SOM 634

Purchasing and Supply Management

Dr Atul Kanyalkar
Procurement Process
 Major elements of the purchasing system
1. Need
2. Make 3. Purchase
or Buy requisitions
Article file

Make 4. Supplier selection Contract file

Supplier file
5. Quotation

6. Order processing

7. Order monitoring and 10. Supplier

expediting evaluation

11. Non-acceptance: 8. Incoming inspection 9. Invoice

return to supplier and quality control processing
SOM634 Purchasing and Supply
Management
 Staging Policies
Staging Policies

Engineer to Order
Design Purchase Manufacture Assemble Ship

Make to Order
Purchase Inventory Manufacture Assemble Ship

Assemble to Order
Purchase Inventory Manufacture Inventory Assemble Ship

Make to Stock
Purchase Inventory Manufacture Assemble Inventory Ship

ETO (for each materials)

• 1 Need
• 3 Purchase Requisition
• 4 Supplier selection
• 5 Right price
• 6 PO
• 7 Follow up
• 8 Receiving and accepting
• 9 Invoice approval and payment
SOM634 Purchasing and Supply
Management
 Staging Policies
Staging Policies

Engineer to Order
Design Purchase Manufacture Assemble Ship

Make to Order
Purchase Inventory Manufacture Assemble Ship

Assemble to Order
Purchase Inventory Manufacture Inventory Assemble Ship

Make to Stock
Purchase Inventory Manufacture Assemble Inventory Ship

MTS (for most materials)

• 4 Supplier selection
• 5 Right price
• 1 Requirement Generation
• 3 Receiving and analysing PR
• 6 PO
• 7 Follow up
• 8 Receiving and accepting
• 9 Invoice approval and payment
SOM634 Purchasing and Supply
Management
1. Need
2. Make or Buy Decisions
 Make or Buy
• Strategic decision.

• “Precisely what business do we really

want to be in, to maximize the use of
our core competencies as we
proceed into future.”
SOM634 Purchasing and Supply
Management
 Make or Buy
• Economics: It is not always economical for the
companies to make all the materials used in its
manufacturing process.
• Abilities / Technical skills
• Capacities
• Quality
• Design protection
• Assured supply
•
•

SOM634 Purchasing and Supply

Management
 Make / Buy ? ?
Making Buying
• Lower production cost • Lower acquisition cost
• Unreliable or unsuitable • Inadequate capacity
suppliers • Reduce inventory costs
• Assure adequate supply
• Ensure alternative sources
(Quantity)
of supply
• Utilize surplus labor capacity
• Item is protected by a
• Obtain desired quality
patent or trade license.
• Protect special design or
quality
• Expected benefit in long
term.
SOM634 Purchasing and Supply
Management
 Make or Buy
• Choosing between making or buying an item is largely
dependent on the Vertical Integration strategy of a company.

• Vertical integration - developing the ability to produce goods

or services that are previously purchased

• It can take the form of forward or backward integration.

SOM634 Purchasing and Supply

Management
 Total Cost of Ownership
• Acquisition Costs
• Price
• Planning costs
• Duties
• …………………..
• Ownership costs
• Downtime costs
• Risk
• Cycle time
• ………………….
• Post Ownership Costs
• Warranty costs
• Product Liability
• …………………..
• Remember: As a purchasing Manager you should also focus
on suppliers manufacturing cost
SOM634 Purchasing and Supply
Management
Forward / Backward Integration

SOM634 Purchasing and Supply

Management
Planned Order
 Planned Order
Opening
?? Period
Lead
??Time

Purchase Order Purchase

Requisition Planned Order
Specific Information General information

Planned order is used for visibility

SOM634 Purchasing and Supply

Management
3. Purchase Requisitions
 Purchase Requisition
XXX Purchase
Supplier
Department Department

Production Warehouse

• Formal communication
• to Purchase department
• to initiate procurement activities
• and procure the material mentioned in the
requisition.
SOM634 Purchasing and Supply
Management
 Purchase Requisition
The PR Should contain following information
• Originator
• Material Specification
• Quantity and Unit of measure
• Delivery date and place
• Any other information
• Signed (approved)
• Account to be charged
SOM634 Purchasing and Supply
Management
 SOM 634
Purchasing and Supply Management

Dr Atul Kanyalkar
4. Supplier Selection
 Strategic Sourcing Plan

• Discovery

• Evaluation

• Selection

• Development
• Management
SOM634 Purchasing and Supply
Management
 Strategic Sourcing Plan
• Engineer to Order

• Make to Order

• Assemble to Order

• Make to Stock

SOM634 Purchasing and Supply

Management
 Discovery
1. Supplies catalogue
2. Print media :Trade directories, trade
journals, news papers, yellow pages
3. Salespersons
4. Trade exhibition, fairs, conferences
5. Colleagues in similar field
6. Internet
……..
SOM634 Purchasing and Supply
Management
 Evaluation
• Background
• Informed
– Surveys
– Financial checks
– Facility visits
– Quality
– Capacity
– Management / Systems
– IT Systems
– --------
SOM634 Purchasing and Supply
Management
 Supplier Selection
Check the following
• Whether the items were purchased earlier ?
(Straight rebuy)
• Any change since then ? (Modified rebuy / new buy)
• Are the items similar / related to any other item
purchased ?
• Can we replace the item by any other item which we
are currently purchasing ?
• Are the items standard ?

