Chap 012
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CHAPTER 12 Procurement
Four Buying Situations • • • •
12-2
Routine order Procedural problem Performance problem Political problem
McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Cost trade-offs to Be Considered by the Purchasing Executive
12-3
Inventory carrying costs ±
Cost savings associated with volume buying*
* The savings associated with volume buying include: Lower per-unit purchasing prices Lower transportation costs Lower warehouse handling costs Lower order-processing costs Lower production lot quantity costs Lower stockout costs ± The costs of carrying inventory include: Capital costs associated with the inventory investment Inventory service costs (insurance and taxes) Storage space costs Inventory risk costs
McGraw-Hill/Irwin
Source: Douglas M. Lambert and Jay U. Sterling, “Measuring Purchasing Performance,” Production and Inventory Management Review 4, no.6 (June 1984), p. 52. Reprinted with permission from P&IM Review, June 1984. Copyright © 2001 1984 by T.D.A. Publications,Copyright Inc., Hollywood, FL.by The McGraw-Hill Companies, Inc. All rights reserved.
Reducing Ordering Costs Results in a Smaller Economic Order Quantity
12-4
Total cost
Annual cost (dollars)
Lowest total costs (EOQ) Inventory carrying costs
Ordering cost
Size of order McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Supplier Development Defined
12-5
A systematic organizational effort to create and maintain a network of competent suppliers and to improve various supplier capabilities that are necessary for the buying organization to meet its increasing competitive challenges.
McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Objectives of Systems Contracts and Stockless Purchasing
12-6
• • • •
Lower inventory levels. Reduce the number of suppliers. Reduce administrative cost and paperwork. Reduce the number of purchases of small dollar value and requisitions that purchasers have to handle. • Provide the opportunity for larger dollar volumes of business to suppliers. • Provide for timely delivery of material directly to user. • Standardize purchase items when possible.
McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Key Performance Measures • • • •
Price effectiveness Cost savings Workload Administration and control • Efficiency • Vendor quality and delivery
McGraw-Hill/Irwin
12-7
• Material flow control • Regulatory, societal, and environmental measures • Procurement planning and research • Competition • Inventory • Transportation
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Sourcing Value Chain
Create annual plan
• Goals and points of focus during the next year by category and in total
McGraw-Hill/Irwin
Develop requirements
• Item requirements by category across the user base
Develop sourcing strategy
• Strategy to leverage buying power and minimize total costs by category
Evaluate and select suppliers
• Targeted suppliers and negotiation and contracting
12-8
Procure materials
• Systems, procedures, and skills to support strategy and execute efficiently
Manage supplier relationships
• Performance metrics, benchmarks, and controls to ensure improvement
Source:Matthew G. Anderson and Paul B. Katz, “Strategic Sourcing,” The International
Copyright © 2001 Management by The McGraw-Hill Companies, Inc. All rights reserved. Journal of Logistics 9, no. 12 (1998), p. 7.
Types of Relationships
12-9
Partnerships Arm’s length
McGraw-Hill/Irwin
Type I
Type II
Type III
Joint venture
Vertical integration
Source: Douglas M. Lambert, Margaret A. Emmelhainz, and John T. Gardner, “Developing and Implementing Copyright © 2001 by The McGraw-Hill Companies, Inc.7,All reserved. Supply Chain Partnerships,” The International Journal of Logistics Management, Volume No.rights 2. (1996), p.2.
The Partnering Process Drivers Compelling reasons to partner
Decision to create or adjust partnership
Drivers set expectation of outcomes
Components Joint activities and processes that build and sustain the partnership
Outcomes The extent to which performance meets expectations
McGraw-Hill/Irwin
12-10
Facilitators Supportive environmental factors that enhance partnership growth
Feedback to: Components Drivers Facilitators
Source: Douglas M. Lambert, Margaret A. Emmelhainz, and John T. Gardner, “Developing and Implementing Supply Copyright by The McGraw-Hill Companies, Allp.4 rights reserved. Chain Partnerships,” The International Journal©of2001 Logistics Management, Volume 7, No. 2.Inc. (1996).
