1582205782181 Procurement AND Logistics Management Notes 1 PDF

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PROCUREMENT AND LOGISTICS MANAGEMENT INTRODUCTION UNDERSTANDING SUPPLY CHAIN MANAGEMENT This is a network of supplier, manufacturing, assembly, distribution, and logistics facilities that perform the functions of procurement of materials, transformation of these materials into intermediate and finished products, and the distribution of these products to customers. Supply chains arise in both manufacturing and service organizations. The concept of supply chain is "a set of interconnected linkages between suppliers of materials and services that span the transformation of raw materials into products and services and delivers them to a firm’s customers. Key characteristics of Supply Chain: a. Supply Chains are networks. The network concept implies some co-ordination of processes and relationships. b. Supply Chain consist of processes which can be defined as specific ordering of work activities, across time and space with a beginning and an end and clearly identified inputs and outputs. c. Supply Chains have linkages which facilitate the co-ordination of processes and relationships d. Supply Chain linkages are upstream and downstream. Upstream refers to the relationship between an enterprise and its suppliers and supplier’s supplier. Downstream refers to the relationship between an enterprise and its clients and client’s client. Supply Chain Management is a systems approach to managing the entire flow of information, materials, and services from raw materials suppliers through factories and warehouses to the end customer. Since Supply Chain Management is a process of optimizing a company's internal practices and improving the interaction with its suppliers and customers, it encompasses all logistic activities, customer-supplier

partnerships, new product development, inventory management, warehousing, transportation, order processing, production scheduling, and customer services. A basic purpose of Supply Chain Management is to control inventory by managing the flow of materials. The philosophy of Supply Chain Management is to have the right product in the right place, at the right price, at the right time, and in the right condition. Supply chain management (SCM) is a process used by companies to ensure that their supply chain is efficient and cost-effective. A supply chain is the collection of steps that a company takes to transform raw components into the final product. Typically, supply chain management is comprised of five stages: plan, develop, make, deliver, and return.  Plan. A plan or strategy must be developed to address how a given good or service will meet the needs of the customers. A significant portion of the strategy should focus on planning a profitable supply chain.  Develop is the next stage in supply chain management. It involves building a strong relationship with suppliers of the raw materials needed in making the product the company delivers. This phase involves not only identifying reliable suppliers but also planning methods for shipping, delivery, and payment.  Make, at the third stage, the product is manufactured, tested, packaged, and scheduled for delivery. Then, at the logistics phase, customer orders are received and delivery of the goods is planned.  Deliver. This is transporting of the ordered items to the customers.  Return. As the name suggests, during this stage, customers may return defective products or wrong items. The company will also address customer questions in this stage. The figure below shows the activities of SCM

Drivers of Supply Chain Management SCM consists of five drivers. Each of these drivers can be developed and managed to emphasize responsiveness (quick response to customer needs) and efficiency (more forecasting and stability). As you investigate how a supply chain works, you learn about the demands it faces and the capabilities it needs to be successful. The five drivers are illustrated below 1. Production – This driver can be made very responsive by building factories that have a lot of excess capacity and use flexible manufacturing techniques to produce a wide range of items. To be even more responsive, a company could do their production in many smaller plants that are close to major groups of customers so delivery times would be shorter. If efficiency is desirable, then a company can build

factories with very little excess capacity and have those factories optimized for producing a limited range of items. Further efficiency can also be gained by centralizing production in large central plants. 2. Inventory – Responsiveness can be enhanced by stocking high levels of inventory for a wide range of products. Additional responsiveness can be gained by stocking products at many locations so as to have the inventory close to customers and available to them immediately. Economies of scale and cost savings can be gotten by stocking inventory in only a few central locations such as regional distribution centers (DCs). 3. Location/Warehousing – A location decision that emphasizes responsiveness would be one where a company establishes many locations that are close to its customer base. Efficiency can be achieved by aggregating its inventory to a central location. 4. Transportation – Responsiveness can be achieved by a transportation mode that is fast and flexible such as trucks and airplanes. Efficiency can be emphasized by transporting products in larger batches and doing it less often. The use of transportation modes such as ship, railroad, and pipelines can be very efficient. 5. Information – The power of this driver grows stronger each year as the technology for collecting and sharing information becomes more widespread, easier to use, and less expensive. Information, much like money, is a very useful commodity because it can be applied directly to enhance the performance of the other four supply chain drivers. High levels of responsiveness can be achieved when companies collect and share accurate and timely data generated by the operations of the other four drivers. The above can be summarised in the diagrams below.

