Chapter 5 Flashcards
Q: What is purchasing?
A: Purchasing refers to the management of an organization’s acquisition procedures and standards. It involves buying products and services through the placement and processing of a purchase order, usually following a formal sourcing process.
Q: What is procurement?
Procurement involves managing a broad range of processes associated with an organization’s need to procure goods and services throughout the supply chain and the overall organization. Examples of activities within the procurement process include product/service sourcing, supplier selection, price negotiation, contract management, transaction management, and supplier performance management.
What is strategic sourcing?
A: Strategic sourcing is a significantly broader process than procurement, aimed at ensuring that procurement priorities are well-aligned with the goals and objectives of the supply chain and the overall organization. It facilitates achieving alignment and collaboration among the supply chain and other areas of the organization, such as marketing, manufacturing, and R&D.
Q: How are purchasing, procurement, and strategic sourcing different?
A: Purchasing is a largely transactional activity, while procurement and strategic sourcing are best described as processes. Procurement involves managing a broad range of processes associated with an organization’s need to procure goods and services, while strategic sourcing is a more comprehensive concept that emphasizes the consolidation and leveraging of purchasing power, the emphasis on value rather than acquisition cost alone, more meaningful supplier relationships, attention directed to process improvement, and enhanced teamwork and professionalism.
Q: What is the strategic evolution of the sourcing process?
The strategic evolution of the sourcing process involves a trend from traditional/tactical sourcing to strategic sourcing, and ultimately to e-enabled procurement and integration of sourcing and supply chain. This trend reflects the high priority placed on developing and enhancing approaches to procurement and sourcing that create additional value for organizations, their customers, and their suppliers.
Q: What is the strategic evolution of the sourcing process?
The strategic evolution of the sourcing process involves a trend from traditional/tactical sourcing to strategic sourcing, and ultimately to e-enabled procurement and integration of sourcing and supply chain. This trend reflects the high priority placed on developing and enhancing approaches to procurement and sourcing that create additional value for organizations, their customers, and their suppliers.
Q: What is the strategic evolution of the sourcing process?
The strategic evolution of the sourcing process involves a trend from traditional/tactical sourcing to strategic sourcing, and ultimately to e-enabled procurement and integration of sourcing and supply chain. This trend reflects the high priority placed on developing and enhancing approaches to procurement and sourcing that create additional value for organizations, their customers, and their suppliers.
- Consolidation and Leveraging of Purchasing Power:
If every department or division in an organization were to make independent purchasing decisions, the end result would be more costly than if the purchases were coordinated. Looking broadly at everything purchased by an organization, signiἀcant savings may be achieved through the consolidation of purchasing power and leveraging larger volumes of purchases with fewer total suppliers.
- Emphasis on Value:
Far too frequently, organizations place the highest priority on trying to procure needed items at the lowest possible cost. In so doing, opportunities may be missed to achieve greater value, for example, through reduced costs over the life cycle of the product. Buying a copier/fax/scan machine on the basis of acquisition cost alone, would effectively neglect the long-term costs that may be associated with toner, repairs, etc.
- More Meaningful Supplier Relationships:
S trategic s ourcing b eneἀts f rom d eveloping s ound b usiness relationships w ith m any t ypes o f s uppliers. D epending o n t he t ype o f p urchase b eing c onsidered, t he development of truly “collaborative” relationships can be very effective.
- Attention Directed to Process Improvement:
S trategic s ourcing l ooks b eyond t he n eed f or e ffective purchasing practices, and f ocuses attention on the business processes t hat a re related to the particular purchase being considered. Additionally, reformulation and streamlining of purchasing processes are a key element of strategic sourcing.
Enhanced Teamwork and Professionalism:
The concept of teamwork is essential to the success of strategic sourcing. Through t he u se o f cr oss-functional t eams, t hat m ay in clude r epresentatives o f s upplier a nd customer organizations, the beneἀts of strategic sourcing may be realized.
What is the value criterion?
