Proactive Purchasing in the Supply Chain

Foreword
Acknowledgments
Introduction
Chapter 1 Purchasing: The Foundation of the Supply Chain
Supply Management and the Bottom Line
Increased Sales
Lower Total Cost of Ownership
Supply Management and Return on Investment (ROI)
The Progression to Strategic Supply Chain Management
Supply Chains
The Supply and Value Networks: The Next Phase of Supply Chain Management
Implementing Strategic Supply Chain Management
The Roles of a Supply Management Professional
Summary
Appendix: An Overview of the Mechanics of Supply Management
Endnotes
Suggested Reading
Chapter 2 Organizational Issues
Placement of Supply Management Within the Organization
Other Factors Impacting Organizational Structure
Classification of Responsibilities and Activities
Operational vs. Strategic Responsibilities
Organizational Authority
e-Commerce
Organizational Structures
The Materials Management Organization
The Supply Chain Management Structure
Organizing with Cross-Functional Teams
Budgeting and Staffing
Summary
Appendix A
Benefits Resulting from Cross-Functional Teams
Challenges and Problems with the Cross-Functional Approach
Prerequisities to Successful Cross-Functional Teams
Team Development and Training
Appendix B: The Professional Organizations of Supply Chain Management
Endnotes
Suggested Reading
Chapter 3 Supply Management: An Organization Spanning Activity
Supply Managementâs Relations with Other Departments
Supply Management and Engineering
Supply Management and Manufacturing and Operations
Supply Management and Quality
Supply Management and Marketing
Supply Management and Finance
Supply Management and Information Technology (IT)
Supply Management and Logistics
Supply Management and Accounts Payable
Supply Management and Lawyers
Supply Management in Non-Manufacturing Organizations
Supply Management in Government
Supply Management and the External Environment
Business Relationships
Monitoring the Supply Environment
Completing the Supply Chain Linkage: Supplier Integration with the Customer
Summary
Endnotes
Suggested Reading
Chapter 4 A Portfolio of Relationships
A Transformation in Relationships
Transactional Relationships
Collaborative and Alliance Relationships
Collaborative Relationships
Supply Alliances
Which Relationship Is Appropriate?
The Supplierâs Perspective
Questions to Be Addressed Before Proceeding
Developing and Managing Collaborative and Alliance Relationships
Situations Wherein Alliances May Not Be Appropriate
The Role of Power
A Portfolio Approach
New Skills and Attitudes Required
e-Commerce and the "Right" Type of Relationship
Relationships of the Future
Summary
Appendix
Institutional Trust
Supply Management in Action
Endnotes
Suggested Reading
Chapter 5 New Product Development
Overview
The Design Process
The Investigation or Concept Formation Phase
The Development Phase
Value Engineering vis- -vis Value Analysis
The Production Phase
Engineering Change Management
How to Expand Supply Managementâs Contributions
Design or Project Teams
Materials Engineers
Co-Location
Supply Management Professionals Who Interface Successfully with Engineers
Appendix
Endnotes
Suggested Reading
Chapter 6 Purchasing Descriptions and Specifications
Specifications and Standardization
Purposes of Specifications
Collaborative Development
Categories of Specifications
Simple Specifications
Complex Specifications
Combination of Methods
Development of Specifications
Organizational Approaches
Supply Management Research
Writing Specifications
Common Problems
Standardization
History of Standardization
Types and Sources of Standards
Benefits of Standardization
Simplification
Developing a Standardization Program
Standards Team
Importance of Supply Management
Materials Catalog
Electronic Materials Catalog
Summary
Endnotes
Suggested Reading
Chapter 7 Managing for Quality
Evolution of Quality Management
Philosophies of the Gurus
W. Edwards Deming
Philip Crosby
Masaaki Imai
Genechi Taguchi
Joseph Juran
Management Approaches
Total Quality Management
Continuous Improvement
Six Sigma
DMAIC Cycle
Quality Management System
Tools and Methodologies
Terminology and Usage
Implications for Supply Management
Common Tools
Costs of Quality
Loss to Society
Process Capability Analysis
Statistical Process Control
Quality Movement Support
Organizations
Standards
Awards
Supply Management Issues
Requirements Development
Supplier Quality Analysis
Inspection Dependence
Defect Detection System
Supplier Development
Certification
Summary
Endnotes
Suggested Reading
Chapter 8 Purchasing Equipment
The Nuances of Capital Equipment Procurement
Nonrecurring Purchases
Nature and Size of Expenditure
Building the Foundation
Identify the Need for a Procurement
Project Management
Selection of an Equipment Sourcing Team
Build and Train the Team
Identify Objectives and Estimate Costs
Identifying Objectives
Used Equipment
Spares
Estimating Acquisition Costs and the Total Cost of Ownership (TCO)
Develop Specifications and Initiate Sourcing, Pricing, and TCO Analysis.
