supply chain mangaement notes

Notes By Prof Varun Keshari

Handout MBA FT 202C

UNIT II

By Varun Keshari Purchasing

Purchasing in ordinary sense, purchasing means procurement of materials, machines, tools and

equipments. But now days, purchasing has acquired a new dimension and it has become a specific

function. It is a process which includes all the functions involved from the requirement to the receipt of material and its final acceptance.

In the words of Alford & Beaty: Purchasing is the procuring of materials, supplies, machine tools & services required for the equipment, maintenance & operation of a manufacturing plant

IMPORTANCE OF PURCHASING:

The purchasing is important function in all type of business organisations whether it is small, medium or large. Without purchasing, no business can be operated. In todays World, purchasing plays a significant role in shaping the business decisions. The role of purchasing in business management has

become very important.

Few important reasons:

Higher cost of goods & services: - As we known nearly 60% or more money in any organisation

blocked in raw materials. Therefore the profitability depends to a great extent on the efficient purchasing.

Escalating cost of stock outs: - Lack of continuity in the availability of materials seriously affects all major Companies. Financial loss due to stock outs of materials in mass/flow production units.

Higher present day cost of Capital: - Unnecessary Capital lock-up can be avoided if purchasing is made efficient.

Purchasing is not mere act of buying: - Purchasing is not mere act of buying. It is in fact a much a

much broader concept. Purchasing in todays context includes- market research, vendor rating, standardisation & variety reduction, codification, surplus disposal, purchase budget etc.

Professionalization of materials function:- Like other branches of industry, purchase to has experienced development of many concepts such as:-ABC analysis, economic lot size, codification,

vendor rating etc.

Changing Concepts of buyer-seller-relations:-Retention of good suppliers, with increasing

competition, is becoming difficult and hence the buying functioning is becoming challenging day by

day.

OBJECTIVES:

1. To maintain regular flow of materials, so that there will be continuity of operations. 2. To procure at a competitive price the needed materials at the right quality, the right time. 3. To suggest better substitutes to materials which are currently being used with a view to lower

cost & maintain quality of the product

4. To integrate the requirements of all departments of all departments of the organisation in order to take the advantage of economy of scale wherever possible and to also avoid duplications of purchases resulting in wastes and obsolescence.

5. To create goodwill for the organisation through healthy buyer supplier relationship.


FUNCTION OF PURCHASE DEPARTMENT:

1. Locating selecting & developing qualified source of supply. 2. Scrutinising purchase indents and deciding suitable method buying. 3. Floating enquires, processing quotations, conducting negotiation and releasing purchase

orders. 4. Pre delivery follow up & shortage chasing. 5. Co-ordination with inward inspection, including timely return of defective materials back to

supplier. 6. Endorsing suppliers invoice for payment. 7. Processing suppliers requests for price increases including price renegotiations. 8. Attending to suppliers representatives and travelling sales men. 9. Arranging discussion meetings between suppliers representatives and Companys officials. 10. Disposal of Surplus, obsolete & scrap material. 11. Advising management as regards to new materials, new products, forward buying etc. 12. Acting as a link between Companys finance department and suppliers for timely

payments/settlement of suppliers bills

13. Attending to periodical activities like applying for important licence, quota etc. 14. Maintaining Companys image among suppliers.

PURCHASING PRINCIPLES:

Right Quality: - Right quality does not mean the best quality. Any quality that is suitable for the

purpose is known as right quality.

Right Quantity: - Purchase organisation is also responsible to maintain regular flow of materials for production activity. For this right quantity of materials is to be purchased. Excess purchase should be

avoided because Capital is unnecessarily blocked.

Right Time Right time means the minimum level. This level indicates the stock has reached to minimum and now the order must be placed. At this level, purchase department will not delay in

placing order. If the goods are arranged earlier than the required time, it will cause over-stock and

blocking of money. On the other hand, delay in delivery means loss of production.

Right Source: - The right source is that supplier who can supply the material of the right quality, in

the right quantity, at the right time and at the agreed or right price. The supplier should have sufficient financial resources and manpower to handle the order. Right source aspects require decisions as to

what items should be purchased directly from the manufacturers, which items from dealers & which

items from open market. As far as possible, the firm should be located near the buyers plant. This will avoid delivery delay and high transportation cost.

