SOURCING E1

Why is Purchasing/SCM so important?

1. increasing value and savings

2. building relationships and driving innovation

3. improving quality and reputation

4. reducing cycle times

5. managing SC risk

6. generating econ impact and competitive advantage

supply chain

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

supply chain management

managing the processes and relationships in SC, consists of firms collaborating to leverage STRATEGIC positioning of resources and to improve operating efficiency.

Integrated logistics

glue that holds SC together, movement/sharing of resources includes financial, material and info

Purchasing/Sourcing

a functional group responsible for supplier selection and buying both direct and indirect materials plus services

Purchasing

place orders and chase late parts

sourcing

where/by whom, evaluation and awarding of contracts

commodity mgmt

strategic sourcing and SCM of specific groups of purchases from SUPPLIERS

category mgmt

strategic sourcing and SCM of specific groups of purchases by CUSTOMERS

Extended value chain

involves tier 2 and below suppliers and customers. supplier long term agreements can be both indirect and indirect

SCM Chart; What is the direction?

circular direction, look at slides

Multi-tier supply chain

-control more spend

-control product quality, chips back to mill, engines back to mfg

-safety stock agreements

4 SCM Enablers to Enablers p6 and p7 level

1. human resources

2. organizational design

3. info tech (GREATEST ENABLER)

4. measurement

Purchasing History

p1 - railroad 1850-1900

p2- standardizing 1900-1939

p3-war years 1940-1946

p4-quiet years 1947-1960

p5-material mgmt 1960-1970

P6 GLOBAL 1970-1999

P7 INTERGRATED SCM 2000s+

Evolution of p6 and p7

1. outsource for cost benefit

2. supplier rationalization to reduce supply base

3. commodity/category mgmt and strategic sourcing

4. IT for transparency

5. Collab with suppliers

6. bottom line performance

7. growing importance of procurement as integrator

ESSAY QUESTION LOOK AT SLIDES FOR MORE

ERP: Enterprise Resource Planning

integrated mgmt of core business processes

MRP:

Material Requirement Planning

EDI

Electronic Data Interchange

P2P: Procure to Pay

process of obtaining and managing materials to manufacture

Leverage

amount paid for in borrowed money for purchase

Rationalization

reorganizing process/system to be more logical

IBM Article

Issues: -difficulty of controlling and capturing spend at IBM

-controlling process enables measurement

-IBM closing loop to stop decentralized spending

HOW? lock down on check requests, wire transfers, can't get reimbursed, capture RT data

Commodity Strategy

• grouping suppliers to reduce cost/risk, base on industry and complexity

• can be broken down further by size, complexity, part etc.

Category Strategy

• channel strategies are set by CUSTOMER

• CUSTOMER FOCUS

• purpose: maximize total value by leveraging internal and external resources and capabilities

• Category = commodity + channel + OM

• link it all together

Category strategy Examples

- simple SC Linkage: Zara Fast Fashion (4 weeks from catwalk to retail)

-Dell: drop ship monitors

- Amazon at P&G distribution center for diaper drop-ship

Diff between Price and Cost?

price: what you pay for the product

cost: EVERYTHING ELSE!!!!!! (all that is needed to make up a product)

Traditional Buyers stress 3 things (in importance)

1. Quality

2. delivery

3. price

4. service (sometimes)

Buyer/Customer wants:

-right product

-right print

-right time

-right cost

-right place

-right condition

-right quantity

-right source

3 Roles to Balance

Overall goals

Strategic: longterm

Tactical: less than a year

Overall Goals

Supply continuity

manage purchase process

supply base management (outsource?)

engage stakeholders

Strategic Goals

Demand mgmt

cost mgmt

procure to pay improvement

supplier relationship mgmt

Tactical Goals

forecast and planning

receipt and inspection

invoice payment

records maintanance

improving p2p process

types of Purchases

direct and indirect include:

1. raw material

2. semi-finished products and comp

3. finished product

4. MRO: maintenance, repair, ops supplies

5. development hardware (one of a kind tech)

