Supply Chain Management A Logistics Perspective

Supply Chain Management: A Logistics Perspective TEST QUESTIONS True-False 1. Procurement serves as a critical link between members of the supply chain. ANSWER: True 2. Distinctives are low-risk, high value items that are fundamental to the company’s finished product. ANSWER: False 3. Strategic sourcing is almost the same as procurement. ANSWER: False 4. There are seven steps in the Strategic Sourcing Methodology. ANSWER: True 5. When a firm makes a “make” decision when analyzing whether to “make or buy”, they may still have to purchase some types of inputs from outside suppliers. ANSWER: True 6. The first step in managing sourcing and procurement is to determine the type pf purchase. ANSWER: True 7. The most important factor in vendor selection is usually financial health. ANSWER: False 8. Some firms are moving towards increasing their number of suppliers in order to encourage competition and lower procurement costs. ANSWER: False 9. Vendors may offer varying levels of discounts from their published prices. ANSWER: True 10. Commodities are items or services that are low in risk but high in value. ANSWER: True 11. Landed costs are independent of sales/FOB terms. ANSWER: False 12. e-Sourcing and e-Procurement are the same. ANSWER: True 13. An advantage of e-Sourcing and e-Procurement is that there is little risk involved. ANSWER: False Multiple-Choice 14. Which of these is not a form of purchasing? a. purchasing b. procurement c. process improvement d. sourcing ANSWER: c 15. Which approach represents a strategy in which the entire organization is focused on the examination of process variability and continuous improvement? a. Total Quality Management b. Six Sigma c. Lean Enterprise Management d. Theory of Constraints e. None of the above ANSWER: a 16. In the Item Procurement Importance Matrix, what item is described as low risk, low value? a. b. c. d. generics commodities criticals distinctives ANSWER: a 17. In the Item Procurement Importance Matrix, what is described as high risk, high value? a. b. c. d. generics commodities criticals distinctives ANSWER: c 18. In the Item Procurement Importance Matrix, what describes high risk, low value? a. b. c. d. generics commodities criticals distinctives ANSWER: d 19. Strategic sourcing as a process is far more broad and comprehensive than procurement. Overall, the process starts with the formation of a a. b. c. d. steering committee. list of vendors. decision as whether to make or buy. list of criticals. ANSWER: a 20. In the Assess Supply Market step, the firm a. b. c. d. determines which are the least cost vendors. decides which vendors are located closest to the firm’s plant to insure timely delivery. identifies all possible suppliers that might be able to satisfy the user’s needs. defines the parameters of the sourcing strategy process. ANSWER: c 21. In the Execute Sourcing Strategy step, the most important thing is to a. b. c. d. appoint the sourcing committee members from the affected groups. choose a supplier or suppliers, depending on the objectives of the sourcing decision. verify which vendors are either TQM or ISO 9000. determine which vendors have the lowest prices. ANSWER: b 22. What vendor selection criteria are described by vendor attitude, cultural compatibility, training aids, packaging, and repair service? a. b. c. d. quality financial considerations reliability desirable capabilities ANSWER: d 23. There are four steps in the Managing Sourcing and Procurement Processes. Which does not belong? a. b. c. d. determine the type of purchase determine the necessary levels of investment evaluate the effectiveness of the strategic sourcing process examine off shore and e-procurement suppliers ANSWER: d 24. What vendor selection criteria are described by price and financial stability? a. b. c. d. capability financial quality reliability ANSWER: b 25. What vendor selection criteria are described by production capability, labor relations, and operating controls? a. b. c. d. capability quality reliability financial ANSWER: a 26. Which e-commerce business model used in procurement and sourcing has a seller-operated service that consists of a number of electronic catalogs from suppliers within a market. a. Sell-side system b. Electronic marketplace c. Buy-side systems d. Online trading community e. None of the above ANSWER: d 27. To help guide the strategic sourcing process, five core principles are recognized as key drivers to achieve the desired levels of value, which one is not one of those core principles a. b. c. d. Access the total value Develop individual sourcing strategies Evaluate internal requirements Drive continuous savings ANSWER: d 28. The concept that represents the sum of all costs associated with making and delivering products to the point where they are needed is called a. b. c. d. purchase/acquisition cost strategic sourcing costs life cycle costs total landed cost ANSWER: d 29. What is an amalgam of catalogs from vendors within a market that is available via the Internet called? a. b. c. d. electronic marketplace buy-side system sell-side system on-line trading community ANSWER: a Essay 30. There are three definitions to aid understanding of some of the similarities, differences, and linkages between purchasing, procurement, and strategic sourcing. Define them, and discuss the differences between the three. ANSWER: Purchasing, procurement, and strategic sourcing are receiving considerable attention as organizations try to improve the overall efficiency and effectiveness of their supply chains. • Purchasing: The transactional function of buying products and services. In a business setting, this commonly involves the placement and processing of a purchase order. • Procurement: Refers to the process of managing a broad range of processes that are associated with a company’s need to procure goods and services that are required to manufacture a product (direct) or to operate the organization (indirect). • Strategic sourcing: Essentially, the strategic sourcing process is broader and more comprehensive than the procurement process. Strategic sourcing takes the process further, focuses more on supply chain impacts of procurement and purchasing decisions, and works cross-functionally within the business to help achieve the organization’s overall business goals. 