Business Logistics Chapter 4
Electronic Data Interchange
(EDI) is the electronic transmission of data between a firm and its suppliers. Shares information and knowledge such as order entry, planning/scheduling, tracking, delivery, billing and payment. (confirmations)
ISO
(International Organization for Standardization) An independent, non-governmental membership organization and the world's largest developer of voluntary International Standards. Made up of 162 member countries, with a Central Secretariat based in Geneva, Switzerland.
Procurement perspective
, transforming it into a strategic activity. Outsourcing- what do we do well lets do that, and let someone else what we cant do better. Purchased goods and services are among the largest cost elements for most firms: Representing 55 cents of every sales dollar. (huge portion of resources ) The growing emphasis on outsourcing has expanded the supply base of organizations This added complexity requires more management attention on the interfaces with suppliers.
insource core competencies
- even if outsourcing would provide a lower cost, in order to reduce risks and maintain control.
When will the purchase material be delivered
-Storage space must be made available. -The inbound transportation vehicle, once unloaded, may need to be reloaded for outbound transportation -The date and time of delivery may affect production planning & scheduling.
Questions that form the basis for the logistical set up of transportation, warehousing and inventory control and help to ensure the continuous flow of products:
1. How much material is being purchased? 2.When will the purchased material be delivered? 3. Who is delivering the purchased material? 4.What is the routing of the inbound flow of materials? 5.Who controls the freight movement?
Logistical interfaces with procurement
1. Procurement of Logistics Services 2. Performance Based logistics
Supplier development
A buyer's activities to improve a supplier's performance and/or capabilities based on the following approach: 1.Identify critical products & services 2.Form a cross-functional team (usually lead by Procurement) 3.Identify critical suppliers 4.Identify areas for performance improvement 5.Meet with top management of selected supplier(s) 6.Identify key projects to drive performance improvements 7.Develop and define details in a formal agreement 8.Implement and monitor status. Modify as necessary
Supplier evaluation
A process to identify the best and most reliable suppliers -Sourcing decisions are formal and made based on facts and not on perception -Frequent feedback to suppliers can help avoid surprises and maintain good relationships. -Suppliers should also be allowed to provide constructive feedback to (you) their customer
Performance based logistics
A process whereby the firm tells the logistics provider what the desired outcome is and lets the logistics provider determine the best way to meet those requirements. The practice is currently used mainly by the government, but is being adopted by business and industry more each year.
ISO 9000
A series of quality standards that provide basic definitions for quality assurance and quality management . Companies wanting to sell in the global market seek ISO 9000 certification.
ISO 14000
A series of standards for environmental management measuring a firm's environmental impact. The benefits include reduced energy consumption, environmental liability, reduced waste & pollution, and improved community goodwill.
transaction costs
Activities carried out as part of the actual buy and sell transaction price negotiation delivery confirmation Purchase order administration transportation Delivery/receiving Reconciliation Taxes/duties Invoicing/payment incoming inspection Rejected goods return to supplier Close out
Post transaction costs
Activities carried out following the actual buy and sell transaction returns from customer replacement repair parts & Labor maintenance Disposal of returned product
pre transaction
Activities carried out prior to the actual buy and sell transaction. identify sources qualify sources certify sources supplier database update training/education of supplier
User Buy
Allow users in the organization to do the routine buying of items considered to be too insignificant to warrant further consideration. allows users in an organization to determine their own purchase needs, evaluate sources of supply, and execute the purchasing process. Even in organizations that have a large centralized purchasing function, User Buy is still common for some items. Examples: Basic office supplies Janitorial and cleaning supplies Such items may be considered too insignificant to warrant the time and effort of the Purchasing staff to handle.
Bottlekneck purchases
Bottleneck purchases - unique procurement problems. Supply risk is high and availability is low. Small number of alternative suppliers. pain in the neck - multiple suppliers Operational Integration
Operational Integration
Building partnerships Sharing information and knowledge Identifying linked processes and shared opportunities for improvement
What is the routing of inbound material
Buyer may have a dedicated transportation route and fixed time schedule set up with a preferred carrier.
Who is delivering the material
Buyer may have a preferred carrier list with favorable contract pricing. Coordination of inbound with outbound freight could result in transportation savings.
outsourcing
Buying materials and components from suppliers instead of making them in-house. The current trend has been to move more toward outsourcing.
Supplier recognition programs
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.
