Chapter 5

import merchants

- A person or company engaged in the purchase and sale of imported commodities for profit. They buy and take title to the goods being imported and then sell the goods domestically.

accuracy

- A reduction in errors. A virtual elimination of manual paperwork and paperwork handling

mobility

- Access virtually anywhere

countertrade

- International trade by exchange of goods rather than by currency.

cost savings

- Lower overhead costs in the purchasing area

pre transaction costs transaction costs post transaction costs

3 Components of the Total Cost of Ownership

higher lower

A _________ turnover ratio is beneficial because it means the company is generating sales efficiently to sell inventory. A ___________ turnover ratio is unfavorable as it means the company is not selling through products efficiently. The company is likely making/buying too much inventory for demand and may end up throwing out expired or unsaleable products.

profit-leverage effect

A decrease in purchasing expenditures directly increases profits before taxes (assuming no decrease in quality or purchasing total cost). Bottom line impact is $ for $

Request for Proposal (RFP)

A detailed capabilities document used to determine a supplier's capability and interest in the production of a product or service.

purchase requisition

A document that defines the need for goods and/or services An internal document. Does not constitute a contractual relationship with an external party. Generated by a user department to notify purchasing personnel of items to order, their quantity, and the timeframe. It may also contain the authorization to proceed with the purchase.

Request for Quote (RFQ)

A document used to solicit bids from interested and qualified suppliers for goods or services that the organization needs to obtain

Return on Assets (ROA)

A high ROA indicates managerial prowess in generating profits with lower spending

Supply management

A newer term that encompasses all acquisition activities beyond the simple purchase transaction. the "Identification, acquisition, access, positioning, and management of resources an organization needs, or potentially needs, in the attainment of its strategic objectives."

competitive bid

A procurement process in which bids from competing suppliers, for the right to supply specified materials or services, are requested. This process is generally initiated by advertising the scope, specifications, and terms and conditions of the proposed contract as well as the criteria by which the bids will be evaluated, either openly or to a selected group of potential bidders.

bid

A proposal or quotation submitted in response to a solicitation from a contracting authority.

time savings

A reduction in the time between need recognition and the release and receipt of an order

Request for Information (RFI)

A standard business process whose purpose is to collect written information about the capabilities of various suppliers

contracting

A term often used for the acquisition of services

import brokers

Agents licensed by the governmental regulatory authority to conduct business on behalf of importers, for a service fee.

trading companies

Buy products in one country and sell them in different countries where they have their own distribution network. They mostly work with high production volume products such as raw materials, chemicals, etc. They may carry wide variety of goods (such as from a catalog).

RFP

Buyer issues a ___________________ for items which have not been previously purchased, or not purchased from a specific supplier being evaluated. Supplier(s) provides their proposal to supply the item(s) including price and delivery.

RFQ

Buyer issues a_________________ for routine or repeat purchased items. Supplier(s) provides a price and delivery quote on the specific item(s) requested

Tariffs and non-tariff barriers, countertrade

Companies interested in pursuing international purchasing arrangements must acquire some specialized knowledge particular to buying products and services internationally. this consists of three things:

stimulating competition

Competitive bidding aims at obtaining goods and services at the lowest prices by_________________, and by preventing favoritism. does not allow for negotiations !!!

tariff barriers

Duties, taxes, or customs imposed by the host country for imported or exported goods.

tariffs

Duties, taxes, or customs imposed by the host country for imported or exported goods.

authorization reconciliation

For high-dollar purchases, the e-procurement process will generally also include: __________ of the purchase order __________ of the invoice.