SOM634 Purchasing and Supply

Management
 Supplier Selection
Bidding Negotiation
• Value of Purchase • Situations when cost
• Clear specifications estimates are difficult
• Number of sellers available • Price is only the only
• Vendors interested in order important factor
• Time • Supplier may have better
knowledge then the buyer

Bidding and then negotiation

SOM634 Purchasing and Supply

Management
Overview of Vendor Selection Criteria

SOM634 Purchasing and Supply

Management
 Prioritization Matrix
Weight Score Weighted
Score
Quality
Reliability
Capability
Financial
Others

Final result

SOM634 Purchasing and Supply

Management
 Supplier Development
????????

- Alignment of systems
- Alignment of expectations
- Knowledge transfers
- -------

SOM634 Purchasing and Supply

Management
 Managing Suppliers
• Feedbacks
• Situation recheck
• Corrective actions
• Realignment
• ……………

SOM634 Purchasing and Supply

Management
 Supplier Selection Issues
• Size Relationship
• Usage of International Suppliers
• Competitors as Suppliers
• Countertrade Requirements
• Social Objective

SOM634 Purchasing and Supply

Management
Pricing
 Sources of Price Information
Commodity Markets Price Quotations
• Exists for basic materials (grain, oil, • For both Standard and
sugar etc.) specialty items
• Useful for promoting
• Demand and supply competition
• Long term prices • Cost sheet
• RFQ (Should contain the
Price Lists manner in which supplier
• For standard products should submit offers)
• Vendors catalog Price • Specifications
• Quantity discounts • Quantity
• Period
available
Negotiations
• For long term relationships or for high cost items
• Time consuming Process
• Can lead to significant quality and price benefits
SOM634 Purchasing and Supply
Management
 Negotiations and e-Sourcing/Auctions

Negotiations

RFQ
Purchase Supplier
/ Quotations
requisitions Selection

E-Sourcing Negotiations
/Auctions / Discussion

SOM634 Purchasing and Supply

Management
Learning Curve
 Learning curve
• Improvement in output due to learning
• The learning rate represents productivity improvement as
cumulative production doubles.
• Improvement in
– Labour work style
– Process modification
– Product modification
• Applicable when
– New product / process
– Complex product
– Labour intensive
SOM634 Purchasing and Supply
Management
 Learning curve
Cumulative Units Total Labour Hrs Avg Labour Hrs per Learning Rate (%)
(N) (A) unit (C)
(B) = (Bn-1-Bn)/Bn-1
1 20 20 -
2 34 17 15.0 (20-17)/20
4 58 14.5 14.7
8 100 12.5 14.8
16 168 10.5 16.0
32 288 9.0 14.3
64 493 7.7 14.4

SOM634 Purchasing and Supply

Management
Learning curve

SOM634 Purchasing and Supply

Management
 Quantity Discounts
• Discounts on purchase of higher quantities
• Tradeoff between
– Discounts
– Inventory carrying costs
– Storage costs
– Obsolescence costs
• The order uncertainty getting transferred to
the buyer.

SOM634 Purchasing and Supply

Management
Negotiations
 What Is Negotiation?
A process of formal communication,

either face-to-face or via electronic means,

where two or more people come together

to seek mutual agreement about an issue

or issues.
*Purchasing & Supply Chain Management, Monczka, Trent, Handfield

SOM634 Purchasing and Supply

Management
 What Is Negotiation?
Involves the

management of time,
information,
and power

between individuals and organizations who are

interdependent
*Purchasing & Supply Chain Management, Monczka, Trent, Handfield

SOM634 Purchasing and Supply

Management
 When Negotiation Required?
• Is bid process inadequate?
• Are many non-price issues involved?
• Is contract large?
• Are technical requirements complex?
• Does contract involve plant, equipment or/and
customization?
• Does contract involve a partnership?
• Will supplier perform value-adding activities?
• Will there be high risk or uncertainty?
*Purchasing & Supply Chain Management, Monczka, Trent, Handfield
SOM634 Purchasing and Supply
Management
 Non-price Negotiation
Quality Support
• Specification compliance • Technical assistance
• Performance compliance • Product research, development, and/or design
• Test criteria • Warranty
• Rejection procedures • Spare parts
• Liability • Training
• Reliability • Tooling
• Design changes • Packaging
• Data sharing, including technical data
Supply
• Lead times Transportation
• Delivery schedule • FOB terms
• Consignment stocks • Carrier
• Expansion options • Commodity classification
• Supplier inventories • Freight allowance/equalization
• Cancellation options • Multiple delivery points

* From Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin
SOM634 Purchasing and Supply
Management
 Negotiation Strategy : Basic Steps
1. Develop the specific objectives (outcomes – must have and good to
have) desired from the negotiation
2. Gather pertinent data
3. Determine the facts of the situation
4. Determine the issues
5. Analyze the positions of strength for both (or all) parties
6. Set the buyer’s position on each issue, and estimate the seller’s position
on each issue based on your research
7. Plan the negotiation strategy
8. Brief all persons on the negotiation team
9. Conduct a dress rehearsal (Devil’s Advocate)
10. Conduct the actual negotiations with an impersonal calmness
11. Record the process and outcome

* From Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin
SOM634 Purchasing and Supply
Management
Negotiation planning and execution

SOM634 Purchasing and Supply

Management
 “Game plan” for Negotiation

* From Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin
SOM634 Purchasing and Supply
Management
 The “Zone of Negotiation”

Seller's Range
$220,000 $230,000 $240,000 $250,000 $260,000 $270,000 $280,000 $290,000 $300,000
Buyer's Range

The overlap between what the

Buyer will pay and what the
Seller will accept defines the
Zone of Negotiation

SOM634 Purchasing and Supply

Management
 The “Zone of Negotiation”
Seller's Range
$220,000 $230,000 $240,000 $250,000 $260,000 $270,000 $280,000 $290,000 $300,000
Buyer's Range

There is a gap between what the

Buyer will pay and what the Seller
will accept. There is NO DEAL
without Creativity or Compromise

SOM634 Purchasing and Supply

Management
 Sources of Negotiating Power
• Informational power Access to information to be used for
persuasion using facts, data etc. (Only un/favorable is presented)

• Expert power accumulated informational power

• Reward power One party can offer something of value expecting
something in return. Give / Take.

