1 Operations Management Part 12 Purchasing and supplier management PROF. NAKO STEFANOV, DR. HABIL.
2 Introduction basic terms Supply management describes the methods and processes of modern corporate or institutional buying. This may be for the purchasing of supplies for internal use referred to as: 1. Indirect goods and services; 2. Purchasing raw materials for the consumption during the manufacturing process; 3. Purchasing of goods for inventory to be resold as products in the distribution and retail process. In many organizations, acquisition or buying of services is called contracting, while that of goods is called purchasing or procurement.
3 Purchasing and Procurement Purchasing refers to a business or organization attempting to acquiring goods or services to accomplish the goals of its enterprise. Typically the word purchasing is not used interchangeably with the word procurement, since procurement usually includes expediting, supplier quality, and transportation and logistics (T&L) in addition to purchasing. Procurement is the acquisition of goods, services or works from an outside external source. It is favorable that the goods, services or works are appropriate and that they are procured at the best possible cost to meet the needs of the acquirer in terms of quality and quantity, time, and location. Corporations and public bodies often define processes intended to promote fair and open competition for their business while minimizing exposure to fraud and collusion.
4 Tools and Dimensions of Supply Management
5 The Procurement Process Creating a Sourcing Plan: Procurement The Procurement Process Creating a Sourcing Plan Introduction Identify Opportunities Analyze the Situation Undertake Strategic Analysis Case Study Create a Strategic Sourcing Plan
6 Introduction The Procurement Process
8 Identify Opportunities Opportunities are usually triggered by a business requirement for a product or service. Material requirements might include: (1)Equipment; (2) Components; (3) Raw materials; (3) Completely finished products. Service requirements might include: (1) Computer programmers; (2) Hazardous waste handlers: (3) Transportation carriers; (4) Maintenance service providers Users (also called internal customers) identify a need for material or service requirements, and communicate this need to purchasing.
9 Analyze the Situation Situation analysis can include Purchase Requisitions or Statements of Work. Purchase Requisitions should contain: (1) Description of required material or service; (2) Quantity and date required; (3) Estimated unit cost; (4) Operating account to be charged; (5) Date of requisition (this starts the tracking cycle); (6) Date required; (7) Authorized signature Statements of Work (SOW) for services specify the work that is to be completed, when it is needed, and what type of service provider is required. Marketing may want to purchase an advertising campaign. R&D may need a clinical trial. Human resources may need to print a brochure.
12 Undertake Strategic Analysis Procurement must work with the suppliers and its internal customers to analyze the process to understand where opportunities exist to eliminate waste and increase value delivery. Supplier evaluation In-depth evaluation is required for major purchases. It is used for non-routine supply items of higher value. It begins with a list of potential suppliers. Existing suppliers with good track records should not be ruled out.
13 Supplier assessment criteria 1. Equipment and facilities Up to date? Ability to expand in the future? 2. Processes Ramp up capabilities? Process cycle times? Reliable quality control program? General housekeeping? Working conditions? Status of back orders? 3. Management Capabilities Project management skills? Stable, harmonious team? How do they view your company as a customer? Long range strategic vision? Leadership? 4. Information Systems Up to date? Training requirements?
14 Supplier evaluation criteria 1. Planning and control systems Planning and control systems include those systems that release, schedule, and control the flow of work in an organization. As we shall see in later courses, the sophistication of such systems can have a major impact on supply chain performance. Among the questions the buying firm should ask: Does the supplier have well developed systems for planning material, personnel, and capacity needs? If not, why not? Does the supplier track key performance measures, such as throughput time, quality levels, and costs? Are these measures compared to performance objectives or standards? How easy is it for customers to interact with the supplier s planning and control systems? This last point is particularly important to organizations interested in effective supply chain management. When interaction is high, information about the customer s needs flow easily to the supplier, and the customer can, in turn, retrieve important information from the supplier. Consider the relationship between Wal Mart and Proctor and Gamble (P&G). When a Wal Mart store sells a particular P&G item, the information flows directly to P&G s planning and control systems. P&G can then plan production and schedule shipments accordingly. Furthermore, Wal Mart can easily find out when a P&G shipment will arrive at one of its distribution warehouses, thereby allowing Wal Mart to consolidate this shipment with others on the way to individual stores.
