Summary Flashcards
Explain “Supply”?
includes at least purchasing, materials management, incoming inspection and receiving. Supply is used when relating to buy based upon total cost of ownership in a manufacturing environment
Explain “Sourcing”
Finding sources of supply, guaranteeing continuity in supply, ensuring alternative sources of supply and gathering knowledge of procurable resources.
Explain “Value Chain Management”
all stakeholders belonging to the same value chain are challenged to improve the (buying) company’s value proposition to its final end-customers i.e. consumers
Explain “Supply Chain Management”
the management of all activities, information, knowledge and financial resources associated with the flow and transformation of goods and services up from the suppliers so the end-users expectations are being met.
Explain “Primary activities”
those activities that are required to offer the company’s value proposition to its customers. They consist of inbound logistics, operations, outbound logistics, marketing & sales and customer service activities.
Explain “Support activities”
those value activities that are required to support the company’s primary activities. These include procurement, technology development, human resources management and maintaining the firm’s infrastructure
Explain “Inbound logistics”
Related to receiving, storing and disseminating inputs to production process. Inbound transportation, inspection, materials handling…
Explain “operations”
Related to transforming inputs. Machining, packaging, equipment maintenance…
Explain “Outbound logistics”
Related to collecting, storing and physically distributing the final product to customer. Finished goods warehousing, order processing…
Explain “Marketing&Sales”
Related to advertising, promotion, management of channel relations, pricing…
Explain “Service (as a primary activity)”
Related to enhancing or maintaining the value of the product. Installations, repair/maintenance, adjustments…
Explain the support activities
P: Purchasing inputs used in the firm’s value chain. Includes raw materials, supplies, assets such as machinery, equipment, buildings.
HR: Recruiting, hiring, training, developing
FI: Supports the entire set of company processes. Management, planning, finance, legal, quality management…
Define “raw material”
materials which have undergone no/minimal transformation. Basis materials for production process.
Define “Supplementary materials”
materials that are not absorbed physically in the end product
Define “Semi- manufactured products”
products that have already been processed once or more times and that will be processed further at a later stage
Define “Components”
manufactured goods that will not undergo additional physical changes, but which will be incorporated in a system with which there is a functional relationship by joining it with other components
Define “Investment goods or capital equipment”
products that are not consumed immediately, but which purchasing value is depreciated over a period of time
Define “MRO”
Maintenance, repair and operation materials (MRO):
materials, which are necessary for keeping the organization running in general and for the support activities in particular
Define “Total cost of ownership (TCO) “
a financial estimate intended to help buyers and owners determine the direct and indirect costs of a product or system.
Explain “MTS”
MTS (Make and distribute to stock):
- standard products
- stocked
- large batches
- based on sales forecasts
Explain “MTO”
MTO (Make to order):
- manufactured after the order has been received
- very large or customer-specific ranges
e. g. packaging materials, bulk products that are expensive to stock
Explain “ETO”
ETO (Engineer to order):
- all manufacturing activities from design to assembly related to specific customer order
- Highly skilled operations
Define “Direct purchasing”
buying for primary activities (purchasing of all materials and products that are used for manufacturing companies’ end products)
Define “Indirect purchasing”
purchasing of all materials, components and services that are used to support the company’s infrastructure.
Define “Expediting”
following up on a purchase order to make sure that the supplier is going to perform as it has confirmed through the purchase order confirmation. e.g. Routine status check
Define “Purchasing function”
covers activities aimed at determining the purchasing specifications, selecting the best supplier, developing routines, negotiating etc. Broader than purchasing department.
Define “Decision-making units (DMU)”
relates to all those individuals and groups who participate in the purchasing decision-making process.
includes users, buyers, influencers, decision-makers, gatekeepers
Describe “Decoupling Point”
describes the point in the system where the “push” (forecast driven) and pull (demand driven) elements of the supply chain meet.
Describe “Request for information (RFI)”
Suppliers are invited to submit general information that may help them to qualify for a potential tender
Describe “Request for quotation (RFQ)”
Suppliers are invited to submit a detailed bid which meets the requirements.. (identical to request for tender)
What steps are included in the “Purchasing process model”?
- Determining specification
- Selecting supplier
- Negotiate and contract
- Develop ordering process and order
- Expediting and evaluation
- Follow up and evaluation
Describe what happens during the 1st step of the purchasing process
Defines functional and technical specification, needs knowledge.
Describe what happens during the 2nd step of the purchasing process
Selecting supplier through adequate method.
