Quiz 2

Chapter 7
Quality
©McGraw-Hill Education. All rights reserved.

Key Questions
Addressed in Chapter 7
• How do we assure quality?
• How do we know that what we ordered meets

expectations?
Market Niches for Quality
Quality
Better than Same as Lower than

Competitors Competitors Competitors
©McGraw-Hill Education. All rights reserved. 3

What is Quality?
• Often used to describe:

– Function
– Suitability
– Reliability
– Conformance with specifications
– Satisfaction with actual performance
– Best buy
Eight Dimensions of Quality
1. Performance: The primary function of the product or
service
2. Features: The bells and whistles.
3. Reliability: The probability of failure within a specified
time period.
4. Durability: The life expectancy.
5. Conformance: The meeting of specifications.
6. Serviceability: The maintainability and ease of fixing.
7. Aesthetics: The look, smell, feel, and sound.
8. Perceived quality: The image in the eyes of the
customer.

The Traditional View of
Quality-Cost Trade-off

The Current View of the
Quality-Cost Trade-off

Five Major Cost of Quality
Categories
• Prevention costs
• Appraisal costs
• Internal failure costs
• External failure costs
• Morale costs

Lean Thinking
• A management philosophy focused on
maximizing customer value while minimizing
waste from:
– Overproduction
– Waiting
– Transportation
– Nonvalue-adding processes
– Inventory
– Motion
– Costs of quality (scrap, rework, and inspection)
A Value Stream
• A series of steps executed in the right way and at
the right time to create value for the customer.
• Each step must be:
– valuable to the customer
– capable (gets the exact same result every time)
– available (it can be performed whenever needed)
– adequate (capacity to perform it exactly when
needed)
– flexible (can respond rapidly to changing customer
desires without creating inefficiencies)
Lean Thinking and the Value
Stream
• Goal: optimize the flow of products and
services through value streams that flow
internally across technologies, assets, and
departments to customers and externally with
supply chain partners
– Pull versus push system
Total Quality Management
• A philosophy and system of management focused
on long-term success through customer
satisfaction.
– Quality integrated throughout the organization’s
activities
– Employee commitment to continuous improvement
– Suppliers are partners in the TQM process
– Uses tools including continuous improvement or
kaizen, quality function deployment (QFD), and
statistical process control (SPC) to achieve
performance improvements

Objectives of Quality
Function Deployment
• Seeks both spoken and unspoken customer needs
• Identifies positive quality and business
opportunities
• Translates these into actions and designs by using
transparent analytic and prioritization methods
• Empowers organizations to exceed normal
expectations
• Provides a level of unanticipated excitement that
generates value

Continuous Improvement or
Kaizen
• Relentless pursuit of product and process
improve-ment through a series of small,
progressive steps
• Follows a well-defined and structured approach
like plan–do–check–act (the Deming Wheel)
• Incorporates problem-solving tools:
– Pareto analysis, histograms, scatter diagrams, check
sheets, fishbone diagrams, control charts, run charts,
and process flow diagrams
Quality Function Deployment
• A comprehensive quality system to satisfy
customers
– Seeks spoken and unspoken customer needs
– Maximizes “positive” quality that creates value
– Translates into actions and designs by using
transparent analytic and prioritization methods
– Empowers organizations to exceed normal
expectations
– Provides a level of unanticipated excitement that
generates value.
• Applies to goods and services
Six Sigma
• Prevent defects by using data to reduce variation and
waste
• No more than 3.4 defects per million opportunities
– six standard deviations are very close to zero defects and
correspond to a Cpk value of 2.0
• Measurable goals: cost reduction or profit increase
through improvements in cycle time, delivery, safety
• Developed by GE and Motorola and widely adopted
• Applies to manufacturing; adaptable to services
Six Sigma
• A philosophy: work is processes that can be
defined, measured, analyzed, improved, and
controlled; if you control the inputs, you will
control the outputs
• A set of qualitative and quantitative tools to drive
process improvement: statistical process control
(SPC), control charts, failure mode and effects
analysis, and flowcharting
• A methodology with five steps: define, measure,
analyze, improve, and control (DMAIC)
--Kubiak and Benbow, ASQ
Common Elements of Six Sigma
● A management environment that supports the initiatives as
business strategy
– Organizational support is provided by designated executives and
champions who set the direction for project selection and deployment
● Well-defined projects with bottom-line impact
● Teams whose members have statistical training
– Master black belt and black, green, yellow and white belts
● Emphasis on the DMAIC approach

Statistical Process Control (SPC)
• A technique that involves testing a random

sample of output from a process in order to
detect if nonrandom changes in the process are
occurring
• Causes of variation: Common causes and special
or nonrandom, assignable causes
• Process capability: ability of the process to meet
specifications consistently

