Supply Chain Chapter 5

International purchasing, service providers- entities that offer specialized skills and knowledge are:

-Import brokers -Import merchants -Trading companies

Step 9: Invoice and reconciliation

-The supplier prepares an invoice for the items ordered. The invoice either accompanies the items or is sent separately to the buyer. -The invoice may need to be reconnected to the purchase order and goods receipt before payment is made. Referred to as a "3-way match".

Step 5: Purchase Order (PO) is created and delivered to the supplier

-To inform the supplier of the intent to purchase. -To identify the item to be procured, the quantity required, the requested delivery dates, the price to be paid, the delivery location, and any terms and conditions that relate to the order. -The PO is the Buyer's formal offer to the supplier to obtain the items.

Benefits of outsourcing:

-concentrate on core capabilities -reduce staffing levels -accelerate reengineering efforts -reduce internal management problems -improve manufacturing flexibility

Advantages of Centralization

-concentrated volume -leveraging purchase volume -avoiding duplication -specialization -lower transportation costs -no competition within units -common supply base

Advantages of decentralization

-knowledge of local requirements -local sourcing -less bureaucracy

Risks associated with outsourcing include:

-potential loss of control -increased reliance one suppliers -increased need for supplier management

The four elements of cost are:

-quality -service -delivery -price (QSDP)

Poor supplier quality costs related to defective finished goods must also be considered:

-scrap -rework -recycling -recovery of materials -warranty administration -repair costs

Administrative expenses associated with the procurement activity itself:

-screening potential suppliers -negotiation -order preparation -order transmission

Value-added services may be offered such as:

-special delivery -special packaging -preparation of promotional displays -subassembly operations in a supplier's plant.

Advantages of an e-Procurement system:

-time savings -cost savings -accuracy -real time -management -mobility -track ability -benefits to the suppliers

Request for Proposal (RFP)

A detailed capabilities document used to determine a supplier's capability in the production of a product or service. -items which have not been previously purchased, or not purchased from a specific supplier being evaluated. -the supplier provides their proposal to supply the item including price and delivery.

Purchase Requisition

A document that defines the need for goods and or services. -an internal document -does not constitute a contractually relationship with an external party. -generated by a user department to notify purchasing personnel of items to order, their quantity, and the timeframe. -may also contain the authorization to proceed with the purchase.

Request for Quote (RFQ)

A document used to solicit bids from interested and qualified suppliers for goods or services that the organization needs to obtain. -used for routine or repeat purchased items. -suppliers provide a price and delivery quote on the specific item requested

Insufficient Capacity

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

Return on Assets (ROA) Effect

A high ROA indicates managerial prowess in generating profits with lower spending. -a 10% cost reduction generates a significantly higher ROA than does a 10% sales increase, given the same number/value of assets.

Request for Information (RFI)

A standard business process whose purpose is to collect written information about the capabilities of various suppliers.

Step 10: Payment

Processed by using an appropriate payment method assuming the items is received and meets all of the criteria established on the PO.

Make

Producing (exp: manufacturing) materials or products internally (exp: in operations owned by the company)

Backword Vertical integration

Refers to a company acquiring one or more of their suppliers. -exp: a manufacturer buying the key supplier of a critical material to take ownership of this aspect of their supply chain.

Supply Management

A newer term that encompasses all acquisition activities.

Import Merchants

A person or company engages in the purchase and sale of imported commodities for profit. -They buy and take title to the goods being imported and then sell the goods domestically.

Inventory Turnover Effect

Represents the number of times the company sold through inventory in a given time period. -Increased inventory turnovers indicate optimal utilization of space and inventory levels, increased sales, avoidance of inventory obsolesce. - Inventory is an asset but it is also capital tied up. -Inventory is an asset but it is also represents financial capital tied up and not available for use in other parts of the business. -COGS divided by the average inventory !

Competitive Bidding

A procurement process in which bids from competing suppliers, for the right to supply specified materials or services, are requested. -this process is generally initiated by advertising the scope, specifications, and terms and conditions of the proposed contract as well as the criteria by which the bids will be evaluated, either openly or to a selected group potential bidders.

Bid

A proposal or quotation submitted in response to a solicitation from a contracting authority.

Accuracy

A reduction in errors. A virtual elimination of manual paperwork and paperwork handling.

Time savings

A reduction in the time between need recognition and the release and receipt of an order.

