Procedures and Information Flows Chapter 3 Mr. Rizwan Tanveer Malik
The Essential Steps in the Purchasing Process 1. 2. 3. 4. 5. 6. 7. 8. 9.
Recognition of need Description of need Determination and analysis possible sources of supply Determination of price and terms Preparation and placement of the purchase order Follow-up and/or expedite the order Receipt and inspection of goods Clear the invoice and pay the supplier Maintain records and relationships
Tactical Elements of the Supply Management Process/purchasing process
The 9 Elements of the Supply Management Process
Customer Demand
Identify Establish Requirements Specifications
Production Schedule
Assess Suppliers
Select Supplier(s)
Supply Mgmt
Issue Purchase Order
Production
Follow-Up & Expedite
Receive & Verify
Shipping
Process Payment
Customer Service
Maintain Records
1. Identify Requirements Identify Requirements
Establish Specifications
Identify Suppliers
Select Supplier(s)
Issue Purchase Order
Follow-Up & Expedite
Receive & Verify
Process Payment
– Direct and Indirect – Material Requisitions – MRP Output – Impact of Lead Time
– Other items to consider As availability becomes scarce, Purchasing alerts users Recommending subassemblies instead of components Proposing substitute items, where appropriate
Maintain Records
2. Establish Specifications Identify Requirements
Establish Specifications
Identify Suppliers
Select Supplier(s)
Issue Purchase Order
Follow-Up & Expedite
Receive & Verify
Process Payment
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Engineering Drawings and Specifications
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Samples
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Requisition Details (electronic or paper) Date originated, Document Number, Dept, Account Number, Signature(s) Complete description of material or service required Quantity and date required Shipping / delivery instructions Authorization to Buy
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Impact of Lead Time
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Other items to consider Understanding ultimate purpose (Are they asking for a Mercedes or just a car?) Catalogues and standard items Supplier Input
Maintain Records
3. Identify Suppliers Identify Requirements
Establish Specifications
Identify Suppliers
Select Supplier(s)
Issue Purchase Order
– History and Geography
– Request for Quotation – Request for Proposal – Request for Bid
– Other items to consider Input from Technical Staff Other
Follow-Up & Expedite
Receive & Verify
Process Payment
Maintain Records
4. Select Suppliers
Identify Requirements
Establish Specifications
Identify Suppliers
Select Supplier(s)
– Supply Capability Quality Capacity Reliability
– Many other factors to be covered later in semester
Issue Purchase Order
Follow-Up & Expedite
Receive & Verify
Process Payment
Criteria for selecting a Supplier
Maintain Records
5. Issue Purchase Order Identify Requirements
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Establish Specifications
Identify Suppliers
Select Supplier(s)
Issue Purchase Order
Follow-Up & Expedite
Receive & Verify
Process Payment
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Relationship to Material Requisition The Requisition provides the information that populates several Purchase Order data fields (see Requisition Details) Ensure Risk Management
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Acknowledgement
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Internal Controls Budgets Approvals Recurring Purchase Order Releases Pre-negotiated contracts Other items to consider ALWAYS ensure that the terms and conditions are in WRITING. A Purchase Order is a CONTRACT
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Maintain Records
Continued on next Slide
Purchase order
5. Issue Purchase Order, continued
Identify Requirements
Establish Specifications
Identify Suppliers
Select Supplier(s)
Issue Purchase Order
Follow-Up & Expedite
Receive & Verify
– Discrete Orders – Pre-negotiated Blanket
– Pre-negotiated Vendor-Managed – Maintenance, Repair, and Operating Supplies (MRO) – Bid and Auction – Corporate Purchase Card (pCard)
Process Payment
Maintain Records
6. Follow-Up and Expedite Identify Requirements
Establish Specifications
Identify Suppliers
Select Supplier(s)
Issue Purchase Order
Follow-Up & Expedite
Receive & Verify
Process Payment
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ERP Applications assume that scheduled dates will be received on time
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A Scheduled delivery date needs to be monitored and managed
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Possible missed dates must be identified in advance and avoided If delays are inevitable, recovery plans must be developed and managed
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Other items to consider An understanding of the Supplier’s production process, capacity, and constraints is critical to collaborative problem solving Expediting should be on an exception basis. If it is determined that a particular supplier is consistently being expedited, corrective action should be initiated
