Supply Chain Exam 2

Total Cost of Ownership

Made up of all costs associated with the acquisition, use, and maintenance of a good or service

Major Manufacturing Strategies

Make-to-Stock (MTS) Make-to-Order (MTO) Assemble-to-Order (ATO) Engineer-to-Order (ETO)

What is Six Sigma?

A quality management process Six Sigma focuses on improving the quality of process outputs by identifying and removing the causes of defects (errors) and minimizing variability in manufacturing and business processes. The goal of Six Sigma is to attain less than 3.4 Defects Per Million Opportunities (DPMO) Six Sigma is a structured and data-driven approach to drive a near-perfect quality goal, i.e., "Zero Defects"

Manufacturing Strategies

Companies must develop a manufacturing strategy that suits the types of products that they produce, their customer's expectations, and their strengths Manufacturing strategies can vary significantly depending on the product and/or the customer requirements Developing a manufacturing strategy that suits a company's strengths is essential for establishing and maintaining an effective supply chain

Government and Non-Profit Purchasing

Government purchases are expenditures made in the private sector by all levels of government Non-Profit purchases are expenditures made in the private sector by all types of non-profit organizations 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

(1) Waste Reduction

Firms reduce costs and add value by eliminating waste from the production system Waste encompasses wait times, inventories, material and people movement, processing steps, variability, any other non-value-adding activity

Sourcing Categories

1. Non-Critical 2. Bottleneck 3. Leverage 4. Strategic

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).

Additional Make versus Buy Concepts

In-sourcing: - Reverting (i.e., going back) to in-house production when external quality, delivery, and services do not meet expectations 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

Organization of Purchasing

Many companies have a Chief Procurement Officer (CPO) as part of their executive leadership team

LEAN

Operating philosophy of waste reduction and value enhancement. It was originally created as the Toyota Production System (TPS) by key Toyota executives

(3) People Involvement

Six Sigma follows a structured methodology. It is important that all Six Sigma team members are assigned specific well-defined Six Sigma "roles" with measurable objectives. A company must involve all its employees in the Six Sigma program, and provide opportunities and incentives for employees to focus their talents and ability to satisfy customers. All employees are responsible to identify quality problems

Merchants

Wholesalers and retailers who purchase for retail

Pain

Using a penalty or punishment as a negative outcome for poor performance, cost overruns, quality problems, etc - Buyer could impose a financial penalty (i.e., fine) on the supplier for poor performance. - Buyer could reduce future business with the supplier for poor performance - Buyer could implement a bill-back amount equal to, or a percent of, the incremental costs resulting from poor performance

Six Sigma Methodology - Three Foundational Aspects

1. Quality is Defined by the Customer 2. Use of Technical Tools 3. People Involvement

Bid

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

Import Brokers

Agents licensed by the governmental 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

TCM -vs- Strategic Alternatives

As volume goes up . . . Manufacturing and Procurement costs go down due to economies of scale. - Generally-step function applies as more capital is required to produce. Inventory and Warehousing costs go up. Transportation costs go down, but level off at high volumes as the shipping container gets filled to capacity and another container must be used

Spend Analysis

Collecting, cleansing, classifying, and analyzing expenditure data for the purpose of decreasing costs, improving efficiency, and monitoring compliance

(7) Continuous Improvement (Kaizen)

Continuous approach to reduce process, delivery, and quality problems, such as machine breakdown problems, setup problems, and internal quality problems

Role of Management

Create the cultural change needed for LEAN to succeed: - Provide an atmosphere of cooperation. - Empower workers to take action based on their ideas - Develop incentive systems to recognize and reward LEAN behaviors

Waste Categories ("DownTime")

Defects Overproduction Waiting Non-Utilized Talent Transportation Inventory Motion/Movement Extra-Processing

Sealed Bid

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

Cost of Poor Quality - External Failure Costs

External Failure Costs occur when the product or service does not meet the designed quality standards, but is not detected until after the product or service is delivered to the customer They include costs for: - Handling and responding to customer complaints. - Failed products that must be replaced or services that are repeated. - Repair of returned products and products still in the field. - Handling and investigation of rejected or recalled products, including return transportation costs

Yellow Belt

Has a basic understanding of Six Sigma Methodology and the tools in the DMAIC problem solving process. A team member that reviews processes and process improvements in support of a Six Sigma process improvement project. A person who has passed the Green Belt certification exam but has not yet completed a Six Sigma project

(6) Workforce Commitment

Managers must support LEAN Manufacturing by providing subordinates with the skills, tools, time, and other necessary resources to identify problems and implement solutions

Operations Management

Operations Management refers to managing the process to convert resources into goods and services, in alignment with the company's business strategy as efficiently and effectively as possible, while also controlling costs The nature of how Operations Management is carried out varies by company and depends on the nature of the products or services in the portfolio

Joseph Juran

Quality Planning: identify internal / external customers and needs - Develop products satisfying those needs. - Mangers set goals, priorities, and compare results. Quality Control: determine what to control - Establish standards of performance. - Measure performance, interpret the difference, take action. Quality Improvement: show the need for improvement - Identify projects for improvement. - Implement remedies - Provide control to maintain improvement

Evolving Responsibilities of Supply Chain Professionals

Supply chain professionals have been tasked with a larger role, and an evolving set of responsibilities over the years - Ethics and sustainability are A significant concern in the Strategic Sourcing process

Leverage Sourcing

Commodity items where many alternatives of supply exist and supply risk is low. Spend is high and there are potential procurement savings (supply risk low, value high) 1. Consolidate volume as a negotiation tool 2. Use competitive marketplace to reduce costs 3. Automate supplier interfaces to minimize process related costs

Philip Crosby

He introduced the concepts of zero defects, and the focus on prevention not inspection. Demonstrated what a powerful tool the cost of quality could be to raise awareness of the importance of quality. Referred to the cost of quality as the "price of nonconformance" and argued that organizations choose to pay for poor quality He introduced the four absolutes of quality: 1. Quality is conformance to requirements 2. The system of quality is prevention. 3. Performance standard is zero defects. 4. The measure of quality is the price of nonconformance

Non-Critical Sourcing

Routine items that involve a low percentage of the firms' total spend and involve very little supply risk (Low supply risk/Low value) 1. Simplify and streamline the purchasing process 2. Reduce number of suppliers and simplify ordering 3. Transfer buying responsibility to "users' within the company

Preferred Suppliers Provide

- Product and process technology, and expertise. - Product development and value analysis. - Information on latest trends in materials, processes, or designs. - Capacity for meeting unexpected demand. - Cost efficiency due to economies of scale

Reducing Waste Results in

- Reduced cycle times - Greater throughput - Better productivity - Improved quality - Reduced costs Only 1-10% of the process steps or activities are value-added

The Primary Objectives of Purchasing

1) Ensure 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

Supplier Recognition Programs 3 Attributes

1. Companies should recognize and celebrate the achievements of their best suppliers 2. Award winners exemplify true partnerships, continuous improvement, organizational commitment, and excellence 3. Award-winning suppliers serve as role models for other suppliers

Supply Management

A newer term that encompasses all acquisition activities beyond the simple purchase transaction

Request for Information (RFI)

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

Contracting

A term often used for the acquisition of services

4 Elements of Cost (TCO)

Quality, Service, Delivery, and Price (QSDP) - TCO is the sum of the cost elements in QSDP (i.e., Quality + Service + Delivery + Price = TCO) - Each element of QSDP has an impact on the TCO - The main TCO insight is that the acquisition cost is often a very small portion of the TCO (Accounting for only 25% to 40% of the total cost for most products)

Setup Time and Changeover Time Reduction

Setup Time and Changeover Time are both considered a waste as they are times when the equipment is not performing its intended function . . . . producing product. Setup Time is the time taken to prepare and format the manufacturing equipment and systems for production. Changeover Time is the time taken to adapt and modify the manufacturing equipment and systems to produce a different product or a new batch of the same product. - While setting up the equipment is a necessary function, if the set up time can be minimized, the difference will be more time available to produce. - Both setup and changeover are non-value added operations and should be minimized as much as possible

Strategic Sourcing

Strategic items and services that involve a high level of expenditure and are vital to the firm's success (high supply risk , high value) 1. Ensure availability of supply 2. Focus on relationship building 3. Encourage process integration and innovation 4. Frequent communications 5. Establish mutually agreeable supplier performance criteria

