Supply Chain Management: Purchasing, Strategic Sourcing, and Inventory Management

Comprehensive practice flashcards covering Chapter 05 (Purchasing Management), Chapter 06 (Strategic Sourcing), and Chapter 04 (Inventory Management), focusing on procurement processes, financial leverage, sourcing matrices, inventory levels, and EOQ mathematics.

Procurement

The overarching process of identifying and vetting suppliers, negotiating contracts, establishing terms, and acquiring vital goods and services.

Purchasing

The tactical, transactional function within procurement responsible for placing orders and buying materials, services, or MRO supplies.

Supply Management (ISM definition)

The identification, acquisition, access, positioning, and management of resources an organization needs or potentially needs to meet strategic objectives.

Purchase Requisition

An internal document submitted by a user department specifying items to order, quantities, and timing; it does not form a legal contract.

Purchase Order (PO)

A buyer's commercial offer to an external vendor that becomes a legally binding contract only upon vendor acceptance and confirmation.

Request for Information (RFI)

A preliminary inquiry used to gather general details regarding supplier capabilities and offerings.

Request for Proposal (RFP)

A detailed solicitation used to evaluate supplier capabilities and pricing for complex, custom, or non-routine purchases.

Request for Quote (RFQ)

A solicitation document sent to pre-qualified vendors to obtain precise pricing and delivery schedules for standard, repeat items.

Three primary objectives of purchasing

1. Ensure uninterrupted material and service flow at lowest total cost.

2. Improve product quality.

3. Maximize customer satisfaction.

3-Way Match

An accounts payable internal control requiring the Purchase Order, Receiving Report (Goods Receipt), and Vendor Invoice to agree before payment.

Profit-Leverage Effect

Every dollar saved in purchasing flows directly to pre-tax profit, generating far more bottom-line impact than an equal percentage increase in sales.

Return on Assets (ROA) Effect

Purchasing cost reductions raise ROA more than equivalent sales gains because profit before tax increases without expanding the asset base.

Total Cost of Ownership (TCO)

The complete sum of all life-cycle expenses for a product: $\text{TCO} = \text{Quality} + \text{Service} + \text{Delivery} + \text{Price}$.

Typical purchase price share of TCO

Acquisition cost typically accounts for only $25\%$ to $40\%$ of an item's total life-cycle cost.

Pre-Transaction Costs (TCO)

Expenses incurred prior to the purchase, including supplier qualification, certification, and onboarding.

Transaction Costs (TCO)

Expenses tied directly to executing the purchase, such as freight, customs duties, price negotiation, inspection, and payment processing.

Post-Transaction Costs (TCO)

Expenses arising after delivery, such as warranty work, scrap, customer returns, repairs, and scrap disposal.

Three core pillars of Make-vs-Buy

1. Business Strategy (core competencies and IP).

2. Risks (quality, reliability, and control).

3. Economic Factors (cost differentials, capital, and ROA).

Backward Vertical Integration

Acquiring upstream suppliers to gain direct ownership of raw materials or intermediate component manufacturing.

Forward Vertical Integration

Acquiring downstream channels (such as distributors, wholesalers, or retail outlets) to control distribution to end customers.

Centralized Purchasing advantages

Spend consolidation, greater volume discounts, avoided duplication, lower freight rates, and specialized purchasing expertise.

Decentralized Purchasing advantages

Direct responsiveness to local plant needs, familiarity with local vendor markets, and minimal corporate bureaucracy.

Import Broker

A licensed agent who prepares customs filings and clears incoming shipments for a fee without taking title to the goods.

Import Merchant

A buyer who purchases and takes physical and legal title to imported commodities to resell them domestically for profit.

Bid Bond

A financial surety guaranteeing that the selected competitive bidder will sign and execute the awarded contract.

Performance Bond

A surety bond guaranteeing that the contractor will finish the agreed scope of work on schedule and per contract specifications.

Payment Bond

A financial protection securing payment to subcontractors, laborers, and material suppliers, shielding the buyer from third-party liens.

Strategic Sourcing

A systematic procurement process that aggregates enterprise spend to secure optimal long-term value, quality, and supplier partnerships.

Functional Products sourcing strategy

Multi-sourcing through competitive bidding among dependable, low-cost vendors due to stable demand and low margins.

Innovative Products sourcing strategy

Single-sourcing through collaborative partnerships with innovative suppliers due to volatile demand and short life cycles.

Non-Critical Items (Kraljic Matrix)

Low supply risk, low spend; managed by automating purchase orders and shifting routine buying to internal end-users.

