Purchasing Management

Purchasing management is the management of the purchasing process and related aspects in an organization. A purchasing management department can be formed and operated by one or more employees in order to ensure that all goods, supplies, and inventory needed for the organization to operate are ordered and kept in stock, as well as control inventory levels and costs associated with purchasing the items. Purchasing is the first phase of Materials Management. Purchasing means procurement of goods and services from some external agencies. The object of purchase department is to arrange the supply of materials, spare parts and services or semi-finished goods, required by the organization to produce the desired product, from some agency or source outside the organization. The purchased items should be of specified quality in desired quantity available at the prescribed time at a competitive price. In the words of Alford and Beatty. Purchasing is the procuring of materials, supplies, machines, tools and services required for equipment, maintenance, and operation of a manufacturing plant. According to Walters, purchasing function means ‘the procurement by purchase of the proper materials, machinery, equipment and supplies for stores used in the manufacture of a product adopted to marketing in the proper quality and quantity at the proper time and at the lowest price, consistent with quality desired.”

Thus, purchasing is an operation of market exploration to procure goods and services of desired quality, quantity at lowest price and at the desired time. Supplier who can provide standard items at the competitive price are selected.

Purchasing in an enterprise has now become a specialized function. It was experienced that by giving the purchase responsibility to a specialist, the firm can obtain greater economies in purchasing. Moreover purchasing involves more than 50% of capital expenditure budgeted by the firm.

Purchasing is a managerial activity that goes beyond the simple act of buying. It includes research and development for the proper selection of materials and sources, follow-up to ensure timely delivery; inspection to ensure both quantity and quality; to control traffic, receiving, storekeeping and accounting operations related to purchases.” The modern thinking is that Purchasing is a strategic managerial function and any negligence will ultimately result into decrease in profits.

Objectives of Purchasing

The purchasing objective is sometimes understood as buying materials of the right quality, in the right quantity, at the right time, at the right price, and from the right source. This is a broad generalization, indicating the scope of purchasing function, which involves policy decisions and analysis of various alternative possibilities prior to their act of purchase. 

The specific objectives of purchasing are:

1. To pay reasonably low prices for the best values obtainable, negotiating and executing all company commitments.
2. To keep inventories as low as is consistent with maintaining production.
3. To develop satisfactory sources of supply and maintain good relations with them.
4. To secure good vendor performance including prompt deliveries and acceptable quality.
5. To locate new materials or products as required.
6. To develop good procedures, together with adequate controls and purchasing policy.
7. To implement such programmers as value analysis, cost analysis, and make-or-buy to reduce cost of purchases.
8. To secure high caliber personnel and allow each to develop to his maximum ability.
9. To maintain as economical a department as is possible, commensurate with good performance.
10. To keep top management informed of material development which could affect company profit or performance.
11. To achieve a high degree of co-operation and co-ordination with other departments in the organization.

Purchasing Managers, Buyers, and Purchasing Agents

Purchasing manager is the primary individual responsible for buying materials, parts, supplies, products and services necessary to manufacture a specific product or sell an item produced by the parent company or subsidiary. He or she should be organized, detail oriented, have an understanding of basic accounting practices and inventory management.

The purchasing manager must retain good relationships with vendors, work closely with accounting, credit, and shipping and receiving departments to insure all that the flow of purchase to inventory runs without issues. These responsibilities must be held with the utmost seriousness since errors in this area can affect the entire financial balance of a business.

A good purchasing manager must first establish a beneficial working relationship with its vendors. Negotiating for the best pricing structure, the guarantee of acceptable availability and dependable shipping times insure that the inventory is maintained and the productivity is stable. An undependable vendor can cause delays in production, lost sales and even financial instability if allowed to continue in the relationship without strong guidelines being set by the manager. Communication and organization work hand in hand to help the purchasing agent establish a stock forecast and keep ordering at a reasonable level.

The accounting department, which includes accounts receivable, accounts payable, and credit, must also work closely with the purchasing manager to determine how much money is allocated to inventory and periodic purchases, how quickly invoices are paid, and how accurately the invoices are when received. In this area, the purchaser needs to be an excellent record keeper and have an understanding of how the accounting department's system works. An accurate flow between these groups is an important task that must be handled carefully, since money is the strongest link in the business chain.

Lastly, having a grasp of the company inventory and how the shipping and receiving departments function daily will prove to complete your foundation successfully. When a company has a detailed oriented and organized shipping department, the purchasing manager can feel confident that the items ordered will reach the dock, be inspected, and moved into inventory with limited problems. Having a team of individuals of like mind will act as quality assurance for whatever enters your inventory. The purchasing manager wears many hats within a company but if focused can accomplish the ultimate goal of any company-to be productive and highly profitable.

A buyer's market is a situation in which supply exceeds demand, giving purchasers an advantage over sellers in price negotiations. The term "buyer's market" is commonly used to describe real estate markets, but it applies to any type of market in which there is more product available than there are people who want to buy it. The opposite of a buyer's market is a seller's market, a situation in which demand exceeds supply and owners have an advantage over buyers in price negotiations.

Purchasing agents, also known as buyers, generally work in the purchasing departments of large companies or governmental entities. Centralizing many of the organization's buying functions saves money and creates a fair process to assess proposals from various suppliers and sales representatives. Selling to a purchasing agent may be different than to your other clients who do not employ that position. Dealing with agents, who can be aggressive and difficult to contact, requires special considerations, especially for smaller companies facing competition from big businesses.

Request for Proposal

Before a purchasing agent buys from a supplier, a request for proposal may be distributed to several companies that carry the required item. The RFP specifies all documents needed, along with pricing, for a company to be considered as a vendor. Each organization may have different requirements, but you will likely need to submit specifications of the product or service, a time line for delivery and information about your company. Do not make exaggerated claims about your item or the ability of your business to supply it on a large scale. If you have doubts about meeting the requirements, it is best to wait for an RFP that you can fulfill.

