Intro to Supply Chain Exam 1

Performance Metrics

"You can't improve what you can't measure." Measurements related to the firm's strategic objectives should be used to evaluate key suppliers.

Strategic Sourcing Decisions

1. Backward Vertical Integration. 2. Forward Vertical Integration. 3. Outsourcing.

Primary Goals of Purchasing

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

The Supplier Evaluation System

1. Select key dimensions of performance acceptable to company & supplier. 2. Monitor & collect performance data. 3. Assign weights to each of the dimensions based on company goals. 4. Evaluate performance measures on a fixed scale (eg. 0 - 100). (Establish benchmarks for performance). 5. Rank & Classify the suppliers based on scores achieved. (Unacceptable, Conditional, Certified, Preferred). 6. Follow up and take action based on scores.

Profit-Leverage Effect

A decrease in purchasing expenditures directly increases profits before taxes, assuming no decrease in quality or other costs.

Insufficient Capacity

A firm may be at or near capacity and subcontracting from a supplier may make better sense.

Supply Base

A list of suppliers that a firm uses to acquire its materials, services, supplies, and equipment. Firms emphasize long-term strategic supplier alliances consolidating volume into one or fewer suppliers, resulting in a smaller supply base.

Punishment

A negative reward, may be to reduce future business; or a bill-back amount equal to the incremental costs resulting from a late delivery or poor quality.

Sustainable Sourcing

A process of purchasing goods and services that takes into account the long term impact on people, profits, and the planet.

Forward Vertical Integration

Acquiring channel partner operations.

Backward Vertical Integration

Acquiring sources of supply.

Green Purchasing

Aimed at ensuring products or material meet environmental objectives.

Metrics need to be

Aligned with the company's goals, Understandable, Measurable at key intervals, Focused on value generation, and Based on facts, not perceptions.

Total Cost of Ownership

All costs associated with the acquisition, use, and maintenance of a good or service.

Ethical Sourcing

Attempts to take into account the public consequences of organizational buying or bring about positive social change through organizational buying behavior.

From the supplier's perspective

Avoids ill-advised customer orders. Supplier decides inventory set up & shipments. Opportunity for supplier to educate customers about other products.

Information Sharing and Lines of Communication

Both formal & informal lines of communication should be set up to facilitate free flow of information. Confidentiality of sensitive information must be maintained.

Keys to Successful Partnerships

Build Trust, Shared Vision & Objectives, Personal Relationships, Mutual Benefits & Needs, Commitment & Top Management Support, Change Management, Information Sharing & Lines of Communication, and Aligned Capabilities.

Inventory Turnover Formula

COGS/Inventory

Hybrid Purchasing Organization

Centralize large national contracts at corporate level and decentralize items specific to business unit at the local level.

Innovative Products

Characterized by short product life cycles, volatile demand, high profit margins, and relatively less competition.

Advantages of Decentralized Purchasing

Close knowledge of requirements, Local sourcing, Relationships, Less bureaucracy, and Customization.

Benchmarking

Comparing what you do to other businesses that do it best and implementing changes to improve. Normally looking at statistics.

Public Procurement is characterized by:

Competitive bidding, sealed bids, performance bonds, bid or surety bonds, and payment bonds.

Outsourcing allows an organization to:

Concentrate on core capabilities. Increase capabilities in the area being outsourced. Reduce staffing levels (not just labor arbitrage). Accelerate reengineering efforts. Reduce risk and management dilution Improve flexibility.

Supply Chain

Consists of the flow of products and services from Raw Materials to End Users. Connected by transportation and storage activities & integrated through information, planning, and technology.

Advantages of Centralized Purchasing

Consolidate orders, Lower transportation costs, Leveraging purchase volume, Avoid duplication, Specialization, No competition within units, and Common supply base.

Competitive Bidding

Contract is usually awarded to lowest priced responsive and responsible bidder.

Best Practices

Copying what other businesses do best and implementing in your organization.

Goal of Supply Chain Management

Correct product; in the needed quantity; at the right location; at the right time; for the lowest total cost. Balancing low cost manufacturing with variable customer demand.

Reasons for Buying or Outsourcing

Cost Advantage, Insufficient Capacity, Lack of Expertise, and Quality.

Post Transaction

Costs incurred after receipt of goods. e.g. Quality failures, warranty, company reputation, returns.

Pre-transaction

Costs incurred prior to order and receipt. e.g. Purchase Planning, Certifying & training suppliers, researching suppliers, supplier setup.

Network Design

Creating distribution networks based on tradeoff decisions between cost and sophistication of distribution system.

Operations Issues

Demand Management, Production & Capacity Planning, Lean Systems, and Employ Quality Systems.

Purchasing Organization

Dependent on many factors, such as market conditions, types of materials required, company culture.

