Supply Chain Exam 2

Profit-Leverage Effect

Reducing purchasing costs directly increases profits dollar-for-dollar because purchasing represents a large portion of total costs

Competitive Bidding

Multiple suppliers submit bids based on clearly defined specifications and requirements in a structured process that ensures fairness transparency and no negotiation with the contract awarded to the lowest priced responsive and responsible bidder

Sustainability

Meeting current supply chain needs without harming future economic social or environmental needs

e-Procurement

Business-to-business (B2B) purchase and sale of goods and services over the internet

Total Cost of Ownership (TCO)

Total cost associated with every activity in the supply stream of a product including quality service delivery and price recognizing that purchase price is only one component of the overall cost

Reverse Auction

Pre-qualified suppliers compete by underbidding each other to win a contract

Strategic Sourcing

comprehensive approach for locating and sourcing key suppliers to leverage its consolidated purchasing power to find the best possible values in the marketplace 

• Requires analyzing what an organizations buy from who, price, volume

• Emphasis is placed on entire life cycle of a product

• Goal is to reduce costs, improve the quality of the final product and achieve a faster time to market

• How it works; identifying suppliers, cultivating relationships, continuously improving skills, understanding the embracing the possibilities 

Spend Analysis

categorizing and analzing expenditure data to decrease costs, improve efficiency, and monitor compliance.

Ethical Sourcing

Sourcing products responsibly with consideration for labor practices environment and ethics

Reasons to Make (Insourcing)

Make = Control + Strategy

• No competent supplier exists

• Protect proprietary technology / intellectual property

• Better control of quality

• Control lead time and supply reliability

• Use excess or idle capacity

• Reduce logistics or transportation costs

• Cost advantage over suppliers

• Strategic importance to the business (core competency / brand strategy)

Reasons to Buy (outsource)

Buy = Cost + Capability

• Lack of internal expertise or capability

• Item is not strategically important (non-core activity)

• Suppliers have cost advantages (economies of scale)

• Temporary capacity constraints

• Access to specialized technology or skills

• Inventory considerations (reduce investment in inventory)

• Flexibility and faster response to demand changes

Pre-Transaction Costs

Costs before purchase such as finding qualifying and certifying suppliers and training

Transaction Costs

Costs that occur during the purchasing process when acquiring goods or services.

• Negotiation costs

• Ordering costs

• Transportation costs

• Receiving and inspection

• Payment processing

• Taxes / duties

Post-Transaction Costs

Costs that occur after the purchase has been completed and the product or service has been received.

• Returns

• Repairs and maintenance

• Warranty claims

• Replacements of defective items

• Disposal costs

Single Supplier

Using one supplier for a particular product or service even when other suppliers are available.

• Build strong relationships

• Improve quality and consistency

• Achieve cost savings (economies of scale)

• Gain transportation efficiencies

• Access proprietary or specialized products

Multiple Suppliers

Using two or more suppliers for the same product or service.

• Reduce supply risk (avoid dependence on one supplier)

• Increase competition (better pricing and terms)

• Ensure capacity and availability

• Gain more market information and flexibility

Vendor Managed Inventory (VMI)

An inventory system where the supplier is responsible for managing and replenishing the buyer’s inventory levels.

• Supplier monitors inventory and decides when and how much to replenish

Co-Managed Inventory (CMI)

An inventory system where the supplier monitors inventory and recommends replenishment, but the buyer must approve the order before it is placed.

• Shared responsibility between supplier and buyer

Supplier Co-Location

A sourcing arrangement where a supplier representative is physically located at the buyer’s facility to support operations.

• Supplier works on-site to help manage forecasting, inventory, and ordering

Strategic Items

Items that are high-value and high-supply-risk in the Kraljic Matrix.

• Require close relationships and collaboration with suppliers

Leverage Items

Items that are high value but low supply risk in the Kraljic Matrix.

• Used to maximize purchasing power and negotiate lower costs

Bottleneck Items

Items that are low value but high supply risk in the Kraljic Matrix.

• Focus on ensuring supply and reducing risk, not cost

Non-Critical Items

Items that are low value and low supply risk in the Kraljic Matrix.

