Supply Chain Management Exam 2
supplier selection
- conducted by a cross functional team - complex and should be based on multiple criteria using evaluation from scorecards
supplier evaluation
- process to identify best and most reliable suppliers - sourcing decisions made on facts and not perception - frequent feedback can help avoid surprises and maintain good relationships - suppliers should be allowed to provide constructive feedback to customer
personal relationships (keys to successful strategic partnerships)
- strategic partnerships begin with development of personal relationships between key people at each company - it is people who communicate and make things happen
total cost of ownership (TCO)
the sum of all the costs associated with every activity in the supply stream of a product - procurement professionals recognize that although the purchase price of an item remains very important, it is only one part of the total cost of ownership
job shop (manufacturing processes)
creates a custom product for each customer. high customization - very long lead time - ETO/MTO
pain and gain share provisions
agreements could be negotiated to spell out in detail the gains (reward) and pains (penalty) that the supplier will realize for either exceptional or poor performance - both parties would mutually agree on the provisions and the positive and negative outcomes
5 key points to consider in the development and implementation of an SRM system
- automation: meant to handle routine transactions - integration: spans multiple departments, processes, ad software applications - visibility: information and clear and concise process flows - collaboration: through information sharing - optimization: process of decision making
characteristics of world class procurement organizations
- being a trusted advisor to the business - driving suppliers to innovate - providing analytics-backed insights - protecting the business from risk - taking an agile approach to staffing
LEAN supply chain relationships (#5 element of LEAN manufacturing)
- suppliers and customers work to remove waste, reduce cost, and improve quality and customer service - JIT (just in time) purchasing includes delivering smaller quantities, at right time, delivered to right location, in right quantities - firms develop lean supply chain relationships with key customers. mutual dependency and benefits occur among these partners
benefits of supplier certification programs
1. reduce time and resources necessary for buyer to conduct incoming inspections of products and materials from certified suppliers - buyer trains supplier on approved test methods so that supplier can test product before shipment, and provide a certificate of analysis (COA) - buyers may then opt to only test items periodically on incoming inspection rather than with each delivery or lot, providing that the period testing confirms the suppliers results 2. building long term relationships 3. decreasing supplier base 4. recognizing excellence
weighted criteria evaluation system
1. select key dimensions of performance mutually acceptable to both customer and supplier 2. monitor and collect performance data 3. assign weights to each of the dimensions 4. evaluate performance measures between 0 and 100 5. multiply dimension rating by weight and sum of overall score 6. classify vendors based on overall score (certified, preferred, acceptable, conditional, developmental, unacceptable, etc) 7. audit and perform ongoing certification review
cause and effect diagram /fishbone diagram (statistical tools)
used to aid in brainstorming and isolating the causes of a problem
utilitarianism
ethical act is that which creates the greatest good for the greatest number of people
strategic sourcing focus
on the development of long-term relationships with trading partners who can help the buyer meet profitability and customer satisfaction goals
six sigma history
originated by motorola in 1980 - motorla developed the new standard, created the methodology, and copyrighted it as well - motorola documented more than 16 billion in savings as a result of six sigma - thousands of companies adopted six signma as a way of doing business. became famous when jack welch made it central to his successful business strategy at general electric in 1995
the process commonly used in continuous improvement.
plan, do, check, act. plan- identify an opportunity and plan for change do- implement the change on a small scale check- use data to analyze results of change and determine whether it made a difference act- if the change was successful, implement it on a wider scale and continuously assess your results. if did not work, begin cycle again.
supply base rationalization (aka supply base reduction, supply base optimization)
reduction in the supply base to the lowest number of suppliers possible without increasing risk (100 suppliers is easier to manage than 1,000)
forward vertical integration
refers to a company acquiring one or more of their customers ex) manufacturer buying wholesaler/distributer to take ownership of this aspect of their supply chain
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 aspect of their supply chain when you're not buying materials but buying the supplier to become part of the operation
distributive negotiations
refers to a process that leads to self-interested, one-sided outcome
important to monitor a supplier's performance and provide visibility and feedback at each step of the evaluation process.
relevant metrics: - supplier price and cost performance - product receipt quality - delivery performance - financial stability - contractual and standard compliance - participation in product development - cooperativeness in third-party production management - support of both ethics and sustainable practices
federal acquisition act (1994) (rules that often govern Government and non-profit procurement)
removed restrictions on bids less than 100,000. micro purchases (less than 2,500) can be made without bidding - only need 2 bidders instead of 3-5 or if you purchase little you don't need to bid
acceptable suppliers
require a plan from these suppliers outlining how they will achieve preferred status
developmental suppliers
require corrective actions from these suppliers on how they will achieve acceptable level. look for alternative suppliers if these do not achieve acceptability within a fixed period of time (ex 3 months)
implementing LEAN and six sigma
require strong management support to incorporate these principles into the standard way of doing business
what is strategic sourcing?
requires analysis of what an organization buy, from whom, at what price and what volume formalizes the way information is gathered and used so that an organization can leverage its consolidated purchasing power analysis and ability to make adjustments based on price, evaluation of supplier performance, and the overall needs of the organization
Step #7- Fulfillment (Purchasing Process Steps)
the supplier ships/delivers the item(s) to the buying organization as per the PO - you have to make sure it is the right quantity and if they sent it to the right place. you can confirm you received the order to the supplier
changeover time
time taken to adapt and modify manufacturing equipment and systems to produce a different product or a new batch of the same product
setup time
time taken to prepare and format the manufacturing equipment and systems for production
goal of operations management
to convert materials and labor into goods and services and efficiently and effectively as possible, while also controlling costs to maximize profits
manufacturing
to make or process a raw material into a finished product, especially by means of a large-scale industrial operation (mass production) - involves the entire process of converting raw materials into finished goods - includes the machine used, personnel involved, inventory handling, warehousing
objective of strategic sourcing
to reduce cost while maintaining or improving quality
sealed bid (government and non-profit agencies)
a document enclosed in a sealed envelope and submitted in response to invitation to bid - open competitive bidding: the bids are opened in the presence of anyone who may wish to be present and evaluated for award of a contract - closed competitive bidding: the bids are opened in presence only of authorized personnel. - contract is usually awarded to the lowest priced responsive and responsible bidder
leverage
commodity items where many alternatives of supply exist and supply risk is low. spend is high and there are potential procurement savings - high value low risk - low risk but potentially high volume, a lot of savings can be made here 1. consolidate volume as a negotiation tool 2. use competitive marketplace to reduce costs 3. automate supplier interfaces to minimize process related costs
payment bonds (government and non-profit agencies)
a debt secured by a bidder for the purpose of providing protection against 3rd party liens not fulfilled by bidder - when i know there was issues when you were working with other people and if you get sued and there is an issue i am not involved or pulled into the lawsuit.
