Chapter 7I.IntroductionSupply Management (SM)- broad set of activities carried out by organizations to analyze sourcing opportunities, develop sourcing strategies, select suppliers and carry out all activities required to procure goods and services. Sometimes referred to as sourcing or purchasing.II.Why Supply Management is CriticalA.Global Sourcing- 50% of companies outsourced some of their activities, 40% developed consolidated andtech enabled service centers ex. Call centers.B.Financial Impact- When large portion of revenue spent on materials and services SM increases profitability through profit leverage effect (1$ in cost savings increase pretax profit by $1, while $1 increases in sales increases pretax by $1 multiplied by pretax margin).Cost of Goods sold (COGS)– purchased cost of goods from outside supplier that sold to customers.Merchandise Inventory– how much company paid for inventory had on hand at time of report.Profit Margin- the ratio of earnings to sales of given time periodReturn on Assets- measures the financial performance. Higher ROA preferred.To improve PM and ROA 1. Every dollar saved in purchasing lower COGS by $1 increase pretax profit by $1. 2. Every dollar saved on purchasing also lowers merchandise inventory figure, and total assets by $1 = higher ROA.C.Performance Impact – How the performance of product affects costs.III.The Strategic Sourcing Process – Managers may follow a strategic sourcingprocess to identify and negotiate agreements, but then switch to tacticalprocure-to-pay procedures to coordinate orders and shipments w/ the suppliers.A.Step 1: Assess Opportunities- Strategic sourcing used to improve firm’s existing performance.Spend Analysis– the application of quantitative techniques to purchasing data in an effort to better understand spending patterns and identify opportunities for improvement.B.Step 2: Profile Internally and Externally- understand all aspects of a particular sourcing category that could ultimately have an impact on the sourcing strategy.Industry Analysis– profiles the major forces and trends that are impacting an industry, including pricing, competition, regulatory forces, substitution, technology changes and supply/demand trends.Maverick Spending– spending that occurs when internal customers purchase directly from non-qualifiedsuppliers ad bypass established purchasing proceduresC.Step 3: Develop the Sourcing Strategy The Make or Buy Decision– The question whether to insource or Outsource.Advantages and Disadvantages of Insourcing and Outsourcing - Core competencies(organizational strengths or abilities, developed over a long period, that customers find valuable and competition finds difficult or impossible to copy) companies should insource these products.