MGt 301 Exam 2

We use ESI to help ensure products are designed in a way that makes them easier and cheaper to build with higher quality. A. True B. False

A. True

Long term supplier relationships require trust and open communication to be successful (among other things.) A.True B.False

A.True

Reducing the size of the supply base is a prerequisite to improving supplier quality. If there are too many suppliers you will not be able to engage in activities like supplier development as you will not have enough resources. A.True B.False

A.True

Strategic alliances

Alliance development: increasing strategic supplier's capabilities (eventually trickles down to second-tier suppliers) Supplier alliances result in: -better market penetration -access to new technologies & knowledge -higher return on investment Apple & MasterCard: Apply Pay -Apple gets MasterCard's reputation in industry -MasterCard is first Apply Pay authorized option and helps Apple work out potential bugs

Supplier alliance fail due to: A.Overly optimistic expectations B.No management commitment C.Mismatched operating principles D.Not sharing benefits E.All the above

E.All the above

Define Early supplier involvement (ESI).

Including suppliers in new product development

Define a sourcing strategy, how must align with the corporate strategy

Sourcing: all of fir's activities to manage external resources Strategic sourcing: managing firm's external resources to support firm's long term goals Drivers of strategic sourcing: -reduce costs & delivery cycle times -improve quality & long term financial performance -increase number of global competitors -increase customer focus -reduce high costs of globalization & materials -deliver more innovative products more frequently & cheaply than competitors

Define Breech of Contract and provide examples of contract breech

Breach - any form of failure to the terms in a contract Examples: 1. Paid for a fireplace to be build. Looked good but it was made of plastic and was unuseable. Attempt to negotiate. File w/ small claims court. Company has to replace fireplace with a functional one 2. Sol car to someone w/o credit. Buyer's check bounced and they ignore calls/emails. Send letter of demand with no response. File complaint with state court. Remove compliant after payment is fulfilled

What are some examples of risk in a SC

Examples in construction: -Longer supply chains (Chile, Russia, Others?) -Sawmill explosions & fire -Long term lumber availability (pine beetle, Canadian lumber, enviro regulation, activist and pressure groups) -Potential capacity shortages post-recession -Demand Risk (rapid building growth, china demand) -Chilean Earthquake General risks: -Financial (supplier bankruptcy) -International affairs (trade embargo) -Governmental affairs (new green regulations) -Quality (Mattel and lead paint) -Currency (Asian currency crisis) -Natural disasters (earthquake in Japan) -Man-made disasters (terrorism) -Logistics (slow steaming)

If the expected annual requirements (R) for a part are less than the break even point, then it is more cost effective to: A.Buy the item B.Make the item C.Costs are the same to make or buy the item D.Cannot be determined

A.Buy the item

Compute annual inventory holding costs after determining average inventory.

Annual Holding cost= (Q/2)kc = (order quantity/2)(holding cost)(purchase cost) Annual Order Cost= (R/Q)s = (annual requirements/order quantity) (cost of placing 1 order) Annual Purchasing Cost = RC = annual requirements Purchase cost Average inventory = ½ the order quantity Q

Which of the following are important in developing successful supplier relationships? I) Keeping prices low by competitively bidding work frequently II) Trust, open communications, and sharing of information III) Communication only thru sales and purchasing IV) A win/win mentality and aligned goals between the partners. a) I and III only b) II and IV only c) I, II, and IV d) II, III, and IV

b) II and IV only

Which of the following are true? I) Having fewer suppliers for a commodity may decrease the chances of supply interruption. II) Preferred suppliers tend to offer key customers benefits like access to supply market information III) Having more suppliers tends to increases quality errors IV) With more suppliers for a commodity you are less likely to receive price-volume discounts. a) I, II and III only b) II, III and IV only c) III only d) I, II, III and IV

b) II, III and IV only

Discuss the costs involved in global commerce

base price tooling packaging escalation transportation custom duties insurance premiums payment terms fees and commissions port terminal and handling fees customers broker fees communication costs payment and currency fees inventory carrying costs

Discuss some of the risks and complexities of global trade

-Order placement -- more difficult -Visibility -- Poorer -Raw materials costs -- may improve -Unit cost -- lower labor cost, quality suffers -Transportation -- higher freight costs -Taxes/tariffs -- import taxes and compliance -On-time delivery -- worsens Increased: -lead times -minimum order quantities -product returns -inventory working capital -hidden costs -stock out

Discuss Purchasing Ethics and the risks that buying firms face when they behave unethically

-Principles or standards of human conduct -Focuses on the "policies and practices regarding potentially controversial issues such as: corporate governance, insider trading, bribery, discrimination, corporate social responsibility, fiduciary responsibilities -Potential for buyer unethical behavior: Conflict of interest: both parties disagree on conflict existence Gifts and Gratuities: sales perspective (influence by establishing relationship), maintain a professional relationship, commercial bribery/favors (agent's acceptance of bribe to commit the act in conflict with principal's interests is illegal) Promotion of suppliers: abide by ISM code of ethics as well as any set standard, avoid all non-business obligation Reciprocity: giving preference in buying to suppliers who are customers of the company Sharp practices: deceptive or cunning business dealings Risks and Impacts on an actual paper sheet

What are the financial impacts of a disruption

-Provide cash or loans (urgently re price materials) -Send payments to a different address -Offer check pickup -Fund capital expenditures -Buy back inventory -Delay of cost reductions -Allow lengthened delivery times -Resource supplier components -Purchase material on supplier's behalf

