What is Procurement Management?
Procurement management, let’s think about a couple of things about failure mode and effect analysis.
Another important quality tool is called Failure Mode Effect Analysis FMEA.
Now there are 2-3 points you should keep in mind whenever you go for failure mode effect analysis,
we need to find out what are different possibilities of failure of a machine are of equipment.
So, try to find out what are the possible failure modes of a machine.
What is the probability of occurrence of failure and how severe that failure is?
It is possible that a machine is failing, but it is effect is not most severe.
You need to know three things;
- The occurrence of the failure,
- How severe that failure is?
- How easily you can detect that failure?
If you know all these three things then you can calculate something called risk priority number. If there is a machine.
First, locate out what are the possible motives of failure.
Failure due to a energy supply.
It is a failure due to operators mistake.
Then if you know that how many times machine failed due to power supply.
Just calculate the probability, if not probability then you can just assign a number between 1 to 10.
Similarly, once you know that they detect what is the probability of that failure.
Then what are the effects of that failure and how severe those effects are?
So, you just calculate the risk priority number for each failure and then assign some persons to look after those failures.
In this way, you can do a failure mode effect analysis by calculating the risk priority number.
And by assigning a person who would be looking after that particular failure right.
This failure mode effect analysis apart from this, there is something called process capability.
Process capability is something which you need to know is the ability of the process to keep central tendency and dispersion at their required levels.
When the term used central tendency it means to mean, mode and median.
In procurement management, the most important part is to know process capability.
It is possible it is good to maintain that the process strikes to central tendency.
And when the term used it is dispersion you can measure it through either range or standard deviation or variance.
It is good to use variance is a method for measuring dispersion.
There are specific kinds of methods available.
If you want to measure the central tendency of the process, then there is something called x bar chart.
You can use x bar chart for measuring variability you can user chart.
If not r chart then in some situations you can use s chart it is called standard deviation chart. If not standard deviation then you can directly use variance chart.
There are different types of charts available through which you can control the quality of a projector or a product.
Now, let us move on to the next important knowledge area, which is procurement management.
Let us look at procurement management, one of the very important functions one of the very important knowledge areas.
Because in a project you have got 100 of vendors and you would be requiring thousands of materials from those vendors.
And if you do not do this activity properly.
Then you would be able to complete a project in time within budget and having a required performance level.
Procurement management is an important area it is also known as sourcing.
In fact, sourcing would be the appropriate word for this because sourcing includes several things.
For example, it includes purchasing, vendor selection marketing research for raw materials and components and so on.
Procurement management or sourcing is to be done properly in a project.
Even if you look at supply chains these days then and there are 6 important drivers namely:
- Wear housing,
Procurement management quite an important topic.
We should know the first thing that looks at this 5 R.
- Right quality,
- Right quantity,
- Right place,
- Right time,
- Right source.
Different Types Of Management
These are 5 R of purchasing.
Apart from these 5 R’s you should also look at some selective inventory control tools.
And there are several tools will not learn at all those tools, but will learn at a couple of important tools.
You can classify your raw materials and components into different categories and these categories are the first one is ABC analysis.
There are products in which the 80 per cent cost is for 20 per cent of the components.
In fact, you’ve seen in Pareto analysis also.
In ABC classification also in a product certain items which would be 20 per cent in quantity, but there their cost would be 80 per cent.
There is something called ABC analysis.
We will see an example on an ABC analysis then you can have you know items as seasonal and of seasonal items in fact.
If you look at these days almost most of the businesses are seasonal.
For example, let us a in summers we have got business off let us a cold drinks and ice creams and so on.
In winters you got some other businesses as and so on.
You need to procure your raw materials according to:
- Seasonal and
- Off seasonal
- VED Analysis:
And there is something called VED analysis.
You can have:
V stands for Vital
E is for Essential and
D is for Desirable
It is called vital, essential and desirable.
If you look at a pen a ballpoint pen when the refill is the vital component because we will write.
A vital component is valid.
Essential is the place from where you hold it right in a pen it is essential. And a cape is desirable is not it.
You can classify the items which you are going to purchase for your product is vital, essential and desirable items.
One more classification is called GOLF.
You can have government source, ordinary source, local source are a foreign source, government, local and foreign.
If you are able to get material from government source having the right quality, price and time.
Then you can go for the otherwise look for some other source.
You can a government source of local source and foreign source of getting raw materials and components.
