BUS-P 320: Exam 2

What is the Ultimate Meaning of Lean

-customer focus that looks @ the Total Cost of Ownership (TCO) which includes price, quality, cycle times & risks -waste reduction

Financial Impact of Poor Quality

-10x Cost of Escapes: -fix and catch quality @ the source -as defects are found later in process the cost grows 10x at each step: 1.$1 → Own Process 2.$10 → Next Process 3.$100 → End-of-Line 4.$1000 → Final Inspection 5.$10000 → Customer

Mercantile Exchange

-Commodity Trading 1. currency, metal, grains, oil 2. Market Driven: Buy Low & Sell High 3. Winner & Loser 4. Speculative → Don't want or use product -Buyers & Commodity /Category Managers want: 1. Support Core Business: Securing Product 2. Smooth & Predictive Pricing -remove Market fluctuation by LTA 3. Risk Mitigation NOT Speculation -Differences: 1. Traditional vs Collaboration 2. Spot Buy vs Plan 3. Core Competencies

International Standards Organization (ISO)

-ISO9000 is family of standards for QMS ₀process orientated ₀set procedures for key areas ₀monitor processes ₀adequate record keeping ₀defect monitoring & corrective action ₀review of processes & quality system for effectiveness ₀continual improvement

Quantity Discount Analysis 3

-LINE 6

Global Supply Chain Risk Management

-SCRM -how SC members communicate & collaborate regarding sources of risk, utilizing risk management tools to mitigate & ↓ risk & uncertainty across SC -capabilities required: 1. Visibility to access risk across SC 2. Event recognition & early warning system 3. Real-Time SC Analytics for improved decision making 4. Evaluation of various competing scenario responses

3-Basic Degrees of Espaces

-a defect/quality issue that disappears into the SC Class-1: Detected entering buyer facility (supplier sent me something bad) Class-2: Detected in facility WIP Class-3: Detected @ customer (put supplier on probation right away) -escapes are bad parts that "escape" from the originator into the SC

Producer Price Index

-actual to PPI comparison -each month a commodity manager will report a year-over-year performance

Learning Curves 2

-applied when: ₀new production processes ₀First Time Items Made ₀technically Complex Items *requires low employee turnover

Framework For Strategic Cost Management

-as supplier = want to work high-val items -critical: latest & greatest (only a couple of suppliers can do it) -eventually move to unique products (industry goes one way & your product flops to unique) or commodities (industry standard → can't go back into critical) -problem w/ unique products = val ↓, not a lot of suppliers that do it and you're paying a premium -try to push unique into a generic → go to engineer to ask (if you can push successfully life is great) -problem w/. generics: ↓ val & transaction costs are crazy -commodities: lots of suppliers and high-val = use 3-quote

ISO Certification

-auditing is both internal & external based: ₀tell me what you do ₀show me where it says that ₀prove that is what happens -ISO will write a procedure for anyone & anything: ₀ISO10006 → Quality Management in Projects ₀ISO19011 → Auditing ₀ISO/TS16949 → Quality management system for auto-related suppliers ₀ISO 13485 → Quality management system for Medical Device Industry

Market Analysis Based Pricing

-buyer's market: capacity/supply > demand -supplier's market: can't make enough of it (cars right now) -suppliers love big orders of standardized stuff -premium for customized orders b/c they don't want to make

Analyzing Supplier's Pricing Strategy

-by answering "what/where is the estimated profit?" a seller's strategy can be determined 1. does the seller have a long-term pricing strategy or is it short-term (make a lot of $ on a big order) in nature? 2. is the seller a price leader or a price follower 3. is the seller attempting to establish entry barriers to other competitors by establishing a low-price initially, then preparing to raise prices later in the future? 4. is the seller using a cost-based pricing approach or market-based pricing? if market-based then buyer must estimate cost-based -individual part pricing -LTA package part pricing can be difficult to decipher

Actual PPI Comparison

-by using just the actual, it appears that paper negotiated best w/ 2% hit from previous year -producer price index (PPI): 1. maintained by US bureau of labor stats 2. base year = 1988 3. updated quarterly 4. standard industrial codes (SIC) determine products -ex: gas 1. base = 9/2002 2. current = 9/2003 3. PPI% change = (90.3 - 109.9) / 90.3 (21% HIT) 4. actual % change (what we negotiated) = (100 - 115)/100 = 15% HIT -CAN'T JUST COMPARE DIFFERENT INDUSTRIES/ COMMODITIES

