SCM 4351 Exam 1

True Category Spend

Actual spend in particular supply category per specific time per & contract cycle

steps of strategic sourcing process

Analysis 1. spend analysis 2. supply market assessment 3. total cost analysis Strategy 4. supplier identification/assessment 5. sourcing strategy Execution 6. supplier negotiation/selection 7. contract management/evaluation

example of threat of new entrant

GE bought Baker Hughes

target pricing originated from?

Japanese Japanese think "Height of arrogance" @U.S. because we say "build it, they will come" Japanese ask customer what they want, and give it to them

Who developed Motorola's six sigma program?

Keki Bhote

What are each side favorable for on Porter's five forces?

Left side is more favorable to the supplier. Right side is more favorable to the buyer.

Spend leakage formula

Maverick Spend + Non-Contract Compliance = Spend Leakage

Determinant of Supplier Power

The power of suppliers to drive up the prices of your inputs

Determinant of Buyer Power

The power of your customers to drive down your prices

Competitive Rivalry

The strength of competition in the industry

Most prevent problems in conducting spend analysis?

They are often quality problems with vendor names.

Target pricing

This is what they developed within Japan with selling price - profit = allowance table costs compared to previous traditional pricing within America, which was not successful

Formula for True Category Spend

Total Spend - Non-addressable Spend = True Category Spend

Sourcing Data Systems:

- Accounts Payable: invoice and Payment Data - Purchasing/E-Procurement: Requisition, P.O. -Receiving: Packing Slip, Receiving Report - Materials Management: Inventory, MRP0 - Note: spend visibility will be directly related to your ability to extract the relevant data

In-depth Analysis of Each Major Supplier in a Category includes:

- Cost chain-total operating expense - Key financial indicator - Geographical scope - List of business issues impacting company/ info market analysis

Single vs sole source:

- Sole source- only source I have (only option you have) - Single source- you choose to only have 1 source out of the options you do have

Spend density tells us...

- how much of our current spend is with our top 5/10 suppliers? - How well we are rationalizing suppliers - Narrow down suppliers, supplier density increases

Spend analysis objective:

1) Ascertain true category spend: 2) Non-addressable Spend 3) Identify strategic sourcing opportunities 4)Assess rate of maverick spend.

Spend analysis organizes spend data in individual spend categories with:

1) Supplier hierarchies 2) Regional divisions (SBU)

Spend analysis organizes aggregate spend data with:

1) supplier hierarchies (LG →SM supplier on spend) 2) Spend categories 3) regions/business divisions (SBU)

4 strategies in the Motorola six sigma program

1.Competency Staircase Approach 2.Triage Approach (TechnipFMC: Exit, Fix, Grow) 3.Improve or Else 4.20/80 Approach

The average potential savings

10%

What is the average potential savings through commodity classifications?

10%

what percentage of cost can be changed

15%

what percentage of cost is locked in design stage

85%

what is sunk cost

Fixed costs that have already been incurred and paid for.

learning curves-

As individuals and firms become more familiar with a task or process, the average amount of direct labor to perform that task or process declines at a predictable rate. Suppliers who should be experiencing a learning curve should provide a continuous stream of price reductions. Learning curve analysis: Across time, value goes up, labor costs goes down ( direct labor decreases)

Pareto Chart:

Classify data in descending order

Within Porter's 5 force model designed to measure?

Competitive intensity

Traditional pricing

Cost + profit = selling price

Target costing:

Determines a product life cycle cost

Direct spend vs indirect spend-

Direct spend:into our finished product, spend that is on products associated with raw materials, found in income statement, highly fragmented, categorized on higher granularity in order to identify better sourcing opportunities Indirect spend: all of the spend on overhead, not affecting the product. Decentralized and examples of this are income statements, business services, travel, softwares etc.

Porter's Five Forces Model definition

Porter's Five Forces Analysis is an important tool for assessing the potential for profitability in an industry. With a little adaptation, it is also useful as a way of assessing the balance of power in more general situations.

Value analysis:

Post-production

Value engineering:

Pre-production

Which quadrant does someone typically want?

Q1 (High opportunity and low difficulty)

If you can't get a Q1, what do you want?

Q3 because it's not hard, but still experience and able to do well and deliver results.

supplier density formula

Supplier Density = % Spend With Top 5/True Category Spend

•Non-Cooperative:

Supplier unwilling to give your pricing data, so you must estimate cost drivers from market data.

Define Spend analysis

Systematic analysis of historical (1-3 years) spend data.

Leverage spend

The amount of extra power that the buying firm is able to bring into the contract negotiations high value low risk

Spend visibility

The amount of spend data that you can access through the firm's information technology systems.The quality of spend analysis is directly correlated with the quality of spend visibility. Ability to extract relevant data, new software packages (ARIBA, ERP) help us see exactly where the spending occurs.