Understand the conditions needed to build strong, successful supplier relationships

-building trust -shared vision -objective willing to collaborate -compromise solutions -long-term shared benefits Commitment and top management support: -partnerships successful with executives support and commitment Change Management: -capacity to accommodate the change from new partnerships Information Sharing & Lines of Communication: -formal and informal; facilitate the free flow of information. More beneficial with high trust due to confidentiality of information Capabilities: -suppliers need right technology and capabilities to meet cost, quality, and delivery requirements and react quickly You can't improve what you can't measure: -supplier Metrics: quality, cost, delivery, & flexibility --(should be: understandable, measurable, and value-added focus) -use multi-criteria approach to measure performance -total cost of ownership(TCO): all costs associated with w/acquisition, use, & maintenance of a good/service

Discuss the risks involved in global commerce

-culture -language -legal -FCPA -logistics -cost ethics -reputation risk -supply chain risk

List and define the factors causing or exacerbating the bullwhip effect

-demand signal processing: involves rational ordering decisions by buyers that over-respond to fluctuations in downstream demand. This response is due to the belief that any fluctuation is indicative of a longer-term trend in demand. The inclusion of safety stock in orders at each tier in the supply chain contributes to distortion of the demand signal, further exacerbating the bullwhip effect. Ultimately, the pattern results in overshoot and collapse in ordering and inventory backlog cycles that increase with each subsequent upstream partner. -lead time: An increase in variability is magnified with increasing lead time. To calculate safety stock levels and reorder points, we multiply estimates of the average standard deviation of the daily customer demand by the lead time. Thus, with longer lead times, a small change in the estimate of demand variability implies a significant change in safety stock, reorder level, and thus order quantities. This results in multiplicative rather than additive variations. -order batching: occurs when buyers place orders based on some order cycle, such as weekly, biweekly, or monthly, rather than placing orders more frequently when demand actually occurs. Such periodic ordering causes spikes in demand followed by periods of zero orders, resulting in what Towill et al. (1992) refer to as the "stop-go" phenomenon, which creates serious problems for the management of production and other logistics resources. -marketing activity: --price discounting: can contribute to the bullwhip effect when channel members overbuy and stockpile inventories to take advantage of a price break, followed by a period of selldown and zero-order. This practice leads to increased inventory carrying costs for the customer, lower margins for the supplier, and increased uncertainty in true demand patterns. --advertising and promotion activity -the rationing game (capacity constraints): is a buyer's reaction to the anticipated shortage, whereby s/he orders substantially more than needed in the hopes of receiving the true (lesser) desired quantity. The inflated orders distort true demand, leaving the upstream partner with a false impression of market demand for the product. Clearly, buyer behavior plays a major role in events contributing to demand amplification.

Discuss how language, legal and cultural differences can act as a barrier to trade

-lack of knowledge and skills concerning trade -resistance to change -longer lead times -import & export compiance -currency fluctuations

Understand why many supplier partnerships fail

-overly optimistic -poor communication -sne-sided benefits -slow payback results -lack of financial commitment -misunderstood operating principles -cultural mismatches -lack of alliance experience

Identify the criteria for selecting suppliers and discuss why cost may not be the most important criterion for every purchasing decision

-product/process tech -willingness to share technologies and information -quality -cost/price -reliability -order system and cycle time -capacity -communication capability -location -service

Discuss the negotiations process

1. Identify/anticipte a purchase requirement 2. determine if negotiation is required 3. plan for the negotiation 4. conduct the negotiation 5. execute the agreement Step 1: Identify or anticipate a purchase requirement -material need for a component -raw material -subassembly -service -suppliers -piece of equipment -or completely finished product) Step 2: Determine if negotiation is required -negotiation is a time-consuming process - is it necessary in your scenario? Step 3: Plan for the negotiation -Preparation and planning are most important (plan -- a method of achieving the desired output) (planning -- the process of devising methods of achieving said output) - Planning weaknesses (failing to: commit sufficient time, establish clear objectives, formulate convincing arguments or support for the position, consider a counterpart's needs. Believing quick in clever enough) Step 4: Conduct the negotiation -decide negotiation setting (atmosphere should be less formal wherever possible) -summarize positions and points of agreement throughout renegotiation -remove managers -debreif after the negotiation session (identify lesions learned from the experience) -effective negotiators display certain behaviors (willingness to compromise goals particularly when new information challenged their positions, view issues independently, establish issue ranges) More: option exploration per issue, common ground discussion Less: reasons for the arguements, counter proposals Step 5: Execute the agreement -an agreement represents beginning of the process -a key part of this step involves performance feedback -build on the success of the agreement

List and define the steps in the procurement process, explain what they are and why this process is needed despite its cost and complexity

1. Recognition of need 2. Translation of that need into a commercially equivalent description 3. Search for potential suppliers 4. Selection of a suitable source 5. Agreement on order or contract details 6. Delivery of products and services 7. Payment of suppliers

SC strategy development

1. classify suppliers either innovative or functional 2. develop strategies of SC 3. evaluate SC capabilities & compare to require performance 4. set capability improvement goals 5. implement work plan 6. monitor progress and adjust work plans accordingly

