COST REDUCTION INPROCUREMENT FOR INCREASED

PROFITABILITY

Project Report

Presented by : Mariamma MathaiRoll number : 1304000215

Bu Company Profile

• Founded in 1979

• Air-Conditioning components, spare parts,

tools, instrumentation, mechanical and

electrical supplies

• USA, Europe, Japan, Far East, Gulf

Cooperation Countries (GCC) and Middle East.

Bu Objective of the project

• Research the effectiveness of the existing procurement process.•Find ways to lower cost of goods procured without compromising on quality and value of goods.•Give recommendation to streamline procurement process to deliver savings to procurement cost

Bu Executive Summary

1. Reducing Costs and Improving Value for Money

2. Building a new work flows that can reduce the administrative cost and speed up the process.

3. Ensuring Legal, Ethical and Professional Standards.

4. Supporting innovation and Ensuring Access to best business practice

Definition1. Purchase planning

(2) Standards determination(3) Specifications development(4) Supplier research and selection (5) Value analysis(6) Financing(7) Price negotiation(8) Making the purchase(9) Supply contract administration(10) Inventory control and stores, and (11) Other related functions

Bu Procurement steps

• Identification of need.

•Supplier Identification

•Supplier Communication

•Negotiation.

•Supplier Liaison

•Logistics Management

Bu Where to implement cost reduction

• Material procurement (COG, Inventory, Product rationalization)

• Logistics - inbound and outbound

• Production ( process ,time and work study,

maintenance ,automation)

• Human resource ( out sourcing )

• Sales & marketing to focus on high potential segments

(customer segmentation)

• Finance

•Supply chain

Bu Research design

•Purchasing as a Profit Center•Internal Controls in Procurement cycle•Strategic Purchasing In Supplier Relationship•The New Purchasing & Supply Management Workplace•Negotiation in Purchasing•Develop Action Plan For Immediate Implementation•Measurement of Result In Cost Reduction

Procurement Risks

•Unrealistic schedule and cost expectations for vendors•Manufacturing capacity capabilities of vendors•Conflicts with current contracts and vendor relationships•Configuration management for upgrades and improvements of purchased technology•Potential delays in shipping and impacts on cost and schedule•Questionable past performance of vendors•Potential that final product does not meet required specifications•These risks are not all-inclusive and the standard risk management process of identifying, documenting, analyzing, mitigating and managing risks will be used.

• Schedule:• Cost• Scope• Resources• Technology:• Government rules and regulations

Procurement Constraints

Procurement Process

Current procurement practices

54%

33%

10%

3%

Very good

Good

Average

Poor

Marks/ Grades Very good Good Average PoorMail 6 1 1 1Fax 3 6 0 0Phone 6 1 1 1Electronic Mail 5 1 2 1Online Orders 5 4 0 0Plan / Scheduled orders 5 4 0 0Order tracking 5 2 2 0Access market place 3 4 2 0Search low cost suppliers 7 2 0 0Access online catalogs 5 3 1 0Web orders via suppliers web site 3 5 1 0Total 53 33 10 3

Current procurement drivers

Marks/ Grades Very good Good Average PoorPrice reduction 3 6 0 0Improve efficiency 3 5 1 0Negotiated cost 4 4 1 0Improve the visibility of the requirement 4 3 2 0Reduce administrative cost 6 2 1 0Improve market intelligence 4 3 2 0Reduce operational and inventory cost 5 3 1 0Enhance decision making 4 4 1 0Handle customer complaints 4 4 1 0Improve the visibility of supply 3 6 0 0Enhance Inventory management 5 3 1 0Shortened procurement cycle time 3 6 0 0Enhancing the service delivery 5 4 0 0Management of information report 6 2 1 0

