Purchasing and Supply Chain Management Second Edition
W. C. Benton, Jr. The Max M. Fisher College of Business The Ohio State University
Me
Grauu Hill
McGraw-Hill Irwin
Contents Preface xiii About the Author xxi Note to Students xxii PART ONE
INTRODUCTION TO PURCHASING AND SUPPLY CHAIN MANAGEMENT 1 Chapter 1
Purchasing and Supply Chain Management 3 Introduction 3 Purchasing Managers, Buyers, and Purchasing Agents 4 The Supply Management Process 5 Purchasing Dollar Responsibility 7 Potential for Profit 9 Integrated Supply Management (ISM) 10 Annual Inventory-Ordering-Transportation Costs 11 Organizing for Purchasing 13 Centralized versus Decentralized Purchasing 13 Advantages of Centralized Purchasing 13 Disadvantages of Centralized Purchasing 14
The Future Organization Concept 14 Reporting Assignment 14 The Supply Management Concept 15 Careers in Purchasing 17 Summary 17 Discussion Questions 18 Suggested Cases 18 References 19 Chapter 2
Purchasing Decisions and Business Strategy 21 Introduction 21 Purchasing and Competitive Strategy Linkage 22
Competitive Strategy 23 Competitive Priorities 24
Purchasing Criteria 25 Supply Chain Strategy 25 Supply Chain Relationship Quality 27 Supply Chain Relationship Quality Indexing Example 28
The Integrated Buying Model 31 Cost 32 Quality Level 32 Lead Time 32 Constraints 33
The Strategic Souring Plan 33 Developing a Strategic Sourcing Plan 33 Program Objectives by Phase 34
Purchasing Strategy Trends 36 Summary 36 Discussion Questions 37 Suggested Cases 37 References 38 Appendix A: Supply Chain Relationship Quality Study 39 Chapter 3
The Legal Aspects of Purchasing 45 Introduction 45 Authority of the Purchasing Manager 46 Execution of Contracts and Purchase Orders by the Purchasing Manager 47 Essentials of a Purchase Contract 48 The Requirements for a Contract 48 Offers 49 Invitation to Do Business 49 Counteroffers 50 The Time Limits of an Offer 50 Firm Offers 51 Option Contracts 51 Bid Bonds 52 Promissory Estoppels 52 Oral Contracts 52 Terms of a Contract 52 Quantity 52 Quality 53 Price and Credit Terms 53 Delivery Terms 53 Leasing 53
Viii
Contents
The Legal Impact of the Information Age 53 Electronic Contracts and Signatures 54 Cryptographic Signatures (PKI) 55 The Federal Electronic Signatures in Global and National Commerce Act (ESGNCA) 55
Purchasing and Ethics 56 Women and Minority Compliance 58 Summary 58 Discussion Questions 58 Suggested Cases 59 References 60
PART TWO MATERIALS MANAGEMENT
Chapter 5
Inventory Management 81
61
Chapter 4
Materials Management 63 Introduction 63 Materials Requirements Planning and Capacity Requirements 64 Capacity Planning 64 Capacity and Inventory
64
Throughput Time 65 Order Cycle 65 Integrated Materials System 66 Order Cycle—Activities 67 Lead Time 67
Customer Satisfaction
67
Material Availability 68 On-Time Shipment 69 On-Time Receipt 69 Complete Shipment 69 Quality of Receipt 69 Flexibility 70 Responsiveness to Inquiry 70 Customer Satisfaction—The Balance 70
Quality 71 The Quality Level 73 Objective Quality 74
Specifying Materials 74 Raw Materials 75 Purchased Parts 75
Maintenance Repair, and Operating (MRO) Supplies 76 Maintenance 76 Repair 76 Operating Supplies
Tooling 77
77
Summary 77 Discussion Questions 78 Suggested Cases 78 References 79
Introduction 81 Independent versus Dependent Demand 83 Inventory Management Overview 83 ABC Classification of Inventory Items 85 Independent Demand 86 Costs in an Inventory System Quantity Discounts 90 Safety Stock 91
87
Dependent-Demand Systems 94 The Material Requirements Concept 95 The General Lot-Sizing Problem 95 Quantity Discounts for the Variable Demand Case 96 Illustration of Various Variable-Demand Lot-Sizing Models 98
Summary 104 Discussion Questions 105 Exercises 105 Suggested Cases 108 References 109 Appendix 5A: Areas under the Normal Curve 110 Chapter 6
Just-in-Time (Lean) Purchasing 111 Introduction 111 Lean Production Systems 112 Just-in-Time Production System 114 Kanban Production Control System 115
Significance of Purchasing 119 JIT Purchasing 119 Purchasing Benefits 122 Implementation of JIT Purchasing 123 Role of Culture 126 Critical Analysis of the JIT Concept 127 Summary 129 Discussion Questions 129 Suggested Cases 129 References 130
Contents
PART THREE
FUNDAMENTALS OF PURCHASING AND SUPPLY CHAIN MANAGEMENT 131 Chapter 7
Purchasing Procedures, E-Procurement, and Systems Contracting 133 Introduction 133 Purchasing Procedures 134 Systems Contracting 136 What Is Systems Contracting?
