supply chain management exam 1 - haloukas & zielinski
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 significantly increasing risk
Strategic Sourcing
(second step in procurement) A comprehensive approach for locating and sourcing key suppliers, so that an organization can leverage its consolidated purchasing power to find the best possible values in the marketplace. -Strategic sourcing requires analysis of what an organization buys, from whom, at what price, and at what volume. -Emphasis is placed on the entire life-cycle of a product, not just its initial purchase price.
Inventory Turnover Ratio
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
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.
Purchasing Process Step 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
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.
Utilitarianism
an ethical act is that which creates the greatest good for the greatest number of people, and should be the guiding principle of conduct.
Qualitative Factors in Make VS Buy
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.
Component of the TCO: Pre-Transaction Costs
Identifying Sources Qualifying Sources Certifying Sources Supplier Database Update Training / Education of Supplier
Vendor Managed Inventory (VMI)
Suppliers directly manage buyer inventories to reduce the buyer's inventory carrying costs and avoid stockouts for the buyer
Supplier Code of COnduct
Suppliers must agree to abide by in order to be considered an approved supplier; includes Corporate Social Responsibility & Business Ethics
Purchasing Process Step 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. PS: the PO becomes contract only when accepted and confirmed by the supplier
Purchasing Process Step 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" (i.e., Invoice, Purchase Order, and Goods Receipt must match)
Make VS Buy Decision (Strategic Decision)
The act of deciding whether to produce an item internally or buy the item from an outside supplier Make: Producing (i.e., manufacturing) materials or products internally (i.e., in operations owned by the company). Buy / Outsource: Buying materials, components, or products from a supplier(s) instead of, or in addition to, making them in-house (i.e., buying from a 3rd-party external source).
Common Metrics for Inventory
Units - the number of units available Dollars - the amount of dollars tied up in inventory Weeks of Supply: (avg. on-hand inventory) / (avg. weekly usage) Inventory Turns: (cost of good sold) / (avg. inventory value) [Every unit/dollar of inventory that you can reduce drops right to the bottom line as pure savings]
ABC System
a method to determine which inventories should be counted and manged more closely than others; classifies inventory based on the degree of importance
B & C Items (ABC System)
accounts for 80% of the total number of items; 20% of total inventory cost. B Items- require closer management since they are relatively more expensive (per unit), require more effort to purchase/make, and may be more prone to obsolescence C Items- have the lowest value, and hence the lower priority
Sourcing Categories: Non-Critical
routine items that involve a low percentage of the firms' total spend and involve very little supply risk. 1. Simplify and streamline the purchasing process 2. Reduce number of suppliers and simplify ordering 3. Transfer buying responsibility to "users' within the company
A Items (ABC System)
given the highest priority; 20% of the total number of items; 80% of the total inventory cost
Corporate Social Responsibility
practice of business ehtics
Sourcing Categories: Bottleneck
unique procurement problems. Supply risk is high and availability is low. Small number of alternative suppliers. 1. Maintain safety/strategic stock 2. Develop contingency plans 3. Strengthen relationships 4. Search for alternatives
Return on Assets (ROA) Effect
A high ROA indicates managerial prowess in generating profits with lower spending
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)
Supplier Certification Programs
-used to differentiate strategic supplier alliance candidates from others -companies may choose to develop internal certification programs, and/or require external certifications such as ISO 9000 and/or ISO 14000 as part of their overall certification process
Component of TCO: Post Transaction Costs
Returns from Customer Replacement Repair Parts & Labor Maintenance Disposal of Returned Product
Characteristics of Suppliers of Choice
1. Achieved a specific and exceptional level of performance over time as measured by a set of criteria agreed upon by both buyer and supplier. 2. Typically trusted partners who know the buyers organization, processes, procedures, and requirements. 3. Provides a higher value than their competitors and are characterized as reliable, responsive, flexible, and cost effective.
e-Procurement Process
1. An electronic purchase requisition and/or purchase order 2. An invoice (which might be one with the receipt) 3. A payment. For high-dollar purchases, the process will generally also include: 1. Authorization of the purchase order 2. Reconciliation of the invoice.
VMI From The Supplier's Perspective
1. Avoids ill-advised customer orders 2. Supplier decides inventory set up and shipments 3. Opportunity for supplier to educate customers about other products
Sourcing Strategy Development
1. Classify the company's products and suppliers as belonging to either the functional or innovative category. 2. Develop strategic sourcing goals and strategies for each category 3. Create the sourcing team (typically a cross-functional team led by Procurement) 4. Develop a team strategy and communication plan 5. Identify the targeted spend area(s) and conduct a spend analysis. 6. Gather information on supplier capabilities. Use Request for Information (RFI) 7. Develop a supplier portfolio (i.e., a profile of each supplier in each category) 8. Develop a future state (i.e., vision of what the company wants the future to look like) 9. Conduct supplier selection and negotiation 10. Implement Supplier Relationship Management (SRM)
Steps of a Spend Analysis
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.
