UNIT III: PURCHASING AND VENDOR MANAGEMENT

Purchasing and Vendor Management: Centralized and Decentralized Purchasing,

Functions of Purchase Department and purchase polices, Use of Mathematical model for
Vendor Rating/ evaluation, single vendor concept, Management of stores, Accounting for
materials, Just- in- time and Kanban System of inventory management.

Purchase is the procurement of goods or services from some external sources.

Acquisition of some kind in lieu of accepted price on consideration in return.
“Purchasing is the procurement of the materials, supplies, machines, tools and
operation of a manufacturing plant.”
---------- Alford & Beatty
Objectives of purchasing:
1. To acquire the goods or services at minimum cost.
2. To ensure the continuous flow of production.
3. To develop the main and attenuate sources of supply.
4. To ensure timely delivery.
5. To make optimum utilization of capital.
6. To acquire quality product so that quality output is served to the consumer.

Types of Purchasing:
1. Purchase made as per requirement: No purchase is made in advance. Purchase is
done as need arises. Method usually applied for emergency requirement or
infrequent goods.
2. Contract Purchasing: Contract of material is given to an agency. It has an
advantage that low price of those materials whose cost fluctuates highly.
3. Market Purchase: Purchase is made from the market to take advantage of price
fluctuations.
4. Schedule Purchasing: It is a cyclic purchase model. A schedule of purchase is
made and it is used for those commodities whose price do not fluctuate.
Purchasing Procedure:
1. Purchase Requisition: All the departments of the organisation are asked to make a
requisition for purchase.
2. Decision of Purchase: Collecting requisition from various departments and
handed it to Purchase department / committee head. Purchase head decide what to
purchase and in what quantity.
3. Study of Market conditions: Market trends are analysed to generate an idea of
price and availability of product.
4. Selection of Vendors.
5. Placing of Purchase order.
6. Receiving of order.

Functions / Responsibilities of Purchase Department:

1. Obtaining prices
2. Selecting vendors
3. Placing Purchase order
4. Settlement of complaints
5. Making and maintaining harmonious relations with vendors.

There are many ways to run a purchasing department. What business functions are
included is one. Some companies include various material management responsibilities,
inventory control, warehouse and logistics in the one department. In larger companies
you might find all of these functions as separate departments.

The major question is always whether to be centralized or decentralized. This is usually a

decision of top management, Chief Purchasing Officer, Director of Purchasing or
possibly the Chief Executive Officer or owner. There is no magic formula to determine
which way is the best.

Centralized purchasing means buying and managing purchases from one location for all
locations within an organization. This can also be run by a central location buying in to a
distribution warehouse that feeds smaller warehouses. This is called a hub and spoke
system.
The responsibility and authority to purchase, lease, or rent materials, supplies, goods,
equipment, or services are placed with the Division of Finance and Operations,
Purchasing and Stores Department.

Purchasing is centralized to:

*realize economy, efficiency, and effectiveness in the procurement function;
*pursue quality assurance and standardization;
*maintain the highest standards of ethics;

The control by a central department of all the purchasing undertaken within an

organization. In a large organization centralized purchasing is often located in the
headquarters. Centralization has the advantages of reducing duplication of effort, pooling
volume purchases for discounts, enabling more effective inventory control, consolidating
transport loads to achieve lower costs, increasing skills development in purchasing
personnel, and enhancing relationships with suppliers.

Advantages of Centralized Purchasing

Volume purchasing – When the district is able to purchase a single item in mass, vendors
are often willing to provide a discount. Purchasing in mass to take advantage of discounts
is called volume purchasing.

Warehouse – In order to take advantage of volume pricing, the district purchases items in
bulk. Vendors typically require that the district take delivery of the items in mass. These
bulk purchases are stored in the warehouse until the items are requested by the sites.

Save time in researching products – Individuals spend hours to research the products and
to find best price. The purchasing department has resources to help reduce the time to
research products.
Disadvantages of Centralized Purchasing

Good processes are not without their shortcomings. Listed below are some of the
challenges of buying in a school district and suggestions on how to help the Purchasing
department minimize their effects.

Extended procurement time – One problem that is commonly associated with centralized
purchasing is the perception “it takes too long”. In reality, the purchasing department
processes vendor requisitions typically within one (1) day. Typically the delay in the
request is either: time spent to research the product, funding sources (account code check
and budget approval), vendor stock status, and shipping.

Decentralized purchasing is the opposite where each plant or office buys what it
needs. This operation allows any employee to buy what he needs. You can also run this
operation with a designated buyer assigned to the site to do the buying.

The more decentralized an operation is, the less control the home office has. You have a
duplication of effort in buying and less buyer specialization. You lose discounts on
quantity buys. You lose freight options based on dollars or weight. Also some support is
lost from the supplier as there is no single contact for the supplier to deal with. Volume
buying may not be calculated for all your sites.

Advantages of decentralized purchaseing

Advocates of decentralization claim that local management has the incentive to control
cost when the local operation is set up as a profit center. Many companies operate with a
mixed system. The central operation may buy major commodities but allow local
operations to buy all MRO supplies.

