Purchasing must become supply management

Purchasing must become
Supply Management
Mehul Mittal(28)
Mridul Pandey(29)
Nabil Ahmad(30)
Nandita Srivastava(31)
Nandivada Naga Raju(32)

Introduction
 In many companies purchasing is a routine activity and with
time and relative stability it has not changed much.
 Few methodologies like Pareto analysis (80-20 rule).
 Companies ignore the fact that stable business
environment, in which they used to operate will perish.
 Patterns of supply and demand can change overnight.
2

Question Arises
 How will a company save itself from these interruption?
 What capabilities it should have to sustain itself ?
RESPONSE
U.S auto manufacturers - relied on domestic materials procurement.
They reevaluated their supply schemes and explored their scope of potential suppliers.
Ex : Chrysler sourced their Omni engines from Volkswagen as long as 1976 after that
from Mitsubishi.
Around 1990 : Sourced 35% to 40% from other countries
2005 : Sourced only 5% from other countries. 3

Change Required
 Instead of monitoring current development, management must
learn to make things happen to its own advantage.
 Change of perspective : Operation ( purchasing ) to strategic one (
Supply management )
 Supply strategy depend on 2 factors :
1. Strategic importance of purchasing in terms of the value added
2. Complexity of the supply market
4

Choosing the right supply strategy
 Is the company making good use of opportunities for concerted
action among different divisions and/or subsidiaries?
 Can the company avoid anticipate supply bottlenecks and
interruption
 How much risk is acceptable ?
 What make or buy will give the best balance ?
 To what extent might co-operation strength supply relationships
5

Kraljic’s Portfolio Purchasing Model
Phase 1
Phase 2
Phase 3
Phase 4
Classification of items
Market analysis
Strategic Positioning
Devising Action Plans
6

Shaping the Supply Strategy
Phase 1 : Classification of Purchase items
7

Shaping the Supply Strategy...
Phase 2 : Market Analysis
S.No. Supplier Strength Company Strength
1. Capacity utilization Capacity utilization of main units
2. Break-even stability Cost of non-delivery
3. Uniqueness of product Own production capability
4. Entry barrier (capital or know-
how)
Entry cost for new sources versus cost
for own production
5. Competitive structure Market share vis-à-vis main competition
6. Market growth versus capacity
growth
Demand growth versus capacity growth
8

Phase 3 : Strategic Positioning
The company positions the materials identified in phase 1 as
strategic in the purchasing portfolio matrix. It can then
identify areas of opportunity or vulnerability, assess supply
risks, and derive basic strategic thrusts for these items. For
supply items with neither major visible risks nor major
benefits, a defensive posture would be over conservative
and costly.
On the other hand, undue aggressiveness could damage
supplier relations and lead to retaliation. In this case, a
company should pursue a well-balanced intermediate
strategy (“balance”).
9

Phase 4: Action Plan
Each of the three strategic thrusts has distinctive implications
for the individual elements of the purchasing strategy, such as
volume, price, supplier selection, material substitution,
inventory policy, and so on. To reduce the long-term risk of
dependence on a single source, the company should search
for alternative suppliers or materials or even consider
backward integration to permit in-house production. On the
other hand, if the company is stronger than the suppliers, it
can spread volume over several suppliers, exploit price
advantages, increase spot purchases, and reduce inventory
levels.
The end product will be a set of systematically documented
strategies for critical purchasing materials that specify the
timing of and criteria for future action.
10

Strengthening the Organization
Purchasing can’t be done in isolation.
In addition to that, greater integration, stronger cross-functional relations and
more top management involvement is necessary.
1. Effective Relations
2. Systems Support
3. Staff and Skill requirements.
11

Effective Relations
Purchasing function should reflect the overall corporate setup.
1. Centralize or decentralize? The top management must decide.
Centralization: Augments a company’s purchasing power but inflexible.
So companies need to find the right balance considering the trade-offs
between purchasing clout and flexibility.
2. Should the companies treat it as a function of production or of operating
division? Should it be setup as central independent department or position it as
a part of materials management function?
It depends on the factors like volume and concentration of purchased goods as
well as on the corporate structure and complexity.
12

Systems Support
In the absence of such data, supply bottlenecks, short-term demand
fluctuations.In turn, the company incurs higher time and money costs, penalties
for unfulfilled contract terms, excessive inventories, and disruption in
purchasing activities.
Following improvements must be made:
 Improvement of operational flexibility
 Improved efficiency, shortened through put time, and reduction in costs
 Integration of purchasing systems with other corporate systems
13

Staff & Skill Requirements
 Sourcing Strategy Development
 Supplier Relationship Management
 Cost Modeling
 Specification Management
 Inventory Management
14

1970’s
Material Requirement Planning(MRP) Systems
 Ensure materials are available for production
 in lowest possible amount
16

Purchasing must become supply management

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