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1OPRE 6371 – Purchasing & Sourcing Management
OPRE 6371 Purchasing & SourcingManagement
Welcome!
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2OPRE 6371 – Purchasing & Sourcing Management
Student LearningOutcomes/Objectives
ü Know the role and function of Purchasing and Sourcingmanagement.
ü Use industry related acronyms,
vernacular, terms, processes,organization structures, jobdescriptions and customer-supplier
relationships in context and completeunderstanding .
ü Realize the importance of Purchasingand Sourcing management in modern
day business.
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3OPRE 6371 – Purchasing & Sourcing Management
Student LearningOutcomes/Objectives
ü Learn the major process stepstypically involved in Purchasing andSourcing management.
ü Use basic Purchasing and Sourcing
management decision-making forproblem solving.
ü Demonstrate knowledge of insourcing,
outsourcing, make versus buy, costmanagement and negotiation.
ü Apply Supply Chain principles,techniques and knowledge to solveoperational problems and develop
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4OPRE 6371 – Purchasing & Sourcing Management
Purc as ng & Supp y ManagementIntroduction
ü Textbook is 14th editionv Chapter sequence changedv Case Studies added, half of total are newv Focus on decision making in the Supply Chain
strengthened
ü Job of the Supply Manager has changedv Scope of work much more expanded role
Ø Cost containment and improvementØ Revenue enhancement
v Criteria for Supply decisions in three categoriesØ StrategicØ OperationalØ
Additional – growing in relevance, even more complex challenge»Balance sheet & income statement considerations
»Dimensions of risk, environmental and social considerations
ü Combination of theoretical and practicalv Real world scenarios reviewed in case studies
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5OPRE 6371 – Purchasing & Sourcing Management
Click to edit Master subtitle style
Chapter 1Purchasing &
SupplyManagement
OPRE 6371 Purchasing & SourcingManagement
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6OPRE 6371 – Purchasing & Sourcing Management
Learning Objectives – Chapter 1
ü Review the importance of Purchasing& Sourcing Management
ü Introduce terminology, supply &logistics
ü Size of organization Spend & financialsignificance
ü The nature of the organization
ü Examine Supply qualifications &associations
ü Look at challenges ahead for Supply
Managers
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Corporate Supply IncreasingImportance
ü Increased outsourcing places great relianceon suppliers to respond to end-customerneeds
ü Greater dependence on suppliers for design
and build responsibilities for completesubassemblies and subsystems
ü Increased global competition
ü Development of new product technologies
ü Evolving information systemsü Trend to single sourcing with fewer key
suppliers and strategic supplierrelationships
d i
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2000’s Decade Recap – Business &Technology
ü Y2K, 9/11ü AOL / Time Warner
ü Wikopedia
üFacebook, Twitterü Ipod, Iphone
ü Enron, Worldcom
ü2008 Financial meltdownü Bernie Madoff
ü Youtube
http://www.youtube.com/results?search_
“Nothing isCertain any
”
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Corporate Supply Opportunities
ü Identify opportunities to reduce unit costsfor products and services
ü Identify opportunities to increase revenue
ü Implement supply initiatives to improve
customer satisfactionü Reduce total costs of ownership (TCO)
ü Improve efficiency/effectiveness of thesupply process
ü Maximize value from suppliersü 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 processesacross organizational boundaries to
meet the real needs of the end
customer.
The development and integration of
people and technological resources arecritical to successful supply chainintegration.”*ISM definition
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Supply Terminology
ü Often used interchangeably;v Purchasing, procurement, materiel, materialsmanagement, logistics, sourcing, supplymanagement, contracting, supply chainmanagement
v Subtle differences
ü Acronyms and Terms rampant;v ISM, APICS, CSCMP, JIT, DFT, P2P, VSM, CPSM,
C.P.M., CPIM, CSCP, TQM, VA, VE, ROB, T’s & C’s,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…
v Lean, Just in Time, Six Sigma, Demand Flow,Value Stream, Value Chain, 2% 15 net 45, 3R’sof sustainability, 7 R’s of supply objectives,
St d d St i th P t
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Standard Steps in the ProcurementProcess
1. Recognition of need2. Translation of that need into acommercially equivalent description
3. Search for potential suppliers
4. Selection of a suitable source
5. Agreement on order or contractdetails
6. Delivery of the products or services
7. Payment of suppliers
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Further Responsibilities of Supply
üReceiving, inspection, warehousing,inventory control, materials handling,packaging, scheduling, inbound andoutbound transportation, traffic, and
disposalü Customer order fulfillment, customer
satisfaction
ü These extensions led to the termSupply Chain Management
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OPRE 6371 – Purchasing & Sourcing Management
What is Supply Chain Management?
