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Purchasing Supply
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MGT 634Purchasing and Supply Management
Dr Atul Kanyalkar
MGT634 Purchasing and Supply Management
The Course Objective• To
– provide an overview of the Purchasing and Supply
Management (PSM) Function
– understand the processes, procedures and policies
followed in PSM
– provide a brief understanding about PSM functionalities in
ERP systems
– provide the information about the tools and trends in PSM.
MGT634 Purchasing and Supply Management
At the end of this course
You will be able to
• Appreciate the significance of PSM function in
an organization
• Appreciate relevance of various processes
followed in PSM function
• Understand relevance of ERP in PSM.
MGT634 Purchasing and Supply Management
Procurement-Production-Distribution System
Manufactu-ring Plant
Selling Location 1
Selling Location 2
Selling Location 3
Port
Inbound logistic or Procurement Production Outbound logistic or
Distribution
Supplier 1
Supplier 2
Supplier 3
5
Supply Chain
Own
Manufactu-ring Plant 1
LL
Manufactu-ring Plant 3
Selling Location 2
Selling
Location 3
Selling Location 4
Selling
Location 5
Selling Location 6
Selling Location 1
Port 1
Port 2
Supplier 1
Procurement Production Distribution
Supplier 2
TP Manufactu-ring Plant 2
HUB StockiestRetailer
MGT634 Purchasing and Supply Management
The syllabus
1. PSM Concepts2. Staging Policies and PSM3. Purchasing Process4. Make or buy decisions5. Purchase Negotiations6. Ethics in Purchasing7. Legal Aspect in Purchasing8. EDI and e-sourcing9. Vendor development and evaluation
MGT634 Purchasing and Supply Management
The syllabus10. Vendor Managed Inventory11. Vendor Performance Measurement12. Capital Equipment Purchasing13. Service Sourcing14. Multi-Location Procurement Problem15. Purchasing Functionality in ERP16. Business Planning17. Supplier Certification
MGT634 Purchasing and Supply Management
The syllabus18. Material Storage and Warehouse Activities19. Warehouse Utilization20. Safety and Security Aspect21. Obsolescence22. Disposal of scrap23. Material Handling24. ERP in Warehouse25. New Product Development
MGT634 Purchasing and Supply Management
References
1. Dobler D. W. and Burt D. N., Purchasing and supply management, Tata McGraw-Hill Publishing company, 1996.
2. Monczka R., Trent R. and Handfield R., Purchasing: An integrated supply chain approach, South-western Cengage Learning. 2005.
3. Coyle J.J., Bardi E.J. and Langley(Jr.) C.J., The management of business logistics, 7th ed., South-western Cengage Learning, 2003.
4. Tony Arnold J.R. and Chapman S.N., Introduction to Materials Management, 5th ed., Pearson Education, 2004.
5. Cases and papers provided time to time
MGT634 Purchasing and Supply Management
Class Discipline• Attendance
• Class timings (attendance will be taken at the beginning)
• Audit – Attendance and minimum passing criterion
• Academic Dishonesty
MGT634 Purchasing and Supply Management
Course Evaluation
1. Assignments (30%) Case Analysis / Paper Reviews (Group & Individual) :
[30%]
• Tests (70%)1. Mid-term test & class tests: [20%] *
2. End-term Test: [50%] *
* Closed Book
MGT634 Purchasing and Supply Management
Teaching SequenceMon Tue Wed Thu Fri Sat Sun
1 23 4 5 6 7 8 9
10 11 12 13 14 15 1617 18 19 20 21 22 2324 25 26 27 28 29 301 2 3 4 5 6 78 9 10 11 12 13 14
15 16 17 18 19 20 2122 23 24 25 26 27 2829 30 31 1 2 3 4
Sep
Oct
Introduction to Purchasing and Supply Management
MGT634 Purchasing and Supply Management
Purchasing Supply Management : Terms
Marketing Manufact. & DistributionPurchasing
1st TierSupplier
2nd TierSupplier Customer
Value Chain Management
Demand Chain ManagementSupply Chain Management
Business Logistics
Physical DistributionPurchasing and Supply Management
Logistics Management
MGT634 Purchasing and Supply Management
Purchasing and Supply Management : Definitions
• Supply Management• It is the process responsible for the development and
management of a firm’s total supply system for both internal and external components.
• Purchasing• The purchasing function comprises of the essential activities
associated with the acquisition of the materials, services, and equipments used in the operation of an organization.
MGT634 Purchasing and Supply Management
Objectives• Support Production• Reduce Cost Of Materials• Ensure Consistent Quality• Reduce Inventory Investment• Improve Corporate Image – Supplier Relations• Maintenance of Records• Preserve and Conserve Materials in Stock• Improve Competitive Strength
MGT634 Purchasing and Supply Management
Purchasing and Supply Management Activities
• Materials Planning and Scheduling• Make or Buy • Procurement (materials, equipments, tools,
supplies and services)• Transportation• Warehousing• Salvage and Scrap Disposal
MGT634 Purchasing and Supply Management
Importance
• Cost• Quality• Sales• Profits• Product development
time
• Technologies and innovation
• Customer service• Competitive
advantage
Purchasing and Supply Management can have a major impact on organization success by influencing:
MGT634 Purchasing and Supply Management
Why Purchasing is ImportantIndustry Materials/Sales RevenuePetroleum 76%Automobile 70%Wood Products 61%Textile Mills 59%Food Manufacturing 59%Machinery 50%Electrical Equipment 49%Computers and electronics 44%
MGT634 Purchasing and Supply Management
Why Purchasing is Important
Purchasing as a profit producer
Profit = Revenues - Cost
Impact of Purchasing on Revenues
Impact of Purchasing on costs
Profit = Revenues - Cost
MGT634 Purchasing and Supply Management
Why Purchasing is ImportantProfit-Leverage Effect• Assuming an 8% margin
• THEREFORE, in this example, the Profit-Leverage Effect is . . .
08.0
15.12
000,100
000,250,1
Profit (Rs 100,000) = Revenues - Cost (Rs
100,000)
Profit (Rs 100,000) = Revenues (Rs.1,250,000) -
Cost
MGT634 Purchasing and Supply Management
Costs Involved • Basic Cost Of Materials• Government Levies And Taxes• Ordering Cost• Inventory Carrying Cost• Packaging And Packing Cost.• Material Handling Cost• Freight Cost• Insurance Cost• Wastage During Receipt , Storage etc….
