Supply Chain Management - Exam 2(5-8)

Sustainable Sourcing should seek to

-Grow Revenues New sustainable product introduction -Reduce Costs Increase resource efficiencies -Manage Risk Link brand to social consciousness of consumer -Build Intangible Assets Build social and environmental responsibility

Benefits of Outsourcing

-Concentrate on Core Capabilities -reduce staffing levels -accelerate reengineering efforts -reduce internal management problems -improve manufacturing flexibility

Reasons for Buying (or Outsourcing)

-Cost Advantage - Especially for components that are non-vital to the organization's operations. Suppliers may have economies of scale -Insufficient Capacity - A firm may be at or near capacity and subcontracting from a supplier may make better sense. Extended Workbench -Lack of Expertise - Firm may not have the necessary technology and expertise -Quality - Suppliers may have better technology, process, skilled labor, etc.

Benefits for Suppliers During Strategic Partnership

-Greater visibility into buyer's purchasing plans -Increased operating efficiencies -Longer term buyer commitments; greater predictability of future business -Increased scope of business and revenue -Lower costs of sales; increased margins -Opportunities to develop, pilot, and showcase innovative solutions -Sustainable competitive advantage

The primary goals of purchasing are:

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

The basic seven-step purchasing process:

1. Identify the need. Receive a Purchase Requisition 2.Identify and evaluate potential suppliers 3.Supplier selection (including bids and negotiations) 4.Approve and issue the Purchase Order 5.Receive and check the order upon delivery 6.Measure the supplier's performance 7.Close out the order

Decentralized - Centralized

(large multiunit org) decentralized purchasing at the corporate level and centralized purchasing at business unit level.

Centralized - Decentralized

(large org w/centralized control) Large national contracts centralized at the corporate level and smaller specific items decentralized at the business unit level.

Electronic data interchange (EDI)

-Allows a supplier to profile demand and determine accurate forecasts -EDI also provides reorder point data to permit timely deliveries

Incorporating LEAN Elements

-Cross-training -Satisfying internal customer demand -Quickly moving products in the production system -Communicating demand forecasts and production schedules up the supply chain -Optimizing inventory levels across the supply chain -Channel integration - extending alliances to suppliers' suppliers and customers' customers

The Eight Wastes ("DOWN TIME")

-Defects-Anything that does not meet the acceptance criteria -Overproduction-Production before it is needed, or in excess of customer requirements. Providing a service that is not needed. -Waiting-Elapsed time between processes when no work is being done -Non-Utilized Talent-Underutilizing people's talents, skills or knowledge. De-motivating the workforce by not asking for input or recognizing success -Transportation-Unnecessary movement of materials or products -Inventory-Excess products or materials not being processed -Motion-Unnecessary movement of people. Multiple hand-offs -Extra Processing-Unnecessary steps in a process. Redundancies between processes. More work or higher quality than required by the customer

(4) Inventory and Setup Time Reduction

-Excess inventory is a waste -Reducing inventory levels can uncover production problems -Once problems are detected, they can be solved. -The end result is a smoother running organization with less inventory investment.

(1) Waste (Muda) Reduction

-Firms reduce costs and add value by eliminating waste from the production system. -Waste encompasses wait times, inventories, material and people movement, processing steps, variability, any other non-value-adding activity.

Statistical Tools of Six Sigma

-Flow Diagrams - annotated boxes representing process to show the flow of products or customers. -Check Sheets - to determine frequencies for specific problems. -Pareto Charts - for presenting data in an organized fashion, indicating process problems from most to least severe. -Cause and Effect Diagrams (Fishbone or Ishikawa diagrams) - used to aid in brainstorming and isolating the causes of a problem.

