Procurement and Inventory Management - Coursework Example

Procurement and Inventory Management Q1. Develop Process Chain: For the given supply network develop a process chain diagram that illustrates the ordering and supply processes between suppliers and the Teddy Bear Company. You may apply the process chain or the SCR-Model for designing the process chart. The supply chain process diagram below is based on the SCOR Model Process or the Supply Chain Reference Model. It is an analytical device used for any Supply Chain Management System. The SCOR Model is supported by three very significant aspects, which are: 1) the Process Modelling Factor, 2) the Performance Measurement Model and 3) the Best Practices Sharing (Exforsys Inc., n.d.). The process modelling factor of the supply chain management is composed of five management processes and principles, which are (Exforsys Inc., n.d.): 1) Plan, 2) Source, 3) Make, 4) Deliver and 5) Return. The plan is comprised of the demand and supply that involves planning and management. At this stage of the supply chain a relationship is being established between the resources and requirements, which are basically the supplier and the customer. Because both parties are related to each other, the plan stage ascertains whether both are on an equal footing or not. After which the demand and supply chain are planned, wherein the information is disseminated to the entire supply chain that includes the source, make, deliver and return. The plan phase likewise entail the management of the business rules which is different from the “collection of data, capital assets, regulatory factors and compliance.” Essentially this stage supports the supply chain management plan with the financial plan (Exforsys Inc., n.d.). The source phase of the supply chain is made up of the delivery schedules, receiving of stocks, and verification and transferring of the product. It likewise control business rules, appraises the supplier’s performance and reliability. It also amasses data and properly preserves it. The source stage also keeps in order the management of inventory, the incoming of products, capital assets, regulations on import and export, the network of suppliers and the contracts that bind them together. The make step is the stage where production activities are scheduled, settles the quantity to be produced and deals with packaging, distributing and finishing the merchandise. It likewise oversees issues regarding production, performance data, production networking along with the equipment and facilities given. The shipment concerns and fulfilment of manufacturing are also dealt with in this stage. Next comes the deliver phase that puts emphasis of having contact with the customer or client. During delivery, customer inquiries are generally arises. It also involves the quantity of merchandise to be delivered. This is a very important step of the supply chain since customer contact is established. This stage also deals with shipments and the management of warehouse where materials are received and picked-up for delivery. To institute a good relationship with the client, the business site could receive the product in-behalf of the customer and install it at the required location. This practice is termed as “end-to-end servicing”. Last but not the least on the principles of the SCOR Model is the returns. Having a product returned could be due to various reasons and conditions in the entire business procedure. The common reason behind such returns is defective products. Products which are returned go through various processes of inspection and evaluation once the product has reached the distribution and manufacturing sites. The evaluation and inspection procedure involves defining the condition of the product, disposing the product, scheduling product transport or shipment and returning the defective merchandise or good. Aside from defective products, returns are also done when there is an excess in quantity of products that were delivered. And this usually comprise the big volume of returns. Normally, the excess is generated at the inventory level which is calculated meticulously. When inventories are restrained by using the supply and demand factor, surplus or excess deliveries could be largely minimized. And when there is less products in excess, time allotted for fixing damaged products could be fully maximized so that return or shipment of said product or good to the customer is hastened. The Performance Measurement Model on the other hand serves as a source of important data and information, assessment and comment or feedback. It aids in the appropriate assessment of the supply chain model where the data is split up at every step of the procedure. It also contains metrics at the various level of the supply chain and is used side-by-side with the factors that comprised the Performance Measurement Model. However, said metrics are not directly relevant with the Plan, Make, Source, Deliver and Return. At the phase of the Best Practices Sharing Model, the deficiency of the supply chain becomes visible – and this only happens after the Process Modelling Factor and Performance Measurement