Ch.1 Purchasing & Supply Chain Management

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1 Module 1 : Purchasing Process. Ch.1 Purchasing & Supply Chain Management Edited by Dr. Seung Hyun Lee (Ph.D., CPM) IEMS Research Center,

2 Definition of Supply Chain. Definition of Supply Chain. The process from the intial raw materials to the ultimate consumption of the finished product linking across supplier-user companies. The functions inside and outside of a company that enable the value chain to make products and provide services to the customer

3 Definition of Supply Chain (cont). Definition of Value Chain. Raw Material Technology Manufacturing Logistics Marketing Sales Customer A process consisting of a number of related steps, with each step adding a certain value to the total outcome. A company's value chain is a system of interdependent activities where the contribution of one link is strongly dependent upon the performance of the other links

4 Definition of Supply Chain (cont). Supply Chain Process

5 Definition of Supply Chain (cont). Supply Chain Elements. Purchasing. The process of buying, and the function of and the responsibility for procuring materials, supplies, and services. Inbound Transportation. A specialized traffic and transportation function to manage the physical and information links between the supplier and the buyers. Quality Control. Quality control has taken on increased importance during the last 15 years. The emphasis has shifted from detecting defects at the time of receipt or use to prevention early in the materials-sourcing process

6 Definition of Supply Chain (cont). Supply Chain Elements. Demand and Supply Planning. Demand planning identified all the demand on output. This includes forecasts of anticipated demand, inventory adjustments, orders taken but not filled, and spare and after-market requirements. Supply planning is the process of taking demand data and developing a supply, production, and logistics network capable of satisfying demand requirements. Receiving, Material handling, and Storage. All inbound material must be physically received as it moves from a supplier to a purchaser. Receiving, material handling, and storage are usually part of the materials management functions because of the need to control the physical processing and handling of inventory

7 Definition of Supply Chain (cont). Supply Chain Elements. Material Control. The material control is often responsible for managing material release to suppliers. This includes generating the release, contracting a supplier directly concerning changes, and monitoring the status of inbound shipments. Inventory Control. The inventory control is responsible for determining the inventory level of finished goods required to support customer requirements, which emphasizes the physical distribution side of the supply chain. Order Processing. Order processing helps ensure that customers receive material when and where they require it. Order processing is an important part of supply chain management : it represents a link between the producer and the external customer

8 Definition of Supply Chain (cont). Supply Chain Elements. Production Planning, Scheduling, and Control. These activities involve determining a time phased schedule of production, developing short-term production schedules, and controlling work-in-process production. Warehousing/Distribution. Before a product heads to the customer, it may be stored for a period in a warehouse or distribution center. Shipping. This activities involves physically getting a product ready for distribution to the customer. This requires packing to prevent damage, completing any special labeling requirements, completing the required shipping documents, or arranging transportation with an approved carrier

9 Definition of Supply Chain (cont). Supply Chain Elements. Outbound Transportation. Fewer organizations "own" the transportation link to their customers than was the case just a few years ago. Increasingly, full-service transportation providers are designing and managing entire distribution networks for their clients. Customer Service. Customer service includes a wide set of activities that attempt to keep a customer satisfied with a product or service

10 Purchasing Objectives. Purchasing Objectives. Support Operational Requirements. Managing the Purchasing Process Efficiently and Effectively Supply Base Management. Develop Strong Relationships with Other Functional Groups. Support Organizational Goals and Objectives. Developing Integrated Purchasing Strategies that support Organization Strategies

11 Purchasing Objectives. Support Operational Requirements. Purchasing supports the needs of operations through the purchase of raw materials, components, subassemblies, repair and maintenance items, and services. Purchasing must support operation strategy by providing the uninterrupted flow of high-quality goods and services that internal customer require. Supporting this flow requires purchasing to 1. Buy products and services at the right price, 2. From the right source, 3. At the right specification that meets users needs, 4. In the right quantity, 5. For delivery at the right time, 6. To the right internal customers

12 Purchasing Objectives (cont). Managing the Purchasing Process Efficiently and Effectively Determining staffing levels. Developing and adhering to administrative budgets. Providing professional training and growth opportunities for employees. Introducing purchasing systems that lead to productivity improvement and better decision making. Supply Base Management. Ensuring that current suppliers are competitive. Identifying new suppliers who have the potential for excellent performance. Improving and developing existing suppliers who are not competitive

13 Purchasing Objectives (cont). Develop Strong Relationships with Other Functional Groups. Purchasing must communicate closely with other functional groups ; marketing, manufacturing, engineering, technology, and finance. Purchasing must communicate closely with other functional groups. 1. With the supplier to improve their quality Manufacturing. 2. Pricing is competitive and service level are being met Marketing. Support Organizational Goals and Objectives. If an organization has as an objective of reducing the amount of inventory across its supply chain, purchasing can work with suppliers to deliver smaller quantities more frequently, leading to inventory reductions

14 Purchasing Objectives (cont). Developing Integrated Purchasing Strategies that support Organization Strategies. Monitoring supply markets and trends (e.g., material price increase, shortages changes in suppliers) and interpreting the impact of these trends on company strategies. Identifying the critical materials and services required to support company strategies in key performance areas, particularly during new product development. Developing supply options and contingency plans that support company plans. Supporting the organization's need for a diverse and globally competitive supply base

15 Establishing Procurement Plan. Make or Buy Analysis : Some Consideration. Making Buying Cost considerations (less expensive to make the part). Desire to integrate plant operations. Productive use of excess plant capacity to help absorb fixed overhead. Need to exert direct control over production and/or quality. Design secrecy required. Unreliable suppliers. Desire to maintain a stable work force (in periods of declining sales). Supplier's research and specialized know-how. Cost considerations (less expensive to buy the part). Small-volume requirements. Limited production facilities. Desire to maintain a stable work force (in periods of rising sales). Desire to maintain a multiple-source policy. Indirect managerial control considerations. Procurement and inventory considerations

