Steps in the Supply Process

Steps in the Supply Process

 

The is somewhat a review of what we covered in Weeks seven and eight, but this iteration of material goes into more detail in the supply process and how it is coordinated with technology.

 

The supply process is important in determining what needs are communicated, to whom, and in what format and time frame.  It is essential to determine when, where, and how the process adds value and when, where, and how the process is best handled by people or technology.  The essential steps in the supply process are: (1) Recognition of need; (2) Description of Need; (3) Identification and analysis of possible sources of supply; (4) Supplier selection and determination of terms; (5) Preparation and placement of the purchase order and requisitions; (6) Follow-up and/or expediting the order; (7) Receipt and inspection; (8) Invoice clearing and payment; (9) Maintenance of records and relationships 

 

  • Recognition of Need – Procurement help the business anticipate its needs.  Supply policies and procedures may encourage or require the use of standardized items, provide procedures for special and unusual orders, and limit rush orders.  Procurement also tracks market conditions, which may necessitate forward buying to protect against supply shortages or increased prices.  Procurement needs involvement early in the conception and design phases when the business identifies its needs.  Early supplier involvement also provides information that may lead to cost avoidance or reduction, faster time to market, and greater competitiveness.

 

  • Description of Need – Procurement must know exactly what internal customers need and want, and this or want should be driven by a clear understanding of the external customer’s need.

 

 

    • Purposes and flow of a requisition – A requisition is usually derived from the purchase order for the customer, and is the document used to communicate needs internally between user and procurement according to established accounting controls.  The flow of the requisition is determined by who needs access to the information to perform their duties, the need for an audit trail, and evidence of proper authorization.  A requisition is a gate keeping tool to manage the flow of information through there gates: (1) authority, (2) internal clarity, and (3) internal clearance
      • Authority – Procurement establishes who has the power (authority) to requisition, prevent unauthorized requisitions, and communicate to suppliers that a requisition is not a purchase order.
      • Internal Clarity – The most effective to ensure accurate requisitions is to maintain a database of commonly purchased items.  Coding structures create efficiency, as well as catalogs help with efficiency and effectiveness of requisitions.
      • Internal Clearance – A buyer or team of buyers should review descriptions before preparing documents to communicate needs to external suppliers.  Quantities requisitioned should match economic order quantities (EOQs) prescribed early in the process.  The delivery date should allow time to secure quotations and samples from suppliers if necessary, and to execute the purchase order and obtain delivery.

 

    • Types of Requisitions – There are several types of requisitions including standard requisitions, traveling requisitions, a bill of materials (BOM), and stores/inventory requisition.
      • Standard Requisition – The following information should be included on a standard requisition:
        • Date
        • Requisition Number (identification number)
        • Originating department
        • Amount to be charged
        • Complete description of material or service desired as well as quantity
        • Date the material or service is needed
        • Any special shipping or service delivery instructions
        • Signature of authorized requisitioner

 

