Procurement And Materials Management


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Procurement And Materials Management

  1. 1. Procurement And Materials Management
  2. 2. Procurement And Materials Management <ul><li>It Is Not Always Economical For The Companies To Make All The Materials Used In Manufacturing. </li></ul><ul><li>Some Items Are Procured From Others, And Some Are Produced In The Company. </li></ul>
  3. 3. Procurement And Materials Management <ul><li>Some Reasons For Making : </li></ul><ul><li>- Lower Production Cost </li></ul><ul><li>- Unreliable Or Unsuitable Suppliers </li></ul><ul><li>- Assure Adequate Supply (Quantity) </li></ul><ul><li>- Utilize Surplus Labor Capacity </li></ul><ul><li>- Obtain Desired Quality </li></ul><ul><li>- Protect Special Design Or Quality </li></ul>
  4. 4. Procurement And Materials Management <ul><li>Some Reasons For Buying : </li></ul><ul><li>- Lower Acquisition Cost </li></ul><ul><li>- Inadequate Capacity </li></ul><ul><li>- Reduce Inventory Costs </li></ul><ul><li>- Ensure Alternative Sources Of Supply </li></ul><ul><li>- Item Is Protected By A Patent Or Trade License </li></ul>
  5. 5. Procurement And Materials Management <ul><li>Choosing Between Making or Buying An Item Is Largely Dependent On The Vertical Integration Strategy Of A Company. </li></ul>
  6. 6. Procurement And Materials Management <ul><li>By Vertical Integration, We Mean Developing The Ability To Produce Goods Or Services that are Previously Purchased. </li></ul><ul><li>It Can Take The Form Of Forward Or Backward Integration: </li></ul>
  7. 7. Procurement And Materials Management
  8. 8. Procurement And Materials Management <ul><li>Because Purchased Items Represent A Large Part Of The Costs, Many Organizations Find Interest In Vertical Integration. </li></ul><ul><li>For example, Murat Ticaret Originally Produces Cable. Then It Started Producing Cable Cords For Automobiles (Otosan, Dodge, Otoyol, Etc.) </li></ul>
  9. 9. Procurement And Materials Management <ul><li>Vertical Integration Is Adventageous When The Organization Has Large Market Share. </li></ul><ul><li>Backward Integration May Be Dangerous For Firms In Industries Undergoing Rapid Technological Changes. </li></ul>
  10. 10. Materials Management <ul><li>Purpose Of Materials Management Is To Obtain Efficiency Of Operations Through Integration Of 1) Material Acquisition , 2) Material Movement, and 3) Material Storage . </li></ul>
  11. 11. Materials Management <ul><li>When Transportation And Inventory Costs Are Substantial, </li></ul><ul><li>A Focus On Materials Management Is Appropriate. </li></ul>
  12. 12. Materials Management <ul><li>Some Basic Functions Of Materials Management: </li></ul><ul><li>- Shipping </li></ul><ul><li>- Purchasing </li></ul><ul><li>- Warehousing (Raw Material, Wip, End Material) </li></ul><ul><li>- Order Processing </li></ul><ul><li>- Production And Inventory Control </li></ul>
  13. 13. Materials Management <ul><li>One of the major issues that materials managers might encounter is the method of Procurement. </li></ul>
  14. 14. Materials Management <ul><li>Procurement method is the way of ordering material. </li></ul><ul><li>Some of the new developments in this area include: </li></ul><ul><li>1) Electronic Ordering </li></ul><ul><li>2) Stockless Purchasing </li></ul><ul><li>3) Standardization, and </li></ul><ul><li>4) Just in Time Purchasing. </li></ul>
  15. 15. Electronic Ordering <ul><li>Electronic Ordering Reduce Paper Transactions. </li></ul><ul><li>Paper Transactions Include Purchase Order, Receiving Document, Authorization To Pay, Etc. </li></ul><ul><li>Transactions Between Firms Are Increasingly Done Via Electronic Data Interchange (EDI) . </li></ul><ul><li>EDI Is A Standardized Data Transmittal Format For Computerized Communications Between Organizations. </li></ul>
  16. 16. Electronic Ordering <ul><li>It Provides Data Transfer For Any Business Application, Including Purchasing. </li></ul><ul><li>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. </li></ul>
  17. 17. Electronic Ordering <ul><li>The Data Are Then Sent From One Computer To Another By Phone Line (Internet) </li></ul><ul><li>A Computer Program Is Used To Read Those Data Into The Receiving Company’s Files. </li></ul><ul><li>Electronic Ordering Also Speeds Up The Traditionally Long Procurement Time. </li></ul>
  18. 18. Stockless Purchasing <ul><li>This Means That The Supplier Maintains The Inventory For The Purchaser. </li></ul><ul><li>Here, The Cost Of Stocking Inventory Has Been Temporarily Transferred From The Purchaser To The Supplier. </li></ul>
  19. 19. Stockless Purchasing <ul><li>Consignment Inventories (Konsinye, To Be Discussed Later) Are A Related Option. </li></ul><ul><li>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. </li></ul><ul><li>Otherwise, Purchasing Costs May Go Up. </li></ul>