Model are accomplished. As the breaches within the model chain become evident, fillers should be established to close said breaches or gaps. But these fillers must be tried and assessed thoroughly before being implemented and applied. And this is where the Best Practices Sharing Model comes in, since it gathers pertinent information or data that would work well with the current business that needs an appropriate chain of supply. The focal point of the SCOR Model is mainly on customer interaction, which begins once the order has been placed until such time that the invoice or billing has been paid. Additionally, the SCOR Model also puts emphasis the product transaction and it does not matter whether the good offered is a “service or physical object”. It takes account of the equipment utilized to generate the product, along with all the raw materials which are bought from suppliers that are scrutinized for both quality and competence (Kietzman, 2009). In congruence to the foregoing, the normal stages of a supply chain starts with the ordering process and ends with the making of an invoice. The order process is an agreement between the supplier and the contractor which simply involves buying raw materials from a chosen supplier. The contractor and supplier should each have a master’s order list that presents an approved product list where products to be purchased and the prices of each item are drawn out. In a business supply chain, there are three (3) processes that should be worked on and incorporated with the principles of the SCOR model. These three processes are: 1) the Order Process, 2) the Delivery Process and 3) the Billing Process (Supply Chain Process, n.d.). The order process which is between a customer and a supplier or a contractor and a supplier sometimes do breakdown due to the following issues (Supply Chain Process, n.d.): 1. Misinterpretation of Requirements This is usually a result of orders which simply gives a basic description of what is needed or required. Sometimes the specification of a product code is incorrect. Orders made through phones are more prone to having a misinterpretation of requirements. 2. Insufficient Stock There are cases when suppliers are out of stock on a particular item but are unaware of the fact until the picking time comes. Hence, the site of delivery may not receive all the ordered items which are needed. Likewise, the supplier substitutes one specified items with another if the so ordered item/s is not available. 3. Picking Discrepancies The mistake in picking/batching of products will only be determined once the products are already delivered to the site. 4. Site not Advising Head Office Delivery sites or distribution centres often forget to advise the head office of orders that were recently placed. This places the head office in a position where it is unaware of the cost that is incurred with the transaction, until such time that the invoices or billings arrive from the supplier. And that make cost control quite complicated. 5. Incorrect Details Recorded in the Head office System Orders which are erroneously recorded in the head office are in general due to a misinterpretation of the requirements given by the sites. The delivery process is the phase where the required supplies are unloaded and matched with the order and delivery lists. However, like the order process beforehand, the delivery process also fails at one point or another due to the following (Supply Chain Process): 1. Handwritten Adjustments on Delivery List Manifesto Every delivery lists must be checked by the supplier for handwritten changes. This generally causes error on missing changes that are made and in the interpretation of the handwritten changes on the delivery list. 2. Unsigned Delivery Manifesto Not being able to locate authorized signatories means that the delivery manifestos remain unsigned and undelivered for sometime. Also, some items are delivered to sites where there is nobody to accept and sign for them. Suck manifestos or delivery lists are often signed at a later time by a site manager. 3. Unauththorized people Signing Manifestos Authorized signatories for delivery acceptance sometimes cannot be located once the items are delivered on the site. And when this happens staff or personnel not authorized to sign for the deliveries affix their signatures just to have the items unloaded. 4. Delivery Manifestos or Lists not being sent to Head Office Missing delivery lists are not filed properly and copies are not sent to the head office for report and collaboration purposes. 5. Interpretation of items on Delivery Lists Often staffs that put information on delivery lists/manifestos are not familiar with the details of the products delivered. This results to making the task of selecting the correct codes for the items very difficult. 