PURCHASING & SUPPLY CHAIN MANAGEMENT, 4e

Purchasing and Supply

Chain Analysis: Tools and
Techniques
Chapter 12

CENGAGE LEARNING
Monczka – Handfield – Giunipero – Patterson
 Chapter Overview

 Project management
 Learning curve analysis
 Value analysis/value engineering
 Quantity discount analysis
 Process mapping

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 Project Management

 Project management is defined as a

series of tasks that:
 Require the completion of specific
objectives
 Has defined start and stop dates
 Consumes resources, particularly time,
personnel, and budget
 Operates with limited resources

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Examples in Supply Management

 Developing new products

 Developing and implementing new
management information systems
 Conducting and implementing value
analysis projects
 Developing and implementing sourcing
strategy
 Supplier development initiatives
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 Defining Project Success
 Within allocated time and budget
 At the proper performance or
specification level determined by the
project’s goals and objectives
 At a level specified by the customer,
user, or management
 With minimal or only mutually agreed
upon changes
 Without disturbing the other work of
the organization 5
 Considerations of a Project

 Ensure objectives and outcomes are

championed by senior management
 Place the project under leaders with
proper skills, credentials, and
credibility
 Establish an effective governance
process through a cross-functional
team
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 Considerations of a Project

 Maintain active participation from team

members
 Break down the project into phased
deliverables
 Manage expectations continuously and
consistently
 Measure objectively
 Ensure rapid problem resolution
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 Project Phases

 Concept Abstract Start

 Project definition
 Planning
 Preliminary studies
 Performance
 Postcompletion Concrete Finish

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 Concept Phase

 Initiate broad discussion of project

 Identify broad constraints
 Create initial budget estimates

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 Project Definition Phase

 Develop project description

 Describe how to accomplish the work
 Determine tentative timing
 Identify broad budget, personnel,
resource requirements

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 Planning Phase

 Develop detailed plans identifying

tasks, timing, budgets, and resources
 Create organization to manage the
project

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 Preliminary Studies Phase

 Validate the assumptions made in the

project plan through interviews, data
collection, literature search, and
experience

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 Performance Phase

 Execute the project plan

 Perform the work
 Use project control tools and
techniques

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 Postcompletion Phase

 Confirm project results to

specifications
 Reassign personnel
 Restore equipment and facilities
 Document project files for future
reference

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 Project Planning and Control
 Gantt charts
 Critical path method (CPM)
 Use when there is a single known time for
each activity with no variance
 Program evaluation and review
technique (PERT)
 Use where time estimates are variable or
uncertain
 Most likely vs. pessimistic vs. optimistic
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 Gantt Chart Example
TASK \ WEEK 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

Define supplier
equipment and
technology
requirements

Ready equipment
for transfer

Transport
equipment
to supplier

Install and test

equipment

Train supplier
personnel

Ramp up to full
production

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 Network Rules

1. Identify each unique activity by a

capital letter that corresponds only to
that activity.
2. A unique branch or arrow represents
each activity in the project. Circles or
nodes represent events.
A

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 Network Rules

3. This diagram means only that B

cannot start until A is complete.
A B

4. Branch direction indicates the general

progression in time from left to right.

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 Network Rules

5. When a number of activities end at

one event, no activity starting at that
event may begin until all activities
ending at that event are complete.
B
D
C

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 Network Rules

6. Two or more activities cannot share

graphically the same beginning and
ending events.

Not K
allowed

L
K
Allowed
L
20
 Network Rules

7. Networks start and finish at only a

single event.
A
Not
allowed B

Allowed B

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 Network Example
Preceding
Activity Designation
Activity
Assemble project team A
Identify potential commodity suppliers B A
Develop supplier evaluation criteria C A
Develop supplier audit form D C
Perform preliminary supplier financial analysis E B
Conduct supplier site visits F E, D
Compile results from site visits G F
Identify requirements for supplier performance system H A
Perform detailed systems analysis and programming I H
Test computerized system J I
Select final suppliers K G

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 Network Example

E F
G

B D K
A C

J
H

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 Learning Curves
 Establish the rate of improvement due
to learning as producers realize direct
labor cost improvements as production
volumes increase
 The learning rate represents the
improvement as production doubles
 85% learning rate indicates that direct
labor declines by 15% each time
production doubles
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 Learning Curve Components
 Ability of the workforce to learn and
improve through repetitive effort and
increased efficiency
 Effort by management to purse
productivity gains
 Modification to the process
 New production methods
 Increased automation
 Vertical integration  cost control
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 When to Use the Learning Curve

 Not all processes or items are subject

to learning curve effects
 When a supplier uses a new production
process for the first time
 When a supplier produces a technically
complex item for the first time
 When an item has high direct labor
content
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Value Analysis/Value Engineering

 Involves examining all elements of a

component, assembly, end product, or
service to make sure that it fulfills its
intended function at the lowest total
cost

Value = Function ÷ Cost

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 Who Is Involved in VA/VE?