Develop Specifications
Sourcing
Develop Updated Acquisition Cost and TCO Estimates
Meet Budget and TCO Objectives?
Top Management Approval
Negotiation
Leased Equipment
Types of Leases
Factors Favoring Leasing
Factors Weighing Against Leasing
To Lease or to Buy?
Initiate Lease or Contract
Post-Award Activities
Summary
Endnotes
Suggested Reading
Chapter 9 Purchasing Services
Introduction
Hidden Opportunities
The Statement of Work
Four Formats for Statements of Work
Planning the Statement of Work
Writing the Statement of Work
Artificial Intelligence
Tips on Writing an Effective Statement of Work
Selecting Service Contractors
Tips from a Professional
The Ideal Services Supplier
Pricing Service Contracts
Professional Services
Technical Services
Operating Services
Third Party Contracts
So, Your Services Contract Is About to Expire
Contract Administration
Services Purchases and the Internet
Construction Services
Conventional Method
Design and Build, Firm Agreed Price Method
Design and Build, Cost-Reimbursable Method
Building Team
The Owner as a Contractor
Construction Purchasing Entails Unique Problems
Performance Contracting
The Special Case of Contracting Consultants
Qualifying the Consultants
Summary
Endnotes
Suggested Reading
Chapter 10 Production and Inventory Control
Part I: The Fundamentals of Production Planning
Modern Production Planning Systems
Aggregate Planning and Master Scheduling
Material Requirements Planning
Capacity Requirements Planning
Control of Production Activities
Two Management Considerations
Evolution of MRP and MRP II Systems
Impact on Purchasing and Supply
Just-in-Time Production Planning
A JIT Illustration
JITâs Impact on Purchasing and Supply
ERP Systems
Radio Frequency Identification System (RFID)
Summary
Part II: The Functions of Inventories
Definition of Inventories
Inventory Analysis
Inventory Catalog
ABC Analysisâ"The 80â"20 Concept
Dependent and Independent Demand
Costs Associated with Inventories
Carrying Costs
Acquisition Costs
Economic Order Quantity (EOQ) Concept
Other Uses of the EOQ Concept
The Weaknesses of the EOQ Formula
Types of Inventory Control Systems
Cyclical or Fixed Order Interval System
The Just-in-Time (JIT) Approach
Material Requirements Planning (MRP) System
Order Point or Fixed Order Quantity System
Summary
Appendix: The Fundamentals of Inbound Transportation
Endnotes
Suggested Reading
Chapter 11 Demand Management and Logistics
The Key to Supply Chain Management
The SCM Triangle
Evolution to Strategic SCM
Strategic Demand Management
The Bullwhip Effect
Evolution of Strategic Demand
Forecasting Demand
Forecasting Fundamentals
Planning with Time Fences
Implications for Supply Management
Strategic Logistics Management
Logistics Defined
The Role of Logistics in Supply Chain Management
Eliminate the Warehouse, If Possible
Summary
Endnotes
Suggested Reading
Chapter 12 Outsourcing
Outsourcing: A Growth Industry
Strategic Issues
Core Competencies
Supplier Dominance
The Creation of Strategic Vulnerabilities
The Dangers of Vertical Integration
Horizontal Integration
New Product Development and Outsourcing
Lean Manufacturing
Tactical Decisions
Factors Influencing Make-or-Buy Decisions
Cost Considerations
Control of Production or Quality
Technology Risk and Maturity
Unreliable Suppliers
Suppliersâ Specialized Knowledge and Research
Small-Volume Requirements
Limited Facilities
Work Force Stability
Multiple-Source Policy
Managerial Control Considerations
Procurement and Inventory Considerations
Netsourcing
The Volatile Natu re of the Make-or-Buy Decision
Insourcing
Dangers of Outsourcing
Administration of Make-or-Buy Activities
Chief Resource Officer
Framework for Outsourcing
Executive Level Involvement
The Special Disadvantages of Outsourcing Business Processes
Summary
Endnotes
Suggested Reading
Chapter 13 Sourcing
The Strategic Sourcing Plan
Discovering Potential Suppliers
Evaluating Potential Suppliers
Selecting Suppliers
Bidding vs. Negotiation
