Purchasing and supply chain management 4th edition

PURCHASING AND SUPPLY
CHAIN MANAGEMENT
Fourth Edition

Robert M. Monczka
Arizona State University and
CAPS Research

Robert B. Handfield
North Carolina State University

Larry C. Giunipero
Florida State University

James L. Patterson
Western Illinois University

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Purchasing and Supply Chain
Management, 4e

© 2009 South-Western, a part of Cengage Learning

Robert M. Monczka, Robert B. Handfield,
Larry C. Giunipero, James L. Patterson

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To Shirley, Kathleen, Thomas, and Elliana
ROBERT M. MONCZKA
To Sandi, Simone, and Luc
ROBERT B. HANDFIELD
To Tressa, Jan, Matthew, Michael, and Amanda
LARRY C. GIUNIPERO
To Diane, Lindsay, Karl, Drew, and Seth
JAMES L. PATTERSON


Brief Contents

Preface xxiii

Part 1

Introduction 1
Chapter

Part 2

Part 3

1

Purchasing Operations and Structure 35
Chapter
Chapter
Chapter

2
3
4

Chapter

5

Chapter

6

Chapter
Chapter
Chapter

7
8
9

Chapter 13
Chapter 14
Chapter 15

Strategic Cost Management 382
Purchasing and Supply Chain Analysis: Tools and
Techniques 423
Negotiation 459
Contract Management 496
Purchasing Law and Ethics 538

Critical Supply Chain Elements 583
Chapter 16
Chapter 17
Chapter 18
Chapter 19

iv

Supply Management and Commodity Strategy
Development 188
Supplier Evaluation and Selection 233

Supplier Quality Management 271
Supplier Management and Development: Creating a
World-Class Supply Base 306
Worldwide Sourcing 343

Strategic Sourcing Process 381
Chapter 11
Chapter 12

Part 5

The Purchasing Process 36
Purchasing Policy and Procedures 85
Supply Management Integration for Competitive
Advantage 110
Purchasing and Supply Chain Organization 153

Strategic Sourcing 187

Chapter 10

Part 4

Introduction to Purchasing and Supply Chain
Management 2

Lean Supply Chain Management 584
Purchasing Services 621
Supply Chain Information Systems and Electronic
Sourcing 665

Performance Measurement and Evaluation 705


Brief Contents

Part 6

v

Future Directions 741
Chapter 20

Purchasing and Supply Strategy Trends 742

Cases 769
Case
Case
Case
Case
Case
Case

1
2
3
4
5
6

Avion, Inc. 770

The Global Sourcing Wire Harness Decision 773
Managing Supplier Quality: Integrated Devices 776
Negotiation—Porto 779
Purchasing Ethics 780
Insourcing/Outsourcing: The FlexCon Piston
Decision 783

Index 795

v


Contents
Preface xxiii

Part 1

Introduction 1
Chapter

vi

1

Introduction to Purchasing and Supply Chain
Management 2
A New Competitive Environment 5
Why Purchasing Is Important 6
Understanding the Language of Purchasing
and Supply Chain Management 8

Purchasing and Supply Management 8
Supply Chains and Value Chains 10
Supply Chains Illustrated 12
Achieving Purchasing and Supply Chain Benefits 15
The Supply Chain Umbrella 15
Management Activities 15
Four Enablers of Purchasing and Supply
Chain Management 17
Capable Human Resources 19
Proper Organizational Design 19
Real-Time and Shared Information
Technology Capabilities 20
Right Measures and Measurement Systems 21
The Evolution of Purchasing and Supply Chain
Management 21
Period 1: The Early Years (1850–1900) 22
Period 2: Growth of Purchasing Fundamentals
(1900–1939) 22
Period 3: The War Years (1940–1946) 23
Period 4: The Quiet Years (1947–Mid-1960s) 23
Period 5: Materials Management Comes of Age
(Mid-1960s–Late 1970s) 24
Period 6: The Global Era (Late 1970s–1999) 25
Period 7: Integrated Supply Chain Management
(Beyond 2000) 25
Looking Ahead 26
Good Practice Example: Taking an Entrepreneurial
Approach to Purchasing at Babson College 26

