mba0810 om 17 purchase supply management

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Chapter 17

Purchasing andSupply

Management



Mahadevan (2007), ³Operations Management: Theory & Practice´, © Pearson Education

Purchasing & Supply Management

Issues to be addressed Every organisation engaged in procuring goods &

services faces certain important questions:

Did the organisation fetch a good price for the

procurement? Are the suppliers reliable?

Will they deliver good quality at the right time?

How efficient is the procurement process?

How can an organisation benefit from its suppliers?

Should the organisation develop new sources?

Purchasing & Supply Management is a structuredset of planning methodologies that enablesorganisations to answer the above questions




Purchasing & Supply ManagementCurrent Requirements

Shift in Quality Management Methods

Transition from Detection & Correction to

Prev

ention & E

limination Changing Cost Structure

Quick Response requirements

Need to create Lean organisations

Importance of New ProductDevelopment




Components of Expenditure(1989-94)

0

10

20

30

40

50

60

C

o m p o n e n t a s a % o f T o t a l

R M

P w r & F u l

S a l & W a g

C o n s S t o r

R e p . & M a i n

A d m n e x p .

S e l l E x p .

D e p r c n

89-90 90-91 91-92 92-93 93-94

Source: Financial Performance of Companies, ICICI, Jan.1995. No. of Companies studied: 565.




Purchasing & Supply ManagementT ransition in Recent Years

MultipleSupplier

LongLead Time

Short-termContract

Long distancefrom customer

High Quality Short Lead time Frequent Delivery

Well selected vendorwith short lead time

Geographically close& concentrated vendors

Single supplierwith high quality Co-operative relationshipusing long term contract




Procurement ProcessSteps

Need Identification Receive purchase request

Estimate the order size

Finalise the specifications

Vendor Selection Search for Vendors

RFP/RFQ

Negotiations

Order Placement Price Fixation

Delivery & payment terms

Purchase order generation

Order Receipt Follow-up with vendor

Receipt of material as per

specifications

Order Acceptance Inward goods inspection

Acceptance/Rejection

Updating stocks in stores

Payment,Vendor Rating Payment authorisation

Performance rating

Vendor record updation

Procurement Lead time (Internal)

Procurement Lead time

(External)

Procurement Lead time

(Internal)




Supply ManagementAlternative Approaches

Multiple Sourcing (Traditional)

Dealing with multiple suppliers every time anitem is procured and obtaining some gains from

the competitive scenario that a supplier faces inthe process

Single Sourcing

Developing long term collaborative relationship

based on mutual trust and dependability toobtain lower prices and several other benefitsthat were missed out in a multiple sourcingmodel




Multiple Sourcing & Single SourcingA

comparisonDeal with several suppliers for

every item procured

Set up competitive situationamong the suppliers when an

item needs to be procured

Engage in price negotiationevery time an item is procured

Withhold information; Obtainbetter price in the process

Suppliers face uncertaintyabout future business; Businessuncertainty weakens supplier

position

Benefit from their weaknesses,

confusions and fears

Deal with only one supplier forevery item, rarely with two

Avoid engaging in any conflictswith the supplier

Engage in joint cost reductionexercises to obtain low costinputs

Exchange relevant businessinformation; Obtain betterbusiness gains

Suppliers informed of futurebusiness prospects; Capacityand Technology investments onaccount of certainty

Benefit from cooperation,

mutual trust, & dependability

SingleSourcing

MultipleSourcing




Traditional supply management practicesHidden Costs

Sl.No.

Item of cost Amount spent(Rs.)

Percentageof annual

cost

1 Incoming materialstransportation

5,92,157.00 23.1

2 Telephone, Telex, Telegram etc. 4,51,290.00 17.6

3 Purchase department salaries 4,09,155.00 15.9

4 Incoming quality control storessalaries

2,82,668.00 11.0

5 Incoming material inspection 2,00,000.00 7.8

6 Receiving stores salaries 1,69,858.00 6.6

7 Stationary charges in purchasedept.

1,62,265.00 6.3

8 Travels and visits to supplierworks

96,802.00 3.8

9 Materials planning & control dept.salaries

90,452.00 3.5

10 Insurance charges for incomingmaterial

61,604.00 2.5

11 Other costs and depreciation 49,495.00 1.9

12 Total expenses for the year 25,65,746.00 100.0




Ranbaxy Laboratories

Recent initiatives Experiments with Associated Capsules

Sharing of data, process improvements,extensive training, technical support «

Supplier of printed aluminium foils withmultiple joints - solved quality (sealing)problems

Quality problems (black particles) in sugar Cast iron pipes in sugar plant changed after

detailed study, loan provided

Third vendor meet (1995) - name changedto Partners¶ meet, Vendor Awards instituted




Stages in Supplier Development

New VendorDevelopment

Search ExistingVendors

Volume of businessExisting history

Initial assessmentVisit of vendor worksSample orderBulk or regular order

Initial screening of potential sources

Prompt payment to suppliersEstablishing communication channelsMutual visits by buyer and supplier

Supplier visiting buyerTechnical assistanceFinancial assistance,Infrastructure supportInformation exchange

Coming closer to potential sources

A clear understanding of what isexpected of both the parties & theconsequences of not meeting them

Vendor rating systemSingle source certification Programme

Single SourceSelf-certified Deliveries

Towards single source




Supplier Certification Programme

Agenda forSingle Sourcing

Certification

programme

SupplierValue Analysis

Effort

ContractPerformance




Vendor RatingAn i

llustration

Yar t k f r asur rf r ance against each f act r

Excellent V Good Good Aver age Below Aver ageSl. No. Cr iter ion f or r ating Weights

