Supply Management and Procurement: From the Basics to Best-in-Class - Hardcover

Robert Turner (author)

Hardcover

ISBN 10: 1604270632 ISBN 13: 9781604270631

Publisher: J. Ross Publishing, 2011

Synopsis

Driven by a down economy and difficult economic realities, many organizations are discovering that what worked well in the past may not be what is needed now to move forward or even survive. This comprehensive and analytical resource draws comparisons between practicing basic procurement and the more advanced modern principles of strategic supply management, and clearly demonstrates how merely practicing the basic procurement principles and methods of the past in our new economy can lead to disastrous consequences. This valuable guide shows readers how to attain best-in-class supply management performance to help ensure survival and achieve competitive advantage. For the individuals in the trenches actually doing the work, it shows why strategic supply management and procurement practices are important to their jobs, why and how to use them, and what benefits can be derived from using them. Supply Management and Procurement: From the Basics to Best-in-Class contains proven tools and techniques and a wealth of information that procurement and supply management professionals at any level can use to improve both their organization's performance and their individual performance in real-world situations they face on a daily basis. This unique text is ideal for individual learning, corporate training, and academic course instruction.Key FeaturesProvides an extended source of knowledge, tools, and techniques to better understand the philosophy of strategic supply management and procurement, and discusses how to facilitate, implement, and manage change from a basic procurement philosophy to a strategic supply management philosophyEmphasizes the value and benefit of integrating new concepts and philosophies into current operations for cost reduction and process improvement, and increases in efficiencies that equate to higher profit margins and greater competitive advantageExamines the various analysis, tools, and techniques used by best-in class strategic supply management organizations and elaborates on each one to demonstrate how to use these tools and techniques in real-world situations so that readers can master them in practiceIncludes interactive case studies that present situational facts, background information, and research results, and then asks readers to make decisions based on all the factsWAV offers a downloadable Incoterm responsibility chart, a sourcing methodology model, a best-in-class sourcing checklist, and a comprehensive listing of supply and procurement terms and definitions - available from the Web Added Value(TM) Download Resource Center at www. jrosspub.com

About this title

About the Author

Robert W. Turner is President and CEO of Business Training Solutions which offers printed, CD-ROM, audio, and web-based training solutions to businesses that can be used to self-train employees internally on various business functions and activities such as supply management, negotiating, marketing, and other important topics. Robert was a former CEO in the coal industry and has held numerous other senior management positions over the past 40 years. He has over 30 years of successfully applied supply management and procurement knowledge in a variety of industries, including his role as a financial analyst and procurement specialist in the Strategic Sourcing department of UPS, where he was responsible for contract development, negotiations, and procurement of several hundred million dollars worth of goods and services to support UPS airline operations in 220 countries and territories.

Excerpt. © Reprinted by permission. All rights reserved.

Supply Management and Procurement

From the Basics to Best-in-Class

By Robert W. Turner

J. Ross Publishing, Inc.

Copyright © 2011 Robert W. Turner
All rights reserved.

ISBN: 978-1-60427-063-1

Contents

Preface, 
About the Author, 
Introduction, 
Chapter 1 What Is Supply Management?, 
Chapter 2 Managing Supply Management, 
Chapter 3 Supply Chain Design and Planning, 
Case Study 1 Made Better Manufacturing, 
Case Study 2 Ship Right Transportation, 
Chapter 4 Value Chain Design and Planning, 
Chapter 5 The Importance of Benchmarks in Supply Management, 
Chapter 6 Activity Process and Design, 
Chapter 7 Organizing and Prioritizing Projects, 
Chapter 8 Creating Competitive Advantage with Supply Management, 
Chapter 9 Strategic Sourcing Methodology Models, 
Chapter 10 The Importance of Critical Thinking and Strategy Development in Supply Management, 
Chapter 11 Risk Identification and Risk Management111, 
Chapter 12 Forecasting for Future Success, 
Chapter 13 Sensitivity Analysis, 
Chapter 14 Writing Appropriate and Successful RFPs, 
Chapter 15 The Importance of Negotiating the Right Agreement, 
Chapter 16 Successful Contract Management, 
Chapter 17 Supply Management and International Trade, 
Chapter 18 Make versus Buy Decisions, 
Chapter 19 Best-In-Class Strategies, Tools, and Techniques, 
Chapter 20 How to Implement and Manage Change, 
Appendix A Case Study Answers, 
Appendix B Transportation Terms and Definitions, 
Appendix C List of Formulas, 

CHAPTER 1

What Is Supply Management?

