Purchasing and Supply Purchasing and Supply ManagementManagement

A Formal Supplier Selection Process1. Questionnaire

Production capability

Emphasis on quality

2.Financial analysisLong-term reliability

3.Buyer tour of supplier's plant

4.Suppliers tour the firm's plant

Why study PSM?

Purchasing and supply management is a powerful tool for improving profitability

McKinsey’s Quarterly, 1997

19% point gap in a survey of electronic companies

Why study PSM

40%-70% of COGS accounted for by the cost of purchased goods and services

10% cost reduction in COGS = 10% improvement in profit

10% improvement in sales (with a profit margin of 10%) translates to only 1% improvement in profit

Why Study PSM

Strategic role:– Globalization– Buyer/Planner concept– Quality at the source– Collaborative role of supplier

Purchasing and Supply Management - Introduction

A company’s procurement organization is tasked withsecuring a reliable supply of quality products to meet the demand of both internal and external customers, at the lowest total cost, by sourcing from strategic suppliersand maximizing corporate buying power.

Objectives of PSM

1. Uninterrupted flow of Materials2. Manage inventory3. Improve Quality4. Develop Suppliers5. Standardize6. Achieve lowest total cost7. Improve competitive position8. Develop cross functional relationships9. Reduce Administrative costs

Uninterrupted flow of materials

Interrupted flow leads to lost production, escalation of operating costs, and inability to satisfy delivery promises – strikes, earthquakes, Sept. 11 etc.

Hedging strategy - Volkswagen operates plants in the United States, Brazil, Mexico and Germany.

Flexible Strategy - multiple suppliers in different countries, excess manufacturing capacity in factories

Collaboration and Outsourcing - share in the downside risk

Improve Quality

The cost to correct a substandard-quality material input can be huge

Specification, quality audit etc.

Develop Suppliers

Reduction of supplier base (normally by 50%)

Select appropriate suppliers and work with the suppliers to attain continuous improvement

Standardize

Reducing the number of parts or the number of variants or models of a product can save significantly on material costs and thus increase profitability

Most complexity of product comes from design, not customer

Achieve total lowest cost

Strive to obtain needed items or services at the lowest possible total cost, assuming that quality, delivery and service requirement are satisfied.

Improve competitive position

PSM does not begin and end with one-off cost reduction

Properly managed, PSM can give companies a network of suppliers capable of delivering the technology, knowledge, products, or service quality that will beat competitors, at the same time as securing ongoing cost reductions.

Develop cross-functional relationships Achieve harmonious, productive working relationship

with other functional areas within the organization Production and Control: provide info on material

requirement in timely fashion Production and Engineering: must be willing to

consider substitute materials and different suppliers QC – interface between QC and supplier Accounting – timely payment to take advantage of

quantity discount etc.

Reduce Administrative Costs

Streamline purchasing procedures– eMart in SAF– Purchasing Card Program by VISA

B2B exchanges

Supply Organization

Centralized Purchasing – Pros and

Cons? Decentralized

Purchasing– Pros and

Cons?

The 5 stages of purchasing

1. Serve the factory – keep the factory running. Focus on clerical, logistical duties.

2. Lowest Unit Cost – Cost analysis, competitive bidding, and negotiation become key skills

3. Coordinated Purchasing – Cooperative purchasing across sites and profit centers. Eg. lead buyers, buying committees, centralization of purchasing etc.

4. Cross functional Purchasing – Recognition that design, specification, and supplier development can have far more impact on cost than does negotiation

5. World Class Supply Management - Strategic supplier selection, long-term relationship design, supplier network management, supplier collaboration on new technologies etc.

JUST IN TIME:

Only what is needed, nothing more... To have only the right materials, parts and products in theright place at the right time. 

