Purchasings role in the supply chainPurpose - manager of external operations (processes)DesignAcquiring inputsInformation systems

Why focus on purchasing ?Traditional viewMaterials as a percentage of sales:Average (1995) 54%Today probably closer to 60% and increasingChrysler outsources 70% of a carVirtual corporationsContribution to the bottom lineCost exampleOther places to contribute

Example

Marketing

Purchasing

Current

Increase Sales 50%

Decrease purchasing Costs 20%

Sales

100,000

150,000

100,000

C.O.G.S.

-80,000

-120,000

-64,000

Gross Margin

20,000

30,000

36,000

Other contributionsSuppliers / partners can lower the amount we spend on inputs.They can also:improve technology mountain bike articleimprove qualitydecrease lead time to customermake a supply chain more flexiblespeed up designsTherefore companies who manage this process strategically have an advantage over companies who view the purchasing function as a cost center Stallkamp and Chrysler articles

What does purchasing do to help gain a competitive advantage1) Provide an uninterrupted flow of goods, services and information to keep the production system operating.2) Ensure that processes performed today and in the future provide the maximum value to customers.minimize total costs to maximize value China price for Toyota and looking ahead cost of quality cost of late orderscost of inventory (having or not having)cost of unreliable supplierscost of bad relationships with suppliersenvironmental costs and risks

Specifics to maximize valueUninterrupted flow of goods, services, and info: without this nothing else matters.Buy wisely - total costis wise the same for every company ?Minimize inventory investmentwhat are inventory costs ?Develop and maintain the supply basewhy build trust ?Integration across firm

Purchasing as a boundary spanning functionExternalupstream members of supply chain: purchasing is the means to communicate with the world of suppliers.customers: purchasing helps translate the voice of customers (internal or external) to suppliers.Internalworks with operations, engineering, finance, logistics and marketingOften referred to as managing external manufacturing - or if you will managing external processes how about logistics

Purchasing and designNote: companies who are practicing supply chain management (well) do the following:design products and processes concurrentlyinvolve all pertinent supply team members in the design of products and processesleverage suppliers in the design processNote 2: because purchasings role is to span internal and external boundaries they are best suited to ensure that we actually include and leverage suppliers and internal capabilities to the fullest (much more so than operations)

General design questionsWhen a company pursues a new concept they need to ask the following questions:1) can we sell the product / service?2) can we design the product / service?3) can we make the product / service ?at a reasonable cost !If the answer to any of these questions is no, we generally should not pursue the concept (there are always exceptions)

Specific purchasing questionsRemember purchasing manages external processes. So purchasing should be asking: can our suppliers provide the process (make it) ?Not only make it, but:can they lower total costs and or increase value if:we change specificationswe change materialswe change supplierswe let suppliers develop the product or process

Traditional design processConceptProduct designProcess designSupply baseProduction

Problems with the traditional approachGeneral problemsWhen do we find out if we can make the product ? Sell it ?How long does this process take ?what happens if you can not buy a needed input ?Purchasing specific problemsNot involved until it is to latecost of changestime to changeStrategic ?

Early Supplier Involvement (ESI)ESI is a process whereby we make suppliers part of the design process from the beginning. This is done to increase the value of our products while lowering total costs. However, do we do ESI with all suppliers ?For key inputs (strategic, large costs, etc.) we involve suppliers in the entire process including generation of specifications.Standard products (commodities) may develop specs (hence design) independent of suppliers.

The next step in design reverse logisticsAn issue many firms are just starting to grapple with is end of life product managementDriven by customers and regulation (especially in EU)Some firms are treating this as a cost to be minimized Others are trying to gain competitive advantage through closed loop chain.

So what why mention this when talking about design?

Acquiring inputsRegardless of their participation in the design of a product or process, one of the key functions performed in a supply chain is the actual purchase of an input.This should be a total cost decisionsupply chain managers who make decisions based purely on price tend to lose (as do most managers)

Total costsOnce more total costs are the sum of all direct and indirect costs associated with a given process or product. Another way of looking at this is that total costs are more than just price.Go back to LopezPick on my Father and car insuranceDetermining the total costs of a product or process is a key and difficult task

A first stepTrying to determine if a price is reasonable / fair ?Number of qualified biddersdid you get numbers from 1 or 50 organizationsExclusions -are the bids for the requested work ?Independence / fraud ?evidence of collusion / competition Is the price reasonable / near or at your target ?price to low ? Tonys Rebar and my finger

More ways to determine costsHistorical prices / costs: often a good starting pointinflation: even at 2% this can be insidiouschanges in technology ?even with adjustments for inflation it is hard to compare todays computers with 5 year old models.learningproduction time and costs decrease as we make more units80% learning curve vs. a 90% learning curveIndependent estimates our rebar guy

Cost data from suppliersSuppliers are often reluctant to share cost information (especially if they have a serious competitive advantage or just do not know)Requires trustmay be much more accurate if request is made after reward of contract.can not share this informationLopez shopping bids !!!!Buyer must have some specific knowledge (a bs detector)suppliers may fudge overhead, profits and the likeBut they know more than us in many cases

