Current Event Assignments 2

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MGT533Chapter171.pptx

Chapter 17

Supply Function Evaluation and Trends

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Key Questions Addressed in Chapter 17

What research is needed to develop and operationalize plans and metrics?

How can the contribution of supply be captured and communicated?

What are supply trends and future challenges?

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Research Skills Needed in Supply

Collect, analyze, and synthesize information that might assist in need recognition and description

Identify potential suppliers in light of organizational goals and objectives

Perform the supplier selection process, manage the supplier relationship throughout its life, and measure the results of these activities

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Types of Studies in Supply Research

Purchased materials, products, or services (value analysis)

Commodities

Suppliers

Supply processes

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Ingredients of Effective Buying

Effective Purchasing

Decisions

Our estimated requirements (usage)

Competing demand

Raw material availability

Price history and forecasts

Cost to make (in-house supplier)

Alternative manufacturing methods

Technological change

Supplier capabilities and strategy

Supplier expansion plans

Supplier pricing methods

Quality considerations

Competitive environment

Innovation in transportation,

handling and distribution

Government regulations and

controls (current and projected)

Systems for processing

purchasing information

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Approaches Used to Conduct Supply Research

Full-time research positions

Inclusion of research as a part-time responsibility of supply personnel

Cross-functional teams to expand the knowledge base

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Effective Cross-Functional Teams

Careful selection of team members

each has something to contribute

Strong leadership

Specific objectives and expectations

communicated to each team member

Normal job responsibilities provide time and resources

Performance evaluation and reward systems

foster team participation and team performance

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Criteria for Deciding Where to Direct Research Efforts

Value of product or service - top dollar (current or projected)

Product profitability - red dollar (unprofitable)

Price/cost characteristics

Availability

Quality

Data flows

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Possible Research Topics for Value Enhancement

Specification

Standardization

Substitution

Packaging

Supplier switching

Lease or buy

Make or buy and continue making or outsource

Investment recovery

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Value Analysis

Compares the function performed by the purchased item with the cost

Goal: find a lower cost alternative

Value analysis

Cost saving possibilities on purchased items used in the ongoing production process

Can be used at all stages

Value engineering

cost saving possibilities in the design stage

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Target Costing

Target Cost = Selling Price – Desired Profit

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Commodity Studies

Provide a basis for making sound procurement decisions

Present supply management and top management with information concerning future supply and price of purchase items

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Major Areas in Commodity Studies

Current and future status of our company as a buyer

Production process alternatives

Uses of the item

Demand

Supply

Price

Strategy to reduce cost and/or ensure supply

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Topics in Supplier Research

Analysis of financial capacity

Analysis of production facilities

Service delivery capabilities

Finding new supply sources

Supplier cost analysis

Relationship classification

Quality assurance of purchased materials/services

Supplier perception survey

Supplier sales strategy

Countertrade

Supply processes

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Research Topics and Methods

Purchasing

Research

What is Acquired?

- value analysis

- target costing

- commodity studies

From Whom?

- supply base analysis

How?

- supply process analysis

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Supply Process Research

Are supply processes efficient?

Efficient supply processes reduce supply operating expenses

Research topics include:

Process administration

ensure speed and cost-effectiveness by eliminating unnecessary steps

Automate through technology solutions

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https://www.youtube.com/watch?v=c6caHzoVfDo

Speed Tape

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Supply Process Research (cont’d)

Role of people

According to quality guru W. Edwards Deming, poor processes, not people, are typically the cause of problems

Good people are instrumental in transforming a poor process into an excellent one

The supply department’s hiring, retraining, retaining, and succession planning are important aspects of supply processes

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Four Common Supply Budgets

Operations purchase budget

One year or less

An estimate of materials and services based on sales forecasts and plans

MRO budget

12-month purchase plan for MRO supplies

Capital budget

Multiyear horizon based on strategic plan for product lines or services, market share, and new ventures

Administrative or operating budget for supply function

Annual; based on anticipated supply function operating workloads

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Supply Performance Measurement Systems

Capture results throughout the supply process

strategic

operational

direct and indirect

Efficiency measures

Examples: price per unit and cost to process a P.O.

