Supply Chain Management

INSC 30313 Session 15

Supply Management

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What is Supply Management?

Supply Management identification, acquisition, and

management of inputs and supplier relationships that
a firm needs to attain its strategic objectives

Different terms, each indicating a level of focus:

Sourcing strategic
Identification and evaluation of new vendors
Procurement tactical
Supplier selection and transaction management
Purchasing operational
Placing and processing purchase orders and requisitions

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Impact on Firm and Supply Chain

Purchased goods and services account for large share of a

products cost
Example
- Honda 75-80% of cars cost comes from purchased parts
- Apple cost of parts for iPad are 30x the cost of assembly

Purchasing isnt just about parts and materials

Sourcing of services
Sourcing of business functions
- Accounting
- IS
- Maintenance
- Logistics
- HR
- Engineering

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Goals of Supply Management

Ensure timely availability of resources

Right purchases available at right time to support:
- New product launches
- Production
- Shipments
Assessment of Supply Risk - probability of an unplanned event in the
acquisition, delivery, or use of goods and services that negatively
impacts a firms ability to serve its customers
- Disruptions
- Thefts of intellectual property
- Price increases
- Product safety problems
Reduce total cost
Effective SM offers a huge potential to reduce costs and improve cash
flow
Focus on Total Cost of Ownership (TCO)
All costs incurred before, during and after the purchase of a good or
service

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Goals of Supply Management

Enhance quality
Garbage in, garbage out

Access technology and innovation

Suppliers often provide essential technical knowledge and
expertise by being directly involved early in product development
activities

Foster social responsibility-

Add value to communities
Increase social diversity
Environmental responsibility
Ethical behavior
Financial responsibility
Respect human rights
Safe working environment

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Insource vs. Outsource: Make or Buy

Strategic level focus on current and future core

competencies
Consider outsourcing non-core activities to suppliers

Advantages of outsourcing
Reduces investment of capital
Benefits from suppliers economies of scale
Increased flexibility
Greater capacity
Better access to technology
Can improve quality, reduce cost

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Insource vs. Outsource: Make or Buy

Risks of Outsourcing
Supplier may not meet requirements
- Quality
- Timing
Costs can increase
Giving away technology and/or design secrets
- Creating future competitors

Make or Buy decisions should be made by a cross-

functional team

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Strategic Sourcing Process

If decision is to outsource, suppliers must be:

Identified
Evaluated
Selected
Managed

5-step Strategic Sourcing Process

Important whether you source materials to make in-house or
outsource complete components
1. Analyze Spend & Market
2. Develop Sourcing Strategy
3. Identify Potential Suppliers
4. Assess & Select Suppliers
5. Manage Relationship

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1. Analyze Spend and Market
Spend analysis process to understand what
purchases are being made, at what price and from what
suppliers
Problem: Often different people in firm buy same or similar
product from different suppliers at different prices
- Boeing found that it was buying 200 types of safety glass when 2 or 3
would suffice
Analysis should include purchases made outside of supply
management
- Marketing
- HR
- IT

Market analysis gather data on market structure

Number of suppliers and buyers; nature of competition

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 2. Develop Sourcing Strategy

Determines which
suppliers to use for which
purchases High

Strategy must support Bottleneck: Strategic:

Use multiple Build
corporate strategy, as well sources partnerships
Level of
as the other functional Supply
strategies within firm Risk
Must consider/address Noncritical: Leverage:
Number of suppliers to use Seek Consolidate
efficiencies purchases
Capabilities and location of
Low
suppliers
Type of relationship and Low Value to Firm High

contract length

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2. Develop Sourcing Strategy

Number of suppliers
Too few increases supply risk
Too many increases complexity, makes communication
and control difficulty

Capabilities and location

How important is proximity?
What are the laws?

Type of relationship and contract length

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3. Identify Potential Suppliers

Current suppliers
Suppliers used in past
Internet searches
Catalogs
Trade directories
Trade journals
Personal contacts / networking

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4. Assess and Select Suppliers

Competitive bidding
Issue Request For Proposal (RFP) or Request for Quote (RFQ)
- Describe the purchase requirements as specifically as possible
Quality
Quantity
Delivery requirements
Packaging
Shipping

- Must be accurate / correct because its what the supplier uses

to develop bid/quote
Online reverse auction
Like eBay, but progressive bids from suppliers get lower and lower

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4. Assess and Select Suppliers

Rank vendors based on the fit between your needs

and their capabilities
Weighted Point Model: establishes performance
categories that are weighted by importance

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4. Assess and Select Suppliers

Negotiation
Preferred method for strategic purchases that require
partnerships
Better choice than bidding when:
- High degree of uncertainty in purchase requirements
- Requirements may change due to long lead time or volatile
market
- Early supplier involvement is required
- Start-up is complex
- Customized equipment is needed

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5. Manage the Ongoing Supplier Relationship
Information sharing and coordination with suppliers
Purchase orders to signal need for goods or services
- EDI (electronic data interchange)
- CPFR (collaborative planning and forecasting replenishment)

Supplier performance monitoring and improvement

Supplier scorecard-track and report supplier performance in key
areas
Supplier certification-assessment of suppliers ability to meet
buyers needs
Supplier Relationship Management (SRM)
Comprehensive system, facilitated by software, that manages the
firms interactions with its supply base
- Like CRM but for suppliers; part of ERP software

https://www.youtube.com/watch?v=FMwkXy3y0g0

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