Chapter 6 Sourcing Flashcards
What business function has primary responsibility for the supply side?
Sourcing
What business organization addresses the upstream part of the supply chain?
Sourcing
What is the business function responsible for all activities and processes required to purchase goods and services from suppliers
Sourcing
What are the 5 related terms that are used interchangeably
Purchasing
Procurement
Sourcing
Strategic Sourcing
Supply Management
This word refers to the overall management of supplier base, encompassing all the terms and range of activities from tactical to strategical
Sourcing
This term is defined as the process of buying goods and services
Purchasing
This term is described as having a narrow functional activity with duties such as supplier identification and selection, buying, negotiating contracts, and measuring supplier performance
Purchasing
This term is described as a tactical process and is a common title of the business function within firms
Purchasing
This term looks at sourcing function from a strategic and future-oriented perspective
- it also seeks competitive advancing with sourcing opportuneness
- builds close and long-term supplier relationships
Strategic Sourcing
Which related term is classified as more strategic?
Strategic Sourcing
Which term is classified as more tactical?
Purchasing
GO back to page 9 part 1
T/F- Tech enabled
- supply chain integration
- lower transaction costs
- faster response times
- internet and B2B e-commerce changed how sourcing goods was conducted
True
Sourcing functions elevated within the organization and created 2 new jobs from it. What are those jobs?
VP of Purchasing
VP of Supply
T/F- During the late 90’s, companies were increasingly dependent on performance of suppliers
True
When many suppliers have common items it gives the consumer the ability to have choices on where to buy what they want. This is an example of?
Consumer Sourcing
When a company has larger volumes purchased because the product is specialized might result in a slower production times because the number of suppliers is limited. Is this an example of customer or commercial sourcing?
Commercial
Which type of sourcing is much more complex?
Commercial
Acquiring the right materials and services, make sure they are available to all parts of the organization in the right
quantities, at the right price, at the right time are all important for what function?
Commercial Sourcing
What are five types of impact on the organization and supply chain
Operational
Financial
Strategic
Risk Mitigation
Information
Which organization impact ensures the right materials, right quantities, right place, and right time and strikes an optimal balance of inventory
- Shortage= disruption
- Excess=tied-up capital and financial losses
Operational Impact
Which organization impact ensures sourcing spends 50% - 90% of revenue in most manufacturing
organizations and ensures large sums of money
Financial Impact
What business function has the largest single category of spend for the company
Sourcing
Which organization impact supports organization’s strategic direction (business strategy –competitive priorities and matching criteria when selecting
suppliers)
Strategic Impact
Which organization impact minimizes supply disruptions and protects reputation? This impact also ensures suppliers meet performance standards and evaluates suppliers on a longer-term source of supply
Risk Mitigation
Which organization impact will continually collect information on prices, suppliers, goods, new products and tech
Information Impact
This process begins when a specific purchase need within the organization is
identified
Purchasing Process
A camera is needed for a phone. Sourcing then determines if this can be met with existing suppliers or if new suppliers will be required. This process is known as
Purchasing Process
What is an important part of the sourcing function of the Sourcing Process which involves identifying potential suppliers and solicits business from potential suppliers by sharing RFQ, RFP, and RFI
Supplier Selection
What 3 documents do businesses show potential suppliers?
Request for Quotation
Request for Proposal
Request for Information
Which document is used to solicit vendor responses when a product has been selected and price quotations are needed from several vendors
Request for Quotation (RFQ)
Which document is used to solicit vendor responses when the functional requirements and features are known but no specific product is in mind
Request for Proposal (RFI)
Which document is an inquiry to a potential supplier about that supplier’s product or service for potential use in the business. The inquiry can provide certain business
requirements or be of a more general exploratory nature.
Request for Information (RFI)
T/F- It is important for supplier management to be
directed through the sourcing function
True
During the sourcing process, the company should combine requests from different users for same materials to lower costs. This will result in?
Economies of Scale/ Quantity Discount
A phenomenon whereby larger volumes reduce unit cost by distributing fixed costs over a larger quantity is known as
Economies of Scale
T/F- “Maverick buying” bypasses the sourcing function. This should not be done on a routine basis, i.e.
True
T/F- the office employee making a one time purchase
of paper is an example of “Maverick Buying”
True
T/F-Sourcing Function must act as the primary supplier contact, but other functions should be able to interact with suppliers as needed.
