“Diploma in Procurement and Supply Chain”

Pakistan Institute of Management

Instructors:
Mr. Samran Tariq-MBA, MS, LLB, CSCP
Mr. Faisal Mir-MBA, PGD SCM, CIPS
 Lean Supply
“The main goal of being “lean” is to obtain the same output from half the resources
used by older methods – half the number of workers, half the number of design
engineers, and half the level of inventory”
Saunders
Daniel Jones identified five principles that characterised lean production organisations:

1. Tasks and responsibilities are transferred to those who are actually adding
value on the production line
2. Discovering defects and problems immediately, and eliminating their
causes, is an important objective of control systems
3. Comprehensive information system enables everyone to respond quickly
4. Organisation must be based on empowered work teams
5. This in turn encourages a strong sense of reciprocal obligation
between staff and employing firm
 Lean Supply
• Based on the concept of eliminating waste
– Waste is any activity that uses resources but adds no value

• Associated with the principles of (JIT) Just in Time manufacturing, also known as
“lean operations”
– JIT was developed by Taichi Ohno in 1940s in Toyota
– Ohno identified “seven wastes”:
• Over-production
• Waste caused by transportation
• Waiting
• Motion
• Over-processing
• Waste caused by Inventory
• Defects/corrections
 Lean Supply
Operational requirements for JIT are:

• High quality (defects/errors reduce throughput and reliability of internal

supply)
• Speed (throughput must be fast. Customer orders must be met by production
and not inventory)
• Reliability (Production must be reliable, without hold-ups)
• Flexibility (meet customer orders quickly, production must be flexible, may
mean small batches)
• Lower cost (as a result of improving quality and speed of throughput)

“Just in time is a disciplined approach to improving overall productivity and eliminating waste”

Voss, Just-in-Time Manufacture, 1987

 Lean Production – other areas:
• Jidoka: the use of “intelligent machines”, ie machines that can measure quality of
their own work and will stop if defined parameters are not being met
• Heijunka: the levelling of production to the market demand. This smoothing of
production allows for maximisation of the lean supply philosophy
• Kaizen: the philosophy of continuous improvement, which underlies all the
activities of lean production
 Factors relevant to the risk of supply
Ability of current supplier

Lead time for delivery

Technological developments

Issues of corporate social responsibility

Complexity of the item (eg in terms of its specification or manufacturing process)

Competition in the supply market

Length and complexity of the supply chain

Length of product lifecyles in the industry sector

Criticality of the item in terms of our business processes

The PMMS supply positioning model
 Evaluation of Suppliers
Suppliers already known to organisation from previous dealings can be evaluated on
the basis of their track record. This type of evaluation is known as “vendor rating”

When the supplier is not known to the organisation there is a need to judge his
capabilities in a different way and on the basis of different information such as:

• Financial stability
• Commercial capabilities
• Management skills
• History
• Who they trade with
 Relationship Lifecycle
Elements of a relationship lifecycle
• Information based, and information is shared
• Focus on competitive advantage that can be provided by the supply chain
• Partners seek to re-define the relationship, with focus on potential future
products and needs

• Close collaboration between customer and supplier, particularly in areas of:

- Conceiving and designing new products

- New product launches
- Pricing a new product
- Promoting a new product
- Forecasting future sales demand and future customer needs
 Stages of the relationship lifecycle
Kettering Relationship Lifecycle Model
Initiation phase Agreement phase Delivery phase
Stages (1-10) Stages (11 – 16) Stages (17 – 25)
Seller develops offering Buyer enquiry Initial delivery
Seller there to be found Seller quotation Refining
Buyer has need Negotiation Ongoing delivery
Seller creates need Headline agreement Continuous improvement
Buyer specifies Detail agreement Business development
Conditioning by seller Implementation Extension
Seller sells Completion
Buyer searches Latent termination
Conditioning by buyer Final termination
Serious discussion
 Uses of the relationship lifecycle
• Intended to assist buyers in their professional work
• In order to apply, the buyer would need to evaluate which stage the relationship
has reached
• Opportunity for forward planning (see what is yet to come and be prepared!)
 Termination of Supply Relationships
• Buyer has changed the type of products it makes or sells
• Supplier makes a strategic shift into other supply markets
• Problems arise with the relationship (becomes “too cosy” or bureaucratic and
inflexible)
• A new supplier enters the market, offering terms the existing supplier cannot
match
• Dispute about quality of goods supplied

Classified under three headings:

