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Leenders−Johnson−Flynn−Fearon:

Purchasing and Supply

Management, 13th Edition

1. Purchasing and Supply

Management

Text © The McGraw−Hill

Companies, 2006

1

Chapter One

Purchasing andSupply Management

Chapter Outline

Purchasing and Supply Management

Definitions

Supply and Logistics

The Size of an Organization’s Spend and

Financial Significance

Supply Contribution

The Operational versus Strategic

Contribution of Supply

The Direct and Indirect Contribution of

Supply

Decision Making in the Supply

Management Context

The Differences between Commercial

and Consumer Acquisition

Supply Qualifications and Associations

Challenges Facing Purchasing and Supply

Management over the Next Decade

Technology

Supply Chain Management

Measurement

Growth and Influence

Effective Contribution to Corporate Success

The Organization of This Text

ConclusionQuestions for Review and Discussion

References

Addresses

Cases

1–1 Custom Equipment

1–2 Roger Gray

1–3 Cottrill Inc.







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2 Purchasing and Supply Management

Key Questions for the Supply Manager

Should we

• Rethink how supply can contribute more effectively to organizational goals and

strategies?

• Try to find out what the organization’s total spend with suppliers really is?

• Calculate the effect on our organization’s ROA at various purchasing savings

levels?

How can we

• Get others to recognize the profit-leverage effect of purchasing/supply

management?

• Determine appropriate salary levels for our purchasing personnel?• Show how supply can affect our firm’s competitive position?

Every organization on earth needs suppliers. No organization can survive without suppli-

ers. Every organization also needs customers. Therefore, as shown in Figure 1–1 all

organizations exist between suppliers and customers. The primary emphasis in this text is

on the supplier side of the organization. The purchasing and supply function has primary

responsibility for this side of each organization while marketing has the primary responsi-

bility on the other side.

For more than 70 years, this text and its predecessors have presented the supply func-

tion and suppliers as critical to an organization’s success, competitive advantage, and cus-

tomer satisfaction. Whereas in the 1930s this was a novel idea, over the past few decades

there has been growing interest at the executive level in the supply chain management and

its impact on strategic goals and objectives.

ORGANIZATION

S

UP

P

L

I

E

R

S

C

US

T

O

M

E

R

S

FIGURE 1–1 The Supplier–Customer Perspective of Supply







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To increase long-term shareholder value, the company must increase revenue, decrease

costs, or both. Supply’s contribution should not be perceived as only focused on cost.

Supply can and should also be concerned with revenue enhancement. What can supply and

suppliers do to help the organization increase revenues or decrease costs? should be a stan-

dard question for any supply manager.

The supply function continues to evolve as technology and the worldwide competitive

environment require innovative approaches. The traditionally held view that multiple sourc-

ing increases supply security has been challenged by a trend toward single sourcing. Results

from closer supplier relations and cooperation with suppliers question the wisdom of the

traditional arm’s-length dealings between purchaser and supplier. Negotiation is receiving

increasing emphasis as opposed to competitive bidding, and longer-term contracts are re-

placing short-term buying techniques. E-commerce tools permit faster and lower-cost solu-

tions, not only on the transaction side of supply but also in management decision support.All of these trends are a logical outcome of increased managerial concern with value and

increasing procurement aggressiveness in developing suppliers to meet specific supply ob-

jectives of quality, quantity, delivery, price, service, and continuous improvement.

Effective purchasing and supply management contributes significantly to organizational

success. This text explores the nature of this contribution and the management require-

ments for effective and efficient performance. The acquisition of materials, services, and

equipment—of the right qualities, in the right quantities, at the right prices, at the right

time, and on a continuing basis—long has occupied the attention of managers in both the

public and private sectors. Today, the emphasis is on the total supply management process

in the context of organizational goals and management of supply chains. The rapidly

changing supply scene, with cycles of abundance and shortages, varying prices, lead times,

and availability, provides a continuing challenge to those organizations wishing to obtaina maximum contribution from this area. Furthermore, environmental, security, and finan-

cial regulatory requirements have added considerable complexity to the task of ensuring

that supply and suppliers provide competitive advantage.

PURCHASING AND SUPPLY MANAGEMENT

Although interest in the performance of the purchasing/supply function has been a phe-

nomenon primarily of the 20th century, it was recognized as an independent and important

function by many of the nation’s railroad organizations well before 1900.

Yet, traditionally most firms regarded the purchasing function primarily as a clerical ac-

tivity. However, during World War I and World War II, the success of a firm was not de-

pendent on what it could sell, since the market was almost unlimited. Instead, the ability

to obtain from suppliers the raw materials, supplies, and services needed to keep the fac-

tories and mines operating was the key determinant of organizational success.

Consequently, attention was given to the organization, policies, and procedures of the sup-

ply function, and it emerged as a recognized managerial activity. During the 1950s and

1960s, supply management continued to gain stature as the number of people trained and

competent to make sound supply decisions increased. Many companies elevated the chief

purchasing officer to top management status, with titles such as vice president of pur-

chasing, director of materials, or vice president of purchasing and supply.

Chapter 1 Purchasing and Supply Management 3







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As the decade of the 70s opened, organizations faced two vexing problems: an interna-

tional shortage of almost all the basic raw materials needed to support operations and a rate

of price increases far above the norm since the end of World War II. The Middle East oil

embargo during the summer of 1973 intensified both the shortages and the price escalation.

These developments put the spotlight directly on supply, for their performance in obtaining

needed items from suppliers at realistic prices spelled the difference between success and

failure. This emphasized again the crucial role played by supply and suppliers. As the

decade of the 1990s unfolded, it became clear that organizations must have an efficient and

effective supply function if they are to compete successfully with both domestic and inter-

national firms. In the early 21st century, the question is to what extent technology appli-

cations will change supply management, operationally as well as strategically.

In large supply organizations, supply professionals often are divided into two cate-

gories: the tacticians who need strong computer and information systems skills and thestrategic thinkers who possess strong analytical and planning skills. The extent to which

the structure, processes, and people in a specific organization will match these trends

varies from organization to organization, and from industry to industry.

The future will see a gradual shift from predominantly defensive strategies, resulting

from the need to change in order to remain competitive, to aggressive strategies, in which

firms take an imaginative approach to achieving supply objectives to satisfy short-term

and long-term organizational goals.1 The focus on strategy now includes an emphasis on

process and knowledge management. This text discusses what organizations should do

today to remain competitive as well as what strategic, integrated purchasing and supply

management will focus on tomorrow.

Growing management interest through necessity and improved insight into the opportu-

nities in the supply area has resulted in a variety of organizational concepts. Terms such as purchasing, procurement, materiel, materials management, logistics, sourcing, supply man-

agement, and supply chain management are used almost interchangeably. No agreement ex-

ists on the definition of each of these terms, and managers in public and private institutions

may have identical responsibilities but substantially different titles. The following definitions

may be helpful in sorting out the more common understanding of the various terms.

