Supplier Selection, Purchasing and Procurement - Coursework Example

Logistics Abstract The primary function of logistics is to manage the flow of goods, information and other critical resources which may include people from a certain point of origin to a certain point of destination. This report tries to examine and evaluate logistics in a shorter context and the factors which are likely to be considered by any organization in evaluating and selecting suppliers. Finally the report concludes by explaining factors which are likely to be given priority over others in the evaluation and selection of suppliers. Table of Contents Abstract______________________________________________________________1 Table of Contents_______________________________________________________2 Introduction___________________________________________________________3 Supplier Selection_______________________________________________________3 Purchasing and Procurement_______________________________________________4 Steps in Supplier Selection________________________________________________8 Conclusion ____________________________________________________________9 References_____________________________________________________________10 Introduction Logistics may be defined as the management of flow of goods, services and other resources from a certain point of origin to another point of consumption so that they may meet the requirements of consumers. It involves integrating information, inventory, transportation, packaging, handling and security of the goods themselves. It is a channel of the supply chain that adds value of time and place utility. According to Gopalakrishnan & Sundaresan (2004) with the fast paced business environment and the evolving competitive nature of businesses globally, materials manager have tremendous tasks and responsibilities since more quantity of raw materials and components are directed into the organizations productions channel today more than in any other historical period In order to achieve effective logistics management, proper & mature decision have to be involved, it is not about getting things to where they are supposed to be but doing it in a competitive environment where other organizations are also competing against you. Its overall goal and objective is to achieve a certain level of customer service at the best possible price with reliability, expediency, information flow, cost and control all being directly involved (Douglas, 2003). With changes in consumer behaviors, new forms of retail outlets have also evolved, and this has eventually made distribution channels shift from the traditional manufacturers to retail chains and with associated globalization and increased economic pressure, both manufacturers and retailers have been forced to look beyond costs of sales. This calls for manufacturing organizations to efficiently choose their suppliers in order for them to competitively compete in the market place at the best possible price which is not necessarily the lowest price per unit cost from the vendors themselves (John et al, 2009) Supplier Selection With materials and components being an important aspect in any manufacturing organization, the organizations return on investment (ROI) portrays on the greatness of the deal pertaining to the utilization of the materials and the components themselves. Organizations have to properly maintain their inventory materializes into predictability in supplies, cushions them against fluctuations, protection from unreliable suppliers, price protection, quantity discounts in bulk purchases and lower ordering costs since items are bought in large quantities (Max Muller, 2003, p.3) Smart organizations are also known to tap the power of their supply base for the benefits of the supply chain improvements that increase the overall return on invested capital (ROIC) through actions that are known to improve on revenues, reduce costs, and finally improve on the capital intensity of the organization itself. Therefore a key driver used in enhancing a shareholder value is to make the ROIC exceed the organizations cost of capital (Robert et al, p.3, 2005) One of the most important responsibilities for the commodity teams, people in charge of procurement and the supplies manager is to select a competent supplier. This entire process is usually an afterthought which is performed by buyers who are measured by their ability in obtaining the lowest price available rather than the highest value they may achieve. With increasing reliance on a handful of suppliers to provide a greater value add and long term contracts, the chances of making an incorrect and unpopular decision is high and may lead to undesired long tem consequences for the organization (Robert, 2007) According to Erick & David (1999, p2) managers have already discovered that actions undertaken by a member of the supply chain, may easily influence the profitability of all the other chains, and this has led organizations into thinking of competing as part of a supply chain against other supply chains and the executive in charge has to be involved in every aspect of the material purchase in order to guarantee the best ROI investment for the organization. Purchasing and Procurement The trend today is for different organizations to focus solely on key aspects that are mandatory in delivering value to their clients such as the emergence of value networks, grouping of organizations that use complementary capabilities in delivering