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org

Purchasing and the

Supply-Chain
Market
Assessment Supplier Bid
Selection Evaluation
Business Proposal
Requirement
Need Evaluation
Definition
Contract
preparation Contract
Procurement Management
Strategy
System
Development

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 Supply Chain for a Florist
Home Commercial
customers customers

Florist

Packaging Local Arrangement Consumables &

delivery materials Maintenance
service

FedEx Flowers market Internet

delivery local/ services
international

Required for facilitating goods Required for implicit services

Required for explicit services Required for supporting facilities

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 Purchasing objectives
Buy to requirements so that
• Inventory is available when, where and in wanted form
(minimum effort to use)
• Least cost for quality
• Optimise purchasing department/function - overheads,
accumulated costs, cash flow, warehousing & timely delivery

The BUYER is the KEY - responsible for researching, placing

and progressing orders.

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 Questions
• Why is purchasing for a Channel Tunnel project different from
purchasing for Tesco or Gap ?
• Why is purchasing for ASDA different from purchasing for Harrods?
• What are the purchasing requirements of the Metropolitan Police?
• Why is the futures market important for Nestle or Kelloggs?
• What are the advantages of centralised vs. decentralised purchasing
functions?
• The know-how: knowledge-base, competencies, the skills of the
buyer for www.dabs.co.uk?
• What is the strategic and operational contribution of
purchasing & supply?

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A national Electric Power company

• industry: generation & distribution

utility
• size: £22 billion revenues
• capacity: 39,000 megawatts
• electricity sales: approx 200m. megawatt hrs
• customers 5.9 million
• spend £3 billion
• transmission lines: 8,000 miles
• Service territory: 197,500 sq. miles
• Geographic Area: England & Wales
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 What are the purchasing
requirements & problems of
• An NHS Trust?
• Airbus industries?
• Virgin Trains?
• Barratts Homes?
• Unilever Detergents Division?
• Royal Air Force?
• www.dabs.co.uk ?
• Pret à Manger?
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What research goes into purchasing?
• Supplier investigation: competencies, capacities, credit
rating, service quality
• Our dependency on particular suppliers
• Competitor information
• Advising suppliers on how to meet our quality requirements
• Economic forecasting & the supplier
• Purchase targets & their attainment
• Financial targets & our profit plan
• Value analysis - of buying processes & items we buy
• Our quality/service requirements & control methods

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What research goes into purchasing?
• Supplier investigation: competencies, capacities, credit rating, service
quality
• Our dependency on particular suppliers
• Competitor information
• Advising suppliers on how to meet our quality requirements
• Economic forecasting & the supplier
• Purchase targets & their attainment
• Financial targets & our profit plan
• Value analysis - of buying processes & items we buy
• Our quality/service requirements & control methods

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 Procurement Role & SCM Core
Processes
• identify needs: materials, products or services
• strategic buying - futures, options, hedging, stock-piling
• supplies/supplier intelligence, selection & negotiation
• contract development & POP
• replenishment Planning - expediting materials & services
• maintaining catalogues
• supplier performance measurement
• transportation & logistics
• procurement systems What % of supply
chain processes are
• diversity spend management
•centralised?
• vendor-managed inventory •decentralised
• JIT •automated?
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Purchasing procedures & methods?
• Instructions for contract
– The terms, the detail, cancellation & penality issues, packaging, export
import docs, insurance, transport, contract security, credit control,
receipt arrangements, quality & data recording
• Catalogues, drawings/specifications.
– CAD , bill of materials & MRP1 - the detail of what we order
– Catalogue changes - part change & the ripple effect
– Deletion or launch of products
• POP:
– Requests, authorisations, purchase orders, GRNs, invoices, payments.
Call-offs from orders.
– Segmentation of duties, physical verifications
– SOP, forecasting & POP

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Purchasing procedures & methods?
• Purchasing by commodity group
– Knowledge of the buyer
– Price leverages
– Data collection & analysis
• Exception for action & progress reports for planning
• Audit & monitoring procedures: wastage,
obsolescence, theft, stock-outs. Pareto 80/20,
warehousing costs

