Fundamentals of Supply Chain Management

Supply Chain Management Overview

• Procurement vs. Purchasing

  • Procurement: Encompasses selecting suppliers, negotiating contracts, payment terms, and purchasing goods/services. It is the umbrella term for all purchasing actions.

  • Purchasing: Specifically refers to the acquisition function within procurement.

Key Components of Procurement

• Supplier Relationship Management

• Purchasing Management

• Strategic Sourcing

Purchasing Process Overview

1. Need Identification

   • Initiated by a user within an organization through a Purchase Requisition for goods/services.

2. Authorization

   • Purchase Requisitions may need multiple authorizations based on the request's nature and value.

3. Supplier Identification

   • Evaluate potential suppliers from an approved list or via an RFI.

4. Supplier Selection

   • May involve issuing RFPs or RFQs to gather bids and proposals.

5. Creating Purchase Order (PO)

   • Formalizes the intent to purchase and outlines specifications, quantities, and terms.

6. Supplier Confirmation

   • Supplier validates acceptance of PO.

7. Fulfillment

   • Supplier delivers goods as per the PO.

8. Receipt of Goods

   • Verify the condition and quantity of items received.

9. Invoice Processing

   • Supplier prepares and transmits the invoice for ordered items.

10. Reconciliation and Payment

    • Match invoice with PO and receipt, process payment accordingly.

Key Purchasing Terms

• Request for Proposal (RFP): Document for evaluating a supplier's capabilities for a customized product/service.

• Request for Quote (RFQ): Soliciting bids for standard goods/services.

• Purchase Requisition: Internal document indicating needs. Purchase Order (PO): A legally binding offer from the buyer.

Financial Significance of Purchasing

• Profit-Leverage Effect: Cost reductions increase profit significantly; more impactful than sales increases.

• Return on Assets (ROA) Effect: High ROA indicates effective management of assets.

• Inventory Turnover Effect: Increased turnover signifies efficient sales; low turnover may indicate poor inventory management.

• Total Cost of Ownership (TCO): The sum of all costs associated with acquiring a product, emphasizing that purchase price is just one part of total costs.

Make vs. Buy Decision

• Make: Producing in-house for control over quality and processes.

• Buy: Outsourcing can lead to lower costs and access to superior resources.

• Analysis: Consider both quantitative (costs, capacity) and qualitative factors (quality control, supplier reliability).

Supplier Selection Criteria

• Consider aspects like reliability, quality, cost, communication, and capacity.

• Often conducted by a cross-functional team to ensure thorough evaluation.

Centralized vs. Decentralized Purchasing

• Centralized: All purchasing decisions made at corporate level, leading to volume consolidation and specialization.

• Decentralized: Local units make purchasing decisions tailored to specific needs.

International Purchasing

• Global Sourcing: Opportunities for cost reduction, quality improvement, and access to advanced technologies.

• Considerations: Must navigate tariffs, language barriers, and international trade complexities.

Government and Non-Profit Procurement

• Governed by specific guidelines; includes competitive bidding processes.

• Bonding requirements for bidders (Bid Bonds, Performance Bonds) to ensure contract fulfillment.

Key Trends in Procurement

• Benchmarking: Assessing and adopting best practices from other organizations.

• E-Procurement: Automation improving efficiency in transactional purchasing, enabling better tracking, communication, and cost management.

Characteristics of World-Class Procurement Organizations

• Trusted advisors, driving supplier innovation, analytics-backed insights, risk management, and proactive talent management.

Conclusion

• The strategic effectiveness of procurement and purchasing processes is vital to overall organizational success, influencing costs, quality, and operational efficiencies.