Purchasing and Supply Management by W C Benton

Learning Objectives 1. To identify the qualifications a good supplier. 2. To learn about the key elements of the make versus buy decision. 3. To identify appropriate supplier selection techniques. 4. To identify potential disadvantages of single sourcing. 5. To analyze how to reduce the number of suppliers. 6. To understand how supplier evaluation is accomplished in a variety of industrial environments 2

Suppliers Must be Carefully Evaluated § In today’s competitive environment, progressive firms must be able to produce quality products at reasonable prices. Product quality is a direct result of the production workforce and the suppliers. § Buying firms _________________________________________________. § In order to select _________________________________________________. 3

A New Role for Purchasing § Traditional purchasing professionals who act as little more than order placers are giving way to _____ involved _____ managers who control vital _____________. § More and more power is being placed in the hands of professional purchasing managers ________________________________________. 4

MAKE VERSUS BUY § The use of outsourcing has quickly become a competitive weapon for an increasing number of businesses. § _________________________ § The decision to outsource has l-ed to a need for strategic partnerships. 5

Key Make or Buy Mistakes § In most cases, businesses are not proficient at identifying their core capabilities. _____________________. § Buying organizations wait too late to assess the value of consultants or strategic partners. § ____________________. § There always new competitors with new technology attacking the market. 6

Key Make or Buy Success Factors § Perform a realistic assessment of the capabilities and expertise of each member of the in house team. If the core competencies exist, what happens if a key member leaves the team. Can the member be easily replaced? § __________________________________________. 7

BENEFITS OF OUTSOURCING § Outsourcing can produce many benefits for a firm that would normally produce a part internally. § Vertical integration gives a firm more control over the part in question. ____________________________________________. § It is very difficult for a manufacturer such as ______________________. § Therefore, ________________. 8

The Make or Buy Decision § When a firm has answered the make or buy question with a decision to buy , the question then becomes to whom to “delegate” this responsibility. • Thus, the firm must select a supplier or suppliers for the part (s) in question. • The buying firm must be highly skilled at (1) ______________, (2) ______________, (3) ______________. 9

SOURCES OF SUPPLIER INFORMATION § Searching for the appropriate supplier for a specific material or component part is becoming a strategic issue in itself. § In the new fast-paced and volatile buying environment, the purchasing firm must know where to look for each item. § ___________________________. § There are many sources available for the buyer to consider when seeking out potential suppliers. § The traditional buying source is the well-known Thomas Register. § ___________________________. § Trade journals are also a valuable source of information regarding potential suppliers. § Two such journals are Purchasing World and Purchasing. Salespersons are not only important resources about materials, they can also be an excellent source of free consulting information. § ___________________________. 10

STRATEGIC SELECTION § Each business unit and department should have a clear understanding of the strategy of the whole firm and have a departmental strategy that complements and aids the overall strategy execution of the firm. § ________________________________________ ________. 11

STRATEGIC SELECTION § These functions must work as a cohesive strategic where each complements the other. _____________________. § In order for good communication to exist between buyer and supplier, __________________________________________ 12

Strategy and Outsourcing • Since outsourcing is a delegation of responsibilities, it should be viewed as an extension of the OEM’s strategy. 13

Criteria for Supplier Evaluation § There are two main categories of supplier evaluations: process based evaluations and performance based evaluations. § The process based evaluation ________________________________________. § Typically, ________________________________________. 14

Criteria for Supplier Evaluation § In addition, large buying organizations increasingly are demanding that their suppliers become certified through third party organizations, such as ISO 9000 certification or Malcolm Baldrige National Quality Awards. 15

Three Common Supplier Performance Based Evaluation Systems § The three general types of supplier evaluation systems in use today are the _______, the ____ method, and the _____ method. § In general, _____________________. § It must be pointed out the interpretation of the results from any of these three systems is a matter of the buyer’s judgment. 16

Categorical Method § The categorical method involves categorizing each supplier’s performance in specific areas defined by a list of relevant performance variables. § The buyer develops a list of performance factors for each supplier and keeps track of each area by assigning a “grade” in simple terms, such as “______, ” “_______, ” and “_______. ” § At frequent meetings between the buying organization and the supplier, the buyer will then inform the supplier of its performance. 17

Advantages and Disadvantaged of the Categorical Method § The advantages associated with implementing _____________________. § The method’s major disadvantage is its dependence on the judgment of its users. § The system is largely dependent on the memories of personnel to explain what “unsatisfactory” or “good” means. _____________________. 18

Cost Ratio Method § The cost ratio method evaluates supplier performance by using standard cost analysis. § The total cost ______________________________________________. § Calculations involve a four step approach § A hybrid of the cost ratio method is the “total cost of ownership rating, ______________________________________________. 19