Profit-Leverage Effect
a decrease in purchasing expenditures that directly increases profits before taxes - 10% cost reduction generates significantly more profit before tax than a 10% sales increase - main reason that procurement managers are under significant pressure from senior management to reduce purchase costs
Request for Quote (RFQ)
a document generally used to solicit bids from interested and qualified suppliers for goods and services that the organization needs to obtain - when business already determined what they want. "I wanna know if you're interested in doing business with me, and how much you're going to sell these to me for"
centralized purchasing (purchasing organization)
purchasing department located at the firm's corporate office makes all the purchasing decisions
LEAN
operating philosophy of waste reduction and value enhancement - originally created as the toyota production system (TPS) by key toyota executives
benefits of outsourcing
- concentrate on core capabilities - reduce staffing levels - accelerate reengineering efforts - reduce internal management problems - improve manufacturing flexibility
key principles of total quality management (TQM)
- management commitment - employee empowerment - fact based decision making - continuous improvement - customer focus
Step #1 - A need is identified, and a Purchase Requisition is issued (Purchasing Process Steps)
- request for goods and services submitted to the procurement/ purchasing department for action. - typically initiated by a user within an organization - certain people have a level of buying authority
from an information technology perspective, strategic sourcing includes automation of
- request for quote (RFQ) - request for proposal (RFP) - electronic auctioning (e-auction or reverse auction) - contract management
total cost of manufacturing (TCM)
complete cost of producing and delivering products to your customers - incorporates both fixes and variable costs used in the manufacturing, storage, and delivery of product - includes all costs associated with: production and procurement activities, inventory and warehousing activities, transportation activities - generally expressed as a cost per unit for each product
Post-Transaction Costs
activities carried out following the actual buy and sell transaction
Pre-Transaction Costs
activities carried out prior to the actual buy and sell transaction
import brokers (types of service providers -international purchasing)
agents licensed by the government 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 - does not take ownership of goods, acts as agent
service providers
companies can use these, they already have the skills and knowledge necessary to deal with international purchasing issues and challenges
current trend favor using
fewer sources. caution: single-source is risky - can run out and then company is in trouble
automation through e-Procurement provides
increased enterprise level visibility of all purchases
decentralized purchasing
individual, local purchasing departments, such as at the plant level, making their own purchasing decisions - operations spread out and each is buying for their own individual operation
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 personnel in new product design and development efforts
Voice of customer (VOC) can be captured in variety of ways
- customer interviews - market surveys - focus group - customer specifications - observation - warranty data - field reports - complaint logs - etc this data is used to identify the quality attributes needed for a process or product
DMADV methodology
- define measure analyze design verify: which is a data-driven quality strategy for designing products and processes - this is used when the company wants to create a new product design or process that is more predictable and defect free
Step #13- 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)
LEAN is composed o 3 elements working in unison
- lean manufacturing - total quality management - respect for people
ISO 9000
- quality standards in design, development, production, installation, and service - companies wanting to sell in the global market seek this certification
inventory turnover formula
costs of goods sold (COGS) / average inventory average inventory is beginning inventory - ending inventory
supply base
group of suppliers from which a company acquires goods and services
sustainable sourcing should seek to
grow revenues: growing company through launch of new sustainable products reduce costs: by increasing resource efficiencies go green: materials used meet environmental objectives for things like waste reduction, reuse, and recycling manage risk: link company brands to the social consciousness of consumers build intangible assets: such as social and environmental responsibility, increasing consumer awareness of sustainable sourcing ad sustainability
voice of the customer (VOC)
in-depth process of capturing internal and external customer's stated and unstated expectations, preferences, likes, and dislikes - total quality management (TCM) is all about meeting or exceeding customer expectations, so capturing the voice of the customer is essential for TQM to be successful
countertrade
international trade by exchange of goods rather than by currency
benchmarking
measuring what other businesses do best and matching their performance, is an effective approach to improving your supply chain
reasons for buying
non-strategic: if it is non strategic item or cheap part cost advantage: suppliers can provide benefit of economies to scale, especially for components that are non-vital to the organization's operations insufficient capacity: firm may be at or near capacity and subtracting from a supplier may make better 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 technology or expertise quality: supplier may have better technology, process, skill labor multi-sourcing strategy: to achieve a multi sourcing strategy using an external supplier in addition to an internal source inventory considerations: opting to 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
Purchasing is
part of procurement
Actions of procurement
plan, source, make, deliver / return, enable
supplier relationship management (SRM)
planning and managing all interactions with third party organizations that supply goods/services in order to maximize the value of those interactions organized approach to defining what they need and want from a supplier and managing the company-to-company link to obtain those needs
corporate social responsibility (CSR)
practice of business ethics
Procurement
process of selecting and vetting suppliers, negotiating contracts, establishing payment terms, and the actual purchasing of goods and services
manufacturing cells
process similar parts or components saving duplication of equipment and labor - are often U-shaped to facilitate easier operate and material movements - ex) sandwich shop
non-value added process
process steps that take time, resources, or space, but do not add value to the product or service
value added process
process steps that transform or shape a product or service which is eventually sold to a customer
Return on Assets Formula
profit before tax / assets
reasons for making
protect proprietary technology: you don't want your intellectual property to be out in the public domain. no competent supplier: there may not be an existing supplier in the market overall lower cost: you may be able to produce the material or product at a lower cost as you will avoid paying a 3rd party's profit margin better quality control: you may feel that you have more control of the quality of the material / product than a supplier use existing idle capacity: you can use your own capacity that is already available. make material out of it instead of letting it sit idle control of transportation and warehousing costs: if you make an item in-house, you avoid transportation costs, and may be able to keep warehousing to a minimum control lead time: you may have more control over lead time to produce the material / product yourself
non-tariff barriers
quotas, licensing agreements, embargoes, laws and regulations imposed on imports and exports
operations management
refers to the design, execution, and control of the operations that convert resources into desired goods and services - managing the process to create goods and services
in-sourcing (also known as back sourcing)
reverting to in-house production when external quality, delivery, and services do not meet expectations
non-critical
routine items that involve a low percentage of the firms' total spend and involve very little supply risk - low value low risk - little risk, plenty of places to buy from. product doesn't change often (ex: office supplies) 1. simplify and streamline the purchasing process 2. reduce number of suppliers and simplify ordering 3. transfer buying responsibility to users within the company
rights and duties
some actions are just right in and of themselves, regardless of the consequences. do the right thing!
ISO 14000
standards for environmental management - benefits include reduced energy consumption, environmental liability, waste and pollution, and improved community goodwill
specialized knowledge includes aspects of
tariffs: duties, taxes, or customs imposed by the host country for imported or exported goods non-tariff barriers: quotas, licensing agreements, embargoes, laws and regulations imposed on imports and exports countertrade: international trade by exchange of goods rather than by currency
key supplier selection
typically conducted by a cross functional team using evaluation forms or scorecards - weighting techniques are often used
low turnover ratio
unfavorable as it means the company is not selling through products efficiently. company is likely making/buying too much inventory for demand and may end up throwing out expired or unsellable products
bottleneck
unique procurement problems. supply risk is high and availability is low. small number of alternative suppliers - low value high risk - may be very few suppliers 1. maintain safety/strategic stock 2. develop contingency plans 3. strengthen relationships 4. search for alternatives
check sheets (statistical tools)
used to determine frequencies for specific problems
pains
using a penalty or punishment is a negative outcome for poor performance, cost overruns, quality problems, etc - buyer could impose a financial penalty (fine) on the supplier for poor performance - buyer could reduce future business with the supplier for poor performance - buyer could implement a bill-back amount equal to, or a percent of, the incremental costs resulting from poor performance
advantages of decentralization
- knowledge of local requirements - local sourcing - less bureaucracy
functional products
MRO items and other commonly low profit margin items with relatively stable demands and high levels of competition (ex: office supplies, food staples) potential strategy: reliable, low cost suppliers. multi-sourced so can bid against each other and compete for better price and delivery