      • Traveling Requisition – The traveling requisition was an innovation used for recurring requirements and standard parts to reduce operating expenses.  The process of determining which items are appropriate for use on a traveling requisition and the flow of information are useful when transitioning to an automated system.
      • Bill of Materials (BOM) – A bill of materials simplifies the requisitioning process for frequently needed line items in organizations that make a standard item over a relatively long period of time.  The BOM includes all materials and parts, including allowance for scrap, to make one end unit.  To make a number of end units, procurement “explodes” the BOM requirements by multiplying the items required by the BOM for each unit by the number of units required.  Comparison of the number of units required with current inventory levels determines how much of each item is needed per the BOM and the number of units (open-to-buy figures).  A materials requirements planning (MRP) or enterprise resource planning system is pre-loaded with pricing information on suppliers with long-term agreements, and order releases are generated to cover the open buy amounts.
    • Early Supply and Supplier Involvement – For purchases that are strategic or of critical value to the buying organization, an organization manages its procurement process with a cross-functional team which consists of internal stakeholders from marketing, finance, accounting, procurement, production, and logistics, as well as external suppliers.
  • Identification of Potential Sources – Supplier selection constitutes an important part of the supply function.  It involves (1) identifying potential qualified sources, and (2) assessing the probability that a purchase agreement would result in on-time delivery of satisfactory product/service with appropriate before and after sale service at lower total cost of ownership.
    • Issue an RFx – When items are not covered in a contract, the buyer has four general options for communicating with potential suppliers, which are listed below:
      • Request for Information (RFI) – Used to gather information about a supplier’s products and services.  Even though the Internet enables fairly quick and easy searches, many supply organizations still prepare and send (electronically or by mail) RFIs to suppliers.  A RFI is not a solicitation for business or an offer for business.  An RFI is for information gathering purposes only.
      • Request for Bid (RFB) – A solicitation for business that is used in a competitive bid process with or without the opportunity to negotiate after the bid receipt.  The buyer develops a detailed bid package similar to an RFP, and the RFB communicate to the suppliers how the final selection will take place.  Bid question usually consist of: (1) Will this be a sealed competitive bid in which the buyer will award the bid to the lowest bidder? (2) Will the bids be the starting point from which negotiations will take place?
      • Request for Quotation (RFQ) – A solicitation for business where there is a clear and unambiguous description of the needs.  An RFQ is basically a price comparison tool for commonly used commodities sold in an open and free market where buyers can obtain quotations at any time.
      • Request for Proposal (RFP) – A solicitation for business which is used for more complex requirements in which price is only one of several key decision factors.  Typically the buyer is planning to negotiate price and terms.  An RFP includes a detailed description of the requirement and invites bidders to use their expertise to develop and propose on or more solutions.  We will do an RFP along with a Statement of Work (SOW) in Week eleven.
  • Supplier Selection and Determination of Terms – Analysis and selection of the supplier lead to order placement.  We will further study selection of domestic and international supplier in Week eleven.
  • Preparation and Placement of the Purchase Order (PO) – The buyer places a purchase order (PO) once the buyer and seller approve and sign a legally valid contract.  The buyer uses a purchase order unless the supplier’s sales agreement or a release against a blanket order is used.  Buyers and sellers should use a PO which has the proper format and reiterates the agreements set forth in the formal contract.  Failure to use the proper PO or contract form may result in serious legal complications or improper documentation.
    • Format – The essential requirements for a PO format include the serial number, date of issue, name and address of the supplier, the quantity and description, date of delivery, shipping directions, price, terms of payment, and conditions governing the order.  The conditions may include example like these:
      • Indemnification clause – to guard the buyer from damage suits caused by patent infringement.
      • Price provisions – such as “if the price is not stated on this order, the material must not be billed at a price higher than the last paid invoice with out notice to us and our acceptance thereof.”
      • A clause stating that no charges will be allowed for boxing, crating, or drayage.
      • Stipulation that the acceptance of the materials is contingent on inspection and quality.
    • Routing – Routing of the PO is important in making the PO a contract.  Giving or sending a PO does not constitute a contract until it has been accepted.  Typically, the supplier sends an acknowledgement to confirm acceptance of the order and to complete the contract.  Without acknowledgement, the buyer can only assume that delivery will be made by the requested date.  When delivery dates are uncertain, the buyer needs definite information in advance to plan operations effectively.
    • Blanket and Open-End purchase orders – These orders reduce costs by reducing the number of purchase orders issued.  An open-end order allows for addition of items and/or extension of time.  Blanket orders are used to buy maintenance, repair, and operations (MRO) items and production line requirements used in volume and purchased repetitively over a period of months.
    • Master Service Agreements (MSA) – the supplier provides predetermined services over a specified period of time with total costs no to exceed an amount previously agreed upon.  The scope of work for each function or level of service is fully defined and agreed upon before the period of performance starts.

 

  • Follow-up and Expediting

 

After issuing a PO, the buyer may follow up and/or expedite the order.  Follow up is a routine order tracking to ensure the supplier can meet delivery promises.  An appropriate follow up date is indicated on the PO.  Progress inquiries may be made by phone, e-mail, fax, or in person.  Early notification of problems such as production scheduling, quality, or delivery enables appropriate action.  Expediting is the application of pressure on a supplier to meet the original delivery promise, to deliver ahead of schedule, or to speed up delivery of a delayed order.  If the buyer has done a good job of analyzing supplier capabilities, only reliable suppliers (ones who will perform according to the purchase agreement) will be selected, minimizing the need for expediting.

