UNIT III: PURCHASING AND VENDOR MANAGEMENT Purchasing and Vendor Management: Centralized and Decentralized Purchasing, Functions of Purchase Department and purchase polices, Use of Mathematical model for Vendor Rating/ evaluation, single vendor concept, Management of stores, Accounting for materials, Just- in- time and Kanban System of inventory management. Purchase is the procurement of goods or services from some external sources. Acquisition of some kind in lieu of accepted price on consideration in return. “Purchasing is the procurement of the materials, supplies, machines, tools and operation of a manufacturing plant.” ---------- Alford & Beatty Objectives of purchasing: 1. To acquire the goods or services at minimum cost. 2. To ensure the continuous flow of production. 3. To develop the main and attenuate sources of supply. 4. To ensure timely delivery. 5. To make optimum utilization of capital. 6. To acquire quality product so that quality output is served to the consumer. Types of Purchasing:
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UNIT III: PURCHASING AND VENDOR MANAGEMENT
Purchasing and Vendor Management: Centralized and Decentralized Purchasing,
Functions of Purchase Department and purchase polices, Use of Mathematical model for
Vendor Rating/ evaluation, single vendor concept, Management of stores, Accounting for
materials, Just- in- time and Kanban System of inventory management.
Purchase is the procurement of goods or services from some external sources.
Acquisition of some kind in lieu of accepted price on consideration in return.
“Purchasing is the procurement of the materials, supplies, machines, tools and
operation of a manufacturing plant.”
---------- Alford & Beatty
Objectives of purchasing:
1. To acquire the goods or services at minimum cost.
2. To ensure the continuous flow of production.
3. To develop the main and attenuate sources of supply.
4. To ensure timely delivery.
5. To make optimum utilization of capital.
6. To acquire quality product so that quality output is served to the consumer.
Types of Purchasing:
1. Purchase made as per requirement: No purchase is made in advance. Purchase is
done as need arises. Method usually applied for emergency requirement or
infrequent goods.
2. Contract Purchasing: Contract of material is given to an agency. It has an
advantage that low price of those materials whose cost fluctuates highly.
3. Market Purchase: Purchase is made from the market to take advantage of price
fluctuations.
4. Schedule Purchasing: It is a cyclic purchase model. A schedule of purchase is
made and it is used for those commodities whose price do not fluctuate.
Purchasing Procedure:
1. Purchase Requisition: All the departments of the organisation are asked to make a
requisition for purchase.
2. Decision of Purchase: Collecting requisition from various departments and
handed it to Purchase department / committee head. Purchase head decide what to
purchase and in what quantity.
3. Study of Market conditions: Market trends are analysed to generate an idea of
price and availability of product.
4. Selection of Vendors.
5. Placing of Purchase order.
6. Receiving of order.
Functions / Responsibilities of Purchase Department:
1. Obtaining prices
2. Selecting vendors
3. Placing Purchase order
4. Settlement of complaints
5. Making and maintaining harmonious relations with vendors.
There are many ways to run a purchasing department. What business functions are
included is one. Some companies include various material management responsibilities,
inventory control, warehouse and logistics in the one department. In larger companies
you might find all of these functions as separate departments.
The major question is always whether to be centralized or decentralized. This is usually a
decision of top management, Chief Purchasing Officer, Director of Purchasing or
possibly the Chief Executive Officer or owner. There is no magic formula to determine
which way is the best.
Centralized purchasing means buying and managing purchases from one location for all
locations within an organization. This can also be run by a central location buying in to a
distribution warehouse that feeds smaller warehouses. This is called a hub and spoke
system.
The responsibility and authority to purchase, lease, or rent materials, supplies, goods,
equipment, or services are placed with the Division of Finance and Operations,
Purchasing and Stores Department.
Purchasing is centralized to:
*realize economy, efficiency, and effectiveness in the procurement function;
*pursue quality assurance and standardization;
*maintain the highest standards of ethics;
The control by a central department of all the purchasing undertaken within an
organization. In a large organization centralized purchasing is often located in the
headquarters. Centralization has the advantages of reducing duplication of effort, pooling
volume purchases for discounts, enabling more effective inventory control, consolidating
transport loads to achieve lower costs, increasing skills development in purchasing
personnel, and enhancing relationships with suppliers.
Advantages of Centralized Purchasing
Volume purchasing – When the district is able to purchase a single item in mass, vendors
are often willing to provide a discount. Purchasing in mass to take advantage of discounts
is called volume purchasing.
Warehouse – In order to take advantage of volume pricing, the district purchases items in
bulk. Vendors typically require that the district take delivery of the items in mass. These
bulk purchases are stored in the warehouse until the items are requested by the sites.