 Communication

Building relationships is part of the selling process. With most contacts, sales representatives become acquainted with them on a professional and personal level. This helps in matching a product with the customer's needs. Even though it may not be a simple task, attempt to contact the purchasing agent directly. If you are successful in obtaining a phone number or email address, introduce yourself and ask pertinent questions about the organization. Inquire about details that may not have been specified on the RFP. After you submit your proposal, contact the buyer again to keep updated on the progress of choosing a vendor and to answer any questions.

 Procedures

Submit the necessary paperwork and pricing as directed by the purchasing department, agent or request for proposal. Reject the notion that you might win the bid without providing all requested documents. If you are familiar with an employee outside of the purchasing department, do not ask that person to intervene on your behalf, as it may not always work in your favor. Purchasing agents do what's best for their companies and work independently, though they may confer with other employees.

Negotiations

The price of your product or service in comparison to competitors is important in determining whether you will win the bid. Just as vital, however, is the quality and benefit of your product. Emphasizing how your item is superior to others and how your company will provide excellent customer service makes the purchasing agent take notice. If your product contains specialized features needed by the organization, you may be contacted by the purchasing agent to negotiate your price down to match the lowest bid from a substandard supplier. Do not undersell yourself in the hope of future business that may never materialize. There is value in what you offer, so reduce your price only to the extent that you will continue to make a profit and be able to serve your customer at the best of your ability.

The Objectives for Purchasing in Manufacturing

The manufacturing process depends on raw materials, as well as supplies. In a small business, your need to keep costs down may always seem to be at war with your need to produce the best quality. You can balance these needs by creating objectives for the person in charge of your purchasing. Setting objectives allows you to think through your company's needs while keeping an eye on expenditures.

Alignment with Objectives

Purchasing must conform to company strategy. For example, you may have decided that your marketing department must explore a new region and offer specific products to customers in that region. Your purchasing manager must increase the raw materials and supplies that are necessary to manufacturing that specific product. Similarly, if you decide to phase out a product, your purchasing agent must gradually reduce the orders for materials and supplies for that product. In a small business, these kinds of changes can represent a high percentage of your overall marketing strategies. That means whoever is doing your purchasing can make a big difference in what you spend and how well focused you are. If your business is so small that the person in charge of purchasing has other duties and does purchasing part-time, make sure she understands the importance of changing purchasing to match strategy.

Replacing Obsolete Stock

The person in charge of purchasing must constantly monitor inventory losses due to damage, deterioration or outdated features. The materials that go into your manufactured products must be of sufficient quality to provide you with a finished item that is free of defects and is up to current standards. The purchasing manager sets an objective of reviewing inventory and keeping up with improvements to make sure you are using the best materials available. For a small business, this kind of attention to quality can give you a competitive edge over larger companies who may be slow to upgrade inventory.

Master Agreements

Your purchasing representative can set an objective of securing master agreements with suppliers. These agreements ensure the delivery of routine orders without having to reorder. Having a master agreement in place can free the purchasing agent to pay attention to less routine matters, and ensure that you are always supplied with the minimum amount of materials you need. This can be crucial if your purchasing is assigned to an employee part-time. The master agreement will help that employee manage that process. Your buyer should also set an objective of periodically reviewing master agreements to make sure they match your current needs and offer the best prices.

Value vs Cost

The goal of purchasing is not always finding the lowest possible price. A buyer must keep an eye on value. This means appraising materials and supplies according to how much is actually useful. Paying low prices for supplies you throw out is not a way to save money. The purchasing agent must analyze how much you spend and how much profit you realize from your purchases to make sure you get a good value. In addition, you may want to pay a premium for materials that are superior and provide you with a better product you can charge more money for when you sell it. This attention to value can give a small business the advantage over large companies that may focus more on cost-cutting.

Objectives of Purchasing Management at the Strategies Level

You can improve business performance by aligning the objectives of purchasing management with your business strategies. At the strategic level, purchasing decisions affect profitability and business growth. For a strategy to be effective, purchasing management objectives have to support its goals. By making sure your purchasing decisions are in line with strategic objectives, you can use purchasing management to help build your business.

Value for Money

Ensuring that what you buy has high value for the company is a key purchasing function, buy what constitutes value depends on your strategic business goals. If you want to grow your business by offering low-cost goods, a matching purchasing management objective is to negotiate low supplier prices. If you want to increase profitability by charging premium prices for the highest quality, your purchasing managers have to ensure that your suppliers deliver the best products available. Review purchasing objectives and align the value they provide with company strategies.

Long-Term Relationship

When you have long-term or exclusive relationships with suppliers, you often obtain lower prices, more reliable service and improved support. Your business strategy may be more effective if supported by such relationships, but it is up to your purchasing management to negotiate them. Purchasing objectives should include the pursuit of long-term relationships if they might be a strategic asset. If your strategy is to deny your competition access to a supplier, your purchasing management may have to negotiate an exclusive supply agreement.

Continuous Evaluation

A strategy of continuous improvement and increased efficiency can only succeed if supported by purchasing management objectives. Suppliers have to undergo continuous evaluation, subject to standards similar to those for internal business processes. When supplier efficiency and performance increases in line with other business functions, you can can reduce processing and production costs. Put in place purchasing management objectives to include benchmarks for suppliers in terms of product failure rates, on-time delivery percentages, and competitiveness. Continuous evaluation against such benchmarks lets you identify preferred suppliers and those with exceptional performance.

Information Technology System Integration

Your business can achieve substantial economies if your suppliers can integrate their information technology system functions with yours. For example, instead of a supplier having to ask your staff whether your stock of the supplier's products is running out, the supplier's IT systems can access your warehouse records directly and automatically ship more products when stock runs low. Strategically plan for purchasing management to support this direction and consider such integration possibilities when selecting suppliers. Specific purchasing objectives might be to automate supply of products you need regularly; automate receiving, invoicing and payments; and integrate your system's tracking of quality issues and customer support with that of key suppliers.

Purchase Order

Purchase orders (POs) are documents of authorization that are issued by a buyer and extended to a seller. Their main function is to specify the terms of purchase that will exist between the two entities, at least in regard to all purchasing activity specified in the document. This form of sales order may be used to authorize a one-time purchase, or provide the means for establishing and governing a series of purchases over an extended period of time, usually one calendar year.