Cost Ratio Method § It includes five performance factors: quality (maximum of 30 points), delivery (25), technology (20), price (15), and service (10). A perfect supplier would receive a score of 1. 00. § _________________________. § The idea is to give a simple numeric rating to the so called hidden cost of ownership—the additional product lifetime cost to Sun. § A score of 1. 20, for instance, means that for every dollar Sun spends with that supplier, it spends another 20 cents on everything from line downtime to added service costs. 20

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Linear Averaging § The linear averaging method is probably the most commonly used evaluation method. § Specific quantitative performance factors are used to evaluate supplier performance. § ______________________________________ ________________. 22

Linear Averaging Method 1. The first step is to assign appropriate weights to each performance factor, such that the total weights of each factor add up to 100. • For example, quality might be assigned a weight of 50, service a weight of 35, and price a weight of 15. _________________________. • The weights are subsequently used as multipliers for individual ratings on each of the three performance factors. 23

Linear Averaging Method 1. After the weights have been assigned, the individual performance factor ratings are determined. ______________________ 2. The third step is to multiply each performance factor rating by its respective weight as a percentage. Continuing the example, a quality rating of 95 would be multiplied by. 50, if quality had a weight of 50 3. Finally, ________________________. 24

Example 25

Single versus Multiple Sources § Much debate has taken place concerning the number of suppliers a firm should use. 1. _________________________________________. 2. The other side of the debate is the ______, in which only one supplier is used to supply a particular part. 26

Advantages of Multiple Sourcing § The main arguments for multiple sourcing are competition and assured supply. _______________________________ _____________. § This sense of competition is in the very root of American thought as competition is the basis for capitalism and is the backbone of Western economic theory. § Multiple sources also can guarantee an undisrupted supply of parts. ___________________________________________________________. 27

Advantages of Single Sourcing § The major arguments in favor of single sourcing are that with the certainty of large volumes that the supplier can enjoy lower costs per unit and increased cooperation and communication to produce win relationships between buyer and seller. § Naming a certain supplier _________________________________________ ____________. 28

Advantages of Single Sourcing § With this contract guarantee, the supplier is more willing to invest in new equipment, or change its business/operating methods to accommodate the buyer. § Single sources __________________________________________. § Spreading fixed costs across a larger volume should also result in an accelerated learning curve. 29

Advantages of Dual Sourcing § The advantages of multiple sourcing can be viewed as the disadvantages of single sourcing and vice versa. § The best scenario would be one that can obtain the advantages of both. 1. 2. _______________________________________________ _______________________________________________. 30

Long Term Issues § Single sourcing advocates may want to address the following issues regarding long term impacts of single sourcing. 1. In the long-run, if everyone reduces their supplier base, there will be fewer suppliers to deal with and overall competition will decrease as there are fewer suppliers. _______________________________________________. 31

Long Term Issues 2. Also, a supplier may be able to forward integrate and ____________________. 3. ________________________________________. 4. The single source movement became popular during the 1990 s. The 1980 s were a period of labor stability as strikes were not a major issue. 32

Long Term Issues § What is to prevent future labor unrest that could unravel single source relationships and bring assembly lines to a halt? – This was the case as strikes crippled Ford and – Renault plants in Europe. § __________________________________________ ____________. 33

Japanese Reality § Many “pop” management techniques have emerged over the last decade by ________________________. § Many managers believe that “if it works in Japan, it can work here. ” ________________________________________________. § Therefore, the common American response has been: Japan uses one source; we should too. In fact, over 98 percent of Ford’s outsourced parts are supplied by single source suppliers. 34

Cross Sourcing § The single sourcing/multiple sourcing issue does not have to be viewed as a “black or white” type of a decision. § A hybrid approach can be used that is known as cross sourcing. _________________________________________. 35

Cross Sourcing § Cross sourcing works this way. If supplier A can produce parts 1, 2, 3, 4, and 5 and so can supplier B, the advantages of both single and multiple sourcing can be achieved if supplier A produces all of parts 1, 3, and 5 and supplier B produces all of 2 and 4. If anything would happen to supplier A, supplier B can pick up the slack as it has the capability to produce 1, 3, and 5 as well. § In sum, _____________________________________________ _____________________. 36

Supplier Reduction § Regardless of one’s final analysis of the single/multiple debate, it is recommended to reduce the supply base. § _________________________________________________. § However, for operations that would be financially damaged when a supply stoppage occurs, ___________________ § Assume that it is desirable to reduce the number of suppliers. _________________________. 37

Grade § “Grade” methods are those that are based on a score or grade given to the supplier by the buyer for some attribute. § ______________________________________________ ___________________. § Many additional attributes an be added to the most common three such as frequency of delivery, but the method remains the same—for each attribute and purchase transaction, the supplier is given a grade. 38

Hurdle § ________________________________________. § In this type of situation, suppliers are required to “jump” over higher and higher hurdles to win the buyer’s business. § ________________________________________. 39

Certification § ____________________. § ________________________________________. § Basically, certification involves the setting of criteria regarding quality levels as demonstrated through the use of SPC and such things as process capability studies of a supplier’s equipment, record keeping abilities, and so forth. 40