15 2. Environmental regulation compliance Supplier evaluation criteria 3. Minimum typical evaluations to consider Price; Quality; Service; Delivery Weighted Point Method Using a Weighted Point evaluation system, purchasing can rank suppliers according to some of these criteria.
16 Weighted Point Method Using a Weighted Point evaluation system, purchasing can rank suppliers according to some of these criteria. In this example, Supplier A has a score of 3/5 on quality, 4/5 on delivery, 2/5 on price, and 7 / 10 on service, with a total score of 63. Supplier B scores better than A on quality, not as well on delivery, but better on price and service. Given the associated weights on quality, delivery, price, and service that are important to the purchaser, the weighted scoring system suggests that Supplier B is better suited for this purchase, and should be awarded the contract.
17 Create a Strategic Sourcing Plan A strategic sourcing plan requires procurement to assess and manage the change so that the benefits of the procurement strategy are realized. The plan must be created in a way that ensures: The benefits identified in the strategy are delivered in full and on time. Change will take place successfully and in accordance with a realistic time plan. Risks have been considered and the appropriate contingencies are built in to the overall plan. What makes a good plan? Implementation is time intensive and often has a high failure rate. Successful implementations are properly planned and communicated during the creation of the strategy, and then are actively executed and continually managed to completion. As the strategy is being developed, the procurement team will identify which areas of the business will be impacted, directly and indirectly. During implementation, measurement and attainment of results and the identification of key milestones help to ensure success.
18 Managing inventory Inventory management is primarily about specifying the size and placement of stocked goods. Inventory management is required at different locations within a facility or within multiple locations of a supply network to protect the regular and planned course of production against the random disturbance of running out of materials or goods. The scope of inventory management also concerns the fine lines between replenishment lead time, carrying costs of inventory, asset management, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory, available physical space for inventory, quality management, replenishment, returns and defective goods and demand forecasting and also by replenishment Or can be defined as the left out stock of any item used in an organization.
19 Inventory management Inventory management is a system used to oversee the flow of products and services in and out of an organization. A company may decide to incorporate one key inventory management technique or combine a variety of techniques to meet organizational needs. Businesses utilize inventory management strategies to create invoices and purchase orders, generate receipts and control inventoryrelated accounting.
20 Inventory Management Key Terms-1 Lead Time Lead time is the amount of time it takes to reorder inventory. Suppliers deliver products at varying times after an order is placed. A useful way to manage inventory is to establish lead time reports to understand how long it takes to replenish your inventory. Monitor Inventory Levels Having high levels of inventory adds to expenses and increases overhead costs. An effective way to manage inventory is to determine the inventory demands of the business. Limit seasonal inventory and cut back on inventory that does not sell. Customer Delivery An effective way to manage inventory is to measure inventory turnover and delivery turnaround time. This involves measuring how often your inventory sells and how long it takes to get into the hands of your customers Return to Vendor (RTV) The Return to Vendor or RTV System allows you to return inventory items to your vendors efficiently, to track open vendor returns accurately, and to close out vendor returns easily, once the disposition of the returned items is known. The RTV system is fast, flexible, and tightly integrated with other Stream V processes including Order Processing, Hold Management, Inventory Allocation, and Order Fulfillment.
