Purchasing

PURCHASING
& Supply
& SUPPLY
Chain Management
CHAIN MANAGEMENT,
– 5th ed. 6e
– 2012

Introduction to
Purchasing and Supply
Chain Management
Chapter 1

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 Learning Objectives
 Understand the differences between purchasing
and supply management
 Understand the differences between supply chains
and value chains
 Identify the activities that are part of supply chain
management
 Appreciate the importance of supply chain enablers
 Identify the historical stages of purchasing’s
evolution
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 Chapter Overview

 A new competitive business environment

 Why purchasing is important
 Understanding the language of purchasing
and supply chain management
 Achieving purchasing and supply chain
benefits

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 Chapter Overview

 The supply chain umbrella – management

activities
 Four enablers of purchasing and supply
chain management
 The evolution of purchasing and supply
chain management
 Looking ahead

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 A New Competitive Environment
 Widely available information sources
 Increasing numbers of world-class global
competitors
 Sophisticated customer base
 More performance at a lower cost
 Greater levels of outsourcing
 Balance of power between buyers and
suppliers
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 Factors Driving SCM

 Low cost and wide availability of

information
 More closely links members of a supply chain
 Higher levels of competition in domestic
and international markets
 Requires greater quickness, agility, and
flexibility

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 Factors Driving SCM

 Customer expectations and requirements

 Constantly changing and more demanding
 Ability of an organization’s supply chain
to identify and mitigate risk
 Minimize disruptions
 Competition is now between supply
chains, not just between companies

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 Why Purchasing Is Important
 Increasing value and savings
 Building relationships and driving
innovation
 Improving quality and reputation
 Reducing time-to-market
 Managing supplier risk
 Generating economic impact
 Contributing to competitive advantage
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 Increasing Value and Savings
 Suppliers have substantial impact on a
firm’s total cost
 Many product features originate from
suppliers
 In manufacturing, purchased content is
more than 55% of revenues
 Avoiding costs through early involvement in
product design stage
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 Building Relationships and
Driving Innovation
 Traditional approach is to bargain hard
for price reductions
 Newer approach is to conduct joint cost
reduction with suppliers
 Both buyer and supplier must benefit
 Suppliers can contribute innovative ideas

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Purchasing & Supply Chain Management, 6e
 Improving Quality and Reputation
 Buyer focuses on core competencies and
outsources non-core activities and
materials
 Need for ability to track materials back up
through the supplier’s supply chain
 Supplier quality  product quality
 Lapses in managing supplier quality can
potentially tarnish a buyer’s reputation
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 Reducing Time-to-Market

 Include suppliers early in product design

process to take advantage of their
expertise
 Early supplier involvement can lead to
an average of 20% improvement on
material costs, material quality, and
product development times

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 Managing Supplier Risk

 Supplier risk is magnified by sourcing

strategies that emphasize global
sourcing, single sourcing, and JIT
inventory
 Need to develop business continuity
plans to mitigate risks

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 Generating Economic Impact
 The monthly ISM Report on Business® is
a closely followed national economic
indicator
 A change index
 Manufacturing and non-manufacturing
components
 > 50 means the economy is expanding
 < 50 means the economy is contracting
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 Contributing to Competitive
Advantage
 Growing recognition of supply
management’s contribution to the firm’s
profitability
 More supply managers have earned
college degrees
 Increased number of supply managers
with certifications such as CPSM

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 Contributing to Competitive
Advantage
 Talent management
 Requires constant focus on finding,
developing, and promoting individuals
making significant contributions
 Vital to furthering supply management’s
impact on company strategies and
competitiveness

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 Language of Purchasing and SCM

 Is purchasing different from supply

management?
 Are supply chains and value chains the
same?
 What is supply chain management?
 What is an extended enterprise?

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 Purchasing

 A functional group (i.e., a formal entity

on the organization chart) as well as a
functional activity (i.e., buying goods
and services)
 Also known as procurement

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 Purchasing
 Activities
 Supplier identification and selection
 Buying
 Negotiation
 Contracting
 Supply market research
 Supplier measurement and improvement
 Purchasing systems development

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 The Five Rights of Purchasing

 Getting the “right” quality

 In the “right” quantity
 At the “right” time
 For the “right” price
 From the “right” source

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 Supply Management

 A strategic approach to planning for and

acquiring the organization’s current and
future needs through effectively managing
the supply base, utilizing a process
orientation in conjunction with cross-
functional teams to achieve the
organizational mission

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 ISM’s Definition

 The identification, acquisition, access,

positioning, and management of
resources and related capabilities an
organization needs or potentially needs
in the attainment of its strategic
objectives

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 Defining Supply Management
Strategic
Orientation

Cross
Supply Base
Functional
Management
Groups

Process-
Driven
Approach
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 Supply Management
 Strategic responsibilities
 Activities that have a major long-term impact on
firm performance
 Aligned with the overall mission and strategies of
the firm
 Managing the supply base
 Work directly with suppliers to provide world-class
performance
 A supercharged version of purchasing