 

    • Assess Costs and benefits

 

One of the costs of doing business with a supplier is the cost associated with follow up and expediting.  One needs to match the level of follow up and expediting with the spend category strategy, which is based on the importance of the purchase to the organization.

 

Follow-up and expediting cost should be included in the total cost of ownership for a buyer.  Follow-up and expediting that cost more than the value added in form of process waste and should be targeted for root cause six sigma analysis and either reduced or eliminated.

 

  • Receipt and Inspection

 

The prime purposes of receiving are to: (1) Confirm that the order placed has actually arrived, (2) Check that the shipment arrived in good condition, (3) Ensure the quantity ordered has be received, (4) Forward the shipment to its proper destination (store, inspection, or use), (5) Ensure that the proper documentation of the receipt is registered and accessible to the appropriate parties.

 

The proper receipt of goods and service is critical.  If just-in-time (JIT) inventory management systems have been implemented, materials from certified suppliers or supplier partners bypass receiving and inspection, and are delivered directly to the point of use.  Shortages may occur because material has been lost in transit, short-shipped, tampered with, or damaged in transit.  Physical counts can be forced by blocking receiving from access to the quantity ordered.  If accurate amounts are entered into the system, the PO is closed, the inventory records are updated, and the invoice is cleared for accounts payable to authorize payment.

 

    • Eliminate or Reduce Inspection – If a supplier is capable and reliable, then quality should be in the supplier’s product through its process.  This reduces or eliminates incoming inspection.  In a JIT environment, production parts go right from the receiving dock to production, and this is only possible when the supplier is capable of meeting the delivery windows consistently.

 

  • Invoice Clearing and Payment – An invoice is a claim against the buying organization.  Invoice procedures are not uniform.  Checks and audits of invoices are established based on cost benefit analysis.  The cost of a person’s time to resolve minor variances may exceed the value of the variance.  A decision rule may be used that stipulates payment of the invoice as submitted, as long as the difference is prescribed limits.  Accounts payable tracks variances to identify suppliers that are intentionally short shipped.

 

Supply or accounting may be responsible for clearing invoices.  If information is missing or does not agree with the PO, supply or accounting returns the invoice to the supplier for correction.  Ordinarily, the buyer insists that discounts be computed from the receipt of the corrected invoice, not from the date originally shipped.  Data should match from the purchaser order, receiving, and the invoice.

    • Aligning Supply and Accounts Payable – Accounts payable (A/P) should look to automate as many processes as possible to eliminate paper based processes and speed up cycle times.  This helps with the cash to cash cycle and working capital management for a firm.  A/P should look to pay suppliers upon term agreed upon in a contract thereby aligning procurement with A/P.  There can be conflicts with supply and A/P in that company cash management policies may not coincide with contractual agreements, thereby straining supplier relationships.  Management may put A/P and supply into one department to force goal alignment through structure and reporting relationship.  A/P supply can also serve on joint teams to resolve discrepancies.
    • Cash Discounts and Late Invoices – There are pros and cons of either paying an invoice before or after receiving goods.  From a legal standpoint, goods do not pass to the buyer until accepts them through the receiving process and inspection of the goods.  Much of it boils down to relationship management between the buyer and the supplier.  Suppliers should invoice in a timely fashion which will a buyer to take early discounts and adhere to the provisions on the contract, while buyers should trust their suppliers to pay them early if necessary.  Every relationship is different and must be managed.

 

  • Maintenance of Records and Relationships

 

Accurate records are critical in managing a buyer-supplier relationship and enforcing provisions to a contract.  Basic maintenance of records should include:

  • ·        PO Log
  • ·        PO File
  • ·        Commodity File
  • ·        Supplier History File
  • ·        Outstanding contracts against which orders are placed as required
  • ·        A commodity classification of items purchased
  • ·        A database of suppliers

 

Additional record files may include:

  • ·        Labor contracts, giving the status of union contract of all suppliers
  • ·        Tool and Die records
  • ·        Minority and small business purchases
  • ·        Bid-Award History

 

    • Linking Data to Decisions – Data is important to decision making, but one cannot get bogged down in data (analysis paralysis).  Data needs to be synthesized into pertinent relevant information for decision making
    • Manage Supplier Relationships – Data is important to managing supplier relationships.  This is done in the form key performance indicators (KPIs) and relevant qualitative information.  We will cover this more in-depth in Week 14.