Some cost specifics we often missTooling costs - tools are expensive !!!injection molds, stamping dies, special cutting tools and the like take months to make and can cost anywhere from a few thousand to over a million dollars.as tooling costs increase buyers are more likely to maintain ownership of the tools.risk reduction - Chrysler changing stamping companies / GM manifold supplierfuture spare partsdo not have to pay suppliers overhead on purchaseExamples of tooling in services and high tech? Basically set-up costs

More cost specifics: indirect costsEngineering overhead:as our expectations for design from our suppliers increase, this cost will increase as well. Note that GM has traditionally done most of their own design .Materials overhead:movement, storage, shrinkage and the likeManufacturing overheadGeneral administrative costsSelling costs

Even more specifics: discountsTrade discounts: basically discounts to various distribution channel members for adding value.the more you buy, the closer you want to get to the producer. Why ?Quantity discounts: price breakscan be spread over multiple productsif you buy more than one thing from a supplier you should get this if possiblecan be dollar volume rather than units (see above)Purchasing in Packs

What have we been doing so far ?Defining what type of costsdirect / indirect / obvious/ not so obviousall tangible costsA good supply chain manager will define what other types of costs ?Why are intangible costs so important ?Late delivery in JIT means what?Poor quality supplies have costs associated with them as wellA cheap supplier with yesterdays technology may hurt us in many ways

Intangible costs - the obviousWe need to examine a potential supply chain members ability todeliver on timedeliver expected quality levelsbe able to change (be flexible)control their costscomply with regulation- avoid negative impacts on communities and the environmentNike / Cathy-Lee and Wal-Mart / Wal-Mart and their Janitorial suppliersremain in businessetc.

Intangible costs - the less obviousMicro-soft is always buying small software companies. Why ?What is access to the latest technology (process/ product / service) worth ? IBM and Linux articlePerhaps the most important question - the nature of the relationshiphow well do (can) we work with this organizationhow much do they care about the relationshipwhat are the costs of ending the relationship (switching costs)

Cost summaryA key role played by purchasing is determining what it will cost to perform a specific process in a specific way.Another key role is managing the supplier selected to perform the role so that actual costs and benefits match expected costs and benefitsThe next issue is managing these relationships

Managing suppliersSome other issues we need to consider are:CommunicationCertificationMeasurementBeing a good customer (chain member)

CommunicationEDI and other electronic meansFastUsually accurateTend to be mainly for routine informationProblem solving and prevention generally requires actual humans interacting and collaboratingWe have talked about this before try to create collaborative real time communicationImagine how hard this is across organizationsWhat can we do to make it happen?

Supplier certificationMany companies require their suppliers to be certified - often as a minimal requirement for being considered for work.Big three have certification programs for all suppliers - moved to a single program(QS 9000) but in past each had their own.CaterpillarMotorolaLandol (Marysville) and BAE systems (Wichita)Concept is to be aware of what suppliers can and can not do - before either company wastes time.Note strong link to determining cost

Certification continuedStarted as quality programssix sigmaISO 9000Baldridge awardQ1 PenstarHas grown to encompass many other elements of value - but most certification programs still start with qualityHome Depot buying forest products ISO 14000

Why certify ?Companies have moved toward certification as a formal way to determine which suppliers can meet their needs.are quality systems in place ?Is an environmental management system in place ? does the supplier have the needed communication abilities such as CAD/CAM or EDI ?Is the supplier financially sound ?And many other questions that sound a lot like total costs.Key difference is that with certification we are determining what they could do - not what they are doing - we may have to work with them to lower total costs.

Certification examplesRelying on third parties http://www.wincor-nixdorf.com/internet/com/Purchasing/NewSuppliers/SupplierCertification/Main.htmlExpanding supplier expectationshttp://www.hp.com/hpinfo/globalcitizenship/environment/supplychain/compliance.htmlA hybrid system certifying the certifiedhttp://www.boeing.com/companyoffices/doingbiz/prefsup.pdf

MeasurementA certified supplier who is also the lowest cost supplier of an input still needs to be measuredyou get what you measureyou want to reward some behaviors - so you need to identify themyou want continuous improvement - for which you must have measuressometimes you need to get rid of a supplier - measurement should tell you when

What do we do with our measures ?Motivation and or elimination from supply basefor measures to have value they need to direct action.supplier non-conformancebill back - supplier pays for non-conformanceother types of remediationelimination from supply basemotivation - rewards for good performancesupplier conferences and recognitionWhy does recognition (say a non-monetary award) have high value? identify developmental needs !!!!

Article in course pacDo we measure the same things for all suppliers? Do strategic / core suppliers require an additional set of measures?What might the beDoes that we ignore things like delivery reliability, quality and the like?

Being a good customerAs a supply chain member we are asking our suppliers to:trust us enough to share informationwork toward an optimized chain -even if their short term needs sufferwork with us to constantly lower costs to increase end customer valueWe must thenwalk the talk - which means what ?

Purchasing conclusionsWe have just scratched the surface with purchasingNo matter what we call it every supply chain needs to have people capable of managing external processesthis is similar to the boundary spanning role marketing plays -and it is just as importantTOTAL COST !Note- this is just an introduction- we will discuss specific decisions (such as supplier selection) later in the term