Marketing 423 Final Exam

Relevant costs

include variable, fixed, direct, and indirect costs

variable costs

will vary in proportion to changes in the level of activity

fixed costs

do not change in proportion to a change in activity level

direct costs

can be traced directly to a unique product or service

indirect costs

shared with multiple products or services and not easily separated

learning curve effect

every time cumulative production doubles, labor hours per unit fall to 90% of the previous level

makes internal production cheaper

ex. $200/unit at 1,500 units

next year doubles to 3,000 units, at 200*.9=$180/un

Indifference Analysis

The number of units of annual production at which the business owner would be indifferent between outsourcing and continued in-house manufacturing

Monte Carlo Simulation

provides an opportunity to systematically introduce uncertainty into an outsourcing decision

Economic value added =

net operating profit - capital charge

E-sourcing Models

sell side systems, buy-side systems, third party marketplaces

sell-side systems

contain products or services from one or more suppliers

pros: no investment by buyer, ease of access to many suppliers

cons: inability to track expenditures or to control spending

ex. ebay

buy side systems

are controlled by buyers and tied into their intranets and extranets

might be self-designed or acquired through 3rd party

allows supply manager to manage sourcing cycle, track spend, and exert secure control of contract management

ex. shell implemented a database to manage their customer’s inventory based on data shared by its customers about their usage and forecast demand

reduces the need for excess inventory,

third-party marketplaces

facilitates electronic purchasing process

independent firms who neither buy nor sell goods and services

bring buyers and sellers together in cyberspace

vertical portal: narrow range of commodities

horizontal portals: broad range goods or services

general e-sourcing suites

transmission of product specifications, submission of a bid, acceptance of contract, submission of payment

SRM e-sourcing suites

modules that interact with elements of purchasing database, ERP, and data from EDI/web based sources

ex. oracle

strategic sourcing process

conduct opportunity assessment

profile commodity

conduct supplier market analysis

develop strategy

issued RFx and Negotiate

Implement and manage performance

cost element

explains where a company spends money

cost driver

focuses on why the money was spent

Cost Drivers (4)

Design

Facility

Geography

Operations

BATNA

best alternative to a negotiated agreement

what you will do if you do not reach an agreement

reservation price

the maximum or minimum at which you would be indifferent between entering into or not entering into an agreement

ZOPA

zone of possible agreement

the range between the parties’ reservations prices

negotiations fundamentals

prepare to negotiate (BATNAs, walk aways, ZOPA)

getting started at the table (work the relationship, frame the negotiation)

parties and interest in negotiations

more parties to the negotiation than those at the table

knowing the parties is the first step and understand what the other side wnats

english auction

selling of art, antiques, and fine items. starts with a reserve price and increases the price in regular increments or bidders increases the prices by whatever they want.

dutch auction

starts at a high price and pushed down until someone buys

sealed bid auction

people submit an offer. highest offer wins.

double auction

buyers and sellers each submit combined price-quantity bids to an auctioneer. auctioneer matches sellers offers to buyers offers.

pfizers 12 tips

Tip 1: Select and prepare the right people

Tip 2: Take ownership

Tip 3: Get the right tool for the job

Tip 4: Have a backup

Tip 5: Sell it internally

Tip 6: Explain the rules and process

Tip 7: Prepare the supply base

Tip 8: Invite only the right ones

Tip 9: Get the RSVPs

Tip 10: Watch the auction, check the system

Tip 11: Talk it up

Tip 12: Track the data

bottoms up approach

looks at every element that explains the cost

ex. labor, materials, energy, machining

macro-economic analysis

supply/demand in the industry determines the price

parametric comparison

quantifies key drivers of cost which allows you to negotiate better pricing going forward

cost model strategy

should be used to define the optimal sourcing strategy

can be an aid to further discussions with the supplier to understand which drivers can be changed

focus should be to learn from the best practices in each region

two interests in every negotiation

substantive interest: tangible

relationship interest: interactions

three categories of people problem

perception: understand the other side

emotion: understand their and your emotions\

communication: listen actively

three largest communication failures

not speaking to be understood

not listening

misinterpretation

how to prevent issues in negotiation process

anticipate people problems before they derail the negotiation

ex. clarify perceptions before it becomes difficult, involve the other side early so they feel ownership

interests vs positions

why they want it vs what they want

focus on interests

how to identify interests

look for human needs behind positions

ask why

observe emotions

look for shared interests

bargaining zone

highest a buyer will buy, lowest a seller will sell

strong sellers sell at a number higher than their lowest

supplier performance management

consists of methods and systems to collect and provide information to measure, rate, or rank ongoing supplier performance

acts as a supplier report card

supplier measurement decisions

corporate and business unit goals, objectives, and strategies must drive supply management’s corresponding goals, objectives, and strategies

supply management must develop appropriate supplier evaluation strategies to support the business unit.

