Procurement Candidate Manual SS Online

P u r c h a s i n g M a n a g e m e n t A s s o c i a t i o n o f C a n a d a

Professionals in Supply Chain Management

Enhanced. Exceptional.

Strategic S U P P L Y C H A I N M A N A G E M E N T

Leadership Program

Module

Procurement and Supply ManagementC A N D I D A T E M A N U A L : S E L F - S T U D Y

CPP SSCMLP Manual Covers 9/21/06 11:53 AM

Module Two Strategic Supply Chain Management Leadership Program Procurement and Supply Management

© Purchasing Management Association of Canada i

Strategic Supply Chain Management Leadership Program

Module Two

Procurement and Supply Management

Candidate Manual

(Self Study)

Copyright © 2007 Purchasing Management Association of Canada. (Rel. 1) Revised October 2009.

No part of this material in this manual may be reproduced without the prior written consent of the Purchasing Management Association of Canada. 777 Bay Street, Suite 2701, P.O. Box 112, Toronto, Ontario M5G 2C8 Tel: (416) 977-7111 Fax: (416) 977-8886 Web Site: www.pmac.ca.

Use of this material is restricted to PMAC and its Provincial/Territorial Institutes for the express purpose of delivering the Strategic Supply Chain Management Leadership Program. No other use is authorized, express or implied. This material must be used in its entirety.


© Purchasing Management Association of Canada ii

Table of Contents Information and Overview………………………………………………….…IO – 1 General Information…………………………………………………….. …IO – 2 Module Overview……………………………………………………….. …IO – 5 Module Materials………………………………………………………........IO – 8 Module Readings……………………………………………………….... ...IO – 9 Session and Reading Summary…………………………………………. …IO – 14 Candidate Evaluation……………………………………………………......IO – 17 Module Evaluation………………………………………………………. .....IO – 24 Session One – Tactical and Strategic Procurement…………………..…………S1 – 1 Session Two – Procurement Processes…………………………….……..……..S2 – 1 Session Three – Competitive Bidding and Negotiation…………..………..……S3 – 1 Session Four – Procurement and Supply Management Organization……..…….S4 – 1 Session Five – Make or Buy…………………………………………..………....S5 – 1 Session Six – Price and Cost Analysis………………………………….………...S6 – 1 Session Seven – Quality and Inventory…………………………………………..S7 – 1 Session Eight – Supplier Selection…………………………….…………………S8 – 1 Session Nine – Supplier Development and Certification…………..…………….S9 – 1 Session Ten – Services Procurement…………………………………………….S10 – 1 Session Eleven – E-Procurement………………………………………………...S11 – 1 Session Twelve – Involving Users and Suppliers………………………………..S12 – 1 Session Thirteen – Module Ending Examination………………………………...S13 – 1 Appendix: Fabritek, 1992 Sample Case and Report (see News section of community) Appendix: PowerPoint Slides

© Purchasing Management Association of Canada IO - 1

Introduction and

Overview

General Information

Module Overview

Module Readings

Schedule & Reading Summary

Candidate Evaluation

Module Evaluation



General Information

About the Program

The Strategic Supply Chain Management Leadership Program is PMAC’s C.P.P. Accreditation Program that has been redesigned and enhanced for 2007. This new Program is competency based and takes an integrated approach, shifting the focus of the profession from purchasing to strategic supply chain management in order to meet the evolving needs of the marketplace. The new C.P.P Accreditation Program is the most comprehensive program available in Canada, balanced to deliver advanced supply chain management knowledge and high-level business skills. The education component of the Program consists of eight modules which cover the foundational knowledge of supply chain management and six interactive workshops which address higher-level business skills. The Program is designed so that learning can be applied immediately in the workplace. This allows candidates to demonstrate their increased knowledge and value to their organizations as they progress through the program.

Program Modules

As stated above, there are eight modules which will be delivered over a 36-month period. There are four modules that are 13 sessions in duration and four modules that are seven sessions in duration. This is the second module of the Program – Procurement and Supply Management, a 13-session module. Below is a listing of all the modules so that candidates can see how they are progressing in the program and what they have to look forward to in the coming months.

Module Title

13-Session Modules

1 Supply Chain Management

2 Procurement and Supply Management

3 Logistics and Transportation

4 Operations and Process Management

7-Session Modules

5 Knowledge Management

6 Global Sourcing

7 Supply Chain Management for the Public Sector

8 Supply Chain Management for Services, Capital Goods and Major Projects



General Information, continued

Program Philosophy

PMAC’s philosophy for all of its modules and interactive workshops is that candidates learn by doing. Candidates who work thoroughly through the material to develop a good understanding of concepts and principles presented, and complete all the assigned readings, framework questions and assignments should have no trouble successfully completing the Program. Memorization of the materials is not as important as is: • careful preparation • being able to fully grasp the ideas and concepts presented, and • knowing where to go for the appropriate reference material. It is expected that candidates will be able to apply the appropriate concepts or techniques to the correct problem or decision at the right time.

Workload As a general rule, candidates should expect to spend an average of 10 hours of

preparation time for each session. Some sessions will require less work, while others may require more. Please note that the amount of time spent on each session will be influenced by present knowledge and experience, as well such factors as reading skills and comprehension skills.

Schedule This module has twelve sessions and a final exam session.

Candidates will receive a session schedule upon enrollment in the module. The session schedule includes the following information: - Assignment due dates - Assignment submission instructions - Information on the final exam - Information on marking Candidates who have not received this information should contact their local provincial or territorial institute.



General Information, continued

Candidate Responsibilities

In order to be successful in this module it is important for all candidates to do the required work for each session. Candidates who do all the required work are prepared for writing the case report in the module exam. Many different assignments and learning activities are provided in this module in order to increase and reinforce transfer of knowledge. To ensure success candidates are expected to: • Do all the required readings for each session prior to completing the assignments • Read and prepare the assignments for submission, following the instructions provided • Through assignments, contribute relevant and timely information that will enhance

learning • Assume a strategic point-of-view when doing all readings and assignments



Module Overview

Introduction Procurement is the process of acquiring goods and services by organizations. Traditionally procurement has not been thought of in a strategic sense. As the share of production that is purchased goods has risen, so has the importance of procurement. Procurement is now one of the key strategic elements of an organization. The goal of this module is for candidates to better understand the strategic role of procurement, as well as tactical approaches that support the strategy.

About this Module

The focus of this module is on matters of strategic and tactical importance in procurement. The module starts with a discussion of strategic and tactical procurement, and goes on to consider key processes that support an organization’s strategic procurement goals. A comprehensive procurement strategy backed up by solid procurement tactics supports an organization’s goal of providing customers with highly valued products. Specific tactical matters are considered along the way. The sessions in this module are inter-related. Tactical and strategic purchasing delves into procurement processes (session 2), which leads to an examination of relationships and teams (session 4), and an exploration of the core competencies of the organization including make or buy decisions (session 5), price and cost analysis (session 6), supplier selection (session 8), and e-procurement (session 11). The cases examined in this module further apply the concepts and tools learned throughout the module. The module has a reading list with diverse but important topics. The articles provided are often theoretical, and explain complex methodologies. It is important when reading to focus on how the methodologies presented are applied. Avoid spending too much time on the theories themselves. Focus on the introductions, management implications and conclusions in the articles. Information gathered in readings can be applied to the activities and case analyses.



Module Overview, continued

Module Objectives

Upon completion of this module candidates should be able to:

• Analyze case studies, and write case reports.

• Understand the elements of procurement strategy.

• Develop procurement strategy.

• Develop and apply tactics that support procurement strategy including those related to processes, organization, supplier selection and relationships, decision making, and technology.

• Analyze, or direct others in the analysis of make or buy decisions, price, cost,

quality, inventory, and total cost of ownership.

• Apply, or direct others in the application of tools to evaluate suppliers, and produce statements of work.



Module Overview, continued

Module and Session Organization

This module consists of thirteen sessions. Each session’s workload is equivalent to that of a three-hour instructor-led class. The module objectives are covered in sessions one to twelve and the module ending examination is administered during session thirteen (a four-hour exam). This self-study module contains the equivalent workload and content as the instructor-led thirteen-week module.

Candidates will receive the following materials:

1. Candidate Manual (this manual): the guide for the module

2. Readings and Cases Manual: articles and cases for this module

3. Session Schedule: assignment due dates and instructions for submission Each session of this manual will contain the following sections as required:

• Agenda – a guide to each session’s format and content

• What You Already Know - a brief statement linking information in the session to any previous session (or to the candidate’s experience).

• Overview – a brief description of the contents of the session

• Objectives – a description of what candidates are expected to learn from the session

• Required Reading – reading assignments for the session

• Case Preparation – indicates the cases to be prepared for written reports

• Framework Questions – questions for framing each case analysis and report

• Exercises – instructions for preparing and submitting exercises

• Self-Assessment Activities – exercises to reinforce knowledge

• Session Notes – notes on the specific concepts or issues covered in the session

Learning Activities

Candidates will achieve learning in this module through the following learning activities: • Readings • Case study preparation • Written case reports • Exercises • Self-assessment activities



Module Materials

Module Materials

Materials included in this manual: The Introduction and Overview – contain the following: − General information and module overview − Information on readings and materials − Information on assignments − Guidelines for candidate evaluation Each Session contains the following – − Agenda for the session (the order of material and assignments in the session) − Readings, cases and assignment instructions − Session notes on the content and purpose of the session The Appendices contains – − Sample case and sample case report: Fabritek, 1992 − Printouts of the PowerPoint slides (from the Instructor-led version of the module) Materials included in the Readings and Cases manual: − Articles and cases Information included in the Session Schedule: − Assignment due dates − Assignment submission instructions − Information on the final exam − Information on marking Materials available on the Internet: − PMAC Code of Ethics (www.pmac.ca)



Module Readings

Module Readings

The readings for this module are drawn from business, professional and academic publications. Each reading is assigned a letter which is used in the Session Schedule and Reading Summary (see the following section) for your easy reference. They are as follows: A. Burt, Dobler and Starling (2003). World Class Supply Management, 7th edition, McGraw-Hill Irwin, New York. A1. Pages 239-246, 250-251 A2. Pages 41-49 A3. Pages 104-117 A4. Pages 304-315 A5. Pages 405-407, 409-411, 413-419, 426-430 A6. Pages 147-155

B. Leenders, Johnson, Flynn and Fearon, (2006) Purchasing and Supply Management, 13th Edition, McGraw-Hill Irwin, New York. Pages 59-77. C. Ritzman, Krajewski, Malhotra and Klassen (2007). Foundations of Operations Management, 2nd Canadian Edition, Pearson Canada Inc., Toronto. p.283-290, 305-6. D. Cavinato, Joseph, L. Fitting Purchasing to the Five Stages of Strategic Management. European Journal of Purchasing and Supply. #5, Issue 2. 1999. Pages 75-83. E. Heath, Stanley. Tackling Spend Analysis. Contract Management. January 2006. Pages 40-45. F. Zsidisin, George A. A Grounded Definition of Supply Risk. Journal of Purchasing and Supply Management. 2003. Pages 217-224. G. Wheeler, Michael (date). Negotiation Analysis: An Introduction. Harvard Business School. 9-801-156. H. Johnson and Leenders. The Supply Organizational Structure Dilemma. Journal of Supply Management, Summer 2001. Pages 4-11. I. Prahalad, C. K. and Hamel, Gary. The Core Competence of the Corporation. Harvard Business Review. May-June, 1990. J. Ellram, Lisa. Total Cost of Ownership: Elements and Implementation. National Association of Purchasing Management. October, 1993. Pages 3-11.



Module Readings, continued


K. Stuart, F. Ian and Mueller, P. Jr. Total Quality Management and Supplier Partnerships: A Case Study. International Journal of Purchasing and Materials Management. Winter, 1994, Pages 14-20. L. Genna, Albert. How do you find the right quality wavelength? Purchasing. Jan 16, 1997. Pages 45-46. M. Wilson, Elizabeth J. The Relative Importance of Supplier Selection: Review and Update. International Journal of Purchasing and Materials Management. Summer, 1994. Pages 35-41. N. Smytka, Daniel L and Clemens, Michael W. Total Cost Supplier Selection: A Case Study. International Journal of Purchasing and Materials Management. Winter, 1993, Pages 42-49. O. Cruz, Clarissa. Purchasing Pros Search for the Perfect Number of Suppliers. Purchasing. July 11, 1996, Pages 28 and 29. P. Carter, Phillip L., Monczka, Robert M., and Mosconi, Trish. Strategic Performance Measurement for Purchasing and Supply. CAPS: Center for Strategic Supply Research, 2005, Pages 10-27. Q. Krause, Daniel D. Supplier Development: Current Practices and Outcomes. International Journal of Purchasing and Materials Management. Spring, 1997. Pages 12-19. R. Lockhart, Marsetta and Ettkin, Lawrence. Vendor Certification: Seven Steps to a Better Product. Production and Inventory Management Journal. First Quarter 1993. Pages 65-69. S. Park, Hong Y., Reddy, S., C. Shin, G.-C. and Eckerle, C., Impact of Supplier Certification Program on U.S. Firms. European Journal of Purchasing and Supply Management. Volume 2, 1996. Pages 107-118. T. Sharland, Alex, Eltantawy, Reham, A. and Giunipero, Larry C. The Impact of Cycle Time on Supplier Performance and Subsequent Performance Outcomes. Journal of Supply Chain Management. Summer, 2003. Pages 4-12. U. Ellram, Lisa M., Tate, Wendy L. and Billington, Carey. Understanding and Managing the Services Supply Chain. Journal of Supply Management. Nov. 2004 Pages 17-32.





V. Smeltzer, Larry R. And Ogden, Jeffrey A. Purchasing Professionals Perceived Differences Between Purchasing Materials and Purchasing Services. Journal of Supply Chain Management, Winter 2002. Pages 54-70. W. Service Level Agreements: Guidelines for Public Sector Organizations. New South Wales Premier’s Department, 1999. X. Porter, Anne Millen. A purchasing manager’s guide to the e-procurement galaxy. Purchasing. September 21, 2000. Pages S72 to S88. Y. Anonymous Author. Consultant’s Top 12 e-procurement tips. Purchasing. November 16, 2000. Pages 79 to 88. Z. Clark, Chris. Five Auction Steps. Purchasing. June 21, 2001. Pages 24 to 26. AA. Manciagli, Dana. A Supplier’s View. Purchasing June 21, 2001. Page 26. AB. Atkinson, William. IT Firm uses reverse auction for big contract labour buy. Purchasing, December 22, 2000. Pages 97 to 99. AC. Palmer. Richard J., Green, Leland D., and Ventura, Marie T. Are Corporate Procurement Cards for You? Management Accounting. September 1996. Pages 22-27. AD. Carbone, James. To save more distribute more cards study says. Purchasing. May 18, 2006. Page 29. AE. Gibley, Tracy. A guide to purchasing card success: overcoming 8 key hurdles. Treasury Management Association Journal. July/August 1999. Pages 47-50. AF. Waller, M, Johnson, M.E., and Davis.D., Vendor Managed Inventory in Retail Supply Chains, Journal of Business Logistics, #20, 1999. 3-187. AG. Dixon, Lance. JIT II: A New Approach to Supply Management. Center for Quality Management Journal. August 1992. Pages 15-19. AH. Pragman, Claudia, H. JIT II: A Purchasing Concept For Reducing Lead Times IN Time-Based Competition. Business Horizons. July-August 1996. Pages 54-58.





Case Studies

• Blozis Company. Purchasing Agents Association of Connecticut. Inc. (Session 2)

• De Havilland Incorporated. Richard Ivey School of Business. #9A95B037.

(Session 3)

• Frich Turbo Engine Company. Harbridge House Inc. (Session 6)

• Placido Engine Company. Burt Dobler and Starling. World Class Supply Management. (Session 7)

• Platinum Box. Satyatas Consulting. (Session 8)

• Fisher and Paykel Limited. Richard Ivey School of Business #9A97D015.

(Session 9)

• Boeing Australia Limited: Assessing the Merits of Implementing a Sophisticated e-Procurement System. #HKU271. Centre for Asian Business Cases. (Session 11)




Supplementary Readings and Websites

These are a selection of additional references on business mathematics that candidates may find useful. These are not required readings for the module. Note that Wikipedia provides information on various subjects. The web links below are suggested reading if you feel you need to review business mathematics and accounting. Also provided are some sites that describe some of the terminology and tools used in this module. • Financial Analysis definitions and terms: http://en.wikipedia.org/wiki/Financial_analysis • Financial Statements definition and terms: http://en.wikipedia.org/wiki/Financial_statements • Holding Costs definition: http://en.wikipedia.org/wiki/Holding_cost • Inventory definitions and terms: http://en.wikipedia.org/wiki/Inventory (then go to Business Inventory) • Return on Investment definition: http://en.wikipedia.org/wiki/Return_on_Investment • Strategic Profit Model Tool (a walk-through of the SPM): http://www.ism.ws/ismapps/cavinato/strat1.cfm • Cycle Time Reduction: a Worksheet for the Construction Industry http://www.toolbase.org/PDF/BestPractices/day_worth_worksheet.pdf



Session and Reading Summary

Introduction The table below provides a summary of all the readings, topics and activities in this

module for easy reference. A more detailed listing of the readings can be found on the preceding pages.

Session Topics and Activities Readings

1

Tactical and Strategic Procurement • Procurement and Supply Management • Strategic Stages of Purchasing • Tactical and Strategic Procurement • Spend Analysis / Procurement Risk • Cavinato’s 5 Stages of Strategic Management • Self-assessment activity: (not marked) Spend Analysis • Individual exercise: (marked – 5%) Goods Spend Analysis at Your

Organization

D,E,F

2

Procurement Processes • Steps in the Procurement Process • Importance of Description of Needs & Specifications • Types of Specifications & Specification Development • Potential Problems • Individual Written Case Report: (marked – 5%) Blozis Company

B, A1

3

Competitive Bidding and Negotiation • Factors related to choice of competitive bidding • Types of bids • Factors related to choice of negotiation. • Objectives of negotiation & steps in negotiation • Individual Written Case Report: (marked – 10%) De Havilland Inc.:

Applying Negotiation Analysis

G

4

Procurement and Supply Management Organization • Internal procurement relationships • Financial leverage effect • Cross functional teams • Organizing - centralized, decentralized and hybrid • Self-assessment activity: (not marked) Financial Leverage Effect • Individual exercise: (marked - 5%) Centralization versus

Decentralization

A2, H, A3



Session and Reading Summary, continued


5

Make or Buy • Make or buy at the strategic and tactical level • Total cost of ownership: elements, benefits and implementation • Individual Written Case Report: (marked – 5%) Make or Buy and

Total Cost of Ownership: Happyland Construction

A4, I, J

6

Price and Cost Analysis • What is the Right Price? • Price Assessment • Market Conditions - Procurement • Leverage / Cost Analysis / Types of Costs / Profit • Learning Curves • Individual Written Case Report: (marked 5%) Frich Turbo Engine

Co. & Price Analysis

A5

7

Quality and Inventory • Factors Affecting Long Term Quality • Total Quality Management • Quality Training for Procurement Staff • Purposes of Inventory • Forecasting Demand • Inventory Models & Inventory Relationships • Self-assessment Activity: (not marked) Placido Engine Company • Individual exercise: (marked – 5%) ISO 9001:2000 and Your

Organization

A6, C, K, L

8

Supplier Selection • Sourcing: Finding Suppliers • Weighted Evaluation Systems & Product Attribute Considerations • Total Cost Approach • Single versus Multiple Sourcing & The Perfect Number of Suppliers • Individual exercise: (marked – 5%) Un-weighted Supplier

Evaluation Matrix: Platinum Box • Individual Written Case Report: (marked – 5%) Platinum Box

M, N, O



Session and Reading Summary, continued


9

Supplier Development and Certification • Procurement performance monitoring • Approaches to supplier development • Objectives of supplier certification & Benefits of certification • Steps in supplier certification • Product development cycle times and supplier performance • Individual exercise: (marked – 5%) Supplier Certification • Self-assessment activity: (not marked) Fisher and Paykel Ltd.

P,Q,R, S,T

10

Services Procurement • Services are different • Procurement involvement: Services are the same • Services spend analysis • Specification: Statements of Work & Service Level

Agreements • Individual exercise: (marked – 5%) Services Spend Analysis

for Your Organization • Individual exercise: (marked – 5%) Services Procurement –

Statement of Work

U,V,W

11

e-procurement • Forms of e-procurement • Pros and cons of e-procurement • e-procurement knowledge areas / Implementing e-procurement • Reverse auctions • Individual Written Case Report: (marked – 10%) Boeing

Australia Limited

X,Y,Z, AA, AB,

AC

12

Involving Users and Suppliers

• P-Cards: Benefits • P- Cards: Considerations in Implementation • Vendor ( Supplier) Managed Inventory • Just in Time II • Wrap up

AD, AE, AF,AG,AH

13 Module Ending Examination • Case Analysis and Written Case Report (marked – 25%)



Candidate Evaluation

Introduction Candidates will be evaluated on individual performance using a variety of methods.

These include exercises, activities, written case reports and a module ending examination. Below is a breakdown of the mark allocation, as well as a description of each evaluation method.

Mark Allocation

The following table shows the allocation of marks for the different methods of evaluation used in this module.

Individual

Exercises (7) 35%

Written Case Reports (6) 40%

Module Ending Examination 25%

Individual Total 100%

Exercises There are a total of seven marked exercises. These exercises are in various forms.

Generally, the exercises require candidates to apply the concepts and tools learned in the session to their own organizations. Each of the marked exercises will be worth 5 percent of the candidate’s total mark. The seven marked individual exercises are:

1. Goods Spend Analysis (session 1) 2. Centralization versus Decentralization (session 4) 3. ISO 9001:2000 and Your Organization (session 7) 4. Un-weighted Supplier Evaluation Matrix: Platinum Box (session 8) 5. Supplier Certification (session 9) 6. Services Spend Analysis for Your Organization (session 10) 7. Services Procurement: Statement of Work (session 10)

Please see the Exercise section of each session for detailed exercise instructions. Candidates are provided with a separate session schedule with assignment due dates upon course enrolment. This schedule will indicate when each exercise is due.



Candidate Evaluation, continued

Case Preparation

There are six cases to prepare as written case reports. The following are quick tips for reading case studies prior to writing case analyses:

1. Read the opening and closing paragraphs to identify issue(s) and challenges. 2. Examine tables and figures in the exhibits to determine what information is

useful in the decision-making process. 3. Examine the headings in the case to determine what information is available

for analysis. 4. Review the framework questions provided in each session of this module. 5. Read the first sentence of each paragraph, scanning for decisions made and

alternatives available. 6. Read closely, highlight issues, and make notes to gain a full understanding

of the case. 7. Decide what you would do if you were the decision maker in the case.

Written Case Reports: an Introduction

The six cases to be submitted as written case reports are:

1. Blozis Company (session 2, worth 5%) 2. De Havilland Inc.: Applying Negotiation Analysis (session 3, worth 10%) 3. Make or Buy and Total Cost of Ownership: Happyland Construction

(session 5, worth 5%) 4. Frich Turbo Engine Co. & Price Analysis (session 6, worth 5%) 5. Platinum Box (session 8, worth 5%) 6. Boeing Australia Limited (session 11, worth 10%)

For specific instructions on each case, refer to the session in which the case report occurs. Candidates will be evaluated on their ability to analyze and present information according to the Written Case Report Guidelines (see next section). When writing the paper connecting threads between thoughts must be present. For example issues, analysis, recommendations and implementation must flow from each other. Ideally all recommendation(s) will fall in line with the identified strategy. The main recommendation(s) should be aimed at fixing the system not the symptoms. The following section outlines the requirements for a case report. For further reference, A sample case, Fabritek, 1992, and a sample case report marking sheet have been provided in the Appendix for your reference. This case represents an example of how a response will be graded by applying the marking structure, it’s is not a sample of a model response.




Written Case Reports: an Introduction (continued)

In general, the objectives of a case analysis are: • to discover the issues in the case • to determine the criteria for making a decision • to analyze the options available (if applicable) • to decide the best plan of action • to present your findings in a written report Each of the cases present a procurement situation in which a decision must be made in a particular context, and in light of a number of tradeoffs and alternatives. While there are no right answers to a case, there are definite approaches that address the issues and recognize the trade-offs involved. For each of the cases there will be framework questions. These questions aid in discovering the important aspects of the case, and guide the preparation of the written case report. Candidates should be prepared to address these questions in the written report itself. It is important for the candidate to adopt the role of decision maker, and to address the real issues: "What should be done and why?", and “How do I plan to resolve the situation?” Candidates are provided with a separate session schedule with assignment due dates upon course enrolment. This schedule will indicate when each case report is due.




Written Case Reports

The written case reports should follow these guidelines: Audience: You will normally be writing your report to a specific person. Assume this person is already familiar with the facts of the case. Do not simply repeat the facts. Rather, use them, as required, to support your position. Style: Your report must be typed and double spaced. It must have at least 2.5 cm margins on all edges; and, it must be printed on white paper, complete with page numbers. Write in complete sentences. Do not use point form, except when providing a coherent list in a wider context. Resist the temptation to use too many new "tools" (e.g., clip art, colour printing). Black-on-white is all that is required. Font: The minimum acceptable font is 12-point for the report and 10-point for exhibits. Length: You are limited to a maximum of 1500 words; this does not include the title page, executive summary, key assumptions, or exhibits. You may have a maximum of three pages of exhibits. Major Components: The major components of your report should contain all of the elements associated with this structure but do not necessarily have to follow the exact format : Executive Summary

I. Process Elements II. List of issues with impact analysis III. Environmental and Root Cause Analysis IV. Alternatives or Options V. Recommendation(s) and Implementation VI. Monitor and Control VII. Judgement and Integration VIII. Written Communication: Format, Language and Style

b. Exhibits and/or Appendixes (if applicable) Title Page: This is a separate page that contains the name of the case, the module title, your marker’s name, your name and candidate number, and the date you submitted the report. Executive Summary: This is on a separate page, along with any key assumptions you have made. The executive summary is a short paragraph, consisting of your decision and the major elements and implications of your action plan. Begin with "My decision is to . . ." (You are required to make a decision to receive a mark for the report). The reader should be able to read your executive summary and understand the direction to be taken in implementing your decision. Do not outline background information or present your analysis in this section.




Written Case Reports (continued)

Process Elements: Are all of the process elements in place? Does your response include all of the elements? A sample of the type of content that should be included in this section is noted below and further detailed in the individual areas.

• Statement of Operating Environment (including assumptions) • Statement of Strategic intention • Issue Identification • Analysis of issue • Alternatives with Pro/Con analysis • Decision criteria / desired outcome • Recommendations • Implementation

List of Issue(s) with Impact Analysis: As the decision maker in the case, explain what you see as the main issue(s) to be addressed. Feel free to write in the first person. Explain, with reference to the data of the case, why the issue is important and/or sensitive. Demonstrate how the external and internal environments faced by the organization influence the issue. Identify one main issue – or just a few issues – not a long list of issues. Environmental and Root Cause Analysis: Your analysis should consist of outlining why your decision best addresses the issue(s) you have identified. Your analysis should flow logically, and rely on the facts of the case, and the criteria you have identified. A good analysis will consist of both qualitative and quantitative evidence. Quantitative (i.e. numerical) data more than a few lines long should be placed in an exhibit. Then, in the body of the report, be sure to explain the importance of the exhibit. Do not expect the reader to scan the exhibit for meaning. Alternatives and/or Options You are not required to present and analyze multiple alternatives. Many cases do not have mutually exclusive alternatives. Rather, they consist of complex problems, all of which may require attention (e.g., quality problems, supplier problems, employee problems, competitive problems, and etc.). Your analysis should argue for your chosen direction for any or all of these problems and include a pro/con analysis with quantitative support. However, some cases clearly require an analysis of mutually exclusive alternatives (e.g., purchase an automated line or hire more manual labour). For these cases, you should present and analyze the alternatives.




Written Case Reports (continued)

Recommendation and Implementation: Based on your analysis of the options, state what you would do (recommendation); then, outline the specific steps to be taken (implementation). Your analysis has explained why you made the decision, now provide the short- and long-term implementation details (who, what, where, when, and how). Set priorities or a timeline for a specific action, where applicable. Then, explain how you intend other stakeholders to buy into your decision; and how you intend to deal with any negative consequences of your decision; and how you intend to protect yourself from critical changes in the environment. The acid test is this: could your action plan be implemented without further study? (For example, an action plan is not complete if it recommends that a consultant or other expert determine the details of how to implement the decision.) Monitor and Control: State, where feasible, the method(s) you will use to determine if your recommendation and implementation plans are working. Some examples are use of budgets, regularly scheduled meetings, or scheduled reviews. The approach you use will depend on the nature of the recommendation. Exhibits: Exhibits may be used for such things as drawing process flow diagrams or showing detailed calculations. Remember that the report should stand alone; the exhibits provide supporting information only. An exhibit should be used when there are more than a few lines of quantitative material in the body of the report.

Judgement and Integration: Pay close attention to the logic, structure and clarity of the analysis. Is there a connecting thread or a sequence in the analysis or is it a potpourri or hodgepodge of ideas and calculations? How well have knowledge and concepts learned throughout the SSCMLP (concepts such as controls and procedures to be addressed, spending authority, information systems to facilitate data transfer, role and accountability of Supply Chain Management in organizational structure) been integrated?

Written Communication: Format, Language and Style: A report should contain titles, sentences and point form lists. It should demonstrate a professionl tone and be free of spelling and grammatical errors.




Written Case Report (continued)

Grading: The case studies will be graded as indicated in the below sample worksheet. Each section will carry an approximate weighting as indicated below. A completed is sample is available in the Appendix of the manual.

CASE ANALYSIS MARKS

AVAILBLE MARK

I. PROCESS ELEMENTS 10

II. LIST ISSUES WITH IMPACT ANALYSIS 10

III.ENVIRONMENTAL AND ROOT CASE ANALYSIS 20

IV. ALTERNATIVES AND/OR OPTIONS 15

V. RECOMMENDATIONS 5

VI. IMPLEMENTATION 10

VII. MONITOR AND CONTROL 10

OVERALL

JUDGEMENT AND INTERGRATION 10

WRITTEN ICOMMUNICATION: FORMAT 5

WRITTEN COMMUNIATION: LANGUGE AND STYLE 5

CASE TOTAL 100




RACI Model Overview

The RACI model is tool used to identify roles and responsibilities of individuals and is often used by organizations when dealing with change management. The tool applies a responsibility assignment methodology that works by assigning a level of accountability to individuals. This model is an important strategic tool to use both when creating and presenting a procurement plan of action.

RACI Model The roles within the model consist of:

R= Responsible, the person who is responsible for the problem/decision/plan A= Accountable, the person who must sign-off or approve a decision/plan C= Consulted- the person who provides required information I= Informed- this person typically needs to be informed of a decision/plan The model is typically accompanied by a chart as illustrated below.

Finance IT Legal HR

Supplier Selection

A C R I

Contract Approval

R I A C

The model should be applied as you work through the various stages of your proposal to ensure that you have incorporated both internally and externally (vendor), the various people, departments and factors that should play a role in your assessment and final recommendation.




Self-Assessment Activities

Candidates will have the opportunity to review, test and reinforce their knowledge through self-assessment activities. These activities are not marked. Generally, the activities require candidates to apply the concepts and tools learned in the session to their own organizations, or to a case study. Candidates are strongly encouraged to complete the self-assessment activities, as these activities provide further coverage of the module content. The self-assessment activities are:

1. Spend Analysis (session 1) 2. Financial Leverage Effect (session 4) 3. Placido Engine Company (session 7) 4. Fisher and Paykel Ltd. (session 9)

Module Ending Examination

A four-hour module ending examination consisting of a case analysis will be administered during the final session (session 13) of this module. This examination is worth 25% of the total mark for the module. The candidate must arrange for exam invigilation through their provincial or territorial Institute.



Module Evaluation

Module Evaluation Form

At the end of the module, candidates are required to submit an evaluation form for this module, rating the module content and format. To obtain the evaluation form, please access the PMAC site at http://www.pmac.ca. Then, click on the Education tab. Then, on the right-hand menu, click on New Accreditation Program The evaluation form will be in this menu. Please print the form, complete it, and mail it to the following address: Purchasing Management Association of Canada 777 Bay Street, Suite 2701 P.O. Box 112 Toronto, Ontario M5G 2C8 Email: [email protected]

© Purchasing Management Association of Canada S1 - 1

Session One

Tactical and Strategic Procurement


“Strategic” Stages of Purchasing


Spend Analysis

Procurement risk

Strategic Management



Agenda for Session 1

Activity Directions

Module Overview Overview of module, objectives for module, and methods for candidate evaluation.

Read the Introduction and Overview chapter to understand the objectives for this module, and the methods of evaluation used in this module.

Session Overview and Objectives Objectives, and a brief overview of the session.

Read What You Already Know, the Session Overview and the Objectives found in this session. Review the PowerPoint slides for this session (see the Appendix of this manual. These slides are from the instructor-led version of this module.)

Session Notes: Strategic vs. Tactical Procurement Resources: - Session Notes in this session

Read the session notes for this section. Here are the key teaching points: • Evolution of procurement. • Modern perspective on procurement. • Difference between strategy and tactics. • Alignment of strategy and tactics with corporate level. • Procurement is strategic, but uses tactics to meet the

strategic purpose.

Session Notes: Cavinato’s 5 Stages of Strategic Procurement

Resources: - Cavinato, Joseph, L. Fitting Purchasing to the Five Stages of Strategic Management. - Session notes

Read the Cavinato article (see the Readings and Cases Manual). A summary of Cavinato’s 5 stages is in the session notes. Here are the key teaching points: • Review the differences in the stages. • Determine which of Cavinato’s stages your organization is

in. • Recommend how your organization can move from a lower

stage to a higher stage. • (If possible, provide your own examples of organizations in

each of the stages.)



Agenda for Session 1, continued

Activity Directions

Session Notes: Spend Analysis Resources: - Heath, Stanley. Tackling Spend Analysis - Session notes

Read the resources for this section. Key teaching points: • Defines spend analysis, and direct and indirect spend. • Monitor both $ and number of spends. • Review Heath’s triggers. • Review opportunities from spend analysis and barriers to

spend analysis. • Spend can support strategic goals of organization.

Self-assessment Activity: Spend Analysis (not marked) Resources: - Session Notes and readings in this session

Read and complete the self-assessment activity in this session.

Self-assessment Activity Evaluation When you are finished the self-assessment activity, review the Self-assessment Evaluation section in this session. Here are the key teaching points for the activity: • To reflect on spend analysis in your organization. • To develop a lists of benefits and constraints to spend

analysis.

Individual Exercise: Goods Spend Analysis at Your Organization (marked – 5%)

Read the requirements and complete the exercise in this session. Submit the exercise for evaluation. Refer to the Session Schedule provided for submission instructions.

Session Notes: Defining Supply Risk Resources: - Zsidisin. A Grounded Definition of Supply Risk - Session notes

Read the resources for this section. Key teaching points: • Definition of supply risk. • Sources of supply risk. • Importance of supply risk.




Review of Written Case Report requirements

Review the Written Case Reports section of the Introduction and Overview chapter. Review the requirements for the cases in sessions 3, 8 and 11. The purpose of this activity is to prepare you for the cases by giving you a preview of the requirements for each case. If you have any questions about case preparation or writing case reports, please contact your marker.

Session Wrap Up

Review this session’s objectives. View the topics and activities for the next session.




What You Already Know

In Module 1, the focus was on supply chain management and relationship management between and within organizations to achieve organizational goals. In this module the focus is on a specific aspect of supply chain management – strategic procurement. Strategic procurement is the driver of the supply chain. It is through strategic procurement that the buying organization manages its supply chain. The field and practice of strategic procurement includes entering into arrangements with various suppliers including goods and service providers, logistics firms, information consultants (such as technology consultants or legal counsel), and asset disposal providers.

Overview

In this session candidates will be introduced to some of the underlying concepts of strategic procurement. It is important to remember that effective procurement is strategic, and that strategic procurement is the examination and formulation of all procurement activities and policies in alignment with the goals of the organization. This is the link between procurement and supply chain management: procurement that aligns with the goals of supply management at the organization, and with the organization’s goals as a whole. Strategic procurement drives the whole supply chain. In effect, strategic procurement “owns” the chain. Even at the strategic level (i.e. answering the questions “why” and “where”), procurement has tactical elements (i.e. answering the question “how”). As a warm up to this module, candidates should assess the situation in their own organization. The session examines some fundamental and strategic aspects of purchasing using Cavinato’s five stages of strategic management. Cavinato lists a large number of criteria for each stage of strategic management. For the purposes of this module, these criteria have been distilled down to a more manageable number. Then, the session examines spend analysis, which is a key tactical method for facilitating strategy. Spend and indirect spend are defined, as are opportunities and constraints to spend analysis. Using Heath’s approach, candidates are introduced to dimensions of spend, as well as triggers for spending. Candidates are required to perform an individual (marked) exercise on spend analysis. The final part of the session considers procurement risk. Procurement risks are important considerations in weighing strategies. There are also other risks to consider in formulating procurement policies. Zsidisin’s definition of supply risk is examined.



Tactical and Strategic Procurement, continued

Objectives

Upon completion of this session candidates should be able to:

1. Describe the relationship between procurement and supply chain management. 2. Describe the relationship between tactical and strategic procurement 3. Describe and differentiate the five stages of strategic procurement management. 4. Define spend analysis including direct and indirect spend. 5. Understand why spend analysis is an important strategic purchasing function. 6. Prepare a goods spend analysis at their organization. 7. Recognize the opportunities from and barriers to spend analysis. 8. Identify types of supply risk.

Required Reading

Read the following: • Cavinato, Joseph, L. Fitting Purchasing to the Five Stages of Strategic

Management. European Journal of Purchasing and Supply. #5, Issue 2. 1999. Pages 75-83.

• Heath, Stanley. Tackling Spend Analysis. Contract Management. January

2006. Pages 40-45.

• Zsidisin, George A. A grounded definition of supply risk. Journal of Purchasing and Supply Management. 2003. Pages 217-224.

Framework Questions

Framework questions help you focus on the issues presented in the session. Answer the following questions as you complete the readings and activities in this session.

1. Where is your organization with respect to strategic purchasing? Is it tactical or

strategic? Is it both? 2. Is your organization acquiring greater strategic skills in its purchasing? 3. How will your organization move to become more strategic? 4. Does your organization use spend analysis? 5. What are the benefits and constraints to performing a spend analysis in your

organization? 6. What is an example in your organization of direct spend? Indirect spend? 7. Why is spend analysis important in your organization? 8. What are the supply risks in your organization? 9. How might you manage supply risks in your organization?




Self-assessment Activity

Goods Spend Analysis (not marked) After completing the readings, answer the following questions: 1. Does your organization perform spend analysis? 2. What is an example in your organization of direct spend? Indirect spend? 3. What are the benefits and constraints to performing a spend analysis in your organization? 4. Why is spend analysis important in your organization? This activity is not submitted for evaluation. See below for instructions on self-evaluating this activity.




