35A00210

Operations Management
Lecture 3
Purchasing and supply
management
Purchasing
Distribution and supply chain management
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Company
Purchasing
Material mgmt.
and inventory
Distri bution
Markets
Purchasing and distribution
link the company to outside world
Information flow
Material flow
Financial flow
2
Lecture 20
Purchasing and Supply Chain Mgmt
Purchasing
Purchases have a big role in the
industry - Total spend as a % of sales/revenue
Aerospace
47%
Utilities
40%
Pharmaceuticals
43%
Construction/
engineering
43%
Source: Caps benchmarking reports 2008-2012
Industrial
manufacturing
47%
Financial services
18%
Semiconductor
industry
43%
PSM 13 - Lecture 1 6
Purchasing includes everything with
an invoice - buying, leasing, renti ng -
Raw materials
Semi-manufactured products
Components
Trade goods
Investment goods
MRO materials
Services
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Raw material purchases can be
huge! - McDonalds potato & raspberry purchases
8
More than 350 kg potatoes a year
Not enough raspberries in the world
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Only about half direct purchases!
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Firms have many reason to buy
from outside
Want to concentrate on core competenci es
- we cannot do everything by ourselves
Attempt to improve effici ency
- you have to buy from where you get the lowest price
- globalization of production forces
Attempt to improve flexibility
- e.g. balancing external capacity much easier than internal
Divide risk
- e.g. when expanding capacity
Market requirements force
- e.g. trade political restrictions
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Purchasing
Procurement
Tactical focus
Supplier
Sourcing
Strategic focus
Vendor
There are two sides in purchasing
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How well
What
Why
Who
How much
and when
Where
How
Purchase
Buying criteria
Purchasings strategic side is
emphasized
12
Purchasing strategy: key questions
What you are buying
- traditional make or buy thinking, negotiation position
- raw materials, production, services, support functions
- customized vs. standard solutions, role and depth of outsourcing
How much and when to buy
- inventory levels, roles and and ownership issues
- pricing and protection against risks
Who buys
- centralized vs. decentralized, outsourcing purchasing
- buyers skill development
What cri teria used i n buying
- balancing price, quality, service and risks
- price vs. functionality, ethics and green values, buy vs. lease
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Purchasing strategy: key questions
Where you are buying from
- local, regional, domestic, continent, global
- large vs. small suppliers, single vs. multiple suppliers
- amount, nature and development of cooperation
How you are buying
- Long vs. short contracts, negotiations vs. competitive bidding
- transparency of orders, sharing risks and information
- systems and processes, IT development
How well you are buying
- internal and external efficiency, developing measures
Why you are buying
- company focus and core competency, buyers skills
- product liability questions and customs orders etc.
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Lots to develop i n everyday
purchasing
Participation in product development
Accurate specification of purchasing needs
Search for suppliers and setting selection criteria
Preparing requests for quotations (RfQ)
Supplier evaluation and selection
Negotiations and contracting
Ordering and delivery management
Supplier evaluation based on gathered data
Purchasing performance evaluation
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Need Search Selection Negotiation Order Follow-up Evaluation
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Analysis of alternatives requires
skill
Company factors
- company size and
finances
- customer base
- capacity and location
- research skills
- managerial competence
Product factors
- quality, characteristics
- reliability
- price, warranty
- packaging
Selection
decision
Service factors
- deliveryissues
- technical support
- solving problems
Sales factors
- knowledge of salesmen
- number of contacts
- level of service
Most important! etc.
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Not all purchases are equivalent
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What product is
customer buying?
how important
how easy to get
what is price level
what are volumes
How is product purchased?
what is maximized
nature of contracts
how is price determined
nature of co-operation
procurement area
Supplier selection?
comparison of possible
suppliers
measurements and
their relative weights
Purchasing portfolio an important
tool
Company has different interests towards suppliers, this
should be taken into account in behaviour
- developedfromthe sales portfolio (Peter Kraljic 1983)
Two-by-two matrix; relative purchasing power and
purchase risk (Finland)
- power can be consideredbig if purchases exceed 1% of suppliers sales
- dimensions can also be total purchases, total costs...
- purchase risk relates to number and distance of potential suppliers
- technical complexitysometimes used as this dimensions...
Based on spend analysis and knowledge of suppliers
- oftenemployees perceptions of product locationin the matrixdiffer
- howis power distributedbetween buyer and seller
Location in matrix affects purchasing strategy
- clarifies what buyers shouldspendtheir time on!
