Podcast
Questions and Answers
Under what conditions would a purchasing department's role most significantly transcend mere transactional buying and evolve into a strategic intelligence function?
Under what conditions would a purchasing department's role most significantly transcend mere transactional buying and evolve into a strategic intelligence function?
- When the company's primary focus is on minimizing immediate purchase costs without considering long-term implications.
- When the company relies heavily on historical purchasing data and established supplier relationships, with minimal emphasis on exploring new market opportunities.
- When the company adopts a decentralized purchasing model, allowing individual departments to handle their own procurement needs independently.
- When the purchasing department is actively involved in gathering and analyzing supply market data, forecasting trends, and informing design and manufacturing decisions. (correct)
In the context of Total Cost of Ownership (TCO), which element incorporates the discounted cash flow analysis of future operational expenses, potential environmental liabilities, and decommissioning costs associated with an asset?
In the context of Total Cost of Ownership (TCO), which element incorporates the discounted cash flow analysis of future operational expenses, potential environmental liabilities, and decommissioning costs associated with an asset?
- Whole Life Costs (WLC) (correct)
- Total Acquisition Cost (TAC)
- Return on Net Assets (RONA)
- Direct Material Variance (DMV)
Within a strategic procurement context, how does a reduction in purchase costs most effectively translate into a disproportionate increase in profit margin, assuming all other factors remain constant?
Within a strategic procurement context, how does a reduction in purchase costs most effectively translate into a disproportionate increase in profit margin, assuming all other factors remain constant?
- By enabling the company to increase sales prices without affecting demand.
- By decreasing the variable costs, thus increasing the contribution margin per unit sold and amplifying overall profitability. (correct)
- By reducing fixed costs, leading to a lower break-even point and higher profits at all sales levels.
- By directly increasing revenue without affecting any cost structures.
What inherent risk is most likely to emerge from an over-reliance on 'outsourcing' policies and a simultaneous focus on core competencies within an organization's labor and overhead structure?
What inherent risk is most likely to emerge from an over-reliance on 'outsourcing' policies and a simultaneous focus on core competencies within an organization's labor and overhead structure?
Considering the trend of increasing supply chain complexity, as evidenced by the rise in dependencies between entities and frequent network configuration changes, what strategic imperative should procurement managers prioritize to mitigate potential disruptions?
Considering the trend of increasing supply chain complexity, as evidenced by the rise in dependencies between entities and frequent network configuration changes, what strategic imperative should procurement managers prioritize to mitigate potential disruptions?
To effectively assess a potential supplier's suitability, which due diligence element offers the most reliable insight into their long-term viability and ability to fulfill contractual obligations under varying economic conditions?
To effectively assess a potential supplier's suitability, which due diligence element offers the most reliable insight into their long-term viability and ability to fulfill contractual obligations under varying economic conditions?
When negotiating supply contracts, under what conditions would a buyer be most justified in accepting higher unit costs in exchange for other considerations?
When negotiating supply contracts, under what conditions would a buyer be most justified in accepting higher unit costs in exchange for other considerations?
How does adhering to ISO9000 quality standards by vendors directly influence a buyer's operational efficiency and risk mitigation strategies?
How does adhering to ISO9000 quality standards by vendors directly influence a buyer's operational efficiency and risk mitigation strategies?
Within the framework of Economic Order Quantity (EOQ), what fundamental trade-off is being optimized to minimize total inventory costs?
Within the framework of Economic Order Quantity (EOQ), what fundamental trade-off is being optimized to minimize total inventory costs?
In the context of supply chain resilience, what strategic advantage does 'Just-In-Time' (JIT) supply offer, and what critical risk does it inherently introduce?
In the context of supply chain resilience, what strategic advantage does 'Just-In-Time' (JIT) supply offer, and what critical risk does it inherently introduce?
Which of the following strategies will a company employ when attempting to gain competitive advantage through its forms of procurement?
Which of the following strategies will a company employ when attempting to gain competitive advantage through its forms of procurement?
A company decides to insource a previously outsourced component. Under what circumstances would this strategic shift most likely prove advantageous?
A company decides to insource a previously outsourced component. Under what circumstances would this strategic shift most likely prove advantageous?
What is the most decisive impetus for companies to strategically link purchasing and supply management directly into their broader business plan?
What is the most decisive impetus for companies to strategically link purchasing and supply management directly into their broader business plan?
How might discounts for larger order quantities be considered mutually beneficial for both buyers and suppliers?
How might discounts for larger order quantities be considered mutually beneficial for both buyers and suppliers?
Why might a vendor choose not to invest in up-to-date machinery when dealing with a short-term contract?
Why might a vendor choose not to invest in up-to-date machinery when dealing with a short-term contract?
What primary strategic objective is achieved by closer coordination with key suppliers?
What primary strategic objective is achieved by closer coordination with key suppliers?
A firm using the EOQ model determines that ordering high-value items more frequently will minimize the total inventory costs. What implications does this have for the firms WLC?
A firm using the EOQ model determines that ordering high-value items more frequently will minimize the total inventory costs. What implications does this have for the firms WLC?
Determine which choice is not a key benefit of helping the supplier.
Determine which choice is not a key benefit of helping the supplier.
Determine which choice is incorrect about the strategic role of procurement?
Determine which choice is incorrect about the strategic role of procurement?
