Terms in this set (143)
The broad set of activities carried out by organizations to analyze sourcing opportunities, develop sourcing strategies, select suppliers, and carry out all the activities required to procure goods and services.
Supply management critical? Global Sourcing *
Competition against global competitors and their supply chains.
Companies that were once content to purchase goods and services from local suppliers are now building relationships with world class suppliers.
Advances in information systems have helped.
To compete globally, you need to source globally.
Supply management critical? Financial impact
% of revenues spent on materials and services
Cost of goods sold
The purchased cost of goods from outside suppliers.
A balance sheet item that shows the amount a company paid for the inventory it has on hand at a particular point in time
The ratio of earnings to sales for a given time period
Return on assets (ROA)
A measure of financial performance defined as Earnings/Total Assets
Profit margin equation
100% X (Pretex earnings/sales)
Return on Assets *
100% X (Pretex earnings/ Total assets)
Every dollar saved in purchasing lowers COGS by $1 and increases pretax profit by $1.
Every dollar saved in purchasing lowers the merchandise inventory figure - and as a result, total assets - by $1.
Profit Leverage effect *
A term used to describe the effect of $1 in cost savings increasing pretax profits by $1 and a $1 increase in sales increasing pretax profits only by $1 multiplied by the pretax profit margin.
Supply management critical? Performance impact
Purchased goods can have a major effect on other dimensions such as quality and delivery performance.
Effect of defective dialysis machine
Interruption in patient treatment
Reduction in the effective capacity for dialysis
Possible medical emergencies
Estimated cost of a failed valve = $1,000
Sourcing dialysis machine example
Supplier A Supplier B
Price per valve $10 $2
% Good 99.8% 95%
Sourcing 5o dialysis machine valves (total costs)
Valves = 50 X $10 = $500
Failure Costs = .2% of all valves fail:
.2% X 50 valves X $1,000 = $100
Total Cost= $600
Supplier B: 50 X $2 = $100
Failure Costs= 5% of all valves fail:
5% X 50 valves X 1,000 = $2,500
Total Cost = $2,600
Is identifying ways to improve long term business performance by better understanding sourcing needs, developing long term sourcing strategies, selecting suppliers and managing the supply base.
The Strategic Sourcing Process
Can provide competitive advantage IF you do this better than your competitors
The strategic sourcing process diagram *
1. Assess opportunities - spend analysis
2. Profile internally & externally - category profile -industry analysis
3. Develop the sourcing strategy - make or buy -total cost analysis -portfolio analysis
4. Screen suppliers % create selection criteria -RFI -Supplier long list
5. Conduct supplier selection -Multi criteria models - supplier shor list
6. Negotiate & Implement Agreement -RFQ -Negotiation -Contracts
The application of quantitative techniques to purchasing data in an effort to better understand spending patterns and identify opportunities for improvement.
Two approaches to creating profiles:
An approach to understand all aspects of a particular sourcing category that could ultimately have an impact on the sourcing strategy.
An approach to provide a more detailed understanding of the characteristics of the external supply base.
The make - or - buy decision
A high-level, often strategic, decision regarding which products or services will be provided internally and which will be provided by external supply chain partners.
The use of resources within the firm to provide products or services.
The use of supply chain partners to provide products or services
*Advantages of insourcing
high degree of control
ability to oversee the entire process
economies of scale and or scope
*disadvantages of insourcing
reduced strategic flexibility
required high investment
potential suppliers may offer superior products and services
*Advantages of outsourcing
high strategic flexibility
low investment risk
improved cash flow
access to state of the art products and services
*Disadvantages of outsourcing
Possibility of choosing a bad supplier
Loss of control over the process and core technologies
"Hollowing out" of the corporation
Increased risk of supply chain disruption
Total cost analysis
A process by which a firm seeks to identify and quantify all of the major costs associated with various sourcing options.
Costs (production and material) tied directly to the level of operations or supply chain activities.
Costs (salaries, lease payments) that are not tied directly to the level of operations or supply chain activity
Direct costs insourcing
Direct costs outsourcing
price (from invoice)
Indirect costs in sourcing
Indirect costs outsourcing
Single Coursing *
The buying firm depends on a single company for all or nearly all of an item or service.
Multiple sourcing *
The buying firm shares its business across multiple suppliers.