21 Inventory Management Key Terms-2 Inventory Consultant Many organizations hire inventory consultants outside the company to develop and manage internal inventory systems. Inventory consultants are responsible for maintaining accuracy, cycle counting, shipping and receiving, and managing order-picking operations. Purchase Software Many businesses manage inventory by designing an inventory management database or purchasing inventory management software. Inventory management software enables distributors to customize the database to fit their individual needs. Product Turnaround All businesses have products that sell and products that sit on the shelves. A helpful way to manage inventory is to establish a system that pinpoints which products move quickly and which products take more time to sell.
22 Inventory Management Key Terms-3 Inventory Consultant Many organizations hire inventory consultants outside the company to develop and manage internal inventory systems. Inventory consultants are responsible for maintaining accuracy, cycle counting, shipping and receiving, and managing order-picking operations. Purchase Software Many businesses manage inventory by designing an inventory management database or purchasing inventory management software. Inventory management software enables distributors to customize the database to fit their individual needs. Product Turnaround All businesses have products that sell and products that sit on the shelves. A helpful way to manage inventory is to establish a system that pinpoints which products move quickly and which products take more time to sell.
23 Inventory Management Key Terms-4 Tracking System Many businesses develop a tracking system to manage inventory and monitor turnaround times. Inventory tracking system formats range from spreadsheets to computer programs. They provide complete inventory control allowing business owners to organize item levels and take cycle counts in distribution centers or stock rooms. Work in Progress Businesses successfully manage inventory by tracking units as they move through different operational stages. Many businesses utilize some inventory to create other products. Establishing a system to track "work-in-progress" materials allows businesses to adjust order amounts before the inventory gets too low and slows production. Supplier Assistance An effective way to manage inventory is to solicit the help of suppliers. Supplier-managed inventory gives the vendor access to the distributor's inventory data. The supplier generates purchase orders based on the distributor's needs. Distribution-intensive companies utilize vendor managed inventory controls to eliminate data-entry errors and to effectively manage the timing of purchase orders.
24 Inventory Management Programs Inventory management programs exist to facilitate the storage and movement of goods. Based on its functional and operational requirements, a company chooses to utilize a certain type of solution to manage its inventory. Inventory management programs have very sophisticated features, and depending on the options chosen can get quite costly. Most inventory management solutions fall into three main categories: warehouse, enterprise and distribution management solutions. WMS Although some warehouse management systems operate as multipurpose tools, the basic foundation of the management of the storage and movement of inventory has not changed. The WMS should allow users to define parameters for storing and moving inventory. Although a WMS makes an excellent tool for managing and tracking inventory, it does not provide the necessary functionality to determine inventory levels and demand requirements.
25 ERP Enterprise resource planning software incorporates various modules designed to effectively communicate data between departments and locations within a company. Inventory management comprises one of the modules found in most ERP software programs. The standard ERP inventory management module works hand-in-hand with the WMS module. The ERP inventory management module monitors the inventory level; order methodology and safety stock levels while the WMS monitors the movement, tracking and storage of the inventory within the warehouse. The ERP inventory management program also sends data to other modules within the program, such as the demand planning module, accounting modules and forecasting modules. DRP Most companies with multiple facilities that utilize a distribution network operate distribution requirements planning software. DRP software allows companies to manage the inventory flow between facilities. DRP software looks at the inventory usage requirements of each branch facility and manages the inventory distribution to these locations. DRP software acts as the brain of a distribution operation; it sends and receives signals from the branch facilities and uses those signals to determine re-order quantities, safety stock levels and analysis. Collaboration Although each of these software programs can manage inventory as a stand-alone solution, most of them collaborate with other programs to form a complete solution. For example, DRP software manages the central distribution of goods in a network, but it relies on data from the local distribution center. ERP programs rely on data from each of its installed modules to manage the inventory as part of a complete enterprise solution. For example, the inventory management module of an ERP system communicates to the purchasing module when all line items of a purchase order get received. The purchasing module communicates this data to the accounts payable module, which in turns facilitates the disbursement of funds to the supplier.
