Chapter 10

Access Technology and Innovation

Firms look to suppliers as sources of innovation and new technology to aid the design of new products and the improvement of existing ones. Very few firms have all the necessary expertise to develop needed innovations on their own. Suppliers often provide essential technical knowledge and expertise by being directly involved in early product development activities.

Reduce Total Costs

Similarly, selecting a supplier based solely on purchase price can be a bad business decision. The supplier with the lowest price may not have the capabilities to meet the buyer's quality or delivery requirements, ultimately resulting in delays and higher costs

Outsourcing

acquiring inputs from operational processes done by suppliers

Total Cost of Ownership (TCO)

all of the costs incurred before, during, and after a purchase These include sourcing costs, purchase price, transportation, handling, inspection, quality, rework, maintenance, and disposal

online reverse auctions

allow suppliers to competitively bid for a buyer's business in real time. Competitive bidding systems that allow suppliers to submit multiple bids within a fixed time.

Which one of the following would NOT be a step in making an insourcing/outsourcing decision?

conduct a detailed internal audit of purchasing practices

If a firm is conducting a "supplier certification" program it would be most important to:

conduct an extensive audit of suppliers processes and systems

Fixed costs per contract

costs incurred at the start of production or the beginning of a new contract

fixed costs per order

costs incurred each time an order is placed, regardless of the size of the order

variable costs

costs that change in proportion to the quantity of units produced or service delivered

Which of the following are NOT typically associated with a vendor managed inventory (VMI) arrangement such as Bose's proposed JIT II?

customer suggests how supplier should schedule production

full partnerships

have close working relations, trust, mutual respect, and highly integrated operations. Full partners acknowledge their interdependencies and work together to reduce total costs so both parties benefit. Partners frequently exchange schedules, information and specifications for new product designs, and cost data, along with other information. Many buyers allow suppliers direct access to their information systems, and vice versa. Also called strategic alliances

Firms use supply chain risk management (SCRM) practices to:

identify, assess, and reduce risk exposure and to speed recovery if a disruption occurs. Risks are assessed based on their probability of occurrence and their impact on the firm.

vendor-managed inventory (VMI)

in which the supplier manages its customer's inventory. The supplier regularly reviews the customer's inventory and restocks as needed. With VMI, suppliers understand what their customers are actually using and thus can plan their own operations more effectively, reducing excess inventory and waste in the supply chain.

Supplier Relationship Management (SRM)

is a comprehensive system, facilitated by software, that manages the firm's interactions with its supply base. The goal of SRM is to streamline the processes and interactions that exist between the firm and its various suppliers so they are more efficient and transparent. A comprehensive system, facilitated by software, that works on managing the firm's interactions with its supply base

Purchase Order (PO)

is a legally binding document prepared by a buyer to describe all terms and conditions of a purchase.

To communicate details such as what, when, and how many to the supply management department, people use an internal company document referred to as a:

purchase requisition (A document that communicates needs between the user and supply management)

adversarial relationship

represent the traditional way that buyers and suppliers have approached each other. These relationships are typified by distrust, limited communications, and short-term business transactions. Adversarial relationships can be serious obstacles to effective supply chain management

acceptance of mutual goals

represents a major step toward collaboration, but it lacks the commitment of resources associated with full partnership

Because of its complexity, insourcing/outsourcing analysis should be done by a cross-functional team. The team must consider quantitative and qualitative issues. The steps in making an insourcing/outsourcing decision are:

1) Assess Fit with the Firm's Core Competencies. Evaluate the product's or process's relationship to the firm's current or future core competencies 2) Evaluate the Suitability for Outsourcing. Certain characteristics favor outsourcing. Mature products with standard processes and requirements are often outsourced. 3) Evaluate the Reasons for Outsourcing. If the product or process seems appropriate for outsourcing, compare the benefits of outsourcing to those of insourcing 4) Assess All Relevant Quantitative Costs. If previous steps indicate that outsourcing makes sense, compare the costs to make the product internally against the total cost of purchasing it 5) Assess All Qualitative Factors. It is not always possible to quantify all factors affecting the insourcing/outsourcing decision 6) Review the Capabilities of Suppliers. After assessing the costs and qualitative factors of insourcing and outsourcing, determine whether to use current or new suppliers. This requires a review of the technical, financial, manufacturing, and quality-related capabilities of suppliers 7) Make and Implement a Decision. After extensive study, make a decision based on the available information. Negotiate the terms of the purchase contract or acquire assets to initiate internal production 8) Monitor the Decision and Revise It as Necessary. Insourcing/outsourcing analysis does not end with the start of production or a purchase. Compare the actual results of the decision against estimates and identify potential problems

