Hasing and Supply Management

MGT 634
Purchasing and Supply

Management
Dr Atul Kanyalkar
The Course Objective

To
provide an overview of the Purchasing and Supply
Management (PSM) Function
understand the processes, procedures and policies
followed in PSM
provide a brief understanding about PSM functionalities in
ERP systems
provide the information about the tools and trends in PSM.
MGT634 Purchasing and Supply

Management
At the end of this course

You will be able to
Appreciate the significance of PSM function in

an organization
Appreciate relevance of various processes

followed in PSM function
Understand relevance of ERP in PSM.

Management
Procurement-Production-Distribution System
Supplier 1
Selling
Location 1
Port
Supplier 2
Manufacturing Plant
Selling
Location 2
Supplier 3
Selling
Location 3
Inbound logistic or Procurement
Production

Management
Outbound logistic or
Distribution
Supply Chain
Selling
Location 1
Port 1
Own
Manufacturing Plant 1
Selling
Location 2
Selling
Location 3
Supplier 1
Supplier 2
Port 2
Procurement
TP
LL
Production
HUB
Stockiest
Retailer
Selling
Location 4
Selling
Location 5
Selling
Location 6
Distribution
The syllabus
1.
2.
3.
4.
5.
6.
7.
8.
9.
PSM Concepts
Staging Policies and PSM
Purchasing Process
Make or buy decisions
Purchase Negotiations
Ethics in Purchasing
Legal Aspect in Purchasing
EDI and e-sourcing
Vendor development and evaluation
Management
The syllabus
10. Vendor Managed Inventory
11. Vendor Performance Measurement
12. Capital Equipment Purchasing
13. Service Sourcing
14. Multi-Location Procurement Problem
15. Purchasing Functionality in ERP
16. Business Planning
17. Supplier Certification
Management
The syllabus
18. Material Storage and Warehouse
Activities
19. Warehouse Utilization
20. Safety and Security Aspect
21. Obsolescence
22. Disposal of scrap
23. Material Handling
24. ERP in Warehouse
25. New Product Development
Management
References
1.
2.
3.
4.
5.
Dobler D. W. and Burt D. N., Purchasing and supply

management, Tata McGraw-Hill Publishing company, 1996.
Monczka R., Trent R. and Handfield R., Purchasing: An
integrated supply chain approach, South-western Cengage
Learning. 2005.
Coyle J.J., Bardi E.J. and Langley(Jr.) C.J., The management
of business logistics, 7th ed., South-western Cengage
Learning, 2003.
Tony Arnold J.R. and Chapman S.N., Introduction to
Materials Management, 5th ed., Pearson Education, 2004.
Cases and papers provided time to time
Management
Class Discipline
Attendance
Class timings (attendance will be taken at

the beginning)
Audit Attendance and minimum passing
criterion
Academic Dishonesty
Management
Course Evaluation
1. Assignments (30%)
Case Analysis / Paper Reviews (Group & Individual) :
Tests
[30%]
(70%)
1. Mid-term test & class tests:
[20%] *
2. End-term Test:
[50%] *
* Closed Book
Management
Teaching Sequence
Sep
Oct
Mon
Tue
Wed
Thu
Fri
3
10
17
24
1
8
15
22
29
4
11
18
25
2
9
16
23
30
5
12
19
26
3
10
17
24
31
6
13
20
27
4
11
18
25
1
7
14
21
28
5
12
19
26
2

Management
Sat
1
8
15
22
29
6
13
20
27
3
Sun
2
9
16
23
30
7
14
21
28
4
Introduction to Purchasing and

Supply Management
Purchasing Supply Management : Terms

2nd Tier
Supplier
1st Tier
Supplier
Purchasing
Manufact. &
Distribution
Marketing
Customer
Value Chain Management
Supply Chain Management
Demand Chain Management

Business Logistics
Logistics Management
Purchasing and Supply Management Physical Distribution

Management
Purchasing and Supply Management :

Definitions
Supply Management
It is the process responsible for the development and
management of a firms total supply system for both internal
and external components.
Purchasing
The purchasing function comprises of the essential activities
associated with the acquisition of the materials, services, and
equipments used in the operation of an organization.

Management
Objectives
Support Production
Reduce Cost Of Materials
Ensure Consistent Quality
Reduce Inventory Investment
Improve Corporate Image Supplier Relations
Maintenance of Records
Preserve and Conserve Materials in Stock
Improve Competitive Strength
Management
Purchasing and Supply Management

Activities
Materials Planning and Scheduling
Make or Buy
Procurement (materials, equipments, tools,
supplies and services)
Transportation
Warehousing
Salvage and Scrap Disposal

Management
Importance
Purchasing and Supply Management can have a major
impact on organization success by influencing:
Cost
Quality
Sales
Profits
Product development
time
Technologies and
innovation
Customer service
Competitive
advantage

Management
Why Purchasing is Important

Industry
Materials/Sales Revenue
Petroleum
Automobile
Wood Products
Textile Mills
Food Manufacturing
Machinery
Electrical Equipment
Computers and electronics
76%
70%
61%
59%
59%
50%
49%
44%

Management

Purchasing as a profit producer
Profit =
Revenues
Cost
Impact of Purchasing on Revenues
Impact of Purchasing on costs
Profit
= Revenues -

Management
Cost

Profit-Leverage Effect
Assuming an 8% margin
Profit (Rs 100,000)
Profit (Rs 100,000)
= Revenues -
= Revenues
Cost
(Rs.1,250,000)
(Rs 100,000)
Cost
THEREFORE, in this example, the Profit-Leverage

