Operations Management
Part 12
Purchasing and supplier
management
PROF. NAKO
STEFANOV,
DR. HABIL.
Introduction – basic terms
Supply management describes the methods and processes of modern corporate or institutional buying. This may be for the purchasing of supplies for internal use referred to as:
1. Indirect goods and services;
2. Purchasing raw materials for the consumption during the manufacturing process;
3. Purchasing of goods for inventory to be resold as products in the distribution and retail process.
In many organizations, acquisition or buying of services is called contracting, while that of goods is called purchasing or procurement. Purchasing and Procurement Purchasing refers to a business or organization attempting to acquiring goods or
services to accomplish the goals of its enterprise. Typically the word “purchasing” is not
used interchangeably with the word “procurement”, since procurement usually includes
expediting, supplier quality, and transportation and logistics (T&L) in addition to
purchasing.
Procurement is the acquisition of goods, services or works from an outside external
source. It is favorable that the goods, services or works are appropriate and that they are
procured at the best possible cost to meet the needs of the acquirer in terms of quality and
quantity, time, and location. Corporations and public bodies often define processes
intended to promote fair and open competition for their business while minimizing
exposure to fraud and collusion.
Tools and Dimensions of Supply Management
The Procurement Process ‐ Creating a Sourcing Plan: Procurement
The Procurement Process –
Creating a Sourcing Plan
Introduction
Identify Opportunities
Analyze the Situation
Undertake Strategic Analysis
Case Study
Create a Strategic Sourcing Plan
Introduction ‐ The Procurement Process
Identify Opportunities
Opportunities are usually triggered by a business
requirement for a product or service.
Material requirements might include: (1)Equipment; (2)
Components; (3) Raw materials; (3) Completely finished
products.
Service requirements might include: (1) Computer
programmers; (2) Hazardous waste handlers:
(3) Transportation carriers; (4) Maintenance service
providers
Users (also called internal customers) identify a need for
material or service requirements, and communicate this
need to purchasing.
Analyze the Situation
Situation analysis can include “Purchase Requisitions” or “Statements of Work.”
Purchase Requisitions should contain: (1) Description of required material or
service; (2) Quantity and date required; (3) Estimated unit cost; (4) Operating
account to be charged; (5) Date of requisition (this starts the tracking cycle); (6) Date
required; (7) Authorized signature
Statements of Work (SOW) for services specify the work that is to be completed,
when it is needed, and what type of service provider is required.
Marketing may want to purchase an advertising campaign.
R&D may need a clinical trial.
Human resources may need to print a brochure.
Undertake Strategic Analysis
Procurement must work with the suppliers and its internal customers to analyze the process
to understand where opportunities exist to eliminate waste and increase value delivery.
Supplier evaluation
In-depth evaluation is required for major purchases. It is used for non-routine supply items of
higher value. It begins with a list of potential suppliers. Existing suppliers with good track records
should not be ruled out.
Supplier assessment criteria
1. Equipment and facilities Up‐to‐date? Ability to expand in the future?
2. Processes Ramp‐up capabilities? Process cycle times? Reliable quality control program? General housekeeping? Working conditions? Status of back orders?
3. Management Capabilities Project management skills? Stable, harmonious team? How do they view your company as a customer? Long‐range strategic vision? Leadership?
4. Information Systems Up to date? Training requirements?
Supplier evaluation criteria
1. Planning and control systems
Planning and control systems include those systems that release, schedule, and control the flow of work in an organization. As we shall see in later courses, the sophistication of such systems can have a major impact on supply chain performance. Among the questions the buying firm should ask:
Does the supplier have well‐developed systems for planning material, personnel, and capacity needs? If not, why not?
Does the supplier track key performance measures, such as throughput time, quality levels, and costs? Are these measures compared to performance objectives or standards?
How easy is it for customers to interact with the supplier’s planning and control systems?
