Introduction to operations and supply chain management 3e bozarth chapter 07s

Supply Management
Chapter 7


Chapter Objectives
Be able to:
 Identify and describe the various steps of the strategic sourcing process.
 Perform and interpret the results of a simple spend analysis.
 Use portfolio analysis to identify the appropriate sourcing strategy for a
particular good or service.
 Describe the rationale for outsourcing and discuss when it is appropriate.
 Perform a simple total cost analysis.
 Show how multicriteria decision models can be used to evaluate suppliers
and interpret the results.
 Understand when negotiations should be used and the purpose of
contracts.
 Describe the major steps of the procure-to-pay cycle.
 Discuss some of the longer-term trends in supply management and why
they are important.
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Supply Management
 Supply Management – The broad set of
activities carried out by organizations to
analyze sourcing opportunities, develop
sourcing strategies, select suppliers, and carry
out all the activities required to procure
goods and services.

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Why is
Supply Management critical?
 Global Sourcing
 Competition against global competitors and their
supply chains.
 Advances in information systems have helped.

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Why is
Supply Management critical?
 Financial Impact

Table 7.1

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Why is

Supply Management critical?
 Financial Impact
 Cost of goods sold – The purchased cost of goods from
outside suppliers.
 Merchandise inventory – A balance sheet item that shows
the amount a company paid for the inventory it has on
hand at a particular point in time.
 Profit margin – The ratio of earnings to sales for a given
time period.
 Return on assets (ROA) – A measure of financial
performance defined as Earnings/Total Assets
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Profit Leverage – Example 7.1
 Financial Impact
Selected Financial
Data for Target
Corporation
Table 7.2

Profit Margin = 100% X ($4,629 / $65,786) = 7%
Return on Assets = 100% X (4,629 / $17,213) = 26.9%

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Profit Leverage – Example 7.1
 Financial Impact
 Every dollar saved in purchasing lowers COGS by
$1 and increases pretax profit by $1.
• Profit leverage effect – A term used to describe the
effect of $1 in cost savings increasing pretax profits by
$1 and a $1 increase in sales increasing pretax profits
only by $1 multiplied by the pretax profit margin.

 Every dollar saved in purchasing lowers the
merchandise inventory figure – and as a result,
total assets – by $1.
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Profit Leverage – Example 7.1
3% purchasing reduction in COGS
Earnings and Expenses

Sales
COGS
Pretax earnings

Current

Reflecting Savings

$65,786
$45,725
$4,629

$65,786
$44,353
$6,001

Selected Balance Sheet Items
Merchandise inventory
$7,596
Total assets
$17,213

$7,368
$16,985

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Pretax earnings
increase by $1372
(30%)

ROA increases
from 26.9% to
35.3%

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Why is
Supply Management critical?
 Performance Impact
 Purchased goods can have a major effect on other
dimensions such as quality and delivery
performance.

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Performance Impact – Example 7.2
Sourcing dialysis machine valves

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Performance Impact – Example 7.2
 Effect of defective dialysis machine





Interruption in patient treatment
Rescheduling difficulties
Reduction in the effective capacity for dialysis

Possible medical emergencies

Estimated cost of a failed valve = $1,000

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Performance Impact – Example 7.2
Sourcing 50 dialysis machine valves
(Total Costs)

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The Strategic Sourcing Process

Figure 7.1

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Assess Opportunities
 Spend Analysis – The application of
quantitative techniques to purchasing data in

an effort to better understand spending
patterns and identify opportunities for
improvement.

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Assess Opportunities – Example 7.3
Examine the trends and
impact of spending.

Table 7.3

Figure 7.2
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Profile Internally and Externally
 Two approaches to creating profiles:
 Category profile – An approach to understand all
aspects of a particular sourcing category that
could ultimately have an impact on the sourcing
strategy.
 Industry Analysis – An approach to provide a more
detailed understanding of the characteristics of
the external supply base.

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Develop the Sourcing Strategy
 The Make-or-Buy Decision
 A high-level, often strategic, decision regarding
which products or services will be provided
internally and which will be provided by external
supply chain partners.
• Insourcing – The use of resources within the firm to
provide products or services.
• Outsourcing – The use of supply chain partners to
provide products or services.

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Develop the Sourcing Strategy
Advantages and Disadvantages of
Insourcing and Outsourcing

Table 7.6
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Develop the Sourcing Strategy
Factors that affect the decision
to Insource or Outsource.

Table 7.7

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Develop the Sourcing Strategy
 Total cost analysis – A process by which a firm
seeks to identify and quantify all of the major
costs associated with various sourcing
options.
 Direct costs – Costs tied directly to the level of
operations or supply chain activities.
 Indirect costs – Costs that are not tied directly to
the level of operations or supply chain activity.

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Develop the Sourcing Strategy
Insourcing and Outsourcing Costs

Table 7.8
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Develop the Sourcing Strategy
 Portfolio analysis – A structured approach
used by decision makers to develop a
sourcing strategy for a product or service,
based on the value potential and the relative
complexity or risk represented by a sourcing
opportunity.

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Develop the Sourcing Strategy
 Portfolio Analysis
 The Routine Quadrant – Readily available products or services (small %
of total).
• Electronic Data Interchange
 The Leverage Quadrant – Standardized and readily available products
or services (large % of total).
• Preferred suppliers
 The Bottleneck Quadrant – Unique or complex products or services
supplied by few suppliers.

 The Critical Quadrant - Unique or complex products or services
supplied by few suppliers, representing large % of total.

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Develop the Sourcing Strategy
Portfolio Analysis
High
Complexity
or Risk
Impact

Bottleneck

Critical

Routine

Leverage

Low
Low

High
Value Potential

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