Purchasing and Materials Management Final
Break-Even Analysis
Net income (or loss) = P(X) - V(C) -FC where: p = average purchase price X = units produced VC = variable cost/unit of production FC = fixed cost of production Net income = $0 at break-even point
North American Free Trade Agreement (NAFTA)
1994 took effect for the U.S., Canada, and Mexico to eliminate tariffs and non tariff barriers to the trade of goods and services Final provisions were implemented in January 1, 2008 Free trade area of 444 million people producing $17 trillion worth of goods and services buyers must adhere to NAFTA's rules of origin for products eligible for preferential reduced tariff rates, other goods are taxed as if they were from any other country common external tariffs would enable the NAFTA countries to eliminate the agreement's rules of origin
semivariable costs
May vary with the number of units produced but are partly variable and partly fixed
Value methodology
a systematic approach to analyzing the functions of a product, part, service, or process to satisfy all needed quality and user requirements at optimum total cost of ownership
Raw and Semi-Processed Materials
normally quoted at market prices which fluctuate daily the price at any particular moment probably is less important than the trend of the price movement
Manufacturing cost elements: tooling and engineering
often are included as a part of general manufacturing overhead, but it is wisest to separate them out for analysis as distinct items since each may account for a relatively large amount of cost
Contract pricing: cost-no-fee (CNF)
only costs are reimbursed buyer must persuade supplier that there will be enough subsidiary benefits from doing a particular job
cost approach
price is a certain amount over direct costs, allowing for sufficient contribution to cover indirect costs and overhead and leaving a certain margin for profit
Contract pricing: firm-fixed-price (FFP)
price is not subject to change under any circumstances
Transaction components of TCO
price, order placement/preparation, tariffs/duties, billing/payment, inspection, return of parts, and follow-up and correction
market approach
prices are set in the marketplace and may not be directly related to cost
Quantity discounts
apply to particular quantities and vary roughly in proportion to the amount purchased sellers grant such discounts because volume purchases result in savings to the seller, enable a lower price to the buyer production cost savings occur because setup costs may be the same for a large order as a small one or material costs may be lower per unit the savings on the size of the order must be compared against the increased inventory costs
indirect costs
are incurred in the operation of a production plant or process or service organization but normally cannot be related directly to any given. unit of production or service provided
ABC or Pareto Analysis and Cost Management
assigns items to either the A, B, or C category. A: high dollar items B: medium dollar items C: low dollar items more time and managerial attention is directed toward A items because of the parent of annual spend consumer by the purchase of these items large-spend categories, A items, emerge from the collection and classification of corporate spend data opportunities for cost reductions can be identified using external data for market pricing or information on recent price trends for the category challenges include compiling and analyzing the right data and understanding how to use it to unlock value for the organization the supplier manager should focus on understanding the supplier's cost structure to identify opportunities for either the supplier or a joint buyer-supplier initiative to eliminate, reduce, or avoid costs in any of a number of cost elements, including materials, services, labor, and overhead A items might be either differentiated products or services (customized) or low-cost commodity type items
Efficiency (or operating) Metrics
attempt to capture how efficient the supply process is the required information varies by the type of industry but typically includes total dollar volume of purchases, total dollars spent for department operating expenses, and total number of purchase orders issued 1. average dollar cost of the purchase orders written as: dollar cost of operating the department / # of POs issued 2. operating costs as a percentage of total dollar volume of purchases 3. operating costs as a percentage of total dollar volume of sales
It is assumed that the bidders must
1. be qualified to make the item or provide the service in accordance with the buyers specifications and deliver it by the desired date 2. be sufficiently reliable 3. be numerous enough to ensure a truly competitive price 4. not be more numerous than necessary
The Basic Steps in Developing a Negotiation Strategy
1. develop the specific objectives (outcomes) desired from the negotiation 2. gather pertinent data 3. determine the facts of the situation 4. determine the issues 5. analyze the positions of strength for both (or all) parties 6. set the buyer's position on each issues, and estimated the seller's position on each issue based on your research 7. plan the negotiation strategy 8. brief all persons on the negotiation team 9. conduct a dress rehearsal 10. conduct the actual negotiations with an impersonal calmness
Operating Reports
