Purch Supply chain management

Purchasing & Supply Chain Management

Introduction

Why is purchasing and supply chain management interesting?

• Spending lots of someone else’s money
• Opportunities to travel and see different companies
• Commercial negotiation can be tense and exciting
• Combines analytical aspects with people-centred activities – requires hard and soft skills

Who makes this car? FIAT, but in terms of manufacturing and making there are a lot of different suppliers.

• MAKE – core: engine(?), design (? we have to make our own design but there are design’s houses), assembly
• BUY (purchasing): wheels, tyres, gearbox, glass, valves and blocks (for the engine), headlamps, seats, dashboard

Core competences and specialized knowledge (design houses e.g. Lancia Ypsilon designed by an external designer) but own design can bring competitive advantage. Fiat 500 has a lot of different suppliers.àThere is nothing that can’t be outsourced.

Economies of scale

Cost of suppliers supplying the whole industry (have better knowledge e.g. Brembo is better than Fiat in terms of brakes); suppliers have cost advantages thanks to the economies of scale.

[H. Ford: mass production system, very large degree of vertical integration (no trust in suppliers: complete control over the supply chain).]

Industrial organization in the old days (mass production)

Lower risks with vertical integration. Clerical problem: negotiating with low value/risk suppliers and keeping record of expenditure.

• “Blame-retaliation” behaviour: the supplier doesn’t deliver the right product. Supplier as an enemy. Adversarial and transactional relationship with suppliers.
• Top-down control: one-way dictatorial control.
• Multi-sourcing: several suppliers for the same item to avoid dependency.

Tactical Purchasing

Radical changes in Purchasing & Supply Chain Management. Vertical disintegration: outsourcing non-core activities. After the make or buy analysis, companies are now going in the opposite direction so people who manage the supply chain are gaining importance; these figures are increasing due to outsourcing.

The value is not just about prices that are only the tip of the iceberg in the total cost perspective: it costs more than the price. Purchasing people have to understand that.

Importance of Purchasing

Proportion of value from supply chain is approximately 80%. These figures are increasing due to outsourcing. Price is only the tip of the iceberg: hidden costs are more important.

• Tip of the iceberg: price.
• Underwater: supplier search and selection costs, supplier negotiation costs, transportation costs, supplier monitoring and development costs.

Development in Purchasing: Towards Supply (Chain) Management

Companies prefer buying to making (outsource) these days. What they choose to do in-house is the integration. Even if they outsource everything, the company integrates systems and everything (the overall product architecture).

When making a saving in purchasing, it is shown directly in the bottom line. It is no longer an administrative/clerical function; purchasing has become an important, even strategic, business function. Purchasing becomes supply (chain) management: a driver of value and competitive advantage.

Textbooks definitions of purchasing, procurement, and sourcing:

• Purchasing can be defined in different ways.
  • Competitive priorities (Bailey’s definition).
  • Input side (Cousins).
  • External resources management (Van Weele).
• Procurement can be either a day-to-day activity or the opposite. Procurement is specific and purchased day-to-day in some contexts; in some others, they mean the same thing.

CIPS Defined Procurement

CIPS defined procurement in a more comprehensive way that includes purchasing:

• Purchasing: “to acquire goods, works or services from a nominated supplier”.... “Purchasing is a component of the wider function of procurement and consists of activities such as ordering, expediting, receipt and payment.”
• Procurement: “the totality of acquisition starting from the identification of a requirement to the disposal of that requirement at the end of its life. It therefore includes pre-contract activities e.g. sourcing and post-contract activities e.g. contract management, supplier relationship management activities. However, it does not include stores management and logistics that are aspects of the wider subject of Supply Chain Management. Procurement generally relates to goods, works and service(s) requirements.”
• Supply Management: “purchasing, expediting, inventory management, delivery and receipt of goods, and quality control.”
• Sourcing: “activities involving searching markets for sources of goods and services. At the opposite end of the supply chain from marketing. Strategic sourcing is the attempt to make sure everything is being sourced as efficiently as possible.”

To sum up all the definitions:

• Procurement is something seen as more comprehensive than purchasing, including e.g. make-or-buy decisions.
• Procurement is the preferred term in the public sector.
• Procurement can be non-commercial means.
• Sourcing is specifically related to locating or searching for suppliers.
• Sourcing is used in supply chain management (e.g. SCOR – Supply Chain Operations Reference Model).
• Purchasing & Supply Chain Management is often used as an encompassing term – and used widely in this course.

Position of Procurement after the Financial Crisis

Financial crisis: people realized they have to look for purchases; if you make a saving in something you buy, it goes directly to the bottom line. More emphasis and pressure on purchasing. Procurement emerged as a winner with improved image for the majority of people. Companies realized they had to focus on this area.

Top Strategic Sourcing Pressures

Saving from top management 60%.

