Understanding Supply Chain Management

LEARNING OBJECTIVES

• Provide basic understanding of the supply chain

• Define the functions of supply chain and understand
the responsibilities of each function
• Define and understand the emerging roles of supply management
• Recognize the challenges in managing the supply chain
• Define the key success factors of supply management
Supply Chain

Consumer Purchase Information

Suppliers Factory Factory Customer Store Consumer

Warehouse Warehouse

Product Flow

Customer Service
Logistics Operations
Demand & Replenishment
The goal of Supply Chain…

• to link the market place, distribution network,

manufacturing and procurement in a way that
delivers high customer service level at the lowest
cost.
Supply Management

Supply Management encompasses the planning and

management of all activities involved in sourcing and
procurement, demand and replenishment and all
logistics management activities including customer
service.
Supply Management

• Importantly, it also includes coordination and collaboration with

channel partners, which can be suppliers, intermediaries, third-
party service providers, and customers.
• The goal of Supply Management is to link the elements of supply
chain to include the distribution network, the manufacturing
process and the procurement activity to deliver high customer
service at the most cost efficient manner.
Plant Management

• To manufacture quality products at the lowest imaginable

controllable cost, in order to deliver volume targets
• This includes the management of all the activities in the plant
to convert raw and packaging materials to finished goods
ensuring the highest levels of productivity are met, whilst
maintaining world-class Environment, Safety and Health
standards
Supply Chain
Supply Management
+
Plant Management (Conversion)
=
Internal Functions that Drive the
Supply Chain
 Functional scope for Supply
Management is based on four pillars.

Demand &
Replenishment
Purchasing

Logistics
Operation
Customer
s
Service
Demand and Replenishment
Logistics
Operations

Demand forecasting

Customer
Services

Supply
Management
Inventory management Demand
And
Replenishm
ent

Purchasing
Replenishment
Logistics Operations
Logistics
Warehousing Operations

Handling Customer
& storage Service

Supply
Management
Inventory
Demand
management And
Replenishm
ent

Transportatio
n & delivery
Purchasing
Customer Service

Logistics
Operations

Order Taking

Customer
Service

Supply
Order Entry Management
Demand
and
Replenishm
ent

Purchasing
Order Processing
Purchasing

Logistics
Operations
Supplier Selection

Customer
Service

Supply
Negotiation and Bidding Management
Demand
and
Replenishm
ent

Purchasing
Contract Administration
Management
Responsibility Logistics
Operations
Management
alignment
Customer
Service
Performance
Supply
Management
Measurement Demand

Systems Capability and

Replenishment

Risk Management
Purchasing
Inventory Management
Inventory

• In the context of our study, INVENTORY concerns those services or

materials that directly or indirectly form part of the ongoing task of
delivering the services or making the products that an organization
provides or sells.
• It comprises the inputs, services or materials used, any part-finished
items (services or products) and those items that are complete and
held awaiting their sale.
• Simply put, inventory is a stock of items kept by an organization to
meet internal and external customer demands.
Business Inventories
DISTRIBUTION/  To meet customers demand
MARKETING  Finished Products at supermarkets,
distributors, traders and manufacturers

MANUFACTURING  To meet production requirements

 Raw and packaging materials at
manufacturing, assembly or fabrication plants

SERVICE/SUPPORT To meet needs of operating department

Operating supplies, spare

parts, office
supplies, maintenance supplies
Functions of Inventories
• Normal inventories
maintained
pipeline because of the need
TRANSIT to transport inventories from one
point to another when the transit
time is not instant

SAFETY/ • Used as protection against stock-

outs due to uncertainties in
BUFFER demand and supply

• This covers anticipated

ANTICIPATION or expected changes in
demand
Functions of Inventories

• This covers the need

produce
to in lot sizes where
CYCLE inventories are accumulated
at certain stages in the
production process ready for
the succeeding stage

• These created by
ECONOMIES ordering or producing
are
OF SCALE quantities to obtain in
lowest unit costs possible the
Why Plan? We need to..