Effect is . . . 1,250 ,000
1
100 ,000
12 .5

Management
0.08
Costs Involved
Basic Cost Of Materials

Government Levies And Taxes
Ordering Cost
Inventory Carrying Cost
Packaging And Packing Cost.
Material Handling Cost
Freight Cost
Insurance Cost
Wastage During Receipt , Storage etc.
Management
Interdepartmental Relations
Production
Sales And Marketing
Finance
Research And Development
Engineering
Quality Control
Planning
Legal
Security
Management

Procurement
Material
Source
Price
Quality
Quantity
Time
Place
Management

Storage
Receive
Store
Track

Management

Usage / Issue
Material
Sequence
Price
Quality
Quantity
Time
Place
Management

Procurement
Storage
Usage
Management
Recap
Introduction
Defn
Objectives
Activities
Importance
Costs
Procurement / Storage / Usage

Management
Classification Of Materials
Large number of materials.
Planning, Procurement, storage, accounting of
so many materials is a Problem.
Common procedures for Planning, Control,

storage, issue, accounting for all materials
Management
Basis Of Classification
Stage of conversion Process
Direct (Raw materials / WIP etc)
Indirect
Nature of Material
Finished goods
Semi-finished goods
etc.

Management
Staging Policies
Staging Policies
Engineer to Order
Make to Order
Assemble to Order
Make to Stock
Design
Purchase
Manufacture
Assemble
Ship
Purchase Inventory
Manufacture
Assemble
Ship
Assemble
Ship
Assemble Inventory
Ship
Purchase Inventory Manufacture
Purchase Inventory
Inventory
Manufacture
Engineer to order
No stock at all. The purchase and order of materials takes place based on the specific
customer order. E.g. construction companies and shipyards.
Make to order
Only raw materials and components are kept in stock. Every customer is a specific
project. E.g. beer and lemonade cans, basic construction materials
Assemble to order
Only systems elements, modules or subassemblies are in stock at the manufacturing

center, whereas final assembly takes place based on a specific customer order.
E.g. cars, computers.
Make to stock
Finished products are kept in stock at the end of the production process and are
from there shipped to geographically dispersed customers. E.g. dairy
products.
Management
Staging Policies
Staging Policies
Engineer to Order
Make to Order
Assemble to Order
Make to Stock
Design
Purchase
Manufacture
Assemble
Ship
Purchase Inventory
Manufacture
Assemble
Ship
Assemble
Ship
Assemble Inventory
Ship
Purchase Inventory
Inventory
Manufacture
Engineer to order
Procurement (?), Storage (?), Issue (?)
Make to order
Assemble to order
Make to stock

Management
Procurement Process
1. Need
Major elements of the purchasing system
2. Make
or Buy
3. Purchase
requisitions
Make
4. Supplier selection
Article file
5. Quotation
Contract file
Supplier file
6. Order processing
11. Non-acceptance:
return to supplier
7. Order monitoring and

expediting
10. Supplier
evaluation
8. Incoming inspection
and quality control
9. Invoice
processing

Management
Staging Policies
Staging Policies
Engineer to Order
Make to Order
Assemble to Order
Make to Stock
Design
Purchase
Manufacture
Assemble
Ship
Purchase Inventory
Manufacture
Assemble
Ship
Assemble
Ship
Assemble Inventory
Ship
Purchase Inventory
Inventory
Manufacture
ETO (for each materials)

Requirement Generation
Receiving and analysing PR
Supplier selection
Right price
PO
Follow up
Receiving and accepting
Invoice approval and payment
Management
Staging Policies
Staging Policies
Engineer to Order
Make to Order
Assemble to Order
Make to Stock
Design
Purchase
Manufacture
Assemble
Ship
Purchase Inventory
Manufacture
Assemble
Ship
Assemble
Ship
Assemble Inventory
Ship
Purchase Inventory
Inventory
Manufacture
MTS (for most materials)

Supplier selection
Right price
Requirement Generation
Receiving and analysing PR
PO
Follow up
Receiving and accepting
Invoice approval and payment
Management
1. Need
Reorder point (Office

stationary)
Need
Lot size
Lead time
MPS / MRP (ETO, ATO, MTS)
Lot Size
Lead time
Dependent
Independent
Need
Optimization (ETO, ATO, MTS)

Lot Size
Lead time
Dependent
Independent
Management
Project Plan (ETO)

Technical & Unique
requirements
Well defined
timelines
Capacity Plans (Machines)

Technical & Unique
requirements
Well defined
timelines
Strategic Plans (Services)
Long term decisions
Timelines can be
uncertain
Plan and mitigation
plan
2. Make or Buy Decisions
Make or Buy
Strategic decision.
Precisely what business do we

really want to be in, to maximize
the use of our core competencies
as we proceed into future.

Management
Make or Buy
Economics: It is not always economical for the
companies to make all the materials used in its
manufacturing process.
Abilities / Technical skills
Capacities
Quality
Design protection
Assured supply

Management
Make / Buy ? ?
Making
Lower production cost
Unreliable or unsuitable
suppliers
Assure adequate supply
(Quantity)
Utilize surplus labor
capacity
Obtain desired quality
Protect special design or
quality
Expected benefit in long
term
Buying
Lower acquisition cost

Inadequate capacity
Reduce inventory costs
Ensure alternative sources
of supply
Item is protected by a
patent or trade license

Management
Make or Buy
Choosing between making or buying an item is largely
dependent on the Vertical Integration strategy of a company.
Vertical integration - developing the ability to produce goods
or services that are previously purchased
It can take the form of forward or backward integration.

