Supply Chain Chapter 5

Sealed Bid

is a document enclosed in a sealed envelope and submitted in response to invitation to bid

Total Cost of Ownership (TCO)

is the sum of all the costs associated with every activity in the supply stream of a product

TCO

is the sum of the cost elements in QSDP (i.e., Quality + Service + Delivery + Price)

A high turnover ratio is beneficial because

it means the company is generating sales efficiently to sell inventory

Inventory Considerations

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

Quantitative Factors

primarily involve the incremental costs of either making or purchasing the item, such as the availability of manufacturing facilities, needed resources, and manufacturing capacity

Brand Strategy

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

Competitive Bidding

A transparent procurement method in which bids from competing suppliers are invited by openly advertising the scope, specifications, and terms and conditions of the proposed contract as well as the criteria by which the bids will be evaluated

Lack of Expertise

Firm may not have the necessary technology and expertise

Return on Assets (ROA) Effect

[Profit Before Tax ÷ Assets]

Bid Bond

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

Cost savings

Lower overhead costs in the purchasing area

Benchmarking

Measuring what other businesses do best and matching their performance, is an effective approach to improving your supply chain

Performance Bond

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

International Purchasing

The opportunity to improve quality, cost, and delivery performance

Green Purchases

Variety of federal, state, and local initiatives to include environmental and human health considerations when making purchases

Payment Bonds

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

Advantages of Decentralization

-Knowledge of local requirements -Local sourcing -Less bureaucracy

Processing costs for small value purchases are minimized through:

- Credit Card/Corporate Purchasing Card (P-card) -Blanket or Open-End Purchase Orders -Blank Check Purchase Orders -Petty Cash -Stockless Buying or System Contracting -Standardization & Simplification of Materials & Components -Accumulating Small Orders to Create a Large Order -Using a Fixed Order Interval

Risks associated with outsourcing include

- Potential loss of control - Over production decisions, intellectual property, etc. - Increased reliance on suppliers - Increased need for supplier management

To exploit global efficiencies:

-Access to low cost labor and materials. -Take advantage of tax breaks and low trade tariffs

Benefits. Outsourcing allows a firm to:

-Concentrate on core capabilities -Reduce staffing levels -Accelerate reengineering efforts -Reduce internal management problems -Improve manufacturing flexibility

Advantages for Centralization

-Concentrated volume -Leveraging purchase volume -Avoiding duplication -Specialization -Lower transportation costs -No competition within units -Common supply base

International Purchasing: Reasons for Global Sourcing

-The opportunity to improve quality, cost, and delivery performance -To exploit global efficiencies -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

Co-Sourcing

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

It is preferable to periodically monitor the purchasing function's performance against ...

... set standards, goals, and/or industry benchmarks

Surveys or audits can be administered as self-assessments among purchasing staff as...

...part of the annual evaluation process

Characteristics of World-Class Procurement Organizations:

1. Being A Trusted Advisor To The Business 2. Driving Suppliers To Innovate 3. Providing Analytics-backed Insights 4. Protecting The Business From Risk 5. Taking An Agile Approach To Staffing

The primary goals of purchasing are:

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

Profit-Leverage Effect

A decrease in purchasing expenditures directly increases profits before taxes (assuming no decrease in quality or purchasing total cost).

Insufficient Capacity

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

Return on Assets (ROA) Effect

A high ROA indicates managerial prowess in generating profits with lower spending

Import Merchants

A person or company engaged in the purchase and sale of imported commodities for profit

Accuracy

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

Time Savings

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

Import Brokers

Agents licensed by the governmental regulatory authority to conduct business on behalf of importers, for a service fee

What is one of the main reasons that Procurement Managers are under significant pressure from senior management to reduce purchase costs?

Because A 10% Cost Reduction generates significantly more Profit Before Tax than does a 10% Sales Increase

A tender, proposal, or quotation submitted in response to a solicitation (i.e., RFP, RFQ) from a contracting authority

Bid

Trading Companies

Buy products in one country and sell them in different countries where they have their own distribution network

Offers submitted by multiple individuals or firms competing for a contract, privilege, or right to supply specified services or merchandise

Competitive Bidding

Tariffs

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

Non-Strategic

If it is a non-strategic item

Real Time

Improved communication both within the company and with suppliers

Inventory Turnover Effect

Increased inventory turnovers indicate optimal utilization of space and inventory levels, increased sales, avoidance of inventory obsolesce

Decentralized Purchasing

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

Countertrade

International trade by exchange of goods rather than by currency

Concerned with acquiring all of the goods, services and work that is vital to an organization

Procurement

The process of selecting and vetting suppliers, negotiating contracts, establishing payment terms, and the actual purchasing of goods and services

Procurement

the overarching or umbrella term within which the action of purchasing can be found

Procurement

The Buyer's offer to the supplier to acquire goods or services. Becomes a legally binding contract only when accepted by the supplier

Purchase Order

Document that defines the need for goods and/or services. An internal document.

Purchase Requisition

Centralized Purchasing

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

Management

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

The four elements of cost are:

Quality, Service, Delivery, and Price (QSDP).

Non-tariff Barriers

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

Forward Vertical Integration

Refers to a company acquiring one or more of their customers

Backward Vertical Integration

Refers to a company acquiring one or more of their suppliers

Federal Acquisition Streamlining Act (1994)

Removed restrictions on bids less than $100,000. Micro purchases (less than $2,500) can be made without bidding

A detailed low-level capabilities evaluation document that is used to precisely determine a supplier's capability and interest in the production of a customized product or service

Request for Proposal (RFP)

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

Request for Quote (RFQ)

In-sourcing (also known as back sourcing)

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

Quality

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

Cost Advantage

Suppliers may provide the benefit of economies of scale, especially for components that are non-vital to the organization's operations

Supplier Section

The process of selecting suppliers is complex and should be based on multiple criteria using evaluation forms or scorecards

Closed Competitive Bidding

The sealed bids are opened in presence only of authorized personnel

Open Competitive Bidding

The sealed bids are opened in the presence of anyone who may wish to be present and evaluated for award of a contract

Multi Sourcing Strategy

To achieve a multi sourcing strategy using an external supplier in addition to an internal source

Buy American Act (1933)

US government purchases and 3rd party purchases using federal funds must buy from US source if the US good is not more than a certain differential above the foreign good

Qualitative Factors

are more subjective and include such things as control over quality, the reliability and reputation of the potential suppliers (internal or external), and the impact of the decision on customers and suppliers

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.

The main TCO insight is

that the acquisition cost is often a very small portion of the TOC (accounting for only 25% to 40% of the total cost for most products).

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

E- Procurement

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