The Challenges ahead in Purchasing and Supply Management - Essay Example

The Challenges ahead in Purchasing and Supply Management Supply management describes a set of techniques and processes that are needed in modern corporate purchasing or institutional buying. The term supply chain means the links that are formed between a firm and their suppliers through its distribution networks and its customers. This form of supply chain management (SCM) is better known as a buyer-supplier relationship1. This can be for the buying of supplies for use within the framework of internal sources that are known as indirect goods, as well as services, buying of raw materials for consumption during manufacturing processes, or for the purchase of goods for the inventory that are to be resold as new products in distribution and the retail outlets. Purchasing and procurement have been used interchangeably in many industries2. In many sectors, the acquisition or the buying of services is referred to as contracting, while that of commercial or industrial goods is known as purchasing or procurement. Purchasing needs to satisfy two primary objectives in business. These are to ensure intact operation in the company by facilitating the economic supply of procurement of goods and services and maintaining the profit levels by controlling the flow of money3. In a supply chain management a vendor or a supplier is known to be an enterprise that provides goods and/or services to the buyers in a supply chain. For any business venture as the distributors and the dealers form its one arm, the other arm is formed by the vendors or the suppliers. It is thus essential to form a good bond with the vendor chain4. Challenges Observed in the Purchasing Department and SCM There can be problems or challenges associated with the purchasing and supply chain management. The challenges can be in the form of: a. Distribution network configuration which can be the number, location, network connections of suppliers, the production facilities, the distribution centers, warehouses, the cross-docks and their customers5. b. Distribution strategy that will consist of the questions related with control whether it is centralized or decentralized or even shared, the delivery scheme which can be direct shipment, pool point shipping, cross docking, DSD, i.e. direct store delivery, mode of transportation etc. c. Trade-Offs in logistics activities that needs to ensure that the activities are well coordinated in order to achieve the lowest total logistics cost. Trade-offs can increase the total cost if there is only one activity that can be is optimized. The trade-offs are the keys to develop the most efficient and perfect logistics and SCM business strategy6. d. Inventory Management that looks after the quantity and location of the inventory that also includes raw materials, work-in-process (WIP) and finally the finished goods. e. Information which involves integration of valuable information through the supply chain which includes demand signals, future forecasts, inventory levels, transportation etc. f. Cash-Flow which looks after the payment arrangement terms and processes for exchanging the funds across the entities that are present in the supply chain. Purchasing and Supply and Management in Petrochemical Industries The petrochemicals industry plays a significant role in many economies. SCM philosophies are used in this sector now-a-days to improve the efficiency of this industry. These industries generally have a multiple chain of suppliers and multiple markets. So it is necessary to plan all activities along the supply chain network. A very important factor that characterizes the planning and scheduling disturbances in the process industries includes the high degree in uncertainty. The stochastic feature of the problem generates from the fact that a number of variables or parameters can be found in the purchasing and supply chain distribution whose value is not possible to be controlled by the decision makers and often involve uncertainty 7. Uncertainty is propagated via the network of supply chain that can be from the markets at supply side, the quantity and quality of the raw materials, to production quality and its yield, and the market economics, as well as customer demands from the second side. Supply chain, as well as supply chain management, is comparatively new term. They crystallize the concepts about an integrated business planning which has been validated by logistics experts, the strategists, and the operations research practitioners8. Components of SCM in Petro-chemical Industries According to Lambert et al. (2000), SCM is considered to be composed of three components which involve the complex but regulated structure of supply chain network which consists of the members firms and the linkages between them, the business processes that are the activities which produces a definite output of value for their customer and lastly management components that includes the managerial variables through which business processes get integrated and are managed all throughout the network of supply chain. Gilmour (1999) suggested the three components of SCM to be the structural components of SCM, information technology input and capabilities, and the organizational capabilities9. Excellence and effectiveness in SCM is based on the technology, the process and its people. Technology is how the company purchase orders get placed with the supplier, via the internet or Electronic Data Interchange also known as EDI or others. It is called the supply chain execution. More importantly it is essential to understand how the