Reverse Auctions
Two-Step Bidding/Negotiation
The Solicitation
Weighted Factor Analysis
Responsibility for Source Selection
Developing Suppliers
Managing Suppliers
Additional Strategic Issues
Early Supplier Involvement
Supply Base Reduction
Single vs. Multiple Sourcing
Share of Supplierâs Capacity
Local, National, and International Sourcing
Manufacturer or Distributor
âGreenâ Supply Management
Minority- and Women-Owned Business Enterprises
Ethical Considerations
Reciprocity
Consortium Purchasing and Group Buying
Disaster Plans
Summary
Appendix
Illustrative Plant Survey
Financial Statement Analysis
Planning a Facility Visit
Endnotes
Suggested Reading
Chapter 14 Global Supply Management
Global Management Perspective
Future of Global Supply Management
Stages to Global Supply Management
Reasons for Global Sourcing
Potential Problems
Questions Before Going Global
Supply Channels
Global Trade Intermediaries
International Procurement Offices
Direct Suppliers
Eliminating Intermediaries
Identifying Direct Suppliers
Qualifying Direct Suppliers
Preparing for Direct Relations
The Initial Meeting
Currency and Payment Issues
Exchange Rates
Payments
Letters of Credit
Countertrade
Countertradeâs Advantages
Countertradeâs Disadvantages
Supply Managementâs Role
Creative Countertrade
Political and Economic Alliances
European Union
North American Free Trade Agreement
MERCOSUR
Association of Southeast Asian Nations
Asia-Pacific Economic Cooperation
Summary
Appendix
Currency Risk
Hedging
Endnotes
Suggested Reading
Chapter 15 Total Cost of Ownership
Three Components of Total Cost
Acquisition Costs
Ownership Costs
Post-Ownership Costs
TCO, Net Present Value (NPV) Analysis, and Estimated Costs
The Importance of Total Cost of Ownership in Supply Management
Service Providers
Retail
Manufacturing
Supply Chains/Supply Networks
Summary
Appendix: Supply Management in Action
Endnotes
Suggested Reading
Chapter 16 Price and Cost Analysis
Introduction
General Economic Considerations
Conditions of Competition
Variable-Margin Pricing
Product Differentiation
Six Categories of Cost
Regulation by Competition
Price Analysis
Competitive Price Proposals
Regulated, Catalog, and Market Prices
Internet/e-Commerce II
Historical Prices
Supply and Demand Factors
Independent Cost Estimates
Cost Analysis
Cost Analysis Defined
Capabilities of Management
Efficiency of Labor
Amount and Quality of Subcontracting
Plant Capacity
Sources of Cost Data
Potential Suppliers
Supply Partners
Cost Models
Direct Costs
Direct Labor
Direct Materials
Tooling Costs
Learning Curves
Cumulative Curve and the Unit Curve
Target Cost Estimation
Indirect Costs
Engineering Overhead
Material Overhead
Manufacturing Overhead
General and Administrative
Selling
Recovering Indirect Costs
Activity-Based Costing
Target Costing
Profit
Resisting Arbitrary Price Increases
Summary
Appendix A: Application of Learning Curves
Appendix B: Discounts
Endnotes
Suggested Reading
Chapter 17 Methods of Compensation
Introduction to Compensation Arrangements
Observation
Contract Cost Risk Appraisal
Technical Risk
Contract Schedule Risk
General Types of Contract Compensation Arrangements
Fixed Price Contracts
Incentive Contracts
Cost-Reimbursement Contracts
Specific Types of Compensation Arrangements
Firm Fixed Price Contracts
Fixed Price with Economic Price Adjustment Contracts
Fixed Price Redetermination Contracts
Incentive Arrangements
Fixed Price Incentive Fee
Cost Plus Incentive Fee Arrangements
Cost Plus Fixed Fee Arrangements
Cost Plus Award Fee (CPAF)
Cost without Fee
Cost Sharing
Time and Materials
Letter Contracts and Letters of Intent
Considerations When Selecting the Method of Compensation
Summary
Endnotes
Suggested Reading
Chapter 18 Negotiations
Introduction
Objectives of Negotiation
Quality
Fair and Reasonable Price
On-Time Performance
Control
Cooperation
Supplier Relationship Management
When to Negotiate
Supply Managementâs Role in Negotiation
