HMOEWORK MARKTING
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ch7_to_12__supply_chain_.pptxChapter 7
Chapter Overview
Supplier evaluation and selection process
Key supplier evaluation criteria
Developing a supplier evaluation and selection survey
Reducing supplier evaluation and selection cycle time
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[1] Evaluation and Selection Process
There is no “one best way”
Overall objective is to reduce sourcing risk and maximize value to buyer
Need to select suppliers for long-term
Can involve intensive effort and major commitment of resources
Many issues and decisions
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1.1. Selection and Evaluation Process
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What does this process suggest?
Why in this particular sequence orders?
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Recognize need for supplier selection
Identify key sourcing requirements
Determine sourcing strategy
Identify potential supply sources
Limit suppliers in selection pool
Determine method of supplier evaluation and selection
Select supplier and reach agreement
[2] Key Supplier Evaluation Criteria
Primary criteria
Cost or price, quality, and delivery performance
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Other Business Criteria
Management capability
Employee capabilities
Cost structure
Total quality performance, systems, and philosophy
Process and technological capability
Sustainability and environmental compliance
Financial stability
Production scheduling and control systems
E-commerce capability
Supplier’s sourcing strategies, policies, and techniques
Longer-term relationship potential
2.1. Method of Supplier Evaluation and Selection
Evaluation from supplier-provided information
Supplier visits
Use of preferred suppliers
External or third-party information
Example
International suppliers
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2.2. Information Search Requirements
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| High Capability of Suppliers | Low Capability of Suppliers | |
| High Strategic Importance to Buyer | Minor to moderate | Major |
| Low Strategic Importance to Buyer | Minor | Minor to moderate |
(1) What types of information?
(2) Why?
2.2. Sources of Information
Current suppliers
Preferred suppliers
Sales representatives
Internet searches and social media
Informational databases
Organizational knowledge
Trade journals
Trade directories
Trade shows
2nd-party or indirect information
Internal sources
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2.3. Determine Sourcing Strategy
No single strategy will satisfy all situations
Influences the approach taken
The environment changes
Market conditions
User preferences
Corporate objectives
Reevaluate as necessary
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2.4. Sourcing Alternatives
Manufacturer vs. distributor
Size of purchase
Manufacturer’s policies on direct sales
Storage space available
Extent of services required
Supplier-managed inventory
Integrated supply
Local, national, or international suppliers
JIT or lean manufacturing support
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Large vs. small suppliers
Capability
Variety of products offered
Locations
Dependency
Multiple vs. single vs. sole sourcing
Overall trend to rationalize supply base
Leverage vs. assurance of supply
2.5. Supplier Categories
Preferred supplier
One that consistently satisfies the performance and service standards as defined and responds to unexpected changes
Certified supplier
Have had quality systems extensively audited and are capable of consistently meeting or exceeding quality needs
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Partnered supplier
Limited to a select group who provide critical high value items
Disqualified supplier
No longer meet buyer’s standards and will not be considered for future business until problems are corrected
2.6. Scheduling and Control Systems
Does supplier use MRP or MRP II?
Does supplier track material, product, or service cycle times?
Can supplier support buyer’s delivery requirements?
What are supplier’s real lead times?
What is supplier’s on-time delivery performance?
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2.7. E-Commerce Capability
Web-based B2B vs. EDI systems
Does supplier have CAD capability?
Does supplier use bar coding or RFID?
Can supplier provide ASNs or accept EFT transfers?
Does supplier communicate via e-mail?
Does supplier use social media for business purposes?
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2.8. Supplier’s Sourcing Capabilities: Strategies, Policies, and Techniques
Track supply base performance of Tier 1 vs. Tier 2 vs. Tier 3 suppliers
Sharing of information
Extent of supplier development activities in its own supply base
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2.9. Longer-Term Relationship Potential
Is supplier willing to participate or commit?
Can supplier commit necessary resources?
Does supplier have requisite technical expertise?
How is supplier unique?
Can supplier participate in joint problem solving and improvement?
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[3] Developing Survey: Supplier Evaluation and Selection
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What does this process suggest?
Why in these particular sequence orders?
Identify supplier evaluation categories
Assign a weight to each evaluation category
Identify and weigh subcategories
Define scoring system for categories and subcategories
Evaluate supplier directly
Review evaluation results and make selection decision
Review and improve supplier performance continuously
3.1. Interpreting Financial Ratios
| Liquidity Ratios | Interpretation |
| Current ratio = Current assets / Current liabilities | Should be > 1.0, but look at industry averages |
| Quick ratio = (Cash + Receivables) / Current liabilities | At least 0.8 if supplier sells on credit; Low means cash flow problems |
| Activity Ratios | Interpretation (compare to industry average) |
| Inventory turnover = COGS / Inventory | Low means slow inventory or possible cash flow problems |
| Fixed asset turnover = Sales / Fixed assets | Too low means supplier may be inefficient using its fixed assets |
| Total asset turnover = Sales / Total assets | Too low means supplier may be inefficient using its total assets |
| Days sales outstanding = (Receivables x 365) / Sales | Too high hurts cash flow; Too low shows restrictive credit policy |
3.2. Interpreting Financial Ratios
| Profitability Ratios | Interpretation (compare to industry average) |
| Net profit margin = Profit after taxes / Sales | Represents after-tax return |
| Return on assets = Profit after taxes / Total assets | Represents the return earned on what a company owns |
| Return on equity = Profit after taxes / Equity | Represents return on shareholders’ investment |
| Debt Ratios | Interpretation (compare to industry average) |
| Debt-to-equity = Total liabilities / Equity | > 3 means highly leveraged |
| Current debt-to-equity = Current liabilities / Equity | Too high means supplier may be unable to pays its bills |
| Interest coverage = (Pretax income + Interest) / Interest | Should be > 3; low may mean difficulty in paying creditors |
3.3. Initial Supplier Evaluation
| Category | Weight | Subweight | Score (1 - 5 scale) | Weighted Score | Subtotal | |
| Quality Systems | 20 | 17.4 | ||||
| Process control systems | 5 | 4 | 4.0 | |||
| Total quality commitment | 8 | 4 | 6.4 | |||
| PPM defect performance | 7 | 5 | 7.0 | |||
| Management Capability | 10 | 8.0 | ||||
| Management/labor relations | 5 | 4 | 4.0 | |||
| Management capability | 5 | 4 | 4.0 | |||
| Financial Condition | 10 | 7.0 | ||||
| Debt structure | 5 | 3 | 3.0 | |||
| Turnover ratios | 5 | 4 | 4.0 | |||
| Cost Structure | 15 | 14.0 | ||||
| Costs relative to industry | 5 | 5 | 5.0 | |||
| Understanding of costs | 5 | 4 | 4.0 | |||
| Cost control/reduction efforts | 5 | 5 | 5.0 | |||
| Delivery Performance | 15 | 9.0 | ||||
| Performance to promise | 5 | 3 | 3.0 | |||
| Lead-time requirements | 5 | 3 | 3.0 | |||
| Responsiveness | 5 | 3 | 3.0 | |||
| Technical/Process Capability | 15 | 14.0 | ||||
| Product innovation | 5 | 4 | 4.0 | |||
| Process innovation | 5 | 5 | 5.0 | |||
| Research and development | 5 | 5 | 5.0 | |||
| Information Systems Capability | 5 | 3.0 | ||||
| EDI capability | 3 | 5 | 3.0 | |||
| CAD/CAM | 2 | 0 | 0.0 | |||
| General | 10 | 8.2 | ||||
| Support of minority suppliers | 2 | 3 | 1.2 | |||
| Environmental compliance | 3 | 5 | 3.0 | |||
| Supply base management | 5 | 4 | 4.0 | |||
| Total Score | 80.6 |
3.4. Sample Recommendation Form
| Company Name | Foster Industries | Survey by: Manufacturing Commodity Team |
| Address | P.O. Box 1256 | Accompanied by: Quality Assurance |
| City, State, & Zip | Stroudsburg, PA 18370 | Initial Survey Resurvey |
| Phone | 570-619-5411 | Survey Date: 9/14/2010 |
| Supplier Code | Foster | Contact: Mr. Robert Jones |
| Supplier Score | 80.8 | Minimum Required Score: 65 |
| Recommendations | ||
| Supplier has potential to become a critical partner. However, limited design/development capability prevents continued growth. Foster will embark on implementing and upgrading design/development function for our business. | ||
| Action Plan Is Due By: | 2/1/2011 | |
| Supplier Acknowledgement | John Weaver Date: 9/15/2010 |
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[4] Reducing Supplier Evaluation and Selection Cycle Time
Map current evaluation and selection process
Integrate with internal customers
Utilize data warehouse software with supplier information
Engage third-party support
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4.1. Reducing Supplier Evaluation and Selection Cycle Time
Integrate technology into organizational design
Commodity CFTs
Product families or groups of products
Supplier categorization
Electronic tools
Predefined contract language and shorter contracts
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4.2. A Good Supplier Does the Following
Builds quality into the product, aiming for zero-defects
Makes delivery performance a priority
Willingness to make short and frequent deliveries to point-of-use
Demonstrates responsiveness to buyer’s needs
Works to reduce lead times
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Provides buyer with information regarding capability and workload
Creates the future, rather than fears the future
Reinvests part of its profits into R&D, takes a long-term view, and is willing to spend for tomorrow
Meets stringent financial stability criteria
Chapter Overview Chapter 8
Overview of supplier quality management
Supply quality management using a TQM perspective
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Process Capability
Striving for Zero Capability
Pursuing Six Sigma supplier quality
Using ISO standards and MBNQA criteria to assess supplier quality systems
[1] Supplier Quality
Ability to meet or exceed current and future customer expectations or requirements within critical performance areas on consistent basis
Keys to supplier quality
Ability to meet or exceed
Current and future expectations or requirements
Critical performance on a consistent basis
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1.1. Why Supplier Quality?
