Procurement And Materials Management

Material management ppt

1. Procurement And
Materials Management

2. Procurement And
Materials Management
It Is Not Always
Economical For The
Companies To Make
All The Materials Used
In Manufacturing.
Some Items Are
Procured From
Others, And Some Are
Produced In The
Company.

3. Procurement And
Materials Management
Some Reasons For Making:
- Lower Production Cost
- Unreliable Or Unsuitable Suppliers
- Assure Adequate Supply (Quantity)
- Utilize Surplus Labor Capacity
- Obtain Desired Quality
- Protect Special Design Or Quality

4. Procurement And
Materials Management
Some Reasons For Buying:
- Lower Acquisition Cost
- Inadequate Capacity
- Reduce Inventory Costs
- Ensure Alternative Sources Of Supply
- Item Is Protected By A Patent Or Trade
License

5. Procurement And
Materials Management
Choosing Between Making or Buying An
Item Is Largely Dependent On The
Vertical Integration Strategy Of A
Company.

6. Procurement And
Materials Management
By Vertical Integration, We Mean
Developing The Ability To Produce
Goods Or Services that are Previously
Purchased.
It Can Take The Form Of Forward Or
Backward Integration:

7. Procurement And
Materials Management

8. Procurement And
Materials Management
Because Purchased Items Represent A
Large Part Of The Costs, Many
Organizations Find Interest In Vertical
Integration.
For example, Murat Ticaret Originally
Produces Cable. Then It Started
Producing Cable Cords For Automobiles
(Otosan, Dodge, Otoyol, Etc.)

9. Procurement And
Materials Management
Vertical Integration Is Adventageous
When The Organization Has Large
Market Share.
Backward Integration May Be
Dangerous For Firms In Industries
Undergoing Rapid Technological
Changes.

10. Materials Management
Purpose Of Materials Management Is To
Obtain Efficiency Of Operations
Through Integration Of 1) Material
Acquisition, 2) Material Movement, and
3) Material Storage.

11. Materials Management
When
Transportation And
Inventory Costs Are
Substantial,
A Focus On
Materials
Management Is
Appropriate.

12. Materials Management
Some Basic Functions Of Materials
Management:
- Shipping
- Purchasing
- Warehousing (Raw Material, Wip, End
Material)
- Order Processing
- Production And Inventory Control

13. Materials Management
One of the major
issues that materials
managers might
encounter is the
method of
Procurement.

14. Materials Management
Procurement method is the way of
ordering material.
Some of the new developments in this
area include:
1) Electronic Ordering
2) Stockless Purchasing
3) Standardization, and
4) Just in Time Purchasing.

15. Electronic Ordering
Electronic Ordering Reduce Paper
Transactions.
Paper Transactions Include Purchase Order,
Receiving Document, Authorization To Pay,
Etc.
Transactions Between Firms Are Increasingly
Done Via Electronic Data Interchange
(EDI).
EDI Is A Standardized Data Transmittal
Format For Computerized Communications
Between Organizations.

16. Electronic Ordering
It Provides Data Transfer For Any
Business Application, Including
Purchasing.
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.

17. Electronic Ordering
The Data Are Then Sent From One
Computer To Another By Phone Line
(Internet)
A Computer Program Is Used To Read
Those Data Into The Receiving
Company’s Files.
Electronic Ordering Also Speeds Up The
Traditionally Long Procurement Time.

18. Stockless Purchasing
This Means That The Supplier Maintains
The Inventory For The Purchaser.
Here, The Cost Of Stocking Inventory
Has Been Temporarily Transferred From
The Purchaser To The Supplier.

19. Stockless Purchasing
Consignment Inventories (Konsinye, To
Be Discussed Later) Are A Related
Option.
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.
Otherwise, Purchasing Costs May Go
Up.

20. Standardization
Rather Than Obtaining A Variety Of
Components Similar In Labeling, Coloring,
Packaging, Etc. The Purchasing Agent Should
Try To Have Those Components
Standardized.
For Every Component That Is Standardized,
There Is One Less Invoice, One Less Item To
Be Inventoried, Etc.

21. Just In Time Purchasing
Just In Time (Jit)
Purchasing Is
Directed Toward
The Reduction Of
Waste (That Is
Present At Incoming
Inspection, Excess
Inventory and Poor
Quality) And Delay.

22. Just In Time Purchasing
This Waste And Delay is Present In All
Production Processes. (Not Only In
Purchasing)
Therefore, JIT Approach Can Be Applied
To All Areas Of Production.
** The Basic JIT Approach: Every
Moment Material Should Add Value.