6. Administration Effort Administrative staffs of both the contractor and supplier are engrossed with other work details and concentration on having a well-organized workforce in making an efficient delivery system is overlooked. The billing process which involves demand for payment is typically the final stage of the supply chain process. Some companies use the regular post to send invoices, while others send them through email via the intranet. However, sending billing/invoices via email may have VAT repercussions and does not suit requirements for revenue filling or report (Supply Chain Process, n.d.). The billing process like the first two processes is often breached when the following happens (Supply Chain Process, n.d.): 1. Missing Delivery Lists/Manifestos Reconciliation between the sent invoice or billing and the delivery lists becomes quite handful because it would necessitate having to request copies of delivery lists to be compared with the invoice. This takes additional time to accomplish. Consequently the bill is not paid on time and the amount of payables increase for the time being. 2. Lack of Visibility When an invoice arrives at a site or distribution centre, it is sometimes found out that an item which was sent by the supplier was not the one ordered and needed. However, it was already used to manufacture and produce the finished product. Once this scenario happens it would entail rectification that requires additional expenses. 3. Cost Overruns The site or distribution centre has ordered items which are more expensive and this would bring about additional overhead costs Taking all the processes and principles involved in having a model supply chain, the above diagram depicts that the chain of supply normally starts with an order from the consumer or customer. Once an order is made to the Teddy Bear Company where the products come from, it is recorded and transmitted to the department which is in-charge of putting in order of raw supplies or materials from various suppliers. On the side of the supplier of raw materials, the order is likewise picked up and recorded. After being recorded, the required supplies are dispatched to the warehouse and unloaded. This being done, the supplier’s staff at the warehouse updates the dispatch details, recording the items that are present and also taking note of the items which are out of stock. Once this is completed it sends the items to the supplier head office or distribution centre of the supplier, where the items are checked and match with the order list. At this point, the staff or personnel in the supplier’s head office updates the delivery list and matches it with the order list. Likewise, taking note if all the ordered items are present or if there are items which could not be delivered because the stock is out. After this is completed, shipment is arranged and the materials are now transported to the Teddy Bear Company manufacturing plant or factory for production of goods and inventory of supplies. Upon delivery of the raw materials at the Teddy Bear manufacturing plant, the supplier should have the delivery list or manifesto received by an authorized signatory. If everything conforms to what has been ordered and it matches the delivery list, the supplier has the option to either bill Teddy Bear Company upon shipment or at a later date if an agreement to such has been done beforehand. Within the manufacturing plant of Teddy Bear Company, all materials are accounted for and the products are assembled and finished. The volume or quantity of production is likewise determined to provide sufficient time for manufacturing and shipment. When the finished products are delivered to the distribution facilities, inventory and quality check is also done before the finished teddy bears are actually delivered to the customer. If the customer is satisfied with the product then an invoice or billing could be forwarded for payment. However if the product is damaged, there is a need for the customer to return the product to the distribution facility which in turn will return it to the manufacturing plant for evaluation and rectification. Once the product has been fixed, it would again be shipped to the customer who will be billed at a later date which concludes the business. And provided of course that the product which was re-shipped is damaged free and satisfies the customer. The supply chain for any kind of business must always be customer centred because the supply and demand always start with a client placing the order and the client paying for the order once the goods are delivered. While many issues may arise within the whole course of the supply chain due to one reason or another, the proper implementation of checks and balances on the overall process would lessen problems on additional costs and would provide greater opportunity in having an increase in profit margins without sacrificing customer satisfaction and product quality. The Supply Chain Process Diagram Q2. Explain the advantages and disadvantages for the Teddy Bear Company if management of inventory is shifted from the stores to the manufacturer of the Teddy Bears. The disadvantage for shifting the management of inventory from the stores to the manufacturer of the Teddy Bears is that it would entail additional work for the manufacturer to keep track of all supplies inventory, which is from the raw material supplier until the product is delivered to the end consumer. But aside from this particular drawback, when the management