Elements of LEAN

-LEAN Manufacturing -Total Quality Management -Respect for People

(3) LEAN Layouts

-Move people and materials when and where needed, and as soon as possible -Are very visual (lines of visibility are unobstructed) with operators at one processing center able to monitor work at another -Manufacturing cells --Process similar parts or components saving duplication of equipment and labor --Are often U-shaped to facilitate easier operator and material movements

Relationship of TCM to Manufacturing Strategy

-Procurement and production costs go down as volume goes up (generally, a step function applies as more capital will be required to produce more as volume grows) -Inventory and warehousing costs go up as volume goes up (must hold more inventory and pay for more storage space, insurance, taxes, etc.) -Transportation costs go down as volume goes up, but level off at high volumes (economies of scale in transportation until the container/conveyance is filled up)

Joseph Juran

-Quality Planning, identify internal / external customers & needs: Develop products satisfying those needs. Mangers set goals, priorities, and compare results. -Quality Control and determine what to control: Establish standards of performance. Measure performance, interpret the difference, take action. -Quality Improvement, show need for improvement: Identify projects for improvement. Implement remedies Provide control to maintain improvement.

LEAN Green Practices

-Reduce the cost of environmental management -Lead to improved environmental performance. -Increase the possibility that firms will adopt more advanced environmental management

Respect for People

-Respect for all people must exist for an organization to be at its best --Flatter hierarchy than traditional organizations. --Ordinary workers given great responsibility. --Supply chain members work together in cross functional teams.

(5) Small Batch Scheduling

-Small batch scheduling drives down costs by: --Reducing purchased, WIP, and finished goods inventories --Makes the firm more flexible to meet customer demand -Small production batches are accomplished with the use of kanbans -Kanbans generate demand for parts at all stages of production creating a "pull" system

(2) LEAN Supply Chain Relationships

-Suppliers and customers work to remove waste, reduce cost, and improve quality and customer service -JIT purchasing includes delivering smaller quantities, at right time, delivered to the right location, in the right quantities -Firms develop lean supply chain relationships with key customers. Mutual dependency and benefits occur among these partners.

Acceptance Sampling

-When shipments are received from suppliers, samples are taken and measured against the quality acceptance standard. Shipment is assumed to have the same quality. -Sampling is less time-consuming than testing every unit but can result in errors -Producer's risk: A buyer rejects a shipment of good quality units because the sample quality level did not meet standards (type I error) -Consumer's risk: Buyer accepts a shipment of poor-quality units because the sample falsely provides a positive answer (type II error)

Engineer to Order (ETO)

-a manufacturing process in which the component is designed, engineered, and built to specifications only after the order has been received. -building a unique product every time, cost of poor quality can be very high

Make-to-Order (MTO)

-a manufacturing strategy that typically allows customers to purchase products that are customized to their specifications. -Only starts production when customer places order, increases wait time -Works with comp. servers, aircraft, ocean vessels

Assemble-to-Order (ATO)

-a manufacturing strategy where products ordered by customers are produced quickly and are customizable to a certain extent. -a hybrid strategy between a Make-to-Stock strategy where products are fully produced in advance, and the Make-to-Order strategy where products are manufactured once the order has been received.

Value

-inherent worth of a product as judged by the customer and reflected in its selling price and market demand -Value is defined as anything for which the customer is willing to pay

Sustainability

-the ability to meet current needs of the supply chain without hindering the ability to meet future needs in terms of economic, environmental, and social challenges -Considers things like worker safety, wages, working conditions, human rights, etc.

Total Cost of Manufacturing (TCM)

-the complete cost of producing and delivering products to your customers. -It incorporates both fixed and variable costs used in the manufacturing, storage, and delivery of the product -Production and procurement activities, Inventory and warehousing activities, Transportation activities

The Five-S's

1. Seiri - Organization - Sort: Keep only necessary items in the workplace 2.Seiton - Tidiness - Set in order - Arrange items to promote efficient workflow 3.Seiso - Purity - Shine - clean the work area so it is neat and tidy 4.Seiketsu - Cleanliness - Standardize - set standards for a consistently organized workplace 5.Shitsuke - Discipline - Sustain - stick to the rules. maintain and review standards

Development and Implementation of an SRM System

1.Automation is meant to handle routine transactions 2.Integration spans multiple departments, processes, and software applications 3.Visibility of information and clear and concise process flows 4.Collaboration through information sharing 5.Optimization of processes and decision making