Flashcards
Modern Purchasing
Modern Purchasing
Procurement is now an intelligence function. It involves knowing about the supply market, and securing the best products at the best price with reliable delivery.
Total Cost of Ownership (TCO)
Total Cost of Ownership (TCO)
TCO includes all relevant costs and revenues associated with the acquisition and ownership of an asset, including end-of-life disposal, repairs, and opportunity costs.
Impact of Cost Reduction
Impact of Cost Reduction
A reduction in purchase cost increases profit margin. Other ways by increase sales or reduce overheads.
Trends in Expenditure
Trends in Expenditure
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Factors Influencing Supply Price
Factors Influencing Supply Price
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Large quantities Discount
Large quantities Discount
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Economic Order Quantity (EOQ)
Economic Order Quantity (EOQ)
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EOQ Formula Components
EOQ Formula Components
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Study Notes
- 7025MAA – Procurement Management is the module.
- Dr Jim Rowley is the Module Leader, and can be contacted via [email protected].
- Aula contains all Module Information.
Strategic Procurement Lecture 2
- Topics include the growth in the strategic role of procurement, purchasing and supply, the concept of strategic procurement management and influences on strategic choice.
- Also covered is the forms of procurement strategy aimed at gaining competitive advantage.
Growth in Role of Purchasing
- Purchasing is an intelligence function, involving knowledge of the supply market.
- Purchasing involves being able to get best products at best price with reliable delivery.
- Purchasing informs design and manufacturing on new materials.
Total Cost of Ownership (TCO)
- TCO equals total acquisition cost (TAC) + whole life costs (WLC)
- WLC is defined as 'the systematic consideration of all relevant costs and revenues associated with the acquisition and ownership of the asset'
- Comparison includes EOL disposal, repairs in service and opportunity costs over time.
Case Study - Ford
- Purchasing and supply management links into their company’ business strategy
- Purchasing and supply management has a recognised impact on competitive advantage
- Ford Motor Company believes procurement controls the ultimate profitability of the company.
Impact of Purchase Cost Reduction
- A 5% reduction in purchase cost can result in a 50% increase in profit margin.
- To obtain an equivalent impact, a company would have to increase sales by 50%, reduce overheads by up to 20%, or significantly reduce staff numbers.
Exercise Scenario
- A manufacturing company has annual sales of £1 million, and profit on turnover of 10%.
- It spends 50% of its turnover on materials and is able to effect a saving of 5% on its materials costs.
- Questions include calculating the increase in profit, determining the equivalent increase in sales, and what methods could be employed to gain this 5% savings.
Total Organisational Expenditure for Resources
- Labour and overheads are decreasing because of automation, more efficient work and competitiveness depending on access to ‘best practice'.
- Externally provided resources are increasing because of greater specialisation on part of buying organisations and 'outsourcing' policies
- Externally provided resources are increasing due to a focus on core competencies, development of specialised contractors, and easier access to world supply market.
- Complex technology restricting breadth of 'make' capabilities contributes to the increase in externally provided resources
- Flexibility depending on external rather than dedicated 'owned' assets contributes to the increase in externally provided resources
- Closer co-ordination with key suppliers contributes to the increase in externally provided resources
Evolution of Supply Chain Complexity
- Dependencies between supply chain entities have increased by 95%
- Changes in the extended supply chain network configuration occur more frequently by 94%
- New product introductions have been more frequent by 87%
- Products and services have become less standard by 80%
- The relationships between supply chain entities have become less transparent 38%
- The number of entities in the supply chain has increased by 74%
Identifying Possible Sources of Supply
- Financial stability, technical competence, experience, and delivery reliability should each be investigated for all potential supplies.
- Vendor (supplier) accreditation (ISO 9000), equipment quality assurance, personnel management systems and vendor support should be investigated for all potential suppliers.
- Helping suppliers with technical knowledge and financial support makes them more likely to help you.
- If vendors conform to ISO9000 quality standards then the buyer can reduce goods inward inspection to a minimum because quality is 'assured'.
- Helping the supplier to help you is a win-win strategy.
Supply Price
- Price depends on volume to be supplied, materials and quality specified, tools and equipment needed and cost of transportation.
- Discounts may be offered for large quantities or with large quantities per order.
- Supply contracts can also affect discounts.
- Contract length affects prices; short term contracts requiring supplier equipment investment result in higher prices.
- Suppliers won't invest in modern equipment with short term contracts.
- Larger quantity and longer period of time make supplier investment more likely, spreading out fixed costs.
- Buyers can buy and own expensive tools allowing supplier to use them.
- Contract termination means the buyer gets the equipment.
Supply Quantity & Delivery
- Ideal quantity and time to order is just the right amount for instant use ('Just - In - Time' or JIT supply)
- EBQ/EOQ is the economic batch or order size, balancing costs.
- A longer contract encourages investment, ordering small amounts often (orders 'called off')
- Manufacturers get small flexible amounts, suppliers get continuity and this is a win-win strategy.
EOQ Calculation
- Formulas balance holding costs and ordering costs.
- EOQ equals the square root of (2rs / ci).
- 'r' is the annual usage.
- 's' is the ordering cost.
- 'c' is the unit cost.
- 'i' is the holding cost.
- Companies should order high value items often.
- Companies should order low value items infrequently.
- The total-cost curve is a U-shape.
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