Management
Forward / Backward Integration

Management
Planned Order
Planned Order
Opening
?? Period
Lead
??Time
Purchase Order
Specific Information
Purchase
Requisition
Planned order is used for visibility

Management
Planned Order
General information
3. Purchase Requisitions
Purchase Requisition
XXX
Department
Purchase
Department
Supplier
Production
Warehouse
Formal communication
to Purchase department
to initiate procurement activities
and procure the material mentioned in the
requisition.
Management
Purchase Requisition
The PR Should contain following information
Originator
Material Specification
Quantity and Unit of measure
Delivery date and place
Any other information
Signed (approved)
Account to be charged
Management
4. Supplier Selection
Strategic Sourcing Plan

Discovery
Evaluation
Selection
Development
Management
Management
Strategic Sourcing Plan

Engineer to Order
Make to Order
Assemble to Order
Make to Stock
Management
Discovery
1. Supplies catalogue
2. Print media :Trade directories, trade
journals, news papers, yellow pages
3. Salespersons
4. Trade exhibition, fairs, conferences
5. Colleagues in similar field
6. Internet
..
Management
Evaluation
Background
Informed
Surveys
Financial checks
Facility visits
Quality
Capacity
Management / Systems
IT Systems
-------MGT634 Purchasing and Supply
Management
Supplier Selection
Check the following
Whether the items were purchased earlier ?
(Straight rebuy)
Any change since then ? (Modified rebuy / new
buy)
Are the items similar / related to any other
item purchased ?
Can we replace the item by any other item
which we are currently purchasing ?
Are the items standard ?
Management
Supplier Selection
Bidding
Negotiation
Value of Purchase
Clear specifications
Number of sellers available
Vendors interested in order
Time
Situations when cost

estimates are difficult
Price is only the only
important factor
Supplier may have better
knowledge then the buyer
Bidding and then negotiation

Management
Overview of Vendor Selection Criteria

Management
Prioritization Matrix
Weight
Score
Quality
Reliability
Capability
Financial
Others
Final result
Management
Weighted
Score
Supplier Development
????????
-Alignment of systems
-Alignment of expectations
-Knowledge transfers
-------MGT634 Purchasing and Supply
Management
Managing Suppliers
Feedbacks
Situation recheck
Corrective actions
Realignment

Management
Supplier Selection Issues
Size Relationship
Usage of International Suppliers
Competitors as Suppliers
Countertrade Requirements
Social Objective

Management
Pricing
Sources of Price Information

Commodity Markets
Exists for basic materials (grain, oil,
sugar etc.)
Demand and supply
Long term prices
Price Lists
For standard products
Vendors catalog
Quantity discounts
available
Price
Price Quotations
For both Standard and
specialty items
Useful for promoting
competition
RFQ (Should contain the
manner in which supplier
should submit offers)
Specifications
Quantity
Period
Negotiations
For long term relationships or for high cost items
Time consuming Process
Can lead to significant quality and price benefits
Management
Total Cost of Ownership

Acquisition Costs
Price
Planning costs
Duties
..
Ownership costs
Downtime costs
Risk
Cycle time
.
Post Ownership Costs
Warranty costs
Product Liability
..
Remember: As a purchasing Manager you should also focus
on suppliers manufacturing
cost
Management
Paper Mill Case

Purchased Fabric Belt
12 FT X 60 FT (Circumference)
25000 USD
Lasts for 40 days
Belts break on the machine
Replacement takes 8 Hrs (16 man hours @ 45 USD per hour)
Per day downtime cost of the plant 100,000 USD
4 6 belts are kept in inventory
Industry average life of a belt is 60 days
Benchmark belt life span 470 days @ 500,000 USD
There are 20 plants across the world

Management
Negotiations and e-Sourcing/Auctions

Negotiations
Purchase
requisitions
RFQ
/ Quotations
Supplier
Selection
E-Sourcing
/Auctions

Management
Negotiations
/ Discussion
Learning Curve
Learning curve
Improvement in output due to learning
The learning rate represents productivity improvement
as production doubles.
Improvement in
Labour work style
Process modification
Product modification
Applicable when
New product / process
Complex product
Labour intensive
Management
Learning curve
Cumulative Units
(N)
Total Labour Hrs

(A)
Avg Labour Hrs per

unit
(B)
Learning Rate (%)

(C)
= (Bn-1-Bn)/Bn-1
20
20
34
17
15.0
58
14.5
14.7
100
12.5
14.8
16
168
10.5
16.0
32
288
9.0
14.3
64
493
7.7
14.4

Management
Quantity Discounts
Discounts on purchase of higher quantities
Tradeoff between
Discounts
Inventory carrying costs
Storage costs
Obsolescence costs
The order uncertainty getting transferred to

the buyer.
Management
Quantity Discount
1 Unit @ $ 85
3 Units @ $ 80
6 Units @ $ 70
10 Units @ $ 69
Find Incremental price and units for the order

Incremental price per units
Management
Quantity Discount
1 5 Unit @ $ 10 Each
6 10 Units @ $ 8 Each
11- 20 Units @ $ 7.8 Each
21- 100 Units @ $ 7.6 Each
Find Incremental price (for max order) and

units for the order.
Incremental price per units.
Management
Negotiations
What Is Negotiation?
A process of formal communication,
either face-to-face or via electronic means,
where two or more people come together
to seek mutual agreement about an issue
or issues.
*Purchasing & Supply Chain Management, Monczka, Trent, Handfield

Management
What Is Negotiation?
Involves the
management of time,
information,
and power
between individuals and organizations who are
interdependent

Management
When Negotiation Required?
Is bid process inadequate?

