Detailed Scheduling and Planning (Lesson 9)

UUnit nit 22 DDetailed etailed SScheduling cheduling aand nd PPlanning lanning Lesson 9 Procurement Plans and Supplier Relations

Unit 2

Detailed Scheduling and Planning

Unit 2

Detailed Scheduling and Planning

© 2004 e - SCP -The Centre for Excellence in Supply Chain Management No portion of this publication may be reproduced in whole or in part. The Leading Edge Group will not be responsible for any statements, beliefs, or opinions expressed by the authors of this workbook. The views expressed are solely those of the authors and do not necessarily reflect any endorsement by The Leading Edge Training Institute Limited. This publication has been prepared by E-SCP under the guidance of Yvonne Delaney MBA, CFPIM, CPIM. It has not been reviewed nor endorsed by APICS nor the APICS Curricula and Certification Council for use as study material for the APICS CPIM certification examination.

The Leading Edge Training Institute Limited Charter House Cobh Co Cork Ireland

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Detailed Scheduling and Planning Preface............................................................................................................4 Course Description................................................................................................................. 4

Lesson 9 – Procurement Plans and Supplier Relations ....................................5 Introduction and Objectives.................................................................................................. 5 Purchasing Decisions .............................................................................................................. 5 Evaluation............................................................................................................................. 12 Price Principles..................................................................................................................... 17 Contract Types ..................................................................................................................... 19 Order Placement Processes................................................................................................. 22 Procurement Process Control ............................................................................................. 23 Approval Systems ................................................................................................................. 23 Supplier Rating Systems ...................................................................................................... 24 Contract Management ......................................................................................................... 26 Ethical Issues ........................................................................................................................ 26 International Purchasing ..................................................................................................... 27 Summary ............................................................................................................................... 30 Further Reading ................................................................................................................... 30 Review ................................................................................................................................... 31 What’s Next? ........................................................................................................................ 32

Appendix.......................................................................................................33 Answers to Review Questions .............................................................................................. 34

Glossary ........................................................................................................37

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Detailed Scheduling and Planning Preface Course Description This document contains the final lesson in the Detailed Scheduling and Planning unit, which is one of five units designed to prepare students to take the APICS CPIM examination. Before completing the Detailed Scheduling and Planning unit, you should complete the Basics of Supply Chain Management unit or gain equivalent knowledge. The five units that cover the CPIM syllabus are: Basics of Supply Chain Management Detailed Scheduling and Planning Master Planning of Resources Execution and Control of Operations Strategic Management of Resources Please refer to the preface of Lesson 1 for further details about the support available to you during this course of study. This publication has been prepared by E-SCP under the guidance of Yvonne Delaney MBA, CFPIM, CPIM. It has not been reviewed nor endorsed by APICS nor the APICS Curricula and Certification Council for use as study material for the APICS CPIM certification examination.

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Detailed Scheduling and Planning Lesson 9 – Procurement Plans and Supplier Relations Introduction and Objectives In this lesson, the concepts, techniques, and data required for proper execution of procurement plans are introduced. It looks at the processes and activities involved in purchasing and managing suppliers according to the procurement plan and looks at issues arising from international purchasing. On completion of this lesson you will be able to: List the purchasing decisions that must be made to execute the material pla n Identify the necessary information and tools required to ensure efficient interaction between companies Identify various types of purchase obligations (such as verbal and contractual) Explain pricing terms Identify points for consideration when reviewing supplier prices List the steps involved in order placement Explain types of formal purchase documentation, contracts, and long-term agreements List legal considerations pertaining to purchasing Identify guidelines for controlling and maintaining ethical standards in procurement processes Identify the impacts of currency fluctuation, international transport, and countertrade on purchasing processes List the benefits of using supplier rating systems

Purchasing Decisions Purchasing decisions are made to further the main objective of the purchasing department, which is to ensure a reliable supply of quality materials and services at the lowest possible cost. In every decision, consideration must be given to factors such as: Make or buy

Cost/value analysis

Compensation agreements

Award criteria

Contractual obligations

Placement of orders

Make or Buy The decision to make or buy will be influenced by the following factors: Cost

Required level of design secrecy

Capacity

Level of control over quality and processes

Time

Sufficiency of supplier’s knowledge and capability

Required volumes

Stability of the workforce

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Detailed Scheduling and Planning Cost and Price The costs of making the item must be compared against the cost of buying the item. The time frame and available capacity must also be considered. Each element of cost must be included in the analysis to ensure an accurate cost comparison. The elements include: Make

Buy

Capital costs

Purchase price

Managerial costs

Purchase management

Factory overheads

Follow on costs

Follow-on costs

Purchasing costs

Direct labor

Receiving & inspection

Inventory carrying costs

Transportation

Delivered material costs Time As the cost analysis needs to include direct and indirect costs, a long-term time range must be used. Short term calculations focus on direct measurable costs and overlook indirect costs such as materials, storage, purchasing and inspections. Capacity The use of existing capacity must be considered when analysing the cost of making a part. Overhead costs relevant to make-buy decision making are the incremental costs that would not be incurred if the part were purchased. These costs may vary. For example, where a plant is operating at close to full capacity and expects to continue production at the same rate, a decision to make a part that was previously purchased will undoubtedly lead to a requirement for extra capacity, either through the purchase of extra equipment or outsourcing some part of current manufacture. This adds the overheads associated with production of this part to the total cost of the make decision along with the variable overhead costs associated with the production of the part. Where there is excess capacity, the variable overheads associated with the make decision are considered, but not the fixed overhead costs as these would be incurred regardless of whether the part was made or bought. Where capacity levels are changing, it may be necessary to divide the time horizon into specific periods and estimate costs for each period. Another approach would be to calculate a weighted average cost over the entire horizon. Quality / Production Control If a high level of production or quality control is required, this will influence the make-buy decision. When production downtime is very expensive, some companies may not be willing to trust external suppliers with critical or unique components that require short lead times unless it is possible to enter into a JIT arrangement with the supplier. © Copyright Leading Edge Training Institute Limited

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Additionally, where the quality specification for a component is very exacting, companies may prefer closer control of production and will tend to make rather than buy the component. Design Confidentiality In some instances, such as in very competitive industries, it is desirable to keep the design of components under wraps in which case it makes more sense to make the components in- house. Reliability of Suppliers Where reliability of delivery dates is important and the company has not sufficient confidence that these dates can be met by potential suppliers it may be necessary to make the component instead. Technical Expertise If the company requiring the component does not have the existing competencies required to make it then it may be more sensible to find a supplier that does. Volume The quantities required will influence the make or buy decision. Where the part is already manufactured by several suppliers and the company only requires small companies, it makes sense to buy rather than make the part. Stability of the Workforce When the workforce is routinely expanded or contracted to respond to varying capacity needs it is often difficult to retain motivated, experienced and trained staff. One method of increasing workforce stability is to ensure the capacity is slightly below the overall required capacity and make use of external suppliers when peak demands are higher than overall capacity. When any of the influencing factors change, such as changing costs and ownership, decisions must be re-examined as they may no longer be valid. Companies may prefer to keep production levels up in a down-turning environment. This will influence them to make rather than buy certain components. Conversely, they may decide to maintain only core companies and buy in all other requirements. Cost and Value Analysis There are three levels of evaluation that a company may enter into. The first is simply a price analysis. More in-depth methods include cost analysis and total cost analysis. Each of these is explained below. Evaluation of price and value is employed to: determine if a price is fair and reasonable. ensure your company receives the best price. assess whether reduction of price is possible. The following methods may be used: © Copyright Leading Edge Training Institute Limited

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Price Analysis •

Is an examination of seller’s prices, without eva luation of cost elements, to ensure the final price is reasonable

