MNP3701 REVISION NOTES.

STRATEGIC SOURCING MNP3701 2 Index Page # CHAPTER 1 : INTRODUCTION TO PURCHASING AND SUPPLY CHAIN MANAGEMENT ...........................................................8 Building Relationships And Driving Innovation .........................................................................................................8 Improving Quality And Reputation .....................................................................................................................8 Reducing Time To Market ..............................................................................................................................8 Managing supplier risk...................................................................................................................................8 Generating Economic Impact............................................................................................................................8 Contributing To Competitive Advantage................................................................................................................8 UNDERSTANDING THE LANGUAGE OF PURCHASING AND SUPPLY CHAIN MANAGEMENT ......................................................8 Supply Chains And Value Chains ........................................................................................................................9 Emerging SCM Technologies .......................................................................................................................... 13 Figure 1: THE DEVELOPMENT OF PURCHASING INTO STRATEGIC SOURCING, AND THE EVOLUTION OF SUPPLY MANAGEMENT .. 14 CHAPTER 2: THE PURCHASING PROCESS ............................................................................................................ 15 Elements Of The Purchasing Process ................................................................................................................ 15 Purchasing Objective .................................................................................................................................. 15 Supply Market Intelligence ........................................................................................................................... 16 Reasons For Not Being Strategic .................................................................................................................... 16 Strategic Supply Management Roles And Responsibilities Purchasing Responsibilities ............................................................ 16 Purchasing Responsibilities ............................................................................................................................ 16 Improve The Procure-To Pay Process ............................................................................................................... 18 P2P process as a cycle consisting of six major stages: ............................................................................................ 18 EXHIBIT 2.3: THE PURCHASING PROCESS ....................................................................................................... 18 Benefits of Electronic Documents .................................................................................................................... 18 Improving the Procure-to-Pay-Process consists of: ................................................................................................ 19 1. Forecast And Plan Requirements ............................................................................................................ 19 2. Clarify Requisition Needs.................................................................................................................... 19 Approval, Contract, And Purchase Order Preparation .............................................................................................. 21 Consists of the following:............................................................................................................................. 21 Types Of Purchases ................................................................................................................................... 22 Improving The Purchasing Process ................................................................................................................... 23 Purchasing Objectives Summary ...................................................................................................................... 23 STUDY UNIT 3: CHAPTER 4: SUPPLY MANAGEMENT INTEGRATION FOR COMPETITIVE ADVANTAGE ..................................... 24 Integration............................................................................................................................................. 24 Supply Integration Defined........................................................................................................................... 24 Elements of Supply Integration ...................................................................................................................... 24 Internal Linkages ...................................................................................................................................... 24 External Integration .................................................................................................................................. 24 External Linkages...................................................................................................................................... 24 Buyer-Supplier Collaboration ......................................................................................................................... 25 EXHIBIT 4.2: CHARACTERISTICS OF THE BUYER-SELLER RELATIONSHIP.................................................................. 25 Advantages of Closer Relations ...................................................................................................................... 25 Figure 3.1: Characteristics of the three principle classes – transactional, collaborative and alliance buyer-seller relationships ............ 26 Obstacles to Closer Relationships .................................................................................................................... 26 Critical Elements for Supplier Relationship Management (SRM) ................................................................................... 27 The following skills are required for effectively managing buyer-seller relationships: .......................................................... 27 Critical Elements – “Little r” ......................................................................................................................... 27 3 Effective SRM......................................................................................................................................... 27 SRM Skills ............................................................................................................................................. 27 Cross-Functional Teams............................................................................................................................... 27 Advantages/Benefits of Cross-functional teams .................................................................................................... 27 Disadvantages/Potential Drawbacks of Cross-Functional Team (CFTs) Approach................................................................. 28 When to Form a CFT ................................................................................................................................. 28 Improving Sourcing Team Effectiveness ............................................................................................................. 28 Questions Driving Use of CFTs....................................................................................................................... 29 Selecting A Task ................................................................................................................................... 29 Selecting Team Members And Leaders ........................................................................................................... 29 Resource Support................................................................................................................................... 29 There are several ways that management can practice subtle management control .......................................................... 29 Integrating Supply Management, Engineering And Suppliers To Develop New Products And Services .......................................... 30 Common Themes For Successful Supplier Integration Efforts ..................................................................................... 