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 structured set of planning methodologies that enables organisations to answer the above questions

Purchasing & Supply Management

Current Requirements
Shift in Quality Management Methods
Transition from Detection & Correction to Prevention & Elimination

Changing Cost Structure Quick Response requirements Need to create Lean organisations Importance of New Product Development

Components of Expenditure
(1989-94)
89-90
60

90-91

91-92

92-93

93-94

Component as a %of Total

50 40 30 20 10 0

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No. of Companies studied: 565.

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Procurement Process
Steps
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

Procurement Lead time (Internal)

Payment, Vendor Rating

Payment authorisation Performance rating Vendor record updation

Order Acceptance
Inward goods inspection Acceptance/Rejection Updating stocks in stores

Order Receipt
Follow-up with vendor Receipt of material as per specifications

Procurement Lead time (Internal)

Procurement Lead time (External)

Supply Management
Alternative Approaches
Multiple Sourcing (Traditional)
Dealing with multiple suppliers every time an item is procured and obtaining some gains from the competitive scenario that a supplier faces in the process

Single Sourcing
Developing long term collaborative relationship based on mutual trust and dependability to obtain lower prices and several other benefits that were missed out in a multiple sourcing model

Multiple Sourcing & Single Sourcing

A comparison
Deal with several suppliers for every item procured Set up competitive situation among the suppliers when an item needs to be procured Engage in price negotiation every time an item is procured Withhold information; Obtain better price in the process Suppliers face uncertainty about future business; Business uncertainty weakens supplier position Benefit from their weaknesses, confusions and fears Deal with only one supplier for every item, rarely with two

Multiple Sourcing

Avoid engaging in any conflicts with the supplier Engage in joint cost reduction exercises to obtain low cost inputs Exchange relevant business information; Obtain better business gains

Single Sourcing

Suppliers informed of future business prospects; Capacity and Technology investments on account of certainty Benefit from cooperation, mutual trust, & dependability

Traditional supply management practices

Hidden Costs
Sl. No. 1 2 3 4 5 6 7 8 9 10 11 12 Item of cost Amount spent (Rs.) 5,92,157.00 4,51,290.00 4,09,155.00 2,82,668.00 2,00,000.00 1,69,858.00 1,62,265.00 96,802.00 90,452.00 61,604.00 49,495.00 25,65,746.00 Percentage of annual cost 23.1 17.6 15.9 11.0 7.8 6.6 6.3 3.8 3.5 2.5 1.9 100.0

Incoming materials transportation Telephone, Telex, Telegram etc. Purchase department salaries Incoming quality control stores salaries Incoming material inspection Receiving stores salaries Stationary charges in purchase dept. Travels and visits to supplier works Materials planning & control dept. salaries Insurance charges for incoming material Other costs and depreciation Total expenses for the year

Ranbaxy Laboratories
Recent initiatives
Experiments with Associated Capsules
Sharing of data, process improvements, extensive training, technical support

Supplier of printed aluminium foils with multiple 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 changed to Partners meet, Vendor Awards instituted

Make or Buy Decision

Relevant Factors
Recent spurt of BPO signals the tendency of organisations to buy rather than make inhouse their requirements Trend towards outsourcing in several organisations is driven primarily by four factors:
Cost Core Vs Non-core activities Managing capacity expansion Strategic restructuring

E- Procurement
Three emerging forms
E-Procurement denotes the set of strategies a purchase manager could employ to identify appropriate sources of supply, finalise the terms of the trade and place the order, all electronically

Purchasing & Supply Management

Implications of E-Procurement
Restructuring the supply chain will be inevitable for every organisation
Some suppliers with close relationships will be required to participate in more competitive mechanisms Still others will be replaced with fiercely competitive neutral market structures Traditional channels and intermediaries may be dis-intermediated

Launching several pilot projects in the next 2 years will be a valuable exercise for organisations