Test 3 SCMN 3730

How does Honda consistently deliver higher profit margins than Toyota?

- inclusive relationships with strategic suppliers - Suppliers are literally considered extensions of Honda - Purchasing a strategic function

What are the major differences between level 3 and level 4 in the sourcing maturity model?

- 3-Establishing o International purchasing part of strategic sourcing o Recognize that a properly executed worldwide sourcing strategy can result in major improvements o Strategies at this level are not well coordinated across worldwide buying locations, operating centers, functional groups, or business units - 4-Advancing o Integration and coordination of global sourcing strategies across worldwide business units o Integration primarily cross-locational not cross-functional

How much do most companies spend on Logistics as a % of Revenue?

- 5-10%

What are the 5 components of Honda's business model that define its cost management culture?

- 6 year dependent plan dependent on a small group of committed suppliers - 100% understanding of all components of product cost (Honda visibility to supplier costs) - Lean supplier development - concurrent engineering - Flawless new product launch - communications

What is a Should Cost analysis and when is it used?

- Also known as "should cost" analysis - Can be used when supplier is reluctant to share its internal cost data - Break down cost into basic components: materials, labor & overhead - Techniques - Internal engineering estimates - Historical experience and judgment - Review of public financial documents

What are two top technology companies that outsource their manufacturing?

- Apple - Cisco

What are some example tests for determining Value in a VA/VE analysis that are key to sourcing?

- Are there equally effective but lower-cost materials available? - Can a lower cost standard part replace a customized part? - Will another, dependable supplier provides materials, components, or subassemblies for less? - Are other companies currently purchasing required materials, components, or subassemblies for less? - If we are making a component now, can we buy it for less? Or vice versa? - Are packaging cost reductions possible?

Other than lower cost, what are other potential benefits of worldwide sourcing?

- Availability - Competition to domestic source - Presence in foreign market - Quality - Meeting competitor buying patterns - Access to technology - Cost/price

What are the additional costs that most be considered when sourcing globally (international transaction costs)?

- Base price - Tooling - Packaging - Escalation - Transportation - Customs duty - Taxes - Insurance premiums - Fees and commissions - Port terminal and handling fees - Customs broker fees - Communication costs - Payment terms - Payment and currency fees - Inventory carrying costs

What are the top three benefits of outsourcing logistics? What are the top three drawbacks?

- Benefits - Increase capabilities quickly - warehouse management, order management and tracking tools - Scale fast - increase space, through-put, and production capacity quickly with minimal startup costs - Allows buyer to concentrate on core business activities - Drawbacks - Less control of resources and operations - emergency, extreme short notice orders are more difficult to execute - Risk not being a priority among vendor's customers - Loss of integration between sales and supply chain

What is a Break-Even Analysis?

- Break-Even = Number of units that must be sold in order to produce a profit of zero (recovers relevant costs) - Fixed cost/ (unit price - variable unit cost) aka profit per unit

What is quantity discount analysis and how can it be useful for sourcing?

- Calculates prices at specific quantities vs. prices at different quantity ranges - Provides better understanding of incremental unit costs - Allows buyer to verify that quantity discounts are reasonable - Buyer may be able to negotiate price improvements - The buyer should not accept a quote that features higher incremental costs as volumes increase unless the supplier can provide a valid explanation. - Questions that come out of a QDA often produce additional discounts and a better understanding of the quotation by the buyer and seller.

What are economic conditions that are favorable to the supplier? And the buyer?

- Conditions favorable to supplier: o High level of capacity utilization o Tight supply o Strong demand - Conditions favorable to buyer: o Low level of capacity utilization o High level of supply o Weak demand

What are the two major current challenges in global sourcing?

- Container transit time - Cost per container

What do most studies show as the number one reason for global sourcing?

- Cost/price

What are the four categories and related strategies in the Strategic Cost framework?

- Critical Products (High value, low suppliers) - Strategy: cost analysis, collaborative cost-reduction efforts focused on total costs - Commodities (High value, high suppliers) - Strategy: leverage preferred suppliers, price analysis using market forces - Unique Products (low value, low suppliers) - Strategy: cost analysis and reverse price analysis, standardize requirements - Generics (low value, high suppliers) - Strategy: total delivered cost, automate to reduce purchasing involvement

According to Gartner who are the leading North American 3PLs (top 2)?