It is difficult to change from decentralized purchasing to centralized

purchasing. Employees feel their privileges are being taken away. They feel they are
losing control of their site. Some will refuse to really cooperate in the changes in hopes to
making the program look unsuccessful.
VENDOR RATING
Vendor ratings are used to rate vendors as entities; however, they are also used to rate
different aspects of a vendor, such as its strategy, organization, products, technology,
marketing, financials or support. Vendors with a clear focus, solid products and an
advantageous market position may be rated "positive" or "strong positive." Vendors or
product lines that lack these qualities may be rated "caution" or "strong negative."
Vendors that have potential, but which we believe should be very carefully evaluated, are
rated "promising."
Additionally, vendors that are rated a "strong negative" are put on a vendor alert list,
while vendors that are rated a "strong positive" are put on a vendor opportunity list.
These vendors, in particular, will be closely monitored.
Vendor rating is the result of a formal vendor evaluation system. Vendors or suppliers are
given standing, status, or title according to their attainment of some level of performance,
such as delivery, lead time, quality, price, or some combination of variables. The
motivation for the establishment of such a rating system is part of the effort of
manufacturers and service firms to ensure that the desired characteristics of a purchased
product or service is built in and not determined later by some after-the-fact indicator.
The vendor rating may take the form of a hierarchical ranking from poor to excellent and
whatever rankings the firm chooses to insert in between the two. For some firms, the
vendor rating may come in the form of some sort of award system or as some variation of
certification. Much of this attention to vender rating is a direct result of the widespread
implementation of the just-in-time concept in the United States and its focus on the
critical role of the buyer-supplier relationship.

Most firms want vendors that will produce all of the products and services defect-free and
deliver them just in time (or as close to this ideal as reasonably possible). Some type of
vehicle is needed to determine which supplying firms are capable of coming satisfactorily
close to this and thus to be retained as current suppliers. One such vehicle is the vendor
rating.

In order to accomplish the rating of vendors, some sort of review process must take place.
The process begins with the identification of vendors who not only can supply the needed
product or service but is a strategic match for the buying firm. Then important factors to
be used as criteria for vendor evaluation are determined. These are usually variables that
add value to the process through increased service or decreased cost. After determining
which factors are critical, a method is devised that allows the vendor to be judged or rated
on each individual factor.

It could be numeric rating or a Likert-scale ranking. The individual ratings can then be
weighted according to importance, and pooled to arrive at an overall vendor rating. The
process can be somewhat complex in that many factors can be complementary or
conflicting. The process is further complicated by fact that some factors are quantitatively
measured and others subjectively.
Once established, the rating system must be introduced to the supplying firm through
some sort of formal education process. Once the buying firm is assured that the vendor
understands what is expected and is able and willing to participate, the evaluation process
can begin. The evaluation could be an ongoing process or it could occur within a
predetermined time frame, such as quarterly. Of course the rating must be conveyed to
the participating vendor with some firms actually publishing overall vendor standings. If
problems are exposed, the vendor should formally present an action plan designed to
overcome any problems that may have surfaced. Many buying firms require the vendor to
show continuing improvement in predetermined critical areas.

CRITERIA FOR EVALUATION

Vendor performance is usually evaluated in the areas of pricing, quality, delivery, and
service. Each area has a number of factors that some firms deem critical to successful
vendor performance.

Pricing factors include the following:

• Competitive pricing. The prices paid should be comparable to those of vendors

providing similar product and services. Quote requests should compare favorably
to other vendors.
• Price stability. Prices should be reasonably stable over time.
• Price accuracy. There should be a low number of variances from purchase-order
prices on invoiced received.
• Advance notice of price changes. The vendor should provide adequate advance
notice of price changes.
• Sensitive to costs. The vendor should demonstrate respect for the customer firm's
bottom line and show an understanding of its needs. Possible cost savings could
 be suggested. The vendor should also exhibit knowledge of the market and share
this insight with the buying firm.
• Billing. Are vendor invoices are accurate? The average length of time to receive
credit memos should be reasonable. Estimates should not vary significantly from
the final invoice. Effective vendor bills are timely and easy to read and
understand.

Quality factors include:

• Compliance with purchase order. The vendor should comply with terms and
conditions as stated in the purchase order. Does the vendor show an
understanding of the customer firm's expectations?
• Conformity to specifications. The product or service must conform to the
specifications identified in the request for proposal and purchase order. Does the
product perform as expected?
• Reliability. Is the rate of product failure within reasonable limits?
• Reliability of repairs. Is all repair and rework acceptable?
• Durability. Is the time until replacement is necessary reasonable?
• Support. Is quality support available from the vendor? Immediate response to and
resolution of the problem is desirable.
• Warranty. The length and provisions of warranty protection offered should be
reasonable. Are warranty problems resolved in a timely manner?
• State-of-the-art product/service. Does the vendor offer products and services that
are consistent with the industry state-of-the-art? The vendor should consistently
refresh product life by adding enhancements. It should also work with the buying
firm in new product development.

Delivery factors include the following:

• Time. Does the vendor deliver products and services on time; is the actual receipt
date on or close to the promised date? Does the promised date correspond to the
 vendor's published lead times? Also, are requests for information, proposals, and
quotes swiftly answered?
• Quantity. Does the vendor deliver the correct items or services in the contracted
quantity?
• Lead time. Is the average time for delivery comparable to that of other vendors for
similar products and services?
• Packaging. Packaging should be sturdy, suitable, properly marked, and
undamaged. Pallets should be the proper size with no overhang.
• Documentation. Does the vendor furnish proper documents (packing slips,
invoices, technical manual, etc.) with correct material codes and proper purchase
order numbers?
• Emergency delivery. Does the vendor demonstrate extra effort to meet
requirements when an emergency delivery is requested?