Prequalification of suppliers, request for quotation
Doc: Supplier selection proposal
Describe what happens during the 3rd step of the purchasing process
Contract agreement; prepare contract, contracting and negotiating expertise is required
Doc: contract
Describe what happens during the 4th step of the purchasing process
Ordering; establish order routine
develop these, and order handling
Doc: Order
Describe what happens during the 5th step of the purchasing process
Expediting;
establish expediting routine
Troubleshooting
Doc: Overdue list
Describe what happens during the last step of the purchasing process
Evaluation and follow-up.
Vendor performance evaluation, settling contract problems.
Vendor rating and vendor evaluation
Doc: Vendor balanced score card, vendor ranking
Describe “Functional specification”
describes the functionality which the product must have for the user advantages of a functional specification.
What are the advantages of functional specification?
- potential suppliers are challenged to give advice using their expertise and experience
- stimulated innovation and innovative ideas; technologies, products and processes
- creates one terms of reference, against which all supplier proposals can be evaluated
Describe “Detailed technical specification”
describes technical properties and characteristics of the product as well as the activities to be performed by the supplier in detail.
What steps is Supplier selection process devided into?
- Spend analysis
- Determine method of subcontracting
- Pre-qualification
- Prepare RfQ and analyze bide
- Select supplier
What are the different method for subcontracting?
Turnkey (subcontracting responsibility for the whole assignment) or partial (parts are contracted out separately often to various suppliers)
What steps is Pre-qualification divided into?
- Summarize prequalification requirements
- Create supplier list (interesting suppliers)
- Send out RFI
- Evaluate RFI
- Decide on “supplier short list” (the ones contacted through a RFQ later)
What steps is “Prepare RfQ and analyze bids” divided into?
- Create RFQ
- Create evaluation framework
- Get in quotations (tenders)
- Make a commercial and technical evaluation of quotations
What steps is the step “Supplier selection” divided into?
- Propose supplier(s)
- Carry out risk analysis
- Select supplier(s) for negotiation
What should a Contract address?
-Price mechanisms
-Currency risks
-Service and spare parts-rates
-Systems responsibility
-Terms of payment
-Penalty clauses & Warranty period
(supplier guarantees for product quality, on-time delivery…
-Terms of delivery
What’s Incoterms?
International Commerce Terms -regularly used pre-defined terms of delivery addressing transportation cost, delivery, documentation, risk and insurance for goods
What are the 4 “rules” for a principled negotiaor?
- Separate the people from the problem
(Separate from relationship issues) - Focus on interest, not positions
(Focus on what both parties need, not what they say they need) - Invent options for mutual gain
(Create win-win situations) - Insist on objective criteria
(Look for a similar trade that has been made, and learn from that what is feasible)
What’s PO?
Purchase Order; offer from the buyer which the supplier can accept and then it becomes a contract.
Name three types of expediting
Routine status check, Advanced status check, and Field expediting
Describe “Routine status check”
the buyer contacts the supplier to confirm the delivery date a few days before.
Describe “Advanced status check”
for critical purchased parts, a detailed production plan will be handed over to the buyer.
Describe “Field expediting”
for critical purchased parts, periodically inspection on site to see if the supplier is on schedule.
Name some problems and bottlenecks in the purchasing process
- Supplier or brand specifications
- Inadequate supplier selection
- Personal relationship
- Insufficient contracting expertise
What’s Maverick buying?
when a department buys materials or services independently, without incorporating the purchasing department. i.e. purchasing outside of standard procurement processes.
What’s Compliance?
the opposite term of Maverick buying;
means employees following preferred supplier, contract, assortment, policy and process. This is usually measured as a percentage of purchasing turnover.
Robinsons purchasing situations
X Product
Y Supplier
- Old + old = “straight rebuy” –> low risk
- Old + new = “modified rebuy”
- New + new = “new task” –> high risk
Give examples of straight rebuy
(old prod + old supplier)
Office supplies, spare parts, cleaning materials..
Give examples of modified rebuy
(Old + new)
business cars, office furniture, electronic components
Give examples of “New task”
(New prod + new supplier)
buildings, computers, telephone system
Industrial buying behaviour
X Product complexity
YCommercial uncertainty
xlow ylow: Purchasing department dominant
xlow yhigh: Finance and administration dominant
xhigh y low: Engineering dominant
xhigh yhigh: Cross functional decisionmaking
Advantages with electronic catalogue and ordering systems
- efficient order handling (processes, logistics and payment systems
- transactions without human interference
- substantial cost reduction (due to reduced transaction costs)
What types of electronic auctions exist?