- movements withinthe matrixpossible due to value analysis, standardization...
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Strategic
develop cooperation
Volume (A,B)
consider purchasing policies
Bottleneck
ensure availability
Ordinary products (C,D)
be efficient
Volume 40
Items 15000
Suppliers 350
Purchasing portfolio as an everyday
tool - case German electronics firm -
200
20000
600
Volume
Low High
A
v
a
i
l
a
b
i
l
i
t
y
L
o
w
H
i
g
h
Volume 10
Items 4370
Suppliers 200
Volume 70
Items 380
Suppliers 33
Volume 80
Items 250
Suppliers 17
21
Forgings
16
Purchasing portfolio as an
everyday tool - case Sikorsky Aircraft -
Raw
material
106
Fasteners
97
Major
subs
66
Castings
16
Bearings
21
Avionics
172
< 25 per y. 25-50 per y. 50-100 per y. over 100 per y.
Gears
21
Machined
parts
61
Electrical
115
Sheet
metal
40
Fluids
73 Composite
34
Volume
Low High
A
v
a
i
l
a
b
i
l
i
t
y
L
o
w
H
i
g
h
600
838
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Volume
consider purchasing policies
utilizing purchasing power
choosing suppliers
negotiation tactics
target pricing
Ordinary
be efficient
product standardization
developing routines
comparing bids
blanket agreement
automatic ordering
Volume
A
v
a
i
l
a
b
i
l
i
t
y
L
o
w
H
i
g
h
Low High
Purchasing portfolio as an
everyday tool
Bottleneck
ensure availability
building relationships
having safety stock
making back-up plans
finding replacements
continuous supplier evaluation
Strategic
develop cooperation
investing on relationships
long-term sourcing contracts
accurate need forecasts
make/buy and risk analysis
possible safety stocks
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Sometimes you do not have a
choice
Number of suppliers
Many
Sole
(only 1 available,
sole sourcing)
One
(chooce 1 from many,
single sourcing)
S
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r
s

g
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r
a
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f
o
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Global
Regional
Local
Ki ng
supplier
24
Should a company make or buy?
Vertical integration less popular than in the past
- a lot of talk about the obligation to buy due to increased competition
- concentration, productivity, flexibility, focus on customers
Several variables have to be considered
- current know-how and know-hows development plans
- forecasted demand of an item and own capacity situation
- cost, quality, delivery reliability and flexibility
- who would be able and willing to supply certain product?
- external, internal and personal influencing factors
- meaning/importance of independence, employment, company size
Buying is supported by focus ideology and costs
- company doesnt want to / isnt able to produce a certain product
- avoiding commitment, unwillingness to invest in developing technology
- product can easily be bought from effective market
- buying a cheaper alternative (when it comes to costs)
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Make or buy -cost curves
Cash flow make
Time
C
a
s
h
f
l
o
w
Cash flow buy
Time
C
a
s
h
f
l
o
w
T
o
t
a
l
c
o
s
t
s
Volume
Make
Buy
Also remember:
learning curve
volume di scounts
capacity utilization
etc.
26
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Make or buy -example
A company is considering whether a products instruction manual should be made in
house or contracted out to an external operator. Supplier A has offered to make the
manuals if the company leases a computer and a printer for him for one year.
Before making the decision the company got a rival offer from Supplier B. The
costs of the alternatives are the following:
Which of the following options is correct?
1) the instruction manual is recommendable to always do in house
2) supplier Bs offer is accepted with a annual volume over 14 000 items
3) buying and making are as expensive with annual volume of 9 500 items
4) the offer from supplier A wins when the annual volume is 13 000 items
5) more than one of the arguments is true
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Make or buy example
The correct answer is number 4
Supplier As offer is 82,90 cheaper per year than supplier Bs
28
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Many hidden costs in addition to
price
Administration
Control
Inventory
Handling
Transportation
Purchase
Price
Capital
Order
Quality
Reliability
Planning
Choosing
29
Latest trends in purchasing
Strategic role has increased
- fountain of competitive advantage (speed, costs, quality etc.)
