Case Study

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Chapter 4

Supply Processes and Technology

Suman Niranjan

GLIB 3190: Global Supply Chain Management

Key Question Addressed in Chapter 4

Which process or processes will be most effective and efficient to support the exchange of money (the buyer’s responsibility) for goods and services (the supplier’s responsibility)?

Reasons to Develop Robust Supply Processes

Large number of items

Large dollar volume involved

Need for an audit trail

Severe consequences of poor performance

Potential contribution to effective organizational operations inherent in the function

Strategy and Goal Alignment

“Where, when, and how can supply personnel contribute to short- and long-term goals and strategies of the organization?”

Vertical alignment:

supply strategy and goals at the functional or business unit level aligned with organizational strategy

Horizontal alignment:

Supply strategy and goals aligned with those of other functional areas

Ensure Supply Process Compliance

Develop organizational structure, culture and information systems that support compliance

Standardize goods, services, and processes across sites

Aggregate requirements and leverage volume

Simplify, streamline and improve processes and deliver consistent results

Formulate annual business plans

Establish objectives for supply

Essential Steps in the Supply Process

Recognition of need

Description of need

Identification and analysis of possible sources of supply

Supplier selection and determination of terms

Preparation and placement of the purchase order

Follow-up and/or expedite the order

Receipt and inspection of goods

Invoice clearing and payment

Maintenance of records and relationships

Step 1: Recognition of Need

A person or a system identifies a definite need in the organization—what, how much, and when needed

The greatest opportunity to affect value is when needs are recognized and described (product conception and design)

Supply and supplier(s) can contribute more in these steps than later in the acquisition process

Step 2: Description of Need

Needs should be driven by external customers.

External customer needs → Internal customers → Purchasers → Potential suppliers

An accurate description of the need (good, service, or combination) is essential

Unclear or ambiguous descriptions, or over specified materials, services, or quality = unnecessary costs

Supply management and the internal customer or cross-functional sourcing team share responsibility for accurate descriptions

A Requisition

A gatekeeping tool to manage the flow of information through three gates:

(1) authority: Does the requisitioner have the authority to make the specified request at the specified budget level?

(2) internal clarity: Is the need described in a clear and unambiguous way?

(3) internal clearance: Is the description ready for communicating externally with potential suppliers?

Information Needed for Requisitions

Date

Number (identification)

Originating department

Account number

Complete description of material or service and quantity

Date material or service needed

Any special shipping or service-delivery instructions

Signature of requisitioner

Step 3: Identification of Potential Sources

Online tools

Colleagues

Existing suppliers

Issue an RFx

One optional communication tool that is NOT a solicitation for business:

(1) request for information (RFI)

Three options for soliciting business:

(1) request for quotation (RFQ)

(2) request for proposal (RFP)

(3) request or invitation for bid (RFB or IFB)

Step 4: Supplier Selection and Determination of Terms

Analysis of qualified potential sources, source selection, and determination of terms

Applicable tools range from a simple bid analysis form to complex negotiations

Step 5: Preparation and Placement of Purchase Order

Several order placement tools available:

A purchase order

The supplier’s sales agreement

A release against a blanket order

Failure to use the proper contract form may result in legal complications or improper documentation

Purchase order format and routing vary

Step 6: Follow-up and Expediting

Follow-up: routine order tracking to ensure the supplier can meet delivery promises

Expediting: the application of pressure on a supplier to meet the original delivery promise, to deliver ahead of schedule, or to speed up delivery of a delay

Expediting:

may be caused by poor planning inside the buying or the selling organization

may indicate the need for process improvements.

Step 7: Receipt and Inspection

The prime purposes of receiving are to:

1. Confirm receipt of order placed

2. Confirm shipment arrived in good condition

3. Ensure quantity ordered has been received

4. Forward shipment to proper destination (storage, inspection, or use)

5. Ensure proper documentation is registered and accessible to appropriate parties

Eliminate or Reduce Inspection

One goal of supply management is to ensure that quality is built in

internally during the design stage and

externally in the suppliers’ processes

This reduces or eliminates incoming inspection

Step 8: Invoice Clearing and Payment

An invoice is a claim against the buying organization

Payment for services may vary from payment for goods.