Corporate Social Responsibility (CSR)

The practice of business ethics

External Certification Programs

Two ISO standards commonly used for supplier certification are: ISO 9000 - A series of management and quality standards in design, development, production, installation, and service. - Companies wanting to sell in the global market seek ISO 9000 certification ISO 14000 - A family of standards for environmental management. - The benefits include reduced energy consumption, environmental liability, waste and pollution, and improved community goodwill

(5) LEAN Supply Chain Relationships

Firms develop lean supply chain relationships with key customers and key suppliers. In an ideal LEAN supply chain relationship, both customers and suppliers get connected in ways that allow them to easily exchange information, demand data, and the visibility of status - Mutual dependency and benefits occur among these partners. - Suppliers and customers work to remove waste, reduce cost, and improve quality and customer service

Role of Supplier

LEAN involves building long-term supplier relationships: - Partnerships with suppliers. - Improving process quality. - Sharing information. The goal is to have the fewest number of high-quality suppliers possible without unnecessarily increasing risk

Uniform Plant Loading

Problem: - Demand exceeds capacity at points in the planning horizon. - Matching the production plan to follow demand exactly can contribute to inefficiency and waste, including excess inventory or shortages of inventory. Uniform Plant Loading: - Planning up to capacity in earlier time periods to meet demand in later time periods. - Also called "front-loading" the plan or "leveling" the plan. - Production schedule is frozen in the up-front time period (i.e., month) - Helps suppliers better plan production

Small Batch Scheduling (Kanbans)

Small batch scheduling can be facilitated through the use of Kanbans: Kanban means "Signal" or "Card" in Japanese and is used for communication (e.g., visual signal) between workstations. Kanban's authorize production or the movement of materials to the next workstation. Could be facilitated through the use of a computer software program, i.e., ERP system

Business Ethics

The application of ethical principles to business The two (2) main ethical approaches are: - Utilitarianism: an ethical act is that which creates the greatest good for the greatest number of people, and should be the guiding principle of conduct. - Rights and Duties: some actions are just right in and of themselves, regardless of the consequences. Do the right thing!

Make versus Buy Decision Continued

- It is important to analyze all of the relevant expenses 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 Factors - incremental costs of either making or purchasing the item, such as the availability of manufacturing facilities, needed resources, and manufacturing capacity. - Qualitative Factors - are 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

Purchasing contributes to these objectives by:

1) Actively seeking reliable suppliers 2) Working with the expertise of strategic suppliers to improve quality and materials 3) Involving suppliers and purchasing personnel in new product design and development efforts

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 - Reconciliation of the invoice

Skill Set Requirements of Purchasing Professionals

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

International Purchasing - Potential Challenges

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, varying 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

Assessing and Improving the Purchasing Function

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) Initiate supplier cost reduction programs 10) Creation of strategic alliances

Import Merchants

A person or company engaged 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

Purchasing Process Steps

1) A need is identified, and a Purchase Requisition is issued - Request for goods and services submitted to the Procurement/Purchasing organization for action. Typically initiated by a user within an organization 2) Obtain authorization as necessary - A Purchase Requisition may be routed to an authorized approver(s) 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. 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 4) Make supplier selection (a) If the Buyer already knows which supplier they will buy from, move to step 3. (b) If not, a competitive bidding process may be initiated through the use of a Request for Proposal (RFP) or a Request for Quotation (RFQ). - Buyer issues a Request for Proposal (RFP) for items which have not been previously purchased, or not purchased from a specific supplier being evaluated. Supplier(s) provides their proposal to supply the item(s) including price and delivery. - Buyer issues a Request for Quotation (RFQ) for routine or repeat purchased items. Supplier(s) provides a price and delivery quote on the specific item(s) requested. (c) A Supplier is selected from the RFP or RFQ bids received based on criteria determined by the Buyer, including price, availability, quality, delivery costs, etc 5) Purchase Order (PO) is created and delivered to the supplier. - To inform the supplier of the intent to purchase . - To identify the item(s) to be procured, the quantity required, the requested delivery date(s), 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 item(s). 6) Supplier confirmation of the Purchase Order - The Supplier formally agrees to supply the item(s) 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 item(s) specified (After supplier accepts and confirms) 7) Fulfillment - The supplier delivers the item(s) to the buying organization as per the PO. 8) Receipt of Goods - Once the item(s) arrives at the designated location, the Buyer will typically conduct some form of receipt process where the item(s) are checked 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. 9) Invoice and Reconciliation - The Supplier prepares an invoice for the item(s) ordered. The invoice either accompanies the item(s) or is sent separately to the Buyer. - The invoice may need to be reconciled to the purchase order and goods receipt before payment is made. Referred to as a "3-way match" (i.e., Invoice, Purchase Order, and Goods Receipt must match) 10) Payment - Payment is processed using an appropriate payment method assuming the item(s) is received and meets all of the criteria established on the PO. 11) Close out the Purchase Order - If the PO has been received complete, and all terms and conditions have been met, then the PO should be closed out in the purchasing system. 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

Component's of Lean

1. LEAN Manufacturing 2. Total Quality Management 3. Respect for People

Key areas of a typical spend analysis

1. Total historic expenditures and volumes 2. Future demand projections or budgets 3. Expenditures categorized by commodity and sub-commodity 4. Expenditures by division, department, or user 5. Expenditures by supplier

Green Belt

A Six Sigma trained individual that can work as a team member on complex project and also lead small, carefully defined Six Sigma projects. On complex Six Sigma projects, green belts work closely with the Black Belt team leader to assist with data collection and analysis, and to keep the team functioning through all phases of the project *Rutgers offers this certification*

Purchase Order (PO)

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

Request for Proposal (RFP)

A detailed capabilities document used to determine a supplier's capability and interest in the production of a product or service

Six Sigma

A disciplined, statistical-based, data-driven methodology for identifying and removing the causes of defects (errors) and minimizing variability in manufacturing and in business processes. It was originally developed by Motorola. LEAN and Six Sigma complement one another LEAN+Six Sigma= Speed and Accuracy

Request for Quotation (RFQ)

A document used to solicit bids from interested and qualified suppliers for goods or services that the organization needs to obtain

Black Belt

A full-time quality professional who has a thorough knowledge of Six Sigma philosophies and principles, and possesses technical and managerial process improvement / innovation skills. Leads the Six Sigma project team and problem-solving efforts. Identifies projects and selects project team members. Trains and coaches project teams. A Black Belt is typically mentored by a master black belt

Role of Workers

Perform tasks and actively pursuing company goals: - Improve production process - Correct quality problems - Monitor quality - Work in Teams

Supply Base

Supply Base - The group of suppliers from which a company acquires goods and services - Firms emphasize long-term strategic supplier alliances consolidating volume into one or fewer suppliers, resulting in a smaller supply base

Supplier Relationship Management System

When considering a SRM program there are several technologies available to support development. The reason for a system is to provide a more comprehensive and objective view of a supplier(s) performance - A system will help in identifying and addressing supplier performance issues. - A system can also be used to help make sourcing decisions. It is important to recognize that an SRM system can only be implemented in line with the associated business process changes. The SRM system is part of the process, not the whole process by itself

Evaluating and Selecting Key Suppliers

When evaluating key suppliers for developing a collaborative relationship, purchase cost becomes relatively less important - The assumption is that excellent suppliers will be able to drive costs out - "Squeezing" suppliers to generate a lower annual purchasing spend hurts strategic relationships! but it is very often still done! [Profit Leverage Effect] Key Supplier Selection is typically conducted by a cross functional team using evaluation forms or scorecards - Weighting techniques are often used

Six Sigma Training and Certification Levels

Yellow Belt Green Belt Brown Belt Black Belt Master Black Belt

Supply Base Rationalization

(also known as, Supply Base Reduction, Supply Base Optimization). Reduction in the supply base to the lowest number of suppliers possible without significantly increasing risk Buyer-supplier partnerships are easier to manage with a rationalized supply base, and they can result in: - Reduced purchase prices - Fewer supplier management problems - Closer and more frequent interaction between buyer and supplier - Greater levels of quality and delivery reliability