Supplier impact on quality
Continuous improvement requirements
Outsourcing of purchase requirements
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1.2. Factors Affecting Supply Management’s Role
Ability of supplier to affect buyer’s total quality
Internal resources available to support ongoing supplier quality management and improvement
Ability of buyer to practice world-class quality
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Supplier’s willingness to work jointly to improve quality
Supplier’s current quality levels
Buyer’s ability to collect and analyze quality-related data
1.3. Basic Contents: Supplier Quality Manual
Description of supplier selection and evaluation process
Conduct of buyer audits
Description of buyer’s quality improvement programs and activities
Copies of relevant forms along with instructions
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Requirements and procedures for control of proprietary information
Including nondisclosure agreements
Description of production parts approval process and/or sample acceptance procedures
Description of engineering change order process
Description of process capability study process
How to handle and/or store non-conforming products
Description of claims process
How to develop and submit corrective action plans
Supplier certification process
1.4. Focus on Process, Not on Output
Move from product orientation to process orientation
Quality process quality output
Supplier must provide ongoing evidence of process capability
Structured, companywide supplier evaluation and selection system
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1.5. Focusing on Sample Inspections
What supplier would knowingly submit a poor sample?
How many parts did supplier produce to get an acceptable sample?
Are samples representative of process operating under normal conditions?
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Did supplier use same process, methods, personnel, and materials that will be used in normal production?
Or was prototype made under controlled laboratory conditions?
Did supplier or subcontractor actually produce the sample?
Do samples give enough evidence of real capacity or process capability?
[2] Quality: The Customer’s Perspective
Nonconforming supplier quality is often due to inconsistent communication and resultant misunderstanding of specifications, expectations, and requirements within supply chain
Need for clear specifications and unambiguous performance requirements
Sharing of final product requirements
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2.1. Key Principles of TQM
Define quality in terms of customers and their requirements
Deming’s 14 Points
Pursue quality at the source
Stress objective rather than subjective analysis
Emphasize prevention rather than detection of defects
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Focus on process rather than output
Basics of process capability
Strive for zero defects
Cost of quality
The Seven Wastes
Establish continuous improvement as way of life
Make quality everyone’s responsibility
2.2. Developing Clarity
Ability of buying company to succinctly identify, clearly define, quantify, or specify its technical and sourcing requirements
Buyer’s ability to effectively communicate these requirements to suppliers, including change orders
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2.3. Deming’s 14 Points
Create a vision and demonstrate commitment
Learn the new philosophy
Understand inspection
Stop making decisions purely on the basis of price
Improve constantly and forever
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Institute training
Institute leadership
Drive out fear
Optimize the efforts of teams
Eliminate exhortations
Eliminate numerical quotas and measurement by objective
Remover barriers to pride in workmanship
Encourage education and self-improvement
Take action
2.4. Summary of Deming’s Philosophy
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Understand employees and customers (mindset)
Intrinsic motivation vs. Extrinsic reward (rewards)
Explain cause and effect (theory-based)
Top Management leadership to involve everyone (collaboration)
System management (system-driven)
Control variation (statistical methods)
Continuous learning cycle (continuous improvement)
Summary of Deeming’s Philosophy
Variation is primary source of quality nonconformance
To reduce variation, the search for improved quality is a never-ending cycle of design, production, and delivery followed by surveying customers
Then starting all over again
2.5. Apply TQM Principles to Supplier Quality
Customer-Driven
Quality at the source and Prevention vs. Inspect defects at the end
Data and fact-based vs. Subjective judgment
Process vs. Output
Zero defects : Cost of quality
The Seven Wastes
Continuous improvement as way of life
Involve everyone.
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2.6. Malcolm Baldridge National Quality Award Established in 1987 - competitive Acts as de facto definition of TQM and competitive set of criteria
2.7. Malcolm Baldridge National Quality Award Established in 1987 - competitive Acts as de facto definition of TQM and competitive set of criteria
Leadership
Organizational leadership
Public responsibility and citizenship
Strategic planning
Strategy development
Strategy deployment
Customer and market focus
Customer and market knowledge
Customer satisfaction and relationships
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Information and analysis
Measurement of organizational performance
Analysis of organizational performance
Human resource focus
Work systems
Employee education, training, and development
Employee well-being and satisfaction
Process management:
Product and service processes
Support processes
Supplier and partnering processes
Business results
Customer focused results
Financial and market results
Human resource results
Supplier and partner results
Organizational effectiveness results
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2.8.Baldridge Award Recipients
[3] Process Capability
Ability of process to generate outputs that meet engineering specifications and/or customer requirements
Must be in a state of statistical control
Output must fall between stated upper/lower specification limits
No special causes of variation present
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99.7% of all output falls between ± 3 standard deviations of process mean
Stable process, in statistical control, can be expected to produce virtually all of its output within these natural tolerance limits
Process’s natural limits must fall within specification limits to be capable
3.1. Which Process Is Capable?
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Specification
Specification
Specification
Specification
Natural Variation
Natural Variation
(a)
(b)
Natural Variation
Natural Variation
(c)
(d)
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3.2. Process Capability Study Information
Determine the operating baseline of a process
Prioritize potential quality improvement projects
Provide evidence of process performance to a customer
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[4] Striving for Zero Defects
Conformance to requirements (Crosby)
Key performance metrics to identify improvement opportunities
Supply base rationalization and optimization
Average supplier quality improves as lower performers are eliminated from supply base
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4.1. Cost of Quality
Really is cost of “poor” quality
Often aggregated into overhead accounts
Impact
Costs of nonconformance
Costs of improvement and avoidance of poor quality
Highly complex issue
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Appraisal costs
Direct costs of measuring quality
Failure costs
Internal – occur before product or service is provided to customer
External – occur following production or after customer takes possession
Prevention costs
Keep defects from occurring
4.2. Common Causes of Waste
Inadequate processes
Inadequate tools or equipment
Inefficient layouts
Lack of training
Inadequate suppliers
Lack of standardization
Poor management decisions
Mistakes by operators
Inadequate scheduling
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4.4. The Seven Wastes
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Over-production
Idle time
Delivery
Waste in the work itself
Inventory
Wasted operator motion
Waste from rejected parts
[5] Six Sigma
Six Sigma is a very popular approach to improving quality.
Sigma () is a Greek letter used to designate a standard deviation (SD) in statistics.
Six refers to the number of SDs from a specification limit to the mean of a highly capable process.
Began at Motorola in 1982 when its CEO requested that costs be cut in half and repeated the same request the following year:
These efforts pointed out that they needed to improve product designs and analytical techniques to achieve these goals.
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From the early days of improving the robustness of design at Motorola, Six Sigma has morphed into an organization-wide program for improvement involving hierarchical training, organizational learning, and pay for learning. As you will see in this chapter, none of the analytical tools used in Six Sigma efforts are new. What is new is how they are packaged and deployed within a company.
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5.1. three-sigma and six-sigma process
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Figure 13-1 shows what this means. In the figure, distribution a shows a typical product design with 3-standard-deviation specifications (or tolerances). If this is the case, about 0.5% of products will not meet specification. As shown in part b of the figure, if the tolerances are 6 standard deviations, the probability of producing a bad part is very low. Notice that in part b, the mean or dispersion of the process could change significantly, and the product would still meet specs.
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5.2. Defects by each Sigma
This Table shows the number of defective parts per million (ppm) that are produced between one and Six Sigma levels.
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| Sigma Level | Long-term ppm defects |
| 1 | 691,462 |
| 2 | 308,538 |
| 3 | 66,807 |
| 4 | 6,210 |
| 5 | 233 |
| 6 | 3.4 |
Table 13-1 shows the number of defective parts per million (ppm) that are produced between one and Six Sigma levels. Using this definition, Six Sigma translates into more robust designs, radically lower defect levels, and lowered costs of poor quality (COPQ).