Critical Purchases
Critical purchases - strategic items and services that involve a high level of expenditure and are vital to the firm's success. (vital to you, a lot of money, but no unique procurement problems) integrate both suppliers value management
Developing a procurement strategy/ 3 major considerations
Developing an effective procurement strategy is a complex process. There are 3 major considerations: 1-which products and services should be produced internally and which should be purchased from outside suppliers, i.e., make-vs-buy. 2-which strategic approach to take in dealing with external suppliers. 3-which strategic approach to take for the different types of products and services the organization buys.
Procurement Objectives / Focuses on these issues
Ensuring Continuous Supply - can impact customers if not ensured Minimizing Inventory Investment- High Customer Service & Low Inventory/operating cost (Main 2 goals of sc) Quality Improvement- Supplier Development Supplier selection Building supplier relationships Supplier continuous improvement Access to Technologies and Innovation (Knowledge) Lowest Total Cost of Ownership (TOC)
Value Management
Extends beyond buyer-seller operations Value engineering Reducing complexity Involving the supplier early in product design Easier to do, less costly, and more efficient and effective if done early Suppliers have knowledge on materials and processes - use their expertise to our benefit. Earlier you do that, the better. High flexibility, easy to change, low costs As design process furthers--> Low flexibility, Cost goes up
quantities
Frequent, steady delivery of small lots in exact quantities that demand reduced supplier production lot sizes. Long-term purchasing contracts are commonplace. Shortages and overages are discouraged.
Who controls freight movement
Ideally, the buyer should control the freight movement to ensure they are getting the best rates, proper insurance, and reliable service
Volume Consolidations
Increasing procurement leverage by reducing the total number of suppliers while continuing to minimize risk LESS SUPPLIERS Volume consolidation does not necessarily mean that a single source of supply is utilized for every, or any, purchased input.
Implicatios of JIT Purchasing
It is necessary to deal with suppliers who have high and consistent levels of quality, as their materials will go directly into the finished product. Absolutely reliable logistical performance is required and eliminates or reduces the need for buffer stocks of materials. JIT generally requires more frequent deliveries of smaller quantities of purchased materials, which may require modification of inbound transportation. There must be very close cooperation and communication between a manufacturer's purchasing organization and suppliers to make JIT work.
Leverage Purchases
Leverage purchases - commodity items where many alternatives of supply exist and supply risk is low. Spend is high and there are potential procurement savings. concentrate purchases volume consolidation- pick one supplier
Insourcing vs Outsourcing (Make vs Buy)
Outsource/ Buy Cheap, easier, can focus on things you can do well, do not have enough capacity, tax breaks, Lower Wages Insource/Make make it cheap, don't trust anyone with idea because you can do it uniquely,
Components of TCO
Pretransaction costs Transaction costs post transaction costs
Operational Integration
Primary objective of operational integration is to cut waste, reduce cost, and develop a relationship with a supplier that allows both buyer and seller to achieve mutual improvements. Integration can take many forms. Some examples are: Buyer providing detailed sales information to the supplier. Buyers and suppliers working together to redesign linked processes and systems. Eliminating duplicated activities performed by both the buyer and supplier, e.g., product testing and inspections. Can provide incremental savings of 5% to 25% over the benefits of volume consolidation alone. ex- Outsourced through DHL Integrated online systems, had real time information and reps at DHL facility
Procurement and Logistical Interface
Procurement and Logistics have much in common, primarily on the inbound flow of materials and products. These two functional areas must coordinate to ensure the continuous flow of products through the supply chain. This coordination involves a number of activities: 1.Inbound transportation 2.Warehousing of raw materials & components 3.Inventory control
Supplier selection considerations
Product & process technologies Willingness to share technologies and information -Early supplier involvement (ESI) -Concurrent engineering (CE) Quality Service Cost - Total cost of ownership or acquisition Reliability Order system & cycle time Capacity Communication capabilities Location Financial Stability
Factors to consider in the procurement process when making a purchase
Quality Price Brand Preference Availability Where from/reputable supplier Need Convenience Ease of purchase/ordering process (Availability)
Forward vertical supply chain
Refers to a company acquiring one or more of their customers. Example: a manufacturer buying a wholesaler/distributor to take ownership of this aspect of their supply chain.
Backward vertical supply chain
Refers to a company acquiring one or more of their suppliers. Example: a manufacturer buying the key supplier of a critical material to take ownership of this aspect of their supply chain.