DefinitionsSome academics and practitioners limit the term purchasing to the process of buying:

learning of the need, locating and selecting a supplier, negotiating price and other perti-

nent terms, and following up to ensure delivery and payment. This is not the perspective

taken in this text. Purchasing, supply management, and procurement are used inter-

changeably to refer to the integration of related functions to provide effective and efficient

materials and services to the organization. Thus, purchasing or supply management is not

only concerned with the standard steps in the procurement process: (1) the recognition of

need, (2) the translation of that need into a commercially equivalent description, (3) the

search for potential suppliers, (4) the selection of a suitable source, (5) the agreement on

order or contract details, (6) the delivery of the products or services, and (7) the payment of

suppliers. Further responsibilities of purchasing may include receiving, inspection, storage,

1 Michiel R. Leenders and David L. Blenkhorn, Reverse Marketing: The New Buyer-Supplier Relationship

(New York: The Free Press, 1988), p. 2.







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2 Council of Logistics Management (CLM), “Definition of Logistics,” http://www.clml.org, March 2001.

materials handling, scheduling, in- and outbound traffic, and disposal. Purchasing also

may have responsibility for other components of the supply chain, such as the organiza-

tion’s customers and their customers and their suppliers’ suppliers. This extension repre-

sents the term supply chain management, where the focus is on minimizing costs and times

across the supply chain to the benefit of the final customer in the chain. The idea that com-

petition may change from the firm level to the supply chain level has been advanced as the

next stage of competitive evolution.

Lean purchasing or lean supply management refers primarily to a manufacturing con-

text and the implementation of just-in-time (JIT) tools and techniques to ensure every step

in the supply process adds value, that inventories are kept at a minimum level, and that dis-

tances and delays between process steps are kept as short as possible. Instant communica-

tion of job status is essential and shared.

The large number of physical moves associated with any purchasing or supply chain ac-tivity has focused attention on the role of logistics. According to the Council of Logistics

Management, logistics is “that part of the supply chain that plans, implements, and con-

trols the efficient, effective flow and storage of goods, services, and related information

from the point of origin to the point of consumption in order to meet customers’ require-

ments.”2 This definition includes inbound, outbound, internal, and external movements.

Logistics is not confined to manufacturing organizations. It is relevant to service organi-

zations and to both private- and public-sector firms.

The term integrated logistics is used by logistics proponents as equivalent to our defi-

nition of purchasing and supply management. Whether an organization chooses to separate

logistics from supply management or not, clearly both functions are essential to a well-

functioning, fully integrated supply system.

The attraction of the logistics concept is that it looks at the material flow process as acomplete system, from initial need for materials to delivery of finished product or service

to the customer. It attempts to provide the communication, coordination, and control

needed to avoid the potential conflicts between the physical distribution and the materials

management functions.

Supply and LogisticsSupply influences a number of logistics-related activities, such as how much to buy and in-

bound transportation. With an increased emphasis on controlling materials flows, the sup-

ply function must be concerned with decisions beyond supplier selection and price. As a

result, some companies combine purchasing and logistics into a single organization.

Such was the case at Texas Instruments (TI) in 1999. TI had separate warehousing facili-

ties for incoming and outgoing products all over the world. Benchmarking with companies

like Wal-Mart revealed better options, including outsourcing, and the plan became to reduce

all distribution centers to four: one in Utrecht (the Netherlands), one near Dallas, one in

Singapore, and one near Tokyo. The decision was also made to have all centers part of the

worldwide procurement and logistics organization whereas, formerly, some of the regional

warehouses had reported to local managers outside the logistics function. The last move in

this consolidation occurred in Japan at the end of 1999. TI used to own its own trucks, but it

was also decided that this function should be outsourced. Mr. K. Bala, senior vice president







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at TI, summed up the transformation of TI’s logistics activities: “We moved from a situation

where inbound and outbound transportation was handled separately from procurement. The

warehouses were in local control. We have combined our logistics activities to create one

seamless process, with control of our logistics service providers supervised by purchasing.” 3

Supply-chain management is a systems approach to managing the entire flow of infor-

mation, materials, and services from raw materials suppliers through factories and ware-

houses to the end customer. The Institute for Supply Management (ISM) glossary defines

supply chain management as “The design and management of seamless, 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 success-

ful supply chain integration.”4

The term value chain has been used to trace a product or service through its various

moves and transformations, identifying the costs added at each successive stage.Some academics and practitioners believe the term chain does not properly convey what

really happens in a supply or value chain and they prefer to use the term supply network or

supply web.

The use of the concepts of purchasing, procurement, supply, and supply chain man-

agement will vary from organization to organization. It will depend on (1) their stage of

development and/or sophistication, (2) the industry in which they operate, and (3) their

competitive position.

The relative importance of the supply area compared to the other prime functions of the

organization will be a major determinant of the management attention it will receive. How

to assess the materials and services needs of a particular organization in context is one of

the purposes of this book. Over 50 cases are provided to provide insight into a variety

of situations and to give practice in resolving managerial problems.

THE SIZE OF AN ORGANIZATION’S SPENDAND FINANCIAL SIGNIFICANCE

The amount of money organizations spend with suppliers is staggering. Collectively, pri-

vate and public organizations in North America spend about 1.5 times the GDPs of the

United States, Canada, and Mexico combined, totaling at least $18 trillion U.S. Dollars

spent with suppliers as a percentage of total revenue are a good indicator of supply’s

financial impact. In almost all manufacturing organizations, the supply area represents by

far the largest single category of spend, ranging from 50 to 85 percent of revenue. Wages,

by comparison, typically amount to about 10 to 20 percent.According to Dave Nelson, former vice president of purchasing at Honda of America,

“One of the reasons that Honda recognizes the importance of the purchasing function is

that 80 percent of the cost of a car is purchased cost. So how goes purchasing is how goes

Honda.”5 When an automobile producer sells a new car to a dealer for $18,000, it already

3 Michiel R. Leenders and P. Fraser Johnson, Major Changes in Supply Chain Responsibilities (Tempe, AZ:

Center for Advanced Purchasing Studies, 2001).4 Institute for Supply Management, “Glossary of Key Purchasing and Supply Terms,” http://www.ism.ws5 Cherish Karoway, “The Power of Influence: Do We Have It?” Purchasing Today , January 1998, p. 32.







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has spent more than $10,800 (about 60 percent) to buy the steel, tires, glass, paint, fabric,

aluminum, copper, and electronic components necessary to build that car.

Obviously, the percentage of revenue that is paid out to suppliers varies from industry

to industry and organization to organization. The increasing use of outsourcing over the

last decade has increased the percentage of spend significantly. While in service organiza-

tions that are highly labor intensive this percentage might be close to 30 percent, the aver-

age for manufacturing firms is close to 65 percent.

The financial impact of the corporate spend is often illustrated by the profit-leverage

effect and the return-on-assets effect.

Profit-Leverage Effect

The profit-leverage effect of supply savings is measured by the increase in profit obtained

by a decrease in purchase spend. For example, for an organization with revenue of $100,000,000, purchases of $60,000,000, and profit of $8,000,000 before tax, a 10 percent

reduction in purchase spend would result in an increase in profit of 75 percent, giving a

leverage of 7.5. To achieve a $6,000,000 increase in profit by increasing sales, assuming

the same percentage hold, might well require an increase of $75 million in sales, or 75 per-

cent! Which of these two options—an increase in sales of 75 percent or a decrease in pur-

chase spend of 10 percent—is more likely to be achieved?

