Current Event Assignments 2
INealChapter 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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