Chapter 3

Supply
Organization
Purchasing & Supply Management
Johnson
Leenders
Flynn
14th Edition
 Learning Objectives and Outcome

• Organizational Structures for Supply Management

• Organizing the Supply Group
• Supply Activities and Responsibilities
• Supply Teams
Traditional View of Supply Objectives
Seven Rights (7Rs) of Purchasing:
1. right materials (meeting quality requirements).

2. right quantity

3. right time of delivery

4. right place

5. right source (a supplier who is reliable and will meet its

commitments in a timely fashion).

6. right service (both before and after the sale).

7. right price in the short and long term.

 Nine Goals of Purchasing
1. Improve organization’s competitive position.

2. Provide an uninterrupted flow of materials ,supplies, and all services to operate

the organization .

3. Keep Inventory Investment & Loss at a minimum.

4. Maintain & Improve Quality (directly linked to an organization’s ability to compete

effectively on the worldwide bases ).

5. Find or Develop best in class Suppliers.(responsive and responsible ) .

6. Standardize Items and process (materials, equipment, MRO and services ).

7. Purchases required items at lowest total cost of ownership

8. Achieve Harmonious Productive Relationships with other Functions within the

Organization
9. Accomplish supply objectives at the lowest possible operating costs
 Organizational Structures for Supply
Management
Small and Medium-Sized Organizations
• Assigning the supply function to supply professionals are
more efficiently and effectively to organizational goals and
strategies than assigning supply responsibilities to those for
whom supply is a secondary responsibility.

• The size and activities of the supply function in a single

business unit organization will depend on a number of
factors such as the size of the company and the nature of its
business.
 Organizational Structures for Supply
Management
Typical Supply Organization Structure - Medium Sized Company
Director of
Purchasing

Commodity Commodity Manager Materials

Manager Manager Administration Manager
and Processes

Buyer Buyer Manager Stores/

e-Purchasing Warehouse
Manager
Buyer Buyer Manager
p-cards Receiving
Inspection
Manager
Manager
Purchasing Manager
Research Transportation
Structure Options for Large Organizations

1. Centralized: Authority and responsibility for most supply-

related functions are assigned to a central organization.

2. Decentralized:

Authority and responsibility for supply-related functions are

dispersed throughout the organization.
Structure Options for Large Organizations

3. Hybrid: Authority and responsibility are shared between a

central supply organization and business units, divisions, or
operating plants.
• May lean more heavily toward centralized or decentralized
depending on how decision-making authority is divided.

• Center-led supply organization: A type of hybrid structure in which

strategic direction is centralized and execution is decentralized.
Structure Options for Large Organizations

1-Centralized: Authority and

responsibility for most supply-related
functions are assigned to a central
organization.

2. Decentralized:
• Authority and responsibility for
supply-related functions are
dispersed throughout the
organization.
 Structure Options for Large Organizations

Authority and responsibility

for supply-related functions

Centralized Decentralized Hybrid

shared between a central
assigned to a central dispersed throughout the
supply organization and
organization organization
business units, divisions, or
operating plants.
 Advantage & Disadvantages of Centralization
Advantages Disadvantages
Strategic focus •Narrow specialization and job boredom
•Lack of job flexibility
Greater Buying specialization Corporate staff appears excessive

Consolidation of requirements-clout •Tendency to minimize legitimate differences in requirements

Coordination and control of policies and procedures •Lack of recognition of unique needs

Ability to pay for talent •Focus on corporate requirements, not on business unit
strategic requirement
•Most Knowledge sharing one – way.

