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8/13/2019 Session 2 - Procurement
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Session 2
Principles of Supply Chain Management:
A Balanced Approach
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Course Outline
2009 South-Western, a division of Cengage Learning 2
Session
No
Topic Description/ Reading(s)
1Introduction to
SCM
Definition, Scope, Element of SCM,
Future Trends in SCM
Reading : Text Book, Chapter 1 (pg.
2-20)
2 ProcurementManagement
Role of Purchasing in org,
Purchasing process, e-procurement,
Sourcing DecisionsMake or Buy,Supplier Selection
Reading : Text Book , Chapter2
(pg. 32-55)
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Review
What is a Supply Chain?
All stages involved, directly or indirectly, in fulfillinga customer request.
Includes manufacturers, suppliers, transporters,
warehouses, retailers, and customers.
Within each company, the supply chain includes
all functions involved in fulfilling a customer
request (product development, marketing,
operations, distribution, finance, customer
service).
Contd
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What is a Supply Chain?
Customer is an integral part of the supply chain
Includes movement of products from suppliers to
manufacturers to distributors, and information, funds,
and products in both directions.
May be more accurate to use the term supply
networkor supply web.
Typical supply chain stages: customers, retailers,
distributors, manufacturers, suppliers.
All stages may not be present in all supply chains
(e.g., no retailer or distributor for Dell).
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Supply Chain and the Flows therein
5Source: Mentzer 2001
Supplier 1
Supplier 3
Supplier 2
Inventory
Inventory
Forecasting and
scheduling information
Cash flow
Order flow
Product returns/Empty bins
Manufacturer
(The focal firm)Inventory
Inventory
Customer 1
Customer 2
Distributor 1
Customer 3
Credit flow
Materials flow
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Objectives of Supply Chain
Profitability
Reliability
Flexibility/Agility
Responsiveness
Turnover Rate
Communication and Coordination
6
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The Objective of a Supply Chain
Maximize overall value created
Supply chain surplus =
Customer value Supply chain cost
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Process View of a Supply Chain
Cycle view: processes in a supply chainare divided into a series of cycles, eachperformed at the interfaces between twosuccessive supply chain stages.
Push/Pull view: processes in a supplychain are divided into two categoriesdepending on whether they are executedin response to a customer order (pull) or in
anticipation of a customer order (push).
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Cycle View of Supply Chain
Processes
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Cycle View of Supply Chain
Processes
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Push/Pull View of Supply Chains
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Push/Pull View of Supply Chain
Processes
Supply chain processes fall into one of twocategories depending on the timing of their
execution relative to customer demand.
Pull: Here execution is initiated in response to a
customer order (reactive).
Push: Here execution is initiated in anticipation of
customer orders (speculative).
Push/pull boundary separates push processes from
pull processes.
Contd
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Push/Pull View of Supply Chain
Processes
Useful in considering strategic decisions relating to
supply chain design more global view of how
supply chain processes relate to customer orders.
Can combine the push/pull and cycle views
Make to StockLL Bean
Build to order - Dell
The relative proportion of push and pull processes
can have an impact on supply chain performance.
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Push/Pull ViewL.L. Bean
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Push/Pull ViewDell
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PURCHASING
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Introduction
Purchasing-
Obtaining merchandise, capitalequipment; raw materials, services, ormaintenance, repair, and operating(MRO)supplies in exchange for money or
its equivalentMerchant Buyers-
Wholesalers and retailers who purchasefor resale
Industr ia l Buyers-
Purchase raw materials for conversion,services, capital equipment, & MROsupplies
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A Brief History of Purchasing
Terms
Purchasing - key business function foracquiring materials, services, & equipment
Contracting- termoften used for theacquisition of services
Supply Management- a newer term thatencompasses all acquisition activities
Institute of Supply management definedsupply management as the Identification,
acquisition, access, positioning, andmanagement of resources anorganization needs or potentially needs inthe attainment of its strategic objectives.
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The Role of Purchasing in an
Organization
The primary goals of purchasing are:1. Ensure uninterrupted flows of raw materials at the
lowest total cost,
2. Improve quality of the finished goods produced, and
3. Optimize customer satisfaction.
Purchasing contributes to these objectives by:
Actively seeking better materials and reliablesuppliers,
Work closely with strategic suppliers to improvequality materials, and
Involving suppliers and purchasing personnel in newproduct design and development efforts.
