Supply Chain Test #2

Procurement

process of selecting suppliers, negotiating contracts, establishing payment terms, and purchasing goods and services vital to an organization

Purchasing

The transactional function within procurement involving obtaining goods or services in exchange for money from a third party

Purchase Requisition

internal document notifying purchasing personnel of necessary items to order, quantity, and timeframe

• does not constitute a contractual relationship with external party

Purchase Order (PO)

official offer from a buyer to a seller to acquire goods or services, controlling the purchasing process from external suppliers

Request for Information (RFI)

A standard process to collect information about supplier capabilities

Request for Proposal (RFP)

A detailed document to determine a supplier's capability and interest in producing a product or service

Request for Quote (RFQ)

document to solicit bids from interested and qualified suppliers for goods or services

Purchasing objectives

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

• to improve the quality of the finished goods

• to optimize customer satisfaction

Purchasing process steps

1. Identify need; issue Purchase Requisition

2. Obtain authorization

3. Identify and evaluate potential suppliers

4. Select supplier

   1. Skip if you did this in Step 3

   2. If not, initiate competitive bidding process

5. Purchase order is created and delivered to supplier

6. Supplier confirms purchase order

7. Order fulfillment

8. Receipt of goods

9. Invoice and reconciliation

   1. 3-way match - invoice, purchase order, and goods receipt must match

10. Payment

11. Close out the purchase order

12. Analysis

    1. Measure efficiency and accuracy of procurement process

e-Procurement

web-enabled automation of non-strategic and transactional activities, such as:

• RFI, RFP, RFQ

• Execution and analysis

• Reverse auction capabilities

increases visibility

e-Procurement process

1. Electronic purchase requisition and/or purchase order

2. Invoice

3. Payment

advantages of e-Procurement

• Time savings - reduction in time between need recognition and the release and receipt of an order

• Cost savings - lower overhead costs in the purchasing area

• Accuracy - a reduction in errors; virtual elimination of manual paperwork

• Real time - improved communication both within the company and with suppliers

• Management - purchasing personnel spend less time on processing of purchase orders and invoices, and more time on strategic value-added purchasing activities

• Mobility - access virtually anywhere

• Trackability - real-time status tracking

Total Cost of Ownership (TCO)

the sum of all the costs associated with every activity 

• Purchase price of an item is very important, but it is only one part of this

• = Quality + Service + Delivery + Price

Components of Total Cost of Ownership

• 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

Make vs. buy decision

The strategic decision of producing internally or buying from an external supplier based on business strategy, risks, and economic factors

Make vs. buy decision key pillars

1. Business strategy

2. Risks

3. Economic factors

Qualitative reasons for making

• Protect proprietary technology - not wanting your intellectual property to be public

• No competent supplier - in the market and you may not want to spend the time or effort to develop one

• Control of lead-time - feeling you have more control over the lead time to produce the product

• Use existing idle capacity - make use of excess capacity

• Better quality control - feeling you have more control of the quality of the material/product than a supplier

Quantitative reasons for making

• Overall lower cost

• Control of transportation and warehousing costs - avoid transportation costs and potentially keep warehousing costs low

Qualitative reasons for buying/outsourcing

• If it is a non-strategic item

• Insufficient capacity

• Temporary capacity constraints - concept of “extended workbench” (i.e., short-term supplementing internal capacity with external capacity during time of constraint or overloaded work centers)

• Lack of expertise - or necessary technology

• Quality - suppliers may have better technology, process, & skilled labor

• Multi Sourcing Strategy - using an external supplier + an internal source

• Brand Strategy - take advantage of a supplier’s brand image, reputation, popularity, etc.