Four Buying Situations • • • •
12-2
Routine order Procedural problem Performance problem Political problem
McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Cost trade-offs to Be Considered by the Purchasing Executive
12-3
Inventory carrying costs ±
Cost savings associated with volume buying*
* The savings associated with volume buying include: Lower per-unit purchasing prices Lower transportation costs Lower warehouse handling costs Lower order-processing costs Lower production lot quantity costs Lower stockout costs ± The costs of carrying inventory include: Capital costs associated with the inventory investment Inventory service costs (insurance and taxes) Storage space costs Inventory risk costs
McGraw-Hill/Irwin
Source: Douglas M. Lambert and Jay U. Sterling, “Measuring Purchasing Performance,” Production and Inventory Management Review 4, no.6 (June 1984), p. 52. Reprinted with permission from P&IM Review, June 1984. Copyright © 2001 1984 by T.D.A. Publications,Copyright Inc., Hollywood, FL.by The McGraw-Hill Companies, Inc. All rights reserved.
Reducing Ordering Costs Results in a Smaller Economic Order Quantity
12-4
Total cost
Annual cost (dollars)
Lowest total costs (EOQ) Inventory carrying costs
Ordering cost
Size of order McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Supplier Development Defined
12-5
A systematic organizational effort to create and maintain a network of competent suppliers and to improve various supplier capabilities that are necessary for the buying organization to meet its increasing competitive challenges.
McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Objectives of Systems Contracts and Stockless Purchasing
12-6
• • • •
Lower inventory levels. Reduce the number of suppliers. Reduce administrative cost and paperwork. Reduce the number of purchases of small dollar value and requisitions that purchasers have to handle. • Provide the opportunity for larger dollar volumes of business to suppliers. • Provide for timely delivery of material directly to user. • Standardize purchase items when possible.
McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Key Performance Measures • • • •
Price effectiveness Cost savings Workload Administration and control • Efficiency • Vendor quality and delivery
McGraw-Hill/Irwin
12-7
• Material flow control • Regulatory, societal, and environmental measures • Procurement planning and research • Competition • Inventory • Transportation
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Sourcing Value Chain
Create annual plan
• Goals and points of focus during the next year by category and in total
McGraw-Hill/Irwin
Develop requirements
• Item requirements by category across the user base
Develop sourcing strategy
• Strategy to leverage buying power and minimize total costs by category
Evaluate and select suppliers
• Targeted suppliers and negotiation and contracting
12-8
Procure materials
• Systems, procedures, and skills to support strategy and execute efficiently
Manage supplier relationships
• Performance metrics, benchmarks, and controls to ensure improvement
Source:Matthew G. Anderson and Paul B. Katz, “Strategic Sourcing,” The International
Copyright © 2001 Management by The McGraw-Hill Companies, Inc. All rights reserved. Journal of Logistics 9, no. 12 (1998), p. 7.
Types of Relationships
12-9
Partnerships Arm’s length
McGraw-Hill/Irwin
Type I
Type II
Type III
Joint venture
Vertical integration
Source: Douglas M. Lambert, Margaret A. Emmelhainz, and John T. Gardner, “Developing and Implementing Copyright © 2001 by The McGraw-Hill Companies, Inc.7,All reserved. Supply Chain Partnerships,” The International Journal of Logistics Management, Volume No.rights 2. (1996), p.2.
The Partnering Process Drivers Compelling reasons to partner
Decision to create or adjust partnership
Drivers set expectation of outcomes
Components Joint activities and processes that build and sustain the partnership
Outcomes The extent to which performance meets expectations
McGraw-Hill/Irwin
12-10
Facilitators Supportive environmental factors that enhance partnership growth
Feedback to: Components Drivers Facilitators
Source: Douglas M. Lambert, Margaret A. Emmelhainz, and John T. Gardner, “Developing and Implementing Supply Copyright by The McGraw-Hill Companies, Allp.4 rights reserved. Chain Partnerships,” The International Journal©of2001 Logistics Management, Volume 7, No. 2.Inc. (1996).
