You are on page 1of 48

Procurement And Materials Management

Procurement And Materials Management

It Is Not Always Economical For The Companies To Make All The Materials Used In Manufacturing. Some Items Are Procured From Others, And Some Are Produced In The Company.

Procurement And Materials Management

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

Procurement And Materials Management

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

Procurement And Materials Management


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

Procurement And Materials Management

By Vertical Integration, We Mean Developing The Ability To Produce Goods Or Services that are Previously Purchased. It Can Take The Form Of Forward Or Backward Integration:

Procurement And Materials Management

Procurement And Materials Management

Because Purchased Items Represent A Large Part Of The Costs, Many Organizations Find Interest In Vertical Integration. For example, Murat Ticaret Originally Produces Cable. Then It Started Producing Cable Cords For Automobiles (Otosan, Dodge, Otoyol, Etc.)

Procurement And Materials Management

Vertical Integration Is Adventageous When The Organization Has Large Market Share. Backward Integration May Be Dangerous For Firms In Industries Undergoing Rapid Technological Changes.

Materials Management

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

Materials Management

When Transportation And Inventory Costs Are Substantial,


A Focus On Materials Management Is Appropriate.

Materials Management

Some Basic Functions Of Materials Management: Shipping Purchasing Warehousing (Raw Material, Wip, End Material) Order Processing Production And Inventory Control

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

Materials Management
Procurement method is the way of ordering material. Some of the new developments in this area include: 1) Electronic Ordering 2) Stockless Purchasing 3) Standardization, and 4) Just in Time Purchasing.

Electronic Ordering

Electronic Ordering Reduce Paper Transactions. Paper Transactions Include Purchase Order, Receiving Document, Authorization To Pay, Etc. Transactions Between Firms Are Increasingly Done Via Electronic Data Interchange (EDI). EDI Is A Standardized Data Transmittal Format For Computerized Communications Between Organizations.

Electronic Ordering

It Provides Data Transfer For Any Business Application, Including Purchasing. For Example, Data For A Purchase Order (Such As Order Date, Due Date, Quantity, Part Number, Order Number, Address, Etc.) Are Fitted Into Standard EDI Format.

Electronic Ordering

The Data Are Then Sent From One Computer To Another By Phone Line (Internet) A Computer Program Is Used To Read Those Data Into The Receiving Companys Files. Electronic Ordering Also Speeds Up The Traditionally Long Procurement Time.

Stockless Purchasing

This Means That The Supplier Maintains The Inventory For The Purchaser. Here, The Cost Of Stocking Inventory Has Been Temporarily Transferred From The Purchaser To The Supplier.

Stockless Purchasing

Consignment Inventories (Konsinye, To Be Discussed Later) Are A Related Option. If The Supplier Can Maintain The Stocks For A Variety Of Customers Who Use Same Products, Then There May Be Net Savings In This Option. Otherwise, Purchasing Costs May Go Up.

Standardization

Rather Than Obtaining A Variety Of Components Similar In Labeling, Coloring, Packaging, Etc. The Purchasing Agent Should Try To Have Those Components Standardized. For Every Component That Is Standardized, There Is One Less Invoice, One Less Item To Be Inventoried, Etc.

Just In Time Purchasing

Just In Time (Jit) Purchasing Is Directed Toward The Reduction Of Waste (That Is Present At Incoming Inspection, Excess Inventory and Poor Quality) And Delay.

Just In Time Purchasing

This Waste And Delay is Present In All Production Processes. (Not Only In Purchasing) Therefore, JIT Approach Can Be Applied To All Areas Of Production. ** The Basic JIT Approach: Every Moment Material Should Add Value.

Goals Of Just In Time Purchasing


1- JIT Tries To Reduce All Non-ValueAdded Activities. (If Purchasing Personnel Can Select More Reliable Vendors, Purchased Items Can Be Received Without Counting, Inspection.)

Goals Of Just In Time Purchasing


2- Elimination Of In-Plant Inventory. No Raw Material Inventory Is Necessary If Materials Are Perfectly Delivered to Where They Are Needed. Parts Should Be Delivered In Small Lots Directly To The Using Department As Needed. Elimination Of Inventory Allows Managers To See Production Problems That Are Hidden Behind Those Inventories.

Goals Of Just In Time Purchasing


3- Elimination Of In-Transit Inventory In-Transit Inventory Is The Inventory Flowing Between The Plant And Material Suppliers. It Can Be Reduced By Encouraging Suppliers To Locate Near The Plant. (The Shorter The Flow Of Material The Less Inventory And The Less Transportation Costs.)

Goals Of Just In Time Purchasing

Another Way To Reduce In-Transit Inventory Is To Have Inventory On Consignment. Under A Consignment Arrangement The Supplier Maintains Title To The Inventory. But, It Locates Its Warehouse Where The User Has Its Stockroom.

Goals Of Just In Time Purchasing


4- Quality And Reliability Improvement To Obtain Improved Quality And Reliability, a) Vendors And Purchasers Must Have Mutual Understanding And Trust. b) Suppliers Long Term Commitment To The Relationship Should Be Increased.

Physical Distribution Management


Products need to be distributed to the customers.

Physical Distribution Management

Today, many manufacturer companies utilize Multi-Echelon inventory systems. In multi-echelon inventory systems, Products are stored at different points, before reaching to the customer.

Physical Distribution Management

After manufacturing the Products, the Manufacturer stores them in its own warehouse. From there, they are Transported to regional warehouses. These regional warehouses serve as a distribution point for retail stores.

Physical Distribution Management

When the retail stores require products, They will request them from their local warehouse. The function of the Regional Warehouse is to provide an Intermediate Stage in the distribution system SO THAT manufacturer Does Not have to deal with every single customer. This also means that, Customers DO NOT have to Reach to the manufacturers plant.

Multi-Echelon inventory systems

Distribution system:

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

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

Modes of Transportation

Air transport is very expensive and limited in Space availability. Therefore, It is usually preferred for small-quantity, high-value products, which require fast delivery (e.g., highly fragile electronic parts).

Modes of Transportation

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

Modes of Transportation

Limitation of Transportation

There may be some limitations on these modes of transport, as well. For example, only Gas and Liquids can be conveniently transported by Pipelines. Similarly, very large products (such as building sections) would not fit in most Aircrafts.

Transportation

However, the mode of transport is usually Chosen with reference to the Relative Importance of the following factors: Delivery speed Delivery dependability (reliability) Quality deterioration Transportation cost, and Route flexibility.

Transportation

The following table gives a ranking of each mode of transport based on these factors: (1 = Best Performance; 5 = Worst Performance)

Transportation

Transportation

The selection of the transportation mode will also affect other decisions related to the management of operations. For example, firms may choose to locate their facilities near to ports or airports, or railway sidings, or close to motorways depending on the selected mode of transport.

Supply Chain Management

Logisticians have devoted little attention to managing the chain of supply up to the purchasing function. And similarly, materials managers have ignored the management of the flow of products down to the customers through distribution channels.

Supply Chain Management

On the contrary Supply Chain Management views the entire chain as a system to be managed. It can be defined as managing the entire chain of raw material supply, manufacture, assembly and distribution to the end customer.

Supply Chain Management

In long supply chains, it is not easy to co-ordinate the whole chain. This is especially true when part of the supply chain serves two sets of end cutomers.

Supply Chain Management


For example, many manufacturers of automobile components serve two different groups of end customers: - One group buys new cars (vehicle market) - The other group buys spare parts for repair of their cars (spares market) The spares market is also known as aftermarket for the car components.

Supply Chain Management

Any Questions?