This is not to suggest that it would be easy to reduce overall purchase costs by 10 per-

cent. In a firm that has given major attention to the supply function over the years, it would

be difficult, and perhaps impossible, to do. But, in a firm that has neglected supply, it

would be a realistic objective. Because of the profit-leverage effect of supply, large savings

are possible relative to the effort that would be needed to increase sales by the much-larger

percentage necessary to generate the same effect on the Profit and Loss (P&L) statement.

Since, in many firms, sales already has received much more attention, supply may be the

last untapped “profit producer.”

Return-on-Assets Effect

Financial experts are increasingly interested in return on assets (ROA) as a measure of cor-

porate performance. Figure 1–2 shows the standard ROA model, using the same ratio of

figures as in the previous example, and assuming that inventory accounts for 30 percent

of total assets. If purchase costs were reduced by 10 percent, that would cause an extra ben-

efit of a 10 percent reduction in the inventory asset base. The numbers in the boxes show

the initial figures used in arriving at the 16 percent ROA performance.

The numbers below each box are the figures resulting from a 10 percent overall pur-chase price reduction, and the end product is a new ROA of 28.9 percent or about an

80 percent increase in return on assets.

Reduction in Inventory Investment

Charles Dehelly, senior executive vice president at Thomson Multimedia, headquartered in

Paris, France, said: “One of my great challenges is to get purchasers interested in the com-

pany’s balance sheet.” Mr. Dehelly was pushing for reductions in inventory investment, not

only by lowering purchase price, as shown in the example in Figure 1–2, but also by getting

suppliers to take over inventory responsibility and ownership, thereby, removing asset dollars








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in the ROA calculations, but also taking on the risk of obsolescence and inventory carrying

and disposal costs. Since accountants value inventory items at the purchaser at purchased cost, including transportation, but inventory at the supplier at manufacturing cost, the same

items stored at the supplier typically have a lower inventory investment and carrying cost.

Thus, it is a prime responsibility of supply to manage the supply process with the low-

est reasonable levels of inventory attainable. Inventory turnover and level are two major

measures of supply chain performance.

Evidently, the financial impact of supply is on both the balance sheet and the income

statement, the two key indicators of corporate financial health used by managers, ana-

lysts, financial institutions, and investors. While the f inancial impact of the supply spend

is obviously significant, it is by no means the only impact of supply on an organization’s

ability to compete and be successful.

SUPPLY CONTRIBUTION

Although supply’s financial impact is major, supply contributes to organizational goals and

strategies in a variety of other ways. The three major perspectives on supply are shown in

Figure 1–3:

1. Operational versus strategic.

2. Direct and indirect.

3. Negative, neutral, and positive.

††

Inventory$150,000

($135,000)

Sales$1 million

Minus

Total cost$950,000

($900,000)

*

†

Totalassets

$500,000

($485,000)

Profit$50,000

($100,000)

Sales$1 million

Sales$1 million

Divided by

Divided by

Investmentturnover 2

(2.06)

Profitmargin5%

(10%)

ROA 10%

(20.6%)

Multiplied by

FIGURE 1–2Return-on-

Assets Factors

*Inventory is approximately 30 percent of total assets.†Purchases account for half of total sales, or $500,000.††Figures in parentheses assume a 10 percent reduction in purchase costs.







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The Operational versus Strategic Contribution of SupplyFirst, supply can be viewed in two contexts: operational, which is characterized as trouble

avoidance, and strategic, which is characterized as opportunistic.

The operational context is the most familiar. Many people inside the organization are

inconvenienced to varying degrees when supply does not meet minimum expectations.

Improper quality, wrong quantities, and late delivery may make life miserable for the ulti-

mate user of the product or service. This is so basic and apparent that “no complaints” is

assumed to be an indicator of good supply performance. The difficulty is that many users

never expect anything more and hence may not receive anything more.

The operational side of supply concerns itself with the transactional, day-to-day opera-

tions traditionally associated with purchasing. The operational side can be streamlined and

organized in ways designed to routinize and automate many of the transactions, thus free-ing up time for the supply manager to focus on the strategic contribution.

The strategic side of supply is future oriented and searches for opportunities to provide

competitive advantage. Whereas on the operational side the focus is on executing current

tasks as designed, the strategic side focuses on new and better solutions to organizational

and supply challenges. (Chapter 20 discusses the strategic side in detail.)

The Direct and Indirect Contribution of SupplyThe second perspective is that of supply’s potential direct or indirect contribution to orga-

nizational objectives.


2. Supply contribution

Indirect

Enhancing performance of others

Direct

Bottom-line impact


Strategic

Opportunity maximization

Operational

Trouble prevention


Neutral

Operationally acceptableStrategically deficient

Directly acceptableIndirectly deficient

Positive

Operationally acceptableStrategically acceptable

Directly acceptableIndirectly acceptable

Negative

Operationally deficientStrategically deficient

Directly deficientIndirectly deficient

FIGURE 1–3Purchasing’s

Operational

and Strategic

Contributions

Source: Michiel R.

Leenders and Anna E.

Flynn, Value-Driven

Purchasing:

Managing the Key

Steps in the

Acquisition Process

(Burr Ridge, IL:

Richard D. Irwin,

1995), p. 7.







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Purchasing savings, the profit-leverage effect, and the return-on-assets effect demon-

strate the direct contribution supply can make to the company’s financial statements.

Although the argument that purchasing savings flow directly to the bottom line appears

self-evident, experience shows that savings do not always get that far. Budget heads when

presented with savings may choose to spend this unexpected windfall on other require-

ments. To combat this phenomenon, some supply organizations have hired financial con-

trollers to assure that purchasing savings do reach the bottom line.

The appeal of the direct contribution of supply is that both inventory reduction and pur-

chasing savings are measurable and tangible evidence of supply contribution.

The supply function also contributes indirectly by enhancing the performance of other

departments or individuals in the organization. This perspective puts supply on the man-

agement team of the organization. Just as in sports, the team’s objective is to win. Who

scores is less important than the total team’s performance. For example, better quality mayreduce rework, lower warranty costs, increase customer satisfaction, and/or increase the

ability to sell more or at a higher price. Ideas from suppliers may result in improved de-

sign, lower manufacturing costs, and/or a faster idea-to-design-to-product-completion-

to-customer-delivery cycle. Each would improve the organization’s competitiveness.

Indirect contributions come from supply’s role as an information source; its effect on effi-

ciency, competitive position, risk, and company image; the management training provided

by assignments in the supply area; and its role in developing management strategy and so-

cial policy. The benefits of the indirect contribution may outweigh the direct contribution,

but measuring the indirect benefits is difficult since it involves many “soft” or intangible

contributions that are difficult to quantify.

