Purchasing

1
Purchasings role in the supply chain

• Purpose - manager of external operations
  (processes)
• Design
• Acquiring inputs
• Information systems

2
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

3
Example
4
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

5
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

6
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

7
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

8
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)

9
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)

10
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

11
Traditional design process
Product design
Process design
Concept
Supply base
Production
12
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 ?

13
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.

14
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?

15
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)

16
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

17
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

18
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

19
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

20
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

21
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

22
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

23
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

24
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.

25
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)

26
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

27
Managing suppliers

• Some other issues we need to consider are
• Communication
• Certification
• Measurement
• Being a good customer (chain member)

28
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?

29
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

30
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

31
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.

32
Certification examples

• Relying on third parties
• http//www.wincor-nixdorf.com/internet/com/Purchas
  ing/NewSuppliers/SupplierCertification/Main.html
• Expanding supplier expectations
• http//www.hp.com/hpinfo/globalcitizenship/environ
  ment/supplychain/compliance.html
• A hybrid system certifying the certified
• http//www.boeing.com/companyoffices/doingbiz/pref
  sup.pdf

33
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

34
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 !!!!

35
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?

36
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 ?

37
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