proc #2

Strategic Criteria

• Focuses on the financial implication or impact of a requirement

• Risk reduction

• Other Needs

  • access to new technology, access to new markets, assurance of supply in tight markets

Traditional Criteria

• Quality

• Quantity

• Delivery

• Price

• Service

7 categories of need

1. resale

2. Raw and Semi-Processed Materials

3. Parts, Components and Packaging

4. Maintenance repair and operating (MRO) Small Value Purchases (SVP)

5. capital

6. services

   1. Every organization acquires a variety of services

7. other:

   1. Anything not covered by the above categories falls into this last one. Major requirements could be energy and water

      1. This category would also include unusual and infrequent requirements, probably better dealt with on an ad hoc or project basis.

Resale (Trading Goods)

A category of needs comprised of retailers and wholesalers who purchase goods to sell to others

Raw and Semi-Processed Materials

Most users of materials are converters, such as factories, and this category includes commodities, agricultural and industrial.

Parts, Components and Packaging

• Assemblers use parts and components produced by their suppliers to create a finished product

• Parts and components may be standard or special depending on the decision of the designer of the finished product.

Maintenance repair and operating (MRO) Small Value Purchases (SVP)

• Every organization has MRO requirements and SVP’s. The availability of MRO suppliers is critical to maintain continued uninterrupted operation of the office, factory, facility, etc

• Because many MRO requirements are relatively small in dollar value, SVP’s are also included in this category.

  • For SVP’s assuring availability at minimum acquisition cost is a challenge.

capital

• Any requirement that accountants classify as capital, and, therefore, an investment, becomes a capital item.

  • Equipment, IT, real estate and construction are included in this category.

• Capital items can be depreciated, are often bought under a separate budgetary allocation and may require special financing arrangements

Total Cost of Ownership (TCO) Analysis

A source selection tool for capital goods where initial price may only represent 30% to 50% of the lifetime cost

Opportunity to Affect Value

A concept stating the ability to add value is highest during need recognition and description and lowest at payment

Quality

• The ability of a supplier to provide goods and services in conformance with specifications

• Item or service performs per original requirements

Suitability

• Ability of material to meet its intended function

• Often referred to as fitness for use

Reliability

• The mathematical probability that a product will function as intended for a stipulated period of time

• Useful to recognize varying reliabilities of components and products acquired

Eight Dimensions of Quality service

1. Performance

   1. The primary function of the product or service

2. Features

   1. The bells and whistles.

3. Reliability

   1. The probability of failure within a specified time period.

4. Durability

   1. The life expectancy.

5. Conformance

   1. The meeting of specifications.

6. Serviceability

   1. The maintainability and ease of fixing.

7. Aesthetics

   1. The look, smell, feel, and sound.

8. Perceived quality

   1. The image in the eyes of the customer

Appraisal Costs

(cost of good quality)

• costs associated with the evaluation of purchased materials, processes, products, and services to ensure that they conform to specifications

They include costs for:

• Testing, evaluating, and inspecting the quality of incoming materials, process setups, and products, against agreed upon specifications.

• Quality assessment and approval of suppliers.

• performing audits to confirm that the quality system is operating properly

Prevention Costs

• are related to the design, implementation, and maintenance of the quality management system

• They are planned, and experienced before actual products or materials are acquired or produced

They include costs for:

• Establishment of specifications for incoming materials, processes, products, and services

• Creation of quality plans

• Development, preparation, and maintenance of quality training

• Creation and maintenance of the quality system

Internal Failure Costs

• Costs occurring when a product fails standards and is identified before delivery to the customer

• occur when the product or service does not meet the designed quality standards, and are identified before the product or service is delivered to the customer.

They include costs for:

• Defective product or material that cannot be used, sold, or repaired, and the costs associated with correction of these defects.

• Unnecessary work or inventory resulting from errors.

