SCM 301 Chapter Notes - Chapter 7: Accounts Payable, Electronic Data Interchange, Spend Analysis
Introduction
Supply Management: 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
•
7.1 Why Supply Management is Critical
Global Sourcing
Firms do not compete only against global competitors by
against their competitors' supply chains
○
Companies that were once content to purchase services and
goods from local suppliers now seek to build relationships
with world-class suppliers
○
To compete globally, companies need to source locally
○
To keep up with global competition and tap into the abilities
of world-class suppliers, many companies have put in place
global sourcing systems
○
Advances in information systems have served as a catalyst for
global sourcing efforts
Organization can maximize buying power by
consolidating purchasing requirements for dozens of
sites and suppliers around the world into one large order
§
○
Applies to services and business processes, as well as
manufactured goods
○
•
Financial Impact
When much of a firm's revenue is spent on materials and
services, supply management represents a major
opportunity to increase profitability through what is known
as the profit leverage effect
○
Cost of Goods Sold (COGS): the purchases cost of goods from
outside suppliers
○
Merchandise Inventory: balance sheet item that shows the
amount of a company paid for the inventory it has on hand at
a particular in time
○
Profit Margin: the ratio of earnings to sales for a given time
period
!"#$%&'()"*%+,-../012)"+%+*3
4)563 7
○
Return on Assets (ROA): a measure of financial performance;
generally defined as earnings/total assets
Higher ROA values are preferred because they indicate
that the firm is able to generate higher earnings from the
same asset base
§
86&9"+'#+':336&3';8<:=,-../'012)"+%+*3
:336&3 7
○
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 cost of goods sold
by one dollar and increases pretax profits by one dollar
○
Every dollar saved in purchasing also lowers inventory and, as
a result, total asets
○
•
Performance Impact
Cost is not the only consideration
○
Purchased goods and services can have a major effect on
other performance dimensions including quality and delivery
performance
○
•
7.2 The Strategic Sourcing Process
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
•
Step 1: Assess Opportunities
Conducted to improve the performance of a firm's existing
sourcing activities
○
Spend Analysis: the application of quantitative techniques to
purchasing data in an effort to better understand spending
patterns and identify opportunities for improvement
No single correct approach
§
○
•
Step 2: Profile Internally and Externally
Decision makers often need to develop a more detailed
picture, or profile, of the internal needs of the organization,
as well as the characteristics of the external supply base
○
Two approaches that sourcing managers use to create these
profiles are category profiles and industry analysis
Category Profile: objective is to understand all aspects of
a particular sourcing category that could ultimately have
an impact on the sourcing strategy
§
Industry Analysis: profiles the major forces and trends
that are impacting an industry, including pricing,
competition, regulatory forces, substitution, technology
changes, and supply/demand trends
§
○
Maverick Spending: spending that occurs when internal
customers purchase directly from nonqualified suppliers and
bypass established purchasing procedures
○
•
Step 3: 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 servicesthatb
§
>?;(=,>?';@=
A,B ?C
!D?EF
○
•
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, such as the production of a
good or service, or transportation
§
Indirect Costs: costs that are not tied directly to the level
of operations or supply chain activity
§
Managers must also consider the time frame of the
make or buy decision
§
○
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
The "Routine" Quadrant: products/services are readily
available and represent a relatively small portion of a
firm's purchasing expenditures (Generics)
Simplify Processes□
Relative power is not an issue□
Low Value to the Firm□
Low Supply Complexity or Risk (# of suppliers)□
Electronic Data Interchange (EDI): info technology
that allows supply chain partners to transfer data
electronically between their information systems
□
§
The "Leverage" Quadrant: tend to be standardized and
readily available, represent a significant portion of spend
(Commodities)
Use purchase power□
Buyer has more power□
High Value to the Firm□
Low Supply Complexity or Risk (# of suppliers)□
Preferred Supplier: supplier that has demonstrated
its performance capabilities through previous
purchase contracts and therefore receives
preference during the supplier selection process
□
§
The "Bottleneck" Quadrant: have unique or complex
requirements that can be met only by a few potential
