materials management sessions 1 and 2

Materials Management: NIIT

Imperia: Sessions 1 and 2

Santanu Roy

Professor

Institute of Management Technology

Ghaziabad

[email protected]; [email protected]

mailto:[email protected]

Introduction

Corporate Supply Challenges

Need to control unit costs

Need to reduce the total cost of acquisition

The increasing influence of suppliers on

the purchaser’s ability to respond to end-

customers needs

Increased reliance on fewer suppliers

Trend towards reliance on suppliers for

design and build responsibilities for

complete subassemblies and subsystems

The Evolution of the Supply

Function

The Handling of Railway Supplies – Their

Purchase and Disposition

◦ Published in 1887

Attention in first half of 1900s to reliable

access to supply of raw materials, supplies

and services

Two vexing problems in the decade of the

1970s put senior management attention on

the supply function:

◦ international shortage of basic raw materials

◦ price inflation


Function By 1990s firms faced challenges of

global “supply chains” and an increased

reliance on suppliers

◦ Outsourcing has led to increased reliance on

suppliers for key components and services

Technological developments in the early

21st century provides expectations for

supply chain integration, lower

transaction costs and faster response

times.

◦ The Internet and B2B e-commerce

• Clerical and tactical

• Focus on policies and

procedures

• Key challenge:

availability of supply

and cost

management


Function

early

1900s early

21st century

• Strategic orientation

• Global supply

chains

• Executive level

leadership

• Key challenge:

Technology and

the Internet

Evolution of the Supply Chain

Pre 1939 1940-49 1950-69 1970-89 1990-1999

Clerical World War II Managerial

emphasis

Purchasing

strategy

Integration into

corporate strategy

Integration with supply networks and information technology

2000-Future

A New Competitive Environment

Increased Competition changes buyer/seller

balance of power

Evolution of competitive environment:

60’s/70’s

◦ Marketing strategies capturing loyalty.

◦ Strong engineering, design, and manufacturing functions to support market requirements.

◦ Customers needs translated into products.

◦ Need for high level quality at a reasonable cost.

◦ Need for flexibility and responsiveness.

A New Competitive Environment

Concept of Supply Chain Management

Emerges

Evolution of competitive environment:

80’s

◦ Need for flexibility and responsiveness

90’s

◦ Organizations realized materials and service inputs from

suppliers impacted ability to meet customer needs.

◦ Resulted in increased focus on supply base and

purchasing.

Why Purchasing is Important

As companies struggle to increase customer value by improving performance, many companies are turning their attention to purchasing and to supply management.

Why Purchasing is Important

Results of Good Supply

Management:

Potential for Profitability

Outsourcing

Improved product and service quality

EPI/ESI

Major Logistics Activities

customer service

demand

forecasting/planning

inventory management

logistics communications

material handling

order processing

packaging

• parts and service support

• plant and warehouse site

selection

• purchasing

• return goods handling

• reverse logistics

• traffic and transportation

• warehouse storage

The Buyer/Planner Concept

Combines planning and purchasing functions into one position ◦ Planners: Determine what materials are needed

and when

◦ Buyers: Handle sourcing and buying

Charged with responsibility for a specific line of inventory

Duties may include: establishing schedules, issues and analyzes quotations, places orders, monitors supplier performance, and keeps abreast of market trends, supplier capacities and technologies.

Supply Chain Management

“The design and management of seamless,

value-added processes across

organizational boundaries to meet the real

needs of the end customer. The

development and integration of people

and technological resources are critical to

successful supply chain integration.”

What are Purchasing and Supply

Management?

Purchasing is a functional

group/activity that supplies the

organization with materials. It is

often referred to as procurement.

Supply Management is a

progressive approach to managing

supply base and the supply chain.

Understanding the Value

Chain

What is a Value Chain?

