Supply Chain Final
Skills required of purchasing professionals
have been changing. Purchasing personnel must today exhibit world-class skills such as: 1. Interpersonal communication 2. Ability to make decisions 3. Ability to work in teams 4. Analytical skills 5. Negotiation skills 6. Customer focus 7. Ability to manage change 8. Influencing and persuasion skills 9. Strategic skills 10. Understanding business conditions
Training suppliers
in the application of lean and six sigma / quality tools. Asking suppliers to lower their price without giving them the knowledge on how to lower their costs is not sustainable in the long-term.
Value-added Services (Total cost of ownership)
may also be offered such as special delivery, special packaging, preparation of promotional displays, or subassembly operations in a supplier's plant.
Quantity Discounts (Total cost of ownership)
may be offered as an inducement to encourage buyers to purchase larger quantities.
Cash Discounts (Total cost of ownership)
may be offered for prompt payment of invoices.
Non-Critical
routine items that involve a low percentage of the firms' total spend and involve very little supply risk. Sourcing Strategies: - low level of supply risk - low value to company 1. Simplify and streamline the purchasing process 2. Reduce number of suppliers and simplify ordering 3. Transfer buying responsibility to "users' within the company
Supplier Co-location
similar to VMI and CMI, except with Supplier Co-location a representative of the supplier is actually embedded in buyer's purchasing department to forecast demand, monitor inventory and place orders. - The employee is on the payroll of the supplier but works for the buyer and is empowered to forecast demand, monitor inventory and place orders. - The buyer grants the supplier access to potentially proprietary or sensitive data. - Supplier Co-location benefits both buyers and suppliers, from day-to-day operational improvement, to strategic advances in the structure of the supply chain organization.
Strategic
strategic items and services that involve a high level of expenditure and are vital to the firm's success. Sourcing Strategies: - high level of supply risk - high value to the company 1. Ensure availability of supply 2. Focus on relationship building 3. Encourage process integration and innovation 4. Frequent communications 5. Establish mutually agreeable supplier performance criteria
Ethical Sourcing
take into account public consequences of organizational buying, or bring about positive social change through buying behavior - Procurement organization ensuring that the products being sourced are acquired in a responsible and sustainable way. - People involved in producing products should be treated fairly and work in a safe environment. - Environmental and social impacts must also be part of the sourcing process.
Supplier development
technical and financial assistance given to existing and potential suppliers to improve quality and/or delivery performance. Simply - - a buyer's activities to improve a supplier's capabilities. A supplier's knowledge and the technology that they use to produce the commodity they supply, can be leveraged through supplier development. Supplier programs should be designed to achieve: - Lower SC total cost - Increased profitability for all SC participants - Increased product quality - Near-perfect on-time-delivery at each point in the SC
Competitive Bidding (Procurement for Government & Non-Profit Agencies)
A transparent procurement method in which bids from competing suppliers are invited by openly advertising the scope, specifications, and terms and conditions of the proposed contract as well as the criteria by which the bids will be evaluated.
Trading Companies (Service providers (international sourcing))
Buy products in one country and sell them in different countries where they have their own distribution network. They mostly work with high production volume products such as raw materials, chemicals, etc. They may carry wide variety of goods (such as from a catalog).
Buy / Outsource
Buying materials and/or components from suppliers instead of making them in-house (i.e., buying from a 3rd-party external source).
Performance Metrics (keys to successful Strategic partnerships)
You can't improve what you can't (or don't) measure - Measures related to quality, cost, delivery, and flexibility. - Metrics should be: 1) understandable, 2) easy to measure, and 3) focused on real value-added results [S.M.A.R.T. objectives] - A multi-criteria approach is best
Procurement for Government & Non-Profit Agencies
Government purchases are expenditures made in the private sector by all levels of government. Non-Profit purchases are expenditures made in the private sector by all types of non-profit organizations. Public purchasing for the government and the non-profit sector is somewhat different from private industrial purchasing and is characterized by: - Competitive Bidding - Sealed Bid
Functional Products
MRO items and other commonly low profit margin items with relatively stable demands and high levels of competition i.e. office supplies, food staples, etc. - *Potential Strategy:* Reliable, low cost suppliers. Multi-sourced.
Sourcing strategies
Managing purchasing transactions in a strategic way. Analysis and ability to make adjustments based on price, evaluation of supplier performance, and the overall needs of the organization.
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.