• Coercive power One party can withdraw something of value.

• Legitimate power Position of the person (representatives of big
companies)

• Referent power Personal qualities and attributes of individuals

*Purchasing & Supply Chain Management, Monczka, Trent, Handfield

SOM634 Purchasing and Supply

Management
 Being an Effective Negotiator
• Willing to compromise or revise goals
• View issues independently
• Establish upper and lower ranges for each major issue
• Explore additional options
• Build on common ground between parties
• Avoid making irritating comments
• Avoid argumentation by presenting too many reasons
(quickly)
• Make fewer counterproposals
*Purchasing & Supply Chain Management, Monczka, Trent, Handfield

SOM634 Purchasing and Supply

Management
 Overcoming Tactics
• Modify tactics when they don’t work
• Prepare for likely tactics to be used against
you
• Tactics are more effective on you if you are
unprepared, stressed, under severe deadlines,
inexperienced, fatigued, or disinterested
• Try not to react without thinking
*Purchasing & Supply Chain Management, Monczka, Trent, Handfield

SOM634 Purchasing and Supply

Management
 Influencing factors in Negotiations
• Low ball / High ball
• Honesty / Openness
• Questions
• Breaks
• Trial Balloon
• Price increase
• Best and final offer
• Silence
• Planned concessions
• Venue

*Purchasing & Supply Chain Management, Monczka, Trent, Handfield

SOM634 Purchasing and Supply

Management
 Win-Win Negotiation
• Win-lose – competitive or distributive
bargaining

• Win-win – collaboration or integrative

bargaining

*Purchasing & Supply Chain Management, Monczka, Trent, Handfield

SOM634 Purchasing and Supply

Management
 Win-Win Methods
• Expand the pie Ways to expand resources or value obtained
• Logroll Tradeoff of disagreeing issues
• Cost Cut Join hands in cutting costs and sharing benefits
• Bridge Involves inventing new options to satisfy both parties
• Non specific compensation One party achieves objective
other gets something of value as reward

*Purchasing & Supply Chain Management, Monczka, Trent, Handfield

SOM634 Purchasing and Supply

Management
Ethical Issues
 Ethics
• The set of moral principles or values guiding
our behavior

• In business, ethical behavior is the use of

recognized social principles involving justice
and fairness

*Purchasing & Supply Chain Management, Monczka, Trent, Handfield

SOM634 Purchasing and Supply

Management
 Rules of Ethical Behavior
• Buyers must commit their attention and energies
for the employer’s benefit rather than their own

• Buyers must act ethically towards suppliers and

potential suppliers

• Buyers must uphold the ethical standards set

forth by the profession
*Purchasing & Supply Chain Management, Monczka, Trent, Handfield

SOM634 Purchasing and Supply

Management
 Pressures Toward Unethical Behavior
• Purchasing has control over large sums of
money.

• Incentives linked to cost reduction.

• Suppliers may have great pressure to meet

aggressive sales goals, leading to questionable
sales practices
• *Purchasing & Supply Chain Management, Monczka, Trent, Handfield

SOM634 Purchasing and Supply

Management
 Risks of Unethical Behavior
• The act may also be illegal
• At a minimum, the buyer may lose his/her job
– Personal bankruptcy
– Jail
• There is a risk to a buyer’s professional
reputation
• Risk to the buying company’s reputation
*Purchasing & Supply Chain Management, Monczka, Trent, Handfield

SOM634 Purchasing and Supply

Management
 Types of Unethical Behavior
• Reciprocity – Preferential treatment to suppliers who are
also customers to the organization.
• Personal buying – Purchasing for personal needs of the
employees.
• Accepting supplier favors – Gifts and favors.
• Sharp practices – Misrepresentation just short of fraud.
• Financial conflicts of interest – investment in other
companies.

*Purchasing & Supply Chain Management, Monczka, Trent, Handfield

SOM634 Purchasing and Supply

Management
 Reciprocity
• Giving preferential treatment to suppliers who
are also customers
• Restrain competition
• Must rely on legitimate performance criteria
to evaluate supplier capability

SOM634 Purchasing and Supply

Management
 Personal Buying
• Purchasing department purchases materials or
goods for the personal needs of its employees
• Subject to trade diversion laws
• Some exceptions do exist
• Often a gray area as to what to do

SOM634 Purchasing and Supply

Management
 Accepting Supplier Favors
• Accepting gifts
• May effect a buyer’s judgment
• At what point does the gift represent showing
appreciation vs. and attempt to influence
future buying behavior
• Gifts from potential suppliers are particularly
questionable

SOM634 Purchasing and Supply

Management
 Sharp Practices
• Willful use of misinformation
• Exaggerating problems
• Requesting bids from unqualified suppliers
solely to drive down prices from qualified
suppliers
• Gaining information unfairly through
deception

SOM634 Purchasing and Supply

Management
 Sharp Practices
• Sharing information on competitive
quotations
• Not compensating suppliers for design or
other work
• Taking unfair advantage of a supplier’s
financial situation
• Lying or misleading

SOM634 Purchasing and Supply

Management
 Financial Conflicts of Interest
• Direct financial interest in a supplier company
• Buying companies typically require disclosure
by buyers having significant personal financial
interest
• Similar to insider knowledge in buying and
selling stocks

SOM634 Purchasing and Supply

Management
 Behaviors
Maintain highest standard.

