8/8/2019 MBA0810 OM 17 Purchase Supply Management
http://slidepdf.com/reader/full/mba0810-om-17-purchase-supply-management 1/22
Chapter 17
Purchasing andSupply
Management
8/8/2019 MBA0810 OM 17 Purchase Supply Management
http://slidepdf.com/reader/full/mba0810-om-17-purchase-supply-management 2/22
Mahadevan (2007), ³Operations Management: Theory & Practice´, © Pearson Education
Purchasing & Supply Management
Issues to be addressed Every organisation engaged in procuring goods &
services faces certain important questions:
Did the organisation fetch a good price for the
procurement? Are the suppliers reliable?
Will they deliver good quality at the right time?
How efficient is the procurement process?
How can an organisation benefit from its suppliers?
Should the organisation develop new sources?
Purchasing & Supply Management is a structuredset of planning methodologies that enablesorganisations to answer the above questions
8/8/2019 MBA0810 OM 17 Purchase Supply Management
http://slidepdf.com/reader/full/mba0810-om-17-purchase-supply-management 3/22
Mahadevan (2007), ³Operations Management: Theory & Practice´, © Pearson Education
Purchasing & Supply ManagementCurrent Requirements
Shift in Quality Management Methods
Transition from Detection & Correction to
Prev
ention & E
limination Changing Cost Structure
Quick Response requirements
Need to create Lean organisations
Importance of New ProductDevelopment
8/8/2019 MBA0810 OM 17 Purchase Supply Management
http://slidepdf.com/reader/full/mba0810-om-17-purchase-supply-management 4/22
Mahadevan (2007), ³Operations Management: Theory & Practice´, © Pearson Education
Components of Expenditure(1989-94)
0
10
20
30
40
50
60
C
o m p o n e n t a s a % o f T o t a l
R M
P w r & F u l
S a l & W a g
C o n s S t o r
R e p . & M a i n
A d m n e x p .
S e l l E x p .
D e p r c n
89-90 90-91 91-92 92-93 93-94
Source: Financial Performance of Companies, ICICI, Jan.1995. No. of Companies studied: 565.
8/8/2019 MBA0810 OM 17 Purchase Supply Management
http://slidepdf.com/reader/full/mba0810-om-17-purchase-supply-management 5/22
Mahadevan (2007), ³Operations Management: Theory & Practice´, © Pearson Education
Purchasing & Supply ManagementT ransition in Recent Years
MultipleSupplier
LongLead Time
Short-termContract
Long distancefrom customer
High Quality Short Lead time Frequent Delivery
Well selected vendorwith short lead time
Geographically close& concentrated vendors
Single supplierwith high quality Co-operative relationshipusing long term contract
8/8/2019 MBA0810 OM 17 Purchase Supply Management
http://slidepdf.com/reader/full/mba0810-om-17-purchase-supply-management 6/22
Mahadevan (2007), ³Operations Management: Theory & Practice´, © Pearson Education
Procurement ProcessSteps
Need Identification Receive purchase request
Estimate the order size
Finalise the specifications
Vendor Selection Search for Vendors
RFP/RFQ
Negotiations
Order Placement Price Fixation
Delivery & payment terms
Purchase order generation
Order Receipt Follow-up with vendor
Receipt of material as per
specifications
Order Acceptance Inward goods inspection
Acceptance/Rejection
Updating stocks in stores
Payment,Vendor Rating Payment authorisation
Performance rating
Vendor record updation
Procurement Lead time (Internal)
Procurement Lead time
(External)
Procurement Lead time
(Internal)
8/8/2019 MBA0810 OM 17 Purchase Supply Management
http://slidepdf.com/reader/full/mba0810-om-17-purchase-supply-management 7/22
Mahadevan (2007), ³Operations Management: Theory & Practice´, © Pearson Education
Supply ManagementAlternative Approaches
Multiple Sourcing (Traditional)
Dealing with multiple suppliers every time anitem is procured and obtaining some gains from
the competitive scenario that a supplier faces inthe process
Single Sourcing
Developing long term collaborative relationship
