Procurement and Supply Chain Management

INTRODUCTION

Procurement is concerned with acquiring (procuring) all of the goods, services, and work that is
vital to an organization. Procurement is, essentially, the overarching or umbrella term within
which purchasing can be found.

Procurement is the business management function that ensures identification, sourcing, access
and management of the external resources that an organisation needs or may need to fulfil its
Strategic objectives

Purchasing is another, while it may be used interchangeably with buying it is just part of
procurement. Purchasing begins with the placement of a requisition, which upon approval,
becomes a purchase order and is sent to a supplier. Whereas procurement necessarily includes a
contract development stage purchasing does not always include contract development .

The term “Purchasing” refers to the process of ordering and receiving goods and services. It is a
subset of the wider procurement process. Generally, purchasing refers to the process involved in
ordering goods such as request, approval, creation of a purchase order record (a Purchase Order
or P.O.) and the receipting of goods.

Supply Chain refers to networks of companies that work together and coordinate their actions to
deliver a product to market. Also, traditional logistics focuses its attention on activities such as
procurement, distribution, maintenance, and inventory management.

Logistics typically refers to activities that occur within the boundaries of a single organization.

Supply Chain Management (SCM) acknowledges all of traditional logistics and also includes
activities such as marketing, new product development, finance, and customer service.

Logistics is about getting the right product, to the right customer, in the right quantity, in the
right condition, at the right place, at the right time, and at the right cost (the seven Rs of
Logistics)
In the past, various logistics tasks were under different departments, but now they are under
"logistics department" and report to the same logistics head as below,

Logistics Management deals with the efficient( doing things right ) and effective (doing things
right ) management of day-to-day activity in producing the company's finished goods and
services.

Inbound Logistics refers to movement of goods and raw materials from suppliers to your
company.
Outbound Logistics refers to movement of finished goods from your company to customers.
As you can see, purchasing and warehouse function communicates with suppliers and sometimes
called "supplier facing function". Production planning and inventory control function is the
center point of this chart. Customer service and transport function communicates with customers
and sometimes called "customer facing functions.

Transport and Logistics refers to 2 types of activities, namely, transportation (traditional

services such as air/sea/land transportation, warehousing, customs clearance) and logistics
(value-added services which including information technology and consulting)

International Logistics (also known as Global Logistics) focuses on how to manage and
control overseas activities effectively as a single business unit. Therefore, companies should try
to harness the value of overseas product, services, marketing, R&D and turn them into
competitive advantage"
3PL or Third Party Logistics
The concept of Third Party Logistics or 3PL appeared on the scene in the 1980s as the way to
reduce costs and improve services.
3PL or Third Party Logistics refers to the outsourcing of logistics activities, ranging from a
specific task, such as trucking or marine cargo transport to broader activities serving the whole
supply chain such as inventory management, order processing and consulting.

In the past, many 3PL providers didn't have adequate expertise to operate in complex supply
chain structure and process. The result was the inception of another concept 4PL.Fourth Party
Logistics or 4PL is the concept proposed by Accenture Ltd in 1996 and it was defined as below,

4PL or Fourth Party Logistics refers to a party who works on behalf of the client to do contract
negotiations and management of performance of 3PL providers, including the design of the
whole supply chain network and control of day-to-day operations
3 reasons why customers would like to use 4PL providers are:

- Lack of technology to integrate supply chain processes

- The increase in operating complexities

- The sharp increase in global business operations

Supply Chain is the network of organizations that are involved, through upstream and
downstream linkages, in the different processes and activities that produce value in the form of
products and services in the hands of the ultimate consumer.

Supply Chain Management (SCM) refers to the coordination of production, inventory,

location, and transportation among the participants in a supply chain to achieve the best mix of
responsiveness and efficiency for the market being served
To dig deeper, supply chain management has 6 important components as discussed below:

- It's a Network: Many companies have the department that controls various activities within
the supply chain. So the people are led to believe that SCM is a "function" which it's not. Supply
Chain is actually a "network" consists of many players.
A generic supply chain structure is as simple as Supplier, Manufacturer, Wholesaler and Retailer
(it's more complex in the real world but a simple illustration serves the purpose).

The word "management" can be explained briefly as "planning, implementing, controlling".

Supply Chain Management is then the planning, implementing and controlling of the networks.

- Information Musts Flow: Another important attribute of supply chain management is the flow
of material, information and finance (money). Even thought there are 3 types of flow, the most
important one is information flow aka information sharing. Let's see the example of this through
the simplified version of bullwhip effect as below,
When demand data is not shared, each player in the same supply chain must make some sort of
speculation. According to the above graphic, the retailer has a demand of 100 units, but each
player tends to keep stock more and more at every step of the way. This results in higher costs
for everyone in the same supply chain.

When information is shared from retailer down to supplier, everyone doesn't have to keep stock
that much. The result is lower cost for everyone.

- Coordination is Essential: Information sharing requires a certain degree of "coordination" (it's

also referred to as collaboration or integration in scholarly articles). Do you wonder when people
started working together as a supply chain network? In 1984, companies in the apparel business
worked together to reduce overall lead-time. In 1995, companies in automotive industry used
Electronic Data Interchange to share information. So, working as a "chain" is the real world
practice.

- Avoid Conflicting Objectives: Working as a supply chain network requires the same
objective, but this is often not the case (even with someone in the same company). "Conflicting
Objectives" is the term used to describe the situation when each function wants something that
won't go well together. For example, purchasing people always place the orders to the cheapest
vendors (with a very long lead-time) but production people need material more quickly.

To avoid conflicting objectives, you need to decide if you want to adopt time-based strategy, low
cost strategy or differentiation strategy. A clear direction is needed so people can make the
decisions accordingly.

- Balance Cost/Service: The concept of Cost/Service Trade-off appeared as early as in 1985 but
it seems that people really don't get it.
When you want to improve service, cost goes up. When you want to cut cost, service suffers. It's
like a "seesaw", the best way you can do is to try to balance both sides.

- Foster Long-term Relationship: To work as the same "supply chain team", long-term
relationship is a key. Otherwise, you're just a separate company with a different strategy /
agenda. So academia keeps preaching about the importance of relationship building, but is not
for everyone.

Since there are too many suppliers to deal with, portfolio matrix is often used to prioritize the
relationship building. Focus your time and energy to create long-term relationship with suppliers
of key products and items with limited sources of supply because these are people who can make
or break your supply chain

INVENTORY/ STOCK CONTROL

Inventory Control is the function responsible for all decisions about all goods and materials in
an organization. It makes decisions for policies, activities and procedures to make sure the right
amount of each item is held in stock at any time.
Inventory Management or Stock Control is sometimes used interchangeably.

Inventory is considered to be one of the most important assets of a business. Its management
needs to be proactive, accurate and efficient. Whilst holding either too much or too little
inventory places a burden on both productivity and profitability, it is still essential for most
businesses to hold a sufficient quantity of inventory at all times.

The primary objective in terms of holding inventory is to ensure that customer service targets can
always be met without compromising cash flow or running out of stock. When customers cannot
purchase what they need, when they need it, they often cease to be customers. Losses as a result
of missed sales, customers jumping ship to a competitor, or paying holding costs on surplus
stock that is no longer in demand is what drives many businesses into the red.

Reasons for Holding Inventory/ Stock

1. Safety stock protects against unforeseen variation in supply and/or demand
2. To compensate forecast inaccuracies (only in case demand is bigger than the forecast)
3. Its purpose is to prevent disruptions in manufacturing or deliveries
4. Avoid stock outs to keep customer service and satisfaction levels high
5. Appreciation in Value - In some situations, some stock gains the required value when it is
kept for some time to allow it reach the desired standard for consumption, or for production e.g.
wine and timber
6. Uncertainty - Inventories are maintained as buffers to meet uncertainties in demand, supply
and movements of goods.

7. Economies of scale - Ideal condition of "one unit at a time at a place where a user needs it,
when he needs it" principle tends to incur lots of costs in terms of logistics. So bulk buying,
movement and storing brings in economies of scale, thus inventory.

8. Time - The time lags present in the supply chain, from supplier to user at every stage, requires
that you maintain certain amounts of inventory to use in this lead time. However, in practice,
inventory is to be maintained for consumption during 'variations in lead time'. Lead time itself
can be addressed by ordering that many days in advance.

9. Seasonal Demand: demands varies periodically, but producers capacity is fixed. This can lead
to stock accumulation, consider for example how goods consumed only in holidays can lead to
accumulation of large stocks on the anticipation of future consumption.
Variety reduction and standardization

Variety reduction is the process of reducing the number of stock varieties in the warehouse to a
controllable minimum. In the course of time the number of stock categories will gradually
increase. When this goes on for a long time and if the stock position is critically examined, it will
be found that there are many items of a similar nature. This is when variety reduction becomes
necessary.
The procedure for variety reduction involves a complete examination of the list of the
commodities in the warehouse to determine:

i. The use or user for which each item is intended

ii. The items that have similar characteristics and that can be used as substitutes
iii. The sizes that are essential
iv. The items that can be eliminated
v. The specifications that are necessary for the retained items

Standardization is the process of making a uniform/ consistent selection of the variety or

assortment of the stock in the warehouse. The process determines a fixed number of items in a
range and in the assortment that is then used to determine a stock plan. The stock plan will be
used until the next variety reduction exercise becomes necessary. Therefore, variety reduction is
to be followed by standardization.

Stock levels/Action levels

1. Maximum stock level – this is the level above which stock should not be allowed to rise.
Any stock quantities above this level is excess
2. Minimum stock level – this is the level below which stock should not be allowed to fall.
Falling below this level creates the risk of stock shortage
3. Re – order stock level – this the level at which the next order of stock should be made.
This enables the delivery of the order before a stock out occurs
4. Hastening/Danger stock level – this is the level at which quick action should be taken to
avoid a stock out. It occurs when the stock level is below the re – order level and is
getting closer to the minimum level.
5. Safety stock level – this is the reserve stock that is held for the purpose of meeting
emergencies. It is determined as a fixed quantity based on the experience of the
management.
Independent and Dependant Demand Inventories

Inventory Management deals essentially with balancing the inventory levels. Inventory is
categorized into two types based on the demand pattern, which creates the need for inventory.
The two types of demand are Independent Demand and Dependant Demand for inventories.

 Independent Demand

An inventory of an item is said to be falling into the category of independent demand

when the demand for such an item is not dependant upon the demand for another item.

Finished goods Items, which are ordered by External Customers or manufactured for
stock and sale, are called independent demand items.

Independent demands for inventories are based on confirmed Customer orders, forecasts,
estimates and past historical data.

 Dependant Demand

If the demand for inventory of an item is dependant upon another item, such demands are
categorized as dependant demand.

Raw materials and component inventories are dependant upon the demand for Finished
Goods and hence can be called as Dependant demand inventories.

Take the example of a Car. The car as finished goods is an held produced and held in
inventory as independent demand item, while the raw materials and components used in
the manufacture of the Finished Goods - Car derives its demand from the demand for the
Car and hence is characterized as dependant demand inventory.

This differentiation is necessary because the inventory management systems and process
are different for both categories.

Types of Inventory

Your business inventory consists of your stock, the goods that you offer for sale and any other
materials you need to run your businesses. Maintaining an appropriate inventory is crucial to the
profitability of any small business, where inventory amounts may be smaller than in a large
company. Running out of goods means you may not be able to meet demand, while having too
many goods means your money is tied up in inventory that you cannot sell.

Raw Materials

This type of inventory includes any goods used in the manufacturing process, such as
components used to assemble a finished product. Raw materials may also include partially
finished goods or materials. For example, for an orange juice company, oranges, sugar and
preservatives are raw materials; while for a computer manufacturer, chips, circuit boards and
diodes are raw materials. Inventory items may be classified as raw materials if the organization
has purchased them from an outside company, or if they are used to make components.

Work-in-Process

Work-in-process inventory items are those materials and parts that are waiting to be made into
something else. These may include partially assembled items that are waiting to be completed.
Work-in-process inventory items may include finished goods that have not yet been packaged
and inspected, as well as raw materials that have moved from storage to a preassembly area. For
example, in an orange juice company, the oranges may come in to a storage area, where they are
raw goods, but once they have been moved out of the storage area and onto the assembly line for
juicing, they become work-in-process inventory. In a small company, work-in-process goods
may be stored in the same area as raw materials and finished goods.

Finished Goods

Finished goods are any products that are ready to be shipped out or sold directly to customers,
including to wholesalers and retailers. Finished goods may be waiting in a storage area or on a
shop floor. If the amount of inventory of finished goods increases faster that the amount of raw
goods and work-in-process goods, then production may need to slow down until more finished
goods are sold. In some businesses, goods are not included in the finished goods inventory until
they are sold.

Other Types of Inventory

Maintenance, repair and operating inventory are all the items an organization needs in order to
operate, such as office equipment, packing boxes and tools to repair equipment. There are also
other types of inventory that are classified based on the purpose they serve. These include transit
inventory, which are products or components that are being moved from one location to another,
such as from a warehouse to a factory; buffer inventory, which are excess inventory items that
are kept on hand to protect against supply problems, such as poor quality or slow delivery of raw
materials; and anticipation inventory, which are items that an organization stocks up on in case
of excess demand -- such as in the build up to Christmas shopping

Inventory Cost

Inventory Cost defined as the total cost that a company experiences while holding inventory, is
often one of the most substantial factors in the success of a business. Inventory cost control has
many facets, including financing, equipment, labor, protective measures, insurance, handling,
obsolescence, losses by pilferage, and the opportunity cost of choosing to deal with inventory.
These factors all combine to create the total cost of holding inventory.
Inventory cost is used to determine the right lot size each time the order is placed and can be
summarized as below,
Inventory Ordering Cost:

Cost associated with the acquisition of stock items such as cost to prepare and transmit purchase
order, cost of inspection, cost to put inventory into storage area. It's sometimes called Setup Cost

Inventory Carrying Cost:

Cost associated with holding stock items such as cost of capital, interest rate, warehouse cost,
insurance cost, damage cost and obsolescence cost. It's sometimes called Holding Cost.

Administrative costs.

The accounting department pays the wages of a cost accounting staff, which is responsible for
compiling the costs of inventory and the cost of goods sold, responding to other inventory
analysis requests, and defending their results to the company's internal and external auditors. The
cost of cost accounting personnel is charged to expense as incurred.

Shrinkage costs:

Shrinkage refers to anything that renders inventory unfit for sale or return to a supplier.
Inventory that has already been paid for can disappear due to theft from employees or
consumers. Perishable inventory items can spoil if not sold on time, making it impossible to
recoup the costs. Damage to inventory caused on your premises can also land inventory items in
the trash with no financial value. Inventory items stored for too long can become obsolete and
lose most of their value in some industries, such as cell phone sales.

Stock out costs

Finally, to get a complete vision of the inventory costs, we should also add the stock out costs (or
shortage costs), that is, the costs incurred when stock outs take place. For retailers, it can
include the costs of emergency shipments, change of suppliers with faster deliveries, substitution
to less profitable items, etc. While this kind of costs can be determined quite precisely, others are
not so easy to pinpoint, such as the cost in terms of customer loss of loyalty or the general
reputation of the company.

INVENTORY CONTROL TECHNIQUES/ METHODS

An inventory control techniques are processes which business uses to manage inventory. There
are several different types of inventory control methods, namely

1. Continuous review system:

Under a continuous review system, inventory is continuously monitored. When the inventory of
a particular good or product reaches a predetermined level, an order for a predetermined quantity
of additional inventory will be placed. For example, a retail store may order six more coffee
machines to sell when it's down to only three in inventory. Other names used for continuous
review systems include event-triggered systems, fixed order size systems (FOSS) or re-order
level system.

A continuous inventory system has advantages and disadvantages. On the plus side, the
continuous record keeping means continuous checking of the status of her inventory and know
when the trigger should be pulled to obtain more. On the negative side, it can be costly and time
consuming to continuously keep count of inventory.

2. Periodic review system: Under a periodic review system, you will check inventory
levels at fixed intervals. For example, you may check your inventory of rolled steel on a
weekly basis. These periodic review systems are also referred to as time-triggered
systems, fixed order interval systems (FOIS) or economic order interval systems (EOI).

Periodic inventory systems have advantages and disadvantages, too. On the plus side, you
really don't have the cost related to recording keeping and constant monitoring. On the other
hand, you lose some control because you're not paying attention all the time to your
inventory. In order to ensure you have enough inventory before the next periodic review, you
may end up ordering more inventory than what is really needed just to be safe, which is not
an efficient allocation of resources.

3. Economic Order Quantity (EOQ Model)

Economic Order Quantity or EOQ is one of the most earliest mathematical model for inventory
control. EOQ Model was introduced by Ford W. Harris in 1913. As the name suggests,
Economic order quantity (EOQ) model is the method that provides the company with an order
quantity. This order quantity figure is where the record holding costs and ordering costs are
minimized. By using this model, the companies can minimize the costs associated with the
ordering and inventory holding.

Formula

Following is the formula for the economic order quantity (EOQ) model:

Where Q = optimal order quantity

D = units of annual demand

S = cost incurred to place a single order or setup

H = carrying cost per unit

This formula is derived from the following cost function:

Total cost = purchase cost + ordering cost + holding cost

Limitations of the economic order quantity model:

It is necessary for the application of EOQ order that the demands remain constant throughout the
year. It is also necessary that the inventory be delivered in full when the inventory levels reach
zero.

Underlying assumption of the EOQ model

Following are the underlying assumptions for the EOQ model. Without these assumptions, the
EOQ model cannot work to its optimal potential.

