This page intentionally left blank Supply Management Eighth Edition David N Burt Emeritus Professor of Supply Management University of San Diego Sheila D Petcavage Assistant Professor and Business Coordinator Cuyahoga Community College Richard L Pinkerton Emeritus Professor of Marketing and Logistics California State University, Fresno B McGraw-Hill Mlrwin Boston Bangkok Milan Burr Ridge, IL Bogota Montreal Caracas New Delhi Dubuque, IA New York Kuala Lumpur Santiago Seoul Lisbon San Francisco London Singapore St Louis Madrid Sydney Mexico City Taipei Toronto The McGraw·Hill Companies B McGraw-Hill t:M Irwin SUPPLY MANAGEMENT Published by McGraw-Hill / Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY, 10020 Copyright© 2010, 2003, 1996, 1990, 1984, 1977, 1971, 1965 by The McGraw-Hill Companies, Inc All rights reserved No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of The McGraw-Hill Companies, Inc., including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning Some ancillaries, including electronic and print components, may not be available to customers outside the United States This book is printed on acid-free paper 0DOC/DOC ISBN 978-0-07-338145-9 MHID 0-07-338145-4 Vice president and editor-in-chief: Brent Gordon Editorial director: Stewart Mattson Executive editor: Richard T Hercher, Jr Editorial coordinator: Christina Lane Project manager: Kathryn D Mikulic Full service project manager: Michael Ryder, Macmillan Publishing Solutions Senior production supervisor: Debra R Sylvester Design coordinator: Joanne Mennemeier Senior photo research coordinator: Jeremy Cheshareck Media project manager: Suresh Babu, Hurix Systems Pvt Ltd Cover design: Brittany Skwierczynski Typeface: 10112 Times New Roman Compositor: Macmillan Publishing Solutions Printer: R R Donnelley Library of Congress Cataloging-in-Publication Data Supply management-8th ed / David N Burt, SheilaD Petcavage, Richard L Pinkerton p cm Includes index Rev ed of: Purchasing and supply management 6th ed., international ed 1996 ISBN-13: 978-0-07-338145-9 (alk paper) ISBN-10: 0-07-338145-4 (alk paper) Industrial procurement II Petcavage, SheilaD Purchasing Materials management Ill Pinkerton, Richard L I Burt, David N IV.Dobler,Donald W Purchasing and supply management HD39.5.D62 2010 658.7-dc22 www.mhhe.com 2008048602 DEDICATION This eighth edition of what originated in 1965 as the textbook Purchasing and Materials Management: Text and Cases is dedicated to founding coauthor Donald W Dobler Dr Dobler was truly one of the "grand old men" of purchasing and supply management After graduating from Colorado State University with a B.S in Mechanical Engineering in 1950, Don began his professional life as an applications engineer with the Westinghouse Electric Corporation Subsequently, he was Manager of Purchasing and Materials for the FMC Corporation Don then enrolled in the doctoral program at Stanford University's School of Business, where he collaborated with the late Lamar Lee, Jr., to create the first three editions of their increasingly popular and impactful textbook He received a Ph.D and an M.B A in Industrial Management from Stanford University in 1960 After graduating, Dr Dobler joined the faculties of Utah State University and then Dartmouth College In 1966, Dr Dobler accepted the Deanship of the School of Business at Colorado State University, where he was the school's longest serving Dean In addition to his duties as Dean, Dr Dobler found time for his wife, Elaine, and their children and his many civic contributions to the city of Fort Collins and the state of Colorado, consulting to manufacturing and service organizations in both the operations and the educational/training areas In recognition of his distinguished service to the purchasing profession, Dr Dobler was awarded the J Shipman gold medal from the Institute for Supply Management Don joined the National Association of Purchasing Management (the forerunner of the Institute for Supply Management) in 1970 He built an impressive record of service: editor of the Journal of Purchasing and Materials Management, member of the P.M.A of Denver's Pro·D Committee, contributing author to the C.P.M Study Guide, coeditor of the Purchasing Handbook, and Corporate Vice President for the National Association of Purchasing Management, where he was responsible for its certification and educational programs Clearly, Dr Donald W Dobler has had an incredible impact on his community, academia, corporate America, and the profession of procurement! He is truly a remarkable individual The dedication of this edition is a modest recognition of Dr Dobler's role as a thought leader and a gentleman I am greatly honored to have been Don's coauthor on four editions of this text! Respectfully, David N Burt, Ph D ABOUT THE AUTHORS David N Burt is Professor Emeritus of Supply Management at the University of San Diego In 2008, Dr Burt completed 50 years in the fields of Procurement, Supply Management and Value Network Management He was recognized by the National Association of Purchasing Management as a NAPM Professor in 1992 David created the University of San Diego's undergraduate and graduate programs in procurement during the 1980s His greatest joy has been in finding meaningful employment for several hundreds of his students He is founder and Director Emeritus of USD's Supply Chain Management Institute and of the Strategic Supply Management Forum, an annual meeting of innovative supply management professionals from North America, Europe and Australia Under Dr Burt's leadership, the