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Purchasing and the Supply-Chain


Market Assessment Supplier Selection Proposal Evaluation Contract preparation Contract Management System Development Bid Evaluation

Business Need

Requirement Definition

Procurement Strategy

Supply Chain for a Florist


Home customers Commercial customers

Florist

Packaging

Local delivery service

Arrangement materials

Consumables & Maintenance

FedEx delivery

Flowers market local/ international

Internet services

Required for facilitating goods Required for explicit services

Required for implicit services Required for supporting facilities

Purchasing objectives
Buy to requirements so that Inventory is available when, where and in wanted form (minimum effort to use) Least cost for quality Optimise purchasing department/function overheads, accumulated costs, cash flow, warehousing & timely delivery The BUYER is the KEY - responsible for researching, placing and progressing orders.
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Questions
Why is purchasing for a Channel Tunnel project different from purchasing for Tesco or Gap ? Why is purchasing for ASDA different from purchasing for Harrods? What are the purchasing requirements of the Metropolitan Police? Why is the futures market important for Nestle or Kelloggs? What are the advantages of centralised vs. decentralised purchasing functions? The know-how: knowledge-base, competencies, the skills of the buyer for www.dabs.co.uk?

What is the strategic and operational contribution of purchasing & supply?


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A national Electric Power company


industry: utility size: capacity: electricity sales: customers spend transmission lines: Service territory: Geographic Area: generation & distribution 22 billion revenues 39,000 megawatts approx 200m. megawatt hrs 5.9 million 3 billion 8,000 miles 197,500 sq. miles England & Wales
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What are the purchasing requirements & problems of


An NHS Trust? Airbus industries? Virgin Trains? Barratts Homes? Unilever Detergents Division? Royal Air Force? www.dabs.co.uk ? Pret Manger?
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What research goes into purchasing?


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


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


identify needs: materials, products or services strategic buying - futures, options, hedging, stock-piling supplies/supplier intelligence, selection & negotiation contract development & POP replenishment Planning - expediting materials & services maintaining catalogues supplier performance measurement transportation & logistics What % of supply procurement systems chain processes are diversity spend management centralised? vendor-managed inventory decentralised JIT automated?
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Purchasing procedures & methods?


Instructions for contract
The terms, the detail, cancellation & penality issues, packaging, export import docs, insurance, transport, contract security, credit control, receipt arrangements, quality & data recording

Catalogues, drawings/specifications.
CAD , bill of materials & MRP1 - the detail of what we order Catalogue changes - part change & the ripple effect Deletion or launch of products

POP:
Requests, authorisations, purchase orders, GRNs, invoices, payments. Call-offs from orders. Segmentation of duties, physical verifications SOP, forecasting & POP

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Purchasing procedures & methods?


Purchasing by commodity group
Knowledge of the buyer Price leverages Data collection & analysis

Exception for action & progress reports for planning Audit & monitoring procedures: wastage, obsolescence, theft, stock-outs. Pareto 80/20, warehousing costs

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Procurement - Key Skills?


1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. Business awareness and strategic procurement Developing & managing procurement systems Purchasing techniques and methods Supplier evaluation and selection Risk and value management Contract management Legal aspects of procurement (contracts) Purchasing negotiations Quality management Service level agreements Ethical behaviours in procurement Relationship management (client-server) Performance evaluation of suppliers & self Change management

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Buying and negotiation?


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

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Supply Chain Management Drivers


Improve customer service
Improve order management corporate Growth Improve asset use Improve demand planning

Improve warehouse/distribution activities


Accelerate cash to cash cycle Supplier/Supply base management Strengthen partnerships Regulatory compliance

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Planning, logistics & zero working capital


Strategic Forecast Pull Point of Use MTO Point of Use Point of Use ContractTO Sales Order Demand Pull
Distributor/Customer
Distributor/Customer

Supplier owned & managed strategic inventory Optimize Capacity Daily Through-put J.I.T. for Common Parts

A c c o u n t s

MTS

R e c e i v a b l e

Distributor/Customer

Flow Manufacturing
Min/Max Replenishment Common Inventory

JIT Supplier

JIT

Accounts Payable

BANK

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Information sharing, dataflows & feedback


Rules configuration Real time available to promise Supplier Management

Delivery on Demand

At Point of Use J.I.T.