30 Supplier Integration Into Customer Order Fulfilment .............................................................................................. 31 Supplier Suggestion Programs ............................................................................................ 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Buyer-Supplier Improvement Teams ................................................................................................................. 31 On-site Supplier Representatives .................................................................................................................... 32 Buyer’s Use of On-Site Supplier Reps............................................................................................................... 32 Potential Benefits Of On-Site Supplier Representatives........................................................................................... 32 PART 3: STRATEGIC SOURCING....................................................................................................................... 34 STUDY UNIT 4: CHAPTER 6: CATEGORY STRATEGY DEVELOPMENT ............................................................................. 34 Supply Policy and Strategies ......................................................................................................................... 34 Aligning Objectives .................................................................................................................................... 34 How Companies Create Shareholder Value........................................................................................................... 34 Integrative Strategy Development ................................................................................................................... 34 Components of Integrative Strategy................................................................................................................. 35 Engaging Stakeholders To Build Category Strategy Objectives.................................................................................... 35 What Is Category Strategy?......................................................................................................................... 35 Difference Between Category Strategies And Strategic Sourcing ................................................................................ 36 Conducting A Spend Analysis ......................................................................................................................... 36 Spend Analysis Spreadsheet.......................................................................................................................... 36 Category Strategy Development/The Strategic Sourcing Process (MOST IMPORTANT) ........................................................ 36 THE STRATEGIC SOURCING PROCESS ............................................................................................................ 37 Step 1: Team and Project Charter .................................................................................................................. 37 Step 2: Conduct Market Research ................................................................................................................... 37 Porter’s Five Forces Model ........................................................................................................................... 37 SWOT Analysis ........................................................................................................................................ 39 Benchmarking Analysis ................................................................................................................................ 39 Requests for information (RFI)....................................................................................................................... 39 Value chain analysis ................................................................................................................................... 39 Supplier research...................................................................................................................................... 39 Step 3: Strategy Development ....................................................................................................................... 39 Portfolio analysis ...................................................................................................................................... 39 Step 5: Supplier Relationship Management (SRM) .................................................................................................. 43 4 Elements of the Monitoring Process.................................................................................................................. 43 Types of Supply Management Strategies............................................................................................................ 43 E-Revers Auctions (e-RA) ............................................................................................................................ 43 Why use E-Reverse Auctions......................................................................................................................... 43 Evolving Sourcing Strategies/Supply Management Transformation Evolution ...................................................................... 44 Observations on Strategic Sourcing.................................................................................................................. 45 STUDY UNIT 5: CHAPTER 7: SUPPLIER EVALUATION AND SELECTION....................................................................... 46 Evaluation and Selection Process ..................................................................................................................... 46 Exhibit 7.1: Supplier Evaluation and Selection Process ............................................................................................ 46 Step 1: Recognize the Need for Supplier Selection ................................................................................................ 46 Step 2: Identifying Key Sourcing Requirements .................................................................................................... 47 Step 3: Determining Sourcing Strategy ............................................................................................................. 47 Identify Potential Supply Sources ................................................................................................................... 47 Sources Of Information .............................................................................................................................. 47 Step 5: Sourcing Alternatives – Consider Sourcing Alternatives................................................................................... 48 Multiple or Single Sourcing ........................................................................................................................... 49 Evaluate Critical Issues............................................................................................................................... 49 Categorising Suppliers for Multiple or Single Sourcing .............................................................................................. 49 Key Evaluation Criteria................................................................................................................................ 51 The seven steps employed to develop a supplier evaluation and selection survey. They include:................................................ 54 Exhibit 7.6: Supplier Evaluation and Selection Survey Development .............................................................................. 54 Reducing Supplier Evaluation Cycle Time............................................................................................................. 55 A good supplier does the following!!! ................................................................................................................. 56 STUDY UNIT 6: CHAPTER 8: SUPPLIER QUALITY MANAGEMENT ................................................................................ 57 What Is Supplier Quality? ........................................................................................................................... 57 Supplier Quality Concerns ............................................................................................................................ 57 Factors Affecting Supply Management’s Role In Managing Supplier Quality...................................................................... 