Ch 5 Supply Chain Management

Procurement

The process of selecting and vetting suppliers, negotiating contracts, establishing payment terms, and the actual purchasing of goods and services
the overarching or umbrella term within which the action of purchasing can be found

Purchasing

obtaining merchandise, capital equipment, raw materials, services, or maintenance, repair, and operating (MRO) supplies in exchange for money or its equivalent. also a term commonly used in business to represent the function, and the responsibility for, acquiring materials, supplies, and services for an organization

Supply management

A newer term that encompasses all acquisition activities beyond the simple purchase transaction
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 need for goods or services

 Does not 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
It becomes a legally binding contract only when accepted by the supplier

Request for proposal

A detailed capabilities document used to determine a supplier's capability and interest in producing a product or service

The primary objectives of purchasing

1. Ensure an uninterrupted flow of materials and services at the lowest overall cost.

2. Improve the quality of the finished goods produced.

3. Optimize customer satisfaction.

Purchase processing steps

1. A need is identified, and a Purchase Requisition is issued

2. Obtain authorization as necessary

3. Identify and evaluate potential suppliers

4. Make supplier selection

5. Purchase Order (PO) is created and delivered to the supplier.

6. Supplier confirmation of the Purchase Order
7. Fulfillment

8. Receipt of Goods

9. Invoice and Reconciliation

 The invoice may need to be reconciled to the purchase order and goods receipt before payment. Referred to as a “3-way match” (i.e., Invoice, Purchase Order, and Goods Receipt must match)

10. Payment

11. Close out the purchase order

12. Analysis

Advantages of e-procurement

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

Cost savings - Lower overhead costs in the purchasing area

Accuracy - A reduction in errors

Mobility – Access virtually anywhere

Trackability – Real-time status tracking

Profit leverage effect

A decrease in purchasing expenditures directly increases profits before taxes

Return on assets (ROA) effect

A high ROA indicates managerial prowess in generating profits with lower spending
ROA = Profit before tax/assets

Inventory turnover

Cost of good sold/average inventory
High turnover = good

Low turnover = bad

Total Cost of Ownership (TCO)

the sum of all the costs associated with every activity in the supply stream of a product
the sum of the elements of cost
The central insight is that the acquisition cost is often a tiny portion of it

The four elements of cost

Quality, service, delivery, price (QSDP)

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)

Make vs buy

the act of deciding whether to produce an item internally or buy the item from an outside supplier
a strategic decision

Key consideration factors for make vs buy

Qualitative Factors - are more subjective and include control over the quality, reliability, and reputation of potential suppliers (internal or external) and the impact of decisions on customers and suppliers.

Quantitative Factors - incremental costs of making or purchasing the item, such as the availability of manufacturing facilities, needed resources, and manufacturing capacity

Qualitative reasons for making

Protect proprietary technology, no competent supplier, control of lead time, use existing idle capacity, better quality control

Quantitative reasons for making

Overall lower costs, control of transportation and warehousing costs

Qualitative reasons for buying

Non-strategic, insufficient capacity, temporary capacity constraints, lack of expertise, quality, multi-sourcing strategy, brand strategy

Quantitative reasons for buying

Cost advantage, supplier holds inventory (inventory considerations)

Risks of outsourcing (buying)

 Potential loss of control

─ Over production decisions, intellectual property, etc.

 Increased reliance on suppliers

 Increased need for supplier management

Co-sourcing

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

2. Using the 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

Foreword vertical integration

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

Centralized purchasing

The Purchasing Department located at the firm’s corporate office makes all the purchasing decisions

Decentralized purchasing

Individual, local purchasing departments, such as at the plant level, make their own purchasing decisions

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

Bid

A proposal or quotation submitted in response to a solicitation from a contracting authority

Bid bond

a debt secured by a bidder to guarantee that the successful bidder will accept the contract once awarded. If not, the bond would be forfeited

Payment bond

a debt secured by a bidder to protect against 3rd party liens not fulfilled by the bidder