Week 1: Introduction

Procurement definition: “Procurement” is the overarching function that describes the activities and processes to acquire goods and services.

Why do we procure?

- To meet the internal customers

- To meet the need of external customers
- Think: who are customers

Procurement:

- Procurement involves the activities involves in sourcing activities such as market research, procurement planning and vendor evaluation
and negotiation of contracts
- It can also include the purchasing activities required to order and received goods
- Purchasing is a subset of the wider procurement process

Purchasing: contribute to corporate strategy in four different ways:

- Monitor supply market

- Interpret the meaning of these trends for the firm
- Identify the materials and services required to support company
- Strategic business unit strategies and develop study options

Sustainable procurement: can be defined as the pursuit of sustainable development objectives through the purchasing and supply process.
Sustainable procurement is consistent with the principles sustainable development, such as ensuring a strong, healthy society, living within
environmental limits, and prompting good governance.

Supply & Logistics: Logistics is related to supply with regard to the flow of goods, services and information in procurement process

Supply/procurement managers focus on:

- Acquisition process
- Goal alignment with the supplier
- Relationship with suppliers
- Quality and efficiency

Supply management:

1. Identify / Need
o Through historical data
o Through MRP (Material Requirement Planning)
2. Procurement (planning)
3. Manage (inventory, inventory, staff, budget)

Industrial buying: buyers who buy for “conversion” purpose (parts, materials, components, … )

MPS (Master Production Schedule) -> MRP + Forecasting

Institution buying: buyers who buy for “consumption” purpose (hotel, hospital,..)

Forecasting -> Historical data

Intermediate buying (Highest risk): buyers who buy for trade purpose

Anticipation
 Commercial buying Consumer buying

- Higher volume - Lower volume

- Less sellers - More sellers
- Lower buyer power - Higher buyer power
- Low advertisement - More advertisement
- Low customer based - More customer based

Supply strategic components

1. What?
- Make or Buy
- Standard versus special
- Insourcing or outsourcing
2. Quality
- Quality versus cost
- Supplier development
- Supplier Quality Assurance Programs
 Zero defect (ZD) plans: “Do it right the first time” is far more cost effective than making corrections after the fact
 Process quality control programs: These use statistical control charts to monitor various production processes to isolate
developing problems and make needed adjustments before bad product is produced
 Quality certification programs
3. How much?
- Large vs small quantities (inventory)
4. Who?
- Centralize and decentralize
- Location of staff
- Top management involvement
5. When?
- Now versus later
- Forward buy
6. What price?

- Premium - Cost-based
- Standard - Market-based
- Lower - Lease/make/buy
7. Where?

- Local versus regional - High versus supplier turnover

- Domestic versus international - Supplier relations
- Large versus small - Supplier certification
- Single versus multiple sourcing - Suppler ownership
8. How?

- Systems and procedures - Materials requirements planning

- E-commerce - Long-term contracts
- Negotiations - Ethics
- Competitive bids - Aggressive or passive
- Fixed bids - Purchasing research
- Blanket orders/ open orders - Value analysis
- System contracting - Group buying
9. Why?
- Objectives congruent
- Market reasons
- Internal reasons
o Outside supply
o Inside supply
Week 2: Supply strategy and organization
Supply strategy & organization: A supply chain is defined as a set of three or more entities (organizations or individuals) directly involved in the
flow of products, services, finances and information from source to a customer

Supply chain management / strategy

- Supply chain management has the potential to improve a firm’s competitiveness

- Supply chain capability is as important to a company’s overall strategy as overall product strategy
- Supply chain management encourages management of processes across departments
- By linking supply chain objectives to company strategy, decisions can be made between competing demands on the supply chain.
- Improvements in performance are driven by external targets

Strategic planning of three levels:

- Corporate: What business are we in? How will we allocate our resources?
- Business level: Decisions of the plan of particular business unit regarding the corporate strategy
- Function: Plan how each unit contributes to the business strategy and allocates resources.

How supply strategy links to organizational strategy

Organizational objectives Supply objectives

- Survival - Quality and function
- Growth - Delivery
Size of the organization, number of employee, - Quantity
number of assets, numbers countries - Price
- Financial performance - Terms and conditions
Total size of budget, profit, total revenue, ROI, - Services
ROA, share price, etc
- Environmental responsibility
Air/water/earth, customer and employee
ideals/values , good citizenship

Challenge of setting supply objectives and strategies:

- Interpretation of objectives
o Expand rapidly: is supply assurance more important than price
- Choice of action plan or strategy
o Supply assurance single or multi-sourcing, in-house making
 - Feedback of supply issues
o New technology can be accessed early through supply efforts
- Supply strategy only requires supply managers fit with the organization’s key objectives and strategies and recognizing opportunities

Strategic planning in supply management

- Supply strategy: designed to achieve selected goals and objectives

- Critical factors:
o Ability to relate environmental factors
o To anticipate changes
o To adjust to changes
o To capitalize on opportunities

Purchase process

Purchase requisition -> Sourcing + quotation -> Evaluation, negotiation -> P.O (Purchase order) -> Receiving -> Billing -> payment

Objectives of supply management

- Right material
- Right quantity
- Right source
- Right time
- Right place
- Right service
- Right price

Nine goals of supply management

1. Improve the organization’s competitive position

2. Uninterrupted supply of materials
3. Keep inventory investment & loss at minimum
4. Maintain and improve quality
5. Find develop best-in-class suppliers
6. Standardize the items to be bought and the process
7. Lowest total cost of ownership
8. Harmonious and productive relationship with other departments
9. Accomplish supply objectives at lowest cost

Small and medium organizations Large organizations

- No formal organizational structure - Centralized:
- Supply responsibility is shared by individuals who Authority and responsibility are assigned to a central
may have no supply expertise organization
- Supply managers is needed as size of businesses - Hybrid:
increase Authority and responsibility are shared between
central supply organization, business units or
operating plants
- Decentralized:
Authority and responsibility are shared throughout
the organization
Centralized vs Decentralized

Centralized Decentralized

Advantages: Advantages:
- Bulk Price - Flexible responsibilities
- Strategic focus - Developed relationship
- Greater buying specialization - Speed of response
- Ability to pay for talent - Effective use of local sources
- Consolidation of requirements –clout - Business unit autonomy
- Coordination and control policies and procedures - Reporting line simplicity
- Effective planning and research - Undivided authority and responsibility
- Common suppliers - Suits purchasing personnel preference
- Proximity to major organizational decision makers - Broad job definition
- Critical mass - Geographical, cultural, political, environmental,
- Firm brand recognition and stature social, language, currency appropriateness
- Reporting line-power - Hides the cost of supply
- Cost of purchasing low Disadvantages:
- Expensive
Disadvantages: - More difficult to communicate among business units
- Responsibilities is not flexible - Encourages users not to plan ahead
- Lack of business focus - Operational versus strategic focus
- Narrow specialization and job boredom - Too much focus on local sources – ignores better
- Cost of central unit highly visible supply opportunities
- Corporate staff appears excessive - No critical mass in organization for
- Tendency to minimize legitimate differences in visibility/effectiveness – “whole person syndrome”
requirements - Lacks clout
- Lack of recognition of unique business unit needs - Sub-optimization
- Focus on corporate requirements, not on business - Business unit preferences not congruent with
unit strategic requirements corporate preferences
- Most knowledge sharing one-way - Small differences get magnified
- Even common suppliers behave differently in - Reporting at low level in organization
geographic and market segments - Limits functional advancement opportunities
- Distance from users - Ignores larger organization considerations
- Tendency to create organizational silos - Limited expertise for requirements
- Customer segments require adaptability to unique - Lack of standardization
situations - Cost of supply relatively high
- Top management not able to spend time on
suppliers
- High visibility of purchasing operating costs
Week 3: Outsourcing
Goal Alignment

