The Challenge of Purchasing and Supply

Management

Text BookPurchasing & Supply ManagementLeenders . FearonFlynn . Johnson 12th Edition

The Foundations of Supply Chain Management

Supply Management

Supplier management, supplier evaluation, supplier certification, strategic partnerships

OperationsDemand management, MRP, ERP, inventory visibility, JIT (AKA lean production & Toyota Production System), TQM (AKA Six Sigma)

Logistics

Transportation management, customer relationship management, distribution network, perfect order fulfillment, global supply chains, service response logistics

IntegrationKey process integration, performance measurement

Purchasing to Supply Management

• Movement from clerical to managerial activity

• Integration into corporate strategy

• Transition to a process oriented, strategic function

• Purchasing potential contribution

• Process & knowledge management emphasized

Advantages of creation of a Special Department

• Easier to standardize

• Cuts down on duplication and allows room for application of electronic supply systems

• Contracts that provide pricing on the organizations total requirements. Long term benefits.

• Prevents interdepartmental competition in periods of material shortages.

Advantages of creation of a Special Department

• Better control over purchases

• Development of specialization and expertise

• Essential for strategic Supply Chain Management

Objectives of Purchasing & Supply Management

1. Right Materials

2. Right Quantity

3. Right Time

4. Right Place

5. Right Source

6. Right Service

7. Right Price

The Purchasing /Supply Management department has the potential to, and should play key role in developing and operational zing a strategy

leading to sharpened efficiency and heightened competitiveness, through action such as:

• fighting inflation by resisting unnecessary price hikes

• Significantly reducing investment in materials inventory through better planning and supplier selection.

• Raising the quality level of purchased materials and parts inputs, so that the quality an consistency of end product/service outputs can be improved

• Reducing the materials segment of cost of goods-sold

• Effecting product ad process improvements through encouraging and facilitating early, open communication between buyer and supplier, to mutual benefit of both parties.

Potential Contribution of Purchasing / Supply Management

Purchasing

The process of buying; learning the need, locating ad selecting a supplier, negotiating price

and other pertinent terms, and following up to ensure delivery.

Procurement

Not limited, but also includes the storage, traffic, receiving, incoming inspection, and salvage.

Material Management

the integration of related materials functions to provide cost –effective delivery of materials and services to the

organization, includes a number of separate groups, such as material planning and control, material and purchasing research, purchasing, inbound traffic,

incoming quality control, inventory control, production scheduling, receiving, stores, in-plant materials

movement, and scrap and surplus disposal.

Others names used for materials management, Integrated Logistic and Supply Chain Management.

Logistic Management

The part of SCM that plans, implements, and controls the efficient, effective flow and storage of goods, services, and related information from the point of origin to the point of consumption in order to meet customers requirement.

Include the inbound, outbound and external movements.

Purchasing and LogisticPurchasing influences a number of logistics-related activities, such as how much to buy and inbound transportation. To ensure timely

delivery of product at given time, close related to transport, such as how much to buy considering availability of transportation with out

disturbing the material flow from point of origin to point of consumption.

Customer Service Parts and service support

Demand forecasting/Planning Plant and warehouse site selection

Inventory Management Purchasing

Logistic Communication Return goods handling

Material Handling Reverse logistic

Order Processing Traffic and Logistic

Packaging Warehouse storage

Major Logistic Activities

Supply Chain Management emphasizes all aspects of delivering products to customers, whereas supply management emphasizes only the buyers – supplier relationships.

SCM represents the philosophy of doing business that stresses processes and integration. Supply management seems to be the term that now is more commonly used to refer to the systems approach when it comes to the purchasing function.

Supply Management Vs Supply Chain Management

The use of the concepts of purchasing, procurement, material management, and supply and supply chain

management will vary from organization to organization.

Significance of Material Cost Purchase value Vs Sales Value in different industries

Importance of Decision Making in the Purchasing / Supply Management

The following decision will have a major impact on the organizational goal, final customer, profitability, return on assets,

etc

•Make or Buy

•Price

•Where shall be order place

•Maximum or Minimum Order Size

•Best alternative in case of any emergency

•Transportation mode and Cost considering quality and timely delivery

•Long term or short term contract

•Dispose of surplus material

•Reactive and Proactive – Wait or Act now?

