TOPIC 1 SCM AND PURCHASING FUNCTION

TOPIC 1

SCM AND PURCHASING FUNCTION

Introduction:

Definitions:

• Procurement: The term procurement is defined as the acquisition of merchandise or services at the optimum possible total cost in the correct amount and quality. These goods and services are also purchased at the correct time and location for the express gain or use of government, company, business or individuals by signing a contract. Procurement function commonly encompass: purchase planning, standards determination, specifications development, supplier research and selection, value analysis, financing, price negotiation, making the purchase, supply contract administration, inventory control and stores/disposals and other related functions.

 

• Supply chain management: Is a set of synchronized decisions and activities utilized to efficiently integrate suppliers, manufacturers, warehouses, transporters, retailers and customers so that the right product or service is distributed at the right quantities, to the right locations and at the right time in order to minimize system-wide costs while satisfying customer service level requirements. The objective of supply chain management (SCM) is to achieve sustainable competitive advantage.

 

ELEMENTS OF SCM : The key supply chain processes stated by Lambert (2004) encompass:

• Customer relationship management
• Customer service management
• Demand management
• Order fulfillment
• Manufacturing flow management
• Supplier relationship management
• Product development and commercialization
• Returns management

 

• Purchasing: Purchasing can be defined as a process of acquiring goods, services, or works in return for a price. The major type of activities under purchasing function entail: coordination with user departments to identify purchase needs, identification of potential suppliers, conduct of market studies for important materials, negotiation with potential suppliers, analysis of proposals, selection of suppliers, issuance of purchase orders, administration of contracts and resolution of related problems and lastly maintenance of a variety of purchasing records.

Purchasing activities involve buying decisions to ensure that: the right goods are in the right place, at the right time, at the right price, at the right quality and at the right quantity. These are sometimes referred to as the six R’s of purchasing.

1. The right goods: In regard to this, the buyer specifies exactly what the organization requires (based on the needs) rather than simply buying from catalogue or what is on offer
2. The right place: In making the buying decisions it is important to provide detailed instructions on how, when and where deliveries are to be made.
3. The right time: This is an attribute of ensuring that the ordered item reaches the company at the stipulated time to facilitate efficient supply chain operations.
4. The right price: Achieving the right price is an important task since this will affect the purchaser’s cost structure and ultimately the margin achieved (profitability).
5. The right quality: The customer either specifies quality or expects the supplier to do so. The bottom line here is that the goods to be supplied should meet the user’s standards
6. The right quantity: This entail fully supply of the ordered items. For instance if the buyer orders ten units then the supplier should exactly deliver the specified units that are ten.

 

Supply management: This is a process responsible for the development and management of a firm’s total internal and external supply system. The specific activities include:

• Early purchase involvement (EPI) and early supplier involvement (ESI) in product design and subsequent specifications development for important items through the use of cross-functional teams
• Conduct of all purchasing function and procurement process activities
• Heavy use of cross-functional teams in supplier qualification and selection
• Heavy use of purchasing partnering arrangement and strategic alliances with suppliers-to develop close and mutually beneficial linkages with key suppliers in the value chain and control quality and costs
• Continuous identification of threats and opportunities in a firm’s supply environment
• Development of strategic , long term acquisition plans for all major materials
• The monitoring of continuous improvement in the supply chain
• Active participation in the corporate strategic planning process

Its prudent to note that supply management concept represents the most advanced stage in the evolutionary development of purchasing/procurement.

Stores management: Entail planning, organizing and controlling the available stocks or supplies awaiting issue or transport to the customers. Stores operations compromise the following:

• Receiving of goods from the suppliers or internal departments
• Inspection to verify whether the goods supplied meet the specifications
• Recording receipts and issue of supplies either manually or through computerized system
• Provision of security to protect stocks against loss through theft, pilferage or misplacement
• Maintenance: Protecting stocks against loss through deterioration from fire, water, bad weather etc.
• Stock control: determining the range and quantities of stock or supplies to be held and their receipt and issue.
• Stocktaking: checking of stocks and verification of stock records against actual physical quantities held in stock and also those at the work in progress stage and finished goods on hand.
• Disposal of surplus: i.e. scrap, components or equipment identified as no longer in use or usable, by donating, reuse or sale.
• Implementation of health and safety regulations relating to stores and stores staff.