- Vertical alignment: Supply strategy and goals at the functional or business unit level aligned with organizational strategy
- Horizontal alignment: Supply strategy and goals aligned with those of other functional areas

Goal of Supply

- Improve the organization’s competitive position

- Uninterrupted flow of materials, supplies and services required to operation the organization
- Inventory investment and loss at minimum
- Maintain and improve quality
- Find or develop best-in-class suppliers
- Standardize, where possible, the items and services bought and the processes used to procure them
- Purchase required items and services at lowest cost
- Achieve harmonious, productive internal relationships
- Achieve supply objectives at lowest possible operating costs

Reasons to develop robust processes

- Large number of items

- Large dollar volume involved
- Need for an audit trail
- Severe consequences of poor performance
- Potential contribution to effective organizational operations inherent in the function

Outsourcing:

Organizations outsource when they decide to buy something they had been making in-house previously. Almost no function is immune to
outsourcing. Some activities, such as janitorial, food and security services have been outsourced for many years. Information Technology (IT), legal
and health care services such as radiology have received much attention recently as targets for outsourcing. The growth in outsourcing in the logistics
area is attributed to transportation deregulation, the focus on core competencies, reduction in inventories, and enhanced logistics management
computer programs

- A form of procurement, generally defined as the use of external agents to perform one or more organization activities
- Also known as competitive tendering and contracting
- Outsourcing has traditionally been applied to the transferring of business functions or processes to entities external to the organization or in
other countries.

Make or Buy?

Make Buy
- Maintain competitive advantage (important) - Lack of managerial or technical experience
- Quantities too small or no suppliers - Excess production capacity
- Quality requirements - Reduce risk
- Greater assurance of suppler - Customer preference for a particular brand
- Closer coordination of supply and demand - Challenges of maintaining technological leadership
- Technological secrets for noncore activity
- Lower cost - Cost accuracy
- Take advantage of unused capacity - Flexibility and desire to stay lean
- Keep our capacity utilization high and outsource the - Insufficient volume to justify in-house production
rest - Forecasts show great demand or technological
- Avoid supply dependency uncertainty
- Reduce risk - Highly capable supplier
- Competitive, political, social or environmental - Buying may open up markets
factors - The ability to bring a product or service to market
fast
Outsourcing projects

Advantages:

- Cost reduction
- Faster project completion
- High level of expertise
- Flexibility

Disadvantages:

- Coordination breakdowns
- Loss of control
- Conflict
- Security issues
- Project completed before problems discovered

How to be successful in Outsourcing

1. Business planning
- SOW (Statement of Words)
2. Supplier selection

- Capable

- Reliable

3. Contract: Negotiation, clarification, sign

4. KPI measure
5. Periodic Review
- Relationship

Offshoring: primarily a geographic activity. Offshoring takes advantages of the cost differentials by relocating factories from costly countries to the
cheaper economies to sell the goods at a hefty discount (and profit).

Offshoring problems: Same problems as the standard outsourcing plus:

- Operations across countries (Competency, delivery, transformation, relationship)

- Regulation and law
- Language
- Culture and social norms
- Contractual style
- Logistics/supply chain
 Week 4: Supplier selection and evaluation
Identification of potential source

1. 2. Can a Current 3.
Can We Make In- Supplier No Find Potential
House? Meet? New Supplier

YesNo
No Supplier One Two or More
Can Meet Supplier Suppliers Can
Yes Can Meet Meet

Make Buy
One Supplier Two or More
Can We Use Supplier
Can Meet Suppliers Can
Development to
Meet
Create Supplier?

Yes
YesNo

Can We Make Can We Redesign/Re-specify

In-House? so that
No Existing or New Supplier Can Yes
Meet?

Rethink
Three levels of supplier evaluation

- Level 1 – Strategic
- Level 2 – Traditional: quality, quantity, delivery, price and services
o Technical, engineering, manufacturing and logistic strengths
o Management and financial evaluation
- Level 3 – Current additional: financial, risk, environmental, regulatory, innovation, social and political
 Formal supplier evaluations
Good Performance
- Quality

- Price
Fair Performance
- Delivery

- Service Unsatisfactory Performance

Supply risks & dollars extended

Bottleneck Strategic
Unique specification Continuous availability essential
Custom design or unique specifications
High Supplier technology important
Production-based scarcity Supplier technology important
Substitution difficult Few adequate suppliers
Usage fluctuates Changing source of supply difficult
Potential storage risk Substitution difficult
Risk

Non-Critical Leverage
Standard or commodity type Unique cost management important
Substitute products available Substitution possible
Competitive supply market Competitive supply market

Low
Low Value High
Weighted point evaluation system

- Identify suppliers
- Important suppliers and/or critical goods and services
- Identify factors or criteria for evaluation
- Determine the importance of each factor
- Establish a system to rate each supplier on each factor
- An example of a categorical supplier evaluation and rating
View of buyer-supplier relationships

Traditional Partnership
- Lowest price - Total cost of ownership
- Specification-driven - End-customer driven
- Short-term, reacts to market - Long-term
- Trouble avoidance - Opportunity maximization
- Purchasing’s responsibility - Cross-functional teams and top management
- Tactical involvement
- Little sharing of information - Strategic
- Both supplier and buyers share short and long-term
plans
- Shared risk and opportunity
- Standardization
- Joint ventures
- Share data

Deployment path to partnership: 1. Supplier Assessment

(Potential)

2. Supplier Improvements

3. Supplier Rationalisation

4. Supplier Alignment

Supplier Partnership
Key performance indicator

Direct measures quantify supplier performance at the time work is completed .Supply manager may develop a supplier score card that include
supplier’s cost, quality, timeliness and a compilation of satisfaction surveys, variation of invoice with contract terms.

Supplier relation

- Significant competitive edge can be gained from relationship with the supplier
- Supplier performance and relationship has greate impact on productivity, qualitative, competitiveness of the
organization
- The objective of the supplier relation is to develop a supply link that provide short and loterm competitive
advantage
Supplier goodwill

- Supplier goodwill is created when companies take attempt and maintain relationship with supplier
- Companies measure supplier goodwill through third party
- Supplier satisfaction survey finds that the best purchasers are those who know about the supplier’s business

Purchaser-supplier satisfaction matrix

- Need to evaluate if relationship is satisfactory

- Complex problem with different perceptions
- A framework is required
o Satisfaction can be assessed
o Unsatisfied party will try to move on
o Attempt to move may affect the relationship
o Attempt might be win-lose, lose-lose, lose-win or win-win
o Different perception of the same relationship
o Tools and techniques to assist
Supplier relationship management

- Extensive communication between buyer and supplier

- Team approach to long term supplier relations
- Trust building
- Cooperation and collaboration
- Commitment

Successful partnership

- Formal communication process

- Commitment
- Mutual profitability
- Stable relationships, not dependent on a few personalities
- Consistent and specific feedback on supplier performance
- Realistic expectations
- Ethical business conduct
- Meaningful information sharing
- Guidance to supplier improvement

Early supplier involvement (design for procureability)

- Involving the supplier and the buyer in the early stages (need recognition and description) can lead to improvement in processes, design,
redesign or value analysis technique.
- A supplier may participate with the hope of securing the business, or as part of an ongoing partnering/alliance relationship. Confidentially
must be dealt with up front and it must be clear to the supplier if involvement guarantees the business or not.
- Partnerships may be seen as an alternate solution for the make option in the make-or-buy decision. Similarly, a partnership could be a
substitute for vertical integration. A partnership attempts to unlock the benefits from shared information without the disadvantages of
ownership
- Partnerships require hard work on both sides to make them effective. They require a tolerance of mistakes and a real commitment to make
the relationship work. The key idea is that each partner might enhance its own competitive position through the knowledge and resources
shared by the other.

