Procurement And Materials Management

Procurement And Materials Management


It Is Not Always Economical For The Companies To Make All The Materials Used In Manufacturing.

Some Items Are Procured From Others, And Some Are Produced In The Company.


Some Reasons For Making:- Lower Production Cost- Unreliable Or Unsuitable Suppliers- Assure Adequate Supply (Quantity)- Utilize Surplus Labor Capacity- Obtain Desired Quality- Protect Special Design Or Quality


Some Reasons For Buying:- Lower Acquisition Cost- Inadequate Capacity- Reduce Inventory Costs- Ensure Alternative Sources Of Supply- Item Is Protected By A Patent Or

Trade License


Choosing Between Making or Buying An Item Is Largely Dependent On The Vertical Integration Strategy Of A Company.


By Vertical Integration, We Mean Developing The Ability To Produce Goods Or Services that are Previously Purchased.

It Can Take The Form Of Forward Or Backward Integration:



Because Purchased Items Represent A Large Part Of The Costs, Many Organizations Find Interest In Vertical Integration.

For example, Murat Ticaret Originally Produces Cable. Then It Started Producing Cable Cords For Automobiles (Otosan, Dodge, Otoyol, Etc.)


Vertical Integration Is Adventageous When The Organization Has Large Market Share.

Backward Integration May Be Dangerous For Firms In Industries Undergoing Rapid Technological Changes.

Materials Management

Purpose Of Materials Management Is To Obtain Efficiency Of Operations Through Integration Of 1) Material Acquisition, 2) Material Movement, and 3) Material Storage.


When Transportation And Inventory Costs Are Substantial,

A Focus On Materials Management Is Appropriate.

Materials Management Some Basic Functions Of Materials

Management:- Shipping- Purchasing- Warehousing (Raw Material, Wip,

End Material)- Order Processing- Production And Inventory Control


One of the major issues that materials managers might encounter is the method of Procurement.

Materials Management Procurement method is the way of

ordering material. Some of the new developments in

this area include:1) Electronic Ordering2) Stockless Purchasing3) Standardization, and4) Just in Time Purchasing.

Electronic Ordering Electronic Ordering Reduce Paper

Transactions. Paper Transactions Include Purchase

Order, Receiving Document, Authorization To Pay, Etc.

Transactions Between Firms Are Increasingly Done Via Electronic Data Interchange (EDI).

EDI Is A Standardized Data Transmittal Format For Computerized Communications Between Organizations.

Electronic Ordering

It Provides Data Transfer For Any Business Application, Including Purchasing.

For Example, Data For A Purchase Order (Such As Order Date, Due Date, Quantity, Part Number, Order Number, Address, Etc.) Are Fitted Into Standard EDI Format.

Electronic Ordering The Data Are Then Sent From One

Computer To Another By Phone Line (Internet)

A Computer Program Is Used To Read Those Data Into The Receiving Company’s Files.

Electronic Ordering Also Speeds Up The Traditionally Long Procurement Time.

Stockless Purchasing

This Means That The Supplier Maintains The Inventory For The Purchaser.

Here, The Cost Of Stocking Inventory Has Been Temporarily Transferred From The Purchaser To The Supplier.

Stockless Purchasing Consignment Inventories

(Konsinye, To Be Discussed Later) Are A Related Option.

If The Supplier Can Maintain The Stocks For A Variety Of Customers Who Use Same Products, Then There May Be Net Savings In This Option.

Otherwise, Purchasing Costs May Go Up.

Standardization Rather Than Obtaining A Variety Of

Components Similar In Labeling, Coloring, Packaging, Etc. The Purchasing Agent Should Try To Have Those Components Standardized.

For Every Component That Is Standardized,

There Is One Less Invoice, One Less Item To Be Inventoried, Etc.

Just In Time Purchasing

Just In Time (Jit) Purchasing Is Directed Toward The Reduction Of

Waste (That Is Present At Incoming Inspection, Excess Inventory and Poor Quality) And Delay.

Just In Time Purchasing

This Waste And Delay is Present In All Production Processes. (Not Only In Purchasing)

Therefore, JIT Approach Can Be Applied To All Areas Of Production.

** The Basic JIT Approach: Every Moment Material Should Add Value.

Goals Of Just In Time Purchasing

1- JIT Tries To Reduce All Non-Value-Added Activities.

(If Purchasing Personnel Can Select More Reliable Vendors, Purchased Items Can Be Received Without Counting, Inspection.)