• Balance the need to SATISFY CUSTOMERS on one hand

and the need to MINIMIZE INVENTORY HOLDINGS on the
other
• Deal with uncertainties in demand and supply lead times
• Categorize stock items according to importance to the firm so
we can focus properly
Objectives of Inventory Management

• High customer service

• Minimum investment

• Maintain optimum inventory level to deliver the high

customer service at the lowest possible cost
Methods of Valuation

FIRST-IN • The oldest goods in inventory

FIRST-OUT are issued
(FIFO)

LAST-IN • The last goods received

FIRST-OUT are issued first
(LIFO)

WEIGHTED • Value of goods received +

AVERAGE Value of goods on hand =
COST Cost per item divided by
total number of units
 Methods of Valuation

STANDARD • Based on estimate

COST before the item is
purchased

REPLACEMENT • Based on estimated

COST replacement cost
 Methods of Valuation
Jan 5 purchase 100 pcs. at Php 100/pc or total of Php 10,000
Jan 20 purchase 100 pcs. at Php 120/pc or total of Php
Total purchase 12,000 200 pcs at Php 22,000 total or Php
110/pc
FIFO LIFO
Inventory 200 Inventory 200
Jan 27 issuance ( 50) Jan 27 issuance ( 50)
Jan end inventory 150 Jan end inventory 150

Inventory Value Inventory Value

Beginning Php 22,000 Beginning Php 22,000

Jan 27 at Php 100 (5,000) Jan 27 at Php 120 (6,000)
End Jan valuation Php 17,000 End Jan valuation Php 16,000

For Method Average, balance of 150pcs will be at

Php 110/pc or End Jan Valuation of Php 16,500
 INVENTORY
COSTS
ORDERING/
SET-UP Carrying Cost Stock-Out Cost
COST

Cost incurred Cost of NOT

to place an Cost to STORE
ORDER or to and MAINTAIN HAVING the
SET-UP Proper ITEM
Inventory when needed
PRODUCTION
of item
• Administrative • Financing • Extra Production
• Transport • Ownership • Extra Transportation
• Forms • Risks • Lost Sales
• Communication • Overhead • Lost Customers
• Labor
Inventory Carrying Cost
COMPONENTS

• Cost of Money
FINANCE
COST  Interest Cost
 Opportunity Cost

OWNERSHIP • Insurance
COSTS • Taxes
Inventory Carrying Costs
COMPONENTS
• Obsolescence
RISKS • Theft
COSTS • Damage
• Shrinkage

• Warehouse
OVERHEAD • Handling
COSTS
• Control
• Labor
 Inventory Carrying or Holding Costs
(Approximate Ranges)
Cost as a
Category % of Inventory Value
Warehousing costs (building rent, 4%
depreciation, operating cost, taxes, (2 - 6%)
insurance)
Material handling costs (equipment,
2%
lease or depreciation, power,
operating cost) (1 – 4%)
3%
Labor cost from extra handling (2 - 4%)

Cost of money (borrowing costs, taxes, 9%

and insurance on inventory) (6 - 12%)

Obsolescence, damages, pilferages 3%

(1 - 5%)
and other risks
Overall carrying cost 12 - 31
Estimated %
Inventory Replenishment
Systems
Inventory Replenishment Systems

• Materials Requirements Planning

• The Just-in-time Approach
• Cyclical or fixed Order Interval System
• Visual Review System (Topping-up Method)
• Flow Control System
• Order Point or Fixed Order Quantity System
• Two-Bin System or Last Bag Method
Materials Requirements Planning
The Just-in-Time Approach

• Just-In-Time is an operations management philosophy

whose dual objectives is to reduce waste and to
increase productivity.
• The basic theme of JIT concept is that inventory is
evil.
The Just-in-Time Approach

• In an effective JIT application, the operating policy is to

minimize production and work-in-progress inventories by
providing each work center with just the quantity of
materials and components needed to do a given job at the
exact time they are needed.
Cyclical or Fixed Order Interval System

• A time based operation which

involves scheduled periodic
reviews of the stock level of
all inventory items.
• Also called the Periodic
Review System.
Cyclical or Fixed Order Interval System

• Inventory records are reviewed periodically.

• Replenishment orders are placed after each review.
• enough stock is ordered to bring the total on hand and
on order up to a predetermined target level.
Target Level = Lead Time Demand + Review Period Demand +
Safety Stock
Cyclical or Fixed Order Interval System

Applications:

• When there are many small issues of items from inventory, thus
posting of records for each issue is impractical.
• When ordering cost are relatively small.
• When many items are ordered at one time to make up
a production schedule.
Visual Review System (Topping-Up Method)

• A variation of the cyclical

system, where the
inventory level is visually
reviewed given a fixed
period and is topped-up
to is maximum level.
 Visual Review System (Topping-Up Method)
Applications:
• When responsibility for storekeeping cannot be assigned to an individual.
• When floor stocks are located near point of use.

