SCM 3301 Exam 2 (Miller)

The following are all typical reasons to Buy or Outsource EXCEPT:

A. If low volumes increase costs

B. When product life-cycles are short

C. To gain access to state-of-the-art technology

D. Better visibility of the process

E. For a cost advantage

D. Better visibility of the process

The following are all typical reasons to Buy or Outsource EXCEPT:

A. When product life-cycles are stable

B. When product life-cycles are short

C. To gain access to state-of-the-art technology

D. For a cost advantage

E. To maintain strategic flexibility

A. When product life-cycles are stable

The following are all typical reasons to Make or Insource EXCEPT:

A. Better control over quality

B. To gain access to state-of-the-art technology

C. Better control over environmental impact

D. When product life-cycles are stable

E. To utilize excess capacity

B. To gain access to state-of-the-art technology

The following are all typical reasons to Make or Insource EXCEPT:

A. To reduce handling/storage costs

B. If low volumes increase costs

C. When product life-cycles are stable

D. To protect intellectual property

E. To utilize excess capacity

B. If low volumes increase costs

The following are all typical reasons to Make or Insource EXCEPT:

A. To gain access to state-of-the-art technology

B. To utilize excess capacity

C. To reduce handling/storage costs

D. Better control over environmental impact

E. When product life-cycles are stable

A. To gain access to state-of-the-art technology

The following are all typical reasons to Buy or Outsource EXCEPT:

A. When product life-cycles are short

B. To maintain strategic flexibility

C. Better control over environmental impact

D. To gain access to state-of-the-art technology

E. For a cost advantage

C. Better control over environmental impact

he following are all typical reasons to Buy or Outsource EXCEPT:

A. If low volumes increase costs

B. When product life-cycles are short

C. To gain access to state-of-the-art technology

D. To protect intellectual property

E. For a cost advantage

D. To protect intellectual property

The following are all typical reasons to Make or Insource EXCEPT:

A. Better control over environmental impact

B. To gain access to state-of-the-art technology

C. To protect intellectual property

D. Better visibility of the process

E. Better control over quality

B. To gain access to state-of-the-art technology

The following are all typical reasons to Buy or Outsource EXCEPT:

A. When product life-cycles are short

B. If low volumes increase costs

C. To utilize excess capacity

D. To gain access to state-of-the-art technology

E. For a cost advantage

C. To utilize excess capacity

The following are all typical reasons to Buy or Outsource EXCEPT

A. Better control over quality

B. For a cost advantage

C. To gain access to state-of-the-art technology

D. To maintain strategic flexibility

E. If low volumes increase costs

A. Better control over quality

The following are all typical reasons to Make or Insource EXCEPT:

A. When product life-cycles are short

B. To utilize excess capacity

C. Better control over environmental impact

D. Better control over quality

E. When product life-cycles are stable

A. When product life-cycles are short

Supply Management

Broad set of activities carried out by organizations:

Analyze sourcing opportunities

Develop sourcing strategies

Select suppliers

Procure goods and services

Measure and manage suppliers

Why Supply Management is Critical- Global Sourcing

Global Sourcing - competing against World-Class organizations

Global competition requires global sourcing

Considerations

Where and when are goods and services needed?

What suppliers have the best mix of performance characteristics?

Advances in information systems have enabled global sourcing efforts.

Global sourcing applies to services and business processes, as well as manufactured goods.

Invoice processing, financial analysis, call centers, IT processing

Why Supply Management is Critical-Performance Impact

Performance Impact- affects the way your company performs

1. Quality: Performance, Features, Reliability,Conformance, Durability, Serviceability, Perceived Quality

2. Delivery: Right Quantity - Right Time - Right Place

3. Price

Why Supply Management is Critical Financial Impact

direct influence on bottom-line profits

Why Supply Management Is Critical for Financial Performance ,

1. Cost Of Goods Sold (COGS) - The purchased cost of goods from outside suppliers.

2. Merchandise inventory - A balance sheet item that shows the amount a company paid for the inventory it has on hand at a particular point in time.

3. Profit margin - The ratio of earnings (profit) to sales (revenue) for a given time period.

Why Supply Management Is Critical- Profit Leverage Effect

1. Decreasing the money spent on purchasing functions increases profit FASTER than increasing revenue as a result of marketing and sales.

