Purchasing s role in the supply chain Purpose manager of external operations processes Design Acquiring inputs Information systems Purchasing s role 1 Drive shaft case Key issues Influence of purchasing decisions on entire supply chain Quality Price Leadtime Customer service and perceptions Background Purchase costs as percentage of COGS this is typical Decentralized purchasing we have hit on this before International sourcing same quality price 40 60 less 30 day delivery lead time Purchasing s role 2 Driveshaft case What is the problem Whose fault is the problem What are you going to do right now What are you going to change in the future Purchasing s role 3 What is the problem Purchasing s role 4 Poor purchasing management Purchasing s role 5 What to do now Purchasing s role 6 Longer term Purchasing s role 7 Case conclusions Note importance of a single purchasing decision on the entire chain Effected quality Price and costs Lead time Customers Etc Note how the decision making process had as much to do with the problem as the suppler did Purchasing s role 8 Why focus on purchasing Traditional view Materials as a percentage of sales Today close to 60 and increasing Chrysler outsources 70 of a car Virtual corporations Contribution to the bottom line Cost example Other places to contribute Purchasing s role 9 Example Purchasing s role 10 Other contributions Suppliers partners can lower the amount we spend on inputs They can also improve technology mountain bike article improve quality decrease lead time to customer make a supply chain more flexible speed up designs Therefore companies who manage this process strategically have an advantage over companies who view the purchasing function as a cost center Stallkamp and Chrysler articles Purchasing s role 11 What does purchasing do to help gain a competitive advantage 1 Provide an uninterrupted flow of goods services and information to keep the production system operating 2 Ensure that processes performed today and in the future provide the maximum value to customers minimize total costs to maximize value cost of quality cost of late orders cost of inventory having or not having cost of unreliable suppliers cost of bad relationships with suppliers environmental costs and risks Purchasing s role 12 Specifics to maximize value Uninterrupted flow of goods services and info without this nothing else matters Buy wisely total cost is wise the same for every company Minimize inventory investment what are inventory costs Develop and maintain the supply base why build trust Integration across firm Purchasing s role 13 Purchasing as a boundary spanning function External upstream members of supply chain purchasing is the means to communicate with the world of suppliers customers purchasing helps translate the voice of customers internal or external to suppliers Internal works with operations engineering finance logistics and marketing Often referred to as managing external manufacturing or if you will managing external processes how about logistics Purchasing s role 14 What does purchasing do design Note companies who are practicing supply chain management well do the following design products and processes concurrently involve all pertinent supply team members in the design of products and processes leverage suppliers in the design process Note 2 because purchasing s role is to span internal and external boundaries they are best suited to ensure that we actually include and leverage suppliers and internal capabilities to the fullest much more so than operations Purchasing s role 15 General design questions When a company pursues a new concept they need to ask the following questions 1 can we sell the product service 2 can we design the product service 3 can we make the product service at a reasonable cost If the answer to any of these questions is no we generally should not pursue the concept there are always exceptions Purchasing s role 16 Specific purchasing questions Remember purchasing manages external processes So purchasing should be asking can our suppliers provide the process make it Not only make it but can they lower total costs and or increase value if we change specifications we change materials we change suppliers we let suppliers develop the product or process Purchasing s role 17 Traditional design process Concept Product design Production Process design Supply base Purchasing s role 18 Problems with the traditional approach General problems When do we find out if we can make the product Sell it How long does this process take what happens if you can not buy a needed input Purchasing specific problems Not involved until it is to late cost of changes time to change Strategic Purchasing s role 19 Early Supplier Involvement ESI ESI is a process whereby we make suppliers part of the design process from the beginning This is done to increase the value of our products while lowering total costs However do we do ESI with all suppliers For key inputs strategic large costs etc we involve suppliers in the entire process including generation of specifications Standard products commodities may develop specs hence design independent of suppliers Purchasing s role 20 The next step in design reverse logistics An issue many firms are just starting to grapple with is end of life product management Driven by customers and regulation especially in EU Some firms are treating this as a cost to be minimized Others are trying to gain competitive advantage through closed loop chains So what why mention this when talking about design Purchasing s role 21 What does purchasing do Acquiring inputs Regardless of their participation in the design of a product or process one of the key functions performed in a supply chain is the actual purchase of an input This should be a total cost decision supply chain managers who make decisions based purely on price tend to lose as do most managers Purchasing s role 22 Total costs Once more total costs are the sum of all direct and indirect costs associated with a given process or product Another way of looking at this is that total costs are more than just price Go back to Lopez Pick on my Father and car insurance Determining the total costs of a product or process is a key and difficult task Purchasing s role 23 A first step Trying to determine if a price is reasonable fair Number of qualified bidders did you get numbers from 1 or 50 organizations Exclusions are the bids for the requested work Independence fraud