Quantitative reasons for buying/outsourcing

• Cost advantage - suppliers may provide the benefit of economies of scale, esp. for non-vital components

• Inventory considerations - opting to have the supplier hold inventory of the item or the materials required to produce the item

Benefits of outsourcing

• Concentrate on core capabilities

• Reduce staffing levels

• Accelerate reengineering efforts

• Reduce internal management problems

• Improve manufacturing flexibility

In-sourcing

reverting to in-house production when external quality, delivery, and services do not meet expectations

Co-sourcing

1. internal staff and an external provider share a process or function

2. using exclusive dedicated staff as an external provider

Backward vertical integration

a company acquires one or more of their suppliers

Forward vertical integration

a company acquires one or more of their customers

Profit-leverage effect

Decrease in purchasing expenditures directly increases profits before taxes

Return on Assets (ROA) effect

a high [this] indicates managerial expertise in generating profits with lower spending

• = Profit / Assets

Centralized purchasing

purchasing department located at the firm’s corporate office makes the purchasing decisions for all departments

• advantages

  • Concentrated volume

  • Leveraging purchase volume

  • Avoiding duplication

  • Specialization

  • Lower transportation costs

  • No competition within units

  • Common supply base

Decentralized purchasing

individual, local purchasing departments make their own purchasing decisions

• advantages

  • Knowledge of local requirements

  • Local sourcing

  • Less bureaucracy

Hybrid approach (centralized/decentralized purchasing)

• centralized purchasing for products and services used throughout the corporation

• decentralized purchasing for products and services used only locally at each facility

Specialized Knowledge

Essential for international purchasing

• Tariffs - duties, taxes, or customs imposed by the host country on imported/exported goods

• Non-tariff barriers - quotas, licensing agreements, embargoes (i.e., official ban on trade with a particular country), laws and regulations imposed on imports and exports

• Countertrade - international trade by exchange of goods rather than by currency

Bid

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

Competitive Bidding

competing suppliers bid for the right to supply specified materials or services

• no negotiations—contract goes to cheapest responsible bidder

Purchasing function

• enhances value

• performance is preferably monitored periodically against standards, goals, and/or benchmarks

Strategic Sourcing

comprehensive approach for locating and sourcing key suppliers, so that an organization can leverage its consolidated purchasing power to find the best possible values in the marketplace

• emphasis on product life-cycle

• how it works

  • Identifying suppliers

  • Cultivating relationships

  • Continuously improving skills

  • Understanding and embracing the possibilities

Objectives of strategic sourcing

1. Improve the value‐to‐price relationship

   • i.e. achieve cost reductions while maintaining or improving quality/service

2. Understand the category buying and management process to identify improvement opportunities

3. Examine supplier relationships across the entire organization. Share best practices across the organization

4. Develop and implement multi‐year contracts with standardized terms and conditions across the organization

5. Leverage the entire organization’s spend

Sourcing Strategies

• Insourcing - producing goods or services internally

• Outsourcing - traditionally involves purchasing an item or service externally, which had previously been produced internally

  • Recently: term has become synonymous with the concept of buying an item from an external supplier regardless of whether the item had previously been produced internally

• Single-source - a sourcing strategy where there are multiple potential suppliers available for a product or service, but the company decides to purchase from only one supplier

  • RISKY

• Multi-source - purchasing a good or service from more than one supplier

  • creates competition between suppliers to achieve higher quality and lower price

Reasons for single supplier

• To establish a good relationship

• Less quality variability

• Lower cost

• Transportation economies

• Proprietary product or process

• Volume too small to split

Reasons for multiple suppliers

• Need more capacity

• Spread risk of supply disruption

• Create competition

• More sources of information

• Dealing with special kinds of business

Functional products

MRO items and other commonly low profit margin items with relatively stable demands and high levels of competition

• Ex.: office supplies, food staples

Potential strategy: reliable, low cost multi-sourced suppliers

Innovative products

have short product life cycles, volatile demand, high profit margins, and relatively less competition

• Ex.: technology products such as iPhone

Potential strategy: innovative, high-tech, cutting edge, market leading single-sourced supplier. Long-term partnership

Strategic sourcing process

1. Identify the targeted spend area

2. Create the sourcing team

3. Develop a team strategy and communication plan

4. Gather market information

5. Develop a supplier portfolio

6. Develop a future state

7. Select suppliers and negotiate

8. Implement Supplier Relationship Management (SRM)

Spend analysis

Categorizing and analyzing expenditure data to decrease costs, improve efficiency, and monitor compliance