57 Supplier Quality Management Using S Total Quality Management Perspective ................................................................... 57 8 Key Principles Of Total Quality Management (TQM perspectives) .............................................................................. 58 Defining Quality: The Customer’s Perspective and Their Requirements ........................................................................... 58 Developing Clarity ..................................................................................................................................... 58 Deming’s 14 Points (Dr Deming, considered to be the father of the modern quality movement)................................................ 58 Summary of Deming’s Philosophy ..................................................................................................................... 59 Pursuing Quality at the Source....................................................................................................................... 59 Basics of Process Capability .......................................................................................................................... 60 Striving for Zero Defects ............................................................................................................................ 60 Cost of Quality ........................................................................................................................................ 60 The Seven Wastes .................................................................................................................................... 61 Making Quality: Everyone’s Responsibility ........................................................................................................... 61 Pursuing Six Sigma Quality ........................................................................................................................... 62 Exhibit 8.5: Six Sigma Performance Improvement Model (DMAIC model)........................................................................ 62 Quality at the Source ................................................................................................................................ 63 Using ISO and MBNQA Criteria ..................................................................................................................... 63 ISO 9000:2008 ....................................................................................................................................... 63 Standards in the ISO 9000 family include:......................................................................................................... 63 5 ISO 14001:2004 Standards ...................................................................................................................... 64 Malcolm Bridge National Quality Award (MBNQA) ................................................................................................. 64 Criteria for Performance Excellence: ................................................................................................................ 64 Basic Contents Of A Supplier Quality Manual....................................................................................................... 64 STUDY UNIT 7: CHAPTER 9: SUPPLIER MANAGEMENT AND DEVELOPMENT: CREATING A WORLD-CLASS SUPPLY BASE ............... 65 Creating a World-Class Supply Base................................................................................................................. 65 Key Points.............................................................................................................................................. 65 Supplier Performance Measurement .................................................................................................................. 65 Supplier Measurement Decisions...................................................................................................................... 65 What to measure? .................................................................................................................................... 65 Categories.............................................................................................................................................. 65 Exhibit 9.1: Qualitative Service Factors............................................................................................................ 65 Measurement & Reporting Frequency ................................................................................................................ 66 Uses of Measurement Data........................................................................................................................... 66 Types of Measurement Techniques................................................................................................................... 66 Rationalization and Optimization (Creating a manageable supply base) ............................................................................ 66 Phases and Activities.................................................................................................................................. 67 Advantages (Supply base optimization) .............................................................................................................. 67 Possible Risks of Maintaining Fewer Suppliers....................................................................................................... 67 Formal Approaches To Supply Base Optimisation ................................................................................................... 68 Exhibit 9.7: Supply Base Optimisation and Development ........................................................................................... 68 Development: A Strategy For Improvement......................................................................................................... 68 Supplier Development Process Map................................................................................................................... 68 Process mapping ....................................................................................................................................... 68 A Process Map for Supplier Development............................................................................................................ 68 Exhibit 9.8: Process of Implementation of Supplier Development Strategy ...................................................................... 70 Overcoming Barriers To Supplier Development ...................................................................................................... 70 Lessons Learned from Development .................................................................................................................. 71 MANAGING SUPPLY BASE RISK .................................................................................................................... 72 Categories of risk: .................................................................................................................................... 72 Exhibit 9.13: Steps in Performing A Scenario Analysis ............................................................................................ 72 Exhibit 9.14: Supply Chain Risk Management System Capabilities ................................................................................ 72 Managing Sustainability In The Supply Base ........................................................................................................ 73 Environmental Responsibilities ........................................................................................................................ 73 Social Responsibilities ................................................................................................................................. 73 PART 4: STRATEGIC SOURCING PROCESSES ........................................................................................................ 74 STUDY UNIT 8: CHAPTER 11: STRATEGIC COST MANAGEMENT ................................................................................. 74 Definitions ............................................................................................................................................. 74 Market Structure...................................................................................................................................... 74 Cost Management Approaches ........................................................................................................................ 