Supply Chain Exam 2 - Rutgers University Ch. 5-8

Procurement

The process of selecting and vetting suppliers, negotiating contracts, establishing payment terms, and the actual purchasing of goods and services.

- concerned with acquiring all of the _goods, services and work_ that is vital to an organization.

- overarching or umbrella term within which the action of purchasing can be found.

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.

- the process of how _goods and services are ordered from an external third party.

- can usually be described as the transactional function of procurement for goods or services.

- also a term commonly used in business to represent the function of, and the responsibility for, acquiring materials, supplies, and services for an organization.

Supply Management

A newer term that _encompasses all acquisition activities beyond the simple purchase transaction.

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.

Purchase Order (PO)

a _commercial document__. It is the official offer issued by a buyer to a seller to acquire goods or services.

- 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.

Purchase Requisition ➔ Purchase Order ➔ Supplier Confirmation of PO

e-Procurement

The business-to-business (B2B) purchase and sale of supplies and services over the Internet.

- 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

e-procurement process

The basic e-procurement process consists of:

An electronic _purchase requistion__and/or _purchase order_

An _invoice___(which might be one with the receipt)

A _payment_______.

Advantages of an e-Procurement System

_Time savings_, _Cost savings, _Accuracy, Real time, Management, Mobility, trackability, Benefits to the suppliers

Merchants

Wholesalers and retailers who _purchase for resale_.

Industrial Buyers

Individuals within an organization who purchase raw materials for _conversion_into products, and/or purchase services, capital equipment, and MRO supplies.

Contracting

A term often used for the _acquisition of services

Request for Information (RFI)

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

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.

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.

Purchasing Process Steps

1. A need is identified, and a Purchase Requisition is issued

2. Obtain authorization as necessary

3. Identify and evaluate potential suppliers

4. Make supplier selection

5. Purchase Order (PO) is created and delivered to the supplier.

6. Supplier confirmation of the Purchase Order

7. Fulfillment

8. Receipt of Goods

9. Invoice and Reconciliation

10. Payment

11. Close out the Purchase Order

12. Analysis

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 $

Return on Assets (ROA) Effect

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

Inventory Turnover Effect

Increased inventory turnovers indicate optimal utilization of space and inventory levels, increased sales, avoidance of inventory obsolesence.

Inventory is an asset but it is also _capital tied up

- represents the number of times the company _sold through inventory in a given time period

Total Cost of Ownership (TCO)

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

- The four elements of cost are: Quality, Service, Delivery, and Price (QSDP).

The Make versus Buy 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).

- strategic decision

Quantitative Factors

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

In-sourcing

_Reverting __(i.e., going back) _to in-house__production when external quality, delivery, and services do not meet expectations

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

Backward Vertical Integration

Refers to a company acquiring (i.e., buying) one or more of their suppliers

Forward Vertical Integration

Refers to a company acquiring (i.e., buying) one or more of their _customers_

Purchasing Organization

dependent on many factors, such as market conditions and types of materials required

Centralized Purchasing

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

_Decentralized Purchasing

Individual, local purchasing departments, such as at the plant level, making their own purchasing decisions

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.

International Purchasing - Specialized Knowledge

Companies interested in pursuing international purchasing arrangements must acquire some specialized knowledge particular to buying products and services internationally.

ex tariffs, non-tariff barriers, countertrade

_Import Brokers

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

_Import Merchants

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

_Trading Companies

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).

Government purchases

expenditures made in the private sector by all levels of government.

Non-Profit purchases

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

Bid

A _proposal or quotation_submitted in response to a solicitation from a contracting authority.

Competitive Bidding

A procurement process in which bids from competing suppliers, for the _right to supply specified materials or services, are requested.

- aims at obtaining goods and services at the lowest prices by _stimulating competition_, and by preventing favoritism.

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.

Payment Bond

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

Benchmarking

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

Sourcing

The process of identifying a company that provides a needed good or service.

Strategic Sourcing

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.

Insourcing

Producing goods or services using a company's own internal resources.

Outsourcing

The traditional definition involves purchasing an item or service externally, which had been produced using a company's own internal resources previously.

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.

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.

Spend Analysis

Collecting, cleansing, classifying, and analyzing expenditure data for the purpose of decreasing costs, improving efficiency, and monitoring compliance.

Non-critical

routine items that involve a low percentage of the firms' total spend and involve very little supply risk.

Bottleneck

unique procurement problems. Supply risk is high and availability is low. Small number of alternative suppliers.

Leverage

commodity items where many alternatives of supply exist and supply risk is low. Spend is high and there are potential procurement savings.

Strategic

strategic items and services that involve a high level of expenditure and are vital to the firm's success.

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.

Supply Base Rationalization

Reduction in the supply base to the lowest number of suppliers possible without significantly increasing risk

- (also known as, Supply Base Reduction, Supply Base Optimization).

Supplier Selection

The process of selecting suppliers is complex and should be based on _multiple criteria using evaluation forms or scorecards

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 _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.

strategic alliance

an agreement between a buyer and a supplier to pursue some agreed upon objectives, while remaining independent organizations.

Strategic Alliance Development

An extension of supplier development which refers to increasing a key or strategic supplier's _capabilities_.

Distributive Negotiations

Refers to a process that leads to self-interested, one-sided outcome

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

Rewarding Supplier Performance

Recognition of a supplier for exceptional performance, contributions, and/or capabilities.

