ACTIVITY BASED COSTING
A
method which allows
managers to better
allocated costs associated
with specific cost
drivers.
ABC
ABC & Economic
Value Add
BAR CODING
(DATA CAPTURE)
Bar Code Quick
Tour
BENCHMARKING
Companies
use benchmarking to identify
best practices within
industry which will enhance
profitability, processes,
efficiency, etc.
Benchmarking
BULLWHIP
EFFECT/BEER
GAME
Unexpected
changes
in demand patterns will
continue to escalate
further up the supply
chain.
Problems tend to escalate
in supply chains where
communication is minimal
between supply
nodes. A small wave
in the middle of the ocean
may end up as a tidal wave
near the shore. The
bullwhip effect can best
be described using the
"Beer Game." It
is an exercise that
showcases the problems
that arise in a company
with minimal communication
in the supply chain.
A quick 15 minute game
graphically represents the
variable opportunities
that can be found in the
supply chain. Feel free to e-mail me if
you would like to know how
the beer game could be
used as a training tool at
your company.
Causes
of the Bullwhip Effect:
Beer
Distribution Game
Beer
Game
Beer
Game Scenario
BullWhip
Effect
Play
the Beer Game
Taming
the Bullwhip Effect
CAUSE
& EFFECT DIAGRAMS
(FISH BONE)
This
diagram also referred to
as a fishbone diagram
allows a person to drill
down and find where a
problem originates.
Cause
and Effect
Fish
Bone and Six Sigma
Links
from iSixSigma
CONTENT
MANAGEMENT
Content
Management - the best explanation I have heard for content management
comes from a TPN White Paper entitled "Secret to Speeding ROI."
e-Procurement provides the shelves for the store and content management
puts the product on the shelf. The main idea behind content
management is to combine all supplies purchased by a company into one
easy to navigate website. In order for content management to
work properly all items need to be standardized so the buyer is always
looking at normalized content. If a buyer is not able to find the
item in the system, then he/she is likely to purchase outside of
pre-negotiated contracts increasing costs by up to 20%.
Content
Factory - Supplier catalogs are aggregated and normalized through a
content factory. The "factory" standardizes content in
order for the catalogs to have the same look and feel. After being
normalized, the products from all the catalogs are placed on the market
place interface. This should make an intuitive atmosphere that
encourage the buyer to use the e-procurement tool.
Content
Management companies include Requisite,
TPN Register, and Vignette.
COST
MANAGEMENT
Cost Management - analyzing
the costs of purchased goods in order to develop strategies to lower
costs while improving supplier relationships. The following table
is from a paper written by Lisa Ellram entitled "A Structured
Method for Applying Purchasing Cost Management Tools." The
article was published by the International Journal of Purchasing and
Materials Mangement 11-19. I highly recommend reading this
article.
Questions to be Addressed
During Cost Analysis/Overhead Analysis
1. Which costs are
necessary and legitimate?
2. Are amounts
estimated for the necessary cost items reasonable?
3. Is the overhead
allocation to this item potentially subsidizing another item which the
organization sells?
4. Have the correct
allocation bases been used? If not, is it to our benefit to
challenge the allocation methods?
5. Are only those
expenses which should be allocated to our purchase so allocated?
6. Are there allowances
for contingencies? Do these allowances seem legitimate?
7. Are profits
reasonable enough, yet not excessive, to keep the supplier motivated?
ORDERING COST
Order Cost = (Annual Demand * Order
Cost)/Order Quantity in Units
PURCHASING
COSTS
Purchasing Cost = Annual Demand *
Price per unit
TOTAL PURCHASING COST
Total cost = Ordering Cost + Carrying
Cost + Purchasing Cost
CPFR
- Collaborative
Planning, Forecasting and
Replenishment
CPFR
Benefits Calculator
The
CPFR Value Proposition
e-PROCUREMENT
e-Procurement
- e-procurement vendors include Oracle, Ariba, and CommerceOne.
This software allows electronic transactions to take place.
The
ROI of the e-procurement
system should include the
cost of the technology
platform, the cost of
content management and the
integration costs for the
system to be live.
Determine all benefits for
an e-procurement system to
find the ROI.
BENEFITS FROM
E-PROCUREMENT
-
Consolidate
supplier base - allows a company to work with fewer suppliers
leveraging its ability to aggregate spend.
-
Improves
communication - reduces variability in the supply chain.
-
Free
buyers to work on
strategic tasks
- buyer's
spend less time on tactical buys and more time on strategic issues.
-
Decrease
cycle times - especially important for companies in the technology
industry.
-
Lower
transaction and processing
costs -
automating the
purchasing
process will
decrease the
amount of
non-value
added
activities
-
Reduce
maverick spending - maverick spending is said to be 10%-20%
higher than purchasing from companies with negotiated
contracts.
