Purch Supply chain management

PURCHASING AND SUPPLY STRATEGY

THE ENVIRONMENT: environmental issues od fit and alignment of P&S strategy

We can divide the business environment, within which we operate, into three groups (Narchal

et al., 1927):

Macro-environment:

- political situation (politics, laws, economics, society, technology)

Industry/sector environment

- (your specific sector – bio-engineering, fashion, local

government)

Competitive environment

- (who are the competitors and what are they doing?)

Industry trends that impact on purchasing

and supply strategy

We have to think about two variables:

output volume and output variety.

- Craft production: diversity of

output but low level of volumes.

- Mass production: high level of

volume but low variety.

- Lean production: increasing level of

variety.

- Mas customization: high level of

both volume and variety.

Changing context for purchasing and supply strategy

Most (not all) markets are more price competitive today than they were in the last few decades:

most of the industries rely on cost priority since they want to lower the costs.

The main reasons can be: learning and experience effects, technology, level of competition

(rising), the internet, value conscious customers

(customers are more demanding, they want good

quality and affordable price).

In order to maintain profitability, companies must

find a way to bring down costs and/or increase

customer value.

Competitive environment analysis: Porter’s Five

Forces

To analyse the competitive environment, we may

Porter’s Five Forces

think of framework. For

having a good strategy, it is necessary to consider

all these forces.

THE STRATEGY

Competitive strategy

An organization’s competitive strategy defines, relative to its competitors, the set of customer

needs it seek to satisfy with its product/service portfolio.

E.g. Walmart: low cost and variety of product; Amazon: focused on variety and being convenient

in the sense that you can always buy something online and receive it at home.

Based on how the customer prioritises cost, quality, service, delivery time, variety, …. 9

Competitive priorities for purchasing and supply

Competitive priorities in the operations management or

purchasing and supply: cost, quality, delivery, flexibility,

innovation, service.

Usually companies try to focus on one or two priorities; but it

is better to spread capabilities to reach all the priorities.

Market Qualifiers:

- priorities that allow companies to

enter in the market only if they have a certain level of it.

Criteria needed to enter the market.

Market Winners:

- priorities that allow companies to

become leaders in the market.

Achieving strategic fit

For any company to be successful, its purchasing and supply strategy and competitive strategy

need to have aligned goals: we need to have the fit between environment and strategy. There is

a need for consistency between the customer priorities that the competitive strategy hopes to

satisfy and the supply chain capabilities that the supply chain strategy aims to build.

The key steps to achieve strategic fit:

1- Understanding the customer and supply chain uncertainty: how predictable is the

supply in our market?

2- Understanding the supply chain capabilities, in terms of responsiveness of the supply

chain to the fluctuations of the demand.

3- Achieving strategic fit: bring together responsiveness of the supply chain and the

uncertainty of the demand.

Purchasing and Supply strategy

What does a purchasing and supply strategy look like?

Determines the nature of the procurement of raw materials, transportation of materials to and

from the company, manufacture of the product or operation to provide the service, and

distribution of the product to the customer, along with any follow-up service and a specification

of whether these processes will be performed in-house or outsourced.

Defines not only processes but what the role played by each supply chain entity is.

Understanding levels of strategy

Key is integration at all three levels:

- Corporate strategy

- Tactical strategy

- Operational strategy

Purchasing strategy levels 10

Supply operations, management, strategy and policy

SUPPLY POLICY SUPPLY STRATEGY SUPPLY MANAGEMENT SUPPLY OPERATIONS

à à à

How the purchasing function can add value to overall business: Porter’s Value Chain concept

Purchasing supply wheel (Cousins et al. 2008) 11

Purchasing: centralization

Purchasing: centralization synergies

- Pooled negotiation power

- Shared resources

- Shared knowledge

- Coordinated strategies and policies

- Vertical integration

- Combined new business creation

Purchasing: decentralization

Purchasing: decentralization pros and cons 12

Corporate Purchasing Organizational Models

Purchasing and Supply strategy changing over time

Purchasing maturity model

Changing strategy over product life cycle 13

Changing performance objectives through PLC

what are the main issues for Apple’s supply chain to deal with from the introduction

Discussion:

of a new iPhone to the replacement by the next model?