Individual Exercise

Goods Spend Analysis in Your Organization Describe components of a goods spend analysis for your organization. Please feel free to use any relevant information about your organization. (All information will be treated as confidential, and used for grading purposes only.) This exercise is worth 5% of the overall mark for this module. It must be typed and double spaced, with 2.5 cm margins on all edges, and be in 12-point font. This exercise is limited to a maximum of five pages. Remember to write in complete sentences; do not use point form, except when providing a coherent list in a wider context. Refer to your Session Schedule for instructions on submitting this assignment for marking. There are three components to the exercise that must be handed in: 1. Show the steps you would use to conduct a goods spend analysis for your

organization. 2. Describe specific key triggers and why you chose them. 3. Describe how spend analysis would fit within your current procurement strategy. In general, you will be evaluated on the following criteria: • Did you complete all the requirements of the assignment? • Did you apply the appropriate concepts and tools from this session? • Was your analysis realistic and achievable? • Was your analysis strategic (i.e. in alignment with your organization’s

procurement strategy, and the organization’s goals in general)? For more details on the characteristics and purposes of a goods spend analysis, refer to the session notes and readings for this session. General evaluation information for all exercises is available in Introduction and Overview: Candidate Evaluation.



Self-Assessment Activity Evaluation

Goods Spend Analysis

The objectives of the activity are to familiarize the candidate with spend analysis terminology, and to promote a strategic view of the candidate’s organization’s spend analysis strategy. You do not have to submit this activity for marking; it is for self-evaluation purposes only. This activity is based on your own experience at your organization. The answers you provide depend on your experience and position within the organization. You should develop a list of reasons to adopt (or not adopt) spend analysis, and ways that the adoption of spend analysis will (or won’t) benefit your organization. If you have difficulties completing this exercise, or understanding the terminology used, refer to the session notes and readings in the session.



Session Notes: Tactical and Strategic Procurement


Purchasing, procurement, and supply management has been defined in a variety of ways by a variety of practitioners. In its earliest form, purchasing was seen as a function that provided the right input at the right place at the right time. This dated perspective still holds in some organizations. A modern view of procurement is that it is process-oriented, and concerned with the management of all supplies of an organization, giving rise to the term “supply management.” Supplies do not necessarily mean goods supplies such as metal, pens, paper, and the like. Supplies also mean supplies of services such as legal advice, and auditing, actuarial and engineering services, among others. The focus on all supplies places procurement at the leading edge of managing corporate supply chains. Through its processes, procurement determines the following: • what specifically is required • who will supply it • how it will move from its source to destination • how its performance or progression will be monitored • how used assets, waste, scrap and redundant supplies will be disposed of The role of procurement has expanded to encompass the lifecycle of the good or service being acquired. The overall goal, i.e. the strategic goal, is to provide value to the customer. Given the breadth of the procurement process, procurement plays a key role in relationships with other supply chain partners, as well as with the ultimate customer.

Strategic Stages of Purchasing

Procurement is of vital strategic interest to the organization. Procurement also provides tactical services to the organization. To better understand these roles, consider strategy as reflecting “where are we going” while tactics answer the question “how are we getting there”. An example of strategy is to require low-cost high-quality suppliers. An example of a tactic to achieve that strategy is to single source. Another tactic is to enter into an alliance with a key supplier. Strategic procurement is linked to the strategic goals of the organization. Purchasing strategies that are incongruent with corporate goals will be unsuccessful. Consider a situation where the corporate goal is to provide low-cost, low-quality products. Clearly a procurement strategy that focuses on low-cost and high-quality does not fit. Thus, any tactics derived from this procurement policy may also be at odds with the company’s goals. In this case, it may be more appropriate to have multiple suppliers who are competitive, as opposed to a single supplier.



Session Notes: Tactical and Strategic Procurement, continued

Cavinato’s Five Stages of Strategic Management

To understand where an organization is strategically placed, we can examine Cavinato’s five stages of strategic management: Stage 1: Basic financial planning Stage 2: Forecast based planning Stage 3: Externally oriented planning Stage 4: Strategic management Stage 5: Knowledge based business The following table, abridged from Cavinato, highlights his staging with respect to procurement. Table 1.1 – A Summary of Cavinato’s Stages of Strategic Management

Stage Concept

of Field Concept of Strategy

Concept of Supply Chain

Range of Products and Services

Management Approach

Key Personal Skills

Key Measures

1 Buying Better price Production- purchasing

MRO, office supplies

Reactive Task-oriented Financial

2 Purchasing Maintain price

Supplier feeding production

Raw materials, MOR , office supplies

Reactive with some planning

Some management

Gap based

3 Procure-ment

Support line of business

Suppliers and suppliers’ suppliers to final product

Capital goods, MRO, office supplies, outsourcing

Fit to rest of organization

Managerial, analytical, interpersonal

Total product cost

4 Supply Entrepreneur-ial team

Innovator to final use and disposition

Product design in view of market

Pro-active Leadership of teams

Total supply chain costs

5 Network facilitation

Conduit and interpreter

Supplier’s capabilities through value to final customer

Unlimited Leadership Leadership, consultant, conduit

Total supply chain costs, comparative supply chain costs

Stage 1: Basic Financial Planning

In stage 1, an organization operates at the basic budgeting level. The major performance criterion is to conform to budget, and control is enforced by financial accounting entities within the organization. In stage 1 organizations, procurement’s role is “buyer” only. The strategic focus is finding the lowest price for an item (or driving the item price down). The supply chain as a whole is not considered, as procurement’s role is to buy goods for production. Value-creation (procurement’s value proposition) is to lower costs. Management is reactive and focuses on conformity. In stage 1 organizations, procurement’s authority is usually restricted to buying maintenance, repair and operational items. Management focuses on meeting the standards, not changing policy. Performance is measured exclusively in terms of financial targets.




Stage 2: Forecast-based Planning

In Cavinato’s stage 2, organizations start to develop a more sophisticated approach to planning. They determine desired financial results, and then design programs to move from the current financial situation to the desired situation (i.e. they conduct a gap analysis). Typically the future is defined as a simple trend, or extrapolated from past experience. In stage 2 the procurement role is expanded to include minimizing future costs with increased consideration of quality. This can be described as purchasing. The primary focus, however, remains on costs minimization or price maintenance. The procurement function’s value proposition is still to reduce the cost of goods and services. Some supply chain perspective has been adopted, in that suppliers are seen as critical to internal production. Management is focused primarily on process efficiency, and meeting standards. Managers have authority to react to events in the marketplace, but not to provide strategic direction for developing supply chain capabilities.

Stage 3: Externally-oriented Planning

In stage 3, procurement begins to step into a more strategic role with a focus on supporting lines of business. Procurement is managing a variety of supply chain activities in addition to basic acquisition. The supply chain view is holistic, from the supplier's suppliers to the final customer. At this stage, procurement becomes proactive and the organization works with partners within the business. Value-add is created by more integrated supplier management. The focus is on costs. To that end, the key measurement of success is total product cost. Management skills become less tactical and more strategic, as procurement managers work with lines of business to deliver total products. Management skills, such as analysis, are developed.

Stage 4: Strategic Management

In stage 4, procurement becomes strategic, and proactively creates value for the organization in line with the strategy of the organization. The measurement of procurement’s success is total supply chain costs. The supply chain from a procurement perspective ranges from innovating with suppliers in design, through satisfaction creation for the customer. Supply alliances become more common. Strategy focuses on entrepreneurship as a member of development teams. Management is proactive. Team leadership skills become important.




Stage 5: Knowledge-based Business

Stage 5 organizations use procurement as the driver of value creation from all elements of the supply chain through to the final customer. Strategy is viewed as being an interpreter of external and internal customer needs, and a conduit through which those needs are met. Procurement determines which needs are viable, and how to meet those needs. The supply chain is viewed as a network, with many other possible networks available. Management leads the organization in strategic supply chain development. Skills needed by procurement staff include the ability to consult, receive feedback, analyze, and implement (i.e. to act as a conduit between the organization and its suppliers in the best interest of the organization’s customers and overall strategy).

Spend Analysis

Spend analysis provides metrics to monitor organizational spending. Without accurate information on spending, it is difficult to manage spend tactically and even less likely that it will be managed strategically. Spend analysis provides information regarding what amount of funds or how many transactions are related to a particular good or service undertaken with a particular supplier or from a group within an organization. Without proper spend analysis, opportunities are missed. Spend analysis consists of direct and indirect spend: • Direct spend is for goods and services that end up in final products. An example is

sheet metal that is used to produce a car. • Indirect spend is spending that does not end up in the final product, that is, spending

on ancillary or overhead items. An example would be the cost of flying in sales representatives to a sales meeting to introduce a new car.

The Heath article (2006) refers to goods as commodities, and those who require spend as customers, and those receive spend as suppliers or contractors. Heath suggests that spend be analyzed by commodity, supplier and customer, and that ‘triggers’ be used to select procurement enhancement opportunities. The triggers are dollar-value and transaction-based. Suggested triggers for supplies to be considered for focus are:

• High dollar value of commodities or services • High number of transactions for commodities or services • High dollar value for suppliers • High number of transaction for suppliers • High dollar value for internal customers • High number of transactions for internal customers • High percentage of sole source for any of commodities, services, suppliers or

customers • A combination of any of these




Spend Analysis: Opportunities and Barriers

Spend analysis can present performance-improvement opportunities. Once a trigger has been hit the potential opportunities include:

• Reducing cost through volume discounts • Reducing cost by leveraging bargaining position • Seeking better quality • Seeking better responsiveness from suppliers • Uncovering process improvements potential • Uncovering opportunities to enter into stronger relationships

There are barriers to spend analysis in many organizations, according to Heath these include:

• Disparate computer systems • Data problems (incomplete, inaccurate or inconsistent information) • Determining the appropriate classification plan for the analysis • Resistance to change • Inadequate resource levels • Setting unrealistic goals in terms of number of changes that can be made at once




Procurement Risk

All procurement involves risk. Zsidisin’s article (2003) examines supply risk in a variety of organizations to develop a definition of this risk. The analysis suggests that supply risk emerges from two sources:

• Individual supplier failures: Cases where the supplier does not meet the requirements

• Market characteristics: Cases where there are market shortages or a non-competitive market

The article also considers the outcomes from procurement risk. The typical outcome is an inability of the purchasing organization to meet its customer’s requirements. This ranges from missed shipments to failure to meet specifications. The ultimate effect of failing to meet customer requirements is a negative effect on profits. The author also notes that in several cases, the effect of supply risk is the safety of ultimate customers. Using the results of the analysis, Zsidisin proposes that supply risk be defined as:

“the probability of an incident associated with inbound supply from individual supplier failures or the supplier market occurring, in which its outcome results in the inability of the purchasing organization to meet customer demand or causes threats to customer life and security”



Session Wrap Up: Tactical and Strategic Procurement

Review Objectives for this Session

Now that you have looked at tactical vs. strategic aspects of procurement, stages of procurement management, procurement risk, and completed activities on spend analysis, you should review the session’s objectives as restated here: Upon completion of this session candidates should be able to: 1. Describe the relationship between procurement and supply chain management. 2. Describe the relationship between tactical and strategic procurement 3. Describe and differentiate the five stages of strategic procurement management. 4. Define spend analysis including direct and indirect spend. 5. Understand why spend analysis is an important strategic purchasing function. 6. Prepare a goods spend analysis at their organization. 7. Recognize the opportunities from and barriers to spend analysis. 8. Identify types of supply risk. Candidates are encouraged to evaluate their learning by determining if they have achieved the objectives for this session as stated above.

Preview Next Session

In session 1 we explored the tactical and strategic aspects of procurement. In session 2, candidates will explore the procurement process in detail, and prepare a written case report for the Blozis Company.


Session Two

Procurement Process

Key steps in the procurement process

Description of Needs: Specifications

Types of Specifications

Specification Development

Potential Problems




Activity Directions

Session Overview and Objectives Objectives and a brief overview of the session.


Session Notes: Steps in the Procurement Process Resources: - Leenders, Johnson, Flynn and Fearon, Purchasing and Supply Management 13th Ed. (page 61) - Session notes

Read the resources for this section. Here is the key teaching point: • Leenders’ 10 steps in the supply process (also see

summary in session notes).

Individual Reflection: Steps in Procurement Process

Ask yourself: - Which of these steps were you unaware of? - Which steps had you not previously considered as being related to procurement? - Do you consider all these steps to be important? Here is the key teaching point: • For procurement to be strategic it must encompass all

these steps, and be integral to the organization as a whole.

Session Notes: Needs Recognition and Description (Specification) Resources: - Leenders, Johnson, Flynn and Fearon, Purchasing and Supply Management (pages 62 and 63). - Session notes

Read the resources for this section. Here are the key teaching points: • Describe need recognition and specification. • Understand the importance of the specification stage.




Activity Directions

Session Notes: Supplier Selection, Ordering, Monitoring, Receipt and Inspection, Payment, Documentation, and Relationship Management Resources: - Leenders, Johnson, Flynn and Fearon, Purchasing and Supply Management (pages 65 to 73). - Course notes

Read the resources for this section. Here is the key teaching point: - Understand the processes: supplier selection, ordering, monitoring, receipt and inspection, payment, documentation and relationship management. (Some of these will be covered in more depth in later sessions.)

Individual Reflection: Follow up and Expediting (and other steps in the procurement process)

Provide one or more examples of follow-up and expediting from your experience. Key teaching points: • There are different levels and approaches of follow-up

and expediting. • There are different approaches to procurement at

different organizations. Session Notes: Types of Specifications Resources: - Burt, Dobler and Starling, World Class Supply Management, Chapter 11 (Pages 239-246, 250-251) - Session notes

Read the resources for this section. Key teaching points: • Simple specifications: Performance, Fit and function,

Brand or equal, Samples and grades • Complex specifications: Commercial, Design,

Engineering Drawings, Material & Method. • Understand the benefits of standardization. • Appropriate level of interaction interdepartmentally

needs to be considered. For simple buys this may be small, for large buys it may be significant.

• Appropriate level of interaction between supply organization and buying organization needs to be considered.

• Understand the common specification problems.




Activity Directions

Individual Case Report: Blozis (marked – 5%) Resources: − Blozis case − Introduction and Overview: Written

Case Reports (report guidelines) − Session notes in this session − Framework questions in this session − Required readings for this session − Fabritek, 1992 Sample Case and

Report (Appendix)

Analyze the case using the Case Preparation method described in the Introduction and Overview. Prepare the case report according to the instructions in this session. Also, use the guidelines in the Written Case Reports section of the Introduction and Overview. Submit the case report for evaluation. Refer to the Session Schedule for submission instructions. Key teaching points: • Pay close attention to the case requirements (as stated at

the end of the case). • Is the supply function organized properly? Is it strategic

or tactical in nature? • How would you revise purchasing procedures at Blozis

related to: specifications, purchase orders and receipt? • What problems are likely to occur with the

specifications as things now stand?

Session Wrap Up




Procurement Processes


In the last session we saw that while modern procurement focuses on strategy, there are also tactical elements. In this session the major procurement processes are considered, as these form the basis of tactics to meet the strategy. As specification of needs and requirements is a critical procedural step, candidates will prepare a case study related to a conflict in specifications (Blozis Co.). This case also encourages an analysis of the procedural elements of purchasing, and requires a restructuring of procedures.

Overview

Building on the strategic and tactical approach of the previous session, candidates will now be introduced to the key processes of procurement. While these processes are more tactical and operational in nature, proper attention to procedural issues results in effective implementation of procurement strategy. We will review 10 steps in procurement. In this session, we will focus on description of the need or requirement. This description is called a specification. Both simple and complex specifications are examined. The benefits of product and specification standardization are considered. Specification development approaches are reviewed from an organizational and a supplier-relationship perspective. This session also considers problems that may arise in the development of specifications. The session involves the preparation of a case (Blozis Company) in which a key problem area is specification development. In addition, the case highlights some areas where there may be organizational issues.

Objectives


1. Describe the steps in the procurement process. 2. Understand the critical importance of needs description (specifications). 3. Display knowledge of the types of specifications. 4. Describe the broad considerations to specification development. 5. Understand potential problem areas. 6. Apply principles learned to case study.



Procurement Processes, continued

Required Reading

Read the following: • Leenders, Johnson, Flynn and Fearon, Purchasing and Supply Management

13th Edition. McGraw Hill Irwin, Pages 59 to 77. • Burt, Dobler and Starling, World Class Supply Management 7th Edition.

McGraw Hill Irwin, pages 239-246, 250-251. • Blozis Company Case. Purchasing Agents Association of Connecticut Inc.

Framework Questions


1. How are needs recognized in your organization? 2. Why is getting the specification correct the most important part of a purchasing

requirement? 3. In your organization, do you collaborate on specifications? Why? Why not?

Should you? 4. Provide an example of follow-up and expediting from your experience. 5. Describe a situation where you wished you had good documentation and it was

missing? 6. Can your organization use standard products more often? 7. What would the benefits be to your organization if you used standard products

more often? 8. Have you developed specifications that included some of these common

problems?

Blozis Company:

1. Is the supply function organized properly? Is it strategic or tactical in nature? 2. How would you revise purchasing procedures at Blozis related to:

specifications, the use of requisitions, purchase orders, receipt and delivery? 3. What problems are likely to occur with the specifications as things now stand?



Procurement Processes, continued

Individual Written Case Report

Blozis Company Write a case report on the Blozis Company case using the guidelines for written case reports found in the Written Case Reports section of the Introduction and Overview. This case report is worth 5% of your overall mark for this module. Refer to your Session Schedule for instructions on submitting this assignment for marking. The requirements (i.e. the problems to be solved) for the written case report are stated at the end of the case. In addition, your case report should address the following issues: 1. Is the supply function organized properly? Is it strategic or tactical in nature? 2. Examine the purchasing procedures at Blozis related to specifications, the use of

requisitions, purchase orders, and receipt and delivery. Should these be changed? Why or why not? If they should be changed, how?

3. What problems are likely to occur with the specifications as things now stand? To help you prepare for the report, see the session notes in this session. For further reference, please see the sample case, Fabritek, 1992, and the sample case report in the Appendix.



Session Notes: Procurement Processes


In most organizations procurement involves a sequence of activities that results in the acquisition of the required good or service. The ten steps in the sequence are:

1. Need recognition 2. Need description 3. Sourcing 4. Supplier selection 5. Ordering 6. Monitoring 7. Receipt and Inspection 8. Payment 9. Documentation 10. Relationship management

1. Need Recognition

Need recognition is the process of identifying that a good or service is required and determining the timing of the requirement. Need recognition may take place in many parts of the organization simultaneously. For example in a manufacturing plant needs may occur on the production floor for items such as welding rods. At the same time in financial reporting there may be a need for audit services. The key to need recognition from a strategic perspective is to ensure that procurement is working actively with goods and services users, as well as with potential suppliers of those goods and services.

2. Need Description (Specification)

Need description or specification is describing the need in sufficient detail to ensure that the correct good or service is procured, in the correct quality, at the correct time, at the correct place. It is considered one of the most important keys to successful procurement. Specifications can range from simple to complex. An example of the former is copier paper, while the latter may could include complex designs such as a computer main board or an office tower. As need complexity increases so should the degree of interaction between the procurement group, users and potential suppliers. The advantage of increased procurement and supplier involvement is improved precision of the specification, identification of a greater range of potential options, higher quality and lower costs. Ultimately, correct specification yields higher customer satisfaction. It is important to note the author’s comment about “mini processes that are owned and managed by different functional areas of the organization” (Leenders, p.63). This is quite typical and is to be avoided.



Session Notes: Procurement Processes, continued

3. Sourcing and 4. Supplier Selection

Sourcing and supplier selection involves three processes: 1. Investigating and qualifying potential suppliers 2. Evaluating the qualifying suppliers’ bids 3. Choosing the supplier or suppliers to provide the good or service Identification can range from looking up suppliers in phone books or on the internet to formal requests for proposals. Evaluation can range from a simple process such as reviewing delivered price, to consulting procurement colleagues in other organizations for their opinions, to multi-faceted evaluative models. Once the evaluation has been made the supplier is selected.

5. Ordering

Ordering is the process of making the purchase from the supplier. Orders can range from simple purchase orders to complex contracts. When ordering paper for a copier a simple purchase order or purchasing card may be used. For a complex product such as an office building, contracts would be negotiated which lay out details of the project, performance guarantees, milestone payments, and etc.

6. Monitoring

There are two components of monitoring: 1. Follow up 2. Expediting Follow up is the process of routine contact with the supplier as to the status of the order. This can be as simple as a regular phone call or email, to presentations by the supplier regarding the progress of completing complex goods or services. The greater the integration of the supplier with the buying organization, the less activity directed to monitoring. For example if the supplier actually manages the item such as in supplier (vendor) managed inventory, follow-up may be less frequent, or unnecessary. A second element of monitoring is expediting. Expediting occurs when there is an unanticipated early requirement for the good or service or the supplier has missed a delivery commitment. Expediting is a form of pressuring the supplier to deliver.




7. Receipt and Inspection

Receipt and inspection involves taking delivery of the good or service and checking that it meets the specified requirement. In a manufacturing setting, receipt may be a procedural process involving a formal “receiving” area where goods in a shipment are matched against the order and inspected to ensure they are the correct goods in the correct quantity. The goods are then transferred to the user departments or inventory, along with the appropriate documentation. Inspection may be as simple as the verification process just described or may involve systematic quality-oriented inspection to ensure the goods fit and meet the required performance standards. At this stage goods may be rejected and returned to the supplier with related follow-up and corrective action required. With services receipt and inspection also occurs; however, it is much more subtle. For example, if a company uses consulting services to develop a strategic plan, the user (executive) will receive the planning advice, review it and make suggestions for changes.

8. Payment

Payment is the process of clearing the invoice for the good or service and issuing payment. Typically an indication is provided from the user (or from the receiving department) to the accounts payable department, who will then issue full or partial payment for the goods. The actual process of paying for goods or services is not as important as ensuring there is an alignment of the goals of the process with the overall corporate objectives. An example of goal misalignment is when the corporate goal is to use suppliers as a means of financing accounts payable (i.e. extending payment terms to their maximum), while the procurement goal is to pay invoices quickly in order to acquire discounts and future price reductions from suppliers.

9. Documentation

Documentation includes completion of all the paperwork related to the goods and service purchased including: bills of lading, invoices, payment requisitions, payment registers, and more. Documentation also includes the completion of documents related to the process used to acquire the goods and services, i.e. How was the specification developed? Which suppliers were contacted? How were they evaluated (and etc)? The more complex the purchased good or service, the greater the need for accurate and clear documentation that documents the whole procurement cycle.




10. Relationship Management

Relationship management is the process of managing internal and supplier relationships. This may include ongoing liaison with the supplier with respect to failures or repair and maintenance.

Specifications and standardization

It is important to identify the type of specification applicable to the good or service being purchased, and then identify the best process to define the specification. Specifications can be simple or complex. Standardization may apply to both simple and complex specifications.

Simple Specifications

A simple specification provides a high level description of the product or service needed. An example of a simple specification is “provide automotive batteries”. There are five types of simple specifications: • Performance • Function and Fit • Brand • Sample • Grade Performance: describe what the good or service is to do. Performance specifications are relatively easy to develop and typically result in the in the good or service meeting a desired performance target. With a performance specification approach, the supplier decides the process to make the supply, and controls quality. Consequently supplier selection takes on added importance. Function and Fit: describe how the good and service will fit and within the larger product or service. Function and fit involve more teamwork between the supplier and buyer as well as within the buying organization to ensure the fit and function goals align with the larger goals. Suppliers are often integrated into the design process. Brand: the specification is described in terms of a “specific brand or its equal”. The “or equal” specification is needed to ensure a reasonable level of competition amongst potential suppliers. Often, user departments are allowed to choose amongst the brand of equivalent products. The advantage of the brand approach is it is quick and simple. However, branded products may be more expensive.




Simple Specifications (continued)

Samples: A sample is product designed by a potential supplier to meet the buyer’s need. A classic example of a sample is an artist’s proof used in print work. The problem with a sample is that it may not meet the needs of the production process or the end user. Furthermore, samples or prototypes impose additional costs on suppliers. A sample may be required when the good or service is highly complex. It can be an inexpensive way to test a concept or finalize the specification of a good or service. Grades: Grades are an agreed upon set of standards for a good. An example of a grade is “regular unleaded gasoline”. Grades typically apply to a commodity. An example of a specification is: a flour mill requires # 1 hard spring wheat.

Complex Specifications

A complex specification provides a detailed description of the product or service. An example is: provide automotive batteries composed of the following: • coil construction • 850 cold cranking amps • a maximum weight of 4 kg • maximum dimensions of 250 mm x 225 mm x 200mm There are four types of complex commercial specifications: • Commercial standards • Design specifications • Engineering drawings • Material and method of manufacture Commercial specifications are similar to grades, however, are used where the product is not a commodity in nature. Commercial standards come with a complete description of the product. An example is the American Petroleum Institute Standards for motor oil. Design Specifications: In design specification the buying organization provides a detailed specification of the requirement. As noted previously this approach should involve teamwork between departments in the buying organization and may involve collaboration with suppliers. The advantage of design specifications is the specification can be developed to provide precisely the product or service the buying organization wants. However, it is more costly, and requires more time and management than using commercial specifications.




Complex Specifications (continued)

Engineering drawings: Are used either by themselves or to enhance the description developed in a design specification. Such drawings (or blueprints) provide a detailed view of the product required. While more costly to prepare than a design specification, engineering drawings provide greater precision in detail, and act as a guide to measure quality. Engineering drawings are a simple way to describe relatively complex parts, and allow more options for sourcing, as the drawings can be provided to a variety of possible suppliers. Material and Method of Manufacture: In this approach the specification describes the materials to be used and how the product is to be made. This approach limits input from the supplier as the buying organization sets the process of manufacture.

Standardization Needs description based on grade or commercial specifications are examples of

industry standardization. Using standardization benefits a buying organization in several ways: • Decreased costs due to larger production runs at suppliers • Known physical characteristics of the product (example: shear strength of a bolt) • Lower specification costs • Improved supplier co-ordination due to universally understood specifications • Ability to produce a variety of products from standard parts (example: computers) • Potentially higher quality • Reduced inventories as the standard part may be useful for a range of activities in

the organization (example: using standard type of office paper rather than specialized paper for copiers, printers etc.)

• Reduced inventories due to later build of the product (delayed differentiation) • Enhanced opportunities for simplification.


There are a variety of approaches used to develop specifications. As a general rule, the interrelationship between internal departments should increase as the importance and complexity of the item being acquired (or supplied) increases (see Figure 2.1). For low complexity and important supplies, the user department may have little need to be involved (example cleaning services) so both departmental and procurement involvement is minimal. Conversely for an important mission critical supply, (example: the type of beef served in a chain of high-end steak houses) the chef, the restaurant, and the procurement department would have a high level of interaction.





Figure 2.1 – Specification Development: Department Interrelationships It is important to have relationships where the department involvement and procurement involvement are matched with respect to the complexity and importance of the supply. If we put aside issues to do with barriers to market, or protection of technologies, supplier involvement should increase as the good or service specification increases. Again, procurement and supplier involvement (i.e. internal and external involvement) should be matched with respect to the complexity and importance of the supply to the buying organization.

Specification Problems

In addition to the organizational challenges related to the proper level of involvement, there are a variety of common problems which may occur in specification preparation: Lack of clarity: The specification is not precise enough in order to meet the requirement. This may occur due to lack of bidders for the work as they do not understand what is required, or when the work being undertaken is incorrect, resulting in re-work. Limiting Competition: The specification is either latently or inadvertently written in a manner that results in only one or two possible suppliers. Overly Restrictive: The specification seeks quality characteristics that are unnecessary. The result is a higher than necessary cost (and possibly delivery time) for the supply.

Low

High

Complexity and Importance of the supply

Low High

Departmental Involvement

Procurement Involvement

Level of Interaction



Session Wrap Up: Procurement Processes


Now that you have looked at procurement processes and have examined a case to do with specifications, you should review the session’s objectives as restated here: Upon completion of this session candidates should be able to: 1. Describe the steps in the procurement process. 2. Understand the critical importance of needs description (specifications). 3. Display knowledge of the types of specifications. 4. Describe the broad considerations to specification development. 5. Understand potential problem areas. 6. Apply principles learned to case study. Candidates are encouraged to evaluate their learning by determining if they have achieved the objectives for this session as stated above.


In session 2 we explored the procurement process. In session 3, candidates will explore competitive bidding and negotiations, and prepare a written case report for De Havilland Inc.


Session Three

Competitive Bidding and Negotiation

Conditions for Competitive Bidding

Types of Competitive Bids

Conditions for Negotiation

Steps in Negotiation




Activity Directions



Session Notes: Competitive Bidding Resources: - Session slides - Session notes

Read the resources for this section. Here are the key teaching points: • Resources define competitive bidding, and reflect on

factors that indicate when competitive bidding applies. • There are different types of competitive bids.

Individual Reflection: Example of Competitive Bidding

Write down examples from your own experience of each type of competitive bid.

Session Notes: Negotiation Resources: - Session notes

Read session notes for this section. Here are the key teaching points: • There are factors that suggest when negotiation should

be used. • Objectives of negotiations should be clear. • There are negotiable and non-negotiable items.

Individual Reflection: Negotiation and Competitive Bidding at Your Organization

Provide answers to the following: 1. What is a situation in my organization where

competitive bidding was used when negotiation would have been more appropriate?

2. What is a situation in my organization where negotiation was used when competitive bidding would have been more appropriate?




Activity Directions

Session Notes: the Negotiation Process Resources: - Wheeler, Negotiation Analysis: an Introduction. - Session notes - Session slides

Read the resources for this section. Here are the key teaching points: • Steps in the negotiation process. • The importance of adequate analysis. • The steps in negotiation analysis (pre-negotiations),

and the importance of BATNAs.

Individual Reflection: Approach to Negotiations

Provide answers to the following: 1. Does my organization have a formal approach to negotiation? Should it? 2. What would the advantages and disadvantages be of a formal approach to negotiating? Here is the key teaching point: • There are advantages and disadvantages of a formal

approach to negotiating.

Case Preparation: De Havilland – Parties, Value, and Barriers

Prepare for writing the case report. First, decide what is De Havilland’s BATNA. Then, focus on parties in the negotiation, value of the negotiations, and barriers to negotiation. Review the PowerPoint slides as required. (There are several slides on De Havilland.) Here are the key teaching points: • You should determine a BATNA for De Havilland. • Parties to negotiations may not always be the

obvious ones. • Analysis of who are the parties, and what are the

values and barriers to negotiation in the case will prepare you to write the case report.




Activity Directions

Case Preparation: Power Relationships and Ethics in the De Havilland Case

Determine the power relationships that exist in the De Havilland case. Also, list the ethical issues that arise before, during, and after negotiations. Here are the key teaching points: • Power relationships are important to negotiations. • Candidates need to consider ethical issues when

negotiating. • You may want to refer candidates to PMAC’s

ethics, values and code of conduct (see: www.pmac.ca )

Individual Case Report: De Havilland (marked – 10%) Resources: − De Havilland Inc. case − Introduction and Overview: Written

Case Reports (report guidelines) − Session notes in this session − PowerPoint slides for this session − Framework questions in this session − Required readings for this session − Fabritek, 1992 Sample Case and Report

(Appendix)

Analyze the case using the Case Preparation method described in the Introduction and Overview. Prepare the case report according to the instructions in this session. Also, use the guidelines in the Written Case Reports section of the Introduction and Overview. Submit the case report for evaluation. Refer to the Session Schedule for submission instructions. Here are the key teaching points: • Write your report as if you are presenting the best

approach to negotiations for De Havilland. • Pay close attention to the stages of negotiation

(BATNA, analysis, values and beliefs, etc.). • Who are all the interested parties? • Form your recommendations for conducting

negotiations. • Anticipate problems that may arise during

negotiations.

Session Wrap Up






In this session, candidates are introduced to concepts related to competitive bidding and negotiation. Competitive bidding is a method to source suppliers. Negotiation is an approach to acquire the good or service at a fair and reasonable price. Negotiation impacts the ordering and payment processes reviewed in session 2, as well as price and supplier relationships, which are topics in later sessions.

Overview

In this session the focus is on competitive bidding and negotiation. Competitive bidding and negotiation are considered unique approaches to acquiring a product or service. The criteria that support choosing one or the other are reviewed. Common types of competitive bids are considered. A significant emphasis of the session is negotiation. Objectives, negotiable items and steps in negotiation are reviewed. The analysis phase of negotiation is of critical importance. This session provides a framework for negotiation analysis, including important elements of negotiation such as BATNA (Best Alternative to a Negotiated Agreement), negotiating parties and their interests and values, barriers to negotiation, power relationships, and ethics in negotiation. Candidates analyze a case study, De Havilland Inc., to become better equipped to perform negotiation analysis. Negotiation is covered in greater detail in the four day Negotiation Skills workshop.



Competitive Bidding and Negotiation, continued

Objectives

Upon completion of this session candidates should be able to: 1. Understand the factors that suggest bidding is more appropriate than negotiation and

vice versa. 2. Determine whether negotiation or bidding is more suited to a particular situation. 3. Describe types of bids. 4. State the objectives of a negotiation. 5. Define the keys steps in negotiations. 6. Prepare a negotiating plan.

Required Reading

Read the following:

• Wheeler, Michael. Negotiation Analysis: An Introduction, Harvard Business School 9-801-156

• De Havilland Incorporated case. Richard Ivey School of Business. #9A95B037

Framework Questions


1. What are some of the methods of competitive bidding that I am familiar with? 2. Does my organization have a formal approach to negotiation? Should it? 3. What would the advantages and disadvantages be of a formal approach to

negotiating?

De Havilland Inc.:

1. What are some possible BATNAs for De Havilland? For Marton? 2. Who are the parties and what were their interests/objectives? 3. What is the potential value to be created? 4. What are some potential barriers to success? 5. What are the power relationships between De Havilland and Marton? 6. What are some possible ethical considerations?



Competitive Bidding and Negotiation, continued


De Havilland Inc. Write a case report on the De Havilland case using the guidelines for written case reports found in the Written Case Reports section of the Introduction and Overview. This case report is worth 10% of your overall mark for this module. Refer to your Session Schedule for instructions on submitting this assignment for marking. The requirement for the written case report is: considering the following questions, as Kim Tomar, write a report stating the issues, criteria, analysis and plan of action (i.e. recommendations) to De Havilland’s Source Selection Board.

1. What are some possible BATNAs for De Havilland? For Marton? 2. Who are the parties and what were their interests/objectives? 3. What is the potential value to be created? 4. What are some potential barriers to success? 5. What are the power relationships between De Havilland and Marton 6. What are some possible ethical considerations?

To help you prepare for the report, see the session notes in this session. For further reference, please see the sample case, Fabritek, 1992, and the sample case report in the Appendix.



Session Notes: Competitive Bidding and Negotiation

Conditions for Competitive Bidding

Competitive bidding is when an open offer is made to potential bidders to respond to a specification. When the offer is widely distributed, perhaps through a newspaper or on the internet, it also provides an opportunity to identify previously unknown suppliers. Therefore, it is also a method of identifying potential new sources. Competitive bidding is appropriate in the following circumstances. Significant Contract: The amount of the contract put out to bid must be significant enough to warrant the effort on the supplier’s part to bid on the contract. For example it may be appropriate for a small company to put a contract for a new office building to bid. However if the company uses one case of pens a year, it would be inappropriate to put that requirement to bid. Clear Specification: The specification must be clear to both the buying organization and potential supplier. If the specification is imprecise or ill defined, two problems may occur: • The number of bids is minimal as few suppliers wish to take a chance on providing

the product or service. • The bids that arrive may not be comparable due to bidders interpreting the

requirement differently. Often the buying company may have a time period where bidders are allowed to ask questions about the product or service. These questions and answers are typically made available to all bidders. Supplier Diversity: There must be enough sellers in the market to prevent collusion or bid allocation. Collusion occurs where bidders gang up to provide a consistent price. Bid allocation occurs where bidders determine which organizations will bid, or alternately which organization will have the lowest price. Supplier Ability: There must be suppliers that are qualified and able to provide the product or service. If there are no qualified suppliers, the best potential supplier is chosen, and the buying organization enters negotiation with the supplier to qualify them. Even if there are qualified suppliers they may not want to bid on the work. Bidders must be qualified and willing in order for competitive bidding to apply. Appropriate Length of Tender: Sufficient time is allowed for potential suppliers to review the specification, ask questions

(if allowed) and to prepare a proper bid. The more complex the specification, the greater the length of time to tender.



Session Notes: Competitive Bidding and Negotiation, cont.

Types of Competitive Bids

In practice there are many variants of competitive bidding. The typical or most common types are as follow: Request for quotation (RFQ). Provides a clear requirement and asks organizations to bid with a firm price to provide the product or service. A typical example is for a grade or commercial standard.

Request for information (RFI) An approach to pre-qualify organizations who then may be asked to provide a quotation for the product or service. Typically the buying organization provides the requirement and seeks organizations to provide information related to their willingness and ability to provide the product or service. Request for Proposal (RFP). Typically identifies the requirement and asks suppliers to propose a solution along with the price for that solution. These are used for more complex purchases such as office space requirements or custom built software. Reverse auction. In a reverse auction the buyer provides the requirement to a group of potential suppliers. In the auction the suppliers bid prices down in order to receive the contract to provide the product or service. Typically these are conducted over the internet. Auction (or Forward Auction). The purchaser bids against other bidders for the supply of the product or service.

Negotiation and Bidding

Negotiation typically occurs where the buying organization has selected a supplying organization with whom they wish to conduct business. At times negotiation may become a secondary part of the competitive bidding process; however, caution should be considered in this approach as it undermines the purpose of RFPs and RFQs. For instance, if the bid in the RFP or RFQ is negotiable, then what is the price the vendor should provide: their best price, or a higher price to be negotiated once the RFP or RFQ is accepted? Negotiation in combination with bidding may occur where an RFI has been used, or where the request is for technical proposals. In either case price should be absent from the bid requirement.




When is Negotiation Applicable?

Negotiation is applicable in cases where the conditions for competitive biding are not met. Negotiation is also applicable where: • Costs and risk are hard to estimate. An example is the development of new specialized

software for a company. Typically this occurs where technical proposals have been submitted.

• Price (or cost) is not the most important decision variable. In cases where factors such as quality, delivery assurance or intangibles (such as brand alliance) are important then negotiations with the supplier are required.

• The specification will likely change. • Special needs are important and a significant component of costs. Through negotiation

the fair value and responsibility for costs can be determined. • Supplier involvement is important, particularly early on. • There are long lead times so product development and improvement can occur as part

of the work. The objectives of negotiation relate to these conditions. A significant, but not necessarily the most important, objective of negotiation is to obtain a fair and reasonable price. The price must be acceptable to the buyer and supplier. A specified quality level or a goal of continuous quality improvement may be a negotiating objective. Negotiation may also be used to ensure a specified level of performance, for example, with respect to delivery times. In certain cases an objective may be to ensure greater co-operation from the supplier or to have more control. Finally negotiation may be useful in building a long term relationship with the supplier, as it starts to consolidate the relationship between the buying and selling organization.

What Can Be Negotiated

The old saying is that everything is negotiable. Typically items that are negotiable fall into five groupings: price, transportation, supply, support and quality. Price: negotiation focuses on obtaining a fair and reasonable price for the overall purchase. Within that goal, the buyer may wish to negotiate discounts. These could be in the form of a straight volume discount per order, to cumulative discounts over a range of orders. Payment terms may also be negotiable. This could include interest charged on overdue accounts, to payment schedules. Transportation: negotiation may focus on an item such as a carrier preference, terms related to shipments such as whether it is FOB (Free on Board) origin or FOB destination. It may include an option to have the good or service delivered to multiple points or alternately diverted from one point to another.




What Can Be Negotiated (continued)

Supply factors relate to the actual good itself. The lead time between order and delivery may be negotiated or alternately the delivery dates. Options to expand the requirement or cancel the requirement (along with penalties) may be included. For large projects such as capital projects, bonds may be required as part of the supply agreement. In the ultimate case, the buying organization may wish to limit their involvement with the particular supply, moving to supply (or vendor) managed inventory. Support is a variety of activities that improve productivity related to the good or service. For a new software system, support might include training and the ability to call the developer when problems arise. Support may involve the warranty provided on the good or service. For industrial machines it may include either spare parts or an agreement on the time frame in which spares will be available. Quality is also subject to negotiation. Quality negotiations may include anything from what the performance requirements for the good or service are, to how those are to be measured, through to a system of continuous improvement.

The Negotiation Plan

The most important part of negotiations is to develop a negotiation plan. A standard negotiating plan will consist of five basic steps:

• Selecting the team and team leader • Analysis • Mock negotiations • Negotiations. • Post Negotiation

Depending on the value or importance of the product or service being negotiated, the effort put into each step should be adjusted. It is not appropriate to have a large full empowered team for negotiating small items ( for example, office supplies) and conversely it is not appropriate to have a small underpowered team to negotiate large value items (for example, engine assemblies for a new vehicle).

Teams The first step is to establish the team and team leader. Team size may vary depending on

the importance of the item. For small importance items it may only require staff of the supply department. For significant items it may include members from finance, marketing engineering and procurement. The key is to involve areas with a significant interest in the outcome of the negotiations. Typically the team leader is from the procurement area. Within the team there should be several clear cut rules for the negation phase, such as: there is only one spokesperson. Internal disagreements are aired outside the negotiation.




Wheeler’s Six Steps of Negotiation Analysis

According to Wheeler there are six steps in the analysis phase and 1 additional consideration. The six steps are:

• BATNA: What to do in the event an agreement is not reached? • Identification of the parties. • Assessing the interests of the parties and their priorities. • Determining the value that will be created and how it will be distributed. • Identifying barriers to success. • Considering the effect of power relationships.

In addition to these steps, an important consideration is the ethical issues related to the negotiation. BATNAs (Best Alternative to a Negotiated Agreement). Of critical importance in negotiations is the BATNA for the procuring organization. BATNA reflect the “walk-away” position of the organization. When developing a BATNA, creativity of the team is employed. A BATNA need not be the simple effect of rejecting a seller’s offer. It may include possibilities such as alternate products, alternate suppliers etc. In addition to their own BATNA, a procurement team should attempt to define a BATNA for the supplier. In complex negotiations, a BATNA may be developed for each component of the entire buy. Identification of the Parties. The members of the other negotiating group are not necessarily the key parties to the negotiation. When preparing to negotiate identify who the key parties are for both the current negotiation and for a BATNA. Assessing the interests of the parties and their priorities. In this phase, the objectives regarding the key BATNAs of the buyer, seller and potential other parties are defined. Suppose the negotiation is for a new office tower. The buyer of the building may have objectives related to price, operating cost, esthetics, and environmental impact. The seller may have objectives related to profit, creating a landmark (reputation) and relationship to the local community. A further party may be the City itself who wants to use the building as an anchor for redevelopment. In preparing for negotiation, all these parties’ interests should be analyzed and potential BATNA reviewed.




Wheeler’s Six Steps of Negotiation Analysis (continued)

Determining the value that will be created and how it will be distributed. In this stage the value proposition is considered. In terms of sequence the first goal is to create value, the second is to obtain an appropriate share of the value. Identifying barriers to success. Even if there is a value to be captured by both parties, this does not necessarily mean that an agreement will be reached. Barriers occur in a variety of areas. Strategic barriers occur where the parties overstate their positions. This may in the worse case scenario result in a position where the party is locked into their position, making agreement difficult if not impossible. Interpersonal relationships are a factor in negotiations as trust breaks down. Institutional barriers may affect negotiations. Considering the building example above, the two parties may agree, but local regulations may prevent the agreed upon position being implemented. Considering the effect of power relationships. The power relationships do not necessarily reflect the divergent sizes of the organizations. For example, a large company may have little power over a small company that holds a patent on a unique process. Power relationships are situational and vary between negotiations. Power can be influenced a number of ways. The first is through a change in the parties. A second is a modification of timeframes as a means to apply “pressure”. The strength of the analysis can affect power. The better the preparation, the greater the power in the negotiation. Similarly the more activity put into the first three steps of negotiation (the preparation phase) the greater the power. Related to these analytical steps is the matter of ethics. Ethics are the principles of conduct governing an individual or a profession. Ethics enter into negotiations in a variety of ways. A series of ethical question should be considered in the preparatory phase of the negotiation. Some of these may include:

• Do we wish to overplay our position? Why? • Are we concerned with the effect of our position on bystanders? • Is it in our best interest to extract many concessions from the supplier? And, how

many concessions are too many?




Negotiation Phases

Mock Negotiations (Pre Negotiation) Mock negotiations provide a run through of the negotiations where the negotiating team works with a group simulating the selling group. The objective is to test the analysis, test positions on each point of the negotiation and to test the approach. Negotiations Is the process of reaching an agreement with another party. In their text, Lysons and Farrington (2005) describe 5 stages within a successful negotiation: • The first stage is introductions, agreement on the agenda and rules of procedure. • Stage 2 involves clarifying the issues that the negotiation will address. • Stage 3 results in goal alignment between the parties. The goals to be achieved will be

agreed upon. Some movement from positions related to the initial definition of the issues can be expected.

• The fourth stage is removal of impediments to reaching common goals. • The final stage is drafting of the agreement and ending the negotiation. Post Negotiation In this phase the i’s are dotted and t’s crossed in the agreement, perhaps with the help of legal counsel. During this phase the negotiating team documents the negotiation process and conducts debriefing sessions on the negotiation process.



Session Wrap Up: Competitive Bidding and Negotiation


Now that you have looked at the criteria for competitive bidding and negotiation, and have recommended a course of action for De Havilland Inc., you should review the session’s objectives as restated here: Upon completion of this session candidates should be able to: 1. Understand the factors that suggest bidding is more appropriate than negotiation

and vice versa. 2. Determine whether negotiation or bidding is more suited to a particular situation. 3. Describe types of bids. 4. State the objectives of a negotiation. 5. Define the keys steps in negotiations. 6. Prepare a negotiating plan. Candidates are encouraged to evaluate their learning by determining if they have achieved the objectives for this session as stated above.


In session 3 we explored bidding and negotiations. In session 4, candidates will explore managing procurement and the financial leverage effect, and prepare an exercise on centralization vs. decentralization.


Session Four

Procurement and Supply Management Organization

Internal Procurement Relationships

Financial Leverage Effect

Cross Functional Teams

Organizations: Centralized, Decentralized, and Hybrid




Activity Directions



Session Notes: Internal Procurement Relationships Resources: - Burt, Dobler and Starling, World Class Supply Management, (Pages 41 to 49) - Session notes

Read the resources for this section. Here are the key teaching points: • Procurement interactions with different business units. • The types of interactions are different. • The importance of internal relationship management.

Individual Reflection: Procurement Relationships

Reflect on the following: What department in your organization do you have working relationships with on a day to day basis as it relates to procurement? What is the condition of those relationships? Why are the relationships good or bad? Here are the key teaching points: • There are many groups in organizations that procurement

should be working with. • Relationships are facilitated by a common goals, positive

attitudes and open communication




Activity Directions

Session Notes: Financial Leverage Effect Resources: - Session notes

The financial leverage effect may be difficult to approach. Review the example of the financial leverage effect provided in the session notes. Also, review the different example provided in the session slides. Here are the key teaching points: • There is synergy between financial objectives and

procurement objectives • There is an important relationship with finance • The financial leverage effect is a way to empower

procurement

Self-assessment Activity: Financial Leverage Effect (not marked)

Read and complete the self-assessment activity in this session.

Self-assessment Activity Evaluation

When you are finished the self-assessment activity, review the Self-assessment Evaluation section in this session. Here are the key teaching points for the activity: • To understand the dynamic relationship between procurement

and finance. • Candidates should be able to calculate the various financial

leverage ratios, and know how to apply them. • Understand the power of financial leverage to achieve

procurement and corporate goals.

Session Notes: Cross-functional Teams Resources - Burt, Dobler and Starling, World Class Supply Management (pages 103 to 117) - Session Notes

Read the resources for this section. Here are the key teaching points: • Emphasize the benefits of cross functional teams. • Determine success factors for cross functional teams.




Activity

Directions Session Notes: Procurement Org. Structures Resources: - Johnson and Leenders. The Supply Organizational Dilemma - Session notes

Read the resources for this section. Here are the key teaching points: • Types of procurement organization structures • Advantages and disadvantages of each • The key factors that guide procurement organization structure (Johnson

and Leenders) • Effect of organizational change on procurement

Individual Exercise: Centralization vs. Decentralization (marked – 5%)


Session Wrap Up






The previous session reviewed the concepts of specifications, bidding and negotiation. This session builds further on internal supply relationships and cross functional teams. Overall corporate strategy from the top level down is reviewed, and the issue of centralized versus decentralized procurement is examined.

Overview

Who do procurement team members meet with? Why? The first part of this session deals with these issues. Overall the goal of procurement is to have healthy, open relationships directed toward corporate strategic goals with all relevant parties in the organization. This session also provides the candidate with an overview of the significant leverage effect that procurement may have on financial results. A desirable approach to working with other departments is to use cross functional teams. In this session the benefits, problems and critical success factors for cross functional teams are considered. Then, the ways that procurement can be organized; centralized, decentralized or a combination of both (hybrid) will be addressed. The related reading suggests the form of organization is not merely a matter of weighing the advantages and disadvantages of centralization or decentralization. More important is the strategic environment in which the corporation operates.

Objectives


1. Identify the relationships between procurement and other functional areas of an organization.

2. Describe the reasons for/benefits of using of cross functional purchasing teams.

3. Review the problems in using cross functional teams.

4. Understand the critical success factors for cross functional teams.

5. Describe range of options for organizing procurement.

6. Assess the options for the organization of procurement in an organization.



Procurement and Supply Management Organization, cont.

Required Reading

Read the following:

• Burt, Dobler and Starling , World Class Supply Management, Pages 41 to 49.

• Johnson and Leenders. The Supply Organizational Structure Dilemma. • Burt, Dobler and Starling, World Class Supply Management, Pages 104 to

117.

Framework Questions


1. What department in your organization do you have working relationships with on

a day to day basis as it relates to procurement? 2. What is the condition of those relationships? 3. Should your organization work using cross functional teams? What could the

problems be? 4. What is the purchasing model for your organization? 5. When did it last change? Why? 6. Should it be more centralized or more decentralized? Why? 7. How might it change in the next 5 years? Why?




Self-assessment Activity (not marked)

Calculate the financial leverage effect at Tricorp, using the following information.

You are the Director of Strategic Procurement with Tricorp, a company that manufacturers aftermarket automotive sheet metal. At the latest strategic planning session there was concern over the slow deterioration of Tricorp’s shares. Some investment analysts had been commenting that the return on assets was lower relative to other automotive suppliers. As part of the strategic commitment you agreed to review procurement costs with your team. You assign Eric Morales, a PMAC certified CPP to see if there is a way to cut costs of materials. Tricorp’s Income statement and balance sheet are as follows. Income Statement (partial) Sales: $75,000,000 Sheet metal: $20,000,000 Dies: $ 5,000,000 Total Material $25,000,000 Forming Labour $10,000,000 Polishing Labour $15,000,000 Total labour: $25,000,000 Overhead: $18,000,000 Cost of goods sold $68,000,000 Balance Sheet (partial) Inventory: $7,000,000 Cash: $5,000,000 Accounts Receivable: $7,000,000 Total Current Assets $19,000,000 Fixed Assets $19,000,000 Total Assets $38,000,000 Eric comes up with two options. The first is a decrease in sheet metal costs of $2,000,000. The second is a decrease in the cost of dies of $1,000,000. What is the effect of each option on the ROA for Tricorp?




Individual Exercise

Centralization vs. Decentralization This exercise is worth 5% of the overall mark for this module. It must be typed and double spaced, with 2.5 cm margins on all edges, and be in 12-point font. This exercise is limited to a maximum of five pages. Remember to write in complete sentences; do not use point form, except when providing a coherent list in a wider context. Refer to your Session Schedule for instructions on submitting this assignment for marking. The requirements for the exercise are: 1. Select one organization that uses centralized purchasing. This could be your current

organization, or a previous organization. (If you do not have an example from your own experience, please feel free to use the cases in this module.) Prepare a written report of the changes if any that could be made toward decentralization. Justify keeping the status quo or the changes.

2. Select one organization that uses decentralized purchasing. This could be your

current organization, or a previous organization. (If you do not have an example from your own experience, please feel free to use the cases in this module.) Prepare a written report of changes if any that could be made toward centralization. Justify keeping the status quo or the changes.

In general, you will be evaluated on the following criteria: • Did you complete all the requirements of the assignment? • Did you apply the appropriate concepts and tools from this session? • Are the recommendations realistic and achievable? • Is the analysis strategic (i.e. in alignment with the organization’s procurement

strategy, and the organization’s goals in general)? For more details on centralization and decentralization, refer to the session notes and readings for this session. General evaluation information for all exercises is available in Introduction and Overview: Candidate Evaluation.




Solution

Tricorp. – Financial Leverage Effect Calculations*

Gross

*Note person in charge of unit: the 560 000 $ (be 8% of 7 MM $) and the 280 000 $ (be 4% of 7 MM $) are the same percentages that those of the reduction of the cost of the matters. Hypothesis of the designer = there is a direct link between these two elements. In practice, it arrives often that the matrix cost (equipment) is absorbed.

Income Statement

Before After option 1 option 2

Sales $75,000,000 $75,000,000 $75,000,000

Sheet Metal $20,000,000 $18,000,000 $20,000,000Dies $5,000,000 $5,000,000 $4,000,000Total Materials $25,000,000 $23,000,000 $24,000,000

Forming labour $10,000,000 $10,000,000 $10,000,000Polishing labour $15,000,000 $15,000,000 $15,000,000Total Labour $25,000,000 $25,000,000 $25,000,000

Overhead $18,000,000 $18,000,000 $18,000,000

Cost of Goods Sold $68,000,000 $66,000,000 $67,000,000

Profit $7,000,000 $9,000,000 $8,000,000

Profit Margin 9.3% 12.0% 10.7%

Balance Sheet

Inventory $7,000,000 $6,440,000 $6,720,000Cash $5,000,000 $5,000,000 $5,000,000Accounts Receivable $7,000,000 $7,000,000 $7,000,000

Total current Assets $19,000,000 $18,440,000 $18,720,000

Fixed Assets $19,000,000 $10,000,000 $10,000,000

Total Assets $38,000,000 $28,440,000 $28,720,000

Asset turnover 2.0 2.6 2.6

Return on Assets 18.4% 31.6% 27.9%

Partial

Partial



Session Notes: Procurement and SM Organization

Procurement Internal Relationships

Procurement should be a central hub for departments within an organization. The procurement as a hub perspective assures that procurement is involved in the many areas where it can provide a positive effect. Procurement should be aware, and in contact with, the many parts of the organization that may affect procurement processes. Typical organizational relationships are as follows: Production. It is through procurement that goods and services are made available for production. Examples include raw materials for transformation such as paper in a print plant, to call centre services for a software producer. At the same time procurement relies on production. Production requirements and schedules provide inputs into the procurement cycle. Without these, supply shortages and excesses may occur resulting in production downtime, or excess resources being tied up in inventory. Design. Design or engineering has a relationship with purchasing in a variety of ways. Often design is the initiator of a need, and a key developer of the specification. As we saw in the earlier case, a failure in liaison between design and procurement can have undesirable consequences, through extra product costs, as well as imbalances in internal relationships. Finance. Procurement works with finance, in terms of payment for goods and services purchased. The goal is alignment of finance’s requirements with benefits that procurement can negotiate with suppliers. At the same time procurement can provide substantial financial leverage benefits for a corporation. Marketing. Sales forecasts drive the production schedule in most organizations and consequently drive supply requirements. At the same time, procurement is an important focal point in the provision of goods and services for the organization to market. Through procurement, costs and price is affected, as is quality and availability. Information technology. Information technology is an enabler of many advanced procurement activities, such as spend analysis and e-commerce. At the same time procurement is an influencer of information technology, through its functions. Procurement works with information technology in terms of goods and services acquired. (Module 1: Supply Chain Management examined technology in the supply chain, and focused on information requirements determination.)



Session Notes: Procurement and SM Organization, continued

Procurement Internal Relationships (continued)

Legal. Many procurement agreements, especially for large capital items, may be quite complex. Accordingly, legal counsel may be involved. From time to time relationships with suppliers may fail, due to a variety of reasons. The result may be legal and procurement working together to resolve the issues. Supply Chain Managers. Depending on the degree of integration of supply chain management within procurement, the degree of involvement may range from simply advising supply chain managers as to requirements to an active role in managing all aspects of the supply chain.

The Leverage Effect of Improved Procurement on Financial Results

Better procurement management has a powerful effect on financial results. Consider an organization with the following Income Statement and Balance Sheet. Income Statement (partial) Sales: $60,000,000 Material: $35,000,000 Labour: $15,000,000 Overhead: $ 5,000,000 Cost of Goods Sold: $55,000,000 Gross Profit $5,000,000 Balance Sheet (partial) Inventory: $5,000,000 Cash: $3,000,000 Accounts Receivable: $2,500,000 Total Current Assets: $10,500,000 Land: $10,000,000 Building: $21,000,000 Total Fixed Assets: $31,000,000 Total Assets: $41,500,000




The Leverage Effect of Improved Procurement on Financial Results (continued)

The profit margin (PM) in this example is 8.33% ($5,000,000/$60,000,000) The asset turnover (AT) in this case is 1.45 (sales/total assets = $60,000,000/$41,500,000) The return on assets (ROA) is 12.08% (8.33% x 1.45) Suppose through strategic procurement activities the costs of material are reduced by 10% to $31,500,000. The cost of goods sold decrease to $51,500,000. Inventory also decreases by 10% to $4,500,000. The effects are: Profits increase by $3,500,000 to $8,500,000 The PM increases to 14.17% ($8,500,000/$60,000,000) Current assets decrease to $10,000,000 Total assets decrease to $41,000,000 AT increases to 1.46 ($60,000,000/$41,000,000) ROA becomes 20.69% (14.17% x 1.46)

Cross Functional Teams: Benefits

Cross functional teams are teams directed towards a common goal that use resources across the organization. In procurement, the goal might be the acquisition of a new service such as technology support or a component for a new product such as a jet engine assembly for a new airplane. Cross functional teams are becoming more common-place. Some of the reasons for, and benefits of cross functional teams are:

• The realization that procurement is strategic and has a significant financial impact

• Teams yield better results than individual activity • The ability to cut timelines (provided the team performs effectively) • They improve cross organizational communication and use of information • The increasingly complicated nature of products and the inputs to products

(global supply chains, high quality requirements) • They improve the ability of an organization to deal with these complex

issues and products • Greater creativity and brainstorming




Cross Functional Teams: Problems

The use of cross functional teams is not without problems. Some of these are:

• Role conflicts for team members between their individual and team duties • Excessive workloads for some team members • Ineffective reward mechanisms for team players • Loss of knowledge: team members may devote more time to teamwork and

less time understanding the specifics of their subject area • Cost of training and retraining team members

Cross Functional Teams: Critical Success Factors

There are a number of critical success factors for successful cross functional team deployment: • Executive sponsorship is a necessity. In order for resources to be freed to the

team, senior management must release time of those resources. Through executive sponsorship, the resources are made available. Issues and developments within the teams can be brought forward at a senior level as necessary.

• Effective leadership as a second success factor. While there are many qualities

that go into successful leadership, generally effective team leaders are non autocratic, communicators who focus on team dynamics and team goals. Such leaders gain power through their ability to build consensus. They do not attain their stature in the team through their formal organizational hierarchical position. For the team to work effectively, the right people must be on the team. Are all the areas with vested interest represented? Are the members of the team competent? Do they want to be on and contribute to the team? Do they have the ability to adapt to the requirements of the team?

• Once a group of team members has been selected, the members will need

training in order to effectively reach the team goal. Training can range from group dynamics through effective communications to specific technical skills to work on the project.

• Finally for a team to be successful it will need resources to undertake the work.

Resources include rooms, technologies and materials to support the team effort. It also includes sufficient time to undertake the work.




Ways of Organizing Procurement

Most of the literature related to supply management suggests there are three models for organizing procurement: • The centralized structure approach creates a central procurement organization for

all locations and divisions of the organization. • In a decentralized approach procurement activities are disbursed throughout the

organization. • Hybrids are a combination of the two, where certain activities are managed by a

central procurement function while others are distributed throughout the organization.

There are advantages and disadvantages to each type of organization. Centralized - Advantages

• Can achieve cost savings • Reduces supplier costs as they have to deal with only one part of the buying

organization • Procurement staff can specialize • Simpler co-ordination and control • Easier to develop a strategic view

Centralized – Disadvantages

• May work against teamwork approach • Potential for too much control • Isolation from business units • Positions may become too specialty focused and this can disenfranchise staff

Decentralized – Advantages • Speedier response for business units • Creates more incentive to use local supply good local PR • Results in wider job authority potential a staff motivator

Decentralized – Disadvantages • Loss of volume opportunities • Communication may be more difficult • May lack strategic view as focus is on operational needs of the business unit • Will have inconsistencies between business units in terms of goods and

services




The Hybrid Approach and Trends in Procurement Organization

The hybrid approach is an attempt to capture the advantages of centralization and decentralization without the related disadvantages. In the hybrid structure, the central areas role may be the co-ordination of activities across units (for example sources, policies, procedures) in keeping with overall corporate strategy. At the business unit level the actual procurement occurs. Alternately, the central group may be responsible for “strategic” purchases, while the business units are responsible for operational purchases.

Large multi-unit organizations tend to migrate from one approach to the other over time. The Johnson and Leenders article shows that while the advantages and disadvantages of centralized versus decentralized structures may be a partial consideration in the how procurement is organized, there are larger overarching considerations. The analysis indicates that it is external environmental factors such as costs and market dynamics that drive the changes, since these factors also drive corporate strategic initiatives. As these initiatives cause changes in the corporate organizational structure the procurement area adapts to the new organizational structure. Within this paradigm of change major influencers, generally from the Chief Executive Office affect the change. At the same time, moderators affect the pace and type of change. Moderators range from external consultants to business unit managers. Johnson and Leenders also suggest that the shift in the procurement organization had substantial effects on the procurement function: • Typically the Chief Purchasing Officer (CPO) was responsible for the re-

alignment, and it was often necessary to change the CPO. • Second, the implementation phase caused a significant stress for staff of the

procurement organization. • Third, establishing a shared services organization which charged for its services

was often a common tactic to procurement reorganization where centralization occurred, as well as where decentralization occurred.

• Finally where the organization was moving toward centralization issues arose with the skills of staff, as there may not have been sufficient numbers of senior or even middle-level staff to effectively resource the new central organization.



Session Wrap Up: Procurement and SM Organization


Now that you have looked at the management of procurement, and have analyzed centralized vs. decentralized operations, you should review the session’s objectives as restated here: Upon completion of this session candidates should be able to:



3. Review the problems in using cross functional teams.




Candidates are encouraged to evaluate their learning by determining if they have achieved the objectives for this session as stated above.


In session 4 we explored procurement and supply management. In session 5, candidates will explore make or buy analysis, and prepare a case on total cost of ownership.


Session Five

Make or Buy

Make or Buy

Core Competencies

Core Products

Total Cost of Ownership: Elements

Total Cost of Ownership: Benefits

Total Cost of Ownership: Implementation




Activity Directions



Individual Reflection: Make or Buy Decision at Your Organization Resources: - Burt, Dobler and Starling, World Class Supply Management Pgs. 304-315 - Session notes

Reflect on the following: 1. Does your organization deploy make or buy analysis? Why? Why not? 2. In your organization have you considered the strategic level factors

related to make or buy? Here are the key teaching points: • Difference in characteristics of make or buy organizations versus non

make or buy (this analysis happens in more strategic organizations). • What factors would need to change for those organizations who do

not use make or buy analysis? Session Notes: Introduction to Total Cost of Ownership Resources: - Burt, Dobler and Starling, World Class Supply Mgmt, Pgs 304 to 315 - Session notes

Read the resources for this section. Here are the key teaching points: • Readings reinforce strategic level issues, particularly supplier

dependence. • Readings explore tactical level issues. • Production capacity and qualitative factors are important to make or

buy analysis.

Session Notes: Core Competencies of the Organization Resources: - Prahalad, C. K. and Hamel, Gary. The Core Competence of the Corporation. - Session notes

Read the resources for this section. Here are the key teaching points: • Understand what a core competency is. Review the examples from

the reading and the session notes. • Differentiate between core competencies, core products and end

products. • Note the importance of core competency in the make or buy decision.




Activity Directions

Individual Reflection: Core Competencies at Your Organization Resources: - Session notes

Reflect on the following questions: 1. Does your organization have core competencies? What are they? 2. What are your organization’s core products? Do they flow from the

core competencies? Here are the key teaching points: • Understand what a core competency is by applying it to your

organization. • Understand the difference between core competencies and core

products at your organization. Session Notes: Components of TCO Resources: - Ellram, Lisa. Total Cost of Ownership: Elements and Implementation - Course notes

Read the resources for this section. Here are the key teaching points: • Review the different components of total cost of ownership (use

information from article) • Highlight differences in pre-transaction, transaction, and post-

transaction costs

Individual Reflection: Benefits of TCO Resources: - Ellram, Lisa. Total Cost of Ownership: Elements and Implementation - Session notes

Reflect on the following questions: 1. Do you use total cost of ownership in your organization? 2. What are the pros and cons of using total cost of ownership in your

organization?




Activity Directions

Session Notes: Calculating TCO Resources - Session Notes - Examples in session notes - Examples in PowerPoint slides

Read the resources for this section. Key teaching points: - Learn to calculate present value. - Perform the steps in total cost of ownership analysis. - Apply total cost of ownership analysis to your organization, or to the

examples provided (i.e. determine what the numbers really mean).

Individual Case Report: Make or Buy and TCO – Happyland Construction (marked – 5%) Resources: − Happyland case − Introduction and

Overview: Written Case Reports (report guidelines)

− Session notes in this session

− PowerPoint slides for this session

− Framework questions in this session

− Required readings for this session

− Fabritek, 1992 Sample Case and Report (Appendix)

Analyze the case using the Case Preparation method described in the Introduction and Overview. Prepare the case report according to the instructions in this session. Also, use the guidelines in the Written Case Reports section of the Introduction and Overview. Submit the case report for evaluation. Refer to the Session Schedule for submission instructions. Here are the key teaching points: • Apply the total cost of ownership in a make of buy decision. • Examine the qualitative factors in a make or buy decision. • Calculate TCO correctly – this will ensure you have the information

you need to make the decision. • Provide your recommendations.

Session Wrap Up




Make or Buy


An important strategic and tactical decision is whether to make or buy a particular product or service. Make or buy depends on procurement processes such as specification, sourcing, competitive bidding and negotiation (see session 3). If buy is the dominant focus of the organization, this will have ramifications on the organization design and supply relationships. You may already have faced these kinds of decisions at your organization. This session will explore the issues and strategies behind make or buy decisions.

Overview

Make or buy has both strategic and tactical elements. At the strategic level, make or buy depends on two significant factors: the core competencies of the organization and the threat of supplier dependence. At the tactical level cost is the significant issue in the decision. The appropriate method to assess cost is through the life cycle approach where all costs (pre-transaction, transaction and post-transaction) are considered. The make or buy decision is also influenced by tactical issues such as production availability of capacity and qualitative factors (e.g. raw material quality). The life cycle approach or total cost of ownership is a critical element of make or buy. Since the decisions involved in determining total costs of ownership are for products and services that are used over a period of time, discounted cash flow analysis is an important part of calculating total cost of ownership.

Objectives

Upon completion of this session candidates should be able to: 1 Describe the factors (quantitative and qualitative) that enter into the make or buy

decision. 2. Explain the concept of core competency. 3. Describe the role of core competencies in creating competitive advantage. 4. Identify core competencies of an organization. 5. Describe the benefits of the total cost of ownership approach. 6. Conduct a total cost of ownership analysis for a product or service used in an

organization. 7. Use total cost of ownership to support a make or buy decision.



Make or Buy, continued

Required Reading

Read the following: Burt, Dobler and Starling, World Class Supply Management 7th Edition, Pages 304-315. Prahalad, C. K. and Hamel, Gary. The Core Competence of the Corporation. Harvard Business Review. May-June, 1990. Ellram, Lisa. Total Cost of Ownership: Elements and Implementation

Framework Questions


1. Does your organization deploy make or buy analysis? Why? Why not? 2. In your organization have you considered the strategic level factors related to

make or buy? 3. Is your organization organized on a strategic business unit or core competence

basis? 4. Does your organization have core competencies? What are they? 5. What are your organization’s core products? Do they flow from the core

competencies? 6. Do you use total cost of ownership in your organization? 7. What are the pros and cons of using total cost of ownership in your organization?

Introduction to Case Report

Happyland Construction Write a case report on the Happyland Construction case using the guidelines for written case reports found in the Written Case Reports section of the Introduction and Overview. This case report is worth 5% of your overall mark for this module. Refer to your Session Schedule for instructions on submitting this assignment for marking. The requirements for the written case report are stated below. To help you prepare for the report, see the session notes in this session. For further reference, please see the sample case, Fabritek, 1992, and the sample case report in the Appendix.





Happyland Construction – Case and Requirements Happyland Construction Inc. is an engineering firm involved in design and construction of oil shale plants. It is building a plant in Blissful Valley which is part of Mirth County, in the province of Giggle. Happyland is a world leader in designing shale oil plants and has about 100 employees working on site. Sid Joyous who is the Chief Purchasing Officer for Happyland has been advised that a new crane has to be used on the site - the GargantuLift 6000 by Mega Corporation. It has been recommended by a team of crane operators, finance staff, purchasing and site management. Sid Joyous is discussing the matter with Bill Hoppedup the Chief Financial Officer. The conversation goes like this:

Bill: I see that the GargantuLift 6000 is being recommended, what sort of financial analysis has been done to date? Sid: We have examined both the purchase price and cost information for the GargantuLift, and the team is quite confident it is a best buy for the work we need to do. Bill: What about costs such as defining the requirement and investigating alternate sources? Sid: We did a lot of prior research working with mine production staff and engineering. We also spent considerable time finding alternate supplies. Mega Corp appears to be the best source. Bill: What did all that internal time and effort amount to? Sid: About $500,000. Bill: Any other financial analyses planned? Sid: We expect to do a total cost of ownership study. Betty Jolly who works in my area will be doing the analysis. She sent the following by email this morning knowing you and I would be meeting:

Purchase Cost: $11,000,000 Travel and Related Costs in Assessing Cranes

and Making Recommendation: $150,000 Initial Training for 2 crane operators: $20,000 Yearly Maintenance:$50,000 Major Overhaul in 5 years: $400,000 Annual operating costs (excluding operators): $100,000 Annual wages and benefits operators): $200,000 Disposal Value at the end of Year 10: $500,000 Useful life: 10 years




Individual Written Case Report (continued)

Bill: That looks good but do not forget we depreciate our capital assets over 5 years using a straight line approach, and use a discount rate of 5%. When Betty is finished, let’s sit down with Kerry Contented the CEO and go over the analysis.

The next day Sid and Betty meet with Bill (CFO) and Kerry (CEO). Bill: Your analysis is very thorough, good work.

Sid: We have only one more thing to do. I am wondering if we can simply subcontract for use of the GargantuLift. Perhaps this is cheaper.

Kerry: Yes let’s investigate that as well. Betty: Okay I will do a comparison of the make analysis I just did with a buy analysis.

Betty investigates and finds that Digger Construction will supply a GargantuLift to Happyland for $1,500,000 yearly payable at the end of the year for the next 10 years. Digger will be responsible for all maintenance, operating and decommissioning at the end of 10 years. Happyland will provide the operators. Requirements:

1. Prepare Betty’s original make analysis (as best you can). 2. Then, prepare the buy analysis Sid has promised. 3. Compare both make and buy analyses. What is the best choice? 4. What are the qualitative factors that should be considered?



Session Notes: Make or Buy

Make or Buy Decisions

Make or buy involves decisions related to producing a good or service in house or buying the good or service. There are two levels to the make or buy decision - strategic decisions and tactical decisions. Strategic Level Decisions The following need to be considered at the strategic level: Core competencies: The make or buy should be consistent with the core competencies of the organization. Organizations should consider carefully before outsourcing any activity that is a core organizational competency (e.g. if the organization is a specialty manufacturer or service provider). Supplier dependence: The make or buy decision should consider the potential that the supplier may attain sufficient power that they are able to dictate future arrangements with the organization. This would put the organization in a position of dependence on a single supplier, and affect the critical operations of the organization. Tactical Level Decisions The following need to be considered at the tactical level: Total cost of ownership: The approach (either to make or buy) should reflect the lowest total cost of ownership. Total cost of ownership is ownership over time, and any calculation of total cost of ownership must also account for the time value of money (discounted cash flow analysis). Production capability: Production capability refers to the availability of capacity to produce the product or service, the amount of control need over the product or service, and the quality requirement for the product or service. If there is limited available production capacity (or other production can not be shifted to increase production capacity for the product or service) a buy decision should be seriously considered. If the critical nature of the component increases or there are concerns with potential supply disruptions, a make decision should be seriously considered. The make or buy decision is also affected by the quality of inputs available from suppliers.



Session Notes: Make or Buy, continued

Make or Buy Decisions (continued)

Qualitative factors and intangibles There are a variety of factors that may either support a make or buy decision. Some of the quality (and intangible) factors that support a buy decision are:

• The supplier’s research knowledge and experience is of great benefit • The product or service is a good candidate for multiple sourcing • The product or service is minimally affected by irreversibility issues. For

example: unions, local media, or any external pressure that would make it difficult to reverse the make or buy decision

• Suppliers can provide tight (and accurate) cost estimates • The product or service is required in low volumes, and suppliers are available who

want to perform the work • The organization has a desire to be seen as a lean organization • There are unexpected sales which increase volume, and require that you add

capacity quickly Some of the quality (and intangible) factors that support a make decision are:

• The quantities are too small to contract to suppliers (no economy of scale) • Making the product or service allows for greater organizational integration (e.g.

economy of scale is achieved through assembly of many different products at the same plant)

• Potential suppliers in the current market are considered unreliable • Management believes that there will be shortages in the future, and that the

organization must make the product or service to assure supply • There is local political pressure, or union pressure to maintain a stable workforce

(the organization may be experiencing declining orders for other products or services)

• Management requires the organization to maintain or increase control over the product line




Core Competencies

Prahalad and Hamel (1990) provide a variety of elements that define an organization’s core competency:

• The competency reflects the learning of the organization, i.e. it is human capital oriented.

• The competency reflects a commitment to communication and working across

organizational boundaries. • The competency improves/grows with use (i.e. naturally develops along with

the organization). • The competency is a driver of new business development. • The competency allows for diversification (different products and businesses

development). • The competency tends to be hidden or ingrained in the organization. It is not

immediately observable when examining the organization and its products or services.

Prahalad and Hamel suggest that the following three criteria must be satisfied for an activity to be a core competence:

• The activity must provide access to a wide variety of markets. • The activity must provide a benefit to the end product consumer (i.e. be

strategic to the company in that it delivers value to the customer). • The activity should be difficult for competitors to imitate.




Competitive Advantage

Competitive advantage is the fostering of core competency to strategically grow the business. Core competencies flow across business units and are not unique to any single division. For example, a core competency would be a research company having specialized knowledge in the mathematical theory and applications of statistics to risk assessment. In this organization, mathematical theory and application of statistics is not the domain of a specific business unit. There may be a software unit, a corporate training unit and an education unit all using this same core competency, and perhaps other core competencies. Core products are the products arising from the core competency. Suppose the core competency of the research organization above is deployed in a risk measurement model for investments. This core product might be sold directly to investment managers, but the organization may also chose to market the algorithm to other risk management software providers that sell to investment managers. End products are the outputs of business units. In the example above this may be the software sold by the company’s software unit. From a strategic perspective, organizations must find their core competencies and use those as drivers for growth and profitability (i.e. to foster their competitive advantage).

Total Cost of Ownership

The Ellram article (1993) provides a detailed discussion of the total cost of ownership methodology. The total cost of ownership includes the purchase price, but that is only one of the costs that should be considered in procuring a product or service. In addition to the price, there are costs that occur prior to procuring the item and costs that occur after procuring the item. Total cost of ownership is all these costs combined. Since the costs before and subsequent to the buy are considered, the costs are often referred to as the total life cycle costs. These life cycle costs are particularly evident in capital goods purchases. Ellram uses a framework that consists of three costs categories – pretransaction, transaction and posttransaction.




Pretransaction Costs

Pretransaction costs are all the costs that occur prior to the good or service being delivered. Typical costs components in the pretransaction phase include:

• Need recognition • Need description • Sourcing • Supplier selection

Within sourcing are costs of finding sources, evaluating them (qualifying) and adding them to the list of approved suppliers (administrative costs). Pretransaction costs may also include initial components of relationship management such as the education of suppliers and the buying organization in each other’s operations.

Transaction Costs

Transaction costs are the costs that occur after supplier selection, and up to the point the product or service is delivered to the organization. These costs include:

• Ordering • Monitoring • Receipt and inspection • Payment • Documentation

Ellram specifically notes price as a transaction cost. Price is often a link between pre transaction and transaction costs as price is typically a major consideration in supplier selection. Duties and tariffs also are typically included in price assessment. Ellram is somewhat unclear with respect to payment and documentation as components of the transaction cost, nevertheless, these costs are elements of the product or service life cycle costs.




Posttransaction Costs

Posttransaction cost analysis is often the most significant contribution that the total cost of ownership approach adds to procurement decision making. In the previous review of procurement processes (session 2), the identifiable posttransaction process was relationship management. Over the life cycle of the product, there are a variety of additional costs that should be considered:

• Relationship costs with the supplier • Maintenance costs • Repair costs • Lost production costs • Customer goodwill costs • Decommissioning, disposal and recycling costs

Many of these post-transaction costs can occur years after the initial acquisition. Post-transaction costs must be analyzed and quantified. They must reflect actual expenditures or expected losses. Items that are accounting costs, such as depreciation, are excluded (i.e. paper-based costs with no real cash outlay).

Total Cost of Ownership: Benefits

According to Ellram, total cost of ownership provides the following benefits: Performance Measurement

• Good framework to evaluate suppliers • Concrete way to measure results of quality improvement efforts • Excellent tool for benchmarking

Decision Making

• Forces purchasing to quantify tradeoffs • Good basis for making supplier selection decisions • More informed decision making • Creates a structured problem-solving environment

Communication

• Excellent communication vehicle between an organization and its suppliers • Involves other functions in purchasing decisions




Total Cost of Ownership: Benefits (continued)

Insight/Understanding

• Provides excellent data for trend analysis on costs • Provides excellent data for comparing supplier performance • Provides excellent data for negotiations • Provides critical data for target pricing • Requires purchasing to develop an awareness of most significant nonprice

factors that contribute to TCO • Improves long-term strategy by focusing on the “big picture”

Support Continuous Improvement

• Identifies where suppliers should focus improvement efforts, i.e. drives suppliers to work on the “right thing”

• Identifies cost savings opportunities • Forces a organization to look at internal issues - how their own

requirements/specifications may actually increase costs • Encourages professional growth in purchasing personnel by broadening their

perspective

Total Cost of Ownership: Implementation

Implementation of total cost of ownership analysis may be difficult as it has extensive data requirements. Spend analysis may provide a variety of detail for the transaction phase but is unlikely to provide pretransaction or posttransaction information. Issues that must be addressed when moving to a total cost of ownership approach are:

• Refocus: move from simple price analysis to long term cost analysis • Determination of when to use total cost of ownership, i.e. only for capital

projects, or for all manufacturing components, or for some of both • Data will need to be developed, stored, and maintained • Will TCO analysis be rolled out for all applicable situations, or pilot tested

first? For total cost of ownership analysis it is essential to understand the concept of discounted cash flow. Some of the costs will occur in the current time period while others will occur in the future. In order to derive a comparison, the future costs must be discounted for the current time frame (i.e. the current value of future money). The discount rate that is applied is often called the internal rate of return, and may derived from a variety of sources, such as the organization’s costs to borrow money or the average risk-adjusted return on the organization’s stock or shares.




Total Cost of Ownership: Discounting Example

The following example shows how discounting works: Billy Smith is confronted with a dilemma. He has two alternatives for his organization’s new REDUCE project. The objective of REDUCE is to decrease procurement costs by 10%. Vendor A can provide the software for $100,000. Billy has checked with other users of this software and discovered it fails from time to time. His colleagues tell him each time it fails, which seems to be about 2 times per year, they expect the cost to be about $20,000 in terms of repairs and loss of goodwill with suppliers. Annual licensing fees are $20,000. The software is expected to have a life of 5 years at which point it will be decommissioned. Costs at that point will be $60,000. Vendor B can provide the software for $250,000. When checking with colleagues at other organizations he finds this software is considered very reliable, rarely going down. Annual licensing fees are $30,000 and decommissioning is estimated to be $25,000. Vendor B’s software is also expected to last 5 years. Assuming an interest rate of 7.5% what is the present value of:

$10,000 received annually starting 1 year from now for 5 years

Year 0 1 2 3 4 5 TotalCash $10,000 $10,000 $10,000 $10,000 $10,000Discount Factor 0.930233 0.865333 0.804961 0.748801 0.696559

1/1.0751 1/1.0752 1/1.0753 1/1.0754 1/1.0755

Discounted Value $9,302 $8,653 $8,050 $7,488 $6,966 $40,459

Assuming an interest rate of 8% what is the present value of

A capital cost for major maintenance, of $250,000 7 years from now(note 7 years from now is 6 discount periods)

Year 0 1 2 3 4 5 6 TotalCash $0 $0 $0 $0 $0 $250,000Discount Factor 0.63017

1.086

Discounted Value $0 $0 $0 $0 $0 $157,542 $157,542

Assuming a discount rate of 7.5% what is the present value of:

Assuming a discount rate of 8% what is the present value of:




Total Cost of Ownership: Discounting Example (continued)

In both cases, the first years’ licensing fees are included in the initial purchase price. Billy and his team have spent about $100,000 on developing the specification, finding sources, qualifying them and reviewing the two bids. The organization uses a discount rate of 7%. Using the total cost approach the analysis is as follows:

Note that if price were simply the criteria then Vendor A would be selected since the cost is $100,000 versus $250,000. However when total cost of ownership is used vendor B proves to be superior, at least at a 7% discount rate. The discount rate is an important consideration. Suppose the discount rate is 15%. Then the choice of Vendor A is superior to Vendor B as shown below: (In this example an interest rate of about 8.5% is the crossover point).

Time Up to today Year 1 Year 2 Year 3 Year 4 Year 5 TOTAL(or year 0)

Vendor A

Pretransaction $100,000Transaction $100,000Posttansaction $40,000 $60,000 $60,000 $60,000 $120,000Total Cost $200,000 $40,000 $60,000 $60,000 $60,000 $120,000 $540,000Discount factor 0.9346 0.8734 0.8163 0.7629 0.7130Discounted value $200,000 $37,383 $52,406 $48,978 $45,774 $85,558 $470,099

Vendor B

Pretransaction $100,000Transaction $250,000Posttansaction $30,000 $30,000 $30,000 $55,000Total Cost $350,000 $0 $30,000 $30,000 $30,000 $55,000 $495,000Discount factor 0.9346 0.8734 0.8163 0.7629 0.7130Discounted value $350,000 $0 $26,203 $24,489 $22,887 $39,214 $462,793

Discount Rate 7%


Vendor A Pretransaction $100,000Transaction $100,000Posttansaction $40,000 $60,000 $60,000 $60,000 $120,000Total Cost $200,000 $40,000 $60,000 $60,000 $60,000 $120,000 $540,000Discount factor 0.8696 0.7561 0.6575 0.5718 0.4972Discounted value $200,000 $34,783 $45,369 $39,451 $34,305 $59,661 $413,569

Vendor B Pretransaction $100,000Transaction $250,000Posttansaction $30,000 $30,000 $30,000 $55,000Total Cost $350,000 $0 $30,000 $30,000 $30,000 $55,000 $495,000Discount factor 0.8696 0.7561 0.6575 0.5718 0.4972Discounted value $350,000 $0 $22,684 $19,725 $17,153 $27,345 $436,907

Discount Rate 15%



Session Wrap Up: Make or Buy


Now that you have examined make or buy analysis, and have recommended a course of action for Happyland Construction, you should review the session’s objectives as restated here: Upon completion of this session candidates should be able to:

1 Describe the factors (quantitative and qualitative) that enter into the make or buy decision.

2. Explain the concept of core competency. 3. Describe the role of core competencies in creating competitive advantage. 4. Identify core competencies of an organization. 5. Describe the benefits of the total cost of ownership approach. 6. Conduct a total cost of ownership analysis for a product or service used in an

organization. 7. Use total cost of ownership to support a make or buy decision.



In session 5 we explored total cost of ownership and the make or buy decision. In session 6, candidates will explore price and cost analysis, and prepare a case report on Frich Turbo Engine Co.


Session Six

Price and Cost Analysis

What is the Right Price?

Price Assessment & Discounts

Market Conditions & Procurement Leverage

Cost Analysis & Types of Costs

Profit & Learning Curves




Activity Directions



Session Notes: Price Assessment Tools Resources: - Burt, Dobler and Starling, World Class Supply Management

(pages 405-411) - Session notes

Read the resources for this section. Here are the key teaching points: • Consider other factors in addition to price. • There are different approaches to price assessments.

Case Preparation: Frich Turbo Engline Resources: - Frich Turbo Engine Co. case - Session notes

Prepare for the Frich Turbo Engine case by answering the following questions:

1. What factors would explain the difference between Bayfleet’s Machining and Union Stamping’s?

2. Should Bayfleet be selected? Why or why not? Here are the key teaching points: • Do your analysis of competitive bids. • Factors other than price that should be included in a buy analysis.

Interactive Lecture: Price Discounts Resources: - Burt, Dobler and Starling, World Class Supply Management (pages 405-411) - Session notes

Read resources for this section. Here are the key teaching points: • There are different types of discounts. • Even though a classification of discounts has been presented, there are

many potential variations.




Activity Directions

Individual Reflection: Buyer’s Leverage Resource - Session notes

Reflect on the following: 1. Provide an example of where you have buying leverage, and where

you do not have leverage (at your organization, or elsewhere). 2. What are the reasons behind the leverage, or non-leverage (i.e. why

parties in negotiations/market situations have the advantage, and why).

Here is the key teaching point: • Always consider the market situation in attempting to negotiate price.

Session Notes: Cost Data and Profit Resources - Burt, Dobler and Starling, World Class Supply Management (pages 413-430) - Session notes

Read the resources for this section. Here are the key teaching points: • Analyze the sources of cost data • Analyze the types of costs • Allow for a “reasonable profit” • “Reasonable profit” is not based on % of cost!

Reflection: Cost Data Reflect on the following three questions 1. What sources of cost data have you used? 2. What are some examples of purchases where direct and indirect costs

have been split? 3. What were some of the problems you faced, if any, in receiving

information on this split? Here are the key teaching points: • Indirect and direct costs may not be important in some purchases. • Typically, this cost data is more useful for larger purchases, strategic

buys, and ongoing sub components buys. It may not be useful for items like maintenance, repair and operations.




Session Notes: Learning Curves Resources: - Burt, Dobler and Starling, World Class Supply Mgmt (pgs. 413-430) - Session notes

Read the resources for this section. Here are the key teaching points: • The importance of learning curves in analyzing the direct and indirect

costs to an organization. • Learning curves may not be useful in some cases. They are most

applicable to new goods and services being produced by the supplier.

Individual Case Report: Frich Turbo Engine (marked – 5%) Resources: − Frich Turbo case − Introduction and






Analyze the case using the Case Preparation method described in the Introduction and Overview. Prepare the case report according to the instructions in this session. Also, use the guidelines in the Written Case Reports section of the Introduction and Overview. Submit the case report for evaluation. Refer to the Session Schedule for submission instructions. Key teaching points: • Pay close attention to the case questions at the end of the case. • Present your analysis and conclusions in case report format.

Session Wrap Up






Price assessment and cost analysis are two key tools in strategic procurement. The selling price and the cost of goods are important considerations in total cost of ownership, and especially in the identification of transactional costs. Thus they are important elements of the make or buy decision, as explored in session 5.

Overview

In this session candidates will explore the mechanisms of pricing and costs. You may already be searching for a tool that provides a solution to “what is the right price” for a good or service. The right price has a number of qualitative elements. Also, there are a number of approaches to assessing price, including cost analysis. A key consideration in price negotiation is procurement leverage for a given market condition. Cost analysis is examined in detail in the second half of the session. Approaches to cost analysis are considered, as are types of costs. The contentious issue of a “correct” level of profit is reviewed. There is no “correct” answer to what is the right price for a product or service, and neither is there a “correct” answer to what is the right amount of profit. To ensure that profit aligns with other strategic procurement goals, the “right” profit should not be based only on the cost of the product or service. This session concludes with a review of learning curves in cost analysis.

Objectives


1. Conduct a price assessment. 2. Understand that lowest price is not necessarily the best option. 3. Describe different types of discounts 4. Describe types of cost analyses. 5. Distinguish the components of direct and indirect costs. 6. Conduct a cost analysis. 7. Describe considerations with respect to supplier profit. 8. Understand, at a general level, the importance of learning curves in cost analysis.



Price and Cost Analysis, continued

Required Reading

Read the following: Burt, Dobler and Starling, World Class Supply Management 7th Edition, pages 405-407, 409-411, 413-419, 426-430. Frich Turbo Engine Company case. Harbridge House Inc.

Framework questions


1. With respect to price assessment, which of the following have you used in your organization: competitive price proposals, current price comparisons, use of web tools, historical price comparisons and cost analysis?

2. Were there missed opportunities to use one or some of these methods? 3. What types of discounts does your organization typically receive? 4. What are some cases where your organization has procurement leverage? Where

it does not? 5. What sources of cost data has your organization used? 6. When have you been involved in a strategic supply project where direct and

indirect costs have been split? 7. What were some of the problems you faced, if any? 8. Are learning curves appropriate in your organization for some purchases? Why?



Price and Cost Analysis, continued


Frich Turbo Engine Company Write a case report on the Frich Turbo Engine Company case using the guidelines for written case reports found in the Written Case Reports section of the Introduction and Overview. This case report is worth 5% of your overall mark for this module. Refer to your Session Schedule for instructions on submitting this assignment for marking. The requirements (i.e. the problems to be solved) for the written case report are stated at the end of the case. Your case report should address these requirements, and present your analysis, conclusion and recommendations in case report format. To help you prepare for the report, see the session notes in this session. For further reference, please see the sample case, Fabritek, 1992, and the sample case report in the Appendix. A note about the case: This is a short case related to price and cost analysis. The point of the case is to consider the differences in costs estimates from different organizations, and why those estimates may vary. A secondary issue is whether the bids of Bayfleet and Union were late, and the proper process to deal with late bids (even when they are lower). There is no “right” answer. Candidates should look beyond the cost information provided in a bid or quotation to determine the real reasons for the variance in bids among suppliers.



Session Notes: Price and Cost Analysis

What is the Right Price?

In determining price for a good or service, the rule of thumb is that the price should be “fair and reasonable”. A fair and reasonable price is a price that neither results in an efficient supplier being put in financial peril, nor results in the buyer paying too much for the good or service. The right price is not necessarily the lowest price. In addition to price, other considerations that relate to the procurement decision include: • Quality • Reliability of the supplier • Terms and conditions (discounts, financing, transportation etc.) • Risk – supplier, exchange rate, and logistics As an example, consider the purchase of paper supplies for a printing plant: • Supplier A will provide roll stock for $300 per ton and is locally based. • Supplier B is in the U.S. Supplier B will provide an equal quantity and quality

product for $250 ton U.S. At an exchange rate $Cdn 1.15 per $ U.S 1, judging by price alone, the purchase should be made from the U.S. firm ($US $250 = $Cdn 287.50). However, there may be hidden logistics issues, for example documentation and clearance at the US/Canada border. Further there is exchange rate risk. Suppose the Canadian dollar falls in value to $Cdn 1.22 = $US 1. Then, the paper costs more from Supplier B than Supplier A. Therefore these and other factors appropriate to the situation should be considered.

Price Assessment

There are five tools for conducting price assessments:

• Analysis of competitive proposals • Price comparisons – current prices • Price comparisons – historic prices • Web tools • Cost analysis



Session Notes: Price and Cost Analysis, continued

Analysis of Competitive Proposals

Assuming the procured item was submitted for competitive bidding, and that competitive bidding was conducted fairly and appropriately, the bids can be compared to one another. In some cases, such as government procurement, it is mandated that the lowest bid be accepted. When lowest price is the requirement, procurement staff should ensure that the products being supplied are standardized. For example, Supplier A provides a bid of $10 per unit for automotive gauges, and the gauges are mount-ready. Supplier B provides a bid of $8 per gauge but the gauges are not mount-ready. Taking the lower bid in this case may be incorrect if it costs more than $2 during production to make the gauges from supplier B mount-ready. This example highlights the importance of thoroughness in preparing specifications (see session 2 for a review of specifications). Even if bids are identical, other factors should be considered in analyzing the price. Some questions to consider are:

• Does the selling firm have a history of trying to negotiate price changes? • Will it help them become more dominant in the market and thereby reduce price

competition for subsequent purchases? • Is the lowest price supplier reliable, i.e. can they commit to a delivery schedule?

(They may be cheaper in price but delivery delays will adversely affect production costs.)

Price Comparisons: Current Prices

There are a variety of methods to compare current prices. One method is to compare current prices to market prices. This is particularly relevant for commodities. For example lumber, gold, oil and grains are traded on commodity markets, where price levels are highly visible (and highly volatile). A second approach is to compare with published catalog prices. Catalogs may be widely available either in paper format or via the internet. In some cases the prices of goods and services are regulated. Regulated prices are published and easily accessible.




Price Comparisons: Historic Prices

Comparison can be made to previous purchases of similar items. When such comparisons are made it is useful to understand the dynamics of the industry involved. For example, a comparison of diesel fuel prices by a transit agency in 2006 with prices from 2000 would have limited value, as oil prices are highly volatile, and have been increasing year over year. Often it is useful to index historic prices to new levels. Statistics Canada publishes a variety of indexes which can be used to bring historic prices to current levels.

Using Web Tools

A variety of tools are available to make price comparison via the internet. A typical approach is membership in exchanges, where buyers can see prices from a variety of suppliers.

Cost Analysis In cost analysis the approach taken is to determine the underlying costs of producing the

good or service, and then determine the profit. A comparison is then made to the quoted price.

Discounts Suppliers often provide discounts from the quoted price. There are four basic types of

discounts – cash, trade, volume and seasonal discounts. Cash discounts – are discounts that provide a lower price when prompt payment is made. Typically they are stated along the lines of “2% 10 days, net 30”. This means a 2% discount is available if payment is received in ten days; otherwise, the balance is due in 30 days. Trade Discounts – are discounts made available to a certain trade, profession or industry. For example, a plumbing company would receive a trade discount from a plumbing supplier. Careful analysis should be undertaken when considering trade discounts from distributors. In some cases, the price, inclusive of discounts, from a distributor may be higher than the price of obtaining the good directly from the manufacturer when possible. In other cases, the price may be lower, as the distributor purchases volumes sufficient to obtain lower prices and higher discounts from the manufacturer.




Discounts (continued)

Volume Discounts – are discounts for buying a certain quantity of goods or services. Volume discounts may occur on a single buy. For example a shirt maker receives a 10% discount for buying 20,000 buttons or more. Another approach to volume discounts is when a supplier offers a discount once a certain dollar threshold is reached. For instance, the shirt manufacturer buys buttons and cloth from the same supplier. The manufacturer reaches a threshold of $1,000,000 worth of purchases, at which time the supplier provides a discount of 5%. Volume discounts may also apply over a set time period. Rather than providing a volume discount applicable to each purchase, the discount threshold may cover a time period, such as a year. A tactical consideration in assessing volume discounts is the impact on inbound goods inventory. The discount must be sufficient to offset inventory holding costs, and the cost of capital tied up in the inventory. Seasonal Discounts – are discounts provided during seasonal cycles. For example, a flaxseed crusher may offer discounts to paint manufacturers to clear out linseed oil products in inventory prior to the new linseed crop becoming available.

Market Conditions and Price Negotiation Strength (Procurement Leverage)

Procurement managers need to consider the competitive aspects of the market in which they are dealing when considering price. The degree of competitiveness in markets can range from perfect competition to monopoly. Where there are many competitive suppliers (or price taker markets) the influence of any single supplier is minimal. An example is the influence an individual farmer would have on wheat prices that a grain mill purchases. Where a monopoly exists there is one supplier. In this case the monopolist has the ability to dictate price arrangements and the purchaser has little negotiating leverage. . Between these are markets with varying degrees of competition ranging from monopolistically competitive markets, where branding is prevalent to differentiate essentially similar products, to oligopolies where it relates a few sellers to a variety of goods in a given market, and there could then be one, two or three sellers, depending on the specific good.




Market Conditions and Price Negotiation Strength (Procurement Leverage, continued)

The following diagram highlights the issue of price negotiation in regards to the number of sellers. Figure 6.1: Procurement Leverage and Sellers Similarly the number of potential buyers influences price negotiation leverage. If there is only one buyer, procurement managers in that buying firm have substantial leverage. If there are many buyers, procurement managers in any particular firm will have little leverage.

Figure 6.2: Procurement Leverage and Buyers

Negotiating leverage

Number of Buyers0


Number of Sellers0




Cost Analysis Cost analysis attempts to determine if the price being charged by the supplier is fair and

reasonable by examining the costs to make the product or service. Cost data can be obtained in various ways: cost breakdown can be a requirement of a bid where bidding is used; pricing can be obtained from other firms in the industry or from strategic partners; or costs can be derived from cost models. Cost breakdowns – can be required as part of a bid package. Cost breakdown is usually stated at various quantities supplied. Procurement staff can compare these costs structures across bids. As well, this becomes important historic documentation for future cost and price analyses. Other organizations – a company may have formed close strategic alliances or partnerships with organizations which can provide cost information. Companies may also belong to organizations that provide benchmark cost data by organization size in an industry. These alliances provide valuable insight into the potential cost structure of suppliers submitting price quotes. It is important, however, to consider the competitive structure of the industry when using this data. Cost Models – the procuring organization can attempt to determine what the costs would be based on a model of the supplier’s potential costs structure that the procuring organization develops internally. This model may also use benchmark data.

Types of Costs

There are two general categories of cost to be considered: Direct costs These are the costs directly related to the production of the product or service. Consider the provision of an actuarial valuation for a pension fund. The direct costs of service from a consulting actuarial firm would be the costs of the actuary’s and their assistant’s time, plus items such as printing the reports and shipping them to the pension fund. Indirect costs These are costs that support production and cannot be directly attributed to the particular product or service (often these are referred to as allocated costs, burden, or overhead). In the example of the consulting actuarial firm to the pension fund, these costs might include office space rent, heating, building and liability insurance, and disability plan coverage (indirect payroll costs). These are allocated to departments, or to an individual product or service.




Direct Costs Direct costs are usually described in terms of direct labour and direct materials.

Direct labour is the labour used in the physical production of the product or service. For example, consider the production of a computer. Direct labour is the labour of the assembly line workers who put the various components (mainboard, optical drives, memory, and etc.) into the chassis and build the computer. Direct materials are the materials that are used in the physical production of the product. In the case of a computer being produced, direct materials include the case, optical drive, wiring, memory, mainboard, cooling fan, and etc.

Indirect Costs Indirect costs must also be accounted for in the price of a product in order for the

organization to remain viable (i.e. profitable) in the long term. Typical indirect costs are: • Overhead • Administrative expenses • Selling expenses Indirect cost is usually expressed as a percent of direct labour, and is applied to the product or service as a per unit cost. Depending on the organization, indirect costs can be expressed in two ways: • Indirect costs related to production. For instance, heat in the production plant,

miscellaneous production supplies, and production equipment maintenance. In this case, the term “labour burden” is sometimes used and it may be shown as a charge per hour much like the wage rate.

• Indirect costs that are “overhead.” These costs are “corporate” in nature, such as

administration, and are allocated as a percent of all other costs.




Indirect Costs: An Example

Here are some figures to calculate “labour burden”: • The total direct labour hours in a year for a particular organization are 2,000,000. • Plant overhead costs are $20,000,000. • Administration including selling expenses is 15% of all cost. • Profit is 5% of all cost. The rate, or “labour burden” are: $20,000,000/2,000,000 = $10.00 per direct labour hour. Total cost of a computer is $100 in direct labour based on 8 hours of direct labour, and $200 in direct materials per unit. The total cost excluding pure overhead and profit would be $380: Direct materials: $200 Direct Labour: $100 Labour Burden: $80 (8 x $10.00) Cost: $380 Overhead and profit are then added to reach the selling price: Overhead $57 (15% of $380) Total All Costs: $437 Profit: $22 (5% of $380 + 57) Selling Price: $459 Indirect costs are typically quite “sticky” with respect to different levels of production, and do not change with production level. For example, a production line may be shut down due to reduced demand for a firm’s products. Direct labour and direct material would become 0 during the shutdown. However, costs such as insurance, heating and rent would not decrease, and, in any case, would never reach 0. With fixed costs, the effect on per unit cost decreases the greater the number of units produced. This is an important consideration in costs analysis, since a large order would be expected to have a lower per unit cost than a small order.




Profit What is the right level of profit that should be provided to the supplier when a purchase is

made? There is no correct answer to this question, as the right amount of profit is contingent on a variety of factors. These include:

• The competitiveness of the industry in which the supplier operates. The more competitive the more likely that profits are lower.

• The competitiveness of the type of supply being purchased.

• The size of the order. (On a per unit basis the profit per unit can be lower the

larger the order).

• Specialization/customization. The greater the specialization and customization of the purchase, the greater the level of profit.

• The greater the risk related to supplying the product or service, the greater the

profit. Profit should not be calculated on a percent of cost basis. The problem with this approach is that an organization that is inefficient is rewarded for that inefficiency. Furthermore, the use of the percent of cost approach is a disincentive to improve efficiency once the purchase has been made. This is at odds with goals of long term supply relationships (to be reviewed later in this module).

Learning Curves

In the production of goods and services, worker skill improves with the number of repetitions. The effect is a decrease in the time per unit of output. In the case of an actuary, it may take quite a while to produce the first pension valuation report. On the second valuation report, the time required would decrease, and so on. Similarly for a worker installing optical drives in a computer, as the worker installs more drives, the time to install a drive decreases. This concept is called a learning curve. For cost analysis, learning curves are used to determine the effect of higher units of production on the direct labour costs. As the level of production rises the cost per unit should decrease. This should be reflected in the cost analysis.



Session Wrap Up: Price and Cost Analysis


Now that you have examined price and cost decisions, and have recommended a course of action for Frich Turbo Engine, you should review the session’s objectives as restated here: Upon completion of this session candidates should be able to: 1. Conduct a price assessment. 2. Understand that lowest price is not necessarily the best option. 3. Describe different types of discounts 4. Describe types of cost analyses. 5. Distinguish the components of direct and indirect costs. 6. Conduct a cost analysis. 7. Describe considerations with respect to supplier profit. 8. Understand, at a general level, the importance of learning curves in cost analysis.



In session 6 we analyzed price and cost decisions. In session 7, candidates will explore quality and inventory issues, and do an exercise on ISO 9001:2000 and their organization.


Session Seven

Quality and Inventory

Factors Affecting Long Term Quality

Total Quality Management

Quality Training for Procurement Staff

Purposes of Inventory

Forecasting Demand

Inventory Models

Inventory Relationships





• Factors affecting long term quality • Case: Placido Engine Co. • Total quality management • Individual exercise (marked): ISO 9001:2000 and Your Organization • Quality training for procurement staff • Purposes of inventory • Forecasting demand • Inventory models & inventory relationships


We have already explored price and cost in session 6. This session discusses quality, and completes our exploration of the cost, price and quality triangle. The importance of quality in the triangle is that price or cost should not be considered in isolation from quality. For example, price and quality should be considered simultaneously when determining the value provided to the ultimate customer.

Overview

In this session a third dimension is added to the procurement decision: quality. The session begins with a look at the factors that procurement influences that affect quality. Then, we review some common total quality management system: Deming’s, Six Sigma and ISO. Then we consider the importance of quality management training for procurement staff. The second part of the session focuses on inventory. Customer perception of value is influenced by their ability to acquire the desired good or service when they want and need it. Inventory is often the key factor in meeting this requirement. The reasons for holding inventory are considered as are some common inventory models. Order size decisions are often based on these inventory models. When deploying models such as these, it is important to consider the relationship between delivery time and inventory level, as well as the relationship between inventory level and customer service.



Quality and Inventory, continued

Objectives


1. Understand factors that affect quality. 2. Review the merits of product testing and the proposal analysis technique in assuring

quality. 3. Identify the difference between error detection and error prevention. 4. Describe some common total quality management systems. 5. Weigh the pros and cons of implementing ISO 9001: 2000 standards in your

organization. 6. Outline the benefits of a strategic purchasing organization having quality

management training. 7. Describe the purposes of inventory. 8. Use basic inventory models. 9. Outline the relationship between delivery issues and inventory. 10. Review the trade-off between inventory and customer service.

Required Reading

Read the following: Burt, Dobler and Starling, World Class Supply Management 7th Edition, McGraw Hill Irwin, Chapter 7, Pages 147-155. Stuart, F. Ian and Mueller, P. Jr. Total Quality Management and Supplier Partnerships: A Case Study. International Journal of Purchasing and Materials Management. Winter, 1994, Pages 14-20. Genna, Albert. How do you find the right quality wavelength? Purchasing. Jan 16, 1997. Pages 45-46. C. Ritzman, Krajewski, Malhotra and Klassen (2007). Foundations of Operations Management, 2nd Canadian Edition, Pearson Canada Inc., Toronto. Pages 283-290. Placido Engine Company case. Burt Dobler and Starling. World Class Supply Management, accompanying material.




Framework Questions


1. In your organization what quality issues have you experienced? 2. Refer to the four factors that determine long run quality. Which factors were (or

are) absent in your organization? 3. Do you partner with organizations as a method to improve quality? Why or why

not? 4. Are you overly dependent on inspection for quality? 5. Should your organization provide quality management training to purchasing staff? 6. Why does your organization hold inventory? 7. What inventory model or models does your organization use? 8. How does delivery affect the level of inventory your organization holds? 9. How do customer service requirements affect the level of inventory your

organization holds?

Self-Assessment Activity

Placido Engine Company Prepare the Placido Engine Company case. In particular, focus on the following:

• What are the basic issues in this case? • What do you think of the relationship Placido has with its suppliers? • Could Placido improve quality in this case? • Provide your recommendations and plan of action.

To help you prepare the case, see the framework questions on the case in this session. For further reference, please see Case Preparation in Introduction and Overview. This activity is not submitted for evaluation. When you have completed the activity, see the Self-Evaluation section in this session.




Individual Exercise

ISO 9001:2000 and Your Organization This exercise is worth 5% of the overall mark for this module. It must be typed and double spaced, with 2.5 cm margins on all edges, and be in 12-point font. This exercise is limited to a maximum of five pages. Remember to write in complete sentences; do not use point form, except when providing a coherent list in a wider context. Refer to your Session Schedule for instructions on submitting this assignment for marking. The requirements for the exercise are: 1. Outline four reasons for your organization to become ISO 9001:2000 certified. If ISO 9001:2000 is not applicable to your organization, outline four reasons that one of your main suppliers should become ISO 9001:2000 certified. Provide a rationale for each of the reasons you have outlined. 2. Describe some of the problems in implementation that are likely to occur. 3. Assuming you are responsible for the implementation, describe how you would proceed through the certification steps. For more details on the characteristics and purpose of ISO 9001:2000 certification, refer to the session notes and readings for this session. In general, you will be evaluated on the following criteria: • Did you analyze your organization, or your supplier’s organization, and relate it to

the requirements and framework of ISO 9001:2000? • Was the analysis realistic and compelling? General evaluation information for all exercises is available in Introduction and Overview: Candidate Evaluation.




Overview

The objective of the Placido Engine case is to explore building in quality, as opposed to inspecting quality in. Focus on determining and implementing the methods required to deal with quality problems. As in most case studies, there is no “right answer.” The following information and questions should help you decide what you would do if you were responsible for this situation.

Basic Issues The obvious basic issue in the case is the corrosion of the castings. However, this case

is about much more. For instance:

• Penson’s approach to dealing with the problem. Is a formal response the right approach?

• Perhaps a less formal approach followed up with a formal ‘change request’ would be better.

• Does the supplier unilaterally have the right to change the specification, as Penson attempts to do?

• The working relationship between Placido and the suppliers seems quite distant. Given the importance of quality, is this appropriate?

Relationship Placido Has with its Suppliers

Ask yourself how you would have responded if you were a supplier and had received Penson’s letter. Placido has been heavy handed in dealing with suppliers, and, judging by the suppliers’ responses, the organization may have damaged the relationships. (In session 9 aspects of supplier development and certification are considered.)



Self-Assessment Activity Evaluation, continued

How Could Placido Improve Quality?

The case provides some information on the quality process at Placido: they inspect quality into the product. When inbound goods are unsatisfactory they appear to fix them in order to preserve the production schedule. Ask yourself why they use inspection. What are the pros and cons of fixing supplies that do not comply with standards? Rather than fixing the castings, what are the other alternatives? (Hint: is Placido is the author of its own problems by fixing the castings?) Consider alternate methods that Placido could have used. These might include: • Clear specifications. These should be implemented properly. Why have the

specifications been changed now? • Supplier understanding. Make sure that the supplier understands the specifications

right from the start. If lack of corrosion is so important, why were the suppliers not knowledgeable with regard to this? Link this to the importance of specifications, as discussion in session 2.

• Supplier selection. The next session discusses methods of supplier selection. Do you believe that either proposal analysis or product testing was done as part of the selection process? Which would be the better supplier selection approach in this case?

• Monitoring. Placido did monitor, but something seems amiss. Once they started having problems, the suppliers were not informed in a timely manner. Why? What is the effect?



Session Notes: Quality and Inventory

Factors That Effect Long Run Quality

Four factors are typically considered with respect to the long run quality of supplies. These are:

• Specification quality • Selecting suppliers that have the expertise to deliver the right quality • Supplier understanding of the quality requirements, and supplier motivation to

deliver the required quality • Monitoring supplier performance

Specification Quality

Procurement must work closely with the users of the supply to properly describe, i.e. specify, the quality required. The quality specified must suit the ultimate customer’s requirements. Burt, Dobler and Starling suggest there are three ways that quality can be specified:

• Absolute specification: quality is described in terms of grades, or in terms of a standard specification. An example of a grade is “#1 Canola”, an example of a standard is “15mm, grade 6 bolt.”

• Specify the need: quality is specified in terms of suitability, e.g. how well the good or service meets the functional requirements for the process or job.

• Specify conformance: Once the good or service has been acquired, it must meet a performance specification or standard. Inspection is often used to enforce this.

Selecting Suppliers

Two typical approaches to considering quality aspects when selecting suppliers are product testing and proposal analysis.

• Product testing: This involves testing a vendor’s product prior to purchase. Product testing can satisfy two procurement objectives: determining whether a particular supplier can meet the required quality specification, and providing a means of comparing suppliers.

• Proposal analysis: As part of their bids, suppliers are required to submit their method for assuring quality requirements are met. If a supplier’s proposal passes, and if the supply is of significant importance, a team of reviewers meet with the supplier at the supplier’s site. The site inspection focuses on quality processes and procedures at the supplier’s site.



Session Notes: Quality and Inventory, continued

Supplier Understanding

Supplier understanding is increased through: • A close relationship with the supplier • The use of cross organizational teams and partnerships to increase understanding

of quality requirements • Supplier development and certification These are discussed in subsequent sessions.

Supplier Monitoring

Monitoring suppliers ensures that the goods and services received continue to meet the desired quality requirements. Inspection is one method of monitoring. Inspection can be as simple as matching orders, or as complicated as inspecting all goods and services used. Traditionally, defect detection methods were deployed as a means to ensure quality. The defect detection approach is to inspect the good or service after a certain stage of production. Items that fail inspection at this stage are re-worked or scrapped. The most significant problem with this approach is that it occurs after the work has been done. Secondary problems are: • Inspection activity needs to be repeated after the defect is detected and corrected • It may result in an excessively large number of inspections • The number of components inspected at any point of the process may be

excessively large • The need to inspect successively more complex components may arise An alternate approach is to focus more attention on error or defect prevention. In this approach the goal is to identify process problems that may lead to defects prior to production.

Total Quality Management

There are several definitions of total quality management. Stuart and Mueller define total quality management as “a system of management that has the customer satisfaction as its primary business goal”. Other authors suggest that TQM means an organization should manage every job and every process so that it is carried out right the first time. Others suggest TQM focus on continuous improvement.




Deming’s Approach

Total quality management focuses on defect prevention. A variety of methods have been adopted to implement TQM. A classic method is Dr. W. Edwards Deming’s. Deming outlines 14 points to better quality:

1. Create constancy of purpose towards improvement 2. Adopt the new philosophy 3. Cease dependence on inspection 4. Move towards a single supplier (or improve the supply) for any one item 5. Improve constantly and forever 6. Institute training on the job 7. Institute leadership 8. Drive out fear in the workplace 9. Break down barriers between departments 10. Eliminate slogans 11. Eliminate management by objectives 12. Increase pride of workmanship 13. Institute education and self-improvement 14. Promote the idea that transformation is everyone’s job, and especially top

management’s job. Points 3, 4, 9 and 12 have direct implications for procurement.

Six Sigma Approach

A newer approach is Six Sigma. The name Six Sigma refers to six deviations from the mean as a statistical measure for error prevention. (Deviation is expressed mathematically as the Greek symbol for sigma: σ.) Six Sigma has 6 core principles:

1. Customer focused 2. Fact based 3. Process oriented 4. Management is proactive 5. Collaboration is required 6. Focused on perfection / taking risks is necessary / failures are expected

All Six Sigma principles relate to procurement.




ISO 9001:2000 Many companies use the International Standards Organization (ISO) quality

designation ISO 9001:2000. The designation covers processes used within the organization, and does not apply to a specific product of the organization. The ISO organization does not certify organizations. Certification is provided by third party certifying and registering entities. For example, a printing company may choose to use ISO quality standards. The standards would apply to its management processes, and not to the papers it produces. When the printing company is certified, it can represent itself as ISO 9001:2000 compliant, but not its products. The ISO standards (refer to www.iso.org) are based on eight principles:

1. Focus on customers 2. Provide leadership 3. Involve your people 4. Use a process approach (to manage activities and resources) 5. Take a systems approach (to manage the organization) 6. Encourage continual improvement 7. Get the facts before you decide 8. Work with your suppliers (for mutual benefit)

ISO 9001:2000 Methodology

ISO outlines a generic methodology to meeting the ISO 9001:2000 standards. The steps are as follows:

1. Identify the goals you want to achieve 2. Identify what others expect of you 3. Obtain information about the ISO 9000 family 4. Apply the ISO 9000 family of standards in your management system 5. Obtain guidance on specific topics within the quality management system 6. Establish your current status, and determine the gaps between your quality

management system and the requirements of ISO 9001:2000 7. Determine the processes that are needed to supply products to your customers 8. Develop a plan to close the gaps in step 6 and to develop the processes in step 7 9. Carry out your plan 10. Undergo periodic internal assessment 11. Determine if you need to demonstrate conformance 12. If yes, undergo independent audit 13. If no, continue to improve your business




ISO 9001:2000 Step 1

Identify the goals you want to achieve

Typical goals may be:

• Be more efficient and profitable • Produce products and services that consistently meet customer requirements • Achieve customer satisfaction • Increase market share • Maintain market share • Improve communications and morale in the organization • Reduce costs and liabilities • Increase confidence in the production system

ISO 9001:2000 Step 2

Identify what others expect of you

These are the expectations of interested parties (stakeholders) such as:

• Customers and end users • Employees • Suppliers • Shareholders • Society

ISO 9001:2000 Step 3

Obtain information about the ISO 9000 family

• Acquire more detailed information re: ISO 9000:2000, ISO 9001:2000 and ISO 9004:2000 from www.iso.org.

• Read over the requirements and certification process to determine what course of action is appropriate for your organization.




ISO 9001:2000 Step 4

Apply the ISO 9000 family of standards in your management system

If you are seeking certification, or if you are applying for a national quality award, your quality management system should be in conformance with ISO 9001:2000.

• Use ISO 9001:2000 as the basis for certification • Use ISO 9004:2000 in conjunction with your national quality award criteria to

prepare for a national quality award

ISO 9001:2000 Step 5

Obtain guidance on specific topics within the quality management system

These topic-specific standards are:

• ISO 10006 for project management • ISO 10007 for configuration management • ISO 10012 for measurement systems • ISO 10013 for quality documentation • ISO/TR 10014 for managing the economics of quality • ISO 10015 for training • ISO/TS 16949 for automotive suppliers • ISO 19011 for auditing

ISO 9001:2000 Step 6

Establish your current status, and determine the gaps between your quality management system and the requirements of ISO 9001:2000

You may self-assess, or contract the assessment, or part of the assessment to an external organization.




ISO 9001:2000 Step 7

Determine the processes that are needed to supply products to your customers

Review the requirements of the ISO 9001:2000 section on Product Realization to determine how they apply or do not apply to your quality management system. The processes to be reviewed include:

• Customer related processes • Design and/or development • Purchasing • Production and service operations • Control of measuring and monitoring devices

ISO 9001:2000 Step 8

Develop a plan to close the gaps in step 6 and to develop the processes in step 7

Identify actions needed to close the gaps. Allocate resources to perform these actions. Assign responsibilities and establish a schedule to complete the needed actions. (ISO 9001:2000 Paragraphs 4.1 and 7.1 provide the information you will need to consider when developing the plan.)

ISO 9001:2000 Step 9

Carry out your plan

Proceed to implement the identified actions and track the progress of your implementation in your project schedule.

ISO 9001:2000 Step 10

Undergo periodic internal assessment

ISO 19011 provides guidance on auditing, auditor qualification and managing audit programs.




ISO 9001:2000 Steps 11 to 13

Step 11: Are you required to demonstrate conformance?

If yes, go to step 12. If no, go to step 13.

You may want to, or be required to show conformance (i.e. ISO certification and registration) for various purposes, for example:

• Contractual requirements • Market reasons or customer preference • Regulatory requirements • Risk management • To set a clear goal for your internal quality development (motivation)

Step 12: Undergo independent audit

Engage an accredited registration/certification body to perform an audit and certify that your quality management system complies with the requirements of ISO 9001:2000.

Step 13: Continue to improve your business

Review the effectiveness and suitability of your quality management system. ISO 9004:2000 provides a methodology for improvement.




Quality Training for Procurement Staff

A significant issue related to quality and procurement is TQM (Total Quality Management) training for procurement staff. In many organizations TQM is part of the culture, and training in TQM systems for procurement staff is expected and planned. In organizations where TQM is not part of the culture, or where the procurement staff does not have access to training, there are several issues. The article by Genna addresses quality training for procurement staff. In the article, Genna makes the following observations and suggestions:

• Quality training of procurement staff will reduce error rates, and thereby improve the bottom line.

• With training, procurement can effectively convey the expected quality standards to suppliers.

• If procurement initiates its own training program, it is likely to be more effective in creating a culture of quality management within procurement.

• The more formal the training program is, the more likely it will be effective. • The program may be extended to suppliers as part of a supplier development

program. • It is more difficult to implement TQM in organizations where procurement is

decentralized than where it is centralized; however, there are approaches that will work.

• For small companies, an in-house training program is likely not cost effective; however, procurement staff can benefit from third party courses that focus on quality management from a procurement point of view.

Purposes of Inventory

The general purpose of inventory is to provide a buffer to accommodate differences between demand and supply. Demand and supply may be mismatched in a number of ways: • Demand may be higher or lower than expected during a period of time • Demand may be different than expected for different products • Demand may differ by location • Supply may differ due to supply chain disruptions • Supply may differ due to lead time uncertainties Providing a buffer of inventory allows for better customer service. Synchronizing inventory may be necessary to ensure that suppliers can produce lot sizes that are economically viable. Inventory may also serve as a financial buffer during periods of fluctuating input prices. This buffer may allow the organization bargaining room to acquire better pricing on supplies.




Forecasting Demand

Forecasting demand is a complex task. You might start with asking these six basic questions: • What is the purpose of the inventory? This determines the level of effort required

to forecast demand. If the forecast is for a high value item subject to substantial fluctuation, significant effort should be spent in determining demand.

• What is the time horizon: short, medium or long? The longer the time horizon the greater the expected forecast error.

• What techniques should be used, qualitative or quantitative? • What data is the basis of the forecast? If the historical data used is inaccurate, the

forecast will be inaccurate. If the purpose of the forecast is critical to the organization, significant effort should be spent on assuring the data is accurate.

• How will the forecast be presented? • How accurate was the forecasted demand? Monitoring and feedback are required

to improve future forecasts. Approaches to forecasting include qualitative and quantitative methods. Qualitative methods are usually based on expert opinion. Quantitative methods are usually based on historical data (numerical analysis). These methods may be simple or complex.

Qualitative Approach to Forecasting

The qualitative approach to forecasting demand relies on factors such as the predictions of internal and external experts, and customer feedback methods such as surveys and testing. One approach to qualitative forecasting is the Delphi method. In this method, different experts are asked to provide forecasts, and the average of these forecasts is used. Where there are significant differences in the forecasts, a feedback loop is used. The experts are contacted about the divergence, and asked to explain how and why their forecast differs significantly.




Quantitative Approach to Forecasting

Quantitative approaches usually involve the use of historical data (often described as time series data). There are a variety of methods for using historical data, and these methods have different levels of sophistication. Simple quantitative forecasting methods include simple averages, weighted averages and exponentially weighted averages. Moderately complex quantitative forecasting methods include linear (simple) or multiple regression. Regression is a statistical process where demand is considered a dependent variable, which is influenced by other variables, called independent variables. The regression technique creates an equation between the independent variables and the dependent variable.Once the equation is created, the forecast is derived by using the values of the independent variables to forecast the dependent variable. • Linear, or simple regression is where there is one independent variable. • Multiple regression is where there is more than one independent variable. Regression analysis is the basis of most mathematical and statistical modeling. Other complex methods may include advanced statistical techniques such as econometric modeling and autoregressive integrated moving average methods. These methods are not discussed in this module.

Inventory Models Inventory models are designed to determine the size of an order. There are three

fundamental types of models:

• Fixed Order Quantity • Economic Order Quantity • Periodic Review




Fixed Order Quantity

Fixed Order Quantity The fixed order quantity is the simplest inventory model. This model calculates the order size based on the usage rate during the lead time period plus a buffer reserve. Once the inventory drops to a certain level, an order is generated. For example, a farm equipment manufacturer in Winnipeg buys hydraulic pumps in China. The firm uses 60 pumps per day. It takes 27 days from the time the order is initiated until the time the pumps are available on the shop floor. The lead time is calculated as follows: • Ordering : 1 day • Production: 3 days • Ocean shipping to Canada: 15 days • Unloading and shipment to Winnipeg: 5 days • Receipt and inspection at plant: 3 days • Average daily request: 60 pumps per day And, there is a buffer of 4 days. (Therefore, lead time is 31 days in total.) The fixed order quantity is 60 x 31 = 1,860 pumps. Suppose that the procurement group institutes a program to reduce delays in at the plant. The result is the pumps spend only 1 day for receiving and inspection. The fixed order quantity becomes 60 x 29 = 1,740 pumps




Economic Order Quantity

The economic order quantity model is more sophisticated and attempts to balance order (or acquisition) costs versus carrying costs of inventory. EOQ is typically determined as the square root of 2 x DS / CI, where: D = Annual demand C = Cost per item I = Carrying cost S = Order cost Example Suppose for the farm equipment manufacture in Winnipeg that it costs $400 per order for pumps, the costs of financing inventory is 7%, and each pump is $500. Annual demand is 15,660 pumps. (60x261 working days) D= 15,600 pumps (60 x 261 working days) 2DS = 2 x 15,660 x $400 CI = .07 x $500 Therefore, 2DS / CI = 357,943 And, the square root of 357,943 is: 598 EQO = √2 x D x 2 C x I EQO = √2 x 15,600 x 400 0.7 x 500 Safety Stock v = 120 Therefore, the EOQ is 598 pumps. Every time the fixed order point is reached, 598 pumps are ordered. Notice that the simple EOQ model does not consider additional factors such as shipment times.




Periodic Review Models

The previous inventory models are based on reordering at a point that inventory reaches a certain level. In the periodic review model, order points are time based. At each review a quantity is ordered to bring the inventory up to the desired level. The order amount is dependent on the time period of the review. The desired (or maximum) level of inventory is determined based on the following formula: M = W (T+L)+S Where: M = the desired ( or maximum) stock level W = average rate of usage T = the time period for review L = the lead time S = safety stock In our example, the farm equipment manufacturer’s review period is 30 days, with a desired safety stock of 300 pumps. Using the periodic review formula, the desired inventory level is: M = 60 pumps/day (30 days + 31 days) + 300 pumps = 3,960 pumps Every 30 days the manufacturer would review the inventory and top it up to 3,960 pumps. Similar to the first example if the lead time decreased to 29 days there would be an affect on inventory. In this case the desired inventory level would be: M = 60 (30 + 29) + 300 = 3,840 pumps.




Inventory Relationships

There are two important relationships to consider with respect to inventory. Delivery lead time and customer service. In the fixed order quantity and periodic review models, as delivery time increases so does the required levels of inventory: Similarly, the ability to provide reliable customer service is related to inventory. The greater the desired level of service the greater the required inventory:

Low

High

Level of Inventory

Short Long

Delivery Lead Time

Low

High

Level of Inventory

Low High

Desired level of customer service



Session Wrap Up: Quality and Inventory


Now that you have examined quality and inventory issues, and have recommended an implementation plan for ISO 9001:2000, you should review the session’s objectives as restated here: Upon completion of this session candidates should be able to: 1. Understand factors that affect quality. 2. Discuss the merits of product testing and the proposal analysis technique in

assuring quality. 3. Identify the difference between error detection and error prevention. 4. Describe some common total quality management systems. 5. Weigh the pros and cons of implementing ISO 9001: 2000 standards in your

organization. 6. Outline the benefits of a strategic purchasing organization having quality

management training. 7. Describe the purposes of inventory. 8. Use basic inventory models. 9. Outline the relationship between delivery issues and inventory. 10. Discuss the trade-off between inventory and customer service.



In session 7 we examined quality and inventory issues. In session 8, candidates will explore methods for selecting suppliers. Candidates will also perform an exercise on supplier evaluation, and submit a written case report.


Session Eight

Supplier Selection

Sourcing: Finding Suppliers

Weighted Evaluation Systems

Product Attribute Considerations

Total Cost Approach

Single versus Multiple Sourcing

The Perfect Number of Suppliers




Activity Directions



Individual Reflection: Sources of Suppliers Resource: - Session notes

Develop a list of the potential sources to find suppliers. How do you currently find them? Should you expand your search? If so, where would you start? Here are the key teaching points: • There are many possible sources to find suppliers. • Find some experts at your organization, or outside your organization,

to help you develop more resources.

Session Notes: Supplier Evaluation Matrices Resources: - Session notes

Read the resources for this section. Here are the key teaching points: • Review the steps in developing supplier evaluation matrices. • Care must be taken in assigning weights to evaluation factors.

Individual Exercise: Un-weighted Supplier Evaluation Matrix for Platinum Box (marked – 5%)





Activity Directions

Session Notes: Type of Product and Supplier Selection Resources: - Wilson article: The Relative Importance of Supplier Selection. - Smytka article: Total Cost Supplier Selection: A Case Study. - Session Notes

Read the resources for this section. Here are the key teaching points: • Note the importance of the type of product in supplier selection

methods. • Review and understand the components of the total costs approach.

Session Notes: Single vs. Multiple Sourcing Resources: - Burt Dobler and Starling, World Class Supply Management (p. 342-343) - Cruz article: Purchasing Pros Search for the perfect number of suppliers. - Session notes

Read the resources for this section. Here are the key teaching points: • Note the arguments in favour of single sourcing. • Note the arguments in favour of multiple sourcing. • Review the concept of the right number of suppliers (supplier

optimization).




Activity Directions

Individual Case Report: Platinum Box (marked – 5%) Resources: − Platinum Box case − Introduction and






Analyze the case using the Case Preparation method described in the Introduction and Overview. Prepare the case report according to the instructions in this session. Also, use the guidelines in the Written Case Reports section of the Introduction and Overview. Submit the case report for evaluation. Refer to the Session Schedule for submission instructions. Key teaching points: • Pay close attention to the total costs, and all the information provided

for evaluating the suppliers. • Present your analysis and conclusions in case report format.

Session Wrap Up




Supplier Selection


Session 2 mentioned key procurement processes: sourcing and supplier selection. In this session the supplier selection process is more fully developed. One approach discussed is the common evaluative matrix approach. Another is the total cost approach. The total cost approach builds on the total cost of ownership concept discussed in session 5.

Overview

This session considers two general models for supplier selection. The common evaluative matrix model is discussed. Un-weighted and weighted evaluation matrices are discussed, and activities reinforce understanding of these models. Type of product is a key evaluative factor in the evaluative matrix model. Evaluative criteria and their importance may differ depending on the type of product. Total cost of ownership forms a basis for evaluating criteria; however, risk factors and desirable characteristics of suppliers are also considered. Supplier selection also involves deciding how many suppliers are appropriate for a particular good or service. Single sourcing and multiple sourcing are reviewed.



Supplier Selection, continued

Objectives


1. Identify potential supply sources. 2. Produce an evaluation matrix for supplier selection. 3. Describe different types of products (routine order, procedural, performance and

political) as they affect supplier selection. 4. Connect the product type with supplier selection criteria. 5. Understand the elements of the total cost approach of selecting suppliers: risk

factors, business desirable factors, and measurable cost factors. 6. Select a supplier using the total cost of ownership approach. 7. Describe the factors that suggest an organization should use a single source for a

good or service. 8. Describe the factors that suggest an organization should use multiple sources for a

good or service. 9. Understand the difficulties in negotiating in a sole source situation. 10. Defend a single versus multiple source decision.

Required Reading

Read the following: Wilson, Elizabeth J. The Relative Importance of Supplier Selection: Review and Update. International Journal of Purchasing and Materials Management. Summer, 1994. Pages 35-41. Smytka, Daniel L and Clemens, Michael W. Total Cost Supplier Selection: A Case Study. International Journal of Purchasing and Materials Management. Winter, 1993, Pages 42-49. Cruz, Clarissa. Purchasing Pros Search for the perfect number of suppliers. Purchasing. July 11, 1996, Pages 28 and 29. Platinum Box case. Satayas Consulting. Copyright © 2007 Allister Hickson, Ph.D. Reprinted with permission.




Framework Questions


1. What methods do you use to find suppliers in your organization? 2. What evaluation method does your organization use to select suppliers? 3. Does your organization have products that are routine order? Does your

organization have procedural problem products, performance problem products, or political outlay products? Describe these products.

4. What are some of the risk factors, business desirable factors, and cost factors your organization would consider in adopting the total cost approach?

5. For what goods and services has your organization single sourced? What were the factors in the decision?

6. How do the power relationships change when we negotiate in a single source situation?

7. What are the implications of reducing the number of suppliers your organization uses?




Individual Exercise

Platinum Box: Un-Weighed Evaluation Matrix This exercise is worth 5% of the overall mark for this module. It must be typed and double spaced, with 2.5 cm margins on all edges, and be in 12-point font. This exercise is limited to a maximum of five pages. Remember to write in complete sentences; do not use point form, except when providing a coherent list in a wider context. Refer to your Session Schedule for instructions on submitting this assignment for marking. The requirements for the exercise are: 1. Refer to the Platinum Box case and the session notes. Develop an un-weighted evaluation matrix for each of the possible press selections in the case. 2. Rank each of the printing presses in the case according to each evaluative factor you have chosen (i.e. complete the un-weighted evaluation matrix). 3. Assume you are responsible for implementation. Make a recommendation for which printing press to implement. Refer to your un-weighted evaluation matrix, and provide the rationale for your recommendation. For more details on supplier selection and evaluation, refer to the session notes and readings for this session. In general, you will be evaluated on the following criteria: • Did you analyze all your options? Did you provide realistic factors and rankings?

Did you complete your un-weighted evaluation matrix? • Was the analysis realistic and compelling? • Were the recommendations realistic, given the organization’s resources and

capabilities? General evaluation information for all exercises is available in Introduction and Overview: Candidate Evaluation.





Platinum Box Write a case report on the Platinum Box case using the guidelines for written case reports found in the Written Case Reports section of the Introduction and Overview. This case report is worth 5% of your overall mark for this module. Refer to your Session Schedule for instructions on submitting this assignment for marking. The requirement for the written case report is: as Jared John, write a report stating the issues, criteria, analysis and plan of action (i.e. recommendations) to the board of Platinum Box re: which press to use. Here are some things to consider in preparing your report:

1. Should Platinum Box use single or multiple sources? Why, or why not? 2. If they continued to single source with JabaKing, what would the effect be on

their negotiating position? 3. What type of product is the new printing press? 4. Develop a list of evaluative factors, rankings, and weighting for each of the

options. 5. Make the supplier selection for Platinum Box using the total cost framework. 6. Remember to put yourself in the role of Jared John, and make your

recommendation(s) realistic. To help you prepare for the report, see the session notes in this session. For further reference, please see the sample case, Fabritek, 1992, and the sample case report in the Appendix.



Session Notes: Supplier Selection

Supplier Selection: Un- Weighted Evaluation Systems

Once potential suppliers for a good or service have been identified, a supplier (or suppliers) needs to be selected. The most common model of supplier selection is to use an evaluation matrix. When using an evaluation approach the procurement team (or the cross functional procurement team) should use the following general steps:

• Identify the important evaluative factors. • Reach consensus on the important evaluative factors. • Specify with precision the evaluative factors. • Determine the range for the rating scale (example 1 to 5, or 1 to 10, etc.). • Develop the definition for each rank in the rating scale. • Perform the rankings individually. • Discuss and develop a consensus ranking.



Session Notes: Supplier Selection, continued

Un-weighted Evaluation Matrix: An Example

Table 1 below provides an example of a simple un-weighted evaluation matrix. In this example, the following is true:

• The consensus agreement on important evaluative factors is the number of engineers, related experience, manufacturing facilities and financial strength.

• The range of the rating scale for each factor is 5 to 1, with 0.25 awarded for each point in the rating.

• A definition for each factor has been provided. • Individual team members developed the rankings and the agreed upon

consensus rankings are shown in Table 1.

Based on this evaluation the procurement team would select firm B.

Table 1 – Un-weighted evaluation matrix

Rankings

FIRM: A B C Criteria

Number of engineers5 = >15 54 = 10-15 4 3 = 7-9 2 = 4-6 2 1 = 1-3

Related Experience5 = worked with firm before, no issues 5 4 = worked with firm before, some issues3 = firm has a lot of similar work, no issues 32 = firm has a lot of similar work, some issues 2 1 = firm has done a bit of similar work

Manufacturing facilities5 = Firm has up to date tools and techniques4 = Firm has about 75% up to date tools and techniques 43 = Firm has about 50% up to date tools and techniques 3 3 2 = Firm has about 25% up to date tools and techniques1 = Firm has about 10% up to date tools and techniques

Financial Strength5 = Firm has a very positive financial outlook 5 4 = Firm has a positive financial outlook3 = Firm has an average financial outlook 3 3 2 = Firm has a below average financial outlook1 = Firm is financially weak

Average 3.75 4.25 2.5




Weighted Evaluation

The simple un-weighted evaluation matrix approach does not consider that certain evaluative factors may be more important than other evaluative factors. Also, the finance members of the team may consider financial strength more important than manufacturing facilities. The production members of the team might consider manufacturing facilities more important than financial strength. Since the evaluative factors may have different levels of importance, a weighted evaluative matrix is typically used. The steps in the process are as follows:

• Identify the important evaluative factors. • Reach a consensus on the important evaluative factors. • Specify with precision the evaluative factors. • Reach a consensus on the weighting of each of the evaluative factors. • Determine the range for the rating scale (example 1 to 5, or 1 to 10, etc.). • Develop the definition for each rank in the rating scale. • Perform the individual rankings. • Discuss and develop a consensus ranking.




Weighted Evaluation Matrix: An Example

In this example, the members of a team reach the following consensus for evaluative factors, as shown in Table 2 below:

Applying the weighted evaluative factors results in the selection of firm A.

Table 2

Rankings

FIRM: A B C

Number of engineers (35% Weight)5= >15 54= 10-12 43= 7-9 2= 4-6 21 = 1-3

Related Experience (20% Weight)5 = worked with firm before, no issues 54 = worked with firm before, some issues3 = firm has a lot of similar work, no issues 32 = firm has a lot of similar work, some issues 21 = firm has done a bit of simialr work

Manufacturing facilities(35% Weight)5= Firm has up to date tools and techniques4 = Firm has about 75% up to date tools and techniques 43 = Firm has about 50% up to date tools and techniques 3 32 = Firm has about 25% up to date tools and techniques1 = Firm has about 10% up to date tools and techniques

Financial Strength (10% Weight)5 = Firm has a very positive financial outlook 54 = Firm has a positive financial outlook3 = Firm has an average financial outlook 3 32 = Firm has a below average financial outlook1 = Firm is financially weak

Weighted Average 4.05 3.95 2.45

Criteria




Supplier Selection: Product Attribute Considerations

Wilson (1994) classifies product types in relation to procurement:

• Routine order products: products where there are no questions regarding the use of the product, or the product’s capability to perform a certain function.

• Procedural problem products: products where there are no questions regarding the capability of the product, but there may be questions on learning to use the product.

• Performance problem products: products where there may be questions related to the capability of the product to perform the expected functions.

• Political problem products: products that involve large expenditures, and may involve people from a wide range of functions in the organization.

The Wilson article shows that evaluative factors differ by product type. It also shows that the importance of factors within product types change over time.

Routine Order Products

The importance of evaluative factors in routine order products has changed over the years: • In 1974, quality was the second least important consideration. By 1993 it had

become the most important factor. • In 1974 delivery was the most important factor. By 1992 it had become the least

important factor. • In 1974 service was the least important factor and remained that way up to 1982.

Service increased marginally between 1982 and 1993. • Price remained the second most important factor throughout the time periods.

Procedural Problem Products

The importance of evaluative factors in procedural problem products has also changed over the years: • In 1974 and 1982 service was the least important factor. In 1993 it was the most

important factor. • Conversely, delivery was the most important factor in 1974 and 1982. It became

the least important factor in 1993. • Quality increased in importance from 1982 to 1993 • Price decreased in importance during the same time period.




Performance Problem Products

The importance of evaluative factors in performance problem products has also changed over the years: • Quality became the most important consideration for performance problem

products in 1992 increasing from a third place ranking. • Delivery decreased from being the most important in 1974, to the least important

in 1993. • Service also increased in importance over the years. • Price was largely unchanged throughout the years.

Political Problem Products

And finally, the importance of evaluative factors in political problem products has also changed over the years: • Price decreased from the most important factor in 1974 and 1982 to the least

important factor in 1993. • Quality became the most important factor in 1993, rising from the second least

important factor in 1972. • Delivery became slightly less important over the years. • Service increased, from being the least important to the second most important.




Supplier Selection: GEWD’s Total Cost Approach

Smytka and Clemens (1993) describe a total cost approach to supplier selection using the model developed by General Electric Wiring Devices (GEWD). In addition to quantifiable total costs, the GEWD model employs an initial qualitative assessment relating to risk factors and business desirable factors. In applying GEWD’s total cost model, the first step is to evaluate qualitative risk factors. If the supplier passes the risk analysis, the supplier undergoes a qualitative assessment of business desirable factors. If the supplier passes the business desirable factors analysis, they undergo the total cost quantitative assessment. The GEWD total cost model has four levels, or steps: Step 1: Risk Assessment Level

• Determine relevant risk factors • Assign risk rankings (pass/fail) • Decision on overall pass fail • If pass, go to the next step

Step 2: Business Desirable Factors Level

• Determine relevant business desirable factors • Determine scoring range • Assign scores • Scores should then be added • If pass, go to the next step

Step 3: Total Cost Level

• Enumerate total costs (quantitative analysis- involves adding the result for each potential supplier)

Step 4: Decision Level

• Decide on the supplier based on the qualitative and quantitative analyses.




Step 1: Risk Factors Level

In the first step of the GEWD model, the team performs a risk assessment on the supplier. The following risk factors can be considered:

• Financial stability • Labour contract matters • Environmental issues • Quality • Product line fit • Warranties • Proprietary design • Supplier visits • Awareness of market conditions • Capacity constraints • Effect on supplier research

Each factor is rated as pass or fail (go, or no-go). If there is an overall fail, then the supplier is excluded. If there is an overall pass, proceed to the next steps. Then this step is repeated for each potential supplier.

Step 2: Business Desirable Factors Level

Business desirable factors are factors that are important in the buyer’s strategy but are not quantifiable. A list of factors for consideration are:

• Delivery capability • Productivity • Quality and quality systems • Other capabilities




Step 3: Total Cost Analysis

This total cost analysis is described differently than the total cost of ownership method in session 5 (Make or Buy). It is important to note that any total cost analysis should include pre and post transaction costs. (The risk analysis layer of this method for supplier selection is equivalent to qualifying suppliers as described in session 5.) Using the total cost of ownership approach introduced in session 5, we can derive a total cost analysis for supplier selection (items in italics are the cost items from the Smytka and Clemens article, and are fit within the total cost of ownership framework): Pretransaction

• Need recognition • Need description • Sourcing

Supplier visits • Supplier selection

Transaction

• Ordering Price with Discounts Ordering costs Transportation

• Monitoring Delivery expediting

• Receipt and Inspection Technical support (inspection mainly) Non conformance (quality)

• Payment • Documentation

Post transaction

• Relationship costs with the supplier Supplier visits

• Maintenance costs • Repair costs • Lost production costs

Line down costs • Customer goodwill costs

Inventory costs Line down costs

• Decommissioning and disposal costs




Step 4: Decision Decision level:

After suppliers pass the risk assessment, all the factors (risk, business desirable factors, and total cost) are considered in order to reach a decision. The lowest total costs do not necessarily trump other factors. For example, a supplier may have the lowest total costs, but have a higher risk assessment consequently the supplier is ruled out. Or, suppliers could have about the same total costs, but one supplier has better business desirable factors.

Single vs. Multiple Sourcing

A significant strategic decision for procurement is when to single or multiple source a good or service. Single sourcing provides the opportunity to establish a tight relationship with a preferred supplier. Some reasons for single sourcing are: • The supplier holds exclusive rights to the good or service • The supplier has a significant quality advantage • Single sourcing significantly reduces internal procurement costs • The order is small, so it makes no sense to divide it • Reduces inventory costs, and better enables just in time approaches • Creates an opportunity for discounts when the order size is larger • Reduces total logistics costs as larger volumes are acquired at one time. This must

be weighed against inventory costs • Reduce product development lead times Multiple sourcing results in less tight relationships with suppliers. Some reasons for multiple sourcing are: • Keeps suppliers competitive, and providing better value • Minimizes the risk of supplier failure (due to business closing, business disasters,

transportation failures, etc.) • One supplier may not have sufficient capacity or skills to meet the need • An opportunity to “test” potential suppliers • Avoids buyer dependence on one supplier organization (or supplier gaining

leverage)




Determining the Perfect Number of Suppliers

Somewhere within the continuum from one supplier to multiple suppliers lies the optimal number of suppliers for a particular good or service. The Cruz (1996) article addresses supplier optimization, and some of the things an organization should consider: • Eighty percent of survey respondents say supplier optimization has improved

delivery performance • Seventy eight percent say that it has reduced transaction costs • Seventy six percent boast product cost reductions • Sixty eight percent witnessed a positive effect on transportation expenditures Critics of supplier optimization contend that organizations may over-optimize suppliers and experience problems related to backup sourcing, potential delivery failure risk, unwillingness to abandon ineffective suppliers, and limited choices for product development. Advocates of supplier optimization suggest instead that these problems arise from inadequate management of supplier optimization programs, which may focus on supplier numbers and fail to promote collaborative partnerships with suppliers. Cruz indicates that only 54% of organizations who use supplier optimization experience cost reductions. For those who were successful, the key is collaboration between procurement and engineering (design). Among organizations who have established supplier optimization programs, the common requirement is supplier evaluation.



Session Wrap Up: Supplier Selection


Now that you have examined supplier selection in detail, and have recommended a course of action for Platinum Box, you should review the session’s objectives as restated here: Upon completion of this session candidates should be able to:

1. Identify potential supply sources. 2. Produce an evaluation matrix for supplier selection. 3. Describe different types of products (routine order, procedural, performance

and political) as they affect supplier selection. 4. Connect the product type with supplier selection criteria. 5. Understand the elements of the total cost approach of selecting suppliers: risk

factors, business desirable factors, and measurable cost factors. 6. Select a supplier using the total cost of ownership approach. 7. Describe factors that suggest an organization should use a single source for a

good or service. 8. Describe the factors that suggest an organization should use multiple sources

for a good or service. 9. Understand the difficulties in negotiating in a sole source situation. 10. Defend a single versus multiple source decision.



In session 8 we analyzed methods for evaluating suppliers. In session 9, candidates will explore the development and certification of suppliers, and do activities on supplier certification and supplier development.


Session Nine

Supplier Development and Certification

Procurement performance monitoring

Approaches to supplier development

Objectives of supplier certification

Benefits of certification

Steps in supplier certification

Product development cycle times and supplier performance




Activity Directions



Session Notes: Procurement Performance Assessment Resources: - Carter et al.: Strategic Performance Measurement for Purchasing and Supply - Session notes

Read the resources for this section. Here are the key teaching points: • Outline the key best practices in procurement performance

measurement. • Describe the types of procurement performance measures.

Session Notes: Supplier Development Resources: - Krause: Supplier Development: Current Practices and Outcomes - Session notes

Read the resources for this section. Here are the key teaching points: • Review the types of supplier development activities. • Supplier certification is a supplier development tool.

Individual Reflection: Supplier Development

Reflect on the following: • What supplier development activities does your organization engage

in? • What are the pros and cons of each? Here is the key teaching point: • List the pros and cons of the supplier development plan in your

organization. Is it complete? If not, how can it be improved?




Activity Directons

Session Notes: Supplier Certification Resources: - Lockhart: Vendor Certification: Seven Steps to a Better Product - Park: Impact of Supplier Certification Program on U.S. Firms - Session notes

Read the resources for this section. Here are the key teaching points: • Review objectives and benefits of certification. • Review steps to supplier certification.

Individual Reflection: Supplier Certification

Reflect on the following: • Does your organization engage in supplier certification? Why or why

not? • How has supplier certification affected your organization’s

performance, if at all? • What problems in certification have occurred in your organization? Key teaching points: • Outline the problems that have occurred or may occur with supplier

certification.

Individual Exercise: Supplier Certification (marked – 5%)





Activity Directions

Self-assessment Activity: Fisher and Paykel case Resources: - Fisher and Paykel case - Session notes

Prepare the Fisher and Paykel case by answering the following questions: • Is this an attractive contract for Walton? • What supplier development activities would you recommend in this

case? • How do you think Walton will respond? • If Walton does not agree then what should Fisher and Paykel do? Here are the key teaching points: • There is more than one choice of development activities. • Suppliers may or may not agree to supplier development. • If supplier does not agree, propose an alternate plan.

Self-assessment Activity Evaluation

When you are finished the self-assessment activity, review the Self-assessment Activity Evaluation section in this session.

Session Notes: Product Development Cycle Time Resources: - Sharland: The Impact of Cycle Time on Supplier Performance - Session notes

Read the resources for this section. Here are the key teaching points: • Important to consider product cycle time in supplier development. • Trust and commitment is key. • Supplier certification should improve cycle time.

Session Wrap Up






In the last session, the focus was on selecting suppliers and determining the correct number of suppliers. Before that, we examined delivery and quality. This session assumes suppliers have been selected, and addresses how to develop and certify suppliers. Quality and delivery are important reasons to consider supplier development. A natural outcome of supplier development and certification is the reduction of the supply base. The focus shifts towards closer relationships with existing supply partners.

Overview

Candidates will explore measuring the performance of an organization’s internal procurement processes. Internal evaluation extends to the evaluation of supply partners. Supplier development and the many potential approaches to supplier development are discussed. One of the trends in procurement is the increase of supplier development and certification. A step-wise model is presented for supplier certification. An important element to consider is how to measure a cycle. This is an important evaluative tool for suppliers. Measuring a product’s development cycle is also a significant benefit of supplier development activities. Candidates perform an exercise on supplier certification. Candidates also analyze the Fisher and Paykel case, which poses problems about how best to develop supplier competencies.



Supplier Development and Certification, continued

Objectives


1. Describe the best practices in procurement performance measurement. 2. Specify procurement performance measures for an organization. 3. Identify the many types of supplier development approaches. 4. Describe the objectives of supplier certification. 5. Discuss the benefits of supplier certification. 6. Apply the general steps in the supplier certification process. 7. Describe the use of cycle times in supplier performance management.

Required Reading

Read the following: Carter, Phillip L., Monczka, Robert M., and Mosconi, Trish Strategic Performance Measurement for Purchasing and Supply. CAPS: Center for Strategic Supply Research, 2005, Pages 10-54. Krause, Daniel D. Supplier Development: Current Practices and Outcomes. International Journal of Purchasing and Materials Management. Spring, 1997. Pages 12-19. Lockhart, Marsetta and Ettkin, Lawrence. Vendor Certification: Seven Steps to a Better Product. Production and Inventory Management Journal. First Quarter 1993. Pages 65-69. Park, Hong Y., Reddy, S., C. Shin, G.-C. and Eckerle, C., Impact of Supplier Certification Program on U.S. Firms. European Journal of Purchasing and Supply Management. Volume 2, 1996. Pages 107-118. Sharland, Alex, Eltantawy, Reham, A. and Giunpero, Larry C. The Impact of Cycle Time on Supplier Selection and Subsequent Performance Outcomes. Journal of Supply Chain Management. Summer, 2003. Pages 4-12. Fisher and Paykel Limited case. Richard Ivey School of Business #9A97D015.




Framework Questions


1. Does your organization use strategic purchasing performance measures? If so

which ones? 2. If not, should it use them? Why? 3. What supplier development activities does your organization engage in? 4. How has supplier development affected your organization’s performance, if at all? 5. Does your organization engage in supplier certification? Why or why not? 6. How has supplier certification affected your organization’s performance, if at all? 7. What are some of the problems of certification? Have they occurred in your

organization? 8. Does your organization use cycle times for supplier evaluation? Why or why not?

Fisher and Paykel Limited

Assume you are Alan Day and you have to consider the following questions:

1. Is this an attractive order for Walton? 2. Why might Walton have had a delivery problem in November and December? 3. Is this team approach the best way to solve the problem? 4. What supplier development activities would you recommend in this case? 5. How do you think Walton will respond?

Self-assessment Activity (not marked)

Prepare the Fisher and Paykel Ltd. case by focusing on the following issues: • What are the basic issues in this case? • What do you think of the relationships within Fisher and Paykel, and the

relationships the organization has with its suppliers? • How can Alan Day solve the immediate problems?

To help you prepare the case, see the framework questions on the case in this session. For further reference, please see Case Preparation in Introduction and Overview. This activity is not submitted for evaluation. When you have completed the activity, see the Self-Evaluation section in this session.




Individual Exercise

Supplier Certification This exercise is worth 5% of the overall mark for this module. It must be typed and double spaced, with 2.5 cm margins on all edges, and be in 12-point font. This exercise is limited to a maximum of five pages. Remember to write in complete sentences; do not use point form, except when providing a coherent list in a wider context. Refer to your Session Schedule for instructions on submitting this assignment for marking. Requirements: • Select one supplier from your organization that you have determined is a good

candidate to undergo certification. Provide a brief explanation as to why you chose this supplier for certification.

• Prepare a brief summary for how you would apply each of the steps in the certification process to this supplier.

• Prepare a short written report of your findings. In general, you will be evaluated on the following criteria: • Did you pick a suitable supplier? • Did you summarize how you would apply each step in the certification process? • Is your certification process realistic and achievable? General evaluation information for all exercises is available in Introduction and Overview: Candidate Evaluation.




Overview

The Fisher and Paykel case is used to illustrate inventory tradeoffs. Focus on development of the supplier, potential reactions of the supplier and potential consequences. Consider the following in your analysis: • Based on the requirements table F&P uses 361 (312 in New Zealand plus 49 in

Australia) evaporator covers daily. • Assuming 300 working days per year, with a price per cover of $7, the yearly

contract is worth about $750,000. • Therefore, this is a significant contract for Walton. • A second consideration is the shortfall that nearly occurred in December 2004. • F&P started working a half day overtime in November and December. • This implies an average requirement of 361+.5(312) = 517 pads. • This compares to the maximum capacity of 400 per day at Walton. • It is not surprising that there was a near problem. • A third consideration is the inadequate inventory procedures at both F&P and

Walton.

Recommended Supplier Development Activities

This case begs for an improvement in inventory management procedures, both at F&P and Walton. The group approach that Alan Day has adopted is desirable. There are thirteen supplier development activities discussed in the session:

1. Feedback on evaluations 2. Supplier visits at the buying organization 3. Supplier site visits 4. Verbal or written requests for improvement 5. Promising future benefits 6. Formal evaluation 7. Creating competition amongst suppliers 8. Informal supplier evaluation. 9. Promising current benefits 10. Certification 11. Recognition of supplier achievements 12. Training and education of suppliers 13. Investment in suppliers




Suggested Approach

The key supplier development activities to focus on are 2, 3, 10, 11 and 12 (2 and 3 are already in place, it seems.) The focus should gravitate towards certification and training and education. These are important because they create a path for F&P and Walton to become more closely aligned in meeting their common goals. Recommend the use of JIT to solve the problems of shortages. JIT is covered more fully in session 12. Note that F&P and Walton have a good working relationship, which is evident by the composition and openness of the team Alan Day has assembled.

How Will Walton Respond?

Given the openness of the relationship it can be expected that Walton will respond favorably to positive approaches to supplier development. Go through the list of potential activities, and determine what the expected response from Walton will be to each. In general candidates should be aware that the F&P and Walton supply issue is a joint problem. Consequently, development activities that focus on Walton solely will result in a negative response. Those that focus on joint activities are likely to have a positive response. These will also result in a more secure long term relationship.




If Walton Does Not Agree

If Walton does not agree to supplier development type activities, which is unlikely given the importance of the F&P contract, there are four possible approaches for Alan Day to take:

1. Do nothing. 2. Improve the current system: In this alternative Walton is retained as the supplier

and practices are improved. Come up with possible improvements. Potential solutions are better inventory control practices, greater information sharing between F&P and Walton with respect to demand, and changes in F&P production schedules.

3. Find another supplier. There is only one supplier (Walton in New Zealand). It

may be possible to encourage another supplier to move into this business. Comment on the consequences of this, especially in a small place like New Zealand. Another possibility is to source offshore. This however, would have significant additional effects on inventory, which F&P does not have room for, as well as costs due to transportation.

4. Produce in house. In this scenario F&P would acquire the machinery to cut the

holes in house. There are several issues with this. First, it moves F&P further away from their core competencies, second the machine will likely be idle a significant part of the time, finally it may have an undesirable effect on Walton.



Session Notes: Supplier Development and Certification

Procurement Performance Monitoring: Eight Best Practices

Carter, Monczka and Mosconi (2005) provide a process-oriented framework for strategic supply performance monitoring. According to the article, there are eight elements that constitute best practices in procurement performance monitoring:

• Align procurement measures with corporate goals • Establish comprehensive measures • Set aggressive but dynamic targets • Make the measures transparent and known • Link them to performance-based incentive systems • Provide the necessary resources to succeed • Provide systems to support the measures • Provide leadership

While the article focuses on measuring procurement an indirect outcome of procurement monitoring is also applicable to supplier monitoring.

Procurement Performance Monitoring Measures

Using this framework, various types of measures can be deployed. The types of measures are as follows: • Price/cost • Revenue • Inventory • Availability • Technology, innovation and new product or process introduction • Quality • Workforce • Operational • Customer satisfaction • Supplier



Session Notes: Supplier Development and Certification, cont.

Price/Cost Measures

Target Price Measures These measures are based cost reduction goals, product or service budgets, competitor prices, or a combination of the above. The primary issue is the ability to establish a target price. This may be particularly difficult for intermediate goods and services. If the target price is focused on cost reductions, the rate of cost reduction may decline on subsequent purchases. This makes it difficult to achieve dramatic target price reductions over time. Cost reduction These measures usually compare current prices with the prices paid on previous purchases. An important consideration is that market prices (particularly for commodities) will affect the calculation of cost changes. Issues include: ensuring that quantities used to measure the cost reduction are consistent, and that procurement adjusts for the effect of cost increases, and that procurement applies What You Already Know cost reductions to the factors responsible for the cost reduction. Actual -Market price These measures are used for products where there is a well functioning market. A comparison is made between the relative change in market cost of the good or service and the change in the organization’s cost for the equivalent good or service. There are two issues with this approach: the cost of building and maintaining the internal indices, and finding a comparable basket of goods and/or services. Cost avoidance These measures are designed to consider what would have happened if procurement had not taken action.




Guidelines for Target and Cost Reduction Measures

The Carter (2005) article suggests the following guidelines for target pricing and cost reduction measures. Target Pricing Guidelines

• Have a clear description of the good or service content (specification) and budget for that good or service

• Clearly report the target prices for each item being measured • Report by good or service • Provide the rationale for trade-offs where specs are changed to meet target

prices • Provide the basis for changing the program in the event projected target price

results can not be achieved Cost Reduction Guidelines

• Specify clear rules of how these prices are determined • Calculate current prices and relate them to prior and budgeted prices • Include volumes purchased • Report savings after they have occurred • Seek independent review and validation • Clearly identify the savings

Revenue Measures

The Carter (2005) article identifies three issues with using revenue measures:

• Revenue generation is a non-traditional view of procurement’s strategic role • Be sure to define the effect that procurement has on revenue generation • Account for the multiple organizational entities involved in revenue

generation, and how this relates to procurement’s role With respect to revenue measures the authors recommend:

• Use an economic value added (EVA) approach • Identify procurement’s contribution to EVA • Develop an initial ‘soft’ approach for supply • Harden the approach over time




Inventory Measures

The greatest issue in terms of performance monitoring is a focus on singular measures of performance where multiple measures of performance are required.

Availability Measures

Availability measures expand beyond simple inventory measures. The focus is on assuring the good or service is available to the customer at the right time, in the right quantity with the right quality. The most significant problem is handling changes in the timing and quantity demanded by the customer.

Technology Measures

The critical issue here is measuring the effect of technology or process implementation. Tracking systems are important to determine results. As well, in order to convince suppliers to focus attention on the need for innovation, the buying company must focus on innovation and push innovation through to the vendor. Technology and process improvement measures are difficult to implement.

Quality Measures Quantitative measures determine the degree of conformance or defects in goods and

services. User surveys ask users of products their opinions of the quality of goods and services. Quality system certification was discussed in the total quality management section of session 7.

Workforce Measures

For successful procurement management it is useful to develop metrics related to an organization’s workforce. As noted by the Carter (2005) article, one of the most important issues with respect to workforce information is procurement training. A second issue is the effectiveness of the training in creating a better and more effective workforce.




Operational Measures

Operational measures focus on the efficiency of the procurement area as well as the degree of internal compliance with company policy. The major issue with these measures is politically-motivated performance compliance. As only a limited number of measures can be implemented, departments will optimize their performance with respect to those measures. This may mean poor performance in areas which are not subject to measurement.

Customer Satisfaction Measures

Measures of internal and external customer satisfaction may be used. These may consist of surveys, measures of return rates, and etc.

Supplier Measures

Supplier performance measures focus on how well the supplier performed related to the good or service being acquired. We will explore this topic in more depth in this session. Supply base management. The most supply-based management measure is spend analysis, which was covered in session 1. Supply relations focus on the quality of the working relationship between procurement and suppliers. Typically this is undertaken through supplier surveys.




Approaches to Supplier Development

Krause (1997) defines supplier development as any effort of a firm to increase the performance and/or capabilities to meet the firm’s short and long term supply needs. Supplier development effort can range from piece-meal, to fully-integrated long term relationship with the supplier. Forms of development activities ranked in terms of frequency 1are:

• Feedback on evaluations • Supplier visits to the buying organization • Supplier site visits • Verbal or written requests for improvement • Promising future benefits • Formal evaluation • Creating competition amongst suppliers • Informal supplier evaluation • Promising current benefits • Certification • Recognition of supplier achievements • Training and education of suppliers • Investment in suppliers

Krause also examined the effect of supplier development on supplier performance. Substantial gains were reported with respect to defect rates, on-time delivery, order cycle time, and percent of orders filled completely. Krause reports on the buying organization’s view of supplier development. Using a 1 to 5 scale, where one is defined as “greatly exceeding expectations” and 5 is “fallen far short of expectations” the indications of the success of supplier development were:

• Has helped reduce product/service cost: 2.13 • Expect supplier to help improve our product design: 2.74 • Has contributed to increasing our product/service sales: 2.55

1 The use of 4 or more suppliers was removed from the list table.




Objectives of Supplier Certification programs

One method of supplier development that has grown in importance is supplier certification. The Park (1996) article describes the results of a study on the objectives of certification programs. Based on a survey of purchasing professionals, the objectives of certification from most to least important are:

• Quality improvement • Establish long term partnerships • Reduce price/cost • Improve on-time delivery • Promote co-operation • Reduce suppliers • Develop technology/product development • Other

Differences between Certifying Organizations and Non Certifying Organizations

The authors also considered the differences between organizations that use supplier certification and those that do not. Organizations with certification tend to be:

• Larger • Use international sources compared to local or regional sources • Single source more often • Have longer term contracts with suppliers • Involve suppliers earlier in product development • Share technology more broadly




Benefits of Supplier Certification

The following table shows the effects of supplier certification based on the Park (1996) study.

Objective Benefit Improve Quality Lower rejection rates and reduced inspection costs. Establish long term relationships Contracts length increased, supplier change frequency

decreased. Reduce price/cost The most prevalent result is no change in price. Where

prices change, more often there is a decrease not an increase.

Improve on-time delivery The most common effect was improved on-time delivery, followed by no change in on-time delivery.

Promote co-operation Co-operation improved significantly. Reduce Suppliers Significant reduction in the number of suppliers. Develop Technology/Product Development

In terms of technology sharing there was little difference when it came to sharing technology with all firms. With closely-linked firms there was greater sharing of technology with certified firms. In terms of product development, certifying firms were more likely to involve suppliers in product development.




Supplier Certification: Steps

Lockhart and Ettkin (1993) provide a model for supplier certification with respect to quality. The model is applicable for any other criteria the buying organization wishes to consider. Certification is a process of examining a supplier to ensure that its goods and services will consistently meet the needs of the buyer. Certification means a tighter and longer-term relationship between supplier and buyer. The steps for certification are as follows: Commitment to a New Philosophy - The new philosophy is to change the buyer supplier relationship to one of trust and commitment. Support for the change should come from the highest levels of the companies engaged in the relationship. Setting Goals and Objectives - In this step, the goals and objectives for the certification program are established. Typically, goals include better quality with the end result being higher customer satisfaction, speedier product development, improved quality, cost reductions and risk mitigation. Establishing a Certification Team - Typically a cross-functional team is used. Involving suppliers - Early on in the process target suppliers should be invited to participate. This helps establish trust and commitment. Measurement (Implementation) - During this phase suppliers that wish to have a stronger partnership with the firm are studied to determine their performance with respect to the desired outcomes of the certification program. Techniques for measurement include surveys, site visits and audits, inspection, and supplier self -assessment. Once measurement has taken place, the gap between the current situation and the desired outcome, if any, is identified. Agreement - At this stage an agreement is reached between the buyer and supplier concerning the responsibilities of each party with respect to the goals and objectives of the certification. Maintenance - In this stage the certification program is in place, and it needs to be maintained. Areas of maintenance include accounting for changes in goals and objectives, continuing to build the relationship with the suppliers, and problem resolution.




Cycle Times and Supplier Performance Measurement

Cycle time is the time from initial concept of the design for a product until the product enters the defined market. Cycle times have become increasingly important in order to meet rapidly changing customer expectations, and to stay competitive. Consequently, cycle times are becoming an increasingly important component of supplier performance management. Sharland, Eltantawy and Giunipiero (2003) provide insight into the importance of cycle times with respect to supply. Product development cycle time is of above-average importance in terms of supplier selection, it is also of above-average importance in terms of supplier performance. The authors reach the following conclusions in the study:

• Quality is the primary factor in supplier selection and evaluations. • Cycle times are an important factor in measuring supplier performance. • Supplier location heavily influences cycle times. The closer the supplier, the

lower the cycle time. • Trust and commitment are important factors in reducing cycle times and

producing higher quality.



Session Wrap Up: Supplier Development and Certification


Now that you have examined supplier development and certification, and have performed an exercise on supplier certification, you should review the session’s objectives as restated here: Upon completion of this session candidates should be able to:

1. Describe the best practices in procurement performance measurement. 2. Specify procurement performance measures for an organization. 3. Identify the many types of supplier development approaches. 4. Describe the objectives of supplier certification. 5. Discuss the benefits of supplier certification. 6. Apply the general steps in the supplier certification process. 7. Describe the use of product cycle times in supplier performance management.



In session 9 we examined how to develop and certify chosen suppliers. In session 10, candidates will explore the issues behind procuring services, and perform exercises on spend analysis and statement of work.


Session Ten

Services Procurement

Services are different

Procurement involvement: services are the same

Services spend analysis

Specification: statements of work

Specification: service level agreements




Activity Directions



Session Notes: Services Are Different Resources: - Ellram: Understanding and Managing the Services Supply Chain - Smeltzer: Purchasing Professionals Perceived Differences Between Purchasing Materials and Purchasing Services - Session notes

Read the resources for this section. Here is the key teaching point: • Understand the differences between services and goods procurement

and contracts.

Individual Reflection: Goods vs. Services Procurement

Reflect on the following: • What types of services does you organization purchase? • How are they different from goods purchases?

Here is the key teaching point: • List differences between services and goods procurement (in your

organization, and from the material you have read).

Session Notes: Procurement involvement – Services are the same

Resource: session notes

Read the resources for this section. Here is the key teaching point: • Services purchases should follow the same approach as goods, except

for the differences outlined in the session notes.




Activity Directions

Session Notes: Spend Analysis Resources: - Session notes (and session 1 notes)

Read the resources for this section. And, review spend analysis from session 1. Here are the key teaching points: • Understand the components of spend analysis. • Apply spend analysis to services.

Individual Exercise: Spend Analysis (marked – 5%)


Session Notes: Components of Statements of Work Resources: - Session notes

Read the resources for this section. Here is the key teaching point: • Outline and familiarize yourself with the steps in preparing a

statement of work.

Individual Exercise: Statement of Work (marked – 5%)


Session Notes: Service Level Agreements Resources: - Service Level Agreements: Guidelines for Public Sector Organizations. New South Wales - Session notes

Read the resources for this section. Here is the key teaching point: • Outline and familiarize yourself with the steps in preparing a service

level agreement.




Activity Directions

Individual Reflection: Service Level Agreements

Prepare your own approach to a service level agreement for the service you prepared a statement of work for. The following should be addressed:

• Identify need and expectations • Define service levels • Establish performance indicators • Determine costs and terms • Establish agreement framework • Establish review framework

Here is the key teaching point: • Candidates should become familiar with, and apply the steps in

preparing a service level agreement. Session Wrap Up






Strategic and tactical issues in procurement have been examined throughout this module. In this session, we will examine strategic and tactical issues that are unique to services procurement. While services procurement differs from goods procurement in some ways, services procurement involves many of the same issues. Some of the tactical and strategic issues in services procurement are: bidding and negotiation, organizational issues, make or buy issues, price, cost and quality issues, supplier selection, and supplier development and certification issues.

Overview

The session begins with a description of the characteristics of services that are unique. This uniqueness however does not mean that services are excluded from normal procurement protocols. Services fit well within the normal procurement protocol. In this session candidates will be exposed to three important aspects of strategic services procurement: spend analysis, statements of work, and service level agreements. Services spend analysis follows the same process as goods spend analysis. Using the spend analysis concepts and tools presented in session 1, candidates will prepare a service spend analysis in this session. In addition, we will examine statements of work and service level agreements, as they are crucial in services procurement.



Services Procurement, continued

Objectives


1. Describe the unique aspects of services procurement. 2. Describe the tactical and strategic considerations related to services

procurement. 3. Assess the need for procurement’s involvement in services buying. 4. Conduct a services spend analysis. 5. Outline the elements of a statement of work. 6. Prepare a statement of work 7. Outline the elements of a service level agreement 8. Prepare a service level agreement.

Required Reading

Read the following: Ellram, Lisa M., Tate, Wendy L. and Billington, Carey. Understanding and Managing the Services Supply Chain. Journal of Supply Management. Nov. 2004 Pages 17-32. Smeltzer, Larry R. And Ogden, Jeffrey A. Purchasing Professionals Perceived Differences Between Purchasing Materials and Purchasing Services. Journal of Supply Chain Management, Winter 2002. Pages 54-70 Service Level Agreements: Guidelines for Public Sector Organizations. New South Wales Premier’s Department, 1999

Framework Questions


1. What types of services do we buy in our organization? 2. How are they different from goods? 3. Is the procurement procedure different for services in my organization? What

are the differences? 4. If procurement is not involved or only indirectly involved in buying services,

what are the benefits of more direct involvement? 5. What steps would you take to increase involvement? 6. My organization has prepared a statement of work for….. 7. My organization has prepared a service level of agreement for…...




Individual Exercise (marked – 5%)

Services Spend Analysis for Your Organization This exercise is worth 5% of the overall mark for this module. It must be typed and double spaced, with 2.5 cm margins on all edges, and be in 12-point font. This exercise is limited to a maximum of five pages. Remember to write in complete sentences; do not use point form, except when providing a coherent list in a wider context. Refer to your Session Schedule for instructions on submitting this assignment for marking. There are three components to this exercise: 1. Choose a service that is critical to your organization. The service should be

complex, and integral to your organization. Indicate if your chosen service is a direct or indirect spend.

2. Show the steps you would use to conduct a services spend analysis for your

organization on the chosen service. Describe specific key triggers for the services spend analysis, and why you chose these triggers.

3. Describe how services spend analysis would fit within your current procurement strategy. Describe the benefits and constraints (i.e. pros and cons) of services spend analysis as it relates to your organization. In general, you will be evaluated on the following criteria: • Did you complete all the requirements of the assignment? • Did you apply the appropriate concepts and tools? • Was your analysis realistic and achievable? • Was your analysis strategic (i.e. in alignment with your organization’s

procurement strategy, and the organization’s goals in general)? For more details on the characteristics and purposes of a services spend analysis, refer to the session notes and readings for this session, and for session 1. General evaluation information for all exercises is available in Introduction and Overview: Candidate Evaluation.




Individual Exercise (marked – 5%)

Services Procurement: Statement of Work This exercise is worth 5% of the overall mark for this module. It must be typed and double spaced, with 2.5 cm margins on all edges, and be in 12-point font. This exercise is limited to a maximum of five pages. Remember to write in complete sentences; do not use point form, except when providing a coherent list in a wider context. Refer to your Session Schedule for instructions on submitting this assignment for marking. There are three components to this exercise: 1. For the service you analyzed in the services spend analysis exercise, outline the

steps you would take to specify a statement of work for this service. 2. Provide a rationale for each step as it relates to the service being procured and implementation issues that may arise. 3. Prepare the statement of work so that it can be used as a basis for preparing a service level agreement in the future. In general, you will be evaluated on the following criteria: • Did you provide all the necessary steps for a complete statement of work? • Did you provide the rationale for each step? Including, did you anticipate

important implementation issues? • Was your analysis relevant, realistic, and achievable? For more details on statements of work and service level agreements, refer to the session notes and readings for this session. General evaluation information for all exercises is available in Introduction and Overview: Candidate Evaluation.



Session Notes: Services Procurement

Services are Different

Services have characteristics that make them different from goods. Services are less tangible than typical goods. For example, audit services are far less tangible than an engine assembly for a bus. Services cannot be inventoried, while many goods can be inventoried. In most cases, you cannot store a service for later application or production. Smeltzer and Ogden (2002) point out that quality measurement has different dimensions for services as compared to goods. For services, quality measurement is often subjective (or qualitative). Using our audit example, measures such as “thoroughness” and “support of conclusions” are quality dimensions, whereas an engine assembly can be inspected quantitatively for performance attributes. Services are often indirectly linked to products. Goods are often directly linked to products. For example, an audit service may be indirectly involved in creating a bus. An engine assembly is obviously part of the finished bus. Services tend to be produced and consumed simultaneously. For example, immediately after an audit is produced the results of the audit are used by the organization. On the other hand, an engine assembly is produced independently of the other bus parts, and may be used at a subsequent date. Note that JIT (Just in Time) ordering and inventory reduces the time between the production and consumption of goods. There may be a range in the complexity of services purchased (lawn cutting is a lot less complex than legal advice); however, service purchases are usually more complex than goods purchases. This is a result of the characteristics of services.



Session Notes: Services Procurement, continued

Categorizing Services

There a variety of ways to categorize services. One system is as follows: Staff/Professional Services. These are services related to specific professional needs. Examples are audit services, actuarial services, medical services and legal services. Customer support services. These are services directly related to customer support. Examples include help desks, reverse logistics providers, etc. Information technology and communication support services. These may be considered as either part of operational or professional services; however, information technology is often considered as a separate category due to its importance in an organization. Operational Support Services. These are services related to day-to-day operations of the organization. Examples include cleaning, yard maintenance, painting, etc. Depending on the nature of the service, there may be substantial overlap between operational services spend and goods spend. For example, cleaning a production facility can also be considered an indirect spend related to the goods produced.

Tactical and Strategic Considerations: Goods

Smeltzer and Ogden (2002) uncovered several important differences between goods purchases and services purchases. For goods purchases, some important and unique considerations are:

• Factors that relate to the tangible nature of goods (storage, handling, etc.) • Transportation • Trust in continuous performance reliability • Delivery schedule flexibility




Tactical and Strategic Considerations: Services

For services, some important and unique considerations are:

• Determining target and total costs is more difficult for services • Specification statements (statements of work and service level agreements)

are less robust for services, and usually more complex to prepare • It is difficult to make quantity purchases with services • Price negotiation is more complex for services • Evaluating performance is more complex for services

Using a supply chain analysis approach, the Ellram (2004) article suggests that:

• Poor specifications cause poor control from a service delivery perspective and a financial perspective.

• Service specifications are often poorly developed, since organizations have an inability to develop appropriate internal measures of performance for the same activities. By outsourcing them the same problem occurs.

• Moral hazard problems: a service supplier has incentive to increase the scope of work (scope creep).

• Lack of professional management.

Additional Costs for Services

There are added costs in the services supply chain such as: • Service suppliers use their customer’s leverage to extract lower prices from their

suppliers. These savings are not necessarily passed on to the buyer. • Potential Additional charges for work outside the agreement. • Suppliers withholding payments to sub-suppliers for long time periods. Sub-

suppliers build this cost into their costs, and this is passed on to the buyer. • Billing errors may be frequent. • Providing summary rather than detailed invoicing. • Use of lower-skilled labour than specified in the agreement. • Providing service below what was agreed to. • Providing package deals so suppliers can not be easily compared.




Services are the Same: Procurement Involvement

Similar to the procurement of goods, procurement for services should follow a standard set of steps. The steps are:

• Need recognition • Need description • Sourcing • Supplier selection • Ordering • Monitoring • Receipt and inspection • Payment • Documentation & Relationship management

Services procurement varies from goods procurement in the following ways:

• Needs description focuses on statements of work for complex services, and service level agreements for ongoing services.

• Inspection tends to be qualitative in nature. • Receipt tends to be by the user as opposed to a centralized entry point to a

facility. Similar to procurement for goods, procurement should be the lead resource for service purchases.

Services Spend Analysis

Service often are indirect spend; however, where the organization making the purchase is a customer service oriented organization, it may be direct spend. Consider a computer manufacturer that offers phone support for the computer hardware and software it produces. Suppose the phone support is provided by a third party call centre. In this case, the third party provider costs are direct spend. Suppose the manufacturer also contracted for lawn maintenance service at its headquarters. This would be an indirect spend. Many organizations allow services spend to occur throughout the organization with little management from procurement. This compounds the difficulty in acquiring spend analysis information. Spend analysis for services should follow the approach outlined in session 1.




Specification: Statements of Work

One of the most fundamental weaknesses in services procurement is that specifications fall below the standards common for goods purchases. A statement of work is the specification for a service. Normally, statements of work focus on specific tasks that need to be accomplished. For example, an audit statement of work details audit tasks for specific departments or processes. Statements of work may also apply to a long-range set of tasks. For example, legal services might be contracted for a multi-year term. The complexity of a statement of work will depend on the complexity of the service being acquired. Typical Content for development of the statement of work are as follows:

• Use a team approach. (Include relevant internal parties and potential suppliers.)

• Provide background information related to the service. What is the history of the service in the organization? What are the problems? What is the current status? Why is this work important?

• Outline the objectives to be achieved. • Provide a detailed, clearly-written proactive description of the requirements. • Describe the deliverables in precise terms. • Describe the expected quality and timing of deliverables. • Provide an expected delivery schedule outlining key tasks and milestones. • Outline performance monitoring with respect to milestones and deliverables.

(This is the project management aspect of the statement of work.) • Designate key contacts and responsibilities. • Determine measurement factors. How will the organization know when the

service is successfully delivered? • Provide information with respect charges, payments and cost issues. • Describe other matters such as dispute resolution, bonds, employer liability,

legal requirements, termination, jurisdiction, etc. Once a service supplier has been selected:

• Communicate on a regular basis with the supplier. Use the team that developed the statement of work to engage with the supplier if appropriate.

• Monitor the plan. • Review and approve or disapprove deliverables as required. • Limit scope creep and change orders as required.




Specification: Service Level Agreements

Service level agreements arose from the outsourcing of information technology. Service level agreements are a subcomponent of all outsourcing agreements, and can arise from a statement of work. Service level agreements set the expected standard for service quality. The New South Wales methodology (1999) for developing service level agreements can be applied equally in private and public sector organizations. The steps in the process are as follow:

1. Start up: form a team of members from the service supplier and service user. Determine the goals for the agreement. Set general parameters related to the timeframe for the agreement.

2. Involve key players. Who will be affected by the agreement? Who has a vested interest?

3. Identify needs and expectations. 4. Define service levels. Typically these are defined in terms of quantity, quality,

timeliness and cost. 5. Establish performance indicators. The indictors are developed from the

service level specifications. 6. Confirm mutual issues. The agreement should recognize the two-way nature

of the agreement. It should include the method of dispute resolution and the method to refresh the agreement as time passes.

7. Determine the costs and terms of payment. 8. Agree on the framework, content and style of the SLA. 9. Establish a review framework. 10. Create and sign the agreement.



Session Wrap Up: Services Procurement


Now that you have examined supplier development and certification, and have performed an exercise on supplier certification, you should review the session’s objectives as restated here: Upon completion of this session candidates should be able to:

1. Describe the unique aspects of services procurement. 2. Describe the tactical and strategic considerations related to services

procurement. 3. Assess the need for procurement’s involvement in services buying. 4. Conduct a services spend analysis. 5. Outline the elements of a statement of work. 6. Prepare a statement of work 7. Outline the elements of a service level agreement 8. Prepare a service level agreement.



In session 10 we examined how to procure services from suppliers. In session 11, candidates will explore the issues behind e-procurement, and submit a written case report.


Session Eleven

e-Procurement

Forms of e-procurement

Pros and cons of e-procurement

e-Procurement knowledge areas

Implementing e-procurement

Reverse auctions




Activity Directions



Individual Reflection: E-procurement Used

Reflect on the following: • What forms of e-procurement do you use in your organization? • What are the advantages and disadvantages of your e-procurement

strategy?

Session Notes: Forms of E-procurement Resources: - Session notes

Read the resources for this section.

Session Notes: Advantages and Disadvantages of E-procurement Resources: - Session notes

Read the resources for this section. Here is the key teaching point: • Expand on the list of advantages and disadvantages of e-

procurement methods as outlined in the session notes.

Session Notes: E-procurement Knowledge Areas Resources: - Porter: A purchasing manager’s guide - Session notes

Read the resources for this section. Here is the key teaching point: • It is important to gain an understanding of each of the key

knowledge areas.




Activity Directions

Individual Reflection: Knowledge Level and E-procurement

Reflect on the following: • What is the knowledge level in your organization related to e-

procurement? • In which knowledge area(s) is your organization the weakest? Where

is it strong?

Here is the key teaching point: • Understand the importance of being knowledgeable in all areas as

part of strategy and tactics.

Session Notes: Implementing E-procurement Resources: - Consultant’s Top 12 e-procurement tips. - Session notes

Read the resources for this section. Here is the key teaching point: • Be aware of tactical consideration in implementing e- procurement

Individual Reflection: E-procurement Tips

Reflect on the following: • With respect to the 12 tips in e-procurement which ones has your

organization considered? Which ones has it violated? • And, what were the consequences of any violations?

Session Notes: Reverse Auctions Resources: - Clark: Five Auction Steps. - Manciagli: A Supplier’s View. - Atkinson: IT Firm uses reverse auction - Session notes

Read the resources for this section. Here are the key teaching points: • Understand the steps in preparing for a reverse auction. • Understand the strategic and tactical issues in using reverse auctions.




Activity Directions

Individual Case Report: Boeing Australia Limited (marked – 10%) Resources: − Boeing case − Introduction and



− PowerPoint slides for this session




Analyze the case using the Case Preparation method described in the Introduction and Overview. Prepare the case report according to the instructions in this session. Also, use the guidelines in the Written Case Reports section of the Introduction and Overview. Submit the case report for evaluation. Refer to the Session Schedule for submission instructions. Here are the key teaching points: • Are there limitations to BAL current practices? What are they? • What issues need to be considered in upgrading BAL’s procurement

platform? • Is the company’s size important? • What are the potential costs and benefits?

Session Wrap Up




e-Procurement


E-procurement links concepts from many of the previous sessions. E-procurement, i.e. the procurement of goods or services electronically, and specifically over the Internet, must be based on sound strategy. The procurement relationship issues we have studied may be favorably or adversely affected by the implementation of e-procurement. In some cases the supply partnership is strengthened by e-procurement (e.g. by EDI, or electronic data interchange), while in other cases the relationship may be weakened (e.g. by reverse auctions). For e-procurement to work an organization needs to be clear on what is being procured, therefore, needs definition and specification is crucial. Supplier evaluation is also an important issue, and so is the use of cross-functional teams to implement e-procurement.

Overview

This session covers the range of e-procurement activities, ranging from simple electronic data interchange to reverse auctions. The advantages and disadvantages of e-procurement are considered as are the knowledge areas needed to use e-procurement in a strategic and tactical manner. Factors to be considered in implementing e-procurement are provided. Reverse auctions, an emerging trend in e-procurement are considered in depth. These form the basis of any e-procurement approach.

Objectives


1. Describe electronic data interchange, e-catalogs, e-marketplaces and e-auctions. 2. Discuss the advantages of e-procurement. 3. Discuss the disadvantages of e-procurement. 4. Discuss the many aspects of, and potential of e-procurement for their

organization. 5. Apply the steps in reverse auctions. 6. Assess the impact of reverse auctions on total costs and supplier relations.



e-Procurement, continued

Required Reading

Read the following: Porter, Anne Millen. A purchasing manager’s guide to the e-procurement galaxy. Purchasing. September 21, 2000. Pages S72 to S88. Anonymous Author. Consultant’s Top 12 e-procurement tips. Purchasing. November 16, 2000. Pages 79 to 88. Clark, Chris. Five Auction Steps. Purchasing. June 21, 2001. Pages 24 to 26. Manciagli, Dana. A Supplier’s View. Purchasing. June 21, 2001 Page 26. Atkinson, William. IT Firm uses reverse auction for big contract labour buy. Purchasing. December 22, 2000. Pages 97 to 99. Boeing Australia Limited: Assessing the Merits of Implementing a Sophisticated e-Procurement System case. #HKU271. Centre for Asian Business Cases.

Framework Questions

Framework questions help you focus on the issues presented in the session. Answer the following questions as you complete the readings and activities in this session. 1. What forms of e-procurement do you use in your organization? 2. Should you use more? What would be the advantages? 3. Should you decrease due to the disadvantages? 4. What is the knowledge level in your organization related to e-procurement? 5. In which knowledge area is it weak? Where is it strong? 6. With respect to the 12 tips in e-procurement, which ones has your organization

considered? Which ones has it violated?

Boeing Australia Limited

1. Are there limitations to BAL current practices? What are they? 2. What issues need to be considered in upgrading BAL’s procurement platform? 3. Is the company’s size important? 4. What are the potential costs and benefits?



e-Procurement, continued


Boeing Australia Limited Write a case report on the Boeing Australia case using the guidelines for written case reports found in the Written Case Reports section of the Introduction and Overview. This case report is worth 10% of your overall mark for this module. Refer to your Session Schedule for instructions on submitting this assignment for marking. The requirement for the written case report is: considering the following questions, write a report stating the issues, criteria, analysis and plan of action (i.e. recommendations) for Boeing Australia:

1. Are there limitations to BAL current practices? What are they? 2. What issues need to be considered in upgrading BAL’s procurement platform? 3. Is the company’s size important? 4. What are the potential costs and benefits?

To help you prepare for the report, see the session notes in this session. For further reference, please see the sample case, Fabritek, 1992, and the sample case report in the Appendix.



Session Notes: e-Procurement

Forms of E-procurement

E-procurement is a form of e-commerce (electronic commerce and commerce over the Internet). E-procurement relates specifically to b2b (business to business) relationships in the sale (from the supply side) and acquisition (from the buyer side) of goods and services. E-procurement can take a variety of forms. These include:

• Electronic data interchange (EDI). EDI ranges from file exchange for orders to email for routine purchases.

• EFT or electronic funds transfer is used for payments. • E-catalogs are catalogs available electronically. They range from simple

versions of a suppliers catalogue on CD to customized catalogs for specific types of buyers available on the Internet or an Intranet.

• E-marketplaces (also called net markets or hubs) are traditional markets available in electronic form, i.e. on the Internet or an Intranet.

• E-auctions are auctions that take place on the Internet. E-auctions can be forward auctions or reverse auctions.

Electronic data interchange (EDI) and Electronic Funds Transfer (EFT) EDI is the process of exchange information and documents over computer networks. The most wide-spread use of EDI is through e-mail. Electronic data interchange may involve more sophisticated approaches with specific software applications. An example is the use of a wide area network (WAN) by an automobile insurance company to issue purchase orders for vehicle repairs to body shops. In this case, the WAN provides a higher level of security than the Internet. Similarly the exchange of funds between two organizations can be accomplished through electronic funds transfer. E-catalogs An e-catalog might be the conversion of print material into electronic format. Typically it starts at this simple level and progresses into a searchable catalogue, or into a customized catalogue specific to a group of buyers often with related linked-in information. In the case of an automobile insurer, this would be a searchable parts catalogue for replacement parts, perhaps linked to expected repair times. Thus, when exchange of data with body shops occurs, the purchase order for repair could include the specific part numbers, sources and estimated repair times.



Session Notes: e-Procurement, continued

Forms of E-procurement, continued

E-marketplaces (also called Net markets/ Hubs) E-marketplaces are virtual markets where buyers and sellers meet for the purpose of buying and selling goods and services. For example, an automobile insurance company may use a net market to buy office supplies. E-Auctions E-auctions are a subtype within e-marketplaces. Forward auctions are auctions where buyers enter the market to buy a good or service. Once a base price is established, the price is driven up through buyers auctioning for the good or service. Reverse auctions are auctions where the buyer places their requirements in the marketplace, and suppliers bid to provide the good or service. Once the base price is established, the price is driven down through sellers auctioning to provide the good or service (at lower and lower prices).

Advantages and Disadvantages of E-procurement

The advantages of e-procurement include: • Improvement in information sharing • Improved collaboration amongst corporate departments and supply partners • Speed • Potential for greater number of sources • Lower costs • Better service hours (i.e. 24/7) • Easier to customize information and requirements • Can facilitate global supply chains • Can improve record keeping, monitoring and tracking

The disadvantages of e-commerce include: • Costs and benefits may be difficult to quantify • There may be a relatively small pool of potential people to work in the area • Security issues • Cost barriers to local or smaller suppliers • If it is used to go global, then related global sourcing issues apply (border

clearance, currency exchange, and etc.) • Resistance to change in the organization and with suppliers • It may adversely effect existing procurement staff




E-procurement Knowledge Areas

Millen Porter (2000) outlines the seven key knowledge areas that procurement professionals need be familiar with in terms of e-procurement. These are: • Software • Net markets (hubs) • Market making technologies • Content creation, management and aggregation • Integration with back end systems • Service to net markets • Intelligent agents

Software E-procurement software allows organizations to automate procurement. Typically,

software allows access to a selected list of suppliers, and provides authorization limits for each computer. In addition to automating manual aspects of procurement, software may allow for data capture that facilitates spend analysis and audit. There are 3 basic choices with respect to software:

• Installed e-procurement software • Hosted e-procurement • Net marketplaces

Installed software: an organization purchases software and operates it on site. This may allow for integration with other systems, such as accounting, production and inventory control systems. It supports spend analysis and audit processes. Installed software provides the greatest level of security for organization-specific transactions. The transactions occur inside the organization on the organization’s computers. Hosted e-procurement solutions are provided by Application Service Providers (ASPs). There are two types of ASPs. Those who use their own software products, and those who use products from software developers. An important consideration in choosing between types of ASPs is who is responsible in the event of failure. For ASPs who use developed software, the chain related to failure is longer than for ASPs who use their own software. ASPs may not be able to provide the level of data integration available with on site installed software. Net markets: certain websites are designated as sources for procurement. A search of the site with a web browser is used to procure the goods or services. This approach offers the least amount of customization, but is typically the lowest cost method.




Net Markets Even if an organization has installed software, it may wish to participate in net

markets. Net markets operate in a hub fashion, allowing multiple information flows simultaneously. For a procurement professional, an important consideration in net markets is deciding the type of market that the organization wants to participate in. Net markets can be classified in terms of two criteria: openness and focus. Openness refers to whether the market is a public marketplace (meaning it is open to all sellers and buyers) or a closed private marketplace. Focus refers to who leads the net market. The market can be led from the buy side, resulting in a focus on supplier competition. Or, the supply side can lead, resulting in competition amongst buyers. Buyer-led or supplier-led marketplaces can be either public or private. In the automobile insurance company example mentioned earlier, the insurance company may participate in both types of markets. For example, it may enter a public buyer-led market to buy office supplies. When it comes to repairs of autos, it may enter a closed private marketplace led by the automotive trade association of the province in order to buy auto body repair services. The most desirable solution from an economic efficiency perspective is a neutral market which is biased neither towards the buyer nor the seller. In addition, net markets may be developed by a consortium of organizations or be independent. For instance, if all automotive recyclers got together to provide a marketplace for the insurer to buy recycled parts that would be consortium supplier-led net market. If, on the other hand, insurers set up a market to buy recycled parts, that would be a consortium buyer-led net market.

Market Making Technologies

Market making technologies are tools to establish pricing (formerly called pricing discovery) that result in an exchange occurring between the buyer and seller. Some examples of market making and enabling technologies are: tools that allow for better specifications, tools that aid in RFP and RFQ writing, decision support technology, multi-organization collaboration technology, and auction technology.




Content Aggregation

Content aggregation is the process of collecting catalogs of information and compiling the information at one site. Content aggregators can create additional content by providing customized views of catalogs or product categories. There are several important considerations with content aggregation:

• Terminology: different suppliers may describe the same product in different ways. Therefore, aggregators may limit the set of suppliers being canvassed.

• Many aggregators: supplying organizations may not be able to provide information to all the aggregators. Consequently, catalog services may not include suppliers with high value goods and services, or may exclude some providers.

• Bias toward large suppliers: smaller suppliers may not have the resources or the recognition required to interest the aggregators.

• Complex requirements: when the good or service being acquired is complex aggregators may not provide particularly useful information.

Integration with Back End Systems

Systems designed to work in the e-marketplace typically do not provide data to back end systems (e.g. an organization’s financial and manufacturing systems). One approach is to revise system infrastructure to allow for integration. A second approach is to manually populate data in the back end system (e.g. enter the transactions generated by the e-procurement system manually into the accounting system). A third option is a middleware solution. Middleware is software between the front end procurement system and the back end systems that automatically converts e-procurement transactions into a format that can be used in the back end systems.

Services to Net Markets

Millen Porter (2000) indicates that as net markets become more competitive and efficient, transaction costs will decrease to the point that market hosts will not earn sufficient revenue from hosting. To survive, hosts will need to provide additional value added services. Some of the services that might be offered are sourcing research, supplier evaluation, and logistics services.

Intelligent Agents The intelligent agent refers to tools that can search many e-marketplaces. The

intelligent agent tools use a set of specifications and preliminary decision criteria to arrive at a set of potential choices for the purchase of goods and services.




Implementing E-Procurement Tips

The article entitled "Consultants’ Top 12 e-procurement tips" (2000) discusses the considerations in implementing e-procurement in an organization. The twelve tips are:

1. Do something, do it soon. 2. Start with strategic sourcing. Then apply e-procurement. 3. Respect your legacy. 4. Segment the supply base and apply e-sourcing tools appropriately. 5. Start with the easy, but don’t neglect the hard. 6. Don’t underestimate the sweeping internal changes e-procurement demands. 7. Focus on delivering sustainable benefits. 8. Understand your power as a market maker. 9. Treat critical suppliers with kid gloves. 10. Benchmark the competition. 11. Remember there are no best practices established in e-procurement. 12. Bear in mind that “you ain’t seen nothing yet.”

1. Do something, do it soon. Rather than being mired in never ending analysis on this decision, the article suggests that organizations should move forward on e-procurement. Risk can be mitigated through the use of ASP’s. Risk is also reduced since data format standards are becoming more common. 2. Start with strategic sourcing. Then apply e-procurement. Prior to implementing e-procurement, organizations need to get their procurement house in order. This includes understanding many of the components previously discussed in this course. When good strategic procurement processes are in effect e-procurement provides additional benefits. 3. Respect your legacy. Two questions related to back end or legacy systems need to be considered when moving to e-procurement:

• How will the e-procurement system relate to the back end system? • Should the legacy purchasing system be cleansed and mined prior to the new

system being implemented?




Implementing E-Procurement Tips, continued

4. Segment the supply base and apply e-sourcing tools appropriately Apply the appropriate e-procurement tool to the type of supply. Different approaches and degrees of effort apply depending on the good or service (e.g. office supplies vs. a new piece of capital equipment). 5. Start with the easy, but don’t neglect the hard In many cases e-procurement tools are applied only to simple goods and services. This is a good starting point for e-procurement. E-procurement should move to more sophisticated supplies. 6. Don’t underestimate the sweeping internal changes that e-procurement demands. E-procurement will have a significant effect on the organization. The organization should be ready for increased centralization of procurement, new skills required for procurement staff, possible staff displacement, and procurement becoming more of a knowledge centre. 7. Focus on delivering sustainable benefits Instead of focusing on short term benefits from lower prices due to enhanced sourcing options, the real focus of e-procurement should be improving the efficiency of the markets and supply chains in which the organization operates. This will provide the most significant long-term benefits. 8. Understand your power as a market maker If your organization is large enough or can form a large enough consortium, it is possible to become the market maker. This provides an opportunity for additional revenue streams. However, an organization must decide if this is a core competency it wants to pursue. 9. Treat Critical Suppliers with Kid Gloves When a supplier is critical to your business, e-procurement should be used if the supplier is willing, and jointly involved, or, at a bare minimum, not adverse to e-procurement. The risk is that the key suppliers may choose to no longer partner with your organization.




Implementing E-Procurement Tips, continued

10. Benchmark the competition Attempt to understand what your competitors are doing better and worse than your organization in terms of e-procurement (and procurement strategy overall). 11. Remember there are no best practices established in e-procurement. 12. Bear in mind that you ain’t seen nothing yet. At the time of the article (2000) there was no best approach to e-procurement. Since that time e-procurement has continued to expand. Keep apprised of developments in e-procurement as you implement.

Reverse Auctions: Steps

A reverse auction is an electronic auction where buyers enter requirements, and suppliers bid to provide the required goods and services It is conducted in real-time, and bidders see the offers of competitive bidders but no the names of the other bidders. The bidding prices move downwards as the auction progresses. The Clark (2001) article outlines the steps in a reverse auction:

• Define the event. • Prepare your suppliers. • Develop item specifications and auction parameters. • Conduct an RFQ period. • Run the auction.

Define the event Define the good or service that is the subject of the auction, and provide a timeline for auction-related activities. Prepare your suppliers Develop a list of qualified suppliers, and attempt to obtain their buy in for the auction process. Train the suppliers to use the tools required for the auction.




Reverse Auctions: Steps, continued

Develop item specifications and auction parameters As discussed earlier in the course the robustness of the specifications will directly affect the result of the auction. Structure the auction to make it relatively simple and easy to follow. Set up a bid question protocol. Develop the scoring system that will be used to select the successful bidder. Hold an internal mock event to test the auction process. Develop a risk management strategy if there is a failure of the auction technology Williamson identifies a number of approaches to mitigating failure including: backup servers, backup phone systems, and etc. Conduct an RFQ period Allow sufficient time for bidders to review and analyze the specifications. Answer questions in a timely manner during this phase. Conduct the Auction Run the auction, and provide prompt feedback to successful and unsuccessful bidders.

Reverse Auctions: Issues

Reverse auctions while providing a method to elicit favourable pricing, have a number of issues:

• Suppliers may view the auction as focusing on price and not value or quality. They may bid using the lowest possible quality that meets the specification.

• There is opportunity for unethical behavior on the part of buyer and suppliers. Buyers could submit phantom “low ball” bids, or include an unqualified bidder in the auction to increase competition even though they don’t intend to use the supplier. Suppliers could collude, and similar bids to trigger renegotiation. Or, suppliers could participate in the event in order to gain knowledge about their competitors.

• The auction may drive certain buyers out of the supply chain, even though they have ongoing relationships with the buyer.

• Reverse auctions may undermine supply relationships. Existing suppliers may be threatened by the approach. Low bidders at one reverse auction may be different than those at another auction for the same good or service.



Session Wrap Up: e-Procurement


Now that you have examined the issues involved in e-procurement, and have recommended a course of action for Boeing Australia, you should review the session’s objectives as restated here: Upon completion of this session candidates should be able to:

1. Describe electronic data interchange, e-catalogs, e-marketplaces and e-auctions.

2. Discuss the advantages of e-procurement. 3. Discuss the disadvantages of e-procurement. 4. Discuss the many aspects of, and potential of e-procurement for your

organization. 5. Apply the steps in reverse auctions. 6. Assess the impact of reverse auctions on total costs and supplier relations



In session 11 we analyzed the issues and decisions behind an e-procurement strategy. In session 12, candidates will explore issues involving users and suppliers, such as p-cards, vendor managed inventory, and just in time inventory.


Session Twelve


P-Cards: Benefits

P- Cards: Considerations in Implementation

Vendor ( Supplier) Managed Inventory

Just in Time II

Wrap up




Activity Directions



Session Notes: P-Cards Resources: - Palmer: Are Corporate Procurement Cards for You? - Carbone: To save more distribute more cards study says. - Gibley: A guide to purchasing card success: overcoming 8 key hurdles. - Session notes

Read the resources for this section. Here are the key teaching points: • Understand the benefits of p-card use. • Understand the considerations related to p-card use. • And, understand the implementation issues.

Individual Reflection: p-Cards

Reflect on the following: • Are p-cards used in your organization? • If they are used what steps did you go through in the

implementation? • What were the cost savings? • What were the potential risks?

Here are the key teaching points: • Think about the steps in implementing p-cards. • Determine the cost savings from p-card use • Determine the risks in adopting p-cards.

Session Notes: VMI Resources: - Waller: Vendor Managed Inventory in Retail Supply Chains

Read the resources for this section. Here are the key teaching points: • Understand the benefits to suppliers and buying

organizations of vendor managed inventory. • Review the process steps for implementing vendor

managed inventory.




Activity Directions

Individual Reflection: VMI Reflect on the following: • Does your organization use vendor managed inventory? Why? Why

not? • Should your organization be using vendor managed inventory? • What would be the benefits of vendor managed inventory for your

organization • How would you implement VMI? Here are the key teaching points: • Reflect on the use of VMI at your organization – and the costs and

benefits. • Determine the implementation issues and risks in VMI.

Session Notes: JIT and JIT II Resources: - Dixon: JIT II: A New Approach to Supply Management. - Pragman: JIT II: A Purchasing Concept - Session notes

Read the resources for this section. Here are the key teaching points: • Familiarize yourself with JIT II terminology. • Familiarize yourself with the conditions necessary to use JIT II. • Understand the benefits to suppliers and buyers of JIT II.

Session Wrap Up and Instructions for Exam:

Review this session’s objectives.

The module ending examination will be administered during the next session.

Check that you have the exam case and instructions. If you have not yet received this information, contact your Marker or your provincial or territorial Institute. Arrange the details for the invigilation and writing of your exam with your provincial or territorial Institute. The exam will be the same format as the written case report assignments. The format is explained in the Written Case Reports section of the Introduction and Overview. Please see session 13 for more information about the exam.





As shown in session 11, e-procurement processes may lead to closer supplier/buyer relationships as well as increase efficiency of the procurement process. E-procurement enables additional opportunities such as: purchasing card (p-cards), vendor managed inventory and Just in Time II inventory systems. Enabling these technologies often results in closer relationships with suppliers.

Overview

In this session we explore the use of purchasing cards as a tactical method to reduce procurement costs, as well as to provide additional benefits. Issues and approaches to p-card implementation are discussed. Two key approaches that affect buyer-supplier relationships are explored: vendor managed inventory and Just in Time II (JIT II). The joint gains of vendor managed inventory are considered, as well as steps in the implementation of vendor managed inventory. Just in time inventory and JIT II are discussed. JIT II is one of the closest supply partnerships, with the supplier’s staff working at the buying company. The supplier’s staff has authority to transact in much the same way as the staff of the buying company.

Objectives


1. Describe the benefits available through effective use of p-cards. 2. Understand the challenges related to implementing a p-card program. 3. Estimate the savings from implementing p-cards at your organization. 4. Understand the gains to vendors (suppliers/manufacturers) and buyers possible

from vendor managed inventories. 5. Describe the benefits of a vendor managed inventory approach. 6. Develop a VMI inventory implementation plan. 7. Describe how JIT II works along with its benefits.



Involving Users and Suppliers, continued

Required Reading

Read the following: Palmer. Richard J., Green, Leland D., and Ventura, Marie T. Are Corporate Procurement Cards for You? Management Accounting. September 1996. Pages 22-27. Carbone, James. To save more distribute more cards study says. Purchasing. May 18, 2006. Page 29. Gibley, Tracy. A guide to purchasing card success: overcoming 8 key hurdles. Treasury Management Association Journal. July/August 1999. Pages 47-50 Waller, M, Johnson, M.E., and Davis.D., Vendor Managed Inventory in Retail Supply Chains. Journal of Business Logistics, #20, 1999. Page 183-187. Dixon, Lance. JIT II: A New Approach to Supply Management. Center for Quality Management Journal. August 1992. Pages 15-19. Pragman, Claudia, H. JIT II: A Purchasing Concept For Reducing Lead Times in Time-Based Competition. Business Horizons. July-August 1996. Pages 54-58.

Framework Questions


1. Are p-cards used in your organization? 2. If they are used, what steps did you go through in the implementation? 3. What were the cost savings? 4. What were the potential risks? 5. Does your organization use vendor managed inventory? Why? 6. Should your organization be using vendor managed inventory? 7. What would be the benefits of vendor managed inventory for your

organization? 8. What steps would your organization take in implementing vendor managed

inventory? 9. What are the strategic and tactical changes I will make (or attempt to make) to

my job/department/organization? 10. What is the one most important thing I learned?



Session Notes: Involving Users and Suppliers

P- Cards: Benefits

Corporate purchasing cards, or p-cards have the following benefits: • Speed of receiving the good or service is increased as internal purchasing steps

are reduced. • Information is readily available for analysis and control of spend. • Employee morale may improve as authority is delegated. • Supplier goodwill improves as they receive payment sooner. • Cost savings to internal processes such as finance and procurement. • Spend can be directed to preferred suppliers.

P- Cards: Considerations in Implementation

In spite of these benefits there are often concerns over the use of p-cards. The most prevalent of these is the control issue. There is a perceived risk that employees may use the card for inappropriate purchases. The Palmer (1996) article suggests there are 3 considerations in implementing p-card programs. These are:

1. Controlling p-card behavior (the risk of abuse) 2. Organizational issues 3. Integration issues 4. Implementation issues

Controlling p-card behavior The control issue involves: who receives p-cards, what are the dollar limits and item types allowed, and what is the documentation and approval process. Who receives p-cards There are a variety of options: provide them to all employees, provide them only senior staff, provide them only to procurement employees, provide them to volume purchasing employees, provide them only to employees who travel, and etc. The decision on who to provide p-cards to will depend on the risk tolerance of the organization as well as the degree of control exercised over the cards. Dollar limits Dollar limits may be set in a variety of ways such as: limits on spend on a particular type of supply (or supplier), number of uses, and etc. To derive the right dollar amount level, assess p-card spending relative to the spend under current purchasing processes. Also, determine the level of risk the organization can tolerate.



Session Notes: Involving Users and Suppliers, continued

P- Cards: Considerations in Implementation, continued

Item types The types of items purchased using p-cards can be controlled using either internal business processes or card technology. Corporate directives on suitable uses of the card, or card issuer technology can be used (example the card will only be valid at certain merchants) or a combination of both. Documentation and approval Documentation may range from attaching receipts to the monthly statements, to more formal purchase logging systems with sign off by superiors. The system of documentation will depend on the risk tolerance of the organization. Other measures These could include having staff sign an internal agreement on the use of p-cards. Organizational considerations The location of p-card management in an organization generally is either in the financial department or in procurement. Some considerations are: • Resources: availability and skill of staff. • Linkage to strategy: if procurement and spend analysis is strategically important,

procurement should manage procurement-related activities such as p-cards. • Users: if the p-card user base is a small group (such as traveling sales people)

management of the p-cards may reside in the individual department. Another organizational issue is encouraging p-card use. If p-cards are not used, the benefits are not realized. The article suggests higher charge-backs to areas that are authorized and do not use p-cards. Another suggestion is to award bonuses based on the number of transaction shifted to p-cards (this could have unintended consequences if not managed carefully).




P- Cards: Considerations in Implementation, continued

Integration Issues There may be integration issues when p-cards are integrated with other procurement systems. This includes data systems as well as policy systems. In some cases, data can be integrated through EDI into the main purchasing system. In other cases, a standalone database may be used to capture p-card transaction data. The importance of information capture is to ensure compliance with the usage policy for p-cards. Gibley (1999) extends the discussion with an analysis of issues that need to be addressed during P-card implementation: Implementation Issues • Challenge #1: Build support across the organization: the crucial parts of the

organization should be aware, or be part of the implementation effort. • Challenge #2: Obtain senior management support: focus on profits. • Challenge #3: Avoid excessive controls otherwise benefits may be limited. • Challenge #4: Allocate sufficient resources. • Challenge #5: Hire the right administrator – a financial-oriented person with

liaison skills (internal and external to the organization). • Challenge #6: Clearly define the goals and measures for success. • Challenge #7: Expand the program. Roll out a pilot program and, if successful,

take the next steps. • Challenge #8: Report successes.




Vendor Managed Inventory: Benefits

Vendor or supplier managed inventory is where the vendor controls the amount of inventory at a particular site or sites. Vendor managed inventory is a component of a just in time approach to inventory. In vendor managed inventory, the goals are to reduce costs across the chain and to improve response time. The vendor decides when to order and how much inventory to order. The vendor is often the owner of the inventory. For suppliers some of the benefits of vendor managed inventory include:

• Increased partnering opportunities with key clients. • Longer-term and more stable relationships that allow longer-term strategy. • Smoothing of demand effect, as the vendor has greater control.

For procuring organizations vendor managed inventory provides:

• Lower inventory costs. • Lower administrative costs. • Potentially improved lead times.

For both suppliers and buyers, vendor managed inventory can reduce transportation costs as the frequency of small shipments is reduced. Vendor managed inventory also has costs and disadvantages. Suppliers can experience increased inventory holding costs. The buying organization has a greater risk of supplier failure, and potentially less leverage over the supplier in future negotiations.




Implementing Vendor Managed Inventory

The implementation of vendor managed inventory should follow a set of steps: Gaining Support – Gaining support of senior management is critical. Only after this step can you engage the support of the supplier or potential suppliers. Analysis - Procurement outlines the qualitative and quantitative benefits, and costs and risks of vendor managed inventory related to a particular supply or supplier Negotiation - During this phase negotiation occurs with the chosen supplier(s). The goals of the negotiation are related to the following factors: staffing for the project, technology, and sharing of financial gains. Development - Policies and procedures technologies and processes are developed jointly between the buying organization and the supplying organization. Performance goals are established. Testing – Trials, or pilot implementations work out any implementation issues. Implementation - Vendor managed inventory is implemented. The program is monitored against the performance goals. Improvement - Once implemented, the system is refined and improved.

Just In Time Just in Time, or JIT is an approach to inventory management where supplies arrive at

the desired location when they are needed. Just in time systems minimize stationary inventory and inventory holding costs. Often, suppliers are located near the organization. Since failure of just in time supplies can adversely affect production, just in time systems focus on low defect (zero) in terms of the supply and delivery of the supply. JIT has several implications for procurement. Relationships with suppliers become increasingly important. This results in additional emphasis on sourcing, selection, monitoring, certification and development. Specifications must be precise with respect to quality, quantity and timing. Procurement must also have a strong relationship with the users of the goods. Due to the risk of potential failures, organizations have adopted ‘just in case’ inventory. In this approach a certain amount of inventory is held either on or off site as a buffer to JIT system failures.




Just in Time II The strongest supplier relationships occur when an organization uses a JIT II

approach. JIT II was pioneered by the Bose Corporation and is a registered trademark. The Dixon article (1992) outlines JIT II at Bose. In JIT II, supplier employees work within the buying host organization. They are usually empowered to undertake activities such as ordering goods and services, and meeting with product engineers, design teams, and marketing staff. They have the same authority as an employee of the host. There are several conditions necessary for JIT II to work in an organization:

• There must already be a trust-based relationship with the supplier. • The supplier must be very good. • The supplier’s employee must have the same authority as an equivalent

employee of the host organization. • There must be sufficient volume and dollar value of purchases from the

supplier to make it cost effective. • The supplier does not work with the part of the organization where trade

secrets or sensitive information is being used. JIT II provides a variety of benefits to the buying organization. Some of these are:

• The potential to reduce lead times and inventory levels. • Better understanding of requirements. • Improved ability to integrate the supplier into product development at early

stages. This improves products and costs plus reduces the product development cycle.

• Reduced administrative costs. • Reduced transportation costs.

For the selling organization some of the benefits are:

• The relationship will likely be long term, assuring a market for their goods. • Improved communication (and lower error rates due to miscommunication)

with key buyers. • Reduced transportation costs.



Session Wrap Up: Involving Users and Suppliers


Now that you have examined ways to involve other users and suppliers, you should review the session’s objectives as restated here: Upon completion of this session candidates should be able to:

1. Describe the benefits available through effective use of p-cards. 2. Understand the challenges related to implementing a p-card program. 3. Estimate the savings from implementing p-cards at your organization. 4. Understand the gains to vendors (suppliers/manufacturers) and buyers possible

from vendor managed inventories. 5. Describe the benefits of a vendor managed inventory approach. 6. Develop a VMI inventory implementation plan. 7. Describe how JIT II works along with its benefits. Candidates are encouraged to evaluate their learning by determining if they have achieved the objectives for this session as stated above.


In session 12 we explored involving users and suppliers in the management of the supply chain. This is the last session before the exam. In the exam, you will be required to analyze a case, and prepare a written case report. The exam case and instructions will be sent to you prior to the exam. If you have not received this information, or arranged for exam writing, contact your provincial or territorial Institute. For more information about the exam, see session 13.


Session Thirteen

Module Examination

Examination Format

What to Bring to the Examination

Final Marks



Module Examination

Overview The final examination is the final step in successfully completing this module. This

section will provide you with information on the process involved in writing the final examination.

Examination Format

The final exam is four hours long, and consists of a case analysis and written case report. The exam is worth 25% of your total mark for the module. You must confirm the exact date, time, and location of the final exam with your provincial or territorial Institute. The exam case study and exam instructions will be available prior to the exam. If you have not received this information, contact your Marker or your provincial or territorial Institute. Candidates will be expected to prepare the case study prior to the exam. Then, candidates will write a written case report on this case during the exam. For guidelines on preparing and writing cases, please refer to Case Preparation and Written Case Reports in the Introduction and Overview.

Part Description Marks Time I Case Analysis 100% 4 hours



Module Examination, continued

What to Bring to the Examination

The following items can be taken into the examination room. The textbook and any course materials needed for reference. Although the examination is "open book", you should know where to look in the materials for information. Prepare in advance by using "post-it" tabs to mark important topics and label them. A (quiet) calculator A wristwatch to keep track of your time Correction fluid or eraser to make corrections easier A ruler and a highlighter 20+ pages of loose-leaf regular lined writing paper. Do not bring any other pre-written materials for submission. All writing for the case report must be done during the four hours of the exam.

Final Marks A mark of 50% is necessary to successfully complete this course.

Candidates who achieve a mark of less than 60%, but more than 50% will receive a letter of caution. Candidates who achieve a mark of less than 50% will be required to complete an additional assignment. Please contact your provincial or territorial Institute to discuss. Final marks are mailed to candidates approximately four (4) weeks after the final examination is written. To ensure confidentiality, marks are not given over the telephone. Also, marks are mailed only to the candidates.



Module Evaluation

Module Evaluation Form

Candidates are required to submit an evaluation form for this module, rating the module content and format. To obtain the evaluation form, please access the PMAC site at http://www.pmac.ca. Then, click on the Education tab. Then, on the right-hand menu, click on New Accreditation Program The evaluation form will be in this menu. Please mail the form to: Purchasing Management Association of Canada 777 Bay Street, Suite 2701 P.O. Box 112 Toronto, Ontario M5G 2C8

© Purchasing Management Association of Canada

Appendix

� PowerPoint slides (Sessions 1 – 12)

1

1

Module 2: Procurement and Supply

Management

Session 1Tactical versus Strategic

Procurement

2

Session Agenda

1. Procurement and supply management2. Strategic stages of procurement4. Tactical and strategic procurement 5. Spend analysis6. Group exercise (not marked): Spend Analysis 7. Procurement risk8. Individual exercise (marked): Goods Spend

Analysis in Your Organization9. Review of Written Case Report requirements

2

3

Session Objectives

1. Describe the relationship between procurement and supply chain management.

2. Describe the relationship between tactical and strategic procurement.

3. Describe and differentiate the five stages of strategic management.

4. Define spend analysis including direct and indirect spend.

4

Session Objectives

5. Understand why spend analysis is an important strategic purchasing function.

6. Prepare a goods spend analysis.

7. Opportunities and barriers to spend analysis

8. Be able to identify the sources of supply risk.

3

5

Discussion QuestionsDiscussion QuestionsBe prepared to discuss the following questions:

Where is your organization with respect to strategic purchasing? Is it tactical or strategic? Is it both?Is your organization acquiring greater strategic skills in its purchasing?How will your organization move to become more strategic?Does your organization use spend analysis?What are the benefits and constraints to performing a spend analysis in your organization?What is an example in your organization of direct spend? Indirect spend? Why is spend analysis important in your organization?What are the supply risks in your organization?How might you manage supply risks in your organization?

6

Procurement and Supply Chains

• Procurement has evolved from a simple “buy”function

• Modern view:Procurement is involved with all suppliesProcurement is the key to supply chain

managementProcurement is proactiveProcurement is customer value focused

4

7

Procurement and Strategy

• Procurement is strategic.

“Where are we going”

8


• Strategic approach to procurement must align with Corporate strategy

• Tactical methods of procurement must support the strategy of procurement

5

9


• Where is your organization with respect to strategic purchasing? Is it tactical or strategic? Is it both?

10


• Cavinato’s staging:

Stage 1: Basic financial planning

Stage 2: Forecast based planning

Stage 3: Externally oriented planning

Stage 4: Strategic management

Stage 5: Knowledge based business

6

11

Total supply chain costs, comparative supply chain costs

Leadership, consultant, conduit

LeadershipUnlimitedSupplier’s capabilities through value to final customer

Conduit and interpreter

Network facilitation

5

Total supply chain costs

Leadership of teams

Pro-activeProduct design in view of market

Innovator to final use and disposition

Enrtepren-eurialteam

Supply4

Total product cost

Managerial, analytical, interpersonal

Fit to rest of firm

Capital goods, MRO, office supplies, outsourcing

Suppliers and suppliers suppliers to final product

Support line of business

Procurement3

Gap basedSome management

Reactive with some planning

Raw materials, MOR , office supplies

Supplier feeding production

Maintain price

Purchasing2

FinancialTask orientedReactiveMRO, office supplies

Production-purchasing

Better price

Buying1

Key Measures

Key Personal Skills

Management Approach

Range of Products and Services

Concept of Supply Chain

Concept of Strategy

Concept of Field

Stage

•Key Points of Cavinato’s staging


12


• Using Cavinato’s 5 stages where is your organization staged? Why? Be prepared to discuss.

7

13


• Spend Analysis

Definition:

o Spend analysis: Metrics related to the commodities and services purchased, the suppliers used, and the internal customers.

o Direct spend: Metrics related to goods and services that go in to final products

o Indirect spend: Metrics related to goods and services that do not go in to final products

14


• Spend Analysis:

Heath suggests:

oThat both the $ spend and # of spends be analyzed

o That triggers be used to establish supplies for targeting

o The analysis occur in three dimensions:- Commodities and services- Suppliers- Customers

8

15


• Spend AnalysisHeath’s Triggers for action:

o High dollar value of commodities or serviceso High number of transactions for commodities or

serviceso High dollar value for supplierso High number of transaction for supplierso High dollar value for internal customerso High number of transactions for internal customerso High percentage of sole sourceo A combination of any of these

16


• Spend Analysis

Opportunities from spend analysis

Supports strategy through:

o Reducing cost through volume discountso Reducing cost by leveraging bargaining positiono Seeking better quality o Seeking better responsiveness from supplierso Uncovering process improvements potentialo Uncovering opportunities to enter into stronger

relationships o Increasing focus on what goods and services are

strategic

9

17


• Spend Analysis

Barriers to spend analysis

o Disparate computer systems o Data problems (incomplete, inaccurate or

inconsistent)o Determining the appropriate classification

plan for the analysiso Resistance to changeo Inadequate resource levelso Setting unrealistic goals

18


• Does your organization use spend analysis?• What are the benefits and constraints to

performing a spend analysis in your organization?

• What is an example in your organization of direct spend? Indirect spend?

• Why is spend analysis important in your organization?

10

19


• Supply Risk

Definition (Zsidisin):

o“the probability of an incident associated with inbound supply from individual supplier failures or the supplier market occurring, in which its outcome results in the inability of the purchasing firm to meet customer demand or causes threats to customer life and security”

20

Supply risk

• Two broad sources of supply risk:

Individual supplier failures

Market characteristics

11

21


• Why is supply risk important?

It affects the customer

It affects the organization

It is “weighed” in strategic thinking

22


• What are the risks to your supplies?

12

23


• Individual Exercise - Marked

Goods Spend Analysis in Your Organization

o Show the steps you would use to conduct a goods spend analysis for your organization.

o Describe specific key triggers and why you chose them.

o Describe how spend analysis would fit within your current procurement strategy.

24

Written Case Report Requirements

• Executive Summary• Process Elements• List of issues with impact analysis• Environmental and Root Cause Analysis• Alternatives or Options• Recommendation(s) and Implementation• Monitor and Control• Judgment and Integration• Written Communication: Format, Language

and Style• Exhibits and/or Appendixes (if applicable)

See the Introduction and Overview chapter of the Candidate Manual for full details.

There are two written case reports each worth 10% (sessions 3 and 11) There is one written case report worth 5% (session 8)

13

25

Case Report: MarkingCase Report: Marking

100CASE TOTAL

5WRITTEN COMMUNIATION: LANGUGE AND STYLE

5WRITTEN ICOMMUNICATION: FORMAT

10JUDGEMENT AND INTERGRATION

OVERALL

10VII. MONITOR AND CONTROL

10VI. IMPLEMENTATION

5V. RECOMMENDATIONS

15IV. ALTERNATIVES AND/OR OPTIONS

20III.ENVIRONMENTAL AND ROOT CASE ANALYSIS

10II. LIST ISSUES WITH IMPACT ANALYSIS

10I. PROCESS ELEMENTS

MARKMARKS AVAILBLE

CASE ANALYSIS

26

Session Objectives

Describe the relationship between procurement and supply chain management.

Describe the relationship between tactical and strategic procurement.

Describe and differentiate the five stages of strategic management.

Define spend analysis including direct and indirect spend.

14

27

Session Objectives

Understand why spend analysis is an important strategic purchasing function.

Prepare a goods spend analysis.

Opportunities and barriers to spend analysis

Be able to identify the sources of supply risk.

1

1

Session 2Procurement Processes

2

Session Agenda

1. Steps in the procurement process2. Importance of description of needs

(specifications) 3. Types of specifications4. Specification development5. Potential problems 6. Case Discussion: Blozis Co. (if time permits)7. Group Case Report (marked): Blozis Co.8. Review requirements for DeHavilland case

2

3

Session Objectives

1. Review and understand steps in the procurement process.

2. Understand the critical importance of needs definition (specifications).

3. Be knowledgeable of the types of specifications.

4. Be aware of the keys to specification development.

4

Session Objectives

5. Understand potential problem areas.

6. Apply principles.

3

5


How are needs recognized in your organization?Why is getting the specification correct the most important part of a purchasing requirement?In your organization, do you collaborate on specifications? Why? Why not? Should you?Provide an example of follow-up and expediting from your experience.Describe a situation where you wished you had good documentationand it was missing?Can your organization use standard products more often?What would the benefits be to your organization if you used standard products more often?Have you developed specifications with some of the common problems?

6

Discussion Questions, continuedDiscussion Questions, continued

Blozis Company:Is the supply function organized properly? Is it strategic or tactical in nature? How would you revise purchasing procedures at Blozisrelated to: specifications, the use of requisitions, purchase orders, receipt and delivery?What problems are likely to occur with the specifications as things now stand?

4

7


• 10 steps:

Need recognitionNeed description (Specification)SourcingSupplier selectionOrderingMonitoringReceipt and InspectionPaymentDocumentationRelationship management

Which of these steps were you unaware of?

8


• Which of these steps were you unaware of?

5

9


• Need recognition is the process of identifying that a good or service is required and the timing of the requirement.

• Need description or specification is describing the need in sufficient detail to ensure that the correct good or service is procured, in the correct quality, at the correct time, at the correct place.

10


• Why is getting the specification correct the most important part of a purchasing requirement?

• In your organization, do you collaborate on specifications? Why? Why not? Should we?

6

11


• Supplier selection involves three processes. Identifying suppliers, evaluating their bids and making a choice of which supplier (s) will provide the goods or services.

•Ordering is the process of making the purchase from the supplier.

12


• Monitoring consists of follow-up and expediting.• Receipt and inspection involves taking delivery of the good or service and assuring it meets the specified requirement.

7

13


•Payment is the process of clearing the invoice for the good or service and issuing payment.

•Documentation

•Relationship management is the process of managing internal and supplier relationships.

14


• Provide and example of follow-up and expediting from your experience.

8

15


• Description of the Need/Specification:

Simple Specifications:

o Performanceo Fit and functiono Brand or equalo Sampleso Grades (commodities)

16



Complex Specifications:

o Commercialo Designo Engineering Drawingso Material and Method

9

17



Standardization:

o Think of grades and commercial specificationso Benefits

o Can you organization benefit from greater use of standardized products? Why or why not?

18



Development: Interdepartmental Interaction

Low

High


Low High

Departmental Involvement

Procurement Involvement


10

19



Development: Buyer Supplier Interaction

Low

High


Low High

Supplying firm Involvement

Supplying firm involvement


20



Problem Areas

o Lack of Clarityo Limiting Competitiono Overly Restrictive

Have you developed specifications with any of these common problems?

11

21


• Have you developed specifications with any of these common problems?

22


• Group Case Report: Blozis Company

Is the supply function organized properly? Is it strategic or tactical in nature?

How would you revise purchasing procedures at Blozis related to: specifications, purchase orders and receipt?

What problems are likely to occur with the specifications as things now stand?

12

23

Session Objectives

Review and understand steps in the procurement process.

Understand the critical importance of needs definition (specifications.

Be knowledgeable of the types of specifications

Be aware of the keys to specification development

24

Session Objectives

Understand potential problem areas

Apply principles in a case

13

25


DeHavilland Inc. (Session 3)Case Report Format

Title pageExecutive SummaryKey assumptionsStatement of IssuesAnalysisPlan of ActionExhibits (if any)

See the Introduction and Overview chapter for case format and content

Case is due at the beginning of session 3

26

Discussion Questions: DeHavilland Case

What are some possible BATNAs for DeHavilland? For Marton?Who are the parties and what were their interests/objectives?What is the potential value to be created?What are some potential barriers to success?What are the power relationships between DeHavilland and Marton? What are some possible ethical considerations?

1

1

Session 3Competitive Bidding and

Negotiation

2

Session Agenda

1. Individual Written Case Report (marked): DeHavilland Inc. – Applying Negotiation Analysis

2. Review of group case discussion approach3. Factors related to choice of competitive bidding2. Types of bids 3. Factors related to choice of negotiation4. Objectives of negotiation5. Steps in negotiation6. Case Discussion: DeHavilland Inc.

2

3

Session Objectives

1. Understand the factors that suggest bidding is more appropriate than negotiation and vice versa.

2. Determine whether negotiation or bidding is more suited to a particular situation.

3. Describe types of bids.4. State the objectives of a negotiation.5. Define the keys steps in negotiations.6. Prepare a negotiating analysis.

4

Discussion QuestionsDiscussion Questions

Be prepared to discuss the following questions:What are some of the methods of competitive bidding that I am familiar with?Does my organization have a formal approach to negotiation? Should it?What would the advantages and disadvantages be of a formal approach to negotiating?

3

5

Discussion Questions, continuedDiscussion Questions, continuedDeHavilland Inc:

What are some possible BATNAs for DeHavilland? For Marton?Who are the parties and what were their interests/objectives?What is the potential value to be created?What are some potential barriers to success?What are the power relationships between DeHavillandand Marton?What are some possible ethical considerations?

6

Group Case Discussion Approach

In general, the criteria for evaluating a candidate’s participation are based on the objectives for a case discussion, namely, did the candidates:

Discuss the issues in the case?Determine the criteria for making a decision?Analyze the options available (if applicable)?Decide the best plan of action?Present findings to the large group (if called upon to

4

7

Evaluating Case Discussions

In general, your contribution to any group discussion is marked as follows (for a total of 4 points for a given discussion):

• 0 out of 4 points means no contribution (listened only, or absent) • 1 out of 4 points means little contribution / understanding of

objectives• 2 out of 4 points means some contribution / understanding of

objectives• 3 out of 4 points means a good amount of contribution /

understanding of objectives• 4 out of 4 points means excellent contribution / understanding of

objectives / extends concepts, application and strategy

The instructor will be assessing both the quantity and qualityof your contribution to the discussions.

8


• Competitive bidding

Is the process of soliciting proposals from multiple sources to supply the product or service as described in the specification.

In order for bidding to work the following conditions need to be met:

o Size of the buy must be sufficiento Specifications need to be clearo The market should be competitiveo There must be qualified sellerso Sellers need sufficient time to prepare the bid

5

9


• Competitive bidding

Some common types of competitive bids:

o Request for quotations (RFQ) o Request for information (RFI)o Requests for proposal (RFP)o Reverse auctionso Auctions

10


• Negotiation

If the following conditions occur negotiation should be used:

o Costs and risks are hard to estimate with any precisiono Where price is not that important. Perhaps quality is more important. o If the buyer expects to make spec changeso Where there are special needs like tooling, expertise etco When you want the supplier involved early on in the worko When there is a long lead time which allows time to improve the product

6

11


• Negotiation

Objectives:

o To obtain a fair and reasonable priceo To obtain the desired qualityo To obtain the desired performanceo To persuade the supplier to provide a high level of co-operationo To have more controlo To build a sound long term relationship with the supplier

12


• Negotiation

Some typical things that are negotiable:

o Price (discounts, payment terms)o Transportation (terms, carrier, multiple delivery points)o Supply (lead times, delivery schedule, expansion/cancellation options, supply held inventory)o Support (technical assistance, spare parts, warranty, training)o Quality (performance compliance, test criteria

rejection procedures, reliability)

7

13


• What is a situation in my organization where competitive bidding was used when negotiation would have been more appropriate?

• What is a situation in my organization where negotiation was used when competitive bidding would have been more appropriate?

14


• Steps in the Negotiation Process

Establish Team and Team LeaderAnalysisMock negotiationsNegotiatePost negotiations

8

15


• Analysis (Wheeler Framework)

BATNASPartiesInterestsValuesBarriersPowerEthics

16



BATNA:

o Best Alternative to a Negotiated Agreemento What will the parties do if they do not come to an agreemento Course of action if no agreement (your walk away position)o Not necessarily a costs or price.o Need to understand your BATNA plus assess the BATNA of the supplier

9

17



PARTIES:

o Not necessarily who you negotiate witho Who holds sway has influence, makes the final odecision o Who are the parties of other options

18



INTERESTS:

o Look for both obvious and hidden objectives

VALUE:

o What value is created?o How will the value be split?o Think in terms of “win win”

10

19



BARRIERS:

o What are the potential barriers?Strategic – overplayingInterpersonal- communication, emotionsInstitutional – within the organizations, legal,

regulatory o How can they be overcome?

20



POWER:

o How you perceive your BATNA and the other party perceives their BATNAo Things that can change power:

Different partiesTimeframesThe strength of analysisThe strength of preparation

11

21



ETHICS:

o Truth or noto Fairnesso Economic Pressureo Effect in bystanders

22


• Does my organization have a formal approach to negotiation? Should it?

• What would the advantages and disadvantages be of a formal approach to negotiating?

12

23


• DeHavilland Inc. Case

What are some possible BATNAs for DeHavilland and Marton?

24



Who are the parties and what is their interests?

13

25



What is the potential value to be created?

26



What are some potential barriers?

14

27



What is the power relationships between DeHavilland and Marton?

28



What are some possible ethical issues?

15

29

Session Objectives

Understand the factors that suggest bidding is more appropriate than negotiation and vice versa.Determine whether negotiation or bidding is more suited to a particular situation. Describe types of bids.State the objectives of a negotiation.Define the keys steps in negotiations.Prepare a negotiating analysis.

1

1

Session 4Procurement and

Supply Management Organization

2

Session Agenda

1. Internal procurement relationships2. Financial leverage effect3. Individual exercise (not marked): Financial

Leverage Effect4. Cross functional teams5. Organizing - centralized, decentralized and

hybrid 6. Group exercise (marked): Centralization vs.

Decentralization

2

3

Session Objectives



3. Discuss the problems in using cross functional teams.

4

Session Objectives




3

5


What department in your firm do you have working relationships with on a day to day basis as it relates to procurement?What is the condition of those relationships?Should your organization work using cross functional teams? What could the problems be?What is the prevalent purchasing model for your organization?When did it last change? Why?Should it be more centralized or more decentralized? Why?How might it change in the next 5 years? Why?

6


• Internal Relationships

Production

Design

Finance

Marketing

4

7


• Internal Relationships

Information technology

Legal

Supply chain manager

8


• What departments in your firm do you have working relationships with on a day to day basis as it relates to procurement?

• What is the condition of those relationships?

5

9


• Financial Leverage Effect Example

A firm has the following income statement

Sales $15,000,000Total Materials $5,000,000Total Labour $7,000,000

Overhead $1,500,000

Cost of Goods Sold $13,500,000Profit $1,500,000

10



What is its profit margin?

o $ 1 500 000 / $ 15 000 000 = % 10

6

11



What is the firm’s return on assets?

o 10.0x 1.3 =13%

12



The same firm has the following balance sheet

Inventory $3,000,000Other $1,000,000Total current Assets $4,000,000

Fixed Assets $7,500,000

Total Assets $11,500,000

7

13



What is its asset turnover rate?

$15,000,000/$11,500,000 = 1.3

14



Suppose through an improvement in procurement costs of purchased materials decline 20%. What is the effect on the Return on Assets?

8

15


• Financial Leverage Effect Example I n c o m e S t a t e m e n t

B e f o r e A f t e r

S a l e s $ 1 5 , 0 0 0 , 0 0 0 $ 1 5 , 0 0 0 , 0 0 0T o t a l M a t e r i a l s $ 5 , 0 0 0 , 0 0 0 $ 4 , 0 0 0 , 0 0 0T o t a l L a b o u r $ 7 , 0 0 0 , 0 0 0 $ 7 , 0 0 0 , 0 0 0

O v e r h e a d $ 1 , 5 0 0 , 0 0 0 $ 1 , 5 0 0 , 0 0 0

C o s t o f G o o d s S o l d $ 1 3 , 5 0 0 , 0 0 0 $ 1 2 , 5 0 0 , 0 0 0P r o f i t $ 1 , 5 0 0 , 0 0 0 $ 2 , 5 0 0 , 0 0 0

P r o f i t M a r g i n 1 0 . 0 % 1 6 . 7 %

B a l a n c e S h e e t

I n v e n t o r y $ 3 , 0 0 0 , 0 0 0 $ 2 , 4 0 0 , 0 0 0O t h e r $ 1 , 0 0 0 , 0 0 0 $ 1 , 0 0 0 , 0 0 0T o t a l c u r r e n t A s s e t s $ 4 , 0 0 0 , 0 0 0 $ 3 , 4 0 0 , 0 0 0

F i x e d A s s e t s $ 7 , 5 0 0 , 0 0 0 $ 7 , 5 0 0 , 0 0 0

T o t a l A s s e t s $ 1 1 , 5 0 0 , 0 0 0 $ 1 0 , 9 0 0 , 0 0 0

A s s e t t u r n o v e r 1 . 3 1 . 4

R e t u r n o n A s s e t s 1 3 . 0 % 2 2 . 9 %

Partial

Partial

Gross

16


• Individual exercise (not marked): Financial Leverage Effect

Financial leverage effect at Tricorp

9

17


• Cross Functional Teams

Benefits/Reasons:o Procurement is strategic o Financial improvemento Better resultso Cuts timeo Better communicationo Better to deal with complex productso Higher creativity

18


• Cross Functional Teams

Success factors:o Executive sponsorship o Effective leadershipo Right peopleo Trainingo Resources

10

19


• Do we use cross functional teams in my organization?

• What worked?

• What did not work?

