
High
Time
Cost of Design Changes
Flexibility in Design
Low
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17. Pathways to Growth Varies Widely 5-25% Buy for Less Buy Better
Level 0
User Buy
Level 1
Leveraged Buy
Level 2
Linked Buy
Level 3
Value Buy
Level 4
Integrated Sell
Buy for Less
Buy Better
Consume Better
Sell Better
Percentage Savings/Revenue Enhancement
5-15%
5-25%
Varies Widely
(Plus ongoing productivity improvements)
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18. Roadblocks to Strategic Procurement
Organization and people
Not “strategic”
Limited skill to align with pathway
Processes
Adversarial relationships
Need end-to-end processes
Information systems
Need total systems cost approach
Knowledge of the possibilities
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19. Major Categories for the Components of Total Cost of Ownership
Pretransaction Components
1. Identifying need
2. Investigating sources
3. Qualifying sources
4. Adding supplier to
internal systems
5. Educating :
supplier in firm’s operations
firm in supplier’s operations
Transaction Components
1. Price
2.Order placement/ preparation
3. Delivery/ transportation
4. Tariffs/ duties
5. Billing/ payment
6. Inspection
7. Return of parts
8. Follow-up and correction
Posttransaction Components
1. Line fallout
2. Defective finished goods
rejected before sale
3. Field failures
4. Repair/ replacement in field
5. Customer goodwill/ reputation
of firm
6. Cost of repair parts
7. Cost of maintenance and repairs
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20. Major Trends in Procurement
Fewer sources of supply will be used
Buyers will be more concerned with final customer satisfaction
Buyers will focus on “lead supplier” relationships
Buyers will drive shorter cycle times
Design engineers and buyers will be part of sourcing teams
Global sourcing will increase
e-procurement will have a major impact-not all of it will be positive for supply chain integration
buying exchanges
auction sites
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21. Malcolm Baldridge Criteria and Values
1 Leadership (120 pts.)
The Leadership Category examines how your organization’s senior leaders address values and performance expectations, as well as a focus on customers and other stakeholders, empowerment, innovation, learning, and organizational directions. Also examined is how your organization addresses its responsibilities to the public and supports its key communities.
2 Strategic Planning (85 pts.)
The Strategic Planning Category examines your organization’s strategy development process, including how your organization develops strategic objectives, action plans, and related human resource plans. Also examined are how plans are deployed and how performance is tracked.
3 Customer and Market Focus (85 pts.)
The Customer and Market Focus Category examines how your organization determines requirements, expectations, and preferences of customers and markets. Also examined is how your organization builds relationships with customers and determines their satisfaction.
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22. Malcolm Baldridge Criteria and Values (cont.)
4 Information and Analysis (90 pts)
The Information and Analysis Category examines your organization’s performance measurement system and how your organization analyzes performance data and information.
5 Human Resources Focus (85 pts.)
The Human Resources Focus Category examines how your organization enables employees to develop and utilize their full potential, aligned with the organization’s objectives. Also examined are the organization’s efforts to build and maintain a work environment and an employee support climate conducive to performance excellence, full participation, and personal and organizational growth.
6 Process Management (85 pts.)
The Process Management Category examines the key aspects of your organization’s process management, including customer-focused design, product and service delivery, support, and supplier and partnering processes involving all work units.
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23. Malcolm Baldridge Criteria and Values (cont.)
7 Business Results (450 pts)
The Business Results Category examines your organization’s performance and improvement in key business areas -- customer satisfaction, product and service performance, financial and marketplace performance, human resource results, supplier and partner results, and operational performance. Also examined are performance levels relative to competitors.
Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper
Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

24. E-Chemicals
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25. Total Cost of Manufacturing
Cost Per Unit
Total Cost
Inventory/ Warehouse
Manufacturing/ Procurement
Transportation
Quantity
MTO
ATO
MTP
Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper
Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.