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The Role of Purchasing in an
Organization (Cont.)
The Financial Significance of SupplyManagement
Profit-Leverage Effect
A decrease in purchasing expenditures directly
increases profits before taxes (assuming nodecrease in quality or purchasing total cost)
Return on Assets (ROA) Effect
A high ROA indicates managerial prowess ingenerating profits with lower spending (caveat- ROA
ratios vary from one industry to another)Inventory Turnover Effect
Increased inventory turnovers indicate optimalutilization of space and inventory levels, increasedsales, avoidance of inventory obsolesce
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The Purchasing Process -
Manual Purchasing (older system)
Step 1- Material Requisition/PurchaseRequisition-Stating product, quantity, anddelivery date. May originate as a planned orderreleasefrom the MRP system. Traveling requisitionused for recurring orders.
Step 2- The Request for Quotation (RFQ) -Buyeridentifies suppliers & issues a request for quotation(RFQ) for routine items or a Request for Proposal(RFP)for more demanding products. SupplierDevelopmentis used to develop suppliercapabilities.
Step 3- The Purchase Order (PO) -Is the buyersoffer & becomes a binding contract when accepted bysupplier. When initiated by the supplier on their ownterms, the document is a sales order. The UniformCommercial Code (UCC)governs transactions in theU.S., except Louisiana.
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The Purchasing Process- (Cont.)e-Procurement (Fig. 2.4)
Materials User Purchasing Department/Buyer
Prepares Materials
Requisitioninputs
information into
computer system
Materials Requisition
is transmitted
electronically to a
buyer
Buyer reviews
Materials Requisition
Extracts and merges
Materials Requisition
data into Internet
based B2B system
Assigns suppliers to
requisition on B2B
system for bidding and
specifies closing date and
other conditions
Collects and reviews bids
submitted by suppliers
through Internet based
B2B system or fax
Selects a supplier
based on quality, cost and
delivery performance,
then issues a
Purchase Order
Purchase Order is
transmitted electroni-
cally (or faxed) to the
supplier
Materials User Purchasing Department/Buyer
Prepares Materials
Requisitioninputs
information into
computer system
Prepares Materials
Requisitioninputs
information into
computer system
Materials Requisition
is transmitted
electronically to a
buyer
Materials Requisition
is transmitted
electronically to a
buyer
Buyer reviews
Materials Requisition
Buyer reviews
Materials Requisition
Extracts and merges
Materials Requisition
data into Internet
based B2B system
Extracts and merges
Materials Requisition
data into Internet
based B2B system
Assigns suppliers to
requisition on B2B
system for bidding and
specifies closing date and
other conditions
Assigns suppliers to
requisition on B2B
system for bidding and
specifies closing date and
other conditions
Collects and reviews bids
submitted by suppliers
through Internet based
B2B system or fax
Collects and reviews bids
submitted by suppliers
through Internet based
B2B system or fax
Selects a supplier
based on quality, cost and
delivery performance,
then issues a
Purchase Order
Selects a supplier
based on quality, cost and
delivery performance,
then issues a
Purchase Order
Purchase Order is
transmitted electroni-
cally (or faxed) to the
supplier
Purchase Order is
transmitted electroni-
cally (or faxed) to the
supplier
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The Purchasing Process (Cont.)e-Procurement
Advantages of the e-ProcurementSystem
Time savings
Cost savingsAccuracy
Real time
Mobility
Trackability
Management
Benefits to the suppliers
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Small Value Purchase OrdersProcessing costs for small value
purchases are minimized through: Procurement Credit Card/Corporate
Purchasing Card
Blanket or Open-End Purchase Orders
Blank Check Purchase Orders Stockless Buying or System Contracting
Petty Cash
Standardization & Simplification of Matls
& Components Accumulating Small Orders to Create a
Large Order
Using a Fixed Order Interval
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Sourcing Decisions: The
Make-or-Buy Decision
Outsourc ing- buying materials andcomponents from suppliers instead ofmaking them in-house. The trend has
moved toward outsourcing. Backward vert ical integrat ionrefers
to acquiring sources of supply
Forward vert ical integrat ionrefersto acquiring customers operations.