University initiated a gradu­ ate hybrid resident/Internet program in 2002 This program grants a Master of Science in Supply Chain Management (MS SCM) on successful completion of the two year program It transfers cutting-edge knowledge and practices to working professionals, while minimizing time away from the participant's workplace, develops leaders in supply chain management, and provides immediate payback to sponsoring firms USD's MS in SCM is the only program endorsed by the Institute of Supply Management David's publications include seven books and numerous articles His articles have appeared in The Journal of Purchasing, Harvard Business Review, Thexis, MIT's Sloan Management Review, The Journal of Marketing Research and The California Management Review David has been a buyer, negotiator, and a CPO (Chief Procurement Officer) of three organizations He began his career as an Air Force Procurement Officer during the 1950s at a time when the Air Force was one of the few organizations in the world to recognize the critical importance of procurement As a result, at the tender age of 22, he gained responsibilities and experience which few purchasing people in their thirties and forties enjoyed His most productive years in the Air Force were as an Associate Profes­ sor of Logistics at the Air Force Institute of Technology's Graduate School of Logistics During this assignment, he was an in-service consultant to the Air Force Director of Procurement and the program directors of the F-15 and B-1 programs His final assignment in the Air Force found him Chief of Military Sales based in Canberra, Australia Dr Burt then began his civilian career as an Associate Professor of Acquisition Management at the Naval Postgraduate School in Monterey, California David studied under the great Lamar Lee, Jr at Stanford and subsequently became co-author with the late Admiral Lee and Dr Donald W Dobler of earlier editions of this text (then known as Purchasing and Materials Management: Text and Cases) In addition to his hands-on and academic experience, Dr Burt has consulted with small, medium and large business including: IBM, Motorola, Lockheed, Avery Dennison, and Southern California Edison with the objective of upgrading their procurement operations to world-class status Dr Burt received his B.A in Economics at the University of Colorado, M.S.I.A at the University of Michigan and Ph.D in Logistics from Stanford University vi About the Authors Sheila D Petcavage vii is Assistant Professor and Business Coordinator at Cuyahoga Community College Western Campus in Cleveland, Ohio She is the Coordinator of Business, Math and Technology Associate Degree Programs Ms Petcavage has a B.A degree in Business administration with honors­ Cum Laude and an M.B.A from Baldwin Wallace College in Cleveland, Ohio She has over 15 years of purchasing and operations management experience in both manufacturing and distribution including Corporate Purchasing Manager, Premier Industrial Corporation, Senior buyer at Johnson & Johnson Corporation, Technicare Division and Material Planner/Buyer at the Tappan Corpora­ tion, Air Conditioning Division She is an active member of T he Institute for Supply Management (ISM) and the Purchasing Manage­ ment Association of Cleveland, Ohio, where she has served on the Board of Directors She is a board member of the ISM Management Materials Group and serves as Editor of its News Publication She holds the Lifetime Certified Purchasing Manager (C.P.M.) Designation In 2003, she received the Ted R Thomp­ son Award for outstanding leadership in purchasing education from the Columbus, Ohio, Purchasing Management Association Richard L Pinkerton is Professor Emeritus of Marketing and Logistics at California State Univer­ sity, Fresno He received his B.A in Economics from the University of Michigan in Ann Arbor, his M.B.A from Case Western Reserve in Cleveland, Ohio, and a Ph.D in Marketing and Curriculum Studies from the University of Wisconsin, Madison His Dissertation "A Curriculum for Purchasing," 1969, was sponsored by the National Association of Purchasing (NAPM) and is regarded as one of the key benchmark studies in the field of purchasing A past Dean of the Graduate School of Administration at Capital University in Columbus, Ohio, he also served as Chair and Business Center Director of the Craig School of Business, California State University at Fresno, California He is a Certified Purchasing Manager (C.P.M.) with a lifetime designation His industrial experience includes Market Research Analyst for the Harris Corporation of Melbourne, Florida, and Manager of Sales Development at the Webb-Triax Company of Cleveland, Ohio His consult­ ing experience includes, Pepsi-Cola, Quaker Oats, Perkin Elmer Laser Lamps, Con Edison of New York City, PG&E of San Francisco, IBM and the Oracle Corporation For almost 40 years he has served T he Institute for Supply Management (ISM) (NAPM) in various leadership roles at both the national and local levels, including Chair of the Academic Planning Committee He was a long-time member of the Purchasing Today (now called Inside Supply Management) and Info-Edge Editorial Review Boards, Chair of the 1992 NAPM Research Symposium and the NAPM representative at the 1992 convention of the Chile Procurement Society in Santiago, Chile At the local level, Professor Pinkerton was very active in the Columbus, Ohio, Cleveland, Ohio, Fresno, California and Silicon Valley Purchasing Associations and is a life member of the Northern California Purchasing Association His research on European