Assuring Quality Through SPC
1. Buyer establishes required quality specifications
2. Supplier determines process capability
a. Identify common or chance causes of variation
b. Identify special or assignable causes of variation
c. Eliminate special causes
3. Compare buyer’s quality requirements to
supplier’s process capability
4. Make necessary adjustments
a. Negotiate process improvements with supplier
b. Seek an alternate supplier
Control Chart
Control Chart
0.034
0.033
0.032 UCL
0.031 LCL
0.03 Sample
0.029 Average
0.028
0.027
1 2 3 4 5 6 7 8 9 10
Sample Number

Service Quality Evaluation
• Reliability: Ability to perform the promised
service dependably and accurately
• Responsiveness: Willingness to help customers
and provide prompt service
• Assurance: Knowledge and courtesy of
employees and their ability to inspire trust and
confidence
• Empathy: Caring, individualized attention the firm
provides its customers
• Tangibles: Physical facilities, equipment and
appearance of personnel
Source: A. Prasuranman, V.A. Zeithaml and L.L. Berry, “A Conceptual Model of Service Quality and Its Implications
for the Future”, Journal of Marketing, Fall 1985, p. 41-50.

A Framework for Analyzing
Services
• Value of the service
– high, medium low
– Pareto/ABC analysis
• Degree of repetitiveness
– repetitive versus unique
• Degree of tangibility
– low versus high
• Direction of the service
– directed towards people or assets

A Framework for Analyzing
Services
• Production of the service
– People, equipment or people and equipment
– Skill level of people
• Nature of demand
– Continuous, periodic or discrete
• Nature of service delivery
– Location, time
• Degree of standardization
– Standard or customized
• Skills required for the service

Quality Standards
• ISO 9000
– International consensus on good quality management practices
consisting of standards and guidelines relating to quality management
systems and related supporting standards
• ISO 14000
– Similar to ISO 9000 in management principles
– Focuses on environmental issues

Chapter 1
Purchasing and Supply Management

Key Question Addressed in
Chapter 1
• What can supply and suppliers do to help the
organization
– increase revenues?
and/or
– decrease costs?

Corporate Supply Changes
• Impact of environmental, security and financial
regulations on competitive advantage
• Increased outsourcing places great reliance on
suppliers to respond to end-customer needs
• Greater dependence on suppliers for design and build
responsibilities for subassemblies and subsystems
• Increased global competition
• Development of new product technologies
• Evolving information systems
• Trend to single sourcing with fewer key suppliers and
strategic supplier relationships

Corporate Supply Opportunities
• Identify opportunities to increase revenue
• Implement supply initiatives to improve
customer satisfaction
• Reduce total costs of ownership
• Improve supply process efficiency and
effectiveness
• Maximize value from suppliers
• Make product/service innovations with key
suppliers

Steps in the Procurement Process
(1) recognition of need
(2) translation of that need into a commercially
equivalent description
(3) search for potential suppliers
(4) selection of a suitable source(s)
(5) agreement on order or contract details
(6) delivery of products and/or services
(7) payment of suppliers

Logistics Management
“Logistics management is
that part of supply chain management
that plans, implements, and controls the
efficient, effective forward and reverse flow and
storage
of goods, services, and related information
between the point of origin and
the point of consumption
in order to meet customers’ requirements.”
--Council of Supply Chain Management Professionals (CSCMP)

Major Logistics Activities
• customer service ● parts and service support
• demand forecasting/planning ● plant and warehouse site
• inventory management selection
• logistics communications ● return goods handling
• material handling ● reverse logistics
• order processing ● traffic and transportation
• packaging ● warehouse storage

Supply Chain Management
“The design and management of seamless, value-added

processes across organizational boundaries to meet the
real needs of the end customer. The development and
integration of people and technological resources are
critical to successful supply chain integration.”
--Institute for Supply Management (ISM) Glossary

Profit-Leverage Effect
• Before Spend Decrease • After 10% Spend Decrease
Revenue $100M $100M

Less Purchases -60M -54M (60 x 0.9)
Less Other Costs -32M -32M
Profit 8M 14M (8 x 1.75)

Return-on-Assets Factors

Purchasing’s Operational and
Strategic Contributions
1. Supply Contribution
Operational Strategic
Trouble Prevention Opportunity Maximization

Direct Indirect
Enhancing Performance
Bottom-Line Impact
of Others

Negative Neutral Positive
Operationally deficient Operationally acceptable Operationally acceptable

Strategically deficient Strategically deficient Strategically acceptable
Directly deficient Directly acceptable Directly acceptable
Indirectly deficient Indirectly deficient Indirectly acceptable

Differences between
Manufacturing and Services
Organizations
Manufacturing Service Provider
• The largest portion of needs is ●The largest portion of needs is
generated by customer needs. generated by capital, services
• The largest portion of spend and other requirements
with suppliers will be on direct enabling employees to provide
requirements which comprise the service.
products sold to customers. ●In retailing the largest spend is
focused on re-sale
requirements.

