Procurement Second Midterm
Calculation for the change in PPI
(End - Beginning)/ Beginning
Annual Carrying Cost =
(Q/2) (KC) where: R = annual requirement (units) S = ordering cost ($ per order) C = purchase cost ($ per unit) K = annual carrying cost percentage
Annual Ordering Cost =
(R/Q) *S where: R = annual requirement (units) S = ordering cost ($ per order) C = purchase cost ($ per unit) K = annual carrying cost percentage
"Should Cost" Analysis
***Handout
In the U.S., a useful index is the Producer Price Index (PPI). How is it used by buyers?
Family of indexes that measures the average change over time in the selling prices received by domestic producers of goods and services. Published monthly by Bureau of Labor Statistics. Note: The PPI measures price change from the perspective of the seller, not the buyer.
Cycle Inventory for Fixed Order Quantity
Fixed Order Quantity: Product received in bulk, used up at a constant demand, and replenished instantly again in bulk. Cycle Inventory (CI) = Average inventory for periodic fixed order quantities, or Order Quantity Q / 2
Which Model is Better?
Fixed Quantity Model •Higher operational costs •Every transaction recorded •Inventory controlled precisely •Same order quantity each time Fixed Period Model •Minimal record keeping, cycle counting is predictable •Stock-out rates tend to be higher •Higher average inventories to protect against stock-outs •Different order quantities for each cycle
JIT Implications for Suppliers
Frequent deliveries Small lot sizes Exacting quality Long-term relationships/contracts Close cooperation and communications
Problem Solving
Highlight areas of agreement Enter problem solving discussion on issues of disagreement •Focus on problems, not people Table issues that cannot be solved during the session
O/H Challenges for the Buyer
How much should the supplier's indirect costs be in absolute terms? How likely is the supplier to cover their fixed overhead costs? How should "allowable" indirect costs be recovered by the supplier in their pricing? What proportion of the indirect costs should be "allowed" in the buyer's purchase price?
Quantity and Timing Issues for Inventory Management:
How much to acquire? When to acquire it? How to manage it effectively? "Quantity and delivery go hand in hand. Order less, deliver more frequently; order more, deliver less frequently."
Raw and Semi-Processed Materials
Most users of materials are converters, such as factories, and this category includes commodities, agricultural and industrial.
What should get outsourced?
Non Core Competence, Commodity Items Not Core or Differentiator
Total Cost of Ownership (TCO)
The goal of TCO is to understand the full life cycle costs of ownership TCO represents the present value of all costs associated with a product, service or capital equipment incurred over its expected life
Case "Deere Cost Management"
Two Factors: Engineering company and dealing with accurate building of the line -engineers said they did not have enough time and would not know how to use this new equipment so procurement would search for an engineering company to fulfil this task Should cost be the primary factor in the selection of the engineering design firm? No, just because it is cheaper does not mean it can fulfil the task with the proper expertise needed. Should Mr. Carter be solely responsible for deciding which engineering design company is selected? Work with engineering people to establish that it would be the right purchase to make What problems can be anticipated with the proposed transmission line project as it stands now? If you were in Mr. Carter's position, what additional information would you like to have before deciding? Which company should be awarded the engineering services contract and why?
The EOQ Model - Economic Order Quantity (for fixed quantity)
EOQ= sqrt [(2RS)/(KC)] where: R = annual requirement (units) S = ordering cost ($ per order) C = purchase cost ($ per unit) K = annual carrying cost percentage Annual Carrying Cost = Annual Ordering Cost
Typical Negotiating Tactics
Ethical: -Honesty/Openness -Planned concessions -Cost Structure Sharing -Best and Final Offer -Silence -Strong Initial Offer Unethical: -Low Balling -Use of Power -Phantom Quotes or Offers
MRO and Small Value Purchases (SVP)
Every organization has MRO requirements and SVP's. The availability of MRO suppliers is critical to maintain continued uninterrupted operation of the office, factory, facility, etc. Because many MRO requirements are relatively small in dollar value, SVP's are also included in this category. For SVP's assuring availability at minimum acquisition cost is a challenge.
