Rutgers Procurement and Global Sourcing Exam 2

What is a "fair price" in supply management?

The lowest price that ensures continuous supply of the proper quality where and when needed, while allowing the supplier to make a reasonable profit.

What are direct costs?

Costs that can be specifically and accurately assigned to a given unit of production of a product or service. Most direct costs are variable (e.g., direct labor, direct materials, manufacturing supplies).

What are indirect costs?

Costs incurred in the operation of a production plant that cannot be related directly to any given unit of production. Often called "overhead" (e.g., rent, property taxes, utilities, machine depreciation).

What are variable costs?

Costs that vary directly and proportionally with the units of products or services produced (e.g., direct labor costs, cost of raw materials).

What are fixed costs?

Costs that generally remain the same regardless of the number of units produced (e.g., rental lease payments, salaries, insurance, property taxes).

What are semi-variable costs?

Costs that vary with production output but are partly variable and partly fixed (e.g., power usage increases with production but is still needed even when production stops).

What is the typical product cost buildup formula?

Direct Materials + Direct Labor + Factory Overhead = Manufacturing Cost; + S,G&A Costs = Total Cost; + Profit = Selling Price.

What is the cost approach to pricing?

Price is set greater than direct costs, allowing for sufficient contribution to cover indirect costs and overhead, leaving a margin for profit. Negotiation is a key tool here.

What is the market approach to pricing?

Prices are set in the marketplace and may not be directly related to cost. If demand is high relative to supply, prices increase.

What is above-market pricing?

A strategy where a firm sets a price above the market average, suitable for prestigious or strong brand-image products (e.g., Rolex watches).

What is at-market pricing?

Setting a price equal to or close to the market price; common for commodity companies with relatively uniform products (e.g., grains, oil, gas).

What is below-market pricing?

Setting prices below market prices, typically targeting budget-conscious consumers (e.g., resale through Walmart, Costco — video game consoles, printers, razor blades).

What does the Sherman Antitrust Act (1890) prohibit?

Any combination, conspiracy, or collusion with the intent of restricting trade in interstate commerce. It is illegal for suppliers to collectively engage in price-fixing.

What does the Robinson-Patman Act require?

Suppliers must sell the same item, in the same quantity, to all customers at the same price ("one price law"). Exceptions include lower prices for larger quantities, distressed/obsolete product, and meeting local competition prices.

What is a bid in procurement?

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

What is competitive bidding?

A procurement process in which bids from competing suppliers for the right to supply specified materials or services are requested, usually via advertising scope, specifications, and evaluation criteria.

What are the four conditions for competitive bidding?

(1) At least two qualified bidders; (2) Suppliers must want the business (buyer's market); (3) Specifications must be clear; (4) No collusion between bidders.

What are the qualifications required for bidders in competitive bidding?

They must be qualified to make the item per buyer specifications, reliable enough to warrant consideration, numerous enough to ensure competitive pricing, but not more numerous than necessary.

What are the two types of bid processes?

Offline process (via mail or phone) and Electronic process (automated, used by US/Canadian governments; results in cycle time reduction and cost savings).

What is a cash discount?

A discount granted by a seller to secure prompt payment (e.g., 2% discount with payment terms of 10 days). Granted by virtually every seller of industrial goods.

What is a trade discount?

A discount granted by a manufacturer to a distributor to compensate for the cost of doing business in moving goods through the distributor channel.

What is a quantity discount?

A discount that applies to particular quantities and varies in proportion to the amount purchased.

What is a multiple discount?

A pricing method in some industries where prices are quoted on a sliding scale based on multiple discount tiers.

What is a Firm-Fixed-Price (FFP) contract?

A contract where the price is set and not subject to change under any circumstances (e.g., constructing an office building for $1,000,000 in six months).

What is a Cost-Plus-Fixed-Fee (CPFF) contract?

A contract where the buyer reimburses the supplier for all reasonable costs plus a specified dollar profit amount. Used when specifications are not firm or future costs cannot be predicted.

What is a Cost-No-Fee (CNF) contract?

A contract where only the supplier's costs are reimbursed, with no fee/profit, typically used when the supplier gains subsidiary benefits from doing the work (e.g., R&D with nonprofit institutions).