value to their clients (Joseph et al,2005, p20) and it is within these networks that each organization has to deliver optimum performance in their service delivery. There are five key areas whereby organizations can make decisions that define their supply chain capabilities, these include inventory, production, location, transport and information and with effective supply chain management there is a calling for a deeper understanding of each particular driver and how they properly operates (Michael, 2006,p.10) Joseph, Anna and Ralph(2006, p.25) argue that with advanced sourcing techniques, an organization is likely to leverage the full value potential within the entire expenditure base hence helping the organization in fully exploiting its own core competencies. Organization that exhibit world class quality within their supply chain should easily establish the connection between the selection process and important quality management principles. A supplier selection decision should be logically flowing by recognizing that selection needs exist in order to reach an agreement with the selected supplier (Roger Moser, 2007). In most cases the selection process commences with a committee which provides the direction for the ongoing efforts and in order to properly guide the entire process, there are principles that have to be recognized, these are, assessing the total value, developing the individual sourcing strategies, evaluating the organizations internal requirements, focusing on a suppliers economics, and finally driving a continuous improvement (John et al, 2009). Material management consists mainly of anticipating material requirements, sourcing and obtaining the materials, receiving the materials and finally monitoring the available stock levels and with the increased global competition there has been a sharp increase in outsourcing of materials by different organizations. Organizations at the same time are increasingly demanding the best value possible for the components that they use in their finished products and in most typical organizations, the share of finished product costs which is represented by parts which have been purchased from outside ranges between 40-60% (Kent, 2006). According to Monczka et al,(2008, p13)every organization needs a consistent supply of raw materials in which they are forced to organize the transfer of raw materials and at the same time arranges change of ownership and location. The stages within the process is usually very extensive and entails: Identifying organizations needs, defining specific requirements necessary for purchasing, deciding whether the purchase should be tailored, studying the suppliers market together with their market power, listing the existing suppliers, pre-qualifying suppliers, awarding tenders, receiving products and finally evaluating the same products whether they meet the organizations standards. But nevertheless, according to Shoshanah & Joseph (2005, p20) there are four key criteria of a modern supply chain strategy which are mandatory in driving an organization strategic objectives with a competitive advantage, these components and choices have to be: Aligned with an organizations business strategy Aligned with an organizations clients needs Aligned with the power position Finally it should be adaptive since market conditions change A strategy based supplier selection should be employed in selecting the most suitable supplier and it should not only based on metrics such as cost, quality, time and flexibility but rather on a wider strategic perspective that focuses on suppliers capabilities (Roger Moser, p.102, ) This has led to several researches in broader supplier selection and evaluation and as a result the following dimension for selecting value creating suppliers emerged, these were product quality, service support, delivery mechanism, suppliers technical know how, suppliers time to the market, suppliers interactiveness, direct production costs and process costs (Roger Moser, p.114, ) In addition to costs and performances on delivery, organizations should consider how suppliers may directly contribute to product and process technology (Joe, Keong & Keah, 2008, p.57, ) Product & Process technologies: Suppliers products should be updated and capable and the process technologies used in production should be available. Willingness to share information: suppliers should be willing to share their technological information with their clients. Quality: the quality of the product should be high and consistent. Cost: This is the total cost of acquisition which may include, unit price of the product, payment terms, discounts, ordering cost, logistical costs, and maintenance costs. Reliability: This refers to suppliers characteristics such as financial stability and lead time so that the production is not interrupted due to material shortage. Order system and Cycle time: How efficient is a suppliers ordering procedures together with the cycle time involved. This calls for a shorter lead time with the capability to order smaller lots. Capacity: the capacity of the supplier in filling orders with requirements and the ability to fill bigger orders. Communication: There should be proper communication between the two parties. Location: Geographic’s is important because it impacts substantially on delivery lead time, transport and other associated logistic costs. Service: These include warranties and after sales service. Steps in Supplier Selection According to Robert (2007, p165), there are seven key steps involved in supplier selection: 1. Recognizing the Suppliers Selections Needs: Supply managers are usually obligated to the internal clients within the organization. Instead of waiting to be alerted that a selection need exist, supply managers have to become proactive to organization the selection needs. 