Bidders are generally required to furnish _______ as an incentive to ensure that the successful bidder will fulfill the contract awarded.

bonds

Purchasing

The action of obtaining merchandise, capital equipment, raw materials, services, or maintenance, repair, and operating (MRO) supplies in exchange for money, or its equivalent. -the process of how goods and services are ordered -can usually be described as the transactional function of procurement for goods and services. -commonly used in business to represent the function of and the responsibility for, acquiring materials, supplies and services for an organization.

e-procurement

The business-to-business (B2B) purchase and sale of supplies and services over the internet. -The term used to describe the automation, through web-enabled tools, of the non-strategic and transactional activities that would otherwise consume the majority of a buyer's time. -typically automate some or all of the following: solicitation tools such as RFI, RFP, RFQ ; execution and analysis ; and reverse auction capabilities

Temporary Capacity Constraints

The concept of "extended workbench" which involves short-term supplementing internal capacity with external capacity during time of constraint or overloaded work centers.

Total Cost of Ownership (TCO)

The sum of all the costs associated with every activity in the supply stream of a product. -procurement professionals recognize that although the purchase price of an item remains very important, it is only one part of the total cost ownership. -Sum of the cost elements in QSDP. -impacted by each element of the QSDP -Main insight is that the acquisition cost is often a very small portion of the TCO.

Step 7: Fulfillment

The supplier delivers the items to the buying organization as per the PO.

No competent supplier

There may not be an existing supplier in the market and you may not want to spend the time or effort to develop one.

Multi Sourcing Strategy

To achieve this, use an external supplier in addition to an internal source.

Skill Set requirements of purchasing professionals....

have been changing. Purchasing personnel must today exhibit world-class skills.

Automation provides:

increased visibility of all purchases.

Government sector purchasing and non-profit sector purchasing is somewhat different from private industrial purchasing as the public requires:

openness, visibility, and accountability since it is the public;s money that is being spent.

Specialized knowledge includes aspects of:

- Tariffs - Non-tariff Barriers - Countertrade

Other types of make/buy strategic decision

- backward vertical integration -forward vertical integration

Profit-Leverage Effect

-A decrease in purchasing expenditures directly increases profits before taxes (assuming no decrease in quality or purchasing total cost). -Bottom line impact is $ for $. -a 10% cost reduction generates significantly more profit than does a 10% sales increase. (this is one reason that Procurement managers are under significant pressure from senior management to reduct purchase costs.)

Step 2: Obtain authorization as necessary

-A purchase requisition may be routed to an authorized approver, depending on the type of material or service being requested and/or the dollar value of the request. -Multiple authorizations, may be necessary if the value exceeds a specific threshold.

Step 3: Identify and evaluate potential suppliers

-May be determined from a list of approved suppliers. -Alternatively, a Request for Information (RFI) may be used to collect information from potential suppliers on their capabilities in supplying the material or service.

Step 12: Analysis

-Measurements of the efficiency and accuracy of the procurement process. -Specific PO data and information captured and used during periodic supplier performance meetings.

Step 8: Receipt of Goods

-Once the item arrives at the designated location, the buyer will typically conduct some form of receipt process where the items are checks to ensure that they conform to the details of the PO, including quality and quantity. -A confirmation of receipt may also be sent to the supplier.

Components of TCO:

-Pre-transaction costs -Transaction costs -Post-Transaction costs

Resources for learning about and implementing sourcing practices:

-The Center for Advances Purchasing Studies -Council of Supply Chain Management Professionals (CSCMP) -Institue of Supply Management (ISM)

International Purchasing- Reasons for global sourcing

-The opportunity to improve quality, cost, and delivery performance. -To exploit global efficiencies: access to low cost of labor and materials, take advantage of tax breaks and low trade tariffs -To respond to insufficient domestic capacity -To achieve access to better process and product technology. -Due to a change in the domestic business environment. -To take advantage of reciprocal trade and countertrade arrangements.

Step 6: Supplier Confirmation of the Purchase Order

-The supplier formally agrees to supply the item per the specifications, terms, and conditions described on the purchase order. -The purchase order then becomes a legally binding contract between the buyer and the supplier for the items specified. -the PO becomes a binding contract only when accepted and confirmed by the supplier.

Purchasing Process Steps

1. A need is identified, and a purchase requisition is issued 2. Obtain authorization as necessary 3. Identify and evaluate potential suppliers. 4. Make Supplier Selection 5. Purchase Order (PO) is created and delivered to the supplier. 6. Supplier confirmation of the purchase order 7. Fulfillment 8. Receipt of goods 9. Invoice and reconciliation 10. Payment 11. Close out the Purchase Order 12. Analysis

Purchasing Contrivutes to These Objectives by:

1. Actively seeking reliable suppliers. 2. Working with

The Basic E-Procurement process consists of:

1. An electronic purchase requisition and/or purchase order. 2. An invoice (which might be one with the receipt) 3. A payment. - For high-dollar purchases, the process will generally also include authorization of the purchase order, and reconciliation of the invoice.

