Supply Chain Chapters 5-8

Purchasing Process Steps

1. A need is identified, and a Purchase Requisition is issued 2. Obtain authorization as necessary 3. Identify and evaluate potential suppliers 4. Make a supplier selection 5. Purchase Order (PO) is created and delivered to the supplier 6. Supplier confirmation of the Purchase Order 7. Fulfillment 8. Receipt of Goods 9. Invoice and Reconciliation 10. Payment 11. Close out the Purchase Order 12. Analysis

Framework for Sourcing Strategy Development

1. Classify the company's products and suppliers as belonging to either functional or innovative category. 2. Develop strategic sourcing goals and strategies for each category. 3. Create the sourcing team (typically led by procurement). 4. Develop a team strategy and communication plan. 5. Identify the targeted spend area(s) and conduct a spend analysis. 6. Gather information on supplier capabilities using RFI. 7. Develop a supplier portfolio. 8. Develop a future state (vision of what company wants) 9. Conduct supplier negotiation. 10. Implement Supplier Relationship Management (SRM)

Primary Objectives of Purchasing

1. Ensure an uninterrupted flow of materials and services at the lowest total cost 2. Improve the quality of the finished goods produced 3. Optimize customer satisfaction

Inventory Turnover

= Cost of Goods Sold (COGS) / Average Inventory Represents the number of times the company sold through inventory in a given time period High turnover ratio: beneficial because it means the company is generating sales efficiently to sell inventory. Low turnover ratio: 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.

Import Brokers

Agents licensed by the governmental regulatory authority to conduct business on behalf of importers, for a service fee - They take the burden of filling out import paperwork, and clearing products through customs barriers for importers

Strategic Alliance Development

An extension of supplier development which refers to increasing a key of strategic suppliers quality and/or due date/ performance - Results in better market penetration, access to new technologies and knowledge, and a higher return on investment - Eventually extends to a firm's second-tier suppliers as the firm's key suppliers begin to form their own alliances

Service Providers

Companies can choose to use service providers that already have the specialized skills and knowledge necessary to deal with international purchasing issues and challenges. E.G. Import Brokers, Import Merchants, Trading Companies

Specialized Knowledge

Companies interested in pursuing international purchasing arrangements must acquire some specialized knowledge particular to buying products and services internationally. E.G. Tariffs, Nontariff barries, countertrade

Bid Bond

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 Bonds

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

Payment Bonds

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

Tariffs

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

Supply Management

Encompasses all acquisition beyond the simple purchase transaction. "Identification, acquisition, access, positioning, and management of resources an organization needs, or potentially needs, in the attainment of its strategic objectives"

Functional Products

MRO items and other commonly low profit margin items with relatively stable demands and high levels of competition (i.e. office supplies, food staples, etc.) Potential Sourcing Strategy: MULTI-SOURCED

Benchmarking

Measuring what other businesses do best and matching their performance, is an effective approach to improving your supply chain

Make

Producing (i.e. manufacturing) materials or products internally (i.e. in operations owned by the company)

Insourcing

Producing goods or services using a company's own internal resources

Forward Vertical Integration

Refers to a company acquiring one or more of their customers. E.G. A manufacturer buying a wholesaler/ distributor to take ownership of this aspect of their supply chain

Distributive Negotiations

Refers to a process that leads to self-interested, one-sided outcome

In-sourcing

Reverting to in-house production when external quality, delivery and service do not meet expectations

Sourcing

The process of identifying a company that provides a needed good or service

Procurement

The process of selecting and vetting suppliers, negotiating contracts, establishing payment terms, and the actual purchasing of goods and services. - Concerned with all of the goods, services and work that is vital to an organization - Overarching umbrella term within which the action of purchasing can be found

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 personnel

Merchants

Wholesalers and retailers who purchase for resale.

