Summer Internship Project (April-June 2011) on

Strategic Sourcing & Role of Long Term Business Agreements (LTBA) for the success of supply chain in Helicopter Division, HAL, Bangalore.
By Subhrajyoti Parida, Roll No.124 , Sec. B, PGDIE 40 Under guidance of Prof.(Mrs.) Sadhana Ghosh, Group Coordinator-Operations, NITIE, Mumbai Bangalore Mr. Lakshminarayana, Sr. Manager (Methods Engg.), Helicopter Division, HAL,

Need for the Project & Objectives

Objective : To strategize & optimize the existing Outsourcing Process in the Division focusing primarily on Vendor Rating, Vendor Selection & Evaluation, and finalization of Long Term Business Agreements with vendors.

Need for the Project

Divisions production target going to climb in coming fiscal years. Serious need of boosting profits & reducing in house overheads. Increasing value of production through outsourcing to meet enhanced targets. Streamlining and optimizing the outsourcing process to improve the vendor performance and develop a robust vendor base.

Methodology
Vendor Rating :
Strategic

Vendor rating System with 7C criteria proposed.

Analytical

Hierarchy Process (AHP) technique used for assigning weightages to the 7C rating criteria.

Vendor evaluation & Selection

Data

Envelopment Analysis (DEA) technique proposed to replace the existing the Categorical Type vendor evaluation technique.
proposed to use for vendor benchmarking and vendor development recommended for order apportionment.

DEA DEA

Methodology
Overall Outsourcing Process :
Wen

based e-Procurement System is proposed with dedicated modules for e-Tendering , e-Sourcing, tender evaluation, PO finalization, contract management, order monitoring and vendor rating etc.
Makes

the process faster, efficient and transparent.

Long Term Business Agreement:

Survey

was done through questionnaire distributed to executives across the top , middle and lower levels of management to record their attitude towards the spirit of LTBA and improvements were suggested to make the process more of collaboration than a transactional affair.

Literature Survey
Vendor rating : Defined as a continuous process of monitoring and evaluating the vendor performance on a periodic basis. Types of vendor rating Based on rating method : Weighted Point Method & Cost Ratio Method. Based on nature of criteria : Conventional & Strategic Vendor Rating System.

Vendor evaluation : Vendor evaluation is a process of rating the performances of several vendors based on their responses against tender inquiries ,leading to selection of most competent vendor (or a group of vendors).

Literature Survey
e-Procurement

: e-Procurement (electronic procurement) is the business-tobusiness or business-to-consumer or Business-to-government purchase and sale of supplies, civil works and services through the Internet as well as other information and networking systems.
Long

Term Business Agreement (LTBA) : It is a collaborative arrangement between two or more organizations that forms part of their overall business strategy, and contributes to achieving their long term goals and objectives (Kwok and Hampson, 1997). Hence, LTBA is also regarded as a Strategic Alliance.

Analysis & Recommendation

Vendor

Rating :

7 C s criteria recommended for strategic vendor rating -Competency -Cash Resources

-Capacity-Physical & Intellectual

-Commitment- Delivery, Package & Billing

- Cost
-Consistency Delivery and quality

-Control Quality, Quality system and Information System

Analytical

Hierarchy Process (AHP) technique employed to assign weightage (Annexure I)

Analysis & Recommendation

Ratings used in AHP

Analysis & Recommendation

Web

based e-procurement through ERP system

Planning and Decision making Module -BI tool for Make/Buy Decision, Capacity Estimate Vs. Production Target and TCE Vendor Assessment, Registration and Approval Module -Database of technical/technological and financial capabilities needed for different work package and components -Assists in decision making for vendor registration -Categorizes and classifies the vendors based on multiple parameters e-Tendering Module Preparation of RFQ, transmitting to vendors and controlling the bidding process. Suppliers Quotations Module- Regulates and assists the quotation process from suppler side

