Exam 2!!!!!
Decentralized- Centralized
Typical for a large multiunit organization. There will be decentralized purchasing at the corporate level and centralized purchasing at the business unit or location level. Business units will buy all of their own materials and services and the corporate level will buy only those items needed for the corporate operations.
Centralized-Decentralized
Typically for a large organization with centralized control. Large national contracts will be centralized at the corporate level and smaller specific items will be decentralized at the business unit or location level.
Bid Bond
is a 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.
Total Quality Management (TQM)
is a management philosophy based on the principle that every employee must be committed to maintaining high standards of work in every aspect of a company's operations, focused on meeting customer needs and organizational objectives. TQM is a combination of quality and management tools designed to increase business and reduce losses resulting from wasteful practices
Statistical Process Control (SPC)
is a method for monitoring, controlling, and improving a process through statistical analysis. All processes exhibit intrinsic variation and SPC is the application of statistical methods and procedures, such as control charts, to analyze that inherent variability to achieve and maintain a state of statistical control.
Management
Allows purchasing personnel to spend less time on processing of purchase orders and invoices, and more time on strategic value-added purchasing activities
Steps to conduct spend analysis
Defining the scope Identifying all data sources Gathering and consolidating all data into one database
Innovative products
Items characterized by short product lifecycles, volatile demand, high-profit margins, and relatively less competition (e.g., technology products such as the iPhone)
Cost savings
Lower overhead costs in the purchasing area
Competitive Bidding
Offers submitted by multiple individuals or firms competing for a contract, privilege, or right to supply specified services or merchandise.
closed competitive bidding
The sealed bids are opened in the presence of authorized personnel only.
Procurement execution
The tactical operation of purchasing/procurement performed by a procurement organization
Green Purchases
involve a variety of federal, state, and local initiatives to include environmental and human health considerations when making purchases.
P-card
A form of company charge card that allows goods and services to be procured without using a traditional purchasing process
Role of Suppliers in LEAN
A key element of LEAN is to build lean supply chain relationships with suppliers over the long term. Suppliers are expected to help improve process quality and share information. The goal is to have fewer but more strategic supply partners.
Supply Management
A newer term that encompasses all acquisition activities beyond the simple purchase transaction. The "Identification, acquisition, access, positioning, and management of resources an organization needs or potentially needs in the attainment of its strategic objectives." Institute of Supply Management (ISM)
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.
Flowchart
A picture of process steps in sequential order. It is comprised of annotated boxes representing process steps to show the flow of products or customers. It helps users understand how a process progresses toward completion, and to identify where process improvements can be made
Competitive Bidding
A transparent procurement method in which bids from competing suppli-ers are invited by openly advertising the scope, specifications, and terms and conditions of the proposed contract as well as the criteria by which the bids will be evaluated. Competitive bidding aims at obtaining goods and services at the lowest prices by stimulating competition, and by preventing favoritism.
Supplier scorecarding
A way to track performance metrics; can be associated with various categories, depending on the supplier's role within your enterprise
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
Using a fixed order interval
Establishing a set schedule with a supplier to deliver a predetermined amount of inventory of an item. Example: water supplier delivers a fixed number of water bottles for the water cooler in a department on a fixed time schedule (e.g., delivers two 10-gallon water bottles to the XYZ Department every Monday morning).
LEAN supply chain relationship principles are:
Focus on the value stream Eliminate waste Synchronize the flow of products and information Minimize transactional costs and production costs Balance cooperation and competition Ensure visibility and transparency Develop quick response capabilities Manage uncertainty and risk Align core competencies and complementary capabilities Foster innovation and knowledge-sharing
Scatter Gram
Graphical method of observing whether or not two parameters are related to each other. Data are plotted with one variable on each axis. If the variables are correlated, the data points will fall along a line or curve. The tighter the points hug the line, the better the correlation of the relationship, and one can be used to predict the other.
Strategic Items
Strategies to ensure the availability of supply, and encourage process integration and innovation, should help to reduce the risk of a supply disruption. Companies should develop a formal supplier relationship management program with these suppliers to build the relationship. Using value management techniques such as value engineering, reducing complexity,
Standardization and Simplification of Materials and Components
The concept of limiting the alternatives or options of some small value purchases in order to maxi-mize the volume and potentially obtain better pricing. Example: creating a catalog or listing of a set number and type of office supplies to be order from a supplier.
Accumulating Small Orders to Create a Large Order
The concept of volume consolidation for small value purchases. Example: having an administrator collect all of the individual departments' office supply needs throughout the month and placing one monthly order for delivery rather than allowing multiple deliveries.
