sc session 6 & 7

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 to sales for a given time period

Decreasing the money spent on purchasing functions

increases profit FASTER than

increasing revenue as a result of marketing and sales

Global Sourcing

Competing against World-Class organizations

Global Sourcing Considerations

Where and when are goods and services needed and What suppliers have the best mix of performance characteristics?

Financial Impact

direct influence on bottom-line profits

Decreasing the money spent on purchasing functions does what?

Increases profit faster than increasing revenue as a result of marketing and sales

Every $1 saved in purchasing would?

Lower COGS by $1 and directly contributes $1 to bottom line profits

Percentage COGS formula

COGS/Sales Revenue

Pretax Profit Margin Formula

Pretax Profit / Sales Revenue

Profit Leverage Effect Formula

[COGS Savings] / [Pretax Profit Margin]

Strategic Sourcing

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.

Strategic Sourcing Process

1 Assess Opportunities → 2 Profile Internally & Externally → 3 Develop the Sourcing Strategy → 4 Screen Suppliers & Create Selection Criteria → 5 Conduct Supplier Selection → 6 Negotiate & Implement Agreements

Spend Analysis

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

Spend Analysis Purpose

Determine where efforts to change purchasing practices will have the most influence.

Pareto Chart

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

Two approaches to creating profiles

Category Profile and Industry Analysis

Category profile (Internal)

Understanding all aspects of a particular sourcing category that could ultimately have an impact on the sourcing strategy. Also breaks down categories of purchasing into more detail and identifies where problems are occurring internally.

Industry Analysis (External)

Profiling the major forces and trends that are impacting an industry, including pricing, competition, regulatory forces, substitution, technology changes, and supply/demand trends. Also maintains visibility of global political and regulatory policy, tracks trends in commodity and supply pricing, monitoring market, customer, and competitor trends.

The Make-or-Buy Decision

A high-level, strategic decision regarding which products or services will be provided internally and which will be provided by external supply chain partners.

Insourcing

The use of resources within the firm to provide products or services.

Outsourcing

The use of supply chain partners to provide 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

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

Direct Costs

Costs tied directly to the level of operations or supply chain activities

Incremental Direct Costs

Costs that are incurred only after a certain number of products are produced

One-Time Costs

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

Indirect Costs

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

Total cost analysis calcs

Kraljic’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.

Single sourcing

The buying firm depends on a single company for all or nearly all of a particular item or service.

Single sourcing advantages

The buying firm depends on a single company for all or nearly all of a particular item or service.

Single sourcing disadvantages

Increased Supply Risk, Supplier Dependence, Must Monitor Best Practices

Multiple sourcing

The buying firm shares its business across multiple suppliers.

Multiple sourcing advantages

Creates Competition, Shares Risk, Promotes Improvements

Multiple sourcing 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. Also balances risk while allowing for strong relationships with suppliers.

Dual sourcing

Multiple sourcing across only two suppliers and enables stronger relationships while reducing risk.

Maverick Spending

When people in an organization need a particular item and then go to a local supplier and just buy that item at retail off the shelf.

Qualitative criteria from Bauer SCM Recruiting Companies

Safety, Sustainability, Quality, Delivery, Cost (SSQDC)

Qualitative criteria from the Textbook

Process and design capabilities and technologies, Management capability, Financial condition & cost structure, and Longer-term relationship potential, willingness to share knowledge

Competitive Bidding

Requesting bids from potential suppliers with a formal RFQ

What does Competitive Bidding include?

Descriptions, specifications, quantities, delivery, terms of payment, contract length, etc.

When to use Competitive Bidding

Price is a dominant criteria, requirements are straightforward

Negotiating

Interactive and iterative process for determining purchase conditions

What does Negotiating involve?

Multiple communications to arrive at an agreement

When to use negotiating?

Exact specification and performance is unknown (new product development) and the buyer needs input or guidance or collaboration from the supplier

Contracting

Legal formalization of the buyer-supplier relationship and agreements

Fixed-price contract

Stated price doesn’t change

Cost-based contract

Price of the good or service is tied to the cost of some other key input(s) or other economic factors

Purchase Order (PO)

A document that authorizes a supplier to deliver a product or service and often includes key terms and conditions such as price, delivery, and quality requirements

Statement of work (or scope of work)

Terms and conditions for a purchased service that indicate, among other things, what services will be performed and how the service provider will be evaluated

What must settlement and payment be paid through in the procure to pay cycle?

Electronic Funds Transfer (EFT)

Components of ethical sourcing

Ethical treatment of workers, fair trade products, and requires verification and management

Components of sustainable sourcing

Green purchasing and Sustainability

Ethical Treatment of Workers

diversity & minorities, child labor, worker abuse, human rights, animal rights, safety, pay scales

Fair Trade Products

Paying fair prices for products manufactured or grown by a disadvantaged producer in a developing country

Sustainability

Replenishment of natural resources

Green Purchasing

Overall reduction in packaging, materials, waste, byproducts with a goal of environmental sustainability

Supply Chain Disruptions

Caused by natural disasters, economic or political events

Risk Assessment and Strategy

Taking a broad view of potential risks, prioritizing risk potential, and developing risk management strategies

Procure to pay cycle

Ordering → Follow up and expediting → Receipt and inspection → Settlement and payment → Records Maintenance