Information SourceThe contacts of the supply function in the marketplace provide a useful source of informa-

tion for various functions within the organization. Primary examples include information

about prices, availability of goods, new sources of supply, new products, and new technol-

ogy, all of interest to many other parts of the organization. New marketing techniques and

distribution systems used by suppliers may be of interest to the marketing group. News

about major investments, mergers, acquisition candidates, international political and eco-

nomic developments, pending bankruptcies, major promotions and appointments, and

current and potential customers may be relevant to marketing, finance, research, and top

management. Supply’s unique position vis-à-vis the marketplace should provide a com-

prehensive listening post.

Effect on Efficiency

The efficiency with which supply processes are performed will show up in other operating

results. While the firm’s accounting system may not be sophisticated enough to identify

poor efficiency as having been caused by poor purchase decisions, that could be the case.

If supply selects a supplier who fails to deliver raw materials or parts that measure up to the

agreed-on quality standards, this may result in a higher scrap rate or costly rework, requiring

excessive direct labor expenditures. If the supplier does not meet the agreed-on delivery

schedule, this may require a costly rescheduling of production, decreasing overall produc-

tion efficiency, or, in the worst case, a shutdown of the production line—and fixed costs

continue even though there is no output. Many supply managers refer to user departments







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as internal customers or clients and focus on improving the efficiency and effectiveness of

the function with a goal of providing outstanding internal customer service.

Effect on Competitive Position/Customer Satisfaction

A firm cannot be competitive unless it can deliver end products or services to its customers

when they are wanted, of the quality desired, and at a price the customer feels is fair. If sup-

ply doesn’t do its job, the firm will not have the required materials or services when

needed, of desired quality, and at a price that will keep end-product costs competitive and

under control.

The ability of the supply organization to secure requirements of better quality, faster at

a better price than competitors, will not only improve the organization’s competitive posi-

tion, but also improve customer satisfaction. The same can be said for greater flexibility to

adjust to customers’ changing needs. Thus, a demonstrably better-performing supply or-ganization is a major asset on any corporate team.

A major chemical producer was able to develop a significantly lower-cost option for a

key raw material that proved to be environmentally superior as well as better quality. By

selling its better end product at somewhat lower prices, the chemical producer was able to

double its market share, significantly improving its financial health and competitive posi-

tion as well as the satisfaction of its customers.

Effect on Organizational Risk

Risk management is becoming an ever-increasing concern. The supply function clearly im-

pacts the risk level for the organization in terms of operational, financial, and reputation

risk. Supply disruptions in terms of energy, service, or direct or indirect requirements can

impact the ability of the organization to operate as planned and as expected by its cus-tomers, creating operational risks.

Given that commodity and financial markets establish prices that may go up or down be-

yond the control of the individual purchaser, and that long-term supply agreements require

price provisions, the supply area may represent a significant level of financial risk.

Furthermore, unethical or questionable supply practices and suppliers may expose the or-

ganization to significant reputation risk.

Effect on Image

The actions of supply personnel influence directly the public relations and image of a com-

pany. If actual and potential suppliers are not treated in a businesslike manner, they will

form a poor opinion of the entire organization and will communicate this to other firms.

This poor image will adversely affect the purchaser’s ability to get new business and to

find new and better suppliers. Public confidence can be boosted by evidence of sound and

ethical policies and fair implementation of them.

The large spend of any organization draws attention in terms of supplier chosen, the

process used to choose suppliers, the ethics surrounding the supply process, and confor-

mance to regulatory requirements. Are the suppliers chosen “clean” in terms of child labor,

environmental behavior, and reputation? Is the acquisition process transparent and legally,

ethically, strategically, and operationally defensible as sound practice? Do supply’s actions

take fully into account environmental, financial, and other regulatory requirements such as

national security?








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Maintaining a proper corporate image is the responsibility of every team member and

supply is no exception.

Training Ground

The supply area also is an excellent training ground for new managers. The needs of the

organization may be quickly grasped. Exposure to the pressure of decision making under

uncertainty with potentially serious consequences allows for evaluation of the individual’s

ability and willingness to make sound decisions and assume responsibility. Contacts with

many people at various levels and a variety of functions may assist the individual in learn-

ing about how the organization works. Many organizations find it useful to include the

supply area as part of a formal job rotation system for high-potential employees.

Examples of senior corporate executives with significant supply experience include

Thomas T. Stallkamp, vice chairman and CEO of MSX International, Inc., and former Chrysler president; Raymond C. Stark, vice president, Six Sigma and Productivity at Honeywell; and

G. Richard Wagoner, president of General Motors’ North American Operations.

Management Strategy and Social Policy

Supply also can be used as a tool of management strategy and social policy. Does man-

agement wish to introduce and stimulate competition? Does it favor geographical repre-

sentation, minority interest, and environmental and social concerns? For example, are

domestic sources preferred? Will resources be spent on assisting minority suppliers? As

part of an overall organization strategy, the supply function can contribute a great deal.

Assurance of supply of vital materials or services in a time of general shortages can be a

major competitive advantage. Similarly, access to a better-quality or a lower-priced prod-

uct or service may represent a substantial gain. These strategic positions in the marketplacemay be gained through active exploration of international and domestic markets, technol-

ogy, innovative management systems, and the imaginative use of corporate resources.

Vertical integration and its companion decisions of make or buy (insource or outsource)

are ever-present considerations in the management of supply.

The potential contribution of supply to strategy is obvious. Achievement depends on

both top executive awareness of this potential and the ability to marshall corporate resources

to this end. At the same time, it is the responsibility of those charged with the management

of the supply function to seek strategic opportunities in the environment and to draw top

executive attention to them. This requires a thorough familiarity with organizational ob-

jectives, strategy, and long-term plans and the ability to influence these in the light of new

information. Chapter 20 discusses both potential supply contributions to business strategy

and the major strategy areas within the supply function.

Progressive managers have recognized the potential contributions of the supply manage-

ment area and have taken the necessary steps to ensure results. One important step in suc-

cessful organizations has been the elevation to top executive status of the supply manager.

Although titles are not always consistent with status and value in an organization, they still

make a statement within and outside of most organizations. Currently, the most common

title of the chief purchasing officer is vice president, followed by director and manager.

The elevation of the chief purchasing officer to executive status, coupled with high-

caliber staff and the appropriate authority and responsibility, has resulted in an exciting and

fruitful realization of the potential of the supply function in many companies.







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DECISION MAKING IN THE SUPPLY MANAGEMENT CONTEXTOne of the appealing aspects of the supply function to its practitioners is the variety and na-

ture of the decisions encountered. Should we make or buy? Should we inventory materials

and how much? What price shall we pay? Where shall we place this order? What should the

order size be? When will we require this material? Which alternative looks best as an ap-

proach to this problem? Which transportation mode and carrier should we use? Should we

make a long- or a short-term contract? Should we cancel? How do we dispose of surplus

material? Who will form the negotiation team and what should its strategy be? How do we

protect ourselves for the future? Shall we change operating systems? Should we use reverse

auctions? What should our e-commerce strategy be? Should we wait or act now? In view of

the trade-offs, what is the best decision? What stance do we take regarding our customers

who wish to supply us? Do we standardize? Is systems contracting worthwhile here? Should we use one supplier or multiple suppliers? Decisions such as these will have a major impact

on the organization and its final customers. What makes these decisions exciting is that they

almost always are made in a context of uncertainty and, therefore, entail risk.