1. market and economic conditions and price performance a. price trends and changes for the major materials, services, and commodities purchased b. changes in demand c. lead time expectations for major items and services 2. inventory investment changes a. dollar investment in inventories, classified by major commodity and materials groups b. days' or months' supply, and on order, for major commodity and materials groups c. ratio of inventory dollar investment to sales dollar volume d. rates of inventory turnover for major items 3. purchasing/supply operations and effectiveness a. cost reductions resulting from supply research and value analysis studies b. quality rejection rates for major items c. percentage of on-time deliveries d. number of out-of-stock situations that caused interruption of scheduled production or service delivery e. number of change orders issues, classified by cause f. number of requisition received and processed g. number of purchase orders issued h. employee workload and productivity i. transportation costs 4. operations affecting administration and financial activities a. comparino of actual departmental operating costs to budget b. cash discounts earned and cash discounts lost c. commitments to purchase, classified by types of formal contracts and by purchase orders, aged by expected delivery dates d. changes in cash discounts allows by suppliers
the 12 guidelines managers should follow to establish a measurement system
1. metrics need to be designed for use at a point in time 2. each organization has specific measurement needs at a given point in time 3. measures should address financial results, supplier, performance, information systems, and internal practices and policies 4. measures must change as required 5. trend analysis often is used 6. measures should not be overdone or underutilized 7. measures are only tools 8. benchmarking is a source of new ideas and measures 9. senior management must see value in the measures used 10. measures can show the effectiveness of supply and identify areas needing improvement 11. the credibility of measures must be ensured 12. continuous improvement in supply depends on measurement
The "Magnificent" 7 types of purchases
1. raw and semi processed materials 2. parts, components, and packaging 3. maintenance, repair, and operating (MRO) supplies and small-value purchases (SVP) 4. capital assets 5. services 6. resale 7. other
Reasons for Global Purchasing
1. unavailability of items domestically 2. price and total cost 3. government pressures and trade regulations 4. quality 5. faster delivery and continuity of supply 6. better technical service 7. technology 8. marketing tool 9. tie-in with offshore subsidiaries 10. competitive clout
Opportunities for buyers of services to reduce, contain, and avoid cost in service contracts:
1. usurping procurement leverage 2. hidden cost adders 3. cost of money 4. billing and calculation errors 5. substitution of lower-skilled staff or inputs 6. providing levels of service below commitment 7. bundling of services with other services or goods 8. summary invoicing improving operating efficiency and productivity rather than better design
The World Trade Organization (WTO)
Formed on January 1, 1995, following the Uruguay Round of trade negotiations Replaced the General Agreement on Trade and Tariffs (GATT), which had been in existence since 1947 In 2018, the WTO had 160 member countries, accounting for more than 9% of world trade objective is to help trade flow smoothly, freely, fairly, and predictably administers trade agreements, acting as a forum for trade negotiations, handling trade disputes, monitoring national trade policies, assisting developing countries in trade policy issues, and cooperating with other international organizations new agreements on trade in services and intellectual property rights
Trade discounts
Granted by a manufacturer to a particular type of distributor or user aim to protect the distributor by making it more profitable for a purchaser to buy from the distributor than directly from the manufacturer manufacturers use distributors in territories where the distributors can sell more cheaply than the manufacturer the distributor is granted a trade discount approximating the cost of doing business to move goods through the channel discounts often are available to a buyer who also purchases aftermarket requirements (replacement parts for units already sold)
Provisions for Price Changes: Price Protection Clause
In a long-term contract for raw materials or other key purchased items with one or more suppliers, the buyer may want to keep open the option of taking advantage of a lower price offered by a different supplier, this might be done by either buying from the non contract supplier or forcing the contract supplier(s) to meet the lower price available from the non contract suppliers may be incorporated Into the contract specifying that "if the buyer is offered material of equal quality in similar quantities under terms from a responsible supplier, at a lower delivered cost to the buyer than specified in this contract, the seller on being furnished written evidence of this offer shall either meet the lower delivered price or allow the buyer to purchase from the other supplier at the lower delivered price and deduct the quantity purchased from the quantity specified in this contract."