Before a purchase order is produced, many businesses make use of an internal document that is known either as a purchase requisition or simply a requisition. A department or other entity within the company structure submits a request for the purchase of specified goods or services using this document. The requisition usually carries a specific identification number, making it relatively easy for the purchasing department to keep track of whether or not the request has been approved, denied, or is still under consideration. In the event that the appropriate purchasing agent approves the requisition, a purchase order is issued to determine the terms and conditions under which the purchase is made. This often involves identifying the vendor who will fill the order, the unit price for the goods or services provided, and the total purchase price. Often, vendors include the order number on the invoice for the filled order, making it easy for accounts payable to process the invoice and apply the charges to the department that originally requested the order.

Along with use in evaluating and approving requested purchases on a one-time basis, this document can also be used to authorize several purchases over a specified period of time. This is often referred to as a blanket PO or blanket order.

For example, if a department within a given company wished to use audio conferencing over the course of the business year, it would submit a requisition to the purchasing area that covered the number of call minutes needed to successfully hold those conferences for that entire year. The purchasing department then seeks to secure a vendor that will provide the service at a reasonable per minute/per line rate. Once the vendor is identified and approved, the purchasing agent issues an order to that vendor, who in turn tracks the minutes used and makes sure the blanket PO number is referenced on each invoice issued to the customer throughout the year.

While larger corporations more often use both a requisition form and a purchase order to keep track of its ordering activity, smaller companies sometimes combine the two documents, effectively using the same identification number for requesting the purchase of items and approving that request. At times, the decision to use a single document or both documents has to do with complying with governmental regulations as well as maintaining a comprehensive internal history. As long as the documentation used creates a consistent and accurate record of the transactions, and provides the company with the detail it needs, either approach will work.

The four main types of purchase orders

There are the four main types of purchase orders, such as:

• Standard purchase orders: a standard purchase order is typically used for irregular, infrequent or one-off procurement. As mentioned above, it contains a complete specification of the purchase, setting out the price, quantity and timeframes for payment and delivery. A restaurant might raise a standard purchase order when it purchases new tables and chairs. If all goes well, this should be a one-off purchase for the restaurant, and the contract will be fulfilled once the chairs are delivered in good order.
• Planned purchase orders: like a standard purchase order, a planned purchase order is relatively comprehensive. A planned purchase order requires full details of the goods and services to be purchased, and their costs. Dates for payment and delivery are also included in a planned purchase order, but these are treated as tentative dates. Issuing a release against the planned purchase order places individual orders.

For example, a restaurant might require 50,000 disposable place mats in one year – the manager could create a planned purchase order with a commercial printer detailing the price and quantity with a tentative delivery schedule. After using the first 5,000 place mats, the restaurant would create a release against the purchase order to order more.

• Blanket purchase orders: When balancing administrative costs against the need for quick and consistent deliveries of goods or services, blanket purchase orders provide a welcome advantage to the owner of a small business. If properly executed, a blanket purchase order saves both the buyer and seller a considerable amount of time and money.
• Convenience: Although the mechanics of a blanket purchase can vary, the theory behind them is always the same. The goal is to create a standing purchase order with predetermined terms and conditions that will save administrative time for buyers and sellers who wish to do an extended amount of business together over a period of time and within certain limits. The main components are a period of performance and some type of limitation on quantity or dollar amounts expended.
• Material and Supply Orders: A common type of blanket purchase order sets up pre-negotiated line items for specific materials or supplies consumed on a frequent basis. For instance, if a business purchases many paper towels and garbage bags from the same company throughout the year, a purchase order with two line items is pre-established at an agreed unit price for each item, and with a limit on how many units can be bought or dollars can be expended for each line item within a year. When goods are needed, the supplier only needs to deliver; the buyer receives the units and pays upon receipt. The contract is typically negotiated to end when the line items, dollar values or time limits have been reached.
• Service Orders: Blanket purchase orders can also be created for services rendered. If frequent maintenance or repairs are required, for example, pre-established prices can be negotiated for each type of service much like a blanket purchase order for materials or supplies. Payment is made upon signature approval from an authorized employee at the purchase location to confirm that the services were rendered complete as outlined in the blanket agreement.
• Limit of Liability Orders: Another type of blanket purchase order can be executed based on a specific time frame and dollar limit of liability, but without detailed line items. These types of agreements are helpful when reserving a limited budget for consulting services for a specific project within a given time frame. For example, if the total budget for a report writing project was $10,000, the buyer would create a single-line-item purchase order with a quantity of 10,000 units at $1 per unit for a total of $10,000 to be executed within a one-year period. The quantity would represent the dollar values to be spent on various portions of report writing as later defined during the year, agreed to by both parties and then delivered in $1 increments. If the first was report defined, written, and delivered with an agreed-upon cost of $2,000, the buyer would receive a quantity of 2,000 units at $1 per unit for a total of $2,000 payable to the consultant. The remaining value on the purchase order would then be $8,000. Subsequent reports would be defined, written, delivered, and paid in the same manner until the total budget of $10,000 was consumed from the purchase order.
• Contract purchase orders: a contract purchase order sets out the vendor’s details and potentially also payment and delivery terms. The products to be purchased are not specified. A contract purchase order is used to create an agreement and terms of supply between a purchaser and vendor as the basis for an ongoing commercial relationship. To order a product, the purchaser may refer to the contract purchase order when raising a standard purchase order.

Methods of Purchasing

Some of the methods of purchasing are discussed as follows:

Purchasing by Requirement

This method refers to those goods which are purchased only when needed and in required quantity. The goods which are not regularly required are purchased in this way. On the other hand it refers to the purchase of emergency goods. These goods are not kept in store. Purchasing department must be in knowledge of the suppliers of such goods so that these are purchased without loss of time.

 Market Purchasing

Market purchasing refers to buying goods for taking advantages of favorable market situations. Purchases are not made to meet immediate needs but are acquired as per the future requirements. This method will be useful if future needs are estimated accurately and purchases are made whenever favorable market situations arise. The market situation is constantly studied for forecasting price trends.