True
This function in the sourcing process, should assess tolerance specification requirements for
purchased parts
Engineering
This function in the sourcing process, should determine which sourcing choice is preferred given the current production process
Operations
This function in the sourcing process, should understand if product changes influenced by sourcing selection will impact sales
Marketing
T/F- Companies often have “sourcing teams” and must
consider inputs from all other organizational functions.
True
What personnel is responsible for understanding a range of material requirements and whether they can meet
organizational needs.
Sourcing Personnel
An example of *** reviews material specifications and questions whether a supplier’s lower cost material can meet
performance standards set by engineering is??
Sourcing Personnel
What two things are sourcing managers responsible for?
Buying goods and services
Determining a fair price under a range of circumstances
T/F- Sourcing Managers must understand the relationship between cost and price
True
What is determined by the summing of all costs incurred to produce the product
Cost
The *** cost of producing a product or service is the sum of its fixed and variable costs
Total Costs
This type of cost are those the company incurs regardless of how much it produces; overhead, taxes, insurance
Fixed Costs
This type of costs vary directly with the number of
units that are produced, i.e. direct materials, direct labor
Variable Cost
What is the formula for total cost?
Total Cost= Fixed Costs + Variable Costs
The amount at which the item is being solid in marketplace is known as
Price
The lowest price that can be paid while ensuring a continuous supply of quality goods is known as
Fair Price
The purchase price plus all other costs associated with acquiring the item
- All other costs may include transportation, admin costs, follow-up, expediting, storage, inspection and testing, warranty,
customer service, and handling returns
This is known as?
Total Cost of Ownership (TCO)
T/F- Buyers understand that a supplier must cover
total cost and make a profit to stay in business
True
T/F- After selecting a supplier, total cost of
ownership (TCO) should be estimated to
evaluate price
False, BEFORE
T/F- If total cost of ownership(TCO) is not taken into account, the organization may not actually profit the desired amount above
TRUE
KNOW THIS EXAMPLE
Variable Cost:
Materials $5,000
Labor $2,000
+
Fixed Cost:
Facility Overhead $3,500
= Total Cost $10,500
+ Profit $1,000
= Selling Price $11,500
After suppliers have been identified, the Sourcing
Function can pursue one of two methods to reach an
agreement and develop contracts with potential
suppliers. What are the two methods?
Competitive Bidding
Negotiation
This method can help develop contracts with potential suppliers because it awards business to the most qualified bidder and is the most efficient for purchasing standard items
Competitive Bidding
This method can help develop contracts with potential suppliers because the communication process between two parties that attempt to reach a mutual agreement and is best when working with supplies on factors beyond the purchase
Negotiation
What are some characteristics of Competitive Bidding
- Performance criteria and specifications can be clearly defined
-Volume purchased is high - Products being purchased are standardized
- Many qualified suppliers exist in the marketplace
-Time is available for bid evaluations
What are some characteristics of Negotiation
- Performance criteria and specifications cannot be clearly defined
- Many criteria exist for suppliers selection ( cost, quality, delivery, and service)
- Product being purchased is new or technically complex
- Few qualified suppliers exist in the marketplace
- Suppliers customize the product to buyer
T/F- Supply chains have uncertainty on the demand, but not the supply side
False, BOTH demand and supply side
Which uncertainty occurs when product demand is unstable and difficult to predict
Demand Uncertainty
Which uncertainty occurs when there is uncertainty regarding sources of supply and their capabilities
Supply Uncertainty
Demand and supply uncertainties are
related to what 2 things
1) the TYPE of product and 2) their supply chains
In order for us to understand demand uncertainties, we must first understand the TYPEs of products. What are two types of products?
