Purchasing at a Cost

What to measure: Quantitative variables: Delivery, Quality, Cost reduction,Compare to standards and goals, Measurement and reporting frequency ,Uses of measurement data

Measurement and Reporting Frequency

Reporting frequency to buyer

Day-to-day performance for troubleshooting and expediting

Reporting frequency to supplier

Routinely summarized monthly or quarterly

Annual face-to-face meeting

Never delay reporting supplier’s poor performance

Use of Measerment Data

Identify poor performing suppliers

Support supply base optimization and rationalization efforts

Determine future purchase

Identify performance improvement opportunities

Make sourcing decisions

Measurement Techniques

Categorical system

Assign rating evaluation for each category of performance

May be completed by buyer, other internal users, or combination

Minimal insight provided

Often significant variance between subjective ratings

Advantages

Easy to implement

Requires minimal data

Different personnel contribute

Good for firms with limited resources

Low-cost system

Disadvantages

Least reliable

Less frequent generation of evaluations

Most subjective

Usually manual

Users

Smaller firms

Firms in the process of developing an evaluation system

Weighted-point system

Weighs and quantifies scores across different performance categories

Weights can be adjusted depending on needs

Need to carefully select categories

Need to choose proper weights

Need to develop a set of decision rules

Advantages

Flexible system

Supplier ranking allowed

Moderate implementation costs

Quantitative and qualitative factors combined into single system

Disadvantages

Tends to focus on unit price

Requires some computer support

Users

Most firms can use this approach

Cost-based system

Most thorough and least subjective

Seeks to quantify total cost of doing business with given supplier

Challenge

Identifying and recording appropriate costs that result when supplier fails to perform as expected

Logic is based on calculation of supplier performance index (SPI)

Advantages

Total cost approach

Specific areas of supplier non-performance identified

Objective supplier ranking

Greatest potential for long-range improvement

Disadvantages

Detailed cost accounting system required

Most complex

Implementation costs are high

Computer resources required

Users

Larger firms

Firms with large supply base

Each system differs in terms of …

Ease of use

Level of decision subjectivity

Required system resources

Implementation cost

SPI Calculation Total Surplus+Nonperformance Costs/Total Purchases

SPI has base value of 1.0

It is total cost index calculated for each item or commodity provided by supplier

Supplier Development Defined “Any activity undertaken by a buyer to improve a supplier’s performance or capabilities to meet the buyer’s short- and long-term supply needs”

Steps To Supplier Deveolpement

1. Identify critical commodities for development
2. Identify critical suppliers for development
3. Form cross-functional development team
4. Meet with supplier’s top management team
5. Identify opportunities and probability for improvement
6. Define key metrics and cost-sharing mechanisms
7. Reach agreement on key projects and joint resource requirements
8. Monitor status of projects and modify strategies as appropriate

 Overcoming Barriers to Supplier Development

• Direct-involvement activities (hands’ on)

• Shared personnel in joint projects
• Incentives and awards (the “carrot”)
• Increase future order volumes
• Annual award ceremonies
• Warnings and penalties (the “stick”)
• Pull back current business
• Withhold future business

Buyer-Specific Barriers

• Barrier

Buying company’s purchase volume from supplier does not justify development investment

Solution

Parts standardization across products

Single sourcing

Political Risk

• Country stability
• Regional stability
• Political party and government stability
• Legal differences
• Intellectual property rights
• Political elections
• Military actions
• Civil disturbances
• Terrorism
• Trade balance issues
• Duties and tariffs

Market Risk

• Number of buyers competing for supplier’s goods, services, and capabilities
• Increasingly shorter product life cycles
• Threat of emerging technologies
• Maintaining trade secrets and intellectual properties

Sourcing Risk

• Longer supply pipelines
• Potential for supply disruption
• Level of supplier competition
• Communication and time differences
• Suppliers shared with competitors

Financial Risk

• Inventory carrying costs
• Currency exchange rate fluctuations
• “Soft” vs. “hard” currencies
• Terms of sale or INCOTERMS

Supplier Risk

• Financial stability and future viability

• Early detection
• Sources of information
• Replacement supplier evaluation and selection

• Supplier capabilities
• Mergers and acquisitions

Inventory

• Traditional method of dealing with risk
• Requires maintenance of the “right” mix of products
• Inventory carrying costs
• Reactive, short-term focus only

Multiple Sourcing

• More competitive marketplace
• Alternative sources of supply
• Upside volume potential
• Added product variability
• Need for total cost of ownership analysis

Third-Party Intermediaries

• International freight forwarders
• Non-vessel operating common carriers
• Export management companies
• Export packers
• Goods surveyors
• Export trading companies

Scenario Analysis

• Attempt to explore and prepare for possible future risk scenarios
• “What if” planning or “rehearsing the future”
• Creation of focused contingency plans prior to an actual risk occurrence
• Need to periodically review and update

Currency Hedging

• Protects domestic currency value of a future foreign currency cash flow
• Protects against major swings in currency exchange rates
• Futures and forward exchange contracts

Choice of Transaction Currency

• Transaction values in buyer’s currency

• Supplier bears currency exchange risk

• Transaction valued in supplier’s currency

• Buyer bears currency exchange risk

Insurance

• Every international shipment should be insured
• Goods in international trade subject to much higher risk of loss or damage
• Insufficient insurance coverage often discovered only after loss occurs
• Not every loss can be fully covered

Supply Chain Risk Management

• How supply chain members communicate and collaborate regarding sources of risk, utilizing risk management tools to mitigate and minimize risk and uncertainty across supply chain
• Systems approach to identify, assess, and develop appropriate risk responses

SCRM Capabilities

• Visibility

• Integrating with and deploying analytics gathered from ERP systems data

• Event recognition and early warning system

• Ability to react quickly and effectively in early stages of risk event

SCRM Capabilities

• Broad mix of real-time supply chain analytics

• Simulating models of risk events
• Suggesting risk mitigation strategies
• Evaluating different risk responses

• Critical evaluation of competing scenario responses

Ch12

What Is a Project

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