Internal i mportance has improved
- e.g. works more and more with engineering
Number of suppliers is decreasi ng
- closer collaboration with remaining few (e.g. product development)
- suppliers are expected to improve also customers processes
Long-term contracts importance has grown
- outsourcing and partnership -ideology
Internal measurements are developed and
supplier mi nimum requirements are heightened
- internal and external efficiency
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Development trend is a lot like JIT
Purchasing more often partnership-based
- moving away from just cost-based tendering
New operati ng methods are taki ng over
- multicriteria supplier selection, few partners, joint goals, long-term
contracts, loose product specifications, small order quantities,
supplier is in charge of quality, time has grown in importance etc.
Competing as supply chains agains other
supply chains
- trying to minimize suboptimization by individual companies
Offers many advantages to companies
- constant quality, saves resources, lower price, extra attention, loyalty
etc.
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Lecture 20
Purchasing and Supply Chain Mgmt
Distribution and supply chain
management
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What is distribution about?
Channel
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How does a distribution channel
add value?
Service
and repai rs
Shares
information
Takes care
of logistics
Guarantees
quality
Offers
selection
Secures
availability
Breaks
bulk
Customizes
Channel
used
37
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Company
Product
Channel D
Channel managements main
questions
Pursued customer
segments?
Each segments needs from
the channel
Customer
Channel C
Channel B
Who are our partners in this
channel?
How are tasks divided?
Channel A
There i s not just one ri ght channel!
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Distribution Sourcing Production
These days supply chains are
complex
39
What is supply chain
management? - focus on material flows -
Supply chain is a connected series of activities, which is concerned
with planning, coordinating and controlling materials, parts and
finished goods from supplier to customer. It is concerned with two
distinct flows (material and information) through the organization.
e.g. Stevens (1989)
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Importance of Supply Chain
Management
In 2010, US companies spent $1,2 trillion (8.3% of GNP) on supply-related
activities (movement, storage, and control of products across supply
chains). Source: State of Logistics Report
Eliminating inefficienci es in supply chai ns
can save mil lions of $.
Tier 1
Supplier
Manufacturer Distributor Retailer Customer
Inefficient
logistics
High
stockouts
Ineffective
promotions
Frequent Supply
shortages
High landed
costs to the shelf
High inventories
through the chain
Low order
fill rates
Glitch-Wrong
Material, Machine is
Down effect
snowballs
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Information issues in the center of
SCM - case bullwhip effect -
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Production pl an
O
r
d
e
r
v
o
l
u
m
e
Time
This is what management wants...
Customer
demand
43
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Customer
demand
Production pl an
O
r
d
e
r
v
o
l
u
m
e
Time
this is what they get...
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O
r
d
e
r
v
o
l
u
m
e
Time
Retail
orders
Whol esale
orders
Production pl an
Customer
demand
and others are not much better
off either!
Order variance increases when movi ng backward in the chain
45
Bullwhip effect in supply chains
Main contributing factors
- demand signal processing
- order batching
- price variations
- rationing and shortage gaming
Some ways to attack information distortion
- avoid repeated forecasting
- e.g. vendor managed inventory, direct selling
- break order batches
- e.g. role of quarterly or annual quotas, FTL/LTL
- stabilization of prices
- e.g. every day low prices, purchase contracts
- allocation based on past sales, sharing of supply and demand
information, penalties
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Customer
Over 50% from inventories are in
wholesale and retail level
Information problems cause higher
inventories
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What if information is not
available?
48
Postponement
Principles
- delay customization closer the time when the product is sold
- differentiate product as close as possible to the pull phase of the
supply chain as possible
Different forms
- resequencing operations reversal
- standardization decrease in product variety
- modularity differentiation e.g. by retailers
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Curse of product variety
- case Hewlett-Packard deskjet printers -
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Production and total process
redesigned
51
Many burning question in SCM
Role and opportunities of informati on
- EDI, ECR, Quick & Accurate Response etc.
SCM strategies and their applicability
- Postponement, mass customization, risk pooling, VMI etc.
Service outsourcing (third-party logistics) and
coordination issues
- fourth-party logistics (coordinator)
- in charge of coordinating the 3rd parties, who owns the supply chain
Considering networks in decision-making (customers
customer etc.)
Electronic commerce and its effects
- calue creation (number of tiers), ownership etc.
Balancing between supply chain length, inventories,
delivery times and distribution
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Many things impact value chains
- manufacturer supporting customer strategy
Dollar General
is currently Dawns
second bi ggest seller!
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Can roles be re-thought?
54
As the economy changes, as
the competition becomes more
global, its no longer company
versus company but supply
chain versus supply chain
Harold Sirkin (Vice President of the Boston Consulting Group)