supply chain chapter 5

Make vs. Buy Decision

The act of deciding whether to produce an item internally or buy it from an outside supplier.

merchants

Wholesalers and retailers who purchase for resale

bid bond

a debt secured by a bidder for the purpose of providing a guarantee that the successful bidder will accept the contract once awarded. If not, the bond would be forfeited.

Performance Bond

a debt secured by a bidder for the purpose of providing a guarantee that the work will be on time and meet specifications

Sealed Bid

a document enclosed in a sealed envelope and submitted in response to an invitation to bid

Import Merchants

a person or company engaged in the purchase and sale of imported commodities for profit

transaction costs

activities carried out as part of the actual buy and sell transaction

cash discounts

may be offered for prompt payment of invoices

quantity discounts

may be offered to encourage buyers to purchase larger quantities

components of the total cost of ownership

pre-transaction costs transaction costs post-transaction costs

make

producing materials or products internally (in operations owned by the company)

centralized purchasing

purchasing department located at the firm's corporate office makes all the purchasing decisions

TCO=

quality+service+delivery+price

what are the 4 elements of cost

quality, service, delivery, price

Forward vertical integration

refers to a company acquiring (buying) one or more of their CUSTOMERS

Backward vertical integration (ON TEST)

refers to a company acquiring (buying) one or more of their SUPPLIERS

low turnover ratio

unfavorable. It means the company is not selling through products efficiently. The company is likely making/buying too much inventory for demand and may end up throwing out expired or unsaleable products.

co-sourcing

-The sharing of a process or function between internal staff and an external provider. -Using dedicated staff at an external provider that works exclusively under your control and direction

The basic e-procurement process consists of:

1. an electronic purchase requisition and/or purchase order 2. An invoice (which might be one with the receipt) 3. A payment

3 Primary objectives of purchasing

1. ensure an uninterrupted flow of materials and services at the lowest total cost 2. Improve the quality of the finished goods produced 3. Optimize customer satisfaction

3 Parts of Procurement

1. purchasing management 2. strategic sourcing 3. supplier relationship management

Profit Leverage Effect

A decrease in purchasing expenditures directly increases profits before taxes (assuming no decrease in quality or purchasing total cost)

Request for Information (RFI)

A standard business process whose purpose is to collect written information about the capabilities of various suppliers

Post-Transaction Costs

Activities carried out following the actual buy and sell transaction

Pre-Transaction Costs

Activities carried out prior to the actual buy and sell transaction

service providers

already have the specialized skills and knowledge necessary to deal with international purchasing issues and challenges

Trading Companies

buy products in one country and sell them in different countries where they have their own distribution network

Inventory Turnover Ratio

cost of goods sold/average inventory

tariffs

duties, taxes, or customs imposed by the host country for imported or exported goods

government purchases are:

expenditures made in the private sector by all levels of government

Competitive Bidding aims at obtaining goods and services at the lowest prices by:

stimulating competition, and by preventing favoritism.

purchasing

the action of obtaining merchandise, capital equipment, raw materials, services, or MRO supplies in exchange for money, or its equivalent. Also a term commonly used in business to represent the function of, and the responsibility for, acquiring materials, supplies, and services for an organization. It is the process of how goods and services are ordered from an external third party It can usually be described as the transactional function of procurement for goods and services It might be a separate department within a company, or it might be a part of the supply chain management department within a company

E-procurement

the business to business purchase and sale of supplies and services over the internet

what does inventory turnover represent?

the number of times the company sold through inventory in a given time period

what is the most value-enhancing functions in any organization?

the purchasing function

benefits of outsourcing allows a firm to:

-Concentrate on core capabilities -Reduce staffing levels -Accelerate reengineering efforts -Reduce internal management problems -Improve manufacturing flexibility

Advantages of Centralization

-Concentrated volume -Leveraging purchase volume - Avoiding duplication -Specialization -Lower transportation costs -No competition within units -Common supply base

Purchasing personnel must today exhibit world-class skills such as:

-Interpersonal communication -Ability to make decisions -Ability to work in teams -Analytical skills -Negotiation skills -Customer focus -Ability to manage change -Influencing and persuasion skills -Strategic skills -Understanding business conditions

Request for Proposal (RFP)

A detailed capabilities document used to determine a supplier's capability and interest in the production of a product or service

Request for Quote (RFQ)

A document used to solicit bids from interested and qualified suppliers for goods or services that the organization needs to obtain

Return on Assets (ROA) effect

A high ROA indicates managerial prowess in generating profits with lower spending

supply management

A newer term that encompasses all acquisition activities beyond the simple purchase transaction. Identification, acquisition, access, positioning, and management of resources an organization needs, or potentially needs in the attainment of its strategic objectives.

does the competitive bidding process allow for negotiations?

