Purchase Managem ent
Submitted By: Brij Mohan Gupta..…037 Shweta Bhandari…....005 Varsha Tushir………034 Neha Singh…………004 Singh…………004 Anuj Sagar……….....014 Deepak Tyagi….…...028
PURCHASE MANAGEMENT
Purchase Management is a function of materials management in a company. Their basic function is procuring the inputs for production function. This function encompasses supp suppli lier erss in the the mark market et exte extern rnal al to the the orga organi niza zatio tion n and and seve several ral inte intern rnal al to the the organization.
Till recently, the purchasing process simply involved placing an order with the supplier who offered the lowest price. Nowadays, increase in competition and market demand and scarcity of reso resour urces ces have have forc forced ed orga organi niza zatio tions ns to reexa reexami mine ne thei theirr purc purcha hasi sing ng acti activi viti ties es.. The The purchasing department functions have expanded considerably and include activities such as verifying verifying the credentials credentials of suppliers, suppliers, inspecting inspecting the quality quality of the material material to be purchased, purchased, ensuring the timely delivery of the material, etc. While the value of purchased items varies from industry to industry, it adds up to more than fifty percent of sales in all industries. Purchase management is regarded as a significant activity activity in many organizatio organizations ns because of the high cost involved in carrying carrying out purchasing purchasing activit activities ies,, increas increasing ing qualit quality y benchm benchmark arks, s, and increa increasin sing g global global compet competiti ition. on. Purcha Purchase se departments departments buy raw materials, parts, machinery, machinery, and services services used by production production systems. systems. The objective of purchase management is to procure the right equipment, materials, supplies and services in the right quantity, of the right quality, from the right suppliers, at the right time, at the lowest price. IMPORTANCE OF PURCHASE MANAGEMENT
Purchase management is considered to be very important function of materials management in a company. Its importance is felt even outside the formal scope of materials management. As the purchase decisions commit a very large portion of financial resource of the company purchase function is said to be highly important. Purchase personnel deal with large number of extern external al agenci agencies es while while perfor performin ming g their their functi functions ons.. Hence Hence they they repres represent ent compan company’s y’s reputation in the outside world. As they negotiate and finalize deals worth lot of money for the company their integrity is of utmost importance for the organization.
OBJECTIVES OR GOALS OF PURCHASING
Primary objective or goal of purchasing function is making inputs available to the conversion process at minimum cost to the final output of the company. Thus focus is on system output rather than on micro level objectives. The inputs to be made available are raw materials, semi finished items, bought out items etc. There are certain parameters to be monitored for fulfilling the system objectives. We can call them goals of purchasing. These goals are popularly known as 5R’s of purchase namely, right price, right quantity, right quality, right place and right time. In simple terms, if the above 5Rs are achieved primary objective is fulfilled:•
Right Price: Right price is determined by costing the production process of the
supplier. Right price is determined by allowing reasonable profit for the supplier and insisting and helping to reduce cost. Tender system should be used to identify lowest responsible bidder rather than lowest bidder. Principles normally used to ensure right price are cost structure and learning curve. •
Right Quantity: Right quantity of purchase is the one that ensures no excess and no
shortag shortage. e. High High priori priority ty items items are subjec subjected ted to EOQ analysis analysis to determ determine ine the right right quantity for purchase. This ensures overall minimum cost for inventory. •
Right Quality: In an item purchased should ensure adhering to mutually accepted
standard by supplier and customer at the time of finalizing the purchase order. The accepted standard may be a drawing, a sample, a grade or a universal standard like DIN, IS, BS etc. •
Right Place: is the one where the item is going to enter the value stream. If the item is
not available here, when needed, it is in short supply for the process. •
decide ded d by prod produc ucti tion on sche schedu dule le for for meet meetin ing g cust custom omer er’s ’s Right Right Time: Time: is as deci
requirements. ORGANISING PURCHASING
The effectiv effectivene eness ss of purcha purchasin sing g activit activities ies can be enhanc enhanced ed by proper proper organi organizati zation on and coordination of the activities. There are two types of purchasing system:-
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Centralized purchasing system
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Decentralized Decentralized Purchasing system
Centralized Centralized purchasing system: In a centra centralize lized d purcha purchasin sing g system system,, all purcha purchasin sing g
activities of an organization are carried out by a separate department. A centralized system is effective when an organization has a number of production sites within the same site which requires the material with same or similar specifications. In such cases, a centralized system allows pooling of all the requirements so that benefit of bulk purch purchasi asing ng can be realize realized. d. The central centralizat ization ion also also leads leads to consis consisten tency cy in buying buying policies and uniformity in maintaining purchasing records. ii.
Decentralized Purchasing System: In a decentralized purchasing system, the heads of
differe different nt departm departments ents purcha purchase se the needed needed materia materials ls accordi according ng to their their specif specific ic requirements. This method gives each department the flexibility to alter its purchasing policies on the basis of specific requirements. However, most organizations do not totally depend on any one system: instead, they use a combination of of both the systems. systems. FUNCTIONS OF PURCHASING DEPARTMENT
The purchase department is one of the key players in achieving the strategic objectives of a firm. firm. Functi Functions ons of purcha purchasin sing g departm department ent or often often categor categorized ized as the respon responsib sibili ilities ties of Purchasing Manager are:•
Vendor Development: The primary responsibility of a purchase manager is to search
for and identify a list of possible suppliers. He should ensure that sources of supplies are reliable and stable. •
Selection of Suppliers: The purchase manager should examine the cost of the material
and other aspects. And selection should be made after analyzing all the relevant issues. •
Contract Negotiations and Communication Communication Interface: Once a vendor is selected, the
purchasing manager should negotiate and establishes the terms and conditions of contract to be drawn between the two parties.
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Value Value Analysis Analysis:: The purcha purchasin sing g manage managerr conduc conducts ts value value analys analysis is that that aims aims at
achieving cost effectiveness and maintaining the required level of quality. PURCHASE SYSTEMS
In an organization all activities are carried out according to systems and procedures for reduci reducing ng variat variation ionss and errors errors arising arising out of indivi individua duality lity.. This This makes makes perfor performin ming g the function simple and less prone to errors. Purchase organization also consists of such systems establ establish ished ed for smooth smooth runnin running g of purcha purchasin sing g functi function. on. These These syste systems ms are pre purcha purchase se system, ordering system, post purchase system. 1. Pre Purchase System: System : This system lays down how purchase activity is initiated. Various
activities controlled by this system are requisitioning, selection of suppliers and obtaining & evaluating quotations. •
Requisitions: Requisition for an item may be made by anyone in the organization.