The advantages of this method are: lower purchase prices, more margin on finished products due to lower material cost and saving in purchase expenses. This method suffers from some limitations: losses in case of wrong judgment, fear of obsolescence, higher storing expenses due to more purchases.

 Speculative Purchasing

Speculative purchasing refers to purchases at lower prices with a view to sell them at higher prices in future. The attention in this method is to earn profits out of price rises later on. The purchases are not made as per the production needs of the plant rather these are far in excess of such requirements. A cloth mill may purchase cotton in the market when prices are low with the attention of earning profits out of its sales when prices go up. Speculative purchasing should not be confused with market purchasing.

The former is done to earn profits out of future price rises whereas the latter is concerned with purchasing for own needs when favorable market situations exist. Though speculative purchasing may result in profits but there are chances of prices going down in future, fear of obsolescence and incurring higher storage costs.

 Purchasing for Specific Future Period

This method is used for the purchase of those goods which are regularly required. These goods are needed in small quantity and chances of price fluctuations are negligible. The needs for specific period are assessed and purchases made accordingly. The requirements for such purchases may be assessed on the basis of past experience, period for which supplies are needed, carrying cost of inventory etc.

Contract Purchasing

In the words of Spiegel it is “the purchasing under contract, usually formal, of needed materials, delivery of which is frequently spread over a period of time.” Under this method a specific quantity of materials is contracted to be purchased and delivery is taken in future. Even though the goods are procured in future but the price and other terms and conditions are fixed at the time of contract. This method may be useful when price rises in future may be expected and material requirements for future may be accurately estimated.

Scheduled Purchasing

Under this method the suppliers are supplied a probable time schedule for material requirements so that they are in a position to arrange these in time. An accurate production schedule is prepared for estimating future material needs. The suppliers are informed of probable needs and orders are sent accordingly. The schedule provided by the purchaser to the vendor is not a contract. This is only a gentleman’s agreement for terms and conditions of purchases. The main objectives of this method are: minimum inventory, prompt service low prices, quality goods etc.

Group Purchasing of Small Items

Sometimes a number of small items are required to be purchased. The prices of these items are so small that costs of placing orders may be more than prices. In such situations the buyer places order with a vendor for all these items. The purchase price is agreed to be by adding some percentage of profit in the dealer’s cost. This method will be used only when dealer’s records are open to inspection for determining his cost. This type of purchasing reduces the cost of the buyer by eliminating much clerical work.

Co-operative Purchasing

Small industrial units may join to pool their requirements and then place bulk orders with dealers. This will help them in availing rebates on large quantity purchases, cash discounts and savings in transportation costs. After receiving the materials these are divided among the member units. Co-operative purchasing helps small units in availing the benefits of bulk purchasing.

Roles of a Purchasing Department

Purchasing departments are responsible for procuring supplies. This largely involved order-placing and was primarily a clerical position. However, as the development of strategic planning and the advent of just-in-time purchasing made purchasing a more crucial business function. Today, purchasing is often referred to as “supply chain management” and the purchasing department has taken on a larger and more vital business role.

Supply Sourcing

One of the main roles of the purchasing department is to source supplies and parts, and then purchase them. In large companies, this may also include deciding whether to make the item in-house. Purchasing departments often work alongside product development teams to source materials and determine cost of the finished product. Purchasing departments may use trade publications to source suppliers, or go straight to the manufacturer. Finding the correct item at the correct price can be difficult, and purchasing departments may also work to assist suppliers in manufacturing the item needed. This can involve providing considerable assistance to the supplier.

Bidding

For items needed in bulk, or specialist items, purchasing departments often use competitive bidding to choose a supplier. The department will then be responsible for all aspects of the bidding process. For example, when the purchasing department of the Port of Houston chooses a supplier, it publishes a public notice, writes detailed instructions on the bidding process, accepts companies onto the approved list of bidders, handles bid security money, opens and reads the bids publicly and makes a recommendation on which bid to accept.

Supplier Management

In addition to finding supplies and negotiating contracts for the supplies, purchasing departments are also responsible for monitoring the supplier's performance. Purchasing departments must evaluate the supplier's performance and quality control. This can include monitoring delivery times, quality, cost and performance. For suppliers in other countries, this can also mean monitoring working conditions and workers’ rights. Large firms and public organizations often certify suppliers once they are shown to meet performance targets. This may involve a training and education program, and detailed inspection of suppliers.

Cost Control

Purchasing departments, especially in government agencies, may also be responsible for maintaining strict cost control. For example, in a 2010 article on hotel purchasing specialist site Food Buyers Network, John Schalow suggests that to get the best price, purchasing departments need to ensure suppliers themselves get a lower cost from distributors and manufacturers. This can be done by increasing delivery size, paying on time, ordering online and making sure suppliers use the best practice.

 Legal Controls

Purchasing departments must also be aware of the laws applying to purchasing. For private companies, this is primarily contract law, but for government bodies, there may be state and federal laws regulating purchasing.

For example, school district purchasing departments in Texas must know that it is a state criminal offense to avoid using competitive purchasing when it is required; and that while federal law requires a bidding process to be used for all child nutrition purchases more than $100,000, Texas state law requires a bidding process for any purchase over $25,000.

 Purchasing Process

The purchasing process for companies breaks down into eight clear steps. In the first step the company identifies a need, for which the answer is the purchase of a product. The final step is the execution of a purchase contract. The steps in between build an organized, informed process that results in the company purchasing the right product for the need from a qualified supplier whose product is the most durable for the price.

Identify Need

Identify the need for a product purchase. For example, a lawn company wants to offer mowing services to its clients. To do this it needs to purchase a mower. Thus, the need to make a purchase of a product, a mower, is identified.

 Select Specific Product

Select a specific product to meet the need. For example the lawn company must select which type of mower from the many push and riding varieties on the market meets the company& amp; #039;s need for a mower the best.

 Appoint Purchase Team

Put a team together to manage the purchase process, including finalizing the list of required technical specifications for the product and the bid solicitation and award process.

 Specify Technical Specifications

Arrive at a list of required technical specifications for the product to ensure it meets the company& amp; #039;s needs.