E-Procurement
136
137
Two Broad E-Procurement Purchasing Categories 138 Indirect Materials Purchasing 138 Direct Materials Purchasing 139
Reverse Auctions 140 What Are Reverse Auctions? 140 Implementing a Reverse Auction 141
Electronic Data Interchange (EDI) and Purchasing 141 What Is EDI? 141 Implementation 143 The Implementation Team 144 EDI in Practice 144 Future Outlook 145
Radio Frequency Identification (RFID) 146 What Is RFID and How Does It Work? 146 Advantages of RFID 147 -' Disadvantages of RFID 148 RFID Implementation 148 E-Sourcing and Purchasing 150
Summary 153 Discussion Questions 153 Suggested Cases 153 References 154 Appendix 7A: Systems Contract Agreement 155 Chapter 8
Supplier Selection and Evaluation 157 Introduction 157 Make versus Buy 158 Benefits of Outsourcing 158 Sources of Supplier Information 159 Strategic Selection 160 Supplier Relationship Management (SRM) 160 Four Pure Supply Management Relationships 161 Supplier Relationship Management Programs 162 Criteria for Supplier Evaluation 163
ix
Three Common Supplier Evaluation Systems 163 Strategic Supplier Relationship Management 167 The Strategic Supplier Performance Review Process 172 The SRM Scoring System 173 Supplier Development 175 Single versus Multiple Sources 175 Supplier Reduction 178
Industry Examples 180 Apparel Industry 180 Chemical Industry 181 Electronics Industry 183 Construction Industry 184
Summary 185 Discussion Questions 186 Suggested Cases 186 References 187 Chapter 9
Strategic Outsourcing 189 Introduction 189 Why Do Organizations Outsource Business Processes? 191 The Hidden Costs of Outsourcing 192 Quality Costs 192 Supplier or Vendor Relationship Management 192 Internal Coordination 193 Implementation of External Sourcing Model 193 Product/Service Design and Development 194 Governmental and Political-Related Expenses 194 Supply Chain Risk Management 195 Miscellaneous Financial Considerations 195
Core Competencies 196 Outsourcing Trends 196 Elements of Strategic Outsourcing 197 Strategic Evaluation 198 Financial Evaluation 198 Supplier Selection and Contract Development Transition to External Sourcing Model 200 Relationship Management 202
Summary 204 Discussion Questions 205 Suggested Cases 205 References 206 Chapter 10
Global Sourcing 209 Introduction 209 Costs of Global Sourcing 212 Currency Exchange Rates 212
199
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Contents
Organizational and Behavioral Issues 213 Global Sourcing as a Strategic Sourcing Option 213 Global Sourcing 216 Protectionism in the United States Importance of Negotiations 218
Chapter 12
Total Quality Management (TQM) and Purchasing 255 Introduction 255 Quality Requirements for Suppliers 256
217
U.S. Export Administration Regulations 221 Foreign Trade Zones 222 The European Union (EU): Overview and What It Means to Purchasing 222 Countertrade 225
Summary 226 Discussion Questions 227 Suggested Cases 227 References 228 Appendix 10A: Outsourcing Policy Example 229
Supply Partnerships and Supply Chain Power 231 Introduction 231 Benchmark Supplier Partnerships: Chrysler Corporation 232 Importance of Supply Chain Partnership Awareness 232 Partnerships: Definition and Overview 232 Relationship Intensity 233 Traditional Sourcing 234 Reduced Supplier Bases 235 Supply Chain Partnerships 236
The Deming Award 264 The Malcolm Baldrige National Quality Award 264 Continuous Improvement and the Supplier 265
ISO 9000 266 Quality Function Deployment (QFD) Supplier Evaluations 267
267
PART FOUR
PRICE/COST ANALYSIS AND NEGOTIATION STRATEGIES 279 Chapter 13
Price Determination 281
Benefits of Supplier Partnerships 237 Risks of Supplier Partnerships 237 Partnership Implementation and Critical Success Factors 238
Introduction 281 The Purchasing Decision 282 Price-Setting Strategy (Economic) 282 Price-Making Strategy (Psychological) 283 Discounts 283
Power Influences on Supply Chain Relationships 240
Summary 244 Discussion Questions 246 Suggested Cases 246 References 247 Appendix 11A: Channel and Supply Chain Power 248
Quality Awards 264
Engineering and Design 268 Summary 268 Discussion Questions 269 Suggested Cases 269 References 270Appendix 12A: Taguchi Method 271 Appendix 12B: Acceptance Sampling 275
Chapter 11
Power and Dependence 240 Power, Commitment, and Trust 241 Power, Cooperation, and Compliance 242 Power and Conflict 242 Power and Satisfaction 243 Power, Performance, and Profitability 243 Automobile Industry Example of Power Asymmetry
Quality Assurance Expectations 256 Quality Target Commitment 256 Preventive Quality 257
Cash Discounts 283 Trade Discounts 283 Quantity Discounts 283
244
