Procurement and

Manufacturing
 Overview of procurement and
manufacturing
• The quality imperative
• Procurement
• Manufacturing
• Lean and six sigma
• Logistical interfaces

4-2
 The 8 Dimensions of Product
Quality
• Features
Performance
– How
Whatwell
different
the product
functions
performs
or tasksincan
comparison
the product
to how
perform
it was designed to
• perform
Aesthetics
• Reliability
– Is the styling, color, workmanship pleasing to the customer
– Likelihood that the product will perform throughout its expected life
• Serviceability
• Durability
– What is the ease of fixing or repairing the product if it fails
– The actual life expectancy of the product
• Perceived Quality
• Conformance
– Based on customer’s experience before, during and after they purchase a
– product
Does the product meet its specifications as designed

4-3
 Total Quality Management
• Total quality management (TQM) is a
philosophy focused on meeting customer
expectations with respect to all needs,
across all company functions, and
recognizing all customers, both internal and
external
• TQM’s basic conceptual elements are:
– Top Management commitment and support
– Maintaining a customer focus in product, service
and process performance
– Integrated operations within and between
organizations
– A commitment to continuous improvement

4-4
 Management standards have been established by
the ISO in both quality and environment
• The International Organization for
Standards (ISO) was formed after World
War II
• ISO 9000—International Quality Standard
– First one established in 1994
– Currently transitioning to ISO 9000:2008
• ISO 14000—International Environmental
Standard
– First one established in 1998
– Current one is ISO 14001:2004

4-5
 ISO certified suppliers are frequently preferred by
procurement departments
• They have to conform to an externally defined
set of standards for quality and delivery of
service
• They are usually more open to sharing supply
chain information
• They welcome building relationships with their
customers
• They have formal processes in place for continual improvement of their
products, services, and processes
• They are easier for procurement folks to initially qualify and periodically
audit
– Certification is done by an external register agency
– Firms have to be re-certified every three years
4-6
 Procurement is now a strategic activity of the
firm
• Several factors have elevated the
importance of procurement to the
firm
– Purchased goods and services are
among the largest cost elements for
most firms
– The growing emphasis of
outsourcing has expanded the
supply base of organizations
• This added complexity requires more
management attention on the
organizational interfaces with suppliers

4-7
 Purchasing perspective

• Purchasing was historically perceived as just a buying

function for manufacturing and repair materials and
supplies
– Purchasing agent tried to get lowest price possible for acceptable
quality
– Transactional focus led to getting the best possible “deal” today
• Did not focus on future transactions
– No concept of Supply Chain
• Purchasing seldom looked beyond the first-tier supplier
– Purchasing simply responded to demands of production group

4-8
 Procurement perspective

• Procurement is an organizational capability that ensures

the firm is positioned to implement its strategies with
support from its supply base
– Procurement looks up and down the entire supply chain for
impacts and opportunities
• Goods and service account for 55 cents of every sales dollars
– Focuses on building relationships with suppliers and downstream
customers
– Involvement with outsourcing includes more than just purchasing
raw materials and parts
• Also includes finding alternate sources for manufactured products or
services to help manage demand

4-9
 Procurement focuses on several issues
related to the firms’ supply base
• Ensuring continuous supply
• Minimizing inventory investment
• Quality improvement of supply
• Supplier development
– Supplier selection
– Building supplier relationships
– Supplier continuous improvement
• Lowest total cost of ownership

4-10
Figure 4.1 Major Categories for the Components of
Total Cost of Ownership

4-11
 Procurement strategies
• Volume consolidation
– Reducing total number of suppliers while
minimizing risk
• Supplier operational integration
– Building partnerships
– Sharing information and knowledge
– Identifying linked processes and shared
opportunities for improvement
• Value management extends beyond
buyer-seller operations
– Involving the supplier early in product design
– Reducing complexity
– Value engineering

4-12
 Savings potential from volume
consolidation
• Purchases average 55% of every sales dollar
• Cost savings estimated between 5% to 15% of
purchases
• Potential savings is $5.5 million annually for a
company with revenues of $100 million

4-13
 Supplier operational integration
• Primary objective of operational integration is to cut waste,
reduce cost, and develop a relationship that allows both
buyer and seller to achieve mutual improvements
• Integration can take many forms
– Buyer providing detailed sales information to supplier
– Buyers and suppliers working together to redesign linked
processes
– Eliminating duplicated activities performed by both the buyer and
supplier
• Can provide incremental savings of 5% to 25% over the
benefits of volume consolidation

4-14
Value management through early supplier
involvement in product design

Figure 4.2 Flexibility and Cost of Design Changes 4-15

 Purchase requirement
segmentation
• Pareto Principle is a small percentage of
items account for a large percentage of
the dollars spent
– For example, “A” items in ABC inventory
• Purchasing processes should be tailored
to the value and/or criticality of the
materials needed
• Segmented approach is used to prioritize
resources for purchasing
– The most procurement effort goes to the most
critical supplies/suppliers

4-16
 E-Commerce and procurement
• Electronic Data Interchange (EDI) is the
electronic transmission of data between a firm
and its suppliers
– Shares information and knowledge such as order
entry, planning/scheduling, tracking, delivery, billing
and payment
• Internet-based communications offer several
opportunities for making product information
available while overcoming compatibility issues
between computer systems
– Electronic catalogs allow rapid access to product
info, specifications, pricing and ordering
– Buying exchanges allow sellers or buyers of specific
goods or services to find each other on a common
web site