Multiple Sourcing Supplier Strategy
The following are some reasons a company may opt for a multiple sourcing supplier strategies: If the company needs more capacity than can be accommodated by a single source To spread the risk of a supply disruption among multiple trading partners To create competition on price, delivery, and other services
Single-source supplier strategy
The following are some reasons a company may opt for a single-source supplier strategy: To establish a good relationship with the supplier To reduce quality variability To achieve the lowest cost, as 100% of the volume will be with a single source To achieve transportation economies If the single-source supplier has a proprietary product or process · If the volume is too small to split between multiple suppliers
Leverage Items
The main strategy for items in this category is to consolidate all of the vol-umes and use the competitive marketplace to generate the lowest total cost of ownership. This is the category where procurement professionals can really use their analytical and negotiation skills to generate savings. Another aspect of the strategy may be to automate supplier interfaces to minimize process-related costs and build longer-term agreements utilizing automated payment methods to simplify the buying activity.
Prevention Costs
incurred to prevent or avoid quality problems. These costs are associated with the design, implementation, and maintenance of the quality management system. They are planned and experienced before actual products or materials are acquired or produced.
Post transaction costs
involve all of the activities carried out following the actual buy and sell transaction. All of the costs associated with defective/rejected finished products, field failures, repair, replacement or warrantee costs, loss of customer goodwill, and so forth.
Pre-transaction costs
involve all of the activities carried out prior to executing the actual buy and sell transaction; and all of the costs associated with identifying a need, finding and qualifying sources, site visits, inspections/audits, administratively establishing new sources of supply, and any approvals necessary.
Payment bonds
is a debt secured by a bidder for the purpose of providing protection against third-party liens not fulfilled by a bidder.
The Five Ways and Hows Techniques
is a questioning process designed to drill down into the details of a problem or a solution to find the root cause and the best corrective measure. Originally developed by Sakichi Toyoda, who stated "that by repeating why five times, the nature of the problem as well as its solution becomes clear." The Five Whys are used to reach the root cause of a problem and the Five Hows are used to develop the details of a root solution to a problem. Both are designed to bring clarity and refinement to a problem statement or a potential solution. This technique is typically used in conjunction with the cause-and-effect diagram
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.
Value Engineering
Activities help the buyer's company to reduce costs, improve quality, and reduce new product development time. The goal is to satisfy the product's performance requirements at the lowest possible cost. This typically involves considering the availability of materials, production methods, transportation issues, limitations or restrictions, planning and organization. Benefits can include a reduction in lifecycle costs, improvement in quality, and a reduction in environmental impact, to name just a few.
Bid
A tender, proposal, or quotation submitted in response to a solicitation from a contracting authority.
Contracting
A term often used for the acquisition of services
Blank Check PO
A term used to describe a situation in which an usually high level of trust is afforded to the supplier by the buyer. The supplier can supply items to the buyer as needed without confirming pricing in advance. This may be used when the buyer is not exactly sure what item(s) will be needed and cannot, therefore, create a blanket PO.
Performance monitoring
A tool that enables end-users, administrators, and organizations to gauge and evaluate the performance of a given system
Transaction costs
involve all of the activities carried out as part of the actual buy and sell transaction. These costs include the purchase price, placing and managing the order, transportation, tariff s and duties, incoming inspections, rejected product handling, late deliveries, missing documentation, expediting, and invoice processing/payment.
Centralized purchasing
Larger companies often establish a centralized purchasing structure with all of the purchasing staff reporting to a purchasing executive such as a chief purchasing officer or chief procurement officer (CPO). - Leverage from concentrated volumes - Control - Avoiding duplication - Specialization - No competition within units
Procurement
The process of selecting and vetting suppliers, negotiating contracts, establishing payment terms, and the actual purchasing of goods and services.
open competitive bidding
The sealed bids are opened in the presence of anyone who may wish to be present and evaluated for the award of a contract.
Bottleneck Items
Two major strategies are searching for alternative sources of supply that might be able to alleviate the unique sourcing problems, and strengthening the relationship with each supplier to maximize the opportunity for success. Eff orts to integrate the supplier with the company's operations may also help to resolve the supply problems. Items in this category are candidates for maintaining safety or strategic stock and also for the development of contingency plans in the event of a supply disruption.
Performance Bond
is a debt secured by a bidder for the purpose of providing a guarantee that the work will be on time and meet specifications.
Merchants
Wholesalers and retailers who purchase for resale
Inventory Turnover
represents the number of times the company sold through inventory in a given time period. It is the costs of goods sold (COGS) divided by the average inventory. High turnover ratio is beneficial because it means the company is generating sales efficiently to sell inventory
Four competencies
that enable strategic sourcing and create value throughout the supply chain: 1. To meet current demand by ensuring that the goods get where they are needed when they need to be there 2. To anticipate and meet future demand 3. To do so in a customer-driven environment 4. To manage the flow of information throughout the extended supply chain
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.
