Supply Chain Logistics Management

Chapter 5: Procurement- Manufacturing Strategies

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Purchasing Vs. Procurement

• Purchasing is normally associated with a functional activity

• Procurement/Sourcing should be viewed as a strategic activity for the business.

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Purchasing vs. Sourcing (cont’d)

Purchasing Mentality Sourcing MentalityOne contract at a time Continual Improvement

Win-lose Win-win

Immediate returns Long-term perspective

Secretive Trusting

Current needs can be met Strategic fit exists

Lowest purchase price Total cost of ownership

Multiple suppliers Supply-base reduction

Infrequent interaction Frequent interaction

Criticism Constructive evaluations

Buyer-sales relationship Cross-functional relationship

Safety in numbers Safety in knowledge

Quality inspected Quality at source

Inventory as safeguard Information as safeguard

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Supplier Development Through Procurement

The Procurement Viewpoint

Supplier PurchaserProcurement Initiative

Marketing Response

Supplier PurchaserMarketing Initiative

Purchasing Response

The Marketing Viewpoint

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Importance of Sourcing

• In the average manufacturing firm purchased goods and services account for 55% of every sales Dollar

• Direct labor costs account for only about 10% of the sales dollar

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Procurement’s Potential Payoff

• Beginning Position– Sales $100,000,000– Purchases(55%) 55,000,000– Labor (15%) 15,000,000– Other (22%) 22,000,000– Pre-tax profit (8%) 8,000,000

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Procurement’s Potential Payoff

Reducepurchase cost

by 10%

Increasesales by 68%

Reduce laborcost by 36%

Sales $100,000,000 $168,000,000 $100,000,000

Purchases 49,500,000 92,400,000 55,000,000

Labor 15,000,000 25,200,000 9,600,000

Other 22,000,000 36,960,000 22,000,000

Pre-taxProfit

13,500,000 13,440,000 13,400,000

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Competing through Sourcing

• Quality Improvement

• Cost Reduction

• Lead Time Reduction

• Delivery/Service Improvement

• Technology Gain

• Shortened Concept-to-Customer Cycle

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

One Approach to Procurement Segmentation

$ Value

Supplier Technology/Knowledge Contributionsmall

large

large

Commodities

Convenience &efficiency

Strategic Alliances

Key Systems

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Sourcing Pathways(Source: Mercer Mgmt Consulting)

• Volume consolidation/Supply base optimization => “Buy for less”

• Supplier-buyer integration/Linked cost minimization => “Buy better’

• Value management/Optimization => “Consume better”

• Sales synergy => “Sell better”

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Volume Consolidation/Supply Base Optimization (Buy for Less)

• Increased supplier fixed cost utilization

• Capitalize on competitive supply base structure

• Leveraged buyer’s share

• Enhanced negotiations and contracting skills

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Supplier-buyer Integration/ Linked Cost Minimization (Buy Better)

• Improved coordination/forecast accuracy and predictability

• Optimized logistical flows/value added roles (including outsourcing)

• Streamlined transactional information flow• Increased and earlier supplier involvement

on cost issues• Improved supplier cost productivity• Committed volumes to allow supplier

investment

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Value Management/ Optimization (Consume Better)

• Early supplier involvement in solution design

• Reduced complexity/simplified specifications

• Increased standardization

• Clarified response time objectives

• Rationalized requirements

• Controlled consumption rates

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Sales Synergy(Sell Better)

• Total supplier integration

• Integrated multi-commodity products/ services and channel portfolio

• Creative risk sharing

• Fully exploited capabilities and potential

• Leveraged channel relationships

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Supplier Integration and Product Development Process

Ideageneration

AssessmentConcept

DevelopmentDesign Prototype Full Scale

Operation

Possible Supplier Integration Points

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Flexibility and Cost of Design Changes

Idea

generation AssessmentConcept

DevelopmentDesign Prototype

High

Low

Time

Cost of Design Changes

Flexibility in Design

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Pathways to Growth

Level 0

User Buy

Level 1

Leveraged Buy

Level 2

Linked Buy

Level 3

Value Buy

Level 4

Integrated Sell

Buy for Less

Buy Better Consume Better

Sell Better

Percentage Savings/Revenue Enhancement

5-15%

5-25%

Varies Widely

Varies Widely

(Plus ongoing productivity improvements)

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Roadblocks to Strategic Procurement

• Organization and people– Not “strategic”

– Limited skill to align with pathway

• Processes– Adversarial relationships

– Need end-to-end processes

• Information systems– Need total systems cost approach

• Knowledge of the possibilities

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Major Categories for the Components of Total Cost of Ownership

Pretransaction Components1. Identifying need2. Investigating sources3. Qualifying sources4. Adding supplier to internal systems5. Educating :

•supplier in firm’s operations•firm in supplier’s operations

Posttransaction Components1. Line fallout2. Defective finished goods rejected before sale3. Field failures4. Repair/ replacement in field 5. Customer goodwill/ reputation of firm6. Cost of repair parts7. Cost of maintenance and repairs

Transaction Components1. Price2.Order placement/ preparation3. Delivery/ transportation4. Tariffs/ duties5. Billing/ payment6. Inspection7. Return of parts8. Follow-up and correction

Total Cost of Ownership

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Major Trends in Procurement

• Fewer sources of supply will be used• Buyers will be more concerned with final customer

satisfaction• Buyers will focus on “lead supplier” relationships• Buyers will drive shorter cycle times• Design engineers and buyers will be part of sourcing

teams• Global sourcing will increase• e-procurement will have a major impact-not all of it

will be positive for supply chain integration– buying exchanges– auction sites

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Malcolm Baldridge Criteria and Values

1 Leadership (120 pts.)

The Leadership Category examines how your organization’s senior leaders address values and performance expectations, as well as a focus on customers and other stakeholders, empowerment, innovation, learning, and organizational directions. Also examined is how your organization addresses its responsibilities to the public and supports its key communities.

2 Strategic Planning (85 pts.)

The Strategic Planning Category examines your organization’s strategy development process, including how your organization develops strategic objectives, action plans, and related human resource plans. Also examined are how plans are deployed and how performance is tracked.

3 Customer and Market Focus (85 pts.)

The Customer and Market Focus Category examines how your organization determines requirements, expectations, and preferences of customers and markets. Also examined is how your organization builds relationships with customers and determines their satisfaction.

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Malcolm Baldridge Criteria and Values (cont.)

4 Information and Analysis (90 pts)

The Information and Analysis Category examines your organization’s performance measurement system and how your organization analyzes performance data and information.

5 Human Resources Focus (85 pts.)

The Human Resources Focus Category examines how your organization enables employees to develop and utilize their full potential, aligned with the organization’s objectives. Also examined are the organization’s efforts to build and maintain a work environment and an employee support climate conducive to performance excellence, full participation, and personal and organizational growth.

6 Process Management (85 pts.)

The Process Management Category examines the key aspects of your organization’s process management, including customer-focused design, product and service delivery, support, and supplier and partnering processes involving all work units.

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Malcolm Baldridge Criteria and Values (cont.)

7 Business Results (450 pts)

The Business Results Category examines your organization’s performance and improvement in key business areas -- customer satisfaction, product and service performance, financial and marketplace performance, human resource results, supplier and partner results, and operational performance. Also examined are performance levels relative to competitors.

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

E-Chemicals

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Cos

t Per

Uni

t

Quantity

Transportation

Inventory/ Warehouse

Manufacturing/ Procurement

Total Cost

Total Cost of Manufacturing

MTO MTPATO