Purchasing and Supply Management

Facilitator: Lic. E. Makoni emakoni@commerce.uz.ac.zw Mobile:0772 428 285

What Is the Supply Chain?

Also referred to as the logistics network Suppliers, manufacturers, warehouses, distribution centers and retail outlets facilities and the Raw materials Work-in-process (WIP) inventory Finished products that flow between the facilities

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Standard Supply Chain

Fig 1.3.1 Standard supply chain Second tier suppliers

First tier suppliers

First tier customers

Second tier customers

The Operation

Purchase and supply management

Physical distribution and logistics management

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The Supply-Chain
VISA

Material Flow Credit Flow

Supplier Manufacturing Supplier

Retailer Wholesaler

Consumer Retailer

Schedules Order Flow

PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)

Cash Flow
11-4

2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

The components of a typical supply chain

The components of a typical supply chain include: Suppliers supplier, Supplier, Manufacturer, Distributor, Retailer, Customer, Customers Customer

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BASICS OF SUPPLY CHAIN

1.

2.

3.

The supply chain has three main links: Materials flow from suppliers and their upstream suppliers at all levels Transformation of materials into semi-finished and finished products through the organizations own production process Distribution of products to customers and their downstream customers at all levels
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BASICS OF SUPPLY CHAIN

Organizations must embrace technologies that can effectively manage supply chains

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Activity
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2.

3.

In groups and design a supply chain for an organization of your choice Choose an organization that is currently experiencing supply chain issues e.g. not receiving an order, receiving an incorrect order, or receiving someone else's order List the names of the suppliers, manufacturers, distributors, retailers, and customers
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Activity

4.Identify one or two areas where the organization can improve its supply chain

5.Your group should present its supply chains to the class along with your recommendations for improvement
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Decision making Vs supply chain management

SCM enhances decision making. Collecting, analyzing, and distributing transactional information to all relevant parties, SCM systems help all the different entities in the supply chain work together more effectively

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Decision making Vs supply chain management

SCM systems provide dynamic holistic views of organizations. Users can drill down into detailed analyses of supply chain activities in a process analogous to DSS. Without SCM systems, organizations would be unable to make accurate and timely decisions regarding their supply chain.

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Supply chain management system best practices

1.

2.

The following are the SCM industry best practices: Make the sale to suppliers - A large part of any SCM system extends beyond the organization to the suppliers. Since the organization has very little control over anything external to itself, these pieces are typically the most complicated.
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Supply chain management system best practices

4. Be sure suppliers are on board with the benefits that the SCM system will provide to ease SCM implementation difficulties. 5.Wean employees off traditional business practices - If the organization cannot convince people that using the SCM software is worthwhile, the employees will probably find a way around using the software
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Supply chain management system best practices

6.Ensure the SCM system supports the organizational goals - Be sure to select SCM software that supports organizational goals and strategies 7.Deploy in Incremental phases and measure and communicate success - Designing the deployment of the SCM system in incremental phases is the most successful deployment method.
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Supply chain management system best practices

8.The BIG BANG approach implementing everything at once fails 90 percent of the time. 9.Be future oriented - An SCM system, like all systems, must scale to meet future demands.

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Supply master planning

1. 2.

3. 4. 5.

This is the organized program of: Compiling and analyzing supply activity profiles Establishing and monitoring supply performance measures Implementing world-class supply practices Designing a supply management system and Developing a supply organization.

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1. SUPPLY ACTIVITY PROFILING

we compile and analyze supply and supplier activity to build a database for decision making throughout the supply master planning program.

the profiling process should yield the design and population of a supply activity data warehouse

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1.SUPPLY ACTIVITY PROFILING

Ideally, the Logistics Information System (LIS) should maintain a repository of historic purchase orders and a supplier master file in a data warehouse equipped with data-mining tools to discover and illustrate patterns in supply activity

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1.1 Principle components of a supply activity profile

1.1.1. 1.1.2. 1.1.3. 1.1.4. the supplier activity profile (SAP) item purchasing activity profile (IPAP) supplier-item activity profile (SIAP) purchase order profile

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1.1.1 Supplier activity profile

The Logistics Information System should compute, monitor, and report purchasing activity by supplier and supplier location in dollars, cases, pieces, weight, volume, frequency, orders, lines, and deliveries, creating and maintaining rankings, and supplier segments (ABC).
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1.1.1. Supplier activity profile

The SAP can and should be used in vendor negotiations and to reveal opportunities for supplier rationalization.

