Supply Chain Chapter 5: Purchasing Management

Procurement

The process of selecting and vetting suppliers, negotiating contracts, establishing payment terms, and the actual purchasing of goods and services.

Procurement is the ____ term within which the action of purchasing can be found

Umbrella

Purchasing

The action of obtaining merchandise, capital equipment, raw materials, services, or maintenance, repair, and operating (MRO) supplies in exchange for money, or its equivalent.

Purchasing can usually be described as the ____ function of procurement for goods or

services

Transactional

Supply Management

The identification, acquisition, access, positioning, and management of resources an organization

needs, or potentially needs, in the attainment of its strategic objectives

Purchase Requisition

An internal document that defines the needs for goods and services

Purchase Order

An external document that's issued from a buyer to a seller to acquire goods and services

When does a Purchase Order become legally binding?

When it's accepted by the supplier

E-Procurement

A business-to-business (B2B) purchase and sale of supplies and services over the Internet.

Merchants

Wholesalers and retailers who purchase for resale

Industrial Buyers

Individuals within an organization who purchase raw materials for CONVERSION into products, and/or purchase services, capital equipment, and MRO supplies.

Contracting

Term often used for the acquisition of services

Request for Information (RFI)

A standard business process whose purpose is to collect written information about the capabilities of various suppliers

Request for Proposal (RFP)

A detailed capabilities document used to determine a supplier's capability and interest in the production of a product or service

Request for Quote (RFQ)

A document used to solicit quotes or bids from interested and qualified suppliers

Purchasing Process Steps

1. A need is identified, and a Purchase Requisition is issued

2. Obtain authorization as necessary

3. Identify and evaluate potential suppliers

4. Make supplier selection

5. Purchase Order (PO) is created and delivered to the supplier.

6. Supplier confirmation of the Purchase Order

7. Fulfillment

8. Receipt of Goods

9. Invoice and Reconciliation

10. Payment

11. Close out the Purchase Order

12. Analysis

Automation Provides ____ ____ of all purchases

increased visibility

Time Savings (e-Procurement)

A reduction in the time between need recognition and the release and receipt of an order

Cost Savings (e-Procurement)

Lower overhead costs in the purchasing area

Accuracy (e-Procurement)

A reduction in errors. A virtual elimination of manual paperwork and paperwork handling

Real-Time (e-Procurement)

Improved communication both within the company and with suppliers

Management (e-Procurement)

Purchasing personnel spend less time on processing of purchase orders and invoices, and more time on strategic value-added purchasing activities

Mobility (e-Procurement)

Access virtually anywhere

Trackability (e-Procurement)

Real-time status tracking

Profit Leverage Effect

A decrease in purchasing expenditures

directly increases profits before taxes

A ____ in purchasing expenditures

directly ____ profits before taxes

Decrease, Increases

Return on Assets Effect

A high ROA indicates managerial prowess in generating profits with lower spending

Inventory Turnover Effect

Increased inventory turnovers indicate optimal utilization of space and inventory levels, increased sales, avoidance of inventory obsolesce

Inventory is an asset but it is also

Capital tied up

A high turnover ratio is ____ because it means the company is generating sales efficiently to sell inventory.

Beneficial

A low turnover ratio is ____ as it means the company is not selling

through products efficiently.

Unfavorable

Total Cost of Ownership (TCO)

The sum of all the costs associated with every activity in the supply stream of a product.

Although the purchase price of an item remains

very important, it is only ____ ____ of the total cost of ownership.

One Part

4 Elements of Cost

Quality

Service

Delivery

Price

TCO Formula

Quality + Service + Delivery + Price = TCO.

What is the main TCO insight?

Acquisition cost is often a very small portion of TCO

Quantity Discounts

Discounts offered to encourage customers to buy in larger amounts

Cash Discounts

Reductions in price to encourage buyers to pay their bills quickly

Value Added Services

Offering extra services like special deliveries

Administrative Expenses associated with procurement

Screening potential suppliers

Negotiation

Order preparation

Order transmission

Poor Supplier Quality

Costs related to defective finished goods

Make

Producing materials or products internally

Outsourcing

Buying materials, components, or products

from a supplier instead of making them internally

Make Vs Buy is a ____ decision

Strategic

What are the 3 Pillars of the Make vs Buy Decision?

Business Strategy, Risks, and Economic Factors

Business Strategy (Pillar 1)

includes the strategic importance to the company

of the product or service that is being considered for outsourcing, as well as the process, technologies, or skills required to make the product or deliver the service.

As a rule, it is desirable to choose ____ capabilities when a product or a function is considered a ____ ____

In-house, Core Operation

Risks (Pillar 2)

Includes the lower quality, reliability, and predictability of outsourcing compared to manufacturing it yourself and risks of going with certain suppliers

Economic Factors (Pillar 3)

Includes the impact of outsourcing on capital expenditures, return on invested capital, and return on assets as well as savings achieved from outsourcing

What are the 2 key factors of the Make vs Buy Decision?