The Make or Buy decis ion is a
strategic decision .
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Sourcing Decisions: The Make-
or-Buy Decision (Cont.)
Reasons for Buying or OutsourcingCost advantage: Especially for components
that are non-vital to the organizationsoperations, suppliers may have economiesof scale.
Insufficient capacity:A firm may be at ornear capacity and subcontractingfrom asupplier may make better sense.
Lack of expertise: Firm may not have thenecessary technology and expertise.
Quality: Suppliers have better technology,process, skilled labor, and the advantage ofeconomy of scale.
Sourcing Decisions: The
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Sourcing Decisions: The
Make-or-Buy Decision
(Cont.)Reasons for Making
Protect proprietary technology
No competent supplier
Better quality control
Use existing idle capacity
Control of lead-time
transportation, and warehousingcost
Lower cost
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The make or buy ? Example
A company has option to make or buy apart.
Annual requirement is 15000 units.
A supplier is able to supply the part at
$7 per unit. The first estimate that it cost $500 to
prepare the contract with the supplier.
To make the part, the firm must invest$25000 in equip and it costs $5 per unitto make the part
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Sourcing Decisions: The
Make-or-Buy Decision (Cont.)
The Make-or-Buy Break-Even Analysis
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Roles of Supply BaseSupply Base-list of suppliers that a firm uses to
acquire its materials, services, supplies, andequipment
Firms emphasize long-term strategic supplieralliances consolidating volume into one or fewer
suppliers, resulting in a smaller supply basePreferred suppliersprovide: Early supplier involvement- Information on the
latest trends in materials, processes, ordesigns
Information on the supply market
Capacity for meeting unexpected demand
Cost efficiency due to economies of scale
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Supplier Selection
Product andprocesstechnologies
Willingness toshare technologies& information[Early supplier
involvement (ESI)and concurrent
engineering (CE)]
Quality
Cost (Total cost ofownership or
acquisition)
Reliability OrderSystem & cycle time
Capacity
Communicationcapability
Location
Service
The process of selecting suppliers, is complexand should be based on multiple criteria:
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How Many Suppliers to Use
Reasons Favoring aSingle Supplier
To establish a good
relationship Less quality
variability
Lower cost
Transportationeconomies
Proprietary productor process
Volume too small to
split
Reasons Favoring
Multiple Suppliers
Need capacity Spread risk of supply
interruption
Create competition
Information
Dealing with specialkinds of business
Single-source - a risky proposition. Currenttrends favor fewer sources.
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Purchasing: Centralized vs.
Decentralized
Purchasing Organizationisdependent on many factors, such asmarket conditions & types of materialsrequired.
Central ized Purchasing-purchasing department located at thefirms corporate office makes all thepurchasing decisions.
Decentral ized Purchasing-individual, local purchasing departments,such as plant level, make their ownpurchasing decisions.
Purchasing: Centralized vs
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Purchasing: Centralized vs.
Decentralized (Cont.)Advantages-
Central izationConcentrated volume-
Leveraging purchase volume
Avoid duplication
Specialization
Lower transportation costsNo competition within units
Common supply base
Advantages-
Decentral ization Closer knowledge
of requirements
Local sourcing
Less bureaucracy
A hybr id purch asing organizat ion-
Decentralized-centralized (large multiunit org)-decentralized corporate and centralized at business unit Centralized-decentralized(large org w/centralized
control) centralized large national contracts at corporatelevel and decentralized items specific to business unit
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International
Purchasing/Global Sourcing
Reasons for Global Sourcing-Opportunity toimprove quality, cost, and delivery performance
Potential Challenges-Requires additional skillsand knowledge to deal with international
suppliers, logistics, communication, politicalenvironment, and other issues Impo rt brok er or sales agent-performs service for a fee
Imp or t merchant-buys and takes title to the goods
Trading company-imports & carries wide variety of goods
Tariff and non -tari f f barr iers-International tradeorganizations strive to reduce barriers
Countertrade- raw materials are traded for goods andservices