Pre purchase system prescribes separate requisition form for capital equipment as this purchase activity is controlled by a separate system. Requisition for an item shall be made in a standard format. This format ensures that indenting person furnishes all relevant information like quantity, specifications, etc. and gets the purchase authorized by competent authority in the organization. Thereby making purchase activity easier and less time consuming. This system shall identify the hierarchical level competent to authorize the purchase depending on the nature and value of the item. Traveling requisitions: In an inventory system where an item is made a
stock item to be perpetually maintained at a minimum level, purchase activity is trigger triggered ed by stores stores functio function n based based on ROL. ROL. The requisiti requisition on is a perman permanent ent document document with specificatio specification, n, authorizatio authorization n and quantity quantity required required permanently permanently marked marked on it. The travel traveling ing requis requisiti ition on return returnss to indent indenting ing departm department ent after after purchase is initiated. Inquiries: Pre-purchasing system prescribes standard formats for making
inquiries in the market for supply of a particular product. These are standard forms boldly declaring that they are not explicit or implicit purchase orders.
2. Ordering System: Purchase order is the most important element in ordering system.
Purchase manager releases the purchase order after selecting the supplier and finalizing the price and other conditions of sale. Once the purchase order is raised and accepted it becomes a legal document. Contents of the purchase order are:Purchase order reference number Description of materials and specifications Quantity required and delivery schedule Price and discounts Shipping instructions Location where the material is to be shipped Signature of the authorized officer Detailed terms and conditions:Several numbers of copies made to be forwarded to various recipients. Many companies color code the copies making the color destination specific. Original and a copy is sent to the supplier for acknowledgment of the original order. This acknowledgment is acceptance of terms and conditions of purchase order. One copy is sent to the receiving department for making necessary receiving arrangement One copy is sent to the indenting department for information. One copy is sent to finance department for organizing payment to the supplier. Post Purchase System: This system includes follow up procedures, receipt and checking
invoices. •
Follow up procedures: procedures: Follow up is an expensive activity for an organization. Hence
this should be minimized and made more effective. A sound procedure for follow up is required to eliminate duplication and ineffectiveness. After conducting FSN analysis follow up frequency should be fixed for follow up according to FSN status so that follow up doesn’t become wasteful. wasteful. Follow up responsib responsibility ility is assigned assigned to buyers responsible for areas in which suppliers are situated. •
Receipt: Receipt Receipt system system should should ensure that defects in receipt receipt process process are eliminated
proactively. A systematic record of all receipts, carrier details and descriptions is maintained. This record is in chronological sequence of arrival of supplies. The system ensures that inspection of consignments received is arranged in time and
payment to suppliers for accepted consignments is organized. In many organizations a receipt section handles this activity centrally. •
Invoice checking: checking: supplier sends his invoice to customer’s finance department for
payment for the goods supplied. Invoice checking system ensures that the invoice is checked checked against against the PO terms, receipt details, quantity received, inspection inspection reports [accepted quantity and rejected quantity], losses, damages etc. this system helps materia materials ls manage managemen mentt to coordi coordinat natee with with financ financee departm department ent for paymen paymentt to suppliers. IMPORTANCE OF SOURCE
Source is the place from where we procure our inputs. These inputs may be in the form of raw materials, out sourced components or semi finished items. Manufacturing companies outsource large number of items as they slim down processes.
Following reasons are considered to be making source an important element in materials management: Source of market intelligence: source is a window through which the buyer organization
looks at the world outside. Source provides access to the real time information about the phenomenon. Information about current trends and industrial climate is obtained from the sources. Crucial for product quality : buyer organizations depend on out sourced components for
producing the product which central to the objectives business. Reliance on capabilities of supplier to meet tough quality standards is very high in current business environment. Member in the value chain: chain : supply source is an important element in the value chain. Any
cost added to the value chain reaches the end user as price. Hence effectiveness and efficiency of the source becomes vital to business. Import substitution, cost reduction, value improvement : as indigenization of sub assemblies,
components and spare parts is necessary to reduce the cost of product in competition, buyer organizations turn to supply sources to develop these items. Several trials and corrections may be required to finalize the substitute. In house capacity is generally not available for this kind of trials. A resourceful supplier is very useful in this process. Same logic holds good in other exercises for cost reduction and value improvement. It is quite logical that entire process is not outsourced but isolated developmental activities are invariably done. It is common knowledge that many small scale companies do not have full-fledged tool rooms but rely on sources for all tool room activities.
PURCHASING POLICIES
The major principles on which purchasing policies should be based are a sound orientation, reflect a cross –functional approach and be directed at improving the company’s bottom line.
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Business orientation
Develo Developin ping g a purcha purchasin sing g and supply supply strateg strategy y requir requires es a thorou thorough gh unders understan tandin ding g of the compan company’s y’s busine business ss polici policies. es. The follow following ing questi questions ons are import important ant to determ determine ine how
purchasin purchasing g and supply strategies strategies will need to support support the company company in meeting meeting its goals and objectives:-
What What end-use end-userr market market is the compa company ny targeti targeting ng and what what are the major major devel developm opment entss going on in those markets?
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What What competi competitio tion n is the compa company ny suffe sufferin ring g from and and what leewa leeway y does does the compa company ny has in setting its own pricing policies?
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To what what extent extent can can materia material’s l’s price price increa increases ses can can be passed passed onto onto the the last custo customer mer or is it impossible?
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What What changes changes are happeni happening ng in the compan company’s y’s produc product, t, produc productio tion n and informa informatio tion n technologies?
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What What inves investm tmen ents ts will will be made made by the the comp compan any y in terms terms of new produ product ctss and and technology?
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ii. ii.
What What produc products ts will will be be taken taken out out of the the marke markett for the the years years to come? come?
Inte Integr grat ated ed,, cro cross ss-f -fun unct ctio iona nall appr approa oach ch
Purchasing decisions cannot be made in isolation, and should not be aimed at optimization of purchasing performance only. Purchasing decisions should be made taking into account the effects of these decisions on other primary activities like:-
Producti ction pla plan nning
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Materia rials man management ent
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Transportation
Therefore purchasing decisions need to be based on balancing total cost of ownership. When buying for instance, a new packaging line it is important to consider not only the initial investment, but also the costs which will be incurred in the future for buying accessories, spare parts and services. This example itself illustrates the complexity of its type of purchases and the different kind of decisions that need to be made.
