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OPRE 6371 Purchasing & Sourcing Management

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OPRE 6371 Purchasing & Sourcing Management

Student Learning Outcomes/Objectives


Know the role and function of

Purchasing and Sourcing management. Use industry related acronyms, vernacular, terms, processes, organization structures, job descriptions and customer-supplier relationships in context and complete understanding . Realize the importance of Purchasing and Sourcing management in modern day business.
OPRE 6371 Purchasing & Sourcing Management

Student Learning Outcomes/Objectives


Learn the major process steps

typically involved in Purchasing and Sourcing management. Use basic Purchasing and Sourcing management decision-making for problem solving. Demonstrate knowledge of insourcing, outsourcing, make versus buy, cost management and negotiation. Apply Supply Chain principles, techniques and knowledge to solve operational problems and develop
OPRE 6371 Purchasing & Sourcing Management

Purchasing & Supply Management Introduction


Textbook is 14th edition
v v v

Chapter sequence changed Case Studies added, half of total are new Focus on decision making in the Supply Chain strengthened Scope of work much more expanded role

Job of the Supply Manager has changed


v Cost containment and improvement Revenue enhancement Strategic Operational Additional growing in relevance, even more complex challenge
Balance sheet & income statement considerations Dimensions of risk, environmental and social considerations

Criteria for Supply decisions in three categories


Combination of theoretical and practical


v

Real world scenarios reviewed in case studies


4

OPRE 6371 Purchasing & Sourcing Management

OPRE 6371 Purchasing & Sourcing Management

Click to edit Master subtitle style

Chapter 1 Purchasing & Supply Management

OPRE 6371 Purchasing & Sourcing Management

Learning Objectives Chapter 1


Review the importance of Purchasing

& Sourcing Management Introduce terminology, supply & logistics Size of organization Spend & financial significance The nature of the organization Examine Supply qualifications & associations Look at challenges ahead for Supply Managers
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Corporate Supply Increasing Importance


Increased outsourcing places great reliance

on suppliers to respond to end-customer needs Greater dependence on suppliers for design and build responsibilities for complete subassemblies and subsystems Increased global competition Development of new product technologies Evolving information systems Trend to single sourcing with fewer key suppliers and strategic supplier relationships
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2000s Decade Recap Business & Technology


Y2K, 9/11 AOL / Time Warner Wikopedia Facebook, Twitter http://www.youtube.com/results?search_q Ipod, Iphone Enron, Worldcom 2008 Financial meltdown Bernie Madoff Nothing is Youtube

Certain any

OPRE 6371 Purchasing & Sourcing Management

Corporate Supply Opportunities


Identify opportunities to reduce unit costs

for products and services Identify opportunities to increase revenue Implement supply initiatives to improve customer satisfaction Reduce total costs of ownership (TCO) Improve efficiency/effectiveness of the supply process Maximize value from suppliers Work with key suppliers to provide product and service innovations
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Supply Chain Management The design and management of seamless and value-added processes across organizational boundaries to meet the real needs of the end customer. The development and integration of people and technological resources are critical to successful supply chain integration. *ISM definition
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Supply Terminology
Often used interchangeably;
v

Purchasing, procurement, materiel, materials management, logistics, sourcing, supply management, contracting, supply chain management Subtle differences ISM, APICS, CSCMP, JIT, DFT, P2P, VSM, CPSM, C.P.M., CPIM, CSCP, TQM, VA, VE, ROB, Ts & Cs, PP, MM, IM, WM, SAP, BATNA, RFI, RFP, RFQ, ECN, PO, BPO, MSA, MPA, EDI, ASN, VMI/SMI, ERP, MRP, CRP, S&OP, RFID, SOX, DFX, MRO, B2B, CPO, SBU, ESI, DMAIC, EOQ, PDCA, QFD, SPC, ISO, E2E Lean, Just in Time, Six Sigma, Demand Flow, Value Stream, Value Chain, 2% 15 net 45, 3Rs of sustainability, 7 Rs of supply objectives,