 The cost of the ordering remains constant.

 The demand rate for the year is known and evenly spread throughout the year.
 The lead time is not fluctuating (lead time is the latency time it takes a process to initiate
and complete).
 No cash or settlement discounts are available, and the purchase price is constant for every
item.
 The optimal plan is calculated for only one product.
 There is no delay in the replenishment of the stock, and the order is delivered in the
quantity that was demanded, i.e. in whole batch.

These underlying assumptions are the key to the economic order quantity model, and these
assumptions help the companies to understand the shortcomings they are incurring in the
application of this model.

4. Just in Time Inventory

Just in time (JIT) inventory is a strategy to increase efficiency and decrease waste by receiving
goods only as they are needed in the production process, thereby reducing inventory costs. In
other words, JIT inventory refers to an inventory management system with objectives of having
inventory readily available to meet demand, but not to a point of excess where you must
stockpile extra products.

Why Use JIT Inventory?

The JIT inventory method requires that producers be able to forecast demand accurately. JIT
inventory supply system represents a shift away from the older 'just in case' strategy where
producers carried large inventories in case higher demand had to be met. A few of the
advantages of using JIT inventory include:

 Free up capital: Funds used to pay for inventory that was being stockpiled can now be
used elsewhere.
  Free up physical space: Areas previously used to store inventories can now be used for
other, more productive things.
 Throughput time reduced: JIT reduces the time it takes to assemble a product, resulting in
greater potential output and quicker response to customers.
 Defect rate reduced: With JIT inventory, if there is a problem with the item being used in
the production of a product line, workers can identify it and request changes quickly. This
results in less waste and greater customer satisfaction.

5. ABC Analysis

Inventory ABC Classification (as known as ABC Analysis) is a term used to define an
inventory categorization technique often used in materials management.

The ABC Classification provides a mechanism for identifying items that will have a significant
impact on overall inventory cost, while also providing a mechanism for identifying different
categories of stock that will require different policy settings and inventory control.

The ABC analysis is done to manage different stocked items (or SKU’s) that are not all equal in
value or order frequency. A best practice is for an organization to group their inventory into three
categories (A, B, and C).

 ‘A Classification’ items are very important for an organization. Because of the high
demand of these ‘A’ items, frequent value analysis is required. These are your fast
moving and typically lower value items that drive the largest percentage of your target
service levels and customer satisfaction rates.
 ‘B Classification’ items are important, but of course less important than ‘A’ items and
more important than ‘C’ items. These are typically mid range in inventory value and
order frequency.
 ‘C Classification’ items are marginally important. Typically, very low order frequency
and high inventory value. These items are usually stocked with very low quantities or not
at all due to the high carrying costs associated with the stock levels.

When it comes to classifying your inventory it is usually safe to follow the Pareto Principle,
also known as the 80/20 rule. The Pareto Principle is the theory that most businesses see 80% of
their sales come from roughly 20% of customers, which should fall into your A classification
category.
ABC Classification & The Pareto Rule for Inventory Management

ABC Classification of inventory management

ABC Classification for inventory management is a very similar approach. Classifying your
inventory items into A, B, C, and D (80%, 15%, 5%, 0%) based on sales volume is an industry
best practice when managing inventory

The table below summarizes the main points of ABC analysis:

Class Quantity/Proportion Value of the items Level of control

A About 20% About 80% Close daily control

B About 30% About 15% Regular review

C About 50% About 5% Infrequent review

Challenges of ABC Analysis

One of the major industry challenges for warehouse and supply chain managers with ABC
analysis is identifying when items could fall into one of two categories, perhaps A or B. With the
rise of mobile e-commerce, social media and 3rd party retailers like Amazon, this means that
items in inventory which were historically considered lower value can move into a higher
category if shortages occur due to abnormal spikes in sales. It is the ability to pick up on these
trends and outliers that helps with the necessary reclassification of a higher value item.

Another problem with ABC analysis is that it does not work with Generally Accepted
Accounting Principles requirements, or GAAP, which are a common set of accounting
principles, standards, rules and procedures that companies use to compile their financial
statements. Because it conflicts with GAAP and other traditional costing systems, stock that is
managed under ABC analysis commonly requires a second costing system, one for internal use
alongside the ABC method and another one to comply with GAAP.

The ABC method requires more resources to maintain than traditional costing systems. When
cycle counts are performed, class A inventory must be routinely analyzed to determine if the
inventory still consists of high-priority items. If an inventory piece is no longer in demand or
demanded has changed, it is moved to another inventory classification, which can be monitored
through complimentary inventory optimization tools, like EazyStock. This constant process
requires much more data measurement and collection.

6. Materials Requirement Planning (MRP)

Success of an operation department of any organization is dependent upon an efficient

production plan. One of the key essential of a production plan is material and manufacturing
planning system. Material requirement planning plays a pivotal role in assembly-line production.
Material requirement planning is a system based approach, which organizes all required
production material.

Material requirement planning is an information system for production planning based on

inventory management. The basic components of material planning are:

 Material planning provides information that all the required raw material and products are
available for production.
 Material planning ensures that inventory level are maintained at its minimum levels. But
also ensures that material and product are available whenever production is scheduled,
therefore, helping in matching demand and supply.
 Material planning provides information of production planning and scheduling but also
provides information around dispatch and stocking.

Objective of Material Requirement Planning

Material requirement planning is processed which production planning and inventory control
system, and its three objectives are as follows:

 Primary objective is to ensure that material and components are available for production,
and final products are ready for dispatch.
  Another primary objective is not only to maintain minimum inventory but also ensure
right quantity of material is available at the right time to produce right quantity of final
products.
 Another primary objective is to ensure planning of all manufacturing processes, this
scheduling of different job works as to minimize or remove any kind of idle time for
machine and workers.

Advantages and Disadvantages of Material Resource Planning

As with every system based process, material resource planning also has its advantages and
disadvantages, and they are as follows:

Advantages of Material Resource Planning

 It helps in maintain minimum inventory levels.

 With minimum inventory levels, material planning also reduces associated costs.
 Material tracking becomes easy and ensures that economic order quantity is achieved for
all lot orders.
 Material planning smoothens capacity utilization and allocates correct time to products as
per demand forecast.

Disadvantages of Material Resource Planning

 Material planning is highly dependent on inputs it receives from other systems or

department. If input information is not correct than output for material planning will also
be incorrect.
 Material planning requires maintenance of robust database with all information pertaining
inventory records, production schedule, etc. without which output again would be
incorrect.
 Material planning system requires proper training for end users, as to get maximum out
of the system.
 Material resource planning system requires substantial investment of time and capital.

Material Resource Planning - Inter dependency of Business Function

Material planning not only benefits operation department but is also beneficial to the other
department of organization. They are as follows:

 Material planning is useful in determining cash flow requirement based on material

requirements and final dispatch schedules.
 It helps procurement team in scheduling purchase of necessary material.
 It helps the sales team in determining delivery dates for final products.

Implementation of Material Resource Planning

Implementation and success of material resource planning dependent on following factors:

  Acceptability of by top management about advantages and benefits
 Proper training and participation of all workers and personnel
 Precision and accuracy of input data for accurate and reliable result

PRODUCTION

INTRODUCTION

Organization are formed to persue goals that are achieve more efficiently by concerted efforts of
a group of people than by individuals working alone. Business organization are devoted to
producing goods and /or providing services

A typical business organization has three basic functions.

1. Finances – pays the bills and collect revenue

2. Marketing – generate demand
3. Production /operation – which create products or services

Organization

Finance operation production Marketing

These three functions and other supporting functions, perform different but related, activities
necessary for the achievement of organizational goal and objectives.

Production

The production function consists of all activities directly related to producing goods or
providing services. Operations is concerned with transforming inputs in to useful outputs and
thereby adding value to some entity this constitutes the primary activity of virtually every
organization

VARIOUS DEFINITIONS OF PRODUCTION

i. Production is defined as step- by step conversion of one form of material into
another from to create or enhance the quality of the product to the user.

ii. The econometrics define productions as an activity from which form utility is
created or enhanced
iii. Production is a process by which goods and services are created
 The production system has the following characteristics

1. Production / operation is an organized activity so every production system has an

objective.
2. The system transforms the various inputs (men materials machines , information, energy)
into useful outputs ( Goods or services)
3. Production system does not operate in isolation from the others organizational system
such as finance, Marketing etc
4. Their exists feedback about the activities which is essential to control and improve
system performance

 Customers
 Government regulations
 Competitors
 Technology
 Suppliers
 Economy

Transformation system Out

INPUTS
Alteration Goods and / or
Capital
Transportation services
Materials
Storage
Equipment
possession
Supplier

Labour

Knowledge

Time

Monitoring and control

 ROLES OF PRODUCTION

The roles of the production is state as

1. Right quality
The quality of the product is established based upon the customer’s needs.
Customer’s needs are translated unto product specifications by the design or
engineering department.
2. Right quantity
The manufacturing organization should produce the products at the right number
If the products are produced in quantities excess of demand the capital will be tied up
in the form of inventory and if it is produced in quantities short of demand, there will
be shortage of products
3. Manufacturing coast.
Manufacturing cost is established before the product is actually manufactured.
Manufacturing department has to manufacture the products at the pre- established
cost in any case any variation between the accrual cost and pre- established cost (
standard cost) should be kept at minimum.
4. Manufacturing schedule
Timelines of delivery (schedule) is one of the important parameter to judge the
effectives of production department. So the manufacturing department should
organize its activities in such a way that the products will be manufactured as per the
schedule.

5. Demand forecasting: Forecasting the demand for the production and using the
forecasting to determine the requirements of various factors of production.
6. Procurement: Arranging for the procurement of required factors of production
7. Entrepreneurship: Utilizing effetely the factors of production and services facilities
available to produce the products

Elements in Production Function

INPUTS

Inputs include facilities, labor, capital equipment, raw material and supplies (oil, paper, pen are
commonly classified as supplies because they only aid in producing the outputs).

Another very important but perhaps less obvious inputs is knowledge and skills of how to transform the
inputs into outputs. The employees of the organization hold this knowledge and skills. Finally, having
sufficient time to accomplish the operation is always critical.

Transformation process (system)

The transformation system (process) is the part of the system that add value to the inputs (form utility)
value can be added to a utility in a number of ways four major ways are described below

1. Alter. Material can be changed structurally, that would be a physical changed and this
approach is basic to manufacturing industries. A transformation process is characterized
by
 A measurable inputs
 An added value
 A measurable output
 A repeatability
2. Transport. A product may have more value if it is located somewhere other than where
it currently is. We may appreciate having things brought to us such as flowers or removed
from us, such as garbage( place utility)
3. Storage. The value of an product may be enhanced for us if it is kept in a protected
environment for some period of time (time utility)
4. Possession. A product may be more valued because we better understand its properties.
This may apply to something we own, plan to use or considering purchasing. (Possession
utility)
OUTPUTS

Two types of outputs commonly result from a production system services and products

Characteristic of products and services

Products Service

Tangible Intangible

minimal contact with customer Extensive contact with customer

Minimal participation by customer in the Extensive participation by customer in the

delivery delivery

Delayed consumption equipment intense Immediate consumption

production quality easily measured
Labour intense production quality difficult to
measure
Stages in Product Design and Development

Organization success is dependent on customer satisfaction and delight. Customer satisfaction is

achieved through development of product and service, which have all attributes required by the
customer. A success product or services do not only have attractive package design but should be
also able to provide robust performance.Thus, product design must be practical enough for
production and powerful enough to provide a competitive advantage.

Product Design

A good product design has following common features:

 Utility: The product design should make product utility as per expectation of customers
and provide steady performance through the product life.
 Aesthetics: Product aesthetics is important in success of the product. The product
aesthetics is dependent on market and end customer.
 Producible: Product design should enable effective production of product through
available production methods.
 Profitability: Product design should make economic sense as to deliver value to
customer and sustainability to the organization.
 Differentiable: A good product design should enable product to be differentiate among
its competition. This can be achieved by attractive packaging and also by providing
additional service on the product.

Stages of Product Design

Have you ever wondered what steps it takes to create a product? In this lesson, we will discuss
the product design process, from coming up with ideas to providing a finished product to
customers.

Product design is when you create a brand-new product to sell to customers. There are several
different stages to completing a product and making it successful. The process is can be divided
into four stages: create an idea, determine product feasibility, test the product, and then
launch the product for customers to buy. Once all the necessary steps are finished, you can now
enjoy the fruits of your labor.
Idea Creation

During the idea creation stage, the company comes up with new concepts to create a product.
You want to concentrate on creating a product that will be useful to customers while also being a
good fit for the company. Creating products that fit with the company's purpose is important
because you want customers to have a clear representation of your brand.

To come up with a new concept, it would be best for a bunch of employees to work together and
throw around ideas on what product should be developed. Imagine you are sitting at a table
having a conversation with yourself about developing a product. You may have a good idea, but
when there are a group of people, the idea can be even better. Joining ideas can help one good
idea become a great idea, because other people can help develop functions that can be beneficial
to the product.

Product Feasibility

Once all of the ideas have been created, the company has to determine the product feasibility. It
is up to the research and development team to analyze the ideas and determine which products
can be created and manufactured. The R&D team then will create a prototype to give the
company an idea of how the product will look and function. The prototype should mirror what
the actual product will be like, and once it does, it's time for the next step.

Product Testing

Now that the product has a prototype, is is ready for product testing among employees and
customers. Customer testing is important because this will determine whether the product is
effective. Customers can give information on what improvements or changes are needed for the
product. Depending on the success of the testing, the product may have to go back to the
research and development team for changes.

Imagine you are creating a new electronic MP3 player. You would have to test the product to
determine what features are beneficial to customers, and which should be changed or improved.
Also, having people outside of the company test the product means you will get an unbiased
opinion.

Product Launch

This is the last stage in which the product is introduced in the market.

Importance of Product Design

product design is how companies create appeal for their customers. The goal is to not only
design a product that customers want but to do so at a low cost with high-quality materials in a
time frame that keeps a company competitive. A company that has a good product design creates
products and services that are of better quality, have greater eye appeal, and perform better. And,
they have a price that matches or beats other products on the shelf.

Factors Affecting Product Design

A successful product design is combination factors as follows:

Correct Team Selection: This is very essential to get the correct team in place which has expert
designers who are not only aware and comfortable with technology but also understanding of
customer expectation.

Customer Involvement: Involvement of customer in product design and testing can provide
insight into the direction of the project

Prototyping and testing: Product design is high risk concept as it involves commitment of
capital and man-power; therefore, it is imperative that extensive prototyping and testing are done
with customer and market.

Raw Material: It is essential that raw material to be used in the production meets the quality
standards of the end product. Furthermore, procurement system needs to be in place to ensure
continuous, cost effective supply.

Production method and process layout: Feasibility of production method and process layout
determines future success of the product.

External Factors: Environmental and government regulations plays an important part in product
design. And these norms are updated from time to time, so product design should have the
flexibility to adapt
 MANAGING QUALITY IN THE SUPPLY CHAIN

Consumers and producers each have different perspectives of a quality product.

Consumers' View of Quality

Consumers generally will pay for the type of product or service that they can afford. If the
consumer is happy with their purchase and feels that they are getting what they paid for, the
product or service is deemed quality in nature.

Quality Defined
There are many definitions of quality available.
Quality is conformance to requirements( Crosby )

Quality is fitness for use(Juran )

Good quality means a predictable degree of uniformity and dependability

With a quality standard suited to the customer (W. Edwards Deming)

Quality is the degree to which performance meets expectations.

Quality denotes an excellence in goods and services, especially to the

degree they conform to requirements and satisfy customers.

METHODS OF DESCRIPTION

Description will mean the various methods by which a buyer conveys to a seller a clear, accurate
picture of the required item. The term specification will be used in the narrower sense referring
to one particular method of description.

1. By brand

2. “Or Equal”

3. By specification

a. Physical or chemical characteristics

b. Material and method of manufacture

c. Performance or function
4. By engineering drawing

5. By miscellaneous methods

a. Market grades

b. Sample

Let us understand each method in detail.

1. Descriptions by brand

This method is used when a product or service is proprietary, or when there is a perceived
advantage in using a particular supplier’s products or services.

Descriptions by brand may be not only desirable but necessary under the following
circumstances:

a. The manufacturing process is secret or covered by a patent.

b. The supplier’s manufacturing process calls for a high degree of ‘workmanship’ or ‘skill’ that
cannot be defined exactly in a specification.

c. Only small quantities are bought so that the preparation of specifications by the buyer is
impracticable.

d. Testing by the buyer is impracticable.

e. The item is a component so effectively advertised as to create a preference or even a demand

for its incorporation into the finished products on the part of the ultimate customer.

f. There is a strong preference for the branded item on the part of the design staff, a bias the
buyer may find almost impossible to overcome.

The main disadvantages of specifying branded item are as follows:

a. The cost of a branded item may be higher than that of an unbranded substitute.

b. The naming of a brand effectively results in a ‘closed specification’ which restricts the
number of potential suppliers and deprives the buyer of the possible advantage of a lower price
or even of improvements brought out by competitors.

2. “Or Equal”

It is not unusual to see requests for quotations or bids that will specify a brand or a
manufacturer’s model number followed by the words “or equal”. In these circumstances, the
buyer tries to shift the responsibility for establishing equality or superiority to the bidder without
having to go to the expense of having to develop detailed specifications.