suppliers; primary goal is to not run out (Strategics)
Form Partnerships□
Buyer/supplier share power□
High Value to the Firm□
High Supply Complexity or Risk (# of suppliers)□
May involve carrying extra inventory to protect
against interruptions in supply or contracting with
multiple vendors to reduce supply chain risks
□
§
The "Critical" Quadrant: product/services have complex
or unique requirements coupled with a limited supply
base "Problems"
Ensure access to supply□
Supplier has more power□
Low Value to the Firm□
High Supply Complexity or Risk (# of suppliers)□
§
○
Single Sourcing: a sourcing strategy in which the buying firm
depends on a single company for all or nearly all of a
particular item or service
○
Multiple Sourcing: a sourcing strategy in which the buying
firm shares its business across multiple suppliers
○
Cross Sourcing: a sourcing strategy in which a company uses a
single supplier for one particular part or service and another
supplier with the same capabilities for a different part or
service, with the understanding that each supplier can act as
a backup for the other supplier
○
Dual Sourcing: a sourcing strategy in which two suppliers are
used for the same purchased product or service
○
Step 4: Screen Suppliers and Create Selection Criteria
Qualitative criteria to evaluate suppliers includes:
Process and design capabilities
§
Management capabilities
§
Financial condition and cost structure
§
Longer-term relationship potential
§
○
Request for Information (RFI): an inquiry to a potential
supplier's products or services for potential use in the
business; the inquiry can provide certain business
requirements or be of a more exploratory nature
○
•
Step 5: Conduct Supplier Selection
Multicriteria decision models: models that allow decision
makers to evaluate various alternatives across multiple
decision criteria
○
Weighted-point evaluation system
Multicriteria decisions models: models that allow
decision makers to evaluate various alternatives across
multiple decision criteria
§
Supplier evaluation requires a significant amount of
judgement in awarding points and assigning weights
§
○
•
Step 6: Negotiate and Implement Agreements
Competitive Bidding: entails a request for bids from suppliers
with whom a buyer is willing to do business
Most effective when:
The buying firm can provide qualified suppliers with
clear descriptions of the items or services to be
purchased
□
Volume is high enough to justify the cost and effort□
The buying firm does not have a preferred supplier□
§
Request for Quotation (ROQ): 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 method that is used when the
requirements are well understood and there is
common agreement between supply chain partners
about what certain terms means
□
Description by specification: description method
that is used when an organization needs to provide
very detailed descriptions of the characteristics of
an item or service
□
Description by performance characteristics:
description method that focuses attention on the
outcomes the customer wants rather than on the
precise configuration of the product or service
□
§
○
Negotiating: more costly, interactive approach to final
supplier selection
Best when:
The item is a new and/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 effort
□
The supplier cannot determine risks and costs
without additional input from the buyer
□
§
○
Contracting: a detailed purchasing contact is required to
formalize the buyer-supplier relationship
Contract can be required if the size of the purchase
exceeds a predetermined monetary value or if there are
specific business requirements that need to be put in
writing
Fixed-Price Contract: a type of purchasing contract
in which the stated price does not change,
regardless of fluctuations in general overall
economic conditions, industry competition, levels of
supply, market prices, or other environmental
changes
□
Cost-Based Contract: a type of purchasing contract
in which the price of a good or service is tied to the
cost of some key input(s) or other economic factors,
such as interest rates
□
§
○
•
7.3 The Procure-to-Pay Cycle
Procure-to-Pay Cycle: set of activities required to first identify a
need, assign a supplier to meet that need, approve the
specification or scope, acknowledge receipt, and submit payment
to the supplier
Five Main Steps of the procure-to-pay cycle
Ordering
§
Follow-up and expediting
§
Receipt and inspection
§
Settlement and payment
§
Records maintenance
§
○
•
Ordering
Purchase Order (PO): a document that authorizes a supplier
to deliver a product or service and often includes key terms
and conditions, such as price, delivery, and quality
requirements
○
•
Follow-up and Expediting
Someone must monitor the status of open purchase orders
○
May be times when the buying firm has to expedite an order
or work with a supplier to avoid shipment delays