• Activities required to establish the root causes of product or service failures

Lean history

• Starting in the 1910’s, Henry Ford’s mass production line was a first breakthrough by using continuous assembly systems that made parts find their way into finished products

• In the 1940’s, Taichii Ohno and Shigeo Shingo created the Toyota Production System (TPS), which incorporated Ford’s production system and other techniques to form the basis of it

• The term was first coined by John Krafcik in 1988 and the definition was expanded in the 1990 book, The Machine that Changed the World

Total Quality Management (TQM)

A philosophy focused on satisfying customer needs by integrating quality throughout all activities

• Quality must be integrated throughout the organization’s activities

• There must be employee commitment to continuous improvement

• The goal of customer satisfaction, and the systematic and continuous research process related to customer satisfaction, drives this

• Suppliers are partners in the process

Lean

• goal is the elimination of waste and the minimization of the amount of all resources used in the operation of a company

• it is philosophy / culture

  • is NOT a tool box of methods, ideas, or methodologies

• is standard in many industries

regularly results in:

• Large cost reductions

• Improved quality

• Increased customer service

Six Sigma

• focuses on improving the quality of process outputs by identifying and removing the causes of defects (errors) and minimizing variability in manufacturing and business processes

• goal is for <3.4 Defects Per Million Opportunities (DPMO)

• structured and data-driven approach to drive a near-perfect quality goal, i.e., “Zero Defects”

DMAIC

(The core Six Sigma improvement tool)

• Define:

  • define the problem

  • What is the customers’ expectation of the process?

• measure:

  • map out current process

  • What is the frequency of defects?

• analyze

  • analyze the cause of problem

  • Why, when and where do defects occur?

• improve:

  • implment & improve situation

  • How can we fix the process?

• control

  • maintain the solution

  • How can we make the process stay fixed?

ISO 9000

An international consensus on good quality management practices regarding process control

ISO 14000

Quality standards focusing specifically on environmental management issues

3 internal Inventory stock Levels held by companies to:

(3 levels = strategic, safety, cycle stock)

• Meet customer demand

• Buffer against uncertainty in demand and/or supply

• Decouple supply from demand

• Decouple dependencies in the supply chain

pipeline Inventory

• inventory in transit.

• Inventory held / owned by suppliers, or by wholesalers, distributors, retailers, and customers

• (considered external inventory)

Economic Order Quantity (EOQ)

• A model determining optimal order quantity by minimizing the sum of annual carrying and ordering costs

  • is a fixed-order quantity model

  • The model seeks to determine an optimal order quantity

Order Costs (Setup Costs)

• Costs incurred each time an order is placed

  • ex: Order preparation costs, Order transportation costs, Order receipt processing costs, Material handling costs

Carrying Costs

• Costs incurred for holding inventory

  • Cost of capital

    • specified by senior management

  • Taxes

    • on inventory held in warehouses

  • 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

ABC System

Classifies inventory by importance

steps:

• Determine annual usage or sales for each item.

• Determine % of total usage or sales that each item represents.

• Rank items from highest to lowest %.

• Classify items into groups:

  • A: Highest Value

    • A' items represent 20% of items but 80% of total cost

  • B: Moderate Value

    • require closer management since they are relatively more expensive (per unit), require more effort to purchase / make, & may be more prone to obsolescence

• C: Least Valuable (lowest priority)

Enterprise Requirements Planning system (ERP)

• information system connecting all functional areas and operations of an organization, and in some cases suppliers and customers, via common software infrastructure and database

  • provides a means for supply chain members to share information so that scarce resources can be fully utilized to meet demand, while minimizing supply chain inventories

Materials Requirement Planning (MRP)

A system designed to get the right materials to the right place at the right time

• Creates schedules identifying the specific parts and materials required to produce end items

• Determines exact numbers needed

• Determines the dates when orders for those materials should be released, based on lead times

Kanban

A 'sign' or 'instruction card' used as a visual signal to trigger inventory replenishment based on consumption

importance of Logistics (Costs)

• May account for 40% of total cost and is often over looked for savings

• Increasingly more important with Global Sourcing

• Not just a cost issue…service levels and reliability are critical

• Outsourcing to 3PLs is very common

• Firm still needs to manage the design and modeling of the logistics networkGenerally, costs increase as distance, quantity and speed increase

choosing free on board (FOB) Point determines 4 things

1. Who pays the carrier

2. When legal title to goods being shipped passes to the buyer

3. Who is responsible for preparing and pursuing claims with the carrier

4. Who routes the freight Shipping Terms and responsibilities covered by INCOTERMS (International Commercial Terms)

FOB Destination

seller:

• responsible for goods until destination

• bears freight costs

• counted in sellers inventory unless received by buyer

buyer:

• ownership of goods transferred after receiving the goods

• records transaction & increase in inventory after goods were received

• not responsible for any damages or loss in transit

Fair Price

The lowest price that ensures a continuous supply of the proper quality where and when needed

Direct Costs

• Can be specifically and accurately assigned to a given unit of production of a product or service

• Most costs are “variable”