tools most commonly used for quality control and improvement are
1. Cause-and-Effect Diagram (Ishikawa or fishbone diagram) 2. Check Sheet 3. Control Chart 4. Flowchart 5. Histogram 6. Pareto Chart 7. Scatter Diagram
Histogram
Another form of bar chart in which the measurements represent a range of values of some parameter. Besides the central tendency and spread of the data, the shape of the histogram can also be of interest
Keys to Successful Partnerships
Building trust Shared vision and shared objectives Personal relationships Mutual benefits and needs Commitment and top management support Change management Information sharing and lines of communication Capabilities Continuous improvement Performance Metrics
decentralized purchasing
Companies with multiple locations may choose to adopt a decentralized purchasing structure. In this model, each unit or location will have its own purchasing function, such as at the plant level, making their own purchasing decisions. Under decentralized purchasing, no individual purchasing manager or unit has the right to purchase materials or services for all units and locations. - Diverse business needs - Local sourcing - Speed - Less bureaucracy
Six Sigma methods
DMADV methodology: Define --> Measure --> Analyze --> Design -->Verify: a data-driven quality strategy for designing products and processes. This methodology is used when the company wants to create a new product design or process that is more predictable and defect free. DMAIC methodology: Define --> Measure --> Analyze --> Improve -->Control: a data-driven quality strategy for improving processes. This methodology is used when the company wants to improve an existing business process. DMAIC is the most widely adopted and recognized Six Sigma methodology in use. It defines the steps a Six Sigma practitioner typically follows during a project
Multiple Sourcing
Purchasing a good or service from more than one supplier. Companies may use multiple sourcing to create competition between suppliers in order to achieve higher quality and lower price
Sourcing Execution
The tactical operation of strategic sourcing performed by a procurement organization
Appraisal Costs
are associated with the measuring and monitoring of activities related to quality. These costs are associated with the evaluation of purchased materials, processes, products, and services to ensure that they conform to specifications.
Administrative expenses
are associated with the procurement activity itself such as screening potential suppliers, negotiation, order preparation, and order transmission.
Phillip Crosby
coined the phrase "quality is free" (which is also the title of his book) as defects are costly. He introduced the concepts of zero defects, and focus on prevention and not in-spection. Philip Crosby demonstrated what a powerful tool the cost of quality could be to raise awareness of the importance of quality. He referred to the measure as the "price of nonconfor-mance" and argued that organizations choose to pay for poor quality. He has been credited with the quote, "Quality is the result of a carefully constructed cultural environment. It has to be the fabric of the organization, not part of the fabric." He introduced the 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
Total Cost of Manufacturing (TCM)
consists of all the costs associated with production, procure-ment, inventory, warehousing, and transportation. All of these costs are impacted by the manufac-turing strategy TCM is the complete cost of producing and delivering products to your customers TCM incorporates both fixed and variable costs. TCM is generally expressed as a cost per unit for each product. Per unit procurement and production costs go down as volume goes up. Per unit inventory and warehousing costs go up as volume goes up. Per unit transportation costs go down as volume goes up, but level off at high volumes (econo-mies of scale in transportation until the container/conveyance is filled up).
JIT 2
is very similar to VMI and CMI, except that with JIT 2 a representative of the supplier is actually embedded in the buyer's organization. The employee is on the payroll of the supplier but works for the buyer and is empowered to forecast demand, monitor inventory, and place orders. The arrangement involves the buyer granting the supplier access to potentially proprietary or sensitive data. JIT 2 benefits both buyers and suppliers, from day-to-day operational improvement to strategic advances in the structure of the supply chain organization.
W. Edwards Deming
is widely considered the father of TQM. He is the creator of the Plan-Do-Check-Act model. He stressed management's responsibility for quality, and he developed 14 points to guide companies in quality improvement. He has been credited with the quote, "In God we trust, all others bring data." Deming's 14 points: 1. Create constancy of purpose to improve product and service 2. Adopt the new philosophy 3. Cease dependence on inspection to improve quality 4. End the practice of awarding business on the basis of price 5. Constantly improve the production and service system 6. Institute training on the job 7. Institute leadership 8. Drive out fear 9. Break down barriers between departments 10. Eliminate slogans and exhortations 11. Eliminate quotas 12. Remove barriers to pride of workmanship 13. Institute program of self-improvement 14. Put everyone to work to accomplish the transformation
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.
Federal Aquisition Streamlining Act (1994)
removed restrictions on bids less than $100,000. Purchases less than $2,500 can be made without bidding.
Early Supplier Involvement (ESI)
"The process of involving suppliers early in the product design activity and drawing on their expertise, insights, and knowledge to generate better designs in less time, and designs that are easier to manufacture with high quality." These strategic supply partners become more involved in the internal operations of the buyer's company, particularly with respect to new product and process design, working with buyers to do concurrent engineering, and designing products specifically for manufacturability.
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. - is also a term commonly used in industry to represent the function of, and the responsibility for, procuring materials, supplies, and services for an organization.
key points to consider in the 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 are vital. 4. Collaboration occurs through information sharing. 5. Optimization of processes and decision making are necessary.
