Preface xix
About the Authors xxvi
Part 1 Introduction 1
Chapter 1 Introduction to Purchasing and Supply Chain Management 3
Introduction 6
A New Competitive Environment 7
Why Purchasing Is Important 8
Increasing Value and Savings 8
Building Relationships and Driving Innovation 8 Improving Quality and Reputation 9
Reducing Time to Market 10 Managing Supplier Risk 10 Generating Economic Impact 10
Contributing to Competitive Advantage 10 Understanding the Language of Purchasing and Supply Chain Management 11
Purchasing and Supply Management 11 Supply Chains and Value Chains 13 Supply Chains Illustrated 14
Achieving Purchasing and Supply Chain Benefits 17 The Supply Chain Umbrella-Management Activities 18
Purchasing 18
Inbound Transportation 18
Quality Control 18
Demand and Supply Planning 19
Receiving, Materials Handling, and Storage 19 Materials or Inventory Control 19
Order Processing 19
Production Planning, Scheduling, and Control 19 Shipping/Warehousing/Distribution 20
Outbound Transportation 20
Customer Service 20
Four Enablers of Purchasing and Supply Chain Management 20
Capable Human Resources 20 Proper Organizational Design 22
Real-Time Collaborative Technology Capabilities 22 Right Measures and Measurement Systems 23
The Evolution of Purchasing and Supply Chain Management 24
Period 1: The Early Years (1850–1900) 24
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Period 2: Growth of Purchasing Fundamentals (1900–1939) 25
Period 3: The War Years (1940–1946) 25
Period 4: The Quiet Years (1947–Mid-1960s) 25
Period 5: Materials Management Comes of Age (Mid-1960s– Late 1970s) 26
Period 6: The Global Era (Late 1970s–1999) 27
Period 7: Integrated Supply Chain Management (The Twenty- First Century) 27
Looking Ahead 28
Part 2 Purchasing Operations and Structure 37
Chapter 2 The Purchasing Process 39
Introduction 41
Purchasing Objectives 42
Objective 1: Supply Assurance 42
Objective 2: Manage the Sourcing Process Efficiently and Effectively 43
Objective 3: Supplier Performance Management 43 Objective 4: Develop Aligned Goals with Internal Stakeholders 44
Objective 5: Develop Integrated Supply Strategies That Support Business Goals and Objectives 44
Strategic Supply Management Roles and Responsibilities 45
Spend Analysis 46
Demand Management and Specifications/SOW’s 46 Category Management and Supplier Evaluation/Selection 47 Contract Management 48
Cost Management 48
Managing the Procure-to-Pay Process 49 Supplier Relationship Management 49 Establish a Supply Management Strategy 50
Improving the Procure-to-Pay Process 51 Forecast and Plan Requirement 54 Needs Clarification: Requisitioning 55
Purchase Requisitions/Statement of Work 55 Traveling Purchase Requisitions/Bar Codes 57 Forecasts and Customer Orders 58
Reorder Point System 58 Stock Checks 59
Cross-Functional Sourcing Teams 60 Description 61
Supplier Identification and Selection 62 Bidding or Negotiating? 62
Request for Quotation 64 Specifications or Blueprints 64 Evaluate Suppliers 64
Approval, Contract, and Purchase Order Preparation 65
Purchase Order 65
Blanket Purchase Order 68 Material Purchase Release 68 Receipt and Inspection 70 Material Packing Slip 71
Bill of Lading 71
Receiving Discrepancy Report 72 Invoice Settlement and Payment 72 Records Maintenance 72
Continuously Measure and Manage Supplier Performance 72 Reengineering the Procure-to-Pay Process 73
Types of Purchases 73
Raw Materials 74
Semifinished Products and Components 74 Production Support Items 75
Services 75
Capital Equipment 75
Transportation and Third-Party Purchasing 76 Improving the Purchasing Process 76
Online Requisitioning Systems from Users to Purchasing 77 Procurement Cards Issued to Users 77
Electronic Purchasing Commerce through the Internet 78 Longer-Term Purchase Agreements 78
Cloud-Based Ordering Systems 78 Purchasing Process Redesign 79 Electronic Data Interchange 81
Online Ordering through Electronic Catalogs 81 Allowing Users to Contact Suppliers Directly 81