Profit Leverage Effect

- A decrease in purchasing expenditures directly increases profits before taxes (assuming no decrease in quality or purchasing total cost) - A 10% Cost Reduction generates significantly more Profit Before Tax than does a 10% Sales Increase. - This is one of the main reasons that Procurement Managers are under significant pressure from senior management to reduce purchase costs

Return on Assets Effect

- A high ROA indicates managerial prowess in generating profits with lower spending - A 10% cost reduction generates a significantly higher Return on Assets (ROA) than does a 10% sales increase, given the same number/value of assets - Profit Before Tax/Assets= ROA

Pain and Gain Share Agreements / Provisions

- A supplier rewards and recognition program could also be reflected as part of the formal supply agreement in the form of pain and gain share provisions - Agreements could be negotiated to spell out in detail the gains (reward) and pains (penalty) that the supplier will realize for either exceptional or poor performance - Both parties would mutually agree on the provisions and the positive and negative outcomes

Purchase Requisition

- An internal document that defines the need for goods and/or services - Does not constitute a contractual relationship with an external party - Generated by a user department to notify purchasing personnel of items to order, their quantity, and the timeframe - It may also contain the authorization to proceed with the purchase

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 function of, and the responsibility for, acquiring materials, supplies, and services for an organization) - Purchasing is the process of how goods and services are ordered from an external third party - Purchasing can usually be described as the transactional function of procurement for goods or services

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, including: - Automation Provides increased visibility of all purchases. - e-Procurement tools typically automate all or part of the following processes: - Solicitation tools such as RFI, RFP, RFQ - Execution and analysis - Reverse auction capabilities

International Purchasing - Reasons for Global Sourcing

- The opportunity to improve quality, cost, and delivery performance - To exploit global efficiencies: (Access to low cost 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

Procurement

- The process of selecting and vetting suppliers, negotiating contracts, establishing payment terms, and the actual purchasing of goods and services (Procurement is concerned with acquiring all of the goods, services and work that is vital to an organization) (Procurement is the overarching or umbrella term within which the action of purchasing can be found- Purchasing Management, Strategic Sourcing, Supplier Relationship Management)

Supplier Reward Incentives

- The promise of future business Public recognition including any or all of the following: - A plaque - An awards dinner - An honors ceremony - A press release - Formal communication to the supplier's senior leadership team. - Cash back for achieving performance-based objectives - Strategic or preferred supplier status

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 of ownership

Benefits of Supplier Certification Programs

1. Reducing the amount of time and resources necessary for the buyer to conduct incoming inspections of products and materials from certified suppliers - Buyer trains supplier on approved test methods so that supplier can test product before shipment, and provide a Certificate of Analysis (COA) - Buyers may then opt to only test items periodically on incoming inspection rather than with each delivery or lot, providing that the periodic testing confirms the supplier's results 2. Building long-term relationships 3. Decreasing the supplier base - Certified suppliers are more reliable and therefore, you don't need as may suppliers. 4. Recognizing excellence

The 5 S's

1. Sort - Keep only necessary items in the workplace, eliminate the rest 2. Straighten - Organize and arrange items to promote an efficient workflow 3. Shine - Clean the work area so it is neat and tidy 4. Standardize - Schedule regular cleaning and maintenance 5. Sustain - Stick to the rules. Maintain and review the standards

The Components of LEAN Manufacturing

1. Waste Reduction 2. LEAN Layouts 3. Inventory, Setup Time, & Changeover Time Reduction 4. Small Batch Scheduling and Uniform Plant Loading 5. LEAN Supply Chain Relationships 6. Workforce Empowerment 7. Continuous Improvement

Brown Belt

A Six Sigma Green Belt who has passed the Black Belt certification examination but has not yet completed their second Six Sigma project

Competitive Bidding Continued

Competitive bidding aims at obtaining goods and services at the lowest prices by stimulating competition, and by preventing favoritism 1) Open competitive bidding - the sealed bids are opened in full view of all who may wish to witness the bid opening 2) Closed competitive bidding - the sealed bids are opened in presence only of authorized personnel 3) The competitive bidding process does not allow for negotiations. By law, the contract is awarded to the lowest priced responsive and responsible bidder

Bottleneck Sourcing

Unique procurement problems. Supply risk is high and availability is low. Small number of alternative suppliers (supply risk high, value low) 1. Maintain safety/strategic stock 2. Develop contingency plans (a plan designed to take a possible future event or circumstance into account) 3. Strengthen relationships 4. Search for alternatives

Sourcing Strategies

- Analysis and ability to make adjustments based on price, evaluation of supplier performance, and the overall needs of the organization. High-level sourcing strategies include: - Insourcing : Producing goods or services using a company's own internal resources. - Outsourcing : The traditional definition involves purchasing an item or service externally, which had been produced using a company's own internal resources previously. The term Outsourcing has more recently become synonymous with the concept of buying an item from an external source of supply regardless of whether the item had been previously produced using a company's internal resources

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"

Inventory Turnover Effect

- 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 - The purchasing function in an organization is frequently responsible for Supply Management and therefore plays a large part in the amount of inventory the company holds. - Inventory turnover represents the number of times the company sold through inventory in a given time period. - Costs of Goods Sold (COGS) ÷ by the Average Inventory - A high turnover ratio is beneficial because it means the company is generating sales efficiently to sell inventory. - A low turnover ratio is unfavorable as 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

Make vs. Buy Decision

- Make: Producing (i.e., manufacturing) materials or products internally (i.e., in operations owned by the company). - Buy / Outsource: Buying materials, components, or products from a supplier(s) instead of, or in addition to, making them in-house (i.e., buying from a 3rd-party external source) - Make -vs- Buy is a strategic decision

Benefits of Strategic Alliance

- Potential to increase revenue and profits for both parties. - Potential to create a competitive advantage or block a competitor from gaining market share. - Mitigate risks and ensure a continuity of supply. - Position the partners for future strategic opportunities

The Financial Significance of Purchasing

- Profit-Leverage Effect - Return on Assets (ROA) Effect - Inventory Turnover Effect

Rewarding Supplier Performance

- Recognition of a supplier for exceptional performance, contributions, and/or capabilities - Rewarding suppliers for outstanding performance motivates and encourages them to continue to strive for excellence in their products, services, and operations. - It also strengthens and fosters strong and productive supplier relationships

LEAN Green Practices

- Reduce the cost of environmental management - Lead to improved environmental performance. - Increase the possibility that firms will adopt more advanced environmental management Carbon-nuetral - Offsetting the carbon footprint of a firm's operations *Sustainability is a LEAN concept*

Supplier Selection

- Supplier Selection is typically conducted by a cross functional team - The process of selecting suppliers is complex and should be based on multiple criteria using evaluation forms or scorecards. The following are some commonly used criteria: - Cost - Quality - Capacity - Service - Location - Reliability - Communication capability - Order system and cycle time - Willingness to share information - Product and process technologies

Internal Certification Programs

- Supplier has no incoming product rejections for a specified time period - Supplier has no incoming late deliveries for a specified time period - Supplier has no significant negative quality related incidents for a specified time period - Supplier is ISO 9000 certified or has successfully passed a recent on-site quality system evaluation - Supplier consistently meets a mutually agreed-upon set of clearly specified quality performance measures - Supplier has a fully documented process and quality system with cost controls and continuous improvement capabilities - Supplier's processes is determined to be stable and in control

International Purchasing - Service Providers

Companies can choose to use service providers that already have the specialized skills and knowledge necessary to deal with international purchasing issues and challenges - Import Brokers - Import Merchants - Trading Companies

Components of the Total Cost of Ownership

1) Pre Transaction Costs- Activities carried out prior to the actual buy and sell transaction 2) Transaction Costs- Activities carried out as part of the actual buy and sell transaction 3) Post Transaction Costs- Activities carried out following the actual buy and sell transaction

Total Cost of Ownership (Other Factors)

1) Quantity Discounts may be offered to encourage buyers to purchase larger quantities. 2) Cash Discounts may be offered for prompt payment of invoices (e.g., 2% 10, Net 30). 3) Value-added Services may be offered such as: - Special delivery - Special packaging - Preparation of promotional displays - Subassembly operations in a supplier's plant 4) Administrative Expenses associated with the procurement activity itself such as: - Screening potential suppliers - Negotiation - Order preparation - Order transmission 5) Poor Supplier Quality costs related to defective finished goods must also be considered. Costs such as: - Scrap - Rework - Recycling - Recovery of materials - Warranty administration - Repair costs