A value chain is a sequence of business functions in which utility (usefulness) is added to products or services as they move from supplier to end customer

Value chains are often viewed like a river--upstream and downstream

NOTE: Value Chain discussion draws heavily from Michael Porter, Competitive Advantage--Creating and Sustaining Superior Performance

Primary and Support Activities

Primary Activities

Inbound logistics

Includes activities associated with receiving, storing, and disseminating inputs to support the product or service, including transportation, material handling, warehousing, inventory control, vehicle scheduling, and returns to suppliers


Primary Activities

Operations

Activities associated with transforming

inputs into final form, such as machining,

packaging, assembly, equipment

maintenance, testing, printing, and facility

operations


Primary Activities

Outbound logistics

Includes activities associated with

physically collecting, storing, and

distributing a product or service to

customers, such as finished goods

warehousing, material handling,

delivery, order processing, and

scheduling

Primary and Support

Activities Primary Activities

Marketing and Sales

Includes activities associated with providing a means to which buyers can purchase the product and inducing them to do so, such as advertising, promotion, sales force efforts, job quoting, channel selection, channel relations, and pricing


Primary Activities

Service

Includes activities associated with providing service to enhance or maintain the value of the product, such as installation, repair, training, parts supply, and product adjustment


Primary Activities

In any firm, all the categories of primary

activities are present to some degree

and play some role

Key primary activities often differ from

industry to industry


Support Activities

Firm infrastructure

Consists of a number of activities, including general management, planning, government affairs, finance, accounting, legal, and quality management

While firm infrastructure is sometimes viewed as overhead, it can be a powerful source of competitive advantage


Support Activities

Human resource management

Consists of activities involved in

recruiting, hiring, training, developing,

and compensating all types of

personnel


Support Activities

Technology Development

Includes activities typically associated with MIS, engineering, and R&D and involve activities that seek to improve product and processes.


Support Activities

Technology Development

New product and process development are primary concerns of technology development support activities


Support Activities

◦ Procurement

• Involves activities associated with

identifying, evaluating, selecting,

managing, and developing sources of

supply


Support Activities

◦ Procurement

Though purchased inputs are commonly

associated with primary activities,

purchased inputs are present in every

value activity, including support activities.


Support Activities

-Procurement

Examples:

Supplies

Travel services

Media

What is Value Chain

Integration? Value chain integration involves

bringing together different groups,

functions, or organizations, either

formally or informally, physically or

by information technology, to work

jointly and often concurrently on a

common business-related

assignment purpose

Horizontal Integration Across the

Value Chain

Examples of how firms integrate

across the value chain--

◦ Committees/groups/teams

◦ Shared and linked information systems

◦ Integrated performance

goals/objectives/measures

◦ Strategy development process

Horizontal Integration Across

the Value Chain

Examples of how firms integrate across the value chain—

◦ Co-location of personnel within and

between the organization

◦ Through a process orientation

◦ Informal or ad hoc exchange of information

◦ Shared risk and reward projects

Supply Chains Illustrated

Simplified One-Stage Decision

Tree

Purchasing’s Operational and Strategic

Contributions

1. Supply Contribution

Operational

Trouble Prevention

Strategic

Opportunity Maximization


Contributions


Direct

Bottom-Line Impact

Indirect

Enhancing Performance

of others


Contributions


Negative

Operationally deficient

Strategically deficient

Directly deficient

Indirectly deficient

Neutral

Operationally acceptable

Strategically deficient

Directly acceptable

Indirectly deficient

Positive

Operationally acceptable

Strategically acceptable

Directly acceptable

Indirectly acceptable

Return on Assets Factors

The Opportunities for Contribution of

the Purchasing/Supply Function

Profit-leverage effect

Return-on-assets effect

Information source

Effect on efficiency

Effect on competitive position and customer satisfaction

Effect on image

Training ground

Management strategy and social policy

Characteristics of an Integrated

Strategic

Procurement and Sourcing Function Executive Leadership

Executive committee support

for integration across

company and strategic

business unit corporate plans

Strategic Positioning

• External/internal customer focus

• Matrix management

• High-level positioning - second, third

or fourth levels

Functional Leadership

• Company-wide customer-

focused leadership

• Establish integrated visions

workers at results and

processes

• Drives supply base/supplier

management strategies

company-wide

Integration

• Cross-functional, cross-

location teaming

• Part of the technology,

manufacturing and SBU

planning process

Characteristics of an Integrated

Strategic

Procurement and Sourcing Function Supply Base Strategy

Quality driven

Design standardization

Concurrent engineering

Supply base optimization

Commercial strategy emerging

Supplier Management

• Focused on supplier development

• Joint performance improvement efforts

• Value focused

• Total cost improvement

• Supplier benchmarking

Measurement

• Customer orientation

• Total value/cost focused

• Benchmarking with best in

class

Systems

• Global databases

• Historical performance data

• Strategic

• EDI, Internet, EFT, CAD, CAM

Four Pillars of Purchasing and Supply Chain

Management Strategies

Professionalism in Purchasing

New assignments

Education

College recruitment

Training programs

Salary levels

Professional associations

Challenges Facing

Purchasing B2B e-commerce

Supply chain management

Measurement

Purchase of non-traditional goods and

services

Contribution to corporate strategy

Recognition by senior management

Supply Organization

Purchasing Objectives

“What makes a department world-class?”

Objective 1: Support Operational

Requirements

◦ Uninterrupted flow of high-quality material.

Objective 2: Manage the Purchasing

Process Efficiently and Effectively

◦ Limited resources necessitate best use of

resources.



Objective 3: Supply Base Management

◦ Develop reliable, high-quality sources of supply.

Objective 4: Develop Strong

Relationships with Other Functional

Groups

◦ Strong cross-functional relationships must exist

internally.



Objective 5: Support Organizational Goals and Objectives. ◦ Purchasing must follow organizational

directives.

Objective 6: Develop Integrated Purchasing Strategies That Support Organizational Strategies. ◦ Purchasing’s goals must be aligned with

company’s goals

Purchasing’s Span of Control

What decisions does Purchasing have legitimate authority to make?

◦ Evaluate and Select Suppliers

◦ Review Specifications

◦ Act as the Primary Contact with Suppliers

◦ Determine the Method of Awarding Purchase Contracts.

Goals of the Purchasing

Function Provide an uninterrupted flow of materials,

supplies and services required to operate the organization

Keep inventory investment and loss at a minimum

Maintain and improve quality

Find or develop competent suppliers

Standardize, where possible, the items bought

Purchase required items and services at lowest cost

Goals of the Purchasing

Function Achieve harmonious, productive working

relationships with other functional areas within the organization

Accomplish the purchasing objectives at the lowest possible level of administrative costs

Improve the organization’s competitive position

The Purchasing Cycle

The Purchasing Process as a Cycle consists of five major stages. ◦ Identify user need

◦ Evaluate potential suppliers

◦ Bid, negotiate and select supplier

◦ Purchase approval

◦ Release and receive purchase requirements

◦ Measure supplier performance

Purchasing’s Prime Decision

Authority

Select the supplier

Use whichever pricing method is

appropriate

Question the specifications

Monitor contacts with potential suppliers

Organizing The

Purchasing Function

Four major areas of specialization within the purchasing department.

1. Sourcing and Negotiating

-Identifies potential suppliers.

2. Purchasing Research

-Long-range material forecasts

-Boundary scanning

Organizing The

Purchasing Function

Responsibilities and Tasks commonly performed by the purchasing function:

-Buying

-Expediting and Inventory Control

-Transportation

-Managing Countertrade Agreements

Organizing The

Purchasing Function

Four major areas of specialization within the purchasing department.

3. Operational Support and Order Follow-up

-Expediting orders

-Releasing orders

4. Administration and Support

Organizing The

Purchasing Function

Responsibilities and tasks commonly performed by the purchasing function.