Make supplier selection

If the Buyer already knows which supplier they will buy from, move to step 3. If not, a competitive bidding process may be initiated through the use of a Request for Proposal (RFP) or a Request for Quotation (RFQ). A Supplier is selected from the RFP or RFQ bids received based on criteria determined by the Buyer, including price, availability, quality, delivery costs, etc.

real time

Improved communication both within the company and with suppliers

inventory turnover effect

Increased inventory turnovers indicate optimal utilization of space and inventory levels, increased sales, avoidance of inventory obsolesce. Inventory is an asset but it is also capital tied up

decentralized purchasing

Individual, local purchasing departments, such as at the plant level, making their own purchasing decisions

industrial buyers

Individuals within an organization who purchase raw materials for conversion into products, and/or purchase services, capital equipment, and MRO supplies.

financial capital

Inventory is an asset but it also represents _____________ tied up and not available for use in other parts of the business.

Chief Procurement Officer (CPO)

Many companies have a ___________________ as part of their executive leadership team.

Obtain authorization as necessary

PURCHASING PROCESS STEPS: A Purchase Requisition may be routed to an authorized approver(s) depending on the type of material or service being requested and/or the dollar value of the request. Multiple authorizations, may be necessary if the value exceeds a specific threshold.

close out the purchase order

PURCHASING PROCESS STEPS: If the PO has been received complete, and all terms and conditions have been met, then the PO should be closed out in the purchasing system.

identify and evaluate potential suppliers

PURCHASING PROCESS STEPS: May be determined from a list of approved Suppliers. Alternatively, a Request for Information (RFI) may be used to collect information from potential suppliers on their capabilities in supplying the material or service.

analysis

PURCHASING PROCESS STEPS: Measurements of the efficiency and accuracy of the procurement process. Specific PO data and information captured and used during periodic supplier performance meetings.

payment

PURCHASING PROCESS STEPS: Payment is processed using an appropriate payment method assuming the item(s) is received and meets all of the criteria established on the PO.

a need is identified and a purchase requisition is issued

PURCHASING PROCESS STEPS: Request for goods or services submitted to the Procurement/Purchasing organization for action. Typically initiated by a user within an organization

Supplier confirmation of the Purchase Order

PURCHASING PROCESS STEPS: The Supplier formally agrees to supply the item(s) per the specifications, terms, and conditions described on the Purchase Order. The Purchase Order then becomes a legally binding contract between the Buyer and the Supplier for the item(s) specified.

invoice and reconcilliation

PURCHASING PROCESS STEPS: The Supplier prepares an invoice for the item(s) ordered. The invoice either accompanies the item(s) or is sent separately to the Buyer. The invoice may need to be reconciled to the purchase order and goods receipt before payment is made. Referred to as a "3-way match" (i.e., Invoice, Purchase Order, and Goods Receipt must match)

Fulfillment

PURCHASING PROCESS STEPS: The supplier delivers the item(s) to the buying organization as per the PO.

Purchase Order (PO) is created and delivered to the supplier

PURCHASING PROCESS STEPS: To inform the supplier of the intent to purchase. To identify the item(s) to be procured, the quantity required, the requested delivery date(s), the price to be paid, the delivery location, and any terms and conditions that relate to the order. The PO is the Buyer's formal offer to the supplier to obtain the item(s).

receipt of goods

PURCHASING PROCESS STEPS: Once the item(s) arrives at the designated location, the Buyer will typically conduct some form of receipt process where the item(s) are checked to ensure that they conform to the details of the PO, including quality and quantity. A confirmation of receipt may also be sent to the Supplier.

market conditions types of materials

Purchasing Organization is dependent on many factors, such as _______________ and ______________ required

centralized purchasing

Purchasing department located at the firm's corporate office makes all the purchasing decisions

function, responsibility

Purchasing is also a term commonly used in business to represent the __________ of, and the __________ for, acquiring materials, supplies, and services for an organization.

mangement

Purchasing personnel spend less time on processing of purchase orders and invoices, and more time on strategic value-added purchasing activities

poor supplier quality

Quality costs related to defective finished goods must also be considered. Costs such as: Scrap Rework Recycling Recovery of materials Warranty administration Repair costs

cost advantage

REASONS FOR BUYING Suppliers may provide the benefit of economies of scale, especially for components that are non-vital to the organization's operations.