control charts (statistical tools)
firms: - gather process performance data - create control charts to monitor process variability - collect sample measurements of the process over time and plot on charts allows firms to: - visually monitor process performance - compare the performance to desired levels or standards - take corrective action as necessary - natural variations: expected and random (cant control) - assignable variations: have a specific cause (can control) - variable data: continuous (weight) - attributable data: indicate some attribute such as color and satisfaction. or beauty
early supplier involvement (ESI)
key suppliers become more involved in the internal operations of the buyer's company, particularly with respect to new product and process design, concurrent engineering, and design for manufacturability - strategic suppliers are asked to add their knowledge and expertise to the company's new product development
make to stock (MTS)
literally means manufacture products for stock based on demand forecasts, which is a push system - critical issue is how to forecast demands accurately one issue of this is to avoid having excess inventory. companies today that operate with this struggle to make the correct product at the correct time in the correct quantity - most used strategy - can be as quick as buying something off shelf or waiting 2 days for amazon order features economies of scale, large volumes, long production runs, low variety, and multiple distribution channels
MRO
maintenance repair and organizing
manufacturing management
management of all the processes, which are involved in manufacturing - therefore, includes the management of personnel, management of raw materials, planning for production, etc
corporate social responsibility program
most companies have these, frequently these programs require suppliers to agree and abide by a supplier code of conduct in order to be considered an approved supplier
purchasing function is one of the
most value-enhancing functions in any organization
single-source (sourcing strategies)
multiple potential suppliers available for a product or service, but company decides to purchase from only one supplier
respect for people
must exist for an organization to be at its best - flatter hierarchy than traditional - ordinary workers given great responsibility - supply chain members work together cross functional teams
malcolm balrige national quality award
objectives: - stimulate firms to improve - recognize firms for quality achievements - establish guidelines so that organizations can evaluate their improvement and provide guidance to others categories measured - leadership - strategic planning - customer and market focus - information and analysis - human resource focus - proces management - business results
Make vs Buy Decision
the act of deciding whether to produce an item internally or buy the item from an outside supplier
Procurement is
vital for the company and like an overarching umbrella
Purchasing can be
a separate department within a company or part of the supply chain management department
Transaction Costs
activities carried out as part of the actual buy and sell transaction
CPO
chief procurement officer
supplier development program must be aimed at
improving suppliers performance, not bullying them into charging less or simply auditing and rewarding them - is all about providing suppliers with what they need to be successful
workforce commitment (#6 element of LEAN manufacturing)
managers must support LEAN manufacturing by providing subordinates with skills, tools, and other necessary resources to identify problems and implement solutions
OTIF
on time in full
use of technical tools (#2 foundation aspect of six sigma)
such as statistical quality control, and the seven tools of quality. six sigma provide a statistical approach for solving any problem and thereby improves the quality level of the product as well as the company - all employees should be trained to use technical tools - six sigma is concerned with the permanent fix to quality problems and seeks to identify and correct the root cause of the problem
efficient consumer response (ECR) (in the 1990's supply chain management combined all these approaches and concepts that have emerged into lean manufacturing)
strategy to increase the level of services to consumers through close cooperation among retailers, wholesalers, and manufacturers
supplier relationship management (SRM) is about
identifying and measure key strategic suppliers
experts all contributed to basic framework of total quality management (TQM)
w. edwards deming: widely considered the father of TQM. he is the creator of the plan-do-check-act model phillip crosby: coined the phrase 'quality is free' as defects are costly. introduced concepts of zero defects, and focus on prevention and not inspection joesph juran: defined quality as 'fitness for use'. he developed the concept of the cost of quality kaoru ishikawa: developed one of the first tools in quality management process, the cause and effect diagram, which is also called the ishikawa or fishbone diagram
supplier recognition program
3 attributes: - companies should recognize and celebrate the achievements of their best suppliers - award winners exemplify true partnerships, continuous improvement, organizational commitment, and excellence - award winning suppliers serve as role models for other suppliers
bid bond (government and non-profit agencies)
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 - i am going to do the work for this bid. and if i don't do the work then i'm going to forfeit the bid and loose my money that i put into my account
Contracting
a term often used for the acquisition of services. - when you buy services you will end up with a contract that states all the terms
just tin time (JIT) (in the 1990's supply chain management combined all these approaches and concepts that have emerged into lean manufacturing)
an inventory strategy to decrease waste by receiving materials only when and as needed in the production process, thereby reducing inventory costs
continuous improvement (#7 element of LEAN manufacturing)
continuous approach to reduce process, delivery, and quality problems, such as machine breakdown problems, setup problems, and internal quality problems
quality is defined by the consumer (#1 foundation aspect of six sigma)
customers expect performance, reliability, competitive prices, on-time delivery, good service, clear and correct transaction processing and more - vital to provide what the customer need to achieve customer satisfaction
Make
producing materials or products internally (in operations owned by the company)
the role of workers, management, and suppliers
the goal is NOT to reduce the number of people in an organization, it it to use people resources more wisely worker duties: - improve production process - correct quality problems - monitor quality work in teams: - quality circles
high turnover ratio
beneficial because it means the company is generating sales efficiently to sell inventory
innovative products
characterized by short product life cycles, volatile demand, high profit margins, and relatively less competition (technology products such as the iPhone) potential strategy: innovative, high-tech, cutting edge, market leading supplier. long term partnership. single-sourced
role of management
create cultural change needed for LEAN to succeed: - provide atmosphere of cooperation - empower workers to take action based on their ideas - develop incentive systems for lean behaviors
significant concern in the strategic sourcing process
ethics and sustainability
supplier relationship management (SRM) seeks to
improve profits and reduce costs using tools such as - sourcing analysis - sourcing execution - procurement execution - payment and settlement - supplier score carding - performance management
uniform plant loading (level loading the plan)
problem: - demand exceeds capacity at points in the planning horizon - matching the production plan to follow demand exactly can contribute to inefficiency and waste uniform plant loading; - planning up to capacity in earlier time periods to meet demand in later time periods - also called 'front loading' the plan or 'leveling' the plan - production schedule is frozen in the up-front time period (month) - helps suppliers better plan production
co-sourcing
1. sharing of a process or function between internal staff and an external provider 2. using dedicated staff at an external provider that works exclusively under your control and direction - maybe you take half of product in house and then send to third party to do finishing things
SMART
specific, measurable, achievable, relevant, time-oriented
sourcing strategies
- non-critical - bottleneck - leverage - strategic
sourcing
the process of identifying a company that provides a needed good or service
assemble to order (ATO)
where products ordered by a customer are produced quickly and are customizable to a certain extent - requires that the basic parts for the product are already manufactured but not yet assembled - once order is received, parts are assembled quickly and sent to customer hybrid strategy between make-to-stock where products are fully produced and make-to-order where products are manufactured once the order has been received. - attempts to combine the benefits of both strategies into customers hands quickly while allowing for product to be customizable - ex) when you buy paint or a computer when base components are made, stocked to forecast, but products are not assembled until customer order is received
Merchants
wholesalers and retailers who purchase for resale - ex) target is a reseller because they buy things for resale/other people to buy. they are not consumers
e-Procurement may NOT
work well for every type of purchase. for example: - the procurement of mission-critical items that are available only through a few suppliers - where the inventory of the item(s) is very low - where procuring the item(s) involves complex negotiations - where the potential to lower costs through an e-procurement platform is minimal
six sigma certification levels based on training, knowledge, and experience.
yellow belt: knows all the technique but hasn't worked on a project yet. knows from academics only. passed the green belt exam but has not yet completed a project green belt: can work as a team member on complex project and also lead small, defined, six sigma projects. brown belt: a green belt that has passed the black belt certification but has not yet completed their second project black belt: full-time quality professional who has a thorough knowledge of six sigma and principles, and possesses technical and managerial process improvement/innovation skills. master black belt: led ten or more teams, the experts. they train everyone else. its a career path, 100% of what they do is making processes better.
