Chapter 5 supply chain management
Other types of make vs buy concepts
Backward Vertical Integration - Refers to a company acquiring one or more of their suppliers. Example: a manufacturer buying a key supplier of a critical material and taking ownership. Forward Vertical Integration - Refers to a company acquiring one of their customers. Example: buying a wholesaler/distributor to take ownership of that aspect of the supply chain.
Characteristics of a world class procurement organizations
Being A Trusted Advisor To The Business: Having a high level of involvement in the company's budgeting and planning cycle. They are considered valued business partners by the organization, not gatekeepers or administrators. Driving Suppliers To Innovate: Effective at harnessing the intellectual capital of their suppliers to bring new and innovative solutions to bear, helping to influence - not just support - the business strategy. Providing Analytics-backed Insights: Working closely with the business during operations planning and budgeting periods to provide predictive insights on supply markets, to the point that analytics, market intelligence and benchmarking are offered on demand as a service to key stakeholders. Protecting The Business From Risk: Have formal risk management programs that includes completing supplier risk assessments and working with finance and other stakeholders to determine the best mitigation strategy when risk exposure is identified. Taking An Agile Approach To Staffing: Talent management sets procurement leaders apart from the pack, They provide more training and invest more in retention planning, and they pay higher salaries. They require substantially fewer FTEs than peer groups and are more productive overall.
Government and non profit agencies
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.
additional make vs buy concepts
In sourcing: internal production Co-sourcing- both internal and external sourcing
Procurement
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 the goods, services and work vital to an organization.
Purchasing terms
Purchase Requisition - Document that defines the need for goods and/or services. An internal document. Does not constitute a contractual relationship with any external party. Purchase order- The Buyer's offer to the supplier to acquire goods or services. Becomes a legally binding contract only when accepted by the supplier.
Centralized vs decentralized purchasing
Purchasing Organization are dependent on factors, such as market conditions and types of materials required. Centralized Purchasing: Purchasing located at a firm's corporate office making all purchasing decisions Decentralized Purchasing: Individual, local purchasing departments, at the plant level, making their purchasing decisions
Reasons for buying products
Quality - Suppliers have better technology, process, skilled labor, etc. Multi Sourcing Strategy - A strategy using an external supplier in addition to an internal source. Inventory Considerations - 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.
Advantaged of an e-procurement system
Time savings - Reduction in time between need, release and receipt of order Cost savings - Lower overhead costs in procurement Accuracy - A reduction in errors. Elimination of manual paperwork and paperwork handling
Small value purchase orders
processing costs for small orders are minimized though Credit card Blank checks Petty cash
International purchasing- service providers
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 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. 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).
International purchasing- potential challenges
Knowledge of international trade policies and procedures Awareness and cost of required tariffs and duties Difficulties in communicating with suppliers due to language barriers, varying time zones, holidays. Locating, evaluating, sourcing and expediting in global markets Payments and currency management Longer time span for negotiations The potential for cultural, political, and labor problems Potentially longer transportation lead times necessitating additional inventory Specific and varying documentation requirements Handling legal matters and the process for settling disputes
financial significance of purchasing
Profit-Leverage Effect A decrease in purchasing directly increases profits before taxes (assuming no decrease in quality or purchasing total cost). Return on Assets (ROA) Effect A high ROA indicates managerial ability generating profits with lower spending 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 $ tied up Inventory turnover represents the number of times the company sold through inventory in a given time period.
Reasons for making products
Protect proprietary technology No competent supplier Overall lower cost Better quality control Use existing idle capacity Control of lead-time Control of transportation and warehousing costs
More purchasing terms
Request for Proposal (RFP) - 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 Quote (RFQ) - A document generally used to solicit bids from interested and qualified suppliers for goods or services that the organization needs to obtain. Bid - A tender, proposal, or quotation submitted in response to a solicitation (i.e., RFP, RFQ) from a contracting authority. Competitive Bidding - Offers submitted by multiple individuals or firms competing for a contract, privilege, or right to supply specified services or merchandise.