purchase orders and its suppliers are managed with the event management team. The use of latest technology enables in revising orders, their levels of priority, their style, as well as the other parameters, the timing and quantities etc. Technology provides visibility in directing and controlling the supplier’s performance, including the happenings with the transport facility and other service providers with the logistics department. Supply management will focus at reducing the cycle time thereby increasing the efficiency and profit levels10. Challenges before Petro-chemical Industry in SCM The challenges that lay ahead the petrochemical industry in terms of their purchasing and supply chain are reservoir uncertainty, crude selection, crude loading and unloading, crude production, trading and pricing 11 . Often companies in the petrochemical industry try to find out for the crude minerals in areas where it might not be available. This can lead to increased cost in procurement and increase the overall cost in the SCM system. Digging in areas where there may not be any hope for crude also increase the time of consumption thereby increasing cycle time. The selection and cost of the crude also influences the supply chain. The properties of the crude vary from one type to the other. The management in the petrochemical company can be faced with many decisions regarding the purchase of the crude mineral and processing it. One of the critical problems in refineries is the loading and the unloading of crude minerals and oil into the tanks 12.The most crucial and expensive operations that are associated with the setup of the tank at each stage before the loading or unloading program can be considered as follows: the configuration of the pipeline networks, such as the opening of the valves, configuration of the pumps, etc. Secondly, filling the pipelines with crude oil, thirdly sampling of the crude oil for chemical analyses, fourthly measurement of the stock of crude oil in tank before the loading or the unloading schedule, fifthly, the beginning of the loading and unloading processes and sixthly, stopping the loading and the unloading process. The crucial aspects that affect the SCM after the loading or unloading stages are configuring the pipeline networks such as closing the valves, checking the configuration and maintenance of the pumps, emptying the pipelines and lastly measuring the amount of crude oil in the loaded and unloaded stages in the tanks. Another crucial problem in many petro chemical refineries is their storage capacity which frequently appears in the refineries and thus multiple usage of the tanks becomes a necessary13. Apart from the above factors there are other challenges like the trading and pricing practices in the petro chemical industries that can affect the purchasing and supple management chain. There are many stages that go in procuring, processing and then finally transforming the crude mineral ready for commercial use. These too contribute in the supply chain management process. Like if the process of distillation is not completed on time, it will increase the other stages which will eventually increase the delivery time from the producers to the suppliers and from them to the ultimate end users. The industry is also faced with inventory problems which directly affects the SCM process. Inefficient and wrong decisions regarding the inventory levels can increase the cost in the SCM process. In a model that was demonstrated by Sterman, it built a common model for inventory management that could be performed in many scenarios, such as placing order for raw materials, production control14. The model could also be used in the macroeconomic levels or in controlling the money stock. All these departments are found in any petro chemical company. This model has two parts. First, the physical inventories with their structures and secondly, applied rules could be used in controlling the systems. According to the theories of Stermen, in most of the practical situations and real conditions, decision making about the inventories, the complexities of reflexive relations amongst different variables refrain the attainment and recognition of the optimized strategy. The chain is made of three loops which are the Producers, whole sellers, retailers with the consumers. The aim of these three groups with the simulation model was that it would help in developing and creating an inventory maintenance politics which would include features, such as increasing the income of the retailer, also reducing the costs simultaneously. Required data and other information could be gathered from the production houses of plants. Data gathering could be done by conducting interview with the executive management, logistic department, department of sale, and the retail agents. The last stage in the simulation model would mean verifying the model by collecting and using data from the real industries and accepting the conclusion that would be generated by the simulated model of CSM15. Lastly, like in any other industry, the petro-chemical industry faces operational problems and from its employees that can arise in its purchasing and supply chain. Different variety of events can occur in supply chain that is mostly unpredictable. This becomes more evident where people like suppliers, retailers, distributors and the workers and employees are involved. Suppliers can make a delivery of a consignment that is ahead of its scheduled time or a late early. There can also be problems of lack in trust between the different suppliers in the chain16. Customers can increase the order, decrease