2. Every $1 saved in purchasing, lowers COGS by $1 and directly contributes $1 to bottom line profits.

What You Need to Know to Calculate Profit Leverage Effect-Financial Indicators

Many Financial Indicators are reported as a "Percent of Sales"

%COGS = COGS / Sales Revenue

Pretax Profit Margin = Pretax Profit / Sales Revenue

What You Need to Know to Calculate Profit Leverage Effect-Purchasing/Procurement

When Purchasing/Procurement reduces COGS by a quantity or percentage, the money saved increases Pretax Profit by the same amount.

EXAMPLE: Reducing COGS by $10 increases Pretax Profit by $10

EXAMPLE: COGS = $100. Reducing COGS by 10%, reduces COGS by:

$100 x 0.1 = $10, which increases Pretax Profit by $10

What You Need to Know to Calculate Profit Leverage Effect

Profit Leverage Effect: Sales must increase by

[COGS Savings] / [Pretax Profit Margin] to have the same effect

EXAMPLE: Pretax Profit Margin = 10%, Purchasing/Procurement save $10

Sales must increase by $10 / 0.1 = $100 to have the same effect on Profit

The Strategic Sourcing Process

Identifying ways to improve long-term business performance by better understanding sourcing needs, developing long-term sourcing strategies, selecting suppliers, and managing the supply base.

Step 1 of the Strategic Sourcing Process

1. Assess Opportunities

- Spend Analysis

Step 2 of the Strategic Sourcing Process

2. Profile Internally and Externally

-Category Profile

-Industry Analysis

Step 3 of the Strategic Sourcing Process

3. Develop the Sourcing Strategy

- Make or Buy

- Total Cost Analysis

- Portfolio Analysis

Step 4 of the Strategic Sourcing Process

4. Screen Suppliers and Create Selection Criteria

- RFI

- Supplier long list

Step 5 of the Strategic Sourcing Process

5. Conduct Supplier Selection

- Multi Criteria models

- Supplier Short List

Step 6 of the Strategic Sourcing Process

6. Negotiate and Implement Agreements

- RFQ

- Negotiation

- Contracts

The Strategic Sourcing Process Step 1:Assess Opportunities- Spend Analysis

The application of quantitative techniques to purchasing data in an effort to better understand spending patterns and identify opportunities for improvement.

The Strategic Sourcing Process Step 1:Assess Opportunities- Purpose of Spend Analysis

PURPOSE: Determine where efforts to change purchasing practices will have the most influence.

1. What categories of products or services make up the bulk of company spending?

2. How much are we spending with various suppliers? Who are our suppliers? How much are we spending with each?

3. What are our spending patterns like across different locations? What divisions, departments, plants, business units are responsible for the most spending?

A Pareto Chart

A Pareto Chart graphically orders categories of numerical data in descending order so that the most important categories are easily recognized.

The Strategic Sourcing Process Step 2: Profile Internally and Externally

Two approaches to creating profiles:

[Internal] Category profile and [External] Industry Ana

The Strategic Sourcing Process Step 2:- An [Internal] Category profile

[Internal] Category profile -Understanding all aspects of a particular sourcing category that could ultimately have an impact on the sourcing strategy.

The Strategic Sourcing Process Step 2:- An [Internal] Category profile- Steps

1. Breaking down categories of purchasing into more detail

2. Identifying where problems are occurring internally

The Strategic Sourcing Process Step 2: An[External] Industry Analysis

[External] Industry Analysis - Profiling the major forces and trends that are impacting an industry, including pricing, competition, regulatory forces, substitution, technology changes, and supply/demand trends.

The Strategic Sourcing Process Step 2: An[External] Industry Analysis- Steps

1. Maintaining visibility of global political and regulatory policy

2. Tracking trends in commodity and supply pricing

3. Monitoring market, customer, and competitor trends

Maverick Spending

Spending that occurs when internal customers purchase directly from non qualified suppliers and bypass established purchasing procedures.

The Make-or-Buy Decision

A high-level, strategic decision regarding which products or services will be provided internally (Make) and which will be provided by external supply chain partners (Buy).

