Purchasing

Define and calculate forecast error & know what forecast bias is

•Forecast Accuracy: measure of how closely forecast aligns with demand •Bias: tendency to over or under predict future demand (forecast error)

Define/explain the Law of agency

•Gives legal status to supply personnel •Gives the authority as an agent of the organization to attend to the business of supply in accordance with the instructions given by his or her employer -Typically instructions are a job description

Direct benifits

•Largest potential source of cost savings -Leverage effect -ROA •The bottom line

List the reasons for having a single supplier and the reasons for having multiple suppliers and explain the benefits that preferred suppliers provide customers

Single-sourcing is utilized when multiple suppliers cannot provide the input (e.g., if the input is under patent protection) or sourcing the input from multiple suppliers could create major coordination challenges. Multi-sourcing arrangements are utilized for many items by most large organizations. Using multiple sources helps to spur competition between vendors, protect the firm against risk by having multiple sources of supply, and avoid becoming overly dependent on a single supplier.

Commercial Arbitration

A voluntary contractual agreement between two businesses that includes a provision to arbitrate any dispute concerning the negotiated business contract

Total Cost of Ownership (TCO)

All of the costs associated with the design, development, testing, implementation, documentation, training and maintenance of a software system.

Discuss purchasing ethics and the risks that buying firms face when they behave unethically

Alternative Dispute Resolution •Any means of settling disputes outside of the courtroom, including -Arbitration -Mediation -Internal escalation

Explain the relationship of forecast accuracy to time horizon and level of detail

As the forecast horizon shortens, forecast accuracy increases. For instance, a forecast for tomorrow will be more accurate than a forecast for next month; a forecast for next month will be more accurate than a forecast for next year; and a forecast for next year will be more accurate than a forecast for ten years in the future.

centralized structure

Authority and responsibility for most supply-related functions assigned to a central organization

Hybrid structure

Authority and responsibility shared between a central supply organization and business units, divisions, or operating plants.

decentralized structure

Authority/responsibility for supply functions dispersed throughout the organization.

Define Collaborative Planning, Forecasting and Replenishment (CPFR) and explain its benefits and process

Collaborative, planning, forecasting and replenishment (CPFR): supply chain partners share forecast, and demand and resource plans to reduce risk -Market Planning: changes to products, locations, pricing and promotions -Demand and resource planning: forecasting -Execution: order fulfillment -Analysis: data on key performance metrics

Discuss the primary goals of purchasing and explain how purchasing can contribute to these goals.

Ensure uninterrupted flows of raw materials at the lowest total cost, improve quality of the finished goods produced, and maximize customer satisfaction. Actively seeking better materials and reliable suppliers, work closely with and exploiting the expertise of strategic suppliers to improve quality and materials, and involving suppliers and purchasing personnel in new product design and development efforts.

indirect benefits

Good forecasting/strategic order sizes ease burden of inventory management Fewer cycle counts, holding costs, and lost/expired inventory Higher quality can lead to less re-work, returns, scrapped products Minimize potential operational/reputational risk

Define a sourcing strategy, how should this align with the corporate strategy?

Sourcing does not strictly mean only looking to purchase cheap products but the emphasis is on acquiring newly formed business partnerships. While many companies only look to benefit from cheaper manufacturing, others look for specialized skills or the creation of leaner operations. Furthering efficiency and ultimately achieving business objectives are common goals of sourcing.

Level III

Management and financial evaluation

Explain the role of measurement and rewards for improving supplier quality

Measurement is critical during supplier evaluation and during the normal course of business

Under what conditions might purchasers be personally liable for contracts they enter into?