- Open RFI/RFP
- Reversed Auction
- Forward Auction
Explain Open RFI/RFP
- Qualification before auction
- Supplier invited if its offer is good enough
Explain Reversed auction
Most popular for buyers
- Input price determined by buyer
- Offers are visible – suppliers can see how far away their offers are
Explain Forward auction
Vendor determines price
Buyers announce their offer to the auctioneer
How can e-auctions contribute to a power shift?
by using reversed auctions. Buyers have the upper hand in these situations because they set the price, and then suppliers have to fight to get the deal.
What e-solutions fits routine products?
Catalog systems and e-payment tools
· Lowering of transaction costs.
E-auctions (secondary)
What e-solutions fits leverage products?
o E-auctions - Reversed auction
Input price is determined by buyer
Offers are visible so that other suppliers can see how far away their offers are.
What e-solutions fits strategic products?
o Electronic data interchange (EDI)
Due to frequent transactions and interactions
What e-solutions fits bottleneck products?
Supplier specific e-solution
Which are the 4 primary tasks of purchasing?
- Supply task
- Spend management task
- Risk management task
- Development task
Explain “Supply task”
continuity of reliable supply of consistent quality to reasonable total cost
Explain “Spend management task”
make sure that goods and services are supplied at the lowest cost of ownership TCO
Explain “Risk management task”
reduce risk exposure in relation to its supply markets
Explain “Development task”
partnership with suppliers to ensure technology development
Value-Cost-Risk triangle. Explain Value
Value Improvement:
- Revenue growth through new products
- Improving customer value propositions
- Early supplier involvement
- Faster new product introduction
- Co-branding and advertising
Value-Cost-Risk triangle. Explain Cost
Purchasing cost reduction
- Supply base reduction
- Product standardization
- Global sourcing
- Outsourcing and offshoring
- Electronic auctions
- Contract management
Value-Cost-Risk triangle. Explain Risk
Risk management
- Single vs. multiple sourcing
- Performance-based contracting
- CSR
- Sustainable Purchasing
- Supplier auditing
- Supplier quality assurance
- Supplier finacial position
- Intellectual property protection
Impacts of strategic purchasing decisions
- Establishing long-term contracts with preferred suppliers
- Adopting a supplier strategy based on multi- VS. single sourcing
- Deciding on backward integration (e.g. bicycle store buying a saddle producer)
Difference between contract supplier, preferred supplier and partner supplier
contract supplier (only cost focus), prefered supplier (cost and risk), and partner supplier (cost, risk and value)
Explain product life cycle
Introduction, growth, saturation, decline
Strategic challenges for Western European industry
- Increased globalization
- More competition from countries in the Far East and South America
- Position in Value Chain?
- Industry in Western Europe seems to be under represented in areas of new technologies
- Many industries seem to be at the stage of saturation or decline
Cost leadership vs. differentiation.
Explain “Cost leadersip”
- price and cost focused for purchasing and negotiations
- delivery reliability more important than lead time
- formal communication and focus on making administration and ordering more efficient
Cost leadership vs. differentiation.
Explain “Differentiation”
- close cooperation with suppliers
- process and product improvement
- quality
- lead time reduction
- information exchange
- often direct contact supplier-user
Which are the steps in the Strategic Purchase Framework?
- Insourcing vs Outsourcing
- Developing commodity/category strategies
- Establish a world-class supply base
- Develop and manage supplier relationships
- Integrate suplliers into the new product/process develop process
- Integrate suppliers into the order fulfilment process
- Supplier development and quality management
- Manage cost strategically across the supply chain.
In the step insourcing vs. outsourcing a popular long-term strategy is “Selective growth”, explain this
a combination of:
o Enhancing core activity
o Starting up new, promising activities
What are the consequences of Selective growth?
o Selling off non-core activities
o Increased subcontracting
o Buying finished products instead of components
o Turnkey delivery
o Technological development
o Suppliers critical in the value chain – important for innovation
What is a “Category/commodity”?
A group of products which can be substituted for one another by a consumer; like cereals, bakery, household product, body care….
What are the steps when developing commodity/category strategies?
- Spend analysis
- Prioritize categories
- Select number of suppliers
How can you perform a Spend analysis? and why?
Using the Spend cube:
The spend cube allows us to allocate purchasing expenditure from three angles:
• Purchasing segment/category (x)
• Suppliers (y)
• Internal budget holders (z)
The purchasing spend cube gives the CPO a good overview of where all expenditures go, which makes it easier to cut costs.
When developing category strategies, what are the options for selecting number of suppliers?
- Single sourcing
- Sole sourcing
- Dual sourcing
- Multiple sourcing
- Parallel sourcing
When to use Single sourcing?
o Small volumes of specialized or complex products or components
o Requiring short lead time
o If the buyer doesn’t have the required technological knowledge
What’s the difference between sole and single sourcing?