Finally, these are service factors to consider:

• Good vendor representatives have sincere desire to serve. Vendor reps display
courteous and professional approach, and handle complaints effectively. The
vendor should also provide up-to-date catalogs, price information, and technical
information. Does the vendor act as the buying firm's advocate within the
supplying firm?
• Inside sales. Inside sales should display knowledge of buying firms needs. It
should also be helpful with customer inquiries involving order confirmation,
shipping schedules, shipping discrepancies, and invoice errors.
• Technical support. Does the vendor provide technical support for maintenance,
repair, and installation situations? Does it provide technical instructions,
documentation, general information? Are support personnel courteous,
professional, and knowledgeable? The vendor should provide training on the
effective use of its products or services.
• Emergency support. Does the vendor provide emergency support for repair or
replacement of a failed product.
 • Problem resolution. The vendor should respond in a timely manner to resolve
problems. An excellent vendor provides follow-up on status of problem
correction.

A 2001 article in Supply Management notes that while pricing, quality, delivery, and
service are suitable for supplies that are not essential to the continued success of the
buying firm, a more comprehensive approach is needed for suppliers that are critical to
the success of the firm's strategy or competitive advantage. For firms that fall into the
latter category performance may need to be measured by the following 7 C's.

1. Competency—managerial, technical, administrative, and professional competence

of the supplying firm.
2. Capacity—supplier's ability to meet physical, intellectual and financial
requirements.
3. Commitment—supplier's willingness to commit physical, intellectual and
financial resources.
4. Control—effective management control and information systems.
5. Cash resources—financial resources and stability of the supplier. Profit, ROI,
ROE, asset-turnover ratio.
6. Cost—total acquisition cost, not just price.
7. Consistency—supplier's ability to exhibit quality and reliability over time.

If two or more firms supply the same or similar products or services, a standard set of
criteria can apply to the vendor's performance evaluation. However, for different types of
firms or firms supplying different products or services, standardized evaluation criteria
may not be valid. In this case, the buying firm will have to adjust its criteria for the
individual vendor. For example, Honda of America adjusts its performance criteria to
account for the impact of supplier problems on consumer satisfaction or safety. A
supplier of brakes would be held to a stricter standard than a supplier of radio knobs.

AWARDS AND CERTIFICATION

Many buying firms utilize awards and certification programs to rate vendors. Attainment
of certification status or an award serves as an indicator of supplier excellence.
Certification and awards-program recognition represents a final step in an intense journey
that involves rigorous data collection under the total-quality-management-rubric as well
as multitudes of meetings with suppliers and purchasing internal customers. Serious
buying firms view these programs as an integral part of their overall efforts to improve
the total value of the company.

The attainment of a supplier award usually serves as an indication that the vendor has
been rated as excellent. Intel awards their best suppliers the Supplier Continuous Quality
Improvement Award (SCQI). Other firms may utilize a hierarchy of awards to indicate
varying degrees of performance from satisfactory to excellent. DaimlerChrysler awards
its best suppliers the Gold Pentastar Award. Several hundred vending firms receive this
award per year. However, only a handful (less than a dozen) of DaimlerChrysler's
vendors are good enough to garner the Platinum Pentastar Award.

For other firms, supplier certification is desirable. Supplier certification can be defined as
a process for ensuring that suppliers maintain specific levels of performance in the areas
of price, quality, delivery, and service. Certification implies that participating firms have
reached a level of excellence that other firms were unable or unwilling to achieve. For
example a quality certified firm maintains a level of quality such that customer-receiving
inspection may be utilized with decreasing frequency up to the point where it is
eliminated altogether. Theoretically, this will ensure that all of the supplier's products
meet the customer's product specifications. In this case, the goal of supplier certification
is quality at the source.

While it is uncertain whether individual firms are consistent in the manner in which they
certify vendors, a quality certification would likely require that the vending firm be part
of a formal education program, utilize statistical process control (SPC), and have a
quality assurance plan (set written procedures).

BENEFITS
Benefits of vendor rating systems include:

• Helping minimize subjectivity in judgment and make it possible to consider all

relevant criteria in assessing suppliers.
• Providing feedback from all areas in one package.
• Facilitating better communication with vendors.
• Providing overall control of the vendor base.
• Requiring specific action to correct identified performance weaknesses.
• Establishing continuous review standards for vendors, thus ensuring continuous
improvement of vendor performance.
• Building vendor partnerships, especially with suppliers having strategic links.
• Developing a performance-based culture.

Vendor ratings systems provide a process for measuring those factors that add value to
the buying firm through value addition or decreased cost. The process will continually
evolve and the criteria will change to meet current issues and concerns.

Just-in-time (JIT) is an inventory strategy implemented to improve the return on

investment of a business by reducing in-process inventory and its associated carrying
costs. In order to achieve JIT the process must have signals of what is going on elsewhere
within the process. This means that the process is often driven by a series of signals,
which can be Kanban (看板 Kanban?), that tell production processes when to make the
next part. Kanban are usually 'tickets' but can be simple visual signals, such as the
presence or absence of a part on a shelf. When implemented correctly, JIT can lead to
dramatic improvements in a manufacturing organization's return on investment, quality,
and efficiency. Some have suggested that "Just on Time" would be a more appropriate
name since it emphasizes that production should create items that arrive when needed and
neither earlier nor later.