2. Identifying the Supply Requirements: This stage involves internal and external clients which is critically essential in identifying the required attributes together with their weights that would normally be used in selecting and evaluating a supplier. For instance the ability of a supplier in adjusting his capacity expeditiously due to a changed demand might prove vital especially for the marketing group. 3. Determining the Supply Strategy: Here participants have to address a series of questions and answer them as well as they formally articulate a supply strategy. 4. Identify Potential Suppliers: With the advent of web based technologies and computerized database system, information is usually at our fingertips. Here at this step we are identifying all the potential suppliers. This search process which pertains to a potential supplier is usually a function of several variables which may involve questions such as, is the product new to the organization, its complexity, is there a preferred supplier who is part of the supply base. 5. Evaluate Potential suppliers: This is mainly concerned with the supplier’s capability in meeting their liquidity ratio. Their leverage ratios also have to be considered, are they capable of paying their debts, His activity ratios, profitability ratios have to considered as well, return on equity and overall investments. Other reasons towards elimination may include poor performance history, lack of the required capacity, pending litigation, the supplier might be a direct competitor, workplace infractions and unfamiliarity within the buyers industry. 6. Conducting a formal evaluation: Here the organization has already identified suppliers who are likely to undergo further assessments. Selection decisions may be based on comparing bids and in some other cases it my involve formal supplier assessments with field visits to their offices which is indeed important considering the extreme costs involved in switching suppliers after a contract has been awarded. 7. Selecting the Supplier and Agreement: The decisions pertaining to supplier selection requires insight and cross functional perspectives before making the final decisions. Part of this step entails reaching an agreement and in a certain survey among European businesses, suppliers revealed their willingness to shifting away from clients who had costly and time consuming processes (Robert, 2007) And reaching an agreement between a buyer and a seller may be sealed by simply an acceptance letter which may be formalized by a purchase order. Conclusion Material manager have to oversee performance while the top notch management have to evaluate their effectiveness. Material management entails more than cost reduction measures and methodologies applied towards this approach has to ensure efficiency which includes cost control, work simplification and value analysis (Datta, 2004 p.369,) Therefore a professional materials manager has to deploy the right procedures, tools and techniques before he embarks on his job. Material functions have to be properly controlled and costs and service factors have also to be thoroughly involved (Datta, 2004p.370) References 1. A. K Datta (2004) Materials Management: Procedures, text and cases. 2nd Edition. PHI Learning Pvt Ltd. 2. Douglas C. Long (2003). International Logistics: Global Supply Chain Management, Illustrated Edition. Springer. 3. Joel D. Wisner, G. Keong Leong, Keah-Choon Tan (2008). Principles of Supply Chain Management. 2nd Edition. Cengage learning. 4. John J. Coyle, C. John Langley, Edward J. Bardi (2009). Supply Chain Management: A logistics Perspective. 8Th Edition. Cengage Learning. 5. Joseph L. Cavinato, Anna E. Flynn, Ralph G. Kauffman (2006). The Supply Management Handbook 7th Edition. McGraw-Hill Professional. 6. Kent N. Gourdin (2006). Global Logistics Management: a competitive management for the 21st Century. Illustrated Edition. Wiley-Blackwell. 7. M. Eric Johnson, David F. Pyke (1999). Supply Chain Management. Retrieved March 2010 From http://mba.tuck.dartmouth.edu/pages/faculty/dave.pyke/case_studies/supply_chain_or_ms.pdf 8. Max Muller (2003). Essentials of inventory management. Illustrated Edition. AMACOM Div American Mgmt Assn. 9. Michael H. Hugos (2006). Essentials of Supply Chain Management. 2nd Edition. John Wiley and Sons. 10. P. Gopalakrishnan, M. Sundaresan (2004). Materials Management: An integrated Approach. PHI Learning Pvt. Ltd. 11. R.M. Monczca, R.B Handfield, L.C. Guinipero, J.L. Patterson, D. Walters (2008). Purchasing and Supply Chain Management. 4th Edition. Cengage Learning Emea. 12. Robert A. Rudzki, Douglas A. Smock, Michael Katzorke (2005). Illustrated Edition. Jross Publishing. 13. Robert J. Trent (2007) Strategic Supply Management: Creating the Next Source of Competitive Advantage. Illustrated Edition. J. Ross Publishing. 14. Roger Moser (2007). Strategic Purchasing and Supply Management: A Strategy-based Selection of Suppliers. Springer. 15. Shoshanah Cohen, Joseph Rousel (2005). Strategic Supply Chain Management: The five Disciplines of top performance. Illustrated Edition. McGraw-Hill Professional. Read More