SCM 301 Exam 4

Supply Management

The broad set of activities carried out by organizations to analyze sourcing opportunities, develop sourcing strategies, select suppliers, and carry out all the activities required to procure goods and services.

Financial Impact

-Cost of goods sold -Merchandise inventory -Profit margin -Return on assets (ROA)

Learning Objectives Chapter 7

-Discuss the rise of global sourcing and the important financial and operational performance impacts of supply management activities. -Identify and describe the various steps of the strategic sourcing process, and apply some of the more common analytical tools, including spend analysis, portfolio analysis, and total cost analysis. -Describe the major steps of the procure-to-pay cycle. -Discuss some of the longer-term trends in supply management and why they are important.

Make-or-buy decision

A high-level, often strategic, decision regarding which products or services will be provided internally and which will be provided by external supply chain partners

Return on Assets (ROA)

A measure of financial performance, generally defined as earnings/total assets. Higher ROA values are preferred because they indicate that the firm is able to generate higher earnings from the same asset base.

Product Structure Tree

A record or graphical rendering that shows how the components in the BOM are put together to make the level 0 item

Planning and control

A set of tactical and execution-level business activities that includes master scheduling, material requirements planning, and some form of production activity control and vendor order management.

Step 1 Assess Opportunities

Spend Analysis - The application of quantitative techniques to purchasing data in an effort to better understand spending patterns and identify opportunities for improvement.

Spend Analysis

The application of quantitative techniques to purchasing data in an effort to better understand spending patterns and identify opportunities for improvement.

Step 3: Develop the Sourcing Strategy

*The Make-or-Buy Decision*- A high-level, often strategic, decision regarding which products or services will be provided internally and which will be provided by external supply chain partners *Insourcing*- The use of resources within the firm to provide products or services *Outsourcing*- The use of supply chain partners to provide products or services

Step 5: Conduct Supplier Selection

*Weighted-point evaluation system --Assign weights to performance dimensions --Rate performance of each supplier with regard to each dimension --Calculate the total score

Production activity control (PAC) and vendor order management systems can

1. Route and prioritize jobs going through the supply chain 2. Coordinate the flow of goods and materials between a facility and other supply chain partners 3. Provide supply chain partners with performance data on operations and supply chain activities

MRP is based on three related concepts

1. The bill of material(BOM) 2. Backward scheduling 3. Explosion of the bill of material

Merchandise Inventory

A balance sheet item that shows the amount a company paid for the inventory it has on hand at a particular point in time.

Master Scheduling

A detailed planning process that tracks production output and matches this output to actual customer orders -The link between the Sales and Operations Plan and the Master Schedule

Available to Promise (ATP)

A field in the master schedule record that indicates the number of units that are available for sale each week, given those that have already been promised to customers. -Think of it as what's still available that we haven't already committed to customers

portfolio analysis

A structured approach used by decision makers to develop a sourcing strategy for a product or service, based on the value potential and the relative complexity or risk represented by a sourcing opportunity.

MRP nervousness

A term used to refer to the observation that any change, even a small one, in the requirements for items at the top of the bill of material can have drastic effects on items further down the bill of material

Distribution Requirements Planning (DRP)

A time-phased planning approach similar to MRP that uses planned orders at the point of demand (customer, warehouse, etc.) to determine forecasted demand at the source level (often a plant).

Bill of Material (BOM)

According to APICS, "a listing of all the subassemblies, intermediates, parts, and raw materials that go into a parent assembly showing the quantity of each required to make an assembly." •Provides product structure (Tree) •Shows low-level coding

Formula Projected Ending Inventory

Best estimate of what inventory levels will look like at the end of each week based on current information. EIt = EIt-1 + MPSt - max⁡(Ft, OBt) where EIt = ending inventory in time period t MPSt = master production schedule quantity available in time period t Ft = forecasted demand for time period t OBt = orders booked for time period t

Formula Available to Promise (ATP)

Calculating ATP for the first week of the master schedule record: (z-1) ATPt = EIt-1 + MPSt - ∑ OBi Where (i=t) ATPt = available to promise in week t EIt-1 = ending inventory in week t-1 MPSt = master production schedule quantity in week t ((z-1)∑(i=t))OBi = sum of all orders booked from week t until week z (when the next positive MPS quantity is due) Calculating ATP for any subsequent week in which MPS>0: (z-1) ATPt = MPSt - ∑ OBi Where (i=t) ATPt = available to promise in week t MPSt = master production schedule quantity in week t ((z-1)∑(i=t))OBi = sum of all orders booked from week t until week z (when the next positive MPS quantity is due)