•

Is the most straightforward method

•

Involves direct comparisons between prices

•

Can be used by the buyer without input from other departments

•

Applies to purchases of any value and quantity

•

Uses readily available data

Cost Analysis •

Requires more detail from the supplier than price analysis

•

Examines original cost, overheads, and profit margins

•

May be required in situations where price evaluation reveals inconsistencies that cannot be explained

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Detailed Scheduling and Planning Total Cost Analysis •

Examines the supplier’s costs in great detail

•

Involves analysis of all direct and indirect costs and overheads associated with the product in the supply chain

•

Is the least commonly used method

Price analysis may not provide sufficient information to determine the reasonableness of the price on offer. A more comprehensive route is total cost analysis. This evaluates all actual or anticipated costs. The buyer should be able to compare all direct and indirect costs and profits for each competing supplier. Cost analysis is most effective on non-standard items. Cost analysis is required in the following situations: Competition has not been obtained. Competition has been obtained, but nonrecurring costs would significantly affect pricing and subsequent negotiations. Competition has been obtained, but cost analysis and initial negotiation will facilitate related pricing actions, for example, engineering changes. A valid basis for price comparison has not been established, because of a lack of definite specifications. Price comparisons reveal inconsistencies that cannot be explained. Prices appear excessive on the basis of available information. The proposed purchase represents a substantial percentage of the supplier’s total sales. A Cost-Reimbursement, Incentive, or Time and Material contract is negotiated. Sources of cost data Cost data is available from the potential supplier. It can also be determined using cost modelling. If a cost analysis is anticipated, the cost data can be requested from the supplier. Cost data can be required as a precondition for submitting a bid. It is important to request such information before beginning negotiations. Where cost data is either unavailable from the supplier or unreliable, the buyer must develop a cost model to predict what the costs should be.

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Costs will vary between companies depending on the quality of the management, the workforce and the plant. Plant capacity will also play a part. Well managed companies that use resources efficiently will provide higher quality products at lower costs. The three elements of cost to consider are direct costs, indirect costs and profit. Direct Costs These are the most important as they contribute most of the total cost. Direct costs include labor and materials Direct labor needs will peak and then decline as the item moves through various phases of design, development and production. The supplier’s direct labor estimate should be analyzed to ensure that it is reasonable and well planned. Geographical variations in wages will also influence these costs. Direct material is material that is incorporated into the final product. It is either purchased or internally produced. Direct material costs should be examined for internal transfer charges and mark-ups. Indirect Costs These include engineering and materials overheads in addition to general administrative, manufacturing, sales, and marketing costs. Indirect costs may account for up to 40% of the total cost. Such costs may include: Supervision

Support labor

Fringe benefits

Indirect supplies

Shipping and handling

Depreciation

Taxes These overheads should be allocated to a specific operation based on the products stage in its lifecycle. Generally an overhead rate will be established through collaboration of engineering and accounting. The indirect costs that contribute to the overhead and the overhead rate should be examined carefully by the buyer and regularly checked to ensure they are applied consistently Total Cost of Ownership The total cost of ownership is more important than just the price. Missed deliveries, downtime, additional overtime costs, airfreight to customers must all be considered as part of total cost. In total cost analysis, all cost elements of the supply chain are examined, for example: New product release and maintenance Customer order creation costs Order entry and maintenance Contract / Program management Order fulfilment Distribution costs Customer accounting costs Material acquisition costs © Copyright Leading Edge Training Institute Limited

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Detailed Scheduling and Planning Total inventory carrying costs Logistics-related financing and Management Information Systems (MIS) costs Manufacturing labor and inventory costs Cost of rejects and return of rejected material Post sales cost such as warranties, servicing, and field failures The total cost of ownership should be established by tracking cost improvements, projected cost improvements, quality levels and rate of rejects, on-time delivery performance, and production and forecasting performance. These will help clarify expectations for potential suppliers. Profit The profit level for a company should be sufficient to keep them in business and encourage them to accept further business of the same sort. A fair profit is best considered as a flexible figure that rewards the more efficient producer. Cost structures vary among suppliers so that it is difficult to determine the overall profit easily by using a one-size fits all formula. Uncertainty of Cost The degree of uncertainty associated with the costs of procurement should be reflected in the type of compensation agreement established between buyer and supplier. This agreement should detail the cost responsibilities of the supplier, the amount of supplier profit, and supplier incentives. 1. When deciding whether to make or buy a component, a company must take into account which of the following factors? A. Relative costs of each option Review Q

B. Importance of design secrecy C. Gantt charts D. Market conditions for finished product

Compensation Compensation agreements are drawn up to deal with the potential risks involved. The cost risk depends on the accuracy of the cost estimate. Where a company is confident in the accuracy of the cost analysis the risk is reduced. There are three main categories of compensation agreement: fixed price, incentives, and cost plus fixed fee. Fixed Price A fixed price contract is the most common type of compensation agreement, and generally the most favourable to the buyer. The supplier delivers the product for a firm fixed price. It is the supplier’s responsibility to cover all costs even if those prove higher than anticipated. However, if the supplier manages to reduce costs, the profit for the supplier is increased. Some contracts are fixed price with built in economic adjustments. These may take contingencies such as changing labor conditions or market conditions into account. Adjustment © Copyright Leading Edge Training Institute Limited

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clauses are included in the contract to cover increases or decreases in certain costs. These protect both the supplier and buyer from changes in economic conditions. High value raw materials are often dealt with in this way. Often, for such commodities the daily price is readily available in daily publications. The contract will often contain a pricing formula linked to the published market rates. Fixed price redetermination contracts are another type of fixed price contract. These specify a fixed price for a given period of time but build in a price review clause at a stated time. The readjustment can be prospective, during the performance of the contract or retrospective. A prospective adjustment would be used where a fair price can only be assessed for the initial period. A retrospective adjustment would be used where a fair price could not be determined at the beginning of the contract. Incentives In incentive agreements the cost responsibility is generally shared between buyer and supplier. The supplier is motivated to improve performance in quality, delivery and customer service through incentive arrangements. A target cost is agreed between the buyer and supplier based on normal business conditions. It is set at a point that both parties agree is fair, where they think that there is a fifty percent chance of hitting either above or below the target. When the target cost is set, a target profit is set, one that is considered fair and reasonable by both parties. Next, the buyer and seller establish best and worst cost cases. These are used to evaluate the potential cost increases or decreases where the supplier does not meet the target cost. These cost increases or decreases are then shared between buyer and supplier. The final price paid by the buyer will be the final cost plus or minus the supplier’s share of the cost savings or cost increase. Another incentive arrangement often used is the cost plus incentive arrangement. This is used when the cost risk requires a cost-type arrangement but where an incentive can be used to motivate the supplier to control costs. When the supplier does well, the agreed cost is paid plus the incentives. Where the best of worst case is realised, the supplier receives a cost plus fixed fee payment. Cost plus Fixed Fee In a cost plus fixed fee arrangement the buyer agrees to reimburse the supplier for all allowable costs and a fixed fee. The supplier will receive the fixed fee regardless of costs. Generally, because the supplier assumes none of the cost risk, the profit is relatively low. This arrangement pushes all the risk to the buyer and therefore should be avoided by buyers unless there is not other arrangement available. Supplier Selection Criteria The supplier selection criteria should be identified in advance to ensure clear understanding of what is critically important in the areas of: Price and Pricing Strategies Responsiveness After-sales service Innovation Location © Copyright Leading Edge Training Institute Limited

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Detailed Scheduling and Planning Size Financial strength Product Offerings Past performance Balance of power in the buyer/supplier relationship These criteria should be classified as order qualifiers and order winners. Order qualifiers are characteristics that a supplier must possess in order to be considered for the contract. Order winners are characteristics that will enable one supplier to win the contract over others.

