purchasing & supply chain management, 4e cengage learning monczka – handfield – giunipero...

PURCHASING & SUPPLY CHAIN MANAGEMENT, 4ePURCHASING & SUPPLY CHAIN MANAGEMENT, 4e

CENGAGE LEARNINGCENGAGE LEARNINGMonczka – Handfield – Giunipero – PattersonMonczka – Handfield – Giunipero – Patterson

Supply Management and Supply Management and Commodity Strategy Commodity Strategy

DevelopmentDevelopmentChapter 6Chapter 6

Chapter Overview

Aligning supply management and Aligning supply management and enterprise objectivesenterprise objectives

What is a category strategy?What is a category strategy? Category strategy developmentCategory strategy development Types of supply management Types of supply management

strategiesstrategies E-reverse auctionsE-reverse auctions Evolving sourcing strategiesEvolving sourcing strategies

Purchasing & Supply Chain Management, 4ePurchasing & Supply Chain Management, 4e22

Aligning Objectives

What markets will the firm compete in, What markets will the firm compete in, and on what basis?and on what basis?

What are the long-term and short-term What are the long-term and short-term business goals?business goals?

What are the budgetary and economic What are the budgetary and economic resource constraints, and how will resource constraints, and how will these be allocated to functional groups these be allocated to functional groups and business units?and business units?


How Companies Make Money


Raise prices

Increase volume

Reduce cost of employees

Reduce cost of processes/waste

Reduce cost of goods/services

1. Increase revenues

2. Decrease costs

Integrative Strategy Development



Corporate strategyCorporate strategy Definition of businesses in which to Definition of businesses in which to

participateparticipate Acquisition and allocation of resources to Acquisition and allocation of resources to

those businessesthose businesses

Business unit strategyBusiness unit strategy Scope or boundaries of those businessesScope or boundaries of those businesses Basis of competitive advantageBasis of competitive advantage



Supply management strategySupply management strategy Support the desired competitive business-Support the desired competitive business-

level strategieslevel strategies How to complement other functional areasHow to complement other functional areas

Commodity strategyCommodity strategy How to purchase commodities to support How to purchase commodities to support

higher-level strategieshigher-level strategies


Components of Integrative Strategy


Translating Objectives Goals

Cost reduction objectives Cost reduction objectives goals goals Be low-cost producer in industryBe low-cost producer in industry

Reduce material costs by 15%Reduce material costs by 15% Reduce levels of inventory required to Reduce levels of inventory required to

supply internal customerssupply internal customers Reduce raw material inventory ≥ 20 Reduce raw material inventory ≥ 20

days’ supplydays’ supply



Technology/new product development Technology/new product development objectives objectives goals goals Outsource non-core competency activitiesOutsource non-core competency activities

Qualify 2 new suppliers by end of yearQualify 2 new suppliers by end of year Reduce product development timeReduce product development time

Develop a formal supplier integration Develop a formal supplier integration process manual by 12/31process manual by 12/31



Supply base reduction objectives Supply base reduction objectives goalsgoals Reduce the number of suppliers usedReduce the number of suppliers used

Reduce the supply base by 30% in next Reduce the supply base by 30% in next 6 months6 months

Joint problem solving with remaining Joint problem solving with remaining supplierssuppliers Identify $300,000 in cost savings with 2 Identify $300,000 in cost savings with 2

suppliers by end of fiscal yearsuppliers by end of fiscal yearPurchasing & Supply Chain Management, 4ePurchasing & Supply Chain Management, 4e

1111


Supply assurance objectives Supply assurance objectives goals goals Assure uninterrupted supply from Assure uninterrupted supply from

identified suppliersidentified suppliers Reduce order cycle time on key parts ≥ 1 Reduce order cycle time on key parts ≥ 1

weekweek

Quality objectives Quality objectives goals goals Increase quality of services and productsIncrease quality of services and products

Reduce average defects by 200 ppm on Reduce average defects by 200 ppm on all receipts in next fiscal yearall receipts in next fiscal year