No gifts / favors

Slow but steady

Remember: These are digital decisions in terms

of actions and occurrences
SOM634 Purchasing and Supply
Management
Legal Aspects
 Contract Terms
• Ex-works: In an ex-works contract, the purchaser
accepts full responsibility for arranging
transportation from the supplier’s location.
• For Purchaser this involves:
– Arranging transportation, insurance, and
documentation to move the goods to the required
source port (air or sea)
– Have them loaded on to the mode of transport
– Transported to, and unloaded at the destination port
– Cleared through customs and transported to the
purchaser’s location.
SOM634 Purchasing and Supply
Management
 Contract Terms
• Free alongside (FAS): In this arrangement, the supplier
agrees to deliver to the (source) port specified by the
purchaser
• For Supplier this involves
– Arranging transportation, insurance, and documentation to
move the goods to the required source port (air or sea)
• For Purchaser this involves
– Have them loaded on to the mode of transport
– Insured, transported to, and unloaded at the destination port
– Cleared through customs and transported to the purchaser’s
location.
SOM634 Purchasing and Supply
Management
 Contract Terms
• Free on board (FOB): Here the supplier pays for and
arranges loading on to the outward-bound transportation
and thereafter the purchaser becomes responsible.
• For Supplier this involves
– Arranging transportation, insurance, and documentation to
move the goods to the required source port (air or sea)
– Have them loaded on to the mode of transport
• For Purchaser this involves
– Insured, transported to, and unloaded at the destination port
– Cleared through customs and transported to the purchaser’s
location.

SOM634 Purchasing and Supply

Management
 Contract Terms
• Cost and Freight (C&F): This is a split responsibility arrangement
in that the supplier arranges and pays for transportation to an
agreed point,
• For Supplier this involves
– Arranging transportation, insurance, and documentation to move the
goods to the required source port (air or sea)
– Have them loaded on to the mode of transport
– Transported to, and unloaded at the destination port
• For Purchaser this involves
– Pay insurance from when the goods are loaded on board.
– Cleared through customs and transported to the purchaser’s location.

SOM634 Purchasing and Supply

Management
 Contract Terms
• Cost, Insurance, and freight (CIF): This is similar to C&F
But here the insurance during transportation is
responsibility of the supplier.
• For Supplier this involves
– Arranging transportation, insurance, and documentation to
move the goods to the required source port (air or sea)
– Have them loaded on to the mode of transport
– Insured, transported to, and unloaded at the destination port
• For Purchaser this involves
– Cleared through customs and transported to the purchaser’s
location.
SOM634 Purchasing and Supply
Management
 Contract Terms
• Delivered: This is the opposite of ex-works in that the
supplier has total responsibility for the goods, their
transportation, insurance, and all documentation until
they are delivered to the purchaser.
• For Supplier this involves
– Arranging transportation, insurance, and documentation to
move the goods to the required source port (air or sea)
– Have them loaded on to the mode of transport
– Insured, transported to, and unloaded at the destination port
– Cleared through customs and transported to the purchaser’s
location.

SOM634 Purchasing and Supply

Management
Contract Terms

SOM634 Purchasing and Supply

Management
  
Contract Terms
Supplier Port Ship Transit Ship Port Purchaser
Supplier              
Transport
Purchaser              
Ex Works
Supplier              
Insurance
Purchaser              
                   
Supplier              
Transport
Purchaser              
Free Alongside
Supplier              
Insurance
Purchaser              
                   
Supplier              
Transport
Purchaser              
Free On Board
Supplier              
Insurance
Purchaser              
                   
Supplier              
Transport
Purchaser              
Cost and Freight
Supplier              
Insurance
Purchaser              
                   
Supplier              
Transport
Cost Insurance Purchaser              
and Freight
Supplier              
Insurance
Purchaser              
                   
Supplier              
Transport
Purchaser              
Delivered
Supplier              
Insurance
Purchaser              
SOM634 Purchasing and Supply
Management
EDI and E-Sourcing
 Types of e-Procurement
1. Web-based ERP (Electronic Resource Planning): Creating and
approving purchasing requisitions, placing purchase orders and
receiving goods and services by using a software system based on
Internet technology.
2. e-MRO (Maintenance, Repair and Operating): The same as web-
based ERP except that the goods and services ordered are non-
product related MRO supplies.
3. e-sourcing: Identifying new suppliers for a specific category of
purchasing requirements using Internet technology.
4. e-tendering: Sending requests for information and prices to
suppliers and receiving the responses of suppliers using Internet
technology.
5. e-reverse auctioning: Using Internet technology to buy goods and
services from a number of known or unknown suppliers.
6. e-informing: Gathering and distributing purchasing information
both from and to internal and external parties using Internet
technology. SOM634 Purchasing and Supply
Management
 Reverse Auctions
• When possible ?

• Requirements ?

• Steps ?

SOM634 Purchasing and Supply

Management
 Reverse Auctions
• Problems ?