-
Enhanced
reporting and auditing tools - an e-procurement system will
track all
costs
allowing a
company to
determine
the spend
to each
supplier.
-
Decreased
prices
-
Improve
compliance
with
approved
suppliers
increasing
bargaining
leverage
-
Better
Approval
Controls
-
Head
count
reduction
-
Better
utilization
of assets
-
Increase
inventory
turnover
Quicker
ramp up for new
employees Faster
response times
Indirect
Goods have little differentiation and are primarily compete with
price. The best items for e-procurement are indirect goods that
are routinely purchased. The items classified as MROs are the most
suitable for an e-procurement system. Most companies start with
MRO due to the high probability of success running through
e-procurement. Anticipated savings fro MRO items range from 5-20%. Direct
Goods can be much more difficult to procure through a
marketplace. Standard direct items such as nuts and bolts are
easily purchased through a marketplace. Configurable items are
much more difficult to purchase through and marketplace and most content
management companies are staying away from this market at this
moment. e-Procurement
platforms include Ariba, Oracle,
CommerceOne, and i2.
ERP
ERP
(Enterprise
Resource
Planning)
ERP
Definition
(3rd party)
INVENTORY
Inventory Carrying Costs
associated with carrying inventory include:
Interest on Capital Costs
- this is the largest component of carrying cost and is associated with
money tied up.
Taxes & Insurance
- insurance and taxes
has to be paid on the
current inventory.
Obsolescence
&
Depreciation
-
inventory obsolescence is a major issue with products with a short shelf
life or lose value over time (computer products). Companies
involved with products that become obsolete quickly should be focusing
on decreasing cycle times.
Storage - the cost
associated with having a facility to hold the inventory.
Opportunity
Cost -
what could
the capital
be used for
that is tied
up in
inventory.
Costs
of running
out of
inventory:
Loss
of
customer/sale
Bad
reputation
Disruption
in supply
chain
INVENTORY CARRYING/HOLDING COST
Carrying Cost = (Price per unit *
Carrying cost percentage * Order Quantity in Units)/2
AVERAGE INVENTORY
Average Inventory = EOQ/2 + safety
stock
ECONOMIC ORDER QUANTITY
REORDER POINT
Reorder point = Estimated Demand *
Lead Time
Capital
Costs
Inventory
Control Websites
Inventory
Control Systems
Managing
Independent Inventory
Management
of Inventory
Mysterious
Cost of Carrying Inventory
Stock
Control Mathematics
Supply
Chain
Total
Cost of Procurement Estimator
Total
Ownership Cost of Inventory
KANBAN
Kanban
- an Integrated JIT system
Kanban
- University
of Cambridge
LOCATION
ANALYSIS
Location Analysis
-
Transportation and
logistics cost; closeness to markets
-
Wages
-
Taxes
-
Utilities such as sewers,
water, gas and electricity
-
Access to vendors and
materials
-
Access
to
customers
-
Labor supply
-
Climate
-
City
Ordinances
-
Attitudes within the
community
-
Incentives from the
community
-
Land
available
-
Proximity
to
freeway/railroad/ocean/airport
LOGISTICS
Business
Logistics
MASTER
PRODUCTION SCHEDULE
Master
Production Schedule Detailed
Information
MIDDLE WARE
(E-BUSINESS)
Middle Ware
- also called B2Bi (business integration) this product allows
integration not only internally but also from buyer to supplier.
This process significantly enhances communication between buyer and
supplier allowing better visibility through out the supply chain.
EAI (Enterprise
Application Integration) - integrating systems in house.
Adapters/Connectors -
the plug and play functionality of a B2Bi system to another technology
platform such as Oracle, Ariba or CommerceOne. Adapters/Connectors
should significantly decrease the implementation time of the product and
make the entire implementation much smoother.
Middle Ware companies include
webMethods, Tibco,
Vignette, Extricity,
CommerceQuest and FrontStep.
MONTE
CARLO
SIMULATION
Monte
Carlo Simulation
OUTSOURCING
ADVANTAGES/DISADVANTAGES
Advantages to Outsourcing
-
Cost
reduction
-
More flexibility with
manufacturing and capacity.
-
Lower labor costs
-
Capital does not need to
be invested in machinery or plant capacity
-
Not
a
core
competency
so
outsource
it
-
Flexibility
Why
People
Don't
Outsource
-
Loss of control over the
process. It is imperative to choose the correct outsourcing
partner and to form contractual arrangements to ensure appropriate
delivery and lead times.
-
Afraid
of
outsourcing
competitive
advantage. IBM outsourced both the microchip (Intel) and the
operating system (Microsoft).