 Budget for Purchase

Establish a budget for the purchase relying on the range of prices identified by the research done in Step 3.

 Research Potential Suppliers

Research the various product types that fit the need along with their suppliers to identify the most durable model at the best price. If the lawn company decides to purchase a riding mower, research is conducted into which brand and manufacturer provides the most durable product for the price asked.

Solicit Bids

Solicit bids from the manufacturers and suppliers of the identified product that meets all the required technical specifications.

 Award Contract

Select a supplier from the bids submitted and award the purchase contract.

 

Functions of a Purchasing Department in an Organization

Most major companies and even some government organizations have a purchasing or procurement department as part of everyday operations. These departments provide a service that is the backbone of many manufacturing, retail, military and other industrial organizations. Many individuals, even some who work for these companies, are unaware of what the purchasing department does, why it exists or what purposes it serves. To understand better what the role of the purchasing department is, consider some functions it performs.

Procuring Materials

One role of the purchasing department is to procure all necessary materials needed for production or daily operation of the company or government organization. For a manufacturing company, this might include raw materials such as iron, steel, aluminum or plastics, but it also might include tools, machinery, delivery trucks or even the office supplies needed for the secretaries and sales team. In a retail environment, the purchasing department makes sure there is always sufficient product on the shelves or in the warehouses to keep the customers happy and keep the store well-stocked. With a small business, it is especially important to keep inventory ordering at a reasonable level; investing large amounts of capital in excess stock could result in storage problems and in a shortage of capital for other expenditures such as advertising or research and development. Purchasing also oversees all of the vendors that supply a company with the items it needs to operate properly.

Evaluating Price

A purchasing department also is charged with continuously evaluating whether it is receiving these materials at the best possible price in order to maximize profitability. This can be challenging for a small business that may purchase in lesser quantities than a larger vendor and which thus may not receive the same type of bulk discounts. A purchasing department in a small business needs to shop around to find the best vendors at the most reasonable prices for the company's particular size orders. Purchasing department staff may communicate with alternate vendors, negotiate better pricing for bulk orders or investigate the possibility of procuring cheaper materials from alternative sources as part of their daily activities.

Paperwork and Accounting

Purchasing departments handle all of the paperwork involved with purchasing and delivery of supplies and materials. Purchasing ensures timely delivery of materials from vendors, generates and tracks purchase orders and works alongside the receiving department and the accounts payable department to ensure that promised deliveries were received in full and are being paid for on time. In a small business, this means working closely with the accounting department to ensure that there is sufficient capital to buy the items purchased and that cash is flowing smoothly and all payments are made on time.

Policy Compliance

The purchasing department also must ensure that it is complying with all company policies. For example, in a small business, individual staff members may communicate with the purchasing department about purchasing needs for things such as office supplies or computers. Before making a purchase, the purchasing department must ensure that it heeds the proper protocols for purchase and budget approval and must ensure that any items are purchased in accordance with the overall purchasing policy of the organization.

 

Supply Chain Management

Supply chain management is the management of the flow of goods and services and includes all processes that transform raw materials into final products. It involves the active streamlining of a business's supply-side activities to maximize customer value and gain a competitive advantage in the marketplace. SCM represents an effort by suppliers to develop and implement supply chains that are as efficient and economical as possible. Supply chains cover everything from production to product development to the information systems needed to direct these undertakings. A supply chain is a network of functional organizations that through their activities perform the logistics functions. These functions include procurement of materials transformation of materials and inter- mediate products into intermediate and finished products, and distribution of finished products to the customers. Supply chains exist both in manufacturing and service organizations Supply chains can differ greatly in complexity from industry to industry and from individual company to company, Because of the widespread prevalence and variety of supply chains, many alternative definitions of a supply chain exist.

The term supply chain is somewhat of a misnomer because a supply chain is often not a single or simple chain but a complex network with many divergent and convergent flows. Because of the current focus of companies on their core competencies, there are usually many different organizations active in a supply chain. If all these organizations belong to the same (multinational) corporation, information flows usually are more comprehensive and engineering methodology based decision-making is easier. However, the fundamental nature of the supply chain does not change with the number of corporations involved. In other words, there is no difference in the definition of a supply chain depending on the fact if one or more corporations are responsible for executing the logistics functions For an organization to become and remain part of a supply chain requires this to be a beneficial relationship or win-win situation in the long run for both this organization and for the other organizations in the supply chain.

Supply chain management (SCM) is the broad range of activities required to plan, control and execute a product's flow, from acquiring raw materials and production through distribution to the final customer, in the most streamlined and cost-effective way possible. SCM encompasses the integrated planning and execution of processes required to optimize the flow of materials, information and financial capital in the areas that broadly include demand planning, sourcing, production, inventory management and storage, transportation or logistics and return for excess or defective products. Both business strategy and specialized software are used in these endeavors to create a competitive advantage. Supply chain management is an expansive, complex undertaking that relies on each partner from suppliers to manufacturers and beyond to run well. Because of this, effective supply chain management also requires change management, collaboration and risk management to create alignment and communication between all the entities. In addition, supply chain sustainability which covers environmental, social and legal issues, in addition to sustainable procurement and the closely related concept of corporate social responsibility which evaluates a company's effect on the environment and social well-being are areas of major concern for today's companies.

 Basic Concept

Supply-chain management (SCM), the management of the flow of goods and services, involves the movement and storage of raw materials, of work-in-process inventory, and of finished goods from point of origin to point of consumption. Interconnected or interlinked networks, channels and node businesses combine in the provision of products and services required by end customers in a supply chain. Supply-chain management has been defined as the "design, planning, execution, control, and monitoring of supply-chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand and measuring performance globally." SCM practice draws heavily from the areas of industrial engineering, systems engineering, operations management, logistics, procurement, information technology, and marketing and strives for an integrated approach. Marketing channels play an important role in supply-chain management. Current research in supply-chain management is concerned with topics related to sustainability and risk management, among others. Some suggest that the “people dimension” of SCM, ethical issues, internal integration, transparency/visibility, and human capital/talent management are topics that have, so far, been underrepresented on the research agenda.