Co-location / in plants:

Having a key supplier locate personnel in a department in the buying organization who can function as buyer, planner and sales person can improve
buyer-seller communication and processes and reduce administrative and sales costs.

How to supplier selection?

1. Business’s vision, goal

2. Set supplier criteria
3. Understand your purchase strategies
- Single source, multiple source
- Manufacturer, distributor
o Distributor:
 Cheaper
 Availability
 Maintenance
o Manufacturer:
 Latest technology
- Local supplier
4. Identify potential sources
- Where to find? Internet, yellow pages, directory, trade office (part of the embassy)
5. Short-listing
- Financially stable
- Financial data available
6. Evaluation
- Plant visit – most effective
- 3rd party inspection
- Ask for sample – maybe fake
- Asking around track record
7. Negotiate understanding
- Condition
8. Trial purchase
If continue to buy
9. Supplier certification
10. Supplier management/ develop
Week 5: Suppliers: Need identification & specifications
Need identification criteria

- Strategic
o Mission critical, total spend, risk reduction, access to new technology or new markets, assurance of supply in tight markets,
etc.
- Traditional supply criteria
o Quality: cover both functionality
o Quantity:
o Delivery:
o Price:
o Service:
- Additional current criteria
o Financial, risk, environmental, innovation, regulatory compliance and transparency, social and political factors

Methods of description

- By brand
- “Or Equal”
- By specification
o Physical or chemical characteristics
o Material or method of manufacture
o Performance
o By engineering drawing
- By miscellaneous methods
o Market grades
o Sample
- By a combination on of two or more methods

Reasons to develop robust supply processes

- Large number of items

- Large dollar volume involved
- Need for an audit trail
- Severe consequences of performance
- Potential contribution to effective organizational operations inherent in the function

Ensure supply process compliance

- Develop organizational structure, culture and information systems that support compliance
- Standardize goods, services, and processes across sites
- Aggregate requirements and leverage volume
- Simplify, streamline and improve processes and deliver consistent results
- Formulate annual business plans
- Establish objectives for supply

Essential steps in the supply process

1. Recognition of need
2. Description of need
3. Identification and analysis of possible sources of supply
4. Supplier selection and determination of terms
5. Preparation and placement of the purchase order
6. Follow-up and/ or expedite the order
7. Receipt and inspection of goods
8. Invoice clearing and payment
9. Maintenance of records and relationships

Information systems & the supply process

Benefits Examples
- Cost reduction and efficiency gains - Enterprise Resource Planning
- Data accessibility - Cloud Computing
- Speedier communications - Electronic Procurement Systems
- Dedicate resources to strategic issues - Electric online catalogues
 - Data accuracy - Electronic Data Interchange
- Systems integration - Online reverse auctions
- Monetary control - Radio Frequency Idenfication

Negotiation

- In general terms, negotiation is the process through which parties perceive one or more incompatibilities between them, and work to
find a mutually acceptable solution
- In contrast to auctions (including competitive tendering), which are framed to determine value of a product or service, negotiation is
designed to create the value of the product or service
- Negotiation can be classified as soft or hard
o Under soft negotiation (SN), agents are ‘friendly’, objective is agreement and concession are permissible and are sought
out; trust matter, with respect for each party when it changes its position, makes an offer and discloses their bottom line
o Hard negotiation (HN) involves agents who are somewhat adversarial; the objective is ‘victory’ and concessions re
demanded as a condition of ‘friendship’. Negotiation involves hard lines in terms of issues, a stric non-trusting position, the
presence of threats, and game playing in terms of revelation of bottom lines. The price of agreement under HN is often a
demanded one-sided gain
- Negotiation is a form of interaction often encountered among agents pursuing different objectives
- Negotiation is defined as a search within a potential agreement space and summarizes negotiation with three essential points:
o A negotiation protocol
o Negotiation objects
o Agent’s decision-making model, also referred to as the negotiation strategy
- Negotiation protocol defines a set of rules governing the interactions among agents
- Agents negotiate according to the established protocol
o The protocol defines the possible actions on the negotiation objects
o The negotiation objects correspond to the points on which an agreement must be found
o The negotiation strategy/ decision model defines an agent’s behavior throughout negotiation. Each agent has its own
model which allows him to take a position, make concessions and to come to an agreement which others in order to reach
his objectives

Preparing for negotiation

- Define your desired outcomes

- Have a wish list
- Understand other party’s objective
- Research
- Understand where you can be flexible
- Know your boundaries
- Keep in simple
- Allocate roles
- Include a decision maker
- Negotiations
o Face-to-face
o Emails, Skype, Telephones
 Mail-based and email-based negotiations share many similarities in that they are difficult to manage, time
consuming and prone to misunderstanding.
Week 6: Quality
What is quality?

Quality refers to the ability of the supplier to provide goods and services in conformance with specifications. Quality also may refer to whether the
item performs in actual use to the expectations of the original requisitioner, regardless of conformance with specifications. Thus, it is often said an
item is no good or of bad quality when it fails in use, even though the original requisition or specification may be at fault. The ideal, of course, is
achieved when all inputs acquired pass this use test satisfactorily.

Often used to describe

- Function
- Suitability
- Reliability
- Conformance with specifications
- Satisfaction with actual performance
- Best buy

The eight dimensions of quality

1. Performance: The primary function of the product or service

2. Features: The bells and whistles
3. Reliability: The probability of failure within a specified time period
4. Durability: The life expectancy
5. Conformance: The meeting of specifications
6. Serviceability: The maintainability and ease of fixing
7. Aesthetics: The look, smell, feel, and sound
8. Perceived quality: The image in the eyes of the customer

Five major costs of quality

1. Prevention costs: relate to all activities that eliminate the occurrence of future defects or nonconformance to requirements. These include
such diverse cost as various quality assurance programs; precertifying and qualifying suppliers and processes; employee training and
awareness programs; machine, tool, material and labor checkouts; preventive maintenance; and single sourcing with quality suppliers as
well as the associated personnel, travel, and space costs
2. Appraisal costs: represents the costs of inspection, testing, measuring and other activities designed to ensure conformance of the product
or service to quality standards and performance requirements
3. Internal failure costs: are the costs incurred within the operating system as a result of poor quality. Included in internal failure costs are
return to suppliers, scrap and rework, reinspection and retesting, lost labor, order delay costs including penalties, machine and time
management, and all costs associated with expediting replacement materials or parts or the carrying extra safety stock.
4. External failure costs: are incurred when poor-quality goods or services are passed on to the customer and include costs of returns,
replacement of services, warranty costs and management time handling customer complaints
5. Morale costs: aside from the obvious productivity impact, it may remove pride one’s work or the incentive to keep searching for
continuing improvement.