6. services: painting, lawn etc

7. capital equipment

8. transportation

9. Centralized: copiers/travel

Purchase Orders

contract originated from the buyer to supplier

includes:

-first page with item, quantity, due date, price per unit, MRE, tooling/fixture $$$

- terms and conditions

The Quoting Process

RFI request for info... RFP request for proposal... RFQ... request for quote

RFI

used to screen suppliers, request for supplier to describe business, could send as many as you want but then will be bothered by them after you show interest

RFP

request for supplier to provide estimate of how and price, now pushed towards engineering and marketing

RFQ

request for supplier to provide from pricing and delivery dates, used as basis for creating a PO, don't want endless RFQ

Procure to Pay (P2P) Process

1. buyer gets forecast and plan requirement,

2. buyer gets need clarification

3. supplier identification and selection (from approved supplier list)

4. Approval, contract and PO prep

5. receipt and inspection

6. invoice settlement and payment

What is an "approved" supplier list?

lists of all suppliers that a buyer can purchase from, supplier MUST be on list, new supplier process is often extremely difficult

Supplier Rationalization

bigger spend=more leverage, have less suppliers so the one you have high leverage with

Formal Order Triggers

When should a buyer initiate a PO:

1. MRP schedule

2. reorder point system

3. stock checks; visual min and max in bin

4. pull system trigger

5. title transfers to consignment/VMI

6. Manual Purchase Requistion: for parts and materials

7. manual statement of work (SOW)= for services

Consignment

Supplier still owns the items until a later time, EX: Dell owns revenue of computer 60 days before they will pay their supplier for it

Vendor Managed Inventory

supplier gives labor to products EX: coke stocking coke bottles at Kroger stores

p2p and ERP systems are RIGID

1. part print in system

2. new part setup: material master

3. BOM setup: get requirements

4. PO placed / released

5. PO approval by supplier

6. supporting docs

7. quality:

8. get on ship list

9 receive in well

10. clear inspection

11. store in inventory

12. pull to floor

13. payment terms

REQUIRES SO MANY PPL AND TRANSACTIONS

ERP are Costly, What are alternatives?

-online purchase agreements (for office supplies)

- pro cards (credit cards)

-blanket purchase orders (not specific, I'm spending ___ with you"

- LTA (negotiate for price over up to 5 year period)

Backdoor buying

internal customers that negotiate purchasing outside of process

spot buy

unplanned purchase, avoid this its expensive

packing slip

generated by supplier to detail contents of shipment

bill of lading

generated and delivered by transportation provided, used for Proof Of Delivery

EDI

electronic data interchange, involves electronic transfer of purchase docs between buyer and seller,

Apple iPod Article

ways to reduce risk: build up inventory and spread out areas where key factories are, risk management is based on determining the impact and the probability of event happening... (HUGE impact, Low probability)

Integration

the process of incorporating or bringing together diff groups, functions, orgs and formally or informally, physically by IT to work jointly or concurrently on a common business assignment

internal--- cross functional

external--- collaboration with suppliers, customers, gov

What is the most important thing Senior exec looks for?

relationship management

the ability to

- act ethically

-listen

-communicate

-use problem solving

Cross-Functional Teams (internal)

-useful when no single function has the resources to solve a problem that affects more than one department

-purchasing lacks resources/control for tech, legal, quality control, capital $$$, IT, ads, healthcare

Purchasing Communication Flow

-purchasing is linked to all functions in business (engineering, ops, finance, suppliers, marketing

-HR, consumers, IT, gov, community (not on chart)

Collaboration (external)

process by which two or more parties adopt a high level of COOPERATION to maintain a relationship over time

Why do firms not want close relationships with their suppliers?