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 Supply Management
 Process approach
 Identifying, evaluating, selecting, managing, and
developing suppliers to improve performance
 Move across functional area boundaries
 Cross-functional
 Sharing information
 Suppliers as an extension of the buying company

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 Supply Chains and Value Chains

 Supply chain orientation

 Higher level recognition of the strategic value
of managing operational activities and flows
within and across a supply chain
 Value chain
 Primary and secondary support activities that
can lead to competitive advantage

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 Supply Chains and Value Chains
 Supply chain
 Set of 3 or more organizations linked directly
by 1 or more of upstream or downstream flows
of products, services, finances, and information
from a source to a customer
 Subset of the value chain

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 The Extended Value Chain
• Firm infrastructure
Support • Human resource management
Activities • Technology development
• Purchasing
Materials/Services Information/Funds/Knowledge

Customers
Suppliers

Inbound Outbound Marketing Customer

Operations
Logistics Logistics & Sales Service

Primary Activities Exhibit 1.2

Materials / Physical Distribution /

Supply Management Channel Management

Total Supply Chain / Total Logistics Management

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 Supply Chains vs. Value Chains

 Supply chain management

 Endorses a supply chain orientation and
involves proactive management of two-way
movement and coordination of goods, services,
information, and funds from raw material
through end user

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Supply Chain & Value Chain Management

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 Supply Chain Management

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 Cereal Value Chain Example
Grain Cereal Packaged Cereal
Farmer Processor Packaging Distributor

Packaged
Cereal
Paperboard
Grocer
Exhibit 1.3
Corrugated Packaged
Box Mfr Cereal

Wood Consumer
Labels

Lumber Label Material flows

Company Mfr
Information flows

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 The Supply Chain Umbrella

 Purchasing
 Inbound transportation
 Quality control
 Demand and supply planning
 Receiving, materials handling, and storage
 Material or inventory control

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 The Supply Chain Umbrella

 Order processing
 Production planning, scheduling, and
control
 Shipping/Warehousing/Distribution
 Outbound transportation
 Customer service

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 Enablers of Purchasing and SCM

View the supply chain Use data from visible

Centrally-led supply Demand planning
holistically sources
teams
Manage critical Order commitment, scheduling,
Executive responsibility for and production management Quantify what creates
relationships
value
Human
Analyze competitive Organizationa
coordinating purchasing and
supply chain activities Information
markets
Distribution and
transportation scheduling Measurement
Use goals that change
Resources l Design
Collocation of supply Technology over time
Engage in fact-based personnel with internal
customers Material replenishment
decision making Rely on benchmarking to
establish performance
Practice advanced cost Cross-functional teams to targets
Reverse auctions
management manage supply chain
processes Link to business goals
Understand e-business Requisition to pay and objectives
systems Supply strategy coordination systems
and review sessions between
Feature efficiency and
business units
Analyze big data Intranets effectiveness measures

Executive buyer-supplier
council to coordinate with Assign ownership and
Utilize mobile devices suppliers Webinars and podcasts accountability

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 Capable Human Resources
 Supplier relationship management
 Total cost analysis
 Purchasing strategies
 Supplier analysis
 Competitive market analysis
 Need for close collaboration with suppliers
 Need for close internal coordination

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 Proper Organizational Design

 Assessing and selecting structure and

formal system of communication
 Division of labor
 Coordination
 Control
 Authority
 Responsibility

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 Real-Time Collaborative
Technology Capabilities
 Supply chain planning software
 Improve forecast accuracy
 Optimize production scheduling
 Reduce working capital costs
 Shorten cycle times
 Cut transportation costs
 Improve customer service

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 Real-Time Collaborative
Technology Capabilities
 Supply chain execution software
 Obtain materials
 Manage physical flows
 Lean supply

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 Key SCM Technologies

 Capture and share real-time or near real-

time data across the supply chain
 Global positioning systems (GPS)
 Internet-based systems
 Bar codes
 Radio frequency identification devices (RFID)

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 Right Measures and
Measurement Systems
 Roadblocks
 Too many metrics
 Debate over the correct metrics
 Constantly changing metrics
 Old data

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 Right Measures and
Measurement Systems

 Overcoming roadblocks
 Know what to measure
 Have a process in place to measure it
 Have accessibility to the right data

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 Why Is Measurement Important?
 Support fact-based decision making
 Communicate requirements throughout the
supply chain
 Improve future supplier performance
 Recognize outstanding performance
 Link critical measures to desired business
outcomes
 Determine if new initiatives are working
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 Evolution of Purchasing and SCM
 The early years
 1850 – 1900
 Growth of purchasing fundamentals
 1900 – 1939
 The war years
 1940 – 1946
 The quiet years
 1947 – Mid 1960s

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 Evolution of Purchasing and SCM

 Materials management comes of age

 Mid-1960s – Late 1970s
 The global era
 Late 1970s – 1999
 Integrated supply chain management
 The 21st century

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 Looking Ahead

 Section 2 – Purchasing Operations and

Structure
 Section 3 – Strategic Sourcing
 Section 4 – Strategic Sourcing Process
 Section 5 – Critical Supply Chain Elements
 Section 6 – Future Directions

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