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Chapter 4 procurement flashcards |

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  • Implications to decisions made in the following dimensions of procurement strategy

    Volume consolidation
    Operational integration
    Value management

    Importance and implications of supplier selection, supplier qualification, and supplier management

    Several factors have elevated the importance of procurement to the firm

    Purchased goods and services are among the largest cost elements for most firms: 55 cents of every sales dollar
    The growing emphasis of outsourcing has expanded the supply base of organizations
    This added complexity requires more management attention on the organizational interfaces with suppliers

    Purchasing was historically

    -Purchasing was historically perceived as just a buying function for manufacturing, repair materials, and supplies

    -Purchasing agents tried to get the lowest price possible for the most acceptable quality

    -Transactional focus led to getting the best possible "deal" today
    Did not focus on future transactions
    No concept of supply chain
    Purchasing seldom looked beyond the first-tier supplier
    Purchasing simply responded to the demands of the production group

    Where does procurement look

    Procurement looks up and down the entire supply chain for impacts and opportunities
    Goods and service account for 55 cents of every sales dollar

    Procurement is an organizational capability that

    ensures the firm is positioned to implement its strategies with support from its supply base

    -Focuses on building relationships with suppliers (Tier 1 and beyond)
    -Involvement with outsourcing includes more than just purchasing raw materials and parts
    -Also includes finding alternate sources for manufactured products or services to help manage demand

    Procurement Focuses on Several Issues related to the Firms' Supply Base

    Ensuring Continuous Supply
    Minimizing Inventory Investment
    Quality Improvement of Supply
    Supplier Development
    -Supplier selection
    -Building supplier relationships
    -Supplier continuous improvement
    Lowest Total Cost of Ownership

    Outsourcing -

    Buying materials and components from suppliers instead of making them in-house. The trend has moved toward outsourcing.

    Backward Vertical Integration

    - Refers to acquiring sources of supply

    Forward Vertical Integration -

    Refers to acquiring customer's operations.

    Is make or buy strategic?


    Alternative procurement strategies

    User buy
    Volume consolidations
    Operational integration
    Value management

    User Buy

    Allow users in the organization to doing the routine buying of items considered to be too insignificant to warrant further consideration.

    Volume Consolidations

    Increasing procurement leverage by reducing the total number of suppliers while continuing to minimize risk

    Operational Integration

    -Building partnerships
    -Sharing information and knowledge
    -Identifying linked processes and shared opportunities for improvement

    Value Management

    Extends beyond buyer-seller operations
    Value engineering
    Reducing complexity
    Involving the supplier early in product design

    Total cost of ownership

    1.) Pretransaction components
    2.) Transaction components
    3.) Posttransaction components

    Pretransaction components

    1.) Identifying need
    2.) Investigating sources
    3.)Qualifying sources
    4.) Adding supplier to internal systems
    5.) Educating

    Transaction components

    1.) Price
    2.)Order placement/preparation
    7.)Return of parts
    8.)Folow-up correction

    Postransaction components

    1.) Line fallout
    2.)Defective finished goods rejected before sale
    3.)Field failures
    4.)Repair/replacement in field
    5.) Customer goodwill/reputation of firm
    6.)Cost of repair costs
    7.) Cost of maitnence and repairs

    JIT delivery

    JIT delivery
    More frequent delivery of smaller quantities
    Close cooperation and communication
    JIT II
    Integration of suppliers into manufacturing processes

    Procurement of logistics services

    Performance-based logistics

    Implications to decisions made in the following dimensions of procurement strategy

    Volume consolidation
    Operational integration
    Value management

    Importance and implications of supplier selection, supplier qualification, and supplier management

    Operational Integration

    Primary objective of operational integration is to cut waste, reduce cost, and develop a relationship that allows both buyer and seller to achieve mutual improvements

    Integration can take many forms
    -Buyer providing detailed sales information to supplier
    -Buyers and suppliers working together to redesign linked processes
    -Eliminating duplicated activities performed by both the buyer and supplier

