CPSM: Foundation of Supply Management

Spend categories

What is being purchased? In what quantities? At what price? From which suppliers? By whom?

Buying to requirements

ensures supply while avoiding excess inventory carrying costs organizations will guarantee that suppliers receive orders for a percentage of the foretasted requirements to maintain flexibility ex. next 4 weeks guaranteed, next 5-8 weeks 90% guaranteed, next 9-12 75% guaranteed

Budget

financial plan that spells out intended actions and the funding levels required for their completion information transmittal device that bridges the planning and execution stages of management

Should-cost

finding cost of an item through data gathering and analysis, rather than comparing price quoted by suppliers helps remove avoidable costs, and eliminate waste, and benchmark for reasonable bid from supplier

Cash flow

movement of money through an organization. It is the measure of inbound revenues and outbound expense by time period the supply managers must place orders only when funds are available - therefore buying smaller economically desirable qtys

Indirect costs or overhead

no immediate attributable to any given unit of production or service composed of fixed costs, variable costs and semi-variable costs ex. property taxes, building maintenance, employee training

Headcount budgets

number of employees in an organization by their position and salary represents the requirements for human resources needed in supply management department

Center-led purchasing

strategic direction is centralized, and the execution is decentralized companies may lead toward either side depending on how decision-making authority is divided

Life-of-product contract

supplier agrees to provide materials, components, or services not for a specific period, but for the entire life span of the product. Usually because duration of the need for supplier is limited other reasons may include supplier's familiarity with he buying organization's need and uses for the item, special supplier capabilities, or a requirement to obtain best possible pricing

Vendor managed inventory (VMI)

supplier is responsible for ensuring stock levels are maintained at appropriate levels in the supply management professional's facility and for replenishing items when stock is low

On consignment

supplier stocks goods at customer's location with the goods remaining the property of the supplier until used or sold buyer doesn't have ownership of material until it is purchased. downside is supplier can use inventory to sell to another buyer since buyer doesn't own it, and there are carrying costs included also

Price analysis works when

suppliers have comparable offerings one-time buys item purchased is not critical

Seller's market

supply management professional cultivate relationships with as many suppliers as possible to ensure continuity of supply

Buyer's market

supply management professional has greater leverage than seller because supply is greater than demand and "the economic forces of business cause prices to be close to the supply management professional's estimate of value"

Value analysis

systematic and objective evaluation of the value of a good or service, focusing on an analysis of function relative to the cost of manufacturing or providing the item or service

Total cost of ownership

the combination of the purchase or acquisition price of a good or service and additional costs incurred before or after product or service delivery costs are grouped in pre-transaction, transaction, and post-transaction costs or acquisition price and in-house costs

Detailed analysis estimating

thorough review of all components, processes and assemblies most accurate of the three methods for estimating the direct cost of production most time consuming

Program or project budgets (PPBS)

tie the organization's goals and objectives for the programs or sections responsible for meeting those goals or objectives often used for non-profit companies and government entities typically uses productivity measurements and cost/benefit analysis

Landed cost

total accumulation of costs for an imported item, including purchase price plus freight, handling, duties, customs clearance and storage to a designated point administrative overhead - fees that are paid to intermediaries like brokers and agents, should be included also in-transit and safety stock can be a good way of comparing international and domestic suppliers on the basis of TCO

Average cost

total cost divided by the rate of output ex. 10 steak dinners cost 75 dollars, average cost is 7.50 dollars

Average total cost

total cost divided by total output ex. needing an additional server for 15 steak dinners instead of 10

E-procurement

transactional activities of the purchasing process are conducted electronically, typically over the internet, to shorten the cycle time and lower the transactional costs ex. advanced shipping notices, planning info, and collaborative designs

Cooperative purchasing (consortium)

two or more organizations that join together formally or informally, through a third party, and combine their purchasing power for selected items to gain leverage in the marketplace and reduce costs through the scale of their purchases

Life-cycle costing

type of TCO analysis that deals specifically with capital purchases like equipment, and differentiating initial purchase prices and different operating costs over a useful life of equipment considers purchase price of the equipment, plus all operating and usage costs of the item over its useful life, including maintenance, downtime, energy costs, and salvage value manager must define key operating cycle for equipment as well as factors that affect costs

Cost analysis is appropriate for

unique or custom buys or to improve supplier processes high-value, long term contracts or collaborations eliminating unnecessary costs

Standard costs

used in estimating budgets for materials and labor given a forecast of revenue, the ________ are used to estimate material and labor requirements predetermined or planned costs of manufacturing/services a single unit or a certain number of product units during a specific period in the immediate future

How has sourcing changed over the years?

went from transactional to strategic, with the use of ERP systems

Gross margin

what the organization has left to cover all its sales, general and administrative costs (SG&A) and make a contribution to operating profit (or margin)

Two elements are common to all budgets

1. Set of specific goals that relate to future operations - goals are held to standard to measure performance 2. Periodic comparison of actual results and established goals - represents control feature of budgeting activity