Effectiveness measures

Examples: congruence with corporate goals and customer satisfaction

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Potential Benefits of Supply Performance Appraisal

Focuses attention on priority areas for achieving objectives

Provides data for corrective action to improve performance

Develop better internal relationships by isolating problem areas

Spotlights training needs of personnel

Identifies the possible need for additional resources

Provides information to senior management about supply’s contribution

Identifies people performing at a better-than-normal level

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Challenges of Performance Measurement Systems

To develop metrics that put supply’s contributions in a language that speaks to the audience

Internally to senior management and functional/process business partners

Externally to stakeholders such as stockholders, the community, suppliers, and other supply chain members

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12 Guidelines for Establishing a Supply Measurement System

Measures need to be designed for use at a point in time

Each organization has specific measurement needs at a given point in time

Measures should address financial results, supplier performance, IT systems and internal practices and policies

Measures must change as required

Trend analysis is often useful

Measures should not be overdone or underutilized

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12 Guidelines for Establishing a Supply Measurement System (cont’d)

Measures are only tools

Benchmarking is a source of new ideas and metrics

Senior management must see value in the metrics used

Metrics show supply effectiveness and areas needing improvement

Ensure the credibility of metrics

Continuous improvement in supply depends on metrics

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Common Efficiency Metrics

Attempt to measure how much is done at a set dollar amount or in a period of time

Average dollar cost of a purchase order:

Dollar cost of operating the department

Number of POs issued

Operating costs as a percentage of total dollar volume of purchases

Operating costs as a percentage of total dollar volume of sales

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Common Effectiveness Metrics

Attempt to measure how well something is done

Include direct and indirect contributions to:

final customer satisfaction

profit

revenue enhancement

asset management

En-route or interim measures might include:

the quality of supplier relationships

levels of internal business partner satisfaction

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Major Topics for Supply Operating Reports

Market and economic conditions and price performance

Inventory investment changes

Purchasing/supply operations and effectiveness

Operations affecting administration and financial activities

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Cost Metrics

Cost savings

Cost reductions

Cost avoidance

Process cost savings

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Six Challenges for Validating Cost Savings

Systems that don’t account for savings

Changes in markets, technologies and volumes

Unwillingness to recognize cumulative savings

Incomplete definition of supply savings

Inability to convert savings into profit

Reluctance to revisit past decisions

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Overcoming Measurement and Reporting Challenges

Focus on the total cost of ownership

Categorize the different types of savings

Hardwire savings to the budget

Source: Johnson, P.F. and M.R. Leenders, “Minding the Supply Savings Gaps,” MIT Sloan Management Review, 2010, vol. 51, no. 2, 25-31.

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Appraising Team Performance

Each team member’s manager evaluates individual

manager may be evaluating from a distance

inconsistency across managers

Team members evaluate each other

may lack objectivity

A joint evaluation or 360-degree process

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Supply Performance Benchmarking

A process of evaluating a company’s work methods, processes, service levels, or products and services against meaningful standards

Purpose: How are we doing compared to other firms?

Performance benchmarking

measures what results organizations have achieved

Process benchmarking

Determines how an organization achieves results

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Challenges with Supply Function Performance Measurement

No industry-wide standards of functional performance

Differences in the scope and sophistication of supply

Even within the same firm

Operational versus strategic

A historical focus on functional goals without linkages to the corporate goal-setting process

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Supply Management Trends

Emphasis on total quality management and customer satisfaction

Sustainability– environmental and social

Global versus local sourcing

Protectionism

Risk management

Safety and security

Supply processes and technology

Blockchain

Supply organizations

External and internal collaboration

Metrics and performance measurement

Innovation

Public procurement

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