Using a single supplier for a certain part or service and another supplier with the same capabilities for a similar part
dual sourcing *
Using two suppliers for the same purchased product or service
Criteria to evaluate suppliers
process and design capabilities
financial condition and cost structure
longer term relationship potential
*Weighted-point evaluation system
An evaluation system to evaluate potential suppliers, track supplier's performance over time, and rank current suppliers.
*Method for Weighted-point evaluation system
Assign weights to performance dimensions.
Rate the performance of each supplier with regard to each dimension.
Calculate the total score.
A request for bids from suppliers with whom a buyer is willing to do business.
Request for quotation
A formal request for the suppliers to prepare bids, based on the terms and conditions set by the buyer.
Description by market grade/industry standard
Description by brand
Description by specification
Description by performance characteristics
A more costly, interactive approach to final supplier selection.
Negotiation is used best when:
The item is a new or technically complex item with only vague specifications.
The purchase requires agreement about a wide range of performance factors.
The buyer requires the supplier to participate in the development efforts.
The supplier cannot determine risks and costs without additional input from the buyer.
The process of creating a detailed purchasing contract to formalize the buyer-supplier relationship.
*Fixed price contract
Stated price does not change
*cost based contract
Price of the good or service is tied to the cost of some other key input or economic factor.
The procure to pay cycle
Follow-up and expediting
Receipt and inspection
Settlement and payment
A document that authorizes a supplier to deliver a product or service and includes the terms and conditions of the sale.
Statement of work (scope of work) (receipt and inspection)
Terms and conditions for a purchased service.
Settlement and payment
May be paid through Electric Funds Transfer (EFT)
Becoming more conscious of the importance of being environmentally friendly and using environmental performance in selecting suppliers.
Reducing packaging, promoting recycling, reducing costs.
Supply chain disruptions
Caused by natural disasters, economic/political events. Threat to revenue streams. Estimated that only 5% to 25% of Fortune 500 companies are prepared to handle a major supply chain disruption.
That part of supply chain management that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customers' requirements.
Logistics management ex
Logistics information systems
*Logistics is critical? Impact on cost, flexibility, and delivery performance
In 2009 $1.1 Trillion or 8% of the GDP (gross domestic product) was spent in Logistics costs.
It was high as 18% in 1980
Advances in information systems have helped reduce costs.
*Logistics is critical? challenges remain
Globalization of markets
Push toward sustainability
Dominates the logistics infrastructure
Has become more cost effective over time
Involves different types of shipments
Dominates the logistics infrastructure due to
Geographic extension of supply chains - as companies develop supply chain relationships with more non—local suppliers.
Greater emphasis on delivery speed and flexibility
Has become more cost effective over time due to
Better scheduling and use of vehicle capacity
More efficient and reliable vehicles
Increased cost competition due to deregulation
Involves different types of shipments *
Direct truck - Shipment made with no stops
Less than truckload (LTL) - Smaller shipment combined with other loads
Ideal for materials with high weight-to-value ratio, especially if delivery speed is not critical.
Examples: farm produce, timber, petroleum-based products.
Imports (no rail or highway option)
Can be sea, river, great lakes, etc.
Ideal for customers with a low weight-to-value ratio, especially if delivery speed or delivery reliability is critical. - high value electronics that may cost thousands.
Higher shipping costs and improvement in other modes have reversed the rise in air growth over the past decade.
Improved demand planning and forecasting
Characteristics similar to Water (high weight to value) but more flexible.
To accommodate growth, rail carriers have doubled the number of lines along busy corridors, changed the physical configuration of the trains, and utilized multimodal solutions.
flexibility to deliver where and when needed
Often the best balance among cost, flexibility and reliability/ speed of delivery
Neither the fastest nor the cheapest option
Highly cost-effective for bulky items
Relatively poor delivery reliability/speed
Highly cost-effective for bulky items
Can be most effective when linked to a multimodal system
Better reliability/ speed of delivery than water
Quickest mode of delivery.
Flexible, especially when linked to highway mode
Often the most expensive mode on a per pound basis
A transportation solution that seeks to exploit the strengths of multiple transportation modes through physical, information, and monetary flows that are as seamless as possible
Standardized shipping containers have helped to drive this multimodal growth.
A specialized rail car the size of a standard truck trailer that can be quickly switched from rail to ground transportation without changing the wheels.
