Current Event Assignments
INeal
MGT533Chapter06.pptxChapter 6
Need Identification and Specification
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Key Questions Addressed in Chapter 6
How do we determine organizational needs?
How do we translate and communicate these needs to (potential) suppliers?
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Need Identification Criteria
Strategic
e.g., mission critical, total spend, risk reduction, access to new technology or new markets, assurance of supply in tight markets, etc.
Traditional supply criteria
quality, quantity, delivery, price and service
Additional current criteria
financial, risk, sustainability, innovation, regulatory compliance and transparency, and political factors
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Traditional Criteria
Quality: functionality and conformance to specifications
Quantity: ability to meet demand
Delivery: on-time, as promised
Price: total cost, including payment terms
may be the “order getter” if other criteria are equal among potential sources of supply
Service: broad category that depends on the product or service being acquired
e.g., flexibility in order quantities and lead times, repair and maintenance, advice, etc.
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Additional Current Criteria: Financial
Improvement of the balance sheet and income statement to raise the company’s attractiveness in the eyes of the investment community.
any initiative that improves return on assets or investment, raises the share price, or improves the company’s financial ratings
revenue enhancement
working capital reduction (inventory investments, accounts payable and accounts receivable)
cash flow improvement
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Additional Current Criteria: Risk
Three categories of supply chain risk:
operational risk: the risk of interruption of the flow of goods or services
financial risk: the risk that the price or total cost of the goods or services acquired will change significantly
reputational risk: the risk that the reputation of the enterprise is adversely affected by the method of acquisition or the behavior of the supplier.
All three risks affect survival, competitiveness, and profitability and may occur simultaneously
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Additional Current Criteria: Sustainability
Sustainability includes environmental and social considerations.
Sustainability performance my comply with legal obligations and meet values and standards of key stakeholders
e.g., employees, customers, shareholders, etc.
Supply plays a central role in the organization’s sustainability performance
energy and water consumption in the supply chain
supplier location and methods transport affect CO2 emissions
material specifications affect resource conservation (e.g., reuse and recycling)
methods of waste disposal
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Additional Current Criteria: Innovation
Supply and supplier innovation:
How can we do better?
What can make my customer more successful?
Supply and suppliers:
suggestions to improve value improvement and reduce total cost of ownership
open to changes in supply chain practice
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Additional Criteria: Regulatory Compliance and Transparency
An extensive and growing legal and regulatory structure affects trade
non-compliance may damage reputation and result in fines and citations
financial scandals and new accounting standards increase demands for greater financial transparency
long-term contracts, lease obligations, and hedge positions have to be reported properly
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Additional Current Criteria: Political Factors
A willingness to support the government in its priorities, rather than opposing them:
support “buy local” government initiatives
assist government training initiatives
work on government-sponsored industry panels
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https://www.nhtsa.gov/laws-regulations/corporate-average-fuel-economy
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Categories of Needs
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| Category | Description |
| Resale | Resellers comprise retailers, wholesalers, distributors, agents, brokers and traders. What they can resell covers the full range of the remaining categories. |
| Raw and Semi-Processed Materials | Most users of materials are converters, such as factories, and this category includes commodities, agricultural and industrial. |
| Parts, Components and Packaging | Assemblers use parts and components produced by their suppliers to create a finished product. Parts and components may be standard or special depending on the decision of the designer of the finished product. |
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Categories of Needs
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| Category | Description |
| MRO and SVP | Every organization has MRO requirements and SVP’s. The availability of MRO suppliers is critical to maintain continued uninterrupted operation of the office, factory, facility, etc. Because many MRO requirements are relatively small in dollar value, SVP’s are also included in this category. For SVP’s assuring availability at minimum acquisition cost is a challenge. |
| Capital Assets | Any requirement that accountants classify as capital, and, therefore, an investment, becomes a capital item. Equipment, IT, real estate and construction are included in this category. Capital items can be depreciated, are often bought under a separate budgetary allocation and may require special financing arrangements. |
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Categories of Needs
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| Category | Description |
| Services | Services are intangible and nonmanufactured. Every organization acquires a variety of services. |
| Other | Anything not covered by the above categories falls into this last one. Major requirements could be energy and water. This category would also include unusual and infrequent requirements, probably better dealt with on an ad hoc or project basis. |
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Challenges of Capital Asset Purchasing
Strategic considerations that can affect the long term competitive position of the organization
High dollar amount for a single purchase
Infrequent purchase
Difficulty estimating the total cost
Derived demand
Impact on the environmental
Significant tax considerations
Technological change
Dedication of time and resources during start-up
Commitment to process, cost, product line and space
Coordination with existing processes and operations
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Reasons for the Purchase of Capital Assets
Capacity
Economy in operation and maintenance
Increased productivity
Improved quality
Dependability in use
Savings in time or labor costs
Durability
Safety, environmental considerations
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Source Selection for Capital Goods Purchases
Total cost of ownership (TCO) analysis
Purchase cost may only represent 20 to 60 percent of TCO
Engineering service
Presale and post-sale service
Design and R&D capabilities and costs
Legal considerations
patents, liability for lost sales, health and safety
Disposal at end of useful life
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Reasons for Lack of Supply Involvement in Service Acquisition
User expertise in specifying complex services and analyzing potential service providers
Buying services involves a more personal relationship between the supplier and user
Pre-deregulation, price and service delivery was essentially the same for all service suppliers (e.g., transportation)
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What Makes Services Different?
Intangible
Cannot touch it
Perishable
no inventories
Heterogeneous: the “service package”
high levels of customization
Customer participation in the service production process
Simultaneous production and consumption
Can be difficult to measure quality
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Opportunity to Affect Value
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1.
Need
recognition
2.
Description
3.
Potential suppliers
4.
Selection
5.
Receipt
Low
Opportunity
to affect value
High
Acquisition Process Steps
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Methods of Description
By brand
“Or Equal”
By specification
Physical or chemical characteristics
Material or method of manufacture
Performance
By engineering drawing
By miscellaneous methods
Market grades
Sample
By a combination of two or more methods
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When Description by Brand is Desirable
Either the manufacturing process is secret or the item is covered by a patent
Specifications cannot be laid down with sufficient accuracy
The quantity bought is so small
End customers or users have preferences in favor of certain branded items
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Advantages of Buying with Specification
Evidence exists that thought and careful study have been given to the need and the ways in which it may be satisfied
A standard is established for measuring and checking materials as supplied, preventing delay and waste that would occur with improper materials
An opportunity exists to purchase identical requirements from a number of different sources of supply
The potential exists for equitable competition
The seller will be responsible for performance when the buyer specifies performance
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Limitations in Using Specifications
It is practically impossible to draw adequate specifications
Specifications add to the immediate cost
Specification may not be better than a standard product
Cost increase by testing to ensure that the specs have been met
Unduly elaborate specifications discourage potential suppliers from placing bids in response to inquiries
Unless the specifications are of the performance type, the responsibility for the adaptability of the item to the use intended rests wholly with the buying organization
Minimum specifications set by the buying organization may be the maximum furnished by the supplier
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Methods of Specification
Physical or chemical characteristics
Material and method of manufacture
Performance or function
Engineering drawing
Miscellaneous
market grade
sample
Some combination of two or more methods
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Standardization and Simplification
Standardization: Agreement on definite sizes, design, quality, or other aspects of the product or service.
A technical and engineering concept
Simplification: A reduction in the number of sizes, designs or other aspects of the product or service.
A selective and commercial problem
May be applied to articles already standardized or as a step preliminary to standardization
The challenge: Balance standardization and simplification against suitability and uniqueness
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