Supplier Selection

Typically conducted by a cross functional team. Process of selecting suppliers is complex and should be based on multiple criteria using evaluation forms or scorecards. Commonly used criteria: - Cost - Quality - Capacity - Service - Location - Reliability - Communication capability - Order system and cycle time - Willingness to share information - Product or process technologies

Pain

Using a penalty or punishments is a negative outcome for poor performance, cost overruns, quality problems, etc. - Buyer could impose a financial penalty (i.e. fine) on the supplier - Buyer could reduce future business with the supplier - Buyer could implement a bill-back amount of equal to, or a percent of, the incremental costs resulting from poor performance

Contracting

A term often used for the acquisition of services

Nontariff Barriers

Quotas, licensing agreements, embargoes, laws and regulation imposed on imports and exports

Pain and Gain (Share Agreements/ Provisions)

A supplier rewards and recognition program could also be reflected as part of the formal supply agreement in the form of pain and gain share provisions. Agreements could be negotiated to spell out in detail the gains (reward) and pains (penalty) that the supplier will realize for either exceptional or poor performance Both parties would mutually agree on the provisions and the positive and negative outcomes

Single sourcing versus multiple sourcing

Single-source supplier strategy: - To establish a good relationship - Less quality variability - Lower cost - Transportation economies - Proprietary product or process - Volume to small to split Multiple Source supplier strategy: - Need more capacity - Spread risk of supplier disruption - create competition - more sources of information - Dealing with special kinds of business

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

Request for Quote (RFQ)

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

Return on Assets Effect (ROA Effect)

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

Objectives of Sourcing Strategies

1. Improve the value-to-price relationship (i.e. reduction of cost while maintaining or improving quality) 2. Understand the category buying and management process, to identify improvement opportunities 3. Examine supplier relationships across the entire organization. Share the best practices 4. Develop and implement multi-year contracts with standardized terms and conditions across the organization 5. Leverage the entire organization's spend

Drivers of Strategic Sourcing

1. Improve long-term financial performance 2. Increase customer focus 3. Improve product quality 4. Reduce the cost of materials 5. Reduce delivery lead times 6. Optimize the number of global suppliers 7. Deliver more innovative products, in less time, and less expensively than competitors

Potential Challenges of International Purchasing

1. Knowledge of international trade policies and procedures. 2. Awareness and cost of required tariffs and duties. 3. Difficulties in communicating with suppliers due to language barriers, varying time zones, working weeks, holidays. 4. Locating, evaluating, sourcing and expediting in global markets. 5. Payments and currency management. 6. Longer time span for negotiations. 7. The potential for cultural political, and labor problems. 8. Potentially longer transportation lead times necessitating additional inventory. 9. Specific and varying documentation requirements. 10. Handling legal matters and the process for settling disputes.

Sourcing Categories

1. Non-critical: Routine items that involve a low percentage of firms' total spend and involve very little supply risk - Simplify and streamline the purchasing process - Reduce number of suppliers and simplify ordering - Transfer buying responsibility to "users" within the company 2. Bottleneck: Unique procurement problems. Supply risk is high and and availability is low. Small number of alternative suppliers. - Maintain safety/ strategic stock - Develop contingency plans - Strengthen relationships - Search for alternatives 3. Leverage: Commodity items where many alternatives of supply exist and supply risk is low. Spend is high and there are potential procurement savings. - Consolidate volume as a negotiation tool - Use competitive marketplace to reduce costs - Automate supplier interfaces to minimize process related costs 4. Strategic: Strategic items and services that involve a high level of expenditure and are vital to the firm's success. - Ensure availability of supply - Focus on relationship building - Encourage process integration and innovation - Frequent communications - Establish mutually agreeable supplier performance criteria

Purchase Order (PO)

A commercial document. It is the official offer issued by a buyer to a seller to acquire goods or services. - Used to control the purchasing of products and services from external suppliers. - Indicates types, quantities, and agreed prices for products or services. - Becomes a binding contract only when accepted by supplier.