Lean thinking – Minimizing waste

A management philosophy focused on maximizing customer value while minimizing waste from:

- Overproduction
- Waiting
- Transportation
- Nonvalue-adding processes
- Inventory
- Motion
- Costs of quality (scrap, rework and inspection)

A value stream

- A series of steps executed in the right way and at the right time to create value for the customer
- Each step must be:
o Valuable to the customer
o Capable (gets the exact same result every time)
o Available (it can be performed whenever needed)
o Adequate (capacity to perform it exactly when needed)
o Flexible (can respond rapidly to changing customer desires without creating inefficiencies)
Lean thinking & the value stream

Goal: optimize the flow of products and services through value streams that flow internally across technologies, assets, and departments to customer
and externally with supply chain partner

Total quality management (TQM)

A philosophy and system of management focused on long-term success through customer satisfaction:

- Quality integrated throughout the organization’s activities

- Employee commitment to continuous improvement
- Suppliers are partners in the TQM process
- Uses tools including continuous improvement or kaizen, quality function deployment (QFD), and statistical process control (SPC) to
achieve performance improvements

Objectives of quality function deployment

- Seeks both spoken and unspoken customer needs

- Identifies positive quality and business opportunities
- Translates these into actions and designs by using transparent analytic and prioritization methods
- Empower organizations
- Provides a level of unanticipated excitement that generates value

The four integrated stages of quality functions deployment

- Product planning – to determine design requirements

- Parts deployment – to determine parts characteristics
- Process planning – to determine manufacturing requirements
- Production planning – to determine production requirements

The role of suppliers in QFD

- Product planning – Provide expertise in analyzing customer requirements and generating a list of new product ideas
- Parts deployment – Provide alternative design concepts and estimate the manufacturing costs of various parts
- Process planning – Suppliers can determine their existing processes constraints
- Production planning – Help develop performance measurement criteria for production planning.

Six Sigma

- Prevent defects by using data to reduce variation and waste

- No more than 3,4 defects per million opportunities
- Measureable goals: cost reduction or profit increase through improvements in cycle time, delivery, safety
- Developed by GE and Motorola and widely adopted
- Applies to manufacturing: adaptable to services
 A philosophy: work is processes that can be defined, measured, analyzed, improved, and controlled, if you control the inputs, you will
control the outputs
 A set of qualitative and quantitative tools to drive process improvement: statistical process control (SPC), control charts, failure mode and
effects analysis, and flowcharting
 A methodology with five steps: define, measure, analyze, improve and control (DMAIC)
 A management environment that supports the initiatives as business strategy
o Organizational support is provided by designated executives and champions who set the direction on for project selection and
deployment
 Well-defined projects with bottom-line impact
 Team whose members have statistical training
o Master black belt and black, green, yellow and white belts
 Emphasis on the DMAIC approach

Statistical process control (SPC)

- A technique that involves testing a random sample of output from a process in order to detect if non-random changes in the process
are occurring
- Causes of variation: Common causes and special or non-random, assignable causes
- Process capability: ability of the process to meet specifications consistently
Assuring quality through SPC

- Buyer establishes required quality specifications

- Supplier determines process capability
o Identify common or chance causes of variation
o Identify special or assignable causes of variation
o Eliminate special causes
- Compare buyer’s quality requirements to supplier’s process capability
- Make necessary adjustments
o Negotiate process improvements with supplier
o Seek an alternative supplier

Service quality evaluation

- Reliability: ability to perform the promised service dependably and accurately

- Responsiveness: Willingness to help customers and provide prompt service
- Assurance: Knowledge and courtesy of employees and their ability to inspire trust and confidence
- Empathy: Caring, individualized attention the firm provides its customers
- Tangibles: Physical facilities, equipment and appearance of personnel
Week 10: Quantity, inventory and delivery
Factors complicating quantity decisions

- Forecasts:
o Purchase decisions made a long time before actual requirements are known
o Rely on forecasts of future demand, lead times, prices and other costs
o Forecasts are rarely, if ever, perfect
- Costs:
o Costs associated with placing orders, holding inventory, running out of materials, and having a service unavailable when
needed
- Availability:
o Desired quantities may be unavailable without paying a higher price or delivery charge
- Price-Volume Relationship:
o Reduced prices for larger quantities versus carrying costs:
- Shortages:
o May cause serious disruptions

Forecasting

Decisions about how much to order, when to order and how to inventory effectively are also complicated by the rapidly changing environment within
which order, inventory and supply planning is carried out. Forecasting is very much a part of the supply management picture and directly affects both
quantity and delivery. Forecasts of use, supply, market conditions, technology, price and so on, are always necessary to make goods decisions.

Forecasting techniques

- Quantitative:
o Use past data to predict the future
o Casual models
o Time series forecasting
- Qualitative:
o Gather opinions and use with judgement to forecast
o Market forecasts: estimates of sales staff
o Top down forecast
o The Delphi technique: a formal approach

Type of demand

- Dependent or derived demand:

o Item is part of a larger component or product, and its use is dependent on the production schedule for the larger component
o Example: demand for bottles and caps for a drink; it is said that transportation is derived demand
- Independent demand:
o Usage is determined directly by customer orders, independent of production scheduling decisions
o Example: demand for an energy drink

The forms of inventory

Inventories may be classified by form as well as function. The five commonly recognized forms are:

1. Raw materials, purchased parts and packaging

2. Work-in-process
3. Finished goods
4. MRO items
5. Resale items

Why inventory?

- To provide and maintain good customer services

- To smooth the flow of goods through the production process
- To provide protection against the uncertainties of supply and demand
- To obtain a reasonable utilization of people and equipment
Cost of inventories:

Basic elements are:

- Capital costs
- Inventory service costs
- Storage space costs
- Inventory risk costs

Determining quantity of services

- Forecasting aggregate demand for services often more unreliable than for goods
o Multiple contacts: users, specifiers, order placers and supplier relationship managers
o Multiple contracts at varying prices and terms with the same supplier
- Organization-wide consumption management is impossible under these conditions
- Difficult for suppliers to determine capacity requirements and project utilization rates

Logistic costs

Three cost categories:

1. Transportation (the bulk of the costs)
2. Inventory carrying costs
3. Administrative costs

Delivery decision

- Components of the delivery decision:

1. What mode of transportation is most appropriate for a specific order?
2. What carrier is the best
3. Which supplier offers the best value

Selection of the FOB point

Selection of the FOB point determines four factors:

1. Who pays the carrier
2. When legal title to goods being shipped passes to the buyer
3. Who is responsible for preparing and pursuing claims with the carrier
4. Who routes the freight
Since deregulation of the transport sector, purchasers are increasingly taking control of transport arrangements as means of controlling
costs

Elements of a transportation and logistics strategy

- Value analysis of alternatives

- Price analysis
- Opportunities for freight consolidation
- Analysis and evaluation of suppliers
- Reassessment of use of different transport modes
- Closer relationship with selected carriers
- Cost analysis and reductions
- Outsourcing, third-party logistics, contracting out
- Safety considerations
- Environmental factors

