LOGI 1000 - Chapter 6 (Procurement)

what are the three methods of integration?

1. Vertical

2. Formal contracts

3. Informal agreements

what is procurement?

the raw materials, component parts, and supplies bought from outside organizations to support a company’s operations

of what percentage of an organization’s procurement costs often range from?

60-80%

how was procurement traditionally viewed in nature?

as transactional in nature

what is the nature of procurement today?

strategic

what may procurement be responsible for?

reducing cycle times, playing an integral role in product development, and generating additional revenue through collaboration with the marketing department

what is typically seen as synonymous with procurement?

purchasing

what is supply management viewed as?

relational exchange

describe strategic sourcing

when there is an increased focus on identifying and using data internally and across the supply chain so the company can consolidate its purchasing power for enhanced value

what are procurement cards (p-cards)?

cards used for an organization’s buying needs

what is a reverse auction?

where the buyer invites multiple bids from multiple sellers; the lowest bid often wins

what are some attributes of P-cards?

only a limited number of employees can use them; there is a detailed statement each month

What are some benefits of using P-cards?

less invoices, a firm will only make one payment per month regardless of number of p-card holders, purchases can be made in minutes instead of days, suppliers can be paid in a more timely fashion

what are some challenges with the globalization of p-cards?

currency differences, availability of technology, differences in card acceptances, and cultural issues with the program

what are the objectives of procurement?

1. supporting an organization’s goals and objectives

2. managing purchase orders efficiently and effectively

3. managing the supply base

4. developing strong relationships with other functional groups

5. supporting operational requirements

What is meant by managing orders effectively and efficiently?

how well procurement keeps promises vs. how well procurement uses company resources to keep those promises

What is meant by managing the supply base?

The selection, development, and maintenance of supply orders

What is meant by supporting operational requirements?

procurement’s focus is on satisfying internal customers; buying the products at the right price, from the right source, at the right specifications, in the right quantities, for delivery at the right time to the right internal customer

What is one of procurement’s most important responsibilities?

Supplier selection and evaluation

What does supplier selection and evaluation involve?

Stating organization’s needs and determining how well potential suppliers can fulfill those needs

What is the supplier selection framework?

Identify need for supply, Situation analysis, Identify and Evaluate Potential Suppliers, Select suppliers, Evaluate decision

What are the two approaches for evaluating suppliers?

1. Process-based approach

2. Performance-based approach

What is a process-based approach?

An evaluation of a supplier’s service and production processW

What is a supplier audit, and what is its purpose?

Typically an onsite visit to a supplier’s facility; done to asses the structure, resources, health, and responsibility of an organization

What is a performance-based evaluation?

evaluatation that focuses on supplier’s actual performance on a variety of criteria

What are supplier scorecards used for?

To report the performance information to suppliers

What are the three types of supplier scorecards?

Categorical, weighted point, and cost based

What is a categorical scorecard?

Scorecard made of simple check off items

What is a weighted point scorecard?

scorecard with weights assigned to multiple categories with defined performance scalesS

What is a cost based scorecard?

Scorecard that attempts to quantify the total costs of doing business with a supplier

Why is supplier selection and evaluation complex?

it often involves multiple criteria, can vary in number and importance; vendor selection criteria may be contradictor; there are potential trade-offs; the evolution of business practices and philosophies may require new selection criteria or reprioritization of existing criteria

What must procurement managers be aware of?