Strategic Sourcing

A comprehensive approach for locating and sourcing key suppliers, so that an organization can leverage its consolidated purchasing power to find the best possible values in the marketplace - Requires analysis of what an organization buys, from whom, at what price and at what volume. - Emphasis is placed on the entire life-cycle of a product, not just its initial purchase price

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

Purchasing Requisition

A document that defines the need for goods and/or services. - 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 time frame - It may also contain the authorization to proceed with the purchase

Competitive Bidding

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 - Aims at obtaining goods and services at the lowest prices by stimulating competition, and by preventing favoritism - Does NOT allow for negotiations. By law, the contract is awarded to the lowest priced responsive and responsible bidder

Strategic Alliance

An agreement between a buyer and a supplier to pursue some agreed upon objectives, while remaining independent organizations - Companies agree to share information and resources to achieve a mutual benefit - Preferred suppliers are potentially ideal candidates for a strategic alliance Benefits: - Potential to increase revenue and profits for both parties - Potential to create a competitive advantage or block a competitor from gaining market share - Mitigating risks and ensure a continuity of supply - Position the partners for future strategic opportunities

Sourcing Strategies

Analysis and ability to make adjustments based on price, evaluation of supplier performance, and the overall needs of the organization Include: - Insourcing - Outsourcing - Single Sourcing - Multiple Sourcing

Collaborative Negotiations (Integrative Negotiations)

Both sides work together to maximize the outcome or create a win-win result. Requires open discussions and a free-flow of information between parties. - Successful collaborative negotiations start with a clearly expressed understanding of how each company wants to benefit from the coolaboration - Alignment between parties regarding motivation, contribution, financial benefit, and the management of the alliance are essential. - Negotiations are not about each company obtaining the most value, negotiations are more about establishing a relationship that works well for both parties

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)

Buy (Outsource)

Buying materials, components, or products from a supplier(s) instead of, or in addition to, making them in-house (i.e. buying from a 3rd party external source) Risks: - Potential loss of control (production decisions, intellectual property, etc.) - Increased reliance on suppliers - Increased need for supplier management Benefits: - Concentrate on core capabilities - Reduce staffing levels - Accelerate re-engineering efforts - Reduce internal management problems - Improve manufacturing flexibility

Innovative Products

Characterized by short product life cycles, volatile demand, high profit margins, and relatively less competition (i.e. technology) Potential Sourcing Strategy: SINGLE-SOURCED

Bonds

Incentive to ensure that the successful bidder will fulfill the contract E.G. Bid bond, performance bond, payment bond

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 Advantages: - Knowledge of local requirements - Local sourcing - Less bureacracy

Industrial Buyers

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

Countertrade

International trade by exchange of goods rather than by currency

Backward Vertical Integration

Refers to a company acquiring one or more of their suppliers. E.G. A manufacturer buying the key supplier of a critical material to take ownership of this aspect of their supply chain

Reasons for Making

Protect proprietary technology: You may not want your intellectual property to be out in the public domain. No competent supplier: There may not be an existing supplier in the market and you may not want to spend the time or effort to develop one. Overall lower cost: You may be able to produce the material or product at a lower cost and avoid paying a 3rd party's profit margins. Better Quality Control: You may feel that you have more control of the quality of the material/ product than a supplier. Use existing idle capacity: Make use of excess capacity by making a material instead of letting the capacity sit idle. Control of transportation and warehousing costs: If you make an item in-house, you avoid transpiration costs, and may be able to keep warehousing costs to a minimum. Control of lead-time: You may feel that you have more control over the lead time to produce the product than a supplier.

Multiple Sourcing

Purchasing a good or service from more than one supplier. companies may use multi-sourcing to create competition between suppliers in order to achieve higher quality at a lower price

Centralized Purchasing

Purchasing department located at the firm's corporate office makes all the purchasing decisions Advantages: - Concentrated volume - Leveraging purchase volume - Avoiding duplication - Specialization - Lower transportation costs - No competition within units - Common supply base