The industry life-cycle

IMPLEMENTATION ISSUES OF P&S STRATEGY

Implementation issues: implementing a purchasing and supply strategy

Differences between strategy formulation and implementation:

- Purchasing and supply strategy formulation:

Is focused on effectiveness/goals

o Involves coordination/ideas of a few individuals

o Requires initiative and analytical skills

o

- Purchasing and supply strategy implementation:

Is focused on efficiency

o Involves coordination and management of many people

o Requires motivation and leadership skills.

o 14

Deliberate and emergent strategy

Leaders in strategic purchasing & supply

Companies such as Apple, Amazon, McDonalds, Intel and Unilever use purchasing and supply

as a competitive weapon.

Today’s organisations focus on purchasing, manufacturing and physical distribution to support

demand driven excellence.

Tomorrow’s organizations must focus on customer needs, identifying revenue generating

services, time-to-market, time-to-volume, customer segment specific capabilities, partners as

core elements.

Example: Starbuck’s Case

- Manufacturing: 5 company-owned coffee roasting plants (Nevada, Pennsylvania, South

Carolina and Washington, USA, and Netherlands), 24 co-manufacturers (in the United

States, Canada, Europe, Asia and Latin America), 1 tea processing plant (Portland,

Oregon, USA).

- Distribution: 9 regional distribution centres, 48 central distribution centres, 6 “green

coffee” warehouses.

- Deliveries: 2,7 million per year.

Business growth: Top 25 World Class Supply Chain (2013)

24,464 stores worldwide, 70 countries (in 2016), 50 million customers/strategy for business

growth.

Costs: $600 million on coffee per year + other products (tea, bakery, dairy), total $2,5 billion

annually.

In 2008 operational costs were rising though sales were cooling; supply chain was lagging far

behind the growth plans.

65-70% operating expenses were to outsourcing agreements (logistics, transportation,

contract management).

Three objectives:

- Reorganize its supply chain organization

- Reduce its cost to serve stores and improve execution

- Lay the foundation for future supply chain capability

Three steps supply chain transformation:

1- Simplify the complex: structure and functional roles

a. Planning group – production planning, replenishment, or new product launches

15

b. Sourcing group – coffee and non-coffee (focus on price benchmarking and TAC*)

c. Manufacturing group – regionalising coffee production plants to reduce logistics

costs/measurement

d. “Make” and “deliver” groups

2- one world, one logistics system: centralize, strategic planning

a. delivery costs/share delivery of products to store/measurement

3- earning company confidence: $500 million savings in Year 2

a. new focus on service and quality

*TAC: total acquisition cost (costs associated with buying goods, services or assets)

Summary

Establish key drivers in purchasing and supply strategy.

Strategic purchasing and supply is now considered to be a critical strategic element of an

organization’s competitive advantage.

Organizations operate in a dynamic and highly competitive environment – there needs to be fit

with business strategy.

your strategy needs a strategy

Additional:

https://youtu.be/YE_ETgaFVo8 16

STRATEGIC SOURCING AND PURCHASING PROCESS

THE PURCHASING PROCESS

What are the main stages of the purchasing process? The purchase process can be divided into

specific stages:

- Specification of the need

- Supply selection

- Contracting

The three first steps can be grouped in: Source the contract.

- Ordering

- Expediting

- Evaluation

The second three steps can be grouped in: Source to pay.

If there is a modification, we can avoid the specification selection and redevelop the contract.

A supplier hierarchy potential

- Supply base is where they have the

suppliers they deal with.

approved supplier.

- A set of preferred suppliers.

- A set of Preferred suppliers

are considered as safe.

The higher in the hierarchy, the higher investments they

are willing to make.

THE STRATEGIC SOURCING PROCESS: building and maintaining a sustainable supply

base

It is very important for companies to build a stable supply base. The process involves several

steps: it is about exploring for new suppliers. Usually we do not supply before a severe

selection, before the cycle has been made. Not only the contract is build up: trust and

commitment as well. 17

Supplier relationship management is absolutely critical and should be based on ongoing

evaluations. We need to monitor: cost, quality, delivery performances, KPIs, service level,

innovation, sustainability and so on.

If the standards are not met, then we invest in supplier development programme. It is a circular

process that will continue improve the suppliers. Today integrations between company and the

suppliers has to be tight, the company has to invest in the supplier and develop information

systems; today it is not like years ago in which you just looked for someone else (physical

proximity is an important characteristic as well).

Company invest heavily to improve and have a stable supply base.

THE MAIN STAGES OF THE PURCHASING PROCESS

Purchase specifications

Assuming decision to buy (rather than make in-house), the specification ‘specifies’ the

purchasing requirements:

- Quality: technical standards, norms, certificates.

- Logistics: quantities and delivery times.

- Maintenance: maintenance and service thorough contract.

- Legal/Environmental: health, safety, environmental, et