Chapter 11

Question 1

ABC or Pareto Analysis:

Answer 1

Assign items to A (high-dollar), B (medium-dollar), or C (low-dollar) category;
 A items = greatest percent of annual spend; differentiated products (customized): Cost reductions by changing specification or design; low-cost commodity type or standard off-the shelf goods or services with substitutes available	
Ex. When a utility company stops asking the PVC pipe supplier to print the company name on the PVC pipe, they save 30% of the total cost
Portfolio Analysis (Kraljic Matrix)

Question 2

P- STRATEGIES: Non-critical /routine items:

Answer 2

Easy to buy Low impact on financial result. Standard products: Many suppliers e.g. Standard bolts for a car Office stationary; Purchasing strategy: Reduce time and money spend on the purchasing. Enhance “efficiency” by decreasing # of products, and automate purchasing process. E-procurement. Catalogs

Question 3

Bottleneck items:

Answer 3

Difficult to buy One or few suppliers Low impact on financial result. Special products E.g. Rare raw materials; purchasing strategy: Minimize the risk of buying the product by signing contracts on a long-term basis with the individual suppliers. Search for alternatives

Question 4

Leverage items:

Answer 4

Easy to buy High impact on financial result. Standard products: Many suppliers eg. Packaging purchases, raw material and ingredient purchases for a food company; Purchasing strategy: Continuous negotiate for “low price” by ordering large orders for successive deliveries so suppliers achieve economies of scales in production and we do not suffer from carry more inventory.

Question 5

Total Cost of Ownership

Answer 5

Target costing:
Learning curve:
Value Engineering (VE) and Value Analysis (VA): Value = Function/ Cost