Are many non-price issues involved?
Is contract large?
Are technical requirements complex?
Does contract involve plant, equipment or/and
customization?
Does contract involve a partnership?
Will supplier perform value-adding activities?
Will there be high risk or uncertainty?
Management
Non-price Negotiation
Quality
Support
Specification compliance
Technical assistance
Performance compliance
Product research, development, and/or design
Test criteria
Warranty
Rejection procedures
Spare parts
Liability
Training
Reliability
Tooling
Design changes
Packaging
Supply
Data sharing, including technical data
Lead times
Transportation
Delivery schedule
FOB terms
Consignment stocks
Carrier
Expansion options
Commodity classification
Supplier inventories
Freight allowance/equalization
Cancellation options
Multiple delivery points
* From Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin
Management
Negotiation Strategy : Basic Steps

1.
Develop the specific objectives (outcomes) desired from the negotiation
2.
Gather pertinent data
3.
Determine the facts of the situation
4.
Determine the issues
5.
Analyze the positions of strength for both (or all) parties
6.
Set the buyers position on each issue, and estimate the sellers position
on each issue based on your research
7.
Plan the negotiation strategy
8.
Brief all persons on the negotiation team
9.
Conduct a dress rehearsal (Devils Advocate)
10. Conduct the actual negotiations with an impersonal calmness

11. Record the process and outcome
Management
Negotiation planning and execution

Management
Game plan for Negotiation
Management
The Zone of Negotiation

Seller's Range
$220,000 $230,000 $240,000 $250,000 $260,000 $270,000 $280,000 $290,000 $300,000
Buyer's Range
The overlap between what the

Buyer will pay and what the
Seller will accept defines the
Zone of Negotiation

Management
The Zone of Negotiation

$220,000 $230,000 $240,000
Buyer's Range
$250,000
$260,000
$270,000
Seller's Range
$280,000 $290,000
There is a gap between what the

Buyer will pay and what the Seller
will accept. There is NO DEAL
without Creativity or Compromise

Management
$300,000
Sources of Negotiating Power

Informational power Access to information to be used for
persuasion using facts, data etc. (Only un/favorable is presented)
Reward power One party can offer something of value expecting

something in return. Give / Take.
Coercive power One party can withdraw something of value.

Legitimate power Position of the person
Expert power Special form of informational power
Referent power Personal qualities and attributes of individuals

Management
Being an Effective Negotiator

Willing to compromise or revise goals
View issues independently
Establish upper and lower ranges for each major
issue
Explore additional options
Build on common ground between parties
Avoid making irritating comments
Avoid argumentation by presenting too many
reasons (quickly)
Make fewer counterproposals
Management
Overcoming Tactics
Modify tactics when they dont work
Prepare for likely tactics to be used against
you
Tactics are more effective on you if you are
unprepared, stressed, under severe deadlines,
inexperienced, fatigued, or disinterested
Try not to react without thinking

Management
Influencing factors in Negotiations
Low ball / High ball

Honesty / Openness
Questions
Breaks
Trial Balloon
Price increase
Best and final offer
Silence
Planned concessions
Venue

Management
Win-Win Negotiation
Win-lose competitive or distributive
bargaining
Win-win collaboration or integrative
bargaining

Management
Win-Win Methods
Expand the pie Ways to expand resources or value obtained

Logroll Tradeoff of disagreeing issues
Cost Cut Join hands in cutting costs and sharing benefits
Bridge Involves inventing new options to satisfy both parties
Non specific compensation One party achieves objective
other gets something of value as reward

Management
Ethical Issues
Ethics
The set of moral principles or values guiding
our behavior
In business, ethical behavior is the use of
recognized social principles involving justice
and fairness

Management
Rules of Ethical Behavior

Buyers must commit their attention and
energies for the employers benefit rather than
their own
Buyers must act ethically towards suppliers and
potential suppliers
Buyers must uphold the ethical standards set
forth by the profession
Management
Pressures Toward Unethical Behavior

Purchasing has control over large sums of
money.
Incentives linked to cost reduction.
Suppliers may have great pressure to meet
aggressive sales goals, leading to questionable
sales practices

Management
Risks of Unethical Behavior

The act may also be illegal
At a minimum, the buyer may lose his/her job
Personal bankruptcy
Jail
There is a risk to a buyers professional

reputation
Risk to the buying companys reputation

Management
Types of Unethical Behavior

Reciprocity Preferential treatment to suppliers who
are also customers to the organization.
Personal buying Purchasing for personal needs of the
employees.
Accepting supplier favors Gifts and favors.
Sharp practices Misrepresentation just short of fraud.
Financial conflicts of interest investment in other
companies.

Management
Reciprocity
Giving preferential treatment to suppliers who
are also customers
Restrain competition
Must rely on legitimate performance criteria
to evaluate supplier capability

Management
Personal Buying
Purchasing department purchases materials or
goods for the personal needs of its employees
Subject to trade diversion laws
Some exceptions do exist
Often a gray area as to what to do

Management
Accepting Supplier Favors

Accepting gifts
May effect a buyers judgment
At what point does the gift represent showing
appreciation vs. and attempt to influence
future buying behavior
Gifts from potential suppliers are particularly
questionable

Management
Sharp Practices
Willful use of misinformation
Exaggerating problems
Requesting bids from unqualified suppliers
solely to drive down prices from qualified
suppliers
Gaining information unfairly through
deception

Management
Sharp Practices
Sharing information on competitive
quotations
Not compensating suppliers for design or
other work
Taking unfair advantage of a suppliers
financial situation
Lying or misleading

Management
Financial Conflicts of Interest

Direct financial interest in a supplier company
Buying companies typically require disclosure
by buyers having significant personal financial
interest
Similar to insider knowledge in buying and
selling stocks

Management
Behaviors
Maintain highest standard.
No gifts / favors
Slow but steady
Remember: These are digital decisions in

terms of actions and occurrences
Management
Cases
Gift delivered at home ?
Equipment purchased higher then the normal
price ?
Unwanted equipment purchased ?