-Insourcing/ Outsourcing

-Value Analysis

-Purchasing Research/Material Forecasting

-Strategic Supply Management

-Other Responsibilities

Organizing the Purchasing Function Separating Strategic and Operational Activities

Manage relationships with critical suppliers

Develop electronic purchasing systems

Implement company-wide best practices

Negotiate company-wide supply contracts

Manage critical commodities

Strategic Sourcing

Activities

Organizing the Purchasing Function Separating Strategic and Operational Activities

Manage transactions with suppliers

Use e-systems to obtain standard or indirect

items through catalogues

Source items that are unique to the operating

unit

Generate and forward material releases

Provide supplier performance feedback

Operational Activities

Various Titles of the Chief

Purchasing Officer

Director of Purchasing

VP of Purchasing

Manager of Purchasing

VP of Materials Management

Materials Manager

Purchasing Reporting Relationships

Position to Whom the CPO Reports 1988 % 1995 %

President 16% 16

Executive VP 19 15

Senior VP/Group VP * 19

Financial VP 7 10

Manufacturing/Operations VP 24 15

Materials/Logistics VP 8 7

Engineering VP 1 1

Administrative VP 13 9

Other (many of whom were VPs) 12 8

Functions that Report to Purchasing: CAPS Study T. E. Hendrics and J.A. Ogden, Chief Purchasing Officers’ Compensation

Benchmarks and Demographics: A 2001 Study of Fortune 500 Companies,

Tempe, AZ: Center for Advanced Purchasing Studies, 2002.

Function 1988 % 1995 %

Scrap/surplus disposal 57 63

Materials and purchasing research * 60

Inbound traffic 40 51

Stores/warehousing 34 41

Inventory control 37 41

Material planning * 40

Outbound traffic 31 39 * category not identified in study

Purchasing Activities

Purchasing/buying Purchasing research Inventory control Transportation Environmental and investment

recovery/disposal Forecasting and planning Outsourcing and subcontracting Nonproduction/nontraditional purchases Supply chain management

Typical Purchasing Organization

Structure - Medium Sized Company

Director of

Purchasing

Manager

Administration

and Processes

Commodity

Manager

Commodity

Manager

Materials

Manager

Buyer

Buyer

Buyer

Buyer

Manager

e-Purchasing

Manager

p-cards

Stores/

Warehouse

Manager

Receiving

Inspection

Manager

Manager

Purchasing

Research

Manager

Transportation

Director of

Purchasing

Manager

Administration

and Processes

Commodity

Manager

Commodity

Manager

Materials

Manager

Buyer

Buyer

Buyer

Buyer

Manager

e-Purchasing

Manager

p-cards

Stores/

Warehouse

Manager

Receiving

Inspection

Manager

Manager

Purchasing

Research

Manager

Transportation

Placement of Authority

Decision making authority exists on a

continuum:

DECENTRALIZED CENTRALIZED

HYBRID

Potential Advantages and

Disadvantages of Centralization

Advantages

greater buying specialization

ability to pay for talent

consolidation of requirements - clout

coordination of policies and procedures

effective planning and research

common suppliers

proximity to major organizational

decision makers

critical mass

firm brand recognition and stature

reporting line - power

strategic focus

cost of purchasing low

Disadvantages • narrow specification and job boredom

• lack of job flexibility

• corporate staff appears excessive

• tendency to minimize legitimate

differences in requirements

• lack of recognition of unique needs

• focus on corporate requirements, not on

business unit strategic requirements

• even common suppliers behave

differently in geographic and market

segments

• distance from users

• tendency to create organizational silos

• customer segments require adaptability

to unique situations

• top management not able to spend time

on suppliers

• lack of business unit focus

• high visibility of purchasing costs

Potential Advantages and

Disadvantages of Decentralization

Advantages

easier coordination/communication with operating department

speed of response

effective use of local sources

business unit autonomy

reporting line simplicity

undivided authority and responsibility

suits purchasing personnel preference

broad job definition

geographical, cultural, political, environmental, social, language, currency appropriateness

hide cost of supply

Disadvantages • more difficult to communicate among

business units

• encourages users not to plan ahead

• operational versus strategic focus

• too much focus on local sources -

ignores better supply opportunities

• no critical mass in organization for

visibility/ effectiveness - “whole person

syndrome”

