Effective Buying Strategies: Enhancing Supply Performance

1. Chapter 17 Supply Function Evaluation and Trends

2. Ingredients of Effective Buying Supplier capabilities and strategy Our estimated requirements (usage) Supplier expansion plans Competing demand Supplier pricing methods Raw material availability Quality considerations Price history and forecasts Competitive environment Cost to make (in-house supplier) Innovation in transportation, handling and distribution Alternative manufacturing methods Government regulations and controls (current and projected) Technological change Systems for processing purchasing information Effective Purchasing Decisions

3. Conditions Necessary for Effective Cross-Functional Teams Team members are carefully selected to ensure that each really has something to contribute Strong leadership Specific objectives and expectations, communicated to each team member Each team member’s normal job responsibilities are rearranged to provide necessary time and resources Performance evaluation and reward systems foster team participation and overall team performance

4. Criteria for Deciding Where to Direct Research Efforts Value of product or service - top dollar Product profitability - red dollar Price/cost characteristics Availability Quality Data flows

5. Possible Research Topics forValue Enhancement Specification Standardization Substitution Packaging Supplier switching Lease or buy Make or buy and continue making or outsource Investment recovery

6. What is Acquired - value analysis - commodity studies Purchasing Research From Whom - supply base analysis

7. Value Analysis Value analysis compares the function performed by the purchased item with the cost in an attempt to find a lower cost alternative Value analysis is done on purchased items used in the ongoing production process Value engineering looks are cost saving possibilities in the design stage

8. Target Costing Target Cost = Selling Price – Desired Profit

9. Commodity Studies Provide a basis for making sound procurement decisions Present supply management and top management with information concerning future supply and price of purchase items

10. Major Areas in Commodity Studies Current and future status of our company as a buyer Production process alternatives Uses of the item Demand Supply Price Strategy to reduce cost and/or ensure supply

11. Topics in Supplier Research Analysis of financial capacity Analysis of production facilities Finding new supply source Supplier cost analysis Relationship classification Quality assurance of purchased material Supplier perception survey Supplier sales strategy Countertrade Supply processes

12. Four Common Purchasing Budgets Materials (operations) purchase budget MRO Budget Capital Budget Administrative Budget

13. Potential Benefits of Supply Performance Appraisal Focuses attention on the priority areas making it more likely that objectives will be realized Provides data for taking corrective action, if needed, to improve performance Should help to develop better internal relationships by isolating problem areas Spotlights training needs Identifies the possible need for additional resources Provides information to senior management about supply’s contribution Identifies people performing at a better-than-normal level

14. 12 Guidelines for Establishinga Purchasing Measurement System Measures need to be designed for use at a point in time Each organization has specific measurement needs at a given point in time Measures should address financial results, supplier performance, IT systems and internal practices and policies Measures must change frequently Trend analysis is often useful Measures should not be overdone or underutilized

15. 12 Guidelines for Establishinga Purchasing Measurement System Measures are only tools Benchmarking is a source of new ideas and measures Senior management must see value in the measures used Measures can show the effectiveness of purchasing and identify areas needing improvement Ensure the credibility of measures Continuous improvement in purchasing depends on measurement

16. Four Types ofPerformance Measurement Systems Efficiency-oriented Emphasizes cost and departmental operating efficiency Effectiveness-oriented Measure of direct and indirect contributions of supply Multiple objectives Considers both efficiency and effectiveness measures Naïve No goals, objectives, or pre-set performance measures Supply managers told that an appraisal will be made of their performance

17. Common Purchasing Efficiency Metrics Total dollar volume of purchases Total dollars spent for department operating expenses Total number of purchase orders issued These figure are sometimes related to each other by calculating average figures and percentages, such as: average dollar cost of purchase orders written operating costs as a percentage of total dollar volume purchases - operating costs as a percentage of total dollar volume of sales

18. Major Sections forPurchasing Operating Reports Market and economic conditions and price performance Inventory investment changes Purchasing operations and effectiveness Operations affecting administration and financial activities

19. Four Major Cost Categories Cost savings Cost reductions Cost avoidance Process cost savings

20. Six Challenges forReporting Cost Savings Systems that don’t account for savings Changes in markets, technologies and volumes Unwillingness to recognize cumulative savings Incomplete definition of supply savings Inability to convert savings into profit Reluctance to revisit past decisions Recommendations to overcome measurement and reporting difficulties are to focus on the total cost of ownership, categorize the different types of savings and hardwire savings to the budget. Source: Johnson, P.F. and M.R. Leenders, “Minding the Supply Savings Gaps,” MIT Sloan Management Review, 2010, vol. 51, no. 2, 25-31.

21. CAPS Benchmarking Metrics Total spend as a percent of sales dollars Supply management employees as a percent of company employees Percent of supply management employees that are strategic Percent of supply management employees that are operational Supply management operating expense as a percent of total spend Supply management operating expense per supply management employee Total spend per supply management employee Managed spend per supply management employee Percent of total spend that is managed/controlled by supply management Percent of total spend via procurement cards Annual spend on professional training per supply management employee Professional training hours completed per supply management employee Supply management group employee retention rate Cost reduction savings as a percent of total spend Cost avoidance savings as a percent of total spend Average purchase order processing cost Average cycle time (in days) from requisition approval to purchase order placement for direct goods Average cycle time (in days) from requisition approval to purchase order placement for indirect goods Percent of active suppliers accounting for 80% of total spend Percent of spend with diversity suppliers

22. Problem Areas in Supply Function Performance Measurement There are no industry-wide standards of functional performance A lack of management information systems support Differences in the scope and sophistication of supply Even within the same firm Operational versus strategic An historical focus on functional goals without linkages to the corporate goal-setting process

23. Supply Management Trends Emphasis on total quality management and customer satisfaction Corporate social responsibility and sustainability Globalization versus local sourcing Risk management Safety and security Supply processes and technology Supply organizations External and internal collaboration Metrics and performance measurement Innovation Public Procurement