based on mutual trust and dependability toobtain lower prices and several other benefitsthat were missed out in a multiple sourcingmodel
8/8/2019 MBA0810 OM 17 Purchase Supply Management
http://slidepdf.com/reader/full/mba0810-om-17-purchase-supply-management 8/22
Mahadevan (2007), ³Operations Management: Theory & Practice´, © Pearson Education
Multiple Sourcing & Single SourcingA
comparisonDeal with several suppliers for
every item procured
Set up competitive situationamong the suppliers when an
item needs to be procured
Engage in price negotiationevery time an item is procured
Withhold information; Obtainbetter price in the process
Suppliers face uncertaintyabout future business; Businessuncertainty weakens supplier
position
Benefit from their weaknesses,
confusions and fears
Deal with only one supplier forevery item, rarely with two
Avoid engaging in any conflictswith the supplier
Engage in joint cost reductionexercises to obtain low costinputs
Exchange relevant businessinformation; Obtain betterbusiness gains
Suppliers informed of futurebusiness prospects; Capacityand Technology investments onaccount of certainty
Benefit from cooperation,
mutual trust, & dependability
SingleSourcing
MultipleSourcing
8/8/2019 MBA0810 OM 17 Purchase Supply Management
http://slidepdf.com/reader/full/mba0810-om-17-purchase-supply-management 9/22
Mahadevan (2007), ³Operations Management: Theory & Practice´, © Pearson Education
Traditional supply management practicesHidden Costs
Sl.No.
Item of cost Amount spent(Rs.)
Percentageof annual
cost
1 Incoming materialstransportation
5,92,157.00 23.1
2 Telephone, Telex, Telegram etc. 4,51,290.00 17.6
3 Purchase department salaries 4,09,155.00 15.9
4 Incoming quality control storessalaries
2,82,668.00 11.0
5 Incoming material inspection 2,00,000.00 7.8
6 Receiving stores salaries 1,69,858.00 6.6
7 Stationary charges in purchasedept.
1,62,265.00 6.3
8 Travels and visits to supplierworks
96,802.00 3.8
9 Materials planning & control dept.salaries
90,452.00 3.5
10 Insurance charges for incomingmaterial
61,604.00 2.5
11 Other costs and depreciation 49,495.00 1.9
12 Total expenses for the year 25,65,746.00 100.0
8/8/2019 MBA0810 OM 17 Purchase Supply Management
http://slidepdf.com/reader/full/mba0810-om-17-purchase-supply-management 10/22
Mahadevan (2007), ³Operations Management: Theory & Practice´, © Pearson Education
Ranbaxy Laboratories
Recent initiatives Experiments with Associated Capsules
Sharing of data, process improvements,extensive training, technical support «
Supplier of printed aluminium foils withmultiple joints - solved quality (sealing)problems
Quality problems (black particles) in sugar Cast iron pipes in sugar plant changed after
detailed study, loan provided
Third vendor meet (1995) - name changedto Partners¶ meet, Vendor Awards instituted
8/8/2019 MBA0810 OM 17 Purchase Supply Management
http://slidepdf.com/reader/full/mba0810-om-17-purchase-supply-management 11/22
Mahadevan (2007), ³Operations Management: Theory & Practice´, © Pearson Education
Stages in Supplier Development
New VendorDevelopment
Search ExistingVendors
Volume of businessExisting history
Initial assessmentVisit of vendor worksSample orderBulk or regular order
Initial screening of potential sources
Prompt payment to suppliersEstablishing communication channelsMutual visits by buyer and supplier
Supplier visiting buyerTechnical assistanceFinancial assistance,Infrastructure supportInformation exchange
Coming closer to potential sources
A clear understanding of what isexpected of both the parties & theconsequences of not meeting them
Vendor rating systemSingle source certification Programme
Single SourceSelf-certified Deliveries
Towards single source
8/8/2019 MBA0810 OM 17 Purchase Supply Management
http://slidepdf.com/reader/full/mba0810-om-17-purchase-supply-management 12/22
8/8/2019 MBA0810 OM 17 Purchase Supply Management
http://slidepdf.com/reader/full/mba0810-om-17-purchase-supply-management 13/22