Maytag Reading

-classic example of strategic cost management -moved from make to buy for survival -understand cost = understand profit -manage cost to get best val

McDonald's AR

-collaborative long-term relations of win-win-win → expand & share the pie = trust & loyalty -3-legged stool (system 1st → what's in it for we) 1. McDonald's employees 2. owner/operators 3. supplier partners -100% outsourced -5-10 times safer than school lunch -business based on: ethical, truthful & dependable 1. Rule 1: focus on outcomes, not transactions (not ↓ RFQ = long-term relationships) 2. Rule 2: focus on what → not how → set standards (quality, service, clean, value) 3. Rule 3: agree of clearly defined & measurable outcomes → suppliers have a seat @ the table -SPI management = management system first assured supply + quality + innovation + predictable competitive pricing 4. Rule 4: pricing model/incentives for cost/service trade-offs → long-term approach across system 5. Rule 5: govern for insight, not oversight → P2P for accountability → lots of communication, awards, feedback & measurement

Supply Base Optimization

-continuous process of determining the appropriate number & mix of suppliers to maintain based on capability -as business changes = suppliers change -get rid of bad & add new + better while still meeting offset reqs -does price always ↓ when adding new supplier = NO -new supplier might be more expensive (to get better quality) or because you got a new one with better capabilities -legal changes maybe (regulations) -offset: new country

6-Sigma

-core is data-driven deep statistical analysis concerning variation -6 Sigma focuses on: ₀defect prevention ₀cycle time reduction ₀cost savings -3 to 4 Sigma was performance norm that creates b/w 6,200 to 67,000 problems per million opportunities (where most companies are) ₀25-40% of rev is spent fixing problems -6 Sigma performance: ₀3.4 defects per million (allows drift) ₀less than 5% of Revenue spent to fix problems -goal is to get to 6 sigma quality -"lean six sigma" combines lean tools w/ power of quantitative analysis

Porter's 5-Forces

-describes competitive forces in market economy -use for both: 1. final product to customer 2. product you're buying (sub-component) -different industries can sustain different levels of profitability based on the competitive industry -the 5 forces 1. ↑ levels of competition create more options for buyers & suppliers 2. The threat of new entrants 3. The threat of substitute products & services 4. The power of buyers 5. The power of suppliers -when you understand your supplier's needs, you can figure out how you can help them help you

Cost Reduction @ Suppliers

-discuss & understand items w/ suppliers relating to: 1. process capability: can they do it and where 2. plant utilization -overtime -economies of scale (how full) -growth (can you cover the growth over the next 5 years) 3. learning curve effects 4. cost reduction ideas & history (management philosophy) 5. SCM efficiency -pay bills -leverage -logistics

SWOT

-environmental factors internal to the firm: ₀(S) Strengths: ₀(W) Weaknesses: -environmental factors external to the firm: ₀(O) Opportunities: ₀(T) Threats: -degree to which the internal environment of the firm matches w/ the external environment is expressed by the concept of strategic fit -SWOT can be carried out for a company, product, place, industry, or person -assists in matching firm's resources & capabilities to the competitive environment in which it operates -identification of SWOTs is important because they can inform later steps in strategy & planning to achieve the objective

Learning Curves 1

-establish the rate of improvement due to learning as producers realize labor cost improvements as production volumes ↑ -learning curves: Labor Focus -experience curves: Longer-Term factors of Production that ↓ costs: 1. automation 2. vertical Integration 3. equipment Investment

Value Engineering / Value Analysis 1

-examining all elements of a component, assembly, end product or service to make sure it fulfills its intended function at the ↓ total cost 1. ↑ functionality while holding cost same 2. ↓ cost & hold functionality even 3. must maintain customer expectation 4. ↑ functionality more than cost increase -value keeps a customer focus

SPI Example 2

-flat rate of $4k = easy -makes inequity w/ smaller supplier (bigger hit) 1. allocation of late delivery is flat rate ($4k) 2. flat rates penalize smaller shipments 3. easy to calc but unfair comparison

Quantity Discount Analysis 2

-from a total cost basis can consider: 1. EOQ → inventory_holding_costs = transactions_costs 2. ROP → lead_time x usage + safety_stock

Quality Escape Process

-general process when "Bad Parts" detected to buyer's facility: 1. parts moved & secured in quality area 2. greater population evaluated to determine total extent of exposure ₀supplier/raw material/WIP/FG/shipped to customer 3. quality assurance determines who is responsible ₀supplier ₀assembly floor/materials ₀engineering 4. root cause & corrective action (RCCA) plan required & tracked to completion by quality assurance -BUYER DOES NOT DETERMINE