performance metrics (keys to successful strategic partnerships)
you can't improve what you can't (or don't) measure - measures related to quality, cost, delivery, and flexibility are used to evaluate suppliers - metrics should be: 1) understandable 2) easy to measure 3) focused on a real value-added results [S.M.A.R.T. objectives] 4) multi-criteria approach is best
reasons for multiple suppliers
- need more capacity - spread risk of supply disruption - create competition - more sources of information - dealing with special kinds of business (may be required to have more than one even if you only wanted one)
e-Procurement tools typically automate all or part of the following processes:
- solicitation development tools; RFI, RFP, RFQ - execution and analysis - reverse auction capabilities
Step #5 - Purchase Order (PO) is created and delivered to the supplier (Purchasing Process Steps)
- 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 buyers formal offer to the supplier to obtain the item(s) - the PO becomes a binding contract only when accepted by supplier
Step #2- Obtain authorization as necessary (Purchasing Process Steps)
- a purchase requisition may be routed to an authorized approver(s) depending on the type of material of 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 specified threshold
supplier of choice (preferred suppliers)
- achieved a specific and exceptional level of performance over time as measured by a set of criteria agreed upon by both buyer and supplier - typically a trusted partners who know the buyers organization, processes, procedures, and requirements - provides a higher value than their competitors and are characterized as reliable, responsive, flexible, and cost effective
information sharing and lines of communication (keys to successful strategic partnerships)
- both formal and informal lines of communication should be set up to facilitate free flow of information - confidentiality of sensitive information must be maintained
shared visions and objectives (keys to successful strategic partnerships)
- both partners must share the same vision and objectives that are not only clear but mutually agreeable - the focus must move beyond tactical issues and toward a more strategic path to corporate success
workers identify and correct quality problems. - 7 tools of quality control
- check sheets - cause and effect diagrams (fishbone) - control charts - histograms - pareto analysis - scatter diagrams - stratification (flow diagrams)
commitment to top management support (keys to successful strategic partnerships)
- commitment must start at the highest management level - partnerships tend to be successful when top executives are actively supporting the partnership - generally means someone in senior management has to sign off on this agreement
change management (keys to successful strategic partnerships)
- companies must be prepared to manage change that comes with the formation of new partnerships - when you do this you are going through a change management process, no matter how long you were working with the third party, we are changing the relationship and giving them access to our business strategies
advantages of centralization
- concentrated volume - leveraging purchase volume - avoiding duplication - specialization - lower transportation costs - no competition within units - common supply base
processing costs for small value purchases are minimized through
- credit card/corporate purchasing card (p-card) - blanket or open-end purchase orders: when you don't want to execute every purchase for something small. so you execute with a company like staples and tell them what you might expect to get from them this year and then you can get a discount or you can get scheduled delivery. all you do is issue an invoice. - petty cash: keeping cash in a drawer like a credit card - stockless buying or system contracting: guy comes once a week to fill vending machines. they just come and replenish stock - standardization & simplification of materials & components: instead of having each individual person go out and buy office supplies, there can be someone in charge of doing that for the department - accumulating small orders to create a large order: same scenario as above - using a fixed order interval
8 quality management principles ISO 9000 standards are based
- customer focus - leadership - involvement of people - process approach - systems approach to management - continual improvement - factual approach to decision making - mutually beneficial supplier relationship
8 wastes - remember the acronym DOWNTIME
- defects: anything that does not meet acceptance criteria - overproduction: production before it is needed, or in excess of customer requirements. providing a service that is not needed - waiting: elapsed time between processes when no work is being done - non-utilized talent: under using people's talents, skills or knowledge. de-motivating the workforce by not asking for input or recognizing success - transportation: unnecessary movement of materials or products - inventory: excess products or materials not being processed - motion/movement: unnecessary movement of people. multiple hand-offs - extra-processing: unnecessary steps in process. redundancies between processes. more work or higher quality than required by the customer
DMAIC
- define measure analyze improve control: which is data-driven quality for improving products and processes - used when the company wants to improve an existing business process -most widely adopted and recognized six sigma methodology in use - defines the steps a six sigma practitioner typically follows during a project
Basic steps for spend analysis
- defining the scope - identify all of the data sources - gathering and consolidating all of the data into one database - cleansing the data (finding and correct errors) and standardizing it for easy review - categorizing the data - analyzing the data for: best deals per supplier, to ensure that all purchases are from preferred supplier, to reduce number of suppliers per category - repeating the process on a regular schedule
waste (muda) reduction (#1 element of LEAN manufacturing)
- firms reduce costs and add value by eliminated waste from production system - waste includes wait times, inventories, material and people movement, processing steps, variability, any other non-value adding activity before waste is removed, processes are often scattered, which can negatively affect your customers after waste is removed, processes are more streamlined, resulting in more satisfied customers. you'll also save your organization time and money
ISO certified suppliers are frequently preferred by procurement departments
- have to conform to an externally defined set of standards for delivery and service - usually more open to sharing supply chain information - welcome building relationships w their customers - have formal processes in place for continual improvement of their products, services, and processes - easier for procurement to initially qualify and periodically audit - certification is done by an external register agency - firms have to be re-certified every 3 years
Return on Assets (ROA) Effect
- how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings - a 10% cost reduction generates a significantly higher return on assets (ROA) than does a 10% sales increase, given the same number/value of assets
supplier development is based on following process steps
- identify critical products and services - identify critical suppliers - form a cross-function team internally to work w the supplier - meet w the top management at the supplier to get their support and involvement - identify key development needs and projects - define details of the agreement and the action plan - monitor the status of projects/ action plan and modify strategies as necessary - with a robust supplier development program, companies can establish trust through a heightened commitment to their supply partners
Step #4- Make Supplier Selection (Purchasing Process Steps)
- if the next buyer already knows which supplier they will buy the item from, move to the next step. - if not, a competitive business 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 items(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
companies spend significant time and resources developing and implementing strategic sourcing initiatives to
- improve long term financial performance - increase customer focus - improve product quality - reduce the cost of materials - reduce delivery cycle times - optimize the number of global suppliers (for most companies this means a reduction in the number of suppliers) - deliver more innovative products, in less time, and less expensively than competitors
Step #12- Reclamation of Taxes (Purchasing Process Steps)
- in some situations, the supplier will be obligated to charge a tax, but the buyer may be eligible to retain some or all the tax based on corporate status
benefits of strategic alliance
- increase revenue and profits for both parties - create a competitive advantage or block a competitor from gaining market share - lessen risk and ensure a continuity of supply - position partners for future strategic opportunities
skill set required of purchasing professionals
- interpersonal communication - ability to make decisions - ability to work in teams - analytical skills - negotiation skills - customer focus - ability to manage change - influencing and persuasion skills - strategic skills - understanding business conditions
Step#11- Payment (Purchasing Process Steps)
- invoice payment processed using an appropriate payment method assuming the item(s) is received and meets all of the criteria established on the PO - request for payment is the invoice
capabilities (keys to successful strategic partnerships)
- key suppliers must have the right technology and capabilities to meet cost, quality, and delivery requirements in a timely manner (current and future)
international purchasing potential challenges
- knowledge of international trade policies and procedures - awareness and cost of required tariffs and duties - language barriers, different time zones, working weeks, holidays - different currencies - there are a lot more
supplier development programs should be designed to achieve
- lower supply chain total cost - increased profitability for all supply chain departments - increased product quality - near-perfect on-time delivery at each point in the supply chain
manufacturing strategies
- make to stock (MTS) - assemble to order (ATO) - make to order (MTO) - engineer to order (ETO)
continuous improvement (keys to successful strategic partnerships)
- making a series of small improvements over time results in the elimination of waste in a system - buyers and suppliers must be willing to continuously improve their capabilities in meeting customer requirements
Step #3- Identify and evaluate potential suppliers (Purchasing Process Steps)
- may be determined from a list of company approved suppliers - alternatively, may use a request for information (RFI) to collect information form potential suppliers on their capabilities and interest in supplying the material or service - you may send RFI to a bunch of different suppliers and ask them if this is something they can even supply. particularly if it is a brand new item - then you must select your supplier. if you know this item and bought it in the past, then you won't have a problem. but if it is new you might need to go through the competitive bidding process and ask them for a request of proposal. if you've bought from them before, you can ask for a request of quote. once you evaluate then you can choose you're supplier and pick what percentage you will give each one.