• key areas

  • Total historic expenditures and volumes

  • Future demand projections or budgets

  • Expenditures categorized by commodity and sub-commodity

  • Expenditures by division, department, or user

  • Expenditures by supplier

Spend analysis process

1. Define the scope

   • Ex.: expenditures over a specified period

2. Identify all data sources

3. Gather and consolidate all data into one database

4. Cleanse the data (i.e., correcting errors) and standardize it for easy review

5. Categorize the data

   • Ex.: commodity and sub-commodities

6. Analyzing the data for:

   • Best deals per supplier

   • To ensure that all purchases are from preferred suppliers

   • To reduce the number of suppliers per category

7. Repeat the process on a regular basis

Sourcing strategies by category

non-critical, bottleneck, leverage, and strategic items

Non-critical items

involve a low percentage of the firm’s total spend and involve very little supply risk

• Ex.: standard screws in a computer factory

Bottleneck items

unique procurement problems. Supply risk is high and availability is low. Small number of alternative suppliers

Leverage items

commodity items where many alternatives of supply exist, and supply risk is low. Spend is high and there are potential procurement savings

Strategic items

involve a high level of expenditure and are vital to the firm’s success

Sourcing categories examples

Supply base rationalization (/reduction/optimization)

reducing the supply base as much as possible without significantly increasing risk

• results in:

  • Reduced purchase prices

  • Fewer supplier management problems

  • Greater levels of quality and delivery reliability

  • Closer and more frequent interaction between buyer and supplier

AI in supplier selection

• can increase effectiveness of supplier relationship management

• eliminates human error

• can quickly and thoroughly analyze supplier-related data (e.g., on-time, in-full delivery performance, evaluations, and credit scoring) and provide information for future decisions

• can improve customer service

Preferred suppliers

• Best meet your company’s overall purchasing requirements

• Achieve a specific and exceptional level of performance over time as measured by agreed-upon criteria, providing higher value than competitor

• they provide

  • Product and process technology and expertise

  • Product development and value analysis

  • Information on latest trends in materials, processes, or designs

  • Capacity for meeting unexpected demand

  • Cost efficiency due to economies of scale

Strategic alliance

A sourcing agreement between a buyer and a supplier to pursue agreed-upon objectives while remaining independent organizations, sharing information and resources for mutual benefit

• benefits

  • Potential to increase profits for both parties

  • Potential to create a competitive advantage or block a competitor from gaining market share

  • Mitigate risks and ensure a continuity of supply

  • Position the partners for future strategic opportunities

Strategic alliance development

an extension of supplier development which refers to increasing a key or strategic supplier’s capabilities

• Results in:

  • better market penetration

  • access to new technologies and knowledge

  • higher return on investment

Distributive negotiations

leads to self-interested, one-sided outcome

• counterproductive - parties work against each other; lose-lose

• competitive - compete for value and barely share info; win-lose

Collaborative negotiations

Both sides work together to create a win-win result, requiring open discussions and alignment on motivation, contribution, and financial benefit

• cooperative - parties work tg and trust each other

• collaborative - same goals and parties work tg to create new opportunities and solve problems

Reverse auction

pre-qualified suppliers bid against one another to secure the buyer’s business, driving the price to be paid for the item downward

Vendor Managed Inventory (VMI)

Suppliers directly manage buyer inventories to reduce carrying costs and avoid stockouts, determining delivery schedules and order quantities

• From buyer-firm’s perspective:

  • Supplier tracks inventories

  • Supplier determines delivery schedules and order quantities

  • Buyer can take ownership at the stocking location

  • Buyer may also be able to avoid taking ownership until the material is actually being used

• From supplier’s perspective:

  • Avoids ill-advised customer orders

  • Supplier decides inventory set up and shipments

  • Opportunity for supplier to educate customers about other products

Co-managed Inventory (CMI)

a specific quantity of an item is stored at buyer’s location, and supplier replaces it with approval from buyer when stock is depleted

• supplier only recommends orders and requires approval

Supplier co-location

Supplier representative embedded in the buyer's purchasing group to forecast demand, monitor inventory, and place orders, benefiting both parties

• employee is paid by supplier but works for buyer

Business Ethics

• Corporate social responsibility (CSR) - the practice of business ethics

• 2 main ethical approaches

  • Utilitarianism - an ethical act is one that creates the greatest good for the greatest number of people and should be the guiding principle of conduct