The Primary Objectives of Purchasing

1. Ensues an uninterrupted flow of materials and services at the lowest total cost. 2. Improve the quality of the finished goods produced. 3. Optimize customer satisfaction.

Step 4: Make Supplier Section

1. If the buyer already knows which supplier they will buy from, move to step 3. 2. If not a competitive bidding process may be initiated through the use of a Request for Proposal (RFP) or a Request for Quotation (RFQ). 3. A supplier is selected from the RFP or RFQ bids received based on criteria determined by the Buyer, including prices availability quality, delivery costs, ect.

Potential challenges of international purchasing

1. Knowledge of international trade policies and procedures. 2. Awareness and cost of required tariffs and duties. 3. Difficulties in communicating with suppliers due to language barriers, carrying time zones, working weeks, holidays. 4. Locating, evaluating, sourcing, and expediting in global markets. 5. Payments and currency management. 6. Longer time span for negotiations 7. The potential for cultural, political, and labor problems. 8. Potentially longer transportation lead times necessitating additional inventory. 9. Specific and varying documentation requirements. 10. Handling legal matters and the process for settling disputes.

Assessment criteria includes:

1. Participating in and leading multifunctional teams 2. Participating in value engineering efforts 3. Optimize supply base 4. create ESI initiatives 5. Utilize e-procurement 6. Further supplier integration 7. contribute to new product development 8. Improve time to market 9. Initial supplier cost reduction programs 10. creation of strategic alliances

Co-sourcing

1. The sharing of a process or function between internal staff and an external provider. 2. Using dedicated staff at an external provider that works exclusively under your control and direction.

Types of World-Class Skills

1. interpersonal communication 2. ability to make decisions 3. ability to work in teams 4. analytical skills 5. negotiation skills 6. customer focus 7. ability to manage change 8. influencing and persuasion skills 9. strategic skills 10. understanding business conditions

Other factors beyond purchase price must be considered for TCO:

1. quantity discounts 2. cash discounts 3. value-added services (special delivery, special packaging, etc) 4. Administrative expenses 5. Poor Supplier Quality

Purchase Order

A commercial document. -it is the official offer issued by a buyer to a seller to acquire goods or services. -used to control the purchasing of products and services from external suppliers. -indicates types, quantities, and agreed prices for products or services -becomes a legally binding contract only when accepted by the supplier.

Bid Bond

A debt secured by a bidder for the purpose of providing a guarantee that the successful bidder will accept the contract once awarded. If not, the bond would be forfeited.

Payment Bond

A debt secured by a bidder for the purpose of providing protection against a 3rd party liens not fulfilled by bidder.

Contracting

A term used for the acquisition of services.

Mobility

Access virtually anywhere.

Transaction Costs

Activities carried out as part of the actual buy and sell transaction.

Post-Transaction Costs

Activities carried out following the actual buy and sell transaction.

Pre-transaction costs

Activities carried out prior to the actual buy and sell transaction.

Import Brokers

Agents licensed by the government regulatory authority to conduct business on behalf of importers, for a service fee. -They take the burden of filling out import paperwork, and clearing products through customs barriers for importers.

Qualitative factors

More subjective and include control over quality, the reliability and reputation of the potential suppliers (internal or external), and the impact of the decision on customers and suppliers.

High turnover ratio

Beneficial because it means the company is generating sales efficiently to sell inventory.

Forward Vertical Integration

Refers to a company acquiring one or more of their customers. -exp: a manufacturer buying a wholesaler/distributor to take ownership of this aspect of their supply chain.

Trading Companies

Buy products in one country and sell them in different countries where they have their own distribution network. -They mostly work with high production volume products such as raw materials, chemicals, etc. They may carry wide variety of goods (such as from a catalog)

Buy/Outsource

Buying materials, components, or products from a supplier instead of, or in addition to, making them in-house. -exp: buying from a 3rd party external source.

The Make versus Buy Decision

Can be described as "the act of deciding whether to produce an item internally or buy the item from an outside supplier". -a strategic decision -It is important to analyze all of the relevant expense associated with developing the capability to make a product, compared to all of the expenses associated with buying the product. -key factors that must be considered: quantitative and qualitative factors

Service providers of international purchasing

Companies can choose to use service providers that already have the specialized skills and knowledge necessary to deal with international purchasing issues and challenges.

Specialized knowledge

Companies interested in pursing international purchasing arrangements must acquire this particular to buying products and services internationally.