Management
Cases
You joined a new company and found that
some of the employees are suppliers.
Find other employees accepting / demanding
gifts from suppliers

Management
Legal Aspects
Contract Terms
Ex-works: In an ex-works contract, the purchaser
accepts full responsibility for arranging
transportation from the suppliers location.
For Purchaser this involves:
Arranging transportation, insurance, and documentation
to move the goods to the required source port (air or
sea)
Have them loaded on to the mode of transport
Transported to, and unloaded at the destination port
Cleared through customs and transported to the
purchasers location.
Management
Contract Terms
Free alongside (FAS): In this arrangement, the supplier
agrees to deliver to the (source) port specified by the
purchaser
For Supplier this involves
to move the goods to the required source port (air or sea)
For Purchaser this involves

Insured, transported to, and unloaded at the destination
port
Management
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.

port
Management
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,
Transported to, and unloaded at the destination port

Pay insurance from when the goods are loaded on board.
Management
Contract Terms
Cost, Insurance, and freight (CIF): This is similar to C&F
But here the insurance during transportation is
responsibility of the supplier.
port

Management
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.
port
Management
Contract Terms

Management
Contract Terms
Supplier
Transport
Port
Ship
Supplier
Purchaser
Ex Works
Insurance
Supplier
Purchaser
Transport
Supplier
Purchaser
Free Alongside
Insurance
Supplier
Purchaser
Transport
Supplier
Purchaser
Free On Board
Insurance
Supplier
Purchaser
Transport
Supplier
Purchaser
Cost and Freight

Insurance
Supplier
Purchaser
Transport
Supplier
Purchaser
Cost Insurance
and Freight
Insurance
Supplier
Purchaser
Transport
Supplier
Purchaser
Delivered
Insurance
Supplier
Purchaser

Management
Transit
Ship
Port
Purchaser
EDI and E-Sourcing
Groups and cases

Metal craft (12 Oct)
E Sourcing strategy (13 Oct)
Bose (19 Oct)
Multisite case (20 Oct)
Management
Types of e-Procurement
1. Web-based ERP (Electronic Resource Planning): Creating and
approving purchasing requisitions, placing purchase orders and
receiving goods and services by using a software system based on
Internet technology.
2. e-MRO (Maintenance, Repair and Operating): The same as webbased ERP except that the goods and services ordered are nonproduct related MRO supplies.
3. e-sourcing: Identifying new suppliers for a specific category of
purchasing requirements using Internet technology.
4. e-tendering: Sending requests for information and prices to
suppliers and receiving the responses of suppliers using Internet
technology.
5. e-reverse auctioning: Using Internet technology to buy goods and
services from a number of known or unknown suppliers.
6. e-informing: Gathering and distributing purchasing information
both from and to internal and external parties using Internet
technology.
Management
Reverse Auctions
When possible ?
Requirements ?
Steps ?

Management
Reverse Auctions
Problems ?

Management
Electronic Data Interchange

The EDI (Electronic Data Interchange) enables
customers and suppliers to electronically exchange
transaction information such as PO, invoices, and
MRP.
Simplifications: This eliminates time consuming
paperwork and facilitate easy communication
between buyer and supplier
Management

External Supplier
RPM Supplier
E-mail to the supplier
Uploading the information on the portal
Subcon / TPM
Uploading the information on the portal
Linkage through ERP system
Internal Supplier
Intercompany
Linkage through ERP system

Management

Purchaser: Requirement generation
Purchaser: Scheduled line is generated against blanket order /
Scheduling agreement and sent to the supplier and accounts
electronically
Supplier: receives and acknowledges the order.
Supplier: sends the shipping notification while dispatching the
material.
Purchaser: records the shipping notification in expected
receipt file.
Purchaser: on receipt of the material the entry is made
against expected receipt and the scheduling line and an
intimation is sent to accounts payable.
Purchaser: accounts payable dept electronically transfer the
payment to the suppliers account.
Purchaser: sends remittance advice to the supplier.
Management
Electronic Procurement
Disadvantages
Security of electronic messages
Lack of face-to-face contact
Other technological concerns
Standard protocols
System reliability

Management
Purchasing
Purchasers Duties
Know the market for their commodities; ascertaining
price
Understand the laws (tax, contract, patent)
Process purchase requisitions and quotation requests
Make supplier selections
Negotiate prices and conditions of sale
Place, follow-up, expedite purchase orders
Supplier relations
Maintain ethical behavior
Do you see any problem

Management
Strategic Sourcing and Planner Buyer

Strategic Sourcing
Know the market for their commodities; ascertaining price

Understand the laws (tax, contract, patent)
Make supplier selections
Supplier relations
Negotiate prices and conditions of sale
Planner Buyer
Determine material requirements

Generate purchase requisitions, PO and schedules.
Issue and controlling Shop orders for factory
Place, follow-up, expedite purchase orders
Management
6. Order Processing
Purchase Order
Significance
Parts of PO

Management
Purchase Order.
The PO is a legal offer to purchase.
Once accepted by supplier it becomes a legal
contract for delivery of goods according to the
terms and conditions specified in the purchase
agreement.

Management
Major Parts of a P.O.
Fixed prices and quantities (including taxes)

Buyers right of inspection and rejection
Right to make specification/design changes
Holding buyer harmless, patent infringement
Suppliers right to assign contract to a third party
Instructions regarding risk of loss
Statement of credit and payment terms
Identification
Packing and preparation
Statements of warranty
Management
Major Parts of a P.O.
Shipment quantities, dates and place

Assignment of sellers rights
Arbitration clause
Right to cancel unshipped portion
And other relevant information etc.