-
Partnering with wrong
supplier.
-
Costs
are
not
justified
-
Company
wants
to
vertically
integrate
-
Does
not
understand
the
benefits
of
outsourcing
Insourcing/Outsourcing
PARETO
RULE The
simplest way to describe
the Pareto rule is
80/20. For example,
80% of a companies profits
will generally come from
20% of the
customers. If this
is true, then 20% of the
valued customers should
receive 80% of the
service. Many times
however, 80% of the
service goes to 20% of the
bad customers. Pareto
Analysis
POSTPONEMENT Waiting
as long as possible to put the finishing touches on a product. For
example: HP would wait to put in its power cord until it knew if it was being
sold in the US or abroad. The US uses 110 and most other countries use
220.
PROCESS
MAPPING Process
mapping - builds a flow chart of the process being analyzed in order
to standardize or find areas of improvement. The primary
information in the flow chart is each step in the process and the amount
of time consumed in each step. Once the flow chart is complete,
the process can be analyze by the process time and value added
activities. Start with the longest process time. Begin by
asking questions why it takes so long and where in the process can steps
be taken out in order to decrease this time. Do this with each
step in the process. While analyzing the process time manager's
would most likely be concerned with value added activities in order to
decrease the process times. Be sure to look for duplicate
transactions, unnecessary steps, and anything adding little
value. Flowcharting Customer/Supplier
Map
PROCUREMENTProcurement
paper Purchasing
Strategies
QUALITY Continuous
improvement in order to
reach superior quality
should be the goal of
every company.
Quality helps to lower
cost and is one of the
primary factors in the
purchase making
decision. The level
of quality also
distinguishes a company's
product/service. A
high quality product can
command a high price where
a low quality product will
have a less expensive
price
tag. Quality
in manufacturing is
generally measured by the
number of defects compared
to the output. When
there is a defect in a
product there are many
costs that come with it
including: rework, waste,
labor usage, late
deliveries and poor
customer
service. Quality
of the product is located
in the:
Costs
associated with poor
quality:
-
Decreased
sales
-
Bad
reputation
-
Waste
-
Rework
-
Late
Deliveries
-
Poor
customer service
-
Labor
usage
There
are three gurus of quality
that will most likely be
mentioned during quality
discussions. They
include Dr.
Edward Deming, Dr.
Joseph Juran and Philip
Crosby. Deming's
14 Points Six
Sigma
Six
Sigma Discussion
Supplier
Quality
SCOR
(SUPPLY CHAIN OPERATIONS
REFERENCE model) A
methodology for supply chain
improvement developed by the
Supply-Chain Council. PLAN
-> SOURCE -> MAKE -> DELIVER -> RETURN SCOR
articles SCOR
model overview
SIX
SIGMA
What
is Six Sigma Six
Sigma Calculator
Six
Sigma Quick Reference
STRATEGIC COST
MANAGEMENT
Strategic
Cost Management contains supply chain analysis, strategic
positioning analysis and cost driver analysis. By evaluating each
of these three and manager will be able to better manage and understand
costs.
Supply
Chain Analysis - management of the flow of information and products
from earliest supplier to the ultimate consumer. This also
includes the disposal of the product.
Strategic
Positioning Analysis - what is the value proposition of the company:
cost leadership, innovation, niche, speed, etc.
Cost Driver
Analysis - what processes or transactions create costs in the supply
chain.
Cost
Analysis:
-
Can
a less expensive
material/components be
used while maintaining
quality?
-
Are
the costs reasonable?
-
Is
a standard item in the
market a suitable
substitute?
-
Can
the weight of the item
be reduced?
-
Can
the packaging be
redesigned to reduce
costs?
-
Are
the correct costs
being allocated to the
project?
-
Have
the correct activity
based costing methods
been used?
-
Is
the product over
engineered?
Could a lower quality
product be
substituted?
-
Are
other suppliers making
a comparable product?
-
Which
costs are necessary?
Procurement
and Sourcing Strategy
Development
SUPPLIER MANAGEMENT
Supplier Management -
managing suppliers in order to reduce overall cost. Suppliers must
be separated by the number of purchases (one time buy vs. ongoing) and the
relationship wanted with the supplier (from strategic to distant
relationship.
Supplier management
also
includes supply base reduction. Most companies deal with more
suppliers than needed. By decreasing the supply base, a company
can leverage its spend with fewer suppliers, therefore, getting better
overall prices. Fewer suppliers also mean better relationships
with
your
key
suppliers.
Are
All Your Trading Partners Worth It?