Purchasing Process
1. A need is identified, and a purchase requisition is created/issued. 2. Obtain authorization as necessary. 3. Identify and evaluate potential suppliers. 4. Make supplier selection. 5. A purchase order (PO) is created and delivered to the supplier. 6. Supplier confirmation of the PO 7. Fulfillment 8. Receipt of goods 9. Invoice 10. Reconciliation 11. Payment 12. Reclamation of taxes 13. Close out the PO 14. Analysis
Trends in Supplier Relationship Management
1. Close alignment of sourcing and negotiation with supplier relation-ship management 2. Focus on cross-functional engagement 3. Focus on innovation 4. Investment in people and "soft skills" 5. More robust measurement
quality management principles on which the ISO 9000
1. Customer focus—understand current and future customer needs 2. Leadership—establish unity of purpose and direction of the organization 3. Involvement of people—people are the essence of an organization 4. Process approach—a desired result is achieved through a managed process 5. Systems approach to management—managing interrelated processes 6. Continual improvement—performance improvement is a permanent objective 7. Factual approach to decision making—decisions are based on facts and data 8. Mutually beneficial supplier relationship - interdependent benefits create value for both an organization and its suppliers.
Basic negotiating Strategies
1. Distributive Negotiations: A process that leads to a self-interested, one-sided outcome 2. Integrative or Collaborative Negotiations: A process where both sides work together to maximize the outcome or create value. A win-win result. This negotiating strategy requires open discussions and a free flow of information between the parties.
Approach to Supplier Development
1. Identify critical products and services. 2. Identify critical suppliers. 3. Form a cross-functional team internally to work with the supplier(s). 4. Meet with the top management at the supplier(s) to obtain their support and involvement. 5. Identify key development needs and projects. 6. Define the details of the agreement and the action plan. 7. Monitor the status of the projects / action plan and modify strategies as necessary
General Portfolio Spend Categories
1. Noncritical: Items that involve a low percentage of the company's total spend and involve very little supply risk 2. Bottleneck: Items that present unique procurement problems (where supply risk is high, availability is low, and there are only a small number of alternative suppliers) 3. Leverage: Commodity items where many alternatives of supply exist and supply risk is low (Spend for these items is generally high, and there are potential procurement savings.) 4. Strategic: Strategic items and services that involve a high level of expenditure and are vital to the company's success
Follow-up actions to take with suppliers
1. Preferred: Work with these suppliers in maintaining a competitive position and on new product development 2. Acceptable: Require a plan from these suppliers outlining how they will achieve Preferred status. 3. Developmental: Require corrective actions from these suppliers on how they will achieve Acceptable status. Look for alternative suppliers if these do not achieve acceptability within a fixed period of time (e.g., three months).
Sig Sigma- Motorola- 1980- Bill Smith
1. Quality is defined by the customer: Customers expect performance, reliability, competitive prices, on-time delivery, good service, clear and correct transaction processing, and more. It is vital to provide what the customers need to achieve customer satisfaction. 2. Use of technical tools: Six Sigma provides a statistical approach for solving any problem and thereby improves the quality level of the product as well as the company. All employees should be trained to use technical tools (e.g., statistical quality control and the seven tools of quality). Six Sigma is concerned with the permanent fix to quality problems and seeks to identify and correct the root cause of the problem. 3. People involvement: Six Sigma follows a structured methodology, and has defined roles for the participants. A company must involve all its employees in the Six Sigma program, and provide opportunities and incentives for them to focus their talents and ability to satisfy customers. All employees are responsible to identify quality problems. It is important that all Six Sigma team members have a well-defined role with measurable objectives. Under Six Sigma, the members of an organization are assigned specific "roles" as follows: - Senior Leader: Defines the goals and objectives in the Six Sigma initiative. - Implementation Leader: Supervises the Six Sigma initiative. - Coach: Six Sigma expert or consultant who sets a schedule, defines result of a project, and who mediates conflict, or deals with resistance to the program - Sponsor: High-level individual within the company that acts as a problem solver for the Six Sigma initiative. - Team Leader: Oversees the work of the Six Sigma team and acts as a liaison between the sponsor and the team members. - Team Member: Executes specific Six Sigma assignments. - Process Owner: Takes responsibility for a process aster the Six Sigma team has completed its work.
The Weighted-Criteria Evaluation System
1. Select the key dimensions of performance mutually acceptable to both customer and supplier and follow the agreed method of evaluation. 2. Assign a weight to each dimension. 3. Monitor and collect supplier performance data. 4. Evaluate the actual performance of the supplier for each dimension on a scale from 0 to 100. 5. Multiply the dimension rating by the weight for that rating, for each dimension, and then sum the overall score. 6. Classify suppliers based on their overall score: - Certified, Preferred, Acceptable, Conditional, Developmental, Unacceptable—according to a criteria scale that the company finds appropriate 7. Audit and perform ongoing certification review.
LEAN 5-s
1. Sort: Keep only necessary items in the workplace, eliminate the rest. 2. Straighten: Organize and arrange items to promote an efficient workflow. 3. Shine: Clean the work area so it is neat and tidy. 4. Standardize: Schedule regular cleaning and maintenance. 5. Sustain: Stick to the rules. Maintain and review the standards.
