supply chain exam 2 (peavey)

procurement

the process of selecting and vetting suppliers, negotiating contracts, establishing payment terms, and the actual purchasing of goods and services.

procurement is concerned with

acquiring all of the goods, services and work that is vital to an organization.

procurement contains 3 sections, which are...

purchasing management,

strategic sourcing

supplier relationship management

purchasing

the action of obtaining merchandise, capital equipment, raw materials, services, or maintenance, repair, and operating (MRO) supplies in exchange for money, or its equivalent.

purchasing is the process of how...

goods and services are ordered from an external third party

purchasing can usually be described as the...

transactional function of procurement for goods and services

purchasing is also a term commonly used in business to represent...

the function of, and the responsibility for, acquiring materials, supplies, and services for an organization

institute of supply management (ism)

identification, acquisition, access, positioning, and management of resources an organization needs or potentially needs in the attainment of its strategic objectives.

purchase requisition

an internal document that defines the need for goods and/or services

does purchase requisition constitute a contractual relationship with an external party?

no

why are purchase requisitions generated by user department?

to notify purchasing personnel of items to order, their quantity, and timeframe. it may also contain authorization to proceed with the purchase.

purchase order (PO)

an external commercial document, the official offer issued by a buyer to a seller to acquire goods or services.

purpose of purchase order

controls the purchasing of products and services from external suppliers

what does a purchase order indicate?

types, quantities, and agreed prices for products or services

when does a purchase order become a legally binding contract?

only when accepted by the supplier

e-procurement

the business-to-business (b2b) purchase and sale of supplies and services over the internet

merchants

wholesalers and retailers who purchase for resale

industrial buyers

individuals within an organization who purchase raw materials for conversion into products, and/or purchase services, capital equipment, and MRO supplies.

contracting

term often used for the acquisition of services

request for information (RFI)

a standard business process whose purpose is to collect written information about the capabilities of various suppliers

request for proposal (RFP)

a detailed capabilities document used to determine a supplier's capability and interest in the production of a product or service

request for quote (RFQ)

a document used to solicit bids from interested and qualified suppliers for goods or services that the organization needs to obtain

primary objectives of purchasing

ensure an uninterrupted flow of materials and services at the lowest total cost

improve the quality of the finished goods produced

optimize customer satisfaction

purchasing contributes to objectives by

seek better materials and reliable suppliers

work with expertise of strategic suppliers to improve quality and materials

Involve suppliers and purchasing personnel in new product design and development

purchasing process steps

1. A need is identified, and a Purchase Requisition is issued

2. Obtain authorization as necessary

3. Identify and evaluate potential suppliers

4. Make supplier selection
5. Purchase Order (PO) is created and delivered to the supplier.

6. Supplier confirmation of the Purchase Order

7. Fulfillment

8. Receipt of Goods

9. Invoice and Reconciliation
10. Payment

11. Close out the Purchase Order

12. Analysis

how are many steps completed in leading procurement organizations?

through automated systems and pre-defined rules for aspects like low-dollar value purchase, non-strategic purchases, etc.

e-procurement is the term to describe the...

automation, through web-enabled tools, of the non-strategic and transactional activities that would otherwise consume the majority of the buyer's time

e-procurement tools typically automate all or parts of these processes:

solicitation tools such as RFI, RFP, RFQ

execution and analysis

reverse auction capabilities

what does automation provide?

increased visibility of all purchases

the basic e-procurement process (EIP pie backwards acronym)

an electronic purchase requisition and/or purchase order

an invoice

a payment

for high-dollar purchases, the e-procurement process will generally also include

authorization of the purchase order and reconciliation of the invoice

advantages of an e-procurement system

time savings
cost savings
accuracy
real time
management
mobility
trackability
benefit to the suppliers

profit-leverage effect

a decrease in purchasing expenditures directly INCREASE profits before taxes

return on assets (ROA) effect

a high ROA indicates managerial prowess in generating profits with lower spending

inventory turnover effect

indicate optimal utilization of space and inventory levels, increased sales, avoidance of inventory obsolesce.

inventory is an asset but also...

capital tied up

what does a high turnover ratio indicate?

the company is generating sales efficiently to sell territory (beneficial)

what does a low turnover ratio indicate?

the company is not selling through products efficiently. the company is likely making/buying too much inventory for demand and may end up throwing out unusable products

total cost of ownership (TCO)

the sum of all the costs associated with every activity in the supply stream of a product

what is the only part of the total cost of ownership?

purchase price

elements of total cost of ownership

quality, service, delivery, and price (QSDP)

tco is the sum of the cost elements in QSDP

true

acquisition cost is often a very small portion of the tco

true

other factors of total cost of ownership

quantity discounts

cash discounts

value-added services

administrative expenses

poor supplier quality

components of the total cost of ownership

pre-transaction costs

transaction costs

post-transaction costs

pre-transaction costs

activities carried out prior to the actual buy and sell transaction

transaction costs

activities carried out as part of the actual buy and sell transaction

post-transaction costs

activities carried out following the actual buy and sell transaction

examples of pre-transaction costs

identifying sources

qualifying sources

certifying sources

supplier database update

examples of transaction costs

prices negotiation

delivery confirmation

purchase order administration

transportation

delivery/receiving

reconciliation

taxes/tariffs/duties

invoicing/payment

incoming inspection

rejected goods return to supplier

close-out

examples of post-transaction costs

returns from customer

replacement

repair parts and labor

maintenance

disposal of returned product

make versus buy decisions

the act of deciding whether to produce an item internally or buy the item from an outside supplier

make

producing materials or products internally

buy

buying materials, components, or products from a supplier instead of, or in addition to, making them in-house

