The Challenge of Purchasing and Supply Management

Marketing 3860 – PurchasingJuly 12, 2004Kimball Bullington, Ph.D.Associate Professor of Operations ManagementMiddle Tennessee State University

How do the 4P’s relate to purchasing?

Product Price Promotion Place

From Purchasing to Supply Management

Materials Management-High transportation cost-High inventory costs

Supply Management-High costs-Scarcity: national or

international

Source Management-Unique items-Custom-made items-High technology items

PurchasingManagement-Commodity items-Standard products

The Evolution of the Supply Function

Clerical & technical Focus on policies &

procedures Key challenge:

availability of supply & cost mgt.

Strategic orientation

Global supply chains

Executive level leadership

Key challenge: Technology & the Internet

Early 1900’s Early 2000’s

From Purchasing to Supply Management Organizational Changes

P rod u c tion

E n g in eerin g

S h ip p in g , Tra ffic

P u rch as in g

P rod u c tion &In ven to ry C on tro l

M an u fac tu rin g

O rd erP rocess in g

S h ip p in g , Tra ffic

P u rch as in g

P rod u c tion , &In ven to ry C on tro l

W areh ou s in g

M ate ria lsM an ag em en t

O rd erP rocess in g

A ccou n tin g

Treasu rer

F in an ce

S a les

P rom otion

M arke tR esearch

W areh ou s in g

M arke tin g

P res id en t

Corporate Supply Challenges

Need to control unit costs

Need to reduce the total cost of acquisition

Increasing influence of suppliers on the purchaser’s ability to respond to end-customers needs

Corporate Supply Challenges

Increased reliance on fewer suppliers

Trend towards reliance on suppliers for design & build responsibilities for complete subassemblies and subsystems

Reliability = Pn

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6

Supply Chain Quality (Sigma Level)

Reliab

ilit

y

2005001000

Effect of Supply Base Size & Variation on Supply Chain Reliability

Reliability = Pn

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6

Supply Chain Quality (Sigma Level)

Reliab

ilit

y

200*

500*

1000*

200

500

1000

Effect of Supply Base Size & Variation on Supply Chain Reliability

Terminology - Purchasing

Identify need Locate / select supplier Negotiate price & terms Expedite deliveries

Terminology - Procurement

Purchase Store / warehouse inventory Manage traffic Receive incoming materials Inspect incoming materials Salvage obsolete materials

Terminology - Materiel

Manage materials for military or gov’t operations

Terminology – Materials Mgt.

Integrate related materials functions including: Procurement materials planning materials control (inventory)

Terminology – Integrated Logistics

Strategic supply issues Sourcing Transportation Information technology and

information flow associated with managing supply

Significance of Material Dollars

U.S. manufacturing firms purchased materials totaling

$1,975,362,000 in 1998.

Leenders, Fearon, Flynn, & Johnson 2002

Differences Between Commercial & Consumer Acquisition

Consumer Commercial

# of Suppliers

Many Few

Needs Generic Specialized

Volume Miniscule Significant

Power None Significant

Time Horizon Short Long

Profit-Leverage Effect

Profit improvement is often easier to achieve through purchasing cost reductions than equivalent sales increases. (This is especially true of low margin operations.)

Purchasing as a Profession

Increasing in importance Increasing in pay Strategic assignments Long-range perspective College degrees more common www.ism.ws

Challenges

Business-to-business e-commerce Supply Chain Management Measurement Purchase of nontraditional goods &

services Contribution to corporate strategy Recognition by senior management

Opportunities for Contribution of the Purchasing / Supply Function

Profit-leverage effect

Return-on-assets effect

Information source

Effect on efficiency

Opportunities for Contribution of the Purchasing / Supply Function

Effect on competitive position & customer satisfaction

Effect on image

Training ground

Management strategy & social policy

SupplyContribution

OperationalTrouble

Prevention

StrategicOpportunity

Maximization

Purchasing’s Operational & Strategic Contributions

SupplyContribution

DirectBottom-line

Impact

IndirectEnhancing Performance

Of Others

Purchasing’s Operational & Strategic Contributions

Purchasing’s Operational & Strategic Contributions

SupplyContribution

NegativeOperationally -Strategically -

Directly -Indirectly -

NeutralOperationally +Strategically -

Directly +Indirectly -

PositiveOperationally +Strategically +

Directly +Indirectly +

Reverse Marketing

Purchasing is sometimes referred to as “reverse marketing”. What does this mean?