Procurement and Supplier Management

Procurement and Supplier Management
“Education in Pursuit of Supply Chain Leadership” dp&c Chapter 11 Chapter 11 Procurement and Supplier Management

Learning Objectives (cont.)
Defining today’s procurement function Detailing the categories of purchasing Detaining purchasing responsibilities and Objectives Describing the purchasing organization Exploring the components of a purchasing strategy Discussing supplier relationship management (SRM) Detailing the components of SRM Implementing SRM Managing the souring process Managing the purchase order cycle

Learning Objectives Detailing supplier performance measurements
Detailing purchasing organization performance measurements Reviewing the impact of e-commerce on procurement Describing the array of B2B e-commerce functions Reviewing the structure of the B2B e-commerce marketplace Reviewing the benefits of B2B e-commerce

Chapter 11 Procurement and Supplier Management Defining the Procurement Function

Defining Purchasing The body of integrated activities that focuses on the purchasing of materials, supplies, and services needed to reach organizational goals. In a narrow sense, purchasing describes the process of buying; in a broader context, purchasing involves determining the need; selecting the supplier; arriving at the appropriate price, terms and conditions; issuing the contract or order; and following up to ensure delivery Purchasing Handbook

Key Purchasing Concepts
Purchasing is a business function. The effective and efficient management of the acquisition of goods and services is a science and is the responsibility of professionals trained and certified in purchasing Purchasing is about the acquisition of goods and services. Just about all departments in the organization will purchase goods and services Purchasing is about developing close supplier relationships. The establishment of collaborative partnerships focused on information sharing, long-term commitment to quality, mutually shared benefits, and joint participation in product design and specification Purchasing is about the close review of purchasing and supplier performance. The goal is to maintain the highest levels of purchasing on-time delivery, product quality, low cost, and collaboration

Range of Purchased Products
Goods purchased for consumption or conversion. Goods consisting of raw materials, semi-finished, and finished components that will be consumed or converted during the manufacturing process Goods purchased for resale. Goods that are the concern of businesses that search and buy products for resale to wholesalers, distributors, and retailers Maintenance, Repair, and Operating (MRO) inventories and services. Goods used for general operating activities, repair, or needed services Custom equipment and services. Goods consisting of specialty items and services

Supply chain management
Responsibilities of Purchasing Supply chain management As today’s supply chain becomes more complex and time-sensitive, purchasers must assume responsibility for the development and management of the total supply system Materials management Purchasers are responsible for activities associated with the receipt, transportation, scheduling and planning, and warehousing of purchased materials Matching purchasing requirements with sources of supply, ensuring continuity of supply, exploring alternative sources of supply, and validating supplier compliance to ensure goods and services meet or exceed buyer criteria for quality, delivery, quantity, and price Sourcing Value analysis Increasing the value-added elements of the purchasing process. Value analysis can consist of such components as price for quality received, financing, and delivery

Responsibilities of Purchasing (cont.)
Supplier development Pursuing capabilities that promote supplier partnering require buyers to be knowledgeable of supplier capacities, resources, product lines, delivery, and information system capabilities. Internal integration Purchasing needs to be closely integrated with other enterprise business areas, such as marketing, sales, inventory planning, transportation, and quality management By sharing the schedule of demand from MRP, reorder point (ROP), and distribution requirements planning (DRP) techniques, purchasing can provide detailed visibility of future company requirements to supply chain partners, who, in turn, can plan the necessary material and capacity resources to support the schedule Supplier scheduling Development and analysis of request for quotation (RFQ); negotiation when pricing, volume, length of contract time, or specific designs or specifications are issues; and supplier selection and monitoring of performance measurements Contracting

Responsibilities of Purchasing (cont.)
Cost management The continuous search for ways to reduce administrative costs, purchase prices, and inventory carrying costs while increasing value Responsibilities include every-day purchasing activities associated with order preparation, order entry, order transmission, status reporting, order receiving, quantity checking and stock put away, invoice and discount review, and order closeout Purchasing and Receiving Monitoring the quality and delivery performance of suppliers is an integral part of supplier "benchmarking." The ability to measure performance is critical when evaluating the capabilities of competing suppliers and ensuring that costs, delivery, and collaborative targets are being attained Performance measurement