    -Can provide incremental savings of 5% to 25% over the benefits of volume consolidation

    Pareto Principle:

    a small percentage of items account for a large percentage of the dollars spent
    For example, "A" items in an ABC inventory classification system

    Purchasing processes should be tailored to the value and/or criticality of the materials needed

    A segmented approach is used to

    prioritize resources for purchasing
    The most procurement effort goes to the most critical supplies/suppliers

    Spend analysis -

    identifies how much is being spent on each type of product or service across all locations in the firm

    Routine purchases

    items that involve a low percentage of the firms' total spend and involve very little supply risk.

    Bottleneck purchases

    unique procurement problems. Supply risk is high and availability is low. Small number of alternative suppliers.

    Leverage purchases

    Commodity items where many alternatives of supply exist and supply risk is low. Spend is high and there are potential procurement savings

    Leverage purchases

    - commodity items where many alternatives of supply exist and supply risk is low. Spend is high and there are potential procurement savings.

    Critical purchases -

    strategic items and services that involve a high level of expenditure and are vital to the firm's success.

    High level of supply risk

    Bottleneck and Critical

    Low level of supply risk

    Routine and Leverage purchase

    Low value

    Routine and Bottle neck

    High value

    Critical and Leverage purchase

    Supplier Selection and Assessment

    Supplier audits
    Supplier development
    Monitoring performance
    Supplier certification
    E-commerce and procurement
    -Electronic data interchange (EDI)

    Supplier selection considerations

    Product & process technologies
    Willingness to share technologies and information
    Early supplier involvement (ESI)
    Concurrent engineering (CE)
    Cost - Total cost of ownership or acquisition
    Order system & cycle time
    Communication capabilities
    Financial Stability

    ISO (International Organization for Standardization)

    An independent, non-governmental membership organization and the world's largest developer of voluntary International Standards. Made up of 162 member countries, with a Central Secretariat based in Geneva, Switzerland.

    ISO 9000

    A series of quality standards that provide basic definitions for quality assurance and quality management .
    Companies wanting to sell in the global market seek ISO 9000 certification.

    ISO 14000

    A series of standards for environmental management measuring a firm's environmental impact.
    The benefits include reduced energy consumption, environmental liability, reduced waste & pollution, and improved community goodwill.

    Supplier Evaluation:

    A process to identify the best & most reliable suppliers
    Sourcing decisions are made on facts and not on perception
    Frequent feedback can help avoid surprises & maintain good relationships.
    Suppliers should also be allowed to provide constructive feedback to (you) the customer

    Supplier Certification

    "An organization's process for evaluating the quality systems of key suppliers in an effort to eliminate incoming inspections."
    Institute for Supply Management

    A buyer's activities to improve a supplier's performance and/or capabilities based on the following approach:

    Identify critical products & services
    Identify critical suppliers
    Form a cross-functional team (usually lead by Procurement)
    Meet with top management of selected supplier(s)
    Identify key projects to drive performance improvements
    Develop and define details of a formal agreement
    Monitor status & modify strategies

    Describe some examples of Supplier Performance Metrics...

    What types of metrics might I use to rate my suppliers?
    What about metrics for transportation providers?

    Supplier Recognition Programs

    Three Attributes:

    1.)Companies should recognize & celebrate the achievements of their best suppliers.
    2.)Award winners exemplify true partnerships continuous improvement, organizational commitment, & excellence.
    3.)Award-winning suppliers serve as role models for other suppliers.

    Electronic Data Interchange (EDI)

    is the electronic transmission of data between a firm and its suppliers
    Shares information and knowledge such as order entry, planning/scheduling, tracking, delivery, billing and payment

    Internet-based communications offer

    several opportunities for making product information available while overcoming compatibility issues between computer systems

    Electronic catalogs allow rapid access to product info, specifications, pricing and ordering
    Buying exchanges allow sellers or buyers of specific goods or services to find each other on a common web site

    Low value

    Routine and Bottle neck

    High value


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