Step #14- Analysis
- measurements of the efficiency and accuracy of the procurement process - specific PO data and information captured and used during periodic supplier performance meetings - you need to do a performance measure analysis and see if you want to continue to buy from that supplier
LEAN layouts (#2 element of LEAN manufacturing)
- move people and materials when are where needed, and as soon as possible - are very visual with operators at one processing center able to monitor work at another
criteria used for internal certification programs
- no incoming lot rejections (less than 0.5 defective) - no incoming non-product rejections (late delivery) - no significant supplier production-related negative incidents - ISO 9000/Q9000 certified or successfully passing a recent, on-site quality system evaluation - mutually agreed-upon set of clearly specified quality performance measures - fully documented process and quality system with cost controls and continuous improvement capabilities - suppliers processes stable in control
Step #8- Receipt of Goods (Purchasing Processing Steps)
- 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
assessment criteria include
- participating in and leading multifunctional teams - participating in value engineering efforts - optimize supply base - create ESI initiatives - utilize e-procurement - further supplier integration - contribute to new product development - improve time to market - initiate supplier cost reduction programs - creation of strategic alliances
LEAN builds long-term supplier relationships
- partner with suppliers - improve process quality - information sharing - goal to have single-source suppliers
building trust (keys to successful strategic partnerships)
- partners are willing to work together, find compromise solutions to problems, work toward achieving long-term benefits for both parties, and go the extra mile - trust must be earned. it is also easily lost, and impossible to regain once lost!
mutual benefits and needs (keys to successful strategic partnerships)
- partnerships should result in win-win, which can only be achieved if both companies have compatible needs - alliance is much like a marriage, and if only one party is happy, then the marriage is not likely to last
risk of outsourcing
- potential loss of control - increased reliance on suppliers - increased need for supplier management
total cost of manufacturing (TCM) to manufacturing strategy
- procurement and production costs per unit go DOWN as volume goes up - inventory and warehousing costs per unit go UP as volume goes up (hold more inventory, pay for more storage space, insurance, taxes) - transportation costs per unit go DOWN as volume goes up, but level off at high volumes (economies of scale until the container is filled up)
preferred suppliers provide
- product and process technology, and expertise - product development and value analysis - information on latest trends in materials, processes, or designs - capacity for meeting unexpected demand - cost efficiency due to economies of scale
supplier relationship management (SRM) is part of strategic sourcing and is typically applied with supplier:
- providing high volumes of a product/service - providing lesser quantities of a crucial product or service - that serve many business units of a company or organization - where intensive engineering, manufacturing and/or logistics interaction is essential
2 of the most important functions of supplier development program
- providing information - training suppliers suppliers need to be an extension of their customers asking suppliers to lower their price without giving them the knowledge on how to lower their costs in not sustainable in the long term
Key Factors that must be Considered (Make vs Buy decision)
- 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 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
rewarding supplier performance
- recognition of a supplier for exceptional performance, contributions, and/or capabilities - motivates and encourages them to continue to strive for excellence in their products, services, and operations - strengthens and fosters strong and productive supplier relationships reward incentives can include: - promise of future business - public recognition including any or all of the following: plaque, awards dinner, honors ceremony, press release, etc - cash back for achieving performance based objectives - strategic or preferred supplier status
LEAN green practices
- reduce the cost of environmental management - lead to improved environmental performance - increase the possibility that firms will adopt more advanced environmental management
reducing waste consequently results in
- reduced cycle times - greater throughout - better productivity - improved quality - reduced costs all of these can improve customer satisfaction and provide the company with a competitive advantage
buyer supplier partnerships are easier to manage with a rationalized supply base, and they can result in
- reduced purchase prices - fewer supplier management problems - closer and more frequent interaction between buyer and supplier - greater levels of quality and delivery reliability
Inventory Turnover Effect
- represents the number of times the company sold through inventory in a given time period - purchasing function in an organization plays a large part in the amount of inventory the company holds
all of LEANs goals and objectives help to facilitate an efficient and effective supply chain
- satisfying internal customer demand - communicating demand forecasts and production schedules up the supply chain - quickly moving products in the production system - optimizing inventory levels across the supply chain - increasing the value, capabilities, and flexibility of the workforce through cross-training - extending collaboration and alliances beyond just 1st tier suppliers and customers to include 2nd and 3rd tier suppliers and customers as well
small batch scheduling can be facilitated through the use of kanbans
- signal or card in japanese used for communication (visual signal) between workstations - contains information passed between stations - authorizes production or the movement of materials to next workstation - could be conducted through the use of a computer software program (ERP system)
LEAN history
- starting 1910's henry ford's mass production line was a breakthrough by using continuous assembly and flow systems that made parts find their way into finished products - in 1940's, taichii ohno and shigeo shingo created toyota production system (TPS), which incorporated ford's production system and other techniques to form the basis of what is now known as LEAN - term LEAN was first coined by John Krafcik in 1988 and the definition was expanded in the 1990 book, 'The machine that changed the world' - lean and six sigma kinda formed supply chain management
ethical policies should include
- supplier code of conduct and require all suppliers to agree and abide by code as condition of being approved supplier - create specific provisions within supplier agreements - determine where all purchased goods originate and the manner in which they are made - knowledge of their suppliers' workplace principles - seek independent verification of supplier compliance with ethical standards - include ethics as part of their supplier performance rating system - routinely report supplier compliance to key stakeholders
Step #9- Invoice (Purchasing Process Steps)
- 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 - request for payment is the invoice
reasons for global sourcing
- the opportunity to improve quality, cost, and delivery performance - to exploit global efficiencies: access to low cost labor and materials, take advantage of tax breaks and low trade tariffs - other parts of the world might be much better than local - 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
Step #6- Supplier confirmation of the Purchase Order (Purchasing Process Steps)
- the supplier formally agrees to supply the item(s) per the specifications, terms, and conditions described on the Purchase Order - the purchase oder then becomes a legally binding contract between the buyer and the supplier for the item(s) specified
goal of manufacturing
- the transformation of raw materials and operational inputs into outputs that, when distributed, meet the needs of customers - plays important role in overall business scenario as it provides goods and services involving financial, commercial, and industrial aspects - plan has to be developed considering product, plant, processes, programs, people
Advantages of an e-Procurement System
- time savings: reduction in the time between need recognition and the release and receipt of an order - cost savings - accuracy: reduction in errors. - real time: improved communication both within the company and with the suppliers - management: less time on processing of purchase and more time on strategic value-added purchasing activities - mobility: access virtually anywhere - trackability: real time status tracking - benefits to the suppliers : if suppliers can get orders faster and speed all their processes up, then they can get more business.