○
Minimize order follow-up by selecting only the best suppliers
and developing internally stable forecasting and ordering
systems
○
•
Receipt and Inspection
When an order arrives at a buyer's location it is received and
inspected to ensure that the right quantity was shipped and
that it was not damaged in transit
○
If the product was provided on time, it will be entered into
the company's purchasing transaction system, physical
products become part of the company's working inventory
○
Statement of Work (SOW): terms and conditions for a
purchased service that indicate, among other things, what
services will be performed and how the service provider will
be evaluated
○
•
Settlement and Payment
After delivery, the buying firm will issue an authorization for
payment to the supplier
○
Payment is then made through the firm's account payable
department
○
Electronic Funds Transfer (EFT): the automatic transfer of
payment from a buyer's bank account to the supplier's bank
account
○
•
Record Maintenance
After delivery and payment, a record of the critical events
associated with the purchase is entered into a supplier
performance database
The database accumulates critical performance data
over an extended period
§
Data often used in future negotiations and dealings with
the supplier in question
§
Data can also support spend analysis efforts
§
○
•
Chapter 7: Sourcing
Monday, April 16, 2018
12:17 PM
Introduction
Supply Management: 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
•
7.1 Why Supply Management is Critical
Global Sourcing
Firms do not compete only against global competitors by
against their competitors' supply chains
○
Companies that were once content to purchase services and
goods from local suppliers now seek to build relationships
with world-class suppliers
○
To compete globally, companies need to source locally
○
To keep up with global competition and tap into the abilities
of world-class suppliers, many companies have put in place
global sourcing systems
○
Advances in information systems have served as a catalyst for
global sourcing efforts
Organization can maximize buying power by
consolidating purchasing requirements for dozens of
sites and suppliers around the world into one large order
§
○
Applies to services and business processes, as well as
manufactured goods
○
•
Financial Impact
When much of a firm's revenue is spent on materials and
services, supply management represents a major
opportunity to increase profitability through what is known
as the profit leverage effect
○
Cost of Goods Sold (COGS): the purchases cost of goods from
outside suppliers
○
Merchandise Inventory: balance sheet item that shows the
amount of a company paid for the inventory it has on hand at
a particular in time
○
Profit Margin: the ratio of earnings to sales for a given time
period
!"#$%&'()"*%+,-../012)"+%+*3
4)563 7
○
Return on Assets (ROA): a measure of financial performance;
generally defined as earnings/total assets
Higher ROA values are preferred because they indicate
that the firm is able to generate higher earnings from the
same asset base
§
86&9"+'#+':336&3';8<:=,-../'012)"+%+*3
:336&3 7
○
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 cost of goods sold
by one dollar and increases pretax profits by one dollar
○
Every dollar saved in purchasing also lowers inventory and, as
a result, total asets
○
•
Performance Impact
Cost is not the only consideration
○
Purchased goods and services can have a major effect on
other performance dimensions including quality and delivery
performance
○
•
7.2 The Strategic Sourcing Process
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
•
Step 1: Assess Opportunities
Conducted to improve the performance of a firm's existing
sourcing activities
○
Spend Analysis: the application of quantitative techniques to
purchasing data in an effort to better understand spending
patterns and identify opportunities for improvement
No single correct approach
§
○
•
Step 2: Profile Internally and Externally
Decision makers often need to develop a more detailed
picture, or profile, of the internal needs of the organization,
as well as the characteristics of the external supply base
○
Two approaches that sourcing managers use to create these
profiles are category profiles and industry analysis
Category Profile: objective is to understand all aspects of
a particular sourcing category that could ultimately have
an impact on the sourcing strategy
§
Industry Analysis: profiles the major forces and trends
that are impacting an industry, including pricing,
competition, regulatory forces, substitution, technology
changes, and supply/demand trends
§
○
Maverick Spending: spending that occurs when internal
customers purchase directly from nonqualified suppliers and
bypass established purchasing procedures
○
•
Step 3: 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 servicesthatb
§
>?;(=,>?';@=