Problems:
• The necessary periodic review of stock levels are not made.
• Stock is not put in its proper location and the reviewer does not find all
the inventory actually on hand.
• Ordering targets are not checked frequently and become outdated
and
useless as demand changes.
Flow Control System

• Used in situations where materials flows through the plant in

continuous streams.
• The materials are stored on the line near the point of use.
• Most materials used are purchased on term contracts and are
delivered on a daily basis.
• Stores personnel visually review the level of all material stock
daily and report any imbalances to purchasing or production
control.
 Order Point or Fixed Order Quantity System

• This system recognizes the fact that each item has its own
unique optimum order quantity, and is therefore based on
order point and order quantity factors , rather than on the time
factor.
 Order Point or Fixed Order Quantity System

• Order quantities are fixed.

• Order points are fixed.
• Replenishment intervals are not constant.
• Replenishment order is placed only when withdrawals reach
the order point.

Order Point = Lead Time Demand + Safety Stock

 Two-Bin System (Last Bag Method)

• Amount of stock equivalent to the order point is physically

segregated into a second bin or container and sealed;
• Replenishment order is place when open stock is consumed and
the second bin of container is opened.
• Used for low value high volume items kept in a controlled
stockroom where responsibility for replenishing stock and
maintaining the inventory can be assigned to one person.
Two Bin System (Last Bag Method)
 Two-Bin System (Last Bag Method)

• Estimate usage and set safety stock;

• Reorder Level = Lead-time Usage + Safety Stock
• Put reorder level in one or two bins or “bags”;
• Place replenishment order when order bag is opened;
• Expedite if third bad is opened.
Comparison of Inventory Control Systems,
Characteristics and Applications
Ty p e of
System/ FLOW
Characterist s O R D E R POINT CYCLICAL MRP CONTROL JIT
ic
Maintains L o w fair f air /good good/excellent excellent excellent

Inventory l
Leve
Application to all types a l l t y pe s primary dependent primary dependent dependent
items, type of par t icu lar l y g o o d demand demand demand
for i n d e p e n d e n t
demand demand
Application to a l l t y pe s of all manufacturing p r i m a r y i nt e r mi t e n t co n t i nu o us c on t i n u ou s
type of manufacturing operations manufacturing manufacturing manufacturing,
operations service o p e r a t i o n s oper a t io ns, w i t h oper at ions , w i t h with moderate
operations
par t icu lar l y g r e a t pr oduct little pr oduct pr odu ct v a r ie t y
good
for service v ar i e t y va i r e t y
operations
D e m a n d data historical a c t u a l in si mp le a ct u a l ac t u a l a c t ua l
operations
used
historical i n
complex
operations
Time-p h as e d no y e s in s imp le yes yes yes
ord er point? operations
no in complex
oparations
Computer o pt i o na l o p t i on a l yes op t i on a l o pt i o na l
required?
Bill of material s n o no yes op t i on a l o pt i o na l
expl osion/ agg r
egation
capability
Administrative minimal moderate moderate heavy heavy
effort required
Over to you!
 ABC Inventory Classification

The ABC Inventory Classification system is a selective

management of inventories which involves different ordering,
stocking levels, inventory review and control policies for different
items of inventory.
This system aims to establish the best possible control at least
possible cost for each class item in inventory. It places the
investment control in the A & B class of items where peso usage
value is most important.
ABC
Analysis
The technique enables individual minimum/maximum levels of
inventory to be easily determined by classifying inventory
into three categories
 Class parts are the “significant few” 60-70%

A
of your companies total purchasing spend
but only around 10-15% of the total number
of items in stock. Critical items that need
tight control

Valuable Class A parts are reviewed frequently

because inventory cover is low due to their high
individual part value
 A-B-C revision

• “ A ” Class parts will have the lowest level

of
inventory cover
• These tend to be important parts
• Very tight controls need to be in place
A • Parts are reviewed very regularly
• Ensure that potential stock-outs are avoided

For “A” class parts, we maintain high service levels by allocating

more effort and better systems, rather than high inventory levels
 Class parts are the “trivial many” 10-
15% of your companies total

C purchasing spend but more than 60-

70% of the total number of items in
stock. Higher volume
deliveries reduce administrative
costs.
 A-B-C revision

• “C” Class parts are the opposite of “ A ” Class

parts
• Trivial parts
• High levels of inventory cover
• Enables reductions to be made to the
time spent managing these parts
• Large delivery quantities
A Class “B” parts fall between “ A ” and “ C ”
class parts in terms of both inventory levels
and effort/systems used to manage the
parts. They usually range from 20-30% of
both expenditure and the number of items

B in stock.