Objectives of Purchasing
Providing an uninterrupted flow of materials and services. The foremost goal of the purchasing function is to ensure that the company is not hindered by inventory and service shortages Purchasing products competitively. purchasers must continuously search for sources of supply that provide the best combination of quality, price, and service relative to the enterprise's needs Keeping inventory investment to a minimum. Effective inventory management requires that purchasing does its part in achieving a reasonable balance between stocking levels and the cost of carrying inventory Developing the supplier base. Purchasers must continually search for ways to enhance supplier relationships by developing mutually beneficial value-added service, quality, and training programs that promote supplier partnerships

Objectives of Purchasing (cont.)
Provide consistent, quality purchased materials and services. Purchasing today requires buyers to explore all possible avenues to ensure product and service quality Developing people resources and information tools for productivity optimization. The continuous development and training of personnel at all levels in the purchasing function results in the creation of a professional staff prepared to shoulder the responsibilities of decentralized decision making, continuous search for improvement, and the acquisition of the technical knowledge required of "world-class" purchasing Expanding the scope of supplier value-added services. The goal of these functions is to reduce wastes in ordering and delivery, and facilitating the flow of goods and information through the supply channel

Purchasing’s Place in the Organization
Executive Level President VP Marketing VP Finance VP Purchasing VP Manufacturing VP Engineering Director Level President VP Marketing VP Finance VP Personnel VP Manufacturing VP Engineering Director Purchasing Operations Level President VP Marketing VP Finance VP Personnel VP Manufacturing VP Engineering Materials Manager Purchasing Manager

Administrative Support
Standard Purchasing Organization Purchasing Manager Buyer Buyer Buyer Buyer Planner Planner Planner Planner Administrative Support

Buyer/Planner Concept
Buyer Role Planner Role Negotiates supplier agreements Communicates requirements schedule Executes changes to supplier agreements Manages inventory investment Explores alternate sourcing Manages MRP planning output Performs value analysis Analyzes excess/obsolete inventory Negotiates quality agreements Reviews receiving quality rejects Develops long-term partnerships Works daily with suppliers Performs supplier selection Plans new product introduction Negotiates lead time reduction Reduces order and transportation costs Involved on a exception basis Executes day-to-day buying Problem solving Forecasts and plans inventory

Centralized versus Decentralized Purchasing
Factors: Firm’s overall business strategy Similarity of products Total purchase expenditure Overall philosophy of management

Centralized versus Decentralized Purchasing
Aggregated purchase volumes Greater facility autonomy Transportation economies of scale Increased replenishment speed and customer responsiveness Increased buyer specialization Effective use of local resources Increased purchasing coordination and control Closer link between facility inventory requirements and purchasing capabilities Reduced duplication of effort Increased local ownership Increased synchronization of purchasing strategies and execution Direct linkage of purchasing with local requirements Improved purchasing research Direct support for local new product development Efficient utilization of MRP Utilization of order point and DRP logic Better change management Local focus on change management Centralized Decentralized

Chapter 11 Procurement and Supplier Management Anatomy of Purchasing Strategy

Purchasing Strategy Model

Step 1 – Environmental Scanning
Activities Internal business scanning External business scanning Objective Assess purchasing ability to provide internal business and external supply chain competitive advantage

Step 2 – Organizational Structure
Activities Map purchasing’s organizational structure Map employee capabilities Map purchasing departmental practices Objective Match purchasing organizational capabilities to the business strategy

Step 3 – Inventory Strategy
Activities Spend analysis New product development requirements Financial budgets Make/buy decision Materials and services classification Objective Ensure timely and cost effective purchase of inventories

Make or Buy Decision Degree of operational change. If the firm decides to produce in-house, does it currently possess the equipment, personnel, and processing experience? Cost. What is the difference in cost to make the selected items in-house or to purchase them from a supplier? Production processing control. If production is performed in-house, what is to be the level of management control over operations, and does that expertise exist within the firm or must it be acquired from the outside Quality. How is quality to be measured during and after production processing? What tools should be used and does the firm currently have such expertise?

