sourcing draft

Why is purchasing/SCM so important?

1.) Value / Savings

2.) Relationships / Innovation

3.) Quality / Reputation

4.) Reducing Cycle Times (must be faster)

5.) SC Risk

6.) Econ Impact / Competitive Advantage

Supply Chain

Global network of organizations and activities involved in designing, consuming, and disposing of goods and services

Integrated Logistics

the glue that holds the SC together

- movement/ sharing of resources: financial, material, information

Supply Chain Management

Management of processes and relationships in a SC

- collaborating to leverage strategic positioning of resources/improve efficiency

- sourcing, procurement, conversion, logistics, services

How much is outsourced?

80% outsourced

Purchasing

Place orders and chase late parts

Purchasing/ Sourcing

Responsible for both direct/indirect materials & services

Sourcing

- selection of suppliers for goods/services

- evaluation/awarding of contracts

SCM chart

materials --> supply network --> integrated logistics/enterprise (procurement/manufacturing/customer accommodation) --> market distribution --> consumers

Commodity Management

strategic sourcing and SCM of specific groups of purchases from *suppliers*

Category Management

Strategic sourcing and SCM of specific groups of purchases by *customers*

Extended value chain/extended enterprise

Tier 2 and below suppliers and customers.

- Supplier LTAs can be both direct and indirect (such as with raw materials)

Who is responsible for all tiers of the suppliers?

All of SCM

Why control a multi-tier supply chain?

- Control the spending

- Cut down costs for tiers

- Control product quality

- Control product

Tier definitions

tier 1: directly pay/buy from for final product

tier 2: suppliers/buyers of tier 1

tier 3: suppliers/buyers of tier 2

reverse logistics

The area of logistics that involves bringing goods back to the manufacturer because of defects or for recycling materials

- No longer left to right

- Any SC ends with final customer

Purchasing History

P1: Early Years (1850-1900)

- Railroad focus

P2: Growth of Purchasing Fundamentals (1900-1939)

- Looking for qualified people/ standardization

P3: The War Years (1940-1946)

- Emphasize execution to college programs

P4: The Quiet Years (1947-1960's)

- Satisfy customer demands

P5: Materials Management (1960's - 1970's)

- Material system focus (Increase in Price bcuz of Vietnam)

P6: Global (1970's to 1999)

- Rapid technology change with comptetion

P7: Integrated SCM (2000+)

- Disputes to cooperative supplier relations

4 SCM Enablers for P6 & P7

1.) HR

- Providing qualified people

2.) Organizational Design

- Exec sponsor, co-located, staffed

3.) IT (*Greatest Enabler*)

- Electronics that are real-time enablers

4.) Measurement

- Metrics, quantifiable data

7 SCM Initiatives

1.) Out-source for cost benefit

- Get it faster, cheaper, and better

2.) Supplier Rationalization to Reduce Supply Base

- Only send to one supplier instead of many

3.) Commodity/ Category Management & Strategic Sourcing

- multi-tier management

- grouping purchases for price leverage

4.) IT for Transparency driving business analytics

- adapt to environment

5.) Collaboration with Suppliers

- Long-term relationships

6.) Bottom Line Performance

- Securing innovation

- Reduce costs and generate revenue

7.) Growing importance of Procurement as Integrator

- Collaborate (external) and become cross-functional (internal)

Rationalization

Reorganization of a company in order to increase its operating efficiency

Why a supplier does something:

- For profit

- Because they have a bad cash flow

Purpose of business

Increase profit:

- Increase revenue (LONG-TERM)

- Decrease costs (SHORT-TERM)

Downsizing

Doing more work with less resources

BIG 3 **from buyers POV (in order of importance):

1.) Quality

2.) Delivery

3.) Price

roles to balance:

strategic, tactical, overall goals

Overall Goals of Purchasing

- Supply Continuity - (Do my customers have all the things they need?)

- Manage purchasing process

- Supply Base Management

- Engage stakeholders

- Develop sourcing strategies - (Where do we buy?)

Types of purchases

- Raw materials

- Semi-finished products and components

- Finished products

- MRO: maintenance, repair, & operating items

- Development hardware

- Services (people)

- Capital equipment

- Transportation, third-party logistics providers

- Centralized copiers/ travel (Car rental)

NRE $

non-Recurring Engineering: One-time engineering design fees

Purchase Orders (PO)

Contract that is originated from the buyer --> supplier

Quoting Process

1.) RFI: request for information

2.) RFP: request for proposal

3.) RFQ: request for quote

RFI

Request for information

Request for supplier to describe their business or any other info the buyer wants to know

RFP

Request for proposal

supplier estimate of how and price

RFQ

Request for quote

supplier firm pricing & delivery dates (Used as basis for creating PO)

Why wouldn't you send out many RFQ at the same time?

