Procurement Management Dr Ranjan Ghosh Indian Institute of

Procurement Management Dr. Ranjan Ghosh Indian Institute of Management Calcutta 1

y. OVERVIEW - ALL ORGANISATIONS 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: z a) ADVANCING TECHNOLOGIES z b) LIMITED RESOURCES z c) INCREASING PROPORTION OF REVENUE SPENT ON PURCHASED GOODS AND SERVICES. z d) OPPORTUNITIES IN OUTSOURCING z e) FEWER AND LARGER SUPPLIERS/CONGLOMERATES. z f) INCREASING ENVIRONMENTAL CONCERNS. z g) SUCCESSFUL ADOPTION OF ‘WORLD CLASS’ IDEAS (TQM, JIT ETC. , ) AND CUTTING 2 EDGE

OVERVIEW ( CONTD…) z FOR ALL THE ABOVE REASONS, BUYERS ROLE IS BECOMING MORE STRATEGIC IN NATURE. IT INCLUDES, AMONG OTHERS. z z z x 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 UNITS 4) VENDOR DEVELOPMENT 5) QUALITY THRUST 6) SUPPLY CHAIN MANAGEMENT y z z 7) TOTAL COST REDUCTION 8) PURCHASE RESEARCH 9) VALUE ADDITION THROUGH CREATIVE PURCHASING ROUTE AND WORKING MORE TOWARDS ‘ TOTAL COST CONCEPT AND VALUE ADDITION’ WITH CONTINUOUS IMPROVEMENT PERSPECTIVE. 3

The Leverage z Strategic Sourcing can have a significant impact on the financial performance and shareholder value of a Company. z “When the goal is boosting profits by dramatically lowering costs, a business should look first at what it buys. ” y. Fortune, February 20, 1995 4

Illustrative Example Percentage Cost Reduction in Direct Materials z z Revenue Baseline 5% 10 % 15 % 100 100 z COGS – Material 60 57 54 51 z Labour & Var OH 20 20 z Gross Margin 20 23 26 29 z Fixed OH Expenses 10 10 z Net Income ( pretax ) 10 13 16 19 30 60 90 z % Improvement 5

PROCUREMENT A. TRADITIONAL VIEW OF PURCHASING B. TODAY’S BUSINESS NEEDS C. PROCUREMENT AND CHANGE MANAGEMENT D. VISION AND MISSION E. COMPETITIVE STRATEGY F. ROLE OF STRATEGIC PROCUREMENT 6

PROCUREMENT - STEPS z z z 1. 2. 3. 4. 5. 6. RECOGNISE AND DESCRIBE THE NEED TRANSMIT THE NEED SELECT THE VENDOR PREPARE AND ISSUE PURCHASE ORDER FOLLOW UP THE ORDER RECEIVE AND INSPECT THE MATERIAL z 7 A) AUDIT THE INVOICE z B) SETTLE THE PAYMENT z 8. CLOSE THE ORDER z 9. AFTER SALES/WARRANTY OBLIGATIONS 7

PROCUREMENT OBJECTIVES: -RIGHT QUALITY -RIGHT TIME -RIGHT QUANTITY -RIGHT SOURCE -RIGHT PRICE 8

QUALITY z z z z - 1) QUALITY- FITNESS FOR USE 2) CONFORMANCE TO SPECS TO BE ENSURED AT SOURCE 3) REJECTION – NO SOLUTION 4) MINIMAL CHECKING AT RECEIVER END 5) RELIABILITY / REPEATABILITY 6) CREATION OF COST EFFECTIVE SPECIFICATIONS; CHANGES, IF ANY, FOR CONSIDERATION; BOTH SUPPLIER AND USER HAVE TO CONTRIBUTE 7) SAFETY AND ENVIRONMENT – MAJOR THRUST AREAS 8) QUALITY TO BE CREATED IN A PRODUCT, CANNOT BE INSPECTED INTO A PRODUCT -RELATED ISSUES z - STANDARDISATION TQM / ISO 9000 / 14000 QUALITY CIRCLES VALUE ENGINEERING / VALUE ANALYSIS SUPPLIER ASSESSMENT / VENDOR DEVELOPMENT 9

TIME - LEAD TIME ANALYSIS z FOLLOW UP SYSTEM z EXPEDITING z NETWORK ANALYSIS/CRITICAL PATH ANALYSIS z LIQUIDATED DAMAGES z ‘FORCE MAJEURE’ CONDITIONS z LOGISTICS z RELATED ISSUES - EFFECT OF TIME OVER-RUN FOR PROJECTS/CRITICAL SPARES - BONUS/PENALTY/COST OF EXPEDITING 10