Mahadevan (2007), ³Operations Management: Theory & Practice´, © Pearson Education
Supplier Certification Programme
Agenda forSingle Sourcing
Certification
programme
SupplierValue Analysis
Effort
ContractPerformance
8/8/2019 MBA0810 OM 17 Purchase Supply Management
http://slidepdf.com/reader/full/mba0810-om-17-purchase-supply-management 14/22
Mahadevan (2007), ³Operations Management: Theory & Practice´, © Pearson Education
Vendor RatingAn i
llustration
Yar t k f r asur rf r ance against each f act r
Excellent V Good Good Aver age Below Aver ageSl. No. Cr iter ion f or r ating Weights
5 4 3 2 1
1 Quality 28 < 1,000 ppm 1,001 - 5,000ppm
5001 - 10,000ppm
10,001 - 50,000 < 50,001 ppm
2 Delivery Reliability 24 100% scheduleadherence
1 day after due date
2 - 4 days after due date
5 - 7 days after due date
> 7 days after duedate
3 Price 21 Base price up to 1%above baseprice
2 - 3% abovebase price
4 - 5% abovebase price
> 5% above baseprice
4 Delivery terms 14 Free Delivery FOR(Chennai)
Only collectionfree
Chargeable basis Ex-works, Ex-Godown
5 Payment terms 13 60 days 45 days 30 days 10 - 15 days Immediate, Advance
Total 100
Vendor 1 Vendor 2
Sl. No. Cr ite
r ion
f o
r r a
ting Weigh
ts Perf or ance Rating Factor scor e Perf or ance Rating Factor scor e
1 Quality 28 792 ppm 5 140 5400 ppm 3 84
2 Delivery Reliability 24 1 day after due date 4 96 2 - 4 days after due date 3 72
3 Price 21 2 - 3 %above base price 3 63 up to 1% above base price 4 84
4 Delivery terms 14 FOR (Chennai) 4 56 FOR (Chennai) 4 56
5 Payment terms 13 45 days 4 52 60 days 5 65
Total 100 407 361
Vendor
r a
ting 81% 72%
8/8/2019 MBA0810 OM 17 Purchase Supply Management
http://slidepdf.com/reader/full/mba0810-om-17-purchase-supply-management 15/22
Mahadevan (2007), ³Operations Management: Theory & Practice´, © Pearson Education
Purchasing & Supply ManagementM
easures of Performance
Sl. o.rchasi g & Supply
erforma ce erspectivepplicable Measures*
1 Basic supplier per ormance j Total Cost o O nership
j ercent On time elivery ( elivery chedule dherence)
j Improvement rate in Lead time, uality elivery per ormancesj endor rating score
j a Material Inventory ( ays)
2 Long term partnership j Percentage o suppliers ho have entered into long term contract
j Percentage o value o purchase under long term contract
j ate o shrinkage o the supplier base
j umber o certi ied deliveries
j Total man-days spent in technical assistance or supplier problem solving
j uantum o inancial assistance to suppliers3 Joint cost reduction j Number and value o alue ngineering assignments done
j verage cost reduction achieved over the previous year
4 Ne capability building
initiativesj Number o import substitution exercises and the value o savings
j Number o ne product development exercises ith supplier participation
j Number o ongoing and completed target costing exercises ith the
suppliers
8/8/2019 MBA0810 OM 17 Purchase Supply Management
http://slidepdf.com/reader/full/mba0810-om-17-purchase-supply-management 16/22
Mahadevan (2007), ³Operations Management: Theory & Practice´, © Pearson Education
Make or Buy Decision
Relevant Factors
Recent spurt of BPO signals the tendency of organisations to buy rather than make in-house their requirements
Trend towards outsourcing in severalorganisations is driven primarily by fourfactors:
Cost
Core Vs Non-core activities
Managing capacity expansion
Strategic restructuring
8/8/2019 MBA0810 OM 17 Purchase Supply Management
http://slidepdf.com/reader/full/mba0810-om-17-purchase-supply-management 17/22
Mahadevan (2007), ³Operations Management: Theory & Practice´, © Pearson Education
E- ProcurementT hree emerging forms
E-Procurement denotes the set of strategies apurchase manager could employ to identifyappropriate sources of supply, finalise the
terms of the trade and place the order, allelectronically
Three E-market forms exists today