Benchmarking
Measuring what other businesses do best and matching their performance, is an effective approach to improving your supply chain. - Benchmarking data regarding sourcing practices can be obtained in any number of ways, both formal and informal.
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.
supply base
The group of suppliers from which a company acquires goods and services. - Firms emphasize long-term strategic supplier alliances consolidating volume into one or fewer suppliers, resulting in a smaller supply base.
Payment Bonds
a debt secured by a bidder for the purpose of providing protection against 3rd party liens not fulfilled by bidder
In-sourcing
(also known as back sourcing): Reverting to in-house production when external quality, delivery, and services do not meet expectations
Strong Supplier Partnerships
- Important to achieve win-win competitive performance for the buyer and supplier --- These require a strategic perspective as opposed to a tactical position - Involves "a mutual commitment over an extended time working together to a mutual benefit of both parties, sharing information and risks and rewards of the relationship"
Merchants
Wholesalers and retailers who purchase for resale.
Supply Base Rationalization
(also known as, Supply Base Reduction, Supply Base Optimization). Reduction in the supply base to the lowest number of suppliers possible without increasing risk Buyer-supplier partnerships are easier to manage with a rationalized supply base, and they can result in: - Reduced purchase prices - Fewer supplier management problems - Closer and more frequent interaction between buyer and supplier - Greater levels of quality and delivery reliability
Reasons for buying
- *Non-Strategic* - If it is a non-strategic item - *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 time 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.
Profit-Leverage Effect
- A decrease in purchasing expenditures directly increases profits before taxes (assuming no decrease in quality or purchasing total cost). - Bottom line impact is $ for $
ISO 14000
- A family of standards for environmental management. - The benefits include reduced energy consumption, environmental liability, waste and pollution, and improved community goodwill.
Return on Assets (ROA) Effect
- A high ROA indicates managerial prowess in generating profits with lower spending
Supplier Evaluation
- A process to identify best and most reliable suppliers - Sourcing decisions are made on facts not on perception - Frequent feedback avoids surprises and maintains good relationships. - Suppliers should provide constructive feedback to the customer
ISO 9000
- A series of management and quality standards in design, development, production, installation, and service. - Companies wanting to sell in the global market seek ISO 9000 certification. There are eight (8) quality management principles on which the ISO 9000 series quality management system standards are based: 1. Customer focus - understand current and future customer needs 2. Leadership - establish unity of purpose and direction of the organization 3. Involvement of people - people are the essence of an organization 4. Process approach - a desired result is achieved through a managed process 5. Systems approach to management - managing interrelated processes 6. Continual improvement - performance improvement is a permanent objective 7. Factual approach to decision making - decision are based on facts and data 8. Mutually beneficial supplier relationship - interdependent benefits create value for both an organization and its suppliers.
Commitment and Top Management Support (keys to successful Strategic partnerships)
- Commitment starts at the highest management level. - Partnerships tend to be successful when top executives are actively supporting the partnership
benefits of outsourcing
- Concentrate on core capabilities - Reduce staffing levels - Accelerate re-engineering 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
Information Sharing and Lines of Communication (keys to successful Strategic partnerships)
- Formal and informal lines of communication facilitate free flow of information. - Confidentiality must be maintained
Suppliers (Benefits of Strategic Partnerships with Suppliers)
- Greater visibility into buyer's purchasing plans - Increased operating efficiencies - Longer term buyer commitments; greater predictability of future business - Increased scope of business and revenue - Lower costs of sales; increased margins - Opportunities to develop, pilot, and showcase innovative solutions - Sustainable competitive advantage
potential challenges (international sourcing)
- 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
Continuous Improvement (keys to successful Strategic partnerships)
- Making a series of small improvements over time results in the elimination of waste in a system - Buyers and suppliers must be willing to continuously improve their capabilities in meeting customer requirements
Reasons for Multiple Suppliers
- Need more capacity - Spread risk of supply disruption - Create competition - More sources of information - Dealing with special kinds of business
Mutual Benefits and Needs (keys to successful Strategic partnerships)
- Partnership muse result in a win-win situation, and achieved if both companies have compatible needs. - An alliance is much like a marriage, if only one party is happy, the marriage is not likely to last.
Buyers (Benefits of Strategic Partnerships with Suppliers)
- Preferred access to the supplier's best people - Increased operating efficiencies - Lower costs - Improved quality - Enhanced service - Influence over supplier investments and technology - Preferred access to supplier ideas - Increased innovation from and with suppliers, leading to lower costs and incremental revenue - Sustainable competitive advantage
Preferred suppliers provide
- Process technology, and expertise. - Product development and value analysis. - Information on latest trends in materials, processes, or designs. - Capacity for meeting unexpected demand. - Cost efficiency due to economies of scale.
