Purchasing &
Supply Chain
Management
7th edition
Chapter 1
Introduction to Purchasing and
Supply Chain Management
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Learning Objectives
By the end of this chapter, you should be able to:
• Understand the differences between purchasing and supply
management
• Understand the differences between supply chains and value chains
• Identify the activities that are part of supply chain management
• Understand how technology is changing the purchasing job
• Appreciate the importance of supply chain enablers
• Identify the historical stages of purchasing’s evolution
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Chapter Overview
• A new competitive environment
• Managing the supply base
• Why purchasing is important
• Understanding the language of purchasing and supply chain management
• Achieving purchasing and supply chain benefits
• The supply chain umbrella – functional activities
• Four enablers of purchasing and supply chain management
• The evolution of purchasing and supply chain management
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A New Competitive Environment
• Increasing numbers of world-class competitors
• A more sophisticated customer base
− Demanding greater performance at a lower cost immediately
• Ability to be in constant contact – 24/7/365
− Mobile devices
− Cloud-based computing
− Real-time communication technologies
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A New Competitive Environment
• Increased use of sophisticated technologies
− Blockchain
− Artificial intelligence and automation
− Robotics
• Widely available information sources
• Availability of low-cost alternatives – a moving target
− Outsourcing, offshoring, re-shoring, and near-shoring
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Managing the Supply Base
• Need to actively manage supply chains
− Upstream (suppliers) and downstream (customers)
• Low cost and increased availability of information
• Level of competition
• Customer expectations and requirements
• Identification and mitigation of supply chain risk
• Competition is between supply chains, not individual firms
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Why Purchasing Is Important
• Increasing value and savings
• Building relationships and driving innovation
• Improving quality and reputation
• Reducing time-to-market
• Managing supplier risk
• Generating economic impact
• Contributing to competitive advantage
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Increasing Value and Savings
• Improving performance
− Supplier performance and expertise helps differentiate products and
services
• Purchased content is about 55% of cost-of-goods-sold
• Early supplier involvement in product and component design
• Proactively avoiding costs through early supplier involvement in design of
products and components
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Building Relationships and
Driving Innovation
• Traditional approach of hard bargaining for price reductions
• Newer approach is to jointly reduce costs with suppliers
• Expect suppliers to contribute to innovate ideas to add value
• Both supplier and buyer must receive acceptable payback from their
investments
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Improving Quality and Reputation
• Buyer specialization on its core competencies with supply base support
based on its own expertise and core competencies
− Non-core competencies are candidates for outsourcing to the experts
− Greater emphasis on relationship management
• Supplier quality can dramatically impact buyer quality
− Lapses in supplier quality can potentially tarnish a buyer’s reputation
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Reducing Time-to-Market
• Supplier impact on product and process design and function
• Early supplier involvement can lead to a 20% improvement in material
costs, material quality, and new product development lead times
• Supplier suggestions can contribute to product and process
improvements
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Managing Supplier Risk
• Supplier risk is magnified by sourcing strategies that emphasize global
sourcing, single sourcing, and lean operations
• Need to monitor supply base for risk exposure and develop business
continuity plans to mitigate potential risks
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Generating Economic Impact
• The ISM Report on Business is a popular and closely watched national
economic indicator in the U.S.
− Monthly surveys of purchasing managers in both manufacturing and
non-manufacturing industries
− Based on a change index (month over month)
− Generally, a rating > 50 indicates that the economy is expanding; a
rating < 50 indicates that the economy is contracting
− Regional reports for larger metropolitan areas are also available
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Contributing to Competitive Advantage
• Growing acknowledgement by executives of supply management’s
contribution to a firm’s profitability
• More supply managers have received college degrees and earn more
money than those without a degree
− More colleges and universities now offer degrees in supply chain
management
• Continuing education through certifications also increases pay
• Importance of managing talent
− Focus on finding, developing, and promoting high performers
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Understanding the Language of Purchasing
and Supply Management
• Is purchasing different from supply management?
