L4M6 Chapter 1 Flashcards
What is a value chain?
A set of primary and support activities and processes that an organization must undertake in order to create value for its customers.
What are primary activities?
Porter’s value chain - Activities which contribute directly to the creation of the product or service such as: Inbound logistics, Operations, Outbound logistics, Marketing and sales and After-Sales service
What are support activities?
Porter’s value chain - Activities which support the business in its efforts to become more efficient such as: Infrastructure, Human resource management, Technology, Procurement
What are the five rights of procurement?
Place - achieving delivery to the right place, packaged and transported in a way that ensures their safe arrival.
Quality - ensuring products and services are of the right quality and fit for purpose.
Quantity - purchasing the correct quantities
Time - ensuring products and services are delivered on the correct date and at the correct time
Price - achieving the right price for products and services
How can procurement add value to organizations?
Selecting a supplier and negotiating the best deal
Developing relationships with key suppliers to ensure continuity of supply
Managing quality of inputs by monitoring supplier performance
Managing inventory and stock control
Supporting the other support functions
What is supplier relationship management (SRM)?
Process of identifying all interactions with key suppliers and then managing them in a way that increases the value of the relationship for both parties
What is a supplier relationship spectrum?
The ‘relationship spectrum’ sets out a continuum (on going) of relationships from adversarial/‘transactional’ to a genuine collaborative/co-destiny/‘partnership’.
What are the 9 types of relationships in a relationship spectrum?
Adversarial Tactical Arms length Transactional Closer tactical Single-sourced Outsourced Strategic alliance Partnership Co-destiny
What are the five competitive forces in Porter’s Five Forces Model?
Rivalry in the market place Threat of new entrants/barriers to entry Threat of substitutes Bargaining power of supplier Bargaining power of buyer
What are the different types of markets?
Monopoly - one supplier in the market place - Supplier power is dominant, Buyer power is low e.g. utilities water.
Oligopoly - few large suppliers in the market place - Supplier power is dominant, Buyer power is low e.g. oil & gas co.
Imperfect competition - number of suppliers in the market place but products are heterogeneous (diverse in character or content) - Supplier power weak, Buyer power Strong
Monopolistic competition - number of suppliers in the market offering similar products but not perfect substitutes - Supplier power strong, Buyer power weak
Perfect competition - large number of suppliers in the market offering identical products (products are homogeneous) - Supplier power low, Buyer power very high
Monopsony - one buyer in the market place - Buyer power is dominant.
Senior managers of Company A are reconfiguring their value chain to sustain their cost advantage. They assume that each activity within value chain are independent from the others. Is this assumption true?
No, because their are linkages between activities
Lene Group is planning for a Supplier Development Programme (SDP) initiative, which aims at all small and medium sized suppliers with development potential, operating in areas of strategic interest to the Group. Lara is assigned to identify the objectives and benefits that the Group and attending suppliers may reap from the initiative. Which of the following statement is true about supplier development programme?
Supplier development programme should be capable of being assessed in terms of quantifiable business benefits
What is the most appropriate type of relationship for a 12-month supply contract of stationaries?
Transactional type
Stationaries are low value, low risk items that many suppliers can supply. The buyer can run competitive tendering to select the best offer. The contract is quite long. The most appropriate type of relationship in this case is transactional.
Friends Company manufactures a product which requires a particular type of valves. The company currently purchases the valves from a supplier at a price of $5 per unit. After analysing the market, the procurement team finds that other suppliers would supply with the same price or higher. With current capacity, the company is able to produce the valves internally. Which of the following should be considered if the company decides to in-source the valve production?
Cost effectiveness
Ability to meet performance standards
he scenario deals with make and buy decision. The make-or-buy decision is the act of making a strategic choice between producing an item internally (in-house) or buying it externally (from an outside supplier). The buy side of the decision also is referred to as outsourcing. Make-or-buy decisions usually arise when a firm that has developed a product or part—or significantly modified a product or part—is having trouble with current suppliers, or has diminishing capacity or changing demand.
