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Product supply management is nothing but Procurement
Strategy, which is integral to corporate strategy.
A corporations corporate strategy and procurement
strategy must fit with each other or otherwise, both will
fail.
We will discuss the strategic decision making issues of
procurement and also how managers make decisions
related to both corporate and procurement strategy.
The discussions should facilitate understanding of the
issues of strategic implementation.
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The new global business environment
Fierce competition
Introduction of products with shorter and shorter
life cycles
Heightened expectations of customer
Continuing advances in communications and
transportation technologies (e.g. mobile
communication, Internet, overnight delivery)
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Cost impact of managing inventory
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Managing costs in the supply arena
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The Success Stories
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What exactly is procurement?
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A procurement or a supply example
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Buying Cereals from Wal-Mart
P&G or other
Wal- Mart Customer
Manufacturer
Corn Plastic
manufacturer Producer
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The Objectives of a Procurement Chain
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While managing procurement process is important for
managing costs and profits and delivering value to the
customer, it is not easy to do.
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Why should procurement be a challenging
problem?
Procurement chain network is often very
complex
Procurement chain partners have conflicting
objectives.
Consequently, making everyone to agree is
not an easy task.
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Conflicting Objectives
in the Procurement Chain
1. Purchasing wants
Stable volume requirements
Flexible delivery time
Little variation in mix
Large quantities
2. Manufacturing wants
Long run production
High quality
High productivity
Low production cost
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Conflicting Objectives
in the Procurement Chain
3. Warehousing wants
Low inventory
Reduced transportation costs
Quick replenishment capability
4. Customers want
Short order lead time
High in stock
Enormous variety of products
Low prices
Tell me why some of these objectives are conflicting.
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While we agree on the importance of
procurement, how does it translate
into a corporate strategy?
Achieving strategic Fit
Matching multiple strategies
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Business strategies change over time
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The Landscape changed
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What went wrong?
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Competitive Strategy let managers answer
questions such as
Relative to competitors, how should my firm
satisfy customers?
What products and services should we offer?
Should we focus on cost or should we focus more
on service and quick response?
How much customization should we allow on our
products?
Compare the competitive strategies of: Lands End
and a local retailer.
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Competitive Strategy and procurement Strategy
The relationship
Competitive strategy
procurement Strategy
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The Dells competitive and procurement
strategies
Competitive strategy: provide a large variety of
customizable computer-related products at a reasonable
price and to let customers select from thousands of
configurations.
procurement strategy: Two possible options: 1. Efficient
procurement limiting variety and exploiting economies of
scale or 2. High flexibility and responsiveness producing a
large variety of products.
Dells procurement Strategy is No. 2
Consequently, Dell focuses on designing easily
customizable products, common platforms and
components that can be assembled quickly.
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Achieving Strategic Fit Achieved
The steps involved
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First, take a look at two types of uncertainties Demand
Uncertainty and procurement chain uncertainty
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Demand uncertainty
(customer-induced)
Usually products that are less mature (electronics,
computers) have greater demand uncertainty (unlike
Salt or milk).
Forecasting demand for such products is very difficult
and usually not very accurate.
With forecasting difficulties, matching demand
against product and services supply is difficult.
For uncertain demand products, prices are not steady
and varies depending on demand levels.
At the same time, a firm could earn greater margin
from uncertain demand products.
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Procurement chain uncertainty, on the contrary, arises
due to constraints within a procurement
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Given procurement limitations, responding to
customer demand would require a compromise
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A comparison of cost and responsiveness
Responsiveness
High
Low
Cost
High Low
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Efficient and Responsive procurement chains A Comparison
Efficient Responsive
Primary goal Supply demand at the lowest Respond quickly to demand
cost
Lead time strategy Reduce but not at expense of Aggressively reduce even if
greater cost costs are significant
Supplier selection strategy Cost and low quality Speed, flexibility, quality
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Let us revisit Dells strategy
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Dell Achieving Strategic Fit
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Dell Achieving Strategic Fit
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Remember the following about Strategic Fit
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What did we learn