not all suppliers need to be evaluated in the same way. must consider supply base risk levels, category spend amounts, switching costs

must understand types of information required, how information will be deployed, methods needed to obtain information in a timely and cost-effective manner, what resources will be required to collect the information

quantitative variables to measuring suppliers

delivery and quality performance as well as cost reduction

qualitative factors

compare these to standards and goals and consider reporting frequency

problem resolution ability

suppliers attentiveness to problem resolution

technical ability

suppliers manufacturing ability compared with other industry suppliers

ongoing process reporting

supplier’s ongoing reporting of existing problems or recognizing and communicating a potential problem

corrective action response

supplier’s solutions and timely response to requests for corrective actions, including engineering change order requests

supplier cost reduction ideas

supplier’s willingness to help find ways to reduce purchase cost

supplier new product support

supplier’s ability to help reduce new product development cycle time or to help with product design

measurement and reporting frequency

reporting frequency to buyer: day to day performance for troubleshooting and expediting

reporting frequency to supplier: routinely summarized monthly and face to face meetings

never delay reporting a supplier’s poor performance

uses of measurement data

identify poor and high performing suppliers

support supply base optimization and rationalization efforts

determine future purchase volume allocations

identify performance improvement opportunities

make sourcing decisions

measurement system design

what data to analyze

when to collect the data

what metrics to use

what performance categories to include

how to weight different categories

how often to generate performance reports

how to use performance data

rationalization and development

determining optimal number and quality of suppliers in supply base

requires effective supplier evaluation and measurement system

usually results in net reduction of suppliers however may result in adding new suppliers

key is to determine the right number of suppliers, not jsut arbitrarily reduce the number

rationalization

analysis of how many and which suppliers to maintain

optimization

analysis to ensure that only most capable suppliers are kept

supplier specific activities

development of supplier evaluation and measurement systems

elimination of marginal and small volume suppliers

replacement of good suppliers with better ones

initiation of supplier development activities to improve performance

global search for world-class suppliers

supplier development definition

any activity undertaken by a buyer to improve a supplier’s performance or capabilities to meet the buyer’s short and long term supply needs

supplier development activities

sharing technology

providing performance incentives

promoting competition among suppliers

providing necessary capital

directly involving buyer personnel

steps to supplier development

1. Identify critical commodities for development

2. Identify critical suppliers for development

3. Form cross-functional development team

4. Meet with supplier’s top management team

5. Identify opportunities and probability for improvement

6. Define key metrics and cost-sharing mechanisms

7. Reach agreement on key projects and joint resource

requirements

8. Monitor status of projects and modify strategies as

appropriate

overcoming barriers to development

direct involvement activities

incentives and rewards

warnings and penalties

goals of a contract

memorializes terms and conditions by which the parties agree to conduct business

defines relationship

provides ways for parties to obtain mutual benefits

captures the understanding of parties

clauses

describes different sets of conditions that parties agree to follow

fixed price contracts

can be obtained using price quotation

supplier may add contingency fee if uncertainty is high

important for buyer to understand underlying market conditions

more risk on supplier

cost based contracts

Cost-based contracts; e.g. Cost plus incentive fee,

Cost-sharing, Time and materials, and Cost plus

fixed-fee

• Used when there is high risk of large supplier contingency fee

that would be included in fixed-price contract

• Lower risk of economic loss for supplier; economic risk is

transferred from supplier to buyer

• But can result in much lower cost to buyer

• Parties must agree on allowable costs

• Generally applicable when goods and/or services are

expensive, complex, or important to buyer and there is high degree of uncertainty

more risk on buyer

contract conflict

all contracts are subject to dispute and interpretation

the more complex and larger the dollar volume, the more likely dispute will arise

build in dispute resolution terms and mechanisms

can use arbitration, mediation, or legal action

contract selection considerations

Component market uncertainty

• Long-term agreements

• Degree of trust between parties

• Process or technology uncertainty

• Supplier’s ability to impact costs

• Total dollar value of purchase

ABC

costing method that assigns overhead based on the actual activities that consume resources, giving a more accurate picture of production and service costs

based on how much the products use those activities

core steps of ABC

identify activities: map them

assign resource costs to activities: costs of labor, equipment, space, and support are traced to the activity that consumes them

Identify outputs: recognizes that not only products but also customers and channels consume activites.

assign activity costs using cost drivers: transaction, duration, intensity

value added vs non value added activities

which adds value and which does not to custoemrs

contract law

Determines nature of

agreements that are enforceable and create

legal rights between the parties

agency law

Deals with role of managers as

individual representatives acting on behalf of

their organization

agent

person who has been authorized to act on behalf of some other person

principal

Corresponding person or entity for whom agents carry out

their authority

buyer

General agent of buying company who has broad authority to

changes prices, terms and conditions. Supplier has right to rely on

individual buyer’s written and verbal statements

sales representative

Special agent of seller who can only solicit orders

and cannot change pricing, terms, or conditions

legal authority

• General agent may sign contract and commit the

company to its terms and conditions

• Buying company must delineate its instructions to

individual buyers clearly and succinctly. Place limits

on how much can be obligated by each individual

buyer

• Fiduciary obligation to employer

actual authority

Stems from instructions and granting of

authority by employer via job description

apparent authority

That authority seller perceives to be

available. Often based on scope of authority possessed by other

purchasing managers in other organizations in same industry

implied authority

When non-agent makes commitment with

supplier. Non-agent often gets P.O. after fact

ethical behavior

Buyers must commit their attention and energies for their

organization’s benefit rather than personal enrichment

• Must not accept outside gifts, favors, or bribes

• Must not be tempted or influenced by unethical practices of salespeople

• Must not have personal financial arrangements with suppliers

Buyers must act ethically towards suppliers and potential

suppliers Treat suppliers professionally and with respect

Buyers must uphold the ethical standards set forth by

their organization and their profession

social responsibility

Idea that organizations and institutions

have an obligation to society that extends

beyond compliance with regulations in

considering broader effects of their actions

how ESG creates value

1. Revenue growth

2. Cost take-outs

3. Increased productivity

4. Investment and asset optimization

5. Improved legal and regulatory performance

measuring ESG

• Key terms for sustainability

• Definition by management and culture

• Factors for implementing ESG

• Application of data and process rigor

• Hazards for ESG implementation