Purchasing & Supply Chain Management
Chapter 1
Introduction to Purchasing and Supply Chain
Management
1
The Evolution of Purchasing and Supply Chain
Management
• The Early Years (1850 – 1900)---American railroad
• Growth of Purchasing Fundamentals (1900 – 1939)---
raw material, semi finished
• The War Years (1940 – 1946)--- Scarce material
• The Quiet Years (1947 – mid-1960s)--- Negative function
• Materials Management Era (mid-1960s – late 1970s)
• The Global Era (late 1970s – 1999)
• Integrated Supply Chain Management and Technology
(2000 – 2025)
2
A New Competitive Environment
• Increasing numbers of world-class competitors
• A more sophisticated customer base
• Demanding greater performance at a lower cost immediately
• Ability to be in constant contact – 24/7/365
• Mobile devices
• Cloud-based computing
• Real-time communication technologies
3
A New Competitive Environment
• Increased use of sophisticated technologies
• Blockchain
• Artificial intelligence and automation
• Robotics
• Widely available information sources
• Availability of low-cost alternatives – a moving target
• Outsourcing, offshoring, re-shoring, and near-shoring
4
Managing the Supply Base
• Need to actively manage supply chains
• Upstream (suppliers) and downstream (customers)
• Low cost and increased availability of information
• Level of competition
• Customer expectations and requirements
• Identification and mitigation of supply chain risk
5
Why Purchasing Is Important
• Increasing value and savings
• Building relationships and driving innovation
• Improving quality and reputation
• Reducing time-to-market
• Managing supplier risk
• Generating economic impact
• Contributing to competitive advantage
6
Increasing Value and Savings
• Improving performance
• Supplier performance and expertise helps differentiate
products and services
• Purchased content is about 55% of cost-of-goods-sold
• Early supplier involvement in product and component
design
• Proactively avoiding costs through early supplier
involvement in design of products and components
7
Building Relationships and Driving Innovation
• Traditional approach of hard bargaining for price
reductions
• Newer approach is to jointly reduce costs with suppliers
• Expect suppliers to contribute to innovate ideas to add
value
• Both supplier and buyer must receive acceptable
payback from their investments
8
Improving Quality and Reputation
• Buyer specialization on its core competencies with
supply base support based on its own expertise and
core competencies
• Non-core competencies are candidates for outsourcing to the
experts
• Greater emphasis on relationship management
• Supplier quality can dramatically impact buyer quality
• Lapses in supplier quality can potentially tarnish a buyer’s
reputation
9
Reducing Time-to-Market
• Supplier impact on product and process design and
function
• Early supplier involvement can lead to a 20%
improvement in material costs, material quality, and
new product development lead times
• Supplier suggestions can contribute to product and
process improvements
10
Managing Supplier Risk
• Supplier risk is magnified by sourcing strategies that
emphasize global sourcing, single sourcing, and lean
operations
• Need to monitor supply base for risk exposure and
develop business continuity plans to mitigate potential
risks
11
Purchasing
• A dual role
• A functional group (formal entity in the organizational chart)
• A functional activity (buying goods and services)
• Also known as procurement or acquisition
12
Purchasing
• Typical activities
• Supplier identification and selection
• Buying
• Negotiation and contracting
• Supply market research
• Supplier measurement and improvement
• Purchasing systems development
13
The Five Rights of Purchasing
• Getting the “right” quality
• In the “right” quantity
• At the “right” time
• For the “right” price
• From the “right” source
14
Supply Management
… is planning and Strategic
acquiring the current and Orientatio
n
future needs of an
organization via …
Supply
Cross-
Base
Functional
Manageme
Groups
nt
Process-
Driven
Approach
15
Supply Management – Strategic Orientation
• Has a major impact on long-term performance
• Should not pursued in isolation but aligned with overall
mission and strategies of the organization
• Is different from tactical, routine, or day-to-day activities
• Must be performed together with tactical activities
16
Supply Management – Supply Base
Management
• A broader perspective than purchasing
• Differs from the traditional “arms’ length” or adversarial
approach
• Requires buyers to collaborate with suppliers capable of
providing world-class performance
• A strategic, supercharged version of purchasing
17
Supply Management – Process-Driven Approach
• Identifying, evaluating, selecting, managing, and
developing suppliers to realize improved supply chain
performance
• Working to exceed performance of competitors
• Commonality of …
• Purchasing
• Supply management
• Strategic sourcing
18
Supply Management – Cross-Functional Groups
• Involving purchasing, engineering, supplier quality
assurance, suppliers, and other related functions
• Working together as one team, early on, to further
mutual goals
• Long-term, win-win relationships internally and
externally
• Treating the supplier as an extension of the buyer
• Recognition of mutual benefit
• Synchronization of internal and external activities
19
Supply Chains and Value Chains
• Supply chain
• A set of three or more organizations linked directly by one or more of the
upstream or downstream flows of products, services, finances, and
information from a source to a customer
• Supply chain management
• Proactively managing two-way movement and coordination of goods,
services, information, and funds from raw material through end user
• Value chain
• Composed of primary and support activities that can lead to competitive
advantage when configured properly
• A supply chain is a subset of the value chain
• Direct materials
• Indirect goods and services
20
The Extended Value Chain
Firm infrastructure
Support Human resource management
Activities Technology development
Purchasing
Materials/Services Information/Funds/Knowledge
Customers
Suppliers
Inbound Outbound Marketing & Customer
Operations
Logistics Logistics Sales Service
Primary Activities
Materials / Physical Distribution /
Supply Management Channel Management
Total Supply Chain / Total Logistics Management
21
The Supply Chain Umbrella
• Purchasing • Order processing
• Inbound transportation • Production planning,
• Quality control scheduling, and control
• Demand and supply • Shipping/Warehousing/
planning Distribution
• Receiving, materials • Outbound transportation
handling, and storage • Customer service
• Materials or inventory
control
22
Real-Time Collaborative Technology Capabilities
• Cloud-based storage systems
• Mobile devices
• Shared software platforms
• Planning software
• Execution software
• Access provided on a real-time or near real-time basis
23
Planning Software Applications
• Improve forecasting accuracy
• Optimize production scheduling
• Reduce working capital costs
• Shorten cycle times
• Cut transportation costs
• Improve customer service
24
Execution Software Applications
• Obtain materials and manage physical flows from
suppliers through downstream distribution
• Provide customers with the right products at the right
location, time, and cost
• Key to managing lean logistics, lean operations, and
lean supply
• Need for highly capable data capture, storage, and real-
time access for managerial analysis and decision-
making
25
Why Is Measurement Important?
• Supports fact-based rather than subjective decision-
making
• Communicates requirements throughout the supply
chain
• Improves future supplier performance
• Recognizes outstanding performance
• Links critical measures to desired business outcomes
• Determines if new initiatives are producing the desired
results
• Is the best tool to control purchasing and supply chain
activities and processes 26