  20. 20. Standardization <ul><li>Rather Than Obtaining A Variety Of Components Similar In Labeling, Coloring, Packaging, Etc. The Purchasing Agent Should Try To Have Those Components Standardized. </li></ul><ul><li>For Every Component That Is Standardized, </li></ul><ul><li>There Is One Less Invoice, One Less Item To Be Inventoried, Etc. </li></ul>
  21. 21. Just In Time Purchasing <ul><li>Just In Time (Jit) Purchasing Is Directed Toward The Reduction Of </li></ul><ul><li>Waste (That Is Present At Incoming Inspection, Excess Inventory and Poor Quality) And Delay. </li></ul>
  22. 22. Just In Time Purchasing <ul><li>This Waste And Delay is Present In All Production Processes. (Not Only In Purchasing) </li></ul><ul><li>Therefore, JIT Approach Can Be Applied To All Areas Of Production. </li></ul><ul><li>** The Basic JIT Approach: Every Moment Material Should Add Value. </li></ul>
  23. 23. Goals Of Just In Time Purchasing <ul><li>1- JIT Tries To Reduce All Non-Value-Added Activities. </li></ul><ul><li>(If Purchasing Personnel Can Select More Reliable Vendors, Purchased Items Can Be Received Without Counting, Inspection.) </li></ul>
  24. 24. Goals Of Just In Time Purchasing <ul><li>2- Elimination Of In-Plant Inventory. </li></ul><ul><li>No Raw Material Inventory Is Necessary If Materials Are Perfectly Delivered to Where They Are Needed. </li></ul><ul><li>Parts Should Be Delivered In Small Lots Directly To The Using Department As Needed. </li></ul><ul><li>Elimination Of Inventory Allows Managers To See Production Problems That Are Hidden Behind Those Inventories. </li></ul>
  25. 25. Goals Of Just In Time Purchasing <ul><li>3- Elimination Of In-Transit Inventory </li></ul><ul><li>In-Transit Inventory Is The Inventory Flowing Between The Plant And Material Suppliers. </li></ul><ul><li>It Can Be Reduced By Encouraging Suppliers To Locate Near The Plant. </li></ul><ul><li>(The Shorter The Flow Of Material The Less Inventory And The Less Transportation Costs.) </li></ul>
  26. 26. Goals Of Just In Time Purchasing <ul><li>Another Way To Reduce In-Transit Inventory Is To Have Inventory On Consignment . </li></ul><ul><li>Under A Consignment Arrangement The Supplier Maintains Title To The Inventory. </li></ul><ul><li>But, It Locates Its Warehouse Where The User Has Its Stockroom. </li></ul>
  27. 27. Goals Of Just In Time Purchasing <ul><li>4- Quality And Reliability Improvement </li></ul><ul><li>To Obtain Improved Quality And Reliability, </li></ul><ul><li>a) Vendors And Purchasers Must Have Mutual Understanding And Trust. </li></ul><ul><li>b) Suppliers’ Long Term Commitment To The Relationship Should Be Increased. </li></ul>
  28. 28. Physical Distribution Management <ul><li>Products need to be distributed to the customers. </li></ul>
  29. 29. Physical Distribution Management <ul><li>Today, many manufacturer companies utilize Multi-Echelon inventory systems . </li></ul><ul><li>In multi-echelon inventory systems, Products are stored at different points, before reaching to the customer. </li></ul>
  30. 30. Physical Distribution Management <ul><li>After manufacturing the Products, the Manufacturer stores them in its own warehouse. </li></ul><ul><li>From there, they are Transported to regional warehouses . These regional warehouses serve as a distribution point for retail stores . ( figure ) </li></ul>
  31. 31. Physical Distribution Management <ul><li>When the retail stores require products, They will request them from their local warehouse. </li></ul><ul><li>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. </li></ul><ul><li>This also means that, Customers DO NOT have to Reach to the manufacturer’s plant. </li></ul>
  32. 32. Transportation <ul><li>Physical distribution managers must ALSO decide on which mode of transport is Best to distribute Products to the Customers. </li></ul>
  33. 33. Transportation <ul><li>Available modes of transport are: </li></ul><ul><li>-Road transport (cars, trucks), </li></ul><ul><li>-Railway transport, </li></ul><ul><li>-Water transport (ships), </li></ul><ul><li>-Air transport, and </li></ul><ul><li>-Pipelines (oil, natural gas). </li></ul>
  34. 34. Transportation <ul><li>Air transport is very expensive and limited in Space availability. </li></ul><ul><li>Therefore, It is usually preferred for small-quantity, high-value products, which require fast delivery (e.g., highly fragile electronic parts). </li></ul>
  35. 35. Transportation <ul><li>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). </li></ul>
  36. 36. Transportation
  37. 37. Transportation <ul><li>There may be some limitations on these modes of transport, as well. </li></ul><ul><li>For example, only Gas and Liquids can be conveniently transported by Pipelines. </li></ul><ul><li>Similarly, very large products (such as building sections) would not fit in most Aircrafts. </li></ul>