Advances in management knowledge in recent years have substantially enlarged the

number of ways in which supply decisions can be analyzed. The basic supplier selection

decision is a classical decision tree model as shown in Figure 1–4. This is a choice between

alternatives under uncertainty. In this example, the uncertainty relates to our own demand:

We are not sure if it will be high, medium, or low. The outcome is concerned with both

price and ability to supply. Does the decision maker wish to trade a higher price against


Supply reasonably assuredPrice $150/unit



Supply not assured forextra 30,000 units



S u p p

l i e r A

( l a r g

e )

S u p p l i e r B ( s m a l l )

Our demand medium70,000 units

O u r d e ma nd l o w 4 0 ,0 0 0 u ni t s

O u r d e m a

n d h i g h

1 0 0, 0 0 0 u n

i t s

.4

.5

. 1

.4

.5

. 1

OUTCOMEUNCERTAINTY DECISIONFIGURE 1–4Simplified

One-Stage

Decision Tree

Showing a

Supplier

Selection

Decision







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over 40,000 members, who belong to ISM through its more than 180 affiliated organizations

in the United States.

In addition to regional and national conferences, ISM sponsors seminars for purchasing

people. It publishes a variety of books and monographs and the leading scholarly journal

in the field, International Journal of Supply Chain Management, which it began in 1965.

Since the early 1930s, ISM has conducted the monthly “ISM Report on Business,” which

is one of the best-recognized current barometers of business activity in the manufacturing

sector. In 1998, the association initiated the Nonmanufacturing ISM Report on Business.

The survey results normally appear the second business day of each month on the front

page of The Wall Street Journal. In January 2001, ISM and Forrester Research initiated the

Report on e-Business, which is released every three months. Additionally, ISM and its

Canadian counterpart, PMAC, work with colleges and universities to encourage and sup-

port the teaching of purchasing and supply management and related subjects and providefinancial grants to support doctoral student research.

In 1974 the National Association of Purchasing Management initiated the Certified

Purchasing Manager (C.P.M.) program, which tests purchasing people. On successful

completion of the program, it certifies by award of the C.P.M. designation that the recipi-

ent has met the established knowledge, education, and experience standards.

In 1986 the Center for Advanced Purchasing Studies (CAPS) was established as a national

affiliation agreement between ISM and the College of Business at Arizona State University.

The Center has three major goals to be accomplished through its research program: (1) to im-

prove purchasing effectiveness and efficiency, (2) to improve overall purchasing capability,

and (3) to increase the competitiveness of U.S. companies in a global economy. CAPS con-

ducts industrywide purchasing benchmarking studies; publishes a quarterly best practices

publication called Practix; runs the annual Purchasing Executives’ Roundtables in theUnited States, Europe, and Asia; and conducts and publishes focused purchasing research

in areas of interest to industry.

In Canada, the professional association is the Purchasing Management Association of

Canada (PMAC), formed in 1919. Its membership of over 7,000 is organized in 10 provin-

cial and territorial institutes from coast to coast. Its primary objective is education, and in

addition to sponsoring national conferences and publishing a magazine, it offers an ac-

creditation program leading to the C.P.P. (Certified Professional Purchaser) designation.

PMAC’s accreditation program was started in 1963.

The Ivey Purchasing Managers Index (Ivey PMI) jointly sponsored by PMAC and the

Richard Ivey School of Business, is the Canadian equivalent of ISM’s Report on Business,

but covers the complete Canadian economy.

In addition to ISM and PMAC, there are other professional purchasing associations,

such as the National Institute of Governmental Purchasing (NIGP), the National

Association of State Purchasing Officials (NASPO), the National Association of

Educational Buyers (NAEB), and the American Society for Health Care Materials

Management.

Several of these associations offer their own certification programs. Most industrialized

countries have their own professional purchasing associations, for example, Institute of

Purchasing and Supply Management (Australia), Chartered Institute of Purchasing and

Supply (Great Britain), Indian Institute of Materials Management, and Japan Materials

Management Association. These national associations are loosely organized into the







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International Federation of Purchasing and Materials Management (IFPMM), which has as

its objective the fostering of cooperation, education, and research in purchasing on a

worldwide basis among the more than 40 member national associations representing over

200,000 supply professionals.

CHALLENGES FACING PURCHASING AND SUPPLY MANAGEMENTOVER THE NEXT DECADE

There are at least five major challenges facing the supply profession over the next decade:

technology, supply chain management, measurement, growth and influence, and effective

contribution to corporate success.

TechnologyOne of the most exciting and challenging developments to affect supply management in

recent years is the advent of electronic business-to-business (B2B) commerce. New tech-

nology offers exciting opportunities to improve effectiveness and efficiency of supply

management. The rapidity of technological change represents a significant challenge, how-

ever, in terms of assessment and implementation.

Supply Chain ManagementThe success of firms like Wal-Mart and Dell in exploiting supply chain opportunities has

helped popularize the whole field of supply chain management. Nevertheless, significant

challenges remain: while the giant firms in automotive, electronics, and retailing can force

the various members of the supply chain to do their bidding, smaller companies do nothave that luxury. Thus, each organization has to determine for itself how far it can extend

its sphere of influence within the supply chain and how to respond to supply chain initia-

tives by others. Clearly, opportunities to reduce inventories, shorten lead times and dis-

tances, plan operations better, remove uncertainties, and squeeze waste out of the supply

chain are still abundant. Thus, the search for extra value in the supply chain will continue

for a considerable period of time.

MeasurementThere is significant interest in better measurement of supply not only to provide senior

management with better information regarding supply’s contribution, but also to be able to

assess the benefits of various supply experiments. No one set of measurements is likely to

suffice for all supply organizations. Therefore, finding the set of measures most appropri-ate for a particular organization’s circumstances is part of the measurement challenge.

Growth and InfluenceGrowth and influence in terms of the role of supply and its responsibilities inside an or-

ganization can be represented in four areas as identified in a recent CAPS study. 6 In the

first place, supply can grow in the percentage of the organization’s total spend for which it

is meaningfully involved. Thus, categories of spend traditionally not involving purchasing


6 Michiel R. Leenders and P. Fraser Johnson, Major Changes in Supply Chain Responsibilities (Tempe, AZ:

Center for Advanced Purchasing Studies, 2001).







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such as real estate, insurance, energy, benefit programs, part-time help, relocation services,

consulting, marketing spend with advertising and media agencies, travel and facilities

management, IT, and telecommunications and logistics have become part of procurement’s

responsibility in more progressive corporations.

Second, the growth of supply responsibilities can be seen in the span of supply chain

activities under purchasing or supply leadership. Recent additions include accounts

payable, legal, training and recruiting, programs and customer bid support, and involve-

ment with new business development.

