CHAPTER 7 – SOURCING, PURCHASING AND PROCUREMENT

Question 1

The process of buying things for your company has many names, but the three most common are:

Answer 1

Sourcing
Purchasing
Procurement

Question 2

– companies that sell you goods and services
– Since supply chains flow from raw materials down to a customer, your __ are ___ in your supply chain

Answer 2

Supplier/Vendors, suppliers, upstream

Question 3

– add value to the supply chain by constantly evaluating the marketplace and selecting sourcing strategies that minimize risk and cost for their companies.

Answer 3

Procurement professionals

Question 4

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.

Answer 4

Procurement professionals

Question 5

includes decisions about what to buy, who to buy it from, when to buy it, and how much to purchase at one time.

Answer 5

Supply chain management

Question 6

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

Answer 6

Strategic sourcing

Question 7

two ways to segment your supply chain based on the characteristics of suppliers

Answer 7

Tiers & Spend Categories

Question 8

– Way to segment suppliers based on how far upstream they are in your supply chain.

Answer 8

Tiers

Question 9

– The company that makes the final product, at the end of all of the tiers, is called the

Answer 9

original equipment manufacturer (OEM).

Question 10

Suppliers can also be placed in ____ based on how your company uses the goods and services that they provide.

Answer 10

spend categories

Question 11

supplier is providing you things that get included in your own products

Answer 11

Direct Suppliers

Question 12

things that you buy from direct suppliers

Answer 12

Direct Materials & Services

Question 13

provide things that aren’t necessarily included in the goods and services you sell

Answer 13

Indirect Suppliers

Question 14

almost always much higher than the price that people expect to pay

Answer 14

Total cost

Question 15

one of many variables to consider when you calculate how much something is really going to cost

Answer 15

Purchase Price

Question 16

– 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.

Answer 16

Total Cost Ownership (TCO) or Life Cycle Cost

Question 17

– 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

Answer 17

• profit
• products and services
• inputs
• reducing input costs

Question 18

A single link in a supply chain usually has five components: (5)

Answer 18

Suppliers
Inputs
Process
Outputs
Customers

Question 19

chart that compares how important or risky each input is with how much money you spend on it

Answer 19

spend categories

Question 20

spend categories (4)

Answer 20

(Critical, Strategic, Commodity, Leverage)

Question 21

Estimating how much of an item that you’re going to need

Answer 21

Forecasting Demand

Question 22

– 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

Answer 22

Core competencies

Question 23

the source of any work that’s directly related to your core competencies should come from people working inside the company, meaning employees

Answer 23

Insourced

Question 24

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.

Answer 24

Outsourcing work to another company

Question 25

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

Answer 25

Offshore work

Question 26

moving the work from a foreign source to a domestic source

Answer 26

Reshoring or Nearshoring

Question 27

Managing Life Cycle Costs (4)

Answer 27

a. Minimizing input costs
b. Sourcing your inputs
c. Forecasting Demand
d. Insourcing, outsourcing and offshoring

Question 28

Managing Supplier Relationships - four things that you should focus on to build trust with your suppliers:

Answer 28

Be honest
Be reasonable
WIIFM
WIIFT

Question 29

Establishing Supply Contracts
(4)

Answer 29

a. Firm-fixed-price contract
b. Cost-plus contract
c. Time and materials contract
d. Indefinite delivery contract

Question 30

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.

Answer 30

Firm-fixed-price contract

Question 31

reimburses a supplier for their costs and allows them to charge an additional fee. The fee is often a fixed percentage of the costs.

Answer 31

Cost-plus contract

Question 32

often used for repairs. The buyer agrees to pay the supplier set rates for the parts and labor that they use on a project.

Answer 32

Time and materials contract

Question 33

is used when the buyer doesn’t know how much they are going to order or when they will need the materials delivered.

Answer 33

Indefinite delivery contract

Question 34

Selecting payment terms
(3):

Answer 34

Payment in advance
Payment on delivery
Net payment terms

Question 35

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.

Answer 35

Payment in advance

Question 36

A company may ask its customers to pay as soon as it delivers a product or service.

Answer 36

Payment on delivery

Question 37

Some suppliers sell products and services and then wait to get paid later. This is a form of credit called

Answer 37

Net payment terms:

Question 38

With net payment terms, there’s a higher risk that customers may not pay their invoices

Answer 38

Default

Question 39

– time between when you collect money from your customers and the time when you pay your suppliers

Answer 39

Cash Conversion Cycle

Question 40

Cash Conversion Cycle
(3)

Answer 40

Zero cash conversion cycle
Positive cash conversion cycle
Negative cash conversion cycle

Question 41

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.

Answer 41

Zero cash conversion cycle

Question 42

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.

Answer 42

Positive cash conversion cycle

Question 43

Suppose that your customers pay you for a product today but you can wait 30 days to pay your suppliers.

Answer 43

Negative cash conversion cycle

Question 44

Uncertainty

Answer 44

Risk

Question 45

– 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.

Answer 45

Risk register

Question 46

other term for risk register

Answer 46

risk scorecard

Question 47

Ways to Dealing with risks

Answer 47

Accepting the risk
Avoiding the risk
Transferring the risk
Mitigating the risk

Question 48

Complete risk register (6)

Answer 48

Item
Description of Risk
Description of Impact
Likelihood of Risk
Severity of Impact
Risk Index (likelihood x Impact)