16 Make or Buy Analysis. Cost Avoidance Method 1. Produce 10,000 units : Cost factors. 4. Total Avoided Cost. Raw material Direct labor Variable factory overhead Fixed factory overhead Total cost to make $ 9,000 $ 12,000 $ 5,000 $ 24,000 $ 50,000 Raw material Direct labor Variable factory overhead Fixed factory overhead Total cost to make $ 9,000 $ 12,000 $ 4,000 $ 18,000 $ 43, Purchase proposal $ 4.50/unit 5. Analysis 3. Factors to Consider : Cost not avoided Plus cost to purchase $ 7,000 $ 45,000 You only avoid 80% of the variable factory overhead cost. You only avoid 75% of the fixed factory overhead cost. Total cost to purchase $ 52,

17 Make or Buy Analysis (cont). Total Cost Analysis Method TC min = C i D + 2C b C h D ( 1 - D R ) Where C i = item cost. C b = ordering cost or line setup expenses. C h = holding rate per period. D = demand during period. R = replenishment rate

18 Make or Buy Analysis (cont). Total Cost Analysis Method : Example Item cost Order or setup cost Replenishment rate/day Holding rate per period (%) Demand per period Make $ 5.00 $ $ 25 $ $ 12 Buy $ 6.00 $ $ $ $ 12 Make = ( 5) ( 12) + 2( 150) ( 0.005)( 1 2) ( ) = $63.06 Buy = ( 6) ( 12) + 2( 10) ( 0.005)( 1 2) ( 1-12 ) = $

19 Internal Factors for Procurement. [TASK 101] Operational Strategy. Many purchasing requirements are transmitted as requisitions that originate from internal customer departments or in a manufacturing unit of production requirements. Coordination and timing between purchasing and operations becomes crucial. Purchasing shares in production's desire to keep operations running smoothly. Financial Strategy. Many economic factors periodically bring about good buying opportunities. Thus, there are times when an organization may wish to buy now to avoid paying higher prices later for the same requirements or, conversely, to delay placement of an order if a drop in price appears likely

20 Internal Factors for Procurement. [TASK 101] Marketing Strategy. Sales forecasts are the basis for production and operations schedules, which, in tern, are the basis of purchasing decision. Supply Strategy. Every class of product or service an organization purchases should have a defined supply strategy. This strategy must support the business unit, corporate goals, and organizational strategies as well. The presence of a strategy gives the purchaser guidance in finding and selecting suppliers that will help support and improve the organization's competitive position. Some of components that make up a supply strategy are the buying policy, sourcing policy, supplier relationship, and role and location of inventory

21 Other Issues. [TASK 101] Marketing Conditions. The nature of the market, whether is a supplier's market, a buyer's market, or a balanced market, affects how the purchaser will plan for and approach the acquisition. In a buyer's market, the purchaser may use a subsistence buying policy, buying only what is needed at the time since supply is plentiful. Supplier Marketing Strategies. In addition to the market conditions, suppliers apply differing strategies and tactics in their quest to maximize profits in the short and long run. This form of marketplace intelligence is important information to the purchaser when planning an acquisition

22 Purchasing Process. Purchasing Process. 1. Identifying user need for product or service. 2. Evaluate potential supplies. 3. Bidding, negotiation, and supplier selection. 4. Purchase approval. 5. Release and receive purchase requirement. 6. Measure supplier performance

23 Purchasing Process (cont)

24 Performance Check. 1. All of the following are internal factors leading to the decision to buy, EXCEPT A. Marketing strategies. B. Financial strategies. C. Departmental strategies. D. Operational strategies 2. A long-term action plan that defines what needs to do to attain a stated goal is a A. Master schedule. B. Strategy. C. Business plan. D. Meeting agenda. 3. Demand greater than supply is known as a(n) : A. Buyer's market. B. Balanced market. C. Supplier's market. D. Allocation

25 Performance Check. 4. Conditions which support buying beyond current demands include all of the following EXCEPT a(n) A. Threat of strike. B. Reduction of number of P.O.'s. C. Political instability. D. Announcement of a price increase. 5. A strategy in a buyer's market would MOST likely include all of the following, EXCEPT A. Buying only what is needed. B. Pressuring suppliers for cost reduction. C. Forward buying. D. Seeking a product redesign

26 Performance Check. 6. Cindy is a buyer for an electronics company and has received an end-of-life notification effective 12/31 on an IC that is used in multiple products in her company. How should Cindy address this new development? A. Continue buying to demand and notify management. B. Buy quantities based on last year's actual demand. C. Talk to marketing to determine life of the products, then forward buy anticipated quantities. D. Do nothing. 7. Which of the following is NOT a good way for purchasing to reduce the total cost of materials and services? A. Standardization of materials. B. Leverage one supplier off of another. C. Use consortiums and co-ops. D. Analyze out-sourcing alternatives

27 Performance Check. 8. In which of the following circumstances is the timing of a purchase MOST important? A. When the product market is stable. B. When the product market is unstable. C. When quantity is crucial. D. When employing MRP. 9. Which of the following is/are MOST likely to be characterized by unstable markets? A. Tin B. Tools. C. Valves D. Pumps

28 Performance Check are based on the following types of organizational needs : (A) MRO (B) Capital equipment. (C) Raw Materials. (D) Resales. From the choice above, choose the need that is MOST likely to be met by the purchase of each of the following. A choice may be used once, more than once, or not at all. 10. Metals. 11. Machinery. 12. Photocopiers. 13. Paint

29 Performance Check. Solutions : C B C B D C B B A C B B A

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