Contents

Part 2

vii

Purchasing Operations and Structure 35
Chapter

2

The Purchasing Process 36
Purchasing Objectives 38
Objective 1: Supply Continuity 38
Objective 2: Manage the Purchasing Process
Efficiently and Effectively 39
Objective 3: Develop Supply Base Management 39
Objective 4: Develop Aligned Goals with Internal
Functional Stakeholders 40
Objective 5: Support Organizational Goals and
Objectives 40
Objective 6: Develop Integrated Purchasing
Strategies That Support Organizational Strategies 40
Purchasing Responsibilities 41
Evaluate and Select Suppliers 41
Act as the Primary Contact with Suppliers 42
Determine the Method of Awarding Purchase
Contracts 42
E-Procurement and the Procure to Pay Process 42
Forecast and Plan Requirement 44

Needs Clarification: Requisitioning 46
Supplier Identification and Selection 54
Approval, Contract, and Purchase Order
Preparation 58
Receipt and Inspection 65
Invoice Settlement and Payment 67
Records Maintenance 68
Continuously Measure and Manage Supplier
Performance 68
Re-engineering the Procure to Pay Process 68
Types of Purchases 69
Raw Materials 70
Semifinished Products and Components 70
Finished Products 70
Maintenance, Repair, and Operating Items 70
Production Support Items 71
Services 71
Capital Equipment 71
Transportation and Third-Party Purchasing 73
Improving the Purchasing Process 74
Online Requisitioning Systems from Users to
Purchasing 74
Procurement Cards Issued to Users 74


viii

Contents

Electronic Purchasing Commerce through the

Internet 75
Longer-Term Purchase Agreements 75
Online Ordering Systems to Suppliers 75
Purchasing Process Redesign 77
Electronic Data Interchange 77
Online Ordering through Electronic Catalogs 77
Allowing Users to Contact Suppliers Directly 78
Good Practice Example: Sourcing Process at Federal
Express 78
Conclusion 82

Chapter

3

Purchasing Policy and Procedures 85
Policy Overview 87
What Are the Advantages and Disadvantages
of Policies? 87
What Makes for an Effective Policy? 88
Purchasing Policies—Providing Guidance
and Direction 89
Policies Defining the Role of Purchasing 89
Policies Defining the Conduct of Purchasing
Personnel 91
Policies Defining Social and Minority
Business Objectives 94
Policies Defining Buyer-Seller Relationships 98
Policies Defining Operational Issues 100
Purchasing Procedures 103

Purchasing Procedural Areas 105
Good Practice Example: Best Practices in Diverse
Supplier Development 106
Conclusion 108

Chapter

4

Supply Management Integration for Competitive
Advantage 110
Integration: What Is It? 114
Internal Integration 116
Supply Management’s Internal Linkages 116
External Integration 121
Supply Management’s External Linkages 121
Collaborative Buyer-Seller Relationships 122
Advantages of Closer Buyer-Seller
Relationships 122
Obstacles to Closer Buyer-Seller
Relationships 123
Critical Elements for Supplier Relationship
Management 125


Contents

ix

The Critical Role of Cross-Functional

Sourcing Teams 127
Benefits Sought from the Cross-Functional
Team Approach 128
Potential Drawbacks to the Cross-Functional
Team Approach 130
When to Form a Cross-Functional Team 131
Improving Sourcing Team Effectiveness 132
Integrating Supply Management, Engineering, and
Suppliers to Develop New Products and Services 137
Common Themes of Successful Supplier
Integration Efforts 137
Supplier Integration into Customer Order
Fulfillment 143
Supplier Suggestion Programs 143
Buyer-Seller Improvement Teams 144
On-Site Supplier Representative 145
Potential Benefits of On-Site Supplier
Representatives 146
Good Practice Example: Caterpillar Works with Delco
to Achieve Mutually Beneficial Outcomes 148
Conclusion 150