No. By law, the contract is awarded to the lowest priced responsive and responsible bidder.

administrative expenses

associated with the procurement activity itself such as screening potential suppliers, negotiation, order preparation, and order transmission to name just a few.

high turn over ratio

beneficial! it means the company is generating sales efficiently to sell its inventory

Bidders are generally required to furnish _______ as an incentive to ensure that the successful bidder will fulfill the contract awarded.

bonds

buy/outsource

buying materials, components, or products from suppliers instead of making them in-house (buying from a third party external source)

many companies have a ___________ as part of their executive leadership team

chief procurement officer (CPO)

Poor Supplier Quality

costs related to defective finished goods, scrap, rework, recycling or recovery of materials, must also be considered, as well as related warranty administration and repair costs

closed competitive bidding

The sealed bids are opened in presence only of authorized personnel.

advantages of an e-procurement system

Time savings: a reduction in the time between need recognition and the release and receipt of an order Cost savings: lower overhead costs in the purchasing area Accuracy: a reduction in errors. A virtual elimination of manual paperwork and paperwork handling Real time: improved communication both within the company and with suppliers Management: purchasing personnel spend less time on processing of purchase orders and invoices, and more time on strategic value-added purchasing activities Mobility: access virtually anywhere Trackability: real time status tracking Benefits to the suppliers

non-profit purchases are:

expenditures made in the private sector by all types of non-profit organizations

inventory is an asset. what else does it represent?

financial capital tied up

Benchmarking data regarding sourcing practices can be obtained in any number of ways, both ________ and ________

formal, informal

Quantitative factors

incremental costs of either making or purchasing the item, such as the availability of manufacturing facilities, needed resources, and manufacturing capacity

Decentralized Purchasing

individual, local purchasing departments, such as the plant level, make their own purchasing decisions

Countertrade

international trade by exchange of goods rather than by currency

purchase requisition

a document that defines the need for goods and/or services an internal document Does not constitute a contractual relationship with an external party Generated by a user department to notify purchasing personnel of items to order, their quantity, and the timeframe It may also contain the authorization to proceed with the purchase

open competitive bidding

the sealed bids are opened in full view of all who may wish to witness the bid opening

Total Cost of Ownership (TCO)

the sum of all the costs associated with every activity in the supply stream of a product

when does a PO become a binding contract?

only when it is accepted and confirmed by the supplier

Government sector purchasing and non-profit sector purchasing is somewhat different from private industrial purchasing as the public requires:

openness, visibility, and accountability since it is the publics money that is being spent

potential challenges for international purchasing:

-Knowledge of international trade policies and procedures -Awareness and cost of required tariffs and duties -Difficulties in communicating with suppliers due to language barriers, varying time zones, working weeks, holidays. -Locating, evaluating, sourcing and expediting in global markets -Payments and currency management -Longer time span for negotiations -The potential for cultural, political, and labor problems -Potentially longer transportation lead times necessitating additional inventory -Specific and varying documentation requirements -Handling legal matters and the process for settling disputes

Advantages of Decentralization

-Knowledge of local requirements -Local sourcing -Less bureaucracy

Reasons for Global Sourcing

-Opportunity to improve quality, cost, and delivery performance -to exploit global efficiencies -to respond to insufficient domestic capacity -To achieve access to better process and product technology -Due to a change in the domestic business environment -To take advantage of reciprocal trade and countertrade arrangements

risks associated with outsourcing:

-Potential loss of control -Increased reliance on suppliers -Increased need for supplier management

Resources for learning about and implementing sourcing practices:

-The Center for Advanced Purchasing Studies. -Council of Supply Chain Management Professionals (CSCMP) -Institute of Supply Management (ISM)

3 ways purchasing contributes to those objectives:

1. Actively seeking reliable suppliers 2. Working with the expertise of strategic suppliers to improve quality and materials 3. Involving suppliers and purchasing personnel in new product design and development efforts

purchasing process steps (12 steps)

