Chapter 20

Strategy in Purchasing and Supply

Management

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An Organization Must Approach Strategic Planning on Three Levels

• Corporate: Decisions and plans that answer the questions of what business are we in? and, how will we allocate resources among these businesses?

• Unit: Decisions mold the plans of a particular business unit, as necessary to contribute to corporate strategy.

• Function: Plans concern the “how” of each functional area’s contribution to the business strategy and involve the allocation of internal resources.

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Key Strategy Questions

1. How can the supply function contribute effectively to organizational objectives?

OR

2. How can the manager of purchasing make sure the supply function contributes effectively to organizational objectives?

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Supply Strategy Interpreted in Organizational Strategy

SupplyObjectives

SupplyStrategy

OrganizationalStrategy

OrganizationalObjectives

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Supply Strategy Links Current and Future Markets to Current and Future Needs

CurrentNeeds

CurrentMarkets

FutureMarkets

FutureNeeds

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Normal Organizational and Supply Objectives

Organizational Objectives

1. Survival

2. Growth

3. Financial

4. Environmental

Supply Objectives

1. Quality

2. Quantity

3. Delivery

4. Price

5. Service

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Potential Business-StrategyContribution Areas

1. Social issues and trends

2. Government regulations and controls

3. Financial planning with suppliers

4. Product liability exposure

5. Economic trends and environment

6. Organizational changes

7. Product or service line

8. Competitive intelligence

9. Technology

10. e-Commerce

11. Investment

12. Mergers/acquisitions/ disinvestment

13. Time-based competition

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Four Possible Changed OrganizationalStrategies Involving Purchasing

1. Materials management

2. Project management

3. Logistics management, or supply chain management

4. JIT purchasing/production

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Three Ways for Supply to Contribute to Technology Strategy

1. By providing information to their own design/ process/production staff on development in technology

2. By working with suppliers to develop new technology that can be incorporated into the buying firm’s operation

3. By assisting to “lock-up” new, advantageous technology through exclusive agreements with suppliers

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e-Commerce Issues

• Which exchanges should our company participate in?

• Should our company form a B2B exchange with our competitors?

• Should we demand that our suppliers conduct business with us on-line?

• What software should we be committing to?

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Risk in the Supply Chain

1. The risk of interruption of the flow of goods and services

2. The risk that the cost of the goods or services will be higher than expected

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Managing Supply Risks

1. Identification and classification of the risks

2. Impact assessment

3. A risk strategy

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Major Purchasing Functional Strategy Areas

1. Assurance of supply strategies

2. Cost reduction strategies

3. Supply support strategies

4. Environmental change strategies

5. Competitive edge strategies

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Strategic Purchasing Planning Process

Identify andanalyze alternatives

Determinesupply strategy

Review implementationfactors

Gain commitmentand implement

Evaluate

Restateorganizational goals

Determine supplyobjectives to contributeto organizational goals

Isolate factors affectingachievement of

supply objectives

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Supply Strategy Questions

• What- Make or buy- Standard versus special

• Quality- Quality versus cost- Supplier involvement

• How much- Large versus small quantities (inventories)

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Supply Strategy Questions

• Who- Centralized or decentralized- Quality of staff- Top management involvement

• When- Now versus later- Forward buy

• What Price- Premium, standard, lower- Cost-based, market-based- Lease/make/buy

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Supply Strategy Questions

• Where- Local, regional- Domestic, international- Large versus small- Multiple versus sole source- High versus low supplier turnover- Supplier relations- Supplier certification- Supplier ownership

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Supply Strategy Questions

• How- Systems and procedures- Computerization- Negotiations- Competitive bids- Fixed bids- Blanket orders/open orders

- Blank check system

- Group buying

- MRP

- Long-term contracts

- Ethics

- Aggressive or passive

- Purchasing research

- Value analysis

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Supply Strategy Questions

• Why?

- Objectives congruent

- Market reasons

- Internal reasons

1) outside supply

2) inside supply

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Trends in Purchasing andSupply Management

• Nontraditional people will be in many supply management

positions

• Technical entry route into purchasing

• Emphasis on total quality management and customer

satisfaction

• Emphasis on the process used in acquisition, rather than the

transactions

• Purchase of systems and services, as well as products

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Trends in Purchasing andSupply Management

• Strategic cost management

• Design engineering and purchasing capitalize on their potential synergy

• The supplier base will be reformulated

• Longer term contracts

• e-Commerce

• Global supply management

• MRO items handled by a third-party contractor

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Trends in Purchasing andSupply Management

• Sourcing will include the complete end product or service and be done proactively

• Closer supplier relationships

• Teaming

• Empowerment

• End-product manufacturers will focus on design and assembly

• Consortiums for purchasing

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Trends in Purchasing andSupply Management

• Separation of strategic and tactical purchasing

• Greater purchasing involvement in nontraditional purchases

• Environmental purchasing

• Value enhancement versus cost reductions

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The Future of Supply Management

1. Supply chain management

2. Cycle time reductions

3. Video communication with suppliers

4. Integration into business strategy

5. Outsource the procurement process

6. Functional lines blurred or even eliminated

7. Design for procurability

8. “Pull systems” become common in manufacturing

9. Reduction of third- and fourth tier suppliers

10. Networking of suppliers

11. Contract with two suppliers simultaneously to design and build

12. Rationalization of B2B marketplace

13. Expert systems/artificial intelligence