Nine Goals of Purchasing

1. Provide an Uninterrupted Flow of Materials: Loss of Production

2. Keep Inventory Investment & Loss at a minimum.

3. Find or Develop Competent Suppliers. E.g. Otsuka

Nine Goals of Purchasing

4. Standardize Items: lower prices through mass volume purchases.

5. Maintain & Improve Quality:

Attention. Begin Best end up with a quality product.

4. Purchases done resulting in lower total costs. Less spending on repairs & returns.

Nine Goals of Purchasing

7. Achieve Harmonious Productive Relationships with other Functions within the Organization

8. Accomplish objectives at lowest possible Administrative costs: efficient team

9. Improve Organizations Competitive Advantage: Work as a team, Customer Satisfaction

Purchasing Prime Decision • Select the Supplier

– Capability

– Services

– Reliability

• Use Whichever Pricing Method is Appropriate– Total cost of Ownership

– Determine the optimal price

– Ultimate lowest possible Cost

• Question the specification– Specification– Alternative (but final decision is end user’s hand)

• Monitor Contacts with Potential Supplier– User contact a potential supplier directly– Requisitioned sometimes make commitments to suppliers– If Supplier technical personnel need to talk directly with engineer or operating personnel

Purchasing ActivitiesArea of Responsibility Activities

Purchasing / Buying •Creating contract and supply agreements for materials, services, and capital items

•Managing key purchasing processes related to supplier selection, supplier evaluation, negotiation, and contract management

Purchasing Research •Identifying better techniques and approaches to supply management , including benchmarking processes and systems

•Identifying medium –and long-term changes in markets, and developing appropriate commodity plans to meet future needs .• Identifying supply chain rends and opportunities for better materials and services

Inventory Control •Managing inventories and expediting material deliveries•Establishing and monitoring vendor-managed inventory systems

Transportation •Managing inbound and outbound transportation services, including carrier selection

Environmental and investment recovery/disposal

•Managing supply chain related activities to assure compliance with legal and regulatory requirements and with company environmental policies

•Managing disposal of surplus materials and equipment

Forecasting and planning •Production planning and forecasting of short-, medium and long-term requirements

•Supporting the transition from internal production to external supply and vice versa

Nonproduction/ Nontraditional purchases

•Managing cost effective delivery of nonproduction and nontraditional purchases , such as offices supplies, security services, janitorial services,

Supply Chain Management •Implementing and managing key suppliers relationships and supplier partnership, including supplier development and participation on cross – functional teams

•Developing strategies that use the supply network to provide value to end customers and contribute to organization al goals.

Advantage & Disadvantages of CentralizationAdvantages DisadvantagesGreater Buying specialization •Narrow specialization and job boredom

•Lack of job flexibility

Ability to pay for talent Corporate staff appears excessive

Consolidation of requirement •Tendency to minimize legitimate differences in requirements

Coordination and control of policy and procedures •Lack of recognition of unique needs

Effective planning and research •Focus on corporate requirements, not on business unit strategic requirement •Most Knowledge sharing one – way.

Common Suppliers •Even common supplier behave differently in geographic and market segment

Proximity to major organizational decision makers •Distance from users

Critical mass •Tendency to create organizational silos

Firm brand recognition and stature •Customer segment require adaptability to unique situations

Reporting line – Power •Top management not able to spend time on suppliers

Strategic focus •Lack of business unit focus

Cost of purchasing low •High visibility of purchasing costs

Advantages & Disadvantages of DecentralizationAdvantages Disadvantages

Easier coordination/communication with operating department

•More difficult to communicate among business units

Speed of response •Encourages users not to plan aheadOperational vs strategic focus

Effective use of local sources •To much focus on local sources. Ignore the better supply opportunities.•No critical mass in organization for visibility / effectiveness – whole person syndrome.Lacks clout

