Introduction to Supply Management Exam 2

procurement

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

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 function of, and the responsibility for, acquiring materials, supplies, and services for an organization

Institute of Supply Management (ISM)

defines Supply Management as the "Identification, acquisition, access, positioning, and management of resources an organization needs, or potentially needs, in the attainment of its strategic objectives."

purchase requisition

an internal document that defines the needs for goods and/or services

no

does a purchase requisition constitute a contractual relationship with an external party?

Purchase Order (PO)

an external commercial document. It is the official offer issued by a buyer to a seller to acquire goods or services

purchase order

(purchase order OR purchase requisition?) becomes a legally binding contract ONLY when accepted by the supplier

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

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 (i.e., price and delivery) from interested and qualified suppliers for goods or services that the organization needs to obtain

Purchasing

Primary Objectives of _________:

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.

Learn purchasing process steps

Ch. 5 Slides 15-19: Learn purchasing process steps

e-procurement

The basic __________ process consists of:

1. An electronic purchase requisition and/or purchase order

2. An invoice (which might be one with the receipt)

3. A payment

time savings

Advantage of an e-Procurement System:

A reduction in the time between need recognition and the release and receipt of an order

cost savings

Advantage of an e-Procurement System:

Lower overhead costs in the purchasing area

accuracy

Advantage of an e-Procurement System:

A reduction in errors. A virtual elimination of manual paperwork
and paperwork handling

real time

Advantage of an e-Procurement System:

improved communication both within the company and with suppliers

management

Advantage of an e-Procurement System:

Purchasing personnel spend less time on processing of purchase orders and invoices, and more time on strategic value-added purchasing activities

mobility

Advantage of an e-Procurement System:

Access virtually anywhere

trackability

Advantage of an e-Procurement System:

Real-time status tracking

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 obsolesce

Inventory is an asset but it is also capital tied up

more

a 10% Cost Reduction generates significantly (less or more?) Profit Before Tax than does a 10% Sales Increase

higher

10% Cost Reduction generates a significantly (lower or higher?) Return on Assets (ROA) than does a 10% sales increase, given the same number/value of assets

inventory turnover

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

beneficial

a high turnover ratio is :

beneficial
or
unfavorable

unfavorable

a low turnover ratio is :

beneficial
or
unfavorable

Total Cost of Ownership (TCO)

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

sum of the costs elements in QSDP

Quality
Service
Delivery
Price
(QSDP)

Four elements of cost (QSDP)

Pre-Transaction Costs

Transaction Costs

Post-Transaction Costs

Components of the Total Cost of Ownership (3 costs)

Pre-Transaction Costs

Activities carried out prior to the actual buy and sell transaction

Identifying sources, qualifying sources, certifying sources, supplier database update, training/education of supplier

Transaction Costs

Activities carried out as part of the actual buy and sell transaction

Price negotiation, delivery confirmation, purchase order administration, transportation, delivery/receiving, taxes, invoicing, close-out

Post-Transaction Costs

Activities carried out following the actual buy and sell transaction

returns from customer, replacement, repair parts & labor, maintenance, disposal of returned product

Make vs Buy Decision

can be described as "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

Make vs. Buy is a _______ decision

Business Strategy

Risks

Economic Factors

Three Key Pillars for Make-vs-buy decision

Business Strategy

Pillar #1

includes the strategic importance to the company of the product or service that is being considered for outsourcing, as well as the process, technologies, or skills required to make the product or deliver the service

Risks

Pillar #2

include lower quality, reliability, and predictability of outsourced solutions as compared with in-house manufacturing or services, as well as risks inherent in the process of identifying and selecting the right supplier and structuring a workable ongoing relationship

Economic Factors

Pillar #3

include the impact of outsourcing on capital expenditures, return on invested capital, and return on assets, as well as the possible savings achieved through outsourcing

protect proprietary technology

Qualitative Reason for Making

You may not want your intellectual property to be out in the public domain

No competent supplier

Qualitative Reason for Making

There may not be an existing supplier in the market and you may not want to spend the time or effort to develop one

