Supply Management Chapter 7. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall7 - 2 1. Define Supply Management.

Supply Management

Chapter 7

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 7 - 2

7

1. Define Supply Management.


7 Supply Management

Supply Management – 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.


7

2. Why is Supply Management very critical to the success of any

business?


7 Why is Supply Management critical?

Global Sourcing Competition against global competitors and their

supply chains. Advances in information systems have helped.



Financial Impact

Table 7.1



Financial Impact Cost of goods sold – The purchased cost of goods from

outside suppliers. Merchandise inventory – A balance sheet item that shows

the amount a company paid for the inventory it has on hand at a particular point in time.

Profit margin – 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


7 Profit Leverage – Example 7.1

Financial Impact Every dollar saved in purchasing lowers COGS by

$1 and increases pretax profit 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.

Every dollar saved in purchasing lowers the merchandise inventory figure – and as a result, total assets – by $1.



Performance Impact Purchased goods can have a major effect on other

dimensions such as quality and delivery performance.


7

3. What are the six steps in the strategic sourcing process?


7 The Strategic Sourcing Process

Figure 7.1


7 Assess Opportunities

Spend Analysis – The application of quantitative techniques to purchasing data in an effort to better understand spending patterns and identify opportunities for improvement.


7Assess Opportunities – Example 7.3

Examine the trends and impact of spending.

Table 7.3

Figure 7.2


7 Profile Internally and Externally

Two approaches to creating profiles: Category profile – An approach to understand all

aspects of a particular sourcing category that could ultimately have an impact on the sourcing strategy.

Industry Analysis – An approach to provide a more detailed understanding of the characteristics of the external supply base.


7 Develop the Sourcing Strategy

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.• Insourcing – The use of resources within the firm to

provide products or services.• Outsourcing – The use of supply chain partners to

provide products or services.


7

4 and 5. What are the advantages and disadvantages of insourcing

and outsourcing?



Advantages and Disadvantages of

Insourcing and Outsourcing

Table 7.6



Factors that affect the decision

to Insource or Outsource.

Table 7.7



Total cost analysis – A process by which a firm seeks to identify and quantify all of the major costs associated with various sourcing options. Direct costs – Costs tied directly to the level of

operations or supply chain activities. Indirect costs – Costs that are not tied directly to

the level of operations or supply chain activity.



Insourcing and Outsourcing Costs

Table 7.8



Portfolio analysis – A structured approach used by decision makers to develop a sourcing strategy for a product or service, based on the value potential and the relative complexity or risk represented by a sourcing opportunity.


7

6. What are the four quadrants in the portfolio analysis?



Portfolio Analysis The Routine Quadrant – Readily available products or services (small

% of total).• Electronic Data Interchange

The Leverage Quadrant – Standardized and readily available products or services (large % of total).• Preferred suppliers

The Bottleneck Quadrant – Unique or complex products or services supplied by few suppliers.

The Critical Quadrant - Unique or complex products or services supplied by few suppliers, representing large % of total.



Bottleneck Critical

Routine Leverage

Value Potential

High

Complexity or Risk Impact

HighLow

Low

Portfolio Analysis


7

7. What are the four types of sourcing options?



Single sourcing – 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.

Cross sourcing – 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.


7 Screen Suppliers and Create Selection Criteria

Criteria to evaluate suppliers

Process and design capabilities

Management capability

Financial condition and cost structure

Longer-term relationship potential


7 Conduct Supplier Selection

Weighted-point evaluation system – An evaluation system to evaluate potential suppliers, track supplier’s performance over time, and rank current suppliers.

Method Assign weights to performance dimensions. Rate the performance of each supplier with regard to each dimension. Calculate the total score.


7 Supplier Selection – Example 7.6

Summary Data for Three Possible Suppliers

Table 7.11



5 = excellent

4 = good

3 = average

2 = fair

1 = poor

Scoring Scheme Criteria Weights

WPrice = 0.3

WQuality = 0.4

WDelivery = 0.3

n

YYXYX WePerformancScore

1



Performance Values for Alternative Suppliers

Table 7.13



Total Scores for Alternative SuppliersScore Aardvark = (4 x 0.3) + (3 x 0.4) + (4 x 0.3) = 3.6

Score Beverly = (3 x 0.3) + (5 x 0.4) + (2 x 0.3) = 3.5

Score Conan = (5 x 0.3) + (1 x 0.4) + (1 x 0.3) = 2.2

Aardvark should improve their quality.Beverly Hills should improve their delivery and price.

Conan is out of the running as a potential supplier.


7 Negotiate and Implement Agreements

Competitive bidding – 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



Negotiating – 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.



Contracting – 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.


7

8. What are the five steps in the Procure-To-Pay cycle?


7 The Procure-to-Pay Cycle

Ordering Purchase order – A document that authorizes a supplier to deliver a

product or service and includes the terms and conditions of the sale.

Follow-up and expediting Receipt and inspection

Statement of work (scope of work) – Terms and conditions for a purchased service.

Settlement and payment May be paid through Electric Funds Transfer (EFT)

Records maintenance


7

9. What are two trends in supply management?


7 Trends in Supply Management

Sustainable Supply Becoming more conscious of the importance of

being environmentally friendly and using environmental performance in selecting suppliers.

Ensuring compliance with regulations. Reducing packaging, promoting recycling,

reducing costs.


7 Trends in Supply Management

Supply Chain Disruptions Caused by natural disasters, economic/political

events. Cause a big threat to revenue streams. Increased risk due to outsourcing to global

suppliers.

Supply Management Chapter 7. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall7 - 2 1. Define Supply Management.

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