Materials Management BUS 3

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Materials ManagementBUS 3 141 Information
Systems and Technology Week of Apr 2, 2007
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Agenda

• Deal of the Break
• Case due Wednesday
• Overview
• Technology and the 9 Elements of the Supply Mgmt
  Process
• Supply Management Applications
• EDI
• Online Auctions
• Summary

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Case 2 Deere Coat Management, p251, 9-1
1. FACTS OF THE CASE (Approx. 20 of Total Effort
/ Grade) Quantitative data (Revenue, Inventory,
Costs, Employees, Divisions, etc.) 2.
BUSINESS ISSUES IDENTIFIED (Approx. 20 of Total
Effort / Grade) Customers, Suppliers, Internal
Measurement Systems, Organization, Competitors,
Supply Shortages, Price Increases, Cash Flow,
etc) 3. CONCLUSIONS (Approx. 25 of Total
Effort / Grade) What has been going well? What
needs improvement? 4. RECOMMENDATIONS (Approx.
35 of Total Effort / Grade) What improvements
should be made? What (if any?) activities should
be stopped? How can the improvements be
implemented?
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Background and Overview
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Technology in the Materials Management Process
Identify WHAT Items are Required
Calculate HOW MUCH is Required
Schedule WHEN they are Received FROM WHOM
At the LOWEST Total COST of Ownership
With the Highest QUALITY and Reliability
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Four Basic Information Flows in Supply Management

• Statement of Need
• MRP
• Requisitions
• Reorder points
• Requests for information within the organization
• Pricing
• Availability
• Approved Suppliers
• Information from Suppliers and the marketplace
• Pricing and Availability
• New laws and regulations
• Information to Suppliers
• Additional requirements
• Specification changes

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Simplified Flowchart of an Automated Purchasing
System
From Leenders, Johnson, Flynn, and Fearon,
Purchasing and Supply Management, Thirteenth
Edition, McGraw Hill Irwin
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MRP is extremely dependent on accurate DATA
The system MUST see ALL inventory in ALL of these
categories at ALL times
In WIP
Open Work Orders
Open Purchase Orders
In Receiving
In a higher Assemblies
In the Stockroom
In Finished Goods
Shipped
In a WIP Location
EVERY time inventory is moved, a TRANSACTION must
be executed
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Technology in the 9 Elements of the Supply
Management Process
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The 9 Elements of the Supply Management Process
Supply Mgmt
Customer Service
Production
Shipping
Customer Demand
Production Schedule
Process Payment
Maintain Records
Follow-Up Expedite
Receive Verify
Select Supplier(s)
Issue Purchase Order
Establish Specifications
Assess Suppliers
Identify Requirements
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1. Identify Requirements
Identify Requirements
Process Payment
Maintain Records
Issue Purchase Order
Follow-Up Expedite
Receive Verify
Identify Suppliers
Select Supplier(s)
Establish Specifications

• Direct and Indirect
• Material Requisitions
• MRP Output
• Impact of Lead Time
• Other items to consider
• As availability becomes scarce, Purchasing alerts
  users
• Recommending subassemblies instead of components
• Proposing substitute items, where appropriate

• MRP
• Reorder Point
• System generated Requisitions
• Periodic Buys

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2. Establish Specifications
Establish Specifications
Process Payment
Maintain Records
Identify Requirements
Issue Purchase Order
Follow-Up Expedite
Receive Verify
Identify Suppliers
Select Supplier(s)

• Engineering Drawings and Specifications
• Samples
• Requisition Details (electronic or paper)
• Date originated, Document Number, Dept, Account
  Number, Signature(s)
• Complete description of material or service
  required
• Quantity and date required
• Shipping / delivery instructions
• Authorization to Buy
• Impact of Lead Time
• Other items to consider
• Understanding ultimate purpose (Are they asking
  for a Mercedes or just a car?)
• Catalogues and standard items
• Supplier Input

• Part Numbers
• Engineering Docs
• Contract Info
• Service Agreements

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3. Identify Suppliers
Identify Suppliers
Process Payment
Maintain Records
Identify Requirements
Establish Specifications
Issue Purchase Order
Follow-Up Expedite
Receive Verify
Select Supplier(s)

• History and Geography
• Request for Quotation
• Request for Proposal
• Request for Bid
• Other items to consider
• Input from Technical Staff
• Other

• Qualified Suppliers
• e-RFQ
• e-RFP

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4. Select Suppliers
Select Supplier(s)
Identify Suppliers
Process Payment
Maintain Records
Identify Requirements
Establish Specifications
Issue Purchase Order
Follow-Up Expedite
Receive Verify

• Supply Capability
• Quality
• Capacity
• Reliability
• Many other factors to be covered later in
  semester

• Pricing History
• Online catalogs
• PO agreements
• Reverse Auctions

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5. Issue Purchase Order
Issue Purchase Order
Identify Suppliers
Select Supplier(s)
Maintain Records
Identify Requirements
Establish Specifications
Follow-Up Expedite
Receive Verify
Process Payment

