1. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 1 Chapter 12: Purchasing and Supply Management Process Management: Creating Value Along the Supply Chain (1 st edition) Wisner and Stanley

2. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 2 Chapter Outline Introduction The Role of Purchasing and Supply Management The Strategic Sourcing Process Cost Management Factors in Supplier Selection Negotiating the Contract

3. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 3 Chapter Outline (cont.) Managing Supplier Relationships Monitoring Supplier Performance Electronic Purchasing Beyond First-Tier Supplier Relationships Supply Management Challenges Summary

4. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 4 Learning Objectives After completing this chapter, you should be able to: Define the role of purchasing and supply management in an organization and the supply chain. Describe the strategic sourcing process. Discuss supplier evaluation techniques. Apply cost management practices to supplier selection. Discuss the continuum of relationships between purchasing and its suppliers.

5. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 5 Learning Objectives (cont.) After completing this chapter, you should be able to: Describe the supplier monitoring process. Describe the types of electronic purchasing. Discuss ways purchasing can monitor supplier relationships beyond the first tier. Understand some of the challenges purchasing and supply management professionals face today.

6. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 6 Introduction Purchasing: a major function of an organization that is responsible for acquisition of required materials, services, and equipment. Supply management: the identification, acquisition, access, positioning and management of resources the organization needs or potentially needs in the attainment of its strategic objectives

7. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 7 The Role of Purchasing and Supply Management Goals of purchasing and supply management: Maintain the flow of goods/ services to serve the organization and its supply chains, at the desired customer service levels on a continuous basis Minimize the investment in inventory to free up capital for other projects Maintain the required quality levels of purchased goods and services Search for and develop capable suppliers Standardize goods and services purchased whenever possible to reduce costs Achieve good working relationships with other functional areas of the organization Operate the purchasing and supply management department at the lowest administrative cost possible Seek ways to improve the organization’s and supply chains’ competitive positions

8. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 8 The Strategic Sourcing Process Conduct an internal assessment Spend categories: each has common characteristics such as raw materials, customized items, standardized items, and services Important to understand the spend category, to identify the users, stakeholders, or consumers of the category Assess the market Porter’s five competitive forces model is a good starting point to understand the current market situation.

9. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. The Strategic Sourcing Process Kraljik’s portfolio matrix: Kraljik introduced first comprehensive portfolio approach for purchasing and supply management Includes the construction of a portfolio matrix that classifies products on the basis of two dimensions: profit impact and supply risk (low and high) The result is a 2x2 matrix and a classification in four categories: Non-critical items (use of p-cards): require efficient processing, product standardization, order volume and inventory optimalization. Leveraged items: allow the buying company to exploit its full purchasing power, for instance through tendering, target pricing and product substitution Bottleneck items: cause significant problems and risks which should be handled by volume insurance, vendor control, security of inventories and backup plans. Strategic items: strategic to production or service delivery because of their unique characteristics. 9

10. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. Kraljic’s supply matrix Bottleneck items *Supplier’s technology critical *Difficult to substitute *Unique requirements Strategic items *Unique specifications *Supplier’s technology critical *Difficult to substitute *Unique specifications Non-critical items *Many suppliers available *Easy-to-find substitute products Leverage items *Large volume purchases *can find substitutes *many suppliers available 10 Low Profit impact High High Supply risk Low

11. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 11 The Strategic Sourcing Process (cont.) Assess the market (cont.) Original equipment manufacturers (OEMs): an OEM is a company that supplied equipment to other companies to resell or incorporate into another product using the reseller's brand name. Collect supplier information : Purchasing and supply must make an assessment of current and potential suppliers. Information sources : On-file records of suppliers used in the past Commodity and supplier directories Online and printed catalogs Purchasing and supply management colleagues Trade magazines Suppliers websites Trade shows and conventions Sales presentations

12. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. The Strategic Sourcing Process (cont.) Develop the sourcing strategy: a long-range plan for managing the supply of purchased items. Linked to their analysis and goals, and tied to the corporate and supply chain strategies. Supplier certification program : buying firm will make a visit to the supplier’s facilities, observing the suppliers’ equipment, personnel, facilities, and systems that monitor quality in order to ensure they meet buying firm's specifications and quality standards. Important to have a good understanding of internal dynamics 12

13. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 13 The Strategic Sourcing Process (cont.) Solicit and evaluate bids Verbal quotes: verbal agreement is requested for lower cost, non-critical purchases Request for information (RFI): to informally collect general information on price, design, timing, and/or other terms the firm is interested in obtaining. Request for quote (RFQ): used when purchasing requirements are clear and used in practice for non-critical or leverage buys Request for proposal (RFP): formal, binding request or pricing and is used for the more complex critical and bottleneck purchases. Invitation for bid (IFB): used for more costly purchases. The number of suppliers will be asked to bid (Reverse auction )

14. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 14 The Strategic Sourcing Process (cont.) Select the supplier and implement the contract Based on their evaluations, purchasing and supply management awards the contract to the winning supplier and then implements the contract. Actions required when the supplier is new Sourcing process is continuous; purchasing personnel should track the benefits and/or drawbacks of the buy throughout the life cycle of the contract. Performance-based contracts address issues such as customer satisfaction, product/service quality, end-user satisfaction, process performance

15. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 15 Cost Management Cost management: used to evaluate a supplier’s pricing structure Process of identifying all the costs associated with company investments by making informed choices about the options that will deliver the best value for the money and managing those costs throughout the life of investment. Target costing: determining what the market will bear and working backwards to see how much you can afford to produce the product or service for, and still make a profit. Total cost of ownership (TCO): a philosophy for understanding all SC- related costs of doing business with a particular supplier for a particular good/service or the cost of a process or particular SC design analyzing the true cost of acquisition, use, maintenance and disposal of a good, service, capital equipment, or process.

16. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 16 Factors in Supplier Selection Use of evaluation forms Factors to be included: All aspects of quality Supplier certification Capability of supplier’s facilities Physical distribution capabilities Supply chain relationship capabilities Purchasing should make an assessment of each supplier

17. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. Factors in Supplier Selection General performance criteria: whether a supplier's product or service design will meet specific performance criteria Quality criteria: purchasing may asses supplier’s quality plan and activities to continually improve its products, services, processes, employees, suppliers Delivery criteria : purchasing will asses the ability of supplier’s of getting the product or service to the customer Relationship criteria : supply chain relationship quality 17

18. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 18 Negotiating the Contract Expensive; time-consuming Purchasing may use negotiations when ; changes need to be made to the initial specifications or drawings, after the original purchase order is issued changes occur in the marketplace that affect the quantities needed or prices agreed upon no acceptable bids are received other problems have arisen during the contracted period Importance of cost information Large firms employ cost analysts to analyze the supplier's cost elements and profit margin For specialized items companies may hire a third party with specific knowledge Activity-based cost accounting : tracks both direct and indirect costs to each specific product sold

19. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 19 Managing Supplier Relationships Importance of managing supplier relationships due to outsourcing Arm’s length relationship: buying and supplying firms bargain from certain strengths for control of the resources Ongoing relationship: buying from a desired supplier on a regular but informal basis Partnership/strategic alliance: when the relationship has been more than satisfactory and the two parties see a reason to work together more often and share more information A means to build stronger, extensive ties between customers and suppliers to lower costs and improve quality and customer service

20. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 20 Managing Supplier Relationships (cont.) Partnership/strategic alliance (cont.) Two examples of partnerships Vendor-managed inventory (VMI): A means of optimizing Supply Chain performance in which the manufacturer is responsible for maintaining the distributors inventory levels. The manufacturer has access to the distributors inventory data and is responsible for generating purchase orders. Just-in-time II (JIT II)

21. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 21 Monitoring Supplier Performance Supplier performance surveys: internal survey may be used to evaluate supplier's performance Supplier scorecard Annual supplier meetings: purchasing and supplier representatives may meet annually Supplier recognition and awards: the buying organization may give awards to suppliers with a demonstrated high level of performance

22. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 22 Electronic Purchasing E-purchasing: It automates and extends manual buying processes, from the creation of the requisition through to payment of suppliers. Supplier relationship management (SRM) software Benefits : Elimination of paperwork Reduced time between recognition of need and receipt of an order Reduced errors Reduced overhead costs More free time to strategically manage the supply base

23. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 23 Electronic Purchasing (cont.) Reverse auctions: In a regular auction, purchasers are allowed to place a bid on an item, which is the amount they are willing to pay in order to buy the item. The person who places the highest bid usually ends up with the item. With a reverse auction, however, the opposite is true. More specifically, the buyer advertises a need for an item or service. Sellers then place bids for the amount they expect to be paid in order to perform such a service or provide such an item. Generally, the seller who places the lowest bid will win the job or sell the item. Electronic data interchange (EDI): the computer-to-computer exchange of routine business data between trading partners in standard data formats.

24. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. Electronic Purchasing (cont.) Web-based marketplaces :accessing supplier websites to obtain information e-marketplaces : digital markets that serve as a virtual meeting place for buyers and sellers 24

25. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 25 Beyond First-Tier Supplier Relationships First-, second- and third-tier suppliers: important to develop a strategic sourcing plan for first-tier suppliers and to consider the impacts from parts sold by second-tier and third-tier suppliers on the firm’s quality, costs, service capabilities Tiered supply management: integration of a firm’s supply management process with its first-, second-, and third-tier suppliers. Benefits: Economic competitiveness Reduced lead times Greater responsiveness to demand and supply changes Better forecasting capability Improved customer response time Direct management of all tiers Cross-organizational teams

26. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 26 Supply Management Challenges Difficult to align purchasing objectives with organizational objectives The flow of supplies and services may be delayed or interrupted because of weather, strikes, supplier bankruptcy Risk of price increases Forward purchase contract: contract to purchase goods at some future date, priced in today’s currency value Hedging strategies Ways to reduce risk: Careful supplier selection Use of long-term contracts Developing strategic alliances Use of ongoing supplier performance assessment