Risks and benefits of outsourcing
Risks associated with outsourcing include: Potential loss of control Increased reliance on suppliers Increased need for supplier management Benefits. Outsourcing allows a firm to: Concentrate on core capabilities Reduce staffing levels Accelerate reengineering efforts Reduce internal management problems Improve manufacturing flexibility
Purchasing process steps
Starts with a demand for something A need is identified, and a Purchase Requisition is issued Request for goods or services submitted to the Procurement/Purchasing organization for action. Typically initiated by a user within an organization 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, in a prescribed sequence, to various management levels of the organization, may be necessary if the value exceeds a specific threshold. Identify and evaluate potential suppliers May be determined from a list of company approved Suppliers. Alternatively, may use a Request for Information (RFI) to collect information from potential suppliers on their capabilities and interest in supplying the material or service. Make supplier selection If the Buyers already knows which supplier they will buy the item from, move to the next step. If not, a competitive bidding process may be initiated. A Request for Proposal (RFP) or a Request for Quotation (RFQ) may be issued to qualified suppliers, to identify proposed alternatives for supplying the desired material or service, and to obtain price and availability information. 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. 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. Purchase Order (PO) is created and delivered to the supplier. A PO is generated and forwarded to the supplier to inform the supplier of the intent to purchase. The purchase order will identify the item(s) to be procured, the quantity required, the requested delivery date(s) and the price to be paid. It will also identify 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). The PO becomes a binding contract only when accepted by supplier. 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. Fulfillment The supplier ships/delivers the item(s) to the buying organization as per the PO. 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. Invoice Supplier prepares an invoice for the item(s) ordered and transmits to the Buyer. The invoice either accompanies the item(s) or is sent separately. Reconciliation The invoice may need to be reconciled to the purchase order and goods receipt before payment is made. Sometime referred to as a "3-way match" Payment Invoice payment processed using an appropriate payment method assuming the item(s) is received and meets all of the criteria established on the PO. Reclamation of Taxes In some situations, the supplier will be obligated to charge a tax, but the buyer may be eligible to retain some or all of the tax based on corporate status. 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 (whether manual or automated). Analysis Measurements of the efficiency and accuracy of the procurement process. Specific PO data and information captured and used during periodic supplier performance meetings.
Total cost of ownership (TCO)
TCO is the sum of the cost elements in QSDP (i.e., Quality + Service + Delivery + Price) Factors beyond purchase price: Quantity Discounts to encourage buyers to purchase larger quantities. Cash Discounts offered for prompt payment of invoices. Value-added Services such as special delivery, special packaging, preparation of promotional displays, or subassembly operations in a supplier's plant. Administrative Expenses the procurement activity itself - - screening potential suppliers, negotiation, order preparation, and order transmission. Poor Supplier Quality costs related to defective finished goods, scrap, rework, recycling or recovery of materials, related warranty administration and repair costs.
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. Advantage of tax breaks and low trade tariffs Achieve access to better process and product technology
The role of purchasing in an organization
The primary goals of purchasing are: Ensure uninterrupted flows of materials and services at the lowest total cost Improve quality of the finished goods produced Optimize customer satisfaction. Purchasing contributes to these objectives by: Actively seeking better materials and reliable suppliers Working with the expertise of strategic suppliers to improve quality and materials Involving suppliers and purchasing in new product design and development efforts. Working with the supplier
Purchasing
a term in business representing the function of, and responsibility for, acquiring materials, supplies, and services for an organization.
Purchasing terms
e-Procurement - The business-to-business (B2B) purchase and sale of supplies and services over the Internet. Merchants - Wholesalers and retailers who purchase for resale. Industrial Buyers - Individuals who purchase raw materials for conversion into products, and/or purchase services, capital equipment, and MRO supplies. Contracting - A term often for the acquisition of services Supply Management - a newer term that encompasses all acquisition activities beyond the simple purchase transaction.
e- procurement
e-Procurement is 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 E-procurement may not work well for every type of purchase. For example: Procurement of critical items only available through a few suppliers Inventory of an item(s) is very low Procuring an item(s) involves complex negotiations Potential to lower costs through e-procurement is minimal. At a bare minimum: Electronic purchase requisition and/or purchase order, Invoice (which might be one with the receipt), Payment. High-dollar purchases will include: Authorization of the purchase order Reconciliation of the invoice.