Supplier Development: Process Steps

1.Identify critical products and services 2.Identify critical suppliers 3.Form a cross-functional team internally to work with the supplier 4.Meet with the top management at the supplier to get their support and involvement 5.Identify key development needs and projects 6.Define details of the agreement and the action plan 7.Monitor the status of the projects / action plan and modify strategies as necessary

Benefits of Supplier Recognition Programs

1.Motivate Suppliers to Perform Better - Can motivate suppliers to excel in terms of their quality, pricing and delivery commitments. 2.Improve Supplier Loyalty and Commitment - Supplier support is important to ensure that customer delivery commitments are maintained. 3.Encourage Suppliers to Adapt to the Company's Culture - If the company treats its suppliers as a part of the family and engages in supplier recognition programs periodically, it can help to bring the suppliers closer to the corporate values, ethics and principles of the company. 4.Helps to Create Entry Barriers for Competitors - If the suppliers trust the company, they may be more inclined to sign deals of exclusivity with the company for certain crucial components. 5.Encourages Supplier Participation in Product Innovation - Recognition to suppliers also brings about their enthusiasm to work closely with the company on new product development.

The Weighted-Criteria Evaluation System

1.Select the key dimensions of performance mutually acceptable to both customer and supplier. 2.Monitor and collect performance data. 3.Assign weights to each of the dimensions. 4.Evaluate performance measures between 0 and 100. 5.Multiply dimension rating by weight and sum of overall score. 6.Classify vendors based on their overall score, e.g., Certified, Preferred, Acceptable, Conditional, Developmental, Unacceptable, etc. 7.Audit and perform ongoing certification review.

W. Edwards Deming

14 Points- (main ones) -Cease dependence on inspection to improve quality -Constantly improve the production and service system -Institute leadership -Break down barriers between departments -Put everyone to work to accomplish the transformation

Supplier Recognition Programs

A program to recognize suppliers who achieve the high performance standards necessary to meet customer expectations. -The success of the business can depend on the quality and performance of the company's suppliers.

Contracting

A term often used for the acquisition of services

(6) Continuous Improvement (Kaizen)

Continuous approach to reduce process, delivery, and quality problems, such as machine breakdown problems, setup problems, and internal quality problems

Statistical Process Control

Allows firms to: -Visually monitor process performance -Compare the performance to desired levels or standards -Take corrective action Firms: -Gather process performance data -Create control charts to monitor process variability -Then collect sample measurements of the process over time and plot on charts . -Natural variations:Expected and random (can't control) -Assignable variations:Have a specific cause (can control) -Variable data:Continuous, (e.g., Weight) -Attribute data:Indicate some attribute such as color and satisfaction, or beauty.

Supplier Certification

An organization's process for evaluating the quality systems of key suppliers in an effort to eliminate incoming inspections

LEAN Six Sigma Supply Chain

Combines the approaches of LEAN and Six Sigma -Methodology to identify and eliminate causes of quality problems Steps: 1.Jointly Define Value. 2.Conduct Supply Chain Capability Analysis. 3.Develop Key Financial and Operational Metrics. 4.Identify and Implement System Improvements. -Value Stream Mapping (VSM).

Visual Signals

Communication between workstations -Kanban:"Signal" or "Card" in Japanese. --Contains information passed between stations. --Authorizes production or the movement of materials to the next workstation.

Role of Management

Create cultural change needed for LEAN to succeed: -Provide atmosphere of cooperation. -Empower workers to take action based on their ideas. -Develop incentive system for lean behaviors.

Six Sigma - 5 Step Plan (DMAIC Methodology)

Define- What is the customers expectation of the process? Measure- What is the frequency of defects? Analyze-Why, When and where do defects occur? Improve- How can we fix the problem? Control-How can we make the process stay fixed?

Purchase Requisition

Document that defines the need for goods and/or services. An internal document. Does not constitute a contractual relationship with any external party.

Philip Crosby

Four Absolutes of Quality 1.The definition of quality is conformance to requirements 2.The system of quality is prevention. 3.Performance standard is zero defects. 4.The measure of quality is the price of nonconformance

LEAN History

Henry Ford production line=first continuous assembly and flow systems -Toyota Production System = basis of what LEAN is today -LEAN coined by John Krafcik in 1988

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.