This last point is particularly important to organizations interested in effective supply chain management. When interaction is high, information about the customer’s needs flow easily to the supplier, and the customer can, in turn, retrieve important information from the supplier. Consider the relationship between Wal‐Mart and Proctor and Gamble (P&G). When a Wal‐Mart store sells a particular P&G item, the information flows directly to P&G’s planning and control systems. P&G can then plan production and schedule shipments accordingly. Furthermore, Wal‐Mart can easily find out when a P&G shipment will arrive at one of its distribution warehouses, thereby allowing Wal‐Mart to consolidate this shipment with others on the way to individual stores.
Supplier evaluation criteria
2. Environmental regulation compliance
3. Minimum typical evaluations to consider – Price; Quality; Service; Delivery
Weighted Point Method
Using a Weighted Point evaluation system, purchasing can rank suppliers according to some of these criteria.
Weighted Point Method
Using a Weighted Point evaluation system, purchasing can rank suppliers according to some of these criteria.
In this example, Supplier A has a score of 3/5 on quality, 4/5 on delivery, 2/5 on price, and 7 / 10 on service, with a total score of 63. Supplier B scores better than A on quality, not as well on delivery, but better on price and service. Given the associated weights on quality, delivery, price, and service that are important to the purchaser, the weighted scoring system suggests that Supplier B is better suited for this purchase, and should be awarded the contract.
Create a Strategic Sourcing Plan
A strategic sourcing plan requires procurement to assess and manage the change so that the benefits of the procurement strategy are realized.
The plan must be created in a way that ensures:
The benefits identified in the strategy are delivered in full and on time.
Change will take place successfully and in accordance with a realistic time plan.
Risks have been considered and the appropriate contingencies are built in to the overall plan.
What makes a good plan?
Implementation is time‐intensive and often has a high failure rate.
Successful implementations are properly planned and communicated during the creation of the strategy, and then are actively executed and continually managed to completion.
As the strategy is being developed, the procurement team will identify which areas of the business will be impacted, directly and indirectly.
During implementation, measurement and attainment of results and the identification of key milestones help to ensure success.
Managing inventory
Inventory management is primarily about specifying the size
and placement of stocked goods. Inventory management is
required at different locations within a facility or within
multiple locations of a supply network to protect the regular
and planned course of production against the random
disturbance of running out of materials or goods.
The scope of inventory management also concerns the fine
lines between replenishment lead time, carrying costs of
inventory, asset management, inventory forecasting,
inventory valuation, inventory visibility, future inventory
price forecasting, physical inventory, available physical
space for inventory, quality management, replenishment,
returns and defective goods and demand forecasting and
also by replenishment Or can be defined as the left out
stock of any item used in an organization.
Inventory management
Inventory management is a system used to oversee the flow of products and services in and out of an organization. A company may decide to incorporate one key inventory management technique or combine a variety of techniques to meet organizational needs. Businesses utilize inventory management strategies to create invoices and purchase orders, generate receipts and control inventory‐
related accounting.
Inventory Management – Key Terms-1
Lead Time Lead time is the amount of time it takes to
reorder inventory. Suppliers deliver products at
varying times after an order is placed. A useful way to
manage inventory is to establish lead time reports to
understand how long it takes to replenish your
inventory.
Monitor Inventory Levels Having high levels of
inventory adds to expenses and increases overhead
costs. An effective way to manage inventory is to
determine the inventory demands of the business.
Limit seasonal inventory and cut back on inventory
that does not sell.
Customer Delivery An effective way to manage
inventory is to measure inventory turnover and
delivery turnaround time. This involves measuring
how often your inventory sells and how long it takes to
get into the hands of your customers
Return to Vendor (RTV)
The Return to Vendor or “RTV” System allows you to return inventory items to your vendors efficiently, to track open vendor returns accurately, and to close out vendor returns easily, once the disposition of the returned items is known. The RTV system is fast, flexible, and tightly integrated with other Stream V processes including Order Processing, Hold Management, Inventory Allocation, and Order Fulfillment.
Inventory Management – Key Terms-2
Inventory Consultant Many organizations hire inventory
consultants outside the company to develop and manage
internal inventory systems. Inventory consultants are
responsible for maintaining accuracy, cycle counting, shipping
and receiving, and managing order-picking operations.
