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Materials Management

Definition & Scope of Materials Management


As you know , the fundamental objectives of the Materials Management function ,often called the famous
5 Rs of Materials Management, are acquisition of materials and services :

• of the right quality


• in the right quantity
• at the right time
• from the right source
• at the right time

From the management point of view , the key objectives of MM are :

• To buy at the lowest price , consistent with desired quality and service

• To maintain a high inventory turnover , by reducing excess storage , carrying costs and inventory
losses occurring due to deteriorations , obsolescence and pilferage

• To maintain continuity of supply , preventing interruption of the flow of materials and services to
users

• To maintain the specified material quality level and a consistency of quality which permits efficient
and effective operation

• To develop reliable alternate sources of supply to promote a competitive atmosphere in


performance and pricing

• To minimize the overall cost of acquisition by improving the efficiency of operations and
procedures

• To hire, develop, motivate and train personnel and to provide a reservoir of talent

• To develop and maintain good supplier relationships in order to create a supplier attitude and
desire furnish the organisation with new ideas , products, and better prices and service

• To achieve a high degree of cooperation and coordination with user departments

• To maintain good records and controls that provide an audit trail and ensure efficiency and
honesty

• To participate in Make or Buy decisions

Materials Management thus can be defined as that function of business that is responsible for the coordination
of planning, sourcing, purchasing, moving, storing and controlling materials in an optimum manner so as to
provide service to the customer, at a pre-decided level at a minimum cost.
Learn Scope of a Materials Manager

The broad Materials function has the following as identified and interlinked sub functions:

Materials planning and control: Materials required for any operation are based on the sales forecasts and
production plans. Planning and control is done for the materials taking into account the materials not available
for the operation and those in hand or in pipe line. This involves estimating the individual requirements of
parts, preparing materials budget, forecasting the levels of inventories, scheduling the orders and monitoring
the performance in relation to production and sales.

Purchasing: Basically, the job of a materials manager is to provide , to the user departments right material at
the right time in right quantity of right quality at right price from the right source.

To meet these objectives the activities undertaken include selection of sources of supply, finalisation of terms of
purchase, placement of purchase orders, follow up, maintenance of relations with vendors, approval of
payments to vendors, evaluating, rating and developing vendors.

Stores : Once the material is delivered , its physical control , preservation , minimisation of obsolescence and
damage through timely disposal and efficient handling, maintenance of records, proper locations and stocking is
done in Stores.
Inventory control : One of the powerful ways of controlling the materials is through Inventory control. It
covers aspects such as setting inventory levels, doing various analyses such as ABC , XYZ etc ,fixing
economic order quantities (EOQ), setting safety stock levels, lead time analysis and reporting.

Materials Management's scope is vast. Its sub functions include Materials planning and control, Purchasing,
Stores and Inventory Management besides others.

Materials management can thus also be defined as a joint action of various materials activities directed
towards a common goal and that is to achieve an integrated management approach to planning, acquiring,
processing and distributing production materials from the raw material state to the finished product state.

In its process of managing , materials management has such sub fields as inventory management , value
analysis, receiving, stores and management of obsolete , slow moving and non moving items. The various
activities represent these four functions:

How to Implement an ERP System ?


Your organization has decided to implement an Enterprise Resource Planning (ERP) system. Whether
the driver for change is that the current Legacy system is out-of-date, cannot handle the volume or is
causing customer service issues, it is imperative that your organization not fall into the trap that plagued
hundreds early ERP adopters. Here are a number of steps to a successful implementation as well as
issues to avoid which may lead to failure.
Create an Implementation Team
This team should be composed of 10-15 people in the organization that are identified as the best people
in each area. Quite often Jim from Marketing is not put on the team because he is ‘too busy’ with driving
sales, so John, a recent hire, is put on the team for fill this role. John, of course, is still learning how the
company operates and is not the best candidate for the team as he has limited knowledge of processes
within the Marketing area. The implementation team should report to a steering committee in the
organization, which is a group of the highest level executives that have authority and responsibility for the
success of the project. The steering committee should act as a guide to ensure that the timelines and
objectives of the implementation are being met and to remove any roadblocks that the implementation
team experiences.

Document Processes in all Functional Areas


The implementation team should then document all functional areas that will be on the ERP system.
This includes Finance, Sales / Marketing, Operations and Human Resources. The team should create a
process map for each area. In addition, ask employees in different areas what they like best about the
current process, what they dislike and what would make things better. Not only is valuable information
gained by this process, but it also involves employees and creates a shared responsibility to make the
process work after the software is implemented.

Select the Software


The implementation team should undergo a software selection phase where its goal is to match the best
software package to its core business processes. It is highly unlikely that it will find a 100% match. The
goal is to find software that will best mirror the organization’s business processes. If the software can
match to 80% of the processes, then two things must happen to get to the other 20%; either the process
must be modified or the software must be customized. The decision on which option is suitable rests on
whether or not the process is a core process of the organization (a core process is defined as a process
that is vital to the organization and its customers).

Begin Implementation
Once the software has been selected it is time to begin the planning for the implementation. The
implementation team should develop a project plan using a project planning tools (gnatt charts, etc.).
Some of the main components of the process are: ensuring that the data transfer is ‘clean’ and that no
data is lost during the transformation; creating a change management process for modifying business
processes; creating a testing and approval methodology; approving the system and sign-off; and
developing training processes. The implementation team should work with the supplier consultants to help
them with technical issues during the implementation.

Common ERP Implementation Issues to Avoid :

Underestimating the Cost of Implementation


Many organizations did not realize the full extent of implementing all of the modules in an ERP system. By
nature, the ERP system is highly process-oriented, and if your organization does not have all of its
processes documented, you have your work cut out for you. For example, not including the cost of
process mapping, will increase implementation costs and lead to frustration when the budget is increased
for the project.

Cutting the Budget Too Soon


As a result of increasing the budget for the ERP implementation, once the
‘core’ elements were in place, ancillary modules are not all turned on as
they were not part of the main processes. Thus, the full benefit of the ERP
system is undermined as this causes ‘work arounds’ that short-circuits the
full value of the system. In addition,
training becomes one of the first areas to suffer budget cuts. This creates problems as users have no-
where to turn for help and go back to the ‘old way’ of doing things.
Branding the implementation as an IT Project
As this is a software implementation, many organizations believe that the Information Technology (IT)
function should be responsible for the implementation. This creates a dis-connect from all of the other
functional areas such as Finance, Sales / Marketing and Operations who are all stakeholders but do not
give adequate input into the selection decision. This results in IT making assumptions on what the
business requirements were, which are almost always incorrect.

Not having Proper Metrics


The first ERP implementations were a result of the Y2K bug. Rather than pay to upgrade a Legacy
system, some organizations opted to install a shiny, brand-new ERP system, without calculating its
Return on Investment (ROI). Each functional area in the organization should estimate what the benefits of
an ERP system are; whether its eliminating redundant activities, improving order fill rates or increasing
supply chain flexibility, there must be a metric that management can follow to ensure it receives the
benefits of the ERP system after implementation, as well as track its progress as the modules are being
implemented. Remember, you cannot manage what you cannot measure.

By ensuring that your organization spends time understanding its processes and involving representatives
of key areas, it will ensure that it has a high likelihood of success for the implementation.
These efforts will pay dividends when the implementation is underway.

