MGSC 487 Final Exam
private carrier
provides transportation for its company owned products company owns (or leases) all related equipment and facilities in a regulated environment, private carriers have the advantage of not being restricted by regulations and the flexibility that this status offers.
UN CISG
the UN convention on contracts for the international sale of goods many countries have adopted this goal is to create a uniform international law for the sale of goods
fair price
the lowest price that ensures a continuous supply of the proper quality where and when needed a fair price to one seller could be higher than a fair price for another
WATNA
worst alternative to a negotiated agreement the worst we can realistically fear
reasons to source globally
- unavailable from a domestic source - price and total cost advantages - government influence - quality - faster delivery & continuity of supply - better technical service - technology - countertrade - existing tie to an offshore subsidiary - *create competitive advantage*
strategic sourcing process step 6: operationalize new agreements
Just do it negotiations - batna - wanna - backup plan engage the new supplier - ABF
strategic cost management
externally focused process of analyzing costs in terms of the overall value chain focus is on applying tools and techniques to sustain cost savings year over year two primary tools: ABC analysis, portfolio analysis
contract breach
failure, without legal excuse, to perform any promise that forms all or part of the contract - nonconforming goods - perfect tender - good faith standard - statute of fraud
identifying potential sources
first, make or buy analysis acquire new need from an existing supplier engage in a search for potential suppliers sources for searching for suppliers: - trade shows - trade journals - past experience - networking - online database
establishing price
for competitive reasons, most firms will not disclose how they set their prices but the two traditional methods are cost approach market approach
contract carriers
for-hire carrier that provides service to a limited number of shippers operates under specific contractual arrangements that specify rates and services rates are generally lower for these carriers because volumes are typically higher with individual shippers and scheduling is more predictable
4PL
fourth party logistics
FOB
free on board means that goods are delivered to a specified point with all transport charges paid for several variations in these terms selection of the FOB point is important because it determines: - who pays the carrier (buyer or seller) - when legal title of the goods being shipped passes to the buyer - who is responsible for preparing and pursuing claims in the case goods are lost/damaged - who routes the freight shipping terms and the responsibilities of buyers and sellers in international's contracts are covered by incoterms
fixed costs
generally remains the same regardless of the number of units produced example: real estate taxes, rent
last mile
getting from wherever you are to your last stop the last step in getting the item to its destination
SCOR people
global view of needs/issies surrounding skills of supply chain professionals key elements: - skill - experience - aptitude - training - competency (experienced beginner, proficient, expert)
government influence on pricing
government can have an active role in price determination by: - establishing production & import quotas - regulating the way buyers and sellers are allowed to behave in agreeing on prices governments influence prices of utilities that offer common services such as electricity, water, licenses and goods/services provided by government run organizations
strategic sourcing process step 3: assess supply markets
identify potential suppliers - global - domestic analyze marketplace - risk - opportunities take TCO perspective - freight and logistics - inventory
key selection criteria: type of item being shipped
if the item is too large/bulky, a particular mode of transportation may be required special container requirements may indicate that only certain carriers have the equipment to handle the job example: bulk liquids may need a railroad tank car or pipeline. safety requirements for hazardous materials
Sherman anti-trust act
illegal to do price fixing
Robinson Patman act
illegal to sell to different customers at different prices exceptions: - large order quantity - meeting local competition - moving obsolete material
the market approach
implies that prices are set in the marketplace and may not be directly related to cost if demand is high relative to supply, prices will most likely rise and vise versa high supply = low costs low supply = high costs with this approach, purchasers either live with the prevailing market prices OR finds a way around them by: - selecting suppliers who offer incentives (holding inventory, superior quality, excellent delivery, etc.) - substitute "like" materials - establish long term contracts
UCC
in the US, the uniform commercial code governs the transactions of goods and may be adapted by each state
indirect costs