Union Procurement Issues, Competitive Intelligence and Supply Chain Management is quoted in eight leading supply chain books He has taught and consulted in Singapore, United Kingdom, Germany, Slovakia, Chile, Poland and Saudi Arabia He is co-author with David N Burt of A Purchasing Manager's Guide to Strategic Proactive Procure­ ment, published by the American Management Association In 2002, he was given the Ted R Thompson Purchasing Educator's Award by the NAPM-ISM Columbus, Ohio, Purchasing Association for his out­ standing contribution to purchasing education A retired Lt Col in the USAF Ready Reserves, he holds the Meritorious Service Medal for his many years of military service He is an honorary member of the Purchasing Management Association of Cleveland, Ohio, his hometown, where he now lives BRIEF CONTENTS Foreword Preface PART xxix xxxi The Foundation 1 The Progression to Professional Supply Management Organizational Issues 30 Supply Management: An Organization-Spanning Activity A Portfolio of Relationships PART 63 The Requirements Process New Product Development 89 93 Purchasing Descriptions and Specifications Managing for Quality Purchasing Services 118 141 The Procurement of Equipment PART 49 177 194 Sourcing: Sourcing Perception and Corporate Outsourcing 10 Outsourcing 11 Sourcing 217 240 12 Global Supply Management viii 273 215 Brief Contents PART Cost Management 301 13 Total Cost of Ownership 14 Price and Cost Analysis 303 321 15 Methods of Compensation 16 Negotiation PART 352 371 Managing Contracts and Relationships 397 17 Contract Formation and Legal Issues 399 18 Contract and Relationship Management 19 Ethics and Social Responsibilities PART 437 Materials Management 459 20 Production and Inventory Control 21 Demand Management and Logistics PART 419 461 527 Implementing Value Network Management 22 Implementing Value Network Management Name Index Subject Index 585 590 543 541 ix www.downloadslide.com Subject Index 592 Cost sharing contracts,367 Creator role,18 Deregulation,514 Cost type contracts,358 Credit card purchasing,29,58-59 Design analysis,107-108 Cost without fee contracts,366 Crib sheets,382 Design and build contracts,209-210 Costs Critical dependencies,220 Design of experiments,70,154, acquisition,11,184,186 187, 304 306,487-488 administrative,35 appraisal,155 Critical path scheduling,423-424, 244,245 Design reviews, 104,106 432-435 Cross functional teams,37-38,39-47, 97,129-130 Design secrecy,229 Design S.O.W., 197 carrying,485-487 CRP,466,470-471 Design specifications,51,126 127 categories of,326-328 Cultural issues,in global sourcing,277, Differentiation,135,323,325 of changing suppliers,68 Direct costs,328,334-337 284-285,379 conversion,12,307 Cumulative curve,337-338 Direct labor,336 337 customer dissatisfaction, 310 Currency issues,286-288,296 299 Direct materials,337,340 cycle time,12,307 Current ratio, 268 Direct offset,288 data sources,334 Customer dissatisfaction costs,310 Direct suppliers,282-286 direct,328,334-337 Customer satisfaction,11 Discounted cash flow analysis,190 downtime,12,306 Customization,134 Discounts,34, 349-351,490,512 environmental,309 Customs brokers,282 Dispatch lists,471 failure,155 Customs duties,305 Dispute resolution, 401-402,414 financing,306 Cyberlaw,403-404 Distribution function,15 fixed, 326 Cycle time,10,11,12,307 Distribution requirements planning global sourcing,276-277,278 Cyclical inventory control system, indirect,328,341-342 492-493 labor, D leasing,190 (DRP II),533 Distributors, buying from,257-258 Diversion,used in negotiation,384 Diversity,in the supply base,564 liability,309-310 Daimler Chrysler,71-72,552,578 DMAIC cycle,150-152 life-cycle,178n Damages,411-412 Dock receipt,510 materials,8,9 Debit cards,purchasing using,29 Documentation, 390 non-value added,12,307-308 Debrieflilg,389-390 Double outsourcing,235 outsourcing,223-227 Debt to equity,270 Downtime costs,12,306 overhead,328,341 Decentralized authority,34-36 DPM,150 ownership,306 309 Decision-making authority,34-36 Drop shipment,257 planning,305 Decoupling,481 DRPII,533 post-ownership,12,309-310 Deere & Co.,33,70,102,281,548-549 Du P ont,424 prevention, 155 Defects Dun & Bradstreet, 245,268,283 processing, 11 causes of,144 quality,11, 155, 305 detection of,170-171 risk, 12,306-307 zero,145 selling,341 Defects per million, 150,545 semi-variable,326 Define,measure,analyze,improve and service providers,202 control,150-152 Duties,305 E E-commerce,3,36,57,78-79,331 E-Sign Act,404 Early supplier involvement (ESI) supplier,35 Delayed differentiation,135 benefits of,129,253 new product development,95-97, supply chain, 12,308-309 Delivery times,340 switching,75 Dell,15,71,133,135 target,101,338-341,343,362-363 Delphi Corporation, 548-549 tooling,337 Demand variable manufacturing,326 dependent,469,485,498 warranty,12,309 forecasting,534-535 102-103,123,561-562 potential problems with,360 Economic order quantity (EOQ), 488-492,497 Economic price adjustment contracts, management oL530-536 360-361 Countertrade,277,288-290 Demand time fence,535-536 EDI,36,57,474n COVISINT,260 Demand volatility,75 80/20 concept,483-485 Cp,158-159 Deming Prize,145,161,165 Elasticity,of pricing,10 Cpk,159 Dependent demand,469,485,498 Electronic data interchange,36, 57,474n CPM,423-424 Depreciation tax shield,31On Electronic materials catalogs,138 Counterpurchase,288 www.downloadslide.com Subject Index Electronic signatures,403-404 Expatriates,281 Freight discounts,512 Engineering bill of materials,23 Expediting,33,519 Freight forwarders,282,511 Engineering change management, Exploded bill