Management
7. Order Monitoring and

Expediting
Order Monitoring and Expediting

Significance

Management
Follow-up (Including expedite and de-expediting)

Supplier is responsible for delivery.
Purchase department is responsible for
ensuring the delivery.
Follow-up is required for
Changes in the plans
IRA issues
QA issues in previous delivery
Product structure change
etc.
Management
8 Incoming Inspection and

Quality Control
Incoming Inspection and Quality

Control
Significance

Management
Receiving
Warehouse is responsible for receiving the
goods. They should confirm
Item
Quantity
Place
Absence of transit damage
Open Purchase Order
Delivery due date
Provide acknowledgement.
Management
Receiving
Mark the goods

Store the goods
Operate information system
Communicate to QA and other concerned
departments

Management
Self Certification
Self Certification
Significance
Where to use
Staging policies
Lot size and consumption
Stocking policies

Management
Supplier Self Certification

Companies spend a large amount of money on
quality inspection of incoming material
This is time consuming and complicated.
Supplier self certification is therefore very useful.

In this supplier certifies and assures that the quality
of the material is as per the company standard.
Cost implication ?
Management
Supplier Self Certification

STEPS
Agreeing upon common Specs.
Process Parameter standardization.
Vendor audits and Inputs.
Trial Lots.
Roll out.

Management
9. Invoice Processing
Invoice Processing
Significance
Factors to be considered

Management
Payment
Accounts is responsible for payment (after QA release
of the received material).
Three way reconciliation
Suppliers invoice
PO
Received quantity
To confirm
Conditions
Prices
Quantities
The accounts should be very efficient and accurate

Management
10. Supplier Evaluation
Supplier evaluation
Why
Better decision making
Better communication
Feedback
Motivate and direct behavior
Problems
Too much data
Wrong measures
Conflicting measures
Drive wrong performance
Management
Performance Measurement - Importance
Systematizes organizational memory

Pool information across plants
Remove excuse for poor quality
Ensure consistent policies across supplier and
plants
To identify the supplier performance and
improvement opportunities.
Helps in decision making.
Negotiations
Resource allocations etc.
Management
Performance Measurement
Characteristics of good performance measure

The measurement should be usable.
Without any scope for adjustment
Communicate / Agreed
Simple to measure

Management
Measures
Measures Must Be ...
Strategically Significant
Driving Right
Behaviors
Balanced
Aligned
Owned
Linked to Compensation
Actionable
Easy to Collect
Management
Balance
Balance is Assessed and Viewed Across Three Specific Dimensions:
1. Financial v. Customer v. Process v. People
2. Leading v. Lagging
3. Efficiency v. Effectiveness
Why Does Balance In These Dimensions Matter?
1. Complete Business Perspective

2. Causality
3. Cost (Time, Resources, Investment) & Quality
Management
Balanced Measures
Example Measure Set
F-C-P-P [1]
Leading v.
Lagging
Effective v.
Efficient
Percent Sales from New Products
Financial
Lagging
Effectiveness
Net Trade Sales Total Growth
Financial
Lagging
Effectiveness
NPV of NPD Pipeline (NPDC Data)
Financial
Leading
Effectiveness
Market Share (TRx)
Customer
Lagging
Effectiveness
Line Item Fill Rate
Process
Lagging
Effectiveness
Percent Growth of Net Trade Sales

from Existing Products
Financial
Lagging
Effectiveness
Manufacturing Compliance Index
Process
Lagging
Effectiveness
Adverse Events/Product (Top 5 Products)
Customer
Lagging
Effectiveness
S/G&A Productivity
Process
Leading
Efficiency
R&D Productivity
Process
Leading
Efficiency
Resource Alignment Index
People
Leading
Effectiveness
Percent Critical Positions Filled
People
Leading
Effectiveness
[1] Financial v. Customer v. Process v. People (from The Balanced Scorecard)

Management
Acceptable/
Satisfactory
Caution/
Additional
Work Reqd.
Unacceptable;
Additional
Work Reqd.
Balanced Process Measures

Suppliers
S-1
S-2
S-3
Leading
Inputs
Process
O-1
O-2
O-3
I-1
I-2
I-3
Input
Measures
Process
Measures
Lagging
Effectiveness
Efficiency
Outputs
Outcome
Measures
X
X
X
X
Management
Customers
C-1
C-2
C-3
The Operational Definition

A Precise Description that communicates how to arrive at a value for
an objective.
Identifies Who, What, Where, When, How
Who = Measure Owner
What = What to Measure (Clear, Specific, Objective)
Where = Where the Measure Data Resides
When = When Measured & Reported
How = How to Measure (Mathematical Formula) (Longer
Term)
Measure Playbook
Not all of the Measure Playbook attributes need to be
defined at the same time its okay to let them mature as the
MGT634 Purchasing
Supply
measure
focus and
matures.
Management
A Well-Dressed Measure
Clean Data Display, Control Limits,

Mean, and Trend Line and Goal
Quick Reference Legend

I.E. Trend Up = Good
4
2
Title
Data Legend and

Chart and Data
Owner Information,
Update Frequency
Description,
Explanation, and
Action Plan
Management
Performance Measurement
SP = Wi X Pi
Wi Weight attached to the performance

characteristic i
Pi Performance of characteristic I
It can be
Quality (material / documentation )

Delivery
Quantity
Flexibility
Technical Contribution etc.
Or treat individual performance characteristic

separately.
Management
Measures Implementation
Drive down from OGSM

Develop specific measures
Identify the base line data
Finalize details
Communicate and implement
Measure and identify projects.