• Relationship to Material Requisition
• The Requisition provides the information that
  populates several Purchase Order data fields (see
  Requisition Details)
• Ensure Risk Management
• Acknowledgement
• Internal Controls
• Budgets
• Approvals
• Recurring Purchase Order Releases
• Pre-negotiated contracts
• Other items to consider
• ALWAYS ensure that the terms and conditions are
  in WRITING. A Purchase Order is a CONTRACT

Continued on next Slide
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5. Issue Purchase Order, continued
Issue Purchase Order
Identify Suppliers
Select Supplier(s)
Maintain Records
Identify Requirements
Establish Specifications
Follow-Up Expedite
Receive Verify
Process Payment

• Discrete Orders
• Pre-negotiated Blanket
• Pre-negotiated Vendor-Managed
• MRO
• Bid and Auction
• Corporate Purchase Card (pCard)

• System generated PO
• e-forms
• Link to open contracts
• Transmit via EDI
• e-Procurement apps

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6. Follow-Up and Expedite
Follow-Up Expedite
Identify Suppliers
Select Supplier(s)
Process Payment
Maintain Records
Identify Requirements
Establish Specifications
Issue Purchase Order
Receive Verify

• ERP Applications assume that scheduled dates will
  be received on time
• A Scheduled delivery date needs to be monitored
  and managed
• Possible missed dates must be identified in
  advance and avoided
• If delays are inevitable, recovery plans must be
  developed and managed
• Other items to consider
• An understanding of the Suppliers production
  process, capacity, and constraints is critical to
  collaborative problem solving
• Expediting should be on an exception basis. If it
  is determined that a particular supplier is
  consistently being expedited, corrective action
  should be initiated

• Past Due orders
• Reschedule messages
• Orders due in next X days / weeks
• Delivery performance data

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7. Receive and Verify
Receive and Verify
Identify Suppliers
Select Supplier(s)
Process Payment
Maintain Records
Identify Requirements
Establish Specifications
Issue Purchase Order
Follow-Up Expedite

• Relationship to Material Requisition and Purchase
  Order
• Key data elements travel throughout
• Key objectives
• Confirm receipt of goods
• Ensure proper physical condition, quantity,
  documentation
• Quality parameters met
• Cross functional activity among Purchasing,
  Receiving, Materials, and Finance
• Other items to consider
• Receiving is technically a non-value-added
  activity. It is designed to ensure that something
  that should have been done properly actually was.
  The goal is to ensure quality throughout, and
  eliminate the need for inspection

• Bar Codes
• Online Documentation
• Exception reports

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8. Process Payment
Process Payment
Identify Suppliers
Select Supplier(s)
Receive Verify
Maintain Records
Identify Requirements
Establish Specifications
Issue Purchase Order
Follow-Up Expedite
Key Document Flow

• Automated check runs
• Exception messages
• Electronic Funds Transfer (EFT)
• Electronic Bill Presentment Payment (EBPP)

Requisition
Payment
Purchase Order
Packing Slip (Receiving)
Invoice

• Match the data in the Purchase Order, Packing
  Slip, and Invoice
• Discrepancies must be reconciled before payment
  is issued
• Some level of discrepancies can be ignored (e.g.
  if /- 5 or /- 25)
• Audits of all
• Discounts for early payment are often available
  and should be taken whenever possible
• Other items to consider
• Chronic discrepancies from a single Supplier
  could lead to a change

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9. Maintain Records
Maintain Records
Identify Suppliers
Select Supplier(s)
Receive Verify
Process Payments
Identify Requirements
Establish Specifications
Issue Purchase Order
Follow-Up Expedite

• Purchase Orders should be archived for up to 7
  years
• Key Records to be Maintained (from p.77)
• Purchase Order Log of all POs
• Copies of Purchase Orders
• Commodity file
• Supplier history file
• Outstanding Contracts against which POs are
  placed
• Other items to consider
• Can be electronic or paper
• Paper can be managed by a third party

• Online data bases

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Supply Management Applications
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Enterprise Resource Planning (ERP)
Definitions
From PC Magazine
An integrated information system that serves all
departments within an enterprise. An ERP system
can include software for manufacturing, order
entry, accounts receivable and payable, general
ledger, purchasing, warehousing, transportation
and human resources
From What is.com
An industry term for the broad set of activities
supported by multi-module application software
that helps a manufacturer or other business
manage the important parts of its business,
including product planning, parts purchasing,
maintaining inventories, interacting with
suppliers, providing customer service, and
tracking orders. ERP can also include application
modules for the finance and human resources
aspects of a business. Typically, an ERP system
uses or is integrated with a relational database
system. The deployment of an ERP system can
involve considerable business process analysis,
employee retraining, and new work procedures
From erpfans.com
Software solution that addresses the enterprise
needs, taking the process view of an organization
to meet the organizational goals, tightly
integrating all functions of an enterprise
Popular ERP Application Providers

