Purchasing and the SupplyChain

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Purchasing and the Supply-Chain
http//www.cips.org
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Supply Chain for a Florist
Home customers
Commercial customers
Florist
Packaging
Local delivery service
Arrangement materials
Consumables Maintenance
FedEx delivery
Flowers market local/ international
Internet services
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Purchasing objectives

• Buy to requirements so that
• Inventory is available when, where and in wanted
  form (minimum effort to use)
• Least cost for quality
• Optimise purchasing department/function -
  overheads, accumulated costs, cash flow,
  warehousing timely delivery
• The BUYER is the KEY - responsible for
  researching, placing and progressing orders.

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Questions

• Why is purchasing for a Channel Tunnel project
  different from purchasing for Tesco or Gap ?
• Why is purchasing for ASDA different from
  purchasing for Harrods?
• What are the purchasing requirements of the
  Metropolitan Police?
• Why is the futures market important for Nestle or
  Kelloggs?
• What are the advantages of centralised vs.
  decentralised purchasing functions?
• The know-how knowledge-base, competencies, the
  skills of the buyer for www.dabs.co.uk?
• What is the strategic and operational
  contribution of purchasing supply?

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A national Electric Power company

• industry generation distribution utility
• size 22 billion revenues
• capacity 39,000 megawatts
• electricity sales approx 200m. megawatt hrs
• customers 5.9 million
• spend 3 billion
• transmission lines 8,000 miles
• Service territory 197,500 sq. miles
• Geographic Area England Wales

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What are the purchasing requirements problems of

• An NHS Trust?
• Airbus industries?
• Virgin Trains?
• Barratts Homes?
• Unilever Detergents Division?
• Royal Air Force?
• www.dabs.co.uk ?
• Pret à Manger?

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What research goes into purchasing?

• Supplier investigation competencies, capacities,
  credit rating, service quality
• Our dependency on particular suppliers
• Competitor information
• Advising suppliers on how to meet our quality
  requirements
• Economic forecasting the supplier
• Purchase targets their attainment
• Financial targets our profit plan
• Value analysis - of buying processes items we
  buy
• Our quality/service requirements control
  methods

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What research goes into purchasing?

• Supplier investigation competencies, capacities,
  credit rating, service quality
• Our dependency on particular suppliers
• Competitor information
• Advising suppliers on how to meet our quality
  requirements
• Economic forecasting the supplier
• Purchase targets their attainment
• Financial targets our profit plan
• Value analysis - of buying processes items we
  buy
• Our quality/service requirements control
  methods

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Procurement Role SCM Core Processes

• identify needs materials, products or services
• strategic buying - futures, options, hedging,
  stock-piling
• supplies/supplier intelligence, selection
  negotiation
• contract development POP
• replenishment Planning - expediting materials
  services
• maintaining catalogues
• supplier performance measurement
• transportation logistics
• procurement systems
• diversity spend management
• vendor-managed inventory
• JIT

• What of supply chain processes are
• centralised?
• decentralised
• automated?

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Purchasing procedures methods?

• Instructions for contract
• The terms, the detail, cancellation penality
  issues, packaging, export import docs, insurance,
  transport, contract security, credit control,
  receipt arrangements, quality data recording
• Catalogues, drawings/specifications.
• CAD , bill of materials MRP1 - the detail of
  what we order
• Catalogue changes - part change the ripple
  effect
• Deletion or launch of products
• POP
• Requests, authorisations, purchase orders, GRNs,
  invoices, payments. Call-offs from orders.
• Segmentation of duties, physical verifications
• SOP, forecasting POP

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Purchasing procedures methods?

• Purchasing by commodity group
• Knowledge of the buyer
• Price leverages
• Data collection analysis
• Exception for action progress reports for
  planning
• Audit monitoring procedures wastage,
  obsolescence, theft, stock-outs. Pareto 80/20,
  warehousing costs

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Procurement - Key Skills?

• Business awareness and strategic procurement
• Developing managing procurement systems
• Purchasing techniques and methods
• Supplier evaluation and selection
• Risk and value management
• Contract management Legal aspects of procurement
  (contracts)
• Purchasing negotiations
• Quality management
• Service level agreements
• Ethical behaviours in procurement
• Relationship management (client-server)
• Performance evaluation of suppliers self
• Change management

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Buying and negotiation?

