foundation of supply management

Foundation of Supply Management

by: Engr. Carlo Senica, MBA

Contracting and Negotiation

A. Prepare solicitations for competitive bids, quotations and proposals, with pertinent specifications, terms and conditions.

• Methods of communicating attributes of a product or service

* Specifications -> description of technical requirement for a material, product, or services.

• Types of solicitations / bids

* Contract to be enforceable -> must have an offer and acceptance

* Informal bid * Electronic solicitations * Competitive proposals * Sealed bids

* Restrictive competition * Non-competitive negotiations * two-step bidding * Pricing models

* Alternative proposals * Lotting strategies * Invitation for bid * Requests for proposal

• Requests for informations (RFI) -> use to survey the market


A. Prepare solicitations for competitive bids, quotations and proposals, with pertinent specifications, terms and conditions.

• Bidder’s conferences

• General solicitation procedures and concepts

* Comparability * Fairness * General format * Fair response time

* Issue dates * Opening/closing dates * Inclusion of potential contract and terms & conditions

• Terms and conditions of solicitations and offers

• Bonds and other types of surety

* Bid bonds * Performance bonds * Payment bonds * Deposits * Letter of credit * Real estate

• Problems related to the solicitation and receipt of offers

* Time extensions * Late bids * Offer with errors * Conflicts of interest * Protests * Confidentiality


B. Prepare for and develop strategies and tactics for negotiations, including definition of roles and responsibilities of team members.

• Preparation for negotiations

* Negotiation objectives * Negotiation site * Team selection

* Relevant information * Analysis of seller’s & buyer’s positions * Alternatives

* Market condition * Development of strategies & tactics * Cultural factors

• Negotiation Philosophies

* Win-win or co-operational

* Win-lose or adversarial/competitive

* Lose-lose or confrontational


C. Lead/conduct/support negotiations with suppliers to obtain desired results.

• Negotiation strategies and tactics

* Reveal no position -> does not want to discuss position

* Reveal the optimistic position -> most common approach

* Reveal the optimistic position and then immediately offer the target position -> not a good strategy

• Special considerations in conducting negotiations

* Fact-finding sessions * Final proposal revisions * Document negotiations

* Negotiation as a consortium or cooperative * Technology considerations

* Negotiation with sole offeror versus entire competitive range


D. Manage the preparation and/or issuance of contract/purchase orders/agreements.

• Elements of a contract

* Offer and acceptance * Consideration * Competent parties * Legality of purpose

• Types of obligation documents

* Contract may be formed orally or in writing (oral agreement is difficult to prove)

• Purchase orders

-> Legally binding document prepared by purchaser to describe the terms & condition

-> Not a contract itself; unless signed, acknowledge or accepted

• Binding and non-binding letter instruments

* Letter of intent (LOI) -> same with memorandum of agreement * Letter of authorization


D. Manage the preparation and/or issuance of contract/purchase orders/agreements.

• Contract / agreement types

* Fixed price * Cost reimbursable * Indefinite delivery contract * Letter contracts

* Dealer’s agreements * Service agreements * Licensing agreements

• Purchase order confirmations and acknowledgements

• Considerations in preparing obligation documents

* Intellectual property * Royalties * Consideration of domestics & international laws

* Consent to subcontract * Notice of awards * Payment terms * Insurance & indemnification

* Termination & exit clause * Customer confidentiality * Force majeure *Collusive offers

• Statement or scope of work (SOW) -> outline specific service to be performed


E. Administer contracts/purchase orders from award to completion or termination.

• Contract administration concepts

* Work control * Compliance * Financial responsibility

* Approving systems * Administrative responsibilities

* Terms & conditions * Documentation requirements * Contract closeout

• Supplier management concepts

* SOW * Annual work plan * Standards of performance * Supplier feedback

* Supervision of supplier * Progress report * Customer feedback * In-plant

• Conflict / dispute resolution (Breach of contract terms)

• Termination options (for cause or for convenience)

Cost and Finance

A. Prepare and/or administer a supply management department budget.

• Budgeting’s relationship to the strategic and operational plans

* Budget -> financial plan that covers a specified period; identifies the financial resources allocated to product, services, divisions of an organization

• Steps in budgeting

1. Review goal & align objective 2. Define needed resources 3. Estimate dollar value of resources 4. Obtain appropriation 4. Variance analysis

• Purposes of a budget

* Control of expenditure * Pre-approved funding * Monitor expenses * Develop standard costs

• Types of budgets

* Zero based * Cash flow * Line item * Program/project * Capital * Flexible * Head count

Cost and Finance

B. Develop a cost management program strategy for purchases.

• Cost savings

* Cost avoidance -> effort to prevent or reduce supplier price increases

* Cost containment -> detailed plan to hold costs within a target limits over a period of time

* Cost reduction -> effort to lower the cost associated with acquiring a product or service

• Issues to be considered when establishing a cost management program

* Status of standardisation program * Coordination with other departments & suppliers * Market testing