Sole sourcing has NO option of choosing between different suppliers.
Describe Dual sourcing
o Volume divided between two suppliers One “main supplier” – improve cooperation with this Reasons to having two suppliers: • Create competition • Back-up if delivery problems
Pros and cons with single sourcing
\+stronger relations \+better communication \+more economy of scale -increased sensitivity for delivery problems -increased dependence and risk
Pros and cons with Multiple sourcing
+purchaser can put pressure on price by competition
+ suppliers can be easily replaced
+broad competence
-difficult to get commitment from many suppliers
-more work to communicate
Describe Parallel sourcing
o Different suppliers for different products
Toyota: one supplier for each car model
o Creates opportunities for good cooperation between product teams and specific factories
o Have established cooperation with many suppliers
o Competitive environment
In step 3 in the Strategic purchase framework, a world-class supply base is supposed to be establish. How? And what are the drivers behind it?
Through global sourcing.
Drivers:
- Globalization
- New technology
- Availability of local suppliers
- Lower cost of labor and material
- Better quality
- Supplier willingness to solve problems
- On-time delivery
What are the challenges with global sourcing?
- Infrastructure availability and compatibility
- Currency fluctuations
- Total cost of purchase
- Quality assurance
- Transport delays
- Company integrity
- Political instability
When is global sourcing preferred?
Global sourcing is used for/when
- Bulk products or standardized products
- Large price diffs between suppliers
- Products can be bought in large quantities (volume bundling -economies of scale)
When is local sourcing preferred?
Local sourcing is used for/when
- High-tech product for which specification often changes
- High delivery flexibility and precision is required
- Much personal communication is required in relationship
Describe conflicts between the Engineering function and Purchasing function
Engineering chooses one quality-supplier. Purchasing wants competition of suppliers to get the best offer, instead of just letting engineering have a supplier that they’re satisfied with.
Name 3 ways to enable communication with suppliers in production-development projects
- Purchasing Engineering
- Early supplier involvement (ESI)
- Residential engineering
Describe Purchasing Engineer
a specialist function in the liaison between the engineering department and the purchasing department
Describe ESI
Early Supplier Involvement (ESI)
“best-in-class” suppliers are invited to participate in the company’s product/process development projects at an early stage
Describe “Residential Engineering”
engineers from the other party are located on a more or less permanent basis within the organization
Name some short-term benefits of ESI
• Improved product quality • Reduction of: o Product cost o Development time o Development cost
Name some long-term benefits of ESI
- More efficient collaboration in the future
- Alignment of future technology strategies
- Better access to technology resources of the supplier
- Contribution of suppliers to product differentiation
Name other benefits of ESI
• De-bottlenecking
o Increase capacity with supplier engineers
• Specializing
o Assign responsibility to the most competent company
• Concurrent engineering
o Prevent, reduce or introduce design changes early – less costly
What are the risks with ESI?
- Losing product- or process knowledge and skills to the supplier
- Becoming locked in to specific technology
- Slowing down development process
- Increasing coordination costs
- Changing interests
Which suppliers should be early integrated?
Early integration for suppliers that have/are: • Complex items • Systems • Critical items or technologies • Strategic alliances • “Black box” suppliers
Name 3 critical issues to succeed with supplier involvement in PD
- Identify specific processes and tasks for the broader area of purchasing involvement in product development
- Form a supporting organization
- Staff the organization with people with the right skills
Which are the 3 core processes in “integrated new product development”?
- Strategic Management Processes
- Operational Management Processes
- Collaboration Management Processes
Describe the Strategic Management Process
(included in Integrated new product development)
o Create infrastructure for future technological collaboration
Select potential tech-partners
Standardize product design
Describe the Collaboration Management Process
(included in Integrated new product development)
o How to cooperate with external parties concerning…
Target costing
Communication on different mgmt. levels
Compatibility of intersystem
Evaluation of product design
Describe the Operational Management Process
(included in Integrated new product development)
o Make-or-buy on project level
o Deciding on technological solutions for a project
o Select project partners
o When to involve supplier?
Name a primary and a secondary function of a cereal package and a refrigerator
Cereal:
Primary- Protect cereal
Secondary -Sell cereal
Refrigerator:
Primary- Preserve food
Secondary-Make ice
What is Value Analysis?
Value Analysis -a tool for cross functional cooperation
the organized and systematic study of every element of cost in a part, material or service to make certain it fulfils its function at the lowest possible cost
What are the steps of a Value Analysis?
