1 BM_M0050/GSLM 54700 Purchasing and Supply Management

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BM_M0050/GSLM 54700

Purchasing and Supply Management

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Outline

What to Teach and How to Teach House-keeping Issues Importance of Purchasing and Supply Management

observations from news observations from Industrial Statistics observations from Business Operations observations from Companies

An Overview of Purchasing factors, process, types, levels and issues

Evolution of Purchasing and SCM

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What and How to Teach?

introduce purchasing and supply management processes, modes, and interactions among

various players in a supply chain

illustrate with industrial cases and practices

stimulate students to think about subtleties and to ask questions instead of feeding facts

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House-keeping Issues

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House-Keeping Issues

Course Webpage

Course Outline

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Importance of Purchasing and Supply Management

Observations from News

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Meaty and Spicy Positions

Suppose that you ask a person working in

High-Tech: Which position in a company (1) is most likely to a pay a crucial role, to

some extent meaty and spicy (2) has most confidence from the boss, and (3) most commanding in interaction with

outside

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Meaty and Spicy Positions

according to 商業周刊 1369 期 p44-46 ， 80% to 90% of persons working in High-Tech would say that the position is purchasing

a key person in a procurement committee detained for allegedly bribery of NT$100mill legal income (stock, salary, and bonus) in 15

years: NT$600 mill

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Importance of Purchasing and Supply Management

Observations from Industrial Statistics

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Simple Question

Total Cost of Material / Value of Shipments = ???

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Importance* of Purchasing and Supply Management

Manufacturing Sector of US

199019911992199319941995199619971998199920002001200220032004

A/B (%)Total Value of Shipments (B) (US$ mill)

Total Cost of Material (A) (US$ mill)

*許振邦（ 2007）採購與供應管理

GDP of Taiwan (2012) US$ 467 billion

2,912,2282,878,1643,004,8003,127,6203,348,0193,594,3593,715,4283,834,7003,899,8094,031,8844,208,5823,967,6983,914,6234,015,0804,265,784

54.1%53.2%52.3%52.7%52.4%52.8%53.2%52.7%51.9%51.7%53.4%53.1%51.7%52.1%52.7%

1,574,6171,531,2211,571,7731,647,4921,752,7351,897,5701,975,3622,020,4762,024,0802,084,3162,245,8392,105,3372,023,3122,091,5852,247,844

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Importance* of Purchasing and Supply Management

Miscellaneous mfg339Furniture & related product mfg337Transportation equipment mfg336Electrical equipment, appliance, & component mfg335Computer & electronic mfg334Machinery mfg333Fabricated metal product mfg332Primary metal mfg331Non-iron metal product mfg 327Plastics & rubber product mfg326Chemical mfg325Petroleum & coal product mfg324Printing & related support activities323Paper mfg322Wood product mfg321Leather & allied product mfg316Apparel mfg315Textile product mills314Textile mills313Beverage & tobacco product mfg312Food mfg311

A/B (%)Total Value of Shipments

(B) (US$ mill)Total Cost of Material (A)

(US$ mill)Industrial SectorsNAICS

*許振邦（ 2007）採購與供應管理

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Questions

heaviest in % of mat. cost industrial sector = material / sales = %

2nd heaviest in % of mat. cost industrial sector = material / sales = %

lightest in % of mat. cost industrial sector = material / sales = %

2nd lightest in % mat. cost industrial sector = material / sales = %

largest in sales industrial sector = value of shipments =

2nd largest in sales industrial sector = value of shipments =

smallest in sales industrial sector = value of shipments =

2nd smallest in sales industrial sector = value of shipments =

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Importance* of Purchasing and Supply Management

Miscellaneous mfg339Furniture & related product mfg337Transportation equipment mfg336Electrical equipment, appliance, & component mfg335Computer & electronic mfg334Machinery mfg333Fabricated metal product mfg332Primary metal mfg331Non-iron metal product mfg 327Plastics & rubber product mfg326Chemical mfg325Petroleum & coal product mfg324Printing & related support activities323Paper mfg322Wood product mfg321Leather & allied product mfg316Apparel mfg315Textile product mills314Textile mills313Beverage & tobacco product mfg312Food mfg311