SOM634 Purchasing and Supply

Management
 Electronic Data Interchange
• The EDI (Electronic Data Interchange) enables
customers and suppliers to electronically exchange
transaction information such as PO, invoices, and MRP.
• Simplifications: This eliminates time consuming
paperwork and facilitate easy communication
between buyer and supplier

SOM634 Purchasing and Supply

Management
 Electronic Data Interchange
• External Supplier
– RPM Supplier
• E-mail to the supplier
• Uploading the information on the portal
– Subcon / TPM
• E-mail to the supplier
• Uploading the information on the portal
• Linkage through ERP system
• Internal Supplier
– Intercompany
• E-mail to the supplier
• Linkage through ERP system

SOM634 Purchasing and Supply

Management
 Electronic Data Interchange
• Purchaser: Requirement generation
• Purchaser: Scheduled line is generated against blanket order /
Scheduling agreement and sent to the supplier and accounts
electronically
• Supplier: receives and acknowledges the order.
• Supplier: sends the shipping notification while dispatching the
material.
• Purchaser: records the shipping notification in expected
receipt file.
• Purchaser: on receipt of the material the entry is made
against expected receipt and the scheduling line and an
intimation is sent to accounts payable.
• Purchaser: accounts payable dept electronically transfer the
payment to the suppliers account.
• Purchaser: sends remittance advice to the supplier.
SOM634 Purchasing and Supply
Management
 Electronic Procurement
• Disadvantages
– Security of electronic messages
– Lack of face-to-face contact
– Other technological concerns
• Standard protocols
• System reliability

SOM634 Purchasing and Supply

Management
Purchasing
 Purchasers’ Duties
• Know the market for their commodities; ascertaining
price
• Understand the laws (tax, contract, patent) …

X
• Process purchase requisitions and quotation requests

O
• Make supplier selections

S
• Negotiate prices and conditions of sale
• Place, follow-up, expedite purchase orders
• Supplier relations
• Maintain ethical behavior
• Do you see any problem
SOM634 Purchasing and Supply
Management
 Strategic Sourcing and Planner Buyer
• Strategic Sourcing
– Know the market for their commodities; ascertaining price
– Understand the laws (tax, contract, patent) …
– Make supplier selections
– Supplier relations
– Negotiate prices and conditions of sale
– Maintain ethical behavior
• Planner Buyer
– Determine material requirements
– Generate purchase requisitions, PO and schedules.
– Issue and controlling Shop orders for factory
– Place, follow-up, expedite purchase orders
– Maintain ethical behavior
SOM634 Purchasing and Supply
Management
6. Order Processing
 Purchase Order
• Significance

• Parts of PO

SOM634 Purchasing and Supply

Management
 Purchase Order.
• The PO is a legal offer to purchase.
• Once accepted by supplier it becomes a legal
contract for delivery of goods according to the
terms and conditions specified in the purchase
agreement.

SOM634 Purchasing and Supply

Management
 Major Parts of a P.O.
• Fixed prices and quantities (including taxes)
• Buyer’s right of inspection and rejection
• Right to make specification/design changes
• Holding buyer harmless, patent infringement
• Supplier’s right to assign contract to a third party
• Instructions regarding risk of loss
• Statement of credit and payment terms
• Identification
• Packing and preparation
• Statements of warranty
SOM634 Purchasing and Supply
Management
 Major Parts of a P.O.
• Shipment quantities, dates and place
• Assignment of seller’s rights
• Arbitration clause
• Right to cancel unshipped portion
• And other relevant information etc.

SOM634 Purchasing and Supply

Management
7. Order Monitoring and
Expediting
 Order Monitoring and Expediting
• Significance

SOM634 Purchasing and Supply

Management
Follow-up (Including expedite and de-expediting)

• Supplier is responsible for delivery.

• Purchase department is responsible for ensuring
the delivery.
• Follow-up is required for
– Changes in the plans
– IRA issues
– QA issues in previous delivery
– Product structure change
– etc.
SOM634 Purchasing and Supply
Management
8 Incoming Inspection and
Quality Control
Incoming Inspection and Quality Control

• Significance

SOM634 Purchasing and Supply

Management
 Receiving

• Warehouse is responsible for receiving the

goods. They should confirm
– Item
– Quantity
– Place
– Absence of transit damage
– Open Purchase Order
– Delivery due date
– Provide acknowledgement.
SOM634 Purchasing and Supply
Management
 Receiving

• Mark the goods

• Store the goods
• Operate information system
• Communicate to QA and other concerned
departments

SOM634 Purchasing and Supply

Management
Self Certification
 Self Certification
• Significance

• Where to use
– Staging policies
– Lot size and consumption
– Stocking policies

SOM634 Purchasing and Supply

Management
 Supplier Self Certification
• Companies spend a large amount of money on
quality inspection of incoming material

• This is time consuming and complicated.

• Supplier self certification is therefore very useful.

• In this supplier certifies and assures that the
quality of the material is as per the company
standard.
• Cost implication ?
SOM634 Purchasing and Supply
Management
 Supplier Self Certification

• STEPS
– Agreeing upon common Specs.
– Process Parameter standardization.
– Vendor audits and Inputs.
– Trial Lots.
– Roll out.