Role of Supplier

LEAN builds long-term supplier relationships: -Partner with suppliers. -Improve process quality. -Information sharing. -Goal to have single-source suppliers.

Make-to-Stock (MTS)

Make-to-Stock (MTS) - to manufacture products for stock based on demand forecasts, which is a push system. -Accuracy of the forecasts will prevent excess inventory and opportunity loss due to stockout, the critical issue is how to forecast demands accurately. -supply schedule can be determined from past data -One issue to avoid having excess inventory

(7) Workforce Commitment

Managers must support LEAN Manufacturing by providing subordinates with the skills, tools, time, and other necessary resources to identify problems and implement solutions

Six Sigma History

Motorola 1979 -Six Sigma became famous when Jack Welch made it central to his successful business strategy at General Electric in 1995

Malcolm Baldrige National Quality Award

Objectives 1.Stimulate firms to improve 2.Recognize firms for quality achievements 3.Establish guidelines so that organizations can evaluate their improvement and provide guidance to others

Cost of Quality

Prevention Cost: -Cost incurred in the process of preventing quality -costs of preparing and implementing quality plan Appraisal Costs: -Costs incurred in the process of uncovering defects Internal Failure Costs: -Costs of defects before they reach the customer -includes scrap, rework, and material loses External Failure Costs: -costs of failure at customer site -includes returns, repairs, recalls

Uniform Plant Loading

Problem: -Demand exceeds capacity at points in the planning horizon. -Matching the production plan to follow demand exactly can contribute to inefficiency and waste Uniform Plant Loading: -Planning up to capacity in earlier time periods to meet demand in later time periods. -Also called "front-loading" the plan or "leveling" the plan. -Production schedule is frozen in the up-front time period (i.e., month) -Helps suppliers better plan production.

Small Lot Production

Producing only a small amount of product at any one time: -Reduces inventory and excess processing. -Increases flexibility allowing the company to respond to changes in customer demands more quickly. -Reduces throughput time and gets product to customers more quickly. More responsive to customer demand. -Shortens manufacturing lead time and the actual time it takes to produce a product. -Setup time must be low so that it is easy to switch from producing one type of product to another.

Six Sigma

Quality Management Process: -Six Sigma seeks to improve the quality of process outputs by identifying and removing the causes of defects (errors) and minimizing variability in manufacturing and business processes. -The goal of Six Sigma is to attain less than 3.4 Defects Per Million Opportunities (DPMO) -a structured and data-driven approach to drive such a near-perfect quality goal, i.e., "Zero Defects"

Voice of the Customer

Quality is meeting or exceeding customer expectations Tools to help determine customer wants: -Focus groups -Market surveys -Customer interviews

Supply Base Rationalization

Reduction in the supply base to the lowest number of suppliers possible without increasing risk -Reduced purchase prices -Fewer supplier management problems -Closer and more frequent interaction between buyer and supplier -Greater levels of quality and delivery reliability

Quality Tools

Seven Tools of Quality Control: 1.Cause and Effect Diagrams (aka root cause analysis) 2.Flowcharts 3.Checklists 4.Control Charts 5.Scatter Diagrams 6.Pareto Analysis 7.Histograms

Supplier Development [Cont.]

Supplier development is all about providing suppliers with what they need to be successful in the supply chain. -Providing information about products, expected sales growth, etc. Suppliers need to become extensions of their customers. -Training suppliers in the application of lean and six sigma / quality tools. Asking suppliers to lower their price without giving them the knowledge on how to lower their costs is not sustainable in the long-term.

Impact of LEAN Six Sigma on Supply Chain Activities

Suppliers: -Lower costs due to efficient systems. -Shorter lead times. -Lower safety stock. Operations: -Proper cycle time calculation ensures production according to customer demand. -Uniform work flow. -Pull production. Logistics: -Optimization models to select routes. -Warehouse design changes reduce waste.

