OSCM Exam 3

Conditions of Sale (Warranties)

"As is" and "where is": "No warranty, guarantee or representation of any kind, expressed or implied, as to the condition of the item offered for sale" With certain specific guarantees Guaranteed and rebuilt

Total Cost of Ownership

Analysis is used to support acquisition and planning decisions Used to support decisions involving computing systems, vehicles, buildings, laboratory equipment, medical equipment CENTRAL CONCERN: budgeting and planning, asset life cycle management, prioritizing capital acquisition proposals, vendor selection, lease vs. buy decisions

Supplier Research

Analysis of financial capacity Analysis of production facilities Finding new supply source Supplier cost analysis Single sourcing Supplier-purchased material quality assurance Supplier attitude survey Supplier performance evaluation Supplier sales strategy Countertrade

FOB Origin Freight Collect

Buyer - Pays freight charges Buyer - Bears freight charges Buyer - Owns goods in transit Buyer - Files claims (if any) Title passes to buyer ----> Seller Freight charges paid by buyer ----> Buyer

Supplier Certification

Is becoming an increasingly important strategic topic

Evaluation of Potential Sources: Two Key Questions---

Is this supplier capable of supplying our requirements satisfactorily in both the short- and long-term? Is this supplier motivated to supply these requirements in the way we expect in the short- and long-term?

Reasons for Buying

Lack of administrative or technical experience Excess production capacity Customer preference for a particular brand Problems maintaining technological leadership for a non-core product Preservation of the status quo: Decisions to outsource are hard to reverse Flexibility Trend to outsourcing: Focus on core activities and outsource the balance of the company's requirements Superior supply management expertise Lower overhead costs

Considerations Favoring Buying

Limited production facilities Cost considerations (less expensive to buy) Small-volume requirements Suppliers' specialized know-how Stable work force (rising sales) Multiple-source policy Indirect managerial control considerations Procurement and inventory considerations

Considerations for Single Sourcing

Lower total cost results from higher volume Quality considerations dictate Buyer obtains more influence with the supplier Lower costs to source, process, expedite, inspect Just-in-time requirements Significantly lower freight costs may result Special tooling is required Total system inventory will be reduced Supplier will have an improved commitment Improved interdependency and risk sharing result Time to market is critical ***JIT -single sourcing***

Advantages of Electronic Procurement

Lowering operating costs -Reduced paperwork -Reduced sourcing time -Improved control over inventory and spending Improved Procurement Efficiency -New sources of supply developed -Improved communications -Improved use of personnel -Shorter cycle times Reduced Procurement Prices -Improved comparison shopping -Lower overall prices paid

Disadvantages of Leasing Equipment

Final cost may be higher -Higher financing costs, fees Surveillance by lessor entailed Less freedom of control and use Tax considerations -Some leases may not be deductible Penalties and fees for early lease termination -Limits flexibility

Perfect Order Busters

Order entry errors Ordered item is unavailable Inability to meet requested ship date Split shipments Picking errors Late shipments Late arrivals Early arrivals Incomplete paperwork Damaged shipments Invoice errors Overcharge errors Customer deductions Errors in payment processing Follow-up required by customer

Total Cost of Ownership Legal Consideration

Patents, liability for lost sales, health & safety

Total Cost of Ownership Transaction Phase

Price Order placement/ preparation Delivery/ transportation Tariffs/ duties Billing / payment Inspection Return of parts Follow-up and correction

What are the methods for reducing small order transaction cost?

Stockless buy and systems contracts Blanket P.O.s EDI-and Internet-based systems Reverse auctions Changing authority levels and bidding practices Single sourcing Outsourcing small value order processing Standardization Batch orders Set requisition schedule Invoiceless payments Users pay directly

Local Sourcing

Firm's headquarters and all facilities are located in the city or region where the materials or services will be used --Local Buying Advantages-- -Closer cooperation between buyer and seller is possible -Delivery dates are more certain -Lower prices can result from consolidated transportation and insurance -Shorter lead times reduce inventory -Rush orders are filled faster -Disputes are usually more easily resolved -Implied social responsibilities to the community are fulfilled

Advantages of Leasing Equipment

Tax considerations -Lease rentals are expenses for income tax purposes Small initial outlay Availability of expert service Reduced risk of obsolescence Adaptability to special and seasonal jobs Test period provided before purchase Burden of investment shifted to supplier Leasing company has greater purchasing clout -e.g., automobiles

Perfect Order Calculation

The Perfect Order = 1x2x3x4x5x6x7 1. Single Contact Resolution- % filled w/o canceled line 2. Order Accuracy-% delivered complete 3. Claims Per 100 Orders (inverted)- % over and/or short 4. Direct Fill Rate- % damaged 5.Pick Accuracy- % refused/returned 6.On-Time Shipments- % billed correctly 7.Invoice Accuracy- % product and pricing errors Multiple all together