5 key points to consider in the development and implementation of an SRM system

1. Automation is meant to handle routine transactions 2. Integration spans multiple departments, processes, and software applications 3. Visibility of information and clear and concise process flows 4. Collaboration through information sharing 5. Optimization of processes and decision making

Framework for Sourcing Strategy Development

1. Classify the company's products and suppliers as belonging to either the functional or innovative category. 2. Develop strategic sourcing goals and strategies for each category 3. Create the sourcing team (typically a cross-functional team led by Procurement) 4. Develop a team strategy and communication plan 5. Identify the targeted spend area(s) and conduct a spend analysis. 6. Gather information on supplier capabilities. Use Request for Information (RFI) 7. Develop a supplier portfolio (i.e., a profile of each supplier in each category) 8. Develop a future state (i.e., vision of what the company wants the future to look like) 9. Conduct supplier selection and negotiation 10. Implement Supplier Relationship Management (SRM)

Trends in Supplier Relationship Management

1. Close alignment of sourcing with supplier relationship management - Many companies are determining their negotiation strategies by tying them to their category management strategy, and to their supplier relationship goals. 2. Focus on cross-functional engagement - A best practice for strategic supplier relationships involves SRM teams at both the company and at the supplier, each led by a relationship manager, who form a steering committee to lead the process 3. Focus on innovation - Companies that engage in more innovation with suppliers, report higher ROI. 4. Investment in people & "soft skills" - Treat suppliers with courtesy and respect. Be candid, and able to disagree without being disagreeable. Hold both sides to the same standards

The basic steps for conducting a spend analysis

1. Defining the scope. 2. Identify all of the data sources. 3. Gathering and consolidating all of the data into one database. 4. Cleansing the data (finding and correcting errors) and standardizing it for easy review. 5. Categorizing the data. 6. Analyzing the data for: - the best deals per supplier - to ensure that all purchases are from preferred suppliers - to reduce the number of suppliers per category. 7. Repeating the process on a regular schedule

Supplier Development: Process Steps

1. Identify critical products and services 2. Identify critical suppliers of those products and services 3. Form a cross-functional team internally to work with the supplier 4. Meet with the top management at the supplier to get their support and involvement 5. Identify key development needs and projects 6. Define details of the agreement and the action plan 7. Monitor the status of the projects / action plan and modify strategies as necessary

Drivers of Strategic Sourcing

1. Improve long-term financial performance 2. Increase customer focus 3. Improve product quality 4. Reduce the cost of materials 5. Reduce delivery lead times 6. Optimize the number of global suppliers (Note: for most companies, this means a reduction in the number of suppliers) 7. Deliver more innovative products, in less time, and less expensively than competitors

Benefits of Supplier Recognition Programs

1. Motivate Suppliers- Can motivate suppliers to excel in terms of their quality, pricing and delivery commitments. 2. Improve Supplier Loyalty- Supplier support is important to ensure that customer delivery commitments are maintained. 3. Encourage Suppliers to Adapt to the Company's Culture- If the company treats its suppliers as a part of the family and engages in supplier recognition programs periodically, it can help to bring the suppliers closer to the corporate values, ethics and principles of the company 4. Helps to Create Entry Barriers for Competitors- If the suppliers trust the company, they may be more inclined to sign deals of exclusivity with the company for certain crucial components. 5. Encourages Supplier Participation in Product Innovation- Recognition to suppliers also brings about their enthusiasm to work closely with the company on new product development

Supplier Evaluation

A process to identify the best and most reliable suppliers Sourcing decisions are made on facts and not on perception (through the use of defined criteria) Frequent feedback can help avoid surprises and maintain good relationships (Hold regular review meetings) Suppliers should be allowed to provide constructive feedback to the customer

Competitive Bidding

A procurement process in which bids from competing suppliers, for the right to supply specified materials or services, are requested Competitve 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 of potential bidders

Supplier Recognition Programs

A program to recognize suppliers who achieve the high performance standards necessary to meet customer expectations The success of the business can depend on the quality and performance of the company's suppliers It is always a good practice for a company to have innovative supplier recognition programs in order to recognize their achievements and reward them for their exceptional performance and services

Additional Sourcing Concepts - Reverse Auctions

A sourcing technique where pre-qualified suppliers enter a website and at pre-designated time and date, and try to underbid competitors to win the buyer's business - The sellers bid against one another to secure the buyer's business, driving the price to be paid for the item downward - Bid prices are monitored until the session is officially over - The winning bidder is the seller who offers the lowest price - Reverse auctions are used by private companies, public sector agencies, and non-profit organizations

Strategic Alliance

A strategic alliance in sourcing, is an agreement between a buyer and a supplier to pursue some agreed upon objectives, while remaining independent organizations. - Companies agree to share information and resources to achieve a mutual benefit. - Preferred suppliers are potentially ideal candidates for a strategic alliance

Supplier Development Continued

A supplier development program must be aimed at improving suppliers performance, not bullying them into charging less or simply auditing and rewarding them Supplier development is all about providing suppliers with what they need to be successful in the supply chain Two of the most important functions of a supplier development program are: 1. Providing information about products, expected sales growth, etc. Suppliers need to become extensions of their customers 2. Training suppliers in the application of lean and six sigma / quality tools - Asking suppliers to lower their price without giving them the knowledge on how to lower their costs is not sustainable in the long-term

Preferred Suppliers

A supplier of choice - Achieved a specific and exceptional level of performance over time as measured by a set of criteria agreed upon by both buyer and supplier. - Typically trusted partners who know the buyers organization, processes, procedures, and requirements. - Provides a higher value than their competitors and are characterized as reliable, responsive, flexible, and cost effective

Advantages of Centralized Versus Decentralized Purchasing

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

Cost of Quality

An approach that supports a company's efforts to determine the level of resources necessary to prevent poor quality, and to evaluate the quality of the company's products and services. Any cost that would not have occurred if quality was perfect, contributes to the cost of quality. Helps a company determine the benefits and savings generated by potential process improvements. Can be divided into the: - Cost of Good Quality - Appraisal Costs - Prevention Costs Cost of Poor Quality - Internal Failure Costs - External Failure Costs

Strategic Alliance Development

An extension of supplier development which refers to increasing a key or strategic supplier's capabilities. Results in better market penetration, access to new technologies and knowledge, and a higher return on investment Eventually extends to a firm's second-tier suppliers as the firm's key suppliers begin to form their own alliances

Cost of Good Quality - Appraisal Costs

Appraisal Costs are associated with the evaluation of purchased materials, processes, products, and services to ensure that they conform to specifications. They include costs for: - Testing, evaluating, and inspecting the quality of incoming materials, process setups, and products, against agreed upon specifications. - Quality assessment and approval of suppliers. - Performing audits to confirm that the quality system is operating properly

Assemble-to-Order

Assemble-to-Order (ATO) is a manufacturing strategy where products ordered by customers are produced quickly and are customizable to a certain extent. The ATO strategy requires that the basic parts for the product are already manufactured but not yet assembled. Once an order is received, the parts are assembled quickly into the finished product which is then sent to the customer. ATO is a hybrid strategy, attempting to combine the benefits of both Make-to-Stock and Make-to-Order strategies, getting products into customers' hands quickly while allowing for some customization to take place

Ethical Sourcing

Attempts to take into account the public consequences of organizational buying, or to bring about positive social change through organizational buying behavior - This involves the Procurement organization ensuring that the products being sourced are acquired in a responsible and sustainable way - The people involved in producing these products should be treated fairly and work in a safe environment - The environmental and societal impacts must also be considered as part of the sourcing process

Other Types of Make/Buy Strategic Decisions

Backward Vertical Integration - Refers to a company acquiring (i.e., buying) one or more of their suppliers - Example: a manufacturer buying the key supplier of a critical material to take ownership of this aspect of their supply chain Forward Vertical Integration - Refers to a company acquiring (i.e., buying) one or more of their customers - Example: a manufacturer buying a wholesaler/distributor to take ownership of this aspect of their supply chain