MGT634 Purchasing and Supply Management
Interdepartmental Relations Production Sales And Marketing Finance Research And Development Engineering Quality Control Planning Legal Security
MGT634 Purchasing and Supply Management
Purchasing and Supply Management
• Procurement– Material– Source– Price– Quality– Quantity– Time– Place
MGT634 Purchasing and Supply Management
Purchasing and Supply Management
• Storage– Receive– Store– Track
MGT634 Purchasing and Supply Management
Purchasing and Supply Management
• Usage / Issue– Material– Sequence– Price– Quality– Quantity– Time– Place
MGT634 Purchasing and Supply Management
Purchasing and Supply Management
• Procurement
• Storage
• Usage
MGT634 Purchasing and Supply Management
Recap
• Introduction– Defn– Objectives– Activities– Importance– Costs
• Procurement / Storage / Usage
MGT634 Purchasing and Supply Management
Classification Of Materials
• Large number of materials.
• Planning, Procurement, storage, accounting of so many materials is a Problem.
• Common procedures for Planning, Control, storage, issue, accounting for all materials
MGT634 Purchasing and Supply Management
Basis Of Classification• Stage of conversion Process
– Direct (Raw materials / WIP etc)– Indirect
• Nature of Material– Finished goods – Semi-finished goods
• etc.
MGT634 Purchasing and Supply Management
Staging Policies
Engineer to order No stock at all. The purchase and order of materials takes place based on the specific customer order. E.g. construction companies and shipyards.
Make to order Only raw materials and components are kept in stock. Every customer is a specific project. E.g. beer and lemonade cans, basic construction materials
Assemble to order Only systems elements, modules or subassemblies are in stock at the manufacturing center, whereas final assembly takes place based on a specific customer order. E.g. cars, computers.
Make to stock Finished products are kept in stock at the end of the production process and are from there shipped to geographically dispersed customers. E.g. dairy products.
Design Ship
Purchase Inventory Ship
Purchase Inventory Manufacture Inventory Ship
Purchase Inventory Assemble Inventory ShipMake to Stock
Assemble to Order
Make to Order
Assemble
Manufacture
Manufacture
Manufacture
Assemble
Assemble
Staging Policies
Engineer to OrderPurchase
MGT634 Purchasing and Supply Management
Staging Policies
Engineer to order Procurement (?), Storage (?), Issue (?)
Make to order Procurement (?), Storage (?), Issue (?)
Assemble to order Procurement (?), Storage (?), Issue (?)
Make to stock Procurement (?), Storage (?), Issue (?)
Design Ship
Purchase Inventory Ship
Purchase Inventory Manufacture Inventory Ship
Purchase Inventory Assemble Inventory ShipMake to Stock
Assemble to Order
Make to Order
Assemble
Manufacture
Manufacture
Manufacture
Assemble
Assemble
Staging Policies
Engineer to OrderPurchase
Procurement Process
MGT634 Purchasing and Supply Management
11. Non-acceptance:return to supplier
8. Incoming inspectionand quality control
9. Invoiceprocessing
10. Supplier evaluation
7. Order monitoring andexpediting
6. Order processing
5. Quotation
4. Supplier selection
3. Purchase requisitions
Article file
Supplier file
Contract file
Major elements of the purchasing system
2. Make or Buy
1. Need
Make
MGT634 Purchasing and Supply Management
Staging Policies
Design Ship
Purchase Inventory Ship
Purchase Inventory Manufacture Inventory Ship
Purchase Inventory Assemble Inventory ShipMake to Stock
Assemble to Order
Make to Order
Assemble
Manufacture
Manufacture
Manufacture
Assemble
Assemble
Staging Policies
Engineer to OrderPurchase
ETO (for each materials)
• Requirement Generation• Receiving and analysing PR• Supplier selection• Right price• PO• Follow up• Receiving and accepting• Invoice approval and payment
MGT634 Purchasing and Supply Management
Staging Policies
Design Ship
Purchase Inventory Ship
Purchase Inventory Manufacture Inventory Ship
Purchase Inventory Assemble Inventory ShipMake to Stock
Assemble to Order
Make to Order
Assemble
Manufacture
Manufacture
Manufacture
Assemble
Assemble
Staging Policies
Engineer to OrderPurchase
MTS (for most materials)
• Supplier selection• Right price• Requirement Generation• Receiving and analysing PR• PO• Follow up• Receiving and accepting• Invoice approval and payment
1. Need
MGT634 Purchasing and Supply Management
Need
Need
Reorder point (Office stationary)
• Lot size • Lead time
MPS / MRP (ETO, ATO, MTS)
• Lot Size • Lead time• Dependent• Independent
Optimization (ETO, ATO, MTS)
• Lot Size • Lead time• Dependent• Independent
Project Plan (ETO)
• Technical & Unique requirements
• Well defined timelines
Capacity Plans (Machines)
• Technical & Unique requirements
• Well defined timelines
Strategic Plans (Services)
• Long term decisions• Timelines can be
uncertain• Plan and mitigation
plan
2. Make or Buy Decisions
MGT634 Purchasing and Supply Management
Make or Buy
• Strategic decision.
• “Precisely what business do we
really want to be in, to maximize the
use of our core competencies as we
proceed into future.”
MGT634 Purchasing and Supply Management
Make or Buy• Economics: It is not always economical for the
companies to make all the materials used in its manufacturing process.
• Abilities / Technical skills• Capacities• Quality• Design protection• Assured supply• •
MGT634 Purchasing and Supply Management
Make / Buy ? ?Making
• Lower production cost• Unreliable or unsuitable
suppliers• Assure adequate supply
(Quantity)• Utilize surplus labor capacity• Obtain desired quality• Protect special design or
quality• Expected benefit in long
term
Buying• Lower acquisition cost• Inadequate capacity• Reduce inventory costs• Ensure alternative sources
of supply• Item is protected by a
patent or trade license
MGT634 Purchasing and Supply Management
Make or Buy
• Choosing between making or buying an item is largely dependent on the Vertical Integration strategy of a company.
• Vertical integration - developing the ability to produce goods or services that are previously purchased
• It can take the form of forward or backward integration.
MGT634 Purchasing and Supply Management
Forward / Backward Integration
Planned Order
MGT634 Purchasing and Supply Management
Planned Order
Lead Time
Opening Period
Purchase OrderSpecific Information
PurchaseRequisition Planned Order
General information
Planned order is used for visibility
??
??
3. Purchase Requisitions
MGT634 Purchasing and Supply Management
Purchase Requisition
• Formal communication • to Purchase department • to initiate procurement activities • and procure the material mentioned in the
requisition.
XXX Department
Purchase Department Supplier
WarehouseProduction
MGT634 Purchasing and Supply Management
Purchase RequisitionThe PR Should contain following information
• Originator
• Material Specification
• Quantity and Unit of measure
• Delivery date and place
• Any other information
• Signed (approved)
• Account to be charged
4. Supplier Selection
MGT634 Purchasing and Supply Management
Strategic Sourcing Plan
• Discovery
• Evaluation
• Selection
• Development
• Management
MGT634 Purchasing and Supply Management
Strategic Sourcing Plan
• Engineer to Order
• Make to Order
• Assemble to Order
• Make to Stock
MGT634 Purchasing and Supply Management
Discovery
1. Supplies catalogue
2. Print media :Trade directories, trade journals, news papers, yellow pages
3. Salespersons
4. Trade exhibition, fairs, conferences
5. Colleagues in similar field
6. Internet
……..
