Learning Objectives
LO 14-1: Explain the strategic importance of supply management.
The strategic importance of supply management can best be explained by the equation profitability is equal to revenues minus expenses. Consequently, even if revenues remain flat, a reduction in expenses will improve profitability. Effective and efficient supply management of material and services purchases can deliver significant reductions in expenses. The cost reductions are not only the actual price of materials and services, by money saved by improved quality, improved delivery times, etc.
LO 14-2: Review the six-step process of the purchasing cycle.
The six steps of the purchasing cycle can be divided into two major areas, preparing for the acquisition of goods and services, and the actual acquisition of goods and services. During the preparation phase, a company conducts an internal assessment and purchases are divided into general spend categories such as raw materials, customized items, etc. The next step is assessing the market, where they determine who has the power, the buyer or the supplier, and make other assessments of risks and opportunities in the external environment. Step three, collecting supplier information, provides information that will be used in the competitive bidding or negotiating processes. As the cycle moves forward, the company develops a sourcing strategy, e.g. sole sourcing, etc. In step five, the supply personnel solicit and evaluate bids. Ways to solicit bids are through verbal quotes, request for information, request for proposal, etc. A common method for evaluating bids is calculating the total cost of ownership. The final step is notifying the selected supplier and implementing the contract.
LO 14-3: Perform the calculations in the break-even analysis for make-or-buy decisions.
See example 14.2, a make-or-buy break-even analysis, page 449. To calculate the break-even point of the break-even analysis, one uses an equation where the cost to make the product is equal to the cost to buy the product (make cost = buy cost). There are five variables in the equation, manufacturing fixed cost (Fm), manufacturing variable costs (Vm), buying fixed cost (Fb), buying variable cost (Vb), and the units manufactured or purchased (x). Solving for x provides the break-even point. EQUATION: Fm + Vm (x) = Fb + Fb (x)
LO 14-4: Discuss the opportunities and challenges of global sourcing.
The opportunities of global sourcing for companies are expanding their supply base, improving product quality, reducing cost, improving delivery performance, and taking advantage of the benefits of free trade agreements. The challenges of global sourcing are the time and costs involved in selecting foreign suppliers, dealing with tariffs, U.S. custom clearance, currency exchange rates, political, cultural, labor, infrastructure, and legal problems.
LO 14-5: Explain the benefits of supply base rationalization.
One benefit of supply base rationalization, also called supply base reduction or supply base optimization, is reducing purchases from marginal or poor performing suppliers. The flip side of the aforementioned benefit is increasing purchases from desirable, top-performing suppliers. Furthermore, reducing the supply base means larger purchases for remaining suppliers; hopefully, resulting in lower prices for the purchaser due to quantity discounts. Since, in theory, the company is now dealing with top-performing suppliers, collaboration will increase as well as product quality and delivery reliability.
LO 14-6: Summarize the approaches used in managing supplier relationships.
Supplier relationship management (SRM) uses several approaches to facilitate collaboration, sourcing, transaction execution, and performance monitoring. One approach is to establish a strategic alliance or key supplier relationship in order to enhance working relationships and the sharing of information. Vendor-managed inventory is another approach for managing supplier relationships that result in better control of inventory and reduced costs. The use of technology is an approach where, through SRM software, information systems provide a wealth of information on a company’s interactions with suppliers such as order planning, returns, etc.
LO 14-7: Describe the issues and benefits of ethical and sustainable sourcing.
Ethical sourcing is essential to avoid issues such as human rights violations, environmental abuses, animal rights violations, and safety violations. The benefits of ethical sourcing are support provided ethnic minority businesses, women-owned enterprises, a reduction in the use of child labor, and other unacceptable labor practices. Sustainability sourcing is a process of purchasing goods and services that takes into account the long-term impact on people, profits, and the planet. The main issue is global warming which can lead to changes in weather patterns, which in turn can increase flooding, drought, and cause extreme changes in temperature. Sustainability sourcing has led to green purchasing. Benefits derived from green purchasing are waste reduction, hazardous material elimination, recycling, etc.
LO 14-8: Discuss how e-procurement systems assist firms in streamlining purchasing activities.
E-procurement (e-purchasing) is the purchasing of goods and services over the internet. E-purchasing has led to reverse auctions which enable a company to reduce purchase spend. Overall, e-procurement systems streamline purchasing activities by eliminating paperwork, reducing overhead costs, reducing errors in ordering and order fulfillment, and reducing the overall time involved in transactions.
LO 14-9: Compare current strategies used for improving supplier performance.
One strategy for improving supplier performance is a supplier performance rating system. Often this is done through internal surveys that rate suppliers on product and service quality, delivery performance, total cost performance, etc. A version of this is the supplier scorecard which is used by buyers to track supplier performance. Supplier performance meetings are another strategy. Meetings are generally annual and suppliers are provided feedback, and both parties discuss ways to improve performance. In addition, supplier performance meetings can include supplier recognition and awards; thus, driving future performance and providing benchmarks for other suppliers to build upon.
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