-Part of step 3 of the The Strategic Sourcing Process- Develop the Sourcing Strategy: Make or Buy

Insourcing

The use of resources within the firm to provide products or services. "Do it Myself" [Insourcing the Supply Chain is "Vertical Integration"]

Outsourcing

The use of supply chain partners to provide products or services. "Pay Someone to Do It"

Step 3: Develop the Sourcing Strategy: Make or Buy- Where is the physical location of the producer/provider of products or services

1. Off-shoring,

2. Near-shoring

3. On-shoring

Off-shoring

Location of an Insourced or Outsourced Firm in a foreign country

Near-shoring

Offshoring in an adjacent country

On-shoring

Location of an Insourced or Outsourced Firm in the firm's country

Reasons to Make or Insource

1. Better control over quality

2. Better visibility of process

3. Better control over social and environmental impact

4. To protect intellectual property

5. For Core Competencies

6. To utilize excess capacity

7. To reduce handling/storage costs

8. When product life-cycles are stable

Reasons to Buy or Outsource

1. If low volumes increase costs

2. To maintain strategic flexibility

3.To gain access to state-of-the art technology and processes

4. Cost and/or Quality Advantage

5. When suppliers are reliable

6. When relationships have been established

7. When product life-cycles are short

Total cost analysis

A process by which a firm seeks to identify and quantify all of the major costs associated with various sourcing options.

Direct Costs

Costs tied directly to the level of operations or supply chain activities. "If you make/do more, the unit cost increases directly." incurred."

Examples: Part-Time Labor, Direct Material Costs, Direct Energy Costs

Multiply "Direct Costs" by the "Number of Units Needed" to calculate "Total Costs"

Incremental Direct Costs

Costs that are incurred only after a certain number of products are produced. "Each time you produce X, a cost of $Y is incurred."

Examples: Direct Labor, Transport Cost, Direct Maintenance Cost, Setup Cost

Divide "Number of Units Needed" by the threshold "X" and multiply by the incremental cost $Y to calculate "Total Costs"

One-Time Costs

Costs that are incurred only when a product or service is first produced.

Examples: Product Design, Fixture Purchase, Mold/Die Purchase

One-Time Costs are added directly to "Total Costs"

Indirect Costs

Costs that are not tied directly to the level of operations or supply chain activities. "If you make/do more, the unit cost does not change."

Examples: Administrative Costs, Overhead, Depreciation, Basic Utilities

Difficult to calculate accurately. For this class, indirect costs will be given as an allocated Direct Cost ($/unit)

How to Calculate Total Cost Analysis

Convert each cost listed to $/part

-If given Dollars Spent and Total Parts, Dollars Spent/Total Parts = (𝐷𝑜𝑙𝑙𝑎𝑟𝑠/𝑃𝑎𝑟𝑡)

-If given Dollars/Day and Parts/Day..... (𝐷𝑜𝑙𝑙𝑎𝑟𝑠/𝐷𝑎𝑦) x (𝐷𝑎𝑦/𝑃𝑎𝑟𝑡) = (𝐷𝑜𝑙𝑙𝑎𝑟𝑠/𝑃𝑎𝑟𝑡)

- If given Dollars/Person and Parts/Person, (𝐷𝑜𝑙𝑙𝑎𝑟𝑠/𝑃𝑒𝑟𝑠𝑜𝑛) x (𝑃𝑒𝑟𝑠𝑜𝑛/𝑃𝑎𝑟𝑡) = (𝐷𝑜𝑙𝑙𝑎𝑟𝑠/𝑃𝑎𝑟𝑡)

Add together all $/part measures to find total $/part

To calculate total lifetime cost, multiply $/part by the total parts needed

Kraljic's Portfolio analysis

A structured approach used by decision makers to develop a sourcing strategy for a product or service, based on the value potential and the relative complexity or risk represented by a sourcing opportunity.

The 4 quadrants in Kraljics Portfolio

1. The Routine Quadrant,

2. The Leverage Quadrant,

3. The Bottleneck Quadrant

4.The Critical Quadrant.

The Leverage Quadrant

Standardized and readily available products or services representing a significant portion of spend.

The Routine Quadrant

Readily available products or services representing a relatively small portion of a firm's purchasing expenditures.

The Bottleneck Quadrant

Products or services with unique or complex requirements that can be met only by a few potential suppliers.