Then you got FSN stands for:
- Slow-moving and
- Non-moving items.
SDE analysis stands for:
- Scares items,
- Difficult items and
- Easy to purchase items.
Let us say if you are getting raw materials from abroad it is it’s quite a because the item is scared in India.
So that you are getting it from abroad right. You can have this kind of different categories right.
We will learn ABC analysis:
We will take one example and then we will try to find out which components are of A B and C type.
We do analysis on the basis of annual consumption value right.
Let say 20 items in your organization, and this is annual consumption, but before this, you will learn the classification of A, B and C.
Items are those items which are having as far as volume is concerned less than 10 per cent of the items, but and their value is more than 70 per cent.
B category of items less than 20 per cent and their values about 20 per cent.
C category of items about 70% but their value is less than 10%.
There are 10 to 20 per cent items having value 70 to 80 per cent they have would be termed as a category item.
A category item:
A category of an item having a small percentage of the total volume of the material handle by the stores i.e only 10%.
But it requires heavy investment it is all about more than 70% of total inventory value.
It is because of the heavy requirement of these types of product and their high price.
- B category item:
B category of the item consists of the total items of material handled by stores i.e about 20%.
It also investment requires about 20% of the total investment in inventories.
- C category item:
C category of an item does not require too much investment.
In c category of item about 10% of the total item of inventory value.
But in that nearly approximately 70% of the total item handled by stores.
In procurement, management purchasing plays an important role.
It is a process of procuring materials, supplies, machine equipment and services, required for tools and then protection and operations of the manufacturing plant.
You need to ensure that you should have sufficient inventories to run the plant.
Nowadays this function is taking more and more importance.
Because in a product you will find that the cost of goods and services is 50 to 70 per cent, it depends on the product.
So, 50-70% is the cost of raw materials in components. That is why this purchasing is very important.
So, if you can save on purchasing then you can increase your profit.
The other reason why this function is gaining importance is the escalating cost of stock-outs.
Nowadays what is happening if you do not provide a finished product to the customer in time.
Then they will switch over to some other product because there are several competitors of that particular product which you are selling.
Responsibility of yours is to ensure that you make a product available.
If you do not make the product available in the market then it would be a loss for you and it is difficult to get customers back.
To ensure that there is no stock out of finished products because that is the product which customers would be buying.
To ensure that there is no stock out taking place of a finished product, you should ensure that the other inventories.
Work in process inventory and raw materials, their stock should also be there in plant.
Because if there is a stock out then it would cost you a lot. Then higher present days higher present-day cost of capital.
You have got fixed and working capital depends it is ratio is 60 to 40 per cent.
Again it depends on organization to organization and product to product.
And most of the times around 60 to 80 per cent working capital is locked up in inventory.
It is in the form of either raw material or work in process or finished goods.
It is always suggested to keep inventory as slow as possible.
You see inventory management is quite an interesting area.
In inventory management, you have to you know optimize conflicting objectives.
And these conflicting objectives are:
First is you do not want to invest money in inventory. Because it is a kind of dead capital, it is dead money.
You do not want to keep money in the form of inventories, at the same time you also want to keep inventory.
Because you want to customers requirements.
They are two conflicting objectives.
So, from one side you need to keep inventory on the other side you do not want to keep inventory.
What to do?
You have to have a balanced approach.
This is quite an interesting area of inventory management.
Purchasing is not merely acted of buying it includes several activities market research.
The purchasing department will have to look for what is happening in the market.
- What are different new raw materials available who are different vendors available?
- What is the various pricing?
- what are various exchange rates?
You need to the purchasing department has to be you know updated in terms of all those things right vendor rating.
You need to ensure that your vendors are rated properly and they are audited properly. Because if something goes wrong with the final product.
Then it is your brand which is at stake it is not the vendor. Because nobody knows vendors, it is your organization which is whose reputation is at stake.
You need to ensure that you are properly taking care of your vendors.
Then standardization and variety reduction codification indent coding and there are several other functions of the purchasing department.
Now, purchasing is becoming quite a professional activity.
It is not like that you just make a phone call to a vendor and he will supply material it is not like that.
Since we are living in the globalised era, you need to at in a professional manner.
It is good to go for there is something called techno commercial activity.
And it is more of a techno-commercial activity these days.right.
Techno commercial activity means what?
Whenever you go for purchasing of any product then if you are going for a global tender, at a national level, tendering process close tendering etc.,
It depends on what kind of materials you are looking for what is the value of those items and so on.