Make or Buy Decision (cont.)
Risk management. Does the outsourcing of specific items pose a competitive risk to the business? Risk is low when the business possesses the capabilities to produce purchased products and high when the firm surrenders control to a supply partner

Purchasing Classification Matrix

Step 4 – Supplier Relations
Activities Determine level of current supplier relationships Apply collaborative strategies to enhance relationships Establish evaluation and certification targets Determine roles of planners and buyers Objective Develop a collaborative partnership with supply partners

Step 5 – Technology Enablers
Activities Determine level of current technologies Explore technologies to link product development and supplier capabilities Deploy technologies to enhance RFQ, order entry, service management, and planning functions Establish real-time analytics and scoreboards Objective Deploy technologies to enhance supplier connectivity and collaboration

Step 6 – Performance and Continuous Improvement
Activities Communicate the value of continuous improvement Establish clear performance benchmarks Train personnel in continuous improvement and performance management techniques Objective Leverage continuous improvement and performance measurement techniques to drive competitive advantage

Productive Improvement
Purchasing’s Strategic Goals Quality Productive Improvement Technology Risk Management Velocity

Strategic Sourcing Objectives
Establish close, collaborative relationships with key suppliers. Finding and building ongoing relationships with supply partners that account for the majority of an organization’s purchasing spend and that provide goods or services that are critical in the production and delivery of the final product or service Ensure reliable quality and delivery of materials. Increasing the availability of high quality materials and components by working closely with suppliers’ manufacturing and delivery processes Reduce supply risk. Creating mechanisms that reduce risks in product and service supply arising from the actions of competitors or problems experienced by suppliers in production or delivery Establish a smaller, flexible, responsive supplier base. Ability to work with a small core of suppliers that are interested in developing deep, collaborative partnerships

Strategic Sourcing Objectives (cont.)
Closely integrate supplier input to product development and innovation. Establishing a collaborative and participative environment where suppliers provide critical core competencies that enables the buying organization to pursue product development and innovation far ahead of the competition Reduce external spending. Establishing long-term contracts locking in price and transportation costs Use of targeted outsourcing. To internally focus on core competencies, companies outsource non-core, non-critical functions to entities that have established strength in these functions Reduce transaction costs. Use of computerized tools, to facilitate supplier and product sourcing, order generation, follow-up, receiving, and payment

Chapter 11 Procurement and Supplier Management Supplier Relationship Management

Compatibility of interests
Range of Supplier Relationships Trust Compatibility of interests Openness Mutual need Tactical relationships Collaborative relationships Ongoing relationship Certified suppliers Strategic alliances Transactional Partnership Higher value-added relationships Lower value-added relationships

SRM Definition A comprehensive approach to managing an enterprise’s interactions with the organizations that supply the goods and services the enterprise uses. The goal of SRM is to streamline and make more effective the processes between an enterprise and its suppliers APICS Dictionary

Traditional Purchasing Vs. SRM
Traditional Approach SRM Partnerships Adversarial relationships Collaborative partnerships Many competing suppliers Small core of supply partners Contracts focused on price Contracts focused on mutual benefits Product information is proprietary Collaborative sharing of information Evaluation by bid Evaluation by commitment to partnership and joint participation Supplier excluded from the design process Functional teams using real-time communication of designs and specifications Process improvements intermittent and unilateral Close on line linkages for continuous design improvement Quality defects reside with the supplier Mutual responsibility for total quality Buyer determines response to marketplace changes Collaborative supply team work together to adapt to changing markets

SRM Marketplace Realities
Increasing requirements for supply chain collaboration. As businesses continue to turn toward outsourcing, a deepening of partnering relationships and mutual dependencies in all industries is fundamental to continuous improvement strategies, total cost management, and competitive advantage Changing nature of the marketplace. The dominance of the customer, shortening product life cycles, demands for configurable products, shrinking lead times, global competition, participative product design, and other issues have altered forever the nature of sourcing and purchasing management and highlighted the importance of supply chain collaboration Changing business infrastructures. Today’s enterprise is characterized by extreme agility and scalability while being customer-centric, collaborative, digitally-enabled, and capable of reliable, convenient, and fast-flow delivery

SRM Marketplace Realities (cont.)
Increased demand for cost control, quality, and innovation. Buyers are now more than ever concerned about traditional purchasing values such as quality and reliability Increased demand for risk sharing. True business partnerships mean that the need for trust and risk sharing be a serious component in any collaborative relationship Enabling power of Internet technologies. The ‘Internet age’ has opened new and exciting doors that have provided supply chain partners with the ability to closely integrate demand and replenishment in ways impossible only a few years ago Focus on continuous improvement. At the core of supplier management can be found a strong commitment to the joint pursuit of continuous improvement as a dynamic process rather than a static business principle