Invoice clearance procedures are not uniform

Checks and audits of invoices are based on cost-benefit analysis

Aligning Supply and Accounts Payable (AP)

Often, payment terms are not met.

Root causes of late payment:

Slow cycle time in the accounts payable process

Conflict between finance and supply policy

Information systems and electronic fund transfers (EFT) may shorten cycle time

Organizational structure and reporting relationships may align goals

A joint team may align processes

Step 9: Maintenance of Records and Relationships

Update records based on law, accounting standards, company policy, and judgment

Update supplier performance scorecards

Link data to future decisions

A Sample Sourcing Process and Flowchart

Strategic versus Nonstrategic Spend

Strategic spend: goods or services critical to the mission of the organization

May be high- and low-dollar-value purchases

Nonstrategic (non-mission critical) spend

Dollar value and repetitiveness drive decisions

Establish a small dollar threshold

Prequalify suppliers

Use efficient order placement tools

Effectiveness Tools that Optimize Strategic Spend

Goal: Assure continuous availability at the lowest total cost of ownership

A cross-functional sourcing team especially during need recognition and description

Early supply and supplier involvement (ESI)

Use information management tools that enable communication and support decision making

Apply time, money, people and other resources

Favor effectiveness over efficiency

Efficiency Tools the Reduce Transaction Costs

Stockless buying and systems contracts

Procurement cards (P-cards)

Blanket P.O.s

EDI- and Internet-based systems

Online reverse auctions

Changing authority levels and bidding practices

Single sourcing

Outsourcing small value order processing

Standardization

Batch orders

Set requisition schedule

Invoiceless payments

Users pay directly

Internal Information Flows to Purchasing

Purchasing

engineering

planning

production

budgeting

financial control

accounting

legal

receiving

quality control

inventory control

new products

production control

sales

forecasting

External Information Flows to Purchasing

Purchasing

sources

supply

suppliers’ capacity

suppliers’

production rates

labor conditions

prices and

discounts

transportation

availability

new product

information

product

information

general

market

conditions

sales and

use taxes,

customs

Internal Informational Flows from Purchasing

Purchasing

Product

Development

Marketing

Finance

Accounting

Engineering

Economic

conditions

Product and

price information

Competitive

conditions

Budget

commitments

Costs, prices

adjustments

Orders

placed

Contracts

Source, product,

price information

Product availability,

lead time, price

and quality

General

Management

Stores

Legal

Production

Potential Benefits of Information Systems Technology

Cost reduction and efficiency gains

Data accessibility

Speedier communication

Dedicate resources to strategic issues

Data accuracy

Systems integration

Monetary control

Information Systems

Technology-Driven Efficiency and Effectiveness

Process effectiveness:

make data more transparent, accurate, and accessible to decision makers

relieves supply decision makers of lower value-adding tasks

Process efficiency:

The primary benefit of technology

Multiple tools

Process Efficiency Tools

ERP systems

Cloud computing

Electronic procurement systems

Electronic or online catalogs

EDI

Marketplaces

Online reverse auctions

Radio frequency identification (RFID)

Enterprise Resource Planning (ERP) Systems

A suite of applications using a common data management system

Integrates functions within the organization and facilitates connection to supply chain stakeholders

Allows users to share information internally and externally in real time

Reduces opportunities for errors in transaction processes by eliminating dispersed organizational information systems

Cloud Computing

“…a model for enabling ubiquitous, convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications, and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction.”

---The National Institute of Standards and Technology (NIST)

Types of Cloud Computing

Private (operated for a single organization, managed internally or by a third party)

Public (operated over a network for general public use)

Community (operated for specific organizations, managed internally or by a third party)

Hybrid (some combination of private, community, and/or public)

Elements of Cloud Computing Relevant to Supply

Software as a Service (SaaS):

Applications that reside in the cloud

Users rent on a pay-for-use basis

Platform as a Service (PaaS):

Software development technologies

Allow users to create customized processes or tools

Infrastructure as a Service (IaaS):

Shared server capacity

Permits sharing of computing power and storage

Accessed as needed on a pay-for-use basis

Electronic Procurement Systems

An applications software package

Allows requisitioning, authorizing, ordering, receiving, invoicing, and paying for goods and services through the Internet