Materials Management in an R & D set up


A typical R & D set up, the following characteristics are easily visible w.r.t. an R&D (research) project:

# a particular project is pursued only once or rarely more than once

# the project duration is small enough to provide the results at the earliest for use

# project conceiving may or may not be predetermined. It may be sudden and resultant of the brain wave
of a scientist

# Project findings may get early implementation for commercial production

# Projects ,mostly, are of pilot nature i.e. of low value and less time duration

Many projects may need materials as tools for diagnosis , tests and trials. Obviously, based on the above
characteristics which are essentially a way of working for any industrial R & D set up, the material
requirement too is peculiar with the following characteristics:
# Item is not repetitive, it may be required only once

Purchase function should ensure speedy procurement


# Element of proper planning w.r.t. timely raising of indent , exact specification, correct estimated price
may be missing
# Quantity of items to be purchased is small
# Sourcing may not be easy as items are developmental in nature, mostly new
Often, the requirement of materials and the nature of purchases are at cross purpose. For example, an
item is required urgently but the exact specification is not available, quantity is too small for the vendors to
show interest, item is new and the sources are not known etc. These and other situations eventually
become the limiting factors for the purchase man who wants to reduce the Lead time in purchasing. It is a
fact of life for the Purchase man that the delivery gets delayed, sometimes enormously, as despite of the
agreed delivery schedule the vendor could not complete the job solely because the item was of
developmental nature and the time it took for completion could not be assessed precisely in the
beginning.

R & D purchases, therefore, are significantly different from those done in a manufacturing unit where
there is enough control on the variables. At least, specification of an item , that determines the item to be
purchased is frozen. Sources, to a great extent, are also known and therefore constant in nature. The
only variables can be price and delivery schedule. As against it, in an R&D set up there is lack of
adequate information on sources, likely price and a justified delivery schedule. Specification often remains
a variable until just prior to placement of order.

Considering that urgent need to procure the material that too on , say short notices at times is of primary
concern in an R & D set up what should be the procurement system or put in other words, can there be a
procurement system that can take care of urgent needs where exact specification, sources and likely
delivery schedule are difficult propositions ?

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Management's expectations From Purchasing

As Purchasing becomes more complex the following aspects too assume more importance to
management now than ever before. In fact , management is looking out for results in the following areas
from its Purchase functions:

Productivity Improvements - Management will always expect you to do more work with fewer
resources. No matter whether you're in a tactical or strategic purchasing organization, there are many
productivity metrics that you can choose from to track productivity gains: PO's per buyer per day, average
length of sourcing cycle, man-hours per dollar saved, etc.

Cost Savings - Management wants Purchasing to save money. However, successfully achieving and
reporting cost savings requires a careful approach. Be sure to synchronise your definition of cost savings
with management's definition, track your cost savings, and focus on total cost reduction, not just price
reduction at any cost (L1 syndrome) A new concept , Total cost of ownership (TCO) is a powerful
approach now. Savings need to be seen on a long term basis.

Brand/Differentiation Support - Your organization's mission or vision statement should give you some
clues as to how your organization wants to be perceived in the marketplace and how it wants to be
differentiated from its competitors, such as offering higher quality, faster cycle time, better service, lower
cost, or something similar. Make sure that your decisions and metrics support your management's brand
and differentiation strategy. As futile as this sounds, you'd be surprised how many organizations have a
mission of being the "highest quality provider" in their industry, yet their purchasing departments measure
only cost savings.

Customer Satisfaction - Sometimes, being in purchasing can make you feel separated from your
organization's customers. But management relies on things that you're responsible for, like assuring
continuity of supply, to keep its promises to its customers etc. Realize that you can personally be
responsible for your organization's failure to meet customer expectations. In the era of tough competition,
organizations shall have have to meet customer expectations (read delight) to survive and Purchasing
has a critical role in that survival.
Positive Cash Flow - In some organizations, the timing of monetary receipts and payments is critical.
Those organizations cannot afford to have more cash leaving the company than coming in during certain
periods. Be aware of that and negotiate appropriate terms with your suppliers. But don't just pay them late
and hope that they don't notice. Remember , once bitten twice shy is a great saying ,applicable to many
organizations.

Crisis in Purchasing & emergency Planning


Emergency plans are often required where some kind of unforeseen happenings may not be ruled out
While no body can think and plan for Tsunami or Hurricane Katrina Purchasers without contingency plans
may face embarrassments as it may lead them scrambling for supply and paying outrageous fees.

Purchasers do learn a lot about contingency planning in the wake of many unthinkable happenings.
The best way to go about it is not to wait for it to arrive to learn that contingency planning is something
that you should have done it earlier.

So what does that mean for purchasing? A lot. Say, for example, if an influenza pandemic does occur,
supply chains lacking good contingency plans will result in many companies being driven out of business.

The world has withstood influenza pandemics before (three times in the 20th century), so your company
can indeed survive with good plans in place.
With less prepared competitors going out of business, your contingency planning may actually help your
company thrive in the long term.

Here are some things to consider in your contingency plan:

1.Establish strong supplier relationships now.

They will mean more than ever. With reduced workforces across all industries, supply of critical items will
be tight. Suppliers will have to pick-and-choose to whom they provide their limited stock. Those buyers
with arms-length or adversarial relationships with their suppliers will struggle.

2.Make sure that your suppliers have contingency plans

The US government has issued a Business Pandemic Influenza Planning Checklist at


http://tinyurl.com/qlnvt. Require your critical suppliers to complete and maintain the checklist and provide
it to you on a bi-monthly basis so that you can assess the strength of your supply chain.

3.Adjust your sourcing strategy

It is common for purchasers to focus on buying from a single source in order to get the most highly-
leveraged pricing. In times of crisis, this strategy exposes you to increased risk.

You should have relationships with multiple suppliers - ideally in dispersed geographical areas - in case a
supplier's operations are brought to a halt by the influenza pandemic.

4.Re-evaluate inventory levels

In the event of an influenza pandemic, demand for the goods or services that your organization provides
will change. For health care products, the demand is likely to increase. For luxury items, the demand is
likely to decrease.

Discuss with your top management what kind of strategy you want to have for related changes in your
inventory levels.

And if you believe that demand will rise, don't wait until an outbreak to decide that you need to purchase
more inventory - your suppliers may not have the inventory nor the staff to handle the increase in demand
when everyone is scrambling for the same items.

Conversely, if you expect demand for your company's products or services to decline, you don't want to
be stuck with tons of inventory.

In that case, you may want to take a lean inventory approach to ensure that your company has the funds
to survive a period of decreased demand.

5.Assess the location of your suppliers

In the past few years, the increase in global sourcing has resulted in many buyers dealing with suppliers
across the globe. Low cost countries have been viewed as great places to source for reducing product
cost. But where is bird flu spreading among humans right now ?

Yes, low cost countries! Plus, you have to remember that low cost countries may not have advanced
healthcare to battle pandemic influenza.

Suppliers in these countries may be particularly susceptible to the consequences of an uncontrolled


outbreak.
Furthermore, customs restrictions may tighten in order to contain the spread of the virus, making it more
difficult to import goods from other countries. You may want to diversify the location of your suppliers to
reduce risk.

6.Revise your Force Majeure clause

Make sure that your contract contains a Force Majeure clause that specifically addresses pandemic
influenza.
You need to be protected from being committed to any purchase quantity guarantees if your company is
affected by an outbreak.
7.Prioritize department tasks :

Identify critical tasks that must continue to be done in the wake of an influenza pandemic and less critical
tasks that could be eliminated. Document procedures for all critical tasks. You don't know which staff
members will miss work due to their own sickness or to care for loved ones, so make sure that all staff
members are trained on the critical tasks. For each staff member, identify a backup person or two for their
work.