• Focus on efficiency and simplifying purchasing processes

Purchasing Process Steps

Need → Order → Receive → Pay → Evaluate

• Need is identified

• Purchase requisition is created

• Requisition is approved

• Suppliers are identified

• Supplier is selected

• Purchase order is issued

• Order is confirmed by supplier

• Order is fulfilled / shipped

• Goods/services are received

• Invoice is received

• Invoice, PO, and receipt are matched (3-way match)

• Payment is made

• Order is closed

• Performance is reviewed / analyzed

Return on Assets (ROA)

ROA = Net Income ÷ Total Assets
measures how efficiently a company uses its assets to generate profit.

Payment Bond

A type of surety bond that guarantees the contractor will pay all subcontractors, suppliers, and labor involved in a project.

• Protects the buyer from claims, liens, or unpaid parties

RFI

A document used to collect general information from suppliers about their capabilities, products, and services.

• Used early in the sourcing process to understand the supplier market

RFP

solicit detailed proposals from suppliers, outlining how they will meet the buyer’s requirements.

• Evaluates solutions, capabilities, and approach, not just price

RFQ

A document used to request pricing and delivery information from suppliers for clearly defined products or services.

• Used when specifications are clear and standardized

Inventory

Stock of goods and materials held by a company

Inventory Categories

• Raw Materials

• Work-in-Process (WIP)

• Finished Goods

• Maintenance, Repair, and Operations (MRO) Supplies

Inventory Stock Levels

• Cycle Stock

• Safety Stock

• Strategic Stock

• Pipeline Inventory

Strategic Stock

Inventory held for a specific future purpose or event, built in advance.

Pipeline Inventory

Inventory in transit through the supply chain

Cycle Stock

Inventory used to meet immediate demand and replenished regularly, decreases over time and is replenished with each order cycle

MRO Supplies

Inventory used to support operations but not part of finished goods

Safety Stock

Extra inventory held to protect against demand or supply uncertainty

Reasons to Hold Inventory

• Meet anticipated customer demand

• Smooth production requirements

• Decouple operations in the supply chain

• Protect against uncertainty (avoid stockouts)

Demand → Production → Separation → Protection

Reorder Point Definition

The inventory level at which a new order must be placed to avoid stockouts

Reorder Point Formula

ROP = (Demand × Lead Time) + Safety Stock

Economic Order Quantity (EOQ)

The optimal order quantity that minimizes the total cost of inventory.

• Based on the trade-off between ordering costs and carrying (holding) costs

Ordering Costs

Costs such as order preparation, transportation, receiving, and material handling

Carrying Costs

Costs such as cost of capital, taxes, insurance, storage, and obsolescence

ABC System

Classifies inventory based on degree of importance

Linear Barcode

Series of bars and spaces representing encoded information read electronically

Base Stock Level System

Inventory system that issues an order whenever a withdrawal is made maintaining a base level

Single Period Model

Inventory system where items are ordered for one-time demand

Radio Frequency Identification (RFID)

Inventory tracking technology that does not require line of sight to read tags, wireless tracking of inventory without scanning directly

Service Inventory

Activities carried out in advance of customer arrival to prepare for service delivery
eg. A restaurant pre-chopping vegetables and preparing ingredients before customers arrive so meals can be served quickly.

Make to Order

Goods are not produced until an order is received with little to no finished goods inventory

Make to Stock

Products are produced based on demand forecasts with inventory maintained

Obsolete Inventory

Stock that is expired out of date or no longer needed and cannot be sold at full value

Inventory Turnover Ratio

Inventory Turnover = Cost of Goods Sold ÷ Average Inventory

A measure of how efficiently a company uses its inventory by showing how many times inventory is sold and replaced over a period.

Absolute Inventory Value

The cost or market value of inventory on hand

Weeks of Supply

Weeks of Supply = Average Inventory ÷ Average Weekly Usage

How many weeks inventory will last

Periodic Review System

An inventory system where inventory is reviewed at fixed, regular time intervals, and an order is placed at each review to bring inventory up to a target level.

• Order quantity varies each time

• Simpler and lower cost, but less responsive than continuous review systems

Continuous Review System

An inventory system where inventory levels are monitored continuously, and a new order is placed as soon as inventory falls below the reorder point (ROP).