  • Ex: 10 pounds of steel, 30 min of labor on machine

Indirect Costs

• incurred in the operation of a production plant or service process, but normally cannot be related directly to any given unit of production of a product or service

• Often referred to as “overhead”

  • Ex: Rent, property taxes, power, machine depreciation

Variable Costs

Costs that vary directly and proportionally with the number of units produced

Fixed Costs

Costs that remain the same regardless of the number of units produced

Sherman Antitrust Act (1890)

Any combination, conspiracy, or collusion with the intent of restricting trade in interstate commerce is illegal

• It is illegal for suppliers to collectively engage in price-fixing

Robinson-Patman Act (1936)

• Suppliers must sell the same item, in the same quantity, to all customers at the same price

  • aka “one price law”

• Some exceptions: lower price for larger purchase quantities, distressed & obsolete product, meeting the lower price of local competition in a particular geography

Firm-Fixed-Price (FFP)

A contract pricing option where the price set is not subject to change under any circumstances

• Ex: The contractor must construct an office building for 1,000,000 USD in six months

Cost-Plus-Fixed-Fee (CPFF)

A contract where the buyer reimburses all reasonable costs plus a specified profit amount

• A maximum amount may be specified for the cost

• Ex: software development company hired to build a new application for:

  • fixed fee (for profit) + other costs (e.g. licenses, hardware, time

Cash Discounts

• A discount granted by sellers to secure prompt payment

  • ex: 2% discount w/ payment terms of 10 days

• Granted by virtually every seller of industrial goods

Trade Discounts

• Granted by a manufacturer to a distributor

• Purpose is to grant discount for the cost of doing business to move goods through distributor channel

Special Problems of Equipment Purchasing

• Strategic considerations and high cost of failure

• Substantial amounts of money for a single purchase

• Long life and infrequent purchases

• Difficulty estimating the total cost

• Technology forecasting

• Dedication of time and resources during start-up

• Coordination with existing processes and operations

reasons to purchase capital goods

• Capacity

• Economy in operation and maintenance

• Increased productivity

• Better quality

• Dependability in use

• Savings in time or labor costs

• Durability

• Safety, environmental and emergency protection

Source Selection Criteria for Capital Goods Purchases

(ex: buildings, machinery, equipment, vehicles, and tool)

• Total cost of ownership (TCO) analysis

  • Purchase cost may only represent 30 to 50 percent of TC)

• Engineering Service

  • Presale and post sale service

• Design and R&D capabilities and costs

• Legal considerations

  • Patents, health & safety

• Disposal at end of useful life

Reasons for Lack of Supply Involvement in Service Acquisition

• Complexity of specifying service needs and analyzing potential service provides means that the user has greater expertise than purchasing

• The buying of services involves more of a personal relationship between the supplier and user.

• The demand for the service is not always easy to forecast

The Four Integrated Stages of Quality Function Deployment

can only be done through strategic alliances with suppliers:

• Product planning

  • to determine design requirements

• Parts deployment

  • to determine parts characteristics

• Process planning

  • to determine manufacturing requirements

• Production planning

  • to determine production requirements

control charts

• is a graph used to study how a process changes over time.

• Statistical “tests” & visual graphics

  • Delineate common cause from special cause

  • Stable vs. unstable

  • Process breaks

• Quantify process data parameters

common cause

(type of variation)

always present to some degree in the process

special cause

• outside, non-random problems

  • ex: machine breakdown

• Out of Control: 1 or more points above or below 3-standard deviations from the centerline

• Trends: 6 or more points in a row increasing or decreasing

• Process Shift: 8 or more points in a row above or below the centerline

The Malcolm Baldrige National Quality Award

• Annual award for U.S. organizations in business, health care, education and nonprofit

• Recognizes excellence in quality achievement and quality management

quantity and Timing: How much to acquire and when? – Impacted by…

• Forecasts

  • managers must make purchase decisions long before actual requirements are known

• Costs

  • order costs, inventory carrying costs, shortage

• Availability

  • paying higher prices or delivery charge for products or services not available

• Price-Volume Relationship

  • reduced prices for buying larger quantities

• Shortages: may cause serious disruptions

Qualitative Forecasting Techniques

• based on opinion and intuition.

• Generally used when data are limited, unavailable, or not currently relevant.