What is Supplier Relationship Management
What is SMR? A comprehensive approach to managing an enterprise’s interactions with the organizations that supply the goods and services the enterprise uses. Collaboration Demands of the marketplace require close collaboration between buyer and seller Expand value creation SRM enables buyers and sellers to expand the value they provide to the marketplace Expand core competencies SMR enables buyers and sellers to utilize each other’s core competencies to expand capabilities and capacities

Components of SRM

Benefits of SRM Add value to products Enable strategic growth
Increase market access Strengthen operations Increase organizational expertise Build organization skills Enhance financial strength

Benefits of SRM (cont.) Enable easier supplier segmentation
Design effective performance measurements

Develop Criteria and Enroll Partners Implement Full Program
Implementing SRM Define the SRM Strategy Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Develop Criteria and Enroll Partners Implement Full Program Monitor and Improve Prepare Partners Conduct Pilot Review current corporate, manu-facturing, and sourcing strategies Identify criteria to be used in selecting suppliers. Enroll potential SRM suppliers Firm SRM partnership by negotiating a mutually beneficial PSA. Establish communi-cations methods Design pilot for a discrete portion of the organi-zation’s business or by period of time Revise PSA as necessary and implement SRM partnership program Establish framework of metrics to ensure compliance to PSA. Focus on collaboration goals achieving common goals

Chapter 11 Procurement and Supplier Management Managing the Sourcing Process

Defining Sourcing The body of integrated activities that focuses on the purchase of materials, supplies, and services needed to reach the firm’s strategic goals. In a narrow sense, sourcing describes the process of buying; in a broader context, sourcing involves determining the need; selecting the supplier; arriving at the appropriate price, terms, and conditions; drafting the contract; and growing mutually beneficial supplier relationships

Sourcing Objectives Establish close, collaborative relationships with key suppliers Ensure reliable quality and delivery of materials Reduce supply risks Establish a smaller, more flexible, more responsive supplier base Closely integrate supplier input to product development and innovation Reduce external spending Reduce transaction costs

Commodity and Supplier Spend Analysis
Sourcing Process Steps Make-or-Buy Decision, Outsourcing Step 1 Step 2 Step 3 Step 4 Step 5 Commodity and Supplier Spend Analysis Supplier Scoring, Assessment, and Selection Pricing, Negotiation, and Contracting Begin Procurement Activities Make the insource versus outsource decision Conduct spend analysis; rank commodities and suppliers by volume and monetary value; create bid (proposal) Score and assess supplier performance, capabilities, costs, flexibility, and viability. Make supplier selection Review pricing, negotiate terms, and finalize contracts for buy Buyers begun procurement activities; ongoing contract review; performance measurement

Make or Buy Decision Criteria
Will it be cheaper to make the item or to outsource it to a supplier? Cost Are items closely linked to the firm’s core competencies or are critical to the customer strategy? Strategic Items Availability of Production Capacity Can the item be made cost effectively with current processes? How are processing activities, costs, quality, and expertise to be managed inside and outside the firm? Control How is quality to be managed and does the firm have the required expertise? Quality Is the product and/or process proprietary and can it be outsourced? Risk

Exercise 11.1 Cost Avoidance Analysis
Item Cost Data - manufactured Step 1: Review possible outsourced price Total quantity supplied: 10,000 units Total price: US$45,000 Unit price: US$4.50

Exercise 11.1 Cost Avoidance Analysis (cont.)
Step 2: Determine cost avoidance percents Step 3: Calculate costs avoided if purchased Variable factory overhead: US$5,000 x 80% = US$4,000 Fixed factory overhead: US$24,000 x 75% = US$18,000 Total cost: US$9, , , ,000 = US$43,000

Exercise 11.1 Cost Avoidance Analysis (cont.)
Step 4: Determine cost avoided Cost not avoided: US$50,000 – 43,000 = US$7,000 Plus cost to purchase: US$4.50 x 10,000 units = US$45,000 Total cost to purchase: US$7, ,000 = US$52,000 Variance to purchase: US$50,000 – 52,000 = (US$2,000)

Considerations Influencing Make or Buy

Spend Analysis – Key Questions
What products and services did the organization purchase by value and volume during the previous year? Answering this question enables the organization to determine the total value of money spent on goods and services Which products and services are strategic and which are tactical buys? Answering this question enables buyers to separate critical and non-critical products and suppliers by value and volume Did the business receive full value for the products and services purchased? Answering this question enables financial managers to certify the value of purchased goods necessary to meet accountability requirements specified by contract compliance and external bodies such as Sarbanes-Oxley Act (SOX) and the Securities and Exchange Commission (SEC)

