Chapter 1
The Progression to

Professional
Supply
Management
1-1
Key Concepts
•
Purchasing, Supply Management, and
Supply Chain Management Defined
»
Increasing Importance of Purchased Materials.
•
Supply Management’s Impact on the
Bottom Line
»
Increased Sales
»
Faster to Market or Time-Based Competition
•
Supply Management and Return on
Investment
•
The Progression to Proactive Supply
Management
1-2
What Is a Profession?
•
A calling requiring specialized knowledge and
often long and intensive preparation

based on research and development
2. Finance, the capital acquisition, financial
planning and control function
3. Personnel, the human resources and labor
relations function
4. Supply, the acquisition of required materials,
services, and equipment
5. Conversion, the transformation of materials into
economic goods and services
6. Distribution, the marketing and selling of goods
and services produced
1-5
Evolution of Purchasing Function
•
Purchasing: a Dynamic Profession
•
Origins of Purchasing and Supply
Management
•
Transition to Supply Management
»
Wider in Scope
»
Value-Adding Benefits
»
Strategic Focus
•
Value Adding Benefits ‑
•
Strategic Focus

improve relationships.
•
Strategic sourcing requires two-way continuous
improvement process work from each
organization
1-8
Four Principles of Strategic Sourcing
1. Define the total value of the relationship
between purchaser and suppler,
2. Develop solutions based on a deep
understanding of the supplier's economics and
business dynamics,
3. Use differentiated purchasing tactics in order to
optimize the economic relationship for both
purchaser and suppliers, and
4. Imbed the required changes in the organization
so the purchaser achieves not only a near-term
measurable performance improvement but also
the ability to continuously improve
1-9
Four Step Process of Implementation
•
Research the industry economics and
dynamics of the team's assigned
commodity;
•
Evaluate sourcing strategies and
suppliers' capabilities;
•
Structure the supply relationship jointly

1850 1900 1950
2% 2%
50% 50%
98% 98%
Machine Power
Horse and Human
Key
1-12
Supply Management and the Bottom Line
•
Purchased items account for a large
percentage of the cost of goods sold.
•
Outsourcing allows firms to focus on their
core competencies.
»
Organizations outsource when they decide to
purchase something they had been making in-
house.
•
A dollar saved in materials cost is usually
considered a dollar increase in profit
1-13
Supply Management’s Impact on Net
Income and the Bottom Line
Increased Sales:
•
Faster to Market
•
Improved Quality

10.0%
Total assets
$4,000,000
Sales
$5,000,000
Divided by
Profit
margin
8%
Asset turnover
rate
1.25
Multiply
Cash
$300,000
Account
receivable
$300,000
Inventories
$500,000
Assets
Labor
$700,000
Materials
$2,300,000
Overhead
$800,000
Operating cost elements
($515,000)
($3,685,000)($2,185,000)

Plus
Supply Management and Return on Investment
Figure 1-3
Figure 1-3
1-15

The Impact on ROI of Reducing Materials Costs
vs. Increasing Sales
•
If the same profit increase were to be
generated by increasing sales, what sales
increase would be required?
•
At the existing 8% profit margin, the
following calculation provides the
answer…
•
Profit increase = new sales X .08
•
$115,000 = new sales X .08
•
new sales = $1,437,500
1-16

The Impact on ROI of Reducing Materials Costs
vs. Increasing Sales
•
therefore…
•
($1,437,500 / $5,000,000) X 100 = 28.8%

(OEM)
Extractors
Miners
Harvesters
Converters
(suppliers)
Figure 1-4
Figure 1-4
Materials and Service
Information/Funds/Relationships
1-19
The Value Chain
Mother
Earth
Original
Equipment
Manufacturers
(OEM)
Extractors
Miners
Harvesters
Converters
(suppliers)
Marketers
Distributor
s
End Customer
(the source
of funds)
Figure 1-5

the good of the larger group, then they
leave established an extended enterprise
characterized by virtual integration
1-22
Implementing Strategic SCM
Figure 1.6
1-23
Concluding Remarks
•
Purchasing is the foundation of Supply
Management and a basic activity common
to all organizations.
•
Effective Supply Management has an
overwhelming impact on the firm’s bottom
line giving organizations a competitive
edge.
•
Supply Management provides tremendous
career opportunities
1-24
END