Purchase Software Many businesses manage inventory by
designing an inventory management database or purchasing
inventory management software. Inventory management
software enables distributors to customize the database to fit
their individual needs.
Product Turnaround All businesses have products that sell
and products that sit on the shelves. A helpful way to manage
inventory is to establish a system that pinpoints which
products move quickly and which products take more time to
sell.
Inventory Management – Key Terms-3
Inventory Consultant Many organizations hire inventory
consultants outside the company to develop and manage
internal inventory systems. Inventory consultants are
responsible for maintaining accuracy, cycle counting,
shipping and receiving, and managing order-picking
operations.
Purchase Software Many businesses manage inventory by
designing an inventory management database or
purchasing inventory management software. Inventory
management software enables distributors to customize
the database to fit their individual needs.
Product Turnaround All businesses have products that
sell and products that sit on the shelves. A helpful way to
manage inventory is to establish a system that pinpoints
which products move quickly and which products take
more time to sell.
Inventory Management – Key Terms-4
Tracking System Many businesses develop a tracking system to manage
inventory and monitor turnaround times. Inventory tracking system
formats range from spreadsheets to computer programs. They provide
complete inventory control allowing business owners to organize item
levels and take cycle counts in distribution centers or stock rooms.
Work in Progress Businesses successfully manage inventory by tracking
units as they move through different operational stages. Many businesses
utilize some inventory to create other products. Establishing a system to
track "work-in-progress" materials allows businesses to adjust order
amounts before the inventory gets too low and slows production.
Supplier Assistance An effective way to manage inventory is to solicit the
help of suppliers. Supplier-managed inventory gives the vendor access to
the distributor's inventory data. The supplier generates purchase orders
based on the distributor's needs. Distribution-intensive companies utilize
vendor managed inventory controls to eliminate data-entry errors and to
effectively manage the timing of purchase orders.
Inventory Management Programs
Inventory management programs exist to facilitate the storage and
movement of goods. Based on its functional and operational
requirements, a company chooses to utilize a certain type of
solution to manage its inventory. Inventory management programs
have very sophisticated features, and depending on the options
chosen can get quite costly. Most inventory management solutions
fall into three main categories: warehouse, enterprise and
distribution management solutions.
WMS
Although some warehouse management systems operate as multipurpose tools, the basic foundation of the management of the
storage and movement of inventory has not changed. The WMS
should allow users to define parameters for storing and moving
inventory. Although a WMS makes an excellent tool for managing
and tracking inventory, it does not provide the necessary
functionality to determine inventory levels and demand
requirements.
ERP Enterprise resource planning software incorporates various modules designed to effectively communicate data
between departments and locations within a company. Inventory management comprises one of the modules found in
most ERP software programs. The standard ERP inventory management module works hand-in-hand with the WMS
module. The ERP inventory management module monitors the inventory level; order methodology and safety stock
levels while the WMS monitors the movement, tracking and storage of the inventory within the warehouse. The ERP
inventory management program also sends data to other modules within the program, such as the demand planning
module, accounting modules and forecasting modules.
DRP Most companies with multiple facilities that utilize a distribution network operate distribution requirements
planning software. DRP software allows companies to manage the inventory flow between facilities. DRP software
looks at the inventory usage requirements of each branch facility and manages the inventory distribution to these
locations. DRP software acts as the brain of a distribution operation; it sends and receives signals from the branch
facilities and uses those signals to determine re-order quantities, safety stock levels and analysis.
Collaboration Although each of these software programs can manage inventory as a stand-alone solution, most of
them collaborate with other programs to form a complete solution. For example, DRP software manages the central
distribution of goods in a network, but it relies on data from the local distribution center. ERP programs rely on data
from each of its installed modules to manage the inventory as part of a complete enterprise solution. For example, the
inventory management module of an ERP system communicates to the purchasing module when all line items of a
purchase order get received. The purchasing module communicates this data to the accounts payable module, which
in turns facilitates the disbursement of funds to the supplier.