Benefits of Strategic Partnerships with Suppliers

Benefits for Buyers: - Preferred access to the supplier's best people - Increased operating efficiencies - Lower costs - Improved quality - Enhanced service - Influence over supplier investments and technology - Preferred access to supplier ideas - Increased innovation from and with suppliers, leading to lower costs and incremental revenue - Sustainable competitive advantage Benefits for Suppliers: - Greater visibility into buyer's purchasing plans - Increased operating efficiencies - Longer term buyer commitments; greater predictability of future business - Increased scope of business and revenue - Lower cost of sales; increased margins - Opportunities to develop, pilot, and showcase innovative solutions - Sustainable competitive advantage

Government & Non-Profit Purchasing - Bonds

Bidders are generally required to furnish bonds as an incentive to ensure that the successful bidder will fulfill the contract awarded - Bid Bond is 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 - Performance Bond is a debt secured by a bidder for the purpose of providing a guarantee that the work will be on time and meet specifications - Payment Bond is a debt secured by a bidder for the purpose of providing protection against 3rd party liens not fulfilled by bidder

Keys to Successful Strategic Partnerships

Building Trust - With trust, partners are more willing to work together, find compromise solutions to problems, work toward achieving long-term benefits for both parties, and go the extra mile Shared Vision and Objectives - Both partners must share the same vision and have objectives that are not only clear but mutually agreeable - The focus must move beyond tactical issues and toward a more strategic path to corporate success Personal Relationships - Strategic Partnerships begin with the development of personal relationships between key people at each company - It is people who communicate and make things happen Mutual Benefits and Needs - Partnership should result in a win-win situation, which can only be achieved if both companies have compatible needs. - An alliance is much like a marriage, and if only one party is happy, then the marriage (i.e., alliance) is not likely to last Commitment and Top Management Support - Commitment must start at the highest management level - Partnerships tend to be successful when top executives are actively supporting the partnership Change Management - Companies must be prepared to manage change that comes with the formation of new partnerships Information Sharing and Lines of Communication - Both formal and informal lines of communication should be set up to facilitate the free flow of information - Confidentiality of sensitive information must be maintained Capabilities - Key suppliers must have the right technology and capabilities to meet cost, quality, and delivery requirements in a timely manner (current and future) Continuous Improvement - Making a series of small improvements over time results in the elimination of waste in a system - Buyers and suppliers must be willing to continuously improve their capabilities in meeting customer requirements

Centralized vs Decentralized Purchasing

Centralized Purchasing: Purchasing department located at the firm's corporate office makes all the purchasing decisions Decentralized Purchasing: Individual, local purchasing departments, such as at the plant level, making their own purchasing decisions

Additional Sourcing Concepts - Co-Managed Inventory

Co-Managed Inventory (CMI) is an arrangement where a specific quantity of an item is stored at the buyer's location - Once it is used, the item is replaced by the supplier, with the full knowledge and approval of the buyer - The buyer provides systems access to the supplier, and the supplier takes responsibility for managing the replenishment process in the buyer's system - The supplier reviews all of the available information and generates orders in the buyer's system *The primary difference from VMI is that in CMI the supplier is just recommending an order which is not confirmed until and unless the buyer approves it*

Ethical Policies Should Include:

Companies that seek to create ethical policies to ensure compliance in this areas should: - Create a Supplier Code of Conduct and require all suppliers to formally agree to abide by the code as a condition of being an approved supplier - Inform suppliers of ethical sourcing expectations and create specific provisions within supplier agreements accordingly. - Determine where all purchased goods originate and the manner in which they are made - Have knowledge of their suppliers' workplace principles - Seek independent verification of supplier compliance with ethical standards - Include ethics as part of their supplier performance rating system - Routinely report supplier compliance to key stakeholders

(1) Quality is Defined by the Customer

Customers expect performance, reliability, competitive prices, on-time delivery, good service, clear and correct transaction processing and more. It is vital to provide what the customers need to achieve customer satisfaction

Kaoru Ishikawa

Developed one the first tools in the quality management process, the Cause and Effect Diagram, which is also called the "Ishikawa" or "fishbone" diagram - With this tool, the user can see all possible causes of a problem to help find the root cause. He is also known as the father of quality circles and helped bring this concept into the mainstream Further, he was a proponent of continuous customer service, meaning that a customer should continue receiving service even after receiving the product

Negotiating Win-Win Strategic Alliance Agreements

Distributive Negotiations: Refers to a process that leads to self-interested, one-sided outcome (bad) Collaborative Negotiations: Both sides work together to maximize the outcome or create a win-win result. Requires open discussions and a free-flow of information between parties (good) - Successful collaborative negotiations start with a clearly expressed understanding of how each company wants to benefit from the collaboration - Alignment between parties regarding motivation, contribution, financial benefit, and the management of the alliance are essential. - Negotiations are not about each company obtaining the most value, negotiations are more about establishing a relationship that works well for both parties

Engineer-to-Order

Engineer-to-Order (ETO) is a manufacturing strategy in which the product is designed, engineered, and built to the customer's specifications after receipt of the order. It is a more dramatic evolution of Make-to-Order strategy. ETO involves building a unique product every time. There may be components that are common from one product to another, but the finished product is different each time. In the ETO world, the cost of poor quality can be very high. - The warranty costs, and the cost of rework to replace an item in a complex assembly, can have a serious negative effect on profit margins

(3) Inventory, Setup Time, & Changeover Time Reduction

Excess inventory takes up space, and costs money to hold, maintain, protect, secure, and insure. - It ties up financial capital which could be used for other aspects of the business Reducing inventory can free up capital and reduce holding costs. - There is less likelihood of waste being created by obsolescence, expiry, spoilage, or damage with lower inventory levels

Sustainable Sourcing Programs Should Try To

Grow Revenues (Growing the company through the launch of new sustainable products) Reduce Costs (Increasing resource efficiencies which will also help to reduce costs) Go "Green" (Ensuring that the products or materials used meet environmental objectives for things like waste reduction, reuse, and recycling) Manage Risks (Link company brands to the social consciousness of consumers) Build Intangible Assets (Such as social and environmental responsibility, increasing consumer awareness of sustainable sourcing and sustainability)

Single Suppliers vs Multiple Suppliers

How many suppliers do you need? Current trends favor using fewer sources; however . . . Single-source is risk Reasons for Single Suppliers: - To establish a good relationship - Less quality variability - Lower cost [100% of volume] - Transportation economies - Proprietary product or process - Volume too small to split Reasons for Multiple Suppliers: - Need more capacity - Spread risk of supply disruption - Create competition - More sources of information - Dealing with special kinds of business

External Certification Facts

ISO certified suppliers are preferred by procurement departments because . . . - They have to conform to an externally defined set of standards for quality and delivery of service - They are usually more open to sharing supply chain information - They welcome building relationships with their customers - They have formal processes in place for continuous improvement of their products, services, and processes - They are easier for procurement to initially qualify and periodically audit - Certification is done by an independent third party agency - Firms have to be re-certified every three years

Industrial Buyers

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

Manufacturing Process Characteristics

Intermittent: - Project Process (also known as a "Job Shop") creates a custom product for each customer. High customization - Batch Process manufactures a small quantity of an item in a single production run Repetitive: - Line Process has standard products with a limited number of variations moving on an assembly line through stages of production - Continuous Process is used to manufacture such items as gasoline, laundry detergent and chemicals. Inflexible processes. High capital investment

Cost of Poor Quality - Internal Failure Costs

Internal Failure Costs occur when the product or service does not meet the designed quality standards, and are identified before the product or service is delivered to the customer They include costs for: - Defective product or material that cannot be used, sold, or repaired, and the costs associated with correction of these defects. - Unnecessary work or inventory resulting from errors. - Activities required to establish the root causes of product or service failures

External Certification (ISO)

International Organization for Standardization (known as ISO) is the world's largest developer of voluntary international standards - Founded in 1947, today ISO has members from 163 countries and about 150 people working full time for the Central Secretariat in Geneva, Switzerland ISO certification is highly sought after as it represents achieving and maintaining a standard of excellence verified by an independent third party organization Benefits of ISO Certification: - Greater market potential - Compliance to procurement bids - Improved efficiency and cost savings - Higher level of customer service - Heightened staff moral and motivation