 Executive  Marketing
management  Production
 Suppliers  Industrial/process
 Supply engineering
management  Quality control
 Design
engineering

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 Tests for Determining Value

 Does the use of this product contribute

value to our customers?
 Is the cost of the final product
proportionate to its usefulness?
 Are there additional uses for this
product?
 Does the product need all its features
or internal parts?
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 Tests for Determining Value

 Are product weight reductions

possible?
 Is there anything else available to our
customers given the intended use of
the product?
 Is there a better production method to
produce the item or product?

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 Tests for Determining Value

 Can a lower cost standard part replace

a customized part?
 Are we using the proper tooling
considering the quantities required?
 Will another dependable supplier
provide materials, components, or
subassemblies for less?

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 Tests for Determining Value

 Is anyone currently purchasing

required materials, components, or
subassemblies for less?
 Are there equally effective but lower
cost materials available?
 Do material, labor, overhead, and profit
equal the product’s cost?
 Are packaging reductions possible?
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 Tests for Determining Value

 Is the item properly classified for

shipping purposes to receive the
lowest transportation rates?
 Are design or quality specification too
tight given customer requirements?
 If we are making the item now, can we
buy it for less? Or vice versa?

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 The Value Analysis Process

 Gather information
 Speculate
 Analyze
 Recommend and execute
 Summarize and follow up

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 Gather Information Stage

 What does this product do for the

customer?
 Why does a customer buy this
product?
 Primary vs. secondary functions
 Name each function with a noun and a
verb
 Collect detailed product information
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 Speculate Stage

 Wide-open, creative thinking

 Use brainstorming or other idea
creating techniques
 Develop as many improvement ideas as
possible without judgment

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 Analyze Stage

 Perform critical evaluation of ideas

created in speculate stage
 Cost/benefit analyses
 Feasibility assessment
 Do ideas address the original goals and
objectives?
 General  specific

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 Recommend and Execute Stage

 Determine priorities
 Make proposal to management for
approval
 Requires:
 Motivation and creativity
 Good communication skills
 Analytical thinking and product knowledge
 Commitment and salesmanship
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 Recommend and Execute Stage

 Implement
 Timing
 Budget
 Responsibilities
 Generate support from outside the
team

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 Summarize and Follow Up Stage

 Ensure that progress is being made

 VA team may follow up
 Another team may have this
responsibility

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 Quantity Discount Analysis

 Allows buyer to verify that quantity

discounts are reasonable
 Buyer may be able to negotiate price
improvements through a better
understanding of incremental unit
costs
 Prices at specific quantities vs. prices
at quantity ranges
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 Quantity Discount Analysis

Number of units/order 1 3 6 10

Price/unit (quoted) $85.00 $80.00 $70.00 $69.00

Total price/order $85.00 $240.00 $420.00 $690.00

Price difference between orders $85.00 $155.00 $180.00 $270.00

Quantity difference/order 1 2 3 4

Price/unit/order quantity difference $85.00 $77.50 $60.00 $67.50

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 Quantity Discount Analysis
Quantity Total Cost Incremental Quantity Incremental Cost

1 $85.00 1 $85.00

3 $240.00 2 $77.50
3 $77.50

6 $420.00 4 $60.00
5 $60.00
6 $60.00

10 $690.00 7 $67.50
8 $67.50
9 $67.50
10 $67.50

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 Process Mapping

 Reduces processes to their component

parts or activities
 Helps identify and then eliminate non-
value-added activities (waste) or delays
 Process is defined as an outcome of a
set of tasks, activities, or steps
 Cross multiple functional boundaries
 Groups have conflicting goals
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 Process Mapping

 Types:
 Sequential processes
 Concurrent processes
 Often used by cross-functional teams
 Generates buy-in from affected groups

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 Process Mapping Example
Step # Activity Average Time Required
1 Employee 1 physically places trailer at receiving dock 15 minutes
2 Employee 2 unloads the trailer with material handling equipment 30 minutes

Employee 3 checks load quantity from the trailer against shipping

3 30 minutes
documents for accuracy
Employee 4 acknowledges receipt of the material on the computer
4 and prints control tickets to move material to required warehouse 60 minutes
locations

5 Employee 5 attaches control tickets to individual loads 20 minutes

6 Employee 6 inspects inbound material 30 minutes

Employee 7 moves material to required warehouse location, freeing

7 30 minutes
up the receipt line for another trailer

Employee 4 files copy of shipping documents and forwards copies to

8 Accounts Payable at the end of the day (no physical movement 15 minutes
required)
Total Average Time to Unload Trailer (excludes Step # 8) 215 minutes

Non-value-adding Value-adding
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 Process Mapping Example
Step #1 • Remove non-value-adding
steps
Step #2 • Seek to combine other
steps
Step #3
Step #4
Step #5
Step #6
Step #7

Hour 1 Hour 2 Hour 3 Hour 4

Non-value-adding Value-adding

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