Purchasing and Supply Chain Management PDF

STUDY UNIT 7 (CH5) THE FIELD OF BUSINESS ACTIVITY AND COMPETITIVE STRATEGIES Purchasing and Supply Chain Management Chapter 1: Purchasing and supply management in perspective  LEARNING OBJECTIVES After you have studied this chapter, you should be able to 1 describe the nature...

STUDY UNIT 7 (CH5) THE FIELD OF BUSINESS ACTIVITY AND COMPETITIVE STRATEGIES Purchasing and Supply Chain Management Chapter 1: Purchasing and supply management in perspective  LEARNING OBJECTIVES After you have studied this chapter, you should be able to 1 describe the nature of the purchasing and supply function 2 explain the importance of purchasing and supply 3 illustrate and explain the importance of purchasing and supply management for organisations 4 list the differences between supply management, logistics management and supply chain management 5 differentiate between environmental purchasing and sustainable purchasing. 2  INTRODUCTION  Purchasing for households – many time spur of the moment purchases  Purchasing for organisations  In case of commerce, purchasing not equally important for all types of organisations  Large volumes – lengthier process  Evolution of purchasing  Knowledge and skills essential 3 1.1 UNRAVELLING THE TERMINOLOGY CONFUSION PURCHASING, PROCUREMENT AND SOURCING  Purchasing  Functional group in organisational structure; functional activity of buying materials, goods and services  Procurement  Purchasing in wider and more modern concept of supply chain management  Sourcing  Process of identifying, conducting negotiations with and forming supply agreements with suppliers of goods and services  Strategic sourcing process – broader and more comprehensive than procurement process 4 1.1 UNRAVELLING THE TERMINOLOGY CONFUSION (CONT) SUPPLY MANAGEMENT  Broad set of activities carried out by organisations to:  analyse sourcing opportunities,  develop sourcing strategies,  select suppliers, and  carry out all the activities to procure goods and services 5 1.1 UNRAVELLING THE TERMINOLOGY CONFUSION (CONT) SUPPLY CHAIN MANAGEMENT  Encompasses planning and management of all activities involved in sourcing and procurement, conversion and all logistics management activities  Coordination and collaboration  Channel partners – suppliers, intermediaries, 3rd party service providers and customers  Figure 1.1 6 1.1 UNRAVELLING THE TERMINOLOGY CONFUSION (CONT) VALUE CHAIN  An organisation consists of primary and secondary value- contributing activities which can lead to competitiveness if configured correctly (Porter)  Figure 1.2  Porter’s value chain  Primary activities  Inbound logistics, Operations, Outbound logistics, Marketing and sales, Customer service  Support activities  Organisational infrastructure, Human resource management, Technology development and Purchasing 7 1.1 UNRAVELLING THE TERMINOLOGY CONFUSION (CONT) Figure 1.2 A simplified value chain (pg.7) 8 1.1 UNRAVELLING THE TERMINOLOGY CONFUSION (CONT)  Value chain is  Composed of value activities and margin which is achieved by these activities  Value chain management  All stakeholders belonging to same value chain are challenged to improve organisation’s value proposition to its final customers  What is the difference between value chain and supply chain management?  Value chain – Personnel and functions within organisation  Supply chain – External parties such as suppliers, intermediaries and customers 9 1.2 OBJECTIVES OF PURCHASING AND SUPPLY MANAGEMENT  Objectives of organisation should always be focused on profitable satisfaction of identified customer’s needs  Efficiently and effectively – highest possible output with lowest possible input 10 1.2 OBJECTIVES OF PURCHASING AND SUPPLY MANAGEMENT (CONT)  Core to most purchasing and supply functions:  To supply organisation with a sustainable flow of materials and services to meet current and expected future needs  To manage supply base so that adequate suppliers are available for current and future requirements of organisation  To foster interfunctional relationships  To maintain an optimum balance of inventory that would ensure desired level of customer service while minimising costs  To maintain and develop quality of purchased products and services as well as internal service delivery  To contribute to development of overall organisational strategies  To ensure that a timely, cost-effective and comprehensive information system is in place 11 1.3 THE IMPORTANCE OF THE PURCHASING AND SUPPLY FUNCTION FOR ORGANISATIONS REASONS FOR THE INCREASING IMPORTANCE OF THE PURCHASING AND SUPPLY FUNCTION  Globalisation of world trade and global competition  Organisations have adjusted business strategies and organisational structures to become more internationally oriented  Rapid development in information technology  Supply risks have increased  Shortened life span of products owing to the technological revolution  Increasingly stringent quality specifications and control  Recycling of materials and conservation of the environment are becoming increasingly imperative  Constant rises in inventory costs – interest and transport 12 1.3 THE IMPORTANCE OF THE PURCHASING AND SUPPLY FUNCTION FOR ORGANISATIONS (CONT) THE IMPORTANCE OF THE PURCHASING AND SUPPLY FUNCTION FOR SUCCESSFUL BUSINESS OPERATIONS  Two key business areas  Turnover/total cost balance  Return on investment (ROI) 13 1.3 THE IMPORTANCE OF THE PURCHASING AND SUPPLY FUNCTION FOR ORGANISATIONS (CONT) Turnover/total cost balance  Purchasing and supply management impact on net