The Threat of New Entry

The ease with which new competitors can enter the market if they see that you are making good profits (and then drive your prices down).

The Threat of Substitution

The extent to which different products and services can be used in place of your own

Opportunity assessment model

Utilized by senior sourcing professionals to determine which sourcing event should be next in the queue. - Strategic sourcing opportunities are segmented based on Size of the opportunity and Difficulty of implementation

who uses opportunity assessment model

VP SCM CPO

formula for variable cost

Variable Cost = Labor Costs + Material Costs

_______________ is the only cost relevant to decision (additional labor + material)

Variable cost

vendor normalization vs. vendor encirclement

Vendor normalization: name variants standardized Vendor encirclement: parent/child relationship established

value analysis is in which stage?

post production- assembly line

Value engineer is in which stage?

pre production- design stage

Micro level analysis (supplier market assessment)

analysis of the supply market that provides context for sourcing strategy.

SWOT analysis Purpose

assists in the development of supplier selection and negotiation strategies (It is typically employed for a market; however, it can be applied effectively for individual suppliers as well.)

What is utility?

benefits or satisfaction

Porter's Five Forces Model Who has more leverage? buyer or supplier?

buyer has more leverage

Who typically handles the strategic sourcing process from step 1-5?

category manager

3 cost analytic technique

common feature cooperative non cooperative

formula for leverage spend

demand aggregation + supplier rationalization= Leverage spend

Types of spend category

direct spend indirect spend MRO spend

Nested

diversity spend

Waterfall chart

excellent for showing commodity spend trend's- make easy visual comparison

opportunity assessment model Q2:

high size opportunity high difficulty of implementation

opportunity assessment model Q1:

high size opportunity low difficulty of implementation

Pivot table:

include nested dimensions

Swot analysis name internal and external factors

internal factor: strength, weakness external factor: opportunity, trends/threats

•Cooperative: Supplier

is willing to give your some pricing data, typically through an RFI.

Total cost that goes down is the __________ per unit

labor cost

3total cost analytic techniques

learning curve target pricing (target cost) value analysis/engineering

opportunity assessment model Q4:

low size opportunity high difficulty of implementation

opportunity assessment model Q3:

low size opportunity low difficulty of implementation

Vendor enrichment

matching vendors and parents. Identify parent/child relationships. This relationship needs to be established to create a hierarchy

Spend leakage

maverick spend + non contract compliance, drains savings from proposed theoretical savings ex: if the spend with the non preferred suppliers is high that's where the leakage is because the prices and terms with the suppliers are usually better than the ones in the effect with non preferred suppliers.

demand aggregation

max the value of the supply contracts, thus increasing leverage- combining related spend= geographical, related categories, extend contract term

Tree mapping

method of visualizing hierarchical data with proportionally sized square

Vendor normalization

name variants are standardized ex: schlumberger SLB. All vendor names need to be associated with their correct names ex: ADM Milling G P should be associated with ADM Milling Company which is the official name of the subsidiary

supplier rationalization

optimizing the supplier base who receive a part of the supply contract to max the leverage without increasing the supply risks Spend per supplier goes up so you get more benefits & leverage

Finding functional equivalence, what does that mean?

reduces costs (item level rationalization)

identify supplier rationalization risk

select wrong supplier to remain in the optimized supply base cutting the supply base too deeply

Multidimensional report

show all spend across all dimension at same time

Map report:

show country/ regional spend on geographical map. (appeal to execs)

Cross-tabular reports:

shows dimension as row/column

Spot Purchase

single purchase order, typically at the going ("spot") price in the marketplace

Non-addressable Spend

spend not relevant to category or have no control (taxes, tariffs, duties, etc.)

Maverick spend

spending that was not cleared and is made outside of agreed upon contracts. spend out of strategically sourced contract

supplier density gets larger as...

supplier base gets smaller

Blanket contract

supply contract covering a supply category for an extended period of time. Prices terms & conditions for the term fixed for the term of the contract Multiple delivery dates over a period of time, take advantage of predetermined pricing. We need this contract the most

formula for total cost

total cost = fixed cost + variable cost

Score carding-

upplier performance assessment system where each supplier is evaluated across a series of performance metrics, typically on a Likert scale (e.g., 1-10), and then a composite score aggregated for comparison with other suppliers. Enables the reporting of metrics through KPIs and comparison with benchmarks and targets.

purpose of opportunity assessment model

used to figure which project to do next

Value is...

utility in relation to price or cost

Formula for value of firm's spend

value= utility/ price or cost

Remedy for problems in access to data: spend visibility

work with acct/fin/IT: new software packages

name 2 variable of opportunity assessment model

y= size of the opportunity x= difficulty of implementation

purpose of Cost Analytic Techniques

•To analytically determine what an item should approximately cost. Particularly critical on engineered or designed-to-build (customized) products.