Other
Include the large variety of purchased parts or special materials peculiar to the organization's end product or service make or buy is always a significant consideration because of the proprietary nature of thee items prices normally are obtained by quotation because published price lists are unavailable
The fundamental questions about cost elements for capital goods include the following:
Is the equipment intended for replacement only or to provide additional capacity? What is the installed cost of the equipment? What will start-up costs be? Will its installation create problems for plant layout? What will be the maintenance and repair costs? Who will provide repair parts and at what cost? Are accessories required, and if so, what will their costs be? What will be the operating costs, including power and labor? What is the number of machine-hours the equipment will be used? Can the user make the machine, or must it be purchased? At what rate is the machine to be depreciated? What financing costs are involved? If the equipment is for production, what is the present cost of producing the product compared to the cost of obtaining the product from a supplier?
SCMA Code of Ethics
Members will conduct themselves in a manner that a reasonable and informed third party would conclude as being appropriate to a professional in supply chain management A. Standards of Conduct 1. avoidance of conflicts of interest. members should exercise professional judgement and discretion in order to avoid any apparent or actual conflict of interest when performing their duties 2. protection of confidential or sensitive information. where a member has been privy to confidential or sensitive information, it is their responsibility to ensure that it remains so 3. Business relationships. members should maintain relationships with suppliers and third parties in a manner that contributes to and promotes fair competition in the market and protects the interest and reputation of his or her employer. members should not use their position to garner personal favors or advantages. 4. Gifts, gratuities, and hospitality inducements. when permitted by employing organizations, members must ensure that the objectivity of their decisions is not compromised or unduly influenced by the acceptance of gifts, gratuities, or hospitalities of any kind. 5, Environmental and social responsibilities. Members shall exercise their responsibilities in a manner that promotes and provides opportunities for the protection and preservation of the natural environment. Members will be cognizant of the social rights extended to all people. B. Professional Principles Members will perform their roles and duties based on the following principles of professional practice: 1. Professional competency. To maintain their professional competency by staying informed of, and complying with, the best supply chain management practices. 2. Professionalism. To provide professional advice to their employer or any other impacted party to the best of their knowledge, recognizing that any final decision is the prerogative of the senior authority within the emptying organization; to act with courtesy and due consideration in dealings with other professional members and in all business relationships. 3. Honesty and integrity. To maintain an unimpeachable standard of integrity and honesty in all their business relationships both inside and outside the organization in which they are employed. 4. Responsible management. To optimize, without prejudice, the use of resources for which they are responsible so as to provide the maximum value as defined by the organizations they represent. 5. Serving the public good. To use their position to advance the interests and well-being of society; to denounce all forms of business practice which may compromise value or bring discredit to the organization and/or society 6. Compliance with legal obligations. Members must not engage in or condone any activity or attempt to circumvent the clear intention of the law.
