i Purchasing and Supply Chain Management: Strategies and Realities Michael Quayle University of Glamorgan, UK IRM Press Publisher of innovative scholarly and professional information technology titles in the cyberage Hershey • London • Melbourne • Singapore ii Acquisitions Editor: Michelle Potter Development Editor: Kristin Roth Senior Managing Editor: Amanda Appicello Managing Editor: Jennifer Neidig Copy Editor: Becky Shore Typesetter: Sharon Berger Cover Design: Lisa Tosheff Printed at: Integrated Book Technology Published in the United States of America by IRM Press (an imprint of Idea Group Inc.) 701 E. Chocolate Avenue, Suite 200 Hershey PA 17033-1240 Tel: 717-533-8845 Fax: 717-533-8661 E-mail: [email protected] Web site: http://www.irm-press.com and in the United Kingdom by IRM Press (an imprint of Idea Group Inc.) 3 Henrietta Street Covent Garden London WC2E 8LU Tel: 44 20 7240 0856 Fax: 44 20 7379 0609 Web site: http://www.eurospanonline.com Copyright © 2006 by Idea Group Inc. All rights reserved. No part of this book may be repro- duced, stored or distributed in any form or by any means, electronic or mechanical, including photocopying, without written permission from the publisher. Product or company names used in this book are for identification purposes only. Inclusion of the names of the products or companies does not indicate a claim of ownership by IGI of the trademark or registered trademark. Library of Congress Cataloging-in-Publication Data Purchasing and supply chain management : strategies and realities / Michael Quayle, editor.-- 1st ed. p. cm. Summary: "This book shows readers how to develop supply chain strategy and implementation and use it gain an advantage in the 21st century competitive marketplace"--Provided by publisher. Includes bibliographical references and index. ISBN 1-59140-899-7 (hardcover) -- ISBN 1-59140-900-4 (softcover) -- ISBN 1-59140-901-2 (ebook) 1. Business logistics--Management. 2. Strategic planning. I. Quayle, Michael, 1947- HD38.5.P87 2006 658.7--dc22 2005023882 British Cataloguing in Publication Data A Cataloguing in Publication record for this book is available from the British Library. All work contributed to this book is new, previously-unpublished material. The views expressed in this book are those of the authors, but not necessarily of the publisher. iii Purchasing and Supply Chain Management: Strategies and Realities Table of Contents Foreword.......................................................................................... viii Preface............................................................................................... ix Chapter I. Developments in Purchasing and Supply Chain Management and Logistics ..................................................................................1 Procurement, Purchasing, Outsourcing, Supply Management and Supply Chain Management.........................................................1 The Sustainable Supply Chain .........................................................9 Resource-Based View and Competitive Advantage........................ 10 Business Issues in the 21st Century................................................. 13 Supply Chains into the Future....................................................... 14 Supply Chain Education................................................................ 16 Professional Competence: Food for Thought................................ 19 Chapter II. Strategic Purchasing Management................................................... 21 Corporate Planning ...................................................................... 21 Purchasing Planning and Purchasing Strategies ...........................27 Corporate and Environmental Factors .........................................29 Strategic Planning ........................................................................ 29 Market Strategic Flexibility........................................................... 30 Objectives and Responsibilities...................................................... 30 iv SWOT and Gap Analysis ............................................................... 32 Functions Involved in Corporate Planning.................................... 33 Functional Contribution to Corporate Strategy............................. 34 Monitoring Performance............................................................... 35 Purchasing Needs and Corporate Strategies ................................. 36 Purchasing Strategies ................................................................... 38 Flexible Strategies......................................................................... 41 International Trade: Implications for Purchasing Management ............................................................................ 44 Ethical Purchasing........................................................................ 47 Procurement Agencies .................................................................. 48 Food for Thought.......................................................................... 49 Chapter III. Purchasing Policy.............................................................................. 50 Policy Issues.................................................................................. 50 Selecting Overall Policy ................................................................ 53 Structure of Purchasing Organisation...........................................53 Structure of the Purchasing Function in Simple Organisations...... 54 Division of Work amongst Buying Groups.....................................57 The Position of Purchasing Management in the Organisation .......59 Structure of the Purchasing Function in Complex Organisation.... 60 A Multilevel Structure for Purchasing Management......................63 Other Methods of Achieving Coordination .................................... 65 The Selection of an Appropriate Structure for Particular Circumstances.......................................................................... 66 Multinational Supplies Structures..................................................67 Public Sector................................................................................. 