Quantity Discount Analysis 1

-get quote from supplier 1. what's the best deal -inv costs: 1. capital 2. taxes 3. insurance 4. obsolescence 5. storage 6. spoilage

Supplier Quality Escapes

-if supplier is @ fault there are different options based on situation: 1. return to supplier for new part -if schedule permits! (usually in just in time) 2. repair yourself -dedicated group to do this (magic group) 3. accept-as-is: special approval required -quality -engineering -possibly customer too

When Using SPI

-if using as comparison of SPI or factors must keep relative: 1. easiest as a trend: month-to-month 2. if comparing companies may need to consider: -diff people rating -diff products (complexity) -cost allocation methodology: lot sizes -don't get false sense of precision -can get a sense of trends though

Honda

-in it for the long-haul w/ suppliers: LTA -80% of their stuff is outsourced -well known for durability -counter-side: Honda practically owns their suppliers (act like it → just show up when problems arise)

Worldwide Global Sourcing

-intl Purchasing: commercial purchase transaction b/w a buyer & supplier located in different countries -global Sourcing: ↑ scope & complexity that involves proactively integrating & coordinating common items & materials, processes, designs, technologies, & suppliers across worldwide purchasing, engineering & operating locations

Globalization

-intl integration by which people of world are unified into single society -process combines: 1. economic 2. technological 3. socioculture 4. political forces -other words to describe: interdependence, connectivity, integration of economies

The (7) Original Wastes

-lean Goal: Cost Reduction by eliminating waste 1. Overproduction: Overstaffing, storage & transport -greatest Waste of the original 7 as creates inventory too 2. Waiting: Includes watching machines 3. Unnecessary Transport: Distance traveled 4. Over-Processing and Incorrect Processing: Unneeded Steps -waste is generated providing higher quality parts than required 5. Excess Inventory: Obsolescence, damage, storage costs 6. Unnecessary Movement: Wasted employee motions 7. Defects: Repair, rework, scrap, inspection 8th Waste: Unused Employee Creativity: not engaging or listening to employees TIMWOOD: 1. transport 2. inventory 3. motion 4. waiting 5. over processing 6. over production 7. defects

Weighted-Point Supplier Measurement & Eval

-measurement/assessment from the book -issues: 1. qualitative assessment 2. why not actual data? = then must develop & communicate new tech -factor ratings = points earned/available points

Supplier Management

-need measurement to support: M&D -an org must have tools to: 1. measure suppliers 2. manage suppliers 3. develop suppliers -measurements must be: 1. continuous, timely, accurate 2. simple to manage & understand (not a secret formula → public knowledge → you have to understand & those who you're measuring have to understand) -measure, rate, rank supplier performance -organizations must manage suppliers: 1. give feedback 2. listen to response 3. consequences

LTA Cost Based Strategies

-need to carefully select cost divers that are eligible for annual price adjustments -consider uncontrollable costs from supplier that may have significant variability over the life of the contract ₀electricity rates (indexes) ₀raw material → prior year invoices & London metal exchange (LME) -generally not covered: ₀health care ₀labor rates

Delivery Performance (Week 8 Live - slide 10)

-on-time delivery performance: 1. point in-time measurement 2. part numbers_on_time, total_part_numbers 3. -ex: rolling 12-mo part number activity = 150 -part #s late right now = 6 -(150-6)/150 = 96% -hold all part numbers w/ equal importance (that's why you don't go by $) because suppliers don't like working on the little stuff but you need it -ANDON: A VISUAL system to notify management & workers of a prob -ANDON hours: time that line stopped -ANDON $: fee associated w/ time line stopped

Comparing "Should Cost" / TCO

-price = cost +profit -COGS = material + DL + Factory OH -gross profit = net sales - COGS

Supplier Development Initiative

-primary objective is the continuous improvement of supplier capabilities: 1. tech sharing -manufacturing processes, patent rights 2. incentives for improved performance -more work: often too much new work 3. supplier benchmarking/competition 4. capital investment: -equipment, payment terms 5. personnel -coordination -training: lean, system, quality

Turnback Pareto Analysis

-problem identification, prioritization & Selection -collect turnback/escape data ₀welcome every turnback as a treasure = we encourage people to tell us what's wrong (fix problems!!!) -w/ data you can analyze & prioritize mistake proofing initiatives -data can be internally & externally generated -focus on first two columns (80%)