The purchaser may be personally held liable for contracts if they made a false statement about his/her authority within the company, performed a damaging act without authority, performed illegal acts, willfully performs an act that is damaging to someone with bad intent, or performs an act outside of their scope of their authority.

execution

order fulfillment

demand forecasting

predicting future customer demand

causal studies

search for cause and effect relationships among variables

Collaborative, planning, forecasting and replenishment (CPFR):

supply chain partners share forecast, and demand and resource plans to reduce risk

Demand Planning

the combined process of forecasting and managing customer demands to create a planned pattern of demand that meets the firm's operational and financial goals

Define Green Sourcing

the purchasing of products and services which take into consideration of the environmental factors

time series analysis

uses historical data arranged in order of occurrence

smoothing coefficient

weight given to most recent demand

leverage

•Best value providers •Respond to price movement •Several suppliers •Potential disruption in replacement •Some differentiation in specifications

Identify the criteria for selecting suppliers and discuss why cost may not be the most important a. criterion for every purchasing decision

•Level I - Strategic •Level II - Traditional: quality, quantity, delivery, price and service -Technical, engineering, manufacturing and logistics strengths •Level III -Additional: Management and financial evaluation -Financial, risk, environmental, regulatory, innovation, social and political

Strategic Characteristic

•Long-term profitable growth •Critical to competitive advantage •Small number of suppliers •Difficulty of replacement •Unique specifications •Focus on development •Leading edge processes used

Bottleneck

•Low potential to add value •Few suppliers •Quality, service issues •Regulatory requirements •Non-standard specifications •Likely to stop production if not available

Routine/ Tactical

•Low potential to add value •Many suppliers •Standard specifications •Ease of replacement •Competitive pressure •Simple market management

Is an oral contract legally enforceable? Under what conditions?

•Only valid up to $500 •Normally there must be some written notation if the price of the order for the sale of goods is $500 or more -Contracts can be accepted by fax/letter/email/tweet/facebook post etc. • •CAN be upheld if deliveries are already being made -May be for part or whole contract -Depends on if a party "relied on terms of contract to their detriment"

Understand why some supplier partnerships fail

•Overly optimistic •Poor communications •Lack of shared benefits •Slow payback results •Lack of financial commitment •Misunderstood operating principles •Cultural mismatches •Lack of alliance experience.

Define forecasting, the goals of forecasting, and list the benefits of improved forecasts.

•predicting future customer demand •"All forecasts are wrong; some are useful."

Apparent authority

-Created when the words or actions of the principal (employer) lead a reasonable person to believe that authority has been granted -Authority a buyer appears to have -Enough for a binding contract

Actual authority

-Express authority: the acts the agent is expressly and directly authorized to perform -Implied authority: all other authority that is necessary, usual, and proper to carry through to completion the express authority -Third party role: the duty of the third party to ascertain the scope of an agent's authority

What are the three ways managers accommodate for forecasting errors?

1. Reduce error through better forecasting 2. Build more flexibility into operations and the supply chain 3. Reduce the lead time over which forecasts are required

Define the elements of a contract and be able to identify is an agreement is actually a contract

1.Competent parties - either principals or qualified agents 2.Legal subject matter or purpose 3.An offer and an acceptance 4.Consideration (bargained-for exchange)

Discuss delivery failure reasons and resolution possibilities

1.Reject the whole shipment 2.Accept the whole shipment 3.Accept part of the shipment and reject the balance

Apply the forecast accuracy & bias measures to determine which forecast model is the best fit for your data.

1.Short term forecasts are more accurate than long term forecasts 2.Aggregate forecasts are more accurate than detailed forecasts 3.Information from more sources yields a more accurate forecast

Understand the conditions needed to build strong, successful supplier relationships

Building Trust, Shared Vision and Objectives, Personal Relationships, Mutual Benefits and Needs, Commitment and Top Management Support, Change Management, Information Sharing & Lines of Communication, Capabilities,

How does supply management affect return on assets (ROA)? In what specific ways could you improve ROA through supply management?

Inventory Control, Quality and Costs , Assets

opterational

Day to day functions

Strategic

Higher level functions

Compare and contrast qualitative and quantitative forecasts and explain when you would use a qualitative forecast or a quantitative forecast during different stages of a product's life cycle

Qualitative •Non-numerical estimation techniques •Lack the rigor of quantitative techniques, but are not necessarily any less accurate -Can be harder to defend/justify •Knowledgeable people with intimate market knowledge have a "feel" that is hard to define but that gives good forecasting results Quantitative •Number/stat based analysis • •Casual Methods - Linear Regressions • •Time Series - Averages, Trends, Seasonal...