insufficient capacity

REASONS FOR BUYING: A firm may be at or near capacity and subcontracting from a supplier may make better sense

non-strategic

REASONS FOR BUYING: If it is a non-strategic item

inventory considerations

REASONS FOR BUYING: opting to have the supplier hold inventory of the item or the materials required to produce the item.

brand strategy

REASONS FOR BUYING: take advantage of a supplier's brand image, reputation, popularity, etc.

lack of expertise

REASONS FOR BUYING: Firm may not have the necessary technology and expertise

quality

REASONS FOR BUYING: Suppliers may have better technology, process, skilled labor, etc.

multi sourcing strategy

REASONS FOR BUYING: To achieve a multi sourcing strategy using an external supplier in addition to an internal source

Temporary Capacity Constraints

REASONS FOR BUYING: the concept of "extended workbench" which involves short-term supplementing internal capacity with external capacity during time of constraint or overloaded work centers.

Control of transportation and warehousing costs

REASONS FOR MAKING If you make an item in-house, you avoid transportation costs, and may be able to keep warehousing costs to a minimum.

control of lead time

REASONS FOR MAKING You may feel that you have more control over the lead time to produce the product than a supplier.

using existing idle capacity

REASONS FOR MARKING: Make use of excess capacity by making a material instead of letting the capacity sit idle.

overall lower cost

REASONS FOR MARKING: You may be able to produce the material or product at a lower cost and avoid paying a 3rd party's profit margin

better quality control

REASONS FOR MARKING: You may feel that you have more control of the quality of the material / product than a supplier.

Protect proprietary technology

REASONS FOR MARKING: You may not want your intellectual property to be out in the public domain.

No Competent Supplier

REASONS FOR MARKING: There may not be an existing supplier in the market and you may not want to spend the time or effort to develop one.

Trackability

Real-time status tracking

forward vertical integration

Refers to a company acquiring (i.e., buying) one or more of their customers. Example: a manufacturer buying a wholesaler/distributor to take ownership of this aspect of their supply chain.

Backward vertical integration

Refers to a company acquiring (i.e., buying) one or more of their suppliers. Example: a manufacturer buying the key supplier of a critical material to take ownership of this aspect of their supply chain

in-sourcing

Reverting (i.e., going back) to in-house production when external quality, delivery, and services do not meet expectations

cost elements in QSDP

TCO is the sum of the____________

purchasing

The ____________ function in an organization is frequently responsible for Supply Management and therefore plays a large part in the amount of inventory the company holds

purchasing

The action of obtaining merchandise, capital equipment, raw materials, services, or maintenance, repair, and operating (MRO) supplies in exchange for money, or its equivalent the process of how goods and services are ordered from an external third party. can usually be described as the transactional function of procurement for goods or services.

E-procurement

The business-to-business (B2B) purchase and sale of supplies and services over the Internet. term used to describe the automation, through web-enabled tools, of the non-strategic and transactional activities that would otherwise consume the majority of a buyer's time

Quality, Service, Delivery, and Price (QSDP).

The four elements of cost are:

procurement

The process of selecting and vetting suppliers, negotiating contracts, establishing payment terms, and the actual purchasing of goods and service concerned with acquiring all of the goods, services and work that is vital to an organization

co-sourcing

The sharing of a process or function between internal staff and an external provider. Using dedicated staff at an external provider that works exclusively under your control and direction

merchants

Wholesalers and retailers who purchase for resale.

value added services

____________ may be offered such as: Special delivery Special packaging Preparation of promotional displays Subassembly operations in a supplier's plant.

