PURCHASING & MATERIALS MANAGEMENT

isbm Case study – 1

A risk is a compound estimation between an impact severity (if the risk concretizes) and the associated probability of occurrence (its uncertainty).

As an example, the nuclear risk is composed of its impact severity (i.e. Tchernobyl) multiplied by its probability of occurrence (hopefully very low in the developed countries, where nuclear plants are operated under adequate security policies), thus the nuclear risk is judged acceptable.

Compare this to the risk associated with a water dam, where the impact is much reduced compared to a nuclear accident (a single region over flooded instead of a whole continent), but with higher probability (much more water dams have broken in human history than nuclear plants).

Other useful points to take into consideration:

If the probability of occurrence associated to a risk is 0, this is not a risk anymore: it’s a no-case. If, on the other side, the probability is 1, this is not a risk either. It’s a problem that must immediately be dealt with such and not managed as a risk anymore.

What can be done to directly reduce a risk?

There are essentially two axes of action:

• Reduce the impact’s severity

• Reduce the probability of occurrence

For example, in the management of fire risk inside a building, these two axes are envisioned:

• Put a fire detector in every room and firewalls between building aisles
(this clearly reduces the impact in case of fire, since the fire is detected earlier)

• Forbid smoking inside the building (this contributes clearly to the probability reduction, since it’s a proven insurance fact that nine fires out of ten are due to improperly out-put butts)

Besides these direct actions, there are also indirect ones, like for example having a rescue plan ready to reduce the number of victims in case the risk concretizes, and delegating (part of) the risk to a third party, typically by taking an insurance, but this has more to do with the side-effects than directly with the risk itself

Question: How is buying under risk different from buying under uncertainty?

ISBM CASE STUDY – 2

Steps in the Purchasing Cycle:

Recognize, describe, and define the need

A. Classification of Needs

1. Type of Need
2. Strategic or Operational?
3. Repetitive or Non-Repetitive
4. Size (quantity; dollars)
5. Speed/Timing

B. Specification of Need

1. Transmit the need (requisitions)

A. standard requisitions
B. traveling requisitions
C. BOM requisition

2. Determine sources, investigate, and select supplier/analyze bids
3. Prepare and issue the PO
4. Follow-up the order (including expediting and de-expediting)
5. Receive and inspect the material (use of receiving report: purchasing, accounting, user, receiving)
6. Clearance of the invoice and payment to supplier
7. Close the order/records

Question:

Base on above points cite an example of a material called backlit flex used for hoarding and advertising? Formulate a purchasing cycle?

CASE – 3

(20 Marks)

Fiat India said on Monday it has successfully implemented an online order management system for spare parts – ‘eSIRA (electronic Systemi inormati Ricambi Afflizoni)- in its dealerships across the country.

The new system would enable the dealers to place orders for spare parts, check parts availability and credit limits and also track the status of their orders in real-time, the company said in a statement.

The ‘eSIRA’ software which has been developed by Global Value Solutions – an IBM and Fiat Auto joint venture, has been successfully implemented by Fiat in other countries as well.

“This new system equips Fiat’s dealers with immediate knowledge of whether the material they have ordered is available and if their order has been accepted, resulting in improving the supply chain management for spare parts. This is another step forward in our efforts to continuously improve our after sales service,” Fiat India Commercial Director A M Gupta said.

Question:

How can spare part management help FIAT handle material management?

CASE-4
Vendor selection is a critical decision for any organization’s business operations. Their decision to have a single vendor or multiple ones depends on the concerned areas of operations, services or procurement. For some of the products and services (for example, hardware AMC and facilities management), companies have the policy of appointing a single vendor. But, at the same time, there are those who follow the multi-vendor approach in majority of areas like hardware procurement, software development, and other services.

There are some key areas in vendor selection and management. It is important to decide upon the correct parameters and decision points in the vendor selection process. Therefore, companies try to look at the capability of the vendor in terms of the solution provider and to work as the organization’s partner rather than spending too much effort and time only in initial price negotiations. Building a long-term relationship, which is beneficial for both the parties, is the key success factor. It is also important to understand that the relationship with a vendor should be based on result-oriented milestones, rather than on just pure sales, and in that case, both the partners in the collaborative relationship gain in the long run.

T G Dhandapani, CIO, Sundaram-Clayton Ltd (SCL) Adapative & TVS Motors said, “We generally prefer to move with a single (strategic) vendor concept and follow it for many of the product procurement and services. It helps in building strategic relationship with the vendor that will pay in the long run.”

Further commenting on this, Madhusudhan Mendu R, (WT01-CIO Office & Operations) Wipro said, “We follow both single vendor as well as multi-vendor (mostly dual) strategy.”

There are some fundamental principles that generally govern the vendor selection and management policy. Firstly, the company needs to decide the specific areas where they should adopt a single or a multi-vendor approach before engaging new vendors. Secondly, rating of the performance and success of any particular project is a must. Thirdly, the decision-makers should try to see what can bring some amount of innovation and value addition through the vendors they work with.