What is a Cost-Plus-Incentive-Fee (CPIF) contract?

A contract where buyer and seller agree on a target cost, a fixed fee, and a formula for sharing any cost over- or under-runs.

What are the six categories of needs in procurement?

(1) Resale; (2) Raw and Semi-Processed Materials; (3) Parts, Components and Packaging; (4) MRO/Small Value Purchases; (5) Capital; (6) Services; (7) Other.

What are the three types of need criteria in the value proposition?

(1) Strategic Criteria (financial impact, risk reduction, access to technology/markets/supply); (2) Traditional Criteria (Quality, Quantity, Delivery, Price, Service); (3) Additional Current Criteria (Financial, Risk, Environmental, Innovation, Regulatory Compliance, Social/Political Factors).

What is the "Resale" category of needs?

Resellers (retailers, wholesalers, distributors, agents, brokers, traders) who resell goods covering the full range of product categories.

What is the "Raw and Semi-Processed Materials" category?

Includes commodities and agricultural/industrial materials used by converters such as factories (e.g., copper, wheat, crude petroleum, steel, cement).

What is the "Parts, Components and Packaging" category?

Parts and components used by assemblers to create finished products; may be standard or special. Prices are fairly stable; quotes often based on list price with some discount.

What is the "MRO / Small Value Purchases" category?

Maintenance, Repair, and Operating supplies and small-value purchases. Availability is critical to uninterrupted operations; effort to check price prior to purchase is often not justified.

What is the "Capital" category of needs?

Requirements classified by accountants as capital investments: equipment, IT, real estate, and construction. Items can be depreciated and often require separate budgetary allocation.

What is the "Services" category of needs?

A broad category including advertising, auditing, consulting, architectural design, legal, insurance, travel, copying, security, waste removal, and cleaning services.

What are special problems of capital equipment purchasing?

Strategic considerations and high cost of failure, substantial amounts of money for a single purchase, long life and infrequent purchases, difficulty estimating total cost, technology forecasting, start-up dedication, and coordination with existing processes.

What are reasons for purchasing capital goods?

Capacity, economy in operation/maintenance, increased productivity, better quality, dependability in use, savings in time/labor, durability, and safety/environmental/emergency protection.

What is Total Cost of Ownership (TCO)?

A source selection tool for capital goods; the purchase price may only represent 30–50% of TCO, which also includes engineering service, design/R&D costs, legal considerations, and disposal costs.

Why is supply involvement in service acquisition often lacking?

Complexity of specifying service needs, the personal relationship between supplier and user, and the difficulty of forecasting demand for services.

Where in the acquisition process is the opportunity to affect value highest?

Earliest stages (Need Recognition and Description); opportunity declines as the process moves toward Receipt and Payment.

What is quality in procurement?

The ability of a supplier to provide goods and services in conformance with specifications, where the item or service performs per original requirements.

What is "suitability" in quality terms?

The ability of a material to meet its intended function; refers to fitness for use.

What is "reliability" in quality terms?

The mathematical probability that a product will function for a stipulated period of time.

What are the Eight Dimensions of Quality?

(1) Performance; (2) Features; (3) Reliability; (4) Durability; (5) Conformance; (6) Serviceability; (7) Aesthetics; (8) Perceived Quality.

What are the five major costs of quality supply can influence?

(1) Prevention costs (pre-certify suppliers, training); (2) Appraisal costs (inspection, testing); (3) Internal failure costs (returns, scrap, rework); (4) External failure costs (warranties, goodwill); (5) Morale costs (don't-care attitude).

What is the Cost of Quality (COQ)?

An approach to determine the level of resources needed to prevent poor quality and evaluate products/services. Any cost that wouldn't occur if quality were perfect contributes to COQ.

What are appraisal costs?

Costs associated with evaluating purchased materials, processes, products, and services to ensure conformance with specifications (e.g., testing, auditing, quality assessment of suppliers).

What are prevention costs?

Costs related to the design, implementation, and maintenance of the quality management system — planned before products are acquired or produced (e.g., specifications, quality plans, training).

What are internal failure costs?

