Chapter 11 - Discussion Questions - Answers

1. Describe the pros and cons of using centralized or decentralized purchasing strategies.Answer:In a centralized strategy, purchasing is placed in a central location responsible for buying for all company facilities. Arguments favoring centralization cen-ter on buyer leverage and economies of scale. By aggregating requirements buyers can obtain larger discounts and cheaper transportation, remove dupli-cation in buying, better coordinate purchasing requirements through the appli-cation of computerized software, link purchasing strategies more closely to overall corporate strategies, more efficiently utilize scarce resources among competing facilities, and develop a specialized professional purchasing staff.

In a decentralized strategy, facilities are responsible for buying goods and services based on their individual needs. The arguments favoring a decentralized purchasing option center on linking acquisition authority directly with the local facility experiencing the demand; increasing responsiveness to the customer; greater speed in item replenishment; use and development of local sources; providing supplier visibility to special product feature, services, or transportation needs; closer alignment of purchasing with local product development; and increased local ownership.

2. ABC Electronics purchases office supplies as well as complex subassemblies for its line of printers. As a buyer, what, if any, differences in sourcing strategy would you use to buy these two types of products?Answer:As a buyer, you would begin by separate these two different categories of purchasing. The office supplies would be considered as MRO goods used in-ternally for general operating activities. The subassemblies, on the other hand, would be considered as goods that would be consumed or converted during the manufacturing process.

The focus of procurement process for MRO materials should be on reduc-ing the transaction cost of each order. These items are not critical and can be purchased in bulk with an eye toward aggregation and cost savings. Stock out costs are low in comparison with conversion materials, so sourcing decisions are not as critical. Purchasing this category of goods or services often requires a knowledgeable buyer, supplier search, detailed request for quotation, price negotiation, and a budget. Many of the goods purchased are not purchased again or purchased periodically.

The procurement process for direct materials should be designed to ensure that components are available in the right place, in the right quantity, and at the right time. Sources should be carefully selected to ensure that quality and responsiveness are acceptable and that a long-term relationship is possible. The primary goal of the procurement process should be to make production

plans and current levels of component inventory at the manufacturer visible to the supplier, and should have alerts built into it if mismatches between supply and demand are detected. Buyers are very active in all facets of the purchase, including planning, researching, sourcing, pricing, order releasing, strategic planning, and supplier relationship building.

3. Discuss the objectives of purchasing.Answer:The objectives of purchasing are as follows: Providing an uninterrupted flow of materials and services. The foremost

goal of purchasing is to ensure that the company is not hindered by inventory and service capacity shortages.

Purchasing products competitively. This objective requires purchasers to continuously search for supplier relationships that will provide the best combination of quality, price, and service relative to the enterprise's needs.

Keeping inventory investment to a minimum. Effective inventory management requires that purchasing does its part to achieve a reasonable balance between stocking levels and the cost of carrying inventory.

Provide consistent, quality purchased materials and services. Purchasers must bargain for nothing short of total product quality while searching for methods to reduce costs.

Developing the supplier base. Purchasers must continually search for ways to enhance supplier relationships by developing mutually beneficial value-added service, quality, and training programs that promote supplier partnerships.

Developing people resources and information tools for productivity optimization. The continuous development and training of personnel is important.

4. What impact does early purchasing and supplier involvement have on new product development?Answer:Lack of effective, cooperative teamwork between engineering, procurement, and suppliers has historically been accompanied by quality problems, cost overruns, loss in cost savings, and new products that are late to enter the mar-ketplace. Further, early recognition of problems is difficult or impossible in the absence of effective team work. Extensive redesign, rework, and retrofit operations are common when operating in the traditional mode, where the de-sign project passes serially from concept through to production. Cost overruns frequently result when designers fail to consider the supply base’s design, manufacturing, quality, and cost capabilities. Scheduling problems frequently are the result of late delivery of unique nonstandard components used in the

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design. These special components require a longer lead time to produce and make it difficult for suppliers to react quickly to changes in market demand.