Sourcing

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

The Pull System

Traditional Approach:Supply chains work as "push" systems, Inventory carried to cover up problems Pull Approach:Each stage in the supply chain requests quantities needed from the previous stage, No excess inventory generated, Reduced inventory exposes problems.

Six Sigma Methodology

Two Aspects: 1.Use of technical tools -Statistical quality control. -Seven tools of quality. 2.People involvement: -All employees responsible to identify quality problems. -All employees trained to use technical tools.

Green Purchases

Variety of federal, state, and local initiatives to include environmental and human health considerations when making purchases

Quality Gurus

W. Edwards Deming: Father of TQM, Managements responsibility for quality Philip Crosby: quality is free as defects are costly, concept of zero defects, focus on prevention not inspection Joseph Juran: quality as fitness for use, cost of quality

Roles for Workers

Workers performing different tasks and actively pursuing company goals -Improve production process -correct quality problems -monitor quality

Six Sigma Training Levels

Yellow:Basic understanding of Six Sigma Methodology and tools Green:A trained team member Black:Thorough knowledge of Six Sigma philosophies and principles Master Black:A proven mastery of process variability reduction, waste reduction and growth principles

Innovative Products

characterized by short product life cycles, volatile demand, high profit margins, and relatively less competition i.e. technology products such as the iPhone

Manufacturing processes- Job Shop

creates a custom product for each customer. High customization -ETO/MTO

Six Sigma

is an enterprise and supply chain-wide philosophy that emphasizes a commitment toward excellence and encompasses suppliers, employees, and customers -reducing defects and variations LEAN + Six Sigma -> Faster speed better accuracy

LEAN

is an operating philosophy of waste reduction and value enhancement and was originally created as the Toyota Production System (TPS) by key Toyota executives. -eliminating wastes and improving efficiency -Culture, not a toolbox of methods and ideas -results in: Large cost reductions, improved quality, increased customer service

Strategic Sourcing partners

offer the opportunity for a company to extend their intellectual capabilities by involving their external partner base in product development.

Manufacturing processes-Line Flow

process has standard products with a limited number of variations moving on an assembly line through stages of production -ATO/MTS

Manufacturing processes-Continuous Flow

process is used to manufacture such items as gasoline, laundry detergent and chemicals. Inflexible processes. High capital investment -MTS

Manufacturing processes- Batch

process manufactures a small quantity of an item in a single production run -ETO/MTO/ATO

Ethical Sourcing

that which attempts to take into account the public consequences of organizational buying, or to bring about positive social change through organizational buying behavior

Bid Bonds or Surety Bonds

to ensure that the successful bidder will accept the contract once awarded

Performance Bonds

work will be on time and meet specifications

Decentralized Purchasing

Individual, local purchasing departments, such as at the plant level, making their own purchasing decisions -Knowledge of local requirements -Local sourcing -Less bureaucracy

Industrial Buyers

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

Strong Supplier Partnerships

Involves "a mutual commitment over an extended time to work together to the mutual benefit of both parties, sharing relevant information and the risks and rewards of the relationship"

Supplier co-location or JIT II

Supplier's employee is embedded in buyer's purchasing department to forecast demand, monitor inventory and place orders. Involves granting supplier access to proprietary or sensitive data

e-Procurement Process

The "electronic" requisitioning, receiving, and reconciliation of the received goods -Automation of the non-strategic and transactional activities that would otherwise consume the majority of a buyer's time -Provides increased enterprise level visibility of all purchases. -At a bare minimum, it consists of an electronic Purchase Requisition and/or Purchase Order, an Invoice (which might be one with the receipt), and a Payment. -For high-dollar purchases, the process will generally also include authorization of the Purchase Order and reconciliation of the invoice.

Purchase Order(PO)

The Buyer's offer to the supplier to acquire goods or services. Becomes a legally binding contract only when accepted by the supplier.

4PL (also known as a Lead Logistics Provider)

- An organization that functions as an interface between the client and multiple logistics services providers (i.e., a primary 3PL that oversees other 3PL's).

