Transcript Purchasing’s role in the supply chain (processes) • Design

Purchasing’s role in the supply chain
• Purpose - manager of external operations
(processes)
• Design
• Acquiring inputs
• Information systems
Purchasing’s role 1
Why focus on purchasing ?
• Traditional view
• Materials as a percentage of sales:
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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
Purchasing’s role 2
Example
Current
Marketing
Purchasing
Increase Sales Decrease
50%
purchasing
Costs 20%
Sales 100,000 150,000 100,000
C.O.G.S. -80,000 -120,000 -64,000
Gross 20,000 30,000 36,000
Margin
Purchasing’s role 3
Other contributions
• Suppliers / partners can lower the amount we spend on
inputs.
• They can also:
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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
Purchasing’s role 4
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
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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
Purchasing’s role 6
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
Purchasing’s role 7
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 purchasing’s 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)
Purchasing’s role 8
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)
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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:
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we change specifications
we change materials
we change suppliers
we let suppliers develop the product or process
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Traditional design process
Concept
Product
design
Production
Process
design
Supply
base
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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 ?
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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.
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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?
Purchasing’s role 14
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)
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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
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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 ? Tony’s Rebar and my finger
Purchasing’s role 17
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 today’s 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”
Purchasing’s role 18
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
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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 supplier’s overhead on purchase
– Examples of tooling in services and high tech?
• Basically set-up costs
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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
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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
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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 yesterday’s technology may hurt us in
many ways
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Intangible costs - the obvious
• We need to examine a potential supply chain
members ability to
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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.
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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)
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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
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Managing suppliers
• Some other issues we need to consider are:
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Communication
Certification
Measurement
Being a good customer (chain member)
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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?
Purchasing’s role 28
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
Purchasing’s role 29
Certification continued
• Started as quality programs
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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
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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.
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Certification examples
• Relying on third parties –
– http://www.wincornixdorf.com/internet/com/Purchasing/NewSuppliers/Su
pplierCertification/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
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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
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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 !!!!
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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?
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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 ?
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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
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