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

Global Sourcing

competing against World-Class organizations

Global competition requires ______

Considerations

Where and when are goods and services needed?

What suppliers have the best mix of performance characteristics?

Advances in information systems have enabled _______ efforts.

_______ applies to services and business processes, as well as manufactured goods - Invoice processing, financial analysis, call centers, IT processing

Performance Impact

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

Delivery: Right Quantity - Right Time - Right Place

Price

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.

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

%COGS

COGS / Sales Revenue

Pretax Profit Margin

Pretax Profit / Sales Revenue

When Purchasing/Procurement reduces COGS by a quantity or percentage, the money saved increases Pretax Profit by ________

the same amount

EXAMPLE: Reducing COGS by $10 increases Pretax Profit by $10

EXAMPLE: COGS = $100. Reducing COGS by 10%, reduces COGS by:

$100 x 0.1 = $10, which increases Pretax Profit by $10

Profit Leverage Effect: Sales must increase by

[COGS Savings] / [Pretax Profit Margin] to have the same effect

EXAMPLE: Pretax Profit Margin = 10%, Purchasing/Procurement save $10

Sales must increase by $10 / 0.1 = $100 to have the same effect on Profit

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 Steps

1. Asses Opportunities

2. Profile Internally & Externally

3. Develop the Sourcing Strategy

4. Screen Suppliers & Create Selection Criteria

5. Conduct Supplier Selection

6. Negotiate & Implement Agreements

Strategic Sourcing Step 1:

Asses Opportunities: Spend Analysis

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

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?

Spend Analysis

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

Pareto Chart

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

Strategic Sourcing Step 2:

Profile Internally and Externally: [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.

Breaking down categories of purchasing into more detail

Identifying where problems are occurring internally

[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.

Maintaining visibility of global political and regulatory policy

Tracking trends in commodity and supply pricing

Monitoring market, customer, and competitor trends

Strategic Sourcing Step 3:

Develop the Sourcing Strategy: Make or Buy, Total Cost Analysis, Portfolio Analysis

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). In-sourcing vs Outsourcing

Insourcing

The use of resources within the firm to provide products or services. "Do it Myself" [_______ 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 - 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 "________" 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 _________ $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

______ 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, ______ will be given as an allocated Direct Cost ($/unit)

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 or Arms-Length Quadrant

Readily available products or services representing a relatively small portion of a firm's purchasing expenditures. Low Risk/Complexity & Low Cost/Value Potential

Examples: office supplies, fasteners, common tools

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

Supplier Rationalization - minimize suppliers used

Automate the purchase process - electronic data

Vendor managed inventory

Minimal negotiation

The Leverage or Preferred Quadrant

Standardized and readily available products or services representing a significant portion of spend. Low Risk/Complexity & High Cost/Value Potential

Examples: standard parts, raw materials

Maximize commercial advantage by maintaining pressure on suppliers to improve

Relationships with several preferred suppliers

Long-term contracts with conditions for improvement

Expectation of lower costs over time

Coordination of procurement with market cycles

The Bottleneck Quadrant

Products or services with unique or complex requirements that can be met only by a few potential suppliers. High Risk/Complexity & Low Cost/Value Potential

Examples: Custom product accessories, custom machine parts

Ensure supply continuity by decreasing the

uniqueness of the suppliers & managing the supply

Widen the specifications where possible

Increase competition by developing new suppliers

Set medium-term contracts

Utilize competitive bidding

The Critical or Strategic Quadrant

Products or service with unique or complex requirements coupled with a limited supply base. High Risk/Complexity & High Cost/Value Potential

Examples: fashion clothing/jewelry, custom electronics

Form partnerships and communication

with selected suppliers

Persistent negotiation tactics

Monitor and manage supplier processes

Create contingency plans

Analyze marketplace and competition trends

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

Strategic Sourcing Step 4:

Screen Suppliers and Create Selection Criteria: SSQDC

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

Also...

Process and design capabilities and technologies

Management capability

Financial condition and cost structure

Longer-term relationship potential, willingness to share knowledge

Strategic Sourcing Step 5:

Conduct Supplier Selection: Weighted-point evaluation system

Weighted-point evaluation system

Score of x = sum of (Performance of xy times W of y)

where:

x= supplier x

y= performance dimension y

Performance xy = rated performance of supplier x with regard to performance dimension y

Wy= assign weight for performance dimension y, where the sum of Wy = 1

Strategic Sourcing Step 6:

Negotiate and Implement Agreements: competitive Bidding, Negotiation, Contracting

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.