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5.3. Six Sigma Effectiveness
Some argue that Six Sigma is an advanced quality improvement approach designed to help tackle the most difficult quality problems. As you can see in the pyramid in Figure 13-2, the basic tools of quality can be used to handle 90% of quality problems.
Most of the next 10% requires advanced training and analytical techniques. Beyond that, there are a few problems that require expertise that may not be found within the company. Thus you can see that care should be taken when determining what projects should be undertaken by Six Sigma specialists.
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5.4. Six Sigma function
At the core of Six Sigma is the following equation, which means that an output is a function of inputs and processes:
Y = f(X)
Where:
Y = output (key business objectives and measures)
f = function (interrelationships to be controlled and managed)
X = controllable and noncontrollable variables that affect Y
For example, the profitability of a company (Y) is affected by several variables (Xs), including customer retention, inventory turnovers, rolled throughput yield, production costs, and many others. If our objective is to improve profits, we focus on these variables on a project-by-project basis and improve our performance. In this scenario, the job of management is to identify and prioritize projects to achieve the goal of lowered costs and higher profits.
The job of employees is to obtain the training and expertise required to meet these objectives.
As you can see, Six Sigma started as a single firm’s approach to reducing costs and improving quality. Currently, it is much more. It involves planning, organization, training, human resources planning, and pay for knowledge. This requires both organizational and individual cooperation to achieve a goal.
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5.5.Organizing Six Sigma Projects
The key players:
Champion - work with black belts to identify possible projects
Master Black Belts - work with and train new black belts
Black Belts - committed full time to completing cost-reduction projects
Green Belts - trained in basic quality tools and work in teams
Yellow Belts – employees familiar with improvement processes
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You have probably heard about lean-Six Sigma black belts. This is the designation for a person who has completed rigorous (and costly) black belt training and has completed one or more lean-Six Sigma projects (depending on the company providing the training and the certificate) with demonstrated results. The cost of training generally runs between $10,000 and $20,000 for a single black belt. Expected returns from Six Sigma projects can run into the hundreds of thousands of dollars. Although these payoffs are attractive to management, they do provide quite a bit of pressure for the organization to achieve outstanding results from their Six Sigma efforts.
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5.5. Pursuing Six Sigma Quality
Proven quality principles and techniques
Virtually error-free performance
Expressed as 3.4 defects per million opportunities (DPMO)
Increasing customer expectations
Focus on defect prevention, cycle time reduction, and cost savings
Use of Six Sigma Black Belts
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5.6. The DMAIC Model
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Define
Improvement activity and goals
Measure
Existing system, establish metrics, and identify performance baseline
Analyze
System and develop causal hypotheses
Improve
Develop ideas, test solutions, and implement new process, structure, and system
Control
Establish standard measures and procedures to ensure new system stays in control
Define
Measure
Analyze
Improve
Control
[6] Using ISO and MBNQA Criteria
Widely accepted quality management frameworks
ISO 9000:2008
ISO 14000:2004
Malcolm Baldrige National Quality Award
Criteria are often used as basis for supplier certification programs
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6.1. ISO 9000:2008
Originally developed in European Common Market in 1987
Updated in 1994, 2000, and 2008
Third-party registration process
Internationally accepted and recognized process quality standards, not product standards
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6.2. Main Sections of ISO 9000:2008
Quality management system (QMS)
Management responsibility
Resource management
Product realization
Measurement, analysis, and improvement
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6.3. Quality Management System
Activities and steps required to implement ISO 9000:2008
Clearly delineate and document …
Process and related activity interaction and sequencing
How processes are operated and controlled
How supporting information is generated and disseminated
How measurements and process analysis are conducted
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6.4. Eight Principles of ISO 9000:2008
Customer focus
Leadership
Involvement of people
Process approach
System approach to management
Continual improvement
Factual approach to decision making
Mutually beneficial supplier relationships
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How is ISO 9000:2008 similar and different from TQM?
6.5. Supplier’s Benefits of ISO 9000:2008
Evidence of higher supplier quality
Immediate confirmation of supplier’s registration
No need for comprehensive supplier certification audit system
Supplier responsibility for meeting and maintaining ISO 9000:2008 standards
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Originally published in 1987, ISO 9001 underwent revisions in 1994, 2000
and again in 2008. The latest revision was published in September 2015.
ISO 9001:1994 included changes to significantly improve the clause
on control of design and development, and to provide several other clarifications.
The 1994 series also slightly modified the role of ISO 9002 and 9003….
The ISO 9001:2008 revision can be thought of as an amendment to
clarify issues that had been raised during the application of ISO 9001:2000.
It included several changes to the text but no additional requirements.
organizations certified to the ISO 9001:2008 standard will have a three-year
period to transition to ISO 9001:2015.
When the transition period ends in September 2018, ISO 9001:2008 certificates will no longer be valid.
6.6. Top ISO Standards
6.7. ISO 14000:2004
Established in 1993 to promote environmental awareness and protection as well as pollution prevention
Used to analyze supplier’s ability to proactively manage its environmental impact and carbon footprint
Ranges from environmental management systems to addressing auditing, labeling, and product standards
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Set of voluntary standards
Classifications
Process-oriented standards
Product-oriented standards
But it does not …
Build on existing governmental regulations
Establish emissions and pollution levels
Detail any specific testing methods
Ch 9
Chapter Overview
Supplier performance measurement
Rationalization and optimization
Supplier development
Overcoming barriers to supplier development
Managing supply base risk
Managing sustainability in the supply base
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1. Supplier Performance Measurement
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Supplier Performance Management
The extent of Buyer’s knowing how well any given supplier is performing?
Methods and systems to collect and provide information to measure, rate, or rank ongoing supplier performance
Supplier “report card”
Quantitative Supplier Performance Measurement
Cost Reduction
Quality Performance
Delivery Performance
Qualitative Supplier Performance Factors
Problem Resolution Ability
Technical Ability
Ongoing Progress Reporting
Corrective Action Response
Supplier Cost Reduction Ideas
Supplier New Product Support
Buyer/Supplier Compatibility
1.1. Choice of measurement systems
Ease of use
Level of decision subjectivity
Required system resources
Implementation cost
1.2. Category and Weighted Average Measurement
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| Performance Category | Weight | Score | Weighted Score | |
| Delivery | ||||
| On time | 0.10 | 4 | 0.40 | |
| Quantity | 0.10 | 3 | 0.30 | |
| Quality | ||||
| Inbound shipment quality | 0.25 | 4 | 1.00 | |
| Quality improvement | 0.10 | 4 | 0.40 | |
| Cost Competitiveness | ||||
| Comparison with other suppliers | 0.15 | 2 | 0.30 | |
| Cost-reduction ideas submitted | 0.10 | 3 | 0.30 | |
| Service Factors | ||||
| Problem resolution ability | 0.05 | 4 | 0.20 | |
| Technical ability | 0.05 | 5 | 0.25 | |
| Corrective action response | 0.05 | 3 | 0.15 | |
| New product development support | 0.05 | 5 | 0.25 | |
| Scale: 1 = Poor; 3 = Average; 5 = Excellent | Total Rating | 3.55 |
1.3. Cost-Based System Example
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| Commodity: Integrated Circuits | |||||
| Part Number | Supplier | Unit Price | SPI | Total Cost | |
| 04279884 | Advanced Systems | $3.12 | 1.20 | $3.74 | ** |
| BC Techtronics | $3.01 | 1.45 | $4.36 | ||
| Micro Circuit | $3.10 | 1.30 | $4.03 | ||
| 04341998 | Advanced Systems | $5.75 | 1.20 | $6.90 | ** |
| BC Techtronics | $5.40 | 1.45 | $7.83 | ||
| Micro Circuit | $5.55 | 1.30 | $7.22 | ||
| Service Factor Ratings: | |||||
| Advanced Systems | 78% | ||||
| BC Techtronics | 76% | ||||
| Micro Circuit | 87% | ||||
| ** Lowest total cost supplier for item (Unit price x SPI = Total cost) |
SPI: Supplier Performance Index= (Total Purchases + Nonperformance Costs)/ Total Purchases
1.4.Supplier Performance Example
| Supplier: | Advanced Systems | |||||
| Commodity: | Integrated Circuits | |||||
| Total part numbers in commodity: 2 | ||||||
| A. Total purchase dollars this quarter: | $5,231.67 | |||||
| Nonperformance Costs | ||||||
| Event | Number of Occurrences | Average Cost per Occurrence | Extended Cost | |||
| Late delivery | 5 | $150.00 | $750.00 | |||
| Return to supplier | 2 | $45.00 | $90.00 | |||
| Scrap labor costs | 3 | $30.00 | $90.00 | |||
| Material rework costs | 1 | $100.00 | $100.00 | |||
| B. Total nonperformance costs | $1,030.00 | |||||
| C. Purchase + nonperformance costs (Line A + Line B) | $6,261.67 | |||||
| D. Supplier Performance Index (SPI) (Line C / Line A) | 1.20 | |||||
| E. Service factor rating | 78% | |||||
| (Ratio of points earned to the total possible points for qualitative or service factors) |
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[2] Rationalization and Optimization
Determining optimal number and quality of suppliers in supply base on a continuous basis
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Optimization
Analysis to ensure that only most capable suppliers are kept
Rationalization
Analysis of how many and which suppliers to maintain
Requires effective supplier evaluation and measurement system
Usually results in net reduction of suppliers
However, may result in adding new suppliers in some spend categories
Key is to determine the “right” number of suppliers, not just arbitrarily reduce the number
2.1. Formal Approaches to Supply Base Rationalization
Twenty-eighty rule
Based on Pareto principle
“Improve or else” approach
Need to improve quickly
Triage approach
Categorization of existing suppliers
Competency staircase approach
Series of performance milestones
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2.2. Buying from World-Class Suppliers
Concentrate on closer relationships with smaller core group of exceedingly capable suppliers
Fewer quality and delivery problems
Access to leading-edge technologies
Opportunities to collaborate
Lower total product cost
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2.3. Use of Full-Service Suppliers
Remaining suppliers are often larger in size
Offer broad range of value-adding services
Provides greater access to supplier’s engineering, R&D, design, testing, production, service, and tooling capabilities
Allows outsourcing of integrated items
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2.4.Pursue Complex Supply Management Strategies
Supplier development
Early supplier design involvement
Just-in-time sourcing
Development of cost-based pricing agreements
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| High | |||||||||||||||
| Low | |||||||||||||||
| Commodity A | Commodity B | Commodity C | |||||||||||||
2.5. Supplier Segmentation Categories
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World-Class Performance
Minimum Threshold
Candidates for Development
Eliminate
Supplier Performance
Minimum Threshold
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[3] Supplier Development
“Any activity undertaken by a buyer to improve a supplier’s performance or capabilities to meet the buyer’s short- and long-term supply needs”
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3.1. Supplier Development Activities
Sharing technology
Providing performance incentives
Promoting competition among suppliers
Providing necessary capital
Directly involving buyer personnel
Training
Process improvement
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3.2.Steps to Supplier Development
Identify critical commodities for development
Identify critical suppliers for development
Form cross-functional development team
Meet with supplier’s top management team
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Identify opportunities and probability for improvement
Define key metrics and cost-sharing mechanisms
Reach agreement on key projects and joint resource requirements
Monitor status of projects and modify strategies as appropriate
What are the rationale of the above steps?????
