Procurement Management & Managing Relationships with Suppliers Dira Ernawati, ST. MT Jur. Teknik Industri – UPN “Veteran” Surabaya

Background About 40 – 70% of cost of goods sold are from material costs Non financial contributions of supply management are of high importance: Quality of supplied materials Delivery consistency from supplier Supplier willingness to deliver more frequently with smaller delivery quantity Supplier involvement in developing new products Supplier production and delivery flexibility Dira Ernawati, ST.MT

Activities Related Procurement Management Design strategic relationships with suppliers Selecting appropriate suppliers Chose and implement appropriate technology to support procurement activities Maintain procurement related data bases Managing purchasing activities Evaluating supplier performance Dira Ernawati, ST.MT

Categories of Goods Purchased Direct materials, components, subassemblies Property, plant, and equipment (PPE) Maintenance, repair, and operating supplies (MRO) Services Dira Ernawati, ST.MT

Supplier Relationships & Sourcing Strategy

What is a Partnership A close collaboration among two or more trading partners in a supply chain, characterized by friction-free information sharing between them. Trading partners: suppliers, 3PL, dealers/distributors. They both agree to share risks and benefits of the relationships for a long term. A study by Helper (1991) revealed that the average length of contract in the US has increased from 1.2 years in 1983 to 2.3 years in 1989. Some companies (like Chrysler and Mazda 626) signed supply contracts for the life cycle of a model (Typically for 3-5 years). Dira Ernawati, ST.MT

Practices Across Nations GM Ford Chrysler Toyota Nissan Hyundai Kia Daewoo Suppliers tend to supply only one automaker Suppliers supply multiple automakers Most effective at strategically segmenting suppliers Big, but not loyal Able to learn from other customers Loyal, but small Unable to learn from other customers Dira Ernawati, ST.MT

Supplier Segmentation in Automotive Industry Supplier Association (190 suppliers) Supplier Association (90 suppliers) Subsidiaries > 20% ownership 30 – 35 suppliers Engine parts Transmission AC/Heater Radiators Body Panels Seats Tires Batteries Spark plugs Shocks Belts Dira Ernawati, ST.MT

Supplier Segmentation @ Japanese Automakers Non Strategic Suppliers Standardized / commodity items Low value inputs Stand alone Low asset specificity Little help from automakers Suppliers supply to multiple automakers Single functional interface (marketing to purchasing) Price benchmarking Strategic Suppliers Customized items critical for product differentiation High value Multiple interaction effects with other inputs High asset specificity Intensive face to face contacts Often exclusive relationships Multiple functional interfaces (engineering, manufacturing, etc.) Self enforcing agreements are necessary (trust, ownership, etc.) Dira Ernawati, ST.MT

Sourcing Strategy Leverage More suppliers Large spending value Reverse Auctions Full Strategic Sourcing Leverage More suppliers Large spending value Commoditized items Strategic Critical, customized Limited suppliers Commodities Low priority items Low spending value Bottleneck Exchanges Spot buys, integration Dira Ernawati, ST.MT

E-Auction, Exchange, Integrator, Spot Buys Jenis Penjelasan e-Auction Real time negotiation. Supplier bisa merevisi bid, bisa melihat bid orang lain. Exchange Linking buyers and sellers electronically, can be private or public exchange. Integrator Third parties, assume responsibility for managing a company’s sourcing activities. Spot buys Made on open market, based on price. Time consuming, because made on individual basis. Dira Ernawati, ST.MT

E-Auction Example AIRLINE EXAMPLE Number of supplier: 9 Number of bids:46 Materials Sourced: Mixed consumables Negotiation format: Reverse Auction Duration:30 minutes with two 5-minute extensions Establish real time competition. Do not address Total Cost of Ownership (TCO). Not suitable if supply < demand. Dira Ernawati, ST.MT

E-MARKETPLACE APPLICATION FOR STRATEGIC SOURCING Industry Commodity Historic costs Cost reduction Airline PC Consumables $ 2.5 M 37% Stationary $ 1.3 M 30% Consumer goods Direct materials-sub assemblies $ 9.3 M Foods Sliced beans $ 230,000 21% Petrochemical Misc. direct and indirect materials $ N/A 10-15% Dira Ernawati, ST.MT

Sourcing Strategy Leverage Test equipments Batteries Antennae Strategic Transport equipment High end routers Premium handsets Commodities Laptops & desktops Cable MRO/Office supplies Fuel Bottleneck OSP Construction Pedestals Old technology plugs Dira Ernawati, ST.MT