Quick communication of the consumption of old stock which triggers new stock to be
ordered is key to JIT and inventory reduction. This saves warehouse space and costs.
However since stock levels are determined by historical demand any sudden demand
rises above the historical average demand, the firm will deplete inventory faster than
usual and cause customer service issues. Some have suggested that recycling Kanban
faster can also help flex the system by as much as 10-30%. In recent years manufacturers
have touted a trailing 13 week average as a better predictor for JIT planning than most
forecastors could provide.

History

The technique was first used by the Ford Motor Company as described explicitly by
Henry Ford's My Life and Work (1923): "We have found in buying materials that it is not
worthwhile to buy for other than immediate needs. We buy only enough to fit into the
plan of production, taking into consideration the state of transportation at the time. If
transportation were perfect and an even flow of materials could be assured, it would not
be necessary to carry any stock whatsoever. The carloads of raw materials would arrive
on schedule and in the planned order and amounts, and go from the railway cars into
production. That would save a great deal of money, for it would give a very rapid
turnover and thus decrease the amount of money tied up in materials. With bad
transportation one has to carry larger stocks." This statement also describes the concept
of "dock to factory floor" in which incoming materials are not even stored or warehoused
before going into production. The concept needed an effective freight management
system (FMS); Ford's Today and Tomorrow (1926) describes one.

The technique was subsequently adopted and publicized by Toyota Motor Corporation of
Japan as part of its Toyota Production System (TPS). However, Toyota famously did not
adopt the procedure from Ford, but from Piggly Wiggly. Although Toyota visited Ford as
part of its tour of American businesses, Ford had not fully adopted the Just-In-Time
system, and Toyota executives were appalled at the piles of inventory laying around and
the uneven work schedule of the employees of Ford. Toyota also visited Piggly Wiggly,
and it was there that Toyota executives first observed a fully functioning and successful
Just-In-Time system, and modeled TPS after it.
It is hard for Japanese corporations to warehouse finished products and parts, due to the
limited amount of land available for them. Before the 1950s, this was thought to be a
disadvantage because it forced the production lot size below the economic lot size. (An
economic lot size is the number of identical products that should be produced, given the
cost of changing the production process over to another product.) The undesirable result
was poor return on investment for a factory.

The chief engineer at Toyota in the 1950s, Taiichi Ohno ( 大 野 耐 一 Ohno Taiichi?),
examined accounting assumptions and realized that another method was possible. The
factory could implement JIT which would require it to be made more flexible and reduce
the overhead costs of retooling and thereby reduce the economic lot size to fit the
available warehouse space. JIT is now regarded by Ohno as one of the two 'pillars' of the
Toyota Production System.

Therefore over a period of several years, Toyota engineers redesigned car models for
commonality of tooling for such production processes as paint-spraying and welding.
Toyota was one of the first to apply flexible robotic systems for these tasks. Some of the
changes were as simple as standardizing the hole sizes used to hang parts on hooks. The
number and types of fasteners were reduced in order to standardize assembly steps and
tools. In some cases, identical sub-assemblies could be used in several models.

Toyota engineers then determined that the remaining critical bottleneck in the retooling
process was the time required to change the stamping dies used for body parts. These
were adjusted by hand, using crowbars and wrenches. It sometimes took as long as
several days to install a large, multi-ton die set and adjust it for acceptable quality.
Further, these were usually installed one at a time by a team of experts, so that the line
was down for several weeks.

So Toyota implemented a strategy now called Single Minute Exchange of Die (SMED),
developed with Shigeo Shingo ( 新郷 重雄 Shingō Shigeo). With very simple fixtures,
measurements were substituted for adjustments. Almost immediately, die change times
fell to hours instead of days. At the same time, quality of the stampings became
controlled by a written recipe, reducing the skill level required for the change. Further
analysis showed that a lot of the remaining time was used to search for hand tools and
move dies. Procedural changes (such as moving the new die in place with the line in
operation) and dedicated tool-racks reduced the die-change times to as little as 40
seconds. Today dies are changed in a ripple through the factory as a new product begins
flowing.

After SMED, economic lot sizes fell to as little as one vehicle in some Toyota plants.

Carrying the process into parts-storage made it possible to store as little as one part in
each assembly station. When a part disappeared, that was used as a signal (Kanban) to
produce or order a replacement.

Philosophy

The philosophy of JIT is simple - inventory is defined to be waste. JIT inventory systems
expose the hidden causes of inventory keeping and are therefore not a simple solution a
company can adopt; there is a whole new way of working the company must follow in
order to manage its consequences. The ideas in this way of working come from many
different disciplines including statistics, industrial engineering, production management
and behavioral science. In the JIT inventory philosophy there are views with respect to
how inventory is looked upon, what it says about the management within the company,
and the main principle behind JIT.

Inventory is seen as incurring costs, or waste, instead of adding value, contrary to

traditional accounting. This does not mean to say JIT is implemented without an
awareness that removing inventory exposes pre-existing manufacturing issues. Under this
way of working, businesses are encouraged to eliminate inventory that does not
compensate for manufacturing issues, and then to constantly improve processes so that
less inventory can be kept. Secondly, allowing any stock habituates the management to
stock keeping and it can then be a bit like a narcotic. Management are then tempted to
keep stock there to hide problems within the production system. These problems include
backups at work centres, machine reliability, process variability, lack of flexibility of
employees and equipment, and inadequate capacity among other things.