FMEA

-procedure for identifying & correcting potential quality problems inherent to product or process designs 1. Determine unit of analysis 2. Identify potential failures & sources 3. Prioritize failure modes -severity: How Serious -occurrence: How Likely -detection: Effectiveness of Controls -risk Priority Number (RPN): Occurrence Rating x Severity Rating x Undetectability Rating 4. Create plans 5. Implement plans, measure impact, adjust analysis

5-Why's for Determining Root Cause

-questioning technique for getting beyond symptoms & uncovering root causes -problem: flat tire in garage: 1. Why: nails on floor → swept-up nails 2. Why: box on shelf split 3. Why: box got wet 4. Why: rain through hole in roof 5. Why: roof 30-years old (rain happens) -need to fix roof

RCCA

-rapid & persistent pursuit of the fundamental breakdown or failure of the process that, when resolved, prevents a recurrence of the problem 1. start w/ 5-Why's for identifying the Root Cause 2. corrective action to prevent from happening again

Total Cost of Ownership

-requires purchaser to measure costs beyond: ₀price / tooling / transportation -must consider costs across the product life cycle -place total cost in present val terms -consider the TCO of a new car purchase: 1. gas (MPG) 2. plan on owning this car for 100,00 mi/MPG 3. kind of gas the car takes (quality) → is premium required or not? 4. upfront cost: how much does the car cost (acquisition) 5. selling car: how much can you get (end of life) 6. insurance!!! (usage) -must consider opportunity costs of the next best alternative: -lost wages, rental, lost sales, downtime, safety

Within MINTO: What's a Risk

-risks to SC range from unpredictable natural threats to counterfeit products, & reach across quality, security, to resiliency and product integrity -mitigation plans to manage risks can involve logistics, cybersecurity, finance & risk management disciplines

Foreign Trade Zones

-secure location approved by U.S. Customs & Border Protection 1. allows an importing company to: -delay/Eliminate/Decrease payments (duty/tariff) on foreign source goods -streamlined customs procedures -reduction in taxes 2. purpose is to attract foreign business by adding jobs 3. general Zones: location that can be used by multiple firms 4. sub-Zones: Approved for a specific firm/product/use

Buyer Focus & Impact

-shift away from price management and towards cost management -buyer impacts prices through: 1. specifications 2. tolerances 3. appearance (pay the "pretty cost") 4. customization (↓ volumes) -get better prices buying off industry standards 5. industry standards 6. risk transference -insurance Buyers can negatively impact a supplier's price by: -all of the items impact price -creating own standards verses using industry standards -customizing requirements -transferring risk to suppliers -tightening tolerances

Quality

-so important to a firm but difficult to define & quantify -w/ so much being purchased → procurement can play vital role in proactively ensuring a firm's success

Cost Based Modeling

-some cost components: 1. direct material 2. direct labor hours (US labor more efficient) 3. direct labor rate (higher in US) 4. significant outside services -electricity -critical capabilities 5. factory OH rate 6. material OH (MOH) rate -MOH = cost of procurement & logistics 7. transportation 8. inventory holding cost 9. buyer contract requirements -warranties, services, penalty clauses 10. G&A 11. profit -consider: ₀80/20 rule ₀controllable/ uncontrollable costs ₀cost of tooling & NRE

ISO9000

-standard classifications are continually changing: 1. ISO9000 → Quality -generic -non-certifiable level 2. ISO9001 -3rd party certification -now includes 9002, 9003 3. ISO9004 -performance improvement -self assessments -ISO9004 Compliant 4. ISO14001 -environmental mgmt (sustainability) -3rd party certification Pros of ISO9000: 1. marketing (I'm certified!) 2. standardization 3. sound practices (not best) 4. some efficiency gains 5. internal company pays for quality audit: not buyer Expense for you to send someone to review -your driving that expense for supplier (not paying they are) Issues with ISO9000: 1. is it worth the certification/documentation 2. already have a process that is better 3. get certification before quality (you could be the worst in your industry and be certified) 4. influencing 3rd Party audits (dangerous)

Culture

-sum of understandings that govern human interaction in a society 1. language 2. religion 3. val & attitudes 4. customs 5. social institutions 6. education -culture further complicates intl sourcing

SPI

-supplier performance index -SPI = (total purchases + nonperformance costs) / total purchases total_cost = total_purcahses x SPI factor ratings = points earned / available points -worst score in SPI: higher -lowest is best (1)

