SCM 371 Final Exam

Fixed-price with incentives contract

-initial target price based on best guess estimates of labor and materials, then cost savings because of supplier initiatives are shared at a predetermined rate for a designated time period. -moderate buyer risk -moderate supplier risk

Fixed-price with redetermination contract

-initial target price based on best guess estimates of labor and materials. Then renegotiated once a specific level or volume of production is reached. -lowish buyer risk -highish supplier risk

Cost-based contract

-risk of large contingency fee -parties must agree what costs should be included in price -usually applicable when goods are expensive/complex/important or when there is a high degree of uncertainty regarding material and labor costs -moderate buyer risk -moderate supplier risk

supplier development activities

-sharing technology -Providing performance incentives -Promoting competition among suppliers -Providing necessary capital -Directly involving buyer personnel --Training --Process improvement

sourcing initiatives

-socially responsible sourcing -sustainable sourcing -ethical sourcing

Cost plus fixed fee contract

-supplier received reimbursement for all of its allowable costs up to a predetermined amount plus a fixed fee (typically a percentage of targeted cost) -little motivation to reduce costs -highest buyer risk -lowest supplier risk

Factors driving globalization

-technology advancements -cost pressures -transportation improvements

Pitfalls of performance measurement

-too much or the wrong data -measures are short-term focused -lack of detail -drive the wrong performance -measure behavior vs accomplishments

Common elements of E-sourcing suites

-transmission of product specifications -submission of a bid -acceptance of contract -inspection and receiving documents -accounting audits -submission of payment

defining project success

-within allocated time and budget -at proper performance or specification level -at level accepted by customer, user, or management -with minimal or only mutually agreed-upon charges -without disturbing main work flow of organization

measurement of cost avoidance

Difference between price paid and potentially higher price which might have occurred without effort or action (Frequently considered a "soft" cost reduction)

6th step in supplier development process map

Define key metrics and cost-sharing mechanisms

potential risks of supply base reduction

Supplier dependency Absence of competition Supply disruption Overaggressive supply reduction

Supplier Rationalization & Optimization is the same as...

Supply Base Reduction

Cost plus incentive fee contract

-parties cannot accurately predict costs and quantities prior to execution of agreement -start with best-guess estimates for a cost -after an agreed-on volume is reached, parties review the process and redetermine a revised firm price -T&Cs allow cost savings sharing with supplier -moderate buyer risk -moderate supplier risk

Value engineering (VE)

the application of value principles during product or service design; systematic method to improve the "value" of goods or services at the time of design

Macro indicators: GDP

US/China trade tensions

unique products strategies

Utilize "should cost" (reverse price) analysis to determine whether price is "too high" and standardize requirements

Global sourcing (more...)

__________ purchasing/sourcing is more strategic

International purchasing (more...)

__________ purchasing/sourcing is more transactional

Outsourcing

contracting with suppliers outside the organization to provide products or services that had been performed inside the organization

Purchase price variance (measurement of price)

difference in what you thought you'd pay vs what you pay

supplier development

"Any activity undertaken by a buyer to improve a supplier's performance or capabilities to meet the buyer's short- and long-term supply needs"

Direct-involvement activities

"hands-on," shared personnel in joint projects

Dimensions of a project

- Defined scope - Time Frame - Cost

Value analysis process

- Gather information - Speculate/Brainstorm - Analyze - Recommend and execute - Summarize and follow up

Categories of Supply Base Risk

- Political Risk - Market risk - sourcing risk - Financial Risk - Supplier Risk

Macro indicators: Debt levels

-20% higher than pre-recession -corporate debt in short-term loans instead of long-term bonds -hard to track effect due to rising interest rates and slowing growth

Digital mindset

-AI -Cloud based solutions -Advanced analytics -Cognitive computing

Benefits of Long-Term Contracts

-Assurance of supply -Access to supplier technology -Access to cost/price information -Volume leveraging -Supplier receives better information for planning

Types of Countertrade

-Barter -counter-purchase -offset -switch trading -buyback

Why measure performance?

-Better decision making -Support better communications -Provide performance feedback -Motivate and direct behavior

Ardent partners top hurdles

-Budget constraints -Staff/Talent constraints -Challenges in aligning processes and systems -Lack of engagement (internal) -Lack of technology infrastructure

Buyer-Specific Barriers

-Buying company's purchase volume from supplier does not justify development investment -No immediate benefit of supplier development is evident to buyer -Importance of purchased item does not justify development efforts -Lack of executive support at buyer organization for supplier development -Supplier is reluctant to share information on costs or processes -Confidentiality inhibits information sharing

Macro indicators: Rising interest rates

-Dampen consumer spending and capital investments -Destabilize fragile economies

How to overcome supplier development barriers

-Direct-involvement activities -Incentives and awards -Warnings and penalties

ERP system overview

-Finance -Accounting -Marketing -Sales -Operations -Purchasing

Macro indicators

-GDP -Debt levels -Rising interest rates -Labor costs -Energy

Criteria to look to re-shore or near-shore

-High shipping cost to value ratio -High product variety -Forecast instability -Safety concerns -Premium price items

