OP 16 Strategic Procurement and Materials Management

Dr Akarte Milind

Contents
Understand Supply Chain Concept Need to focus on customer Key issue in SCM Vertical Integrations Vs Supply chain Problem of Supply Chain Elements of Supply Chain Role of Procurement in Supply Chain Traditional Vs Todays Purchasing view Why Purchasing Case Examples: Supply Chain at - Dell Inc Strategic Procurement at - Siemens Medical Solutions

Introduction
Read

key issues at Dell Inc

Excess inventory Replacing inventory with information Collaborate Conduct business with suppliers Top thirty suppliers Share (customer sensitive) information Suppliers to match production schedules to Dells Use of Internet - to collaborate

Supply Chain in Action Dell Inc

Enlist key issues discussed in the context of the subject

key issues at Dell Inc

Key issues: Inventory reduction replace by information Top 30 suppliers identification of key suppliers Use of Internet & Web Technology for Competitiveness Information sharing Partnership/ Alliance
forecast, production schedule, quality issues, defect rates, engineering changes, and product enhancements Win Win Situation lower price,
Inbound

SCM - Concept
Final Product Manufacturer Ex. IBM, Tata Motors, GM Firms Acting on purchase orders and specifications received from component manufacturer. Ex. Sheet metal, aluminum, copper wholesalers or distributors Outbound

Strategic approach
Firms extracting raw materials from ground Ex. Iron ore, oil wood

Retailers

customers

SCM - Concept
customers
Buy products based on cost, quality, availability, maintainability, reputation + other requirements and expectations

SCM - Concept
Reverse Logistic
Customer may return products or undergo warranty repairs or just throw products away or recycle them It is also a part of SCM activity

Companies and their supply chains that provide things will be successful

Generic Supply Chain

Component Manufacturer End Product Manufacturer Wholesalers / Distributors Retailers

SCM - Concept
Definition : The series of companies that eventually make products and services available to customers, including all of the functions enabling the production, delivery, and recycling of materials, components, end products, and services, is called a supply chain.

Raw Material Suppliers

Product and Service Flow Recycling and Returns

End Customers

Information / planning / Activity Integration

SCM - Definition
Institute for Supply Management
The design and management of seamless, value added process across organizational boundaries to meet the real needs of the end customers

SCM - Definition
Council of Logistic Management The systematic strategic coordination of the traditional business functions and tactics across these business functions within a particular company and across businesses within the supply chain for the purpose of improving the long term performance of the individual companies and the supply chain as a whole.

Supply chain Council

Managing supply and demand, sourcing raw materials and parts, manufacturing and assembly, warehousing and inventory tracking, order entry and order management, distribution across all channels, and delivery to the customers.

SCM - Concept
Why to focus on Customer?:
There is only one truly source of income for the entire chain of organizations that is the end customer Suboptimal when individual firm make business decision that ignore the interest of the chain Sub optimization
Add cost and time to the end product (customer) Leads to lower demand from customer

SCM - Concept
Other companies involved in Chain:
Play important role in delivering end product to customer Generally referred as service providers Trucking and airfreight shipping companies Information system providers Warehousing firms Freight forwarders Agents and consultants

SCM - Concept
Service providers Extremely useful
Get the product where they need to be in the timely fashion Allow buyer and seller to communicate effectively Allow firms to serve the customer for the lowest possible cost

Vertical Integration and Supply Chain

Forward Integration
Refers to acquiring customers operations Example Acquiring distributor or other outbound logistics provider

Backward Integration
Refers to acquiring source of supply An end product manufacturer acquiring a suppliers operation that supplied component parts

Difference Supply Chain & Vertical Integration

Firms in supply chain are relatively free to enter and leave the chain relationship if it is no longer beneficial

Supply chain Are effective than vertical integration Are dynamic in nature

Example Supply Chain

Bullwhip Effect?

Example Supply Chain

This is the case of: Independent planning and lack of supply chain information sharing and coordination XYZ bearing limited safety stock, which is build in to its roller bearing purchase order results in additional and even greater safety stock levels at ABC limited In turn, an increased % of specialty steels production in the form of safety stock. Conclusion: If the supply chain was longer, the magnification of safety stock, would continue as orders pass to more distant suppliers in the chain. This supply chain inventory and production problem is known as the Bullwhip Effect.

