purchasing. © 2008 pearson prentice hall --- introduction to operations and supply chain...
TRANSCRIPT
Purchasing
© 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036
Chapter 11, Slide 2
Chapter Objectives
Be able to:Make a strong case for why purchasing is a
critical part of a firm’s supply chain strategy. Identify and describe the various steps of the
purchasing process, and discuss how this process will vary according to the type of good or service being purchased.
Explain why spend analysis is important and perform a simple spend analysis.
© 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036
Chapter 11, Slide 3
Introduction
• Why Purchasing is Critical
• The Purchasing Process
• Spend Analysis
© 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036
Chapter 11, Slide 4
• Sourcing decisions – (discussed in Chapter 10) High level, often strategic decisions regarding which products or services will be provided internally and which will be provided by external supply-chain partners
• Purchasing – The activities associated with identifying needs, locating and selecting suppliers, negotiating terms, and following up to ensure supplier performance
Sourcing decisions and purchasing activities serve to link a company with its supply chain partners
Focus
© 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036
Chapter 11, Slide 5
Why Purchasing is Critical – I
• To compete globally, you need to purchase globally
• Global purchasing efforts are supported by advances in information systems
The Changing Global Competitive Landscape
© 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036
Chapter 11, Slide 6
• For the average manufacturer, 52.5% of the value of shipments comes from materials
• Purchasing represents a major opportunity to increase profitability
Financial Impact
Why Purchasing is Critical – II
© 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036
Chapter 11, Slide 7
Why Purchasing is CriticalFinancial Impact - I
Earnings and Expenses
Sales $26,491 COGS $18,465 Pretax earnings $2,359
Selected Balance Sheet Items
Merchandise inventory $3,968 Total assets $16,109
Lowe’s CompanyEvery dollar saved in
purchasing for increases pretax profit
by one dollar
Every dollar saved in purchasing
inventorylowers total assets
by one dollar
© 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036
Chapter 11, Slide 8
Earnings and Expenses Current With 3% saving
Sales $26,491 $26,491 COGS $18,465 $17,911 Pretax earnings $2,359 $2,913
Selected Balance Sheet Items Merchandise inventory $3,968 $3,849 Total assets $16,109 $15,990
3% purchasing reduction in COGS
Pretax earnings
increase by $554 (23.4%)
ROA increases from 14.6% to
18.2%
Why Purchasing is CriticalFinancial Impact - II
© 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036
Chapter 11, Slide 9
• Quality
• Delivery
• Ability to exploit new technologies
Performance Impact
Why Purchasing is Critical – III
© 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036
Chapter 11, Slide 10
$10 $2
99.8% 95%
Overnight delivery
1 day to 3 weeks
Supplier A Supplier B
Cost per valve
% good
Delivery lead time
Sourcing dialysis machine valves
Why Purchasing is CriticalPerformance Impact - I
© 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036
Chapter 11, Slide 11
Effect of defective dialysis machine valves• Interruption in patient treatment
• Rescheduling difficulties
• Reduction in the effective capacity for dialysis
• Possible medical emergencies
Estimated cost of a failed valve = $1,000
Why Purchasing is CriticalPerformance Impact - II
© 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036
Chapter 11, Slide 12
Supplier A Supplier BValve costs Failure costs Backup inventory Total costs
Sourcing 50 dialysis machine valves (Total Costs)
50 x $10 = $500 50 x $2 = $100
0.2% x 50 valves x $1,000 = $100
5% x 50 valves x $1,000 = $2,500
1 valve x $10 = $10 3 valves x $2 = $6
$610 $2,606
Why Purchasing is CriticalPerformance Impact - III
© 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036
Chapter 11, Slide 13
Settlement & payments
Records maintenance
Receipt and inspection
Follow up and expediting
Purchase order preparation
Supplier selection & contracting
Supplier identification and evaluation
Description
Needs identification
Is there a preferred supplier?No
Yes
The Purchasing Process
Ordercycle
© 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036
Chapter 11, Slide 14
The Purchasing ProcessNeeds Identification
Needs identification• Purchase requisition –
An internal document completed by a user that informs purchasing of a specific need
• Reorder point system – A method used to initiate the purchase of routine items. Typically, each item has a predetermined order point and order quantity
• Statement of Work/Scope of Work (SOW) –Terms and conditions for a purchased service. Includes how supplier will be evaluated
© 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036
Chapter 11, Slide 15
The Purchasing ProcessDescription
• Description by market grade/industry standard
• Description by brand
• Description by specification
• Description by performance characteristics
• Description by prototypes or samples
DescriptionThe communication of a user’s needs to potential suppliers in the most efficient and accurate way possible
© 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036
Chapter 11, Slide 16
The Purchasing ProcessSupplier Identification and Evaluation - I
Supplier identification and evaluation • The complexity of the product
or service increases
• The amount of money that is committed increases
• The length of the proposed buyer-supplier relationship increases
The amount of effort increases as:
© 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036
Chapter 11, Slide 17
Supplier identification and evaluation • Process and design capabilities
• Management capability
• Financial condition and cost structures
• Planning and control systems
• Environmental regulation compliance
• Longer-term relationship potential
Criteria for supplier assessment:
The Purchasing ProcessSupplier Identification and Evaluation - II
© 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036
Chapter 11, Slide 18
Supplier selection & contracting
• Competitive bidding
• Negotiation
• Fixed-price contracts
• Cost-based contracts
The Purchasing ProcessSupplier Selection - I
© 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036
Chapter 11, Slide 19
Preferred supplierA supplier that has demonstrated its performance capabilities through previous purchase contracts and therefore receives preference during the supplier selection process
The Purchasing ProcessSupplier Selection - II
Supplier selection & contracting
© 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036
Chapter 11, Slide 20
• The buying firm can provide qualified suppliers with clear descriptions of the items or services
• Volume is high enough to justify the cost and effort
• The firm does not have a preferred supplier
Competitive bidding is most effective when:
The Purchasing ProcessSupplier Selection - III
Supplier selection & contracting
© 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036
Chapter 11, Slide 21
• The item is new or technically complex with only vague specifications
• The purchase requires agreement about a wide range of performance factors
• The supplier must participate in the development effort
• The supplier cannot determine risks and costs without input from the buyer
Negotiation is most effective when:
The Purchasing ProcessSupplier Selection - IV
Supplier selection & contracting
© 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036
Chapter 11, Slide 22
• There is a large amount of money involved
• The business needs specific requirements that need to be put into writing such as quality levels, delivery times
Two basic types of contracts:
• Fixed-price – price does not change for life of contract
• Cost-based – price tied to cost of selected key input or economic factor
Contracting is most effective when:
The Purchasing ProcessSupplier Selection - V
Supplier selection & contracting
© 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036
Chapter 11, Slide 23
Purchase order preparation
Records maintenance
Settlement and payment
Receipt and inspection
Follow-up and expediting
• Purchase order preparation74% of firms currently have electronic data interchange (EDI) with some part of their supply base
• Follow-up and expediting
• Receipt and inspection
• Invoice clearance and payment
• Records maintenance
The Purchasing ProcessThe Order Cycle
© 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036
Chapter 11, Slide 24
Spend Analysis
Answers the questions:• What are the top 10 commodities by
annual spend? (provides priority)*
• Which commodities have the most suppliers? (helps reduce purchasing load)
• Which commodities have the lowest spend per supplier? (if also among top 10, potential for savings)
* Similar to ABC analysis to identify critical inventory items based on cost and quantity
© 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036
Chapter 11, Slide 25
Typical Answer to First Question
Case Study in Purchasing
The ABCs of Spend Analysis