Acronyms and Terms rampant;


v

OPRE 6371 Purchasing & Sourcing Management

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Standard Steps in the Procurement Process


1. Recognition of need 2. Translation of that need into a 3. 4. 5. 6. 7.

commercially equivalent description Search for potential suppliers Selection of a suitable source Agreement on order or contract details Delivery of the products or services Payment of suppliers
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Further Responsibilities of Supply


Receiving, inspection, warehousing,

inventory control, materials handling, packaging, scheduling, inbound and outbound transportation, traffic, and disposal Customer order fulfillment, customer satisfaction These extensions led to the term Supply Chain Management

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What is Supply Chain Management?

http://www.youtube.com/watch?v=Mi1QBxVjZA Lets take a bottle of water to market.


v

Simple product

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Supply and Logistics


Institute of Supply Management, ISM = old

National Association of Purchasing Management, NAPM Council of Supply Chain Management Professionals, CSCMP = old Council of Logistics Management, CLM

Logistics management is that part of SCM

that plans, implements and controls the efficient, effective forward and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customers requirements.
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Major Logistics Activities


Customer service Demand Parts and service

forecasting/plannin g Inventory management Logistics communications Material handling Order processing Packaging
OPRE 6371 Purchasing & Sourcing Management

support Plant and warehouse site selection Purchasing Return goods handling Reverse logistics Traffic and transportation Warehouse storage
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The Evolution of the Supply Function


The Handling of Railway Supplies

Their Purchase and Disposition


v

Published in 1887

Attention in first half of 1900s to

reliable access to supply of raw materials, supplies and services Two vexing problems in the decade of the 1970s put senior management attention on the supply function:
v v

international shortage of basic raw materials price inflation

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The Evolution of the Supply Function


By 1990s firms faced challenges of

global supply chains and an increased reliance on suppliers


v

Outsourcing has led to increased reliance on suppliers for key components and services

Technological developments in the

early 21st century provides expectations for supply chain integration, lower transaction costs and faster response times.
v

New challenges in the areas sustainability, globalization, supply chain security and risk management
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OPRE 6371 Purchasing & Sourcing Management

The Evolution of the Supply Function earl y 190 0s Clerical and tactical
Focus on policies and

early 21st century


Strategic orientation Global supply chains Executive level

procedures Key challenges: availability of supply and cost management

leadership Key challenges: Sustainability, security, globalization, risk management

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Evolution of the Supply Chain


Pre 1939 1940-49 1950-69 1970-89 1990-1999 2000-2010 2010-Future

Clerical

World War II

Managerial emphasis

Purchasing strategy

Integration into corporate strategy Integrated supply Networks and Information technology Sustainability, security, globalization, risk management

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1950s office

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2010 Office

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Characteristics of an Integrated Strategic Procurement and Sourcing Function

Executive Leadership Executive committee support for integration across company and strategic business unit corporate plans Functional Leadership Company-wide customerfocused leadership Establish integrated visions workers at results and processes Drives supply base/supplier management strategies company-wide
OPRE 6371 Purchasing & Sourcing Management

Strategic Positioning External/internal customer focus Matrix management High-level positioning second, third or fourth levels Integration Cross-functional, crosslocation teaming Part of the technology, manufacturing and SBU planning process

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Characteristics of an Integrated Strategic Procurement and Sourcing Function


Supply Base Strategy Quality driven Design standardization Concurrent engineering Supply base optimization Commercial strategy emerging

Supplier Management Focused on supplier development Joint performance improvement efforts Value focused Total cost improvement Supplier benchmarking Systems Global databases Historical performance data Strategic EDI, Internet, EFT, CAD, CAM
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Measurement Customer orientation Total value/cost focused Benchmarking with best in class

