CHAPTER 7 – SOURCING, PURCHASING AND PROCUREMENT Flashcards
The process of buying things for your company has many names, but the three most common are:
Sourcing
Purchasing
Procurement
– companies that sell you goods and services
– Since supply chains flow from raw materials down to a customer, your __ are ___ in your supply chain
Supplier/Vendors, suppliers, upstream
– add value to the supply chain by constantly evaluating the marketplace and selecting sourcing strategies that minimize risk and cost for their companies.
Procurement professionals
One of their responsibilities should include calculating the total cost of each option because the upfront savings from any one change is often offset by additional costs down the road.
Procurement professionals
includes decisions about what to buy, who to buy it from, when to buy it, and how much to purchase at one time.
Supply chain management
Companies now compile their purchasing data to evaluate what they buy, who they buy it from, and what they could change to drive additional value to their supply chain
Strategic sourcing
two ways to segment your supply chain based on the characteristics of suppliers
Tiers & Spend Categories
– Way to segment suppliers based on how far upstream they are in your supply chain.
Tiers
– The company that makes the final product, at the end of all of the tiers, is called the
original equipment manufacturer (OEM).
Suppliers can also be placed in ____ based on how your company uses the goods and services that they provide.
spend categories
supplier is providing you things that get included in your own products
Direct Suppliers
things that you buy from direct suppliers
Direct Materials & Services
provide things that aren’t necessarily included in the goods and services you sell
Indirect Suppliers
almost always much higher than the price that people expect to pay
Total cost
one of many variables to consider when you calculate how much something is really going to cost
Purchase Price
– big-picture view of how much something really costs
– Understanding ___can help you ensure that you make purchasing decisions that deliver the greatest value, rather than just the lowest purchase cost.
Total Cost Ownership (TCO) or Life Cycle Cost
– A business is sustainable only if it makes a ___
– The__ and __that your purchasing department buys are the __ for your company
– every dollar you save by ___ is pure profit
- profit
- products and services
- inputs
- reducing input costs
A single link in a supply chain usually has five components: (5)
Suppliers
Inputs
Process
Outputs
Customers
chart that compares how important or risky each input is with how much money you spend on it
spend categories
spend categories (4)
(Critical, Strategic, Commodity, Leverage)
Estimating how much of an item that you’re going to need
Forecasting Demand
– the things that your company can do better than others, and for a lower cost
– key to maintaining your competitive position in a supply chain
Core competencies
the source of any work that’s directly related to your core competencies should come from people working inside the company, meaning employees
Insourced
Some work is important for your company but isn’t a core competency, because it isn’t important for maintaining your competitive position, it doesn’t make sense for you to pay more to do this work yourself.
Outsourcing work to another company
take work that’s being done in one country and move it to a different country.
can reduce costs and improve quality, as well as allow your company to access talent and open new markets
Offshore work
moving the work from a foreign source to a domestic source
Reshoring or Nearshoring
Managing Life Cycle Costs (4)
a. Minimizing input costs
b. Sourcing your inputs
c. Forecasting Demand
d. Insourcing, outsourcing and offshoring
Managing Supplier Relationships - four things that you should focus on to build trust with your suppliers:
Be honest
Be reasonable
WIIFM
WIIFT
Establishing Supply Contracts
(4)
a. Firm-fixed-price contract
b. Cost-plus contract
c. Time and materials contract
d. Indefinite delivery contract
sets out the amount of products or services that will be purchased and how much they will cost. This type of contract can include adjustments for inflation and can include incentives for meeting goals.
Firm-fixed-price contract
reimburses a supplier for their costs and allows them to charge an additional fee. The fee is often a fixed percentage of the costs.
Cost-plus contract
often used for repairs. The buyer agrees to pay the supplier set rates for the parts and labor that they use on a project.
Time and materials contract
is used when the buyer doesn’t know how much they are going to order or when they will need the materials delivered.
Indefinite delivery contract
Selecting payment terms
(3):
Payment in advance
Payment on delivery
Net payment terms
Some companies expect their customers to pay in advance. They want to have the money in hand before they provide a product or service to ensure that their customers pay.
Payment in advance
A company may ask its customers to pay as soon as it delivers a product or service.
Payment on delivery
Some suppliers sell products and services and then wait to get paid later. This is a form of credit called
Net payment terms:
With net payment terms, there’s a higher risk that customers may not pay their invoices
Default
– time between when you collect money from your customers and the time when you pay your suppliers
Cash Conversion Cycle
Cash Conversion Cycle
(3)
Zero cash conversion cycle
Positive cash conversion cycle
Negative cash conversion cycle
Suppose that you charge your customers when they place an order and that you instantly place an order with your supplier and pay for it at the same time.
Zero cash conversion cycle
Suppose that you buy products from suppliers on net 30 terms and sell to your customers on net 60 terms, which means that you pay your suppliers 30 days before you get paid by your customers.
Positive cash conversion cycle
Suppose that your customers pay you for a product today but you can wait 30 days to pay your suppliers.
Negative cash conversion cycle
Uncertainty
Risk
– the spreadsheet program can calculate a risk index so that you can focus on the risks that are most likely to occur and will have the biggest effect.
Risk register
other term for risk register
risk scorecard
Ways to Dealing with risks
Accepting the risk
Avoiding the risk
Transferring the risk
Mitigating the risk
Complete risk register (6)
Item
Description of Risk
Description of Impact
Likelihood of Risk
Severity of Impact
Risk Index (likelihood x Impact)