MGT634 Purchasing and Supply Management
Evaluation
• Background• Informed
– Surveys– Financial checks– Facility visits– Quality– Capacity– Management / Systems– IT Systems – --------
MGT634 Purchasing and Supply Management
Supplier SelectionCheck the following
• Whether the items were purchased earlier ? (Straight rebuy)
• Any change since then ? (Modified rebuy / new buy)
• Are the items similar / related to any other item purchased ?
• Can we replace the item by any other item which we are currently purchasing ?
• Are the items standard ?
MGT634 Purchasing and Supply Management
Supplier Selection
Bidding• Value of Purchase• Clear specifications• Number of sellers available• Vendors interested in order• Time
Negotiation• Situations when cost
estimates are difficult• Price is only the only
important factor• Supplier may have better
knowledge then the buyer
Bidding and then negotiation
MGT634 Purchasing and Supply Management
Overview of Vendor Selection Criteria
MGT634 Purchasing and Supply Management
Prioritization MatrixWeight Score Weighted
ScoreQuality
Reliability
Capability
Financial
Others
Final result
MGT634 Purchasing and Supply Management
Supplier Development????????
-Alignment of systems-Alignment of expectations-Knowledge transfers- -------
MGT634 Purchasing and Supply Management
Managing Suppliers•Feedbacks•Situation recheck•Corrective actions•Realignment•……………
MGT634 Purchasing and Supply Management
Supplier Selection Issues
• Size Relationship• Usage of International Suppliers• Competitors as Suppliers• Countertrade Requirements• Social Objective
Pricing
MGT634 Purchasing and Supply Management
Sources of Price Information
Price
Commodity Markets• Exists for basic materials (grain, oil,
sugar etc.)• Demand and supply• Long term prices
Price Lists• For standard products• Vendors catalog• Quantity discounts
available
Price Quotations• For both Standard and
specialty items• Useful for promoting
competition• RFQ (Should contain the
manner in which supplier should submit offers)• Specifications• Quantity• Period
Negotiations• For long term relationships or for high cost items• Time consuming Process• Can lead to significant quality and price benefits
MGT634 Purchasing and Supply Management
Total Cost of Ownership• Acquisition Costs
• Price• Planning costs• Duties• …………………..
• Ownership costs• Downtime costs• Risk • Cycle time• ………………….
• Post Ownership Costs• Warranty costs• Product Liability• …………………..
• Remember: As a purchasing Manager you should also focus on suppliers manufacturing cost
MGT634 Purchasing and Supply Management
Paper Mill Case
• Purchased Fabric Belt • 12 FT X 60 FT (Circumference)• 25000 USD• Lasts for 40 days• Belts break on the machine• Replacement takes 8 Hrs (16 man hours @ 45 USD per hour)• Per day downtime cost of the plant 100,000 USD• 4 – 6 belts are kept in inventory• Industry average life of a belt is 60 days • Benchmark belt life span 470 days @ 500,000 USD• There are 20 plants across the world
MGT634 Purchasing and Supply Management
Negotiations and e-Sourcing/Auctions
Purchase requisitions
Supplier Selection
Negotiations
E-Sourcing/Auctions
Negotiations / Discussion
RFQ / Quotations
Learning Curve
MGT634 Purchasing and Supply Management
Learning curve
• Improvement in output due to learning• The learning rate represents productivity improvement as
production doubles.• Improvement in
– Labour work style– Process modification– Product modification
• Applicable when– New product / process– Complex product– Labour intensive
MGT634 Purchasing and Supply Management
Learning curveCumulative Units
(N)Total Labour Hrs
(A)Avg Labour Hrs per
unit(B)
Learning Rate (%)(C)
= (Bn-1-Bn)/Bn-1
1 20 20 -
2 34 17 15.0
4 58 14.5 14.7
8 100 12.5 14.8
16 168 10.5 16.0
32 288 9.0 14.3
64 493 7.7 14.4
MGT634 Purchasing and Supply Management
Quantity Discounts
• Discounts on purchase of higher quantities• Tradeoff between
– Discounts– Inventory carrying costs– Storage costs– Obsolescence costs
• The order uncertainty getting transferred to the buyer.
MGT634 Purchasing and Supply Management
Quantity Discount
• 1 Unit @ $ 85• 3 Units @ $ 80• 6 Units @ $ 70• 10 Units @ $ 69
• Find Incremental price and units for the order• Incremental price per units
MGT634 Purchasing and Supply Management
Quantity Discount
• 1 – 5 Unit @ $ 10 Each• 6 – 10 Units @ $ 8 Each• 11- 20 Units @ $ 7.8 Each• 21- 100 Units @ $ 7.6 Each
• Find Incremental price (for max order) and units for the order.
• Incremental price per units.
Negotiations
MGT634 Purchasing and Supply Management
What Is Negotiation?
A process of formal communication,
either face-to-face or via electronic means,
where two or more people come together
to seek mutual agreement about an issue
or issues.*Purchasing & Supply Chain Management, Monczka, Trent, Handfield
MGT634 Purchasing and Supply Management
What Is Negotiation?
Involves the
management of time,
information,
and power
between individuals and organizations who are
interdependent*Purchasing & Supply Chain Management, Monczka, Trent, Handfield
MGT634 Purchasing and Supply Management
When Negotiation Required?• Is bid process inadequate?• Are many non-price issues involved?• Is contract large?• Are technical requirements complex?• Does contract involve plant, equipment or/and
customization?• Does contract involve a partnership?• Will supplier perform value-adding activities?• Will there be high risk or uncertainty?*Purchasing & Supply Chain Management, Monczka, Trent, Handfield
MGT634 Purchasing and Supply Management
Non-price NegotiationQuality
• Specification compliance
• Performance compliance
• Test criteria
• Rejection procedures
• Liability
• Reliability
• Design changes
Support
• Technical assistance
• Product research, development, and/or design
• Warranty
• Spare parts
• Training
• Tooling
• Packaging
• Data sharing, including technical dataSupply
• Lead times
• Delivery schedule
• Consignment stocks
• Expansion options
• Supplier inventories
• Cancellation options
Transportation
• FOB terms
• Carrier
• Commodity classification
• Freight allowance/equalization
• Multiple delivery points
* From Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin
MGT634 Purchasing and Supply Management
Negotiation Strategy : Basic Steps
* From Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin
1. Develop the specific objectives (outcomes) desired from the negotiation
2. Gather pertinent data
3. Determine the facts of the situation
4. Determine the issues
5. Analyze the positions of strength for both (or all) parties
6. Set the buyer’s position on each issue, and estimate the seller’s position on each issue based on your research
7. Plan the negotiation strategy
8. Brief all persons on the negotiation team
9. Conduct a dress rehearsal (Devil’s Advocate)
10. Conduct the actual negotiations with an impersonal calmness
11. Record the process and outcome
MGT634 Purchasing and Supply Management
Negotiation planning and execution
MGT634 Purchasing and Supply Management
“Game plan” for Negotiation
* From Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin
MGT634 Purchasing and Supply Management
The “Zone of Negotiation”
The overlap between what theBuyer will pay and what theSeller will accept defines the
Zone of Negotiation
$220,000 $230,000 $240,000 $250,000 $260,000 $270,000 $280,000 $290,000 $300,000Buyer's Range
Seller's Range
MGT634 Purchasing and Supply Management
The “Zone of Negotiation”
There is a gap between what theBuyer will pay and what the Seller
will accept. There is NO DEALwithout Creativity or Compromise
$220,000 $230,000 $240,000 $250,000 $260,000 $270,000 $280,000 $290,000 $300,000Buyer's Range
Seller's Range
MGT634 Purchasing and Supply Management
Sources of Negotiating Power
• Informational power Access to information to be used for persuasion using facts, data etc. (Only un/favorable is presented)
• Reward power One party can offer something of value expecting something in return. Give / Take.
