Proactive Purchasing in the Supply Chain: The Key to World-Class Procurement

Distinguished Professor of Supply Chain Management and Director of the University of San Diego's undergraduate and graduate programs in supply chain management. He is founder and Director of USD's Supply Chain Management Institute and of the Strategic Supply Management Forum, an annual meeting of innovative supply management professionals from North America, Europe and Australia.

• 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 Management’s 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 Supplier’s 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-à-vis Value Analysis The Production Phase Engineering Change Management How to Expand Supply Management’s 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 JIT’s 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 Analysis—The 80–20 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 Suppliers’ 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 Nature 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 Supplier’s Capacity Local, National, and International Sourcing Manufacturer or Distributor “Green” 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 Countertrade’s Advantages Countertrade’s Disadvantages Supply Management’s 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 Management’s 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 “Murder Boards” 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