Supply Chain Management : Background

1. Supply Chain Management : Background

2. Production & Operation Management By Prof Srikanth Venkataswamy

3. Purchasing What is Purchasing ? Purchasing is an “Act” Of Buying an item at a price.

4. Objective Of Purchasing The Basic objective of Purchasing Is To procure : 5 R’s • The right material • With the right quality and Along With the right quantity • At the right Time • For the right Price • From the right source

5. Goals of Purchasing • Uninterrupted Flow Of Material • Manage Inventory • Improve quality • Developing and managing suppliers relationship • Achieve Lowest Total costs • Reduce administrative costs • Advance firm’s competitive Position

6. Importance Of Purchasing • Purchase function provides material and flow of materials to the Organization. • Provides Effective Buying • As purchase Of material Contributes almost 50% to 60% of the organizational spending budget led to efficient buying and cost saving structure. • Helps in proper Planning and control of materials. • Helps in better forecast , scheduling, capacity planning to the top management.

7. Centralized & decentralized Purchasing Centralized & decentralized Purchasing is the matter of discretion and policy. Centralized Purchasing: Is the policy of the Management where all purchases of the entire organistion is made by a single purchase department.

8. Merits of Centralized Purchasing • Uniform purchasing policy/Duplicacy avoided: • Better cost (economics of large scale buying)& quality control: • Control on Multiple buying: • Healthy Supplier buyer relationship: • Effective Flow of materials/Supplies: • Efficient Departmental line of control • Better cash Flow/working capital or Financial management:

9. Demerits of Centralized Purchasing • Efficiency of other related departments depends On the efficiency of the purchase department. • No localized Purchase advantages: • Delay in supply & Receipt Of materials: • Room for Miscommunication/ gaps in line of authority. • Unsuitable for small buys or for perishable goods or distance between the purchase & production been very Large : • Huge Transitional procedures, systems, Paperwork, approvals & costs

10. Decentralized Purchasing Decentralized Purchasing: Stands for extended line of authority to make independent decision and act up them.

11. Merits of Decentralized Purchasing • Better decision freedom /cut on In Efficiency & short comings of the centralised department: • Close Vendor – vendee relationship directly with the user departments: • Hands on to tap local Advantage: • Effective follow up/Better interdepartmental co-ordination: • Reduce in Transitional procedures, systems, Paperwork, approvals & costs: • Reduction of overloading of centralized Purchase Departments • Streamlined & better Control on the decentralized units for the top management.

12. Demerits of Decentralized Purchasing • Lack of uniform or standard Practices with the different units of the organistion: • Underutilization of services of Experts: • Absent of Economics of Large Scale Buying: • Sometimes Maintaining Decentralized department may be costlier. • May lack centralized coordination between different departments and may lead to conflicts.

13. Steps Involved In Purchasing • Need recognition • Description of the need/ Specification of the requirements • Suitable source selection • Determination of price & availability

14. Industrial Buying- Decision Process Phases In Buying Decision Process : • Recognition Of problem or need • Description of the need/ Specification of the requirements/Determination of the application or Characteristics and Quantity of needed product /Development of specifications or description of Need • Search for source and Qualification of Potential suppliers

15. Industrial Buying- Decision Process Cont… • Obtaining and analyzing supplier proposal and selection of suppliers/ Determination of price & availability • Selection of an order Routine/Placing purchase orders • Performance feedback/Delivery Of material : • Post Purchase evaluation: Checking Invoice/approval quality & Quantity/Making payment

16. Purchasing cycle Recognition Of problem or need Description Specification of the Need Search for source & Qualification of Potential suppliers selection of suppliers Post Purchase evaluation Feedback Delivery Of material Routine/ Placing PO

17. Phases In Buying Decision Process : Phase-1 Recognition Of problem or need : The Recognition of a problem or need May originate within the Buying firm or may also be recognized By a Smart Marketer.

18. Phase-2 Determination of the characteristics and Quantity of needed product : Once The problem is recognized within or outside the organization, The next Phase Is How To resolve the problem. Questions : What Type of products or services to be considered ? What quantity of product needed?

19. Phase –2 contd…. For technical Products: The technical depts like R&D , industrial engineering, production or Quality control Will suggest general Solutions of The needed Product. For Non-technical Products & services: Either the User dept or the Purchase dept May suggest products & services Based On experience and also the quantity required to solve the problem or by any external source as well.

20. Phase-3 Development of Specifications Of Needed Product : Phase 2 & 3 are Closely related, once the problem is Recognized and determined, in this Phase development Of a precise statement of specifications and Characteristics are taken up . Outside sources Such as suppliers & Consultants may also be contacted .

21. Search phase Phase 4- Search & Qualification Of potential supplier In the Phase the Buying organization Searches for acceptable suppliers or vendors. The search for potential buyer is based on various sources of information like trade journals, sales calls, word- of –Mouth,catalogues,trade shows,industrial directories, associations, approved list from approval agencies,web sites and other media.

22. Phase-5Obtaining and Analyzing supplier Proposal • Once the qualified suppliers are decided • Float enquiries (RFQ) • Obtain proposal- In form of a formal bid, quotation or written e-mail

23. The proposal should Include- • Product Specification Details • Price • Delivery Period • Payment terms • Taxes & levies • Transportation Type & cost • Insurance-transit , product etc. • Any other Costs , discounts (if any),Delivery schedule,(Quantity ) • Other details

24. Selection of supplier/Source • General soundness of the supplier in Consideration. • Financial strengths • Technical Proficiency/manufacture or supplying abilities • Flexibility and cooperative ability • Special consideration influencing the choice • Size of the supplier/SWOT Analysis • Supplier’s client List / List Of clients/ background • Delivery adherence : confirmation/Analysis.