Business and autonomy Sub optimizationBusiness unit preferences not congruent with corporate preferencesSmall differences get magnified

Reporting line simplicity Reporting at low level in organization

Undivided authority and responsibility Limit functional advancement opportunities

Suits purchasing personnel preference Ignores larger organization consideration

Broad job definition Limited expertise for requirements

Geographical, cultural, political, environmental , social , language , currency appropriateness

Lack of standardization

Hide the cost of supply Cost of supply relatively high

Consortiums

Consists of two or more independent organization that join together, either formally or informally, or

through an independent third party, for the purpose of combining their individual

requirement for purchased materials, services and capital goods to leverage more value added

pricing, service, and technology from their external suppliers than could be obtain if each

firm purchase goods and services alone.

Concern about consortia• Anti trust issues• Unmanageable • Fear of Open enrollment• Fear that the competition might be allowed to join• Disclosure of sensitive information• Supplier resistance• Availability of suitable distribution channels• Unequal size of members• Uncertainty• Standardization & Compliance• Governance

Six Objectives of Consortium

• Reducing total Cost

• Eliminating and avoiding violations of anti trust regulations

• Installing sufficient safeguards

• Mutual and equitable sharing

• High degree of trust & Professionalism

• Maintaining Similarity

Procurement ProcessProcurement ProcessRequisitions

Purchase Orders

Receiving

Payment

SupplierPerformance

Catalog Content

Management

Supplier Management

OrderingSourcing

Analysis

Negotiations & Awards

Information System & Purchasing

• Planning • Sales Forecasting• Budgeting & Financial Control• Accounting • Legal• Engineering• Production & Production Control• Inventory Control• Quality Control and Receiving

Internal Information Flows to Purchasing

External Information Flows to Purchasing

• General Market Conditions• Sources of Supply• Suppliers’ Capacity• Suppliers’ Production Rate• Suppliers’ Labor Conditions• Price, Discount, Customs, Sales and Taxes• Transportation Availability and Rates• New Product and Product Information

Information flows from Purchasing to Organization

• General Management• Engineering • Product Development• Marketing• Production• Legal• Finance and Accounting• Stores

Steps in Purchasing Cycle /Process

1. Recognition of need2. Description of need3. Determination and analysis possible sources

of supply4. Determination of price and terms5. Preparation and placement of the purchase

order6. Follow-up and/or expedite the order7. Receipt and inspection of goods8. Clear the invoice and pay the supplier9. Maintain records and relationships

Quality Specification and Inspection

Determination of Need

• Quality Concerns Drive Supply Initiatives• How the need is described and how its quality is

determined and measured• Before the input can be acquired effectively and

efficiently it is necessary to identify exactly what is needed

• The role if quality is to determine how needs are define , what constitute a best way and what action purchaser take to ensure that the right quality is supplied

Determination of Need

• Determination of Need is a Three Step Process – The organization needs our established by

focusing the needs of our customers – It is determine what the market can supply .– What constitute good value under the

circumstances

Need can be categorize

• Every organization’s needs can be divided into various categories – Raw material– Purchase parts – MRO (maintenance, repair, operating)– Packaging – Services– Resale item’s – Equipments , machineries

Three role of every organization

Supplier CustomerConverter

Supplier

ConverterCustomer Supplier

Converter Customer

The transformation and value-added chain

Identifying value opportunities

• 70% of opportunities for value Improvement lies in the first two phases of the acquisition process

1. Need identification

2. Description

Early supply and supplier involvement

Early supply and supplier involvement (ESI) help ensure that is what is specify is also procurable and represent good value.

Opportunity to affect value during the six steps of the acquisition process

High

Opportunity to affect value

Low

Need recognition

Description Potential suppliers

Selection Receipt Payment

Acquisition process chart

Method of description

• Purchasing role and describing needs

– Purchasing department is responsible to provide goods and services to the user as per their specification and what exactly they want and need at a

given point of time with quality ,quantity and safe .

Description mean anyone of various methods by which a buyer conveys to a sailor a clear accurate picture /information/detail of the required

product . The term specification will be used in the narrower and commonly

accepted sense referring to one particular form of description .