The value criterion examines product or service features that enhance profits for the final product and the firm’s ability to maintain a competitive advantage in the marketplace.
Can you give an example of the value criterion?
A computer chip that is faster or an operating system that is more user friendly will make the computer more desirable, thereby increasing demand for the product and, consequently, increasing profits.
What is risk?
Risk reflects the chance of failure, nonacceptance in the marketplace, delivery failures, and source nonavailability.
What are generics?
Generics are low-risk, low-value items and services that typically do not enter the final product. Items such as office supplies and maintenance, repair, and operating items (MRO) are examples of generics.
What is the strategic procurement thrust for generics?
The strategic procurement thrust for generics is to streamline the procurement process to reduce the cost associated with purchasing generics. For example, the use of purchasing cards (corporate credit cards) reduces the number of checks written and the administrative costs associated with check payment, bank verification, and so on.
To help guide the strategic sourcing process, ἀve core principles are recognized
- Assess the total value—Emphasis must go beyond acquisition cost and evaluate total cost of ownership and the value of the supplier relationship.
- Develop individual sourcing strategies—Individual spend categories need customized sourcing strategies.
- Evaluate internal requirements—Requirements and speciἀcations must be thoroughly assessed and rationalized as part of the sourcing process.
- Focus on supplier economics—Suppliers’ economics must be understood before identifying buying tactics such as volume leveraging, price unbundling, or price adjustment mechanisms.
- Drive continuous improvement—Strategic sourcing initiatives should be a subset of the continuous improvement process for the procurement and sourcing organizations.
What are commodities in procurement and supply chain management?
Answer: Commodities are items or services that are low in risk but high in value. They are not unique and have many sources of supply. Basic production materials, basic packaging, and transportation services are examples of commodities. Price is a significant distinguishing factor for commodities, and procurement strategies for these items include volume purchasing to reduce price and just-in-time systems to lower inventory costs.
Question: What are distinctives in procurement and supply chain management?
Answer: Distinctives are high-risk, low-value items and services, such as engineered items, parts available from only a limited number of suppliers, or items that have a long lead time. The company’s customers are unaware of or do not care about the uniqueness of distinctives, but these products pose a threat to continued operation and/or high procurement cost. A stockout of distinctives results in stopping the production line or changing the production schedule to work around a stocked-out item, both tactics increase production costs. The strategic focus for distinctives is developing a standardization program to eliminate or reduce the uniqueness of the distinctives, thereby changing these items to generics.
Question: What are criticals in procurement and supply chain management?
Answer: Criticals are high-risk, high-value items that give the final product a competitive advantage in the marketplace. These items determine the customer’s ultimate cost of using the finished product and can lead to customer dissatisfaction and reduced sales if not available. Procurement strategies for criticals include strengthening their value through the use of new technologies, simplification, close supplier relations, and/or value-added alterations. The focus of critical procurement is on innovation to make the critical item provide greater market value to the finished product.
Question: What is the most effective way to initiate a MSSP process?
Answer: The most effective way to initiate a MSSP (Managed Strategic Sourcing Process) is to map out a formal plan for the design and implementation of the process itself. This should include creating a cross-functional planning group to guide and oversee the overall strategic sourcing process and identifying key members of the strategic sourcing team. Additionally, there should be consensus on the scope and design of the MSSP process, which must include a preliminary understanding of what types of products and services may be within the responsibility of this initiative.
Question: What is the first step in initiating an MSSP process?
Answer: The first step in initiating an MSSP process is to develop a formal plan for the design and implementation of the process. This includes creating a cross-functional planning group to guide and oversee the overall strategic sourcing process, identifying key members of the strategic sourcing team, and achieving consensus on the scope and design of the MSSP process.
Question: What is the purpose of a spend analysis in the MSSP process?
Answer: The purpose of a spend analysis in the MSSP process is to develop a baseline understanding of what products and services are being procured, what purposes they serve, and the financial implications of these purchases. The spend analysis is designed to understand spend by supplier, category, and internal user and to profile current sourcing approaches and areas for improvement
Question: How are sourcing needs determined in the MSSP process?