(A) Define Goals(1); (B) Identify Key Stakeholders (2, 3); (C) Focus on Efforts (4,5); (D) Performance Goals (6,7); (E) Follow-up
3.3. Supplier Development Process Map
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Are these steps applicable for other development projects (e.g., Critical human resource developments, Capital Resources Development)?
1. Identify critical commodities for development
2. Identify critical suppliers for development
3. Form cross-functional development team
4. Meet with supplier’s top management team
5. Identify opportunities and probability for improvement
6. Define key metrics and cost-sharing mechanisms
7. Reach agreement on key projects and joint resource requirements
8. Monitor status of projects and modify strategies as appropriate
[4] Overcoming Barriers to Supplier Development
Direct-involvement activities (hands’ on)
Shared personnel in joint projects
Incentives and awards (the “carrot”)
Increase future order volumes
Annual award ceremonies
Warnings and penalties (the “stick”)
Pull back current business
Withhold future business
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| Barriers | Solution |
| Buying company’s purchase volume from supplier does not justify development investment | Parts standardization across products Single sourcing |
| No immediate benefit is evident to buyer | Pursue small wins to build momentum |
| Importance of purchased item does not justify development efforts | Take a longer-term focus Include integrated solutions to be used in future designs |
| Lack of executive support in buyer organization for supplier development | Prove benefits Document and publicize |
4.1. Buyer-Specific Barriers
| Barriers | Solutions |
| Supplier is reluctant to share information on costs or processes | Create ombudsman to deal with non-contractual issues |
| Confidentiality inhibits information sharing | Establish confidentiality agreements (Non-disclosure agreements, Exclusivity agreements) Engage in ethical behavior |
| Supplier does not trust buyer | Spell it out with properly executed written agreement |
| Organizational cultures are poorly aligned | Adapt new approach to local conditions (Supplier partnership manual, Training) |
| Not enough inducements to participate are provided to supplier | Designed-in motivation (Future business) Financial incentives (Payment terms favorable to supplier) |
4.2. Buyer-Supplier Interface Barriers
4.3. Supplier-Specific Barriers
| Barriers | Solutions |
| Lack of commitment on part of supplier’s management | Implement only after commitment (Joint development of goals and objectives, Determination of potential costs and benefits to each party and how they will be shared) |
| Supplier’s management agrees to improvements but fails to implement proposals | Supplier champions (Key supplier employee, Training in tools and techniques) |
| Supplier lacks engineering resources to implement solutions | Direct on-site support from buyer personnel |
| Supplier lacks required information systems | Direct electronic data interchange (EDI) support (Direct financial assistance as required, Training on hardware and software) |
| Supplier is not convinced development will provide benefits | Let suppliers know where they stand (Supplier evaluation and measurement system, View supplier performance vis-à-vis competitors) |
| Supplier lacks employee skill base to implement solutions | Establish training centers (Develop supplier skill levels) Provide human resource support (Co-location and direct involvement) |
4.4. Lessons from Supplier Development
Many barriers are interrelated
Managerial attitude is common and difficult barrier to overcome
Requires strategic orientation toward SCM and alignment of supply management objectives with business unit goals
Relationship management is critical to supplier development success
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Supplier development is neither quick nor easy
It requires …
Vision and commitment from both parties
Open communication
Equitable sharing of costs and benefits
4.5. Lessons from Supplier Development
As supplier development problems are well-defined in terms of (1) what they are and (2) why they occur…
(1) Symptoms/Urgency
(2) Root Causes/Solutions
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There always will be realistic options (what can be done) and decisions (what is most desirable short- and long-term solutions)
Don’t just sit there; Do Something.
Don’t just do something; Sit and reflect deeply.
5. Managing Supply Base Risk
General risk issues …
What are the common sources of risk?
How can they be mitigated or managed effectively?
Risk must be evaluated relative to cost exposure and probability of occurrence
Risk is inherent in all sourcing decisions
Risk and uncertainty not synonymous
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5.1. Categories of Supply Base Risk
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Buyer
Political risk
Market risk
Sourcing risk
Financial risk
Supplier risk
5.2. Contingency Management Tools
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Inventory
Multiple sourcing
Use of third-party intermediaries
Scenario analysis
Currency hedging
Insurance
Automated visibility systems
5.3. Impacts of Risk
Expenditures of time, effort, and money
Negative public relations
Loss of customer confidence
Lost sales
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[6] Managing Sustainability in the Supply Base
ISM Principles of Sustainability and Social Responsibility with a Guide to Adoption and Implementation
Sustainability
“Ability to meet current needs without hindering the ability to meet the needs of future generations in terms of economic, environmental, and social challenges.”
Social responsibility
“Framework of measurable corporate policies and procedures and resulting behavior designed to benefit the workplace and, by extension, the individual, the organization and the community in the following areas: community, diversity and inclusiveness-supply base, diversity and inclusiveness-workforce, environment, ethics, financial responsibility, human rights, health and safety, and sustainability.”
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6.1. Sustainable and Environmental Practices
Material-related
Climate and energy
Procurement-specific
Transportation and logistics
Metrics and measures
Appropriate contractual language
Product life cycle analysis
Environmental compliance auditing
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Ch 10
Chapter Overview
Globalization
Benefits of Worldwide Sourcing
Developing a worldwide sourcing program
Counter Trade
Moving to a global sourcing philosophy
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[1] Impact of Globalization
Common to most definitions
Interdependence
Connectivity
Integration of economies
Social
Technical
Political
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Technology accelerates globalization
Cost savings opportunities on supply side
Opportunities for new markets on demand side
Issue of trade balances and currency fluctuations
1.1. U.S. Trading Partners - 2012
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Billions of U.S. Dollars
Column1 France Saudi Arabia Brazil South Korea U.K. Germany Japan Mexi co China Canada 80.0 81.0 84.0 100.0 110.0 155.0 215.0 495.0 530.0 620.0
1.2. Definitions
Outsourcing
Involves contracting with independent suppliers outside the organization (domestic or foreign) to provide products or services that were performed inside the organization
Offshoring
Contracting with independent suppliers located outside geographic boundaries of the U.S.
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Re-shoring
Bringing offshore sources back into the U.S.
Nearshoring
Relocating sources to countries geographically closer to the U.S.