Master Black Belt

Is a career path. A Master Black Belt has successfully led ten or more teams through complex Six Sigma projects. A proven change agent, leader, facilitator, and technical expert in Six Sigma. A seasoned individual with a proven mastery of process variability reduction, and waste reduction. Acts as an advisor to executives, and a coach and mentor on projects that are led by black belts and green belts. Functions as the keeper of the Six Sigma process, and can effectively provide Six Sigma training at all levels

Supplier Evaluation: Performance

It is important to actively monitor a supplier's performance and provide visibility and feedback on supplier performance at each stage of the evaluation process Some relevant metrics include: - Supplier price and cost performance - Product receipt quality - Delivery performance - Financial stability - Contractual and standard compliance - Participation in product development - Cooperativeness in third-party production management - Support of both ethics and sustainable practices

Supplier Relationship Management (SRM) Continued

SRM is often a part of the rollout of Strategic Sourcing and is typically applied with suppliers: - Providing high volumes of a product/service - Providing lesser quantities of a crucial product/service - That serve many business units of a company or organization - Where intensive engineering, manufacturing and/or logistics interaction is essential

LEAN Manufacturing

LEAN Manufacturing is a natural fit within the discipline of Supply Chain Management as all of the LEAN goals and objectives help to facilitate an efficient and effective supply chain - Satisfying internal customer demand - Communicating demand forecasts and production schedules up the supply chain - Quickly moving products in the production system - Optimizing inventory levels across the supply chain - Increasing the value, capabilities, and flexibility of the workforce through cross-training - Extending collaboration and alliances beyond just 1st tier suppliers and customers to include 2nd and 3rd tier suppliers and customers as well

Implementing LEAN and Six Sigma

LEAN and Six Sigma are complementary principles with significant overlap. They are frequently implemented together, but the two initiatives approach their common purpose from somewhat different angles: - The goal of LEAN is the elimination of waste and the minimization of the amount of all resources (including time) used in the operation of a company - LEAN achieves its goals by using less technical tools such as value stream mapping, LEAN Layouts, Continuous Improvement, and Respect for People. - Six Sigma focuses on the elimination of defects and the reduction of variations - Six Sigma uses technical tools such as Root Cause Analysis, Statistical Process Control, and DMAIC. The most successful implementations begin with LEAN, followed by the more technical Six Sigma statistical tools used to resolve process problems

Make-to-Order

Make-to-Order (MTO) is a manufacturing strategy in which manufacturing starts only after a customer's order is received. This strategy creates additional wait time for the customer to receive the product, but allows customers to purchase products that are customized to their specifications. The MTO strategy relieves the problems of excessive inventory that is common with the Make-to-Stock strategy. MTO is not appropriate for all types of products. It is appropriate for highly configured products such as aircraft, ocean vessels, bridges, or products that are very expensive to keep in inventory

Make-to-Stock

Make-to-Stock (MTS) - means to manufacture products for stock based on demand forecasts. Push system. Since accurate forecasts will prevent creating excess inventory and avoid stockouts, the critical issue is how to forecast demands accurately. Most daily necessities such as foods, sundries, and textiles are MTS-type products. The challenge of MTS is to avoid having excess inventory. Companies that operate with a MTS model tend to hold more inventory just in case they need it, therefore, they struggle to ensure that inventory levels don't get out of control

Benchmarking

Measuring what other businesses do best and matching their performance, is an effective approach to improving your supply chain Resources for learning about and implementing sourcing practices: - The Center for Advanced Purchasing Studies - Council of Supply Chain Management Professionals (CSCMP) - Institute of Supply Management (ISM)

(2) LEAN Layouts

Move people and materials when and where needed, and as soon as possible Are very visual (lines of visibility are unobstructed) with operators at one processing center able to monitor work at another Manufacturing cells - Process similar parts or components saving duplication of equipment and labor - Are often U-shaped to facilitate easier operator and material movements

Reasons for Buying or Outsourcing

Non-Strategic - If it is a non-strategic item Cost Advantage - Suppliers may provide the benefit of economies of scale, especially for components that are non-vital to the organization's operations. Insufficient Capacity - A firm may be at or near capacity and subcontracting from a supplier may make better sense 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 Lack of Expertise - Firm may not have the necessary technology and expertise Quality - Suppliers may have better technology, process, skilled labor, etc. Multi Sourcing Strategy - To achieve a multi sourcing strategy using an external supplier in addition to an internal source Inventory Considerations - opting to have the supplier hold inventory of the item or the materials required to produce the item. Brand Strategy - take advantage of a supplier's brand image, reputation, popularity, etc

Malcolm Baldrige National Quality Award

Objectives - Stimulate Firms to Improve - Recognize firms for quality achievements - Establish guidelines so that organizations can evaluate their improvement and provide guidance to others Categories Measured 1. Leadership 2. Strategic Planning 3. Customer and Market Focus 4. Information and Analysis 5. Human Resource Focus 6. Process Management 7. Business Results

Objectives of Strategic Sourcing

Objectives of strategic sourcing involve the reduction of cost while maintaining or improving quality: 1. Improve the value‐to‐price relationship (i.e. achieve cost reductions while maintaining or improving quality/service) 2. Understand the category buying and management process, to identify improvement opportunities 3. Examine supplier relationships across the entire organization. Share best practices across the organization 4. Develop and implement multi‐year contracts with standardized terms and conditions across the organization 5. Leverage the entire organization's spend

Supplier Certification Programs

One of the elements for building a strong strategic supplier partnership is having a well-defined and established Supplier Certification program A certified supplier is a source that through prior experience and qualification can provide material of such quality that it needs little if any receiving inspection or testing before going into approved stock or into the product process Administration of a Certified Supplier Program requires planning and long-term attention

Manufacturing Processes

Part of any manufacturing strategy involves developing a manufacturing process that can create the exact product that has been designed. Although there are differences between companies, many manufacturing processes have certain characteristics in common. Based on these characteristics, processes can be grouped into two broad categories: - Intermittent processes- used to produce a large variety of products with different processing requirements in lower volumes. - Repetitive processes- used to produce one, or a few, standardized products in high volumes

Weighted Criteria Classifications

Preferred: work with these suppliers in maintaining a competitive position and on new product development Acceptable: Require a plan from these suppliers outlining how they will achieve preferred status Developmental: require corrective actions from these suppliers on how they will achieve acceptable level. Look for alternative suppliers if these do not achieve acceptability within a fixed period of time, e.g., 3 months

Cost of Good Quality - Prevention Costs

Prevention Costs are related to the design, implementation, and maintenance of the quality management system. They are planned, and experienced before actual products or materials are acquired or produced. They include costs for: - Establishment of specifications for incoming materials, processes, products, and services - Creation of quality plans - Development, preparation, and maintenance of quality training - Creation and maintenance of the quality system

Reasons for Making

Protect proprietary technology - You may not want your intellectual property to be out in the public domain 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 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 Use existing idle capacity - Make use of excess capacity by making a material instead of letting the capacity sit idle 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 Control of lead-time - You may feel that you have more control over the lead time to produce the product than a supplier

In the 1990s, Supply Chain Management combined (Lean History)

Quick Response - the rapid replenishment of a customer's stock by a supplier with direct access to data from the customer's point of sale Efficient Consumer Response - a strategy to increase the level of services to consumers through close cooperation among retailers, wholesalers, and manufacturers Just-in-Time (JIT) - an inventory strategy to decrease waste by receiving materials only when and as needed in the production process, thereby reducing inventory costs Keiretsu Relationships - involves companies both upstream and downstream of a manufacturing process, remaining independent but working closely together for mutual benefit *The combination of these concepts have emerged as the philosophies and practices known as LEAN Manufacturing*

Respect For People

Respect for all people must exist for an organization to be at its best - Flatter hierarchy than traditional organizations. - Ordinary workers given greater responsibility. - Supply chain members work together in cross functional teams. The goal is NOT to reduce the number of people in an organization, it is to use people's resources more wisely

Risks and Benefits of Buying/Outsourcing

Risks: - Potential loss of control - Over production decisions, intellectual property, etc. - Increased reliance on suppliers - Increased need for supplier management Benefits: - Concentrate on core capabilities - Reduce staffing levels - Accelerate reengineering efforts - Reduce internal management problems - Improve manufacturing flexibility