SOM634 Purchasing and Supply

Management
9. Invoice Processing
 Invoice Processing
• Significance

• Factors to be considered

SOM634 Purchasing and Supply

Management
 Payment

• Accounts is responsible for payment (after QA release of the

received material).
• Three way reconciliation
– Suppliers invoice
– PO
– Received quantity
• To confirm
– Conditions
– Prices
– Quantities
• The accounts should be very efficient and accurate
SOM634 Purchasing and Supply
Management
 SOM 634
Purchasing and Supply Management

Dr Atul Kanyalkar
10. Supplier Evaluation
 Supplier evaluation
• Why
– Better decision making
– Better communication
– Feedback
– Motivate and direct behavior
• Problems
– Too much data
– Wrong measures
– Conflicting measures
– Drive wrong performance
SOM634 Purchasing and Supply
Management
 Performance Measurement - Importance
• Systematizes organizational memory
• Pool information across plants
• Remove excuse for poor quality
• Ensure consistent policies across supplier and
plants
• To identify the supplier performance and
improvement opportunities.
• Helps in decision making.
• Negotiations
• Resource allocations etc.
SOM634 Purchasing and Supply
Management
 Performance Measurement
Characteristics of good performance measure
• The measurement should be usable.
• Without any scope for adjustment
• Communicate / Agreed
• Simple to measure

SOM634 Purchasing and Supply

Management
Measures
Measures Must Be ...
• Strategically Significant
• Driving “Right”
Behaviors
• Balanced
• Aligned
• Owned
• Linked to Compensation
• Actionable
• “Easy” to Collect

SOM634 Purchasing and Supply

Management
 Balance
Balance is Assessed and Viewed Across Three Specific Dimensions:

1. Financial v. Customer v. Process v. People

2. Leading v. Lagging
3. Efficiency v. Effectiveness

Why
Why Does
Does Balance
Balance In
In These
These Dimensions
Dimensions Matter?
Matter?

1. Complete Business Perspective

2. Causality
3. Cost (Time, Resources, Investment) & Quality
SOM634 Purchasing and Supply
Management
 Balanced Measures
Leading v. Effective v.
Example Measure Set F-C-P-P [1]
Lagging Efficient

Percent Sales from New Products Financial Lagging Effectiveness

Net Trade Sales Total Growth Financial Lagging Effectiveness

NPV of NPD Pipeline (NPDC Data) Financial Leading Effectiveness

Acceptable/
Market Share (TRx) Customer Lagging Effectiveness
Satisfactory
Line Item Fill Rate Process Lagging Effectiveness

Percent Growth of Net Trade Sales

Financial Lagging Effectiveness
from Existing Products Caution/
Manufacturing Compliance Index Process Lagging Effectiveness Additional
Work Req’d.
Adverse Events/Product (Top 5 Products) Customer Lagging Effectiveness

S/G&A Productivity Process Leading Efficiency

Unacceptable;
R&D Productivity Process Leading Efficiency Additional
Work Req’d.
Resource Alignment Index People Leading Effectiveness

Percent Critical Positions Filled People Leading Effectiveness

[1] Financial v. Customer v. Process v. People (from The Balanced Scorecard)

SOM634 Purchasing and Supply

Management
 Balanced Process Measures
Suppliers Inputs Process Outputs Customers

• S-1 • I-1 • O-1 • C-

• S-2 • I-2 • O-2 1
• S-3 • I-3 • O-3 • C-
2
• C-
3

Input Process Outcome

Measures Measures Measures

Leading X X
Lagging X
Effectiveness X X X
Efficiency X
SOM634 Purchasing and Supply
Management
 The Operational Definition
• A Precise Description that communicates how to arrive at a value for
an objective.
– Identifies Who, What, Where, When, How
• Who = Measure Owner
• What = What to Measure (Clear, Specific, Objective)
• Where = Where the Measure Data Resides
• When = When Measured & Reported
• How = How to Measure (Mathematical Formula) (Longer
Term)

Measure Playbook

Not
Not all
all of
of the
the Measure
Measure Playbook
Playbook attributes
attributes need
need to
to be
be
defined
defined at
at the
the same
same time…
time… it’s
it’s okay
okay to
to let
let them
them mature
mature asas the
the
measure
measure focus
focusand
SOM634 Purchasing matures.
matures.
Supply
Management
 “A Well-Dressed Measure”
Clean Data Display, Control Limits,
Quick Reference Legend
Mean, and Trend Line and Goal
I.E. “Trend Up = Good”

11
44

Title 22

55

33

Data Legend and

Chart and Data Description,
Owner Information, Explanation, and
Update Frequency Action Plan
SOM634 Purchasing and Supply
Management
 Performance Measurement
SP = ∑Wi X Pi
– Wi – Weight attached to the performance characteristic i
– Pi – Performance of characteristic I
– It can be
• Quality (material / documentation )
• Delivery
• Quantity
• Flexibility
• Technical Contribution etc.
• Or treat individual performance characteristic
separately.
SOM634 Purchasing and Supply
Management
 Measures Implementation
• Drive down from vision statement
• Develop specific measures
• Identify the base line data
• Finalize details
• Communicate and implement
• Measure and identify projects.

SOM634 Purchasing and Supply

Management
 Measures
• Engineer to order

• Make to order

• Assemble to order

• Make to stock

SOM634 Purchasing and Supply

Management
11 Non Acceptance – Return to
Supplier
 Return to supplier
• Based on the PO

• Local / Imported
• Rework / Destroy
• Credit note

SOM634 Purchasing and Supply

Management
Others
Purchasing Functionality of ERP
 ERP - What is it?
– ERP is a generic term used to describe a
comprehensive information system designed to
integrate all the business processes found in an
enterprise.

– Efficiency and productivity are improved through

the integration of information and the removal of
duplicate information and processes.

