Strategic Procurement Sourcing & Process Management
Changing Aspects of Business • Competition Basis » Price » Quality » Service » Delivery » Technology » Speed/Time » Value Addition
Five Stages for Improvement Fire Fighting – Crisis management Push Effect – Supply driven, speculative Pull Effect – Demand driven, reactive Just In Time – SCM, optimization Zero Inventory – Triggers driven Costs down, Value up, Lead time down Product & Volume flexibility up 3
Effective strategic sourcing To produce the best products world-wide, you need more than ideas, design and specifications. You need to choose the very best suppliers • Your products are only as strong as your weakest supplier
Supplier’s quality & capability depends on • Technology • Plant & Machinery • Quality control system • Technical man-power • Source of raw material • Financial health • Management
Strategic considerations in sourcing • Does it have a value analysis programme ? • Where does it have a service organization that is available to the purchaser? • Repair parts available locally? At short notice? • Will it provide design data and mfg drg etc for parts when it goes out of production? • Does it specialize in your type of equipment? • Does it have a prescribed schedule for service calls?
Vendor evaluation- Categorical plan • Under this plan, Purchasing, User Dept, Q. C. and Engineering keep record of evaluation of each major supplier • In a meeting, each supplier is assigned an overall group evaluation, usually expressed in categorical terms, such as “preferred”, “neutral”, or “unsatisfactory” • It is non-quantitative, but easy to administer. This is helpful while selecting sources for LTE
Vendor development • Vendor development is a continuous undertaking. It is achieved though: • Providing technical guidance to the vendor. • Providing financial assistance to the vendor • Giving them educational order to start with. • Giving assurance regarding long-term business should they develop the item
Sourcing • The term Sourcing refers to Procurement practice – Which is aimed at finding, evaluating and engaging suppliers of goods and services – As against Procurement which essentially is the acquisition of goods or services • Sourcing is the way an organization acquires its needed goods and services in such an integrated manner that functional and hierarchical organizational boundaries are permeated. • Sourcing is the process of finding and subsequently managing a source for the input of production
Strategic Sourcing • The overall Goals of strategic sourcing – To achieve large and sustainable cost reductions, – Long-term supply stability and – Minimization of supply risk – Improve quality – Reduce cost • Benchmarking
Drivers of Strategic Sourcing • Reduce cost • Reduce cycle time • Improve quality over time • Achieve long term financial performance. • Increase no. of local/global options • Increase customer focus • Deliver more innovative products/services more frequently & cheaper than competitors
Developing Strategic Sourcing • Successful sourcing strategies are different for – Functional products and – Innovative products • Functional product : are commonly – Low profit margins with – Relatively stable demands and – High levels of competition • Innovative products : are characterized by – Short product life cycle, – Volatile demand, – High profit margin, and – Relatively less competitive
Strategic Sourcing • Key supplier selection is conducted by – cross functional team having • purchasing staff, • primary user, • product designer, and • manufacturing personal
Developing Strategic Sourcing Identify Supplier Step 1 Set Goals For Improving Capabilities Step 2 Implement Work Plan Step 3 Monitor Progress & Adjust The Work Plans Step 4
Strategic Sourcing Goal Tools • Benchmarking • Brainstorming • SWOT Analysis • Customer Focus • Value Analysis • Quality improvement • Cost Reduction, Target costing • Market complexity Vs Risk/Impact – Non-critical, Bottleneck, Leverage, Strategic
Procurement Performance Assessment - KPI’s • Procurement Operating Costs as a Percentage of Spend procurement department's cost efficiency • On-Time Supplier Deliveries gets when needed • Supplier Defect Rate measures the quality of purchases made • Customer Satisfaction ability to satisfy its internal customers • Procurement Cycle Time measures the productivity • Supplier Idea Implementation leveraging the intellect in the supply base