• Supplier partnerships vs. competitive (least
  cost) buying
• Negotiation skills
• researching sources, assessing sources, customer
  relationships management, win-win mutual
  respect.
• Methods to keep costs down - tendering, WWW
  B2B, Buying portals
• Negotiate preparation, the negotiation,
  completing the buy.
• Attention to detail
• Humour, patience, self-control, Avoid dramatics
• Analytical approach to problems
• Questioning listening
• Verification - contract formulation testing

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Supply Chain Management Drivers
Improve customer service Improve order
management corporate Growth Improve asset
use Improve demand planning Improve
warehouse/distribution activities Accelerate
cash to cash cycle Supplier/Supply base
management Strengthen partnerships Regulatory
compliance
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Planning, logistics zero working capital
Strategic Forecast
Sales Order Demand
Pull
Pull
Supplier owned managed strategic inventory
Point of Use MTO
Distributor/Customer
ContractTO
Point of Use
Distributor/Customer
MTS
Point of Use
Distributor/Customer

• Optimize
• Capacity
• Daily Through-put
• J.I.T. for Common Parts

Flow Manufacturing
Min/Max Replenishment Common Inventory
BANK
JIT
JIT
Supplier
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Information sharing, dataflows feedback
SupplierManagement
Rules configuration
Real time availableto promise
Delivery on Demand
At Point of Use
J.I.T.
Continuous flowmanufacturing
Interprise Visibility
First PromisedDeliver Date
Inventory
WIP
CorrectConfiguration
Distributor
Supplier
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Integrating SCM Applications
Integration of Process and Technology

• functional areas
• accounts payable
• inventory
• procurement
• Performance indicators for SCM
• Optimise
• material sources track/measure supplier
  performance, scorecard them
• spending patterns/supplier
• materials handling - available when/where needed
• inventory levels - reduce out-of-stock or
  overstock

Available to Promise
Production Optimization
Advanced Planning
ERP Engines - Oracle - SAP
Purchasing
Order Management
Export / Import Freight Management
Warehousing Distribution
Forecasting and Demand Planning
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Supply/Procurement Issues
Resource Usage
Quality

• make or buy (contract out)
• market-based purchasing?
• supply partnerships?

Speed
Performance objectives
Reliabiity
Market competitiveness
Flexibility
Supply network relationships
Cost
Capacity
Process technologies
buyers market sellers market
Decisions
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Consider

• the detail of B2B system interactions
• planning, design, control of information
  materials flows along the SC to meet customer
  requirements efficiently, now future.
• methods of coordination in the SC
• how can the SC be improved 'structurally?
• what technology e.g. EDI, WWW/internet has
  affected the development of SCM?

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Tiered supply relationships

• a company can trade with
• 1st tier - immediate suppliers
• 2nd tier - suppliers of suppliers
• end-customers
• Consider balance of each
• Non-exclusive relationships e.g. Firm C - may
  single source (exclusive supply) or multi-source
  item X
• Exaluate relationships
• close intimate? Make or contract in
  (outsource)?
• For what items strategic, trivial?
• Many suppliers or a few?
• Keiretsu (collaborative) vs. Transactional
  (arms-length)

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Flows of products, services information
Supply side
Demand side
Company A
2nd-tier suppliers
1st-tier suppliers
1st-tier customers
2nd-tier customers
Company B
Up stream
Down stream
Company C
X
X
X
X
X
For Company A Internal supply network Immediate
supply network Total supply network
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Analysis of supply relationships
Long term virtual operation
Vertical integration
Close - few suppliers
Partnership supply relationship
Market relationship
Type of inter- firm contact
Traditional market supply
Virtual spot trading
Transactional - many suppliers
Resource scope
Do nothing
Do everything
Character of internal operations activity
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Aggregate Plan ?? MRP1
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Aggregate Plan (product groups)
MRP2
Firm orders
Forecast random orders
Master production schedule (MPS)
Design changes
Plan how many when where we will build each
finished product.
Bill of materials
MRP1
Inventory data
Stock movements
Control Reports
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Distribution Channels Logistics

• distribution channels routes methods from
  producer ? distributors ?customer
• Logistics management synonymous with SCM?
• narrowly defined concerned with inbound
  transportation, storage (warehouse) outbound
  distribution.