31. There are four types of products and services that are purchased with varying degrees of importance. Name all four, and choose two to discuss in terms of risk and value. ANSWER: Generics are low-risk, low-value items and services that typically do not enter the final product. Items such as office supplies and maintenance, repair, and operating items (MRO) are examples of generics. The administrative and acquisition processing costs are more significant than the purchase price of generics, and, for some generics, the administration and processing costs may exceed the price paid for the item or service. Commodities are items or services that are low in risk but high in value. Basic production materials (bolts), basic packaging (exterior box), and transportation services are examples of commodities that enhance the profitability of the company but pose a low risk. Distinctives are high-risk, low-value items and services such as engineered items, parts that are available from only a limited number of suppliers, or items that have a long lead time. The company’s customers are unaware of or do not care about the uniqueness of distinctives, but these products pose a threat to continued operation and/or high procurement cost. Criticals are high-risk, high-value items that give the final product a competitive advantage in the marketplace. The procurement strategy for criticals is to strengthen their value through use of new technologies, simplification, close supplier relations, and/or value-added alterations. 32. There are seven steps in the Strategic Sourcing Methodology. Name at least five, and choose two to discuss in more detail. ANSWER: Step 1: Develop strategic plan The most effective way to initiate a MSSP process is to take the time to map out a formal plan for the design and implementation of the process itself. Included here is the creation of a crossfunctional planning group to guide and oversee the overall strategic sourcing process, and the identification of key members of the strategic sourcing team. Also, there should be consensus on the scope and design of the MSSP process, which must include a preliminary understanding of what types of products and services may be within the responsibility of this initiative. Step 2: Understand Spend the planning group needs to develop a baseline understanding of what products and services are being procured, what purposes they serve, the financial implications of these purchases, etc. This needs to include a formal “spend analysis” that is designed to understand spend by supplier, category, and internal user and to profile current sourcing approaches and areas for improvement. Step 3: Evaluate Supply Source This critical step involves making sure that all potential sources of supply are identified and that useful mechanisms are in place for meaningful comparisons of alternative supply sources. Step 4: Finalize Sourcing Strategy Prior to embarking on the step of supplier selection, it is important to fully develop a sourcing strategy that defines the parameters of the process and the steps to be followed. Of particular interest in this process are the steps related to initial supplier research and screening, development of a responsive request for information (RFI) and request for proposal (RFP), site visits with follow-up discussions, and supplier selection. Step 5: Implement Sourcing Strategy This step begins with an evaluation of the suppliers that remain following the RFI and RFP processes and culminates in the award of a contract. Step 6: Onboarding and Transitioning Important elements of this step are the finalization of the contractual agreement, planning the transition process, and receipt or delivery of the product or service. This activity occurs with the first attempt by the supplier or suppliers to satisfy the user’s needs. The completion of this activity also begins the generation of performance data to be used for the next step in the strategic sourcing process. Step 7: Collaborative Process Improvement A very important step in the strategic sourcing process is the measurement and improvement of supplier performance. This involves making a post-purchase performance evaluation. 33. Name several criteria that are important in vendor selection. Which one is the most important? ANSWER: The most important factor in vendor selection is usually quality. Quality often refers to the specifications that a user desires in an item. The procurement professional compares the actual quality of a supplier’s product with the specifications the user desires. In actuality, quality includes additional factors such as life of the product, ease of repair, maintenance requirements, ease of use, and dependability. In today’s Six Sigma and lean environments, not only are quality standards higher, but suppliers are typically counted upon to take major responsibility for quality. Reliability comprises on-time delivery and performance history, the second- and third-ranked factors for most procurement professionals. Reliability is often considered a part of a total quality management program. Risk is a factor of great contemporary relevance. One way this may occur is if there is likely variability in the cost of purchased products or services that may result in higher prices. Other ways in which risk may occur include supply uncertainties and unusual variation in delivery lead times. Capability considers the potential supplier’s production facilities and capacity, technical capability, management and organizational capabilities, and operating controls. Financial considerations In addition to price, the buying firm considers the supplier’s financial position. Financially unstable suppliers pose possible disruptions in a long-run continued supply of material. Desirable capabilities include several that may be helpful depending on the type of purchase being made and the type of relationship desired between the customer and the supplier. The impression or image that the supplier projects has a similar effect on supplier selection, as well as cultural compatibility. Other factors that may be important include training aids, packaging, and repair service availability. 