operation management notes

1. Purchasing and
Vendor Management

2. What Is Purchasing?
` Purchasing is a functional group and a functional activity.
` Objectives of Purchasing may be defined as: to buy
materials of the right quality, in the right quantity from the
right source delivered to the right place at the right time
at the right price.
` Purchasing is proactive.
` Purchasing is transactional as well as relational
` Purchasing is strategic.

3. Perspectives on Purchasing
` Purchasing as a function: people use specialized
knowledge skills and resources to perform specialized
tasks.
` Purchasing as a process
` Purchasing as a link in the supply or value chain.
` Purchasing as a relationship
` Purchasing as problem solving
` Purchasing as a discipline.
` Purchasing as a profession.

4. Definition of Purchasing:
The process undertaken by the organizational unit
that, either as a function or as part of integrated
supply chain, is responsible for procuring or
assisting users to procure, in the most efficient
manner, required supplies at the right time,
quality, quantity and price and management of
suppliers, thereby contributing to the competitive
advantage of the enterprise and the achievement
of its corporate strategy.

5. Purchasing and Change
` Globalization
` InformationTechnology
` Changing production and management
philosophies.

6. Changing Aspects of Purchasing
` Structure: Horizontal, flatter, involving self-managed
teams and cross-functional relationships. It is an
integrated part of Supply Chain Management.
` Procedures: Based on IT applications; rapid, low cost.
Increased emphasis on center-led user procurement.
` Purchase Considerations: Subcontract or outsource
non-core business.
` Sourcing: reducing supplier base, global, increased use of
purchasing consortia.

7. Changing Aspects of Purchasing
` Supplier Relationships: long-term partnerships and
collaborations; win-win negotiations, sharing of
information.
` Quality and Specifications: supplier specifications of
design and quality.
` Inventory and Lead times: Low due to JIT
requirements,thus obviating waste.
` Purchasing Performance: Assessed mainly on its
value-added activities as part of supply chain.

8. Purchasing Process Cycle
1. Identify user need for product or service.
2. Evaluate potential suppliers.
3. Bidding negotiation, & supplier selection.
4. Purchase approval.
5. Release & receive purchase requirements.
6. Measure supplier performance.

9. Improving the Purchasing Process
` Online-requisitioning systems from users to purchasing
` Procurement cards
` Electronic purchasing commerce
` Long-term purchase agreements
` Online ordering systems to suppliers
` Electronic Data Interchange
` Online ordering through electronic catalogs
` Allowing users to contact suppliers directly

10. Purchasing Integration
Purchasing in 1940s²VA VE.
Purchasing in 1950s² System Contracting
Purchasing in 1960s² Material Management
Purchasing in 1970s² MRP
Purchasing in 1980s² JIT
Purchasing in 1990s² SCM

11. Purchasing Integration
Integration can occur in many forms:
1. Sourcing
2. New-product development teams
3. Cross-location teams
4. Cross-organizational teams.

12. Characteristics of External Integration
` One or more number of suppliers for each
purchased item or family of items.
` A win-win approach
` Joint efforts to improve supplier performance.
` Joint efforts to resolve conflicts.
` Open exchange of information
` A credible commitment to work together.
` A commitment to quality defect-free
products.

13. Evolving from Adversarial to
Collaborative relationships
Phase I:Traditional school of management
Phase II:Arms-length relationship
Phase III: Closer-buyer seller relationships
Phase IV:Total trust

14. Stages of Supplier Integration
One-night stand [competitive leverage]
Regular date [preferred supplier]
Going steady [performance partnerships]
Living together [strategic alliances]
Marriage [co-business integration]

15. Types of Purchasing Strategies:
` Long term Supplier Relationship
` Early supplier design involvement
` Supplier Development
` E-Reverse Auctions [e-RAs]

16. Early-Supplier Involvement [ESI]
Advantages:
1. Reduced concept-to-customer development
time.
2. Improved product specifications.
3. Enhanced quality
4. Access to new technology
5. Lower development costs.
6. Interchange of knowledge.
7. Improved manufacturing.

17. Steps in Supplier Development
Step 1: Identify critical products for development.
Step 2: Identify critical suppliers.
Step 3: Appraise Supplier performance.
Step 4: Determine the gap between present and
desired supplier performance.