List the skills needed today for successful strategic sourcing

1. interpersonal communication 2. strong decision making 3. ability to work in teams 4. analytical skills 5. negotiation skills 6. customer focus 7. adaptable 8. influential & persuasion skills 9. strategic skills 10. understanding business conditions

The total cost to make an item is = 40,000 + 7Q The total cost to buy the item is = 1000 + 10Q Given this, if my expected volume for a part is 10,000 units, I should: A.Buy the item B.Make the item C.I'm indifferent D.Cannot be determined

A.Buy the item 40K + 2Q = 1K + 10Q 39K = 3Q Q = 13000

Supplier quality can be impacted by poor communication, unclear specifications and having too many suppliers. These issues are largely the fault of: A.The buyer B.The supplier

A.The buyer

Examples of being a good customer include awarding new business, paying invoices on time, and signing long-term contract with key suppliers. A.True B.False

A.True

Rewards tied to specific performance goals are most effective. A.True B.False

A.True

You should measure supplier performance to determine areas needing improvement, ID top performing suppliers, and to help eliminate poor performing suppliers. A.True B.False

A.True

ESI - Early Supplier Involvement - is defined as including your suppliers early in the design of your products, and this can have the benefits of improving the product's quality and reducing it manufacturing costs. A.True B.False

A.True D.F x x: manuf., logistics, quality, environment, recycling

Your most important supplier is having cash flow problems and has asked to shorten your payment terms from net 72 days to net 36 days. If you buy $1,000,000 annually from this supplier, how much will this cost your company (assume a working capital cost of 10% per year, 360 days per year, and no discounts for paying early)? A.$20,000 B.$10,000 C.$100,000 D.$200,000 E.Cannot be determined

B.$10,000

Price only should be considered when making a purchasing decision A.True B.False

B.False

After receiving a materials requisition, purchasing will typically A.Send out a PO (purchase order) B.Send out an RFQ (Request for Quotation) C.Pay the invoice D.Receive the product E.Send out a pack slip (delivery order)

B.Send out an RFQ (Request for Quotation)

Benchmarking

Benchmarking: copying best practice of businesses and an effective way to improve SC performance obtainable in informal and formal ways Types: -technology -finance -services -processes -markets -products Sourcing practice resources: -the Center for Advanced Purchasing Studies -Supply-Chain Council

Discuss the commodity portfolio. Discuss the differences between non-critical, leverage, bottleneck, and critical commodities. Discuss the differences in strategy for each. Justify the strategy based on controlling key cost drivers for the commodity

Bottleneck: (low volume purchases, high opportunity higher risk commodities) -substitution difficult -monopolistic markets -high entry barriers -critical geographic/political situation Critical strategic suppliers: (high volume purchases, high opportunity higher risk commodities) -strategically important -substitution/alternate supplier difficult -major importance for purchasing overall Non-critical suppliers: (low volume purchases, low opportunity lower risk commodities) -availability adequate -standard specifications of goods/services -substitution possible Leverage supplies: (high volume purchases, low opportunity lower risk commodities) -availability adequate -alternative suppliers -standard product specifications -substitution possible

Define the bullwhip effect and discuss why order magnitude and variability increase for upstream suppliers

Bullwhip: is a distribution channel phenomenon in which forecasts yield supply chain inefficiencies. It refers to increasing swings in inventory in response to shifts in customer demand as one moves further up the supply chain. -forecasts & their corresponding orders along the supply chain can become amplified and accumulate, causing what is termed the bullwhip effects -variations in demand lead to problems incapacity planning, inventory control, & workforce & production scheduling -ultimately, these variations result in lower levels of customer service & higher total supply chain costs

Discuss the Make/Buy decision and list the reasons why a company chooses to outsource an item and the reasons it chooses to make an item

Buy---horizontal integration -Outsourcing refers to buying materials and components from suppliers instead of making them in-house. The trend has moved toward outsourcing. MAKE - Vertical integration -Insourcing - producing items in-house. -Backward integration refers to acquiring sources of supply -Forward integration refers to acquiring customer's operations. Outsourcing advantages: -Cost advantage: Especially for components that are non-vital to the organization's operations. -Insufficient capacity: a firm may be at or near capacity. -Lack of expertise: the firm may not have the necessary technology and expertise. -Quality: suppliers have better technology, process, skilled labor, and the advantage of economy of scale. Insourcing advantages: -proprietary tech protection -high-quality control -competence assurance -utilize idle capacity -logistical control: lead-time transportation and warehousing cost -overall lower cost

Concession

Concession- movement away from a position by offering something of value to the other party For success, all parties must be willing to demonstrate flexibility: -If absent, negotiation often deadlock Manner of concession approach is an important part of the negotiating strategy Tips for concessions: Leave room to maneuver: -if you take a flexible position, make sure your counterpart is too A strong opening offer equals usually success Remove the audience: -larger audience = more difficult to offer concessions -smaller concessions indicate a possible resistance As a negotiation progresses, following diminishes: -concession frequency -concession value

Provide examples of contingency plans

Contingency plans should focus on: 1. Reducing the chance the disruption occurs 2. Reducing the impacts if the disruption occurs Examples: -Use common parts (risk pooling) -ID alternate parts -Qualify back up suppliers -Inventory buffers -Geographically disperse suppliers -ID alternatives for transportation -Shorten lead times -Involve key suppliers in recovery plans -Insurance (business continuity) Existing methods: 1. Plan for every part (PFEP) 2. Procurement risk assessment and mitigation (PRAM)

How do you interpret the following payment terms1% 10 Net 75 A.The buyer must pay in full in 10 days B.The buyer must pay in full in 75 days C.The buyer gets a 1% discount for paying in 75 days D.The buyer can either pay in 75 days or get a 1% discount if he/she pays in 10 days.