National Sourcing

The source is headquartered within the country and has facilities in multiple regions throughout the country --National Buying Advantages-- -Economies of scale -Superior technical assistance -Better handling of fluctuating demand -Shortages are less likely

Arguments in Favor of Multiple Sourcing***

Traditional practice Keep suppliers "on their toes" Assurance of supply Capable of dealing with multiple suppliers efficiently Avoid supplier dependence on one customer Obtain a greater degree of volume flexibility Strategic considerations; e.g., military preparedness Government regulations Limited supplier capacity Opportunity to test a new supplier Supply market volatility

Objectives of Supply Management

Uninterrupted flow of materials, supplies, and services Minimize inventory investment and losses Maintain/ improve quality Identify and develop competent suppliers Standardize items where possible Purchase at lowest total cost Improve firm's competitive position Achieve harmonious, productive relationships with internal departments Minimize administrative costs

Characteristics of Forward (English) Auctions

Usually starts with a low price that the buyers will bid up on until a set time has expired or no other buyer wishes to place a higher bid ----Like a silent auction---

Reasons for Purchasing Used Equipment

When price is important For use in a pilot or experimental plant For use with a special or temporary order Where the machine will be idle for a substantial amount of time For use with apprentices For maintenance departments, not production For faster delivery / availability When a used machine can be modernized easily or is already the latest technology

4 Things Determined by FOB

Who pays the carrier When legal title to goods being shipped passes to the buyer Who is responsible for preparing and pursuing claims with the carrier Who routes the freight?

Key Questions Faced by Supply Managers

Communicating with internal customers, paperless system Should we: -Use electronic data interchange with some or all our suppliers? -Adopt an invoice-less payment system? -Make greater use of the computer to simplify and improve the purchasing system? How Can We: -Handle small orders more efficiently? -Obtain better and more complete information from other functions within the organization? -Communicate more effectively with our internal customers (the departments we serve)?

Considerations Favoring "Making"

Cost considerations Desire to integrate plant operations Use of excess plant capacity control over production and/or quality Design secrecy required Unreliable suppliers Desire to maintain a stable work force

Question will be: Which of the following is not an advantage of centralized purchasing? The advantages are:

Greater buying specialization Ability to pay for talent Consolidation of requirements-clout Coordination of policies and procedures Effective planning and research Common suppliers Proximity to major organizational decision makers Critical mass Firm brand recognition and stature Reporting line-power Strategic focus Cost of purchasing low

What contributes the most to imperfect contributors?

Inconsistent carrier times

Total Cost of Ownership Limitations

Initially add costs by asking procurement decision makers to gather and consider more information Model tracks long-term, life-cycle costs, capturing the benefits of TCO analysis in a single year can be difficult Model does not always assess risk or how well a particular technology fits with an agency's or facility's strategic goals or needs Does not necessarily track environmental or social costs and benefits that may arise from a given project or initiative

Services

Intangible -Cannot touch it ***Perishable -no inventories Heterogeneous: The "service package" high levels of customization Customer participation in the production process Simultaneous production and consumption Difficult to measure quality

Types of Common Purchasing Budgets

*MRO-Maintenance Repair and Operating* Materials (Operations) Purchase Budget Capital Budget Administrative Budget **MRO: Supplies consumed in the production process but which do not either become part of the end product or are not central to the firm's output. MRO items include consumables (such as cleaning, laboratory, or office supplies), industrial equipment (such as compressors, pumps, valves) and plant upkeep supplies (such as gaskets, lubricants, repair tools), and computers, fixtures, furniture, etc.**

Discount Terms

2/10/net 30 equates to a 36% APR (Annual Percentage Rate)

What percent of supplier capacity considerations should you not exceed?

25%

Dual Sourcing Using the "70-30" Approach

70 percent of the volume is awarded to one supplier 30 percent to a second supplier Economies of scale are obtained from the "big supplier" The "little supplier" provides competition When the "big supplier" fails to perform the percentages may be reversed by the buyer

Total Purchase Price Formula

Base price + Direct Transaction Costs + Supplier Relationship Costs + Transportation Costs + Quality Control Costs + Operations / Logistics Cost

Types of Bonds

Bid (or surety) Bond: Guarantees that if the order is awarded to a specific bidder, it will accept the purchase contract Performance Bond: Guarantees that the work done will be done according to specifications and the time specified Payment Bonds: Protects the buyer against liens

Parts of a Requisition (Purchase Order or PO)