Make vs Buy is a [blank] decision.

strategic

the make-vs-buy decision is based on three pillars

business strategy, risks, and economic factors

business strategy

includes the strategic importance to the company of the product or service that is being considered for outsourcing.

examples of business strategy

process
technologies
skills required to make the product or deliver the service

rule in business strategy

it is desirable to chose in-house capabilities when a product or a function is critical to a company's performance or is considered a core operation

risks

include lower quality, reliability, and predictability of outsources solutions as compared with in-house manufacturing or services, as well as risks inherent in the process of identifying and selecting the right supplier and structuring a workable ongoing relationship

when there are multiple suppliers, a single failure...

may not be fatal

when suppliers are making components rather than finished products...

manufacturing errors will likely be caught during assembly and not be passed on to the consumer directly

economic factors

include the impact of outsourcing on capital expenditures, return on invested capital, and return on assets, as well as the possible savings achieved through outsourcing

qualitative factors considered in the make vs buy decision

quality, reliability, and reputation of the potential suppliers and the impact of the decision on customers

quantitative factors considered in the make vs buy decisions

incremental costs of either making or purchasing the item, such as the availability of manufacturing facilities, needed resources, and manufacturing capacity

qualitative reasons for making

protect proprietary technology

no competent supplier

control of lead time

use existing idle capacity

better quality control

quantitative reasons for making

overall lower cost

control of transportation and warehousing costs

cost factors for the make analysis

Direct labor expenses

Incremental inventory-carrying expenses

Incremental capital expenses

Incremental purchasing expenses

Incremental factory operating expenses

Incremental managerial expenses

Delivered purchased material expenses

Any follow-on expenses resulting from quality and associated problems

qualitative reasons for buying or outsourcing

non-strategic

insufficient capacity

temporary capacity constraints

lack of expertise

quality

multi sourcing strategy

brand strategy

quantitative reasons for buying or outsourcing

cost advantage

inventory considerations

cost factors for the buy analysis

unit price of the purchased item

transportation expenses

incremental purchasing expenses

receiving and inspection expenses

any follow-on expenses associated with service or quality

risks of outsourcing

potential loss of control

increased reliance on suppliers

increased need for supplier management

benefits of resourcing

concentrate on core capabilities

reduce staffing levels

accelerate reengineering efforts

reduce internal management problems

improve manufacturing flexibility

additional make vs buy concepts

in-sourcing

co-sourcing

backward vertical integration

refers to a company acquiring one or more of their suppliers

forward vertical integration

refers to a company acquiring one or more of their customers

types of purchasing

centralized purchasing

decentralized purchasing

centralized/decentralized purchasing

centralized purchasing

purchasing department located at the firm's corporate office makes all the purchasing decisions

decentralized purchasing

individual, local purchasing departments, such as plant level, make their own purchasing decisions

centralized/decentralized purchasing (hybrid approach)

centralized purchasing for products and services used throughout the corporation. decentralized purchasing for products and services used only locally at each facility

advantages of centralization

concentrated volume

leveraging purchase volume

avoiding duplication

specialization

lower transportation costs

no competition within units

common supply base

advantages of decentralization

knowledge of local requirements

local sourcing

less bureaucracy

reasons for global sourcing

opportunity to improve quality, cost, and delivery performance

exploit global efficiencies

to respond to insufficient domestic capacity

to achieve access to better process and product technology

due to a change in domestic business environment

to take advantage of reciprocal trade and countertrade arrangement

specialized knowledge

tariffs

non-tariff barriers

countertrade

potential challenges

knowledge of international trade policies and procedures

awareness and cost of required tariffs and duties

difficulties in communicating with suppliers due to language barriers, time zones, holidays

locating, evaluating, sourcing and expediting in global markets

payments and currency management

longer time span for negotiations

potential for cultural, labor, and political problems

potentially longer transportation lead times necessitating additional inventory

specific and varying documentation requriements

handling legal matters and the process for settling disputes

import brokers

agents licensed by the governmental regulatory authority to conduct business on behalf of importers for a service fee

import merchants

a person or company engaged in the purchase and sale of imported commodities for profit

trading companies

buy products in one country and sell them in different countries where they have their own distribution network

bid

a proposal or quotation submitted in response to a solicitation from a contracting authority

competitive bidding

a procurement process in which bids from competing suppliers, for the right to supply specified materials or services, are requested

open competitive bidding

the sealed bids are opened in full view of all who may wish to witness the bid opening

closed competitive bidding

the sealed bids are opened in the presence of authorized personnel

the competitive bidding process allows for negotiations

false

bid bond

a debt secured by a bidder for the purpose of providing a guarantee that the successful bidder will accept the contract once awarded. If not, the bond would be forfeited.

performance bond

a debt secured by a bidder for the purpose of providing a guarantee that the work will be on time and meet specifications

payment bond

a debt secured by a bidder for the purpose of providing protection against 3rd party liens not fulfilled by bidder

it is preferable to [blank] monitor the purchasing function's performance against set [blank]

periodically; standards, goals, and/or industry benchmarks

benchmarking

process of measuring performance against the best in the same or another industry

purpose of benchmarking

identify internal opportunities for improvement

sourcing

the process of identifying a company that provides a needed good or service