income of organisation  Two major elements responsible for higher net income  Increase in turnover (sales)  Lower total cost  Figure 1.3 14 1.3 THE IMPORTANCE OF THE PURCHASING AND SUPPLY FUNCTION FOR ORGANISATIONS (CONT) Figure 1.3 Purchasing and supply management balancing lower cost and increased sales (10) 15 1.3 THE IMPORTANCE OF THE PURCHASING AND SUPPLY FUNCTION FOR ORGANISATIONS (CONT) Factors influencing increased sales  Improved customer lead time  Flexibility  Improved quality  Innovation Factors contributing to lower total cost  Lower inventory cost  Price of products and services  Quality cost  Innovations may mean lower input costs 16 1.3 THE IMPORTANCE OF THE PURCHASING AND SUPPLY FUNCTION FOR ORGANISATIONS (CONT) Return on investment (ROI)  ROI = Profit margin x Total asset turnover rate  Profit margin (PM) = (Net income ÷ Sales) × 100  Total asset turnover rate (TAT) = Turnover ÷ Total assets  Turnover = total income from sales  Net assets = current assets (inventories, accounts receivable and cash) and non-current (fixed) assets  Figure 1.4 17 1.3 THE IMPORTANCE OF THE PURCHASING AND SUPPLY FUNCTION FOR ORGANISATIONS (CONT) Figure 1.4: How the return on investment is calculated (pg. 12) 18 1.3 THE IMPORTANCE OF THE PURCHASING AND SUPPLY FUNCTION FOR ORGANISATIONS (CONT) THE INFLUENCE OF SUPPLY MANAGEMENT ON GENERAL BUSINESS OPERATIONS  Interaction between purchasing and supply management and other organisational often determines level of success achieved by these operating units  Operations/production function  Requires uninterrupted flow of goods, materials and services to perform its activities  Avoid production stoppages and poor quality products  Sales (as part of marketing function)  Purchasing identify products – good ideas for marketing for expansion purposes  Requires timely availability of stock for marketing purposes 19 1.3 THE IMPORTANCE OF THE PURCHASING AND SUPPLY FUNCTION FOR ORGANISATIONS (CONT) THE INFLUENCE OF SUPPLY MANAGEMENT ON GENERAL BUSINESS OPERATIONS (CONT)  Human resources function  Requires eg equipment for cafeteria or tangible fringe benefits for staff  Administrative and finance functions  Require office equipment and supplies  Finance – inventory holding, conditions of payment, hedging foreign exchange risks, cash flow  Public relations  Constant communication with external parties 20 1.4 PURCHASING AND SUPPLY MANAGEMENT AND RELATION DEVELOPMENT SUPPLY CHAIN MANAGEMENT  SCM  Management philosophy aimed at integrating network of  upstream linkages (sources of supply,  internal linkages inside the organisation and  downward linkages (distribution and ultimate customers)  Create value for customers by providing products/services meeting customer demands  Figure 1.5 21 1.4 PURCHASING AND SUPPLY MANAGEMENT AND RELATION DEVELOPMENT (CONT) SUPPLY CHAIN MANAGEMENT Figure 1.5 A supply chain model (pg.15) 22 1.4 PURCHASING AND SUPPLY MANAGEMENT AND RELATION DEVELOPMENT (CONT) Some of the most important processes of a supply chain  Customer-driven supply chain  Customer defines product/service, info fed through supply chain  Suppliers impact entire supply chain – involve in processes creating value  Efficient logistics  Least cost in supply chain  Activities include inventory, transportation, warehousing and order processing  Demand-driven sales planning  Linked to customer-driven demand  Volume and mix trigger for all processes 23 1.4 PURCHASING AND SUPPLY MANAGEMENT AND RELATION DEVELOPMENT (CONT) Some of the most important processes of a supply chain (cont)  Lean manufacturing  Most effective operation of all manufacturing processes  Should be fully integrated with supply chain  Lean production – value-adding processing in operations management where elements of waste have been eliminated  Information processing  Flow of info upstream and downstream – integrates individual systems of participants in supply chain  Sourcing  Upstream extension of supply chain 24 1.4 PURCHASING AND SUPPLY MANAGEMENT AND RELATION DEVELOPMENT (CONT) Key concepts in SCM  Value and the creation of customer value  Better quality of inputs, optimisation of input costs, timeliness of transformation and customer satisfaction  Total cost of ownership (TCO)  Competitive advantage  Optimise total cost over whole supply chain  Cost of buying, using and disposing of product is optimised  Benefit passed on to end customer 25 1.4 PURCHASING AND SUPPLY MANAGEMENT AND RELATION DEVELOPMENT (CONT) Key concepts in SCM (cont)  Integration of processes  Processes are linked  Managed processes across functional or organisational boundaries  Reduction of cycle time  Anticipate customer demand  Reduce lead times  Reduce design and manufacturing time  Quicker introduction of product to market 26 1.4 PURCHASING AND SUPPLY MANAGEMENT AND RELATION DEVELOPMENT (CONT) Characteristics of supply chain management  SCM:  Philosophy or approach to conducting business  Implies optimised performance from all supply chain members across all processes and activities  Integration of multiple layers or tiers of organisations striving as a team  Management of a network of organisations which may be involved in numerous supply chains of many organisations  Management of all links and interfaces in supply chain  Made possible by information sharing throughout whole chain  Based on a shared vision of what customer value is 27  PREPARATION FOR NEXT LECTURE  Work through Chapter 1 together with the slides, textbook and study guide  Read through Chapter 2 in preparation for your next lecture 28