  38. 38. Transportation <ul><li>However, the mode of transport is usually Chosen with reference to the Relative Importance of the following factors: </li></ul><ul><li>- Delivery speed </li></ul><ul><li>- Delivery dependability (reliability) </li></ul><ul><li>- Quality deterioration </li></ul><ul><li>- Transportation cost, and </li></ul><ul><li>- Route flexibility. </li></ul>
  39. 39. Transportation <ul><li>The following table gives a ranking of each mode of transport based on these factors: </li></ul><ul><li>(1 = Best Performance; 5 = Worst Performance) </li></ul>
  40. 40. Transportation
  41. 41. Transportation <ul><li>The selection of the transportation mode will also affect other decisions related to the management of operations. </li></ul><ul><li>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. </li></ul>
  42. 42. Contract Terms <ul><li>In any exchange between buyers and suppliers, both sides have to agree on Who will Pay for the transportation. </li></ul><ul><li>This becomes a particular issue in international trade Where knowledge of international trade agreements and legislation are critical to purchasing Successfully from other Countries. </li></ul>
  43. 43. Contract Terms <ul><li>Internationally recognized shipping terms are now in operation which are applied to international transportation by sea or air . </li></ul><ul><li>The main definitions of these terms are as follows: </li></ul>
  44. 44. Contract Terms <ul><li>Ex-works : In an ex-works contract, the purchaser accepts full responsibility for arranging transportation from the supplier’s location. </li></ul>
  45. 45. Contract Terms <ul><li>This involves: (1) Arranging transportation, insurance, and documentation to move the goods to the required source port (air or sea), (2) Have them loaded on to the mode of transport, (3) Transported to, and unloaded at the destination port, (4) Cleared through customs and transported to the purchaser’s location. </li></ul>
  46. 46. Contract Terms
  47. 47. Contract Terms <ul><li>More recently, purchasers and suppliers have sub-contracted this transportation function to specialists such as Federal Express. </li></ul>
  48. 48. Contract Terms <ul><li>Free alongside (FAS) : In this arrangement, the supplier agrees to deliver to the (source) port specified by the purchaser </li></ul><ul><li>and is responsible for the transportation and insurance of the goods Until that point . </li></ul>
  49. 49. Contract Terms <ul><li>However, the purchaser has to arrange and pay for loading on to the vessel and all onward transportation, insurance, and documentation. </li></ul>
  50. 50. Contract Terms
  51. 51. Contract Terms <ul><li>Free on board (FOB) : Here the supplier pays for and arranges loading on to the outward-bound transportation and thereafter the purchaser becomes responsible. </li></ul>
  52. 52. Contract Terms
  53. 53. Contract Terms <ul><li>Cost and Freight (C&F) : This is a split responsibility arrangement in that the supplier arranges and pays for transportation to an agreed point, </li></ul><ul><li>But the purchaser has to pay insurance from when the goods are loaded on board. </li></ul>
  54. 54. Contract Terms <ul><li>The purchaser has to acquire any documentation required by the country of origin. </li></ul><ul><li>Once the goods have been unloaded at the port of entry, the purchaser is responsible for all ongoing transportation and insurance. </li></ul>
  55. 55. Contract Terms
  56. 56. Contract Terms <ul><li>Cost, Insurance, and freight (CIF) : This is similar to C&F But here the insurance during transportation is responsibility of the supplier. </li></ul>
  57. 57. Contract Terms <ul><li>Delivered : This is the opposite of ex-works in that the supplier has total responsibility for the goods, their transportation, insurance, and all documentation until they are delivered to the purchaser. </li></ul>
  58. 58. Logistics <ul><li>Logistics originated during the Second World War when it related to the movement and co-ordination of troops to the required location. </li></ul>
  59. 59. Logistics <ul><li>When adopted by the business world as a concept It referred to the movement and coordination of finished products. </li></ul>
  60. 60. Logistics <ul><li>Logistics function manages the total flow of products from the plant to the customers. </li></ul><ul><li>As contrary to the materials management, Logistics provides an emphasis on physical distribution management. </li></ul>
  61. 61. Logistics <ul><li>However, These minor differences are present because of the backgrounds of the two groups who have originated the concepts. </li></ul><ul><li>Generally, the logisticians tend to come from marketing discipline. </li></ul>