1) Functional
2) Innovative
Which demand uncertainty products satisfy basic functions or needs
- have a long life cycle
- a lot of competition
- have low profit margins
- have a stable and predictable demand ( supply chain is easier to manage)
- are typically acquired in retail outlets, grocery and convenient stores
Functional Products
Which demand uncertainty products are those that are purchased for reasons other than basic needs, such as
innovation or status
-Are new products to the market that offer something different
– Products are introduced quickly
– Have unpredictable demand patterns
– Have short life cycles
– Have supply chains that are more difficult to manage
– Can have a high profit margin
Innovative Products
Uncertainties on the sourcing side of the supply chain can be classified as either:
- A Stable supply process or
- An Evolving supply process
A *** supply process is where sources of supply are well established
- manufacturing processes used are mature
- underlying tech is stable
Stable Supply Process ( low supply uncertainty)
A *** supply process is where sources of supply are rapidly changing
- manufacturing processes are in early stage of execution
- underlying technology is quickly evolving
Evolving Supply Process (high supply uncertainty)
What supply side uncertainty process can be described as sourcing apples, lumber, or t shirts
Stable Supply Process
What supply side uncertainty process can be described as sourcing certain organic foods, computer tech , or energy sources
Evolving Supply Process
Figure 6.5 KNOW
Low demand and supply uncertainty = efficiency focused supply chain ( least challenging)
Low demand uncertainty and high supply uncertainty= Risk-hedging SC
High demand uncertainty and low supply uncertainty = responsive SC
High demand and supply uncertainty= Agile SC ( most challenging)
What are 4 types of supply chains
Efficiency- focused
Responsive
Risk-hedging
Agile
What SC am I describing? low demand and supply uncertainty, EASIEST TO MANAGE, low profit margins, operations are highly predictable, gains made here are realized through efficiency and
elimination of waste
Efficiency- focused
What SC am I describing?
innovative products with stable supply base, mass customization (postponement),
challenge to respond quickly to customer demands
Example: HP printers are kept in generic form as long as possible, only customizing for
country at the last step in process
Responsive
What SC am I describing?
high supply uncertainty, needs to minimize risk of supply disruption and inventory shortages (must carry high safety stocks), and pooling of resources
Risk-hedging
What SC am I describing?
high demand and supply uncertainty, MOST CHALLENGING!, use mass customization strategies on the demand side, carry higher safety stock and pool resources to mitigate
risk on the supply side
Agile
Which type of sourcing am I describing? (single or multiple)
- traditionally considered the best
- increases competition
- ensures supplier security
- arms-length relationship with buyer
- can result in variations between sources
Multiple Sources of Supply
Which type of sourcing am I describing? (single or multiple)
- becoming the norm!!
- focuses on building close, long term relationship
- cooperative negotiation
- lower freight costs
- easier scheduling
- can be risky!! ( capacity, dependency, catastrophic event)
Single Source of Supply
Which sourcing strategy has a portfolio of few suppliers?
Portfolio Strategy
For a portfolio strat, suppliers are selected to create a balance of requirements such as
Local supplier for rapid delivery and Global with lower cost per piece
This strategy of sourcing balances the risks of relying on a single supplier in the event of supply chain disruption
Portfolio Strategy
Which type of sourcing
-reduces transportation costs
-can monitor quality more closely
- closer buyer-supplier relationships
- an emphasize on sustainability and “green” has resulted in a push toward local sourcing
Domestic Sourcing
Which type of sourcing is also referred to as “off-shoring”
- takes advantage of cheaper labor
- prominent with products with easily defined standards
- higher fuel costs result in high transportation costs
- visual teaming can result in culture clashes and misunderstandings
- can also be used in service operations, i.e. call centers, processing claims, and reading x-rays
Global Sourcing
What is defined by APICS as the process of having suppliers provide goods
and services that were previously provided
internally
Outsourcing
What term involves substitution internal capacity and production by that of the supplier
Outsourcing
Why would a company outsource? ( 3 reasons)
- access technical skills
- lower costs
- free themselves of doing non-core activities
What are two key dimensions that help define outsourcing?
Scope and Criticality
What outsourcing dimension has a degree of responsibility assigned to the supplier
- As *** increases, buyer control decreases
Scope
What outsourcing dimension emphasizes on the importance of outsourced activities.
The more critical the outsourced task is, the more
risk the buying firm takes on…which means
supplier management must step up!
Criticality
What enables efficient and effective supplier selection
E-auctions
What are the advantages of E-Auctions
-simplified comparison of supply sources
– decreased error rate
– market transparency
– increased buying reach
– reduction in ordering cycle time
What are some of the disadvantages of E-Auctions
- unrealistic low bidders seek to renegotiate after contract is awarded
(WARNING – the
E-auction process may eliminate better suppliers!!!!)
– auction may include nonparticipants seeking
to gather market intelligence
– may interrupt an existing good supplier relationship
What are the 3 different types of E-Auctions
Open
Sealed Bid
Reverse
Which type of E-Auction am I describing?
-suppliers can select items to place offers on
– suppliers can SEE competitive offers
– suppliers can keep submitting offers until close
Open Auction
Which type of E-Auction am I describing?
- sellers submit one bid while other competitors are NOT able to see his offer
Sealed Bid Auction
Which type of E-Auction am I describing?
