Purchasings role in the supply chain

Purpose - manager of external operations

(processes)
Design
Acquiring inputs
Information systems

Purchasings

Why focus on purchasing ?

Traditional view
Materials as a percentage of sales:

Average (1995) 54%

Today probably closer to 60% and increasing
Chrysler outsources 70% of a car
Virtual corporations

Contribution to the bottom line

Cost example
Other places to contribute
Purchasings

Example

Purchasings

Other contributions
Suppliers / partners can lower the amount we spend on
inputs.
They can also:

improve technology mountain bike article

improve quality
decrease lead time to customer
make a supply chain more flexible
speed up designs

Therefore companies who manage this process

strategically have an advantage over companies who view
the purchasing function as a cost center Stallkamp and
Chrysler articles
Purchasings

What does purchasing do to help gain a

competitive advantage
1) Provide an uninterrupted flow of goods, services and
information to keep the production system operating.
2) Ensure that processes performed today and in the
future provide the maximum value to customers.
minimize total costs to maximize value China price for Toyota and
looking ahead
cost of quality
cost of late orders
cost of inventory (having or not having)
cost of unreliable suppliers
cost of bad relationships with suppliers
environmental costs and risks

Purchasings

Specifics to maximize value

Uninterrupted flow of goods, services, and info:
without this nothing else matters.
Buy wisely - total cost
is wise the same for every company ?

Minimize inventory investment

what are inventory costs ?

Develop and maintain the supply base

why build trust ?

Integration across firm

Purchasings

Purchasing as a boundary spanning function

External
upstream members of supply chain: purchasing is the
means to communicate with the world of suppliers.
customers: purchasing helps translate the voice of
customers (internal or external) to suppliers.
Internal
works with operations, engineering, finance, logistics
and marketing
Often referred to as managing external manufacturing - or
if you will managing external processes
how about logistics

Purchasings

Purchasing and design

Note: companies who are practicing supply chain
management (well) do the following:
design products and processes concurrently
involve all pertinent supply team members in the design
of products and processes
leverage suppliers in the design process

Note 2: because purchasings role is to span

internal and external boundaries they are best
suited to ensure that we actually include and
leverage suppliers and internal capabilities to the
fullest (much more so than operations)
Purchasings

General design questions

When a company pursues a new concept they need
to ask the following questions:
1) can we sell the product / service?
2) can we design the product / service?
3) can we make the product / service ?
at a reasonable cost !

If the answer to any of these questions is no, we

generally should not pursue the concept (there are
always exceptions)

Purchasings

Specific purchasing questions

Remember purchasing manages external
processes. So purchasing should be asking: can
our suppliers provide the process (make it) ?
Not only make it, but:
can they lower total costs and or increase value if:

we change specifications
we change materials
we change suppliers
we let suppliers develop the product or process

Purchasings

Traditional design process

Concept

Product
design

Production

Process
design

Supply
base

Purchasings

Problems with the traditional approach

General problems
When do we find out if we can make the product ? Sell
it ?
How long does this process take ?
what happens if you can not buy a needed input ?

Purchasing specific problems

Not involved until it is to late
cost of changes
time to change

Strategic ?
Purchasings

Early Supplier Involvement (ESI)

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

The next step in design reverse logistics

An issue many firms are just starting to grapple
with is end of life product management
Driven by customers and regulation (especially in EU)

Some firms are treating this as a cost to be

minimized
Others are trying to gain competitive advantage
through closed loop chain.
So what why mention this when talking about
design?
Purchasings

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

Purchasings

Total costs
Once more total costs are the sum of all direct and
indirect costs associated with a given process or
product. Another way of looking at this is that
total costs are more than just price.
Go back to Lopez
Pick on my Father and car insurance

Determining the total costs of a product or process

is a key and difficult task

Purchasings

A first step
Trying to determine if a price is reasonable / fair ?
Number of qualified bidders
did you get numbers from 1 or 50 organizations

Exclusions are the bids for the requested work ?

Independence / fraud ?
evidence of collusion / competition

Is the price reasonable / near or at your target ?

price to low ? Tonys Rebar and my finger

Purchasings

More ways to determine costs

Historical prices / costs: often a good starting point
inflation: even at 2% this can be insidious
changes in technology ?
even with adjustments for inflation it is hard to
compare todays computers with 5 year old models.
learning
production time and costs decrease as we make
more units
80% learning curve vs. a 90% learning curve

Independent estimates our rebar guy

Purchasings

Cost data from suppliers

Suppliers are often reluctant to share cost
information (especially if they have a serious
competitive advantage or just do not know)
Requires trust
may be much more accurate if request is made after reward of
contract.
can not share this information
Lopez shopping bids !!!!

Buyer must have some specific knowledge (a bs

detector)
suppliers may fudge overhead, profits and the like

But they know more than us in many cases

Purchasings

Some cost specifics we often miss

Tooling costs - tools are expensive !!!
injection molds, stamping dies, special cutting tools and
the like take months to make and can cost anywhere
from a few thousand to over a million dollars.
as tooling costs increase buyers are more likely to
maintain ownership of the tools.
risk reduction - Chrysler changing stamping companies / GM
manifold supplier
future spare parts
do not have to pay suppliers overhead on purchase

Examples of tooling in services and high tech?

