Thursday, April 5, 2012

Supply Management - The Transition from Purchasing and Procurement


Purchasing: Its  Evolution into Supply Management

Purchasing has long been considered one of the basic functions in organizations. There are references to purchasing activities and buyers in the ancient literature.
In the modern writings, Charles Babbage addressed this issue.  One of the early books focusing in purchase was written by H.B. Twyford of the Otis Elevator Company 90 years ago. The first college textbook writing was credited to Howard T. Lewis of Harvard University (1933).
During 1960 and 1970s purchasing and materials management functions used kardex systems to record material receipts and issues, and for reordering material on the basis of economic order quantities or economic order periods.  The buyer's main focus was on material availability to keep the production lines running and purchase price. Inventory control was an additional activity which was a tertiary issue.
By the end of 1970s, international marketing and international purchasing had become widespread. Computer data processing replaced kardex systems. Oil embargo and the consequent inflation made material price a very important issue for the organization. Automation has increased in production processes and specialized suppliers were providing components at much lower prices compared to firms with less automated processes. These developments brought about significant changes in the objectives and activities of purchasing departments. Inventory control became important and some companies which could cut down their inventories made profits. Material requirement planning (MRP) became possible. Just in time concepts made their appearance. People educated in materials management, logistics and management information systems were recruited and  deputed to purchasing departments.
By the late 1980s, material costs made up approximately 60 percent of the cost of goods. The Japanese became more competitive in the world gaining significant competitive advantage. Firms world over started embracing the techniques used by Japanese in their post-war industrial revival. The lead was taken by USA. JIT, Quality Circles, Kaizen, Kanban etc. became the buzz words to be understood and implemented in organizations. Continuous improvement was required not only inside the organization but also from suppliers of the organizations as they are responsible for 60 percent of the cost of a finished product.  Purchasing department managers saw the need for bifurcation of responsibilities within purchasing departments.
One category of persons were asked manage the operational and tactical activities. The second category were asked to take care of broader strategic aspects.
Operational and tactical activities consisted of placing orders based on order levels and order periods against purchase agreements, following up for deliveries, arranging payments and monitoring inventories.
The strategic activities included selecting sources, managing costs of purchased items as well as purchasing systems, developing and nurturing partnerships and strategic alliances,  and making long-term agreements with carefully selected suppliers.

Major Developments in the Modern Purchasing or Supply Organizations

Burt, Dobler and Starling identified five major developments in the modern purchasing or supply organizations.
1. Cross functional teams
National Association of Purchasing Management in a 1990s study found that the following 18 activities have  association of cross functional teams.
1. Material requirements review
2. Specifications development
3. Make-or-Buy analysis
4. Materials standardization
5. Determination of inventory levels
6. Quality requirements determination
7. Negotiation of price and terms
8. Supplier selection
9. Joint problem solving with suppliers
10. Supplier monitoring and analysis
11. Communication of specification changes
12. Productivity/cost improvements
13. Development of sourcing strategy
14. Market analysis
15. Price forecasting
16. Long-range purchasing planning
17. Determination of purchasing policy
18. Value analysis.
2. Supply Chains and Supply Networks
Supply chain concept makes every organization a part of a supply chain that starts with the extraction of materials from mother earth to the receipt of the product in the hands of supplier. In certain industries, the supply chain takes care of collection of used products and dumping it into the mother earth once again. Every organization has to coordinate with the rest of the supply chain to keep the cost of the supply chain optimal and maximize value derived from the supply chain. Remember every individual who is working in any organization is a consumer of various supply chains. When each supply maximizes it contribution to its customers, the total value derived by all the people in the world is maximized.
3. Supply Alliances
Supply alliances are closer relationships between suppliers and customers
4. Strategic Sourcing
Strategic sourcing is based on four principles:
1. Define total value of the relationship between purchaser and supplier.
2. Develop solutions based on a deep understanding of the supplier's economics and business dynamics.
3. Optimize the economic relationship for both purchaser and suppliers
4. There has to be near-term measurable improvement and there should be continuous improvement in the supplier performance and the purchasing organization also has to make the required changes to derive the benefits of continuous improvement.
5. E-procurement
Users can communicate requirements to the suppliers through electronic communication. So tactical responsibility is moving away from the purchasing department. So it can focus more on strategic supply activities.

The Future of Supply Management

Supply chain management is focusing more on value addition as manual tasks related to communication have been automated. Suppliers are being seen as production resources of an organization outside the boundaries of the organization. Supply managers are being projected as organization's outside production managers. The supply managers must possess a sound grounding in all the commercial and contractual aspects of supply management. They need to understand the entire supply chain, all technology trends, they have to keep an eye on innovations and global capacity. They have to monitor global capactiy as they have to develop suppliers worldwide to contribute to the objectives of their organizations. No doubt many may start as buyers in the department, but they have to graduate to be supply managers.

Burt, David N., Dobler, Donald W.,  and Starling, Stephen L., World Class Supply Management: The Key to Supply Chain Management, McGraw Hill, USA, 2003
OK - 1386

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