-
2012 Cengage Learning. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website,
in whole or in part.*LEARNING OBJECTIVESYou should be able to:
Understand the role of supply management and its strategic impact
on an organizations competitive advantage Have a basic knowledge of
the manual purchasing process, e-procurement, public procurement,
and green purchasing Understand and know how to handle small value
purchase orders Understand sourcing decisions and the factors
impacting supplier selection
2012 Cengage Learning. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
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2012 Cengage Learning. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website,
in whole or in part.*LEARNING OBJECTIVES (Continued)You should be
able to: Understand the pros and cons of single sourcing versus
multiple sourcing Understand the pros and cons of single versus
multiple sourcing Describe opportunities and challenges of global
sourcing and its impacts on supply management Understand and
compute total cost of ownership
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copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
-
2012 Cengage Learning. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website,
in whole or in part.*CHAPTER OUTLINEIntroductionA Brief History of
Purchasing TermsThe Role of Supply Management in an OrganizationThe
Purchasing ProcessSourcing Decisions The Make or Buy DecisionRoles
of Supply BaseSupplier SelectionHow Many Suppliers to UsePurchasing
OrganizationInternational Purchasing/Global SourcingProcurement for
Government/Non-Profits Agencies
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copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
-
Purchasing Obtaining merchandise, capital equipment, raw
materials, services, or maintenance, repair, and operating (MRO)
supplies in exchange for money or its equivalent. - also it is the
key business function for acquiring materials, services, &
equipment
Merchants Wholesalers and retailers who purchase for resale
purpose.
Industrial Buyers Purchase raw materials for conversion,
services, capital equipment, & MRO supplies. (e.g.
manufacturers)A Brief History of Purchasing Terms2012 Cengage
Learning. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or
in part.*
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-
A Brief History of Purchasing Terms (Continued)Contracting -
term often used for the acquisition of services
Supply Management - a newer term that encompasses all
acquisition activitiesInstitute of Supply Management defined supply
management as the: Identification, acquisition, access,
positioning, and management of resources an organization needs or
potentially needs in the attainment of its strategic
objectives.
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in whole or in part.*
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-
The Role of Supply Management in an OrganizationThe primary
goals of purchasing are:Ensure uninterrupted flows of raw materials
at the lowest total cost, Improve quality of the finished goods
produced, and Maximize customer satisfaction. Purchasing
contributes to these objectives by: Actively seeking better
materials and reliable suppliers, Work closely with and taking
advantage the expertise of strategic suppliers to improve quality
and materialsInvolving suppliers and purchasing personnel in new
product design and development efforts.2012 Cengage Learning. All
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posted to a publicly accessible website, in whole or in part.*
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The increasing use of outsourcing noncore activities has
elevated the role of purchasing in a firm. In addition to affecting
the competitiveness of a firm, purchasing also directly affects
profitability.
Therefore, firms should focus on financial significance of
supply management.2012 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.*The Role of Supply
Management in an Organization (Continued)
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The Role of Supply Management in an Organization (Continued)The
Financial Significance of Supply ManagementProfit-Leverage
EffectMeasures the impact of a change in purchase spend on a firms
profit before taxes, assuming gross sales and other expenses remain
unchanged. Or a decrease in purchasing expenditures directly
increases profits before taxes (assuming no decrease in quality or
purchasing total cost).Return on Assets (ROA) EffectIs a financial
ratio of a firms net income in relation to its total assets. ROA
indicates how efficiently management is using its total assets to
generate profits. A high ROA suggests that the management is
capable of generating large profits with little investment.2012