The Critical Quadrant

Products or service with unique or complex requirements coupled with a limited supply base.

The Bottle Neck Quadrant- Cost and Value Potential

- High Risk/Complexity

- Low Cost and Value Potential

1. Complex specifications requiring complex manufacturing or service processes

2. Few alternative sources of supply

3. Large impact on operations or maintenance

4. New or untested technology and processes

Examples: Custom product accessories, custom machine parts

The Critical or Strategic Quadrant- Cost and Value Potential

- High Risk/Complexity

- High Cost and Value Potential

1. Critical or Strategic

2. Critical to profitability and operations

3. Few qualified supply sources

4. Large expenditures

5. Design and quality critical

6. Complex and/or rigid specifications

Examples: fashion clothing/jewelry, custom electronics

Leverage or Preferred Quadrant

- Low Risk/Complexity

- High Cost and Value Potential

1. High expenditures, commodity items

2. Large marketplace capacity, ample inventory

3. Many alternative products and services

4. Many qualified supply sources

5. Market/price sensitive

Examples: standard parts, raw materials

More on the Bottleneck Quadrant

Ensure supply continuity by decreasing the

uniqueness of the suppliers & managing the supply

Widen the specifications where possible

Increase competition by developing new suppliers

Set medium-term contracts

Utilize competitive bidding

The Routine or Arms-Length Quadrant

- Low Risk/Complexity

- Low Cost and Value Potential

1. Many alternative products and services

2. Many alternative supply sources

3. Low value, small individual transactions

4. Everyday use, unspecified items

5. Anyone could buy it

Examples: office supplies, fasteners, common tools

More on the Leverage or Preferred Quadrant

Maximize commercial advantage by maintaining pressure on suppliers to improve

Relationships with several preferred suppliers

Long-term contracts with conditions for improvement

Expectation of lower costs over time

Coordination of procurement with market cycles

Single sourcing

The buying firm depends on a single company for all or nearly all of a particular item or service.

Advantages: Volume Discounts, Reduction in Variability, Enables Strong Relationships

Disadvantages: Increased Supply Risk, Supplier Dependence, Must Monitor Best Practices

More on the Critical or Strategic Quadrant

Form partnerships and communication

with selected suppliers

Persistent negotiation tactics

Monitor and manage supplier processes

Create contingency plans

Analyze marketplace and competition trends

Cross sourcing

The buying firm uses a single supplier for one particular part or service and another supplier with the same capabilities for a different part or service.

Balances risk while allowing for strong relationships with suppliers

More on The Routine or Arms-Length Quadrant

Simplify the acquisition process by increasing the role of systems and reducing the effort to purchase

Supplier Rationalization - minimize suppliers used

Automate the purchase process - electronic data

Vendor managed inventory

Minimal negotiation

Multiple sourcing

The buying firm shares its business across multiple suppliers.

Advantages: Creates Competition, Shares Risk, Promotes Improvements

Disadvantages: Decreases Dedication of Suppliers, Increases Variability

Dual sourcing

Multiple sourcing across only two suppliers

Enables stronger relationships while reducing risk

Qualitative criteria from Bauer SCM Recruiting Companies: SSQDC Process

Qualitative criteria from Bauer SCM Recruiting Companies: SSQDC

Safety: Internal and External

Sustainability: Green and Ethics

Quality: Consistency, Conformance, Service

Delivery: Reliability, Speed, Capacity

Cost: Total Cost of Ownership

Qualitative criteria from the Textbook for SSQDC

Process and design capabilities and technologies

Management capability

Financial condition and cost structure

Longer-term relationship potential, willingness to share knowledge

Competitive Bidding

Requesting bids from potential suppliers with a formal RFQ

RFQ-Request for Quotation: Includes all the characteristics required or desired

Includes: descriptions, specifications, quantities, delivery, terms of payment, contract length, etc.

USE WHEN: Price is a dominant criteria, requirements are straightforward

Negotiating

Interactive and iterative process for determining purchase conditions

Involves: Multiple communications to arrive at an agreement

USE WHEN: Exact specification and performance is unknown (new product development) and the buyer needs input or guidance or collaboration from the supplier.