Objectives of a world class procurement class
1. To support the organization's goals and objectives 2. To support operational requirements 3. To manage the procurement process and the supply base efficiently and effectively 4. To develop strong relationships with key suppliers 5. To develop strong relationships with other functional groups within the organization
Pareto Chart
A bar graph. The lengths of the bars generally represent the frequency that specific defects occur, and are arranged with the longest bars on the left and the shortest bars on the right. A Pareto chart will visually depict which defects are more significant
Request for Quote
A document generally used to solicit bids from interested and qualified suppliers for goods or services that the organization needs to obtain.
ISO 14000
A family of standards for environmental management The benefits include reduced energy consumption, environmental liability, waste and pollution, and improved community goodwill.
Trading companies
Buy products in one country and sell them in different countries where they have their own distribution network. Trading companies mostly work with high production volume products such as raw materials, chemicals, generic pharmaceuticals, etc. They may carry a wide variety of goods (such as from a catalog).
Line Flow
"A form of manufacturing organization in which machines and operators handle a standard, usually uninterrupted, material flow. The operators generally perform the same op-erations for each production run. A flow shop is osten referred to as a mass production shop or is said to have a continuous manufacturing layout. The plant layout (arrangement of machines, benches, assembly lines, etc.) is designed to facilitate a product 'flow.' Some process industries (chemicals, oil, paint, etc.) are extreme examples of flow shops. Each product, though variable in material specifications, uses the same flow pattern through the shop. Production is set at a given rate, and the products are generally manufactured in bulk." - Characteristics: A line flow manufacturing process is characterized as being somewhat inflexible, with a limited variety of products, short lead times, and high volumes. Products are standardized allowing a better organization of resources than with job shop or batch processing. The sequence of operations in line flow is generally fixed, and production orders are not linked to customer orders as is typical in job shop and batch processing. - Examples: Automobiles, computers, appliances, household goods - Manufacturing Strategies: ATO or MTO are the manufacturing strategies that are most closely aligned with the line flow process.
Assemble to Order (ATO)
"A production environment where a good or service can be assembled after receipt of a customer's order. The key components (bulk, semi-finished, intermediate, subassembly, fabricated, purchased, packing, and so on) used in the assembly or finishing process are planned and usually stocked in anticipation of a customer order. Receipt of an order initiates assembly of the customized product. This strategy is useful where a large number of end products (based on the selection of options and accessories) can be assembled from common components." ATO is a hybrid strategy between a MTS strategy where products are fully produced in advance, and the MTO strategy where products are manufactured once the order has been received. The ATO strategy attempts to combine the benefits of both strategies—that is, getting products into customers' hands quickly while allowing for the product to be customizable.
Make to Order (MTO)
"A production environment where a good or service can be made aster receipt of a customer's order. The final product is usually a combination of standard items and items custom-designed to meet the special needs of the customer." The MTO strategy only manufactures the end product once the customer places the order, creating additional wait time for the consumer to receive the product but allowing for more flexible customization.
Make to Stock (MTS)
"A production environment where products can be, and usually are, finished before receipt of a customer order. Customer orders are typically filled from exist-ing stocks, and production orders are used to replenish those stocks." Make-to-stock means to manufacture products for stock based on demand forecasts. The more accurate the forecast is, the less likely excess inventory will be created, and the less likely a stockout will occur. Therefore, the critical issue is how to forecast demands accurately.
Continuous Flow
"A production system in which the productive equipment is organized and sequenced according to the steps involved to produce the product. This term denotes that material flow is continuous during the production process. The routing of the jobs is fixed and setups are seldom changed."1 - Characteristics: A continuous flow manufacturing process is characterized as being inflex-ible, with a very limited variety of products, very short lead times, very high volumes, high fixed costs, and low variable costs. This type of manufacturing process involves standard-ized production with rigid line flows and tightly linked process segments. The process is osten operated 24/7 to maximize utilization and to avoid expensive stops and starts. - Examples: Gasoline, laundry detergent, chemicals - Manufacturing Strategies: MTS is the manufacturing strategy that is most closely aligned with the continuous flow process.
Job Shop
"A type of manufacturing process used to produce items to each customer's specifications. Production operations are designed to handle a wide range of product designs and are performed at fixed plant locations using general-purpose equipment." Job shops produce small lots of a variety of products, which require a unique setup and sequence of process steps to create a custom product for each customer. - Characteristics: A job shop manufacturing process is characterized as being highly flexible, with a large variety of products, very long lead times, low volumes, low labor requirements, low fixed costs, but high variable costs. - Examples: Metal fabrication shops, print shops, custom cabinet making - Manufacturing Strategies: ETO or MTO are the manufacturing strategies that are most closely aligned with the job shop process.