Careful decision making in those circumstances, therefore requires a cross functional and team based approach among all the business disciplines affected by it. This can only be done when when top top mana manage gers rs are are invo involv lved ed.. The The purc purcha hasi sing ng and and supp supply ly mana manage gerr will will lead lead the the developing of such views and visions.
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Bott ottom-li -line ori orieentati ation
The purcha purchasin sing g should should provid providee a health healthy y commer commercial cial oppos oppositi ition on vis-à-v vis-à-vis is its intern internal al customers. Through their activities the buyers should make their company more and more cost aware. They should consistently look for improving the price/value ratio of the goods and services bought by the company. To accomplish this, purchasing should be able to suggest alternatives to existing product designs, materials or components to be used and alternative suppliers. Experience with companies in which purchasing is recognized as a bottom-line driven activity shows this function contributes to a permanent reduction in cost price of the end product, whilst stimulating innovation from the suppliers at the same time.
IMPLEMENTATION IMPLEMENTATION OF PURCHASE POLICY
Import Important ant areas areas to consid consider er when when implem implementi enting ng supply supply and purcha purchase se policy policy are supply supply,, product and supplier quality, materials costs and prices, supplier policy and communication policy
i.
Supply
Supply is aimed at the optimization of both the ordering process and the incoming materials flow. Purchasing order processing entails handling of:-
Purc Purch hasin asing g req requisi uisiti tio ons
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Orde Orderr proc proces essi sing ng and and exp exped edit itin ing g
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Develo Developme pment nt of effi efficien cient, t, compu computer ter –sup –suppor ported ted orde orderr routin routines es
Materials and supply planning relates to:-
Issuin Issuing g mater materials ials delive delivery ry sche schedul dules es to suppl supplier ierss
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Redu Reduci cing ng supp suppli lier er lead lead time timess
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Trou Troubl bles esho hoot otin ing g in case case of of deliv delivery ery pro probl blem emss
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Redu Reduci cing ng (pi (pipe peli line ne)) inven invento tori ries es
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Moni Monito torin ring g supp suppli lier er deli delive very ry perf perfor orma manc ncee
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Prod Produc uctt and and supp suppli lier er qual qualit ityy
Central to this aspect are the materials specifications. Two important subjects of concern here are purchasing early involvement in design and product development and improving product and supply quality performance. Activities which may contribute to both areas are:•
Standa Standardi rdizati zation on of materia materials-b ls-by y strivi striving ng for standa standardi rdisat sation ion or simpli simplifica ficatio tion n of product- specifications, the buyer may reduce product variety resulting in both cost reduction and supplier dependence at the same time;
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A purchasing policy focussed on the life cycle of the end products- there is not much point point in investigatin investigating g material material quality quality improvemen improvements ts used in products products which will be eliminated shortly;
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Specific quality improvements- negotiating targets on improving reject rates, reducing incoming inspection, and negotiating quality agreements;
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Agreeing on and gradually extending permanent warranty conditions that are to be provided by the supplier;
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Initiating special programmes in the field of value analysis to simplify product design and/or reduce product costs;
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Materials co cost po policy
The objective of cost policy is twofold:-
Firs Firstt to obtain obtain contr control ol of materi material alss cost and and prices prices in such such a way way that that suppl supplie iers rs are unable to pass on unjustified price increases to the company.
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Seco Second nd,, to syste systema matic ticall ally y reduc reducee the the supp suppli lier’ er’ss mate materi rials als cost cost thro throug ugh h join joint, t, well well prepared action plans.
In order to be successful in both aspects a thorough knowledge of the supplier’s pricing policies and cost structure is required. Understanding and knowledge of the market structures and of their susceptibility of the price paid to market and cost factors is necessary. It should be decided for what products to build detailed cost models, for what models to monitor underlying cost factors, and for what products to develop detailed materials budget estimates.
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Supplier policy
The supplier policy is focused on the systematic management of the company’s supplier base. -
Deci Decisi sion onss need need to be made made for for what what comm commod odit itie iess to pursu pursuee a mult multip iple le sour sourci cing ng strategy or to go for single sourcing or a partnership relationship.
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Suppliers Suppliers who perform perform best best should should be rewarded rewarded with more business business in the the future. future.
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Targets Targets and and possibl possiblee projects projects for future future co-operatio co-operation n should should be determin determined ed carefully carefully..
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Relationsh Relationships ips with with suppl suppliers iers who who consisten consistently tly fail fail to meet the the company company’s ’s expectat expectations ions should be terminated.
Howeve Howeverr such such decisi decisions ons need to be made made based based on detailed detailed data data on how the supplie supplier r performed in the past and be implemented carefully.
v.
Communication policy
The The comp compan any’ y’ss purch purchas asin ing g poli polici cies es need need to be comm commun unic icate ated d both both inte intern rnall ally y and and to suppliers. Companies use the Intranet for the former and many employ their own Purchasing
Websites in order to communicate their future materials requirements and ways wa ys of working to their suppliers. The next step is that preferred suppliers have access to the customer’s Intranet through which internal users can order directly from them through their electronic catalogues.
VALUE ANALYSIS
The The purc purcha hasi sing ng mana manage gerr cond conduc ucts ts valu valuee analy analysi siss that that aims aims main mainly ly at achiev achievin ing g cost cost effectiveness and maintaining the required level of quality. Value analysis is an organized effort that studies in detail the ‘value’ of material. Value Analysis reviews the design changes with the objective of eliminating high cost materials and the materials that are technically obsolete and reducing the number of parts. After analyzing the functions and cost of material, the purchasing manager evaluates the possibilities of using the material. Value Analysis evaluates the materials by seeking answers to the following questions:-
What What is the the fun funct ctio ion n of of the the item item??
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Is it it possi possible ble to run the syste system m witho without ut the the item item??
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Can Can the the item item be be subs substi titu tuted ted wit with h a stan standa dard rd part part??
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How How muc much h do does the the ite item m cos cost? t?
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How How much much doe doess the the subs substi titu tute te,, if any any,, cost cost??
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Can Can the funct functio ions ns perfo perform rmed ed by two or three three mater material ialss be club clubbe bed d togeth together er and be replaced by any other material?