Frequently a module in the company’s ERP system

Electronic or Online Catalogs

A digitized version of a supplier’s catalog

Buyers use a web browser to view information about supplier’s products and/or services

Product e-catalogs include:

product specification data-- describe the products and are the same for all buyers

transaction data -- prices, shipping, billing addresses, and quantity discounts customized to each buyer

Electronic Data Interchange (EDI)

Allows computer-to-computer exchange of business documents

purchase orders, shipping schedules and notifications, and invoices

Widely adopted in manufacturing, transportation, and retailing

Benefits of EDI

Provides secure transmission and fast turnaround of large amounts of data

Greater accuracy internally and with trading partners

Shorter process cycle time that may help to lower inventory

Provides electronic logs or audit trails

Reduces administrative costs

Private Marketplaces: Extranets

A private intranet that is extended to authorized users outside the company

Improves supply chain coordination and information sharing with key business partners

a web-based interface for suppliers to link into a customer’s systems, and vice versa, to perform activities, such as checking inventory levels, tracking the status of invoices, or submitting quotes

Example: Walmart’s RetailLink

Private Marketplaces: Intranets

A private, secure internal Internet accessible to authorized users only; may be linked to ERP system

Communicate and facilitate employee collaboration

May display supplier catalogs, list of approved suppliers, and supply policies

Enhances supply processes by allowing employees to place orders via web browsers, approve and confirm purchases, and generate POs

Advantages: low transaction costs and reduced lead times

Online Reverse Auctions

Online, real-time, dynamic, declining-price auction for goods or services between one buying organization and a group of prequalified suppliers

Suppliers compete by bidding against each other online using specialized software

Suppliers see the status of their bids in real time

The supplier with the lowest bid or lowest total cost bid is usually awarded the business.

Three Types of Online Reverse Auctions

Open offer auctions

Suppliers select items, see competitive offers, and enter offers up until a specified closing time.

Names not disclosed to other bidders

Private offer auctions

The buyer offers a target price and quantity

Suppliers enter offer(s) by a specific time

The buyer evaluates and posts a status level

Accepted; closed; best and final offer (BAFO); open

Posted price

Buyer posts price and accepts first supplier to meet price

When to Use Reverse Auctions

Clearly defined specifications

A competitive market with willing, qualified suppliers

At least three: ensure competition

Less than 7: avoid unnecessary cost/complexity

Knowledge of market conditions: set a reserve price

Buyer and seller competency with auction technology

Clear rules of conduct

Buyer is prepared to switch suppliers if necessary

Projected savings justify a reverse auction

Potential Buyer-Related Issues with Reverse Auctions

Buyer knowingly accepts bids from suppliers with unreasonably low prices

Buying firm submits phantom bids during the event to increase the competition artificially

Buyer includes unqualified suppliers to increase price competition

Potential Supplier-Related Issues with Reverse Auctions

Supplier collusion

Suppliers bid unrealistically low prices and attempt to renegotiate afterwards

Suppliers “bird watch” or participate, but do not bid to collect market intelligence. Buyer may require bids before entering the auction to preclude this behavior

Suppliers submit bids after the auction event in an attempt to secure the business

Potential Problems with Using Online Auctions

Risk of interrupting good supplier relationships

Risk of developing a reputation for aggressive price-buying over other considerations

Costs of running auction versus expected savings

Cost savings potential of auctions versus sourcing processes such as RFP/RFQ and negotiation

Significant up-front preparation and cost required compared to determining price through an RFP/RFQ

Actual price versus bid price given unforeseen costs

Radio Frequency Identification (RFID) Tags

Contain a chip and antenna that emit a signal, using energy from a radio frequency reader, which contains information about a shipping container or its individual contents

Can be passive, active, or battery-assisted passive

Vary in memory, frequency, power source, and cost

Three primary applications in the supply chain:

real-time inventory tracking

product tracking

transportation

Key Questions When Adopting New Information Systems Technology

Should we be a leader or a follower?

What should be acquired through e‑commerce?

What tools should we use to acquire those items?

Who should we use as a service provider?

Should we enter into an alliance, and if so, what type, or work privately?