• Coercive power One party can withdraw something of value.
• Legitimate power Position of the person
• Expert power Special form of informational power
• Referent power Personal qualities and attributes of individuals*Purchasing & Supply Chain Management, Monczka, Trent, Handfield
MGT634 Purchasing and Supply Management
Being an Effective Negotiator• Willing to compromise or revise goals• View issues independently • Establish upper and lower ranges for each major
issue• Explore additional options• Build on common ground between parties• Avoid making irritating comments• Avoid argumentation by presenting too many reasons
(quickly)• Make fewer counterproposals*Purchasing & Supply Chain Management, Monczka, Trent, Handfield
MGT634 Purchasing and Supply Management
Overcoming Tactics
• Modify tactics when they don’t work• Prepare for likely tactics to be used against
you• Tactics are more effective on you if you are
unprepared, stressed, under severe deadlines, inexperienced, fatigued, or disinterested
• Try not to react without thinking*Purchasing & Supply Chain Management, Monczka, Trent, Handfield
MGT634 Purchasing and Supply Management
Influencing factors in Negotiations• Low ball / High ball • Honesty / Openness• Questions• Breaks• Trial Balloon• Price increase• Best and final offer• Silence• Planned concessions• Venue
*Purchasing & Supply Chain Management, Monczka, Trent, Handfield
MGT634 Purchasing and Supply Management
Win-Win Negotiation
• Win-lose – competitive or distributive bargaining
• Win-win – collaboration or integrative bargaining
*Purchasing & Supply Chain Management, Monczka, Trent, Handfield
MGT634 Purchasing and Supply Management
Win-Win Methods
• Expand the pie Ways to expand resources or value obtained
• Logroll Tradeoff of disagreeing issues
• Cost Cut Join hands in cutting costs and sharing benefits
• Bridge Involves inventing new options to satisfy both parties
• Non specific compensation One party achieves objective other gets something of value as reward
*Purchasing & Supply Chain Management, Monczka, Trent, Handfield
Ethical Issues
MGT634 Purchasing and Supply Management
Ethics
• The set of moral principles or values guiding our behavior
• In business, ethical behavior is the use of recognized social principles involving justice and fairness
*Purchasing & Supply Chain Management, Monczka, Trent, Handfield
MGT634 Purchasing and Supply Management
Rules of Ethical Behavior• Buyers must commit their attention and energies
for the employer’s benefit rather than their own
• Buyers must act ethically towards suppliers and potential suppliers
• Buyers must uphold the ethical standards set forth by the profession
*Purchasing & Supply Chain Management, Monczka, Trent, Handfield
MGT634 Purchasing and Supply Management
Pressures Toward Unethical Behavior
• Purchasing has control over large sums of money.
• Incentives linked to cost reduction.
• Suppliers may have great pressure to meet aggressive sales goals, leading to questionable sales practices
• *Purchasing & Supply Chain Management, Monczka, Trent, Handfield
MGT634 Purchasing and Supply Management
Risks of Unethical Behavior
• The act may also be illegal• At a minimum, the buyer may lose his/her job
– Personal bankruptcy– Jail
• There is a risk to a buyer’s professional reputation
• Risk to the buying company’s reputation*Purchasing & Supply Chain Management, Monczka, Trent, Handfield
MGT634 Purchasing and Supply Management
Types of Unethical Behavior
• Reciprocity – Preferential treatment to suppliers who are also customers to the organization.
• Personal buying – Purchasing for personal needs of the employees.
• Accepting supplier favors – Gifts and favors.• Sharp practices – Misrepresentation just short of fraud. • Financial conflicts of interest – investment in other
companies.
*Purchasing & Supply Chain Management, Monczka, Trent, Handfield
MGT634 Purchasing and Supply Management
Reciprocity• Giving preferential treatment to suppliers who
are also customers• Restrain competition• Must rely on legitimate performance criteria
to evaluate supplier capability
MGT634 Purchasing and Supply Management
Personal Buying• Purchasing department purchases materials or
goods for the personal needs of its employees• Subject to trade diversion laws• Some exceptions do exist• Often a gray area as to what to do
MGT634 Purchasing and Supply Management
Accepting Supplier Favors
• Accepting gifts• May effect a buyer’s judgment• At what point does the gift represent showing
appreciation vs. and attempt to influence future buying behavior
• Gifts from potential suppliers are particularly questionable
MGT634 Purchasing and Supply Management
Sharp Practices
• Willful use of misinformation• Exaggerating problems• Requesting bids from unqualified suppliers
solely to drive down prices from qualified suppliers
• Gaining information unfairly through deception
MGT634 Purchasing and Supply Management
Sharp Practices
• Sharing information on competitive quotations
• Not compensating suppliers for design or other work
• Taking unfair advantage of a supplier’s financial situation
• Lying or misleading
MGT634 Purchasing and Supply Management
Financial Conflicts of Interest
• Direct financial interest in a supplier company• Buying companies typically require disclosure
by buyers having significant personal financial interest
• Similar to insider knowledge in buying and selling stocks
MGT634 Purchasing and Supply Management
Behaviors
Maintain highest standard.
No gifts / favors
Slow but steady
Remember: These are digital decisions in terms of actions and occurrences
MGT634 Purchasing and Supply Management
Cases
• Gift delivered at home ?
• Equipment purchased higher then the normal price ?
• Unwanted equipment purchased ?
MGT634 Purchasing and Supply Management
Cases
• You joined a new company and found that some of the employees are suppliers.