  • Rights and duties - some actions are just right in and of themselves, regardless of the consequences

Supplier Relationship Management (SRM)

Strategically planning and managing interactions with third-party suppliers to maximize value

• defining needs and wants and establishing company links to obtain them

• part of Strategic Sourcing rollout

• best supplier candidate traits

  • Providing high volumes of a product/service

  • Providing lesser quantities of a crucial product/service

  • Serve many business units of a company or organization

  • Applied where intensive engineering, manufacturing and/or logistic interaction is essential

Strategic Partnerships

Mutual commitment over an extended time to work to benefit both parties, sharing relevant information and the risks and rewards of the relationship

10 Keys to developing successful strategic partnerships

1. Building trust

2. Having a shared vision and objectives

3. Developing personal relationships

4. Establishing mutual benefits and needs

5. Gaining commitment from top management

6. Managing change

7. Information sharing and lines of communication

8. Understanding and influencing capabilities

9. Continuous improvement

10. Measuring performance

Common Continuous Improvement process

• Plan - identify each specific improvement that is needed, what change is necessary to make the improvement, and then plan for that change

• Do - implement the change on a small scale to see if the change improves the process before moving forward with a full implementation

• Check - use data to analyze the results to see if the change made a positive impact

• Act - if the change was successful, implement the change on a larger scale and continuously assess results

  • If the change did not work, then the root cause was most likely not identified, or the change was not the correct solution, and you may need to begin the cycle over again

Benefits of strategic partnerships with suppliers for buyers

• Increased operating efficiencies

• Preferred access to the supplier’s best people

• Influence over supplier investments and technology

• Preferred access to supplier ideas

• Increased innovation from and with suppliers

• Sustainable competitive advantage

Benefits of strategic partnerships with suppliers for suppliers

• Increased operating efficiencies

  • Lower cost of sales

  • Increased margins

  • Incremental revenue

• Greater visibility into buyer’s purchasing plans

• Increased scope of business

• Opportunities to develop, pilot, and showcase innovative solutions

• Longer term buyer commitments; greater predictability of future business

• Sustainable competitive advantage

Supplier Evaluation

Process to identify most reliable suppliers based on facts, not perception

• frequent feedback can help avoid surprises

Supplier performance evaluation

It is important to actively monitor a supplier’s performance and provide visibility and feedback on supplier performance

• relevant metrics

  • Price and cost performance

  • Product quality

  • Delivery performance

  • Contractual compliance

  • Participation in product development initiatives

  • Cooperativeness in third-party production management

  • Support of ethics and sustainable practices

Key supplier selection

typically conducted by a cross-functional team using evaluation forms or scorecards

• Weighting techniques often used

• robust Supplier Evaluation process to select key suppliers with whom to develop a collaborative relationship → purchase cost becomes relatively less important

Weighted-criteria evaluation system

1. Select the key dimensions of performance mutually acceptable to both buyer and supplier

2. Monitor and collect performance data

3. Assign weights to each of the dimensions

4. Evaluate performance measures between 0 and 100

5. Multiply dimension rating by weight and sum of overall score

6. Classify suppliers based on their overall score

   1. e.g., certified, preferred, acceptable, conditional, developmental, unacceptable, etc.

7. Audit and perform ongoing certification review

Benefits of supplier certification programs

1. Reducing the amount of time and labor required for the buyer to conduct incoming inspections of products and materials from certified suppliers, creates cost savings

2. Building long-term relationships

3. Recognizing excellence

4. Decreasing the supplier base

Supplier certification

verification that select suppliers operate, maintain, improve, and document effect procedures that relate to the buyer’s requirements

Internal certification program example criteria

• Supplier has no incoming product rejections for a specified time period

• Supplier has no incoming late deliveries for a specified time period

• Supplier has no significant negative quality related incidents for a specified time period

• Supplier is ISO 9000 certified or has successfully passed a recent on-site quality system evaluation

• Supplier consistently meets a mutually agreed-upon set of clearly specified quality performance measures

• Supplier has a fully documented process and quality system with cost controls and continuous improvement capabilities