Inventory Management Tool: Inventory Carrying Cost (ICC)
ICC includes all inventory expenses such as handling charges, storage facility costs, equipment costs, labor expense, operating costs, insurance premiums, taxes, breakage, obsolescence, and pilferage. Inventory expense is expressed as a percentage (%) of average inventory value (different for every firm). ICC = (Avg. Inv. Cost) x (Inv. Expense %)
Characteristics of Cost Elements
X= Cost Y= Quantity Total fixed costs remain constant over total production. Examples of Fixed Costs • CEO and other executive salaries • R&D Budget • Cost of corporate support services (HR, IT, Legal) • Building rent and other lease payments Fixed costs per unit decline over total production. • FC / Unit = Total Fixed Costs / # of Units Produced Total variable costs increase over total production • TVC = VC / Unit X # Units Produced Variable costs per unit remain constant over total production.
MRP Implications for Supply Management
-Accurate records for quantities, lead times, bills of material, and specifications -Tight control of inventory -Cooperation from suppliers for on-time delivery, proper quantities and batch sizes, exacting quality (zero defects, no variations) -Long-term planning horizon -Less "slack" in the system
Need Identification: Methods of Description
-By specification (very common) •Physical or chemical characteristics •Material or method of manufacture •Performance or function *-By "or equal" -By engineering drawing -By samples -By market / manufacturer grades -By brand -By a combination of two or more above methods
Best Practices When Offshoring
-Clear contract terms - no assumptions -Ensure project financially viable -Know your partner -Know the rules, they may be different -Search for problems before they come up -Do a thorough risk analysis -Stay focused -Expect competition -Watch intellectual property -Set realistic time horizons -Build cross-cultural teams
Reasons for Diminished ProcurementInvolvement in Service Acquisitions
-Complexity of specifying service needs and analyzing potential service provides means that the user has greater expertise than the purchasing department. -The buying of services sometimes involves a personal relationship between the supplier and the user. -Users tend to resist relinquishing decision makingauthority based on longstanding working relationships and well established process intimacy.
Fixed Quantity Model
-Continuous (perpetual) inventory system -When inventory is depleted to a specific level (re-order point P), a fixed quantity (Q) is ordered automatically and inventory is replenished -Objective is to minimize total annual cost by determining what quantity (Q) should be ordered each time -This quantity is our Economic Order Quantity (EOQ)
Goals of Cost Management
-Develop accurate price/cost information to enhance your negotiating effectiveness -Drive continuous price/cost improvement -Determine the quality of the business relationship that you can achieve from your supplier
When is "Description by Brand" Desirable?
-Either the manufacturing process is secret or because the item is covered by a patent -Specifications cannot be provided with sufficient accuracy -End users have technical requirements in favor of branded items -Previous sole source conditions exist (you have no other choices
Advantages of Buying with Specifications
-Evidence exists that thought and careful study have been given to the need and the ways in which it may be satisfied -A standard is established for measuring and checking materials as supplied, preventing delay and waste that would occur with improper materials -An opportunity exists to purchase identical requirements from a number of different sources of supply -The potential exists for equitable competition -The seller will be responsible for performance when the buyer specifies performance
Special Purchasing Characteristics and Considerations for Capital Assets
-High strategic enterprise importance -Substantial amounts of money for a single purchase -Long life and infrequent purchases -Difficulty estimating the total cost -Environmental impact and disposal challenges -New technology requirements and forecasting -Dedication of time and resources during start-up -Commitment to process, cost, product line and plant space -Coordination with existing processes and operations
What Makes Services Different?