  • Examples: new product, new market segment

• Forecast depends on skill and experience of forecaster(s) and available information

The five ____models used are:

1. Personal Insight

2. Jury of Executive Opinion

3. Delphi Method

4. Sales Force Estimation

5. Customer Survey

Quantitative Forecasting Techniques

• uses mathematical models and historical data to make forecasts

• It is generally recommended to use a combination of quantitative and qualitative techniques

• Time Series:

  • based on the assumption that the future is an extension of the past.

  • Historical data is used to predict future demand

  • The most frequently used among all the forecasting models.

• Cause and Effect

  • assumes that one or more factors (independent variables) predict future demand

    • e.g: seasonality in retail markets

obsolete inventory

Stock that is expired, out-of-date or no longer needed

safety stock

• also known as “buffer stock,” is inventory that is above and beyond what is actually needed to meet anticipated demand.

• A quantity of stock planned to be in inventory to protect against fluctuations in demand or supply.

  • Companies operating in a make-to-stock environment will generally maintain some amount of this stock whether based on a management decision, or based on a safety stock determination formula.

fixed order quantity system

• If the review determines that an order should be placed, then the order for a pre-defined quantity for that item is placed.

Two main variables to calculate:

• Reorder Point (ROP)

• Order Quantity (Q)

Assumptions:

• A constant demand (d) rate

  • ex: not erratic, seasonal, etc.

• Inventory position (IP) is reduced

  • (i.e., consumed/used) by a rate of (d).

• Replenishment order placed when reorder point (ROP) is reached.

• When inventory is received, (IP) increases by the order quantity (Q).

• (Q) computed using the economic order quantity (EOQ) model.

• Lead time (L),

  • the time between placing an order and receiving delivery of the order, is known and constant.

• Inventory position (IP) is reviewed on continual basis

forms of inventory

• Raw materials, purchased parts and packaging

• Work-in-progress

• Finished goods

• MRO items

• Resale items

functions of inventory

• transit or pipeline inventories

• Cycle inventories (sell in lots)

• Buffer or uncertainty inventories or safety stock

• Anticipation or certainty inventories (for well defined future needs, seasonal)

• Decoupling inventories (method to create independence)

mode & selector criteria

• Required delivery time

• Reliability and service quality

• Available services

  • (warehousing, inventory mgmt.)

• Type of item being shipped

  • (hazardous material)

• Shipment size

• Possibility of damage

• Carrier financial situation

• Handling of claims

just in time (JIT)

• strive to eliminate waste

  • Waste includes: inefficient set-up procedures, inventories

• Focus on all aspects of the production system: human resources, supply, technology, and inventories

• is based on the logic that nothing will be produced until it is needed

  • When a unit is sold, the system pulls a replacement unit from the last position in the system

  • This process continues throughout the system

• is characterized by providing the exact quantity needed at the precise moment it is required —> Same objective as MRP

• However, to be able to support __ firms require certain capabilities:

  • short production lead times

  • flexible resources (labor, material and equipment)

  • exacting quality

air (cargo)

• fastest but also most expensive

• Paired with trucks for door-to-door delivery

• Cannot carry extremely heavy or bulky cargo.

  • Ideally, items with a high cost to weight ratio

• Shipments involve very light, high-value goods that need to travel long distances quickly including; jewelry, fine wines, pharmaceuticals, racehorses, etc.

  • Half of the goods transported by air are carried by freight–only airlines

    • e.g., FedEx. Other half in passenger planes with luggage

rail

• is slow and inflexible but it has the most capability

• competes for transportation when distance long

• Paired with trucks for door-to-door delivery.

  • As a result, carriers have begun purchasing motor carriers and can now offer point-to-point pickup and delivery service

• Shipments involve building materials, construction equipment, coal, gravel, sand, lumber, etc.

  • Aging infrastructure and equipment are an issue

truck

(motor freight)

• Most flexible mode of transportation

• Carries > 80% of U.S. Freight —> (most common)

  • Carries nearly anything from packaged household goods, to

    building materials, to liquid petroleum, etc

water

(marine= inflexible and slow, needed for int’l containers)

• Inexpensive

• Very slow and inflexible

• Includes inland waterways, coastal and intercostal, and deep-sea cargo shipments

  • Primarily used for heavy, bulky, low value materials like coal, grain, sand, and petroleum.

