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Course: Strategic Procurement in SCM Lecture / Week #.

4 (26th August, 2011) Lecture Contents about: Supply Processes Book Chapters #. 3

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

Supply Processes
(Chapter #. 3)

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

Business Process may Include: Purchasing Process; Marketing Process; Accounts Payable Process; R&D Process.
Robust Process: A set of activities that have a beginning and an end; Occur in a specific sequence; Have inputs and outputs; Must have structure and discipline.

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

Purchases and Supply Chain Process Model

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

Purchases and Supply Chain Process Model

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

Corporate Strategies and Supply Process:


The first step in optimizing the supply process is

building consensus with the organization around the opportunities to add value.
And this requires vertical and horizontal alignment of

strategies and goals:

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

Steps in the Supply Processes:


Basically a communication process that include: 1. Recognition of the need; 2. Description of the need; 3. Identification of potential sources; 4. Supplier Selection and Determination of terms; 5. Preparation and placement of the purchase orders; 6. Follow-up and expediting of the order; 7. Receipt and inspection of the goods; 8. Invoice clearing and payment; 9. Maintenance of Records and Relationships

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

1. Recognition of the need:


A need transform into what, how much and when it is needed; Result in supply/material requisition or indent or demand;

Requirement may be fulfilled with transfer of surplus stock from

one business unit to the one where it needs; the need of using department;

Primarily it is supply departments responsibility to anticipate

The purpose of anticipating in advance is to prevent the

situations for rush orders considering the lead time as well as any major changes;

STRATEGY in this step may include ESI Early Supplier

Involvement. This will brings in information that may result in cost avoidance / reduction, fast time to market and greater competitiveness;

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

PEST Analysis

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

2. Description of Need:
Unclear or ambiguous descriptions, or over-specified materials or quality levels

all may lead to unnecessary costs, re-work, design changes, production losses, etc etc.;

Ideally, organizations must have a template detailing each and every aspect

about the requirement i.e. size/dimensions, color, strength, quality, desired lab test results, manufacturing and expiry dates; delivery packaging; lot size; transportation mode etc. requirements to produce one SKU (Stock Keeping Unit). This document must also summarize the total requirement for a batch size production. persons is to carefully audit the requirement s. To eliminate the chances of ordering the materials which already available in stock within the corporate locations, verification of stock levels is a must to do thing here; and samples, if necessary, and to execute the purchase order and obtain delivery;

BOM Bill of Materials. A recipe document which tells the entire assembly

Before any action being taken, the primary responsibility for procurement

The delivery date requested should allow for sufficient time to secure quotations

STRATEGY An extremely cautious approach towards this highly critical step;

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

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3. Identification of potential sources: Generally, there are 3 formal ways:


Issuing a RFQ Request for Quotation Issuing a RFP Request for Proposal Issuing a RFB Request for Bid Salesperson interviews, Catalogs, Trade Directories and Journals, Yellow Pages, Direct Mail, Market Visits, Exhibitions, Colleagues, Other Buyers, Agents, Embassies and Commercial Attaches, etc.;

Other sources are:

Data collected is summarized into a comparative statement that

must show other things besides prices i.e. ability, strengths, willingness on terms specified, industry experience etc.

STRATEGY driven by final customer requirements.

The strategic decision could be make or buy or single source or diversification or whom to issue the order and why.

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

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3.

Identification of potential sources (contd.):


Multiple Sourcing Diversification for critical items to reduce the sole dependency; Supplier can give good price and service due to competition; Insufficient capacity of existing supplier to accommodate current of future needs.

Single Sourcing Supplier may be the only possible source; Supplier may be outstanding in quality and service; The order may be small; Associated advantage i.e. discounts and lower freight rates; Supplier may be more cooperative if he has all the business; When the purchase involves a die, tool, mold, or costly customized setup; Delivery may be easily scheduled; The opportunity of JIT, stockless buying,

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

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4 Supplier selection and determination of terms:


Suppliers of strategic supplies must be selected must be with long-term

business perspective instead opportunistic on short-term business;

Selections criteria must address:


Suppliers Ability and Experience; Suppliers Willingness; Suppliers Financial Strength and Stability; Suppliers Facility Location; Suppliers Sources and Resources ; Labour Relations; Production Specialization; After Sales Service;