A/B (%)Total Value of Shipments

(B) (US$ mill)Total Cost of Material (A)

(US$ mill)Industrial SectorsNAICS

*許振邦（ 2007）採購與供應管理

91.0%312,884253,339

61.3%666,502408,310

36.2%112,27040,658

38.7% 93,19336,112

44.9%528,215237,304

52.3% 5,7563,013

43.8% 80,15335,091

41.1%361,937148,580

49.1% 33,49516,45155.6% 33,25418,48159.0% 40,25723,742

56.4%511,450288,359

50.7%269,203136,58045.2%259,875117,544

50.2%182,54791,629

60.6%178,995108,551

53.0%153,96980,087

49.7%104,24451,798

58.3%103,42060,264

42.4%101,86943,202

36.8%132,28748,73452.7%4,265,7842,247,844

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Comments

Petroleum & Coal Product Mfg sales: US$312.884 billion

mat. / sales = 91.0%

Beverage & tobacco product mfg sales: US$112.27 billion

mat. / sales = 36.2%

differences in modes of operations

procurement

price fluctuation common in real life, e.g., paper pulp, DRAM, TFT-LCD …

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Importance of Purchasing and Supply Management

Observations from Business Operations

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Importance of Purchasing and Supply Management

assumption: linear changes of sales and cost w.r.t. the production quantity

how to increase profit?

$10Profit$40 Others

$50 Material

Cost$100Sales

sales? price? cost?

10% increase in

sales

$11Profit$44 Others

$55 Material

Cost$110Sales

10% increase in profit

$20Profit$40 Others

$50 Material

Cost$110Sales

100% increase in profit

10% increase in price with

30% decrease in

demand$14Profit$28 Others

$35 Material

Cost$77Sales

40% increase in profit

10% increase in

price without change in demand

$12.5Profit$40 Others

$47.5 Material

Cost$100Sales

25% increase in profit

5% decrease in

material cost

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Questions

which is a good way to increase profit?

is it always possible to raise price?

is it always possible to reduce material cost?

in general how can cost be reduced continuously?

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Importance of Purchasing and Supply Management

Observations from Companies

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Which Company is Stronger?

Company A: 1891 stores, average revenue US$7.25 mill per store, total revenue ~ US$13.7 billion

Company B: 229 stores, each store earning about half as that of Company A, total revenue ~ US$ 0.83 billion

statistic taken around 1979 23 years later

Company A filed for Chapter 11 Company B became one of the most successful companies in the

world

Company A: K Mart; Company B: Wal-Mart main reason: Wal-Mart has one of the best skills in supply

management

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Another Strong Company

consecutively 15 years best seller among competitors in country

18% market share, largest in country sales ~ NT$ 46 billion prestigious national award of science and technology rigorous and rigid quality control procedures aired

nationwide 2008 Sept: news of unsafe products 2008 Dec: declared for bankruptcy reasons: excessive unhealthy ingredient turning into

poisonous

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Another Strong Company

Sanlu Group in Shijiazhuang selling milk powder melamine

66% nitrogen by mass industrial usage, e.g., fabrication of fire retarding material causing kidney damage by forming round, yellow crystal in kidney safety limits: EU 0.2 mg/kg of body; Canada, WHO 0.2 mg/kg of

body; US 0.063 mg/day

300,000 infants babies affected, at least 6 dead of problems caused by melamine in the milk powder

Consequences: more than the failure of a company ….

