Materials Management BUS 3 – 141 Supplier Selection and Supply Research and Metrics November 26, 2007

1. Materials ManagementBUS 3 – 141Supplier Selection andSupply Research and Metrics November 26, 2007

2. Agenda • Exam Review • Term Paper & Case Study • Supplier Selection • Research in Supply Management

3. Exam Review

4. Grade Distribution – Exam 2

5. Term Paper • Research Study Project: • Learning will be enhanced by observing or studying how actual organizations manage and leverage their Supply organizations. • Students may research a local company and present: • How the Supply Management function is organized • How requirements are established • How suppliers are selected and prices are negotiated • Use of Technology • Supply interaction with other functional groups in the organization • Other • Students may choose, instead, to write a research paper, using existing research sources (library, internet, etc…). Topics will be determined based on the student’s interest and after a brief discussion / proposal with the instructor. • For the local company research project, students may work alone, or in groups of two to four. For the research paper, students are to work independently.

6. Case 3: Deere Cost Management, p251, 9-1 1. FACTS OF THE CASE (Approx. 20% of Total Effort / Grade) Quantitative data (Revenue, Inventory, Costs, Employees, Divisions, etc….) 2. BUSINESS ISSUES IDENTIFIED (Approx. 20% of Total Effort / Grade) Customers, Suppliers, Internal Measurement Systems, Organization, Competitors, Supply Shortages, Price Increases, Cash Flow, etc…) 3. CONCLUSIONS (Approx. 25% of Total Effort / Grade) What has been going well? What needs improvement? 4. RECOMMENDATIONS (Approx. 35% of Total Effort / Grade) What improvements should be made? What (if any?) activities should be stopped? How can the improvements be implemented?

7. Materials ManagementBUS 3 – 141Supplier Selection Nov 26, 2007

8. Highest Level Materials Management Process Calculate HOW MUCH is Required Identify WHAT Items are Required Schedule WHEN they are Received & FROM WHOM At the LOWEST Total COST of Ownership With the Highest QUALITY and Reliability

9. How this Course supports Supply Chain Objective & Process The Right PRICE The Right SERVICE paying The Right SUPPLIER and with the The Right PLACE The Right TIME at the The Right QUANTITY at the The Right QUALITY with the

10. Before Anything Else…… Is the Supplier CAPABLE? Yes No Yes Is the Supplier MOTIVATED? No

11. Company records Catalogs (online and printed) Trade Journals and Trade Shows Advertisements Supplier and commodity directories The Internet Sales contacts and interviews Colleagues, networking, professional contacts Suppliers can be found through many sources There are GENERAL sources and COMMODITY-SPECIFIC sources

12. Factors to Consider when Selecting Suppliers Technical, Engineering and Operations • Quality History • Quality Systems • Design Engineering capability • Sustaining Engineering capability • Facilities and Equipment • Output Capacity • Ability to ramp up and down quickly • Long term potential • Flexibility and responsiveness • Track record of cost reductions • Logistics expertise

13. Additional factors to consider for STRATEGIC Suppliers Management and Financial • “Going concern” • Financial history • Balance Sheet and Income Statement • Credit worthiness • Executive and Management Team • Management controls, information systems, policies and procedures • Organization structure and decision-making • Alignment with Mission, corporate culture, values and goals • Ability to integrate procurement systems Physical Visits with Individuals outside Purchasing and Design

14. Sources and Channels

15. Dealing Direct with Manufacturer vs. another Channel Sales Channels: • Direct to Manufacturer • High volume • Influence with Design • Physical proximity less of an issue than strategic factors • Wholesale • Greater variety of products from multiple manufacturers • Pooled buying by the wholesaler can result in better availability and pricing than can be achieved directly • Generally local • Distribution • Similar to Wholesale • Frequently includes Value-Added services • Packaging • Light Assembly • Test • Retail Buying and Selling organizations deal with each Channel every day, depending on the needs and circumstances of the Business Value

16. Definitions Multiple Sourcing Items can be purchased from a variety suppliers, including Manufacturers, Distributors, Retailers, and “e-tailers” Single Sourcing While many suppliers are capable and qualified for particular items, ONE is chosen to provide all spend volume “Short List” Sourcing From a list of qualified (and interchangeable) sources, a small number of Suppliers compete for volume Sole Sourcing Critical items that require a specific technical capability and Performance must be supplied by ONLY ONE source