of materials,467 Freight rates,510-511 Export brokers,282 Freight terms,508-509 Engineering drawings,127 Export declaration,510 Frequency histograms,154 Engineering function,51-53 Express warranty,409-410 Frozen time fence,535 Engineering overhead,341 Extended enterprise,17,308 112-113 Engineering tests,167 F Enterprise resource planning (ERP),80, 138,480 Environment 593 Full-service lessors, 189 Function and fit specifications,123 Functional silos,37,571 Face-to-face negotiation,382-384 Functional S.O.W.,197 Fact finding,382-383 Funds management ratios,269-270 costs,309 Failure analy sis,104,106 green sourcing,258 Failure costs,155 hazardous materials,507 Federal Acquisition Regulations,107 Gantt charts,422-423 social responsibility,454-455 Federal Aviation Administration General and administrative costs,341 Environmental Protection Agency, Federal Express,507 EOQ,488-492,497 Equipment,purchase of; Act,514 Federal Bureau of Specifications,133 181,455 see Capital equipment purchasing ERP,80,138,480 G General Electric,28,96,102,106, 151-152,252,309,394 General Motors,98,143,550 Finance function,56,180 German Institute for Standards,133 Financial Accounting Standards Getting to know you technique,384 Board,189 Gifts and gratuities,441,450-452 Escalation clauses,360-361 Financial lease,188-189 Global Opacity Index,278 ESI; Financial statement analysis,268-270 Global supply management,273-299 see Early supplier involvement Financing costs,306 CISG,282,415 Estimated costs,310-312 Finished goods inventories,482 countertrade,277,288-290 Ethics,437-457 Firm fixed price contracts,209,358-360 cultural issues,277,284-285,379 direct suppliers,282-286 (ESI) competitive bidding and,448-449 Fishbone diagram,153 confidentiality,253,443-444 Five M's,7-8 ethics,442 conflict of interest,259,441 Five rights,2,6 European Union,290 293 defined,439 Fixed asset turnover,269 future of,275 gratuities and gifts,441,450-452 Fixed costs,326 INCOTERMS,404,513 gray areas,453-454 Fixed manufacturing costs,326 legal issues,414-416 importance of,439-440 Fixed order interval sy stem, 492-493 payment/currency issues,286-288, influence and,441-442 Fixed order quantity system,495-499 international,442 Fixed price contracts,357 political/economic alliances,290-294 legal issues and,445 Fixed price incentive fee,363-364 problems with,277-278 management responsibilities,452-453 Fixed price redetermination contracts,361 questions to ask,279 professional competence,445-44 Fixed price with price adjustment 296 299 reasons for,276-277 reciprocity,55,259,444 contracts,360 361 sharp practices, 447-448 Flexibility,of suppliers,475 social responsibility,443,564 565 Flexibility capability analy sis,246-247 standards, 440-447,452 Floating currency,297 Globalization,37 training,452-453 stages of,276 supply channels,279-281 using IPOs,281 Florida Power and Light,165 Goalpost philosophy, 155-156 Euro,291-293 Flow control system,493 Goals,balancing of,120 121 European Foundation for Quality Fluid time fence,535 Government procurement,60 Fluor Hanford,577-578 Grading, 125 European Monetary Unit,291 Follow-up,24,33 Graham Packaging, 64, 84-88 Management,162,164 European Organization for Quality,162 Ford,258,323,394,550 Granger,499 European Quality Award,162,164 Forecasting,55,464-465,534-535 Gratuities,441,450-452 European Union,290-293 Foreign Corrupt Practices Act,284, Green supply management,258 Evergreen contracts,410-411 415-416 Greenbelt,151 Exchange rates,286 287 Forward contracts,298 Gross profit margin,269 Exchanges,259-260,331 Free on board (FOB),508-509 Group buying,259-260 Executive sponsorship,42 Freight bill auditing,519-520 GTE,46 www.downloadslide.com 594 Subject Index H Hard bargaining,383-384 Hazardous materials,507 Hedging,298-299 Hewlett-Packard,102,553,577,580 Histograms,154 Hitachi,165,280 Honda of America,20,70,243,252, 253,394,548-549,562 Honeywell,244 Horizontal integration,220 222 Human specialization, 70 Hybrid structure,36 Intermediaries,280 281,282 Just-in-time (JIT) Intermodal carriers,507 contracts, 412 International Aero Engines,191 flexibility capability analysis, 246-247 International Chamber of Commerce, inventory management and, 493-494 404,414 International Organization for Standardization (ISO), 133,147, 152,161,163-164 International procurement offices,281 International sourcing,256-257,276; kanban,149,476 local buying and,256 production planning and,476-480 quality and waste management,149 Justitia International Inc.,284 see also Global supply management K International standards,133 Internet Kaiser Aluminum Chemical,26 B 2B commerce,2,57,78-79,331 Kaizen,145,148 e-commerce,3,36,57,78-79,331 Kanban,149,476 electronic ordering systems,28 Kawasaki,98 IBM,68,71,96, 167,254,552-554,577 negotiation using,390 392 Keiretsu,98 ICC Termination Act,514-515 netsourcing,232-233 KLA-Tencor,577 Imperfect competition,323 role in product development,102 Knowledge transfer, 110 Implied warranties, 409-410 services purchasing and,207 Kodak, 236 Import brokers, 280 supplier selection and,242 KPMG LLP,305 Import license, 510 Interpreters,285 Import merchants,280 Inventory catalog,482-483 Impropriety,perceived,440 Inventory management L Labor Improvement curve,337 analysis of,482-485 In-process inventory,482 bullwhip effect,532-533 costs of,8 In-process testing,112 centralized stores,26 direct,336-337 Incentive contracts,357,361-365 control systems, 492-499 efficiency of,333 Incentives,for team performance,42 costs, 485-488 problems with,278 Income-base shifting,305 definition, 482 Law of agency,400-401,404-405 Income tax