Strategic Procurement Management

Indirect Materials

20~40% of the spend and 80~90% of the total transactions Two categories: ORM (Office equipment, furniture, office supplies) MRO (Critical maintenance and replacement parts, highly engineered machine parts, manufacturing equipment)

Procurement as a process

It can be seen as a sequential chain of events leading to the acquisition of supplies. Link in the procurement process chain is information.

Procurement as a functional group

Procurement is a formal entity on the organization chart. People under this department or unit use specialized knowledge, skills and resources to perform only procurement related (specialized) tasks.

reverse auctions

A sourcing technique where pre-qualified suppliers enter a website and at pre-designated time and date, and try to underbid competitors to win the buyer's business.

sole sourcing

An organization's decision to use only one supplier Only 1 company holds the IP rights Only 1 company has the most efficient process, making it less expensive You hold patent or IP rights that need to be carefully guarded

Factors Driving SCM

Low cost and wide availability of information: More closely links members of a supply chain Higher levels of competition in domestic and international markets: Requires greater quickness, agility, and flexibility . Customer expectations and requirements: Constantly changing and more demanding Ability of an organization's supply chain to identify and mitigate risk: Minimize disruptions

Request for Information (RFI)

RFI is applicable when the buyer does not have enough information to write a detailed request. Typically RFI is followed by an RF

Cost Focus

competitive strategy: Narrow scope, cost as competitive advantage

Differentiation

competitive strategy: broad scope, differentiation as competitive advantage

Cost Leadership

competitive strategy: broad scope, low cost as competitive advantage

Differentiation Focus

competitive strategy: marrpw scope, differentiation as competitive advantage

Maverick buying

when an unauthorized employee uses company money to purchase something they are not authorized to do so. Usually only procurement personnel are authorized agents

Tools and Techniques

• Systems Contracting • Electronic Data Interchange (EDI) • Radio Frequency Identification (RFID) • E-Procurement and Reverse Auctions

Direct Materials

60~80% of the spend and 10~20% of the total transactions Purchased in quantities based on complicated production planning and control systems May involve long intricate negotiations

Centralized structure

Chief purchasing officer has authority for majority of purchase expenditures

A good supplier

Builds quality into the product, aiming for zero-defects Makes delivery performance a priority Willingness to make short and frequent deliveries to point-of-use Demonstrates responsiveness to buyer's needs Works to reduce lead times Provides buyer with information regarding capability and workload Creates the future, rather than fears the future Reinvests part of its profits into R&D, takes a long-term view, and is willing to spend for tomorrow Meets stringent financial stability criteria

5 Competitive Priorities

Cost, Quality, Delivery Performance, Flexibility, Innovation

decentralized structure

Divisional, business unit, or site levels have authority for majority of purchase expenditures

japanese sourcing practice

For high tech items: Single source For simple items: 2 or 3 suppliers Orders are divided between two or three members of their supplier group Orders multiple items from the same suppliers Uses volume shifting between suppliers as a form of punishment Dual Sourcing !!! Obtain the advantages of both using pressure (contract length and volume)

Request for Quotation (RFQ)

If the buyer has a clear idea (criteria and specifications) of what he is buying, they request for quotation from their suppliers. The judgment is primarily based on price.

Request for Proposal (RFP):

If the buyer is looking for a proposed solution to a requirement or a problem, they request for proposals from their suppliers. Possibly there is no clear specification from the buyer side. If the product being bough is a complicated one, buyers tend to go for RFP rather than RFQ.

Key Make-or-Buy Mistakes

Not being proficient at identifying own core capabilities Not recognizing that the product or service is approaching maturity Not recognizing that there are always new competitors with new technology

When to use e-procurement

Not for direct materials; as they usually are important from a revenue perspective. But yes, for indirect

Key Make-or-Buy Success Factors

Perform a realistic assessment of in-house capabilities and expertise Evaluate alternative strategic partnership arrangements and select the appropriate partner