Save time in researching products – Individuals spend hours to research the products and
to find best price. The purchasing department has resources to help reduce the time to
research products.
Disadvantages of Centralized Purchasing
Good processes are not without their shortcomings. Listed below are some of the
challenges of buying in a school district and suggestions on how to help the Purchasing
department minimize their effects.
Extended procurement time – One problem that is commonly associated with centralized
purchasing is the perception “it takes too long”. In reality, the purchasing department
processes vendor requisitions typically within one (1) day. Typically the delay in the
request is either: time spent to research the product, funding sources (account code check
and budget approval), vendor stock status, and shipping.
Decentralized purchasing is the opposite where each plant or office buys what it
needs. This operation allows any employee to buy what he needs. You can also run this
operation with a designated buyer assigned to the site to do the buying.
The more decentralized an operation is, the less control the home office has. You have a
duplication of effort in buying and less buyer specialization. You lose discounts on
quantity buys. You lose freight options based on dollars or weight. Also some support is
lost from the supplier as there is no single contact for the supplier to deal with. Volume
buying may not be calculated for all your sites.
Advantages of decentralized purchaseing
Advocates of decentralization claim that local management has the incentive to control
cost when the local operation is set up as a profit center. Many companies operate with a
mixed system. The central operation may buy major commodities but allow local
operations to buy all MRO supplies.
It is difficult to change from decentralized purchasing to centralized
purchasing. Employees feel their privileges are being taken away. They feel they are
losing control of their site. Some will refuse to really cooperate in the changes in hopes to
making the program look unsuccessful.
VENDOR RATING
Vendor ratings are used to rate vendors as entities; however, they are also used to rate
different aspects of a vendor, such as its strategy, organization, products, technology,
marketing, financials or support. Vendors with a clear focus, solid products and an
advantageous market position may be rated "positive" or "strong positive." Vendors or
product lines that lack these qualities may be rated "caution" or "strong negative."
Vendors that have potential, but which we believe should be very carefully evaluated, are
rated "promising."
Additionally, vendors that are rated a "strong negative" are put on a vendor alert list,
while vendors that are rated a "strong positive" are put on a vendor opportunity list.
These vendors, in particular, will be closely monitored.
It was out of a need to maintain the level of improvements that the kanban system was
devised by Toyota. Kanban became an effective tool to support the running of the
production system as a whole. In addition, it proved to be an excellent way for promoting
improvements because reducing the number of kanban in circulation highlighted problem
areas.
Origins
The term kanban describes an embellished wooden or metal sign which has often been
reduced to become a trade mark or seal. Since the 17th century, this expression in the
Japanese mercantile system has been as important to the merchants of Japan as military
banners have been to the samurai. Visual puns, calligraphy and ingenious shapes — or
kanban — define the trade and class of a business or tradesman. Often produced within
rigid Confucian restrictions on size and color, the signs and seals are masterpieces of logo
and symbol design. For example, sumo wrestlers, a symbol of strength, may be used as
kanban on a pharmacy's sign to advertise a treatment for anemia.
In the late 1940s, Toyota was studying supermarkets with a view to applying some of
their management techniques to their work. This interest came about because in a
supermarket the customer can get what is needed at the time needed in the amount
needed. The supermarket only stocks what it believes it will sell and the customer only
takes what they need because future supply is assured. This led Toyota to view earlier
processes, to that in focus, as a kind of store. The process goes to this store to get its
needed components and the store then replenishes those components. It is the rate of this
replenishment, which is controlled by kanban that gives the permission to produce. In
1953, Toyota applied this logic in their main plant machine shop.
Operation
An important determinant of the success of "push" production scheduling is the quality of
the demand forecast which provides the "push". Kanban, by contrast, is part of a pull
system that determines the supply, or production, according to the actual demand of the
customers. In contexts where supply time is lengthy and demand is difficult to forecast,
the best one can do is to respond quickly to observed demand. This is exactly what a
kanban system can help: it is used as a demand signal which immediately propagates
through the supply chain. This can be used to ensure that intermediate stocks held in the
supply chain are better managed, usually smaller. Where the supply response cannot be
quick enough to meet actual demand fluctuations, causing significant lost sales, then
stock building may be deemed as appropriate which can be achieved by issuing more
kanban. Taiichi Ohno states that in order to be effective kanban must follow strict rules of
use (Toyota, for example, has six simple rules) and that close monitoring of these rules is
a never-ending problem to ensure that kanban does what is required.