Value Value Analys Analysis is involv involves es the coordi coordinat nated ed effort effortss of the engine engineeri ering, ng, produ productio ction n and the purchasing personnel and helps in reviewing purchase activities to ensure that expenditures result in the receipt of appropriate value. The step by step procedure of Value Analysis is given below:-
Exami Examine ne all the produc products/ ts/mat materia erials ls that that are being being reorde reordered red and identi identify fy each product/material that needs an improvement.
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Gather Gather all possib possible le informatio information n about about the designs, designs, costs and so so forth forth of the produc product. t.
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Form a team that includ includes es experts experts from from variou variouss function functional al areas that are related related to to the functions performed by the material.
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Gene Genera rate te alte altern rnat ativ ives es by gene genera rati ting ng new new ides ides and and eval evalua uate te diff differ eren entt ways ways of accomplishing the task.
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Evalu Evaluate ate the altern alternat ativ ives es on crit criteri eriaa like like cost cost and and feasi feasibi bili lity ty and elimin eliminate ate the non feasible alternatives.
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Refine Refine the feasibl feasiblee altern alternati atives ves and and selec selectt the the optim optimal al one. one.
MAKE-OR-BUY DECISIONS
The make-or-buy decision is the act of making a strategic choice between producing an item internally (in-house) or buying it externally (from an outside supplier). The buy side of the decision also is referred to as outsourcing. Make-or-buy decisions usually arise when a firm that has developed a product or part—or significantly modified a product or part—is having trouble with current suppliers, or has diminishing capacity or changing demand. Make-or-buy analysis is conducted at the strategic and operational level. Obviously, the strategic level is the more long-range of the two. Variables considered at the strategic level include analysis of the future, as well as the current environment. Issues like government regulation, competing firms, and market trends all have a strategic impact on the make-or buy decision. Of course, firms should make items that reinforce or are in-line with their core competencies. These are areas in which the firm is strongest and which give the firm a competitive advantage. Considerations that favor making a part in-house:•
Cost considerations (less expensive to make the part)
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Desire to integrate plant operations
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Productive use of excess plant capacity to help absorb fixed overhead (using existing idle capacity)
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Need to exert direct control over production and/or quality
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Better quality control
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Design secrecy is required to protect proprietary technology
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Unreliable suppliers
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No competent suppliers
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Desire to maintain a stable workforce (in periods of declining sales)
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Quantity too small to interest a supplier
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Control of lead time, transportation, and warehousing costs
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Greater assurance of continual supply
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Provision of a second source
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Political, social or environmental reasons (union pressure)
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Emotion (e.g., pride)
Factors that may influence firms to buy a part externally include:•
Lack of expertise
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Suppliers' research and specialized know-how exceeds that of the buyer
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cost considerations (less expensive to buy the item)
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Small-volume requirements
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Limited production facilities or insufficient capacity
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Desire to maintain a multiple-source policy
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Indirect managerial control considerations
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Procurement and inventory considerations
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Brand preference
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Item not essential to the firm's strategy
LEAN MANAGEMENT
It is a philosophy concerning how to run a manufacturing organization, which entails all aspects of the business system in general, and design, manufacturing and supply management in particular. Fundamental to lean management is that it transfers the maximum number of tasks and responsibilities to those workers actually adding value to the product and it has in place a system for detecting the defects that quickly traces every problem. Important features of lean management are:•
Teamwork among line workers, who are trained in a variety of skills to conduct different jobs within their working group. These not only relate to manufacturing task tasks; s; work workers ers are are also also trai traine ned d to do simp simple le mach machin inee repai repairs rs,, qual qualit ity y check checkss , housekeeping and material ordering.
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Simple, but comprehensive information display systems that make it possible for everyone in the plant to respond quickly to problems and understand the plant’s overall situation.
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Tota Totall comm commit itme ment nt to qual qualit ity y impr improv ovem emen ent5 t5 on the the shop shop floo floor. r. Work Worker erss are encouraged to think and act positively on how to improve the effectiveness of their work, whereas their supervisors need to provide active support to bring these ideas to fruition.
LEAN MANAGEMENT AND PURCHASE SYSTEM
The average supply base is much smaller in lean management system .Suppliers are usually involved in new product development in a very early stage. Supplier along with engineers from the manufacturer may work full time at each other premises when solving technical problems and/or working out improvements . Suppliers are confronted with well defined targets in terms of quality improvement, lead time reduction and cost reduction and are, by means of a simple grading and performance system, fully informed as to whether they meet contractual obligations. JIT AND PURCHASING SYSTEM
The principle of just-in-time (JIT) means that all materials and products become available at the very moment moment when they are needed in the production production process, process, not sooner sooner and not later, but exactly on time and in exactly the right quantity .It implies that nothing is produced if there is no demand. The production process is in fact ‘pulled’ by customer orders. When no customer orders have been received, manufacturing activities will come to an end and the spare spare time time is used used to do minor minor repairs repairs/ma /maint intena enance nce,, housek housekeep eeping ing and/or and/or prepar preparee for materials planning. A second characteristic of JIT principle is related to quality awareness, smaller batch sizes which make it necessary to detect quality defects at an early stage. The JIT concept cannot be limited to production only. It must be supported and implemented in every functional area in the organization .Applied to purchasing JIT is a philosophy that aims to make the required materials and products available at exactly the time they are needed, so that value is added only to the product which is to be manufactured , and indirect costs are avoided . JIT has a major impact on both the quality and quantity of the materials to be purchased. The JIT approa approach ch is charact characteri erized zed by regula regularr but flexible flexible suppl supply y .order .ordered ed materia materials ls are delivered delivered frequently in different different quantities. quantities. To facilitate this, the supplier is informed informed of the production planning and the related purchasing requirements on a daily, weekly and monthly basis through delivery schedules which are available on-line. In this way Conditions are renegotiated with the supplier. Targets for productivity improvement and cost reduction, as required by the producer, are also part of these negotiations.