Credit ratings, research, and risk analysis information sources
Moody's Investors Services, S&P, Fitch, and A.M. Best
Commodity exchanges information sources
The London Commodity Exchange (LCE) The New York Mercantile Exchange (NYMEX) typically provide historical information about prices and volumes most exchanges also provide access to reports by government agencies and some analysts Commodity exchanges exist worldwide in Africa, the Americas, Asia, Europe, and Oceania
Forward buying
The commitment of purchases in anticipation of future requirements beyond current lead times an organization may buy ahead because of anticipated shortages, strikes, or price increases as the time between procurement commitment and actual use of the requirement grows, uncertainties also increase one common uncertainty is whether the actual need will be realized a second concern is with price how can the purchases ascertain that the price currently committed is reasonable compared to the actual price that would have been paid had the forward buy not been made commodities represent a special class of purchases frequently associated with forward buying almost all organizations purchase commodities in a variety of processed forms many organizations buy commodities for further processing or for resale, for them, the way they buy and the prices they pay for commodities may be the single most important factor in success all forward buying involved some risk, purchases are confined to actually known requirements or to carefully estimated requirements for a limited period of time in advance, the essential controlling factor is need the organization's size, financial strength, and the percentage of total cost represented by volatile commodities influences how the company organizes to determine and execute policy on long-term commodity commitments safeguards should be set up to ensure that commodity commitments will be kept within proper bounds
With competitive bids, the following are required:
a careful initial selection of dependable, potential sources; an accurate wording of the request to bid; submission of bid requests to a sufficient number of suppliers to ensure a truly competitive price; proper treatment of quotations; a careful analysis prior to award
The price-discount problem
accepting a price discount for ordering larger quantities leads to higher levels of anticipation inventory marginally, the question is: Should we increase the size of our inventory so that we obtain the benefits of the lower price? this can be analyzed as a return on investment (ROI) decision
Total Cost of Ownership (TCO)
acquisition price plus all other associated costs requires the cooperation of engineering, quality, manufacturing, and supply to coordinate requirements such as specifications and tolerance that affect the supply decisions attempts to determine all the cost elements, thereby revealing opportunities for cost reduction or cost avoidance for each cost element, rather than merely analyzing or comparing prices the difficulty lies in identifying and tracking these cost elements and using the information appropriately to compare different supplier, achieving changes externally with suppliers, and achieve changes internally to reduce/avoid costs uses for TCO data: highlight cost reduction opportunities aid supplier evaluation and selection provide data for negotiations focus suppliers on cost reduction opportunities highlight advantage of expensive, high-quality items clarify and define supplier performance expectations create long-term supply perspective forecast future performance
off-line process
after selecting the companies to be invited to bid, the purchaser in an off-line process sends a general inquiry that includes a complete description of the item(s), the delivery date, and the due date for bids a telephone inquiry may be substituted for a formal request to bid
Resale
merchandise managers must determine a fair price to pay for resale items that allows both the supplier and the merchandiser to make a profit the largest single cost for a reseller who takes ownership of the goods it resells is what is paid for the goods or services
Firm Bidding
bid price information is treated confidentially because buyers often face "firm bidding" most organizations have a policy of notifying suppliers that original bids must be final (firm) and that revisions will not be permitted under any circumstance, exceptions are made only in the case of obvious error when prices are falling and suppliers need orders, suppliers try to ensure that their bid will be the lowest frequently, suppliers are encourage by purchasers who have acced to requests that revisions be allowed an exception the the firm bidding approach is one in which the buyer wants both parties (seller and buyer) to have the flexibility to clarify and define specifications and prices further after the initial bids are received
Contract pricing: cost-plus-incentive-fee (CPIF)
both buyer and seller agree on a target cost figure, a fixed fee, and a formula under which any cost over- or underpins are shared
direct costs
can be specifically and accurately assigned to a given unit of production or a specific identifiable task performed by a services provider
Parts, Components and Packaging
comparatively stable and likely to be quoted on a basis of list-less-certain-discounts includes a range of items commonly obtainable from multiple sources changes in prices do occur but they are moderate and far less frequent than with raw materials
Service cost elements: overhead
consist of indirect costs incurred in the design, development, delivery, and operational facilities of the company the buyer's own operations should provide data on processing costs labor intensity will affect the relative percentage of overhead versus direct labor
