Procurement and Materials

Management - Introduction

Arvind Tiwari
Guest Faculty IIFT

Overview

Industries in daily life

Objective
GP
Supply Chain
Procurement Importance
Product Cost
Quality
Availability
PMI

Evolution

Introduction
Procurement and Materials Management as it is
practised in the industry
There are similarities and differences across
industries and there are specific reasons for it
During the day and everyday we use various products
without thinking about much about them
They come from different industries
Within each industry or product category also
different organisations operate differently depending
on their business strategies and positioning

Industries in daily life

FMCG Industry

Toothpaste
Toothbrush
Soap
Shaving Cream
Shaving Razor
Deodorant / Aftershave / Perfume
Cosmetics
Moisturiser

Sanitary Fittings
Metal fittings
Ceramics

Industries in daily life

Apparel
Footwear
Consumer Durables
Geyser
Refrigerator
Microwave
Induction Cooker
Toaster

Industries in daily life

Furniture
Home
Office

Food Industry
Processed
Pre cooked
Cooked to order

Lighting
Domestic
Industrial / Commercial

Industries in daily life

Transportation
Public Transport
Private

Consumer Electronics & Computers

TV
Mobile phones
Computers
Printers
Photocopiers

Industries in Daily Life - Services

Mobile
Internet
Restaurants
Couriers
Transport
Hospitals
Banks
Coaching Institutes
Physical products required for services to exist or
support the services in most cases

Industry Structure
Each industry is structured and operates in its own
way for specific reasons
One of the most important reasons for the structure
is Cost of making the product available
Market competition decides the Price so the
company with the best cost structure is the most
profitable in that industry segment
The Supply Chain is becoming increasingly important
in each industry and therefore so is Procurement
We will focus on Procurement in B to B situations

Objective
Organisations have Vision & Mission and
statements
Vision & Mission
Universal all parts of the world
All business segments
Stated or unstated

Common Objective
Growth
Profitability

GP
Grow Profitably GP
GP also stands for Gross Profit
Everyone in the world just loves GP because
GP drives
Stock Price
Shareholder returns
Bonus
Promotions
Increments
Investments and therefore growth

How to GP ?
What is required to Grow Profitably ?
Product(s) / Services , Strategy , Execution
Business Plan

Components of a Business Plan

Current Products
Quantity
Quality
Price & Cost
New product availability

The Supply Chain

Who makes available
the right product
of the right quality
at the right cost
in the right quantity
at the right place
at the right time

The Supply Chain

It is not companies competing but their
Supply Chains competing in the Market

Procurement / Purchasing / Sourcing

Supply Chain Management
Management of activities pertaining to movement
of materials and information in the Supplier to
final Customer chain

Materials Management
Portion of the Supply Chain within the
Organisation

Procurement
Management of activities in the interface
between the Supplier and the Organisation
Diagram

Procurement Importance Product Cost

In a manufacturing organisation close to 60 %

of the Product Cost is Material Cost
Organisation today focus on Core
Competencies outsourcing the rest.
So most of the Material Cost is from bought
outs
More and more organisations are buying fully
made products from Suppliers
Contract Manufacturing
Apple Products

Procurement Importance Product Cost Break Up

Manufacturing Organisation Typical Product
Cost breakup (%)
Material
Labour
Overheads
Finance Cost & Depreciation
Profit

- 60 to 65
- 8 to 10
- 12 to 15
- 3 to 5
- 10 to 15

Procurement team is biggest spender in the

organisation

Procurement Importance Impact on Profit

Impact on profit of 2 % reduction in Material Cost v/s %
increase in sale required to achieve same increase in
profit
INR Mn
Sales
100
Material Cost
60
Other Costs
30
Profit
10
5% reduction in material cost adds INR 3 Mn directly to
profit
To add the same to profit Sales need to add INR 30 Mn or
30%

Procurement Importance
Finished product quality depends on bought
out quality
In many cases the finished product itself is
bought out
So customer experience of the product
depends on bought outs
The brand owners name is made or unmade
depending on the suppliers performance
More than cost this is the key reason for
importance of procurement

Procurement Importance
More parts bought out less made inhouse
More critical parts / sub assemblies /
assemblies bought out
Timely production depends on availability and
quality of bought parts
Inventory also depends on the same
Inconsistency in bought quality requires
higher inventory to avoid disruption

Procurement Importance
With parts outsourced the plants are mainly
used for assembly and testing
Assembly line concept
No. of parts in a passenger car over 2500.
varies with level of aggregation
Non availability of even one part can stop
production wasting time and money
Procurement is responsible for keeping the
line running

Procurement Importance
Important to chose the right supplier
More competent domestic suppliers available
More competitive International suppliers available

Frequent new product launches possible with

supplier technology and innovation
Suboptimal performance in procurement has
an adverse impact on entire business
The human factor on both sides of this
interface can make or break things

Procurement Importance
Representative of the company to its supplier
community so it creates a good (or bad) image
of the company outside
Represents the supplier community inside the
organisation
How an organisation views a supplier, its products,
competence, capability , technology & services etc
depends on the Procurement interface
Used improperly an organisation can lose good
suppliers and become dependent on bad ones

Procurement Importance
Interacts with all other functions in the
company
Marketing new products
Sales forecasts
Manufacturing feeds the production
Quality product quality
Engineering specifications and drawings
Finance supplier payments
Legal contracts
HR & Admin procures services for admin
So wherever you are you will be dealing with them

Procurement Importance Purchase Managers Index (PMI)

Purchase Managers Index
most widely used indicator of economic activity in
a country

> 50 indicates growth in economy

< 50 indicates contraction in the economy

Procurement Evolution
Traditional Purchasing
More parts were made inhouse and only less
critical ones purchased
Supplier treated almost like an adversary
Approach was transaction based
Focus was on getting the lowest price
Other parameters like quality and delivery were
not considered that important

Procurement Evolution
Traditional Purchasing Impact
Very little connect between Supplier and
Customer
Predominant focus on price led suppliers to
compromise on quality
Timely delivery was also impacted due to
suppliers lowest cost production approach
Customers covered it with higher inventory and
multiple sources

Procurement Evolution
Current situation
Manufacture minimum procure maximum
Keep minimum inventory
Introduce new products quickly and frequently

Impact
Procurement spend most important
Possible only with high quality and timely delivery
Work closely with Suppliers

Procurement Evolution
Procurement now
Price still important but not the only criteria
Competent suppliers capable of delivering quality
consistently essential
Close relationship with suppliers essential but
possible with only few suppliers
With critical parts / full products outsourced
sometimes very few capable suppliers available
worldwide
Long term growth & profitability of suppliers in
the interest of customers

Procurement Evolution
Future Trend
Manufacture even less and buy even more
Do not invest in manufacturing capacity if it can
be sourced from outside
So most of Material plus Labour cost % becomes
bought out

Buy full product

Full Material plus Labour cost % becomes bought out

Procurement Evolution
Procurement has come a long way in the last
2-3 decades
It has been possible for sometime now to set
up , run and grow a product business without
having own manufacturing facility
Has become possible as the capability and
also size of the suppliers has improved
dramatically
But there still all types of suppliers in business

Procurement Evolution
Partnering with suppliers is inevitable
The right supplier base can grow the business
with less investment
The wrong supplier base does more harm
than good
Can even destroy the brand and its market
So Procurement gets more and more
important everyday