Planning lead time

In the context of MRP, the time from when a component is ordered until it arrives and is ready to use

forecasted demand

In the context of master scheduling, a company's best estimate of the demand in any period.

booked orders

In the context of master scheduling, confirmed demand for products

Dependent demand inventory

Inventory whose demand levels are tied directly to the production of another item

Formula Net Requirements

NRt = maximum(0; GRt - EIt-1 - SRt ) NRt = net requirement in time period t GRt = gross requirement in time period t EIt-1 = ending inventory from time period t-1 SRt = scheduled receipts in time period t

core competencies

Organizational strengths and abilities that develop over long time periods, are valuable and competitors find difficult or impossible to copy.

Formula Profit Margin

Profit Margin = Earnings/Sales

Formula Return on Assets

Return on Assets = Earning/Assets

Profit margin

The ratio of earnings to sales for a given period.

Step 2: Profile Internally and Externally

Two approaches to creating profiles Category profile -Understanding all aspects of a particular sourcing category that could ultimately have an impact on the sourcing strategy. Industry Analysis - Profiling the major forces and trends that are impacting an industry, including pricing, competition, regulatory forces, substitution, technology changes, and supply/demand trends

rough-cut capacity planning

a capacity planning technique that uses the master production schedule to monitor key resource requirements

description by performance characteristics

a description method that focuses attention on the outcomes the customer wants rather than on the precise configuration of the product or service

description by brand

a description method that is used when a product or service is proprietary or when there is a perceived advantage to using a particular supplier's products or services

description by specification

a description method that is used when an organization needs to provide very detailed descriptions of the characteristics of an item or a service.

description by market grade/industry standard

a description method that is used when the requirements are well understood and there is common agreement between supply chain partners about what certain terms mean

Purchase Order (PO)

a document that authorizes a supplier to deliver a product or service and often includes key terms and conditions, such as price, delivery, and quality requirements

Projected Ending Inventory

a field in the master schedule record that indicates estimated inventory level at the end of each time period

Request for Quotation (RFQ)

a formal request for the suppliers to prepare bids, based on the terms and conditions set by the buyer

Material Requirements Planning (MRP)

a planning process that translates the master production schedule into planned orders for the actual parts and components needed to produce the master schedule items

Total Cost Analysis

a process by which a firm seeks to identify and quantify all of the major costs associated with various sourcing options

indirect costs

costs that are not tied directly to the level of operations or supply chain activity

cross sourcing

a sourcing strategy in which a company uses a single supplier for one particular part or service and another supplier with the same capabilities for a different part or service, with the understanding that each supplier can act as a backup for the other supplier.

single sourcing

a sourcing strategy in which the buying firm depends on a single company for all or nearly all of a particular item or service

multiple sourcing

a sourcing strategy in which the buying firm shares its business across multiple suppliers

dual sourcing

a sourcing strategy in which two suppliers are used for the same purchased product or service

preferred supplier

a supplier that has demonstrated its performance capabilities through previous purchase contracts and therefore receives preference during the supplier selection process

Profit Leverage Effect

a term used to describe the effect of $1 in cost savings increasing pretax profits by $1 and a $1 increase in sales increasing pretax profits only by $1 multiplied by the pretax profit margin

Cost-based contract

a type of purchasing contract in which the price of a good or service is tied to the cost of some key input(s) or other economic factors, such as interest rates

fixed-price contract

a type of purchasing contract in which the stated price does not change, regardless of fluctuations in general overall economic conditions, industry competition, levels of supply, market prices, or other environmental changes

Direct costs

costs tied directly to the level of operations or supply chain activities, such as the production of a good or service, or transportation.

Electronic Data Interchange (EDI)

an information technology that allows supply chain partners to transfer data electronically between their information systems

Request for Information (RFI)

an inquiry to a potential supplier about that supplier's products or services for potential use in the business. The inquiry can provide certain business requirements or be of a more exploratory nature

Multicriteria Decision Models

models that allow decision makers to evaluate various alternatives across multiple decision criteria

Industry Analysis

profiles the major forces and trends that are impacting an industry, including pricing, competition, regulatory forces, substitution, technology changes, and supply/demand trends

job sequencing rules

rules used to determine the order in which jobs should be processed when resources are limited and multiple jobs are waiting to be done

Maverick Spending

spending that occurs when internal customers purchase directly from non qualified suppliers and bypass established purchasing procedures

Statement of work, or scope of work (SOW)

terms and conditions for a purchased service that indicate, among other things, what services will be performed and how the service provider will be evaluated

Master Production Schedule (MPS)

the amount of product that will be finished and available for sale at the beginning of each week. The master production schedule drives more detailed planning activities, such as material requirements planning.

planning horizon

the amount of time the master schedule record or MRP record extends into the future. In general, the longer the production and supplier lead times, the longer the planning horizon must be

Electronic Funds Transfer (EFT)

the automatic transfer of payment from a buyer's bank account to a supplier's bank account.