-Intangible -- cannot touch it -Perishable -- no inventories -High levels of specialization -High levels of customization -Internal user participation in the selection process -Simultaneous production and consumption -Difficult to measure quality both before and after
Reasons to Buy Instead of Make
-Lack of managerial or technical production experience -Lack of production capacity -Customer preference for a particular brand -Challenges of maintaining technological leadership for non-coreactivity -Lower cost -Enables greater operational flexibility and resource utilization -There are more options in potential sources and substitute items -Insufficient volume to justify in-house production -Forecasts show great demand and/or technological uncertainty -Availability of a highly capable supplier nearby -May open up markets for firm's products and services -Bring a product or service to market faster -Superior supply management expertise
Risks of Outsourcing
-Loss of control in your supply chain -Exposure to supplier risks such as: financial, loss of supplier commitment, response time, quality, poor service, cultural issues -Unexpected/unanticipated costs -Difficulty quantifying economics, conversion costs -Supply availability constraints -More attention required by senior management -Possibility of being tied to obsolete technology -Concerns with long-term flexibility and meeting changing requirements -Reduced employee morale / union opposition
Current Example of Offshoring Risks: Coronavirus Supply Chain Disruptions
-Material / component parts shortages -Labor shortages (workers quarantined) -Sourcing restrictions (travel) -Sluggish logistics (supply networks) -Reduced consumer demand (spending) -Impact on Just-In-Time manufacturing
Purchasing's Role in Outsourcing
-Providing a comprehensive, competitive process -Identifying opportunities for outsourcing -Aiding in selection of supplier sources -Identifying potential relationship issues -Developing and negotiating contracts -Ongoing monitoring and management of the supplier relationship (SRM)
Reasons to Make Instead of Buy
-Quality requirements are exacting / special processing needed -Greater assurance of supply -Preserve technological secrets -Lower cost -To take advantage of unused capacity/avoid having idle equipment -Maintain control of a core competency -Avoid single-source dependency -Reduce extended supply chain risk -A significant customer requires it -Distance from the closest available supplier is excessive -Future market potential for the product or service is expanding rapidly -Forecasts of future shortages in the market or rising prices -Quantities are too small and/or no supplier is interested
Limitations of Buying with Specifications
-The use of specifications can unintentionally add to the cost -The specification may not be better than a standard product -The cost is increased by testing to ensure that the specifications have been met -Unduly elaborate specifications sometimes result in discouraging potential suppliers from providing bids -Unless the specifications are of the performance type, the responsibility for the adaptability of the item to the use intended rests wholly with the buying organization -The minimum specifications set up by the buying organization are likely to be the maximum furnished by the supplier
Case "Sedgman Steel"
1) Why are there so many trailers parked outside the warehouse waiting to be unloaded? Not enough room inside, strategy is not efficient for inventory 2) Do material deliveries two weeks in advance make sense? No especially if there are trailers parked outside to unload 3) Can you estimate Sedgman's inventory turns? 70M Annually/20M (July)= 3.5 turns 4) What might an ABC analysis of Segdman's sixteen suppliers tell us about next steps for improvements? 16 Suppliers
Negotiation Framework: preparation process involves 10 critical activities :
1. Identify specific objectives 2. Analyze strengths and weakness of each party 3. Gather information 4. Recognize counterpart's needs 5. Identify facts vs. issues 6. Establish a position on each issue 7. Develop appropriate strategies and tactics 8. Determine who will participate 9. Brief other personnel 10. Practice the negotiation
Language for Minimizing and Managing Conflict:
1.Avoid leading and loaded questions -"Can't you see that I am taking all of the risks?" -"Are you saying that these unfair terms are the only ones you will accept?" 2. Use open-ended questions to seek explanations - "The initial program targets a large group of entry level associates. What type of associates would the advanced program attract?" 3. Use questions rather than statements to facilitate the dialog - "What profit margin do you need for this to be a successful project?"
The deal is done - now what?
1.Need a signed agreement, contract or purchase order. 2.Start managing the supplier relationship: -Start forming the relationship before you sign the contract -Select the right people to manage the relationship -Involve negotiators in implementation -Keep leaders involved in the relationship -Educate company personnel about the deal -Plan and oversee joint activities with the supplier -Provide frequent two-way feedback -Agree on schedule of meetings to review progress
Index Analysis
A price index measures the change over time in the price of a product or service versus starting price at time 't = 0'.
