SCM 300 Module 2

"Total Cost of Ownership (TCO)"

" total cost of ownership is the cost of owning an item over the entire lifetime of the item."

Supplier Scorecards

"A report card that can be used to communicate desires before a sales presentation or shipment. It can then also communicate performance outcomes after the sales presentation or shipment. The results can then be used to discuss changes that might be required in future interactions.

Stock Keeping Unit (SKU)

"A specific product or service's identification code used to track inventory or catalog sales."

Supplier Base

"An established group of suppliers from which a company makes most of its purchases.

Supplier Certifications

"Assessments that help ensure that a buyer's suppliers all meet the minimum supplier standards. Some buyers may not even consider purchasing from a supplier unless that supplier first gets certified. Supplier certifications can be developed by the buyer themselves or they may be developed by an outside agency.

Pros of low inventory levels

"Less storage space required - Costs of holding inventory may be lower Lower chance of inventory obsolescence and shrinkage Less inventory typically means less materials handling requirements Less money invested in inventory means more money available for other investment opportunities"

Purchasing Documents

"Material Requisition (MR) - The document used to initiate the purchasing process. It is filled out by the intended user and then sent to their procurement office to communicate that need. It will not only signal that a product or service is needed; it may also list quantity needed, product/service description and/or specifications. Request for Quotation (RFQ) - If the product or service requested is not in stock then an RFQ can be issued to one or more potential suppliers. This document simply asks the potential supplier to provide a detailed quote that might include more than just a per unit price, it may also include delivery date, and payment terms. Be aware the quote provided may only be the first step in a negotiation with a supplier. Purchase Order (PO) - If a supplier is chosen and a quote is deemed acceptable, then an order can be formally requested through the use of a PO. A PO is a contract that states the terms and conditions of the order. Once the PO is accepted by the supplier, a signed copy returned to the buyer represents a binding contract."

Reason for making

"Proprietary technology - Not only can others not make it, but our company does not want to tell anyone else how to make it. No competent supplier - Others can make it, but not as good as we can. Better quality control - We like it made a certain way and are concerned others will not be as detail oriented. Idle Capacity - We have the machines and people to make it. Why not take advantage of the idle capacity? Control - We want it faster, cheaper, better...than others are willing to make it. Perhaps the demands of our supply chain do not allow us to have suppliers that can dictate so much control over our supply chain flexibility."

Single Supplier

"Quantity discount opportunities - When buying in large quantities a buyer may have negotiating leverage and economies of scale may be easier to achieve. This goes for both the purchase price of the tires and the transportation costs. Lowest total cost - Perhaps this supplier's product and service package cannot be matched by any other supplier. Good product, reliable supplier, fast delivery. Intellectual property advantages - Perhaps no other company can make a tire like the one offered by this company. Quality control - With a single tire supplier a buyer can be fairly certain that all the tires are very similar in design and quality, and that all business interactions will be similar. Relationship management is easier - Sharing and "

Inventory

"The items that are owned by a company for the purpose of present or future sale or for use in day-to-day operations.

How does Honda use report cards?

Honda, for instance, uses a report card to monitor its core suppliers, some of which may be even second- or third-tier vendors. Unlike most Fortune 1,000 companies, which send reports to suppliers annually or biannually, Honda sends reports to its suppliers' top management every month. A typical report has six sections: quality, delivery, quantity delivered, performance history, incident report, and comments. The incident report section has a subcategory for quality and another for delivery. Honda uses the comments section to communicate how the supplier is doing. We've seen comments like "Keep up the good work" and "Please continue the effort; it is greatly appreciated." Honda also uses this section to highlight problems.

What did American companies do to copy the Japanese partnering model? Despite the efforts of American car manufacturers, why did cost resurface as the key criterion

First, companies were more easily able to source globally the development and spread of Internet-based technologies allowed companies to get suppliers to compete on cost more efficiently—and more brutally—than they used to

What are the general steps outlined in the supplier-partnering hierarchy? How should companies go about fulfilling each step?

First, they understand how their suppliers work. Second, they turn supplier rivalry into opportunity. Third, they supervise their vendors. Fourth, they develop their suppliers' technical capabilities. Fifth, they share information intensively but selectively. And sixth, they conduct joint improvement activities. Some of these steps support others.

Explain the benefits of Honda's Best Practices program to both Honda Suppliers and Honda.

To be successful, an extended lean enterprise must have leadership from the manufacturer, partnerships between the manufacturer and suppliers, a culture of continuous improvement, and joint learning among the companies in the supplier network. That's what Toyota and Honda are ultimately trying to achieve through their remade-in-America keiretsu.

Japanese cars are seen as durable, reliable and high in quality. How do they both improve quality and manage cost?

Tough love had small companies to start and then allowed them to grow

Despite the low cost wage opportunities presented by Chinese and Indian suppliers Toyota and Honda did not switch suppliers. Why?

Toyota and Honda don't source from low-wage countries much; their suppliers' innovation capabilities are more important than their wage costs.

What is kieretsu?

close-knit networks of vendors that continuously learn, improve, and prosper along with their parent companies.