3. Descriptions by specification

In some cases, an organisation may need to provide very detailed descriptions of the
characteristics of an item or service. Specification constitutes one of the best known of all
methods employed. A lot of time and effort has been expended in making it possible to buy on a
specification basis. Closely related to these endeavours is the effort towards standardisation of
product specifications and reduction in the number of types, sizes, and so on, of products
accepted as standard. It is becoming common practice to specify the test procedure and results
necessary to meet quality standards as part of the specification as well as instructions for
handling, labelling, transportation and disposal to meet environmental regulations.

a. Specification by physical or chemical characteristics

This specification provides definitions of the properties of the materials the buyer desires. They
represent an effort to state in measurable terms those properties deemed necessary for
satisfactory use at the least cost consistent with quality.

b. Specification by material and method of manufacture

The second type of specification prescribes both the material and method of manufacture. This
method is used when special requirements exist and when the buyer is willing to assume the
responsibility for results.

c. Specification by performance or function

Performance specification is result-and user oriented, leaving the supplier with the decisions on
how to make the most suitable product. The assumption is that the supplier will know the best
way to meet the buyer’s needs. This enables the supplier to take advantage of the latest
technological developments and to substitute anything that exceeds the minimum performance
required. The detailed specification is in the hands of the supplier.

Where applicable, performance specifications are to be preferred in that they allow a wider
competition and enable suppliers to suggest new improved ways of meeting the requirement. The
satisfactory use of a performance specification, of course, is absolutely dependent on securing
the right kind of supplier. It should be noted that it may be difficult to compare quotations and
the supplier may include a risk allowance in the price.

Advantages of buying with specifications include:

i. Evidence exists that thought and careful study have been given to the need and the ways in
which it may be satisfied.
ii. A standard is established for measuring and checking materials as supplied, preventing delay
and waste that would occur with improper materials.

iii. An opportunity exists to procure identical requirements from a number of different sources of
supply.

iv. The potential exists for equitable competition. This is why public agencies place such a
premium on specification writing. In securing bids from various suppliers, a buyer must be sure
that the suppliers are quoting for exactly the same material or service.

v. The seller will be responsible for performance when the buyer specifies performance.

Limitations in using specifications:

i. There are requirements for which it is practically impossible to draw adequate specifications.

ii. The use of specifications adds to the immediate cost.

iii. The specification may not be better than a standard product that is, readily available.

iv. The cost is increased by testing to ensure that the specifications have been met.

v. Unduly elaborate specifications sometimes discourage potential suppliers from placing bids in
response to inquiries.

vi. Unless the specifications are of the performance type, the responsibility for the adaptability of
the item to the use intended rests wholly with the buyer.

vii. The minimum specifications set up by the buyer are likely to be the maximum furnished by
the supplier.

Descriptions by engineering drawing

Description by a blueprint or dimension sheet is common and may be used in connection with
some form of descriptive text. It is particularly applicable to the procurement of construction,
electronic and electrical assemblies, machined parts, forgings, castings and stampings. It is an
expensive method of description not only because of the cost of preparing the print or computer
program itself but also because it is likely to be used to describe an item that is quite special as
far as the supplier is concerned and, hence, expensive to manufacture. However, it is probably
the most accurate of all forms of description and is particularly adapted to procuring those items
requiring a high degree of manufacturing perfection and close tolerances.

5. Miscellaneous methods of description

a. Description by market grade or industry standard

Buying on the basis of market grades are confined to certain primary materials and might be the
best choice for standard items, where the requirements are well understood and there is common
agreement between supply chain partners about what certain terms mean. Wheat, cotton, lumber,
steel and copper are commodities. For some purposes, procurement by grade is entirely
satisfactory. Its value depends on the accuracy with which grading is done and the ability to
ascertain the grade of the material by inspection.

Furthermore, the grading must be done by those in whose ability and honesty the buyer has
confidence. It may be noted that even for wheat and cotton, grading may be entirely satisfactory
to one class of buyer and not satisfactory to another class.

b. Description by sample or prototype

Still another method of description is by submission of a sample of the item desired. Almost all
buyers use this method from time to time but ordinarily — there are some exceptions — for a
minor percentage of their procurements and then more or less because no other method is
possible. Good examples are items requiring visual acceptance, such as wood grain, colour,
appearance, smell and so on.

At times, organisations need to develop prototypes or samples to share with their suppliers.
Prototypes can provide critical information on the look or feel of a product or service. Such
information is often difficult to convey in drawings or written descriptions. Note that prototypes
or samples are not limited to physical products. An excellent example is a prototype information
system that an organisation might share with potential software suppliers. The prototype may
include sample output screens and reports. Through the prototype, the organisation can give its
software suppliers a clearer idea of how the organisation expects its users to interact with the
systems.

When orders are placed and products specified by reference to a sample, it is important that the
sample on which the contract is based should be:

i. Identified

ii. Labeled

iii. The signed and labeled samples retained by both buyer and supplier

It is implied that where goods are sold by sample, the bulk must correspond to the sample in
quality and the buyer must have a reasonable opportunity to compare the bulk with the sample.

Quality control (QC) And Quality Assurance

What is meant by Quality Control?
This is the most basic level of quality. It started with activities whose purpose is to control the
quality of products or services by finding problems and defects. At its simplest, QC is inspecting,
testing or checking something (service or product) to make sure it's OK. The intent is to identify
anything that isn't OK, and either fix it or eliminate it, to make sure it conforms to the
specifications, and has/does/functions as required. QC is typically done at the end of the line,
before it 'goes out the door'. If the something isn't OK, this is called 'nonconformity' or a
nonconforming service/product.

Quality Control does not ensure quality; it only finds instances where quality is missing.
Obviously it's better than nothing, but it has its limitations. The most important of these is that
you only find out that things aren't OK at the end of the process

Quality Control refers to the checks carried out on a product by workers, during stages of its
manufacture. These checks may include, simply ensuring that components are positioned
correctly, or that they are the correct type and size. A final quality check should include, testing
the product to ensure it is to the correct standard, before it is distributed to the retailer / customer.
A combination of visual checks and automated checks (by sensors and computers) are usually
carried out.

Quality control (QC) is a procedure or set of procedures intended to ensure that a manufactured
product or performed service adheres to a defined set of quality criteria or meets the
requirements of the client or customer.

QC is similar to, but not identical with, quality assurance (QA).

Quality Assurance was developed from the realization that quality could be improved by looking
'further up the line'. It is aimed at preventing nonconformities/defects.

Quality Assurance focuses on preventing defect. Quality Assurance ensures that the approaches,
techniques, methods and processes are designed for the projects are implemented correctly.
Quality assurance activities monitor and verify that the processes used to manage and create the
deliverables have been followed and are operative.
Quality Assurance is a proactive process and is Prevention in nature. It recognizes flaws in the
process. Quality Assurance has to complete before Quality Control. QA is defined as a procedure
or set of procedures intended to ensure that a product or service under development (before work
is complete, as opposed to afterwards) meets specified requirements.

In order to implement an effective QC program, an enterprise must first decide which specific
standards the product or service must meet. Then the extent of QC actions must be determined
(for example, the percentage of units to be tested from each lot). Next, real-world data must be
collected (for example, the percentage of units that fail) and the results reported to management
personnel. After this, corrective action must be decided upon and taken (for example, defective
units must be repaired or rejected and poor service repeated at no charge until the customer is
satisfied). If too many unit failures or instances of poor service occur, a plan must be devised to
improve the production or service process and then that plan must be put into action. Finally, the
QC process must be ongoing to ensure that remedial efforts, if required, have produced
satisfactory results and to immediately detect recurrences

The difference is that QA is process oriented and QC is product oriented.

Many people think QA and QC are same and interchangeable but this is not true. Both are tightly
linked and sometimes it is very difficult to identify the differences. Fact is both are related to
each other but they are different in origins. QA and QC both are part of Quality Management
however QA is focusing on preventing defect while QC is focusing on identifying the defect.

Key Points

 In QA, processes are planned to evade the defects.

 QC agreements with discovery the defects and modifying them while making the
product.
 QA detects weakness.
 QC detects defects.
 QA is process oriented
 QC is product oriented.
 QA is failure prevention system.
 QC is failure detection system

 Quality Assurance makes sure you are doing the right things, the right way.
 Quality Control makes sure the results of what you've done are what you expected.
 Quality Tools in Supply chain

Just as a construction team needs tools to build, operations and supply chain management
departments need tools to evaluate quality throughout their processes. There are seven quality
tools that are used to help support quality management goals by understanding and improving
production processes.

The tools are referred to by many different names in the business world, such as 'The Old Seven',
'The First Seven' and 'The Basic Seven'. The father of the tools is Karoru Ishikawa, an
engineering professor at Tokyo University who first came up with the list.

Cause-And-Effect Diagram

The first quality tool that can be used to evaluate processes is the cause-and-effect diagram,
also known as Ishikawa/fishbone chart. This diagram can be used to identify many possible
causes for an effect or problem. The final results of the chart are vital to help structure a
brainstorming session as it immediately sorts ideas into useful categories. This type of diagram
can be very helpful for companies to understand the causes of everyday problems.

Jets R Us begins the process for building a cause-and-effect diagram with a brainstorming
session in a team environment. The problem is discussed and then all causes from each area of
the problem are shown on the diagram. In this instance, Jets R Us is having an issue with a defect
in their newest airliner. You can see an example of their cause-and-effect diagram with potential
problem areas.

Check Sheet

Another method of evaluating processes for quality control is a check sheet, which is a real-
time, structured form for compiling, recording and researching both observational and historical
data. Jets R Us considers a check sheet the most basic tool for quality, and it can be tabulated and
analyzed by simple software, such as Excel. Jets R Us uses one form of a check sheet exclusively
to observe and note any finishing issues. Their tally sheet is a form of a check sheet and is used
to make note of where any exterior issues are noted as the plane is heading for sale. For example,
the tally sheet for plane 104 showed two areas of exterior finish issues on the right wing.

Control Charts

Control charts are also used by Jets R Us to monitor quality and study how a process changes
over a time period. Control charts are most effective analyzing time series data. Each point on
the chart represents a statistic, such as a range. The center line is then represented with the mean
of the statistics in order to establish upper and lower control limits. Anything over or below the
limits causes Jets R Us to investigate.

Jets R Us uses them to help with analyzing performance in areas such as stability and
predictability of the production process and to discover any variations in order to fix them. For
instance, Jets R Us has been using control charts to monitor the number and percent of defects in
their production process for the new small jet planes.

Histograms

Jets R Us also uses histograms as visual interpretation of numerical data by showing the number
of data points that lie within a range of values, called a class or bin. The frequency of the data
that falls in each class is represented by the use of a bar.

The graph consists of columns that represent the distribution of the mean. If the histogram is not
normal, it does not have a bell-shape curve. For example, Jets R Us uses histograms to analyze
their production process for the planes. If a histogram does not result in a bell-shape curve, then
there could be an issue in the manufacturing process.

Pareto Chart

A Pareto chart is a vertical bar graph where values are shown in decreasing order of relative
frequency from left to right. Pareto charts are detrimental for analyzing what problems need to be
prioritized because the taller bars on the chart, which represent frequency, show which variable
has the biggest impact on a process.

The advantage of a Pareto chart is that it can determine which factors are more significant or to
identify a set of priorities that could be the cause of company issues. Jets R Us uses the Pareto
chart to illustrate issues related to employee absences and record the number of occurrences. Jets
R Us was able to discover that traffic and childcare were the leading two issues that stood in their
way for a productive day. This led to the company building an onsite daycare to fix the issue.

Scatter Diagram

A scatter diagram is a type of diagram that reflects the relationship between data items that
have two numeric properties. One property is shown along the x-axis and the other along the y-
axis with every item characterized by a single point.
The quality control circle or more popularly known as quality circle concepts were formed in
Japan in 1960 and in United States it started in 1977. Gradually it caught the attention world over
and most of the developed and developing countries are using this concept to their benefits.

Quality Circle

A Quality circle is defined as a small group of employees who voluntarily cooperate to solve
problems relating to:

i. production, wastage of materials,

ii. quality of raw material, tool, semi-finished and finished goods,
iii. work-environment, energy consumption,
iv. scheduling, delay,
v. maintenance,
vi. Safety and anything that acct these factors.

These groups, under the leadership of their own foreman or supervisor are trained to identify,
analyze and solve the quality related problems.

Theoretically, quality circles are groups of workers who do similar work but could be built up of
individuals drawn from different positions provided they share the same work area and can
identify common problems. The underlying perception in forming the quality circle is that it
should be a homogeneous and coherent body for a common goal.

For example, the quality circle should not be formed with people with, say, from foundry shop,
welding shop, heat treatment and design section. As these cannot form a coherent group as they
do not share common problems.

Characteristics of Quality Circle

The quality circle thus has the following characteristics:

1. A small group of people who do similar work

The quality circle essentially consists of people who do similar work. But it does not imply that
the circle cannot consult the specialists or others. In fact, ideas and solutions can be sought from
any corner.

2. The members in the circle should not be many

It is argued that smaller the circle better the coordination and homogeneity. The circle should
look like a team and not a committee. It should consists of members between three and ten
depending upon the size of the department. As suggestions for removing any snag or improving
the productivity are invited from every member of the department no one would feel neglected or
side tracked.
3. Voluntarily meeting together

People are invited to join the quality circle but they are not compelled. The members feel the
need to meet together to discuss and devise ways to improve the functioning of their areas
concerned. Hence, joining a quality circle is voluntary and not forced upon.

4. Meeting regularly every week

The duration and frequency of meetings even vary in Japan (where this concept originated), it is
favored to have meetings at least an hour every week. But actually, the frequency and duration of
each meeting should be decided by the circle members who will take all factors into account
such as the severity of the problem, urgency of problem, number of problem etc. The date of
holding a meeting is also decided by the circle members so that their meeting does not disturb
the production schedule.

In practice, the quality circles have proved to be a boon in disguise for the industries. They may
hold the meetings during a maintenance period, a job change over or after completion of weekly
work schedule. They may meet at the beginning or end of the shift or during lunch break.

5. under the leadership of their own supervisor

The quality circle is purely concerned with work-related problems. Therefore, supervisors of the
work area prove to be the best persons to lead the group, as they are thorough with the
functioning of the department. The idea of electing or selecting the leader from the quality circle
members is not encouraged as it does not work out effectively.

6. Identification, Analysis and Solutions

The circle identify their own problems in their own work area. The circle members are not
encouraged to highlight the fault of others.

7. Presenting Solutions to Management

After collection of data, working out new ideas in consultation with all kinds of people, the
members come to a conclusion which if implemented will deliver the goods. The final idea
(solution) should be presented to the management together by the group members (not by the
leader alone or any other member). Interestingly the circle solutions (projects) are so
meticulously thought out that their outright rejection (not favored for implementation) by the
management is rare.

8. Self Implementation

The quality circles are made for implementation of their solutions as they deal with the problems
over the fence in the next department are completely isolated from it. Only each department has
to care for their babies.
9. Meeting time any time

The meetings of the circle members may not be arranged essentially during their normal working
hours. As it may affect their working and thereby production. Also, if the work is done in shifts
then the circle members may come different shifts and a common free time for all may be
difficult to spare within normal working period. Hence, such meetings could be held any time in
a working day and holiday.

Advantages of Quality Circles

The following are some of the advantages of Quality Circles.

1. It infuses team spirit among the workers.

2. It improves decision making ability.

3. It improves employee communication at all levels of the organization.

4. It improves problem solving ability.

5. It improves leadership skill.

6. It builds confidence / trust.

7. It incorporates a sense of belonging to their organization.

8. It creates a sense of corporate loyalty and corporate pride.

9. It improves the relationship between managers and the work force.

10. It improves quality, production and productivity.

11. It improves the self image of the employees.

12. It reduces cost of production.

13. It enhances customer satisfaction.

14. It increases demand for product/services of the organization.

15. There is greater job security and more employment opportunity

Problems of Quality Circle

1. As the circle membership is voluntary, a member can drop out when he/she wishes so. This
option may be even be exercised to force other members to come to his/her terms.
2. The selection of a problem to be tackled first may generate more heat among the circle
members. A strong-willed member may bulldoze his/her ideas straining the relationship.

3. The quality circle takes up a problem which is difficult to solve, thus, wasting their time and
energy.

4. The departmental managers often prove less supportive, as the members of quality circle come
to limelight often.

5. Fixing-up meeting time becomes difficult due to fluctuating working demand.

6. The circle may form an impression that the management is not implementing its suggestions
whole heatedly and is dilly-dallying the idea which may have a dampening effect on the circle,
demoralizing them.

7. The quality circle may feel after some time that it has run out of problems which in effect
implies that it is not brainstorming according to the rules.

Quality Function Deployment

Quality function deployment (QFD) is the translation of user requirements and requests into
product designs. The goal of QFD is to build a product that does exactly what the customer
wants instead of delivering a product that emphasizes expertise the builder already has. .

QFD was created by Japanese planning specialist Yoji Akao in 1966 as a way to help product
planners look at new products through the lenses of customer, company and technology. QFD is
achieved by linking the needs of the end user to subsystems or specific elements of the product
creation process -- from design and development to engineering, manufacturing and services.

QFD requires the customer to document his needs and wants in his own words so that a "House
of Quality" matrix can be built. The customer meets with the manufacturer to prioritize
requirements so the manufacturer understands priorities and can translate them into engineering
and business process requirements. The manufacturer then establishes design criteria to ensure
the customer's requirements are met.

Failure Modes and Effects Analysis (FMEA) Tool

Also called potential failure modes and effects analysis; failure modes, effects and criticality analysis
(FMECA).