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or duplicated, or posted to a publicly accessible website, in whole
or in part.*
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Inventory Turnover Effect Shows how many times a firms inventory
is utilized and replaced over an accounting period, such as a
year.Increased inventory turnovers indicate optimal utilization of
space and inventory levels, increased sales, avoidance of inventory
obsolesce
2012 Cengage Learning. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website,
in whole or in part.*The Role of Supply Management in an
Organization (Continued)
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The Role of Supply Management in an Organization (Continued)The
Financial Significance of Supply ManagementProfit-Leverage
Effect
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copied or duplicated, or posted to a publicly accessible website,
in whole or in part.*
2012 Cengage Learning. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
Sheet1
Profit Leverage Effect
Simplified P&LIncrease Sales 10%Decrease Cost 10%
Gross Sales1,000,0001,100,0001,000,000
- Cost of Goods Sold (50%)(500,000)(550,000)(450,000)
= Gross Profit500,000550,000550,000
- Sales, General, & Administrative
(45%)(450,000)(495,000)(450,000)
= Profit Before Tax50,00055,000100,000
Change in Profit10%100%
Sheet2
Sheet3
Sheet4
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The Role of Supply Management in an Organization (Continued)The
Financial Significance of Supply ManagementReturn on Assets (ROA)
Effect
2012 Cengage Learning. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website,
in whole or in part.*
2012 Cengage Learning. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
Sheet1
Profit Leverage Effect
Simplified P&LIncrease Sales 10%Decrease Cost 10%
Gross Sales1,000,0001,100,0001,000,000
- Cost of Goods Sold (50%)(500,000)(550,000)(450,000)
= Gross Profit500,000550,000550,000
- Sales, General, & Administrative
(45%)(450,000)(495,000)(450,000)
= Profit Before Tax50,00055,000100,000
Change in Profit10%100%
Return on Assets Effect
Simplified P&LIncrease Sales 10%Decrease Cost 10%
Gross Sales1,000,0001,100,0001,000,000
- Cost of Goods Sold (50%)(500,000)(550,000)(450,000)
= Gross Profit500,000550,000550,000
- Sales, General, & Administrative
(45%)(450,000)(495,000)(450,000)
= Profit Before Tax50,00055,000100,000
Assets500,000500,000500,000
Return on Assets10%11%20%
Sheet2
Sheet3
Sheet4
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The Purchasing Process Manual Purchasing (older system)Step 1-
Material Requisition/Purchase Requisition Stating product,
quantity, and delivery date. May originate as a planned order
release from the MRP system. Traveling requisition used for
repeating orders.Step 2- The Request for Quotation (RFQ) Buyer
identifies suppliers and issues a request for quotation (RFQ) for
routine items or a Request for Proposal (RFP) for a complicated and
high technical component part. Supplier Development is used to
develop supplier capabilities, quality, delivery and cost
performance.Step 3- The Purchase Order (PO) It is the buyers offer
and becomes a binding contract when accepted by supplier. When
initiated by the supplier on their own terms, the document is a
sales order. The Uniform Commercial Code (UCC) governs the purchase
and sales of goods in the U.S., except Louisiana.2012 Cengage
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The Purchasing Process Manual PurchasingFigure 2.12012 Cengage
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The Purchasing Process Manual Purchasing (Continued)Figure
2.22012 Cengage Learning. All Rights Reserved. May not be scanned,
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Figure 2.3The Purchasing Process Manual Purchasing
(Continued)2012 Cengage Learning. All Rights Reserved. May not be
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website, in whole or in part.*
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The Purchasing Process e-ProcurementStep 1- Material user inputs
a materials requisition Relevant information such as quantity and
date needed. Step 2- Materials requisition submitted to buyer At
purchasing department (hardcopy or electronically). Step 3- Buyer
assigns qualified suppliers to bid Product description, closing
date, & conditions are given. Step 4- Buyer reviews closed bids
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Figure 2.4The Purchasing Process e-Procurement2012 Cengage
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Advantages of the e-Procurement SystemTime savingsCost
savingsAccuracyReal time (once the purchase requisition is
processed, the buyer can post the bid immediately, instead of
waiting to contact all the suppliers individually to alert them of
the bids.)MobilityTrackabilityManagement (summary statistics and
supplier performance reports can be generated for management to