You will basically be playing the field, making it less likely that the specific companies will want to have to go through this every time you want a product

- Companies will stop working for you if they give you a quote and you keep turning them down

P2P Process

Procure To Pay Process

1.) Buyer gets forecast & plan requirement

2.) Buyer gets clarification

- Formal: Identify/authorize the needs for PO

3.) Supplier Identification & Selection

- LTA (long term agreement)

- Bid (RFI/RFP/RFQ)

- May need to negotiate

4.) Approval, Contract, PO Prep

- Release and receive purchase requirements

5.) Receipt and Inspection

6.) Invoice Settlement and Payment

- Record Maintenance

- Measure Supplier Performance

Approved Supplier Lists

supplier must be on list for buyer to purchase from + issue PO

- Hard to get a new supplier because costs money to maintain relationships

Price vs. Cost

Price is the amount a buyer pays

Cost is amount seller pays to produce a good

formal order triggers

What tells a buyer when to initiate a PO:

1.) MRP Schedule (Material Requirements Planning)

2.) Reorder point system: System Min/ Max

3.) Stock Checks: Visual Min/ Max (Bulk)

4.) Pull System Trigger (JIT)

5.) Title transfers for Consignment / Vendor Managed Inventory

6.) Manual Purchase Requisition

- For parts and material

7.) SOW (Manual Statement of Work)

- For services

Manual Purchase Requisition

A request document for parts and materials - PO trigger

Manual SOW for PO trigger

Statement of Work

- A request document that states the services done by the company

Consignment

supplier owns inventory in buyer's facility:

- Supplier is still responsible for inventory until it is used by buyer.

- Supplier pays for inventory costs

- transfer trigger later

VMI

vendor managed inventory:

Consignment + supplier labor

- suppliers in your facility handling material, re-stocking, re-ordering

ERP System

IT software system that enables organization to integrate its business processes using a single operating database

- costly and slow

Alternate procurement ideas from ERP:

- Online Purchase Agreements (Staples)

- Procurement Cards: purchase low value items rapidly (Credit Card rewards)

- Blanket Purchase Orders (Promised $ to spend with company)

- LTA (3 to 5 year agreements)

E-Procurement

Suite of IT electronic tools to achieve efficiency in purchasing transactions and documentation

Maverick Buying

back-door buying:

Internal customers that negotiate and purchase items outside the purchase process

spot buy

Unplanned purchase in the market

Blanket PO

- Don't have to go through approval process for each

- Promised money to spend with the company

EDI

Electronic Data Interchange:

electronic transfer of purchase documents between buyer/seller

- larger firms

packaging slip

generated by supplier to detail contents of a shipment

POD

proof of delivery

bill of lading

Generated and delivered by the transportation provider

- **Used for Proof of Delivery (POD)

reactive

order --> make --> deliver at 30 days ago

proactive

order 30 days future --> make --> deliver 60 days future

How is IBM "Closing the Loop"?

By stopping maverick buying

PM success factors

- on time

- on budget

- delivered to customer expectation

- w/out disturbing main work flow of group

COS

condition of satisfaction

- minimum acceptable project outcome

WBS

work breakdown structure - activities/events of project

gantt charts

good for smaller projects

slack (CPM/PERT)

LS-ES

LF-EF

waterfall approach

Predictive, plan-driven

- fixed: scope

- estimated: resources, time

agile approach

Adaptive, value-driven

- fixed: resources, time

- estimated: scope

stacey matrix

waterfall:

- simple (cause -> effect)

- complicated (cause ----> effect)

agile:

- complex (cause

disruption/innovation:

- chaotic (cause not equal to effect)

agile software development

individuals/interactions > processes/tools

working software > documentation

customer collaboration > contract negotiation

responding to change > follow a plan

- scrum framework

Integration (internal)

- Internal: Departmental (cross functional)

process of bringing different groups together to work jointly and concurrently

Integration (external)

- External: Collaboration with Suppliers, Customers, Gov't and Community

process of bringing different groups together to work jointly and concurrently

What is the single most important element that senior executives look for?