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 Procurement - Key Skills?
1. Business awareness and strategic procurement
2. Developing & managing procurement systems
3. Purchasing techniques and methods
4. Supplier evaluation and selection
5. Risk and value management
6. Contract management Legal aspects of procurement (contracts)
7. Purchasing negotiations
8. Quality management
9. Service level agreements
10. Ethical behaviours in procurement
11. Relationship management (client-server)
12. Performance evaluation of suppliers & self
13. Change management

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 Buying and negotiation?
• Supplier partnerships vs. competitive (least cost) buying
• Negotiation skills
– researching sources, assessing sources, customer relationships
management, win-win & mutual respect.
– Methods to keep costs down - tendering, WWW & B2B, Buying
portals
– Negotiate: preparation, the negotiation, completing the buy.
– Attention to detail
– Humour, patience, self-control, Avoid dramatics
– Analytical approach to problems
– Questioning & listening
– Verification - contract formulation & testing

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 Supply Chain Management Drivers
Improve customer service
Improve order management
corporate Growth
Improve asset use
Improve demand planning
Improve warehouse/distribution activities
Accelerate “cash to cash” cycle
Supplier/Supply base management
Strengthen partnerships
Regulatory compliance

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 Planning, logistics & zero working capital

A R
Strategic Sales Order
c e
Forecast
c c
Demand
o e
Pull Pull u i
Supplier
n v
owned & Point of Use MTO Distributor/Customer
t a
managed s b
Point of Use ContractTO Distributor/Customer
l
strategic e
Point of Use MTS Distributor/Customer
inventory
Optimize Flow Manufacturing
• Capacity Min/Max Replenishment Common Inventory

• Daily Through-put
Accounts
• J.I.T. for Common JIT JIT Payable BANK
Parts
Supplier

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 Information sharing, dataflows & feedback
Supplier
Rules configuration Real time available
Management
to promise
Delivery on
At Point of
Demand
Use

J.I.T.

Continuous flow Interprise

manufacturing Visibility First Promised
WIP Inventory
Deliver Date

Correct
Distributor Supplier Configuration

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 Integrating SCM Applications

Integration of Process and Technology

functional areas:
Available to
Production Promise  accounts payable
Optimization Advanced  inventory
Planning
 procurement
Purchasing
ERP  Performance indicators for SCM
Engines Optimise
- Oracle Order  material sources: track/measure
Management supplier performance, scorecard
- SAP
Export / Import them
& Freight
Management  spending patterns/supplier
Forecasting
Warehousing
& Distribution
 materials handling - available
and Demand when/where needed
Planning
 inventory levels - reduce out-of-
stock or overstock

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 Supply/Procurement Issues
Resource Usage
Performance objectives

Market competitiveness
Quality make or buy (contract out)
Speed market-based purchasing?
Reliabiity supply partnerships?
Flexibility
Supply network
Cost relationships
Capacity
Process technologies
Decisions buyers market
sellers market

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 Consider
• the detail of B2B system interactions
• planning, design, control of information &
materials flows along the SC to meet
customer requirements efficiently, now &
future.
• methods of coordination in the SC
• how can the SC be improved 'structurally?
• what technology e.g. EDI, WWW/internet has
affected the development of SCM?

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 Tiered supply relationships
• a company can trade with
– 1st tier - immediate suppliers &
– 2nd tier - suppliers of suppliers
– end-customers
Consider % balance of each
• Non-exclusive relationships e.g. Firm C - may single
source (exclusive supply) or multi-source item X
Exaluate relationships
• close & intimate? Make or contract in (outsource)?
• For what items: strategic, trivial?
• Many suppliers or a few?
• Keiretsu (collaborative) vs. Transactional (arms-length)

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 Flows of products, services & information
Supply side Demand side
Company A
2nd-tier 1st-tier 1st-tier 2nd-tier
suppliers suppliers customers customers