In short, the just-in-time inventory system is all about having “the right material, at the
right time, at the right place, and in the exact amount”, without the safety net of
inventory. The JIT system has implications of which are broad for the implementors.

Stocks

JIT emphasises inventory as one of the seven wastes (overproduction, waiting time,
transportation, inventory, processing, motion and product defect), and as such its practice
involves the philosophical aim of reducing input buffer inventory to zero. Zero buffer
inventory means that production is not protected from exogenous (external) shocks. As a
result, exogenous shocks reducing the supply of input can easily slow or stop production
with significant negative consequences. For example, Toyota suffered a major supplier
failure as a result of the 1997 Aisin fire which rendered one of its suppliers incapable of
fulfilling Toyota's orders. In the U.S., the 1992 railway strikes resulted in General Motors
having to idle a 75,000-worker plant because they had no supplies coming in.

Transaction cost approach

JIT reduces inventory in a firm. However, unless it is used throughout the supply chain, it
can be hypothesized that firms are simply outsourcing their input inventory to suppliers
(Naj 1993). This effect was investigated by Newman (1993), who found, on average,
suppliers in Japan charged JIT customers a 5% price premium.

Environmental concerns

During the birth of JIT, multiple daily deliveries were often made by bicycle; with
increases in scale has come the adoption of vans and lorries (trucks) for these deliveries.
Cusumano (1994) has highlighted the potential and actual problems this causes with
regard to gridlock and the burning of fossil fuels. This violates three JIT wastes:

• 1) Time; wasted in traffic jams

• 2) Inventory; specifically pipeline (in transport) inventory and
 • 3) Scrap; with respect to petrol or diesel burned while not physically moving.

Price volatility

JIT implicitly assumes a level of input price stability such that it is desirable to inventory
inputs at today's prices. Where input prices are expected to rise storing inputs may be
desirable.

Quality volatility

JIT implicitly assumes the quality of available inputs remains constant over time. If not,
firms may benefit from hoarding high quality inputs.

Demand stability

Karmarker (1989) highlights the importance of relatively stable demand which can help
ensure efficient capital utilisation rates. Karmarker argues without a significant stable
component of demand, JIT becomes untenable in high capital cost production. n the U.S.,
the 1992 railway strikes resulted in General Motors having to idle a 75,000-worker plant
because they had no supplies coming in.

JIT Implementation Design

Based on a diagram modeled after the one used by Hewlett-Packard’s Boise plant to
accomplish its JIT program.

1) F Design Flow Process

- F Redesign/relayout for flow
- L Reduce lot sizes
- O Link operations
- W Balance workstation capacity
- M Preventative maintenance
- S Reduce Setup Times
2) Q Total quality control
- C worker compliance
- I Automatic inspection
- M quality measures
- M fail-safe methods
- W Worker participation

3) S Stabilize Schedule
- S Level Schedule
- W establish freeze windows
- UC Underutilize Capacity
4) K Kanban Pull System
- D Demand pull
- B Backflush
- L Reduce lot sizes
5) V Work with vendors
- L Reduce lead time
- D Frequent deliveries
- U Project usage requirements
- Q Quality Expectations
6) I Further reduce inventory in other areas
- S Stores
- T Transit
- C Implement Carroussel to reduce motion waste
- C Implement Conveyor belts to reduce motion waste

7) P Improve Product Design

- P Standard Production Configuration
- P Standardize and reduce the number of parts
- P Process design with product design
- Q Quality Expectations
Effects

Some of the initial results at Toyota were horrible, but in contrast to that a huge amount
of cash appeared, apparently from nowhere, as in-process inventory was built out and
sold. This by itself generated tremendous enthusiasm in upper management.

Another surprising effect was that the response time of the factory fell to about a day.
This improved customer satisfaction by providing vehicles usually within a day or two of
the minimum economic shipping delay.

Also, many vehicles began to be built to order, completely eliminating the risk they
would not be sold. This dramatically improved the company's return on equity by
eliminating a major source of risk.

Since assemblers no longer had a choice of which part to use, every part had to fit
perfectly. The result was a severe quality assurance crisis, and a dramatic improvement in
product quality. Eventually, Toyota redesigned every part of its vehicles to eliminate or
widen tolerances, while simultaneously implementing careful statistical controls for
quality control. Toyota had to test and train suppliers of parts in order to assure quality
and delivery. In some cases, the company eliminated multiple suppliers.

When a process problem or bad parts surfaced on the production line, the entire
production line had to be slowed or even stopped. No inventory meant that a line could
not operate from in-process inventory while a production problem was fixed. Many
people in Toyota confidently predicted that the initiative would be abandoned for this
reason. In the first week, line stops occurred almost hourly. But by the end of the first
month, the rate had fallen to a few line stops per day. After six months, line stops had so
little economic effect that Toyota installed an overhead pull-line, similar to a bus bell-
pull, that permitted any worker on the production line to order a line stop for a process or
quality problem. Even with this, line stops fell to a few per week.

