Supply Management Chapter 7

1. Define Supply Management.

Supply Management Supply Management – The broad set of activities carried out by organizations to analyze sourcing opportunities, develop sourcing strategies, select suppliers, and carry out all the activities required to procure goods and services.

2. Why is Supply Management very critical to the success of any business?

Why is Supply Management critical? Global Sourcing Competition against global competitors and their supply chains. Advances in information systems have helped.

Why is Supply Management critical? Financial Impact Table 7.1

Why is Supply Management critical? Financial Impact Cost of goods sold – The purchased cost of goods from outside suppliers. 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. Profit margin – The ratio of earnings to sales for a given time period. Return on assets (ROA) – A measure of financial performance defined as Earnings/Total Assets

Profit Leverage – Example 7.1 Financial Impact Every dollar saved in purchasing lowers COGS by $1 and increases pretax profit by $1. Profit leverage effect – A term used to describe the effect of $1 in cost savings increasing pretax profits by $1 and a $1 increase in sales increasing pretax profits only by $1 multiplied by the pretax profit margin. Every dollar saved in purchasing lowers the merchandise inventory figure – and as a result, total assets – by $1.

Why is Supply Management critical? Performance Impact Purchased goods can have a major effect on other dimensions such as quality and delivery performance.

3. What are the six steps in the strategic sourcing process?

The Strategic Sourcing Process Figure 7.1

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.

Assess Opportunities – Example 7.3 Examine the trends and impact of spending. Table 7.3 Figure 7.2

Profile Internally and Externally Two approaches to creating profiles: Category profile – An approach to understand all aspects of a particular sourcing category that could ultimately have an impact on the sourcing strategy. Industry Analysis – An approach to provide a more detailed understanding of the characteristics of the external supply base.

Develop the Sourcing Strategy The Make-or-Buy Decision A high-level, often strategic, decision regarding which products or services will be provided internally and which will be provided by external supply chain partners. Insourcing – The use of resources within the firm to provide products or services. Outsourcing – The use of supply chain partners to provide products or services.

4 and 5. What are the advantages and disadvantages of insourcing and outsourcing?

Develop the Sourcing Strategy Advantages and Disadvantages of Insourcing and Outsourcing Table 7.6

Develop the Sourcing Strategy Factors that affect the decision to Insource or Outsource. Table 7.7

Develop the Sourcing Strategy 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. Indirect costs – Costs that are not tied directly to the level of operations or supply chain activity.

Develop the Sourcing Strategy Insourcing and Outsourcing Costs Table 7.8

Develop the Sourcing Strategy 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.

6. What are the four quadrants in the portfolio analysis?

Develop the Sourcing Strategy Portfolio Analysis The Routine Quadrant – Readily available products or services (small % of total). Electronic Data Interchange The Leverage Quadrant – Standardized and readily available products or services (large % of total). Preferred suppliers The Bottleneck Quadrant – Unique or complex products or services supplied by few suppliers. The Critical Quadrant - Unique or complex products or services supplied by few suppliers, representing large % of total.

Develop the Sourcing Strategy Portfolio Analysis High Bottleneck Critical Routine Leverage Complexity or Risk Impact Low Low High Value Potential

7. What are the four types of sourcing options?

Develop the Sourcing Strategy Single sourcing – The buying firm depends on a single company for all or nearly all of an item or service. Multiple sourcing – The buying firm shares its business across multiple suppliers. Cross sourcing – Using a single supplier for a certain part or service and another supplier with the same capabilities for a similar part. Dual sourcing – Using two suppliers for the same purchased product or service.

Screen Suppliers and Create Selection Criteria Criteria to evaluate suppliers Process and design capabilities Management capability Financial condition and cost structure Longer-term relationship potential

Conduct Supplier Selection Weighted-point evaluation system – An evaluation system to evaluate potential suppliers, track supplier’s performance over time, and rank current suppliers. Method Assign weights to performance dimensions. Rate the performance of each supplier with regard to each dimension. Calculate the total score.

Supplier Selection – Example 7.6 Summary Data for Three Possible Suppliers Table 7.11

Supplier Selection – Example 7.6 Criteria Weights WPrice = 0.3 WQuality = 0.4 WDelivery = 0.3 5 = excellent 4 = good 3 = average 2 = fair 1 = poor Scoring Scheme

Supplier Selection – Example 7.6 Performance Values for Alternative Suppliers Table 7.13

Supplier Selection – Example 7.6 Total Scores for Alternative Suppliers Score Aardvark = (4 x 0.3) + (3 x 0.4) + (4 x 0.3) = 3.6 Score Beverly = (3 x 0.3) + (5 x 0.4) + (2 x 0.3) = 3.5 Score Conan = (5 x 0.3) + (1 x 0.4) + (1 x 0.3) = 2.2 Aardvark should improve their quality. Beverly Hills should improve their delivery and price. Conan is out of the running as a potential supplier.

Negotiate and Implement Agreements Competitive bidding – A request for bids from suppliers with whom a buyer is willing to do business. Request for quotation – A formal request for the suppliers to prepare bids, based on the terms and conditions set by the buyer. Description by market grade/industry standard Description by brand Description by specification Description by performance characteristics

Negotiate and Implement Agreements Negotiating – A more costly, interactive approach to final supplier selection. Negotiation is used best when: The item is a new or technically complex item with only vague specifications. The purchase requires agreement about a wide range of performance factors. The buyer requires the supplier to participate in the development efforts. The supplier cannot determine risks and costs without additional input from the buyer.

Negotiate and Implement Agreements Contracting – The process of creating a detailed purchasing contract to formalize the buyer-supplier relationship. 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 or economic factor.

8. What are the five steps in the Procure-To-Pay cycle?

The Procure-to-Pay Cycle Ordering Purchase order – A document that authorizes a supplier to deliver a product or service and includes the terms and conditions of the sale. Follow-up and expediting Receipt and inspection Statement of work (scope of work) – Terms and conditions for a purchased service. Settlement and payment May be paid through Electric Funds Transfer (EFT) Records maintenance

9. What are two trends in supply management?

Trends in Supply Management Sustainable Supply Becoming more conscious of the importance of being environmentally friendly and using environmental performance in selecting suppliers. Ensuring compliance with regulations. Reducing packaging, promoting recycling, reducing costs.

Trends in Supply Management Supply Chain Disruptions Caused by natural disasters, economic/political events. Cause a big threat to revenue streams. Increased risk due to outsourcing to global suppliers.