1. a need is identified, and a Purchase Requisition is issued - Request for goods or services submitted to the Procurement Purchasing organization for action. Typically initiated by a user, within an organization 2. obtain authorization as necessary -A Purchase Requisition may be routed to an authorized approver(s) depending on the type of material or service being requested and/or the dollar value of the request - Multiple authorizations, may be necessary if the value exceeds a specific threshold 3. identify and evaluate potential suppliers - May be determined from a list of approved suppliers - Alternatively, a Request for Information (RFI) may be used to collect information from potential suppliers on their capabilities in supplying the material or service 4. make supplier selection - If the Buyer already knows which supplier they will buy from, move to step 3 - If not, a competitive bidding process may be initiated through the use of a Request for Proposal (RFP) or a Request for Quotation (RFQ). - Buyer issues a Request for Proposal ( RFP) for items which have not been previously purchased, or not purchased from a specific supplier being evaluated. Supplier(s) provides their proposal to supply the item(s) including price and delivery. - Buyer issues a Request for Quotation (RFQ) for routine or repeat purchased items. Supplier(s) provides a price and delivery quote on the specific item(s) requested. - A supplier is selected from the RFP or RFQ bids received based on criteria determined by the Buyer, including price, availability, quality, delivery, costs, etc 5. Purchase Order (PO) is created and delivered to the supplier - To inform the supplier of the intent to purchase - To identify the item(s) to be procured, the quantity required, the requested delivery date(s), the price to be paid, the delivery location, and any terms and conditions that relate to the order - The PO is the Buyer's formal offer to the supplier to obtain the item(s) 6. Supplier confirmation of the Purchase Order - The Supplier formally agrees to supply the item(s) per the specifications, terms, and conditions described on the Purchase Order - The Purchase Order then becomes a legally binding contract between the Buyer and the Supplier for the item(s) specified 7. fulfillment - The supplier delivers the item(s) to the buying organization as per the PO. 8. receipt of goods - Once the item(s) arrives at the designated location, the Buyer will typically conduct some form of receipt process where the item(s) are checked to ensure that they conform to the details of the PO, including quality and quantity - A confirmation of receipt may also be sent to the Supplier 9. invoice and reconciliation - The supplier prepares an invoice for the item(s) ordered. The invoice either accompanies the item(s) or is sent separately to the Buyer - The invoice may need to be reconciled to the purchase order and goods receipt before payment is made. Referred to as a "3-way match" 10. payment - Payment is processed using an appropriate payment method assuming the item(s) is received and meets all of the criteria established on the PO 11. close out the Purchase Order - If the PO has been received complete, and all terms and conditions have been met, then the PO should be closed out in the purchasing system 12. analysis - Measurements of the efficiency and accuracy of the procurement process - Specific PO data and information captured and used during periodic supplier performance meetings

import brokers

Agents licensed by the governmental regulatory authority to conduct business on behalf of importers, for a service fee

inventory turnover effect

Increased inventory turnovers indicate optimal utilization of space and inventory levels, increased sales, avoidance of inventory obsolescence. Inventory is an asset, but it is also capital tied up

.....

It is preferable to periodically monitor the purchasing function's performance against set standards, goals, and/or industry benchmarks.

Reasons for Buying or Outsourcing

Non-Strategic - If it is a non-strategic item, everyday item, don't wanna make in house Cost Advantage - Suppliers may provide the benefit of economies of scale, especially for components that are non-vital to the organization's operations. Insufficient Capacity - A firm may be at or near capacity and subcontracting from a supplier may make better sense. Temporary Capacity Constraints - the concept of "extended workbench" which involves short-term supplementing internal capacity with external capacity during times of constraint or overloaded work centers. Lack of Expertise - Firm may not have the necessary technology and expertise Quality - Suppliers may have better technology, process, skilled labor, etc. Multi Sourcing Strategy - To achieve a multi sourcing strategy using an external supplier in addition to an internal source. Inventory Considerations - opting to have the supplier hold inventory of the item or the materials required to produce the item. Brand Strategy - take advantage of a supplier's brand image, reputation, popularity, etc.

Reasons for Making

Protect proprietary technology - You may not want your intellectual property to be out in the public domain. No competent supplier - There may not be an existing supplier in the market and you may not want to spend the time or effort to develop one. Overall lower cost - You may be able to produce the material or product at a lower cost and avoid paying a 3rd party's profit margin. Better quality control - You may feel that you have more control of the quality of the material / product than a supplier. Use existing idle capacity - Make use of excess capacity by making a material instead of letting the capacity sit idle. Control of transportation and warehousing costs - If you make an item in-house, you avoid transportation costs, and may be able to keep warehousing costs to a minimum. Control of lead-time - You may feel that you have more control over the lead time to produce the product than a supplier.

non-tariff barriers

Quotas, licensing agreements, embargoes, laws and regulations imposed on imports and exports.

in-sourcing

Reverting to in-house production when external quality, delivery, and services do not meet expectations

procurement

The process of selecting and vetting suppliers, negotiating contracts, establishing payment terms, and the actual purchasing of goods and services. Procurement is concerned with acquiring all of the goods, services, and work that is vital to an organization Procurement is the overarching or umbrella term within which the action of purchasing can be found

purchase order (PO)

a commercial document. it is the official offer issued by a buyer to a seller to acquire goods or services It is used to control the purchasing of products and services from external suppliers Indicates types, quantities, and agreed prices for products or services Becomes a legally binding contract only when accepted by the supplier

Payment Bond

a debt secured by a bidder for the purpose of providing protection against 3rd party liens not fulfilled by bidder

competitive bidding

a procurement process in which bids from competing suppliers, for the right to supply specified materials or services, are requested

bid

a proposal or quotation submitted in response to a solicitation from a contracting authority

contracting

a term often used for the acquisition of services

qualitative factors

are more subjective and include control over quality, the reliability and reputation of the potential suppliers (internal or external), and the impact of the decision on customers and suppliers.

value-added services

may be offered such as -Special delivery -Special packaging -Preparation of promotional displays -Subassembly operations in a supplier's plant

Benchmarking

measuring what other businesses do best and matching their performance, is an effective approach to improving your supply chain

what kind of decision is a make vs buy

strategic!