- Information phase
- Speculation phase
- Analytical phase
- Program-Execution phase
- Summary and Conclusion
Brief on the steps of a VA
- Information
a. Define cost of a function
b. Understand all facts - Speculation
a. “What else will do the job?” - Analytical
a. Compare strengths and weaknesses with other solutions - Program execution
a. Get input from all affected departments and suppliers
b. Select best alternative and get approval from mgmt. - Summary and conclusion
a. Cost is most important
b. Evaluate implementation
What can be determined using VA?
if max value is obtained for the money spent
- Does its use contribute to value?
- Is its cost proportionate to its usefulness?
- Does it need all its features?
- Is there anything better for the intended use?
- Can a usable part be made by a lower-cost method?
- Can a standard part be found at lower cost?
When is a VA useful?
- Large annual money amount
- Large quantities
- Complex design
- High scrap or rework costs
- Involves many operations
- Difficult to make
- Possibilities of standardization
- Product is competitive in all market conditions
Describe Kraljic’s purchasing product portfolio
X: Supply risk
Y: Purchasing’s impact on financial results
X1Y1: Routine Products
X1Y2: Leverage products
X2Y1: Bottleneck products
X2Y2: Strategic products
Factors for purchasing’s impact on financial results (Y-axis in Kraljic matrix)?
- Cost of materials
- Total cost
- % purchasing turnover
- Volume purchased
- Impact on quality
- Impact on business growth
- Direct impact on customers’ buying decision
Supply risk factors? (X-axis Kraljic matrix)
- Short-term and long-term availability
- Number of potential suppliers
- Switching cost of changing supplier
- Competitive structure of supply markets
- Storage risks
- Substitution possibilities (for the buyer to substitute the component to another)
Describe Leverage products
- alternative sources of supply available
- substitution possible
Describe Strategic products
- critical for product’s cost price
- dependence on supplier
Describe routine products
- Large product variety
- High logistics complexity
- Labor intensive
Describe Bottleneck products
- Monopolistic market
- Large entry barriers
Describe Leverage Suppliers
- many competitors
- commodity products
Buyer dominated segment
Describe Strategic Suppliers
- market leaders
- specific know how
Balance of power may differ among buyer/supplier
Describe Routine Suppliers
- large supply
- many suppliers with dependent position
Reduce number of suppliers
Describe Bottleneck Suppliers
- technology leaders
- few (if any) alternative suppliers
Supplier Dominated Segment
Which are the 4 basic Supplier Strategies?
- Strategic Partnership
- Competitive Bidding
- Secure Supply
- Category Management and E-procurement Solutions.
What is strategic partnership suitable for?
Strategic products
What objective and activities are related to Strategic Partnership?
Objective: Create mutual commitment in long-term relationship.
Activities: • Accurately forecast future requirements • Supply risk analysis • “Should-cost” analysis • Careful supplier selection • Vendor rating
What is Competitive bidding suitable for?
Leverage Products
What objective and activities are related to Competitive Bidding?
Objective: Obtain best deal for short term.
Activities:
• Improve product/market development
• Search for alternative products/suppliers
• Reallocate purchasing volumes over suppliers
• Optimize order quantities (volume bundling)
• Target pricing (target costing)
o The maximum price paid that still enables a company to earn the required profit margin.
What is Secure Supply suitable for?
Bottleneck products
What objective and activities are related to Secure Supply?
Objective:
• Secure short- and long-term supply
• Reduce supply risk
Activities:
• Accurately forecast future requirements
• Supply-risk analysis
• Determine ranking in supplier’s client list
• Develop preventative measures (buffer stock, transportation)
• Search for alternative products/suppliers
What is Category management and e-procurement solutions suitable for?
Routine products
What objective and activities are related to Category management and e-procurement solutions?
Objective:
• Reduce logistics complexity
• Improve operational efficiency
• Reduce number of suppliers
Activities:
• Subcontract per product group/ product family
• Standardize product assortment
• Design effective internal order delivery and invoicing procedures
• Delegate order handling to internal user
Purchasing market research can be both Quantative and Qualitative. Describe the Quantitative part
Numerical data, such as..:
- market shares
- supply and demand development
- macra-economic indicators
- cost break down analysis
Purchasing market research can be both Quantative and Qualitative. Describe the Qualitative part
- Trends and development in different industrial sectors
- Interviews (industry experts..)
Why is Purchase market Analysis important?
- Technological development
- Supply-market dynamics
- Changes in Western society (high wages offshore production)
- Monetary development (currency fluctuations)
How can one perform a market analysis?
