Procurement Management

Dr. Ranjan Ghosh

Indian Institute of Management
Calcutta

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 OVERVIEW

 ALL ORGANISATIONS NEED INPUTS OF GOODS AND SERVICES FROM EXTERNAL

SUPPLIERS OR PROVIDERS.

 SAVINGS IN MATERIAL COSTS MEAN SIGNIFICANT OPPORTUNITIES FOR IMPROVING

CORPORATE PROFITABILITY AND RETURN ON INVESTMENT.

 QUALITY OF INPUT MATERIALS AFFECTS FINAL PRODUCT QUALITY IN A MAJOR WAY.

 IN MOST CONCERNS, LARGE OR SMALL, PURCHASING IS FAST ACQUIRING WIDER
RECOGNITION AND A MORE STRATEGIC ROLE, DAY BY DAY, DUE TO:

 a) ADVANCING TECHNOLOGIES
 b) LIMITED RESOURCES
 c) INCREASING PROPORTION OF REVENUE SPENT ON PURCHASED GOODS AND SERVICES.
 d) OPPORTUNITIES IN OUTSOURCING
 e) FEWER AND LARGER SUPPLIERS/CONGLOMERATES.
 f) INCREASING ENVIRONMENTAL CONCERNS.
 g) SUCCESSFUL ADOPTION OF ‘WORLD CLASS’ IDEAS (TQM, JIT ETC.,) AND CUTTING EDGE
 TECHNOLOGIES BY LEADING CONCERNS.

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OVERVIEW ( CONTD…)
 FOR ALL THE ABOVE REASONS, BUYERS ROLE IS BECOMING MORE STRATEGIC IN NATURE.
IT INCLUDES, AMONG OTHERS.

1) ADVISING TOP MANAGEMENT ON MARKET TRENDS – SHORT TERM AND LONG
TERM
 2) NEGOTIATING LONG TERM RELATIONSHIPS WITH CRITICAL SUPPLIERS
 3) BUILDING STRATEGIC LINKAGES WITH KEY SUPPLIER UNITS
 4) VENDOR DEVELOPMENT
 5) QUALITY THRUST
 6) SUPPLY CHAIN MANAGEMENT
 7) TOTAL COST REDUCTION
 8) PURCHASE RESEARCH
 9) VALUE ADDITION THROUGH CREATIVE PURCHASING ROUTE AND WORKING
MORE TOWARDS ‘ TOTAL COST CONCEPT AND VALUE ADDITION’ WITH
CONTINUOUS IMPROVEMENT PERSPECTIVE.

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 The Leverage

Strategic Sourcing can have a significant

impact on the financial performance and
shareholder value of a Company.
“When the goal is boosting profits by
dramatically lowering costs, a business
should look first at what it buys.”
Fortune, February 20, 1995

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 Illustrative Example

Percentage Cost Reduction in Direct Materials


 Baseline 5% 10 % 15 %

 Revenue 100 100 100 100

 COGS – Material 60 57 54 51

 Labour & Var OH 20 20 20 20

 Gross Margin 20 23 26 29

 Fixed OH Expenses 10 10 10 10

 Net Income ( pretax ) 10 13 16 19

 % Improvement 30 60 90

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 PROCUREMENT

A. TRADITIONAL VIEW OF PURCHASING

B. TODAY’S BUSINESS NEEDS

C. PROCUREMENT AND CHANGE MANAGEMENT

D. VISION AND MISSION

E. COMPETITIVE STRATEGY

F. ROLE OF STRATEGIC PROCUREMENT

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 PROCUREMENT - STEPS
 1. RECOGNISE AND DESCRIBE THE NEED
 2. TRANSMIT THE NEED
 3. SELECT THE VENDOR
 4. PREPARE AND ISSUE PURCHASE ORDER
 5. FOLLOW UP THE ORDER
 6. RECEIVE AND INSPECT THE MATERIAL