Costs that occur when products/services don't meet quality standards before delivery to the customer (e.g., defective/unsellable product, unnecessary rework, root cause investigation).

What is LEAN manufacturing?

A philosophy/culture focused on the elimination of waste and minimization of all resources used in company operations. It regularly results in large cost reductions, improved quality, and increased customer service.

What is the origin of LEAN?

Henry Ford's 1910s assembly line was the first breakthrough; in the 1940s, Taichi Ohno and Shigeo Shingo created the Toyota Production System (TPS). The term "LEAN" was coined by John Krafcik in 1988.

What supply chain concepts merged into LEAN in the 1990s?

Quick Response, Efficient Consumer Response (ECR), Just-in-Time (JIT), and Keiretsu Relationships.

What is Just-in-Time (JIT)?

An inventory strategy to decrease waste by receiving materials only when and as needed in the production process, thereby reducing inventory costs.

What are Keiretsu relationships?

Arrangements involving companies upstream and downstream of a manufacturing process remaining independent but working closely together for mutual benefit.

What are Deming's 14 Points (key themes for TQM)?

Quality must be integrated throughout the organization; employee commitment to continuous improvement; customer satisfaction drives TQM; suppliers are partners in the TQM process.

What are the Four Integrated Stages of Quality Function Deployment (QFD)?

(1) Product planning (design requirements); (2) Parts deployment (parts characteristics); (3) Process planning (manufacturing requirements); (4) Production planning (production requirements). Can only be done through strategic alliances with suppliers.

What is Six Sigma?

A quality management process focused on improving process outputs by identifying and removing causes of defects and minimizing variability. The goal is fewer than 3.4 Defects Per Million Opportunities (DPMO).

What is the DMAIC methodology in Six Sigma?

Define (customers' expectations), Measure (frequency of defects), Analyze (why/when/where defects occur), Improve (fix the process), Control (make the fix permanent).

What is a control chart?

A graph used to study how a process changes over time. It uses statistically determined control limits to distinguish common cause from special cause variation.

What is common cause variation?

Variation that is always present to some degree in the process — inherent, natural variability.

What is special cause variation?

Outside, non-random problems in a process (e.g., machine breakdown). Indicated by points outside 3 standard deviations, trends of 6+ points, or process shifts of 8+ points in a row.

What is ISO and its significance?

The International Organization for Standardization, founded in 1947, is the world's largest developer of voluntary international standards. ISO certification verifies achieving and maintaining a standard of excellence by a third party.

What is ISO 9000?

An international standard for good quality management practices regarding process control.

What is ISO 14000?

A management standard similar to ISO 9000 but focused on environmental issues.

What is the Malcolm Baldrige National Quality Award?

An annual U.S. award for organizations in business, health care, education, and nonprofits that recognizes excellence in quality achievement and quality management.

What are the two basic questions in inventory management?

How much to acquire and when to order.

What are the key factors that impact quantity and timing decisions?

Forecasts, costs (order costs, carrying costs, shortage costs), availability, price-volume relationships, and risk of shortages.

What are the two basic types of forecasting techniques?

(1) Qualitative forecasting (based on opinion and intuition); (2) Quantitative forecasting (uses mathematical models and historical data).

What are the five qualitative forecasting models?

(1) Personal Insight; (2) Jury of Executive Opinion; (3) Delphi Method; (4) Sales Force Estimation; (5) Customer Survey.

What are the two quantitative forecasting approaches?

(1) Time Series (future is an extension of the past; most frequently used); (2) Cause and Effect (independent variables predict future demand, e.g., seasonality).

What are the three levels of internal inventory?

(1) Strategic Stock; (2) Safety Stock (buffer stock); (3) Cycle Stock.

What is pipeline inventory?

Inventory in transit, or inventory held/owned by suppliers, wholesalers, distributors, retailers, or customers — external to the company.

What is safety stock?

Inventory above and beyond what is actually needed to meet anticipated demand; used to protect against fluctuations in demand or supply.

What is the Fixed-Order Quantity System?

An inventory system where an order is placed for a pre-defined quantity (EOQ) when inventory position reaches the Reorder Point (ROP). Assumes constant demand and known, constant lead time.

What is the EOQ model?