18. Steps in Supplier Development
Step 5: Form cross-functional supplier
development.
Step 6: Meet with suppliers· top management
team.
Step 7: Agree how the perceived gaps can be
abridged.
Step 8: Set deadlines for achievement.
Step 9: Monitor improvements

19. Supplier Performance
Measurement
Supplier Performance measurement includes
the methods and systems to collect and
provide information to measure, rate, or rank
supplier performance on a continuous basis.
The measurement system is a critical part of
the sourcing process² essentially serving as
¶supplier·s report card·.

20. Supplier Measurement Decisions
Objective [Quantitative Measures]:
1. Delivery Performance: A buyer can assess
how well a supplier satisfies the quantity and
due-date commitment.
2. Quality Performance: A buyer can
compare a supplier·s quality against some
previously specified performance objective.
3. Cost Reductions: Comparing supplier·s
cost against other suppliers within the same
industry.

21. Supplier Measurement Decisions
Subjective [Qualitative Measures]:
1. Problem resolution ability.
2. Technical ability
3. Ongoing progress report
4. Corrective action response
5. Supplier cost reduction ideas.
6. Supplier New-Product support.
7. Buyer/Seller Compatibility.

22. Measurement Areas:
Operational Purchasing
Coordination with other functions
Purchasing Organization and system
Budget Performance
Creative Performance
Policy Development
Planning forecasting

23. Measurement Areas:
Area Measure
Quality Percentage of rejects in goods received;
percentage of parts rejected in production raw
materials rejected.
Quantity Percentage of stock which has not moved over a
specified period; number of production stock-outs;
number of emergency orders; comparison of stock
with target stock.
Timing Supplier¶s actual delivery performance against
promised; time taken to process requisitions; time
taken for action.
Price Prices against standard; prices paid for key items
compared with market indexes; price at the time
of purchase against price at the time of use.
Operational
Cost
Cost of processing an order; progressing costs as
percentage of total; communication costs.

24. Types of Supplier Measurement
Techniques
Categorical System
Weighted-Point System
Cost Based System

25. Supply-Base Optimization
Advantages:
a) Buying fromWorld-class suppliers
b) Use of full-service suppliers
c) Reduction of supply base risk
d) Lower supply base maintenance costs
e) Lower total product cost
f) Ability to pursue complex purchasing strategies.

26. Risks in Maintaining Fewer
Suppliers
1. Supplier Dependency
2. Absence of competition
3. Supply disruptions
4. Over aggressive supply reductions

27. Approaches to Supply Base
reduction
Twenty-Eighty Rule
´Improve or Elseµ Approach
Triage Approach
Competency Staircase Approach

28. Purchasing Structure
Centralized Purchasing:
` Economies of Scale:
1. Forecasting benefits
2. Negotiation on quantities
3. Compete for preferred supplier status
4. Reduction in prices by spreading overheads.
5. Professional can be employed.

29. ` Coordination of Activities:
1. Strategic focus possible
2. Uniform policies can be adopted such as
¶single sourcing·
3. Competitive buying is eliminated.
Centralized Purchasing

30. Centralized Purchasing
` Control of Activity:
1. Separate profit centre
2. Budgetary control
3. Uniformity of prices.
4. Inventories can be controlled.
5. Performance can be monitored

31. Decentralized Purchasing
` Closer to users and better understanding of local
needs.
` Response time to divisional or plant needs maybe
rapid and of high quality.
` Possibly closer relationship with suppliers.
` Selecting local suppliers leads to lower
transportation costs.
` Geographical,cultural, political aspects maybe
considered.

32. Centralized Purchasing Activities
` Determination of major purchasing strategies
and policies such as vertical integration,
outsourcing,single and partnership sourcing.
` Purchase of leverage, bottleneck, strategic
products.
` Purchase of capital equipment and systems.
` Negotiating for bulk purchases.

33. Centralized Purchasing Activities
` Purchasing research into market conditions,
vulnerability and similar matters.
` Rationalization of share of orders to be received
by specific suppliers.
` Control of group inventory.
` Staff training and development.

34. Decentralized Purchasing Activities
` Small-value orders and maintenance, repair and
operating (MRO) items.
` Items used only for that plant.
` Emergency purchases.
` Local buying to save transport costs.
` Staff purchases.