- DHL Supply Chain - UPS Supply Chain Solutions

What is the U.S. Foreign Corrupt Practices Act?

- Designed to prevent companies from making questionable or illegal payments to foreign government officials, politicians, and political parties to secure or retain business - Lots of recordkeeping - Applies to US citizens - No dollar threshold amount

What are the logistics services do most companies outsource (top 3)?

- Domestic transportation - Warehousing - International transportation

What is a learning curve and how is this useful in supply contracts?

- Establish a rate of improvement due to direct labor cost improvement as production volumes increase - Learning rate represents cumulative improvement as production doubles - Learning rate 85% indicates direct labor declines by 15% each time production doubles in volume - Used to lower purchase price over time with suppliers

What is the difference between FOB origin and FOB destination?

- FOB (free on board) destination = supplier controlled freight and assumes title and risk of loss and pays freight bill and files loss and damage claims - FOB origin = buyer controlled freight and assumes title and risk of loss and files loss and damage claims

What is an FTZ and how can they be useful?

- Foreign trade zone - Secure location approved by CBP - Allows importing company to delay, eliminate, or decrease its duty payment on foreign-produced goods that enter the zone site - Advantages o Duty exemption o Duty deferral o Inverted tariff o Streamlined customs procedures o Reduced state/local inventory taxes

What are some common topics to cover when negotiating a transportation services contract?

- Freight rates and discounts - Carrier's capacity (fleet size and availability) - Shipper's commitments to minimum amount of freight volume - Carrier's service performance guarantees o Penalties and rewards based on actual performance - How carriers handle freight loss and damage claims - Frequency and timing of shipments - Technology and data integration capabilities - Creative and innovative joint cost reduction

What does it take to be a Honda supplier?

- Have an open book arrangement with Honda, in which Honda purchasing has access to all your financials - Agree to welcome Honda's BP teams (lean supplier development teams) to help optimize manufacturing and business processes - Agree to participate in Honda training as necessary - Agree to a top-management business meeting once a year - Agree to develop new models from the earliest development stages together with Honda engineers - Commit to world class performance in quality and delivery - Practice continuous improvement in all manufacturing and business processes

What are the common insights from a Break-Even Analysis?

- Identify if target purchase price provides reasonable profit given supplier's cost structure - Analyze supplier's cost structure - Perform sensitivity ("what if") analysis on impact of varying mixes of purchase volumes and prices - Prepare for negotiation

How does Honda utilize target pricing with its suppliers?

- Initial metrics in the design include the target price that the final product could be introduced at in the market. - The price/value relationship for Honda's customer is a focal point of debate and discussion. - A production cost is established at a high level as a target, and then R&D, manufacturing, and supply chain work on how to achieve it, separating manufacturing and supply cost to make that unit. - They then break it down component by component, on how to build up to the target price.

What are the differences between outsourcing, offshoring, international purchasing, global sourcing, nearshoring, and re-shoring?

- International purchasing o Commercial purchase transactions between buyers and suppliers in different countries - Global sourcing o Proactively integrating and coordinating common items and materials, processes, designs, technologies, and suppliers across worldwide purchasing, engineering, and operating locations - Outsourcing o Involves contracting with independent suppliers outside the organization (domestic or foreign) to provide products or services that were performed inside the organization - Offshoring o Contracting with independent suppliers located outside geographic boundaries of the US - Nearshoring o Relocating sources to countries geographically closer to the US - Re-shoring o Bringing offshore sources back to US

What are Incoterms and how are they used?

- Internationally recognized commercial terms that describe the responsibilities of the buyer and seller in the arrangement of transportation - Has specific collect terms and prepaid terms depending on transfer of risk and obligations and charges

What are the challenges and barriers to worldwide sourcing?

- Lack of skills - Increased supply risk - Currency fluctuations - Customs language and culture - Longer lead times - Resistance to change

What is a market analysis?

- Market Analysis - is an analytical tool that identifies the primary external forces that are causing prices to either increase or decrease - A. When demand exceeds supply, a seller's market exists, and prices generally increase. - B. Buyer's market occurs when supply exceeds demand, and prices generally move downward.