reasons for a single supplier
- to establish a good relationship - less quality variability - lower cost - transportation economies - proprietary product or process - volume too small to split
5 key areas of spend analysis
- total historic expenditures - future demand projections or budgets - expenditures categorized by commodity and sub-commodity - expenditures by division, department, or user - expenditures by supplier
Purchasing
- transaction function of procurement - function of/ responsibility for acquiring materials, supplies, etc
supplier certification programs
- used to differentiate strategic supplier alliance candidates from others - buyers can monitor quality assurance methods and specify the type of acceptance sampling and statistical processes control methods used - companies may choose to develop internal certification programs, and may also require external certification programs such as ISO 9000 ISO 14000 as part of overall certification process
acceptance sampling
- when shipment is received from supplier, statistically representative sample is taken and measures against the quality acceptance standard - entire shipment is assumed to have same quality as the representative sample that was taken sampling is less time-consuming then testing every unit but can result in errors - suppliers risk: buyer rejects shipment of good quality units the sample quality level did not meet the acceptance standard (type I error) - buyers risk: buyer accepts a shipment of poor quality units because the sample falsely provides a positive result against the acceptance standard (type II error)
trends in supplier relationship management
1. close alignment of sourcing with supplier relationship management: many companies are determining their negotiation strategies by tying them to their category management strategy, and to their supplier relationship goals 2. focus on cross-functional engagement: best practice for strategic supplier relationships involves SRM teams at both the company and at the supplier, each led by a relationship manager, who form a steering committee to lead the process 3. focus on innovation: companies that engage in more innovation w suppliers, report higher ROI 4. investment in people and soft skills: treat suppliers courtesy and respect. be candid, and able to disagree without being disagreeable. hold both sides to the same standards
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 - second goal is to improve the actual quality of the finished good. to use the external supply market to supply your material but also get their knowledge and expertise. maybe company offers a better option that would work better for your product. don't just use third party supplier for material, use them for their knowledge too - third goal means if there is a more efficient way of doing things like getting shipments in faster or lowering costs and to make sure end customer is happy with the product
benefits of supplier recognition programs
1. motivate supplier to perform better 2. improve supplier loyalty and commitment 3. encourage suppliers to adapt to the company's culture 4. helps to create entry barriers for competitors: if suppliers trust company, they may be more inclined to sign deals exclusively 5. encourages supplier participation in product innovation a properly developed and led supplier recognition program will make major contributions to the organization, its suppliers, and to its customers and stakeholders if a company is going to keep a supplier, there should be a motivation plan
7 elements of LEAN manufacturing
1. waste reduction 2. LEAN layouts 3. inventory, setup time, and changeover time reduction 4. small batch scheduling and uniform plant loading 5. lean supply chain relationships 6. workforce empowerment 7. continuous improvement
six sigma methodology
3 main foundational aspects of six sigma: 1. quality is defined by the customer 2. use of technical tools 3. people involvement
six sigma has 2 methodologies
DMADV methodology: - define measure analyze design verify: which is a data-driven quality strategy for designing products and processes - this is used when the company wants to create a new product design or process that is more predictable and defect free DMAIC - define measure analyze improve control: which is data-driven quality for improving products and processes - used when the company wants to improve an existing business process -most widely adopted and recognized six sigma methodology in use - defines the steps a six sigma practitioner typically follows during a project
lead times experiences by customers (manufacturing strategies)
MTS- has fastest lead time. customer only has to wait for delivery ATO- customer waits for delivery and manufacturing MTO- customer waits for delivery, manufacturing, and procurement ETO- has the longest. customer must wait for product design lead time. procurement lead time, manufacturing lead time, and customer delivery lead time
joseph juran
QUALITY PLANNING, identify internal/external customers & needs: - develop products satisfying those needs - managers set goals, priorities, and compare results QUALITY CONTROL, determine what to control: - establish standards of performance - measure performance, interpret the difference, take action QUALITY IMPROVEMENT, show need for improvement: - identify projects for improvement - implement remedies - provide control to maintain improvement
buy american act (1933) (rules that often govern Government and non-profit procurement)
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 - if you are spending publics money you must buy from america
Step #10- Reconciliation (Purchasing Process Steps)
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
performance bond (government and non-profit agencies)
a debt secured by a bidder for the purpose of providing a guarantee that the work will be on time and meet specifications - may be in addition to or aside from bid bond. if they can't do in time frame or at certain price then their money will be forfeited
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 - when a business says to a supplier "idk what you have to offer but i'll tell you what i want and then you'll write me a proposal for how you're going to write my needs." "I have need for an item that does this what can you offer"
Supply Management
a newer term that encompasses all the acquisition activities beyond the simple purchase transaction "Identification, acquisition, access, positioning, and management of resources an organization needs or potentially needs in the attainment of its strategic objectives"
import merchants (types of service providers -international purchasing)
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 - actually takes ownership and buys things from another country and bring it here and sell it under their name
what is six sigma
a quality management process: - seeks to improve the quality of process outputs by identifying and removing the causes of defects (errors) and minimizing the variability in manufacturing and business processes - goal is to attain less than 3.4 defects per million opportunities (DPMO) - a structured and data-driven approach to drive a near-perfect quality goal "zero defects"
reverse auctions
a sourcing technique where pre-qualified suppliers enter a website and at pre-designated time and date, and try to underbid competitors to win the buyer's business - buyer makes potential sellers aware of their intent to buy a specified good or service - during the course of the event, the sellers bid against one another to secure buyer's business, driving the price to be paid for the item downward - bid prices are monitored until session is over. winning bidder is the seller who offers the lowest price - used by private companies, public sector agencies, and non-profit organizations - suppliers are bidding on the volume they are going to supply only the price goes down - company will go onto site at certain time and everyone can see what other companies have been
the 5 S's; 5 pillars of visual workplace
a systematic process of workplace organization. - sort: keep only necessary items in the workplace, eliminate the rest - straighten: organize and arrange items to promote an efficient workflow - shine: clean the work area so it is neat and tidy - standardize: schedule regular cleaning and maintenance - sustain: stick to the rules. maintain and review standards there is a place for everything, and everything should be in place
Bid
a tender, proposal, or quotation submitted in response to a solicitation (RFP, RFQ) from a contracting authority - when business goes out and says exactly what they want, what they are willing to pay for, and the terms and conditions they want the supplier to meet and have the suppliers bid if they want to do business with them. Ask suppliers if they are willing to do this and the supplier can actually come back with a lower price which can ensure that they got the business
LEAN is NOT
a tool box of methods, ideas, or methodologies - LEAN is a culture - lean provides value for customers through the use of the most efficient resources possible - lean is standard in many industries - lean often results in: large cost reductions, improved quality, increased customer service
value engineering
activities to help with buyer's company to reduce cost, improve quality and reduce new product development time
make to order (MTO)
allows customers to purchase products that are customized to their specifications - only manufactures the end product once the customer places the order, creating additional wait time for the customer to receive the product but allowing for more flexible customization - pure pull strategy relieves the problem of excess inventory that is common the in the make-to-stick strategy - this strategy is not appropriate for all types of products. appropriate for highly configured items such as aircraft, bridges, automobiles, or products that are very expensive to keep in inventory - only will work is customer is willing to wait - very efficient bc not spending any money on holding goods or warehousing space relies on relatively small quantities, but more complexity
strategic alliance
an agreement between a buyer and supplier to pursue some agreed upon objectives, while remaining independent organizations - companies agree to share information and resources to achieve a mutual benefit - preferred suppliers are potential ideal candidates for an alliance
cost of quality
an approach that supports company's efforts to determine the level of resources necessary to prevent poor quality, and to evaluate the quality of the company's product or services - any cost that would not have occurred if quality was perfect, contributes to the cost of quality - this information will help a company to determine the benefits and savings generated by potential process improvements
co-managed inventory (CMI)
an arrangement where a specific quantity of an item is stored at the buyer's location - once it is used, item is replaced by the supplier, with the full knowledge and approval of the buyer - buyer provides system access to supplier, and supplier takes responsibility for managing the replenishment process in the buyers system accordingly - supplier reviews all of the available information and generated orders in the buyer's system - primary different of CMI and VMI is that in CMI the supplier is just recommending an order which is not confirmed until and unless the buyer approves it
business ethics
application of ethical principles to business. the two main ethical approaches are: utilitarianism: ethical act is that which creates the greatest good for the greatest number of people rights and duties: some actions are just right in and of themselves, regardless of the consequences. do the right thing!