Other Factors of TCO

Quantity: Discounts may be offered to encourage buyers to purchase larger quantities Cash: Discounts may be offered for prompt payment of invoices (e.g. 2, 10, net 30) Value-added services: E.G. special delivery, special packaging, preparation of promotional displays, sub-assembly operations in a supplier's plant Administrative Expenses: Associated with the procurement activity itself such as screening potential suppliers, negotiation, order preparation, order transmission Poor Supplier Quality: Costs related to defective finished goods must also be considered. Costs such as scrap, rework, recycling, recovery of materials, warranty administration, and repair costs

Purchasing

The action of obtaining merchandise, capital equipment, raw materials, services, or maintenance, repair or operating (MRO) supplies in exchange for money, or its equivalent. - The process of how goods and services are ordered from an external third party - Transactional function of procurement for goods or services - Represents the function of, and the responsibility for, acquiring materials, supplies, and services for an organization

Preferred Suppliers

- Achieved a specific and exceptional level of performance over time as measured by a set of criteria agreed upon by both buyer and supplier - Typically trusted partners who know the buyers organization, processes, procedures, and requirements. - Provides a higher value than their competitors and are characterized as reliable, responsive, flexible and cost effective Provide: - Product and process technology, and expertise - Product development and value analysis - Information on latest trends in materials, processes or designs - Capacity for meeting unexpected demand - Cost efficiency due to economies of scale

Reasons for Global Sourcing

- Opportunity to improve quality, cost, and delivery performance - To exploit global efficiencies (access to low cost labor and materials and take advantage of tax breaks and low trade tariffs) - To respond to insufficient domestic capacity - To achieve access to a better process and product technology - Due to a change in the domestic business environment - To take advantage of reciprocal trade and counter trade arrangement

Single Sourcing

A sourcing strategy where there are multiple potential suppliers available for a product or service, however, the company decides to purchase from only one supplier - This is in contrast to sole sourcing (only one supplier for one item)

Request for Information (RFI)

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

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

Bid

A proposal or quotation submitted in response to a solicitation from a contracting authority Sealed Bid: enclosed in a sealed envelope and submitted in response to an invitation to bid

Supplier Certification

Certification process verifying that a supplier operates, maintains, improves, and documents effective procedures that relate to the buyer's requirements (e.g. cost, quality, delivery, flexibility, maintenance, safety, etc.) - Supplier certification programs are used to differentiate strategic supplier alliance candidates from other - companies may choose to develop internal certification programs, and/or require external certifications such as ISO 9000 and/or ISO 14000 as part of their overall certification process

Spend Analysis

Collecting, cleansing, classifying, and analyzing expenditure data for the purpose of decreasing costs, improving efficiency and monitoring compliance. Basic steps include: 1. Defining the scope 2. Identify all the data sources 3. Gathering and consolidating all of the data into one database 4. Cleansing the data (correcting errors) and standardizing it for easy review 5. Categorizing the data 6. Analyzing the data for best deals for supplier, ensure all purchases are from preferred suppliers, reduce the numbers of suppliers per category, etc. 7. Repeating the process on a regular schedule Key areas include: - Total historic expenditures and volumes - Future demand projections or budgets - Expenditures categorized by commodity or sub-comodity - Expenditure by division, department or user - Expenditure by supplier

Rewarding Supplier Performance

Recognition of a supplier for exceptional performance, contributions and/or capabilities Rewarding suppliers for outstanding performance motivates and encourages them to continue to strive for excellence in their products, services and operations. It also strengthens and fosters strong and productive supplier relationships. Reward incentives can include: - promise of future business - public recognition (plaque, awards dinner, honors ceremony, press release, formal communication with the senior staff) - cash back for achieving performance-based objectives - strategic or preferred supplier status

Supply Base Rationalization (Supply Base Reduction; Supply Base Optimization)

Reduction in the supply base to the lowest number of suppliers possible without significantly increasing risk Buyer-supplier partnerships are easier to manage with a rationalized supply base, and they can result in: - Reduced purchase prices - Fewer supplier management problems - Closer and more frequent interaction between buyer and supplier - Greater levels of quality and delivery reliability

Outsourcing

The traditional definition involves purchasing an item or service externally, which had been produced using a company's own internal resources previously