 

How Supply Chain Management Works

Typically, SCM attempts to centrally control or link the production, shipment, and distribution of a product. By managing the supply chain, companies are able to cut excess costs and deliver products to the consumer faster. This is done by keeping tighter control of internal inventories, internal production, distribution, sales, and the inventories of company vendors. SCM is based on the idea that nearly every product that comes to market results from the efforts of various organizations that make up a supply chain. Although supply chains have existed for ages, most companies have only recently paid attention to them as a value-add to their operations.

In SCM, the supply chain manager coordinates the logistics of all aspects of the supply chain which consists of five parts: 1) the plan or strategy, 2) the source (of raw materials or services), 3) manufacturing (focused on productivity and efficiency), 4) delivery and logistics, and 5) the return system (for defective or unwanted products). The supply chain manager tries to minimize shortages and keep costs down. The job is not only about logistics and purchasing inventory. According to Salary.com, supply chain managers, “make recommendations to improve productivity, quality, and efficiency of operations.” Improvements in productivity and efficiency go straight to the bottom line of a company and have a real and lasting impact. Good supply chain management keeps companies out of the headlines and away from expensive recalls and lawsuits. 

 

Supply Chains

A supply chain is the connected network of individuals, organizations, resources, activities, and technologies involved in the manufacture and sale of a product or service. A supply chain starts with the delivery of raw materials from a supplier to a manufacturer and ends with the delivery of the finished product or service to the end consumer. SCM oversees each touch point of a company's product or service, from initial creation to the final sale. With so many places along the supply chain that can add value through efficiencies or lose value through increased expenses, proper SCM can increase revenues, decrease costs, and impact a company's bottom line.

 

Elementary Perception of Supply Chain

A supply chain is a network of retailers, distributors, transporters, storage facilities and suppliers that participate in the production, delivery, and sale of a product to the consumer. It is typically made up of multiple companies who coordinate activities to set themselves apart from the competition.

There are three key parts to a supply chain:

• Supply focuses on the raw materials supplied to manufacturing, including how, when, and from what location.
• Manufacturing focuses on converting these raw materials into finished products.
• Distribution focuses on ensuring these products reach the consumers through an organized network of distributors, warehouses, and retailers.

While often applied to manufacturing and consumer products, a supply chain can also be used to show how several processes supply one another. The definition in this sense can apply to Internet technology, finance, and many other industries. A supply chain strategy defines how the network should operate in order to compete in the market, evaluating the benefits and costs relating to the operation. While a business strategy focuses on the overall direction a company wishes to pursue, supply chain strategy focuses on the actual operations of the organization and the path that will be used to meet a specific goal.

Another related term is supply chain management (SCM), which is the oversight of materials, information, and finances as they are distributed from supplier to consumer. The supply chain also includes all the necessary stops between the supplier and the consumer, so its management involves coordinating this flow of materials within a company and to the end consumer.

The SCM can be divided into three main flows:

• The Product flow includes moving goods from supplier to consumer, as well as dealing with customer service needs.
• The Information flow includes order information and delivery status.
• The Financial flow includes payment schedules, credit terms, and additional arrangements.

The supply chain operations reference model (SCOR) is a management tool used to address, improve, and communicate the SCM decisions within a company and with suppliers and customers of a company. The model describes the business processes required to satisfy a customer’s demands. It also helps to explain the processes along the entire supply chain and provides a basis for how to improve those processes.

The SCOR model was developed by the supply chain council with the assistance of 70 of the world’s leading manufacturing companies. It has been described as the “most promising model for supply chain strategic decision making. The model integrates business concepts of process re-engineering, benchmarking, and measurement into its framework. This framework focuses on five areas of the supply chain: plan, source, make, deliver, and return. These areas repeat again and again along the supply chain. The supply chain council says this process spans from “the supplier’s supplier to the customer’s customer.”

 Plan

This is the strategic portion of SCM. Companies need a strategy for managing all the resources that go toward meeting customer demand for their product or service. A big piece of SCM planning is developing a set of metrics to monitor the supply chain so that it is efficient, costs less and delivers high quality and value to customers.

Supply chain planning (SCP) is the component of SCM involved with predicting future requirements to balance supply and demand.

The SCM is sometimes broken down into the stages of planning, execution and shipping. Supply chain planning and supply chain execution (SCE) is the two main categories of SCM software. The SCP products may include supply chain modeling, and design, distribution and supply network planning. SCE software applications track the physical status of goods, the management of materials, and financial information involving all parties.

Demand and supply planning and management are included in this first step. Elements include balancing resources with requirements and determining communication along the entire chain. The plan also includes determining business rules to improve and measure supply chain efficiency. These business rules span inventory, transportation, assets, and regulatory compliance, among others. The plan also aligns the supply chain plan with the financial plan of the company.

 Develop (Source)

This step describes sourcing infrastructure and material acquisition. It describes how to manage inventory, the supplier network, supplier agreements, and supplier performance. It discusses how to handle supplier payments and when to receive, verify, and transfer product.

The companies must choose suppliers to deliver the goods and services they need to create their product. Therefore, supply chain managers must develop a set of pricing, delivery and payment processes with suppliers and create metrics for monitoring and improving the relationships. And then, SCM managers can put together processes for managing their goods and services inventory, including receiving and verifying shipments, transferring them to the manufacturing facilities and authorizing supplier payments.

 Make

Manufacturing and production are the emphasis of this step. Is the manufacturing process make-to-order, make-to-stock, or engineer-to-order? The make step includes, production activities, packaging, staging product, and releasing. It also includes managing the production network, equipment and facilities, and transportation.

 Deliver

Delivery includes order management, warehousing, and transportation. It also includes receiving orders from customers and invoicing them once product has been received. This step involves management of finished inventories, assets, transportation, product life cycles, and importing and exporting requirements.

 Return

This can be a problematic part of the supply chain for many companies. Supply chain planners have to create a responsive and flexible network for receiving defective and excess products back from their customers and supporting customers who have problems with delivered products.