The Supply Management Professional Acting Alone
The Supply Management Professional as the Negotiating Team Leader
The Negotiation Process
Preparation
Establishing Objectives
Identify the Desired Type of Relationship
Five Powerful Preparation Activities
The BATNA
The Agenda
âMurder Boardsâ and Mock Negotiations
Crib Sheets
Draft Agreements
Face-to-Face Discussions
Fact Finding
Recess
Narrowing the Differences
Hard Bargaining
Techniques
Universally Applicable Techniques
Transactional Techniques
Collaborative and Alliance Negotiating Techniques
The Debriefing: An Incredible Learning Opportunity
Documentation
Online Negotiation
Advantages to Online Negotiation
An Example of a Successful Application of Negotiating Online
Drawbacks to Online Negotiation
Negotiating for Price
Price Analysis Negotiation
Cost Analysis Negotiation
Characteristics of a Successful Negotiator
Summary
Endnotes
Suggested Reading
Chapter 19 Contract Formation and Legal Issues
Litigation Prevention
Dispute Resolution
Negotiation
Mediation
Litigation
Arbitration
Courts
Development of Commercial Law
Electronic Contract Considerations: Cyber Law
Attempts to Revise the UCC
Basic Legal Considerations
Status of an Agent
The Purchase Contract
Letters of Intent
Special Legal Considerations
Inspection Rights
Rights of Rejection
Title and Risk of Loss
Warranties
Evergreen Contracts
Order Cancellation and Breach of Contract
JIT Contracts
Honest Mistakes
Patent Infringement
Restraint of Trade Laws
International Considerations
Contracts for the International Sale of Goods
Foreign Corrupt Practices Act
Summary
Endnotes
Suggested Reading
Chapter 20 Contract and Relationship Management
Need for Better Contract Management
Preaward Conference: The Stage Has Been Set
Monitoring and Controlling Project Progress
Operations Progress Reports
Gantt Charts
CPM and PERT
Closed-Loop MRP Systems
Monitoring and Controlling Total Supplier Performance
Supplier Performance Evaluation
Motivation
Punishment
Rewards
Assistance
Transformational Training
Quality Audits and Supply System Reviews
Problem Solving
Collaboration
Managing the Relationship
Summary
Appendix A: Supplier Reporting Requirements for Unique Major Projects
Appendix B: How Critical Path Scheduling Works
Appendix C: Supplier Questionnaire
Endnotes
Suggested Reading
Chapter 21 Ethics and Social Responsibility
Ethics in the Supply Management Context
Professional Supply Management Ethics
Principles and Standards of Ethical Supply Management Conduct
National and International Supply Management Conduct
Important Areas Requiring Amplification
Avoid Sharp Practices
Competitive Bidding
Negotiation
Samples
Treating Salespeople with Respect
Substandard Materials and Services
Gifts and Gratuities
Management Responsibilities
Written Standards
Ethics Training and Education
Departmental Environment
Miscellaneous Factors
Dealing with Gray Areas
The Four Way Test
Social Responsibilities
Summary
Endnotes
Suggested Reading
Chapter 22 Implementing World-Class Purchasing in the Supply Chain
Designing an Effective Purchasing/Supply Management Department
The Purchasing Planning Function
Defining Planning
Four Phases of Planning
The Organizing Function
The Five Basic Steps to Organizing
Basic Concepts of Organizing
Organizing for Supply Chain Management
The Staffing Function
The Directing Function
Leadership
Leadership and the Purchasing Profession
The Controlling Function
Evaluating the Purchasing/Supply Management Department
The Annual Report
Risk Management
New Focus on Risk Management
Appendix A: The Institute for Supply Management Awards for Excellence in Supply Management
Appendix B: From Reactive to Proactive Procurement: A Case Study
Appendix C: Raytheon Supply Base Optimization, April
Appendix D: At Rolls-Royce North America, an Organizational Shift Is the Driving Force Behind an Innovative New Journey to Engage Its Supply Chain
Endnotes
Suggested Reading
Epilogue The Future of Supply Management
Index