Right Price: - Right price does not mean the lowest price but the price which minimise the overall

cost.

Purchase procedure

The procedure describes the sequence of steps leading to the completion of an identified specific task.

Thus purchasing procedure describes the sequence of steps by which a purchase function is carried through from its inception to its completion. The purchasing procedure starts with the realization that

something is required, the need is then spelt out either in the form of requisition or in a bill of

materials, then attempts are made to identify their sources, the appropriate supplier is selected on the basis of some scientific analysis, the purchase order is placed with the selected supplier, it is checked

to ensure that the delivery is made as per the agreed terms, the invoice of the vendor is checked and

paid out and finally all relevant records are filed and maintained. Generally the professionally


managed organizations prepare their own Purchase Manual which details out the purchase procedure. It is not desirable to prescribe any standard purchasing procedure due to the existence of wide range of variations that exist among industries, companies, products, personnel etc. Generally

organizations should devise their own procedure on the basis of their specific needs. However, the

following basic steps are considered while prescribing the full proof purchasing procedure.

Steps of purchasing procedure: The purchasing generally comprises the following steps: 1) Recognition of the need

2) Selection of the supplier

3) Placing the purchase order 4) Follow up of the order

5) Receiving and inspection of the materials

6) Payment of the invoice 7) Maintenance of the records

8) Maintenance of the vendor relations.

Purchasing is a continuous and recurring phenomenon. The prescription of procedure simplifies and

expedites the operation. Similarly various types of forms are designed to simplify the purchasing procedure. The popular forms which are used in the purchasing procedure are: Purchase Requisition,

Purchase Order, Purchase Contract Form, Follow up Form, Receiving slip, Inspection Report, Test

Certificate, Rejection Form etc. These are all now computerized and the concerned Purchase and Stores personnel can review the same online.

Buyer Supplier Relationship

The relationship between a supplier and buyer can be a complex one. Each party wants to maximize

its time, resources, and cash investment; these may be competing priorities that can strain the

relationship. For such a partnership to succeed, it is paramount there exists a mutual business

understanding underscored with respect and a sincere wish for each party to prosper. Creating this

balance does not mean driving for the lowest possible price with no regard for the true expense

incurred, but rather recognizing that the success of one partner helps the success of the other.

1. Compliance with local and international regulations;

2. Conduct that breeds honesty, respect and open dialogue; and

3. Strategic financing that benefits both parties.

What is the difference between negotiation and bargaining?

Good negotiation actually either gets you to the point where you can bargain or better yet get you to

the point where you dont need to bargain at all. Bargaining is what people typically think of as

haggling, point counterpoint or pushing back and forth in what many people look at as a zero sum

game. Most people look at point counter point as being all that negotiation involves. What I want,

what Im unwilling to give up and what Im willing to trade in order to get what I want.

Negotiation is a broader communication between two people that involves what influences the other

side and what drives them. Its asking open ended questions about what their motivations and goals

are, the entire communication process around bargaining. Bargaining is a small subset of negotiation.

Negotiation is a much broader idea. A negotiation is really any communication between two parties

where you need or want the other party to do something.


You might communicate with them in a way that gets them to do something and because its not a

request, they wont have any idea that you influenced their decision. Negotiation is the process of

influentially communicating in a way that prompts the other side to react. Its communication thats

designed to provoke or create a response.

Negotiation is synonymous with navigation. We say the most dangerous negotiation is the one you

dont know youre in. So if people dont understand the difference between negotiating and bargaining someone could be negotiating with them in a way that influences their mindset.

Why Negotiate?

Perhaps you havent realized it, but youve been playing the negotiating game all your life. You were doing it even before you entered the real world of business-to-business negotiations. It was part of your reality before negotiating business-to-consumer to buy a car or digital TV or satellite TV service. In todays world, you negotiate consumer-to-consumer for things you buy or sell on Craigslist and eBay.

This may seem far away from the kind of negotiating you did when you were a child, trading

baseball cards or swapping lunches at school. However, tapping into the core skills you developed

during all those scrimmages is easy once you learn where your innate desire to swap originated. While those days may have long faded into history, the practice and promise of negotiating has

most likely stayed with youand most likely has become more important than ever in the real life you lead today.

