Purchasing & Supply Exam 2

supplier quality

ability to meet or exceed current and future customer expectations or requirements within critical performance areas on consistent basis

Deming’s 14 points

1. Create a vision and demonstrate commitment

2. Learn the new philosophy

3. Understand inspection

4. Stop making decisions purely on the basis of price

5. Improve constantly and forever

6. Institute training

7. Institute leadership

8. Drive out fear

9. Optimize the efforts of teams

10. Eliminate exhortations

11. Eliminate numerical quotas and measurement by objective

12. Remove barriers to pride in workmanship

13. Encourage education and self-improvement

14. Take action

Total Quality Management

1. Define quality in terms of customers’ requirements

2. Pursue quality at the source

3. Stress objective rather than subjective analysis

4. Emphasize defect prevention vs defect detection

5. Focus on process rather than output

6. Strive for zero defects

7. Establish continuous improvement as way of life

8. Make quality everyone’s responsibility

variation

primary source of quality nonconformance

management

has ultimate responsibility for quality improvement

quality at the source

• evaluate key value-adding points in process where defects could occur, including supplier facilities

• product and process design

  • early supplier design involvement

• issue of sharing proprietary information

objective measurement & analysis

• make decisions on facts

• rigorous supplier measurement system

• develop a preferred supplier list

prevention of defects

• strive for predictable consistency and reduce process variation

• reduce reliance on appraisal, inspection, and detection activities

  • non-value-adding activities

• Supplier certification program

• Use of corrective action request

process capability

ability of process to generate outputs that meet specifications and/or customer requirements

99.7%

% of output that falls between ± 3 std deviations of mean

appraisal costs

direct costs of measuring, testing, audits, and inspection

internal failure

failure occurs before product or service is provided to customer

external failure

failure occurs after customer takes possession

prevention cost

keeps defects from occurring

• design and plan for quality

• equipment calibration

• develop quality manual

• maintain quality management system

supplier incentives for quality improvement

• Longer-term contracts

• Higher share of purchase volume

• Public recognition and awards

• Shared cost savings

• Access to new technology

• Early insight to new business and product plans

• Early participation in new-product and process development projects

• Use of buyer’s supply agreements to improve pricing

• Participation in executive buyer-supplier councils

• Listed as preferred supplier with first opportunity for new business

principles of ISO 9000

• Customer focus

• Leadership

• Involvement of people

• Process approach

• Systems approach to management

• Continual improvement

• Factual approach to decision-making

• Mutually beneficial supplier relationships

benefits of ISO 9000 for supplier

• included on master list of ISO certified firms

• helps address adherence to standards

benefits of ISO 9000 for buyer

• buyers have immediate confirmation of supplier’s registration

• may substitute for variety of individual buyer certification programs

• supplier assumes responsibility for meeting ISO 9000 standards and paying own registration fees

• buyer does not have to create its own comprehensive supplier certification audit system

categorical system

• assign subjective rating score for each performance category

• may be completed by buyer, other internal users, or combinations

• minimal insight provided

• easy and simple to develop, update, and maintain

• 
  

weighted point system

• weighs and quantifies relative scores across performance categories

• weight adjusted depending on needs

• develop a set of decision rules

• still somewhat subjective but if applied consistently, very effective in achieving ranking objective

• less subjective

cost based system

• seeks to identify and quantify total cost of doing business with given supplier

• challenging to identify and record appropriate costs that result when supplier fails to perform as expected

• logic is based on calculation of supplier performance index (SPI)

• most thorough and least subjective

SPI calculation

(total purchases + nonperformance costs) / total purchases

rationalization

analysis on how many and which suppliers to maintain

optimization

analysis to ensure that only most capable suppliers are kept

price analysis

process of comparing supplier prices against external price benchmarks without knowledge of supplier costs

cost analysis

process of analyzing individual cost elements making up total price

total cost analysis

applies price/cost equation across multiple processes that span two or more organizations across a supply chain

critical products

• high value

• low number of available suppliers

• cost analysis strategy

• collaborative cost-reduction efforts focused on total costs

unique products

• low value

• low number of suppliers

• cost analysis and reverse price analysis strategy

• standardize requirements

commodities

• high value

• high number of available suppliers

• leverage preferred suppliers strategy

• price analysis using market forces strategy

generics

• low value

• high number of available suppliers

• total delivered cost (price) strategy

• automate to reduce purchasing involvement

supplier’s market

market where demand exceeds supply

buyer’s market

market where supply exceeds demand

price volume model

• maximizing profit

  • lowering price results in more units sold

  • greater volume will spread indirect cost over more units

  • quantity price breaks

• leveraging volume across business units can yield savings in tooling, setup, and operating efficiencies

market-share model

• long run profitability depends on level of market share obtained

  • aka penetration pricing

• lower margins initially increase market share

• eventually spreads out indirect and fixed costs over greater volume to improve profitability

