Purchasing and Supply Management

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Purchasing and Supply Management
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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

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Why study PSM?

• Purchasing and supply management is a powerful
  tool for improving profitability McKinseys
  Quarterly, 1997
• 19 point gap in a survey of electronic companies

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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

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Why Study PSM

• Strategic role
• Globalization
• Buyer/Planner concept
• Quality at the source
• Collaborative role of supplier

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Purchasing and Supply Management - Introduction
A companys procurement organization is tasked
withsecuring 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 suppliersand maximizing
corporate buying power.
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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
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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

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Improve Quality

• The cost to correct a substandard-quality
  material input can be huge
• Specification, quality audit etc.

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Develop Suppliers

• Reduction of supplier base (normally by 50)
• Select appropriate suppliers and work with the
  suppliers to attain continuous improvement

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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

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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.

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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.

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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.

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Reduce Administrative Costs

• Streamline purchasing procedures
• eMart in SAF
• Purchasing Card Program by VISA
• B2B exchanges

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Supply Organization

• Centralized Purchasing
• Pros and Cons?
• Decentralized Purchasing
• Pros and Cons?

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The 5 stages of purchasing

1. Serve the factory keep the factory running.
   Focus on clerical, logistical duties.
2. Lowest Unit Cost Cost analysis, competitive
   bidding, and negotiation become key skills
3. Coordinated Purchasing Cooperative purchasing
   across sites and profit centers. Eg. lead buyers,
   buying committees, centralization of purchasing
   etc.
4. Cross functional Purchasing Recognition that
   design, specification, and supplier development
   can have far more impact on cost than does
   negotiation
5. World Class Supply Management - Strategic
   supplier selection, long-term relationship
   design, supplier network management, supplier
   collaboration on new technologies etc.

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JUST IN TIME

• Only what is needed, nothing more... To have
  only the right materials, parts and products in
  theright place at the right time. 

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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

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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 defectsdefects interrupt the smooth flow
  of of work

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• 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.
• Inventoriesexcess inventories adds extra cost to
  the product

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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

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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

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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!

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1. Production flexibility at every stage of
supply

• Smaller and more frequent shipments of products
• Flexibility to produce quantities of intermediate
  products as needed

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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

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3. Comprehensive quality assurance

• Defective-free, high quality products and
  processes avoids costs.
• Eliminates wastes of
• - Time - Material
• - Product - Energy
• - Money - Information

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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

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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

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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)

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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

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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