issues,189-190 EOQ,488-492,497 Lead time,11,276,277 INCOTERMS,404,513 fixed order interval system,492-493 Leadership Incremental costs,490 functions of,480-481 awards for,577-580 Independent demand,485,498 in global sourcing,278 defined,546 Independent inspection certificate,510 JIT; see Just-in-time (JIT) skill sets,548-554 Indirect costs,328,341-342 order point system,495-499 of teams, 43-44,47 Indirect offset,288 supplier managed,499 Lean manufacturing, 221-222 Industry standards,133 supplier stores,29 Learning curves,68,337-341,347-349 ln:fluence,ethics and,441-442 turnover,269 Learning organization,77 Informal approach,to specification two-bin system,498 Leasing,187-191 development,128 Information technology,2,56-58 Investigation phase,of product development,100 104 Legal issues,399-418; see also Contracts Invitation for bids, 41,250 authority,34-36,405 Invoices,audit of,25-26,519-520 breach of contract,59,411 Innovation,10 11 Irrevocable letter of credit,287 cancellation of orders, 411-412 lnsourcing,233-234 ISO standards,134,152,163-164 commercial law,402-404 Inspection,25,127,168-172,408 ITT,145 consideration,406-407 Information technology capability analysis,247 cyberlaw,403-404 Institute for Supply Management, 8,162, J 243,378,440,455 damages,411-412 Jacobs Manufacturing Company,414 dispute resolution, 401-402, 414 Insurance,210 211 Japanese Academy of Quality,145 ethics,445 Integration,220 222 Jidohka, 170 171 evergreen contracts,410-411 Intel Corporation,26,100 John Deere,252,254 global sourcing, 414-416 lnterfirm teams,46 Johnson & Johnson, 577,578 inspection rights, 408 Institutional trust,70, 81-84 www.downloadslide.com Subject Index law of agency,400 401,404 405 litigation prevention,400 401,402 Manufacturing resource planning (MRP II),473-475 595 National Association of Purchasing Agents,8 Margin tests,106 National Bureau of Standards,133-134 patents,413 Market grades,125 National Conference of CoIIlIIlissioners restraint of trade,414 Market prices,330 331 offer and acceptance, 24,405-406 rights of rejection,408-409 Marketing function,13,15,55 title/risk of loss,409 Masco Corporation,579 transportation,512,514 Mass production,132-133 UCC,199,402-404,418 Master production schedule (MPS), warranties,409-410 on UniforIIl State Laws,402 National Institute of GoveffiIIlental Purchasing, 243 National Lu1I1ber Manufacturers' Association,133 National Motor Freight 465-466 Less than truckload (LTL),506 Master scheduling,464-466 Letter contracts,367-368 Material and 1I1ethod-of-1I1anufacture, Classification, 514 National sourcing,256 257 Natural tolerance range,156 Letter of credit,287-288,510 127-128 Letter of intent,367-368,408 Material costs,8,9 Need,21-23,101,179 Level-of-effort S.O.W.,197 Material overhead,341 Negotiated Rates Act,514 Leveraging,10 11,34 Material requireIIlents planning (MRP), Negotiation,371-396 21,23,466-470,494-495 Liability activities to prepare for,381-382 cost of, 309-310 Materials,7,21 environIIlent and,258 Materials catalog,137-138 versus bidding, 247-249 Materials engineers,114,129 characteristics for successful, Life cycle for alliance building,86 87 product,101 Materials IIlanageIIlent,36-37 technology,229-230 Mattel,276 cultural preparation,284-285 Life cycle costing,178n McKinsey & Co.,548 debriefing,389-390 Life tests,106 Mediation,401-402 defined,372 Liquidated daIIlages,411-412 MERCOSUR,293 for dispute resolution,401 Liquidity,268 Metric Conversion Act,134 docu1I1entation,390 394-395 Litigation prevention,400 401,402 Minority-owned businesses,258,564 establishing objectives,380-381 Local sourcing, 256-257 Mission stateIIlent,558,570 ethics and,449 Lockheed Martin,424,579 Mistakes,in contracts,413 face-to-face, 382-384 Logistics function,58 Mixed IIlanufacturing costs,326 objectives of,373-374 Logistics 1I1anage1I1ent,536-537 Mock negotiation,381-382 online,390-392 Loss function,156 Modified rebuy,23n preparation for,377-380 Loss to society,155-156 Monopolistic co1I1petition,323 for price,392-394 Lot sizing,488-492 Monopoly,323-324 process, 377-381 Most optiIIlistic cost (MOC),362-363 supply 1I1anage1I1ent's role, 375-377 Most optiIIlistic profit (MOPr),362-363 techniques for,384-389 M Machine power,7-8 Maintenance,repair and operating (MRO),11,260,482 Make-or-buy; see also Outsourcing adIIlinistration of activities, 235-237 Most pessimistic profit (MPPr), 362-363 of transportation contracts,518-519 using a teaIIl,41,187,376 377 Motivation,427-428 when to use,374-375 Motor Carrier Act,514 Net present value analysis,310 312 Motor carriers,506 Netsourcing,232-233 Motorola,147,150,154 Netting,469 factors influencing,223-232 MRO,11,260,482 Network 1I1anage1I1ent,530 volatile nature of,233-235 MRP,21,23,466-470,494-495 Networks,supply,15-16,308-309,315 MRP II,473-475 New Directions Consulting MalcolIIl Baldrige National Quality Award,162,164 Multiple sourcing,232, 254-255 ManageIIlent,role of,17-18 Murder boards,381-382 ManageIIlent capability analysis, 246 Mutual obligation,406-407 Manifest,510 Group,37,56 New product developIIlent,93-117 altemative developIIlent, 101-103 colocation with suppliers,72,114 N Manufacturers,buying froIIl,257-258 concept fofIIlation,100 104 Manufacturing,lean,221-222 NAFfA,293 cycle tiIIle and,10,11 Manufacturing operations,53-54,314 NAICS,261 design analysis, 107-108 Manufacturing overhead,341 National Association of Educational design process,97-99 Manufacturing plans,110 Buyers, 243 developIIlent phase,104-106 www.downloadslide.com 596 Subject Index New product development-Cont early supplier involvement,95-97, 102-103,123,561-562 