E-procurement helps reduce cost by

1. eliminating clerical input and automating the transmittal processes 2. continuous monitoring and auditing of the systems

short-term strategy (two steps)

1. organizational analysis 2. opportunity analysis

Product/Service life cycle

1. precommercialization - supply chain seeks flexibility 2. introduction - balance chances of product failure 3. growth - ensure continuity of supply 4. maturity - reduce lead times and costs and ensure continuity of supply 5. decline - continue to look for lower-cost sources

Sourcing cycle

1. recognition of need 2. specification of need in terms of quality, quantity and timing 3. search for potential sources 4. analysis of suppliers and proposals 5. negotiation with, and selection of, suppliers 6. administering the contract 7. evaluation of performance and feedback to suppliers 8. disposal of excess, scrap or surplus

JIT II

A phrase first popularized by the Bose Company, emphasizing vendor managed inventory and colocation of those vendors within a production facility.

Opportunity cost

Cost of the next best alternative use of money, time, or resources when one choice is made rather than another

Cost of quality

Expenditures related to achieving product or service quality, such as the costs of prevention, appraisal, internal failure, and external failure. Prevention costs - costs of activities that attempt to reduce or eliminate future defects, like certifying suppliers Appraisal costs - costs associated with activities designated to ensure product or service conformance, like inspections Internal failure costs - costs incurred within the organizations operating system as a result of poor quality, ex. scrap External failure costs - costs incurred when poor quality goods or services are passed on to the customers, ex. warranty costs

Roundtable approach

Experts develop cost estimates with limited specifications

When writing a contract the buying organization shouldn't have a written exit strategy: True or False?

False

Operational importance of Supply Management part 1

Provide uninterrupted flow of materials and services to the operating system Keep inventory investment at a minimum Maximize quality Find and develop competent sources of supply internationally

Outsourcing permits operating with fewer assets increasing the _____

ROI

Operational importance of Supply Management part 2

Standardize requirements for products and services Purchase materials and services at the lowest (TCO) Foster cross-functional relationships

Price analysis

The examination of a supplier's price proposal or bid by comparison with reasonable benchmarks, without examination and evaluation of the separate elements of cost and profit making up the price. - can be accomplished by analysis of competitive price proposals - comparison with catalog or market prices, comparison with historical prices - use of independent cost estimates

TCO should always be supply management's primary service or material selection criterion: True or False

True

Intangible costs

a category of location costs that cannot be easily quantified, such as quality of life and government

Capital budget

budget for buildings, equipment and other long-term assets that are used for the operation of the organization provides formal summary of future plans for acquiring facilities and/or equipment

Flexible budgets

change depending on changing conditions, such as an increase or decrease in output determines needed budget based on output

Marginal costs

change in total costs when one more unit of output is produced

CPFR

collaborative, planning,​ forecasting, and replenishment focuses on exchange of jointly developed sales forecasts, inventory replenishment schedules and promotion plans

Depreciation

allocation of a portion of the value of an asset as an expense in the current period gives supplier insight on whether to buy, lease, capital equipment, or outsource processes

Spend analysis

analysis of historical spending patterns in an organization, usually by commodity or category

Activity-based costing management (ABCM)

approach that recognizes that not all activities and processes use the same amount of indirect resources ex. pooling costs with equipment on a production line, depreciation on the equipment, electricity to run the line and routine maintenance would be some of the pooled costs

target price

approach where buying organization begins with the highest price it could pay and still sell its products in the marketplace

Production function

as capacity is approached, output slows down

Decentralized purchasing

authority or responsibility for most supply-related functions and decisions are assigned to individual functions or managers good - closeness and responsiveness to the customer needs bad - lack of standardization supply management processes across the organization

Comparsion estimating

based on determining historical cost of the same or similar item with the one being estimated along with predicting historical cost for future production can be performed at the cost element level or total price level

Business analytics

broad use of data and quantitative analysis for decision-making within organizations

Cost or price forecasts

contain factors like influences of gov't action and laws or perception of supply shortages ex. war

Escalation clause

contract clause generally permitting a specific increase in the price of goods or services in the event of certain conditions ex. increase in supplier's raw materials

Futures contract

contract for the purchase or sale and delivery of commodities or currencies at a specified future date

Final step in budgeting process

control of expenditures during the budgetary year

Direct costs

costs that can be accurately attributed to a product or service where suppliers make their allocation of overhead costs reduction in supplier's _______ cost is more important than reduction in the supplier's profit percentage and represents a win-win rather than win-lose ex. material or labor

Irrelevant costs

costs that have no impact on a decision ex. production facility freed up 1000m of space. The "saved" space is an irrelevant cost, as they must pay for the space and there is no alternative use for it

Relevant costs

costs that will change for the organization if a particular decision is made

Technological forecasts

deals with characteristics of technology ex. accuracy or precision of measuring instrument

Second step in budgeting process

defining needed resources in the budgeting process begins with general forecasts in terms of economic trends, purchase prices, sales & profit