Enabling Effective Category Strategies

Spend money on resources initially, Spend money on resources initially, including assessment of current spend, including assessment of current spend, data collection, market research, data collection, market research, training, and peopletraining, and people

Validate savings or contribution to Validate savings or contribution to other company objectives achieved by other company objectives achieved by supply management and drive them to supply management and drive them to bottom linebottom line


Enabling Effective Category Strategies

Sustain the initiative through Sustain the initiative through presentations to senior executives who presentations to senior executives who support the move towards an support the move towards an integrated supply management integrated supply management function with other functional groups in function with other functional groups in the supply chainthe supply chain


Conducting a Spend Analysis

What did the business spend its money What did the business spend its money on over the past year?on over the past year?

Did the business receive the right Did the business receive the right amount of products and services given amount of products and services given what was paid for them? (S/OX issue)what was paid for them? (S/OX issue)

What suppliers received the majority of What suppliers received the majority of the business?the business?


Conducting a Spend Analysis

Did the suppliers charge an accurate Did the suppliers charge an accurate price across all divisions vs. P.O. price across all divisions vs. P.O. requirements, contracts, and SOWs?requirements, contracts, and SOWs?

Which divisions spent their money on Which divisions spent their money on products and services that were products and services that were correctly budgeted for?correctly budgeted for?

Are there opportunities to combine Are there opportunities to combine volumes and standardize purchases?volumes and standardize purchases?


Procurement KPIs Example


%%

Spend Analysis Spreadsheet

Sort by commoditySort by commodity Find total spend by commodityFind total spend by commodity Chart top 10 in descending $ amountChart top 10 in descending $ amount Sort by number of suppliers/commoditySort by number of suppliers/commodity Chart top 10 by descending # of Chart top 10 by descending # of

supplierssuppliers Find average spend/supplier/commodityFind average spend/supplier/commodity Apply Pareto analysis for opportunitiesApply Pareto analysis for opportunities


Sample Spend CategoriesSupplier Commodity Annual Spend

Rebate Company Rebate fulfillment & call center $329,873,663

Invest Company Investments $130,328,512

Advert Company Advertising $56,134,490

Repair Company Service repairs $49,339,218

Benefits Company Benefits $48,969,149

Hardware Company Hardware $40,572,450

Partco Service parts $39,910,372

Telecom Telecommunications $31,055,599

Display Company Store displays $30,020.969

Penpaper Company Paper $29,175,843

Labor Company Contract labor $27,880,363

Supply Company Paper $23,844,707

Contract Company General contracting $22,579,113

Office Company Paper $22,257,690

Graphics Company Graphic design $21,966,989

Payment Company Business & management services $20,380,275

Freight Company Surface freight $19,369,010

Paper Company Paper $15,603,682

Service Plan Company Service plan $15,478,827

Service Company Service parts $14,868,023

Consumer Company Consumer financing $14,833,333

Energy Company Energy $14,087,177

Spend by Commodity


Mil

lio

n $

Mil

lio

n $

Suppliers by Commodity


Spend/Supplier by Commodity


Percent of Total Spend


The Strategic Sourcing Process


Goal:Develop a

statement of work and plan

Goal:Understand the supply market

Goal:Classify suppliers

and define sourcing approach

Goal:Goal:Negotiate a win-win Negotiate a win-win

contractcontract

Goal:Goal:Continuously Continuously

improve improve performanceperformance

Inputs and Tools: Project leader;

other team members

Inputs and Tools: Interviews; online

research; conferences

Inputs and Tools: Market research; portfolio matrix;

forecasted spend

Inputs and Tools: Inputs and Tools: Negotiation plan; Negotiation plan;

supplier evaluation supplier evaluation tooltool

Inputs and Tools:Inputs and Tools:Contract; supplier Contract; supplier

scorecardscorecard

Outputs:Baseline data; project charter;

work plan

Outputs:Report on supply trends; changes; pricing; capacity;

etc.