D. The buyer can either pay in 75 days or get a 1% discount if he/she pays in 10 days.

The goals of purchasing include: A.Ensuring uninterrupted supply B.Lowering total cost C.Improving quality and customer satisfaction D.All the above

D.All the above

Define/explain the Law of agency

Definition: "An area of commercial law dealing with a set of contractual, quasi-contractual and non-contractual fiduciary relationships" Involve a person, "agent" that is authorized to act on behalf of another, "principal", to create legal relations with a third party - Must act in the best interest of their employer An agency is created when a person delegates his authority to another person, that is, appoints them to do some specific job or a number of them in specified areas of work. EX: purchasing agent acts as intermediary with third party for employer

Define early supplier involvement (esi) and list the potential benefits

Definition: is a form of vertical collaboration between supply chain partners in which the manufacturer involves the supplier at an early stage of product development Key suppliers involved in internal operations of the firm, especially with new product/process design, concurrent engineering & design for manufacturability Value engineering: activities help firms reduce cost and new product development time while improving quality ex. Russian liquid-fuel rocket motors designed to permit ugly welding reduced to the cost of finishing product

Supplier relationship management may include: A.Supplier evaluation and optimizing the supply base B.Developing suppliers C.Allocating the share of business that each supplier will be awarded D.Rewarding suppliers E.All the above

E.All the above

Compute annual freight costs based on weight (in annual tons), distance and freight rate (based on a full truckload or partial truckload).

Freight cost = D x Wt x Rt D = Distance Wt = Annual weight in tons = R*w/2000 lbs/ton R = Rate (Freight cost in ton-miles)

Define a reverse auction and list the goals and risks of using reverse auctions and what types of commodities would benefit from using a reverse auction for sourcing

How do regular auctions work? -buyers place bids on seller's items util time is up and highest bidder wins How does a reverse auction work? -sellers bid for prices they're willing to sell product at Why use reverse auctions? -lower purchasing costs, improved procurement process, higher purchasing efficiency What is the main objective when using reverse auctions? -drive purchase prices down What are the risks of using reverse auctions? -potentially higher prices -lack of available produce -damage to supplier relationship

Discuss damages when there is a breech of contract and be able to calculate the damages

Impacts - Lessened quality, lower quantity, delayed or canceled shipment, inability to complete product manufacturing, reduced customer satisfaction, potential legal repercussions Damages - -Restitution: money the plaintiff actually paid to the defendant -Reliance: money the plaintiff lost b/c they relied on the defendant's commitment to the contract (meant to restore or pay back the innocent party) -Expectancy: money the plaintiff was hoping to gain from the contract

Explain the importance of strategic sourcing as a tool to help companies achieve strategic goals and how your sourcing strategy must support the objectives of your product.

Keys to strategic sourcing: Purchasing function: is a major value-enhancing function -supply base rationalization -sustainable sourcing -outsourcing -ESI/VMI -alliances -managing 2nd tier suppliers -E-procurement -commodity strategies *must align SC and sourcing strategy with the overall corporate strategy and with strategies product objectives* Evaluating & selecting key suppliers: -when evaluating suppliers for a collaborative relationship, the purchase cost is less important -supplier selection conducted by a cross-functional team selection approach using evaluation forms or scorecard -channel partnerships provide value for all participants or "channel equity"

Describe what a company can do to mitigate the bullwhip effect

Make actual demand data available to suppliers. Vendor-managed inventory (VMI) Reduces the length of the supply chain. Reduce the lead times from order to delivery Safety stocks, & the desire to order full container loads of materials cause orders to be placed monthly or even less often, or at varying time intervals. Order batching occurs when sales reps fill end-of-period sales quotas, or when buyers spend end-of-year budgets. Solution: use frequent & smaller order sizes. Firms can order smaller quantities of a variety of items from a supplier or use a freight forwarder to consolidate small shipments. Maintain consistent, smaller order sizes -offering bulk discounts may attract customers but it also unnecessarily increases inventory levels and magnifies the bullwhip effect -encouraging orders according to customer need instead of bulk discounts helps mitigate the bullwhip effect

Explain the role of measurement and rewards for improving supplier quality

Measurement is critical during supplier evaluation and during the normal course of business

Discuss some common negotiations tactics

Negotiating tactics: short term plans and actions to execute a negotiating strategy -tactics are crucial to: 1. persuade a counterpart to endorse a postions 2. understand a counterpart's technique *Not all negotiating tactics are ethical Types: - high ball - price increase - strong initial offer - planned concessions - scarcity - honesty - silence - use of power - low ball - best and final offer - phantom quote offers

Define negotiations and discuss the need for and objectives of negotiations

Negotiation- process of formal communication (face to face via electronic means) where two or more people seek mutual agreement about an issues -involves management of time, info, power -time consuming process that requires extensive planning and commitment of resources *90% of the negotiation process involves preparation, rather than execution Primary objective is a win/win situation -- to reach an agreement that satisfies both parties Need for: 1. involves relationships between people, not just organizations 2. negotiation is an opportunity to create value within the supply chain 3. good negotiators develop their skills through practice