Date Number (identification) Originating department Account number Complete description of material or service and quantity Date material or service needed Any special shipping or service-delivery instructions Signature of requisitioner

Sources of Used Equipment

Dealers and manufacturers that accept used equipment as trade-ins Directly from users/owners Equipment brokers Auctions Equipment dealers

Total Cost of Ownership Formula

Delivered Acquisition Cost + Present Value of (Operating Costs + Training Costs + Maintenance Costs + Warehousing and Distribution Costs + Environmental Costs - Salvage Value)

3 Types of Auctions

Dutch: reverse auctions, the buying firm specifies a particular requirement and allows suppliers to bid on it Market Making (Double K): most commonly used in industry, used in commodities (gold, oil, corn, ect.) English Auction: used to reduce or liquidate excess finished goods, parts, assemblies and equipment. Has one seller and two or more potentially buyers

Types of Contracts

Evergreen from one fixed period to another Completely Open Book Cancelable for failure to perform Open to bid RFP / RFQ **A Request for Quote (RFQ) is commonly used when you know what you want but need information on how vendors would meet your requirements and/or how much it will cost. **A Request for Proposal (RFP) is used when you know you have a problem but don't know how you want to solve it. This is the most formal of the "Request for" processes and has strict procurement rules for content, timeline and vendor responses.

When to Use Single Sourcing

Exclusivity: The supplier may be only available source -patent protection, exclusive distributorship Outstanding quality or service → value Order too small to split Opportunities for discounts or lower freight costs More important customer → more attention from supplier Cost of duplication prohibitive Easier to schedule deliveries JIT, stockless buying or EDI arrangements Focus on one, not many suppliers Prerequisite to partnering

Purchase Agreements and Negotiation: What parts are subject to negotiation?

Price -Purchase order price -Discounts -Escalation provisions -Exchange terms -Import duties -Payment of taxes -Counter trade credits Transportation -FOB terms -Carrier -Commodity classification -Freight allowance/ equalization -Multiple delivery points Supply -Lead times -Delivery schedule -Consignment stocks -Expansion options -Supplier inventories -Cancellation options Quality -specification compliance -performance compliance -test criteria -rejection procedures -liability -reliability -design changes Support -technical assistance -product research, development, and/or design -warranty -spare parts -training -tooling -packaging -data sharing, including technical data

Perfect Order Concept

Products and product categories: -Order type -Product and/or product category -Customer and/or customer segment -Current vs advance (future) orders -Ship point (warehouse location)

Considerations for Multiple Sourcing

Protect the buyer during bad times Maintain competition Provide a back-up source Meet local content requirements Meet customer's volume requirements When the customer is a small player in the market for a specific item Avoid complacency on the part of a supplier When the technology path is uncertain Suppliers tend to "leapfrog" in technology

Elements of Buy Cost Analysis

Purchase price of the part Transportation costs Receiving and inspection costs Incremental purchasing costs Any follow-on costs related to quality or service

Purchasing activities

Purchasing/buying Purchasing research Inventory control Transportation Environmental and investment recovery/disposal Forecasting and planning Outsourcing and subcontracting Nonproduction/ nontraditional purchases Supply chain management

Supplier Evaluation Criteria

Quality Price Delivery Service --Weighted Point Evaluation Systems-- Identify suppliers -Important suppliers and/or critical goods and services Identify factors or criteria for evaluation Determine the importance of each factor Establish a system for rating each supplier on each factor

Reasons for Making

Quantities are too small and/or no supplier is interested Quality requirements are too exacting or unusual and require special processing methods Greater assurance of supply Closer coordination of supply and demand Preserve technological secrets To take advantage of unused capacity Keep our capacity utilization high and outsource the rest Avoid supply dependency Competitive, political, social or environmental factors Personal preference Preservation of the status quo

Steps in the Purchasing Process (First Step)

Recognition of need (user, bottom need)

Supply Management Prime Decision authority

Select the supplier Use whichever pricing method is appropriate Question the specifications Monitor contacts with potential suppliers

FOB Origin Freight Prepay and Paid Back

Seller - Pays freight charges Buyer - Bears freight charges Buyer - Owns goods in transit Buyer - Files claims (if any) Title passes to buyer ----> Seller Freight charges paid by seller ----> Seller ...then collected from buyer by adding amount to invoice ----> Buyer

Problems Associated with Equipment Purchases

Strategic considerations and high cost of failure Substantial amounts of money for single purchase Long life and infrequent purchases Difficulty estimating the total cost Derived demand Environmental impact and disposal Significant tax considerations Technology forecasting Dedication of time and resources during start-up Commitment to process, cost, product line and plant space Coordination with existing processes and operations