26 Reorder point (ROP) The reorder point (ROP) is the level of inventory which triggers an action to replenish that particular inventory stock. It is normally calculated as the forecast usage during the replenishment lead time plus safety stock. In the EOQ (Economic Order Quantity) model, it was assumed that there is no time lag between ordering and procuring of materials. Therefore the reorder point for replenishing the stocks occurs at that level when the inventory level drops to zero and because instant delivery by suppliers, the stock level bounce back. Reorder point is a technique to determine when to order; it does not address how much to order when an order is made.
27 Material requirements planning(mrpi) Prior to MRP, and before computers dominated industry, Reorder point (ROP) / reorder-quantity (ROQ) type methods like EOQ (Economic Order Quantity) had been used in manufacturing and inventory management. In 1964, as a response to the Toyota Manufacturing Program, Joseph Orlicky developed Material Requirements Planning (MRP). The first company to use MRP was Black & Decker in 1964, with Dick Alban as project leader. Orlicky's book Material Requirements Planning has the subtitle The New Way of Life in Production and Inventory Management (1975). By 1975, MRP was implemented in 700 companies. This number had grown to about 8,000 by In 1983 Oliver Wight developed MRP into manufacturing resource planning (MRP II). In the 1980s, Joe Orlicky's MRP evolved into Oliver Wight's manufacturing resource planning (MRP II) which brings master scheduling, rough-cut capacity planning, capacity requirements planning, S&OP in 1983 and other concepts to classical MRP. By 1989, about one third of the software industry was MRP II software sold to American industry ($1.2 billion worth of software).
28 MRPI functioning Material requirements planning (MRP) is a production planning, scheduling, and inventory control system used to manage manufacturing processes. Most MRP systems are software-based, while it is possible to conduct MRP by hand as well. An MRP system is intended to simultaneously meet three objectives: Ensure materials are available for production and products are available for delivery to customers; Maintain the lowest possible material and product levels in store; Plan manufacturing activities, delivery schedules and purchasing activities.
29 Manufacturing resource planning (MRP II) Manufacturing resource planning (MRP II) is defined as a method for the effective planning of all resources of a manufacturing company. Ideally, it addresses operational planning in units, financial planning, and has a simulation capability to answer "what if" questions and extension of closed loop MRP. This is not exclusively a software function, but the management of people skills, requiring a dedication to database accuracy, and sufficient computer resources. It is a total company management concept for using human and company resources more productively.
30 MRP II is not a proprietary software system and can thus take many forms. It is almost impossible to visualize an MRP II system that does not use a computer, but an MRP II system can be based on either purchased licensed or in-house software. Almost every MRP II system is modular in construction. Characteristic basic modules in an MRP II system are: Master production schedule (MPS); Item master data (technical data); Bill of materials (BOM) (technical data); Production resources data (manufacturing technical data); Inventories and orders (inventory control); Purchasing management; Material requirements planning (MRP); Shop floor control (SFC); Capacity planning or capacity requirements planning (CRP); Standard costing (cost control); Cost reporting / management (cost control) There are also auxiliary systems such as: Business planning; Lot traceability; Contract management; Tool management; Engineering change control; Configuration management; Shop floor data collection; Sales analysis and forecasting; Finite capacity scheduling (FCS)
31 Toyota Production System(TPS)-Lean Management The Toyota Production System (TPS) is an integrated socio-technical system, developed by Toyota, that comprises its management philosophy and practices. The TPS organizes manufacturing and logistics for the automobile manufacturer, including interaction with suppliers and customers. The system is a major precursor of the more generic "lean manufacturing." Taiichi Ohno, and Eiji Toyoda developed the system between 1948 and Originally called "just-in-time production," it builds on the approach created by the founder of Toyota, Sakichi Toyoda, his son Kiichiro Toyoda, and the engineer Taiichi Ohno. The principles underlying the TPS are embodied in The Toyota Way.
32 Ohno Taiichi
34 Thank you for the attention!