• Are supply chains and value chains the same?
• What is supply chain management?
• What is an extended enterprise?
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Purchasing
• A dual role
− A functional group (formal entity in the organizational chart)
− A functional activity (buying goods and services)
• Also known as procurement or acquisition
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Purchasing
• Typical activities
− Supplier identification and selection
− Buying
− Negotiation and contracting
− Supply market research
− Supplier measurement and improvement
− Purchasing systems development
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The Five Rights of Purchasing
• Getting the “right” quality
• In the “right” quantity
• At the “right” time
• For the “right” price
• From the “right” source
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Supply Management
• Our definition
− “A strategic approach to planning for and acquiring the organization’s
current and future needs through effectively managing the supply
base, utilizing a process orientation in conjunction with cross-
functional teams (CFTs) to achieve the organizational mission.”
• ISM’s definition
− “The identification, acquisition, access, positioning, and management
of resources and related capabilities an organization needs or
potentially needs in the attainment of its strategic objectives.”
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Supply Management
… is planning and Strategic
acquiring the current and Orientation
future needs of an
organization via …
Cross-
Supply Base
Functional
Management
Groups
Process-
Driven
Approach
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Supply Management –
Strategic Orientation
• Has a major impact on long-term performance
• Should not pursued in isolation but aligned with overall mission and
strategies of the organization
• Is different from tactical, routine, or day-to-day activities
• Must be performed together with tactical activities
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Supply Management –
Supply Base Management
• A broader perspective than purchasing
• Differs from the traditional “arms’ length” or adversarial approach
• Requires buyers to collaborate with suppliers capable of providing world-
class performance
• A strategic, supercharged version of purchasing
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Supply Management –
Process-Driven Approach
• Identifying, evaluating, selecting, managing, and developing suppliers to
realize improved supply chain performance
• Working to exceed performance of competitors
• Commonality of …
− Purchasing
− Supply management
− Strategic sourcing
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Supply Management –
Cross-Functional Groups
• Involving purchasing, engineering, supplier quality assurance, suppliers,
and other related functions
• Working together as one team, early on, to further mutual goals
• Long-term, win-win relationships internally and externally
• Treating the supplier as an extension of the buyer
• Recognition of mutual benefit
• Synchronization of internal and external activities
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Supply Chains and Value Chains
• Supply chain
− A set of three or more organizations linked directly by one or more of
the upstream or downstream flows of products, services, finances, and
information from a source to a customer
• Supply chain orientation
− A higher-level recognition of the strategic value of managing operational
activities and flows within and across a supply chain
• Supply chain management
− Proactively managing two-way movement and coordination of goods,
services, information, and funds from raw material through end user
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Supply Chains and Value Chains
• Value chain
− Composed of primary and support activities that can lead to competitive
advantage when configured properly
− A supply chain is a subset of the value chain
▪ Direct materials
▪ Indirect goods and services
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The Extended Value Chain
Firm infrastructure
Support Human resource management
Activities Technology development
Purchasing
Materials/Services Information/Funds/Knowledge
Customers
Suppliers
Inbound Outbound Marketing & Customer
Operations
Logistics Logistics Sales Service
Primary Activities
Materials / Physical Distribution /
Supply Management Channel Management
Total Supply Chain / Total Logistics Management
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28
Cereal Value Chain Example
Grain Cereal Packaged Cereal
Farmer Processor Packaging Distributor
Packaged
Cereal
Paperboard
Grocer
Corrugated Packaged
Box Mfr Cereal
Wood Consumer
Labels
Lumber Label Material flows
Company Mfr
Information flows
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The Supply Chain Umbrella
• Purchasing • Order processing
• Inbound transportation • Production planning, scheduling,
and control
• Quality control
• Shipping/Warehousing/Distribution
• Demand and supply planning
• Outbound transportation
• Receiving, materials handling, and