Maintain Records
7. Receive and Verify Identify Requirements
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Establish Specifications
Identify Suppliers
Select Supplier(s)
Issue Purchase Order
Follow-Up & Expedite
Receive and Verify
Process Payment
Relationship to Material Requisition and Purchase Order Key data elements travel throughout Key objectives Confirm receipt of goods Ensure proper physical condition, quantity, documentation Quality parameters met Cross functional activity among Purchasing, Receiving, Materials, and Finance
Other items to consider Receiving is technically a “non-value-added” activity. It is designed to ensure that something that should have been done properly actually was. The goal is to ensure quality throughout, and eliminate the need for inspection
Maintain Records
8. Process Payment Identify Requirements
Establish Specifications
Identify Suppliers
Select Supplier(s)
Issue Purchase Order
Follow-Up & Expedite
Receive & Verify
Maintain Records
Process Payment
Key Document Flow Requisition
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Purchase Order
Packing Slip (Receiving)
Invoice
Payment
Match the data in the Purchase Order, Packing Slip, and Invoice Discrepancies must be reconciled before payment is issued Some level of discrepancies can be ignored (e.g. if +/- 5% or +/- $25) Audits of all Discounts for early payment are often available and should be taken whenever possible
Other items to consider Chronic discrepancies from a single Supplier could lead to a change
9. Maintain Records Identify Requirements
Establish Specifications
Identify Suppliers
Select Supplier(s)
Issue Purchase Order
Follow-Up & Expedite
Receive & Verify
Process Payments
– Purchase Orders should be archived for up to 7 years – Key Records to be Maintained (from p.77) Purchase Order Log of all PO’s Copies of Purchase Orders Commodity file Supplier history file Outstanding Contracts against which PO’s are placed – Other items to consider Can be electronic or paper Paper can be managed by a third party
Maintain Records
A Sample Sourcing Process Flowchart
Some Possible Methods of Reducing Small Order Transaction Costs • • • • • • • • • • • • •
Stockless buy and systems contracts P-cards Blanket P.O.s EDI- and Internet-based systems Reverse auctions Changing authority levels and bidding practices Single sourcing Outsourcing small value order processing Standardization Batch orders Set requisition schedule Invoice less payments Users pay directly
Case Study The Kraljic Portfolio Purchasing Model
Assessing Risk and Maximizing Profits • You've just taken responsibility for purchasing at a major international logistics company, and you're reviewing all of the fuel purchases over the past two years. The company spends a fortune on fuel, and it's hired you, in part, to look for ways to cut costs. • The problem is that, because of the diverse nature of your company's transportation methods (which cover air, ground, and ocean freight), each individual department purchases fuel separately. So, the air division purchases its own jet fuel, the trucking division purchases its own diesel, and the shipping freight division purchases its own oil.
Question • How could you possibly reduce costs on such a necessary, but ultimately scattered, commodity? The Kraljic Portfolio Purchasing Model helps you do this.
Understanding the Kraljic Portfolio Purchasing Model History: The Kraljic Portfolio Purchasing Model was created by Peter Kraljic and it first appeared in the Harvard Business Review in 1983. Despite its age, it's a popular and useful model used in companies worldwide.
• Its purpose is to help purchasers maximize supply security and reduce costs, by making the most of their purchasing power. In doing so, procurement moves from being a transactional activity to a strategic activity – because, as Kraljic said, "purchasing must become supply management.�
How to use this tool? • • • • •
The model involves four steps: Purchase classification. Market analysis. Strategic positioning. Action planning.
Let's explore each in more detail…
Step 1: Purchase Classification Start by classifying all of the commodities, components, products, and services that you buy according to the supply risk and potential profit impact of each. • Supply risk is high when the item is a scarce raw material, when its availability could be affected by government instability or natural disasters, when delivery logistics are difficult and could easily be disrupted, or when there are few suppliers.
Figure 1 – Product Purchasing Classification Matrix
Step 1: Purchase Classification • Profit impact is high when the item adds significant value to the organization's output. This could be because it makes up a high proportion of the output (for example, raw fruit for a fruit juice maker) or because it has a high impact on quality (for example, the cloth used by a high-end clothing manufacturer). • Then mark each item in the appropriate place on the product purchasing classification matrix shown in Figure 1.