* Design flexibility * Effect on quality & service * Effect on operations * Top management support

• Value analysis / value engineering processes

* Value analysis -> focuses on existing products

* Value engineering -> analysis conducted at the design stage of the product development

Cost and Finance

B. Develop a cost management program strategy for purchases.

• Cost modeling -> focuses on the cost structure of a product or a supplier (materials, direct labor, overhead expenses)

• Standard cost setting

* Standard cost -> planned costs of manufacturing a single unit; predetermined costs of a single unit of service

• Product cost roll-up -> sum of all costs in which the product passes in different processes

• Margins -> ratio of operating profit to revenue

• Contribution to profit -> also called as contribution margin; sales revenue for a product minus variable costs

• Cost of poor quality

• Cost of inventory -> also called as inventory holding costs = finance + overhead + ownership + risk cost

• Intangible cost

• Total cost of ownership -> combination of purchase price of a good and additional costs incurred before or after product or service delivery

Cost and Finance

C. Identify savings potential and opportunities and strategies for specific categories through spend analysis.

• Sources of spend data

* Spend data * Market intelligence * Benchmarking

• Data mining tools -> concept of organizing intensively searching through increasingly large & complex amount of data.

• Cost baseline

* Forecasting future use and spend * cost savings versus avoidance * Budget reduction

• Cost modeling

*Addressable versus non-addressible * Geographic

Cost and Finance

D. Perform cost/benefit analyses on acquisitions.• Definition of total cost of ownership

* Unit total cost * Life-cycle cost * Landed cost * Total cost of performance for services

• Direct costs -> expenses that can be identified with individual units of output

* Direct materials * Direct labor

• Indirect costs -> costs that are not directly identified with specific products or services

* Fixed costs * Variable costs * Semi-variable costs

• Carrying costs -> also called inventory holding costs

* Inventory on-hand + Finance costs + Overhead cost + Ownership cost + Risk cost

• Should cost -> cost modelling technique in which price is projected by estimating the dollar value

• Target cost = Selling price (buyer) - Target profit

Cost and Finance

D. Perform cost/benefit analyses on acquisitions.• Relevant versus irrelevant costs

• Overhead -> costs associated with the operation of the organization as a whole

• Opportunity costs -> cost of the opportunity to earn money lost to an organization by spending or tying up money in one investment rather than the other

• Financial analysis tools

* Return on investment * Net present value * Internal rate of return * Profitability

* Return on assets * Margin analysis * Cashflow * Balance Sheet * Profit and Loss

• Lease / buy analysis

* Type of leasing arrangements * Factors in a lease/buy decision * Legal consideration

Cost and Finance

E. Develop financing and leveraging strategies for purchases.

• Cash flow

• Interest rates

• Payment terms

• Depreciation

• Market condition

• Commodity markets

• Bond and currency markets

• Regulations

• Tax laws

• Import / export quotas

• Supplier financing

• Equity investment

• Centralized buying, decentralized buying, and hybrid buying

• Cooperative purchasing

• Consortia

International

A. Identify and assess international markets to source goods and services.

• Cultural awareness

* Culture -> sum of the understandings that govern human interaction in a society

* Values -> way people think * Behavior -> way people act

• Issues in global business

* Globalization * Global macro & micro concepts * Global marketing * Human resource management

• Infrastructure

* Technology * Transportation & logistics * Utilities

• Risk assessment

* Geopolitical * Environmental * Public relations * Contract enforceability

• Cost / benefit and opportunity analysis

International

B. Develop international sources of materials and services.

• Research and benchmarking of potential global suppliers

• Financial issues

• Development of a business case / plan

• Contingency plans and exit strategies

• Country-specific governmental regulations

• Brokers and import merchants

• Trade networks / trading companies

• Logistics: 3PL / 4PL

• Quality assurance and regulatory compliance

International

C. Develop and maintain documenting regarding cross-border transactions.

• Major international laws:

* Maritime laws

* United Nations Convention on Contracts for International Sale of Goods (CISG)

* International Commercial Terms (Incoterms)

• Governmental regulations pertaining to restricted parties and countries

• Customs requirements

• Broker management

* Brokers -> required to collect and pay the appropriate tariff or duty on shipped items

Social Responsibility

A. Develop and act upon a code of business conduct for the supply management function and external suppliers.

• ISM Principles and Standards of Ethical Supply Management Conduct

• ISM Principles of Sustainability and Social Responsibility

• Organizational policies

• Industry codes of conduct

• International issues

• Communication to and training for key stakeholders

• Laws governing issues in ethics

• Customer-driven requirements


B. Establish and monitor environmentally responsible and compliant programs throughout the supply chain and life cycle.

• Environmental laws and regulations

• Risk transfer

• Ethical issues

• Auditing

• Organization values and policies

• Purchase of recycled materials

• Minimization of waste

* Reduce * Reuse * Recycle * Cradle-to-cradle design * Zero waste * Waste from electrical equipment