The Procure-To-Pay Cycle

Ordering, Follow-Up and Expediting, Receipt and Inspection, Settlement and Payment, Records Maintenance,

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]

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.

Inspection

100% Incoming Inspection (for new suppliers or new purchases)

Sample Inspection (for established suppliers and purchases, utilizes statistical principles)

No Inspection (for Certified Suppliers)

Settlement and Payment

May be paid through Electric Funds Transfer (EFT)

Payment is aligned with Quotation, Receipt, and Inspection

Records Maintenance

Supplier Relationship Management (SRM) Software

Ethical Sourcing

Ethical Treatment of Workers, Fair Trade Products, Requires Verification and Management

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.

Sustainable Sourcing

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

Sustainability- Replenishment of natural resources

Supply Chain Disruptions

Caused by natural disasters, economic or political events.

Risk Assessment and Strategy

Take a Broad View of Potential Risks, Prioritize Risk Potential, Develop Risk Management Strategies

Develop Risk Management Strategies

Evaluating relationships with diverse suppliers

Holding higher inventory at various locations within the supply chain

Developing alternative sources of supply

Questions to ask when selecting a manufacturing process:

What are the physical requirements of the company's product?

How similar to one another are the products the company makes?

What are the company's production volumes?

Where in the value chain does customization take place (if at all)?

Product-based layout (continuous flow & production lines)

A type of layout where resources are arranged sequentially, according to the steps required to make a product

Used for products with identical or highly similar designs

Think about the process used to make sandwiches at Quiznos or Subway

Functional layout (job shop & batch manufacturing)

A type of layout where resources are physically grouped by function

Used for products with high degrees of customization or expertise required

Think about the process you must go through to sign up for and pay for classes

Process Types

Continuous Flow Processes

Production Line

Batch Manufacturing

Job Shop

Fixed Position Layout

Continuous Flow Processes

A process that produces highly standardized products using a tightly-linked, paced sequence of steps.

Example products: oil, gas, oils, beverages, fluids, yarn and fabric

Product usually cannot be broken into discrete units

Processes are organized according to use

Capital-Intensive processes - designed by engineers and difficult to alter

Production runs continually. Changing product configuration involves extensive setups (cleaning out piping, draining lines, etc.)

Often dedicated to a small number of unique products made in high volumes

Product-based layout

Production Line

A process used to produce a narrow range of standard items with identical or highly similar designs.

Examples: high-volume standardized products such as automobiles, candy bars, paper, pens

Follows a product-based layout: sequential steps for completing the process are arranged next to one another

Steps are usually linked by a material handling system that moves the items from one step to the next at a predetermined pace

Can be suitable for high-volume production, especially when automation is utilized

Utilizes specialized equipment and labor (people and machines do a small (specialized) task within the large process

Are inflexible with regard to items that do not fit the design characteristics of the ______ - customization is difficult to achieve

Product-based layout

Job Shops

A process used to make a wide variety of highly customized products in quantities as small as one.

Examples include custom furniture, specialized machine tools used by manufacturers, restoration work, custom clothing, emergency room

Characterized by general-purpose equipment and broadly skilled workers

Main emphasis is meeting a customer's unique requirements.

Product design and production process is not standardized

Typically follows a functional equipment layout

Batch Process

A process where items are moved through the different manufacturing steps in groups or batches.

Examples: mass-market consumer products such as hand tools, computers, clothing, shoes, books, packaged food items, office furniture, etc.

Batch processes set up a process to make many of one particular item. The process makes many of these identical products (often running continuously for days) before being stopped and changed to produce a different product.

Fits between job shops and production lines in terms of product volume

Flexible Manufacturing Systems - Highly automated batch processes that can quickly change from making one item to the next when making groups of similar products using computerized technology.

Functional Layout

Product-based layout

Production Line and Continuous Flow Processes

Equipment and people are highly specialized and arranged sequentially according to the steps required to make a product or product family, often paced, best suited to high-volume production of standardized products

Functional Layout

Job Shop and Batch Processes

Work areas are arranged by function (identical machines and functions are located in "departments"

[Batch Processes may have portions of the process that are arranged in a product line layout]

Production pace varies from work area to work area

Best suited where a wide range of product configurations or customization is required

Highly flexible, but requires extensive coordination between functions to be effective

Fixed-Position Layout

A type of manufacturing process in which the position of the product is fixed.

Examples: shipbuilding, construction projects, and traditional home building.

Materials, equipment, and workers are transported to and from the product.

Used in industries where the products are very bulky, massive, or heavy and movement is problematic

Hybrid Manufacturing Process

A group of processes that seeks to combine the characteristics, and hence advantages, of more than one of the classic processes.