OPRE 6371 Purchasing & Sourcing Management

Spend & Spend Management


Spend is the sum total a company

uses to buy goods and services needed to run the business Spend management is the way in which companies control and optimize the money they spend. It involves cutting operating and other costs associated with doing business. These costs typically show up as "operating costs" or SG&A (Selling, General and Administrative) costs, but can also be found in other areas and in other
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Spend Management
Spend Management is meant to

represent a holistic view of the activities involved in the "source-tosettle" or procure-to-pay process. This process includes spend analysis, sourcing, procurement, receiving, payment settlement and management of accounts payable and general ledger accounts. Spend Analytics is a hot button in software.
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Spend Management
Whether it is the money spent on

goods or services for direct inputs (raw goods and materials used in the manufacture of products), indirect material (office supplies and other expenses that do not go into a finished product), or services (temporary and contract labor, print services, etc.), a company needs a mechanism by which they are not only able to save money, but control costs.
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Spend Management
In an enterprise, spend management

is managing how to spend money to best effect in order to build products and services. The term is intended to encompass such processes as outsourcing, procurement, e-procurement, and supply chain management. Spend Analytics offers valuable insights into spending patterns, visibility into contract compliance, purchasing policy compliance, and can
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Profit-Leverage Effect
Financial impact of the corporate
v v

spend I soften illustrated in two ways;


Profit-Leverage Effect Return-on-Assets Effect

Profit-Leverage Effect = Purchasing

Multiplier Increase in Profit caused by a decrease in Spend


v

Direct bottom line impact

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Profit-Leverage Effect
Example:
v v v v

$100M sales revenue $60M purchase (representative 60% of Sales) $8M profit before taxes (representative 8% net) If $10% reduction in purchase spend thru cost savings

v v

To achieve $6M increase in Profit by increasing Sales, at 8% profit margin, would require $75M increase in Sales, $75M x .08 = $6M So, a 75% increase in sales would be needed to achieve same level of profit improvement Which would be more likely to be achieved?

Save $6M Profit increases 75% from $8M to $14M So, leverage factor is 75% ($8M x 1.75 = $14M or, $6M/$8M = .75)

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Return-on-Assets Factors

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Purchasings Operational and Strategic Contributions


1. Supply Contribution

Operation al Trouble Prevention

Strateg ic Opportunity
Maximization

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Purchasings Operational and Strategic Contributions


2. Supply Contribution

Dire ct Bottom-Line Impact

Performance of others

Indire ct Enhancing

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Purchasings Operational and Strategic Contributions


3. Supply Contribution

Negativ e Operationally
deficient Strategically deficient Directly deficient Indirectly deficient

Neutr al Operationally
acceptable Strategically deficient Directly acceptable Indirectly deficient

Positiv e Operationally
acceptable Strategically acceptable Directly acceptable Indirectly acceptable

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Differences between Manufacturing and Services Organizations Manufacturing


needs is generated by customer needs. The largest portion of spend with suppliers will be on direct requirements which comprise products sold to customers.

Services
of needs is generated by capital, services and other requirements enabling employees to provide the service. In retailing the
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The largest portion of The largest portion

OPRE 6371 Purchasing & Sourcing Management

Opportunities for Contribution of the Supply Function


Profit-leverage effect Return-on-assets effect Information source Effect on efficiency Effect on competitive position and customer satisfaction Effect on organizational risk Effect on image Training ground Management strategy and social policy
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Differentiations for Supply in Public Organizations

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Differentiations for Supply in Private Organizations

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Challenges Facing Purchasing


B2B e-commerce paperless, E2E Supply chain management adding

value Measurement assess the benefits Purchase of non-traditional goods and services
v

Benefits, real estate, insurance, energy, temp labor

Risk Management Contribution to corporate strategy


v

Sustainability, green, reverse logistics, disposal


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Recognition by senior management


OPRE 6371 Purchasing & Sourcing Management