• Find other employees accepting / demanding gifts from suppliers
Legal Aspects
MGT634 Purchasing and Supply Management
Contract Terms• Ex-works: In an ex-works contract, the purchaser
accepts full responsibility for arranging transportation from the supplier’s location.
• For Purchaser this involves: – Arranging transportation, insurance, and
documentation to move the goods to the required source port (air or sea)
– Have them loaded on to the mode of transport– Transported to, and unloaded at the destination port– Cleared through customs and transported to the
purchaser’s location.
MGT634 Purchasing and Supply Management
Contract Terms
• Free alongside (FAS): In this arrangement, the supplier agrees to deliver to the (source) port specified by the purchaser
• For Supplier this involves – Arranging transportation, insurance, and documentation to
move the goods to the required source port (air or sea)• For Purchaser this involves
– Have them loaded on to the mode of transport– Insured, transported to, and unloaded at the destination port– Cleared through customs and transported to the purchaser’s
location.
MGT634 Purchasing and Supply Management
Contract Terms• Free on board (FOB): Here the supplier pays for and
arranges loading on to the outward-bound transportation and thereafter the purchaser becomes responsible.
• For Supplier this involves – Arranging transportation, insurance, and documentation to
move the goods to the required source port (air or sea)– Have them loaded on to the mode of transport
• For Purchaser this involves– Insured, transported to, and unloaded at the destination port– Cleared through customs and transported to the purchaser’s
location.
MGT634 Purchasing and Supply Management
Contract Terms
• Cost and Freight (C&F): This is a split responsibility arrangement in that the supplier arranges and pays for transportation to an agreed point,
• For Supplier this involves – Arranging transportation, insurance, and documentation to move
the goods to the required source port (air or sea)– Have them loaded on to the mode of transport– Transported to, and unloaded at the destination port
• For Purchaser this involves– Pay insurance from when the goods are loaded on board.– Cleared through customs and transported to the purchaser’s
location.
MGT634 Purchasing and Supply Management
Contract Terms
• Cost, Insurance, and freight (CIF): This is similar to C&F But here the insurance during transportation is responsibility of the supplier.
• For Supplier this involves – Arranging transportation, insurance, and documentation to
move the goods to the required source port (air or sea)– Have them loaded on to the mode of transport– Insured, transported to, and unloaded at the destination port
• For Purchaser this involves– Cleared through customs and transported to the purchaser’s
location.
MGT634 Purchasing and Supply Management
Contract Terms
• Delivered: This is the opposite of ex-works in that the supplier has total responsibility for the goods, their transportation, insurance, and all documentation until they are delivered to the purchaser.
• For Supplier this involves – Arranging transportation, insurance, and documentation to
move the goods to the required source port (air or sea)– Have them loaded on to the mode of transport– Insured, transported to, and unloaded at the destination port– Cleared through customs and transported to the purchaser’s
location.
MGT634 Purchasing and Supply Management
Contract Terms
MGT634 Purchasing and Supply Management
Contract Terms Supplier Port Ship Transit Ship Port Purchaser
Ex Works
TransportSupplier
Purchaser
InsuranceSupplier
Purchaser
Free Alongside
TransportSupplier
Purchaser
InsuranceSupplier
Purchaser
Free On Board
TransportSupplier
Purchaser
InsuranceSupplier
Purchaser
Cost and Freight
TransportSupplier
Purchaser
InsuranceSupplier
Purchaser
Cost Insurance and Freight
TransportSupplier
Purchaser
InsuranceSupplier
Purchaser
Delivered
TransportSupplier
Purchaser
InsuranceSupplier
Purchaser
EDI and E-Sourcing
MGT634 Purchasing and Supply Management
Groups and cases
• Metal craft (12 Oct)
• E Sourcing strategy (13 Oct)
• Bose (19 Oct)
• Multisite case (20 Oct)
MGT634 Purchasing and Supply Management
Types of e-Procurement1. Web-based ERP (Electronic Resource Planning): Creating and
approving purchasing requisitions, placing purchase orders and receiving goods and services by using a software system based on Internet technology.
2. e-MRO (Maintenance, Repair and Operating): The same as web-based ERP except that the goods and services ordered are non-product related MRO supplies.
3. e-sourcing: Identifying new suppliers for a specific category of purchasing requirements using Internet technology.
4. e-tendering: Sending requests for information and prices to suppliers and receiving the responses of suppliers using Internet technology.
5. e-reverse auctioning: Using Internet technology to buy goods and services from a number of known or unknown suppliers.
6. e-informing: Gathering and distributing purchasing information both from and to internal and external parties using Internet technology.
MGT634 Purchasing and Supply Management
Reverse Auctions• When possible ?
• Requirements ?
• Steps ?
MGT634 Purchasing and Supply Management
Reverse Auctions
• Problems ?
MGT634 Purchasing and Supply Management
Electronic Data Interchange
• The EDI (Electronic Data Interchange) enables
customers and suppliers to electronically exchange
transaction information such as PO, invoices, and
MRP.
• Simplifications: This eliminates time consuming
paperwork and facilitate easy communication
between buyer and supplier
MGT634 Purchasing and Supply Management
Electronic Data Interchange• External Supplier
– RPM Supplier• E-mail to the supplier• Uploading the information on the portal
– Subcon / TPM• E-mail to the supplier• Uploading the information on the portal• Linkage through ERP system
• Internal Supplier– Intercompany
• E-mail to the supplier• Linkage through ERP system
MGT634 Purchasing and Supply Management
Electronic Data Interchange• Purchaser: Requirement generation• Purchaser: Scheduled line is generated against blanket order /
Scheduling agreement and sent to the supplier and accounts electronically
• Supplier: receives and acknowledges the order.• Supplier: sends the shipping notification while dispatching the
material.• Purchaser: records the shipping notification in expected
receipt file.• Purchaser: on receipt of the material the entry is made
against expected receipt and the scheduling line and an intimation is sent to accounts payable.
• Purchaser: accounts payable dept electronically transfer the payment to the suppliers account.
• Purchaser: sends remittance advice to the supplier.
MGT634 Purchasing and Supply Management
Electronic Procurement
• Disadvantages– Security of electronic messages– Lack of face-to-face contact– Other technological concerns
• Standard protocols• System reliability
Purchasing
MGT634 Purchasing and Supply Management
Purchasers’ Duties
• Know the market for their commodities; ascertaining price
• Understand the laws (tax, contract, patent) … • Process purchase requisitions and quotation requests• Make supplier selections• Negotiate prices and conditions of sale• Place, follow-up, expedite purchase orders• Supplier relations• Maintain ethical behavior
• Do you see any problem
SOX
MGT634 Purchasing and Supply Management
Strategic Sourcing and Planner Buyer
• Strategic Sourcing – Know the market for their commodities; ascertaining price– Understand the laws (tax, contract, patent) … – Make supplier selections– Supplier relations– Negotiate prices and conditions of sale– Maintain ethical behavior
• Planner Buyer– Determine material requirements– Generate purchase requisitions, PO and schedules.– Issue and controlling Shop orders for factory – Place, follow-up, expedite purchase orders– Maintain ethical behavior
6. Order Processing
MGT634 Purchasing and Supply Management
Purchase Order
• Significance
• Parts of PO
MGT634 Purchasing and Supply Management
Purchase Order.
