SCM 3301 Exam 2

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

Cost Of Goods Sold (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

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.

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.

Pretax Profit Margin

Pretax Profit / Sales Revenue

Global Sourcing

competing against World-Class organizations

Global competition requires

global sourcing

Global Sourcing Considerations

Where and when are goods and services needed?

What suppliers have the best mix of performance characteristics?

Performance Impact

affecting the way your company performs

Performance Impact: Quality

Performance, Features, Reliability, Conformance, Durability, Serviceability, Perceived Quality

Performance Impact: Delivery

Right Quantity - Right Time - Right Place

Performance Impact: Price

How much it costs

What has enabled global sourcing efforts?

Advances in information systems

Global sourcing applies to...

services and business processes, as well as manufactured goods. (Invoice processing, financial analysis, call centers, IT processing)

Financial Impact

direct influence on bottom-line profits

Profit Leverage Effect

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

Profit Leverage Effect

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

percent of COGS

COGS/Sales Revenue

Spend Analysis questions to determine where efforts to change practices

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

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

Two approaches to creating profiles

(Internal) Category Profile & (External) Industry Analysis

[Internal] Category profile

Understanding all aspects of a particular sourcing category that could ultimately have an impact on the sourcing strategy.

[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.

[External] Industry Analysis Responsibilities

Maintaining visibility of global political and regulatory policy

Tracking trends in commodity and supply pricing

Monitoring market, customer, and competitor trends

[Internal] Category profile Responsibilities

Breaking down categories of purchasing into more detail

Identifying where problems are occurring internally

The Make-or-Buy Decision

A 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

near-shoring

on-shoring

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

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."

Examples: 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."

Examples: 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.

Examples: 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."

Examples: Administrative Costs, Overhead, Depreciation, Basic Utilities

Difficult to calculate accurately. For this class, indirect costs will be given as an allocated Direct Cost

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.

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.

The Critical Quadrant

Products or service with unique or complex requirements coupled with a limited supply base.

Single sourcing

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

single sourcing advantages/disadvantages

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.

Multiple Sourcing advantages/disadvantages

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

Qualitative criteria from Bauer SCM Recruiting Companies: SSQDC

Safety: Internal and External

Sustainability: Green and Ethics

Quality: Consistency, Conformance, Service

Delivery: Reliability, Speed, Capacity

Cost: Total Cost of Ownership

Qualitative criteria from the Textbook:

Process and design capabilities and technologies

Management capability

Financial condition and cost structure

Longer-term relationship potential, willingness to share knowledge

Competitive Bidding

Requesting bids from potential suppliers with a formal RFQ

RFQ

Request for Quotation: Includes all the characteristics required or desired

Includes: descriptions, specifications, quantities, delivery, timelines

USE WHEN: Price is a dominant criteria, requirements are straightforward

Negotiating

Interactive and iterative process for determining purchase conditions

Involves: Multiple communications to arrive at an agreement

USE WHEN: 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 does not 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.

Material Requisition or Purchase Requisition

An internal document that identifies characteristics about materials or supplies that are needed

Request for Quotation (RFQ) or Request for Proposal (RFP)

A document sent to suppliers requesting details for a potential purchase. [Resulting in a Quotation or Proposal]

Material Description

Quality Tolerances

Quantities Required

Quantity Thresholds for Price Breaks

Delivery Capabilities

Terms of Payment

Contract Length

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 [details taken from the Quotation or Proposal]

Legally binding agreement when formally accepted by the supplier

What are some 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 & requires global sourcing

Performance Impact

Affects the way your company performs in sectors such as quality, delivery, and price.

Quality: Performance, Features, Reliability, Conformance, Durability, Serviceability, Perceived Quality

§Delivery: Right Quantity  -  Right Time  -  Right Place

Financial Impact

Direct influence on bottom-line profits

Cost of Goods Sold (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.

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.

Spend Analysis

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

What’s the purpose of spend analysis

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

Pareto Chart

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

Internal Category Profile

Understanding all aspects of a particular sourcing category that could ultimately have an impact on the sourcing strategy.

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. 

Make-or-Buy Decision

A 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”

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

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

Steps in strategic sourcing

Assess opportunities, profile internally & externally, develop the sourcing energy, conduct supplier selection, and negotiate & implement arguments

Reasons to Make/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/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.”

• Examples: Part-Time Labor, Direct Material Costs, Direct Energy 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.”

• Examples: Direct Labor, Transport Cost, Direct Maintenance Cost, Setup Cost

One-Time Costs

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

• Examples: Product Design, Fixture Purchase, Mold/Die Purchase

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.”

• Examples: Administrative Costs, Overhead, Depreciation, Basic Utilities

Kraljic 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.

Routine Quadrant - Low Risk & Low Cost

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

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

Leverage Quadrant - Low Risk & High Cost

Standardized and readily available products or services representing a significant portion of spend.

Maximize commercial advantage by maintaining pressure on suppliers to improve

Bottleneck Quadrant - High Risk & Low Cost

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

Ensure supply continuity by decreasing the uniqueness of the suppliers & managing the supply

Critical Quadrant - High Risk & High Cost

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

Form partnerships and communication with selected suppliers 

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