Spend Analysis – Key Questions (cont.)
Which suppliers received the majority of the firm’s spend? Answering this question enables buyers to determine by product, volume, and financial value the top suppliers to the organization What opportunities can be pursued for supplier reduction, combining purchases from across the enterprise, standardizing products, and leveraging market conditions? Answering this question enables procurement to accurately ascertain how well suppliers met item requirements and specifications and to assess opportunities for improvement of procurement processes

Chart of Spend by Commodity Category

Spend Analysis by Supplier, Category, annual Spend, and Percent

Creating the Bid or Proposal
Sealed bid Bids from prospective suppliers are “sealed” Posted offer to buy The bid is posted in a public biding document or through the Internet Reverse auctions Suppliers can bid and rebind with the objective of outbidding the competition Request for information (RFI) Used by buyers seeking to compile a list of suppliers or to prequalify suppliers Used when the detailer item or service specification or the statement of work (SOW) has not been finalized Request for proposal (RFP) Request for quotation (RFQ) Used to obtain price, delivery, and other specific terms from prequalified suppliers

Key Supplier Attributes
How closely the supplier's product matches the buyer's specification, life of the product, ease of repair, maintenance requirements, ease of use, and dependability Quality Reliability Measures the on-time delivery and performance history of a supplier Risk Measures supply uncertainties, delivery lead time variations, and changes in pricing Considers the capacities of a supplier's production facilities, technical sophistication, management and organization abilities, and operating controls to meet buyer quantity and quality requirements Capability

Key Supplier Attributes (cont.)
Financial stability Considers the financial stability of the supplier Considers special attributes possessed by the supplier such as special equipment, location, reputation, commitment to environmental sustainability and lean principles, technology, quality certification, and others Desirable attributes

Exercise 11-2 Supplier Rating and Scoring

Product Classification Matrix

Exercise 11-3 Supplier Break-Even Analysis
Data Elements Step 1: Calculate total cost Overhead costs plus (unit cost x anticipated quantity), or US$3,000 + (900 units x US$6) = US$8,400 Step 2: Calculate unit cost Total cost / anticipated quantity, or US$8,400 / 900 units = US$9.33

Exercise 11-3 Supplier Break-Even Analysis
Step 3: Calculate break-even quantity Overhead cost / (purchase price – unit cost), or US$3,000 / (US$10 - US$6) = 750 units Step 4: Calculate break-even revenue purchase price x break-even quantity, or US$10 x 750 units = US$7,500 Step 5: Calculate supplier’s expected profit ((purchase price x anticipated quantity) minus (unit cost x anticipated quantity)) minus overhead costs, or US$10 x 900 units - US$6 x 900 units - US$3,000 = US$600

Supplier Break-Even Analysis – Graphic
Target purchase price = US$10 per unit Fixed costs = US$3,000 Variable costs = US$6 per unit Anticipated volume = 900 units Total Revenue Value 12,000 Total Cost 9,000 Break-Even Point Profit 6,000 3,000 Units 200 400 600 900 1200 1500 1800

Exercise 11-4 Production/Supplier Break-Even Analysis
Data Elements Step 1: Calculate difference in fixed costs Manufacturing fixed cost minus purchasing fixed cost of (US$25,000 - US$8,000 = US$17,000) Step 2: Calculate difference of unit costs Purchase unit cost minus manufacturing unit cost or (US$ US$0.50 = US$1.15)

Exercise 11-4 Production/Supplier Break-Even Analysis (cont.)
Step 3: Calculate break even quantity The break even quantity is determined by dividing the fixed cost by the unit cost or (US$17,000 / US$1.15 = 14,783 (rounded)) The results of the analysis indicate that if sales volumes are less than 14,783 units, it would be more economical to manufacture the product in house

Total Cost of Ownership
Purchase price The purchase price of the materials and components acquired from suppliers The amount paid for delivery of purchased goods and services including sourcing, administration, freight, duties, and taxes Acquisition costs Costs for planning, engineering, materials, scrap, downtime, opportunity costs, and technologies used in finished goods production Product costs Product cost plus the costs associated with carrying inventory, warehousing, transportation, product handling, customs, duties, environmental sustainability, and others Landed costs End-of-life costs Costs include salvage, obsolescence, disposal, clean-up, project termination, and recovery