Method of description 1. By brand

2. Or equal

3. By specification – Physical or chemical characteristics

– Material and method of manufacture

– Performance or function

4. By engineering drawing

5. By miscellaneous method • Market grades • Sample

6.By a combination of two or more method

Standardization and simplification

• Standardization means: – agreement on definite sizes – Quality – design

Simplification refer to a reduction in number of sizes, designs and so far .

The challenge in an organization is where to draw the line between standardization and simplification , on the one hand, and suitability uniqueness , on the other hand.For e.g.: in the automotive industry has used this approach extensively to cut costs, improve quality, and still give the appearance of extensive consumer option.

Global standardization

• Standardization is important to all, not just for leveraging purchases across the group , but also in terms of our ability to design and build a product for our costumer that is consistent, regardless of where it is manufacture .This can only be done if we use the same supplier

who can provide support everywhere in the world .

For example:

Made by Toyota not made in Japan

Quality , suitability, and best buy

• Quality – Quality is a simplest sense refer to the ability of the supplier to provide services

in conformance with specification .– Quality may also refer to whether the item performs in actual use to the

expectations of the original requisitioned , regardless of conformance with specification .

•Suitability •Refer to the ability of material , good , or services to meet the intended functional use .In a pure sense , suitability ignores the commercial consideration and refer to the fitness for use

•Best buy •The best buy puts equality , reliability and suitability into a sound procurement perspective. The best buy assumes , of necessity , a certain minimum measure of suitability but consider ultimate's needs , cost and procrability transportation , and disposal as well •For example :if the prices of copper increases from 1 to 1.5 USD or more , its relationship to aluminum or other substitutes may change

Total quality management (TQM)• Four features of TQM:

– Qulity must be integrated through out the organization’s activities – Their must be employ commitment to continuous improvement.– The goal of costumer satisfaction, and a sustametic and

continuous research process related to costumer satisfaction , drives TQM systems.

– Suppliers are partners in the TQM process .

TQM stresses quality as the integrated force in the organization to work, all stages in the production process must conform to

specification that are driven by the needs and wants of the final costumer

Quality Dimensions• The product quality is used as a competitive tool in the market .

• Supplier perform crucial part in the success of organization by providing quality goods and services .

• New management tools and techniques like MRP, JIT, and stockless purchasing all required that what is delivered by a supplier confirm the specification.

• Quality improvement is a continuing challenge for both buyer and seller .

• Close corporation/good relationships between buying and selling organization in necessary to achieve significant over time .

Eight Dimensions Of Quality

• Performance. The primary function of the product or services.• Features. The bells and whistles .• Reliability. The probability of failure with in a specified time period • Durability. The life expectancy .• Conformance. The meeting of specification.• Serviceability. The maintainability and ease of fixing • Aesthetics. The look , smell , feel , and sound .• Perceived quality. The image in the eye of costumer

From a procurement point of view , the ninth dimension should be “ procurability ” – the short – and long-term availability on the

market at reasonable prices and subject to continuing improvement

Quality function deployment (QFD)Is an important aspect of TQM and represent a method for developing

new product with higher quality with less cost and in less time .

For example : Toyota

Four stages of QFD process •Product planning , to determine design requirements .•Parts deployment , to determine parts characteristics .•Process planning , to determine manufacture requirements •Production planning ,to determine production requirement .

Supplier role in each stage •Product planning. Provide expertise in analyzing costumer requirements and generating a list of new product ideas •Part deployment . Provide alternative design concepts and estimates the manufacture cost of various parts •Process planning. Supplier can determine their own existing processes constrains •Production planning. Help develop performance measurements criteria for production planning

Benefits of QFD 1. Reducing or eliminating engineering changes during product

development.

2. Reducing product development cycle time.

3. Reducing startup cycle time .

4. Minimizing product failures and repair costs over the product life .

5. Creating product uniformity and reliability during production .

Supply management , well-functioning buyer-supplier relationship are a key contribution that purchaser and supply management can make

the organization TQM & QFD

Thank You