Management
Measures
Engineer to order
Make to order
Assemble to order
Make to stock

Management
11 Non Acceptance Return to

Supplier
Return to supplier
Based on the PO
Local / Imported
Rework / Destroy
Credit note

Management
Others
Multi-location problem
MSPPDS: Multi-Site Procurement Production

Distribution System
Selling
Location 1
Port 1
Selling
Location 2
Selling
Location 3
Supplier
Selling
Location 4
Port 2
Selling
Location 5
Selling
Location 6
Production
Distribution
-Alternate sourcing for manufacturing and selling locations

-Opportunities for reduction in costs and improved availability
represented by solid and dotted lines.
Management
MSPPDS: Multi-Site Procurement Production

Distribution System
Selling
Location 1
Port 1
Selling
Location 2
Selling
Location 3
Supplier
Selling
Location 4
Port 2
Selling
Location 5
Selling
Location 6
Production
Distribution
-Alternate sourcing for manufacturing and selling locations

-Opportunities for reduction in costs and improved availability
represented by solid and dotted lines.
Management
EXTENT OF CONTROL
Centralized v/s Decentralized Purchase
Centralized
- Ease Of Operation, buyer specialization, Less ordering
cost, control.
- Consistency
- Better Pricing, more clout, better continuity
- Better Maintenance Of Records

Management
EXTENT OF CONTROL
Decentralized
- Better Time To React
- Developing Local Vendors
- Better Control On Local Vendors
- Close Co-ordination with Plant

Management
Optimization
GLPK
Path command
Program file / Data file
Set / Param / Var / Min / Max / s.t. / end.

Management
Simulation
Random parameters interacting with each
other.
Arena
Vensim / Stella

Management
Purchasing Functionality of ERP
ERP - What is it?

ERP is a generic term used to describe a
comprehensive information system designed to
integrate all the business processes found in an
enterprise.
Efficiency and productivity are improved through
the integration of information and the removal of
duplicate information and processes.

Management
MRP OVERVIEW

Management
MRP RUN

Management
PLANNING FILE AND MRP

Management
PLANNING SEQUENCE

Management
BOM EXPLOSION

Management
MRP: NET REQUIREMENT CALCULATION

Management
LOT SIZING PROCEDURES

Management
MRP SCHEDULING

Management
STATIC LOT SIZING PROCEDURES

Management
PERIOD LOT SIZE PROCEDURE

Management
Safety stock
Fixed safety stock
Range of coverage
Safety days

Management
Purchasing master Data

Vendor master (at client level)
Information about the vendor.
Source list (at Plant level)

The master which links a material to a vendor for a
period.
Purchase Info Record (at Plant level)

The master containing pricing and other information
of the material if sourced from a particular vendor
(This data gets adapted while converting PR to PO)
Management
Purchasing master data

Outline agreement
The agreement against which scheduled lines are
generated.

Management
Process
Sourcelist
Purchase
Requisition of a
material
Vendor
Purchase
Info Record /
Scheduling
Agreement
Quality UD
Payment
PO/ Scheduled
Line
Follow-up
Receipt

Management
Business Planning in an ERP

system
Business Planning in an ERP System

Once a year activity
Based on the Business Plan for the next
periods.
To arrive at
Annual production plans
Standard costs
Machine loadings
Annual Purchase volumes
Management

The output is used to
Arrive at the variances during the year.
Bargain with supplier
Decide on the focus cost improvement ideas

Management

1. The business plan is uploaded in System in a
scenario.
2. Master data is corrected in the scenario.
3. MPS orders for the Business Plan are generated
4. Machine loading is checked to make appropriate
corrections are made.
5. MRP is generated for the entire period using
appropriate assumptions
6. Total consumptions is checked.
Management
Material Storage
Why Storage is required ?

Material
Handling
Inventory
Material Storage
IRA
Pilferage
SLOB

Management
Is it only a storage facility?

A warehouse is typically viewed as a place to
store inventory.
However, in many logistical system designs,
the role of the warehouse is more properly
viewed as a switching facility as contrasted to
a storage facility.
Value Addition?
Management
Storage
Objective
Minimize costs
Maximize customer service
This is achieved by
Timely customer service
Keep track of the items
Minimize total physical efforts
Provide requisite communication
Management
Storage Costs
Costs
Capital costs
Space
Material handling equipments
Etc.
Operating costs
Labor costs
Etc.

Management
Warehouse Activities
Receive goods
Check the goods against order and Bill of lading

Check the quantities
Check for damage
Inspection if necessary
Identify the goods

Dispatch to storage
Hold goods
Pick
Marshal shipment
Dispatch
Operate Information system
Management
Benefits of Warehousing
Consolidation
Break bulk
Processing
Postponement
Stockpiling

Management
Warehouse Location
Warehouse Location
Modeling the supply chain, J F Shapiro (pp 143)

Management
Warehouse Location
Objective / Constraints
Modeling the supply chain, J F Shapiro (pp 143)
Objective: Minimization of transportation cost and fixed

and variable costs for warehouse
Warehouse Capacity (Supply plan <= Operating Capacity)
Transfer Quantity (Transferred quantity from warehouse <= operating
capacity of warehouse)
Demand Satisfaction (Transferred quantity to CFA >= Demand of CFA)

Unique Channel Matrix (All product demands of a CFA to be
satisfied by one warehouse)

Management
Channel matrix definition

Objective / Constraints
Objective: Minimization of transportation cost
Manufacturing Capacity (Production plan <= Mfg Capacity)
Transfer Quantity (Transferred quantity from plant <= Production plan at
plant)
Demand Satisfaction (Transferred quantity to CFA >= Demand of CFA)

Unique Channel Matrix (All product demands of a CFA to be
satisfied by one manufacturing plant)

Management
Warehouse Layout
Design Considerations in Warehousing

General considerations
Quantity and character of goods must be known
product profiling
Know the purpose to be served
Storage
Distribution
Cross-docking

Management
Warehousing Trade-offs
Fixed / variable slot locations for merchandise

Build out (horizontal) / build up (vertical)
Order-picking / stock-replenishing functions
Two-dock / single-dock layout
Labor-intensive / mechanization / automation
Space devoted to aisles / space devoted to
storage

Management
Warehousing Trade-offs
Paperless warehousing / traditional paperoriented warehousing operations
Virtual warehouse / real warehouse
Other space needs
Retail store rooms

Management
Warehouse
Pallet Positions
(Refer Tony Arnold)
Number of pallet positions on ground required