Planning forecasts

depend on the flow of accurate info about supply markets

Centralized purchasing

determines needs of the various divisions, facilities, selects suppliers, and negotiates the purchases for the entire organization works when there is commonality of materials across divisions or locations, and when consolidating the requirements gives the organization more leverage with suppliers

Sourcing strategy begins with

developing an understanding of the organization's purchases supply market environment forecasts of future needs

Purchasing price variance

difference between the standard price and the actual price paid during a budget period could be good or bad depending on the company and market

Product cost roll-up or Costs of goods sold

direct materials direct labor other direct costs overhead ERP systems can used in work-centers to establish standard costs for products, and eventually the standard price

Zero-based budgeting

does not use past experience to determine future needs helpful in questioning the traditional way things have been done typically only used for selected segments of the operation

Cost reduction

effort to lower costs associated with acquiring and using a particular product or service may be obtained by selecting alternative materials, processes, services, sources and procurement methods can be accomplished by value analysis and negotiation

Volume purchase agreement (VPA)

ensures supply and consolidates requirements to maximize purchase leverage to get a lower price discounts may be through specific order volume, total dollar value of an order, or total dollars spent over a specified period of time purchase price is negotiated based on the total number of items purchased or the total dollar amount to be spent with the supplier over period of time. Depending on duration of demand these agreements may be short or long term, and may be specific or broad in description

Materials budget allows for

identification of quantity and cost of materials to produce predetermined number of units of finished goods or to provide services also serves as a means of control

What is the responsibilities of the ISM?

identification, acquisition, access, positioning and management of resources and related capabilities of the organization needs or potentially needs in the attainment of its strategic objectives

Semivariable costs

include both fixed and variable cost elements - costs tends to change in proportion to changes in the level of operational activity but not in direct proportion - The cost can be separated into a fixed and variable element ex. utilities price increasing as usage increases

Variable costs

increase as output increases are constant on a unit basis, but tend to vary in direct proportion to changes in volume when measured over a specified period of time ex. direct labor, materials, and commissions controlled by top-level management

Cost analysis

method of identifying and comparing as many of the product/service-related costs as possible to ensure that the final price paid is reasonable in terms of the market, industry, supplier's cost structure, the organization's needs, and the end use of the product, service or material - should include structure of industry ex. monopoly - the market structure ex. global vs. domestic - cost drivers and price trends - technology trends and any barriers to entry by new competitors

Lean organization

lean thinking is applied to identify value-creating activities and eliminate all others which represent waste in systems, processes, procedures and practices

Open-to-buy (OTB) budget

link cash requirements and expenditures during a budgeting period with available funds during the budgeting period often used in the retail sector

Cash-flow budget

links budgeted expenses to revenue in each budgetary period what is spent is a function of what is received, or funds are available as expenditures are required useful when tight cash controls are necessary

Just-in-Time

materials are purchased, transported, and processed "just in time" for their use in a subsequent stage of the manufacturing process ex. pull system quality has been the most notable improvement, as component have to be acceptable for process to continue biggest difficult is fostering a collaborative relationship with the supplier to share information, and to allow for flexibility of lot size deliveries to manage demand communication is important, supplier will have a production schedule weeks in advance with updates of progress, EDI helps significantly

Spot buying

practice of buying for immediate delivery good if prices are expected to decrease soon

Product gross margin

price - cost of goods sold

Market intelligence

process and result of gathering and analyzing information about the aggregate forces at work in trade and commerce in a specific service or commodity ex. info on changes in supply and demand, 10K's

Benchmarking

process by which selected practices and results of one organization are compared to those of one or more other organizations to establish targets for improvement

Sourcing

process of identifying sources that could provide needed products or services for the acquiring organization

Forecasting

process of making a prediction nor estimation

Dollar cost averaging

process that dampens the departure of short-term price fluctuations from long-term averages ex. 10,000 pounds of copper are bought at $1.09, $1.04, and $1.07, having an average dollar cost of 1.069

Speculative buying

purchasing material in excess of current and future know requirements, with the intention of profiting from price movement and resale this is done to take advantage of expected increases in price to profit from the resale of goods

Competitivness

refers to an organizations ability to maintain and enchance its market share and profitability

Unit total cost

reflects TCO of an item per relevant unit of output ex. for a printer: cost per printed side of paper

Fixed costs

remain constant regardless of production volume ex. plant, equipment, taxes, insurance and plant management salaries controlled by department head or manager

Quantity or volume forecasts

requirements for purchased goods and services are based on sales or usage projections

First step in budgeting process

review and concurrence on organization's goals and objectives

Purchase option

right to purchase something under agreed terms for a specified period ex. time constraint

Data mining

searching large volumes of data using queries to identify patterns

Line-item budget

shows individual expenses during the budgetary period without tying those expenses into broad programs or goals they are typically incremental or based on the previous budget period

Forward buying

sourcing goods or services beyond actual forecasted need, usually due to supply constriction or inflationary market trade-off is increased carrying cost