Early Supplier Involvement (ESI

- Key suppliers become more involved in the internal operations of the buyer's company, particularly with respect to new product and process design, concurrent engineering, and design for manufacturability. Strategic Suppliers are asked to add their knowledge and expertise to the company's new product development process.

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 $

ISO 14000

-A family of standards for environmental management. -The benefits include reduced energy consumption, environmental liability, waste and pollution, and improved community goodwill.

Third-Party Logistics (3PL)

-A growing industry that involves managing a company's materials and/or product distribution responsibilities -3PL providers charge a fee for services. Typically generates an estimated savings of 10 to 20% of total logistics costs -Benefits include improved service, quality, and profits for their clients.

Supplier Evaluation

-A process to identify best and most reliable suppliers -Sourcing decisions are made on facts and not on perception -Frequent feedback can help avoid surprises and maintain good relationships. -Suppliers should be allowed to provide constructive feedback to the customer

ISO 9000

-A series of management and quality standards in design, development, production, installation, and service. -Companies wanting to sell in the global market seek ISO 9000 certification.

Purchasing contributes to these objectives by:

-Actively seeking better materials and reliable suppliers -Work with the expertise of strategic suppliers to improve quality and materials -Involving suppliers and purchasing personnel in new product design and development efforts.

Public Purchasing

-Bidders are generally required to furnish bonds as incentive to ensure that the successful bidder will fulfill the contract awarded. -Procurement for Government and Non profit sectors

Benefits of Supplier Certification

-Building long-term relationships -Reducing time spent on incoming inspections -Decreasing the supplier base -Recognizing excellence

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 $ tied up

Reasons for Multiple Suppliers

-Need more capacity -Spread risk of supply disruption -Create competition -More sources of information -Dealing with special kinds of business -Current trends favor using fewer sources.

General Portfolio Spend Categories

-Non-Critical - items that involve a low percentage of the firms' total spend and involve very little supply risk. -Bottleneck - unique procurement problems. Supply risk is high and availability is low. Small number of alternative suppliers. -Leverage - commodity items where many alternatives of supply exist and supply risk is low. Spend is high and there are potential procurement savings. -Strategic - strategic items and services that involve a high level of expenditure and are vital to the firm's success.

Vendor-managed inventory (VMI) services

-One of the more popular roles of 3PL -Suppliers directly manage buyer inventories to reduce the buyer's inventory carrying costs and avoid stockouts for buyer

Risks Associated With Outsourcing

-Potential Loss of control -increased reliance on suppliers -increased need for supplier management

Benefits for Buyers During Strategic Partnership

-Preferred access to the supplier's best people -Increased operating efficiencies -Lower costs -Improved quality -Enhanced service -Influence over supplier investments and technology -Preferred access to supplier ideas -Increased innovation from and with suppliers, leading to lower costs and incremental revenue -Sustainable competitive advantage

Reasons for Making

-Protect proprietary technology -No competent supplier -Overall lower cost -Better quality control -Use existing idle capacity -Control of lead-time -Control of transportation and warehousing cost

Total Cost of Ownership (TCO) Factors

-Quantity Discounts may be offered as an inducement to encourage buyers to purchase larger quantities. -Cash Discounts may be offered for prompt payment of invoices. -Value-added Services may also be offered such as special delivery, special packaging, preparation of promotional displays, or subassembly operations in a supplier's plant. -Administrative Expenses associated with the procurement activity itself such as screening potential suppliers, negotiation, order preparation, and order transmission to name just a few. -Poor Supplier Quality costs related to defective finished goods, scrap, rework, recycling or recovery of materials, must also be considered, as well as related warranty administration and repair costs.