International purchasing
Commercial purchase transactions between buyers and suppliers in different countries
Global sourcing
Proactively integrating and coordinating common items and materials, processes, designs, technologies, and suppliers across worldwide purchasing, engineering, and operating locations
1.3. Worldwide Sourcing Location Criteria
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High shipping cost to value ratio
High product variety
Forecast instability
Safety concerns
Premium price items
Low shipping cost to value ratio
Standard product
Stable forecast
Labor intense
Competes on price
Re-shore or Nearshore
Offshore
[2] Benefits of Sourcing Worldwide
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Meeting Competitor Buying Patterns
Availability
Competition to Domestic Sources
Presence in Foreign Market
Quality
Access to Technology
Cost/Price
2.1. Cost/Price Benefits
Lower labor rates
Different productivity levels
Possible willingness to accept a lower profit margin
Exchange rate differences
Lower-cost materials and inputs
Government subsidies
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2.2. Barriers to Worldwide Sourcing
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Lack of skills
Resistance
to change
Longer lead times
Customs, language, and culture
Currency fluctuations
Increased supply risk
2.3. Lack of Knowledge and Skills
Ignorance of intricacies of global sourcing
How to identify potential sources of supply
Documentation issues
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2.4. Documentation Requirements
Letters of credit
Multiple bills of lading
Dock receipts
Import licenses
Certificates of origin
Inspection certificates
Certificates of insurance coverage
Packing lists
Commercial invoices
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2.4. Resistance to Change
Established, routine sourcing patterns
Shifting from longstanding suppliers
Domestic market nationalism
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2.5. Longer Lead Times
Extended material pipelines
Forecasting over longer time horizons
Need to manage delivery dates more closely
Possibility of transit and/or customs delays
Greater degree of logistical, political, and financial risks
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2.6. Other Barriers
Offshore business practices
Language
Culture
More difficult negotiations
Need to manage delivery and engineering changes more closely
Interpersonal relationships due to cultural differences
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2.7. Currency Fluctuations
Daily or hourly fluctuations
Need to understand highly complicated financial options
How to price purchases
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2.8. Increased Supply Risks
Need for critical assessment
Prior to contracting
Look at more than just price
Types of risks vary between different countries
Need to be more proactive
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2.9. Overcoming Barriers to Worldwide Sourcing
Education and training
Publicizing success stories
Globally linked technologies
Supplier providing U.S.-based support personnel
Measurement and reward systems
Third-party or external agents
Top management support
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[3] Developing a Worldwide Sourcing Program
No suitable domestic supplier exists
Competitors are gaining competitive advantage from overseas suppliers
Information about worldwide sources
Supplier qualification and selection issues
Understanding cultural issues
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Language and communication differences
Logistical issues
Legal systems
Countertrade requirements
Costs associate with international purchasing
Managing currency risks
3.1. Information about Worldwide Sources
Worldwide sourcing directories
Trade shows
Intermediaries and organizations
Trading companies
Third-party support
Trade consulates
Foreign nationals
International purchasing offices (IPOs)
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3.2. Types of Intermediaries and Support
Trading companies
Third-party support
Trade consulates
Foreign nationals
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3.3. Role of IPO (initial public offerings)
Identify potential suppliers
Solicit quotes or proposals
Expedite and trace shipments
Negotiate supply contracts
Obtain product samples
Manage technical and commercial concerns
Represent the buyer to suppliers
Manage counter-trade requirements
Perform supplier site visits
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An initial public offering (IPO) is the first time that the stock of a private company is offered to the public. IPOs are often issued by smaller, younger companies seeking capital to expand, but they can also be done by large privately owned companies looking to become publicly traded.
3.4. Understanding Cultural Issues
Culture is “sum of all understandings that govern human interaction in a society”
Language
Religion
Values and attitudes
Customs
Social institutions
Education
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3.5. Values vs. Behavior
Values
Shared beliefs or group norms that are internalized
Affect the way people think
Behavior
Based on values and attitudes
Affects the way people act
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3.6. Language Differences
Communicating purchase requirements clearly and effectively
Not everyone speaks and understands English the same way Americans do
Message speed
Level of content
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3.7. Recommendations from An Expert
If supplier is using English as second language, buyer should be responsible for preventing communication problems
To aid in communication
Speak slowly
Use more communication graphics
Eliminate jargon, slang, and sports and military metaphors
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Bring interpreter to all but the most informal meetings
Allow extra day to educate interpreters on your issues and vocabulary
Document, in writing, conclusions and decisions made in a meeting before adjourning
3.8. Logistical Considerations
Extended distances
Additional planning and management required
Shipping delays are to be expected
Often less capable transportation infrastructure
Role of INCOTERMS
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3.9. INCOTERMS 2010
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| Location Freight Responsibility | Seller Premise | Export Formalities | Named Place or Terminal | Loading Port of Shipment | On Board Ship/Rail/ Plane | Discharge Port of Arrival | Named Place or Terminal | Import Formalities | Buyer Premise |
| Ex Works (EXW) | Seller *** | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer |
| Free Carrier (FCA)1 | Seller *** | Seller | Seller *** | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer |
| Free Alongside Ship (FAS) | Seller | Seller | Seller | Seller *** | Buyer | Buyer | Buyer | Buyer | Buyer |
| Free on Board (FOB) | Seller | Seller | Seller | Seller | Buyer *** | Buyer | Buyer | Buyer | Buyer |
| Cost & Freight (CFR) | Seller | Seller | Seller | Seller | Buyer *** | Buyer | Buyer | Buyer | Buyer |
| Cost, Insurance,& Freight (CIF) | Seller | Seller | Seller | Seller | Buyer *** | Buyer | Buyer | Buyer | Buyer |
3.10. INCOTERMS 2010
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| Location Freight Responsibility | Seller Premise | Export Formalities | Named Place of Terminal | Loading Port of Shipment | On Board Ship/Rail/ Plane | Discharge Port of Arrival | Named Place or Terminal | Import Formalities | Buyer Premise |
| Carriage Paid to (CPT)2 | Seller *** | Seller | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer |
| Carriage & Insurance to (CIP)2 | Seller *** | Seller | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer |
| Delivered at Terminal (DAT) | Seller | Seller | Seller | Seller | Seller | Seller *** | Buyer | Buyer | Buyer |
| Delivered at Place (DAP) | Seller | Seller | Seller | Seller | Seller | Seller | Seller *** | Buyer | Buyer |
| Delivered Duty Paid (DDP) | Seller | Seller | Seller | Seller | Seller | Seller | Seller | Seller | Seller *** |
Notes:
*** Where risk passes
1 Delivery can occur at seller premise or place of departure
2 Risk passes from seller to buyer when the goods are delivered to the first carrier
3.11. Legal Issues
Common law vs. codified or civil law
Different levels of protection for the buyer
Role of personal relations and trust
Intellectual property protection issues
U.N.’s Convention on Contracts for the International Sale of Goods (CISG)
World Trade Organization (WTO)
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3.12. U.S. Foreign Corrupt Practices Act
Designed to prevent companies from making questionable or illegal payments to foreign government officials, politicians, and political parties to secure or retain business
Applies to U.S. citizens and their agents
Requires accurate recordkeeping and adequate controls
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Also applies to foreign nationals who make such payments while in U.S.
No dollar threshold amount
Enforcement focuses on intent more than the amount
[4] Countertrade Requirements
Refers to all international trade where there is full or partial exchange of goods for goods
Purchasing is often responsible for negotiating and managing countertrade agreements
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4.1. Reasons for Countertrade
Some countries lack hard currency to purchase goods
Countertrade provides means to sell products in that market
Factors
Typically involve large dollar amounts
Found in countries with perceived low or non-differentiated (commodity-like) goods
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4.2. Types of Countertrade
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Barter
Counter-purchase
Offset
Switch trading
Buy-back
4.3. Barter
Straight exchange of goods for goods with no exchange of currency
Involves single contract to fulfill trading requirements
Usually relates to specific transaction and covers shorter period of time
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4.4. Counterpurchase
Requires selling firm to purchase specified amount of goods from country that purchased its products
Generally percentage of original sale
Involves products unrelated to company’s primary business
Issue of disposition of goods
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4.5. Offset
Closely related to counterpurchase
Generally percentage of original sale over specified period
Allowed to offset its countertrade requirements with any company or industry – more flexible
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4.6. Buy-Back
Sometimes called compensation trading
Occurs when …
Building a plant in third world country or
Providing services, equipment, or technology to support a plant
Builder agrees to buy back some or all of plant’s output as payment
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4.7. Switch Trading
Occurs when selling company agrees to accept goods from buying country as partial payment
Company may decide to utilize third-party to sell or market goods
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4.8. Use of Foreign Trade Zones
Secure U.S. location approved by CBP
Authorized by Foreign-Trade Zone Act of 1934
Allows importing company to delay, eliminate, or decrease its duty payment on foreign-produced goods that enter the zone site
General-purpose zone vs. subzone
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4.9. Advantages of FTZs
Duty exemption
No duties or quota charges will be placed on goods that are reexported from the FTZ
Duty deferral
Allows the importer to improve cash flow by postponing payment of duties and tariffs until the imported goods are withdrawn from the FTZ
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Inverted tariff
Occurs when goods produced in a FTZ have a lower duty rate than the duty rates on the imported components that comprise the finished goods upon withdrawal from the FTZ
Streamlined customs procedures
Weekly reporting
Reduced state/local inventory taxes
4.10. FTZ Activities Allowed
Stored
Sold
Exhibited
Broken up
Repacked
Assembled
Distributed
Sorted
Graded
Cleaned
Mixed with other merchandise
Otherwise manipulated
Exported
Destroyed
Released into the U.S.