Company B

Down stream
Up stream

Company C X

X
X X For Company A
Internal supply network
Immediate supply network
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Total supply network
 Analysis of supply relationships
Long term
virtual
Vertical
operation
integration
Close - few

Market relationship

Partnership
suppliers
Type of inter- firm contact

supply relationship

Traditional
Transactional - many

market supply

Virtual
spot trading
suppliers

Resource scope
Do nothing Do everything
Character of internal operations activity
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 23

Aggregate Plan  MRP1

Aggregate
MRP2
Plan (product groups)
Firm
orders Forecast
random
Master orders
production
schedule
Design Plan how many + when + where we
(MPS)
changes will build each finished product.

Bill of Inventory
materials MRP1
data

Control Stock
Reports movements
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Distribution Channels & Logistics
• distribution channels:
routes & methods from producer 
distributors customer
• Logistics management:
synonymous with SCM?
• narrowly defined: concerned with
inbound transportation, storage
(warehouse) & outbound distribution.

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SC Partnership - Shared information

• e.g. production rate (as % of capacity)

• on-hand inventory
• inventory in transit
• advance ship notices
• forecasts
• damaged goods
• actual vs. delivered amounts
• real-time alerts
• planned product & engineering changes
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 Measuring P&S contribution to Corporate performance
• ‘suppliers’ include contractors for work & services
• ‘performance monitoring’ = measuring supplier ability to comply with
contractual obligations & delight (P&S is a supplier)
Balanced Scorecard + "SMART" objectives:
• Proactive & visible alignment of P&S strategy & operations to fit corporate position
• the basics contribute to value-add (right goods/services, right place, right time, right
price).
• ample •evidence
Product if Pquality
& S is delivering key objectives
• post contract monitoring - vendor rating
• MTBF (Mean Time to Fail)
What corporate objectives?
• % of incoming rejects (delivery
• innovative products/services - differentiation & advantage
accuracy)
• control over costs thru. systems •Specific
• development
• supplier warranty claims& R&D
•Measurable
• Audit
• appraisals service
of new quality (against agreed
supply chains.
SLAs)
• reputation is not at risk by activities within the SC •Achievable
• call-out & service response times •Realistic
• performance against agreed •Time-bound
delivery lead times
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Some yardsticks of performance (P&S Function & Suppliers?)

• quality of supplier performance - fundamental to contract management

• relationships management
• evaluating the supply base & supplier profiles e.g. growth, market share
& £ performance
• transaction processing costs, prices & cost avoidance + contribution to
revenue targets
• impact on spend: ‘controlled’, ‘directly influenced’, ‘not yet targeted’
• year on year improvement
• no. of suppliers & their rationalisation (single sourcing vs. competitive
sourcing)
• robust, effective procurement systems + eProcurement
• no purchasing fraud
• price benchmarking - comparing similar organisations
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 Measuring Supply-Chain Performance

• Stock Turnover = Cost of items sold .

Average aggregate inventory value
Delivery
Quality • Weeks of Supply = Avg. aggregate inventory value
Time cost of items sold/week
Cost

Company report states costs of goods sold for year = £160 m. +

total average inventory (prodn. materials + WIP) = £35 m.
usual stock turn ratio = 10.
What is this year’s stock turnover ratio?
What does it mean?
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Supply-Chain Performance - answer

Stock Turnover
= Cost of goods sold/Average aggregate inventory value
= £160/£35
= 4.57

• stock turnover has dropped from 10 to 4.57

• inventory is not turning over as quickly
• Compare with the industry average

See also value density

• the value of an item per unit. A significant measure when

deciding where items should be stocked
– geographically
– how they should be shipped

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 Strategic alliances
Part Qty Description Supplier
Number
Doc-00341 1 Assembly and use Salleramics
instructions for valve kit
Chas-00798 1 Mechanical valve parts Flor plan Ltd
Sen-00332 2 Sensor specification Florplan Ltd
Con-00544 1 control module with Florplan Ltd
interface kit
Pack-00456 1 Packaging specification Salleramics

• Joint SCM improvement objectives

– share/feedback demand information
– MURA, quality, reliability, speed, JIT replenishment, costs,
security
• 1st & 2nd tier suppliers read/write permission to enter BOMs,
enter new suppliers, enter alerts, update status, acknowledge
requests, view reports etc?