review and utilize for future planning.)Benefits to the suppliers
(lower barriers to entry to market conditions)The Purchasing
Process e-Procurement (Continued)2012 Cengage Learning. All Rights
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publicly accessible website, in whole or in part.*
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Small Value Purchase OrdersProcessing costs for small value
purchases are minimized through:Procurement Credit Card/Corporate
Purchasing Card (P-card)Blanket or Open-End Purchase Orders (covers
a variety of items and is negotiated for repeated supply over a
fixed time period)Blank Check Purchase Orders (special purchase
order, usually signed blank check attached at the bottom of the
purchase order)Stockless Buying or System Contracting (requires the
suppliers to maintain a minimum inventory level)Petty Cash (a small
cash reserve maintained by a midlevel manager or
clerk)Standardization & Simplification of Materials &
ComponentsAccumulating Small Orders to Create a Large OrderUsing a
Fixed Order Interval (to group materials and supplies into
categories and set fixed order intervals for each category)2012
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Sourcing Decisions The Make or Buy DecisionOutsourcing Buying
materials and components from suppliers instead of making them
in-house. The trend has moved toward outsourcing. Backward vertical
integration Refers to acquiring sources of supply (upstream
suppliers)Forward vertical integration Refers to acquiring
customers operations (downstream customers)
The make or buy decision is a strategic decision2012 Cengage
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Reasons for Buying or OutsourcingCost advantage Especially for
components that are non-vital to the organizations operations,
suppliers may have economies of scaleInsufficient capacity A firm
may be at or near capacity and subcontracting from a supplier may
make better senseLack of expertise Firm may not have the necessary
technology and expertiseQuality Suppliers may have better
technology, process, skilled labor, and the advantage of economy of
scaleSourcing Decisions The Make or Buy Decision (Continued)2012
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Reasons for MakingProtect proprietary technology No competent
supplier (or capable and suitably skilled suppliers)Better quality
controlUse existing idle capacityControl of lead-time
transportation, and warehousing cost (since management controls all
phases of the design, manufacturing and delivery processes.) Lower
cost (for large quantity of the components on the continuing
basis)Sourcing Decisions The Make or Buy Decision (Continued)2012
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or duplicated, or posted to a publicly accessible website, in whole
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The Make-or-Buy Break-Even Analysis Sourcing Decisions The Make
or Buy Decision (Continued)2012 Cengage Learning. All Rights
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The Make-or-Buy Break-Even Analysis Find break-even point Q by
setting the total cost of the two options equal to one another and
solving for Q:
Total Cost to Make = Total Cost to Buy
25,000 + 5Q = 500 + 7Q 7Q 5Q = 25,000 500 2Q = 24,500 Q = 12,250
units = Break-even pointSourcing Decisions The Make or Buy Decision
(Continued)2012 Cengage Learning. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.*
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in whole or in part.
Sheet1
Profit Leverage Effect
Simplified P&LIncrease Sales 10%Decrease Cost 10%
Gross Sales1,000,0001,100,0001,000,000
- Cost of Goods Sold (50%)(500,000)(550,000)(450,000)
= Gross Profit500,000550,000550,000
- Sales, General, & Administrative
(45%)(450,000)(495,000)(450,000)
= Profit Before Tax50,00055,000100,000
Change in Profit10%100%
Return on Assets Effect
Simplified P&LIncrease Sales 10%Decrease Cost 10%
Gross Sales1,000,0001,100,0001,000,000
- Cost of Goods Sold (50%)(500,000)(550,000)(450,000)
= Gross Profit500,000550,000550,000
- Sales, General, & Administrative
(45%)(450,000)(495,000)(450,000)
= Profit Before Tax50,00055,000100,000CostsMakeBuy
Assets500,000500,000500,000Fixed$25,000$500
Return on Assets10%11%20%Variable$5$7
Annual Requirements15,000
Sheet2
Sheet3
Sheet4
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The Make-or-Buy Break-Even Analysis Total Cost for both options
at the Break-even Point TCBE = 25,000 + 512,250= 86,250 dollars
Total Cost for the Make Option at 15,000 units; TCMake = 25,000
+ 515,000= 100,000 dollars
Total Cost for the Buy Option at 15,000 units;TCBuy = 500 +
715,000= 105,500 dollars
Cost Difference =TCBuy TCMake= 105,500 100,000= 5,500
dollarsSourcing Decisions The Make or Buy Decision (Continued)2012
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in whole or in part.
