Supply & Organization Strategy

(CHAPTER 2)
Effective organizational planning occurs at three distinct yet interconnected levels:
Corporate, Business Unit, and Function. Supply strategy plays a pivotal role in linking
market dynamics to organizational needs, ensuring both current and future requirements are
met.

Organizational & Supply Objectives

Organizational objectives typically encompass survival, growth, financial performance,
and environmental/social responsibility. Supply objectives, however, are often articulated
in terms of quality, quantity, delivery, price, and service.

챌린지 Challenges in Setting Supply Strategy

Setting effective supply objectives and strategies involves three primary challenges:

1. Interpreting Objectives: Accurately understanding and translating corporate and

supply objectives.
2. Action Plan Selection: Choosing the most appropriate strategy or action plan to
achieve these objectives.
3. Feedback Integration: Incorporating feedback on supply chain issues back into
overarching organizational objectives and strategies.

Six Major Supply Strategy Areas

Supply strategies are broadly categorized into six crucial areas, each contributing to the
organization's overall success:

1. Assurance of Supply:
o Ensuring that future needs for materials and services are consistently met.
o Focuses on maintaining high quality and adequate quantity.
o Mitigates risks of disruption and scarcity.
2. Cost Reduction:
o Aiming to lower the total cost of acquisition and use of goods and services.
o Goes beyond unit price to include all associated expenses.
3. Supply Chain Support:
o Maximizing the knowledge and capabilities of all members within the supply
chain.
o Fosters collaboration and leverages external expertise.
4. Environmental Change:
o Anticipating and proactively adjusting to shifts in the competitive
environment.
 oIncludes technological advancements, market fluctuations, and regulatory
changes.
5. Competitive Edge:
o Exploiting market opportunities and organizational strengths to gain a
competitive advantage.
o May involve innovation, faster time-to-market, or unique sourcing strategies.
6. Risk Management:
o Addressing various operational, financial, and reputational risks associated
with supply.
o Involves identifying, assessing, and mitigating potential disruptions.

Types of Supply Risk

Supply risk can be broken down into three core categories:

• Operational Risk: The potential for interruption in the flow of goods or services.
This includes disruptions from natural disasters, labor strikes, or supplier failures.
• Financial Risk: The possibility of significant changes in the price or cost of goods
or services, impacting profitability. This can arise from currency fluctuations,
commodity price volatility, or unexpected cost increases.
• Reputational Risk: The danger that an organization's reputation may be damaged
due to supply-related issues, such as ethical breaches, quality failures, or
unsustainable practices by suppliers.

Corporate risk management groups often work closely with the Chief Purchasing Officer
(CPO) to assess and manage these supply-related risks comprehensively.

Strategic Purchasing Planning Process

The strategic purchasing planning process is a systematic approach to align supply activities
with organizational goals:

1. Restating Organizational Goals: Clarifying the overarching objectives of the

organization.
2. Determining Supply Objectives: Defining specific objectives for the supply function
that support organizational goals.
3. Isolating Factors: Identifying internal and external factors that could influence the
achievement of these objectives.
4. Identifying & Analyzing Alternatives: Exploring various strategic options and
evaluating their potential impact.
5. Determining Supply Strategy: Selecting the most appropriate strategy based on
analysis.
6. Reviewing Implementation Factors: Assessing resources, capabilities, and potential
hurdles for execution.
7. Gaining Commitment: Securing buy-in from stakeholders across the organization.
8. Evaluating: Continuously monitoring and assessing the effectiveness of the strategy.
Organizational strategies often involve purchasing in areas like materials management,
project management, logistics management (supply chain management), and the adoption
of Just-In-Time (JIT) purchasing/production systems.