Qualitative Service Factors

1. problem resolution ability 2. technical ability 3. ongoing progress reporting 4. corrective action response 5. supplier cost-reduction ideas 6. supplier new-product support -buyer/seller compatibility -issue with qualitative service facts = subjective (what people think & accuracy varies) -subjective rating: much more difficult to place a value & quantity (also hard to have people agree)

Countertrade

-trade goods for goods (maybe some $ too) ₀lack of Hard Currency ₀means of Selling Product 1. Barter: Goods for Goods (No Cash) 2. Counterpurchase: Seller must purchase % of unrelated products from buying country 3. Offset: Seller purchases % of related products from buying country 4. Buy-Back: Seller agrees to take-back output from sale as payment -often complex plant & equipment 5. Switch Trading: 3rd party trader works w/ Seller to buy at a discount the traded goods from Buyer -duty Drawback: firm pays a duty to import goods into a foreign country but duty paid can be drawn back or returned if the items or a comparable designate is exported

Value Engineering / Value Analysis 2

-typical Actions are Cost Reductions: ₀loosen Specifications & Tolerances ₀standardize Components from Customized ₀reducing part count ₀substitute for lower-cost materials (form of a Specification) ₀process improvements (CI) in Production & Assembly

Managing International Currency Risk

-want to avoid surprise of less U.S. $ than expected: 1. Contract in U.S. $ 2. Contract in a 3rd currency that both parties agree 3. Share Currency Fluctuation Risk within contract 4. Currency Adjustment Contract Clauses: Option to Renegotiate if rates change beyond scope -delivery Trigger: Review before delivery -time Trigger: Periodic Review by time interval 5. Currency Hedging: 2-offsetting contracts -externally: Futures / Options -internally: AR / AP & Contract / Contract 6. Forward Exchange Contract: Issued by bank -Speculating: Currency "Gambling" Contract w/ intention to realize gain -what is your firm's core competency?

Target Pricing

-what a market segment is willing to pay (selling price) less the profit goals for the product (selling price: to customer) less (profit) equals (target pricing: from supplier: allowable cost) -the difference b/w supplier's price & target price becomes a strategic cost reduction objective -a top-down approach based on what the customer is willing to pay -cost approach is typically a bottoms-up approach

SWOT Analysis

-which quad may be different based on position of: ₀Buyer vs Supplier ₀Sub-Component vs Final Product (Industry /Commodity) -good way to figure-out what data you have & where are the gaps ₀Minimize weaknesses and threats ₀Exploit strengths and opportunities -address: sourcing & risks

Process for Implement of Supplier Development Strategy

-work biggest stuff first

FEMA 2

-work from highest to lowest

SPI Example

-worst supplier: A (highest score) -problem: smaller supplier

Why Source Worldwide

1. Cost/Price Benefits: Often 20%-30% reduction 2. Access to Product & Process tech (Innovation) 3. Quality 4. Access to only Source Available 5. Introduce Competition to Domestic Suppliers 6. Establish a Presence for Marketing Effort (Sales) -countertrade reqs 7. React to Buying Patterns of Competitors 8. ↓ Financial Risk: -currency Exchange & Inflation -can't assume domestically you are the best -firms must move from In-Source to Out-Source to be competitive -this has created the competitive battleground of SCM

Does Price Reduction Affect Quality (article)

1. Facts: -suppliers are cutting corners in response to buyer demands of price reduction (trying to squeeze price) ₀razor thin margins in many industries -only 20% of suppliers are improving quality ₀used to be notion that quality costs you money but in reality quality saves you money in the long run -reduction in scrap and waste showed more improvement in quality ₀easily measurable and quantifiable -suppliers are questioning the level of durability and material quality -Toyota expects a 3% annual cost reduction from suppliers ₀uses collaboration ₀not mandating reductions (debatable but expectation is there) ₀not price concessions → one way give → have so much leverage over suppliers = kind of have to do it 2. Issues: -get what you pay for → buyer can drive poor quality at supplier too -price → cost → value ₀if they can lower their costs, they can lower their price -traditional v. collaborative relationships -does better quality increase price (NO) -what does a supplier ultimately need: 1. long terms profit 2. short term cash

