SCM06 Procurement

PROCUREMENT & SOURCING
© Krishnan Subramaniam
Outline
1. Introduction
2. Purchasing Managers, Buyers and Purchasing Agents
3. The supply management process
4. Purchasing dollar responsibility
5. Potential for profit
6. Integrated supply management (ISM)
7. Annual inventory-ordering-transportation costs
8. Organising for purchasing
9. Centralised vs Decentralised purchasing
10.The future organisation concept
11.Reporting assignment
12.The Supply management concept
13.Careers in purchasing
14.Case 5: Austin Wood products
Purchasing Managers, Buyers and
Purchasing Agents
• Purchasing Managers
– for consumption within the organisation
– Includes services also
• Buyers
– Primarily buying for resale
– Excludes services
• Purchasing Agents
– Acts on behalf of principal buyers / consumers
– Primarily for goods
The supply management process
• Supply planning system

• Material requirements planning
Purchasing dollar responsibility
• Costs as % of sales
– Marketing: 10%
– Transportation: 10%
– Purchase: 80%
• Areas to consider
– Material shortages
– Synthetic materials
– Inflation
– Complex, high-value products
5. Potential for profit
Sales $1000
Direct materials $500
Direct labor $200
Gross profit $300
Selling & admin exp $250
Net profit $50
Target: increase net profit by 10%

- By increasing sales volume
- By reducing purchasing costs
Integrated Supply Management
• Purchasing
• Production-Inventory control
• Transportation
• Warehousing
• Sales
What is the objective of each function and how

do they integrate to wards a common
organisational goal?
Annual inventory-ordering-transportation costs
• Perspectives
– Manufacturing manager
– Financial controller
– Plant Manager
– Sales Manager
– Logistics Manager
Organising for purchasing
Main questions
• Where should it be placed in the
organisation
• Reporting structure
• Level of authority
Centralised vs Decentralised purchasing
Centralised
• Lower costs
• Professionalism
• Better monitoring
• Preferred by the Supplier
De-centralised
• Engineering involvement in procurement decision-
making
• Need to coordinate purchased parts with production
schedules
• Need to buy from local community
The Supply management concept
Functional areas affected by Purchasing

• Inventory control
• Transport
• Production
• Stores
• Information management
Purchasing decisions and Business Strategy
Outline
1. Introduction
2. Competitive strategies
3. Competitive priorities
4. Purchasing criteria
5. Supply chain strategy
6. Supply chain relationship pegging
7. The integrated buying model
8. Cost
9. Quality level
10. Lead time
11. Constraints
12. The purchasing strategic plan
13. Developing a strategic sourcing plan
14. Program objectives by phase
15. Purchasing strategy trends
Components of Purchasing strategy
Strategic Sourcing
• Strategic sourcing: the development and

management of supplier relationships to
acquire goods and services in a way that
aids in achieving the immediate needs of the
business
• In the past, sourcing was another name for
purchasing.
• As a result of globalization, sourcing implies
a more complex process suitable for
products that are strategically important.
Strategic Sourcing (continued)
• Specificity: refers to how common the item is and, in

a relative sense, how many substitutes might be
available
– Commonly available products can be purchased using a
relatively simple process.
• Request for proposal (RFP): used for purchasing
items that are more complex or expensive and where
there may be a number of potential vendors
• Vendor-managed inventory: when a customer
actually allows the supplier to manage an item or
group of items for them
Sourcing/Purchasing Design Matrix
The Bullwhip Effect
• Bullwhip effect: phenomenon of variability

magnification as we move from the customer
to the producer in the supply chain
– A slight change in consumer sales ripples
backward as magnified oscillations upstream,
like the result of a flick of a bullwhip handle.
• Continuous replenishment: inventory is
replaced frequently, as part of an ongoing
process
The Bullwhip Effect
Consumer sales Retailer orders start to show

are predictable variability as lot sizes and other
and steady. factors have an impact.
Farther up the supply chain

variability increases.
Functional Products
Functional products include the staples that people buy

in a wide range of retail outlets, such as grocery stores
and gas stations.
Lead time
for make-to-
Product life Contribution An average
Only 10 to order
cycle of margin of 5 forecast
20 product products of
more than to 20 error of only
variations from six
two years percent 10 percent
months to
one year
Innovative Products
Innovation can enable a Newness of the innovative