Third, growth can occur in the type of involvement of supply in what is acquired and

supply chain responsibilities. Clearly, on the lowest level, there is no supply involvement

at all. The next step up is a transactionary or documentary role. Next, professional in-

volvement implies that supply personnel have the opportunity to exercise their expertise in

important acquisition process stages. At the highest level, meaningful involvement, a termfirst coined by Dr. Ian Stuart at the University of Victoria, represents true team member

status for supply at the executive table. Thus, in any major decision taken in the organiza-

tion, the question “What are the supply implications of this decision?” is as natural and

standard as “What are the financial implications of this decision?”

Fourth, supply can grow by its involvement in corporate activities from which it might

have been previously excluded. While involvement in make-or-buy decisions, economic

forecasts, countertrade, in- and outsourcing, and supplier conferences might be expected,

other activities such as strategic planning, mergers and acquisitions, visionary task forces,

and initial project planning might be good examples of broader corporate strategic

integration.

Each of these four areas of opportunity for growth allows for supply to spread its wings

and influence creation in organization and increase the value of its contributions.

Effective Contribution to Corporate SuccessUltimately, supply’s measure of its contribution needs to be seen in the success of the or-

ganization as a whole. Contributing operationally and strategically, directly and indirectly,

and in a positive mode, the challenge for supply is to be an effective team member.

Meaningful involvement of supply can be demonstrated by the recognition accorded sup-

ply by all members of the organization.

How happy are other corporate team members to have supply on their team? Do they

see supply’s role as critical to the team’s success? Thus, to gain not only senior manage-

ment recognition but also the proper appreciation of peer managers in other functions is a

continuing challenge for both supply professionals and academics.

THE ORGANIZATION OF THIS TEXT

The first four chapters of this text cover the introduction to the field, how supply is organ-

ized, standard acquisition process, and information systems and technology as applied to

supply. Then the next five chapters deal with the standard supply concerns of quality and

service; quantity and inventory; delivery and transportation; and price, cost, and negotia-

tion. All of these first nine chapters are prerequisites to supplier selection, followed by dis-

posal and law and ethics.







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The following five chapters deal with metrics, global and public supply, and two major

specialty categories of acquisition: capital goods and services. The last three chapters are

all focused on major strategic issues: make or buy, insourcing, outsourcing, supplier rela-

tions, and strategic supply.

Conclusion If the chief executive officer and all members of the management team can say, “Because

of the kinds of suppliers we have and the way we relate to them, we can outperform our

competition and provide greater customer satisfaction,” then the supply function is con-

tributing to its full potential.This is the ambitious goal of this text: to provide insights for those who wish to understand

the supply function better, whether or not they are or will be employed in supply directly.

1. What is the profit-leverage effect of supply? Is it the same in all organizations?

2. “Purchasing is not profit making; instead, it is profit taking since it spends organiza-

tional resources.” Do you agree?

3. What kinds of decisions does a typical supply manager make?

4. “In the long term, the success of any organization depends on its ability to create and

maintain a customer.” Do you agree? What does this have to do with purchasing and

supply management?

5. Is purchasing a profession? If not, why not? If yes, how will the profession, and the peo-

ple practicing it, change over the next decade?6. Differentiate between purchasing, procurement, materials management, logistics, sup-

ply management, and supply chain management.

7. In what ways might e-commerce influence the role of supply managers in their own or-

ganizations? In managing supply chains or networks?

8. In the petroleum and coal products industry, the total purchase/sales ratio is 80 percent,

while in the food industry it is about 60 percent. Explain what these numbers mean. Of

what significance is this number for a supply manager in a company in each of these

industries?

9. How does supply management affect return on assets (ROA)? In what specific ways

could you improve ROA through supply management?

QuestionsforReviewandDiscussion

Ballou, Ronald H. Business Logistics/Supply Chain Management. 5th ed. Upper Saddle

River, NJ: Pearson Prentice Hall, 2004.

Burt, David N.; D. W. Dobler; and Stephen L. Starling. World Class Supply Management.

7th ed. New York: McGraw-Hill Irwin, 2003.

Chopra, Sunil, and P. Meindl. Supply Chain Management . 2nd ed. Upper Saddle River,

NJ: Pearson Prentice Hall, 2004.

Handfield, R. B., and E. L. Nichols Jr. Introduction to Supply Chain Management . Upper

Saddle River, NJ: Prentice Hall, 1998.

References







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Hughes, Jon; Mark Ralf; and Bill Michells. Transform Your Supply Chain. London:

Thomson, 1998.

Leenders, M. R., and A. E. Flynn. Value-Driven Purchasing: Managing the Key Steps in

the Acquisition Process. Burr Ridge, IL: Irwin Professional Publishing, 1995.

Monczka, R.M., and R.J. Trent. Purchasing and Sourcing Strategy: Trends and Implica-

tions. Tempe, AZ: Centre for Advanced Purchasing Studies, 1995.

Monczka, R. M.; R. J. Trent; and R. Handfield. Purchasing and Supply Management. 2nd ed.

Mason, OH: South-Western, 2002.

Neef, Dale. e-Procurement . Upper Saddle River, NJ: Prentice Hall, 2001.

Nelson, Dave; Patricia E. Moody; and Jonathan Stegner. The Purchasing Machine. New York:

The Free Press, 2001.

Rozemeijer, Frank. Creating Corporate Advantage in Purchasing . Eindhoven, The

Netherlands: Technische Universiteit Eindhoven, 2000.

CAPS Research

2055 East Centennial Circle

P.O. Box 22160

Tempe, Arizona 85285-2160

http://www.capsresearch.org

Institute for Supply Management

2055 East Centennial Circle

P.O. Box 22160

Tempe, Arizona 85285-2160

http://www.ism.ws NAEB: National Associaton of Educational Buyers Inc.

450 Wireless Boulevard

Hauppauge, NY 11788

http://www.naeb.org/index.html

PMAC: Purchasing Management Association of Canada

2 Carlton Street, Suite 1414

Toronto, Ontario M5B 1J3

Canada

http://www.pmac.ca

CIPS: Chartered Institute of Purchasing and Supply

Easton HouseEaston on the Hill

Stamford, Lincolnshire, PE9 3NZ

United Kingdom

http://www.cips.org

IFPMM: International Federation of Purchasing and Materials Management

http://www.ifpmm.org

Addresses







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Case 1–1

Custom Equipment

It was July 2, and Matt Roberts had just been given his

first assignment, the “Wire Management Program”

(WMP), by the purchasing manager of Atlanta-based

Custom Equipment Inc. The purpose of the WMP was to

reduce the supplier base for the company’s wire and cable

requirements. As a newly hired purchasing agent, Matt

wondered how to proceed.

CUSTOM EQUIPMENTCustom Equipment Inc. (CE) was a relatively new

division of Custom Equipment Global, a multinational

electrical engineering and technology company. CE

generated sales of $66 million in the past year, and had

forecast growth of 25 percent for each of the upcoming

four years.

CE’s products were divided into assembly line

equipment and press automation equipment. Assembly

line products included units such as framers, in which a

vehicle frame was fed onto a line and welded in specified

areas. Press automation products were units built to move

vehicle frames, doors, and hoods between machinesalready installed within the customer’s assembly process.

The machines were built in Atlanta, tested, approved,

disassembled into sections, shipped to the customer’s

facility, and then re-assembled.