Sourcing Strategies Continued

Single-Source: A sourcing strategy where there are multiple potential suppliers available for a product or service, however, the company decides to purchase from only one supplier. - This is in contrast to a situation where there is only one supplier for an item, i.e., sole sourced. Sole source is not truly a strategy as there really isn't a choice, and there is very little opportunity for a company to negotiate price or service. Multi-Source: Purchasing a good or service from more than one supplier. Companies may use multi-sourcing to create competition between suppliers in order to achieve higher quality and lower price. A regular review of an organization's sourcing strategy is a must in order to achieve significant agreed upon results

Six Sigma Methodology

Six Sigma has two key methodologies: DMADV Methodology: Define --> Measure --> Analyze --> Design -->Verify: which is a data-driven quality strategy for designing products & processes. - This methodology is used when the company wants to create a new product design or business process that is more predictable and defect free. DMAIC Methodology: Define --> Measure --> Analyze --> Improve -->Control: which is a data-driven quality strategy for improving products & processes. - This methodology is used when the company wants to improve an existing product or business process. - DMAIC is the most widely adopted and recognized Six Sigma methodology in use. - It defines the steps a Six Sigma practitioner typically follows during a project

Small Batch Scheduling

Smaller batches will facilitate producing at the same rate as customer demand. Production in small batches creates a smooth workload as production can be synchronized with customer demand, facilitating a pull system. - It increases flexibility allowing the company to respond to changes in customer demands more quickly. - Throughput times in manufacturing go down, and Work-in-Process inventory goes down, reducing costs and eliminating or minimizing waste in the system

What is Strategic Sourcing?

Sourcing- The process of identifying a company that provides a needed good or service Strategic Sourcing- A comprehensive approach for locating and sourcing key suppliers, so that an organization can leverage its consolidated purchasing power to find the best possible values in the marketplace - Strategic sourcing requires analysis of what an organization buys, from whom, at what price, and at what volume - Emphasis is placed on the entire life-cycle of a product, not just its initial purchase price

LEAN History

Starting in the 1910's, Henry Ford's mass production line was a first breakthrough by using continuous assembly systems that made parts find their way into finished products In the 1940's, Taichii Ohno and Shigeo Shingo created the Toyota Production System (TPS), which incorporated Ford's production system and other techniques to form the basis of what is now known as LEAN. The term LEAN was first coined by John Krafcik in 1988 and the definition was expanded in the 1990 book, The Machine that Changed the World

(2) Use of Technical Tools

Statistical quality control. Six Sigma provides a statistical approach for solving any problem and thereby improves the quality level of the product as well as the company All employees should be trained to use the seven tools of quality. Six Sigma is concerned with the permanent fix to quality problems and seeks to identify and correct the root cause of the problem

Tapping into Strategic Supplier's Knowledge

Strategic Sourcing partners offer the opportunity for a company to extend their intellectual capabilities by involving their external partner base in product development Early Supplier Involvement (ESI)- Key suppliers become more involved in the internal operations of the buyer's company, particularly with respect to new product and process design, concurrent engineering, and design for manufacturability - Strategic Suppliers are asked to add their knowledge and expertise to the company's new product development process. Value Engineering activities help the buyer's company to reduce cost, improve quality and reduce new product development time beginning with the initial design

W. Edwards Deming

Stressed management's responsibility for quality. He developed 14 points to guide companies in quality improvement Father of TQM Creator of the Plan-Do-Check-Act Model 5 Main Points : 1. Cease dependence on inspection to improve quality 2. Constantly improve the production and service system 3. Institute leadership 4. Break down barriers between departments 5. Put everyone to work to accomplish the transformation

Successful Strategic Partnerships

Strong Supplier Partnerships Important to achieving win-win competitive performance for the buyer and supplier - These require a strategic perspective as opposed to a tactical perspective Involves "a mutual commitment over an extended time to work together to the mutual benefit of both parties, sharing relevant information and the risks and rewards of the relationship"

Sourcing Strategies Continued #2

Successful sourcing strategies are almost always different for functional products versus innovative products Functional Products - MRO items and other commonly low profit margin items with relatively stable demands and high levels of competition i.e. office supplies, food staples, etc. - Potential Strategy:Reliable, low cost suppliers. Multi-sourced. Innovative Products - characterized by short product life cycles, volatile demand, high profit margins, and relatively less competition i.e. technology products such as the iPhone - Potential Strategy: Innovative, high-tech, cutting edge, market leading supplier. Long term partnership. Single-sourced

Supplier Development

Supplier development is the technical and financial assistance given to existing and potential suppliers to improve quality and/or delivery performance In simpler terms, it can be described as a buyer's activities to improve a supplier's capabilities A supplier's knowledge and the technology that they use to produce the commodity they supply, can be leveraged through supplier development. Supplier development programs should be designed to achieve: - Lower supply chain total cost - Increased profitability for all supply chain participants - Increased product quality - Near-perfect on-time-delivery at each point in the supply chain

International Purchasing - Specialized Knowledge

Tariffs- Duties, taxes, or customs imposed by the host country for imported or exported goods Non-tariff Barriers- Quotas, licensing agreements, embargoes, laws and regulations imposed on imports and exports Countertrade- International trade by exchange of goods rather than by currency

Voice of the Customer

Term used in business to describe the in-depth process of capturing internal and external customer's expectations, preferences, likes, and dislikes The VOC can be captured in a variety of ways: - Customer Interviews - Market Surveys - Focus Groups - Customer Specifications - Observation - Warranty Data - Field Reports - Complaint Logs

The 5 How's Technique

The "5 How's," is a questioning technique for drilling down into the details of a potential solution to a known problem. It is designed to bring clarity and refinement to a solution and arrive at the root solution (best solution). 5 How's is a useful method of brainstorming resolutions to the root causes and developing action items to resolve the problem Think of this activity as being halfway up a ladder, with 5 steps above it and 5 below. You go up the ladder by asking "why" and down it by asking "how." The 5 Whys and 5 How's are typically used in conjunction with the Cause and Effect Diagram

The 5 Why's Technique

The "5 Whys," is a questioning technique for identifying the root cause of a problem. By repeatedly asking the question "Why" (five is a good rule of thumb), you can peel away the layers of symptoms which can lead to the root cause of a problem (i.e., the underlying factors or causes of an event) At this point you understand the root cause, and can see where a change is needed. 5 Whys is used in the "Analyze" phase of the Six Sigma DMAIC (Define, Measure, Analyze, Improve, Control) methodology

Quality Tools

The Seven Tools of Quality Control are used by workers to identify and correct quality problems: 1. Check Sheets- Used to determine frequencies for specific problems 2. Histograms- A graphical display where the data is grouped into ranges 3. Pareto Analysis- For presenting data in an organized fashion, indicating process problems from most to least severe 4. Cause & Effect Diagrams- Used to aid in brainstorming and isolating the causes of a problem 5. Flow Diagram- Sequence of movements or actions of people or things involved in a complex system or activity 6. Control Charts- Graph to study how a process changes over time 7. Scatter Diagrams- The values of two variables plotted along two axes, to reveal any correlation present

Supplier Evaluation: Weighted-Criteria

The Weighted-Criteria Evaluation System: - Select the key dimensions of performance mutually acceptable to both buyer and supplier - Monitor and collect performance data - Assign weights to each of the dimensions - Evaluate performance measures between 0 and 100 - Multiply dimension rating by weight and sum of overall score - Classify suppliers based on their overall score, e.g., Certified, Preferred, Acceptable, Conditional, Developmental, Unacceptable, etc - Audit and perform ongoing certification review

Sustainable Sourcing

The ability to meet current needs of the supply chain without hindering the ability to meet future needs in terms of economic, social, and environmental challenges. - Do not mortgage the future for the present. - Companies must consider worker safety, wages, working conditions, human rights, etc - Establishing a sustainable procurement process takes work - The company involved must understand the value of incorporating sustainable standards into their sourcing goals

Manufacturing Strategy -vs- Performance Cycle

The choice of strategy determines which performance cycles (i.e., lead time) the customer experiences Cycles: Product design, Procurement Cycle, Manufacturing Cycle, Customer Delivery Cycle

Six Sigma History

The concept of Six Sigma was originated by Motorola - Motorola developed the concept in the 1980's, created the methodology, and copyrighted it as well. - Motorola has documented > $16 Billion in savings as a result of Six Sigma. Thousands of companies globally have adopted Six Sigma - This is a direct result of many of America's leaders openly praising the benefits of Six Sigma Six Sigma became famous when Jack Welch made it central to his successful business strategy at General Electric in 1995 - Reported $200MM in savings in the first year of implementation (1996) alone