How did the relationship between Honda and Atlantic Tool and Die develop?

it sent one of its engineers to spend a year with the Cleveland-based company. For 12 months, the middle manager studied the way the organization worked, collected data and facts, and informally shared the findings with his counterparts at Atlantic. Over time, they agreed with the Honda engineer's conclusions and implemented many of his suggestions, which led to marked improvements on the shop floor. About six months into his stay, the Honda engineer asked Atlantic's top managers to show him the company's books, which they reluctantly agreed to do. By the time the Honda engineer left, he knew almost everything about Atlantic's operations and cost structure.

How do American suppliers feel about Japanese and American car manufacturers?

not good, they are evil, not trust worthy, hateful

centralized purchasing system

"Centralized purchasing - A purchasing system where all corporate employees send material requisitions to a single purchasing department. The centralized purchasing department is then responsible for all purchasing decisions, including, supplier choice, order size, and payment terms. Advantages of Centralized Purchasing Avoid duplication - Centralized purchasing departments know the company's total inventory. If a request is made the purchasing department would be aware if someone else in the company already has the needed item and is not using it. Volume Discounts - By pooling together common orders from different departments, large orders can be used to take advantage of quantity discounts. Consolidated shipping - Perhaps different departments in one company need pens, paper, and tape. These are all items that might come from a single supplier. Multiple orders from a single supplier all being shipped in a single shipment. Established supply base- A centralized purchasing system allows a purchasing department to have a core group of suppliers that it knows and trusts. It also allows for deep supplier relationships to form. Supply specialization - In a centralized purchasing system certain purchasing employees can develop expertise in buying certain categories of products or services."

Inventory Risk

"Company risks: Theft or damage to inventory, late shipments from supplier, employee sickness, employee strike, machine malfunctions, harsh weather Supplier risks: Employee sickness or strikes, sudden increases in demand for your company's supplies, the risks posed by their suppliers Customer risks: Sudden increase in demand, damage to customer's inventory"

Multiple Supplier

"Competition can breed innovation - Multiple tire suppliers fighting for a larger percentage of our tire purchases will work harder to set themselves apart in both product and service dimensions. Risk is spread out among multiple suppliers - If one tire supplier encounters difficulties, the other tire suppliers are ready to step in and carry the additional load. Capacity Flexibility - If more tires are needed immediately a buyer can call upon their large tire supplier base to increase supply quickly. Location advantages - For car companies that have multiple plants around the country or even around the world, having multiple suppliers may help ensure that a tire supplier is always relatively close by. This can reduce transportation costs and also reduce lead times. This can help reduce inventory requirements."

Choosing a Supplier

"Consumer needs- Do they have a part that will make your product more desirable to your customer? Cost, Quality, Speed, and Flexibility - What do you and your customer want? Are your goals similar to their goals? Technological capability - Do they offer a product or service no one else can offer? Location - Will the distance between their facility and your facility significantly increase lead time or increase supply chain risk? Will transportation and tariffs pose cost challenges? Information Technology system - Will their system and your system be able to share data selectively and securely? Ability to innovate - Do they have money to invest in R&D? Are they interested in innovating? Your product can't improve if their parts do not improve. Capacity Potential - Is their present capacity or their potential for growing capacity sufficient to help you meet your growing demand? 2nd and 3rd tier suppliers - If we look farther downstream in the supply chain are we comfortable with the risks or opportunities their suppliers may pose? Are they willing to let us develop a relationship with their suppliers? Reliability - How often do they actually deliver on their promises? When they can't meet our deadlines what is the typical outcome? "Service - In addition to great products, what else do they offer? If we are buying a commodity where the market drives the price, what does this supplier offer to differentiate themselves from their competition?"

Reason for Outsourcing

"Insufficient Capacity - We could make it (we have the know-how), but we just don't have the time and resources to make it. Lack of expertise - We don't know how to make it. No competent supplier - We know how to make it, but not up to the standards we'd like. Our suppliers could definitely make it better. Better use of resources - We know how to make it, but outside suppliers can produce it to acceptable standards faster and/or at a lower cost. "

Cost of Inventory

"Cost to Purchase - The cost to purchase the inventory. Holding Cost - The cost of holding the inventory. Some of the costs this may include are: Rent for the storage facility, energy and equipment required to keep inventory in an acceptable environment, insurance, security personnel, employees that handle inventory, etc. Ordering Cost - The costs associated with placing an order for inventory. This might include the cost to research suppliers, negotiate purchase, the cost to have items shipped, and the upkeep of any electronic ordering system. Stockout Cost - The costs associated with not having enough inventory on hand to meet customer demand. This might include loss of the unmet sale in the present, the loss of any future sales from this customers, cost of expedited shipment, and the cost of altering operational plans to expedite production

Decentralized purchasing system

"Decentralized purchasing - A purchasing system where material requisitions are sent to a departmental purchasing department. Thus a company with a decentralized purchasing system might have a purchasing department in each department, or perhaps each office might have the ability to make purchases on their own. Advantages of Decentralized Purchasing Closer Knowledge of Requirements - In certain cases the employee requesting the material has a better understanding of the items required and the suppliers. Decentralized purchasing may allow users to buy the best item for the intended purpose. Closer Knowledge of the Suppliers - Especially when departments are spread across the country or around the world, there are certain items and services where local buyers would be able to make better purchasing decisions than a faraway central purchasing department. Speed of purchase- In a decentralized system when a need arises a product can be bought immediately. In a centralized system multiple documents and approvals, as well as a drawn out purchasing process may slow the purchasing of a product or service."

