9/7/2006 9:19 AM A Purchasing Manager's Guide to Strategic Proactive Procurement David N. Burt, Ph.D. NAPM Professor of Supply Management and Marketing, School of Business Administration, University of San Diego Richard L. Pinkerton, Ph.D., C.P.M. Professor of Marketing and Logistics, The Sid Craig School of Business, California State University, Fresno American Management Association New York · Boston · Chicago · Kansas City · San Francisco · Washington, D.C. Brussels · Mexico City · Tokyo · Toronto 9/7/2006 9:23 AM This book is available at a special discount when ordered in bulk quantities. For information, contact Special Sales Department, AMACOM, a division of American Management Association, 1601 Broadway, New York, NY 10019 This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Library of Congress Cataloging-in-Publication Data Burt, David N. A purchasing manager's guide to strategic proactive procurement/ David N. Burt, Richard L. Pinkerton. p. cm. Includes bibliographical references and index. ISBN 0-8144-0288-7 1. Industrial procurement. 2. Purchasing. I. Pinkerton, Richard L. II. Title. hd39.5.b857 1996 658.7'2—DC20 95-44558 CIP ©1996 David N. Burt and Richard L. Pinkerton. All rights reserved. Printed in the United States of America. This publication may not be reproduced, stored in a retrieval system, or transmitted in whole or in part, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of AMACOM, a division of American Management Association, 1601 Broadway, new York, NY 10019 Printing number 10 9 8 7 9/7/2006 9:27 AM To Lamar Lee, Jr., Gayton Germane, and Bob Davis, all former members of Stanford University's great School of Business, and mentors of David N. Burt To William P. Stilwell, J. Howard Westing, Harland E. Samson, and Isadore V. Fine, all professors emeriti, The University of Wisconsin, Madison, and the superb teachers of Richard L. Pinkerton 9/7/2006 9:27 AM Page v Contents Preface ix Acknowledgments xv 1 Benefits of the Integrated Procurement System 1 The IPS diamond; success stories; the effect of quality of purchased material on productivity and profits; five approaches to doubling profits; IPS in manufacturing, service organizations and hospitals, government, and construction; purchasing and materials management; the steps to successful integration; summary. 2 Determining What to Purchase: The Design Process 23 Developing requirements; the design process and procurement; crossfunctional teams; the investigation phase; the laboratory phase; the manufacturing phase; engineering change management (ECM); key purchasing inputs; how to integrate engineering successfully into the procurement system; material engineers; design review committee; project teams; approved components list; suggestions from pros; summary. 3 Developing the Right Purchase Description to Save You Time and Money 37 Classifying an inventory catalog; requirement trade-off analysis; describing the purchase by brand name, samples, standard specifications, design specifications, or performance specifications; how to select the right approach; summary. 4 Procuring Services 49 Six major problems; objectives; statement of work (SOW); professional services; technical services; operating services; SOW language; summary. 9/7/2006 9:28 AM Page vi 5 How to Stretch Your Equipment and Building Dollar 59 Major problems; the capital equipment buying team; the capital equipment procurement flowchart; the process flow of procuring equipment; classification of capital equipment; installation; requests for proposals; supplier selection; total cost of ownership (TCO); financing vs. leasing, new vs. used; purchasing plant facilities; top management functions; alternative methods of purchasing construction; summary. 6 Two Key Interfaces: Production Planning and Inventory Control 72 Production planning; scheduling; forecasting; MRP; MRP II; JIT; supplier schedules in production control; the role of purchasing under MRP and JIT; proper levels of inventory; inventory costs; the fallacy of EOQ; catalogs; distribution resource planning (DRP); integrating marketing, production planning, and inventory management into the production system; electronic data interchange (>EDI); purchasing credit cards; summary. 7 To Make or to Buy: That Is the Question 96 The issues: strategy, cost, quality, quantity, service, specialized knowledge, design or production process secrecy, urgency, labor problems, plant capacity, capital equipment, use of idle resources; make and buy; vertical integration vs. specialization; summary. 