Supplier
Management
Questions
Supplier
Management
and
Development
Supplier
Evaluation
and
Selection
SUPPLY
CHAIN
There
are various descriptions of
supply chain
management. Two that
are commonly used are
"cradle to grave"
and "dirt to
dirt." The supply
chain starts from the origin
of the raw material and ends
once the product has been
discarded or recycled.
Getting
the right product, to the right place, in the right quantity, with the right
quality, at the right cost.
The primary decisions made
within the supply chain
include:
-
Sourcing
-
Production
-
Location
of production
(domestic,
international)
-
Make
vs. Buy
-
Capacity
of plants
-
Quality
of the product (low
cost leader,
differentiation
strategy)
-
Inventory
-
Logistics
Some
of the objectives of
a supply chain
manager include:
-
Increase
communication along
all nodes of the
supply chain to create
an uninterrupted flow
of
materials.
-
Decrease
inventory while still
maintaining high
customer service
levels.
-
Reduce
the supplier base and
develop supplier
relationships in order
to reduce overall
costs.
-
Standardize
parts as much as
possible in order to
reduce the amount of
inventory needed to be
carried.
An
Introduction to Supply Chain
Management - Penn State
Principles
of Supply Chain
Management -
techexchange.com
Supply
Chain Introduction
What
XML Will Do For Supply Chain Management - DM Review
TARGET
COSTING
Target
costing
is
a
methodology
of
costing
new
products.
The
target
cost
is
derived
by
subtracting
the
desired
profit
from
the
market
price
(Target
cost
=
market
price
-
desired
profit).
Target
Cost
Workshop
TOTAL COST OF OWNERSHIP
Total Cost
of Ownership – the cost of the product starting from the initial
planning stage to the ultimate disposal of the product. Example: the
total cost of a vehicle begins during the search while visiting various
websites and car dealers. The purchase of the vehicle is where most
people believe the majority of the cost lies. This isn’t necessarily
true. The total cost of the vehicle also includes insurance premiums,
gas mileage, maintenance problems etc.
Total
Cost
of
Ownership
Determing
Your PC's TCO - a brief paper on the TCO of computers.
VALUE
ADD
Value
add refers to the added
benefit a service or product
provides. Non-value
added refers to an activity
performed by a company that
does not enhance the value
of the product
produced. One of the
primary responsibilities of
a supply chain manager is to
take out all non-value added
activities.
VARIABILITY
Reducing
variability is one of the
most important aspects of
supply chain
management.
Variability refers to the
uncertainty in a supply
chain. A classic
example of jargon used by a
supply chain consultant
would be: "In order to
reduce the variability in
the supply chain we need to
increase the
visibility."
For
example, many vendors
supplying product to retail
stores have a great amount
of variability when it comes
to demand forecasts.
In order to reduce this
variability a retail store
can send real time data from
the check out register
directly to the
supplier. This enables
the vendors to better manage
their supply chain and
passing on the cost savings
to the customer.
Increase visibility, Reduce
variability. These two activities encompass all layers of
supply chain management. I believe this motto should be engrained
into every supply chain manager's thinking. Let me know what you
think.
VENDOR
MANAGED INVENTORY
The
primary benefits of VMI are inventory and stock out reductions.
VMI
Definition and More
VISIBILITY
Supply
chain visibility is
terminology that will be
used significantly among
consultants.
Basically, this is saying to
increase communication among
the different nodes in the
supply chain. This
will enable a company to
better understand what is
going on throughout the
supply chain. By
increasing visibility, you
reduce variability, which
will improve overall
operations of the
company.
Supply
Chain Visibility Boosts
Bottom Line
XML
XML - an
extensible mark up language providing a flexible way to share information
through the world wide web and intranets. XML allows users to form
their own language using meta tags. HTML is the language that is
used on the web. Many people predict that XML will take over HTML as
the main language used to produce web pages. A new language, XHTML
is out in order to bridge the gap between HTML and XML. The
difference between HTML and XML is that HTML describes what the words look
like and XML describes what the words are.
What
is XML?
Ok,
So
What
is
This
XML
Thing?
WAREHOUSE
MANAGEMENT SYSTEM
Warehouse
Management
WEB DEVELOPMENT
There are two main types of
websites: informational and e-commerce. SupplyChainToday.com is an informational based
website. A website that exchanges
goods for funds is an e-commerce website.
I encourage small businesses who outsource informational based websites to consider bringing it in-house. This is
for information websites, not e-commerce websites. E-commerce
websites are much more difficult to maintain. If the company website
is going to cost more than $1,000 definitely look into building the site
in-house. If you do not know much about web development I would be
happy to give a training session in front page.
Computer
Terminology (3rd party)
e-Business
Terminology
Glossaries
Terminology Generator
(3rd party site)
University
Toronto SCMwill
give a
retayou have
any question
|