- Fulfilled objectives
- Disputes
- One party behaved badly
 Reducing Cost
To achieve competitive prices companies must focus on costs. Purchasing’s
contribution to reducing costs is throughout the supply chain, whilst maintaining
quality
• Traditional model builds the cost of a product by analysing its components
step by step. Profit margin is then added
• Target costing starts at the other end. Manufacturer estimates the selling
price (what the market would be willing to pay) then works backwards to
calculate the production cost that must be achieved in order to provide
reasonable profit
 Agile Supply
Agility is proficiency at dealing adequately with change or unexpected event, such as
recovering from a situation where a supplier has failed.
Unplanned events could be caused by:
• Staff shortages, breakdowns, delayed deliveries, urgent requirements
To achieve agility calls for:
• Streamlining physical flows or parts from suppliers
• Streamlining the bilateral flow of information through EDI
• Adaptability in responding to changing needs of the market
 Taichi Ohno’s seven wastes
Waste caused by … Comments
Over-production Producing output which customers are not yet demanding leads to
stockholding costs and possibly scrap. This refers both to finished goods for
external customers, and to work in progress for the next stage in the
production process
Transportation Moving materials between different locations adds cost. This may refer to
moving materials from their source to our production facility, or to moving
materials within the production facility. Either way, effective planning can
minimise the unnecessary transportation.

Waiting Delays in processing mean that more time is taken than is really needed. This
is quite common in the traditional manufacturing process, but lean supply
aims to eliminate it.
Motion Unnecessary motion violates sound ergonomic principles and can cause
waste of time and possibly injury to staff.
Over-processing This can happen when unnecessarily sophisticated equipment is used to
produce relatively simple goods, adding to their cost.
 Taichi Ohno’s seven wastes (continued)
Waste caused by … Comments
Inventory Lean supply aims to eliminate the use of buffer stocks because
stockholding costs do not add value, and because holding stocks can
mask inefficiencies in the production process.
Defects/corrections Clearly the costs of rework and scrap do not add value, but do reduce
the bottom-line profit.
 Features of Lean Supply

• Specify what creates value as seen from the customer’s perspective

• Identify all steps across the value stream
• Perform those actions that create that value flow
• Only make what is pulled by the customer just in time
• Strive for perfection by continually removing successive layers of waste
 Features of Agile Supply
“Using market knowledge and a responsive supply network to exploit profitable opportunities
in the market place”
CIPS
• Able to see opportunities for product modification
• Product lifecycles may be short (because organisation’s offerings change
frequently in response to market demand)
• Late customisation
• Ready to accept stock
• Stock is seen as a source of value enhancement for the customer and not seen
as cost
Andrew Cox believes that the lean philosophy is powerful when key criteria are
cost and quality, whereas agility is paramount where service and customer
value enhancement are key
 Corporate Social Responsibility

CSR is being a good corporate citizen. Some matters are covered by legislation:
• Legislative requirements (Health and Safety at Work Act)
• Regulatory requirements (Ofcom, Competition Commission)
• Professional codes of practice (CIPS, CIMA, CIM etc)

Many organisations set social responsibility objectives in relation to:

– Sustainability issues
– Environmental issues
– Ethical trading
 Corporate Social Responsibility

Why is it important to organisations?

• Enhances stakeholder values

• Helps to increase reputation
• Increases knowledge of supply, encourages minimal risk taking
 Corporate Social Responsibility
Key Areas for Purchasing Professionals

Environmental Equal
Human rights
responsibility opportunities

Corporate
Diversity Sustainability
governance

Impact on Ethics and

Biodiversity
society ethical trading
 Ethics and Purchasing
Why are buyers interested?
• Both customers and suppliers expect to see ethical behaviour (could lose
business if deemed to be unethical)
• Concern for the environment is just one aspect of ethical business policies
• Unethical behaviour is not beneficial in the long term
• Policies and ethical behaviour are considered to be an essential element in
strategic management
• Buyers are more exposed to temptation than other professionals
 Ethics and Purchasing
Dealing with supplier compliance
How to promote appropriate behaviour
Prepare written standards of conduct
Management should ensure the standards are publicised widely and monitored
systematically
Management should foster an ethos of responsible and ethical behaviour
Support by training

Measures that can be taken to avoid possible abuse

Rotation of buyers
Controls over single sourcing deals
Controls over authority levels
Encourage suppliers to report wrongdoing
Encourage employees to report ethical breaches
 Ethics and Purchasing
Selecting a supplier
Factors that the buyer should consider:
Is the supplier using scarce resources responsibly?
Is the supplier polluting, and what measures are in place to prevent pollution?
Is the supplier energy efficient?
Are there any ethical concerns with the owners of the company?
Does the supplier pay its employees a proper wage?
Does the supplier have ethical employment and working practices?
Do the suppliers themselves use any suppliers who have ethical concerns?
Do they have any history of operating unethically or illegally?
Does the supplier discriminate in any way?
 Examples of ‘sharp practice’
• A buyer talks in terms of large quantities to encourage a price quote on that basis. However, the order is
then placed for a smaller amount which does not justify the low price thus developed.