• End of life cycle: Disposal options and Sell to another organization


C. Implement, monitor and promote organizational and supply chain safety policies and procedures.

• Laws and regulations

• Policies and procedures

* Employee safety: training requirements, personal protective equipment, MSDS, RoHS, REACH

* Record retention

* Industry best practice

* Storage requirements

* Documentation & dissemination

• Supplier and subcontractor safety

• Customer-driven requirements

Sourcing

A. Analyze potential sources of goods and services.• Supply base analysis

* Full and open competition * Limited competition * Technical competition

* Single source * Sole source * Multiple source

• Nature of sources and their effects on procurement

* Manufacturer vs distributors * Large vs small * National vs local * International vs domestics

* Emergency sources * Cooperative/consortium buying * Joint venture * Internal vs external sources

• Existing versus new sources

* Market conditions * Product complexity * Urgency of needs * Quality expectations

* Supplier processes * Adequacy of competition * Cost vs value of sources * Long-term needs

* Long-term relationships * Supply base optimization * Supply continuity * Internet-based searches

Sourcing

B. Evaluate competitive offerings to determine the overall best offer for a product/services.

• Decision matrix / multi-attribute evaluation tool

• Receiving, controlling, and analyzing offers

• Offer responsiveness: SOW, quality requirements, terms & conditions

• Technical analysis: involves cross-functional teams from appropriate functions

• Operational analysis: site audits -> facility, safety & security, employee morale

• Cost and price analysis: price, profit, savings, cost analysis

• Offeror capability/offeror responsibility: performance, capacity, skills, integrity, financial factors

• Transportation terms: Incoterms

• Other factors: availability, lead time, business continuity plan, supplier diversity considerations

Sourcing

C. Plan and communicate sourcing and supply strategies based on forecasted data.

• Buying strategies

* Spot buying * Buying to requirements * Forward buying * Speculative buying

* Volume purchase agreement * Life-of-product supply *Just-in-time * consignment

• Financial tools

* Hedging * Dollar averaging * Contracting

• Forecasts of volumes

* Determining annual volume * Supply markets relative to short & long term needs * capacity

• Factors in the selection of the method of procurement

* Market situation * Industry norms & standards * Urgency * Dollar value * Risk

Supplier Relationship Management

A. Identify opportunities and benefits for rationalizing supply base.

• Strength, weaknesses, opportunities, threats (SWOT) analysis

• Data mining tools

• Supplier categories

* Approved suppliers * Preferred suppliers * Partnered suppliers

* Prequalified suppliers * Certified suppliers * Disqualified suppliers

* De-barred suppliers * Diverse suppliers * Certifiable suppliers

• Supplier segmentation

* Strategic (Tier 1) * Preferred (Tier 2) * Performance-managed (Tier 3) * Basic (Tier 4)


B. Develop/manage effective relationships with suppliers.

• Benefits of good supplier relations

• Confidentiality policies

• Ways of promoting good relation and trust

• Issues in supplier product education and involvement

• Issues in reciprocity

• Concepts of continuous improvement

• Supplier partnership / strategic alliance

• Reverse marketing / supplier development

• Supplier mentorship

• Early supplier involvement

• Supply chain management

• Supply base innovation


C. Develop/implement a supplier diversity program.• Rationale in developing programs

* Organizational policies * Impediments * Benefits * Subcontracting Plans

* Assessing program goals * Disparity studies * Customer-driven requirements

• Sources of information on socially or economically disadvantaged suppliers

* Small Business Administration * Minority/Women Business Development Agency

* The Women Business Development Agency * Business directories * Business fairs

* Minority/women business development council * Local minority/women chambers of council

• Independent certification of diverse suppliers

• Program elements

* Top management support * Organization policy * Program coordinator * Buyer diversity goals


D. Develop new supplier qualification plans and reports to assure components, materials and suppliers meet specified requirements (regulatory, safety, reliability, quality)

• Customer relationship management (CRM)

• Supply chain mapping

• Quality systems

• Logistics systems

• Financial analysis

• Methods of requirements gathering

• Supplier evaluation measures

• Contingency plans


E. Conduct supplier performance evaluations.• Factors used to analyze a supplier’s ability to perform

* Capacity and utilization * Delivery * Quality history * Cycle/lead time

* Contractor’s “make or buy” programs * Productivity * Flexibility

* References * Electronic capabilities * Breath of product line * Scorecards

* Customer requirements * Financial stability * Labor stability

• Issues in conducting site visits

* Reasons for visits * Cost vs benefit of visit * Performance audits, documentation, metrics

* Factors appraised at site visits * Timing of visits * Site inspection team

• Evaluate changes within supplier organization


F. Develop and execute supplier exit strategies. • Internal considerations

* Stakeholders * Timing * Assets * Documentation * Continuity of supply

• External considerations

* Contractual * Customer requirements * Supplier certificate status

* Assets * Sources of supply

• Associated risks

* Legal requirements * Financial requirements

• Community concerns

-> negative publicity can harm both the buying organization and the supplier

foundation of supply management

Education