Certification § The certification criteria can be changed and updated as recertification may be required. _____________________________________. § In combination with certification are ____________. OEMs can add these criteria to make it more difficult to be a “select” supplier. 41

Certification Example § Certification programs are usually only as good as their designers make them. § _____________________. § For example, requiring a 5 percent decrease in price annually may force suppliers to look for short term cost reductions that may hurt long term investments, which would make a partnership with a single source stronger. 42

Designing Certification Programs § When designing a certification program, careful attention should be paid to the selection of criteria. § Good certification should include issues regarding equipment capability, quality assurance, financial health. __________________________________________ ________________ 43

INDUSTRY EXAMPLES § Consider the apparel, chemical, electronics, and construction industries. ___________________________. § The particular selection strategy may be acceptable in the apparel industry, where the highest emphasis is placed on price or price markup, but would be unacceptable in the chemical industry, where the highest priority is purity of the chemicals (i. e. , quality). _________________________________. 44

Apparel Industry § Organizational buying can be broken down into two categories: retail buying and industrial buying. § There are distinct differences between retail and industrial buying. § ________________________________________. § Successful retail buying depends on ________________________________________. 45

Apparel Industry § The most important difference between industrial buying and retail buying is in the buyer’s responsibility for meeting the profit objectives of the firm. § While industrial buyers _________________________________________________. § While industrial buyers purchase raw materials and component parts for use in production, retail buyers purchase finished goods for resale to the consumer. § Consequently, the right goods for industrial buyers are those necessary to support the production process, _________________________. 46

Chemical Industry § Industrial buying in the chemical industry mostly__________________________________________ § Overall, in ranking which criterion is considered most important in supplier selection, quality was number one. Reliability and dependability of the delivery ranked second, while price considerations ranked third. § Purchasing managers send requests for quotes (RFQs) to prequalified suppliers. § Maintaining quality _______________________________________________. 47

Electronics Industry § Industrial buying within the electronics industry is _______. § Some ________________________. § For example, Dynalab prefers to deal with a single source, while Tandy uses many suppliers to meet their needs. § Supplier selection at Tandy Corporation is based solely on price. When Tandy sends out an RFQ, suppliers that lack a good reputation are ignored. § Thus, ________________________. 48

Electronics Industry § Delivery time is not a major factor due to the fact that the firm does not operate on a just in time basis. _________________________. § _________________________________________________. § On the few occasions that samples do not conform to quality standards, the entire lot is sent back to the supplier. § However, the likelihood of this happening is very minimal. _________________________. 49

Electronics Industry • In today’s market, an electronics supplier must have a quality product to survive. • Thus, electronics firms do not test the quality of the electronics suppliers. • Two decades ago, electronics firms tested each electronics product due to such poor quality, __________________________________________. 50

Construction Industry § In the construction industry, material quality, delivery dependability, and price appear to be the most critical criteria. § However, the degree of importance that various construction firms place on the four criteria varies. § The supplier selection process __________________________. § The selection process is usually based solely on past performance. § Once a pool of potential sources is formed, __________________________. 51

Construction Industry § High quality materials are expected from every potential supplier. § __________________________________________ __________. § Visual material inspection is used any piece of material that is not visibly damaged is accepted and used. 52

Construction Industry § However, materials such as steel beams or concrete require a more formal inspection to ensure that they conform to specifications. § Quality is rarely __________________________________________ ____. § If a supplier cannot provide adequate quality, _____________________. 53

Construction Industry § Delivery dependability is obviously vital in today’s fast track construction industry, where construction is often begun before the architects’ final designs are completed. § __________________________________________ _________________. 54

Construction Industry § If a project is not completed by its deadline, the loss of potential profits increases with each day past the due date. § In this industry, ________________________. § If one company can supply a contractor (buyer) considerably faster than another supplier, the faster company will have an advantage. § _______________________________________________. 55

Construction Industry § While quality, delivery dependability, and price may play the most vital role in selecting a supplier, ___________________. § Depending on the project, and the specific types of materials, ________________________. § As an example, ________________________. § Also, warranties may play an important role when buying roofing materials, wooden doors, and cabinets. 56

Supplier Evaluations § As firms increasingly emphasize cooperative relationships with critical suppliers, executives of buyer firms are using supplier evaluations to ensure that their per formance objectives are met. § Supplier evaluations, _________________________________________ ________________. 57

Supplier Evaluations § When a supplier is unable to conform to the buying firm’s expectations, _____________________. § To maintain the working relationship, _____________________. § The buying firm must develop supplier evaluation, or report card, _____________________. 58

Supplier Evaluations 1. For the buying firm manager, specific communication strategies should be designed into their SDP efforts. _____________________________________________________ _________________. 2. Buying firm managers _____________________________________________________. 3. As the recipient of their customer's SDP efforts, the supply firm manager has the opportunity to improve the relationship with the customer. Improved relationships can result in increased market share, growth opportunities and other benefits. 59