Intro to Supply Chain Mgmt Chapter 5 Rutgers

Decentralized Purchasing

**purchasing organization is dependent on many factors such as market conditions and types or materials required** Individual, local purchasing departments, such as the plant level, making their own decision Advantages: -Knowledge of local requirements -Local sourcing -Less bureaucracy

Centralized Purchasing

**purchasing organization is dependent on many factors such as market conditions and types or materials required** Purchasing department located at the firms corporate office makes all the decisions Advantages: -Concentrated volume -Specialization -Common supply base -leveraging purchase volume -Lower transportation costs -Avoids duplication -No competition within units

Risk and Benefit of Outsourcing

Risk: -Potential loss of control ---overproduction decisions, intellectual property -Increased reliance of suppliers -Increased need for supplier management Benefit: -Concentrate on core capabilities -Reduce staffing levels -Accelerate reengineering efforts -Reduce internal management problems -Improve manufacturing flexibility

Bid

Tender, proposal, or quotation submitted in response to solicitation (RFP/RFQ) from a contracting authority

E-Procurement

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 including: -Solicitation development tools: RFI, RFQ, RFP -Reverse auction capabilities -Execution and Analysis

What characterizes the purchases for the government and non-profits?

Unlike private industrial purchasing, there needs to be competitive bidding

Green Purchases

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

Merchants

Wholesalers and retailers who purchase for resales

Bench-marking

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

Supply Management

Newer term that encompasses all acquisition activities beyond the simple

Buy American Act

-1933 -U.S government purchases and third party purchases using federal funds must buy from US source, if the US good is not above a certain differential above the foreign good

Federal Acquisition Streamlining Act

-1994 -Removed restrictions on bids less than $100,000 and micro purchases (under $2,500) can be made without bidding

Potential Challenges to International Purchasing

-Knowledge of international trade policies and procedures -Awareness and cost required tariffs and duties -Difficulties in communication with suppliers due to language barriers, time zones, work weeks, and holidays -Locating, evaluating, sourcing, and expediting in global markets -Payment and currency management -Longer spans for negotiation -Potential cultural, political, and labor problems -Potential longer transportation lead time necessitating additional inventory -Specific and varying documentation needed -Handling legal matters and the process of settling disputes

Make v. Buy Decision

-Make: producing (manufacturing) materials or products internally -Buy/Outsource: buying materials, components, or products from a supplier instead of, or addition to, making them in house Key factors: -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 -Qualitative factors are more subjective and include things such 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

Reasons for Buying/Outsourcing

-Non-strategic: if it is a non-strategic item -Cost advantage: suppliers may provide the benefit of economies of scale, especially for components that are non-vital to the organization's operations -Insufficient capacity: firm may be at or near capacity and subcontracting makes more sense -Temporary capacity constraints: concept of "extended workbench" which involves short-term supplementing internal capacity with external capacity during time of constraint or overloaded work centers -Lack of expertise: firm may not have the necessary technology and expertise -Quality: suppliers may have better technology, processes, skilled labor -Multi-sourcing strategy: to achieve multi-sourcing strategy using external supplier plus internal source -Inventory considerations: opting to have the supplier hold inventory of the item/material required to produce the item -Brand strategy: taking advantage of the suppliers brand image, reputation, popularity, etc

Reasons for Global Sourcing

-Opportunity to improve quality, cost , and delivery performance -To exploit efficiencies ---Access to low cost of labor and materials ---Take advantage of tax breaks and how trade tariffs -To respond to inefficient domestic capacity -Achieve access to better process and product technology -Due to a change in the domestic business environment -Take advantage of reciprocal trade and counter trade arrangements

Reasons for Making

-Protect proprietary technology: you may not want your intellectual property to be out in the public domain. Even is you have a confidentiality agreement, there is always a risk -No competent supplier: may be no supplier for you in the market and don't want to spend time finding one -Overall lower costs: may be able to produce it at a lower cost as you will avoid paying third party's profit margin -Better quality control: many feel that you more control of the quality of it than the supplier -Use existing idle capacity: company can make the use of excess capacity by making material instead of letting capacity sit idle -Control of transportation and warehouse costs: if in-house, avoid transportation cast and keep warehousing costs to a minimum -Control lead-time

What are other factors beyond purchase price that must also be considered?

-Quantity discounts may be offered as an inducement to encourage buyers to purchase larger quantities -Cash discounts may be offered for prompt payment of invoices -Value added services may also be offered such as special delivery, special packaging, preparation of promotional displays, or sub-assembly operations in a supplier's plant -Administrative expenses associated with the procurement activity itself such as surveying potential suppliers, negotiations, order preparations, and order transmission -Poor supplier quality costs related to defective goods, scrap, rework, recycling, or recovery

Examples where e-procurement would not work?

-The procurement of mission-critical items that are only available through a few suppliers -Where the inventory of the item is very low -Where procuring the items involves complex negotiations -Where the potential to lower costs through an e-procurement platform is minimal?

