SCM 4351 Exam 1
True Category Spend
Actual spend in particular supply category per specific time per & contract cycle
steps of strategic sourcing process
Analysis 1. spend analysis 2. supply market assessment 3. total cost analysis Strategy 4. supplier identification/assessment 5. sourcing strategy Execution 6. supplier negotiation/selection 7. contract management/evaluation
example of threat of new entrant
GE bought Baker Hughes
target pricing originated from?
Japanese Japanese think "Height of arrogance" @U.S. because we say "build it, they will come" Japanese ask customer what they want, and give it to them
Who developed Motorola's six sigma program?
Keki Bhote
What are each side favorable for on Porter's five forces?
Left side is more favorable to the supplier. Right side is more favorable to the buyer.
Spend leakage formula
Maverick Spend + Non-Contract Compliance = Spend Leakage
Determinant of Supplier Power
The power of suppliers to drive up the prices of your inputs
Determinant of Buyer Power
The power of your customers to drive down your prices
Competitive Rivalry
The strength of competition in the industry
Most prevent problems in conducting spend analysis?
They are often quality problems with vendor names.
Target pricing
This is what they developed within Japan with selling price - profit = allowance table costs compared to previous traditional pricing within America, which was not successful
Formula for True Category Spend
Total Spend - Non-addressable Spend = True Category Spend
Sourcing Data Systems:
- Accounts Payable: invoice and Payment Data - Purchasing/E-Procurement: Requisition, P.O. -Receiving: Packing Slip, Receiving Report - Materials Management: Inventory, MRP0 - Note: spend visibility will be directly related to your ability to extract the relevant data
In-depth Analysis of Each Major Supplier in a Category includes:
- Cost chain-total operating expense - Key financial indicator - Geographical scope - List of business issues impacting company/ info market analysis
Single vs sole source:
- Sole source- only source I have (only option you have) - Single source- you choose to only have 1 source out of the options you do have
Spend density tells us...
- how much of our current spend is with our top 5/10 suppliers? - How well we are rationalizing suppliers - Narrow down suppliers, supplier density increases
Spend analysis objective:
1) Ascertain true category spend: 2) Non-addressable Spend 3) Identify strategic sourcing opportunities 4)Assess rate of maverick spend.
Spend analysis organizes spend data in individual spend categories with:
1) Supplier hierarchies 2) Regional divisions (SBU)
Spend analysis organizes aggregate spend data with:
1) supplier hierarchies (LG →SM supplier on spend) 2) Spend categories 3) regions/business divisions (SBU)
4 strategies in the Motorola six sigma program
1.Competency Staircase Approach 2.Triage Approach (TechnipFMC: Exit, Fix, Grow) 3.Improve or Else 4.20/80 Approach
The average potential savings
10%
What is the average potential savings through commodity classifications?
10%
what percentage of cost can be changed
15%
what percentage of cost is locked in design stage
85%
what is sunk cost
Fixed costs that have already been incurred and paid for.
learning curves-
As individuals and firms become more familiar with a task or process, the average amount of direct labor to perform that task or process declines at a predictable rate. Suppliers who should be experiencing a learning curve should provide a continuous stream of price reductions. Learning curve analysis: Across time, value goes up, labor costs goes down ( direct labor decreases)
Pareto Chart:
Classify data in descending order
Within Porter's 5 force model designed to measure?
Competitive intensity
Traditional pricing
Cost + profit = selling price
Target costing:
Determines a product life cycle cost
Direct spend vs indirect spend-
Direct spend:into our finished product, spend that is on products associated with raw materials, found in income statement, highly fragmented, categorized on higher granularity in order to identify better sourcing opportunities Indirect spend: all of the spend on overhead, not affecting the product. Decentralized and examples of this are income statements, business services, travel, softwares etc.
Porter's Five Forces Model definition
Porter's Five Forces Analysis is an important tool for assessing the potential for profitability in an industry. With a little adaptation, it is also useful as a way of assessing the balance of power in more general situations.
Value analysis:
Post-production
Value engineering:
Pre-production
Which quadrant does someone typically want?
Q1 (High opportunity and low difficulty)
If you can't get a Q1, what do you want?
Q3 because it's not hard, but still experience and able to do well and deliver results.
supplier density formula
Supplier Density = % Spend With Top 5/True Category Spend
•Non-Cooperative:
Supplier unwilling to give your pricing data, so you must estimate cost drivers from market data.
Define Spend analysis
Systematic analysis of historical (1-3 years) spend data.
Leverage spend
The amount of extra power that the buying firm is able to bring into the contract negotiations high value low risk
Spend visibility
The amount of spend data that you can access through the firm's information technology systems.The quality of spend analysis is directly correlated with the quality of spend visibility. Ability to extract relevant data, new software packages (ARIBA, ERP) help us see exactly where the spending occurs.