 

Material management: Can be defined as the planning, organizing and control of all aspects of inventory embracing procurement, warehousing, work-in process and distribution. The goal of materials management is to consolidate and efficiently handle core services. The specific materials management activities include:

• Purchasing and supply management
• Inventory management
• Stores and warehousing
• In-plant materials handling
• Production planning, scheduling and control
• Traffic and transportation

 

Logistics management: This is the process of planning, implementing and controlling the efficient, effective flow and storage of goods, services and other related information from the point of origin to the point of consumption for the purpose of conforming to customers requirements. Logistics involves integration of information, transportation, inventory, warehousing, material handling and packaging. Logistical management includes the design and administration of systems to control the flow of materials, work in process and finished inventory to support business unit strategy. The overall goal of logistics is to achieve a targeted level of customer service at the lowest possible total cost. World class logistics firms create a competitive edge by providing customers with superior service / information systems to monitor logistics performance on real time basis, identifying potential operational breakdowns and taking corrective action prior to customer service failure.

Scope of logistics management:

• Concept of supply chain management: The supply chain can be likened to a well- balanced relay team in which the entire team is coordinated to run the race. The supply chain emphasis the process approach concerned with how a product or service is delivered to the customer. Supply chains are likened to value chains in that each activity within a value chain provides inputs after processing each input provides added value to the output which the ultimate customer receives in form of a product/service. It is worthwhile to underscore the fact that the supply chain concept emphasis the use of cross-functional teams which perfect their areas of specialization in aid of accomplishing the company’s set goals.

Objectives of supply chain management:

1. Enhancing Customer Service/satisfaction
2. Expanding Sales Revenue
3. Reducing Inventory Cost
4. Improving On-Time Delivery
5. Improving quality
6. Reducing Lead Time
7. Reducing Transportation Cost
8. Reducing Warehouse Cost
9. Reducing / Rationalize Supplier Base
10. Expanding Width / Depth of Distribution

 

Decision Phases In a Supply Chain

Successful supply chain management requires many decisions relating to the flow of

information, product, and funds. These decisions fall into three categories or phases, depending on the frequency of each decision and the time frame over which a decision phase has an impact. The distinct phases in supply chain set up entail:

 

1. Supply chain strategy or design: During this phase, a company decides how to structure

the supply chain over the next several years. It decides what the chain’s configuration

will be, how resources will be allocated, and what processes each stage will perform.

Strategic decisions made by companies include the location and capacities of production

and warehouse facilities, the products to be manufactured or stored at various locations,

the modes of transportation to be made available along different shipping legs, and the

type of information system to be utilized. A firm must ensure that the supply chain

configuration supports its strategic objectives during this phase.

 

1. Supply chain planning: For decisions made during this phase, the time frame considered

is a quarter to a year. Therefore, the   supply chain’s configuration determined in the

strategic phase is fixed. The configuration establishes constraints within which planning

must be done. Companies start the planning phase with a forecast for the coming year (or

a comparable time frame) of demand in different markets. Planning includes decisions

regarding which markets will be supplied from which locations, the subcontracting of

manufacturing, the inventory policies to be followed, and the timing and size of

marketing promotions.

 

1. Supply chain operation: The time horizon here is weekly or daily, and during this phase

companies make decisions regarding individual customer orders. At the operational

level, supply chain configuration is considered fixed and planning policies are already

defined. The goal of supply chain operations is to handle incoming customer orders in

the best possible manner. During this phase, firms allocate inventory or production to

individual orders, set a date that an order is to be filled, generate pick lists at a warehouse,

allocate an order to a particular shipping mode and shipment, set delivery schedules of

trucks, and place replenishment orders. Because operational decisions are being made in

the short term (minutes, hours, or days), there is less uncertainty about demand

information. Given the constraints established by the configuration and planning

policies, the goal during the operation phase is to exploit the reduction of uncertainty and

optimize performance.