Make versus Buy Decision

The act of strategically deciding whether to produce an item internally or buy the item from an outside supplier Key Factors: - Quantitative Factors: incremental costs of either making or purchasing the item, such as the availability of manufacturing facilities, needed resources, and manufacturing capacity - 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

E-Procurement

The business-to-business (B2B) purchase and sale of supplies and services over the Internet - Automation provides increased enterprise level visibility of all purchases - Typically automate solicitation tools (RFI, RFP, RFQ), execution and analysis, and reverse auction capabilities Basic Process consists of: 1. An electronic Purchase Requisition and/or Purchase Order 2. An invoice 3. A payment (for high dollar purchases, the process will also include authorization of PO and reconciliation of invoice)

Supply Base

The group of suppliers from which a company acquires goods and services - Firms emphasize long-term strategic supplier alliances consolidating volume into one or fewer suppliers

Total Cost of Ownership (TCO)

The sum of all the costs associated with every activity in the supply stream of a product TCO = Q + S + D + P The four elements of cost are: Quality, Service, Delivery and Price (QSDP) - TCO is the sum of the cost elements in QSDP - Each element of QSDP has an impact on the TCO - The main TCO insight is that the acquisition cost is often a very small portion of the TCO (25% - 40%)

Advantage of E-Procurement

Time Savings: A reduction in time between need recognition and release and receipt of an order Cost Savings: Lower overhead costs in the purchasing area Accuracy: A reduction in errors. A virtual elimination of manual paperwork and paperwork handling Real Time: Improved communication both within the company and with suppliers Management: Purchasing personnel spend less time on processing of purchase orders and invoices, and more time on strategic value added purchasing activities Mobility: Access virtually anywhere Trackability: Real-time status tracking Benefits to Suppliers

Gain

Using a reward as a positive outcome from exceptional performance - Award financial bonus - Award more business and/or longer contracts to the supplier - Share a portion of any cost reductions developed by the supplier which benefit the buyer - Provide access to in-house training seminars, conferences, tools and information, or other resources to the supplier - Publicly recognize the supplier and/or confer a special status on the supplier such as "Preferred Supplier", "Partner", "Supplier of the Year", etc.

Government Purchases

Expenditure made in the private sector by all levels of government REQUIRES openness, visibility and accountability since it is the public money that is being spent.

Non-profit purchases

Expenditure made in the sector by all types of non-profit organizations REQUIRES openness, visibility and accountability since it is the public money that is being spent.

Reasons for Buying (Outsourcing)

Non-strategic: If it is a non-strategic item. Cost Advantage: Suppliers may provide the benefit of economies of scale, especially for components that are non-vital to the organization's operations. Insufficient Capacity: A firm may be at or near capacity and subcontracting from a supplier may make better sense. Temporary Capacity Constraints: The concept of "extended workbench" which involves short-term supplementing internal capacity with external capacity during time of constraint or overload work centers. Lack of expertise: Firm may not have the necessary technology and expertise. Quality: Suppliers may have better technology, process, skilled labor, etc. Multi Sourcing Strategy: To achieve multi sourcing strategy using an external supplier in addition to an internal source. Inventory considerations: Opting to have the supplier hold inventory of the item or the materials required to produce the item. Brand strategy: Take advantage of a suppliers brand image, reputation, popularity, etc.

Components of TCO

Pre-Transaction Costs: Activities carried out prior to the actual buy and sell transaction such as: - Identifying sources - Qualifying sources - Certifying sources - Supplier database update - training/ education of supplier Transaction Costs: Activities carried out as part of the actual buy and sell transaction such as: - Price negotiation - Delivery confirmation - Purchase order administration - Transportation - Delivery/ receiving - Reconciliation - Taxes/ tariffs/ duties - Invoicing/ payment - Incoming inspection - Rejected goods return to supplier - Close out Post-transaction Costs: Activities carried out following the actual buy and sell transaction such as: - Returns from customer - Replacement - Repair parts & labor - Maintance - Disposal of returned product