Chapter

5

Purchasing and Supply Chain Organization 153
Purchasing’s Position within the Organizational
Structure 156
Factors Affecting Purchasing’s Position in the

Organizational Hierarchy 156
To Whom Does Purchasing Report? 157
Organizing the Purchasing Function 158
Specialization within Purchasing 158
Purchasing Department Activities 161
Separating Strategic and Operational
Purchasing 163
Placement of Purchasing Authority 164
Factors Influencing Centralized/Centrally Led
or Decentralized Structures 166
Advantages of Centralized/Centrally Led Purchasing
Structures 167
Advantages of Decentralized Purchasing 169
A Hybrid Purchasing Structure 170
Organizing for Supply Chain Management 174
A Supply Chain Management Structure 175
Using Teams as Part of the Organizational
Structure 175
Creating the Organization of the Future 178


x

Contents

Good Practice Example: Air Products and Chemicals
Organizes to Meet Global Challenges 182
Conclusion 184

Part 3

Strategic Sourcing 187
Chapter

6

Supply Management and Commodity Strategy
Development 188
Aligning Supply Management and
Enterprise Objectives 190
Integrative Strategy Development 192
Translating Supply Management Objectives into
Supply Management Goals 193
What Is a Category Strategy? 195
Conducting a Spend Analysis 196
Spend Analysis Spreadsheet 198
Category Strategy Development (Strategic
Sourcing) 203
Step 1: Build the Team and the Project
Charter 204
Step 2: Conduct Market Research on
Suppliers 204
Step 3: Strategy Development 210
Step 4: Contract Negotiation 215
Step 5: Supplier Relationship Management 217
Types of Supply Management Strategies 218
Supply Base Optimization 218
Supply Risk Management 218
Global Sourcing 220
Longer-Term Supplier Relationships 220

Early Supplier Design Involvement 221
Supplier Development 221
Total Cost of Ownership 221
E-Reverse Auctions 221
Evolving Sourcing Strategies 222
Phase 1: Basic Beginnings 223
Phase 2: Moderate Development 224
Phase 3: Limited Integration 224
Phase 4: Fully Integrated Supply Chains 225
Observations on Supply Management Strategy
Evolution 225
Good Practice Example: Commodities Forecasting:
It’s All in Your Head 226
Conclusion 230


Contents

xi

Chapter

7

Supplier Evaluation and Selection 233
The Supplier Evaluation and Selection Process 236
Recognize the Need for Supplier Selection 236
Identify Key Sourcing Requirements 237
Determine Sourcing Strategy 237
Identify Potential Supply Sources 238

Sourcing Alternatives 243
Limit Suppliers in Selection Pool 244
Determine the Method of Supplier Evaluation
and Selection 245
Select Supplier and Reach Agreement 247
Key Supplier Evaluation Criteria 248
Management Capability 249
Employee Capabilities 249
Cost Structure 250
Total Quality Performance, Systems, and
Philosophy 251
Process and Technological Capability 251
Environmental Regulation Compliance 251
Financial Stability 252
Production Scheduling and Control Systems 253
E-Commerce Capability 254
Supplier’s Sourcing Strategies, Policies,
and Techniques 254
Longer-Term Relationship Potential 254
Developing a Supplier Evaluation
and Selection Survey 255
Step 1: Identify Supplier Evaluation
Categories 256
Step 2: Assign a Weight to Each Evaluation
Category 257
Step 3: Identify and Weigh Subcategories 258
Step 4: Define a Scoring System for Categories
and Subcategories 258
Step 5: Evaluate Supplier Directly 259
Step 6: Review Evaluation Results and Make

Selection Decision 259
Step 7: Review and Improve Supplier Performance
Continuously 261
Supplier Selection 261
Critical Issues 261
Reducing Supplier Evaluation and Selection
Cycle Time 262
Tools and Approaches 263


xii

Contents

Good Practice Example: Eaton Corporation Wins
Purchasing Medal of Excellence through Supplier
Management 264
Conclusion 268