We have all heard the buzzwords supply management, supply chain management, value chain management, just-in-time, kaizen, lean, and so on. But what is supply management really? I define it as a system or process that supports an organization's total needs for the supply of goods, services, and processes required to accomplish the goals and tasks established by the organization. It is the optimization of material costs, transportation, handling, quality, reliability, and service to internal and external customers. Supply management involves the consolidation of certain business activities such as purchasing, transportation, warehousing, inventory control, quality assurance, and materials distribution into one management department. Strategic supply management, as referred to throughout this book, refers to the various tools, techniques, philosophies, and concepts that can be utilized in striving for a greater level of achievement and efficiency in a supply management and procurement environment.

But do most people really understand what these terms mean from an operational and process standpoint or from a value opportunity standpoint? Basic procurement practices of soliciting a minimum of three bids and writing a purchase order for the cheapest price may have the appearance of bringing value to an organization, and in many cases it does. However, there are risks with this type of procurement system, and an organization is most assuredly missing opportunities for increased or maximum value.

Even if your organization incorporates some or all of the concepts and philosophies available through strategic supply management, do you fully understand their implications to the success of your endeavors, the quality of your decisions, and the success of your organization? In this book we discuss supply management from a procurement perspective and focus on two of its key components: (1) supply chain management and (2) value chain management. We look at specific tools, processes, and skill sets that can be used to move individuals and organizations from basic procurement and supply activities to best-in-class strategic supply management. The concepts demonstrated here will help you achieve improved economies of scale, lower operation costs, higher profit margins, and an advantage over your competition.

Supply management is a concept and philosophy, within and of itself, that uses specialized tools and focuses on specific techniques and processes to maximize effectiveness and add value to an organization's procurement services. These activities produce increased profitability for an organization. Supply management and procurement are both cost centers in an organization's operational hierarchy, but strategic supply management and procurement also adds to an organization's profitability by engaging in processes beyond just basic procurement. Every dollar saved through effective procurement and supply management goes directly to the organization's bottom line.

You probably have heard the rule of thumb that the selling price of goods and services would have to be increased by five dollars to equal every dollar saved by procurement. The assumption for this statement is true; the amount would depend on how efficient an organization was and how effectively they practiced strategic supply management. Less efficient organizations would realize less benefit and more efficient organizations would realize more benefit. The beauty of this phenomenon is that less efficient organizations can become more efficient and profitable by changing their philosophies and culture and begin practicing strategic supply management and procurement. As the title suggests — Supply Management and Procurement: From the Basics to Best-in-Class — this book describes current basic procurement processes and operations. Additionally, it presents the tools and techniques that can be used to move to a strategic supply management and procurement role that will allow any organization to become best-in-class.

Supply management can be both tactical and strategic. Tactical procurement is a reaction to a need or requirement. Examples of tactical procurement are buying to replenish inventory or fulfill specific organizational requirements. Strategic procurement goes further by analyzing what the need is, how it fits into the organizational structure, and, most importantly, whether opportunities exist that might add extra value through operational reorganization and process improvement.

There are five main components of supply management and procurement that are the key performance drivers:

1. Cost

2. Quality

3. Time

4. Reliability

5. Technology

For an organization to realize and maximize the greatest value opportunity potential, it must consider all key performance drivers before making any decision regarding the selection of activities and processes that will be used in the strategy.

You may be asking 'Isn't supply management and purchasing the same thing?' Not necessarily. Supply management and purchasing are two different concepts although there can be some overlap. Supply management can be a separate business unit or it can be incorporated into the procurement business unit. Supply management encompasses much more than just purchasing. It can also involve logistics. Broadly defined, logistics is the management of the procurement and flow of goods and services along the supply chain from the point of origin to the point of consumption. This includes systems and infrastructure required for movement (transportation and material handling) and storage (inventory) of raw materials. It also includes parts, services, and finished goods that move through an organization and its outside channels to maximize performance and effectiveness. For the purpose of this book we approach supply management from the standpoint of being a function and process of the procurement business unit.