Overhead: An Indirect Cost ("Burden")
Any cost that is not a direct cost, that is, costs that are notdirectly assigned to the production of a product or service Costs that impact or benefit two or more products or services
Inventory Management Tool: Inventory Turnover Ratio (Turns)
Absolute inventory value on a company's balance sheet does not provide sufficient evidence about whether the company is using its inventory wisely. Inventory turns for any accounting period provides a better perspective: Inventory Turnover = Cost of Goods Sold/ Average Inventory Value
How do suppliers incorporate most O/H costs into their prices?
Accounting Allocations % of Labor $ Per Hour of Labor % of Sales $ / Revenue $ % of Total Cost $ Per Unit of Output
Operational Procurement
Acquisition of equipment, materials and services required to meet the day-to-day needs of an organization. Cost Management Quality Availability and Delivery Technology / Intellectual Property Environmental Sustainability Managing Supply Risks
Parts, Components and Packaging
Assemblers use parts and components produced by their suppliers to create a finished product. Parts and components may be standard or special depending on the decision of the designer of the finished product.
MRP Materials Requirement Planning
Based on a Master Production Schedule; a material requirements planning system for dependentdemand: •Creates schedules identifying the specific parts and materials required to produce finished goods •Determines exact quantities needed •Determines the dates when orders for those materials should be released, based on supplier lead times MRP Objective is: "Get the right materials to the right place at the right time."
Determine Your BATNA:
Best Alternative To a Negotiated Agreement: the alternative you'll be stuck with if you can't come to a negotiated agreement. •Examples of BATNA'S: -Moving ahead with another supplier -Settling for a spot buy now and pursue negotiations later -Extending current agreements •Purpose of BATNA is to give you something to which you can compare a proposed deal. •If you don't know your BATNA going in to a negotiation, you may settle for a lousy deal. •Always verify your BATNA.
Introduction Presentations
Brief client overview •Standard company presentation •Strategic Sourcing program objectives Supplier overview •Corporation, products, facilities, ...
What is a Core Competence?
Core competencies are the collective learnings in an organization, especially how to coordinate diverse production skills and integrate multiple streams of technology A firm's core competence: - provides access to wide variety of markets - makes significant contribution to perceived customer benefits - is difficult for competitors to imitate - and is not typically outsourced
Total Average Inventory =
Cycle Inventory + Safety Stock
Case "Moren Corp."
Discussion Questions: What is your financial analysis for the make or buy decision for mustard? (perform all calculations on a "per liter" basis) What benefits would accrue to TFL from making mustard in-house? What risks would there be for TFL? Are there other alternatives to consider? What should Alicia emphasize to the CEO?
Need Identification Criteria
Level 1: Strategic Supply Criteria •ABC analysis of total spend (80/20 rule), Kraljic's 4 spend category quadrants (see p. 291), risk management factors, access to new technology or new markets, assurance of supply for critical materials or services Level 2: Traditional Supply Criteria •quality, quantity, delivery, price and service Level 3: Additional Criteria •financial, supply chain risk, environmental, innovation, regulatory compliance and transparency, social and political factors
Key Inputs to Utilize MRP
Master Production Schedule (when do we need it?) Bill of Material (what sub-components are required?) Inventory Record File (what do we have and what do we need to order?) Accurate Supplier Lead Times (always a challenge!)
When conducting negotiations, the sessions should follow a predefined sequence to reach objectives
Opening Introduction Presentations Proposal Exploration Problem Solving Closing Make an agenda
Reorder Point
P = D + SS = dL + SS D = expected demand during the lead time (dL) d = periodic demand L = lead time SS = safety stock Managers will review the demand cycle (D) and re-order (P) with sufficient lead time (L) to avoid penetrating the Safety Stock (SS
Fact-based negotiations drive the process and overcome barriers to effective negotiations.
Potential Barriers -Perceived supplier "partnerships" -Loyalty as a result of past long term relationships -Perceived relationships with senior executives -Service to internal clients at all cost -Not possible to introduce competition -Switching costs are too high
Why outsource?