• A large number of bids are solicited in the hope that the buyer will be able to take advantage of a
quotation error.
• Bids are solicited from unqualified suppliers whom the buyer would not patronise in any case. These bids
are then played against the bids of responsible suppliers in order to gain a price or other advantage.

• A market is misrepresented by a buyer who places in competition the prices of seconds, odd lots, or
distress merchandise.
• An attempt is made to influence a seller by leaving copies of bids, or other confidential correspondence,
where a supplier can see them.
• A concession may be forced by dealing only with ‘hungry’ suppliers. The current philosophy is that a
purchase order should create a mutual advantage with a price that is fair and reasonable.

• Obscure contract terms of benefit to the buyer’s firm are buried in the small type of contract articles.

• A buyer may take advantage of a vendor who is short of cash and who may seek only to cover his/her out-
of-pocket costs. (However, such a situation poses a dilemma, since the vendor may be saved from
borrowing at a disadvantage and may look upon such an order as a blessing.)
 Environmental concerns relevant to purchasing staff
• Recovery, recycling and reusing of materials and waste products

• Safe disposal of waste products that cannot be recycled

• Supplier selection policies to support firms that conform to environmental standards with
regard to air, water and noise pollution

• Supplier and product selection policies that reflect concern for conservation and renewal of
resources

• Safe testing of products and materials

• Concern for noise, spray, dirt and vibration in the operation of transportation facilities
Exercise

Suppose an established supplier announces that he is

about to institute an environmental program to clean up
his products and production processes. Unfortunately, the
cost impact is heavy and from now on the prices he
charges you will have to increase by 5 per cent.What do
you do?
 Stakeholders and their expectations
‘EXTERNAL’ STAKEHOLDERS Typical expectations from organisation
Government Best practice in employment
Adherence to laws
Environmental awareness
Receipt of tax revenue
Acceptable use of grants
Suppliers Continued relationship
Fair dealing
Timely payments
Involvement/partnership
Customers Competitive pricing
Quality and availability
After-sale service
Fair dealing
Lenders Return on investment – interest
Good security for loan
Timely payments
Society as a whole Adherence to laws
Environmental awareness
 Stakeholders and their expectations (continued)
‘EXTERNAL’ STAKEHOLDERS Typical expectations from organisation
Employees Good security of job
Timely payments
Best practice in employment
Interesting work
Opportunity for development
Owners Return on investment – dividends, and capital growth
Good security of investment
 Influence of stakeholders
• Stakeholders can affect the success of a strategy
• Stakeholder interests must be considered when making decisions

Examples of internal stakeholders:

– Production
– Quality control
– Research and development
– Warehousing and distribution
– Finance
– Sales and marketing
 Buyer’s techniques for handling stakeholder conflict

A specialist may be seconded to the purchasing department to assist with the sourcing
decision which will meet the objectives of all parties

Use of cross-functional teams

Lead buyer approach – involves delegating defined purchasing responsibilities onto a

designated individual within a user department

Business partnering approach – a member of the purchasing team works with different
functional areas
 Culture
Organisation culture is:

“a pattern of beliefs and expectations shared by the organisation’s members, and which
produce norms which powerfully shape the behaviour of individuals and groups in the
organisation”
(Schwartz and Davies)
or

“ the way we do things around here”

 Culture
Within a company can be expressed through:

Dress codes,
Informal norms,
office decor,
formality, familiarity
logos

Behaviour Artefacts

Beliefs
Rituals
and values
Awards,
retirements, Mottos: “customer is
routines king”, get it right first
time”
 Culture
Four types of cultures

Bureaucratic culture Defined roles, hierarchical, strict adherence to policies and

procedures. Like stable conditions, do not like changes

Paternalistic culture Dominated by single individual or small group. Small-

medium family firm, treat employees as extended members
of family

Aggressive culture Challenge, dispute, aggressive. Lead to adversarial

relationships

Progressive culture Embrace change, continuous improvement, constant change,

enjoy flexibility
Exercise

Any basic economic textbook provides analysis of market

structures, ranging from monopoly at one extreme to
perfect competition at the other.You may already be
familiar with this from earlier studies of economics. Brush
up your understanding of the main characteristics of both
extreme cases and try to outline the implications of each
for purchasing staff.
Exercise