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1.1.2.Item Purchasing Activity Profile

In item purchasing activity profiling the LIS should compute, monitor, and report line item purchasing activity in dollars, pieces, cases, pallets, cube, weight, and lines.

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1.1.3.Supplier-Item Purchase Activity Profile

The LIS should compute, monitor, and report the purchasing activity in dollars, cases, cube, and weight in nine purchasing segments: AA, AB, AC, BA, BB, BC, CA, CB, and CC (supplier class or SKU class). As was the case in customer response, this joint distribution will be used in creating a segmented supplier service policy and a segmented inbound logistics strategy.
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1.1.3.1 Supplier-item purchase profile

Supplier classification A Item classification A A items from A suppliers B items from A suppliers C items from A suppliers B A items from B suppliers B items from B suppliers C Items from B Suppliers C A items from C suppliers B items from C supplier C Items from C Suppliers

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1.1.4.Purchase Order Profile

In purchase order profiling, the LIS should compute, monitor, and illustrate the distribution of lines, cases, weight, and cube per purchase orders.

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2. SUPPLY PERFORMANCE MEASUREMENT

Hold each logistics activity accountable to business measurements that align the execution and planning of the activity with the other logistics activities and motivate highly competitive performance.

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Areas of focus in supply performance measurement

Here we review the related indicators in supply management. (i) financial, (ii) productivity, (iii) quality, and (iv) response-time metrics.
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Areas of focus in supply performance measurement

These indicators are a mix of metrics for monitoring the performance of our internal supply organization and the performance or our suppliers. The supplier metrics should be a foundation for a supplier selection and negotiation program.

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(i)Supply Financial Indicators

The four key supply financial indicators are 1. Total supply cost (TSC) 2. Purchase order cost (POC) 3. Supplier return on inventory (SROI) 4. Supplier total logistics cost (STLC)

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1.Total Supply Cost (TSC)

The TSC includes all the costs related to supply planning, supplier management, and procurement execution. Those costs include related personnel costs, telecommunications, office space, and computer hardware and software dedicated to the supply process.
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2.Purchase Order Cost (POC)

The cost per purchase order is a critical element in supply planning, affecting the size of order quantities and related inventories. The most familiar effect is in the Economic Order Quantity (EOQ) The individual elements of the POC include the staff, space, communications, supplies, and overhead cost to plan, negotiate, check, execute, track, and pay a purchase order.
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3. Supplier Return on Inventory (SROI)

The SROI is computed as the total profit on stock-keeping units (SKUs) provided by that vendor divided by the average inventory value for that vendor. It is an effective indicator of the efficiency of logistics transactions executed with that supplier. The LIS should compute, monitor, and report the return on inventory for each vendor, providing rankings and segments accordingly.
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Supplier total logistics cost(STLC) or Total Acquisition cost (TAC)

The TAC of an item (sometimes referred to as total ownership cost or total logistics cost) for each supplier includes the cost of the item and the cost of purchase order placement, float, inventory carrying, lost sales, transportation, warehousing, and international logistics fees.

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4.Total Acquisition Cost (TAC)

Since the terms of payment, unit cost, logistics capabilities, and locations infrastructure vary widely by supplier, the TACs can vary greatly for the same SKU. Hence, the TAC is a critical metric upon which to base sourcing decisions.

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(ii) Supply Management Productivity

Supply management productivity indicators are used primarily to monitor and motivate buyer performance.

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The most popular supply productivity measures

Number of SKUs managed Number of suppliers managed Dollar amounts of purchasing managed Number of purchase orders launched per person-hour Inventory turns versus target Fill rate performance versus target
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1. 2. 3. 4.