Steps for ABC System
1. Determine annual usage or sales for each item 2. Determine % of total usage or sales that each item response 3. Rank items from highest to lowest % 4. Classify items into group: ABC (Highest Value; Moderate Value; Least Valuable)
Characteristics of Sustainable Sourcing Programs
1. Grow Revenues -Growing the company through the launch of new sustainable products 2. Reduce Costs -Increasing resource efficiencies which will also help to reduce costs 3. Go "Green" -Ensuring that the products or materials used meet environmental objectives for things like waste reduction, reuse, and recycling 4.Manage Risks -Link company brands to the social consciousness of consumers 5. Build Intangible Assets -Such as social and environmental responsibility, increasing consumer awareness of sustainable sourcing and sustainability
Drivers of Strategic Sourcing
1. Improve long-term financial performance 2. Increase customer focus 3. Improve product quality 4. Reduce the cost of materials 5. Reduce delivery lead 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
Radio Frequency Identification (RFID)
1. Material Management- goods automatically counted and logged as they enter the supply warehouse 2. Manufacturing- assembly instructions encoded on RFID tag provide information to computer controlled assembly devices 3. Distribution Center- shipment leaving DC automatically updates ERP to trigger a replenishment order and notify customers for delivery tracking 4. Retail Store- no check out lines as scanners link RFID tagged goods in shopping cart with buyers credit card
Advantages For Multi Supplier
1. Need more capacity 2. Spread risk of supply disruption 3. Create competition 4. More sources of information 5. Dealing with special kinds of business
Reasons For Outsourcing
1. Non-Strategic - If it is a non-strategic item 2. Cost Advantage - Suppliers may provide the benefit of economies of scale, especially for components that are non-vital to the organization's operations. 3. Insufficient Capacity - A firm may be at or near capacity and subcontracting from a supplier may make better sense. 4. 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. 5. Lack of Expertise - Firm may not have the necessary technology and expertise 6. Quality - Suppliers may have better technology, process, skilled labor, etc. 7. Multi Sourcing Strategy - To achieve a multi sourcing strategy using an external supplier in addition to an internal source. 8. Inventory Considerations - opting to have the supplier hold inventory of the item or the materials required to produce the item. 9. Brand Strategy - take advantage of a supplier's brand image, reputation, popularity, etc.
Advantages For Strategic Alliances
1. Potential to increase revenue and profits for both parties. 2. Potential to create a competitive advantage or block a competitor from gaining market share. 3. Mitigate risks and ensure a continuity of supply. 4. Position the partners for future strategic opportunities.
Preferred Suppliers Provide
1. Product and process technology, and expertise. 2. Product development and value analysis. 3. Information on latest trends in materials, processes, or designs. 4. Capacity for meeting unexpected demand. 5. Cost efficiency due to economies of scale.
Reasons For Making
1. Protect proprietary technology - You may not want your intellectual property to be out in the public domain. 2. 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. 3. 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 4. Better quality control - You may feel that you have more control of the quality of the material / product than a supplier. 5. Use existing idle capacity - Make use of excess capacity by making a material instead of letting the capacity sit idle. 6. 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. 7. Control of lead-time - You may feel that you have more control over the lead time to produce the product than a supplier.
Advantages For Rationalized Supply Bases
1. Reduced purchase prices 2. Fewer supplier management problems 3. Closer and more frequent interaction between buyer and supplier 4. Greater levels of quality and delivery reliability
VMI From The Buyer-Firm's Perspective
1. Supplier tracks inventories 2. Supplier determines delivery schedules and order quantities 3. Buyer can take ownership at the stocking location 4.Buyer may also be able to avoid taking ownership until the material is actually being used.
International Purchasing (Global Sourcing)
1. The opportunity to improve quality, cost, and delivery performance 2. To exploit global efficiencies: -Access to low cost labor and materials. -Take advantage of tax breaks and low trade tariffs 3. To respond to insufficient domestic capacity 4. To achieve access to better process and product technology 5. Due to a change in the domestic business environment 6. To take advantage of reciprocal trade and countertrade arrangements
Advantages For Single Supplier
1. To establish a good relationship 2. Less quality variability 3. Lower cost [100% of volume] 4. Transportation economies 5. Proprietary product or process 6. Volume too small to split
Key Areas to a Spend Analysis
1. Total historic expenditures and volumes 2. Future demand projections or budgets 3. Expenditures categorized by commodity and sub-commodity 4. Expenditures by division, department, or user 5. Expenditures by supplier
How does purchasing contribute to it's 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
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
Purchasing Process Step 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.
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 $
Single Sourcing
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.
Reverse Auctions
A sourcing technique where pre-qualified suppliers enter a website and at pre-designated time and date, and try to underbid competitors to win the buyer's business. -The sellers bid against one another to secure the buyer's business, driving the price to be paid for the item 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.
Strategic Alliance
A strategic alliance in sourcing, is an agreement between a buyer and a supplier to pursue some agreed upon objectives, while remaining independent organizations. -Companies agree to share information and resources to achieve a mutual benefit. -Preferred suppliers are potentially ideal candidates for a strategic alliance.
Purchasing Process Step 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.
