Purchasing & Supply notes PDF

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Katariina Kemppainen...

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35C00200 Purchasing and Supply Management Luento 2 (7.1.) Tools and firm performance Purchasing brings value in several ways - Profit, sales, assets, equity… -> margin, turnover, leverage Purchasing tools - Basic rule: use different tools for different needs o Administrative  Spend analysis  Process analysis o Technical  Value analysis  Quality o Financial  Supplier market research  Should cost o Operations management  Forecasting inventory Value analysis / engineering - Method is 60+ years old o Lawrence Miles from GE’s purchasing department thought to be the inventor in 1947 o Requires enthusiasm from the buyers and cooperation with engineering and marketing o First only a purchasing tool, now used more widely - Produce at least an equally good product with a lower cost o Starting point current cost structure, searches for ways to cut costs or increase benefit - Analysis answers everyday questions, e.g. o What benefit / purpose the customer looks for in the product? o Does it cost more for the customer than it benefits him / her Sourcing should also be talking to customers, not just sales & marketing! - How well has product development familiarized themselves with the customers’ needs? - What kind of feedback are sales personnel getting about the products? Buyers need to understand quality - Quality is important for operations o “Quality is the single most important thing you can work on to improve effectiveness of your company. Things just cascade when you get control of your quality.” - Quality is relevant for the competitive landscape o It affects sales, costs, profits…

Bad quality increases costs - Internal mistakes o Cost of rework o Cost of retesting o Cost of scrap o Downtime o Lower yield o Extra capacity, inventory and time o Extra arrangements - External mistakes o Warranties and liabilities o Cost of repair o Product returns and call-backs o Discounts o Customer complaints o Bad reputation o Lost sales o Legal costs - Attending to quality early on o Costs increase when we go further in the process Supply market research improves - Systematic collection, classification and analysis of data o All the more significant due to rapid technological development, increased outsourcing and market globalization (supply and demand) - Research should be done on both macro and micro level o General economic cycles and economic variables o Industry and competitor analysis; supply and demand, usage rates, profitability and costs, technological development o Analyses of individual actors in the field: finances, quality, costs… Market structure impacts price negotiation - Type of competition - Amount of competition - Share  Buyer must be able to estimate right price! Buyers should know their numbers - Difficult to ask right questions and understand answers otherwise - Price analysis is an everyday method o Correctness of price compared to e.g. other offers, market prices or previously paid prices o Usable when differences in offers are small  More than one supplier and no cooperation between suppliers  No significant differences in supplier reliability  Purchased item is standard or clearly specified - Cost analysis needed to evaluate offers by unraveling the cost factors o Usable in negotiations where offers are not totally comparable

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 Ability to ask the right questions in negotiations (“why this way”)  Find objects for cooperation (“where could we help”)  Cost separation should be asked in requests for tender o Is the offer feasible and fair for both parties?  Material quantities and prices – calculated labor hours, wage level, learning curve – fixed costs, volume dependence and bases for allocation – overhead costs – contribution margins etc. Activity based costing (ABC) is often basis for development work Target costing (cost = intended selling price – target margin) works in planning phase

Practical Total Cost of Ownership –problems - Thinking beyond the purchase price - Getting access to the needed supply - Chain cost information o Visibility often ends to the point when material is used in manufacturing or service is consumed o Requires good activity-based costing  E.g. What is the cost of a delayed delivery? - Implementing it o Pilot projects have been useful o Uncertainty: where to start and in what purchases to apply o Are multiple costing models needed? Business environment is often turbulent - Seller’s market o Limited number of bidders  No interest in the market  Barriers of entry  Customized / special product o Capacity limited and demand exceeds supply  Avoidable with long-term contracts and cooperation? - Buyer’s market o Plenty of bidders  Operations simple  Easy entry into the market  General / replaceable product o Extra capacity and demand less than supply -> Bad supplier treatment may come back to haunt you!

Game 1: Purchasing Cocoa -

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Cocoa is critical for company profits o In cases, where a company is unable to pass cost increases straight to customer e.g. due to contracts or market position, purchasing skills are vital to success Data collection and forecasting necessary o Monitoring markets, discussions with commodity suppliers, assessment of need, mathematical models (own or third party)

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 Results are rarely shared with the commodity suppliers o Also consider suppliers commodity price risk vulnerability Different approaches on reducing risk o Contractual methods; escalator clauses, fixed price contracts, staggering contact timing, directed sourcing contracts o Financial tools; options and futures (typical bottlenecks are small volumes, limited offerings and lack of experience), cross-hedging o Demand reduction; reduction of need (R&D), trying to find substitutes (seldom applied due to technical reasons) o Sourcing strategies; forward buying, vertical integration (improving security of supply), switching suppliers Inventory issues need to be understood o Stock-outs are 15 times more costly than holding in inventory  Avoiding stock-outs as much as possible is a wise strategy o Inventory holding rather cheap compared to stock out costs Most of the profits are made in the beginning due to large volumes and lower prices o If you miss a fashion trend you are most likely screwed o US stock market’s bull-run is not expected to continue Risk profiles are often individual o Buying into inventory vs. hoping prices will fall and buying later o How do bonuses affect purchasing behavior?  What would be the role of futures in the game if they were in use? o Should purchasing decisions be made in groups?

Guest lecturer Harri Hellman (13.1): Purchasing for Retail, fast moving consumer goods Decision-making is based a lot on poor or insufficient information, so the ability to estimate is very important. More than 100 000 products in a year, 25 % change every year. More than 2 000 suppliers. Strategic objectives of the grocery trade - Turning the market share in the Finnish grocery trade around o Negotiations, commercial deals - Further improving quality and service level o Answering to the price competition (Lidl) - Investments to improve the K-supermarket and K-market store network - Customer focused renewal of the K-citymarket concept - Improving price competitiveness and price image - Offering leading digital services in grocery - Developed retailer business model In retail buying = selling

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Planning portfolios and assortments so that you’re sales are maximized Three areas o Fast moving consumer goods  Buyer’s role: decides the assortment, assesses demand trends, has to differentiate, targets related to sales (common also to durable consumer goods)  Low margin, high volume, small percentages o Durable consumer goods  Finding and evaluating alternative sources is a major task (common also to raw material components)  Risky choices o Raw material components  Continuous products form a major share of volume (common also to FMCG)  Exact specifications

Product line responsibilities - Supplier relations - Purchasing & negotiating - Product master data maintenance - Assortment planning - Price planning - Promotions merchandising - Cooperate with replenishment - Category expertise Private Label and category management unit’s responsibilities - Category management structures, processes and tools – and their training - Private Label (Pirkka) brand, planning and sales - Planogram (hyllykartta) planning and production - Data flow to suppliers and stores - Pricing studies and analyses - Category management analyses - Negotiation back office assistance Negotiations are going on all the time - A purchasing negotiation is opened when needed, either initiated by the supplier or the buyer - Purchasing negotiation main areas: o Basic negotiations: conducted when needed o Promotion merchandising negotiations: begins by sending a request for proposal to the supplier o Private Label negotiations: traditional, auction, or through AMS purchasing alliance o Project negotiations: for specific development projects A successful product remains on the shelf if - An adequate amount of customers buy it o Movement - Product does not get spoiled/old on the shelf

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o Shrinkage Customer satisfaction...