No retailing in zone
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4.12. Evaluating the Use of an FTZ
Total annual value and volume of imported (dutiable) merchandise
Number of Customs entries annually
Weighted average duty rate of imported merchandise
Percentage and/or value of foreign (dutiable) reexports for previous year
Total annual value of drop shipments
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Annual dollar amount of duty drawbacks
Annual value and volume of dual sourced merchandise
Forecast of annual growth of dutiable merchandise over next 3 years
Approximation of U.S. value-added as percent of finished goods value
4.13. International Transaction Costs
Base price
Tooling
Packaging
Escalation
Transportation
Customs duty
Insurance premiums
Payment terms
Fees and commissions
Port terminal and handling fees
Customs broker fees
Taxes
Communication costs
Payment and currency fees
Inventory carrying costs
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4.14. Letters of Credit
Assure supplier that it will be paid for shipment
Issued by the buyer’s bank to supplier’s bank when LOC terms are fulfilled
Paid when accurate and appropriate documents are presented to buyer’s bank
Revocable vs. irrevocable
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4.15. Port Terminal and Handling Fees
Unloading of cargo
Administrative services of port authority personnel
General use of port
Temporary storage for goods awaiting customs and/or documentation clearance
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4.16. Managing Currency Risks
Purchase in U.S. dollars
Sharing currency fluctuation risk
Currency adjustment contract clauses
Delivery-triggered vs. time-triggered
Currency hedging
Finance department expertise
Tracking currency movements
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4.17. Currency Hedging
Form of risk insurance that can protect both parties
Seeks risk aversion, not monetary gain
Options
Buy or sell foreign currency at certain future rate
Forward exchange contract
Agreement to pay pre-established rate for currency in future
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[5] Moving to a Global Sourcing Philosophy
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Domestic purchasing only
Level I – no foreign purchases
International purchasing as needed
Level II – foreign purchases as needed (reactive and uncoordinated)
Level III – part of strategic sourcing
Global sourcing
Level IV – integration and coordination of global sourcing strategies across worldwide business units
Level V – integration and coordination of global sourcing strategies with other functional groups
5.1. Global Sourcing Success Factors
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Success Factors: (a) Control and coordination mechanism;
(b) Information flows
(c) Resources and System Support
Decentralized operational activities
Information sharing with suppliers
Critical resources available
Sourcing and contracting systems
Centrally coordinated/led decision making
Real-time communication methods
International purchasing office support
5.2. Future Trends in Global Sourcing
Development of higher level skill sets
Need to reach agreement on global performance measures
Need to establish integrated systems
Continued development and refinement of global sourcing strategies
Greater internal integration with other functional areas
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Seeking suppliers with global capabilities
Shift from component sourcing to subsystems, systems, and services sourcing
Continued cost reduction pressures
More suppliers in low-cost, emerging markets
5.3. Debate in US Presidential Election
| Hillary Clinton supports the reauthorization of the Export-Import Bank. She opposes the Trans-Pacific Partnership and instead supports trade agreements that would raise wages, increase prosperity, create more new, good jobs for Americans, and protect our security. |
| Donald Trump has proposed steep tariffs on imported goods and has called NAFTA “a disaster.” He describes trade promotion authority and the Trans-Pacific Partnership as “bad, bad deal[s] for American businesses, for workers, for taxpayers. |
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Ch 11
Chapter Overview
Introduction
Structured approach to cost reduction
Pricing Strategy and Cost analysis techniques
Total cost of ownership
Collaborative approaches to cost management
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Key Supply Chain Idea
Extend value creation and delivery to network stakeholders (e.g., suppliers involvement)
Examine front-end and back-end process
(e.g., Lifecycle —start from birth
to death process of products)
Use totality concept
(e.g., strategic cost management;
total cost ownership)
Major product components are provided by suppliers.
Most value decisions are made in the early stage of product development as most habits of individuals are formed in early years (e.g., childhood/teenagers)
Total value includes both tangible and intangible complex elements
Rationale
[1] Introduction
Six-year plan dependent on a small group of committed suppliers
100% understanding of all components of product cost
Lean supplier development concurrent engineering
Flawless new product launch
Communications
The Honda Business Model for Suppliers
1.1. Strategic Cost Management
2-19-15(R) WSJ Campbell Outlines Aggressive Cost Cuts B2
Campbell Soup Co. announced plans to slash costs and retool its operation to make them more nimble…..
it would eliminate “excess layers” of management, and include a start-from scratch accounting approach called zero-based budgeting that requires departments to justify spending anew every year. …
Campbell, which sells Pepperidge Farm snacks and Prego pasta sauce in addition to its namesake soup, said the effort will eventually shave $200 million off annual costs that totaled $6.9 billion in its last fiscal year, when the company reported revenue of $8.27 billion….
.It is Campbell’s second major cost-cutting initiative in four years, following an effort focused on improving supply-chain efficiency that was announced June 2011…..
In January , Campbell said that it would reorganize into divisions based on product type instead of geography.
How would you characterize Campbell’s Aggressive Cost Cuts initiatives?
Would you characterize this as strategic cost management?
1.2. Strategic Cost Management
2-19-15(R) WSJ Delphi Sale Signals New Era for Car Suppliers (B1, B8)
Spun Off from General Motors Co., in the late 1990s, Delphi once sold everything from steering wheels to brake pads….Delphi has agreed to sell its lower margin automotive heating and cooling business to German competitor Mahle GmbH for more than $700 million…..
After a four-year bankruptcy, Delphi return to the public market in 2011 and its shares have jumped…its market value to $22.8 billion,….nearly as large as electric-car-maker Telsa Motors…
Delphi earns most of its money from products that help make engines more fuel efficient and vehicles capable of operating more autonomously. Cameras, sensors, emissions systems and safety equipment are staples of today’s product line…..
Much of the work of done by unmanned robots called “froggers” scurrying among bins and rows of machines. ….
Delphi now concentrates on 33 different high-tech product lines ranging from diesel injection systems to active safety parts. It closed or sold its 86 other products ranging from steering wheels and bearings to batteries and brakes
How would you characterize Delphi’s transition over the years?
How different would strategic cost issues now?
1.3.Strategic Cost Management
2-25-15(W) Rising U.S. Dollar Weighs on H-P B4
Hewlett-Packard Co., has a thorny new problem to deal with: The strong U.S. dollar…
The dollar’s strength lately has tripped up many U.S. companies with significant sales abroad, effectively discounting each sale they make oversea. ..
the dollar’s recent appreciation against the euro and other major currencies would cut about #3.3 billon more off its expected annual revenue…
H-P profit for the quarter ended Jan. 31 was $1.37 billion….down from $1.43 billion……
Why is strong dollar a thorny new problem for H-P?
What can H-P do about this in short-run and long-run?
1.4. The Value Equation
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Quality + Technology + Service + Cycle Time
Price
Value =
1.5. Definitions
Price analysis
Process of comparing supplier prices against external price benchmarks without knowledge of supplier costs
Cost analysis
Process of analyzing each individual cost element that add up to final price
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Total cost analysis
Applies price/cost equation across multiple processes that span two or more organizations across a supply chain
[2] Structured Approach of Cost Management
Tier 2 Supplier
Tier 1 Supplier
Enterprise
Customer
Consumer
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Single Company Focused Cost-Reduction Initiatives
Strategic Cost Management –
Finished Product/Service Focus throughout the
Supply Chain
Customer Needs
2.1. Historical Cost Reduction Approaches
Value analysis/value engineering
Process improvements
Standardization
Improvements in efficiency using technology
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2.2. Strategic Cost Management Processes
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Most focus is on a single company
Need to migrate to a supply chain focus
Supply Chain Strategic Cost Management
Supply Chain Cross-Enterprise Focus (Joint Efforts)
Value Engineering / Value Analysis
On-Site Supplier Development
Cross-Enterprise Cost Improvement
Joint Brainstorming for Cost Improvement
Supplier Suggestion Programs
Supply Chain Compression
2.3. Strategic Cost Management Processes
Value analysis/Value engineering
Team-based
Cross-enterprise
On-site supplier development
Process to accomplish supplier continuous improvement
Cross-enterprise cost improvement
Joint effort
Costs identified
Cost drivers determined
Strategies to improve execution
Results review
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Joint brainstorming
Establish list of value-add projects and execute
Supplier suggestion programs
Motivate
Act on
Reward
Overall process
Supply chain compression
Reducing number of levels
Supplier consortiums
2.4. Managing Life Cycle Costs
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Initial Cost Target Final Cost Target Contract Baseline Cost/Price Continuous Improvement
| Quality function deployment Feasible cost Risk assessment Technology road map/information shared Supplier concept competition/request for proposal Finalize statement of work | Value engineering Design for manufacturing, purchasing, assembly, environment, etc. Supplier integrated into new product development Target costing standardization | Competitive bidding Value analysis Aggressive negotiations Volume leveraging Inventory consignment Managed service contracts Forecast/adjust for inflation Engineering change control Longer-term agreements | Remanufacture Recycle Refurbish |
Front-end Back-end
When is the majority of costs committed?