Chapter 3 Purchasing Policy and Procedures 86 Introduction 88
Policy Overview 88
What Are the Advantages and Disadvantages of Policies? 88 What Makes for an Effective Policy? 89
Purchasing Policies—Providing Guidance and Direction 90
Policies Defining the Role of Purchasing 90
Policies Defining the Conduct of Purchasing Personnel 92 Policies Defining Social and Minority Business Objectives 92 Corporate Social Responsibility 98
Policies Defining Buyer-Seller Relationships 99
Other Policies Dealing with Buyer-Seller Relations 101 Policies Defining Operational Issues 101
Purchasing Procedures 104
Purchasing Procedural Areas 106
Chapter 4 Supply Management Integration for Competitive Advantage 114 Introduction 117
Integration: What Is It? 119 Internal Integration 120
Supply Management Internal Linkages 121
External Integration 125
Supply Management’s External Linkages 126 Collaborative Buyer-Seller Relationships 126 Advantages of Closer Buyer-Seller Relationships 127 Obstacles to Closer Buyer-Seller Relationships 128
Critical Elements for Supplier Relationship Management 128
The Critical Role of Cross-Functional Sourcing Teams 130 Benefits Sought from the Cross-Functional Team Approach 132
Potential Drawbacks to the Cross-Functional Team Approach 134
When to Form a Cross-Functional Team 134 Improving Sourcing Team Effectiveness 135
Integrating Supply Management, Engineering, and Suppliers to Develop New Products and Services 140
Common Themes of Successful Supplier Integration Efforts 140
Supplier Integration into Customer Order Fulfillment 146 Supplier Suggestion Programs 146
Buyer-Seller Improvement Teams 147 On-Site Supplier Representative 148
Potential Benefits of On-Site Supplier Representatives 149
Chapter 5 Purchasing and Supply Management Organization 157 Introduction 160
P/SM Organizational Structure 161
Location of Authority Centralized or Decentralized 162
Drivers Influencing the Adoption of Centralized/Center-Led or Decentralized Structures 162
Advantages of Centralized/Center-led Purchasing Structures 163
Advantages of Decentralized Purchasing 165
Organizational Mechanisms to Enable Center-led Organization Design 166
Purchasing’s Position within the Organizational Structure 171
To Whom Does Purchasing/Supply Management Report? 171 Factors Affecting Purchasing’s Position in the Organizational Hierarchy 171
Scope of the Purchasing/Supply Management Job Function 174
Purchasing/Supply Management Job Tasks 175 Separating Strategic and Operational Purchasing 177 Using Teams as Part of the Organizational Structure 177
Supply Chain Management Structure 180 Future Trends in Organizational Design 180
Part 3 Strategic Sourcing 189
Chapter 6 Category Strategy Development 191
Introduction 193
Aligning Supply Management and Enterprise Objectives 194
Integrative Strategy Development 195
Engaging Stakeholders to Build Category Strategy Objectives 196
What Is a Category Strategy? 199
Difference Between Category Strategies and Strategic Sourcing 200
Conducting a Spend Analysis 201 Spend Analysis Spreadsheet 202
Category Strategy Development 208
Step 1: Build the Team and the Project Charter 208 Step 2: Conduct Market Intelligence Research on Suppliers 213
Step 3: Strategy Development 218
Process 224
Step 4: Contract Negotiation 228
Step 5: Supplier Relationship Management 229
Types of Supply Management Strategies 230
Insourcing/Outsourcing 230 Supply Base Optimization 231 Supply Risk Management 231
Early Supplier Design Involvement 235 Supplier Development 235
Total Cost of Ownership 236
E-R everse Auctions 236
Phase 1: Basic Beginnings 237
Phase 2: Moderate Development 238
Phase 3: Limited Integration 238
Phase 4: Fully Integrated Supply Chains 239
Observations on Supply Management Strategy Evolution 239
Chapter 7 Supplier Evaluation and Selection 245 Introduction 247
The Supplier Evaluation and Selection Process 248
Recognize the Need for Supplier Selection 248
Identify Key Sourcing Requirements 249 Identify Potential Supply Sources 249
Current Suppliers 250
Sales Representatives 250
Internet Searches and Social Media 250
Informational Databases 251
Organizational knowledge 251
Trade Journals 251
Trade Directories 252
Trade Shows 252
Second-Party or Indirect Information 252 Internal Sources 252
Determine Sourcing Strategy 254 Consider Sourcing Alternatives 255 Manufacturer vs. Distributor 255
Local or National or International Suppliers 255 Large or Small Suppliers 255
Categorizing Suppliers for Multiple or Single or Sole Sourcing 256
Evaluate Critical Issues 257 Size Relationship 257
Risk/Reward Issues 257
Sustainability and Diversity Objectives 258 Competitors as Suppliers 258
International Suppliers and Countertrade 258 Limit Suppliers in Selection Pool 258 Supplier Risk Management 259
Evaluation of Supplier Performance 261 Evaluation of Supplier-Provided Information 261 Determine the Method of Supplier Evaluation
and Selection 261
Supplier-Provided Information 261
Supplier Visits 262
Use of Preferred Certified and Partnered Suppliers 263
Third-Party Information 264
Select Supplier and Reach Agreement 264 Key Supplier Evaluation Criteria 264 Management Capability 265
Employee Capabilities 265
Cost Structure 266
Total Quality Performance, Systems, and Philosophy 266 Process and Technological Capability 266
Sustainability and Environmental Compliance 267 Financial Stability 269
Scheduling and Control Systems 269 E-Commerce Capability 270
Supplier’s Sourcing Strategies, Policies, and Techniques 271 Longer-Term Relationship Potential 271
Developing a Supplier Evaluation and Selection Survey 272 Step 1: Identify Supplier Evaluation Categories 272
Step 2: Assign a Weight to Each Evaluation Category 273 Step 3: Identify and Weigh Subcategories 273
Step 4: Define a Scoring System for Categories and Subcategories 274
Step 5: Evaluate Supplier Directly 274 Step 6: Review Evaluation Results and Make Selection Decision 276
Step 7: Review and Improve Supplier Performance Continuously 277
Reducing Supplier Evaluation and Selection Cycle Time 278
Map the Current Supplier Evaluation and Selection Process 278
Integrate with Internal Customers 278
Data Warehouse Software with Supplier Information 278 Third-Party Support 279
Integrating Technology into Organizational Design 279 Supplier Categorization 279
Electronic Tools 279
Predefined Contract Language and Shorter Contracts 279
Chapter 8 Supplier Quality Management 285
Overview of Supplier Quality Management 287
What Is Supplier Quality? 287
Why Be Concerned with Supplier Quality? 289 Factors Affecting Supply Management’s Role in Managing Supplier Quality 290
Supplier Quality Management Using a Total Quality Management Perspective 292
Defining Quality in Terms of Customers and Their Requirements 292
Deming’s 14 Points 293
Pursuing Quality at the Source 296
Stressing Objective Rather than Subjective Measurement and Analysis 298
Emphasizing Prevention Rather Than Detection of Defects 298
Focusing on Process Rather than Output 300 Basics of Process Capability 301
Striving for Zero Defects 302 Cost of Quality 303
The Seven Wastes 304
Establishing Continuous Improvement as a Way of Life 305 Making Quality Everyone’s Responsibility 306
Pursuing Six Sigma Supplier Quality 308
Using ISO Standards and MBNQA Criteria to Assess Supplier Quality Systems 309
ISO 9001:2008 Standards 310
ISO 14001:2004 Standards 312
The Malcolm Baldrige National Quality Award 313
Basic Contents of a Supplier Quality Manual 315
Part 4 Strategic Sourcing Process 407
Chapter 11 Strategic Cost Management 409
Introduction 411
A Structured Approach to Cost Reduction 412 Price Analysis 418
Market Structure 418
Economic Conditions 419 Pricing Strategy of the Seller 420
Market-Driven Pricing Models 421
Using the Producer Price Index to Manage Price 423
Cost Analysis Techniques 426 Cost-Based Pricing Models 426 Product Specifications 427
Estimating Supplier Costs Using Reverse Price Analysis 427 Break-Even Analysis 431
Break-Even Analysis Example 433
Building a Should-Cost Model 435
Step 1: Conceptual Design 436
Step 2: Refine and Derive Elements of the Cost Model 437 Step 3: Design and Construction of Cost Model 437
Step 4: Identify Data Sources for the Model 439 Supplier Provided Data 440
Total Cost of Ownership 441
Building a Total Cost of Ownership Model 441 The Importance of Opportunity Costs 442
Important Factors to Consider When Building a TCO Model 444
Example of a TCO Model 444
Collaborative Approaches to Cost Management 445
Target Pricing Defined 446
Cost-Savings Sharing Pricing Defined 447 Prerequisites for Successful Target and Cost-Based
Pricing 447
When to Use Collaborative Cost Management Approaches 448
An Example of Target Pricing and Cost-Savings Sharing 448
Chapter 12 Purchasing and Supply Chain Analysis: Tools and Techniques 459
Introduction 462
Project Management 462
Defining Project Success 462 Project Phases 463
Project Planning and Control Techniques 466
Rules for Constructing a Project Management Network 468 Project Management Example: Sourcing Strategy 469 Project Management with Time Estimates 470
Learning-Curve Analysis 474
Components of the Learning or Experience Curve 475 When to Use the Learning Curve 475
Learning Curve Illustrated 476 Learning-Curve Problem 477
Value Analysis/Value Engineering 477
Who Is Involved in Value Analysis? 479
Tests for Determining Value in a Product or Service 479 The Value Analysis Process 480
Quantity Discount Analysis 481
Quantity Discount Analysis Illustrated 482
Process Mapping 484
Value Stream Mapping 485
Chapter 14 Contract Management Introduction 535 Elements of a Contract 533
537
How to Negotiate and Write a Contract 542 Types of Contracts 543
Fixed-Price Contracts 544
Fixed-Price Contract with Redetermination 545 Fixed-Price Contract with Incentives 545
Cost-Based Contracts 545
Considerations When Selecting Contract Types 547
Long-Term Contracts in Alliances and Partnerships 549
Benefits of Long-Term Contracts 549 Risks of Long-Term Contracts 551
Contingency Elements of Long-Term Contracts 552
Nontraditional Contracting 553 IT Systems Contracts 553 Consulting Contracts 555
Construction Contracts 557 Other Types of Contracts 558
Settling Contractual Disputes 559
Legal Alternatives 560
Arbitration 561
Other Forms of Conflict Resolution 562
Part 5 Critical Supply Chain Elements 617
Chapter 16 Lean Supply Chain Management 619 Introduction 621
Understanding Supply Chain Inventory 622
Types of Inventory 622 Inventory-Related Costs 624
Inventory Investment—Asset or Liability? 625
The Right Reasons for Investing in Inventory 629 Avoid Disruptions in Operational Performance 629 Support Operational Requirements 629
Support Customer Service Requirements 630 Hedge against Marketplace Uncertainty 630 Take Advantage of Order Quantity Discounts 630
The Wrong Reasons for Investing in Inventory 631
Poor Quality and Material Yield 631 Unreliable Supplier Delivery 632
Extended Order-Cycle Times from Global Sourcing 632 Inaccurate or Uncertain Demand Forecasts 632 Specifying Custom Items for Standard Applications 633 Extended Material Pipelines 633
Inefficient Manufacturing Processes 633
Creating the Lean Supply Chain 635 Six Sigma 637
The Lean Perspective on Inventory 638
Lean Supply 640
Lean Transportation 641
Just-in-Time Kanban Systems 643
Approaches for Managing Inventory Investment 644
Achieve Perfect Record Integrity 645 Improve Product Forecasting 646
Standardize and Simplify Product Design 646 Leverage Companywide Purchase Volumes 648
Use Suppliers for On-Site Inventory Management 649 Reduce Supplier-Buyer Cycle Times 649
Delivering the Perfect Customer Order 650 Material Requirements Planning System 650 Distribution Resource Planning System 651 Supply Chain Inventory Planners 651 Automated Inventory Tracking Systems 652
Chapter 17 Purchasing Services 657
Introduction 659
Transportation Management 659
Deregulation of Transportation and Supply Management’s New Role 661
A Decision-Making Framework for Developing a Transportation Strategy 663
Current Transportation Issues 676 Performance-Based Logistics 678
Outsourcing Logistics to Third-Party Logistics Providers 680
Select Providers 680
Gain Access to Critical and Timely Data 682
Develop Systems Visibility to Material Shipments 682 Develop Closer Relationships with Fewer Providers 682 Establish Companywide Contracts 683
Purchasing Services and Indirect Items 683
Internal Methods of Managing Indirect Spend 684 External Methods of Managing Indirect Spend 686 Enabling Tactics and Strategies 686
Sourcing Professional Services 688
Have a Clearly Defined Scope 689
Move to a Centralized Procurement Structure 689 Develop a Professional Services Database 690
Develop a Sound Procedure for Evaluation and Selection of Consultants 691
Optimize the Supply Base 691 Develop a Standardized Contract 692 Monitor Results 692
Develop Policy Compliance 692 Service Supply Chain Challenges 693
Chapter 18 Supply Chain Information Systems and Electronic Sourcing 700 Introduction 703
Evolution of E-SCM Systems 704
An Overview of the E-Supply Chain 705
Supply Chain Information Flows 706
Drivers of New Supply Chain Systems and Applications 711 Internal and External Strategic Integration 712 Globalization and Communication 712
Data Information Management 712 New Business Processes 712 Replacement of Legacy Systems 712 Strategic Cost Management 713
Internal Information Systems—Enterprise Resource Planning (ERP) 713
Implementing ERP Systems 715
Purchasing Databases and Data Warehouses 717 Electronic Data Interchange (EDI)—Pioneering External Electronic Communication 719
The Electronic Order Process 719 EDI and the Internet 720
E-S ourcing Basics 721
E-Sourcing Models—The External Information Systems 721
E-Sourcing Suites—General 722
E-Sourcing Suites—Supplier Relationship Management (SRM) 722
Spend Analysis 722
Sourcing 723
Contract Management and Compliance 728 Risk Management and Supplier Performance Measurement 728
Total Cost Reporting 729
Internal and External Systems Integration 729
Social Networking Software in SCM—Improving Collaboration and Visibility 730
Professional Networking Software in SCM 732 Blogs, Tweets, and Cloud Computing 733
Information Visibility in SCM 735 Benefits of Information Visibility 735 Information Visibility in the Cloud 736
Collaboration and Big Data 737
Chapter 19 Performance Measurement and Evaluation 746 Introduction 749
Purchasing and Supply Chain Performance Measurement and Evaluation 749
Why Measure Performance? 750
Problems with Purchasing and Supply Chain Measurement and Evaluation 751
Purchasing and Supply Chain Performance Measurement Categories 752
Price Performance Measures 754 Cost-Effectiveness Measures 756
Revenue Measures 757
Quality Measures 758
Time/Delivery/Responsiveness Measures 758 Technology and Innovation Measures 759 Environmental Sustainability Measures 760
Asset and Integrated Supply Chain Management Measures 761
Administration Efficiency/Overhead Cost Measures 762 Governmental/Social Measures 763
Safety Measures 763
Internal Customer Satisfaction Measures 763
Supplier, Risk, and Strategic Performance Measures 764 Strategic Performance Measures 764
Developing a Performance Measurement and Evaluation System 765
Determine Which Performance Categories to Measure 766 Develop Specific Performance Measures 766
Establish Performance Objectives for Each Measure 768 Finalize System Details 769
Implement and Review System Performance and Measures 770
Performance Benchmarking: Comparing Against the Best 770
Benchmarking Overview 770 The Benchmarking Process 772
Balanced Scorecard for Purchasing and Supply 774 A Summary of Purchasing Measurement and Evaluation Characteristics 775
System Characteristics 775
Human Resource Characteristics 776