Make-or-buy analysis is conducted at the strategic and operational level. Obviously, the strategic level is the more long-range of the two. Variables considered at the strategic level include analysis of the future, as well as the current environment. Issues like government regulation, competing firms, and market trends all have a strategic impact on the make-or-buy decision. Of course, firms should make items that reinforce or are in-line with their core competencies. These are areas in which the firm is strongest and which give the firm a competitive advantage.
The two most important factors to consider in a make-or-buy decision are cost and the availability of production capacity. Burt, Dobler, and Starling warn that “no other factor is subject to more varied interpretation and to greater misunderstanding” Cost considerations should include all relevant costs and be long-term in nature. Obviously, the buying firm will compare production and purchase costs. Burt, Dobler, and Starling provide the major elements included in this comparison. Elements of the “make” analysis include:
- Incremental inventory-carrying costs
- Direct labor costs
- Incremental factory overhead costs
- Delivered purchased material costs
- Incremental managerial costs
- Any follow-on costs stemming from quality and related problems
- Incremental purchasing costs
- Incremental capital costs
Buying organisation should establish adversarial relationships with suppliers in which of the following contracts?
Simple one-off contracts
In adversarial relationships, the outcome of the deal is more important than maintaining the relationship over a long term period. Both parties are trying to extract the maximum value out of the deal for themselves. The gain of the buyer will be at the expense of the supplier’s profit margin. These relationships are characterised by poor communication, a lack of trust and short-term or one-off contracts.
Which of the following are most likely to be the right relationship strategies with suppliers when procuring items that have high profit impact and high supply risk?
Partnering agreements
Joint venture
According to Lysons and Farrington, to strategic items (high profit impact, high supply risk), main tasks of procurement should be:
- Prepare accurate forecasts of future requirements
- Carefully analyse supply risk
- Seek long-term supplier/partnering agreements (3-5 years) with built-in arrangements for continuous improvement and performance measurement.
- Consider joint ventures with selected suppliers and customers to gain competitive advantage
- Take prompt action to rectify slipping performance
- Possibly move purchasing back into leverage quadrant until confidence restored.
Supplier’s perspective on buyer is fundamentally based on which of the following?
Contribution to total sales
Buyer’s attractiveness
The supplier preferencing model looks at how the supplier views the relationship with the buyer.
Attractiveness - Behaviour of purchasing, Ease of doing business, Culture, ethics, etiquette and potential business growth.
Value of account - Profitability and percent of sellers business.
High attractiveness Low value - Develop - close relationship, high focus on the business
High attractiveness High value - Core - very attractive to supplier with lots of marketing/sales effort allocated
Low attractiveness Low value - Nuisance - supplier not keen in business and will unlikely put in effort/resource
Low attractiveness High value - Exploit - supplier tend to raise price while not put in further effort/resource
Procurement is a strategic function within an organisation, especially in terms of pricing and cost management. Which of the following are the ways that procurement can add value?
Undertaking open book costing
Specification development
Procurement can add value either by reducing costs without any compromise in quality or product features. or by assuring operational efficiency to enable better quality at no additional cost.
Ideally, we might aim to achieve both of these objectives (improved output at reduced cost) by means such as the following.
- Efficient management of procurement activities to reduce transaction cost that will enable cost reduction
- Effective inventory management, to minimise acquiring and holding costs this also will help in cost reduction
- Effective contracts negotiation and management in order to reduce the cost of inputs
- Effective communication with user departments to enhance specifications, so that business needs are fulfilled more efficiently and at lower cost
- Selecting and managing suppliers, in order to improve the quality of inputs, with consequent improvement in the quality of outputs
- Working with key supply chain partners to eliminate wastes (non-value adding activities) wherever they are found in the supply process: an approach sometimes referred to as ‘lean’ supply.
