Purchasing and Supply Management

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.


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.


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


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


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


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


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


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


Class Discipline• Attendance

• Class timings (attendance will be taken at the beginning)

• Audit – Attendance and minimum passing criterion

• Academic Dishonesty


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


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


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


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.


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


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


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:


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%


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


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


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….


Interdepartmental Relations Production Sales And Marketing Finance Research And Development Engineering Quality Control Planning Legal Security


Purchasing and Supply Management

• Procurement– Material– Source– Price– Quality– Quantity– Time– Place



• Storage– Receive– Store– Track



• Usage / Issue– Material– Sequence– Price– Quality– Quantity– Time– Place



• Procurement

• Storage

• Usage


Recap

• Introduction– Defn– Objectives– Activities– Importance– Costs

• Procurement / Storage / Usage


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


Basis Of Classification• Stage of conversion Process

– Direct (Raw materials / WIP etc)– Indirect

• Nature of Material– Finished goods – Semi-finished goods

• etc.


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


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




Assemble to Order

Make to Order

Assemble

Manufacture

Manufacture

Manufacture

Assemble

Assemble

Staging Policies


Procurement Process


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


Staging Policies

Design Ship




Assemble to Order

Make to Order

Assemble

Manufacture

Manufacture

Manufacture

Assemble

Assemble

Staging Policies


ETO (for each materials)

• Requirement Generation• Receiving and analysing PR• Supplier selection• Right price• PO• Follow up• Receiving and accepting• Invoice approval and payment


Staging Policies

Design Ship




Assemble to Order

Make to Order

Assemble

Manufacture

Manufacture

Manufacture

Assemble

Assemble

Staging Policies


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


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


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.”


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• •


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


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.


Forward / Backward Integration

Planned Order


Planned Order

Lead Time

Opening Period

Purchase OrderSpecific Information

PurchaseRequisition Planned Order

General information

Planned order is used for visibility

??

??

3. Purchase Requisitions


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


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


Strategic Sourcing Plan

• Discovery

• Evaluation

• Selection

• Development

• Management


Strategic Sourcing Plan

• Engineer to Order

• Make to Order

• Assemble to Order

• Make to Stock


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

……..


Evaluation

• Background• Informed

– Surveys– Financial checks– Facility visits– Quality– Capacity– Management / Systems– IT Systems – --------


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 ?


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


Overview of Vendor Selection Criteria


Prioritization MatrixWeight Score Weighted

ScoreQuality

Reliability

Capability

Financial

Others

Final result


Supplier Development????????

-Alignment of systems-Alignment of expectations-Knowledge transfers- -------


Managing Suppliers•Feedbacks•Situation recheck•Corrective actions•Realignment•……………


Supplier Selection Issues

• Size Relationship• Usage of International Suppliers• Competitors as Suppliers• Countertrade Requirements• Social Objective

Pricing


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


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


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


Negotiations and e-Sourcing/Auctions

Purchase requisitions

Supplier Selection

Negotiations

E-Sourcing/Auctions

Negotiations / Discussion

RFQ / Quotations

Learning Curve


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


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


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.


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


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


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


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


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


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


Negotiation Strategy : Basic Steps


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


Negotiation planning and execution


“Game plan” for Negotiation



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


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


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


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


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


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


Win-Win Negotiation

• Win-lose – competitive or distributive bargaining

• Win-win – collaboration or integrative bargaining



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


Ethical Issues


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



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



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


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


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.



Reciprocity• Giving preferential treatment to suppliers who

are also customers• Restrain competition• Must rely on legitimate performance criteria

to evaluate supplier capability


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


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


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


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


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


Behaviors

Maintain highest standard.

No gifts / favors

Slow but steady

Remember: These are digital decisions in terms of actions and occurrences


Cases

• Gift delivered at home ?

• Equipment purchased higher then the normal price ?

• Unwanted equipment purchased ?


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


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.


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.


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.


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.


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.


Contract Terms

• Cost, Insurance, and freight (CIF): This is similar to C&F But here the insurance during transportation is responsibility of the supplier.


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.


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.


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.


Contract Terms


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


Groups and cases

• Metal craft (12 Oct)

• E Sourcing strategy (13 Oct)

• Bose (19 Oct)

• Multisite case (20 Oct)


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.


Reverse Auctions• When possible ?

• Requirements ?

• Steps ?


Reverse Auctions

• Problems ?


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


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


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.


Electronic Procurement

• Disadvantages– Security of electronic messages– Lack of face-to-face contact– Other technological concerns

• Standard protocols• System reliability

Purchasing


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


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


Purchase Order

• Significance

• Parts of PO


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.


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


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


Order Monitoring and Expediting

• Significance


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


Incoming Inspection and Quality Control

• Significance


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.


