unit 2 scm

supply management

• broad set of activities carried out by organizations

  • analyze sourcing opportunities

  • develop sourcing strategies

  • select suppliers

  • procure goods and services

  • measure and manage suppliers

global sourcing

• competing against world class organizations

  • global competition requires global sourcing

  • considerations

    • where and when are goods and services needed?

    • what suppliers have the best mix of performance characteristics?

  • advances in informations systems have enabled global sourcing efforts

  • global sourcing applies to services and business processes, as well as manufactured goods

    • invoice processing, financial analysis, call centers, IT processing

performance impact

• affecting the way your company performs

• quality

  • performance, features, reliability, conformance, durability, serviceability, perceived quality

• delivery

  • right qty, right time, right place

• price

financial impact

• direct influence on bottom line profits

COGS

• the purchased cost of goods from outside suppliers

merchandise inventory

• a balance sheet item that shows the amount a company paid for the inventory it has on hand at a particular point in time

profit margin

• the ratio of earnings (profit) to sales (revenue) for a given time period

profit leverage effect

• decreasing the money spent on purchasing functions increases profit FASTER than increasing revenue as a result of marketing and sales

• every $1 saved in purchasing, lowers COGS by $1 and directly contributes $1 to bottom line profits

financial indicators reported as “percent of sales”

• % COGS = COGS/sales revenue

• pretax profit margin = pretax profit / sales revenue

same amount

• when purchasing/procurement reduces COGS by a qty or percentage, the money saved increases pretax profit by ?

  • ex., reducing cogs by $10 increases pretax profit by $10

  • ex., COGS = $100. reducing cogs by 10% reduces cogs by

    • $100 × 0.1= $10, which increases pretax profit by $10

profit leverage effect

• sales must increase by

  • [cogs savings]/[pretax profit margin] to have the same effect

  • ex., pretax profit margin = 10%, purchasing/procurement save $10

    • sales must increase by $10/0.1= $100 to have the same effect on profit

strategic sourcing process

• identifying ways to improve long term business performance by better understanding sourcing needs, developing long term sourcing strategies, selecting suppliers, and managing the supply base

assess opportunities

• step 1 of strategic sourcing process

• spend analysis

  • the application of quantitative techniques to purchasing data in an effort to better understand spending patterns and identify opportunities for improvement

• purpose

  • determine where efforts to change purchasing practices will have the most influence

    • what categories of products or services make up the bulk of company spending?

    • how much are we spending with various suppliers? who are our suppliers? how much are we spending with each?

    • what are our spending patterns like across different locations? what divisions, departments, plants, business units are responsible for the most spending?

pareto chart

• visualize most important categories

• graphically orders categories of numerical data in descending order so that the most important categories are easily recognized

profile internally and externally

• step 2 of strategic sourcing process

  • 2 approaches to creating profiles

    • [internal] category profile

      • understanding all aspects of a particular sourcing category could ultimately have an impact on the sourcing strategy

        • breaking down categories of purchasing into more detail

        • identifying where problems are occurring internally

        • consolidate purchases btw depts to save money (higher volume same amt)

    • [external] industry analysis

      • profiling the major forces and trends that are impacting an industry, including pricing, competition, regulatory forces, substitution, technology changes, and supply/demand trends

        • maintaining visibility of global political and regulatory policy

        • tracking trends in commodity and supply pricing

        • monitoring market, customer, and competitor trends

internal category profile

• understanding all aspects of a particular sourcing category could ultimately have an impact on the sourcing strategy

  • breaking down categories of purchasing into more detail

  • identifying where problems are occurring internally

external industry analysis

• profiling the major forces and trends that are impacting an industry, including pricing, competition, regulatory forces, substitution, technology changes, and supply/demand trends

  • maintaining visibility of global political and regulatory policy

  • tracking trends in commodity and supply pricing

  • monitoring market, customer, and competitor trends

develop the sourcing strategy: make or buy

• make or buy decision

  • high level, strategic decision regarding which products or services will be provided internally (make) and which will be provided by external supply chain partners (buy)

    • insourcing

      • the use of resources within the firm to provide products or services “do it myself” [insourcing the supply chain is “vertical integration”]

  • outsourcing

    • the use of supply chain partners to provide products or services; “pay someone to do it”

• where is the physical location of the producer/provider of products or services?