Kraljic recommends the following purchasing approaches for each of the four quadrants: 1) Strategic items (high profit impact, high supply risk). These items deserve the most attention from purchasing managers. Options include developing long-term supply relationships, analyzing and managing risks regularly, planning for contingencies, and considering making the item in-house rather than buying it, if appropriate. • Note that step 3, below, provides detailed options for the best purchasing approach for these items, after considering other factors.
2) Leverage items (high profit impact, low supply risk). Purchasing approaches to consider here include using your full purchasing power, substituting products or suppliers, and placing high-volume orders.
3) Bottleneck items (low profit impact, high supply risk). Useful approaches here include over ordering when the item is available (lack of reliable availability is one of the most common reasons that supply is unreliable), and looking for ways to control vendors. 4) Non-critical items (low profit impact, low supply risk). Purchasing approaches for these items include using standardized products, monitoring and/or optimizing order volume, and optimizing inventory levels.
Step 2: Market Analysis • Here, you investigate how much power your suppliers have, and how much buying power you have as their customer. • A good way of doing this is to use Porter's Five Forces analysis. (You'll use this information in the next step.)
Step 3: Strategic Positioning • Classify the products or materials you identified as "strategic" in Step 1 according to the supplier and buyer power analysis you did in Step 2. To do this, simply enter each item in the purchasing portfolio matrix, shown in Figure 2, in next slide.
Figure 2 – Purchasing Portfolio Matrix
Step 4: Action Plans Finally, develop action plans for each of the products and materials you need on a regular basis according to where those items are placed in the matrix in Figure 2. The three purchasing strategies indicated are as follows: • Exploit – Make the most of your high buying power to secure good prices and long-term contracts from a number of suppliers, so that you can reduce the supply risk involved in these important items. You may also be able to make "spot purchases" of individual batches of the item, if a particular supplier offers you a good deal. • The only real caution is not to take any aggressive approach too far, just in case circumstances change.
Cont. • Balance – Take a middle path between the exploitation approach and the diversification approach described below. • Diversify – Reduce the supply risks by seeking alternative suppliers or alternative products. For example, in our logistics example, could you use the railroad to ship some of your overland freight instead of relying solely on trucking companies? • You can also increase your buying power by consolidating to a single supplier. And, in other situations, you could bring the production of the item in-house.
Key Points • Purchasing should be part of corporate strategy. As such, it's important that purchasers know how to evaluate risk and maximize profits by having the right approach to procurement. • The Kraljic Portfolio Purchasing Model helps purchasers understand where their products are classified in terms of supply risk and profit contribution, and also know whether the balance of power lies with them or with their suppliers. Once you know this, you can select an appropriate purchasing strategy.
Information Needed for Requisitions • • • • •
Date Number (identification) Originating department Account number Complete description of material or service and quantity • Date material or service needed • Any special shipping or service-delivery instructions • Signature of requisitioned
A Traditional Supply Chain Information Flow
The Bullwhip Effect Bullwhip effect - the inaccurate or distorted demand information created in the supply chain • Causes are generated by: – demand forecasting updating, – order batching, – price fluctuations, – rationing and – gaming
The Bullwhip Effect Counteracting the Effect: – Change the way suppliers forecast product demand by making this information available at all levels of the supply chain – Share real demand information (POS terminals) – Eliminate order batching – Stabilize pricing – Eliminate gaming
Internal Information Flows to Purchasing sales forecasting
engineering
production control
planning production
new products inventory control
budgeting
Purchasing
quality control
financial control receiving
legal
accounting
External Information Flows to Purchasing sources of supply
general market conditions
product information new product information
suppliers’ capacity transportation availability
Purchasing suppliers’ production rates labor conditions
transportation rates sales and use taxes, customs
prices and discounts
Internal Information Flows from Purchasing General Management
Engineering Source, product, price information
Product Development
Economic conditions
Product and price information
Production Product availability, lead time, price and quality
Competitive conditions
Purchasing
Budget commitments
Contracts Orders placed
Legal
Stores
Marketing
Costs, prices adjustments
Accounting
Finance