Key Supply Strategy Questions

Supply strategy involves asking fundamental questions across various dimensions:

• What: Pertains to make or buy decisions and the use of standard versus special
items.
• Quality: Involves balancing quality and cost and determining the extent of supplier
involvement in quality initiatives.
• How much: Addresses decisions on large versus small quantities and optimal
inventory levels.
• Who: Focuses on centralization versus decentralization of purchasing, the quality
of staff, and top management involvement.
• When: Concerns the timing of purchases, including strategies like forward buying.
• What Price: Considers strategies such as premium, standard, or lower prices, cost-
based versus market-based pricing, and lease/make/buy options.
• Where: Deals with local versus regional, domestic versus international sourcing,
single versus multiple sources, supplier turnover, supplier relations, certification,
and ownership.
• How: Encompasses systems and procedures, computerization, negotiations,
bidding methods, contract types, group buying, MRP, ethics, purchasing
research, and value analysis.
• Why: Explores the underlying objectives, market reasons, and internal reasons
driving sourcing decisions.
 Supply Organization (CHAPTER 3)
The traditional view of supply objectives centers on obtaining the right materials in the
right quality, quantity, and time, from the right source, with the right service, and at the
right price, considering both short-term and long-term perspectives.

Nine Goals of Supply

The broader goals of supply extend beyond mere transaction processing to strategic
contributions:

1. Competitive Position: Improving the organization's overall competitive position.

2. Uninterrupted Flow: Ensuring an uninterrupted flow of materials and services.
3. Inventory Minimization: Minimizing inventory investment and loss.
4. Quality Improvement: Maintaining and improving quality standards.
5. Supplier Development: Finding or developing best-in-class suppliers.
6. Standardization: Standardizing items and procurement processes where feasible.
7. Lowest Total Cost: Purchasing at the lowest total cost of ownership.
8. Internal Harmony: Achieving harmonious internal relationships.
9. Operating Cost Efficiency: Accomplishing supply objectives at the lowest possible
operating costs.

Supply Organization Structures

The structure of the supply organization is crucial for its effectiveness. Small to medium-
sized companies often adopt a centralized structure within a single business unit. Large
organizations have more complex options:

• Centralized:
o Authority and responsibility for most supply functions are concentrated in
one central unit.
o Advantages include specialization, better talent acquisition, consolidated
requirements (increased "clout"), policy coordination, and proximity to
decision-makers.
o Disadvantages can involve narrow specialization, lack of flexibility, and
potential distance from users' unique needs.
• Hybrid:
o Authority and responsibility are shared between a central supply unit and
business units or divisions.
o A common model is "center-led," where strategy is centralized, but execution
is decentralized.
o Combines benefits of both centralized and decentralized approaches.
• Decentralized:
o Authority and responsibility for supply functions are dispersed throughout
the organization.
o Advantages include easier coordination with operating departments, speed of
response, and effective use of local sources.
 o Disadvantages can include more difficult communication among units, lack of
critical mass, and potential for overlooking global opportunities.

Centralized vs. Decentralized Purchasing

Feature Centralized Purchasing Decentralized Purchasing

- Easier coordination with operating
Advantages - Specialization and better talent
departments
- Consolidated requirements
- Speed of response
(clout)
- Policy coordination, planning,
- Effective use of local sources
and research
- Common suppliers, proximity - Business unit autonomy, simpler
to decision-makers reporting lines
- Critical mass, brand - Broader job definitions,
recognition, strategic focus geographical/cultural appropriateness
- Lower purchasing costs - Can hide supply costs
- Narrow specialization, lack of - More difficult communication among
Disadvantages
job flexibility units
- Excessive corporate staff,
minimization of diverse - Encourages users not to plan ahead
requirements
- Lack of recognition of unique
- Operational vs. strategic focus
needs
- Focus on corporate rather than
- Overlooking better global opportunities
business unit needs
- Silos, distance from users - Lack of critical mass and clout
- Potentially higher overall - Business unit preferences conflicting
supply costs (due to rigidity) with corporate preferences
- Magnified small differences, reporting at
lower levels
- Limited functional advancement,
ignoring larger organizational
considerations
- Limited expertise, lack of
standardization
- Relatively high supply costs (due to
lack of consolidation)

A hybrid structure often centralizes tasks like policy establishment, training, coordination
of common items, auditing, and strategy development, while business units handle specific or
unique needs.

Supply Roles and Responsibilities

Supply functions have key roles in four areas:

 • What is acquired: Defining specifications and requirements.
• Supply chain responsibilities: Managing the flow of goods and information.
• Type of involvement: Ranging from no involvement to meaningful strategic
involvement.
• Involvement in corporate activities: Contributing to broader organizational
initiatives.

Purchasing activities encompass a wide range, including buying, research, inventory

control, transportation, environmental management, forecasting, outsourcing,
nonproduction purchases, and supply chain management.

