1. Procurement and Manufacturing
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Overview of procurement and manufacturing
The quality imperative
Procurement
Manufacturing
Lean and six sigma
Logistical interfaces

3. The 8 Dimensions of Product Quality
Performance
How well the product performs in comparison to how it was designed to perform
Reliability
Likelihood that the product will perform throughout its expected life
Durability
The actual life expectancy of the product
Conformance
Does the product meet its specifications as designed
Features
What different functions or tasks can the product perform
Aesthetics
Is the styling, color, workmanship pleasing to the customer
Serviceability
What is the ease of fixing or repairing the product if it fails
Perceived Quality
Based on customer’s experience before, during and after they purchase a product

4. Total Quality Management
Total quality management (TQM) is a philosophy focused on meeting customer expectations with respect to all needs, across all company functions, and recognizing all customers, both internal and external
Top Management commitment and support
Maintaining a customer focus in product, service and process performance
Integrated operations within and between organizations
A commitment to continuous improvement
TQM’s basic conceptual elements are:

5. Management standards have been established by the ISO in both quality and environment
The International Organization for Standards (ISO) was formed after World War II
First one established in 1994
Currently transitioning to ISO 9000:2008
ISO 9000—International Quality Standard
First one established in 1998
Current one is ISO 14001:2004
ISO 14000—International Environmental Standard

6. ISO certified suppliers are frequently preferred
by procurement departments
They have to conform to an externally defined set of standards for quality and delivery of service
They are usually more open to sharing supply chain information
They welcome building relationships with their customers
They have formal processes in place for continual improvement of their products, services, and processes
They are easier for procurement folks to initially qualify and periodically audit
Certification is done by an external register agency
Firms have to be re-certified every three years

7. Procurement is now a strategic activity of the firm
Purchased goods and services are among the largest cost elements for most firms
The growing emphasis of outsourcing has expanded the supply base of organizations
This added complexity requires more management attention on the organizational interfaces with suppliers
Several factors have elevated the importance of procurement to the firm 2 7

8. Purchasing perspective
Purchasing agent tried to get lowest price possible for acceptable quality
Transactional focus led to getting the best possible “deal” today
Did not focus on future transactions
No concept of Supply Chain
Purchasing seldom looked beyond the first-tier supplier
Purchasing simply responded to demands of production group
Purchasing was historically perceived as just a buying function for manufacturing and repair materials and supplies

9. Procurement perspective
Procurement looks up and down the entire supply chain for impacts and opportunities
Goods and service account for 55 cents of every sales dollars
Focuses on building relationships with suppliers and downstream customers
Involvement with outsourcing includes more than just purchasing raw materials and parts
Also includes finding alternate sources for manufactured products or services to help manage demand
Procurement is an organizational capability that ensures the firm is positioned to implement its strategies with support from its supply base

10. Procurement focuses on several issues
related to the firms’ supply base
Ensuring continuous supply
Minimizing inventory investment
Quality improvement of supply
Supplier selection
Building supplier relationships
Supplier continuous improvement
Supplier development
Lowest total cost of ownership

11. Figure 4.1 Major Categories for
the Components of Total Cost of Ownership

12. Procurement strategies
Reducing total number of suppliers while minimizing risk
Volume consolidation
Building partnerships
Sharing information and knowledge
Identifying linked processes and shared opportunities for improvement
Supplier operational integration
Involving the supplier early in product design
Reducing complexity
Value engineering
Value management extends beyond buyer-seller operations

13. Savings potential from volume consolidation
Purchases average 55% of every sales dollar
Cost savings estimated between 5% to 15% of purchases
Potential savings is $5.5 million annually for a company with revenues of $100 million

14. Supplier operational integration
Primary objective of operational integration is to cut waste, reduce cost, and develop a relationship that allows both buyer and seller to achieve mutual improvements
Buyer providing detailed sales information to supplier
Buyers and suppliers working together to redesign linked processes
Eliminating duplicated activities performed by both the buyer and supplier
Integration can take many forms
Can provide incremental savings of 5% to 25% over the benefits of volume consolidation

15. Value management through early supplier involvement in product design
Figure 4.2 Flexibility and Cost of Design Changes

16. Purchase requirement segmentation
For example, “A” items in ABC inventory
Pareto Principle is a small percentage of items account for a large percentage of the dollars spent
Purchasing processes should be tailored to the value and/or criticality of the materials needed
The most procurement effort goes to the most critical supplies/suppliers
Segmented approach is used to prioritize resources for purchasing

17. E-Commerce and procurement
Shares information and knowledge such as order entry, planning/scheduling, tracking, delivery, billing and payment
Electronic Data Interchange (EDI) is the electronic transmission of data between a firm and its suppliers
Electronic catalogs allow rapid access to product info, specifications, pricing and ordering
Buying exchanges allow sellers or buyers of specific goods or services to find each other on a common web site
Internet-based communications offer several opportunities for making product information available while overcoming compatibility issues between computer systems