C
ABC
Classification
Materials Matrix% ANNUAL % TOTAL REVIEW
ITEM STOCK DELIVERY
INVENTORY INVENTORY AND
GROUP
VALUE ITEMS CONTROL
LEVEL SCHEDULE

MOST
MOST
A 60% - 70% 10% - 20% LOW TIGHT &
FREQUENT
FREQUENT

LESS
LESS
B 20% - 30% 20% - 30% MEDIU TIGHT &
FREQUENT
M FREQUENT

LEAST
LEAST
C 10% - 20% 60% - 70% HIGH TIGHT &
FREQUENT
FREQUENT
Over to you!
ABC Classification

 List down your supply list and classify accordingly (volume, value, critical
importance)

 Considering the classification, share opportunities for inventory

reduction and/or increased service level
Demand and Replenishment
 Demand and Replenishment

Demand and Replenishment (Manage the demand and

replenishment process)
• Demand Forecasting
• Inventory Management
• Replenishment planning
• Development of Sourcing Strategy
• Production Planning
Definition of Forecasting

Forecasting is the prediction, projection, or

estimation of the occurrences of uncertain future
events or level of activity based on past behaviors,
experiences and events.
Forecasting Characteristics
• Forecasts will be wrong.
• Forecasts are most useful
with an estimate of error.
• Forecasts are more
accurate for larger groups
of items.
• Forecasts are more
accurate for shorter periods
of time.
Forecasting Implications

Planning Purposes Decision-Making

• Financial Planning • Policy Decisions

• Market Planning • Product Decisions

• Production Planning • Plant Decisions

• Master Scheduling • Operation Decisions

Demand Management

• The first step of Demand Management is Demand Planning which helps ensure a
product or service is available when the customer wants it.
• Demand Management (ISM glossary) is the “ proactive compilation of
requirements’ information regarding demand (i.e., customers, sales, marketing,
finance) and the organization’s capabilities from the supply side (i.e., supply,
operations and logistics management); the development of a consensus
regarding the ability to match the requirements and capabilities; and the
agreement upon a synthesized plan that can most effectively meet
customer requirements within the the constraints imposed by supply chain
capabilities”.
Demand

• Demand is the number of units that our customers ordered,

not necessarily the number of units that we shipped or
sold.

• Demand is determined at every stock location across the

different members/ levels of the supply chain, that would
best represent the actual consumer order.
Forecasting Approaches

Forecasting
Models

Quantitative Qualitative
(Statistical) (Judgmental)

Time Series Economic Econometric Soliciting

Analysis Indicators Models Opinions

Expert Market
Surveys
Opinion
Factors That Influence Forecasts

• Internal Factors

 advertising plans

 sales promotions

 selling effort

 pricing

 quality improvement
Factors That Influence Forecasts
• External Factors
 general business condition and state of
economy.
 competitor actions and reactions.
 governmental legislative actions.
 market place trends
― product life cycle
― style and fashion
― changing consumer demands
 technological innovations
Forecasting Framework
INPUTS:
market research ENVIRONMENTAL
CONSTRAINTS: demand history
management policies FACTORS:
advertising economic
available resources promotion
market conditions social
opinion political
technology
cultural

FORECASTING
MODEL(S)

OUTPUTS:
Expected demand and timing
1. by product
2. by customer
3. by region
Demand Forecasting Flow
The 6-Step Process

Publish Sales For

Baseline
Construction ecasti
Forecas ng Inputs
t
Bulletin
Demand Planning

Forecast
Sent to Supply Catego Forecas
Planning (U ry t
nconstrained Forecast Review
Forecast) Meeting
Sign-Off

