ORGANIZATION BUYING PROCESS

Receipt of order
from the end Need Analysis Information search
customer

Quality check by
Evaluation of Negotiation with suppliers & L&T QC
Alternatives the selected vendor team at supplier
Location

Quality check in L&T

Payment
factory

Step 1: Receipt of order from the end customer

End customer places an order with L&T valves. They send a document to the company which clearly
specifices:

Type of Valves required

Quantity of each type of valve
Date and place of delivery
Mode of delivery
Payment terms

This document serves as a guiding map. All the further steps are taken on the basis of this document.
More the order is detailed, more are the chances of effective delivery of the order.

Step 2: Need Analysis

On the basis of the order received from the customer, L&Ts Planning team will decides on what all
components would be needed to deliver the desired valves. It segregates the components in two
parts the one which can be manufactured in-house and the one which needs to be procured from
outside vendor. The segregation is done on the basis of capacity, time and cost implication in both
in-house and outside vendor. Quantity of components to be sourced from outside is decided.

Step 3: Information search

Company maintains a database of authorized suppliers. On the basis of the past performance
(manufacturing time, location, quality standards, cost etc.), company makes a consideration set out
of all the authorized suppliers. A RFP (Request for proposal) is sent to the vendors in the
consideration set. The vendors send the detailed proposal to the company. Proposal contains:
 Manufacturing time (Ideal delivery time is 8 weeks before the actual delivey to the end
customer)
Date of Delivery
Total Cost
Quality standards- accreditation
Maximum Defect rate

Step 4: Evaluation of Alternatives On the basis of location/ availability, Faundry is selected

L&T valves has procurement managers known as buyer, each for each or a set of specific parts. Each
Regional procurement manager is the incharge of foundry (factory that produces castings) in his
region. He evaluates faundry in his region on the basis of location, available manufacturing capacity,
cost, quality standard, past performance, defect rate etc.

A meeting is called wherein all the regional managers come to a consensus select the best vendor
and his foundry.

Step 5: Negotiation with the selected vendor

Once company confirm the vendor for their product requirement, Company procurement manager
start the negotiation process with the supplier.

Negotiation starts on the below paramenter

1) Date of supplies:
When company place order, then in how many days vendor has to fulfill that demand. For L&T
valvs, this time period is of 2 weeks. Once, L&T place order for casting hose of valve, it should
be received by the company in 2 weeks. Company keeps some buffer time with them to avoid
last moment casualities like high defect rate, political uncertainities like protests, natural
calamities like flood, etc. (Standard buffer time is 50% of time required to manufacture the
supplier product)

2) Company contract rules related to transfer of intangible/tanible properties with competitor:

L&T valve has huge competition in the market, hence transfer of technology, design or
physical product can hamper the business in long run. Hence, L&T make a contract of non-
transfer of any intellectual property with anyone. L&T Valve have some permanent supplier
for oils, coolents which are exclusively connected with the company. And these exclusive
partner dont do business with any other company.

3) Inbound logistics:
It is prerequisit for the supplier company to take all the expenses of the logistics on their own.
All packaging required to avoid the defects in the casting parts is also responsibility of the
supplier company as per the rules in L&T valves.

4) Defect rate:
As no company can avoid defects in their parts but they can try to minimises these defects in
the part by employing the various TQM methods. L&T has put 0.5% defect limit on the vendor.
Beyond this, they put the fine on the vendor because company has to fulfill the demand of
their customer.
Step 6: Quality check by suppliers and L&T team at suppliers manufacturing unit

In casting, probability of getting distorted part is very high because of vapours created during the
casting process which can damage the quality of the part. And as per the contracts, vandor has to
maintain defect rate below 0.5%. To manage both the things, supplier keeps one quality team who
inspect the product lot during the assembly.

Company also keep one quality team who visits to the supplier location and do random checking to
confirm the quality of the product. This process is added on organizations buying process to reduce
the variabilility and it also reduced the transportation cost. Once quality check is done, all those parts
transport to the L&T valves in respective plant.

Step 7: Quality check in L&T factory

All these parts get registered into companies IT system using OMNIFLOW platform which provide
business process management solution. Once the entries are done, this lot of products send to quality
lab which has all the world class equipments and techology. In this quality check lab, all parts are
checked to give final decsion by procurement manager.

If parts are defected, then all the defected parts send back to the supplier and replaced them with the
new defect free parts. And then all the defect-free parts are sent to the final assembly of the valves
which will be delivered to the end consumer.

Step 8: Payment

There is a credit cash cycle of 30 days. Once delivery is done, vendor gets their money for that lot of
delivery in next 30 days. All these invoices are computer generated and visible to all the stakeholders
involved to maintain the transparency in the system.

Evaluation Process

As discussed above, after receiving an order at the L&T valves division, the order is scrutinised by the
planning department. The planning department then sends an Indent to the buyer/purchase
department with list of materials required. Simultaneously the design department will send a design
document of operations required to be carried out on the materials that will be purchased.

The L&T Values division has two kinds of vendors Raw material/Casting suppliers and the sub-
contractor who is responsible for machining and shaping of these parts as per design requirement. For
the raw materials the L&T centralised supply chain management team takes care of identifying and
setting standards for the vendors. The standards are sent in terms of safety and quality standards
followed by the raw material supplier. In case of the sub-contractor evaluation, the L&T purchase and
Quality Control Team has a structured evaluation process as detailed below.

L&T being one of the leading companies enjoys great bargaining power towards its suppliers. They
generally maintain three to four vendors for each of the activity of material to ensure high bargaining
power. Hence, most of the suppliers or sub-contractors who are registered in the system have been
evaluated and tested in terms of their capabilities and performance. However, the L&T purchase team
and the Quality control team frequently renew the contracts depending on the frequency of order
with each of the supplier or sub-contractor. Moreover, irrespective of the frequency of the order, each
supplier or the sub-contractor need to be evaluated based on the Quality and Safety Standards and
Financial auditing standards.
In case of a new vendor or a sub-contractor registration, the process starts with either an existing
vendor introducing the new vendor to the purchase department or when they need a new operation
is required, which the existing sub-contractors cannot fulfil or a material that is not available with the
existing vendor. For the first case, where the vendor is introduced by an existing vendor, the new
vendors provides the details of his capabilities, majorly related to the number of machines, operations
that he can perform and the duration he takes for performing these operations. Once this is done, the
concerned buyer from the purchase team will evaluate the need for the vendor or sub-contractor and
if he finds that to be beneficial, he will send the request for evaluation. The Quality Assurance team
will do a thorough evaluation, where they will verify their capabilities, certifications such as ISO, and
their quality standards and control measures followed. Once the Quality Assurance Team finds the
capabilities of the vendor or sub-contractor to be of required standard, they pass it on to the financial
audit team, who evaluates the financial capabilities of the sub-contractor. Thereafter, the vendor or
sub-contractor is added to their SAP system as registered vendor for considerations in further
consignments. For the second case, where the purchase department looks for a new vendor when
their existing vendor is unable to provide an operation or material required by the customer
requirement. In such cases, the L&T purchase team will evaluate all the available vendors across India
who can provide the requirements using parameters like distance, cost and time of deliver, capabilities
of the vendor, current clients of the vendor and the operating load of the vendor etc. Based on these
evaluation the buyer for the purchase department takes a call, which will be further evaluated and
approved by the process discussed above.