How could you measure a supplier’s performance in terms

of price?
 Supplier Appraisal
Definitions:

Appraisal – the assessment of potential suppliers, prior to contract award

Vendor rating – the assessment of a supplier’s performance in fulfilling a contract

after its award

Supplier development – the activities carried out both before and after contract
award; aim to assist a supplier in providing a service/product we need
 Supplier Appraisal

Factors to be appraised in supplier appraisal:

Demand analysis Estimate likely usage in the period ahead

Vendor analysis Evaluate the performance of current suppliers

Market analysis Appraise general supply conditions in the market,

availability, shortages, price
 Supplier Appraisal

Features that a buyer is unable to influence:

- the number of buyers in the market

- the number of suppliers in the market

- methods of pricing in the market

- the degree of product differentiation in the market

- technological developments in the market

 Factors involved in supplier appraisal
Purchasing and Supply Chain Purchasing Principles and Purchasing and Supply
Management by C K Lysons Management, by Baily, Farmer, Management, by Dobler and
Jessop and Jones Burt
Personal attitudes Task variables, such as quality, Results of preliminary survey
service and price
Adequacy and care of Financial stability Financial stability
production equipment

Means of controlling quality Good management Good management

Housekeeping Results of site visits Results of site visits

Competence of technical staff Ability to support electronic Quality of service
data interchange
Competence of management Just in time capabilities Just in time capabilities
 Identifying potential suppliers
Past experience
Salesmen from suppliers
Contacts with other buyers
Published catalogues
Trade directories
Trade journals
Trade shows and exhibitions
Direct mail
Formal requests for information
 Site visits / Supplier audit

Production equipment and operations

Operation of key materials management activities

Existence of adequate production capacity

Expertise and motivation of personnel

Technological know-how of supervisory personnel

Management capabilities
 Supplier selection criteria – Carter’s 10cs

Competency Cost

Capacity Consistency

Commitment to quality Culture

Control of processes Clean

Cash Compliance
All manufacturing performed by top-level purchaser
Top-level purchaser outsources most manufacturing
 Tiering of suppliers
Reasons for tiering Benefits of tiering

OEM wants to develop long-term OEM has fewer commercial relationships to

relationships with key suppliers, but only has manage, and directs its attention to
the time and resources to develop a limited improving these key relationships
number of such relationships

Standardisation of parts and variety OEM can have strategic focus, without having
reduction has reduced the number of parts to worry so much about the transactional
required, so that the OEM needs fewer and operational details of procurement
suppliers than in the past

There has been consolidation of suppliers OEM can share an objective to improve the
within the supply market supply chain with first-tier suppliers: a shared
effort is likely to bring more and better
improvements
 Tiering of suppliers
Characteristics of a first-tier supplier
- A direct supplier to the OEM
- Usually a supplier of a high-cost or complex sub-assembly
- Heavily dependent on the OEM
- Close and long-term buyer-supplier relationship with the OEM
- Often involved in discussing new product ideas with the OEM
- Responsible for dealing with a number of second-tier suppliers
- Understands and shares the “mission” of the OEM
- Disseminates the standards and working practices of the OEM
- Must be a competitive producer to justify selection by the OEM
- Supplier must also must have the management capabilities to manage the second-tier
suppliers efficiently
- Relationship with the OEM is a long-term partnership
 Why suppliers may not welcome an appraisal
Reason for reluctance
A particular supplier may not find the buyer’s
business attractive.
They may have bad experiences of previous
appraisals, possibly with other buyers.
They may be unsure of the supplier selection
process, perhaps suspecting that some other
supplier has an ‘inside track’ or that the buyer is
not serious.
The timing of the proposed appraisal may be
inconvenient.
They may believe that the process will be
expensive and time-consuming, and of course it
may not lead to profitable business in the end.
They may be wary of sharing confidential
information.
Steps a buyer can take
Check out potential suppliers first, using tools such
as the supply positioning model.
Conduct the appraisal process fairly and
transparently so that suppliers can see that they are
not just wasting their time.
Provide full information about how the selection
process will work, and keep suppliers informed about
progress through the various stages.
Ensure that suppliers have adequate time to prepare
for the appraisal, and avoid suggesting dates that will
obviously coincide with suppliers’ busy periods. Be
sympathetic if a supplier suggests a different
timetable.
Be sympathetic to suppliers’ likely perception of the
cost of the exercise. Ensure that the exercise is
streamlined as far as possible, consistent with
obtaining the information required.
Be prepared to sign a confidentiality agreement.
 A supplier’s possible reactions to the appraisal process
Favourable reactions
We may be able to do business with this
organisation in future.
We managed to get to know the people well.
We felt the process was handled fairly and
efficiently.
We will be able to benefit in the future from
the potential cost savings and efficiency
improvements we identified as a result of the
exercise.
They listened carefully to what we had to say
and applied reasonable and even-handed
criteria in evaluating it.
Unfavourable reactions
We did not form a favourable picture of this
organisation as a possible future business
partner.
The people they fielded did not come across
well to us.
We felt they were taking advantage of us, just
inviting us to make up the numbers.
The exercise was an expensive waste of time
and money, through no fault of our own.
They gave us no chance to present the full
strength of our case.
 Characteristics of services