ü http://www.youtube.com/watch?v=Mi1QBxVjZ
ü Let’s take a bottle of water to market….v Simple product
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OPRE 6371 – Purchasing & Sourcing Management
Supply and Logistics
ü Institute of Supply Management, ISM = oldNational Association of PurchasingManagement, NAPM
ü Council of Supply Chain ManagementProfessionals, CSCMP = old Council of Logistics Management, CLM
ü “Logistics management is that part of SCM
that plans, implements and controls theefficient, effective forward and reverse flowand storage of goods, services, and relatedinformation between the point of origin and
the point of consumption in order to meetcustomers re uirements.”
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OPRE 6371 – Purchasing & Sourcing Management
Major Logistics Activities
ü Customer service
ü Demand
forecasting/planning
ü Inventorymanagement
ü Logistics
communicationsü Material handlingü Order processingü Packaging
ü Parts and service
supportü Plant and
warehouse
site selectionü Purchasingü Return goods
handling
ü Reverse logisticsü Traffic and
transportationü Warehouse storage
Th E l ti f th S l
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OPRE 6371 – Purchasing & Sourcing Management
The Evolution of the SupplyFunction
ü The Handling of Railway Supplies – Their Purchase and Disposition
v Published in 1887
ü Attention in first half of 1900s to
reliable access to supply of rawmaterials, supplies and services
ü Two vexing problems in the decade of
the 1970s put senior managementattention on the supply function:v international shortage of basic raw materialsv price inflation
The Evolution of the Supply
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OPRE 6371 – Purchasing & Sourcing Management
The Evolution of the SupplyFunction
üBy 1990s firms faced challenges of global “supply chains” and anincreased reliance on suppliers
v Outsourcing has led to increased reliance onsuppliers for key components and services
ü Technological developments in theearly 21st century providesexpectations for supply chain
integration, lower transaction costsand faster response times.
v New challenges in the areas sustainability,globalization, supply chain security and riskmanagement
The Evolution of the Supply
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OPRE 6371 – Purchasing & Sourcing Management
The Evolution of the SupplyFunction
early
1900s
early21st
century
ü Clerical and tacticalü Focus on policies and
proceduresü Key challenges:
availability of supply
and cost management
ü Strategic orientationü Global supply chainsü Executive level
leadershipü Key challenges:
Sustainability,security, globalization,risk management
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20OPRE 6371 – Purchasing & Sourcing Management
Evolution of the Supply Chain
Pre 1939 1940-49 1950-69 1970-89 1990-1999
2000-2010
2010-Future
Clerical World War II Managerialemphasis
Purchasingstrategy
Integrationinto
corporatestrategyIntegrated supply
Networks andInformationtechnology
Sustainability,security,
globalization, risk
management
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21OPRE 6371 – Purchasing & Sourcing Management
1950’s office
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22OPRE 6371 – Purchasing & Sourcing Management
2010 Office
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23OPRE 6371 – Purchasing & Sourcing Management
StrategicProcurement and Sourcing Function
Executive Leadershipü Executive committee
support for integrationacross company andstrategic business unitcorporate plans
Strategic Positioningü External/internal customer
focusü Matrix managementü High-level positioning -
second, third or fourth
levelsFunctional Leadershipü Company-wide customer-
focused leadershipü Establish integrated
visions workers at resultsand processes
ü Drives supplybase/suppliermanagement strategiescompany-wide
Integrationü Cross-functional, cross-
location teamingü Part of the technology,
manufacturing and SBU
planning process
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24OPRE 6371 – Purchasing & Sourcing Management
StrategicProcurement and Sourcing Function
Supply Base Strategyü Quality drivenü Design standardizationü Concurrent engineeringü Supply base optimizationü Commercial strategy
emerging
Supplier Management
ü Focused on supplierdevelopment
ü Joint performance improvementefforts
ü Value focused
ü Total cost improvementü Supplier benchmarking
Measurementü Customer orientation
ü Total value/cost focusedü Benchmarking with best inclass
Systemsü Global databasesü Historical performance
dataü Strategicü EDI, Internet, EFT, CAD,
CAM
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25OPRE 6371 – Purchasing & Sourcing Management
Spend & Spend Management
ü Spend is the sum total a companyuses to buy goods and servicesneeded to run the business
ü Spend management is the way in
which companies control and optimizethe money they spend. It involvescutting operating and other costs
associated with doing business. Thesecosts typically show up as "operatingcosts" or SG&A (Selling, General andAdministrative) costs, but can also be
found in other areas and in other
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26OPRE 6371 – Purchasing & Sourcing Management
Spend Management
ü Spend Management is meant torepresent a holistic view of theactivities involved in the "source-to-settle" or “procure-to-pay” process.