Suppliers' Secrets For Negotiating With Purchasing

What Are Your Suppliers Thinking When Negotiating With You?

There are several negotiating principles for purchasing managers. From the supplier's side, "the key to
negotiation is that you have to start with a pretty wide spread," Knudsen shares. "If my goal is to sell
something for $20 a case and I open at $20, we don't have negotiation room. Most sales professionals
have something in their 'back pocket'."

What can compel a salesperson to offer the better deal in her "back pocket?" The goal of many
salespeople is to earn more and work less. That goal is best accomplished by working with customers
with long-term relationship potential. But that doesn't mean that a purchasing manager's only
necessary negotiating tactic is to promise a long-term relationship.

Salespeople are trained to identify whether a purchasing negotiator is serious or bluffing.


Before negotiating, they consider the states of the purchaser's company and the industry. While
negotiating, they evaluate the body language of the purchasing manager.

Certain actions may signal a dishonest representation, such as:

• Keeping the hand over the mouth


• Scratching the nose
• Failing to make eye contact

There are really two lessons to be learned with regard to body language:

1. The purchasing manager must be aware of her mannerisms, as they may be being interpreted by the
salesperson; and
2. The purchasing manager should also observe the salesperson's body language

One of the things is that you should always take someone into the sales call with you because they're
observing while you're trying to present. Most purchasing managers try to (negotiate) one-on-one or one-
on-two and, therefore, fail to be as effective at observing the supplier's body language.

An indicator that the purchasing manager is interested in a long-term relationship is the manner in which
the purchasing manager communicates. Purchasing managers often open a sales call or a negotiating
session with a phrase like "You have five minutes, what do you got?" Knudsen identified that as one of
many "red flags" that positions the purchasing manager as a "short timer" and compels the salesperson to
withhold better deals.

One of the salesperson's objectives is to get the purchasing manager to talk, but also "Most
purchasing managers should try to get the salesperson to talk more." By learning about a salesperson's
objectives, the purchasing manager can uncover opportunities for good deals that the supplier is
withholding for potential long-term relationships or "reference accounts." Sometimes, salespeople are
sent into a meeting with the instructions: "Price is not an issue. Get the account." But purchasing
managers risk never discovering that if they don't foster an open dialogue.

Purchasing managers are often reluctant to share information, and Knudsen sees that as a barrier to
their success in negotiating. The sharing of information is often important for a salesperson to be able to
go back to her management for approval to offer a better deal.
Purchasing managers need to be proficient at distinguishing good-intentioned salespeople from
unscrupulous ones who are just seeking a negotiating advantage.

So, no single rule applies to the sharing of information in a negotiating situation. The purchasing manager
has to make the decision that is right for the specific circumstances.

More open communication may make some purchasing managers nervous as some feel that developing
a relationship plays to the salesperson's advantage and to the purchasing manager's disadvantage. That
does not have to be the case.

By communicating openly, the purchasing manager can learn the objectives of both the salesperson and
the supplier and how a win-win result can be achieved. And a relationship-building demeanor has many
times influenced Knudsen to believe in a higher probability of a long-term relationship which gave him the
"ammunition to go back to my boss or my boss' boss or the company to help (the purchasing manager's
company)."

So, to summarize the negotiating principles :

• Salespeople often enter negotiating situations with available improvements in their "back
pockets."

• A significant motivator for salespeople to offer improvements is the potential for a long-term
relationship.

• Skilled salespeople evaluate your body language as well as your openness and friendliness in
communicating in determining the likelihood of a long-term relationship and, therefore, how much
improvement to make to their offers.

• Purchasing managers should observe, or have a colleague observe, suppliers' body language in
negotiating situations.

• By asking questions and getting a salesperson to talk, you may uncover available opportunities
for better deals.

• Sharing information is critical to developing the long-term relationships that result in good deals.
But you have to be careful to distinguish good-intentioned sales people from unscrupulous ones
and share or withhold information as dictated by the specific situation.
• The belief that developing a relationship plays to the salesperson's advantage and to the
purchasing manager's disadvantage is a myth.

By having an open relationship, the purchasing manager can learn a lot about the objectives of
the salesperson and the supplier and can be better positioned to achieve better deals and a win-
win situation.

• A relationship-building demeanor on your part may compel the salesperson to seek a better deal
from management

• Often the deadlock develops , in course of negotiation , due to the terrible presence of the
element of taking stand early on either side. It needs to be resolved by drawing a bigger canvass
keeping in view a win-win solution.

Code of Ethics in Purchase


The broad objective of Purchase Department is to meet the material and service requirements of the
internal customers of an enterprise by maintaining regular flow of materials/ services by following the
principles of purchasing viz. to purchase at the right price, the right quantity, of right quality, at a right time
and from the right source. In carrying out purchasing responsibilities, the enterprise shall endeavor to
adopt the most suitable Purchase Policy to achieve the best results keeping in view departmental
objectives and overall needs of the business enterprise. In framing Purchase Policy, CODE OF ETHICS
needs to be defined.

Ethics (from Greek ???? meaning “custom”) sometimes also is referred as moral philosophy, is the
guiding principles of practicing norms.

Ethics is about fairness, virtues, duty, obligation, rights, justice and a sense of honesty, exercising
diligence judgment by making a choice between right and wrong; good and evil.

Statutory obligations, Social norms, Company Policy and Practices govern ethical issues. The specific
operating policies, which regulate acceptable and non-acceptable behavior constitute the “Ethical Policy”.

Corporate Ethical Policy is needed by enterprises to define values & behavior guide-lines, to establish
framework for professional practices
and responsibilities, and to discipline and self evaluate the work practices. Adherence to the ethical policy
is essential to maintain, protect and further the reputation of the enterprise for fair and ethical practices
among customers, shareholders, suppliers, business associates, communities, fellow employees and
statutory bodies. Business ethics set the standard on how the business shall be conducted. They define
the value system of how one operates in the marketplace and within her/his business.

The Code of Conduct or Code of Ethics is an organisation’s policy statement and defines ethical
standards for sound corporate governance, that involves systematizing, defending, and recommending
concepts of right and wrong behavior. The Code of Conduct not only establishes the organization’s
values, but also spells out essential practices, behavior, ethics, and business standards for all individuals
who are employed by and represent the organization. It is a guide to legal and ethical conduct of an
enterprise and to deter wrongdoing and promotes ethical standards. This Code covers a wide range of
business practices and procedures and serves as a guide to ethical decision-making. This Code does not
cover every issue that may arise, but it sets out basic policies to guide its affiliates. Normally the principles
described in the code are general in nature. However, one should also review the enterprise’s other
applicable policies and procedures for more specific instructions.
The Purchase Policy is guided by ETHICS and accordingly Values are defined. Keeping in view the
purpose and mission, Objectives are formulated, To institutionalize Purchase Policy, Guide Lines are
framed. The Purchase Policy shall be evolved so as to be fair to both the purchaser and the seller. Good
Ethical Practices foster fruitful Relationships with the Suppliers, while indulgence in Un-Ethical means for
whatever short term gains may damage image of the enterprise in long run.