Answer: Sourcing needs are determined in the MSSP process by refining understanding of the sourcing needs, particularly with the needs and requirements of process owners throughout the supply chain and the broader organization. Once these needs have been determined, the nature of the requirement must be represented by some type of measurable criteria. Using these criteria, the sourcing professional can communicate the user’s needs to potential suppliers.
Question: What is the importance of the “make vs. buy” decision in the MSSP process
Answer: The “make vs. buy” decision is critical to the direction of the MSSP process. Even with a “make” decision, however, the buying arm will usually have to purchase some types of inputs from outside suppliers. This step has become much more important today, when more companies are outsourcing in order to focus upon their core activities. The end result should include recommendations for improvement of the overall sourcing process and likely financial benefits
Q: Why is identifying potential sources of supply critical in the strategic sourcing process?
A: It is critical because it ensures that all potential sources of supply are identified and that useful mechanisms are in place for meaningful comparisons of alternative supply sources.
Q: What is the first step in the evaluation of supply sources?
A: The first step is a comprehensive market analysis to determine the type of market, the number of suppliers in the market, where the power/dependence balance lies, and which method of buying might be most effective.
Q: Why is it important to identify all possible suppliers that might be able to satisfy the user’s needs?
A: It is important to identify all possible suppliers to ensure that the pool of potential suppliers is large enough to satisfy the user’s demands.
Q: What is pre-qualifying potential suppliers?
A: Pre-qualifying potential suppliers is the process of identifying the pool of possible suppliers that can satisfy the users’ demands.
Q: What other factors should be considered in this step?
A: Other factors that should be considered include simplifying purchasing complexity, rationalizing products, developing a detailed understanding and analysis of pricing, identifying opportunities to consolidate buying and create leverage, and redefining and modernizing supplier relationships.
Q: Why is it important to fully develop a sourcing strategy prior to supplier selection?
A: It is important to fully develop a sourcing strategy prior to supplier selection in order to define the parameters of the process and the steps to be followed. This ensures that the sourcing process is conducted in a structured and organized manner and helps to ensure that all potential sources of supply are identified and that useful mechanisms are in place for meaningful comparisons of alternative supply sources.
Q: What is the purpose of a request for information (RFI) in the supplier portfolio screening process?
A: The purpose of a request for information (RFI) is to establish whether a supplier has the capabilities and interest to be considered further in the sourcing process and is potentially able to meet the customer’s business requirements. The RFI generally focuses attention on non-price information that may be of interest and relevance to the buying organization, such as company background, financial stability, markets covered, manufacturing and distribution facilities, research and development, and quality systems.
Q: What is the purpose of a request for proposal (RFP) in the supplier portfolio screening process?
A: The purpose of a request for proposal (RFP) is to provide specific information as to what the buying company would like to source and ask potential suppliers for details as to how they would respond to the request. This includes substantive information as to the specific products and services to be provided, as well as pricing information. The RFP is an important tool in the supplier portfolio screening process as it helps to determine which potential suppliers are best suited to meet the buying company’s needs.
Q: What types of investments are required in the strategic sourcing process?
A: The strategic sourcing process requires two major types of investments by the firm: time and information. Time is expended by the individuals involved in making the purchase; the more complex and important the purchase, the more time must be spent on it, especially if it is a new buy. Information can be both internal and external to the firm. Internal information is gathered concerning user requirements and the implications that the purchase will have for the firm, while external information concerning the input to be purchased may be gathered from supply chain members, potential suppliers, and others. The level of investment needed in time and information to adequately meet a user’s requirements is a firm-specific process.
What should be included in a sourcing strategy?
A sourcing strategy should include supplier selection criteria and a process for evaluating submissions from multiple suppliers. The selection criteria should relate directly to the previously established objectives to be met by the formal strategic sourcing process.
