PMM Introduction

Procurement and Materials Management - Introduction

Arvind Tiwari

Guest Faculty IIFT

Overview Industries in daily life

Objective

GP

Supply Chain

Procurement Importance

Product Cost

Quality

Availability

PMI

Evolution

Introduction

Procurement and Materials Management as it is practised in the industry

There are similarities and differences across industries and there are specific reasons for it

During the day and everyday we use various products without thinking about much about them

They come from different industries

Within each industry or product category also different organisations operate differently depending on their business strategies and positioning

Industries in daily life FMCG Industry

Toothpaste

Toothbrush

Soap

Shaving Cream

Shaving Razor

Deodorant / Aftershave / Perfume

Cosmetics

Moisturiser

Sanitary Fittings Metal fittings

Ceramics

Industries in daily life

Apparel

Footwear

Consumer Durables

Geyser

Refrigerator

Microwave

Induction Cooker

Toaster

Industries in daily life

Furniture

Home

Office

Food Industry

Processed

Pre cooked

Cooked to order

Lighting

Domestic

Industrial / Commercial

Industries in daily life Transportation

Public Transport

Private

Consumer Electronics & Computers

TV

Mobile phones

Computers

Printers

Photocopiers

Industries in Daily Life - Services

Mobile

Internet

Restaurants

Couriers

Transport

Hospitals

Banks

Coaching Institutes

Physical products required for services to exist or support the services in most cases

Industry Structure

Each industry is structured and operates in its own way for specific reasons

One of the most important reasons for the structure is Cost of making the product available

Market competition decides the Price so the company with the best cost structure is the most profitable in that industry segment

The Supply Chain is becoming increasingly important in each industry and therefore so is Procurement

We will focus on Procurement in B to B situations

Objective

Organisations have Vision & Mission and statements

Vision & Mission

Universal all parts of the world

All business segments

Stated or unstated

Common Objective

Growth

Profitability

GP

Grow Profitably GP

GP also stands for Gross Profit

Everyone in the world just loves GP because GP drives

Stock Price

Shareholder returns

Bonus

Promotions

Increments

Investments and therefore growth

How to GP ?

What is required to Grow Profitably ?

Product(s) / Services , Strategy , Execution

Business Plan

Components of a Business Plan

Current Products

Quantity

Quality

Price & Cost

New product availability

The Supply Chain

Who makes available

the right product

of the right quality

at the right cost

in the right quantity

at the right place

at the right time

The Supply Chain

It is not companies competing but their Supply Chains competing in the Market

Procurement / Purchasing / Sourcing

Supply Chain Management

Management of activities pertaining to movement of materials and information in the Supplier to final Customer chain

Materials Management

Portion of the Supply Chain within the Organisation

Procurement

Management of activities in the interface between the Supplier and the Organisation

Diagram

Procurement Importance - Product Cost

In a manufacturing organisation close to 60 % of the Product Cost is Material Cost

Organisation today focus on Core Competencies outsourcing the rest.

So most of the Material Cost is from bought outs

More and more organisations are buying fully made products from Suppliers

Contract Manufacturing

Apple Products

Procurement Importance - Product Cost Break Up

Manufacturing Organisation Typical Product Cost breakup (%)

Material - 60 to 65

Labour - 8 to 10

Overheads - 12 to 15

Finance Cost & Depreciation - 3 to 5

Profit - 10 to 15

Procurement team is biggest spender in the organisation

Procurement Importance - Impact on Profit

Impact on profit of 2 % reduction in Material Cost v/s % increase in sale required to achieve same increase in profit

INR Mn

Sales 100

Material Cost 60

Other Costs 30

Profit 10

5% reduction in material cost adds INR 3 Mn directly to profit

To add the same to profit Sales need to add INR 30 Mn or 30%

Procurement Importance Finished product quality depends on bought

out quality

In many cases the finished product itself is bought out

So customer experience of the product depends on bought outs

The brand owners name is made or unmade depending on the suppliers performance

More than cost this is the key reason for importance of procurement


More parts bought out less made inhouse

More critical parts / sub assemblies / assemblies bought out

Timely production depends on availability and quality of bought parts

Inventory also depends on the same

Inconsistency in bought quality requires higher inventory to avoid disruption


With parts outsourced the plants are mainly used for assembly and testing

Assembly line concept

No. of parts in a passenger car over 2500. varies with level of aggregation

Non availability of even one part can stop production wasting time and money

Procurement is responsible for keeping the line running


Important to chose the right supplier

More competent domestic suppliers available

More competitive International suppliers available

Frequent new product launches possible with supplier technology and innovation

Suboptimal performance in procurement has an adverse impact on entire business

The human factor on both sides of this interface can make or break things


Representative of the company to its supplier community so it creates a good (or bad) image of the company outside

Represents the supplier community inside the organisation

How an organisation views a supplier, its products, competence, capability , technology & services etc depends on the Procurement interface

Used improperly an organisation can lose good suppliers and become dependent on bad ones

Procurement Importance Interacts with all other functions in the

company

Marketing new products

Sales forecasts

Manufacturing feeds the production

Quality product quality

Engineering specifications and drawings

Finance supplier payments

Legal contracts

HR & Admin procures services for admin

So wherever you are you will be dealing with them

Procurement Importance -Purchase Managers Index (PMI)

Purchase Managers Index

most widely used indicator of economic activity in a country

> 50 indicates growth in economy

< 50 indicates contraction in the economy

Procurement Evolution

Traditional Purchasing

More parts were made inhouse and only less critical ones purchased

Supplier treated almost like an adversary

Approach was transaction based

Focus was on getting the lowest price

Other parameters like quality and delivery were not considered that important


Traditional Purchasing Impact

Very little connect between Supplier and Customer

Predominant focus on price led suppliers to compromise on quality

Timely delivery was also impacted due to suppliers lowest cost production approach

Customers covered it with higher inventory and multiple sources


Current situation

Manufacture minimum procure maximum

Keep minimum inventory

Introduce new products quickly and frequently

Impact

Procurement spend most important

Possible only with high quality and timely delivery

Work closely with Suppliers

Procurement Evolution Procurement now

Price still important but not the only criteria

Competent suppliers capable of delivering quality consistently essential

Close relationship with suppliers essential but possible with only few suppliers

With critical parts / full products outsourced sometimes very few capable suppliers available worldwide

Long term growth & profitability of suppliers in the interest of customers


Future Trend

Manufacture even less and buy even more

Do not invest in manufacturing capacity if it can be sourced from outside

So most of Material plus Labour cost % becomes bought out

Buy full product

Full Material plus Labour cost % becomes bought out


Procurement has come a long way in the last 2-3 decades

It has been possible for sometime now to set up , run and grow a product business without having own manufacturing facility

Has become possible as the capability and also size of the suppliers has improved dramatically

But there still all types of suppliers in business


Partnering with suppliers is inevitable

The right supplier base can grow the business with less investment

The wrong supplier base does more harm than good

Can even destroy the brand and its market

So Procurement gets more and more important everyday

Documents

PMM Introduction