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PURCHASING

Definition and scope of purchasing:

Purchasing is defined as a process of acquiring goods, services and works in return for a price. All organisations invariably need input of goods and services from external suppliers or providers and to this extent therefore, purchasing function plays an integral part in ensuring the goods/services are provided to the company. The role and contribution of purchasing has increased quite steadily over the second half of 20^th century with interest in the activity taking place in the last few years. The reasons behind this paradigm shift based on importance and recognition of purchasing entail:

1. New management concepts
2. Advanced technology
3. Government policies
4. Fewer but larger suppliers
5. Competition hence the need for quality

The scope of purchasing function is in line with the following activities:

1. Coordination with user departments to identify purchase needs
2. Identification of potential suppliers
3. The conduct of market studies for important materials
4. Negotiation with potential suppliers
5. Analysis of proposals
6. Selection of suppliers
7. Issuance of purchase orders
8. Administration of contracts and resolution of related problems
9. Maintenance of a variety of purchasing records
10. Payment follow up
11. Inspection and acceptance

Objectives of purchasing:

Purchasing objectives can be seen from two sides:

• General managerial level
• Functional or operational level

The general objectives are the five rights:  that is acquiring materials of:

• The right quality
• From the right supplier

• In the right quantity

• At the right time
• At the right place

The perfection of the above purchasing rights invariably creates a desired service level necessary for optimal supply of materials.

The functional or operational level objectives of purchasing:

1. To support the company operations with uninterrupted flow of materials and services
2. To buy competitively-keeping abreast of the forces of supply and demand
3. To buy wisely-Continual search for better values of quality, service, price relative to the buyer’s needs
4. To keep stock investment and losses at a practical minimum
5. To develop effective and reliable sources of supply
6. To develop good relationships with the supplier community and good continued relationship with active suppliers
7. To achieve maximum integration with other departments of the firm
8. To handle the purchasing function proactively in a professional and cost effective manner.

 

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Relationship between the purchasing and supply function with other departments:

Some issues on which interaction and cooperation may take place between purchasing and other company departments include the following:

• Purchasing and finance/accounts department:
• Finance/accounts department prepares budget allocation for goods/services to be purchased in a given time period
• The purchase department establishes and forwards to finance/accounts department value analysis report for goods/services to be purchased
• Finance/accounts department briefs the purchasing department on issues based on supplier payment
• Purchasing department gives accounts department information based on damaged items and obsolete items
• Purchasing department gives out information based on stock movement to the accounts department
• Purchasing/supplies department works together with accounts department during stock taking exercise which is based on assessing the variance status of the company’s inventory.
• Stores personnel who works under purchasing/supplies department works together with the accounts personnel when it comes to the issue of receiving goods from the supplier(s). The accounts personnel checks whether the amount indicated in the invoice correspond with the amount indicated in the local purchase order (LPO).

 

Purchasing and design department:

• Preparation of specifications for purchase of materials and components
• Quality assurance or defect prevention
• Value engineering and value analysis
• Information to departments regarding availability of materials, suppliers and costs
• Agreement of alternatives when specified materials are not available
• Creation of library of books, catalogues, journals and specifications for joint use by the design and purchasing departments

 

Purchasing and production (User department)

• Preparation of material schedules to meet just in time requirements
• Ensuring that delivery schedules are maintained
• Control of inventory to meet production requirements
• Disposal of scrap and obsolete items
• Quality control or defect detection and correction
• Approval of ‘first-off samples’
• Make or buy decisions
• General involvement in such techniques and systems as optimised production technology, computer integrated technology, materials requirement planning (MRP) and manufacturing resource planning (MRP 2)

 

Purchasing and human resource development:

• Purchasing professionals gives out technical expertise when a prospective purchasing staff is being interviewed for a job.
• Human resource personnel liaise with purchasing managers on checking the performance of purchasing employees through job appraisal analysis.
• Human resource development relates with purchasing department when it comes to issues of arranging training and seminars for the purchasing staffs.
• Human resource development work hand in hand with purchasing department through provision of motivational incentives for the purchasing staffs. This entail the acknowledgment of best employees through giving out Awards, presents and so on.
• Purchasing department works also with human resource development on disciplinary matters of the employees.