Just-in-time systems Just-in-time systems attempt to attempt to increase flexibility and increase flexibility and

responsiveness between suppliers responsiveness between suppliers and customers in order to eliminate and customers in order to eliminate

waste, improve customer waste, improve customer satisfaction, and improve overall satisfaction, and improve overall

competitivenesscompetitiveness

Slide 16.6

Motivation for implementing JIT:Motivation for implementing JIT:

reduction in raw material, purchased parts, reduction in raw material, purchased parts, work-in-process, and finished goods work-in-process, and finished goods inventoryinventory

increased direct labor productivityincreased direct labor productivity

improved equipment utilization improved equipment utilization

defect-free production of well-designed defect-free production of well-designed productsproducts

improved responsiveness to changing improved responsiveness to changing markets and customer requirementsmarkets and customer requirements

THE SEVEN WASTES

from Shigeo Shingo in Robert W. Halls bookAttaining Manufacturing Excellence, 1987

Waste of over production

Waste of waiting

Waste of transportation  

Waste of processing itself

Waste of stocks

Waste of motion

Waste of making defective products

Toyota: seven sources of waste in manufacturing The process: if the wrong type or size of machinees

are used, if the process is not operated correctly of if the wrong tools and fixtures are used

Methods: of methods in performing tasks by operators cause wasted movement, time,or effort

Movement: Poorly planned layouts cause unnecessary movements.

Product defects;defects interrupt the smooth flow of of work

Waiting time: two kinds of waiting time that of the operator and that of material.

Overproduction: raw materials and labor are consumed for parts not needed resulting in unnecessary inventories.

Inventories:excess inventories adds extra cost to the product

Misunderstandings about JIT:

thinking of JIT as a physical system to be implemented rather than a management philosophy to be adopted

thinking of JIT as simply an inventory control system

thinking of JIT as strictly a manufacturing oriented management approach

Slide 16.8

Total Business CycleTotal Business Cycle

A firmA firm’’s total business cycle is the s total business cycle is the elapsed time from when a customer elapsed time from when a customer need is identified until the need is need is identified until the need is satisfied and payment is received.satisfied and payment is received.

It is important to manage all It is important to manage all elements of this cycle to eliminate elements of this cycle to eliminate waste and improve efficiencywaste and improve efficiency

Slide 16.10

Overall Cash Flow CycleOverall Cash Flow Cycle

Order Arriv es

Order Entry Cy cle

ProcurementCy cle

Production Cy cle

Packing & Shipping Cy cle

Distribution Cy cle

AccountsReceiv able Cy cle

What happens with JIT…

Eliminate non-value added activities less time spent and less money spent...

Involve your suppliers and customers eliminate duplications, non value addded activ.

Shorter Set-up time and less WIP Faster through-put, less time, higher quality

JIT Action Areas…

Develop people - increase skills,productivity, morale

Eliminate waste in all areas Optimize materials handling and production flow Control Tooling Increase quality Improve continuously!

Slide 16.11

Requirements for JIT Requirements for JIT ImplementationImplementation

11. . Production flexibility at every stage of Production flexibility at every stage of supplysupply

22. Stability and disciplines of schedules. Stability and disciplines of schedules

33. Comprehensive quality assurance. Comprehensive quality assurance

44. Teams of empowered employees. Teams of empowered employees

55. A signaling system to pull production. A signaling system to pull production

66. A logistics system to support JIT . A logistics system to support JIT deliverydelivery

1. Production flexibility at every stage of supply

Smaller and more frequent shipments of products

Flexibility to produce quantities of intermediate products as needed

2. Schedule stability and discipline

Replace large batch sizes with continuous flow of smaller quantities

Reduction of storage, movement from place to place or inspection

Minimizes extra inventory extra with changes in demand

Quick delivery of products to respond to changes in demand

3. Comprehensive quality assurance

Defective-free, high quality products and processes avoids costs.

Eliminates wastes of:- Time - Material

- Product - Energy

- Money - Information

4. Teams of competent, empowered employees

Supervisor becomes a teacher, facilitator and a leader rather than an enforcer

Employees are empowered to take appropriate actions

5. A signaling system to pull production

Every system has a signal that triggers production

Kanban Push production system Pull production system Modifications in the signaling system Areas of Kanban applications

6. A logistics system to support JIT delivery

JIT requires fast and regular supply Cost, reliability, quality, and flexibility

are key factors in vendor selection Vendors preferred with small lot sizes,

frequent deliveries Few to single suppliers Vendor Managed Inventory (VMI)

Barriers to Successful Implementation of JIT

Cultural resistance to change Lack of resources Frequently top management lack

understanding or commitment Lack of or difficulty establishing

performance measures

37

JIT Purchasing

Just in Time purchasing requires frequent releases of orders and frequent deliveries of products. For this to work, purchasers and suppliers must develop long-term relationships rather than use the multiple sourcing