Potential Challenges of Global Sourcing

-Requires additional skills and knowledge to deal with international suppliers, logistics, communication, political environment, and other issues -Import Broker - or sales agent performs service for a fee -Import Merchant - buys and takes title to the goods -Trading Company - imports & carries wide variety of goods (like catalogues) -Tariffs - Duties, taxes, or customs imposed by the host country for imported or exported goods. -Non-tariff Barriers - Quotas, licensing agreements, embargoes, laws, and regulations imposed on imports and exports. -Countertrade - raw materials are traded for goods and services

Keys to Successful Strategic Partnerships

-Shared Vision and Objectives -Personal Relationships -Mutual Benefits and Needs -Commitment and top management support -change management -Information Sharing and Lines of Communication -Capabilities -Continuous Improvement

Co-managed inventories

-Suppliers work from customers' storage areas or at the point of assembly or sale -Bar codes and scanners update computer counts

The Make versus Buy Decision

-The act of deciding whether to produce an item internally or buy it from an outside supplier. -Make: Producing (i.e., manufacturing) materials or products internally (i.e., in operations owned by the company). -Buy / Outsource: Buying materials and/or components from suppliers instead of making them in-house (i.e., buying from a third-party external source).

Purchasing

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

Procurement

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

Reasons for Single Supplier

-To establish a good relationship -Less quality variability -Lower cost [100% of volume] -Transportation economies -Proprietary product or process -Volume too small to split

Five key areas of a typical spend analysis

-Total historic expenditure and volumes -Expenditure categorized by commodity and sub-commodity -Expenditure by division, department or user -Expenditure by supplier -Future demand projections or budgets

Supplier Certification Programs

-Used to identify strategic supplier alliance candidates -Companies use internal certification programs, and many also require external certifications such as ISO 9000 / ISO 14000 as part of their overall certification process -Buyers can monitor quality assurance methods and specify the type of acceptance sampling and statistical process control methods used

Key Supplier Selection

-When evaluating key suppliers for developing a collaborative relationship, purchase cost becomes relatively less important. -Typically conducted by a cross functional team using evaluation forms or scorecards.

Drivers of Strategic Sourcing

-improve long-term financial performance -increase customer focus -improve product quality -reduce the cost of materials -reduce delivery cycle times (i.e., lead times) -optimize the number of global suppliers. Note: For most companies, this generally means a reduction in the number of suppliers. -deliver more innovative products, in less time, and less expensively than competitors

Supply Base

-list of suppliers -Firms emphasize long-term strategic supplier alliances consolidating volume into one or fewer suppliers, resulting in a smaller supply base.

Supplier Relationship Management (SRM)

-the discipline of strategically planning for, and managing, all interactions with the third party organizations that supply goods and/or services to an organization in order to maximize the value of those interactions. -Most supply professionals view SRM as an organized approach to defining what they need and want from a supplier and establishing and managing the company-to-company link to obtain those needs. -about identifying and measuring suppliers -Seeks to improve profits and reduce costs

Total Cost of Ownership (TCO)

-the sum of all the costs associated with every activity of the supply stream. -The main insight that TCO offers is that the acquisition cost is often a very small portion of the total cost of ownership. -Purchase price remains very important but it is only one part of the total cost of ownership.

Characteristics of World-Class Procurement Organizations

1. Being a trusted advisor to the business 2.Driving Suppliers To Innovate 3.Providing Analytics-backed Insights 4.Protecting The Business From Risk 5.Taking An Agile Approach To Staffing

e-Procurement Process Steps

1. Purchase Requisition: A request for goods or services is received. 2.Authorization: Each Requisition gets automatically routed to an authorized approver. 3.Purchase Order: Created and automatically delivered to the supplier(s). 4.Receipt of Goods: Goods are received and an e-confirmation is sent to the supplier. 5.Invoice: Supplier prepares an invoice for the goods ordered and transmits to the buyer. 6.Reconciliation: The invoice may need to be reconciled to the purchase order and goods receipt before payment is made. 7.Payment: Scheduled and made using an appropriate payment method. 8.Reclamation of Taxes: In some situations, the supplier will be obligated to charge a tax, but the buyer may be eligible to retain some or all of the tax based on corporate status. 9.Analysis: Measurements of the efficiency and accuracy of the procurement process.