A,B ?C
!D?EF
○
•
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, such as the production of a
good or service, or transportation
§
Indirect Costs: costs that are not tied directly to the level
of operations or supply chain activity
§
Managers must also consider the time frame of the
make or buy decision
§
○
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
The "Routine" Quadrant: products/services are readily
available and represent a relatively small portion of a
firm's purchasing expenditures (Generics)
Simplify Processes□
Relative power is not an issue□
Low Value to the Firm□
Low Supply Complexity or Risk (# of suppliers)□
Electronic Data Interchange (EDI): info technology
that allows supply chain partners to transfer data
electronically between their information systems
□
§
The "Leverage" Quadrant: tend to be standardized and
readily available, represent a significant portion of spend
(Commodities)
Use purchase power□
Buyer has more power□
High Value to the Firm□
Low Supply Complexity or Risk (# of suppliers)□
Preferred Supplier: supplier that has demonstrated
its performance capabilities through previous
purchase contracts and therefore receives
preference during the supplier selection process
□
§
The "Bottleneck" Quadrant: have unique or complex
requirements that can be met only by a few potential
suppliers; primary goal is to not run out (Strategics)
Form Partnerships□
Buyer/supplier share power□
High Value to the Firm□
High Supply Complexity or Risk (# of suppliers)□
May involve carrying extra inventory to protect
against interruptions in supply or contracting with
multiple vendors to reduce supply chain risks
□
§
The "Critical" Quadrant: product/services have complex
or unique requirements coupled with a limited supply
base "Problems"
Ensure access to supply□
Supplier has more power□
Low Value to the Firm□
High Supply Complexity or Risk (# of suppliers)□
§
○
Single Sourcing: a sourcing strategy in which the buying firm
depends on a single company for all or nearly all of a
particular item or service
○
Multiple Sourcing: a sourcing strategy in which the buying
firm shares its business across multiple suppliers
○
Cross Sourcing: a sourcing strategy in which a company uses a
single supplier for one particular part or service and another
supplier with the same capabilities for a different part or
service, with the understanding that each supplier can act as
a backup for the other supplier
○
Dual Sourcing: a sourcing strategy in which two suppliers are
used for the same purchased product or service
○
Step 4: Screen Suppliers and Create Selection Criteria
Qualitative criteria to evaluate suppliers includes:
Process and design capabilities
§
Management capabilities
§
Financial condition and cost structure
§
Longer-term relationship potential
§
○
Request for Information (RFI): an inquiry to a potential
supplier's products or services for potential use in the
business; the inquiry can provide certain business
requirements or be of a more exploratory nature
○
•
Step 5: Conduct Supplier Selection
Multicriteria decision models: models that allow decision
makers to evaluate various alternatives across multiple
decision criteria
○
Weighted-point evaluation system
Multicriteria decisions models: models that allow
decision makers to evaluate various alternatives across
multiple decision criteria
§
Supplier evaluation requires a significant amount of
judgement in awarding points and assigning weights
§
○
•
Step 6: Negotiate and Implement Agreements
Competitive Bidding: entails a request for bids from suppliers
with whom a buyer is willing to do business
Most effective when:
The buying firm can provide qualified suppliers with
clear descriptions of the items or services to be
purchased
□
Volume is high enough to justify the cost and effort□
The buying firm does not have a preferred supplier□
§
Request for Quotation (ROQ): 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 method that is used when the
requirements are well understood and there is
common agreement between supply chain partners
about what certain terms means
□
Description by specification: description method
that is used when an organization needs to provide
very detailed descriptions of the characteristics of
an item or service
□
Description by performance characteristics:
description method that focuses attention on the
outcomes the customer wants rather than on the
precise configuration of the product or service
□
§
○
Negotiating: more costly, interactive approach to final
supplier selection
Best when:
The item is a new and/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 effort
□
The supplier cannot determine risks and costs
without additional input from the buyer
□
§
○
Contracting: a detailed purchasing contact is required to
formalize the buyer-supplier relationship
Contract can be required if the size of the purchase