incurred in the operation of a production plant or process or service organization, but normally cannot be related directly to any given unit of production of service provided often referred to as overhead. can be fixed or variable examples: rent, property taxes, machine depreciation, expenses
supplier evaluation and rating methods
informal methods mean there is no "formula" so there is no way to really defend your score to a supplier a formal method of evaluation with a prescriptive methodology is what you need. something that tracks actual performance over time
intermodal
integrating modes
internal vs external cost management
internal: -process improvement - supply chain efficiencies external: - strategic cost management - negotiation
incoterms
international commercial terms a uniform set of rules to clarify the costs, risks, and obligations of buyers and sellers in an international commercial transaction cover contracts for FOB knowing how to use the right language when communicating with an international suppler
continuous supply
is possible in the long run only from a supplier who is making a reasonable profit
key selection criteria: handling of claims
it is inevitable that some damage claims will arise prompt and efficient investigation and settlement of claims is other key factor in carrier selection
LTL
less than truck load type of road carrier typically of short haul compared to TL shipments
triple bottom line
organizations are paying close attention to the combination of the their social, environmental, and financial performance sustainability also referred to as the 3 P's of sustainability: people, planet, profit thus, the term sustainability is used to include all 3 pillars of the triple bottom line
the institute of supply chain management
outlines a code of ethics and principles and standards for professional behavior of purchasing practitioners
ethics perspective
perspective of aligning values and behavior principles: - integrity to your decisions and actions - value for your employer - loyalty to your profession
pipeline transportation
pipelines can only transport products in either liquid or gaseous state, the use of this mode is limited variable costs of operation are low
key selection criteria: shipment size
postal services can move items of small size and bulk larger shipments probably can be moved more economically by truck or rail
air transportation
primary advantage is speed it is costly and must be combined with trucks to provide door to door service products best suited for this mode are of high value/extremely perishable
positional based negotiating
"I am older, therefore I win" believing that the higher position should win the negotiation taking advantage of a privileged position
free trade agreements
- NAFTA (north American free trade agreements) - TPP (trans Pacific partnership - T-TIP (transatlantic trade & investment partnership - AGOA (African growth & opportunity act)
disruptive technologies
- big data (volume, variety, velocity, veracity) - cloud computing - drones: amazon same day delivery creating competitive advantage. Issues include aviation approvals, insurance and cost, weather, theft, urban delivery) - 3D printing: additive manufacturing. issues include metals, composites, different materials from the same printer head - digital supply chain - internet of things: a network of interest connected objects able to collect and exchange data. could transform the way people, processes, and technologies drive value through the enterprise procurement process. barriers include cybersecurity, privacy, implementation problems
negotiation tactics to be aware of
- extreme claims follows by small slow concessions - commitment ("best I can do") - take it or leave it - getting personal - try to make you flinch - belittling alternatives (know your BATNA) - bluffing or outright lying - good cop, bad cop
what to audit/appraise
- financial stability - capacity - production facilities - HR - quality - environment - social & ethical practices - IT
general supply chain trends
- global sourcing - emphasis on quality and customer satisfaction - sustainability - risk management - supply process and technology - metrics & performance measurement
ethical standards
- impropriety - conflict of interest - influence - responsibility to employer - supplier and customer relationships - confidentiality - reciprocity - laws, regulations, trade agreements - competence
when to audit your supplier
- purchase of strategic items - purchase of non standard items - changing normal mode of operation - entering into an outsourcing arrangement - capital equipment purchases - construction project
issues with sourcing globally
- source location and evaluation - lead time and delivery - logistics and transportation - hidden costs - currency risk - quality - warranties and claims - reverse logistics - risk of disruptions - legal issues - language barriers - time zones - cultural & social customs - ethics, moral, and social responsibility may not align
decision to support the "best value" in supplier selection
1. direct purchase from OEM vs distributor? 2. local vs regional vs national? 3. on shore vs off shore vs near shore? 4. supplier size (small, medium, or large)?