Issue Purchase Order

Determine flow of information and goods. Establish terms of sale. State item, quantity, and price.

Ethical Policies should include

Determining where all purchased goods originated & the manner in which they were made. Knowledge of the suppliers' workplace principles. Inclusion of ethics as a performance rating. Independent verification of vendor compliance. Report of supplier compliance to stakeholders. Provision of detailed ethical sourcing expectations to suppliers.

Successful Sourcing Strategies

Different for functional products and for innovative products.

Preferred Suppliers provide:

Early supplier involvement information on the latest trends in materials, processes, or designs. Information on the supply market. Capacity for meeting unexpected demand. Cost efficiency due to economies of scale.

Two Basic Supply Chain Models

Efficient and Responsive

Ethical Trading Initiative- Base Code

Employment is freely chosen (no forced labor). Freedom of association & collective bargaining. Safe and Hygienic working conditions. No child labor used. Living wages are paid. Working hours are not excessive. No discrimination (hiring, wages, opportunity). Regular employment is provided. No harsh or inhumane treatment.

International Organization for Standardization (ISO)

Ensure that products and services are safe, reliable, and of good quality. For business, they are strategic tools that reduce costs by minimizing waste and errors and increasing productivity. They help companies to access new markets, level the playing field for developing countries and facilitate free and fair global trade.

General Services Administration (GSA)

Establishes contracts for products purchased by government agencies. About 25% of government purchases.

Globalization

Expanding the Supply Chain Internationally, both mature and emerging markets have become a part of the overall business growth strategy for many companies.

Lack of Expertise

Firm may not have the necessary technology and expertise.

Flexibility and Responsiveness

Firms need to be more flexible and responsive to customer needs, adapting to unexpected changes. Necessitating closer integration and collaboration.

Keys to Successful Partnerships

Focus on total cost of ownership. Group costs around the transaction. (Pre, at time, and post). Continuous Improvement (Kaizen).

Demand Management

Forecast customer demand to determine supply requirements.

Utilitarianism

Greatest good for greatest number of people.

Early Supplier Involvement

Highly effective integrative technique. Suppliers become more involved in the internal operations of the firm. These value engineering activities help the firm to reduce cost, improve quality, and reduce new product development time. Supplier locks in their role and future business in the new product.

Popular Standards

ISO 9000 Quality management ISO 14000 Environmental management ISO 26000 Social responsibility ISO 50001 Energy management ISO 31000 Risk management ISO 22000 Food safety management ISO 27001 Information security management ISO 20121 Sustainable events

Strong Supplier Partnerships

Important to achieving win-win competitive performance for the buyer and supplier -- these require a strategic perspective as opposed to a tactical position. Involve "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 Management

Improve performance through supplier selection, evaluation, certification, and development.

Use Lean Systems

Improve production and reduce inventory levels.

Return on Assets (ROA) Effect

Improving profit for a set of assets or reducing asset requirements to produce the profit both improve ROA.

Performance Bonds

Incentive to fulfill contract. Work will be on time and meet specifications.

Inventory Turnover Effect

Increased inventory turnovers indicates improved utilization of space and inventory levels and reduced impact of inventory obsolescence.

Alliance Development

Increasing the firm's key or strategic supplier's capabilities.

Decentralized Purchasing

Individual, local purchasing departments, such as plant level, make their own purchasing decisions.

Supplier Selection

It is complex and should be based on multiple criteria: Product/process technologies, willingness to share information, quality, service, location, reliability, order time, capacity, communication, and cost.

Personal Relationships

It is people who communicate and make things happen.

Risks associated with outsourcing:

Loss of control / loss of intellectual property. Increased reliance on suppliers. Increased need for supplier management. Public perception issues.

Functional Products

MRO items & other commonly low profit margins with relatively stable demands & high levels of competition.

Continuous Improvement (Kaizen)

Making a series of small improvements over time results in the elimination of waste in a system. Buyers & suppliers must be willing to continuously improve their capabilities in meeting customer requirements of cost, quality, delivery, & technology.

Strategic Sourcing

Managing the firm's external resources to support a firm's long term goals.

Purchasing Process

Material Requisition, Supplier Determination, Issue Purchase Order, and Receive, Inspect, and Pay.

Production & Capacity Planning

Meet Supply Requirements.

Reasons Favoring Multiple Suppliers

Need capacity, Spread risk of supply interruption, Create competition, Information, Dealing with special kinds of business.

Small Value Purchase Orders

Need to minimize processing costs for small value purchases: Procurement credit card, online catalogs, blanket purchase orders, and accumulating small orders to create a large order.

What Port did the 1st container ship sail?

Newark

Purchasing (aka Sourcing)

Obtaining merchandise, capital equipment; raw materials, services, or maintenance, repair, and operating (MRO) supplies in exchange for money or its equivalent.

Supply Base Rationalization

Often the initial supply chain management effort.

