Procurement’s Impact on Logistics Business Marketing 880 Spring 1999

1. Procurement’s Impact on Logistics Business Marketing 880 Spring 1999 Bernard J. LaLonde Steven Robeano

2. Objectives • To define purchasing, procurement & strategic sourcing • To explain how purchasing processes impact logistics operations & material flow processes • To understand the impact of improved supply chain planning on procurement & logistics operation

3. Logistics Impacts of Purchasing Function • Shrink gap between demand signal & channel actions on a continuous basis • Leverage front end of supply chain (suppliers) • process integration • customer value focus • JIT • Allow integrated metrics • time / inventory velocity • cash to cash • segment costing

4. Purchasing: Applies to the transaction functions of buying products & services at the lowest possible price. Procurement: Relates to a broader activity involving the materials management of goods & services in addition to purchasing transactions. Strategic Sourcing: Strategic sourcing takes the process further, focusing on developing channels of supply at the lowest possible total cost with alignment of purchasing activities to support company business goals. Definitions:

5. Types of Buys Types of Purchasing Activity Capital Goods Standard Rebuy Modified Rebuy Maintenance, Repair, Operations (MRO)

6. Quality Accounting/ Finance Engineering/ R&D Operations/ Manufacturing Information Systems Purchasing Marketing & Sales Logistics/ Transportation/ Warehousing Legal Information Flows Related to Procurement Source: Adapted from Lisa Ellram/Laura Birou, Purchasing from bottom line impact (Irwin), 1995

7. Why Focus on Procurement? Despite the perceived risks, changing procurement operations has significant benefits How much is it worth to: • Reduce cycle times by 20%? • Limit variability in manufacturing? • Decrease work in process inventory by more than 15%? • Reduce out of stocks by 50%? • Perform all purchasing transactions electronically?

8. Percent of value created Purchase Manufacture Distribute Industry Expendable Consumer Goods (soap, shampoo) 30-50% 5-10% 30-50% Durable Consumer Goods (cars, washing machines, PCs) 50-60% 10-15% 20-30% Heavy Manufacturing (industrial equipment, aerospace, defense) 30-50% 30-50% 5-10% Value Contribution to Supply Chain

9. Strategic Sourcing Elements of Strategic Sourcing Reduce Transaction Costs Global Sourcing Joint Product Development Promote Vendor Scale Economies Build Continuous Improvement Base of Supplier & Supplier Development Reengineering Relationships with Supplier Value Added by Supplier

10. Definition: Total Cost of Ownership Strategic Sourcing is based on the Total Cost of Ownership (TCO) which relates to “all costs associated with the acquisition, use & maintenance” of a good or service. Source: Lisa Ellram, Total Cost Modeling in Purchasing (CAPS), 1994.

11. Strategic and Operational Issues • Supplier / Product Segmentation • Supplier Certification • Accelerate Material Flow • Manufacturing Flexibility • Increase Costing Precision

12. Level Velocity Measuring Inventory Productivity

13. Impact of Improved Planning • Better production planning & coordination with suppliers • Reduction of raw material inventories through smaller, just-in-time shipments • Ability to move to vendor managed inventory (VMI) with electronic payment • Ability to move toward strategic alliances with key suppliers to focus on design, quality & TCO • Potential to move toward agile manufacturing

14. Supplier Assessment Practices Seven point Likert scale: 1 = Extensively, 7 = Very little Mean Response Rank 2.34 2.84 3.33 3.47 4.37 1 2 3 4 5 Provide Supplier with feedback evaluation results Assess supplier’s performance through formal evaluation Use a supplier certification program to certify supplier’s qualify Conduct in-depth audit of supplier’s quality processes, etc. Assess suppliers performance through informal evaluation

15. Level of Direct Involvement Activities in Supplier Firms (Seven point Likert scale: 1 = Extensively, 7 = very little) Rank Mean Response 2.48 3.08 3.20 3.68 4.22 4.35 4.77 4.78 4.95 5.16 6.54 1 2 3 4 5 6 7 8 9 10 11 Bring this supplier’s personnel to your facility Site visits by your firm to the supplier’s premises High-level meetings with the supplier’s upper management Planning and execution of joint cost savings projects Cost savings are shared with this supplier Encourage the supplier to improve its suppliers. Regular visits by your engineering personnel Dedicated Supplier development team. Allocation of your personnel Training/education of the supplier’s personnel Direct investment in the supplier’s operation

16. Summary of Key Messages • Procurement is a key function which has a major impact on total supply chain costs • The transformation from purchasing to strategic sourcing involves moving the organization toward a broad supply chain perspective & total cost of ownership focus • Utilizing a strategic sourcing approach provides opportunity for a company to capture more value from its supply chain