Win-Win Strategic Alliance Agreements: Collaborative Negotiations
Both sides work together to maximize the outcome or create a win-win result. Requires open discussions and a free-flow of information between parties -Successful collaborative negotiations start with a clearly expressed understanding of how each company wants to benefit from the collaboration -Alignment between parties regarding motivation, contribution, financial benefit, and the management of the alliance are essential. -Negotiations are not about each company obtaining the most value, negotiations are more 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.
Advantages of Centralization
Concentrated volume Leveraging purchase volume Avoiding duplication Specialization Lower transportation costs No competition within units Common supply base
Supplier Selection Criteria
Cost Quality Capacity Service Location Reliability Communication capability Order system and cycle time Willingness to share information Product and process technologies
Purchasing Process Step 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.
Purchasing Process Step 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.
Inventory Turnover Effect
Increased inventory turnovers indicate optimal utilization of space and inventory levels, increased sales, avoidance of inventory obsolesce. Inventory is an asset but it is also capital tied up and not available for use in other parts of the business.
Decentralized Purchasing
Individual, local purchasing departments, such as at the plant level, making their own purchasing decisions
Examples of costs for TCO
Installation Costs Purchase Price Test & Balance Inspection Cost Maintenance Cost Unplanned Downtime Training & Education Cost of Field Failure Risk Management & Safety Environmental Impact Warranty Cost
Advantages of Decentralization
Knowledge of local requirements Local sourcing Less bureaucracy
Purchasing Process Step 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.
Purchasing Process Step 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.
Order Costs Examples
Order preparation costs; order transportation costs; order receipt processing costs; material handling costs
Purchasing Process Step 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.
Component of TCO: Transaction Costs
Price Negotiation Delivery Confirmation Purchase Order Administration Transportation Delivery / Receiving Reconciliation Taxes / Tariffs / Duties Invoicing / Payment Incoming Inspection Rejected Goods Return to Supplier Close-Out
Win-Win Strategic Alliance Agreements: Distributive Negotiations
Refers to a process that leads to self-interested, one-sided outcome
Multi Sourcing
Purchasing a good or service from more than one supplier. Companies may use this type of-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
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 from an external third party. Purchasing can usually be described as the transactional function of procurement for goods or services.
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. [SOURCING: purchasing power; strategic sourcing; supplier relationship management]
Supplier Selection
The process of selecting suppliers is complex and should be based on multiple criteria using evaluation forms or scorecards. -conducted by a cross functional team
Purchasing Process Step 7: Fulfillment
The supplier delivers the item(s) to the buying organization as per the PO.
Purchasing Process Step 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).
Sourcing Categories: Leverage
commodity items where many alternatives of supply exist and supply risk is low. Spend is high and there are potential procurement savings 1. Consolidate volume as a negotiation tool 2. Use competitive marketplace to reduce costs 3. Automate supplier interfaces to minimize process related costs
Carrying Costs Examples
cost of capital; taxes (on inventory held in warehouse); insurance (based on estimated risk or loss over time and facility characteristics); obsolescence (deterioration of product during storage, and shelf life); storage (facility expense related to product holding rather than product handling)
Economic Order Quantity (EOQ)
determined the optimal order quantity; trade off between annual ordering costs and annual inventory carrying costs; where the sum of the annual order costs & the annual inventory cost is minimized
Quantitative Factors in Make VS Buy
incremental costs of either making or purchasing the item, such as the availability of manufacturing facilities, needed resources, and manufacturing capacity
High Turnover Ratio
is beneficial because it means the company is generating sales efficiently to sell inventory.
Purchasing Organization
is dependent on many factors, such as market conditions and types of materials required
Sustainability
is the ability to meet current needs of the supply chain without hindering the ability to meet future needs in terms of economic, social, and environmental challenges. -Do not mortgage the future for the present. -Companies must considering worker safety, wages, working conditions, human rights, etc. 1. Establishing a sustainable procurement process takes work 2. The company involved must understand the value of incorporating sustainable standards into their sourcing goals
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.
Rights and Duties
some actions are just right in and of themselves, regardless of the consequences. Do the right thing!
EOQ (equation)
square root ((2 x Order Cost x Annual Demand Volume)/(Annual Carrying Cost % x Unit Cost))
Sourcing Categories: Strategic
strategic items and services that involve a high level of expenditure and are vital to the firm's success 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
Supplier Certification: Verification
that a supplier operates, maintains, improves, and documents effective procedures that relate to the buyer's requirements (e.g., cost, quality, delivery, flexibility, maintenance, safety, etc.)
Ethical Sourcing
that which attempts to take into account the public consequences of organizational buying, or to bring about positive social change through organizational buying behavior -This involves the Procurement organization ensuring that the products being sourced are acquired in a responsible and sustainable way. -The people involved in producing these products should be treated fairly and work in a safe environment. -The environmental and societal impacts must also be considered as part of the sourcing process.
Business Ethics
the application of ethical principles to business -the two main principles are: Utilitarianism Rights and Duties
Order Costs
the costs that are incurred each time an order is placed
Carrying Costs
the costs that are incurred for holding inventory in storage
Total Cost of Ownership (TCO)
the sum of all the costs associated with every activity in the supply stream of a product