MNP2601-Summary-Notes.

CHAPTER 1 INTRODUCTION TO PURCHASING AND SUPPLY CHAIN MANAGEMENT  Understand the differences between purchasing and supply management  Understand the differences between supply chains and value chains  Identify the activities that are part of supply chain management  Appreciate the importance of supply chain enablers  Identify the historical stages of purchasing’s evolution Re-shoring involves bringing some sourcing back to the United States, while near-shoring involves evaluating suppliers located closer to United States. Such suppliers may be located in Mexico and Central and South America. The supply base consists of all the suppliers that provide and organization with its materials and services. In some organization’s this supply base extends to the network of downstream firms responsible for delivery and aftermarket service of the product to the end customer. The realization that competitive advantage could be achieved by managing both upstream (suppliers) and downstream (customers) flows led to a focus on supply chains and supply chain management. Several factors are driving an emphasis on supply chain management. 1. First, the low cost and increased availability of information resources among entities in the supply chain allow easy linkages that eliminate time delays in the network. 2. Second, the level of competition in both domestic and international markets requires organizations to be fast, agile, and flexible. 3. Third, customer expectations and requirements are becoming much more demanding. 4. Fourth, the ability of an organization’s supply chain to identify and mitigate risk minimizes disruptions in both supply and downstream product or services to mitigate the impact on lost sales. The supply base is an important part of the supply chain. Supplier capabilities can help differentiate a producer’s final good or service, increasing their value to the final customer. Savings come in different forms; the traditional approach is to bargain hard for price reductions. A newer approach is to build relations with suppliers to jointly pull costs out of the product or service and expect suppliers to contribute innovative ideas that continually add value to a firm’s products and services. Poor quality is only one supply threat; others include natural disasters, financial instability, operational problems, transportation delays, and so on. These risks are magnified by sourcing strategies that emphasized global sourcing, single sourcing, and JIT inventory. Certainly there were benefits realized from these strategies, however, often the increased vigilance necessary to mitigate and manage these additional risks was not established. Managing talent requires a constant focus on finding, developing, and promoting individuals who will contribute to making the supply management department recognized as a strategic contributor to the organization. lOMoARcPSD| MNP2601-Summary-Notes. 2 PURCHASING AND SUPPLY MANAGEMENT Purchasing is a functional group (i.e., a formal entity on the organizational chart) as well as a functional activity (i.e., buying goods and services). The purchasing group performs many activities to ensure it delivers maximum value to the organization. Examples include supplier identification and selection; buying, negotiation, and contracting; supply market research; supplier measurement and improvement; and purchasing systems development. Purchasing has been referred to as doing “the five rights”: getting the right quality, in the right quantity, at the right time, for the right price, from the right source. In this text we will interchange the terms “purchasing” and “procurement.” Supply management is a strategic approach to planning for and acquiring the organization’s current and future needs through effectively managing the supply base, utilizing a process orientation in conjunction with cross-functional teams (CFTs) to achieve the organizational mission. Similar to our definition, the Institute for Supply Management defines supply management as the identification, acquisition, access, positioning, and management of resources and related capabilities an organization needs or potentially needs in the attainment of its strategic objectives. Supply management requires pursuing strategic responsibilities, which are those activities that have a major impact on the long-term performance of the organization. These long-term responsibilities are not pursued in isolation, but should be aligned with the overall mission and strategies of the organization. These strategies exclude routine, simple, or day-to-day decisions that may be part of traditional purchasing responsibilities. The routine ordering and follow-up of basic operational supplies is not a strategic responsibility. The development of the systems that enable internal users to order routine supplies, however, is considerably more important. Supply management is a broader concept than purchasing. Supply management is a progressive approach to managing the supply base that differs from a traditional arm’s-length or adversarial approach with lOMoARcPSD| 3 sellers. It requires purchasing professionals to work directly with those suppliers that are capable of providing world-class performance and advantages to the buyer. Think of supply management as a strategic and supercharged version of basic purchasing. Supply management often takes a process approach to obtaining required goods and services. We can describe supply management as the process of