-one buyer and many sellers
– most common type
– sellers place decreasing bids
“An internet auction in which suppliers attempt to underbid their
competitors. Company identities are known only by the buyer.”
Reverse Auctions
The specifications for goods or services are well defined and the Buyer’s expectations are clear. What are 4 clear expectations
Product Characteristics
Quality Standards
Technological requirements
Delivery Expectations
T/F- there is a sufficient number of qualified suppliers in E-auctions and the number is usually between 3 and 6 as “sufficient”
True
What are the three stages of the E-Auction Process?
Preparation
The Auction Event
Follow-up
In this stage of the E-auction, the buyer sets product requirements
- buyer must identify and prequalify suppliers and must specify auction rules
- they also must pre-test tech and train participants on how to use the tech
( often the determining factor for success or failure)
Preparation
This stage of the E-auction, is where most software enables communication between buyers and bidding suppliers
- tech offers the buyer alternative approaches such as price visibility and rank adjustments
( tech assistance must be available during the auction)
The Auction Event
T/F- We measure sourcing performance because sourcing has a LARGE responsibility over supply chain inventory
True
What are the three common performance measures of how we measure sourcing performances?
Inventory Turnover
Weeks of Supply
Cash to Cash Cycle Time
The number of times that an inventory cycles or “turns over” during the year or how quickly inventory moves
Inventory Turnover
What is the formula for inventory turnover?
Cost of goods sold DIVIDED by Average inventory value
An accounting classification useful for determining the amount of direct materials,
direct labor, and allocated overhead associated with the products sold during a
given period of time (APICS defn.)
Cost of Goods Sold
Where do we find cost of goods sold? or also known as cost of sales or cost of revenue
Income Statement
Where do we find the average inventory value?
Balance Sheet
What is one of a firm’s core financial statements that
shows their profit and loss over a period of time
This also displays the firm’s revenue, expenses, and profits for a period of time
Income Statement
This is another one of a firm’s core financial statements that shows assets, liabilities, and owner’s equity at
a given point in time.
Balance Sheet
Income Statement: Cost of Revenue = $34,768,000
Balance Sheet Inventory = $5,017,000
What is the inventory turnover?
34,768,000/$5,017,000 = 6.93
Which sourcing performance provides the length of time current demand can be met with on-hand inventory
Weeks of Supply
T/F- A LARGE Weeks of Supply means the firm is holding too much inventory ($$$)
True
T/F- A small Weeks of Supply increases the likelihood of a
stock-out or lost sale
True
What is the formula for weeks of supply?
Average On- Hand Inventory DIVIDED BY Average Weekly Usage SUBTRACTED BY Average Weekly Usage= COGS/52 weeks
Income Statement: Cost of Revenue = $34,768,000
Balance Sheet 6/30/2019: Inventory = $5,017,000
What is the week of supply?
$5,017,000/($34,768,000/52 weeks) = 7.50 weeks of supply
Which sourcing performance is an indicator of how efficiently a company
manages its assets to improve cash flow
Cash to Cash cycle time
Which sourcing performance can be defined as the number of days between paying for raw materials and components and getting paid for a product
Cash to Cash cycle time
What is the Cash to Cash cycle time formula
the number of inventory days of supply
+ days sales outstanding
– the average payment period for materials
Cash-to-Cash Cycle Time Example:
Sales Revenue $5,000,000
Cost of Goods Sold $2,500,000
Gross Profit $2,500,000
Number of units sold per year 5,000,000
Average inventory on hand $500,000
Inventory days of supply 73
Days sales outstanding 25
Days payables outstanding 40
What is the Cash to Cash Cycle Time?
Cash-to-Cash Cycle Time = 73+25-40 = 58 days
Cash-to-Cash Cycle Time Example:
Sales Revenue $5,000,000
Cost of Goods Sold $2,500,000
Gross Profit $2,500,000
Number of units sold per year 5,000,000
Average inventory on hand $500,000
Inventory days of supply 73
Days sales outstanding 25
Days payables outstanding 40
What is the inventory turnover ratio?
Inventory Turns= $2,500,000/$500,000
=5 turns per year
Cash-to-Cash Cycle Time Example:
Sales Revenue $5,000,000
Cost of Goods Sold $2,500,000
Gross Profit $2,500,000
Number of units sold per year 5,000,000
Average inventory on hand $500,000
Inventory days of supply 73
Days sales outstanding 25
Days payables outstanding 40
What are the weeks of supply?
Weeks of Supply= $500,000/($2,500,000/52 weeks per year)=10.4 weeks of supply
