1 Purchasing Decisions And Business StrategyChapter Two Purchasing Decisions And Business Strategy McGraw-Hill/Irwin Copyright ©2007 The McGraw-Hill Companies, All Rights Reserved

2 Learning Objectives To learn the role of purchasing in the corporate strategy. To learn the most important elements of the strategic planning process for purchasing. To learn about the components of purchasing strategy. To learn how sourcing is integrated into corporate strategy. To learn how purchasing strategy is linked to other functional areas.

3 Learning Objectives To understand the impact of purchasing decisions on supply chain management. To learn how the sourcing audit can be used to formulate purchasing objectives and strategy. To learn about the supply chain relationship pegging analysis. To learn how to develop a strategic purchasing plan.

4 Introduction to Purchasing StrategyIn most industrial firms, material constitutes __________________________________________ __________________________ Purchased inputs offer __________________________________________ _____________________________. Purchasing can give the firm ______________________________________ In essence, __________________________________________ ________________________________.

5 Purchasing and Competitive Strategy LinkagePurchasing professionals are expected to _________________________________________. Purchasing managers need to devise _______________________________________. The competitive priorities are a _________________________________________. The buyer performance measures __________________________________________________________________________________.

6 Strategic Purchasing Purchasing decisions or actions that constitute purchasing strategy are determined by the firm’s competitive priorities, its resource capabilities, and the environment. ______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

7 COMPETITIVE STRATEGY A firm can compete in two broad alternate ways. It can either seek competitive advantages on cost or choose to differentiate itself from its competitors on some attributes of the product or in the way it markets its product. Cost and differentiation—________________________________________________________________________________________________________________________________________________________________________ The competitive strategy_________________________________________________________________________________________________________

8 COMPETITIVE PRIORITIESThe competitive priorities operationalize the firm’s competitive strategy. The two generic competitive advantages—delivery speed and reliability—are ________________________________________________________________________________________________________________________________________________________________________________.

9 PURCHASING CRITERIA The criteria in buying material must reflect firms’ competitive priorities. A firm competing on cost ___________________________________________. With short lead times, the company can be more flexible; and develop the ability to respond to changing situations quickly.________________________________________________________________________________________ Suppliers with short lead times and who are reliable in meeting their due dates minimize the problem of material shortages for the manufacturer; __________________________________________________________________________________.

10 PURCHASING CRITERIA The criterion on which the buyer’s performance is evaluated can influence the effectiveness of purchasing actions and effectiveness in making the firm competitive. ____________________________________________________________________________________________________________.

11 SUPPLY CHAIN STRATEGY As competitive forces increase, customers demand better products, faster delivery, increased service, and decreased costs. __________________________________________________________________________________________________________________________ As inventory levels are reduced throughout the supply chain,_________________________.

12 SUPPLY CHAIN STRATEGY Companies participate in a variety of supplier relationships and take on a variety of roles. Each company can be a supplier, customer, or end-user of products. Supplier partnerships can be categorized using five factors: __________________________________________________________________.

13 SUPPLY CHAIN STRATEGY The characteristics of buyer-seller relationships exist on a continuum beginning with the traditional approach of open-market, with a single short-term contract that presents minimal risk to both parties. The opposite extreme is vertical integration, where the parties are fully integrated as one unit. Partnerships are _____________________________________________. A long-term relationship____________________________. In theory, ______________________________________.

14 THE SUPPLY CHAIN RELATIONSHIP ENVIORNMENTIn dynamic business environments, maintaining a competitive advantage is a major survival factor. ___________________________________________________________________________________. Not only does the individual firm have to maintain its competitive edge, the entire supply chain must be competitive. Competitive and industrial ranking__________________________________________

15 SUPPLY CHAIN RELATIONSHIP PEGGINGThe supply chain relationship pegging system consists of four phases. Phase I is an assessment of the current performance gaps in the process. In this phase, the performance gaps should be prioritized based on the firm’s strategic direction and the relative cost of taking action versus not taking action. Phase II______________________________________. Phase III is____________________________________. The final phase (Phase IV) is _____________________.

16 THE INTEGRATED BUYING MODELThe decision maker faces multiple goals in making the buying decision. The cost per unit, quality, and lead time are some of the issues that a decision maker faces in making the buying decision. __________

17 Materials Cost The cost per unit of material depends on the volume or amount purchased, the quality level desired, and the desired lead time. Material procured in larger _________________________________________.

18 QUALITY LEVEL LEAD TIMEThe quality level of material purchased must meet the desired objective as defined by the firm’s competitive priorities. _______________________________________________________________________________________. 2. Six sigma suppliers focus on ______________________________________________________________________________________________________________ LEAD TIME Supplier lead time affects a firm’s flexibility and service to its own customers. Firms that compete in volatile markets and face rapidly changing product or technology require greater flexibility than firms competing in stable markets. _________________________________________________________________________________________________ _____________________________________________________________________

19 CONSTRAINTS A buyer must not only satisfy cost, quality, and lead-time goals, but also stay within _________________________________________. The buyer must ______________________________________ The budget limitations __________________________________________________________________________.

20 THE PURCHASING STRATEGIC PLANThere are a number of important challenges facing materials managers and executives in the future. The opportunities, _____________________________________. In order to take full advantage of the challenges, ___________________________.

21 DEVELOPING A STRATEGIC SOURCING PLANThe development of a strategic purchasing plan requires the following: A complete understanding_________________________________ An extensive evaluation/study of current suppliers, __________________________________________. Study of the degree of global purchasing opportunities. Identification of total costs associated with _____________________________________________

22 DEVELOPING A STRATEGIC SOURCING PLANPhase 1. Sourcing Audit _________________________________________________________________________________________________________

23 THE STRATEGIC SOURCING PLANPhase 2. Organizational Development This phase involves development of sourcing strategies; setting of clearly outlined areas to cut costs and improve profitability; ________________________________________________________________________________________________________________________________________________________________________________________

24 THE STRATEGIC SOURCING PLANPhase 3. Implementation and Evaluation In this phase, a thorough indoctrination of the company with sourcing strategy, _____________________________________________________________________________________________________________________________________________.

25 THE STRATEGIC SOURCING PLANPhase 4. In-House Training Sessions Classes should be conducted in groups of no more than 15 individuals. ______________________________________________________________________________________________________________________________________________________________________________

26 PURCHASING STRATEGY TRENDSThe NAPM and Center for Advanced Purchasing Studies produced a study entitled “The Future of Purchasing and Supply: A Five- and Ten-Year Forecast.” The 1998 study reported the results of a comprehensive survey on the evolving responsibilities of the purchasing function during the periods between 1998 and 2008. 1. ___________________________. 2. ___________________________. 3. ___________________________.