SOM634 Purchasing and Supply

Management
MRP OVERVIEW

SOM634 Purchasing and Supply

Management
MRP RUN

SOM634 Purchasing and Supply

Management
MRP: NET REQUIREMENT CALCULATION

SOM634 Purchasing and Supply

Management
LOT SIZING PROCEDURES

SOM634 Purchasing and Supply

Management
STATIC LOT SIZING PROCEDURES

SOM634 Purchasing and Supply

Management
PERIOD LOT SIZE PROCEDURE

SOM634 Purchasing and Supply

Management
 Safety stock
• Fixed safety stock

• Range of coverage

• Safety days

SOM634 Purchasing and Supply

Management
 Purchasing master Data
• Vendor master (at client level)
– Information about the vendor.
• Source list (at Plant level)
– The master which links a material to a vendor for a
period.
• Purchase Info Record (at Plant level)
– The master containing pricing and other information
of the material if sourced from a particular vendor
(This data gets adapted while converting PR to PO)
SOM634 Purchasing and Supply
Management
 Purchasing master data
• Outline agreement
– The agreement against which scheduled lines are
generated.

SOM634 Purchasing and Supply

Management
 Process
Sourcelist Vendor

Purchase
Purchase Info Record / PO/ Scheduled
Requisition of a Scheduling Line
material Agreement

Quality UD Follow-up

Payment Receipt

SOM634 Purchasing and Supply

Management
Business Planning in an ERP
system
Business Planning in an ERP System
• Once a year activity
• Based on the Business Plan for the next
periods.
• To arrive at
– Annual production plans
– Standard costs
– Machine loadings
– Annual Purchase volumes

SOM634 Purchasing and Supply

Management
Business Planning in an ERP System
• The output is used to
– Arrive at the variances during the year.
– Bargain with supplier
– Decide on the focus cost improvement ideas

SOM634 Purchasing and Supply

Management
Business Planning in an ERP System
1. The business plan is uploaded in System in a
scenario.
2. Master data is corrected in the scenario.
3. MPS orders for the Business Plan are generated
4. Machine loading is checked to make appropriate
corrections.
5. MRP is generated for the entire period using
appropriate assumptions
6. Total consumptions is checked.
SOM634 Purchasing and Supply
Management
Material Storage
 Why Storage is required ?

Material
Inventory
Handling

Material Storage

IRA Pilferage

SLOB

SOM634 Purchasing and Supply

Management
 Is it only a storage facility?
• A warehouse is typically viewed as a place to
store inventory.

• However, in many logistical system designs,

the role of the warehouse is more properly
viewed as a switching facility as contrasted to
a storage facility.
• Value Addition?

SOM634 Purchasing and Supply

Management
 Storage
• Objective
– Minimize costs
– Maximize customer service
• This is achieved by
– Timely customer service
– Keep track of the items
– Minimize total physical efforts
– Provide requisite communication

SOM634 Purchasing and Supply

Management
 Storage Costs
• Costs
– Capital costs
• Space
• Material handling equipments
• Etc.
– Operating costs
• Labor costs
• Etc.

SOM634 Purchasing and Supply

Management
 Warehouse Activities
• Receive goods
– Check the goods against order and Bill of lading
– Check the quantities
– Check for damage
– Inspection if necessary
• Identify the goods
• Dispatch to storage
• Hold goods
• Pick
• Marshal shipment
• Dispatch
• Operate Information system
SOM634 Purchasing and Supply
Management
 Benefits of Warehousing
• Consolidation
• Break bulk
• Processing
• Postponement
• Stockpiling

SOM634 Purchasing and Supply

Management
 Situations
• Supplier is regularly increasing price
• RM are expiring at the factory
• There are trucks getting detained at the factory
• IRA falling down weekly
• Suppliers material is delivered much earlier
than required
• Suppliers materials are coming with shorter
expiry than maintained in system
SOM634 Purchasing and Supply
Management
 RCA

SOM634 Purchasing and Supply

Management
Warehouse Location
 Warehouse Location
• Modeling the supply chain, J F Shapiro (pp 143)

SOM634 Purchasing and Supply

Management
 Warehouse Location
Objective / Constraints
Modeling the supply chain, J F Shapiro (pp 143)

• Objective: Minimization of transportation cost and fixed

and variable costs for warehouse

• Warehouse Capacity (Supply plan <= Operating Capacity)

• Transfer Quantity (Transferred quantity from warehouse <= operating
capacity of warehouse)
• Demand Satisfaction (Transferred quantity to CFA >= Demand of CFA)
• Unique Channel Matrix (All product demands of a CFA to be
satisfied by one warehouse)

SOM634 Purchasing and Supply

Management
 Channel matrix definition
Objective / Constraints

• Objective: Minimization of transportation cost

• Manufacturing Capacity (Production plan <= Mfg Capacity)

• Transfer Quantity (Transferred quantity from plant <= Production plan at
plant)
• Demand Satisfaction (Transferred quantity to CFA >= Demand of CFA)
• Unique Channel Matrix (All product demands of a CFA to be
satisfied by one manufacturing plant)

SOM634 Purchasing and Supply

Management
Warehouse Layout
 Design Considerations in Warehousing

• General considerations
– Quantity and character of goods must be known—
product profiling
– Know the purpose to be served
• Storage
• Distribution
• Cross-docking

SOM634 Purchasing and Supply

Management
 Warehousing Trade-offs
• Fixed / variable slot locations for merchandise

• Build out (horizontal) / build up (vertical)

• Order-picking / stock-replenishing functions

• Two-dock / single-dock layout

• Labor-intensive / mechanization / automation

• Space devoted to aisles / space devoted to storage

SOM634 Purchasing and Supply
Management
 Warehousing Trade-offs
• Paperless warehousing / traditional paper-
oriented warehousing operations