Shubhojit Roy, IT-Head, SBI Mutual Fund explained, “As we believe in a multi-vendor approach, the vendor strategy depends on various factors. Price consideration is one of them, but this comes at a later stage of vendor selection. We evaluate the vendors on technical parameters first, where price does not figure at all and then subsequently, only the proposals of technically qualified vendors are further evaluated on commercial terms.” Hence, the parameters of technical evaluation and technical evaluation process of the vendors are two very important aspects of the company’s vendor selection strategy. He further added that in order to promote competition among the competent vendors, they prefer a competitive bidding process and have observed that if it is adopted correctly, it has many benefits for the company.
Vendors for concerned needs
Speaking about the most important vendors they work with, Roy said, “For hardware, we generally deal with partners of HP, Dell, IBM and also HCL, for our regular requirements.” He further informed, “For procurement of hardware, we generally have multiple vendors. While procuring servers and other critical components, we follow a set of parameters for selection of the vendors, but adopt a different set of parameters for vendor selection while procuring desktops and laptops across the organization.” For the letter, they give more weightage to factors like capability of the vendor to deliver on time, the ability to provide timely support and service at remote branch locations, etc.

However, for maintenance of normal desktops and laptops across the organization, the company prefers to have a single vendor approach, so that they have uniform and standard level of services and support across the country for all the branch offices of the company, and also, to reduce costs.

For Wipro, the major vendors for software are Microsoft, IBM, Symantec and Oracle. In services category, there is Wipro Infotech and for products they are working with Sun, HP, Cisco, Nortel and Dell.

Mendu explained, “As we follow a dual vendor strategy, a single vendor helps in standardization, less transactions and reduces operations overhead. On the other hand, multiple vendors build competitiveness and is meant for specific business requirements.”
Complexity in selection
The same rule cannot be applied for all the scenarios as far as vendor selection and management strategy is concerned. While, on the one hand, some of the deciding factors for single vendor strategy are availability of uniform and standardized support and services, cost reduction, ease of vendor management, etc., adoption of multi-vendor strategy generates competition to increase performance and better value.

From the risk mitigation and better price negotiations aspects, many companies prefer to opt for multiple vendors as far as possible. The pertinent question is—is it difficult to deal with a single vendor approach? To this, Roy replied, “We have already faced problems while dealing with a single vendor in some of the business operations. In terms of lack of flexibility, too much dependence/dominance of the vendor in decision-making makes it more difficult and finally ends up in moving out of the relationship with the single vendor.”

However, Dhandapani has a different story to tell, he said, “Though the understanding is very clear at the top level, the same does not precipitate in all cases at the operating level.

Due to high level of attrition in the IT industry some unwritten (in many cases written as well) understandings are ignored when it matters, especially in commercials and in service levels. When the wheel is redesigned, one needs to benchmark in all aspects and bring in a new vendor.”

This unnecessarily leads to wastage of time and efforts. Perhaps good application of CRM from the vendor-end and SRM at the buyer-end especially to address the softer aspects of the contract might help.
A satisfactory experience
To a large extent, companies are quite satisfied with their current vendor strategy. But there are bound to be some areas that need improvement. The exact match between the company and the vendor in terms of size, focus and attitude forms very important components of one’s vendor selection strategy.

Dhandapani averred that satisfaction is always a moving target and one needed to ensure minimum gap between what is desired and the actual.

Mendu asserted that they were satisfied with the strategy that they follow, as they are able to get the best suited Service Level Agreement (SLA). Because of competition, vendors strive to meet the SLA to ensure continuity in business.
Contract period
Talking about the timeline with a particular vendor, it is always preferable to have a contract for a specific period of time, say one to two years that will give room for formal review to take stock of the situation.

“In cases where there is applicability of time period, we decide on the tie-up for a specific period (say, for three to five years), based on the specifics of the project and price benefits. In some of the cases, tie-up with the vendor for a longer time period is beneficial from the company’s point of view. The time period is generally decided based on the nature of the project or procurement and the price benefits it can offer in the long run,” stated Roy, adding that three years is the time period in most of the cases. Otherwise, in service oriented-scenario, the contract is for one year and based on the positive review, they renew the contract for another year.
The problem areas
Talking about the challenges that companies face while sticking to a particular strategy, Dhandapani said, “One of the challenges we face is the availability of technology with the strategic vendor when business needs it, and that is why a single vendor concept is very successful for procuring standardized products and services.”

Mendu conceded that the single vendor concept increases the dependency on the vendor and they need to drive the vendor more aggressively to meet his SLA and pricing.

Multiple vendors need to work aggressively to deliver the right SLA and pricing. These vendors are aware that they might lose new opportunities as well as sustenance of existing business if they are unable to do so. Hence, there is pressure on them to meet the client’s expectations.
Service matters
Good service is one of the most significant components of vendor selection and evaluation process. “We give a lot of emphasis to the servicing and support aspects. Servicing capability of the vendor and availability of competent and timely support are crucial decision factors in vendor evaluation process. Apart from documenting servicing and support required in the scope of work document, we have SLAs with the vendors to measure and monitor servicing issues. But at the end of the day, relationship with the vendor is the key to success,” stated Roy.

In this given scenario where vendor selection strategy of one company appears contradictory to another’s, it is safe to bet that vendor selection has reached a phase of subjective convenience.

There are companies that find convenience in having a vendor as a single point source for all needs i.e. a single vendor approach. On the other hand, this also gives rise to the speculation as to how competent the vendor would address the issues of the company when in dire need. This is because a company negotiating with a single vendor would remain dependent on it for the entire contract period.
Consequently, it is essential to identify the accurate vendor for long-term relationship from the company’s perspective.

The decision-makers should be very clear on the scope of work, service/support levels, etc., with the vendor before the final selection process.

Question:

Why do some organizations adopt a single vendor approach while others are more comfortable with multiple vendors?