Chapter

8

Supplier Quality Management 271
Overview of Supplier Quality Management 273
What Is Supplier Quality? 273
Why Be Concerned with Supplier Quality? 275
Factors Affecting Supply Management’s Role in
Managing Supplier Quality 276
Supplier Quality Management Using a Total Quality

Management Perspective 278
Defining Quality in Terms of Customers
and Their Requirements 279
Deming’s 14 Points 279
Pursuing Quality at the Source 283
Stressing Objective Rather Than Subjective
Measurement and Analysis 284
Emphasizing Prevention Rather Than
Detection of Defects 285
Focusing on Process Rather Than Output 285
Basics of Process Capability 287
Striving for Zero Defects 288
Cost of Quality 289
Establishing Continuous Improvement as a Way of
Life 289
Making Quality Everyone’s Responsibility 290
Pursuing Six Sigma Supplier Quality 292
Using ISO Standards and MBNQA Criteria to Assess
Supplier Quality Systems 294
ISO 9000:2000 Registration 294
ISO 14000 Standards 296
The Malcolm Baldrige National Quality Award 296
Good Practice Example: Supplier Certification at
Alcoa 298
Conclusion 302

Chapter

9

Supplier Management and Development: Creating a
World-Class Supply Base 306
Supplier Performance Measurement 308
Supplier Measurement Decisions 309
Types of Supplier Measurement Techniques 311
Rationalization and Optimization: Creating a
Manageable Supply Base 316


Contents

xiii

Advantages of a Rationalized and Optimized
Supply Base 317
Possible Risks of Maintaining Fewer
Suppliers 319
Formal Approaches to Supply Base
Rationalization 320
Summary of Supplier Rationalization and
Optimization 322
Supplier Development: A Strategy for
Improvement 324
A Process Map for Supplier Development 325
Supplier Development Efforts That Sometimes
Don’t Work 327
Overcoming the Barriers to Supplier
Development 328
Buyer-Specific Barriers 328
Buyer-Supplier Interface Barriers 331

Supplier-Specific Barriers 332
Lessons Learned from Supplier Development 334
Good Practice Example: Supplier Measurement Helps
FedEx Manage a Worldwide Supply Base 336
Conclusion 339

Chapter 10

Worldwide Sourcing 343
Worldwide Sourcing Overview 347
Why Source Worldwide? 348
Barriers to Worldwide Sourcing 350
Progressing from Domestic Buying to International
Purchasing 353
Information about Worldwide Sources 353
Supplier Selection Issues 355
Cultural Understanding 356
Language and Communication Differences 356
Logistical Issues 357
Legal Issues 357
Organizational Issues 361
Countertrade Requirements 362
Costs Associated with International
Purchasing 364
Currency Risk 367
Progressing from International Purchasing to Global
Sourcing 369
Factors Separating Successful from LessSuccessful Global Sourcing Efforts 370
Global Sourcing Benefits 374
Future Global Sourcing Trends 375

xiv

Contents

Good Practice Example: Air Products Manages
Worldwide Sourcing 376
Conclusion 378

Part 4

Strategic Sourcing Process 381
Chapter 11

Strategic Cost Management 382
A Structured Approach to Cost Reduction 385
Price Analysis 390
Market Structure 391
Economic Conditions 391
Pricing Strategy of the Seller 392
Market-Driven Pricing Models 393
Using the Producer Price Index to Manage
Price 397
Cost Analysis Techniques 399
Cost-Based Pricing Models 400
Product Specifications 400
Estimating Supplier Costs Using Reverse Price
Analysis 401
Break-Even Analysis 404

Total Cost of Ownership 408
Building a Total Cost of Ownership Model 408
The Importance of Opportunity Costs 409
Important Factors to Consider When Building
a TCO Model 411
Example of a TCO Model 412
Collaborative Approaches to Cost Management 412
Target Pricing Defined 413
Cost-Savings Sharing Pricing Defined 414
Prerequisites for Successful Target and Cost-Based
Pricing 414
When to Use Collaborative Cost Management
Approaches 415
An Example of Target Pricing and Cost-Savings
Sharing 416
Good Practice Example: A Computer Manufacturer
Brings in the Voice of the Customer and the Voice of
the Factory 417
Conclusion 420