What are the three main cost components in a Should Cost analysis?

- Materials - commodity price fluctuations, handling difficulties, tolerances, lead times, design limitations, managed flow, cost of poor quality - Labor - direct labor cost, process complexity, safety concerns, scrap, efficiencies, turnover, correction, cost of poor quality - Overhead - machines, tools, indirect labor, maintenance, transactional costs, governmental constraints.

How much do most companies spend on indirect purchases as a % of organization's total purchases?

- May be > 50% of organization's total purchases

What is causing most companies to consider outsourcing non-core competencies to expert third-party logistics providers (3PLs)?

- Move to be more product and cost oriented has driven more companies to focus on their internal core competencies - research and development, product development, and manufacturing

What are the external methods of managing Indirect Spend?

- Reverse auctions - online auctions for indirect - Purchasing consortia - buyers from various businesses pool their buying power to reduce prices - Supply management outsourcing - outsource indirect spend to a vendor

What are many companies doing to their supply chains in response to the pandemic? (WSJ video)

- Shifting manufacturing close to home - Regionalization- setting up factories in multiple parts of world so supply products to closest markets to minimize risks - Nearshoring- production moved back to country closer to origin country - Reshoring- bring production back to original country

What is the current trend of spending by US companies on 3PL Services?

- Spending on 3PL services projected to double to $300B in 2023 from $147B in 2013 - 2x in last 10 years

What is the definition of indirect spend, and what are some examples?

- Sum of all purchased goods and services that are not a direct, identifiable part of products or services delivered to the customer - Ex. Marketing consulting services, customer service, utilities, corporate travel, office supplies

What are some of this issues with "FOB destination"? Why is "FOB origin" preferred?

- Supplier includes transportation charges as part of the unit price of a good, buyer often loses the ability to track or control its inbound transportation expenses - Artificially increases value of buyer's inventory because inbound transportation costs are hidden inside purchase price, which may have tax and other related financial implications - Difficult for buyer to determine their true total freight costs - FOB origin preferred - More effective control of inbound shipment costs - Savvy buyers will want to control these costs internally instead of simply allowing the shipper (supplier) to pass them along in the form of a delivered price - Buyer can more effectively monitor its freight costs and delivery performance and take corrective action as required

What is TCO and its four major elements?

- TCO is defined as the present value of all costs associated with a product, service, or capital equipment that are incurred over its expected life. o Purchase price - Invoice amount paid to supplier o Acquisition costs - Costs of bringing product to buyer o Usage costs - Conversion and support costs o End-of-life costs - Net of amounts received/spent at salvage

How did deregulation of domestic transportation dramatically increase supply management's role?

- Transportation carriers had to compete openly and aggressively against new entrants, existing carriers, and competition from other modes of transportation - Supply management became more active in sourcing most, if not all, transportation services: carrier selection, 3PL selection, negotiate long term freight agreements, and evaluate carrier performance

What is target pricing and when is it used?

- Used early in new product development (NPD) - Sales price - Profit = Allowable cost - The gap between the supplier's price and the target cost becomes the strategic cost-reduction objective. - Must be a joint agreement on a supplier's full cost to produce an item

What is value analysis/value engineering?

- VA involves examining all elements of component, assembly, end product, or service to make sure that it fulfills its intended function at lowest total cost - Value = function/cost - VE is the application of value analysis techniques during product or service design

What are the benefits of VA/VE?

- Value analysis is a way to achieve continuous performance improvement in an item, product, or service - It is not a technique for cheapening a product or service by lowering quality or other performance attributes below what customers expect - Many firms realize that VA/VE is a powerful technique that can help a firm achieve its continuous cost and quality improvement targets

When should you perform a learning curve analysis?

- When supplier uses new production process for first time - When supplier produces technically complex item for first time - When item has high direct labor content

What % of the cost of a vehicle are outside purchase costs for Honda?

75%

How do you calculate inventory carrying costs?

Carrying cost = AI x P x ACC AI = average inventory in units P = unit price ACC = carrying cost per year (%)

What three countries are the top trading partners with US based on import value? (from lecture slides)

China Mexico Canada

What are the differences between price analysis and cost analysis?