Delivery options for services

- Modes (Means of a service gaining mobility):

o People, equipment, and radio frequency waves
- Carriers (means of service conveyance):
o Different service categories, e.g., law firms are carriers of legal expertise, janitorial firms are carriers of cleaning
expenditure, and phone companies are carriers for information transmission
- Suppliers (companies providing a specific service):
o Verizon, AT&T, and Sprint provide telecommunications services
Other supply responsibilities

- Receiving
- Logistics and warehousing
- Inbound and outbound transportation
- Production planning
- Accounts payable
- Investment recovery

Receiving

- The first step in the internal supply chain

- A critical part of the acquisition process
- Closure of the contract with supplier
- Buying firm accepts responsibility for the goods
- Involves inspection, physical handling of goods, and information processing
- Receiving inspection ensures goods arrive in the quantity and condition in the purchase order

Logistics and warehousing

- Warehousing and inventory storage

o Internal function
o Outsourced to a third party logistics firm (3PL)
- Supply involvement
o Direct accountability for warehouse personnel
o For 3PL supplier selection and oversight
- Trend: outsource logistics activities

Inbound and outbound transportation

- Ensure proper, cost-effective delivery

- May be one of largest cost components
- Suppliers may have responsibility (FOB destination)
- Inbound: company-owned fleet or dedicated carriers
- Supply frequently has input or direct control over inbound transportation, especially for JIT deliveries
- Cost reduction and improved utilization rates if inbound and outbound transportation-related resources are coordinated

Production planning

- Involves short, medium and long-term schedules for controlling inventory and production schedules
- Relies on:
o Sales forecasts
o Delivery and storage of key raw materials with suppliers
o Operations implementation
- Supply plays key role on team or manages

Accounts payable

- Payment terms included in purchase contract

- Problems if:
o Changes to the original order (engineering changes)
o Mismatched paperwork (bill of lading, PO)
o Buying organization delays payment to finance short-term working capital
- Accounts payable reporting to supply
o Familiarity with the supplier and the order
o Opportunities to reduce transaction costs/headcount
o Ensure payments made on time

Investment recovery

- Effective, efficient and profitable recovery and disposal of scrap, surplus, obsolete and waste
- Focused on:
o Stringent environmental regulations
o Rising disposal costs
o End-to-end supply chain and return loops to recapture initial materials investment through remanufacturing, repair,
reconfiguration and recycling
o New methods to avoid solid waste generation
o Better means of disposing of wastes
o Consider government policy e.g. Waste Electrical & Electrical & Electrical Equipment (WEEE) policy in Europe
Week 11+12: Risk
Defining risk

- Risks are all those things that leap you away from the perfect path and perfect outcomes and got to be able to translate (risks) into
dollars somehow
- These and several other definitions provided by supply chain managers are consistent with the literature that suggests two components
of risk:
o Potential losses (if the risk is realized, what losses will result and what is the significance of the consequences of the losses
o Likelihood of those losses (the probability of the occurrence of an event that leads to realization of the risk)
- Therefore, risk is the expected outcome of an uncertain event, i.e. uncertain events lead to the existence of risks. We call these
uncertain events “risk events”. While probability and impact of losses are the most commonly discussed dimensions of risk, two more
risk dimensions (speed and frequency) are important in global supply chains

Supply risk

- Distinguishing risk and uncertainty in supply chain operations

o Risk sometimes is interpreted as unreliable and uncertain resources creating supply chain interruption, whereas uncertainty
can be explained as match risk between supply and demand in supply chain processes
- A better definition of supply chain risk should refer to:
o Events with small probability but may occur abruptly
o These events bring substantial negative consequences to the system
o Consequently, “the management of supply chain risk through coordination or collaboration among the supply chain partners
so as to ensure profitability and continuity.
- Risk can be broadly defined as a chance of danger, damage, loss, injury or any other undesired consequences
- The risk events most salient to global supply chain managers interviewed were currency, transit time variability, forecasts, quality,
safety, business disruption, survival, inventory (and tools) ownership, culture, dependency and opportunism, oil price fluctuation, and
risk events affecting suppliers and customers

Supply risk – Classifications

- Four categories of risks: supply, demand, operational and security risks:

o Supply risk: is the distribution of outcomes related to adverse events in inbound supply that affect the ability of the focal
firm to meet customer demand (in terms of both quantity and quality) within anticipated costs and time, or causes threats to
customer life and safety
o Operation risk: is the distribution of outcomes related to adverse events within the firm that affect a firm’s internal ability
to produce goods and services, quality and timeliness of production, and//or profitability
o Demand risk: is the distribution of outcomes related to adverse events in the outbound flows that affect the likelihood of
customers placing orders with the focal firm, and/or variance in the volume and assortment desired by the customer
o Security risk: is the distribution of outcomes related to adverse events that threaten human resources, operations integrity
and information systems; and may lead to outcomes such as freight breaches, stolen data or proprietary knowledge,
vandalism, crime and sabotage.

Risks in global supply chains

Risk management improvement process

- The various process improvement activities found to reduce supply risk are:
o Forming alliance relationships (working with suppliers on mitigating risk)
o Having suppliers responsible to develop risk mitigation plans
o Maintaining common platforms for products
o Direct access to “brainware” of suppliers
o Establishing industry standards
Buffer activities

- Buffer activities that purchasing organizations use to circumvent supply risk are:
o Developing multiple sources for strategic items
o Holding safety stock
o A well-stocked supply pipeline

Risk management actions

- Commonly used strategies for risk management include:

o Risk transfer: using a contract to shift an agreed risk from one party to another e.g: insurance
o Risk taking: Take the risk and absorb the consequences
o Risk elimination: Removing any hazards, activities and exposures that can negatively affect an organization
o Risk reduction: measures taken to reduce the frequency or severity of losses e.g forward contracts
o Further analysis of individual risks

Four basic approaches for managing supply chain risks

Product management

Supply
management Supply chain risks Demand management

Information management

Supply network risk tool

1. Map supply network
• Structure of factors
• Key measures
• Ownership
2. Identify risk & its current location
6. Implement supply network risk • Type
strategy • Potential loss

3. Assess risk
5. Form collaborative supply network
• Likelihood of occurrence
risk strategy
• Stage in lifecycle
• Exposure
4. Manage risk • Likely triggers
• Develop risk position • Likely loss
• Develop scenarios

Risk mitigation

- To mitigate the impact of the supply chain risks depicts four basic approaches ( supply management, demand management, product
management, and information management) that a firm could deploy through a coordinated/collaborative mechanism
 - Each of these four basic approaches is intended to improve supply chain operations via coordination or collaboration as follows:
1. A firm can coordinate or collaborate with upstream partners to ensure efficient supply of materials along the supply chain
2. A firm can coordinate or collaborate with downstream partners to influence demand in a beneficial manner
3. A firm can modify the product or process design that will make it is easier to make supply meet demand
4. The supply chain partners can improve their coordinated or collaborative effort if they can acess various types of private information that is
available to individual supply chain partners

Risk management process

- Risk
o Uncertain or chance events that planning cannot overcome or control i.e. Flu Virus or Change in scope requirements
o This will impact the cost, schedule and quality of the project
- Risk management
o A practical attempt to recognize and manage internal events and external threats that affect the likelihood of a project’s
success
 What can go wrong (risk event)
 How to minimize the risk event’s impact )penalties/costs)
 What can be done before an event occurs (expectation)
 What to do when an event occurs (contingency plans)