23. Goals Of Just In Time
Purchasing
1- JIT Tries To Reduce All Non-Value-
Added Activities.
(If Purchasing Personnel Can Select
More Reliable Vendors, Purchased
Items Can Be Received Without
Counting, Inspection.)

24. Goals Of Just In Time
Purchasing
2- Elimination Of In-Plant Inventory.
No Raw Material Inventory Is Necessary If
Materials Are Perfectly Delivered to Where
They Are Needed.
Parts Should Be Delivered In Small Lots
Directly To The Using Department As Needed.
Elimination Of Inventory Allows Managers To
See Production Problems That Are Hidden
Behind Those Inventories.

25. Goals Of Just In Time
Purchasing
3- Elimination Of In-Transit Inventory
In-Transit Inventory Is The Inventory Flowing
Between The Plant And Material Suppliers.
It Can Be Reduced By Encouraging Suppliers
To Locate Near The Plant.
(The Shorter The Flow Of Material The Less
Inventory And The Less Transportation
Costs.)

26. Goals Of Just In Time
Purchasing
Another Way To Reduce In-Transit Inventory
Is To Have Inventory On Consignment.
Under A Consignment Arrangement The
Supplier Maintains Title To The Inventory.
But, It Locates Its Warehouse Where The
User Has Its Stockroom.

27. Goals Of Just In Time
Purchasing
4- Quality And Reliability Improvement
To Obtain Improved Quality And
Reliability,
a) Vendors And Purchasers Must Have
Mutual Understanding And Trust.
b) Suppliers’ Long Term
Commitment To The Relationship
Should Be Increased.

28. Physical Distribution
Management
Products need to be
distributed to the
customers.

29. Physical Distribution
Management
Today, many manufacturer companies
utilize Multi-Echelon inventory systems.
In multi-echelon inventory systems,
Products are stored at different points,
before reaching to the customer.

30. Physical Distribution
Management
After manufacturing the Products, the
Manufacturer stores them in its own
warehouse.
From there, they are Transported to
regional warehouses. These regional
warehouses serve as a distribution point
for retail stores. (figure)

31. Physical Distribution
Management
When the retail stores require products, They
will request them from their local warehouse.
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.
This also means that, Customers DO NOT
have to Reach to the manufacturer’s plant.

32. Transportation
Physical distribution managers must ALSO
decide on which mode of transport is Best
to distribute Products to the Customers.

33. Transportation
Available modes of transport are:
-Road transport (cars, trucks),
-Railway transport,
-Water transport (ships),
-Air transport, and
-Pipelines (oil, natural gas).

34. Transportation
Air transport is very expensive and
limited in Space availability.
Therefore, It is usually preferred for
small-quantity, high-value products,
which require fast delivery (e.g., highly
fragile electronic parts).

35. Transportation
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).

36. Transportation

37. Transportation
There may be some limitations on these
modes of transport, as well.
For example, only Gas and Liquids can
be conveniently transported by
Pipelines.
Similarly, very large products (such as
building sections) would not fit in most
Aircrafts.

38. Transportation
However, the mode of transport is usually
Chosen with reference to the Relative
Importance of the following factors:
- Delivery speed
- Delivery dependability (reliability)
- Quality deterioration
- Transportation cost, and
- Route flexibility.

39. Transportation
The following table gives a ranking of
each mode of transport based on these
factors:
(1 = Best Performance; 5 = Worst
Performance)

40. Transportation

41. Transportation
The selection of the transportation
mode will also affect other decisions
related to the management of
operations.
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.

42. Contract Terms
In any exchange between buyers and
suppliers, both sides have to agree on
Who will Pay for the transportation.
This becomes a particular issue in
international trade Where knowledge of
international trade agreements and
legislation are critical to purchasing
Successfully from other Countries.

43. Contract Terms
Internationally recognized shipping
terms are now in operation which are
applied to international transportation
by sea or air.
The main definitions of these terms are
as follows:

44. Contract Terms
Ex-works: In an ex-works contract, the
purchaser accepts full responsibility for
arranging transportation from the
supplier’s location.

45. Contract Terms
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.

46. Contract Terms

47. Contract Terms
More recently, purchasers and suppliers
have sub-contracted this transportation
function to specialists such as Federal
Express.

48. Contract Terms
Free alongside (FAS): In this
arrangement, the supplier agrees to
deliver to the (source) port specified by
the purchaser
and is responsible for the transportation
and insurance of the goods Until that
point.

49. Contract Terms
However, the purchaser has to arrange
and pay for loading on to the vessel
and all onward transportation,
insurance, and documentation.