ethical sourcing
attempts to take into account the public consequences or organizational buying, or to bring about positive social change through organizational buying behavior - involves procurement organization ensuring that the products being sourced are acquired in a responsible and sustainable way - the people involved in producing these products should be treated fairly and work in a safe environment - environmental and societal impacts must also be considered as part of the sourcing process
e-Procurement is the term used to describe
automation, through web-enabled tools, that would otherwise consume the majority of a buyer's time - adds speed to the steps but also makes it easy to share throughout the company
bidders are generally requires to furnish (government and non-profit agencies)
bonds as an incentive to ensure that the successful bidder will fulfill the contract awarded
setup time and changeover time reduction
both considered a waste as they are times when the equipment is not performing its intended function; producing product while setting up equipment is a necessary function, if it can be minimized, the difference will be more time available to produce. - these are both non-value added operations and should be minimized as much as possible
collaborative negotiations
both sides work together to maximize the outcome or create a win-win result. requires open discussion and a free-flow of information between parties - successful collaborative negotiations start with a clearly expressed understanding of how each company wants to benefit from the collaboration - confirming the alignment between parties regarding motivation, contribution, financial benefit, and the management of the alliance are essential - consequently, negotiations are not about each company obtaining the most value, negotiations are more about establishing a relationship that works well for both parties
e-Procurement
business to business (B2B) purchase and sale of supplies and services over the internet
trading companies (types of service providers -international purchasing)
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) - trading companies have a whole catalog of materials. can take care of lots of different products
buyer's risk (acceptance sampling)
buyer accepts a shipment of poor quality units because the sample falsely provides a positive result against the acceptance standard (type II error)
supplier's risk (acceptance sampling)
buyer rejects shipment of good quality units the sample quality level did not meet the acceptance standard (type I error)
Buy / Outsource
buying materials, components, or products from a supplier(s) instead of, or in addition to, making them in house (buying them from a 3rd-party external source)
lean and six sigma
compliment one another; - LEAN focuses on eliminating waste and improving efficiency - six sigma focuses on reducing defects and variations - LEAN + six sigma = faster speed and better accuracy
engineer to order (ETO)
component is designed, engineered, and built to specifications only after the order has been received - building a unique product every time - cost of poor quality can be very high - warranty costs and cost of rework to replace an item in a complex assembly can have a serious negative effect on profit margins - quality must be part of entire process, not just part of purchasing and manufacturing-- the typical focus of a repetitive manufacturer - make to order already has a design where this does not, brand new design used when products are uniquely and extensively customized for the specific needs of individual customers
strategic sourcing definition
comprehensive approach for locating and sourcing key suppliers, which often includes the business process of analyzing the total-spend by material category
cost of quality can be divided into the
cost of good quality - appraisal costs - prevention costs cost of poor quality - internal failure costs: when failure happens while product is still in marketplace - external failure costs: failure when customers have it. can damage reputation
prevention costs
costs associated with the design, implementation, and maintenance of the quality management system. they are planned, and experienced before actual products or materials are acquired or produced - establishment of specifications for incoming materials, processes, products, and services - creation of quality plans - quality training: development, preparation, and maintenance of programs - created and maintenance of the quality system
appraisal costs
costs associated with the evaluation of purchased materials, processes, products, and services to ensure that they conform specifications. they include: - testing, evaluating, and inspecting the quality of incoming materials, process setups, and products, against agreed upon specifications - quality assessment and approval of suppliers - performing audits to confirm that the quality system is operating properly.
external failure costs
costs that occur when the product or service that does not meet quality standards, are not detected until after the product or service is delivered to the customer. they include: - costs for handling and responding to customer complaints - costs for failed products that must be replaced or services that are repeated - costs for repair of returned products and products still in the field - costs for handling and investigation of rejected or recalled products, including return transportation costs
internal failure costs
costs that occure when the product or service does not meet the designed quality standards, and are identified before the product or service is delivered to the customer. they include: - defective product or material that cannot be used, sold, or repaired, and the costs associated with correction of these defects - unnecessary work or inventory resulting from errors - activities required to establish the root causes of product or service failures
small batch scheduling
creates a smooth workload as production can be synchronized with customer demand, facilitating a pull system - facilitate producing at the same rate as customer demand - increases flexibility allowing company to respond to changes in demands more quickly - throughput times in manufacturing go down, and work-in-process inventory goes down, reduce costs and eliminating or minimizing waste in the system - company can also get the product to the customer more quickly - shortens manufacturing lead time and the actual time it takes to produce product, however, setup time must be low so that it is easy to switch from producing one type of product to another
DMAIC in more detail
define: define the problem. what is the customers expectation of the process? measure: map out the current process. what is the frequency of defects? analyze: identify the cause of the problem. why, when, and where do defect occur? improve: implement and verify the solution. how can we fix the process? control: maintain the solution. how can we make the process stay fixed?
purchasing organization
dependent on many factors, such as market conditions and types of materials required
kaoru ishikawa
developed one of the first tools in the quality management process, the cause and effect diagram, also called the 'ishikawa' or 'fishbone' diagram - with this tool, users can see all possible causes of a problem to help find the root cause - also known as the father of quality circles and helped bring this concept into the mainstream - was a proponent of continuous customer service, meaning that a customer should continue receiving service even after receiving the product
public purchasing for the government and the non-profit sector are
different from private industrial purchasing and is characterized by competitive bidding and a sealed bid
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 - general document that never leaves the company, company is going to complete this document with what they need and when they need it. basically saying this is what they need and giving it to the procurement department
tariffs
duties, taxes, or customs imposed by the host country for imported or exported goods
Purchase Requisition and Purchase Order (PO)
each of these documents can be paper based or electronic
six sigma
enterprise and supply chain-wide philosophy that emphasizes a commitment toward excellence, encompassing suppliers, employees, and customers. identification and reduction of defects (errors)
government purchases
expenditures made in the private sector by all levels of government
non-profit purchases
expenditures made in the private sector by all typed of non-profit organizations
strategic alliance development
extension of supplier development which refers to increasing a key or strategic supplier's capabilities - results in better market penetration access to new technologies and knowledge, and high return on investment - extend a firm's second-tier suppliers as the firm's key suppliers begin to form their own alliances
successful sourcing strategies are always different for
function products vs innovative products
small batch scheduling and uniform plant loading (#4 element of LEAN manufacturing)
ideal schedule is to produce every product as quickly as possible at the same rate as customer demand - in real world, material availability, labor availability, and setup or changeover time influences the scheduling of large batches large batches can exacerbate the bullwhip effect as production in large batches creates an uneven workload - production is not synronized with customer demand making a pull system impossible - throughput times in manufacturing go up and work-in-process inventory goes up, creating more waste in the system - like a snake trying to swallow a large meal , would be better to have many smaller meals
strong supplier partnerships
important to achieving a win-win competitive performance for the buyer and supplier - these require a strategic perspective as opposed to a tactical position - mutual commitment over extended time to work together to the mutual benefit of both parties. sharing relevant information and the risks and rewards of the relationship
Purchase Processing Steps
in leading procurement organizations, every step will be completed, although many will be completed automatically by the e-Procurement system using defined rules for low-dollar or non-strategic purchases
Industrial Buyers
individuals within an organization who purchase raw materials for conversion into products, and/or purchase services, capital equipment, and MRO supplies. - buying raw materials to convert it into something that will have more value
value
inherent worth of a product as judged by the customer. and reflected in its selling price and market demand - further defined as anything for which the customer is willing to pay - only valuable if the customer things so, not the people who make it
external certification
international organization for standardization (ISO) is the worlds largest developer of voluntary international standards - members for 163 countries - ISO certification is high sought after in the business world as it represents achieving and maintaining a stand of excellence verified by an independent third party organization
phillip crosby
introduced the concepts of zero defects, and focus on prevention and not inspection - raise awareness of the importance of quality introduced the 4 absolutes of quality: - definition of quality is conformance to requirements - system of quality is prevention - performance standard is zero defects - measure of quality is the price of nonconformance
keiretsu relationships (in the 1990's supply chain management combined all these approaches and concepts that have emerged into lean manufacturing)
involves companies both upstream and downstream of a manufacturing process, remaining independent but working closely together for mutual benefit
assessing and improving the purchasing function
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
total quality management (TQM)
management philosophy based on the principle that every employee must be committed to maintaining high standards of work in every aspect of company's operations, focused on meeting customer needs and organizational objectives. - a combination of quality and management tools designed to increase business and reduce losses resulting from wasteful practices - when implemented, six sigma is an integral part of total quality management
Competitive Bidding
offers submitted by multiple individuals or firms competing for a contract, privilege, or right to supply specified services or merchandise - bidding can be a type of this, and businesses do this because they want to find competitive suppliers for their business. sometimes done in public or in private
supplier certification
procedures verifying that a supplier operates, maintains, improves, and documents effective procedures that relate to the customer's requirements (cost, quality, delivery, flexibility, maintenance, safety, etc) - used to differentiate strategic supplier alliance candidates from others - companies may choose to develop internal certification programs, and many also require external certifications such as ISO 9000 or ISO 14000 as part of their overall certification process
line flow (manufacturing processes)
process has standard products with a limited number or variations moving on an assembly line through stages of production (like ford cars) - short lead time - ATO/MTS
continuous flow
process is used to manufacture such items as gasoline, laundry detergent, and chemicals. inflexible process. high capital investment - highly inflexible - very short lead time - MTS
batch (manufacturing processes)
process manufactures a small quantity of an item in a single production run - long lead time - MTO/ATO
insourcing (high level sourcing strategy)
producing goods or services using a company's own internal resources
Financial Significance of Purchasing
profit leverage effect: a decrease in purchasing expenditures that directly increases profits before taxes return on assets: a high ROA indicates managerial prowess in 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
when evaluating key suppliers for developing a collaborative relationship,
purchase cost becomes relatively less important - assumption that excellent suppliers will drive costs out - "squeezing" suppliers to generate lower annual purchasing spend hurts strategic relationships! but it is very often still done! (profit leverage effect)
multi-source (sourcing strategies)
purchasing a good or service from more than one supplier. companies may use this to create competition between suppliers in order to achieve higher quality and lower price
outsourcing (high level sourcing strategy)
purchasing an item or service externally, which had previously been produced using a company's own resources - term has more recently become synonymous with buying an item from external source regardless of whether item had been previously produced using a company's own resources.