A simple example of the kanban system implementation might be a "three-bin system"
for the supplied parts (where there is no in-house manufacturing) — one bin on the
factory floor, one bin in the factory store and one bin at the suppliers' store. The bins
usually have a removable card that contains the product details and other relevant
information — the kanban card. When the bin on the factory floor is empty, the bin and
kanban card are returned to the factory store. The factory store then replaces the bin on
the factory floor with a full bin, which also contains a kanban card. The factory store then
contacts the supplier’s store and returns the now empty bin with its kanban card. The
supplier's inbound product bin with its kanban card is then delivered into the factory store
completing the final step to the system. Thus the process will never run out of product
and could be described as a loop, providing the exact amount required, with only one
spare so there will never be an issue of over-supply. This 'spare' bin allows for the
uncertainty in supply, use and transport that are inherent in the system. The secret to a
good kanban system is to calculate how many kanban cards are required for each product.
Most factories using kanban use the coloured board system (Heijunka Box). This consists
of a board created especially for holding the kanban cards.
E-Kanban Systems
Many manufacturers have implemented electronic kanban systems. Electronic kanban
systems, or E-Kanban systems, help to eliminate common problems such as manual entry
errors and lost cards. E-Kanban systems can be integrated into enterprise resource
planning (ERP) systems. Integrating E-Kanban systems into ERP systems allows for real-
time demand signaling across the supply chain and improved visibility. Data pulled from
E-Kanban systems can be used to optimize inventory levels by better tracking supplier
lead and replenishment times.
VENDOR RATING
Vendor rating is a system providing a single, focused perspective on a vendor and his major products. These vendor ratings represent an overall view of a vendor and his initiatives, much like the industry's use of "buy, or not" recommendations. The research rates a vendor's strengths and challenges, thereby giving investors a clearer sense of a vendor's overall "fitness".
• It is also known as performance monitoring.• It is a rigorous part of purchasing procedure.• It is a system used by buying organizations or industry analysts to record, analyze,
rank, and report the performance of a supplier in terms of a range of predefined criteria, which may include such things as:
Quality of the product or service Delivery performance Price (to supply materials at as low price as possible)
The type of evaluation used for the sources of supply varies with the nature, thecomplexity, and the monetary value of the purchase to be made. It also varies with thebuyer’s knowledge of the suppliers being considered. For simple and low-volume /valuepurchases, the information already in the purchasing department’s file is usually sufficient.For complex as well as high-value/volume purchases, additional evaluation steps may benecessary, which may include a detailed analysis of the supplier’s managerial and servicecapabilities. For an extremely complex purchase, a conference with potential suppliersmay be held at the buyer’s plant. From the discussion it is usually easy to identify thosesuppliers who understand the complexity of the purchase, thus further reducing the list.Financial strength and stability of the supplier company may be essential to assurecontinuity of supply and reliability of product quality. A competent buyer should be able toread and interpret financial reports and make intelligent conclusions from the data. Forexample, when a firm’s financial condition begins to deteriorate, the buyer should begin
looking for another supplier, while continuing to deal with the distressed company withcaution.Plant visits should be made after the choice of suppliers has been narrowed to a few. Suchvisits are made to determine if the suppliers are both capable and motivated to meetcontractual obligations. Usually, during the plant visit, the following aspects are evaluated:i) Adequacy of Equipment: Is the equipment modem or out-of-date? Are theproduction rates adequate? Look for bottlenecks and the number of backorders.ii) Competence of Technical and Managerial Staffs: A contract requiring complexcoordination of development and production coupled with state-of-the-art designrequires managerial skills to have successful performance.iii) Labour-Management Relations: It is beneficial for the buyer to understand thelabor-management relations in the supplier plant as poor relations may result inerratic delivery performance and inconsistent quality standards. On the other hand,good relations may provide the buyer’s company lower-priced items plus goodquality and delivery performance.Past performance provides an excellent insight into probable future success. The key tosuccessful analysis is to identify the important characteristics of the particular purchase.Usually, three important factors are evaluated.Quality Evaluation is simply reviewing the supplier’s record in respect to meeting therequired specifications, which is measured as a percentage of acceptable shipments ordelivery. It should be the policy for the quality-control section to inform the purchasingdepartment of the facts concerning each shipment/delivery.Price Evaluation in its simplest form is the net price quoted in each instance forconforming goods compared to the prices quoted by competitors. Consistency of successand integrity in price behavior would provide a measure criterion.Service Evaluation includes prompt submission of data, response to inquiries, deliveryperformance, special services rendered, and other intangibles. Most of the elements in thisfactor are subjective in nature.