20


• Procurement Organization

CentralizedDecentralizedHybrid

11

21



Centralized - Advantageso May reduce costs o Lower supplier costso Specializationo Better co-ordination and controlo Easier to develop strategic view

22



Centralized - Disadvantageso Reduces teamwork o Too much controlo Too specializedo Isolation from business units

12

23



Decentralized - Advantageso Faster response to business unit needs o Support local activitieso Wider authority better morale

24



Decentralized - Disadvantageso Higher cost lost volume discount opportunities o Communicationso Difficult to create strategic focuso Inconsistencies

13

25



More Important Factorso External Environment o Major influencers approacho Moderators influenceo Difficult to create strategic focuso Inconsistencies

26



Effect on Procuremento CPO’s role o Stress on staffo Shared services approacho Staff competency issue if shift toward centralization

14

27


Group exercise (marked): Centralization vs. Decentralization

Select one firm in your group that uses centralized purchasing. Prepare a written discussion of changes if any that could be made toward decentralization. Justify keeping the status quo or the changes.

Select one firm in your group that uses decentralized purchasing. Prepare a written discussion of changes if any that could be made toward centralization. Justify keeping the status quo or the changes.

28

Session Objectives

Identify the relationships between procurement and other functional areas of an organization.

Describe the reasons for/benefits of using of cross functional purchasing teams.

Discuss the problems in using cross functional teams.

15

29

Session Objectives

Understand the critical success factors for cross functional teams.

Describe range of options for organizing procurement.

Assess the options for the organization of procurement in an organization.

1

1

Session 5Make or Buy

2

Session Agenda

1. Make or buy at the strategic and tactical level

2. Total cost of ownership: elements3. Total cost of ownership: benefits4. Total cost of ownership: implementation 5. Group exercise (marked): Make or Buy and

Total Cost of Ownership - HappylandConstruction

2

3

Session Objectives

1. Quantitative and qualitative factors that enter into the make or buy decision.

2. The concept of core competency.

3. The role of core competencies in creating competitive advantage.

4. Factors to identify core competencies of an organization.

4

Session Objectives

5. Benefits of the total cost of ownership approach.

6. Total cost of ownership analysis for a product or service used in an organization.

7. Total cost of ownership as a support to the make or buy decision.

3

5


Be prepared to discuss the following questions:Does your organization deploy make or buy analysis? Why? Why not?In your organization have you considered the strategic level factors related to make or buy?Is your organization organized on a strategic business unit or core competence basis?Does your organization have core competencies? What are they? What are your organization’s core products? Do they flow from the core competencies?Do you use total cost of ownership in your organization?What are the pros and cons of using total cost of ownership in your organization?

6

Make or Buy

• Does your organization deploy make or buy analysis? Why? Why not?

• In your organization have you considered the strategic level factors related to make or buy?

4

7

Make or Buy

• Considerations at the strategic level

Core competencies

Supplier dependence

8

Make or Buy

• Considerations at the tactical level

Total cost of ownership

Production capability

Qualitative/intangibles

5

9

Make or Buy

• Core Competencies

Elements that define core competencies:

o human capital oriented

o grow with use

o drivers of new business development

o allow different products and business development

o tend to be hidden

10

Make or Buy


Key to competitive advantage

Three criteria must be satisfied:

o It must provide access to a wide variety of markets

o It must provide benefit to the end product consumer.

o It should be difficult for competitors to imitate.

6

11

Make or Buy


Core Products

End Products

12

Make or Buy

• Does your organization have core competencies? What are they?

• What are your organization’s core products? Do they flow from the core competencies your organization deploy make or buy analysis? Why? Why not?

7

13

Make or Buy

• Total Cost of Ownership

Considers all costs to do with the acquisition from initial need recognition to ultimate disposal

Three broad categories of cost:

o Pretransactiono Transactiono Posttransaction

Uses present value (discounting) approach

14

Make or Buy


Pretransaction costs:

o Need recognitiono Need description (specification)o Sourcingo Supplier Selection

8

15

Make or Buy


Transaction costs:

o Orderingo Monitoringo Receipt and Inspectiono Paymento Documentation

16

Make or Buy


Benefits:

o Performance measurement o Decision making o Communicationo Insight/Understandingo Supports continuous improvemento Decommissioning and Disposal

9

17

Make or Buy


Issues in Implementation:

o Refocusingo Deciding appropriate circumstances o Data needso Pilot testing versus full rollout

18

Make or Buy

• Do you use total cost of ownership in your organization?

• What are the pros and cons of using total cost of ownership in your organization?

10

19

Make or Buy


Discounting:

o Objective is to restate future costs to todayo Example:

Assuming an interest rate of 7.5% what is the present value of:

$10,000 received annually starting 1 year from now for 5 years

Year 0 1 2 3 4 5 TotalCash $10,000 $10,000 $10,000 $10,000 $10,000Discount Factor 0.930233 0.865333 0.804961 0.748801 0.696559

1/1.0751 1/1.0752 1/1.0753 1/1.0754 1/1.0755

Discounted Value $9,302 $8,653 $8,050 $7,488 $6,966 $40,459

20

Make or Buy


Steps:

o Determine pretransaction costso Determine transaction costso Estimate posttransaction cost by year in the futureo Total all three costs for each yearo Determine discount rateo Discount costs in each year to todayo Total the discounted costso Make decision

11

21

Make or Buy


Example Time Up to today Year 1 Year 2 Year 3 Year 4 Year 5 TOTAL

(or year 0)Vendor A

Pretransaction $100,000Transaction $100,000Posttansaction $40,000 $60,000 $60,000 $60,000 $120,000Total Cost $200,000 $40,000 $60,000 $60,000 $60,000 $120,000 $540,000Discount factor 0.9346 0.8734 0.8163 0.7629 0.7130Total Discounted value $200,000 $37,383 $52,406 $48,978 $45,774 $85,558 $470,099

Vendor B

Pretransaction $100,000Transaction $250,000Posttansaction $30,000 $30,000 $30,000 $55,000Total Cost $350,000 $0 $30,000 $30,000 $30,000 $55,000 $495,000Discount factor 0.9346 0.8734 0.8163 0.7629 0.7130Total Discounted value $350,000 $0 $26,203 $24,489 $22,887 $39,214 $462,793

Discount Rate 7%

22

Make or Buy


Example Effect of discount rate (8.5%)


Vendor A

Pretransaction $100,000Transaction $100,000Posttansaction $40,000 $60,000 $60,000 $60,000 $120,000Total Cost $200,000 $40,000 $60,000 $60,000 $60,000 $120,000 $540,000Discount factor 0.9208 0.8479 0.7807 0.7189 0.6620Total Discounted value $200,000 $36,832 $50,873 $46,845 $43,135 $79,439 $457,125

Vendor B

Pretransaction $100,000Transaction $250,000Posttansaction $30,000 $30,000 $30,000 $55,000Total Cost $350,000 $0 $30,000 $30,000 $30,000 $55,000 $495,000Discount factor 0.9208 0.8479 0.7807 0.7189 0.6620Total Discounted value $350,000 $0 $25,437 $23,422 $21,568 $36,409 $456,836

Discount Rate 8.6%

12

23

Make or Buy

Group exercise (marked): Make or Buy and Total Cost of Ownership - Happyland Construction

Up to Today Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 etc(or year 0)

PreTransaction

Transaction

Post Transaction

TOTAL $0 $0 $0 $0 $0 $0 $0

Discount Factor

Discounted Cash Flow $0 $0 $0 $0 $0 $0 $0

Total Cost of Ownership $0

Discount Rate 5%

24

Session Objectives

Quantitative and qualitative factors that enter into the make or buy decision.

The concept of core competency.

The role of core competencies in creating competitive advantage.

Factors to identify core competencies of an organization.

13

25

Session Objectives

Benefits of the total cost of ownership approach.

Total cost of ownership analysis for a product or service used in an organization.

Total cost of ownership as a support to the make or buy decision.

1

1

Session 6Price and Cost Analysis

2

Session Agenda

1. What is the right price?2. Price assessment 3. Case Discussion: Frich Turbo Engine Co.4. Market conditions – procurement leverage5. Cost Analysis & Types of costs5. Profit6. Learning curves

2

3

Session Objectives

1. Conduct a price assessment.

2. Understand that lowest price is not necessarily the best option.

3. Describe different types of discounts.

4. Describe types of cost analyses.

4

Session Objectives

5. Distinguish the components of direct and indirect costs.

6. Conduct a cost analysis.

7. Describe considerations with respect to supplier profit.

8. Understand, at a general level, the importance of learning curves in cost analysis.

3

5


With respect to price assessment, which of the following have you used in your organization: competitive price proposals, current price comparisons, use of web tools, historical price comparisons and cost analysis?Were there missed opportunities to use one or some of these methods?What types of discounts does your organization typically receive?What are some cases where your firm has procurement leverage? Where it does not?What sources of cost data has your organization used?When have you been involved in a strategic supply project where direct and indirect costs have been split?What were some of the problems you faced, if any?Are learning curves appropriate in your organization for some purchases? Why?

6


• What is the Right Price?

Fair and Reasonable

Not necessarily the lowest price

Other factors to consider:

o Quality

o Reliability

o Terms and conditions

o Risk

o Other?

4

7


• Price Assessment

Methods:

o Competitive proposals

o Price comparisons - current

o Price comparisons – historic

o Web tools

o Cost Analysis

8


Case Discussion: Frich Turbo Engine Company

What factors would explain the difference between Bayfleet’s Machining and Union Stamping’s?

Should Bayfleet be selected? Why or why not?

5

9


• Discounts:

Cash

Trade

Volume

Seasonal

10


• What types of discounts does your organization typically receive?

6

11


• Market Conditions and Procurement Leverage

Supplier Side of the Market


Number of Sellers0

12


• Market Conditions and Procurement Leverage

Buyer Side of the Market


Number of Buyers0

7

13


• What are some cases where your firm has procurement leverage? Where it does not?

14


• Cost Analysis Approaches:

Cost Breakdown

Other Firms

Cost Models

8

15


• Types of Costs:

Direct+Indirect

= Total Cost

+ Profit

= Price

16


• Type of Costs:

Direct

o Direct materials

o Direct labour

Indirect

o Allocated (Burden)

Production overheadCorporate overhead

9

17


• Profit

NOT TO BE BASED ON A PERCENT OF COSTS

Considerations

o Competitiveness of industry

o Competitiveness of the product or service

o Size of order

o Specialization/Customization

o Risk

18


• What sources of cost data has your organization used?

• When have you been involved in a strategic supply project where direct and indirect costs have been split?

• What were some of the problems you faced, if any??

10

19


• Learning Curves

Basic idea is that the more often we do something the better our skill and the less time to do it.

Greatest impact is on new things we learn.

Most relevant to major projects, assemblies etc.

20


•DeHavilland Incorporated

Referring to exhibit 5 and exhibit 3 for Marton Enterprises for the Flap Shrouds Part 300, is a learning curve implied in Exhibit 3? Why or why not?

11

21

Session Objectives

Conduct a price assessment.

Understand that lowest price is not necessarily the best option.

Describe different types of discounts

22

Session Objectives

Describe types of cost analyses.

Distinguish the components of direct and indirect costs.

Conduct a cost analysis.

Describe considerations with respect to supplier profit.

Understand, at a general level, the importance of learning curves in cost analysis.

1

1

Session 7 Quality and Inventory

2

Session Agenda

1. Factors affecting long term quality2. Case Discussion: Placido Engine Co.3. Total quality management4. Individual exercise (marked): ISO 9001:2000

and Your Organization5. Quality training for procurement staff6. Purposes of inventory7. Forecasting demand8. Inventory models9. Inventory relationships

2

3

Session Objectives

1. Understand factors that affect quality.

2. Discuss the merits of product testing and the proposal analysis technique in assuring quality.

3. Describe some common total quality management systems.

4

Session Objectives

4. Weigh the pros and cons of implementing ISO 9001: 2000 standards in your organization

5. Outline the benefits of a strategic purchasing organization having quality management training.

6. Describe the purposes of inventory

3

5

Session Objectives

7. Understand basic inventory models.

8. Outline the relationship between delivery issues and inventory.

9. Discuss the trade-off between inventory and customer service.

10. Identify the difference between error detection and error.

6


In your organization what quality issues have you experienced?Refer to the four factors the determine long run quality. Which factors were, or are, absent at your organization?Do you partner with firms as a method to improve quality? Why orwhy not?Are you overly dependent on inspection for quality?Should your organization provide quality management training to purchasing staff?Why does your organization hold inventory?What inventory model or models does your firm use?How does delivery affect the level of inventory your firm holds?How do customer service requirements affect the level of inventory your firm holds?

4

7


• Four factors that affect long term quality

Specification quality

Selecting Suppliers

Supplier Understanding

Monitoring

8


• Specification quality

Absolutely

In terms of need

Conformance

• Selecting Suppliers

Product Testing

Proposal Analysis

5

9


• Specification Quality

Relationship with supplier

• Monitoring

Defect detection

Error/defect prevention

10


• In your organization what quality issues have you experienced?

• With reference to the four factors the determine long run quality which were absent?

6

11


• What are some solutions to these problems?

• What are barriers to them?

12


Case Discussion: Placido Engine Company

What are the basic issues in this case?

What do you think of the relationship Placido has with its suppliers?

How could Placido improve quality in this case?

7

13


• Do you partner with firms as a method to improve quality? Why or why not?

14


• Total Quality Management

Definition

Demings

Six Sigma

ISO 9001:2000

8

15


• Steps in Applying ISO 9001:2000

Identify the goals you want to achieve.

Identify what others expect of you.

Obtain information on the ISO 9000 family.

Apply the ISO 9000 family of standards in your management system.

Obtain guidance on specific topics within the quality management system.

16



Establish your current status, determine the gaps between your quality management system and the requirements of ISO 9001:2000.

Determine the processes that are needed to supply products to your customers.

Develop a plan to close the gaps in these 2 steps.

Carry out your plan.

9

17



Undergo periodic internal assessment.

Do you need to demonstrate conformance?

o Yes Undergo independent audit.

o No Continue to improve your business.

18


Individual exercise (marked): ISO 9001:2000 and Your Organization

For your company outline at least four reasons to become ISO 9001:2000 certified.

If it is not applicable to your organization, outline four reasons that one of your main suppliers should become ISO 9001:2000 certified.

In either case what are some of the problems that are likely to occur?

If you were responsible how would you proceed through the steps?

10

19


• Quality Training for Procurement Staff

Reduce error rates, improve bottom line.

Better relate expectations to suppliers.

Quality mentality within procurement.

20


• Should your organization provide quality management training to purchasing staff?Why? Why Not?

11

21


• Why does your company hold inventory?

• Does it hold different types of inventory for different purposes?

22


• Demand forecasting

Qualitative models:o Experts

o Customer feedback

o Delphi

Quantitative models:o Simple

o Moderately sophisticated

o Sophisticated

12

23


• Inventory Models

Fixed Order Quantity

Economic Order Quantity

Periodic Review

24



Relationship between inventory and delivery

Low

High

Level of Inventory

Short Long

Delivery Lead Time

13

25



Relationship between inventory and customer service

Low

High

Level of Inventory

Low High

Desired level of customer service

26


• How does delivery affect the level of inventory your firm holds?

• How do customer service requirements affect the level of inventory your firm holds

14

27

Session Objectives

Understand factors that affect quality.

Discuss the merits of product testing and the proposal analysis technique in assuring quality.

Describe some common total quality management systems.

28

Session Objectives

Weigh the pros and cons of implementing ISO 9001: 2000 standards in your organization

Outline the benefits of a strategic purchasing organization having quality management training.

Describe the purposes of inventory

15

29

Session Objectives

Understand basic inventory models.

Outline the relationship between delivery issues and inventory.

Discuss the trade-off between inventory and customer service.

1

1

Session 8Supplier Selection

2

Session Agenda

1. Individual written case report (marked): Platinum Box

2. Sourcing3. Weighted Evaluation Systems4. Case Discussion: Platinum Box 5. Product Attribute Considerations6. Total Cost Approach7. Case Discussion: Platinum Box

(continued)8. Single versus multiple Sourcing

2

3

Session Objectives

1. Identify potential supply sources.

2. Produce a supplier evaluation matrix.

3. Describe different types of products.

4. Connect the product type with supplier selection criteria.

5. Understand the elements of the total cost approach of selecting suppliers.

4

Session Objectives

6. Describe factors that suggest using a single source for a good or service.

7. Describe the factors that suggest using multiple sources for a good or service.

8. Understand the difficulties in negotiating in a sole source situation.

9. Defend a single versus multiple source decision.

10. Select a supplier using the total cost of ownership approach.

3

5


What methods do we use to find suppliers in our organization?In selecting suppliers what type of evaluation system does your organization use? Does your organization have products that are routine order? Procedural problem products? Performance problem products? Political outlayproducts? What are they?What are some of the risk, business desirable, and cost factors your organization would consider in adopting the total cost approach?For what goods and services has your organization single sourced? What were the factors in the decision?How do the power relationships change when we negotiate in a single source situation?What are some implications of reducing the number of suppliers your organization uses?

6

Supplier Selection

• What methods do you use to find suppliers in your organization?

4

7

Supplier Selection

Individual exercise (not marked): Platinum Box

1. Referring to Platinum Box, develop an unweightedevaluation matrix for each of the possible press selections.

2. Rank each of the presses for each evaluative factor you have chosen.

3. Make a recommendation.

Include 5 evaluative factors in your analysis.

8

Supplier Selection

• Supplier Selection: Weighted Evaluations

Steps:

oIdentification of the important evaluative factors

o Consensus on the important evaluative factors

o Specifying with precision the evaluative factors

o Reach consensus on the weighting of each of the evaluative factors

o Determining the range for the rating scale

5

9

Supplier Selection

• Supplier Selection: Weighted Evaluations

Steps:

o Developing the definition for each rank in the rating scale

o Performing the rankings individually

o Developing a consensus ranking

10

Supplier Selection

• Effect of Weighting

Getting the weights right is important as it affects the selection.

Table 2

Rankings

FIRM: A B C



Manufacturing facilities (35% Weight)5= Firm has up to date tools and techniques4 = Firm has about 75% up to date tools and techniques 43 = Firm has about 50% up to date tools and techniques 3 32 = Firm has about 25% up to date tools and techniques1 = Firm has about 10% up to date tools and techniques



Criteria

6

11

Supplier Selection

• Effect of Weighting

Weights on the first 2 items change and so does the supplier selected

Rankings

FIRM: A B CCritirea



Manufacturing facilities (35% Weight)5= Firm has up to date tools and techniques4 = Firm has about 75% up to date tools and techniques 43 = Firm has about 50% up to date tools and techniques 3 32 = Firm has about 25% up to date tools and techniques1 = Firm has about 10% up to date tools and techniques



12

Supplier Selection

Platinum Box Discussion

Part 1

o Referring to Platinum Box, develop an agreed upon the list of evaluative factors, rankings, and weighting for each of the options.

7

13

Supplier Selection

• Product Types

Routine Order

Procedural Problem

Performance Problem

Political Problem

o These effect the evaluative factors selected and the importance of those factors

14

Supplier Selection

• Supplier Selection: Total Cost Approach

Steps:

o Risk Assessment Level

- Determine relevant risk factors- Assign risk rankings (pass/fail)- Decision on overall pass fail- If pass go to the next two steps

8

15

Supplier Selection


Steps:

o Business Desirable Factors Level

- Determine relevant business desirable factors- Determine scoring range- Assign scores

o Total Cost Level

- Enumerate total costs

o

16

Supplier Selection


Steps:

o Decision Level

- Examine risk level (for passing firms), businessdesirable factors, and total costs.

- Make decision

9

17

Supplier Selection

Platinum Box – continued

Part 2

o What type of product is the new printing press?o Make the supplier selection for Platinum Box using

the total cost framework.o Prepare the case report

18

Supplier Selection

• Single versus Multiple Sourcing

Reasons to Single Source:

o Supplier has exclusive rightso Supplier quality advantageo Reduce internal procurement costso Small ordero Inventory costso Discounts – larger ordero Lower logistics costso Faster product development

10

19

Supplier Selection

• Single versus Multiple Sourcing

Reasons to Multiple Source:

o Suppliers on their toeso Minimizes risk form supplier failureo A single supplier may not be able to meet the needo Test new supplierso Reduce potential of supplier leverage

20

Supplier Selection

• Perfect Number of SuppliersBenefits:

o Improved delivery o Cost reduction

Concerns:

o May overshoot

11

21

Supplier Selection

• Should Platinum Box use a single or mutliplesources? Why? Why not?

• If they continued to single source with JabaKing what would the effect be on their negotiating position?

22

Session Objectives

Identify potential supply sources.

Produce a supplier evaluation matrix.

Describe different types of products.

Connect the product type with supplier selection criteria.

Understand the elements of the total cost approach of selecting suppliers.

12

23

Session Objectives

Describe factors that suggest using a single source for a good or service.

Describe the factors that suggest using multiple sources for a good or service.

Understand the difficulties in negotiating in a sole source situation.

Defend a single versus multiple source decision.

1

1

Session 9Supplier Development and

Certification

2

Session Agenda

1. Procurement performance monitoring2. Supplier development3. Objectives of supplier certification4. Benefits of certification5. Steps in supplier certification6. Product development cycle times7. Group exercise (marked): Supplier

Certification8. Case Discussion: Fisher & Paykel

2

3

Session Objectives

1. Describe the best practices in procurement performance measurement.

2. Specify procurement performance measures for an organization.

3. Identify the many types of supplier development approaches.

4. Describe the benefits of supplier development.

4

Session Objectives

5. Present information related to the objectives of supplier certification.

6. Present information related to the benefits of supplier certification.

7. Apply the general steps in the supplier certification process.

8. Describe the use of product cycle times in supplier performance management.

3

5


Does your organization use strategic purchasing performance measures? If so which ones?If not, should it use them? Why?What supplier development activities does your organization engage in?How has supplier development affected your organization’s performance, if at all?Does your organization engage in supplier certification? Why or why not?How has supplier certification affected your organization’s performance, if at all?What are some of the problems of certification? Have they occurred in your organization?Does your organization use product cycle times for supplier evaluation? Why or why not?

6

Discussion Questions, continuedDiscussion Questions, continuedFisher and Paykel Ltd.

Assume you are Alan Day and you have to consider the following questions only:

Is this an attractive order for Walton?Why might Walton have had a delivery problem in November and December?Is this team approach the best way to solve the problem?What Supplier development activities would you recommend in thiscase?How do you think Walton will respond?

4

7


• Procurement Performance Evaluation

8 Elements of Best Practices:

o Align the measures with corporate goals.

o Establish comprehensive measures.

o Set aggressive dynamic targets

o Make the measures transparent and known.

8



8 Elements of Best Practices:

o Link targets to performance based incentives.

o Provide the necessary resources.

o Provide systems to support the measures.

o Provide leadership.

5

9



Types of Measures

o Price/Cost

o Revenue

o Inventory

o Availability

o Technology. Innovation and New Product/Process Introduction measures

10



Types of Measures

o Quality

o Workforce

o Operational

o Customer satisfaction

o Supplier

6

11


• Select a firm from your group.

Describe potential measures that could be applied to measure procurement performance.

Describe problems you might expect to occur as the system is implemented.

12


• Approaches to Supplier Development

Definition: “any effort of a firm to increase the performance ad/or capabilities to meet the firm’s short and long term supply needs”

Approaches

o Evaluation feedbacko Supplier visits at buyero Buyer visits at suppliero Verbal or written requests to improveo Future benefitso Formal evaluationo Supplier competition

7

13


• Approaches to Supplier Development

Approaches

o Current benefitso Certificationo Achievement recognitiono Training and educationo Investment

14


• Supplier Development

What types of supplier development activities does your organization engage in?

What are the pros and cons of each?

8

15


• Supplier Certification

Objectives

o Promote cooperation

o Reduce # of suppliers

o Develop technology/products

o Other

16



BenefitsObjective Benefit

Improve Quality Lower rejection rates and reduced inspection costs

Establish long term relationships

Contracts length increase, supplier change frequency decrease

Reduce price/cost The most prevalent result is no change in price, where prices change, more often it is a decrease than an increase

Improve on-time delivery The most common effect was improved on time delivery, followed by no change in on-time delivery.

Promote co-operation Co-operation improved significantly

9

17



Benefits

Objective Benefit Reduce Suppliers Significant reduction in the number of

suppliers Develop Technology/Product Development

In terms of technology sharing there was little difference when it came to sharing technology with all firms. With closely linked firms there was greater sharing of technology with certified firms. In terms of product development, certifying firms were more likely to involve suppliers in product development.

18


• Does your organization engage in supplier certification? Why or why not?

•How has supplier certification affected your organization’s performance, if at all?

•What are some of the problems of certification that have occurred in your organization?

10

19



Steps

o Commitment to a new philosophy

o Setting goals and objectives

o Establishing a certification team

o Involving suppliers

20



Steps

o Measurement (Implementation)

o Agreement

o Maintenance

11

21


Group exercise (marked): Supplier Certification

Select an organization from your group.

Prepare a brief summary of how you would apply each of the steps in certification for one of its key suppliers.

22


Discussion – Supplier Development: Fisher and Paykel

What supplier development activities would you recommend in this case?

How do you think Walton will respond?

12

23


• Product Development Cycle Times

Conclusions:

o Quality is primary factor in selection and evaluation

o Cycle times are important

o Location influences cycle time

o Trust and commitment are important factors

24


• Product Development Cycle Times

Will supplier certification improve cycle times?

13

25

Session Objectives

Describe the best practices in procurement performance measurement.

Specify procurement performance measures for an organization.

Identify the many types of supplier development approaches.

Describe the benefits of supplier development.

26

Session Objectives

Present information related to the objectives of supplier certification.

Present information related to the benefits of supplier certification.

Apply the general steps in the supplier certification process.

Describe the use product cycle times in supplier performance management.

1

1

Session 10Services Procurement

2

Session Agenda

1. Services are different2. Procurement involvement: services are the same3. Services spend analysis4. Individual exercise (not marked): Services Spend

Analysis5. Specification: statements of work6. Individual exercise (marked): Services

Procurement - Statement of Work7. Specification: service level agreements8. Review requirements for Boeing Australia case

(session 11)

2

3

Session Objectives

1. Describe the unique aspects of services procurement.

2. Describe the tactical and strategic considerations related to services procurement.

3. Assess the need for procurement’s involvement in services buying.

4. Conduct a services spend analysis.

4

Session Objectives

5. Outline the elements of a statement of work

6. Prepare a statement of work

7. Outline the elements of a service level agreement

8. Prepare a service level agreement

.

3

5


What types of services do we buy in our organization?How are they different from goods?Is the procurement procedure different in my organization for these? What are the differences?If procurement is not involved or only indirectly involved in buying services, what would the benefits of more direct involvement? What steps would you take to increase involvement? My organization has prepared a statement of work for…..My organization has prepared a service level of agreement for…...

6


• Services are different

Less tangible

Not storable

Quality measurement is different

Lower traceability

Produced and consumed simultaneously

More complex

4

7



Considerations relative to goods

o Target and total costs

o Specification statements weaker

o Quantity purchases

o Price negotiation

o Performance (supplier) evaluation

8



Considerations relative to goods

o Poor specs cause poor control

o Problems with measurement when internally produced – carries over to outsourced

o Moral hazard – scope creep

o Lack of professional management

o Added cost concerns

5

9


• What types of services do we buy in our organization?

• How are they different from goods?

10


• Services are the same

Same basic process

o Need recognitiono Need descriptiono Sourcing o Supplier selectiono Orderingo Monitoring o Receipt and Inspectiono Paymento Documentationo Relationship management

Except

6

11


• Need description a little different.

• Receipt and inspection a little different.

12


•Is the procurement procedure different in my organization for these? What are the differences?

•If procurement is not involved or only indirectly involved in buying services, what would the benefits of more direct involvement?Need description a little different.

•What steps would you take to increase procurement’s involvement?

7

13


• Spend analysis reviewed

Definition: Metrics related to the commodities and services purchased, the suppliers used, and the internal customers.

Both the $ spend and # of spends be analyzedTriggers be used to establish supplies for targetingThe analysis occur in three dimensions:

o Commodities and serviceso Supplierso Customers

14

Spend Analysis


Heath’s Triggers for action

o High dollar value of commodities or serviceso High number of transactions for commodities or

serviceso High dollar value for supplierso High number of transaction for supplierso High dollar value for internal customerso High number of transactions for internal customerso High percentage of sole sourceo A combination of any of these

8

15

Spend Analysis


Supports strategy through:

o Reducing cost through volume discountso Reducing cost by leveraging bargaining positiono Seeking better quality o Seeking better responsiveness from supplierso Uncovering process improvements potentialo Uncovering opportunities to enter into stronger

relationships o Increasing focus on what goods and services are

strategic

16

Spend Analysis

• Barriers to spend analysis

Disparate computer systems Data problems (incomplete, inaccurate or inconsistent)Determining the appropriate classification plan for the analysisResistance to changeInadequate resource levelsSetting unrealistic goals

9

17


• Spend Analysis

Same as for goods spendIssue: May be more disbursed through

organization

18


Individual exercise (not marked)Services Spend Analysis for Your OrganizationPrepare the following information:

1. Does your organization perform spend analysis for services? 2. What is an example in your organization of direct spend on services? Indirect spend? 3. What are the benefits and constraints to performing a spend analysis for services in your organization?4. Why is spend analysis for services important in your organization?Develop a list of benefits and constraints to services spend analysis. Be prepared to share your findings with the class.

10

19


Approach to Preparing Statements of Work

Use a cross functional team

Provide background

Describe objectives

Detailed, clear description of requirements

Describe deliverables

Describe quality and timing of deliverables

20


Approach to Preparing Statements of Work

Expected delivery schedule

Describe performance monitoring…project management

Key contacts and responsibilities

Describe performance metrics

Information related to charges, costs, payments

Other matters

11

21


Individual exercise (marked): Statement of Work

For a service buy for your organization, or an organization of your choice, prepare a statement of work. Choose a service that can later use for a service level agreement.

o Use a cross functional teamo Provide backgroundo Describe objectiveso Detailed, clear description of requirementso Describe deliverableso Describe quality and timing of deliverableso Expected delivery scheduleo Describe performance monitoring…project managemento Key contacts and responsibilitieso Describe performance metricso Information related to charges, costs, paymentso Other matters

22


• Approach to Service Level Agreements

Start up

Involve key players

Key contacts and responsibilities

Identify need and expectations

Define service levels

Establish performance indicators

12

23


• Approach to Service Level Agreements

Confirm mutual issues

Determine costs and terms

Agree on agreement framework

Establish review framework

Create and sign agreement

24


Service Level Agreement

Prepare a service level agreement for the service that you previously defined a statement of work for.

Undertake the following steps:

o Identify need and expectationso Define service levelso Establish performance indicatorso Determine costs and termso Establish agreement frameworko Establish review framework

13

25

Session Objectives

Describe the unique aspects of services procurement.

Describe the tactical and strategic considerations related to services procurement.

Assess the need for procurement’s involvement in services buying.

Conduct a services spend analysis.

26

Session Objectives

Outline the elements of a statement of work.

Prepare a statement of work

Outline the elements of a service level agreement

Prepare a service level agreement.

.

1

1

Session 11e-Procurement

2

Session Agenda

1. Individual written case report: Boeing Australia Ltd.

2. Forms of e-procurement3. Pros and cons of e-procurement4. e-procurement knowledge areas5. Implementing e-procurement6. Reverse auctions: steps7. Reverse auctions: issues8. Case discussion: Boeing Australia Ltd.

2

3

Session Objectives

1. Describe electronic data interchange, e-catalogs, e-marketplaces and e-auctions.

2. Discuss the advantages of e-procurement.

3. Discuss the disadvantages of e-procurement.

4

Session Objectives

4. Lead a discussion on the many aspects of and potential of e-procurement for your organization.

5. Apply the steps in reverse auctions.

6. Assess the impact of reverse auctions on total costs and supplier relations.

3

5


Be prepared to discuss the following questions:What forms of e-procurement do you use in your organization?Should you use more? What would be the advantages?Should you decrease due to the disadvantages? What is the knowledge level in your organization related to e-procurement?In which knowledge area is it weak? Where is it strong?With respect to the 12 tips in e-procurement which ones has your organization considered? Which ones has it violated?

6

Discussion Questions, continuedDiscussion Questions, continued

Boeing Australia LimitedAre there limitations to BAL current practices? What are they?What issues need to be considered in upgrading BAL’sprocurement platform?Is the company’s size important?What are the potential costs and benefits?

4

7

e-Procurement

• What forms of e-procurement do you use in your organization?

8

e-Procurement

• Forms of e-procurement

EDI Electronic data interchange

EFT or electronic funds transfer

e-catalogs

e-marketplaces

e-auctions

5

9

e-Procurement

• What are the advantages and disadvantages of e-procurement?

10

e-Procurement

• Advantages of e-procurement

better information sharing

improved collaboration

speed

more sources

lower costs

6

11

e-Procurement

• Advantages of e-procurement

better service hours

customization

global supply chains

better monitoring, tracking

12

e-Procurement

• Disadvantages of e-procurement

difficult to quantify costs and benefits

small resource pool

security

cost barrier small/local suppliers

7

13

e-Procurement

• Disadvantages of e-procurement

if for going global then global issues apply

resistance to change

adverse effect on procurement staff

14

e-Procurement

• Required knowledge areas

Software

o Installed

o Hosted (Application Service Providers)

o Net Marketplaces

8

15

e-Procurement


Net Markets

o Openness

o Focus

o Consortium or Independent

16

e-Procurement


Content Aggregation

o Terminology

o Many aggregators

o Large supplier bias

o Complex requirements

9

17

e-Procurement


Integration with back end systems

o Complete new infrastructureo Manual integrationo Middleware

Services to net markets

Intelligent agents

Market Making technologies

18

e-Procurement

• Implementing e-procurement

So something, do it soon

Start with strategic sourcing, then apply e-procurement

Respect your legacy

Segment the supply base and apply e-sourcing tools appropriately

Start with the easy, but don’t neglect the hard.

Don’t underestimate the sweeping internal changes that e-procurement demands

10

19

e-Procurement

• Implementing e-procurement

Focus on delivering sustainable benefits

Understand your power as a market maker

Treat critical suppliers with kid gloves

Benchmark the competition

Remember there are no best practices established in e-procurement

Note that there are other unquantifiable risks and issued

20

e-Procurement

• With respect to the 12 tips in e-procurement which ones has your organization considered? Which ones has it violated?

11

21

e-Procurement

• Reverse auctions

Steps

o Define the event

o Prepare your suppliers

o Develop item specifications and auction parameters

Conduct an RFQ period

o Run the auction

22

e-Procurement

• Reverse auctions

Issues

o Suppliers view it is solely on price thus affecting quality

o Potential unethical behaviors by buyers and suppliers

o May drive long term suppliers out of the supply chain

o Adverse effect on relationship development

12

23

e-Procurement

• Discussion: Reverse Auctions

For a member of your group, set up a reverse auction for the provision of a service.

What are some of the expected cost savings?

24

e-Procurement

• Case discussion: Boeing Australia Limited

Are there limitations to BAL’s current practices? What are they?

13

25

e-Procurement


What issues need to be considered in upgrading BAL’s procurement platform?

26

e-Procurement


Is the company’s size important?

14

27

e-Procurement


What are the potential costs and benefits?

28

Session Objectives

Describe electronic data interchange, e-catalogs, e-marketplaces and e-auctions.

Discuss the advantages of e-procurement.

Discuss the disadvantages of e-procurement.

15

29

Session Objectives

Lead a discussion on the many aspects of and potential of e-procurement for your organization.

Apply the steps in reverse auctions.

Assess the impact of reverse auctions on total costs and supplier relations.

1

1

Session 12 Involving Users and Suppliers

2

Session Agenda

• P-Cards: benefits• P- Cards: considerations in implementation• Vendor (Supplier) managed inventory• Just in Time• Just in Time II• Course wrap up• Discuss module exam requirements

2

3

Session Objectives

1. Describe the benefits available through effective use of p-cards.

2. Understand the challenges related to implementing a p-card program.

3. Estimate the savings from implementing p-cards at your organization

4. Understand the dual gains to vendors (suppliers/manufacturers) and buyers possible from vendor managed inventories.

4

Session Objectives

5. Describe the benefits of a vendor managed inventory approach.

6. Develop a VMI inventory implementation plan.

7. Describe how JIT II works along with its benefits.

3

5


Are p-cards used in your organization?If they are used what steps did you go through in the implementation?What were the cost savings?What were the potential risks?Does your organization use vendor managed inventory? Why? Should your organization be using vendor managed inventory?What would be the benefits of vendor managed inventory for your organization?What steps would your organization take in implementing vendor managed inventory?What are the strategic and tactical changes I will make (or attempt to make) to my job/department/organization?What is the one most important thing I learned?

6


• Benefits of P-cards

Speed

Information availability

Employee morale

Supplier goodwill

Cost savings

Directed spend to preferred suppliers

4

7


• Considerations in p-card implementation

1. Controlling p-card behavior

2. Organizational issues

3. Integration issues

4. Implementation issues

8


• Controlling p-card behavior

Who

Dollar limits

Item types

Documentation and Approval

Other

5

9


• Organizational Issues

Location of p-card management

Encouraging use

• Integration Issues

Into data systems

Into policy systems

10


• Implementation Issues

Challenges

o Build general supporto Obtain senior management supporto Avoid over controlo Allocate sufficient resourceso Hire the right administratoro Define goalso Expand programo Report successes

6

11


• Discuss the following:

Are p-cards used in your organization?

If they are used what steps did you go through in the implementation?

What were the cost savings?

What were the potential risks?

12


• What were the cost savings your group identified?

How would they be measured?

• What were the risks you identified

How could they be mitigated?

7

13


• Vendor (Supplier) Managed Inventory

Supplier Benefits:

o Partneringo Long term relationshipso Smoothing demand

Buyer Benefits:

o Lower inventory costso Lower administrative costso Potentially improved lead times

14


• Vendor (Supplier) Managed Inventory

Steps in Implementation

o Analysiso Gaining supporto Negotiationo Developmento Testingo Implementationo Improvement

8

15


• Discuss the following:

Does your organization use vendor managed inventory? Why?

Should your organization be using vendor managed inventory?

What would be the benefits of vendor managed inventory for your organization

16


•Vendor (supplier) managed inventory

•For a goods producing organization (a member of your group) prepare a vendor managed inventory implementation plan. Identify the risks.

9

17


• JIT II

Conditions to use JIT II

o Trust based relationship with suppliero Supplier must be very goodo Supplier employee has authorityo Sufficient volume and value to make it worthwhileo Not in an area with trade secrets

18


• JIT II

Benefits to buyer of JIT II

o Reduce lead times and inventory levels o Better understanding of requirementso Easier to integrate supplier into product developmento Reduced administrative costso Reduced transportation costs

10

19


• JIT II

Benefits to supplier of JIT II

o Creates a very long relationshipo Improved communicationo Reduced transportation costs

20


• What are the strategic and tactical changes I will make (or attempt) to make to my job/department/organization (as applicable)?

11

21


• What is the one most important thing I learned?

22

Session Objectives

Describe the benefits available through effective use of p-cards.

Understand the challenges related to implementing a p-card program.

Estimate the savings from implementing p-cards at your organization

Understand the dual gains to vendors (suppliers/manufacturers) and buyers possible from vendor managed inventories.

12

23

Session Objectives

Describe the benefits of a vendor managed inventory approach.

Develop a VMI inventory implementation plan.

Describe how JIT II works along with its benefits.

24

Module 2 Exam RequirementsModule 2 Exam Requirements

See session 13 in the Candidate ManualExam case Exam instructionsExam format and content (same as written case report)

Procurement Candidate Manual SS Online

Documents

Transcript of Procurement Candidate Manual SS Online