Procurement Management & Managing Relationships with

Suppliers

Dira Ernawati, ST. MT

Jur. Teknik Industri – UPN “Veteran” Surabaya

Dira Ernawati, ST.MT 2

Background

• About 40 – 70% of cost of goods sold are from material costs

• Non financial contributions of supply management are of high importance:– Quality of supplied materials – Delivery consistency from supplier– Supplier willingness to deliver more

frequently with smaller delivery quantity– Supplier involvement in developing new

products– Supplier production and delivery flexibility

Dira Ernawati, ST.MT 3

Activities Related Procurement Management

• Design strategic relationships with suppliers

• Selecting appropriate suppliers• Chose and implement appropriate

technology to support procurement activities

• Maintain procurement related data bases• Managing purchasing activities• Evaluating supplier performance

Dira Ernawati, ST.MT 4

Categories of Goods Purchased

• Direct materials, components, subassemblies

• Property, plant, and equipment (PPE)

• Maintenance, repair, and operating supplies (MRO)

• Services

Supplier Relationships & Sourcing Strategy

Dira Ernawati, ST.MT 6

• A close collaboration among two or more trading partners in a supply chain, characterized by friction-free information sharing between them. Trading partners: suppliers, 3PL, dealers/distributors.

• They both agree to share risks and benefits of the relationships for a long term. A study by Helper A study by Helper (1991) revealed that the average length of contract in the (1991) revealed that the average length of contract in the US has increased from 1.2 years in 1983 to 2.3 years in US has increased from 1.2 years in 1983 to 2.3 years in 1989. Some companies (like Chrysler and Mazda 626) 1989. Some companies (like Chrysler and Mazda 626) signed supply contracts for the life cycle of a model signed supply contracts for the life cycle of a model (Typically for 3-5 years).(Typically for 3-5 years).

What is a Partnership

Dira Ernawati, ST.MT 7

Practices Across Nations

GM Ford Chrysler Toyota Nissan Hyundai Kia Daewoo

Suppliers supply multiple automakers

Suppliers tend to supply only one automaker

Big, but not loyalAble to learn from other customers

Loyal, but smallUnable to learn from other customers

Most effective at strategically

segmenting suppliers

Dira Ernawati, ST.MT 8

Supplier Segmentation in Automotive Industry

Subsidiaries> 20% ownership30 – 35 suppliers

Supplier Association(90 suppliers)

Supplier Association(190 suppliers)

Engine partsTransmissionAC/HeaterRadiatorsBody PanelsSeats

TiresBatteriesSpark plugsShocksBelts

Dira Ernawati, ST.MT 9

Supplier Segmentation @ Japanese Automakers

Non Strategic Suppliers

• Standardized / commodity items

• Low value inputs

• Stand alone

• Low asset specificity

• Little help from automakers

• Suppliers supply to multiple automakers

• Single functional interface (marketing to purchasing)

• Price benchmarking

Strategic Suppliers

•Customized items critical for product differentiation

• High value

• Multiple interaction effects with other inputs

• High asset specificity

• Intensive face to face contacts

• Often exclusive relationships

• Multiple functional interfaces (engineering, manufacturing, etc.)

• Self enforcing agreements are necessary (trust, ownership, etc.)

Dira Ernawati, ST.MT 10

Sourcing Strategy

Leverage More suppliers Large spending value Commoditized items

Strategic Critical, customized Limited suppliers Large spending value

Commodities Low priority items More suppliers Low spending value

Bottleneck Low priority items Limited suppliers

Full Strategic Sourcing

Reverse Auctions

Exchanges Spot buys, integration

Dira Ernawati, ST.MT 11

E-Auction, Exchange, Integrator, Spot Buys

Jenis Penjelasan

e-Auction Real time negotiation. Supplier bisa merevisi bid, bisa melihat bid orang lain.

Exchange Linking buyers and sellers electronically, can be private or public exchange.

Integrator Third parties, assume responsibility for managing a company’s sourcing activities.

Spot buys Made on open market, based on price. Time consuming, because made on individual basis.

Dira Ernawati, ST.MT 12

E-Auction Example

AIRLINE EXAMPLE• Number of supplier: 9• Number of bids:46• Materials Sourced: Mixed

consumables• Negotiation format: Reverse

Auction• Duration:30 minutes with two

5-minute extensions

Establish real time competition. Do not address Total Cost of Ownership (TCO). Not suitable if supply < demand.

Dira Ernawati, ST.MT 13

E-MARKETPLACE APPLICATION FOR STRATEGIC SOURCING

Industry Commodity Historic costs Cost reduction

Airline PC Consumables

$ 2.5 M 37%

Airline Stationary $ 1.3 M 30%

Consumer goods

Direct materials-sub assemblies

$ 9.3 M 30%

Foods Sliced beans $ 230,000 21%

Petrochemical Misc. direct and indirect materials

$ N/A 10-15%

Dira Ernawati, ST.MT 14

Sourcing Strategy

Leverage Test equipments Batteries Antennae

Strategic Transport equipment High end routers Premium handsets

Commodities Laptops & desktops Cable MRO/Office supplies Fuel

Bottleneck OSP Construction Pedestals Old technology plugs