Purchasing and Supply Management Organization

1. Purchasing and Supply Management Organization Chapter 5

2. Supply Integration Defined • Professionally managing suppliers and developing close working relationships with different internal groups • To become more closely integrated with other internal and external functions in order to develop capabilities that will lead to improved competitive performance

3. Relationship Management Skills • Ability to … • Act ethically • Listen effectively • Communicate • Use creative problem-solving • Drive relationships

4. Customer Management Customer Success Assist customers in meeting objectives Customer Service Product availability Lead time performance Service Reliability Customer Satisfaction Meet or exceed customer expectations

5. How to Achieve Integration • Cross-functional teams • Information systems • Integrated performance objectives and measures • Process-focused organizations • Co-location of suppliers and customers • Buyer or supplier councils • Steering committee

6. Communication Flows and Linkages(internal integration)

7. Operations • Traditional close relationship through direct support • Development of global operations strategy • Sales and operations plan (S&OP) • Often co-located

8. Quality Assurance • Increasing in importance • Growing % of outsourced requirements • Supplier quality training and development • Supplier process capability studies • Joint corrective action planning

9. Engineering • One of most important, yet challenging, linkages • Working together on joint product and process development activities • Co-locating buyer in engineering • Co-opting engineers to work in supply management

10. Engineering • Looking for new sources of technology • Ongoing and direct communication • Identifying, assessing, and qualifying technically-capable suppliers • Dealing with quality risks in new products • Ongoing technical support and service

11. Accounting and Finance • Much communication is tactical and electronic • Highly focused on cost reduction • Inbound material requirements • Reconciliation of P.O.s, invoices, and receiving documents • Purchase of capital equipment

12. Accounting and Finance • Developing timely and accurate cost data on supplier performance • Provide total cost data • Often basis for make-or-buy decisions

13. Marketing/Sales • Voice of the customer • New product ideas • Sales forecasts  production plans

14. Legal • Contractual issues • Patent ownership of new technologies • Intellectual property issues • Product liability claims • Antitrust issues • Long term contracts with escape clauses • Supplier nonconformance issues

15. Environmental Management,Health, and Safety • Environmental management system • Supplier sustainability • ISO 14000 • Hazardous waste handling and transportation • Health issues • Safety issues

16. Benefits of CFT s(Cross-functional Team) • Reduced time to complete tasks • Increased innovation • Joint ownership of decisions • Enhanced communication among functions or organizations

17. Benefits of CFTs • Realizing synergies by combining individuals and functions • Better identification and resolution of problems • Need to build internal relationships

18. Potential Drawbacks of CFTs • Use does not guarantee success • Team process loss • Negative effects on individual members • Poor team decisions • Groupthink • Artificial consensus

19. External Integration • Supply management is face of organization to its supply base • Acts as liaison on multiple fronts • Materials • New technology • Market information • Services • Suppliers, government, and local communities

20. External Integration • Supply management is face of organization to its supply base • Acts as liaison on multiple fronts • Materials • New technology • Market information • Services • Suppliers, government, and local communities

21. Suppliers • Primary external linkage • Maintain open and continuous communication • Supplier selection and management • Non-supply management should not deal with suppliers without knowledge of supply management

22. Government • International countertrade issues • Negotiation with foreign governments • Compliance with foreign laws regarding contracts and suppliers • Negotiation with foreign governments • Consult with appropriate agencies regarding regulatory compliance

23. Local Communities • Control of substantial budget which could affect local economies • May affect certain social goals • Sourcing from local suppliers • Awarding contracts to minority suppliers • Ethical issues

24. Collaborative Buyer-Supplier Relationships • Definition • Process by which two or more parties adopt high level of purposeful cooperation to maintain trading relationship over time • Relationship is bilateral • Mutual commitment to future • Balanced power relationship • Procedures for managing conflict

25. Advantages of Closer Relations • Trust • Not take advantage of each other • Share sensitive data • Early supplier involvement • Long-term contracts • Incentive for supplier investment in new plant and equipment • Joint development of new technology, risk-sharing, and supplier capabilities