All machines at Custom Equipment were hand-built.

Most units were unique due to the requirements of the

manufacturer and the intended purpose of the machines.

Each machine was comprised of steel, mechanical,

electrical, and hydraulic parts. Wires and cables were

purchased in lengths and installed throughout the unit.

With automotive design changes occurring annually, CE

was constantly reconditioning previous builds or

bidding on new lines. CE prided itself on customer satisfaction. In the automotive industry, a key factor was

on-time delivery of equipment required to begin

production.

CE’S PURCHASING DEPARTMENT

The purchasing department at CE was composed of six

purchasing agents and one manager. Responsibilities

were divided into commodity groups. These groups

consisted of electrical, mechanical, hydraulic/pneumatic,

robots/weldguns, affiliate-produced parts/fabricated com-

ponents, and steel/other metals. Matt was hired recently

to replace two retiring purchasing agents.

MATT ROBERTS

Matt held an undergraduate business degree from a well-

known business school. Upon graduation, Matt had

worked for a year as an inventory analyst for amultinational manufacturing organization. He had

applied to CE after visiting its display booth at a local

manufacturing trade show. Matt was eager to make an

early contribution at CE and he believed that the WMP

presented an excellent opportunity.

WIRE MANAGEMENTPROGRAM (WMP)

Matt’s manager had recently initiated the WMP

believing that CE could improve value for all of its wire

and cable requirements from volume leverage.Rationalizing the supplier base would also save time

currently spent processing multiple supplier invoices. A

stronger relationship could be fostered with the chosen

supplier, which could help increase the priority of CE

orders and open further opportunities for cost savings.

Also, transportation costs could be reduced because all

items would be arriving from a single source. Finally,

sourcing from a single supplier would allow the

purchasing agent to focus on issues involving higher

dollar values.

Matt’s manager had given him the impression that the

WMP should be implemented before the end of October.

MANUFACTURING COMPONENTS

Last year CE’s total component purchases totaled $32

million. CE had a total supplier base of 3,000 companies,

of which less than 5 percent were regular suppliers. The

first reason for having such a large number of suppliers

was that newly hired purchasing agents usually had

previously established relationships with certain suppliers.

The second reason was that some suppliers specialized in

certain products.







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certification requirements. Criteria such as delivery,

product returns, and overall supplier service were tracked

and kept within the records of the receiving department.

With these records, in conjunction with his conversations

with the receiving manager, Matt believed he could

develop an objective assessment of the suppliers’ past

performance. There had been no significant quality

problems with any of CE’s current suppliers according to

the receiving manager. He believed that the vendors

possessed relatively uniform quality.

THE NEXT STEP

Matt’s boss had created the Wire Management Program toseek benefits from reducing the number of wire and cable

suppliers. Matt’s initial thought was that a single supplier

could provide the best prices for CE’s annual require-

ments. He realized that there were arguments both in

favor and against using this approach. He would have to

analyze the capabilities and managerial abilities of each

company in order to reach a decision.

Matt began to think about possible methods to reduce

the total number of wire and cable suppliers. CE had

established strong relationships with some of the

suppliers, and he therefore wanted to give all interested

companies an opportunity to present their case.

Whatever he chose, he would need to justify his

recommendation to his manager and CE’s engineers and

other employees.

Case 1–2

Roger Gray

Late in the afternoon of August 23, Roger Gray, purchasing

manager at Anderson Plastics, watched as his boss angrily

left the room. It was the second time in a week that Roger

had been blamed when the plant had run out of raw

materials, and he wondered how he should address thematerials management problems at the California plant.

ANDERSON PLASTICS INC.

Anderson Plastics Inc. was a large multinational supplier

of plastic compounds, which constituted the raw material

for a number of different plastic materials, such as

polypropylenes, polyethylenes, styrenes, and nylons.

These compounds were used to manufacture a variety of

products, such as automotive bumpers and dashboards,

helmets, packing material, and hard-shell suitcases.

The company had pursued a growth strategy, mainly

through acquisitions, during the last decade. Currently,Anderson Plastics operated 13 manufacturing plants in

North America, Europe, Latin America, and the Asia-

Pacific region with a combined sales volume of about

$1 billion. The company employed approximately 2,200

people worldwide.

ANDERSON PLASTICS

The California manufacturing plant was 110,000 sq. ft. in

size and sat on about 14 acres of industrial land with

access to a rail siding. A total of 74 people worked at the

plant.

During the last decades, Anderson and its customers

had moved to just-in-time systems (JIT), which required

Anderson to work closely with customers to scheduledelivery of raw materials. The result had been a trend

toward lower supply chain inventories. However, this also

increased the risk of stockouts, which could result in

expensive downtime for Anderson’s customers.

PURCHASING & MATERIALSMANAGEMENT

Until two years ago, purchasing at Anderson Plastics had

been a noncentralized function, where each department

was responsible for ordering its own raw materials.

Because of materials management problems, such as

excess inventory for some products while experiencingfrequent stockouts of others, management decided to

make a change. Therefore, Roger Gray, a production

supervisor at the plant with 16 years’ experience, was

moved over to take control of a newly created centralized

purchasing function for the plant.

The materials management system in place at Anderson

Plastics had not yet been properly integrated with other

parts of the Anderson Plastics organization or its suppliers.

Roger had found the materials management system to be

unreliable, frequently contributing to stockouts. While it







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was good at processing regular shipments, it could not

handle unexpected requirements adequately. In addition, a

parallel “handwritten” system was in effect, which required

Gray to spend two to three hours a day filling out forms. In

his first year, Gray developed a series of spreadsheet

applications to automate some of the repetitive and error-

prone tasks.

As the plant expanded, the number of products that

Roger had to keep track of rose from 250 to 550. Even

with his new spreadsheet applications, it became

increasingly difficult for Roger to manage inventory levels

accurately.

Roger was severely criticized when a stockout

occurred, even though he believed that most of the time itwas not his fault. Often, the materials management system

was a couple of days behind real time and so it didn’t

reflect current inventory levels. At other times, trans-

portation problems, especially the chronic unreliability of

the U.S. rail system, caused shipments to be delayed. The

plant only had a 10-silo capacity for raw materials and

also used rail cars full of material as temporary ware-

houses when necessary. Roger felt that inventory levels

were high, but he had never been criticized for carrying

“too-much” inventory.

THE TWO RECENT INCIDENTS

Both of this week’s stockouts were typical. The first had

occurred because production had not informed Roger that

a prime customer had suddenly ordered twice its usual

requirement a week earlier and had failed to record the

quantities withdrawn from inventory properly. Thus,

Roger’s record showed a significant amount of inventorystill on hand.

Today’s incident had involved a shipment by rail from

Texas that should have arrived four days ago but which

had been mysteriously delayed in transit. The supplier had

shipped on the proper date and was not at fault.

Case 1–3

Cottrill Inc.