E-procurement

______________ tools typically automate all or part of the following processes: Solicitation tools such as RFI, RFP, RFQ Execution and analysis Reverse auction capabilities

inventory turnover

_______________ represents the number of times the company sold through inventory in a given time period

administrative expenses

____________associated with the procurement activity itself such as: Screening potential suppliers Negotiation Order preparation Order transmission

purchase order

a commercial document. It is the official offer issued by a buyer to a seller to acquire goods or services. It is used to control the purchasing of products and services from external suppliers. Indicates types, quantities, and agreed prices for products or services.

payment bond

a debt secured by a bidder for the purpose of providing protection against 3rd party liens not fulfilled by bidder

- Time savings - Cost savings - Accuracy - Real time - Mobility - Trackability - Management - Benefits to the suppliers

advantages of an e-procurement system (8)

Decentralization

advantages of centralization or decentralization? Knowledge of local requirements Local sourcing Less bureaucracy

centralization

advantages of centralization or decentralization? Concentrated volume Leveraging purchase volume Avoiding duplication Specialization Lower transportation costs No competition within units Common supply base

qualitative factors

are more subjective and include control over quality, the reliability and reputation of the potential suppliers (internal or external), and the impact of the decision on customers and suppliers.

core capabilities staffing levels reengineering efforts internal management problems manufacturing flexibility

benefits of outsourcing include: Concentrate on ______________ Reduce ______________ Accelerate ______________ Reduce ________________________ Improve _____________________

make vs buy decision

described as "the act of deciding whether to produce an item internally or buy the item from an outside supplier". (producing vs buying materials) **STRATEGIC DECISION

quantitative factors

incremental costs of either making or purchasing the item, such as the availability of manufacturing facilities, needed resources, and manufacturing capacity.

Costs of Goods Sold (COGS) ÷ by the Average Inventory

inventory turnover formula

bid bond

is a debt secured by a bidder for the purpose of providing a guarantee that the successful bidder will accept the contract once awarded. If not, the bond would be forfeited

performance bond

is a debt secured by a bidder for the purpose of providing a guarantee that the work will be on time and meet specifications.

uniteruppted flow quality customer satisfaction

primary objectives of purcashing (3) 1. Ensure an ________________ of materials and services at the lowest total cost. 2. Improve the ________ of the finished goods produced. 3. Optimize ________________

government

purchases are expenditures made in the private sector by all levels of government. requires openness, accountability, and visibility

nonprofit

purchases are expenditures made in the private sector by all types of non-profit organizations.

reliable suppliers strategic suppliers new product design

purchasing contributes to its objectives bc it: 1.Actively seeks _____________ Working with the expertise of ___________ to improve quality and materials. Involving suppliers and purchasing personnel in ______________ and development efforts.

A need is identified, and a Purchase Requisition is issued Obtain authorization as necessary Identify and evaluate potential suppliers make supplier selection Purchase Order (PO) is created and delivered to the supplier Supplier confirmation of the Purchase Order Fulfillment receipt of goods invoice and reconciliation payment close out analysis

purchasing process steps (12)

quality, cost, and delivery performance global efficiencies: insufficient domestic capacity process and product technology domestic business environment reciprocal trade r

reasons for global sourcing: The opportunity to improve ___________ performance To exploit ___________________: To respond to ____________________ To achieve access to better ____________________ Due to a change in the _______________ To take advantage of _______________ and countertrade arrangements

purchasing management strategic sourcing supplier relationship management

since procurement is an overarching or umbrella term within which the action of purchasing can be found, what are the 3 terms that fall underneath it?

purchase requistion/purchase order invoice payment

the basic e-procurement process consists of: 1. An electronic ____________ 2. An _______ (which might be one with the receipt) 3. A __________

open competitive bidding

the sealed bids are opened in full view of all who may wish to witness the bid opening

closed competitive bidding

the sealed bids are opened in presence only of authorized personn

Total Cost of Ownership (TCO)

the sum of all the costs associated with every activity in the supply stream of a product. * purchasing price is only a PART of this

cash

what Discounts may be offered for prompt payment of invoices (e.g., 2% 10, Net 30).

quantity

what Discounts may be offered to encourage buyers to purchase larger quantities

risk associated with outsourcing

what are the following associated with? Potential loss of control Over production decisions, intellectual property, etc. Increased reliance on suppliers Increased need for supplier management

only when accpted by the supplier

when does a purchase order become legally binded?