Chapter 12

Purchasing and Supply Chain Analysis: Tools and
Techniques 423
Project Management 425
Defining Project Success 426
Project Phases 426


Contents

xv

Chapter 13

Project Planning and Control Techniques 430
Rules for Constructing a Project Management
Network 431
Project Management Example: Sourcing
Strategy 433
Project Management with Time Estimates 435
Learning-Curve Analysis 438
Components of the Learning or Experience
Curve 438
When to Use the Learning Curve 439
Learning Curve Illustrated 441
Learning-Curve Problem 442
Value Analysis/Value Engineering 442
Who Is Involved in Value Analysis? 444
Tests for Determining Value in a Product or
Service 445
The Value Analysis Process 445
Quantity Discount Analysis 447
Quantity Discount Analysis Illustrated 447
Process Mapping 447
Process Mapping Illustrated 451
Good Practice Example: Lean Takes Off at Cessna 454
Conclusion 457
Negotiation 459
What Is Negotiation? 461

Negotiation Framework 464
Identify or Anticipate a Purchase
Requirement 464
Determine If Negotiation Is Required 464
Plan for the Negotiation 467
Conduct the Negotiation 468
Execute the Agreement 469
Negotiation Planning 470
Develop Specific Objectives 470
Analyze Each Party’s Strengths and
Weaknesses 470
Gather Relevant Information 471
Recognize Your Counterpart’s Needs 471
Identify Facts and Issues 472
Establish a Position on Each Issue 472
Develop the Negotiation Strategy and
Accompanying Tactics 473
Brief Other Personnel 474
Practice the Negotiation 474
Power in Negotiation 474


xvi

Contents

Chapter 14

Sources of Negotiation Power 475
Concessions 476

Negotiation Tactics: Trying to Reach Agreement 478
Win-Win Negotiation 481
Good Practice Example: Mack Trucks Uses
Negotiation to Rev Up Its Sourcing Process 482
International Negotiation 485
Selected Countries 487
The Impact of the Internet on Negotiations 490
Good Practice Example: Texas Instruments Provides
Its Procurement Professionals with Comprehensive
Global Negotiation Skills and Enhanced Cultural
Understanding 491
Conclusion 492
Contract Management 496
Introduction 499
Elements of a Contract 501
How to Write a Contract 506
Types of Contracts 507
Fixed-Price Contracts 507
Cost-Based Contracts 509
Considerations When Selecting Contract
Types 512
Long-Term Contracts in Alliances and
Partnerships 513
Benefits of Long-Term Contracts 513
Risks of Long-Term Contracts 515
Contingency Elements of Long-Term
Contracts 517
Nontraditional Contracting 518
IT Systems Contracts 518
Minority- and Women-Owned Business Enterprise

Contracts 520
Consulting Contracts 521
Construction Contracts 523
Other Types of Contracts 524
Settling Contractual Disputes 526
Legal Alternatives 526
Arbitration 528
Other Forms of Conflict Resolution 528
Good Practice Example: The Top Ten Most Frequently
Negotiated Terms Reveal Continued Focus on
Failure 532
Conclusion 535


Contents

xvii

Chapter 15

Part 5

Purchasing Law and Ethics 538
Legal Authority and Personal Liability of the
Purchasing Manager 541
Laws of Agency 541
Legal Authority 542
Personal Liability 542
Contract Law 544
Essential Elements of a Contract 544