18. Manufacturing perspectives
Brand power is the measure of customer preference based on reputation, product quality and supply chain capabilities
Volume is traditionally treated according to the principle of economy of scale
Average cost to produce product declines as manufacturing volume increases
Particularly important when high fixed costs are present
Variety involves frequent product runs and high repetition of small lot sizes
Processes that can rapidly switch production from one product to another while retaining efficiency are said to have economy of scope

19. Manufacturing perspectives continued
Constraints interact with volume and variety to create realistic manufacturing plans
Capacity is how much can you produce in a given unit of time
Equipment considers how flexible it is
Is one particular piece a bottleneck?
Setup/Changeover considers how quickly can you change from one variety of product to another
Leadtime is the measure of elapsed time between release of a work order to the shop floor and completion of all work on the product to achieve ready-to-ship status

20. The four common manufacturing processes
Job shop creates a custom product for each customer
Batch process manufactures a small quantity of an item in a single production run
Line flow process has standard products with a limited number of variations moving on an assembly line through stages of production
Continuous process is used to manufacture such items as gasoline, laundry detergent and chemicals
Modifications of the above can create new options
Mass customization produces a unique product quickly and at a low cost using a high volume production process

21. Manufacturing strategies should match your market requirements
Make to Stock (MTS) features economies of scale, large volumes, long production runs, low variety, and distribution channels [Also known as MTP – make-to-plan]
Assemble to Order (ATO) is when base components are made, stocked to forecast, but products are not assembled until customer order is received
Manufacturing postponement practiced here
Make to Order (MTO) relies on relatively small quantities, but more complexity
Requires much interaction with customer to work out design and specification
Usually shipped direct to customer

22. The choice of strategy determines
which performance cycles the customer experiences
Figure 4.3 Manufacturing Strategy and Performance Cycles

23. Total cost of manufacturing
Total cost of manufacturing (TCM) includes:
Procurement and production activities
Inventory and warehousing activities
Transportation activities
TCM generally expressed as cost per unit
Procurement and production costs go down as volume goes up
Inventory and warehousing costs go up as volume goes up
Transportation costs go down as volume goes up, but level off at high volumes

24. TCM per unit ranging across strategic alternatives
/MTS
Figure 4.4 Total Cost of Manufacturing

25. Lean systems
Lean is a philosophy of manufacturing that emphasizes the minimization of the amount of all resources (including time) used in the operation of a company
Defining principle is the elimination of “waste”

26. Primary objectives of lean systems are to
Produce only the products that customers want
Produce products only as quickly as customers want them
Produce products with perfect quality
Produce in the minimum possible lead times
Produce products with features that customers want and no others
Produce with no waste of labor, materials or equipment
Produce with methods that reinforce the occupational development of workers

27. Six sigma quality concepts
Six sigma approach is to identify sources of variability and then systematically reduce them
The six sigma goal is to achieve a process standard deviation that is six times smaller than the range of outputs allowed by the product’s design specification

28. Example of a six sigma quality level
Three sigma quality level
Produces defect free product percent of the time
66,807 defects per million parts produced
Six sigma quality level
Produces defect free product percent of the time
3.4 defects per million parts produced

29. Logistical interfaces
Resources must be procured, positioned, and coordinated as needed to support the manufacturing strategy selected
Four approaches to achieve this are:
Just-in-time (JIT)
Materials requirements planning (MRP)
Design for logistics
Performance based logistics

30. Just-in-time (JIT) interfaces
Just-in-time only produces to a customer order (ATO, MTO)
Purchased materials and components arrive at the manufacturing or assembly point just at the time they are required for the transformation process
Raw material and work in process inventories are minimized
Demand for materials depends on the finalized production schedule
Lot sizes are as low as one unit
Close cooperation with suppliers is essential!

31. Materials requirements planning (MRP) interfaces
For more complex manufacturing (MTO, ATO) where large numbers of components or assemblies are used to produce a final product
Procurement has a key role in insuring all the components are obtained on time to make an end item
Key information requirement is the bill of materials (BOM)
Planning sometimes spans multiple manufacturing locations (e.g. Boeing Dreamliner)

32. Design for logistics interfaces
Design for logistics includes the requirements and framework for logistical support in the early phases of product development
Considers
What we are going to make
How we are going to make it
What logistics capabilities do we need
How we are going to integrate our suppliers into the process
Any subassembly manufacture by suppliers
The need for outsourcing of some parts or assemblies

33. Performance based logistics interface
Initiated by US Department of Defense to purchase performance outcomes instead of individual transactions defined by product specifications
Government specifies desired outcomes and lets suppliers determine the best way to meet those requirements
Currently limited to government purchasing but business organizations are expected to adopt the practice

34. Table 4.2 Strategic Integration Framework