Slide 16.

Support Tools

Tendering
Types of Tenders
Open Restricted open Selective Serial Negotiated Security Liability Business benefits Portability of data Affordability Scalability

E-tendering Some Key Principles to be Considered

Lysons & Farrington, Purchasing and Supply Chain Management, 7th edition, Pearson Education Limited 2005

Slide 16.2

Support Tools
Possible Topics Cost Schedules Design Experience Facilities Sub-contracting Industrial relations Contract terms After sales service
Lysons & Farrington, Purchasing and Supply Chain Management, 7th edition, Pearson Education Limited 2005

Slide 16.3

Support Tools Post-tender Negotiation 1 Eight Common Areas for Price Negotiation 2 3
When it is suspected that price fixing has taken place Where prices appear grossly inflated

Where single tender action has been authorised

Where despite competitive tendering a particular supplier is consistently successful

Where the enquiry is based on a functional specification

Where the purchaser needs to justify selections by testing the market

Where splitting requirements is appropriate

8
To evaluate market conditions

Lysons & Farrington, Purchasing and Supply Chain Management, 7th edition, Pearson Education Limited 2005

Slide 16.4

Support Tools Life Cycle Costing Breakdown Structure Total Life Cycle Costs Acquisition Costs
Initial costs Cost of transportation

Operation, Maintenance & Disposal Costs

Cost of operation Supervision Operator wages & employment costs Expenditure of fuel, power Cost of materials used Maintenance costs Cost of spares Storage of spares Wages of maintenance stage Maintenance materials Disposal costs Cost of depreciation (obsolescence) Estimated disposal value Insurance

Costs of installation & commissioning

Initial spares Cost of supervisor/ operator training

Maintenance agreements Internals between servicing

Lysons & Farrington, Purchasing and Supply Chain Management, 7th edition, Pearson Education Limited 2005

Slide 16.5

Support Tools Target Costing

Definition
A product cost estimate derived from a competitive market price. Used to reduce costs through continuous improvement and replacement of technologies and processes.

Characteristics Proactive and forward looking Dynamic applies to life cycle Market driven Linked to concept of functional analysis

Lysons & Farrington, Purchasing and Supply Chain Management, 7th edition, Pearson Education Limited 2005

Slide 16.6

Support Tools Absorption Costing

Material Costs Use bill of material as basis for evaluation

Labour Cost

Uses breakdown of hourly rate, apply time allocations and consider the learning curve

Overheads

Consider fixed and variable overheads

Profit

Relate profit to risk and examine Profit Before Tax (PBT) and ROCE (Return on Capital Employed)

Lysons & Farrington, Purchasing and Supply Chain Management, 7th edition, Pearson Education Limited 2005

Slide 16.7

Support Tools Allocations of Service Resources to Get Pools

Service resources 1,600,000 Salaries
First stage Resource Drivers

Office costs 4,000,000 (50,000 sq ft)

Sq ft (Occupied (00)) 85 200 150 65

Computers 200,000 (20,000 hrs) Hours used (000) 60 20 20 100

No of employees 40 10 20 30

Materials Management Activity Centre Purchasing

Salaries 400,000 Office 68,000 Computers 60,000 528,000

Storage
Salaries 100,000 Office 160,000 Computers 20,000 280,000

Distribution
Salaries 200,000 Office 120,000 Computers 20,000 340,000

Accounting
Salaries 300,000 Office 52,000 Computers 100,000 452,000

Lysons & Farrington, Purchasing and Supply Chain Management, 7th edition, Pearson Education Limited 2005

Slide 16.8

Support Tools Learning Curve

Reduction in the average time taken to produce 1 unit Units produced Time of last unit produced Total time so far 1 1.00 1.00 2 0.60 1.60 3 0.51 2.11 4 0.45 2.56 5 0.42 2.98 6 0.39 3.37 7 0.37 3.74 8 0.35 4.10 9 0.34 4.44 10 0.33 4.77 11 0.32 5.08 12 0.31 5.39

Cumulative average time

1.00

0.80

0.70

0.64

0.60

0.56

0.53

0.51

0.49

0.48

0.46

0.45

The learning curve theorem The manufacture of a product involves four operations. Operation Improvement rate Percentage of task

1
2 3 4

90%
92% 85% 80%
0.28 0.18 0.17 0.24 0.87

30%
20% 20% 30%

The aggregate learning curve slope will be:

0.92x0.30 (0.92x0.20) (0.85x0.20) (0.80x0.30)

Lysons & Farrington, Purchasing and Supply Chain Management, 7th edition, Pearson Education Limited 2005

Slide 16.9

Support Tools Operational Research

Table 16.4 Applications of operational research Aspect of OR Linear programming (LP). A mathematical technique for determining the optimum technique for determining the optimum allocation of resources such as capital, raw materials or labour, or plan to obtain a desired objective such as minimum cost of operations or maximum profit when there are alternative uses of the resource in question. LP can also help to analyse alternative objectives such as the economics of alternative resources. Queuing theory. Mathematical analysis and solution of problems in which items requiring or providing service stand idle and in which it is required to optimise either the arrival rate or service rate or both. Games theory. A mathematical technique or decisionmaking in a competitive situation in which the outcome depends not only on the actions of a manager but also on those of his competitors. The aim of the game is to devise a strategy that maximises returns and minimises losses. Typical supplies applications Analysis of quotations from several suppliers who, because of limited resources, can accept only certain combinations of the business offered. Linear programming can indicate the combination of quotations that will minimise purchasing expenditure. Determining the relative advantages of a low price and a high probability of late delivery against a higher price with a better chance of delivery time. Sequencing and scheduling arrivals of parts or components to achieve minimum costs. The most economical staffing of stores to provide the minimum waiting time. Negotiation. Decisions are based on the assumption that the rival is shrewd and will always play to minimise his opponents gain.

Lysons & Farrington, Purchasing and Supply Chain Management, 7th edition, Pearson Education Limited 2005

Slide 16.10
Table 16.4 Applications of operational research Aspect of OR Decision trees. A decision tree is a type of flowchart or visual aid that summarises the various alternatives and options available in a complex decision process. Decision trees consist of three parts: (i) the initial decision point; (ii) the branches representing various outcomes; (iii) the paths, which may consist of several branches, representing the various probabilities and events of a particular outcome. The whole tree represents the decision problem. The object of decision trees is not to find optimum solutions but to represent visually a wide range of alternatives which can apply to specific policies and procedures. Forecasting. The process of estimating future quantities required normally using past experience as a basis. OR methods of forecasting include: exponential smoothing moving averages trend analysis multiple regression analysis curve fitting Probability theory. An aspect of forecasting based on mathematical techniques for establishing the likelihood of particular events taking place. The probability of an event ranges from 0 to 1. (0 = event will certainly not occur; 1 = event is certain) Typical supplies applications

Virtually any supplies problems that can be reduced to: a set of mutually exclusive decisions for each decision, a set of possible outcomes, together with an assessment of the likelihood of each outcome occurring. revenues or costs for each outcome. Any supplies problem involving the prediction of future requirements, e.g., stock levels, purchasing expenditure, stores space, purchase of sensitive commodities in various market conditions. The application of statistical techniques, e.g., sampling, as a means of controlling quality. Determining the life expectancy of materials and components. Predicting the probability of stockouts at given levels of inventory.

Lysons & Farrington, Purchasing and Supply Chain Management, 7th edition, Pearson Education Limited 2005