Chapter 2

1. Chapter 2 PURCHASING BECOMES SUPPLY MANAGEMENT

2. Purchasing: A Dynamic Profession Is purchasing a profession? Specialized knowledge required? Intensive preparation required? Special skills and methods? Underlying principles? Professional standards and certifications? Ongoing education? Is purchasing a public service?

3. Purchasing: A Dynamic Profession Is purchasing a profession? YES! Specialized knowledge continues to expand the profession Based on rich history and science Most principles from Economics Ancient history (Julius Caesar PO�s) Dynamic research and learning is ongoing Journal of Supply Chain Management Other journals around the world Various professional organizations ISM � Institute of Supply Management (NAPM) Chartered Institute of Purchasing & Supply (UK) Public service rendered to organizations & society Impacts quality, cost, and productivity Part of every organizations including public (gov�t) 1996 AT Kearney study � �procurement professionals are highly prized partly because they are so rare � people who make procurement their profession will come to be highly rewarded, both financially and in terms of career mobility.�1996 AT Kearney study � �procurement professionals are highly prized partly because they are so rare � people who make procurement their profession will come to be highly rewarded, both financially and in terms of career mobility.�

4. Origins and Evolution of SM Prior to the 1960s Few texts or attention � academic or professional Staffed by flotsam and jetsam personnel During the 1960s and 1970s Purchasing was largely clerical Focus on price and preventing line shutdowns Activities were still largely operational and tactical During the 1980s Importance of purchasing grew with the need to better manage inventories and quality Purchasing managers were now required to �add value�

5. Driver of Change Knowledge is the single most important driver of change, including the evolution of Supply Management (William Christensen, 2003) Increased knowledge drives specialization Specialization drives outsourcing Outsourcing increases the strategic importance of SM and the need for integration and coordination of specialist skills throughout the supply network

6. "no longer will any child be able to live in the same kind of world - sociologically and intellectually - as their parents and grandparents inhabited� (Daniel Bell, 1973) We should not underestimate the power of knowledge to bring about change� or the change that will continue to brought about through the growth of knowledge. OK, so knowledge is cool, it�s important, but what is it? It�s interesting to note that our epistemologist friends have sort of let us down when it comes to coming up with a clear definition of knowledge, despite its great importance to us. An old definition coined by old Confucius is about as good as it gets � he defined knowledge like this... �When you know a thing, to recognize that you know it, and when you do not know a thing, to recognize that you do not know it. That is knowledge� We should not underestimate the power of knowledge to bring about change� or the change that will continue to brought about through the growth of knowledge. OK, so knowledge is cool, it�s important, but what is it? It�s interesting to note that our epistemologist friends have sort of let us down when it comes to coming up with a clear definition of knowledge, despite its great importance to us. An old definition coined by old Confucius is about as good as it gets � he defined knowledge like this... �When you know a thing, to recognize that you know it, and when you do not know a thing, to recognize that you do not know it. That is knowledge�

7. Transition to Supply Management By the late 1980s material costs made up approximately 60 percent of the cost of goods sold Manufacturing industries became focused on just-in-time, quality and continuous improvement (all things Japanese) Electronic purchasing systems provided the stimulus for more change Two types of supply activities needed management: (1) operational and tactical activities (material coordinators) (2) strategic aspects of the function (supply managers)

8. Strategic Business Plan

9. Value-Adding Benefits Performance evolution from purchase price to: Quality (75% traceable to purchased items) Cost (TCO � total cost of ownership) versus simple purchase price) TCO = cost of acquiring, moving, holding, converting, supporting, disposal Time (reduced design-to-market cycle times) Technology Getting the best technologies from suppliers Protecting firm�s core competencies Continuity of supply

10. Strategic Focus Integration � within and without Business environment - SWOT Technology � access and control Component and commodity strategies Supply information system Supply base strategy � for now and future Reporting responsibility � CPO/CSO reporting to CEO or head of SBU Relationship management � need skills Number of professional personnel � the few, the proud, the overworked

11. Five Major Developments Cross-Functional Teams Replaces sub-optimized and isolated functional silos Pervasive � from spec development to forecasting and value analysis Part-time and ad hoc Requires leadership and team behavioral skills Supply Chain and Supply Networks Challenging and exciting Requires technical and commercial competence

12. Cross-Functional Teams Requirements review Make-or-buy analysis Determination of inventory levels Negotiation Problem solving w/suppliers Communication of specification changes Development of sourcing strategy Price forecasting Determination of purchasing policy Specifications development Materials standardization Quality requirements determination Supplier selection Supplier monitoring and analysis Productivity/ cost improvements Market analysis Long-range purchasing planning Value analysis

13. Five Major Developments Strategic Alliances Mutually beneficial and open relationships wherein the needs of both parties are satisfied (not a legal entity) Use only as appropriate Strategic Sourcing Processes associated with integrating suppliers and the value they provide into the strategic objectives of the firm

14. Trust and Relationships

15. Strategic Sourcing Strategic sourcing is understanding the markets you're purchasing from inside and out� �and learning from your own organization and your suppliers' organizational processes,� �working as a mediator between suppliers and your organization,� �and capturing information and using it to improve relationships. Strategic sourcing requires two-way continuous improvement process work from each organization

16. 4 Principles of Strategic Sourcing define the total value of the relationship between purchaser and suppler, develop solutions based on a deep understanding of the supplier's economics and business dynamics, use differentiated purchasing tactics in order to optimize the economic relationship for both purchaser and suppliers, and imbed the required changes in the organization so the purchaser achieves not only a near-term measurable performance improvement but also the ability to continuously improve

17. Five Major Developments e-Procurement Studies have suggested the non-value-added cost of processing an order is from $50 to $200 per order Non-value-added cost is virtually eliminated via a streamlined, controlled process allowing users to directly purchase from a pre-established sources and catalogs of items 90% relegated to indirect purchases

18. e-Procurement E-procurement frees supply managers to focus on value-added activities, such as: Early involvement in the development of requirements, Strategic sourcing or supply base management. Pricing Post award activities The strategic activities introduced in Chapter one

19. Future of Supply Management Supply management as a function will grow in importance Manual tasks are being automated Focus is now 1 to 5 five years out An understanding of the entire supply chain Suppliers will be developed worldwide Supply management can be a foundation for executive level assignments Integration and coordination skills will increase in importance