company to achieve higher products makes demand for
profit margins. them unpredictable.
Typically these products have a

life cycle of just a few months. The short life cycles and the
• Imitators quickly erode the great variety typical of these
competitive advantage that
innovative products enjoy.
products further increase
• Companies are forced to introduce a unpredictability.
steady stream of newer innovations.
Demand and Supply Uncertainty
Uncertainty Framework
Demand Uncertainty
Low (Functional Products) High (Innovative Products)
Low Grocery, basic apparel, Fashion apparel, computers,
(Stable Process) food, oil, and gas popular music
Uncertainty
Efficient supply chain Responsive supply chain

Supply
High Hydroelectric power, some Telecom, High-end

(Evolving Process) food products computers, semiconductor
Risk-Hedging supply chain Agile supply chain
Supply Chain Strategies
Risk-hedging supply chains:

Efficient supply chains utilize
utilize strategies aimed at
strategies aimed at creating
pooling and sharing resources
the highest cost efficiency.
in a supply chain to share risk.
Strategy
Agile supply chains utilize

Responsive supply chains
strategies aimed at being
utilize strategies aimed at
responsive and flexible to
being responsive and flexible.
customer needs.
16-26
JIT Purchasing - Outline
1. Introduction
2. Significance of purchasing
3. JIT purchasing
4. Purchasing benefits
5. Implementation of JIT purchasing
6. Role of culture
7. Critical analysis of the JIT concept
What is Lean Manufacturing?
Lean manufacturing or lean production, often
simply "lean", is a systematic method for
the elimination of waste ("Muda") within a
manufacturing system.
Lean also takes into account waste created

through overburden ("Muri") and waste
created through unevenness in work loads
("Mura").
Lean strives to produce products (and deliver services):

• On-Time
• Using as few resources as possible
• Better than competitors
• Faster & Cheaper than competitors
• While Eliminating as Much Waste as Possible
The Revolutions
• JIT
o High Volume Production, Minimal inventory
• TQC
o Eliminate causes of production defects
• Manufacturing Strategy Paradigm
o Capability as strategic competitive weapon
o Focused Factories - cost/ quality/ flexibility
The Revolutions
• Early 90’s recession and Lean – push
towards innovation
• “Re-engineering Work: Don’t Automate,
Obliterate”
• Revolutionary Change Vs Evolutionary
Change (As advocated by TQM)
• Remove non-value adding activities
The Revolutions
• Lean
o Manufacturing
o Consumption
o Enterprise
o Supply Chain
• Types of Waste
o Muda, Mura, Muri
• TOC
Lean – 10 innovations
① QM – Quality Management
② JIT – Just in Time
③ EI – Employee Involvement
④ MS – Manufacturing Strategy
⑤ Sup Red – Reduction in Supplier Base
⑥ Red Mgt – Reduced levels of Management
⑦ Sim Eng – Simultaneous Engineering
⑧ CAD – Computer Aided Design
⑨ CAE – Computer Aided Engineering
⑩ MRP – Material Requirement Planning
Reverse auctions
• Industries – Electrical, Electronics,

Construction, Government agencies
Define market Identify Perform pre-

specifications Suppliers award review
Approve Specify terms Invite

Suppliers listing & conditions Suppliers
Conduct Write up
Set up auction
auction Contract
Questions ?

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PROCUREMENT & SOURCING

• Supply planning system

Target: increase net profit by 10%

What is the objective of each function and how

Functional areas affected by Purchasing

• Strategic sourcing: the development and

• Specificity: refers to how common the item is and, in

• Bullwhip effect: phenomenon of variability

Consumer sales Retailer orders start to show

Farther up the supply chain

Functional products include the staples that people buy

Innovation can enable a Newness of the innovative

Typically these products have a

Efficient supply chain Responsive supply chain

High Hydroelectric power, some Telecom, High-end

Risk-hedging supply chains:

Agile supply chains utilize

Lean also takes into account waste created

Lean strives to produce products (and deliver services):

• Industries – Electrical, Electronics,

Define market Identify Perform pre-

Approve Specify terms Invite

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