• The PO is a legal offer to purchase.• Once accepted by supplier it becomes a legal
contract for delivery of goods according to the terms and conditions specified in the purchase agreement.
MGT634 Purchasing and Supply Management
Major Parts of a P.O.• Fixed prices and quantities (including taxes)• Buyer’s right of inspection and rejection• Right to make specification/design changes• Holding buyer harmless, patent infringement• Supplier’s right to assign contract to a third party• Instructions regarding risk of loss• Statement of credit and payment terms• Identification• Packing and preparation• Statements of warranty
MGT634 Purchasing and Supply Management
Major Parts of a P.O.
• Shipment quantities, dates and place• Assignment of seller’s rights• Arbitration clause• Right to cancel unshipped portion• And other relevant information etc.
7. Order Monitoring and Expediting
MGT634 Purchasing and Supply Management
Order Monitoring and Expediting
• Significance
MGT634 Purchasing and Supply Management
Follow-up (Including expedite and de-expediting)
• Supplier is responsible for delivery.• Purchase department is responsible for
ensuring the delivery.• Follow-up is required for
– Changes in the plans– IRA issues– QA issues in previous delivery– Product structure change – etc.
8 Incoming Inspection and Quality Control
MGT634 Purchasing and Supply Management
Incoming Inspection and Quality Control
• Significance
MGT634 Purchasing and Supply Management
Receiving
• Warehouse is responsible for receiving the goods. They should confirm– Item– Quantity– Place– Absence of transit damage– Open Purchase Order– Delivery due date– Provide acknowledgement.
MGT634 Purchasing and Supply Management
Receiving
• Mark the goods• Store the goods• Operate information system• Communicate to QA and other concerned
departments
Self Certification
MGT634 Purchasing and Supply Management
Self Certification
• Significance
• Where to use– Staging policies– Lot size and consumption– Stocking policies
MGT634 Purchasing and Supply Management
Supplier Self Certification• Companies spend a large amount of money on
quality inspection of incoming material
• This is time consuming and complicated.
• Supplier self certification is therefore very useful.• In this supplier certifies and assures that the
quality of the material is as per the company standard.
• Cost implication ?
MGT634 Purchasing and Supply Management
• STEPS– Agreeing upon common Specs.– Process Parameter standardization.– Vendor audits and Inputs.– Trial Lots.– Roll out.
Supplier Self Certification
9. Invoice Processing
MGT634 Purchasing and Supply Management
Invoice Processing
• Significance
• Factors to be considered
MGT634 Purchasing and Supply Management
Payment
• Accounts is responsible for payment (after QA release of the received material).
• Three way reconciliation– Suppliers invoice– PO– Received quantity
• To confirm– Conditions– Prices– Quantities
• The accounts should be very efficient and accurate
10. Supplier Evaluation
MGT634 Purchasing and Supply Management
Supplier evaluation• Why
– Better decision making– Better communication– Feedback– Motivate and direct behavior
• Problems – Too much data– Wrong measures– Conflicting measures– Drive wrong performance
MGT634 Purchasing and Supply Management
Performance Measurement - Importance
• Systematizes organizational memory• Pool information across plants• Remove excuse for poor quality• Ensure consistent policies across supplier and
plants• To identify the supplier performance and
improvement opportunities.• Helps in decision making.• Negotiations• Resource allocations etc.
MGT634 Purchasing and Supply Management
Performance Measurement
Characteristics of good performance measure• The measurement should be usable.• Without any scope for adjustment• Communicate / Agreed• Simple to measure
MGT634 Purchasing and Supply Management
• Strategically Significant• Driving “Right”
Behaviors• Balanced • Aligned• Owned• Linked to Compensation• Actionable• “Easy” to Collect
Measures Must Be ...
Measures
MGT634 Purchasing and Supply Management
BalanceBalance is Assessed and Viewed Across Three Specific Dimensions:
1. Financial v. Customer v. Process v. People2. Leading v. Lagging3. Efficiency v. Effectiveness
Why Does Balance In These Dimensions Matter?Why Does Balance In These Dimensions Matter?
1. Complete Business Perspective2. Causality3. Cost (Time, Resources, Investment) & Quality
MGT634 Purchasing and Supply Management
Example Measure Set F-C-P-P [1]Leading v. Lagging
Effective v. Efficient
[1] Financial v. Customer v. Process v. People (from The Balanced Scorecard)
Percent Sales from New Products Financial Lagging Effectiveness
Net Trade Sales Total Growth Financial Lagging Effectiveness
NPV of NPD Pipeline (NPDC Data) Financial Leading Effectiveness
Market Share (TRx) Customer Lagging Effectiveness
Line Item Fill Rate Process Lagging Effectiveness
Percent Growth of Net Trade Sales from Existing Products
Financial Lagging Effectiveness
Manufacturing Compliance Index Process Lagging Effectiveness
Adverse Events/Product (Top 5 Products) Customer Lagging Effectiveness
S/G&A Productivity Process Leading Efficiency
R&D Productivity Process Leading Efficiency
Resource Alignment Index People Leading Effectiveness
Percent Critical Positions Filled People Leading Effectiveness
Acceptable/Satisfactory
Caution/Additional Work Req’d.
Unacceptable;Additional Work Req’d.
Balanced Measures
MGT634 Purchasing and Supply Management
Balanced Process MeasuresSuppliers Inputs Process Outputs Customers
• S-1• S-2• S-3
• I-1• I-2• I-3
• O-1• O-2• O-3
• C-1
• C-2
• C-3
InputMeasures
ProcessMeasures
OutcomeMeasures
Leading
Lagging
Effectiveness
Efficiency
X X
X
X X X
X
MGT634 Purchasing and Supply Management
The Operational Definition• A Precise Description that communicates how to arrive at a value for
an objective.– Identifies Who, What, Where, When, How
• Who = Measure Owner• What = What to Measure (Clear, Specific, Objective)• Where = Where the Measure Data Resides• When = When Measured & Reported• How = How to Measure (Mathematical Formula) (Longer
Term)
Not all of the Measure Playbook attributes need to bedefined at the same time… it’s okay to let them mature as the
measure focus matures.
Not all of the Measure Playbook attributes need to bedefined at the same time… it’s okay to let them mature as the
measure focus matures.