Companies must be prepared to handle the return of containers, packaging, or defective product. The return involves the management of business rules, return inventory, assets, transportation, and regulatory requirements. Management must have humans, communication, and a positive enterprise endeavor. Plans, measurements, motivational psychological tools, goals, and economic measures (profit, etc.) may or may not be necessary components for there to be management.

 Benefits of Using the SCOR Model

The SCOR process can go into many levels of process detail to help a company analyze its supply chain. It gives companies an idea of how advanced its supply chain is. The process helps companies understand how these steps repeat over and over again between suppliers, the company, and customers. Each step is a link in the supply chain that is critical in getting a product successfully along each level. The SCOR model has proven to benefit companies that use it to identify supply chain problems. The model enables full leverage of capital investment, creation of a supply chain road map, alignment of business functions, and an average of two to six times return on investment.

 Logistics vs. Supply Chain Management

The terms supply chain management and logistics are often confused or used synonymously. However, logistics is a component of supply chain management. It focuses on moving a product or material in the most efficient way so it arrives at the right place at the right time. It manages activities such as packaging, transportation, distribution, warehousing and delivery.

In contrast, SCM involves a more expansive range of activities, such as strategic sourcing of raw materials, procuring the best prices on goods and materials, and coordinating supply chain visibility efforts across the supply chain network of partners, to name just a few.

 Benefits of Supply Chain Management

Supply chain management creates efficiencies, raises profits, lowers costs, and boosts collaboration and more. SCM enables companies to better manage demand, carry the right amount of inventory, deal with disruptions, keep costs to a minimum and meet customer demand in the most effective way possible. These SCM benefits are achieved through the appropriate strategies and software to help manage the growing complexity of today's supply chains.

Supply Chain Complexity

The most basic version of a supply chain includes a company, its suppliers and the customers of that company. The chain could look like this: raw material producer, manufacturer, distributor, retailer and retail customer.

A more complex, or extended, supply chain will likely include a number of suppliers and suppliers' suppliers, a number of customers and customers' customers or final customers and all the organizations that offer the services required to effectively get products to customers, including third-party logistics providers, financial organizations, supply chain software vendors and marketing research providers. These entities also use services from other providers.

The totality of these organizations, which evokes the metaphor of an interrelated web rather than a linear chain, gives insight into why supply chain management is so complex. That complexity also hints at the types of issues that can arise, from demand management issues, such as a release of a new iPhone that chokes demand for old iPhone cases; to natural supply chain disruptions, such as the halt of transportation in the U.S. in 2015 due to extreme winter weather, or California's drought and its effect on crops; to political upheaval, such as the strikes in India that throttled movement at its largest container port.

The Role of Supply Chain Management Software

Technology is critical in managing today's supply chains, and ERP vendors offer modules that focus on relevant areas. There are also business software vendors that focus specifically on SCM. A few important areas to note include:

• Supply chain planning software for activities such as demand management.
• Supply chain execution software for activities such as day-to-day manufacturing operations.
• Supply chain visibility software for tasks such as spotting and anticipating risks and proactively managing them.
• Inventory management software for tasks such as tracking and optimizing inventory levels.
• Logistics management software and transportation management systems for activities such as managing the transport of goods, especially across global supply chains.
• Warehouse management systems for activities related to warehouse operations.

The increasingly global nature of today's supply chains and the rise of e-commerce, with its focus on nearly instant small deliveries straight to consumers, are posing challenges, particularly in the area of logistics and demand planning. A number of strategies such as lean and newer approaches such as demand-driven material requirements planning may prove helpful.

Technology especially big data, predictive analytics, internet of things (IoT) technology, supply chain analytics, robotics and autonomous vehicles is also being used to help solve modern challenges, including in the areas of supply chain risk and disruption and supply chain sustainability.

As just two examples, IoT can help with transparency and traceability to help boost food quality and safety by using sensors to monitor the temperature of perishable food while it's in transit. And analytics can help determine where to put smart lockers in densely populated areas to cut the number of single-item deliveries and lower greenhouse gas emissions.

 The Advantages of Supply Chain

Effective supply chains give businesses a competitive advantage in the marketplace and help mitigate risks associated with acquiring raw materials and delivering products or services. By implementing supply chain management systems, businesses are able reduce waste, overhead costs and shipping delays in a scientific way. The benefits of this systematic approach impacts areas ranging from product quality to order turn-around times.

 Quality Assurance

Many manufacturers in the U.S. have relocated their operations to countries such as China, India and Russia in an effort to cut production costs. This has caused experienced domestic personnel to opt for other job assignments. As a result, product quality within the supply chain has become a pressing issue. Defects and rework attributable to poor systems are raising the costs of doing business. One of the advantages of supply chain management is that it incorporates quality techniques, such as quality management systems, to improve operations.

 Inventory Buffers

In almost every type of business, there is variability in customer spending. This requires companies to manage their inventories in a way that minimizes holding costs while providing enough flexibility to meet customer demands. If inventory levels fall too low, businesses may have to pay overtime to produce products or lose out on revenue by making customers wait or shop somewhere else. Supply chain management systems typically include inventory buffer levels that are pre-determined with careful analysis of historical trends.

 Shipping Options

As e-commerce continues to grow globally, buyers have more options to order products than ever before. Shipping options need to keep pace with the demands of the marketplace, which requires companies to readjust their supply chains to meet customers’ preferences. Whether it is small parcel shipping or larger bulk orders, shipping in a quick and accurate fashion is key for business success. Supply chain management systems help companies determine the optimal ways to ship while reducing costs to the lowest possible level.

 Risk Mitigation

Managing risk is a key responsibility for business leaders, and supply chain management systems allow for the identification of critical risk factors in an organization or with their suppliers. Whether it is product quality, compliance with applicable laws or operational safety, management must mitigate risk in an effective manner. Supply chain methodologies assist management with organizing risks and ascertaining the potential for internal or external failures. Without effective supply chain management systems, many companies are exposed to legal risks and liabilities.

