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Profit Leverage Effect

is measured by the increase in profit obtained by a decrease in purchase spend and large savings are
possible relative to the effort that would be needed to increase sales by much-larger percentage
necessary to generate the same effect on the profit and loss statement.

Return on Assets Effect

measuring price reduction on firms inventory, and rating firms based on corporate performance

Direct Contribution of Supply

is a bottom line impact and both inventory reduction and purchasing saving are measurable and tangible
evidence of supply contribution. profit leverage effect and return on assets both represents the effect
that _ contribution can make on the financial statements.

Indirect Contribution of Supply

enhances the performance of other departments or individuals in the organization. measuring is difficult
since it involves many "soft" or intangible contributions that are difficult to quantify

Just in Time Purchasing

go right from the receiving dock to production, the product is purchased in the exact quantities required
for a specific production turn and delivered just in time. Buying firm can substantially reduce its
investment in purchased inventories, enjoy needed continuity of supply, and reduce incoming inspection
costs

Standardization

refers to the process of agreeing on a common specification or process. It leads to lower risk in the
marketplace, lower prices through volume purchase agreements, and lower inventory tracking costs
while maintaing service levels. An agreement on definite sizes, design, quality, and the like. It is essential
a technical and engineering concept.
Centralization Purchasing

refers to where spending decisions are made, not where the purchasing and supply staff are located
geographically. Where the authority and responsibility for most supply-related functions are assigned to
a central organization. Adv: cost controls, clout, cost of purchasing low, greater buyer specialization, and
strategic focus

Decentralization Purchasing

where the authority and responsibility for most supply related functions are dispersed throughout the
organization. Adv: easier coordination/communication with operating department, effective use of local
sources, undivided authority, reporting line simplicity, and speed of response

Hybrid Purchasing

where authority and responsibility are shared between a central supply organization and business units,
divisions, or operating plants

Cross-Functional Teams

A group of people from different departments or areas working together.

Sourcing Teams

includes supply and representatives from other relevant functional areas. Teams can focus on a wide
range of projects including developing cost-reduction strategies, developing local, business unit, or
organization-wide sourcing strategies; evaluating and selecting suppliers, performing value analysis,
analyzing spend, and identifying consolidation opportunities

New Product/Service Development Team

can improve an organization's competitive position

Purchasing Consortia

are a form of collaborative purchasing that is used by both public and private sector organizations as a
means of delivering a wider range of services at a lower total cost

Purchasing Profession
on the front lines of supply chain management, planning purchasing strategies, developing
specifications, selecting suppliers, and negotiating price and service levels.

Inward Flows

information from within the organization is sent to supply, including statements of need for materials
and services. Information from external sources is sent to supply, this may come from suppliers or other
sources.

Outward Flows

information from within the supply is sent to others within the organization including supplier pricing,
market conditions, and supply forecasts for cash flow budgeting. Information such as requests for
quotes or proposals, is sent from supply to external sources

Early Supplier Involvement

help assure that what is specified is also procurable and represents good value. Often as members of
new product development teams, provides information that may lead to cost avoidance or reduction,
faster time market, and greater competitiveness.

Requisition

is the document used to communicate needs internally between users/specifiers and supply
management. The flow is determined by who needs access to the information to perform their duties,
the need for an audit trial, and evidence of proper authorization. Gatekeeping tool to manage the flow
of information through three gates: authority, internal clarity, and internal clearance.

Standard Requisition

should include: date, number, originating department, account to be charged, complete description of
material or service desired and quantity, date service or material needed, any special shipping or
service-delivery instructions, and signature of authorized requisitioner.

Traveling Requisition

was an innovation used for recurring requirements and standard parts to reduce operating expenses.

Bill of Materials
simplifies the requisitioning process for frequently needed line items in organizations that make a
standard item over a relatively long period of time. Includes all materials and parts, including allowance
for scrap, to make one end unit.

Stores/Inventory Requisition

needs may be met by a material requisition from inventory or the transfer of surplus stock from another
department or division.

Maintenance Repair Operating Supply (MRO)

a supply management term that refers to various commodities that are generally of low value,
purchased frequently and available from multiple sources. typical examples include fuel oil, cleaning
materials, hand tools, office supplies, & repair parts

Request For Information (RFI)

is issued to gather information about potential suppliers products and services. Is for information
gathering purposes only.