• Virtual warehouse / real warehouse

• Other space needs

• Retail store rooms

SOM634 Purchasing and Supply
Management
Warehouse
 Pallet Positions
Number of pallet positions on ground required
1. Per pallet = 30 Cartons
2. For storing 13000 Cartons
3. Number of pallets required = 13000/30 = 433.33
= 434 Pallets
4. Three high placement
5. 434 / 3 = 144.67 = 145 pallet positions
SOM634 Purchasing and Supply
Management
 Accessibility
Being able to get at the goods wanted with
minimum amount of work (directly)
1. Industry
2. Expiry periods
3. Fifo / Lifo etc

SOM634 Purchasing and Supply

Management
 Cube utilization
Use of space horizontally and vertically
Number of pallets actually stored / Maximum
number of pallets can be stored

Accessibility vs. Cube utilization

SOM634 Purchasing and Supply

Management
 Cube Utilization
Number of pallet positions on 1. Today I have 8000
ground required
Cartons
1. Per pallet = 30 Cartons
2. Number of pallets
2. For storing 13000 Cartons
3. Number of pallets required
required = 8000/30 =
= 13000/30 = 433.33 = 434 266.67 = 267 Pallets
Pallets 3. Three high placement
4. Three high placement
4. Cube Utilization = 267
5. 434 / 3 = 144.67 = 145
/ 434 = 61.5
pallet positions
SOM634 Purchasing and Supply
Management
 Stock Location
• Functionally similar items together
• Fast moving / slow moving
• Physically similar items
• Working stock and reserve stock

SOM634 Purchasing and Supply

Management
 Stock Location
• Point of usage
• Central storage

– Fixed location
• Advantages / disadvantages
– Floating location
• Advantages / disadvantages

SOM634 Purchasing and Supply

Management
 Order picking

Picking
Area
Through out the warehouse Zone
selecting items for one Picker works in his zone
order

Single
Multi order
order
SOM634 Purchasing and Supply
Management
Warehouse Safety
 Warehouse Safety
• Safety
– Guarding
– Material safety data sheets
– Employees safety
• Industrial hygiene
– Ergonomics
• Environment
– Spills / incidences
– Disposals
SOM634 Purchasing and Supply
Management
 e ct
sp
A
ty
fe
Sa

SOM634 Purchasing and Supply

Management
Security of goods
 Pilferage Protection
• Shortage (IRA / loss)

• Brand name issues

• Etc.

SOM634 Purchasing and Supply

Management
 Pilferage Protection
• Theft: Protection against theft of merchandise has
become a major factor in warehouse operations.
• No private automobiles
• All normal precautions employed throughout the
enterprise should be strictly enforced at each warehouse.
• Many are honest mistakes in order selection and
shipment, but the purpose of security is to restrict theft
from all angles.

• Security begins at the fence.

• As standard procedure, only authorized personnel should
be permitted into the facility and surrounding grounds
and entry to the warehouse yard should be controlled
through a single gate.

SOM634 Purchasing and Supply

Management
 Pilferage Protection…
• Computerization
– Computerized inventory control and order processing
systems help protect merchandise from being carried out
of the warehouse doors.

– No items should be released from the warehouse unless

accompanied by a computer release document.

– If samples are authorized for use by salespersons, the

merchandise should be separate from other inventory.

SOM634 Purchasing and Supply

Management
Scrap Disposal
• Salvage and Scrap Disposal
– Value of scrap may be income to the firm.
– Disposal must adhere to environmental
regulations.
– Ensure no possibility of misuse
– The organizations interest

SOM634 Purchasing and Supply

Management
Inventory Record Accuracy and
Cycle count
 IRA and Cycle count
• Please refer to Tony, Arnold

SOM634 Purchasing and Supply

Management
VMI
 Stockless Purchasing
• The supplier maintains the inventory for the
purchaser.
• The cost of stocking inventory has been
temporarily transferred from the purchaser to
the supplier.

SOM634 Purchasing and Supply

Management
NPD
 NPD
• Timelines based on the understanding /
experience
• Clear expectations beforehand
• Involve suppliers early

SOM634 Purchasing and Supply

Management
Standardization
 Standardization
• Rather than obtaining a variety of components
similar in labeling, coloring, packaging, etc.
The purchasing agent should try to have those
components standardized.
• For every component that is standardized,
• There is one less invoice, one less item to be
inventoried, etc.

SOM634 Purchasing and Supply

Management
Value Analysis
 Value analysis
• Process of examining all elements of a component, assembly,
end product, or service to make sure that it fulfils its intended
function at the lowest cost throughout the intended life.

• Objective : Increase the value of the product at the lowest cost while maintaining
quality.

• Value = function / cost

SOM634 Purchasing and Supply

Management
 Value analysis
• Gather information
• Study
• Speculate
• Analyse
• Recommend
• Summerize

SOM634 Purchasing and Supply

Management
 Value analysis
• Separate the object in its component
• Check the value addition by each component
• Check the manufacturing process for each
component
• Check the value addition by each process step
• Apply creativity

SOM634 Purchasing and Supply

Management
 Value analysis Team members
• Executive management
• Suppliers
• Purchaser
• Design engineer
• Marketing
• Production
• Industrial / process engineer
• Quality control
SOM634 Purchasing and Supply
Management
 Team exercise
• Identify Object (and its function)
• Separate the object in its component
(Understand the assembly process)
• Understand the manufacturing process for each
component (and go on further exploding its
BOM)
• Identify the value addition by each process and
component
• Brainstorm
SOM634 Purchasing and Supply
Management