Qualitative and Quantitative factors

Qualitative Factors

Subjective factors, like reputation, quality, and reliability, and how they impact the decisions on suppliers and customers

Quantitative Factors

Incremental costs of either making or purchasing the item

Protecting proprietary technology is a _____ reason for making

Qualitative

Not having a competent supplier is a ____ reason for making

Qualitative

Having more control over lead time is a ____ reason for making

Qualitative

Using existing idle capacity is a ____ reason for making

Qualitative

Having better quality control is a ____ reason for making

Qualitative

Having an overall lower cost is a ____ reason for making

Quantitative

Having control of transportation and warehousing costs is a ____ reason for making

Quantitative

Cost Factors for Make Analysis

-Direct labor expenses

-Incremental inventory-carrying expenses

-Incremental capital expenses

-Incremental purchasing expenses

-Incremental factory operating expenses

-Incremental managerial expenses

-Delivered purchased material expenses

-Any follow-on expenses resulting from quality and associated problems

An item being non-strategic is a ____ reason for Outsourcing

Qualitative

Having insufficient capacity is a ____ reason for Outsourcing

Qualitative

Having a lack of expertise is a ____ reason for Outsourcing

Qualitative

Suppliers making the item with better quality is a ____ reason for Outsourcing

Qualitative

Wanting to achieve a multi sourcing strategy is a ____ reason for Outsourcing

Qualitative

Taking advantage of a supplier's brand (Brand Strategy) is a ____ reason for Outsourcing

Qualitative

Suppliers providing economies of scale for non-vital items is a ____ reason for Outsourcing

Quantitative

Having the supplier hold onto inventory is a ____ reason for Outsourcing

Quantitative

Cost Factors for the Buy Analysis

- Unit price of the purchased item

- Transportation expenses

- Incremental purchasing expenses

- Receiving and inspection expenses

- Any follow-on expenses associated with service or quality

Risks of Outsourcing

- potential loss of control

- increased reliance on suppliers

- increased need for supplier management

Benefits of Outsourcing

-Concentrate on company's core capabilities

-Reduce staffing levels

-Speed up reengineering efforts

-Reduce internal management efforts

-Improve manufacturing flexibility

In-Sourcing

Going back to In-House production due to external results not meeting expectations

Co-sourcing

-The sharing of a process or function between internal staff and an external provider.

-Using dedicated staff at an external provider that works exclusively under your control and direction

Backward Vertical Integration

A company buying or acquiring one or more of their suppliers

Forward Vertical Integration

A company buying or acquiring one or more of their customers (EX: Wholesalers)

Centralized Purchasing

Purchasing department located at the firm's corporate office makes all the purchasing decisions

Decentralized Purchasing

Individual departments or separate locations handle their own purchasing requirements

Hybrid Purchasing Approach

Centralized purchasing for products used everywhere, decentralized purchases for products used locally

Having more concentrated volume is an advantage of (Centralization/Decentralization)

Centralization

Leveraging purchase volume is an advantage of (Centralization/Decentralization)

Centralization

Avoiding duplication is an advantage of (Centralization/Decentralization)

Centralization

Specialization is an advantage of (Centralization/Decentralization)

Centralization

Having lower transportation costs is an advantage of (Centralization/Decentralization)

Centralization

Having no competition within units is an advantage of (Centralization/Decentralization)

Centralization

Having a common supply base is an advantage of (Centralization/Decentralization)

Centralization

Having knowledge of local requirements is an advantage of (Centralization/Decentralization)

Decentralization

Local sourcing is an advantage of (Centralization/Decentralization)

Decentralization

Having less bureaucracy is an advantage of (Centralization/Decentralization)

Decentralization

Reason for Global Sourcing

Opportunity to improve quality, cost, and delivery performance and exploit global efficiencies

Tariffs

Duties, taxes, or customs imposed by the host country for imported or exported goods

Non-Tariff Barriers

Quotas, licensing agreements, embargoes, laws and regulations imposed on imports and exports.

Countertrade

The practice of using barter rather than money for making global sales

Challenges of International Purchasing

1. Knowledge of international trade policies and procedures

2. Awareness and cost of required tariffs and duties

3. Difficulties in communicating with suppliers due to language barriers, varying time zones, working weeks, holidays.

4. Locating, evaluating, sourcing and expediting in global markets

5. Payments and currency management

6. Longer time spantime span for negotiations

7. The potential for cultural, political, and labor problems

8. Potentially longer transportation lead times necessitating additional inventory

9. Specific and varying documentation requirements

10. Handling legal matters and the process for settling disputes

Service Providers

Those who already have the specialized skills and knowledge to deal with international purchasing challenges

Import Brokers

Agents licensed by the government to conduct business on behalf of importers, for a service fee

Import Merchants

A person or company engaged in the purchase and sale of imported goods for profit

Trading Companies

Companies that buy products in one country and sell them in different countries where they have their own distribution networks

Government and non-profit sector purchasing is different from private industrial purchasing as the public requires ____, ____ and ____ since it is the public's money that is being spent

Openness, Visibility, Accountability

Bid

A proposal or or quotation submitted in response to a request from a contracting authority.

Competitive Bidding

A procurement process where competing suppliers bid for the right to supply certain materials or services