Introduction to Global Supply Chain Management Module Four: Product Procurement & Supplier...

Introduction to Global Supply Chain ManagementModule Four:

Product Procurement &Supplier Relationship Management

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This project received $24.5M (100% of its total cost) from a grant awarded under TAACCCT, as implemented by the U.S. Department of Labor’s Employment and Training Administration. This is an equal opportunity program and auxiliary aids and services are available upon request to individuals with disabilities.

Class Agenda

• Sourcing & Purchasing defined• The purchasing function

– S&OP integration & synchronization

• Key elements of Supplier Relationship Management (SRM)

– Strategic considerations– Operational requirements

• Analysis of the purchasing process• SRM & Key Performance Indicators

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Sourcing & Purchasing:Buy-Side Activities In a Global Model

SUPPLIERS

MANUFACTURER DISTRIBUTION

SYSTEM

CUSTOMERS

MATERIALS MANAGEMENT

Buy Side

DISTRIBUTIONMANAGEMENT

Sell Side

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Different Operating Models & Inventory TypesInfluence Sourcing & Purchasing Strategies

Operating Model

• Raw materials• Components/sub-assemblies• Work In Process• Finished goods• Distribution inventory• Accessories• Spare parts• MRO

Types of Inventory

• Build to stock• Build to order• Assemble to Order• Engineer to Order• Just In Time• Vendor Managed Inventories

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Global Sourcing & Purchasing Defined

“The business disciplines of sourcing and purchasing are closely linked in that they are both related to the acquisition of goods & services that contribute to the execution of a company’sbusiness model.

Sourcing is a strategic function that establishes the criteria, policies and procedures for selectingand working with both domestic, and overseas suppliers. Executed within the framework of anintegrated global supply chain, product sourcing activities include country/region/industry analysis, structural analysis of supplier networks, single vs. multi-vendor sourcing strategies, risk management, logistics & Customs infrastructure, government regulations & tax code, vendorprofiles, landed cost analysis, cumulative lead-times, human rights & environmental policies.

Conversely, purchasing is involved in the actual procurement of raw materials, components,sub-assemblies, finished goods, accessories and/or service parts in quantities that are the resultof ongoing S&OP. Regardless of a company’s business model, purchasing executes on activities that include vendor selection, quality specifications, price & quantity negotiations, terms of sale, shipping terms, cancellation dates, last-ship dates, charge-backs, title transfer, standard operating procedures and documentation requirements.”

Dan Gardner, April 2015

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The Integration of PurchasingWith Other S&OP Functions

• Whether a company acquires goods through an intercompany purchase or from an outside vendor, the coordination of MRP with other S&OP activities is critical to success

– Bill(s) of Material – Purchase order management– Production planning & MPS– Capacity planning– Lead time compliance– Logistics planning

• Material Requirements Planning is what drives the purchasing function

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The Global Purchasing Function &Material Requirements Planning

Resourceplanning

Masterproductionscheduling

Demandmanagement

Productionplanning

Front end

Detailedmaterialplanning

Routingfile

Material and capacity

plans

Time-phasedrequirement

(MRP) records

Engine

Back endVendor systemsShop-floorsystems

Bills ofmaterial

In-ventorystatusdata

Detailedcapacityplanning

Marketingplanning

Financialplanning

Strategicplanning

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MRP & Purchasing:Gross-to-Net Exploding

• Gross–to-Net Exploding– An exercise whereby the original

(gross) requirement for a product is reduced by:

• Inventory on hand• Confirmed order receipts• Confirmed order releases• Planned order releases

• Gross-to-Net Exploding must be integrated with the raw materials inventory management function

• Integration is achieved through process design and supply chain software applications

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MRP & Purchasing:Lead Time Off-Setting

• Lead time off-setting– Orders are placed for products on a

date that “off-sets” cumulative lead times with the desired date of receipt

• P.O. preparation/acceptance• Production time• Transportation lead time• Customs clearance• Domestics distribution

• Lead time off-setting must be integrated with the logistics function

• Integration is achieved through process design and supply chain software applications

MRP & Purchasing:A Typical Inbound Supply Chain

Origin: Somewhere Overseas

Destination: Somewhere in the U.S.A.