CORE VALUES :
The key to ethical action is to behave with integrity that is based on sound Core Values like :

HONESTY (be Principled, Straight – Forward and Fair in all the dealings),

INTEGRITY (maintain the highest standards of Professionalism and Organisational Integrity),

FLEXIBILITY (adapt to change)

RESPECT TO OTHER’S VIEWS (Recognise and Appreciate the views of the suppliers and others by
treating others with dignity, respecting individual differences)

RESPECT FOR KNOWLEDGE (acquire and apply


leading edge expertise in all aspects of the business
for value creation and share with concerned
stakeholders as required)
COLLABORATIVE RELATIONSHIP (recognize mutual interests in a WIN-WIN situation)

OBSERVANCE OF STATUTES, RULES AND REGULATIONS (abide by the letter and spirit of the
provisions of the Statutes, Rules and Regulations which may be applicable and relevant to the activities
carried on by the Enterprise)
DILIGENCE (in conducting the business shall at all times
- render high standards of service
- exercise due diligence
- exercise independent professional judgment

GREEN BUYING (encourage the use of products that minimize adverse environmental and health
impacts)

OBJECTIVES :

The broader Policy objectives of the Purchase Department may be :

To align supply base’s capabilities with company’s strategic initiatives by developing an integrated supply
management with focus on Strategic Sourcing that can optimize Total Cost of Ownership.

By seeing a business as a “Value System” for customers, the shift is towards lean strategic priorities
towards growth-oriented targets of lowering cost per unit to gain a competitive edge in a holistic manner
instead of mere cost-cutting by whatever means.
To evaluate and improve the purchasing cycle process in the organization by eliminating non-value added
activities in the supply management process through adoption of lean practices in supply chain.

To adopt collaborative approach with the suppliers to develop new processes, means of saving costs,
increasing competitiveness and continuously innovating strategies to ensure a productive partnership
between the enterprise and its vendors.

To optimize overall material cost including inventory carrying cost & cost of stock out.

In an endeavour to achieve the above goals the enterprise shall nurture and harness skills to develop
core competency by adopting right tools and techniques to derive competitive advantage. The Prime
Objective is adoption of right practices of APPROPRIATE SELECTION AND SOURCING OF
RESOURCES (Material/Services) that leverage ENHANCEMENT IN VALUE CREATION. Waste of
resources in any form, in any activity is a “National Waste” and Value Created by whatever incremental
improvement adds up to “National Wealth”. Therefore it should be the objective of every one to strive in a
“True National Spirit” to work towards “Elimination of Waste and Value Creation”.

POLICY GUIDE LINES :


While transacting purchases the enterprise may observe the following “10 COMMANDMENTS” as
broader guidelines :

• Conduct business with potential and current suppliers openly, fairly, equitably, ethically, honesty
and in an atmosphere of good faith.
• Encourage competition through open, equitable and fair practices.
• Avoid restrictive sharing of required information/ specifications.
Avoid the intent and appearance of unethical or compromising practices.
• Know and observe fair, ethical, and legal trade practices and remain alert to the legal
ramifications of purchasing decisions.
• Strive to maintain/ comply with all applicable environment, safety and health laws and
regulations.
• Promote positive supplier relationships through courtesy and impartiality in all phases of the
purchasing cycle.
• Maintain secrecy & confidentiality within the guiding principles of the company.
• Strive to obtain the maximum value of each rupee of expenditure while concluding deals with
the suppliers in a mutually agreeable win-win situation.
• Remain committed and behest commitment to promises. Acting ethically is everyone’s
responsibility.
• Take individual & collective responsibility in exhibiting Moral Courage, Transparency,
Accountability and Ethical Choices.

“Ethical cultures create trust within and outside corporations. Trust strengthens Relationships and
encourages closure associations with suppliers – which propels mutual progress – and ultimately a win-
win environment”. Corporate ethical reputations have a clear impact on the business as business
associates place a higher value on a corporation’s ethical reputation that on its financial performance,
while ethical lapses in the workplace put those reputations at risk. There are evidences that corporate
cultures that self govern based upon the highest standards of ethical behavior help businesses
outperform their peers. Surveys, suggest organizations have a significant incentive to safeguard ethical
reputations and strengthen the ethical health of their corporate cultures for business advantage. Business
enterprises now-a-days are committing substantial resources to cultivating ethical cultures to foster and
fortify strong ethical practices as a foundation for winning in the marketplace. They are investing to
inspire, educate and empower each and every employee to do the right ethical things as defined. “They
are understanding the power of culture in transforming business”.

Entering into a Time and Materials Contract

A Time & Materials Contract , as the term suggests takes care of the requisite supply within the
specified time period.

A Purchaser probably prefer fixed price service contracts.

In those, if the service requires more time or material than planned, the supplier's profit is reduced, not
yours. Sometimes, a supplier will refuse such risk and will insist on using a time and materials contract.

In a time and materials contract, you pay the supplier for the number of hours actually required to
perform the service.

So, the supplier has no incentive to minimize the number of hours expended on the service. The less
efficient the supplier is, the more money it makes!

Purchasers often feel that using a time and materials contract is like issuing a blank check. But it doesn't
have to be. You can negotiate these items to control final pricing :

1.Labour Rate. Suppliers not quoting fixed prices may charge "list price" for labor. If you are a big
company or are sourcing a big project, don't pay list price. Negotiate a lower labor rate to reduce your
total cost.

2.Maximum Number of Labor Hours. Experienced suppliers should be able to estimate the hours
needed for a job.

Negotiate a cap on the number of hours where, if the supplier exceeds that number of hours, you don't
pay for the overage. This avoids the "less efficiency = more money" issue of time and materials contracts.

3.Mark-Up on Materials. When billing for a time and materials contract, the supplier usually calculates
the materials cost by adding a markup (usually 15 – 35%) onto the prices it paid. If a supplier paid $1,000
for materials, it will bill you about $1,200. You can ask the suppliers to charge only what they paid for
materials, with no markup.
4.Not-To-Exceed Total. The next best thing to a fixed price contract is a time and materials contract with
a "no price escalation" clause. Under this arrangement, the supplier can charge you for its labor and
materials up to a certain maximum.

If the time and materials costs exceed that maximum, the supplier charges you the escalated amount and
assumes the excessive costs. This offers incentive for the supplier to work efficiently and helps you
provide a good estimate for your internal customer’s budget.

Supplier's bid Comparison Formula


In course of purchasing , finding out a bid comparision method for arriving out at and selecting the best
bid for placement of order is an extremely important activity. This is done by inviting the bids keeping in
mind various criteria against which the suppliers are to offer their best offers.

When there are multiple criteria for a supplier selection, purchasers often rely on supplier scorecards as
a guide. Such supplier scorecards allow a maximum number of points per criterion. Suppliers' scores for
each criterion are based on predetermined point award schemes.

For example, one criterion may be location with a maximum of 50 points. The evaluator may award 50
points if the supplier is located within 20 Kilometers (KM) of the buyer's plant, 25 points if the supplier is
located between 20 and 40 KM away, and 0 points if the supplier is located more than 40 KM away.

But most purchasers struggle to figure out a way to score prices for comparison. So, I took it upon myself
to create a supplier scorecard price comparison formula.

The Formula is built on this principle: The penalty to a supplier's pricing score should be proportionate
to the degree that its price varies from the Lowest Qualified Bid (LQB). So, if a supplier's price is 25%
higher than the LQB, its pricing score should be 25% lower than the pricing score of the supplier who
submitted the LQB. If the supplier's price is 40% higher, it's pricing score should be 40% lower. Here is
the Formula:

PS = MP x (1 - ((SP-LQB)/LQB))

Where,

PS = Pricing Score
MP = Maximum Points
SP = Supplier's Price
LQB = Lowest Qualified Bid
Supplier Diversity Program
An increasingly popular purchasing practice is the implementation of supplier diversity programs.