Control of lead-time

Qualitative Reason for Making

You may feel that you have more control over the lead time to produce the product than a supplier

Use existing idle capacity

Qualitative Reason for Making

Make use of excess capacity by making a material instead of letting the capacity sit idle

Better quality control

Qualitative Reason for Making

You may feel that you have more control of the quality of the material / product than a supplier

Overall lower cost

Quantitative Reason for Making

You may be able to produce the material or product at a lower cost and avoid paying a 3rd party's profit margin

Control of transportation and warehousing costs

Quantitative Reason for Making

If you make an item in-house, you avoid transportation costs, and may be able to keep warehousing costs to a minimum

Non-strategic

Qualitative Reason for Buying or Outsourcing

If it is a non-strategic item

Insufficient Capacity

Qualitative Reason for Buying or Outsourcing

A firm may be at or near capacity and
subcontracting from a supplier may make better sense

Temporary Capacity Constraints

Qualitative Reason for Buying or Outsourcing

the concept of "extended workbench" which involves short-term supplementing internal capacity with external capacity during time of constraint or overloaded work centers.

Lack of Expertise

Qualitative Reason for Buying or Outsourcing

Firm may not have the necessary technology and expertise

Quality

Qualitative Reason for Buying or Outsourcing

Suppliers may have better technology, process, & skilled labor

Multi sourcing strategy

Qualitative Reason for Buying or Outsourcing

To achieve a multi sourcing strategy using an
external supplier in addition to an internal source

Brand Strategy

Qualitative Reason for Buying or Outsourcing

take advantage of a supplier's brand image, reputation, popularity, etc.

Cost Advantage

Quantitative Reason for Buying or Outsourcing

Suppliers may provide the benefit of economies of scale, especially for components that are non-vital to the organization's operations

Inventory Considerations

Quantitative Reason for Buying or Outsourcing

opting to have the supplier hold inventory of the item or the materials required to produce the item

In-sourcing

Reverting (i.e., going back) to in-house production when external
quality, delivery, and services do not meet expectations

Co-Sourcing

1. The sharing of a process or function between internal staff and an external provider

2. 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

Example: a manufacturer buying the key supplier of a critical material to take ownership of this aspect of their supply chain

Forward vertical integration

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

Example: a manufacturer buying a wholesaler/distributor to take ownership of this aspect of their supply chain

Chief Procurement Officer (CPO)

Responsible for procurement, sourcing goods and services and negotiating prices and contracts

Centralized Purchasing

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

Decentralized Purchasing

individual, local purchasing departments, such as plant level, make their own purchasing decisions

Centralized/Decentralized Purchasing (Hybrid)

Centralized purchasing for products and services used throughout the corporation. Decentralized purchasing for products and services used only locally at each facility

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

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

competitive bidding

aims at obtaining goods and services at the lowest prices by stimulating competition, and by preventing favoritism

Open competitive bidding

the sealed bids are opened in full view of all who may wish to witness the bid opening

Closed competitive bidding

the sealed bids are opened in presence only of authorized personnel

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

Robotic Process Automation (RPA)

using automation and artificial intelligence to create software bots that capture data, execute sequences, and make simple decisions

Benchmarking

a process of measuring the performance of a company's products, services, or processes against those of another business considered to be the best in the industry, aka "best in class."

the point of this is to identify internal opportunities for improvement

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

holistic

he expansion of the global marketplace in recent years has made it necessary for companies to take a more _________ approach to the integration of supply chain processes and overall business growth

Study the Drivers and Objectives of Strategic Sourcing

Ch. 6 Slides 10-11: Study the Drivers and Objectives of Strategic Sourcing

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

Functional Products

MRO items and other commonly low profit margin items with relatively stable demands and high levels of competition i.e. office supplies, food staples, etc.

Potential strategy: Multi-sourced

Innovative Products

characterized by short product life cycles, volatile demand, high profit margins, and relatively less competition i.e. technology products such as the iPhone

Potential Strategy: Single-sourced

Spend Analysis

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

Non-critical sourcing

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