Chapter 7

Electronic data interchange

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

Request for information

An inquiry to a potential supplier products or services for potential use in the business the inquiry can provide certain business requirements or be of more exploratory nature

The bottleneck quadrant

Bottleneck products or services have unique or complex requirements that can be met only by a few potential suppliers. High complexity or risk impact, low value impact

Indirect cost

Cost that are not directly tied to the level of operations or supply chain activities

Direct costs

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

Multiple sourcing advantages

Creates competition. Spreads risks, required if purchased volume is to great for one supplier. Desired if the firm wishes to meet obligation to support minority. Can ensure that suppliers do not become complacent

Insourcing advantages

High degree of control. Ability to oversee the entire process. Economies of scale and or scope

Outsourcing advantages

High strategic flexibility. Low investment risk. Improved cash flow. Access to state of the art products and services

Single sourcing disadvantages

Knowing they have the business, suppliers can actually increase prices in the short term. Increased supply risk- if a disaster occurs, the buyer can be left without a source of supply. Buyer can become captive to a suppliers technology- while others are surging ahead with newer technologies that had a better performance. Do not know if you have the best supplier available. Dangerous strategy if the supplier has a limited capacity may shut down the buyer if it takes in too much business or quality or delivery issues.

Multi criteria decision models

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

Core competencies

Organizational strengths or abilities developed over a long period that customers find valuable and competitors find difficult or impossible to copy

Outsourcing disadvantages

Possibility of choosing bad supplier. Loss of control over the process and core technologies. Communication/ coordination challenges. Increased risk of supply chain disruption, corporate social responsibility risk.

The routine quadrant

Products and services in the routine quadrants are readily available and represent a relatively small portion of a firms purchasing expenditures. Examples include office supplies, cleaning services. Low value potential and low complexity or risk impact.

Leverage quadrant

Products or services in the leverage tend to be standardized and readily available and the represent a significant portion of the spend. High value potential, low complexity or risk impact.

Industry analysis

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

Insourcing disadvantages

Reduced strategic flexibility required high investment. Potential suppliers may offer superior products and services

Multiple sourcing disadvantages

Reduces supplier loyalty- suppliers may not be willing to go the extra mile for the purchaser. Can increase risk in the event of a shortage. Supplier may supply only preferred customer. Can result in increased prices over time, as suppliers are reluctant to provide cost saving ideas. Suppliers can let performance slide if volume is not high enough to merit their attention.

Maverick spending

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

Statement of work

Terms and conditions for a purchased service that indicates among other things what services will be performed and how the service provider will be evaluated

Spend analysis

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

Electronic transfer funds

The automatic transfer of payment from a buyers bank account to a suppliers bank account

Supply management

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

Corporate social responsibility

The economical legal ethical and discretionary expectations that society has of organizations at any given point in time

COGS

The purchased cost of goods from outside suppliers

Profit margin

The ratio of earnings to sale for a given time period

Procure to pay cycle

The set of activities required to first identify a need assign a supplier to meet that need approve the specifications or scope acknowledge receipts and submit payments to the supplier

Insourcing

The use of resources within the firm to provide products and services

Outsourcing

The use of supply chain partners to provide products and services

Critical quadrant

Unique products and services coupled with a limited supply base. High risk impacts and complexity, high value impact.

Description by performance characteristics

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

Description by brand

A description method that is used when a product or service is proprietary or when there is a perceived advantage to using a particular suppliers products or services

Description by specification

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

Decryption by market/ industry standard

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

Purchase order

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

Request for quotation

A formal request for the suppliers o prepare bids based on the terms and conditions set by the buyers

Make or buy decision

A high level often strategic decision regarding which product or service will be provided internally and which will be provided by external supply chain partners

ROA

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

Total cost analysis

A process by which firms seek to identify and quantify all of the major costs associated with various sourcing options

Cross sourcing

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

Single sourcing

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

Multiple sourcing

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

Dual sourcing

A sourcing strategy in which two suppliers are used for the same purchaser product or service

Portfolio analysis

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

Preferred supplier

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

Profit leverage

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

Cost based contract

A type of manufacturing contract in which the price of a good or service is tied to the cost of some key inputs or other economic factors such as interest rates

Fixed price contract

A type of purchasing contract in which the stated price does not change regardless of fluctuation in general overall economic decisions industry competition levels of supply market prices or other environmental changes

Single sourcing advantages

Volume leveraging as volumes go up, cost per unit decreases as suppliers spreads fixed costs over a larger volume. Transportation economics- fewer shipments and lower per unit transportation costs. Reduces quality variability; standardized products. Builds stronger relationship with supplier and gains access to design and engineering capabilities. Required when a supplier has a proprietary product.

Merchandise inventory

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