Purchasing and Supply Management
Open the file (Homework 1 5R’s) for instructions and read (Ch 1 Intro to SC) to answer it
Homework 1
Describe how would you address the 5Rs for one personal or one professional purchase (you are the buyer).
Type your answer: double space, font 11 or 12; include your name, and date.
Use bullet points and stay on the topic.
Work independently. Submission must be done using the Safe Assign option in BB (it will be checked for plagiarism).
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Clearly state your need
Establish a link between your need and the item that will best satisfy it (2p)
Indicate what you plan to do (or what you did) to make sure that you covered all the 5 Rs of purchasing (5 x 2p => 10p)
Select the correct item (clear and unambiguous characteristics such as size, model number, etc.); the right quality (durability, #of defects, etc.) and so on.
Answer should be concise, yet comprehensive and specific
Organize your answer by using Bullet Points will help you stay focused (2p)
Remember that You are the Buyer, present your statements from this perspective
Avoid complications (for example, I do not encourage you to position yourself as a professional buyer for a retailer), a simple purchase of a personal item will be good enough for this assignment.
Homework Tips
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Learning suggestions:
Take your own Notes
Use both PP and Textbook
Focus on the PP. It is important to go through the materials every week.
Exam questions could be from the manual too, but the essence is in the PP.
Do not hesitate to ask questions
3 Chapter 1
Purchasing and Supply Management
2020 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
Key Issues Addressed in Chapter 1
Supply function – description and historic perspective
The Acquisition Process: Main Steps and the 5Rs
Supply Contribution
The profit leverage effect as a measure of supply impact on profitability (the income statement)
The ROA effect as a measure of supply impact on asset performance (the balance sheet)
The potential contribution of supply to organizational goals and strategies
Operational versus Strategic & Direct versus Indirect
The nature of organizations and the implications for supply
2020 McGraw-Hill Education.
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What is Supply Chain?
A Function, A set of Processes, A multitude of Activities
A Group of people, A Department, A group of Interconnected Organizations
Multiple Related Names, Taxonomies and Meanings:
Logistics, Purchasing, Procurement, SC, SCM, Value Chain, Distribution Chain, Supply Network (web)
Complex: Activities, Relations, Context
Definitions
What do we mean, what are we thinking of when we say SC?
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Supply Management
The integration of related functions to provide effective and efficient materials and services to the organization.
Logistics management is that part of supply chain management that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customers requirements.
Note: The terms purchasing, procurement and supply management are used interchangeably in this text.
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Definitions
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Supply Chain Management
The design and management of seamless, value-added processes across organizational boundaries to meet the real needs of the end customer.1
Value Chain Porter: Primary and secondary support activities that can lead to competitive advantage
–Institute for Supply Management (ISM) Glossary
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Supply Chain
Supply Chain
Marketing and
Distribution
Definitions
1Supply Chain Management Definition by Institute for Supply Management
2Value Chain – Porter
Primary and secondary support activities that can lead to competitive advantage
Supply Chain is a subset of Value Chain
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The Evolution of the
Supply Function
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Pre 1939
1940-1949
1950-1969
1970-1989
1990-1999
Clerical
Supply
assurance
Managerial
emphasis
Purchasing
strategy
Integration into
corporate strategy
Integrated supply networks and information technology
Sustainability, globalization, technological innovations and risk management
2000-2010
Today
Historical Perspective
Transition from Tactical to Strategic position of the Supply Function
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early
1900s
Today
Clerical and Tactical
Focus on Policies and Procedures
Key challenges:
Availability of supply,
Cost Management
Strategic orientation
Global supply chains
Executive level leadership
Key challenges:
Risk Management,
TCO,
Sustainability,
Security,
Globalization
Historical Perspective
5 Ms!^
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Historical Perspective
Materials,
Manpower,
Machine,
Management,
Money
The 5Ms production factors are important : Materials, Manpower, Machine, Management, Money.
understand and remember the signification, and the shift in their $ amount and % significance to organizations economics
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Steps in the Procurement Process^!
Need recognition
Description: translation of that need into a commercially equivalent (specification)
Search for potential suppliers
Selection of a suitable source(s)
Agreement on order or contract details
Price!
Delivery of products and/or services
Payment of suppliers
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Acquisition Process
^ 5 Major Steps:
Establish the Item,
Select the Source,
Set the Price,
Determine the terms and sign the Contract,
Manage the Relation with the supplier
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Purchase Order (PO), Purchase Requisition, Receiving Report, Invoice, Payment1,^
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Supplier
Purchasing
Internal department
Accounting
Receiving
Purchased
Goods
(4)
Purchase Requisition (1)
P.O. (3)
Acknowledgement
P.O. (2)
Receiving
Reports
(4)
Purchased
Goods
(4)
P.O. A.
(3)
P.O. A.
(3)
Invoice (4)
Payment (5)
P.O. A.