Porter’s 5 forces
Mention some criticism towards portfolio models
- Hard to measure the variables
- Hard to know if the most relevant variables are chosen
- Where is the difference between “high” and “low”?
- How to make strategies based on only two dimensions?
- How is the supply chain/network perspective taken into consideration?
What’s the Purpose of RfP?
Create a common basis for comparison
Create a sense of urgency in the mind of the supplier
Getting and processing large amounts of information efficiently
Ensure that the supplier selection process complies with legal requirements
What is RFP asking you to specify?
- How you would solve the problem
* How much you would charge for implementing your solution.
When is RfP used?
RFP is typically for more complex products than RFQs handle
What is RFQ is asking you to specify?
how much you will charge to perform a specific task.
When is RfQ used?
This is typically for commodities.
What is the Purchase price determined by?
Internal and external factors
Examples of internal factors affecting costs
- change in labor costs
- change in material costs
- change in energy costs
- labor productivity
Examples of external factors affecting market price
- change in demand
- change in supply
- change in supply side capacity utilization
- change in supply side inventory
Which are the 4 Main Models for how the Purchase Price is Determined?
- Cost based pricing
- the supplier’s offering price is directly derived from the cost price - Market based pricing
- the price is determined on the market and generated by market circumstances (demand, supply, economic factors..) - Competitive bidding
- the price is influenced by market factors as well as cost factors
- !most common situation! - Value based pricing
- the price is determined by the value the customer get, which can be the case when competition is low and value high
Name 5 Different Pricing Methods
- Mark-up Pricing (pålägg)
- adding a fixed percentage markup to the cost price - Target-return Pricing
- the price is determined based on profits that should be made - Perceived value Pricing
- “do not base your price on the cost price but on what the market can bear” - Going rate pricing
- setting a price for a product or service using the current market price as a basis. Going rate pricing is a common practice with homogeneous products with very little variation from one producer to another, such as aluminum or steel. - Auction type pricing
- based on a request from the principal, contractors are invited to submit bids for a specific job. The contractor with the lowest bid gets the job.
Name Different discounts:
- Cash discount
e.g. X% discount for payments within Y days - Quantity discounts
- Volume bonus
- Geographical discount
given when customer is located near supplier - Seasonal discount
applied to improve capacity utilization in periods when sales decline - Promotional discount
provided to temporarily stimulate the sale of a product
Describe “Cherry picking”
Receiving several offers, but only choosing the most price worthy articles from every offer.
Explain X % learning curve
Each time the cumulative production volume of a particular item
doubles, the average time required to produce that item is
approximately x % of the previously required number of hours
What is Target Costs?
Target price - Profit = Target Costs
What’s included in Total cost of ownership ?
· Price · Support · Inventory and warehousing · “Buying cost” · Training · Usage · Maintenance · Scrapping (=discarded waste material)
What are the Benefits of using TCO?
- easy to understand
- information provides important data for analysing, negotiating, supplier selection
- increases understanding of costs and suppliers
What are the barriers with TCO?
- Limited use in practice
- data collection difficult
What are the Four levels of supplier assessment?
- Product level
a. Establishing and improving the supplier’s product quality - Process level
a. Supplier ‘s production process is closely investigated - Quality assurance system level
a. The entire quality organization of the supplier is subject of investigation. - Company level
a. Besides quality, also financial situation and other aspects are considered. Checking how competitive is the supplier in the future?
Supplier Assessment Tools:
• Spreadsheets
o Systematic comparison and assessment of quotations from suppliers
• Qualitative assessment
o For suppliers with existing close business relationships
• Vendor rating
o Quantitative data only
• Supplier audit
o Supplier visited by specialists from the customer
• Cost modeling
o Specialist estimates, based on the production technology, the cost of the product. May lead to “should cost” discussions
Describe Supplier Audit
- Focus on future
- New and current suppliers
- Mainly qualitative
- Broad, many aspects
- Time consuming
Describe Vendor Rating
- Based on historical data
- Current Suppliers
- Mainly quantitative
- Limited, few aspects
- Standard data
When is Supplier Audit performed?
- New supplier
- Insecure about current choices
- At periodic intervals to avoid getting the relationship into a routine
Who performs Supplier Audit?
-Cross functional teams
-Purchasers
-Quality experts
-Engineering/ Productions
can specifications be met?
-Finance/Accounting
-Risk manager
Which Dimensions are investigated in Supplier Audit?
- Technical aspects
- Financial
- Quality
- Logistics
- Development
- Environment
- Risk
- Security
What’s the purpose of vendor rating and when is it performed?