Bartering Back Through Time

So where, how, when, and why did negotiation become a part of civilized society? It really started as barterthe direct exchange of goods or services without money involved.

No one really knows when the first barter took place, but we do know that bartering has been

around for much longer than buying and selling. It grew up as a system of give-and-take that accommodated anyone who chose to participate. Whether it was to acquire a piece of lamb in

exchange for some pottery or to obtain jewelry for a hand-painted headpiece, people found ways to

fulfill their needs.

The Negotiating Game

A good negotiation draws on the skills used for marketplace bartering and on the focused

determination required of bargaining. Negotiating encompasses a wide range of core principles and becomes a series of tactics and strategies that you must know how and when to use throughout the

entire game. In addition to remaining focused and forging strong relationships, youll need to be informed, be prepared, know who your challengers are, and have other alternatives.

Types of Negotiation

Although several forms of negotiation will be discussed in this book, the two most common

are positional negotiating and win-win negotiating. Particularly in todays fast-paced and heavily interconnected world, you should be aware of both types of negotiation and should embrace win-win

negotiation as the more favourable approach.

Positional Negotiation

Positional negotiating occurs when neither side moves from its original position because both are so

focused on their own needs that they cannot even begin to comprehend those of the other party. A power struggle ensues and they never really discuss goals and objects. The result is hours of trying to

produce agreements that everyone is satisfied with; long-term relationships are jeopardized because


theres too much negativity being exhibited. Time is wasted, because in todays environment an hour is forever. In positional negotiating, everyone is out for himself, and thats that.

When They Dont Want to Play

Since negotiations require two or more, what do you do if the person you want to negotiate with refuses your offer? First, find out why. There may be a simple explanation. Maybe the person doesnt have the time to take you up on your offer just yet but would be willing to work with you at a later

date. If you cant find out why, find out what or how. What can you put forth in order to make your

proposal more attractive? What can you put forth to make the negotiation quicker or easier? If the

coworker you carpool with decides she likes the freedom of having her own car every day, remind her of the benefits that carpooling provides. You could even offer to let her take your car to lunch or to

run errands. By switching the focus on how the deal gives her an advantage, and by giving her

something in return for the freedom shed be giving up, shes more likely to agree to the terms. And if you dont have time to work out the details, simply offer to drive the first weekyoull have plenty of time in the car to flesh out the deal.

The five main negotiation strategies are:

Competitive

Accommodating

Compromising

Collaborating and

Avoidance

Competitive strategy involves an I win, you lose attitude. Accommodation is I will let you win in exchange for some other benefit I hope to gain now or later. Compromising is I dont care who wins, I just want to get this over with quickly. Collaboration is We can both win by expanding the pie before we cut it. And avoidance is I dont really want to play at all. The Competitive Strategy

The Competitive Strategy of I win, you lose is the one most often used in settlement negotiations. It involves the use of intimidation, distraction, and diversion tactics to gain leverage.

You can choose a Competitive Strategy regardless of your bargaining position. If you have greater leverage, you can use competitive tactics to realize your advantage. But if your case is weaker,

competitive tactics can they create value.

Most negotiations of every type begin with a Competitive Strategy. The parties need to test each others wills before they begin bargaining seriously. The parties then continue their competitive bargaining or shift their approach to one of the four other strategies.

Following are examples of some competitive tactics:

Alternatives to Settlement Emphasize you have better choices than

settlement. The side that cares more about

settling is weaker. If you have the better

BATNA (Best Alternative to a Negotiated Agreement), you have more chips. Make that clear to your adversary.

One example is the threat to beat your adversary in the marketplace. This threatens the lawful use of market power to

make a legal victory Pyrrhic. Properly

used, this tactic is effective.

Anything But That


Claim your adversarys offer is not enough, even when it is. Pick up other concessions before he wrenches your agreement from you.

Bluffing Bluffing is at negotiations core because each side has limited information. A good

bluff uses your adversarys uncertainty to create even more doubt. And doubt

translates into risk, and risk into money.

Look for signs of uncertainty on her face or in her body language. But a bluff is not a

lie never expressly mislead.