Tool: Collaborative Forecasting Software / System

Demand Planning vs. Forecasting
imported history
Application of
Advanced Statistics +add
level
Comprehensive Tools
Market Intelligence

seasonality

growth
Base Statistical
Forecast
At any level Total Demand
of Plan
Aggregation
Measuring Forecast Accuracy

• Hit/Miss

• Forecast Error = [ (F / A) - 1] x 100%

• MAPE = / F – A / x 100%
------------------

A
Purchasing
 Purchasing is one of the functions which deals with
an element of the public and has an impact on the image
of the organization.
 Objective of Purchasing

The acquisition of materials and services of the right quality, in the right quantity,
at the right price, at the right time, at the right place with the right service-
support from the right source.
Fundamental Objective of Purchasing
• To buy at the lowest price, consistent with required quality and service.
• To attain a high inventory turnover, thereby diminishing excess storage,
carrying costs and inventory losses as a result of deterioration, obsolescence
and pilferage.
• To maintain continuity of supply, preventing interruption of the flow of
materials and services to users.
• To maintain specified materials quality level and consistency of quality which
permits efficient and effective operations
• To develop reliable alternate sources of supply to promote a
competitive atmosphere in performance and pricing.
• To minimized the cost of acquisition by improving the efficiency of
operations and procedures.
• To maintain the specified materials quality level and consistency of
quality which permits efficient and effective operations.
• To develop and maintain good supplier relationship in order to create a
supplier attitude and desire to furnish the organization with new ideas,
products and better prices and services.
Responsibilities of Purchasing
• It evaluates the requirements
• It selects the sources
• It monitors the orders or contracts to assure compliance
• It maintains liaison among suppliers, production, engineering,
quality assurance and accounting.
• It assures propriety of payment for goods and services.
• It maintains records of transactions.
The Purchasing Organization

A typical purchasing organization will have a manager or

director, buyers and supervisor of buyers, if the span of
control requires them; expediters, staff research
specialists and clerical support.
1. A manager of purchasing is the chief purchasing executive and is
primary concerned with administration of the function and decision
making.
2. Supervisory buyers are intermediate managers responsible for review
of transactions, administrative details and the buying of major
items.
3. Buyers evaluate requirements, determined methods of purchasing,
solicit and analyze bids and proposals, select sources, negotiate
prices, prepare and award contracts and orders, maintain control for
performance. Acts as liaison and advisor to other end users.
4. Expediters follow up status of suppliers’ performance, maintain
control of changes and modification, take expediting action as
necessary and identify receiving reports as necessary.

5. Staff research specialists act to serve buyers by investigating

qualified suppliers, maintain performance data, make market
studies, analyze pricing and cost, advise buyers in their selection of
sources and negotiations.
Buyers or buying groups may be organized to perform
buying of specific group of materials:

1. By commodity
2. By product
3. By stages of manufacturing
Purchasing Policies and Procedures
1. Defines interdependent functions and
responsibilities
2. Standardizes operations and promotes
uniformity
3. Assists in training
4. Permits measurement of performance
5. Facilitates continuity of operations.
6. Policies are guide to performance, establishing
what is to be done, procedures specify how the
policies are to be carried out.
Purchase Requisition
• It is a company documents that user departments
utilize to communicate to purchasing what, when and
how many products or service they need.

• It serves as an authority for purchasing to initiate and

effect the procurement of materials and services.
Types of Purchase Requisition
1. Standard requisition
2. Travelling requisition
3. Bill of Materials
4. Computer generated materials
5. On-line requisition
Sourcing Environment

The growth in the worldwide markets has

given the buyers more leverage in promoting
competition because of the greater number
of suppliers.
Nature of Sources

Manufacturers vs. Distributors

Large vs. Small Suppliers
National vs. Local Suppliers
International vs. Domestic Suppliers
Mandatory Sources of Supply
Emergency Sources
Small Disadvantaged/Labor Surplus Area Suppliers
Cooperative/Leveraged Buying
Degree of Competition and their
effects on Procurement

Full and Open Competition

Limited Competition
Technical Competition
Single Source
Sole Source
 Locating Sources of Supply

• Buyer’s Guide
• Telephone Directories
• Chamber of Commerce and Industry
• Professional Associations
• Shows/Exhibits
• Trade Publications/trade journals
• Colleagues of other companies
• Sales Representatives
• International Sources through foreign embassies
• Minority Supplier Sources
• Mail
• User Departments
• Electronic Mail and the Internet
Factors Related to the Use of
Existing vs. New Sources