Discounts Associated with Purchase Price
Related to the price quote, is normally a schedule of one or more possible discounts that the buyer may receive. For example: -- Quantity Discounts may be offered as an inducement to encourage buyers to purchase larger quantities. The buyer must consider the costs associated with holding inventory. Larger purchase quantities increase inventory and holding costs. Larger purchase quantities also impact administrative costs in purchasing. Cash Discounts may be offered for prompt payment of invoices. What is not normally considered in traditional purchasing is the impact of pricing and discounts on logistics operations and costs. Many of these logistical considerations had been ignored or given cursory consideration as buyers attempted to achieve the lowest purchase price of the goods and services, but there is now increasing recognition of the importance of these logistics costs.
Portfolio Spend Categories
Routine purchases Bottleneck purchases Leverage purchases Critical purchases
Routine Purchases
Routine purchases - items that involve a low percentage of the firms' total spend and involve very little supply risk. (Inexpensive items, purchase a lot of, mult suppliers, why use a lot of effort for these) (reduce Buying effort) USER BUY
Service Pricing and Debundling
Sellers typically offer a number of standard services that must be considered in procurement. Additionally, a wide variety of value-added services may also be offered and must be evaluated to find the lowest TCO. Many of these services involve the logistical interface between buyers and sellers. The simplest of these services is delivery. How will delivery be accomplished; when, and to where are all aspects for cost consideration Other potential value-added services range from special packaging, to preparation of promotional displays, to subassembly operations in a supplier's plant or a third-party distribution center. A key aspect of determining the TCO for purchased requirements is to consider the trade-offs involved in terms of value-added versus cost and price of each service. To do so, the purchase price of an item must be debundled from the price of services under consideration; each service should be priced separately so that appropriate analysis can be made.
quality
The buyer imposes minimal product specifications. The buyer assists the supplier in meeting quality requirements. The buyer and supplier quality assurance departments work closely together.
Transportation
The buyer schedules and controls as much of the transportation activity as possible. Deliveries of materials occur as close to the place and time of consumption as possible.
suppliers
The fewest number of suppliers possible should be used. The suppliers should be in close proximity to the buyer whenever possible. The buyer should consistently monitor and evaluate the suppliers. Repeat business with suppliers is preferred. Bidding is minimized. Suppliers should be encouraged and incentivized to develop JIT purchasing with their suppliers.
life cycle costs
The final aspect of lowest TCO includes numerous elements known as life cycle costs. One aspect of life cycle costs involves the administrative expense associated with the procurement activity itself. Expenses related to screening potential suppliers, negotiation, order preparation, and order transmission are just a few. Receiving, inspecting, and payment are also important. The costs related to defective finished goods, scrap, and rework, which are associated with poor supplier quality, must also be considered, as well as related warranty administration and repair of items that have been purchased. Even the costs associated with recycling or recovery of materials after the useful life of a finished product may have an impact on TCO. Poor supplier quality : Miss production schedules Incur extra costs Spend money returning items to supplier
How much material is being purchased
The purchase quantity affects the need for warehouse storage space. It could also affect the choice of transportation mode and storage location
Advantages of volume consoldiation for the buyer
This strategy offers advantages for the buyer: Potential suppliers are continually bidding for the business, ensuring that prices are kept low. The buyer is able to leverage its share of a supplier's business, and raise negotiating strength.
Advantages of volume condolidation for the supplier
This strategy offers advantages for the suppliers: By concentrating a larger volume of purchases with a supplier, the supplier can gain greater economies of scale in its own internal processes, partially by being able to spread its fixed costs over a larger volume of output. If a supplier secures a larger volume of purchases, it may be more willing to make investments in capacity or in processes to improve customer service.
