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Class # 5 – Chapter 2
Purchasing ManagementPart 2
1) What is Traditional Purchasing, Operational Procurement, Supply Management, Strategic Sourcing?
2) Why is the Procurement function of strategic importance to CEO’s and CFO’s in today’s global environment?
Strategic SourcingOperational Procurement
• Higher $ Values/Unit Costs
• Critical / Bottleneck Items
• Contracts / Agreements
• Alliances / Partnering
• Complex T’s & C’s
• Lower $ Values/ Unit Costs
• Leveraged / Non-Critical Items
• Purchase / Blanket Orders
• Arms Length Relationships
• Standard T’s & C’s
Purchasing and Supply Management
Today’s Procurement Landscape:
Operational Procurement :The acquisition of materials and services required to meet the day-to-day needs of an organization.
Cost Management: Revenue - Less Cost of Goods Sold - Less Overheads and Expenses PROFIT
Quality and Quantity
Delivery – right location, right time
Service
Risk Management
The Traditional Procurement Process
1) Purchase Requisition – the internal user’s request for material or outside services
2) For material, check available existing inventory3) Start competitive bid process – RFQ or RFP4) Evaluate bids – pricing, technical and commercial5) Possibly negotiate for improvements (large $)6) Create a Purchase Order (PO) 7) Copies of PO to internal user, accounting dept. and
the successful supplier (enables the “three way match” for payment)
5
A five step disciplined process is critical to optimizing value.
Strategic Sourcing: Using facts about required goods and services, the supplier base and the supply market, in order to determine best acquisition strategies and best suppliers available to achieve required improvements.
Demand Analysis
Supply Analysis
Sourcing Strategy
Development
Negotiations and Supplier
SelectionImplementation
1 2 3 4 5
Source: European Business School
Procurement and Supply Management CREATES ENTERPRISE VALUE IN THREE WAYS
q Flexibility andresponsiveness tomarket trends
q Improved product/service quality
q Capital utilizationq Cash velocityq Inventory managementq Cycle time reductionq Continuous improvement
q Raise productivityq Logistics efficiency
AssetManagement
RevenueGrowth
q New products andservices
q First to market /volume
q Lower purchase priceq Lower transaction
costsq Lower overhead costs
FinancialPerformance
EPS
Michigan State University Global Benchmarking Initiative
Strategic Importance
22%
17%
16%
30%
11%
11%
11%
10% Improvement in … Increased Shareholder Returns by …Pricing Increases
Purchasing Costs
Market Share
Labor
Other Expenses
Fixed Assets
Working Cap. Assets
According to a McKinsey study, after Pricing Increases, reducing Purchasing Cost is the most powerful way to increase Shareholder Returns
McKinsey Quarterly
CEO
’s S
trat
egic
Lev
ersStrategic Importance
What might a 10% material cost reduction mean to a “typical” $1 billion company?
Percent $ millions
Revenue 100% $1000
Labor 10% 100
Material 50% 500
Mfg. O/H 10% 100
Less COGS 70% 700
Less SG&A 15% 150
Profit 15% $150
Strategic Importance
What might a 10% material cost reduction mean to a “typical” $1 billion company?
Percent $ millions (10%)
Revenue 100% $1000 $1000
Labor 10% 100 100
Material 50% 500
Mfg. O/H 10% 100 100
Less COGS 70% 700
Less SG&A 15% 150 150
Profit 15% $150 $200
450
650
+33%
Strategic Importance
Supplier Relationship Management (SRM):
Companies Depend on the Success of their Suppliers
• The effects of outsourcing, off-shoring, globalization• Customer Satisfaction and Supplier Performance are linked
together as never before!• Need for Supplier Performance Measurement Systems (Ex. unacceptable, developmental, approved, preferred) • Utilize a combination of quantitative and qualitative
performance measures• Communicate results (good and bad) quickly• Pursue longer term relationships (partnerships, alliances)
for strategic purchases when appropriate
Strategic Importance
Typical Performance Measurements Metrics for Suppliers:
1) Procurement cost savings2) Quality / defects / returns3) On-time delivery4) Responsiveness / flexibility5) Process improvement / cost reductions6) Innovation / product development7) Corporate social responsibility pursuit8) Adherence to legal / ethical standards
Strategic Importance
Assignment for Next Class:
Read “How to Get Procurement Strategy Right” by
Per Segerberg (in Blackboard) and answer questions:
1. What are the key points of the article?2. Does the author’s approach make practical
sense?3. How hard would it be to implement in a
non-manufacturing environment?
Today’s Case Discussion:
“Service Purchasing at the Sunny Hotel”