The Economic Order Quantity model — a quantitative model based on the trade-off between annual inventory carrying costs and annual order costs, seeking to minimize total inventory cost.

What is the EOQ formula?

Q* = √(2DS / H), where D = annual demand, S = order cost per order, H = carrying cost per unit per year.

What are order costs (setup costs)?

Costs incurred each time an order is placed: order preparation, transportation, receipt processing, and material handling costs.

What are inventory carrying costs?

Costs incurred for holding inventory: cost of capital, taxes, insurance, obsolescence, and storage facility expenses.

What is the Total Inventory Cost formula?

Total Cost = Purchase Cost + Order Cost + Carrying Cost.

What is the ABC inventory system?

A system that classifies inventory by degree of importance: A = highest value items, B = moderate value, C = least valuable. Based on annual usage/sales percentage rankings.

What is an ERP system?

Enterprise Requirements Planning — an information system connecting all functional areas and operations of an organization (and sometimes suppliers/customers) via common software and database, enabling supply chain members to share information.

What is MRP (Materials Requirement Planning)?

A system that creates schedules identifying specific parts and materials required to produce end items, determines exact quantities needed, and determines order release dates based on lead times. "Get the right materials to the right place at the right time."

What are the key requirements to support JIT?

Short production lead times, flexible resources (labor, material, and equipment), and exacting quality.

Why is logistics important in procurement?

It may account for 40% of total cost, is increasingly important with global sourcing, affects service levels and reliability, and is frequently outsourced to 3PLs.

What are the six modes of transportation?

(1) Air cargo; (2) Motor freight (truck); (3) Railroad; (4) Marine (water); (5) Pipeline; (6) Intermodal.

What is the most common mode of transportation?

Motor freight (truck) — accounts for approximately 80% of freight movement; most flexible mode.

How does air freight compare to other modes?

Fastest and most expensive mode; accounts for ~5% of US freight spend; cannot carry heavy or bulky cargo; ideal for high cost-to-weight ratio items (e.g., pharmaceuticals, jewelry).

How does rail freight compare to other modes?

Accounts for ~9% of US freight spend; competes for long-distance, heavy or bulky shipments; slow and inflexible but high capability; often paired with trucks for door-to-door delivery.

How does water/marine freight compare to other modes?

Inflexible and slow; needed for international containers; cheapest per-unit cost; worst reliability and speed.

What is intermodal transportation?

The use of multiple modes of transportation to execute a single shipment. Most common forms: Rail + Motor (TOFC), Rail + Water (COFC), and Roll-on/Roll-off ships.

What is TOFC?

Trailer-on-Flatcar — a form of intermodal transportation using rail and motor carriers (trucks) for point-to-point pickup and delivery.

What is COFC?

Container-on-Flatcar — a form of intermodal transportation using rail and water carriers for point-to-point pickup and delivery.

What are the four types of carriers?

(1) Common carriers (available to anyone at published rates); (2) Contract carriers (for-hire at contractual rates); (3) Exempt carriers (for-hire, exempt from regulation, originally for farmers); (4) Private carriers (company-owned).

What is the FOB (Free-On-Board) point and what does it determine?

The FOB point determines: (1) who pays the carrier; (2) when legal title passes to the buyer; (3) who is responsible for freight claims; (4) who routes the freight.

What are INCOTERMS?

International Commercial Terms — shipping terms and responsibilities used to define FOB and other international trade obligations between buyers and sellers.

What are the rankings of transportation modes (best to worst overall)?

Truck (score 11) → Rail (12) → Pipeline (16) → Air (17) → Water (19), based on accessibility, capability, per-unit cost, reliability, and speed.

Which transportation mode has the best reliability ranking?

Air (ranked 1st for speed/reliability).

Which transportation mode has the lowest per-unit cost?

Pipeline (ranked 1st for lowest per-unit cost).

What is the difference between a 3PL and a private carrier?

A 3PL (third-party logistics provider) is an outsourced logistics company managing transportation/warehousing for other firms, while a private carrier is a company-owned transportation fleet.

What is the relationship between lead time and inventory?

Longer or less reliable lead times require more safety stock and increase working capital requirements. Lead time directly drives inventory levels.