Continuous flow manufacturing

Interprise Visibility

WIP

Inventory

First Promised Deliver Date Correct Configuration

Distributor

Supplier

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Integrating SCM Applications


Integration of Process and Technology
functional areas:
Production Optimization Available to Promise Advanced Planning

Purchasing

ERP Engines
- Oracle - SAP
Order Management

accounts payable inventory procurement Performance indicators for


Optimise

SCM

material sources: track/measure


supplier performance, scorecard them

Export / Import & Freight Management Forecasting and Demand Planning Warehousing & Distribution

spending patterns/supplier materials handling - available


when/where needed

inventory levels - reduce out-ofstock or overstock 17

Supply/Procurement Issues
Resource Usage Performance objectives Quality Speed Reliabiity

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


Supply network relationships

Flexibility
Cost

Capacity Process technologies Decisions

buyers market sellers market


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Market competitiveness

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


a company can trade with
1st tier - immediate suppliers & 2nd tier - suppliers of suppliers end-customers Consider % balance of each

Non-exclusive relationships e.g. Firm C - may single source (exclusive supply) or multi-source item X Exaluate relationships close & intimate? Make or contract in (outsource)? For what items: strategic, trivial? Many suppliers or a few? Keiretsu (collaborative) vs. Transactional (arms-length)
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Flows of products, services & information


Supply side 2nd-tier suppliers 1st-tier suppliers Company A Demand side 1st-tier customers 2nd-tier customers

Company B

Company C

X X

X X X
For Company A Internal supply network Immediate supply network Total supply network

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Down stream

Up stream

Analysis of supply relationships


Long term virtual Vertical

operation
Type of inter- firm contact Transactional - many Close - few suppliers suppliers

integration

Market relationship

Partnership supply relationship

Traditional market supply Virtual spot trading

Resource scope
Do nothing Do everything 22 Character of internal operations activity

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Aggregate Plan MRP1


Aggregate Plan (product groups) Firm orders MRP2 Forecast random orders

Design changes

Master production schedule Plan how many + when + where we (MPS)


will build each finished product.

Bill of materials

MRP1

Inventory data

Control Reports

Stock movements
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Distribution Channels & Logistics


distribution channels: routes & methods from producer distributors customer Logistics management: synonymous with SCM? narrowly defined: concerned with inbound transportation, storage (warehouse) & outbound distribution.
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SC Partnership - Shared information


e.g. production rate (as % of capacity) on-hand inventory inventory in transit advance ship notices forecasts damaged goods actual vs. delivered amounts real-time alerts planned product & engineering changes
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Measuring P&S contribution to Corporate performance


suppliers include contractors for work & services performance monitoring = measuring supplier ability to comply with contractual obligations & delight (P&S is a supplier)

Balanced Scorecard + "SMART" objectives:

accuracy) What corporateclaims warranty objectives? innovative products/services - (against agreed Audit service quality differentiation & advantage control SLAs) over costs thru. systems supplier development & R&D call-out & service response times appraisals of new supply chains. performance against agreed delivery reputation istimes risk by activities within the SC lead not at

Proactive & visible alignment of P&S strategy & operations to fit corporate position the basics contribute to value-add (right goods/services, right place, right Product quality time, right price). MTBF (Mean Time to Fail) ample evidence if P & S is delivering key objectives % of incoming rejects (delivery post contract monitoring - vendor rating

Specific Measurable Achievable Realistic Time-bound


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Some yardsticks of performance (P&S Function & Suppliers?)


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


Stock Turnover = Delivery Quality Time Cost Cost of items sold . Average aggregate inventory value

Weeks of Supply = Avg. aggregate inventory value cost of items sold/week

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


Stock Turnover = Cost of goods sold/Average aggregate inventory value = 160/35 = 4.57 stock turnover has dropped from 10 to 4.57 inventory is not turning over as quickly Compare with the industry average See also value density the value of an item per unit. A significant measure when deciding where items should be stocked geographically how they should be shipped
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Strategic alliances
Part Number Doc-00341 Chas-00798 Sen-00332 Con-00544 Pack-00456 Qty Description 1 1 2 1 1 Assembly and use instructions for valve kit Mechanical valve parts Sensor specification control module with interface kit Packaging specification Supplier Salleramics Flor plan Ltd Florplan Ltd Florplan Ltd Salleramics

Joint SCM improvement objectives share/feedback demand information MURA, quality, reliability, speed, JIT replenishment, costs, security 1st & 2nd tier suppliers read/write permission to enter BOMs, enter new suppliers, enter alerts, update status, acknowledge requests, view reports etc?
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Outsourcing?
moving a firms internal activities (production & service delivery) to outside providers. Why do it? Drivers Core competencies, stick to the knitting. No strategic expertise loss Improvement - contractor is more competent, reliable, high quality, price/cost effective, release of management time Finance: releases internal assets. Out-source costs are less than or equal to DIY costs Short term revenue gains - selling off fixed to out-source agent Specialist labour market - cannot hire expert staff we need. No expected loss of flexibility or growth potential WHAT ARE THE PROBLEMS?
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Logistics & Air Force Operations

Brunei

Australia Other Detachments: Thailand, Indonesia, Bangladesh, N. Zealand


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before landing, radio defect symptoms to control control analysis/troubleshoot identify parts for indent trigger pick items at warehouse apply FIFO priority issue movement update collect defect items Repair shop check repair status tracking global assets & freight
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- Item Data creation - Endorse requirement, - Funds allocation - PO release

Provisioning(MRP)

Disposal

Usage

- FMS or commercial - R for Quote - PO - Payt -Inspect -accept & locate -reject quarantine/claim -wholesale/retail level