Push / Pull View • Push Process (Supply Driven, Ready-made) • Demand is forecast but not known at the time of execution of the process • Speculative Processes • Pull Process (Demand Driven, Tailor-made) • Definite customer demand precedes execution of the process • Reactive Processes • Push/Pull Mix (Boundary) • Separates Push processes from Pull processes • Significant for supply chain performance • For achieving acceptable delivery Lead Time • Enables achieving cost efficiency 23-Dec-19 SCM 17
Postponement: Bringing Push/Pull Boundary nearer to Customer The final customisation/ finishing of the product is delayed until actual customer is identified: A more generic inventory with a less stock variation is possible Forecasting becomes easier as the product basis is generic and interchangeable (standard items) Enables providing Customised products at low cost & fast speed Individual or regional designs are based on certain common components & design
Just-in-time procurement • JIT requires virtually defect-free material / parts • Assess supplier’s capability and willingness to meet your quality requirements and delivery schedule requirements. • Establish a long term contract • Provide technical guidance to the supplier • Monitor the contract closely
Conventional system Receiving Srores Inspection Finished Receiving of Final Goods • Materials Assembly Inventory • Parts • Components
Just In Time System (JIT) Receiving of Finished • Materials Final Goods • Parts Assembly Inventory • Components • This is primarily for high value i.e. ‘A’ items • Deliveries are scheduled once or twice a week • Inventory is maintained at absolutely minimal level
What is EOQ The EOQ concept holds that the appropriate quantity to order is the one that tends to minimise all the costs associated with the order- Carrying costs, acquisition cost and cost of the material itself.
EOQ Graph TC ANNUAL INCREMENTAL COSTS OC=ICC ICC EOQ OC ORDER QUANTITY
Inventory Model A – Annual consumption in units. s – Ordering cost per order I – ICC as % of value of average inv. p – Unit price of the item Let Q be the EOQ in units. Then average inventory = Q/2 units No. of orders = A/Q Inventory carrying cost = Q/2xp x I Ordering Cost = A/Q x s EOQ : ICC = OC Q/2xp x I = A/Q x s
Inventory Model Solve the equation : pQ/2 x I = A/Q x s Exercise: pQI = As Annual Consumption of the item --20000Units 2 Q Cost of Ordering --Rs10000 Inventory Carrying Cost --10% Q 2 = 2As Unit Price of the item --Rs1000 I p EOQ = ? 2As Q = Ip
Use EOQ concept in purchasing • Purchaser should also considerer this concept from Supplier’s point of view while determining ordering lot sizes on long term contracts. • This will reduce supplier’s costs and will enable them to offer lower prices
Structuring the Drivers: A Framework Competitive Strategy Supply Chain Strategy Efficiency Responsiveness Inventory Transportation Facilities Information 23-Dec-19 SCM 27
Drivers Inventory Raw materials, work in process, finished goods in S-C Inventory Policies have dramatic impact on supply chain efficiency & responsiveness Retailer’s Choice: High Stocks: High Responsiveness Low Stocks: High Efficiency A trade off
Drivers Transportation Entails moving inventory in a supply chain Transportation choice seriously affects the responsiveness & efficiency of the supply chain Dispatch a 100 Kg parcel by Air from DEL to Mumbai, highly responsive mode of transport Send the parcel by Train, highly efficient mode A trade off 23-Dec-19 SCM 29
Drivers • Facilities Places where inventory is stored or assembled or fabricated Two major types: Production sites; Storage sites Decisions regarding location, capacities & flexibilities have significant impact on S- C’s performance High responsiveness Auto Parts Distributor vs High efficiency Auto Parts Distributor 23-Dec-19 SCM 30
Drivers Information : The biggest driver Consists of data & analysis, regarding inventory, transportation, facilities & customers, throughout S-C PoS data Demand Means to fulfill demand With information on customer demand pattern: One can produce and stock in advance: Higher responsiveness. More accurate quantity forecast, produce only the right quantity, economy of scale: Higher efficiency Also helps selection of economic transport and still achieving high service level (Efficiency & responsiveness) 23-Dec-19 SCM 31
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