Evaluation Evaluation – Criteria The issues indicated in the table below should be assessed and weighted in importance by the relevant functional areas of your organization to help evaluate each supplier.

√ √ √

√

Technical Capabilities Financial and Business Stability

Location √ √

Evaluation Criteria - Issues to Consider Delivery Consider the following: • Past Delivery Performance • Quick Response Capability • Process Flexibility • Statusing Capabilities • Risk Management • Lead Time Price Consider the following: • Best Value Justification • Value Analysis • Joint Cost Reduction • History of No Surprises

√

√

Capacity

√

Responsivenes s Project Tracking Capabilities

Quality

√

References

√ √ √

Price

Issues to Consider: → By Functional Areas: ↓ Business Technical Quality

Delivery

Evaluation - Issues to Consider by Key Areas

√ √ √

√

100 % On Time

Early On-Time Late

Price ($)

Time

Quality © Copyright Leading Edge Training Institute Limited

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Consider the following: • Total Quality Management / Continuous Improvement • Near Zero Defects • Quality Assurance Guarantees • Evidence of Corrective and Preventive Action • Organizational Responsibility • High MTBF, Uptime, Field Reliability

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Detailed Scheduling and Planning Quality Improvement

Capacity Consider the following: • Current v. Forecast • Preventive Maintenance • Capital Equipment Investment • Tracking and Statusing • Delivery and Responsiveness • Extent of Expediting

Innovation Innovation Innovation Time

150% 100%

Planned

Current

Responsiveness Consider the following: • Philosophy Toward Customer Satisfaction • Management Commitment • Technical Support • Ability to Respond to Sudden Surge in Demand Timeliness • Philosophy Toward Customer Satisfaction • Management Commitment • Technical Support • Ability to Respond to Sudden Surge in Demand Project Tracking Capabilities • Reporting and Corrective Action • Program Management Support Location • Service-capable Sites • Breadth of technical assistance available • Technical talent available • Statusing Process • Potential to expand • Global presence, local execution Technical Capabilities • Leader / follower in technology advances • Track record for bringing on new technologies / products © Copyright Leading Edge Training Institute Limited

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• • •

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Detailed Scheduling and Planning Quality management in R&D Technical and product strategy Intellectual depth

References References play a critical role in the decision to do business with a supplier. If a supplier is delivering late or poor quality to others customers, you can expect similar problems. Ask for a list of all similar customers over the last six to twelve months. References can be received from: • Other customers • Suppliers • Competitors It is important that all decisions are recorded to assist the final communication with all suppliers, and also to provide insight into various suppliers for review at a alter stage, should an opportunity arise. Based on the specific criteria agreed by the sourcing review group, the replies from the suppliers should be evaluated into the following categories: Go / No Go Where there is a very clear understanding of the supplier’s capabilities, the supplier can be rated a Go if they fulfill all requirements. Those suppliers that do not fulfill all requirements may fall into one of the following categories or are designated No Go. Almost There The supplier has most components desired and meets key technical requirements. Might be Able to Meet Criteria The company has the basic components and exhibits a great interest in the business opportunity. The following example shows the application of Go/NoGo criteria in the evaluation of 5 potential suppliers. BCN ISO 9000 certified Has the ability to double output over the coming 24 months Fully operational ERP system in place for more than 12 months 70% of Senior management team with at least 10 years managerial experience 5 years supporting & demonstrating international logistics capability

Yes 1 1

Alpha No

No

Yes 1

No 1

Percival

Cyclops

Yes 1 1

Yes 1 1

No

No

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

2

5

5 GO?

Yes 1 1

Static

0 GO

5

0 GO

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0 GO

2

3 NO

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Once this initial screening has been completed, more detailed evalua tion, perhaps using Kepner Tregoe methods may be employed. Kepner Tregoe analysis is a method used in making objective decisions. It involves: • Establishing the evaluation criteria • Dividing criteria into ‘Musts’ and ‘Wants’ • Weighting the ‘Want’ criteria, giving most points to the most critical criteria • Scoring potential suppliers on these criteria Must / Wants -

Decide whether the criteria are absolutely necessary (‘Must’) or desirable (‘Want’).

Weighting -

Assign each ‘Want’ criteria with a weight factor. The higher the weight the more critical the criteria.

Analysis -

Score each potential supplier against the essential and weighted criteria. Then, multiply the scores by their relative weights and total the results to identify the best suppliers.

The following table provides an example of Kepner Tregoe analysis.

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Kepner Tregoe Analysis Example Mandatory (Must) Criteria

Supplier:

PEL

1 Supplier "must" agree to supply parts that conform to the print/specification 2 Supplier "must" agree to support JIT - either through Kanban or consignment 3 Supplier "must" agree to a cost reduction plan that will yield a 5% reduction in total cost each year.

Desired (Want) Criteria 1 Acceptance of Siebe payment terms 2 Ability to support PPAP requirements 3 Secondary capabilities (machining, deburring, platting) 4 Multiple facilities and/or expansion capacity to support

ACCURATE

BRAWO

CERRO

CMC

ISVAL

MIDWEST

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

No

Yes

No

Weight Raw Cumm Raw Cumm Raw Cumm Raw Cumm Raw Cumm Raw Cumm Raw Cumm Factor Score Score Score Score Score Score Score Score Score Score Score Score Score Score 10 8 80 10 100 10 8 7 7 5 10 7 70 8 80 10 8 3 8 3 9 5 45 8 9 7 3 7 3 Etc… 9 4 36 5 8 9 1 6 1

multiple SIEBE business units

5 Capable of quick response (i.e. quick die changes, number

8

5

40

5

8

6

3

5

2

of presses, customer base) 6 QS 9000 Certified / ISO Certified 7 In-House tool shop for mold production and/or die repairs

8 8

6 5

48 40

7 8

8 9

7 10

3 2

7 7

1 1

8 Demonstrated "lean manufacturing" techniques and/or Six

8

3

24

4

7

4

0

4

0

8

5

40

6

8

6

2

6

1

7

8

56

8

8

8

6

8

5

7

8

56 535

7

9

7

9

9

7

Sigma qualified 9 Evidence of a strong engineering department/technical support team 10 Tooling lead times (comparable with competitors/industry)

11 Proven factory and workforce stability Total Points

Figure 1 Example of Kepner Tregoe Analysis

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Detailed Scheduling and Planning 2. Which type of pricing is least favorable to the buyer? A. Incentives B. Fixed Fee Review Q

C. Cost plus fixed fee D. Fixed Fee with adjustment clauses

Price Principles The right price should be fair and reasonable to both supplier and buyer. To determine a fair and reasonable price, the buyer must consider economic conditions, perform price analysis and evaluate opportunities for discounts. Economic Considerations The setting of prices is ruled by the level of competition. Where a monopoly exists and only one supplier can deliver the buyer is dependent on that supplier and the supplier has complete freedom to set the price. Where competition is extremely stiff, it is likely that all possible cost savings have already been implemented and prices are as low as possible. In either case, there is little the buyer can do to modify the price. However, most situations exist somewhere in the middle where there is some price flexibility. Most companies sell a line of products and establish prices that will ensure an overall profit for the entire line. The average profit margin is used by the seller to price orders. IF the buyer knows which products are high margin and which are low margin, he can determine whether the price is too high. Product differentiation is another factor in pricing. The differences between products can sometimes appear greater than they are in fact as a result of marketing hype. Buyers should be able to see the through the hype and objectively weigh each product on its merits. Price is equal to cost plus profit. Before analyzing the reasonableness of a price, the buyer must understand the effects of the following cost elements: Variable costs: these vary with production quantity and generally include labor and material costs Fixed costs: these cover building rent, the cost of equipment and depreciation and other costs that are incurred whether or not the company manufactures product or not Semi variable costs: these many include maintenance and postage Total costs: this is the sum of variable, semi variable and fixed costs. Total cost increases as volumes increase although the cost per unit will drop Direct costs: these are directly attributed to a production operation and are not variable Indirect costs or overheads: these cannot be attributed to a specific production activity. They may be fixed or variable. Examples of indirect costs include utility bills and office equipment.