8 How to Select the Right Supplier 106 Prescreening; sourcing outline and checklist for major purchases; the pre-experience supplier evaluation form; the critical evaluation factors of management: financial strength, financial ratio tests, production capacity, experience, quality assurance; R&D, delivery, purchasing expertise, price/cost controls; direct or indirect, number of proposals, local or national suppliers, global sources; request to bid, quote, or get information; what is an offer?; lower bid implications; when to use competitive bidding; selecting the source; source development; supplier certification; supplier contract management; final supplier rating forms; suggestions to reduce mistakes; summary. 9 Price Analysis 132 Basic supplier pricing strategies; pricing elements under the control of purchasing; defining fair and reasonable pricing; the price analysis process; competition; catalog or market price; price comparisons; engineering estimates; keeping total cost low; transportation costs; two-step procurement; the special case of "price in effect at time of delivery"; 9/7/2006 9:28 AM target pricing and cost drivers; summary. 10 Cost Analysis 146 Cost within a traditional relationship; the supplier's cost breakdown: materials, labor, overhead; activity-based costing; proof profit; the role 9/7/2006 9:28 AM Page vii of estimates; price increases; cost within a strategic supply alliance; target costing; summary. 11 Value Analysis and Value Engineering 156 Development of value analysis and value engineering; principles, techniques, and examples; the VA-VE procedure; the two faces of VA/VE; the keys to successful implementation; summary. 12 Quality Assurance Overview 169 Defining quality; total quality management (TQM); mapping TQM, quality function deployment (QFD); continuous improvement (CI); the major technical quality tools; statistical process control (SPC); the control; the investigative tools of quality assurance; design of experiments (DOE); Pareto analysis; cause-and-effect diagrams or "fishbones"; plan-do-check-act (PDCA); the poka-yoke system; Certification Program; the Malcolm Baldrige National Quality Award; the Deming Prize; supplier certification; benchmarking; the role of purchasing in quality assurance; summary. 13 Team Building 188 What is a team?; the team's charter; a recent case history; how to have more effective teams; clearly defined objectives; explicit goals and vision; team structure and mandate; competent team members; types of team members; unified commitment; collaborative climate; the four stages of team development; standards of excellence; exterior support; recognition, rewards, and motivation; principled informal and formal leadership; the special situation of cross-functional sourcing teams; measuring team progress; final thoughts and warnings; summary. 14 The Winning Way of Negotiating 199 What is negotiation?; the best of Fisher, Ury, and Patton's "Getting to Yes"; problems in negotiating; when to negotiate; what to negotiate; preparing for negotiation and fact-finding; determining bargaining strength; final agenda preparation; practice; the negotiating meetings; negotiating techniques; how to handle the difficult potential or current supplier; hints for the negotiator; terminating and/or documenting the agreement; negotiation post mortem; negotiating with someone from another culture; summary. 15 Strategic Supply Management 218 Supply as a competitive weapon; integrating supply strategy with the strategic business units' (SBUs) strategy; gaining velocity during 9/7/2006 9:28 AM development and production; measuring continuous improvement; sourcing globally; optimizing the cost of ownership; centralizing supply strategy; purchasing power with measurement; data available and 9/7/2006 9:29 AM Page viii used; supply base by design; leverage supplier technology; monitoring the supply management; managing relationships; value chain management; summary. 16 Planning for Proactive Procurement 229 Defining "planning"; procurement planning; the current situation analysis phase; the objective phase; the consolidation procedure as a major planning tool; the creative new action steps (the new plan); the great assumptions; the materials plan; the procurement planning chart; planning hazards; implementation, monitoring, and revision; summary. Appendix A: Make-or-Buy Policy and Procedure 241 Appendix B: Supplier Welcome Booklet 248 Appendix C: The Learning Curve 269 Appendix D: Alternative Methods of Contract Pricing 274 Appendix E: Other Approaches to Cost Estimating 282 Appendix F: Special Secondary Source Techniques for Estimating Cost Components 287 Appendix G: Managing Price Increases 290 Appendix H: Statistical Process Control 292 Appendix I: Design of Experiments 297 Appendix J: Supplier Quality Survey Example 300 Appendix K: Sample Audit-Situational Analysis Questionnaire 307 Index 313 [...]