  62. 62. Logistics <ul><li>On the other hand, The materials managers come from operations management, </li></ul><ul><li>(Particularly from purchasing). </li></ul><ul><li>During the last twenty years, an even broader, and statistically significant concept emerged: </li></ul>
  63. 63. Supply Chain Management <ul><li>Logisticians have devoted little attention to managing the chain of supply up to the purchasing function. </li></ul><ul><li>And similarly, materials managers have ignored the management of the flow of products down to the customers through distribution channels. </li></ul>
  64. 64. Supply Chain Management <ul><li>On the contrary Supply Chain Management views the entire chain as a system to be managed. </li></ul><ul><li>It can be defined as “managing the entire chain of raw material supply , manufacture , assembly and distribution to the end customer .” </li></ul>
  65. 65. Supply Chain Management <ul><li>In long supply chains, it is not easy to co-ordinate the whole chain. </li></ul><ul><li>This is especially true when part of the supply chain serves two sets of end cutomers. </li></ul>
  66. 66. Supply Chain Management <ul><li>For example, many manufacturers of automobile components serve two different groups of end customers: </li></ul><ul><li>- One group buys new cars (vehicle market) </li></ul><ul><li>- The other group buys spare parts for repair of their cars (spares market) </li></ul><ul><li>The spares market is also known as “aftermarket” for the car components. </li></ul>
  67. 67. Supply Chain Management
  68. 68. Supply Chain Management <ul><li>The Role of Inventory, The planning and control priorities, and price negotiations will All be different for each chain. </li></ul>
  69. 69. Supply Chain Management <ul><li>Since the components for both chains are produced by the same Component Manufacturer, Operations should be split between the two chains, AND they should be well managed. </li></ul>
  70. 70. Types of Relationships in Supply Chains <ul><li>1- Integrated Hierarchy </li></ul><ul><li>2- Semi-Hierarchy </li></ul><ul><li>3- Co-Contracting </li></ul><ul><li>4- Coordinated contracting </li></ul><ul><li>5- Coordinated revenue links </li></ul>
  71. 71. Types of Relationships in Supply Chains <ul><li>1) Integrated hierarchy means that a firm houses all activities in the supply chain </li></ul><ul><li>FROM raw material source TO distribution of products to end users (figure). </li></ul><ul><li>This is also called Full Vertical Integration. </li></ul>
  72. 72. Types of Relationships in Supply Chains <ul><li>2) In a Semi-hierarchy organization, the firms in the Supply Chain are owned by the same holding Company, But they operate as Separate Business Units. </li></ul><ul><li>For example, An Oil Company delegates the following activities to the following business units: Oil extraction, Oil refining, Petrol Distribution, and Petrol Retailing. </li></ul>
  73. 73. Types of Relationships in Supply Chains <ul><li>3) Co-contracting is a term used to describe alliances between organizations that have </li></ul><ul><li>Long term relationships but do not Merge together. </li></ul><ul><li>They rather transfer some Equity (ownership), technology, Information, AND People. </li></ul><ul><li>Such alliances are evident in aerospace industry (Airbus transfers technology with others). </li></ul>
  74. 74. Types of Relationships in Supply Chains <ul><li>4) Coordinated Contracting involves a prime contractor who employs a set of sub-contractors. </li></ul><ul><li>For example, a building trader (or decorator) employs a set of sub-contractors, such as carpenters, electricians, and bricklayers AND calls them when needed. </li></ul><ul><li>There is a long-standing relationship between contractor and sub-contractors. </li></ul>
  75. 75. Types of Relationships in Supply Chains <ul><li>The contractor provides Materials and usually take responsibility for the planning and control of the entire job. </li></ul><ul><li>But the sub-contractor provides the necessary equipment required for its profession. </li></ul>
  76. 76. Types of Relationships in Supply Chains <ul><li>5) The category of Coordinated revenue links is used primarily for Licensing and Franchising . (e.g., fast food chains) </li></ul>
  77. 77. Types of Relationships in Supply Chains <ul><li>It is a form of relationship that transfers ownership to other firms (usually smaller) while guaranteeing an income for the franchiser or the licensor. </li></ul>
  78. 78. Types of Relationships in Supply Chains <ul><li>In this form of contract Franchiser, </li></ul><ul><li>- Has the property rights of the product </li></ul><ul><li>- sets the territory in which the franchisee can operate </li></ul><ul><li>- sets the process specification to be used in operations, and </li></ul><ul><li>- monitors the performance of the franchisee. </li></ul>