storage • Customer service
• Materials or inventory control
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Proactive Strategies
• Global sourcing • Joint improvement activities
• Risk management • Outsourcing
• Supplier quality management • Partnerships and alliances
• Long-term contracting • Supplier-managed inventory
• Early supplier design
involvement
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Business Requirements
and Guiding Philosophies
• Shareholder value • Total quality management
• Innovative products • Supply chain integration
• Revenue growth • Risk management
• Customer service • Responsiveness
• Global market share
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Enablers of Purchasing and Supply Chain
Management
Human Organizational Information
Measurement
Resources Design Technology
View the supply chain holistically Demand planning Use data from visible sources
Centrally-led supply teams
Manage critical Order commitment, scheduling,
relationships Executive responsibility for and production management Quantify what creates value
coordinating purchasing and
supply chain activities Distribution and transportation
Analyze competitive markets
scheduling
Use goals that change over time
Collocation of supply personnel
Engage in fact-based decision with internal customers Materials replenishment
making
Rely on benchmarking to
establish performance targets
Practice advanced cost
Cross-functional teams to Reverse auctions
management
manage supply chain processes
Link to business goals and
objectives
Understand e-business systems Requisition to pay systems
Supply strategy coordination and
review sessions between
Feature efficiency and
business units
Analyze big data Intranets effectiveness measures
Executive buyer-supplier council Assign ownership and
Utilize mobile devices to coordinate with suppliers Webinars and podcasts accountability
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Capable Human Resources
• Key knowledge areas
− Supplier relationship management
− Data and analytics
− Total cost analysis
− Social and collaborative technologies
− Supplier and competitive market analysis
• Need to internally develop high-potential individuals
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Proper Organizational Design
• Organizational design
− Process of assessing and selecting the structure and formal system of
communication, division of labor, coordination, control, authority, and
responsibility required to achieve organizational goals and objectives
• Increased use of center-led supply management
• Continued use of teams
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Real-Time Collaborative
Technology Capabilities
• Cloud-based storage systems
• Mobile devices
• Shared software platforms
• Planning software
• Execution software
• Access provided on a real-time or near real-time basis
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Planning Software Applications
• Improve forecasting accuracy
• Optimize production scheduling
• Reduce working capital costs
• Shorten cycle times
• Cut transportation costs
• Improve customer service
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Execution Software Applications
• Obtain materials and manage physical flows from suppliers through
downstream distribution
• Provide customers with the right products at the right location, time, and
cost
• Key to managing lean logistics, lean operations, and lean supply
• Need for highly capable data capture, storage, and real-time access for
managerial analysis and decision-making
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Right Measures and Measurement Systems
• Roadblocks between measurement and improved performance
− Too many metrics
− Debate over the correct metrics
− Constantly changing metrics
− Old, inaccurate, or incomplete data
• Overcoming roadblocks
− Know what to measure, have a measurement process in place, and be
able to access the right data
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Why Is Measurement Important?
• Supports fact-based rather than subjective decision-making
• Communicates requirements throughout the supply chain
• Improves future supplier performance
• Recognizes outstanding performance
• Links critical measures to desired business outcomes
• Determines if new initiatives are producing the desired results
• Is the best tool to control purchasing and supply chain activities and
processes
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The Evolution of Purchasing
and Supply Chain Management
• The Early Years (1850 – 1900)
• Growth of Purchasing Fundamentals (1900 – 1939)
• The War Years (1940 – 1946)
• The Quiet Years (1947 – mid-1960s)
• Materials Management Era (mid-1960s – late 1970s)
• The Global Era (late 1970s – 1999)
• Integrated Supply Chain Management and Technology (2000 – 2025)
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Looking Ahead
• Part 2 – Purchasing operations and structure
• Part 3 – Strategic sourcing
• Part 4 – Strategic sourcing process
• Part 5 – Critical supply chain elements
• Part 6 – Future directions
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