• Supplier’s processes are determined to be stable and in control

ISO 9000

A series of management and quality standards focusing on design, development, production, installation, and service

• global market

Supplier development

Assistance given to suppliers to improve quality and delivery performance

• should achieve:

  • Lower supply chain total cost

  • Increased profitability for all supply chain participants

  • Increased product quality

  • Near-perfect on-time-delivery at each point in the supply chain

Supplier recognition programs

recognize high-performing suppliers and motivate them to meet customer expectations

1. Companies should recognize and celebrate the achievements of their best suppliers

2. Award winners exemplify true partnerships, continuous improvement, organizational commitment, and excellence

3. Award-winners serve as role models for other suppliers

Benefits

• Motivate suppliers

• Improve supplier loyalty

• Encourage suppliers to adapt to the company’s culture

• Helps create entry barriers for competitors

• Encourages supplier participation in product innovation

Supplier Relationship Management System

Provides a comprehensive and objective view of supplier performance and helps in sourcing decisions

5 key characteristics

1. Automation handles routine transactions

2. Integration spans multiple departments, processes, and software applications

3. Visibility of information and clear and concise process flows

4. Collaboration through information sharing

5. Optimization of processes and decision making

Operations management

Managing the process to convert resources into goods and services in alignment with the company’s business strategy as efficiently and effectively as possible

Manufacturing

to process components into a finished product, especially by means of mass production

• Includes the machines used, personnel involved, inventory handling, warehousing, etc.

Lean Manufacturing

Philosophy of waste reduction and value enhancement in the supply chain flow

Six Sigma

Data-driven methodology for identifying and removing causes of defects and minimizing variability in manufacturing and business processes

Make-to-stock

to manufacture products for stock based on demand forecasts

• used for most daily necessities such as food and textiles

• challenge: avoid having excess inventory

Make-to-order

manufacturing starts only after a customer’s order is received

• used for highly configured products

  • Ex.: aircraft

Assemble-to-order

products ordered by customers are produced quickly and are customizable to a certain extent

• requires that the basic parts for the product are already manufactured but not yet assembled

• hybrid strategy = make-to-stock + make-to-order

Engineer-to-order

product is designed, engineered, and built to the customer’s specifications after receipt of the order

• every product is unique

• poor quality is expensive

Manufacturing strategy vs. performance cycle

Intermittent manufacturing process

used to produce a large variety of products with different processing requirements in lower volumes

Repetitive manufacturing process

used to produce one or a few standardized products in high volumes

Types of manufacturing processes

Job shop production (aka project production)

Creates a custom product for each customer, generally one at a time

• intermittent

• ETO, MTO

• long lead time

Batch production

Manufacturing of a small fixed quantity of an item in a single production run

• Each individual item in the batch goes through one stage of production process before the whole batch moves on to the next stage

• Aims to achieve better use of equipment

• Produces good quality products more economically than manufacturing them individually

• intermittent

• MTO, ATO

• long lead time

Line flow production (aka mass production)

For standardized products with a limited number of variations

• When one task is finished, the next task must start immediately → time taken on each task must be equal

• repetitive

• limited variety

• ATO, MTS

• short lead time

Continuous flow production

Raw materials run through a series of inflexible processes

• Generally highly automated and workers act as monitors rather than as active participants over 24 hr day

• Ex.: oil refining; laundry detergent

• repetitive

• limited variety

• MTS

• short lead time

Total cost of manufacturing

Complete cost of producing and delivering products, including fixed and variable costs from manufacturing, storing, and delivery

• generally expressed as cost per unit

TCM vs. strategic alternatives - as volume goes up:

• Manufacturing and Procurement costs go down due to economies of scale

• Inventory and Warehousing costs go up

• Transportation costs go down, but level off at high volumes as the shipping container gets filled to capacity and another container must be used

LEAN Manufacturing

A management philosophy based on the Toyota Production System, aiming to eliminate waste in the customers’ eyes

• use value stream mapping as primary work unit

• focus on improving process performance using learn-by-doing approach

• standard in many industries

Value stream map

Shows information flows from customer to supplier, driving material flow back to the customer based on requirements

Value

inherent worth of a product as judged by the customer and reflected in its selling price and market demand