Logistics and Supply Chain Management - Essay Example

? Managing Purchase and Supply Textile Spinning and Weaving Mills Bachelor of Business Logistics and Supply Chain Management Academia-RESEARCH Order#533745 ABSTRACT Managing purchase and supply of materials is one of the most challenging and fundamental activity for the efficient operation of an industry. Processes and tasks involved in managing uninterrupted supply of inputs through efficient methods of purchasing are discussed in this report. Causes of risks and its remedy are also addressed. INTRODUCTION A critical discussion is made in this report on the aspects of managing purchase and supply chain and risks associated with it through a case study of “Textile Spinning and Weaving Mills Ltd.” A visit to the textile mill was made and the report is written in light of the information given by the Purchase and Supply department on the condition that their name should be kept anonymous. The managing of purchase and supply revolves around the materials; what is needed when? And who will supply how? Roles of manufacturers, suppliers, agents, transporters, and government agencies are discussed. FINDINGS I have identified seven themes in this section for effective management of purchase and supply chain: Managing Materials, Planning and Building Supply Resources, Ordering and Stock Maintaining, Monitoring Deliveries and Goods Receipts, Controlling and Servicing Consumptions, Stocking Finished Goods and Waste Materials, and Anticipating Risks and Expected Remedy. Managing Materials The first and foremost thing in purchase and supply chain is the identification and recognition of materials. Material is defined as “anything that serves as crude or raw matter to be used or developed: Wood pulp is from which paper is made.”(Material 2011) Materials used in industries are unique and different for each industry. Each and every industry should first identify and recognize the materials which they will need to produce a set of finished goods. Materials also include stores, spares, tools and consumables required for the operation and maintenance of plant and machinery. There are four broad categories of materials in a manufacturing unit and each material that is needed in the process of production will fall in any one of these categories. These broad categories are Raw Materials and Operational Materials which when processed by Plant and Machinery, produces Finished Goods and Waste Materials. A figure given below illustrates it It is also important to understand the properties of materials to make efficient decisions that optimize cost and performance. “Materials engineering involves understanding the correlation between a material's cost, performance, and basic properties. The knowledge gained in the materials engineering approach facilitates timely and well-informed materials decisions relating to new designs, cost reduction efforts, supplier selection, and manufacturing yield improvements.”( Pfeifer 2005) The chief Raw Materials in a textile mill are “Cotton” and “Cones.” The “Cotton” is an agricultural product. It is a crop produced by farmers on the fields and sold to Ginners. Ginners clean and process it in the form of cotton lint and pack it in bales. “The quality of the fibres varies greatly according to the variety, the seasonal conditions during cultivation and the way the crop is handled after harvest. 100 kg seed cotton gives 35 to 42 kg of cotton lint. Cotton fibers are characterized by a longitudinal spiral twist (see picture magnified 630 times), which contributes to an elasticity of about 10%” (Chaudhry 2003) The lint cotton is purchased by the textile mills, processed to produce yarns and cloths. Textile Mills are one of the most important global industries today. Modern textile mills are far more advanced and automated today and therefore needs even more accurate and precise purchase and supply chain. The real world photographs (Loyal Chennai) below show how huge and automated textile mills are today. Spinning and Weaving Mills photograph of a real world Manufacturing of yarn and cloth from cotton is one of the oldest and inquisitive tasks. The main Cotton Manufacturing Processes are Blowing, Carding, Spinning and Weaving. Each of these processes have been segregated into many smaller processes that helped the automation of industry and today we see ultra modern and fully automated textile mills that when gets input of cotton-lint from one end, brings out high quality and sophisticated Yarn on the other end. Purchase and sale of Cotton is a speculative, complex, highly financed and organized trade. There are “Cotton Exchanges” all around the leading cotton growing countries which trade in purchase and sale of Cotton-lint bales. It is a commodity exchange similar to a modern day Stock Exchange. The cotton is traded here through brokers who have the entire latest, international and sophisticated information related to the availability, quality and supply of cotton. Each transaction is recorded, displayed and finalized by the brokers. Cotton Exchanges are independent and autonomous body that trades and control the supply and demand of the Cotton. The suppliers of cotton are Ginning Mills who purchase cotton directly from the growers. The buyers of cotton are mostly textile mills. GARMENT maker Tlway Texco Sdn Bhd (TTSB) plans to set up a Malaysian-based Asian Cotton Exchange (ACE), an international electronic market for investors to trade cotton futures contracts, its chief executive officer said.