Supply Management Chapter Chapter Objectives Be able to:  Identify and describe the various steps of the strategic sourcing process  Perform and interpret the results of a simple spend analysis  Use portfolio analysis to identify the appropriate sourcing strategy for a particular good or service  Describe the rationale for outsourcing and discuss when it is appropriate  Perform a simple total cost analysis  Show how multicriteria decision models can be used to evaluate suppliers and interpret the results  Understand when negotiations should be used and the purpose of contracts  Describe the major steps of the procure-to-pay cycle  Discuss some of the longer-term trends in supply management and why they are important Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 7-2 Supply Management  Supply Management – The broad set of activities carried out by organizations to analyze sourcing opportunities, develop sourcing strategies, select suppliers, and carry out all the activities required to procure goods and services Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 7-3 Why is Supply Management critical?  Global Sourcing  Competition against global competitors and their supply chains  Advances in information systems have helped Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 7-4 Why is Supply Management critical?  Financial Impact Table 7.1 Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 7-5 Why is Supply Management critical?  Financial Impact  Cost of goods sold – The purchased cost of goods from outside suppliers  Merchandise inventory – A balance sheet item that shows the amount a company paid for the inventory it has on hand at a particular point in time  Profit margin – The ratio of earnings to sales for a given time period  Return on assets (ROA) – A measure of financial performance defined as Earnings/Total Assets Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 7-6 Profit Leverage – Example 7.1  Financial Impact Selected Financial Data for Target Corporation Table 7.2 Profit Margin = 100% X ($4,629 / $65,786) = 7% Return on Assets = 100% X (4,629 / $17,213) = 26.9% Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 7-7 Profit Leverage – Example 7.1  Financial Impact  Every dollar saved in purchasing lowers COGS by $1 and increases pretax profit by $1 • Profit leverage effect – A term used to describe the effect of $1 in cost savings increasing pretax profits by $1 and a $1 increase in sales increasing pretax profits only by $1 multiplied by the pretax profit margin  Every dollar saved in purchasing lowers the merchandise inventory figure – and as a result, total assets – by $1 Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 7-8 Profit Leverage – Example 7.1 3% purchasing reduction in COGS Earnings and Expenses Sales COGS Pretax earnings Current Reflecting Savings $65,786 $45,725 $4,629 $65,786 $44,353 $6,001 Selected Balance Sheet Items Merchandise inventory $7,596 Total assets $17,213 $7,368 $16,985 Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall Pretax earnings increase by $1372 (30%) ROA increases from 26.9% to 35.3% 7-9 Why is Supply Management critical?  Performance Impact  Purchased goods can have a major effect on other dimensions such as quality and delivery performance Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall - 10 Develop the Sourcing Strategy  Single sourcing – The buying firm depends on a single company for all or nearly all of an item or service  Multiple sourcing – The buying firm shares its business across multiple suppliers  Cross sourcing – Using a single supplier for a certain part or service and another supplier with the same capabilities for a similar part  Dual sourcing – Using two suppliers for the same purchased product or service Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall - 26 Screen Suppliers and Create Selection Criteria  Criteria to evaluate suppliers  Process and design capabilities  Management capability  Financial condition and cost structure  Longer-term relationship potential Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall - 27 Conduct Supplier Selection  Weighted-point evaluation system – An evaluation system to evaluate potential suppliers, track supplier’s performance over time, and rank current suppliers  Method  Assign weights to performance dimensions  Rate the performance of each supplier with regard to each dimension  Calculate the total score Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall - 28 Supplier Selection – Example 7.6 Summary Data for Three Possible Suppliers Table 7.11 Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall - 29 Supplier Selection – Example 7.6 n Score X   Performance XY WY Y 1 Criteria Weights WPrice = 0.3 Scoring Scheme = excellent = good WQuality = 0.4 = average = fair WDelivery = 0.3 = poor Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall - 30 Supplier Selection – Example 7.6 Performance Values for Alternative Suppliers Table 7.13 Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall - 31 Supplier Selection – Example 7.6 Total Scores for Alternative Suppliers Score Aardvark = (4 x 0.3) + (3 x 0.4) + (4 x 0.3) = 3.6 Score Beverly = (3 x 0.3) + (5 x 0.4) + (2 x 0.3) = 3.5 Score Conan = (5 x 0.3) + (1 x 0.4) + (1 x 0.3) = 2.2 Aardvark should improve their quality Beverly Hills should improve their delivery and price Conan is out of the running as a potential supplier Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall - 32 Negotiate and Implement Agreements  Competitive bidding – A request for bids from suppliers with whom a buyer is willing to business  Request for quotation – A formal request for the suppliers to prepare bids, based on the terms and conditions set by the buyer • • • • Description by market grade/industry standard Description by brand Description by specification Description by performance characteristics Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall - 33 Negotiate and Implement Agreements  Negotiating – A more costly, interactive approach to final supplier selection  Negotiation is used best when:  The item is a new or technically complex item with only vague specifications  The purchase requires agreement about a wide range of performance factors  The buyer requires the supplier to participate in the development efforts  The supplier cannot determine risks and costs without additional input from the buyer Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall - 34 Negotiate and Implement Agreements  Contracting – The process of creating a detailed purchasing contract to formalize the buyer-supplier relationship  Fixed-price contract – Stated price does not change  Cost-based contract – Price of the good or service is tied to the cost of some other key input or economic factor Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall - 35 The Procure-to-Pay Cycle  Ordering  Purchase order – A document that authorizes a supplier to deliver a product or service and includes the terms and conditions of the sale  Follow-up and expediting  Receipt and inspection  Statement of work (scope of work) – Terms and conditions for a purchased service  Settlement and payment  May be paid through Electric Funds Transfer (EFT)  Records maintenance Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall - 36 Trends in Supply Management  Sustainable Supply  Becoming more conscious of the importance of being environmentally friendly and using environmental performance in selecting suppliers  Ensuring compliance with regulations  Reducing packaging, promoting recycling, reducing costs Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall - 37 Trends in Supply Management  Supply Chain Disruptions  Caused by natural disasters, economic/political events  Cause a big threat to revenue streams  Increased risk due to outsourcing to global suppliers Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall - 38 Supply Management Case Study Pagoda.com Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall - 39 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher Printed in the United States of America Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall - 40 ... the longer-term trends in supply management and why they are important Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 7-2 Supply Management  Supply Management – The broad set... Inc publishing as Prentice Hall 7-3 Why is Supply Management critical?  Global Sourcing  Competition against global competitors and their supply chains  Advances in information systems have... internally and which will be provided by external supply chain partners • Insourcing – The use of resources within the firm to provide products or services • Outsourcing – The use of supply chain