The Threat of New Entry
The ease with which new competitors can enter the market if they see that you are making good profits (and then drive your prices down).
The Threat of Substitution
The extent to which different products and services can be used in place of your own
Opportunity assessment model
Utilized by senior sourcing professionals to determine which sourcing event should be next in the queue. - Strategic sourcing opportunities are segmented based on Size of the opportunity and Difficulty of implementation
who uses opportunity assessment model
VP SCM CPO
formula for variable cost
Variable Cost = Labor Costs + Material Costs
_______________ is the only cost relevant to decision (additional labor + material)
Variable cost
vendor normalization vs. vendor encirclement
Vendor normalization: name variants standardized Vendor encirclement: parent/child relationship established
value analysis is in which stage?
post production- assembly line
Value engineer is in which stage?
pre production- design stage
Micro level analysis (supplier market assessment)
analysis of the supply market that provides context for sourcing strategy.
SWOT analysis Purpose
assists in the development of supplier selection and negotiation strategies (It is typically employed for a market; however, it can be applied effectively for individual suppliers as well.)
What is utility?
benefits or satisfaction
Porter's Five Forces Model Who has more leverage? buyer or supplier?
buyer has more leverage
Who typically handles the strategic sourcing process from step 1-5?
category manager
3 cost analytic technique
common feature cooperative non cooperative
formula for leverage spend
demand aggregation + supplier rationalization= Leverage spend
Types of spend category
direct spend indirect spend MRO spend
Nested
diversity spend
Waterfall chart
excellent for showing commodity spend trend's- make easy visual comparison
opportunity assessment model Q2:
high size opportunity high difficulty of implementation
opportunity assessment model Q1:
high size opportunity low difficulty of implementation
Pivot table:
include nested dimensions
Swot analysis name internal and external factors
internal factor: strength, weakness external factor: opportunity, trends/threats
•Cooperative: Supplier
is willing to give your some pricing data, typically through an RFI.
Total cost that goes down is the __________ per unit
labor cost
3total cost analytic techniques
learning curve target pricing (target cost) value analysis/engineering
opportunity assessment model Q4:
low size opportunity high difficulty of implementation
opportunity assessment model Q3:
low size opportunity low difficulty of implementation
Vendor enrichment
matching vendors and parents. Identify parent/child relationships. This relationship needs to be established to create a hierarchy
Spend leakage
maverick spend + non contract compliance, drains savings from proposed theoretical savings ex: if the spend with the non preferred suppliers is high that's where the leakage is because the prices and terms with the suppliers are usually better than the ones in the effect with non preferred suppliers.
demand aggregation
max the value of the supply contracts, thus increasing leverage- combining related spend= geographical, related categories, extend contract term
Tree mapping
method of visualizing hierarchical data with proportionally sized square
Vendor normalization
name variants are standardized ex: schlumberger SLB. All vendor names need to be associated with their correct names ex: ADM Milling G P should be associated with ADM Milling Company which is the official name of the subsidiary
supplier rationalization
optimizing the supplier base who receive a part of the supply contract to max the leverage without increasing the supply risks Spend per supplier goes up so you get more benefits & leverage
Finding functional equivalence, what does that mean?
reduces costs (item level rationalization)
identify supplier rationalization risk
select wrong supplier to remain in the optimized supply base cutting the supply base too deeply
Multidimensional report
show all spend across all dimension at same time
Map report:
show country/ regional spend on geographical map. (appeal to execs)
Cross-tabular reports:
shows dimension as row/column
Spot Purchase
single purchase order, typically at the going ("spot") price in the marketplace
Non-addressable Spend
spend not relevant to category or have no control (taxes, tariffs, duties, etc.)
Maverick spend
spending that was not cleared and is made outside of agreed upon contracts. spend out of strategically sourced contract
supplier density gets larger as...
supplier base gets smaller
Blanket contract
supply contract covering a supply category for an extended period of time. Prices terms & conditions for the term fixed for the term of the contract Multiple delivery dates over a period of time, take advantage of predetermined pricing. We need this contract the most
formula for total cost
total cost = fixed cost + variable cost
Score carding-
upplier performance assessment system where each supplier is evaluated across a series of performance metrics, typically on a Likert scale (e.g., 1-10), and then a composite score aggregated for comparison with other suppliers. Enables the reporting of metrics through KPIs and comparison with benchmarks and targets.
purpose of opportunity assessment model
used to figure which project to do next
Value is...
utility in relation to price or cost
Formula for value of firm's spend
value= utility/ price or cost
Remedy for problems in access to data: spend visibility
work with acct/fin/IT: new software packages
name 2 variable of opportunity assessment model
y= size of the opportunity x= difficulty of implementation
purpose of Cost Analytic Techniques
•To analytically determine what an item should approximately cost. Particularly critical on engineered or designed-to-build (customized) products.