Collaborative market structures
Fundamentally enable market participants to exploitelectronic integration effects
Quasi-Market structures
One or a small group of either the buyers or sellerswill host, monitor and even moderate the behaviour
Neutral Market structures
8/8/2019 MBA0810 OM 17 Purchase Supply Management
http://slidepdf.com/reader/full/mba0810-om-17-purchase-supply-management 18/22
Mahadevan (2007), ³Operations Management: Theory & Practice´, © Pearson Education
B2B Market Structures
12 Dominant types Extranets Trading Partner Networks (TPNs) Web EDIs Buyer Centric Private Market Place
Supplier Centric Private Market Place Consortia Market Place Forward Auctions Reverse Auctions Neutral Auctions Exchanges
Aggregators Online Communities
8/8/2019 MBA0810 OM 17 Purchase Supply Management
http://slidepdf.com/reader/full/mba0810-om-17-purchase-supply-management 19/22
Mahadevan (2007), ³Operations Management: Theory & Practice´, © Pearson Education
B2B Market StructuresSome examp
les
1 Extranet www.aventail.com,www.adventnet.com,www.citrix.com.
2 Trading Partner Network (TPN) www.geis.com,www.nexprise.com
3 Web EDI www.1edisource.com
www.geis.com
4 Buyer Centric Private Market www.ariba.com, www.i2.com,www.commerceone.comwww.verticalnet.com.
5 Supplier Centric Private Market
6 Consortia Market Place www.avendra.com,www.aeroexchange.com
7 Seller-oriented (Forward) Auction Sites www.fedsales.gov
8 Buyer oriented (Reverse) Auction Sites www.freemarkets.com
9 Neutral Auctions www.dovebid.com,www.assettrade.com
10 Exchanges www.eSTEEL.com (Now part of New View),www.HoustonStreet.com
11 Catalogue Aggregators www.sciquest.com,www.officedepot.com
8/8/2019 MBA0810 OM 17 Purchase Supply Management
http://slidepdf.com/reader/full/mba0810-om-17-purchase-supply-management 20/22
Mahadevan (2007), ³Operations Management: Theory & Practice´, © Pearson Education
Purchasing & Supply Management
Implications of E-Procurement
Restructuring the supply chain will beinevitable for every organisation
Some suppliers with close relationships will be
required to participate in more competitivemechanisms
Still others will be replaced with fiercelycompetitive neutral market structures
Traditional channels and intermediaries may bedis-intermediated
Launching several pilot projects in the next2 years will be a valuable exercise fororganisations
8/8/2019 MBA0810 OM 17 Purchase Supply Management
http://slidepdf.com/reader/full/mba0810-om-17-purchase-supply-management 21/22
Mahadevan (2007), ³Operations Management: Theory & Practice´, © Pearson Education
Purchasing & Supply Management
ChapterHigh
lights
Recent developments have redefined the role of purchasing and supply management in organisations.These include:
New quality management initiatives
Changing nature of cost structures
Creating lean organisations
Quick response requirements
A typical procurement process consists of six steps:
Need Identification
Vendor Selection
Order Placement
Order Receipt
Order Acceptance
Vendor Rating
8/8/2019 MBA0810 OM 17 Purchase Supply Management
http://slidepdf.com/reader/full/mba0810-om-17-purchase-supply-management 22/22
Mahadevan (2007), ³Operations Management: Theory & Practice´, © Pearson Education
Purchasing & Supply Management
ChapterHigh
lights«
Traditionally organisations utilised a multiple sourcingmodel for vendor selection. However, in recent timesorganisations employ a single sourcing model. The singlesourcing model provides several advantages over the
traditional model. Supplier certification and vendor rating are important
components of modern day supplier development andmanagement initiatives
The make or buy decision is made on the basis of
Criticality of the item under consideration Cost
Capacity issues
Strategic restructuring initiatives
E Procurement offers several advantages to an
organisation such as reduced cost and lead time