exceeds a predetermined monetary value or if there are
specific business requirements that need to be put in
writing
Fixed-Price Contract: a type of purchasing contract
in which the stated price does not change,
regardless of fluctuations in general overall
economic conditions, industry competition, levels of
supply, market prices, or other environmental
changes
□
Cost-Based Contract: a type of purchasing contract
in which the price of a good or service is tied to the
cost of some key input(s) or other economic factors,
such as interest rates
□
§
○
•
7.3 The Procure-to-Pay Cycle
Procure-to-Pay Cycle: set of activities required to first identify a
need, assign a supplier to meet that need, approve the
specification or scope, acknowledge receipt, and submit payment
to the supplier
Five Main Steps of the procure-to-pay cycle
Ordering
§
Follow-up and expediting
§
Receipt and inspection
§
Settlement and payment
§
Records maintenance
§
○
•
Ordering
Purchase Order (PO): a document that authorizes a supplier
to deliver a product or service and often includes key terms
and conditions, such as price, delivery, and quality
requirements
○
•
Follow-up and Expediting
Someone must monitor the status of open purchase orders
○
May be times when the buying firm has to expedite an order
or work with a supplier to avoid shipment delays
○
Minimize order follow-up by selecting only the best suppliers
and developing internally stable forecasting and ordering
systems
○
•
Receipt and Inspection
When an order arrives at a buyer's location it is received and
inspected to ensure that the right quantity was shipped and
that it was not damaged in transit
○
If the product was provided on time, it will be entered into
the company's purchasing transaction system, physical
products become part of the company's working inventory
○
Statement of Work (SOW): terms and conditions for a
purchased service that indicate, among other things, what
services will be performed and how the service provider will
be evaluated
○
•
Settlement and Payment
After delivery, the buying firm will issue an authorization for
payment to the supplier
○
Payment is then made through the firm's account payable
department
○
Electronic Funds Transfer (EFT): the automatic transfer of
payment from a buyer's bank account to the supplier's bank
account
○
•
Record Maintenance
After delivery and payment, a record of the critical events
associated with the purchase is entered into a supplier
performance database
The database accumulates critical performance data
over an extended period
§
Data often used in future negotiations and dealings with
the supplier in question
§
Data can also support spend analysis efforts
§
○
•
Chapter 7: Sourcing
Monday, April 16, 2018
12:17 PM
Introduction
Supply Management: 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
•
7.1 Why Supply Management is Critical
Global Sourcing
Firms do not compete only against global competitors by
against their competitors' supply chains
○
Companies that were once content to purchase services and
goods from local suppliers now seek to build relationships
with world-class suppliers
○
To compete globally, companies need to source locally
○
To keep up with global competition and tap into the abilities
of world-class suppliers, many companies have put in place
global sourcing systems
○
Advances in information systems have served as a catalyst for
global sourcing efforts
Organization can maximize buying power by
consolidating purchasing requirements for dozens of
sites and suppliers around the world into one large order
§
○
Applies to services and business processes, as well as
manufactured goods
○
•
Financial Impact
When much of a firm's revenue is spent on materials and
services, supply management represents a major
opportunity to increase profitability through what is known
as the profit leverage effect
○
Cost of Goods Sold (COGS): the purchases cost of goods from
outside suppliers
○
Merchandise Inventory: balance sheet item that shows the
amount of a company paid for the inventory it has on hand at
a particular in time
○
Profit Margin: the ratio of earnings to sales for a given time
period
!"#$%&'()"*%+,-../0
1
2)"+%+*3
4)563
7
○
Return on Assets (ROA): a measure of financial performance;
generally defined as earnings/total assets
Higher ROA values are preferred because they indicate
that the firm is able to generate higher earnings from the
same asset base
§
86&9"+'#+':336&3'
;
8<:
=
,-../'0
1
2)"+%+*3
:336&3
7
○
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 cost of goods sold
by one dollar and increases pretax profits by one dollar
○
Every dollar saved in purchasing also lowers inventory and, as
a result, total asets
○
•
Performance Impact
Cost is not the only consideration
○
Purchased goods and services can have a major effect on
other performance dimensions including quality and delivery
performance
○
•
7.2 The Strategic Sourcing Process