Batch
"A type of manufacturing process used to produce items with similar designs and that may cover a wide range of order volumes. Typically, items ordered are of a repeat nature, and production may be for a specific customer order or for stock replenishment."1 - Characteristics: A batch manufacturing process, in comparison to a job shop process, is characterized as being less flexible, with a more narrow variety of products, long lead times, slightly higher volumes, moderate labor requirements, and moderate fixed and variable costs. In batch processing, some of the components for the final product may be produced in advance. - Examples: Manufacturing component parts for a production line, manufacturing clothing, or furniture - Manufacturing Strategies: MTO or ATO are the manufacturing strategies that are most closely aligned with the batch process.
Request for Information (RFI)
"An inquiry to a potential supplier about that supplier's product or service for potential use in the business. The inquiry can provide certain business requirements or be of a more general exploratory nature."
Supplier Certification
"Certification procedures verifying that a supplier operates, maintains, improves, and documents effective procedures that relate to the customer's requirements. Such requirements can include cost, quality, delivery, flexibility, maintenance, safety, and ISO quality and environmental standards."
Engineer to order
"Products whose customer specifications require unique engineering design, significant customization, or new purchased materials. Each customer order results in a unique set of part numbers, bills of material, and routings." The essence of ETO is building a unique product every time. There may be components that are common from one product to another, but not in the same quantity as in repetitive manufacturing.
Blanket or Open-End Purchase Orders
A purchase order that the buyer negotiates with its supplier, which can incorporate multiple delivery dates over a period of time (osten a year). It is typically used for frequently needed expendable goods. Once negotiated, authorized users within the buyer's company can arrange for the necessary items, quantities, and delivery dates directly with the supplier.
Accuracy
A reduction in errors; a virtual elimination of manual paperwork and paperwork handling
Time Savings
A reduction in the time between recognizing the need for an item and the release and receipt of an order for that item
Check Sheet
A simple way of gathering data so that decisions can be based on facts. Check sheets are commonly used to determine the frequencies for specific problems. They could also be used to correlate the number of defects to other variables such as the day of the week or month of the year, to see if there is any significant variation or pattern. The data gathered in a check sheet can also be used as input to a Pareto chart for analysis.
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 a situation where there is only one supplier for an item (i.e., sole-sourced). Sole source is not truly a strategy as there really isn't a choice, and there is very little opportunity for a company to negotiate price or service.
Petty Cash
An accessible amount of money kept by an organization for expenditure on small items. A typical example of when this might be used is a company sending someone out with petty cash to buy coffee and donuts for a business meeting.
Stockless Buying or System Contracting
An arrangement in which a supplier holds the items ordered by the buyer in its own warehouse, and releases them when required by the buyer.
Utilitarianism
An ethical act that creates the greatest good for the greatest number of people, and should be the guiding principle of conduct
Noncritical Items
Because items in this category are both low risk and low value, the strategy here is for procurement to reduce their level of effort and focus. The transactional costs associated with buying these items may actually exceed the purchase price of these items. These are most likely routinely purchased items which may be suitable candidates for delegating the transactional purchasing activities to users within the company based on some predetermined guidelines, rather than to use valuable procurement personnel's time to process. Simplifying, streamlining, standardizing, and reducing the number of suppliers will facilitate this strategy
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.
Sourcing Analytics
Drives deep category and supplier insights by using market leading tools to process vast amounts of data
Functional Sourcing
MRO items and other commonly low-profit margin items with relatively stable demands and high levels of competition (office supplies, food staples, etc.) - Potential Strategy: Multiple sourcing with several reliable, low-cost suppliers
total cycle time or lead time per strategy
MTS: The product is already produced and available in the warehouse when the customer or-der is received, so the customer will only experience the customer delivery lead time. ATO: The product design is complete and the components/materials have already been procured when the customer order is received, so the customer will experience the manufacturing (e.g., assembly) and customer delivery lead times. MTO: The product design is the only element complete when the customer order is received, so the customer will experience the procurement, manufacturing, and customer delivery lead times. ETO: Since no supply chain elements have been completed when the customer order is received, the customer will experience the full cumulative supply chain lead time.
Role of Managers in LEAN
Management must create the cultural change needed for LEAN to succeed. They provide an atmosphere of cooperation, empower workers to take action based on their ideas, and develop incentive systems to encourage and reward lean behaviors.
hybrid purchasing organization
Many companies have tried to adopt a mix of centralized and decentralized purchasing, where business units or locations have the purchasing responsibility for certain items, and the central purchasing organization has responsibility for other items. The two main types of hybrid purchasing organization are: Decentralized-centralized and Centralized-decentralized
Benefits of Supplier Recognition Programs
Motivate Suppliers to Perform Better Help to Improve Supplier Loyalty and Commitment Encourage Suppliers to Adapt to the Company's Culture Helps to Create Entry Barriers for Competitors Encourages Supplier Participation in Product Innovation
continuous improvement
Plan: Identify an opportunity and plan for change. Do: Implement the change on a small scale. Check: Use data to analyze the results of the change and determine whether it made a difference. Act: If the change was successful, implement it on a wider scale and continuously assess your results. If the change did not work, begin the cycle again.
