procurement - lecture01 010214
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procurementTRANSCRIPT
Procurement & Contracts ManagementLecture #1 01 February, 2014
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Introduction Education
◦ BCS; 1997◦ MBA; 2001◦ PMP; PMI 2009◦ Six Sigma Black Belt; ASQ 2013
Work Experience (16 years)◦ Jaffer Brothers (Pvt) Ltd◦ Ultimus Inc.◦ Enabling Technologies◦ Halliburton◦ BP◦ NTT DoCoMo◦ Schlumberger◦ Mobilink◦ Wateen Telecom 2
Class IntroductionPersonal Info
◦Name, Degree◦Professional Experience (if any)◦Why Procurement & Contracts
Management?Four facts about you
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Course Structure 15 classes (course outline to be
shared)3 Hourly ExamsProject Marks distribution
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Marks Head Total Qty Marks Total Marks
Hourly Exams 1 30 30
Attendance 1 10 10
Class participation
1 20 20
Final paper 1 40 40
CR SelectionResponsibility
◦Manage infrastructure i.e. board markers, multimedia etc
◦Manage communication i.e. circulate presentations, reading material
◦Manage feedback Perks
◦5 special marksSelection criteria
◦Popular vote5
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Overview All organizations need inputs of goods and services from external
suppliers or providers. Savings in material costs mean significant opportunities for
improving corporate profitability and return on investment. Quality of input materials affects final product quality in a major
way. In most concerns, large or small, purchasing is fast acquiring wider
recognition and a more strategic role, day by day, due to:◦ Advancing technologies◦ Limited resources◦ Increasing proportion of revenue spent on purchased goods and services.◦ Opportunities in outsourcing◦ Fewer and larger suppliers/conglomerates.◦ Increasing environmental concerns.◦ Successful adoption of ‘world class’ ideas (TQM, JIT etc.,) and cutting edge◦ Technologies by leading concern
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Overview (Contd…)For all the above reasons, buyers role is becoming more
strategic in nature. It includes, among others.
1. Advising top management on market trends – short term and long term
2. Negotiating long term relationships with critical suppliers
3. Building strategic linkages with key supplier units4. Vendor Development5. Quality Trust6. Supply Chain Management7. Total Cost Reduction8. Purchase Research9. Value addition through creative purchasing route and
working more towards ‘ total cost concept and value addition’ with continuous improvement perspective. 8
The LeverageStrategic Sourcing can have a
significant impact on the financial performance and shareholder value of a Company.
“When the goal is boosting profits by dramatically lowering costs, a business should look first at what it buys.”
Fortune, February 20, 1995 9
Illustrative Example
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Percentage Cost Reduction in Direct Materials
Baseline 5 % 10 % 15 %
Revenue 100 100 100 100
COGS – Material 60 57 54 51
Labour & Var OH 20 20 20 20
Gross Margin 20 23 26 29
Fixed OH Expenses 10 10 10 10
Net Income ( pretax ) 10 13 16 19
% Improvement 30 60 90
Procurement Steps1. Recognize and describe the need2. Transmit the need3. Select the vendor4. Prepare and issue purchase order5. Follow up the order6. Receive and inspect the material7. Audit the invoice8. Settle the payment9. Close the order10.After sales/warranty obligations
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Procurement ObjectivesRight Quality
Right Time
Right Quantity
Right Source
Right Price12
Quality Quality- fitness for use Conformance to specs to be ensured at source Rejection – no solution Minimal checking at receiver end Reliability / repeatability Creation of cost effective specifications;
◦ Changes, if any, for consideration;◦ Both supplier and user have to contribute
Safety and environment – major trust areas Quality to be created in a product, cannot be inspected into a
product
Related issues Standardization TQM / ISO 9000 / 14000 Quality circles Value engineering / value analysis Supplier assessment / vendor development 13
Time Lead time analysis Follow up system Expediting Network analysis/critical path analysis Liquidated damages ‘Force majeure’ conditions Logistics
Related issues
Effect of time over-run for projects/critical spares
Bonus/penalty/cost of expediting
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Time: Lead Time AnalysisEffect of long lead time on costs and profitabilityElements of administrative lead timeMaking a flow chart showing time for different
activitiesAnalysis of flow chart to identify delays and
shortcomings of procedures Improvement of procedures to shorten internal lead
time Integrated approachSupplier’s lead time analysisNegotiation with suppliers to reduce lead time and
rendering such help as may be necessary and feasible
Logistics
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Time: Important IssuesInternal lead time
◦ Purchasing systems and procedures◦ Knowledge base◦ Incomplete specifications / over specifications
External lead time◦ Incorrect choice of supplier◦ Over optimistic delivery promise◦ Change in buyer’s requirement / incomplete
order / buyer’s failure to keep his part of promise◦ Lack of efficiency in supplier organization◦ Delay genuinely beyond supplier’s control◦ Logistics
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Price Concept of price Cost basis Value / Quality Concept of right price Lowest price not necessarily right price “Total Cost” concept Price terms Discounts Commercial factors Monopoly / Oligopoly / Perfect competition Economic trends Buyer & supplier partnerships - creating value togetherKey success factors : Knowledge Product & its alternatives Market trends Competitive forces Hedge / forward buying
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Price (Contd…)Risk ManagementForward Markets - CommoditiesBusiness / Economic FactorsPrice Analysis And Cost AnalysisLearning CurvesRelationship / Inter DependenceNegotiation Skills
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Quantity Order Quantity( EOQ / Batch Lot / Min Order Quantity ) Inventory Control JIT Systems Economic Lots Discounts Etc Staggered Delivery TermsRelated Issues Working Capital Logistics Warehousing Distribution Shelf Life / Obsolescence Availability / Shortages - ( Short Term / Long Term
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Source: Determinants Of Supplier – Mix
Consistent Quality Supplier Facilities Cost, Not Price (‘Total Cost’ Concept) Stable And Competitive Delivery Time (Normal, Sos) Location Service / Attitude / Reliability Developmental Orientation / Innovation Financial Strength Technology / Quality Control / R&d Market Standing / References
Key Success Factors Knowledge Of Suppliers/Market/Own Product Understanding Of Environment Long Term Planning Developing Strategic Linkages With Key Suppliers Supplier Development 20
Purchasing: Related IssuesPurchasing Objectives And
StrategiesPurchasing Structure And
OrganisationSystems And ProceduresMeasuring Performance,
Efficiency And EffectivenessBench Marking - Best Practices
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Conclusion Procurement is acquiring a more strategic role in business Integrate purchasing into your organization's strategic
planning ‘Make or buy’ decision Gain competitive advantage through excellence in
purchasing performance Set and apply right criteria for selection of your vendors Supplier development Set right performance standards for your purchasing function Re-engineer your procurement process for better user
satisfaction and achieve continuous improvements in inventory and purchasing costs through improvement in purchasing cycle.
Logistics and supply chain Bench marking the purchasing function Total quality in purchasing Role of purchasing in the value chain 22
thanK yoU
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