The result was a factory that eventually became the envy of the industrialized world, and
has since been widely emulated.
The just-in-time philosophy was also applied to other segments of the supply chain in
several types of industries. In the commercial sector, it meant eliminating one or all of the
warehouses in the link between a factory and a retail establishment.

Benefits

As most companies use an inventory system best suited for their company, the Just-In-
Time Inventory System (JIT) can have many benefits resulting from it. The main benefits
of JIT are listed below.

1. Set up times are significantly reduced in the factory. Cutting down the set up time
to be more productive will allow the company to improve their bottom line to
look more efficient and focus time spent on other areas that may need
improvement. This allows the reduction or elimination of the inventory held to
cover the "changeover" time, the tool used here is SMED.
2. The flows of goods from warehouse to shelves are improved. Having employees
focused on specific areas of the system will allow them to process goods faster
instead of having them vulnerable to fatigue from doing too many jobs at once
and simplifies the tasks at hand. Small or individual piece lot sizes reduce lot
delay inventories which simplifies inventory flow and its management.
3. Employees who possess multiple skills are utilized more efficiently. Having
employees trained to work on different parts of the inventory cycle system will
allow companies to use workers in situations where they are needed when there is
a shortage of workers and a high demand for a particular product.
4. Better consistency of scheduling and consistency of employee work hours. If there
is no demand for a product at the time, workers don’t have to be working. This
can save the company money by not having to pay workers for a job not
completed or could have them focus on other jobs around the warehouse that
would not necessarily be done on a normal day.
5. Increased emphasis on supplier relationships. No company wants a break in their
inventory system that would create a shortage of supplies while not having
inventory sit on shelves. Having a trusting supplier relationship means that you
 can rely on goods being there when you need them in order to satisfy the
company and keep the company name in good standing with the public.
6. Supplies continue around the clock keeping workers productive and businesses
focused on turnover. Having management focused on meeting deadlines will
make employees work hard to meet the company goals to see benefits in terms of
job satisfaction, promotion or even higher pay.

Problems Within a JIT system

The major problem with just-in-time operation is that it leaves the supplier and
downstream consumers open to supply shocks and large supply or demand changes. For
internal reasons, this was seen as a feature rather than a bug by Ohno, who used the
analogy of lowering the level of water in a river in order to expose the rocks to explain
how removing inventory showed where flow of production was interrupted. Once the
barriers were exposed, they could be removed; since one of the main barriers was rework,
lowering inventory forced each shop to improve its own quality or cause a holdup in the
next downstream area. One of the other key tools to manage this weakness is production
levelling to remove these variations. Just-in-time is a means to improving performance of
the system, not an end.

With very low stock levels meaning that there are shipments of the same part coming in
sometimes several times per day, Toyota is especially susceptible to an interruption in the
flow. For that reason, Toyota is careful to use two suppliers for most assemblies. As
noted in Liker (2003), there was an exception to this rule that put the entire company at
risk by the 1997 Aisin fire. However, since Toyota also makes a point of maintaining
high quality relations with its entire supplier network, several other suppliers immediately
took up production of the Aisin-built parts by using existing capability and
documentation. Thus, a strong, long-term relationship with a few suppliers is preferred to
short-term, price-based relationships with competing suppliers. This long-term
relationship has also been used by Toyota to send Toyota staff into their suppliers to
improve their suppliers' processes. These interventions have now been going on for
twenty years and result in improved margins for Toyota and the supplier as well as lower
final customer costs and a more reliable supply chain. Toyota encourages their suppliers
to duplicate this work with their own suppliers.

Kanban System

Kanbans maintains inventory levels; a signal is sent to produce and deliver a new
shipment as material is consumed. These signals are tracked through the replenishment
cycle and bring extraordinary visibility to suppliers and buyers.

Kanban is a concept related to lean and just-in-time (JIT) production. The Japanese
word kanban is a common everyday term meaning "signboard" or "billboard" and utterly
lacks the specialized meaning that this loanword has acquired in English. According to
Taiichi Ohno, the man credited with developing JIT, kanban is a means through which
JIT is achieved.

Kanban is a signaling system to trigger action. As its name suggests, kanban historically
uses cards to signal the need for an item. However, other devices such as plastic markers
(kanban squares) or balls (often golf balls) or an empty part-transport trolley or floor
location can also be used to trigger the movement, production, or supply of a unit in a
factory.
It was out of a need to maintain the level of improvements that the kanban system was
devised by Toyota. Kanban became an effective tool to support the running of the
production system as a whole. In addition, it proved to be an excellent way for promoting
improvements because reducing the number of kanban in circulation highlighted problem
areas.

Origins

The term kanban describes an embellished wooden or metal sign which has often been
reduced to become a trade mark or seal. Since the 17th century, this expression in the
Japanese mercantile system has been as important to the merchants of Japan as military
banners have been to the samurai. Visual puns, calligraphy and ingenious shapes — or
kanban — define the trade and class of a business or tradesman. Often produced within
rigid Confucian restrictions on size and color, the signs and seals are masterpieces of logo
and symbol design. For example, sumo wrestlers, a symbol of strength, may be used as
kanban on a pharmacy's sign to advertise a treatment for anemia.