A standard bluff is take it or leave it. Meet this bluff (and most others) by calling

it. You wont know your adversarys limit unless you push for it.

Bringing in the Media

Threaten to report some action or behavior to the media to induce concessions.

Plaintiffs will use this tactic in media-

sensitive industries, such as the

entertainment industry. Recognize that parties in such industries have fair

resistance to this tactic and will combat

your disclosure through press releases of their own.

Creating Deadlock

Create deadlock to force your adversary into concessions to move the negotiations

along. But distinguish this tactic, as a

tactic, from a legitimate impasse. Even reasonable people can disagree.

Diversion/Distraction If you feel you are losing an important

issue, shift the discussions to a different

issue before you concede. Even change the

subject altogether or use some other technique to distract your adversary from

completing the current discussion.

Done Deal: Take some unilateral action

and present it to other side as a done deal. Your adversary is thus forced to acquiesce or walk out. An example is when

a co-party shows up at the negotiation only

to discover that the other co-party has

already settled.

Good Cop/Bad Cop

Team an aggressive negotiator with a

friendly negotiator to win concessions. The aggressive negotiator uses competitive

tactics to anger and distract your adversary.

The friendly negotiator steps in to smooth

things over. The friendly negotiator becomes the mediator between your

adversary and the aggressive negotiator,

and you can strike a deal on the friendly negotiators terms.

Irrational Behavior Sometimes act irrationally, not only to

distract and unnerve, but also to undermine

your adversarys confidence. Lawyers tend toward rational argument. The irrational can throw off even an experienced

negotiator.

Limited Authority

Claim to lack authority to settle at some

amount and ask your adversary to reduce the offer to your authority limits. To

prevent your adversary from using this

tactic, determine her authority in advance.

If she lacks full authority, do not proceed.

Limited Time

Constrain the time limits of the negotiation. Counter this tactic by clarifying time

constraints in advance.

Poor Me Act like you have no background or

training in negotiation and ask your

adversarys help. He may sympathize with you and be more reasonable than he

intended. This tactic can be especially

effective for younger advocates.

Silence

Very few people can endure silence.

Silence can impel your adversary to give you more information or concede more

than he intended.

If your adversarys silence discomforts you, say something like, I see you are thinking about my offer. Im going to leave the room for a bit. Please let me know

when you are ready to respond. And begin to leave. The silence will end before you

reach the door.


Straw Man

Demand agreement on Issue 1, which your adversary cares about most. Create

deadlock and then reluctantly concede Issue 1 to gain agreement on Issue 2 (the

one you care about most) and maybe Issues 3 and 4 as well.

Turnabout After you have conceded an issue or

otherwise acted defensively, gain space by coming out strong on the next issue. But

choose that issue wisely. It must be

important, and you must win it.

Use of Power

Threaten to use your power and sometimes

actually use it. But heed this chess axiom: The threat is more powerful than its execution. The threat creates doubt and, hence, concessions; but once implemented, you limit your adversarys choices, and she will do what she must to respond.

The Accommodation Strategy

An Accommodating party will sublimate its concerns to satisfy the other partys, at least for the present. You choose an Accommodation Strategy if you have done wrong and want to get the

matter over with quickly and less expensively (airplane crashes and oil spills are two examples

where quick settlements will save money). And there are less dramatic examples where a desire to limit personal or business disruption will encourage you to end the matter quickly. Or maybe you

wish to gain some goodwill or other benefit now or later through a quick resolution.

Some accommodating tactics:

Face-Saving

Prioritize the other sides dignity. Use every opportunity to give face and respect to the other side. Allow the other

side to make tactful retreats to avoid embarrassment.

Identification

Align your interests with your adversarys, see the facts from her perspective, and

agree with her arguments. But dont concede unnecessary issues.

Take the Lead Oar

Move the negotiation forward regardless of who created the difficulty. Suggest

solutions, offer to prepare the documents,

and be flexible about timing.

Take Reasonable Actions

Always be the party of reason, whether

setting realistic deadlines or other conditions of the negotiation. Rarely if ever

use a competitive tactic to move the other

side.