Price analysis - Process of comparing supplier prices against external price benchmarks without knowledge of supplier costs Cost analysis - Process of analyzing each individual cost element that add up to final price

What are the main right reasons and wrong reasons for investing in inventory?

Right · Avoid disruptions in operational performance · Support operational requirements · Support customer service requirements · Hedge against marketplace uncertainty · Take advantage of order quantity discounts Wrong · Poor quality and material yield · Unreliable supplier delivery · Extended order-cycle times from global sourcing · Inaccurate or uncertain demand forecasts · Specifying custom items for standard applications · Extended material pipelines · Inefficient manufacturing processes · Most inventory waste comes from underlying problems that management has failed to correct

What are inventory turns and why are they important?

· (or turnover) measures how many times a year a company needs to replace its average inventory to support sales volumes · Higher turn numbers to show efficient use of company's capital or investment in inventory · Small number of turns implies weak sales and or excessive inventory · Key indicator of use of capital and vary by industry · = annual sales/avg value inventory

What are the components of inventory carrying costs, and what is a normal range?

· Cost of capital (cost of money) · Cost of storage (space, insurance, cycle counting) · Cost of obsolescence, deterioration, and loss · Costs of services (taxes) · Opportunity cost- dollars not available for other economic use · Vary with level of inventory

What types of problems can be hidden by high inventory levels?

· Higher carrying costs · Reduced profits · Poor material quality · Inaccurate demand-forecasting systems · Unreliable supplier delivery

What are the possible downsides of poor customer demand forecasting?

· Higher inventory volumes · Higher inventory carrying charges · Poor customer service- inventory misallocated across locations and products · Excessive safety stock levels · Poor labor planning and warehouse capacity · Reason of this: forecasts use usually driven from sales reps who do not use statistical forecasting but back into sales targets (do not reflect reality or trend analysis)

What is MRO inventory?

· Items used to support production and operations · Not physically part of finished product but are critical for continuous operation of plant, equipment, and offices · Examples are spare parts, tools, office supplies, computers

What is the difference between a make to order and a make to stock environment?

· Make to stock (MTS)- when firms produce goods in anticipation of future customer orders, expect to hold finished inventory in anticipation of future demand · Make to order (MTO)- when firms produce goods in response to a customer order, they are operating in a make to order environment

Describe how a JIT production system is able to significantly reduce production inventories.

· Philosophy of manufacturing based on planned elimination of all waste and on continuous improvement of productivity · Evolving to lean thinking o Way to understand value from customers perspective and eliminate waste processes that do not add value o Process improvement philosophy · Raw material and sub-assemblies/component come straight from supplier to production · Very little inventory, frequent small Kanban shipments match production rate · Finished goods sold straight to dealers in the automotive example

Explain the differences between raw materials, WIP, and finished goods inventory.

· Raw Materials o items purchased from suppliers or produced internally to directly go into production requirements o items purchased in a bulk or unfinished condition o example is bulk quantities of chemicals, resins, or petroleum o semifinished inventory (components) includes those items used as inputs during the final production process (ex. computer chips and wiring harness subassemblies) · Work in Progress o sum total of inventory within all manufacturing process centers o incomplete and has not yet been transformed to a saleable finished good o if WIP increases over a certain level, may indicate production bottlenecks or delays · Finished Goods o Completed items or products that are available for shipment or future customer orders o Make to stock (MTS)- when firms produce goods in anticipation of future customer orders, expect to hold finished inventory in anticipation of future demand o Make to order (MTO)- when firms produce goods in response to a customer order, they are operating in a make to order environment

What are supply chain planners and why are they important?

· Responsible for managing inventories regardless of location in supply chain · Use of supply chain planning and execution systems · Coordinates movement and placement of inventory · Organized along product lines · Liaison between various supply chain nodes · Manage raw material inventories to support production schedule · Determine finished goods inventory deployment at field warehouses · Continuously evaluate safety stock levels

How does JIT reinforce resilience? (from WSJ Reading)

· Strengthens the relationships along the supply chain between companies, their suppliers, and customers · React collaboratively to supply chain disruptions · Will promote agility over time and increased response speed

What is a Kanban system?

· Uses simple signaling mechanisms to indicate when materials should be produced or moved- containers, cards, or signals · Provide synchronization of activities · Control mechanisms, not planning tools · Acts as pull system