1. Per pallet = 30 Cartons
2. For storing 13000 Cartons
3. Number of pallets required = 13000/30 =

433.33 = 434 Pallets
4. Three high placement
5. 434 / 3 = 144.67 = 145 pallet positions
Management
Accessibility
Being able to get at the goods wanted with
minimum amount of work (directly)
1. Industry
2. Expiry periods
3. Fifo / Lifo etc

Management
Cube utilization
(Refer Tony Arnold)
Use of space horizontally and vertically

Number of pallets actually stored / Maximum
number of pallets can be stored
Accessibility vs. Cube utilization

Management
Stock Location
Functionally similar items together

Fast moving / slow moving
Physically similar items
Working stock and reserve stock

Management
Stock Location
Point of usage
Central storage
Fixed location
Advantages / disadvantages
Floating location
Advantages / disadvantages

Management
Order picking
Picking
Area
Through out the warehouse
selecting items for one order
Zone
Picker works in his zone
Single
order
Management
Multi order
Warehouse Safety
Warehouse Safety
Safety
Guarding
Material safety data sheets
Employees safety
Industrial hygiene
Ergonomics
Environment
Spills / incidences
Disposals
Management

Management
Security of goods
Pilferage Protection
Shortage (IRA / loss)
Brand name issues
Etc.

Management
Theft: Protection against theft of merchandise has
become a major factor in warehouse operations.
No private automobiles
All normal precautions employed throughout the
enterprise should be strictly enforced at each warehouse.
Many are honest mistakes in order selection and
shipment, but the purpose of security is to restrict theft
from all angles.
Security begins at the fence.
As standard procedure, only authorized personnel should
be permitted into the facility and surrounding grounds
and entry to the warehouse yard should be controlled
through a single gate.
Management
Computerization
Computerized inventory control and order processing
systems help protect merchandise from being carried out
of the warehouse doors.
No items should be released from the warehouse unless
accompanied by a computer release document.
If samples are authorized for use by salespersons, the
merchandise should be separate from other inventory.

Management
Scrap Disposal
Salvage and Scrap Disposal

Value of scrap may be income to the firm.
Disposal must adhere to environmental
regulations.
Ensure no possibility of misuse
The organizations interest

Management
Inventory Record Accuracy and

Cycle count
IRA and Cycle count

Please refer to Tony, Arnold

Management
VMI
Stockless Purchasing
The supplier maintains the inventory for the
purchaser.
The cost of stocking inventory has been
temporarily transferred from the purchaser to
the supplier.

Management
NPD
NPD
Timelines based on the understanding /
experience
Clear expectations beforehand
Involve suppliers early

Management
Standardization
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.

Management
Value Analysis
Value analysis
Process of examining all elements of
a component, assembly, end product,
or service to make sure that it fulfils
its intended function at the lowest
cost throughout the intended life.
Objective : Increase the value of the product at the lowest cost while maintaining
quality.
Value = function / cost

Management
Value analysis
Gather information
Study
Speculate
Analyse
Recommend
Summerize

Management
Value analysis
Separate the object in its component
Check the value addition by each component
Check the manufacturing process for each
component
Check the value addition by each process step
Apply creativity

Management
Value analysis Team members
Executive management
Suppliers
Purchaser
Design engineer
Marketing
Production
Industrial / process engineer
Quality control
Management
Team exercise
Identify Object (and its function)
Separate the object in its component
(Understand the assembly process)
Understand the manufacturing process for
each component (and go on further exploding
its BOM)
Identify the value addition by each process
and component
Brainstorm
Management
Thanks
Best of luck
Management

Hasing and Supply Management

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MGT 634

Purchasing and Supply

The Course Objective

MGT634 Purchasing and Supply

At the end of this course

Appreciate the significance of PSM function in

Appreciate relevance of various processes

Understand relevance of ERP in PSM.

Inbound logistic or Procurement

MGT634 Purchasing and Supply

Dobler D. W. and Burt D. N., Purchasing and supply

Class timings (attendance will be taken at

1. Mid-term test & class tests:

MGT634 Purchasing and Supply

Introduction to Purchasing and

Purchasing Supply Management : Terms

Value Chain Management

Supply Chain Management

Demand Chain Management

MGT634 Purchasing and Supply

Purchasing and Supply Management :

MGT634 Purchasing and Supply

Purchasing and Supply Management

MGT634 Purchasing and Supply

MGT634 Purchasing and Supply

Why Purchasing is Important

MGT634 Purchasing and Supply

Why Purchasing is Important

Impact of Purchasing on Revenues

Impact of Purchasing on costs

MGT634 Purchasing and Supply

Why Purchasing is Important

Profit (Rs 100,000)

THEREFORE, in this example, the Profit-Leverage

MGT634 Purchasing and Supply

Basic Cost Of Materials

Purchasing and Supply Management

Purchasing and Supply Management

MGT634 Purchasing and Supply

Purchasing and Supply Management

Purchasing and Supply Management

Procurement / Storage / Usage

MGT634 Purchasing and Supply

Common procedures for Planning, Control,

MGT634 Purchasing and Supply

Purchase Inventory Manufacture

Only systems elements, modules or subassemblies are in stock at the manufacturing

Purchase Inventory Manufacture

Procurement (?), Storage (?), Issue (?)

Procurement (?), Storage (?), Issue (?)

Procurement (?), Storage (?), Issue (?)

Procurement (?), Storage (?), Issue (?)

MGT634 Purchasing and Supply

Major elements of the purchasing system

7. Order monitoring and

MGT634 Purchasing and Supply

Purchase Inventory Manufacture

ETO (for each materials)

Purchase Inventory Manufacture

MTS (for most materials)

Reorder point (Office

Optimization (ETO, ATO, MTS)

Project Plan (ETO)