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An Overview of Purchasing

Factors, Process, Types, Levels and Issues

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Factors Affecting Operations and Modes of Purchasing Personnel

type of industry Coca Cola vs. Formosa Petrochemical Corporation

size of company Walmart vs. a corner store

position in a supply chain a supplier, a wholesaler, a distributor, a retailer

type of product capital equipment, spare parts, consumables, …

position in a company a VP vs. a clerk

…

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Types of Products

for self-consumption

capital equipment, e.g., machinery

spare parts, maintenance service, consumables

for production processes or customers

raw material

semi-finished products and components finished products, e.g., Carrefour, a retail channel, or Li & Fung, a traderservices, e.g., transportation and third-party purchasing

production support items

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Aspects to Consider in a Transaction

main aspects: supplier, time, price, quantity, quality

means to align incentives by various contract mechanisms

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A Typical Purchasing Process

needs identification from needs, requirement, forecast, planning, and new product development

requisition raised by an unit (a person) with iterative discussion between purchasing and the requesting unit

setting the specification request for quotation supplier identification and selection contract negotiation

issuing a purchase order (PO) upon agreement on negotiation following up the PO

receipt, including checking and following up invoice settlement payment record maintenance

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Strategic Level Issues of purchasing

from purchasing to procurement and eventually to supply management value analysis material, supplier, market analysis new product development continuous measurement and management of suppliers performance development of supplier relationship continuous improvement of the procurement process supporting organizational goals and objectives development of integrated purchasing strategies …

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Evolution of Evolution of Purchasing and SCM in USAPurchasing and SCM in USA

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Evolution of Evolution of Purchasing and SCM in USAPurchasing and SCM in USA

events and phenomena: consequences background and trend: driving forces

any idea about the timeline of the following events (some major, some minor): Collapse of Communism in Eastern Europe, Completion of Transc

ontinental Railway, Disintegration of USSR, Industrial Revolution, Iranian Revolution, Iran–Iraq War, Vietnam War, Oil and energy crises, Oil Embargo, $1.5 billion federal bailout of Chrysler, Open-Door of China, Trouble of US automobile industry, US Civil War, Watt steam engine, WWI , WW II

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Evolution of Evolution of Purchasing and SCM in USAPurchasing and SCM in USA

any idea about the timeline of the following events some major, some minor

Industrial Revolution (1750 – 1850)

Watt steam engine (1765)

US Civil War (1861 – 1865)

Completion of Transcontinental Railway (5/1869)

WWI (1914 – 1918)

WW II (1939 – 1945)

Vietnam War (1964 (?) – 1975) Oil and energy crises in 70’s

Embargo (10/1973 to 3/1974)

Iranian Revolution (1979)

Trouble of US automobile industry (late 70’s)

$1.5 billion federal bailout of Chrysler (1979)

Open-Door of China (1979)

Iran–Iraq War (9/1980 to 8/1988)

Collapse of Communism in Eastern Europe (1989)

Disintegration of USSR (1991)

First Iraq War (1991)

Second Iraq War (2003)

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Evolution of Evolution of Purchasing and SCM in USAPurchasing and SCM in USA

http://thegulfblog.com/tag/oil-price-graph/

Ind. R

ev.

Civil

War

completion of transcontinental railway

WWI WWII

Vietnam War

Oil Embargo

Iranian Revolution; Open door of China

Trouble of US Auto. Ind.

Iran-Iraq War

Collapse of Communism in Eastern Europe

disintegration of USSR, 1st

Iraq War

2nd Iraq War

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GATT GATT (General Agreement on Tariffs and Trade)(General Agreement on Tariffs and Trade) & & WTO WTO (World Trade Organization)(World Trade Organization)

rounds of negotiation of GATT

http://en.wikipedia.org/wiki/GATT

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Evolution of Evolution of Purchasing and SCM in USAPurchasing and SCM in USA

a result of the interaction with the economic environment and technology advancement

gradually from clerical (before 1949) to

mechanical (1950-1969) to

proactive (1970-1989) to

strategic supply management (1990 onwards)

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Evolution of Evolution of Purchasing and SCM in USAPurchasing and SCM in USA

19001850 19401947

mid-1960slate 1970slate 1970s

1999

Growth of Purchasing

Fundamentals, 1900 – 1939

The Early Years, 1850 –

1900

The War Years, 1940

– 1946

The Quiet Years, 1947 –

mid-1960s

mid-mid-1960s – 1960s –

late 1970slate 1970s

The Global Era, Late

1970s – 1999

beyond 2000, Integrated

Supply Chain Management

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Evolution of Evolution of Purchasing and SCM in USAPurchasing and SCM in USA

