Chapter 10 & 11

Chapter 10 & 11 - BUS 370: Sourcing Decisions and...

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BUS 370: Sourcing Decisions and Purchasing Chapters 10 and 11 Donavon Favre College of Management North Carolina State University 1
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Chapter Objectives Be able to: Describe why sourcing and purchasing are critical. Develop a total cost of ownership model. Discuss the various strategic issues surrounding sourcing decisions and identify some of the key factors favoring one approach over the other. Perform a simple total cost analysis. Explain what a sourcing strategy is, and show how portfolio analysis can be used to identify the appropriate sourcing strategy for a particular good or service. Show how multicriteria decision models can be used to evaluate suppliers, and interpret the results. Discuss some of the longer-term trends in supply management and why they are important. 2
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Why Purchasing is Critical To compete globally, you need to purchase globally Global purchasing efforts are supported by advances in information systems The Changing Global Competitive Landscape 3
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Financial impact – on average, cost of materials consumes over half of a manufacturer’s revenue Industry Cost of Materials Value of Shipments Food 53.5% 45.8% Chemicals 46.2% 49.0% Fabricated metal 45.3% 42.8% Transportation equipment 60.5% All manufacturers 52.5% 4
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Financial Impact of Purchasing Earnings and Expenses ($M) Sales $26,491 COGS $18,465 Pretax earnings $2,359 Selected Balance Sheet Items ($M) Merchandise inventory $3,968 Total assets $16,109 Lowe’s Company Every dollar saved in purchasing increases pretax profit by one dollar Every dollar saved in purchasing inventory lowers total assets by one dollar 5
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Earnings and Expenses ($M) Current With 3% saving Sales $26,491 $26,491 COGS $18,465 $17,911 Pretax earnings $2,359 $2,913 Selected Balance Sheet Items ($M) Merchandise inventory $3,968 $3,849 Total assets $16,109 $15,990 3% purchasing reduction in COGS Pretax earnings increase by $554 (23.4%) ROA increases from 14.6% to 18.2% Financial Impact of Purchasing 6
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Quality Delivery Ability to exploit new technologies Performance Impact Why Purchasing is Critical 7
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$10 $2 99.8% 95% Overnight delivery 1 day to 3 weeks Supplier A Supplier B Cost per valve % Good Delivery Lead Time Sourcing dialysis machine valves Total Cost of Ownership 8
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Effect of defective dialysis machine valves Interruption in patient treatment Rescheduling difficulties Reduction in the effective capacity for dialysis Possible medical emergencies Estimated cost of a failed valve = $1,000 Total Cost of Ownership 9
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Supplier A Supplier B Valve costs Failure costs Backup inventory Total costs Sourcing 50 dialysis machine valves 50 x $10 = $500 50 x $2 = $100 0.2% x 50 valves x $1,000 = $100 5% x 50 valves x $1,000 = $2,500 1 valve x $10 = $10 3 valves x $2 = $6 $610 $2,606 Total Cost of Ownership 10
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Insourcing – The use of resources within the firm to provide products or services
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This note was uploaded on 10/27/2011 for the course BUS 370 taught by Professor Favre during the Fall '08 term at N.C. State.

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Chapter 10 & 11 - BUS 370: Sourcing Decisions and...

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