Define the elements of a contract and be able to identify is an agreement is actually a contract

Offer - a proposal by one person that he/she is willing to do something for certain terms (an request for quotient is NOT an offer) Acceptance - contract exists once offer is formally accepted (meeting of the minds; compromise) (terms of counter offer does NOT stand unless both parties agree) Consideration - a form of mutual obligation Competent parties/mutual assent - Principle or qualified agent• Own free will• Willingness to enter into agreement and be bound by terms• Not fraudulent Legal subject matter - The "subject matter" of a contract is the goods or services for which the parties have bargained, one party providing the goods or services in exchange for something else. IE; you ask for a Chuck's Woods for a quote. THey response with a price of $2/cubic foot (this is an offer). You disagree with his price and counter offer $1.75/cubic foot (this is not a contract until they accept)

Explain the link between supply base optimization and supply chain quality.

Optimization is a prerequisite to improving supply base quality. With too many suppliers you cannot engage in other activities that can improve quality live development, ESI, etc.

Calculate annual order costs

Order Cost = # of orders x cost per order # of Orders = Total units / order quantity (12,000/1,000) x $125 = $1,500

Outsourcing programs

Outsourcing allows a firm to: -concentrate on core capabilities -reduce staffing levels -accelerate reengineering efforts -reduce management problems -improve manufacturing flexibility Outscouring risks: -loss of control -increased reliance on suppliers -increased need for supplier management

Explain the importance of metrics like TCO and continuous improvement for improving supplier relationships

Performance Metrics: -cost/price -quality: zero defects, fit for use, ISO 9000 -delivery -responsiveness & flexibility: to customers & changing situations -environment: responsible, ISO 14000 -technology: superior product/service design -business metrics: reputation, information sharing -Total Cost of Ownership (TCO) ISO 9000: -Developed by International Organization for Standardization (ISO) -Series of management & quality standards in design, development, production, installation, and service -Best for U.S. companies aiming to sell in the global market ISO 14000 -A family of standards for environmental management -Benefits include: reduced energy consumption, environmental liability, waste and pollution, improved community goodwill

Discuss the types of power prevalent in negotiations and the use of power

Power: the ability to influence another person's or organization's behavior -individuals and organizations bring different sources of power to the negotiating table -the use of power can be part of a party's negotiating strategy -different sources of power can have varying effects on negotiation and relationship Sources of power: 1. Coercive: -improves the ability to punish -repeated use can damage relationships or potential retaliation -related to the holder's belief that the other party will comply 2.Referent: -referent has some attributes that attract another party -non-referent wants the referent to look favorably upon him or her 3.Reward: -one party is able to offer something of value to others -represents direct effort to exert control -source of power only if other parry values the rewards *be careful not to abuse power or risk damaging relationships* Effective sources of power: 1. Legitimate: -position that person holds forms the basis of legitimate power -not focused on individual person 2. Expert: -expert has acquired vast knowledge or credentials -nonexperts are less likely to challenge experts 3. informational: -most common form of power -relies on persuasion through the use of facts, data, info, etc. *a party with power will likely rise to during a negotiation*

Discuss the primary goals of purchasing and explain how purchasing can contribute to these goals.

Primary Goals -ensure uninterrupted flow of raw materials/services at lowest TCO -improve quality of the finished goods and services -enhance customer satisfaction Purchasing contributes to these objectives by: -Actively seeking better materials, services, and reliable suppliers -Work closely with strategic suppliers to improve quality materials and services -Involving suppliers and purchasing personnel in new product, process, service design, and development efforts. Related tasks: -finding better materials, services, and reliable suppliers -partnerships to improve supplier performance -early supplier involvement (ESI) in new product development

E-procurement systems

Primary benefits: saving time & money E-procurement systems: -concentrate large volumes of small purchases with few suppliers, using e-catalogs Reverse auctions: -pre-qualified suppliers enter the website at pre-designated time & data in an attempt to underbid and monitor competitors

Explain why companies must effectively manage small dollar purchases. Discuss this from the perspective of managing transaction costs

Processing/transaction costs can be substantial. Small value purchasing overhead should be minimized through: -Procurement Credit Card/Corporate Purchasing Card -Blank Check Purchase Orders -Blanket or Open-End Purchase Orders -Stockless buying or system contracting petty cash standardization & simplification of matls & components -Accumulating small orders to create a large order using a fixed order interval

The role of purchasing: the financial significance of supply management

Profit-Leverage Effect: -decreased purchasing expenditures -- increased profits before taxes (assuming same quality/purch total cost) -return on assets (ROA) effect -- High ROA = managerial prowess in generating profits with lower spending -inventory turnover effect -- increased inventory turnovers = optimal space/inventory utilization, increased sales, lack of inventory obsolesce

Explain comparative advantage

Reason for price differences Defintion: -Ability of a firm/individual to produce goods/services at a lower opportunity cost than others (gives a company ability to sell goods/services at a lower price than it competitors and realize stronger sales margins) Example: maximum output for each country Canada: 60M vehicle or 12M machines US: 70M vehicles or 42M machines US has a overall advantage but Canada has comparative advantage for vehicles since US 3.5X better at machine production but only 1.17X better at vehicle production

Contrast demand error in a traditional supply chain vs. a collaborative supply chain