The Opportunities for Contribution of
the Supply Function
• Profit-leverage effect
• Return-on-assets effect/Reduction in inventory
investment
• Information source
• Effect on efficiency
• Effect on competitive position and customer
satisfaction
• Effect on organizational risk
• Effect on image
• Training ground
• Management strategy and social policy

Differentiations for Supply in
Public Organizations

Differentiations for Supply in
Private Organizations

Challenges Facing Supply
• Supply chain management

• Measurement
• Risk management
• Sustainability
• Purchase of non-traditional goods/services
• Contribution to corporate strategy
• Recognition by senior management

Chapter 3
Supply Organization

Key Questions Addressed in
Chapter 3
• What are the objectives of supply?
• How might supply be organized to achieve

these objectives effectively and efficiently?
• What are the activities and responsibilities of

supply management?

Traditional View of Supply Objectives
• Obtain the right materials/services (meeting quality

requirements),
• in the right quantity,
• for delivery at the right time and
• right place,
• from the right source (a supplier who is reliable and
will meet its commitments in a timely fashion),
• with the right service (both before and after the
sale),
• and at the right price in the short and long term.

Nine Goals of Supply
1. Improve the organization’s competitive position
2. Provide an uninterrupted flow of materials, supplies and
services required to operate the organization
3. Keep inventory investment and loss at a minimum
4. Maintain and improve quality
5. Find or develop best-in-class suppliers
6. Standardize, where possible, the items and services bought
and the processes used to procure them
7. Purchase required items and services at lowest total cost of
ownership
8. Achieve harmonious, productive internal relationships
9. Accomplish supply objectives at the lowest possible
operating costs
Typical Supply Organization Structure—
Medium Sized Company, Single Location
Director of
Purchasing
Commodity Commodity Manager Materials

Manager Manager Administration Manager
and Processes
Buyer Buyer Manager Stores/

e-Purchasing Warehouse
Manager
Buyer Buyer Manager
p-cards Receiving
Inspection
Manager
Manager
Purchasing Manager
Research Transportation

Structure Options for Large
Organizations
• Centralized: Authority and responsibility for most supply-
related functions assigned to a central organization
• Hybrid: Authority and responsibility shared between a central
supply organization and business units, divisions, or operating
plants
– May lean toward centralized or decentralized depending on division of
decision-making authority
– Example: “center-led” organization in which strategic direction is
centralized and execution is decentralized
• Decentralized: Authority and responsibility for supply-related
functions dispersed throughout the organization

Potential Advantages and
Disadvantages of Centralization
Disadvantages
• Lack of business unit focus
Advantages • Narrow specification and job boredom
• Strategic focus • Corporate staff appears excessive
• Greater buying specialization • Tendency to minimize legitimate differences
• Ability to pay for talent in requirements
• Consolidation of requirements - clout • Lack of recognition of unique business unit
• Coordination of policies and procedures needs
• Effective planning and research • Focus on corporate requirements, not on
business unit strategic requirements
• Common suppliers
• Even common suppliers behave differently in
• Proximity to major organizational decision
geographic and market segments
makers
• Distance from users
• Critical mass
• Tendency to create organizational silos
• Firm brand recognition and stature
• Customer segments require adaptability to
• Reporting line - power unique situations
• Cost of purchasing low • Top management not able to spend time on
suppliers
• High visibility of purchasing costs
Potential Advantages and
Disadvantages of Decentralization
Advantages Disadvantages
• Easier coordination/communication with ● Difficult to communicate among business units
operating department ● Encourages users not to plan ahead
● Operational versus strategic focus
• Speed of response
● Too much focus on local sources - ignores better
• Effective use of local sources
supply opportunities
• Business unit autonomy ● No critical mass in organization for visibility/
• Reporting line simplicity effectiveness - “whole person syndrome”
• Undivided authority and responsibility ● Lacks clout
• Suits purchasing personnel preference ● Suboptimization
• Broad job definition ● Business unit preferences not congruent with
corporate preferences
• Geographical, cultural, political, ● Small differences magnified
environmental, social, language, currency
● Reporting at low level in organization
appropriateness
● Limits functional advancement opportunities
• Hides cost of supply ● Ignores larger organizational considerations
● Limited expertise for requirements
● Lack of standardization
● Cost of supply relatively high
Advantages and Disadvantages of Hybrid,
Centralized, and Decentralized Structures
Centralized Decentralized
Disadvantages Advantages Advantages Disadvantages
Hybrid
structure