Teams and Consortiums

Key success factors for teams include a supportive culture, clear purpose, customer focus,
cross-functional involvement, effective communication, and delegation. Team leaders are
responsible for goal setting, conflict management, resource securing, and task coordination.

Successful consortiums (group buying initiatives) aim to reduce total costs, avoid antitrust
violations, protect confidential information, ensure equitable sharing of risks/costs/benefits,
and maintain trust among members.
 Supply Processes and Technology
(CHAPTER 4)
Efficiently handling lower-value purchases, integrating supply managers early in processes,
and improving internal communication are key focuses for supply chain decision-makers.
Given that purchases represent 50-70% of costs in manufacturing and 30-40% in services,
robust processes are critical.

Essential Steps in the Purchasing Process

The core purchasing process involves nine sequential steps:

1. Recognition of need: Identifying that an item or service is required.

2. Description of need: Clearly defining the specifications and requirements.
3. Identification and analysis of possible sources of supply: Researching and
evaluating potential suppliers.
4. Supplier selection and determination of terms: Choosing a supplier and agreeing
on contractual terms.
5. Preparation and placement of the purchase order: Formalizing the order with the
chosen supplier.
6. Follow-up and/or expediting the order: Tracking the order and ensuring timely
delivery.
7. Receipt and inspection: Accepting the goods and verifying their quality and quantity.
8. Invoice clearing and payment: Processing the invoice and making payment.
9. Maintenance of records and relationships: Documenting the transaction and
managing ongoing supplier relationships.

Reducing Small Order Transaction Costs

Various methods can reduce the high administrative costs associated with small-value
purchases:

• Vendor Managed Inventory (VMI), stockless buy, and systems contracts.

• Blanket P.O.s (purchase orders) and P-cards (procurement cards).
• EDI/Internet-based systems for automated transactions.
• Changing authority levels and bidding practices.
• Reverse auctions for competitive pricing.
• Single sourcing for specific items to streamline processes.
• Standardization of items.
• Outsourcing small order processing.
• Batch orders to consolidate purchases.
• Invoice-less payments and setting requisition schedules.
• Allowing users to pay directly (within defined limits).
 Requisition Requirements

A requisition, the formal request for goods or services, must contain specific information:

• Date and number

• Originating department
• Account number
• Description and quantity of items needed
• Needed date
• Shipping instructions
• Requisitioner signature

Information Flows and Technology

Internal information flows to purchasing originate from departments like engineering,
planning, production, finance, and sales. External information flows provide insights into
market conditions, supplier capacity, labor, prices, transportation rates, and new products.
Information flows from purchasing go to engineering, production, finance, and logistics.

Benefits of Information Systems Technology

Information systems and technology significantly improve process efficiency and

effectiveness by:

• Increasing data transparency and accessibility.

• Automating lower-value tasks, allowing supply managers to focus on strategic
activities.
• Cost reduction and efficiency gains.
• Speedier communication and data accuracy.
• Improved systems integration and monetary control.

Common types of systems include ERP systems, cloud computing, electronic

procurement systems, electronic catalogs, EDI (Electronic Data Interchange),
marketplaces, and online auctions. RFID (Radio-Frequency Identification) is also
utilized in supply chains.

e-Auctions (Reverse Auctions)

e-Auctions can be open offer negotiations, private offer negotiations, or posted price.
Reverse auctions are particularly effective when:

• Specifications are clear and unambiguous.

• A competitive market exists with multiple qualified suppliers.
• Market conditions are well understood.
• Both buyers and sellers are familiar with the technology.
• Clear rules and processes are established.
• The buyer is genuinely prepared to switch suppliers.
• Projected savings justify the effort and cost.
 Potential Issues with Reverse Auctions
• Buyer-related issues: Accepting unreasonably low bids, submitting phantom bids,
including unqualified suppliers.
• Supplier-related issues: Collusion, bidding unrealistically low prices and
renegotiating, "bird watching" (gathering intelligence without serious intent to bid),
and submitting bids after the auction deadline.

Problems with Online Auctions

Despite their benefits, online auctions can pose challenges:

• Interrupting good supplier relationships.