The Purchase Order—Is It a Contract? 547
Cancellation of Orders and Breach of
Contract 549
Damages 551
Acceptance and Rejection of Goods 552
Honest Mistakes 553
The Uniform Commercial Code 554
Purchasing Law before the UCC 554
Warranties 556
Transportation Terms and Risk of Loss 559
Seller’s and Buyer’s Rights 560
Patents and Intellectual Property 561
Other Laws Affecting Purchasing 565
Laws Affecting Antitrust and Unfair Trade
Practices 565
Laws Affecting Global Purchasing 566
Purchasing Ethics 567
Risks of Unethical Behavior 568
Types of Unethical Purchasing Behavior 569
Influence and Ethics 571
ISM Professional Code of Ethics 571
Supporting Ethical Behavior 573
Corporate Social Responsibility 574
Good Practice Example: Eaton’s CEO Talks Openly
about Ethics 577
Conclusion 579

Critical Supply Chain Elements 583
Chapter 16

Lean Supply Chain Management 584
Understanding Supply Chain Inventory 587
Types of Inventory 587
Inventory-Related Costs 588
Inventory Investment—Asset or Liability? 590
The Right Reasons for Investing in Inventory 593
Avoid Disruptions in Operational Performance 593
Support Operational Requirements 594


xviii

Contents

Support Customer Service Requirements 594
Hedge against Marketplace Uncertainty 594
Take Advantage of Order Quantity Discounts 595
The Wrong Reasons for Investing in Inventory 596
Poor Quality and Material Yield 596
Unreliable Supplier Delivery 596
Extended Order-Cycle Times from Global
Sourcing 597
Inaccurate or Uncertain Demand Forecasts 597
Specifying Custom Items for Standard
Applications 598
Extended Material Pipelines 598
Inefficient Manufacturing Processes 599
Creating the Lean Supply Chain 600
The JIT Perspective of Waste 601
The JIT Perspective on Inventory 602

Just-in-Time Purchasing 604
Just-in-Time Transportation 605
Just-in-Time Kanban Systems 606
Approaches for Managing Inventory Investment 607
Achieve Perfect Record Integrity 608
Improve Product Forecasting 609
Standardize and Simplify Product Design 610
Leverage Companywide Purchase Volumes 612
Use Suppliers for On-Site Inventory
Management 612
Reduce Supplier-Buyer Cycle Times 612
Delivering the Perfect Customer Order 613
Material Requirements Planning System 614
Distribution Resource Planning System 614
Supply Chain Inventory Planners 615
Automated Inventory Tracking Systems 615
Good Practice Example: Managing Low-Value
Inventory for High-Value Savings at Lockheed 615
Conclusion 618

Chapter 17

Purchasing Services 621
Transportation Management 623
Deregulation of Transportation and Supply
Management’s New Role 625
A Decision-Making Framework for Developing a
Transportation Strategy 626
Performance-Based Logistics 640
Outsourcing Logistics to Third-Party Logistics

Providers 642
Select Providers 642


Contents

xix

Chapter 18

Gain Access to Critical and Timely Data 644
Develop Systems Visibility to Material
Shipments 644
Develop Closer Relationships with Fewer
Providers 644
Establish Companywide Contracts 645
Purchasing Services and Indirect Items 646
Internal Methods of Managing Indirect Spend 648
External Methods of Managing Indirect
Spend 650
Enabling Tactics and Strategies 650
Sourcing Professional Services 653
Have a Clearly Defined Scope 653
Move to a Centralized Procurement Structure 654
Develop a Professional Services Database 654
Develop a Sound Procedure for Evaluation
and Selection of Consultants 655
Optimize the Supply Base 656
Develop a Standardized Contract 656
Monitor Results 656