identifying, evaluating, selecting, managing, and developing suppliers to realize supply chain performance that is better than that of competitors. We will interchange the terms “purchasing,” “supply management,” and “strategic sourcing” throughout this book. Supply management is cross-functional, meaning it involves purchasing, engineering, supplier quality assurance, the supplier, and other related functions working together as one team, early on, to further mutual goals. Instead of adversarial relationships, which characterize traditional purchasing, supply management features a long-term, win-win relationship between a buying company and specially selected suppliers. Except for ownership, the supplier almost becomes an extension of the buying company. Supply management also recognizes the mutual benefits to both parties, through shared information, provisions for on-site resources, and frequent help to suppliers in exchange for dramatic and continuous performance improvements, including steady price reductions. In short, supply management is a new way of operating, involving internal operations and external suppliers to achieve advances in cost management, product development, cycle times, and total quality control. Organizationally, leading and coordinating strategic supply management activities have largely become the responsibility of the functional group called purchasing. Practicing professionals often use the terms “supply management” and “purchasing” interchangeably. Through the above discussion we have sought to clarify some of the differences while recognizing that good purchasing and supply management practices can have significant impact on the organization’s overall performance. SUPPLY CHAINS AND VALUE CHAINS These researchers break down the concept into three areas and separate supply chains from supply chain orientation and from supply chain management A supply chain is a set of three or more organizations linked directly by one or more of the upstream or downstream flows of products, services, finances, and information from a source to a customer. It is important to acknowledge that anytime business is conducted a supply chain will exist. A supply chain orientation is a higher-level recognition of the strategic value of managing operational activities and flows within and across a supply chain. Supply chain management then, endorses a supply chain orientation and involves proactively managing the two-way movement and coordination of goods, services, information, and funds (i.e., the various flows) from raw material through end user. According to this definition, supply chain management requires the coordination of activities and flows that extend across boundaries. Organizations that endorse a supply chain orientation are likely to emphasize supply chain management. Regardless of the definition or supply chain perspective used, we should recognize that supply chains are composed of interrelated activities that are internal and external to a firm. These activities are diverse in their scope; the participants who support them are often located across geographic boundaries and often come from diverse cultures. lOMoARcPSD| 4 Although many activities are part of supply chain management (which a later section discusses), an improved perspective visualizes supply chains as composed of processes rather than discrete, often poorly aligned activities and tasks. A process consists of a set of interrelated tasks or activities designed to achieve a specific objective or outcome. New product development (NPD), customer-order fulfilment, supplier evaluation and selection, and demand and supply planning are examples of critical organizational processes that are part of supply chain management. Recent product recalls of consumer products such as automobiles, toys, peanut butter, and dog food have placed increasing emphasis on a new supply chain concept: the reverse supply chain; its goal is to rapidly identify and return these tainted products back through the supply chain. Toyota’s much publicized quality breakdowns that created acceleration and braking problems led to massive recalls and forced Toyota to temporarily suspend the sales of certain models. In this case the creation of a reverse supply chain was necessary to fix defective brakes and gas pedals was necessary to fix these problems and restore confidence in the Toyota brand value chain is composed of primary and support activities that can lead to competitive advantage when configured properly. The accumulation of these activities results in the total value added by the firm. One way to think about the difference between a value chain and a supply chain is to conceptualize the supply chain as a subset of the value chain. All personnel within an organization are part of a value chain. The same is not true about supply chains. The primary activities, or the horizontal flow across Exhibit 1.2, represent the operational part of the value chain, or what some refer to as the supply chain. At an organizational level, the value chain is broader than the supply chain, because it includes all activities in the form of primary and support activities. Furthermore, the original value chain concept focused primarily on internal participants, whereas a supply chain, by definition, is both internally and externally focused. A good example of a simple supply chain involves cereal producers (see Exhibit 1.3). A cereal company purchases the grain from a farmer and processes it into cereal.