TIME ( CONTD…. ) LEAD TIME ANALYSIS -EFFECT OF LONG LEAD TIME ON COSTS AND PROFITABILITY -ELEMENTS OF ADMINISTRATIVE LEAD TIME -MAKING A FLOW CHART SHOWING TIME FOR DIFFERENT ACTIVITIES -ANALYSIS OF FLOW CHART TO SHORTCOMINGS OF PROCEDURES IDENTIFY DELAYS AND -IMPROVEMENT OF PROCEDURES TO SHORTEN INTERNAL LEAD TIME -INTEGRATED APPROACH -SUPPLIER’S LEAD TIME ANALYSIS -NEGOTIATION WITH SUPPLIERS TO REDUCE LEAD TIME AND RENDERING SUCH HELP AS MAY BE NECESSARY AND FEASIBLE - LOGISTICS 11

TIME ( CONTD…) IMPORTANT ISSUES z INTERNAL LEAD TIME z PURCHASING SYSTEMS AND PROCEDURES z KNOWLEDGE BASE z INCOMPLETE SPECIFICATIONS / OVER SPECIFICATIONS z EXTERNAL LEAD TIME z INCORRECT CHOICE OF SUPPLIER z OVER OPTIMISTIC DELIVERY PROMISE z CHANGE IN BUYER’S REQUIREMENT / INCOMPLETE ORDER / BUYER’S FAILURE TO KEEP HIS PART OF PROMISE z LACK OF EFFICIENCY IN SUPPLIER ORGANISATION z DELAY GENUINELY BEYOND SUPPLIER’S CONTROL z LOGISTICS 12

PRICE 1. CONCEPT OF PRICE 2. COST BASIS 3. VALUE / QUALITY 4. CONCEPT OF RIGHT PRICE 5. LOWEST PRICE NOT NECESSARILY RIGHT PRICE 6. “TOTAL COST” CONCEPT 7. PRICE TERMS 8. DISCOUNTS 9. COMMERCIAL FACTORS 10. MONOPOLY / OLIGOPOLY / PERFECT COMPETITION 11. ECONOMIC TRENDS 12. BUYER & SUPPLIER PARTERNERSHIPS - CREATING VALUE TOGETHER KEY SUCCESS FACTORS : 1. 2. 3. 4. 5. KNOWLEDGE PRODUCT & ITS ALTERNATIVES MARKET TRENDS COMPETITIVE FORCES HEDGE / FORWARD BUYING 13

PRICE(CONTD…) 6 RISK MANAGEMENT 7 FORWARD MARKETS - COMMODITIES 8 BUSINESS / ECONOMIC FACTORS 9 PRICE ANALYSIS AND COST ANALYSIS 10 LEARNING CURVES 11 RELATIONSHIP / INTER DEPENDENCE 12 NEGOTIATION SKILLS 14

QUANTITY * ORDER QUANTITY( EOQ / BATCH LOT / MIN ORDER QUANTITY ) * INVENTORY CONTROL * JIT SYSTEMS * ECONOMIC LOTS * DISCOUNTS ETC * STAGGERD DELIVERY TERMS RELATED ISSUES * * * WORKING CAPITAL LOGISTICS WAREHOUSING DISTRIBUTION SHELF LIFE / OBSOLESCENCE AVAILABILITY / SHORTAGES - ( SHORT TERM / LONG TERM ) 15

SOURCE DETERMINANTS OF SUPPLIER – MIX z z z 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 z KEY SUCCESS FACTORS z z z KNOWLEDGE OF SUPPLIERS/MARKET/OWN PRODUCT UNDERSTANDING OF ENVIRONMENT LONG TERM PLANNING DEVELOPING STRATEGIC LINKAGES WITH KEY SUPPLIERS SUPPLIER DEVELOPMENT 16

PURCHASING: RELATED ISSUES - PURCHASING OBJECTIVES AND STRATEGIES - PURCHASING STRUCTURE AND ORGANISATION - SYSTEMS AND PROCEDURES - MEASURING PERFORMANCE, EFFICIENCY EFFECTIVENESS - BENCH MARKING - BEST PRACTICES AND 17

IN CONCLUSION PROCUREMENT IS ACQUIRING A MORE STRATEGIC ROLE IN BUSINESS - INTEGRATE PURCHASING INTO YOUR ORGANISATION’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 18