Failure modes and effects analysis (FMEA) is a step-by-step approach for identifying all possible
failures in a design, a manufacturing or assembly process, or a product or service.

“Failure modes” means the ways, or modes, in which something might fail. Failures are any
errors or defects, especially ones that affect the customer, and can be potential or actual.
“Effects analysis” refers to studying the consequences of those failures.

Failures are prioritized according to how serious their consequences are, how frequently they
occur and how easily they can be detected. The purpose of the FMEA is to take actions to
eliminate or reduce failures, starting with the highest-priority ones.

Failure modes and effects analysis also documents current knowledge and actions about the risks
of failures, for use in continuous improvement. FMEA is used during design to prevent failures.
Later it’s used for control, before and during ongoing operation of the process. Ideally, FMEA
begins during the earliest conceptual stages of design and continues throughout the life of the
product or service.

Failure Modes and Effects Analysis (FMEA) is a systematic, proactive method for evaluating a
process to identify where and how it might fail and to assess the relative impact of different
failures, in order to identify the parts of the process that are most in need of change. FMEA
includes review of the following:

 Steps in the process

 Failure modes (What could go wrong?)
 Failure causes (Why would the failure happen?)
 Failure effects (What would be the consequences of each failure?)

Teams use FMEA to evaluate processes for possible failures and to prevent them by correcting
the processes proactively rather than reacting to adverse events after failures have occurred. This
emphasis on prevention may reduce risk of harm to both customers and staff. FMEA is
particularly useful in evaluating a new process prior to implementation and in assessing the
impact of a proposed change to an existing process.

Types of FMEA’s

There are several types of FMEAs, some are used much more often than others. FMEAs should
always be done whenever failures would mean potential harm or injury to the user of the end
item being designed. The types of FMEA are:

 System – focuses on global system functions

 Design – focuses on components and subsystems
 Process – focuses on manufacturing and assembly processes
 Service – focuses on service functions
 Software – focuses on software functions

FMEA Usage

FMEA’s provide the engineer with a tool that can assist in providing reliable, safe, and customer
pleasing products and processes. Since FMEA help the engineer identify potential product or
process failures, they can use it to:
  Develop product or process requirements that minimize the likelihood of those failures.
 Evaluate the requirements obtained from the customer or other participants in the design
process to ensure that those requirements do not introduce potential failures.
 Identify design characteristics that contribute to failures and design them out of the
system or at least minimize the resulting effects.
 Develop methods and procedures to develop and test the product/process to ensure that
the failures have been successfully eliminated.
 Track and manage potential risks in the design. Tracking the risks contributes to the
development of corporate memory and the success of future products as well.
 Ensure that any failures that could occur will not injure or seriously impact the customer
of the product/process.

Benefits of FMEA

FMEA is designed to assist the engineer improve the quality and reliability of design. Properly
used the FMEA provides the engineer several benefits. Among others, these benefits include:

 Improve product/process reliability and quality

 Increase customer satisfaction
 Early identification and elimination of potential product/process failure modes
 Prioritize product/process deficiencies
 Capture engineering/organization knowledge
 Emphasizes problem prevention
 Documents risk and actions taken to reduce risk
 Provide focus for improved testing and development
 Minimizes late changes and associated cost
 Catalyst for teamwork and idea exchange between functions

FMEA Timing

The FMEA is a living document. Throughout the product development cycle change and updates
are made to the product and process. These changes can and often do introduce new failure
modes. It is therefore important to review and/or update the FMEA when:

 A new product or process is being initiated (at the beginning of the cycle).
 Changes are made to the operating conditions the product or process is expected to
function in.
 A change is made to either the product or process design. The product and process are
inter-related. When the product design is changed the process is impacted and vice-versa.
 New regulations are instituted.
 Customer feedback indicates problems in the product or process.
 PHYSICAL DISTRIBUTION MANAGEMENT

Distribution channels: A marketing channel is a set of practices or activities necessary to

transfer the ownership of goods, and to move goods, from the point of production to the point of
consumption and, as such, which consists of all the institutions and all the marketing activities in
the marketing process.

Intermediaries: An intermediary is a third party that offers an intermediation service between

two trading parties.

Roles of Physical Distribution

Economic utility – the value or usefulness of a product in fulfilling customer needs or wants.
There are four general types of economic utility; however, logistics contributes to the place and
time utility:

o Possession utility – the value or usefulness that comes from a customer being able
to take possession of a product.
o Form utility – product’s being in a form that (1) can be used by the customer and
(2) is of value to the customer.
o Place utility – having products available where they are needed by the customers;
products are moved from points of lesser value to points of greater value.
o Time utility – having products available when they are needed by customers.

Functions of a Channel

The primary purpose of any channel of distribution is to bridge the gap between the producer of
a product and the user of it, whether the parties are located in the same community or in different
countries thousands of miles apart. The channel of distribution is defined as the most efficient
and effective manner in which to place a product into the hands of the customer. The channel is
composed of different institutions that facilitate the transaction and the physical exchange.

Institutions in channels fall into three categories:

 The producer of the product: a craftsman, manufacturer, farmer, or other extractive

industry producer
 The user of the product :an individual, household, business buyer, institution, or
government
 Certain middlemen at the wholesale and/or retail level

A channel performs three important functions. Not all channel members perform the same
function. The functions are:
  Transactional functions: buying, selling, and risk assumption
 Logistical functions: assembly, storage, sorting, and transportation
 Facilitating functions: post-purchase service and maintenance, financing, information
dissemination, and channel coordination or leadership

These functions are necessary for the effective flow of product and title to the customer and
payment back to the producer. Physical distribution adds value by performing one or more of the
following channel functions:

 Selling and Promoting

 Buying and Assortment Building
 Bulk-Breaking
 Warehousing
 Transportation
 Financing
 Risk Bearing
 Market Information – giving information to suppliers and customers about competitors,
new products, and price developments
 Management Services and Advice – helping retailers train their sales clerks, improving
store layouts and displays, and setting up accounting and inventory control systems.

Characteristics of a Channel

Certain characteristics are implied in every channel.

First, although you can eliminate or substitute channel institutions, the functions that these
institutions perform cannot be eliminated. Typically, if a wholesaler or a retailer is removed from
the channel, its function will either shift forward to a retailer or the consumer, or shift backward
to a wholesaler or the manufacturer.

For example, a producer of custom hunting knives might decide to sell through direct mail
instead of retail outlets. The producer absorbs the sorting, storage, and risk functions; the post
office absorbs the transportation function; and the consumer assumes more risk in not being able
to touch or try the product before purchase.

Second, all channel institutional members are part of many channel transactions at any given
point in time. As a result, the complexity of all transactions may be quite overwhelming.
Consider how many different products you purchase in a single year and the vast number of
channel mechanisms you use.

Third, the fact that you are able to complete all these transactions to your satisfaction, as well as
to the satisfaction of the other channel members, is due to the routinization benefits provided
through the channel.

Routinization means that the right products are most always found in places where the consumer
expects to find them (such as catalogues or stores), comparisons among products are possible,
prices are marked, and methods of payment are available. Routinization aids the producer as well
as the consumer, because it tells the producer what to make, when to make it, and how many
units to make.

Fourth, there are instances when the best channel arrangement is direct, from the producer to the
ultimate user. This is particularly true when available middlemen are incompetent or unavailable,
or the producer feels he or she can perform the tasks better. Similarly, it may be important for the
producer to maintain direct contact with customers so quick and accurate adjustments can be
made.

Direct-to-user channels are common in industrial settings, as are door-to-door selling and
catalogue sales. Indirect channels are more typical and result, for the most part, because
producers are not able to perform the tasks provided by middlemen.

Finally, although the notion of a channel of distribution may sound unlikely for a service product
(such as health care or air travel), service marketers also face the problem of delivering their
product in the form and at the place and time demanded by the customer.

Banks have responded by developing bank-by-mail, Automatic Teller Machines (ATMs), and
other distribution systems. The medical community provides emergency medical vehicles,
outpatient clinics, 24-hour clinics, and home-care providers. Even performing arts employ
distribution channels. In all three cases, the industries attempt to meet the special needs of their
target markets while differentiating their product from that of their competitor.

Types of Distribution Channels

There are basically 4 types of distribution channels:

 Direct selling;
 Selling through intermediaries;
 Dual distribution; and
 Reverse channels.

1. Direct Selling

Direct selling is the marketing and selling of products directly to consumers away from a fixed
retail location. Peddling is the oldest form of direct selling.

Modern direct selling includes sales made through the party plan, one-on-one demonstrations,
personal contact arrangements as well as internet sales.
 2. Selling Through Intermediaries

A distribution channel where intermediaries such as wholesalers and retailers are utilized to
make a product available to the customer is called an indirect channel.

The most indirect channel you can use (Producer/manufacturer –> agent –> wholesaler –>
retailer –> consumer) is used when there are many small manufacturers and many small retailers
and an agent is used to help coordinate a large supply of the product.

3. Dual Distribution

Dual distribution describes a wide variety of distribution arrangements by which the

manufacturer or wholesalers uses more than one channel simultaneously to reach the end user.
They may sell directly to the end users as well as sell to other companies for resale. Using two or
more channels to attract the same target market can sometimes lead to channel conflict.

An example of dual distribution is business format franchising, where the franchisors, license the
operation of some of its units to franchisees while simultaneously owning and operating some
units themselves.

4. Reverse Channels

Recycling Containers: Recycling is an example of a reverse marketing channel.

Technology has made another flow possible. This one goes in the reverse direction and may go
— from consumer to intermediary to beneficiary. Think of making money from the resale of a
product or recycling.
Selecting Distribution Channels

Before selecting which distribution channels are ideal for a given organization, it’s important to
understand the underlying role of channels in marketing strategy. Channels influence:

 The relationship between the producer and the buyers.

 The firm’s pricing strategy.
 The overall product strategy through branding, policies, and willingness to stock.

By selecting the optimal channels, organizations create strategic alliances between the firm and
the providers. This has a number of implications, including how a user group will perceive the
organization’s brand and how they will be treated when interacting with that brand in a given
channel situation (such as a retail outlet ). With this in mind, there are a few key considerations
organizations will want to keep in mind when selecting channels.

1. Consumer Preferences

First and foremost, the consumer’s habits and behaviors determine channel strategy more than
anything else. If all of an organization’s consumers love to shop at Walmart, then it may be a
smart idea to begin stocking Walmart shelves with products. If consumers have a strong desire to
find a given good in a given channel, organizations should strive to make that happen (as long as
the opportunity costs down exceed the potential benefits).

2. Cost

Some channels will be more costly than others. Low cost goods function best at low cost retail
outlets. Better yet, directly selling eliminates organizations between the user and the producer,
and therefore can be even lower cost (albeit, shipping, storing and other logistics must be
considered). Wholesalers are willing to buy large shipments of goods, but usually at a significant
discount.

3. Brand

Organizations create strategic alliances to build channels for consumers, and these alliances will
reflect on the overall branding initiatives of both partners. If an online retailers stocks a certain
type of item, users of that online retailer will equate the two brands together. This can have an
impact on how those consumers view both companies.

For example, A premium coffee machine manufacturer may not want to be stocked at a discount
retailer, as it will lower the brand’s power in the eyes of the consumer. A high end good being
sold on a low-cost distribution channel can cannibalize sales and reduce profitability through
offering a price point the producer doesn’t believe matches the quality of the produced good.
 4. Localization

In the current global economy, it is also useful to localize and enter new markets through
effective marketing channel selections. A producer of household goods, for example, like
laundry detergent could just as easily sell their goods in Europe as in the United States. The
question for accomplishing this task is which retailers to work with, and how to localize the
brand to be recognized and understood by foreign consumers. Strategic channel selection can
greatly improve an organization’s ability to accomplish this goal.

Logistics Definition

“Logistics is that part of SCM that plans, implements, and controls the efficient, effective,
forward and reverse flow and storage of goods, services, and related information between the
point of origin and point of consumption in order to meet customers’ requirements.”

Various terms have been used to describe logistics such as:

 Business logistics
 Distribution
 Industrial distribution
 Logistics
 Logistics management
 Materials management
 Physical distribution
 Supply chain management

So what does the definition mean?

1. The definition says that it is part of the supply chain management- this means that supply
chain involves a bigger process which engages different organizations; however, logistics
determines how well or how poor an individual firm can achieve their goals.

2. It is part of SCM that plans, implements, and controls – this means that logistics must
cover all these areas not just one or two.

3. It also mentions the efficient, effective, forward and reverse flow and storage – this means
“How well does the company do what they are going to do?”

4. Goods, services, and related information between the point of origin and point of
consumption – this means that information about what you are delivering is as important as the
delivery itself.

5. To meet customers’ requirements – means logistics strategies should be focused on

customers’ needs and wants .
Reverse Logistics (opposite to Forward Logistics) is "the process of planning, implementing,
and controlling the efficient, cost effective flow of raw materials, in-process inventory, finished
goods and related information from the point of consumption to the point of use for the
purpose of recapturing value or proper disposal.

Activities in the Logistics Channel

Activities that are considered to be logistics related include, but are not limited to:

 Customer service
 Demand forecasting
 Facility location decision
 Industrial packaging
 Inventory management (cost of carrying/holding, cost of ordering, and cost of being out
of stock)
 Materials handling
 Order management
 Parts and service support
 Production scheduling
 Procurement
 Returned products
 Salvage and scrap disposal
 Transportation management
 Warehousing management

ORGANIZATION OF SUPPLY CHAIN

An organization is a group of people who together work to achieve a common goal. In order to
work together efficiently, the group must find the best way to organize the work that needs to be
done in order to meet the goals of the organization. Organizational structure defines how tasks
are divided, grouped, and coordinated in organizations. Every organization has a structure that
clarifies the roles that organizational members perform, so that everyone understands their
responsibilities to the group.

For example, the Beaver Scouts is a youth organization that meets for outdoor activities, such as
hiking and camping. When the Beaver Scouts of Colony #33 go camping, the lodge leader
constructs a list of tasks that must be performed during the trip. Tasks are divided up among the
members of the colony and written down on a chore chart, so every scout knows what job they
are responsible for each day. Without this formal structure, the scouts would waste a lot of time
trying to decide who should do what, and many tasks would likely go undone.

Factors to consider in designing structures

1. Size of the organization and the range of activities and resources

 2. The dispersal of the activities
3. The resources available
4. The level of technology used
5. The nature of business undertaken

Organizations can be structured in different ways:

 by function, for example, operations, marketing, finance, procurement, human resource,

etc
 by region
 by product, for example, books, support, consultancy, delivery etc
 In work teams, for example, client/customer groups

The Role of Structure in an Organization

Similar to the Beaver Scout chore chart, companies use a diagram called an organizational
chart that displays the structure of the organization, and also shows the relationships between
organizational members and the ranks of all the positions in the organization.

The formal structure of an organization provides two important roles for organizational
members. The structure of an organization clarifies roles for organizational members, so that
each member knows what they are supposed to do and who they report to. The structure also
dictates the amount of control an organizational member has regarding his job in the
organization.

Elements of Organizational Structure

The structure of an organization consists of a combination of different elements. Each of these

elements has an impact on how the tasks are carried out in an organization.

Work specialization - the first element that affects the structure of an organization is how tasks
are subdivided into separate jobs. Is a job completed by an individual, or is it broken down into
separate steps and completed by several individuals? The more a job is broken down into small
tasks, the more specialization is required by each individual worker. High specialization results
in high efficiency, but can lead to boredom by workers who are required to perform the same
repetitive task over and over.

Departmentalization- It establishes how jobs are grouped together. Jobs can be grouped in
many ways, including by job function, product line, or territory.

Coordination- refers to integrating the objectives and activities of specialized departments to

realize broad strategic objectives of the organization. It includes two basic decisions pertaining
to:
(i) Which units or groups should be placed together and

(ii) The patterns of relationships, information networks and communication.

Efficient coordination can also help in resolving conflicts and disputes between departments in
an organization. Hierarchy facilitates vertical coordination of various departments and their
activities. Some of the important principles are discussed below.

Chain of command - It provides a line of authority that reaches from the top of the organization
to the bottom and spells out who reports to whom in the organization. Every person in an
organization should be responsible to one superior and receive orders from that person only. It
considered to be the most important principle for efficient working and productivity in an
organization.

The Scalar Principle; Decision making authority and the chain of command in an organization
should flow in a straight line from the highest level to the lowest. The principle evolves from the
principle of unity of command.

Span of control -determines how many individuals a manager can efficiently and effectively
manage. Companies with wider spans of control require fewer managers and are more efficient
than companies with narrow spans of control, but if the span of control becomes too large,
employees may not receive adequate leadership and support from their managers.

Responsibility and Authority -To successfully performing certain tasks, responsibility must be
accompanied by proper authority. Those responsible for performance of tasks should also have
the appropriate level of influence on decision making.

Centralization and Decentralization, -determines 'where does decision-making authority lie?' If top
management makes all the organizational decisions with no input from lower-level personnel, the
organization is considered to be centralized. The more that lower-level managers are involved in the
decision-making process, the greater the degree of decentralization that exists in the organization. The
degree of centralization and de-centralization depends on the number of levels of hierarchy, degree of
coordination, specialization and span of control. Centralization and de-centralization could be organized
according to:

l concentration or dispersion of operations;

Every organizational structure contains both centralization and de-centralization, but to varying degrees.
The extent of this can be determined by identifying how much of the decision making is concentrated at
the top and how much is delegated to lower levels. Modern organizational structures show a strong
tendency towards de-centralization.