of inventory becomes the responsibility of the Teddy Bear manufacturer, the retail supply chain becomes integrated at all levels (Doherty, M. et al, 2003). The retail supply chain is more or less depicted by lack of integration or incorporation between all the major players, and trust among supply chain partners. Ideally, there is one replenishment method in the retail stores, another system at the DC level and another system for the manufacturer. Hence, each supply partner develops a forecasting technique for its own sole needs, which is totally independent of its partners. So when inventory is given to the manufacturer, it generally receives a time phase requirement from the retailer. Thus, the needs of other retailers are likewise consolidated by including the time phase requirements as per retailer. This is the basis for what must manufactured and when (Doherty, M. et al, 2003). The requirements for materials are obtained from this and are subsequently corresponded to the suppliers of raw materials. As sales take place and inventories alter, the integrated supply chain refreshes its plans and adjusts accordingly. The new plans are usually based on the changes where they actually took place. Also, time phased plans are tailored exactly to the needs of each supply chain partner, which are based on the latest information available (Doherty, M. et al, 2003). By taking on the management of inventory, the manufacturer of the Teddy Bears could (Doherty, M. et al, 2003): 1) forecast activity in one place, 2) re-calibrate itself to changes in the market and, 3) provides visibility. Being able to forecast an activity or activities in one place is advantageous for the Teddy Bear Company because it could focus on the demands of the consumer which is definitely the only independent variable within the supply chain. Consequently, the other aspects within the supply chain are dependent variables which are based on the consumer demand. Hence, when the demand has been forecasted, the calculation could be done in a simple and straightforward method. And sharing dependent demand between all players integrated in the supply chain. Therefore, all the players in the supply chain serve only or cater only to the satisfaction of the end consumer. The supply chain is continuously adapting to the changes in the market and often re-calibrates itself according to the changes which develop. When things do not come out as planned or as expected, the entire supply chain is immediately re-planned to accommodate the change needed. Since each participant in the supply chain providing information to suppliers that could actually be acted on, the appropriate changes to the demand is both automatic and instantaneous. Visibility provides (Doherty, M. et al, 2003): a) Realistic order lead times, b) Proactive replenishment planning, and c) Proactive capacity and financial planning. Since visibility is supplied in the form of “actionable information”, realistic ordering lead times can be established. Surprise orders and uncertainty are reduced within the supply chain through proper integration, where lead times does not necessitate safeguard. As for proactive replenishment planning, planners are provided with the capacity to foresee and resolve any probable problems before an actual crisis develops or emerges. Since planners now have demand, supply and inventory levels estimated, the detection of possible stockouts could be accomplished and suppliers could be informed about early deliveries before inventory in reality becomes zero. Proactive capacity and financial planning gives the advantage of having “a forward-looking system” that allows significant planning data/information within the other areas or level of the organization. Forecasts on unit demand, inventory balances and schedule of supply may be used as a basis for scheduling along with outbound and inbound scheduling. Likewise, the price and data cost of each item could provide cash flow forecast and evaluate future margins or profits. Q2. Explain available concepts for supplier or vendor managed inventories. Describe the influences on the ordering process. Two available concepts for the supplier or vendor managed inventories are the continuous replenishment program (CRP) and the vendor managed inventory (VMI) (Intentia, 2001). CRP or continuous replenishment program is an effective replenishment concept in the efficient consumer response (ECR) place. It aims to improve and further develop the course of products in the supply chain, forward to the customer or end consumer; and backward to the supplier (Intentia, 2001). The objectives of CRP are: to increase inventory returns, minimize inventory levels, decrease or reduce service level, improve customer service levels, enhance warehouse efficiency, and improve trading partners’ awareness of value. VMI is an understanding where the supplier and not the customer settle on when and how much of the customer’s stock is replenished. It is one way of cost cutting and keeping levels of inventory at acceptable levels within the supply chain. VMI centres on guaranteeing that products are replenished and stocked efficiently without the