Request For Quotation (RFQ)

(solicitation of business) is issued when there is a clear and unambiguous description of the need. Is
basically a price comparison tool for commonly used commodities sold in an open and free market
where quotations can be obtained at any time. Is a standard requisition form that includes a list
potential suppliers.

Request For Proposal (RFP)

is used for more complex requirements in which price is only one of several key decision factors.
Includes a detailed description of requirement and invites bidders to use their expertise to develop and
propose one or more solutions.

Request For Bid (RFB)

is used in a competitive bid process with or without the opportunity to negotiate after bid receipt.

Purchase Order (PO)

essential requirements are the serial number, date of issue, name and address of suppliers, the quantity
and description, date of delivery, shipping directions, price, terms of payment, and conditions covering
the order.

Master Service Agreements (MSA)

is an agreement wherein the suppliers provide predetermined services over a specified period of time
with total costs not exceed an amount previously agreed upon. Are usually awarded for periods of one
year or longer.

Follow-up

is a routine order tracking to ensure the supplier can meet delivery promises. May not occur on low-
value purchases or it may be built into the electronic supply system whereby buyers are only notified of
exceptions.

Expediting

is the application of pressure on a supplier to meet the original delivery promise, to deliver ahead of
schedule, or to speed up delivery of a delayed order. Should only be used on a small percentage of PO's
issued.

Strategic Spend

is goods or services critical to the mission of the organization. In this type of management, effectiveness
is favored over efficiency.

Nonstrategic Spend

dollar value and repetitiveness drive process decisions. First, a small dollar threshold is established and
efficiency tools, especially electronic ones, are used. Second, suppliers are pre-qualified and tools for
efficient order placement are used.

Corporate Purchasing Cards

are credit cards issued to internal customers in the buying organization to purchase low-dollar value,
high-volume goods and services.

System Contracting
rely on periodic billing procedures, allow non-supply personnel to issue order releases, employ special
catalogs, and require suppliers to maintain minimum inventory levels. Frequently used in buying office
supplies and maintenance, repair, and operating supplies.

Total Cost of Ownership

purchase price makes up 30 to 50 percent of it. All of the costs associated with the design, development,
testing, implementation, documentation, training and maintenance of a software system.

Vendor Managed Inventory (VMI)

the supplier is responsible for maintaining the buying organization's inventory levels. The supplier has
access to inventory levels (often electronically) and generates purchase orders.

Benefits of Information Systems Technology

-cost reduction and efficiency gains

-data accessibility
-speedier communication
-dedicate resources to strategic issues
-data accuracy
-systems integration
-monetary control

Product Specification Data

describes the products and are the same for all buyers

Transaction Data

(price, shipping and billing addresses, and quantity discounts) are customized to each buyer.

Electronic Data Interchange (EDI)

allows computer-to-computer exchange of business documents between two organizations using

agreed standards to structure the message data.

Online Catalogs
is a digitized version of a suppliers catalog. It allows buyers to use the Web browser to view buying and
specifying information about the suppliers products and/or services.

E-Procurement System

is an application software package that allows requisitioning, authorizing, ordering, receiving, invoicing,
and paying for goods and services over the Internet. Performance measures include: the percent of
organizational spend under procurement control, requisition-to-order costs, requisition-to-order cycles,
and percent of off-contract (maverick) spend.

Reverse Auction

is an online, real-time, dynamic, declining price auction for goods or services between one buying
organization and a group of pre-qualified suppliers. Its three stages include: preparation, the auction
event, and implementation and follow-up. Required conditions include: clearly defined specifications, a
competitive market with qualified suppliers willing to participate, understanding of the market
conditions, buyer and seller familiarity, clear rules for conduct, buyer is prepared to switch suppliers if
necessary, buyer believes that the projected savings justify it.

Radio Frequency Identification (RFID)

contain a chip and antenna that emit a signal, using energy from a radio frequency reader, which
contains information about the container or its individual contents. They vary widely in memory,
frequency, power source, and cost. The most common are passive read only tags.