Supplier Origin Trucker Origin Forwarder International Transportation

CHB U.S. transport W&D Order Fulfillment Last Mile Client

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How MRP Software Helps To Manage The Purchasing Function

Item: ABCOrder Qty: 1,000Lead Time: 8 weeks

Time Bucket (week) 1 2 3 4 5Gross RequirementsScheduled ReceiptsProjected Available Net RequirementsPlanned Order ReceiptPlanned Order Release

Based on upstream S&OP activities, MRP software nets, offsets, explodes requirements and creates Planned Order Releases. It is the purchasing function that manages the process of converting Planned Releases into Planned Order Receipts and ultimately, into Scheduled Receipts. Integral to that process is the placementof system-driven purchase orders on vendors, as well as making adjustments to

to those P.O.’s as new demand information becomes available.

Product Procurement & SRM:Strategic Sourcing Considerations

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Product Procurement & SRM:Complexity & Risk

• Many companies buy hundreds (if not thousands) of different products in overseas markets

• To purchase that many products a firm has to deal with hundreds of active and potential vendors

• Suppliers can be spread across multiple regions and dozens of countries

• Vendors have to be vetted and qualified prior to working with them

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Product Procurement & SRM:Complexity & Risk

• Detailed purchase agreements must be negotiated with each supplier

• Vendors must be able to work with other supply chain players

• Detailed Standard Operating Procedures (SOP’s) have to be crafted with each supplier

• The vendor has to be able to execute• Ideally, cloud-based software helps to

manage the relationship

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Product Procurement & SRM:Strategic Sourcing Considerations

• Macro-economic profile (region/country)

• Industry-specific eco-system• Government stability• Human rights & environmental issues• Proximity to other supply chain

players (Tier I, II, III suppliers, customers, ports/airports, 3PL’s etc.)

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Product Procurement & SRM:Strategic Sourcing Considerations

• Utilities infrastructure (water, power, et al)

• I.T. infrastructure• Tax structure• Demographics• Education level• Single source or multi-source strategy

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Product Procurement & SRM:Strategic Sourcing Considerations

• Intra-company or third party sourcing• Vendor profile & qualifications• Labor costs• Unit costs• Landed costs

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Product Procurement & SRM:Strategic Sourcing Considerations

• Logistics infrastructure• Supply chain risk profile• Free Trade Agreements• Preferential Duty Programs• Customs regulations• Lead-times

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The Purchasing Function:Key Considerations in Vendor Selection

• Ownership structure• Financial stability• Product portfolio• Existing portfolio of clients• Technical (engineering) capabilities• Location(s)

– Possible countries of origin

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The Purchasing Function:Key Considerations in Vendor Selection

• Number of employees• Physical plant• Production capacity• Product quality programs

– Lean Manufacturing– Six Sigma

• Use of Standard Operating Procedures (SOP’s)

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The Purchasing Function:Key Considerations in Vendor Selection

• Cost structure (unit cost)• Demonstrated S&OP capabilities

– MPS, MRP, Capacity Planning

• Supply chain software & visibility tools

• Knowledge of global trade– Shipping, documentation &

compliance

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The Purchasing Function:Key Considerations in Vendor Selection

• Respect for patents, trademarks & intellectual property

• Human rights compliance• Green vendor initiatives• Key Performance Indicators

– Product quality, quantities, logistics, billing, rejections/returns, et al

The Purchasing Function:Contractual Clauses

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• Product specifications• Merchandise description• Quality, grade, size & condition• Quantities & weights• Price• Currency of sale• Payment terms

The Purchasing Function:Contractual Clauses

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• Product warranties & returns• Substitution• Incoterms® 2010 rule• Mode of transport• Lead-time• Last ship date

The Purchasing Function:Contractual Clauses

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• Order cancellation date• Charge backs• Documentation requirements• Dispute resolution• Applicable law• Severability

The Purchasing Process:Alignment, Integration & Synchronization

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Purchasing Example:Build-to-Order Model

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Origin Country

Suppliers Consolidation Center

De-Consolidation Center

Customer DC

Stores

In Transit Destination Country

• Buyer places P.O. on vendor

• Vendor acknowledges receipt of P.O.

