Ch4: Procurement
Supplier Audits
Attempts to develop a detailed understanding of a supplier's organization and capabilities Cross functional team from buyer's org visits supplier facilities to conduct extensive audits of processes and systems to evaluate their ability to generate quality products in a timely fashion Always investigate supplier quality management and continuous improvement processes Goal- ensure supplier has desired critical capabilities currently and also that these capabilities will be maintained
Supplier Development
Buyer's activities to improve supplier's performance and/or capabilities based on following approach 1. Identify critical products and services 2. Form cross functional team 3. Identify critical suppliers 4. Identify areas for performance improvement 5. Meet with top management of suppliers 6. Identify key projects to drive performance improvements 7. Develop/define details in a formal agreement 8. Implement/monitor status
Leverage Purchases
Commodity items where many alternatives of supply exist and supply risk is low Spend is high and there are potential procurement savings
Reasons for the Decision to Buy
Cost advantage Insufficient internal capacity Lack of expertise in house Better quality from third party
Electronic Data Interchange
EDI Electronic transmission of data between a firm and its suppliers Shares information and knowledge such as order entry, planning/scheduling, tracking, delivery, billing and payment
Value Management
Earlier suppliers are involved the better Changes made earlier are easier to do, less costly, and more efficient and effective if done early
Procurement
Elevated importance of purchasing to a strategic activity Purchased goods/services among highest cost for most firms Growing emphasis on outsourcing Chief Procurement Officer (CPO) position established by most companies
Procurement Objectives
Ensure continuous supply Minimize inventory investment Quality improvement Supplier development- supplier selection, build supplier relationships, continuous supplier improvement Access to technologies and innovation Lowest total cost of ownership (TOC)- main focus
Life Cycle Costs
Final aspect of lowest TCO includes numerous elements known as life cycle costs Administrative expense associated with procurement activity itself- screening potential suppliers, negotiation, order prep/transmission, receiving, inspecting, and payment Defective finished goods, scrap, and rework costs- associated with poor supplier quality
Supplier Recognition Programs
Gives suppliers something to strive for and drives company behavior Companies should recognize and celebrate the achievements of their best suppliers Award winners exemplify true partnerships Award winners serve as role models
Purchasing
Historically perceived as just a buying function for manufacturing, repair materials, and supplies Lowest price possible for most acceptable quality Simply responded to the demands of the production group and the rest of the organization
International Organization for Standardization
ISO Independent, non governmental membership organization and the world's largest developer of voluntary international standards
Spend Analysis
Identifies how much is being spent on each type of product/service across all locations in the firm
Benefits of Supplier Certification
Improve supplier competitiveness Optimize source selection process Reduce inspection Support lean manufacturing
Routine Purchases
Items that involve a low percentage of the firm's total spend and involve very little supply risk
Insourcing vs. Outsourcing
Make vs buy decision Outsourcing- buy materials/components from suppliers instead of making them in house Strategic decision
Procurement Strategies- 3 Considerations
Make vs buy- produce internally or purchase from outside suppliers Determine which strategic approach to take in dealing with external suppliers Determine which strategic approach to take for the different types of products/services the organization buys
Procurement and the Logistical Interface
Much in common especially with inbound flow of materials and products Must coordinate to ensure continuous flow of products through the supply chain- inbound transportation, warehousing of raw materials and components, inventory control
Reasons for the Decision to Make
No competent supplier exists Protect proprietary technology Better quality control Use existing idle capacity Control of lead time, transportation, and warehousing cost Overall lower cost
Internal Based Communiations
Offers several opportunities for making product information available while overcoming compatibility issues between computer services Electronic catalogues allow rapid access to product information, specifications, pricing, and ordering Buying exchanges allow sellers or buyers of specific goods/services to find each other on a common website
Supplier Certification
Organization's process for evaluating quality systems of key suppliers in an effort to eliminate incoming inspections Assures supplier's product is produced, packaged, and shipped under a controlled process that results in consistent conformance to buyer's requirements
Procurement Perspective
Organizational capability that ensures the firm is positioned to implement its strategies with support from its supply base Looks at whole supply chain for impacts/opportunities Focuses on building relationships with suppliers Includes more than just purchasing raw materials and parts, includes services and subcontracting as well Risk management
Components of Total Cost of Ownership
Pre-transaction costs- activities carried out prior to actual buy/sell transaction Transaction costs- activities carried out as part of the actual buy/sell transaction Post-transaction costs- activities carried out following the actual buy/sell transaction
Supplier Evaluation
Process to identify the best and most reliable suppliers Sourcing decisions are formal and made based on facts Frequent feedback to suppliers helps avoid surprises and maintains good relationships Suppliers should provide constructive feedback to you
Supplier Selection Considerations
Product and process technologies Willingness to share information and technologies Quality Service Cost Reliability Order system and cycle time Capacity Communication capabilities Location Financial stability
4 Elements of Cost
Quality Service Delivery Price TCO is the sum of the cost elements Each element has an impact on TCO
Discounts Associated with Purchase Price
Related to price quote Normally a schedule for 1+ possible discounts buyer may receive Quantity discounts- inducement to buyers to purchase larger quantities Cash discounts- prompt payment of invoices
Portfolio Spend Categories
Routine purchases Bottleneck purchases Leverage purchases Critical purchases
Service Pricing and Debundling
Sellers typically offer standard services that must be considered in procurement Value added services may also be offered and evaluated to find lowest TCO Many services involve logistical interface between buyers and sellers- delivery Special packaging, preparation of promotional displays, subassembly operations Consider trade offs involved in terms of value added services versus cost and price of each service
ISO 14000
Series of environmental management standards
ISO 9000
Series of quality standards
Pareto Principle
Small percentage of items account for large percentage of dollars spent "A" items in ABC inventory classification system Purchasing processes should be tailored to the value and/or criticality of the materials needed Segmented approach is used to prioritize resources for purchasing
Critical Purchases
Strategic items and services that involve a high level of expenditure and are vital to the firm's success
Total Cost of Ownership
Sum of all the costs associated with every activity in the supply stream of a product Purchase price of a material is important but its only 1 part of total cost equation, other factors must be considered such as discounts to purchase price, service pricing and debundling, and life cycle costs
5 Key Areas of a Typical Spend Analysis
Total historic expenditure and volumes Future demand projections or budgets Expenditure categorized by commodity and sub-commodity Expenditure by division, department, or user Expenditure by supplier
Bottleneck Purchases
Unique procurement problems Supply risk is high and availability is low Small number of alternative suppliers