Reasons for making
- Protect proprietary technology - No competent supplier - Overall lower cost - Better quality control - Use existing idle capacity - Control of lead-time - Control of transportation and warehousing costs
Personal Relationships (keys to successful Strategic partnerships)
- Strategic Partnerships begin with development of personal relationships between key people at each company - It is people who communicate and make things happen
e-procurement might not work
- The procurement of mission-critical items that are available only through a few suppliers - Where the inventory of the item(s) is very low - Where procuring the item(s) involves complex negotiations - Where the potential to lower costs through an e-procurement platform is minimal.
Basic Purchasing process
- The purchasing process can vary from one organization to another, but there are some common key elements. - The process usually starts with a demand for a material, component or a service. - There are a number of inputs, interfaces, communications, and outputs involved in the process.
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 - Mobility - Trackability - Management - Purchasing personnel spend less time on processing of purchase orders and invoices, and more time on strategic value-added purchasing activities - Benefits to the suppliers
Reasons for a Single Supplier
- To establish a good relationship - Less quality variability - Lower cost [100% of volume] - Transportation economies - Proprietary product or process - Volume too small to split
areas of a typical spend analysis
- Total historic expenditures and volumes - Future demand projections or budgets - Expenditures categorized by commodity and sub-commodity - Expenditures by division, department, or user - Expenditures by supplier
Gain (Pain and Gain Share Agreements)
- Us a reward as a positive outcome for exceptional performance: - Buyer could award a financial bonus - Buyer could award more business and/or longer contracts - Buyer could share a portion of any cost reductions - Access to training seminars, conferences, tools and information. - Publically recognize the supplier and /or confer a special status such as "Preferred Supplier", "Partner", "Supplier of the Year", etc.
building trust (keys to successful Strategic partnerships)
- With trust, partners are more *willing to work together,* find compromise solutions to problems, work toward achieving long-term benefits for both parties, and go to the extra mile.
Three Attributes (supplier recognition programs)
1. Companies should recognize and celebrate the achievements of their best suppliers. 2. Award winners exemplify true partnerships, continuous improvement, organizational commitment, and excellence. 3. Award-winning suppliers serve as role models for other suppliers.
primary goals of purchasing
1. Ensure uninterrupted flows of materials and services at the lowest total cost 2. Improve quality of the finished goods produced 3. Optimize customer satisfaction. Purchasing contributes to these objectives by: - Actively seeking better materials and reliable suppliers - Working with the expertise of strategic suppliers to improve quality and materials - Involving suppliers and purchasing personnel in new product design and development efforts.
Supplier Development Process Steps
1. Identify critical products and services 2. Identify critical suppliers 3. Form a cross-functional team internally to work with a supplier 4. Meet with the top management at the supplier to get support and involvement 5. Identify key development needs and projects 6. Define details of the agreement and the action plan 7. Monitor status of projects / action plan and modify as necessary
benefits of supplier certification programs
1. Reducing amount of time and resources for buyers to conduct incoming inspections of products and materials from certified suppliers. - Buyer trains supplier on approved test methods so that supplier can test product before shipment, and provide a Certificate of Analysis (COA) - Buyers may then opt to only test items periodically on incoming inspection rather than with each delivery or lot, providing that the periodic testing confirms the supplier's results. *Other Benefits of Supplier Certification* 1. Building long-term relationships 2. Decreasing the supplier base 3. Recognizing excellence
The Weighted-Criteria Evaluation System
1. Select key dimensions of performance acceptable to both customer and supplier. 2. Monitor and collect performance data. 3. Assign weights to each dimensions. 4. Evaluate performance measures between 0 and 100. 5. Multiply dimension rating by weight and sum of overall score. 6. Classify vendors based on their overall score, e.g., Certified, Preferred, Acceptable, Conditional, Developmental, Unacceptable, etc. 7. Audit and perform ongoing certification review.