• SAP
• Oracle
• J.D. Edwards

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e-Procurement Applications
Key Functions of Procurement Applications

• Spend Analysis
• Supplier Performance Assessment
• Supplier Sourcing
• Contract life-cycle management
• Procurement
• Order Tracking
• Invoicing

Popular e-Procurement Application Providers

• Ariba
• i2
• FreeMarkets

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Adoption Rate of Internet-Based Procurement

• To identify new suppliers 80.7
• Purchasing indirect materials 70.9
• As part of RFP 48.8
• On-line collaboration with suppliers 42.8

From Leenders, Johnson, Flynn, and Fearon,
Purchasing and Supply Management, Thirteenth
Edition, McGraw Hill Irwin
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Implementing e-Procurement Systems for Indirect
Materials
Planning and Set-Up

• Select a solutions-provider and determining the
  type of relationship
• Determine how many suppliers and which suppliers
  to keep in its supply base for indirect purchases
• Negotiate terms and conditions with the chosen
  suppliers, including deeply discounted prices in
  return for volume
• Load digitized versions of the suppliers
  catalogs alongside the e-procurement application

Using the System

• Employees use computer browsers to search the
  catalogs of designated suppliers, selected items
  for purchase, and create requisitions and a P.O.
  is generated
• The P.O. is streamed directly into the suppliers
  inventory application and the order is processed,
  and the goods shipped
• Invoicing and/or payment is made sometimes
  through and electronic bill presentment and
  payment process

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Electronic Data Interchange (EDI), Online
Collaboration, and Auctions
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Electronic Data Interchange (EDI)
Computer-to-computer data exchange between two
organizations. Uses standards to determine how
the data will be structured and transmitted
Key uses of EDI

• Purchase Orders
• Shipping notifications
• Shipping schedules
• Invoices

While EDI remains very common, many organizations
are moving toward Internet data exchange. This is
less costly to implement and provides greater
flexibility in structuring and standardizing data
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EDI Benefits
EFT
fosters JIT relationship
paperless purchasing
purchasing professionalism
EDI Benefits
support for bar coding
increased productivity
increased data accuracy
inventory and lead time reduction
internal systems impact
building enhanced communication with suppliers
From Leenders, Johnson, Flynn, and Fearon,
Purchasing and Supply Management, Thirteenth
Edition, McGraw Hill Irwin
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Uses of the Internet in Supply Management

• Significantly reduced time throughout every step
  of the procurement process
• Significantly reduced errors throughout every
  step of the procurement process
• Identifying suppliers throughout the world
• Searching electronic catalogs
• Accessing government sources
• Supporting global sourcing
• Exploiting on-line auctions where appropriate
• Exchanging emails
• Automatic shipment and receipt acknowledgement
• Near-real-time delivery tracking
• Near-real-time inventory status tracking
• Near-real-time pricing information
• Enabling the controlled purchase of C items
  outside Procurement organizations

Best suited for executing routine, repetitive
transactions and communicating standard
information status. Also very helpful in planning
strategic buys
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On-line collaboration in Supply Management
Intranets

• Internal network for authorized employees to
  share information
• Based on internet technologies
• Secure environment that enables the use of
  e-procurement applications

Extranets

• Intranets extended to Suppliers (and others)
  outside the organization
• Established with Key suppliers only
• Can be designed to facilitate communication
  between
• Individuals at the Buying and Selling
  organizations
• Systems at the Buying and Selling organizations

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Online Auctions
Definitions in the Textbook
Auction
A seller with goods to sell invites multiple
buyers to bid against each other at a set time
and place to purchase the goods
On-line Reverse Auction
A buyer wishes to purchase to purchase goods or
services and invites multiple sellers to bid
against one another in a declining price auction
using the Internet
From Leenders, Johnson, Flynn, and Fearon,
Purchasing and Supply Management, Thirteenth
Edition, McGraw Hill Irwin
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When to Use Online Auctions

• The good or service has the characteristics of a
  commodity
• There is a clear and unambiguous specification
• There are multiple suppliers available and
  willing to compete for business
• The organization has access to the technology
  necessary to run the auction

From Leenders, Johnson, Flynn, and Fearon,
Purchasing and Supply Management, Thirteenth
Edition, McGraw Hill Irwin
33
Three Types of e-Auctions

• Open offer negotiations

Sellers list items for sale Suppliers select
items for bid and enter offers until
closing Names not disclosed to other bidders
Private offer negotiations
Buyers provide a list that includes target price
and quantity Suppliers select item(s) and offer
prices Status levels accepted closed BAFO open
Posted price
Buyer posts price and first supplier that meets
price is accepted
From Leenders, Johnson, Flynn, and Fearon,
Purchasing and Supply Management, Thirteenth
Edition, McGraw Hill Irwin
34
Summary
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Seven Benefits of Information Technology for
Supply

• Efficiency
• Quick access to data
• Quick communication with Suppliers
• Greater focus on A items
• Fewer errors than manual systems
• Better integration across functions
• Increased control and reduced maverick buying