Reducing the bullwhip: Demand forecasting update: -make actual demand data available to suppliers -vendor-manages inventory (VMI) -reduce the length of the SC -reduce the lead times from order to delivery Monitor order batching: -safety stocks & the desire to order full container loads of material causes an order to place monthly or even less often, or at varying time intervals -order batching occurs when sales reps fill end-of-period sales quotas, or when buyers spend end-of-year budgets Solution: use frequent & smaller order sizes. Firms can order smaller quantities of a variety of items from a supplier or use a freight forwarder to consolidate small shipments. To avoid Bullwhip Effect: 1. reduce price fluctuations through forward buying activities to take advantage of the low price offers between: -retailers & consumers -distributors & retailers -manufacturers & distribution 2. eliminate price discounting. many retailers have adopted every low price (EDLP) Rationing & Shortage Gaming: Rationing: occurs when demand exceeds the availability of a supplier's finished goods. To provide a partial supply to all customers, goods are rationed to customers. Buyers tend to inflate their orders to satisfy their real needs. Shortage: occurs when production capacity eventually equals demand & orders are filled completely, demand suddenly drops to less-than-realistic levels, as the buying firms try to unload their excess inventories. Solution: sellers should allocate short supplies based on the demand histories of their customers. Sharing future order plans with suppliers allows suppliers to increase capacity if needed, thus avoiding a rationing situation.

Rewarding Supplier Performance

Rewarding suppliers: provides incentive to surpass goals Punishment (negative reward) could consists of: -reduction of future business -bill-back amount + to incremental costs from late delivery and/or poor quality Strategic suppliers agreements can reward suppliers by allowing: -share of the cost reductions -more business and/or longer contracts -access to in-house training seminars & other resources -company & public recognition

How do you define supply chain risk

Risk within the supply chain that could or has caused a disruption "Supply risk is defined as the probability of an incident associated with inbound supply from individual supplier failures or the supply market occurring, in which its outcomes result in the inability of the purchasing firm to meet customer demand or cause threats to customer life and safety." Supply chain risk management: Implementation of strategies to manage both everyday and exceptional risks along the supply chain based on risk assessment with the objective of reducing vulnerability and ensuring continuity of supply

Define supply base optimization

Selecting the right number & mix of suppliers. This usually results in a reduction in the number of suppliers.

Discuss a single issue distributive negotiation "win-lose"

Single issue distributive negotiation: a type of process that normally entails a single issue to be negotiated -the single issue often involves price and frequently relates to the bargaining process -also referred to as 'win-lose negotiation because one party generally gains at the expense of another party -parties maintain rigid negotiating positions -disagreement over a fixed amount of value -strict use of the power of one party over the other -adversarial competition

List the reasons for having a single supplier and the reasons for having multiple suppliers and explain the benefits that preferred suppliers provide customers

Single-sourcing: risky but trend favoring; try to avoid single sourcing Single benefits: -to establish a good relationship -less quality variability -lower cost -transportation economies -proprietary product or process -volume too small to split Multiple benefits: -need capacity -spread risk of supply interruption -create competition -information• -dealing with special kinds of business

What should companies do to minimize risk and reduce the impacts of disruption that occurs

Step 1: What can go wrong? -Assess possible points of failure in supply (ex. limited raw materials, the potential at each supplier, logistics/delivery, even at own facility) -Anticipate potential failures that will disrupt incoming supply-- (consider Tier 1, 2, 3 supplier and associated logistical risks) (ex. supplier small with limited capacity, far or treacherous distance from supplier) -Why is __ a possible disruption? -What are the root causes of the risk? Step 2: What is the likelihood? -Is this failure highly likely to occur? Very rare? Somewhere in between? -Can you put a probability to it? (if so, assign the probability -- for example timely deliveries based on previous data) (if not, determine somewhere between low-high -- for example natural disasters) Step 3: What is the impact? -If a failure occurs, consider what happens to cost, profit, your company's ability to fulfill customer orders, potentially more factors -Contemplate duration of the failure (how long will it last until normal levels of supply return) -Can you assign a dollar amount? (if possible, do so, if not assess cost (low-high) Step 4: What reaction will you have? Example: You are a bicycle manufacturer and are concerned about the wheel supplier not being able to fulfill your product demand -What steps to reduce the risk from occurring? (ex. establish alternative or additional suppliers) -What steps to reduce the impact of the risk occurs? (ex. manufacturer ahead of schedule to allow ample safety stock in case of stock out) -What will these plans cost?

Define supplier development and explain the benefits of doing supplier development

Supplier development: refers to buyer's activities to improve a supplier's performance and/or capabilities: 1.Identify critical products/services 2.Identify critical suppliers 3.Form a cross-functional team 4.Meet with supplier top management 5.Identify key projects 6.Define details of agreement 7.Monitor status and modify strategies

Explain the importance of supply base optimization to improving supplier quality

Supply Base: suppliers the provide materials, services, supplies, and equipment -emphasize long-term supplier alliances -one or a limited # of suppliers -smaller supply base Preferred suppliers provide: -early supplier involvement: Info on trends -info on the supply market -capacity for meeting an unexpected demand -cost efficiency due to economies of scale Supply Base Optimization: the process of determining the right mix and number of suppliers to maintain: -t improves the lines of communication -it increases access to information -it ensures that those rules that dictate the management of your business are firm and present -it reduces costs -it increases everyone's sense of control -it streamlines points of contact