Develop Policy Compliance 657
Service Supply Chain Challenges 657
Good Practice Example: Bank of America’s Document
Management Services 658
Conclusion 661
Supply Chain Information Systems and Electronic
Sourcing 665
Evolution of E-SCM Systems 668
An Overview of the E-Supply Chain 669
Supply Chain Information Flows 669
Drivers of New Supply Chain Systems
and Applications 675
Internal and External Strategic Integration 675
Globalization and Communication 675
Data Information Management 675
New Business Processes 676
Replacement of Legacy Systems 676
Strategic Cost Management 676
Enterprise Resource Planning Systems 676
Implementing ERP Systems 678
Purchasing Databases and Data Warehouses 681
Technology for Electronic Communication
between Buyers and Sellers 683
Electronic Data Interchange 683
EDI and the Internet 685


xx

Contents

E-Sourcing Suites 686
E-Sourcing Basics 687
E-Sourcing Models 687
Supplier Relationship Management 687
Spend Analysis 688
Contract Management and Compliance 692
Supplier Performance Measurement and
Control 693
Total Cost Reporting 693
E-Sourcing and Supply: Fully Integrated
Systems 694
What Is Information Visibility? 694
Dell’s Information Visibility System: The
Benchmark 697
Benefits of Information Visibility 697
Good Practice Example: Deploying Information
Visibility Systems at a Tier 1 Automotive
Company 698
Conclusion 701

Chapter 19

Performance Measurement and Evaluation 705
Purchasing and Supply Chain Performance
Measurement and Evaluation 708
Why Measure Performance? 709
Problems with Purchasing and Supply Chain
Measurement and Evaluation 709
Purchasing and Supply Chain Performance

Measurement Categories 711
Price Performance Measures 713
Cost-Effectiveness Measures 715
Revenue Measures 716
Quality Measures 716
Time/Delivery/Responsiveness Measures 717
Technology or Innovation Measures 718
Physical Environment and Safety Measures 719
Asset and Integrated Supply Chain Management
Measures 719
Administration and Efficiency Measures 720
Governmental and Social Measures 722
Internal Customer Satisfaction Measures 722
Supplier Performance Measures 722
Strategic Performance Measures 722
Developing a Performance Measurement and
Evaluation System 724
Determine Which Performance Categories to
Measure 724


Contents

xxi

Develop Specific Performance Measures 724
Establish Performance Objectives for Each
Measure 727
Finalize System Details 728
Implement and Review System Performance

and Measures 728
Performance Benchmarking: Comparing Against the
Best 729
Benchmarking Overview 729
The Benchmarking Process 731
Balanced Scorecard for Purchasing and Supply 733
A Summary of Purchasing Measurement and
Evaluation Characteristics 733
System Characteristics 734
Human Resource Characteristics 735
Good Practice Example: Using Measurement to Drive
Continuous Supply Chain Improvement at Accent
Industries 735
Conclusion 737

Part 6

Future Directions 741
Chapter 20

Purchasing and Supply Strategy Trends 742
Expanding the Mission, Goals, and Performance
Expectations 744
Developing Category Strategies Will Become Broader
and More Complex 746
Strategy Formulation and Selection 748
Outsourcing of Non–Core Competencies 749
Concluding Observations 749
Developing and Managing Suppliers as a Truly
Extended Part of the Organization 750

Improving Supplier Relationships 751
Concluding Observations about Supply Base
Management 752
Designing and Operating Multiple Supply Networks to
Meet Customer Requirements 753
Concluding Observations 753
Leveraging Technology Enablers Takes on Additional
Focus 754
Linking Collaboration Tools to Product Life Cycle
Management 754
Concluding Observations 756
Collaborating Internally and Externallly Will Grow in
Strategic Importance 756


xxii

Contents

Obtaining Innovation 757
Concluding Observations 757
Attracting, Developing, and Retaining Supply
Management Talent Will Become a Key Differentiator
for Success 757
Current and Future Supply Management
Skills 758
Cross-Functional Skills and Teaming 758
Cross-Cultural Skills 760
“Soft-Side” Skills 760
Concluding Observations 760

Managing and Enabling the Future Supply
Management Organization and Measurement
Systems 761
Measuring Supply Management Performance 762
Concluding Observations 763
Twelve High-Impact Sourcing and Supply Chain
Strategies for 2009–2015 763
Good Practice Example: Cessna Transforms to
Achieve Leading-Edge Sourcing and Supply
Status 764
Conclusion 766