Incentives and awards (the "carrot")

-Increase future order volumes -Annual award ceremonies

Impact of Globalization

-Interdependence -Connectivity -Integration of economies (social, technical, political)

Contingency management tools

-Inventory -Multiple Sourcing -Use of third-party intermediaries -Scenario Analysis -Currency Hedging -Insurance -Automated Visibility Systems

Supplier Specific Barriers

-Lack of commitment on part of supplier's management -Supplier lacks engineering resources to implement solutions -Supplier lacks required information systems -Supplier is not convinced development will provide benefits -Supplier lacks employee skill base to implement solutions

Barriers of global sourcing

-Lack of knowledge and skills -Resistance to change -Longer lead times -Different business customs, language, and culture -Currency fluctuations -Increased supply risk

Criteria to look to offshore

-Low shipping cost to value ratio -Standard product -Stable forecast -Labor intense -Competes on price

Macro indicators: Energy

-Major swings in crude oil prices ($61 --> $77 --> 62) in last 12 months -US v OPEC

Benefits of global sourcing

-Meeting Competitor Buying Patterns -Availability -Competition to Domestic Sources -Cost/Price (most common reason) -Access to Technology -Quality -Presence in Foreign Market

PESTLE analysis

-Political -Economic -Social -Technological -Legal -Environmental

Firm-fixed price contract

-Price stated in agreement does not change regardless of fluctuations -lowest buyer risk -highest supplier risk

Warnings and penalties (the "stick")

-Pull back current business -Withhold future business

Key drivers of price volatility

-Rising trade tensions between the United States and its major trading partners -Growing levels of nationalism and protectionism that inhibit trade -Uncertainty surrounding Brexit and its larger impact on the European Union -Worsening supply chain risks and costs due to intensifying climate-related events -Volatile energy markets with the U.S. asserting power over OPEC regarding production and pricing -Potential market corrections driven by record debt levels coupled with rising interest rates

E-Sourcing Suites

-Spend analysis -ERFX -Reverse auctions -Decision optimization -Negotiation/ total cost -Total cost reporting -Supplier performance & risk -Contract management & compliance -Receiving & inspection -P.O. issuance & procure-to-pay -Strategic sourcing

Buyer-Supplier barriers

-Supplier does not trust buyer -Organizational cultures are poorly aligned -Not enough inducements to participate are provided to supplier

Risks of Long-Term Contracts

-Supplier opportunism -selecting the wrong supplier -supplier volume uncertainty -supplier foregoes other business -buyer is unreasonable

Factors to countertrade

-Typically involve large dollar amounts -Found in countries with perceived low or non-differentiated (commodity-like) goods

Macro indicators: Labor costs

-Unemployment rates in US and China at full employment -Upward pressure on service costs in tech sector with high demand -Blue collar wages remain relatively flat given factory automation continues to displace workers

managers of critical products should explore opportunities for...

-VA/VE -Cost savings sharing -Collaborative efforts to identify cost drivers -Supplier integration early in product development cycle

Supplier development requires...

-Vision and commitment from both parties -Open communication -Equitable sharing of costs and benefits

Cost sharing contract

-allowable costs shared between parties on a predetermined percentage basis -identify firm set of of operating guidelines/goals/objectives -important when raw material prices are increasing -highish buyer risk -lowish supplier risk

Fixed-price with escalation contract

-clause included to allow for increases or decreases in base price depending on circumstances -low buyer risk -high supplier risk

Enterprises experienced new levels of volatility in...

-commodity and energy pricing -interest and exchange rates -generally in international trading conditions

Settling contract disputes

-direct negotiation -arbitration by third party -mediation by a third party (disputing parties preserve right to final decision) -minitrial (presentations and discussions between executives) -"rent-a-judge" (neutral party conducts a trial) -formal lawsuit

Time and materials contract

-generally used in plant and equipment maintenance contracts -parties cannot accurately predict costs prior to execution of agreement -define labor rate, overhead, and profit percentage (result in "not-to-exceed" price) -high buyer risk -low supplier risk

Pareto principle applied to supplier spend or quality issues

80/20 rule, 20% of suppliers receiving bulk of purchase spend OR minority of suppliers causing the most quality problems

project

A series of tasks that requires the completion of specific objectives within a certain time frame; has defined start and end dates; consumes resources, particularly time, personnel, and budget; operates with limited resources

Total Cost analysis

Applies price/cost equation across multiple processes that span two or more organizations across a supply chain

Re-shoring

Bringing offshore sources back to the home country

Types of supplier development barriers

Buyer-specific Buyer-Supplier Supplier-specific

advantages of supply base reduction

Buying from world-class suppliers Use of full-service suppliers Reduction of supply base risk Lower supply base administrative costs Lower total product cost Ability to pursue complex supply management strategies

International purchasing

Commercial purchase transactions between buyers and suppliers in different countries