Measure Playbook
MGT634 Purchasing and Supply Management
“A Well-Dressed Measure”
33
Data Legend and Chart and Data
Owner Information, Update Frequency
Description, Explanation, and
Action Plan
55
Quick Reference LegendI.E. “Trend Up = Good”
44
Clean Data Display, Control Limits, Mean, and Trend Line and Goal
22Title
11
MGT634 Purchasing and Supply Management
Performance Measurement
SP = ∑Wi X Pi
– Wi – Weight attached to the performance characteristic i
– Pi – Performance of characteristic I
– It can be • Quality (material / documentation )• Delivery• Quantity • Flexibility• Technical Contribution etc.
• Or treat individual performance characteristic separately.
MGT634 Purchasing and Supply Management
Measures Implementation• Drive down from OGSM• Develop specific measures• Identify the base line data• Finalize details• Communicate and implement• Measure and identify projects.
MGT634 Purchasing and Supply Management
Measures• Engineer to order
• Make to order
• Assemble to order
• Make to stock
11 Non Acceptance – Return to Supplier
MGT634 Purchasing and Supply Management
Return to supplier• Based on the PO
• Local / Imported • Rework / Destroy • Credit note
Others
Multi-location problem
MGT634 Purchasing and Supply Management
MSPPDS: Multi-Site Procurement Production Distribution System
Manufactu-ring Plant 1
Manufactu-ring Plant 2
Selling Location 2
Selling
Location 3
Selling Location 4
Selling
Location 5
Selling Location 6
Selling Location 1
-Alternate sourcing for manufacturing and selling locations -Opportunities for reduction in costs and improved availability represented by solid and dotted lines.
Port 1
Port 2
Supplier
Inbound logistic or Procurement Production Outbound logistic or
Distribution
MGT634 Purchasing and Supply Management
MSPPDS: Multi-Site Procurement Production Distribution System
Manufactu-ring Plant 1
Manufactu-ring Plant 2
Selling Location 2
Selling
Location 3
Selling Location 4
Selling
Location 5
Selling Location 6
Selling Location 1
-Alternate sourcing for manufacturing and selling locations -Opportunities for reduction in costs and improved availability represented by solid and dotted lines.
Port 1
Port 2
Supplier
Inbound logistic or Procurement Production Outbound logistic or
Distribution
MGT634 Purchasing and Supply Management
EXTENT OF CONTROL
• Centralized v/s Decentralized Purchase– Centralized
- Ease Of Operation, buyer specialization, Less ordering cost, control.
- Consistency- Better Pricing, more clout, better continuity- Better Maintenance Of Records
MGT634 Purchasing and Supply Management
EXTENT OF CONTROL
• Decentralized - Better Time To React- Developing Local Vendors- Better Control On Local Vendors- Close Co-ordination with Plant
MGT634 Purchasing and Supply Management
Optimization
• GLPK• Path command• Program file / Data file• Set / Param / Var / Min / Max / s.t. / end.
MGT634 Purchasing and Supply Management
Simulation
• Random parameters interacting with each other.
• Arena
• Vensim / Stella
Purchasing Functionality of ERP
MGT634 Purchasing and Supply Management
ERP - What is it?
– ERP is a generic term used to describe a comprehensive information system designed to
integrate all the business processes found in an enterprise.
– Efficiency and productivity are improved through the integration of information and the removal of duplicate information and processes.
MGT634 Purchasing and Supply Management
MRP OVERVIEW
MGT634 Purchasing and Supply Management
MRP RUN
MGT634 Purchasing and Supply Management
PLANNING FILE AND MRP
MGT634 Purchasing and Supply Management
PLANNING SEQUENCE
MGT634 Purchasing and Supply Management
BOM EXPLOSION
MGT634 Purchasing and Supply Management
MRP: NET REQUIREMENT CALCULATION
MGT634 Purchasing and Supply Management
LOT SIZING PROCEDURES
MGT634 Purchasing and Supply Management
MRP SCHEDULING
MGT634 Purchasing and Supply Management
STATIC LOT SIZING PROCEDURES
MGT634 Purchasing and Supply Management
PERIOD LOT SIZE PROCEDURE
MGT634 Purchasing and Supply Management
Safety stock
• Fixed safety stock
• Range of coverage
• Safety days
MGT634 Purchasing and Supply Management
Purchasing master Data
• Vendor master (at client level)– Information about the vendor.
• Source list (at Plant level)– The master which links a material to a vendor for a
period.• Purchase Info Record (at Plant level)
– The master containing pricing and other information of the material if sourced from a particular vendor (This data gets adapted while converting PR to PO)
MGT634 Purchasing and Supply Management
Purchasing master data
• Outline agreement– The agreement against which scheduled lines are
generated.
MGT634 Purchasing and Supply Management
Process
Purchase Requisition of a
material
Sourcelist Vendor
Purchase Info Record /
Scheduling Agreement
Follow-up
Receipt
PO/ Scheduled Line
Payment
Quality UD
Business Planning in an ERP system
MGT634 Purchasing and Supply Management
Business Planning in an ERP System
• Once a year activity• Based on the Business Plan for the next
periods.• To arrive at
– Annual production plans– Standard costs– Machine loadings– Annual Purchase volumes
MGT634 Purchasing and Supply Management
Business Planning in an ERP System
• The output is used to – Arrive at the variances during the year.– Bargain with supplier– Decide on the focus cost improvement ideas
MGT634 Purchasing and Supply Management
Business Planning in an ERP System
1. The business plan is uploaded in System in a scenario.
2. Master data is corrected in the scenario.3. MPS orders for the Business Plan are generated4. Machine loading is checked to make appropriate
corrections are made.5. MRP is generated for the entire period using
appropriate assumptions6. Total consumptions is checked.
Material Storage
MGT634 Purchasing and Supply Management
Why Storage is required ?
Material Storage
Inventory
Pilferage
SLOB
IRA
Material Handling
MGT634 Purchasing and Supply Management
Is it only a storage facility?
• A warehouse is typically viewed as a place to store inventory.
• However, in many logistical system designs, the role of the warehouse is more properly viewed as a switching facility as contrasted to a storage facility.
• Value Addition?
MGT634 Purchasing and Supply Management
Storage
• Objective – Minimize costs – Maximize customer service
• This is achieved by – Timely customer service– Keep track of the items– Minimize total physical efforts– Provide requisite communication
MGT634 Purchasing and Supply Management
Storage Costs
• Costs– Capital costs
• Space• Material handling equipments• Etc.
– Operating costs• Labor costs• Etc.