Common Suppliers •Even common supplier behave differently in geographic

and market segment
Proximity to major organizational decision makers •Distance from users

Critical mass •Tendency to create organizational silos

Firm brand recognition and stature •Customer segment require adaptability to unique situations

Reporting line – Power •Top management not able to spend time on suppliers

Effective planning and research •Lack of business unit focus

Cost of purchasing low •High visibility of purchasing costs

 Advantages & Disadvantages of Decentralization
Advantages Disadvantages

Easier coordination/communication with operating •More difficult to communicate among business units
department

Speed of response •Encourages users not to plan ahead

Operational vs strategic focus

Effective use of local sources •To much focus on local sources. Ignore the better supply
opportunities.
•No critical mass in organization for visibility /
effectiveness – whole person syndrome.
Lacks clout

Business and autonomy Sub optimization

Business unit preferences not congruent with corporate
preferences
Small differences get magnified

Reporting line simplicity Reporting at low level in organization

Undivided authority and responsibility Limit functional advancement opportunities

Suits purchasing personnel preference Ignores larger organization consideration
Broad job definition Limited expertise for requirements
Geographical, cultural, political, environmental , social , Lack of standardization
language , currency appropriateness

Hide the cost of supply Cost of supply relatively high

 Advantages and Disadvantages of Hybrid,
Centralized and Decentralized Structures

Centralized Decentralized

Disadvantages Advantages Advantages Disadvantages

Hybrid
structure
 Structure for Direct and Indirect Spend

Direct spend: any goods that go into the end product

The control over direct spend is in highly centralized supply group

Indirect spend: goods and services that are needed to run the
organization, such as professional services, utilities, travel, employee
benefits, and office supplies.
 Organizing the Supply Group
(CPO)Trends

 Increasing education levels(all hold a bachelor’s degree

about half are holding MBA)

 The Chief Purchasing Officer (CPO) or Chief Supply Officer is

the “most senior” or “ Top level” executive.

 The CPO responsibility may be divided among managers and

departments but functional responsibility and authority of
the CPO should be definitely recognized.
 Organizing the Supply Group
CPO Trends
 When a new CPO replaces a current CPO, the current CPO is
promoted or leaves the company for a similar position in
another firm

 CPO reporting lines change every 2.5 years on average, which

means that the typical CPO will have at least two different
bosses during his or her tenure in the role

 The CPO role is still new in many organizations

 Organizing the Supply Group
CPO Trends
Some of CPO responsibilities:
• Logistics (Inbound & Outbound transportation) • Quality

• Warehousing • Account payable

• Materials handling • Contract agreement

• Order fulfillment • Manufacturing

• Inventory management • Materials

• Supply/demand planning. • Distribution

Supply can have Key Roles and Responsibilities in
Four Areas

1. What is acquired

2. Supply chain responsibilities

3. Type of involvement in “what is acquired” and “supply

chain responsibilities
– no involvement, documentary, professional and
meaningful involvement

4. Involvement in corporate activities

1-What is acquired?

It is vary from organization to organization and items

are added or deleted depending on the buying
organization needs.

In some organization, purchasing activities are

limited to production-related materials and services,
leaving responsibility for nonproduction or indirect
materials and services in the hands of users.
 2-Supply chain activities

The activities handled by the supply function vary from

firm to firm even within the same industry.

1- internally focused :account 2-Externally focused activities may

payable ,centralized
coordination of purchasing ,cost
management ,material
management ,legal ,,logistic
,production planning ,quality
and supply budget , and
financial management
have either a supplier focus or a
customer focus.
Supplier focus activities include inbound
logistics, supplier development, raw
materials procurement, e-procurement,
and outsourcing or subcontracting.

