Chapter 1

Purchasing and Supply Management

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 Key Issues Addressed in Chapter 1
• Evolution of the supply function
• The potential contribution of supply to
organizational goals and strategies
– Operational versus strategic
– Direct versus indirect
• The profit leverage effect as a measure of supply
impact on profitability (the income statement)
• The ROA effect as a measure of supply impact on
asset performance (the balance sheet)
• The nature of organizations and the implications
for supply

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 Competitive Factors Affecting Supply
• Increased outsourcing places great reliance on suppliers
• Greater dependence on suppliers for design and build responsibilities
for subassemblies and subsystems
• Increased global competition requires best value from suppliers for
price, quality, delivery and sustainability performance
• Development of new product technologies
• Evolving information systems
• Trend to single sourcing and strategic supplier relationships
• Greater importance of supply chain environmental and social
sustainability performance
• Risk management
• A supply chain orientation to managing relationships with suppliers and
customers

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 Opportunities for Supply to Contribute
to Organizational Success
• Increase revenue
• Improve customer satisfaction
• Reduce total costs of ownership
• Reduce lead times through process efficiencies
• Identify opportunities for product/service innovations by
collaborating with suppliers
• Improve supply chain sustainability performance
• Minimize financial, operational and reputational risks
• Provide information to others in the organization in areas
such as market conditions and new products and services.

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 The Evolution of the Supply Function

• Late 1800s:
– The Handling of Railway Supplies – Their Purchase
and Disposition, published 1887
• 1900-1950s:
– reliable access to supply of raw materials, supplies and
services
• 1970s:
– senior management attention on the supply function:
• international shortage of basic raw materials
• price inflation

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 The Evolution of the Supply Function

• 1990s:
– challenges of global supply chains
– increased reliance on suppliers because of outsourcing

• early 21st century:

– supply chain integration
– lower transaction costs
– faster response times

• Challenges: sustainability, globalization,

technological innovations and risk management

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 The Evolution of the
Supply Function

early
1900s Today
● Clerical and tactical ● Strategic orientation
● Focus on policies and ● Global supply chains
procedures ● Executive level
● Key challenges: leadership
availability of supply and ● Key challenges:
cost management Sustainability, total cost of
ownership, security,
globalization, risk
management
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 The Evolution of the
Supply Function

Pre 1939 1940-1949 1950-1969 1970-1989 1990-1999

Managerial Purchasing Integration into

Clerical Supply assurance
emphasis strategy corporate strategy

2000-2010 Today

sustainability,
Integrated supply
globalization,
networks and information
technological innovations
technology
and risk management

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 Supply Management
“The integration of related functions to provide effective and
efficient materials and services to the organization.”

Includes:
• Operational and strategic responsibilities
• In some organizations supply may have additional
responsibilities for some or all of the following: receiving,
inspection, warehousing, inventory control, materials
handling, packaging, scheduling, in/outbound transportation,
and disposal

Note: The terms purchasing, procurement and supply management are

used interchangeably in this text.

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 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

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 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)

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 Examples of Logistics Activities

• customer service • parts and service

• demand forecasting/planning support
• inventory management • plant and warehouse
• logistics communications site selection
• return goods handling
• material handling
• reverse logistics
• order processing
• traffic and
• packaging
transportation
• warehouse storage

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 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

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 Characteristics of an Integrated Strategic
Procurement and Sourcing Function
Executive Leadership Strategic Positioning
● Executive level awareness of ● Integration across company and
the opportunities to use supply strategic business unit corporate
to achieve strategic goals and plans
objectives ● External/internal customer focus

Functional Leadership Integration

● Executive status of the chief
supply officer
● Establishes integrated visions
and works at results and
processes
● Drives supply base/supplier
management strategies
company-wide
● Cross-functional, cross-
location teaming
● Part of the technology,
manufacturing and strategic
business unit (SBU) planning
process

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 Characteristics of an Integrated Strategic
Procurement and Sourcing Function (cont’d)
Supply Base Strategy Supplier Management
● Driven to achieve best value ● Joint performance improvement
for cost, delivery and quality efforts
● Standardization ● Value focused
● Concurrent engineering ● Total cost and value improvement
● Supply base optimization ● Supplier benchmarking

Measurement Systems
● Customer orientation ● Integrated global databases
● Total value/cost focused and ERP systems
● Benchmarking with best in ● Historical performance data
class

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 Profit-Leverage Effect
($ millions)
Before Spend Decrease After 5% Spend Decrease
Sales: $500 Sales: $500
Purchases 300 Purchases 285
Labor 35 Labor 35
Overhead 100 Overhead 100
Gross Profit $ 65 Gross Profit $ 80
SG&A, Interest 40 SG&A, Interest 40
Profit: $ 25 Profit: $ 40

A 5% reduction in purchase cost

creates a 60% increase in profit

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Return-on-Assets Factors

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 Purchasing’s Operational and
Strategic Contributions

1. Supply Contribution

Operational Strategic

Trouble Prevention Opportunity Maximization

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 Purchasing’s Operational and
Strategic Contributions

2. Supply Contribution

Direct Indirect
Enhancing Performance
Bottom-Line Impact
of Others

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 Purchasing’s Operational and
Strategic Contributions

3. Supply Contribution

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

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 Manufacturing and Services
Organizations
Manufacturing
• The largest portion of needs
is generated by customer
needs.
• The largest portion of spend
with suppliers will be on
direct requirements which
comprise products sold to
customers.
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Service Provider
• The largest portion of
needs is generated by
capital, services and other
requirements enabling
employees to provide the
service.
• In retailing the largest
spend is focused on re-
sale requirements.
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 The Opportunities for the Indirect
Contribution of the Supply Function
• Reducing total costs of ownership (income statement)
• Improving ROA/reduction in inventory investment (balance
sheet)
• Information source
• Effect on efficiency
• Effect on competitive position
• Effect on customer satisfaction
• Effect on image
• Risk management
• Training ground
• Management strategy and social policy

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Differentiations for Supply in
Public Organizations

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Differentiations for Supply in
Private Organizations

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 Challenges Facing Supply
• Capturing opportunities in the supply chain
• Establishing the appropriate set of measures to evaluate the
contribution of supply and supply initiatives
• Managing financial, operational and reputational risks
• Improving supply chain sustainability performance
• Managing growth and influence in total spend, span of supply
chain activities, meaningful involvement in supply-related
decisions, and involvement in strategic corporate activities
• Integrating the use of technologies in supply processes,
including e-commerce, digitization, and artificial intelligence
• Providing effective contribution to organizational success

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