Business Economics

WEEK 2W/C 18th February 2013

INTRODUCTION

Course 17832 Advanced Diploma Management

Week Chapter TopicsOne (1) Ch 16 – Purchase

controlIntroduction- Course overview- Objectives- AssessmentThe time value of moneyPurchasing - Intent

Two (2) Ch 16 – Purchase control

Supply strategies (make or buy?)OutsourcingPurchasing strategies

Three (3) Ch 16 – Purchase control

Supplier analysisPurchasing processesPurchase simulation exercise

Four (4) Ch 17 – Stock management

What does a company want to achieve?Stock mgmt – IntentStock adv vs disadv.Stock ordering methods

Five (5) Ch 17 – Stock management

OPV methodsOPV calculations Conundrum – People/Profit/Planet

Six (6) Ch 17 – Stock management

Case study tasksTrivia – Pop Quiz Course review

Education

• What is the purpose of education?

• Perspective or perception

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The time value of money concept

• How much is $1.00 worth in 12 months time if you leave it in your drawer at home?

• $0.90c

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Purchasing

• What is the intent of purchasing?

• Right #, right time, right customer or client

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Purchasing control

Purchasing functions:1. Provides an external link with the supply

market.2. Controlling purchasing in cooperation with

production and sales.3. Ensure an efficient purchasing control.

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Purchasing control

The primary objectives of purchasing are:1. Ensure uninterrupted flows of raw materials

at the lowest total cost, 2. Improve quality of the finished goods

produced, and 3. Optimize customer satisfaction.

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Purchasing control

Purchasing contributes to these objectives by: – Actively seeking better materials and reliable

suppliers, – Work closely with strategic suppliers to improve

quality materials, and – Involving suppliers and purchasing personnel in

new product design and development efforts.

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Understanding purchasing• Purchasing-

Obtaining merchandise, capital equipment; raw materials, services, or maintenance, repair, and operating supplies in exchange for money or its equivalent.

• Merchant Buyers-Wholesalers and retailers who purchase for resale.

• Industrial Buyers- Purchase raw materials for conversion, services, capital equipment, & MRO supplies.

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Purchasing control

• Purchase goods and services:– From the right suppliers– In the right quantities– In the right qualities– At the right prices– Delivered at the right place and time

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Proposition

• Niche is the new mass?

• In your group – take 5 or 10 mins to discuss and then explain this to the class.

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Make or buy

• The following slide contains a summary of the issues involved when deciding whether to make products yourself or buy them from other suppliers.

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Supply strategy – make or buy

Do the company´s core competences includemaking the products concerned?

If the products are bought, is there a risk thatthe company will become dependent on thesuppliers in question?

If the products are bought, is there a risk thatthe company´s supply reliability will beaffected negatively?

Are the costs of making the products lowerthan the cost of buying them?

Buy Make

No

No

No

No

Yes

Yes

Yes

Yes

Make or buy

• Reasons for making:• Lower Production Cost• Unreliable Or Unsuitable Suppliers• Assure Adequate Supply (Quantity)• Utilise Surplus Labor Capacity• Obtain Desired Quality• Protect Special Design Or Quality

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Make or buy

• Reasons for buying:• Lower Acquisition Cost• Inadequate Capacity• Reduce Inventory Costs• Ensure Alternative Sources Of Supply• Item Is Protected By A Patent Or Trade License

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Make or Buy Break-Even Analysis

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Make or buy

• Choosing between making or buying an item is largely dependent on the vertical integration strategy of a company.

• By vertical integration, it means developing the ability to produce goods or services that are previously purchased.

• It can take the form of forward or backward integration:

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Make or buy

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Make or buy

• Factors to consider:

• What are your core competencies – does it include making products?• Is competitive advantage linked to making

products?• What is the risk of not making your own

products?

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Outsourcing

• In the short term a company’s fixed costs remain unchanged whether the products are made or bought.

• Short-term financial view the cost price of buying products should be compared with the company’s variable unit costs (VU) incurred in producing the products concerned.

• Long-term financial view the cost price of buying products must be compared with the company’s total unit costs (TU) incurred in producing the products concerned.