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
•
Step 1: Assess Opportunities
Conducted to improve the performance of a firm's existing
sourcing activities
○
Spend Analysis: the application of quantitative techniques to
purchasing data in an effort to better understand spending
patterns and identify opportunities for improvement
No single correct approach
§
○
•
Step 2: Profile Internally and Externally
Decision makers often need to develop a more detailed
picture, or profile, of the internal needs of the organization,
as well as the characteristics of the external supply base
○
Two approaches that sourcing managers use to create these
profiles are category profiles and industry analysis
Category Profile: objective is to understand all aspects of
a particular sourcing category that could ultimately have
an impact on the sourcing strategy
§
Industry Analysis: profiles the major forces and trends
that are impacting an industry, including pricing,
competition, regulatory forces, substitution, technology
changes, and supply/demand trends
§
○
Maverick Spending: spending that occurs when internal
customers purchase directly from nonqualified suppliers and
bypass established purchasing procedures
○
•
Step 3: 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 servicesthatb
§
>?;(=,>?';@=
A,B ?C
!D?EF
○
•
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, such as the production of a
good or service, or transportation
§
Indirect Costs: costs that are not tied directly to the level
of operations or supply chain activity
§
Managers must also consider the time frame of the
make or buy decision
§
○
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
The "Routine" Quadrant: products/services are readily
available and represent a relatively small portion of a
firm's purchasing expenditures (Generics)
Simplify Processes□
Relative power is not an issue□
Low Value to the Firm□
Low Supply Complexity or Risk (# of suppliers)□
Electronic Data Interchange (EDI): info technology
that allows supply chain partners to transfer data
electronically between their information systems
□
§
The "Leverage" Quadrant: tend to be standardized and
readily available, represent a significant portion of spend
(Commodities)
Use purchase power□
Buyer has more power□
High Value to the Firm□
Low Supply Complexity or Risk (# of suppliers)□
Preferred Supplier: supplier that has demonstrated
its performance capabilities through previous
purchase contracts and therefore receives
preference during the supplier selection process
□
§
The "Bottleneck" Quadrant: have unique or complex
requirements that can be met only by a few potential
suppliers; primary goal is to not run out (Strategics)
Form Partnerships□
Buyer/supplier share power□
High Value to the Firm□
High Supply Complexity or Risk (# of suppliers)□
May involve carrying extra inventory to protect
against interruptions in supply or contracting with
multiple vendors to reduce supply chain risks
□
§
The "Critical" Quadrant: product/services have complex
or unique requirements coupled with a limited supply
base "Problems"
Ensure access to supply□
Supplier has more power□
Low Value to the Firm□
High Supply Complexity or Risk (# of suppliers)□
§
○
Single Sourcing: a sourcing strategy in which the buying firm
depends on a single company for all or nearly all of a
particular item or service
○
Multiple Sourcing: a sourcing strategy in which the buying
firm shares its business across multiple suppliers
○
Cross Sourcing: a sourcing strategy in which a company uses a
single supplier for one particular part or service and another
supplier with the same capabilities for a different part or
service, with the understanding that each supplier can act as
a backup for the other supplier
○
Dual Sourcing: a sourcing strategy in which two suppliers are
used for the same purchased product or service
○
Step 4: Screen Suppliers and Create Selection Criteria
Qualitative criteria to evaluate suppliers includes:
Process and design capabilities
§
Management capabilities
§
Financial condition and cost structure
§
Longer-term relationship potential
§
○
Request for Information (RFI): an inquiry to a potential
supplier's products or services for potential use in the
business; the inquiry can provide certain business
requirements or be of a more exploratory nature
○
•
Step 5: Conduct Supplier Selection
Multicriteria decision models: models that allow decision
makers to evaluate various alternatives across multiple
decision criteria
○
Weighted-point evaluation system
Multicriteria decisions models: models that allow
decision makers to evaluate various alternatives across
multiple decision criteria
§
Supplier evaluation requires a significant amount of
judgement in awarding points and assigning weights
§
○
•
Step 6: Negotiate and Implement Agreements
Competitive Bidding: entails a request for bids from suppliers