Customer focus activities include outbound

logistics, involvement with a new business
development and new product
development and customer bid support.
 Common Purchasing Activities
• Purchasing/buying
• Purchasing research
• Inventory control
• Transportation
• Environmental and investment recovery/disposal
• Forecasting and planning
• Outsourcing and subcontracting
• Nonproduction/nontraditional purchases
• Supply chain management
 Common Purchasing Activities
Area of Responsibility
Purchasing / Buying
Purchasing Research
Inventory Control
Transportation
Environmental and investment
recovery/disposal
Forecasting and planning
Nonproduction/ Nontraditional
purchases
Supply Chain Management
Activities
•Creating contract and supply agreements for materials, services, and capital items
•Managing key purchasing processes related to supplier selection, supplier evaluation,
negotiation, and contract management
•Identifying better techniques and approaches to supply management , including
benchmarking processes and systems
•Identifying medium –and long-term changes in markets, and developing appropriate
commodity plans to meet future needs .
• Identifying supply chain trends and opportunities for better materials and services
•Managing inventories and expediting material deliveries
•Establishing and monitoring vendor-managed inventory systems
•Managing inbound and outbound transportation services, including carrier selection
•Managing supply chain related activities to assure compliance with legal and regulatory
requirements and with company environmental policies
•Managing disposal of surplus materials and equipment
•Production planning and forecasting of short-, medium and long-term requirements
•Supporting the transition from internal production to external supply and vice versa
•Managing cost effective delivery of nonproduction and nontraditional purchases , such as
offices supplies, security services, janitorial services,
•Implementing and managing key suppliers relationships and supplier partnership,
including supplier development and participation on cross – functional teams
•Developing strategies that use the supply network to provide value to end customers and
contribute to organization al goals.
 3-Type of involvement
in “what is acquired”1 and “supply chain activates”2

1- No involvement supply is excluded completely

2-Documentary the supply function to act as a recorder, a

important supply decision are made outside sender of purchase orders, or a receiver of
supply. bids

3-Professional supply professionals have the opportunity

to exercise their expertise in important
acquisition process stages

4-Meaningful involvement parties outside the supply group are willing

and able to take supply considerations into
account in managing their own areas of
responsibilities
 4-Involvement in corporate
activities
Major strategic corporate initiatives include mergers
and acquisitions, new facility planning, new product
development, outsourcing, revenue enhancement,
technology planning, corporate e-commerce initiative,
and corporate cost reduction initiative.
 Supply Teams
Corporate organization structure are leaner, flatter and more flexible than
the past. It depends more on the cross-functional teams that cover the
functional organization to push decision lower in the organizational
hierarchy. Teams bring together a number of people, often from different
functional areas, to work on a common task. It believed that teams provide
superior capabilities of team members.

Teams are used by a number of functions for a variety of purposes, such as

improvements in quality, cost, or delivery; product development; process
engineering; and technology management.
 Supply Teams
Teams can be:

1. Project oriented team: are brought together for a limited time

to achieve a specific goal or outcome such as completion of a
capital project or an e-commerce initiative.

2. Ongoing team: continue indefinitely, such as a commodity-

sourcing team that manages the process and the supplier
relationship.
 Purchasing and Supply Teams
• Cross-functional teams
– sourcing, new product development/service
development, commodity management
• Teams with suppliers
• Teams with customers
• Teams with suppliers and customers
• Supplier councils - key suppliers
• Purchasing councils - purchasing personnel only
• Consortia
 Supply Teams

Cross-functional teams: consist of personnel from

multiple functions focused on a supply-related task.

It is believed that high-performing, cross-functional

teams will get better results on the task, with greater
benefits to the organization as a whole, at lower costs,
in less time, with greater stakeholder buy-in.
 Cross-functional teams
1-Sourcing team
(supply and representatives from other
relevant functional areas)
2-New product/service development
team:
(improve an organization's competitive
positions)
3-Commodity management team
(when expenditures are high and
commodity is complex )
1-Developing cost-reduction strategies.
2-Developing sourcing strategies
3-Evaluating and selecting suppliers
design, engineering, manufacturing, quality
assurance, purchasing, and marketing-
work on the new product development
-Supply base reduction
-Consolidation of requirements
-Supplier quality certification
-Management of delivery and lead time
-Cost saving project
-Management of supplier relationship
 Purchasing and Supply Teams
• Supplier councils - key suppliers: usually consist of 10 to 15 senior
executives from the company's preferred supplier base, along with
six to eight of the buying firm's top management.

• Purchasing councils - purchasing personnel only: generally

comprised of senior supply staff and are established to facilitate
coordination among the business units, divisions, or plants.

• Consortia: Purchasing consortia are a form of collaborative

purchasing that is used by both public and private sector
organizations to deliver a wider range of services at a lower total
cost.
• Ex, Educational institution and healthcare organizations.