As far as quality is concerned, the guiding principle is zero defects. Imposing quality targets upon suppliers may represent large savings to the producer, both in terms of a reduction of the numbers of incoming quality inspections and a reduction of buffer stock. In this way the supplier is educated towards a better quality performance. VENDOR MANAGEMENT
Vendor Management is the management and control, by an entity, of those third parties that supply goods and/ or services to that entity. It is the discipline of establishing service, quality, cost, and satisfaction goals and selecting and managing third party companies to consistently meet these goals:•
Establis Est ablishing hing Goals G oals - Just as employees need clearly established goals, operations need
clearly clearly define defined d perfor performan mance ce parame parameter ters. s. When When selecti selecting ng or managi managing ng vendor vendors, s, vendor managers must optimize their opportunity to achieve these goals by using third parties companies. •
Selecting Vendors- The fine art of vendor management is essential to optimizing
operational results. Different vendors have different strengths and weaknesses, and it is the vendor manager’s responsibility to match the right company with the desired performanc performancee characteristic characteristics. s. Failure Failure to consider consider this comprehensively comprehensively could lead to complete failure. •
Managing Vendors- On a daily basis, vendor managers must monitor performance,
provi provide de feedbac feedback, k, champi champion on new project projects, s, define define or approv approve/d e/disa isappr pprove ove change change control control processes, processes, and develop vendors. vendors. There’s There’s a tremendous tremendous amount amount of detail to this aspect of the discipline, and we’ve covered this in many posts here. •
Consistently Consistently Meet Goals - Operations Operations must perform perform within within statistically statistically acceptable
upper and lower control bounds. bounds. Everything the vendor manager manager does should focus on meeting goals, from providing forecasts to defining requirements, from ensuring vendors have adequate staff to ensuring the staff have completed all required training. VENDOR RELATIONS
An important objective in purchase management is that of maintaining good relations with vendors. A good vendor is an asset of the company; and, therefore, just as customer goodwill is considered important, a good relationship with the vendor should be treated likewise. A vendor who supplies the proper quality material in proper amounts in proper time is not very
easy to find. Moreover, there are many situations where materials are required in hurry. There are situations where materials are in shortage in the supply market. In all such situations, good relationships with the vendors pay dividends. This may entail: personal relationship, professional relationship:-
By helpin helping g the vendor vendor in time timess of stress stress and strai strain n with finan financia ciall aid, by prov providi iding ng management skills if necessary, and,
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Maintaining Maintaining a healthy healthy professiona professionall relations relationship hip by by fair fair negotia negotiation, tion, fair evalua evaluation tion and fair compensation.
The modern management theory and world class manufacturing call for a long-term, almost a lifetime, lifetime, associatio association n with the vendors. This also means that there will be fewer vendors but these will be dedicated vendors- almost a part of organizational family. Until Until the presen presentt and even now, now, the Indian industr industry y has not given/ given/is is not giving giving much much importance to vendor relations. The emphasis, if any, has been on vendor selection and on monitoring the performance of the vendor through a vendor rating system. Vendor is the entity that is, generally, taken for granted. This attitude is: All said and done, the vendors for the company may change over a period of time. They may change to another business; some of them may not give the desired performance in quality, delivery and price, and therefore, one should always expect a drop-out rate in the vendors list of the company. SELECTION OF VENDORS 1.
The production capabilities of the vendor
(a) Capacity Capacity to manufacture manufacture the required product product in desired quantities. quantities. (b) Possibilit Possibility y of future expansion expansion in capacity. (c) The understandin understanding g or the knowledge knowledge of the vendor vendor regarding the buying buying company and its need. 2.
The financial soundness of the company
(a) The vendor vendor company’s company’s capital capital structure. structure. (b) Whether Whether it belongs belongs to a larger group of companies; companies; whether whether it is a Private Limited Limited or a Public Limited company.
(c) The profitabil profitability ity record of the the company company in the past. (d) Expansion Expansion plans plans of the company company in the future. 3. Techn Technic ical al capabi capabili liti ties es
(a) Whether Whether the available machines machines are capable of the required required quality of materials? materials? What are the future plans of the vendor? (b) Whether Whether there are enough technical technical skills available available with the vendor? vendor? (c) Whether Whether there is proper proper research, design design and development development facility available available with the vendor? (d) What is the record of the vendor vendor in filling the orders of other other buying companies companies in the same business? (e) What has been the consistency in the quality quality produced by by the vendor? vendor? (f) Whether Whether the vendor has appropriate appropriate storage storage and warehouse warehouse facilities facilities to retain the quality of the product produced? (g) Whethe Whetherr proper proper qualit quality y contro controll proced procedure uress are being being follow followed ed in the vendor vendor company? 4. Othe Otherr cons consid ider erat atio ions ns
(a) What are the working working condition conditionss in the vendor company? company? (b) How are the industrial industrial relations relations in the vendor company? company? (c) Whether Whether there is any possibility possibility of disruption disruption of the supply of materials in terms of quantity and/or quality due to human relations problem in the vendor company?
VENDORS MANAGED INVENTORIES Vendor Vendor Managed Managed Inventor Inventory y (VMI) (VMI) is a supply supply chain practice practice where where the inventor inventory y is
monitored, planned and managed by the vendor on behalf of the consuming organization, based on the expected demand and on previously agreed minimum and maximum inventory levels levels.. In its simple simplest st form, form, Vendor Vendor Manage Managed d Invent Inventory ory is the proces processs where where the vendor vendor
assumes the task of generating purchase orders to replenish a customer’s inventory. VMI is a te r m
that
is
used
to
describe
many
types
of
supply
chain
initiatives.
Traditionally, success in supply chain management derives from understanding and managing the trade off between inventory cost and the service level. The Vendor Managed Inventory Approach
VMI reduces stock-outs and reduces inventory in the supply chain. Some features of VMI include:•
Shortening of the supply chain
•
Centralized forecasting
•
Frequent communication of inventory, stock-outs, and planned promotions. Electronic Data Interchange (EDI) linkages facilitate this communication.
•
•
No manufacturer promotions Trucks Trucks are filled in a prioritized prioritized order. For example, items that are expected to stock out have top priority, then items that are furthest below targeted stock levels, then advanc advancee shipm shipment entss of promot promotion ional al items items (promo (promotio tions ns allowed allowed only only in transi transitio tion n phase), and finally, items that are least above targeted stock levels.
•
Relationship with downstream distribution channels
•
Result: Inventory reduction and stock-out reduction
VMI is based on the belief that supplying parties are in a better position to manage inventory as they have better knowledge of the goods production capacities and lead times. Also it is based on the belief that allowing vendors to manage inventory reduces the number of layers in the supply chain, increasing stock visibility and reducing overall inventory levels. To enable VMI, sales data must be provided to the vendor via Electronic Data Interchange (EDI), other electronic means, or via traditional human agents at outlets. Origin of Vendor Managed Inventory
VMI started in the retail business and grew out of Efficient Consumer Response (ECR), where where consum consumer er satisf satisfacti action on or rather rather consum consumer er expecta expectatio tion n of stock stock availab availabilit ility y is an important way to have a competitive edge over others. Wal-Mart is one of the successful pioneers of this supply chain strategy.