 7 A) AUDIT THE INVOICE

 B) SETTLE THE PAYMENT

 8. CLOSE THE ORDER

 9. AFTER SALES/WARRANTY OBLIGATIONS

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 PROCUREMENT OBJECTIVES:

RIGHT QUALITY

RIGHT TIME

RIGHT QUANTITY

RIGHT SOURCE

RIGHT PRICE

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QUALITY
 1) QUALITY- FITNESS FOR USE
 2) CONFORMANCE TO SPECS TO BE ENSURED AT SOURCE
 3) REJECTION – NO SOLUTION
 4) MINIMAL CHECKING AT RECEIVER END
 5) RELIABILITY / REPEATABILITY
 6) CREATION OF COST EFFECTIVE SPECIFICATIONS;
 CHANGES, IF ANY, FOR CONSIDERATION;
 BOTH SUPPLIER AND USER HAVE TO CONTRIBUTE
 7) SAFETY AND ENVIRONMENT – MAJOR THRUST AREAS
 8) QUALITY TO BE CREATED IN A PRODUCT, CANNOT BE INSPECTED INTO A PRODUCT

RELATED ISSUES
 STANDARDISATION
 TQM / ISO 9000 / 14000
 QUALITY CIRCLES
 VALUE ENGINEERING / VALUE ANALYSIS
 SUPPLIER ASSESSMENT / VENDOR DEVELOPMENT
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 TIME

 LEAD TIME ANALYSIS

 FOLLOW UP SYSTEM
 EXPEDITING
 NETWORK ANALYSIS/CRITICAL PATH ANALYSIS
 LIQUIDATED DAMAGES
 ‘FORCE MAJEURE’ CONDITIONS
 LOGISTICS

 RELATED ISSUES

 EFFECT OF TIME OVER-RUN FOR PROJECTS/CRITICAL SPARES

 BONUS/PENALTY/COST OF EXPEDITING

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TIME ( CONTD….)

LEAD TIME ANALYSIS

EFFECT OF LONG LEAD TIME ON COSTS AND PROFITABILITY

ELEMENTS OF ADMINISTRATIVE LEAD TIME

MAKING A FLOW CHART SHOWING TIME FOR DIFFERENT ACTIVITIES

ANALYSIS OF FLOW CHART TO IDENTIFY DELAYS AND SHORTCOMINGS OF

PROCEDURES

IMPROVEMENT OF PROCEDURES TO SHORTEN INTERNAL LEAD TIME

INTEGRATED APPROACH

SUPPLIER’S LEAD TIME ANALYSIS

NEGOTIATION WITH SUPPLIERS TO REDUCE LEAD TIME AND RENDERING SUCH

HELP AS MAY BE NECESSARY AND FEASIBLE

 LOGISTICS 11
 TIME ( CONTD…)
IMPORTANT ISSUES
 INTERNAL LEAD TIME

 PURCHASING SYSTEMS AND PROCEDURES

 KNOWLEDGE BASE
 INCOMPLETE SPECIFICATIONS / OVER SPECIFICATIONS

 EXTERNAL LEAD TIME

 INCORRECT CHOICE OF SUPPLIER

 OVER OPTIMISTIC DELIVERY PROMISE
 CHANGE IN BUYER’S REQUIREMENT / INCOMPLETE ORDER / BUYER’S FAILURE TO KEEP HIS
PART OF PROMISE
 LACK OF EFFICIENCY IN SUPPLIER ORGANISATION
 DELAY GENUINELY BEYOND SUPPLIER’S CONTROL
 LOGISTICS

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PRICE
1. CONCEPT OF PRICE
2. COST BASIS
3. VALUE / QUALITY
4. CONCEPT OF RIGHT PRICE
5. LOWEST PRICE NOT NECESSARILY RIGHT PRICE
6. “TOTAL COST” CONCEPT
7. PRICE TERMS
8. DISCOUNTS
9. COMMERCIAL FACTORS
10. MONOPOLY / OLIGOPOLY / PERFECT COMPETITION
11. ECONOMIC TRENDS
12. BUYER & SUPPLIER PARTERNERSHIPS - CREATING VALUE TOGETHER