supplier selection process
1. identify potential sources 2. decide on single vs multiple sources 3. determine channel (MFR vs distributor, small vs large, domestic vs offshore) 4. evaluate the possibilities 5. make decision
Logistics Costs
Carrying costs Administrative costs Transportation costs (40% of item cost) these costs have been declining in the US over the past 3 decades. Reasons for this include: - deregulation of transportation sector - technology advances (eCommerce) - greater emphasis on improving supply chain processes and efficiencies
calculating EOQ
EOQ = square root of (2DS/H) S = ordering cost H = holding cost (quantity x % purchase price insurance) + $ per unit D = demand DO THIS FOR EACH QUANTITY
ABC analysis
Pareto analysis divides total spend into 3 broad categories A = high dollar items/highest percentage of spend B = medium dollar C = low dollar items more time and managerial attention is directed towards A items because the % of annual spend consumed by the purchase of these items supply managers focus on understanding why the A items are A items. they could be differentiated products, or low cost commodity items
legal contracts
a *valid* contract is based on 4 factors: - competent parties; either principals or qualified agents - legal subject matter or purpose: no illegal activities or violations of existing laws - an offer and acceptance - consideration: bargained for exchange, typically money for goods or services an signature is binding and verbal contracts can be also certain contracts MUST be in writing: - agreements that can't be performed within 1 year - when the sale of goods exceeds $500
transportation carriers
a carrier transports property or people by any means of conveyance, most always for a charge truck, auto, taxi, bus, railroad, ship, or airplane once a mode of transportation has been selected, the buyer must decide on a carrier an specific supplier
SCOR performance metrics & diagnostics
agreed upon standards reliability, responsiveness, agility, cost, assets 3 levels of metrics (3 tiered) level 1: perfect order fulfillment level 2: delivery performance to customer commit date level 3: documentation accuracy
creating a win-win in negotiations
an attempt to find an agreement that allows both parties to achieve their objectives - separate people from the problem - focus on interests, not the position - generate several options - use objective standards negotiating a fair price, NOT haggling fair price also implies it is ethical
64 tactical methods
an operating tool for procurement use 16 operations methods once again broken down even further, getting more specific
the learning curve
analytical framework for quantifying the commonly recognized principal that one becomes more proficient with experience same phenomenon occurs in a variety of industries has implications for cost determination and negotiation process is logarithmic choice of learning curve % is not an exact science implies that improvement never stops is appropriate to use when there is a new production process, or an item is being produced for the first time
quantity discounts
apply to particular quantities and vary roughly in proportion to the amount purchased creates pressure to maintain large inventory doesn't always translate to lower total costs: larger order sizes may mean lower unit price, but carrying charges on larger inventory are more costly
strategic sourcing process step 2: determine business needs
evaluate all options to satisfy the consumption requirements determined in step 1 highlight opportunities
BATNA
best alternative to a negotiated agreement the best we can hope for if negotiations do not succeed
cost plus incentive fee (CPIF)
both buyer and seller agree on a target cost figure, a fixed fee, and an incentive sharing formula under which any cost over or under is shared
cost no fee (CNF)
buyer persuades supplier that there will be enough benefits from doing a particular job, the supplier may do the job and only get reimbursed for the costs example: supplier may be willing to do the research and produce some new product if only the costs are returned because doing the job gives him new technological or product knowledge that he can use make a profit elsewhere
key selection criteria: cost
buyer should select the mode, carrier, and routing that will provide for the safe movement of goods, within the required time frame, AND at the lowest total transport cost
portfolio/quadrant analysis
enables a supply management team to place each major spend category on a spend map based on the risks to acquire and the value of the category to the organization segregation based on risk vs value the 4 boxes are - bottleneck (high risk, low value) - strategic (high risk, high value - non critical (low, risk low value) - commodity (high value, low risk)
direct costs
can be specifically & accurately assigned to a given unit of production or specific identifiable task performed by a service provider examples: cleaning supplies,, wages paid to professionals, fees paid to a contract, direct material
supply chain management
concerned with the efficient integration of suppliers, factories, warehouses and stores so that merchandise is produced and distributed in the right quantity, at the right locations, and at the right time in order to - minimize total system cost - satisfy customer service level policy/requirements - create sustainable, competitive advantage
preference matrix
converting qualitative data to quantitative data - develop criteria - give each criteria a weight (% out of 100) - for each supplier, rank them 1-5 in each of the criteria categories - multiply each number weight their weights and add them up - the supplier with the higher number wins
transportation costs
counts for the majority of logistics costs, almost 62% in 2013. depending on the type of goods being moved, it can cost up to 40% of total cost of the item if the item is of low value, bulky, and heavy, it will have a higher transportation cost percentage if the item has a high value, low weight and low bulk, transportation costs may be less than 1% of the total purchase costs
appraisal/audit methods
desk audit: first party audit, company is sent a form to audit themselves, companies can see how honest you are site (field) audit: when you actually go to the supplier site to audit them 3rd party audit: sending in a third party company to audit your supplier
strategic sourcing process background
developed by A.T Kearney claim to have "invented" strategic sourcing - packaged as a 7 step process - couples with the procurement chessboard - uses demand power vs supply power to customize procurement
strategic sourcing process step 5: execute strategy