25. Purchasing policy • Tenders • Make or Buy • Vendor analysis and vendor rating • Ancillarisation • Ethics • Purchasing For the benefits Organisation • Gifts

26. Modes of Tendering • Open tendering • Global tendering • Limited Tendering • Single tender • Spot tender.

27. Make or Buy Decision • Making or Buying an item • Making the item now bought out • Buying the item now made The Two Factors to be consider in Make Or Buy Decision are: • Cost • Production Capacity

30. Inventory Management

31. The central focus of most manufacturing layouts is to minimize the cost of processing, transporting, and storing materials throughout the production system. • Materials used in manufacturing include: • Raw material • Purchased components • Work-in-progress • Finished goods • Packaging material • Maintenance, repair, and operating supplies

32. What are Inventories ? Inventories are the stocks Of materials Of any Kind stored for future operations. Inventories Includes materials like : • Raw materials • Semi Finished goods • Work-in-process • Finished Goods • Consumables • Maintenance Spare Parts

33. Objective Of Inventories Objective Of Inventory Management are: • To facilitate smooth Operations of the manufacturing process Or Balance Demand to Supply. • To run the operations economically • To minimize investment on inventory. • To reduce material Handling costs and other Costs. • To eliminate Uncertainties- • Uncertainties in demand from customers • Uncertainties in Procuring the material. • Reasonable utilization of manpower and Other resources. • Contribute to the efficient and effective operation of the production system.

34. Inventory Costs Four types of Inventory costs: • Ordering Costs • Inventory Carrying Costs • Out -Of-stock or stock out Costs • Capacity costs

35. Inventory Costs 1.Ordering Costs 2.Inventory Carrying Costs 3.Out-Of-Stock Costs 4.Capacity Costs

36. Inventory costs: 1.Ordering costs 1.Ordering costs: Cost Of Placing an order – • Preparing a purchase order. • Processing Payments. • Receiving & inspecting the material.

37. Inventory costs: 2.Inventory carrying costs • Costs connected directly with the Materials • Obsolescence • Deterioration • Pilferage • Costs connected to finance. • Taxes • Insurance • Storage • Interest On Capital • Interest On inventory

38. Inventory costs: 2.Inventory carrying costs contd… Details Of Carrying costs- Capital Goods: • Interest On Capital Invested In inventory. • Interest On Capital Invested on land & building to hold the inventory. Rent On Building Taxes & insurance on Building /inventory ,Depreciation ,Cost of maintenance & repairs, Utility Charges, Salaries Of security, maintenance personnel • Interest On Capital Invested In inventory Holding and control equipment.

39. Inventory costs: 2.Inventory carrying costs contd… Handling –Equipment costs: • Cost of Capital on equipment • Taxes & insurances On equipment • Depreciation • Fuel expense • Cost Of maintenance and repairs

40. Inventory costs: 3. Out-Of-Stock costs • Back ordering • Lost sales

41. Inventory costs: 4. Capacity costs • Overtime payments when capacity is too small • Layoffs and idle time when capacity is too large.

42. Different costs Involved • The cost of holding the stock (e.g., based on the interest rate). • The cost of placing an order (e.g., for row material stocks) or the set-up cost of production. • The cost of shortage, i.e., what is lost if the stock is insufficient to meet all demand. The third element is the most difficult to measure and is often handled by establishing a "service level" policy, e. g, certain percentage of demand will be met from stock without delay.

43. Costs & EOQ Total costs Carrying costs Cost/Period Ordercosts Min EOQ

44. Factors Affecting Inventory Costs Factors Affecting Inventory costs Sales Characteristics Market Characteristics Production Characteristics

45. Factors Affecting Inventory Costs • Sales Characteristics- • Size & frequency of the order • Uniformity Or Probability of Sales • Service Requirements • Distribution Pattern • Accuracy, Frequency & Details Of sales forecasts

46. Factors Affecting Inventory Costs 2. Production Characteristics: • Types Of production • No Of Manufacturing Stages • Degree of specification Of the Product at specific Stages • Processing Time At Each Stage • Production Flexibility • Capacity Of production & Warehousing Stages • Kind Of Processing

47. Factors Affecting Inventory Costs • Market Characteristic: • Procurement Cycle • Internal Lead Time • Frequency Of Cancellation of the Purchase Orders • Terms Of Payments • Discounts • Speculation • Imports • Govt/Organisational Polices • Shortages/Rising Prices • Other Marketing Forces.

48. Process Of Inventory Management & control • Determination of optimum inventory Analysis • Determination The Optimize degree of stock control required. • Planning and design of the inventory control system • Planning Of the inventory control Mission

49. Why We Want to Hold Inventories • Improve customer service • Reduce certain costs such as • ordering costs • stock out costs • acquisition costs • start-up quality costs • Contribute to the efficient and effective operation of the production system

50. Why We Want to Hold InventoriesContd… • Finished Goods • Essential in produce-to-stock positioning strategies • Necessary in level aggregate capacity plans • Products can be displayed to customers • Work-in-Process • Necessary in process-focused production • May reduce material-handling & production costs • Raw Material • Suppliers may produce/ship materials in batches • Quantity discounts & freight/handling $$ savings