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Detailed Scheduling and Planning Price Analysis Price analysis is an examination of the seller’s price in comparison with price benchmarks. It does not involve an examination of the cost and profit elements that contribute to that price. Price analysis can be performed using competitive proposals, historical price data or market prices. When performing a price analysis the purchaser must: be familiar with market conditions and published information such as supplier price lists, trade journals, and government publications. compare bids. compare price versus quantity relationships. compare pricing of similar products. 5 Steps for Establishing Comparability Step

Considerations

1. Select items or prices for comparison

Is this comparison valid?

2. Identify product and price-related differences

Are the items or services compared the same?

Are better comparisons available?

Are there discrepancies in terms and conditions that affect price? How do the environments shaping the respective prices differ?

3. Determine the precise effects of the differences

How do the noted differences affect prices? (Recall earlier discussion concerning variations in quantity) How substantial might the differences be?

4. Select and apply method for adjustment

Can resources such as the producer price index be used to establish comparability? Must more sophisticated manipulative techniques be applied?

5. Make comparison

Have all price-related differences been accounted for? Has a common basis for comparison been developed If not, to what extent is the comparison still valid? Should it be discounted?

Discounts Quantity, trade, seasonal and cash discounts help to reduce prices. Trade discounts are price reductions from list price that are given to a distributor to compensate for performing some of the marketing functions of the seller. These are usually a series of individual discounts applied to various stages in the distribution chain. To maximise the discount, the buyer must ensure they get to a distributor as close as possible to the manufacturer.

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Detailed Scheduling and Planning Quantity discounts apply to large orders, either in terms of quantity or dollar value. These are based on the reduction in cost per unit to be gained from longer production runs. High dollar repetitive purchases should incorporate quantity discounts where possible. Seasonal discounts are based on the seasonal nature of goods and services. The buyer may get reduced prices out of season. Cash discounts may be offered for prompt payment. For example, it is often possible to pay a reduced price for a car if paying in cash rather than in instalments.

Contract Types The types of obligations and purchasing agreements that companies enter into vary from simple verbal commitments to long-term formalized contracts. Verbal Commitments In the United States, verbal contracts are considered just as binding as written contracts for values of less than $500. When verbal contracts are later confirmed in writing they are considered binding. Purchasing Credit Cards Corporate credit cards can be used to simplify the purchasing process by reducing the need for purchase orders, thereby reducing cycle time and workload. The buyer must make arrangements with suppliers to accept the company credit card. The card is then issued to selected operating personnel with a spending limit. One disadvantage of such an approach is the loss of control from the purchasing department. A company may be exposed to petty fraud and unauthorized suppliers. The number of authorized suppliers should be limited and the dollar limit on each card should be at an appropriate level for the purchases for which it is to be used. Purchase Orders Purchase orders are the most common type of purchase agreement. A purchase order acts as a legal contract and must state clearly all relevant product requirements and information such as the buying firm, the PO identification, internal information such as the charge code or name of the buyer, supplier details, account number, shipping information, billing address, item identification and description, quantities, prices and due dates. Blanket Orders A blanket order is a long term commitment to a supplier to purchase a quantity of material over a period of time. These are used to minimize problems associated with frequent small orders. The amount of the blanket order is determined through analysis of past purchases. The buyer selects an appropriate supplier, negotiates a rate and then issues a blanket order that contains a description of the items and unit prices along with estimated usage over the period of the blanket © Copyright Leading Edge Training Institute Limited

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order. It also contains provisions for the delivery of material upon receipt of a release form from the company. Blanket orders are useful because: They require fewer purchase orders, thereby reducing administration They permit volume pricing They improve the visibility and flow of information They often lead to reduced lead times and inventories They help develop long-term stability in supplier relationships Contracts A contract should comprise four elements in order to be enforceable: An agreement that has resulted from an offer and acceptance of that offer Mutual obligations Competent parties, each over the age of majority, mentally competent and not under influence of alcohol or drugs A purpose that is lawful and does not restrain trade or violate price discrimination laws. The type of contract that is chosen will depend on the level of shared risk and the degree of commitment between the customer and the supplier. Where there are clear specifications and the cost risk is low, firm fixed price contracts may be used. Where this is not the case, contracts based on costs are chosen. Incentive type contracts fall somewhere between the two extremes. A contract is an agreement between two parties, either verbal or written. As it is easier to verify a written contract, this will carry more weight in law. Annual or Multi-Year Agreements Long term contracts extending over three years are useful in that they reduce the amount of time required to investigate suppliers. This reduces administration and consequently costs. As a more stable agreement, a multiyear agreement can provide advantages on both sides. The supplier will be encouraged to increase investment in research, tooling and training. This in turn can lead to lower costs. The buyer has a reliable agreement in place and does not have to spend time continually researching potential suppliers. Definite Delivery Contracts Definite delivery contracts are used when the production schedules over the period of the contract are known. Definite quantities and associated delivery dates can be specified with a low risk of change in such cases. Indefinite Delivery Contracts In most cases it is not possible to plan production precisely over the entire period of the contract. In this case the material and services in support of production should be contracted on an indefinite delivery schedule. This may be a definite quantity © Copyright Leading Edge Training Institute Limited

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Detailed Scheduling and Planning contract, a requirements contract or an indefinite quantity contract. Definite Quantity Contracts This contract type specifies the quantities of material and states that the delivery instructions will be provided at a later date. Requirements Contracts In this type of contract the entire requirements of the buyer over a particular period of time will be covered. Generally there will be a minimum quantity of material. Neither party will be able to terminate the agreements as long as the supplier exhibits satisfactory performance and the buyers requirements continue to exist. Indefinite Quantity Contracts Indefinite quantity contracts provide for the delivery of a specific category of material over an agreed period of time. The buyer commits to purchase quantities that fall within a certain range but actual quantities and due dates are not specified in the contract. Legal Issues and Contract Law The activities of a purchasing department are governed by the law of agency and the law of contracts. The law of agency governs a purchasing manager acting as an agent for a firm. When the purchasing department buys materials or services from another company both parties are entering into contracts that are governable by contract law. 3. Which of the following statements about price analysis are accurate? A. It requires familiarity with market conditions

Review Q

B. It examines price in comparison with benchmarks without consideration of cost or profit contributions. C. It examines cost and profit breakdown of supplier price against various benchmark figures D. It involves comparisons between a wide variety of products

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Detailed Scheduling and Planning Order Placement Processes The order placement process begins usually with a requisition form. This is used to generate a request for proposals. Various suppliers may submit proposals which are then evaluated by the company. When a suitable supplier has been selected a purchase order is generated and sent to the supplier. The supplier acknowledges this purchase order and fulfils it. The purchasing company then verifies receipt of the material ordered. The supplier then invoices and the buyer approves and pays the invoice. This process is illustrated below. Requisition of material

Generation of RFP

Evaluation of Supplier Bids

Generation of Purchase order

Reconciliation

Approval of invoice

Verification of receipt of goods

Fulfillment of purchase order

Purchase Requisition When a need for a product or service is identified, through the MRP system, a purchase plan, or an operating department, a purchase requisition is prepared. This is an internal document that describes the items and quantities to be purchased. A copy of this is sent to the purchasing department. Request for Proposal (RFP) The buyer prepares a Request for proposal (RFP) or request for quote(RFQ). This is a document that will detail requirements to potential suppliers. The document is sent to appropriate potential suppliers that have been chosen either from an approved suppliers list or by the efforts of a crossfunctional strategic sourcing team. Evaluation of Quotations The potential suppliers return bids or quotes to the buyer and these are compared and contrasted using predefined techniques and methods such as price analysis, technical evaluation, total cost analysis and Kepner Tregoe comparisons using pre-defined criteria. Purchase Orders When the successful supplier has been selected a purchase order (PO) is prepared to identify the buyer’s requirements. This becomes a legal contract between the supplier and the buyer. Acknowledgement The PO is a legal offer to buy but the purchasing contract is not complete until the supplier accepts the offer either by simply fulfilling the requirements of the PO or by acknowledging acceptance of the contract through some form of written notification. The purchasing department should then focus efforts on follow-up to ensure the supplier is executing the contract as required.