Analysis & Recommendation

Vendor evaluation and Selection Module-

DEA Algorithm for selection & performance analysis of vendors Efficiency = (Sum of weighted output/Sum of weighted input) Max E0= Sum of weighted output , for fixed weighted input Explanation as per Annexure II Clustering of most efficient vendors Order splitting among the efficient vendors or order placement on the most efficient vendor Benchmarking of vendor efficiency by comparing the inefficient vendors with efficient vendors ; assists in resource allocation for vendor support & development

Analysis & Recommendation

Contract Management Module -Provides the technical, commercial & legal inputs for finalizing Long Term Business Agreements with vendors Purchase Order Release Module -PO drafting, finalizing technical & commercial T & C , authentication & online release

Order monitoring Module -Treating every purchase order as a Project

- Monitors critical outsourcing processes (vendor development program, supplies from buyer side, production phases, first article inspection, delivery schedule, inspection, final acceptance and release of payment)

Analysis & Recommendation

-

Vendor Rating Module Monitors the overall performance of the registered vendors and tracks the same. Employs a pre-defined algorithm and set of 7 strategic criteria Rating based on regular updated and historical data collected through periodic vendor audits Categorizes the vendors into Cat. A, B or C. Monitors the performance of Cat A/B/C vendors dynamically.

performance rating for different vendors. It then categorizes the vendors under different

lasses like Class A, B or C.

The proposed vendor rating module makes the process highly transparent by allowing the

egistered vendors, in real-time, monitor the rating process, view the ratings and request

or feedback for continuous improvement in ratings.

Analysis & Recommendation

Class A B Categorization of Vendors (Table 5c.) Vendor Rating Implication 85% Qualified ( i.e , enquiry to be floated if technically applicable) 85 % < & > 65 % Qualified but enquiry may be floated, based on the emergency in requirement or if no. of Class A vendors are insufficient. Vendor may be subjected to performance improvement scheme. 65 % < Disqualified till it improves itself. Enquires are never floated till the audit team approves it.

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Analysis & Recommendation

Understanding the spirit of Long Term Business Agreements (LTBA)

To record the attitude of the O/S dept. towards the LTBA and understand the existing buyer-seller relationship, a questionnaire was used.(refer Appendix VI) Responses taken on a scale of 1 (strongly disagree),2,4 & 5(strongly agree) w.r.t input attributes (Trust, Commitment, Interdependence, Communication, Cooperation ,Joint Problem Solving) & Output attributes (Order execution performance). The items leading to poor item to total score co-relation values were removed

Analysis & Recommendation

Understanding the spirit of Long Term Business Agreements (LTBA)

Cronbachs Coefficient Alpha was calculated to measure the consistency. Spearmans Rank Correlation was found between the input and output attributes of LTBA.

For detailed calculation & analysis , refer Annexure III

Conclusions
Vendor Rating System :
The

Strategic Vendor Rating System proposed takes a comprehensive approach for rating the overall performance of the strategically significant vendors.

Vendor Evaluation & Selection :

DEA

technique helps in detailed evaluation of the vendors performance and categorizes them on basis of their relative efficiencies. benchmarking of vendors and allocation of resources for vendor development. apportionment of order among the qualified vendors based on their efficiencies.

Enables

Enables

Conclusions
e-Procurement System :
Enables

faster , efficient and transparent procurement and outsourcing process through minimization of human error,lesser paper work and better security.

Long Term Business Agreements :

Should

reflect more of cooperative/collaborative nature in buyer-seller relationship rather than transactional. and conditions for long term mutual benefits to either of the parties.

Terms

The proposed recommendations require phase wise implementations to obtain long term strategic benefits

Limitations

The proposed recommendations involves initial investments in terms of training and installation of the new set up. May require procedural makeover in the existing work set up. Hence the implementation should be phase wise and gradual. May result to internal resistance towards the change. The outcomes from the recommendations shall reflect in longer terms. Hence the solutions are not suitable for short term goals.