Reorder point (ROP)
The reorder point (ROP) is the level of inventory
which triggers an action to replenish that particular
inventory stock. It is normally calculated as the
forecast usage during the replenishment lead time
plus safety stock. In the EOQ (Economic Order
Quantity) model, it was assumed that there is no
time lag between ordering and procuring of
materials. Therefore the reorder point for
replenishing the stocks occurs at that level when the
inventory level drops to zero and because instant
delivery by suppliers, the stock level bounce back.
Reorder point is a technique to determine when to
order; it does not address how much to order when
an order is made.
Material requirements planning(MRPI)
Prior to MRP, and before computers dominated industry, Reorder point
(ROP) / reorder-quantity (ROQ) type methods like EOQ (Economic Order
Quantity) had been used in manufacturing and inventory management.
In 1964, as a response to the Toyota Manufacturing Program, Joseph Orlicky
developed Material Requirements Planning (MRP). The first company to use
MRP was Black & Decker in 1964, with Dick Alban as project leader.
Orlicky's book Material Requirements Planning has the subtitle The New
Way of Life in Production and Inventory Management (1975). By 1975,
MRP was implemented in 700 companies. This number had grown to about
8,000 by 1981.
In 1983 Oliver Wight developed MRP into manufacturing resource planning
(MRP II).[1] In the 1980s, Joe Orlicky's MRP evolved into Oliver Wight's
manufacturing resource planning (MRP II) which brings master scheduling,
rough-cut capacity planning, capacity requirements planning, S&OP in 1983
and other concepts to classical MRP. By 1989, about one third of the software
industry was MRP II software sold to American industry ($1.2 billion worth of
software).
MRPI functioning
Material requirements planning (MRP) is a
production planning, scheduling, and inventory
control system used to manage manufacturing
processes. Most MRP systems are software-based,
while it is possible to conduct MRP by hand as well.
An MRP system is intended to simultaneously meet
three objectives:
Ensure materials are available for production and
products are available for delivery to customers;
Maintain the lowest possible material and product
levels in store;
Plan manufacturing activities, delivery schedules
and purchasing activities.
Manufacturing resource planning (MRP II)
Manufacturing resource planning (MRP II) is defined as a method for the effective planning of all resources of a manufacturing company. Ideally, it addresses operational planning in units, financial planning, and has a simulation capability to answer "what‐if" questions and extension of closed‐loop MRP.
This is not exclusively a software function, but the management of people skills, requiring a dedication to database accuracy, and sufficient computer resources. It is a total company management concept for using human and company resources more productively.
MRP II is not a proprietary software system and can thus take many
forms. It is almost impossible to visualize an MRP II system that does
not use a computer, but an MRP II system can be based on either
purchased–licensed or in-house software. Almost every MRP II
system is modular in construction. Characteristic basic modules in an
MRP II system are:
Master production schedule (MPS); Item master data (technical data);
Bill of materials (BOM) (technical data); Production resources data
(manufacturing technical data); Inventories and orders (inventory
control); Purchasing management; Material requirements planning
(MRP); Shop floor control (SFC); Capacity planning or capacity
requirements planning (CRP); Standard costing (cost control); Cost
reporting / management (cost control)
There are also auxiliary systems such as: Business planning; Lot
traceability; Contract management; Tool management; Engineering
change control; Configuration management; Shop floor data
collection; Sales analysis and forecasting; Finite capacity scheduling
(FCS)
Toyota Production System(TPS)-Lean Management
The Toyota Production System (TPS) is an
integrated socio-technical system, developed by
Toyota, that comprises its management philosophy
and practices. The TPS organizes manufacturing
and logistics for the automobile manufacturer,
including interaction with suppliers and customers.
The system is a major precursor of the more
generic "lean manufacturing." Taiichi Ohno, and
Eiji Toyoda developed the system between 1948
and 1975. Originally called "just-in-time
production," it builds on the approach created by
the founder of Toyota, Sakichi Toyoda, his son
Kiichiro Toyoda, and the engineer Taiichi Ohno.
The principles underlying the TPS are embodied
in The Toyota Way.
Ohno
Taiichi
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