Systems Contracting

System contracting is an approach for ordering and stocking items that needs repeat purchasing.As the name suggests, it is a contract between systems of a buyer and a supplier. Objectives: -Streamlining the purchase process system -Reducing ordering and inventory costs Sources of cost reduction in contracting -Issuing of purchase order, inventory holding, expediting, receiving time and price protection Requirements: -A negotiated agreement between buyers and sellers including: type of material, scope of contract, price, billing policy, stocking policy and delivery requirements

center-led structure

The organizational structure which combines a centralized approach for purchased items common to several business units and a decentralized approach to unique requirements is termed a/an _____. (p. 162)

multiple sourcing

an organization's decision to use several suppliers Improved assurance of supply Check against price increases Active competition that motivates suppliers to perform effectively

critical

high supply risk/complexity high strategic impact - Strategic category, together with leverage category, can account for 80% of the turnover - Small changes in price will have an immediate and significant impact on cost - Risk is significant due the high dependence on the supplier - Balance of power may differ between buyer and supplier - Design and quality of the item are critical - Complex and/or rigid specifications of the item being purchased - Creating competitive advantage - Creating mutual commitment to long term relationships - Minimizing supply risk - Carefully analyze supply risks - Increase role of selected suppliers - Get involved in supplier process management - Seek long term partnering agreements (3 to 5 years) with built-in arrangements for continuous improvement and performance measurement. Even consider joint ventures with selected suppliers. - Take prompt action to rectify slipping performance (be proactive) - Prepare accurate forecast of future requirements

Bottleneck

high supply risk/complexity low strategic impact - Complex specifications requiring complex manufacturing or service process - Relatively limited in value but danger of sudden price rises. - High risk due to few alternative suppliers; suppliers may be technology leaders - Big impact on operations/maintenance - Reducing cost - Ensuring supply continuity - Decreasing uniqueness of supplier - Forecast as accurate as possible - Consolidate purchases to secure leverage - Widen specifications (many MRO items are bottleneck only because of over-specification) - Search for alternative products/suppliers - Develop new suppliers - As this is a supplier dominated segment, manage contract with the suppliers to reduce risk of supply (medium term contracts are more suitable) - Keep more safety stock

Two problems for procurement of indirect materials

inefficiency and labour intensity of the process itself because indirect procurement policies are rarely standardised.

leverage

low supply risk/complexity high strategic impact - High expenditures, commodity items - Small change in the price may have large impact on profit - Risk is small as there are many qualified alternative suppliers and substitution is possible - Market /price sensitive - It is a buyer dominated segment - Obtaining best short term deal - Maximizing cost savings and other commercial advantages Ensure suppliers are aware that they are in a competitive situation - Group similar items together to increase value and quality for quantity discounts - Use competitive bidding - Keep the contract terms relatively short - Negotiate value added arrangements with the suppliers (just in time delivery, vendor managed inventory, etc.) - Exploit market trends - Achieve coordinated efficiency in procurement process

routine

low supply risk/complexity low strategic impact - Can require up to 80% of the procurement activity for 20% of the turnover - Low value, small individual transactions - high administrative cost - No risk due to many alternative suppliers and large product variety - Reducing buying effort (Reduce administrative procedures and cost) - Eliminating complexity - Improving operational efficiency - Simplify acquisition process (requisitioning, buying and payment) - (Rationalize supply base) Reduce the number of suppliers - Consolidate and buy from consortia - Standardize where possible - Use system contracting and e-procurement technologies - Little negotiation

Efficient Supply Chain

matching with functional products

Responsive Supply Chain

matching with innovative products

E-procurement

purchasing through electronic connections between buyers and sellers - usually online Cyber-security Lack of face-to-face contact between the buyer and seller Technology-related concerns (lack of standard protocols, system reliability, time & money investment) Lower operating costs (reduce paperwork & sourcing time, improve control inventory & spending) Improve procurement and sourcing efficiency (find new supply sources, imp communications, improve personnel use, lower cycle times) Reduce procurement prices (improve comparison shopping, reduce overall p paid)

single sourcing

the business practice of buying a particular product from only one supplier Optimum leverage and power over supplier Ability to develop closer relationships Development of value-adding programs such as supplier stocking, process improvement, etc.

Electronic Data Interchange (EDI)

the computer-to-computer exchange of business documents from a retailer to a vendor and back

Competitive Priorities

the dimensions along which a company chooses to compete in the targeted market

Radio Frequency Identification (RFID)

uses electronic tags and labels to identify objects wirelessly over short distances RFID plays an important role in supporting logistics and supply chain processes because of their ability to identify, trace and track information throughout the supply chain.