In the late 1940s, Toyota was studying supermarkets with a view to applying some of
their management techniques to their work. This interest came about because in a
supermarket the customer can get what is needed at the time needed in the amount
needed. The supermarket only stocks what it believes it will sell and the customer only
takes what they need because future supply is assured. This led Toyota to view earlier
processes, to that in focus, as a kind of store. The process goes to this store to get its
needed components and the store then replenishes those components. It is the rate of this
replenishment, which is controlled by kanban that gives the permission to produce. In
1953, Toyota applied this logic in their main plant machine shop.

Operation
An important determinant of the success of "push" production scheduling is the quality of
the demand forecast which provides the "push". Kanban, by contrast, is part of a pull
system that determines the supply, or production, according to the actual demand of the
customers. In contexts where supply time is lengthy and demand is difficult to forecast,
the best one can do is to respond quickly to observed demand. This is exactly what a
kanban system can help: it is used as a demand signal which immediately propagates
through the supply chain. This can be used to ensure that intermediate stocks held in the
supply chain are better managed, usually smaller. Where the supply response cannot be
quick enough to meet actual demand fluctuations, causing significant lost sales, then
stock building may be deemed as appropriate which can be achieved by issuing more
kanban. Taiichi Ohno states that in order to be effective kanban must follow strict rules of
use (Toyota, for example, has six simple rules) and that close monitoring of these rules is
a never-ending problem to ensure that kanban does what is required.

A simple example of the kanban system implementation might be a "three-bin system"

for the supplied parts (where there is no in-house manufacturing) — one bin on the
factory floor, one bin in the factory store and one bin at the suppliers' store. The bins
usually have a removable card that contains the product details and other relevant
information — the kanban card. When the bin on the factory floor is empty, the bin and
kanban card are returned to the factory store. The factory store then replaces the bin on
the factory floor with a full bin, which also contains a kanban card. The factory store then
contacts the supplier’s store and returns the now empty bin with its kanban card. The
supplier's inbound product bin with its kanban card is then delivered into the factory store
completing the final step to the system. Thus the process will never run out of product
and could be described as a loop, providing the exact amount required, with only one
spare so there will never be an issue of over-supply. This 'spare' bin allows for the
uncertainty in supply, use and transport that are inherent in the system. The secret to a
good kanban system is to calculate how many kanban cards are required for each product.
Most factories using kanban use the coloured board system (Heijunka Box). This consists
of a board created especially for holding the kanban cards.
E-Kanban Systems

Many manufacturers have implemented electronic kanban systems. Electronic kanban

systems, or E-Kanban systems, help to eliminate common problems such as manual entry
errors and lost cards. E-Kanban systems can be integrated into enterprise resource
planning (ERP) systems. Integrating E-Kanban systems into ERP systems allows for real-
time demand signaling across the supply chain and improved visibility. Data pulled from
E-Kanban systems can be used to optimize inventory levels by better tracking supplier
lead and replenishment times.

VENDOR RATING

Vendor rating is a system providing a single, focused perspective on a vendor and his
major products. These vendor ratings represent an overall view of a vendor and his
initiatives, much like the industry's use of "buy, or not" recommendations. The research
rates a vendor's strengths and challenges, thereby giving investors a clearer sense of a
vendor's overall "fitness".
• It is also known as performance monitoring.
• It is a rigorous part of purchasing procedure.
• It is a system used by buying organizations or industry analysts to record, analyze,
rank, and report the performance of a supplier in terms of a range of predefined
criteria, which may include such things as:
 Quality of the product or service
 Delivery performance
 Price (to supply materials at as low price as possible)

The type of evaluation used for the sources of supply varies with the nature, the
complexity, and the monetary value of the purchase to be made. It also varies with the
buyer’s knowledge of the suppliers being considered. For simple and low-volume /value
purchases, the information already in the purchasing department’s file is usually sufficient.
For complex as well as high-value/volume purchases, additional evaluation steps may be
necessary, which may include a detailed analysis of the supplier’s managerial and service
capabilities. For an extremely complex purchase, a conference with potential suppliers
may be held at the buyer’s plant. From the discussion it is usually easy to identify those
suppliers who understand the complexity of the purchase, thus further reducing the list.
Financial strength and stability of the supplier company may be essential to assure
continuity of supply and reliability of product quality. A competent buyer should be able to
read and interpret financial reports and make intelligent conclusions from the data. For
example, when a firm’s financial condition begins to deteriorate, the buyer should begin
looking for another supplier, while continuing to deal with the distressed company with
caution.
Plant visits should be made after the choice of suppliers has been narrowed to a few. Such
visits are made to determine if the suppliers are both capable and motivated to meet
contractual obligations. Usually, during the plant visit, the following aspects are evaluated:
i) Adequacy of Equipment: Is the equipment modem or out-of-date? Are the
production rates adequate? Look for bottlenecks and the number of backorders.
ii) Competence of Technical and Managerial Staffs: A contract requiring complex
coordination of development and production coupled with state-of-the-art design
requires managerial skills to have successful performance.
iii) Labour-Management Relations: It is beneficial for the buyer to understand the
labor-management relations in the supplier plant as poor relations may result in
erratic delivery performance and inconsistent quality standards. On the other hand,
good relations may provide the buyer’s company lower-priced items plus good
quality and delivery performance.
Past performance provides an excellent insight into probable future success. The key to
successful analysis is to identify the important characteristics of the particular purchase.
Usually, three important factors are evaluated.
Quality Evaluation is simply reviewing the supplier’s record in respect to meeting the
required specifications, which is measured as a percentage of acceptable shipments or
delivery. It should be the policy for the quality-control section to inform the purchasing
department of the facts concerning each shipment/delivery.
Price Evaluation in its simplest form is the net price quoted in each instance for
conforming goods compared to the prices quoted by competitors. Consistency of success
and integrity in price behavior would provide a measure criterion.
Service Evaluation includes prompt submission of data, response to inquiries, delivery
performance, special services rendered, and other intangibles. Most of the elements in this
factor are subjective in nature.