The supply and demand characteristics of raw materials, component parts, and supplies they purchase

What is Kraljic’s Portfolio Matrix used for?

to classify corporate purchases in terms of their importance and supply complexity

What is the goal of Kraljic’s Portfolio Matrix?

to minimize supply vulnerability and to get the most out of a firm’s purchasing power

What are the four categories of Kraljic’s Portfolio Matrix?

non-critical, leverage, strategic, and bottleneck

Describe non-critical in Kraljic’s Portfolio Matrix

low importance, low complexity

Describe leverage in Kraljic’s Portfolio Matrix

high importance, low complexity

Describe strategic in Kraljic’s Portfolio Matrix

high importance, high complexity

Describe bottleneck in Kraljic’s Portfolio Matrix

low importance, high complexity

What is supplier development (reverse marketing)?

an aggressive procurement movement not typically part of supplier selection

What is a reason for a more proactive/aggressive approach?

there are many inefficiencies associated with suppliers initiating marketing efforts towards purchasers (suppliers possessing inadequate, insufficient, or untimely information

What is a reason for a more proactive/aggressive approach?

purchasers may be aware of important benefits such as reduced inventory and improved forecasting accuracy

What is a reason for a more proactive/aggressive approach?

to achieve a competitive advantage

What is global procurement (sourcing)?

buying components and inputs anywhere in the world

What are the two strategies of global procurement?

Factor-input strategy and market access strategyW

What is factor-input strategy?

when an organization is seeking low-cost or high-quality sources of supplyW

What is market access strategy?

When an organization is sourcing in markets where it plans to do significant business

What are the components of the global sourcing development model?

Planning, Specification, Evaluation, Relationship Management, Transportation and Holding Costs, Implementation, and Monitoring and Improving

Describe the planning component of the global sourcing development model

an honest assessment of global sourcing opportunities and challenges; the outcome should be a set of global procurement policies and procedures that are consistent with the organization’s overall objectives

Describe the specification component of the global sourcing development model

quantifying and qualifying current sources across a variety of dimensions like quality, costs, reliability, and standardization

What is relationship management exacerbated by?

potential difficulties in cross-cultural communications like language and time considerations

Describe the transportation and holding costs component of the global sourcing development model

global sourcing increases the distance components and inputs must be moved, so managers must consider trade-offs between transportation and holding costs

(faster transportation may create higher transportation costs and lower holding costs, vice versa)

Describe the implementation component of the global sourcing development model

AKA “carrying out”. implementation plans must be flexible and provide guidance for decision making when confronted with the unexpected

Describe the monitoring and improving component of the global sourcing development model

performance measures should be established for global procurement systems, which should be reviewed on a regular basis

What are examples of hidden costs

increased costs of dealing with suppliers outside of a domestic market, duty and tariff changes that occur over supply agreement life, increased inventory-related costs associated with global supply chains, and the rising levels of logistics cost volitality

what is the Total Cost of Ownership (TCO) Approach?

where a firm considers all costs that can be assigned to an acquisition , use, and maintenance of a purchase

what is near-sourcing?

procuring products from suppliers close to one’s own facilitiesW

What are reasons for using near-sourcing?

the rising transportation and energy costs, growing desire to adapt to changing market trends, and risk/ sustainability concerns

What is sustainable procurement?

the integration of social and environmental considerations into all stages of the purchasing process

What is the goal of sustainable procurement?

to minimize the impact of procurement activities on human health and the environment

What are the five dimensions of social responsibility?

Diversity, Environment, Human Rights, Philanthropy, and Safety

What can a “win-at-all-costs” philosophy exacerbate?

unethical behavior

What are some ethical considerations for procurement?

Bribes, kickbacks, gift giving/receiving, misuse of information, improper methods of knowledge acquisition, lying, lack of product quality, misuse of company assets, and conflicts of interest.

What are excess (surplus) materials?

stock materials that exceed reasonable requirements

What are obsolete materials?

not likely to ever be used againW

What are scrap materials?

no longer serviceable, have been discarded, or are a by-product of production processes

What are waste products?

materials that are spoiled, broken, or otherwise rendered unfit for further use or reclamation

What is supply chain finance?

set of technology and finance-based processes that strive to optimize cash flow W

How does supply chain finance optimize cash flow?

by allowing businesses to extend payment terms to supplies and simultaneously allowing suppliers to get paid early

What are FinTech?

companies that use cloud-based software to optimize connection between procurement and accounts payableW