Formalization- determines to what degree the jobs in the organization are standardized. A
highly formalized job has clearly defined procedures and leaves organizational members little
freedom in regard to how they perform their tasks. A low degree of formalization, on the other
hand, allows employees a high degree of flexibility in how they get their jobs done.

Why Organizational Structure Is Important

Every organization must determine which type of structure will allow the organization to work
the most effectively and efficiently towards reaching the organization's goals.

APPROACHES (TYPES) OF ORGANIZATION STRUCTURES

The approaches can be considered in two categories i.e. traditional approaches and new
approaches. The traditional approaches include the following :

A. THE TRADITIONAL APPROACHES

Organizations are set up in specific ways to accomplish different goals, and the structure of an
organization can help or hinder its progress toward accomplishing these goals. Organizations
large and small can achieve higher sales and other profit by properly matching their needs with
the structure they use to operate. Traditional organizational structure employs a familiar power
dynamic: somebody leads, others follow, with extra managers deputized to help run things.
Companies still use this structure of top boss, middle management and employees, because it
provides control and stability. There are Four main types of organizational structure: functional,
divisional, strategic business unit and matrix structure

1. FUNCTIONAL STRUCTURES.

Functional structure is set up so that each portion/units of the organization is grouped according
to its purpose. The functional structure works very well for small businesses in which each
department can rely on the talent and knowledge of its workers and support itself. One traditional
way of organizing people is by function. Some common functions within an organization include
production, marketing, human resources, and accounting. Under this approach organizing is
 based on areas of specialization (Departments) e.g. Purchasing, Marketing, Finance, Human
Resource, etc

CEO

Purchasing Department Marketing Department H.R. department

Advantages of functional

1) The CEO is in direct relationship with the departments

2) It gives an important status to the departments
3) Communication and decision making is easy
4) It simplifies training of departmental specialists
5) It preserves strategic control at the top management level

Disadvantages of functional structures

1. Co-ordination among departments may be unsatisfactory

2. Emphasis can be on narrow department objectives instead of wider organizational
objectives
3. It may lead to wasteful interdepartmental disputes and conflicts

NB: This approach is mainly suitable for small organizations

2. DIVISIONAL STRUCTURES
Divisional structure typically is used in larger organization/companies that operate in a wide
geographic area or that have separate smaller organizations within the umbrella group to cover
different types of products or market areas. This approach emphasizes on creating divisions out
of the department (functional areas). It becomes necessary when the number of departments have
 increased beyond the control of the CEO. The control is transferred to divisional heads. This
approach has a number of bases of creating divisions e.g.
a) Project divisions
b) Product divisions
c) Process divisions
d) Geographical divisions
e) Market/Customer

The divisional structure or product structure consists of self-contained divisions. A division is a

collection of functions which produce a product. It also utilizes a plan to compete and operate as
a separate business .Employees who are responsible for certain market services or types of
products are placed in divisional structure in order to increase their flexibility. When using
divisional structures that are organized by either markets or geographic areas they generally have
similar function and are located in different regions or markets. This allows business decisions
and activities coordinated locally.

CEO

Div.1 Div. 2

Purchasing Dept Marketing dept Purchasing dept Marketing dept

Advantages of Divisional Structures

1. It concentrates on a particular basis e.g. project, product, process, market geography etc.
2. It allows divisions to adapt to local circumstances
3. It allows the divisional managers to strategize on their areas
4. It provides a training opportunity for general managers
5. Uses delegated authority so the performance can be directly measured with each group. This
results in managers performing better and high employee morale
6. Is more efficient in coordinating work between different divisions, and there is more
flexibility to respond when there is a change in the market.
7. A company will have a simpler process if they need to change the size of the business by
either adding or removing division

8. This allows business decisions and activities coordinated locally.

Disadvantages of divisional structures

1. There is a possible conflict between the divisions

2. There is a possible duplication of the divisions
3. It requires several general managers for the divisions
4. It is an expensive structure because of the number of levels
5. Co-ordination may be complex because of the number of divisions

NB. Small businesses can use a divisional structure on a smaller scale, having different offices in
different parts of the city, for example, or assigning different sales teams to handle different
geographic areas.

STRATEGIC BUSINESS UNIT (SBU) STRUCTURES

When the number of divisions in an organization increases to an extent that it becomes difficult
for CEO to control, then it is necessary to create strategic business units that accommodate the
divisions. An SBU is considered as independent entity that has its own allocation of resources
and is accountable for its own performance

CEO

SBU 1 SBU 2

Div 1 Div 2 Div 3 Div 4

Advantage of SBU structures

i) It focuses on a specific area of business

ii) It is independent or autonomous
iii) It is a centre of resource allocation
iv) There is a greater accountability

Disadvantages of SBU structures

i) It is a more expensive structure because of an extra level – (SBU level)

ii) It requires a high level of specialization
iii) It puts less emphasis on teamwork
iv) It decentralizes control

4. Matrix structures

The fourth main type of organizational structure, called the matrix structure, it is an hybrid of
divisional and functional structure. Typically used in large multinational companies. The matrix
structure allows for the benefits of functional and divisional structures to exist in one
organization. It creates dual authority relationships i.e two sources of authority. The matrix
structure groups employees by both function and product. This structure can combine the best of
both separate structures. A matrix organization frequently uses teams of employees to
accomplish work, in order to take advantage of the strengths, as well as make up for the
weaknesses, of functional and decentralized forms.
  Weak/Functional Matrix: A project manager with only limited authority is assigned to
oversee the cross- functional aspects of the project. The functional managers maintain
control over their resources and project areas.
 Balanced/Functional Matrix: A project manager is assigned to oversee the project.
Power is shared equally between the project manager and the functional managers. It
brings the best aspects of functional and projectized organizations. However, this is the
most difficult system to maintain as the sharing of power is a delicate proposition.
 Strong/Project Matrix: A project manager is primarily responsible for the project.
Functional managers provide technical expertise and assign resources as needed.

Matrix management is more dynamic than functional management in that it is a combination of

all the other structures and allows team members to share information more readily across task
boundaries. It also allows for specialization that can increase depth of knowledge in a specific
sector or segment.

CEO

HR Purchasing

Div I HR Div Purchasing

I Div I

Div II HR Div Purchasing

II Div II
Advantages of matrix structures

i) It establishes one person as the focal point for all matters of the organization i.e CEO
ii) It makes it possible to respond to the needs of several divisions and functions
iii) It maximizes the use of limited number of function specializations
iv) It ensures that the functional specialists are equally available to divisions and
functions
 v) It provides excellent training for running a diversified organization
vi) Allows the spread of information across task boundaries to happen much quicker
vii) Allows for specialization that can increase depth of knowledge & allows individuals
to be chosen according to project needs
viii) Improves upon the “silo” critique of functional management in that it diminishes the
vertical structure of functional and creates a more horizontal structure

Disadvantages of matrix structures

i) The unity of command principle is lost because of the duality off authority
ii) The authority and responsibility of managers overlap, therefore causing conflicts
iii) It places premium on teamwork which is not easy to achieve
iv) It slows down decision making
v) complexity of the chain of command
vi) conflicting loyalties of employees

NEW ORGANIZATION STRUCTURES

Modern organization design draws on ideas from many fields to make communication more
dynamic and blend individual and organizational solutions together into a cohesive whole. New
designs focus on adaptability. They rely highly on employee involvement, distribute authority
based on skill and have fewer rules and boundaries, resulting in a more organic structure.

TEAM BASED STRUCTURES

The team structure transfers power from middle management to employees. When charted, the
traditional organizational structure gains height thanks to rows of middle managers, whose
subordinates occupy the bottom of the structure. The team structure removes most, if not all
middle management, creating a shorter, flatter chart. Naturally, the team structure is less
bureaucratic and, therefore, less rigid. Removing middle managers means the authority they once
wielded must be redistributed to employees. This decentralization of power gives employees of
the team structure much more autonomy than employees working within traditional structures
Teams can be both horizontal and vertical. While an organization is constituted as a set of
people who synergize individual competencies to achieve newer dimensions, the quality of
organizational structure revolves around the competencies of teams in totality.

NETWORK
The network structure meanwhile, isn’t so much a structure as it is a hub connected to outside
suppliers. The network structure forgoes the hierarchical approach of the traditional
organizational structure. A network structure instead uses a small group of managers and their
support staff to coordinate a network of outside suppliers. The suppliers fulfill the functional
work needed for business. The company might hire a manufacturer to assemble products, an
accounting firm to manage finances and a shipping company to distribute orders. Traditionally,
companies kept such work in-house, creating functional departments such as accounting and
manufacturing, along with the management hierarchy needed to oversee operations

The new network organizations contract out any business function that can be done better or
more cheaply. In essence, managers in network structures spend most of their time coordinating
and controlling external relations, usually by electronic means.

H&M is outsourcing its clothing to a network of 700 suppliers, more than two-thirds of which
are based in low-cost Asian countries. Not owning any factories, H&M can be more flexible than
many other retailers in lowering its costs, which aligns with its low-cost strategy.

VIRTUAL STRUCTURES
It emphasizes on online linkages among various positions in the same or in different
organizations. The relations are among people in different locations that may not even know
each other. Virtual organization is defined as being closely coupled upstream with its suppliers
and downstream with its customers such that where one begins and the other ends means little to
those who manage the business processes within the entire organization. A special form of
boundary less organization is virtual. Virtual organization do not physically existing as such, but
enabled by software to exist. The virtual organization exists within a network of alliances, using
the Internet. This means while the core of the organization can be small but still the company can
operate globally and become a market leader in its niche. Because of the unlimited shelf space of
the Web, the cost of reaching customers or niche goods is falling dramatically. Although none
sell in huge numbers, there are so many niche products that collectively they make a significant
profit, and that is what made highly innovative Amazon.com so successful.

AGILE STRUCTURES
It emphasizes on flexibility to change or quick response to environmental changes. They consist
of very highly skilled staffs that are capable of multitasking and use of modern technology

LEAN STRUCTURES
It emphasizes on very few job positions and very few activities for each job position in an
organization. It is created by downsizing the organization (reducing activities and job positions
that are not necessary). Most of the activities are out sourced.

HIERARCHY-COMMUNITY PHENOTYPE MODEL

The business organizations are no longer just a place where people come to work. For most of
the employees, the firm confers on them that sense of belonging and identity –– the organizations
firm has become their “village”, their community. The organization of the 21st century is not just
a hierarchy which ensures maximum efficiency and profit; it is also the community where people
belong to and grow together, where their affective and innovative needs are met.

"A phenotype refers to the observable characteristics of an organism. It results from the
expression of an organism’s genes and the influence of the environment. In our model, each
employee’s formal, hierarchical participation and informal, community participation within the
organization, as influenced by his or her environment, contributes to the overall observable
characteristics (phenotype) of the organization. In other words the combined expressions of all
the employees’ formal hierarchical and informal community participation within an organization
give rise to the organizational structure. Due to the vast potentially different combination of the
employees’ formal hierarchical and informal community participation, each organization is
therefore a unique phenotype along a spectrum between a pure hierarchy and a pure community
(flat) organizational structure.

-
N/B: Strategic organizations strive to use new organizational structures so as to enhance their
competitiveness

STORAGE AND WAREHOUSING OPERATIONS

Storage involves proper arrangement for preserving goods from the time of their production or
purchase till the actual use. When this storage is done on a large scale and in a specified manner
it is called ‘warehousing’. The place where goods are kept is called ‘warehouse’. The person in-
charge of warehouse is called ‘warehouse-keeper’.

Warehousing refers to the activities involving storage of goods on a large-scale in a systematic

and orderly manner and making them available conveniently when needed. In other words,
warehousing means holding or preserving goods in huge quantities from the time of their
purchase or production till their actual use or sale.

Warehousing is one of the important auxiliaries to trade. It creates time utility by bridging the
time gap between production and consumption of goods.

Roles for Warehousing in Supply Chain

Warehousing is necessary due the following reasons.

(i) Seasonal Production- Agricultural commodities are harvested during certain

seasons, but their consumption or use takes place throughout the year. Therefore,
there is a need for proper storage or warehousing for these commodities, from where
they can be supplied as and when required.
(ii) Seasonal Demand- There are certain goods, which are demanded seasonally, like
woollen garments in winters or umbrellas in the rainy season. The production of these
goods takes place throughout the year to meet the seasonal demand. So there is a need
to store these goods in a warehouse to make them available at the time of need.
(iii) Large-scale Production - In case of manufactured goods, now-a-days production
takes place to meet the existing as well as future demand of the products.
Manufacturers also produce goods in huge quantity to enjoy the benefits of large-
scale production, which is more economical. So the finished products, which are
produced on a large scale, need to be stored properly till they are cleared by sales.
(iv) Quick Supply - Both industrial as well as agricultural goods are produced at some
specific places but consumed throughout the country. Therefore, it is essential to
stock these goods near the place of consumption, so that without making any delay
these goods are made available to the consumers at the time of their need.
 (v) Continuous Production- Continuous production of goods in factories requires
adequate supply of raw materials. So there is a need to keep sufficient quantity of
stock of raw material in the warehouse to ensure continuous production.
(vi) Price Stabilization- To maintain a reasonable level of the price of the goods in the
market there is a need to keep sufficient stock in the warehouses. Scarcity in supply
of goods may increase their price in the market. Again, excess production and supply
may also lead to fall in prices of the product. By maintaining a balance of supply of
goods, warehousing leads to price stabilisation.

Types of Warehouses

Private Warehouses - The warehouses which are owned and managed by the manufacturers or
traders to store, exclusively, their own stock of goods are known as private warehouses.
Generally these warehouses are constructed by the farmers near their fields, by wholesalers and
retailers near their business centres and by manufacturers near their factories. The design and the
facilities provided therein are according to the nature of products to be stored.

Public Warehouses - The warehouses which are run to store goods of the general public are
known as public warehouses. Any one can store his goods in these warehouses on payment of
rent. An individual, a partnership firm or a company may own these warehouses. To start such
warehouses a licence from the government is required. The government also regulates the
functions and operations of these warehouses. Mostly these warehouses are used by
manufacturers, wholesalers, exporters, importers, government agencies, etc.

Government Warehouses -These warehouses are owned, managed and controlled by central or
state governments or public corporations or local authorities. Both government and private
enterprises may use these warehouses to store their goods. Central Warehousing Corporation of
India, State Warehousing Corporation and Food Corporation of India are examples of agencies
maintaining government warehouses.

Bonded Warehouses - These warehouses are owned, managed and controlled by government as
well as private agencies. Private bonded warehouses have to obtain licence from the government.
Bonded warehouses are used to store imported goods for which import duty is yet to be paid.
Incase of imported goods the importers are not allowed to take away the goods from the ports till
such duty is paid. These warehouses are generally owned by dock authorities and found near the
ports.

Co-operative Warehouses - These warehouses are owned, managed and controlled by co-
operative societies. They provide warehousing facilities at the most economical rates to the
members of their society.

Functions of Warehousing
 i. Storage of goods- The basic function of warehouses is to store large stock of goods.
These goods are stored from the time of their production or purchase till their
consumption or use.
ii. Protection of goods- A warehouse provides protection to goods from loss or damage
due to heat, dust, wind and moisture, etc. It makes special arrangements for different
products according to their nature. It cuts down losses due to spoilage and wastage
during storage.
iii. Risk bearing - Warehouses take over the risks incidental to storage of goods. Once
goods are handed over to the warehouse-keeper for storage, the responsibility of these
goods passes on to the warehouse-keeper. Thus, the risk of loss or damage to goods in
storage is borne by the warehouse keeper. Since it is bound to return the goods in
good condition, the warehouse becomes responsible for any loss, theft or damage, etc.
Thus, it takes all precautions to prevent any mishap.
iv. Financing- When goods are deposited in any warehouse, the depositor gets a receipt,
which acts as a proof about the deposit of goods. The warehouses can also issue a
document in favour of the owner of the goods, which is called warehouse-keeper’s
warrant. This warrant is a document of title and can be transferred by simple
endorsement and delivery. So while the goods are in custody of the warehouse-
keeper, the businessmen can obtain loans from banks and other financial institutions
keeping this warrant as security. In some cases, warehouses also give advances of
money to the depositors for a short period keeping their goods as security.
v. Processing - Certain commodities are not consumed in the form they are produced.
Processing is required to make them consumable. For example, paddy is polished,
timber is seasoned, and fruits are ripened, etc. Sometimes warehouses also undertake
these activities on behalf of the owners.
vi. Grading and branding- On request warehouses also perform the functions of
grading and branding of goods on behalf of the manufacturer, wholesaler or the
importer of goods. It also provides facilities for mixing, blending and packaging of
goods for the convenience of handling and sale.
vii. Transportation- In some cases warehouses provide transport arrangement to the bulk
depositors. It collects goods from the place of production and also sends goods to the
place of delivery on request of the depositors.

Factors to Consider When Choosing a Location for Warehouse

Layout

The physical layout of the facility location will determine whether future expansion can include
adding more facility buildings and enlarging manufacturing space within the site. Whether
buildings and manufacturing lines must be created by scratch or they are already exist on-site
with minimal renovations is also a consideration.
Cost

The cost of relocating facilities to the site is a major factor in determining the acceptability of a
location. Cost can involve tailoring existing buildings to fit your operations or building an
operation from scratch. Land may be cheap, but to make it workable might be expensive.

Logistics

The site must have adequate transportation routes to get goods to and from the site. The facility
itself must come equipped with adequate electrical and plumbing to run an effective operation; if
they don't yet exist they must be cheap enough to install at the site.