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Detailed Scheduling and Planning Material Receipt Inspection When the goods are received the material received is compared against the purchase order to verify the correct materials and quantities are there. Subsequently the material is inspected for quality and condition. JIT Purchasing In JIT environments, the purchasing process follows the Pareto principle by paying attention to the few most significant items. The items of most value to the company should be the target of the greatest purchasing effort. Finding and evaluating suppliers for JIT purchasing programs is a time-consuming and costly activity. It can bring great benefits such as lower inventories and shorter cycle times, lower costs and improved profitability on both sides. JIT purchasing requires the company to: Create a specific plan to reduce the number of suppliers Create conditions where extensive long-term contracts and partnerships with valued suppliers are set up. Buyers will need to maintain tighter schedules and higher quality as well as improving performance and problem solving skills in a JIT environment. Approving and Paying Invoices The purchasing department must approve invoices and authorize payment either through manual or electronic signatures. The invoices are then handled by accounting and any discrepancies found must be communicated between accounting and purchasing in order to reconcile differences. 4. When it is not possible to plan production precisely over the entire period of the contract which of the following contract types is most suitable? A. Definite delivery contract B. Definite quantity contract Review Q

C. Requirements contract D. Indefinite quantity contract

Procurement Process Control Control and appraisal of processes should address both problem detection and problem prevention. Establishing policies and procedures to control the pur chasing process are prevention techniques. Monitoring that process will help detect any unforeseen problems.

Approval Systems Purchases should always be approved. Generally the dollar value of the purchase will dictate the level of approval required. For example, it may be possible to authorize supervisors to approve purchases of low value operating materials up to a certain value. Purchases of a greater value may require department head approval or possibly approval from company directors or vice presidents. Some companies for example, require that all information technology (IT)-related © Copyright Leading Edge Training Institute Limited

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Detailed Scheduling and Planning purchases are approved by the IT department even though that department may not be responsible for the initial requisition.

Supplier Rating Systems A rating system to monitor performance and provide timely feedback to suppliers is important for safeguarding the smooth running of the supplier –customer relationship. Several factors must be considered when establishing such a system. These are described in the following paragraphs. Quantitative Methods of Supplier Evaluation A supplier evaluation system should ensure that the supplier is meeting the needs of the buyer. It should also contribute to the continuing improvement of the processes and systems in place between supplier and buyer and create a better understanding of the process and its position in the supply chain. Various metrics can be used to evaluate supplier performance, depending on company requirements. For example, the rate of on-time delivery, the level of process capability, the percentage of product conforming to specifications, the level of inventory turnover, all may be used as measures of supplier success. Where possible, measures used should be based on quantifiable data rather than on subjective judgeme nts. The main aim of such an evaluation program is to contribute eventually to the improvement of customer service. This ultimate aim should be borne in mind during the development and implementation of the evaluation process. Ideally the performance measures used will provide sufficient data to help identify potential and actual problems in sufficient time to enable corrective actions to be taken before the customer is affected. Balanced Scorecard Many companies use a ‘balanced scorecard’ approach which combines measurements on financial performance, operating performance, sales and marketing performance, technical performance, and performance in other strategic business areas identified by the company. The balanced scorecard begins by defining key objectives in each business area, then devising strategies to meet those objectives and finally linking each objective with appropriate performance measures. This approach filters through each level in the company, with each business unit formulating its own objectives, strategies and measures in line with the overall business objectives and strategy. Performance Measurement Standards Effective measurement of performance depends on the selection of appropriate metrics. These should promote continuous improvement in the areas they are intended to measure. Additionally, the performance measurement effort should focus on the most critical areas, such as those suggested by Mel Pilachowski in Purchasing Performance Measurements (1996, PT Publications Inc.): Certification – the supplier earns points for the level of certification

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Detailed Scheduling and Planning Product quality – ensuring the meeting of customer specifications with zero defects. This can be measured through monitoring the defect rate, the tolerance, conformance to specification, and appearance for example. Delivery performance – This can be measured by looking at the ratio of on time deliveries compared to late deliveries. Additionally, it can be useful to monitor lead times Cost performance – This should be measured in terms of return cots, pricing, freight cost and other costs. Cooperation – this is a more subjective judgement than objective measurement of partnership relations. However, a typical measurement might be supplier response time Quantity – the number or percentage of products delivered to order and or the number of variations from requirements should be monitored. Buyer Performance Standards It is important to measure not only the supplier’s performance but also the company’s own performance as a buyer. The company is responsible for ensuring that orders of sufficient quantities are made on time to facilitate production and product flow. This can be measured in the following ways: Buyers’ service level – measured by recording the number of stockouts against potential total sales. Purchasing workload Number of documents per year per buyer Planned number of buyers Product flow Input ration: the number of requisitions received compared to the number of orders placed Year to date expense variance The failure to meet customer service levels can lie with the buyer or supplier depending on the originating problem. Take for example the case where a shipment arrives from a supplier 3 days after it was required, leading to delays in fulfilling customer orders. This would appear on the surface to be a problem with late delivery on the part of the supplier. However, by investigating further it may be found that the order was placed only one week previously and the expected lead time for the item is 12 days. In such a case the supplier has actually exceeded performance expectations by reducing the lead time by 2 days. The fault for the late delivery lies with the purchasing department as they did not place the order in time. 5. What is an RFP? A. an internal document that describes the items and quantities to be purchased B. a document that will detail requirements to potential suppliers Review Q

C. a method of systematically comparing the relative strengths and weaknesses of various suppliers D. a legal contract to buy material when accepted by the supplier

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Detailed Scheduling and Planning Contract Management While the supplier is responsible for satisfactory contract performance, the buyer can not rely on the supplier alone to ensure that work is progressing on schedule. When the buyer determines that an active progress monitoring system is necessary to ensure timely delivery the proposed delivery schedule must be reviewed. Gantt charts and PERT charts are project management tools used to track performance in such situations. These provide graphical representation of performance and can be easily evaluated. GANTT Charts Gantt charts list each element of a project along with the duration of the task represented by a horizontal bar. The tasks are listed vertically. The horizontal axis of the chart is the timeline. Each project activity is entered on the time line sequentially. This shows at a glance which tasks should be performed in which sequence. Actual performance can be plotted against planned performance although it is not possible to highlight mission critical activities. However, the overall critical path to completion can be highlighted. Critical Path Method (CPM) and Program Evaluation Review (PERT) The critical path method and program evaluation and review technique (PERT) both look at the relationships between individual tasks, identifying which tasks are dependent on other tasks. The probability of a task slipping is also included in the analysis. The result is presented as a network diagram.