Supplier diversity means using suppliers from different "categories." These categories are usually based
on the ownership characteristics of suppliers.

Some organizations have categories such as veteran-owned businesses, woman-owned businesses,


minority-owned businesses, and majority-owned businesses. Other categories can be based on supplier
size (small vs. large businesses). A category for suppliers located in economically distressed areas is also
common. Organizations starting supplier diversity programs seek to include among their supplier base
those suppliers who fall into certain categories that might have been historically disadvantaged for social
or other reasons.So why should you consider starting a supplier diversity program? Here are four reasons
why others do:

1.Their organizations have a diverse


customer base. By showing support for the demographic groups of its customers, an organization hopes
to strengthen its appeal to them.

2.Their organizations serve customers that support supplier diversity. Companies that are committed to
supplier diversity don't just select diverse suppliers. They require their suppliers to support supplier
diversity.

3.The government may require it. When an organization accepts a grant or contract from the
government, that organization may be required to subcontract a portion of the award to diverse suppliers.

4.Their organizations want to demonstrate social responsibility. Many organizations voluntarily utilize a
diverse supplier base because it the leadership feels that it is the right thing to do for society and the
community.

Determinants of a Modern Purchasing Department


Competition and technology are redefining the ways business is to be conducted today. The old and the
by gone methods and concepts are giving way to the new ones. Purchasing being a key business
function can't remain aloof. After all, for many companies Purchasing is their real customer face
Modernisation of Purchasing function is a priority.
The purchasing function has changed dramatically over the last several years. And it continues to change
and evolve almost daily.

Following are criteria that determine if your Purchase department is a modernised one or not. One can
use this checklist as a set of goals which you aspire.

1.The head of purchasing reports directly to the CEO of your company

2.Your department is responsible for procurement in "non-traditional" spend areas such as healthcare
benefits, fleet management, facilities and construction, temporary labor, and travel.

3.Purchasing is actively involved in senior management level, long-term strategic planning

4.The purchasing staff is responsible for manually placing only a small percentage of your
organization's purchase orders

5.Logistics and inventory functions either fall under Purchasing on the organizational chart or are
integrated into the work of purchasing staff

6.Maverick buying is a thing of the past

7.When dealing with large, frequently used suppliers, no paper is exchanged between the time that a
need for a product or service is defined until the time that the supplier receives payment

8.No major sourcing process is conducted without the use of a cross-functional team

9.You are buying from global sources and measuring non-domestic spend as a percentage of total
spend

10.Your department has social responsibility goals and measurements in place

Negotiating With Suppliers Over their Policies


Can You Get A Supplier To Waive Its Policy?

Who Doesn't hate to hear a supplier say "But our policy states...?" That usually means that you'll hear bad
news and a claim that nothing that can be done about it.

But you usually can do something. Negotiating with the supplier's firm, non-empowered customer service
rep isn't it. So ask for the email address of someone empowered to waive policies. Then email them,
stating:

1. What You Want

2. Why You Want It

3. What You Were Told About The Policy

4. Why You Disagree With The Policy (use logic)


5. Your Personal Experience With Policies

6. That Humans Can Waive Policies (use emotion)

7. A Call To Action

Here's an example. Adapt it to your own situations :

Dear ___

I would like you to reconsider my request to return item #12345 from my order #67890 for a refund.

This item does not work as the manual describes. I was told that your policy states that widgets are not
returnable. However, I do not consider this item to be a widget.

Both your Web site and the manufacturer's call it an external USB interface, not a widget, which is
generally a small chipboard installed inside a computer.

I know what your policy states. But even if you disagree with my notion that your policy does not apply to
this item, I believe that you can and should grant my request.

In my purchasing department, we have policies. But human beings can waive policies. And if one of my
internal customers justifiably felt that the enforcement of a policy would be unreasonable, I would waive it.

I trust that the management of ABCD, Inc. shares this customer-centric view of how exceptions to policies
can be granted by intelligent, caring business leaders.

Please reply with the instructions for arranging my refund.

Thank you.

Procurement Project Management Plan

Planning for any activity is one of the starting points. It may not be visible for easy and routine kind of
activities but where an activity depends upon many other activities complexity increases and thus
planning becomes all pervasive.

These are the components of a good procurement project plan:


1. Scope. The scope is the goal of the procurement. Sometimes, you can use the description from your
RFP, RFI, or RFQ for your scope. But the big secret is that it has to be very specific and document every
assumption that has been made.

2. Schedule. The schedule includes a work breakdown structure - the specific steps that are required to
complete the procurement. You break down each activity into its smallest task. Then you can assign a
specific amount of time it is going to take to do each one of those tasks.

3. Budget :The budget can mean different things to different companies. In some companies, if you're
billing your time to specific internal projects or the business unit, the budget does become important. The
easiest way to create a budget is to tie it to the schedule, multiplying the number of hours of work by the
pro-rated salaries (perhaps including benefits) of the workers.

4. Quality Plan. The quality plan lays out how you're going to maintain the standards and requirements
for a good procurement, adding examples of ensuring that competition is fair and that suppliers are
qualified

5. Human Resources Plan. The human resources plan describes the qualifications of the personnel that
you need on your team. Usually, you can get the people you want if you can justify exactly why you need
them. What is it that they know or do that you need? Remember to document it if you aren't allowed to
use the people that you asked for. That can help you in explaining why your project is not doing as well as
you thought it ought to do.

6. Communications Plan. The communications plan clearly describes who is on the team, who the end
users are, and anyone else affected by the procurement. It also defines the role each stakeholder has
within that procurement. Including titles and contact information is important as well as defining how
communications will take place, citing the example of the procurement professional being the only ones to
communicate with bidders during the RFP process.

The Purchasing Risk Analysis

Risk analysis is a powerful project management technique. You can use risk analysis to address the risks
that make your procurement job unnecessarily difficult.

A risk analysis is "figuring out what can go wrong and how to either avoid it or fix it," said Diana
Lindstrom, a former strategic sourcing manager for a huge telecommunications firm and currently the
president of Los Lobos Consulting - a company specializing in project management and coaching project
managers.

"By figuring out what can go wrong -identifying risks - we're one step ahead of Murphy's Law."
Great project managers see projects in a logical sequence of systematically executed events. Developing
a procurement risk analysis is no different.

"Once we've identified the risk, then we assign a level to that risk," Lindstrom explains. "You can use 1
through 10, ABC, or any other ranking system."

The final piece of the procurement risk analysis is the plan. "The risk plan includes the steps necessary
to avoid the risk or mitigate the fallout from the risk if it does happen," she says. "By knowing the risks,
understanding how likely each one is to occur, and having a plan in place to deal with it, we're able to
successfully complete projects."
Using a risk plan can help a procurement department demonstrate its value to the organization. "Most
internal customers don't understand why procurement needs to follow all the steps that are laid out by the
company. And they don't care," she notes.

"So, using a risk plan becomes an educational tool. It teaches folks what happens if the procurement
steps are not followed. It shows them in black and white what can happen - the risk - and how
procurement professionals deal with it - the plan. It shows them that procurement wants to help them do
business in a less risky way."

So, in summary, identify risks, assign levels to those risks, determine the steps to avoid or mitigate the
risks, and share the plan with stakeholders.