Outputs:Supplier evaluation

tool with desired relationship

Outputs:Outputs:Signed contractSigned contract

Outputs:Outputs:Supplier Supplier

development plan; development plan; communicationcommunication

Step 1: Team and Project Charter

Identify key cross-functional team Identify key cross-functional team membersmembers

Define the scope of the category Define the scope of the category strategystrategy

Publish a team charterPublish a team charter Develop a work plan and Develop a work plan and

communication plancommunication plan


Step 2: Conduct Market Research

Understand the purchase requirement Understand the purchase requirement relative to business unit objectivesrelative to business unit objectives

Conduct thorough spend analysisConduct thorough spend analysis Identify specific internal usersIdentify specific internal users Identify current suppliersIdentify current suppliers Research supply marketplaceResearch supply marketplace



Information requiredInformation required Total annual purchasesTotal annual purchases Interviews with stakeholdersInterviews with stakeholders External market researchExternal market research


Key suppliersKey suppliers Available capacityAvailable capacity Technology Technology trendstrends

Price data and Price data and trendstrends

Cost data and Cost data and trendstrends

Technical Technical requirementsrequirements

Environmental Environmental issuesissues Regulatory issuesRegulatory issues Other available Other available

datadata


Triangulation – explore, compare, and Triangulation – explore, compare, and contrast data from multiple sourcescontrast data from multiple sources


Trade Trade journalsjournals

Annual Annual reportsreports InternetInternet BooksBooks

Snow-ball Snow-ball samplingsampling

Trade Trade consultantsconsultants

Category Category managersmanagers HeadlinesHeadlines

SuppliersSuppliers Investment Investment reportsreports


Porter’s Five Forces ModelPorter’s Five Forces Model SWOT analysisSWOT analysis Establish benchmarks through industry Establish benchmarks through industry

databasesdatabases Requests for informationRequests for information Value chain analysisValue chain analysis Supplier researchSupplier research


Porter’s Five Forces Model


Market Internal Competition

Threat of New Entrants

Pressure from Substitutes

Supplier Bargaining

Power

Buyer Bargaining Power

Source:Source:Competitive StrategyCompetitive StrategyMichael E. Porter (1980)Michael E. Porter (1980)

Other possible forces:Other possible forces:•GlobalizationGlobalization•DigitizationDigitization•DeregulationDeregulation

Market Internal Competition

Speed of industry growthSpeed of industry growth Capacity utilizationCapacity utilization Exit barriersExit barriers Product differencesProduct differences Switching costsSwitching costs Diversity of suppliersDiversity of suppliers



Capital marketsCapital markets Availability of skilled workersAvailability of skilled workers Access to critical technologies, inputs, Access to critical technologies, inputs,

or distributionor distribution Product life cyclesProduct life cycles



Brand equity and customer loyaltyBrand equity and customer loyalty Government deregulationGovernment deregulation Risk of switchingRisk of switching Economies of scaleEconomies of scale


Pressure from Substitutes

Relative performance of substitute Relative performance of substitute products and servicesproducts and services

Relative priceRelative price Switching costsSwitching costs Buyer’s propensity to switchBuyer’s propensity to switch



Buyer concentrationBuyer concentration Buyer volumeBuyer volume Buyer switching costsBuyer switching costs Price sensitivityPrice sensitivity Product differencesProduct differences



Brand identityBrand identity Impact on quality or performanceImpact on quality or performance Buyer profitsBuyer profits Availability of substituttesAvailability of substituttes


Supplier Bargaining Power

Price of major inputsPrice of major inputs Ability to pass along price increasesAbility to pass along price increases Availability of key technologies or other Availability of key technologies or other

resourcesresources Threat of forward or backward integrationThreat of forward or backward integration Industry capacity utilizationIndustry capacity utilization Supplier concentrationSupplier concentration Importance of volume to supplierImportance of volume to supplier