Two general ways to set price
cost approach and market approach
Five Sources of Information Regarding Price Trends
creditworthiness ratings, commodity exchanges, government data, expert data, and purchasing manager indexes (PMIs) all have limitations on their value and dependability
The European Union (EU)
efforts to increase cooperation economically and politically began in Europe after World War II In 1993, four freedoms were agreed to: freedom of movement of goods, services, people, and money In 2002, the euro became the sole currency of most EU member states, allowing easier price comparisons and lower foreign currency transaction costs As of 2018, the EU had 28 member states and a total population of more than 510 million people Nominal GDP of $16.477 trillion in 2016, representing approximately 22% of global nominal GDP
Capital assets
equipment, IT, real estate, and construction high-dollar long-term consequences purchase price is often a small percentage of total cost of ownership
The Association of South East Asian Nations (ASEAN)
established in 1967 includes: Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam The ASEAN Free Trade Area (AFTA) was created in January 1992 to eliminate tariff barriers its members have combined GDP of $2.8 trillion Seeks to reduce or remove trade barriers within the region with the objective to facilitate the free movement of goods, services, capital, and skilled labor 5 regional free trade agreements with Australia and New Zealand, China, Japan, South Korea, and India
Model of Negotiation Process
established objectives determine: facts set range and target: maximum target and minimum for each defined issue plan: negotiation strategy
Manufacturing cost elements: direct labor
estimates are not made as easily as material estimates
Value
function / cost
Manufacturing cost elements: overhead costs
generally consist of indirect costs incurred in the manufacturing, research, or engineering facilities of the company important to know how these overhead costs are distributed to a given product equipment depreciation is typically the largest single element in manufacturing overhead
Fixed costs
generally remain the same regardless of the number of units produced
Value Analysis/Value Engineering (VA/VE)
goal is to perform a function at the same or an improved level while reducing costs eliminate or avoid unnecessary costs: do not provide quality do not extend product or service life do not provide features desired by customers
Cash discounts
granted by virtually every seller of industrial goods actual discounts terms are determined by individual trade custom and vary considerably the purpose is to secure the prompt payment of any account
Expert Data Information Sources
highly unscientific yet valuable if properly weighted information derived from sales representatives, other buyers, and others with whom the buyer comes in daily contact
Pretransaction components of TCO
identifying need investing sources qualifying sources adding supplier to internal systems educating: supplier ins firms operations and firm in supplier's operations
variable costs
most direct costs are variable costs because they vary directly and proportionally with the units produced
Contract pricing: cost-plus-fixed-fee (CPFF)
if the item is experimental and the specifications are not firm or if future costs cannot be predicted buyer to reimburse supplier for all reasonable costs incurred (under a set of definite policies under which "reasonable" is determined) in doing the job or producing the required item or service, plus a specified dollar amount of profit a maximum amount may be specified for the cost
electronic process
in both the public and private sectors, the entire bid process may be automated process is similar to an online bid
Multiple discounts
in some industries and trades, prices are quoted on a multiple discount basis
Service cost elements: direct labor
includes the supplier's employees whose time is directly engaged to perform an identifiable task required under the terms of the contract this task may or may not result in a tangible output depending on the nature of the service provided companies are relying moron contract and temporary labor, domestic and offshore, to eliminate or reduce labor costs labor savings is a prime driver of the trend to outsource and offshore a growing variety of services
Competitive bidding
is a common practice for buyers of routine suppliers, purchased from the same sources time after time, to issue unpriced orders or to automatically through an e-procurement system
Strategic cost management
is an externally focused process of analyzing costs in terms of the overall supply chain cost analysis can be used to measure and improve cost performance by focusing attention on specific cost elements cost management is a major opportunity area for strong supply leadership and management and is an important part of continuous improvement the focus is essentially on applying tools and techniques to sustain cost savings year over year develop a cost culture rather than a price culture with multiple internal stakeholders and suppliers strategic partnering to achieve competitive adnvatge
maintenance, repair, and operating supplier (MRO) and Small-value purchases (SVPs)
items of small comparative value prices are typically competitive may be procured through e-procurement systems sources of supply are typically local
Manufacturing cost elements: General and administrative expenses
items such as selling, promotion, advertising, executive salaries, and legal expense
Service cost elements: general and administrative expense
items such as selling, promotion, advertising, executive salaries, and legal expenses