Corporate Social Responsibility

the economic, legal, ethical, and discretionary expectations that society has of organizations at a given point in time.

Parent/child relationship

the logical linkage between higher and lower level items in the BOM

exploding the BOM

the process of working backward from the master production schedule for a level 0 item to determine the quantity and timing of orders for the various subassemblies and components. Exploding the BOM is the underlying logic used by MRP.

Cost of Goods Sold (COGS)

the purchased cost of goods from outside suppliers

procure-to-pay cycle

the set of activities required to first identify a need, assign a supplier to meet that need, approve the specification or scope, acknowledge receipt, and submit payment to the supplier 1. Ordering 2. Follow-up and expediting 3. Receipt and inspection 4. Settlement and payment 5. Records maintenance

Insourcing

the use of resources within the firm to provide products or services

Outsourcing

the use of supply chain partners to provide products or services

Step 6: Negotiate and Implement Agreements

•Competitive bidding -Request for quotation (RFQ) -Description by market grade / industry standard -Description by brand -Description by specification -Description by performance characteristics •Negotiating •Contracting •Fixed-price contract •Cost-based contract

Learning Objectives Chapter 12

•Complete the calculations for the master schedule record and interpret the results. •Complete the calculations for the MRP record and interpret the results. •Discuss the role of production activity control and vendor order management and how these functions differ from higher-level planning activities.

Performance Impact

•Cost is not the only consideration. •Purchased goods and services can have a major effect on other performance dimensions including quality and delivery performance.

The Master Schedule Record

•Forecasted demand •Booked orders •Projected inventory levels •Production quantities •Units still available to meet customer needs (Available to Promise)

MRP Record

•Gross Requirements •Scheduled Receipts •Projected Ending Inventory •Net Requirements •Planned Receipts •Planned Orders

Strategic Sourcing Process

•Identifying ways to improve long-term business performance by better understanding sourcing needs, developing long-term sourcing strategies, selecting suppliers, and managing the supply base.

Lot Sizing Techniques

•Lot-for-Lot (Minimum order quantity = 1) •Minimum order quantity

MRP - Advantages

•MRP is directly tied to the master production schedule and indicates the exact timing and quantity of orders for all components. •MRP allows managers to trace every order for lower-level items through all the levels of the BOM, up to the Master Production Schedule. (pegging) •MRP tells a firm and its suppliers precisely what needs to be made when.

Procure-To-Pay Cycle

•Ordering •Purchase Order •Follow-Up and Expediting •Receipt and Inspection •Statement of work •Settlement and Payment •EFT •Records Maintenance

Planning Horizon / Time Fences

•Planning Horizon -Vary Based on company •Time Fences -Dictate who can add or change schedule Frozen-Manager Moderately Firm-Planner Flexible-Anyone

Step 4: Screen Suppliers and Create Selection Criteria

•Qualitative criteria to evaluate suppliers include: -Process and design capabilities -Management Capability -Financial condition and cost structure -Longer-term relationship potential •Can be done through a RFI (Request for Information)

MRP Dynamics

•Supports "replanning" •"Time fence" •"Pegging" •That a manager can react to changes, doesn't mean he/she should

Trends in Supply Management

•Sustainable Supply •Becoming more conscious of the importance of being environmentally friendly and using environmental performance in selecting suppliers. •Ensuring compliance with regulations. •Reducing packaging, promoting recycling, and reducing costs while being good for the environment. •Supply Chain Disruptions •Caused by natural disasters, economic or political events. •Cause a big threat to revenue streams. •Lead to increased risk due to outsourcing to global suppliers.

"Exploding" the BOM

•The process of working backward from the master production schedule for a level 0 item to determine the quantity and timing of orders for the various subassemblies and components.

Lead Times

•The time required to purchase, produce, or assemble an item •For purchased items •For production