SWOT Analysis

Strengths Weaknesses

OpportunitiesOpportunities Threats


Internal Factors

External Factors

• Broad customer base

• Established product range

• Established distribution channels

• Emergence of other uses and markets

• Emerging overseas markets

• High entry barriers

• Low product innovation

• Traditional, unionized business processes

• Low patent protection

• Emerging Emerging overseas overseas supplierssuppliers

• NPD costs are NPD costs are highhigh

• Environmental Environmental regulationsregulations

Benchmarks

Identify critical performance criteriaIdentify critical performance criteria Identify relative competitive Identify relative competitive

performanceperformance Use of industry benchmarksUse of industry benchmarks

CAPSCAPS Third party consulting firmsThird party consulting firms


Requests for Information (RFIs)

Use before a specific requisition is Use before a specific requisition is issuedissued

Use to obtain general information about Use to obtain general information about services, products, or suppliersservices, products, or suppliers Does not constitute a binding documentDoes not constitute a binding document

Use when a large or complicated Use when a large or complicated purchase is considered and when pool purchase is considered and when pool of suppliers must be prequalifiedof suppliers must be prequalified


Supplier Research

Cost structureCost structure Financial statusFinancial status Customer Customer

satisfaction levelssatisfaction levels Support capabilitiesSupport capabilities Relative strengths Relative strengths

and weaknessesand weaknesses Buyer’s fit with Buyer’s fit with

suppliersupplier

How the company is How the company is viewedviewed

Core capabilitiesCore capabilities Strategy/future Strategy/future

directiondirection CultureCulture


Step 3: Strategy Development

Portfolio analysisPortfolio analysis Critical commodity – strategic supplierCritical commodity – strategic supplier Routine commodityRoutine commodity Leverage commodity – preferred supplierLeverage commodity – preferred supplier Bottleneck commodity – transactional Bottleneck commodity – transactional

suppliersupplier

Process and design capabilitiesProcess and design capabilities Management capabilityManagement capability


Step 3: Strategy Development

Financial condition and cost structureFinancial condition and cost structure Planning and control systemsPlanning and control systems Environmental regulation complianceEnvironmental regulation compliance Longer-term relationship potentialLonger-term relationship potential Weighted point supplier evaluation Weighted point supplier evaluation

systemssystems


Portfolio Analysis

Bottleneck Commodity

Critical Commodity

Routine Commodity

Leverage Commodity


Co

mp

lexi

ty o

r C

om

ple

xity

or

Ris

k Im

pac

tR

isk

Imp

act

Value PotentialValue Potential

LowLowLowLow

HighHigh

HighHigh

Critical Commodity

Critical to profitability and operationsCritical to profitability and operations Few qualified sources of supplyFew qualified sources of supply Large expendituresLarge expenditures Design and quality are criticalDesign and quality are critical Complex and/or rigid specificationsComplex and/or rigid specifications


Critical Commodity

StrategyStrategy Form partnership with suppliersForm partnership with suppliers

TacticsTactics Increase role of selected supplierIncrease role of selected supplier


Critical Commodity

ActionsActions Heavy negotiationHeavy negotiation Supplier process managementSupplier process management Prepare contingency plansPrepare contingency plans Analyze market and competitionAnalyze market and competition Use functional specificationsUse functional specifications


Routine Commodity

Many alternative products and servicesMany alternative products and services Many sources of supplyMany sources of supply Low value, small individual Low value, small individual

transactionstransactions Everyday use, unspecified itemsEveryday use, unspecified items Anyone could buy itAnyone could buy it


Routine Commodity

StrategyStrategy Simplify acquisition processSimplify acquisition process

TacticsTactics Increase role of systemsIncrease role of systems Reduce buying effortReduce buying effort


Routine Commodity

ActionsActions Rationalize supply baseRationalize supply base Automate requisitioning, e.g., EDI, credit Automate requisitioning, e.g., EDI, credit

cardscards Stockless procurementStockless procurement Minimize administrative costsMinimize administrative costs Little negotiationsLittle negotiations


Leverage Commodity

High expendituresHigh expenditures Large marketplace capacity with ample Large marketplace capacity with ample

inventoriesinventories Many alternate products and servicesMany alternate products and services Many qualified sources of supplyMany qualified sources of supply Market / price sensitiveMarket / price sensitive