Receiving

• Mark the goods• Store the goods• Operate information system• Communicate to QA and other concerned

departments

Self Certification


Self Certification

• Significance

• Where to use– Staging policies– Lot size and consumption– Stocking policies


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 ?


• STEPS– Agreeing upon common Specs.– Process Parameter standardization.– Vendor audits and Inputs.– Trial Lots.– Roll out.

Supplier Self Certification

9. Invoice Processing


Invoice Processing

• Significance

• Factors to be considered


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


Supplier evaluation• Why

– Better decision making– Better communication– Feedback– Motivate and direct behavior

• Problems – Too much data– Wrong measures– Conflicting measures– Drive wrong performance


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.


Performance Measurement

Characteristics of good performance measure• The measurement should be usable.• Without any scope for adjustment• Communicate / Agreed• Simple to measure


• Strategically Significant• Driving “Right”

Behaviors• Balanced • Aligned• Owned• Linked to Compensation• Actionable• “Easy” to Collect

Measures Must Be ...

Measures


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


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


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


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


“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


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.


Measures Implementation• Drive down from OGSM• Develop specific measures• Identify the base line data• Finalize details• Communicate and implement• Measure and identify projects.


Measures• Engineer to order

• Make to order

• Assemble to order

• Make to stock

11 Non Acceptance – Return to Supplier


Return to supplier• Based on the PO

• Local / Imported • Rework / Destroy • Credit note

Others

Multi-location problem


MSPPDS: Multi-Site Procurement Production Distribution System



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


Distribution


MSPPDS: Multi-Site Procurement Production Distribution System



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


Distribution


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


EXTENT OF CONTROL

• Decentralized - Better Time To React- Developing Local Vendors- Better Control On Local Vendors- Close Co-ordination with Plant


Optimization

• GLPK• Path command• Program file / Data file• Set / Param / Var / Min / Max / s.t. / end.


Simulation

• Random parameters interacting with each other.

• Arena

• Vensim / Stella

Purchasing Functionality of ERP


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.


MRP OVERVIEW


MRP RUN


PLANNING FILE AND MRP


PLANNING SEQUENCE


BOM EXPLOSION


MRP: NET REQUIREMENT CALCULATION


LOT SIZING PROCEDURES


MRP SCHEDULING


STATIC LOT SIZING PROCEDURES


PERIOD LOT SIZE PROCEDURE


Safety stock

• Fixed safety stock

• Range of coverage

• Safety days


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)


Purchasing master data

• Outline agreement– The agreement against which scheduled lines are

generated.


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


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



• The output is used to – Arrive at the variances during the year.– Bargain with supplier– Decide on the focus cost improvement ideas



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


Why Storage is required ?

Material Storage

Inventory

Pilferage

SLOB

IRA

Material Handling


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?


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


Storage Costs

• Costs– Capital costs

• Space• Material handling equipments• Etc.

– Operating costs• Labor costs• Etc.


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


Benefits of Warehousing

• Consolidation• Break bulk• Processing• Postponement• Stockpiling

Warehouse Location


Warehouse Location• Modeling the supply chain, J F Shapiro (pp 143)


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)


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


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


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


Warehousing Trade-offs

• Paperless warehousing / traditional paper-oriented warehousing operations

• Virtual warehouse / real warehouse• Other space needs• Retail store rooms

Warehouse


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


Accessibility

Being able to get at the goods wanted with

minimum amount of work (directly)

1. Industry

2. Expiry periods

3. Fifo / Lifo etc


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


Stock Location

• Functionally similar items together• Fast moving / slow moving• Physically similar items• Working stock and reserve stock


Stock Location

• Point of usage• Central storage

– Fixed location• Advantages / disadvantages

– Floating location• Advantages / disadvantages


Order picking

Picking

ZonePicker works in his zone

Multi orderSingle order

AreaThrough out the warehouse selecting items for one order

Warehouse Safety


Warehouse Safety

• Safety– Guarding– Material safety data sheets– Employees safety

• Industrial hygiene– Ergonomics

• Environment– Spills / incidences– Disposals


Safety

Asp

ect

Security of goods


Pilferage Protection• Shortage (IRA / loss)

• Brand name issues

• Etc.


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.


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


• 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


IRA and Cycle count

• Please refer to Tony, Arnold

VMI


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


NPD

• Timelines based on the understanding / experience

• Clear expectations beforehand• Involve suppliers early

Standardization


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


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


Value analysis

• Gather information• Study• Speculate• Analyse• Recommend• Summerize


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


Value analysis Team members

• Executive management• Suppliers• Purchaser• Design engineer• Marketing• Production• Industrial / process engineer• Quality control


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


ThanksBest of luck

Documents

Purchasing and Supply Management