Any operations that stores, repackages, stages, sorts, or centralizes goods or materials.
Warehousing can be used to:
Reduce transportation costs
Improve operational flexibility
Shorten customer lead times
Lower inventory-related costs.
A form of warehousing that pulls together shipments from a number of smaller sources in the same geographic area and combines them into larger and more economical loads
Consolidation warehouse ex *
Cross-docking - Large shipments in small out, usually not stored in the Warehouse
Break-bulk - (single source) Bulk paper and water
A form of warehousing that combines classic warehouse operations with light manufacturing and packaging duties to allow firms to put off final assembly or packaging of goods until the last possible moment.
Receive in bulk and repackage into smaller selling units.
Assortment warehouse *
A form of warehouses in which a wide array of goods is held close to the source of demand in order to assure short customer lead times.
Spot stock warehouses*
A form of warehouses that attempts to position seasonal goods close to the marketplace.
Decision support tools
Real-time simulation and optimization - where to locate the next distribution center, traffic conditions, etc.
Cost estimations - travel times or the number of containers needed
Planning systems *
Carrier selection for outgoing shipments
Scheduling weekly deliveries
Executive Systems (WMS) - Brain *
They control shipment management, receiving management, warehouse management ..... Coordinates and aligns activities.
RFID - radio frequency identification, small chips used to track the position and movement of items. Could replace bar coding (Fed Ex)
Implications for transportation
Using slower and cheaper transportation modes will cause inventory levels within the supply chain to rise.
Using faster and more expensive transportation modes will enable firms to lower inventory levels.
Implication for warehousing:
Warehousing and inventory managers must work closely to achieve the desired business outcome.
A functional strategy which ensures that an organization's logistics choices are consistent with its overall business strategy and support the performance dimensions that targeted customers most value. (Rail or Air, consolidation warehouse or direct shipment, how do you receive it, move it, ship it, manage it)
Does the firm have the volume needed to justify a private logistics system?
low or sporadic needs may be better off contracting for those services.
Would owning a logistics system limit the firm's ability to respond to changes in the marketplace or supply chain?
requires capital, ongoing resources to manage, is your supply chain stable.
Is logistics a core competency for the firm? *
Common or contract carriers for transportation
Third-party (full service) logistics providers (3PL)
The perfect order (logistics performance)
how effectively they serve the customer
Delivered on time (according to buyer's delivery dates)
Undamaged in transit
Percentage of perfect orders
100% X (number ordered processed - failures of orders/ orders processed)
landed cost *
The cost of a product plus all costs driven by logistics activities, such as transportation, warehousing, handling, customs fees, etc.
Generally speaking, this term is associated more with import products.
Reverse logistics system
A complete supply chain dedicated to the reverse flow of products and materials for the purpose of returns, repair, remanufacture, and/or recycling.
Firms have less control over the timing, transportation modes used, and packaging for goods flowing back up the supply chain.
Goods can flow back up the supply chain for a variety of reasons and a reverse logistics system needs to be able to sort and handle these different flows.
Forward logistics systems typically aren't set up to handle reverse logistics flows. It's a different flow, one that just needs to be created.
Weighted center of gravity method
A logistics decision modeling technique that attempts to identify the "best" location for a single warehouse, store, or plant given multiple demand points that differ in location and importance.
wighted center of gravity method equation *
A type of mathematical model used when the decision maker seeks to optimize some objective function subject to some constraints.
A quantitative function that an optimization model seeks to optimize (minimize or maximize).
A quantifiable condition that places limitations on the set of possible solutions.
An estimate of the future level of some variable (usually Demand). - is often the very first step organizations go through when determining long term capacity needs, yearly business plans and shorter term operations and supply chain activities.
Assess long-term capacity needs
Develop budgets, hiring plans, etc.
Plan production or order materials
Market-level - US demand for hybrid vehicles to reach 5 million in 2014
Firm-level - components, spare parts, etc.
Number of current producers and suppliers
Projected aggregate supply levels
Technological and political trends
What do you Forecast the future price to be?
Commodity prices, forward buying, futures contracts. (jet fuel page 254)
Types of forecasts *
Forecasts are almost always wrong by some amount (but they are still useful). Goal is to get a close estimate.