50. Contract Terms

51. Contract Terms
Free on board (FOB): Here the supplier
pays for and arranges loading on to the
outward-bound transportation and
thereafter the purchaser becomes
responsible.

52. Contract Terms

53. Contract Terms
Cost and Freight (C&F): This is a split
responsibility arrangement in that the
supplier arranges and pays for
transportation to an agreed point,
But the purchaser has to pay insurance
from when the goods are loaded on
board.

54. Contract Terms
The purchaser has to acquire any
documentation required by the country
of origin.
Once the goods have been unloaded at
the port of entry, the purchaser is
responsible for all ongoing
transportation and insurance.

55. Contract Terms

56. Contract Terms
Cost, Insurance, and freight (CIF): This
is similar to C&F But here the insurance
during transportation is responsibility of
the supplier.

57. Contract Terms
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.

58. Logistics
Logistics originated
during the Second
World War when it
related to the
movement and co-
ordination of troops to
the required location.

59. Logistics
When adopted by the business world as
a concept It referred to the movement
and coordination of finished products.

60. Logistics
Logistics function manages the total
flow of products from the plant to the
customers.
As contrary to the materials
management, Logistics provides an
emphasis on physical distribution
management.

61. Logistics
However, These minor differences are
present because of the backgrounds of
the two groups who have originated the
concepts.
Generally, the logisticians tend to come
from marketing discipline.

62. Logistics
On the other hand, The materials
managers come from operations
management,
(Particularly from purchasing).
During the last twenty years, an even
broader, and statistically significant
concept emerged:

63. Supply Chain Management
Logisticians have devoted little attention
to managing the chain of supply up to
the purchasing function.
And similarly, materials managers have
ignored the management of the flow of
products down to the customers
through distribution channels.

64. Supply Chain Management
On the contrary Supply Chain
Management views the entire chain as a
system to be managed.
It can be defined as “managing the
entire chain of raw material supply,
manufacture, assembly and distribution
to the end customer.”

65. Supply Chain Management
In long supply chains, it is not easy to
co-ordinate the whole chain.
This is especially true when part of the
supply chain serves two sets of end
cutomers.

66. Supply Chain Management
For example, many manufacturers of
automobile components serve two different
groups of end customers:
- One group buys new cars (vehicle market)
- The other group buys spare parts for repair of
their cars (spares market)
The spares market is also known as
“aftermarket” for the car components.

67. Supply Chain Management

68. Supply Chain Management
The Role of
Inventory, The
planning and control
priorities, and price
negotiations will All
be different for each
chain.

69. Supply Chain Management
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.

70. Types of Relationships in
Supply Chains
1- Integrated Hierarchy
2- Semi-Hierarchy
3- Co-Contracting
4- Coordinated contracting
5- Coordinated revenue links

71. Types of Relationships in
Supply Chains
1) Integrated hierarchy means that a
firm houses all activities in the supply
chain
FROM raw material source TO
distribution of products to end users
(figure).
This is also called Full Vertical
Integration.

72. Types of Relationships in
Supply Chains
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.
For example, An Oil Company delegates the
following activities to the following business
units: Oil extraction, Oil refining, Petrol
Distribution, and Petrol Retailing.

73. Types of Relationships in
Supply Chains
3) Co-contracting is a term used to describe
alliances between organizations that have
Long term relationships but do not Merge
together.
They rather transfer some Equity
(ownership), technology, Information, AND
People.
Such alliances are evident in aerospace
industry (Airbus transfers technology with
others).

74. Types of Relationships in
Supply Chains
4) Coordinated Contracting involves a prime
contractor who employs a set of sub-
contractors.
For example, a building trader (or decorator)
employs a set of sub-contractors, such as
carpenters, electricians, and bricklayers AND
calls them when needed.
There is a long-standing relationship between
contractor and sub-contractors.

75. Types of Relationships in
Supply Chains
The contractor provides Materials and
usually take responsibility for the
planning and control of the entire job.
But the sub-contractor provides the
necessary equipment required for its
profession.

76. Types of Relationships in
Supply Chains
5) The category of Coordinated revenue
links is used primarily for Licensing and
Franchising. (e.g., fast food chains)

77. Types of Relationships in
Supply Chains
It is a form of relationship that transfers
ownership to other firms (usually
smaller) while guaranteeing an income
for the franchiser or the licensor.

78. Types of Relationships in
Supply Chains
In this form of contract Franchiser,
- Has the property rights of the product
- sets the territory in which the franchisee
can operate
- sets the process specification to be used
in operations, and
- monitors the performance of the
franchisee.