engineering change management, 112-113 investigation phase, 100-104 fixed interval system,492-493 Performance contracting,211 fixed quantity,495-499 Performance evaluation follow-up of,24,33 benchmarking, 17,553 purchase, 23-24 of suppliers,424-427,520 small,26 of supply management,17 Organizational structure Performance S.O.W., 197 outsourcing of,103,221 factors affecting,33-36 process, 99 hybrid,36 production phase,110-112 materials management,36 37 Personal relationships,441-442 using teams, 39-47, 113,561-564 placement of supply management,32 PERT,423-424 value engineering, 68,106-110,565 staffing,565-568 Pfizer, Inc., 579 122-123, 184,479 supply chain management,37 Nippon Steel,165 Performance specifications, 98, Physical asset specialization,70 Nissan,165 OSHA,181,258 PIMS,10 Non-value added costs,12,307-308 Outsourcing,217-239; see also Plan,do,check, act,149 Noncompetitive markets,75-76 Make-or-buy Planned order release,469 Nonrandom variations,159 administration of,235-237 Planning costs,305 North American Free Trade Agreement of business processes, 228-229,237 Planning time fence,535-536 cost analysis, 223-227 Plant capacity,333-334 dangers of,234-235 Plant visits, 245, 263-268, 270 272,286 double, 235 Poka-yoke,171 (NAFTA),293 North American Industry Classification System (NAICS),261 NPV, 310-312 Objectives framework,236 Polaroid,35,55, 61,196 horizontal integration,220 222 Portfolio approach,77 increase in, 218-219 Post-ownership costs,12,309-310 insourcing,233-234 Power,role of,76 77 establishment of,380 381 lean manufacturing,221-222 Pre-award conference,420-421,431-432 identification of,181 netsourcing,232-233 Preferred supplier, 73 of negotiation,373-374 new product development Prevention costs,155 statement of,101 and, 103,221 Price Obsolescence, 189,486 of services,7,8,195 analysis of,330-332,379 OEM,15,19 strategic issues,219-220 categories of cost,326 328 Offer and acceptance,24, 405-406 of supply management,229 conditions of competition,322-324 Offsets, 277, 288 tactical decisions,222-223 historical,331 Offshoring,8 technology risk,229-230 impact of controlling,10 Ok Tedi Mining Limited,196 transportation,511,517 independent cost estimates,331-332 Oligopoly,323-324 Overcharge claims,512 negotiation for, 392-394 Omnibus Trade Act,416 Overhead costs,328,341 product differentiation,323,325 Online negotiation,390-392 Owens On-Line,284 purchase,304-305 Opacity Index, 278 Ownership costs,306-309 regulated/catalog/market,330 331 Open order netting,469 p Operating lease,188 Operating services,206 P-D-C-A, 149 Operational responsibilities/activities, Pacific Bell, 200 33-34 regulation by competition, 328-330 of service contracts,204 variable-margin,324-325 volatility of,74-75 Packing list, 510 Price adjustment contracts,360 361 Price indexes,361 Opportunity cost of capital,310,486 Pareto analysis,483 Or equal,124 Pareto charts,153-154 Prime contractor,333 Oracle,57 Partnerships; see Alliances Probability,269-270 Oral contracts,407-408 Patent infringement,413 Problem resolution,40 Order point system, 495-499 Payment bonds,210 Problem solving,429 Orders Payment issues,25,286 288,296-299 Process capability analysis,156 159 blanket, 27-28, 410 Pegged currency,298 Process capability index,158-159 cancellation of,411-412 Perceived impropriety,440 Process control,110,112 completion of,25-26 Perfect competition,322-323 Process engineering,179 electronic system,28 Performance based contracts,512 Process flow charts,153 EOQ,488-492,497 Performance bonds, 210, 410 Process-oriented layout,476 www.downloadslide.com Subject Index Processing costs,11 Procter & Gamble, 15, 238, 439 Purchasing; see also Supply management R R Gene Richter Awards for Leadership Procurement,6; see also Purchasing careers in,5 Procurement cards,29,58-59 defined,2,6 R chart,160 161 five rights of,2,6 Rail carriers, 506 Producibility,101 andlnnovation,577-580 Producer price index (PPD,361 Purchasing cards,29,58-59 Product differentiation,323,325 Purchasing cycle,21,22 Rebuys,23n Product liability costs,309-310 Purchasing Management Association Receiving reports,27 Product life cycle, 101 Product testing,166 167 of Canada,243 Pure competition,322-323 Product-type layout,476 Q Production inventories,482 Production phase,of product development, 110 112 Production planning, 462-480 597 Random variations, 156 Recess, during negotiation,383 Reciprocity,55,259,444 Regulated pricing,330 Rejection, rights of,408-409 Quaker Oats,63-64,84-87 Relationship management,33 Qualification testing, 106 Request for proposals (RFP), 186, Qualified products list (QPL),125 200,250 activities of, 462-463 Qualitative forecasts, 534 Request for quotation (RFQ),23 aggregate planning,464-466 Quality capability analysis,245 Requirements, 21,90 91 control of activities,227,471-472 Quality function deployment, 100 Requisition,21,23 CRP,466,470-471 Quality management,141-176 Research, 130 DRPII,533 audits,428-429 Responsibilities,classification of,33 ERP,80, 138,480 awards,162,164-165 Restraint of trade,414 flowchart of,464 common tools,153-154 JIT; see Just-in-time (JIT) Retail sector,314 continuous improvement, Return on assets,270 management considerations, 472-473 148-149 master scheduling,464-466 cost of, 11, 155,305 MRP,21,23,466-470,494-495 defects, 144, 145, 150, 170-171,545 MRP II,473-475 defined,165-166 objectives of, 462 design of experiments,70, 154, Professional competence, 445-447 Professional services,procurement of, 244,245 Return on equity,270 Return on investment (ROI), 13,14, 56,57 Reverse auctions,62,78,249,331, 396,563 