68 Benchmarking............................................................................... 69 Materials Management.................................................................. 71 Exemplar Case Study: Procurement Business Strategy.................. 73 Chapter IV. Quality Management and Customer Service.................................... 89 Defining Quality............................................................................ 89 Design and Conformance.............................................................. 92 The Costs of Quality...................................................................... 93 Efficient Consumer Response........................................................ 99 Total Quality Management.......................................................... 100 Food for Thought........................................................................ 103 v Chapter V. Supply Chain Management............................................................. 104 The Role of Supply Chain Management....................................... 104 The Supply Chain Mix................................................................. 107 The Scope of the Supply Chain.................................................... 109 The Value Chain and Interlock Strategy...................................... 113 Chapter VI. Managing the Supply Chain Function............................................. 120 Staffing the Department.............................................................. 121 Operating Manuals...................................................................... 124 Qualities of Supply Chain Personnel............................................ 125 Recruiting Personnel ................................................................... 126 Managing the Department .......................................................... 130 Implications for Supply Chain Management................................ 133 Management and Implementation of Change.............................. 133 Supply Chain and Change........................................................... 135 Chapter VII. Operating Environments................................................................. 138 Integrated Logistic Support......................................................... 138 ILS Management Structure.......................................................... 143 Level of Repair Analysis.............................................................. 148 Logistics Information Systems..................................................... 150 Logistics and Other Organisational Functions............................. 155 Chapter VIII. Provisioning and Inventory Control................................................ 161 Provisioning................................................................................ 161 The Use of Computers ................................................................ 171 The Objectives of an Inventory Control System........................... 174 Method of Inventory Control....................................................... 180 Cost of Inventory Investment ...................................................... 185 Inventory Control and Accounting Methods................................ 187 Pricing Issues.............................................................................. 189 Price Analysis ............................................................................. 195 Inventory in the Final Accounts................................................... 196 Identification and Coding of Materials........................................ 198 Development of the Coding System............................................. 205 vi The Stores Vocabulary ................................................................ 210 Inventory Reduction.................................................................... 217 Review of Other Concepts........................................................... 221 Materials Requirements Planning................................................ 224 Manufacturing Resource Planning .............................................. 226 Chapter IX. Stores Management ....................................................................... 228 Stores Management Objectives ................................................... 228 The Siting of Stores Buildings and Stockyards ............................. 230 Construction of the Buildings and Stockyards ............................. 231 Stockyards .................................................................................. 233 Internal Layout ........................................................................... 233 Detailed Planning of Layouts...................................................... 234 Types of Stores............................................................................ 235 Special Storage Facilities............................................................ 240 Planning Storage Equipment....................................................... 242 Handling Equipment ................................................................... 245 Types of Handling Equipment ..................................................... 248 Security....................................................................................... 255 Safety and Safe Methods of Working........................................... 256 Case Studies................................................................................ 260 Chapter X. Transport ........................................................................................ 264 Introduction................................................................................ 265 Fleet Management ...................................................................... 266 Vehicle Scheduling ...................................................................... 269 Maintenance and Security ........................................................... 273 Facilities for Maintenance........................................................... 273 Quality Control........................................................................... 274 Security....................................................................................... 