(Sharen 2007) Purchase of cotton involves huge amount of financing and prudence. Therefore decision for the purchase of cotton is mostly made by the top executive or owners of the mills. Protocols or procedures are seldom followed for the deal of cotton purchase. All purchases are done on phone between owner and the agent of the Cotton Exchange. Many times when prices begin to fall, the owner over-purchase cotton and sell it as soon as prices begin to rise. A deal of cotton purchase is once finalized between broker and mill owner, it is confirmed and executed in the form of a formal ‘Purchase Order’ or informal ‘Paper chit’ The process of ordering finishes and the process of receiving cotton in the mills warehouses begins. Each Cotton Exchange deals with the qualities and varieties of cotton based on the country and the regions where crops are harvested. The working of Cotton Exchanges is beyond the scope of this report. The second most important category of materials is “Operational Materials”. If they are overstocked, dead-stock are left and when understocked risks interruption in production. Inefficient management of operational materials results in higher costs, lower profits and liquidity crunch. MTI Association states the significance of controlling and analyzing operational materials consumption as under:- “For 32 years MTI has been collecting cost operating ratio data showing 30 expense line items (in operations, sales and G & A categories) as a percentage of sales ………”(MTI 2004) In the textile mill, operational materials have two main categories. Stores and spares which are necessary to replace the worn out parts. They are usually imported from the manufacturers of suppliers or bought locally from their resellers or agents. All remaining operation materials fall in the second category. Their needs are usually fulfilled through purchase from local markets. The main sub-categories in this include Oil and Lubricants, Tools and Machinery, Pipes and Fittings, Stores and Spares, Consumables, V-Belts, Ball Bearings, etc. There are about 14,000 materials identified in the Case Study of different materials, sizes, colours, length and weight Once each and every material is classified into a category, a code list is made in the form of “Material Reference Manual”. Coding of items helps in referencing and automating other processes of purchase and supply chain. There are now many standardized list of parts that each manufacturer make it for its own identity. The Material Reference Manual should be updated periodically for any changes or additions of new material as per prescribed procedures. Planning and Building Supply Resources Once we have the Material Reference Manual, the next step is to build a database on the number of suppliers for each and every material through research, phone contacts and market observation. Relationship with high quality and dependable suppliers is one of the most important factors in today’s mass production units. Whether a supplier is friend or foe was discussed elaborately in the following article:- “Japanese carmakers like Honda and Toyota, however, became known for building long-term, close-knit relationships with top suppliers under the keiretsu system, which had OEMs (original equipment manufacturers) owning a percentage of its top suppliers.”(Hannon 2003) The purchase department must have knowledge about all his suppliers’ personal information, competitors (who supply same products), production and supply capacity, proximity to factory, transportation used, delivery time, quality, minimum acceptable order, etc. This is elaborated further as under:- Minimum Stock Level; stock not to fall below this quantity Maximum Stock Level; stock not to rise above this quantity Reorder Level; stock which alerts to place new orders Making of a profile for each material with above given information is one of the most critical works. Information in such a database must be accurate, updated and recent. It is through this information order is planned and materials are received. Today, mostly all the textile mills uses highly comprehensive computer programs designed for maintaining such a data base and generating all the required reports. Order planning takes into consideration minimum and maximum stock levels, reorder quantity for each material, days required for order processing, transportation time, closing stock and undelivered orders quantities which are at port, in transit or unshipped. Once a report is made as to whom, when and what to order, a management meeting is called to approve it. The cash flows required are discussed, production priorities are viewed and if necessary a set of new parameters are defined to generate a new report based on the constraints of finance and production. Once the RE-ORDER REPORT is approved the process of ordering begins. Ordering and Stock Maintaining, Orders are placed to the approved suppliers through “Purchase Orders” with all the necessary terms of payments, delivery and quality. Prices are constantly negotiated each time a new order is placed; similarly alternative source of supplier is also researched. The Material and Supplier database is constantly updated with new additions. Some items which are very common and available from many vendors, are enquired and quotations are called for from each one of them. Mostly the lowest bidder for identical quality and quantity is given the order. In case the materials are imported, a “Proforma Invoice” is called from the overseas supplier or “Indent” is received from the local agent of the suppliers. Based on this document, a “Letter of Credit” is opened in favour of the foreign supplier mentioning all the terms and conditions of purchase contract. Goods are mostly dispatched through cargo ships by sea. When vessel on which goods were shipped, arrives on destination port, the goods are inspected by “Customs Department”. Any applicable tax is received by them after which goods are released which then arrives to warehouse. In the meanwhile, bank through which Letter of Credit was opened also claims payment based on the Exchange Rate prevailed at the time of making payment. This whole process of purchase is generally called “Imports” as illustrated in a figure below. Monitoring Deliveries and Goods Receipts All orders are constantly monitored to ensure delivery of materials on time. When goods are received in the warehouse, a “Goods Receipt” note is generated, having a reference of Purchase Order. Materials received are checked for quantity and quality as per the defined procedures of the management