• Developing a reputation for aggressive price-buying.
• High costs vs. savings (preparation costs, unforeseen costs).
• Potentially lower savings potential compared to other sourcing processes.

Policies and Procedures

A policy and procedure manual is an essential document that defines:

• Authority levels for purchasing decisions.

• Approved suppliers and bidding processes.
• Contract management guidelines.
• Rules for employee purchases.
• Ethical guidelines and other operational aspects.
 Make or Buy, Insourcing, and
Outsourcing (CHAPTER 5)
The make-or-buy decision is a fundamental strategic choice that determines whether an
organization produces goods or services internally (make/insource) or procures them from
external suppliers (buy/outsource). This decision is dynamic and requires continuous review.

Core Competencies and Outsourcing

A core competence is an organization's unique set of activities, skills, or advantages that
differentiate it from competitors. Identifying core competencies involves assessing their
contribution to customer value, replicability, the company's excellence or willingness to
invest, and their breadth across diverse markets. Outsourcing non-critical activities allows
companies to leverage complementary core competencies from external partners.

Outsourcing, increasingly a competitive weapon, involves moving aspects of production or

services to an outside supplier. Trends include contract manufacturing, third-party
logistics (3PL), offshoring, and business process outsourcing (BPO).

Benefits of Outsourcing

• Focus on core competencies: Allows the organization to concentrate resources on its

unique strengths.
• Capital conservation: Reduces the need for significant capital investment in non-
core areas.
• Cost savings: Achieved through economies of scale, lower labor costs, or specialized
expertise from suppliers.
• Performance improvement: Leveraging supplier expertise often leads to higher
quality or efficiency.
• Leveraging outside expertise: Access to specialized skills and technology that may
not be available internally.
• Accessing low-cost labor or resources: Particularly relevant for offshore
outsourcing.

Reasons to "Make" (Insourcing)

Organizations choose to insource for various reasons:

• Quantities too small or no interested suppliers available.

• Exacting quality requirements or special processing needs.
• Greater assurance of supply or closer coordination of supply and demand.
• Preserving technological secrets and intellectual property.
• Lower costs (e.g., due to unused internal capacity).
• Utilizing unused capacity within the organization.
• Avoiding supply dependency on external parties.
• Reducing risk associated with external suppliers.
 • Market potential expansion or forecasts of future shortages/rising prices.

Reasons to "Buy" (Outsourcing)

Reasons to outsource (buy) include:

• Lack of managerial or technical experience internally.

• Excess production capacity elsewhere.
• Reducing risk (e.g., market volatility, technological obsolescence).
• Customer preference for a particular brand.
• Challenges in maintaining technological leadership for non-core activities.
• Difficulty in reversing a "make" decision once significant investment is made.
• Cost accuracy and transparency from external suppliers.
• Flexibility in scaling production up or down.
• Insufficient volume for efficient in-house production.
• Forecasts of high demand or technological uncertainty.
• Availability of a highly capable supplier.
• Opening up new markets or faster time to market.
• Superior supply management expertise from a specialized supplier.

Risks of Outsourcing

Despite the benefits, outsourcing carries significant risks:

• Loss of control over production processes, quality, or intellectual property.

• Higher exit barriers if the relationship needs to be terminated.
• Exposure to supplier risks (financial instability, lack of commitment, slow response
time, quality issues).
• Unexpected costs that were not initially accounted for.
• Difficulty quantifying economies and conversion costs.
• Supply restraints or over-reliance on a single supplier.
• Required senior management attention to manage complex relationships.
• Possibility of being tied to obsolete technology if the supplier doesn't innovate.

Purchasing's Role in Outsourcing

Purchasing plays a critical role in the outsourcing process:

• Providing a competitive process for supplier selection.

• Identifying outsourcing opportunities.
• Aiding in supplier selection and evaluation.
• Identifying potential relationship issues.
• Developing robust contracts.
• Managing ongoing relationships with outsourced partners.

Insourcing (Back-sourcing)

Insourcing occurs when activities that were previously outsourced are brought back in-
house. This often happens due to:
• Failure to achieve expected benefits from outsourcing.
• Changing business priorities.
• A desire for increased control over critical functions or intellectual property.
 Need Identification and Specification
(CHAPTER 6)
Need identification and specification are foundational steps in the supply process, crucial
for determining organizational needs and clearly communicating them to suppliers to achieve
the best value.