59 55 12 0

54%

33%

10%

3%

Very good

Good

Average

Poor

Current procurement barriers

54%

33%

10%3%

Very good

Good

Average

Poor

Marks/ Grades Very good Good Average PoorTechnology infrastructure 5 3 1 0Financial resources 2 4 2 1Procurement personals efficiency 9 0 0 0Awareness & Training of procurement programs 3 3 3 0Company culture 6 2 1 0Upper management support 5 2 1 1Business process to support procurement 6 2 0 1Maturity of suppliers 4 5 0 0Suppliers interest 2 5 2 0Total 42 26 10 3

current procurement cycle is result oriented

Marks/ Grades Very good Good Average PoorSupply chain integration 6 3 0 0Suppliers sources 6 2 0 0Employee over head 4 1 2 2Level of out sourcing 5 3 0 1Efficiency of procurement process 8 1 0 0Staff development & training 2 4 3 0

31 14 5 3

58%26%

9%

6%

Very goodGoodAveragePoor

SWOT Analysis

S

T

R

E

N

G

T

H

Good inventory and product mix Strong efficient personals Customer satisfaction Efficient procurement process & cycle Access to market information and

supplier price Excellent company culture Vendor commitment

WEAKNESS

Technically not updated as per suppliers level

Financial turnover Negotiation cost is more Administrative cost Employee overhead cost System not efficient enough No Safety stock alerts

OPP

ORT

UNI

TES

Improving Productivity Moving-up the value chain Enhancing Competitiveness Getting closer to the customers More training leads to efficiency of

the process & team members Handling customer complaints Enhance asset utilization Integrate Logistics & Distribution

THREATS

Product price needs to be evaluated continuously

Technology infrastructure Financial resources Awareness and training programs Demand & Supply needs not system

generated. Maturity of supplier

Recommendations

1, InventoryTo reduce operational and inventory cost the need to eliminate obsolete inventory and store the right mix, will enhance cash flow and increase profitImprove demand planning and identification of safety stock levels Action plan – Improved purchase forecasting reports to be implemented.

2, SystemsTo improve the visibility of supply, improved systems and process will help in demand forecasting and plan distribution.The company needs to upgrade the system to generate order tracking information, provide management information reports like data on product segment profit ratio, debt to asset ratio, inventory and working capital turn over. Asset utilization and supply chain efficiency will reduce cost, increase profits and reduce wastage. Action plan – Upgraded ERP system being implemented.

Recommendations (Cont)

3, SupplierTo improve the commitment by external parties to think in terms of long standing cooperation will facilitates reduction in cost of goods and services.By creating an environment of stability and progress will open doors for vendors to invest more in terms of credit, quality and value for money goods. Action plan – Emphasis on time payment .

4, ManpowerTo enhance decision making, efforts need to be taken in hiring efficient, professional and technical qualified staff which will enhance decision making.Training in advanced procurement systems, time management and continuous development of skills is needed to optimize efficiency. Efficient manpower, fast purchase confirmation, improved payment terms and additional benefits like rebates, discounts, improved warranty period through negotiation will reduce administrative cost. Action plan – Monthly training programs will be implemented in house.

Recommendations (Cont)

5, Market intelligenceTo identify new niche markets and new alternative technology through market intelligence will bring information on phasing out of products which will help to ordering obsolete product and identify new products. Weekly meeting with sales and marketing team can provide market information of new product mix, competitors strategies & supply source and market price. To handle customer complains steps to be taken to record customer complain and actions taken to help in future remedial action.Action plan – To hold meeting fortnightly with sales and marketing team and develop customer complain tracking report .

Conclusion

The study of the procurement system and process in KAZEMA has shown immense opportunities for progress and development exist. With high inflation and tough competition for HVAC Spares in Kuwait, reducing the cost of goods and increasing company profits is a huge challenge.With continual improvements in supply chain efficiency like profit margin, asset turnover, debt to asset ratio by reducing working capital, cost of goods sold and improved asset utilization will give valuable results. The need to maintain inventory at the right mix without compromising on customer service is very important. With good upper management support, investing in latest procurement systems will helps in on time purchase which will expedite inventory and working capital rotation and reduce bad debts.

Result

The overall intend of this project is to bring in improvement in procurement policies, process and systems which will lead to clear understanding of best practices, modern sourcing tools and techniques, effective tracking process, track variance is any, measure saving which will give considerable motivation to procurement team to continual develop skills and tools to ultimate give savings in cost and increase profits