1. OUTLINE
Questions, Comments?
Quiz
Go over Quiz
Go over homework
New homework
Ballot results
There will be a quiz on Thursday, 9/28
More on Risk
Start Evaluating suppliers

2. Ballot Results

3. Chapter 14 – Sourcing Decisions
Assessing suppliers
Selecting suppliers - Single or multiple
Contracts
Negotiation
Design Collaboration
Procurement Process

4. Definitions
Cost of Goods Sold – total expenditures to obtain or manufacture the product. This does not include Sales and administrative costs.
Safety Inventory – Inventory held to protect against variations in demand and lead time
Cycle Inventory – Inventory held to account for lot sizing
Landed Cost – Purchase Price plus transportation in
Bullwhip effect – accentuation of variations in demand as we go up the chain
Replenishment lead time – time from ordering to receipt

5. Definitions - continued
Quantity Discounts – Price depends on the amount purchased
Double Marginalization – Retailer sets price higher than is optimal for the chain in order to have enough margin (Sales are a function of price)
Newspaper problem – Deciding how many of a perishable item to order, based on loss of profits (under stocking) and cost of unsold goods (over stocking)
Excel Norm functions to calculate normal probabilities:
NORMINV(percentage, mean, standard deviation) = Value
NORMDIST(Value, mean, standard deviation, TRUE) = percentage

6. Newspaper problem Newspaper person’s cost = $0.25, no salvage value
Profit on a paper = $0.50
Estimated average sales = 60
Estimated standard deviation of sales = 5
Percentage (Service level) = 0.50/( ) = .667
NORMINV(0.667, 60, 5) = 63 or Q= average + z(std. dev)
If the overage cost is lower than the shortage cost we order more than the average
Underage cost = lost profit = Selling price – Cost
Overage cost = Excess unsalvageable inventory = Cost – salvage value
Service level = Underage cost/ (Underage + overage cost)

7. The newspaper problem
Expected Profit at Q = 62: $28.64
Expected Profit at Q = 63: $28.62
The formula for expected profit comes from the probability of demand being less or more than the order quantity

8. The newspaper problem

9. The newspaper problem

10. Assessing suppliers
What would you want to now about a potential supplier?

11. Assessing suppliers
Price (landed) and terms
Lead time, mean and variance affect safety inventory
Supply flexibility – changes in quantities (lot sizes) (safety inventory)
Delivery frequency – affects cycle inventory
Quality
Information infrastructure
Design collaboration
Exchange rates, taxes, duties
Viability – are they going to be around

12. Evaluation Company Profile Management Capability
Personnel capabilities
Cost Structure (see example on next three slides)
Total quality management
Process and technology
Environmental capability
Financial capability (see slides from Park’s Engineering Economics Text)
Production scheduling and control systems
Information Systems capability
Supplier sourcing strategies
Potential for a long term relationship

13. CHAPTER 2 of Park - CATEGORIES OF RATIOS
DEBT MANAGEMENT - HOW DO YOU GET YOUR CAPITAL
LIQUIDITY - CAN YOU PAY YOUR DEBTS
ASSET MANAGEMENT- INVENTORY AND RECEIVABLES
MARKET VALUE - HOW REALISTIC IS THE VALUE OF THE STOCK
PROFITABILITY - HOW WELL ARE YOUR INVESTMENTS GENERATING PROFITS

14. CHAPTER 2 of Park - DEBT MANAGEMENT
DEBT RATIO = TOTAL DEBT / TOTAL ASSETS
HAVE YOU BORROWED TOO LARGE A PART OF YOUR ASSETS?
TIMES INTEREST EARNED RATIO =
EARNINGS BEFORE INTEREST AND INCOME TAXES /
INTEREST EXPENSE
CAN YOU EARN ENOUGH TO PAY THE INTEREST?

15. CHAPTER 2 of Park - LIQUIDITY
CURRENT RATIO =
CURRENT ASSETS / CURRENT LIABILITIES
DO YOU OWE MORE THAN YOU HAVE?
QUICK RATIO =
(CURRENT ASSETS - INVENTORIES) /
CURRENT LIABILITIES
HOW FAST CAN YOU PAY YOUR DEBTS?

16. CHAPTER 2 of Park - ASSET MANAGEMENT
INVENTORY TURNOVER =
SALES / AVERAGE INVENTORY BALANCE
ARE YOU MOVING YOUR INVENTORY FAST ENOUGH?
ACCOUNT RECEIVABLE TURNOVER (DAYS SALES OUTSTANDING) =
RECEIVABLES / DAILY SALES
ARE YOU COLLECTING FROM YOUR CUSTOMERS?
TOTAL ASSET TURNOVER =
SALES / TOTAL ASSETS
ARE YOUR ASSETS GENERATING SALES?

17. CHAPTER 2 of Park - MARKET VALUE
PRICE EARNING RATIO =
STOCK PRICE / ANNUAL EARNINGS PER SHARE
LIKE INTEREST (JUST A LOT LOWER)
BOOK VALUE PER SHARE
(TOTAL STOCK HOLDER EQUITY - PREFFERED STOCK) /
SHARES OUTSTANDING
USUALLY MUCH LOWER THAN THE STOCK PRICE

18. CHAPTER 2 of Park - PROFITABILITY
PROFIT MARGIN ON SALES =
NET INCOME / SALES
HOW EFFECTIVE ARE YOUR SALES IN GENERATING INCOME?
RETURN ON TOTAL ASSETS =
(NET INCOME + TAXED INTEREST EXPENSE) /
AVERAGE TOTAL ASSETS
ARE YOUR INVESTMENTS GENERATING ENOUGH INCOME?

19. Contracts
Objectives
Protect both parties
Reduce double marginalization
Reduce information distortion
Increase agent effort
Induce improvement in performance
Types
Buyback or return
Revenue sharing
Quantity flexible

20. Design Collaboration
Customers’ Requirements
Suppliers’ specifications
Design for manufacturability (DFM)

21. Procurement Process
Placing orders
Receiving orders
Paying for orders
Consider types of transaction when designing the process
Separate direct from indirect purchases