5. 6.

(iii) Supply Quality

Four helpful indicators of supply quality are 1. Perfect purchase order percentage (PPOP) 2. Vendor fill rate (VFR) 3. Supplier satisfaction index (SSI) 4. Matching rate of receipts and purchase orders

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1.Perfect purchase order percentage (PPOP)

This is the percentage of all purchase orders that are delivered perfectly. A perfect purchase order arrives on time, without damage, and with perfect documentation at the right location with each line item request completely satisfied with the correct item in the correct quantity.
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1. Perfect purchase order percentage (PPOP)

This indicator should be closely monitored for each vendor and vendor location. It is not unusual to find perfect PO percentages below 50 percent.

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2. Vendor fill rate (VFR)

The VFR measures the percentage of demand satisfied by a vendor. It can and should be measured as order fill, line fill, and unit fill.

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3.Supplier satisfaction index (SSI)

The SSI is an overall indicator of a suppliers performance, incorporating a variety of factors typically including the elements of the perfect order percentage along with less quantifiable factors such as general responsiveness, honesty, and service attitude.

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4.Matching rate of receipts and purchase orders

The matching rate of receipts and purchase orders records the percentage of receiving lines that match the delivery timing and quantities specified on the purchase order.

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(iv) Response-time metrics.

Purchase Order Cycle Time (POCT) and

Purchase Order Cycle Time variability(POCTV) are the principle indicators of supply cycle time performance for each vendor and vendor location.

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3.Supplier Service policy

Developing a supplier Service Policy is the central part of implementing world- class supply practices.

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3.SUPPLIER SERVICE POLICY (SSP)

This is a set of guidelines for choosing suppliers, monitoring supplier performance, and designing inbound logistics programs. *This is part of implementing of world class supply services

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What the Supplier Service Policy should include

1.

2.

3. 4.

Supplier logistics certification criteria and monitoring to established targets Supplier classification based on logistics performance and activity levels Segmented inbound logistics strategies Nonconformance penalty programs

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1.Supplier Certification Criteria

A key step in supply master planning is the creation of a set of supplier logistics certification criteria, a set of performance measures, logistics capabilities, and other business requirements that must be met or exceeded that qualify a supplier to participate in our supply base.

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1.Supplier Certification Criteria

The logistics information system should compute, monitor, and report supplier performance to these predetermined supplier certification criteria such as on-time delivery, fill rate, delivery quality, documentation, unitization, labeling, packaging, and PPOP.

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2.Supplier Classification

Based on performance to established targets and inbound logistics volumes, suppliers should be classified into three or four segments. One large retailer classifies suppliers as red light (100 percent receiving inspection), yellow light (50 percent receiving inspection), and green light (5 percent receiving inspection).

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2.Supplier Classification

The LIS should continually rank and classify suppliers based on their performance to certification standards.

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3.Segmented Inbound Logistics

The performance and activity classification of suppliers should be used in conjunction with the SKU inbound activity classification to segment the inbound logistics activity into nine or more segments. As a minimum, specific inbound strategies should be developed for A items inbound from A suppliers, A items inbound from B suppliers, and so on, to C items inbound from C suppliers.
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3.1 Inbound logistics strategy and stratification

Supply Plan Dry groceries Perishables clothing . . ..

Suppliers A B C D

D A

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4.Nonconformance Penalties
An important follow-up to the creation of supplier certification criteria is the design of rewards and penalties for extraordinary performance or nonconformance to established criteria. Typical rewards are high-profile vendor recognition, long-term contracts, and sole sourcing.

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4.Nonconformance Penalties

Typical penalties include fines for specific violations of the certification criteria, sourcing reductions, and/or rejected receipts. The LIS should support and automate a program of chargebacks for nonconformance to stated criteria according to published nonconformance charges.