Ethical Issues The National Association of Purchasing Management (NAPM) in the United States addresses the ethical standards for purchasing professionals in its Principles and Standards documentation. Each of the principles is summarized below: Ethical Perceptions : avoid the intent and appearance of unethical or compromising practice in relationships, actions and communications. For example, avoid price fixing. Responsibility toward Employer: Diligently follow the lawful instructions of the employer using reasonable care and only the authority with which you have been granted. For example do not split a single order into two or more orders if you have not the authority to do so. Conflict of Interest: Refrain from any private business or professional activity that would create a conflict between personal interests and the interests of the employer Gratuities: Do not solicit or accept money, loans, credit, prejudicial discounts, gifts, entertainment or other favors from suppliers that might appear to influence purchasing decisions. Confidentiality: Handle all confidential information belonging to employers or suppliers with due care and proper consideration of ethical and legal consequences Treatment of Suppliers : Promote positive supplier relationships through courtesy and impartiality in all phases of the purchasing cycle. Reciprocity: Avoid reciprocal agreements that have the effect of limiting competition © Copyright Leading Edge Training Institute Limited

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Federal and State laws : know and obey the letter and spirit of the law regarding purchasing functions, and be aware of the legal ramifications of purchasing decisions Small businesses: Encourage all segments of society to participate by demonstrating support for small disadvantaged and minority-owned businesses. Observe contractual requirements for total content related to these types of businesses especially government and military contracts. Personal Purchases for Employees: Discourage purchasing involvement in employeesponsored programs of personal purchases that are not business related. Observe company policy regarding purchases of computers, printers, and other items for personal use. Responsibilities to the Profession: Enhance the proficiency and stature of the purchasing profession by acquiring and maintaining current technical knowledge and the highest standards of ethical behaviour. Maintain a program of ongoing professional development. International purchasing : Obey the laws, customs and practices of foreign countries in so far as they are consistent with your country’s laws, your organizations’ policies and the ethical standards and guidelines.

International Purchasing In today’s global economy it is increasingly likely that buyers will be dealing with suppliers and customers in other countries. However, many international companies are making efforts to manufacture and source locally in order to support the manufacturing efforts in other countries. The advantages of local sourcing include reduced transportation costs, reduced lead times for raw materials, and the avoidance of tariffs imposed on international trading. Normally international procurement would be a strategic sourcing strategy due to the risk factors for currency fluctuations. The purchase process for global sourcing is complex. Like the standard process, the first step is the identification of need and the development of an RFP. After that, it is important to locate a customs broker. Bid evaluation, selection of the supplier, and the securing of a line of credit must be completed before a purchase order can be generated. After that the supplier notifies the buyer of the planned shipment, confirms the mode of delivery and ships the goods. The goods are subjected to customs inspection at the port of entry to ensure the proper duties, tariffs or taxes have been addressed and paid. Then the shipment is released for domestic delivery. The company mus t then verify receipt and approve the invoice for payment. The payment process will involve a currency exchange. This takes place at the point where the invoice is paid unless it was fixed in advance. In the diagram below, the green boxes indicate the extra steps required for international procurement.

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Employ a customs broker

Requisition of material

Generation of RFP

Reconciliation

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Detailed Scheduling and Planning Secure a line of credit

Evaluation of Supplier Bids

Generation of Purchase order

Verification of receipt of goods

Fulfillment of purchase order

Approval of invoice

Perform currency exchange

Cover tarrifs and duties to clear customs

Possible Pitfalls Currency fluctuations can increase costs when a PO is issued at one currency rate but the invoice is paid at another rate. A company can protect itself against such fluctuations by locking in to an exchange rate in advance. Exchange insurance specifies a given current-day exchange rate for a future transaction. International procurement requires additional steps, time, risk and cost. Intermediaries who are proficient in expediting the import process should be contracted to handle the complexities of international trade and assist in avoiding potential problems. International Shipping Documentation The shipping documentation to accompany goods in international transit must include: Bill of lading

Packing list

Customs invoice

Certificate of origin

Invoice

Arrival notice

Customer entries

Insurance certificate

Dock receipt

Inspection certificate

Delivery order

Freight release

Carriers certificate and release order

Trade Cost Issues Before considering international sourcing it is important to take into account the following elements: Transportation and bonded carriers (what are bonded carriers?) Customs duties, tariffs, and taxes Insurance and broker costs Currency fluctuations and exchange valuation management Communications and language barriers Inventory holding costs at intermediate points Fees for documentation, inspection, ports, consolidation and brokerage © Copyright Leading Edge Training Institute Limited

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Detailed Scheduling and Planning Banking costs and line of credit fees. Credit Many international suppliers will request that a buyer obtain a letter of credit from their bank during negotiations. This letter promises to pay a specified amount of money. While not a method of payment it is an extension of credit from the bank rather like a loan. This transfers the risk of payment to the bank. Letters of credit may be: Irrevocable (they cannot be cancelled or changed without the consent of the supplier) Confirmed (the bank confirms the letter of credit assumes the risk) Revolving (as the balance owed is paid the amount available to borrow increases. Nonrevolving letters are valid for one transaction only) Currency Fluctuation and Forward Buying Buyers should try to use currency fluctuations to their advantage by observing trends and using forward buying techniques, suc h as hedging to minimize the risks associated with currency fluctuation. For example, a company may decide to make an agreement with a supplier in another country when the economy in that country is generally quiet, exchange rates are favourable and demand for the product is low. They will then reap the benefits if the exchange rate becomes less favourable later on. Hedging protects against short term risk through forward buying techniques. The buyer enters into contracts to sell dollars for foreign currency at a time the supplier is paid. Hedging involves risk arising from the inaccuracy of forecasts, where unexpected price variation can occur. If a company underforecasts purchases, some parts must be purchased without a hedging offset. Countertrade Countertrade refers to a transaction in which payment is made either in whole or in part with goods rather than money: a type of barter arrangement. Countertrade links two unrelated transactions. It may be imposed by foreign governments to preserve foreign exchange.

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Detailed Scheduling and Planning Summary This lesson introduced the concepts, techniques, and data required for proper execution of procurement plans. It examined the processes and activities involved in purchasing and managing suppliers according to the procurement plan as well as issues arising from international purchasing. You should be able to: List the purchasing decisions that must be made to execute the material plan Identify the necessary information and tools required to ensure efficient interaction between companies Identify various types of purchase obligations (such as verbal and contractual) Explain pricing terms Identify points for consideration when reviewing supplier prices List the steps involved in order placement Explain types of formal purchase documentation, contracts, and long-term agreements List legal considerations pertaining to purchasing Identify guidelines for controlling and maintaining ethical standards in procurement processes Identify the impacts of currency fluctuation, international transport, and countertrade on purchasing processes List the benefits of using supplier rating systems

Further Reading Introduction to Materials Management, JR Tony Arnold, CFPIM, CIRM and Stephen Chapman CFPIM 5th edition, 2004, Prentice Hall APICS Dictionary 10th edition, 2002 Manufacturing Planning and Control Systems, Vollmann, T.E.; W.L. Berry; and D.C. Whybark 5th edition, 2004, McGraw-Hill Production & Inventory Management, Fogarty, Donald W. CFPIM; Blackstone, John H. JR. CFPIM; and Hoffmann, Thomas R. CFPIM 2nd edition, 1991, South-Western Publishing Co., Cincinnati, Ohio

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Detailed Scheduling and Planning Review The following questions are designed to test your recall of the material covered in lesson 9. The answers are available in the appendix of this workbook. 6. Which of the following are required in international trade rather than domestic trade ? A. Reconcile invoices B. A letter of credit C. An RFP or RFQ D. A customs broker 7. Which of the following performance measurement tools can be used to determine the likelihood that an order will fall behind schedule? A. Balanced scorecard B. Supplier certification C. Gantt chart D. PERT 8. Which of the following are ethical trade guidelines? A. Pursue reciprocal agreements that have the effect of limiting competition B. Diligently follow the lawful instructions of the employer using reasonable care and only the authority with which you have been granted. C. Refrain from any private business or professional activity that would create a conflict between personal interests and the interests of the employer D. Encourage purchasing involvement in employee-sponsored programs of personal purchases. 9. Which forecasting technique uses the following formula: New forecast = old forecast + ? (old forecast – actual demand)? A. Weighted moving average B. Seasonal index C. Exponential smoothing D. Focus forecasting

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Detailed Scheduling and Planning What’s Next? This lesson looked at guidelines and principles for developing and maintaining successful relationships with suppliers. You should review your work using the questions in the next section and then revise your knowledge of the Detailed Scheduling and Planning unit. Before progressing to the final APICS module, Strategic Management of Resources, you should ensure that you have completed the following modules: Master Planning of Resources Detailed Scheduling and Planning Execution and Control of Operations

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Detailed Scheduling and Planning Appendix

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Detailed Scheduling and Planning Answers to Review Questions 1. A and B When deciding whether to make or buy a component, the company should consider the total cost of each approach and the required volumes. The company should check if making the item is feasible by examining available capacity, potential quality issues, the time and expertise required, and the stability of the workforce. When considering outsourcing the item, the technical capability of the supplier, the trustworthiness of the supplier with regard to design secrecy, available capacity and workforce stability will all be influencing factors. Market conditions for the finished product will have little influence on the decision to make or buy a component of that product. Gantt charts are a useful way of comparing two sets of information but are not a requirement in this decision making process. 2. C In a cost plus fixed fee arrangement, the buyer assumes all the risk of rising costs. The supplier receives a fixed fee regardless of cost, although the profit margin may be relatively low given that the supplier’s exposure to risk is low. On top of the fixed fee, the buyer agrees to pay the costs. This type of agreement should be avoided by buyers where possible. The opposite is a fixed fee arrangement where the supplier agrees to a fixed price for the contract without any reference to changes in cost. The supplier is therefore taking the risk that costs may rise and erode profits. An incentive arrangement shares cost increases or decreases fairly between supplier and buyer. A fixed fee with adjustment clauses allows for changes to be made to the fixed fee given specified changes in other factors influencing cost. These adjustment clauses are agreed in advance between supplier and buyer. 3. A and B Price analysis is an examination of the seller’s price in comparison with price benchmarks. It does not involve an examination of the cost and profit elements that contribute to that price. Price analysis can be performed using competitive proposals, historical price data or market prices. When performing a price analysis the purchaser must be familiar with market conditions and published information such as supplier price lists, trade journals, and government publications. Comparisons between bids, between price and quality and between similar products must be completed. 4. D In most cases it is not possible to plan production precisely over the entire period of the contract. In this case the material and services in support of production should be contracted on an indefinite delivery schedule. This may be a definite quantity contract, a requirements contract or an indefinite quantity contract. Definite Quantity Contracts specify the quantities of material and states that the delivery instructions will be provided at a later date. Definite delivery contracts are used when the production schedules over the period of the contract are known. Definite quantities and associated delivery dates can be specified with a low risk of change in such cases. With a requirements contract the entire requirements of the buyer over a particular period of time will be covered. Generally there will be a minimum quantity of material. Neither party will be © Copyright Leading Edge Training Institute Limited

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able to terminate the agreements as long as the supplier exhibits satisfactory performance and the buyers requirements continue to exist. Indefinite quantity contracts provide for the delivery of a specific category of material over an agreed period of time. The buyer commits to purchase quantities that fall within a certain range but actual quantities and due dates are not specified in the contract. 5. B The buyer prepares a Request for proposal (RFP) or request for quote(RFQ). This is a document that will detail requirements to potential suppliers. The document is sent to appropriate potential suppliers that have been chosen either from an approved suppliers list or by the efforts of a crossfunctional strategic sourcing team. 6. B and D When trading internationally there are several extra steps to be carried out in comparison to domestic trading. These are illustrated in the flowchart below. (International trade steps are in green, those common to both are in blue). Employ a customs broker

Requisition of material

Generation of RFP

Reconciliation

Approval of invoice

Secure a line of credit

Evaluation of Supplier Bids

Generation of Purchase order

Verification of receipt of goods

Fulfillment of purchase order

Perform currency exchange

Cover tarrifs and duties to clear customs

7. D Many companies use a ‘balanced scorecard’ approach which combines measurements on financial performance, operating performance, sales and marketing performance, technical performance, and performance in other strategic business areas identified by the company. The balanced scorecard begins by defining key objectives in each business area, then devising strategies to meet those objectives and finally linking each objective with appropriate performance measures. Supplier certification is used to confirm that suppliers meet buyer criteria. Gantt charts list each element of a project along with the duration of the task represented by a horizontal bar. The tasks are listed vertically. The horizontal axis of the chart is the timeline. Each project activity is entered on the time line sequentially. This shows at a glance which tasks should be performed in which sequence. Actual performance can be plotted against planned performance although it is not possible to highlight mission critical activities. However, the overall critical path to completion can be highlighted. © Copyright Leading Edge Training Institute Limited

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The critical path method and program evaluation and review technique (PERT) both look at the relationships between individual tasks, identifying which tasks are dependent on other tasks. The probability of a task slipping is also included in the analysis. The result is presented as a network diagram. 8. B and C Companies should never seek to limit competition. The purchasing department should not become involved in employee purchase schemes for materials not related to their work.

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Unit 2

Detailed Scheduling and Planning Glossary Term

Definition

Backward scheduling

This is a technique for calculating the start dates and due dates of an operation. The due date for the order is the starting point. The planner works back in time to determine the necessary start and due dates for each operation in the order

Balanced scorecard

A list of financial and operational measures used to evaluate organizational performance. There may be several perspectives on the scorecard, for example, business processes, customer service, and finance.

bill of material (BOM)

A listing of all the subassemblies, intermediates, parts, and raw materials needed for a parent assembly, showing the required quantity of each. It is used with the MPS to determine items that must be ordered. Also called formula or recipe.

Blanket order

A long term commitment to a supplier for material against which several material releases will be issued in order to meet customer requirements.

Bottleneck

A resource that cannot cope with the level of demand placed upon it. Such resources can hold up entire production processes, with queues building up before them. Effective management involves identifying and ameliorating issues that cause bottlenecks

Capacity

The capability of a system to perform its expected function. This could be the capability of an operator, machine, work center, plant or organization to produce output per time period. Available and required capacity must be measured to assist in planning.

Capacity planning

This is the process of determining the amount of capacity needed to produce the required quantities of product in the future. Resource planning, rough-cut capacity planning, and detailed capacity planning are performed at different levels of the planning structure.

Capacity The planning activity that determines the capacity requirements for each Requirements work center with regard to the material plan. Open shop orders and planned Planning (CRP) orders from MRP are the main inputs to CRP along with part routings and time standards. These inputs are converted into hours of work by work center for each time period in MRP. CRP may highlight insufficient capacity during some periods. Capacityoriented materials management

A scheduling principle that increases work- in-process to ensure flexibility in utilization of capacity. When used appropriately it leads to reduced total cost when taking into account work in process, capacity, and finished goods inventory

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Detailed Scheduling and Planning (Corma) Cartel

A group of companies that agree to cooperate rather than compete in producing the same product, thereby limiting external competition

Central point scheduling

A scheduling method that starts at a critical point in production and uses both backward and forward scheduling to work backward and forward from that critical point

Certified supplier

A supplier who consistently meets the quality, cost, delivery, and count objectives of its customer

Consortium

A group of companies working together to produce a product

Constraint

A factor that prevents the achievement of a targeted level of performance, such as machine center capacity, lack of raw material, inefficient policy etc.