Where is the greatest cost saving potential?
Idea/Concept Generation
Design and Development
Prototype, Pilot, Launch
Ongoing Production
Product End-of-Life
2.5. Strategic Cost Framework
| Critical Products Strategies: Cost analysis Collaborative cost-reduction efforts focused on total costs | Commodities Strategies: Leverage preferred suppliers Price analysis using market forces |
| Unique Products Strategies: Cost analysis – reverse pricing Standardize requirements | Generics Strategies: Total delivered cost Automate to reduce purchasing involvement |
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VALUE
NUMBER OF AVAILABLE SUPPLIERS
High
High
Low
Low
2.6. Strategic Cost Framework
Generics
Competitive market with many potential suppliers
Emphasize total delivered price
No need for detailed cost analysis
Commodities
High-value products or services
Competitive market situation
Traditional bidding approaches
Identify competitive pricing through price analysis
Standardized products
Users order direct through supplier catalogs, p-cards, or e-procurement
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Unique products
Few available suppliers
Relatively low value
Utilize reverse price analysis to determine whether price is “too high”
Try to move to generics quadrant over time
Critical products
Requires majority of buyer’s focus
Relatively few suppliers
Higher-value items
Explore opportunities for:
VA/VE
Cost savings sharing
Collaborative efforts to identify cost drivers
Supplier integration early in product development cycle
2.7. Best Practices in Strategic Cost Management (pp. 454-455)
| Category | Basic | Advanced | Most Advanced |
| Governance | Establish Demand Program and Budget | Organizational Alignment | Global sourcing Alignment |
| Systems | Firm-wide costing system | Supply chain wide costing system | Cost System through Supply chain life cycle of |
| Supply Base Management | Establish a program for specific targets | Segmented Supply base with strategic suppliers | A set of long-term supplier partnerships |
| Leadership and Planning | Corporate champion for cost leadership | Planning team for global sourcing needs | Document category strategy and cost imprudent plan |
| Metrics | Key Performance Indicators | Documented for all major facilities and product lines | Detailed cost breakdowns, pricing strategies on a rolling three-year basis |
| Talent | A network of key subject matter experts | Talent development efforts for all major functions | Clear career path and leadership plan to attract high talented individuals |
| NPI | A major audit of NPI processes | Initial engagement with strategic suppliers | Advanced Mfg. engineering teams and supplier development teams |
3. Pricing Strategy
162
Supplier’s
Market
Buyer’s
Market
PRICE
VOLUME
Supply
Demand
3.1. Elements of Price and Cost Drivers
| Profit Margin |
| Selling and Administrative Cost |
| Production Overhead |
| Direct Labor Cost |
| Direct Materials Cost |
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Price Charged
Skimming
Rate of return
Margin pricing
Supplier’s Total Cost
Market forces
Market strategy
Competition
Direct Costs
Labor force
Raw materials
Economic conditions
3.2. An Illustration
Firm A has experienced serious competitive challenges over the past five years. It has lost major customer base and its profit margin is shrinking fast. Its R&D department has been working on new product lines which have somewhat optimistic market potential.
What pricing strategy do you recommend for this firm for
(1) existing product lines; (2) new product lines?
3.3. Penetration Pricing: Entry to a market
Price set to ‘penetrate the market’
‘Low’ price to secure high volumes
Typical in mass market products – chocolate bars, food stuffs, household goods, etc.
Suitable for products with long anticipated life cycles
May be useful if launching into a new market
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3.4. Value Pricing: Premium Market
Price set in accordance with customer perceptions about the value of the product/service
Examples include status products/exclusive products
Companies may be able to set prices according to perceived value.
Copyright: iStock.com
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3.5. Target Pricing: Competitive Advantage
Setting price to ‘target’ a specified profit level
Estimates of the cost and potential revenue at different prices, and thus the break-even have to be made, to determine the mark-up
Mark-up = Profit/Cost x 100
3.6. Cost-Plus Pricing: Long-term survival
Calculation of the average cost (AC) plus a mark up
AC = Total Cost/Output
3.7. Cost-Based Pricing Example
| First-year target price = $61.00 | ||
| Negotiated/Analyzed Cost Structure | Material Labor rate Burden rate Scrap rate SG&A expense rate Effective volume range Projected product life ROI agreement | $20/unit $8.50/unit 200% of direct labor 10% 10% of mfg cost 125,000 units/year ± 10% 2 years 30% |
| Supplier Investment Total Supplier Investment | Year 1 $3,000,000 $5,000,000 | Year 2 $2,000,000 |
| Cost Savings Sharing (50/50) | Direct labor Scrap rate | 10% annual reduction 50% annual reduction |
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3.8. Cost-Based Pricing Example
170
| Year 1 | Year 2 | Rationale | |
| Materials | $20.00 | $19.24 | Materials reduction of $1.50 plus an overall materials increase of 4% or ($20.00 - $1.50) x 1.04 |
| Direct labor | 8.50 | 7.88 | Reduction of 10% - Contractual target improvement - plus 3% increase |
| Burden (200% of D.L.) | 17.00 | 15.76 | |
| Total Materials, Labor, & Burden | $45.50 | $42.88 | |
| Scrap @ 10% | 4.55 | 2.14 | Scrap reduced from 10% to 5% |
| Manufacturing Cost | $50.05 | $45.02 | |
| Selling and administrative expenses @ 10% | 5.00 | 4.50 | |
| Total Cost | $55.05 | $49.52 | |
| Profit ** | 6.00 | 6.75 | Includes $0.75 share for joint material reduction or $6.00 + ($1.50 / 2) |
| Selling price | $61.05 | $56.27 | New selling price after Year 1 improvements |
| ** Profit based on 30% return on investment negotiated in agreement | |||
| ($5 million over 2-year investment x 0.3) / 250,000 total units = $6.00 profit/unit |
Purchasing & Supply Chain Management, 6e
4.6. An Illustration
Firm A has experienced serious competitive challenges over the past five years. It has lost major customer base and its profit margin is shrinking fast. Its R&D department has been working on new product lines which have somewhat optimistic market potential.
What pricing strategy do you recommend for this firm for
(1) existing product lines; (2) new product lines?