The Early Years, 1850 – 1900 definition of the purchasing process and the

realization of purchasing towards company profit

importance of purchasing came along with industrialization and improvement in transportation

heavy material cost in heavy industry

Supply Department in Pennsylvania Railroad (1866) first book on purchasing, The Handling of Railway

Supplies – Their Purchase and Disposition (1887)

Railroad mileage increase by groups of statesSource: Chauncey Depew (ed.), One Hundred Years of American Commerce 1795-1895 p 111

1850 1860 1870 1880 1890

New England 2,507 3,660 4,494 5,982 6,831

Middle States 3,202 6,705 10,964 15,872 21,536

Southern States 2,036 8,838 11,192 14,778 29,209

Western States and Territories 1,276 11,400 24,587 52,589 62,394

Pacific States and Territories 23 1,677 4,080 9,804

Totals 9,021 30,626 52,914 93,301 129,774

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Evolution of Evolution of Purchasing and SCM in USAPurchasing and SCM in USA

Growth of Purchasing Fundamentals, 1900 – 1939 slow growth of purchasing and gradual

recognition of purchasing as a field

diffusion of the importance of purchasing to non-railway fields

first non-railway purchasing book, The Book on Buying (1905)

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Evolution of Evolution of Purchasing and SCM in USAPurchasing and SCM in USA

The War Years, 1940 – 1946 growth in importance of purchasing to secure

materials during the war

growth of the discipline 9 colleges with courses related to purchasing in 1933,

and 49 colleges in 1945

members of the National Association of Purchasing Agents 3,400 in 1934 to 9,400 in 1945

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Evolution of Evolution of Purchasing and SCM in USAPurchasing and SCM in USA

The Quiet Years, 1947 – mid-1960s overshadowing of purchasing by marketing and

finance due to relatively dull competition and availability of materials

valuable developments in purchasing value analysis by GE

Purchasing Analysis Department by Ford Motor

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Evolution of Evolution of Purchasing and SCM in USAPurchasing and SCM in USA

Materials Management Comes of Age, mid-1960s – late Materials Management Comes of Age, mid-1960s – late 1970s1970s pressure in material availability unstable economic environment, pressure in material availability unstable economic environment,

e.g., Vietnam War and Oil Embargo e.g., Vietnam War and Oil Embargo boom of material control concepts: materials planning and control, boom of material control concepts: materials planning and control,

inventory planning and control, materials and procurement inventory planning and control, materials and procurement research, purchase, incoming traffic, receiving, incoming quality research, purchase, incoming traffic, receiving, incoming quality control, stores, materials movement, scrap and surplus disposal, …control, stores, materials movement, scrap and surplus disposal, …

purchasingpurchasing primarily price-base by squeezing suppliersprimarily price-base by squeezing suppliers local and regional sourcing local and regional sourcing suggestion of more active role for purchasingsuggestion of more active role for purchasing

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Evolution of Evolution of Purchasing and SCM in USAPurchasing and SCM in USA

The Global Era, Late 1970s – 1999 intensive global competition

realization of the importance of the management of the process to transform raw materials to end products of customers

Supply Chain Management

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Evolution of Evolution of Purchasing and SCM in USAPurchasing and SCM in USA

Integrated Supply Chain Management, beyond 2000 emphasis on integration and collaboration

enterprisewide system and integrated internet linkage

ideas such as supplier development, supplier design involvement, adoption of full-service suppliers, total cost concepts on supplier selection, long-term supplier relationship, …

co-ordination and collaboration of purchasing with customer requirements, operations, logistics, finance, human resoruces, accounting, marketing, information systems

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Evolution of Evolution of Purchasing and SCMPurchasing and SCM

what would happen in the future? oil reserve, new sources of energy, food supply,

water supply ….