On November 12th, Judy Stevens, purchasing supervisor at the Cottrill Inc. plant in Columbus, Ohio, was

reviewing a proposal from Saxton Wireless. Judy was

dissatisfied with Cottrill’s paging service from its current

supplier and had been approached by Saxton about

switching service providers. She knew that the sales

representative at Saxton was expecting a reply later that

day and needed to finalize her decision.

COTTRILL INC.

Cottrill was established in the mid-1800s and was the one

of the largest corn refining operations in North America.

The company operated six wet-milling plants, four in the

United States and two in Canada. Cottrill was an industry

leader and maintained this position by continuously

developing new products, technologies, and manufactur-

ing processes.

The Columbus plant had been operating for over 20

years and employed more than 100 people. It produced

high-fructose corn syrup, starch, and glucose, which were

used as supply inputs for a variety of industries including

baked goods, beverages, confections, corrugating and

paper, and processed foods. Cottrill competed primarily

in the business-to-business segment and recognized thatcustomers demanded both reliability and consistency.

THE PURCHASING DEPARTMENT

Cottrill’s purchasing department had to ensure that the

plant ran efficiently and was responsible for replenishing

a variety of supplies at the plant, ranging from chemicals

to communications equipment. A current initiative for

Cottrill, and particularly for the purchasing department,

was reducing the level of working capital. This had been a

focus in the purchasing department for over two years,

and the departmental target was an annual decrease of

$300,000.

Judy Stevens was the purchasing supervisor at the

Columbus plant and had one employee reporting to her.

In general, the purchasing department had a large degree

of autonomy as most decisions did not have to be cleared

by Judy’s boss, the plant controller.

THE PAGING SYSTEM

The majority of Cottrill’s products were manufactured

through a continuous flow process. Therefore, downtime







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at the Columbus plant was extremely costly and was

estimated at $200,000 per hour. In an attempt to minimize

plant downtime, management implemented an automated

software program and an electronic pager system 12 years

ago. The software program, called ProductionMessaging,

monitored Cottrill’s equipment. If an unusual condition,

such as heat failure, was detected, this system automatically

sent out a warning message to a pager. Pagers were grouped

by process so that in the event of a malfunction, only the

appropriate technicians and supervisors were notified. The

plant had a total of 20 pagers, and this number included a

variety of different models.

Usually one warning was experienced per week.

Depending on the message sent by the system, pagescould report a machine malfunction or simply inform staff

about potentially anomalous machine operating statistics.

THE CURRENT SYSTEM

Cottrill initially approached Tallant, a large international

wireless company, 12 years ago because they offered the

only paging service that could be used in conjunction with

the ProductionMessaging software system. The current

contract with Tallant was open-ended and required 30 days’

notice if Cottrill wished to terminate the contract. Tallant

did not provide Cottrill with a designated service

representative. Instead, if a problem occurred, someonewould call a 1-800 number and then wait on hold until his

or her call was taken to speak with a customer service

representative. This process could become an issue if

Cottrill was placed on hold during a plant emergency for

an extended period of time.

Several recent events had caused Judy to become

dissatisfied with the current arrangement with Tallant. In

June, Judy contacted Tallant with a routine request to

replace a broken pager. Judy was dissatisfied with

Tallant’s service, feeling that she spent too much time on

the phone arranging the order and it took Tallant over a

month to send out the replacement pager.

Judy contacted Tallant again in September to replace

another pager. She was informed that Tallant no longer

carried this model and that the option of renting the pager

hardware would be discontinued in the near future. Judy

ordered a comparable product, valued at approximately

$150, but felt a little unsettled by the new information.

Cottrill’s budget was tight and she preferred renting this

equipment instead of purchasing for cash flow reasons.

Although annoyed with the disappointing level of service

from Tallant, Judy was consumed with more pressing

issues at Cottrill and brushed off both incidents.

THE SAXTON PROPOSAL

In late October, a Saxton sales representative, Natalie

Hopkins, contacted Judy to present a proposal outlining

the benefits to Cottrill of switching to Saxton’s services.

Saxton offered a simpler fee structure and also a lower

overall cost than Tallant (see Exhibit 1). Additionally, by

switching to Saxton, Judy would be able to directly access

Natalie by e-mail or by phone if any service issues arose.

Although Saxton was a large wireless services

company, it did not have the established reputation in the

area of in-plant wireless messaging systems, nor did it

have the local service history that Tallant did. Judy

wondered about Saxton’s current customers and was

unclear whether Saxton had the necessary experience tohandle the technological requirements of Cotrill’s

account. Tallant also required notice upon termination of

the agreement, and Judy recognized that the paging

service timeframes could overlap due to this constraint,

effectively forcing Cottrill to pay for paging services

from both companies during the transition. Additionally,

if Cottrill did switch suppliers, all of the existing pager

numbers would need to be changed and plant staff would

need to be informed of the switch.

Since the initial meeting had gone well, both Judy and

Natalie had agreed to move forward with the process and

schedule a trial of Saxton’s hardware. This test was

EXHIBIT 1 Per-Unit Comparison of Service Terms for Tallant and Saxton

Tallant Saxton

Monthly fee for airtime (per pager) $16.95 $13.95

Monthly fee for phone number (per pager) $1.95 None

Monthly fee for equipment rental (per pager) $11.90 None

Yearly maintenance fee (per pager) $60.00 None

Service provided (no additional cost) 1-800 # help line Direct sales representative







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necessary to confirm that Saxton’s pagers would be

compatible with the relevant applications in the

ProductionMessaging software. After Judy spoke with

Cottrill’s systems group, a trial was scheduled for the f irst

week in November.

Judy was not able to be present for the trial, but her

contact in the systems group advised her of the events.

Unfortunately, the pagers did not immediately function

with the ProductionMessaging software. However, after

several attempts to solve the functionality issue, Cottrill’s

systems group resolved the snags in the hardware and

reworked the connection after completing some repro-

gramming. It appeared that the problem was under

control, but Judy was worried about how easily the Saxtonsystem could be implemented. Also, she was unsure about

how the systems group perceived the functionality

problems and if this would be an issue going forward.

DECISION CRITERIA

Judy often used a structured set of criteria to approach

purchasing decisions at Cottrill. Although she had the

final decision-making authority with this issue, she

recognized that the systems group would have to support

this switch. The systems group was primarily concerned

with functionality, and providing that the Saxton product

could perform to the similar level of functionality of

Tallant, they would not have any objections to switching

suppliers.

Judy wondered which criteria were most important to

the decision of supplier selection and how these issues

should be ranked. Judy knew that before a recom-

mendation could be made, she would have to apply her

evaluation framework and proposed criteria to the

alternatives.

It was Monday morning, and Judy had taken some

time to think about the issues of the Saxton hardware

testing that had taken place the previous Friday. She had

expected the trial to be executed without incident and wondered if the decision to switch suppliers was as

simple as she had initially thought. Judy wanted to be

certain that she had considered all of the implications

involved with switching suppliers before making a

decision. She knew that the change to Saxton was an

option but recognized that Cottrill could also remain with

Tallant, and was now wondering if there were any other

alternatives. However, Judy understood that it had been

nearly a week since the Saxton sales representative had

presented her proposal and she was expecting Judy’s

response by the end of the day.

purchasing & supplier management 1

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