Inventory Audit Checklist

A firm may conduct an audit of the firm’s inventory planning and monitoring systems. Some of the
possible areas to look out for are as follows:

Description Yes No Remarks

ON INVENTORY LEVELS

1. Is too much money tied up in your inventory?


2. Do frequent shortages in inventory occur?
3. Does an excessive inventory discrepancy occur?
4. Is there are a lot of obsolete and/or non-moving items on stock?

ON INVENTORY INFORMATION / POLICIES :

1.Does the company have realistic safety stock levels?

2. Does the company have realistic reorder point levels?

3. Does the company have realistic inventory lead times?


4. Are inventory control policies and procedures adequately documented and communicated to all
concerned departments?

INVENTORY MONITORING :

1. Are inventory records kept up- to-date for all materials?


2. Are inventory records regularly verified by actual count?
3. Are incoming and outgoing materials / goods properly checked, authorized and logged in/out?
4. Are surplus and scrap items properly recorded and controlled?
Hazards Of Purchasing profession ?

Today's purchasers are purchasing more and more services. Purchasing services have unique hazards.
These include:

1. Non completion of job by the expected date


2. Having a problematic "customer review"
3. Not getting good responsiveness from your supplier

When buying goods , one usually expects delivery within the schedule period as given in the P.O. But
"days" in a services quote's lead time may mean one of three things:

Calendar Days: Each day, including weekends and holidays, counts towards the lead time. So, if you
place your order on July 1 and the lead time is 30 days, expect your service to be complete by July 31.

Business Days: Each day, except weekends and holidays, counts towards the lead time. So, if you place
your order on July 1 and understand that July 4 is a holiday and Saturdays and Sundays aren't business
days, expect your service to be complete by August 14.

Working Days: For some services, specific supplier employees are assigned to specific tasks. Working
days include only those days that those people actually work on your project. If an individual works on
another customer's project on a certain day, that day will not be deemed a working day nor count towards
your lead time. So, if you place your order on July 1 and the individual works on your project every other
business day, expect your service to be complete in late September.

Wouldn't it be easy for you and your internal customer to be disappointed if by "30 days" your supplier
meant 30 working days and you were expecting the service to be performed in 30 calendar days? When
purchasing services, personally reach agreement with your supplier on the meaning of days. And then
confirm it in writing!

Tactical vs Strategic Purchasing


Most purchasing departments aspire to be "strategic." They seek to minimize their tactical tasks and
spend more time on strategic ones. Here are 10 characteristics of strategic, in contrast to tactical,
purchasing :

Spend Analysis: Strategic purchasing teams examine the amount of money they spend in each category
of goods and services and use this analysis to identify opportunities for improvement.

Supplier Relationship Management: Strategic purchasing teams measure supplier performance and
regularly spend time meeting with their most important suppliers to implement improvements.

Technology Implementation: Strategic purchasing teams frequently update and add technologies that
measurably reduce costs, decrease cycle time, and make the purchasing process more efficient.
Developing Project Plans: Strategic
Enterprise-wide Contracts: Strategic purchasing teams consolidate spend across all parts of their
organizations and enter into contracts with a limited supply base to serve the needs of the entire
organization.

Forecasting: Strategic purchasing teams regularly document changes that they foresee in price levels,
availability, and markets to ensure a competitive advantage for their organizations.
Involvement in Spec Development: Strategic purchasing teams are involved at the early stages of
specification development, lending specialized knowledge in material availability, cost drivers, standard
parts, and reliability of supply.

Development of Productivity Tools: Strategic purchasing teams develop tools (e.g., RFP templates) so
repetitive tasks can be done more quickly and error-free.

Supplier Development: Strategic purchasing teams don't blindly accept the suppliers and products that
are currently available. They work with suppliers to develop new capabilities or products that will improve
cost or quality.

Work Responsibility Refinement: Strategic purchasing teams constantly identify ways to automate,
delegate, or eliminate tactical, non-value-added work.

Demystifying Group Purchasing Organizations

A group purchasing organization (GPO) is "a group that's responsible for sourcing and managing
aggregated contracts on behalf of a discrete group of companies," according to David Clevenger, VP of a
large GPO, Corporate United. So, instead of a purchasing department sourcing for a category of goods or
services to establish a favorable contract with a supplier, joining a GPO will give that purchasing
department access to an existing contract with favorable pricing and terms.

Purchasing departments join GPO's primarily for savings. By combining its spend with that of other
companies, a purchasing department gets the buying power and leverage of a much larger organization.

But using a GPO can also help a purchasing department address under-managed and unmanaged
categories.

"Most organizations are responsible for buying 150+ different categories and those responsible for
indirect procurement simply cannot handle that," says Clevenger. "In managing less strategic categories,
like office supplies, office equipment, or safety supplies, (a GPO) allows the internal resources at these
organizations to tackle more of those strategic, larger spends."

Also, smaller companies who've struggled to get suppliers to correct problems can have more success
when their spend is part of a GPO contract. Large GPO's have "the ability to go up the ladder within those
supplier organizations because (large GPO's) represent such a significant spend.

So it's frequently easier for (large GPO's) to get the attention of senior leadership on the supply side than
it is for an individual member."

Using a GPO doesn't necessarily mean totally sacrificing control. When sourcing a new category, some
GPO's utilize a steering committee consisting of members' procurement specialists to identify and qualify
suppliers and vote on the selected supplier.
Like any investment, an investment in a GPO should produce a satisfactory return on that investment.
To determine your return on investment requires baselining your current spend and comparing it to the
pricing available through the GPO.

Your actual savings will depend on how well-managed the categories are currently as well as how
effective you are at getting end users to channel their spend through the GPO contracts.

If the savings exceeds the investment, a purchasing department can count the net savings towards its
goals for the year. And, if the category wasn't going to be addressed due to an already full workload,
using a GPO can multiply the success of a purchasing department.

Suppliers' Secrets For Negotiating With Purchasing

What Are Your Suppliers Thinking When Negotiating With You?

There are several negotiating principles for purchasing managers. From the supplier's side, "the key to
negotiation is that you have to start with a pretty wide spread," Knudsen shares. "If my goal is to sell
something for $20 a case and I open at $20, we don't have negotiation room. Most sales professionals
have something in their 'back pocket'."

What can compel a salesperson to offer the better deal in her "back pocket?" The goal of many
salespeople is to earn more and work less. That goal is best accomplished by working with customers
with long-term relationship potential. But that doesn't mean that a purchasing manager's only
necessary negotiating tactic is to promise a long-term relationship.

Salespeople are trained to identify whether a purchasing negotiator is serious or bluffing.


Before negotiating, they consider the states of the purchaser's company and the industry. While
negotiating, they evaluate the body language of the purchasing manager.

Certain actions may signal a dishonest representation, such as:

• Keeping the hand over the mouth


• Scratching the nose
• Failing to make eye contact

There are really two lessons to be learned with regard to body language:

1. The purchasing manager must be aware of her mannerisms, as they may be being interpreted by the
salesperson; and
2. The purchasing manager should also observe the salesperson's body language

One of the things is that you should always take someone into the sales call with you because they're
observing while you're trying to present. Most purchasing managers try to (negotiate) one-on-one or one-
on-two and, therefore, fail to be as effective at observing the supplier's body language.
An indicator that the purchasing manager is interested in a long-term relationship is the manner in which
the purchasing manager communicates. Purchasing managers often open a sales call or a negotiating
session with a phrase like "You have five minutes, what do you got?" Knudsen identified that as one of
many "red flags" that positions the purchasing manager as a "short timer" and compels the salesperson to
withhold better deals.

