Supply Management Burt Sheila Richard Chapter 1

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

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Chapter 1

The Progression to Professional

Supply Management

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Key Concepts• Purchasing, Supply Management, and

Supply Chain Management Defined» Increasing Importance of Purchased Materials.

• Supply Management’s Impact on the Bottom Line» Increased Sales

» Faster to Market or Time-Based Competition

• Supply Management and Return on Investment

• The Progression to Proactive Supply Management

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What Is a Profession?

• A calling requiring specialized knowledge and often long and intensive preparation

• including instruction in skills and methods as well as in the scientific, historical, or scholarly principles underlying such skills and methods,

• maintaining by force of organization or concerted opinion high standards of achievement and conduct,

• and committing its members to continued study and to a kind of work which has for its prime purpose the rendering of a public service.

(Source: Webster's Third International Edition)(Source: Webster's Third International Edition)

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Purchasing: A Dynamic Profession

• Is purchasing a profession?

• Do the required skills have a historic foundation?

• Does the supply management profession render a public service?

• Is the profession undergoing changes?

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Six Key Business Functions(Supply Management’s Role in Business)

1. Creation, the idea or design function, frequently based on research and development

2. Finance, the capital acquisition, financial planning and control function

3. Personnel, the human resources and labor relations function

4. Supply, the acquisition of required materials, services, and equipment

5. Conversion, the transformation of materials into economic goods and services

6. Distribution, the marketing and selling of goods and services produced

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Evolution of Purchasing Function

• Purchasing: a Dynamic Profession

• Origins of Purchasing and Supply Management

• Transition to Supply Management

» Wider in Scope

» Value-Adding Benefits

» Strategic Focus

• Value‑Adding Benefits

• Strategic Focus

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Supply Management

• A Five Stage Process

» Identification of item or service required

» Identification of best supplier

» Establishment of a fair and reasonable price

» Creation of an enforceable agreement

» Management of the relationship

• Supply Management utilizes Strategic Sourcing

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Strategic Sourcing

• Strategic sourcing is understanding the markets you're purchasing from inside and out…

• …and learning from your own organization and your suppliers' organizational processes,…

• …working as a mediator between suppliers and your organization,…

• …and capturing information and using it to improve relationships.

• Strategic sourcing requires two-way continuous improvement process work from each organization

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Four Principles of Strategic Sourcing

1. Define the total value of the relationship between purchaser and suppler,

2. Develop solutions based on a deep understanding of the supplier's economics and business dynamics,

3. Use differentiated purchasing tactics in order to optimize the economic relationship for both purchaser and suppliers, and

4. Imbed the required changes in the organization so the purchaser achieves not only a near-term measurable performance improvement but also the ability to continuously improve

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Four Step Process of Implementation

• Research the industry economics and dynamics of the team's assigned commodity;

• Evaluate sourcing strategies and suppliers' capabilities;

• Structure the supply relationship jointly with suppliers and develop action plans to build the required infrastructure;

• Implement the plan and organize for continuous improvement

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Increasing Importance of Purchased Materials

• The Five Ms of Business: Machines, Man/Womanpower, Material, Money, Management

» Materials costs have increased

– As a percentage of the cost of goods sold

» Labor costs have decreased

» Machine power has replaced much of human (and horse) labor over the last 150 years

• The result?

» Materials costs are increasingly the focus of management

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Power Source Relationships: The Reduction of Labor Content in Products

Figure 1-1Figure 1-1

1850 1900 1950

2% 2%

50% 50%

98% 98%

Machine Power

Horse and Human

Key

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Supply Management and the Bottom Line

• Purchased items account for a large percentage of the cost of goods sold.

• Outsourcing allows firms to focus on their core competencies.

» Organizations outsource when they decide to purchase something they had been making in-house.

• A dollar saved in materials cost is usually considered a dollar increase in profit

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Supply Management’s Impact on Net Income and the Bottom Line

Increased Sales:• Faster to Market• Improved Quality• Pricing Flexibility• Innovation

Lower Total Cost:• Acquisition Cost• Processing Cost• Quality Cost• Downtime Cost• Risk Cost• Cycle Time Cost• Conversion Cost• Non-value Added Cost• Supply Chain Cost• Post Ownership Cost

Figure 1-2Figure 1-2

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Return onInvestments

10.0%

Total assets$4,000,000

Sales$5,000,000

Divided by

Profitmargin

8%

Asset turnoverrate1.25

Multiply

Cash$300,000

Accountreceivable$300,000

Inventories$500,000

Ass

ets

Labor$700,000

Materials$2,300,000

Overhead$800,000O

pe

ratin

g c

ost

ele

me

nts

($515,000)

($3,685,000)($2,185,000)(10.3%)

(1.26)

($3,975,000)

($1,075,000)

($475,000)

(13.0%)

What if wedecreasematerials costby 5%?(or $115,000)

Sales$5,000,000

Net income$400,000

Divided by

Fixed assets$2,900,000

Current assets$1,100,000

Plus

Other costs$800,000

Sales$5,000,000

Cost ofGoods Sold$3,800,000

Minus

Plus

Supply Management and Return on Investment

Figure 1-3Figure 1-3

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The Impact on ROI of Reducing Materials Costs vs. Increasing Sales

• If the same profit increase were to be generated by increasing sales, what sales increase would be required?