Supply base rationalization

Supply base rationalization (reduction/optimization): is often initial SCM effort Rationalized supply base - easier buyer-supplier partnerships & results in: -reduced purchase prices -fewer supplier management problems -closer/more frequency buyer-supplier interactions -higher quality and delivery reliability

Define Green Sourcing

Sustainability: meeting current needs without hindering future needs in terms of economic, environmental & social challenges Green sourcing: ISM defines it as "making environmentally conscious decisions throughout the purchasing process, beginning with product and process design, and through product disposal

Explain the planning process, what information is needed and why planning is important

The negotiation planning process involves: -determining participants -identification of objective -analysis of strengths and weaknesses -collection of information (facts & issues) -recognition of counterpart's needs -established of issue positions -development of strategies and tactics -briefing of other personnel -negotiation rehearsal -BANTA (best alternative to a negotiated agreement)

Identify and explain the causes of the bullwhip effect during the Beer-Game simulation and discuss how you would change the 'rules' of the beer game to reduce the bullwhip effect and lower costs

To Avoid Bullwhip Effect-Reduce price fluctuations through forward buying activities to take advantage of the low price offers between:retailers & consumers.distributors & retailers.manufacturers & distribution.Eliminate price discounting. Many retailers have adopted everyday low prices (EDLP). Rationing & Shortage Gaming Rationing- occurs when demand exceeds the availability of a supplier's finished goods. To provide a partial supply to all customers, goods are rationed to customers. Buyers tend to inflate their orders to satisfy their real needs. Shortage gaming- occurs when production capacity eventually equals demand & orders are filled completely, demand suddenly drops to less-than-realistic levels, as the buying firms try to unload their excess inventories. Solution: sellers should allocate short supplies based on the demand histories of their customers. Sharing future order plans with suppliers allows suppliers to increase capacity if needed, thus avoiding a rationing situation.

Are supply chains riskier today? Discuss why and why not.

Unbalanced supply chains are riskier today than they were 10-15 years ago. Supply chains are riskier today because: 1. How we manage it. -Lean (just-in-time inventory. hold only a little bit of inventory & bring in more when needed) -Outsourcing (you focus on your strength and let others supply you with your weaknesses. Heavily contingent on others) -Supply base rationalization (more reliant on fewer suppliers) 2.Boarder trends -Globalization (longer supply chins, language, currency, compliance) -Reduced buffers -Higher customer demands (ex. on-time delivery) -Shorter product life cycles) -Recession and bankruptcy -IT reliance

Vendor managed inventory (vmi)

VMI: suppliers manage buyer inventories to reduce carrying costs & avoid buyer stock-outs Buyer-firm's perspective: -supplier tracks inventories -determines delivery schedules and order quantities -buyer can take ownership at stocking location Supplier's perspective: -avoids ill-advised customer orders -supplier decides inventory set & shipments -opportunities for supplier to educate customers about other products

Explain how ESI can reduce R&D costs and the time required to develop new products

Via contact engineering, fewer design changed late in the design process, sharing R&D costs w/ suppliers

provide examples of the types of questions you would answer thru your sourcing strategy.

What are past expenditures by commodity and by supplier? What are expenditures as a percent of total for business? What is technology roadmap, and that of the supplier?What are current / future volumes and user location requirements? Are there opportunities to leverage commodity expenditures with similar commodities? Who are current and potential suppliers? What are the characteristics of the marketplace (best price, average price, etc.) What are future trends in terms of supply continuity and expected pricing What are strengths and weaknesses of your suppliers, and who are the market leaders? insource or outsource? Type of suppliers?: -High or low technology -Full service -Niche or distributor Local or global supplier? Single, dual or multiple source? Percentage of buy to each supplier? Long-term or short-term contract? Evergreen or escape clause? Degree of buyer/supplier risk taking? On-line or manual ordering? Supplier development - degree of commitment? Use full-service suppliers? "Black box" or traditional level of supplier involvement in design?

Discuss what a Fiduciary responsibility is and how it applies to purchasing

When someone has a fiduciary duty to someone else, the person with the duty must act in a way that will benefit someone else, usually financially. The person who has a fiduciary duty is called the fiduciary, and the person to whom the duty is owed is called the principal or the beneficiary. The person doing the purchasing should have the best interest of the company and owner in mind

Discuss win/win

Win/Win: applies only to certain situations: 1. strategically important items or services 2. trust between parties exists 3. both parties endorse a win-win approach -parties identify other's needs and want -parties build on common ground to develop solutions to provide additional value -primary use of power is to focus on common interests -likely to engage in open sharing of information

Compute the cost impact from payment terms and explain why this represents a cost savings to the buyer.