Outsourcing

organizations decide to buy something that they previously made in house. Concerning issues include:
loss of control, exposure to supplier risks, unexpected fees or "extra use" charges, conversion costs,
supply restraints, attention required by senior management, possibility of being ties to obsolete
technology, and concerns with long-term flexibility.

Subcontracting

common in military and construction procurement, they can only exist when there are prime
contractors who bid out part of the work to other contractors. Is a purchase order with more explicit
terms and conditions. Is appropriate when placing orders for work that is difficult to define, will take a
long period of time, and will be extremely costly.

Make or Buy Decision

a decision concerning whether an item should be produced internally or purchased from an outside
supplier

Insourcing

deals with past buying decisions that are reversed. Reasoning may be anything that threatens assurance
of supply. Would greatly enhance competitive ability.

Methods of Description

-By brand
-"Or Equal"
-By specification- physical or chemical characteristics, material and method of manufacturer, and
performance
-By engineering drawing
-By miscellaneous methods- market grades and sample
-By a combination of two or more methods

Brand Description

is a method of description that indicates a reliance on the integrity and the reputation of the supplier.
Two major questions relating to this method are one relates to the desirability this type of description
and other to the problem of selecting a particular brand. Favorable when the manufacturing process is a
secret, specifications cannot be laid down with sufficient accuracy by the buyer, quantity bought is so
small that it makes the buying organization unduly costly, and when end customers have real
preferences in favor of branded items.

Or Equal Description

it is not usual, particular in the public sector, to see requests for quotations or bids that will specify a
brand or a manufacture's model number followed by what words?

Specification

one of the best known of all methods employed. Closely related to these endeavors is the effort toward
standardization of product specifications and reduction in the number of types, sizes, and so on of the
products accepted as standard. Advantages include: evidence exists that thought and careful study have
been given to the need and the ways in which it may be satisfied, standard is established for measuring
and checking materials as supplied, opportunity exists to purchase identical requirements from a
number of different sources of supply, and potential exists for equitable competition.
Specification by Physical or Chemical Characteristics

provides definitions of the properties of the materials the purchaser requires. They represent an effort
to state in measurable terms those properties deemed necessary for satisfactory use at least cost
consistent with quality.

Specification by Material Method of Manufacture

is used when special requirements exist and when the buying organization is willing to assume the
responsibility for results.

Specification by Performance or Function

is the understanding of the required functions. Is employed to a considerable extent, partly because it
throws the responsibility for a satisfactory product or service back to the seller. Use a RFP.

Description by Engineering and Drawing

It is particularly applicable to the purchase of construction, electronic and electrical assemblies,

machined parts, forgings, castings, and stampings. It is an expensive method of description, it is likely to
be used to describe an item that is quite special as far as the supplier is concerned.

Description by Market Grades

is a miscellaneous method of description, that is confined to certain primary materials, wheat, cotton,
lumber, steal, and copper are commodities. Its value depends on the accuracy with which the grading is
done and the ability to ascertain the grade of the material by inspection.

Description by Sample

is a miscellaneous method of description, that almost all purchasers use this method from time to time
but ordinarily for a minor percentage of their purchases and then more or less because no other method
is possible. Ex: items requiring visual acceptance such as wood grain, color, and appearance.

Individual Standards

is a source of specification data, that requires consultation among users, engineering, supply, quality
control, suppliers, marketing, and possibly, ultimate consumers. This means task is likely to be arduous
and expensive.
Standard Specification

is a source of specification data, that has been developed as a result of a great deal of experience and
study by both governmental and nongovernmental agencies, and substantial effort has been expended
in promoting in promoting them. They may be applied to raw or semi-manufactured products, to
component parts, or the composition of material. They are widely known and commonly recognized and
readily available to every supply professional.

Simplification

refers to a reduction in the number of sizes, designs, and so forth. It is a selective commercial problem,
an attempt to determine the most important sizes of a product and to concentrate production or use on
these wherever possible.

Need Criteria

-strategic criteria
-traditional criteria
-additional current criteria

Strategic Criteria

strategic sourcing identifies the major spend areas and is often used for this category aligning supply
strategy to corporate strategy. They may involve risk reduction, access to new technology or new
markets, assurance of supply in tight markets, revenue enhancement, potential competitive benefits,
corporate image or reputation improvement and others.

