IDIS 424 Lect 10-16 Flashcards
When do you use Hand-To-Mouth?
- Price goes down
- Emergency
- Short on working capital or storage space
- Used when the goods are only occasional and not taken into stock
- Perishables
Hand-to-Mouth Buying
purchase by a business in the smallest feasible quantities for immediate requirements. Also known as Zero Stock Buying or Just in time
TCO Hand-To-Mouth
- Item cost Ct at period time t (unit price)
- Fixed order setup cost K
- Inventory holding cost per unit per period, h
H2M TCO tips
- Take the purchase cost
- Take the order setup costs (if monthly k*number of orders)
- Inventory holding cost you take your avg. inv (total divided by 2) then multiply by h
- Add all of them together
Forward Buying
Policy for buying in advance of the time when item is actually needed
When do you use forward buying?
- Price goes up
- Manufactures offer quantity discounts in a short period
- Future availability of the product is limited
What are the costs associated with Forward Buying?
- Warehouse storage expense
- Cost of tying your money up in inventory when it could otherwise be used to earn a better return
- Insurance cost
Mixed Buying Strategy
- Combination of hand-to-mouth and forward strategies
- Applies if an item has a predictable seasonal price pattern
Total sourcing cost
cost of goods + transportation cost
Mathematical optimization
In optimization, decision variables (shipping quantities) are related to parameters (shipping costs and cost of goods) to calculate objective function (total sourcing cost)
Decision Variables
amount shipped from supplier i to customer j
“Prisoner Dilemma” in SCM
- The distributor takes all risks but the manufacturer takes no risk from the market.
- Manuf. wants dist. to carry large inv. to ensure satisfied demand
- Dist. would prefer less inv. to reduce overstock risk
- Dist. orders quantity based on own consideration – often results in suboptimal supply chain performance
Shortcomings occur because?
dist. and supplier are both trying to maximize profits independently
Contracts
Agreement btw two parties. Usually designed to encourage dist. to purchase more and supplier to take some of the overstock risk
Buyback Contract
Allows dist. to return unsold inventory at the agreed buyback price higher than salvage value s.
Reason for buyback cont.
Gives dist. an incentive to order more units since overstock is shared with supplier
Adv. of buyback contracts
Profits for both dist. and supplier tend to be higher
Risk of buyback contract
- Results in surplus inventory for supplier
- requires the supplier to have an effective reverse logistics
- the buyer may have incentive to push similar items that are not under buy-back
Revenue-Sharing Contract
Dist. shares some of its revenue with suppliers, in return for a discount on purchasing price. The buyer transfers a portion of revenue from each unit sold to end customer. Results in dist. to order more due to smaller overstocking risk
Quantity-Flexible contract
Supplier provides full refund for return (unsold) items as long as the number of returns is no larger than a certain quantity
Sales Rebate Contract
Provide direct incentive to retailer to increase sales by means of a rebate paid by the supplier for any item above certain quantity
Buy-back
Partial refund for all unsold goods
Revenue-Sharing
Buyer shares revenue with supplier in return for discount wholesale price
Quantity-Flexibility
Full refund for a limited number of unsold goods
Sales rebate
Incentives for meeting target sales
Supplier Selection
- Process of selecting a supplier to acquire necessary materials to support outputs of organizations
Step one in choosing right supplier for business
Recognize the need for supplier selection
How or when do we know that a need exists to evaluate and select a supplier?
- Requisitions from internal customer
- Poor performance of existing supplier
- End of an existing contract
- Current suppliers have insufficient capacity
- Expanding into new markets or product lines
- During new product development
Step Two in choosing right supplier for business
Identify key purchasing sourcing requirements
Key supplier evaluation criteria (step 2)
– Cost structure
– Delivery performance
– Quality systems and performance
– Process and technological capability
- Management Capability
- Workforce Capability
- Supplier agility and flexibility
- Supplier’s supply chain management capabilities
- Environmental compliance
- Financial capability and stability
- Information systems capability
-…
Step three in choosing right supplier
Determine purchasing or sourcing strategy
Determining sourcing strategy involves?