1. confidentiality: financial and technical

2. limited interest by suppliers (wouldn't want to upset other customers by being closer with one than another)

3. legal barriers: anti-trust laws

4. resistance to change (just want to make profits, don't want to have so much extra work to build relationship)

5. no alignment of goals, benefits

Traditional Approach (to relations)

-multiple sources play off eachother

-closed/cautious

-have a problem... get a new supplier

-"big stick"

-buyer takes all savings, suppliers will hide savings

-design controlled by buyer

-no joint improvement efforts

-disputes will be resolved by buyer

-no exchange of info

-buyer inspects quality at receipt

Collaborative Approach (to relations)

-one of few preferred suppliers for each major item

-trustworthy

-have a problem... help supplier fix

-win win and share rewards

-design is joint efforts

-conflict resolution mechanisms

-open and complete communication exchange

-quality is designed into product early on

Collaborative Supplier Efforts

1. escapes and quality issues (resolved early)

2. late hardware

3. cost reduction (two way exchange of ideas

4. supplier development: (training)

5. new product development

6. joint training (suppliers attending company workshops)

7. co location of employees (suppliers at site of buyer or vice versa)

8. SC integration: inventory, transportation

Drop Ship

retailer doesn't keep goods in stock but transfers them directly to a consumer

organizational design

process of assessing and selecting the structure and formal system of communication, division of labor, coordination, control, authority, and responsibility required to achieve org goals and obj

SCM Roles within MFG

-procurement manager, buyer, expeditor

-commodity/category manager

-spares supervisor/mger

-materials supervisor

-WH supervisor

-assembly supervisor

-quality supervisor

-erp analyst

-compliance

-back office admin

Who should you report too CEO or vp of OPS???

- can be difficult to report to higher exec (CEO), buttttttt only reporting to VP of Ops means they only care about meeting prod. goals and no strategy goals

Commodity and Category Manager

strategic sourcing, more strategic role, manage relationships, develop ERS, negotiate company contracts, manage commodities,

Buyer

operational, more tactical, manage transactions, source items to ops unit, generate and forward material releases

Centralized Purchasing

a single buyer/org is responsible to purchase across the firm, based on division, product, plant or region

Decentralized purchasing

multiple buyers from diff locations/orgs/managers, each has purchase authority buying same item

Purchase Authority

how much money you can sign to the company, authority to commit to a company contract

Advantages to Centralized Purchasing (ESSAY)

1. consolidate purchase volumes: gain leverage

2. Reduce duplication: multiple purchase order placement

3.Aligned plans and strategy

4. one system for IT

5. people development: specialized

6. change mgmt is coordinated

should emphasize Support, integration, and coordination not CONTROL

Advantages to Decentralized Purchasing (ESSAY)

1. speed and responsiveness

2. understanding unique operational requirements (co-location)

3. new product development support

4. ownership and control

ex. walmart had to decentralize across the globe, bcuz in India walmart very diff from american walmart

Overall Factors for Centralized vs Decentralized

1. firm's strategy: responsive (decentralized) vs. efficient (centralized)

2. similarity of purchases (jet engine vs. air conditioner)

3. total purchase dollar expenditures (high volume/high $$$ will be centralized)

4. management philosophy

which is better central vs decentralized??

• centralized for common items

• decentralized for unique requirements

• hybrid is most popular, centralized is growing due to IT

Organization of the Future entails:

-move from vertical to horizontal (managed across groups)

-shift from commodity only focus to end item

Who is Purchasing Dept customer?

-final consumer

-ops

-sales

-engineers

-quality

-suppliers

basically everyone in some way

AR01 Review

• history: goods to services to solutions to innovation of sourcing

• sourcing now includes solving problems, competitieve advantage, relationship mgmt and risk mitigation

• issues include: change is difficult, history culture holding back

AR02 Review

25cent part stops production of 10,000 snowmobile

how to solve: making longer committments and stock piling so you no longer have issues with shortages

Supply Chain Risk with Sourcing

1. need for continuity

2. increased unplanned price

3. extended lead time (example: toyota car)

4. panic buying

5. bullwhip

6. all connected

3 pieces to developing ops strategy

• critical customer: critical to firms success and receives firms focus

• value prop

• capabilities: what a firm does well

• fit is defined as the alignment with capabilities, value prop and the critical customer