MGT634 Purchasing and Supply Management
Warehouse Activities• Receive goods
– Check the goods against order and Bill of lading– Check the quantities– Check for damage– Inspection if necessary
• Identify the goods• Dispatch to storage• Hold goods• Pick• Marshal shipment• Dispatch• Operate Information system
MGT634 Purchasing and Supply Management
Benefits of Warehousing
• Consolidation• Break bulk• Processing• Postponement• Stockpiling
Warehouse Location
MGT634 Purchasing and Supply Management
Warehouse Location• Modeling the supply chain, J F Shapiro (pp 143)
MGT634 Purchasing and Supply Management
Warehouse LocationObjective / Constraints
Modeling the supply chain, J F Shapiro (pp 143)
• Objective: Minimization of transportation cost and fixed and variable costs for warehouse
• Warehouse Capacity (Supply plan <= Operating Capacity)
• Transfer Quantity (Transferred quantity from warehouse <= operating capacity of warehouse)
• Demand Satisfaction (Transferred quantity to CFA >= Demand of CFA)
• Unique Channel Matrix (All product demands of a CFA to be satisfied by one warehouse)
MGT634 Purchasing and Supply Management
Channel matrix definitionObjective / Constraints
• Objective: Minimization of transportation cost
• Manufacturing Capacity (Production plan <= Mfg Capacity)
• Transfer Quantity (Transferred quantity from plant <= Production plan at plant)
• Demand Satisfaction (Transferred quantity to CFA >= Demand of CFA)
• Unique Channel Matrix (All product demands of a CFA to be satisfied by one manufacturing plant)
Warehouse Layout
MGT634 Purchasing and Supply Management
Design Considerations in Warehousing
• General considerations– Quantity and character of goods must be known—
product profiling– Know the purpose to be served
• Storage• Distribution• Cross-docking
MGT634 Purchasing and Supply Management
Warehousing Trade-offs• Fixed / variable slot locations for merchandise• Build out (horizontal) / build up (vertical)• Order-picking / stock-replenishing functions• Two-dock / single-dock layout• Labor-intensive / mechanization / automation• Space devoted to aisles / space devoted to
storage
MGT634 Purchasing and Supply Management
Warehousing Trade-offs
• Paperless warehousing / traditional paper-oriented warehousing operations
• Virtual warehouse / real warehouse• Other space needs• Retail store rooms
Warehouse
MGT634 Purchasing and Supply Management
Pallet Positions (Refer Tony Arnold)
Number of pallet positions on ground required
1. Per pallet = 30 Cartons
2. For storing 13000 Cartons
3. Number of pallets required = 13000/30 = 433.33
= 434 Pallets
4. Three high placement
5. 434 / 3 = 144.67 = 145 pallet positions
MGT634 Purchasing and Supply Management
Accessibility
Being able to get at the goods wanted with
minimum amount of work (directly)
1. Industry
2. Expiry periods
3. Fifo / Lifo etc
MGT634 Purchasing and Supply Management
Cube utilization (Refer Tony Arnold)
Use of space horizontally and vertically
Number of pallets actually stored / Maximum
number of pallets can be stored
Accessibility vs. Cube utilization
MGT634 Purchasing and Supply Management
Stock Location
• Functionally similar items together• Fast moving / slow moving• Physically similar items• Working stock and reserve stock
MGT634 Purchasing and Supply Management
Stock Location
• Point of usage• Central storage
– Fixed location• Advantages / disadvantages
– Floating location• Advantages / disadvantages
MGT634 Purchasing and Supply Management
Order picking
Picking
ZonePicker works in his zone
Multi orderSingle order
AreaThrough out the warehouse selecting items for one order
Warehouse Safety
MGT634 Purchasing and Supply Management
Warehouse Safety
• Safety– Guarding– Material safety data sheets– Employees safety
• Industrial hygiene– Ergonomics
• Environment– Spills / incidences– Disposals
MGT634 Purchasing and Supply Management
Safety
Asp
ect
Security of goods
MGT634 Purchasing and Supply Management
Pilferage Protection• Shortage (IRA / loss)
• Brand name issues
• Etc.
MGT634 Purchasing and Supply Management
Pilferage Protection• Theft: Protection against theft of merchandise has
become a major factor in warehouse operations. • No private automobiles• All normal precautions employed throughout the
enterprise should be strictly enforced at each warehouse.• Many are honest mistakes in order selection and
shipment, but the purpose of security is to restrict theft from all angles.
• Security begins at the fence. • As standard procedure, only authorized personnel should
be permitted into the facility and surrounding grounds and entry to the warehouse yard should be controlled through a single gate.
MGT634 Purchasing and Supply Management
Pilferage Protection…
• Computerization– Computerized inventory control and order processing
systems help protect merchandise from being carried out of the warehouse doors.
– No items should be released from the warehouse unless accompanied by a computer release document.
– If samples are authorized for use by salespersons, the merchandise should be separate from other inventory.
Scrap Disposal
MGT634 Purchasing and Supply Management
• Salvage and Scrap Disposal– Value of scrap may be income to the firm.– Disposal must adhere to environmental
regulations.– Ensure no possibility of misuse– The organizations interest
Inventory Record Accuracy and Cycle count
MGT634 Purchasing and Supply Management
IRA and Cycle count
• Please refer to Tony, Arnold
VMI
MGT634 Purchasing and Supply Management
Stockless Purchasing
• The supplier maintains the inventory for the purchaser.
• The cost of stocking inventory has been temporarily transferred from the purchaser to the supplier.
NPD
MGT634 Purchasing and Supply Management
NPD
• Timelines based on the understanding / experience
• Clear expectations beforehand• Involve suppliers early
Standardization
MGT634 Purchasing and Supply Management
Standardization • Rather than obtaining a variety of components
similar in labeling, coloring, packaging, etc. The purchasing agent should try to have those components standardized.
• For every component that is standardized, • There is one less invoice, one less item to be
inventoried, etc.
Value Analysis
MGT634 Purchasing and Supply Management
Value analysis• Process of examining all elements of
a component, assembly, end product, or service to make sure that it fulfils its intended function at the lowest cost throughout the intended life.
• Objective : Increase the value of the product at the lowest cost while maintaining quality.
• Value = function / cost
MGT634 Purchasing and Supply Management
Value analysis
• Gather information• Study• Speculate• Analyse• Recommend• Summerize
MGT634 Purchasing and Supply Management
Value analysis
• Separate the object in its component• Check the value addition by each component• Check the manufacturing process for each
component• Check the value addition by each process step• Apply creativity
MGT634 Purchasing and Supply Management
Value analysis Team members
• Executive management• Suppliers• Purchaser• Design engineer• Marketing• Production• Industrial / process engineer• Quality control
MGT634 Purchasing and Supply Management
Team exercise
• Identify Object (and its function)• Separate the object in its component
(Understand the assembly process)• Understand the manufacturing process for each
component (and go on further exploding its BOM)
• Identify the value addition by each process and component
• Brainstorm
MGT634 Purchasing and Supply Management
ThanksBest of luck
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