Procurement of Logistic Services
Was traditionally considered an "Indirect Spend" and not given strategic importance. With the increase in outsourcing, procurement of logistical services has grown substantially and is now being integrated into the firm's strategic procurement plans. May even be considered a "Leverage" or "Critical Purchase"
Monitoring performance metrics
What types of metrics might I use to evaluate my suppliers? (Quality, Arrival periods, responsiveness, pricing/payment stability) What are some metrics for logistics/transportation providers? (Timely arrivals, handling, reliability/resources needed) supplier scorecard
Pareto Principle
a small percentage of items account for a large percentage of the dollars spent (Costs, highest sales/rev) Purchasing processes should be tailored to the value and/or criticality of the materials needed A segmented approach is used to prioritize resources for purchasing The most procurement effort goes to the most critical supplies/suppliers 20 percent of the effort--> 80 percent of the results
supplier certification
an important component of a total quality management system. It is an organization's process for evaluating the quality systems of key suppliers in an effort to eliminate incoming inspections. (Institute for Supply Management) It assures that a supplier's product is produced, packaged, and shipped under a controlled process that results in consistent conformance to the buyer's requirements. Overall benefits Improve supplier competitiveness Optimize source selection process Reduce inspection Support lean manufacturing Types of certifications: External (ISO 9000, etc.) Industry equivalents Internal (Self-designed certification program by the company) Leads to a reduction in the number of suppliers needed by a company as certified suppliers are more reliable and consistent. Therefore, risk is lower and the need for more suppliers is reduced.
supplier audit program
attempts to develop a detailed understanding of a supplier's organization and capabilities. Cross functional team from the buyer's organization visits the supplier facilities to conduct extensive audits of processes and systems to evaluate their ability to consistently generate quality products in a timely fashion. Supplier quality management and continuous improvement processes are a particular area of investigation. The goal is to ensure that the supplier has the desired critical capabilities currently and also that these capabilities will be maintained.
outsource non-core competencies
even if outsourcing might cost a little more, in order to reallocate internal resources to core competency areas. This is why many companies have recently started outsourcing logistics functions. Need to evaluate Total Cost of Ownership carefully Must be willing to relinquish some control Must be willing to accept a higher level of risk
JIT 2
goes beyond JIT and involves the integration of the suppliers personnel into the buyer's purchasing or manufacturing processes. Some organizations, seeing the benefits of JIT systems and recognizing the benefits of supplier integration, have gone so far as to bring their suppliers' personnel into their production plants. The supplier's personnel are empowered to use the buyer's purchase orders, have full access to production schedules, and have responsibility for scheduling arrival of materials. This better integrates the buyer and supplier and relieves the buyer of the need to monitor inventory and execute purchase orders for the supplier's material which is now handled by the supplier's personnel.
procurement
is an organizational capability that ensures the firm is positioned to implement its strategies with support from its supply base. It goes well beyond the transactional activities. Procurement looks up and down the entire supply chain for impacts and opportunities Focuses on building relationships with suppliers (Tier 1 and beyond) Involvement with outsourcing includes more than just purchasing raw materials and parts. Includes services and subcontracting as well. Also includes finding alternate sources for manufactured products or services to help manage demand Make sure suppliers are capable of achieving those strategies. Purchasing- looking at supply side and making sure they are going along with whatever strategies the company has in mind.
Internet based communications
offers several opportunities for making product information available while overcoming compatibility issues between computer systems. Electronic catalogs allow rapid access to product info, specifications, pricing and ordering. Buying exchanges allow sellers or buyers of specific goods or services to find each other on a common web site.
characteristics define successful JIT purchasing programs:
quality transportation suppliers quantity
TCO Perspective
represents a major difference in perspective between traditional purchasing practices and contemporary procurement strategy. Procurement professionals recognize that although the purchase price of a material or item remains very important, it is only one part of the total cost equation in their organization. (Hidden issues) Other factors must also be considered, such as: Discounts Associated with Purchase Price Service Pricing and Debundling Life Cycle Costs
total cost of ownership
the sum of all the costs associated with every activity in the supply stream of a product. The four elements of cost are: Quality, Service, Delivery, and Price (QSDP). TCO is the sum of the cost elements in QSDP (i.e., 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).
Just in TIme
to time-phase activities so that purchased materials and components arrive at the manufacturing or assembly point just at the time they are required for the transformation process. -Raw material and work-in-process inventories are minimized as a result of reducing or eliminating reserve stocks. -The key to JIT operations is that demand for components and materials depends on the finalized production schedule. -Once the production schedule is established, just-in-time arrival of components and materials can be planned to coincide with finalized production schedule, resulting in reduced handling and minimal inventories.
Purchasing (Historically)
was historically perceived as just a buying function for manufacturing, repair materials, and supplies. Purchasing agents tried to get the lowest price possible for the most acceptable quality . This transactional(execution) focus led to getting the best possible "deal" today and did not focus on future transactions. No concept of supply chain. Purchasing seldom looked beyond the first-tier supplier. Purchasing simply responded to the demands of the production group and the rest of the organization.