Procurement cost reduction usually grabs the headlines, HOWEVER, it should not be the only, or even the most important reason. There should be STRATEGIC reasons for outsourcing such as: ØLOWER TOTAL COST OF OWNERSHIP / PRODUCTION COST ØTHIRD PARTY EXPERTISE - PRODUCT DESIGN AND QUALITY Ø ENABLES RAPID GROWTH / EXPANSION ØPROVIDES ACCESS TO NEW MARKETS / REGIONS Ø INCREASED AGILITY - IMPROVED PROCESS EFFICIENCY Ø REDUCED CAPITAL AND ASSET MANAGEMENT ØNEW KEY SUPPLIER RELATIONSHIP OPPORTUNITIES
Opportunity to Affect Value: Early Supply and Supplier Involvement (70% guideline)
Procurement's opportunity to affect value: High to Low as the Acquisition Process Steps goes from Recognition to Payment
Proposal Exploration
Proposal presentation by supplier (highlights) Clarification of open questions (technical, commercial) Communication of our position (Wants) Assess supplier response and flexibility
TCO: 4 Key Elements to Consider
Purchase price - on the purchase order and invoice Acquisition costs - sourcing, administration Usage costs - installation, freight, storage End-of-life costs - disposal, salvage value Lowest Purchase Price may not be the Lowest TCO
The Four Forms of Inventory
Raw Materials / Purchased Parts Work-in-Process Finished Goods MRO (maintenance, repair and operating supplies)
JIT Implications for Supply Mgt.
Reduction in number of suppliers Reduction in supplier lead times Improvement in supplier quality Improvement in supplier delivery Increased inventory turnover Inventory reduction in total dollars Reduction in inventory carrying costs
What are the characteristics of the cost elements that make up the price of a product or service?
Revenue - Less Cost of Goods Sold: Direct Labor 100% Variable Direct Material 100% Variable Factory Overhead 20% Variable 80% Fixed - Less SG&A Costs 10% Variable 90% Fixed - - Less R&D Costs 100% Fixed = Profit before Taxes
Opportunity to Improve Value: Standardization and Simplification
Standardization: Agreement on definite sizes, design, quality, or other aspects of the product or service. •It is a technical and engineering concept Simplification: A reduction in the number of sizes, designs or other aspects of the product or service. •It is a selective and commercial consideration •It may be applied to articles already standardized or as a step preliminary to standardization
Closing
Summarize key points of the meeting •Agreements •Open issues Define next steps and actions to be taken by each party with firm due dates
Purchase Negotiations Objective
The primary objective of a purchase negotiation is to reach an agreement that satisfies both parties. Negotiation is an opportunity to create value within the supply chain.
Offshoring - Global Sourcing
The transfer of manufacturing processes or services to a foreign country. Unique factors to consider .... -Legal climate and protection of intellectual property -Local ability to copy manufacturing technology and processes -Control over ingredients, formulations, etc. -Economic and political stability vs. USA -Foreign government investment in necessary infrastructure -Tariff and trade regulations -Currency and exchange rate differences -Understanding customs and cultures
Price / Cost Analysis
Using analytical tools and techniques to evaluate the reasonableness of a supplier's quoted prices.
How can companies assure that they get the best price for what they buy?
Utilize the Competitive Bidding Process Perform Price / Cost Analysis
JIT Inventory
is based on the logic that nothing will be produced until it is needed •When a unit is sold, the system pulls a replacement unit from the last position in the system •This process continues throughout the system characterized by providing the exact quantity needed at the precise moment it is required However, to be able to support JIT certain capabilities are required: •short production lead times •economical small batch production •flexible resources (labor, material and equipment) •exacting quality
Negotiating Tactics
•Negotiating tactics are the short-term plans and actions employed to execute a successful negotiating strategy. •Understand that tactics are important. -Use tactics to try and persuade a counterpart to endorse a position. -A negotiator must understand what type of tactics the counterpart is using. Watch out -- not all negotiating tactics are ethical
Lean Production Systems
strive to eliminate waste •Waste includes: inefficient set-up procedures, excess inventories, unnecessary movement, waiting •Focus is on all aspects of the production system: human resources, supply, machines, technology, and inventories
So What Gets Outsourced?