5. What two major factors affect the make-or-buy decision?Answer:Two factors stand out above the others when considering the make-or-buy de-cision: total cost and control of production. Cost considerations require buyers to conduct a thorough cost analysis to determine what it costs the company to make the item versus the cost to buy it. Among the cost components involved in the make estimate are materials, labor, quality, carrying cost, overheads, planning, purchasing, and capital. Among the buy components are price, transportation, receiving and inspection, purchasing, and administrative costs.

The second factor, control of production, focuses on two key requirements. The first centers on how closely the firm need to control production opera-tions. Companies subject to extreme short-term fluctuations in demand or configured products require short production runs and access to unique com-ponents on short notice. Most suppliers serving a wide customer base cannot normally execute quick change for a small quantity of a unique product on a moment’s notice. Also, suppliers may not be able to handle an abnormal in-crease in production due to marketplace swings. Another reason to use a sup-plier is to optimize economies of scale in the plant by outsourcing small-vol-ume item manufacture to suppliers. Similar to this approach is the use of sup-pliers to handle periods of buyer plant under-capacity or need to stabilize the workforce. The second production-related factor centers on quality require-ments. Some products may be difficult to manufacture or require exacting quality specifications. Another factor is design secrecy, especially in highly competitive industries where style and cost play unusually important roles. On the other hand, an outsourced decision may be favored do to the special-ized knowledge, research, workforce, and equipment of a supplier.

6. Why has supplier relationships management (SRM) become so important?Answer:The growth of the SRM concept is focused directly on establishing coopera-tion, partnership, and communication between the buyer and supplier. En-hanced by Internet applications that draw buyers and supplier together in “real time,” partnering can assume many forms based on the dynamics of the sup-ply chain. Partnering can be found among allied industries, third-part logistics (3PL) organizations, and even competitors, and may exist for strategic or op-erational reasons. Whatever the formal arrangement, SRM can be described as the creation of cooperative alliances formed to exponentially expand the capabilities involved in materials requisition, procurement procedures and ef-ficiencies, and product information exchange. Among the key challenges SRM seeks to solve are the move by firms to outsource non-core processes to shrink internal costs and construct more agile, scalable, and fast flow pro-

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cesses; gain competitive edge by using supplier core competencies to shrink lead times, participate in collaborative design, accelerate innovation, and shrink risk; and integrate and streamline demand and replenishment functions to guarantee product availability.

7. When economic or market conditions are unstable, what methods of purchase order release will buyers pursue?Answer:When there is economic or marketplace instability, buyers need to determine how strategic the items to be purchased are. For MRO goods and services and non-strategic items, buyers will pursue a purchase on an as-needed basis. This method will reduce cash flow and the possibility of overstocks. For strategic items buyers could utilize a buying schedule based on the purchasing require-ments schedule generated by their ERP systems. Another method would be for buyers to engage in medium- to long-term contract buying n which the buyer and supplier seek some form of contract to agree on price, quantities, quality, and delivery. Some reasons why purchasers will use forward buying are to hedge against possible price increases, attain economies of scale through quantity discounts and favorable transportation rates, guarantee sup-plier capacities, and guard against events such as materials shortages or labor disputes. Finally, buyers could engage in speculative buying to lock in prices in anticipation of a price increase. A decision to use this technique, which en-tails high risk, requires the authorization of purchasing management and should support company objectives.

8. What main performance measurements can buyers use to validate the performance of their suppliers?Answer:The common measurements are: Quality metrics such as number of lots rejected/number of lots received,

dollar value of rejected items/total dollar value of shipments, number of parts received/number of parts rejected, and parts per million defective.

Delivery metrics such as PO request date versus actual ship date, supplier promise date versus actual ship date, supplier promise date versus actual receipt date, and sum of actual delivery points earned /sum of possible delivery points (where points equal brackets of days late tied to specific points).