What is risk management

Risk management benefits

Managing risks

Step 1: Risk identification

- Generate a list of possible risks through brainstorming, problem identification and risk profiling
o Macro risks first, then specific events
o One common mistake that is made early in the risk identification process is to focus on objectives and not on the events
that could product consequences.
o Organizations use Risk Breakdown Structures (RBSs) in conjunction with work Breakdown Structures (WBSs) to help
management teams identify and eventually analyze risks
o As well, a Risk Profile, is a list of questions that address traditional areas of uncertainty on a project

Managing risk – risk profile questions

- Technical requirements: Are the requirements stable

- Design? Does the design depend on unrealistic of optimistic assumptions
- Testing: Will testing equipment be available when need
- Development: Is the development process supported by a compatible set of procedures, methods and tools
- Schedule: Is the schedule dependent upon the completion of other projects
- Budget: How reliable are the cost estimates
- Quality: Are quality considerations built into the design?
- Management: Do people know who has authority for what
- Work Environment: Do people work cooperatively across functional boundaries
- Staffing: Is staff inexperienced or understaffed
- Customer: Does the customer understand what it will take to complete the project?
- Contractors: Are there any ambiguities in contractor task definitions?

Risk identification

- Risk is dependent on technology and environmental factors

- Delphi method is useful for identifying project risks
- Other methods include brainstorming, nominal group techinques, checklists and attribute listing
- May also use cause-effect diagrams, flow charts, influence charts, SWOT analysis

Qualitative risk analysis

- Purpose is to prioritize risks

- A sense of the impact is also needed
- Each objective should be scaled and weighted
- Construct a risk matrix
- Same approach can be used for opportunities

Step 2: risk assessment

- Scenario analysis for event probability and impact
o Risk assessment matrix
o Failure Mode and Effects Analysis (FMEA) – Developed in 1950s, to study problems that might arise from malfunctions of
military systems
- Probability analysis
o Decision trees, NPV, and PERT
- Semi-quantitative scenario analysis

Step 3: Risk response development

- Justifying/ Modifying Risk
o Reducing the likelihood/ possibility an adverse event will occur. To solve this issue Testing and Prototyping
o Reducing impact of adverse event
- Avoiding Risk
o Changing the project plan to eliminate the risk or condition
- Transferring Risk
o Paying to premium to pass the risk to another party – i.e. fixed price contracts are the classic example of transferring risk
from an owner to a contractor
o Requiring Build-Own-Operate-Transfer (BOOT)
- Retaining risk
o Making aware decision to accept the risk i.e. earthquake or flood
Contingency planning

- Contingency Plan:
o An alternative plan that will be used if a possible foreseen risk event actually occurs
o A plan of actions that will reduce or mitigate the negative impact (consequences) of a risk event
- Risk of not having a contingency plan:
o Having no plan may slow managerial response
o Decisions made under pressure can be potentially dangerous and costly

Step 4: Risk response control

- Risk control
o Execution of the risk response strategy
o Monitoring of triggering events
o Initiating contingency plans
o Watching for new risks
- Establishing a Change Management System
o Monitoring, tracking and reporting risk
o Fostering an open organization environment
o Repeating risk identification// assessment exercises
o Assigning and documenting responsibility for managing risk

Who controls risk?

- Contract types should be selected based on organization on controlling risk

o Project manager controls risk. Ideal form of contracts is fixed price preferably with cardinal points procurement (I.e.,
functional specification). Assumption is that risk lies in process of projects delivery and owner can make no contribution to
solving delivery problem
o Owner controls risk. In high complexity cost-plus incentive fee contracts are used. Assumption is that risk lies in definition
or design of project’s product, which is done by owner who contracts out delivery products
o Both control risk. Ideal form of contract is alliance. Project comprises owner and contractor as almost equal partners.
Alliance contracts need to be carefully managed, with all parties kept informed of progress and involved in decision making

Procurement risk

• Those events that may affect the realisation of the contractual performance, and whose occurrence cannot be accurately predicted and
influenced by contracting parties.

• In large and complex acquisitions, such as the construction of a new tunnel, risk may refer, among other things, to the discovery of a
particularly resistant rock that needs a specifically designed drilling machine.

• In less complex procurements, such as the supply of milk to schools, risk may refer to late deliveries cause by bad weather conditions, or to
the sudden increase in fuel prices (which raises the actual deliver cost with respect to the level estimated by the contractor before the
tendering process).

• Procurement risk affect actual production costs and it can affect the quality of the performance, be it on-time delivery of ink cartridges for
laser printers or the brightness of paper for photocopiers.

• Most important, the buyer and the contractors care about ‘extreme’ events such as the risk of contractor default that may disrupt the service
altogether. The degree of fear of (procurement) risk is also called risk aversion (Dimitri, Piga & Spagnolo, 2006)

Contract risk

• It is only when the contract is signed that specific contractual risks can be known

• Customer should share risk information:

‒ Risk analysis by each bidding contractor could be based on the project owner’s risk analysis if it were provided in the tender
documentation. The greater the detail provided by the owner in relation to risks that are to be borne in whole or in part by the
contractor, the less the contractor has to price for risk related to the contractor’s uncertainty about what the project involves
(Ward & Chapman, 1991)

Other risks associated with contracts

• End-customer satisfaction: contract is not effectively managed, resulting in poor supplier performance; this affects end-customers and
internal users and undermines company’s credibility and predictability
• Authority limit: also includes common issue of where employees or even contractors act as purchasing agents without proper authority
and/or qualifications, thereby putting the company at risk from bad deals and lower profits. Organisations typically overpay by between 15
percent and 20 percent and more for unauthorised or “maverick” purchases

• Regulatory non-compliance: contract is not well-designed and/or managed and results in fines, reputation damage, lost customers and so
on due to supplier-related activities. See general and specific industry regulations & guidelines governing and regulating aspects of third
party contracts management including the Sarbanes-Oxley Act , FASB, HIPPA, FFIEC, OCC, etc

• Information security, access and privacy: closely linked to regulatory non-compliance risk in many areas (healthcare and financial
services, for example), includes unauthorised access to company, supplier, or customer information, and can lead to serious consequences
for parties in the agreement

• Terms and Conditions: poorly designed and negotiated contracts fail to address key components such as indemnification, product
ownership, payment terms, termination, pricing, rights, warranty, obligations, general and specific risk assignment etc., leading to disputes
and potentially significant losses or costs

• Reputation: bad press and a tarnished corporate image as a direct result of supplier actions or noncompliance, or from sourcing and
contracting failures such as absence of contracts with minority, women, or locally-owned suppliers, etc.;

• Environment, health and safety risk: caused by (a) a lack of clarity in the contract or (b) noncompliance; may result in breaches of laws
and regulations;

• Inventory and obsolescence: as a result of or aggravated by poor contract design, inability to manage the contract, or poor performance
versus the contractual intent;

• Off-balance-sheet inventory liability: in cases where products are outsourced to contract manufacturers and where there may be a level
of liability and SOX reporting requirements

• Automatic renewals risk: unwanted products or services are committed to and purchased automatically due to an absence of effective
contracts management and controls

• Contractual and legal (general): can result in costly legal disputes, the inability to achieve a remedy after supplier failures, or a lack of
protection for company etc.