•Production •Assembly •Transportation •Warehousing •Distribution •Sales •Payroll •Employee Benefits •Design •Engineering •Construction •Installation •Human Resources •Accounting •Call Centers •Purchasing
The Make or Buy Decision and Break-Even Analysis
•A tool for computing the cost-effectiveness of sourcing decisions when cost is the most important criterion. •Assumes all costs can be classified as either fixed or variable. •Assumes linear relationships can be established for both the make option and the buy option with the point of intersection representing the breakeven quantity.
How Do Suppliers Establish Price?
•Cost Approach - either a "cost-plus-profit" model or a "target pricing" model •Market Approach - supplier allows the marketplace to set the price for the product or service (traditional supply and demand)
Quantity Discount Analysis
***Handout
Example of PPI
***Handout and Slides Class 15
Cost / Volume / Profit Analysis
***Slides Class 15 -similar to should cost analysis
What to Negotiate Beyond Price
***Slides Class 17
Price / Cost Analysis Tools
**Income Statement Revenue (Price X Volume) Less: Cost of Goods Sold Direct Labor Direct Material Factory Overhead = Gross Profit Less: Other Expenses Sales, General & Administrative Costs (SG&A) Research and Development Costs (R&D) = Profit before Taxes
Determine the full range from Needs to Wants
*Range of Acceptability Needs: • Maximum acceptable price that meets profit goals • Market advantage delivery time • Product performance to meet specifications • Price firm for one year Wants: • Minimum price in the market • Shorten time from current levels • Performance exceeding specifications • Longer term price guarantee Needs= Least Acceptable Agreement (LAA) Wants= Most Desired Outcome (MDO)
Categories of Needs
-Resale -Raw and Semi-Processed Materials -Parts, Components and Packaging -MRO and Small Value Purchases (SVP) -Capital Assets
Steps in Conducting a TCO Analysis
1. Understand full business process and map TCO categories. 2. Determine cost elements for each category. 3. Determine how each category will be measured. 4. Gather relevant data and quantify costs. 5. Develop cost time line. 6. Compute NPV of all future cost flows.
Capital Assets
Any requirement that accountants classify as capital, and, therefore, an investment, becomes a capital item. Equipment, IT, real estate and construction are included in this category. Capital items can be depreciated, are often bought under a separate budgetary allocation and may require special financing arrangements.
Fixed Period Model
Inventory on-hand is counted at periodic review time intervals and replenished to the required level Only the passage of time triggers the re-order quantity Each re-order quantity will be different Each review period will be the same used to be more popular, doesn't help monitor inventory -may overcompensate with safety stock
The Outsourcing Decision
Is the activity strategic? Is the activity critical to the business but not strategic? Create a RFP Is the supplier's bid more desirable than the internal option? Could the internal option achieve similar results?
Example: Buy or Continue-to-Make AX-12 Component AX-12 is available in the marketplace at a unit price of $6.00. Existing factory unit cost to make AX-12 is: Labor $2.00 Material $2.75 O/H Variable $0.50 O/H Fixed $1.25 Total $6.50 Should the company continue-to-make or start buying?
It depends. The decision will be influenced by whether the machinery that is used to make AX-12 will become idle or used profitably elsewhere in the factory. If machinery becomes idle: Fixed costs are sunk costs, so they are ignored. Variable unit costs are: Labor $2.00 Material $2.75 O/H Variable $0.50 Total $5.25 Since the $6.00/unit market price exceeds the make cost by $0.75/unit, it is desirable to continue making the AX-12 component. If machinery can be utilized profitably: Costs that can be avoided by buying now include both variable as well as fixed. O/H Fixed $1.25 Total $6.50 Since the $6.00/unit market price is $0.50/unit less than the make cost, it is desirable to purchase AX-12.
Preparation begins with a fact and information based negotiation strategy
Learn about: Industry reports Internal studies Cost analysis Trade publications RFQ/RFP results Interviews Suppliers Turn it into: •Develop/confirm company's vision and objectives •Understand supplier's potential vision and objectives •Establish alternative options *Know your suppliers better than they know themselves!