Market Condition
Product Complexity/Technology Changes
Urgency of Need
Quality Expectations
Adequacy of Competition
Long-term Needs
Factors Related to the Use of Existing vs. New Sources

Long-term Relationships
Need for modification of supplier base
Changes in the supplier’s organization
Three Sourcing Policies

1. Sole Sourcing – it occurs when a supplier is the only

provider of a product or service, like proprietary product.
2. Single Sourcing – it is conscious choice by the purchaser to
use only one supplier even there are many suppliers that
exist for the product or services.
3. Multiple Sourcing – when orders are distributed among
several suppliers of the same product or products.
 Key Points

1.Sourcing strategies are affected by internal, external and product

factors.
2.Components of the sourcing strategy, include buying policies,
number of suppliers, type of suppliers and supplier relationship.
3.Common Approaches for dealing with the small-order sourcing
problem include central store, systems contract, blanket orders,
electronic ordering, petty cash, COD, procurement cards and other
drafts.
4.There are variety of resources for identifying potential suppliers.
5.Considerations for deciding between using current or a new supplier
include market conditions, product complexity, supplier
characteristics and supply continuity.
Local Sourcing/Distributor - Factors

Closer cooperation between buyers and sellers is possible because of

close geographical proximity
Delivery dates are more certain as transportation is only a minor
factor in delivery
Shorter lead time can frequently permit inventory reduction
Rush orders are likely to be filled faster
Disputes are usually more easily resolved
Foreign/Global Sourcing - Factors

Economies of scale can be more efficient and offer better services

and lower prices
Offshore companies can offer better technical services
Can offer greater flexibility due to larger production capacity
Longer lead times and cycle time
Frozen schedules
Methods of Procurement
• Regular Purchase Order
• Blanket Purchase Order
• Systems Contracting
• Consignment Methods
• Standing Orders
• Electronic Order System
• Petty Cash Purchase
• On-line procurement process
Vendor Performance Evaluation
What kind of Company Makes a
Good Supplier?

“ A good supplier is one who is at all times honest and fair

in his dealings with customers, his own employees, and
himself; who has adequate plant facilities and know-how
so as to be able to provide materials which meet
purchaser’s specifications, in the quantities required and
at the time promised; whose financial position is sound;
Whose prices are reasonable both to the buyer and to himself;
whose management policies are progressive; who is alert to the
need for continued improvement in both his products and his
manufacturing processes; and who realizes that, in the last
analysis, his own interest are best served when he best serves his
customers.”

•Dr. Wilbur England

•Harvard University
Vendor Accreditation Process

Organize accreditation team

Establish formal program

Identify Prospective candidates

Review current & historical data

Conduct supplier survey

Accredit qualified Supplier

 Vendor Accreditation Process

Accredit qualified supplier

Continuous improvement
Issues in Conducting Supplier Plant Visit

Reason for conducting visits

Cost vs. benefit of visits
Site Inspection team
Factors appraisal at site visits
Pre-Evaluation of Suppliers
Factors Used to Analyze Vendor’s
Ability to Perform

Frequency and/or volume of orders

Length of time to process orders
Delivery
Quantity
Product/services expertise
Order backlog
Factors Used to Analyze Vendor’s
Financial Status

Balance Sheets
Income statement
Cost control history
Credit ratings
Annual reports
Financial advisory reports
Factors Used to Analyze Vendor’s
Organization and Management

Top management commitment

Stability/technical competence
Training of personnel
Equipment capabilities
General reputation/industry status
Customer commitment
Commitment as a good employer
Factors Used to Analyze Vendor’s
Labor Status

Employee Skills
Unionization
CBA Expiration date
Development and Use of Approved
Supplier List

Partnered Supplier
Certified Supplier
Preferred Supplier
Accredited Supplier
Suppliers
Classification of Suppliers

• Conditional
• Approved
• Certified
• Preferred
 Classification of Suppliers

• Conditional supplier – an existing supplier whose performance

does not meet standards or a new supplier who has not
establish a performance history.

• Approved supplier – also called an accredited supplier, a

vendor who has met the organization’s selection criteria and
been approved or accredited to supply a required item.
Supplier has been added to the approved list. Customer
inspection and testing would precede use.
 Classification of Suppliers

• Preferred supplier – a supplier that an organization has

determined meet its expectations for quality, delivery
and/or price and that are able to respond to unexpected
changes.