Raw Material - High Carbon Steel

Specialty Steels Limited

ABC Bearing Limited

XYZ Auto Limited

End Customers

Raw Material - Steel Rods

Component Rollers

Component Roller Bearing

Example
Read Purchasing An Important Function Strategic procurement at Siemens Medical Solutions

Role of Purchasing
Traditional
Purchasing regarded as service to production Corporate executives
paid less attention issues concerned to purchasing

Role of Purchasing
Hence, purchasing identified as a key activity
Rather it is a strategic activity to overall business

Primary goal of purchasing:

Smooth flow of raw material at lowest total cost To improve quality of finished goods To obtain customer satisfaction

After 1980
Global competition intensified Executives realized
impact of large quantity of purchased materials and WIP On cost, quality, delivery lead time, NPD

Purchasing can contribute these goals by:

Selecting better materials and suppliers Working closely with strategic suppliers
to improve quality of raw material

Involving purchasing & suppliers in NPD Serve as a link between

Supplier and organization for improved manufacturability

Role of Purchasing
Involvement of purchasing and strategic suppliers in Concurrent Engineering activities:
It is essential for selecting components and raw materials, that ensure the requisite quality is designed into product and to aid in reducing design-to-produce cycle time.

Why Purchasing in SCM?

Purchasing function among supply chain is viewed as a major strategic contributor to cost reduction through: 1. Better supplier evaluation techniques 2. Early Supplier Involvement 3. Value engineering in Product Design 4. Standardization of parts 5. Make or buy decision

Purchasing View
Traditional Multiple sourcing Competitive bidding Lowest price Specification driven Short term contract, React to market Trouble avoidance Purchasing responsible Little sharing of information on both sides Manual, paper based system Duplication of data entries specification from requisition reproduced on PO Todays Key Suppliers Understand Capabilities of supplier End customer driven Long term Opportunity maximization Cross functional team with top management involvement Strategic Share risk and opportunity Automated, electronic based

Movement of Supply Management functions

Pre 1939 1940-49 1950-69 1970-89 1990-99 2000- Future Clerical World War II unlimited market emerged as managerial activity Managerial Emphasis Purchasing Strategy Integration into corporate strategy Integration with supply networks and information technology

Evolution of the purchasing / Materials / Supply management functions

Supply Management
According to National Association of Purchasing Management Supply Management is defined as a system management concept employed by some organizations, designed to optimize the factors of material costs, quality, and service. It include following activities (generally combined in single department): Purchasing, transportation, warehousing Quality assurance for incoming materials Inventory management, and internal distribution of materials

Supply chain Management

SCM is a system approach to maintain the entire flow of information, materials, and services from raw materials suppliers through factories and warehouses to the end customer

National Association of Purchasing Management Defined SCM as the design and management of seamless, value added process across organizational boundaries to meet the real need of the end customer The development and integration of people and technological resources are critical to successful supply chain integration.

Supply Management Vs SCM

SCM is different from supply management SCM emphasizes all aspects of delivering products to customers, whereas supply management emphasizes only the buyer-supplier relationship SCM represents a philosophy of doing business that stresses processes and integration whereas Supply management is more commonly used as system approach in purchasing function. The use of the concepts of purchasing, procurement, materials management, and supply and SCM will vary from organization to organization

Purchasing - Function
Purchasing also called process of buying
Assumption: sole responsibility of purchase department

For carrying out the function effectively

All departments must involve Also called cross functional approach

Function Obtaining the right material in right quality, right quantities, with the right delivery (time and place) from the right source and at right price.
* Introduction to materials management by Arnold Tony, Person Ed, pp 179, 2004

Books
Purchasing and Supply Management
Dobler and Burt, Tata McGraw Hill, 1998

Purchasing and Supply Management

Leenders, Fearon, Flynn and Johnson, McGraw Hill 20 th Edition, 2001

Purchasing and Supply Chain Management

Monczka, Trent and Handfield, Thomson, 2002