26. Obstacles to Closer Relationships • Confidentiality • May create a direct competitor • Limited interest by suppliers • Legal barriers • Antitrust issues • Resistance to change • Traditional “arm’s-length” approach

27. P/SM Organizational Structure:Influences and Direction

28. Organizational Structure • Location of formal power for purchasing decisions • Division of purchasing tasks and activities • Scope of jobs in supply management function

29. Organizational Structure • Patterns of communication and workflow • Relative job satisfaction of P/SM employees • Overall effectiveness of P/SM in meeting its goals and objectives

30. Centralization vs. Decentralization • Centralized • Chief purchasing officer has authority for majority of purchase expenditures • Center-led • Centralized approach for common items and decentralized approach for unique ones • Decentralized • Divisional, business unit, or site levels have authority for majority of purchase expenditures

31. Drivers of Organization Structure (Authority) • Firm’s overall business strategy • Responsiveness  decentralized • Efficiency  centralized • Similarity of purchases • Similar  centralized • Dissimilar  decentralized

32. Drivers of Organization Structure • Total purchase dollar expenditures • Small  decentralized • Large  centralized • Role of e-sourcing software • Overall philosophy of management • Highly controlled  centralized • Less control  decentralized

33. Advantages of Centralization • Leverage purchase volumes • Reduced duplication of supply management effort • Coordination of purchasing strategies and plans

34. Advantages of Centralization • Coordination and management of company-wide purchasing systems • Development of specialized expertise • Meet corporate goals and manage company-wide change

35. Advantages of Decentralization • Speed and responsiveness • Understanding unique operational requirements • New product development support • Ownership of decisions affecting purchases

36. Organizational Mechanisms to Enable Center-Led Structure

37. Organizational Mechanisms to Enable Center-Led Structure • Strategic sourcing groups • Often located by sourcing region • Use of a common ERP system for spend management • Lead division buying • Largest using division takes lead in contracting for common items

38. Organizational Mechanisms to Enable Center-Led Structure • Business unit leaders • Located at corporate headquarters • Interface with business unit CFTs • Provide expertise and input • Global sourcing councils • Worldwide commodity sourcing teams • Global coordination for key items

39. Organizational Mechanisms to Enable Center-Led Structure • Regional buying groups • Used when geographic concentration exists • Responsible for large volume common items • Corporate purchasing councils • Share expertise and develop common sourcing strategies

40. Organizational Mechanisms to Enable Center-Led Structure • Corporate steering committees • Tend to be more advisory in nature than corporate purchasing councils • Develop sourcing strategies • Consortiums and group purchasing organizations (GPOs) • Spend category expertise and contract management skills • Usually within single industry

41. Formal Organizational Structure • Details assignment of work along with authority that accomplishes those responsibilities • Helps define how firm communicates and integrates decision making across groups comprising organization, i.e., coordination

42. To Whom Does Purchasing/Supply Management Report? • Upper-level function reporting to executive vice president • Mid-level function reporting to executive one level below executive vice president • Lower-level function reporting at least two levels below executive vice president

43. P/SM as Upper-Level Function

44. P/SM as Mid-Level Function

45. P/SM as Lower-Level Function

46. Factors Affecting P/SM’s Position in the Organization’s Hierarchy • History • Type of industry • Total value of goods and services • Other factors • Founding philosophy • Type of purchased materials • Ability to influence company’s performance

47. Scope of P/SM Job Function • Sourcing and negotiating • Market analysis and research • Operational support and order follow-up • Administration

48. P/SM Job Tasks • Buying • Expediting • Inventory control • Transportation • Insourcing/ outsourcing • Value analysis • Purchasing research • Materials forecasting • Supply management • Other responsibilities

49. Strategic vs. Tactical Purchasing • Strategic • Future-oriented • Managing total cost • Enhancing value • Minimizing risks • Tactical • Day-to-day challenges required to meet current needs

50. Sourcing Activities