dont forget the "who" organizational structure skills and competencies
purchaser - supplier satisfaction matrix
dotted line = equal satisfactory levels on both sides. neither good or bad thing top right box is desirable
multiple/dual sourcing
dual sourcing advantages: - assurance of supply - capacity - market volatility - creates competition (price) - keeps each supplier hones, - regulatory requirements - financial stability concerns - minimizes risk, not all eggs in one basket
EOQ
economic order quantity tells us how much to order to minimize the total annual costs must calculated total cost and EOQ for EACH order quantity amount
legal perspective
making sure the right people are entering into the commercial agreement is the starting point for *aligning the commercial agreement and the legal agreement* legal authority of the buyer and the seller is different both organizations must understand their own legal authority (committing organizations funds, accepting an order) not understanding this could put the buying organization at legal risk purpose: facilitate fair and efficient transactions
target pricing
management team establishes the price at which it plans to sell its finished product then subtracts out its normal operating profit, leaving the target cost that the organization seeks target cost then divided into cost sectors - manufacturing - overhead - material - services
fair and just price
managers can determine a "fair and just price" only if they: -capitalize on past experiences - have thorough knowledge of production processes for goods and services and their associated costs - knowledge on logistics costs such as storage, transportation, service delivery, and other relevant costs
semi variable costs
may vary with the number of units produced but are partly variable and partly fixed example: more heat, light, and power are used when a plant is operating at 90% of capacity than when it is operating at 50%, but the difference is not directly proportional to the number of units produced
the cost approach
means that price is a certain amount more than direct costs, allowing for sufficient contribution to cover indirect costs and overhead, leaving a certain margin for profit costs are classified here at variable, semi variable, or fixed
strategic sourcing process step 7: sustain results/manage suppliers
measure monitor feedback closed loop corrective action
logistics competing priorities
minimizing costs while maximizing service needs purchasing logistics services demands a high degree of skill and knowledge if the costs of movement are to be minimized while at the same time meeting service needs due to the complexity of the logistics industry and the large number of alternatives available (bc of deregulation), getting the best value for an organizations transportation and logistics dollar involves much more than "getting the best rate"
radio frequency waves
mode of transportation for information carriers are air (wireless), copper wire, and fiber optic cable routes information instantaneously
variable costs
most direct costs are variable because they vary directly and proportionally with amount of units produced
water transportation
most international trade uses water carriers also used domestically in inland water and coastal systems inexpensive compared to other modes but water carriers are slow and inflexible risks include increased cost for added security, expense of qualified security employees to detect and prevent terrorist attacks, weather events and climate change on routes best suited for hauling large tonnage over long distances frequently used for bulk commodities
road transportation
motor carriers are the most flexible mode of transportation and account for about 80% of transportation expenditures in the US advantages: point to point service over any distance for products with varying weight and size, fast and reliable service with low damage and loss rates most likely will use this if pursuing JIT delivery
legal recourse for international suppliers
must follow incoterms specific rules for sea and inland waterway transport how can you take foreign supplier to court if you are in the US? You can't since they are not liable to US law
SCOR process
nested: Russian doll example also 3 tiers level 1: high level configuration ( plan, source, make, delivery, return) level 2: differentiate the strategies of level 1 (make to stock, make to order, engineer to order) level 3: process steps required to execute the level 2 strategies (production & test, packaging, waste disposal)
common carriers
offer transportation service to all shippers at published rates non discriminatory bases, between designated points under deregulation, common carriers have considerable flexibility in establishing rates and routes
total cost of ownership
purchaser should define the TCO before selecting a suppler includes accounting for all relevant costs such as - administrative - follow up - expediting - transportation - inspection & testing - reword - scrap - warranty - holding costs - lost sales, etc. the acquisition price PLUS all the other associated costs becomes the TCO basics: TCO = the pre transaction costs + transaction costs + post transaction costs TCO = material + freight + inventory + admin can be used to highlight cost reduction opportunities, aid supplier evaluation and selection, provide data for negations, etc.
rail and intermodal transportation
rail carriers once dominated but have been declining since WW2. they are relative inflexible, slow, and have higher loss and damage rates, compared to motor carriers has the advantage of lower variable operating costs, making it attractive for hauling large tonnage over long distances
reefer
refrigerated truck
key selection criteria: required delivery time
required date for material receipt could make the selection of shipment mode simple
reverse logistics
returning goods
SCOR best practices
risk vs return matrix high risk, high returns: leading practices (positive, not proven impact) high risk, low returns: poor practices (proven to result in poor performance) high returns, low risk: best practices (proven and positive impact) low returns, low risk: common practices (established, but no significant cost advantage)
strategic sourcing process step 4: develop category strategy
scenario/sensitivity analysis establish cross-functional buy in - business partner concept business case approvals
key selection criteria: available services & experience
shippers want services like warehousing and inventory management in addition to transportation services
single vs multiple sourcing
should the supply professional choose a single supplier or choose to utilize several?