5 4 3 2 1

1 Quality 28 < 1,000 ppm 1,001 - 5,000ppm

5001 - 10,000ppm

10,001 - 50,000 < 50,001 ppm

2 Delivery Reliability 24 100% scheduleadherence

1 day after due date

2 - 4 days after due date

5 - 7 days after due date

> 7 days after duedate

3 Price 21 Base price up to 1%above baseprice

2 - 3% abovebase price

4 - 5% abovebase price

> 5% above baseprice

4 Delivery terms 14 Free Delivery FOR(Chennai)

Only collectionfree

Chargeable basis Ex-works, Ex-Godown

5 Payment terms 13 60 days 45 days 30 days 10 - 15 days Immediate, Advance

Total 100

Vendor 1 Vendor 2

Sl. No. Cr ite

r ion

f o

r r a

ting Weigh

ts Perf or ance Rating Factor scor e Perf or ance Rating Factor scor e

1 Quality 28 792 ppm 5 140 5400 ppm 3 84

2 Delivery Reliability 24 1 day after due date 4 96 2 - 4 days after due date 3 72

3 Price 21 2 - 3 %above base price 3 63 up to 1% above base price 4 84

4 Delivery terms 14 FOR (Chennai) 4 56 FOR (Chennai) 4 56

5 Payment terms 13 45 days 4 52 60 days 5 65

Total 100 407 361

Vendor

r a

ting 81% 72%




Purchasing & Supply ManagementM

easures of Performance

Sl. o.rchasi g & Supply

erforma ce erspectivepplicable Measures*

1 Basic supplier per ormance j Total Cost o O nership

j ercent On time elivery ( elivery chedule dherence)

j Improvement rate in Lead time, uality elivery per ormancesj endor rating score

j a Material Inventory ( ays)

2 Long term partnership j Percentage o suppliers ho have entered into long term contract

j Percentage o value o purchase under long term contract

j ate o shrinkage o the supplier base

j umber o certi ied deliveries

j Total man-days spent in technical assistance or supplier problem solving

j uantum o inancial assistance to suppliers3 Joint cost reduction j Number and value o alue ngineering assignments done

j verage cost reduction achieved over the previous year

4 Ne capability building

initiativesj Number o import substitution exercises and the value o savings

j Number o ne product development exercises ith supplier participation

j Number o ongoing and completed target costing exercises ith the

suppliers




Make or Buy Decision

Relevant Factors

Recent spurt of BPO signals the tendency of organisations to buy rather than make in-house their requirements

Trend towards outsourcing in severalorganisations is driven primarily by fourfactors:

Cost

Core Vs Non-core activities

Managing capacity expansion

Strategic restructuring




E- ProcurementT hree emerging forms

E-Procurement denotes the set of strategies apurchase manager could employ to identifyappropriate sources of supply, finalise the

terms of the trade and place the order, allelectronically

Three E-market forms exists today

Collaborative market structures

Fundamentally enable market participants to exploitelectronic integration effects

Quasi-Market structures

One or a small group of either the buyers or sellerswill host, monitor and even moderate the behaviour

Neutral Market structures




B2B Market Structures

12 Dominant types Extranets Trading Partner Networks (TPNs) Web EDIs Buyer Centric Private Market Place

Supplier Centric Private Market Place Consortia Market Place Forward Auctions Reverse Auctions Neutral Auctions Exchanges

Aggregators Online Communities




B2B Market StructuresSome examp

les

1 Extranet www.aventail.com,www.adventnet.com,www.citrix.com.

2 Trading Partner Network (TPN) www.geis.com,www.nexprise.com

3 Web EDI www.1edisource.com

www.geis.com

4 Buyer Centric Private Market www.ariba.com, www.i2.com,www.commerceone.comwww.verticalnet.com.

5 Supplier Centric Private Market

6 Consortia Market Place www.avendra.com,www.aeroexchange.com

7 Seller-oriented (Forward) Auction Sites www.fedsales.gov

8 Buyer oriented (Reverse) Auction Sites www.freemarkets.com

9 Neutral Auctions www.dovebid.com,www.assettrade.com

10 Exchanges www.eSTEEL.com (Now part of New View),www.HoustonStreet.com

11 Catalogue Aggregators www.sciquest.com,www.officedepot.com





Implications of E-Procurement

Restructuring the supply chain will beinevitable for every organisation

Some suppliers with close relationships will be

required to participate in more competitivemechanisms

Still others will be replaced with fiercelycompetitive neutral market structures

Traditional channels and intermediaries may bedis-intermediated

Launching several pilot projects in the next2 years will be a valuable exercise fororganisations





ChapterHigh

lights

Recent developments have redefined the role of purchasing and supply management in organisations.These include:

New quality management initiatives

Changing nature of cost structures

Creating lean organisations

Quick response requirements

A typical procurement process consists of six steps:

Need Identification

Vendor Selection

Order Placement

Order Receipt

Order Acceptance

Vendor Rating





ChapterHigh

lights«

Traditionally organisations utilised a multiple sourcingmodel for vendor selection. However, in recent timesorganisations employ a single sourcing model. The singlesourcing model provides several advantages over the

traditional model. Supplier certification and vendor rating are important

components of modern day supplier development andmanagement initiatives

The make or buy decision is made on the basis of

Criticality of the item under consideration Cost

Capacity issues

Strategic restructuring initiatives

E Procurement offers several advantages to an

organisation such as reduced cost and lead time

mba0810 om 17 purchase supply management

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