VMI is now now gradua gradually lly progre progressi ssing ng toward towardss strateg strategic-p ic-part artner nershi ship p based based forms. forms. These These influe influence ncess the way compan companies ies plan plan their their invent inventory ory,, evolvi evolving ng to Collab Collabora orativ tivee Planni Planning, ng, Forecasting and Replenishment (CPFR). Usage of Vendor Managed Inventory •
Error sensitive industries. Example: Pharmaceutical Sector.
•
Multiple outlets, fast-moving consumer goods. Example: Wal-Mart.
•
Perishable goods. Example: K Mart.
•
Valuable and unpredictable components. Example: PC manufacturing.
•
Strong competition (small margins). Example: Automotive.
Steps in Vendor Managed Inventory
VMI should be achieved in a number of phases:1. Commu Communic nicate ate expec expectati tations ons of of all parti parties. es. 2. Retailer/dis Retailer/distribut tributor or must must commit commit to sharing sharing precise precise inform information ation.. 3. Vendor Vendor must ensure ensure reliable reliable transmis transmission, sion, receipt, receipt, and and use of of information information.. 4. Agreement Agreement on ordering ordering policy, policy, risk and and reward reward sharing sharing.. 5. Comm Commit it tim timee and and reso resour urce ces. s. 6. Exte Extens nsiv ivee testi testing ng.. 7. Implem Implement entatio ation n and evalu evaluatio ation. n. Adjus Adjust. t. 8. Appreciate Appreciate vendors vendors that that manage manage the inventory inventory well. well. Example: Example: promotio promotion n to Category Category Captain, profit sharing schemes, etc. Strengths of Vendor Managed Inventory •
•
Supply Chain level o
Lower inventory levels at total supply chain level.
o
Less overhead.
o
Increased sales.
o
Reduces human data entry errors.
Vendors o
Better insight in customer demand (better resource usage, reduced raw and finished goods inventories).
•
o
Improved, more direct communication with customers.
o
Improved market analysis.
o
Increased sales via lower out of stock rates.
o
Opportunity to provide category management and other value-added services.
Suppliers o
Reduced replenishment times and lower inventory costs.
o
Increased sales through reduced stock outs.
o
Less redundancy.
o
Buil Build d
stra strate tegi gicc
stre streng ngth thss
thro throug ugh h
esta establ blis ishi hing ng
stro strong ng
supp supply ly
chai chain n
relationships. o
•
Vendor assistance with category management.
End-users o
Increased service level.
o
Reduced stock outs
Limitations of Vendor Managed Inventory •
Success of VMI initiative depends on the strength of relationship between the vendors and retailers.
•
Increased dependency between the parties and increased switching costs.
•
Lack of trust to exchange data can result in the ineffective implementation in one or more of the following forms: o
Inventory invisibility.
o
Inventory imbalance.
•
Costs of technology and changing organization.
•
Extensive data- and EDI testing is needed.
•
Loss of necessary shelf space at the selling party may result in less attention by buyers, compared to competitors that are not into VMI yet.
•
Speci Special al prom promot otio ions ns or even events ts need need to be comm commun unic icate ated d befo before reha hand nd to avoi avoid d replenishment planning mistakes (loss of flexibility).
•
Increased vulnerability for non-foreseeable risks such as employee strikes, hurricanes, etc. due to lower inventory levels.
•
Most of the benefits benefits are for the end client and for the selling selling party, while the vendor vendor does much of the work.
Assumptions of Vendor Managed Inventory
VMI is usually successful for industries and organizations with the following characteristics: •
Multiple outlets, because this increases the benefits compared to traditional inventory management.
•
Severe consequences in case of human errors (Pharmaceutical).
•
Industries with steady and high volumes (Retail, Consumer Products).
•
Industries with high-value inventory and a high level of demand unpredictability (High Tech).
•
Mana Manage geme ment nt with with stro strong ng lead leader ersh ship ip capa capabi bili lity ty to form form stra strate tegi gicc long long term term partnerships (Automotive).
VMI Implementation Challenges
VMI can be made to work, but the problem is not just one of logistics. VMI often encounters resistance from the sales force and distributors. At issue are roles and skills, trust, and power shifts. Some of the sales force concerns are: •
Loss of control
•
Effect on compensation - incentive bonuses may depend on how much is sold, but sales force has less influence under VMI.
•
Possible loss of job
•
Scepticism that it will function well - technical problems
•
Concern that reduced inventory will result in less shelf space and therefore loss of market share. This concern can be addressed by filling the shelf space with other stock keeping units from the same vendor.
VENDOR RATING
Vendor rating is the result of a formal vendor evaluation system. Vendors or suppliers are given standing, status, or title according to their attainment of some level of performance, such as delivery, lead time, quality, price, or some combination of variables. The motivation for the establishment of such a rating system is part of the effort of manufacturers and service firms to ensure that the desired characteristics of a purchased product or service is built in and not determined later by some after-the-fact indicator. The vendor rating may take the form of
a hierarchical ranking ra nking from poor to excellent and whatever rankings r ankings the firm chooses to insert in between the two. For some firms, the vendor rating may come in the form of some sort of award system or as some variation of certification. Much of this attention to vender rating is a direct result of the widespread implementation of the just-in-time concept in the United States and its focus CRITERIA FOR EVALUATION
Vendor Vendor perfor performan mance ce is usual usually ly evalua evaluated ted in the areas areas of pricin pricing, g, qualit quality, y, delive delivery, ry, and service. Each area has a number of factors that some firms deem critical to successful vendor performance. Pricing factors include the following:•
The pric prices es paid paid shou should ld be comp compar arab able le to thos thosee of vend vendor orss Competitive Competitive pricing: The providing similar product and services. Quote requests should compare favorably to other vendors.
•
Price stability- Prices should be reasonably stable over time.