Basically set-up costs

Purchasings

More cost specifics: indirect costs

Engineering overhead:
as our expectations for design from our suppliers
increase, this cost will increase as well. Note that GM
has traditionally done most of their own design .

Materials overhead:
movement, storage, shrinkage and the like

Manufacturing overhead
General administrative costs
Selling costs
Purchasings

Even more specifics: discounts

Trade discounts: basically discounts to various
distribution channel members for adding value.
the more you buy, the closer you want to get to the
producer. Why ?

Quantity discounts: price breaks

can be spread over multiple products
if you buy more than one thing from a supplier you should get
this if possible

can be dollar volume rather than units (see above)

Purchasing in Packs
Purchasings

What have we been doing so far ?

Defining what type of costs
direct / indirect / obvious/ not so obvious
all tangible costs

A good supply chain manager will define what

other types of costs ?
Why are intangible costs so important ?
Late delivery in JIT means what?
Poor quality supplies have costs associated with them as well
A cheap supplier with yesterdays technology may hurt us in
many ways

Purchasings

Intangible costs - the obvious

We need to examine a potential supply chain
members ability to

deliver on time
deliver expected quality levels
be able to change (be flexible)
control their costs
comply with regulation- avoid negative impacts on
communities and the environment
Nike / Cathy-Lee and Wal-Mart / Wal-Mart and their Janitorial
suppliers

remain in business
etc.
Purchasings

Intangible costs - the less obvious

Micro-soft is always buying small software
companies. Why ?
What is access to the latest technology (process/
product / service) worth ? IBM and Linux article
Perhaps the most important question - the nature
of the relationship
how well do (can) we work with this organization
how much do they care about the relationship
what are the costs of ending the relationship (switching
costs)
Purchasings

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

Purchasings

Managing suppliers
Some other issues we need to consider are:

Communication
Certification
Measurement
Being a good customer (chain member)

Purchasings

Communication
EDI and other electronic means
Fast
Usually accurate
Tend to be mainly for routine information

Problem solving and prevention generally requires

actual humans interacting and collaborating
We have talked about this before try to create
collaborative real time communication
Imagine how hard this is across organizations
What can we do to make it happen?
Purchasings

Supplier certification
Many companies require their suppliers to be
certified - often as a minimal requirement for being
considered for work.
Big three have certification programs for all suppliers - moved to a
single program(QS 9000) but in past each had their own.
Caterpillar
Motorola
Landol (Marysville) and BAE systems (Wichita)

Concept is to be aware of what suppliers can and

can not do - before either company wastes time.
Note strong link to determining cost
Purchasings

Certification continued
Started as quality programs

six sigma
ISO 9000
Baldridge award
Q1
Penstar

Has grown to encompass many other elements of value

- but most certification programs still start with quality
Home Depot buying forest products
ISO 14000

Purchasings

Why certify ?
Companies have moved toward certification as a formal
way to determine which suppliers can meet their needs.
are quality systems in place ?
Is an environmental management system in place ?
does the supplier have the needed communication abilities such as
CAD/CAM or EDI ?
Is the supplier financially sound ?
And many other questions that sound a lot like total costs.

Key difference is that with certification we are determining

what they could do - not what they are doing - we may
have to work with them to lower total costs.
Purchasings

Certification examples
Relying on third parties
http://www.wincor-nixdorf.com/internet/com/Purchasin
g/NewSuppliers/SupplierCertification/Main.html

Expanding supplier expectations

http://www.hp.com/hpinfo/globalcitizenship/environme
nt/supplychain/compliance.html

A hybrid system certifying the certified

http://www.boeing.com/companyoffices/doingbiz/prefs
up.pdf

Purchasings

Measurement
A certified supplier who is also the lowest cost
supplier of an input still needs to be measured
you get what you measure
you want to reward some behaviors - so you need to
identify them
you want continuous improvement - for which you
must have measures
sometimes you need to get rid of a supplier measurement should tell you when

Purchasings

What do we do with our measures ?

Motivation and or elimination from supply base
for measures to have value they need to direct action.
supplier non-conformance
bill back - supplier pays for non-conformance
other types of remediation
elimination from supply base
motivation - rewards for good performance
supplier conferences and recognition
Why does recognition (say a non-monetary award) have high
value?

identify developmental needs !!!!

Purchasings

Article in course pac

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

Purchasings

Being a good customer

As a supply chain member we are asking our
suppliers to:
trust us enough to share information
work toward an optimized chain -even if their short
term needs suffer
work with us to constantly lower costs to increase end
customer value

We must then
walk the talk - which means what ?

Purchasings

Purchasing conclusions
We have just scratched the surface with
purchasing
No matter what we call it every supply chain
needs to have people capable of managing external
processes
this is similar to the boundary spanning role marketing
plays -and it is just as important

TOTAL COST !
Note- this is just an introduction- we will discuss
specific decisions (such as supplier selection) later
in the term
Purchasings