One of the salesperson's objectives is to get the purchasing manager to talk, but also "Most
purchasing managers should try to get the salesperson to talk more." By learning about a salesperson's
objectives, the purchasing manager can uncover opportunities for good deals that the supplier is
withholding for potential long-term relationships or "reference accounts." Sometimes, salespeople are
sent into a meeting with the instructions: "Price is not an issue. Get the account." But purchasing
managers risk never discovering that if they don't foster an open dialogue.

Purchasing managers are often reluctant to share information, and Knudsen sees that as a barrier to
their success in negotiating.

The sharing of information is often important for a salesperson to be able to go back to her management
for approval to offer a better deal.
Purchasing managers need to be proficient at distinguishing good-intentioned salespeople from
unscrupulous ones who are just seeking a negotiating advantage.

So, no single rule applies to the sharing of information in a negotiating situation. The purchasing
manager has to make the decision that is right for the specific circumstances.

More open communication may make some purchasing managers nervous as some feel that
developing a relationship plays to the salesperson's advantage and to the purchasing manager's
disadvantage. That does not have to be the case.

By communicating openly, the purchasing manager can learn the objectives of both the salesperson and
the supplier and how a win-win result can be achieved. And a relationship-building demeanor has many
times influenced Knudsen to believe in a higher probability of a long-term relationship which gave him the
"ammunition to go back to my boss or my boss' boss or the company to help (the purchasing manager's
company)."

So, to summarize the negotiating principles :

• Salespeople often enter negotiating situations with available improvements in their "back
pockets."

• A significant motivator for salespeople to offer improvements is the potential for a long-term
relationship.

• Skilled salespeople evaluate your body language as well as your openness and friendliness in
communicating in determining the likelihood of a long-term relationship and, therefore, how much
improvement to make to their offers.

• Purchasing managers should observe, or have a colleague observe, suppliers' body language in
negotiating situations.

• By asking questions and getting a salesperson to talk, you may uncover available opportunities
for better deals.
• Sharing information is critical to developing the long-term relationships that result in good deals.
But you have to be careful to distinguish good-intentioned sales people from unscrupulous ones
and share or withhold information as dictated by the specific situation.

• The belief that developing a relationship plays to the salesperson's advantage and to the
purchasing manager's disadvantage is a myth.

By having an open relationship, the purchasing manager can learn a lot about the objectives of
the salesperson and the supplier and can be better positioned to achieve better deals and a win-
win situation.

• A relationship-building demeanor on your part may compel the salesperson to seek a better deal
from management

• Often the deadlock develops , in course of negotiation , due to the terrible presence of the
element of taking stand early on either side. It needs to be resolved by drawing a bigger canvass
keeping in view a win-win solution.

Six Sigma to Success !!


Globalisation and instant access to information, products, and services has redefined the way companies
function – old business models no longer work. The competitive environment leaves no room for error.
Organisations must delight their customers and constantly look for new ways to exceed expectations. But
how do they do it? The answer may lie in Six Sigma, now a buzzword in corporate management circles.

Six Sigma is a management philosophy that propagates setting extremely high objectives, collecting data
and analysing results to a minute degree so as to reduce defects in products and services. Sigma is the
Greek symbol for standard deviation in Statistics. This standard deviation measures the number of
variations in a process.

Six Sigma is a disciplined approach to business process improvement. It helps achieve significant quality
and performance improvements without requiring significant investment.

Although Six Sigma was started in Motorola in its manufacturing division, it eventually evolved and was
used in other non-manufacturing companies such as Allied Signal and GE. It has since been used by
Ford, Caterpillar, Microsoft, Seagate, Siemens and also Merrill Lynch. Six Sigma is now used in several
management initiatives and can be applied to any sector where the control of variation is desired, such as
services, call centres, medical and insurance procedures.

Incidentally, Mumbai’s super-efficient dabbawalas were given a Six Sigma rating by Forbes magazine.
About 5,000 dabbawalas work daily in a finely tuned system to deliver tiffins in an exercise that beings at
9 am and ends at 5 pm. According to the article, only one mistake for every eight million deliveries is their
norm.

How does six Sigma work ??

Six Sigma is a data-driven, customer-focused management methodology that improves the process
performance, decreases levels of variation and maintains consistent quality of the output. This result is a
reduction in defects and improvement in product quality, profits and customer satisfaction.

The philosophy behind Six Sigma is that by measuring how many defects are in a process, you can figure
out how to systematically eliminate them and get as near to perfection as possible. For a company to
achieve Six Sigma, it cannot produce more than 3.4 defects per million parts (or opportunities).
In almost any sector, including accounts, customer-service, logistics and marketing, every process can be
analysed in terms of its adherence to Critical To Quality (CTQ) parameters.

This is because defects can be present whether it’s a customer transaction, an engineering design, a
banking transaction, or even in the time it takes to treat a patient at a hospital. Thus, any process that
deviates from an ideal level can cost extra time, labour, and material.

Over time, Six Sigma serves as a mechanism for cultural transformation in organisations by making
managers more data-oriented and using sound techniques in decision-making. Many organisations today
do not promote managers or staff until they have been trained in Six Sigma.

Benefits

Six Sigma helps companies focus on the customer. Its system helps companies identify and manage the
key input variables that have a major impact on output. This helps them optimise processes and save
money by eliminating defects and reducing variation in processes.

Typically, companies use a project-based approach in implementing Six Sigma. Each project helps the
company save from Rs. 10 to a crore, depending on the size of the company and the project.

Six Sigma Methodologies

Six Sigma DMAIC : It is a process that Defines, Measures, Analyses, Improves, and Controls existing
processes that fall below the Six Sigma specification.

Six Sigma DMADV: Defines, Measures, Analyses, Designs, and Verifies new processes or products that
are trying to achieve Six Sigma quality.

Design For Six Sigma: Six Sigma can also be used to create a brand new business process from scratch
using Design For Six Sigma principles.

Training

There are three levels of training in the Six Sigma quality system: Black Belts, Green Belts and Yellow
Belts. An external Six Sigma expert trains Master Black Belts. Black Belts are the on-site experts who will
develop and lead cross-functional teams, and advise management on prioritising, planning and launching
Six Sigma projects. They are the ones who are directly responsible for the execution of projects in a Six
Sigma organisation.

The Master Black Belts then train black, green and yellow belts. Green Belts are the organisation’s
employees who execute Six Sigma in their jobs. They have less Six Sigma responsibility and their efforts
are focused on projects that are directly related to their daily work.

Factors contributing to its success

Since Six Sigma employs a strongly data-driven approach and places emphasis on measurement at
every stage, ensuring the availability of reliable data is critical. If the process selected does not meet this
requirement, the methodology is unlikely to work.

Six Sigma is heavy on Statistics, but process change is about mindset too, and so the people aspect
receives considerable focus. Establishing the Six Sigma management system is critical to success. The
company needs to also make a commitment to have full time Black Belts. These Black Belts should be
selected carefully from within the organisation and their career planned carefully to send the right signals
to other employees.
The selection of Black Belts is important. In the initial phase of implementation, there is a mix of
uncertainty, and a resistance to change. Therefore, in addition to the senior management’s commitment,
the quality of the Black Belt is also very critical. The Black Belt should have leadership qualities in addition
to technical capabilities to remove the barriers fast.

Constant communication and involvement of all stakeholders at all stages are a must to ensure the
project stays focused and does not lose momentum. Only then will the project be able to draw the energy
for its sustenance from all the stakeholders involved, rather than from just the identified owners or
champions.