  • off shoring:

    • location of an insourced or outsourced firm in a foreign country

  • near shoring

    • offshoring in an adjacent country

  • on shoring

    • location of an insourced or outsourced firm in the firm’s country

insourcing

• the use of resources within the firm to provide products or services “do it myself” [insourcing the supply chain is “vertical integration”]

outsourcing

• the use of supply chain partners to provide products or services; “pay someone to do it”

nearshoring

• offshoring in an adjacent country

on shoring

• location of an insourced or outsourced firm in the firm’s country

reasons to make or insource

• better control over quality

• better visibility of process

• better control over social and environmental impact

• to protect intellectual property

• for core competencies

• to utilize excess capacity

• to reduce handling/storage costs

• when product life cycles are stable

reasons to buy or outsource

• if low volumes increase costs

• to maintain strategic flexibility

• to gain access to state of the art technology and processes

• cost and/or quality advantage

• when suppliers are reliable

• when relationships have been established

• when product life cycles are short

total cost analysis

• a process by which a firm seeks to identify and quantify all of the major costs associated with various sourcing options

  • direct costs

    • costs tied directly to the level of operations or supply chain activities

    • “if you make/do more, the unit cost increases directly” incurred.

      • ex., part time labor, direct material costs, direct energy costs

      • multiply “direct costs” by the “number of units needed” to calculate “total costs”

    • incremental direct costs

      • costs that are incurred only after a certain number of products are produced

      • “each time you produce x, a cost of $y is incurred”

      • ex., direct labor, transport cost, direct maintenance cost, setup cost

      • divide “number of units needed” by the threshold “x” and multiply by the incremental cost $y to calculate “total costs”

    • one time costs

      • costs that are incurred only when a product or service is first produced

      • ex., product design, fixture purchase, mold/die purchase

      • one time costs are added directly to “total costs”

    • indirect costs

      • costs that are not tied directly to the level of operations or supply chain activities

      • “if you make/do more, the unit cost does not change”

      • ex., administrative costs, overhead, depreciation, basic utilities

      • difficult to calculate accurately. for this class, indirect costs wil be given as an allocated direct cost ($/unit)

direct costs

• costs tied directly to the level of operations or supply chain activities

• “if you make/do more, the unit cost increases directly” incurred.

  • ex., part time labor, direct material costs, direct energy costs

  • multiply “direct costs” by the “number of units needed” to calculate “total costs”

incremental direct costs

• costs that are incurred only after a certain number of products are produced

• “each time you produce x, a cost of $y is incurred”

• ex., direct labor, transport cost, direct maintenance cost, setup cost

• divide “number of units needed” by the threshold “x” and multiply by the incremental cost $y to calculate “total costs”

one time costs

• costs that are incurred only when a product or service is first produced

• ex., product design, fixture purchase, mold/die purchase

• one time costs are added directly to “total costs”

indirect costs

• costs that are not tied directly to the level of operations or supply chain activities

• “if you make/do more, the unit cost does not change”

• ex., administrative costs, overhead, depreciation, basic utilities

• difficult to calculate accurately. for this class, indirect costs wil be given as an allocated direct cost ($/unit)

calculate total cost analysis

• convert each cost listed to $/part

  • if given dollars spent and total parts, dollars spent/total parts

    • (dollars/part)