Purchasing manager indexes (PMI) information sources
leading near-term economic indicators derived from monthly survey of purchasing managers about actual company conditions present a composite reading in a number of areas for manufacturing, these include prices, inventory levels, lead times, new order, production, and employment for services, these include business activity, new business, backlogs of work, prices charged, input prices, employment, and expectations for activity in services a PMI is a diffusion index, a composite reading of 100 means that all respondents reported improvement on a variable, zero means all reported a decline, 50 means no changes, above 50 means expansion, and below 50 means contraction
Posttransaction Components of TCO
line fallout, defective finished goods rejected before sale, field failures, repair/replacement in field, customer goodwill/reputation of firm, cost of repair parts, cost of maintenance and repairs
Manufacturing cost elements: raw materials
material costs can be estimated from a bill of material, a drawing, or a sample of the product the prices entering into the product are commonly accessible and the amounts required are also fairly well known
Service cost elements: transportation costs, in the form of Travel and Entertainment (T&E)
may be high depending on the amount and geographical range of travel in support of sales and customer relationship management these costs may be easily determined if the service provider has consolidated and manages this spend category or, these costs may be hidden if responsibility for travel spend is highly decentralized
Services
prices may be fixed or variable, by the job or by the hour, day, or week prices may be obtained by competitive bid if the size of the contract warrants it; enough competitors are available; and adequate, specific, consistent specifications can be prepared negotiation is commonly used to establish prices and may be the only option in sole-source situations
The Learning (or experience) Curve
provides an analytical framework for quantifying the commonly recognized principle that one becomes more proficient with experience brought about by a combination of the following factors: 1. the learning rate of labor 2. the motivation of labor and management to increase output 3. the development of improved methods, procedures, and support systems 4, the substitution of better materials, tools, and equipment, or more effective use of materials, tools, and equipment 5. the flexibility of the job and the people associated with it 6. the ratio of labor versus machine time in the task 7. the amount of preplanning done in advance of the task 8. the turnover of labor in the unit 9. the pressure of competition to do tasks better, faster, and cheaper tremendous implications for cost determination and negotiation implies that improvement never stops, no matter how large the volume becomes progressive discounts, shortened lead times, and better value can be planned and obtained through its use used along with target costing to set progressively lower price targets for future deliveries
Sarbanes-Oxley Act (2002)
public company accounting reform and investing protecting act section 401a requires off-balance-sheet transactions and obligations to be listed section 404 requires the creation and maintenance of viable internal controls that the SEC has ruled include policies, procedures, training programs, and other processes beyond financial controls section 409 requires timely reporting of material events that impact financial reporting
Discounts
represent a legitimate and effective mens of reducing prices most commonly used types of discounts are cash discounts, multiple discounts, quantity discounts, and cumulative or volume discounts
CIP: Carrier and Insurance Paid (named place of destination)
seller clear the goods for export, delivers them to the carrier, and is responsible for paying carriage and insurance to the named port of destination seller is also responsible for the costs of unloading, customs clearance, duties, and other costs if included in the cost of carriage, such as in small package delivery
DDP: Delivery Duty Paid (named place of destination)
seller clears the goods for export and is responsible for making them available to the buyer at the named place of destination, including customer clearance for import seller assumes all responsibilities for all costs associated with transportation to the named place of destination, including duties and other costs payable upon import buyer responsible for unloading
DAP: Delivered at Place (named place of destination)
seller clears the goods for export and is responsible for making them available to the buyer on the arriving vehicle at the named place of destination the buyer is responsible for unloading and cleaning the goods for import buyer assumes all risks from the times the goods have been made available at the place of destination
FOB: Free on Board (named port of shipment)
seller clears the goods for export and is responsible for the costs and risks of delivering the goods on board title passes once the goods are on board
FAS: Free Alongside Ship (named port of shipment)
seller clears the goods for export and places them alongside the vessel for loading buyer takes possession at the dock of the port of export
FCA: Free Carrier (named place)
seller clears the goods for export, deliver them to the carriers, specified by the buyer at the named location, where the buyer takes possession; the "named place" is domestic to the seller; buyer assumes all risk of loss or damage from the time the goods have been deliver to the carrier
CPT: Carriage Paid To (named place of destination)