Selection of suitable source (4 R's)

Right: Product, Price, Place & Time

List and define the procurement process, explain what the steps are and why this process is a. needed despite its cost and complexity

Stage 1: Identify Goods or Services Needed The onset of the procurement process begins when a business has a need for goods or services. These goods or services can be internal - meaning any materials required to run the business, or external - materials that the business will eventually sell. This stage also includes setting a budget. Take, for example, a company that supplies tires for automobiles. One of their local branches is running low on a particular type of tire. In this stage, they would determine the type of tire, how many tires they need, when they need them to arrive, and approximately how much they should cost. Stage 2: Explore and Select Vendor(s) This stage is all about sourcing potential vendors and determining their ability to provide the best value and quality for your goods or services. While the stage seems straightforward, it's important to find vendors who not only deliver a high quality product for a competitive price, but who have a strong reputation. Ideally, you would build a mutually beneficial relationship that can last long-term, if necessary. Best practice in this area is known as strategic sourcing. This would be a less responsive approach to procurement as the preferred supplier for most key purchase requirements will already be in place. Using our tire supplier company as an example, during this stage, they would develop a short list of all the different tire manufacturers and wholesalers that provide the type of tire they need. The selection criteria would weigh cost, quantity, reputation, speed of service, dependability, and customer service - then select the best fit. Sub-processes in this stage could include tendering, bid management, compliance checks, contract management, supplier relationship management, etc. Stage 3: Submit Purchase Requisition The next stage in the procurement process involves getting the thumbs up from the internal department that controls finances to purchase your goods or services. This includes creating a purchase requisition document and submitting it to that department. It's important to note here that you're not actually ordering anything from the vendor, you're getting the internal approval to do so. The process of turning a purchase requisition into a purchase order is known as the purchase order process. Depending on your company's procurement process this could be straightforward or could include multiple steps of approval depending on the value of the order. While purchase requisitions vary depending on the organization, the tire supplier would share the following information with purchasing for their approval: purchaser's location or department (name of branch), the quantity and description of supplies requested (30 winter tires, size 215), the name of the vendor that is providing the goods (e.g. Firestone®), and the price ($1,500). The tire supplier would then share this document directly with the purchasing department for approval, rejection, or further discussion. Stage 4: Create Purchase Order This is the part of the procurement where the buying happens. Once the purchase requisition has been approved, the department that controls finances issues a purchase order (PO) to the vendor. Purchase orders are typically created using electronic purchasing systems or a full Procure-to-Pay software like PurchaseControl, which enable businesses to track POs and submit them electronically. If there are no contracts involved, purchase orders are considered legally binding documents. Again, information may vary, but our tire supplier's purchase order would include the name of the company purchasing the goods or services (ABC Tire Company), the description and quantity of the goods or services (30 winter tires, size 215), price ($1,500), a mailing address (15 Fake Lane, Sacramento, CA, 12345), payment information and terms (to be paid in 45 days), invoice address (same as mailing address), and a purchase order number (345). Stage 5: Receive Invoice and Order This stage in the procurement process - receiving the invoice and the order - may or may not happen together; one may arrive before the other. The vendor sends an invoice to the purchaser which describes exactly what the order includes. The invoice confirms the sale and reaffirms exactly when the payment is due. When the purchaser receives the order, they typically have a limited amount of time to notify the vendor of any issues with the good or service. At this point, three documents - purchase orders, order receipts (which arrives with the order), and vendor invoices - are aligned and reconciled, highlighting any discrepancies to ensure that what you are being charged matches what you have received. Stage 6: Pay for Goods or Services The next step in the procurement process will involve the company's finance team. Upon receiving the order and invoice as described, the accounts payable team will process the invoice. Matching the invoice against an approved PO and the delivery details for the order follows a best practice called three-way matching in the accounts payable process. If everything matches up the accounts team sends payment to the vendor within the specified timeframe. Stage 7: Record for Audit The final stage in the procurement cycle is important for all around good bookkeeping and for audit purposes. Auditors require thorough documentation of all purchases, so all relevant documents from purchase requisition through invoice should be stored in one central location.