Often the organization master price agreements with

preferred suppliers. For items where preferred suppliers
have been identified, the entire organization is required to
buy from these suppliers.
 Classification of Suppliers

• Certified suppliers – one whose quality control systems is

integrated with the buying firm’s quality control system
and through which a larger quality assurance system is
established.

Cost associated with quality are reduced through the

elimination of duplicate efforts and use of SPC and other
quality control processes and information sources.
Post-Evaluation of Suppliers
Factors used in Evaluating
Supplier’s Performance:

Quality
Service
Price
Factors used in Evaluating
Supplier’s Performance:

QUALITY

Percentage of accepted materials

Degrees of quality acceptance
Accurate labeling, coding, documentation
Integrity of quantity
Factors used in Evaluating
Supplier’s Performance:

SERVICE
Percentage of stock-out/production stoppage due to late
deliveries
Percentage of overdue orders
Unauthorized partial/split shipments
Supplier stocking arrangements
Lead-time reduction
Factors used in Evaluating
Supplier’s Performance:

PRICE

Competitive net price

Supplier initiated cost savings
Supplier’s Performance
Rating Methods

1. Benchmarking
2. Categorical method
3. Weighted point method
4. Cost-ratio method
5. Total acquisition cost
 Benchmarking

A comparison of product or a process to the best

available
To use it for supplier measurement, compare a
supplier’s performance to the best – known
performance.
Categorical Method

Develop a range of performance categories for each appraisal criteria element.

Determine your acceptable baseline for each category.
Set score for each category.
Complete the rating of suppliers.
When scoring a supplier for each appraisal criteria component, you can add a
comment to describe the basis on which your scoring was based.
In some cases, you have actually two choices, either the supplier fulfils the criteria
or not.
Weighted Point Plan

A comprehensive mathematical vendor rating formula

used by many purchasing departments.
Designed to provide a comparative evaluation of vendor
performance among suppliers.
Formula based on:
 Factors such as quality, price and service
 Relative importance varies with respect to various items.
Assignment of weights is a matter of judgement.
Weighted Point Plan

The quality rating is a direct percentage of the

number of acceptable lots received in relation to
total lots received.
In rating price, the lowest net price (gross price less
discounts plus transportation cost) obtained from
any vendor is taken as 100 points and net price from
other vendors are rated inverse ratio to this figure.
Weighted Point Plan

The service rating is a direct percentage of lots

received as promised in relation to the total lots
received.
These three ratings are multiplied by their
respective weighting factors and results are added
to give a numerical “incoming material rating” for
each vendor for a given item.
 Weighted Point Plan

Supplier Raw
Performance Weights Ratings
Evaluation Factors Score

Quality 24 Acceptable Deliveries 96% 50% 48%

25 total Deliveries

Price 0.80 Lowest Net price 80% 30% 24%

1.00 Supplier Net Price

Service 22 Deliveries on time 88% 20% 18%

25 total deliveries

Total 100% 90%

 Weighted Point Plan – Example
Weights Measurement

Quality – 40% No. of lots rejected/no. of lots received

Lowest net price/net price
Price – 35%
Lots received as promised/total lots
Service – 25% received
Weighted Point Plan – Example
Vendor A Vendor B

Shipped 58 lots/2 rejected; % good lots – Shipped 34 lots/4 rejected; % good lots –
96.5; quality rating 38.6 88.2%; quality rating 35.3
Price- $1.07/unit; lowest price Price- $0.93/unit; lowest price so full
$0.93/unit; price perf. – 86.9%; price price rating of 35
rating 30.4
Service – 55 lot delivered out of 58 lots Service – 29 lot received as promise; 5
ordered =94.8% performance; service late deliveries; 85.3% performance;
rating 23.7 service rating 21.3
Cost – Ratio Plan

Attempts to capture costs associated with actual supplier performance in the

areas of quality and delivery.
Comprehensive in terms of a total cost approach to purchasing.
Costs uniquely associated with quality, delivery and price are determined for
each supplier. These are then totaled to produce an overall ratio.
The adjusted price for each supplier in a articular commodity is then compared.
Cost – Ratio Plan