seller clears the goods for export, delivers them to the carrier, and is responsible for paying carriage to the named port of destination the seller is also responsible for the costs of unloading, customs clearance for import, and duties where such costs are included in the cost of carriage the buyer is responsible for all additional costs, such as procuring and paying for insurance coverage
CIF: Cost, Insurance, and Freight (named port of destination)
seller clears the goods for export, is responsible for delivering the goods, pays the costs associated with transport of the goods, and procures and pays for marine insurance in the buyer's name for the shipment buyer assumes responsibility for risk of loss or damage once the goods are on board seller also contracts for insurance cover against the buyer's risk of loss of or damage to the goods during carriage the seller is require to obtain insurance only on minimum cover for more coverage, the buyer will need to either agree with the seller or purchase its own extra insurance
DDT: Delivery at Terminal (named place of destination)
seller covers all transport costs and assumes all risks until the goods, having been unloaded from the arriving means of transport, are placed at the buyer's disposal at a named terminal at the named place of destination requires the seller to clear the goods for export where applicable
CFR: Cost and Freight (named port of destination)
seller is responsible for clearing the goods for export, delivering the goods on board at the port of shipment, and paying the costs to transport the goods buyer assumes responsibility for risk of loss or damage and additional transportation costs once the good are on board
Foreign Trade Zones (FTZ)
special commercial and industrial areas in or near ports of entry, designed to avoid, postpone, or reduce duties on imported goods foreign and domestic merchandise may be brought in without paying customs duties the U.S. version of what are known internationally as free trade zones merchandise brought into these zones may be stored, sold, exhibited, repacked, assembled, sorted, graded, cleaned, or otherwise manipulated prior to reexport or entry into the national customs territory U.S. FTZs are restricted-access sites in or near ports of entry, licensed by the Foreign Trade Zone Board and operate under the supervision of the U.S. Customs and Border Protection Services Zones are operated under public utility principles to create and maintain employment by encouraging operations in the United States that might have otherwise been carried on abroad 2 categories: General purpose zones: handle merchandise for many companies and are typically sponsored by a public agency or corporation, like a port authority Subzones: special purpose zones, usually located at manufacturing plants, usually preexisting manufacturing sites that operate under the guarantee of a local general-purpose site, no legal differences in the types of activities that can be undertaken at zones or sub zones Each FTZ different in character depending upon the functions performed in serving the pattern of trade peculiar to that trading area 6 major functions: manufacturing transshipment storage manipulation refunding of duties, taxes, and drawbacks exhibition and display
Value Engineering (VE)
the application of value methodology to the design stage of a product or service
Fair price
the lowest price that ensures a continuous supply of the proper quality where and when needed
Competitive Bidding
the number of suppliers to whom inquiries are sent is largely a matter of the buyer's judgement ordinarily, at least two suppliers are invited to bid, more often, three or four are multiple bidders do not ensure a competitive price the buyer normally will exclude from the bid list those firms with whom it is unlikely to place an order even though their prices are low sometimes bids are solicited solely for the purpose of price checking or for inventory-pricing purposes it costs a company to submit a bid suppliers should not be asked to bear this cost without good reason the receipt of a request to bid is an encouragement to the supplier and implies that an order is possible; 1. initial selection of sources 2. accurate wording 3. ensure competition 4. analyze quotations 5. aware the contract
Commodity Exchanges
the prime function of an organized commodity exchange is to furnish an established marketplace where the forces of supply and demand may operate freely as buyers and sellers cary on their trading an exchange that has facilities for both cash and futures trading also can be used for hedging operations the rules governing the operation of an exchange are concerned primarily with procedures for the orderly handling of the transactions negotiated on the exchange, providing, among other things, terms and time of payment, time of delivery, grades of products traded, and methods of settling disputes In general, the purposes of a commodity exchange will be served best if the following conditions are present: 1. the products traded are capable of reasonably accurate grading 2. there are a large enough number of sellers and buyers and a large enough volume of business so that no one buyer or seller can significantly influence the market In order for a commodity exchange to be useful for hedging operations, the following conditions should also be present: 1. trading in "futures" -- the buying or selling of the commodity for delivery at a specified future date 2. a fairly close correlation between "basis" and other grades 3. a reasonable but not necessarily consistent correlation between "spot" and "future" prices all of these conditions usually are present on the major grain and cotton exchanges, and in varying degrees on the minor exchanges, such as those on which hides, silk, metals, rubber, coffee, and sugar are traded financial futures also permit a firm to hedge against interest rate fluctuations, which are one of the strongest factors affecting exchange rate fluctuations one of the most easily accessed sources of information about futures and options prices is the commodities section of Bloomberg and the Wall Street Journal