Need Criteria in the Value Proposition

Evaluating needs involves considering multiple criteria:

• Strategic Criteria:
o Impact on the organization's mission.
o Risk reduction (operational, financial, reputational).
o Access to new technology or markets.
o Assurance of supply.
o Revenue enhancement and competitive advantage.
o Impact on reputation.
• Traditional Criteria:
o Quality (both functionality and conformance to specifications).
o Quantity (required volume).
o Delivery (timing and reliability).
o Price (cost of acquisition).
o Service (presale and after-sale support).
• Additional Current Criteria:
o Financial considerations beyond just price (e.g., total cost of ownership).
o Risk management factors.
o Sustainability (environmental and social impact).
o Innovation potential.
o Regulatory compliance.
o Political factors.

Categories of Needs
Organizational needs can be categorized into distinct groups:

1. Resale: Items purchased by wholesalers, retailers, and distributors for direct sale.
2. Raw and Semiprocessed Materials: Basic commodities, agricultural products, and
industrial materials used in production.
3. Parts, Components, and Packaging: Items used in assembly, which can be standard
or custom-made.
 4. Maintenance, Repair, and Operating Supplies (MRO) and Small Value
Purchases (SVP): Essential for ongoing operations, often low in dollar value but
critical.
5. Capital Assets: Long-term investments like equipment, IT infrastructure, real estate,
and construction, often requiring special financing and depreciation.
6. Services: Intangible activities acquired by an organization (e.g., consulting, cleaning,
logistics).
7. Other: Unique or infrequent requirements not fitting the above, such as energy,
water, or project-specific needs.

Repetitive vs. Nonrepetitive Requirements

• Repetitive requirements allow for streamlined processes, long-term contracts, and

automated systems.
• Nonrepetitive requirements often necessitate ad hoc decision-making and more
intensive, one-off sourcing efforts.

Commercial Equivalents and Early Involvement

Translating organizational needs into commercial language understandable by suppliers is

vital for value improvement. This often occurs at the need recognition and specification
stages.

Early Supply and Supplier Involvement (ESI) is a strategic approach where supply
professionals and potential suppliers are engaged early in the design and specification
process. This helps ensure products are procurable, represent good value, and can lead to
cost savings, faster market entry, and improved competitiveness.

Methods of Description
Clear and accurate description of needs is paramount:

• Brand:
o Relies on a supplier's reputation for quality and performance.
o Desirable when specifications are difficult to develop or for small quantities.
o Can increase costs and limit sourcing options.
• "Or Equal":
o Attempts to gain competitive bids without highly detailed specifications.
o Allows bidders to offer products comparable to a specified brand.
o Can be subjective and lead to disputes over equivalency.
• Specification:
o Detailed statements of materials, dimensions, quality, and manufacturing
processes.
o Advantages: Evidence of careful study, a standard for checking, potential for
multiple sources, equitable competition, and clear seller responsibility for
performance.
o Limitations: Difficulty in specifying some requirements, added cost, potential
for specifications to be no better than standard products, increased testing
 costs, discouraging bidders, and placing adaptability responsibility on the
buyer (unless performance specifications are used).
o Can be based on:
▪ Physical or chemical characteristics.
▪ Material and method of manufacture.
▪ Performance or function (focusing on what the item does rather than
how it's made).
• Engineering Drawing:
o Highly accurate and detailed, used for specialized items requiring high
manufacturing precision.
o Often expensive to produce and interpret.
• Miscellaneous Methods:
o Market grades (for commodities like lumber, grains).
o Samples (for items needing visual acceptance, like textiles or custom parts).
• Combination of Methods:
o Often, using multiple descriptive methods provides the best and most
comprehensive approach to meeting requirements.

Sources of Specification Data

Specification data can come from:

• Individual standards set by the buying organization itself.

• Standards from technical societies or individual suppliers.
• Governmental standards and regulations.

Standardization and Simplification

• Standardization: Aims for agreement on uniform specifications for basic
characteristics of items.
• Simplification: Reduces the variety of sizes and designs of products and
components.

These practices lead to lower costs, better inventory management, and greater supplier
options, while still allowing for product individuality in final products.