The Institute of Supply Management (ISM)

Defines supply management as the "identification, acquisition, access, positioning, and management of resources an organization needs, or potentially needs, in the attainment of its strategic objectives.

Purchasing Organization

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

Tariffs

Duties, taxes, or customers imposed by the host country for imported or exported goods.

Sealed Bid

Enclosed in a sealed envelope and submitted in response to an invitation to bid.

Government Purchases

Expenditures made in the private sector by all levels of government.

Non-profit purchases

Expenditures made in the private sector by all types of non-profit organizations.

Lack of expertise

Firm may not have the necessary technology and expertise.

Competitive bidding process does not allow:

For negotiations. By law, the contract is awarded to the lowest prices responsive and responsible bidder.

Cash Discounts

May be offered for prompt payment of invoices. -exp: 2/10, net 30

Quantity Discounts

May be offered to encourage buyers to purchase larger quantities.

Non-strategic

If it is a non-strategic item.

Step 11: Close out the Purchase Order

If the PO has been received complete, and all terms and conditions have been meant, then the PO should be closed out in the purchasing system.

Control of transportation and warehousing costs

If you make an item in-house, you avoid transportation costs, and may be able to keep warehousing costs to a minimum.

Real time

Improved communication both within the company and with suppliers.

Quantitative factors

Incremental costs of either making or purchasing the item, such as the availability of manufacturing facilities, needed resources, and manufacturing capacity. -putting all the numbers together

Decentralized purchasing

Individual, local purchasing departments, such as at the plant level, making their own purchasing decisions.

Industrial Buyers

Individuals within an organization who purchase raw materials for conversion into products, and/or purchase services, capital equipment, and MRO supplies.

Countertrade

International trade by exchange of goods rather than by currency.

Performance Bond

Is debt secured by a bidder for the purpose of providing a guarantee that the work will be on time and meet specifications.

Assessing and improving the purchasing function

It is preferable to periodically monitor the purchasing function's performance against set standards, goals, and/or industry benchmarks. -surveys or audits can be administered as self-assessments among purchasing stars as part o the annual evaluation process. -The purchasing function is one of the most value-enhancing functions in any organization.

Benchmarking

Measuring what other businesses do best and matching their performances, is an effective approach to improving your supply chain. -data regarding sourcing practices can be obtained in any number of ways, both formal and informal.

Cost savings

Lower overhead costs in the purchasing area.

Use existing idle capacity

Make use of excess capacity by making a material instead of letting the capacity sit idle.

Organization of Purchasing

Many companies have a Chief of Procurement Officer as part of their executive leadership team.

Inventory considerations

Opting to have the supplier hold inventory of the item or the materials required to produce the item.

Centralized purchasing

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

Management

Purchasing personnel spend less time on processing of purchase orders and invoices, and more time on strategic value-added purchasing activities.

Non-tariff Barriers

Quotas, licensing agreements, embargoes, laws and regulations imposed on imports and exports.

Trackability

Real-time status tracking

Closed competitive bidding

The sealed bids are opened in presence only of authorized personnel.

Step 1: A need is identified, and a purchase requisition is issued:

Request for goods or services submitted to the Procurement/Purchasing organization for action. -typically initiated by a user within an organization

In-sourcing

Reverting to in-hous production when external quality, delivery, and services do not meet expectations.

Quality

Suppliers may have better technology, process, skilled labor, etc.

Cost advantage

Suppliers may provide the benefit of economies of scale, especially for components that are not-vital to the organization's operations.

Brand Strategy

Take advantage of a supplier's brand image, reputation, popularity, etc.

Open competitive bidding

The sealed bids are opened in full view of all who may wish to witness the bid opening.

Procurment

The process of selecting and vetting suppliers, negotiating contracts, establishing payment terms, and the actual purchasing of goods and services. -concerned with acquiring all of the goods, services & work that is vital to an organization. -the overarching or umbrella term within which the action of purchasing can be found.

Low turnover ratio

Unfavorable because it means the company is not selling through products efficiently. The company is likely making/buying too much inventory for demand and may end up throwing out expired or unsaleable products.

Merchants

Wholesalers and retailers who purchase for resale.

Overall lower cost

You may be able to produce the material or product at a lower cost and avoid paying a 3rd party's profit margin.

Better quality control

You may feel that you have more control of the quality of the material/ product than a supplier.

Control of lead-time

You may feel that you have more control over the lead time to produce the product than a supplier.

Project Proprietary Technology

You may not want your intellectual property to be out in the public domain.

Competitive bidding aims at:

obtaining goods and services at the lowest prices by stimulating competition, and by preventing favoritism.