Vertical Integration

"Forward integration - Taking over supply chain responsibilities formerly performed by downstream supply chain partners. (Example: A bakery decides to open up a sandwich shop. Rather than just selling bread to sandwich shops, they now forward integrate and use their own bread for their sandwich shop) Backward integration - Taking over supply chain responsibilities formerly performed by upstream supply chain partners. (Example: A bakery decides to purchase a flour company. Rather than purchase flour from a flour supplier they now use their new flour branch to both sell flour to other companies (including competitors) and they also use the flour in their own bakery."

Pros for high Inventory

"Higher levels of customer service - Having inventory will help a company address their immediate demand for product Quantity discounts may be possible - Lower per unit costs Fewer orders will need to be placed - Possibly lower ordering costs and transportation costs Greater security against unexpected demand variability

"Independent vs. Dependent Demand"

"Independent demand item: An item for which demand levels are not directly impacted by the demand of another related item. Dependent demand item: An item for which demand levels are directly impacted by the demand of another related item."

Inventory Classifications

"Raw Materials - Typically refers to material, parts, or components that will be used to create an end item or service. These materials have not yet begun their manufacturing/transformation into a finished good or service. (Examples: unassembled handles, shafts, and shovel blades) Work-in-Process (WIP) - Items that have begun the manufacturing process but are not yet completed. ""(Example: Partially assembled shovels)" "Finished Goods (FG) - Items that are completed and ready for shipment at a manufacturing facility or assembly plant. (Example: Fully assembled shovels) Maintenance, Repair, and Operations (MRO) - Items that are not intended as part of the finished goods but are important to the daily operations of the company. (Examples: Desks, computers, cleaning supplies, oil/lubricants, factory equipment) Market Inventory - Inventory that is readily available on the shelf. (Example: Shovels on the shelf of Home Depot) Safety Stock (buffer stock) - Inventory kept to account for variation/uncertainty of demand. (Example: 100 shovels are sold per week Sunday to Saturday. Shipments arrive Sunday morning. Stores always wants to start Sunday with 125 units of inventory. The additional 25 units are safety stock) Anticipation Inventory - Inventory that is created and stored for future use. Typically used to absorb uneven rates of demand that may be related to seasonal demand or planned price reductions. (Example: Shovels assembled in summer and stored through fall in anticipation of large winter demand would be classified as anticipation inventory.) Pipeline Inventory - Inventory in transit between two points. Those two points establish the pipeline. So the inventory does not necessarily need to be on a truck or train[...]" "Pipeline Inventory = Periodic demand * Lead time Pipeline Inventory = dL"

"Steps in the Purchasing Process"

"Requisition - Someone discovers they need something (Item A). A materials requisition (MR) is issued by the person in need of Item A to inform procurement to get Item A. Supplier Selection - Procurement searches their supplier base to see if one of their present suppliers sells Item A. If no one does, they must find a supplier. If more than one company sells the item they will need to choose a supplier. In either case, procurement may send out a Request for Quotation (RFQ) to get a price for Item A. A negotiation may ensue. Place order - Once a supplier is chosen and a price for Item A is agreed upon, a Purchase Order (PO) may be issued by procurement to formally order the item. Track Order - In an effort to inform the eventual user of Item A as to when Item A will be available, procurement will likely track the order to see if it is due to arrive when promised. Receive Order - Once Item A arrives it will likely be inspected, scanned into inventory, and moved either to where it will be used or onto a shelf for storage.

Types of Inventory

1. Raw Materials/Components, Work-in-Process, Finished Goods 2. Spare and/or replacement parts 3. Capital Equipment & MRO (Maintenance, repair & operations) Storage - Space, Hot/Cool Environment, Energy Requirements, Labor, Handling, Buy/Lease, Cost Transport - Vehicle, Cool/Heat, Fuel, Labor, Packaging, Cost Shrinkage - Pilferage, Security, Lost Items, Damaged, Obsolescence Money - Cash, Financing Terms, Taxes, Insurance Legal Considerations - Licenses, Certifications, Other Laws Other Inventory Needs - Additional inventory needs or options. Limits on space, money, security, quotas...

How did Johnson Controls benefit from its' relationship with Toyota?

In 2003, while Trim Masters had a 32% share of the business, Johnson Controls had a 56% share. Because of its investment in the joint venture, Johnson Controls has benefited from Trim Masters' success. Toyota turned a need to create competition between suppliers into an opportunity to cement its relationship with an existing vendor.

Lead Time / Lot Size

Lead Time - Time elapsed between customer placing order and order being received by customer Lot Size - Typically refers to the order size