Quality costs include rework, rejection processing,

sorting, etc.
Delivery costs include production downtime,
expediting costs, higher price substitution, etc.
Data collection is extensive and time consuming.
Hence, not many firms use this approach.
Cost – Ratio Method

Step 1- Determine the factor to be included (such as delivery, quality, or

service)
Step 2- determine the purchasing’s costs for non-performance in any these
areas.
Step 3- For a given shipment, calculate the costs actually incurred. Calculate
the ratio of each incurred costs to the purchase value of the shipment. A ratio
for each factor will exist.
Cost – Ratio Method

Step 4- Total the ratios for all factors to

determine a total for that shipment. This is the
supplier’s overall costs ratio.
Step 5- Calculate an adjusted price as follows:
Adjusted price= price x (1 +Overall Cost Ratio)
Step 6-Use the adjusted price to evaluate
suppliers for future business
 Example of Cost – Ratio Plan

Quality cost ratio= total quality cost for item/total

value of purchases for item

Delivery cost ratio = total delivery for item/total

value of purchases for item
 Total Acquisition Cost

Sum of price plus all other identified costs of

acquisition such as delivery performance,
overhead cost of handling the transaction and
delivery and cost of working capital and the cost
of nonconformance (such as inspection costs and
costs by defective products)
 Example of Cost – Ratio Plan

Supplier A Supplier B

Cost - $50/unit Cost - $51/unit

Quality cost ratio – 3% Quality cost ratio – 1%
Delivery cost ratio – 2% Delivery cost ratio - 0%
Total cost ratio = Total cost ratio =
50+(3%x$50)+(2%x50 51+(1%x51)+(51x0%)
= $ 52.50 =$51,51
Factors that can Distort Ratings

Inaccurate data – if databases from which the performance number

are calculated include errors, the resulting measurements will be
wrong resulting in no credibility with internal customer and suppliers
Improper weighting of factors – weights assigned to factors must
reflect accurately the value the organization places on them.
Subjectivity– measurements that are subjective can be affected by
selective memory of evaluators and can be skewed by an unusual
recent event.
Inter-Relationship with Other Departments

1. Purchasing and Engineering

• Product design and specification
• Processes

2. Purchasing and Production

• Product schedule
• Inventory Turnover

3. Purchasing and Sales

• Sales Forecasting
• Materials planning requirements
4. Purchasing and Quality Assurance
• Product / material quality requirements
• Supplier quality reliability

5. Purchasing and Finance

• Product design and specification
• Processes
Customer Service
Supply Chain

Consumer Purchase Information

Suppliers Factory Factory Customer Store Consumer

Warehouse Warehouse

Product Flow

Customer Service
Logistics Operations
Demand & Replenishment
 Functional scope for Supply
Management is based on four pillars.

Demand &
Replenishment
Purchasing

Logistics
Operation
Customer
s
Service
The goal of Supply Chain…

• to link the market place, distribution network,

manufacturing and procurement in a way that
delivers high customer service level at the lowest
cost.
Customer Service is the supply chain management process
that represent the company’s face to the customer. The
process is the key point of contact for administering service
level agreements (SLA) developed by customer teams as part
of the customer relationship management process. The goal
is to provide a single source of customer information, such as
product availability, shipping dates and order status.
Customer Service

Logistics
Operations

Order Taking

Customer
Service

Supply
Order Entry Management
Demand
and
Replenishm
ent

Purchasing
Order Processing
 Key Performance measure for
Customer Service

1. Order Taking/Entry/Processing - Accuracy in data entry / Customer

Service

2. Invoicing – Invoice Accuracy

3. Credit Memos – No. of credit and Accuracy of Credit Memos

1. Order Taking/Entry/Processing - Accuracy in data entry /
Customer Service

2. Invoicing – Invoice Accuracy

3. Credit Memos – No. of credit and Accuracy of Credit Memos

 What is Order to Cash (OTC)?

Reminder: An order cycle is not complete until it’s paid.

 WHAT ARE THE REASON FOR CHANGE?
• A one stop shop for customer inquiries as well as other internal customers
• One voice with our Customers and Sales for any information about order
status
• Optimize the OTC process
 Process optimization versus a single phase/activity optimization
 Synchronization of all the activities (same priorities and target)
 Integrated management of supply issues
 Clear ownership of problems
• Focus on Customer versus focus on activity
THANK YOU!