Purchasing — or procurement — is an entity on the organizational chart responsible for buying goods and services that the organization needs to carry out its business. How procurement performs its job determines the effectiveness and value it has to the organization. Basic functions performed by procurement and purchasing are:

• Supplier identification and selection

• Supply market research

• Bidding and buying (creating purchase orders)

• Negotiating and contracting

• Supplier measurement and performance

Supply management is a much broader concept. It manages the supply base in a progressive and aggressive manner. Although procurement frequently has ownership of supply management, it is actually a cross-functional approach and may involve representatives from the following entities, if applicable:

• Purchasing

• Receiving

• Warehousing and shipping

• Transportation

• Production or operations

• Maintenance

• Engineering

• Industrial engineering (IE)

• Marketing

Other pertinent business functions may also be added while others may be eliminated, depending on the type and structure of the business. The purpose of supply management is to identify, evaluate, select, and manage processes, suppliers, and customer relationships (both internal and external) to maximize and improve processes and efficiencies. It is a mandate of supply management to add extra value that will benefit the organization, through their actions, by improving profitability and creating competitive advantage.

As previously noted, two important components of supply management are supply chain management and value chain management. Supply chain management looks at all of the links in the supply chain from the birth of a product until its death — when it is sold or completely used up. It is a primary component of supply management, but it can also be practiced as a standalone process. Some companies might not choose to practice supply management as a total business unit, rather they may opt to incorporate supply chain management as part of their purchasing or procurement business unit. This is perfectly acceptable and depends entirely on the structure of the business.

There are many tools and resources used in a successful strategic supply management model and environment, including:

• Price analysis: Comparison of prices between suppliers and against external benchmarks with no direct knowledge of supplier costs.

• Total cost analysis: Includes additional costs associated with a buy or transaction such as the life of a part (mean time before failure), transportation, tariffs, special packaging (if applicable), warehousing (inventory), and quality control.

• Total cost of ownership analysis: The total value of all costs associated with an item over the life of the item. These costs include but are not limited to:

• Purchase price — amount paid for the item

• Acquisition costs — all costs incurred to acquire the item

º Employee time and total compensation

º Heat, light and power, telephone, building rent or cost, and other overhead

º Internet and online procurement platforms and services

º Engineering and/or implementation costs

º Transportation costs, taxes, tariffs, and so forth

º End-of-life and disposal costs

• Usage cost analysis — costs associated with converting or using the item or service

º Receiving, stocking, storage, requisition, picking, and shipping costs

º Installation (if applicable)

º Removal and repair costs (if applicable)

• End-of-life cost analysis — costs associated with end-of-life and disposal

º Removal or disposal costs

º Shelf life expiration (write off)

º Beyond economical repair determination (write off)

º Hazmat costs (if applicable)

• Financial analysis: An analysis of suppliers' (bidders') financial capabilities and soundness that includes but is not limited to:

• Dun & Bradstreet reports — D & B shows credit ratings, credit score, accounts payable, delinquency history, risk of failure by industry, and financial stress, among others

• Annual reports — published annual reports of publicly held companies show:

º Income statements

º Balance sheets

º Cash flow statements

º Summary of how the company did the previous fiscal year and plans for forthcoming year(s)

• Internal financial analysis — calculates financial risks, payback periods, and so forth and is typically performed by an organization's accounting and finance department

• Technical Analysis: An analysis of the physical characteristics of the item or service includes but is not limited to:

• Meets organizational minimum requirements

• Lead time

• Reliability (average time before failure or other measure)

• Repair turnaround time, if applicable

A strategic sourcing model or methodology is a good source for developing procurement project strategy. It is a process road map that helps identify strategy steps and keeps you on course throughout the project. A proven strategic sourcing methodology or model is presented in Chapter 9. Although we discuss this in more depth later, it is important to understand that when using models that cover more than the basics that all tasks listed in the model may not be used in every procurement project. Furthermore, some not listed may need to be added, depending on the needs of the procurement project and your organization. The model does cover most of the basics. There will always be variations since every procurement project is different and each will have its own peculiarities.