Price and the Law 284 Price 284 Costs 286 The Learning Curve 286 The Model 287 Example Problem 289
Pricing Strategy 291 Standard Price List 291 Competitive Bidding 291 Negotiations 293
Contents
The Price/Cost Analysis Process 293 Summary 295 Discussion Questions 296 Exercises 296 Suggested Cases 298 References 299 Appendix 13A: The Robinson-Patman Act: General Price Discrimination 300 Appendix 13B: Unit Factors for Progress Functions 307 Appendix 13C: Estrada Systems 312
Documentation/Tracing/Claims 354 Terms and Conditions of Transportation Purchasing 354
Three Transportation Purchasing Examples 355 Ross Laboratories 355 Consolidated Stores 356 Copeland Inc. 356
Summary 357 Discussion Questions 358 Suggested Cases 358 References 359
Chapter 14
Bargaining and Negotiations 321
Chapter 16
Introduction 321 Psychological Bargaining Framework 323
Equipment Acquisition and Disposal 361
Payoff System 324 Bargaining Strategy
325
Economic Bargaining Framework 326 An Experiment in Distributive Bargaining 328 Planning for a Formal Negotiation 332 Planning (Seller's Perspective) 332 Planning (Buyer's Perspective) 333
A Richer Model of the Buyer-Seller Interaction 336 Summary 338 Discussion Questions 338 Suggested Cases 339 ' References 340 PART FIVE
SPECIAL PURCHASING APPLICATIONS 341 Chapter 15
Purchasing Transportation Services 343 Introduction 343 Transportation's Role in Purchasing 344 Mode Selection 344 Relative Prices for Transportation Goods and Services 350 Carrier Selection 350 Carrier Evaluation 351 Rate Determination 351 Third-Party Relationships 353 Freight Consolidation 353
Introduction 361 Department Requisition 363 Company Goals and Objectives 363 New Project Ideas 363 Cash-Flow Analysis 366 Economic Evaluation 367 Payback 367 Average Rate of Return 367 Net Present Value 367 Internal Rate of Return (IRR) Profitability Index 369 Selection 369
368
Financial Plan Analysis 370 Types of Leases 370 Lease versus Borrow and Purchase 371
Implementation 371 Expenditure Control 371 Audits 371 Disposal of Capital Equipment 371 Purchasing New versus Used Capital Equipment 371 New Equipment Purchases 372 Used Equipment Purchases 372
Summary 372 Discussion Questions 373 Exercises 373 Suggested Cases 374 References 375 Appendix 16A: Federal Acquisition Regulation; Electronic and Information Technology 376 Appendix 16B: Lease versus Borrow and Purchase Example 381 Appendix 16C: Present Value Table 386
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Contents
Chapter 17
Health Care Purchasing and Supply Management 387 Introduction 387 Purchasing, Supplies, and Services 388 Supply (Materials) Management Survey 389 Methods of Supply Management 390 Fixed Order Quantity System 391 Fixed Order Interval 391 Stockless Inventory Systems 391 The Best Method 392 Group Purchasing Organizations 392 Antikickback Issues 394
Complicating Factors Unique to Health Care for Inventory Control 394 Demand Problems 394 Safety Stock 396
Current Trends 396 Primary Supplier 397 Automation Technology 397
Acquisition of Capital Equipment Process Overview 397 Overview of the Process 398 Factors and Decision Rules 400 Selecting the Right Supplier 402
Summary 404 Discussion Questions 405 Suggested Cases 405 References 406 Appendix 17A: Purchasing Health Care Plans 407 Chapter 18
Procuring Professional Services 409 Introduction 409 Service Sector Characteristics and Strategies 410 Professional Services 410 Project Management 412 Project Planning and Scheduling Processes 413 Gantt Chart (or Bar Chart) Method
415
Progress Curves 415 The Critical Path Method (CPM)
416
Summary 418 Discussion Questions 418 Suggested Cases 418 References 419 Appendix 18A: FHWA Project Example 420 Appendix 18B: Fortune 500 Company Example 427 Cases Case 1 Advanced Computer Logic 431 Case 2 AMD Construction Company: Negotiating the Old-Fashioned Way 433 Case 3 The ARMS Procurement System at Tustin State University 437 Case 4 The Auction Case 447 Case 5 Austin Wood Products 451 Case 6 Butler Systems 455 Case 7 Camp Bowie Technologies, Inc. 457 Case 8 The Capital State Arena 461 Case 9 Carter Systems Canada, Inc. 465 Case 10 Eastern Waves Inc. 469 Case 11 Firebird Electric, U.S. 475 Case 12 Hoosier Pride Construction, Inc. 479 Case 13 Hudson Fabricators, Inc. 481 Case 14 KACI Products, Inc. 487 Case 15 MARS, Inc. (D) 489 Case 16 Medical Laser Equipment, Inc. (B) 491 Case 17 Microfuse, Inc. 495 Case 18 NEP: The Art and Science of Purchasing Coal 497 Case 19 Pendleton Construction, Inc. 503 Case 20 Point Clear, Inc. (B) 505 Case 21 Swisher Systems 507 Case 22 The Tank Case 513 Case 23 TEMKO Earthmovers 519 Case 24 Trip 7 Screen Printing 521
Purchasing Glossary 525 Index 535