Co-sourcing
1. The sharing of a process or function between internal staff and an external provider. 2. Using dedicated staff at an external provider that works exclusively under your control and direction
Bid
A tender, proposal, or quotation submitted in response to a solicitation (i.e., RFP, RFQ) from a contracting authority.
strategic sourcing
A comprehensive approach for locating and sourcing key suppliers, which often includes the business process of analyzing the total-spend by material category. *It differs from conventional purchasing* because it places emphasis on the entire life-cycle of a product, not just its initial purchase price. The focus on development of long-term relationships with trading partners who can help the buyer meet profitability and customer satisfaction goals. From an information technology perspective, strategic sourcing includes automation of: - Request for Quote (RFQ) - Request for Proposal (RFP) - Electronic Auctioning (e-auction or reverse auction) - Contract Management
Request for Proposal (RFP)
A detailed low-level capabilities evaluation document that is used to precisely determine a supplier's capability and interest in the production of a customized product or service.
Request for Quote (RFQ)
A document generally used to solicit bids from interested and qualified suppliers for goods or services that the organization needs to obtain.
Import Merchants (Service providers (international sourcing))
A person or company engaged in the purchase and sale of imported commodities for profit. They buy and take title to the goods being imported and then sell the goods domestically.
Distributive Negotiations
A process leading to self-interested, one-sided outcome
Reverse Auctions
A process where pre-qualified suppliers join a website at pre-designated time and date - - then try to underbid competitors to win a buyer's business. - Buyers sellers aware of the intent to buy a specified good or service. - During the reverse auction, sellers bid against one another for the buyer's business, trying to drive the price downward. - Bid prices are monitored until the session is officially over. The winning bidder is the seller who offers the lowest price. - Reverse auctions are used by private companies, public sector agencies, and non-profit organizations.
supplier recognition programs
A program to recognize suppliers who achieve the high performance standards necessary to meet customer expectations. - The success of the business can depend on the quality and performance of the company's suppliers. - It is always a good practice for a company to have innovative supplier recognition programs in order to recognize their achievements and reward them for their exceptional performance and services.
Pain and Gain Share Agreements
A rewards and recognition program can also be part of the formal supply agreement in the form of pain and gain share provisions. Negotiated the gains (reward) and pains (penalty) suppliers will realize for either exceptional or poor performance. Both parties mutually agree on provisions of positive and negative outcomes.
Single-Source
A sourcing strategy where there are multiple potential suppliers available for a product or service, however, the company decides to purchase from only one supplier. - This is in contrast to a situation where there is only one supplier for an item, i.e., sole sourced. Sole source is not truly a strategy as there really isn't a choice, and there is very little opportunity for a company to negotiate price or service.
preferred suppliers
A supplier of choice - Achieved a specific and exceptional level of performance over time as measured by a set of criteria agreed upon by both buyer and supplier. - Typically a trusted partners who know the buyers organization, processes, procedures, and requirements. - Provides a higher value than their competitors and are characterized as reliable, responsive, flexible, and cost effective.
Contracting
A term often used for the acquisition of services
performance (supplier evaluation)
Actively monitor a supplier's performance and provide visibility and feedback on supplier performance at each stage of the evaluation process. - Some relevant metrics include: - Supplier price and cost performance - Product quality - Delivery performance - Financial stability - Contractual and standard compliance - Participation in product development - Cooperativeness in third-party production management - Support of both ethics and sustainable practices
Import Brokers (Service providers (international sourcing))
Agents licensed by the governmental regulatory authority to conduct business on behalf of importers, for a service fee. They take the burden of filling out import paperwork, and clearing products through customs barriers for importers
strategic alliance
An agreement between buyer and supplier to pursue agreed objectives, while remaining independent. - Companies agree to share information and resources to achieve a mutual benefit. - Preferred suppliers are candidates for strategic alliance. The benefits of these types of arrangements include: - Potential to increase revenue and profits for both parties. - Potential to create a competitive advantage or block a competitor from gaining market share. - Mitigate risks and ensure a continuity of supply. - Position the partners for future strategic opportunities.
strategic alliance development
An extension of supplier development to increasing a strategic supplier's capabilities. - Results - - better market penetration to new technologies and knowledge, and higher ROI - Eventually extends to a firm's second-tier suppliers as the firm's key suppliers begin to form their own alliances.
Assessing and Improving the Purchasing Function
Assessment criteria includes: 1. Participating in and leading multifunctional teams 2. Participating in value engineering efforts 3. Optimize supply base 4. Create ESI initiatives 5. Utilize e-procurement 6. Further supplier integration 7. Contribute to new product development 8. Improve time to market 9. Initiate supplier cost reduction programs 10. Creation of strategic alliances
Shared Vision and Objectives (keys to successful Strategic partnerships)
Both partners must share the same vision and have objectives that are not only clear but mutually agreeable. The focus must move beyond tactical issues and toward a more strategic path to corporate success.