Rewards,for good performance,428 DMAIC, 150 152 205; see also Services, Rework,336 evolution of, 143-144 Rights of rejection,408-409 procurement of inspection,25, 127,168-172,408 Risk,technology,229-230 Profit,343-345 Profit Impact of Market Strategy approach, 10 involvement with supply Risk appraisal,356 357 management, 54-55 Risk costs,12,306 307 ISO, 134, 152, 163-164 Profit margin,269,329-330 Risk of loss, 409 kaizen, 145, 148 Robinson-Patman Act,414 Program evaluation and review loss to society,155-156 Rockwell Collins,578 management approaches to, ROI,13,14, 56,57 technique (PERT),423-424 Progress payments, 341 146-147 Role conflict, 41 Project management, 179 outsourcing and,228 Rolls-Royce,580-583 Project teams,113 philosophy of, 144-146 Promissory Estoppel, 211 Rotary International,454 process capability analysis, 156 159 Promotion and advertising, 55 six sigma,149-152 Royal KPN, 579-580 Prompt payment,25 standards,134, 152, 162-164 Proprietary information,443-444 statistical process control, Prototypes, 104 Public key infrastructure,404 RPS,507 Run plots,154 s 159-162,478 supplier certification,70,172-174 Salaries,6 Sales,increase in, 10 Pull system,149 of suppliers,166-168 Punishment,427-428 supply management and,10 Samples, 124-125, 449 Purchase description; see TQM,147-148,308 Scatter diagrams, 154 Quality Management System,152 Scheduling,463-466 Purchase order,23-24 Quantity discounts,350,490 Scorecard,balanced,427 Purchase price,304-305 Quick ratio,268 Scott Paper,317-320 Purchase requisition,21,23 Quotation,request for,23 Scrap disposal, 12 Specifications www.downloadslide.com 598 Subject Index Seasonal discounts,350 locally,256 257 Secrecy,of design,229 manufacturer versus distributor, Securities Exchange Act, 416 Selling costs,341 Semi-variable costs,326 257-258 minority/women-owned businesses, 258,564 Statement of work (SOW),23,25, 196 201 Statistical process control (SPC), 159-162,478 Stockless purchasing,28 Service capability analysis,246 multiple,232,254-255 Stores,centralized,26 Service level agreement,234 nationally,256 257 Strategic demand management,530 536 Service providers,9,313 single versus multiple,254-255 Strategic network,17 Services,procurement of,194-213 strategic,7,241,559-560 Strategic outsourcing,235 construction,207-211 Southern California Edison,45 Strategic planning,33, 555-568 contract administration,207 Spare parts,184 Strategic responsibilities/activities, contract extension,206 SPC,159-162 contractor selection,201-204 Specialization, 8,35 Strategic sourcing,7,241,559-560 costs,202 Specifications,118-140 Strategic supply chain management, importance of,195 brand or trade name, 123-124 33-34 529-530 Internet,207 categories of, 121-128 Stress testing,104 operating services,206 commercial standards,126 Structured multilevel bill of outsourcing of,7,8,195 complex, 125-128 pricing,204 conformance to,155 Subcontracting,333 process,25 design,51,126 127 Subsidiaries,280 281 professional services,205 development of,128-132 Substandard materials and services, 449 statement of work,23,25,196 201 engineering drawings, 127 Suitability,101 technical services,205-206 for equipment purchasing, 184-186 Sun Microsystems,252,254,537 transportation,511-512 materials,23 function and fit,123 Supplier delivery system,29 70/30 approach,255 market grades,125 Supplier equality, 78 Sharp practices,447 448 material and method-of-manufacture, Supplier feedback, 564 Shipper's letter of instruction,510 Shipping terms, 508-509 Shortages,3,53 127-128 performance,98,122-123, 184,479 Supplier managed inventory,499 Supplier relationship management,374 Supplier samples,124-125,449 Should-cost models,334 problems with,130 132 Supplier scheduler,474-475 Simple specifications,122-125 purpose of,120 121 Supplier stores,29 Simplification,90,108,135-136 samples,124-125,449 Supplier survey s,244,263-268, Simulation,104,153 simple,122-125 Single sourcing,254-255 simplification,90, 108,135-136 Six sigma,149-152 standardization, 90,119, Slushy time fence,535 132-138,565 581-582 Suppliers alliances with,63-64, 65,70 76, 84-87,334 Small-orders,26 Spin City,102 Small-volume requirements,230 231 Sponsorship,of teams, 42 certification of,70,172-174 Social responsibility,443,454-455, Staffing,565-568 collaborating with,429-430 564-565 Society of Automotive Engineers,133 Society of Mechanical Engineers, 133 Solectron,255 Solicitation,250; see also Bidding Sourcing,240 272; see also Suppliers Staggers Rail Act,514 colocation with,72,114 Standard industrial classification cost to change,68 system,261 Standardization, 90,119,132-138,565; see also Specifications Standards for capital equipment,186 commercial,126 early supplier involvement; see Early company,133 supplier involvement (ESI) ethics,259 evaluating potential suppliers, 244-247 green,258 group buying,259-260 internationally,256 257,276 capacity,255-256 development/management of,172, 252-253 direct,282-286 early involvement with; see Early supplier involvement (ESI) evaluating potential,244-247 for ethics, 440 447, 452 financial analysis of,245,268-270 industry,133 locating,241-244 international, 133 minority/women-owned,258, 564 for quality,134,152,162-164 monitoring progress,421-424 team development of,137 performance evaluation,424-427, 520 types and sources of,133-134 preferred,73 Statement of objectives,101 quality analysis, 166 168 www.downloadslide.com Subject Index questionnaires for,436 Taxes,189-190,305 reduction in number,253-254 Teams selection of,23-24,122-123, 201-204,242,247-252 Training ethics,452-453 for capital equipment, 179-181 