- Rewarding suppliers for outstanding performance _motivates___and _encourages__them to continue to strive for excellence in their products, services, and operations.

- It also strengthens and fosters strong and productive supplier relationships.

Pain

Using a _penalty or punishment___as a negative outcome for poor performance, cost overruns, quality problems

Gain

Using a _reward as a positive outcome__ from exceptional performance:

Supplier Certification

_Verification_that a supplier operates, maintains, improves, and documents effective procedures that relate to the buyer's requirements

Reverse Auctions

A sourcing technique where pre-qualified suppliers enter a website and at pre-designated time and date, and try to _underbid__to win the buyer's business.

Vendor Managed Inventory (VMI)

Suppliers directly _manage buyer inventories__to reduce the buyer's inventory carrying costs and avoid stockouts for the buyer

Co-Managed Inventory (CMI)

an arrangement where a specific quantity of an item is __stored at the buyers location__.

Supplier Co-location

a representative of the supplier is actually _embedded in the buyer's purchasing group_to forecast demand, monitor inventory, and place orders.

Business Ethics

is the application of ethical principles to business. The two (2) main ethical approaches are:

_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.

_Rights and Duties__: some actions are just right in and of themselves, regardless of the consequences. Do the right thing!

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.

_Rights and Duties

some actions are just right in and of themselves, regardless of the consequences. Do the right thing!

_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

Sustainability

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.

Supplier Relationship Management (SRM)

The discipline of strategically planning for, 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.

- Identifying and measuring key strategic suppliers.

- Improving _profits and _reducing costs__

Plan, Do, Check, & Act

The process commonly utilized in continuous improvement

Plan___: Identify an opportunity and plan for change.

_Do_: Implement the change on a small scale.

_Check____: Use data to analyze the results of the change and determine whether it made a difference.

_Act__: If the change was successful, implement it on a wider scale and continuously assess your results. If the change did not work, begin the cycle again.

Total Cost of Ownership

made up of all costs associated with the acquisition, use, and maintenance of a good or service

Supplier Evaluation

A process to identify the _best_and most _reliable_suppliers

Sourcing decisions are made on _facts___ and not on _perceptions (through the use of defined criteria)

Frequent feedback can help avoid _surprises__and maintain good relationships. (Hold regular review meetings)

The Weighted-Criteria Evaluation System

Select the key dimensions of performance mutually acceptable to both buyer and supplier.

Monitor and collect performance data.

Assign weights to each of the dimensions.

Evaluate performance measures between 0 and 100.

Multiply dimension rating by weight and sum of overall score.

Classify suppliers based on their overall score, e.g., Certified, Preferred, Acceptable, Conditional, Developmental, Unacceptable, etc.

Audit and perform ongoing certification review.

The Weighted-Criteria Evaluation System - _-Preferred_

_work with these suppliers in maintaining a competitive position and on new product development

The Weighted-Criteria Evaluation System - Acceptable

require a plan from these suppliers outlining how they will achieve preferred status

The Weighted-Criteria Evaluation System - Developmental

require corrective actions from these suppliers on how they will achieve acceptable level. Look for alternative suppliers if these do not achieve acceptability within a fixed period of time, e.g., 3 months

Supplier Certification Programs

a source that through prior experience and qualification can provide material of such quality that it needs _little if any receiving inspection or testing__ before going into approved stock or into the product process.

ISO 9000 - External Certification

- 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:

_ISO 14000 - External Certification

- A family of standards for environmental management.

- The benefits include reduced energy consumption, environmental liability, waste and pollution, and improved community goodwill.

Supplier Development

the _technical and financial assistance_given to existing and potential suppliers to improve quality and/or delivery performance.

In simpler terms, it can be described as a _buyer's activity to improve a supplier's capabilities

- must be aimed at improving suppliers performance, _not bullying them into charging less_or simply auditing and rewarding them.

_Early Supplier Involvement_(ESI)

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.

_Value Engineering__activities

help the buyer's company to reduce cost, improve quality and reduce new product development time beginning with the initial design

Supplier Recognition Programs

A program to recognize suppliers who achieve the _high performance standards_necessary to meet customer expectations.

Supplier Recognition Programs Three Attributes

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.

Supplier Relationship Management System

o provide a more comprehensive and objective view of a supplier(s) performance

A system will help in identifying and addressing supplier performance issues.

A system can also be used to help make sourcing decisions.

It is important to recognize that an SRM system can only be implemented in line with the _associated business process changes__.

five (5) key points to consider in the development and implementation of an SRM system

_Automation__is meant to handle routine transactions

_Integration___spans multiple departments, processes, and software applications

_Visibility____of information and clear and concise process flows

_Collaboration__through information sharing

_Optimization___of processes and decision making

Operations Management

managing the process to _convert resources into goods and services__, in alignment with the company's business strategy as efficiently and effectively as possible, while also controlling costs.

Manufacturing

To process or make __raw materials or components into a finished product__, especially by means of a large-scale industrial operation, i.e., mass production.

Manufacturing Strategies

Companies must develop a manufacturing strategy that suits the _types of products__that they produce, their _customer's expectations__, and their _strengths__.

Make-to-Stock (MTS)

means to _manufacture products for stock_ based on demand forecasts. Push system.

Make-to-Order (MTO)

a manufacturing strategy in which manufacturing starts only _after a customer's order is received_.