Purchasing and Procurement Activities Under_2003

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PURCHASING AND PROCUREMENT

ACTIVITIES UNDER

MATERIAL MANAGEMENT

- Vihang Naik



PRESENTATION FLOW

Elements of Purchasing / Procurement Cycle

Buyer Supplier Relationship

Self Certified Vendors / Suppliers

Method of Buying ± under certainty ,

under risk ,

under uncertainty



ELEMENTS OF PURCHASING /PROCUREMENT CYCLE



ELEMENTS OF PROCUREMENT CYCLE

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 supplier Enquiry , tender,

import

Supplier¶s

Record

Specification File

Contd..



ELEMENTS OF PROCUREMENT CYCLE

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 note

Storage and Record keeping

Closing the order



BUYER SUPPLIER RELATIONSHIP




´ Introduction

Three Types of the Buyer Seller Relationship

1. Traditional or Transactional Relation




2. Collaborative Relation

3. Alliance Type Relation




´

Traditional or Transactional Relation

Features

1. 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 , informationsystems 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)



SELF CERTIFIED VENDORS / SUPPLIERS



SELF CERTIFIED SUPPLIERS

Dr. Kauro Ishikawa ± one of the pioneers in the JapaneseQuality 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 ³Self-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 QualityManagement 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



METHOD OF BUYING ± UNDER CERTAINTY,

UNDER RISK ,UNDER

UNCERTAINTY



METHOD OF BUYING

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



METHOD OF BUYING

II. Decision Making Under Risk

Pay-off Matrix

Stock

Number

Probability of Requirement Expected

Totalcosts

(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



METHOD OF BUYING

III. Decision Making Under Uncertainty

Type of Cost Apparatus A Apparatus B

Capital cost s. s.

Operating cost per

year

s. 1 s.

Maintenance

expenses( s.)

P1 P2 P3 P4

Year 1 2 2 2 1

Year 2 2 2 1 1

Year 3 3 3 1 1

Year 4 3 1 2

Year 2 1 1



METHOD OF BUYING

Life in years 4 5 4 5 4 5 4 5

Maintenance

A

P1 P1 P2 P2 P1 P2 P1 P2

MaintenanceB

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



METHOD OF BUYING

Principles used in Decision under uncertainty :-

1. Rationality

2. Minimax Principle

3. Maximax Principle

4. Criterion of optimum (Hurwitz Criterion)

5. Principle of Regret

Documents

Purchasing and Procurement Activities Under_2003