• Employee/third party fraud: leads to a loss of cash, poor press or general reputation damage;

• Outsourcing: service or product is outsourced, but risk cannot be. Lack of risk management can lead to loss of control over data security,
personnel, process performance, outcomes, total cost, delivery performance and so on; and

• Efficiency: process takes too long, or entails too much bureaucracy, and/or leads people to circumvent the process with serious
consequences including legal risks and financial loss (Protiviti, 2015)
Week 14: Global Supply
The importance of global supply

The internet has accelerated the trend to global supply, make it easier for source selection and reducing communication problems. While trading
patterns and partners shift depending on a number of economic factors, the clear trend is toward more trade globally. The value of worldwide
merchandise trade imports grew by a factor of 95 times between 1948 and 2001.

Reasons for global purchasing

• Unavailability of items domestically

• Price and total cost (labour cost, exchange rate, efficient equipment & processes, expertise on specific products and attractive pricing)

• Government pressure & trade regulations

• Quality

• Faster delivery & continuity of supply

• Better technical service

• Technology

• Marketing tool

• Tie-in with offshore subsidiaries

• Competitive clout

Potential problem areas

• Source location & evaluation • Warranties & claims

• Lead time & delivery • Tariffs & duties

• Expediting • Administrative costs

• Political, labour & security problem • Legal issues

• Hidden costs
• Logistics & Transportation
• Currency fluctuation
• Language
• Payment methods
• Communication
• Quality
• Cultural & social customs

• Ethics & social responsibility

Potential hidden costs

• Foreign exchange premiums

• Commissions to customs brokers

• Terms of payment costs and finance charges: letter of credit fee, translation costs, exchange rate differentials

• Foreign taxes imposed

• Import tariffs

• Extra safety stock/buffer and transit inventory; inventory carrying costs due to longer lead times

• Extra labour for special handling

• Obsolescence, deterioration, pilferage, and spoilage

• Additional administrative expenses

 • Packaging and container costs

• Business travel

• Fees for freight forwarders, consultants, or inspectors

• Marine insurance premium

• Customs documentation charges

• Transportation costs, including from manufacturer to port, ocean freight, from port to company plant, freight forwarder’s charges, port
handling charges, warehouse

• Additional security measures

Selecting and managing offshore suppliers

Selecting and managing offshore supplies involves three decisions:

1. The infrastructure of global sourcing group/organization: regional purchasing offices, global commodity management organization,
international purchasing office
2. The role of third party intermediaries: import brokers and agents, import merchants etc.
3. How potential sources will be identified and researched

Requirements in documentation

• Letter of credit: if the buyer is unable to make a payment, the bank will cover the outstanding amount

• Multiple bills of lading: document issued by the carrier which details a shipment of merchandise

• Dock receipts

• Import licenses

• Certificates of origin: a document to certify the place of growth, production or manufacture of goods

• Inspection certificates

• Certificates of insurance coverage

• Packing lists: is used to inform transportation companies about what they are moving; it is attached to the outside of a package in a
waterproof envelope

• Commercial invoices, etc.

Associated costs

• Additional costs is a non-domestic supplier is chosen comparable costs (not equal costs but types)

‒ Unit purchase price

‒ Tooling charges

‒ Transportation costs (mode, responsibility, etc.)

• (Higher) costs to be considered for international sourcing

‒ Base price

‒ Packaging (multiple handling, rough transport)

‒ Escalation (price changes, hidden?)

‒ Extra safety stock, longer lead times, deterioration, spoilage

‒ Customers duty

‒ Insurance
Incoterms*

• Incoterm: an International Commerce Term, or a formalised international term of trade which specifies the responsibilities of the
exporter and the importer in an international transaction

• Developed by the: International Chamber of Commerce

• Updated: Incoterms 2010

• Internationally recognized standard definitions that describe the responsibilities of a buyer and seller in a transaction

‒ May vary across regions and among carriers

• 11 standard Incoterms in two groups:

‒ Rules for Any Form of Transport

‒ Rules for Sea and Inland Waterway Transport Only

• Each term must be followed by a geographic location, such as a port or city

• For each international sale, it is important to determine, who — the exporter or the importer — is responsible for:

‒ Domestic transportation in the exporting country

‒ International transportation

‒ Domestic transportation in the importing country

‒ The risks involved in international transportation

‒ Customs clearance in the importing country

• In 1936, the International Chamber of Commerce developed the International Commerce Terms (or Incoterms) that formalize these
responsibilities.

• Every Incoterm has:

‒ A scope — The type of products for which it can be used

‒ A modality — The mode of transport for which it can be used

‒ A syntax — The way it has to be stated on invoices and paperwork

• Every Incoterm defines:

‒ The responsibilities of the exporter

‒ The responsibilities of the importer

‒ A specific transfer point at which the responsibilities for the goods shifts from the exporter to the importer

Understanding Incoterms

• Incoterms formally define the following aspects of an international sale:

‒ Which tasks will be performed by the exporter

‒ Which tasks will be performed by the importer

‒ Which activities will be paid by the exporter

‒ Which activities will be paid by the importer

‒ When the transfer of responsibilities takes place

 • There are 11 different Incoterms, all abbreviated with a three-letter acronym, such as EXW, DEQ, FOB, and so on.

Choosing the correct Incoterm depends on which export strategy a company is following. The following factors are particularly important:

• The type of product being sold (weight, volume, perishability, value, sensitivity to temperature changes, and so on)

• The method of shipment

• The ability and willingness of either of the exporter and importer to perform the tasks involved

• The amount of trust placed by either of the parties toward the other

Tools for global supply

1. Countertrades

• Exchange of goods & services being (completely) paid for with other goods & services, rather than with money.

• Practice of a company promising to buy material, products or services from a country in return for the privilege of selling in the country

• Arguments:

‒ Lack or low value of hard currencies

‒ Open new markets in countries with limited access

‒ Large dollar values of items (military, aircrafts)

Types of countertrade

• Barter

‒ The direct exchange of goods between two parties. Usually a specific transaction

• Counterpurchase

‒ A reciprocal buying agreement, not a direct exchange of goods. Limited decision on the possible goods

• Offset

‒ A device to allow the importing country to make part of the product so as to minimise the impact on the balance of payments

• Switch

‒ A barter arrangement involving a third (or more) party in the chain of goods swapping until all parties have products they can use
or covert

• Buyback

‒ The export of a technology package, the construction of a project, or the provision of services. The buyer pays by delivery a share
of the output

2. Foreign trade zones/free trade zones- a geographic area (close to port area) where goods may be landed, handled, manufactured or reconfigured,
and re-exported without the intervention of the customs authorities.

3. Bonded warehouse- are utilised for storing goods until duties are paid or goods are otherwise properly released.

4. Duty drawbacks- Permits a refund of duties paid on imported materials that are exported later.

Regional trade agreement

• Efforts to eliminate trade barriers result in bilateral, regional and global trade agreements. Supply managers should know who the major
trading partners with their countries are, what trade agreements are in place and what opportunities exist in emerging markets.