275 Containers, Unitisation and Palletisation.................................... 276 Mechanical Aids to Loading and Off-Loading ............................. 280 Loading and Unloading Equipment Available on Vehicles........... 282 Road Vehicle Design and Road Planning..................................... 282 Road Haulage ............................................................................. 287 Operating Costs of Own Fleet..................................................... 291 Rail Freight................................................................................. 295 vii Air Freight.................................................................................. 297 Food for Thought........................................................................ 300 Case Study.................................................................................. 301 Chapter XI Physical Distribution....................................................................... 303 Distribution................................................................................. 303 Distribution Planning.................................................................. 304 Logistics and Delivery Planning.................................................. 307 Budgetary Control in Distribution ............................................... 312 Food for Thought........................................................................ 315 Case Study.................................................................................. 317 United Parcel Service ................................................................. 318 Modelling Systems....................................................................... 318 Radio Frequency Identification.................................................... 319 Chapter XII. E-Business ...................................................................................... 320 A Definition of Electronic Data Interchange................................ 320 Why Use EDI?............................................................................. 323 Viewpoint.................................................................................... 340 References and Bibliography.......................................................... 342 About the Author............................................................................. 355 Index............................................................................................... 356 viii Foreword For too long the emphasis on logistics in academia has focused on the econom- ics of time and place and the physical movement of materials and finished goods. How refreshing to see a new book by Michael Quayle, which looks at logistics and the supply chain in the widest sense. This book looks at current thinking and development of the supply chain concept through purchasing and purchasing policies. Management issues surrounding quality, and value chain and controls within the supply chain follow. This is not a theoretical treatise but rather a look at various operating environments that will change emphasis within supply chain. It looks at the balance between service levels and profitability. This logically leads to issues such as inventory control and the alternative to holding stock and all the implications surrounding warehousing. Stores manage- ment is covered in considerable detail, giving current thinking on all aspects of storage of goods. Next, Michael considers transport, including the issues surrounding exports and imports. This is, in itself, a valuable reference to current practice. He next covers physical distribution and concepts of channel formation, and this is a comprehensive treatment of current thinking. Finally, he addresses e-business and the capture of information as a resource to be managed. I found this to be a stunning book that will reach a wide audience, because - every supply chain, logistics, production, purchasing, and service manager must have it as an office reference book. Sir Roger S. Jones, OBE ix Preface This first edition of Purchasing and Supply Chain Management: Strategies and Realities has been produced in response to market demand. I have devel- oped and reinforced the concept of purchasing and supply chain management as a dynamic and managerial process, and have added material that reflects the current more general view of purchasing and supply chain management as a strategic function. The terrorist attacks of September 11, 2001, in the United States of America, subsequent impacts, and other worldwide tragic events re- sulting from the war on terror have created a need to revisit how we achieve effective purchasing and supply chain management. Post 9/11 has had no ef- fect? On September 11, 2001, terrorists left their mark of murder and took the lives of many citizens. With the passing of months and years, it is the natural human desire to resume a quiet life and to put that day behind us, as if waking from a dark dream. The hope that danger has passed is comforting, is under- standing, and is false. The attacks that followed on Bali, Jakarta, Casablanca, Bombay, Mombassa, Najaf, Jerusalem, Riyadh, Baghdad, and Istanbul, for ex- ample (and indeed London in July 2005), were not dreams. They are part of the global campaign by terrorist networks to intimidate and demoralize all who op- pose them (Bush, 2003). Ask those trans-Atlantic and trans-America passengers and airlines who have had flights cancelled because of terrorist concerns. Ask customers, purchasers, and suppliers worldwide who have seen shipping costs and timescales increase as enhanced security measures are embodied. The threat matrix is a clear and present danger. Similarly, on a humanitarian scale, integration of purchasing and supply chain management and a sharing of resources can be a crucial element in international disaster relief. Indeed, integrative practices are an im- portant area in the effectiveness of purchasing and supply chain management. In general, however, the 21stcentury events such as the Iranian earthquake and the Asian tsunami disaster suggest the world still has much to learn in terms of integrating resources in order to achieve supply chain effectiveness. Conse-