Public-Sector Bidding
the process for bidding in the public sector is similar to the private sector, but there are a few important differences Public statues normally provide that the award of purchase contracts should be made on the basis of open, competitive bidding the goal is to ensure that all qualified supplier who are taxpayers, or who employ personnel who are tax payers, have an equal opportunity to compete for the sale of products or services needed to operate government since bids are open to public inspection it is difficult for the buyer to defend selecting a higher-priced supplier providing a list of weighted criteria for bid evaluations in the invitation to bid allows the buyer to consider nonprice factors
Value analysis (VA)
the redesign of a product or service
EXW: Ex Works (named place)
the seller/exporter makes the goods available at his or her premises, and the buyer assumes all costs and risks from the seller's "named place" of business, seller does not clear the goods for export and does not load the goods for transport, this arrangement places the greatest responsibility on the buyer, who assumes all risks from the time when the seller has made the goods available
Provisions for Price Changes: Escalator Clauses
the wording provides for either an increase or decrease in price if costs changes came into common use during the hyperinflation years in the 1970s when suppliers believed the the uncertainty of future costs made firm quotations either impossible or, if covering all probable risks, so high as to make it unattractive, and perhaps unfair, to the buyer there are several general and many specific problems with escalator clauses, including: determining the proportion of the total price subject to adjustment; the particular measures of prices and wage rates to be used in making the adjustment; the methods to be followed in applying these averages to the base price; the limitations, if any, on the amount of adjustment; and the methods for making payment when prices are stable, escalation usually is reserved for long-term contracts in which certain costs may arise and the seller has no appreciable control over this rise when prices are unstable -- with inflation, shortages, and sellers' markets -- escalation becomes common on even short-term contracts as seller attempt to ensure the opportunity to raise prices and preserve contribution margins most escalation is automatic, it is important to carefully determine the index, the portion of the contract subject to escalation, the frequency of revision, and the length of the contract
Limitations of Commodity Exchanges
there are limitations to these exchanges as a source of physical supply for the buyer in spite of a reasonable attempt to define the market grades, the grading is often not sufficiently accurate for manufacturing purposes there are other reasons why these exchanges are not satisfactory for the buyer endeavoring to meet actual physical commodity requirements on some of the exchanges, no spot market exists on others there is a lack of confidence in the validity of the prices quoted it is not asserted that these sellers use their position to manipulate the market artificially any more than it is asserted that the buyers of rubber manipulate the market to their advantage
The 7 disposal channels
there are several possible means of material and equipment disposal in order of maximum return to the selling company 1. use elsewhere within the firm on an "as is" basis 2. reclaim for use within the plant -- recycling materials such as paper or copper 3. sell to another firm for use on an "as is" basis 4. return to supplier 5. sell through a broker 6. sell through an auction or e-auction 7. sell to a local scrap or surplus dealer -- return from sale will likely be low 8. donate, discard, or destroy the material or item
Activity-based costing
tries to turn indirect costs into direct costs by tracking cost drivers behind indirect costs manufacturing overhead is divided into: costs that change in response to unit-level activities batch-level activities product-level activities the remainder are true fixed costs and are allocated according to traditional cost accounting
Governmental data information sources
wide variety of governmental and other published data such as: the Federal Reserve Bulletin, The Bureau of Economic Analysis's Survey of Current Business, Bloomberg BusinessWeek, Bloomberg, Barron's, and the Wall Street Journal Trade magazines also are helpful in particular industries and are typified by such publications as American Metal Market and Chemical Market Reporter Probably the most watched indicator of industrial purchase prices is the produce price index (PPI) compiled and released monthly by the Bureau of Labor Statistics, it is a family of indexes that measure the average change over time in selling prices received by domestic producers of goods and services measure price changes from the perspective of the seller, In contrast to the consumer price index (CPI), which measures prices changes from the purchasers perspective the three main PPI classification structures are: industry, commodity, and commodity-based final demand-intermediate demand (FD-ID) system covers approximately 72 percent of the service sector's output, such as wholesale and retail trade; transportation and warehousing; information; finance and insurance; and real estate brokering, rental, and leasing