Grouping of Indirect Overhead Costs and Expenses
Material: Transportation Receiving Inspection Storage Manufacturing / Production: Supervision Custodial Benefits Small tools Insurance SG&A (Sales, General & Admin.): Executives Legal Accounting / Finance Public Relations Sales and Marketing Information Technology Human Resources
Purchase Negotiations
Negotiation is a process of formal communication, either face-to-face, or via electronic means, where two or more people come together to seek mutual agreement about issues •Negotiation involves relationships between people, not just organizations. •It is a time-consuming process that requires extensive planning and a commitment of resources -- 90% of the negotiation process involves preparation, not execution.
Resale
Resellers comprise retailers, wholesalers, distributors, agents, brokers and traders. What they can resell covers the full range of the remaining categories.
How about Safety Stock?
Safety stock is held as buffer inventory because of uncertainty in supply and/or demand The trade-off is the cost of a "stock out" versus the cost of carrying inventory Safety stock levels can be calculated using statistical techniques
Case "Alicia Wong"
Why is implementation of the new ERP system taking longer than expected? Human Error Issues- continual flow of problems encountered by staff trying to use the new system to deliver the functions they wanted. Although the cost of using consultants is more expensive, why should this be considered? More convenient, there would be no need for additional overtime or temporary staff beyond the current budget. Temps don't get benefits and you can cut them loose at any time. Although the cost of using overtime and temps is less expensive, why should this be considered? Because Cat believes that over time the staff can manage to do it on their own Are you prepared to recommend that the entire ERP implementation schedule should be pushed back one year? Who else in the company should be consulted? The Staff
Common Preparation Weaknesses:
•Failing to develop clear objectives •Failing to envision desired outcomes •Failing to commit sufficient time •Failing to formulate convincing arguments that support your positions •Failing to consider your counterparty's needs •Believing quick and clever is enough •Failing to practice complex negotiations
Make or Buy Decision with Marginal Cost Considerations
•Firms facing a continue-to-make or buy decision for a component must evaluate marginal costs of the decision. •The decision to buy will depend on whether the firm can utilize the released machinery capacity profitably or not. •If machinery will become idle, then fixed (sunk) costs become irrelevant and only variable costs should be compared to the buy price in the analysis. •If, on the other hand, machinery does not become idle, but will be used profitably elsewhere, then both variable and fixed costs should be compared to the buy price. *idle= not fixed cost *not idle (used profitably)= use fixed cost
Make or Buy and Break-Even Example: A manufacturer has the option to make or buy one of its component parts. The annual requirement is 7,000 units. A supplier is able to supply the parts for $2 per piece. The firm estimates that it costs $500 to prepare the contract with the supplier. In order to make the parts in-house, the firm would have to invest $5,000 in new capital equipment. Once the new equipment is in place, the firm estimates that it would cost $1.25 per piece to make the parts. Assuming that cost is the only criterion for making decisions: A) What is the break-even quantity? B) What is the total cost at the break-even point? C) If 7,000 units are required, how much will it cost to make the parts? D) If 7,000 units are required, how much will it cost to buy the parts? E) At 7,000 units, what is the cost savings of the cheaper alternative?
Make Fixed cost $5000 Variable cost $1.25/unit Buy Fixed cost $500 Variable cost $2.00/unit Establish linear equations : y = mx + b; solve for x A) $1.25(x) + $5000 = $2.00(x) + $500; x = 6000 units B)What is the total cost at the break-even point? $1.25/ unit (6000 units) + $5000 = $12,500 C)If 7,000 units are required, how much will it cost to makethe parts? $1.25/unit (7000 units) + $5000 = $13,750 D)If 7,000 units are required, how much will it cost to buythe parts? $2.00/unit (7000 units) + $500 = $14,500 E)At 7,000 units, what is the cost savings of the cheaper alternative? $14,500 - $13,750 = $750 savings to make
Opening
Team introduction Setting the stage •Meeting objectives •Agenda and timing •Ground rules