Topic 2.3 Purchasing Strategy and Practices, and their effect on materials management and

plant location

Learning Outcome: ILO1**of Module Descriptor

1. Examine and show an understanding of supply chain management, enterprise integration and logistics management.

Copyright@Dr SIU Brian KT

Agenda of Topics

• 2.3.1 Purchasing Strategy

• 2.3.2 Purchasing and Materials Management

• 2.3.3 Purchasing and Plant Location

• Supplementary the Boeing video and lean organization re-visited

• Class Discussion

Topic 2.3 Purchasing Strategy, Materials Management and Plant Location Copyright@Dr SIU Brian KT 2

• 2.3.1 Purchasing Strategy

• Large firms tends to have global sourcing

–e.g. large manufacturing companies

–Design product in Europe

–Manufacture in Asia

–Sell worldwide

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• Global sourcing process:

– Described in Topic 2.2“Manufacturing companies comparing cost, and value for their

products found that many elements of values can be PURCHASED (SUB-CONTRACTED in DEFENSE INDUSTRY) MORE COST EFFECTIVELY

TREND towards OUTSOURCING intensified when WALL STREET ANALYSTS focused on RETURN ON ASSETS as a MEASURE for VALUING CORPORATIONS”.

• Further Example: US commercial aviation company

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• 2.3.2 Materials Management

• Scope and objectives

– Low cost

• Material

• Capital

• Overhead

– High level service

• Quick response in production

• Quick response in market

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• QA

– Maintain quality of material

– Improve quality of material

• Support

– Sales

– Design

– Development

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• Compare and contrasts

– Purchasing

• Buying of material

– Procurement

• Purchasing

• Transportation

• warehousing

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• 2.3.3 Plant location

– Finished goods at point of manufacture

– Storage for unprocessed material e.g. iron core, coal

– Processed material

• Packing

• Special storage

– JIT delivery system

• Minimize need for inbound warehousing space

– Warehouse and Inventory account for large percent of product value

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• Materials manager

– Administers material flow in the firm

• Inventory level

• Delivery schedule

• Pricing

• Supplier information

• Disposal of scrap (obsolete) materials

– Materials management also uses data produced in MRP (materials requirements planning) and DRP (distributed requirements planning) – discussed in Topic 4.1

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– Forecasting

• helps in – Lowering safety stock requirements

– Make more pricing decisions

– Reducing product obsolescence cost

– Reducing stockouts

• What type of forecasts– Demand forecast

– Supply forecast

– Price forecast

• Planning horizon for forecasts– Long term; Medium-term; Short-term

– Which type of forecasts will firms carry out?

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• SAP - Enterprise resource planning (ERP) software and supply chain management

– ERP software with 21,000 companies and 12 million worldwide user (data at 2006)

– ERP (Enterprise Resource Planning) is enterprise wide information system which consolidate information from various functions/departments of an organisation.

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– ERP function

• Supply chain Management,

• Manufacturing,

• Operations,

• Customer relationship management,

• Human resource,

• Payroll,

• Accounts,

• Finance,W

• Warehouse Management

Topic 2.3 Purchasing Strategy, Materials Management and Plant Location Copyright@Dr SIU Brian KT12

• SAP (Systems,Applications and Products) is a name of a company which offers ERP solution for various industries to integrate information from various functions of that industry under one system.

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• SAP Case example: Firm with multiple centre

– The SAP database

– SAP multi-lingual feature

• e.g. Cannon in – German

– France

– Sweden

• How do we manage material management– Different language

– Currency conversion

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• SAP 2008

– With approximately 76,000 customers (includes customers from the acquisition of Business Objects) in over 120 countries, the company is listed on several exchanges, including the Frankfurt stock exchange and NYSE, under the symbol “SAP.” (For more information, visit www.sap.com)

– (*) SAP defines business software as comprising enterprise resource planning and related applications.

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• Example material management using SAP software

1. The Kowloon Moter Bus Holdings Limited

2. Towngas

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Topic 2.3 Purchasing Strategy, Materials Management and Plant Location Copyright@Dr SIU Brian KT17

• When KMB first began its franchised bus service in 1933, Hong Kong was a much simpler place. KMB deployed a fleet of only 106 single-deck buses to meet the travelling needs essentially in Kowloon.

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• Today, it’s a very different story. The drastic increase of population and fast pace of development in Hong Kong over the last seven decades have brought new towns and new roads that require efficient public transportation. Currently,

• KMB operates a fleet comprising some 4,200 double-deck and 250 single-deck buses. The majority of them are fully air-conditioned.

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• In 2001 The KMB Group companies, including KMB, Long Win and Sun Bus, make use of SAP e-business solutions - mySAP.com - to optimise its financial management and cost control processes, human resources operations and information management systems for supporting the delivery of reliable, comfortable, friendly and value-for-money bus services.

Topic 2.3 Purchasing Strategy, Materials Management and Plant Location Copyright@Dr SIU Brian KT20

• The Hong Kong and China Gas Company LimitedThe Hong Kong and China Gas Company Limited (Towngas) has been one of Hong Kong's leading utilities for 138 years, supplying town gas as well as providing maintenance and inspection services to over 1.2 million households and businesses locally

Topic 2.3 Purchasing Strategy, Materials Management and Plant Location Copyright@Dr SIU Brian KT21

• SAP's consultants implement eight SAP modules for Towngas

– Financials,

– Controlling,

– Materials Management,

– Sales and Distribution,

– Treasury,

– Asset Management,

– Plant Maintenance and

– Project System.

Topic 2.3 Purchasing Strategy, Materials Management and Plant Location Copyright@Dr SIU Brian KT22

• Supplementary Material

– Re-run of the Boeing Video (takes 30 minutes)

• Supply Chain Hub (ExoStar?)– 34,000 companies joining ExoStar

– Advantage: instead of dealing of over 5,000 suppliers, large firms can deal with less than 400

• Supply Chain Management as capability for continuous improvement in lean organization

• Class Discussion

– Material management, disposal of scrap or obsolete materials

Topic 2.3 Purchasing Strategy, Materials Management and Plant Location Copyright@Dr SIU Brian KT23

•Q&A (any questions?)• Suggested Reading:

– Grant06, Chapter 6

– Zeng, A.Z. (2003) Global sourcing: Process and design for efficient management. Suply Chain Management, 8(3/4), pp.367-373.(CS)(to be collected from Library assistance)

– The Bloomberg reference on MRP is used in Topic 4.1

Topic 2.3 Purchasing Strategy, Materials Management and Plant Location Copyright@Dr SIU Brian KT24