    • However, because transport is so cheap almost any item may be shipped by water including: automobiles, produce, containerized cargo, etc

pipeline

• Most reliable form & Lowest per unit cost for transportation

• Limited variety of commodities

• transported in a liquid or gaseous state

  • petroleum, natural gas, drinking water, gasoline

intermodal transportation

• the use of multiple modes of transportation to execute a single transport shipment

  • sometimes referred to as 6th mode of transportation

• growing substantially because it is fairly cost-efficient and cost-effective

the most common combos are:

• Rail and Motor Carriers

  • (i.e., trucks)

• Rail and Water Carriers

• Roll-on/Roll-off Ships

  • (for cars, truck, other self-propelled modular transporter)

common carrier

available to anyone at published rates

private carrier

company owned carrier

Contract carriers

for-hire carrier at contractual rates

Exempt carriers

• for-hire and exempt from regulation

  • Originally established for farmers

cost approach

• Price is set greater than direct costs, allowing for sufficient contribution to cover indirect costs and overhead, and leaving a margin for profit

• Negotiation is a particularly useful tool here

market approach

• Prices are set in the marketplace and may not be directly related to cost

• If demand is high relative to supply, prices should increase

  • e.x: commodities, cell phone industry

quick response

the rapid replenishment of a customer's stock by a supplier with direct access to data from the customer's point of sale

Keiretsu relationships

involves companies both upstream and downstream of a manufacturing process, remaining independent but working closely together for mutual benefit

rail & motor carriers (truck)

Offer point-to-point pickup and delivery service known as Trailer-on-Flatcar (TOFC)

rail & water carriers

Offer point-to-point pickup and delivery service known as Container-on-Flatcar (COFC)

competitive bidding

• Bidders must be qualified to make the item in question in accordance with the buyer’s specifications and to deliver it by the date required

• Bidders must be sufficiently reliable in other respects to warrant serious consideration as suppliers

• Bidders must be numerous enough to ensure a truly competitive price

  • (note: usually at least two suppliers are invited to bid; however, normally three or four are invited)

• Bidders must not be more numerous than necessary

  • (note: number of suppliers to whom inquiries are sent is largely a matter of the buyers’ judgment)

conditions for competitive bidding

• There must be at least two, and preferably more, qualified bidders

• The suppliers must want the business

  • a “buyer’s market”

• Specifications must be clear

• No collusion between bidders

multiple discounts

in some industries and trade, prices quoted on a multiple discount basis – based on a sliding scale

quantity discounts

Applies to particular quantities and vary in proportion to amount purchased

cycle stock

• Inventory that a company builds to satisfy its’ immediate demand.

• stock depletes gradually as customer orders are received, and is replenished cyclically when supply orders are received.

  • The amount of stock that a company holds is dependent on actual demand in the immediate time period, supply replenishment lead time and order quantities

strategic stock

• Additional inventory beyond cycle and safety stock, generally used for a very specific purpose or future event, and for a defined period of time

  • Also called anticipation stock, build stock, or seasonal stock

A company may decide to carry strategic stock to:

• hedge currency fluctuations take advantage of a price discount protect against a short-term disruptive event in supply

• take advantage of a business opportunity

• for life cycle changes: seasonal demand, new product launch, transition protection

bin system

• inventory system that uses either one or two bins to hold a quantity of the item being inventoried.

  • It is mainly used for small or low value items.

• When the inventory in the first bin has been depleted, an order is placed to refill or replace the inventory.

  • The second bin is set up to hold enough inventory to cover demand during the replenishment lead time so as to last until the replacement order arrives

mode

refers to the way in which goods are transported

carrier

refers to the company that transports the goods

general freight carriers

• A trucking company which handles a wide variety of commodities in standard trailers. Freight is generally palletized.

  • These can be LTL or FTL carriers. [see next slide for definition]

  • They carry the majority of goods shipped.

  • Does not require the use of specialized equipment.

specicalized carriers

• A trucking company which handles the movement of cargo that requires specialized equipment for transportation because of the shipment's size, weight and shape.

  • Transport commodities like liquids, petroleum, household goods, building materials, and other specialized items.

Less-Than-Truckload (LTL)

• is the transportation of relatively small freight

  • i.e., the freight does not require the entire space of a truck.

• Advantages:

  • Can be cost effective

  • There are more available carrier options.

  • Ideal for small businesses.

• Disadvantages:

  • Increased risk of theft/damage

  • Increased shipping times and delays

full truckload (FTL)

• is the transport of goods that fill up a full truck, or a partial load shipment occupying an entire truck.

• Advantages:

  • Best way to transport large shipments

  • Ideal for high risk or delicate freight shipments

  • Considerably faster than LTL.

• Disadvantages: Costs more than LTL