The Procure-To-Pay Cycle

1. Ordering

2. Follow-Up and Expediting

3. Receipt and Inspection

4. Settlement and Payment

5.Records Maintenance

Receipt and Inspection

Statement of work (or scope of work) - Terms and conditions for a purchased service that indicate, among other things, what services will be performed and how the service provider will be evaluated.

-100% Incoming Inspection (for new suppliers or new purchases)

-Sample Inspection (for established suppliers and purchases, utilizes statistical principles)

- No Inspection (for Certified Suppliers)

Settlement and Payment

May be paid through Electric Funds Transfer (EFT)

Payment is aligned with Quotation, Receipt, and Inspection

Records Maintenance

Supplier Relationship Management (SRM) Software

Contracting

Legal formalization of the buyer-supplier relationship and agreements

Fixed-price contract - Stated price does not change.

Cost-based contract - Price of the good or service is tied to the cost of some other key input(s) or other economic factors.

Ethical Sourcing

1. Ethical Treatment of Workers,

2. Fair Trade Products

3. Requires Verification and Management

Ordering

Purchase Order (PO) - A document that authorizes a supplier to deliver a product or service and often includes key terms and conditions such as price, delivery, and quality requirements [details taken from the Quotation or Proposal]

- Legally binding agreement when formally accepted by the supplier

Ethical Treatment of Workers

diversity & minorities, child labor, worker abuse, human rights, animal rights, safety, pay scales

Fair Trade Products

Paying fair prices for products manufactured or grown by a disadvantaged producer in a developing country.

Green Purchasing

Overall reduction in packaging, materials, waste, byproducts with a goal of environmental sustainability

Sustainability

Replenishment of natural resources

Trends in supply management include:

Supply Chain Disruptions and Risk Assessment and Strategy

Supply Chain Disruptions

Caused by natural disasters, economic or political events.

Sustainable Sourcing

Green Purchasing and Sustainability

Risk Assessment and Strategy-Take a Broad View of Potential Risks

What are all the risks throughout the supply chain? Evaluating upstream as far as possible. Identify duplicate suppliers that are in the same geographic region.

Risk Assessment and Strategy- Prioritize Risk Potential

Significance: In what ways would a disruption affect your company?

Likelihood: How quickly would a disruption affect your supply? How long would a disruption affect your supply? How flexible is your system to respond to such a disruption?

Risk Assessment and Strategy

1. Take a Broad View of Potential Risks

2. Prioritize Risk Potential

3. Develop Risk Management Strategies

Risk Assessment and Strategy- Develop Risk Management Strategies

-Evaluating relationships with diverse suppliers

-Holding higher inventory at various locations within the supply chain

-Developing alternative sources of supply

Processes

Processes are how organizational inputs are transformed into outputs. These processes are what deliver value to customers.

Manufacturing and Service processes

Manufacturing and Service processes are important.

1. They tend to be expensive & involve the coordination and flow of materials, tools, machines, people, information

2. Different processes have different strengths and weaknesses.

-Some processes are good at supporting a wide variety of goods or services, while others are better at providing standardized products or services at the lowest possible cost.

3. Processes should support the overall business strategy, the needs of the targeted customers, and provide competitive advantage

4. Most businesses utilize a combination of manufacturing and service oriented processes.

Product-based layout (continuous flow & production lines)

A type of layout where resources are arranged sequentially, according to the steps required to make a product

Used for products with identical or highly similar designs

Think about the process used to make sandwiches at Quiznos or Subway

Functional layout (job shop & batch manufacturing)

A type of layout where resources are physically grouped by function

Used for products with high degrees of customization or expertise required

Think about the process you must go through to sign up for and pay for classes

Process Types

Continuous Flow Processes

Production Line

Batch Manufacturing

Job Shop

Fixed Position Layout

Continuous Flow Processes

A process that produces highly standardized products using a tightly-linked, paced sequence of steps.

Questions to ask when selecting a manufacturing process

1. What are the physical requirements of the company's product?

2. How similar to one another are the products the company makes?

3. What are the company's production volumes?

4. Where in the value chain does customization take place (if at all)?

Production Line

A process used to produce a narrow range of standard items with identical or highly similar designs.

Product-based layout

1. Equipment and people are highly specialized and arranged sequentially according to the steps required to make a product or a product family

2. Production is often paced

3. Best suited to high volume production of standardized products