•
Price accuracy: There should be a low number of variances from purchase-order prices
on invoiced received. •
Advance notice of price changes: changes : The vendor should provide adequate advance notice
of price changes. •
Sensiti Sensitive ve to costs: costs: The vendor vendor should should demons demonstrat tratee respec respectt for the custom customer er firm's firm's
bottom line and show an understanding of its needs. Possible cost savings could be suggested. The vendor should also exhibit knowledge of the market and share this insight with the buying firm. •
Billing: Are vendor invoices are accurate? The average length of time to receive credit
memos should be reasonable. Estimates should not vary significantly from the final invoice. Effective vendor bills are timely and easy to read and understand. Quality factors include:•
The vend vendor or shou should ld comp comply ly with with term termss and and Compli Complianc ancee with with purch purchase ase order: order: The conditions as stated in the purchase order. Does the vendor show an understanding of the customer firm's expectations?
Conformity to specifications: The product or service must conform to the specifications
•
identified in the request for proposal and purchase order. Does the product perform as expected? •
Reliability: Is the rate of product failure within reasonable limits?
•
Reliability of repairs: Is all repair and rework acceptable?
•
Durability: Is the time until replacement is necessary reasonable?
•
Support: Is quality support available from the vendor? Immediate response to and
resolution of the problem is desirable. The leng length th and and prov provis isio ions ns of warra warrant nty y prot protec ectio tion n offer offered ed shou should ld be Warranty: The
•
reasonable. Are warranty problems resolved in a timely manner? State-of-the-art State-of-the-art product/service: product/service: Does the vendor offer products and services that are
•
consistent with the industry state-of-the-art? The vendor should consistently refresh product product life by adding enhancement enhancements. s. It should should also work with the buying firm in new product development. Delivery factors include the following:•
Time: Does the vendor deliver products and services on time; is the actual receipt date
on or close to the promised promised date? Does the promised promised date correspond correspond to the vendor's published lead times? Also, are requests for information, proposals, and quotes swiftly answered? •
Quantity: Does the vendor deliver the correct items or services in the contracted
quantity? •
Lead time: Is the average time for delivery comparable to that of other vendors for
similar products and services? •
Packaging: Packaging should be sturdy, suitable, properly marked, and undamaged.
Pallets should be the proper size with no overhang. •
Documentation: Does the vendor furnish proper documents (packing slips, invoices,
tech techni nical cal manu manual al,, etc. etc.)) with with corr correct ect mate materia riall code codess and and prop proper er purch purchas asee orde order r numbers? •
Emergency delivery: delivery: Does the vendor demonstrate extra effort to meet requirements
when an emergency delivery is requested? Finally, these are service factors to consider:-
•
Good Good vendor vendor repres represent entati atives ves have have sincer sinceree desir desiree to serve. serve. Vendor Vendor reps reps displa display y courteous and professional approach, and handle complaints effectively. The vendor should also provide up-to-date catalogs, price information, and technical information. Does the vendor act as the buying firm's advocate within the supplying firm?
•
Inside Inside sales. sales. Inside Inside sales should should display display knowledge knowledge of buying firms needs. needs. It should also also be helpfu helpfull with with custom customer er inquir inquiries ies involv involving ing order order confir confirmat mation ion,, shippi shipping ng schedules, shipping discrepancies, and invoice errors.
•
Technical support. Does the vendor provide technical support for maintenance, repair, and installation installation situations? situations? Does it provide provide technical technical instruction instructions, s, documentat documentation, ion, gene genera rall
info inform rmat atio ion? n?
Are Are
supp suppor ortt
pers person onne nell
cour courte teou ous, s,
prof profes essi sion onal al,,
and and
knowle knowledge dgeabl able? e? The vendor vendor should should provid providee traini training ng on the effecti effective ve use of its products or services. •
Emerge Emergency ncy suppor support. t. Does Does the vendor vendor provid providee emerge emergency ncy suppor supportt for repair repair or replacement of a failed product.
•
Proble Problem m resolu resolutio tion. n. The The vendor vendor should should respon respond d in a timely timely manner manner to resolv resolvee problems. An excellent vendor provides follow-up on status of problem correction.
A more comprehensive approach is needed for suppliers that are critical to the success of the firm firm's 's strat strateg egy y or comp compet etit itiv ivee adva advant ntag age. e. For For firm firmss that that fall fall into into the the latte latterr categ categor ory y performance may need to be measured by the following 7 C's. 1.
Competency -managerial, technical, administrative, and professional competence of
the supplying firm. 2.
Capacity- supplier's ability to meet physical, intellectual and financial requirements.
3.
supplier's willingness willingness to commit commit physical, physical, intellectual and financial financial Commitment- supplier's resources.
4.
Control- effective management control and information systems.
5.
Cash resources- financial resources and stability of the supplier. Profit, ROI, ROE,
asset-turnover ratio. 6.
Cost -total -total acquisition cost, not just price.
7.
Consistency- supplier's ability to exhibit quality and reliability over time.
BENEFITS
Benefits of vendor rating systems include:-
•
Helpin Helping g minimi minimize ze subjec subjectiv tivity ity in judgme judgment nt and make make it possib possible le to consid consider er all relevant criteria in assessing suppliers.
•
Providing feedback from all areas in one package.
•
Facilitating better communication with vendors.
•
Providing overall control of the vendor base.
•
Requiring specific action to correct identified performance weaknesses.
•
Establ Establish ishing ing contin continuou uouss review review standa standards rds for vendor vendors, s, thus thus ensuri ensuring ng contin continuou uouss improvement of vendor performance.
•
Building vendor partnerships, especially with suppliers having strate gic links.
•
Developing a performance-based culture.
Vendor ratings systems provide a process for measuring those factors that add value to the buying firm through value addition or decreased cost. The process will continually evolve and the criteria will change to meet current issues and concerns. RECENT TRENDS AND DEVELOPMENT IN PURCHASING
Many companies are now confronted with diminishing growth opportunities, which results in a situ situat atio ion n where where an incre increas asee in turn turnov over er can only be reali realize zed d at the the expe expens nsee of the the competition and only with a great deal of effort. This leads to increased pressure on sales prices and consequently on cost prices and margins, which causes two developments. -
On the the one hand hand it has has result resulted ed in shift shiftss of powe powerr betw between een purc purcha hasi sing ng and sell sellin ing g parties in many markets. Due to the fact that in many cases the market has changed from seller’s market to buyer’s market, the role of the buyer is now more dominant than a number of years ago.