Control Chart
Plots representative samples of the selected values from a process, in se-quence over time. Control charts are used to study how a process changes over time. A control chart always has a median line for the average, an upper line for the upper control limit, and a low-er line for the lower control limit. These lines are determined from historical data. By comparing current data to these lines, conclusions can be drawn regarding whether the process variation is in control or out of control. (Refer to "Statistical Process Control" later in this chapter.) A sample measurement outside the control limits therefore indicates that the process is no longer stable, and is usually a reason for corrective action.
Important Functions of a Supplier Development Program
Providing information about products, expected sales growth, etc. Poor communication and a lack of information translates into additional costs (usually in the form of just-in-case inventory). 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 (through LEAN implementation, for example) is not sustainable in the long term. This tactic will drive suppliers out of business, which goes against the purpose of supplier development.
nontariff barriers
Quotas, licensing agreements, embargoes, laws and regulations imposed on imports and exports.
Forward vertical integration
Refers to a company acquiring one or more of its customers. Example: a manufacturer buying a wholesaler/distributor to take ownership of this aspect of its supply chain.
Backward vertical integration
Refers to a company acquiring one or more of its suppliers. Example: a manufacturer buying the key supplier of a critical material to take ownership of this aspect of its supply chain.
E-procurement
The business-to-business purchase and sale of supplies and services over the Internet. The term describes the automation through web-enabled tools of many elements of the purchas-ing process including: The issue, collection, and analysis of bids Execution and analysis Award of business via reverse auction e-Procurement tools typically automate all or part of the following processes: Solicitation development tools (i.e., RFI, RFP, RFQ) Reverse auctions
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. The primary goals are to: 1. Ensure an uninterrupted flow of materials and services for the company. 2. Obtain materials and services at the best value, meaning the best quality at the best prices, with the best service, in the most economic order quantities. 3. Secure reliable alternative sources of supply as necessary to manage risk. 4. Optimize customer satisfaction by using the knowledge and expertise of the supply base to provide high quality at the lowest total cost. - Actively seek better materials and reliable suppliers - Work with the expertise of strategic suppliers to improve quality and materials and finished goods - Involve suppliers and purchasing personnel in new product design and development efforts 5. Maintain good relationships with suppliers
Insourcing (backsourcing)
This involves reverting back to in-house production when external quality, delivery, and services do not meet expectations.
Cause-and-Effect Diagram (Ishikawa or fishbone diagram)
Tool used to aid in brainstorm-ing and isolating the cause(s) of a problem. The function is to identify the factor(s) that are causing a defect(s) so that improvement actions can be taken. Typically, the potential factors are identified by those familiar with the process involved. Major factors could be grouped using the four Ms: materials, machinery, methods, and manpower. It is commonly used in combination with the Five Whys and Five Hows technique to help identify the root cause
Role of Workers in LEAN
Workers are given greater responsibility and their expanded duties include improving the production process, monitoring quality, and correcting quality problems. Workers often work in teams and form quality circles to facilitate these expanded responsibilities.
Internal Failure Costs
are incurred to fix defects discovered before the product or service is delivered to the customer. These costs occur when the product or service does not meet the designed quality standards, and are identified before the product or service is delivered to the customer.
External Failure Costs
are incurred to fix defects discovered by customers. These costs occur when the product or service that does not meet the designed quality standards are not detected until after the product or service is delivered to the customer.
Buy American Act (1933)
basically states that purchases (whether by the government or by third parties) using federal funds must be bought from a U.S. source if the cost of the goods from the U.S. source is not more than a specific differential above the foreign source for the goods.
Joseph Juran
defined quality as "fitness for use." He developed the concept of the cost of quality. He has been credited with the quote, "Without a standard, there is no logical basis for making a decision or taking action." He was a proponent of concepts of quality planning, quality control, and quality improvement. - Quality Planning: Identify internal/external customers and needs: • Develop products satisfying those needs. • Managers must set goals, priorities, and compare results. - Quality Control: Determine what to control: • Establish standards of performance. • Measure performance, interpret the differences, and take action. - Quality Improvement: Show the need for improvement: • Identify projects for improvement. • Implement remedies. • Provide control to maintain improvement.
Kaoru Ishikawa
developed one of the first tools in the quality management process, the cause-and-effect diagram, or the Ishikawa (fishbone) diagram. With this tool, the user can see all possible causes of a problem to help find the root cause. He emphasized the use of all seven of the basic quality tools. He is also known as the father of quality circles and helped bring this concept into the mainstream. Further, Ishikawa was a proponent of continuous customer service, meaning that a customer should continue receiving service even after receiving the product
make-versus-buy decision
is a strategic decision and every company must decide what and how much they want to make versus buy. 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). Quantitative factors primarily involve the incremental costs of making or purchasing the component, such as the availability of manufacturing facilities, needed resources, and manufacturing capacity. Fixed and variable costs can be determined with certainty or by estimation. Qualitative factors are more subjective and include such things as control over the quality, the reliability, and reputation of the potential suppliers, and the impact of the decision on customers and suppliers.
