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CHAPTER 2- PURCHASING
MANAGEMENT
Principles of Supply Chain Management:
A Balanced Approach
Prepared by Daniel A. Glaser-Segura, PhD
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Prof essional Publishing2
Learning Objectives
You should be able to:– Describe the role of purchasing and understand its impact on
an organization’s competitive advantage.
– Have a basic knowledge of manual purchasing and e-procurement.
– Understand and know how to handle small value purchase orders.
– Understand sourcing decisions and the factors impacting supplier selection.
– Understand the pros and cons of single versus multiple sourcing.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Prof essional Publishing3
Learning Objectives- Cont.
– Describe centralized, decentralized, and hybrid purchasing
organizations and their advantages.
– Describe and understand how globalization impacts,
purchasing, and describe and understand the opportunities and
challenges of global sourcing.
– Understand total cost of ownership and be able to select
suppliers using more than unit price alone.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Prof essional Publishing4
Chapter Two Outline
• The Role of Purchasing in an Organization
• The Purchasing Process
• Sourcing Decisions: The Make-or-Buy Decision
• Roles of Supply Base
• Supplier Selection
• How Many Suppliers to Use
• Purchasing Organization: Centralized versus
• Decentralized Purchasing
• International Purchasing/Global Sourcing
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Prof essional Publishing5
Introduction
Purchasing-Obtaining merchandise, capital equipment; raw materials, services, or maintenance, repair, and operating (MRO) supplies in exchange for money or its equivalent.
Merchant Buyers-wholesalers and retailers who purchase for resale.
Industrial Buyers-purchase raw materials for conversion, services, capital equipment, & MRO supplies.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Prof essional Publishing6
The Role of Purchasing in an
Organization
The primary goals of purchasing are:1. Ensure uninterrupted flows of raw materials at the lowest total cost,
2. Improve quality of the finished goods produced, and
3. Optimize customer satisfaction.
Purchasing contributes to these objectives by: – Actively seeking better materials and reliable suppliers,
– Work closely with strategic suppliers to improve quality materials, and
– Involving suppliers and purchasing personnel in new product design and development efforts.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Prof essional Publishing7
The Purchasing Process
Manual Purchasing-Older system, prone to duplication of effort and error
Step 1-Material Requisition/Purchase Requisition- stating product, quantity, and delivery due date are clearly.
Step 2- The Request for Quotation (RFQ)- Buyer identifies suppliers & issues a request for quotation (RFQ).
Step 3- The Purchase Order (PO)- The purchase order is the buyer’s offer & becomes a binding contract when accepted by supplier.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Prof essional Publishing8
The Purchasing Process- Cont.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Prof essional Publishing9
The Purchasing Process- Cont.
Electronic Procurement (e-Procurement)
Step 1- Material user inputs a materials requisition- relevant information such as quantity and date needed.
Step 2- Materials requisition submitted to buyer- at purchasing department (hardcopy or electronically).
Step 3- Buyer assigns qualified suppliers to bid- Product description, closing date, & conditions are given.
Step 4- Buyer reviews closed bids & selects a supplier
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Prof essional Publishing10
The Purchasing Process- Cont.
Advantages for the e-Procurement System
– Time savings
– Cost savings
– Accuracy
– Real time
– Mobility
– Trackability
– Management
– Benefits to the suppliers
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Prof essional Publishing11
Small Value Purchase Orders
Processing costs can be substantial. Small value purchases should be minimized through:
•Procurement Credit Card/Corporate Purchasing Card
•Blank Check Purchase Orders
•Blanket or Open-End Purchase Orders
•Stockless Buying or System Contracting
•Petty Cash
•Standardization & Simplification of Matls & Components
•Accumulating Small Orders to Create a Large Order
•Using a Fixed Order Interval
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Prof essional Publishing12
Sourcing Decisions: The Make-or-
Buy Decision
• Outsourcing -buying materials and components from suppliers
instead of making them in-house. The trend has moved toward
outsourcing.
• Backward integration refers to acquiring sources of supply
• Forward integration refers to acquiring customer’s operations.
The Make or Buy decision is a strategic decision.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Prof essional Publishing13
Sourcing Decisions: The Make-or-
Buy Decision- Cont.
Reasons for Buying or Outsourcing
• Cost advantage: Especially for components that are non-vital to the organization’s operations.
• Insufficient capacity: A firm may be at or near capacity.
• Lack of expertise: Firm may not have the necessary technology and expertise.
• Quality: Suppliers have better technology, process, skilled labor, and the advantage of economy of scale.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Prof essional Publishing14
Sourcing Decisions: The Make-or-
Buy Decision- Cont.
Reasons for Making
• Protect proprietary technology
• No competent supplier
• Better quality control
• Use existing idle capacity
• Control of logistics- lead-time transportation,
and warehousing cost
• Lower cost
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Prof essional Publishing15
Sourcing Decisions: The Make-or-
Buy Decision- Cont.
The Make-or-Buy Break-Even Analysis
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Prof essional Publishing16
Roles of Supply Base
Supply Base- suppliers that a firm uses to acquire its materials, services, supplies, and equipment.
Firms emphasize long-term strategic supplier alliances consolidating volume into one or fewer suppliers, resulting in a smaller supply base.
Preferred suppliers provide:
– Early supplier involvement- Information on the latest trends in materials, processes, or designs
– Information on the supply market
– Capacity for meeting unexpected demand
– Cost efficiency due to economies of scale
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Prof essional Publishing17
Supplier Selection
– Product and process
technologies
– Willingness to share
technologies and
information
– Quality
– Cost
– Reliability
– Order System and cycle
time
– Capacity
– Communication capability
– Location
– Service
The process of selecting suppliers, is complex and should be based on multiple criteria:
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Prof essional Publishing18
How Many Suppliers to Use
Reasons Favoring a Single Supplier
• To establish a good relationship
• Less quality variability
• Lower cost
• Transportation economies
• Proprietary product or process
• Volume too small to split
Reasons Favoring More than One Supplier
• Need capacity
• Spread risk of supply interruption
• Create competition
• Information
• Dealing with special kinds of business
Single-sourcing- a risky proposition. Although trends favor
fewer sources, avoid single source.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Prof essional Publishing19
Purchasing: Centralized vs.
Decentralized
Purchasing Organization dependent on many factors, such as market conditions & types of materials required.
– Centralized Purchasing- purchasing department located at the firm’s corporate office makes all the purchasing decisions.
– Decentralized Purchasing- individual, local purchasing departments, such as plant level, make their own purchasing decisions.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Prof essional Publishing20
Purchasing: Centralized vs.
Decentralized
Advantages- Centralization
– Concentrated volume-leveraging purchase volume
– Avoid duplication
– Specialization
– Lower transportation costs
– No competition within units
– Common supply base
Advantages- Decentralization
– Closer knowledge of requirements
– Local sourcing
– Less bureaucracy
A hybrid purchasing organization- both decentralized at
the corporate level and centralized at the business unit
level may be warranted.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Prof essional Publishing21
International Purchasing/Global
Sourcing
Global sourcing-
– Opportunity to improve quality, cost, and delivery performance.
– Requires additional skills and knowledge to deal with
international suppliers, logistics, communication, political
environment, and other issues.
• Import broker or sales agent- performs service for a fee.
• Import merchant- buys and takes title to the goods.
• Trading company- imports & carries wide variety of goods.