Exam 1 - Make or Buy & Supplier Selection Flashcards
Reasons to outsource - Necessity Argument
We would prefer not to outsource, but we really don’t have any other options
Reasons to outsource - Opportunity Argument
We would prefer to outsource because it would give us a strategic competitive advantage
Risks of outsourcing
- Loss of control
- Exposure to supplier risks
- Unexpected/unanticipated costs
- High exit barriers
- Difficulty quantifying economies
- Conversion costs
- Supply restraints
- Attention required by senior mgt
- Concerns w/ long-term flexibility
Purchasing’s Role in Outsourcing
- Identify opportunities for outsourcing
- Aid in selection of sources
- Identify potential relationship issues
- Develop and negotiate contract
- Monitor and manage relationship
- Provide a comprehensive, competitive process
Subcontracting
When the initial contractor (supplier) outsources some of their work to another supplier
Outsourcing
Buying materials and components from suppliers instead of making them in-house
Total Cost of Ownership (TCO)
The cost of owning the product not just buying
Cost of a product is MORE than just a per unit cost
Why would a company need to search for a new supplier?
- Contract expiration
- Poor supplier performance
- Innovation - new need
- Supply market change
Large suppliers
- Lower prices
- Variety
- Larger production
- Quantity discounts
- More likely to use “boiler plate” contracts (take it or leave it)
Small suppliers
- Higher expertise
- Better relationship
- More flexible/responsive
- More willing to negotiate
- Less stable
Supplier Evaluation Level 1
Level 1 - Strategic
- Directly linked to organizational strategy, goals and objectives
Supplier Evaluation Level 2
Level 2 - Traditional
- Quality, quantity, delivery, price, and service
Hard sources
Online, journals, record
Soft sources
Visits to suppliers, interviews, networking, personal experience
Supplier Evaluation Level 3
Level 3 - Additional
financial, risk, environmental, regulatory, innovation, social and political
Fair price
The lowest price that ensures a continuous supply of the proper quality where and when needed
Market Approach to Pricing
Prices are set in market and may not be directly related to cost (ex. Disney, Uber)
Cost Approach to Pricing
Price is set greater than direct costs, allowing for sufficient contribution to cover indirect costs and overhead, and leaving a margin for profit (ex. gas)
Solvency Ratios
Financial “soundness” - how well can a firm satisfy short and long term obligations?
Liquidity or Acid test
Degree to which current assets cover current liabilities
If ratio is 1:1 or better supplier is in “liquid condition”
Current Ratio
Amount due to creditors within year as a % of shareholder investment
Red flag if below 1
Accounts Payable to Sales Ratio
How firm pays suppliers in relation to sales volume
Fixed Assets to Net Worth Ratio
% of assets centered in fixed assets compared to equity
Sales to Inventory Ratio
Indicates whether firm is over or understocked
Assets to Sales Ratio
A firm’s assets relative to the revenues those assets generate
Return on Sales (%)
Measure profits per dollar of sales (higher is better)
Return on Assets ratio
KEY indicator of profitability
Higher is better
Return on Net Worth
Ability of a company to realize adequate return on investment capital
Higher is better
Weighted Point Evaluation System
- Identify Suppliers
- Identify factors or criteria
- Determine the importance of each factor
- Establish a system to rate each supplier on each factor
Advantages to Weighted Point Evaluation
Intuitive, quantifiable, applicable, discipline
Scorecard Approach
A more complicated approach that considers multiple facets