Supplier Discounting Trade Promotion Quantity Discount Volume Discount
Payment made to the buyer to compensate for performing some marketing function for the seller Trade Promotion Quantity Discount Price discount based on the quantity or monetary value of the buyer’s purchase Volume Discount Price discount resulting from supplier production economies of scale Seasonal Discount Price discount based on seasonal nature of goods or services Cash Discount Cash discount determined by negotiations relating the terms of buyer payment

Exercise 11-5 Supplier Selection Comparison
Data Elements

Exercise 11-5 Supplier Selection Comparison
Three supplier cost data

Negotiating Objectives
Quality Price Negotiation Objectives Continuing relations Service Levels Contract length Control Capacity/ volume

Contracting Purchase order – PO defines nature of contract
Requirements for unspecified delivery – a “blanket” or “standing order” Definite quantity – contract defines a specific quantity over a time frame, but no specific delivery dates Fixed price – contract defines a fixed price over a time period Cost-based – contract requires buyer to cover a certain level of cost Buy-back – contract enables buyer to return unsold goods at negotiated price Revenue and cost sharing – contract requires buyer to share portion of sales revenue in exchange for discounts

Chapter 11 Procurement and Supplier Management Purchase Order Management

Purchase Order Cycle

Purchasing Methods Current requirements buying. This is the most common method for order release of production inventories. Based on a purchase schedule developed from planning tools such as MRP and order point, buyers will assemble a purchase order that balances minimum lot quantities with cost elements such as quantity discounts, carrying costs, stock out costs, and ordering costs Forward buying. This approach utilizes medium- to long-term inventory planning to purchase goods and services in excess of current requirements. Normally, buyer and supplier engage in some form of contract in which price, quantities, quality, and delivery are agreed upon Speculative buying. Buyers purchase goods and services far beyond current requirements, often called hedge purchasing. Speculative buying is used to lock in prices in anticipation of a price increase or an impending product shortage

Purchase Order Entry Discrete Purchase Order
The buyer generates a single purchase order (PO) to buy goods or services “as needed” Online Requisitioning System Employees create requisitions that are in turn reviewed and released by the buyer into POs. Procurement Cards (P-cards) Buyers use a purchasing card which is similar to a personal credit card Internet (B2B) Buyers use the Internet to source, submit requisitions, generate POs and transfer funds

Purchase Order Entry (cont.)
Automated Ordering Systems Planning systems automatically generate purchase orders (POs) through EDI, auto fax, or the Internet Blanket Purchase Order A type of PO containing a fixed quantity or order value that extends over a contract period Requirements Contract Buyer commits to purchase a fixed percentage of requirements in exchange for quality, price, availability, and delivery considerations Direct-Ship Purchase Order Buyers purchase products through a third-party seller, thereby skipping material handling and shipping by the immediate supplier.

Transportation Decision Process
Identify relevant performance variables Select transportation mode Select carrier Negotiate rates and service levels Evaluate carrier performance

Transportation Mode Performance
Cost Completeness Frequency Speed Dependability Capability

Receiving, Inspection, and Order Close-Out
Unloading – Unloading of the order from the carrier Shipment verification – Verifying the receipt by referencing the freight bill and the original order Unpacking and inspection – Unpacking the delivery and performing damage inspection Unitize materials – Unitize receipt to reduce materials handling Hot list review – Check for existing materials backorders Prepare receiving report – Report receipt completeness quality, delivery, and other performance issues Delivery of materials – Move goods to put away locations or to requestor.

Chapter 11 Procurement and Supplier Management Supplier and Procurement Performance Measurement

Purchasing Performance Measurement
Supplier Performance Measurement How well the objectives, expectations, and agreements contracted between buyer and supplier are being fulfilled Purchasing Department Performance How well departmental activities are being optimized in the pursuit of value-added objectives Continuous Improvement How deeply buyers and suppliers are committed to continuous purchasing improvement objectives

Conformance to Contract
Supplier Performance Measurement Product Quality The quality of the supplier’s goods and services is considered the prime metric On-Time Delivery Ability of the supplier to deliver on-time and often to a specific delivery schedule Quantity Received How often the PO quantity received matches the original quantity ordered Flexibility Indicates how easily suppliers can accommodate changes to orders Price Measures how competitive a suppliers price is for goods and services Conformance to Contract How well the supplier is meeting the terms of the purchasing contract

