Purchasing and Supply Management

A Formal Supplier Selection Process 1. Questionnaire Production capability Emphasis on quality 2. Financial analysis Long-term reliability 3. Buyer tour of supplier's plant 4. Suppliers tour the firm's plant 21

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 with securing 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 suppliers and maximizing corporate buying power.

Objectives of PSM 1. Uninterrupted flow of Materials 2. Manage inventory 3. Improve Quality 4. Develop Suppliers 5. Standardize 6. Achieve lowest total cost 7. Improve competitive position 8. Develop cross functional relationships 9. 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 Decentralized Purchasing Pros and Cons? Decentralized Purchasing

The 5 stages of purchasing Serve the factory – keep the factory running. Focus on clerical, logistical duties. Lowest Unit Cost – Cost analysis, competitive bidding, and negotiation become key skills Coordinated Purchasing – Cooperative purchasing across sites and profit centers. Eg. lead buyers, buying committees, centralization of purchasing etc. Cross functional Purchasing – Recognition that design, specification, and supplier development can have far more impact on cost than does negotiation 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 the right place at the right time.  

THE SEVEN WASTES. from Shigeo Shingo in Robert W. Halls book THE SEVEN WASTES from Shigeo Shingo in Robert W. Halls book Attaining 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

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!

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

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