Intangibility Service cannot be tasted, touched, seen or smelled before it is

purchased

Inseparability Services are produced and consumed at the same time. A service
cannot be stored

Heterogeneity The quality of a service will be variable, service will be influenced

by many factors such as patient’s mood

Perishability Service cannot be stored so supply of a service is difficult to

control
 Supplier appraisal – what to investigate

Manufacturing supplier Details relating to statistical process control

Service supplier - Details relating to cost savings achieved by other

clients

- Details relating to service level agreements with

other clients and the extent to which these have been
met

ALL Details of financial performance and stability

 Differences between public and private sector purchasing
Area of difference Private sector
Objectives Usually, to increase profit
Responsibility Buyers are responsible to
directors, who in turn are
responsible to shareholders
Legal restrictions Activities are regulated by
company law, employment law,
product liability law etc
Competition There is usually strong
competition between many
different firms
Publicity Confidentiality applies in
dealings between suppliers and
buyers
Public sector
Usually, to achieve defined
service levels
Buyers are responsible
ultimately to the general public
Most of this applies equally to
public sector, but additional
regulations are present too (eg
compulsory competitive
tendering)
There is usually no competition
Confidentiality is limited
because of public interest in
disclosure
 Differences between public and private sector purchasing
(continued)
Area of difference Private sector Public sector
Budgetary limits Investment is constrained only by Investment is constrained by
availability of attractive externally imposid spending limits
opportunities; funding can be found
if prospects are good

Information exchange Private sector buyers do not Public sector buyers are willing to
exchange information with other exchange notes
firms, because of confidentiality and
competition

Defined procedures Private sector buyers can cut red Public sector buyers are often
tape when speed of action is constrained to follow established
necessary procedures
 Reciprocal trading
Intra-organisational trading
Intra-organisational trading refers to commercial relationships between entities which are part
of the same organisation. It may be regarded as one variety of reciprocal trading, which means the
practice of buying from a supplier simply because that supplier happens to buy from you.
Problems with reciprocal buying:
• Brings into the buying decision factors that have nothing to do with the buyer’s principal duty, which
is to secure the best possible value for his organisation
• Unsuitable purchase decisions are made which could result in a heavy price to pay in terms of
product quality and customer satisfaction
• Possible breach of law (in the UK there are legal regulations which prohibit most attempts to stifle
competition)
Malcom Saunders suggests that three questions should be asked in analysing an
opportunity for reciprocal trade:
• How necessary is it to have a reciprocal agreement with a customer in order to win the sales
contract?
• What are the benefits to the company of winning the sales contract?
• What are the costs to the company of using this customer as a supplier, as opposed to exercising a
free choice?
 Changing supply source
Risks to consider when changing supply source:
• New supplier will fail to perform
• Relationship issues
• Learning curve effect
• Teething problems
• Incompatibility in the systems and processes
• Total cost of ownership will be greater with new supplier

Costs to consider when changing supply source:

• Identifying potential new suppliers
• Tendering exercise
• Transition period
• Changing of internal systems and processes to align with new supplier
• Familiarising with new supplier’s systems and procedures
 Strategic Relationships
Consider the following:
• Nature of supplier’s products and services
• Position of the supplier and products (market management matrix)
• Managerial resource within the business
• Skills and competencies
• How the supplier is regarded by other organisations in the sector
• The nature of their production processes

Risks :
• Financial difficulties
• Partner may become extremely successful and our business becomes no longer
important
• Partner is taken over by another organisation who views us in a different light
Thank you