Collaborative Negotiations
Both sides work together to maximize outcome and create a win-win result. Requires open discussions and a free-flow of information between parties - start with a clear understanding how each company wants to benefit from the collaboration. - Alignment between parties regarding motivation, contribution, financial benefit, and management are essential. - Negotiations are not about each company obtaining the most value, negotiations are about establishing a relationship that works well for both parties.
spend analysis
Collecting, cleansing, classifying, and analyzing expenditure data for the purpose of decreasing costs, improving efficiency, and monitoring compliance. The basic steps for conducting a spend analysis include: 1. Defining the scope. 2. Identify all of the data sources. 3. Gathering and consolidating all of the data into one database. 4. Cleansing the data (finding and correcting errors) and standardizing it for easy review. 5. Categorizing the data. 6. Analyzing the data for: - the best deals per supplier - to ensure that all purchases are from preferred suppliers - to reduce the number of suppliers per category. 7. Repeating the process on a regular schedule.
Service providers (international sourcing)
Companies can choose to use service providers that already have the specialized skills and knowledge necessary to deal with international purchasing issues and challenges. Some of the entities offering these specialized skills and knowledge are:
specialized knowledge (international sourcing)
Companies interested in pursuing international purchasing arrangements must acquire some specialized knowledge particular to buying products and services internationally. This specialized knowledge includes aspects of: - *Tariffs* - Duties, taxes, or customs imposed by the host country for imported or exported goods. - *Non-tariff Barriers* - Quotas, licensing agreements, embargoes, laws and regulations imposed on imports and exports. - *Countertrade* - International trade by exchange of goods rather than by currency.
Change Management (keys to successful Strategic partnerships)
Companies must prepared to manage change that comes with new partnerships
drivers of strategic sourcing
Companies spend significant time and resources developing and implementing Strategic Sourcing initiatives to: 1. Improve long-term financial performance 2. Increase customer focus 3. Improve product quality 4. Reduce the cost of materials 5. Reduce delivery cycle times 6. Optimize the number of global suppliers. Note: for most companies, this means a reduction in the number of suppliers. 7. Deliver more innovative products, in less time, and less expensively than competitors
Purchase Requisition
Document that defines the need for goods and/or services. An internal document. Does not constitute a contractual relationship with any external party.
Evaluating and Selecting Key Suppliers
Evaluating key suppliers for a collaborative relationship, purchase cost becomes relatively less important. - Assumption is excellent suppliers will drive costs out - "Squeezing" suppliers to a lower annual purchasing factor hurts strategic relationships! . . . but it is very often still done! [Profit Leverage Effect] Key Supplier Selection is conducted by a cross functional team using evaluation forms or scorecards. - Weighting techniques are often used.
internal certification programs
Example of Criteria used for an internal Certification Program - No incoming product rejections (e.g., less than 0.5 percent defective) for a specified time period. - No incoming non-product rejections (e.g., late delivery) for a specified time period - No significant supplier production-related negative incidents for a specified time period - ISO 9000/Q9000 certified or successfully passing a recent, on-site quality system evaluation - Mutually agreed-upon set of clearly specified quality performance measures - Fully documented process and quality system with cost controls and continuous improvement capabilities - Supplier's processes stable and in control
Sustainable sourcing should
Grow Revenues - Growing a company through the launch of new sustainable products Reduce Costs - Increasing resource efficiencies which will help reduce costs Go "Green" - Ensuring products or materials used meet environmental objectives - - like waste reduction, reuse, and recycling Manage Risk - Link company brands to the social consciousness of consumers Build Intangible Assets - Such as social and environmental responsibility, increasing consumer awareness of sustainable sourcing and sustainability
Decentralized Purchasing
Individual, local purchasing departments, such as at the plant level, making their own purchasing decisions
Industrial Buyers
Individuals within an organization who purchase raw materials for conversion into products, and/or purchase services, capital equipment, and MRO supplies.
external certification program
International Organization for Standardization (ISO) is the world's largest developer of voluntary international standards. - It was founded in 1947, and since then have published more than 21,000 international standards covering almost all aspects of technology and business. - Today ISO organization has members from 163 countries and about 150 people working full time for the Central Secretariat in Geneva, Switzerland. - Organizations ISO certified can request and receive written permission from the ISO organization to display the ISO logo. - ISO certification is highly sought after in the business world as it represents achieving and maintaining a stand of excellence verified by an independent third party organization.