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SC Partnership - Shared information

• e.g. production rate (as of capacity)
• on-hand inventory
• inventory in transit
• advance ship notices
• forecasts
• damaged goods
• actual vs. delivered amounts
• real-time alerts
• planned product engineering changes

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Measuring PS contribution to Corporate
performance

• suppliers include contractors for work
  services
• performance monitoring measuring supplier
  ability to comply with contractual obligations
  delight (PS is a supplier)
• Balanced Scorecard "SMART" objectives
• Proactive visible alignment of PS strategy
  operations to fit corporate position
• the basics contribute to value-add (right
  goods/services, right place, right time, right
  price).
• ample evidence if P S is delivering key
  objectives
• post contract monitoring - vendor rating
• What corporate objectives?
• innovative products/services - differentiation
  advantage
• control over costs thru. systems
• supplier development RD
• appraisals of new supply chains.
• reputation is not at risk by activities within
  the SC

• Product quality
• MTBF (Mean Time to Fail)
• of incoming rejects (delivery accuracy)
• warranty claims
• Audit service quality (against agreed SLAs)
• call-out service response times
• performance against agreed delivery lead times

• Specific
• Measurable
• Achievable
• Realistic
• Time-bound

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Some yardsticks of performance (PS Function
Suppliers?)

• quality of supplier performance - fundamental to
  contract management
• relationships management
• evaluating the supply base supplier profiles
  e.g. growth, market share performance
• transaction processing costs, prices cost
  avoidance contribution to revenue targets
• impact on spend controlled, directly
  influenced, not yet targeted
• year on year improvement
• no. of suppliers their rationalisation (single
  sourcing vs. competitive sourcing)
• robust, effective procurement systems
  eProcurement
• no purchasing fraud
• price benchmarking - comparing similar
  organisations

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Measuring Supply-Chain Performance

• Stock Turnover Cost of items sold
  .
• Average aggregate inventory value
• Weeks of Supply Avg. aggregate inventory value
• cost of items sold/week

Delivery Quality Time Cost

• Company report states costs of goods sold for
  year 160 m. total average inventory (prodn.
  materials WIP) 35 m.
• usual stock turn ratio 10.
• What is this years stock turnover ratio?
• What does it mean?

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Supply-Chain Performance - answer

• Stock Turnover
• Cost of goods sold/Average aggregate inventory
  value
• 160/35
• 4.57
• stock turnover has dropped from 10 to 4.57
• inventory is not turning over as quickly
• Compare with the industry average
• See also value density
• the value of an item per unit. A significant
  measure when deciding where items should be
  stocked
• geographically
• how they should be shipped

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Strategic alliances

• Joint SCM improvement objectives
• share/feedback demand information
• MURA, quality, reliability, speed, JIT
  replenishment, costs, security
• 1st 2nd tier suppliers read/write permission to
  enter BOMs, enter new suppliers, enter alerts,
  update status, acknowledge requests, view reports
  etc?

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Outsourcing?

• moving a firms internal activities (production
  service delivery)
• to outside providers. Why do it? Drivers
• Core competencies, stick to the knitting. No
  strategic expertise loss
• Improvement - contractor is more competent,
  reliable, high quality, price/cost effective,
  release of management time
• Finance releases internal assets. Out-source
  costs are less than or equal to DIY costs
• Short term revenue gains - selling off fixed to
  out-source agent
• Specialist labour market - cannot hire expert
  staff we need.
• No expected loss of flexibility or growth
  potential
• WHAT ARE THE PROBLEMS?