Three P's

People, planet, and profit.

Pull or Make-to-Order

Producing stock in response to actual demand. 10%.

Reasons for Making

Protect proprietary technology, No competent supplier, Better quality control, Use existing idle capacity, Control of lead-time, transportation & warehousing cost, and Cost advantage.

Rewarding Suppliers

Provides an incentive to surpass performance goals.

Performance Metrics Measures

Quality (defect rates) Cost (TCO) Delivery (on time, reliable, secure) Flexibility (responsive, creative) Environment Technology (Development) Business (Financial stability, management capability)

Non-Tariff barriers to international trade

Quotas, restrictions, embargos, laws, regulations.

Return on Assets Formula

ROA = Profit/Assets

Innovative Products

Rapidly changing, very short life-cycle products, great variety, and very unpredictable demand.

Receive, Inspect, and Pay

Receive product / service and invoice. Confirm quantity, quality, performance. Match to invoice and pay.

Rights and Duties

Recognize rights of others and the duties those right impose on your actions.

Ethics and Sustainability

Recognizing suppliers' impact on reputation and environment impact.

Cost Reduction and Continuous Improvement

Reducing purchasing costs, waste, excess inventory & non-value added activities. Improving demand planning. Increased outsourcing of non-core competencies.

Sustainability and "Greening" the Supply Chain

Societal pressures to make and source in 'the right way'; minimizing social, economic and environmental impact. Developing positive impact.

Functional Products

Staples that people buy everywhere, don't change much over time, and stable predictable demand.

Customer Relationship Management

Strategies to communicate with customers, resolve complaints, and determine service requirements.

Strategic Partnerships

Successful and trusting relationships with top-performing suppliers.

Bid or Surety Bonds

Successful bidder will accept contract.

From the buyer-firm's perspective

Supplier tracks inventories. Determines delivery schedules and order quantities. Buyer can take ownership at stocking location.

Quality

Suppliers have better technology, process, skilled labor, and the advantage of economy of scale.

Vendor Managed Inventory (VMI)

Suppliers manage buyer inventories to reduce inventory carrying costs & avoid stock outs for buyer.

Integration Trends

Supply Chain Process Integration and Supply Chain Performance Measurement

Four Parts of SCM

Supply Management, Operations, Logistics, and Integration.

Efficient

Supply chain processes are designed to minimize cost. Predictable supply and low cost, low cost production and highly utlized capactiy, high inventory turnovers, and ideal for functional products.

Outsourcing

Taking in house activities / operations and deciding to purchase from suppliers instead. Outsourcing has become a key method to reduce costs and increase flexibility.

Tariff

Tax (Duty) imposed by the government on products imported.

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.

Business Ethics

The application of ethical principles to business.

Transportation Management

The balance of cost, speed, and customer service using the different modes of transportation.

Corporate Social Responsibility

The practice of business ethics in a corporation.

Contracting

The term normally used for the acquisition of services.

Supply Management

The term used to encompass all activities in acquiring goods and services.

Advantages of e-Procurement

Time savings, cost savings, accuracy, real time, mobility, tracking, management, and benefits to the suppliers.

Reasons Favoring a Single Supplier

To establish a good relationship,Less quality variability, Lower cost, Transportation economies, Proprietary product or process, Volume too small to split.

The Make-or-Buy Break-Even Analysis

Total Cost to Make = Total Cost to Buy. Algebraically: Find break-even point <Q> by setting the total cost of the two options equal to one another and solve for Q. If requirement is greater than break even point make it. If requirement is less than break even point buy it.

Logistics Management

Transportation Management, Customer Relationship Management, and Network Designs.

Buy American Act (1933)

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

Sealed Bids

Used to ensure fairness and are opened in public display.

World Trade Organization (WTO)

WTO is the only international organization dealing with the global rules of trade between nations. Its main function is to ensure that trade flows as smoothly, predictably and freely as possible. The result is assurance. Currently 161 members (Republic of Seychelles - April 2015).

Supply Chain Process Integration

When supply chain participants work for common goals. Requires intra-firm functional integration. Based on efforts to change attitudes and adversarial relationships.

Merchant Buyers

Wholesalers, Distributors and retailers who purchase completed product for resale.

Building Trust

With trust, partners are more willing to work together, find compromise solutions to problems, work toward achieving long-term benefits for both parties, &, in short, go to the extra mile.

Green Purchases

a variety of federal, state, and local statutes and executive orders require environmental and human health considerations when making purchases.

ISO 14000

addresses various aspects of environmental management and constantly improve their environmental performance. The benefits include reduced energy consumption, environmental liability, waste & pollution, & improved community goodwill.

ISO 9000

addresses various aspects of quality management & quality standards in design, development, production, installation, & service. It is based on a number of quality management principles including a strong customer focus, the motivation and implication of top management, the process approach and continual improvement.

