Part 6- Procurement in the SC Flashcards
The procurement step
Buying materials is the next step after the planning process is completed
- raw materials of components for a manufacturing company
- finished goods for a distributor
The definition of procurement
The definition of procurement: The transaction function of buying products or conducting services
To buy or make?
choose between internal production (make) and external sources (buy)
example: buy or make the wheels for a bike-maker
Example: Breakeven analysis
Machine- 500 000usd + 20usd per wheel OR buy for 30usd per wheel
500 000 + 20Q = 30Q
Q = 50 000 wheels (25 000 bikes)
Higher demand- make
Lower demand- buy
Benefits of outsourcing
- focus on core activities (focus their assets, experience and energy on the core activities and outsource the other parts of the business)
- cost savings
- reduce investment in capital expenditure (CAPEX)- buy a machine, rent a warehouse etc → if market change you won’t have to sell the machine etc
- increased flexibility
Disadvantages of outsourcing
- security risk → confidentiality and loss of sensitive information
- loss of management control of business functions
- quality problems → expectations, regulations ++
- loss of focus of the supplier → the supplier has many other customers and the company are just one out of many, maybe others are more important and we are the last ones in the queue
- hidden costs and legal problems
- financial risks → if a supplier of your company has legal/ financial problems it will cost your reputation as well as you are associated with them
- incompatible culture (poor communication)
Other SC strategies
1) In-sourcing → reversed the outsourcing process and starting making those functions by themselves
2) Vertical integration → for big companies that buy your supplier or your customer
3) Near sourcing → we bring the wheels from China and we have experienced delays, bad quality etc. Lets decrease the risk and bring the wheels to Romania, closer to the company and the manufacturing plans.
4) Few or many suppliers
5) Joint ventures → We don’t have enough financial capital to buy the company producing the wheels but we can have a joint venture and work together
6) Virtual companies → providing customer services etc online and outsource all the manufacturing and functions
The procurement process- steps
1) Identify and review requirements
2) Establish specifications
3) Identify and select suppliers
4) Determine the right price
5) Issue purchase orders
6) Follow up to assure correct delivery
7) Receive and accept goods
8) Approve invoices for payment
Step 1- identify and review requirements
2 different types of procurement activities
1) Direct procurement- (production related) purchasing of raw materials and production goods
2) Indirect procurement- maintenance, repair and operating supplies, capital goods and services
Sources for requirement:
- MRP
- Planners
- Purchase requisitions from other users within the company
Step 2- establish specifications
Normally the description of the item may be by brand or specification.
- Brand- quantity too small or if the item is patented or requested by a customer
- Specification- if u are looking for a very specific material or performance specifications
Source of specifications based on:
- buyer requirements
- standards set by government or nongovernmental agencies
Step 3- identify and select suppliers
1) Identification of potential suppliers from different channels
2) An RFI (request for information) is sent to potential suppliers
3) A RFQ (request for quotation) is sent to the selected list of potential supplies inviting them to bid or quote on delivering specific products - requested to return their bids meeting a precise deadline
Important factors when selecting a supplier (apart from price)
- technical ability → do they have the technical ability to produce?
- manufacturing capacity → can they deliver the amount we require? Will we have delays?
- reliability- can you trust they deliver quality on time? Are they reliable?
- after-sale services- are the contract is signed the after-sales department isn’t good and don´t provide the information necessary, can’t reach them etc
- location- very important for the logistics and distribution
Step 4- determine the right price
Negotiations depend on the type of product:
Commodities → price from market
Standard products → price from listings, usually little room for negotiation
Small value items → companies should try to reduce ordering costs or increase volume when possible
Made-to-order items → price based on quotations from different sources (suppliers)- price negotiated when possible
2 types of negotiations:
- Distributive (winner/loser)- big companies with big volume necessities may have a much stronger bargaining power
- Integrative (win-win)- more collaborative
Step 5- issue purchase orders
Types of purchase orders:
1) Discrete orders- one single transaction
2) Prenegotiated blanket- containing multiple delivery dates over a period of time, lower price because volume is higher on a long-term contract
3) Prenegotiated vendor-managed inventory (VMI)- supplier maintains an inventory of items at the customers plant and the customer pays for the inventory when its actually consumed
4) Bid and auction (e-procurement)- purchasing is done online using catalogs, exchanges and auctions to speed up the process, reduce costs and integrate the SC
5) Corporate purchase card (Pcard) pr procurement cards- goods can be purchased without using the traditional purchasing process
Step 6- Follow up to ensure correct delivery
- to identify and avoid possible delays
- supplier performance should be monitored on an ongoing basis
Step 7- Receive and accept goods
- make an inspection to make sure they follow the requirements we have
- check the documentation is correct
- guarantee the quality
- if there are any problems we stop the payment process immediately and the funds are not released until we get a compensation