74 Exhibit 11.1: Cost Management Approaches ........................................................................................................ 74 Historical Cost Reduction Approaches ............................................................................................................... 75 Strategic Cost Management Processes............................................................................................................... 75 Strategic Cost Management Processes............................................................................................................... 75 Managing Life Cycle Costs ............................................................................................................................ 76 6 Strategic Cost Framework ............................................................................................................................ 76 Price Analysis.......................................................................................................................................... 76 Market Structure ..................................................................................................................................... 76 Economic Conditions ................................................................................................................................... 77 Pricing Strategy of the Seller ....................................................................................................................... 77 Exhbit 11.7: Elements of Price and Associated Cost Drivers ..................................................................................... 78 Market-Driven Pricing Models ........................................................................................................................ 78 Using The Producer Price Index To Manage Price .................................................................................................. 79 Cost Analysis Techniques ............................................................................................................................. 79 Cost Based Pricing Model ............................................................................................................................. 79 Product Specifications ................................................................................................................................ 79 Estimating Supplier Costs Using Reverse Price Analysis ............................................................................................ 79 Break-Even Analysis .................................................................................................................................. 79 Assumptions of Break-Even Analysis................................................................................................................. 80 Total Cost Of Ownership (TCO)...................................................................................................................... 81 TCO Issues: ........................................................................................................................................... 81 Building a TCO Model ................................................................................................................................. 81 The Importance of Opportunity Costs................................................................................................................ 81 Factors to be Considered in TCO .................................................................................................................... 82 Collaborative Cost Management ...................................................................................................................... 82 Prerequisites Target and Cost-Based Pricing........................................................................................................ 82 When to Use Cost-Based Pricing..................................................................................................................... 82 STUDY UNIT 9: CHAPTER 12: PURCHASING AND SUPPLY TECHNIQUES........................................................................ 83 Purchasing Tools ....................................................................................................................................... 83 Project Management................................................................................................................................... 83 Defining Project Success ............................................................................................................................. 83 Considerations Of A Project.......................................................................................................................... 83 Project Phases......................................................................................................................................... 84 Project Planning and Control Techniques ............................................................................................................. 84 Gantt Charts........................................................................................................................................... 84 CPM/PERT.............................................................................................................................................. 85 Rules For Constructing A Project Management Network ........................................................................................... 85 Project Management With Time Estimates .......................................................................................................... 87 Project Management Example With Time Estimates ................................................................................................ 88 Learning Curves Analysis.............................................................................................................................. 88 When to Use the Learning Curve..................................................................................................................... 88 Value Analysis/Value Engineering..................................................................................................................... 88 The Value Analysis Process ........................................................................................................................... 89 Quantity Discount Analysis ........................................................................................................................... 90 Process Mapping ....................................................................................................................................... 90 Value Stream Mapping (VSM) ........................................................................................................................ 91 Value and Non value added activities ................................................................................................................ 91 VSM Process........................................................................................................................................... 91 STUDY UNIT 10: CHAPTER 14: CONTRACT MANAGEMENT........................................................................................ 92 Pitfalls in Global Commerce........................................................................................................................... 92 7 Preventive Contracting ................................................................................................................................ 92 What Does a Purchase Contract Do? ................................................................................................................ 92 Elements of a Purchase Contract .................................................................................................................... 92 Information in Purchase Contracts................................................................................................................... 92 Key Details in International Contracts............................................................................................................... 93 Contract................................................................................................................................................ 93 Types of Contracts.................................................................................................................................... 93 Considerations When Selecting Contract Types ..................................................................................................... 