GOALS OF VENDOR RATING• Rectification of defects.• Ability to serve more satisfactorily.• Basis for making future purchase decisions.• Purpose of this scheme is to establish a procedure by which quality control,
purchasing and user departments can fulfill the corporate objective of obtaining the quality products with minimum costs.
ADVANTAGES• Helps in finding best vendor for the organization.• Saves both time and money.• Rates the entire performance of vendor.• Not guided by tunnel vision.• Easy comparison of various vendors and maintaining better relation with best
performers• Can be used as a feedback to vendors for improving the performance.• A supplier or vendor rating system will allow a company to benchmark their
supplier's performance against the performance of similar suppliers serving the company
Source selection is an essential responsibility of any purchasing function. It hasassumed importance in view of growing need of the buyer company to survive in afiercely competitive market. Through proper selection of source, it is possible for abuyer company to have best quantity, required quantity, and improved deliveryperformance from the supplier company. If time-tested and scientific policies, basedon practical considerations and awareness about establishment of good and healthyrelations with the suppliers, are pursued, vigorously and continuously, a strong supplierbase can be developed in the long run. Several techniques have already beenproposed for vendor rating, and given an opportunity, the buyer company shoulddevelop and use a comprehensive vendor performance evaluation system.Socioeconomic factors also need to be considered in source selection.
TECHNIQUES OF VENDOR RATING
CATEGORICAL PLAN :-
Under this method the members of the buying staff related with the supplier are required to assess the performance of each supplier.
Members:- Receiving section, quality control department, manufacturing department etc.
The rating sheets are provided with the record of the supplier, their products and the list of factors for the evaluation purposes.
The members of the buying staff are required to assign the plus or minus notations against each factor.
The periodic meetings, usually at the interval of one month, are held by senior men of thebuying staff to consider the individual rating of each section.
The consolidation of the individual rating is done on the basis of the net plus value.
The suppliers are assigned the categories such as “preferred, neutral or unsatisfactory.”
This is a very simple and inexpensive method. Its quality heavily depends on the experience and ability of the buyer to judge the situation. As compared to other methods, the degree of subjective judgement is very high as rating is based on personal whim and
the vague impressions of the buyer. The rating is done on the basis of memory, and thus it becomes only a routine exercise without any critical analysis.
COST RATIO PLAN:-
Under this method, the vendor rating is done on the basis of various costs incurred for procuring the materials from various suppliers.
The cost-ratios are ascertained for the different rating variables such as quality, price and timely delivery etc.
The cost-ratio is calculated in percentage on the basis of total individual cost and total value of purchase.
For example :-
The total delivery cost is Rs. 5000 and the total purchases are Rs. 1,00,000, then delivery cost-ratio will be :
5000*100 = 5 % 100000
All such cost-ratios will be adjusted with the quoted price per unit. The plus cost ratio will increase the unit price while the minus cost ratio will decrease the unit price.
The net adjusted unit price will indicate the vendor rating. The vendor with the lowest net adjusted unit price will be the best supplier.
Under this method, the most strategic issue is the identification of various costs and their allocation among different variables and suppliers. Certain important heads of quality costs and delivery costs can be listed as under :
QUALITY DELIVERY COSTS
Inspection costs Postage and telegrams
Cost of defectives Telephones
Reworking costs Extra cost for getting
quick delivery for example, costlier
means of transportation.
Manufacturing losses on rejected items.
All the cost-ratio are calculated for all the suppliers on individual basis. On the basis of the value of the each cost-ratio, the consolidated rating of each supplier is done.
WEIGHTED-POINT METHOD Attributes for quality, price and delivery are separately identified. Relatives weightages of attributes are assigned by the process of grading.
Quality Q-Factor comparisonPoints
Q1=Accepted without remarks 100 Q2=Accepted with some rejections 60 Q3=Accepted due to acute shortage 40 Q4=Totally rejected 0
Accepted rate=(Accepted lots/Total lots) *100 It will be multiplied by the weighted-point of quality factor.
Price P-Factor comparisonP=Pa-Po/Po*100Where Po=lowest pricePa=accepted price PointsP1=20% 60P2=60% 40P3=75% 30Net price=(Lowest net price/Respective net price)*100This % will be multiplied by the weighted point of price.
Delivery D-Factor comparisonD=No. of scheduled delivery/No. of actual deliveries*100 Points
• D1=90-100% 100• D2=60-75% 60• D3=40-50% 50
Critical Incident Method Records of events and occurrences of buyer-vendor relationship is maintained They reflect positive and negative aspects of actual performance.
Improved performance Determining the competence of a vendor
Checklist SystemVendor rating is done on the basis of: