Omer's SCM exam 2 flashcards

procurement

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

purchasing

the action of obtaining merchandise, capital equipment, raw materials, services, or MRO supplies in exchange for money, or its equivalent

purchasing is the process of how ____ are ____ from an external 3rd party

goods and services; ordered

purchasing can usually be describes as the _____ of _____ for goods or services

transactional function; procurement

T/F

purchasing can be a separate department within a company, or it might be part of the supply chain management department within a company

true

supply management

a newer term that encompasses all acquisition activities beyond the simple purchase transaction

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

purchase requisition is generated by...

it can also contain the...

user department to notify purchasing personnel of items to order, their quantity, and the timeframe;

authorization to proceed with the purchase

purchase order

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

purchase order is used to control the...

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 legally binding

when accepted by the supplier

e-procurement

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

merchants

wholesalers 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

a 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

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

primary objectives of purchasing

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

2. improve the quality of the finished goods produced

3. optimize customer satisfaction

how does purchasing contribute to the objectives of purchasing?

by actively seeking reliable suppliers, working with the expertise of strategic suppliers to improve quality and materials, and involving suppliers and purchasing personnel in new product design and development efforts.

what are the 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 PO

12. analysis

In leading procurement organizations, ____, although many of the steps will be completed via _____ using _____ for aspects such as low-dollar value purchase, non-strategic purchases, etc.

every step will be completed; an automated system; pre-defined rules

e procurement

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

automation Provides ___ of all purchases

increased visibility

the basic e-procurement process consists of

1. an electronic purchase requisition and/or purchase order

2. an invoice (which might be one with the receipt

3. a payment

for high-dollar purchases the e-procurement process consists of

1. an electronic purchase requisition and/or purchase order

2. an invoice (which might be one with the receipt

3. a payment

4. authorization of the PO

5. reconciliation of the invoice

advantages of an e-procurement system

-time saving
-cost saving
-accurate
-real time
-management
-mobility
-trackability
-benefits the suppliers

how is an e-procurement system time saving

there is a reduction in the time between the need recognition and the release and receipt of an order

how is an e-procurement system cost saving

there are lower overhead costs in the purchasing area

how is an e-procurement system accurate

there's a reduction in the amount of errors; a virtual elimination of manual paperwork and paperwork handling = less potential for errors

real time advantage of an e-procurement system

improved communication both within the company and with suppliers

management advantages in an e-procurement system

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

advantages of mobility in an e-procurement system

accessible virtually anywhere

trackability advantage of an e-procurement system

allows for real-time status checking

profit leverage effect

a decrease in purchasing expenditures directly increases profits before taxes ($ is for $)

return on asset (ROA) effect

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

inventory turnover effect

increased inventory turnovers indicate optimal utilization of space and inventory levels, increased sales, avoidance of inventory obsolesce; inventory is an asset but it is also capital tied up

Inventory turnover represents the number of times the company...

sold through inventory in a given time period

a high turnover ratio is ___ because it means the company is ___

beneficial; generating sales efficiently to sell inventory

a low turnover ratio is ____ because the company is ____

unfavorable; not selling through products efficiently

why might a company experience a high turnover ratio

the company is likely making/buying too much inventory for the demand and may end up throwing out expired or unsealable products

total cost of ownership (TCO)

the sum of all the costs associated with every activity (the acquisition, use, and maintenance of a good or service) in the supply stream of a product

procurement professionals recognize that although ____ of an item remains _____, it is _only ____

the purchase price; very important; one part of the total cost of ownership

elements of TCO

1. quality

2. service

3. delivery

4. price

factors beyond purchase price that can impact the TCO

1. quantity discounts offered

2. cash discounts

3. value-added services (such as special delivery, special packaging, preparation of promotional displays, subassembly operations in a supplier's plant)

4. administrative expenses associated with the procurement activity itself

5. poor supplier quality costs related to defective finished goods

components of TCO

pre-transaction costs, transaction costs, post-transaction costs

pre-transaction costs

activities that are carried out prior to the actual buy and sell transaction

• identifying sources

• qualifying sources

• PO administration

• certifying sources

• supplier database update

• training/education of suppliers

transaction costs

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

• price negotiation

• delivery confirmation

• PO administration

• transportation

• delivery/receiving

• reconciliation

• taxes/tariffs/duties

• invoicing/payments

• incoming inspection

• rejected goods return to supplier

• close out

post-transaction costs

activities carrie out following the actual buy and sell transaction

• returns from a customer

• replacement

• repair parts and labor

• maintenance

• disposal of returned product

make

producing materials or products internally (the company makes)

buy/outsource

buying materials, components, or products from a supplier(s) instead of (or in addition to) making them in-house; buying from a 3rd party

the make-vs-buy decision is ultimately based on three key 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, as well as the process, technologies, or skills required to make the product or deliver the service

risks

include lower quality, reliability, and predictability of outsourced 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

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 reasons for make

• protect the proprietary technology (private; not out in the public domain)

• no competent supplier that can produce your products

• you may have more control of the lead time to produce the product than if you had a supplier

• make uses excess capacity by making a material instead of letting the capacity sit idle