Traditional Criteria

comprise the traditional value proposition of:

-quality
-quantity
-delivery
-price
-service

Additional Current Criteria

increases the difficulty of assuring a sound value proposition. The Criteria includes: financial, risk,
environmental, innovation, regulatory compliance and transparency, social and political factorrs
Categories of Needs

-Resale
-Raw and semi-processed Materials
-Parts, Components, and Packaging
-Maintenance, Repair, and Operating Supplies
-Capital
-Services
-Other

Repetitive Requirements

a system or process of acquisition can be designed. Accumulation of these requirements over a specified
period of time with same suppliers may be sufficient volume for a purchase order or contract, avoiding
the total acquisition process used to select the supplier

Nonrepetitive Requirements

depending on the category and the need criteria, an ad hoc decision needs to be made regarding the
process of acquisition. If it is small and insignificant, having the user order it directly on a purchase card
or treating it like a small value purchase may be adequate.

Value-Added Concept

each department or function must add value and strive to minimize the cost of doing so by process
control and continuous improvement in congruence with organizational goals and strategies.

Quality

has at least eight dimensions:

-Performance- primary function of product or service
-Features- the bells and whistles
-Reliability- the probability of failure within a specified time period.
-Durability- the life expectancy
-Conformance- the meeting of specifications
-Serviceability- the maintainability and ease of fixing
-Aesthetics- the look, smell, feel, and sound
-Perceived Quality- the image in the eyes of the customer
and from procurement point of view the ninth dimension should be:
-Procurability- the short and long-term availability at reasonable prices and subject to continuing
improvement
Best Buy

assumes, of necessity, a certain minimum measure of suitability but considers ultimate consumers
needs, cost and procurabiltiy, transportation, and disposal as well. Is a combination of characteristics,
not merely one. Requires all relative parties- marketing, engineering, operations, and supply-to work
closely together. Is preferable to cross-functional teams.

High Cost Solution

if quality were "inspected in"

Lower Cost Solution

making it right the first time

Prevention Costs

relate to all activities that eliminate the occurrence of future defects. Include such divers costs as
various quality assurance programs: pre-certifying and qualifying suppliers, employee training and
awareness programs, machine, tool, material, and labor checkouts, preventative maintenance, and
single sourcing with quality suppliers.

Appraisal Costs

represent the costs of inspection, testing, measuring, and other activities designed to ensure
conformance of the product or service. Might occur at both seller's and buyer's organizations as each
uses a variety of inspection systems to ensure quality conformance.

Internal Failure Costs

are the costs incurred within the operating system as a result of poor quality. Includes: returns to
suppliers, scrap and rework, lost labor, order delay costs including penalties, machine and time
management, and all costs associated with expediting replacement materials or parts or the carrying of
extra safety stock.

External Failure Costs

are incurred when poor-quality goods or services are passed on to the customer and include cost of
returns, warranty costs, and management time handling customer complaints.
Morale Costs

Seldom recognized in the accounting sense, is the cost of producing (or having to use) defective
products or services. It may remove pride in one's work or the incentive to keep searching for continuing
improvement. The motivation to work hard and well may be replaced by a "don't care" attitude.

Overall Quality Cost Perspective

The cost of defective quality has been ignored by many organizations, as a consequence, the
opportunity to improve quality is great in most organizations. 30 to 40 percent of final product cost may
be attributable to quality.

ABC Analysis

The inventory management strategy that pays the most attention to the items with the highest dollar
value and less attention to items with the lowest dollar value is called?

Total Quality Management (TQM)

is a philosophy and system of management focused on long-term success through customer satisfaction.
Developed in Japan in 1950 by Union of Japanese Scientists and Engineers. Was reimported to the
United States in the 1980's and contributed to the revitalization of US industries.

Deming's 14 Points

create consistency, adopt new philosophy, cease dependence on inspection, end practice of awarding
based on price tag, improve constantly, institute job training, leadership, drive out fear, break down
barriers, eliminate slogans, work standards, remove barriers that rob employees, institute self-
improvement programs, put everyone to work

Four Important Features of TQM

-quality must be integrated throughout the organizations activities

-there must be employee commitment to continuous improvement
-the goal of satisfaction and the systematic and continuous research process related to customer
satisfaction, drives TQM systems.
-suppliers and partners in the TQM process

Continuous Improvement
sometimes called by Japanese "kaizen", refers to the relentless pursuit of product and process
improvement through a series of small, progressive steps. Integral part in both (JIT) and (TQM). Should
follow a well-defined and structured approach and incorporate problem-solving tolls such as, Pareto
Analysis.

Quality Function Deployment (QFD)

is an important aspect of TQM. It is a method for developing higher-quality new products at less cost
and less time. Seeks both spoken and unspoken customer needs, identifies positive quality and business
opportunities, translates these into actions and designs by using analytic and prioritization methods.,
empowers organizations to exceed normal expectations, and provides a level of unanticipated
excitement that generates value.

Four Integrated Stages of QFD

-product planning- to determine design requirements

-parts development- to determine parts characteristics
-process planning- to determine manufacturing requirements
-production planning- to determine production requirements.

Six Sigma

it is a philosophy based on the view that all work processes that can be defined, measured, analyzed,
and controlled. It is a set of tools, including statistical process control, control charts, failure mode and
effects analysis, and flowcharting. These are quantitative and qualitative techniques to drive process
improvement. Is a methodology with five steps: define, measure, analyze, improve,and control (DMAIC),
this is the most widely adopted and recognized methodology.

Statistical Process Control (SPC)

is a technique that involves testing a random sample of output from a process in order to detect if non-
random, assignable changes in the process are occurring. Basic steps in insuring quality:
-Buyer establishes required quality specifications.
-Supplier determines process capability
-Compare buyer's quality requirements to supplier's process capability
-Make adjustments, if necessary

Common or Chance Causes of Variation

these causes are intrinsic to the processes and will always be there unless the process is changed. May
be related to machine, people, material, method, environment, or measurement.
Special or Assignable Causes of Variation

these causes are outside, non-random problems such as breakdown of machinery, material variation, or
human error. Are primarily detected by Statistical Process control procedures.

Process Capability

is capable when there are no special or assignable causes of variation, only common or chance causes. It
is capable of meeting specifications consistently. the process is said to be in statistical control, stable,
and predictable.

Process Capability Index (Cp)

this index combine process spread and tolerance into one index and indicates whether process variation
is satisfactory.

Cpk Index

index adjusts the Cp for the effect of non-centered distribution.

-less than 1.0-unacceptable because part of teh te process distribution is out of specification.
-between 1 and 1.33-marginal because the process distribution is barely within specification.
-greater than 1.33-acceptable because the process distribution is well within the specification.

Process Control

is a key aspect of TQM. it is a method of monitoring process to prevent defects. Quality control charts
are the primary tool.

Quality Control Charts

it is invaluable if process use repetitive operations. Is useful for charting the population means and R
chart the dispersion.

Upper and Lower Limits

can be set so that operator action is required only when process or machine starts to fall outside the
normal desirable operating range. The process is stable along as output falls within the established
limits.
Quality Assurance and Control Group

responsibilities are to establish and maintain effective controls for monitoring processes and equipment
and supporting effects to help suppliers to design, implement, and monitor continuous quality
improvement programs.

ISO 9000 Quality Standards

were first adopted in 1987 and revised in 1994 and 2000, are now being transitioned to ISO 9001:2008.
Its family of standards represent an international consensus on good quality management systems and
related supporting standards. It is the only standard in the family against which organizations can be
certified. It provides a tested framework for a systematic approach to managing organizational
processes to consistently deliver product that satisfies the customers expectations.

ISO 4000 ENvironmental Standards

describe the basic elements of an effective environmental management system and do not replace
federal, sate, provincial environment laws and regulations. Series consist of two standards ISO
14004:2004 (provides guidelines on the elements of environmental management system and its
implementation and discusses principle issues involved) and ISO 14001:2004 (specifies the requirements
for such an environmental management system).

Purchasing Policy

policy specifying the amount to purchase of a product and when to purchase it

Small Value Purchases

items so that you are not spending a lot on transaction costs, blanket orders and catalog procurement.