Level 1

Strategic

Explain the importance of strategic sourcing as a tool to help companies achieve strategic goals and a. how your sourcing strategy must support the objectives of your product

Strategic sourcing is an approach to supply chain management that formalizes the way information is gathered and used so an organization can use its consolidated purchasing power to find the best possible values in the marketplace and align its purchasing strategy to business goals. your sourcing strategy must support the objectives of your product. In order to effectively implement strategic sourcing in your organization, it is necessary to analyze the suppliers, their profiles, and their core capabilities. Once this is accomplished, an organization is equipped with information that will allow them to match their business objectives to their ideal suppliers.

Explain the importance of metrics like TCO and continuous improvement for improving supplier relationships

TCO: made up of all costs associated w/acquisition, use, & maintenance of a good or service. •The process of evaluating suppliers based on a set of mutually agreed-upon performance measures provides opportunities for continuous improvement 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 of cost, quality, delivery, and technology.

Use the weighted average scorecard to evaluate supplier performance and apply the results

The Weighted-Criteria Evaluation System 1.Select the 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 overall score. 6.Classify vendors based on their overall score: Unacceptable, Conditional, Certified, & Preferred Audit and perform ongoing certification review.

Discuss the Make/Buy decision and list the reasons why a company chooses to outsource an item a. and the reasons it chooses to make an item

The decision as to whether to make vs. buy a product is based on a variety of factors, including the cost of either option, whether the product is available from other vendors, the expertise and resources your business has when it comes to manufacturing, and whether you have enough cash in place to make a purchase.

Return-on-Assets Effect

The effect of purchasing on the Return-on-Assets (ROA) percentage - stemming from cost reductions to inventory asset base and represented on the balance sheet

Profit Leverage Effect

The profit-leverage effect of supply savings is measured by the increase in profit obtained by a decrease in purchase spend

What is the profit-leverage effect of supply? In what specific ways could you improve profit through supply management?

The profit-leverage effect of supply savings is measured by the increase in profit obtained by a decrease in purchase spend. While this leverage is more effective than boosting sales, its different for organizations who have spent years on their supply system. Increasing savings through supply will become increasingly difficult.

Explain in your own words how to apply TCO techniques for evaluating supplier quotes

Total cost of ownership (TCO) is a financial estimate that helps consumers and enterprise managers determine direct and indirect costs of a product or system. TCO goes beyond the initial purchase price or implementation cost to consider the full cost of an asset over its useful life. A TCO analysis often shows there can be a large difference between the price of something and its long term cost.

Level II

Traditional: quality, quantity, delivery, price and service

linear regression

You can use correlations as the basis for the prediction of the value of one variable from the value of another

Exponential Smoothing

a moving average approach that applies exponentially decreasing weights to each demand that occurred farther back in time

Historical Analogy

assume past demand is a good predictor of future demand

Demand Management

influencing either pattern or consistency of demand

Market Planning

changes to products, locations, pricing and promotions

simulation models

create representations of previous events to evaluate future outcomes

Delphi Method

input for panel of experts

Grassroots

input from those close to products or customers

executive judgement

input from those with experience

analysis

data on key performance metrics

Marketing Research

examine patterns of current customers

Demand and resource planning

forecasting

How might social or political issues impact a supplier selection decision?

government legislation requiring suppliers on government contracts to place a percentage of business with designated service disabled-, veteran-, minority-, or women-owned business has forced many purchases to undertake such searches for suppliers companies in the private sector tend to do this voluntarily out of a sense of corporate social responsibility and to gain strategic advantage Political - "buy local" is a common requirement for city and state purchasing officials "buy american"