with whom a buyer is willing to do business
Most effective when:
The buying firm can provide qualified suppliers with
clear descriptions of the items or services to be
purchased
□
Volume is high enough to justify the cost and effort□
The buying firm does not have a preferred supplier□
§
Request for Quotation (ROQ): 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 method that is used when the
requirements are well understood and there is
common agreement between supply chain partners
about what certain terms means
□
Description by specification: description method
that is used when an organization needs to provide
very detailed descriptions of the characteristics of
an item or service
□
Description by performance characteristics:
description method that focuses attention on the
outcomes the customer wants rather than on the
precise configuration of the product or service
□
§
○
Negotiating: more costly, interactive approach to final
supplier selection
Best when:
The item is a new and/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 effort
□
The supplier cannot determine risks and costs
without additional input from the buyer
□
§
○
Contracting: a detailed purchasing contact is required to
formalize the buyer-supplier relationship
Contract can be required if the size of the purchase
exceeds a predetermined monetary value or if there are
specific business requirements that need to be put in
writing
Fixed-Price Contract: a type of purchasing contract
in which the stated price does not change,
regardless of fluctuations in general overall
economic conditions, industry competition, levels of
supply, market prices, or other environmental
changes
□
Cost-Based Contract: a type of purchasing contract
in which the price of a good or service is tied to the
cost of some key input(s) or other economic factors,
such as interest rates
□
§
○
•
7.3 The Procure-to-Pay Cycle
Procure-to-Pay Cycle: set of activities required to first identify a
need, assign a supplier to meet that need, approve the
specification or scope, acknowledge receipt, and submit payment
to the supplier
Five Main Steps of the procure-to-pay cycle
Ordering
§
Follow-up and expediting
§
Receipt and inspection
§
Settlement and payment
§
Records maintenance
§
○
•
Ordering
Purchase Order (PO): a document that authorizes a supplier
to deliver a product or service and often includes key terms
and conditions, such as price, delivery, and quality
requirements
○
•
Follow-up and Expediting
Someone must monitor the status of open purchase orders
○
May be times when the buying firm has to expedite an order
or work with a supplier to avoid shipment delays
○
Minimize order follow-up by selecting only the best suppliers
and developing internally stable forecasting and ordering
systems
○
•
Receipt and Inspection
When an order arrives at a buyer's location it is received and
inspected to ensure that the right quantity was shipped and
that it was not damaged in transit
○
If the product was provided on time, it will be entered into
the company's purchasing transaction system, physical
products become part of the company's working inventory
○
Statement of Work (SOW): terms and conditions for a
purchased service that indicate, among other things, what
services will be performed and how the service provider will
be evaluated
○
•
Settlement and Payment
After delivery, the buying firm will issue an authorization for
payment to the supplier
○
Payment is then made through the firm's account payable
department
○
Electronic Funds Transfer (EFT): the automatic transfer of
payment from a buyer's bank account to the supplier's bank
account
○
•
Record Maintenance
After delivery and payment, a record of the critical events
associated with the purchase is entered into a supplier
performance database
The database accumulates critical performance data
over an extended period
§
Data often used in future negotiations and dealings with
the supplier in question
§
Data can also support spend analysis efforts
§
○
•
Chapter 7: Sourcing
Monday, April 16, 2018 12:17 PM
Document Summary
Supply management: 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. Firms do not compete only against global competitors by against their competitors" supply chains. Companies that were once content to purchase services and goods from local suppliers now seek to build relationships with world-class suppliers. To compete globally, companies need to source locally. To keep up with global competition and tap into the abilities of world-class suppliers, many companies have put in place global sourcing systems. Advances in information systems have served as a catalyst for global sourcing efforts. Organization can maximize buying power by consolidating purchasing requirements for dozens of sites and suppliers around the world into one large order. Applies to services and business processes, as well as manufactured goods.