Supplier Selection

-Typically conducted by a cross-functional team -The process of selecting suppliers is complex and should be based on multiple criteria using evaluation forms or scorecards Common Criteria: -Process and product technology -Capacity and service -Cost -Location -Willingness to share information -Order system and cycle time -Reliability and quality -Communication capability

Return on Assets Effect (ROA)

A high ROA indicates managerial prowess in generating profits with lower spending -Profits Before Taxes/Total Assets

14 Purchasing Process Steps (Industrial Purchasing Process)

1. A need is identified and a Purchase Requisition is issued -Typically by a user within an organization 2. Obtain authorization as necessary -Purchase requisition routed to authorized approvers -If above a specific threshold, may need multiple authorizations 3. Identify and evaluate potential suppliers -May use Request for Information (RFI) to collect information from potential suppliers on their capabilities 4. Make supplier selection -Buyer issues a Request for Proposal (RFP) for items which have not been previously purchased or not purchased from a specific supplier being evaluated. Suppliers provide proposal (price and delivery) -Buyer issues a Request for Quotation ((RFQ) for routine or repeat purchased items 5. Purchase order is created and delivered to the supplier -PO identifies items to be produced, the quantity required, requested delivery dates, and price. Also identifies the delivery location and any terms and conditions 6. Supplier confirmation of the PO 7. Fulfillment -The supplier ships/delivers the items 8.Receipt of Goods -Once items are received, the buyer will typically conduct some sort of receipt process where items are checked -Confirmation receipt may also be sent to the supplier 9. Invoice -Supplier prepares an invoice for the items ordered and transmits to the buyer. Invoice either comes with the items or is sent separately 10. Reconciliation -Invoice may need to be reconciled to the PO and goods receipt before payment. -Called "3 way match" 11. Payment 12. 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 13. Close out the PO -If all is there then the PO should be closed out in the purchasing system 14. Analysis -Measurements of the efficiency and accuracy of procurement process -Specific PO data and information captured and used during periodic supplier performance meetings

How are processing costs minimized for small value purchases?

1. Credit card/Corporate purchase card (P-card) 2. Blanket or open-ended PO 3. Blank Check PO 4. Petty Cash 5. Stockless buying or system contracting 6. Standardization and simplification of materials and components 7. Accumulating small orders to create a large order 8. Using fixed order interval

3 Primary Goals of Purchasing in an Organization

1. Ensure uninterrupted flows of materials and services at the lowest total cost 2. Improve quality of the finished goods 3. Optimize customer satisfactions All these contribute to these objectives: -Actively seeking better materials and reliable suppliers -Working with the expertise of strategic suppliers to improve quality and materials -Involving suppliers and purchasing personnel in new product design and development materials

3 Components of TCO

1. Pre-transaction costs: identify sources, qualifying sources, certifying sources, supplier database update 2. Transaction costs: price negotiation, delivery confirmation, PO administration, transporting 3. Post-transaction costs: returns, replacement, repair parts, maintenance

What generates more profits before taxes: 10% increase in sales or 10% cost reduction?

10% cost reduction

3 Parts of Procurement

1. Purchasing Management 2. Strategic Sourcing 3. Supplier Relationship Management

Advantages of e-Procurement

1. Time savings: reduction in the time between need recognition and the release and receipt of the order is reduced 2. Cost savings: lower overhead cost in purchasing department 3. Accuracy: reduction in errors 4. Real time: improved communication both within the company and with suppliers 5. Management: purchasing personnel spend less time on processing of PO and invoices, and more time on strategic value-added purchasing activities 6. Mobility: access virtually anywhere 7. Track-ability: real-time status tracking

Purchase Order (PO)

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

Profit Leverage Effect

A decrease in purchasing expenditure (COGS) directly increases profits before taxes -Bottom line impact is dollar for dollar

Request for Quote (RFQ)

Document that generally used to solicit bids from interested and qualified suppliers for goods and services.

Import Brokers

Agents licensed by the governmental regulatory authority to conduct business on behalf of importers, for a service fee -Take the burden of filling out paperwork and clearing products through customs barriers for importers

Inventory Turnover

An increase in inventory turnover indicates optimal utilization of space and inventory levels, increased sales, avoidance of inventory obsolesce -Inventory is an asset but its money tied up, so you want a higher ratio -COGS/Average inventory at cost

Backward v. Forward Vertical Integration

Backward Vertical Integration -Refers to a company acquiring one or more of their suppliers -ex: manufacturer buying the key supplier of a critical material to take ownership of this part of their supply chain Forward Vertical Integration: -Refers to a company acquiring one or more their customers -ex: manufacturer buying a wholesaler/distributor

Trading Companies

Buy products in one country and sells them in different countries where they have their own distribution networks -Mostly work with high production volume products such as raw materials, chemicals, etc. May carry a wide variety of goods (ie: catalog)

Bid Bonds

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 bid would be forfeited

Performance Bond

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

Payment Bond

Debt secured by a bidder for the purpose of providing protection against third party liens not fulfilled by bidder

Request for Proposal (RFP)

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

Purchase Requisition

Document that defines the need for goods and/or services. An INTERNAL documentm, and has NO contractual relationship

In-Sourcing v. Co-Sourcing

In-Sourcing: -Aka back-sourcing -reverting to in-house production when external quality, delivery, and services do no meet expectations Co-Sourcing: -Sharing the process of function between internal staff and external suppliers -Using dedicated staff at an external provider that works exclusively under your control and direction

Industrial Buyer

Individuals within an organization who purchase raw materials for conversion into products, and/or purchase services, capital equipment, and MRO supplies

Counter-Trade

International trade by exchange of goods rather than currency

Import Merchants

Person or company engaged in the purchase and sale of imported commodities for profit -Buy and take title to the goods being imported and sells them domestically

The ________ function is one of the most value-enhancing functions

Purchasing

Purchasing

The action of obtaining merchandise, capital equipment, raw materials, services, or maintenance, repair, and operating supplies in exchange for money or its equivalent -Process of how goods and services are ordered -Can usually be described as the transactional function of procurement for goods and services -Also commonly used in business to represent the function, and responsibility for, acquiring materials, supplies and services for the company

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 all the goods, services, and work that is vital to the organization -Procurement is the overarching term within the action of purchasing can be found

Total Cost of Ownership

The sum of all the costs associated with every activity in the supply stream of a product -Procurement pros recognize that although purchase price is very important, it is only one part of TCO 4 Elements of Cost: 1. Quality 2. Service 3. Delivery 4. Price -Cost= Q+S+D+P

Competitive Bidding

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