Additional Sourcing Concepts - Supplier Co-location

The concept of Supplier Co-location is very similar to VMI and CMI, except that a representative of the supplier is actually embedded in the buyer's purchasing group to forecast demand, monitor inventory, and place orders - The employee is on the payroll of the supplier but works for the buyer and is empowered to forecast demand, monitor inventory and place orders - The arrangement involves the buyer granting the supplier access to potentially proprietary or sensitive data - Benefits both buyers and suppliers, from day-to-day operational improvement, to strategic advances in the structure of the supply chain organization

Supplier Relationship Management (SRM)

The discipline of strategically planning for, and managing, all interactions with the third party organizations that supply goods and/or services to an organization in order to maximize the value of those interactions - Most supply professionals view SRM as an organized approach to defining what they need and want from a supplier - Establishing and managing the company-to-company link to obtain those needs - Identifying and measuring key strategic suppliers Improving profits and reducing costs using tools such as: - Sourcing Analytics - Sourcing Execution - Procurement Execution - Payment and Settlement - Supplier Score-carding - Performance Monitoring

Lean Principles

The goal of LEAN is the elimination of waste and the minimization of the amount of all resources used in the operation of a company LEAN is NOT a tool box of methods, ideas, or methodologies, it is philosophy/ culture Principles: 1. Define Value 2. Map Value Stream 3. Create Flow 4. Establish Pull 5. Pursuit Perfection

(4) Small Batch Scheduling and Uniform Plant Loading

The ideal schedule is to produce every product as quickly as possible and at the same rate as customer demand. - In the real world, material availability, labor availability, and setup or changeover time influences the scheduling of large batches Large batches can exacerbate the Bullwhip Effect as production in large batches creates an uneven workload - Production is not synchronized with customer demand, making a pull system impossible. - Throughput times in manufacturing go up, and work-in-process inventory goes up, creating more waste in the system

Plan, Do, Check, Act

The process commonly utilized in continuous improvement is; Plan, Do, Check, & Act Plan: Identify an opportunity and plan for change Do: Implement the change on a small scale. Check: Use data to analyze the results of the change and determine whether it made a difference. Act:If the change was successful, implement it on a wider scale and continuously assess your results. If the change did not work, begin the cycle again

ISO 9000

There are eight (8) quality management principles on which the ISO 9000 series quality management system standards are based: 1. Customer focus - understand current and future customer needs 2. Leadership - establish unity of purpose and direction of the organization 3. Involvement of people - people are the essence of an organization 4. Process approach - a desired result is achieved through a managed process 5. Systems approach to management - managing interrelated processes 6. Continual improvement - performance improvement is a permanent objective 7. Factual approach to decision making - decision are based on facts and data 8. Mutually beneficial supplier relationship - interdependent benefits create value for both an organization and its suppliers

Advantages of an e-Procurement System

Time savings- A reduction in the time between need recognition and the release and receipt of an order Cost savings- Lower overhead costs in the purchasing area Accuracy- A reduction in errors. A virtual elimination of manual paperwork and paperwork handling Real time- Improved communication both within the company and with suppliers Management- Purchasing personnel spend less time on processing of purchase orders and invoices, and more time on strategic value-added purchasing activities Mobility- Access virtually anywhere Trackability- Real-time status tracking Benefits of the Supplier

Manufacturing

To process or make of raw materials or components into a finished product, especially by means of a large-scale industrial operation, i.e., mass production. Manufacturing involves the entire process of converting the raw material(s) or the component(s) into a finished goods item. - It includes the machines used, the personnel involved, inventory handling, warehousing, etc. Manufacturing Management is the management of all the processes which are involved in manufacturing

Total Cost of Manufacturing

Total Cost of Manufacturing (TCM) is the complete cost of producing and delivering products to your customers. - It incorporates both fixed and variable costs used in the manufacturing, storage, and delivery of the product TCM includes: 1. Manufacturing and Procurement activities 2. Inventory and Warehousing activities 3. Transportation activities

Total Quality Management

Total Quality Management (TQM) is a management philosophy based on the principle that every employee must be committed to maintaining high standards of work in every aspect of a company's operations. TQM is a combination of quality and management tools which are designed to increase business and reduce losses resulting from wasteful practices. *Six Sigma is an integral part of Total Quality Management* The key principles of TQM are: - Management Commitment - Employee Empowerment - Fact Based Decision Making - Continuous Improvement - Customer Focus

The Pull System

Traditional Approach: - Supply chains work as "push" systems, and inventory is carried to cover up problems Pull Approach: - Each stage in the supply chain requests quantities needed from the previous stage. - No excess inventory is generated. - Reducing inventory levels can also uncover production problems - Inventory can hide the underlying problems, but they are still there and can potentially create major issues in the supply chain. - Lowering inventory will help to expose the hidden problems. Once the problems are detected, they can be solved. The end result will be a smoother running supply chain with less inventory investment

Gain

Using a reward as a positive outcome from exceptional performance: - Buyer could award a financial bonus to the supplier for exceptional performance - Buyer could award more business and/or longer contracts to the supplier - Buyer could share a portion of any cost reductions developed by the supplier which benefit the buyer - Buyer could provide access to in-house training seminars, conferences, tools and information, or other resources to the supplier. - Buyer could publicly recognize the supplier and /or confer a special status on the supplier such as "Preferred Supplier", "Partner", "Supplier of the Year", etc

Understand "Value"

Value is the inherent worth of a product as judged by the customer, and reflected in its selling price and market demand. - It is any activity that increases the market, form, or function of the product/service. - Things for which the customer is willing to pay Value Added Process - Process steps that transform or shape a product or service which is eventually sold to a customer Non-Value Added Process - Process steps that take time, resources, or space, but do not transform or shape the product or service

Additional Sourcing Concepts - Vendor Managed Inventory

Vendor Managed Inventory (VMI) - Suppliers directly manage buyer inventories to reduce the buyer's inventory carrying costs and avoid stockouts for the buyer From the buyer-firm's perspective: - Supplier tracks inventories - Supplier determines delivery schedules and order quantities - Buyer can take ownership at the stocking location - Buyer may also be able to avoid taking ownership until the material is actually being used. From the supplier's perspective: - Avoids ill-advised customer orders - Supplier decides inventory set up and shipments - Opportunity for supplier to educate customers about other products

Supplier Certification

Verification that a supplier operates, maintains, improves, and documents effective procedures that relate to the buyer's requirements (e.g., cost, quality, delivery, flexibility, maintenance, safety, etc.) - Supplier certification programs are used to differentiate strategic supplier alliance candidates from others - Companies may choose to develop internal certification programs, and/or require external certifications such as ISO 9000 and/or ISO 14000 as part of their overall certification process

Total Quality Management Gurus

W. Edwards Deming - is widely considered the father of TQM. He is the creator of the Plan-Do-Check-Act model. Philip Crosby - coined the phrase "quality is free" (which is also the title of his book) as defects are costly. He introduced the concepts of zero defects, and focus on prevention and not inspection. Joseph Juran - defined quality as "fitness for use". He developed the concept of the cost of quality. Kaoru Ishikawa - developed one of the first tools in the quality management process, the cause and effect diagram, which is also called the "Ishikawa" or "fishbone" diagram

Acceptance Sampling

When a shipment is received from a supplier, a statistically significant representative sample is taken and measured against the quality acceptance standard. The entire shipment is assumed to have the same quality as the representative sample that was taken. Sampling is less time-consuming than testing every unit but can result in errors: - Supplier's Risk: The buyer rejects a shipment of good-quality units because the sample quality level did not meet the acceptance standard (type I error) - The 5 WhyBuyer's Risk: The buyer accepts a shipment of poor-quality units because the sample falsely provides a positive result against the acceptance standard (type II error)

Performance Metrics

You can't improve what you can't (or don't) measure - Measures related to quality, cost, delivery, and flexibility are used to evaluate suppliers. - Metrics should be: 1) understandable, 2) easy to measure, and 3) focused on real value-added results [S.M.A.R.T. objectives] - A multi-criteria approach is best [i.e., a SCORECARD] Specific Measurable Achievable Relevant Time-Oriented