single sourcing
single sourcing advantages: - partnership - set up costs/MO - quantity discounts, - reliability - JIT - intellectual property - past history is good
16 operational levers
specific approaches for interdisciplinary discussions 4 strategies broken down even further into 16 categories of demand power vs supply power
4 basic strategies
specifically designed to support discussions between the company's procurement department and top management supply power vs demand power matrix high demand power, high supply power: seek joint advantage with supplier high demand power, low supplier power: leverage competition among suppliers high supply power, low demand power: change nature of demand low supply power, low demand power: manage spend
meaning of cost
suppliers must cover total costs and receive a profit, or else they will be forced out of the business at times, cost is defined to mean only direct labor and material costs and in a period of depressed business conditions, a supplier may be willing to recover this amount rather than not make a sale at all cost could also mean direct labor and material costs with a contribution toward overhead determining the cost of a particular article or service is not a precise process
SCOR
supply chain operations reference developed by supply chain council framework for evaluating and comparing supply chain activities identifies 5 top supply chain challenges - superior customer service - cost control - planning & risk management - supplier/partner relationship management - talent
VA/VE
systematic approach to analyzing the functions of a product, part, service, or process to satisfy all needed quality and user requirements at optimum total cost of ownership VA = value add/value analysis to the redesign effort of a product or service VE = value engineering, the application of the analytical process to the design stage of a product or service Value = function/cost can be used to avoid unnecessary costs
interest based negotiating
takes into account the many needs of the various parties
Logistics
the management of inventory in motion and at rest the part of supply chain management that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services, and related information between the point of origin to the point of consumptions in order to meet customers requirements. inbound and outbound transportation management
modes of transportation
the means by which people, freight, and information gain mobility the 3 basic means of mobility are land (road, rail, pipeline), water, and air transportation trends include integrating modes (intermodality) and linking modes more closely into supply chain activities
firm fixed price (FFP) contract
the price set it not subject to change under any circumstances buyers prefer this type of contract but if there is substantial risk to price escalation, a supplier may feel that there is too much risk with this type of contract
metrics
the way we measure performance of a supplier strategic: quadrant analysis traditional: KPI (key performance indicators) - quality - quantity - delivery - price - service - financial strength other ways to measure: financial stability, willingness to offer services like consignment inventory
rotterdam rules
these rules establish a uniform and modern global legal regime governing the rights and obligations of stakeholders in the maritime transport industry under a single contract for door to door carriage provide legal framework that accounts for the many technological and commercial developments in maritime transport
3PL
third party logistics provide a wide range of logistics services for clients transactional, operational, and repetitive activities outsourced most often
cost plus fixed price (CPFF) contract
this contract is used if it is unreasonable to expect a supplier to sell at a firm fixed price buyer agrees to reimburse supplier for all reasonable costs incurred in doing the job or producing the required item, plus a specified dollar amount of profit occurs if the item is experimental and the specifications are not firm, or if the costs in the future cannot be predicted
comparing EOQ to total cost
total cost = holding cost + ordering cost + material cost = (Q/2)(H) + (D/Q)(S) + pD H= holding cost+(% purchase price discount)(purchase price x 1-discount) pD = price of the demand = (purchase price x 1-discount)(demand) FOR EACH QUANTITY
activity based costing (ABC)
tries to turn indirect costs into direct costs by tracking the cost drivers behind indirect costs accountants looking for other ways to allocate overhead the cost of tracking indirect costs and translating them into direct costs can be high
TL
truck load shipments type of road carrier both rail and motor carriers offer discounts for this since these will be substantially less per hundred weight than LTL quantities
strategic sourcing process step 1: analyze category spend
understand the organizations spend characterize consumption - item (SKU) - quantity - types - sizes - users - where located - processes used
global sourcing trends
until now, sourcing in low cost regions (such as China) was seen as an obvious step to reduce costs and maintain competitiveness a growing number of companies are re-examining their strategies in favor of less emphasis on low cost regions reasons: - increasing transportation costs - increasing labor costs - appreciation of currency - governmental policies
key selection criteria: carrier financial situation
when damages of freight occurs, there will be claims against the carrier if the carrier is in financial distress, collection on the claims becomes a problem, therefore buyers should avoid those carriers
key selection criteria: reliability & service quality
while 2 carriers may offer freight service between the same points, their reliability and dependability may differ one may be more attentive to customer needs while the other is more dependable on living up to its commitments