Procurement

Warehousing Store & Issue


Documentation breakage

System fulfillment, issue & acknowledge stock take

Distribution

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Gems of PO Receiving
how goods are received can be a headache receiving problems are credit/payment problems errors & confusions cause delays & more processing Transactions on goods received:
correct Order Ref, quantity, specification & pricing Items shipped match PO & invoiced quantity? split shipments - item consolidation? How? reaction to shortage

What % of invoices are paid via auto-pay? When do we have to pay? If it is valuable someone will steal it !!!!
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Segregation of Duties & Fraud


No one individual can influence purchasing outcomes to own advantage or has responsibility for more than one of specification/requisition process & authorisation supplier selection : tender lists & receipt, short-listing, negotiation parties contract award: deciding the supplier; authorisor of contract/order goods received: checking exact order received & to be paid for payment authorisation: signing off invoices & setting system tolerances

Control Methods
procurement procedures, processes & policies (incl. ethical code retransparency & declaration of interest). risk analysis random audits of different contracts & procurement projects. financial limits e.g. open-to buy, how much each buyer can commit disciplinary & whistle blowing policies rotations: buyers not too close to favourite suppliers

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eBusiness - B2B
$ value of transactions over the Internet? B2B, B2C? significant channel for purchasing MNCs can get best prices without using open eMarketplace. growth in Intranet B2B applications installed & operational EDI (point to point) still an important re-volume of B2B transactions Fax & email is common online B2B portals (eMarketplaces) offer Supplier/supplies intelligence (specialist groupings) opportunities/collaborations e.g. networked participants (SMEs? Hospitals) to combine spend & bargaining volume. potentially lower buying costs & operating efficiencies NHS Purchasing & Supply Agency http://www.pasa.doh.gov.uk/
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Inventory at Different Stocking Points

Raw materials

Work in process

Finished goods

Supplier

Manufacturing plant

Distribution center

Retailer

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What is a Supply Chain?


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


9,000 Order Quantity 7,000 5,000 3,000 0 Time
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Consumers daily demand
Retailers daily orders to manufacturer Package suppliers weekly orders to cardboard supplier Manufacturers weekly orders to package supplier

Materials Management
FG storage

Transformation process and WIP storage


Purchasing domain of responsibility

Egg supplier

Sugar supplier

Flour supplier

Chocolate chips supplier

Maintenance services supplier

RM storage

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Materials Management
FG storage

Production domain of responsibility


Transformation process and WIP storage

RM storage

Purchasing domain of responsibility

Egg supplier

Sugar supplier

Flour supplier

Chocolate chips supplier

Maintenance services supplier

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Materials Management
FG storage

Production domain of responsibility

Transformation process and WIP storage

RM storage

Purchasing domain of responsibility

Egg supplier

Sugar supplier

Flour supplier

Chocolate chips supplier

Maintenance services supplier

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Materials Management
Supermarket A distribution center Distribution domain of responsibility Supermarket B distribution center
FG storage

Transportation services supplier

Production domain of responsibility

Transformation process and WIP storage

RM storage

Purchasing domain of responsibility

Egg supplier

Sugar supplier

Flour supplier

Chocolate chips supplier

Maintenance services supplier

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Materials Management
Supermarket A distribution center Distribution domain of responsibility FG storage Supermarket B distribution center Transportation services supplier

Production domain of responsibility

Transformation process and WIP storage

RM storage

Purchasing domain of responsibility

Egg supplier

Sugar supplier

Flour supplier

Chocolate chips supplier

Maintenance services supplier

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Inventory Measures
Average inventory = 2 million Cost of goods sold = 10 million 52 business weeks per year

2 million Weeks of supply = = 10.4 weeks (10 million)/(52 weeks)

10 million Inventory turns = = 5 turns/year 2 million


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Inventory Measures

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Supply-Chain Process Measures


SUPPLYCHAIN PROCESS MEASURES

Customer Relationship
% of orders taken

Order Fulfillment
shipped % of orders shipped on time Time to fulfill order % of botched services or returned items Cost to produce service or item Customer satisfaction with order fulfillment process

Supplier Relationship
deliveries on time Suppliers lead times % defects in services & purchased materials Cost of services & purchased materials

% of incomplete orders % of suppliers

accurately Time to complete order placement process Customer satisfaction with order placement process

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Supply-Chain Design
DESIGN FEATURES FOR EFFICIENT & RESPONSIVE SUPPLY CHAINS

Factor
Operation strategy

Efficient Supply Chains


Make-to-stock or standardized services; emphasize high volume, standardized services or products Low Low, enable high inventory turns Shorten, but do not increase costs Emphasize low prices, consistent quality, ontime delivery

Responsive Supply Chains


Assemble-to-order, maketo-order, or customized services; emphasize service or product variety High As needed to enable fast delivery time Shorten aggressively
Emphasize fast delivery time, customization, variety, volume flexibility, top quality 49

Capacity cushion Inventory investment Lead time


Supplier selection

Reading and WWW sources


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