-
On the the other other hand the the increas increasing ing pres pressur suree on sales sales prices prices and and margins margins has has result resulted ed in an increased pressure on direct materials-related costs. Because the purchasing prices determine the sales prices in the industrial sector to a large extent, the company will be constantly on the look-out for opportunities to keep these prices as low as possible.
As a resul resultt of both both deve develo lopm pmen ents ts,, the the purc purcha hasi sing ng and and supp supply ly strat strateg egie iess of indu indust stri rial al companies have undergone major changes. Several examples of these changes are presented below:-
i.
Co-ordination of purchasing requirements: In companies with several manufacturing
plants, important purchasing advantages can be realized by combining policy is seen to emerge emerge in many many Europe European an compan companies ies of this this type, type, even even across across nation national al borde borders. rs. Traditionally this was already common for raw materials; at present however, a similar approach is used for the purchase of computer hardware and software, capital goods and components. Good examples of companies with an active policy concerning purchasing co-ord co-ordina inatio tion n are, are, apart apart from from the autom automoti otive ve and comput computer er indust industry, ry, Shell, Shell, Philip Philipss electronics and Alcatel. ii.
Automation enables companies companies to improve improve Integra Integratio tion n of purchasi purchasing ng in logistic logistics: s: Automation materials planning and supply systems. It furthermore may significantly improve the productivity within the materials area. An integrated approach of materials management requires close cooperation between the production planning, inventory control, quality inspection and purchasing. To achieve succesful a utomation, system standardization is a prerequisite. Purchasing cannot be allowed to follow its own course. To ensure effective integration of the different materials related areas. Purchasing increasingly is integrated into supply chain management.
iii.
practice, ce, Integra Integratio tion n of purchasi purchasing ng in engineer engineering ing and producti production on planning planning:: In practi supplier supplier selection is determined determined to a large degree by the technical specifications specifications.. Once established, this specification is often very difficult to change. From a commercial point of view it is undesirable that specifications are defined towards a particular supplier; in that that case case purcha purchasin sing g often often ends ends up with with a monopo monopolis list, t, which which seriou seriously sly hamper hamperss negotiating. To prevent this it is desirable to include purchasing in the development process process at an early stage. The goal is to make optimal use of purchasing purchasing knowledge knowledge of products and markets for the benefit of the product design.
iv.
Make or Buy: Buy : Practice shows that several production activities can be done cheaper and
faster faster by specia specialize lized d suppl suppliers iers.. Moreov Moreover, er, compan companies ies may take take greate greaterr demand demandss in terms of quality on external suppliers than on their own. This is why in some industrial branches, the purchasing to sales ratio has been steadily rising. For some companies these these have have result resulted ed in detaile detailed d make make or buy studies. studies. Purcha Purchasin sing g should should always always be closely involved in this type of study, because they are the logical source of market information.
v.
Companies ies operat operation ion on Rec Recipro iprocity city agreeme agreements nts and compens compensatio ation n obligati obligations: ons: Compan international markets is often obliges to compensate their sales turnover by counter purchase obligations. The recent opening up of the eastern European block has counter trade an actual issue. Buying from these countries may even open up interesting sales opportunities. Purchasing become involved in fulfilling such obligations
vi.
Total quality control and just-in-time production: production : In several companies a growing
interes interestt in qualit quality y improv improveme ement nt and increa increased sed produc productiv tivity ity can be observ observed. ed. The acti activi viti ties es of the the Euro Europe pean an foun founda dati tion on for for Qual Qualit ity y Mana Manage geme ment nt,, init initia iated ted by the the presidents of 14 European industries on 5 September 1988, illustrate the first; several EEC programmes, aimed at logistics, the second. There is a growing awareness in the international business scene that, if Europe wishes to remain competitive on a world scale in several sectors, Improveme Improvements nts must be made in both the level of costs and the level of quality of the end products. E-PURCHASING AND E-PROCUREMENT
The Internet and e-commerce is drastically changing the way purchasing is done. Internet use in buying has led to the terms "e-purchasing" or "e-procurement." Certainly, communication needed in competitive bidding, purchase order placement, order tracking, and follow-up are enhanc enhanced ed by the speed speed and ease ease afford afforded ed by establ establish ishing ing online online system systems. s. In additi addition, on, negotiation may be enhanced and reverse auctions facilitated. Reverse auctions allow buying firms to specify a requirement and receive bids from suppliers, with the lowest bid winning. E-pr E-proc ocur urem emen entt is cons consid ider ered ed one one of the the chara charact cteri erist stics ics of a world world-cl -clas asss purch purchas asin ing g organization. The use of e-procurement technologies in some firms has resulted in reduced prices for goods and services, shortened order-processing and fulfillment cycles, reduced administrative burdens and costs, improved control over off-contract spending, and better inventory control. It allows firms to expand into trading networks and virtual corporations. Criteria for e-purchasing include: •
Suppor Supportin ting g comple complete te requir requireme ements nts of produc productio tion n (direct (direct)) and non-pr non-produ oductio ction n (indirect) purchasing through a single, internet-based, self-service system.
•
Delivering a flexible catalog strategy.
•
Providing tools for extensive reporting and analysis.
•
Supporting strategic sourcing.
•
Enhancing supply-chain collaboration and coordination with partners.
ETHICS IN BUYING
Since the purchasing department deals with large sums of money purchasing personnel may in some some case casess may may take take part part in unet unethi hical cal and and ille illegal gal activ activiti ities es such such as mani manipu pula latin ting g quotations, fixing prices, favoring up specific supplier and so on. Most organisations develop a set of rules and guidelines to ensure that their purchasing manager conduct business in ethical manner. Some of these rules are:-
The orga organiz nizatio ation’s n’s inter interest est shoul should d be kept kept in mind mind while while purcha purchasin sing. g. No undue favor should be taken from or given to suppliers.
-
All purch purchasi asing ng activi activities ties shou should ld be condu conducte cted d honestl honestly y and truthf truthfull ully. y.
-
All purcha purchasin sing g comm commitme itments nts should should be comp complet leted ed on on time. time.
Organi Organisat sation ion can reduce reduce the tempta temptatio tion n to adopt adopt unethi unethical cal practi practices ces by compen compensat sating ing employees suitably.
Bibliography •
Operations Management By S.N. Charry
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Purchase and Supply Management by Arjan J Van Welee
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Operation Management by ICFAI Business School
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Operation Management by K. Ashwathapa
•
Purchase Management by L.C. Jhamb
•
Wikipedia