Exercise 11-6 Weighted Point Plan
Data Elements Establish supplier performance attributes Determine past actual performance Determine weights for all performance attributes Calculate values

Balanced Scorecard – Example

Purchasing Organization Performance
Direct attention to main purchasing performance areas and objectives so that performance continually improves while objectives are being met Improve purchasing department organizational structure, policies, and procedures Identify those areas where additional training and educational efforts may be required Provide data so that corrective action can be taken where necessary Improve interrelations within purchasing, between purchasing and other business functions, and between purchasing and the firm's suppliers Evaluate departmental staffing requirements

Three Levels of Performance
Departmental functional review Consists of a broad appraisal of the purchasing function including policies, procedures, personnel, and interdepartmental relations Goal is to ascertain how well the purchasing function matches predetermined operational standards, and then to provide a basis for corrective action to redirect purchasing activities that exhibit a wide variance from allowable performance tolerances Purchasing policy and procedural audits Designed to reveal the magnitude of purchasing efficiency. Effective measurement on this level requires weekly or at least monthly evaluation of day-to-day purchasing results Ongoing purchasing efficiency

Chapter 11 Procurement and Supplier Management Impact of e-Commerce on Procurement

Benefits of B2B Marketplaces
Increased market supply and demand visibility Price benefits from increased competition Increased operational efficiencies Enhanced customer management Improved supply chain collaboration Synchronized supply chain networks

B2B e-Commerce Functions

Procurement e-Services
Virtual B2B marketplaces offer large communities of buyers and sellers an online, real-time channel to reach out to each other in an interactive mode that transcends barriers of time and space. Supplier search B2B services provide buyers access to a wide-range of online product and service catalogs for all types of goods and services, including MRO and indirect materials, production, administrative, and capital goods Product search Leveraging three categories of B2B applications: decision support (Web-based spend analysis, contracts, etc.); negotiation automation (e-RFP, e-auctions, etc.); and value-added services (billing and settlement, comparison shopping, pricing, logistics support, etc.) Strategic sourcing

e-Order Processing Product Catalog Management. Virtual storefronts consisting of catalogs containing the most current pricing, product information, and product specifications Requisitioning. Facilitate the requisitioning process by integrating product/service catalogues hosted by exchange marketplaces, industry consortia, or third party aggregators located across the Internet into a single “virtual” catalogue available through on-line interfaces RFQ. Buyers can automate the RFQ process, thereby cutting costs and reducing cycle times and can greatly increase marketplace competition and solicit suppliers separated by geography and time to participate in the sourcing process Shopping Tools. The use of software shopping agents to perform the tasks of Internet browsing and initial gathering of and acting on basic information is expected to expand through time

e-Order Processing (cont.)
Auctions. Used primarily as a means to buy and sell products whose value is difficult to determine or commodity in nature, Internet-based auctions enabled buyers to expand beyond the domain of niche markets to reach potential sellers across geographic barriers and traditional industry lines Purchase Order Generation and Tracking. Once the order requisitioning or RFQ has been approved, a PO is generated through a paper order or electronically via fax, EDI, or the Internet Logistics. Today’s B2B order management functions can be significantly enhanced by the utilization of a variety of Web-based logistics services that can be integrated into the procurement process. Logistics partners have the capability to offer Internet enhanced services, such as inventory tracking, carrier selection, supplier management, shipment management, and freight bill management

e-Technology Services
Web Processing. The ability to drive B2B requires a technology focus on data access and transactions as well as optimizing business processes. Web applications should provide for effective and timely decision-making prior to the point when the actual transaction is being made Security. Security services include such components as information boundary definition, authentication, authorization, encryption, validation keys, and logging of attempted security breaches Member Services. The quest to create Web-sites that are characterized by extreme usability, personalization, and customization is perhaps the “holy grail” of B2B procurement. Winning Web exchanges require marketers to ensure that customers have, first of all, an effective personal experience, and second, a positive emotional experience

e-Technology Services (cont.)
Content Search and Management. The essence of e-business is the capability of buyers and sellers to utilize knowledge-bases, catalogs, text, graphics, and embedded files to access and transact a broad range of products, services, and information over the Web. Effective search requires engines that provide access either by content or by parameter Workflow. Workflow management provides the vehicle by which process paths are mapped, the business rules that govern workflow decisions, and the workflow engine receives the user’s request and determines the next sequence of screen displays that will match both the process and the business rules definition