4-17
 Manufacturing perspectives
• Brand power is the measure of customer
preference based on reputation, product quality
and supply chain capabilities

• Volume is traditionally treated according to the

principle of economy of scale
– Average cost to produce product declines as
manufacturing volume increases
– Particularly important when high fixed costs
are present
• Variety involves frequent product runs and high
repetition of small lot sizes
– Processes that can rapidly switch production
from one product to another while retaining
efficiency are said to have economy of scope

4-18
 Manufacturing perspectives
continued
• Constraints interact with volume and variety to create
realistic manufacturing plans
– Capacity is how much can you produce in a given unit of time
– Equipment considers how flexible it is
• Is one particular piece a bottleneck?
– Setup/Changeover considers how quickly can you change from
one variety of product to another

• Leadtime is the measure of elapsed time between release

of a work order to the shop floor and completion of all work
on the product to achieve ready-to-ship status

4-19
 The four common manufacturing
processes
• Job shop creates a custom product for each customer
• Batch process manufactures a small quantity of an item in a
single production run
• Line flow process has standard products with a limited
number of variations moving on an assembly line through
stages of production
• Continuous process is used to manufacture such items as
gasoline, laundry detergent and chemicals
• Modifications of the above can create new options
– Mass customization produces a unique product quickly and at a
low cost using a high volume production process

4-20
 Manufacturing strategies should match
your market requirements
• Make to Stock (MTS) features economies of scale, large
volumes, long production runs, low variety, and distribution
channels
• Assemble to Order (ATO) is when base components are
made, stocked to forecast, but products are not assembled
until customer order is received
– Manufacturing postponement practiced here
• Make to Order (MTO) relies on relatively small quantities,
but more complexity
– Requires much interaction with customer to work out design and
specification
– Usually shipped direct to customer

4-21
 The choice of strategy determines which
performance cycles the customer experiences

Figure 4.3 Manufacturing Strategy and Performance Cycles 4-22

 Total cost of manufacturing
• Total cost of manufacturing (TCM) includes:
– Procurement and production activities
– Inventory and warehousing activities
– Transportation activities
• TCM generally expressed as cost per unit
• Procurement and production costs go down
as volume goes up
• Inventory and warehousing costs go up as
volume goes up
• Transportation costs go down as volume goes
up, but level off at high volumes

4-23
TCM per unit ranging across
strategic alternatives

/MTS

Figure 4.4 Total Cost of Manufacturing 4-24

 Lean systems

• Lean is a philosophy of
manufacturing that
emphasizes the
minimization of the amount
of all resources (including
time) used in the operation
of a company
• Defining principle is the
elimination of “waste”

4-25
 Primary objectives of lean systems
are to
 Produce only the products that
customers want
 Produce products only as quickly as
customers want them
 Produce products with perfect quality
 Produce in the minimum possible
lead times
 Produce products with features that
customers want and no others
 Produce with no waste of labor,
materials or equipment
 Produce with methods that reinforce
the occupational development of
workers

4-26
 Six sigma quality concepts
• Six sigma approach is to
identify sources of variability
and then systematically reduce
them
• The six sigma goal is to
achieve a process standard
deviation that is six times
smaller than the range of
outputs allowed by the
product’s design specification

4-27
 Example of a six sigma quality level

Three sigma quality level

• Produces defect free product
99.74 percent of the time
• 66,807 defects per million parts
produced

Six sigma quality level

• Produces defect free product
99.99966 percent of the time
• 3.4 defects per million parts
produced

4-28
 Logistical interfaces

• Resources must be procured, positioned, and

coordinated as needed to support the
manufacturing strategy selected
• Four approaches to achieve this are:
– Just-in-time (JIT)
– Materials requirements planning (MRP)
– Design for logistics
– Performance based logistics

4-29
 Just-in-time (JIT) interfaces
• Just-in-time only produces to a customer
order (ATO, MTO)
• Purchased materials and components arrive
at the manufacturing or assembly point just
at the time they are required for the
transformation process
• Raw material and work in process
inventories are minimized
• Demand for materials depends on the
finalized production schedule
• Lot sizes are as low as one unit
• Close cooperation with suppliers is
essential!

4-30
 Materials requirements planning (MRP)
interfaces
• For more complex manufacturing
(MTO, ETO) where large numbers of
components or assemblies are used to
produce a final product
• Procurement has a key role in insuring
all the components are obtained on
time to make an end item
– Key information requirement is the bill of
materials (BOM)
• Planning sometimes spans multiple
manufacturing locations (e.g. Boeing
Dreamliner)

4-31
 Design for logistics interfaces
• Design for logistics includes the
requirements and framework for logistical
support in the early phases of product
development
• Considers
– What we are going to make
– How we are going to make it
– What logistics capabilities do we need
– How we are going to integrate our
suppliers into the process
– Any subassembly manufacture by
suppliers
– The need for outsourcing of some parts
or assemblies

4-32
 Performance based logistics
interface
• Initiated by US Department of
Defense to purchase performance
outcomes instead of individual
transactions defined by product
specifications
• Government specifies desired
outcomes and lets suppliers
determine the best way to meet
those requirements
• Currently limited to government
purchasing but business
organizations are expected to
adopt the practice

4-33
Table 4.2 Strategic Integration Framework

4-34