Considerations for Sourcing Location

1. Labor Intensity & Labor Rates 2. Variability: Product & Schedule 3. Energy Costs: Natural Gas & Electricity 4. Flexibility in Production (Response): Lead Times 5. Growth of Local Customer Segment 6. Gov: Regulatory & Corruption (IP) 7. Inventory Value of Product / Lead Times 8. Labor Talent and Industry Core Competencies (Capabilities) 9. SC Risk of Longer Chains -transportation % Costs -geographic Diversity

Corrective Actions (Mistake Proofing)

1. Level 1: prevent an error from occurring @ the source 2. Level 2: detect error as it is being made 3. Level 3: prevent defect from reach the next operation -levels 2&3 still make waste -cannot blame human error (need to eliminate it) -training and labels are not mistake proofing

Worldwide Sourcing Costs

1. Packaging: Product Protection 2. Transportation 3. Customs Duty: Paid whenever a shipment crosses intl lines 4. Insurance 5. Brokers: Transportation 6. Port & Terminal Fees 7. Taxes 8. Communication: Phone, travel, mail 9. Currency Exchange 10. Inventory Carrying Costs

Overall Types of Supply Base Risks

1. Political Risk of where you source -country & gov stability, laws, tariffs 2. Market Risk related to commodity & product -# of Buyers Competing, capacity, innovation, IP 3. Sourcing Risk: Make/Buy/Domestic/Intl -SC disruption, Supplier Competition 4. Financial: Costs incurred Internally to Buyer's firm -inventory, storage, currency exchange, transportation $ 5. Supplier Level -financial Stability & future viability -capabilities: Knowledge, Skills, & Abilities -ultimate goal is to ensure continuity in event of scenario which would have interrupted normal business & profitability/cashflow -by including profitability & cashflow we open risk to include price/cost

Value Analysis Teams

1. Purchasing: Usually the lead role 2. Executive Management: Guidance & Support 3. Suppliers: Cost / Manufacturability 4. Design Engineering: Development 5. Marketing: Customer Focus 6. Production: Cost: Manufacturability & Assembly 7. Industrial/(Process) Engineering: -manufacturing, Material Handling, Assembly 8. Quality Control

Worldwide Sourcing is Difficult

1. Resistance to Change 2. Finding New Suppliers & Risk of New Supplier 3. Lack of Knowledge: Understanding the processes & documentation required (Legally) -domestic & Intl Regulation (FCPA) 4. Travel distance requirement for people 5. Longer more Complicated Lead Times 6. Language, Business Custom & Cultural Barrier 7. Overall ↑ Supply Risks -currency

Transport Participant Interests

1. Shipper (consignor -supplier) 2. Destination Party (consignee - buyer/you) 3. Carriers & Agents: want to charge customers highest rate possible while ↓ labor, fuel, & vehicle costs 4. Gov: Reliable service to economic & social well being 5. Internet: communication that provides: -Marketplace for matching capacity w/ shipments -Purchase of fuel, equipment, parts & supplies -shipment tracking & tracing 6. Public: Accessible, Affordable, Effective, Environmental & Safety

Total Quality Management (TQM)

1. Total: Everyone 2. Quality: Definition 3. Management: Function ₀plan ₀organize ₀control ₀lead ₀staff

Advantages of Optimized Supply Base

1. buying from world class suppliers 2. use of full service suppliers -larger on avg can offer more 3. reduction of supply base risk -probability of unintended or unwanted event 4. lower supply sase maintenance costs -interaction, qualification, training 5. lower total product cost: leverage 6. ability to pursue complex purchasing strategies: -(need more interaction/coordination) -optimization usually starts w/ rationalization (reducing suppliers)

Types of Supplier Measurement Techniques

1. categorical system -easiest/fastest & most basic -very subjective in nature 2. weighted-point system -must understand / apply methodology -receive overall weighted average (1-5) 3. cost-based system -system required -total cost basis 4. analytics / big data -more qualitative = ↑ time & ↑ money -lowest price is not always lowest cost

(8) Key Principles of TQM

1. define quality in terms of customers & their requirements 2. pursue quality @ the source: -where val-add occurs 3. stress objective rather than subjective analysis (not a lot of dimples) 4. emphasize prevention rather than detection of defects 5. focus on process rather than output 6. strive for 0 defects 7. establish continuous improvement as a way of life -empower everyone to find a better way 8. make quality everyone's responsibility

What to Measure: Traditional 3

1. delivery performance -MRP % -ANDON 2. cost reduction -purchase price variance 3. quality performance -number of spaces/turnbacks -cost of escapes