Specialization in Supply
• Sourcing and commodity management

• Materials management
• Administration
• Supply research

Various Titles of the Chief
Purchasing Officer (CPO)
• VP of Supply
• VP of Purchasing
• VP of Strategic Sourcing
• VP Supply Chain Management
• Director, Global Procurement
• General Manager, Supply

CPO Trends
• Increasing education levels
• CPOs tend to report higher in the organization than they did in
the 1980s and 1990s
• CPOs are increasingly hired from outside the organization rather
than promoted from within
• CPOs are increasingly hired from functional areas other than
supply
• When a new CPO replaces a current CPO, the current CPO is
promoted or leaves the company for a similar position in
another firm
• CPO reporting lines change every 2.5 years on average (the
typical CPO will have at least two different bosses during tenure
in the role)
• The CPO role is still new in many organizations
Most Common CPO Reporting
Lines
• CEO
• Executive Vice President
• Vice President of Finance/CFO
• Group Vice President
• Senior Vice President

Factors that Influence Reporting
Level
1. The amount of purchased material and
services as a percentage of total costs or total
income
2. The nature of the products or services

acquired
3. The extent to which supply and suppliers can

provide competitive advantage

Categories of Supply’s Roles and
Responsibilities
1. What is acquired
2. Supply chain responsibilities
3. Type of involvement in “what is acquired”
and “supply chain responsibilities”
– no involvement, documentary, professional and
meaningful involvement (page 62)
4. Involvement in corporate activities

Purchasing Activities
• Purchasing/buying
• Purchasing research
• Inventory control
• Transportation
• Environmental and investment recovery/disposal
• Forecasting and planning
• Outsourcing and subcontracting
• Nonproduction/nontraditional purchases
• Supply chain management

Supply Teams
• Cross-functional teams
– sourcing, new product development/service
development, commodity management
• Teams with suppliers
• Teams with customers
• Co-location of Supply with Internal Customers
• Co-location of Suppliers in the Buying Organization
• Supplier councils - key suppliers
• Purchasing councils - purchasing personnel only

Purchasing Consortia
• A form of collaborative purchasing
• Used by public and private-sector organizations
• Goal:
To deliver a wider range of services at a lower
total cost through staff reductions, product and
service standardization, improved supplier
management capabilities, specialization of staff,
and better customer service

Chapter 13
Supplier Evaluation and Supplier
Relationships

Chapter 13
• How do we evaluate supplier

performance?
• How do we manage our supplier

relationships?
Example of a Categorical Supplier
Evaluation and Rating
Excellent: a. Meets delivery dates without expediting.

b. Requested delivery dates are usually accepted.
Good: c. Usually meets shipping dates without substantial follow-up.
d. Often is able to accept requested delivery dates.
Fair: e. Shipments sometimes late, substantial amount of follow-up required.
Poor: f. Shipments usually late, delivery promises seldom met, constant expediting
required.

Weighted Point Evaluation
Systems
• Identify suppliers
– Important suppliers and/or critical goods and services
• Identify factors or criteria for evaluation
• Determine the importance of each factor
• Establish a system to rate each supplier on each

factor

Customer Satisfaction and
Supplier Performance
Customer Satisfaction
Strategic Traditional Other Additional

Needs Needs Needs
Suppliers

Simplified Supply Chain
Perspective:
The Three Core Links
Supply Internal Customer

Link Link Link

Purchaser-Supplier Satisfaction
Model

Purchaser-Supplier Satisfaction Model:
Congruent and Noncongruent Perceptions

View of Buyer-Supplier
Relationships
Traditional Partnership
• Lowest price  Total cost of ownership
• Specification-driven  End-customer driven
• Short-term, reacts to market  Long-term
• Trouble avoidance  Opportunity maximization
• Purchasing’s responsibility  Cross-functional teams and top

management involvement
• Tactical
 Strategic
• Little sharing of information
 Both supplier and buyer share
short- and long-term plans
 Shared risk and opportunity
 Standardization
 Joint ventures
 Share data
The Deployment Path to
Partnership
1. Supplier Assessment
(Potential)
2. Supplier Improvements
3. Supplier Rationalization
4. Supplier Alignment
Supplier Partnership