So, it is good to talk about vendors.
An important role of vendors in procurement management. You can have discussions on technical aspects first.
You can look at what are the specifications of products whether it is a chemical, mechanically specification, physically specifications etc.,
You should talk about all these things. And then if you are done with technical aspects and go for commercial aspects.
You should also look at green supply chain aspects or green aspects of purchasing.
- What is the cost of raw material,
- What is the delivery period or
- What is the payment mode?
Rather than going for these three things it is good to go for how good that raw material is for the environment.
You just look at vendors from an environmental perspective.
- Are the processes of vendors affecting the environment?
- Is the vendor using environment-friendly materials?
- Is he using environment-friendly colours?
- Is the process of a vendor is polluting?
- Is vendor polluting air quality, is not it?
You should look at green aspects these days and then you should look at techno and commercial aspects.
These are a couple of things which you should keep in mind.
Nowadays whenever you buy material from a vendor, it should be a win-win situation for both of you.
It is not like that you should always suppress your vendors.
Because his win his victory and your victory will at the end of the day fetch profit from the market right.
So, there should be a win-win situation for supplier and buyer.
There are a couple of objectives of scientific purchasing procure material at a competitive price.
Maintain continuity in supply right it is not that your vendor has supplied material and he is stopped for some reasons.
Nowadays Just-In-Time concept is very important for procurement management.
There is something called nowadays people are talking about Just-In-Time(JIT).
Just-In-Time you see the concept is you should get raw material and work in process items.
Whenever you required not too late not too early.
Because if you are getting it too early it is a kind of wastage in inventory.
Too late you will not be able to make a finished product and you will not be able to supply in the market.
It should be just in time. For that, you need to have very few vendors a few suppliers
who are reliable.
Just-In-Time is basically it is a technique of reduction of waste.
So, it is a waste reduction technique and inventory is a kind of waste it should not be there in plant. And there are certain other wastes.
In fact, there are different 7 types of wastages available.
But Just-In-Time is a process of reducing waste or those it is a waste minimization technique. And for that, you need to have a close relationship with few suppliers.
Then ensure the production of goods and goods of better quality.
In fact, these are a couple of points you should keep in mind whenever you are going for purchase purchasing.
The purchasing department has got certain duties to perform, there are some primary duties some secondary duties some tertiary duties.
Primary duty is to look for the right source then you should get material in time.
You should place the order in time, you should follow up the order and you should get things in time.
Then the disposal of surplus obsolete and scrap materials. These are a couple of primary duties of purchase department.
Make or Buy Product:
In procurement management make or buy decision is very important.
There are some other duties, for example, Make or Buy.
When an organization should make a product and then it should buy a product.
Do you have the capability to make that product?
If you want capability, but if the total cost is more than the cost of buying from outside then it is good to buy.
Because if you buy it from outside if it is cheaper than what your facilities will do.
Try to make the product in house by in such a way, that it cost is less than the cost which you are getting from outside.
Make or buy a decision very important decision, it also depends on what is the urgency.
Let say if you can make a product in the house, but it takes time and you do not have time, but you will have to buy.
So, you need to take make or buy decision.
Capital equipment and construction purchase:
These are again this is one of the secondary duties. Purchase research is a very important
To carefully monitor the entire market about the prices of raw materials, exchange rates, inflation, the payment mode to different vendors.
And then you have got traffic and store these are other optional duties.
In fact, earlier people used to think that purchasing is something we should not be focused on.
Because it is an activity which will not result in any profit for the organization.
It is a function like that where you need to always you spend and spend.
But nowadays profit should be; this purchasing should be seen as a profit centre.
To increase profit by 100 rupees, you need to increase sales.
And for and the efforts are putting in increasing sales would be much more than saving 100 rupees in purchasing.
You should have such kind of skilful negotiations with the vendors.
If you go for skill full negotiations, then you can save a lot in purchasing.
And that is how you can make purchasing as a profit centre.
Purchasing and capital release:
Purchasing and life cycle cost very important. We should not think about purchasing just for the time being.
You should learn the life cycle cost of the project. Life cycle cost of the raw material which you are purchasing.
Because let us if you are purchasing a machine tool.
If the machine is let us a cheaper today, but it would have a very high repair in maintenance cost.
You should look at the entire life cycle of the machinery equipment which is going to purchase.
These are a couple of points you should look carefully before going for purchasing.
Different types of Management