Approaches to Overcome Barriers to Supplier Development

1. direct-involvement activities: hands-on -people + funding 2. incentives & rewards (carrot) -new work/development 3. warnings & penalties (stick) -withholding future business -limited resource that few supplier receive -suppliers should believe before & after that they received a scarce/valuable resource

Hidden Costs in China

1. entry into China needs clear strategy for buyer & seller -transactional or reciprocal 2. must understand culture 3. calc & expect hidden costs (15-24% higher than plan) -shipping (10-15%) -warranty costs (4-7%) -travel/coordination (1-3%) -IP issues -varying & ↑ labor rates 4. plan for site visits -send stables processes operating at competitive levels -shortage of high-skilled labor -plan for training -was 2x longer to stabilize production than planned -set expectations and process improvement plans -can be applied for any home country -many qualitative/hidden costs to consider including cycle/lead times

Tips for Supplier Development Success

1. get supplier senior management commitment in writing -resource reqs -cost reduction sharing 2. set common/aligned goals & expectations 3. build a relationship & trust 4. select small easy-win project first 5. provide training 6. follow-thru on implementation (weekly status) 7. ombudsman: independent company person to hear concerns 8. spend time explaining how "bottom line" is affected as gains are often difficult to measure 9. place supplier development in mission and objectives

Quality Performance

1. number & type of escapes / turnbacks -class1 = caught at buyer facility before use -class2 = caught in WIP or FG -class3 = escape reaches customer (worse case scenario) 2. defects per million (DPM) 3. cost of escapes

What Determines a "Bad" Supplier

1. output (a good part) -bad part = quality stinks 2. WIP -how do they manage their WIP? do they have scrap cost, rework cost, latent defects -focus on this: that's driving hire costs which leads to higher price (no good) 3. quality systems -TQM: monitor/control espace process -TQM = ex quality system 4. business processes and systems -even reputation/perception: with newspaper test ₀manufacturing (how and how well they do it) ₀logistics ₀engineering ₀services -total cost of ownership in the customer's eyes

Customer/Buyer can cause Poor Supplier Quality

1. poor communication to supplier -none -wrong message/direction -delivery is #1 2. poor specifications 3. late requirements (Schedules / Prints) 4. Unreasonable Expectations -supplier begins to cut corners

Strategic Cost Management

1. price analysis: process of comparing supplier prices against external price benchmarks w/o knowing the supplier's cost structure (the 3-quote) 2. process of analyzing each cost element (material, labor, OH, G&A, and profit) & adding them for a final price -bottoms-up 3. total cost analysis: applies the price/cost equation across multiple processes that span 2 or more organizations in the supply chain (inventory, quality, transportation -LOOKING TO ENSURE THAT THE PRICE PAID IS FAR AND REASONABLE: WE WANT TO DELIVER VAL -to understand profit = must understand cost -lower cost = lower price Which of the following is FALSE concerning strategic cost management: -we will attempt to standardize unique parts to generics -cost + profit = price -it's a supplier's market for small unique orders -for a total cost analysis we compare three quotes -all items are TRUE

Market-Driven Pricing Models

1. price volume model: ↑ vol ↓ cost -need to consider vol break-even analysis -COSTCO 2. market-share model: ↓ price for possibility of mass-market sales 3. market skimming model: get what you can get -what drives: demand>supply (hot items) & technology (buy the latests every year) 4. revenue pricing model: during downturn to generate revenue to cover operating costs (not profit) -car industry makes stuff even when people aren't buying -when it's cheaper to make it than to close down a factory and start back up later (steel industry = furnace) → highly capitalized 5. promotional pricing model: ↓ initial cost and recover later in life-cycle -razor blade refill v. razor -ink cartridges -subscription services 6. competition pricing model: what market is doing -never buy it on a Thursday: gas 7. cash discounts: reward for timely payment -avoid credit card fees -time value of money or risk of bad debt -ex: costs 1k → I'll pay you $800 cash -how do you get 20% savings? → assumption that Laura's going to avoid income tax (not going to declare as sales)

Cost Reduction (Week 8 Live - slide 11)

1. purchase price variance -(old_price - New_price) * current quantity -ex: -2020 price = 10 -2021 price = 11.5 (increase is bad = paying more) -2021 quantity = 500 -(10-11.5)*500 = $750 -general rule: negative is BAD in most firms -why PPV important? easy → can't argue it → love it -issue with price: not exact? -issue with cost: everyone has an idea of what cost is 1. total cost reduction: -includes items not reflected in price -lead time -inventory carrying costs (consignment)

What Can Purchasing Do?