2- Elimination Of In-Plant Inventory. No Raw Material Inventory Is Necessary

If Materials Are Perfectly Delivered to Where They Are Needed.

Parts Should Be Delivered In Small Lots Directly To The Using Department As Needed.

Elimination Of Inventory Allows Managers To See Production Problems That Are Hidden Behind Those Inventories.


3- Elimination Of In-Transit Inventory In-Transit Inventory Is The Inventory

Flowing Between The Plant And Material Suppliers.

It Can Be Reduced By Encouraging Suppliers To Locate Near The Plant.

(The Shorter The Flow Of Material The Less Inventory And The Less Transportation Costs.)

Goals Of Just In Time Purchasing Another Way To Reduce In-Transit

Inventory Is To Have Inventory On Consignment.

Under A Consignment Arrangement The Supplier Maintains Title To The Inventory.

But, It Locates Its Warehouse Where The User Has Its Stockroom.


4- Quality And Reliability Improvement To Obtain Improved Quality And

Reliability, a) Vendors And Purchasers Must Have

Mutual Understanding And Trust. b) Suppliers’ Long Term

Commitment To The Relationship Should Be Increased.

Physical Distribution Management

Products need to be distributed to the customers.


Today, many manufacturer companies utilize Multi-Echelon inventory systems.

In multi-echelon inventory systems, Products are stored at different points, before reaching to the customer.


After manufacturing the Products, the Manufacturer stores them in its own warehouse.

From there, they are Transported to regional warehouses. These regional warehouses serve as a distribution point for retail stores. (figure)

Physical Distribution Management When the retail stores require products,

They will request them from their local warehouse.

The function of the Regional Warehouse is to provide an Intermediate Stage in the distribution system SO THAT manufacturer Does Not have to deal with every single customer.

This also means that, Customers DO NOT have to Reach to the manufacturer’s plant.

Transportation

Physical distribution managers must ALSO decide on which mode of transport is Best to distribute Products to the Customers.

Transportation

Available modes of transport are:-Road transport (cars, trucks),-Railway transport,-Water transport (ships),-Air transport, and-Pipelines (oil, natural gas).

Transportation

Air transport is very expensive and limited in Space availability.

Therefore, It is usually preferred for small-quantity, high-value products, which require fast delivery (e.g., highly fragile electronic parts).

Transportation

On the contrary, Water or Railway transportation is slower BUT cheaper. Therefore, they are used for carrying Large Quantities of raw materials (e.g., coal and iron).

Transportation

Transportation There may be some limitations on

these modes of transport, as well. For example, only Gas and Liquids

can be conveniently transported by Pipelines.

Similarly, very large products (such as building sections) would not fit in most Aircrafts.

Transportation However, the mode of transport is usually

Chosen with reference to the Relative Importance of the following factors:

- Delivery speed- Delivery dependability (reliability)- Quality deterioration- Transportation cost, and- Route flexibility.

Transportation

The following table gives a ranking of each mode of transport based on these factors:

(1 = Best Performance; 5 = Worst Performance)

Transportation

Transportation The selection of the transportation

mode will also affect other decisions related to the management of operations.

For example, firms may choose to locate their facilities near to ports or airports, or railway sidings, or close to motorways depending on the selected mode of transport.

Contract Terms

In any exchange between buyers and suppliers, both sides have to agree on Who will Pay for the transportation.

This becomes a particular issue in international trade Where knowledge of international trade agreements and legislation are critical to purchasing Successfully from other Countries.

Contract Terms

Internationally recognized shipping terms are now in operation which are applied to international transportation by sea or air.

The main definitions of these terms are as follows:

Contract Terms

Ex-works: In an ex-works contract, the purchaser accepts full responsibility for arranging transportation from the supplier’s location.

Contract Terms This involves: (1) Arranging

transportation, insurance, and documentation to move the goods to the required source port (air or sea), (2) Have them loaded on to the mode of transport, (3) Transported to, and unloaded at the destination port, (4) Cleared through customs and transported to the purchaser’s location.

Contract Terms

Contract Terms

More recently, purchasers and suppliers have sub-contracted this transportation function to specialists such as Federal Express.

Contract Terms

Free alongside (FAS): In this arrangement, the supplier agrees to deliver to the (source) port specified by the purchaser

and is responsible for the transportation and insurance of the goods Until that point.

Contract Terms

However, the purchaser has to arrange and pay for loading on to the vessel and all onward transportation, insurance, and documentation.