CHAPTER 2

Managing Supply Management

In Chapter 1 the question of what supply management is was answered and examples of some of the strategic tools and techniques were presented. Now, and throughout this book, we are going to discuss how to specifically manage supply management and the procurement business unit to provide maximum efficiency, process improvement, and profitability to an organization.

There is a substantial distance between basic procurement and best-inclass strategic supply management. Basic is self-explanatory and is just that, basic. No frills, no extra effort, no real strategy, no extensive research, no in-depth analysis, simply get the job done and buy at the cheapest price. Basic does work for many organizations and it does supply some value. But the big secret is that doing more (strategic supply management) offers substantial benefits in the form of higher cost savings, improved efficiencies, and increased profitability for the organization.

Best-in-class describes an organization that is practicing strategic supply management to its maximum potential and is recognized as a leader in strategic supply management and procurement practices. It also means that a best-in-class organization is using its maximum potential to realize the greatest benefits and achieve a competitive advantage over its competition. They are leaving nothing on the table but rather taking it all. The purpose of this book is to present philosophies and processes that companies can use to become supply management best-in-class organizations.

The first step in managing supply management is to take a look at what you are managing now and how you are managing it. It is helpful to develop an activity and process map to help you understand what you are presently doing and how you are doing it. Activity and process maps are covered in more detail in Chapter 6. It is also beneficial to ask and answer questions about your current activities and processes.

Step 1. Determining current activities and processes:

• What are the current activities and processes that procurement is performing?

• Do we have and use a supply management philosophy and methodology in our present procurement operations?

• What is it exactly?

• Do we use supply chain management?

• Would using supply chain management be beneficial to my organization and add extra value and improve efficiencies?

• What level of supply chain management are we practicing?

• How efficient is our supply chain management?

• Do we use value chain management?

• Would using value chain management be beneficial to my organization and add extra value, improve efficiencies, and allow me to recognize opportunities for improvement?

• What level of value chain management are we practicing?

• Do we know the total costs of goods and services we are buying (price of goods plus other associated costs such as internal costs, procurement activities, transportation, warehousing, distribution, etc.)?

• Do we know the total cost of ownership of the goods and services?

• Cost of money to purchase or lease

• Cost in money, time, and resources of owning over the life of the goods or equipment

• Depreciation

• Inventory costs (receiving, warehousing, picking, and packaging)

• Shipping and transportation costs to receive goods and deliver finished products to customers

• Costs for setup, operation, ongoing maintenance (repairs), and disposal of goods or equipment

• Do we know the cost of raw materials and parts that our suppliers are paying to make the goods we buy from them?

Step 2. Developing a strategic supply management philosophy:

• What is our present organizational culture and will it support philosophical change?

• What level of supply management do we want to practice?

• Will practicing strategic supply management add extra value and improve efficiencies for our organization?

• Review and learn all of the various tools and techniques that can be used in strategic supply management and determine which ones would have an application in your particular situation.

• What will be the estimated cost of reengineering the business unit and adding strategic supply management processes?

• Initial costs

• Ongoing costs

Step 3. Identifying organizational culture:

• What is the current organizational culture?

• What is the organization's current mission statement?

• What are the organization's current long-term strategies?

• What are the organization's current goals?

• Is the current organizational culture compatible or comfortable with change?

• Will there be senior management support for changing practices and processes to add more value and improve efficiencies?

Step 4. Developing strategies for change:

• What is required to change the current organizational culture if needed?

• What specifics of the organizational culture need to be changed?

• What resources would be required to develop and implement change?

• What is the estimated time line for change implementation?

Step 5. Business unit design:

• Based on what the current supply management or procurement activity and process maps show, what specific activities should be reengineered?

• What specific philosophies, techniques, activities, and processes should be added?

• What would the reengineered procurement business unit look like?

• Create a redesigned activity and process map.

• Would new job functions and/or responsibilities be added?

• What new job functions would be added?

• What new responsibilities would be added?

(Continues...)

Excerpted from Supply Management and Procurement by Robert W. Turner. Copyright © 2011 Robert W. Turner. Excerpted by permission of J. Ross Publishing, Inc..
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Edition details

• Publisher: J. Ross Publishing
• Publication date: 2011
• Language: English
• ISBN 10: 1604270632
• ISBN 13: 9781604270631
• Binding: Hardcover
• Number of pages: 272