Constraintoriented finite loading

This finite- loading technique is used to plan orders around bottleneck work centers, aiming to maximize total throughput. Small orders are aggregated into one larger lot size and loaded at the constraining work center. Operations are then backward and forward scheduled as required

Continuous line A production system involving a plant layout that closely follows the production production process for a product. Material flow is continuous during production, routings are fixed and setups are rarely changed. Contract

An agreement between two or more companies or people, either oral or written, to perform or not perform a specified act. A purchase order, once accepted by a supplier in writing or through performance, is a contract.

Cost analysis

A review of actual or anticipated cost values.

Cost plus fixed fee

A pricing method where the seller is paid a fixed fee in addition to acceptable costs for a product or service (up to a maximum).

Countertrade

A transaction in which payment is made with goods rather than money. This is often used in international trade where the alternative is to deal in rapidly fluctuating currency exchanges

Critical path method (CPM)

A project planning technique that determines project completion time based on the identification of the critical path, which includes the elements that constrain the total project time

Current ratio

Current assets divided by current liabilities

Customer service

The ability of a company to meet customer needs. The term is also used to refer to the measurement of product delivery to a customer within required time constraints

Delphi method

A qualitative forecasting technique where the opinions of experts are combined in a series of iterations. The results of each iteration are used to

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Detailed Scheduling and Planning develop the next, so that convergence of the experts’ opinion is achieved. Demonstrated capacity

A level of capacity that is calculated from historical performance data and therefore proven to be achievable.

Dependent demand

Demand that is directly related to or derived from the bill of material structure for another item or end product. Dependent demand should be calculated rather than forecast. Some items may have both dependent and independent demand at the same time.

Distributed A time-phased order point approach that uses MRP logic to determine requirements warehouse requirements. This approach is useful in multilevel distribution planning (DRP) networks. Earliest due date(EDD)

A priority rule used in sequencing of queued orders depending on their operation or order due dates.

Efficiency

A measure of actual output compared to standard output.

Exceptions

Items that deviate from plan

exponent ial smoothing

A weighted moving average forecasting technique in which past records are geometrically discounted according to their age with the heaviest weight assigned to most recent data. A smoothing constant is applied to avoid using excessive historical data.

Extrinsic forecast

A forecast based on a correlated leading indicator, for example, estimating furniture sales based on house builds. Extrinsic forecasts are more useful for large aggregations like total company sales.

Finite loading

A method of loading work centers that ensures the available capacity of the work station is not exceeded.

Fixed price

The seller is paid a set price for services or product without reference to the cost of producing them

Flow production Uninterrupted flow of material through the production process. May also be called mass production or continuous manufacturing. The plant layout usually facilitates the flow of the product through the plant. Forward buying The practice of buying materials that exceed current requirements but will eventually be used Forward scheduling

A scheduling technique that involves progressing from a known start date and determining the completion date for an order.

Incentive

A financial or other type of reward for above standard performance. This is used as a motivation to exceed expectations

Independent

Demand for an item that is unrelated to the demand for other items.

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Examples include finished goods and service part requirements.

Infinite loading

Calculation of capacity needed at work centers regardless of the maximum capacity of the work centers in question

Interoperation time

The elapsed time between completion of one operation and the beginning of the next

intrinsic forecast A forecast based on internal factors, such as an average of past sales. Inventory turnover

The number of times an inventory turns over in a year. It is determined by dividing the annual cost of sales by the average inventory level.

Job shop

A manufacturing environment that produces items to customer specification. Usually a wide range of product designs are possible and are performed at fixed locations using general equipment

Joint venture

An agreement between companies in the pursuit of a joint business objective to which each company contributes capital and other resources.

Kieretsu

A form of cooperation between companies where they remain separate legal entities but work closely together in many ways, for example sharing purchasing and financial processes and setups.

Latest start date The last day upon which a given activity may be started without jeopardizing the project completion date. Lead time

Lead time is the span of time required to perform a process.

Limited partnership

A partnership that comprises partners who contribute assets but are no t involved in company management and general partners who manage the company and are responsible for all debts.

Liquidity ratio

A financial ratio that highlights a company’s ability to fulfill short term financial obligations

logistics

The art of obtaining, producing, and distributing material in the quantities and places required.

Management information systems (MIS)

A system, either manual or computerized, that provides a database of organized information to a variety of management functions

Manufacturing environment

The type of manufacturing strategy currently implemented in a plant. For example, a plant may be laid out according to functional area and covering several small projects. It is often used to refer to whether a company is maketo-stock, make-to-order or assemble-to-order

Master

The anticipated build schedule for those items assigned to the master

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production scheduler. The master scheduler maintains this schedule and it drives schedule (MPS) material requirements planning. It specifies configurations, quantities and dates for production. Multisourcing

The procurement of an item from more than one supplier so that risks are limited and a company is not dependent on any one supplier

Partnership

A form of business that is owned by two or more people. It can also refer to a supply chain relationship based on trust and shared risk to gain competitive advantage

Program evaluation and review technique (PERT)PERT

A network analysis technique provides a standard deviation of the estimated project duration, by assigning 3 durations to each activity: pessimistic, most likely, and optimistic. The critical path method is then applied with a weighted average of the times for each activity.

price analysis

The evaluation of a seller’s price proposal in comparison with price benchmarks. This does not involve examination of the elements of cost and profit that make up the price.

Profitability

The amount of income less expenditure over a given time period

Quick asset ratio This measures cash, securities and accounts receivable against current liabilities Request for proposal (RFP)

A document that is sent to suppliers to solicit responses when the functional requirements and features are known to the buyer but there is no specific product in mind

Resource planning

Capacity planning at business levels, resource planning is the process of establishing, measuring and adjusting long-range capacity. It is based on the production plan but may be driven by higher level strategic plans beyond the time frame of the production plan. Resource planning concerns itself with planning for resources that take a long time to acquire, for example, the necessity for a new production facility or a new strategic partner.

Rough-cut capacity planning (RCCP)

The process of converting the master production schedule into requirements for potential bottleneck resources such as labor, machines, warehouse space, and supplier capabilities. These requirements are compared against available capacity. This helps ensure a feasible master production schedule.

Scheduled receipts

An open order with an assigned due date.

Seasonality

A repetitive pattern of demand from year to year or month to month (or other time period) showing much higher demand in some periods than in others.

Setup time

The amount of time between the production of the last item of one run and the first usable item in another production run for a different product

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Single sourcing

The opposite of multisourcing, only one supplier is cultivated for the supply of a particular item. This is the approach often used in JIT manufacturing

Strategic alliance A relationship between two or more companies that involves the sharing of information, the participation in joint investments and development of linked processes to mutual benefit. Strategic alliances can lead to better supply chain performance Theoretical capacity

The maximum output capability for a workstation without considering maintenance or other down times.

Theory of constraints

A management philosophy that incorporates logistics, performance measurement, and logical thinking

Throughput

The total amount of production that flows through a production facility. In the theory of constraints, throughput is the rate at which the company generates money through sales. Throughput and output are not the same.

Time to market (TTM)

The total time elapsed between a customer placing an order and receiving the product

trend

General upward or downward movement of a variable over time, for example in product demand.

Utilization

A measure of how intensively a resource is used, calculated by comparing available time to actual time

Vendor

A seller of an item in the marketplace

Vendor-owned Also known as consigned stock, such inventory is held at a customer location inventory (VOI) but remains the property of the manufacturer until it is used. Work order

An order to the machine shop for tool manufacture or equipment maintenance or an authorization to start work on an activity or product.

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Unit 2

Detailed Scheduling and Planning