Quality Management Principles on which ISO 9000 is based

1.Customer Focus 2.Leadership 3.Involvement of People 4.Process Approach 5.Systems Approach to Management 6.Continual Improvement 7.Factual approach to decision making 8.Mutually beneficial supplier relationship

Assessment criteria

1.Participating in and leading multifunctional teams 2.Participating in value engineering efforts 3.Optimize supply base 4.Create ESI initiatives 5.Utilize e-procurement 6.Further supplier integration 7.Contribute to new product development 8.Improve time to market 9.Initiate supplier cost reduction programs 10.Creation of strategic alliances

Strategic Sourcing

A comprehensive approach for locating and sourcing key suppliers, which often includes the business process of analyzing the total-spend by material category. -The focus is on development of long-term relationships with trading partners who can help the buyer meet profitability and customer satisfaction goals.

Request for Proposal (RFP)

A detailed low-level capabilities evaluation document that is used to precisely determine a supplier's capability and interest in the production of a customized product or service.

Request for Quote (RFQ)

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

Return on Assets (ROA) Effect

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

Bid

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

Collaborative Negotiations

Both sides work together to maximize the outcome or create a win-win result

Benchmarking

Measuring what other businesses do best and matching their performance, is an effective approach to improving your supply chain. -Benchmarking data regarding sourcing practices can be obtained in any number of ways, both formal and informal.

Competitive Bidding

Offers submitted by multiple individuals or firms competing for a contract, privilege, or right to supply specified services or merchandise.

International Purchasing - Global Sourcing

Opportunity to improve quality, cost, and delivery performance

Mutual Benefits and Needs

Partnership should result in a win-win situation, which can only be achieved if both companies have compatible needs.

Reverse Auctions

Pre-qualified suppliers enter a website and at pre-designated time and date, try to underbid competitors. Bid prices are monitored until the session is officially over.

Centralized Purchasing

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

Forward Vertical Integration

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

Backward Vertical Integration

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

Distributive Negotiations

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

Federal Acquisition Streamlining Act (1994)

Removed restrictions on bids less than $100,000. Micro purchases (less than $2,500) can be made without bidding

In-sourcing (back sourcing)

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

e-Procurement

The business-to-business purchase and sale of supplies and services over the Internet.

Supply Base

The group of suppliers from which a company acquires goods and services.

Supplier Selection

The process of selecting suppliers is complex and should be based on multiple criteria. -Product and process technologies, Reliability , Quality, Order system and cycle time, Cost, Willingness to share information , Capacity, Service, Communication capability, Location

Co-sourcing (selective sourcing)

The sharing of a process or function between internal staff and an external provider.

Advantages of e-Procurement

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

Buy American Act (1933)

US government purchases and 3rd party purchases using federal funds must buy from US source if the US good is not more than a certain differential above the foreign good

Merchants

Wholesalers and retailers who purchase for resale

Supply Management

a newer term that encompasses all acquisition activities beyond the simple purchase transaction.

Value Engineering

activities help the buyer's company to reduce cost, improve quality and reduce new product development time

Green Purchasing

aimed at ensuring products or materials meet environmental objectives, e.g., waste reduction, reuse and recycling

Strategic Alliance Development

an extension of supplier development which refers to increasing a key or strategic supplier's capabilities. -Results in better market penetration access to new technologies and knowledge, and 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.

Competitive Bidding

contract is usually awarded to lowest priced responsive & responsible bidder -Sealed Bids are used to satisfy the Invitation for Bid (IFB) and are opened in public display

Total Cost of Ownership (TCO)

made up of all costs associated with the acquisition, use, and maintenance of a good or service

Payment Bonds

protection against 3rd party liens not fulfilled by bidder

Objectives of Strategic Sourcing

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

Business Ethics

the application of ethical principles to business. The two (2) main ethical approaches are: -Utilitarianism: an ethical act is that which creates the greatest good for the greatest number of people, and should be the guiding principle of conduct. -Rights and Duties: some actions are just right in and of themselves, regardless of the consequences. Do the right thing!

Corporate Social Responsibility (CSR)

the practice of business ethics

Supplier Development

the technical and financial assistance given to existing and potential suppliers to improve quality and/or delivery performance. In simpler terms, it can be described as a buyer's activities to improve a supplier's capabilities . -Lower supply chain total cost -Increased profitability for all supply chain participants -Increased product quality -Near-perfect on-time-delivery at each point in the supply chain