17. Traditional practice Keep suppliers “on their toes” Assurance of supply Capable of dealing with multiple suppliers efficiently Avoid supplier dependence on one customer Obtain a greater degree of volume flexibility Strategic considerations; e.g., military preparedness Government regulations Limited supplier capacity Opportunity to test a new supplier Supply market volatility Arguments in Favor of Multiple Sourcing * From Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin

18. Arguments in Favor of Single Sourcing • Outstanding quality or service  value • More important customer  more attention from supplier • Opportunities for discounts or lower freight costs • Orders too small to split • Cost of duplication prohibitive • Easier to schedule deliveries • JIT, stockless buying or EDI arrangements • Focus on one, not many suppliers • Prerequisite to partnering Avoid exceeding 33% of a Supplier’s total Revenue * Adapted from Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin

19. Argument in Favor of Sole Sourcing Performance of the item results in a Competitive Advantage for the Buying organization Key Implications when managing Sole Sourced items • Increased focus on supplier continuity • Greater safety stock levels • Longer term contracts • Eventual part substitution • Eventual development of new supplier(s)

20. Using Technology in Sourcing Tracking and Decisions • Planned spend percentages linked to ERP systems • Enter planned split (e.g. Supplier “A” 60%, Supplier “B” 25%, Supplier “C” 15%) • Planned Orders and Requisitions automatically tied to percentages • Eventual PO’s tied to plan • Procurement applications • Record recent volumes committed and provide reports of Planned spend vs. Actual • Ensure that contractual agreements are followed • Supplier evaluations available in formal data bases • Information on previous Quality issues easily accessible • Disputes and delays recorded • Automated Reports for periodic (Quarterly or Annual) formal assessments

21. Evaluating Supplier Performance

22. Price Delivery Quality Responsiveness (ability to flex up or down quickly) Customer Service Ease of Doing Business Key Criteria for Evaluating Suppliers The process can be FORMAL and/or INFORMAL. In either case, the following should be estimated for potential Suppliers and tracked for existing Suppliers:

23. Dynamics in Supplier Evaluation Relative weight and importance can vary. For some Items and Industries, it can be primarily Price; for others Delivery, etc QUALITY SERVICE PRICE QUANTITY DELIVERY QUALITY SERVICE PRICE QUANTITY DELIVERY QUALITY SERVICE PRICE QUANTITY DELIVERY QUALITY SERVICE PRICE QUANTITY DELIVERY

24. The Objective of Supplier Evaluation Tracking and Reporting should result in DECISIONS and ACTIONS The information should lead to: • Keeping current Supplier(s) • Selecting New Supplier(s) • Developing under-performing Supplier(s) • Negotiating future Pricing and Terms

25. Risk Factors in New Supplier Sourcing • Continuity of Supply • Time and Cost to develop new sources • Nondisclosure and Intellectual Property • Political and geographical issues CONTINUITY OF SUPPLY cannot be compromised. When qualifying a new supplier, start with Small Orders and parallel sourcing with known good sources. As new suppliers demonstrate their capability, they earn more Spend

26. Research in Supply Management

27. Reasons why organizations invest in Research The purpose is Better Prices, Better Availability, Better Quality • Price variability and volatility • Seasonality impacts • Laggards and Leaders (e.g. Petroleum based products, fashion items, etc.) • Availability and new sources • New suppliers • International suppliers • New product offerings in current supply base Supply Research focuses on PRODUCTS and SUPPLIERS beyond day-to-day Supply transactions and activities

28. Product Research • Value Analysis • Compares Function with Cost • Scope is unique items and substitutable components • Uses Cross-functional Teams • Encourages creative solutions to find alternatives • Commodity Research • Defined beyond what is traded on the commodities market (e.g. precious metals, natural resources, foods, etc..) • Used for categories of spend (computers, components, travel, equipment, etc.) • Tied to ABC classification

29. Value Analysis Topics in Product Research Most useful when addressing whether an item addresses a CORE COMPETENCY, might be OVER-ENGINEERED with Specifications and Materials, and can DIFFERENTIATE the final function with Customers • Make or Buy • Lease or Own • Continue making or outsource • Packaging • Specification • Standardization • Substitution • Supplier switching • Manufacturability • Subassemblies and Modules vs. Components

30. Demand Supply Price Ability to influence Market Prices Strategy to reduce cost and/or ensure supply Sources entering and exiting Technology Roadmaps and future substitutions Form factors Impacts on Product Life Cycles Commodity Topics for Research The research is targeted at UNIQUE NEEDS of the Business. A Computer business would research processors, video and storage products, etc.. A coffee business would focus on coffee, an automobile business on transmissions, tires, audio, etc..