four elements of cost are
quality, service, delivery, and price (QSDP) - TCO is the sum of the cost elements in QSDP (quality + service + delivery + price) - each element of QSDP has an impact on the TCO - 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)
other factors beyond purchasing price (TCO)
quantity discounts: to encourage buyers to purchase larger quantities cash discounts: may be offered for prompt payment of invoices. if you are comparing a few suppliers, the one who is offering a discount on a larger quantity i want to consider that value-added services: special delivery, special packaging. offering additional services that you could take advantage of. administrative expenses: may be easier to work with one supplier instead of many. if one company does things manually and the other electronically, electronically will cost less, take less time, and be a lot of a smoother process. poor suppler quality: cost related to defective finished goods, scrap, etc. if a company has a bad record then they are going to cost you more money and could even damage your reputation.
the 5 why's and 5 how's technique
questioning technique designed to drill down into details of a problem or a solution to find the root cause and the best corrective measure - by repeating why 5 times, the nature of the problem as well as the solution becomes clear. - whys are used to get to root cause of a problem - hows are used to develop the details of a root solution to the problem - both are designed to bring clarity and refinement to a problem statement or a potential solution - technique is typically used in conjunction with the cause and effect diagram
quick response (in the 1990's supply chain management combined all these approaches and concepts that have emerged into lean manufacturing)
rapid replenishment of a customer's stock by a supplier with direct access to data from the customers point of scale
supplier relationship management system
reason for a system is to provide a more comprehensive and objective view of suppliers performance - a system will help in identifying and addressing supplier performance issues - a system can also be used to help make sourcing decisions - can only be implemented in line with the associated business process changes - SRM system is part of the process, not the whole process by itself
supplier co-location
similar to VMI and CMI except that a representative of the supplier is actually embedded in buyer's purchasing department to forecast demand, monitor inventory and place orders - employee is on the payroll of the supplier but works for the buyer and is empowered to forecast demand, monitor inventory and place orders - the arrangement involves the buyer granting the supplier access to potentially proprietary or sensitive data - benefits both buyers and suppliers, from day-to-day operational improvement, to strategic advances in the structure of the supply chain organization - need a high level of trust for this bc they make all of the decisions
people involvement (#3 foundation aspect of six sigma)
six sigma follows a structured methodology, and has defined roles for participants - company must involve all its employees in the six sigma program, and provide opportunities and incentives for employees to focus their talents and ability to satisfy customers - all employees are responsible to identify quality problems - important that all six sigma team members have a well-defined role with measurable objectives - members of an organization are assigned specific six sigma 'roles'
inventory setup time, and changeover time reduction (#3 element of LEAN manufacturing)
some inventory may be necessary, but excess inventory is a waste - excess inventory takes up space and costs money to hold, maintain, protect, secure, and insure - ties up financial capital which could be used for other aspects of the business reducing inventory levels can free up capital and reduce holding costs - there is less likelihood of waste being created by obsolescence, expiry, spoilage, or damage with lower inventory levels
companies interested in pursuing international purchasing arrangements must acquire some
specialized knowledge particular to buying products and services internationally
strategic
strategic items and services that involve a high level of expenditure and are vital to the firm's success - high value high risk - critical to business, high value and high risk. spend most of your time and resources on these items to make sure there are no issues w them 1. ensure availability of supply 2. focus on relationship building 3. encourage process integration and innovation 4. frequent communications 5. establish mutually agreeable supplier performance criteria
w. edwards deming
stressed management's responsibility for quality, and he developed 14 points to guide companies in quality improvement - cease dependence on inspection to improve quality - constantly improve the production and service system - institute leadership - break down barriers between departments - put everyone to work to accomplish the transformation
companies must develop a manufacturing strategy that
suits the type of products that they produce, their customer's expectations, and their strengths - can vary depending on the product or the customer requirements - developing strategy that suits a company's strength is essential for establishing and maintaining an effective supply chain
vendor managed inventory (VMI)
suppliers directly manage buyer inventories to reduce the buyer's inventory carrying costs and avoid stockouts for the buyer - a confirmed order is independently created by the supplier who is then responsible to deliver the item and bill the buyer the materials delivered from the buyer-firms perspective - supplier tracks inventory - determines delivery schedule and order quantities - buyer can take ownership at the stocking location - buyer may also be able to avoid taking ownership until the material is actually being used from the suppliers perspective: - avoids ill-advised customer orders - supplier decides inventory set up and shipments - opportunity for supplier to educate customers about other products
supplier development
technical and financial assistance given to existing and potential suppliers to improve quality and/or delivery performance - in simpler terms, buyer's activities to improve a supplier's capabilities
sustainability
the ability to meet current needs of the supply chain without hindering the ability to meet future needs in terms of economic, social, and environmental challenges - in simple terms, do not mortgage the future or present - companies must consider things like work safety, wages, working conditions, human rights, etc establishing a sustainable procurement process takes work and the company involved must understand the value of incorporating sustainable standards into their sourcing goals
Purchase Order (PO)
the buyer's offer to the supplier to acquire goods or services - becomes a legally binding contract only when accepted by the supplier - this is what happens after the purchasing person decides who they are buying the supplies from. not legally binding document until the supplier agrees they are going to supply for the business. supplier needs to confirm and accept order, then it becomes a legally binding order
the pull system
traditional approach - supply chains work as "push" systems - inventory carried to cover up problems approach: - each stage in the supply chain requests quantities needed from the previous stage - no excess inventory generated - reducing inventory levels can also uncover production problems when inventory is high, you dont see the problems, issues, and obstacles that persist. - inventory can hide underlying problems, but they are still there and can create major issues in supply chain - lowering inventory will help to expose the hidden problems. once problems are detected, they can be solved. end result will be smoother running supply chain w less inventory investment
competitive bidding (government and non-profit agencies)
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 - people want government to be responsible with their tax money
basic e-Procurement cycle consists of
up to 9 steps, depending on the complexity of the buy, and the organizational policies at a bare minimum, it consists of: - an electronic purchase requisition and/or purchase order - an invoice (which might be one with the receipt) - a payment for high-dollar purchases, the process will generally also include: - authorization of the purchase order - reconciliation of the invoice
gain
using a reward as a positive outcome from exceptional performance - financial bonus - more business and/or longer contracts - share a portion of any cost reductions - provide access to in-house training seminars, conferences, tools, information, or other resources - publicly recognize or confer a special status such as "preferred supplier" "partner" "supplier of the year"
green purchases (rules that often govern Government and non-profit procurement)
variety of federal, state, and local initiatives to include environmental and human health considerations when making purchases - you can't buy from known polluters if you are buying with the publics money
commonly used criteria for supplier selection
we use numbers 1-10 and rate each supplier on each criteria - product and process technologies - reliability - quality - order system and cycle time - cost - willingness to share information - capacity - service - communication capability - location
sole-sourced
when there is only one supplier so you don't get to choose - NOT truly a strategy as there really is no choice and little opportunity to negotiate price or service