Other Assessment Factors: Lead Time, Delivery Frequency, Transport Cost, Quality Certifications, Willingness to hold inventory, Pricing terms etc. STRATEGY making a win-win situation for both i.e. buyer and supplier to

capitalize on competitive advantage;

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

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5.Preparation and Placement of the Purchase Order:


Orders must/generally include: Complete specifications, Quantity, Delivery Date, Delivery Place, Samples, Inspection Criteria, Damages clause etc. Failure to include proper terms and conditions in the Purchase Orders or Contracts

may result in serious legal complications. follow the POs or the Contracts;

Orders do not materialized until and unless written acknowledgement that must Rush Order, Blanket Orders, Open-End Orders; Terms and Conditions must contain: Provision to guard the buyer from non-material costs and damages i.e.; No charges will be allowed for boxing or crating; Acceptance of materials is subject to successful quality inspection; Precise quality parameters and method of quality assurance; Right of cancellation of the order if deliveries are not received on specified date; Quantities with over shipments or under shipments; Non acceptances if changes made in the material specifications without approval. STRATEGY Play safe and sure.

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

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5. Preparation and Placement of the Purchase Order (contd.):


Price Determinants:

Following should be considered while negotiating prices with the suppliers: Cost Factor covers total unit cost and earn a reasonable profit; Nature of Market; Competitors Prices; Channel of Distribution; Warranty and after-sale service; Margin for rebates or concessions; Government Policy; Buying habits of customers; Nature of sales seasonal sales or regular sales; Demand and supply; Discounts.

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

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SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

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6. Follow-up and Expediting of the order:


Follow-up is the routine tracking of an order to ensure that the

supplier will be able to meet delivery promises;

Follow-up is basically a frequent inquiries about the suppliers

progress and possibly a visit to suppliers facilities;

The idea is to plan and take appropriate actions if failure occurs;


Expediting is the application of pressure on a supplier to meet

the original delivery promise, or to deliver ahead of schedule, or to speed up delivery of a delayed order; may include threat of order cancellation or withdrawal of future businesses if the supplier cannot meet the agreement; should be minimized or ideally eliminated from the process;

Expediting

Follow-up and Expediting has a cost associated its a waste that

STRATEGY Risk Management and Contingency Planning;

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

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7. Receipt and Inspection of Goods:


Receiving Department reporting varies to Operations / Factory Manager or

Procurement Manager depends upon what strategic outcome organization want to achieve;

Receiving reports to Procurement means more risk of mal-practices. On the

other hand, not reporting to procurement may result in conflicting focuses and other ways of ill-practices;
implemented;

The functionality of Receiving, Inspection and Storing is by-passed where JIT is The purposes of receiving and inspection are: Confirm the order place has actually arrived; Check the shipment arrived in good condition; Quantity is received as order with any under or over shipment; Ensure the proper documentation and recording. Rejection types include incoming rejection, line rejection and field

rejection; This process also posses the cost and organizations want to cut it to minimum; this would in turn assure the quality input in processes.

STRATEGY Ensuring materials are received with specified and agreed details,

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

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8. Invoice Clearing and Payment:


Different opinion about this function domain i.e. procurement or

accounting?;

The prime argument for having invoices checked by Procurement is

that this is where the original agreement was made;

Payables Management and Procurement tends to be within the same

department. This bring higher levels of goals alignment; critical is missing, invoice is returned for correction;

If any of the necessary information is not on the invoice or something

Internal Audit Department plays a very vital role in invoice checking

and approval to cut away any chances of anomalies that may occur;

Sometimes suppliers are negligent about invoicing, and normally it

becomes very necessary to request the invoice to complete the transaction.; performance of both the parties.

STRATEGY Timely payments of supplies indicate commitment to

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

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9. Maintenance of Records and Relationships:


Most of the organizations are operating with

computerized systems (ERPs Enterprise Resource Planning Systems) to keep the records all the cross functional transactions, which provides a great platform for decision makings;

Within the context of supply management, internal

and external relationships are affected throughout the supply process. There is a need of continued efforts of relationship initiation, development, repair and management to keep the business momentum going;
the state where they benefit in a win-win situation.
SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

STRATEGY keep the cross functional interest in

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Some more Illustrations

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

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4 Stages Purchasing Development Model

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

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4 Stages Purchasing Development Model (Contd.)

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

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Analysis and Methodologies:

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

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Convergence:

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

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