Sheet1
Profit Leverage Effect
Simplified P&LIncrease Sales 10%Decrease Cost 10%
Gross Sales1,000,0001,100,0001,000,000
- Cost of Goods Sold (50%)(500,000)(550,000)(450,000)
= Gross Profit500,000550,000550,000
- Sales, General, & Administrative
(45%)(450,000)(495,000)(450,000)
= Profit Before Tax50,00055,000100,000
Change in Profit10%100%
Return on Assets Effect
Simplified P&LIncrease Sales 10%Decrease Cost 10%
Gross Sales1,000,0001,100,0001,000,000
- Cost of Goods Sold (50%)(500,000)(550,000)(450,000)
= Gross Profit500,000550,000550,000
- Sales, General, & Administrative
(45%)(450,000)(495,000)(450,000)
= Profit Before Tax50,00055,000100,000CostsMakeBuy
Assets500,000500,000500,000Fixed$25,000$500
Return on Assets10%11%20%Variable$5$7
Annual Requirements15,000
Sheet2
Sheet3
Sheet4
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Roles of Supply BaseSupply Base - list of suppliers that a firm
uses to acquire its materials, services, supplies, and
equipmentFirms emphasize long-term strategic supplier relationship
unifying volume into one or fewer suppliers, resulting in a smaller
supply basePreferred suppliers supply:Product and process
technology and expertise to support buyers operations, particularly
in new product development and value analysisInformation on latest
trends in materials, processes, or designsInformation on the supply
market such as shortages, price increases, etc.Capacity for meeting
unexpected demandCost efficiency due to economies of scale2012
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Supplier SelectionProduct and process technologiesWillingness to
share technologies & information Early supplier involvement
(ESI)Concurrent engineering (CE)QualityServiceCost Total cost of
ownership or acquisitionReliability Order system & cycle
timeCapacityCommunication capabilityLocationThe process of
selecting suppliers, is complex and should be based on multiple
criteria:2012 Cengage Learning. All Rights Reserved. May not be
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Supplier Selection (Continued)Total cost of ownership or
acquisitionFigure 2.62012 Cengage Learning. All Rights Reserved.
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How Many Suppliers to UseReasons Favoring a Single SupplierTo
establish a good relationshipLess quality variabilityLower
costTransportation economiesProprietary product or processVolume
too small to split (if the requirement is too small, it is not
worthwhile to split the order among many suppliers)Reasons Favoring
Multiple SuppliersNeed capacitySpread risk of supply
interruptionCreate competitionInformationDealing with special kinds
of business Single-source - a risky proposition. Current trends
favor fewer sources.2012 Cengage Learning. All Rights Reserved. May
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Purchasing Centralized vs. Decentralized Purchasing Organization
is dependent on many factors, such as market conditions & types
of materials requiredCentralized Purchasing - purchasing department
located at the firms corporate office makes all the purchasing
decisionsDecentralized Purchasing - individual, local purchasing
departments, such as plant level, make their own purchasing
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Advantages - Centralization Concentrated volume- Leveraging
purchase volume Avoid duplication Specialization Lower
transportation costs No competition within units Common supply base
(thus make it easier to manage and to negotiate
contracts.)Advantages - DecentralizationCloser knowledge of
requirementsLocal sourcingLess bureaucracyPurchasing Centralized
vs. Decentralized (Continued)2012 Cengage Learning. All Rights
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2012 Cengage Learning. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website,
in whole or in part.*Purchasing Centralized vs. Decentralized
(Continued)A hybrid purchasing organization: Allows the firms to
take the advantages of both the centralized and decentralized
systems.
Decentralized-centralized (large multiunit organizations)-
decentralize purchasing at the corporate level and centralize the
procurement at business unit levelCentralized-decentralized (large
organizations with centralized control) centralize large national
contracts at the corporate level, but decentralize buying at the
business unit level
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International Purchasing/Global SourcingReasons for Global
Sourcing Opportunity to improve quality, cost, and delivery
performancePotential Challenges Global sourcing poses challenges
that purchasing must know how to handle effectively:the complexity
and costs involved in selecting foreign suppliers and dealing with
duties, tariffs, custom clearance, currency exchange and political,
cultural, labor and legal problems present sizable challenges for
the international buyer.2012 Cengage Learning. All Rights Reserved.
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Procurement for Government & Non-Profit AgenciesPublic
Procurement or Public Purchasing purchasing & supply function
for government & non-profit sector such as educational
institutions, hospitals, Public Procurement is characterized
by:Competitive bidding - contract is usually awarded to lowest
priced bidder determined to be responsive & responsible by the
buyer.Sealed Bids are used to satisfy the Invitation for Bid (IFB)
when the requirements are clear, accurate and complete, and are
opened in public displayBid or Surety Bonds guarantee the work of
the successful bidder will accept contractPerformance Bonds
guarantee the work of the successful bidder meets specifications
and in the time statedPayment Bonds protect the buyer against any
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Procurement for Government & Non-Profit Agencies
(Continued)Rules that often govern Government & Non-Profit
Procurement:Federal Acquisition Streamlining Act (1994) Removed
restrictions on bids less than $100,000. Micro purchases (less than
$2,500) can be made without biddingBuy American Act (1933) Mandates
US government purchases and third-party purchases that utilize
federal funds to buy domestically produced goods, if the price
differential between the domestic product and an identical
foreign-sourced product does not exceed a certain percentage
amount.Green Purchases Variety of federal, state, and local
initiatives to include environmental and human health
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