Enhance Quality

A supplier's quality is an order qualifier with a specified level of quality required to do business with the buyer. If a supplier's quality is poor, buyers will often look for a new supplier. Most large corporations require that their suppliers have extensive quality management systems such as ISO 9000 and statistical process control, as discussed in Chapter 6. Many companies expect suppliers to demonstrate continuous improvement in quality and use continuous improvement as a key performance indicator.

Which of the following activities is NOT typically one of supply management's responsibilities?

ANSWER: All of the above are responsibility of supply management -Analysis of make versus buy decisions -Economic forecasting -Maintaining good relationships with vendors -Finding new sources of purchased commodities

Insourcing

Acquiring inputs from operational processes done within the firm

Which of the following statements provides the best definition of "total cost of ownership"

All the costs incurred before, during and after the purchase

Which one of the following would NOT be a step in conducting a make/buy analysis?

Conducting a detailed internal audit of purchasing practices

When the costs occur after the transaction

Costs of inventory, supply risk, production downtime, defects in finished goods, warranties, safety recalls, replacements, repairs, lost sales, liability, and damaged reputation

Request for Proposal (RFP) or request for quotation (RFQ)

Documents sent to suppliers to request bids. These must describe the purchase requirements as specifically as possible. These documents describe the purchase requirements as clearly as possible in terms of technical specifications, quality, quantity, delivery requirements, packaging, shipping, and any other characteristics.

Ensure Timely Availability of Resources

Ensuring that the right purchases are available at the right time to support new product launches, operations, and shipments is an important supply management goal. Identifying and managing supply chain risks can help to ensure that deliveries are on time.

weighted point model

Establishes performance categories that are weighted according to importance

Purchasing personnel would be least likely to be involved in which of the following activities:

Product testing with customers

When the costs occur during the transaction

Purchase price and costs of ordering, transporting, expediting, receiving, inspecting, and following up

Identify, Assess, and Mitigate Supply Chain Risk

Supply managers gather information and carefully evaluate supply markets and suppliers capabilities to assess supply chain risk, the probability of an unplanned event in acquisition, delivery, and use that negatively affects a firm's ability to serve its customers.

Foster Sustainability

Supply managers play important roles in fostering sustainability, which simultaneously addresses how decisions made within the firm and throughout the supply chain affect people, the planet, and company profits. Firms develop policies and procedures designed to improve sustainability. Sustainability can improve financial performance, lower total costs, increase quality, instill customer loyalty, and enhance a firm's reputation.

When the costs occur before the transaction

Time spent and costs of searching for, visiting, evaluating, and certifying suppliers.

A "full partnership" supplier relationship tends to emphasize total cost of ownership more than a "transactional" relationship does

True

According to the recorded lecture, one of the ways to improve supply management is through "consuming better"

True

Reducing purchase price of a raw material by $1 affects a firm's profit more than increasing sales of its finished goods by $1

True

Supply managers create value by managing relationships as well as processes

True

Spend Analysis

a process that identifies what purchases are being made in an organization (is a process used to understand what purchases are being made, at what price, and from which specific suppliers)

A relationship with a supplier that is characterized by short term focus, emphasis on purchase price and limited interaction is knowns as

a transactional relationship

When outsourcing to a different country, the term _______ is used

offshoring

Supplier Certification

is an assessment that verifies that the supplier operates, maintains, improves, and documents effective procedures related to the buyer's requirements. Quality certification reduces the need for incoming quality inspections. An assessment that verifies effective procedures related to the buyer's requirements

negotiation

is an exploratory bargaining process (planning, reviewing, analyzing, compromising) involving a buyer and seller seeking to reach mutual agreement on all aspects of a contract—including price, service, specifications, technical and quality requirements, contract length, delivery frequency, shipping, and payment terms. A bargaining process involving a buyer and seller seeking to reach mutual agreement.