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4.Designing a supply management system

For each cross-section of suppliers and items , an optimal inbound logistics strategy is recommended based on improvements in customer service and logistics cost reductions

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The optional strategies include

Vendor managed inventories (VMI) for stable, popular items coming from reliable suppliers Cross-docking for time-sensitive products Traditional warehousing and delivery for slowmoving products and commodities Consignment inventory for promotional items Outsourcing to wholesalers for the slowest moving items in all categories
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5.Developing a supply organization

You develop a supply organization through engaging in SUPPLIER INTEGRATION AND RELATIONSHIP MANAGEMENT

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SUPPLIER INTEGRATION AND RELATIONSHIP MANAGEMENT

The supplier base is really an extension of the enterprise As such, supplier relationships (face-to-face, telecommunications, or the Internet) need to be developed as aggressively and strategically as customer relationships.

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supplier relationship management (SRM)

The reliability, predictability, and value added in links with suppliers serve as the foundation for the ability to serve customers reliably, predictably, and with increasing value.

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Recognizing Supplier integration and excellence in SRM

1.

Supplier partnerships

2.
3. 4.

Vendor managed inventory (VMI)

Forecast sharing Supply chain collaboration, optimization, scheduling, and simulation Pre-receiving Standard, economic-handling increments Supply chain exchanges
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Supplier Partnerships

Supplier partnerships are the ultimate expression of supplier integration implying sharing in profits and losses stemming from changes in the material, information, or cash flows between two organizations.

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Managing Through Teams

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Supply Chain Management Key Issues

ISSUE Network Planning CONSIDERATIONS
Warehouse locations and capacities Plant locations and production levels Transportation flows between facilities to minimize cost and time

Inventory Control
Supply Contracts Distribution Strategies

How should inventory be managed? Why does inventory fluctuate and what strategies minimize this?
Impact of volume discount and revenue sharing Pricing strategies to reduce order-shipment variability Selection of distribution strategies (e.g., direct ship vs. cross-docking) How many cross-dock points are needed? Cost/Benefits of different strategies How can integration with partners be achieved? What level of integration is best? What information and processes can be shared? What partnerships should be implemented and in which situations?

Integration and Strategic Partnering

Outsourcing & Procurement Strategies Product Design

What are our core supply chain capabilities and which are not? Does our product design mandate consider different outsourcing approaches? Risk management How are inventory holding and transportation costs affected by product design? Lic. E. Mak How does product design enable mass customization?

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Supply Chain Management Key Issues

Purchasing Manufacturing Distribution Customer Service/ Sales
High inventories

Low purchase price Multipl e vendors

SOURCE

Few changeovers Stable schedules Long run lengths MAKE

Low inventories
Low transportation

High service levels Regional stocks

DELIVER
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SELL
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Supply Chain Management Key Issues

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Plan

This is the strategic portion of supply chain management. A company must have a plan for managing all the resources that go toward meeting customer demand for products or services. A big piece of planning is developing a set of metrics to monitor the supply chain so that it is efficient, costs less, and delivers high quality and value to customers.
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Source

Companies must carefully choose reliable suppliers that will deliver goods and services required for making products. Companies must also develop a set of pricing, delivery, and payment processes with suppliers and create metrics for monitoring and improving the relationships.
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Make

This is the step where companies manufacture their products or services. This can include scheduling the activities necessary for production, testing, packaging, and preparing for delivery. This is by far the most metric-intensive portion of the supply chain, measuring quality levels, production output, and worker productivity.
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Deliver

This step is commonly referred to as logistics. Logistics is the set of processes that plans for and controls the efficient and effective transportation and storage of supplies from suppliers to customers.

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Deliver

During this step, companies must be able to receive orders from customers, fulfill the orders via a network of warehouses, pick transportation companies to deliver the products, and implement a billing and invoicing system to facilitate payments.
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Return

This is typically the most problematic step in the supply chain. Companies must create a network for receiving defective and excess products and support customers who have problems with delivered products.
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Supply-Chain Performance Compared

Typical Firms
Number of suppliers per purchasing agent Purchasing costs as percent of purchases Lead time (weeks) Time spent in placing order Percentage of late deliveries Percentage of rejected material Number of shortages per year

Benchmark Firms

34 3.3% 15 42 minutes 33% 1.5% 400

5 0.8% 8 15 minutes 2% .0001% 4