• lacks clout

• suboptimization

• business unit preferences not

congruent with corporate preferences

• small differences magnified

• reporting at low level in organization

• limits functional advancement

opportunities

• ignores larger organizational

considerations

• limited expertise for requirements

• lack of standardization

Potential Advantages of the Hybrid

Structure

Hybrid

structure

Centralized Decentralized

Disadvantages Disadvantages Advantages Advantages

Placement of Purchasing Authority (Data from 172

US Firms)

Currently

In 5 Years

Highly Decentralized (1)

Moderately Decentralized (2)

Decentralized with some

Coordinated Procurement (3)

Decentralized with some

Controlled Procurement (4)

Moderately Centralized (5)

Highly Centralized (6) 20.3%

27.3%

27.9%

32.6%

19.8%

18.6%

19.2%

13.4%

5.2%

5.2%

7.6%

2.9%

Current Average = 4.16

Expected Average = 4.55

Purchasing and Supply

Teams Cross-functional teams

Teams with suppliers

Teams with customers

Teams with suppliers and customers

Supplier councils - key suppliers

Purchasing councils - purchasing personnel only

Commodity management teams

Consortiums

Team Leader Responsibilities

Work with the team to establish and

commit to performance goals

Secure individual member involvement

and commitment

Manage internal team conflict

Help maintain team focus and direction

Secure required organizational

resources

Team Leader Responsibilities

Prevent team domination by a member or function

Deal with internal and external obstacles confronting the team

Coordinate multiple tasks and manage the status of team assignments

Clarify and help define each team member’s role

Provide performance feedback to members

Keys for Successful

Consortiums Reducing total costs for the consortium

members

◦ Through lower prices, higher quality and better

services

Eliminating and avoiding all real and

perceived violations of anti-trust

regulations

Installing sufficient safeguards to avoid

real and perceived threats concerning

disclosure of confidential and proprietary

information

Keys for Successful

Consortiums

Mutual and equitable sharing of risks, costs

and benefits to all stakeholders, including

buying firms/members, suppliers and

customers

Maintaining a high degree of trust and

professionalism

Maintaining a strong similarity among

consortium members and compatibility of

needs, capabilities, philosophies and

corporate cultures

Creating the

Organization

of the Future

Co-Locating Purchasing with Internal Customers

Operations Engineering Marketing

supplier performance

internal requirements

in cost, quality,

delivery, cycle time

capacity, material,

and service needs

material

specifications

evolving product and

process technology

requirements

new product

requirements

demand planning

requirements

new product ideas

promotions and

planned demand

shifts

Procurement Support Personnel

Formally report to the procurement organization

Gain insight into... Gain insight into... Gain insight into...

Purchasing and Supply Chain Management, 3e Monczka,/Trent/ Handfield Thomson Learning Copyright 2005

Supply Processes

Companies Look to

Purchasing to Add Value

A world-class purchasing staff must

provide cost-reductions, improve supply

chain quality, gain access to new

sources of technology, improve cycle

time, involve suppliers in product and

process development, and streamline

processes.

The Essential Steps in the Purchasing

Process

1. Recognition of need

2. Description of need

3. Determination and analysis possible sources of supply

4. Determination of price and terms

5. Preparation and placement of the purchase order

6. Follow-up and/or expedite the order

7. Receipt and inspection of goods

8. Clear the invoice and pay the supplier

9. Maintain records and relationships

A Sample Sourcing Process Flowchart

1. User need for Product or Service

Approved

Supplier?

Purchasing Card

On-line catalog

Electronic Data

Interchange

Stock Check

Automated Reorder

Point

NO

YES

Small $

Amount?

YES NO

4. Purchase

Approval

Specification

Statement of Work

New product requirement

Customer order / MRP

Traveling req / barcode

Purchase requisition

2. Evaluate

Suppliers

3a. Bid and/or

Negotiation

3b. Supplier

Selection

Purchase Order

Blanket PO

Purchase Release

5. Release and

Receive

Product or

Service

Bill of Lading

Packing Slip

Discrepancy Report

Kanban

Acknowledgement

Supplier

Invoice

Match PO and

Invoice

Payment to

Supplier

6. Update

Supplier

Scorecard Input used

To Award

Future

Business

E-Procurement

Documents

The Purchasing Process

Request for

Quote /

Information

Complex

Requiremen

t

?