Usage costs

Conversion and support costs

opportunity costs

Cost of the next best alternative

Acquisition costs

Costs of bringing product to buyer

ERP

Enterprise Resource Planning

Value analysis (VA)

Examining the elements of a component, assembly, or end product to make sure it fulfills its intended function at the lowest total cost (applies to existing products/services)

Opportunities and Threats

External factors in SWOT analysis

3rd step in supplier development process map

Form cross-functional development team

Value=

Function/Cost

1st step in supplier development process map

Identify critical commodities for development

2nd step in supplier development process map

Identify critical suppliers for development

5th step in supplier development process map

Identify opportunities and probability for improvement

measurement of Cost changes/Cost reduction

Increase or decrease in cost resulting from change in strategy or practice

Source to Pay (S2P) Applications

Increased penetration and easier adoption due to Cloud

Strengths and Weaknesses

Internal factors in SWOT analysis

Purchase price

Invoice amount paid to supplier

4th step in supplier development process map

Meet with supplier's top management team

8th step in supplier development process map

Monitor status of projects and modify strategies as appropriate

end-of-life costs

Net of amounts received/spent at salvage

What can you compare a supplier's performance to?

Other suppliers, Industry standards, Pre-established standards

Global sourcing

Proactively integrating and coordinating common items and materials, processes, designs, technologies, and suppliers across worldwide purchasing, engineering, and operating locations

Cost analysis

Process of analyzing each individual cost element that add up to final price

Price analysis

Process of comparing supplier prices against external price benchmarks without knowledge of supplier costs

U.S. Foreign Corrupt Practices Act

Prohibits American companies from influencing foreign officials with payments or rewards (in order to obtain or keep business) *No dollar threshold amount*

7th step in supplier development process map

Reach agreement on key projects and joint resource requirements

Near-shoring

Relocating sources to countries geographically closer to the U.S.

F

T/F: Emails cannot be contracts

T

T/F: Supplier development is not quick and easy

project management

The application of knowledge, skills, tools, and techniques to a broad range of activities to meet project requirements

Total Cost of Ownership (TCO)

all of the costs incurred before, during, and after a purchase

SWOT Analysis

analysis that examines strengths, weaknesses, opportunities, and threats can provide insight even with limited data

ERP central database

applications with a common technological platform and built-in integration

Ideally, supplier development...

assures strategic suppliers are working towards becoming world class

there should be a higher supplier measurement reporting frequency to the __________

buyer

What are the types of supplier measurement techniques?

categorical, weight-pointed, and cost-based

long-term contracts

contract purchases that are made on a continuing basis for a specified or indefinite period of time, typically exceeding one year

short-term contracts

contract purchases that are routinely made over a relatively limited time horizon (typically 1 yr or less)

Name the 3 quantitative variables for supplier measurement

delivery performance, quality performance, and cost reduction

Optimization

detailed analysis to ensure only the most capable and highest performing are kept

the key to Supplier Rationalization & Optimization is...

determining the "right" number of suppliers (rightsizing)

generic products strategies

focus on total delivered price and automate to reduce purchasing involvement

commodities

high value, high number of suppliers

Critical

high value, low number of suppliers

Rationalization

how many and which suppliers to maintain

Countertrade

international trade where there is full or partial exchange of goods for goods rather than for currency

commodities strategies

leverage preferred suppliers and price analysis using market forces

generics

low value, high number of suppliers

unique

low value, low number of suppliers

the best way to manage a project

manage through influence

"Improve or else" approach

provides all suppliers, regardless of performance history, a chance to remain in the supply base (need to improve quickly)

disadvantages of pareto principle with suppliers

possible elimination of capable suppliers simply for receiving fewer purchase dollars, also could eliminate needed suppliers that have capabilities not currently being used (i.e. seasonal)

spot contracts

purchases that are made on a nonrecurring or limited basis with little or no intention of developing an ongoing relationship

Competency Staircase Approach

requires suppliers to successfully navigate a succession of performance milestone improvement to remain in the supply base

Triage approach

requires the systematic evaluation of the performance of individual suppliers and placement into one of three categories

Supplier performance measurement

requisite methods and systems to collect and provide information to measure, rate, or rank supplier performance on an ongoing basis

digital transformation trend

technology is replacing people in supply chain management -- and doing a better job

Technology will no longer be a tool for helping processes...

technology will be the definer of new capabilities within the organization, such as advanced, best-practice processes in which manual ones are automated and some are eliminated entirely

Offshoring

the relocation of business processes and services to a lower-cost foreign location

Arbitration

the submission of a disagreement to one or more impartial persons with the understanding that the parties will abide by the arbitrator's decision

Critical path method (CPM)

used when there is a single known time for each activity with no variance

Program Evaluation and Review Technique (PERT)

used where time estimates are variable or uncertain, most likely vs pessimistic vs optimistic

Gantt Chart

visually displays the tasks and times associated with a project

commodities (type of products that...)

which type of products are involved in a competitive market situation and using traditional bidding approaches?

critical products (type of products that...)

which type of products require majority of buyer's focus?