• you may feel that you have more control of the quality of the material/product than a supplier would

quantitative reasons for make

• you may have an overall lower cost if you produce the materials/product

• if you make the item you avoid high transportation and warehouse costs

cost factors for make

• direct labor expenses

• incremental inventory- carrying_expenses

• incremental capital expenses

• incremental purchasing expenses (for starting/raw materials)

• incremental factory operating expenses

• incremental managerial expenses

• transportation expenses for purchased starting/raw materials

• any follow-on expenses resulting from quality and associated problems

qualitative reasons for buying/outsourcing

• non-strategic item

• a firm may not have enough capacity to produce the product

• temporary capacity constraints

• lack of expertise; firm may not have the necessary technology and expertise to make the product

• suppliers may be able to produce the product at a higher quality

• multi sourcing strategy; using both an external and internal supplier

• firm may want to take advantage of the supplier's brand image, reputation, popularity, etc.

quantitative reasons for buying/outsourcing

• suppliers may have economies of scale and can produce at a lower cost than a firm

• the supplier can hold on to the inventory or materials required to produce the item

cost factors for the buy analysis

• unit price of the purchased item

• transportation expenses

• incremental purchasing expenses

• receiving and inspection ecpenses

• any follow-on expenses associated with service or quality

risks of outsourcing

• potential loss of control of the product (may have over production decisions, intellectual property, etc.)

• increased reliance on the suppliers

• increased need for supplier management

benefits of outsourcing

allows the firm to:

• concentrate on their core capabilities

• reduce staffing levels

• accelerate reengineering efforts

• reduce internal management problems

• improve manufacturing flexibility

insourcing

producing goods or services using a company’s own internal resources

co-sourcing

the sharing of a process or function between internal staff and an external provider; using dedicated staff at an external provider than works exclusively under your control and direction

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

Purchasing Organization is dependent on many factors, such as...

market conditions and types of materials required

centralized purchasing

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

de-centralized purchasing

individual, local purchasing departments, such as at the plant level, making their own purchasing

centralized purchasing / de- centralized purchasing (hybrid approach)

using centralized purchasing for products and services used throughout the corporation and decentralized purchasing for products and services used only at the local 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

• to exploit global efficiencies (access to low labor cost and materials and take advantage of tax breaks and low trade tariffs)

• to respond to insufficient domestic capacity

• to achieve access to better process and product technology

• a change in the domestic business environment

• take advantage of reciprocal trade and countertrade arrangements

potential challenges of international purchasing

• knowledge of international trade policies and procedures

• awareness and cost of required tariffs and duties

• difficulties in communicating with suppliers due to language barriers, varying time zones, working weeks, holidays

• locating, evaluating, sourcing, and expediting in global markets

• payments and currency management

• longer time span for negotiations

• the potential for cultural, political, and labor problems

• potentially longer transportation lead times necessitating additional inventory

• specific and varying documentation requirements

• handling legal matters and the process for settling disputes

service providers for international purchasing

import brokers, import merchants, trading companies

government purchasing

purchases are expenditures made in the private sector by all levels of government

non-profit purchasing

purchases are expenditures made in the private sector by all types of non-profit organizations

Government sector purchasing and non-profit sector purchasing is somewhat different from private industrial purchasing as the public requires ___ since it is the ___

openness, visibility and accountability; public’s money that is being spent

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

Competitive bidding aims at obtaining goods and services at the lowest prices by ___, and by ___

stimulating competition; preventing favoritism

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

The point of benchmarking is to

identify internal opportunities for improvement

sourcing

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

strategic sourcing

a 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

In today’s competitive business climate, supply chain management professionals are constantly seeking out creative ways to...

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

steps of strategic sourcing

• identifying suppliers

• cultivating relationships

• continuously improving skills

• understanding and embracing the possibilities

a sound strategic sourcing strategy can create opportunities for your company to...

improve corporate image, increase sales and market share, and reduce costs

some of the top competencies needed to excel in making the most of a company’s strategic sourcing decision-making process include:

• recognizing and accessing key issues, opportunities, strategies, and techniques to achieve a competitive advantage

• identifying internal and external challenges that affect sourcing strategy

• defining issues involved in global sourcing, electronic procurement, negotiations, and ethics

• applying problem-solving skills to determine the best course of action pertaining to the above strategy areas

Companies spend significant time and resources developing and implementing Strategic Sourcing initiatives to:

1. improve long-term financial performance

2. increase customer focus

3. improve product quality

4. reduce the cost of materials

5. reduce delivery lead times

6. optimize the number of global suppliers

7. deliver more innovative products, in less time, and less expensively than competitors

objectives of strategic sourcing

• improve the value-to-price relationship

• understand the category buying and management process to identify improvement opportunities

• examine supplier relationships across the entire organization (share best practices across the organization)

• develop and implement multi-year contacts with standardized terms and conditions across the organization

• leverage the entire organization's spend

single source

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

multi-source

purchasing a good or service from more than one supplier; companies may use multi-sourcing to create competition between suppliers in order to achieve higher quality and lower price

do current supply chain trends favor using fewer or more suppliers?

fewer

functional products

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