Sourcing option decisions
Sourcing option decisions
- Single versus multiple suppliers
- Domestic versus foreign
- Short-term versus longer-term purchase contracts
What do companies often develop using portfolio analysis approach?
strategies around commondities
Step 4 in choosing the right supplier
Identify potential supply sources
What are the various sources of information available for identifying potential suppliers?
- Trade journals
- Trade directories
- Trade show
Step 5 in determining right supplier
Limit suppliers in selection pool
Step 5 expanded
- It is impossible to perform in-depth analysis of all suppliers due to time and resources constraints
- Purchasers often perform a first cut or preliminary evaluation of potential suppliers to narrow the list
Methods used to reduce suppliers in pool?
-Scorecard for existing suppliers
- Evaluation of supplier provided info (RFI, RFP, or RFQ) and preliminary surveys
- Financial risk analysis
Step 6 in determining the right supplier
Determine method of supplier evaluation
What methods can be used to evaluate the remaining suppliers? (Step 6)
- Using supplier-provided info (bids or product samples)
- On-site supplier visits
- Using preferred supplier lists
- Current supplier performance scorecards
- Internal customer surveys
- Combination of above
Step 7 in choosing the right supplier
Select supplier and reach agreement
Typical activities in selecting supplier and reach agreements? (Step 7)
Competitive bidding
Negotiations
Supplier Scoring Model
Step 1 - Evaluation Criteria
Step 2 - list the candidates
Step 3 - Score each candidate according to each criteria
Step 4 - Assign a weight to each criterion
Step 5- Calculate weighted scores
Step 6 - Select winner
How to determine criteria weight
Rank sum
Characteristics of an effective supplier selection process
Straight forward, reliable, comprehensive, objective and flexible
Supplier Quality
Ability to meet or exceed current and future customer expectations or requirements in the critical performance areas on a consistent basis
Primary objective of supply base management and supplier development processes
Continuous improvement and growth of supplier capabilities
Supplier Performance Index (SPI)
evaluates suppliers by identifying and quantifying total cost of doing business, as the lowest purchase price may not always result in the lowest total cost for an item
SPI Equation
SPI = Total purchases + Nonperformance cost / Total purchases
Supply base Optimization
Process of determining the right mix and number of suppliers to maintain. This could mean adding, reducing, or even switching suppliers
Global Sourcing
Integrating and coordinating common items, sourcing strategies and suppliers across worldwide purchasing and operating locations
Why source Worldwide?
- Cost/price benefits
- Access to product / process technology
- Introduce competition to domestic suppliers
- React to buying patterns of competitors
- Establish a presence in a foreign market
Incoterms
Define responsibilities of buyer/seller transportation
EXW (ex-works) Incoterm
Seller prepares goods at their location and prepares them for pickup by buyer. Buyer handles all arrangements and costs and has liability for shipments.
DDP (Delivery duty paid) Incoterm
Seller handles shipments, including customs
FAS (free alongside ship) Incoterm
The seller clears the goods for export, delivery and places them alongside the vessel. Buyer bears all costs and risks of loss once items are placed alongside.
FOB (Free on board) Incoterm
The seller clears goods for export, delivers, and places them on the vessel. Buyer bears all costs and risks of loss once items are placed on board the vessel.
Difference btw outsourcing and offshoring
Outsourcing is passing of some part of the work to a third-party organization
- Offshoring is moving processes to remote country
Reshore/near-shore
- High shipping cost to value ratio
- High product variety
- Forecast instability
- Safety concerns
- Premium price items
Offshore
-Low shipping cost to value ratio
- Standard product
- Stable forecast
- Labor intense
- Competes on price
Barriers to Global Sourcing
-Lack of knowledge and skill
- Longer lead times
- Different customs, languages and culture
- Currency fluctuations
- Resistance to change