GOALS OF VENDOR RATING

• Rectification of defects.
• Ability to serve more satisfactorily.
• Basis for making future purchase decisions.
• Purpose of this scheme is to establish a procedure by which quality control,
purchasing and user departments can fulfill the corporate objective of obtaining
the quality products with minimum costs.

ADVANTAGES
• Helps in finding best vendor for the organization.
• Saves both time and money.
• Rates the entire performance of vendor.
• Not guided by tunnel vision.
• Easy comparison of various vendors and maintaining better relation with best
performers
• Can be used as a feedback to vendors for improving the performance.
 • A supplier or vendor rating system will allow a company to benchmark their
supplier's performance against the performance of similar suppliers serving the
company

Source selection is an essential responsibility of any purchasing function. It has

assumed importance in view of growing need of the buyer company to survive in a
fiercely competitive market. Through proper selection of source, it is possible for a
buyer company to have best quantity, required quantity, and improved delivery
performance from the supplier company. If time-tested and scientific policies, based
on practical considerations and awareness about establishment of good and healthy
relations with the suppliers, are pursued, vigorously and continuously, a strong supplier
base can be developed in the long run. Several techniques have already been
proposed for vendor rating, and given an opportunity, the buyer company should
develop and use a comprehensive vendor performance evaluation system.
Socioeconomic factors also need to be considered in source selection.

TECHNIQUES OF VENDOR RATING

CATEGORICAL PLAN :-

Under this method the members of the buying staff related with the supplier are required
to assess the performance of each supplier.

Members:- Receiving section, quality control department, manufacturing

department etc.

The rating sheets are provided with the record of the supplier, their products and the list
of factors for the evaluation purposes.

The members of the buying staff are required to assign the plus or minus notations
against each factor.

The periodic meetings, usually at the interval of one month, are held by senior men of the
buying staff to consider the individual rating of each section.

The consolidation of the individual rating is done on the basis of the net plus value.

The suppliers are assigned the categories such as “preferred, neutral or

unsatisfactory.”
This is a very simple and inexpensive method. Its quality heavily depends on the
experience and ability of the buyer to judge the situation. As compared to other methods,
the degree of subjective judgement is very high as rating is based on personal whim and
the vague impressions of the buyer. The rating is done on the basis of memory, and thus
it becomes only a routine exercise without any critical analysis.

COST RATIO PLAN:-

Under this method, the vendor rating is done on the basis of various costs incurred for
procuring the materials from various suppliers.

The cost-ratios are ascertained for the different rating variables such as quality, price
and timely delivery etc.

The cost-ratio is calculated in percentage on the basis of total individual cost and total
value of purchase.

For example :-

The total delivery cost is Rs. 5000 and the total purchases are Rs. 1,00,000, then delivery
cost-ratio will be :

5000*100 = 5%
100000

All such cost-ratios will be adjusted with the quoted price per unit. The plus cost ratio
will increase the unit price while the minus cost ratio will decrease the unit price.

The net adjusted unit price will indicate the vendor rating. The vendor with the lowest net
adjusted unit price will be the best supplier.

Under this method, the most strategic issue is the identification of various costs and their
allocation among different variables and suppliers. Certain important heads of quality
costs and delivery costs can be listed as under :

QUALITY DELIVERY COSTS

Inspection costs Postage and telegrams

 Cost of defectives Telephones

Reworking costs Extra cost for getting

quick delivery for
example, costlier
means of
transportation.
Manufacturing losses
on rejected items.

All the cost-ratio are calculated for all the suppliers on individual basis. On the basis of
the value of the each cost-ratio, the consolidated rating of each supplier is done.

WEIGHTED-POINT METHOD
 Attributes for quality, price and delivery are separately identified.
 Relatives weightages of attributes are assigned by the process of grading.

Quality Q-Factor comparison

Points
 Q1=Accepted without remarks 100
 Q2=Accepted with some rejections 60
 Q3=Accepted due to acute shortage 40
 Q4=Totally rejected 0
Accepted rate=(Accepted lots/Total lots) *100
It will be multiplied by the weighted-point of quality factor.

Price P-Factor comparison

P=Pa-Po/Po*100
Where Po=lowest price
Pa=accepted price
Points
P1=20% 60
P2=60% 40
P3=75% 30
Net price=(Lowest net price/Respective net price)*100
This % will be multiplied by the weighted point of price.

Delivery D-Factor comparison

D=No. of scheduled delivery/No. of actual deliveries*100
Points
• D1=90-100% 100
• D2=60-75% 60
 • D3=40-50% 50

Critical Incident Method

 Records of events and occurrences of buyer-vendor relationship is maintained
 They reflect positive and negative aspects of actual performance.
 Improved performance
 Determining the competence of a vendor

Checklist System
Vendor rating is done on the basis of:
• Financial strength
• Size
• Product service
• Price
• Quality