• accept lower price initially in hope of greater volume (revenue) later

market skimming model

• prices set for high profit margins on each unit based on perceived benefits

• may be used through “backdoor” selling to non-supply management personnel

• carefully analyze price to ensure validity of greater product benefits

revenue pricing model

• used by supplier in market downturns to obtain sufficient revenue to cover current variable/fixed costs

• supplier addressing key issues

  • capacity utilization issues

  • covering fixed costs

  • retaining skilled labor

• be aware of quality and service degradation

promotional pricing model

• prices set to enhance overall product line profitability, not individual products within line

• need to utilize TCO analysis

competition pricing model

• focuses on reacting to actual or anticipated competitor pricing

• what is the highest price the supplier can charge and still be just below its competition

• Ex: reverse auction

• (pricing to market, not to cost)

cash discounts

• incentives to buyer who pay invoices promptly

  • ex: 2/10, net 30

• relatively high return

cost markup pricing model

• estimate costs and add markup % for desired profit

  • ex: assume supplier desires 20% markup over its $50 total cost

    • total cost + (% x total cost)

    • $50 + (20% x $50) = $60

margin pricing model

• establish profit margin that earns % of quoted price

• ex: assume supplier wants 20% profit margin on sales (assume $50 total cost)

  • Cost / (1- margin rate) = selling price

  • $50 / (1-0.2) = $62.50

  • 
    

rate of return pricing model

• desired profit is added to estimated cost

• ex: assume a supplier wants a 20% return on its investment of $300,000 to produce 4,000 units (assume $50 total cost per unit)

  • cpu + (% x investment) / # of units)

  • $50 + ((20% x $300,000) / 4,000) = $65

reverse price analysis

• aka should cost analysis

• can be used when supplier is reluctant to share its internal cost sata

• break down cost into basic components

Total cost of ownership

• purchase price

• acquisition costs

• usage costs

• end of life costs

purchase price

invoice amount paid to supplier

acquisition costs

costs of bringing product to buyer

usage costs

conversion and support costs

end of life costs

net of amounts received/spent at salvage (ex: selling used car)

target pricing

• used early in new product development

• cap in cost becomes cost reductio goal

allowable cost

sales price - profit

cost savings sharing

• sharing of continuous improvement benefits with supplier

• financial incentives to supplier to pursue cost reduction

project types

• developing new products

• installing new software/hardware

• implementing value analysis cost reduction recommendations

• developing sourcing strategies

• initiating supplier performance improvement plans

project phases

1. concept

2. project definition

3. planning

4. preliminary studies

5. performance

6. post-completion

learning curve analysis

• use to expect, quantify, and request lower purchase price over time

• establish rate of price improvement due to direct-labor cost reduction as production volumes increase

learning curve

• workforce learns and becomes more efficient through repetitive effort

• assume quantity of labor or process components don’t change over time

• modification to process can affect learning rate basis but still reduce price

  • new production methods

  • substitution of automation for labor

  • vertical integration → cost control

use learning curve

• when suppliers use new production process for first time

• when supplier produces technically complex item for first time

• when item has high direct labor content

(x-y)/x

learning rate formula

function / cost

value formula

quantity discount analysis

• allows buyer to verify that quantity discounts are reasonable

• buyer may be able to negotiate price improvements

  • better understanding of incremental unit costs vs prices at different quantity ranges

overproduction

category of waste where items are produced for which there are no orders

waiting time

category of waste where employees stand around or inventory is at a standstill

unnecessary transport

category of waste when moving material unnecessarily or long distances

excess inventory

category of waste where unnecessary inventory is being retained between process steps

unnecessary movement

any wasted motion by man or machine

tests for determining value opportunity

• does this product add value to our customers

• is cost of the product proportionate to its value

• are there additional uses for this product

• does product need all its features or internal parts

• are product weigh reductions possible

• is there anything else available to our customers

• is there anything else available to our customers

• is there a better method to produce item or product

• can we replace a customized part with a low-cost standardized part

• can another supplier provide same items for less

• are design or quality specs too tight given customer requirements

• if we make item now, can we buy it for less