• At the existing 8% profit margin, the following calculation provides the answer…

• Profit increase = new sales X .08

• $115,000 = new sales X .08

• new sales = $1,437,500

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The Impact on ROI of Reducing Materials Costs vs. Increasing Sales

• therefore…..

• ($1,437,500 / $5,000,000) X 100 = 28.8%

• or a sales increase of 28.8% is required to match the profit increase generated by a 5% reduction in materials cost

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A Definition of Supply Chain Management

• Supply Chain Management is a set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses, and stores,…

• …so that merchandise is produced and distributed at the right quantities, to the right locations, and at the right time,…

• …in order to minimize system wide costs

• …while satisfying service level requirements.

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Source: Simchi-Levi, Kaminsky, and Simchi-Levi, Designing Source: Simchi-Levi, Kaminsky, and Simchi-Levi, Designing and Managing the Supply Chain, Irwin, McGraw-Hill, 2000.and Managing the Supply Chain, Irwin, McGraw-Hill, 2000.

The Supply Chain

MotherEarth

OriginalEquipmentManufacturers(OEM)

ExtractorsMinersHarvesters

Converters(suppliers)

Figure 1-4Figure 1-4

Materials and Service

Information/Funds/Relationships

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The Value Chain

MotherEarth

OriginalEquipmentManufacturers(OEM)

ExtractorsMinersHarvesters

Converters(suppliers)

MarketersDistributors

End Customer(the sourceof funds)

Figure 1-5Figure 1-5

Materials and Service

Information/Funds/Relationships

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The Supply and Value Networks

• Flexible virtual systems linked by communication systems and alliances.

• Simultaneous activities.

• Focus is on the ultimate customer to deliver:

» Value creation through innovation

» Value delivery through order fulfillment

» Value maintenance through after sales service

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The Extended Enterprise

• When a group or network of firms collaborate in partnership (alliance) fashion, this is sometimes referred to as a strategic network, virtual corporation, or extended enterprise

• When the group of firms view each other as partners and collaborate effectively for the good of the larger group, then they leave established an extended enterprise characterized by virtual integration

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Implementing Strategic SCM

Strategic Supply Management Institute and The Warren CompanyCopyright 2006

12

Pro-Active To Customer Responsive to Customer Reactive to Customer Isolated from CustomerTime Focus

Performance Metrics

Speed & Integration, Design Supply Base Integrated Supply Strategy

Process Innovation, Develop Requirements, Near Defect Free Supply

Squeeze the Vendor Internet Auctions Nothing

Basis of Competitive Advantage

Performance Metrics Timeliness & Efficiency

Low Component/Unit Cost, On Time Delivery

Speed, Effectiveness, Monitor Supply Environment

Coordination & Synchronicity Interconnectedness Relationships & Trust

Coordination & Cost, Develop Suppliers

Through-Put Global Impact Leverage Size of Buyer

Power Dynamics Between Buyer & Seller Do the Job

Moderate Integration Internal & External Integration: Supply , R&D, Logistics, Operations, Engineering, Marketing, Customer Service

Partial Internal IntegrationProcurement, Logistics, Operations, Engineering Low Internal Integration

Procurement & Logistics No Internal Integration

Purchasing

Integration Level & Functional Elements

Revenue & Bottom Line Impacts Increase Share Holder Value Transform Innovation into Value Improve Bottom Line

Some Consideration of Revenue Impacts Improve Bottom Line

No Consideration of Revenue Impacts Overhead-Cost Center

Financial Impact

Innovation Top & Bottom Line Internal Integration

Quality, Just In Time Total Cost of Ownership

Purchase Price Timely Availability,

ConvenienceValue Driver

4. StrategicSupply Chain Mgmt

3. ProactiveSupply Management

2. TransactionalMechanical

1. ReactiveClerical

BurtBurt--Lynch Supply Chain Evolution ModelLynch Supply Chain Evolution Model

5.0 World Class4.0 4.53.0 3.52.0 2.51.0 1.5Rating

Transactional & Collaborative Transactional, Collaborative, & Alliance

Adversarial & Transactional Personal

SupplierRelationships

e-Commerce “Should Cost” Analysis

Thomas Directory, Phone Book Rolodex

Understand Industries, Supply Base

Understand SuppliersKnowledge

VARIABLE

Building to World Class

Note: Some Elements of an Earlier Stage are Carried as a Foundation into the next stage, while other elements may be discarded

Copyright D.N.Burt & R.P.Lynch

Pro-Active as Market Differentiator for Customer Considered As Part of TCO Added Cost Factor Not Considered

Environmental

Figure 1.6

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Concluding Remarks

• Purchasing is the foundation of Supply Management and a basic activity common to all organizations.

• Effective Supply Management has an overwhelming impact on the firm’s bottom line giving organizations a competitive edge.

• Supply Management provides tremendous career opportunities

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