It is advisable to clearly articulate the benefits in terms people can relate to. For example, rather than
simply portraying reduction of defect density as a goal, it is a good idea to translate that reduction into the
cost savings the customer will get.

The senior management needs to also be absolutely in accord and committed to bring this discipline. Six
Sigma initiatives are long-term and hence require ample commitment, dedicated resources and
willingness to look at everything critically. Management’s commitment and their role in getting goals and
identification of the right projects is critical.

Important issues

Today large and small companies have launched Six Sigma initiatives. However, for many it is just joining
the bandwagon. At times people think every problem will have a Six Sigma solution, which is not the case.
There are certain problems, which need a quick-fix solution and then there are problems related to culture
and people that cannot be addressed using Six Sigma.

However, some companies, which took the effort to build the necessary infrastructure early on, have
reaped the benefits of Six Sigma over the years and saved crores of rupees. Six Sigma has evolved into
a global movement to enhance the mechanisms for improving business.

If companies want to remain competitive, they must invest in their core competencies. And seeing the
positive results of Six Sigma on a firm’s competitiveness, it is indeed a proposition that makes smart
business sense.

Cost Savings Reporting: Dot Your I's!

Are Your Cost Savings Reports Believable?

Purchasing often fails to get management's respect because its cost savings reports aren't believable. But
you can make your cost savings reports more believable if you can understand and reconcile the
difference between "cost savings" and "expense reductions.

When you claim cost savings, management expects to see the expenses on its financial statements lower
than the previous year. In many cases the cost savings you report are much different than the change in
expenses.

This disparity hurts your credibility. Managers with a financial background were trained early in their
careers to reconcile financial reports - ensuring that differences between numbers from two sources are
accounted for.
You should account for the differences between your cost savings and the actual expense reduction. Here
are reasons cost savings exceed expense reductions. Think about how to reconcile these in a cost
savings report.

Quantities Increased: If you paid $2.00 per pair of safety goggles last year and this year purchased
10,000 goggles at $1.50 per pair, you'd probably report a cost savings of $5,000 ($0.50 x 10,000), right?

But what happens to the expenses if you only bought 5,000 last year?

That's right, the expenses increased from $10,000 (i.e., $2.00 x 5,000) to $15,000 ($1.50 x 10,000)! So
account for that when reporting cost savings, explaining that while the quantity increase would have
resulted in expenses rising by $10,000 if last year's price was held, you offset $5,000 of that increase by
improving pricing.

New Expenses Arose: If you purchased large quantities of an item that your organization never used
before, you don't have a price benchmark. If you negotiated the low bidder's prices even lower, you'd
likely report the negotiated difference as your cost savings. But what do expenses do? They go up
because you spent money on a category on which you spent no money last year.
Increases Aren't Reported: Cost savings are often reported in isolation. Let's say you reported cost
savings of $100,000 for reducing costs in one category by that amount. But what if the spend in your
other categories increased by a total of $200,000? Should you still report $100,000 as your annual cost
savings?

Better-Than-Market Performance Is Counted: Many purchasers measure their cost savings on price-
volatile commodities (e.g., petroleum-based products) by comparing percentage cost changes with
indexed cost changes in the market. But before claiming cost savings when you "beat" the market,
consider how management may see things in terms of expense reduction.

How to Implement an ERP System ?


Your organization has decided to implement an Enterprise Resource Planning (ERP) system. Whether
the driver for change is that the current Legacy system is out-of-date, cannot handle the volume or is
causing customer service issues, it is imperative that your organization not fall into the trap that plagued
hundreds early ERP adopters. Here are a number of steps to a successful implementation as well as
issues to avoid which may lead to failure.

Steps to Success :

Create an Implementation Team


This team should be composed of 10-15 people in the organization that are identified as the best people
in each area. Quite often Jim from Marketing is not put on the team because he is ‘too busy’ with driving
sales, so John, a recent hire, is put on the team for fill this role. John, of course, is still learning how the
company operates and is not the best candidate for the team as he has limited knowledge of processes
within the Marketing area. The implementation team should report to a steering committee in the
organization, which is a group of the highest level executives that have authority and responsibility for the
success of the project. The steering committee should act as a guide to ensure that the timelines and
objectives of the implementation are being met and to remove any roadblocks that the implementation
team experiences.

Document Processes in all Functional Areas


The implementation team should then document all functional areas that will be on the ERP system.
This includes Finance, Sales / Marketing, Operations and Human Resources. The team should create a
process map for each area. In addition, ask employees in different areas
what they like best about the current process, what they dislike and what would make things better. Not
only is valuable information gained by this process, but it also involves employees and creates a shared
responsibility to make the process work after the software is implemented.

Select the Software


The implementation team should undergo a software selection phase where its goal is to match the best
software package to its core business processes. It is highly unlikely that it will find a 100% match. The
goal is to find software that will best mirror the organization’s business processes. If the software can
match to 80% of the processes, then two things must happen to get to the other 20%; either the process
must be modified or the software must be customized. The decision on which option is suitable rests on
whether or not the process is a core process of the organization (a core process is defined as a process
that is vital to the organization and its customers).

Begin Implementation
Once the software has been selected it is time to begin the planning for the implementation. The
implementation team should develop a project plan using a project planning tools (gnatt charts, etc.).
Some of the main components of the process are: ensuring that the data transfer is ‘clean’ and that no
data is lost during the transformation;

creating a change management process for modifying business processes; creating a testing and
approval methodology; approving the system and sign-off; and developing training processes. The
implementation team should work with the supplier consultants to help them with technical issues during
the implementation.

Common ERP Implementation Issues to Avoid :

Underestimating the Cost of Implementation


Many organizations did not realize the full extent of implementing all of the modules in an ERP system. By
nature, the ERP system is highly process-oriented, and if your organization does not have all of its
processes documented, you have your work cut out for you. For example, not including the cost of
process mapping, will increase implementation costs and lead to frustration when the budget is increased
for the project.

Cutting the Budget Too Soon


As a result of increasing the budget for the ERP implementation, once the ‘core’ elements were in place,
ancillary modules are not all turned on as they were not part of the main processes. Thus, the full benefit
of the ERP system is undermined as this causes ‘work arounds’ that short-circuits the full value of the
system. In addition,

training becomes one of the first areas to suffer budget cuts. This creates problems as users have no-
where to turn for help and go back to the ‘old way’ of doing things.

Branding the implementation as an IT Project


As this is a software implementation, many organizations believe that the Information Technology (IT)
function should be responsible for the implementation. This creates a dis-connect from all of the other
functional areas such as Finance, Sales / Marketing and Operations who are all stakeholders but do not
give adequate input into the selection decision. This results in IT making assumptions on what the
business requirements were, which are almost always incorrect.

Not having Proper Metrics


The first ERP implementations were a result of the Y2K bug. Rather than pay to upgrade a Legacy
system, some organizations opted to install a shiny, brand-new ERP system, without calculating its
Return on Investment (ROI). Each functional area in the organization should estimate what the benefits of
an ERP system are; whether its eliminating redundant

activities, improving order fill rates or increasing supply chain flexibility, there must be a metric that
management can follow to ensure it receives the benefits of the ERP system after implementation, as well
as track its progress as the modules are being implemented. Remember, you cannot manage what you
cannot measure.

By ensuring that your organization spends time understanding its processes and involving representatives
of key areas, it will ensure that it has a high likelihood of success for the implementation.
These efforts will pay dividends when the implementation is underway.