93 Desirability of Contract Types ....................................................................................................................... 94 LONG-TERM CONTRACTS IN ALLIANCES AND PARTNERSHIPS ............................................................................... 94 Benefits/Advantages Of Long Term Contracts ...................................................................................................... 94 Risks/Disadvantages Of Long-Term Contracts ...................................................................................................... 94 Contingency Elements Of Long-Term Contracts..................................................................................................... 95 Non-Traditional Contracting.......................................................................................................................... 95 Other Types Of Contracts ........................................................................................................................... 96 Settling Contractual Disputes ........................................................................................................................ 97 Legal Alternatives ..................................................................................................................................... 97 Non-Legal Alternatives ............................................................................................................................... 97 ADDITIONAL TERMINOLOGY FROM TUTORIAL 101................................................................................................ 98 8 CHAPTER 1 : INTRODUCTION TO PURCHASING AND SUPPLY CHAIN MANAGEMENT A New Competitive Environment  Increasing numbers of world-class competitors  Sophisticated customer base  More performance at a lower cost  Widely available information sources  Balance of power between buyers and suppliers  Greater outsourcing Factors Driving SCM/Drivers of SCM 1. Low cost and wide availability of information more closely links the members of a supply chain among entities in the supply chain allow easy linkages that eliminate time delays in the network. 2. Competition in domestic and international markets requires quickness, agility, and flexibility 3. Customer expectations and requirements are more demanding 4. Major disruptions require the ability of a supply chain to react rapidly Why Purchasing Is Important? 1. Increasing Value and Savings Supplier capabilities can help differentiate a producer’s final goods or services, increasing their value to the final customer. Cost savings also encompasses avoiding costs through early involvement with design and proactively responding to supplier requests for price increases. 2. Building Relationships And Driving Innovation The traditional approach of bargaining hard for price reductions are being replaced by a newer approach of building relations with suppliers to jointly pull costs out of the product or service and expecting suppliers to contribute innovative ideas that continually add value to a firm’s products and services. 3 Improving Quality And Reputation Supplier quality is important during the supplier selection process as there is an important link between supplier quality and product quality. Poor quality input affects the entire supply chain, including finished product and brand name reputation. 4. Reducing Time To Market Companies that involve suppliers early achieve an average 20 percent improvement on materials costs, material quality and product development times. 5. Managing supplier risk Every time purchasing places an order with a supplier a potential risk arises, this risk could be as minor as a late delivery or as major as loss of an entire supplier due to bankruptcy or a natural disaster 6. Generating Economic Impact The ISM Report on Business is one of the most closely followed indicators of economic activity. This monthly survey of purchasing managers is closely monitored by the financial sector, and the results have the power to move financial markets. 7. Contributing To Competitive Advantage Many executives will agree that a focus on effective purchasing has become a critical way to gain a competitive advantage. An indication of this enhanced status, reputation and recognition is the higher salaries being paid to purchasing professionals. UNDERSTANDING THE LANGUAGE OF PURCHASING AND SUPPLY CHAIN MANAGEMENT Purchasing The buying of goods and services as well as the organisational function of deciding what, when and how to buy. It includes: 1) Supplier identification and selection; 2) Buying – performing the act of purchasing; 3) Negotiation of terms and availability agreements ; 4) Contracting with suppliers; 5) Supply market research; 6) Supplier measurement and improvement and Purchasing development systems Purchasing has been referred to as doing the “The 5 rights”: GETTING THE RIGHT QUALITY, IN THE RIGHT QUANTITY, AT THE RIGHT TIME, FOR THE RIGHT PRICE, FROM THE RIGHT SOURCE Strategic Purchasing The process of planning, implementing, evaluating and controlling strategic and operating decisions to direct all the activities of the purchasing function towards opportunities that are consistent with the organisation’s capabilities to achieve its long-term goals. Supply Management A strategic approach responsible for identifying, acquiring, accessing, positioning and managing the resources that the organisation currently or potentially needs to achieve its mission and strategic goals 9 ISM’s Definition 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 Cross-functional Involves various functions working together to further a mutual goal(s) e.g. Purchasing, engineering, supplier quality assurance, the supplier etc.. 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 (TQM). Supply Chains And Value Chains Value chain – primary and secondary activities that can lead to a competitive advantage. Supply chain – a set of 3 or more organizations linked directly by 1 or more of the upstream or downstream flows of products, services, finances, and information from a source to a customer (subset of a value chain) Supply chain orientation – a higher level recognition of the strategic value of managing operational activities and flows within and across a supply chain New Supply Chains Concept: The Reverse Supply Chain; its goal is to rapidly identify and return tainted products back through their supply chain. E.g. Toyota’s problem with acceleration and braking problems lead to massive recalls and forced Toyota to suspend the sale of certain models. Defining Supply Management Strategic Orientation Cross Functional Groups Process-Driven Approach Supply Base Management 10 The Extended Value Chain (Michael Porter’s model) SUPPORT ACTIVITIES Firm Infrastructure Management, finance, legal planning Human Resource Management Professional development, employee relations, performance appraisals, recruiting, competitive wages, training programmes Technology Development Integrated supply chain system, real-time sales information Procurement Real-time inventory, communication with suppliers, purchase supplies and materials PRIMARY ACTIVITIES Inbound Logistics  Real-time inbound inventory data  Location of distribution facilities  Trucks  Material handling  warehouse Operations  standardized model  access to realtime sales and inventory system Outbound Logistics  order processing  full delivery trucks Marketing & Sales  pricing  communication  promotion  products based on community needs  low prices Service  delivery  installation  repair  greeters  customer service focus PRIMARY ACTIVITIES (MAIN ACTIVITIES) Inbound Logistics All processes involved in the receiving, storing and delivery of products/goods and or services coming into the organisation. Operations Activities that convert the input of products or services into semi-finished or finished products or services. Outbound Logistics All activities related to delivering of products or services by the organisation to the customer(s) Marketing and Sales All processes relating to putting the product or service into the market. Customer Service A wide set of activities that attempt to keep customers satisfied with a product or service. SUPPORT ACTIVTIES Firm Infrastructure Support activities within the organisation that enables the organisation to function. Human Resources Support activities that develop the workforce of the organisation. Information Technology Support activities that relate to the development of products and services of the organisation both internally and externally. Purchasing The buying of goods and services as well as the organisational function of deciding what, when and how to buy