- Vihang Naik

Elements of Purchasing / Procurement Cycle

Buyer Supplier Relationship

Self Certified Vendors / Suppliers

Method of Buying – under certainty , under risk ,

under uncertainty

Recognition of the need

Description of specification and requirements

Purchase Requisition

Check specifications /prices /suppliers

Determination of price and availability of materials

Purchase Records

Preparation and issue of purchase order

Price and terms finalization after negotiation

Select the supplierEnquiry , tender,import

Supplier’s Record

Specification File

Contd..

Supplier’s acceptance of purchase order ( order acknowledgement)

Delivery of material by supplier

Receiving and inspection of materials

Checking the invoice and authorizing payment of bills

Follow-up of supplier

Invoice checked with purchase orders and stores

receipt noteStorage and Record keeping

Closing the order

Introduction

Three Types of the Buyer Seller Relationship

1. Traditional or Transactional Relation

2. Collaborative Relation

3. Alliance Type Relation

Traditional or Transactional Relation Features1. Focus on price

2. Lack of sharing of data and information

3. Absence of concern

4. Market forces fix prices

5. E-procurement

6. Absence of basis for collaboration

Merits of Transactional relationships

1. Inspection of incoming material

2. Requirement of lower skilled personnel

3. Market forces of demand and supply

4. Less purchasing time and effort

Demerits of Transactional relationships

1. Transactional Relation cannot provide flexibility

2. Minimum after sales service

3. Quality with transactional relation will be just acceptable level

4. More Delivery Problems

5. High investment in expansion and monitoring

6. Buyers expect less effective performance

Collaborative and Alliance Relation

Features

1. Long term agreement allows suppliers an opportunity to show performance and reduce their costs

2. Suppliers are more likely to take initiative to reduce costs through standardization , variety reduction , value engineering , value analysis

3. Procurement of non-commodity items and service

4. Replace market forces with controlled competition ,

benchmarking , and advanced supply management pricing practices.

Three most important factors in a successful buyer-supplier relationship

(a) Two-way communication

(b) The supplier’s responsiveness to supply managements needs

(c) Clear product specification

Alliance Type Relation

Features

1. Improved quality - design of experiments and supplier certification

2. Reduced time to market

3. Improved technology flows from suppliers

4. Improved continuity of supply

5. Lowest total costs

Merits of Alliance Type Relation

1. Focus – Continuous improvements

2. Controlled through formal and informal connections , information systems and internal infrastructure

3. Existence of co-operation

4. High level of interdependence and commitment

5. Openness exist in all areas of relationships

6. Adaptability to changing conditions

Demerits of Alliance Type Relation

1. Instability

2. Capability limitation

3. Dependency

4. Concentration of benefits

5. Likelihood of conflicts in purchasing terms of contract

Choice of type of Relationship

Traditional relationship is favoured when:

i) There is a large no. of supplier who are equally good and the buyer has a wide range of choices

ii) Well-off suppliers willing to help a few chosen customers

Collaborative relationship is favoured when:

i) Both the parties have potential benefits

ii) Both the parties are flexible

Alliance type relationship is favoured when:

i) If a potent supplier is willing to join hands with a firm and wishes to take risks

ii) If a supplier who makes all semi-finished and finished components is located adjacent to a firm

iii) Customers those in the need of fast supply chain

(Institutional)

(Interpersonal)

(Little)

Transactional Collaborative Alliance

Time

Trust

Changes in Buyer-seller relations with time

Supplier’s Point of view

Globalization

A gradual shift from transactional to collaborative and alliance type relation

E.g. Hindustan Motors , Pithampur (M.P)

Dr. Kauro Ishikawa – one of the pioneers in the Japanese

Quality Movement

Traditional Approach

Two assumptions :-.

(a) Supplier will supply fallacious goods

(b) In-house resources are capable and available for the testing and certification

New Approach

Supplier will receive “Self-Certified Vendor Certificate” from the organization

Steps in Supplier Certification

1. Verify the capability of the supplier in meeting the needs of the organization in all areas

2. Motivate supplies to continue to improve their processes

3 levels-Quality Vendor, Certified Vendor, Excellent Vendor.

3. Improve key supplier processes in the value chain

4. Assess continuously the supplier’s capabilities

Guidelines for the implementation of Supplier Quality

Management Process(SQMP)

1.Assess organization’s needs

2.Assess internal , stakeholders needs and develop a plan

3.Design SQM system structure

4.Provide adequate training

5.Implement supplier policy deployment

Contd..

6. Hold supplier symposiums

7. Perform planning for supplier quality projects

8. Provide logistics improvement support

9. Train suppliers in the macro logistics management system

10. Create a system for continuous monitoring

11. Perform supplier certifications and review prior certifications

12. Review and revise the supplier quality management system

Green Channel Suppliers Elements- TIIA

Benefits:-1. Reduces all round liability & long term risk

2. Improves inventory control

3. Reduces packaging costs

4. Improves status with regulatory agencies

5. Improves supplier relations and productivity

What Do Buyer Gain ?

1. Multiplier effect of supplier gains

2. Reduced purchase costs

3. Reduced liability

4. Greater assurance of consistent and reliable supply

5. Improved inventory control

6. Elimination of unresponsive / non-committal suppliers

What Do Seller Gain ?

1. Reduced production cost-resource optimization

2. Assured client commitment / potential for more clients

3. Reduced liability

4. Improved relations with regulatory agencies

5. Competitive advantage over others

6. Improved management systems at marginal costs

What are the mutual gains ?

1. Mutual competitiveness

2. Improved relations-secured ties

3. Reduction production costs- grater margins

Features of all purchase decision making problems:-

a.Recognition of the existence of several possibilities

b.Prediction of the pay-off of each one of the strategies

c.Assessment of the orders of preference of the strategies

Classification of Decision problems:-

I.Decision Making Under Certainty

II. Decision Making Under Risk

Pay-off Matrix

Stock Number

Probability of Requirement Expected Total costs (Rs.)

0.1 0.5 0.3 0.1

0 1 2 3

0 --- 1000 2000 3000 1400

1 300 --- 1000 2000 530

2 600 300 --- 1000 310

3 900 600 300 --- 480

III. Decision Making Under Uncertainty

Type of Cost Apparatus A Apparatus B

Capital cost Rs. 50000 Rs. 75000

Operating cost per year

Rs. 10000 Rs. 5000

Maintenance expenses(Rs.)

P1 P2 P3 P4

Year 1 2000 2000 2000 1000

Year 2 2000 2000 1000 1000

Year 3 3000 3000 1500 1500

Year 4 7000 3000 1000 2000

Year 5 2000 7000 1000 1000

Life in years 4 5 4 5 4 5 4 5

Maintenance A

P1 P1 P2 P2 P1 P2 P1 P2

Maintenance B

P3 P3 P4 P4 P3 P3 P4 P4

Average Cost A

26000 23200 25000 23400 26000 23200 25000 23400

Average Cost B

27130 22900 27130 22900 25130 23100 25150 23100

Difference

A 0 300 3 500 870 100 0 300

B 1130 0 2230 0 0 0 150 0

Pay-off Table

Principles used in Decision under uncertainty :-

1. Rationality

2. Minimax Principle

3. Maximax Principle

4. Criterion of optimum (Hurwitz Criterion)

5. Principle of Regret