Voice of the Customer (VOC)
is a term used in business to describe the in-depth process of capturing internal and external customers' stated and unstated expectations, preferences, likes, and dislikes. Total quality management is all about meeting or exceeding customer expectations, so capturing the VOC is essential for TQM to be successful. The VOC can be captured in a variety of ways: direct discussion or customer interviews, market sur-veys, focus groups, customer specifications, observation, warranty data, field reports, complaint logs, among others.
Co-Managed Inventory (CMI)
is an arrangement where a specific quantity of an item is stored at the buyer's location. Once it is used, the item is replaced by the supplier, with the knowledge and approval of the buyer. In CMI, the buyer provides system access to the supplier, and the supplier takes responsibility for managing the replenishment process in thebuyers system accordingly
LEAN
is an operating philosophy of waste reduction and value enhancement. Elements of what is today known as LEAN were originally created as part of the Toyota Production System (TPS) by key Toyota executives. The Six Sigma approach is a set of concepts and practices that key on reducing variability in processes and reducing deficiencies in the product. Important elements are (1) Producing only 3.4 defects for every one million opportunities or operations; (2) Process improvement initiatives striving for six sigma-level performance. -John Krafcik in 1988 LEAN is composed of three elements working in unison: LEAN manufacturing Total quality management Respect for people Key elements of LEAN Manufacturing 1. Waste reduction 2. Lean layouts 3. Inventory, setup time, and changeover time reduction 4. Small batch scheduling and uniform plant loading 5. Lean supply chain relationships 6. Workforce empowerment and respect for people 7. Continuous improvement
Supply Base
is defined as "the group of suppliers from which a firm acquires goods and services.
Ethical Sourcing
is that which attempts to take into account the public consequences of organizational buying, or to bring about positive social change through organizational buying behavior. This involves the procurement organizations ensuring that the products being sourced are acquired in a responsible and sustainable way. The people involved in producing these products should be treated fairly and work in a safe environment. The environmental and societal impacts must also be considered as part of the sourcing process.
Supplier Relationship Management (SRM)
is 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.
Sourcing
is the process of identifying a company that provides a needed good or service. Strategic sourcing is a comprehensive approach for locating and sourcing key suppliers, which often includes the business process of analyzing the total spend by material category (see figure 6.1). The focus of strategic sources is on the development of long-term relationships with trading partners who can help the buyer meet profitability and customer satisfaction goals.
Acceptance Sampling
is the selection of a set of items from a product lot to test as a representative sample of the entire lot. Sampling lets you draw conclusions or make inferences about the popula-tion from which the sample is drawn. Acceptance sampling is useful when the cost of testing is high compared to the cost of passing a defective item, or when testing is impractical or destructive However, acceptance sampling can result in errors: · Manufacturer'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: A buyer accepts a shipment of poor quality units because the sample falsely provides a positive answer (type II error)
Total Cost of Ownership (TCO)
is the sum of all the costs associated with every activity of the supply stream.1 The four elements of cost are quality, service, delivery, and price (QSDP). TCO is the sum of the cost elements in QSDP (i.e., Quality + Service + Delivery + Price).
International Organization for Standardization (ISO)
is the world's largest developer of voluntary international standards. Two ISO standards commonly used in supplier certification programs are: ISO 9000 A series of management and quality standards in design, development, production, installation, and service. Companies wanting to sell in the global market will want to seek ISO 9000 certification.
The Hackett Group's
research identified five key areas where world-class organizations are adopting procurement strategies to differentiate themselves: 1. Being a Trusted Advisor to the Business: Having a high level of involvement in the company's budgeting and planning cycle. They are considered valued business partners by the organization, not gatekeepers or administrators.2 2. Driving Suppliers to Innovate: Effective at harnessing the intellectual capital of their suppliers to bring new and innovative solutions to bear, helping to influence—not just support—the business strategy.2 3. Providing Analytics-Backed Insights: Working closely with the business during operations planning and budgeting periods to provide predictive insights on supply markets, to the point that analytics, market intelligence, and benchmarking are offered on-demand as a service to key stakeholders.2 4. Protecting the Business from Risk: Have formal risk management programs that include completing supplier risk assessments and working with finance and other stakeholders to determine the best mitigation strategy when risk exposure is identified.2 5. Taking an Agile Approach to Staffing: Talent management sets procurement lead-ers apart from the pack, they provide more training and invest more in retention planning, and they pay higher salaries. They require substantially fewer FTEs than peer groups and are more productive overall.
Profit Leverage Effect
states that a decrease in purchasing expenditures directly increases profits before taxes (assuming no decrease in quality or purchasing total cost). The bottom line impact is a dollar saved is a dollar of profit to be used for such things as shareholder dividends, employee pay increases, investments, company reinvestments in R&D, or marketing and sales, among others.
Return on assets effect
states that with the exact same number/value of assets, a decrease in purchasing expenditures significantly increases the return on those assets compared to a comparable increase in sales. A high ROA indicates managerial prowess in generating profits with lower spending.