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Logistics Air Force Operations
Brunei
Other Detachments Thailand, Indonesia,
Bangladesh, N. Zealand
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• before landing, radio defect symptoms to control
• control analysis/troubleshoot
• identify parts for indent
• trigger pick items at warehouse
• apply FIFO priority
• issue movement update
• collect defect items ? Repair shop
• check repair status
• tracking global assets freight

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- Item Data creation - Endorse requirement, -
Funds allocation - PO release
Provisioning(MRP)
Procurement
- FMS or commercial - R for Quote - PO - Payt
Disposal
Usage
-Inspect -accept locate -reject ?
quarantine/claim -wholesale/retail level
Warehousing
Store Issue

• Documentation
• breakage

• System fulfillment,
• issue acknowledge
• stock take

Distribution
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Gems of PO Receiving

• how goods are received can be a headache
• receiving problems are credit/payment problems
• errors confusions cause delays more
  processing
• Transactions on goods received
• correct Order Ref, quantity, specification
  pricing
• Items shipped match PO invoiced quantity?
• split shipments - item consolidation? How?
• reaction to shortage
• What of invoices are paid via auto-pay?
• When do we have to pay?
• If it is valuable someone will steal it !!!!

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Segregation of Duties Fraud

• No one individual can influence purchasing
  outcomes to own advantage or has responsibility
  for more than one of
• specification/requisition process authorisation
• supplier selection tender lists receipt,
  short-listing, negotiation parties
• contract award deciding the supplier authorisor
  of contract/order
• goods received checking exact order received
  to be paid for
• payment authorisation signing off invoices
  setting system tolerances
• Control Methods
• procurement procedures, processes policies
  (incl. ethical code re-transparency declaration
  of interest).
• risk analysis
• random audits of different contracts
  procurement projects.
• financial limits e.g. open-to buy, how much each
  buyer can commit
• disciplinary whistle blowing policies
• rotations buyers not too close to favourite
  suppliers

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eBusiness - B2B

• value of transactions over the Internet? B2B,
  B2C?
• significant channel for purchasing
• MNCs can get best prices without using open
  eMarketplace.
• growth in Intranet B2B applications installed
  operational
• EDI (point to point) still an important re-volume
  of B2B transactions
• Fax email is common
• online B2B portals (eMarketplaces) offer
• Supplier/supplies intelligence (specialist
  groupings)
• opportunities/collaborations e.g. networked
  participants (SMEs? Hospitals) to combine spend
  bargaining volume.
• potentially lower buying costs operating
  efficiencies

NHS Purchasing Supply Agency http//www.pasa.doh
.gov.uk/
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Inventory at Different Stocking Points
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What is a Supply Chain?

• Chain
• of processes, transactions information that
  takes product or service from suppliers thru.
  manufacturing distribution to the end consumer.
• Network
• a group of organisations in a market-place that
  interact to buy, sell, deliver goods and
  services (client-server processes activities).
  Generally B2B transactions (not retail B2C).
• Server aims to delight add value to each client
  so the end customer.
• Failure to receive supplies on time can --
  problems
• cash flow - overstocking - obsolescence

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Supply Chain Dynamics for Facial Tissue
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Materials Management
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Materials Management
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Materials Management
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Materials Management
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Materials Management
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Inventory Measures
Average inventory 2 million Cost of goods sold
10 million 52 business weeks per year
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Inventory Measures
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Supply-Chain Process Measures
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Supply-Chain Design
Factor Efficient Supply Chains Responsive Supply
Chains
Operation Make-to-stock or Assemble-to-order,
make- strategy standardized
services to-order, or customized emphasize
high services emphasize volume,
standardized service or product services or
products variety
Capacity Low High cushion
Inventory Low, enable high As needed to enable
fast investment inventory turns delivery time
Lead time Shorten, but do not Shorten
aggressively increase costs
Supplier Emphasize low prices, Emphasize fast
delivery selection consistent quality,
on- time, customization, time
delivery variety, volume flexibility, top
quality
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Reading and WWW sources

• Saunders M, Strategic Purchasing and Supply Chain
  Management, FT Prentice Hall, 1997
• Handfield Nichols, Supply Chain Redesign, FT
  Prentice-Hall, 2002
• Ross D, Competing Thru. Supply Chain Management,
  Kluwer, 1998
• Heywood B, E-procurement A Guide to Successful
  E-procurement Implementation, FT Prentice Hall.
  2001
• www.cips.org (Chartered Institute of Purchasing
  and Supply)