Supplier Alliances result in

better market penetration access to new technologies & knowledge higher return on investment Collaboration resulting in mutual benefits

Import broker or sales agent

specializes in handling the steps needed to import, performs service for a fee

Supplier Evaluation and Certification

1. A process to identify best and most reliable suppliers. 2. Sourcing decisions are made on facts and not on perception. 3. Frequent feedback can help avoid surprises and maintain good relationships. 4. Suppliers should be allowed to provide constructive feedback to the customer.

Purchasing contributes to these activities by:

Actively seeking better materials and reliable suppliers, Working closely with strategic suppliers to improve quality materials Involving suppliers and purchasing personnel in new product design and development efforts.

Commitment and Top Management Support

Commitment must start at the highest management level. Partnerships tend to be successful when top executives are actively supporting the partnership.

Change Management

Companies must be prepared to manage change that comes with the formation of new partnerships.

Transaction

Costs incurred during acquisition. e.g. Cost of goods, cost to place and receive order, inspection costs, delivery costs inaccurate shipments.

Supply Chain Performance Measurement

Crucial for firms to know if procedures are working.

Cost Advantage

Especially for components that are non-vital to the organization's operations, suppliers may have economies of scale.

Material Requisition

Identify need to acquire product or service. (quantity and price)

Supplier Determination

Identify potential suppliers. Issue: (RFI, RFP, RFQ). Select supplier. Set up supplier.

Aligned Capabilities

Key suppliers must have the right technology and capabilities to meet cost, quality, and delivery requirements in a timely manner.

Push or Make-to-Stock

Producing stock on the basis of anticipated demand. Demand forecasting can be done via a variety of sophisticated techniques. 90%.

Criteria Commonly Used in Certification Programs

Product quality rates (defective product). Non-product issues (e.g., on time delivery). No significant negative incidents. Recognized agency certified or successfully passing a recent audit. Fully documented process & quality system with cost controls & continuous improvement capabilities. Supplier's process is stable with proper controls .

Payment Bonds

Protection against 3rd party liens not fulfilled by bidder.

Industrial Buyers

Purchase raw materials, services, capital equipment, & maintenance, repair, and operating (MRO) supplies to produce another product or service.

Centralized Purchasing

Purchasing department located at the firm's corporate office makes all the purchasing decisions.

Drivers of Strategic Sourcing

Reduce costs & delivery cycle times. Improve quality & long-term financial performance. Increase number of global competitors. Increase customer focus Reduce high costs of globalization & materials. Deliver more innovative products more frequently & cheaply than competitors.

Supplier Relationship Management (SRM)

Refers to extended procurement processes such as: execution improvement, sourcing analytics, supplier scorecards, performance monitoring, and supplier development. SRM enables companies to identify their most important suppliers. This enables companies to focus their resources and maintain more strategic relationships with suppliers. This will result in positive impacts from the supply base on costs, quality, delivery and innovation.

Employ Quality Systems

Such as Six Sigma to improve quality.

Supply Elements

Supplier Management, Strategic Partnerships, and Ethics and Sustainability.

Import merchant or Trading company

buys the goods, imports and sells to buyers

Benjamin Franklin

1,300 foot container ship. Largest ever. December 25, 2015.

Supplier Performance Review

1. Categorize suppliers based on performance scores. 2. Meet regularly with each supplier to review performance report.

Supplier Development

A buyer's activity to improve a supplier's performance and/or capabilities based on the following approach: 1. Identify Critical products and services. 2. Identify critical suppliers. 3. Form a cross-functional team. 4. Meet with top management of supplier. 5. Identify key projects. 6. Define details of agreement. 7. Monitor status and modify strategies.

Shared Vision and Objectives

Both partners must share the same vision & have objectives that are not only clear but mutually agreeable. The focus must move beyond tactical issues & toward a more strategic path to corporate success.

Sustainable sourcing should seek to

Grow revenues. Reduce Costs. Manage Risk. Build intangible assets.

Mutual Benefits and Needs

Partnership should result in a win-win situation, which can only be achieved if both companies have compatible needs. An alliance is much like a marriage, & if only one party is happy, then the marriage is not likely to last.

Buyer-supplier partnerships are easier with a rationalized supply base & result in -

Reduced TCO (lower price, lower supply costs, improved quality). Fewer supplier management problems. Closer & more frequent interaction between buyer & supplier. Greater levels of quality & delivery reliability.

Why is SCM a competitive advantage?

Reduced operating capital requirements, reduced fixed capital requirements, reduced costs, and looking at total cost of ownership.

Responsive

Supply chain designed to respond quickly to market demand. Fast response, minimal stock outs, need flexible capacity, inventory of parts, minimize lead time, need to have variety of products available for customers when they want to buy, and ideal for innovative products.