Contract Terms

Contract Terms

Free on board (FOB): Here the supplier pays for and arranges loading on to the outward-bound transportation and thereafter the purchaser becomes responsible.

Contract Terms

Contract Terms

Cost and Freight (C&F): This is a split responsibility arrangement in that the supplier arranges and pays for transportation to an agreed point,

But the purchaser has to pay insurance from when the goods are loaded on board.

Contract Terms

The purchaser has to acquire any documentation required by the country of origin.

Once the goods have been unloaded at the port of entry, the purchaser is responsible for all ongoing transportation and insurance.

Contract Terms

Contract Terms

Cost, Insurance, and freight (CIF): This is similar to C&F But here the insurance during transportation is responsibility of the supplier.

Contract Terms

Delivered: This is the opposite of ex-works in that the supplier has total responsibility for the goods, their transportation, insurance, and all documentation until they are delivered to the purchaser.

Logistics

Logistics originated during the Second World War when it related to the movement and co-ordination of troops to the required location.

Logistics

When adopted by the business world as a concept It referred to the movement and coordination of finished products.

Logistics

Logistics function manages the total flow of products from the plant to the customers.

As contrary to the materials management, Logistics provides an emphasis on physical distribution management.

Logistics

However, These minor differences are present because of the backgrounds of the two groups who have originated the concepts.

Generally, the logisticians tend to come from marketing discipline.

Logistics

On the other hand, The materials managers come from operations management,

(Particularly from purchasing). During the last twenty years, an

even broader, and statistically significant concept emerged:

Supply Chain Management

Logisticians have devoted little attention to managing the chain of supply up to the purchasing function.

And similarly, materials managers have ignored the management of the flow of products down to the customers through distribution channels.


On the contrary Supply Chain Management views the entire chain as a system to be managed.

It can be defined as “managing the entire chain of raw material supply, manufacture, assembly and distribution to the end customer.”


In long supply chains, it is not easy to co-ordinate the whole chain.

This is especially true when part of the supply chain serves two sets of end cutomers.

Supply Chain Management For example, many manufacturers of

automobile components serve two different groups of end customers:

- One group buys new cars (vehicle market)

- The other group buys spare parts for repair of their cars (spares market)

The spares market is also known as “aftermarket” for the car components.



The Role of Inventory, The planning and control priorities, and price negotiations will All be different for each chain.


Since the components for both chains are produced by the same Component Manufacturer, Operations should be split between the two chains, AND they should be well managed.

Types of Relationships in Supply Chains

1- Integrated Hierarchy2- Semi-Hierarchy3- Co-Contracting4- Coordinated contracting5- Coordinated revenue links

Types of Relationships in Supply Chains 1) Integrated hierarchy means that

a firm houses all activities in the supply chain

FROM raw material source TO distribution of products to end users (figure).

This is also called Full Vertical Integration.

Types of Relationships in Supply Chains 2) In a Semi-hierarchy organization, the

firms in the Supply Chain are owned by the same holding Company, But they operate as Separate Business Units.

For example, An Oil Company delegates the following activities to the following business units: Oil extraction, Oil refining, Petrol Distribution, and Petrol Retailing.

Types of Relationships in Supply Chains 3) Co-contracting is a term used to

describe alliances between organizations that have

Long term relationships but do not Merge together.

They rather transfer some Equity (ownership), technology, Information, AND People.

Such alliances are evident in aerospace industry (Airbus transfers technology with others).

Types of Relationships in Supply Chains 4) Coordinated Contracting involves a

prime contractor who employs a set of sub-contractors.

For example, a building trader (or decorator) employs a set of sub-contractors, such as carpenters, electricians, and bricklayers AND calls them when needed.

There is a long-standing relationship between contractor and sub-contractors.


The contractor provides Materials and usually take responsibility for the planning and control of the entire job.

But the sub-contractor provides the necessary equipment required for its profession.


5) The category of Coordinated revenue links is used primarily for Licensing and Franchising. (e.g., fast food chains)


It is a form of relationship that transfers ownership to other firms (usually smaller) while guaranteeing an income for the franchiser or the licensor.

Types of Relationships in Supply Chains In this form of contract Franchiser, - Has the property rights of the

product- sets the territory in which the

franchisee can operate- sets the process specification to be

used in operations, and- monitors the performance of the

franchisee.

Procurement And Materials Management

Health & Medicine

materials managers

time purchasing

time jit purchasing

purchasing agent

inventory costs

raw material inventory

long procurement time

elimination of inventory