34. What are at least three types of certifications and registrations, what do they signify, and why are they important? ANSWER: A topic of interest to many buyers of products and services is the extent to which potential suppliers have achieved excellence in terms of process management and continuous improvement. As a result, over time several techniques and approaches have been developed that address issues relating to soundness of processes, results achieved, and continuous improvement. A few of the more prevalent approaches are: • Total Quality Management—Arising in the 1980s in response to Japanese competition and the teachings of Dr. W. Edwards Deming, TQM represented a strategy in which entire organizations were focused on an examination of process variability and continuous improvement. This approach, which was very popular into the mid-1990s, included a goal of improving a company’s quality to only three defects per million through systematic incremental change in processes and careful statistical measurement of outcomes. • Six Sigma—Is similar to TQM in its focus on techniques for solving problems and using statistical methods to improve processes. But whereas TQM emphasizes employee involvement for the total organization, the Six Sigma approach involves training experts (known as green belts and black belts) who work on solving important problems while they teach others in the company. • ISO 9000—A program started in 1987 by the International Organization for Standardization. It has an objective of making sure that companies have standard processes in place that they follow: “Document what you do and do what you document.” ISO 9000 involves a third-party registration program certifying that companies are following documented processes. Aside from the fact that these approaches typically require very significant commitments in terms of time, effort, and expense, buying organizations need to look closely to make sure that participation in these programs actually produces results that are of tangible value. While it is encouraging to know that certain potential suppliers have committed their organizations to approaches such as these, one needs to be sure to document the benefits and improvements that are likely to be created as a result. 35. For the buyer, the total procurement price is more than just the basic purchase price. There are other elements to consider. Name these elements, and discuss the primary considerations of each. ANSWER: • Traditional Basic Input Costs This is the primary price of the product or materials as paid by the firm. It is the traditional price buyers seek through bidding, through negotiating, or in requests for quotes. • Direct Transaction Costs These are the costs of detecting, transmitting the need for, and processing the material flow in order to acquire the goods. The use of blanket or systems contracting can also reduce transaction costs. These include direct ordering by users to suppliers, single consolidated billing, and user inspection and checking. • Supplier Relational Costs These are the costs of creating and maintaining a relationship with a supplier. They include travel, supplier education, and the establishment of planning and operational links between purchasing and the supplier’s order-entry operation, as well as other links, including those related to traffic, engineering, research, and product development in both firms. • Landed Costs The inbound transportation flow includes two key cost elements: the actual transportation cost and the sales/FOB terms. There are four different transportation options with inbound movements – supplier-selected for-hire carrier or private carrier and buyer-selected for-hire carrier or private carrier. • Quality Costs/Factors Quality pertains to the conformance of goods to a desired specification. It includes the cost of conformance, nonconformance, appraisal, and ultimate use costs. (Pages 566-568) 36. Define and discuss the four basic types of e-commerce business models used in procurement and sourcing. ANSWER: The four basic types of e-commerce business models used in procurement and sourcing are sell-side system, electronic marketplace, buy-side system, and online trading community. • Sell-side system: Online businesses selling to individual companies or consumers. • Electronic marketplace: A seller-operated service that consists of a number of electronic catalogs from vendors within a market. • Buy-side system: A buyer-controlled e-procurement or e-commerce service that is housed on the buyer’s system and is administered by the buyer, who typically preapproves the suppliers who have access to the system, and the process of the suppliers’ products and services that have been prenegotiated. • Online trading community: A system maintained by a third-party technology vendor where multiple buyers and multiple sellers in a given market can conduct business. The online community permits the buyers and sellers to conduct business transactions.