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:
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a) ADVANCING TECHNOLOGIES
b) LIMITED RESOURCES
c) INCREASING PROPORTION OF REVENUE SPENT ON PURCHASED GOODS AND SERVICES.
d) OPPORTUNITIES IN OUTSOURCING
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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
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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
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Revenue
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Baseline
5%
10 %
15 %
100
100
100
100
COGS – Material
60
57
54
51
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Labour & Var OH
20
20
20
20
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Gross Margin
20
23
26
29
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Fixed OH Expenses
10
10
10
10
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Net Income ( pretax )
10
13
16
19
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% 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
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1.
2.
3.
4.
5.
6.
RECOGNISE AND DESCRIBE THE NEED
TRANSMIT THE NEED
SELECT THE VENDOR
PREPARE AND ISSUE PURCHASE ORDER
FOLLOW UP THE ORDER
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
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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
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STANDARDISATION
TQM / ISO 9000 / 14000
QUALITY CIRCLES
VALUE ENGINEERING / VALUE ANALYSIS
SUPPLIER ASSESSMENT / VENDOR DEVELOPMENT
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TIME
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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
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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.
2.
3.
4.
5.
KNOWLEDGE
PRODUCT & ITS ALTERNATIVES
MARKET TRENDS
COMPETITIVE FORCES
HEDGE / FORWARD BUYING
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PRICE(CONTD…)
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RISK MANAGEMENT
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FORWARD MARKETS - COMMODITIES
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BUSINESS / ECONOMIC FACTORS
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PRICE ANALYSIS AND COST ANALYSIS
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LEARNING CURVES
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RELATIONSHIP / INTER DEPENDENCE
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NEGOTIATION SKILLS
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QUANTITY
* ORDER QUANTITY( EOQ / BATCH LOT / MIN ORDER QUANTITY )
* INVENTORY CONTROL
* JIT SYSTEMS
* ECONOMIC LOTS
* DISCOUNTS ETC
* STAGGERD DELIVERY TERMS
RELATED ISSUES
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WORKING CAPITAL
LOGISTICS
WAREHOUSING
DISTRIBUTION
SHELF LIFE / OBSOLESCENCE
AVAILABILITY / SHORTAGES - ( SHORT TERM / LONG TERM )
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SOURCE
DETERMINANTS OF SUPPLIER – MIX
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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
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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
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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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