cross functional,37-38,97,129-130 for teams,45 transformational,428,554-555 as a source of cost data,334 for development of standards,137 specialized knowledge,230 incentives for,42 visits to, 245,263-268,270 272,286 interfirm,46 Transactional relationships,66 68 Transformational training,428, Supply base reduction,253-254 leadership of,43-44,47 Supply chain evolution map,547 for negotiation,41,187,376 377 Supply chain management product development,39-47,561-564 Transactional negotiation techniques, 386-388 554-555 Transportation,502-526 defined, 13-15 project,113 benefits of controlling,504 evolution to, 529-530 role conflict, 41 carrier classifications,507-508 implementing,17,18 skills needed, 44-45 carrier evaluation and selection, key to,528-529 for transportation purchasing,516 stages of,529-530 traditional approach,16 Supply Chain Pollution Avoidance (SCPA),455 Supply management; see also Purchasing careers in,5 504-506 Technical analysis,285-286 contracts,511-512,517-518 Technical inspection,169-170 deregulation,514 Technicalrisk,356-357 documentation,509-510 Technical services,procurement of, Supply channels,279-281 205-206 Technology risk, 229-230 expediting,33,519 freight bill auditing, 519-520 freight forwarders,282,511 Terms and conditions, 24 freight rates,510 511 Testing, 106, 166 167 freight terms, 508-509 classification of responsibilities,33 Time and materials contracts,367 glossary of terms,521-524 evaluation of,17 Time-based competition,10,224 of hazardous materials,507 external environment,60 61 Time fences,535-536 impact of,504 in government,60 Time phasing, 469 legal issues,512,514 impact of,2-3,9-12,32 Time to market,70 modes of,506-507 mechanics of,21-29 Timex,56 outsourcing, 511,517 monitoring changes in supply,60 61 Title,to goods,409 steps in controlling,516-520 in nonmanufacturing,59 Tolerance stacking,156 outsourcing of,229 Tolerances,131-132 placement with organization,32 Tooling costs,337 progression to supply chain Toshiba,229 management,13-17,18 relationship with other departments, 51-59 Total cost of ownership acquisition costs and,11,184, 186-187,304-306,487-488 tariffs,305,514,517 Transportation Industry Regulatory Reform Act,514 Transportation savings,35 Truckload (TL), 506 Trust,70,73,81-84 TRW, 548-549 ROI,13,14,56,57 components of,304-310 Turnover,of inventory,269 role of professionals, 17-18 implementation example,317-320 Two-bin system,498 stages of,2,6 importance of,312-315 Two-step bidding,249-250 Supply management research,130 net present value analysis,310 312 u Supply networks,15-16,308-309,315 ownership costs,306 309 Supply system review,428-429 post-ownership costs,309-310 Uncertainty,354-356 reducing,11-12 Undifferentiated products,325 Surveys,suppliers,244,263-268, Total production costs,327 581-582 Sustainability, 443; see also Environment Total quality management (TQM), 147-148,308 Toyota,15,148,149,165 Switching costs,75 Systems contracting,28 T 599 Uniform Commercial Code (UCC), 199, 402-404, 418; see also Legal issues Uniform Computer Information Transactions Act,403 Tracing of shipments,519 Uniform Freight Classification,514 Trade agreements,305 Uniform Sales Act,405 Trade discounts,349-350 Unit curve,337-338,348-349 Target cost,101,338-341,343,362-363 Trade names,123-124 United Technologies,38,154 Target profit,362-363 Trade shows,243 UPS,507 Tariffs,305,514,517 Trading companies, 280 Use tests,167 Tax Reform Act of 1986,190 Trading Process Network (TPN), 28 Used equipment,181-184 www.downloadslide.com 600 Subject Index v Value analysis/engineering, 68, 106-110,565 Value chain, 2,13,15-16 Variable manufacturing costs,326 Water carriers,506 Weighted-average cost of capital Variable-margin pricing, 324-325 (WACC), 310n Weighted-factor analysis, 250 251 Variations,156,159 Weighted point plan,425-426 leadership, 546 554 Verbal contracts,407-408 Weyerhaeuser,407 new product development,561-564 Vertical integration, 220 Win-win negotiation, 394 organization and staffing,565-568 Virtual corporation,17,220 Women-owned businesses,258,564 overview of,543-544 Virtual integration, 429 Workforce stability,231-232 quality, 560 561 Vision statements, 544,558 Working capital, 268 R Gene Richter Award, 577-580 Volume discounts,34 World Trade Organization, 293 Value network management, 543-583 Rolls-Royce example, 580-583 x w social responsibility,564-565 standardization, 565 Wal-Mart, 15 X chart, 160 161 strategic planning,555-568 Warehousing,537 Xerox, 253 technology,561 Warranties,409-410 transformational training,554-555 Warranty costs, 12, 309 value proposition,544-545 Waste,elimination of,149 z Zero defects, 145 www.downloadslide.com This page intentionally left blank www.downloadslide.com This page intentionally left blank www.downloadslide.com This page intentionally left blank www.downloadslide.com This page intentionally left blank www.downloadslide.com This page intentionally left blank www.downloadslide.com This page intentionally left blank ... to "purchasing and supply management, " "supply management, " "procurement," "strategic sourcing," and "supply chain management. " Purchasing provides the foundation of supply management, which tends... Burt, Ph D ABOUT THE AUTHORS David N Burt is Professor Emeritus of Supply Management at the University of San Diego In 2008, Dr Burt completed 50 years in the fields of Procurement, Supply Management. .. founder and Director Emeritus of USD's Supply Chain Management Institute and of the Strategic Supply Management Forum, an annual meeting of innovative supply management professionals from North