[4] Total Cost of Ownership (TCO)
Purchase price
Invoice amount paid to supplier
Acquisition costs
Costs of bringing product to buyer
Usage costs
Conversion and support costs
End-of-life costs
Net of amounts received/spent at salvage
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4.1. Building a TCO Model
Map process and develop TCO categories
Determine cost elements for each category
Determine how each cost element is to be measured (metrics)
Gather data and quantify costs
Develop a cost timeline
Bring costs to present value
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4.2. Opportunity Costs
Defined
Cost of next best alternative
Examples:
Lost sales
Lost productivity
Downtime
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4.3. Factors to be Considered in TCO
Use for evaluating larger purchases
Obtain senior management buy-in
Work in a team
Focus on big costs first
Obtain realistic estimate of life cycle
Use as a decision making tool
Consider all relevant costs in global sourcing throughout supply chain
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4.4. TCO Model Example
| Cost Elements | Cost Measures for 1,000 PCs |
| Purchase price: Hardware Software licenses A, B, and C | $1,200/PC – supplier quote $450/PC – supplier quotes (3) |
| Acquisition costs: Sourcing Administration | 2 FTE employees @ $85K and $170K for 2 months 1 P.O. @ $150, 12 invoices @ $40 each |
| Usage costs: Installation Equipment support Network support Warranty Opportunity cost – lost productivity | $700/PC $120/month/PC – supplier quote $100/month – supplier quote $120/PC for 3-year warranty Downtime: 15 hours/PC/year @ $30/hour |
| End-of-life costs Salvage value | $36/PC |
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4.5. TCO Model Example
Purchasing & Supply Chain Management, 6e
177
| Cost Elements | Present | Year 1 | Year 2 | Year 3 |
| Purchase Price: | ||||
| Hardware | $ 1,200,000 | |||
| Software licenses A, B, and C | $ 450,000 | |||
| Acquisition Costs: | ||||
| Sourcing | $ 42,500 | |||
| Administration | $ 150 | $ 480 | $ 480 | $ 480 |
| Usage Costs: | ||||
| Opportunity cost – productivity | $ 450,000 | $ 450,000 | $ 450,000 | |
| Installation | $ 700,000 | |||
| Equipment support | $ 1,440,000 | $ 1,440,000 | $ 1,440,000 | |
| Network support | $ 1,200,000 | $ 1,200,000 | $ 1,200,000 | |
| Warranty | $ 120,000 | |||
| End-of-Life Costs: | ||||
| Salvage value | $ (36,000) | |||
| Total | $ 2,512,650 | $ 3,090,480 | $ 3,090,480 | $ 3,054,480 |
| Present Values @ 12% | $ 2,512,650 | $ 2,759,799 | $ 2,463,113 | $ 2,174,790 |
CH 12
Chapter Overview
Project management
Project Management Tools
Value Analysis/Process Mapping
Risk Management
179
Project is defined as series of tasks that …
Requires completion of specific objectives
Has defined start and stop dates
Consumes resources, particularly time, personnel, and budget
Operates with limited resources
180
1.1. Project: Examples and Basics
Developing new products
Developing and implementing new management information systems
Implementing value analysis recommendations
Developing sourcing strategy for a new market
Initiating supplier performance improvement plans
181
Defined scope
Project overview
Agreed-upon tasks, responsibilities, and deliverables
Time frame
Starting and ending points
Strategic/Total Cost Management
1.2. Project Management Leadership
Clarify goals (e.g., front-end planning and goal setting)
Define strategic Fit (Project goals fit to overall business unit goals)
Motivate cross-functional work (communication, collaboration, contribution)
Manage Work Processes (e,g., paths, deadlines and deliverables)
Respond to surprises (e.g., glitches, conflicts, risk situations)
Deliver outcomes (e.g., show the tangible results)
1.3. Six Phases of a Project
183
Concept
Project definition
Planning
Preliminary studies
Performance
Post-completion
[2] Project Management Tools
Project Management Tools Define:
Project activities: Define key activities for productive deployment of resources
Timeline: Clear timeline
Deliverables: Process Outcomes and Performance Outcomes
184
2.1. Gantt Chart: Visually displays tasks and times associated with a project Advantages: (1) Relatively inexpensive to develop and use (2) Can convey great deal of information Disadvantages: (1)Difficult to use and maintain for complex projects
185
| TASK \ WEEK | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14 | 15 | 16 | 17 | 18 | 19 | 20 | 21 | 22 |
| Define supplier equipment and technology requirements | ||||||||||||||||||||||
| Ready equipment for transfer | ||||||||||||||||||||||
| Transport equipment to supplier | ||||||||||||||||||||||
| Install and test equipment | ||||||||||||||||||||||
| Train supplier personnel | ||||||||||||||||||||||
| Ramp up to full production | ||||||||||||||||||||||
2.2. Project Management Network: Define series of activities in proper sequential relationships
186
Network Example
| Activity | Designation | Preceding Activity |
| Assemble project team | A | |
| Identify potential commodity suppliers | B | A |
| Develop supplier evaluation criteria | C | A |
| Develop supplier audit form | D | C |
| Perform preliminary supplier financial analysis | E | B |
| Conduct supplier site visits | F | E, D |
| Compile results from site visits | G | F |
| Identify requirements for supplier performance system | H | A |
| Perform detailed systems analysis and programming | I | H |
| Test computerized system | J | I |
| Select final suppliers | K | G |
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2.3. Learning Curves
Establish rate of improvement due to direct labor cost improvement as production volumes increase
Learning rate represents improvement as production doubles
85% learning rate indicates that direct labor declines by 15% each time production doubles in volume
Use to lower purchase price over time
188
Learning Curve Illustrated
| Cumulative Units Produced | Total Labor Hours | Average Labor Hours/Unit | Learning Rate |
| 1 | 20 | 20.0 | |
| 2 | 34 | 17.0 | 15.0% |
| 4 | 58 | 14.5 | 14.7% |
| 8 | 100 | 12.5 | 14.8% |
| 16 | 168 | 10.5 | 16.0% |
| 32 | 288 | 9.0 | 14.3% |
| 64 | 493 | 7.7 | 14.4% |
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Note: Average improvement rate is approximately 15% per year, yielding a 85% learning curve
[3] Value Analysis/Value Engineering
Involves examining all elements of component, assembly, end product, or service to make sure that it fulfills its intended function at lowest total cost without sacrificing quality
Value = Function ÷ Cost
190
Gather information
Speculate
Analyze
Recommend and execute
Summarize and follow up
3.2. Process Mapping
Reduces processes to component parts or activities
Helps identify and then eliminate non-value-added activities (waste) or delays
Process
Is outcome of set of tasks, activities, or steps
Crosses multiple functional boundaries
Groups have conflicting goals
192
Types:
Sequential processes
Concurrent processes
Often conducted by cross-functional teams
Generates buy-in from affected groups
3.3. Process Mapping Example
193
| Step # | Activity | Average Time Required |
| 1 | Employee 1 physically places trailer at receiving dock | 15 minutes |
| 2 | Employee 2 unloads the trailer with material handling equipment | 30 minutes |
| 3 | Employee 3 checks load quantity from the trailer against shipping documents for accuracy | 30 minutes |
| 4 | Employee 4 acknowledges receipt of the material on the computer and prints control tickets to move material to required warehouse locations | 60 minutes |
| 5 | Employee 5 attaches control tickets to individual loads | 20 minutes |
| 6 | Employee 6 inspects inbound material | 30 minutes |
| 7 | Employee 7 moves material to required warehouse location, freeing up the receipt line for another trailer | 30 minutes |
| 8 | Employee 4 files copy of shipping documents and forwards copies to Accounts Payable at the end of the day (no physical movement required) | 15 minutes |
| Total Average Time to Unload Trailer (excludes Step # 8) | 215 minutes |
Non-value-adding
Value-adding
| Step #1 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Step #2 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Step #3 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Step #4 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Step #5 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Step #6 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Step #7 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Hour 1 | Hour 2 | Hour 3 | Hour 4 | |||||||||||||||||||||||||||||||||||||||||||||||
3.4. Process Mapping Example
194
Non-value-adding
Value-adding
Remove non-value-adding steps
Seek to combine other steps
[4] Risk management
Risk management is concerned with identifying risks and drawing up plans to minimise their effect on a project.
A risk is a probability that some adverse circumstance will occur
Project risks affect schedule or resources;
Product risks affect the quality or performance of the software being developed;
Business risks affect the organisation developing or procuring the software.
4.1. Risk Management
Corporate Risk Management
Define
Measure
Manage
Monitor
Since so much money is at risk in relation to procurement, it is important to develop an outline of a policy statement, or recommend improvements to existing document
Benchmark controls versus best practices/relevant practices
4.2. Sources of Procurement Risk
Uncertain Markets
Uncertain
Exposures
Mistaken
Views
Wrong Risk Measurement Methods
Risk!
4.3. Monitoring and Control
Corporate Risk Management
Define
Measure
Manage
Monitor
Monitoring implies performance measurement
Performance measurement is the science of attribution
Performance measurement requires a benchmark
Surprises require reassessment and response
Uncertain Markets
Uncertain
Exposures
Mistaken
Views
Risk!
Wrong methods
4.4. The risk management process
Risk identification
Identify project, product and business risks;
Risk analysis
Assess the likelihood and consequences of these risks;
Risk planning
Draw up plans to avoid or minimise the effects of the risk;
Risk monitoring
Monitor the risks throughout the project;
4.5. The risk management process
4.6. Attributes of Different Hedging Tools
In finance, a collar is an option strategy that limits the range of possible positive or negative returns on an underlying to a specific range.
Complex Moderate Simple
Call Options
Specific, up-front cost (like buying insurance)
Ceiling price established
Collars
Often, no up-front costs
Downside is price is set (floor)
Unlimited downside price participation
Upside cost is capped (ceiling)
Fixed Price Swaps
No up-front costs
Single, fixed price
Full protection from higher prices
No ability to participate in price decreases
Customer Pays Difference
Customer Receives Difference
4.7. Customer Buys a Fixed-Price Swap
202
Swap Price
Net Price
Underlying Market Price
Hedged
Unhedged
Customer Pays Difference
Customer Receives Difference
4.8. Customer Buys Zero-Cost Collar
203
Call Strike
Net Price
Underlying Market Price
Hedged
Unhedged
Put Strike
Puts, a right to sell. Put Strike—futures is below strike price
Calls, a right to buy. Call Strike—futures is above strike price
A zero cost collar is a short-term option trading strategy that offsets the volatility risk by purchasing a cap and a floor for the price of a derivative. By creating a hedge against even moderate swings in a particular commodity, a zero cost collar effectively limits the upside earnings and downside risk.
Customer Receives Difference
4.9. Customer Buys a Call Option
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Strike Price
Net Price
Underlying Market Price
Hedged
Unhedged
Premium Paid
“Strike Price”: Specific price owner has right to buy or sell
Risk avoidance
and contingency
plans
Risk planning
Prioritised risk
list
Risk analysis
List of potential
risks
Risk
identification
Risk
assessment
Risk
monitoring