competitive bidding

is used when price is the most important factor, the specifications are known and clear, the spend level is large enough, and there are a number of equally qualified suppliers who are willing to compete. Mature, standard products are often sourced using competitive bidding because price is often the only difference among suppliers. Competitive bidding is often required for purchases by local, state, and the federal governments. Competitive bidding is used when relationships are adversarial or arm's-length. A selection process in which suppliers submit bids to win the buyer's business.

The "Sourcing and Supply Management" chapter indicates that purchases should be "strategically sourced" according to what criteria?

supply risk and value to the firm

arm's-length relationship

tend to be limited to simple purchasing transactions, but they lack the high levels of distrust and antagonism often associated with adversarial relationships.

Sustainability

the ability or capacity of the system (the firm and its supply chain) to maintain or sustain itself by improving its performance in terms of how it manage pollution (planet), people, and changes in the business model (profit).

Supply Chain Resilience

the capability of a supply chain to minimize the impact of a disruption and to recover after a disruption

make or buy decision

the choice between making a product internally or purchasing it from a supplier

supply base optimization

the determination of the number of suppliers to use

Supply Management

the identification, acquisition, positioning, and management of resources and capabilities that a firm needs to attain its strategic objectives

Sourcing

the identification, evaluation, selection, and management of suppliers

Supply Chain Risk

the probability of an unplanned event that negatively affects a firm's ability to serve its customers

supplier scorecard

used to report a supplier's performance on key performance indicators (KPI)

Supply Management goals

• Ensure timely availability of resources. • Identify, assess, and mitigate supply chain risk. • Reduce total costs. • Enhance quality. • Access technology and innovation. • Foster sustainability.

Assess All Qualitative Factors. It is not always possible to quantify all factors affecting the insourcing/outsourcing decision. Numerous qualitative factors are often important, including:

• Loss of control by releasing work to a supplier. • Risk of dealing with a supplier. • Importance assigned to a supplier's location and the convenience of site visits. • Quality of the supplier's management team. • Compatibility of organizational cultures and values. • Supplier's willingness to remain flexible and accommodate changes. • Supplier's labor-management climate. • Supplier's warranty, repair, and support systems. • Proprietary information and degree of secrecy required.

A sourcing strategy is developed using information from the spend analysis and the market analysis. A classic framework developed by Kraljic in 1983 is still relevant today. The framework categorizes sourcing strategies based on supply risk and the value of the total amount spent by the firm and recommends a sourcing strategy:

• Strategic purchases represent a high spend level and are high risk. Typically these purchases are unique and core to the firm's performance. Tactics—Use one or two suppliers and build partnerships with them to foster collaboration and innovation. • Bottleneck purchases are high risk and low spend and typically are not core to the firm's performance, but lack of availability can cause delays. Tactics—Use at least two suppliers to assure supply, develop new suppliers, and explore using different materials. • Leverage purchases are low risk but represent a high level of spend. They typically involve standard goods or services where many possible suppliers are available. Tactics—Standardize purchases across the company, use competition to select suppliers, and consolidate purchases with one or a few suppliers to get discounts. • Noncritical items typically are a low percentage of overall spend and have little impact on performance. Tactics—Use vendor-managed inventory and allow users to make their own purchases using online catalogs or corporate credit cards (called purchasing cards) to lower the transaction costs of purchasing.

Operations and supply chain practices can increase exposure to supply chain risk. Lean manufacturing, just-in-time deliveries, reliance on a single supplier for each component, and global sourcing increase supply chain risks. Factors contributing to risk include:

• Supplier technical, operations, or quality problems. • Supplier financial problems. • Labor disputes. • Major increases or decreases in demand. • Lack of transparency in the supply chain. • Inadequate physical, information, and intellectual property security. • Disasters such as fires, earthquakes, hurricanes, and floods. • Political instability. • Changes in government regulations. • Concentration of suppliers within the same geographical region