The Most Valued Procurement

Over the past twenty years, outsourcing has become a separate branch of business. The number of consulting companies, providing this kind service is growing.  Accenture, for instance, makes a specialty out of providing services of this type. Information technology specialists, IBM associated with outsourcing as a major part of the business.

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The main change in the different types of relations in outsourcing is the degree of management control in the two companies. The presence or absence of management control can be analyzed using a special tool, a continuum of "make or buy" (see Fig. 1) 

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"Or equivalent".

There is nothing seditious in requesting quotations or proposals, based on the manufacturer's brand or model, frequently followed by the words "or equivalent".In such circumstances, the buyer is trying to move the responsibility for compliance with the required performance on the potential supplier, and maybe, getting better results without spending money and effort to develop appropriate specifications.

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Procurement management starts with defining the needs of internal customers and ends up monitoring suppliers’ performance and relationship with them. In this process, there is a number of separate steps, including the description of needs, identification of potential sources, the choice of the source of supply and the determination of essential conditions, follow-up to ensure the supply conditions, receipt of goods, payment to the supplier, and monitoring. In this article we will have a look at two stages in the management of procurement - awareness and description of needs.

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Forward procurements stand for buying the feedstock, materials, components, and equipment in the amounts which are bigger than the demand, with essential advancing in time when there is no necessity in these product categories.

This kind of procurements lets reduce the negative impact of rising prices on different product categories, also providing protection from the problems rising in future periods gaining the necessary resources.

That is why, under conditions of uncertainty, the companies fall back on forward procurements. It deals with retail trade most of all, when some suppliers propose special prices to their most important customers in the end of quarter, in order to reach the objective KPI of sales.

The example of alternative cost analysis (inventory costs VS savings from forward procurement) is given.

For the purpose of this article, some simple models used for measuring the order size and level of supply are reviewed.

The degree of applicability of those varies relying on the dependence of demand and supply use. Dependent demand means that the produced item makes up a part of a bigger assembly or product, and its use depends on production schedule of the bigger part.

Independent demand means that the use of storage unit is not determined by production schedule, and is directly related to customers’ orders which are coming independently on production schedule.

In this article the easiest way of inventory management is considered: the model with fixed order quantity

Models with fixed period.

Sometimes, it makes more sense to place an order with certain frequency rather than reaching some amount of order. For instance, to divide the work load is easier, when every day, week, month, etc., the employees are directed in order to check certain types of supplies.

According to the model with fixed order quantity, orders are placed after reaching the point of repeated order. And in the models with fixed period, orders are placed only at particular time. That is why the level of supplies should be built up so that no deficiency was formed within the period from order placement till lead-time.

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For the production of substitute components, equipment, advertisement with the fair market price within the limits determined by technical standards and specifications, purchase executives face the necessity of choosing a vendor of uninterrupted supply of feedstock in their everyday activities.

As weird as it may seem, these are suppliers who determine the success of a company project and your own efficiency as a purchase executive. This is why building effective relations with them plays and essential part. There exist two diametrically opposed approaches to building this kind of relations: strategic partnership and fierce competitive procedure.

For giving better characteristics on the mentioned approaches, let’s have a look at American car industry in early 90’s of the 20^th century and the two antagonists: Thomas T. Stallkamp and Jose Ignacio Lopez.

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One of the basic indicators for professional skills of the purchase executive is the awareness of sources of information upon suppliers. Among the instruments frequently used there are: on-line search, electronic sites and web- sites of a company. Special magazines, advertisements, directory of suppliers and trade stock, negotiations with sales representatives, colleagues, professional contacts and own accounts and records are also related to the information sources.

For the purpose of this article, the most wide-spread of the mentioned instruments are reviewed.

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SCORE program has become a ground for bigger concept named Extended Enterprise. 

For better description of this method let’s have a detailed look at what SCORE program is. (Data is based on the results of meetings held in person between Chrysler Company and general managers of their suppliers). The main points of the program are described below.

 What SCORE is supposed to work on:

* Execution;

* Modernization of production process;

* Materials;

* Technological innovation;

* Sales growth of produced output;

* Quality of packaging;

* Reduction of the car weight.

 What SCORE is supposed to work on (2)

* Share fraction;

* Terms of payment;

* Warranty;

* Terms of inventory survey;

* Growth of throughput;

* Quality of packaging;

* Reduction of the car weight.

 What SCORE is supposed to work on (3)

* Terms of transportation;

* Grade;

* Reduction of legalization costs;

* Conserving on equipment and tools;

* Repair parts;

* Information exchange;

* Business relations between Chrysler and its suppliers.

 What SCORE program implies.

Extended enterprise supposes reviewing each participant of the team as fully functional member f a chain in a context of profit distribution. According to this system, each supplier is a mature member of a supply chain regardless of his compay size and status.

Extended enterprise is a philosophy of structuring the mutual relations with suppliers. It was successful due to willingness to let the suppliers show their expert skills. Extended Enterprise concept has enlarged the suppliers’ right of property. In return, Chrysler team expected more profound research projects and technology adoption.

Considering suppliers as well-informed experts and implementing a co-project with them is helpful for creating an atmosphere of partnership instead of isolation from each other.

Principles of Extended Enterprise concept , which are: close communication with suppliers, exchange of the future plans, cost-volume-profit relationship, participation in leadership implementation and long-term reciprocal liabilities during long-term strategic projects, might be applied for the management of any company.

Extended Enterprise concept is an innovation approach to work, implying co-operation with suppliers, creation of trust-based atmosphere and development of common ideas as well as resources for their achievement. A serious and detailed planning and strategic vision are necessary for these purposes.

Complex use of Extended Enterprise ideas by Chrysler showed that cost reduction and gaining profit from close and stable relations with the companies is a merit of co-operation and partnership with the suppliers..

Chrysler example shows that cost reduction for RTD and technological developments as well as sustainable resource use are the most essential achievements of this concept.