SUPPLY CHAIN MANAGEMENT PROCESSES: Lambert et al. lists eight Supply Chain Management Processes as: 1. Customer Relationship Management (CRM): It is concerned with learning about customers’ needs and behavior and the integration sales, marketing and service strategies.A critical aspect of Customer Relationship management is tracking down customer interactions. This can be done using software such as “Kalakota”. 2. Customer Service Management (CSM): It is concerned with providing internal and external customers with high-quality goods and services, at the lowest cost, with the shortest waiting times and maximum responsiveness and flexibility to their needs. 3. Demand Management: This is concerned with balancing the requirements of internal and external customers with supply chain capabilities. It includes forecasting demand, synchronizing supply and demand, increasing flexibility, reducing the variability of demand by means of standardization and the control of inventory. Demand Management is closely aligned to Materials Requirements Planning (MRP). 4. Order Fulfillment: This is concerned with the fulfillment of customer’s orders efficiently, effectively and at a minimum cost. 5. Manufacturing Flow Management: It is concerned with all the processes and activities required to transform inputs and a variety of resources into finished goods and services. It is therefore closely aligned to Operations Management. It is also closely aligned to approaches such as Manufacturing Resource Planning (MRP II), Manufacturing Execution Systems (MES) and Quick Response Manufacturing (QRM). 6. Supplier Relationship Management (SRM):This is concerned with how an enterprise interacts with its supplies. Relationship may be either short-or-long term and vary in intensity from “armslength” to high involvement. 7. Product Development and Commercialization: This is concerned with all the processes and activities involved in the development and marketing of new or existing products. Product Development involves four major steps: i.

Idea Generation

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Concept Development

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Product & Process Design

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Production & Delivery/Marketing

8. Returns Management: This is concerned with reverse logistics. Reverse Logistics can be defined as the process of planning, implementing and controlling the efficient, cost-effective flow of raw materials, in process inventory, finished goods and related information from the point of consumption to the point of origin for the purpose of recapturing value or proper disposal. PROCUREMENT PROCESS Procurement is the act of obtaining goods or services, typically for business purposes. Procurement is most commonly associated with businesses because companies need to solicit services or purchase goods, usually on a relatively large scale. The ultimate goal of procurement is coordinated and integrated action to fulfil a need for goods, services or works in a timely manner and at a reasonable cost. Early and accurate planning in procurement is essential to avoid last minute, emergency or ill-planned procurement, which is contrary to open, efficient and effective – and consequently transparent – procurement. Good procurement planning is essential to optimize the contribution of the procurement function towards achieving the overall goals of the organization. It supports: 

Transparency.

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Development of Key Performance Indicators (KPIs) according to milestones and accountabilities set in the procurement plan, and use of the same to monitor performance.

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Effective and timely solicitation of offers, award of contracts and delivery of the goods, services and works required.

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Early requisition to reduce any delays in procurement and timely delivery to project sites.

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Early identification of right commodities and quantities to meet programme needs.

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Sourcing the right suppliers on time to avoid cutting corners under rush procurement to meet deadlines or budget expenditure.

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Effective supply strategy and timely programme and project implementation.

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Avoidance of unnecessary exigencies and urgencies, enabling full competition and full compliance with standard rules and procedures.

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Sufficient time to fully explore alternative procurement approaches, such as joint bidding with other organizations

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Strengthened procurement power vis-à-vis suppliers.

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Obtaining best prices for aggregate requirements.

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Establishment of criteria to measure effectiveness of the procurement function.

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Systematic and procedurally correct procurements.

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Development of long term agreements.

Objectives of Purchasing The basic objective of the purchasing function is to ensure continuity of supply of raw materials, sub-contracted items and spare parts and to reduce the ultimate cost of the finished goods. The objectives of the purchasing department can be outlined as under:  To avail the materials, suppliers and equipment at the minimum possible costs: These are the inputs in the manufacturing operations. The minimization of the input cost increases the productivity and resultantly the profitability of the operations.  To ensure the continuous flow of production through continuous supply of raw materials, components, tools etc. with repair and maintenance service.  To increase the asset turnover: The investment in the inventories should be kept minimum in relation to the volume of sales. This will increase the turnover of the assets and thus the profitability of the company.

 develop an alternative source of supply: Exploration of alternative sources of supply of materials increases the bargaining ability of the buyer, minimization of cost of materials and increases the ability to meet the emergencies.  establish and maintain the good relations with the suppliers: Maintenance of good relations with the supplier helps in evolving a favorable image in the business circles. Such relations are beneficial to the buyer in terms of changing the reasonable price, preferential allocation of material in case of material shortages, etc.  To achieve maximum integration with other department of the company: The purchase function is related with production department for specifications and flow of material, engineering department for the purchase of tools, equipment and machines, marketing department for the forecasts of sales and its impact on procurement of materials, financial department for the purpose of maintaining levels of materials and estimating the working capital required, personnel department for the purpose of manning and developing the personnel of purchase department and maintaining good vendor relationship.  To train and develop the personnel: Purchasing department is manned with varied types of personnel. The company should try to build the imaginative employee force through training and development.  Efficient record keeping and management reporting:

Paper processing is inherent in the purchase function. Such paper processing should be standardized so that record keeping can be facilitated. Periodic reporting to the management about the purchase activities justifies the independent existence of the department. PROCUREMENT CYCLE According to CIPS, the procurement and supply cycle is as shown below:

1) Understand need and develop a high level specification

The first stage of the procurement process is to understand and define the business needs. By involving cross functional stakeholders in this process and utilising their expertise you can develop a high level specification. Engaging stakeholders at this early stage can support the change process where stakeholder buy in is required. 2) Market/Commodity and options (inc make or buy assessment) Once the business needs are outlined and a high level specification developed the next stage is to research the options available in the marketplace. By scoping out your spend and current positioning and dynamics of the marketplace you can start to identify potential suppliers and degree of competition in the marketplace. At this stage analysis can be conducted on whether to make or buy the product or outsource the service. 3) Develop strategy / plan This stage should consider the potential impact of the external environment. It may be the organisation’s policy to use small local suppliers or it may be to move to a global source. If there is competition, and you are well positioned to leverage the market, you may decide to conduct a competitive tender. If however you are reliant on one sole source of supply your strategy may be to develop competition in the marketplace or bring this in house. If for example your volume represents 50% of your supplier’s total turnover your procurement power will be greater, however also presents risks. All of these considerations should be incorporated within your analysis. 4) Pre procurement / market test and market engagement Market development identifies both stakeholder and business needs and the changes required in order to implement the procurement strategy to meet those needs flexibly. Testing the market or strategy will help to identify if it is the right time to go into the marketplace and other factors to consider such as what your competitors are doing, suppliers end of financial year or new legislation. 5) Develop documentation, PPQ / detailed spec / combine with 1 Time should be spent in developing the tender documents including a detailed breakdown of the volumes, service level agreement and terms and conditions along with a detailed specification to ensure consistency on pricing, product quality, operational functionality and that products are fit for purpose in order to reduce the financial impact of the wrong specification further down the line. When developing

specifications it is important to distinguish between product requirements and product preferences and build in tolerances for suppliers to adhere to, not restricting the supply and build cost into a product. You may decide to include technical, engineering or operations in this process. The specification will form part of the tender documentation issued to suppliers to quote on a like for like basis. 6) Supplier selection to participate in ITT (Invitation to tender) / RFQ (Request for Quotation)/ negotiation Conducting a Request for Information (RFI) at this stage in the procurement cycle will help to gain insights into suppliers, size, capabilities, financials, strengths and weaknesses before assessing whether they should be included in the tender process. Ranking the performance qualifiers against the business needs with key stakeholders is a useful exercise at this stage before reviewing the RFI against the selection criteria in order to select whom to invite to participate in the tender process. 7) Issue ITT/RFQ Once you have selected the companies to participate a formal Invitation to Tender (ITT) and Request for quotation (RFQ) is sent out to participants, items to be included are specification and documentation developed around the business requirements along with clear timescales to respond. 

In an ITT, suppliers submit an offer to provide a product or service strictly as it is described in the solicitation documents. ITBs are used by most organizations for most competitive procurement of goods and standard works.

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In an RFP, suppliers may offer alternative approaches to providing the required product or service. In other words, suppliers have an opportunity to be innovative in their proposals, and the RFP should make this opportunity clear. RFPs are used by organizations for competitive procurement of services, complex goods and complex works.

8) Bid/Tender Evaluation and validation Once the tenders are submitted, bids must be evaluated and validated in order to select the preferred supplier. Whether tendering contracts for the supply of goods or services, tender evaluation should be carried out in a structured, disciplined and transparent manner. Most evaluations explore price comparisons alongside technical capability, capacity, quality of service and financial health. At this stage a post tender negotiation often takes place, along with checking of references and credit checks or

carrying out supplier visit, technical audit, product sampling or a trial. Whole life costs should also be considered including the decommissioning, removal or disposal costs. 9) Contract award and implementation Once the supplier has been selected a contract is typically developed which allows both parties to fully understand their obligations and key success criteria as part of the agreement. This forms the foundation to manage the contract and relationship effectively. The agreed terms and conditions help to minimise contractual risks and exposure when doing business. Once the contract and terms are agreed then the communication and implementation process can begin with clear timescales and parameters set out on both sides, including relevant stakeholder groups to manage the implementation effectively. 10) Warehouse logistics and receipt The warehouse operations need to be considered in terms of the product coding and classification, space, layout and racking, frequency of deliveries, order processing and booking in procedures to ensure an efficient process, along with any other business requirements. 11) Contract performance review and continuous improvement There should be periodic reviews of performance against Key Performance Indicators (KPI’s) set out in the contract along with discussions on how the relationship is working and resolve any conflicts that have arisen. At this stage discussions and plans can be set for continuous improvement along with the next review date. 12) SRM (Supplier Relationship Management) and SC management and deve...