need of having manual information like transferring orders among suppliers and customers. The “automatic electronic message” is employed to track the present stock circumstances and plan sales forecasts. Thus, it could be determined when the time to refill stock and avoid stockouts is supposed to be accomplished. VMI also involves the process where the customer is invoiced “directly at shipment” or “after selling the products to their own end customers (Intentia, 2001).” This concept or idea is termed as “consignment stock”. Consignment stock is a marketing agreement where the “physical control of the merchandise is transferred from one business (consignor) to another (consignee). As consignee, the right to the title of the goods remains under the consignor until the goods have been purchased and sold. As a result, stock consignment is not integrated or shown as an asset in the books of the consignee (Intentia, 2001). The objectives of VMI are: to increase in-stock inventory, add to sales, enhance customer service, maximize gross margins, decrease overall inventory in the whole supply chain, and alleviate vendor’s production. Taking the VMI model from the suppliers point of view, the following activities exist (Intentia, 2001): receiving stock levels from a customer; receiving sales forecasts from a customer; generating replenishment orders when needed; sending dispatch advice to a customer; receiving sales reports from a customer; and sending invoices to a customer. Looking at the above activities, the first pace is where the supplier receives information on the availability of the product through electronic data interchanged or EDI. But needing to forecast future sales and when and how to replenish stock, the supplier develops a planned or scheduled replenishment order for the customer. The whole concept of VMI is based on the suppliers producing the replenishment order, not the customer. Upon delivery of the product, a dispatch notice is sent electronically and regular delivery takes place. Then the balance of inventory is brought up-to-date. The next possible situation is the determination of agreement between the customer and supplier. If a consignment agreement was drawn, the supplier will not be paid until the goods are either sold or used by the customer. This will require the customer to send back a sales report to the supplier which commences the process of invoicing. Another way is to directly invoice the customer at shipment. The efficiency of continuous replenishment program (CRP) and the vendor managed inventory (VMI lies with having an established electronic data interchanged (EDI) since it comprises the entire “business-to-business communication” (Intentia, 2001). The main concern with being able to maximize the benefits of an electronic data interchanged is the fast turn around that happens with technologies in the internet, and because it is a system which is expensive to put into operation. But practically speaking, the electronic data interchanged process will not be substituted overnight by incoming latest technologies as the process of change that may take place is gradual (Intentia, 2001). The vendor managed inventory (VMI) still uses EDI or electronic data interchange. The procedure normally begins by receiving stock inventory data or information that is re-evaluated by the manufacturer on a daily basis. After having received the pertinent EDI files from the retailer or distributor, all other information like sales forecasts or the making of any replenishment order are consolidated or collated. The usual flow commences from the acknowledgement of the order, and then proceeds to the transport or shipment of the finished products, after which the invoice or billing is forwarded. In the same manner, EDI also supports the transfer of funds for payment which happens when the account of the customer is debited of the appropriate amount of money. Messages or information which is commonly gleaned in a CRP-VMI system through the use of an EDI are: the inventory report, sales forecast, order response, dispatch advice, sales report and the invoice (Intentia, 2001). . References Doherty, M. and Harrop, J. (2003). Integrating the Retail Supply Chain. [Online]. Available: www.demandclarity.com. [25 January 2009]. Exforsys Inc. (n.d.) SCOR Model Process: Execution for System. [Online]. Available: http://www.exforsys.com/tutorials/supply-chain/scor-model-process/1.html [19 January 2009]. IBM. (2005). Order Flow Process – Value Chain Supply Model, Supplier’s Store [Online]. Available: http://publib.boulder.ibm.com/infocenter/wchelp/v5r6m1/index.jsp?topic=/com.ibm.commerce.user.business.doc/concepts/cosoflowvalsu.htm [21 January 2009]. Intentia. (2001). Continuous Replenishment program and Vendor management Inventory. [Online]. Available: http://www.vendormanagementinventory.com/crp.pdf [23 January 2009]. Kietzman, Shannon. (2009). What is SCOR? [Online]. Available: http://www.wisegeek.com/what-is-scor.htm [19 January 2009]. Supply Chain Process. (n.d.). [Online]. Available: http://www.cita.ie/member_benefits/documents/module_2/070321-SupplyChainProcessDiagram.doc [23 January 2009]. Read More