Inventory Turnover Effect
Inventory is an asset but it also represents financial capital tied up and not available for use in other parts of the business. - The purchasing function in an organization is frequently responsible for Supply Management and therefore plays a large part in the amount of inventory the company holds. Inventory turnover represents the number of times the company sold through inventory in a given time period. *Costs of Goods Sold (COGS) ÷ by the Average Inventory* - A *high turnover ratio* is beneficial because it means the company is generating sales efficiently to sell inventory. - A *low turnover ratio* is unfavorable as 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.
The Make versus Buy Decision
It is important to analyze all of the relevant expenses associated with developing the capability to make a product, in addition to all of the expenses associated with buying the product. - *Quantitative Factors* primarily involve the incremental costs of either making or purchasing the item, such as the availability of manufacturing facilities, needed resources, and manufacturing capacity. - *Qualitative Factors* are more subjective and include such things as control over quality, the reliability and reputation of the potential suppliers (internal or external), and the impact of the decision on customers and suppliers.
Early Supplier Involvement (ESI) (Tapping into Strategic Supplier's Knowledge)
Key suppliers become more involved in the internal operations of the buyer's company, particularly with respect to new product and process design, concurrent engineering, and design for manufacturability. - Strategic Suppliers are asked to add their knowledge and expertise to the company's new product development process.
Objectives of Strategic Sourcing
Objectives of strategic sourcing surround the reduction of cost while maintaining or improving quality: - Improve the value‐to‐price relationship (i.e. achieve cost reductions while maintaining or improving quality/service) - Understand category buying and management process, to identify improvement opportunities - Examine supplier relationships across the entire organization - Develop and implement multi‐year contracts with standardized terms and conditions across the organization - Leverage the entire organization's spend - Share best practices across the organization
Pain (Pain and Gain Share Agreements)
Penalty or punishment a negative outcome for poor performance, cost overruns, quality problems, etc.: - Buyer could impose a financial penalty (i.e., fine) on the supplier for poor performance. - Buyer could reduce future business with the supplier for poor performance - Buyer could implement a bill-back amount equal to, or a percent of, the incremental costs resulting from poor performance.
Plan, Do, Act, Check (keys to successful Strategic partnerships)
Plan: Identify opportunity and plan for change. Do: Implement changes on a small scale. Check: Use data to analyze results of a change and determine if a difference. Act: - If change was successful, implement it and continuously assess results. - If the change did not work, begin the cycle again.
Risks of Outsourcing
Potential loss of control - Over production decisions, intellectual property, etc. Increased reliance on suppliers Increased need for supplier management
Supplier Certification Programs
Procedures verifying a supplier operates, maintains, improves, and documents effective procedures that relate to the customer's requirements. - Supplier certification programs differentiate strategic supplier alliance candidates from others. - Companies may develop internal certification programs, also require external certifications such as ISO 9000 / ISO 14000 as part of their overall certification process.
Small Value Purchase Orders
Processing costs for small value purchases are minimized through: - Credit Card/Corporate Purchasing Card (P-card) - Blanket or Open-End Purchase Orders - Blank Check Purchase Orders - Petty Cash - Stockless Buying or System Contracting - Standardization & Simplification of Materials & Components - Accumulating Small Orders to Create a Large Order - Using a Fixed Order Interval
Make
Producing (i.e., manufacturing) materials or products internally (i.e., in operations owned by the company).
Insourcing
Producing goods or services using a company's own internal resources.
Multi-Source
Purchasing a good or service from more than one supplier. Companies may use multi-sourcing to create competition between suppliers in order to achieve higher quality and lower price.
Centralized Purchasing
Purchasing department located at the firm's corporate office makes all the purchasing decisions
rewarding supplier performance
Recognize a supplier for exceptional performance, contributions, and/or capabilities. Rewarding suppliers *motivates and encourages* them to continue to strive for excellence. It also strengthens and *fosters strong and productive supplier relationships. Incentives can include:* - Promise of future business - Public recognition including: --- A plaque --- An awards dinner --- An honors ceremony --- A press release --- Formal communication to the supplier's senior leadership team. - Cash back for achieving performance-based objectives - Strategic or preferred supplier status
Forward Vertical Integration
Refers to a company acquiring one or more of their customers. - Example: a manufacturer buying a wholesaler/distributor to take ownership of this aspect of their supply chain.
