1. Introduction

Activities in operations : product R&D , process R&D, sourcing **, supply chain planning **, logistics and distribution, sales and marketing, customer service Procurement = purchasing = material/supplier management (very similar)Some supply challenges include (1) increased outsourcing, reliance on suppliers to respond to end-customer needs (2) Greater dependence on suppliers for design and complete subassemblies and subsystems (3) increased global competition (4) development of new product technologies (5) evolving information systems (6) strategic supplier relationships Decreases in materials cost lead to greater profit improvements than same increase in salesEffective purchasing and supply mgmt enabled enterprises to thrive by providing risk-free, cost-effective, value-adding supply chains which support all the enterprises activities

2. Purchasing Strategy

Some competitive advantages are visible to competitors such as marketing and production (quality, price, product positioning, etc.) However, some things can be hidden such as R&D and purchasing. Ways in which purchasing can me act as a competitive advantage are Privileged supplier relationship/ development TCO value generation across business system looking for non-value adding processes and simplifying/reorganizing then. Unique capabilities

How can supply an supply chain contribute effectively to organizational objectives and strategies? How can the organizational objectives and strategy reflect contribution/opportunities offered in the supply chain?

Phase I: Classification of products1. Strategic (high profit impact, high supply risk)-> Conduct market and risk analysis, price forecast, optimization2. Bottle neck (low profit impact, high supply risk)-> Without this component, it will be difficult to manufacture the product. Find a substitute, or switch to in-house production-> Conduct market analysis and decision models 3. Leverage (high profit impact, low supply risk)-> Have leverage to find the best supplier you want. Value analysis, improve value and squeeze cost to the mainmen.-> Conduct vendor and value analysis, price forecast4. Non-critical (low profit impact, low supply risk)-> Conduct simple market analysis, inventory optimization

Phase II: Market Analysis Compare supplier strength vs company strengths Company factors: purchasing volume VS capacity of main units, demand vs capacity growth, capacity utilization, market share, profitability, cost and price structure, cost of non delivery, own production capability or integration depth, entry cost for new sources vs cost inhouse, logistic, Supplier strength: market size vs supplier capacity, market vs capacity growth, competitive structure, capacity utilization vs bottleneck risk, ROI or ROC, cost and price structure, break-even stability, uniqueness of product and technology stability, entry barrier, logistic situation

Suppliers: Analyze the relationship with a specific supplier. Will the supplier continue to be able to satisfy technical, logistical requirement and still be competitive

Phase III: Strategic position I dont understand this

Phase IV: Strategic implication

Lean purchasing reduces purchased material inventory by ~30-35%, improve csh flows, material availability, and achieves on time supplier delivery. To implement it, need sophisticated information systems & communication with suppliers. Review the number of suppliers you have and find balance. Conduct A-B-C analysis. Ensure on time supplier delivery. Review lead times and complexity of ordering patterns.

4. Purchasing Organization

The purchasing organization structure strongly depends on business characteristics and situational factors. Can be centralized or decentralized.

Decentralized purchasing each unit is responsible for all purchasing decisions Centralized purchasing central purchasing department is responsible for all strategic and tactical purchasing decisions Line/staff organization both corporate and BU purchasing exist next to each other and divide responsibilities and activities Hybrid structure combination of the above three.. combining common requirements across operating units. Dif types of pooling: voluntary coordination, lead buyership, and lead design concept // both centralized dpt and decentralized BU Cross-functional sourcing teams - contract is done centrally by a commodity team. However, operational purchasing is decentralized.

Four areas for purchasing activities (1) sourcing and negotiation (2) purchasing research (3) operational support (4) administration

11. Risk Management

Top row asks who is handing production (within the company or outside)First column asks where is the production being done (local or internationally)In- source Outsource

DomesticWholly owned domestic operationDomestic operation owned by a third party

OffshoreWholly owned foreign operation owned Foreign operation owned by third party

Purchasing, sourcing, and procurement accounts for ~60% of companys total cost. This is huge! & therefore there is great potential for bottom line improvement

Sourcing must be strategic because (1) cost containment is fundamental (2) opportunity to drive innovation, quality, flexibility

Global sourcing brings many advantages (1) Cost/price (2) Access to technology (3) Quality (4) Access to only source available (5) Introduce competition to domestic suppliers (6) react to buying patterns of competitors (7) established a presence in a foreign market place

However, there are many barriers to global sourcing (1) Lack of understanding of international procedures (2) Lack of knowledge of documentation (3) Resistance to change (4) domestic market nationalism (5) Longer lead times (6) logistical, political, financial risks (7) lack of knowledge of foreign business practices (8) Language and cultural difference (9) Difficult negotiations (10) changes can be difficult

Can overcome these barriers by (1) Education and training (2) publicizing success stories (3) globally linked CAD systems (4) globally linked information systems (5) foreign suppliers with US based support personnel (6) Measurement and reward system that encourage worldwide sourcing (7) Use of third party agents or intermediaries

Risk is an undesirable consequence of uncertainty, it is variance. There are two types (1) operational risk which is a mismatch btw supply and demand, reducing expected profit (2) financial risk which is undesirable variability of realized profit flows Types of risks: lead time, disruption from disasters, fuel costs, material costs, exchange costs, customer demands, new technologies, process failures, quality, security High probability but lower impact. High impact but lower probability.

Hedging involves mitigating risks. There are two forms of this (1) Operational hedging is constructions in the processing network to reduce operational risks that may increase expected profits as well as reduce its variance (2) Financial hedging is constructions with financial instruments to reduce variance in profits

More types of risks, in global supply chains: disruptions, delays, systems risk, forecast risk, intellectual property risk, procurement risk, inventory risk, capacity risk

To engage in risk management(1) Identify all potential hazards Operational risk via activity view Innovation -> marketing sales commercial -> demand/supply -> production & distribution -> service Operational risk via resource view Tangible: property plant equipment asset, people, Intangible assets: Culture, policy, IP Environmental and background risks Competitive, natural, political

(2) Assess risk level of all hazards Create a probability VS impact graph

(3) Make a tactical risk decision This means developing a plan to mitigate against the risk & to react once the risk has occurred This involves risk preparedness (contingency plans), risk discovery (monitoring continuously, detection) and risk recovery

(4) Implement strategic risk mitigation actions Four generic hedging strategies include: Reserves & Redundancy Diversification and pooling Risk sharing and transfer Structured contracts: To control/modify product, financial, and information flow can define a set of rules through a contract. Modify financial terms to align incentives. Restrict physical flow or improve information flow. Contract must be verifiable and enforceable. Reducing or eliminating root causes of risk Financial hedging means using a financial instrument to mitigate risks.

Hedging demand risk with Options: Weather derivatives: When demand is correlated with weather conditions, demand risk can be mitigated through these

Forward contract: an agreement to buy or sell and asset at a predetermined price, within a specified future date

Forward buying: a commitment of purchase in anticipation of future requirement in certain lead times. Risk as the time btw procurement commitment and actual use of the requirement grows, uncertainties also increase Price its difficult to be certain that the price currently committed is reasonable compared to the actual price that would have been paid. Increases as lead time grows longer

Tailored redundance selects appropriate no. of suppliers based off max acceptable supply failure risk & failure risk profiles of individual suppliers