Bottleneck Items (Kraljic Matrix)

High supply risk, low spend; managed by maintaining safety stock, building contingency plans, and finding alternative sources.

Leverage Items (Kraljic Matrix)

Low supply risk, high spend; managed by aggregating spend across business units and using competitive market bidding.

Strategic Items (Kraljic Matrix)

High supply risk, high spend; managed through tight collaboration, shared technology, and long-term joint partnerships.

Supply Base Rationalization

Trimming the total supplier roster to the smallest viable pool of top-performing vendors to lower administrative overhead and unit costs.

Distributive Negotiations

Adversarial, win/lose bargaining over a fixed pool of value characterized by minimal transparency and self-interested goals.

Collaborative Negotiations

A cooperative, win/win discussion involving transparent information sharing to expand value and align joint business goals.

Vendor Managed Inventory (VMI)

A system where the vendor tracks buyer inventory levels and initiates replenishment shipments autonomously.

Co-Managed Inventory (CMI)

A system where the vendor accesses buyer inventory data to recommend replenishment orders, requiring buyer approval prior to shipment.

Supplier Co-location

Placing a supplier's employee directly within the buyer's procurement office to manage demand forecasts and place orders.

Evolution of SCM: 1950s–1970s

Era concentrated strictly on siloed, functional roles: Procurement, Manufacturing, and Logistics.

Evolution of SCM: 1970s–1980s

Era centered on total process optimization and enterprise resource management.

Evolution of SCM: 1980s–1990s

Era focused on supply chain vulnerability, risk management, and security.

Evolution of SCM: 2000s–Present

Era emphasizing corporate social responsibility, ethical practices, and environmental sustainability.

Utilitarianism in business ethics

The ethical rule stating an action is morally correct if it produces the greatest overall good for the greatest number of people.

Rights and Duties in business ethics

The moral rule stating certain actions are intrinsically right or wrong on principle, irrespective of the outcome.

Raw Materials inventory

Unprocessed feedstocks, components, or extracted materials waiting to be transformed into finished products.

Work-in-Process (WIP) inventory

Materials undergoing active transformation or waiting between intermediate processing stages on the production floor.

Finished Goods inventory

Completed goods that have passed final quality testing and are packaged for sale or customer dispatch.

Maintenance, Repair, and Operating (MRO) supplies

Consumables and equipment spare parts used to keep operations running without becoming part of the end product.

Facilitating Goods

Tangible items maintained by service businesses (e.g., food and cookware in restaurants) that enable service execution.

Cycle Stock

The portion of inventory maintained to satisfy predicted routine demand between regular replenishment orders.

Safety Stock

Buffer inventory kept beyond baseline requirements to absorb unexpected demand surges or lead time delays.

Strategic Stock

Inventory built up for specific planned events, such as seasonal spikes, price hedging, or new product rollouts.

Pipeline Inventory

Stock currently in transport or held downstream within intermediate distribution networks.

Periodic Review System

An inventory method that checks stock at preset intervals (e.g., weekly) and reorders up to a target level if below a threshold.

Continuous Review System

An inventory method that continuously monitors stock levels and triggers a fixed reorder as soon as the reorder point is reached.

Reorder Point (ROP) formula

$\text{ROP} = (d \times L) + \text{SS}$, where $d$ is daily demand, $L$ is replenishment lead time, and $\text{SS}$ is safety stock.

Optimal EOQ cost intersection

The order volume at which annual carrying costs equal annual ordering costs, minimizing total inventory cost.

Economic Order Quantity (EOQ) formula

$$\text{EOQ} = \sqrt{\frac{2 \times \text{Order Cost} \times \text{Annual Demand}}{\text{Carrying Cost \%} \times \text{Unit Cost}}}$$

ABC Inventory Classification rule

Category A accounts for $\approx 20\%$ of items and $\approx 80\%$ of spend; B and C make up $\approx 80\%$ of items and $\approx 20\%$ of spend.

Base Stock Level System

A replenishment approach where an order equal to the withdrawal quantity is placed immediately upon any consumption.

Single-Period Inventory Model

An ordering model used for short life-cycle or perishable goods intended for a single selling period (e.g., newspapers).

Linear (1D) vs. 2D Barcodes

1D barcodes encode data horizontally up to $85$ characters; 2D barcodes encode data horizontally and vertically up to over $7{,}000$ characters.

Three core components of an RFID tag

1. Microchip (data storage).

2. Antenna (signal transmission).

3. Protective packaging (housing).

RFID advantages over barcodes

No line-of-sight required, ability to read multiple tags simultaneously at range, and capability to read/write dynamic data.