 

Purchasing and marketing:

• Provision of sales forecasts on which purchasing can base its forward planning of materials, components etc
• Ensuring that through efficient buying, purchasing contributes to the maintenance of competitive prices
• Obtaining materials on time to enable marketing and production to meet promised delivery dates to the end-customer
• Exchange of information regarding customers and suppliers
• Marketing implications on partnership sourcing

 

Purchasing and information technology department (IT):

Purchasing department and IT have an increasing number of interdependencies. In some cases IT function is outsourced by the purchasing function. To this extent therefore its performance is evaluated accordingly by the purchasing department. Also the manager of IT works closely with purchasing manager to develop automated procedures and reports in line with purchasing. To add on that IT department establishes computer devices to purchase and to this extent the IT manager prepares purchase order requisition (POR) for such items and forwards the same to purchasing department. On the other hand the purchasing department sources for such devices on behalf of the IT department.

 

Organisation and structures in supply organisation:

Organisational structure can be defined as the pattern of relationships among positions in the organisation and among members of the organisation. Organisation design and structure is concerned with such elements as:

• The definition and allocation of specific tasks
• The grouping of related tasks into manageable functions, divisions, departments, sections or other units
• The allocation of responsibility within the organisation and to constituent functional units.

 

The supply function focus primarily on centralised and decentralized purchasing when building up the structures for the organisation. Centralized purchasing encompass grouping of purchasing tasks and specialist functions or services into one serving unit and under unified control. On the other hand decentralized purchasing entail division of purchasing function into sections whereby each section is mandated to control the functions within its scope. Here each department or branch is entirely responsible for its own buying.

 

• Centralized purchasing: The advantages of concentrating purchasing in a strong central department with a responsibility of coordinating across functions include:

 

(1) Economies of scale: Centralized purchasing enables an organisation to use its purchasing power or leverage to the best effect, since:

• Consolidation of quantities can take place resulting in quantity discounts
• Suppliers dealing with a central purchasing department have an incentive to compete for the whole proportion of an undertaking’s requirements
• Cheaper prices by enabling suppliers to spread overheads over longer production runs
• Specialist staff can be employed for each of the major categories of purchase
• Lower administration costs e.g. it is cheaper to place and process one order for one million shillings than ten each for one million.

 

(ii) Coordinating of activity: 

• Uniform policies can be adopted e.g. single sourcing, partnership sourcing etc.
• Uniform purchasing procedures can be followed
• Competitive buying between departments within the organisation is eliminate
• Standardization is facilitated by the use of company’s wide specification
• The determination of order quantities and delivery dates is facilitated.
• Staff training and development can be undertaken on a systematic basis.
• Purchasing research into sources, quantities and supplier performance is facilitated
• Suppliers find it more convenient to approach one central purchasing department.

       

  (iii)  Control of activity:

•  The purchasing department may become either a separate cost centre i.e. a location within the organisation in relation to which costs may be ascertained or a profit centre.
• Budgetary control may be applied both to the purchasing department and to the total expenditure on supplier.
• Uniformity of purchase prices obtained by centralized purchasing assists standard costing.
• Inventories can be controlled, reduced obsolescence and loss of interest on capital locked up in excessive stocks.
• Approaches such as Just-in-time and MRP ii can be implemented
• Purchasing department performance can be monitored by setting objectives and comparing actual results with pre-determined standards.

Disadvantages of centralized purchasing:

• Centralized can result in many activities that involve expenditure and time without adding value.
• Centralization can foster emphasis on functional objectives with a minimum concern for overall organisational goals.
• User departments will resort to informal procedures if formal purchasing procedures are slow.
• Training of managers with broad perspectives and wide understanding of business may be inhibited.
• Employee identification with a specialist group or function can make it difficult to implement change. It is a more rigid structure.
• Long chain of command.
• Slow-decision making.
• More bureaucratic.

 

(b)Decentralized Purchasing:

Advantages:

• The local buyer will have better knowledge of the needs of his/her factory and local suppliers for improved service. It is more responsive to clients i.e. the user departments.
• The buyer will be able to respond more quickly to emergency requirements.
• Local purchase will be emphasized and this attribute will save on transport costs.
• Local purchase will contribute to local prosperity of the local community etc.
• Small and easy to manage.
• Easy to install team spirit.
• Fast in decision making

Disadvantages:

• May lead to buying expensively for lack of economies of scale.
• Duplication of purchases may result.
• Standardization of materials and procedures may be difficult to implement.
• Specialized staff training may not be possible
• Rivals can emerge