Partnering Strategies and
Outcomes
Strategies Outcomes
 Decrease average delivery lot  Improved quality of the
size supplier’s operations/processes
 Decrease number of suppliers  Improved quality of incoming
 Decrease average number of goods

sources used per purchased item  Decreased supplier’s and buyer’s
 Increase average contract length total costs

 Increase average frequency of  Improved supplier’s ability to
delivery to the plant handle buyer-initiated changes

 Increase supplier involvement in
to the agreed-to delivery date
quality certification programs  Improved buyer’s ability to
handle supplier-initiated changes
to the agreed-to delivery date
Source: T. S. Graham, P. J. Daugherty and W. N. Dudley, “The Long Term Strategic Impact of Purchasing
Partnerships”, International Journal of Purchasing and Materials Management, Fall 1994..
Some Indicators of a Successful
Partnering Effort
• Formal communication processes
• Commitment to suppliers’ success
• Mutual profitability
• Stable relationships, not dependent on a few personalities
• Consistent and specific feedback on supplier performance
• Realistic expectations
• Employee accountability for ethical business conduct
• Meaningful information sharing
• Guidance to supplier in defining improvement efforts
• Non-adversarial negotiations and decisions based on total
cost of ownership

Buyer-Supplier Relationship:
Investment Versus Rewards
Obtained

Chapter 4
Supply Processes and Technology

Key Question Addressed in
Chapter 4
• Which process or processes will be most
effective and efficient to support the exchange
of money (the buyer’s responsibility) for goods
and services (the supplier’s responsibility)?

Reasons to Develop Robust
Supply Processes
• Large number of items
• Large dollar volume involved
• Need for an audit trail
• Severe consequences of poor performance
• Potential contribution to effective
organizational operations inherent in the
function

Strategy and Goal Alignment
• “Where, when, and how can supply personnel

contribute to short- and long-term goals and
strategies of the organization?”
• Vertical alignment:
– supply strategy and goals at the functional or business
unit level aligned with organizational strategy
• Horizontal alignment:
– Supply strategy and goals aligned with those of other
functional areas

Ensure Supply Process
Compliance
• Develop organizational structure, culture and
information systems that support compliance
• Standardize goods, services, and processes across
sites
• Aggregate requirements and leverage volume
• Simplify, streamline and improve processes and
deliver consistent results
• Formulate annual business plans
• Establish objectives for supply

Essential Steps in the Supply
Process
1. Recognition of need
2. Description of need
3. Identification and analysis of possible sources of
supply
4. Supplier selection and determination of terms
5. Preparation and placement of the purchase
order
6. Follow-up and/or expedite the order
7. Receipt and inspection of goods
8. Invoice clearing and payment
9. Maintenance of records and relationships

Step 1: Recognition of Need
• A person or a system identifies a definite need

in the organization—what, how much, and
when needed
• The greatest opportunity to affect value is
when needs are recognized and described
(product conception and design)
– Supply and supplier(s) can contribute more in
these steps than later in the acquisition process

Step 2: Description of Need
• Needs should be driven by external customers.
– External customer needs → Internal customers →
Purchasers → Potential suppliers
• An accurate description of the need (good,

service, or combination) is essential
– Unclear or ambiguous descriptions, or overspecified
materials, services, or quality = unnecessary costs
– Supply management and the internal customer or
cross-functional sourcing team share responsibility for
accurate descriptions

A Requisition
• A gatekeeping tool to manage the flow of information
through three gates:
(1) authority: Does the requisitioner have the authority

to make the specified request at the specified budget
level?
(2) internal clarity: Is the need described in a clear and

unambiguous way?
(3) internal clearance: Is the description ready for

communicating externally with potential suppliers?

Information Needed for
Requisitions
• Date
• Number (identification)
• Originating department
• Account number
• Complete description of material or service and
quantity
• Date material or service needed
• Any special shipping or service-delivery
instructions
• Signature of requisitioner

Step 3: Identification of Potential
Sources
• Online tools
• Colleagues
• Existing suppliers

Issue an RFx
• One optional communication tool that is NOT

a solicitation for business:
(1) request for information (RFI)
• Three options for soliciting business:

(1) request for quotation (RFQ)
(2) request for proposal (RFP)
(3) request or invitation for bid (RFB or IFB)

Step 4: Supplier Selection and
Determination of Terms
• Analysis of qualified potential sources, source
selection, and determination of terms
– Applicable tools range from a simple bid analysis

form to complex negotiations

Step 5: Preparation and
Placement of Purchase Order
• Several order placement tools available:
– A purchase order
– The supplier’s sales agreement
– A release against a blanket order
• Failure to use the proper contract form may

result in legal complications or improper
documentation
• Purchase order format and routing vary
Step 6: Follow-up and Expediting
• Follow-up: routine order tracking to ensure the
supplier can meet delivery promises
• Expediting: the application of pressure on a
supplier to meet the original delivery promise, to
deliver ahead of schedule, or to speed up delivery
of a delay
• Expediting:
– may be caused by poor planning inside the buying or
the selling organization
– may indicate the need for process improvements.

Step 7: Receipt and Inspection
• The prime purposes of receiving are to:
1. Confirm receipt of order placed

2. Confirm shipment arrived in good condition
3. Ensure quantity ordered has been received
4. Forward shipment to proper destination
(storage, inspection, or use)
5. Ensure proper documentation is registered
and accessible to appropriate parties

Eliminate or Reduce Inspection
• One goal of supply management is to ensure

that quality is built in
– internally during the design stage and
– externally in the suppliers’ processes
• This reduces or eliminates incoming

inspection

Step 8: Invoice Clearing and
Payment
• An invoice is a claim against the buying
organization
• Payment for services may vary from payment

for goods.
• Invoice clearance procedures are not uniform
• Checks and audits of invoices are based on

cost-benefit analysis
Aligning Supply and Accounts
Payable (AP)
• Often, payment terms are not met.
• Root causes of late payment:
– Slow cycle time in the accounts payable process
– Conflict between finance and supply policy
• Information systems and electronic fund
transfers (EFT) may shorten cycle time
• Organizational structure and reporting
relationships may align goals
• A joint team may align processes
Step 9: Maintenance of Records
and Relationships
• Update records based on law, accounting
standards, company policy, and judgment
• Update supplier performance scorecards
• Link data to future decisions

A Sample Sourcing Process and
Flowchart

Strategic versus Nonstrategic
Spend
• Strategic spend: goods or services critical to
the mission of the organization
– May be high- and low-dollar-value purchases
• Nonstrategic (non-mission critical) spend

– Dollar value and repetitiveness drive decisions
– Establish a small dollar threshold
– Prequalify suppliers
– Use efficient order placement tools
Effectiveness Tools that Optimize
Strategic Spend
 Goal: Assure continuous availability at the lowest
total cost of ownership
– A cross-functional sourcing team especially during
need recognition and description
– Early supply and supplier involvement (ESI)
– Use information management tools that enable
communication and support decision making
– Apply time, money, people and other resources
– Favor effectiveness over efficiency
Efficiency Tools the Reduce
Transaction Costs
• Stockless buying and systems contracts
• Procurement cards (P-cards)
• Blanket P.O.s
• EDI- and Internet-based systems
• Online reverse auctions
• Changing authority levels and bidding practices
• Single sourcing
• Outsourcing small value order processing
• Standardization
• Batch orders
• Set requisition schedule
• Invoiceless payments
• Users pay directly
Internal Information Flows to
Purchasing
sales
forecasting engineering
production control planning
new products production
inventory control budgeting

Purchasing
quality control financial control
receiving legal accounting

External Information Flows to
Purchasing
general
sources market product
of conditions information
supply new product
information
suppliers’ capacity
transportation
Purchasing availability
suppliers’
production rates
labor conditions sales and prices and

use taxes, discounts
customs

Internal Informational Flows from
Purchasing
General
Management Product
Engineering
Development
Source, product, Economic Product and
price information conditions price information
Production
Competitive Marketing
Product availability, conditions
lead time, price
and quality
Purchasing
Budget
commitments
Contracts
Costs, prices
Orders adjustments Finance
Legal placed
Stores Accounting

Potential Benefits of Information
Systems Technology
• Cost reduction and efficiency gains
• Data accessibility
• Speedier communication
• Dedicate resources to strategic issues
• Data accuracy
• Systems integration
• Monetary control

Process Efficiency Tools
• ERP systems
• Cloud computing
• Electronic procurement systems
• Electronic or online catalogs
• EDI
• Marketplaces
• Online reverse auctions
• Radio frequency identification (RFID)
Key Questions When Adopting
New Information Systems Technology
• Should we be a leader or a follower?
• What should be acquired through e-commerce?
• What tools should we use to acquire those items?
• Who should we use as a service provider?
• Should we enter into an alliance, and if so, what

type, or work privately?
Chapter 5
Make or Buy, Insourcing and
Outsourcing

Key Questions Asked in Chapter 5
– Should we make or buy a good or service?
– If we have been making a good or service should

we reverse the decision and outsource?
– If we have been buying, should we reverse the

decision and insource?

Make or Buy Insourcing and
Outsourcing Decisions
What Product / Service to Create
in What Market Segment(s)?
What Do We Make or Buy?
100% 100%
Gray Zone
Make Buy
Stay Change Stay Change Stay Change
Outsource Insource
More More
Make Buy
Gray 100% Insource Outsource Gray 100%
Zone Buy Zone Make
100% Gray 100% Gray

Make Zone Buy Zone

Reasons to Make Instead of Buy
• Quantities are too small and/or no supplier is interested
• Quality requirements are too exacting or special processing
methods needed
• Greater assurance of supply
• Closer coordination of supply and demand
• Preserve technological secrets
• Lower cost
• To take advantage of unused capacity
• Keep our capacity utilization high and outsource the rest
• Avoid supply dependency
• Reduce risk
• Competitive, political, social or environmental factors
• Distance from the closest available supplier is too great
• Market potential for the product or service is expanding rapidly
• Forecasts of future shortages in the market or rising prices
Reasons to Make Instead of Buy
• Lack of managerial or technical experience
• Excess production capacity
• Reduce risk
• Customer preference for a particular brand
• Challenges of maintaining technological leadership for noncore
activity
• Outsourcing is difficult to reverse
• Cost accuracy
• Flexibility and desire to stay lean
• Insufficient volume to justify in-house production
• Forecasts show great demand and/or technological uncertainty
• Availability of a highly capable supplier
• Buying may open up markets
• The ability to bring a product or service to market faster
• Superior supply management expertise
Insourcing and Outsourcing
• Two ongoing questions for a cross-functional

team including supply, operations, accounting
and marketing are:
(1) Which products or services are we currently

buying that we should be doing in-house?
(2) Which products and services that we are

currently doing in-house should we be buying
from suppliers?
Reasons to Insource
• The necessity argument: “We would prefer

not to produce this product or service in-
house, but we really don’t have any other
options.”
• The opportunity argument: “We would prefer

to do this in-house because it would give us a
strategic competitive advantage.”
Examples of Necessity Drivers of
Insourcing
• Anything that threatens assurance of supply
– An existing source of supply goes out of business or
drops a product or service line and no other supplier
is available
– No opportunities for supplier development
– A sudden massive increase in price
– The purchase of a sole source by a competitor
– Political events and regulatory changes
– Lack of supply of a key raw material or component
required for the manufacture of the purchased
product
Reasons to Outsource
• The necessity argument: “We would prefer

not to outsource this product or service, but
we really don’t have any other options.”
• The opportunity argument: “We would prefer

to outsource this product or service because it
would give us a strategic competitive
advantage.”
Deciding What Might be
Outsourced
• Determine strategic, critical, non-core activities
• An entire function or some elements of an activity
may lend themselves to lower cost purchase and
management by a third party
• Identify a function as a potential outsourcing
target, break that function into its components,
determine which activities are strategic or critical
and should remain in-house, and which can be
outsourced
Risks of Outsourcing
• Loss of control
• Higher exit barriers
• Exposure to supplier risks
– e.g., financial, commitment to relationship, response time, quality, service
• Unexpected/unanticipated costs
• Difficulty quantifying economies
• Conversion costs
• Supply restraints
• Attention required by senior management
• Possibility of being tied to obsolete technology
• Concerns with long-term flexibility

The Outsourcing Decision
Yes Keep the function
Is the activity strategic?
in-house
No
Is the activity critical to the Yes Keep the function
business but not strategic? in-house
No
Create a RFP.
Gather supplier bids/proposals.
No
Is the supplier’s bid/proposal more Yes Keep the function
desirable than the internal option? in-house
No
Could the internal option achieve Yes Keep the function
similar results? in-house
No
Negotiate a contract to ensure
that expectations are realized

Purchasing’s Role in Outsourcing
• Provide a comprehensive, competitive process

• Identify opportunities for outsourcing
• Aid in selection of sources
• Identify potential relationship issues
• Develop and negotiate contract
• Monitor and manage relationship

Chapter 12
Supplier Selection

Chapter 12
• How can the supply professional match the
organization’s needs to what the market can
supply?
• Which supplier(s) should be selected?

Potential Sources of Information
• Online sources
• Catalogs (online and printed)
• Trade journals
• Trade directories
• Visits to suppliers
• Supplier and commodity databases
• Sales contacts and interviews
• Colleagues, networking, professional contacts
• Your own records

Identification of Potential
Sources
1. 2. Can a Current 3.
Can We Supplier No Find Potential
Make In-House? Meet? New Supplier
Yes No
No One Two or More
Yes Supplier Supplier Suppliers
Can Meet Can Meet Can Meet
Make Buy
One Two or More Can We Use
Supplier Suppliers Supplier
Can Meet Can Meet Development to
Create Supplier?
Yes
Yes No
Can We Make Can We

In-House? Redesign/Re-specify
No so that Yes
Existing or New Supplier
Can Meet?
Rethink

Supplier Selection Decisions
• Should we use a single source, dual sources, or
more than two?
• Should we buy from a manufacturer or a
distributor?
• Where should the supplier be located?
• Relative to our organization, should the supplier
be small, medium, or large?
• If no supplier can be found, should we use
supplier development?