Forecasts for the near term tend to be more accurate. (just like the weather)
Forecasts for groups of products or services tend to be more accurate. (total car sales vs. that of a particular color)
Forecasts are no substitute for calculated values. (cross dept. communication pg 255)
Qualitative forecasting techniques *
Forecasting techniques based on intuition or informed opinion.
Used when data are scarce, not available, or irrelevant.
Quantitative forecasting models *
Forecasting models that use measurable, historical data to generate forecasts.
Time series and causal models
Market surveys (qualitative)*
structured questions submitted to potential customers to solicit opinions
build up forecasts (qualitative) *
individual market segments aggregated up
life cycle analogy method (qualitative)*
Often used with NEW items. Base the forecast of the NEW off of the actual history of a similar product
panel consensus forecasting (qualitative)*
panel of experts working together jointly
delphi method (qualitative)*
panel of experts working independently and then the results shared
Time series forecasting models (quantitative)
Models that use a series of observations in chronological order to develop forecasts.
Causal forecasting models (quantitative)
Models in which forecasts are modeled as a function of something other than time.
Randomness (demand movement) *
Unpredictable movement from one time period to the next.
Trend (demand movement) *
long-term movement up or down in a time series.
seasonality (demand movement) *
a repeated pattern of spikes or drops in a time series associated with certain times of the year.
Last period model
Very simple, uses demand from the current period to forecast the next period, the risk with this model is that it is only based on one observation
Moving average model
A time series forecasting model that derives a forecast by taking an average of recent demand value. Less susceptible to random swings in demand.
Weighted moving average model
A form of the moving average model that allows the actual weights applied to past observations to differ.
Exponential smoothing model
A form of the moving average model in which the forecast for the next period is calculated as the weighted average of the current period's actual value and forecast.
Linear Regression *
A statistical technique that expresses a forecast variable as a linear function of some independent variable
Repeated patterns or drops in a time series associated with certain times of the year.
Gas prices - summer months
Sun Tan Lotion - Summer months
Cough syrup - winter
Allergy medication - spring
Batteries - Xmas
Seasonal adjustment (4 step procedure) *
For each of the demand values in the time series, calculate the corresponding forecast using the unadjusted forecast model.
For each demand value, calculate (Demand/Forecast). If the ratio is less than 1, then the forecast model overforecasted; if it is greater than 1, then the model underforecasted.
If the time series covers multiple years, take the average (Demand/Forecast) for corresponding months or quarters to derive the seasonal index. Otherwise use (Demand/Forecast) calculated in Step 2 as the seasonal index.
Multiply the unadjusted forecast by the seasonal index to get the seasonally adjusted forecast value.
Calculate the (Demand/Forecast) for each of the time periods: *
January 2012: (Demand/Forecast) = 51/106.9 = .477
January 2013: (Demand/Forecast) = 112/205.6 = .545
Calculate the monthly seasonal indices:
Monthly seasonal index, January = (.477 + .545)/2 = .511
Calculate the seasonally adjusted forecasts
Seasonally adjusted forecast = unadjusted forecast x seasonal index
January 2012: 106.9 x .511 = 54.63
January 2013: 205.6 x .511 = 105.06
Causal Forecasting Models
changes in the variable we are looking to forecast are caused by something other than time.
Linear Regression *
home sales vs. mortgage rates
Multiple regression *
food consumed by 20 football players
causal forecasting models examples
variable Cause of change
dollars spent on drought relief rainfall levels
Mortgage refinancing applications intrest rates
Amount of for eaten at a party Number and size of guests
Forecast accuracy *
How do we know:
-If a forecast model is "best"?
-If a forecast model is still working?
-What types of errors a particular forecasting model is prone to make?
Need measures of forecast accuracy
Forecast error for period (i)
# of errors per period
mean forecast error (MFE)
negative MFE suggests the model over forecasted, while if positive it suggests under forecasting.
mean absolute deviation (MAD) *
tracks the size of the error regardless of direction, a much better indicator.
Mean absolute percentage error (MAPE) *
absolute value of the forecast errors
used to flag a forecasting model that may attention.
Collaborative Planning, Forecasting, Replenishment (CPFR) *
A set of business processes, backed up by information technology, in which members agree to mutual business objectives and measures, develop joint sales and operational plans, and collaborate electronically to generate and update sales forecasts and replenishment plans.