KEY SUCCESS FACTORS :

1. KNOWLEDGE
2. PRODUCT & ITS ALTERNATIVES
3. MARKET TRENDS
4. COMPETITIVE FORCES
5. HEDGE / FORWARD BUYING 13
PRICE(CONTD…)

6 RISK MANAGEMENT

7 FORWARD MARKETS - COMMODITIES

8 BUSINESS / ECONOMIC FACTORS

9 PRICE ANALYSIS AND COST ANALYSIS

10 LEARNING CURVES

11 RELATIONSHIP / INTER DEPENDENCE

12 NEGOTIATION SKILLS 14
QUANTITY

* ORDER QUANTITY( EOQ / BATCH LOT / MIN ORDER QUANTITY )

* INVENTORY CONTROL

* JIT SYSTEMS

* ECONOMIC LOTS

* DISCOUNTS ETC

* STAGGERD DELIVERY TERMS

RELATED ISSUES

* WORKING CAPITAL
* LOGISTICS
* WAREHOUSING
* DISTRIBUTION
* SHELF LIFE / OBSOLESCENCE
* AVAILABILITY / SHORTAGES - ( SHORT TERM / LONG TERM )

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SOURCE
DETERMINANTS OF SUPPLIER – MIX

 CONSISTENT QUALITY
 SUPPLIER FACILITIES
 COST, NOT PRICE (‘TOTAL COST’ CONCEPT)
 STABLE AND COMPETITIVE
 DELIVERY TIME (NORMAL, SOS)
 LOCATION
 SERVICE / ATTITUDE / RELIABILITY
 DEVELOPMENTAL ORIENTATION / INNOVATION
 FINANCIAL STRENGTH
 TECHNOLOGY / QUALITY CONTROL / R&D
 MARKET STANDING / REFERENCES

 KEY SUCCESS FACTORS

 KNOWLEDGE OF SUPPLIERS/MARKET/OWN PRODUCT
 UNDERSTANDING OF ENVIRONMENT
 LONG TERM PLANNING
 DEVELOPING STRATEGIC LINKAGES WITH KEY SUPPLIERS
 SUPPLIER DEVELOPMENT
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 PURCHASING: RELATED ISSUES

 PURCHASING OBJECTIVES AND STRATEGIES

 PURCHASING STRUCTURE AND ORGANISATION
 SYSTEMS AND PROCEDURES
 MEASURING PERFORMANCE, EFFICIENCY AND EFFECTIVENESS
 BENCH MARKING - BEST PRACTICES

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IN CONCLUSION

PROCUREMENT IS ACQUIRING A MORE STRATEGIC ROLE IN BUSINESS

 INTEGRATE PURCHASING INTO YOUR ORGANISATION’S STRATEGIC PLANNING
 ‘MAKE OR BUY’ DECISION
 GAIN COMPETITIVE ADVANTAGE THROUGH EXCELLENCE IN PURCHASING
PERFORMANCE
 SET AND APPLY RIGHT CRITERIA FOR SELECTION OF YOUR VENDORS
 SUPPLIER DEVELOPMENT
 SET RIGHT PERFORMANCE STANDARDS FOR YOUR PURCHASING FUNCTION
 RE-ENGINEER YOUR PROCUREMENT PROCESS FOR BETTER USER SATISFACTION
AND ACHIEVE CONTINUOUS IMPROVEMENTS IN INVENTORY AND PURCHASING
COSTS THROUGH IMPROVEMENT IN PURCHASING CYCLE.
 LOGISTICS AND SUPPLY CHAIN
 BENCH MARKING THE PURCHASING FUNCTION
 TOTAL QUALITY IN PURCHASING
 ROLE OF PURCHASING IN THE VALUE CHAIN
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