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 Outsourcing?
moving a firm’s internal activities (production & service delivery)
to outside providers. Why do it? Drivers

• Core competencies, stick to the knitting. No strategic expertise loss

• Improvement - contractor is more competent, reliable, high quality,
price/cost effective, release of management time
• Finance: releases internal assets. Out-source costs are less than or equal
to DIY costs

• Short term revenue gains - selling off fixed to out-source agent

• Specialist labour market - cannot hire expert staff we need.

• No expected loss of flexibility or growth potential
• WHAT ARE THE PROBLEMS?
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Logistics & Air Force Operations

Brunei

Australia

Other Detachments: Thailand, Indonesia, Bangladesh, N.

Zealand
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• before landing, radio defect symptoms to control
• control analysis/troubleshoot
• identify parts for indent
• trigger pick items at warehouse
• apply FIFO priority
• issue movement update
• collect defect items  Repair shop
• check repair status
• tracking global assets & freight
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 - Item Data creation
- Endorse requirement,
- Funds allocation
- PO release Provisioning(MRP)

- FMS or commercial Procurement

Disposal - R for Quote - PO - Pay’t
Usage
-Inspect
-accept & locate
-reject  quarantine/claim
-wholesale/retail level
Warehousing
Store & Issue
•Documentation
•breakage
•System fulfillment,
•issue & acknowledge Distribution
•stock take

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 Gems of PO Receiving
• how goods are received can be a headache
• receiving problems are credit/payment problems
• errors & confusions cause delays & more processing
• Transactions on goods received:
– correct Order Ref, quantity, specification & pricing
– Items shipped match PO & invoiced quantity?
– split shipments - item consolidation? How?
– reaction to shortage
• What % of invoices are paid via auto-pay?
• When do we have to pay?
• If it is valuable someone will steal it !!!!

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 Segregation of Duties & Fraud
No one individual can influence purchasing outcomes to own advantage or has responsibility
for more than one of

• specification/requisition process & authorisation

• supplier selection : tender lists & receipt, short-listing, negotiation parties
• contract award: deciding the supplier; authorisor of contract/order
• goods received: checking exact order received & to be paid for
• payment authorisation: signing off invoices & setting system tolerances

Control Methods
• procurement procedures, processes & policies (incl. ethical code re-transparency &
declaration of interest).
• risk analysis
• random audits of different contracts & procurement projects.
• financial limits e.g. open-to buy, how much each buyer can commit
• disciplinary & whistle blowing policies
• rotations: buyers not too close to favourite suppliers

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 eBusiness - B2B
• $ value of transactions over the Internet? B2B, B2C?
• significant channel for purchasing
• MNCs can get best prices without using open eMarketplace.
• growth in Intranet B2B applications installed & operational
• EDI (point to point) still an important re-volume of B2B transactions
• Fax & email is common
• online B2B portals (eMarketplaces) offer
– Supplier/supplies intelligence (specialist groupings)
– opportunities/collaborations e.g. networked participants
(SMEs? Hospitals) to combine spend & bargaining volume.
– potentially lower buying costs & operating efficiencies

NHS Purchasing & Supply Agency http://www.pasa.doh.gov.uk/

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 Inventory at Different
Stocking Points

Raw Work in Finished

materials process goods

Supplier Manufacturing plant Distribution center Retailer

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 What is a Supply Chain?
• Chain:
of processes, transactions & information that takes
product or service from suppliers thru. manufacturing &
distribution to the end consumer.
• Network:
a group of organisations in a market-place that interact to
buy, sell, deliver goods and services (client-server
processes & activities). Generally B2B transactions (not
retail B2C).
• Server aims to delight & add value to each client & so the
end customer.
• Failure to receive supplies on time can --> problems
– cash flow - overstocking - obsolescence