The Compromising Strategy

Compromisers look for an expedient, partially satisfactory middle ground. Their primary interest is

haste and rough justice. Thus, compromisers are willing to trade concessions, sometimes despite the merits, simply to make a deal. One example is a dispute involving an ongoing business relationship. You may choose to give a little to preserve the relationship.

Following are the compromisers tactics.

Bit-by-Bit

Gain your concessions bit-by-bit rather than all at once. As the direction of the

incremental movement becomes clear,

suggest meeting at the mid-point.

Conditional Proposals

Make a proposal conditioned upon your

adversarys acceptance of issues you need favorably resolved.

Log-Rolling Concede on an unimportant issue to you (but important to your adversary) in


exchange for your adversarys concession on an issue that does matter to you.

Splitting the Baby At some point offer to split the difference

with the other side, whether through an exchange of remaining issues or halving

the dollar amount still in issue.

Tit-for-Tat

Never make a concession without obtaining one in return. This rule underlies all

bargaining (I wont negotiate against myself!). But you must adhere to it when compromising or you will compromise away all your value simply for

expediencys sake.

The Collaborative Strategy

The Collaborative Strategy (Win-Win) seeks to create value for both sides. Its focus is on each sides underlying interests and not their positions. You give the other side something it wants in exchange for something you want. You both gain in the process.

Business negotiators use the Collaborative Strategy. Business negotiations involve many different

components of value and risk allocation, all of which can be traded against one another for an

ultimately satisfactory outcome. The lesser opportunities for value and risk allocation in litigation settlement talks explain why most litigants begin with a Competitive Strategy.

Following are some collaborative tactics.

Flexibility

Be flexible, the hallmark of a skilled

collaborator. Know when to mount a tactical retreat and when to press for an

important point. Be willing to re-examine

decided issues, but dont feel obligated to make further concessions unless you also

gain something.

Focus on Process Process often translates into improved

substance. Rearrange the mechanical steps

of the negotiation to overcome impasse and deadlock and enhance problem-solving

prospects. Typical examples: take a break

in the negotiation; change the physical

setting of the negotiation; or return the

negotiation to the fact-finding stage.

Identify with Others in Similar

Circumstances This tactic might be termed the transitive rule of negotiation: argue that the other side has already treated similarly-situated

X in a particular way, and they should treat you the same way. Defendants in multi-

defendant suits often use this tactic when

the plaintiff has settled favourably with one of them.

The Avoidance Strategy

Avoiders try to ignore the entire dispute, or some specific issues, for at least some period of time.

The avoider uses tactics to sidestep or postpone an issue or withdraw altogether from what the avoider perceives as a threatening situation.

Negotiate Money Issues First If you prioritize money, insist that money

be negotiated first. By fixing the money

component of the settlement, you avoid discounts for the cash-worth of any non-

money concessions.

Negotiate Non-Money Issues First But if you wish to avoid paying money,

address the non-money issues first. You

can then value your non-monetary concessions and use those values to reduce

the amount of money you will pay your

adversary.

Refuse to Combine Negotiation of

Related Disputes If you are litigating multiple related

actions, refuse to negotiate the actions


together if you determine that you are

stronger in one case than another. You can thus avoid offsetting your strong case with

the other cases weaknesses.

Walk Out of the Negotiation If you become engaged in negotiations you

are not ready for, walk out. You may state

dissatisfaction with your adversarys proposals, but your goal is to defer

discussions to a later time.

Withdraw an Issue

If you are not yet ready to address an issue,

perhaps because it is too painful or simply

not ripe for discussion, remove that issue

from the negotiation, for at least some period of time.

Switching Strategies

You may decide to switch strategies if you feel you are making insufficient progress.

As negotiations move forward and you

want to encourage continued progress, you may abandon a Competitive Strategy for

one of the cooperative strategies

(Accommodation, Compromising, or Collaborative). Or you may instead move

to a more Competitive Strategy in response

to the other sides competitive behavior.

Conclusion

The Game of Negotiation requires specific strategies and the right tactics to implement that strategy. Your case and bargaining position will determine which negotiation strategy will work

best for you: Competitive, when you must have what you want; Accommodation, when you have

done wrong and want to settle quickly; Compromising, when expedience matters most; Collaborative, when you want to create a bigger pie; and Avoidance, when you are not yet ready to

bargain.

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