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Outsourcing

• The following slide shows a trend towards outsourcing.

• Once only Peripheral tasks (cleaning, canteen operations, and transport) were outsourced but now Core tasks (production, product development and design) are being outsourced.

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Outsourcing:VU/TUDEPENDENT?

Coretasks

Peripheraltasks

Time

Caretakerfunctions

Cantine functions

Book-keeping

IT-systems

Cleaning

Transport

Marketing

Product development

Production

Design

Outsourcing

Outsourcing

• Advantages: – Companies can concentrate on core competencies– Reduce fixed costs (increases variable costs)– Offers greater flexibility

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Outsourcing

• Disadvantages:– Risk of being overly dependent on suppliers– Is a greater risk when their is only a small number

of suppliers.

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Purchasing Strategy

There are three (3) main purchasing strategies:A – competition-based purchasing strategyB – cooperation-based purchasing strategyC – differentiated purchasing strategy

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Purchasing Strategy

Competition-based Purchasing Strategy – Price is the primary factor– No preferences for specific suppliers– Regards their suppliers as opponents– This type of strategy is know as

’Multisourcing’

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Cooperation-based purchasing strategyCooperation-based

• Using this type of strategy usually involves:

– Regarding their suppliers as partners– Singlesourcing– Win-Win situation

Partnership normally:– Make more information available – ”Open calculations”– Common product development

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Cooperation-based purchasing strategyCooperation-based

• Competitive Advantages– More rapid exchange of information– Easier and more reliable planning– Simpler administration– Better utilisation of capacity– Better product and service quality– More rapid delivery – Reduction of stock costs– Reduction of logistics costs– Better quality of development work

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Differentiated purchasing strategy

A combination of the two market based purchasing strategy with coperation based strategy.

It is mult- faceted. Companies may choose to switch suppliers due to price.

The following model show this strategy in practice. Some important points to note:

• The strategic importance of a product reflects its importance with regard to the company’s core competence and future competitiveness.

• The financial importance of a product reflects its importance with regard to the company’s overall purchasing budget.

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Differentiated purchasing strategy

• Partnership• When products have large strategic and

financial importance for a company, there are often a great number of advantages to be gained by entering into a close, long-term and committed partnership with a chosen supplier

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Differentiated purchasing strategy

• Framework Agreement• A framework agreement is a contract defining

the terms on which a more regular trading relationship can be based (for one year.

• Framework agreements contain details of the products to be supplied, prices, and terms of delivery and payment for the contract period.

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Differentiated purchasing strategy

• Routine Purchases• Require little time or effort required• Use small number of suppliers• Can involve competition based purchasing

strategy• In Danish environment companies try to

reduce the number of suppliers they deal with.

• In Australia the best deal is important.32

Differentiated purchasing strategy

DPS Model

Economic significance

Small

Strategicimportance

Large

Frameworkagreement

Partnership

Routine purchase Negotiation

Large

Small

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Triple bottom line

Starbucks Announces Leadership Moves to Accelerate Global Growth Agenda

• SEATTLE, May 16, 2012 - Starbucks Coffee Company (NASDAQ:SBUX) today announced several leadership changes to accelerate its innovation and growth. The company announced the following leadership moves as it further strengthens its three-region operating model:

• “As we continue to sharpen our focus and strengthen our three-region operating model, local relevancy and speed of decision making are two critical requirements we must deliver so that we can seize opportunities,” said Howard Schultz, Starbucks chairman, president and ceo. “We will never rest when it comes to coffee innovation and elevating the overall coffee experience for our customers. The leadership moves we announced today will enable us to more swiftly position ourselves for the exciting opportunities ahead while never losing sight of the fact that we are a global brand with a rich heritage in coffee, long-standing values, and the responsibility to use our scale for good.”

• http://news.starbucks.com/article_print.cfm?article_id=655

What do you notice about the new packaging?

Global Responsibility Report Goals & Progress 2011

Global Responsibility Report Goals & Progress 2011

Homework tasks

• Please complete 16.1 and 16.3 from the textbook chapter.

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