Introduction to operations and supply chain management 3e bozarth chapter 07s

publishing as Prentice Hall 7 - 3Supply Management activities carried out by organizations to analyze sourcing opportunities, develop sourcing strategies, select suppliers, and carry

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Supply Management

Chapter 7

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Chapter Objectives

Be able to:

 Identify and describe the various steps of the strategic sourcing process.

 Perform and interpret the results of a simple spend analysis.

 Use portfolio analysis to identify the appropriate sourcing strategy for a particular good or service.

 Describe the rationale for outsourcing and discuss when it is appropriate.

 Perform a simple total cost analysis.

 Show how multicriteria decision models can be used to evaluate suppliers and interpret the results.

 Understand when negotiations should be used and the purpose of

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Supply Management

activities carried out by organizations to

analyze sourcing opportunities, develop

sourcing strategies, select suppliers, and

carry out all the activities required to procure goods and services.

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Why is Supply Management critical?

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Table 7.1

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 Profit margin – The ratio of earnings to sales for a given time period.

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Profit Leverage – Example 7.1

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 Every dollar saved in purchasing lowers COGS by

$1 and increases pretax profit by $1.

• Profit leverage effect – A term used to describe the

effect of $1 in cost savings increasing pretax profits by

$1 and a $1 increase in sales increasing pretax profits only by $1 multiplied by the pretax profit margin.

 Every dollar saved in purchasing lowers the

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3% purchasing reduction in COGS

Earnings and Expenses Current Reflecting Savings

(30%)

ROA increases from 26.9% to 35.3%

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 Purchased goods can have a major effect on other dimensions such as quality and delivery

performance.

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Performance Impact – Example 7.2

Sourcing dialysis machine valves

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 Interruption in patient treatment

 Rescheduling difficulties

 Reduction in the effective capacity for dialysis

 Possible medical emergencies

Estimated cost of a failed valve = $1,000

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Sourcing 50 dialysis machine valves

(Total Costs)

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The Strategic Sourcing Process

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Assess Opportunities

quantitative techniques to purchasing data in

an effort to better understand spending

patterns and identify opportunities for

improvement.

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Assess Opportunities – Example 7.3

Examine the trends and impact of spending.

Table 7.3

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Profile Internally and Externally

 Category profile – An approach to understand all aspects of a particular sourcing category that

could ultimately have an impact on the sourcing strategy.

 Industry Analysis – An approach to provide a more detailed understanding of the characteristics of

the external supply base.

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Develop the Sourcing Strategy

 A high-level, often strategic, decision regarding which products or services will be provided

internally and which will be provided by external supply chain partners.

• Insourcing – The use of resources within the firm to

provide products or services.

• Outsourcing – The use of supply chain partners to

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Advantages and Disadvantages of

Insourcing and Outsourcing

Table 7.6

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Factors that affect the decision

to Insource or Outsource.

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firm seeks to identify and quantify all of the major costs associated with various sourcing options.

 Direct costs – Costs tied directly to the level of

operations or supply chain activities.

 Indirect costs – Costs that are not tied directly to the level of operations or supply chain activity.

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Insourcing and Outsourcing Costs

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used by decision makers to develop a

sourcing strategy for a product or service,

based on the value potential and the relative complexity or risk represented by a sourcing opportunity.

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 The Routine Quadrant – Readily available products or services (small %

of total).

• Electronic Data Interchange

 The Leverage Quadrant – Standardized and readily available products

or services (large % of total).

• Preferred suppliers

 The Bottleneck Quadrant – Unique or complex products or services supplied by few suppliers.

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 Single sourcing – The buying firm depends on a single

company for all or nearly all of an item or service

 Multiple sourcing – The buying firm shares its business

across multiple suppliers

 Cross sourcing – Using a single supplier for a certain part or service and another supplier with the same capabilities for a similar part.

 Dual sourcing – Using two suppliers for the same purchased

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Screen Suppliers and Create Selection Criteria

 Process and design capabilities

 Financial condition and cost structure

 Longer-term relationship potential

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Conduct Supplier Selection

evaluation system to evaluate potential

suppliers, track supplier’s performance over time, and rank current suppliers

 Assign weights to performance dimensions.

 Rate the performance of each supplier with regard to each dimension.

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Supplier Selection – Example 7.6

Summary Data for Three Possible

Suppliers

Table 7.11

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5 = excellent

4 = good

3 = average

Scoring Scheme Criteria Weights

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Performance Values for Alternative Suppliers

Table 7.13

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Total Scores for Alternative Suppliers

Score Aardvark = (4 x 0.3) + (3 x 0.4) + (4 x 0.3) = 3.6 Score Beverly = (3 x 0.3) + (5 x 0.4) + (2 x 0.3) = 3.5 Score Conan = (5 x 0.3) + (1 x 0.4) + (1 x 0.3) = 2.2

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Negotiate and Implement

Agreements

suppliers with whom a buyer is willing to do business.

 Request for quotation – A formal request for the suppliers to prepare bids, based on the terms and conditions set by the buyer.

• Description by market grade/industry standard

• Description by brand

• Description by specification

• Description by performance characteristics

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Agreements

approach to final supplier selection.

 The item is a new or technically complex item with only vague

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Agreements

detailed purchasing contract to formalize the buyer-supplier relationship.

 Fixed-price contract – Stated price does not

change.

 Cost-based contract – Price of the good or service

is tied to the cost of some other key input or

economic factor.

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The Procure-to-Pay Cycle

 Ordering

 Purchase order – A document that authorizes a supplier to deliver a product or service and includes the terms and conditions of the sale.

 Follow-up and expediting

 Receipt and inspection

 Statement of work (scope of work) – Terms and conditions for a purchased service.

 Settlement and payment

 May be paid through Electric Funds Transfer (EFT)

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Trends in Supply Management

 Becoming more conscious of the importance of

being environmentally friendly and using

environmental performance in selecting suppliers.

 Ensuring compliance with regulations.

 Reducing packaging, promoting recycling, reducing costs.

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Trends in Supply Management

 Caused by natural disasters, economic/political events.

 Cause a big threat to revenue streams.

 Increased risk due to outsourcing to global

suppliers.

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Supply Management

Case Study

Pagoda.com

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otherwise, without the prior written permission of the publisher

Printed in the United States of America.

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