Strategic ProcurementSourcing

&

Process Management

Changing Aspects of Business

• Competition Basis»Price»Quality»Service»Delivery»Technology»Speed/Time»Value Addition

Five Stages for Improvement

Fire Fighting – Crisis managementPush Effect – Supply driven, speculative

Pull Effect – Demand driven, reactiveJust In Time – SCM, optimizationZero Inventory – Triggers driven

Costs down, Value up, Lead time downProduct & 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 isavailable to the purchaser?

• Repair parts available locally? At short notice?

• Will it provide design data and mfg drg etc forparts when it goes out of production?

• Does it specialize in your type of equipment?

• Does it have a prescribed schedule for servicecalls?

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 integratedmanner 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

Set Goals For Improving Capabilities

Implement Work Plan

Monitor Progress & Adjust The Work Plans

Step 1

Step 2

Step 3

Step 4

Identify Supplier

Developing Strategic Sourcing

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

23-Dec-19 SCM 17

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

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 of

•Materials

•Parts

•Components

Final Assembly

ReceivingInspection

Srores

Finished GoodsInventory

Just In Time System (JIT)

• 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

Finished GoodsInventory

Final Assembly

Receiving of

•Materials

•Parts

•Components

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.

ORDER QUANTITY

AN

NU

AL

INC

REM

ENTA

L C

OST

S

OC=ICC

EOQ

ICC

TC

OC

EOQ Graph

Inventory Model

A – Annual consumption in units.s – Ordering cost per orderI – ICC as % of value of average inv.p– Unit price of the itemLet Q be the EOQ in units.Then average inventory = Q/2 unitsNo. of orders = A/Q Inventory carrying cost = Q/2xp x IOrdering Cost = A/Q x sEOQ : ICC = OCQ/2xp x I = A/Q x s

Inventory Model

pQI2 = As

Q

Q2 = 2AsI p

Q 2As= Ip

Solve the equation : pQ/2 x I = A/Q x s

Exercise:Annual Consumption of the item --20000UnitsCost of Ordering --Rs10000 Inventory Carrying Cost --10%Unit Price of the item --Rs1000

EOQ = ?

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

23-Dec-19 SCM 27

Structuring the Drivers: A Framework

Competitive Strategy

Supply Chain Strategy

ResponsivenessEfficiency

Facilities InformationTransportationInventory

Inventory

Raw materials, work in process, finished goods in S-C

Inventory Policies have dramatic impact on supply chain efficiency & responsivenessRetailer’s Choice:

High Stocks: High Responsiveness

Low Stocks: High Efficiency

A trade off

Drivers

23-Dec-19 SCM 29

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

Drivers

23-Dec-19 SCM 30

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 31

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)

Historical and Current Perspective

• In the past there well defined and rigid

boundaries between organizations

• JIT viewed suppliers as partners

- mutual analysis for cost reduction

- mutual product design

- greatly reduced inventory

- improved communications (Internet,Data)

Elements of JIT

• Pull production concept

• Flexible resources

• Cellular manufacturing

• Kanban production control

• Small-lot production

• Quick setups

• High quality focus

• Supplier networks

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Synonyms for JIT

• Continuous flow of manufacturing

• Zero inventory

• Keep moving material for manufacture

• Time bases competitiveness

• Synchronous manufacturing

JIT Stages

• JIT techniques are classified into Two stages:

• Stage 1: The stage 1 techniques are concerned with preparing the plant for flow, flexibility, short lead time and high quality. They may be said to be the prerequisites for JIT.

• Stage 2: The stage 2 set of techniques generally build on stage 1 set, and comprise those techniques allows operations to run in JIT manner, that is with short (Zero?) lead time and little (Zero?) waste.

JIT Stage 1

Prepare the plantfor Flexibility, Low Cost, Short Lead Time and High Quality

Quality (TQM)

Maintenance (TPM)Design

Focus

People Preparation

Setup Time Reduction

Layout and GT

Small Machines

JIT Stage 2

Produce with Zero lead time and No waste

Enforced Improvement

Process Data Collection

VisibilityTotal People Involvement

Supplier and Customer Partnerships

Buffer and Lot Size Reduction

Inventory Control

Flow Scheduling

JIT

1. People Involvement

2. Visibility to all involved

3. Process data collection

4. Continuous Improvement

5. Flow scheduling

6. Lot size and buffer reduction

7. Inventory Control over network

8. Suppliers partnership

Can we • Adopt certain principles for

enhanced efficiency and optimized working of Public procurement systems

• Basic principles are same• Important to work with people with

visibility, transparency, continuous improvements

Thank you