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 Supply Chain Dynamics for
Facial Tissue
Package supplier’s
weekly orders to
9,000 – cardboard supplier
Manufacturer’s
weekly orders
to package
7,000 – Retailers’ supplier
Order Quantity

daily orders to
manufacturer
Consumers’
5,000 – daily
demand

3,000 –

0–

Time 40
Materials Management
FG storage

Transformation
process and WIP
storage

Purchasing
domain of
responsibility

Chocolate Maintenance
Egg Sugar Flour
chips services
supplier supplier supplier
supplier supplier

RM storage
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 Materials Management

FG storage

Production domain
of responsibility
Transformation
process and
WIP storage

Purchasing
domain of
RM storage responsibility

Chocolate Maintenance
Egg Sugar Flour
chips services
supplier supplier supplier
supplier supplier

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Materials Management

FG storage

Transformation
Production domain
process and
of responsibility
WIP storage

Purchasing
domain of
RM storage responsibility

Chocolate Maintenance
Egg Sugar Flour
chips services
supplier supplier supplier
supplier supplier

43
 Materials Management
Supermarket A Supermarket B
distribution center distribution center

Distribution FG storage
domain of Transportation
responsibility services supplier

Transformation
Production domain
process and
of responsibility
WIP storage

Purchasing
domain of
RM storage responsibility

Chocolate Maintenance
Egg Sugar Flour
chips services
supplier supplier supplier
supplier supplier

44
Materials Management
Supermarket A Supermarket B
distribution center distribution center

Distribution
Transportation
domain of
services supplier
responsibility

FG storage

Transformation
Production domain
process and
of responsibility
WIP storage

Purchasing
domain of
RM storage responsibility

Chocolate Maintenance
Egg Sugar Flour
chips services
supplier supplier supplier
supplier supplier

45
 Inventory Measures
Average inventory = £2 million
Cost of goods sold = £10 million
52 business weeks per year

£2 million
Weeks of supply = = 10.4 weeks
(£10 million)/(52 weeks)

£10 million
Inventory turns = = 5 turns/year
£2 million

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Inventory Measures

47
Supply-Chain Process Measures
SUPPLY–CHAIN PROCESS MEASURES
Customer Order Supplier
Relationship Fulfillment Relationship
 % of orders taken  % of incomplete orders  % of suppliers’
accurately shipped deliveries on time
 Time to complete  % of orders shipped on  Suppliers’ lead
order placement time times
process  Time to fulfill order  % defects in
 Customer  % of botched services services &
satisfaction with or returned items purchased
order placement  Cost to produce materials
process service or item  Cost of services &
 Customer satisfaction purchased
with order fulfillment materials
process

48
 Supply-Chain Design
DESIGN FEATURES FOR EFFICIENT &
RESPONSIVE SUPPLY CHAINS

Factor Efficient Supply Chains Responsive Supply Chains

Operation Make-to-stock or Assemble-to-order, make-

strategy standardized services; to-order, or customized
emphasize high services; emphasize
volume, standardized service or product
services or products variety
Capacity Low High
cushion
Inventory Low, enable high As needed to enable fast
investment inventory turns delivery time
Lead time Shorten, but do not Shorten aggressively
increase costs
Supplier Emphasize low prices, Emphasize fast delivery
selection consistent quality, on- time, customization,
time delivery variety, volume flexibility,
top quality 49
 Reading and WWW sources
 Saunders M, Strategic Purchasing and Supply Chain
Management, FT Prentice Hall, 1997
 Handfield
2002
& Nichols, Supply Chain Redesign, FT Prentice-Hall,

 Ross
1998
D, Competing Thru. Supply Chain Management, Kluwer,

 Heywood B, E-procurement: A Guide to Successful E-

procurement Implementation, FT Prentice Hall. 2001
 www.cips.org (Chartered Institute of Purchasing and Supply)

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