- Purpose is to check that suppliers meet requirements in contracts
- Is done after each delivery and random sampling
Which dimensions are investigated in Vendor rating?
- Quality
- Delivery reliability
- Lead time
- Stock availability
- Flexibility
- Responsiveness
Name the steps in the Vendor Rating Process
- Define Performance indicators
- Define standards (goals)
- Collect data
- Analyse, and follow up.
What’s the Weighted Point Evaluation Method?
-define weights and scores, multiply and sum up
What’s AHP?
The Analytic Hierarchy Process (AHP)
-a more advanced decision-making method to rank in cases of multiple criteria
-purpose: select/rank the best supplier on criteria
WHich are the 5 steps of Analytical Hierarchy Process?
- Specify the set of criteria for evaluating the supplier’s proposal
- Obtain pairwise comparisions of the relative importance of the criteria, and compute the weight of the criteria
- Obtain measures that describes the extent to which each supplier achieves the criteria
- Obtain pairwise comparison of the relative importance of the suppliers, with respect to the criteria
- Using steps 2 and 4, compute the priorities of each supplier in achieving the total goal of the hierarchy
Advantages and disadvantages with Analytical Hierarchy Process.
+ relative simple
+handle different types of data, many suppliers etc
- not that effective in taking qualitative evaluation factors into consideration (CSR, etc)
- subjectivity of decision maker in identification of weights can be very high
Why should one use a negotiation plan?
- forces you to prepare in a structured way
- forces you to define goals
- is updated continuously during the negotiation when you get information from the other side
What should a negotiation plan include?
- many different negotiation areas -each with “Most Wanted Results” and “Retreat Goal”
- BATNA
- opportunity to add negotiation areas
- space for thoughts, insights regarding the other side’s negotiation area, interests…
- distribution of roles and responsibilities
What is BATNA?
Best Alternative To a Negotiated Agreement -if original goals of a negotiation are not required, BATNA is your plan B.
What is the process of a negotiation meeting?
- Prepare
- Exploration
- parties get acquainted
- exchange of information
- discover mutual interests and intentions - Reflection
- Digest information
- revise objectives?
- collect missing information - Negotiation
- check other side’s responds
- be cool -do not give in too much (more than planned) - Closing
- repeat and summarize agreements
- make sure that there are no misunderstandings
3 important Factors which can weaken the negotiating position
- Goals&Objectives
- what should the negotiation accomplish? - Authority
- what authority does the negotiator have to make a deal? - Expertise and knowledge
- do the people who are going to conduct the negotiaion have the required expertise and knowledge?
Which are the different structures for multi-unit companies?
- Decentralized purchasing
- Centralized purchasing
CENTERLED PURCHASING:
- Hybrid Structure (pooling)
- Cross-functional sourcing teams
Which are the “new roles” for purchasers compared to the old days?
- Cost reduction and cost planning activities
- Supplier Measurement and improvement activities
- Supplier strategies
- Component Development Strategies
Name some Strategic purchasing Decisions
LONG TERM IMPACT
- Development and implementation of auditing and review programs
- Outsourcing of activities and/or functions
- Establishing long term contracts with preferred suppliers
- Major investments
- Formulating policies concerning transfer pricing
- Development of operational guidelines, procedures and task descriptions
Name some Tactical purchasing Decisions
MEDIUM TERM IMPACT
- Preparing and developing value analysis programs
- Adopting and conducting quality certification programs for suppliers
- Selection and contracting of suppliers in general
Name some Operational purchasing Decisions
SHORT TERM IMPACT
- Ordering process
- Troubleshooting
- Monitoring and evaluation of supplier performance
Describe Decentralized purchasing
o Business Unit is responsible for all purchasing decisions
Describe Centralized purchasing
o Central purchasing department is responsible for all strategic and tactical purchasing decisions.
Describe Hybrid structure (pooling)
o Combination of centralized and decentralized structures, aimed at combining common requirements across operating units.
Describe different forms of pooling (Hybrid structure)
- Voluntary coordination
- Lead buyership – the BU with highest demand of a product buys this product for the whole company
- Lead design concept
Describe Cross-functional sourcing teams (Centerled purchasing)
o Contracting is done centrally by a commodity/category team
o All operational activities are decentralized
What are the criterias to consider regarding centralized vs decentralized purchasing?
• Commonality of purchasing requirements
o More commonality –> centralized due to more economies of scale
• Geographic location
o Geographic spread of BUs –> decentralized
• Supply market structure
o If big and powerful suppliers –> centralized to even out balance of power
• Savings potential
o High volume sensitivity on price –> centralized
• Expertise required
o More expertise –> centralized
• Price fluctuations
o More fluctuations –> centralized
• Customer demands
o Customers dictating what they need to purchase –> decentralized
What are the advantages of Decentralized purchasing?