Working Capital Savings: Annual purchase $ X (rate X Payment days/360 + discount) Example: (remember Net 30 = $6M x (10% x 30/360 + 0%) = $50,000 2% 10 = $6M x (10% x 10/360 + 2%) = $136,667

TCO example

Your company makes scooter. You are evaluating a quote from a potential new supplier for tires. The quote is as follows: New Supplier Price per tire (C) = $25 Payment Terms = 1% 10 Net 75 Distance = 800 Order quantity (Q) = 2000 Weight (w) = 10 lbs Assume the following: -Annual requirements (R) for tires is expected to be 100,000 units -The price is constant regardless of volume or order quantity -Inventory holding costs (k) are 25% -Working capital costs (wc) are 10% -Your freight rate is $1 per ton mile for a full truckload (40,000 lbs) and $1.5 for a less-than-truckload shipment -There are 360 days in a year. - Order costs, tooling costs, quality costs, on-time delivery costs should be ignored. Part 1 - 20 points: If your current supplier's total cost is $3,000,000, should you switch to the new supplier (Show all your work.) APC = 100,000*25 = $2.5m AHC = 2000/2*.25*25 = $6250 AOC = Not needed for this problem Freight = 800*1.5*100000*10/2000 = $600,000 Terms: Net 75 = 2.5m*10%*75/360 = 52,0831%10 = 2.5m*10%*10/360 + 1% * 2.5m = 31,944 TCO = $2.5m + 6250 + 600,000 - 52,083 = $3,054,167 Part 2 - 10 points: If you can convince the new supplier to increase the order quantity to 4000, does that change your answer to Part 1 (SHOW WHAT COSTS CHANGE.) AHC increases to $12,500 Freight drops to $400,000 So now you might consider changing to the new supplier as they are cheaper

Define ZOPA, zone of potential agreement, and why having a range of acceptable outcomes is needed

ZOPA: (zone of possible agreement) is a bargaining range in an area where two or more negotiating parties may find common ground - parties compromise and strike a deal -important to find a settlement or reach an agreement, this must work towards a common goal and seek an area that incorporated at least some of each party's ideas

A company using a weighted-criteria evaluation system has established these 4 categories and the appropriate weight is in parentheses: Quality(0.20), Delivery(0.10), Cost(0.50), and Technology(0.2). The scores for each category are shown below. Based on this, which company appears to be your top supplier? a) Company A: Quality(90), Delivery(60), Cost(90) , Technology(75) b) Company B: Quality(90), Delivery(90), Cost(60), Technology(80) c)Company C: Quality(80), Delivery(80), Cost(80) , Technology(80) d) All companies scored the same.

a) Company A: Quality(90), Delivery(60), Cost(90) , Technology(75)

A buyer received a materials requisition for a new part. What should the buyer do next? a) Send out a request for quote to potential suppliers. b) Issue a purchase order to the chosen supplier. c) Write up a contract for the purchase of this part and pay the invoice. d) Receive the part.

a) Send out a request for quote to potential suppliers

Effective use of performance metrics and thoroughly integrating your supply chain with key suppliers can help to understand supply chain risk, and to mitigate those risks. a) True b) False

a) True

Risk in a supply chain is defined as any event that may lead to a disruption in the supply chain. a) True b) False

a) True

You currently have 4 warehouses in North America. You are considering closing 3 warehouses leaving you with 1 central warehouse in North America. a) calculate the impact to inventory? b) will risk pooling increase or decease after this change? c) what do you have to assume for your answer in part A to be correct?

a) √n2/√n1 = 1/√4 = 1/√2 ; so inventory will be cut in half b) increase c) service level is constant

You are using the break-even analysis to decide whether to make or buy a small metal part used in your product. The variable costs are $10 to buy and $5 to make. The fixed costs are $2000 to buy and $22,000 to make. Therefore, you should: a) Buy the part if volumes are expected to be greater than 4000 b) Buy the part if volumes are expected to be greater than 3000 c) Make the part if volumes are expected to be greater than 4000 d) Make the part if volumes are expected to be greater than 3000

c) Make the part if volumes are expected to be greater than 4000 (see separate page on how to do break-even analysis)

Which of the following is true regarding supplier evaluation programs? a) Supplier certification and supplier evaluation are the same thing b) The buyer will typically award business to the lowest priced supplier regardless of their performance c) The firm may eliminate poor suppliers that do not improve based on their performance evaluation d) ISO certifications become meaningless.

c) The firm may eliminate poor suppliers that do not improve based on their performance evaluation

Companies must do risk planning in their supply chain in order to recover from disruptions. All of the following are true regarding risk mitigation and recovering from disruptions except: a) recovery plans are needed and employees must be trained on these procedures b) risk is defined as any disruption in your supply chain c) as long as an employee is empathetic to your concern, it doesn't matter if they are empowered to resolve your issue d) companies need to assess the likelihood of a disruption occurring and the consequences if that disruption does occur.

c. as long as an employee is empathetic to your concern, it doesn't matter if they are empowered to resolve your issue

A company using a weighted-criteria evaluation system has established these 3 categories and the appropriate weight in parentheses: Quality(0.40), Delivery(0.10), Cost(0.50). The scores for each category are shown below. Based on this, which company appears to be your top supplier? a) Company A: Quality(85), Delivery(60), Cost(90) b) Company B: Quality(90), Delivery(90), Cost(80) c)Company C: Quality(85), Delivery(85), Cost(85) d) All companies scored the same.

d) All companies scored the same (see separate page on how to use scorecard)

The goals of a purchasing organization include: a) Reducing total cost b) Ensuring raw materials are on hand when they are needed c) Reducing price only d) All the above e) A and B only

e) A and B only

Some examples of risks present in today's supply chains are: a) A fire in your factory b) A natural disaster c) A key supplier going bankrupt d) A supplier shipping poor quality parts e) All the above

e) All the above

Calculate the make-buy break-even point and apply the results

on seperate sheet

Use the weighted average scorecard to evaluate supplier performance and apply the results

on seperate sheet