Development in Purchasing: Sustainability

Collapsing building in Bangladesh: supplier factory of textile for the fashion industry. A lot of purchasing decisions driven by low cost locations. Companies are looking for the least expensive. Blame by media, observers, and customers (even if not murder) if something happens. Accidents will reflect on the company.

• Purchasing decisions are often – still – driven by cost reduction.
• Global sourcing has become best practice.
• Global sourcing often means low-cost country sourcing.
• Risks associated with global sourcing are catching up especially those related to sustainability.

CSR – Corporate Social Responsibility function: companies’ actions to tackle this issue.

E.g. KitKat produced by Nestlé: Greenpeace is an NGO that doesn’t like bad practices and made a bad advertisement. Sourcing decisions have to take into consideration everything: e.g. palm oil for KitKat that destroyed the forest.

In December 2009, it was announced that the four-finger variety of KitKat would use Fairtrade chocolate (at least in Britain and Ireland) from January 2010. Nestlé eventually agreed to Greenpeace's terms, committing to removing palm oil/deforestation from all products.

Supply Chain Management

Upstream: mining, then assembler/manufacturer, then downstream in distribution and marketing. It’s not just about the source part, but it includes different steps. Collaborative planning and forecasting, shared information and collaboration to satisfy the final customer (e.g. stock levels, capacity of the supply chain).

Supply chain is all about collaboration: do it together instead of doing it yourself. Metaphor of rowing boat: all at the same time and in the same direction, aiming at the same thing; synchronous actions.

The basic assumptions of SCM: Do It Yourself Do It Together.àSupply chains compete against supply chains: rowing boat against rowing boat. Added value in effective intra-and-inter relationships. Supply chain is also about intra and inter-organization issues.

Definitions

• The management of upstream and downstream relationships with suppliers and customers to deliver superior customer value at less cost to the supply chain as a whole. (Christopher, 1998)
• The integration of business processes from end-user through original suppliers that provides products, services, and information that add value for customers. (Cooper et al, 1997)
• The management of a network of relationships within a firm and between interdependent organizations and business units consisting of material suppliers, purchasing, production facilities, logistics, marketing, and related systems that facilitate the forward and reverse flow of materials, services, finances, and information from the original producer to the final customer with the benefits of adding value, maximizing profitability through efficiencies, and achieving customer satisfaction (Stock & Boyer, 2009)

• Relationship management. Value maximization, cost minimization.
• Process integration.
• Network of relationships.

Supply Chain: System of Relationships

Two dimensions: (max) value and (min) time and cost. The chain: how we connect, relationships among each of these.

SCOR Model

Divided into five parts: plan, source, make, deliver, return. The return is about making sure that what comes in the end finds the way back in the supply chain, once used. Every actor in the supply chain has all these.

Supply Chain Management: An Idea State

Supplier Component Failure Response

E.g. burning oil platform: BP’s internal inquiry into the causes of the disastrous Gulf of Mexico oil spill provoked an immediate backlash from its contractors, as well as US politicians who said the British group was “happy to slice up blame, as long as it gets the smallest piece”... BP accepted that its engineers should shoulder some of the blame but shifted much of the responsibility onto its contractors, Transocean, the owner of the Deepwater Horizon drilling rig that exploded, and Halliburton, the company responsible for cementing the Macondo well.

P.S. main job is saving but also value creation.

Salaries in Procurement & Supply Chain Management

Key Skills in Procurement & Supply

The right mindset? Is purchasing & supply management just about saving (money)? Peter Schmeichel had a 43% clean sheet career record - he excelled at saving. He scored 12 goals in his career - he was a goalkeeper. Do you have a “Schmeichel” mindset?

Conclusions

Purchasing is becoming increasingly important to organisations as they outsource production and service provision, evolving from a tactical to a strategic business function (from ‘purchasing’ to ‘supply management’). The purchasing function influences a significant amount of cost and value and is faced with increasing supply risks. Customer-supplier relationships are the glue that binds supply chains together. Companies need skilled purchasing and supply management professionals and are willing to reward top people.

Purchasing and Supply Strategy

The Environment: Environmental Issues of 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.
• Mass 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 think of Porter’s Five Forces 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 seeks 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, etc.

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: 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 the 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

Supply operations, management, strategy, and policy

Supply Policy, Supply Strategy, Supply Management, Supply Operations

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

Purchasing Supply Wheel (Cousins et al. 2008)

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

Corporate Purchasing Organizational Models

Purchasing and Supply strategy changing over time

Purchasing Maturity Model

Changing Strategy over Product Life Cycle

Changing Performance Objectives through PLC

What are the main issues for Apple’s supply chain to deal with from the introduction 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
  • Involves coordination/ideas of a few individuals
  • Requires initiative and analytical skills
• Purchasing and Supply Strategy Implementation:
  • Is focused on efficiency
  • Involves coordination and management of many people
  • Requires motivation and leadership skills.

Deliberate and Emergent Strategy

Leaders in Strategic Purchasing & Supply

Companies such as Apple, Amazon, McDonald's, 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: Starbucks' 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.