Leverage Commodity

StrategyStrategy Maximize commercial advantageMaximize commercial advantage

TacticsTactics Concentrate businessConcentrate business Maintain competitionMaintain competition


Leverage Commodity

ActionsActions Promote competitive biddingPromote competitive bidding Exploit market cycles / trendsExploit market cycles / trends Procurement coordinationProcurement coordination Use industry standardsUse industry standards Active sourcingActive sourcing



Complex specifications requiring Complex specifications requiring complex manufacturing or service complex manufacturing or service processprocess

Few alternate productions / sources of Few alternate productions / sources of supplysupply

Big impact on operations / maintenanceBig impact on operations / maintenance New technology or unleaded processesNew technology or unleaded processes



StrategyStrategy Ensure supply continuityEnsure supply continuity

TacticsTactics Decrease uniqueness of suppliersDecrease uniqueness of suppliers Manage supplyManage supply



ActionsActions Widen specificationsWiden specifications Increase competitionIncrease competition Develop new suppliersDevelop new suppliers Medium-term contractsMedium-term contracts Attempt competitive biddingAttempt competitive bidding


Step 4: Contract Negotiation

Establishing and tasks and time linesEstablishing and tasks and time lines Assigning accountabilities and process Assigning accountabilities and process

ownershipownership Ensuring adequate resources are made Ensuring adequate resources are made

availabilityavailability Strategy communicated to all Strategy communicated to all

stakeholdersstakeholders Price analysisPrice analysis


Step 4: Contract Negotiation

Preferred supplier listsPreferred supplier lists Competitive biddingCompetitive bidding NegotiationNegotiation


Price Analysis

Defined marketplaceDefined marketplace Best priceBest price Average priceAverage price Business unit’s priceBusiness unit’s price Expected trends in pricingExpected trends in pricing


Effective Competitive Bidding

Buying firm can provide qualified Buying firm can provide qualified suppliers with clear descriptions of the suppliers with clear descriptions of the items or services to be purchaseditems or services to be purchased

Volume is high enough to justify the Volume is high enough to justify the cost and effortcost and effort

Buying firm does not have a preferred Buying firm does not have a preferred suppliersupplier

Price is dominant criterionPrice is dominant criterionPurchasing & Supply Chain Management, 4ePurchasing & Supply Chain Management, 4e

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Effective Negotiation

Item is new or technically complex item Item is new or technically complex item with only vague specificationswith only vague specifications

Purchase requires agreement about a Purchase requires agreement about a wide range of performance factorswide range of performance factors

Buyer requires supplier to participate in Buyer requires supplier to participate in the development effortthe development effort

Supplier cannot determine risks and Supplier cannot determine risks and costs without buyer’s inputcosts without buyer’s input


Step 5: SRM

Continuous monitoring of both the Continuous monitoring of both the strategy and the supplierstrategy and the supplier

Continuous monitoring of the Continuous monitoring of the supplier’s performance on key goals supplier’s performance on key goals and objectivesand objectives

Supplier scorecardSupplier scorecard Use quarterly and review results with Use quarterly and review results with

suppliersupplier


Elements of the Monitoring Process

Regular review meetings to ensure that Regular review meetings to ensure that the strategy is still congruent with the strategy is still congruent with organizational objectivesorganizational objectives

Share results with top managementShare results with top management Assess internal customer and supplier Assess internal customer and supplier

perceptionsperceptions Determine if key goals have been Determine if key goals have been

achievedachieved Provide feedbackProvide feedback


Types of Strategies

Supply base optimizationSupply base optimization Supply risk managementSupply risk management Global sourcingGlobal sourcing Longer-term supplier relationshipsLonger-term supplier relationships Early supplier design involvementEarly supplier design involvement Supplier developmentSupplier development Total cost of ownershipTotal cost of ownership


Facilitating E-Reverse Auctions

Buyers and suppliers able to Buyers and suppliers able to communicate in real-time, worldwide, communicate in real-time, worldwide, via the Internetvia the Internet