Machining centers - machines or series of machines that complete several manufacturing steps

Group technology/Cellular Layout - Dedicating equipment and people to producing all the products within a product family

Product Family: A set of products that require similar processing

Common in companies that utilize "Lean" concepts

Make-to-stock (MTS)

Products that require no customization.

Assemble-to-order (ATO)

Products that are customized only at the very end of the manufacturing process.

Make-to-order (MTO)

Products that use standard components but the final configuration of those components is customer-specific. Customized from a Standard "Menu" of options.

Engineer-to-order (ETO)

Products are designed and produced from the start to meet unusual customer needs or requirements. Completely Customized.

When customization occurs early in the supply chain:

Flexibility in response to unique customer needs will be greater.

Lead times to the customer will tend to be longer.

Products will tend to be more costly.

When customization occurs late in the supply chain:

Flexibility in response to unique customer needs will be limited.

Lead times to the customer will tend to be shorter.

Products will tend to be less costly.

"Pure" Manufacturing

Tangible Product

Output can be Stored (inventory)

Low Customer Contact and Involvement

Typically Large Markets

Quality Can be Measured Objectively

"Pure" Services

Intangible Product

Output cannot be Stored (no inventory)

High Customer Contact and Involvement

Typically Small Markets

Quality is Perceived Subjectively

Three dimensions on which services can differ and compete:

The nature of the Service Package

The degree of customization

The level of customer contact

Challenge: communicating customer needs throughout the service process

The nature of the Service Package

All the physical and intangible activities that a service organization provides

Physical: Requires capital expenditures, material costs, tangible assets

Intangible: Requires training, skill development, knowledge assets

The degree of customization

Lower customization allow for standardized processes. Primary measurements are related to productivity and cost

Higher customization requires flexible processes. Primary measurement becomes customer satisfaction.

The level of customer contact

Front Room - Direct customer interface, high customer contact. Activities designed to guide the customer through the process - "Onstage Activities"

Back Room - Activities done away from the customer, low customer contact. Activities carried out much like a manufacturing process - "Backstage Activities" and "Support Processes"

Mapped using "Service Blueprinting"

Structural Layout

an important factor in designing a manufacturing or service process

Layouts will contribute to manufacturing and service performance:

Designed to:

Minimize movement of Materials & People

Maximize utilization of Machines & People

Maximize productivity & quality of Machines & People

Manage complexity - improve management of processes

Manage interactions between Machines, People, Customers, Stakeholders

Project Management

The application of knowledge, skills, tools, and techniques to project activities to meet project requirements.

Project

A temporary endeavor undertaken to create a unique product, service, or result.

Non-routine, making planning difficult

Complex, involving a variety of skills and capabilities

Require significant levels of cross-functional and inter-organizational coordination.

Clear starting and ending points after which the people and resources dedicated are reassigned.

Concept Phase

The first of five phases of a project where project planners develop a broad definition of what the project is and what its scope will be.

Primary Performance of a Project: Time, Scope, Money

Scope - description of the desired outcomes of a project

Scope Creep - the tendency for the scope to change throughout the duration of a project

Project Definition Phase

The second of five phases of a project where project planners identify how to accomplish the work, how to organize for the project, the key personnel and resources required to support the project, tentative schedules, and tentative budget requirements. Budget estimates become more accurate.

Planning Phase

The third of five phases of a project where project planners prepare detailed plans that identify activities, time and budgets targets, and the resources needed to complete each task, while also putting into place the organization that will carry out the project.

Milestones - Performance , Time, & Budget targets scheduled throughout the project timeframe used to track whether the project is progressing as planned

Acquisition and scheduling of resources

Performance Phase

The fourth of five phases of a project where the organization actually starts to execute the plan.

Costs, Quality, and Speed of this portion of the project is a function of how well managers have completed the first three phases of the project.

Postcompletion Phase

The fifth of five phases of a project where the project manager or team confirms the final outcome, conducts a postimplementation meeting to critique the project and personnel, and reassigns project personnel.

Critical Path

A sequence of tasks for which there is no extra time available. Delays on the Critical Path will delay the entire project.

Critical Task: A task along the critical path

Slack

Extra time that is available for task completion. Tasks with available slack may be delayed without delaying the entire project.

Crashing

Efforts to shorten the duration of a project or to make up delays that have occurred.

Gantt Chart

A graphical tool used to show expected start and end times for project activities and to track actual progress against these time targets. Demonstrate:

Task Duration

Task Precedence

Task Milestones & Deadlines

Task Responsibility

Critical Tasks/Critical Path

Tasks With Slack

Project Completion Date