This process includes spend analysis,sourcing, procurement, receiving,payment settlement and managementof accounts payable and generalledger accounts.
ü Spend Analytics is a hot button insoftware.
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27OPRE 6371 – Purchasing & Sourcing Management
Spend Management
ü Whether it is the money spent ongoods or services for direct inputs (rawgoods and materials used in themanufacture of products), indirect
material (office supplies and otherexpenses that do not go into a finishedproduct), or services (temporary andcontract labor, print services, etc.), acompany needs a mechanism bywhich they are not only able to savemoney, but control costs.
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28OPRE 6371 – Purchasing & Sourcing Management
Spend Management
ü In an enterprise, spend managementis managing how to spend money tobest effect in order to build productsand services. The term is intended to
encompass such processes asoutsourcing, procurement,e-procurement, and supply chainmanagement.
ü Spend Analytics offers valuableinsights into spending patterns,visibility into contract compliance,
purchasing policy compliance, and can
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29OPRE 6371 – Purchasing & Sourcing Management
Profit-Leverage Effect
ü Financial impact of the corporatespend I soften illustrated in two ways;
v Profit-Leverage Effectv Return-on-Assets Effect
ü Profit-Leverage Effect = PurchasingMultiplier
ü Increase in Profit caused by a decreasein Spend
v Direct bottom line impact
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30OPRE 6371 – Purchasing & Sourcing Management
Profit-Leverage Effect
ü Example:v $100M sales revenuev $60M purchase (representative 60% of Sales)v $8M profit before taxes (representative 8% net)v If $10% reduction in purchase spend thru cost
savingsØ Save $6MØ Profit increases 75% from $8M to $14MØ So, leverage factor is 75% ($8M x 1.75 = $14M or, $6M/$8M
= .75)
v To achieve $6M increase in Profit by increasing
Sales, at 8% profit margin, would require $75Mincrease in Sales, $75M x .08 = $6Mv So, a 75% increase in sales would be needed to
achieve same level of profit improvementv Which would be more likely to be achieved?
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31OPRE 6371 – Purchasing & Sourcing Management
Return-on-Assets Factors
Purchasing’s Operational and
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32OPRE 6371 – Purchasing & Sourcing Management
Purchasing s Operational andStrategic Contributions
1. SupplyContribution
Operational
TroublePrevention
StrategicOpportunity
Maximization
Purchasing’s Operational and
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33OPRE 6371 – Purchasing & Sourcing Management
Purchasing s Operational andStrategic Contributions
2. SupplyContribution
DirectBottom-Line
Impact
IndirectEnhancing
Performance
of others
Purchasing’s Operational and
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34OPRE 6371 – Purchasing & Sourcing Management
Purchasing s Operational andStrategic Contributions
3. SupplyContribution
NeutralOperationally
acceptableStrategically
deficientDirectly acceptableIndirectly deficient
PositiveOperationally
acceptableStrategically
acceptableDirectly acceptable
Indirectlyacceptable
NegativeOperationallydeficient
Strategicallydeficient
Directly deficientIndirectly deficient
Differences between Manufacturing
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35OPRE 6371 – Purchasing & Sourcing Management
Differences between Manufacturingand Services Organizations
Manufacturingü The largest portion of
needs is generatedby customer needs.
ü The largest portion of spend with supplierswill be on directrequirements which
comprise productssold to customers.
Servicesü The largest portion
of needs is
generated by
capital, servicesand other
requirements
enablingemployees to
provide the service.
ü In retailing the
Opportunities for Contribution of
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36OPRE 6371 – Purchasing & Sourcing Management
Opportunities for Contribution of the Supply Function
ü Profit-leverage effectü Return-on-assets effectü Information sourceü Effect on efficiency
ü Effect on competitive position andcustomer satisfaction
ü Effect on organizational risk
ü Effect on imageü Training groundü Management strategy and social
policy
Differentiations for Supply in Public
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37OPRE 6371 – Purchasing & Sourcing Management
Differentiations for Supply in PublicOrganizations
Differentiations for Supply in
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38OPRE 6371 – Purchasing & Sourcing Management
Differentiations for Supply inPrivate Organizations
Ch ll F i P h i
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Challenges Facing Purchasing
ü B2B e-commerce – paperless, E2E
ü Supply chain management – addingvalue
ü Measurement – assess the benefits
ü Purchase of non-traditional goods andservices
v Benefits, real estate, insurance, energy, templabor…
ü Risk Management
ü Contribution to corporate strategyv Sustainability, green, reverse logistics, disposal
ü R iti b i t