Safety Stock

Also called buffer stock, it is extra inventory kept on hand in case demand is higher than expected or
problems in the factory slow production

Quantitative Forecasting

casual models, tries to identify leading indicators, from which linear or multiple regression models are
developed. Assumes sales follow a repetitive pattern overtime.
Six Basic Aspects of Pattern

value, trend, seasonal variations, cyclical variations, random variations, and turning points.

Qualitative Forecasting

is one of the most common classes of gathering opinions from a number of people and using these
opinions with a degree of judgement to give a forecast. May flow from top to down.

Collaborative Planning, Forecasting, and Replenishment (CPFR)

links sales and marketing processes to supply chain planning and execution processes. Is one example of
a business practice in which multiple trading partners agree to exchange knowledge and share risks to
generate most accurate forecast possible and develop effective replenishment plans.

Dependent Demand

the item is a part of a larger component or product, and its use is dependent on the productions
schedule for the larger component.

Independent Demand

the usage of the inventory item is not driven by the production schedule. It is determined directly by
customer orders.

Fixed Period Inventory

Set period you check inventory, place order to reach maximum level of inventory.

Service Coverage

the portion of user requests served. Also, can be defined as the portion of demand served immediately.
Can be used to determine the appropriate level of safety stock. Companies set coverage typically at
95%, implying a ratio of stockout to holding cost of about 19 to 1.

Materials Requirement Planning (MRP)

(pull system) attempt to support the activities of manufacturing, maintenance, or use by meeting the
needs of master schedules. Need an accurate bill of materials for each final product or project.
Conceptually advantageous to view them as structural trees. Implementation may take years and
involve major investments.

Three Basic MRP Inputs

-Master Production Schedule- details how many end items are to be produced during a specified time
period.
-Structured Bill of Materials- uses information from the engineering and process records to detail the
subcomponents necessary to manufacture one finished item.
-Inventory Record- contains informations such as open orders, lead times, and lot policy so that the
quantity and timing of orders can be calculated.

Capacity Requirement Planning (CRP)

is often linked to a module that controls the manufacturing plan on the shop floor. The goal is to
measure output by work center against the previously determined plan. This information allows
identification of trouble spots and is necessary on an ongoing basics for capacity planning.

Enterprise Resource Planning (ERP)

are used to integrate business systems and processes. It is software that allows all areas of the company
to combine and analyze information. Can provide a link from customer orders through the fulfillment
processes.

Manufacturing Resource Planning Two (MRP II)

links the firms planning processes with the financial systems. They combine the capability of "what if"
production scenario testing with financial and cash flow projections to help achieve the sale and
profitability objectives of the firm.

Inventories

exist for many purposes including:

-To provide maintain good customer service
-To smooth the flow of goods through the productive process
-To provide protection against uncertainties of supply and demand
-To obtain a reasonable utilization of people and equipment

Transit Inventories
are used to stock supply and distribution pipelines linking an organization to its suppliers and customers
as well as internal transportation points. They exist because of the need to move material from one
point to another.

Cycle Inventories

arise because of management's decision to purchase, produce, or sell in lots rather than individual units
or continuously. They accumulate various point in an operating system.

Economic Order Quantity (EOQ)

The quantity to be purchased which minimizes total costs.

Kanban

is a simple but effective control system that helps make JIT production work. Japanese word for card.
are most useful for high-volume parts used on a regular basis. Two types of systems single card
(production) and double card (conveyance and production).

Continuous Service

insurance or a 365/24/7 around the clock security service pr technical support.

Discrete or One Shot Service

an interior decorator to suggest a new color scheme for an office complex.

Periodic Service

may be regular, such as once a week or once a month, as with regular inspections, or it may vary with
need, as in repair services.

Nine Step Purchasing Process

1. Need Recognition
2. Description of Need
3. Identification/Analysis of Possible Sources
4. Supplier Selection/Determination of Price and Terms
5. Preparation/Placement
6. Follow-up and expediting order
7. Receipt/Inspection of Goods
8. Invoice Clearing and Payment
9. Maintenance of Records and Relationships

Blanket Order

1 year contract for high volume, repetitively purchased materials/MRO items.

- material releasees issued against the "open order" -Blanket order release-

Materials/Sales Ratio

indicates how much of the sales dollar is consumed by the cost of direct materials.

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