  • if given dollars/day and parts/day

    • dollars/day x day/part = dollars/part

  • if given dollars/person and parts/person

    • dollars/person x person/part = dollars/part

• add together all $/part measures to find total $/part

• to calculate total lifetime cost, multiply $/part by the total parts needed

portfolio analysis

• step 3 of sourcing strategy

• kralijic’s portfolio analysis

  • a structured approach used by decision makers to develop a sourcing strategy for a product or service, based on the value potential and the relative complexity or risk represented by a sourcing opportunity

    • the routine quadrant

      • readily available products or services representing a relatively small portion of a firm’s purchasing expenditures of low cost/value

    • the leverage quadrant

      • standardized and readily available products or services representing a significant portion of spend

    • the bottleneck quadrant

      • products or services with unique or complex requirements that can be met only by a few potential suppliers representing low cost/value

    • the critical quadrant

      • products or service with unique or complex requirements coupled with a limited supply base that are high cost/value

routine quadrant

• readily available products or services representing a relatively small portion of a firm’s purchasing expenditures of low cost/value

leverage quadrant

• standardized and readily available products or services representing a significant portion of spend

bottleneck quadrant

• products or services with unique or complex requirements that can be met only by a few potential suppliers representing low cost/value

critical quadrant

• products or service with unique or complex requirements coupled with a limited supply base that are high cost/value

bottleneck sourcing strategy

• complex specifications requiring complex manufacturing or service processes

• few alternative sources of supply

• large impact on operations or maintenance

• new or untested technology and processes

• ex., custom product accessories, custom machine parts

critical or strategic sourcing strategy

• critical to profitability and operations

• few qualified supply sources

• large expenditures

• design and quality critical

• complex and/or rigid specifications

• ex., fashion clothing/jewelry, custom electronics

routine or arms length sourcing strategy

• many alternative products and services

• many alternative supply sources

• low value, small individual transactions

• everyday use, unspecified

• anyone could buy it

• ex., office suppliers, fasteners, common tools

leverage or preferred

• high expenditures, commodity items

• large marketplace capacity, ample inventory

• many alternative products and services

• many qualified supply sources

• market/price sensitive

• ex., standard parts, raw material

bottleneck

• ensure supply continuity by decreasing the uniqueness of the suppliers and managing the supply

  • widen the specifications where possible

  • increase competition by developing new suppliers

  • set medium term contracts

  • utilize competitive bidding

critical or strategic

• form partnerships and communication with selected suppliers

  • persistent negotiation tactics

  • monitor and manage supplier processes

  • create contingency plans

  • analyze marketplace and competition trends

routine or arms length

• simplify the acquisition process by increasing the role of systems and reducing the effort to purchase

• supplier rationalization- minimze suppliers used

• automate the purchase process - electronic data

• vendor managed inventory

• minimal negotiation

critical or strategic

• form partnership and communication with selected suppliers

• persistent negotiation tactics

• monitor and manage supplier processes

• create contingency plans

• analyze marketplace and competition trends

leverage or preferred

• maximize commercial advantage by maintaining pressure on suppliers to improve

• relationships with several preferred suppliers

• long term contracts with conditions for improvement

• expectation of lower costs over time

• coordination of procurement with market cycles

single sourcing

• the buying firm depends on a single company for all or nearly all of a particular item or service

  • advantages: volume discounts, reduction in variability, enables strong relationships

  • disadvantages: increased supply risk, supplier dependence, must monitor best practices

multiple sourcing

• the buying firm shares its business across multiple suppliers

• advantages: creates competition, shares risk, promotes improvements

• disadvantages: decreases dedication of suppliers, increases variability

cross sourcing

• the buying firm uses a single supplier for one particular part or service and another supplier with the same capabilities for a different part or service

• balances risk while allowing for strong relationships with suppliers

dual sourcing

• multiple sourcing across only two suppliers

• enables stronger relationships while reducing risk

maverick spending

• employees buy goods or services without following the organization's established purchasing rules, often leading to higher costs, compliance risks, and reduced spending control

• basically go to staples with company cc and buy paper