YES

NO

Purchasing & Supply Chain Management 3e, Monczka/Trent/Handfield

Thomson Learning, Copyright 2005

Some Possible Methods of Reducing

Small Order Transaction Costs

Stockless buy and systems contracts P-cards Blanket P.O.s EDI- and Internet-based systems Reverse auctions Changing authority levels and bidding

practices Single sourcing Outsourcing small value order processing Standardization Batch orders Set requisition schedule Invoice-less payments Users pay directly

Information Needed for Requisitions

Date Number (identification) Originating department Account number Complete description of material or service

and quantity Date material or service needed Any special shipping or service-delivery

instructions Signature of the requisitioner

Purchase Requisition Flow

Internal Information Flows to Purchasing

Purchasing

engineering

planning

production

budgeting

financial control

accounting legal receiving

quality control

inventory control

new products

production control

sales

forecasting

External Information Flows to

Purchasing

Purchasing

general

market

conditions sources

of

supply

suppliers’ capacity

suppliers’

production rates

labor conditions sales and

use taxes,

customs

prices and

discounts

transportation rates

transportation

availability

new product

information

product

information

Internal Information Flows from

Purchasing

Purchasing

General

Management Product

Development

Marketing

Finance

Accounting Stores

Legal

Production

Engineering

Economic

conditions Product and

price information

Competitive

conditions

Budget

commitments

Costs, prices

adjustments Orders

placed

Contracts

Source, product,

price information

Product availability,

lead time, price

and quality

When to use Competitive Bidding

Conditions for Competitive Bidding:

◦ High enough volume

◦ Clear specifications

◦ Competitive marketplace

◦ Adequate time for the process

◦ If no preferred supplier exists

When is Negotiating Better?

Conditions for Negotiating: ◦ When a criteria for competitive bidding is

missing.

◦ When price is not the only deciding factor.

◦ When Early Supplier Involvement is needed.

◦ When supplier can’t determine risks and costs.

◦ When development and production time are lengthy.

Purchase

Order

Blanket

Purchase

Order

Receiving Process

Types of Purchases

Classifications of Goods and

Services:

◦ Raw Materials : petroleum, coal, lumber

◦ Semifinished Products and Components:

subassemblies, semi finished products

◦ Finished Products: a complete, saleable

product

◦ MRO: maintenance, repair and operating

items

Types of Purchases

Classifications of Goods and

Services:

◦ Production Support Items: packaging

materials, tapes, glues, etc.

◦ Services: payroll services, lawn care,

snow removal

◦ Capital Equipment: production machinery,

new manufacturing facilities

◦ Transportation and Third Party

Purchasing: logistics services,

management of inbound and outbound

materials.

Selected Activities

• Confirm user requirements

• Develop category definition

• Define basic characteristics

• Understand industry and supply

markets

• Assess bargaining position

• Evaluate alternative strategies

• Select appropriate approaches and

techniques

• Identify qualified suppliers

• Determine supplier value-added

capabilities

• Develop supplier “short list”

• Verify and adjust sourcing strategy

• Develop implementation plan

Sourcing Process

FedEx Strategic Sourcing Process

Profile the Sourcing

Group

Select Sourcing Strategy

Generate Supplier

Portfolio

Select Implementation

Path

Selected Activities

• Plan negotiation strategy

• Evaluate supplier proposals

• Conduct negotiations with suppliers

• Recommend sourcing decision

• Plan and implement transition to

new suppliers relationships

• Link key processes

• Conduct joint process improvement

activities

• Monitor market conditions

• Assess new technology and best

practices impact

• Conduct benchmarking activities

• Determine appropriateness for

reexamining category

Sourcing Process

FedEx Strategic Sourcing Process

Negotiate and Select

Suppliers

Operationalize

Supplier Integration

Benchmark the

Supply Market

Purchasing & Supply Chain Management 3e, Monczka/Trent/Handfield

Thomson Learning, Copyright 2005