(3)
Receiving
Report
(4)
Acquisition Process
1An shows an internal follow up in that specific purchasing step
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The 5 Rs of Purchasing!^
Right Item and/or Service
Right Quality
Right Quantity
Right Price
Right Time (some include Place and extend the statement to the right Delivery)
Some sources include the Right Source
(see the Procurement Steps)
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Acquisition Process
Important
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Purchasings Operational and Strategic Contributions
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Supply Contribution
Operational
Trouble Prevention
Strategic
Opportunity Maximization
Supply Contribution
Direct
Bottom-Line Impact
Indirect
Enhance Others Performance
S.C. Impact on Revenue/Sales
Pricing Flexibility (more flexibility for marketing depart.)
Improved Quality (75% of quality problems could be traced back to defects in purchased materials)
Reduced Time to Market, Shorter Cycle Times and Lead Times (relevant for Time-Based Competition)
Customer Satisfaction and Customer Fulfillment Flexibility
Assist in becoming a Supplier of Choice (higher value offer)
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Supply Contribution
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S.C. Cost Impact
Product Design (70-80% of total cost of ownership is set during the product design process)
Acquisition costs (both items and services)
Processing, Quality, Conversion costs
Non-Value-Added (activities) costs
Downtime and Cycle Time1 costs
Supply Chain Costs (SC processes and activities including suppliers management)
Post Ownership Costs (waste, service, warranty)
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Supply Contribution
Cycle time is the total time from the beginning to the end of your process
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Profit-Leverage Effect ($ millions) !
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Income Statement
Sales: $500
Purchases 300
Labor 35
Overhead 100
Gross Profit $ 65
SG&A1, Interest 40
Profit: $ 25
After 5% Spend Decrease
Sales: $500
Purchases 285
Labor 35
Overhead 100
Gross Profit $ 80
SG&A*, Interest 40
Profit: $ 40
A 5% reduction in purchase cost
creates a 60% increase in profit
Supply Contribution
1 Selling, General and Administrative Expenses
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Return-on-Assets Factors!
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Sales Total Costs (CGS + Other Costs) Total Assets (Current Assets + Fixed Assets)
Supply Contribution
Opportunities for Supply to Contribute to Organizational Success
Increase revenue
Reduce total costs of ownership
Reduce lead times through process efficiencies
Improve customer satisfaction
Identify opportunities for product/service innovations by collaborating with suppliers
Minimize financial, operational and reputational risks
Improve supply chain sustainability performance
Provide information to others in the organization in areas such as market conditions and new products and services.
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Supply Contribution
SC and Organizations Nature
Ownership (figure 1-3)
Public (Gov. local, state, federal)
Focus on the mission of the organization
Supports the efficiency and effectiveness of the org.
Transparency & Fairness of the supply process
Social aims
Minority support
National security considerations
(mostly services)
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SC and Org. Nature
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SC and Organizations Nature
Non Government Organizations non profit
Strong social focus
Support organizational objectives
More flexibility, less restrictions (compare to gov. org.)
Could operate globally
Private (for profit, fig 1-4)
Identic to Public 1. & 2. (mission and efficiency & effectiveness)
Lower restrictions on supply process Commerce Law (mainly)
A tool for obtaining and securing competitive advantage
Commitment to shareholders
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SC and Org. Nature
Important
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SC and Organizations Nature^
What is delivered: Goods and/ or services; Industry
Batch manufactures (cars, electronics, etc.) SC. Very important
Buying goods & services (50 80% of revenue)
Flow industry (oil, chemicals) SC could have a smaller role
Commodity trading group is responsible for the largest % of expenditures of the organization
Service Industry: 25-35% of the revenue goes to outside $ spent
Size: Large vs. Small
Size enables and/or requires specialization
Location, number of sites affects SC organization and structure
Financial – ability to obtain good deals, bargain power
Reputation: Good vs not so good reputation
Ability to maintain good relations with world-class suppliers
Access to the best deals and offers
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SC and Org. Nature
Factors Affecting Supply Function
Increased outsourcing places great reliance on suppliers
Greater dependence on suppliers for design and build (responsibilities for subassemblies and subsystems Boeing)
Increased global competition requires best value from suppliers for price, quality, delivery and sustainability performance
Development of new technologies
Evolving information systems
Trend to single sourcing and strategic supplier relationships
Greater importance of environmental SC and CSR
Higher focus on Risk management
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Closing Remarks
Challenges Facing Supply Function
Managing growth and influence in total spend, span of supply chain activities, involvement in all supply-related decisions, and involvement in strategic corporate activities
Capturing opportunities in the supply chain
Establishing the appropriate set of measures to evaluate the contribution of supply and supply initiatives
Managing operational, financial and reputational risks
Improving supply chain sustainability performance
Integrating technologies in supply processes, including digitization, e-commerce, and artificial intelligence
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Closing Remarks
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Recap
Supply Chain vs Distribution Chain vs Value Chain
5 Ms
5 Rs
Process Steps (5 major Steps: Item, Source, Price, Contract, Relation)
SC Contributions
Direct vs Indirect
Operational vs Strategic
SC and Organizations Nature
Chapter Questions: 1; 2; 4; 5; 9; 10
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