Backward Vertical Integration
Refers to a company acquiring one or more of their suppliers. - Example: a manufacturer buying the key supplier of a critical material to take ownership of this aspect of their supply chain.
Supplier Relationship Management (SRM)
SRM is planning, and managing, all interactions with the third party organizations that supply goods and/or services to an organization in order to maximize the value of those interactions. Most supply professionals view SRM as an organized approach to defining what they need and want from a supplier and establishing and managing the company-to-company link to obtain those needs. SRM is identifying and measuring KEY STRATEGIC suppliers. SRM seeks to improve profits & reduce costs using tools such as: - Sourcing Analytics - Sourcing Execution - Procurement Execution - Payment and Settlement - Supplier Score-carding - Performance Monitoring
Vendor Managed Inventory (VMI)
Suppliers directly manage buyer inventories to reduce the buyer's inventory carrying costs and avoid stockouts for the buyer - A confirmed order is created by the supplier who is responsible to deliver items and bill the for materials delivered. From the *buyer-firm's perspective:* - Supplier tracks inventories - Determines delivery schedules and order quantities - Buyer can take ownership at the stocking location - Buyer may avoid taking ownership until material is actually used. From the *supplier's perspective:* - Avoids ill-advised customer orders - Supplier decides inventory set up and shipments - Opportunity for supplier to educate customers about other products
Capabilities (keys to successful Strategic partnerships)
Suppliers must have the right technology and capabilities to meet cost, quality, and delivery requirements.
Purchase Order (PO)
The Buyer's offer to the supplier to acquire goods or services. Becomes a legally binding contract only when accepted by the supplier.
Purchasing
The action of obtaining merchandise, capital equipment, raw materials, services, or maintenance, repair, and operating (MRO) supplies in exchange for money, or its equivalent. - Purchasing is the process of how goods and services are ordered. - Purchasing can usually be described as the transactional function of procurement for goods or services. Purchasing is 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 can be a separate department within a company, or it can be part of the supply chain management department within a company.
Reasons for Global Sourcing (international sourcing)
The opportunity to improve quality, cost, and delivery performance To exploit global efficiencies: - Access to low cost labor and materials. - Take advantage of tax breaks and low trade tariffs 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
Sourcing
The process of identifying a company that provides a needed good or service.
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. Includes: 1. Purchasing management 2. Strategic Sourcing 3. Supplier Relationship management
Outsourcing
The traditional definition involves purchasing an item or service externally, which had been produced using a company's own internal resources previously. - The term has more recently become synonymous with the concept of buying an item from an external source of supply regardless of whether the item had been previously produced using a company's internal resources.
Sealed Bid (Procurement for Government & Non-Profit Agencies)
a document enclosed in a sealed envelope and submitted in response to invitation to bid. - *Open Competitive Bidding:* The sealed bids are opened in the presence of anyone who may wish to be present and evaluated for award of a contract. - *Closed Competitive Bidding:* The sealed bids are opened in presence only of authorized personnel. - The contract is usually awarded to the lowest priced responsive and responsible bidder.
Supply Management
a newer term that encompasses all acquisition activities beyond the simple purchase transaction. - The "Identification, acquisition, access, positioning, and management of resources an organization needs or potentially needs in the attainment of its strategic objectives." Institute of Supply Management (ISM)
Sustainability
ability to meet current needs of supply chain without hindering ability to meet future needs in terms of economic, social, and environmental challenges. - In simple terms, do not mortgage the future for the present. - Companies must considering things like worker safety, wages, working conditions, human rights, etc.
Providing information
about products, expected sales growth, etc. Suppliers need to be extensions of their customers.
transaction costs
activities carried out as part of the actual buy and sell transaction - price negotiation - delivery confirmation - purchasing order administration - transportation - delivery/receiving - reconciliation - taxes/tariffs/duties - invoicing/payment - incoming inspection - rejected goods return to supplier - close-out
post-transaction costs
activities carried out following the actual buy and sell transaction - returns from customer - replacement - repair parts & labor - maintenance - disposal of returned product
pre-transaction costs
activities carried out prior to the actual buy and sell transaction - identifying sources - qualifying sources - certifying sources - supplier database update - training/education of supplier
Value Engineering (Tapping into Strategic Supplier's Knowledge)
activities help the buyer's company to reduce cost, improve quality and reduce new product development time
Total Cost of Ownership (TCO) (keys to successful Strategic partnerships)
all costs associated with acquisition, use, and maintenance of a product or service
Co-Managed Inventory (CMI)
an arrangement where a specific quantity of an item is stored at the buyer's location. - Once used, an item is replaced by the supplier, with full knowledge and approval of the buyer. - Buyer provides systems access to the supplier. The supplier takes responsibility for managing the replenishment in the buyer's system. - Supplier reviews available information and generates orders in the buyer's system. - Primary difference between CMI and VMI is - - in CMI the supplier just recommends an order which is not confirmed until and unless the buyer approves it.