Arguments in Favor of Single
Sourcing
• Exclusivity: Supplier may be the only available source
– patent protection, exclusive distributorship (referred to as a sole
source)
• Outstanding quality or service  value
• Order too small to split
• Opportunities for discounts or lower freight costs
• More important customer  more attention from
supplier
• Cost of duplication prohibitive
• Easier to schedule deliveries
• JIT, stockless buying or EDI arrangements
• Focus on one, not many suppliers
• Prerequisite to partnering

Arguments in Favor of Multiple
Sourcing
• Traditional practice
• Keep suppliers “on their toes”
• Assurance of supply
• Capable of dealing with multiple suppliers efficiently
• Avoid supplier dependence on one customer
• Obtain a greater degree of volume flexibility
• Strategic considerations; e.g., military preparedness
• Government regulations
• Limited supplier capacity
• Opportunity to test a new supplier
• Supply market volatility

Supplier Development Initiative
The Marketing Context
Marketing Initiative
Supply Response
Supplier Purchaser
The Supplier Development Context
Sales Response
Supplier Purchaser
Supply Initiative

Key Supplier Evaluation Question
• Is this supplier able to supply the purchaser’s

requirements satisfactorily?
– strategically and operationally
– in the short and long term

Three Levels of Supplier
Evaluation
• Level 1 – Strategic
• Level 2 – Traditional: quality, quantity,
delivery, price and service
– Technical, engineering, manufacturing and
logistics strengths
– Management and financial evaluation
• Level 3 – Current Additional: financial, risk,
environmental, regulatory, innovation, social
and political

Level 1: Strategic Evaluation
• Sourcing strategy directly linked to

organizational strategy, goals, and objectives
drives effective sourcing decisions
• Strategic sourcing: captures the linkage

between sourcing strategy and organizational
strategy
– considers suppliers and the supply base integral to
an organization’s competitive advantage
Define Strategic Purchases
• What makes a purchase or a supplier

strategically important to the organization?
– Mission critical - may help or hinder attainment of
the organization’s mission
– First step in the strategic sourcing process
– Drives decisions in sourcing and selection process
– Drives allocation of resources to any specific buy
– Without categorizing, may overinvest resources in
tactical or operational purchases and under-invest
in strategic ones
Risk Assessment
• Management makes decisions about the risks

it is willing to take in light of the expected
returns
• Takes actions to avoid, mitigate, transfer,
insure against, limit, or explicitly assume risk
• Supply decisions must be made in the context

of the organization’s risk profile
Evaluation of Potential Sources
• Technical, Engineering and Operations
– Quality systems and performance
– Engineering and technical strengths
– Capacity and flexibility to meet demand (lead

time)
– Process capabilities

Evaluation of Potential Sources
• Management and Financial
– Mission, corporate culture, values and goals
– Organization structure and decision-making
– Management controls, information systems,
policies and procedures
– Qualifications and background of managers
– Financial analysis; e.g., profit, inventory turns,
receivables, current ratio
– Procurement systems
Weighted Point Evaluation
Systems
• Identify suppliers
– Important suppliers and/or critical goods and services
• Identify factors or criteria for evaluation
• Determine the importance of each factor
• Establish a system to rate each supplier on each

factor

Evaluation of Potential Sources:
Two Key Questions
1. Is this supplier capable of supplying our
requirements satisfactorily in both the short-
and long-term?
2. Is this supplier motivated to supply these

requirements in the way we expect in the
short- and long-term?

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Chapter 7

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• How do we know that what we ordered meets

Better than Same as Lower than

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• Often used to describe:

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• Internal failure costs

• External failure costs

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• A technique that involves testing a random

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“The design and management of seamless, value-added

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• Before Spend Decrease • After 10% Spend Decrease

Revenue $100M $100M

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Trouble Prevention Opportunity Maximization

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Negative Neutral Positive

Operationally deficient Operationally acceptable Operationally acceptable

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• Supply chain management

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• How might supply be organized to achieve

• What are the activities and responsibilities of

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• Obtain the right materials/services (meeting quality

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Commodity Commodity Manager Materials

Buyer Buyer Manager Stores/

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Disadvantages Advantages Advantages Disadvantages

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• Sourcing and commodity management

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• Executive Vice President

• Vice President of Finance/CFO