- Direct responsibility of operating companies
- Stronger customer orientation towards internal user
- Less bureaucratic purchasing procedures/ higher operational flexibility
- Less friction costs due to coordination
- Direct communication with suppliers
What are the disadvantages of Decentralized purchasing?
- Dispersed purchasing power, lack of economies of scale
- No uniform way of handling towards suppliers
- Scattered supply market research
- Limited possibilities for building up specific expertise on purchasing, supply markets and components
- Different commercial purchasing conditions among different operating companies
- More difficult to drive standardization
Explain “Lead buyer”
• BU with greatest volume for a commodity is responsible for corporate agreement
o Collects baseline for all units
o Central function
Explain Category/Commodity manager
- Similar to lead buyer
* Doesn’t have to be the one with highest BU volume
What are important things to measure with regards to purchasing?
- Price/cost
- Product/quality
a. Are products and services delivered by suppliers in conformance with specifications and requirements? - Logistics
a. Supplier evaluation and vendor rating are used - Organization
What are the problems in measuring and evaluating purchasing performance?
- Lack of clear definitions
2. Problems of accurate measurement
Why measure purchasing performance?
- Improved decision making
- Alligning actions to strategy
- Improved communication with other departments
What are the two measurement areas of price/cost and what is done in those areas?
- Price/cost control:
BUDGETS - Price/cost reduction:
- searching new suppliers, value analysis, substitute materials
What are the two areas of product/ quality?
- Purchasing involvement in New Product Development
2. Purchasing contribution to Total Quality Control
What are the three measurement areas of logistics, and what techniques are used?
- Control of materials requisitions
- Control of supplier deliveries
- Control of quantities delivered
Supplier evaluation and Vendor rating
What are the 4 measurement areas of organization?
- Personell
- Management
- Procedures and policies
- Information system
What are the steps of the Development model?
- Transactional orientation
- Commercial orientation
- Purchasing co-ordination
- Internal Integration
- External Integration
- Value Chain Integration
Which are the 3 categories of people problem?
- Perception
- try switching shoes - Emotion
- body language - Communication
- summarize
Explain Offshoring
· Operating outside a country’s boundaries
· Can include both in-house making AND outsourcing
What are the advantages with outsourcing?
· Freeing up of cash
· Optimal usage of knowledge, equipment and experience of the third party
· Increased flexibility
o Fluctuations in workload – no need to fire staff
· More focused on primary processes
· Input through an independent’s party’s point of view
What are the disadvantages with outsourcing?
· Increased dependence on suppliers · Continuous follow-ups are necessary · Communication risk · Leakages of information · Depending on power-balance o Inability to execute contractual performance o Losing essential strategic knowledge
What are the steps in the Outsourcing Process?
- Competence Analysis
- Assessment &approval
- Contract negotiation
- Project execution &transfer
- Managing relatonship
- Contract termination
Describe the Outsourcing Matrix
X Strategic importance of competence
Y Level of competitiveness relative to suppliers
X1Y1: Outsource
X1Y2: Maintain/invest
X2Y1: Collaborate/maintain control
X2Y2: in-house/invest
What are transaction costs? give examples
TC = costs associated with an exchange between partners.
o Finding suppliers/products o Comparing o Selecting o Monitoring o Adjusting to circumstances o Conflict solving
What types of transaction costs are there?
• Ex-ante: cost for the search and evaluation of business partners, cost of
negotiation and contracting.
• Ex-post: costs for keeping the contract, renegotiation, making correction,
handling conflicts.
TCE-analysis:
Let IHC = in-house cost
MP = market price
When should you do internally/outsource?
· IHC < MP + TC → do internally
· IHC = MP + TC → indifferent
· IHC > MP + TC → outsource
What is TCE?
Transaction Cost Economics: organizations want to minimize their costs by using different types of contracts/relations (governance structures).
Which are the 4 methods of specifying services?
- Input specification
o Focus on resources and capabilities of the supplier - Output specification
o Focus on the functionality to be generated by the service - Outcome specification
o Focus on the economic value to be generated by the service - Throughput/process specification
o Focus on the processes needed to produce the service
Describe SLA
Service level agreement (SLA) is important especially if you are buying “performance” It helps specifying performance
How is Service level defined?
Service level is defined in very specific terms by using key performance indicators
What are the 4 main price-mechanisms?
- cost-plus contracts
- fixed pricing
- unit-pricing
- performance-based/incentive contract