Cases 769
Case 1

Avion, Inc. 770

Case 2

The Global Sourcing Wire Harness Decision 773

Case 3

Managing Supplier Quality: Integrated Devices 776

Case 4

Negotiation—Porto 779
Negotiation Session Requirements 779

Case 5

Purchasing Ethics 780

Case 6

Insourcing/Outsourcing: The FlexCon Piston
Decision 783

Index 795


Preface
The Fourth Edition of Purchasing and Supply Chain Management is the culmination
of ongoing discussions and research with purchasing and supply chain executives and
managers across many industries from around the world. In this edition, we have combined our experience and research to further enhance a managerial perspective of the
core tasks and challenges required to effectively manage the purchasing function within
the context of an integrated supply chain. Although prior editions have dealt with many
components of obtaining goods and services, we have created an integrated text that
helps managers develop purchasing and supply chain strategies that contribute to overall
business objectives. This new edition includes a number of innovative subjects that have
been developed as a result of recent research projects undertaken by the authors.
Some of the subjects that are newly introduced or expanded upon in this edition
include:
• Cross-functional teaming
• Purchasing and supply performance measurement
• Supplier integration into new product development
• Digitizing purchasing through electronic procurement systems and full
e-sourcing and supply
• Supplier development

• Strategic cost management and total cost of ownership
• B2B electronic commerce and e-reverse auctions
• Enterprise resource planning
• Third-party logistics
• Price analysis tools and techniques
• Negotiation simulations
• Contracting and Internet law
• Creating the lead supply chain
• Emerging strategies and practices
• Expanded and comprehensive cases
We are proud of this new edition and believe that it reflects many new themes that
are only beginning to emerge in industries worldwide.

Course Description
Purchasing and Supply Chain Management is intended for college and university
courses that are variously entitled purchasing, materials management, supply chain
management, sourcing management, and other similar titles. The text is also well suited for training seminars for buyers, and portions of it have been used in executive
education forums. Chapters have been used in both undergraduate and M.B.A. classes
in purchasing, e-commerce, operations management, and logistics. Some instructors
may also elect to use sections of the book for a class in operations management or
logistics.
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Preface

The text is appropriate for either an elective or a required course that fulfills the
American Assembly of Collegiate Schools of Business (AACSB) requirements for coverage of materials management issues. Most of the cases included in the book are

based on actual companies and have all been used and modified through classroom
use by the authors.

Course Objectives
Depending on the placement of a course in the curriculum or the individual instructor’s philosophy, this book can be used to satisfy a variety of objectives:
1. Students should be made aware of the demands placed on purchasing and supply chain managers by business stakeholders.
2. As prospective managers, students need to understand the impact of purchasing and supply chain management on the competitive success and profitability
of modern organizations.
3. Students should appreciate the ethical, contractual, and legal issues faced by
purchasing and supply chain professionals.
4. Students must understand the increasingly strategic nature of purchasing, especially the fact that purchasing is much more than simply buying goods and
services.
5. Students entering or currently in the workforce must understand the influence
of purchasing on other major functional activities, including product design,
information system design, e-commerce, manufacturing planning and control,
inventory management, human resource development, financial planning,
forecasting, sales, quality management, as well as many other areas.

Unique to This Edition
Many of the insights and topics presented throughout this book are based on examples developed through discussions with top purchasing executives and from various
research initiatives, including research published by CAPS Research, work at the
North Carolina State University Supply Chain Resource Consortium, and a project on
supplier integration funded by the National Science Foundation. In addition, the text
has a chapter format that includes an opening vignette, a set of sourcing snapshots,
and a concluding good practice example that illustrates and integrates each chapter’s
topics. These new case studies and examples provide up-to-date illustrations of the
concepts presented throughout each chapter.
The concept of teaming is emphasized throughout this book. Many of the case exercises require a team effort on the part of students. We recommend that the instructor have students work in teams for such projects to prepare them for the team environment found in most organizations.

Structure of the Book

This book is subdivided into six parts and 20 chapters that provide thorough coverage of purchasing and supply chain management.