1. rigorous screening process for new suppliers 2. require quality certification review 3. quality is King (not delivery, not price) 4. preferred supplier lists 5. supplier certification programs (bronze/silver/gold) 6. supply base rationalization (Manageable Level) 7. supplier awards 8. measurement & feedback to suppliers 9. correct internal turn-backs that cause supplier issues

Risk Management

1. risk management is inherent in supply base mgmt & involves: -identifying the common sources of risk -establishing how can they be managed effectively 2. as SC grows (length) risk ↑ exponentially -no simple magic list of risk 3. uncertainty v. risk: -uncertainty: ability to predict future events & conditions -risk: how uncertainty will affect org 4. buyers must perform "due diligence" before the rise event occurs -risk recovery is typically expensive in time, effort & money -resiliency: capacity to recover quickly from difficulties; toughness

Sourcing Decisions

1. sourcing determines who & where -in-source: make -out-source: buy -where can be defined as: 1. domestice: home country, local, onshore 2. off-short (intl): relocation of a business process from one country to another 3. near shore: relocation of business processes to (typically) ↓ cost foreign locations but close in geographical proximity (US: Mexico) 4. re-shore: moving offshoring back onshore (domestic) -back-shoring -in-shoring

Risks of Maintaining Fewer Suppliers (optimization)

1. supplier dependency -buyer: loss of core competency -supplier: become too much of business mix 2. absence of competition: -less options to move 3. supply disruption: -strike/fire/hurricane 4. overaggressive supply reduction -take-out too much supply-base capacity -existing suppliers can't absorb work fast enough (late hardware/quality issues) -new work takes longer -cross-sourcing: select & develop suppliers w/ multiple or duplicate capabilities

Why Concern over Supplier Quality?

1. suppliers account for an avg 50% of quality issues 2. continuous improvement is critical to going-forward entities (goodwill) -we're trying to get better and better internally = expect same from suppliers 3. growing outsourcing requirements place greater emphasis on suppliers -increase # of parts (moving from make to buy) = other people making large number of parts or entire products w/ brand name slapped on at the end -black box design -entire products -latent defects: deeper & more complex -buyer pays in both higher prices & total cost -only as strong as your weakest link (ace Ventura)

Quality Definition

1. understanding & assisting in customer objectives -basic measures -internal focus: this is how I do customer services 2. ability to meet current & future customer expectations or requirements -give what I mean (in addition to what I say) -durability -future orders 3. consistently with critical perf areas -delivery -conformance (specification) -after-sale services -tech & features -total cost management -customer success for critical customers (driving rev) → need to understand business better than you do (this is why you want to be a top 3 customer) -CTQ: Critical to Quality = attribute of a product or process that has a direct & significant impact on its actual or perceived quality -attributes you have to have -get what you pay for with investment in supplier

Supplier Management & Development

1. why should a firm even care abt supplier M&D? -need to organize & manage resources & processes across a SC 2. what is primary objective within supplier M&D -continuous improvement of supplier capabilities -also risk mitigation!

Supply Base Risk Mitigation

How to effectively manage performance of the SC: 1. ↑ Inventory: Balancing Investment, obsolescence, loss, damage 2. Multiple Sourcing: Balancing Rationalization & Optimization 3. LTA Contracting: For price & supply stabilization 4. Insurance 5. Location Diversification w/ same supplier 6. Reducing Lead Times 7. Governance: Directed Multi-Tier Sourcing 8. shorten SC (↓ complexity) 9. 3rd Party Intermediaries: Cost of outside expertise & resources 10. Scenario Analysis: What-if planning -brainstorm Risks -prioritize severity / disruptive impact w/ probability 11. Offsetting Currency Contracts 12. Forecasting Risk: Analytics: Ability to Identify issues faster (Transparency) -becomes a complicated cost/benefit analysis

Mercantile Exchange

What's the difference between Commodity Trader & Commodity Manager: Commodity Trading Buyers and Commodity/Category Managers want: Differences:

Quiz Question 2

Which of the following is FALSE concerning lean: -everyone within a firm is involved in lean six sigma -overproduction is the greatest waste of the original 7 -we reduce waste to eliminate headcount -all items are true -move from push to pull from the customer

Quiz Question 1

Which of the following is FALSE: -six sigma's original focus was reducing variability -all items are TRUE -learning curves are great for highly automated processes -learning curves require low employee turnover -the goal of lean is waste reduction