• Vendor uploads P.O. in system

• Vendor executes MRP• Supplier acquires net

raw materials requirements

• Completes production process

• Supplier prepares commercial documentation

• Vendor notifies 3PL and buyer of cargo readiness

• 3PL picks up cargo & documentation

• 3PL prepares shipment for export

• 3PL makes booking with SS Line

• 3PL executes export• 3PL send ASN to

buyer• Goods are shipped

Purchase Order Flowchart Example:Hong Kong to Warsaw

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Supplier

OriginTrucker

OriginCustoms

Hong KongDestination

Customs

TruckDelivery

Destination3PL

Buyer

Warsaw

Origin3PL

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Purchase Order Process Flowchart:

No

Begin

Buyer’s system generates

Planned OrderRelease (P.O.R.)

Makechanges

Changesrequired?

Yes

No

End

Negotiatechanges

Purchasing agentreviews P.O.R.

Purchasing agentisssues P.O.

to buyer

Supplier acknowledgesreciept of P.O.

Changesrequired? Yes

Vendor inputs P.O. information,S&OP updated

No

Purchasing & The “Documentation Trail”

• The Documentation Trail is a metaphor that symbolizes the source, creation, use and filing of all documents associated with an international transaction

– Sales contract– Purchase orders– Commercial invoice– Packing list– Forwarder’s cargo receipt– Ocean bill of lading– Airway bill– Insurance certificate– Certificate of origin– Phytosanitary certs– Letter of credit

Principles That Support The “Documentation Trail”

• All information found in export documents should be born of the original contract or agreement

• One person’s sale is another person’s purchase

• One person’s export becomes another’s import

• Different entities in the supply chain use the same information and documents for different reasons

– Customs may use a commercial invoice for product classification purposes, while a bank uses it for paying on a letter of credit

Principles That Support The “Documentation Trail”

• For all of these reasons, all documents have to adhere to “The 3 C’s of Documentation”

– Complete– Consistent– Correct

• The smallest of errors can stop a supply chain in its tracks

– The devil is in the details (and so are the dollars)

Document Example:Purchase Order

Document Example:Commercial Invoice

Document Example:Airway Bill

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Product Procurement & SRM:Developing Key Performance Indicators

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Key Performance Indicators (KPI’s)

• Key Performance Indicators are measurement tools used to quantify performance in specific areas

• KPI’s should be aligned with the strategic goals of the company

• The use of KPI’s can be internal and/or external (vendors, etc.)

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Key Performance Indicators (KPI’s)

• KPI’s should be used to measure overall supply chain performance

– Buy-Side, Sell-Side, Finance, Customer Service, et al

• KPI’s should be evaluated in periodic business reviews

• KPI’s can be used as part of a “Supplier Certification” Program

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KPI’s for Measuring Supplier Performance(Period-Specific)

• Total dollar spend by vendor• Landed cost: budget vs. actual

– Total– By SKU or part number

• Number of purchase orders issued• Number of SKU’s or part numbers by

vendor• Dollar value by SKU or part number

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KPI’s for Measuring Supplier Performance(Period-Specific)

• Number of incomplete P.O.’s (missing items)

• Over/under quantities• Incorrect merchandise• Defective merchandise• Damaged merchandise• Number/value of insurance claims

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KPI’s for Measuring Supplier Performance(Period-Specific)

• Number of changed purchase orders• Instances of late shipments• Instances of early shipments• Number of cancelled orders• Products on backorder• Dollar value of backorders

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KPI’s for Measuring Supplier Performance(Period-Specific)

• Number of rejected purchase orders• Missing documents• Incorrect prices on invoice• Errors on commercial documentation• Missed sailings/flights• Number of expedited shipments

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KPI’s for Measuring Supplier Performance(Period-Specific)

• Air freight expense for expedited shipments

• Number of charge-backs• Reason for charge-backs• Dollar value of charge-backs

End of Module Four

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