it, or even cancel the same. There can be new customers who might place orders beyond the capacity of the firm. There are problems while delivering or transportation like a machine or a truck that can break down. Employees can become sick or go on a strike or even quit. Also, because of these factors the supplier shipments or the manufactured goods can be poor in quality and standards. Addressing the staff problem is thus necessary. This can be done by separating each element in the pipeline and devising different strategies for each of the respective staffing problems 17. The quality aspect in the petrochemical industry is very important as in the natural gas companies. The supply chain management has to ensure that it produces the product in the right quality and volume, select the best consumer profile and sell the goods using the right distribution network18. Conclusion The success of business in any industry lies in the hands of many departments one of which is the supply chain distribution. Supply chain management is a core strategy that helps in attaining world class performance in productivity thus improving customer satisfaction. Supply chain management (SCM) is defined as a broadened management tool that considers all combined impact of the companies which are involved in the procurement and production of goods as well as services, from the suppliers to the manufacturers, to the wholesalers, to the retailers and finally to the consumers. This particular approach which manages the production and all logistics networks assumes that all companies which are involved in the stages of delivering goods to the consumers are part of the network, the pipeline and the supply chain as a whole. It encompasses everything that is required to satisfy the customers and includes in determining which products the customers would buy, how to produce it, and how to deliver the same. The supply chain guideline ensures that the customers get the right products at the proper time, in the right price and at the desired location. Companies that have practiced supply chain management have reported to have significantly reduced cost and cycle time. A fundamental aspect of supply chain management is to check the chain of facilities, the processes, and the people who procure the raw materials, transform it into products, and ultimately distribute it to the customer in an integrated chain, rather than as a group of separate, interrelated tasks. The importance of the integration cannot be understated because the branches of the chain are the keys to achieve the goal. Every company can have a supply chain, but not all companies manage the supply chain for their strategic advantage. In addition to creating an efficient, integrated firm, the supply chain management can also play an important part in reducing the costs. Partners who are in the supply chain need to be highly flexible. The supply chain strategies can require alteration or changes in the processes and in traditional roles. All members in the supply chain need to be open to the latest methods and ideas. The flexibility and the changes required are often tough for organizations and the employees. It is however the capacity of the company to embrace the necessary changes that would position the company to take advantages of the benefits in the supply chain management. As the supply chain is a fast, dynamic entity, companies are advised to opt for changes. The petrochemical sector has many problems in its supply chain network. Very few producers and industries invest in proper workforce and hardware resources. The importance of SCM in these petrochemical companies is still to make its presence felt. The companies need to anticipate the problems, the resistances and need to be prepared to handle the problem. Training the people and its higher staff in the concepts related with supply chain management could help in this effort. Also, as petro-chemical industries incur huge costs in its procurement and refining stages, proper SCM strategies can help to reduce this as well as. References 1. Al-Abdullatif, Mansour Mohammad. THE CONCEPT AND DEVELOPMENT OF SUPPLY CHAIN MANAGEMENT IN SAUDI PETROCHEMICALS COMPANIES, 2010, http://www.masterstudies.net/media/pdf/Theses/2010/Project-51060136.pdf (accessed on August 8, 2012) 2. Boudreau, John W. Retooling HR: Using Proven Business Tools to Make Better Decisions About Talent. Harvard Business Review Press, 2010 3. Kulkarni, Sarika. Supply Chain Management: Creating Linkages for Faster Business Turnaround. Tata McGraw-Hill Publishing Company, 2004 4. Kazemi, Mohammad Ali Afshar. “Recognition of Demand Changes Pattern of Petrochemical Downstream Products Supply Chain with Continues Simulation”. Contemporary Engineering Sciences, 2, no. 7, (2009): 299 – 317 5. Li, Ling. Supply Chain Management, World Scientific Publishing Company, 2007 6. Mangan, John, Lalwani, Chandra. & Butcher, Tim. Global Logistics and Supply Chain Management. John Wiley & Sons, 2008 7. Pooler, Victor, P. & Pooler, David J. Purchasing and Supply Management: Creating the Vision. Springer, 2004 8. Supply chain management New trends and strategies, 2007, http://www.infosys.com/infosys-labs/publications/documents/setlabs-briefings-scm.pdf (accessed on August 8, 2012) 9. Weele, Arjan J., V. Purchasing and Supply Chain Management, Cengage Learning EMEA, 2009 10. Kumar, Sandeep and Ashish K. Tewary, Scheduling of Loading and Unloading of Crude Oil in a Refinery with Optimal Mixture Preparation, 2009, http://www.infosys.com/infosys-labs/publications/Documents/SETLabs-briefings-SCM.pdf (accessed on August 8, 2012) . Read More