Independent Trading Exchanges (ITX)
Buyer-driven e-marketplaces provide a simple B2B model to enable companies to facilitate internal procurement by linking, through Internet tools, divisions, partners, or companies to an internally maintained centralized online catalog assembled from a number of supplier catalogs that could be accessed through a portal linked directly to supplier websites Vertical exchanges provide Internet trading functions for a particular industry. These types of digital marketplaces act as hubs servicing a single industry. These exchanges work by aggregating a variety of industry-specific product/service catalogues into a single Internet site or to leverage online tools that distributors or brokers can use to tap into excess reservoirs supplier materials and capacities and accelerate the matching of potential buyers and sellers

Independent Trading Exchanges ITX (cont.)
Horizontal exchanges facilitate e-business functions for products/services common across multiple industries and can range from simple portals to sophisticated collaboration hubs. By providing a sort of virtual trading “hub” where multiple buyers and sellers can be matched and conduct transactions, these Web sites enable manufacturers, distributors, buying groups, and service providers to develop shared marketplaces that deliver real-time, interactive commerce services through the Internet

Private Trading Exchanges (PTX)
This model is characterized by one-to-one collaborative capabilities with network partners, total visibility throughout the supply chain, seamless integration of applications, and tight security In this model an enterprise and its preferred suppliers would be linked into a closed e-marketplace community with a single point of contact, coordination, and control. Often this type of e-marketplace is driven by a large market dominant company that seeks to facilitate transactions and cut costs while also cementing the loyalties of their own customers and suppliers

Consortia Trading Exchanges (CTX)
Defined as a some-to-many network consisting of a few powerful companies and their trading partners organized into a consortium. Historically, CTXs are formed by very large corporations in highly competitive industries such as automotive, utilities, airlines, high-tech, and chemicals The goal of a CTX is simple: to combine purchasing power and supply chains in an effort to facilitate the exchange of a wide range of common products and services through the use of Web-based tools, such as aggregation and auction, between vertically-organized suppliers and a few large companies

Benefits of B2B e-Commerce
Increased market supply and demand visibility. B2B e-marketplaces provide buyers with an ever-widening range of choices, an exchange point that enables the efficient matching of buyers and product/service mixes, and a larger market for suppliers Price benefits from increased competition. Online buying and use of auctions can be used to increase price competition, thereby resulting in dramatically lower procurement costs for buyers Increased operational efficiencies. B2B applications have the capability to increase the automation and efficiency of procurement processes through decreased cycle times for supplier sourcing, order processing and management, and buying functions

Benefits of B2B e-Commerce (cont.)
Enhanced customer management. e-Marketplaces assist suppliers to accumulate and utilize analytical tools that more sharply define customer segmentation and develop new product/service value packages that deepen and make more visible customer sales campaigns Improved supply chain collaboration. Today’s B2B toolsets enable buyers and sellers to structure enhanced avenues for collaboration for product life cycle management, marketing campaigns, cross-channel demand and supply planning, and logistics support Synchronized supply chain networks. The ability of e-markets to drive the real-time interoperability of functions anywhere in the supply network focused on merging information and providing for the execution of optimal choices provides supply partners with the capability to realize strategic and operations objectives

Benefits of B2B e-Commerce (cont.)
Enhanced customer management. e-Marketplaces assist suppliers to accumulate and utilize analytical tools that more sharply define customer segmentation and develop new product/service value packages that deepen and make more visible customer sales campaigns Efficient payment transfer. e-Commerce greatly facilitates the collection of payment. Often, especially in retail sales, the payment for the goods/services occurs at the moment of purchase either through credit card, P-card, or the use of a third party such as PayPal Impact on cost. Companies with B2B models will find their technology infrastructures and call-center services dramatically increased, while experiencing decreases in inventory through improved supply channel cooperation, reduction in facilities costs by centralizing or outsourcing operations, and increases in direct or partner-based transportation

Chapter 11 End of Session dp&c Chapter 11
“Education in Pursuit of Supply Chain Leadership” dp&c Chapter 11 Chapter 11 End of Session

Procurement and Supplier Management

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Procurement and Supplier Management

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