31. Analysis of financial capacity Analysis of production facilities Finding new supply source Supplier cost analysis Single sourcing Supplier-purchased material quality assurance Supplier attitude survey Supplier performance evaluation Supplier sales strategy Countertrade (requirements to source local suppliers in foreign countries) Supplier Topics in Research Consistent with Supplier Selection criteria

32. Metrics: Supply Organization Performance

33. Benefits of Measurement Systems • More likely to achieve objectives by focusing on priority areas • Data collection for corrective action to improve performance • Uncovers training needs • Isolates the impact of resources on performance • Personnel • Technology • Provides information to senior management • Opportunity to recognize and reward superior performance You get what you MEASUREand what you EXPECT

34. Types of Performance Measurement Efficiency Performance to a Standard (e.g. Time to place a Purchase Order, PO’s placed per hour, etc.) Emphasis is Value-Added activities Utilization Per cent of time that is devoted to Value-Added activities Productivity Efficiency * Utilization Effectiveness The Contribution that the activity / department provides to the overall mission of the business

35. Performance to Standard (Purchase Price Variances – PPV) Performance to reduction targets Transportation Costs Relationship with Inventory levels (to avoid excessive volume buying) Purchasing operations and effectiveness Price Delivery • Number of Stock-outs • Number of Delays and Reschedules attributable to Supply issues • On-Time delivery Quality • Incoming rejections • Production scrap • Field failures Department Performance • Transaction volumes per employee • Budget compliance • Controllable Inventory

36. Purchase dollars as % of sales dollars Purchase operating expense as % of sales dollars Purchase operating expense as % of Spend Purchase operating expense per purchasing employee Purchasing employees as % of company employees Purchase spend per purchasing employee Per cent of purchase spend managed / controlled by Purchasing Total cost savings as a percent of total savings Cost avoidance savings as a percent of total savings Cost reduction savings as a percent of total savings Per cent of active suppliers accounting for 80% of purchase spend Per cent of spend with diversity suppliers Per cent of purchase spend using Strategic Alliances Technology usage Suppliers connected Spend dollars using e-procurement Spend dollars using e-auctions Spend dollars using procurement cards Benchmarks: Center for Advanced Purchasing Studies (CAPS) Very useful for general planning; most valuable when tailored to business size and industry

37. Dependent on Sales and Production Can vary as business conditions vary Specific “A” items sometimes budgeted separately Supply Department Budgets Spend (Direct and Indirect) to support Operations Maintenance, Repair, and Operating Supplies (MRO) • Budgeted at a macro level, rather than at an Item level • Often ratio-based • Enabled by Technology Capital • Tied to future technology and capacity • Requires the longest planning horizon • Generally part of cross-functional budgets and activities Administrative / Operating • Salaries • Travel • Allocations

38. Metrics: Supplier Performance

39. Cost Reductions On-Time Delivery Rejects Contribution to Design Time to Market Hitting cost targets Percent of design transferred Responsiveness Upside demand and pull-ins Downside demand and push-outs Ease of doing business Billing discrepancies Shipping discrepancies Supplier Performance Metrics Not all metrics carry the same Weight. Scorecard emphasis is generally on Quality, Cost, & Delivery Purpose is to enhance Supplier Performance and provide data for future NEGOTIATIONS

40. Metrics: Buyer Performance

41. Continuity of Supply Cost variance to standards Understanding ERP system, or other transaction systems Number of Purchase Orders Placed Understanding selected Commodities Understanding company’s industry Supplier On-Time Delivery Cycle Time between Requisition and PO placements Compliance to standards Continuing education Professional certifications Entry Level Buyer Performance Metrics

42. Understanding Production processes Cycle time to analyze MRP and issue requisitions Operations efficiency Component inventory levels Entry Level Buyer / Planner Performance Metrics Buyer metrics, plus:

43. Continuity of Supply Cost reductions Proficiency in ERP system Expertise in one (or a few) Commodities Expertise in company’s industry Number of Strategic Purchase Orders Placed Professional activities Supplier performance Supplier development Inventory Levels Experienced Buyer Performance Metrics

44. Continuity of Supply Cost reduction targets and achievements Technology usage and leadership Leadership in professional societies Leadership in company’s industry Supplier performance Supplier development New suppliers identified and utilized Commodity management Cross-functional team leadership Buyer development Department efficiency and effectiveness Strategic capacity management Professional leadership Budget performance Customer satisfaction Revenue growth and Market Share Inventory turns Purchasing Manager / Executive Metrics