Capabilities

-unique and superior abilities based upon the firms routines, skills and processes

-core capabilities: enable firm to meet customer expectations and are difficult for competitors to initiate (rare or unique, hard to imitate, valuable, few substitute)

Innovation Management

-accomplished through more effective products, processes, services and technologies or business models

- critical to survival of firm

-managing innovation is the org responding to external or internal opportunities, workers always responding to product development, marketing and mfging

types of innovators

fast- get things to market very quick Ex: Zara, Samsung

high quality- more cautious, emphasizing high quality

efficient-fund new design, development and fulfillment with lowest cost, developed less quickly at low price

mimics

Examples of Innovation

1. improved product/service differnetion

2. quality

3. sustainability

4. speed (delivery, time to market, time to profit)

5. lower cost

6. reduced risk

7. efficiency/effectiveness

Why In source?

- control/ visibility/ flexibility/ delivery

-economies of scale/synergy

-core competency

why outsource?

-capital requirement

-free to pursue other enablers

-cant make it affordable

-secure innovation

Product Life cycle

launch: intro to market and may require SC process innovation

growth: increase demand, flexible supply chain, more data from customers, increase standardization

maturity: demand and product stabilization, increase importance of cost

decline: change tech or customer needs, declining demand, potential phase of replacement product

How to extend the product life cycle through sourcing?

-design core comp in-house near customer and mfg

-make in-house the latest core tech

-domestic supplier used

-near shore (mexico)

-low-cost sourcing (china etc.)

-through each step labor and OH rates decrease, helps the firm remain competive

SC innovation: design for manufacture

design the product to make it easy to produce to reduce cost

SC innovation: design for assembly

design the product to minimize the # of components ex: toy industry

SC innovation: design for product serviceability

design for ease of assembly, disassembly and component reuse ex: car oil changes being easy

SC innovation: design for 6 sigma

design to eliminate failures, improve consistency, and reduce costs, always improving

SC innovation: design for sustainability

designing the product to reduce its environmental impact, focus on sustainability

Traditional Vs Collaborative Design

traditional relationship: buyer owns the ip/design and shows supplier to make(white box)

(gray box)

collaborative: engineers come together from both buyer and supplier, means buyer can't take and give to another supplier, we don't really know who owns the IP

(black box)-supplier owns total design, can't give this design to another supplier

Value Mgmt: Joint Design

1.idea generation

2. assessment

3. concept development

4. design

5. prototype

procurement and suppliers must get involved in beginning

issues with SC innovation

1. confusion about role of internal resources

2. new and complex responsibilities for procurement

3. alignment of supplier and company objectives

4. developing a supplier into a competitor (how much info do you give them?)

5. how to create, nurture and develop value creation

6. need for governance but still support entrepreneruship

7. ownership of IP

8. balancing the trade offs

(efficient vs responsive)

(cheap vs customized)

(quality vs price)

How to secure SC innovation- ESSAY

1. define goals

2. clearly define core competencies

3. procurement moves from price to cost to value and profit

4. systematic approach to select suppliers

5. supplier development (help suppliers fix problems)

6. standardize management of suppliers (building trust!!!)

7. have formalized process across the value chain network (involving suppliers early, must be collaborative)

What happens if Engineer brings procurement in after already developing supplier contract?

1. engineer may select the wrong supplier

2. high switching costs

3. need to bring in suppliers during idea generation

(no leverage, specs and designs are locked down, all tooling and prototype money has been spent, too late for competition)

Part Shortages

everyone impacts one another and has an agenda, info is power, difficult to always determine fault.

Tactical (short term) Actions during Part Shortage

1. fix buyer releases

2. understand "dropdead" dates

3. daily updates

4. visit the supplier

5. break away- (ordering up to the ones you need to then have them all catch up)

6. hardward from alt sources

7. facilitate/ pay expediting

8. execute by EOD