• Important regional trade agreements are:

‒ NAFTA- North American Free Trade Agreement (US, Canada, Mexico)

‒ EU- The European Union (27 members countries in Europe)

 ‒ ASEAN- The Association of South east Asian Nations (10 South East Asian countries)

‒ Mercosur – El Mercado Comun del Sur (Argentina, Brazil, Paraguay, Uruguay, Velenzuela, Bolivia)

‒ China’s Trade Agreements: 14 FTA partners, including ASEAN, Pakistan, Chile and New Zealand, comprising 31 economies.

‒ WTO: The World Trade Organization (159 member countries, account for more than 90% of world trade)

• Data on trading patterns of countries and regional trading block available from the World Trade Organization (wto.org)

Emerging markets

Countries undergoing a high growth rate and rapid economic liberalization

• MSCI Emerging Markets Index (msci.com)

• Emerging markets by region (Focus Economics, 2017)

‒ Latin America (Brazil, Chile, Columbia, Mexico, and Argentina)

‒ Sub-Saharan Africa (Kenya, Ghana, Nigeria)

‒ Middle East & North Africa (Saudi Arabia, United Arab Emirates, Egypt, Morocco)

‒ Eastern Europe (Hungary, Czech Republic, Romania, Israel, Russia)

‒ Asia (example Japan) (India, China, Thailand, Malaysia, Indonesia, South Korea)

Managing currency risk

Variation in exchange rates (strong/ weak dollar) can significantly effects investments/ costs

Methods handling currency risk

• Purchase in buyer’s currency

‒ Safe, easy, risk on seller’s side

• Sharing currency fluctuation risk

‒ Divide the gain/loss

• Currency adjustment contract clauses

‒ Range for exchange rate (delivery- or time-triggered)

• Currency hedging

‒ Use the spot market to protect against changes, NOT speculating

• Finance department expertise

• Tracking currency movements

‒ Observe, use opportunities

Supplier selection

• Are there significant cost differences including the additional costs?

• Will the offshore supplier maintain the price difference?

• What’s the impact of longer material pipelines and increased average inventory level?

• What are the technical and quality capabilities?

• Can the supplier assist with new designs?

• What is the quality performance?

 • What is the min/max lead time?

• How is the consistency?

• Safety of proprietary technology & patents?

• What are the payment terms?

• How does the supplier handle currency exchange issues?

Global sourcing philosophy

Successful global sourcing program

• Defined process to support global sourcing

• Centrally-co-ordinated and centrally-led decision making

• Site-based and decentralised control or operational activities

• Real-time communication tools

• Information sharing with suppliers

• Availability of critical resources

• Souring and contracting systems

• International purchasing office support

Global sourcing process

1. Identify global sourcing opportunities

2. Establish global sourcing development teams

3. Propose global strategy

4. Develop request for proposal specifications

5. Release RFP to suppliers

6. Evaluate bids and proposals

7. Negotiate with suppliers

8. Award contract

9. Implement contract and manage supplier

Source selection
 • Total cost of ownership (TCO) analysis

• Purchase cost may only represent 20-60% of TCO

• Engineering service

• Pre-sale and post-sale service

• Design and R&D capabilities and costs

• Legal considerations

• Patents, liability for lost sales, health & safety

• Disposal at the end of life

Lean supply philosophy

- Lean thinking: focuses on the elimination of waste in all forms, and smooth, efficient flow of material and information throughout the
value chain to obtain faster customer response, higher quality and lower costs (lean operating systems)

Lean supply chain concepts

- It is about eliminating all forms of waste

1. Over production
2. Waiting (time in queue)
3. Transportation
4. Nonvalue-adding processes
5. Inventory
6. Motion
7. Cost of quality
- Maximise the use of people
- Simplify first, and only then, apply new technology
- Focus on gradual, but continuous, improvement
- Ensure visibility and transparency
- Develop quick response capability
- Manage uncertainty and risk
- Striving for zero quality defects essential to success

Lean supply system

- Three primary elements:

o Lean supply
o Lean transportation
o Just-in-time (Kanban) system

Lean supply

• Commitment to zero defects by buyer and seller

• Frequent shipment of small lot sizes

• Strict quality and delivery performance standards

• Closer, even collaborative, buyer-seller relationship

• Stable production schedules sent to suppliers on a regular basis

• Extensive sharing of electronic information between supply chain members

• EDI capability with suppliers

• Co-located suppler engineers and material managers

Lean transportation

• Efficient movement of goods

• Reliable transport provider (or own vehicles)

 • Closed-loop transportation system

‒ Repeatable schedule

‒ Moving goods from seller to buyer

‒ Moving return material from buyer to seller

‒ Long-term contracts

Just-in-time system

• Traditional: push system (produces finished goods inventory in advance of customer demand using forecast of sales)

‒ Parts and sub-assemblies are “pushed” through the operating system based on a pre-defined schedule (independent of actual
customer demand)

‒ Push systems typically have long set-up times and large batch sizes, resulting in high WIP inventories

• Pull system: withdraw the units from the source as required

‒ Entire manufacturing process is synchronised to the final-assembly schedule by pulling parts from each preceding workstation

‒ Finished goods are made to coincide with the actual rate of customer demand, resulting in minimal inventories and maximum
responsiveness

Lean supply barriers

- Dispersed supply base

- Historic buy-seller relationships
- Number of suppliers
- Supplier quality performance

Collaborative planning, forecasting and replenishment (CPFR)

- A business practice in which supply chain members agree to exchange knowledge and share risks to generate the most accurate
forecast and develop effective replenishment plans
- When changes in demand, promotions, or policy occur jointly managed forecasts and plans can be adjusted immediately
- Needs integration of information as well as organizational integration to implement CPFR. Sharing the information, joint planning,
forecasting are important for implementation of CPFR

Planning requirement and resources

• Material requirement planning (MRP): Attempts to support the activities of manufacturing, maintenance, or use by meeting the needs of the
master schedule.

• There are three basic MRP inputs:

1. Master production schedule- based on forecast it details how many end items are to be produced in a particular time.

2. Structured bill of material- using the process data to detail the sub-components necessary to manufacture each item.

3. Inventory record- contains information about order, lead time, IoT size policy.

Planning and inventory

- Capacity requirement planning: When the MRP system has developed a materials plan, CRP translates the plan into the required
human and machine resources
- Manufacturing Resource Planning: MRP II is concerned with the integration of all aspects of the manufacturing process, including
materials, finance and human relations and has a simulation capability to answer “what-if”
- Enterprise Resource Planning (ERP systems): The main aim of MRP and MRP II is to ensure resources for manufacturing while
Effective ERP facilitates an integrated management process that extend horizontally across the company, including product
development, sales, marketing, manufacturing and finance
- Supply implications of MRP: MRP system provides the purchasers with an information window to production scheduling so that
they are better able to use judgement in dealing with suppliers

Inventory management
1. Controlling the costs of inventories (holding cost, ordering cost, stock-out cost, variations in delivered cost such as quantity discount).
2. ABC Classification – Need a careful review of a category products as investment is high
3. Lean supply, JIT and Kanban systems:
a. Lean – Controlling cost by reducing seven forms of waste – Transport, Inventory, Motion, Waiting ttime, Non-value adding
Processes, Overproduction, Defects
b. JIT – Components, materials and services arrive at work centres exactly as they needed
c. Kanban – Kanban aligns inventory levels with actual consumption. It’s a signal tells a supplier to produce and deliver a new
shipment when material is consumed