and a stamp of approval is affixed by the store keeper. All Goods Receipts are entered in the computer program for updating stocks and adjusting balances of Purchase Orders, Goods in Transit, etc. which completes a procurement process. This cycle of ordering and purchasing continues as the stocks are constantly consumed through production. Controlling and Servicing Consumptions Information of materials consumed daily is always needed by the purchase and supply department. All consumptions are recorded through “Store Issue Slip” and as each transaction is updated, stocks are reduced and all the other adjustments made accordingly. This is done through network of systems. Real time information about materials consumption is therefore always available. Stocking Finished Goods and Waste Materials The process of manufacturing constantly produces Yarn which are packed in Bags and placed in stock. Waste Materials released are also stored. Most of the yarn is exported while some of it is used for weaving section of the factory. Weaving section produces Cloth. The real world photographs (Loyal Chennai) below show Yarn, Cotton Crop and Cotton garments produced by modern days textile mills:- Photograph of a real world Cotton Crop Yarn Cotton Garments Anticipating Risks and Expected Remedy Risks in supply such as delay, scarcity, price surge, unavailability, unacceptable quality, and shortages should be anticipated due to uncertainties of life. Delay in supply The delay in supply means non-delivery of goods as promised by the suppliers. Any such event could have damaging effects as can be seen well from this real world example:- “Giving evidence to the Commons Defense Select Committee, Burridge told lawmakers that other supply delays involved body armor and lightweight desert uniforms.” (Xinhua News 2003) To handle any such event, it is necessary that an alternate source is always planned. A constant monitoring of orders is also very essential. A track record of such a supplier should also be considered while planning any future orders. Scarcity Scarcity generally occurs when materials demand go exaggeratedly high due to rapid increase in consumptions or sudden fall in supply. In case of increased consumptions, alternative sources of productions should be set. Causes creating sudden fall in supply should be addressed to resolve scarcity as is done in the article ‘The Various Causes of Water Scarcity in the World’, (Edwin 2011) Price Surge Price Surge occurs when people having huge finances hoards all the materials from market until selling price reaches their desired level. Stocks level must me planned to copy with such contingencies. Unavailability Unavailability of materials arises out of natural disasters destructions and devastations caused by earth quake, tsunami and floods, political instability and war as it interrupts normal life. ‘It is generally accepted that being prepared for a disaster is simply good business practice and essential for reestablishing the business after an interruption.’(Carton, Lockwood, Richmond, 2006) Unacceptable quality It may happen seldom that the quality of the goods received is contradictory to the orders given. Penalty clause for such a situation is added in the purchase contract. Goods are returned and alternate supplier is reordered. Shortages It is the result of pilferage or mishandling while loading and unloading the goods during transit. Shipments are, therefore usually insured. Specifying correct packing and transportation conditions while placing orders prevent such incidences. CONCLUSIONS Today the world is a global village. A distributed network system of internet is bringing real time information to each and every corner of the world. “Delivering great breadth and depth of functionality, it supports end-to-end processes that address the unique business demands of more than 25 industries.”(SAP 2008) Even SAP today is restricted with only 25 industries. It is absolutely important therefore to practice the seven themes discussed in this report to efficiently and effectively manage purchase and supply chain. REFERENCES Pfeifer, Michael, August 1, 2005, ‘Minding the materials: how to take a materials engineering approach to product design (testing, quality and standards)’, Appliance Design, viewed May 12, 2011, http://www.highbeam.com/doc/1G1-135380748.html Material, 2011, "Define Material at Dictionary.com”, viewed May 12, 2011, http://dictionary.reference.com/browse/material Chaudhry, M. Rafiq, Guitchounts, Anderi (2003), "Cotton Facts”, viewed May 11, 2011, http://www.organiccotton.org/oc/Cotton-general/Plant-and-fibres/Cotton-lint.php Loyal Textile Mills Limited, Chenai, "E-Brochure”, viewed May 11, 2011, http://www.loyaltextiles.com/vision.html Sharen Kaur, May 2, 2007, ‘TTSB plans local-based Asian Cotton Exchange’, New Straits Times, viewed May 12, 2011, http://www.highbeam.com/doc/1P1-138837424.html MTI Association News, September 1, 2004, ‘Annual operational cost survey’, Industrial Heating, viewed May 12, 2011, http://www.highbeam.com/doc/1G1-122769848.html Hannon, David, February 6, 2003, ‘Suppliers: friend or foe? Traditional supplier management strategies begin to blur in the automotive industry. (The Automotive Buy)’, Purchasing, viewed May 12, 2011, http://www.highbeam.com/doc/1G1-97920168.html Xinhua News Agency, June 11, 2003, ‘British commander admits supply delays for UK troops in Iraq’, Xinhua News Agency, viewed May 12, 2011, http://www.highbeam.com/doc/1P2-13409561.html Edwin. S, March 11, 2010, ‘The Various Causes of Water Scarcity in the World’, Sachig.com Category Nature, viewed May 12, 2011, http://www.saching.com/Articles/The-Various-Causes-of-Water-Scarcity-in-the- World-254.html Carton, Robert; Lockwood, Frank; Richmond, William, January 1, 2006, ‘DISASTER LOANS: DOES PREPAREDNESS MATTER?’, ‘The Entrepreneurial Executive’, viewed May 12, 2011, http://www.highbeam.com/doc/1P3- 1301937681.html Supply Chain Management, 2008, "SAP Solution Over-View”, viewed May 11, 2011, http://www.sap.com/contactsap Read More