• Provides real-time tracking and replenishment

• More accurate but more expensive to maintain

Fixed Time Period System

An inventory system where inventory is checked at fixed intervals, and the order quantity varies to bring inventory up to a predetermined target level.

• Orders are placed on a schedule (time-based)

• Order size depends on how much inventory is left

Fixed Order Quantity System

Same order quantity is placed each time inventory reaches the reorder point

EOQ Formula

√[(2 × Order Cost × Annual Demand) ÷ (Carrying Cost % × Unit Cost)]
Balances ordering cost and carrying cost to find the best order size

EOQ Constraints

Limited capital storage, capacity, transportation constraints, obsolescence risk, production lot size, and unitization requirements

Real-world limits that prevent ordering the “perfect” EOQ

Bin System

• In a two-bin system, when the first bin is empty, a reorder is triggered

• The second bin covers demand during lead time

2D Barcode

Stores data horizontally and vertically and holds large amounts of information

1D Barcode

Stores data in horizontal lines and is limited in capacity

Direct Costs

Costs directly tied to each unit such as materials and labor

Indirect Costs

Costs not directly traceable such as overhead equipment and MRO

Variable Costs

Costs that change with production volume such as materials and utilities

Fixed Costs

Costs that remain constant regardless of output such as rent and buildings

Hidden Costs of Too Much Inventory

Costs that are not always obvious but occur when a company holds excessive inventory, too much inventory hides problems and wastes money

• Capital is tied up in inventory

• Problems in processes are hidden

• Reduces incentive for improvement

Hidden Costs of Too Little Inventory

Costs that occur when a company does not have enough inventory to meet demand. Too little inventory = delays and lost sales

• Expediting costs increase

• Longer lead times

• Reduced responsiveness to customers

• Lost sales and revenue

Procurement

The overall process of obtaining goods and services, (everything involved) including supplier selection, negotiation, purchasing, and managing supplier relationships.

• Broader than purchasing

• Covers the entire sourcing and acquisition process

Purchasing

The transactional function of procurement focused on acquiring goods or services

Purchase Requisition

An internal document used to request the purchase of goods or services within an organization.

• Identifies the need for items

• Not a contract with external suppliers

Purchase Order

An external document sent from a buyer to a supplier that specifies the items, quantities, prices, and terms of purchase.

• Becomes a legally binding contract once accepted by the supplier

3-Way Match

invoice, purchase order, and goods receipt are compared to ensure all details match before payment is made.

Merchants

Wholesalers and retailers who purchase goods for resale

Industrial Buyers

Individuals who purchase raw materials services equipment or MRO for organizations

Contracting

The acquisition of services

Inventory Turnover Effect

Higher turnover means better inventory use more sales and less capital tied up

Sealed Bid

A confidential bid opened at a specified time to ensure fairness

Bid Bond

Ensures bidder will accept the contract if selected

Performance Bond

Guarantees contractor will complete work according to contract

Open Competitive Bidding

Bids are opened publicly for transparency

Closed Competitive Bidding

Bids are opened only by authorized personnel

Centralized Purchasing

Corporate team handles all purchasing for better control and cost savings

Decentralized Purchasing

Local units (eg. plant managers) handle purchasing for faster response and local knowledge

Hybrid Purchasing

Combination of centralized and decentralized purchasing approaches

Tariffs

Taxes imposed on imported or exported goods

Non-Tariff Barriers

Restrictions such as quotas licenses embargoes and regulations

Countertrade

Trading goods or services instead of using money

Import Brokers

Licensed agents who act on behalf of importers to handle the process of bringing goods into a country.

Import Merchants

They own the goods and are responsible for selling them

Trading Companies

Buy goods in one country and sell in others through global networks

Sourcing

Identifying suppliers that provide needed goods or services

Supply Base

Group of suppliers a company uses

Supply Base Rationalization

Reducing number of suppliers without increasing risk

Sole Source

Only one supplier exists with no alternatives

Single Source

Company chooses one supplier despite having options

Multi-Source

Using multiple suppliers to reduce risk and increase competition

Functional Products

Products that have stable, predictable demand and low profit margins.

• Focus on efficiency, low cost, and reliable supply

• Typically sourced using multiple suppliers