Relationship Management

Relationship Management is the ability to:

- Act ethically

- Listen Effectively

- Communicate

- Use creative problem solving

Roles of Quality Assurance in Communication Flow

- Supplier quality performance feedback

Roles of Engineering in Communication Flow

- Early product design support

- Developing material specs

Roles of Legal and Environmental Safety in Communication Flow

- Contracts

- IP

Roles of Marketing in Communication Flow

- Early visibility to new products/ product promotion

Roles of Suppliers in Communication Flow

- Information Sharing

- Early Design involvement

- Innovation

- Sustainability

Roles of Accounting and Finance in Communication Flow

- Total cost model development

- Inventory Measurement

Roles of Operations in Communication Flow

- Generation of material requirements

- Sales and operations plan

- Supplier payments

Joint Ventures

Sharing of investment cost for rights of revenue streams

- Formal/legal action

Why firms don't close buyer-seller relationships

1.) Confidentiality

2.) Limited Interest by Suppliers

- Ex: I don't want to lose my other customers

3.) Legal barriers

4.) Resistance to change

- Don't want added work/cost of finding other sellers

5.) No alignment of Goals, Benefits, and Metrics

Traditional vs. Collaborative Approach

Traditional:

- The buyer would get all savings; supplier small amt of savings

- With a problem, buyer would get new supplier

Collaborative:

- Win-win shared rewards

- With a problem, help supplier fix it

Is Consignment and VMI considered only a win for the buyers?

No; If set up properly, both buyer and supplier can win

Organizational design

Process of creating a formal structure of control to achieve organizational goals

Why is quality outside of the SCM roles within Manufacturing?

Because of the use of an unbiased opinion while checking the quality of the products

How high up would you report in purchasing?

The higher the purchasing is in the corporate structure, the higher the role plays

- With it being higher up, indicated status and influence

Commodity/Category Manager: strategic or operational?

Strategic:

- Manage relationships with critical suppliers

- Develop electronic purchasing systems

- Collect and manage market intelligent data

- Negotiate company-wide supply contracts

- Manage risk monitoring programs

Buyer: strategic or operational?

Operational (tactical):

- Manage transactions with suppliers

- Use e-systems to obtain info about items

- Provide supplier performance feedback

purchase authority

ability to commit to contract

T&C

terms and conditions

centralized purchasing

A single buyer/organization is responsible to purchase across the firm

Decentralized Purchasing

Multiple buyers from different locations/organizations/managers (each with purchase authority) buying the same item

Advantages of Centralized Purchasing

1.) Gain leverage in negotiating

2.) Reduce duplication of PO's and Policies

3.) Aligned Plans and Strategies

4.) Coordinated corporate purchase processes and IT Systems

5.) Specialize development of people

- Emphasizes support, integration, and coordination of different tasks (NOT strict control)

Advantages of Decentralized Purchasing

1.) Speed and Responsiveness to Operations

2.) Understanding unique Operational Req.

- Ex: Put all teams in the same location

3.) New product development support

- Purchasing is near development location

4.) Ownership and control

- Same team and commitment

- Ops does the hire, reviews and fires of purchasing staff

Factors for Centralized or Decentralized Purchasing

- Firm's overall strategy (Responsive or efficient)

- Similarity of purchases within the firm (If similar then use centralize)

- Total purchase Dollar expenditures (Big $ then centralize)

- Listen to management's philosophy

What is better: Centralized or decentralized?

Hybrid is most popular

- Centralized is gaining more popularity bcuz of IT

- Centralized: Similar items, big $

- Decentralized: Unique requirements

What is the shift in the organizational structure?

Shift from a vertical (power) structure to horizontal (collaborative)

Who is purchasing's customer?

Touches EVERYONE in some way

History of sourcing

Goods -> Services -> Solutions -> Innovation

Developing an Operations Strategy

customer, values, capabilities:

1.) Critical Customer

- Critical to firm's success and receives firm's focus

2.) Value Proposition

- Tangible and intangibles that customers expect from a firm

3.) Capabilities

- what a firm uniquely does well

core capabilities

unique to firm, difficult for competitors to imitate

Difference between Ops and SCM

Ops - Internally Focused

SCM - Everything Else

Innovation Management importance

Critical to on-going long term survival of the firm

- responding to external OR internal

Fast Innovators

Innovators who get products to the market quickly

- React immediately to competitor actions