Quantity received to quantity ordered. How flexible suppliers are to handle order changes and expediting. How closely supplier pricing matches benchmark or competitive pricing. How closely suppliers are compliant to contract metrics such as order

accuracy, purchase order cycle time, inventory investment, cost reduction/value analysis, inbound freight cost reduction, flexibility, and technical competence.

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9. Describe the various purchasing methods available to buyers.Answer:The various methods of purchasing can be described as follows: Discrete purchase order. The most commonly used method consists of

the buyer generating a single purchase order to buy goods or services. Often, the process begins with a requisition. After research, sourcing, and price negotiation, the buyer generates a one-time buy purchase order that is then sent to the selected supplier.

Online requisitioning system. This method utilizes a computer system available to all employees. The requisition is entered into the system and is automatically presented to the buyer, which in turn, uses the system to release the purchase order to the supplier.

Procurement cards (P-cards). In this method of purchasing, buyers are presented with a purchasing card which acts much the same way as a personal credit card. The card owner makes the buying decision, bypassing the purchasing department altogether. This method works well for low-volume, inexpensive purchases.

Internet (B2B). In this method, buyers use Internet commerce capabilities to source, price compare, submit requisitions, generate purchase orders, and transfer funds. Buyers can use such devices as buying exchanges, auctions, and online catalogs.

Online/automated ordering systems. In this method, direct electronic links are established between buyer and seller through EDI, auto fax, or the Internet. Normally used with a blanket or contracted agreement or for low-value, repetitive items, this method permits buyers to place orders directly into a supplier’s customer order system.

Blanket purchase order. This type of purchase order contains a fixed quantity of units for specific items or total value amount that extends over a period of time. When the quantity or value amount specified by contract on the order is reached, the order expires. Blanket orders work best when the quantity or value amount is known.

Requirements contract. In this method, the buyer commits to purchase a fixed percentage of the company’s requirements in exchange for quality, price, availability, and delivery considerations. Normally, the buyer will provide the supplier with a short-range rolling schedule as well as authorization to buy for a specific number of forecasted periods.

Direct-ship purchase order. Often, customers wish to purchase products or large quantities the seller does not inventory. Instead of turning the order away, the products are ordered from a supplier, which in turn, ships directly to the customer, bypassing normal in-house receiving, material handling, and shipping.

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10. What are the objectives of strategic supplier sourcing?Answer:The main objectives of strategic supplier sourcing include the following: Establishing close, collaborative relationships with key suppliers.

Strategic sourcing involves finding and building ongoing relationships with trading partners that account for the majority of an organization’s purchasing funds and that provide goods or services that are critical in the final production and delivery of the final product or service.

Ensuring reliable quality and delivery of materials. The goal of strategic sourcing is to increase the availability of high-quality materials and components as organizations work closely with supplier manufacturing and delivery processes. This objective can be accomplished by a close analysis of spend patterns and the profile of suppliers indicating volume, variety, and percentage of sales.

Reducing supply risk. Strategic sourcing seeks to ensure mechanisms that reduce supply risks such as those posed by competitors and suppliers, and by interruptions caused by natural disasters and other non-business events.

Establishing a smaller, more flexible, responsive supplier base. Strategic sourcing works best when buyers are able to work with a small number of suppliers that are interested in developing deep, collaborative partnerships based not on price advantage or marketplace leverage, but rather on processes that are mutually beneficial and provide each party with a distinct competitive advantage. In addition, a smaller number of suppliers will assist in streamlining the supply chain.

Closely integrating supplier input on product development and innovation. Strategic sourcing seeks to establish a collaborative and participative environment where shared core competencies enable product development and innovation that is far ahead of the competition.

Reducing external spending. Strategic sourcing seeks the establishment of long-term contracts locking in price and transportation costs. It is also cross-functional, whereby departments can assemble teams to combine purchasing requirements to reduce design and acquisition costs.

Reducing transaction costs. Strategic sourcing enables buyers to leverage computerized tools that facilitate order generation, follow-up, receiving, and payment.