... materials management into the total operations of an organization A Purchasing Managers Guide to Strategic Proactive Procurement retains the visionary topics of Proactive Procurement while adding the very latest and, indeed, future procurement methods for effective purchasing in the twenty-first century A great many trade books addressing an organization's relations with its suppliers have appeared... item that incorporates the purchased material Purchasing 9/7/2006 9:34 AM Page 13 Exhibit 1-5 The functional organization and procurement activities in the IPS: manufacturing 9/7/2006 9:35 AM Page 14 must maintain a good dialogue with Marketing on changes in material prices and availability and product acceptance relative to purchased components to allow Marketing to update sales quotations and current... reactive purchasing department generally are constrained by activities that have taken place before purchasing becomes involved in the procurement The very survival of the organization may be affected by the presence or absence of a viable strategic material plan Under the myopic approach of traditional reactive purchasing, the company may awaken one day to a world in which sources of supply capable of... be suitable alternatives to machined metal knobs, at a savings of 85% Market share, prices, and profits are all favorably affected by attention to quality Today, quality and reduced time to market have replaced price as the key to increased market share and profit margins Procuring the right quality materials frequently is the quickest and easiest way to improve the quality of the final product Procuring... just has to be a better way Extreme? Perhaps Perhaps not All managers have experienced many of Ted's problems There is a way of avoiding most of them, and, in turn helping the purchasing department to make a greater contribution to profitability That way is proactive procurement And you can and should be responsible for making it happen Total quality management (TQM), just-in-time (JIT) manufacturing,... requirements are fully occupied supplying the company's competitors and are unavailable Proactive procurement includes strategic supply management as a key responsibility and, as discussed in Chapter 15, helps to avoid such situations 9/7/2006 9:34 AM Page 7 Materials Selection The implementation of an integrated proactive approach to procurement can significantly affect productivity For example, many of... Production Planning, an Inventory Management Into the Procurement System Purchasing managers must show missionary zeal in making Marketing, Production Planning, and Inventory managers aware of the cost and productivity implications of inadequate purchasing lead time Managers should develop examples showing the results of adequate and inadequate lead time These examplessome with happy endings and some of... IPS and a proactive approach to procurement and IPSs By the way as far back as 1981, Victor H Pooler and David J Porter were using the term proactive purchasing. 3 Successful integration of the system leading to proactive procurement requires dedication, qualified managers and subordinates, an understanding of sound procurement techniques by all involved, and a can-do attitude This book is an outgrowth... alloy under consideration The zinc alloy cost half the price of the tin-bronze alternative 2 Another manufacturer found that a synthetic insulation material was far superior to asbestos in the production of high-temperature hose lines The synthetic material cost one third as much as the asbestos and avoided the latter's hazards 3 An appliance manufacturer found molded plastic knobs to be suitable alternatives... of more than 60 years of experience as practitioners, professors, and students of procurement It is based on the belief that proactive procurement is the key to greatly improved profits, productivity, and product quality Although written for the purchasing manager, A Purchusing Managers Guide to Strategic Proactive Procurement has considerable relevance for top management The understanding and support . concept to customer delivery times, and strengthening the integration of materials management into the total operations of an organization. A Purchasing Managers Guide to Strategic Proactive Procurement. 9/7/2006 9:19 AM A Purchasing Manager's Guide to Strategic Proactive Procurement David N. Burt, Ph.D. NAPM Professor of Supply Management and Marketing, School of Business Administration, University. the implementation of IPS and a proactive approach to procurement and IPSs. By the way as far back as 1981, Victor H. Pooler and David J. Porter were using the term proactive purchasing. 3 Successful