Development of robust, user-friendly, Development of robust, user-friendly, third-party auction systemsthird-party auction systems

Significant improvements in goods and Significant improvements in goods and service quality and cycle time reductionservice quality and cycle time reduction


Evolving Sourcing Strategies

Basic Beginnings

Moderate Development

Limited Integration

Fully Integrated Supply Chains

• Quality/cost teams

• Longer-term contracts

• Volume leveraging

• Supply base consolidation

• Supplier quality focus

• E-RAs• Ad hoc supplier

alliances• Cross-functional

sourcing teams• Supply base

optimization• International

sourcing• Cross-location

sourcing teams

• Global sourcing• Strategic

supplier alliances

• Supplier TQM development

• Total cost of ownership

• Nontraditional purchase focus

• Parts/service standardization

• Early supplier involvement

• Dock-to-stock pull systems

• Global supply chains with external customer focus

• Cross-enterprise decision making

• Full-service suppliers

• Early sourcing• Insourcing/

outsourcing to maximize core competencies of firms throughout the supply chain

• E-systems


Phase 1: Basic Beginnings

Supply management characterized as a Supply management characterized as a lower-level support functionlower-level support function

Short-term approachesShort-term approaches ReactionaryReactionary Impetus for change is driven by Impetus for change is driven by

managementmanagement Ensure adequate capacityEnsure adequate capacity


Phase 1: Basic Beginnings

Adversarial supplier relationshipsAdversarial supplier relationships Limited resources for improvementLimited resources for improvement Mid-level reportingMid-level reporting Efficiency-related performance Efficiency-related performance

measuresmeasures Focus on price reductionFocus on price reduction Transaction-based information systemsTransaction-based information systems


Phase 2: Moderate Development

Centralization of supply management Centralization of supply management functionfunction

Commodity managementCommodity management Company-wide databasesCompany-wide databases Company-wide agreementsCompany-wide agreements Single sourcing with long-term Single sourcing with long-term

agreementsagreements


Phase 2: Moderate Development

Limited cross-functional integrationLimited cross-functional integration Recognition of strategic supplier Recognition of strategic supplier

relationshipsrelationships Evaluated on achievement of Evaluated on achievement of

competitive objectivescompetitive objectives Supplier viewed as a resourceSupplier viewed as a resource Informal internal integrationInformal internal integration


Phase 3: Limited Integration

Concurrent engineeringConcurrent engineering Supplier developmentSupplier development Lead time reductionLead time reduction Early supplier involvementEarly supplier involvement Supply management strategies Supply management strategies

integrated early in product and process integrated early in product and process design activitiesdesign activities


Phase 3: Limited Integration

Evaluated on strategic contributionEvaluated on strategic contribution Extensive functional integrationExtensive functional integration Focus on building competitive Focus on building competitive

advantageadvantage Strong external customer focusStrong external customer focus Global databasesGlobal databases Total cost modelingTotal cost modeling


Phase 4: Full Integration

Assumed a strategic orientationAssumed a strategic orientation Automated non-value-adding activitiesAutomated non-value-adding activities Greater focus on strategic objectives Greater focus on strategic objectives

and activitiesand activities Developing global supplier capabilitiesDeveloping global supplier capabilities Systems thinking approach over entire Systems thinking approach over entire

supply chainsupply chain


Observations on Strategic Sourcing

Few organizations have fully executed Few organizations have fully executed complex Phase 3 and Phase 4 complex Phase 3 and Phase 4 strategiesstrategies Relative complexityRelative complexity Inadequate resources and commitmentInadequate resources and commitment Lack of supply base optimizationLack of supply base optimization Personnel requiring higher level skillsPersonnel requiring higher level skills


purchasing & supply chain management, 4e cengage learning monczka – handfield – giunipero...

Documents

supply chain goals

supply base

uninterrupted supply

aligning objectives

enterprise objectives

week quality objectives

shortterm business goals

product development