Labor

A facility requires labor to run. Management staff might relocate from other areas, but on the
ground workers are sourced locally. A facility close enough to a place with a healthy supply of
labor to operate it is a must.

Infrastructure

Many older buildings don't have the necessary infrastructure to support the high-tech needs of
contemporary operations. Make sure the building has adequate electrical, air conditioning, and
telecommunications service to meet your present and future needs. It's a good idea to hire an
independent engineer to check this out for you so you're sure to have an objective evaluation.

Regulations

Stringent local environmental regulations that limit the nature of business operations can deter a
company from choosing a particular location. In addition, government regulations and taxes of
various kinds can prove costly down the line. On the flip side, government tax incentives that
encourage corporate development can prove a benefit to certain locales.

Community

Facility locations are not temporary; the choice you make will stick with your company for the
long haul. It's therefore key that your company fits with the community it's associated with.
Although the community might appreciate your company's facility because it creates jobs, some
might resent your presence because of aesthetics or environmental factors. Maintaining a hassle-
free relationship with the locals helps ensure your licenses and permits are easier to obtain and
maintain over the life of the site

Storage Requirements

From hazardous materials, flammable product and food items, many companies manufacture
products that have strict storage and firefighting requirements. Is the location you’ve chosen
properly suited to handle your unique needs? And how will they handle the different
requirements for products that require a chemical/foam system versus a water based system?
Always be sure to also take any environmental concerns into consideration.

Proximity to other services

Take a look at what other services are in the vicinity. Does the vicinity have an adequate
selection of restaurants so your employees have places to go for lunch? Is there a nearby day-
care center for employees with children? Are other shops and services you and your employees
might want conveniently located?

Health and Safety in Warehouse

Warehousing and storage cover a wide range of activities that can result in various hazards and
risks. Effective health and safety management involves Employees. the employer, looking at the
risks that arise in the workplace and then putting sensible health and safety measures in place to
control them. By doing this you can protect your most valuable asset, your employees, as well as
members of the public from harm. You will also help protect your premises, goods, equipment
and reputation.

Warehousing is a complex industry that can expose workers to a multitude of risks; health and
safety should be proactively managed just like any other part of the business.

The Management of Health and Safety at Work Regulations require employers to put in place
appropriate health and safety arrangements. This means having an effective health and safety
management system.

Steps to successful health and safety management include:

i. identifying the key health and safety priorities within a business;

ii. concentrating efforts on these priorities;
iii.assessing the risks to employees and others;
iv. eliminating risks where possible. Where risks can’t be eliminated, they should be
reduced to an acceptable level; using safe systems of work;
v. providing the workforce with adequate information and training;
vi. involving the workforce and health and safety representatives in decision making on
health and safety issues; and regularly reviewing performance.

Some General Duties of Workplace Parties

In all provincially regulated workplaces, employers and other workplace parties must comply
with the Occupational Health and Safety Act (OHSA) and its regulations.

Some of the general duties of workplace parties include:

Employers

 provide information, instruction and supervision to workers to protect their health and
safety, including information on safe work policies, measures and procedures specific to
the workplace and the work to be performed
 take every precaution reasonable in the circumstances for the protection of workers
 ensure equipment, materials and protective devices are maintained in good condition
 ensure equipment, materials and protective devices required by the regulations are
provided
 prepare and review, at least annually, a written occupational health and safety policy, and
develop and maintain a program to implement that policy
 post a copy of the OHSA in the workplace

Supervisors

 ensure workers comply with the OHSA and its regulations

 ensure any equipment, protective device or clothing required by the employer is used or
worn by workers
 advise workers of any potential or actual health or safety dangers known by the
supervisor
 if prescribed, provide workers with written instructions about measures and procedures to
be taken for the workers' protection
 take every precaution reasonable in the circumstances for the protection of workers

Workers

 use or operate equipment in a safe manner

 report defects in equipment
 work in compliance with the OHSA and its regulations
 report any known workplace hazards or contraventions of the OHSA to your supervisor
or employer

Workers should also be aware of their rights under the OHSA, including the right to refuse
unsafe work and the right-to-know about any potential hazards to which they may be exposed in
the workplace.

Health and safety considerations and best practices

Employers, supervisors and trainers should emphasize the need for workers to communicate any
questions or concerns that they may have about warehousing hazards. Supervisors or others
involved in training workers should be familiar with some of the unique health and safety
concerns faced by warehouse workers.

Material Handling
Materials handling refers to the process of moving, controlling, protecting as well as storing
materials such as goods, items, etc. for manufacture, disposal, and distribution or even for
consumption. This process is very crucial because all the materials should be handled well in
order to keep it safe, to reach its destination safely and to maintain their quality and condition. In
other words, good materials handling is important. Good materials handling is important because
it will help you:

 Eliminate accidents. If good materials handling is applied, accidents can be prevented and
eliminated as this means proper and careful handling is performed.
 Reduce stress and effort. Through good materials handling, stress and effort can be
minimized. If you are handling materials the right away and you are eliminating all the
factors that would make material handling a risky and challenging such as a non-
functional equipment, ineffective workers, etc., then materials handling would be a
stress-free process.
 Minimize time spent on distribution, storage, etc. If you are applying good materials
handling, then you are definitely making storage, manufacture, distribution, or
consumption of materials and goods less time-consuming. This is because good materials
handling means applying solutions that can help make this process quick and easy.
 Eliminate redundant work. If there is good material handling, there is no need for you to
utilize redundant workers that will only take time and cost extra expenses. When you
apply good materials handling, you are also saving money since you are not jeopardizing
the quality and condition of the products as well as you are no longer spending a lot to
pay extra workers just to ensure that the materials or product are handled well.

There are two essential things needed to apply good materials handling. These are:

 Expert material handlers. If you are manually handling materials and products for
distribution, storage, etc. this refers to utilizing workers who will serve as material
handlers. They are the ones who are going to store, distribute, etc. all the goods to their
proper destinations. To ensure good material handling, you need effective material
handlers who are really trained and excellent when it comes to the task they are to
perform. This will ensure you that they are going to perform materials handling well for
the safety of other workers and the products.
 Efficient material handling storage systems. If you also want to apply materials handling,
efficient storage systems are also necessary. This refers to storage systems that are really
functional and automated and can really handle materials well so your time, money and
effort would be saved.

Materials handling is not a joke. This is especially true if the materials you are moving or storing
are larger materials. This process can be the cause of many warehouse accidents and have earned
most companies a lot of workers compensation lawsuits already. For this reason, if you want to
save yourself from these lawsuits and prevent tragedies inside the warehouse, make sure that you
are applying good materials handling process by hiring expert workers and buying efficient
storage systems.
 INFORMATION TECHNOLOGY IN SUPLY CHAIN MANAGEMENT

Information technologies (systems) include interconnected components that collect, process, and
store raw data and distribute information to support decision making, control and coordination
within the organization. Information technology allows organizations to be connected with
important partners in their supply chain networks. Capabilities to exchange reliable information
with these partners quickly, is essential for the improvement of supply chain performance.

Role of I.T in Supply Chain Management

a. Cost reduction and efficiency gains – these can be achieved by streamlining the supply
process and freeing up supply staff to do more value-adding work.
b. Data accessibility – quick and easy access to critical data in real time aids sound decision
making, makes it easier to identify supply problems earlier and provides useful information
for negotiations.
c. Speedier communication – faster communication improves supply chain effectiveness and
efficiency, especially with global suppliers. Faster turnaround may increase market share and
lower inventories.
d. Dedicate resources to strategic issues – more resources (staff and budgets) can be spent on
strategic supply initiatives, and strategic and critical suppliers and projects because less time
is spent on administrative ant tactical supply activities.
e. Data accuracy – automation decreases errors, especially data entry errors. Benefits include
lower inventories (safety stock) and stock outs, lower expediting costs, and improved
customer satisfaction.
f. Systems integration – integration across departments, suppliers and customers can provide
accurate information on a timely basis to assist with production and materials planning and
decision making.
g. Monetary control – enterprise systems provide control over how and where money is spent.

ICT has had a particular impact on procurement

 a) Dramatically increasing the speed of communication and information processing
b) Offering wider access to environmental and supply market information
c) Facilitating 24hours, 7days global business
d) Supporting paperless communications
e) Offering opportunities for cost saving
f) Freeing up buyers time
g) Enhancing management information
h) Creating virtual supplier relationships, teams and organizations

ICT can also be used to develop supply chain relationships by:

a) Providing real time information for transaction processes

b) Streamlining procurement and delivery process for higher level of customer service
c) Supporting the customization of products and services and the personalization of contacts
d) Creating knowledge communities, e.g. sharing information via extranets
e) Facilitating the coordination of collaborative activities.
 BAR CODING

A barcode system is an optical machine – readable representation of data which shows certain
data on certain products. A typical bar code usually consists of a series of parallel, adjacent bars
and spaces. These predefined bar and space patterns are used to encode small strings of character
data into a printed symbol.

Bar codes can be read by optical scanners called bar code readers or scanned from an image by
special software. Barcode systems are used to automate data collection where hand recording is
neither timely nor cost effective. Barcode technology helps to identify and track products since it
is a simple and inexpensive method.

A typical barcode system consist of some infrastructure, either wired or wireless that connects
some number of mobile computers, handheld scanners, and printers to one or many databases
that store and analyze the data collected by the system. At some level there must be some
software to manage the system. The software may be as simple as code that manages the
connection between the hardware and the database or as complex as an ERP, MRP, or some
other inventory management software.

Supply chain management is easily manageable through many supply chain management based
softwares, which makes integration of businesses easier. The process becomes even simpler with
the aid of barcodes.
Barcode technology helps keep track of products and services that they identify, and therefore
provide all necessary information about them. Every point of the supply chain involves vendors
and suppliers who must be able to provide all details when asked. Their inability to do so will
mean being left behind and their job assigned to a competitor. The use of barcodes would ensure
detailed and correct information, which ultimately helps to reduce costs. Barcodes provide
accuracy and speed that help in reducing expenses incurred to rectify errors made by manual
oversight or faulty data entry.

Using bar coding for materials and supply chain management captures data faster and more
accurately. Costs are lowered and data entry mistakes are minimized, making managing
inventory easy and purchasing more efficient.

Barcodes may also be scanned for:

a) Tracking deliveries in transit, at key points of contact

b) Recording issues of items from stock, updating stock levels
c) Recording outgoing deliveries or sales, in an EPOS system to customers.

Radio frequency identification (RFID)

RFID tags contain a chip and antenna that emit a signal, using energy from a radio frequency
reader, which contains information about the container or its individual contents. RFID tags vary
widely in memory, frequency, power source, and cost.

Radio frequency identification offers significant advantages compared to the conventional

optical scanning of barcodes

a) Capturing goods inward information accurately and integrating this information with stock
balances, contract management and payment system
b) Recording stock movements, receipt, issues, transfer and location
c) Translating issue requisitions into stock picking and packing tasks
d) Maintaining stock balances and stock valuation
e) Triggering automatic replenishment requisition s or orders
f) Monitoring productivity and utilization
g) Maintaining stock integrity, by recording and identifying damage, deterioration and losses of
stock
h) Producing management reports using any of the above data

Electronic Point of Sale (EPOS)

The most important purpose of using an EPOS system is to scan and capture information relating
to goods sold. An EPOS system verifies, checks an d changes transactions, provides instant sales
reports, monitors and changes prices, send intra and inter stores messages and stores data. The
most familiar example of EPOS is the recording of retail stores sales by scanning product bar
codes at the check out tills. In the context of retailing, the benefits of EPOS to customers and
sellers include:

1. Reduced checkout times

2. Provision of information to customers relating to products and prices.

3. Facilitation of payments by credit cards

4. Reduction in labour costs by eliminating the need to mark products individually

5. Electronic article surveillance (EAS) can assist in the detection and prevention of shoplifting.

6. Smart shelves which read and transmit data through the internet to store manages and
manufactures notifying them when stocks are low, managers are thereby relieved of checking
inventory or placing orders since automatically generated purchase orders enable suppliers to
produce and replenish goods sold. Daily, weekly, etc.
 6. EPOS also has applications in production supply chain management including vendor-
managed inventory (VMI) and collaborating planning, forecasting and replenishment
(CPFR). Captured data is fed into the computer using such devices as a keyboard, mouse,
voice or scanner. Care must be taken to avoid mistakes when inputting data.

E-PROCUREMENT

E-procurement is the combined use of information and communication technology through

electronic means to enhance external and internal purchasing and supply chain management
processes. This tool and solutions deliver a range of options that will facilitate improved
purchasing and supply chain management. It is the business-to-business or business-to-consumer
or business-to-government purchase and sale of supplies, work, and services through the Internet
as well as other information and networking systems, such as electronic data interchange and
enterprise resource planning.

The key enabler of e-procurement is the ability for systems to communicate across
organizational boundaries. While the technology for e-procurement provides the basic means, the
main benefits derive from the resultant changes in business procedures, processes and
perspectives. E-procurement is made possible by the open standard of XML (Extensible Markup
Language), a structured language that allows easy identification of data types in multiple formats
and can be understood across all standard internet technologies. Adoption of XML will help
organizations to integrate applications seamlessly and exchange information with trading
partners.

The e-procurement value chain consists of indent management, e-Tendering, e-Auctioning,

vendor management, catalogue management, Purchase Order Integration, Order Status, Ship
Notice, e-Invoicing, e-Payment, and contract management. Indent management is the workflow
involved in the preparation of tenders. This part of the value chain is optional, with individual
procuring departments defining their indenting process. In works procurement, administrative
approval and technical sanction are obtained in electronic format. In goods procurement, indent
generation activity is done online.

E-procurement systems
The key enabler of E-procurement is the ability for the systems to communicate across
organizational boundaries. While the technology for E-procurement provides the basic means,
the main benefits, derive from resultant changes in business procedures, processes and
perspectives.

For example is, e-procurement system manages tenders through a web site. This can be accessed
anywhere globally and has greatly improved the accessibility of tenders. An example is the
Public Procurement Oversight Authority (PPOA) tender portal in Kenya and the System for
Acquisition Management (SAM), in the United States.

Benefits of E-procurement

i. Saves time
ii. It is efficient
iii. It is reliable
iv. Reduced transaction costs through the automation of requisitioning, purchase order
management and accounting processes by the use of internet technology including online
ordering etc.
v. Less paper work as compared to manual
vi. Variety of suppliers and products to make a decision/ option
vii. Choice of high quality of products or latest technology
viii. Cuts on the cost of middlemen
ix. Reduction of ‘Maverick’ purchasing i.e. purchases made outside the organizations
contractual arrangements.
x. Improved information flow and service through real time market intelligence and
information. Such information includes finding the best price and quality points across a
large range of suppliers through the use of marketplaces, order status and tracking,
reduced inventory levels and also better demand forecasting.
xi. The ability to aggregate purchasing across multiple depts. or divisions without taking
away any needed individual control or introducing time wasting authorization routines.
 ELECTRONIC DATA INTERCHANGE (EDI)

Electronic data interchange (EDI) is an electronic communication system that provides

standards for exchanging data via any electronic means. By adhering to the same standard, two
different companies, even in two different countries, can electronically exchange documents
(such as purchase orders, invoices, shipping notices, and many others).

An EDI message contains a string of data elements, each of which represents a singular fact,
such as a price, product model number, and so forth, separated by delimiter. The entire string is
called a data segment. One or more data segments framed by a header and trailer form a
transaction set, which is the EDI unit of transmission (equivalent to a message). A transaction set
often consists of what would usually be contained in a typical business document or form. The
parties who exchange EDI transmissions are referred to as trading partners.

EDI implies a sequence of messages between two parties, either of whom may serve as
originator or recipient. The formatted data representing the documents may be transmitted from
originator to recipient via telecommunications or physically transported on electronic storage
media.

EDI delivers a lot of benefits for companies that can afford the up-front expense of becoming
EDI-enabled. Most stem from a single key starting point: data input. Because data is entered
just once, errors are kept to a minimum, and the entire process is streamlined, saving paper and
time and improving accuracy and order fulfillment for customers. In addition to data entry, other
labor-intensive manual processing tasks, such as typing invoices, sealing envelopes, and affixing
postage, are dramatically reduced or eliminated. People are employed more effectively,
increasing productivity. Inventories are used more efficiently because EDI provides speedier,
more accurate information on both the customer and supplier sides, reducing inventory costs, and
lead times. In the long run, the investment in EDI delivers dramatic cost savings as well as the
opportunity to do business within a wider, more global EDI-enabled trading community

Key benefits of Electronic Data Interchange (EDI)

Here are some reasons why businesses adopt EDI.

a) Provides better customer services
b) EDI tends to promote long-term buyer-supplier relationships and increase mutual trust
c) Reduces lead times and stockholding
 Electronic trading documents can be delivered far more quickly than their paper
counterparts, thus the turnaround time from order to delivery can be reduced.
 By using EDI for forecasting and planning, companies are able to get forward
warning of likely orders and to plan their production and stock levels accordingly.
 Companies receiving advanced shipping notes or acknowledgments know in advance
what is actually going to be delivered, and are made aware of shortages so alternate
supplies can be sourced.
 Integrating electronic documents means they can be processed much faster, again
reducing lead times and speeding up payments.
 Reduction in lead times through buyers and suppliers working together in real time
environment.

d) The integration of functions, particularly marketing, purchasing production and finance

e) The replacement of paper documents e.g. purchase orders, acknowledgement slips,

invoices, etc is used by buyers and sellers in commercial transactions by standard electronic
messages conveyed between computers often without the need for human intervention . By
replacing paper documents, your company can benefit significantly by:

 Reduced labour costs

 Elimination of human keying errors
 Faster document processing
 Instant document retrieval
 Remove reliance on the postal service

a) Increase quality of the trading relationship

 Electronic trading documents when printed are much easier to read than copies faxed or
generated on multi-part stationery by impact printers.
 Accurate documents help ensure accurate supplies.
  Batches of electronic documents are usually sequentially numbered; therefore missing
documents can easily be identified, not causing companies to wade through piles of
paper.

g) Competitive Edge: Because electronic data interchange (EDI) makes you attractive to deal
with from your customers' point of view, and you are in their eyes cheaper and more efficient to
deal with than a competitor trading on paper, your costs will be lower because you will require
less manpower to process orders, deliveries or payments.
It is no accident that the leading UK retailers all rely on EDI for placing orders and receiving
invoices - they know the benefits they get and the costs that can be saved.

h) End Repetition: If your trading partner wants a copy of a document, instead of calling you,
they simply check their mailbox. This results in a great time savings from not having to copy and
fax/mail copies of business documents.

i) Save Time: EDI also saves time over paper processing since the transfer of information from
computer to computer is automatic. There is no need to rekey information with EDI. And the
chance for error drops to near zero, with no data entry.

j) Expand Your Customer Base: Thus with improved customer service, you can ultimately
expand your customer base. Many large manufacturers and retailers are ordering their suppliers
to institute an EDI program. So, when evaluating a new product to carry or a new supplier to use,
the ability to do EDI is a big plus.

Disadvantages of EDI

a) Too Many Standards: There are too many standards bodies developing standard documents
formats for EDI. For example your company may be following the X12 standard format, while
your trading partner follows the EDIFACT standard format.

b) Changing Standards: Each year, most standards bodies publish revisions to the standards.
This poses a problem to EDI users. You may be using one version of the standard while your
trading partners are still using older versions.
c) EDI is too expensive: Some companies are only doing business with others who use EDI. If a
company wants to do business with these organizations, they have to implement an EDI
program. This expense may be very costly for small companies.

d) Limit Your Trading Partners: Some large companies tend to stop doing business with
companies who don't comply with EDI. For example WalMart is only doing business with other
companies that use EDI. The result of this is a limited group of people you can do business with.

PROFESSIONAL ETHICS IN SUPPLY CHAIN

Ethics is about fairness, virtues, duty, obligation, rights, justice and a sense of honesty,
exercising diligence judgment by making a choice between right and wrong; good and evil.

Ethics is "a theory or system of moral values, the principles of conduct governing an
individual or group."

The Code of Conduct or Code of Ethics is an organisation’s policy statement and defines ethical
standards for sound corporate governance that involves systematizing, defending, and
recommending concepts of right and wrong behavior.

The Code of Conduct not only establishes the organization’s values, but also spells out essential
practices, behavior, ethics, and business standards for all individuals who are employed by and
represent the organization. It is a guide to legal and ethical conduct of an enterprise and to deter
wrong doing and promotes ethical standards.

The Code covers a wide range of business practices and procedures and serves as a guide to
ethical decision-making.

The Code does not cover every issue that may arise, but it sets out basic policies to guide its
affiliates. Normally the principles described in the code are general in nature. However, one
should also review the enterprise’s other applicable policies and procedures for more specific
instructions.

Ethical principles in supply chain management.

1. Avoid the intent and appearance of unethical or compromising practice in relationships,

actions, and communications.
 2. Demonstrate loyalty to the employer by diligently following the lawful instructions of the
employer, using reasonable care and granted authority.
3. Avoid any personal business or professional activity that would create a conflict between
personal interests and the interests of the employer.
4. Avoid soliciting or accepting money, loans, credits, or preferential discounts, and the
acceptance of gifts, entertainment, favors, or services from present or potential suppliers
that might influence, or appear to influence, supply management decisions.
5. Handle confidential or proprietary information with due care and proper consideration of
ethical and legal ramifications and governmental regulations.
6. Promote positive supplier relationships through courtesy and
impartiality.
7. Avoid improper reciprocal agreements.
8. Know and obey the letter and spirit of laws applicable to supply
management.
9. Encourage support for small, disadvantaged, and minority-owned
businesses.
10. Acquire and maintain professional competence.
11. Conduct supply management activities in accordance with national and international
laws, customs, and practices, your organization's policies, and these ethical principles and
standards of conduct.
12. Enhance the stature of the supply management profession.

Ensuring Professionalism in supply Chain Management

A distinguishing characteristic of a profession is the ability to combine ethical standards with the
performance of technical skills. In fact, "professional" is described as "characterized by or
conforming to the technical or ethical standards of a profession. In order to achieve stature as a
profession, those in supply management must establish and subscribe to a set of ethical standards
to guide individual and group decisions and actions.

These Principles and Standards of Ethical Supply Management Conduct with Accompanying
Guidelines are established to encourage adherence to an uncompromising level of integrity. They
are designed to heighten awareness and acceptance of appropriate conduct. They are not intended
to supplant an organization's policies pertaining to ethical practice. These Principles and
Standards of Ethical Supply Management Conduct with Accompanying Guidelines are intended
to be a model for consideration. Further, they are recommended as guidelines to all those who
influence the supply management process, including supply management professionals,
engineers, quality control personnel, sales representatives, and senior management.

An element of a recognized profession is a set of principles and standards. The goal of this
booklet is to convey the principles and standards which the supply management profession
considers just, fitting, and correct. It is the responsibility of each supply management
professional to strive to achieve acceptance of and adherence to these principles and standards.
Supply management organizations are encouraged to have an ethics policy and reporting process
in place that is clearly and consistently communicated to employees, including those outside the
supply organization, and suppliers.
Although no set of principles and standards can be all-inclusive, these were established to cover
major domestic and international supply management issues. Sensitivity to and consideration of
other cultures including the laws, customs, and practices of other nations must be acknowledged.

Ethical standards are intended to provide insight for handling difficult day-to-day issues.
Standards and guidelines cannot take the place of good judgment. When in doubt, consult with
management, professional colleagues … and of course your conscience.

1. PERCEIVED IMPROPRIETY

Avoid the intent and appearance of unethical or compromising conduct in relationships, actions,
and communications.

The consequences of a perceived impropriety can be the same as consequences of an actual

impropriety. Therefore, it is essential that any activity or involvement between supply
management professionals and active or potential suppliers which in any way diminishes, or
even appears to diminish, open and fair treatment of suppliers is strictly avoided. Those who do
not understand the circumstances will judge based on appearances. Supply management
professionals must consider this and act accordingly.

The following are recommended guidelines in dealing with perception:

 Situations may occur in which, through unanticipated circumstances, a business

relationship transpires with a personal friend. The perception (as well as the potential) of
a conflict of interest should be discussed with management, and a reassignment of
procurement responsibility should be considered.
 Business meeting locations should be carefully chosen. Environments other than the
office may be perceived as inappropriate by the business community or by co-workers.
 Displays of personal preference may give an impression of impropriety and should be
avoided. Conversation that delves excessively into personal affairs should be avoided.
 Positive action should be taken by management to alleviate suspicion of impropriety.

2. RESPONSIBILITIES TO THE EMPLOYER

Demonstrate loyalty to the employer by diligently following the lawful instructions of the
employer, using reasonable care and granted authority.

It is the duty of the supply management professional to ensure that actions taken as an agent for
the employer will serve the interests of the employer to the exclusion of personal gain. This
requires application of sound judgment and consideration of both the legal and ethical
implications of our actions.

The following are recommended guidelines for satisfying responsibilities to our employers:
  Understand the agency authority granted, and apply the legal and ethical requirements
embodied in the agency relationship with the employer.
 Obtain the maximum value for monies expended as agents for the employer.
 Avoid activities which would compromise, or create the perception of compromising, the
best interests of the employer.
 Avoid using the employer's purchasing power to make purchases for specific individuals'
non-business use. If employer-sponsored personal purchasing programs exist, the supply
management professional should make certain that the arrangements are fair to suppliers,
employees, and the employer.
 Maintain up-to-date knowledge of applicable laws, purchasing and supply management
techniques, and management responsibilities.

3. CONFLICT OF INTEREST

Avoid any personal business or professional activity that would create a conflict between
personal interests and the interests of the employer.

Supply management professionals must not use their positions in any way to induce another
person to provide any benefit to themselves, or persons with whom they have family, business,
personal, or financial relationships. Even though a conflict may not technically exist, supply
management professionals must avoid the appearance of such a conflict. Whenever a potential
conflict of interest arises, the supply management professional should notify the appropriate
person for guidance or resolution.

The following are recommended guidelines to avoid conflicts of interest:

Conduct to be Avoided

 Engaging in outside business, or employment by an outside organization, which may

encroach upon the supply professional's primary responsibility of loyalty to the goals of
the employer.
 Engaging in improper personal business with, or employment by, an organization which
competes with, or is a supplier to, the employer. Examples include but are not limited to:
 Owning or leasing any property with knowledge that the employer has an active or
potential interest therein.
 Lending money to, or borrowing money from, any customer or supplier.
 Using the organization's name (unless authorized) to lend weight or prestige to
sponsorship of a political party or cause, or endorsing the product or service of another
organization.

Personal Investment

Ownership of stock in a supplier of goods or services, competitor, or customer should be

reported to the employer for review and guidance to avoid the potential for impropriety. Interests
by members of the professional's immediate family are considered to be of the same significance
as direct ownership.

Outside Activities

Supply management professionals must not use their position with their employer when
participating in outside educational, professional, political, philanthropic, social, or recreational
activities, which might be detrimental to their employer's business or reputation.

Conflict of Interest Statements

Supply management professionals are encouraged to disclose any potential conflict of interest,
and to advocate that their employer obtain conflict of interest statements from all employees
upon employment, and annually thereafter.

Self-Evaluation Procedure

Supply management professionals are encouraged to perform an annual self-evaluation of their

outside interests which may have the potential of being contrary to the best interests of their
organization or the profession.

4. ISSUES OF INFLUENCE

Avoid soliciting or accepting money, loans, credits, or preferential discounts, and the acceptance
of gifts, entertainment, favors, or services from present or potential suppliers that might
influence, or appear to influence, supply management decisions.

Those in a position to influence the supply process must be dedicated to the best interests of their
employer. It is essential, for all in a position to influence a purchasing decision, to avoid any
activity which may diminish, or even appear to diminish, the objectivity of the decision making
process.

In some circumstances, items which could be considered an issue of influence may be a bona
fide business activity. In such cases, extreme care should be taken to evaluate the intent and the
perception of acceptance of such an offer to ensure:

 It is legal.
 It is in the best interests of the employer.
  It will not influence the purchasing decision.
 It will not be perceived by peers or others to be unethical.

Sources of influence include:

 Management Policies
 Gifts, Gratuities, and Entertainment
 Product Samples
 Business Meals
 Personal Relationships
 International Practices
 Political Considerations
 Advertising
 Market Power
 Specifications and Standards

The following are recommended guidelines when dealing with issues of influence:

Management Policies

Supply management professionals should encourage and recommend the development and
implementation of management policies that reduce or eliminate inappropriate influences on the
supply process.

Gifts, Gratuities, Hospitality and Entertainment

Gifts, gratuities, and entertainment include material goods, services, or activities offered with the
intent of, or providing the potential for, influencing a buying decision. As such, these may be
offered to a supply professional or to other persons involved in the supply process (or members
of their immediate families). They may be offered in various forms.

 Extreme caution must be used in evaluating the acceptance of gifts, gratuities, or

entertainment, even if of nominal value, and the frequency of such actions (the collective
impact) to ensure that one is abiding by the letter and the spirit of these guidelines.
 Soliciting gifts, gratuities, or entertainment in any form for yourself or your employer is
unacceptable.
 Avoid accepting monies, credits, and prejudicial discounts.
 Establish nominal value in organization policy to address supplier offerings of nominal
value as a gesture of goodwill, or for public relations purposes.
 Refuse gifts exceeding nominal value, and return them with a polite explanation, or if
perishable, either return the gifts or donate them to a local charity in the name of the
supplier.
 Seek direction of management if concerned that a business relationship may be impaired
by refusal of a gift, gratuity, or entertainment .
Product Samples

Product test samples may be offered by suppliers. If test samples exceed nominal value, supply
management should consider issuing a document to cover the transaction. This document should
clarify the responsibility for the cost of the samples and should address any obligation for
sharing test results with the supplier.

Business Meals

Occasionally, during the course of business, it may be appropriate to conduct business during
meals.

 Such meals shall be for a specific business purpose.

 Frequent meals with the same supplier should be avoided.
 The supply management professional should be in a position to pay for meals as
frequently as the supplier. Supply management professionals are encouraged to budget
for this business activity.

Personal Relationships

Personal relationships are an inherent aspect of supply management. Supply management

professionals interact extensively with suppliers' representatives. Individuals in many other
functional areas in both the buying and supplying organizations also interact extensively with
each other. The development of personal relationships from such interactions is both expected
and desirable as it leads to relationships based on understanding and trust. It must also be
recognized that the purchasing decision must not be influenced by anything other than what is in
the best interest of the organization, and that personal relationships that develop beyond what is
necessary to ensure understanding and trust may be inappropriate. It is important, therefore, for
supply management professionals to closely monitor the nature of relationships with suppliers'
representatives to ensure that personal friendships do not develop that would result in decisions
not in the organization's best interest.

International Practices

There may be great cultural variation with respect to the appropriateness of business gifts, meals,
entertainment, and the nature of personal relationships. In some cultures, business gifts, meals,
and entertainment are normal and expected, as are close personal relationships. In other cultures,
business is transacted at arm's length, and business gifts, meals, and entertainment, as well as
close personal relationships, are viewed as inappropriate when making supply management
decisions. It is important, therefore, for supply management professionals to understand such
variation and establish policies and procedures to deal effectively with suppliers from different
cultures to ensure making supply management decisions that are in the best interest of the
organization. This requires that suppliers be informed of the organization's policies with respect
to business gifts, meals, entertainment, and the nature of personal relationships. It also requires
that supply management professionals act courteously to suppliers' representatives who may
inadvertently act in ways contrary to the organization's policies.

Political Considerations

All organizations are subject to internal and external forces and pressures. Internal forces and
pressures result from an organization's culture. External forces and pressures consist of economic
conditions, laws, regulations, public opinion, special interest groups, and political entities. The
negative influence of internal and external forces and pressures on supply management can be
minimized when the organization adopts practices based on ethical principles and standards.

Advertising

Care should be exercised when accepting promotional items or participating in activities that
tend to promote one supplier over another, or could be perceived as preferential supplier
advertising by the supply management professional.

Market Power

Supply management professionals must be aware of their organization's position (e.g., economic
size, power, etc.) in the marketplace and ensure this position is used within the scope of ethical
behavior by the supply management professional and the organization.

Specifications and Standards

Supply management professionals must ensure that specifications and standards are objectively
written in a manner that encourages competition when appropriate, excludes unnecessary
restrictive requirements, and appropriately defines quality.

5. CONFIDENTIAL AND PROPRIETARY INFORMATION

Handle confidential or proprietary information with due care and proper consideration of ethical
and legal ramifications and governmental regulations.

Proprietary and confidential information requires protection. Such information may or may not
be upheld by patent, copyright, or non-disclosure agreement. Proprietary and confidential
information should be released to other parties (internal and external) only on a need-to-know
basis. It is the responsibility of the individual sharing confidential or proprietary information to
ensure that the recipient understands his or her obligation to protect such information.

Examples of information which may be considered confidential or proprietary include:

  Pricing
 Bid or quotation information
 Cost sheets
 Formulas and/or process information
 Design information
 Organizational plans, goals, and strategies
 Profit information
 Asset information
 Wage and salary scales
 Personal information about employees, officers, and directors
 Supply sources or supplier information
 Computer software programs

Recommended guidelines for dealing with confidential or proprietary information:

 Each organization should develop and communicate a policy covering proprietary and
confidential information.
 Proprietary and confidential information must be identified as such when communicated, whether
disclosed electronically, in writing, or orally.
 Use of confidentiality agreements that clarify the parameters for use of information and
responsibilities inherent in its use is recommended.
 The supply professional and others within the organization are cautioned not to accept
confidential or proprietary information unless they have the need for such information.
 When dealing with any information, whether or not confidential or proprietary, care should be
exercised in determining the effects of its use.

6. SUPPLIER RELATIONSHIPS

Promote positive supplier relationships through courtesy and impartiality.

Supply management professionals should promote mutually acceptable business relationships

with suppliers and customers. By affording all business contacts the same courtesy and
impartiality in all phases of business transactions, professionals will enhance the reputation and
good standing of their employer, the supply management profession, and themselves.

Fairness and impartiality should be extended to all legitimate business concerns. While it may be
desirable to build long-term relationships with selected suppliers, such relationships should not
deter the potential of establishing similar working relationships with other suppliers.

The following are recommended guidelines for maintaining positive supplier relationships:

 Establish parameters for bidding, rebidding, and/or negotiations prior to the issuance of a
request for quotation or similar document to ensure a fair, consistent, and unbiased
process.
 Maintain confidentiality regarding proprietary information as well as suppliers' prices and
terms, unless otherwise required by government regulation.
 Achieve a prompt and fair resolution of problems.
 Avoid unreasonable demands.
  Ensure prompt and open communications.
 Exercise professional, cooperative, and objective behavior in business relationships and
avoid partiality, or the appearance of partiality, in business dealings.

7. RECIPROCITY

Avoid improper reciprocal agreements.

If supply management professionals or their organizations give preference to suppliers because

they are also customers, or when the organization influences a supplier to be a customer, the
professional or the organization is engaging in a practice known as reciprocity. Agreements
involving a specific commitment to buy in exchange for a specific commitment to sell also
constitute reciprocity. These purchasing actions are illegal if they tend to restrict competition or
trade or if they are coerced, since such acts may be construed as "restraint of trade" in violation
of Sections 1 and 2 of the Sherman Act.

Supply management professionals and their organizations must be able to recognize reciprocity
and its ethical and legal implications.

Reciprocity is both a legal and an ethical issue that may result in legal sanctions against the
organization, its management, and/or its supply management personnel.

The following are recommended guidelines in dealing with reciprocity:

 Dealing with a supplier that is also a customer may not constitute a problem if, in fact,
the supplier is the best source.
 Supply management strategy must include a positive effort to oppose any corporate or
organizational commitment to, or pursuit of, any form of improper reciprocity.
 Supply management professionals should become sufficiently knowledgeable of the
provisions in antitrust laws to recognize a potential legal problem and to know when to
seek legal counsel.
 If a supply management professional believes the potential for improper reciprocity
exists, or is being encouraged by marketing, sales, or management to engage in
reciprocity, legal counsel should be sought.
 Lists of suppliers should not be provided to sales or marketing for their use in pursuing
improper reciprocal agreements.
 Supply management professionals must be especially careful when dealing with suppliers
that are customers when making sourcing decisions.

8. APPLICABLE LAWS

Know and obey the letter and spirit of laws applicable to supply management.

Supply management professionals should obtain and maintain an understanding of the legal
concepts that govern their activities as agents of their employers, and of the various laws that
govern the purchase and sale of goods and services. These include laws and regulations at the
international, national, state, and local levels.

Some of the laws and regulations that supply management professionals should be aware of
include:

 Agency law
 Contract and commercial laws, including the Uniform Commercial Code (UCC) and the
Uniform Computer Information Transactions Act (UCITA)
 Electronic commerce laws, including the Uniform Electronic Transactions Act (UETA)
and the federal Electronic Signatures in Global and National Commerce Act (E-Sign)
 Antitrust laws, including the Sherman Act, the Clayton Act, and the Robinson-Patman
Act
 The Federal Trade Commission Act
 Government procurement regulations, including the Federal Acquisition Regulations
(FARs) and the Defense Acquisition Regulations (DARs)
 Patent, copyright, trade secret, and trademark laws
 Environmental laws, including Environmental Protection Agency (EPA) laws
 Employment laws, including Equal Employment Opportunity Commission (EEOC) laws
 Worker health and safety laws, including Occupational Safety and Health Administration
(OSHA) laws
 Foreign Corrupt Practices Act
 Import/export compliance laws
 United Nations Convention on Contracts for the International Sale of Goods (CISG)
 Similar laws in other countries

The following are recommended guidelines for understanding and complying with applicable
laws:

 Supply management professionals should pursue training in the legal aspects of supply
management to understand the laws that govern their conduct and to know when to seek
legal counsel.
 Interpretation of the laws should be left to legal counsel. It is often beneficial to involve
legal counsel early in analysis and planning in order to identify and avoid potential legal
pitfalls, rather than to only involve legal counsel after problems arise.
 Supply management professionals involved in governmental procurement must
understand and apply laws that are specific to their particular governmental body.

9. SMALL, DISADVANTAGED, AND MINORITY-OWNED BUSINESSES

Encourage support for small, disadvantaged, and minority-owned businesses.

All business concerns, large or small, majority- or minority-owned, should be afforded an equal
opportunity to compete. Most government entities and many businesses have developed specific
guidelines and procedures to enforce policies designed to support and stimulate the growth of
small businesses and those owned by minorities or other disadvantaged groups.
The following are recommended guidelines for support of small businesses and those owned by
minorities and other disadvantaged groups:

 Adhere to all applicable laws and regulations.

 Work to ensure development and implementation of a program within the supply
professional's organization, as appropriate.
 Actively strive to attain organizational and/or governmental goals regarding purchases.
 Participate in organizations whose purpose is to stimulate growth of these entities.
 Actively identify small, disadvantaged, and minority-owned businesses as potential
suppliers.
 Encourage employees to support supplier development of small businesses, minority-
owned businesses, and those owned by other disadvantaged groups.

10. PROFESSIONAL COMPETENCE

Acquire and maintain professional competence.

Professional competence is expected of supply management professionals by their employers,

their supply management peers, others in their organizations, suppliers, and by society at large.

A distinguishing characteristic of a profession is the ability to combine ethical standards with the
performance of technical skills. Because of the impact that the conduct of supply management
professionals has on the stature of the profession, it is important for all those in the profession to
consider what is meant by professional competence and how it is perceived by others.

Professional competence can be defined in many ways. Most definitions include the concept of
mastery of a body of knowledge, continued efforts to increase one's ability and knowledge of the
profession, communication skills, the willingness to share knowledge with others, and
conformance to the highest standards of ethical behavior.

Professional competence is also assessed by others, based on dress, conduct in business settings,
and how the professional presents himself or herself.

The following are recommended guidelines for achieving a high level of professional
competence:

 Ensure a basic understanding of all the requirements to be recognized as a competent

supply management professional.
 Monitor trends, and the development of new knowledge, in the profession.
 Conduct a self-assessment of talents and skills.
 Establish a self-development program designed to meet the needs of immediate and
future employment.
 Seek out mentors and role models.
 Serve as a mentor.
 Earn, and maintain, the C.P.M., A.P.P., or other related credentials.
 Become actively involved in a professional association.
11. NATIONAL AND INTERNATIONAL SUPPLY MANAGEMENT CONDUCT

Conduct supply management in accordance with national and international laws, customs, and
practices, your organization's policies, and these ethical principles and standards of conduct.

Legal systems vary throughout the world, as do business customs and practices. Supply
professionals therefore must be knowledgeable about these variations, and potential conflicts
inherent in them, when doing business across borders.

The following are recommended guidelines:

 Be especially sensitive to customs and cultural differences with respect to social and
business behavior and issues of influence.
 Recognize that suppliers may not be familiar with laws, customs, and practices of various
countries, or with the supply professional's organization's policies. Consequently, it is
important to ensure that appropriate information is effectively communicated to them.
 When confronted with issues such as facilitating type payments (e.g., payments made to
expedite "routine government action"), which may be permissible in certain
circumstances, be guided by organization policy and by the Foreign Corrupt Practices
Act or other applicable laws.
 Recognize that national laws may not apply in other countries. For example, outside the
United States, ISM's "Reciprocity" and "Small, Disadvantaged, and Minority-Owned
Businesses" Standards and Guidelines may not apply.
 Utilize organization management, legal counsel, and other available resources for
guidance whenever there is uncertainty as to actions to take.
 Ensure that suppliers comply with appropriate employment and environmental standards.
 Become aware of standards, statements, and information such as the Ethical Trade
Initiative and ISO 14000.

12. RESPONSIBILITIES TO THE PROFESSION

Enhance the stature of the supply management profession.

The stature of the profession is enhanced through ethical actions and behavior of supply
management professionals. When combined in professional groups or associations, such actions
and behavior become highly visible and enhance the stature of the profession. This has a direct
impact on the profession, the professional's organization, peers, and suppliers.

The following are recommended guidelines dealing with enhancing the stature of the profession:

 Support professional development and interchange of ideas through membership in

professional and service organizations.
 Actively seek and support change in ethical standards and practice when appropriate
(e.g., changes in the environment or technology).
 Supply professionals are obligated to support only those actions and activities that uphold
the highest ethical standards of the profession.
  Support the ethical principles and standards of the organization(s) with which the
individual professional is affiliated.
 Encourage, support, and participate in ongoing ethical training and review within
business and professional organizations

Emerging Issues in Supply Chain Management

1. Better Product Understanding

There is an overarching need above all changing trends and requirements for procurement
professionals; that need is to understand the product.

With this knowledge and expertise, in addition to the procurement and supply chain management
skills, delivering the product on time and within budget is not a difficult task.

2. Demand-Driven Planning

Rather than planning solely based on production capacity and distribution capabilities, the supply
chain is now taking a more customer-focused approach.

This enables costs to be kept low without the sacrifice of efficiency in operations. Taking into
account varying demand at different periods and the impact of lead times, supply can be
optimised to ensure delivery on time and within budget.

3. Globalisation

Globalisation is not a new trend by any stretch, but it still deserves a mention. Why? Because is
still an evolving trend and the impact it will have on supply in 2016 will not be the same as in
previous years.

It is important for organisations to be considering both outsourcing and exporting on a global

level in order to keep up with the changing and growing supply chain. Global supply is
becoming increasingly more popular, expected even, as those who were lagging behind begin to
pick up slack. Those who work with international suppliers no longer have an advantage and will
need to start diversifying their efforts in 2016.

4. Cost Cutting

Fuel costs are one of the key drivers of cost increases at the moment. This is leading to logistics
providers having to increase prices, while procurement professionals are trying to negotiate
lower costs. Procurement staff will need to look elsewhere to reduce costs as fuel prices are not
set to decrease or even stand still anytime soon.
An area where costs can be reduced is customs. Organisations are often overcharged for import
duties and taxes; there are often much more cost-effective ways of importing goods.

5. Increased Outsourcing

When seeking to globalise and lower costs, outsourcing is the way many organisations are going.
It enables them to extend their network of expertise in particular areas such as logistics and
manufacturing in a cost effective manner, while focusing on core competencies in-house.

6. E-Procurement

Electronic procurement, commonly referred to as e-procurement, defines the automation of

procurement and supply chain processes using internet based applications and technology. This
expands the idea of enterprise resource planning (ERP) systems, allowing the automation of
internal business processes, thus providing a platform that supports automation at a global level.
It allows procurement professionals across the world to communicate information simply and
efficiently, streamlining the global procurement process; reducing time and costs without
compromising on standards and quality

E-Procurement Advantages

There are many benefits to be found from using e-procurement within an organisation, and the
following are just some of the key points:

Reduced Transaction Time: individual business activities (transactions) can be completed

much more quickly; they are not restricted by office hours and may not even need human
intervention, thus increasing the capacity to complete transactions on a real-time basis. This
means that downstream processes are not constrained by waiting for transactions to be
completed.

Electronic catalogues: the development of e-catalogues has enabled organisations to market

their product offer electronically, this has been a fantastic marketing tool for sellers and for
buyers, there is price transparency (you can easily see how much items cost) and buyers can
compare offers from various e-catalogue vendors.

Increased Standardisation: With the electronic catalogues mentioned, there has been a move
by some suppliers to offer a more standardised offer, thus allowing buyers to easily compare the
offers from e-catalogues, however care must be exercised in these comparisons as it is difficult to
assess the quality of products without samples. If in doubt request samples and take time to make
your own assessment.

The great news is that most catalogue sites operate in a very similar way, and they are very easy
to set up allowing multiple business users to undertake some of their own procurement…this
keeps the business running, sourcing the day-to-day needs of the business and allows
procurement people to continue to develop great value-adding relationships.
Wider Spread Supplier Bases: Because the virtual e-procurement portals are web-based, buyers
can search suppliers worldwide, meaning a wider selection of products and services are available
to the organisation meaning that when items are not available locally, it is still possible to source
these. It is important to remember the time and cost of shipping goods, but it’s great to know that
it is possible to source items from somewhere in the world!

Simplified Global Procurement: With the e-procurement applications supporting various

languages, currencies, international taxation and financing, shipping regulations and more, it is
simple for buyers and suppliers in different countries worldwide to communicate and co-operate.

Increase Productivity: As e-procurement automates some of the procurement and wider

business processes typically handled by employees, this will free up time for the team to spend
on more strategically significant functions and tasks. For example with automated matching of
invoices, goods can be ordered, processed and paid in a matter of minutes; the key however is to
ensure that the supplier is set up in the buyers systems support as much automation as possible.

Simple Configuration and Scalability: E-procurement applications can be configured to suit

the individual needs or both the buyer and the supplier, and can grow with the organisation as
needs be. It is important to select suppliers for both the current requirement as well as possible
future need so gaining an understanding of the technical infrastructure development plans of
suppliers will help buyers to select possible longer term partners.

Creation of Trading Communities: Because the e-procurement applications are internet based,
they allow for both vertical and horizontal trading communities to be developed. This means
buyers can consolidate buying power and it also opens up opportunities for new supply chains.
The opportunity to consolidate the requirements of smaller buyers via consortia or trading
communicates has enabled smaller business to access prices historically reserved for bigger
buyers, thus fuelling a fast developing SME sector. Many Chambers of Commerce and other
local business organisations operate such buying communities.

More Cost Efficient: With the time reductions and increased supplier selection, development of
trading communities, more opportunities for purchasing surplus goods and services at below
market price, and much more, it isn’t surprising that e-procurement proves to be much more cost
efficient than traditional procurement.

VALUE CHAIN MANAGEMENT

Definition

Value chain analysis (VCA)

is a process where a firm identifies its primary and support activities that add value to its
final product and then analyze these activities to reduce costs or increase differentiation.
Value chain
represents the internal activities a firm engages in when transforming inputs into outputs
VCA is a strategy tool used to analyze internal firm activities. Its goal is to recognize, which
activities are the most valuable (i.e. are the source of cost or differentiation advantage) to the
firm and which ones could be improved to provide competitive advantage. In other words, by
looking into internal activities, the analysis reveals where a firm’s competitive advantages or
disadvantages are. The firm that competes through differentiation advantage will try to perform
its activities better than competitors would do. If it competes through cost advantage, it will try
to perform internal activities at lower costs than competitors would do. When a company is
capable of producing goods at lower costs than the market price or to provide superior products,
it earns profits.

M. Porter introduced the generic value chain model in 1985. Value chain represents all the
internal activities a firm engages in to produce goods and services. VC is formed of primary
activities that add value to the final product directly and support activities that add value
indirectly.

Although, primary activities add value directly to the production process, they are not necessarily
more important than support activities. Nowadays, competitive advantage mainly derives from
technological improvements or innovations in business models or processes. Therefore, such
support activities as ‘information systems’, ‘R&D’ or ‘general management’ are usually the most
important source of differentiation advantage. On the other hand, primary activities are usually
the source of cost advantage, where costs can be easily identified for each activity and properly
managed.

There are two different approaches on how to perform the analysis, which depend on what type
of competitive advantage a company wants to create (cost or differentiation advantage). The
table below lists all the steps needed to achieve cost or differentiation advantage using VCA.
 Competitive advantage types
Cost advantage Differentiation advantage
This approach is used when organizations try to
The firms that strive to create superior products
compete on costs and want to understand the
or services use differentiation advantage
sources of their cost advantage or disadvantage
approach.
and what factors drive those costs.
 Step 1. Identify the firm’s primary and
support activities.
 Step 2. Establish the relative importance  Step 1. Identify the customers’ value-
of each activity in the total cost of the creating activities.
product.  Step 2. Evaluate the differentiation
 Step 3. Identify cost drivers for each strategies for improving customer value.
activity.  Step 3. Identify the best sustainable
 Step 4. Identify links between activities. differentiation.
 Step 5. Identify opportunities for
reducing costs.

Cost advantage

To gain cost advantage a firm has to go through 5 analysis steps:

Step 1. Identify the firm’s primary and support activities. All the activities (from receiving
and storing materials to marketing, selling and after sales support) that are undertaken to produce
goods or services have to be clearly identified and separated from each other. This requires an
adequate knowledge of company’s operations because value chain activities are not organized in
the same way as the company itself. The managers who identify value chain activities have to
look into how work is done to deliver customer value.

Step 2. Establish the relative importance of each activity in the total cost of the product.
The total costs of producing a product or service must be broken down and assigned to each
activity. Activity based costing is used to calculate costs for each process. Activities that are the
major sources of cost or done inefficiently (when benchmarked against competitors) must be
addressed first.

Step 3. Identify cost drivers for each activity. Only by understanding what factors drive the
costs, managers can focus on improving them. Costs for labor-intensive activities will be driven
by work hours, work speed, wage rate, etc. Different activities will have different cost drivers.

Step 4. Identify links between activities. Reduction of costs in one activity may lead to further
cost reductions in subsequent activities. For example, fewer components in the product design
may lead to less faulty parts and lower service costs. Therefore identifying the links between
activities will lead to better understanding how cost improvements would affect he whole value
chain. Sometimes, cost reductions in one activity lead to higher costs for other activities.

Step 5. Identify opportunities for reducing costs. When the company knows its inefficient
activities and cost drivers, it can plan on how to improve them. Too high wage rates can be dealt
with by increasing production speed, outsourcing jobs to low wage countries or installing more
automated processes.

Differentiation advantage

VCA is done differently when a firm competes on differentiation rather than costs. This is
because the source of differentiation advantage comes from creating superior products, adding
more features and satisfying varying customer needs, which results in higher cost structure.

Step 1. Identify the customers’ value-creating activities. After identifying all value chain
activities, managers have to focus on those activities that contribute the most to creating
customer value. For example, Apple products’ success mainly comes not from great product
features (other companies have high-quality offerings too) but from successful marketing
activities.

Step 2. Evaluate the differentiation strategies for improving customer value. Managers can
use the following strategies to increase product differentiation and customer value:

 Add more product features;

 Focus on customer service and responsiveness;
 Increase customization;
 Offer complementary products.

Step 3. Identify the best sustainable differentiation. Usually, superior differentiation and
customer value will be the result of many interrelated activities and strategies used. The best
combination of them should be used to pursue sustainable differentiation advantage.