Chapter 1 -Supply Chain and Procurement

• The rapid globalization and advances in telecommunications have made comprehensive supply chain understanding and management crucial
• Supply chains influence everything from raw material procurement to finished goods delivery
• Supply chains are generally organized into planning, sourcing, making, and delivering/returning key functional areas
• Recent global disruptions have heightened scrutiny on supply chains and procurement, which entails acquiring external resources
• Procurement encompasses strategy, design, management, and process evaluation
• Outsourcing decisions shape a company's business model, competitiveness, and overall performance

Core Supply Chain Functions

• Supply chains include planning, sourcing, making, and delivering/returning activities
• The planning function determines the strategic direction for all activities
• Procurement is crucial in the sourcing function, which drives value through material acquisition, cost reduction, supply continuity management, and quality assurance

Procurement, Purchasing, Sourcing and Supply Management

• Differentiating between procurement, sourcing, and purchasing is essential in supply chain management to understand strategic and operational activities
• Procurement is the strategic framework overseeing the lifecycle of acquiring goods and services, focusing on long-term value
• Sourcing is a component of procurement that involves identifying and evaluating suppliers, aimed at building a reliable vendor base
• Purchasing is the transactional segment of procurement, focusing on immediate operational tasks and securing necessary inputs for immediate needs
• Supply management is associated with the end-to-end management of goods and services flow, ensuring procured items are delivered in alignment with operational demands

Outsourcing Trends

• Procurement has gained importance, becoming a management priority as it creates tangible value for firms
• Purchasing costs typically account for 60-80% of company revenues
• Companies have increased outsourcing of non-core activities to focus on core competencies and leverage expertise of supply networks
• Historically, complete supply chain control happened through vertical integration

Transition from Vertical Integration

• The transition from vertical integration to supply networks is driven by increased flexibility and cost efficiency
• The need to convert fixed costs into variable costs has grown because of higher demand volatility and increased competition
• Markets today require rapid innovation leading to open innovation relying on suppliers as key innovation sources
• Modern consumers expect personalized products and services which requires diverse suppliers who can tailor products thus a shift from mass production to mass customization
• Growing sophistication of products has compelled companies to turn to specialized suppliers
• Globalization opens up outsourcing opportunities and enables sourcing from competitive suppliers worldwide

Increased Profitability

• Focusing on core competencies and outsourcing non-core functions helps firms improve their efficiency and financial performance
• Suppliers are key value creators in supply chains contributing significantly to the value, especially in innovation
• Reliance on suppliers can lead to a loss of differentiation if companies use the same suppliers, which can be mitigated through customization
• The fragmentation of supply chains has reshaped automotive and textiles, food, electronics, and apparel
• Procurement's role has evolved, now involves co-creating differentiation with suppliers by strategically managing relationships to foster innovation

Procurement impact on profitability

• Purchasing decisions significantly drive a company's overall economic performance
• The purchase-to-sales ratio measures the percentage of a company's turnover spent on purchasing from external suppliers, a proxy for the level of outsourcing
• Reducing procurement costs can greatly enhance profitability, an increase in purchasing costs can have an equally negative impact
• Financial markets play a pivotal role in driving the value

Comparing Actions

• Besides improving procurement efforts, companies can increased costs to boost profitability
• Factors such as the firm's stage in the business life cycle, the industry context, and procurement and sales maturity influence best approach
• Younger companies should focus on sales growth whereas mature companies enhance profitability through procurement efficiency.

Procurement impact on financial performance

• Procurement is the leading decision driver of a company's profitability
• An important factor as optimizing working capital
• Optimizing working capital entails balancing costs and revenues of economic transactions
• Procurement plays key role in working capital and sustaining financial performance of a company

Cash-to-cash cycle definition

• Cash-to-cash cycle (C2C) known as the cash generation cycle
• Cash flow should be monitored as economic performance and financial stability
• C2C represents the average time between outflows (payment to suppliers) and inflows (payment from customers)
• C2C calculated by summing three components: Days Inventory Outstanding (DIO), Days Sales Outstanding (DSO) and Days Payable Outstanding (DPO)

Components of the cash-to-cash cycle

• Each of the three components DIO, DSO, and DPO measures the short-term financial stability of a company
• In practice each variable requires trade offs that the financial department monitor

Optimizing Net Operating Working Capital

• Companies can improve their financial health, by managing their cash-to-cash cycle effectively
• By reducing their reliance on external financing, and can enhance the operational efficiency
• To manage financial exposure created by the C2C, companies will rely on on short-term credit instruments to manage
• Procurement plays a pivotal role in influencing the cash-to-cash cycle, which is the financial equilibrium
• Short cash cycle indicated company is converting its payment more quickly this improving liquidity

Procurement and risk

• As companies increase their number of suppliers and the complexity of chains, their exposure is heightened to risks such as disruptions quality issues and sustainability challenges
• Effective supply risk management has become increasingly important as complex cases severe consequences
• Boeing's experience illustrates the dangers of outsourcing without sufficiently managing supplier quality

Procurement and innovative management

• Supply chain can have huge impact on innovation for many reasons
• Modern procurement strategies emphasize co-creation with supplies through combined development projects
• Procurement team tasked scouting for innovative suppliers and technologies that can enhance the company's product offerings and operation processes
• Open communication is key and facilitates new learning
• Innovation has the potential to ensure continuous improvement through strategic partnerships with suppliers

Explore the essential functions of supply chain management, including planning, sourcing, making, and delivering. Understand the critical role of procurement in acquiring resources and driving value through cost reduction and supply continuity. Recent global disruptions highlight the importance of robust supply chains and effective procurement strategies.