Administrative Expenses (Total cost of ownership)
associated with the procurement activity itself such as screening potential suppliers, negotiation, order preparation, and order transmission to name just a few.
Innovative Products
characterized by short product life cycles, volatile demand, high profit margins, and relatively less competition i.e. technology products such as the iPhone - *Potential Strategy:* Innovative, high-tech, cutting edge, market leading supplier. Long term partnership. Single-sourced.
Leverage
commodity items where many alternatives of supply exist and supply risk is low. Spend is high and there are potential procurement savings. Sourcing Strategies: - low level of supply risk - high value to the company 1. Consolidate volume as a negotiation tool 2. Use competitive marketplace to reduce costs 3. Automate supplier interfaces to minimize process related costs
e-procurement cycle
consists of up to nine steps, depending on the complexity of the buy, and the organizational policies. At a bare minimum, it consists of: - An electronic purchase requisition and/or - purchase order, - An invoice (which might be one with the receipt), - A payment. For high-dollar purchases, the process will generally also include: - Authorization of the purchase order - Reconciliation of the invoice.
Poor Supplier Quality (Total cost of ownership)
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.
Benefits of Supplier Recognition Programs
that make them valuable for a business organization. 1. *Motivate Suppliers to Perform Better* - Can motivate suppliers to excel in terms of their quality, pricing and delivery commitments. 2. *Improve Supplier Loyalty and Commitment* - Supplier support is important to ensure that customer delivery commitments are maintained. 3. *Encourage Suppliers to Adapt to the Company's Culture* - If the company treats its suppliers as a part of the family and engages in supplier recognition programs periodically, it can help to bring the suppliers closer to the corporate values, ethics and principles of the company. 4. *Helps to Create Entry Barriers for Competitors* - If the suppliers trust the company, they may be more inclined to sign deals of exclusivity with the company for certain crucial components. 5. *Encourages Supplier Participation in Product Innovation* - Recognition to suppliers also brings about their enthusiasm to work closely with the company on new product development.
Business Ethics
the application of ethical principles to business. The two (2) main ethical approaches are: - *Utilitarianism:* an ethical act which creates the greatest good for the greatest number of people, and should be the guiding principle of conduct. - *Rights and Duties:* some actions are just right in and of themselves, regardless of the consequences. Do the right thing!
Corporate Social Responsibility (CSR)
the practice of business ethics
total cost of ownership
the sum of all the costs associated with every activity in the supply stream of a product. Procurement professionals recognize that although the purchase price of an item remains very important, it is only one part of the total cost of ownership. The four elements of cost are: Quality, Service, Delivery, and Price (QSDP) - TCO is the sum of the cost elements in QSDP (i.e., Quality + Service + Delivery + Price) - Each element of QSDP has an impact on the TCO - The main TCO insight is that the acquisition cost is often a very small portion of the TOC (accounting for only 25% to 40% of the total cost for most products).
e-Procurement
the term used to describe the automation, through web-enabled tools, of the non-strategic and transactional activities that would otherwise consume the majority of a buyer's time, including: - Automation Provides increased enterprise level visibility of all purchases. - e-Procurement tools typically automate all or part of the following processes: --- Solicitation development tools; RFI, RFP, RFQ --- Execution and analysis --- Reverse auction capabilities
Supplier Selection
typically conducted by a cross functional team. The process of selecting suppliers is complex and should be based on multiple criteria using evaluation forms or scorecards. The following are some commonly used criteria: - Product and process technologies - Reliability - Quality - Order system and cycle time - Cost - Willingness to share information - Capacity - Service - Communication capability - Location
Bottleneck
unique procurement problems. Supply risk is high and availability is low. Small number of alternative suppliers. Sourcing Strategies: - high level of supply risk - low value to company 1. Maintain safety/strategic stock 2. Develop contingency plans 3. Strengthen relationships 4. Search for alternatives