Operations and Supply Chain Management

The Supply Chain and Operations Management (SCOM) major examines the integration of all key business processes from original suppliers through end users and provides products, services, and information that can add value for customers and stakeholders. The supply chain portion of the curriculum examines the supply, storage, movement of materials, and finished goods within an organization while the operations function relates to the efficient and most effective use of personnel, machines, and other resources.

Operations and SCM have concepts related to the design, planning, control, and improvement of manufacturing and service operations. One will be introduced to an innovative blend of analytical and empirical approaches to important problems facing the private and public sectors, including: project management, service delivery systems, product development, business analytics, inventory and supply chain management, among others

A supply chain is the collection of steps that a company takes to transform raw components into final products and deliver them to customers. The SCM is the process that is used by a company to ensure that its supply chain is efficient and cost effective. This typically is comprised of five stages: planning, development, manufacturing, logistics and returns.

During the planning stage, a strategy must be developed to address how a given product will meet the needs of the customers. A significant portion of this strategy often focuses on planning a profitable supply chain. The development stage involves building a strong relationship with suppliers of the raw materials that are needed in making the product the company delivers. This phase involves not only identifying reliable suppliers but also creating methods for shipping, delivery and payment.

In the next stage, the product is manufactured, tested, packaged and scheduled for delivery. Then, at the logistics phase, customer orders are received, and delivery of the goods is planned. The final stage of SCM is when customers can return defective products. The company also must address customer questions during this stage.

Supply Chain Management Flows

One can be divided into three main flows:

• The product flow includes the movement of goods from a supplier to a customer, as well as any customer returns or service needs.
• The information flow involves transmitting orders and updating the status of delivery.
• The financial flow consists of credit terms, payment schedules, and consignment and title ownership arrangements.

Elements of the Supply Chain

A simple supply chain is made up of several elements that are linked by the movement of products along it. The supply chain starts and ends with the customer.

• Customer: The customer starts the chain of events when they decide to purchase a product that has been offered for sale by a company. The customer contacts the sales department of the company, which enters the sales order for a specific quantity to be delivered on a specific date. If the product has to be manufactured, the sales order will include a requirement that needs to be fulfilled by the production facility.
• Planning: The requirement triggered by the customer’s sales order will be combined with other orders. The planning department will create a production plan to produce the products to fulfill the customer’s orders. To manufacture the products the company will then have to purchase the raw materials needed.
• Purchasing: The purchasing department receives a list of raw materials and services required by the production department to complete the customer’s orders. The purchasing department sends purchase orders to selected suppliers to deliver the necessary raw materials to the manufacturing site on the required date.
• Inventory: The raw materials are received from the suppliers, checked for quality and accuracy and moved into the warehouse. The supplier will then send an invoice to the company for the items they delivered. The raw materials are stored until they are required by the production department.
• Production: Based on a production plan, the raw materials are moved inventory to the production area. The finished products ordered by the customer are manufactured using the raw materials purchased from suppliers. After the items have been completed and tested, they are stored back in the warehouse prior to delivery to the customer.
• Transportation: When the finished product arrives in the warehouse, the shipping department determines the most efficient method to ship the products so that they are delivered on or before the date specified by the customer. When the goods are received by the customer, the company will send an invoice for the delivered products.

 Significance and Functions of Operations and SCM

The SCM is an essential element to operational efficiency. SCM can be applied to customer satisfaction and company success, as well as within societal settings, including medical missions; disaster relief operations and other kinds of emergencies; cultural evolution; and it can help improve quality of life. Because of the vital role SCM plays within organizations, employers seek employees with an abundance of SCM skills and knowledge. The SCM is critical to business operations and success for the following reasons:

 SCM is Globally Necessary

Basically, the world is one big supply chain. The SCM touches major issues, including the rapid growth of multinational corporations and strategic partnerships; global expansion and sourcing; fluctuating gas prices and environmental concerns, each of these issues dramatically affects corporate strategy and bottom line. Because of these emerging trends, SCM is the most critical business discipline in the world today.

 Reasons for SCM in Society

The SCM is necessary to the foundation and infrastructure within societies. SCM within a well-functioning society creates jobs, decreases pollution, decreases energy use and increases the standard of living.

 Reasons for SCM in Business

Clearly, the impact that SCM has on business is significant and exponential. Two of the main ways SCM affects business include:

 Boosts Customer Service

The SCM impacts customer service by making sure the right product assortment and quantity are delivered in a timely fashion. Additionally, those products must be available in the location that customers expect. Customers should also receive quality after-sale customer support.

Improves Bottom Line

The SCM has a tremendous impact on the bottom line. Firms value supply chain managers because they decrease the use of large fixed assets such as plants, warehouses and transportation vehicles in the supply chain. Also, cash flow is increased because if delivery of the product can be expedited, profits will also be received quickly.

Supply chain management helps streamline everything from day-to-day product flows to unexpected natural disasters. With the tools and techniques that SCM offers, one will has the ability to properly diagnose problems, work around disruptions and determine how to efficiently move products to those in a crisis situation.

Functions of SCM

The process of SCM can be divided into three distinct flows; product flow, information flow, and finances flow.

1. Product flow includes the movement of goods from a supplier to the customer.
2. The flow of information related to the status of product delivery is referred to as information flow.
3. The finances flow involves the payment schedule, credit terms, and title ownership arrangements.

Strategic activities that are a part of the SCM involve strategic network optimization, the establishment of partnerships with suppliers, distributors and customers, planning for the integration of existing products into the supply chain, and the design of a business strategy. Taking inventory and production decisions, devising transportation strategies, benchmarking of operations and focusing on customer demand are some of the other activities involved in the supply chain management. Planning of daily production and distribution, planning and scheduling of inbound and outbound operations are some of the important operational activities involved in supply chain management.

 Supply Chain Performance Measures

An important component in supply chain design and analysis is the establishment of appropriate performance measures. A performance measure, or a set of performance measures, is used to determine the efficiency and/or effectiveness of an existing system, or to compare competing alternative systems. Performance measures are also used to design proposed systems, by determining the values of the decision variables that yield the most desirable level(s) of performance. Available literature identifies a number of performance measures as important in the evaluation of supply chain effectiveness and efficiency.

Qualitative Performance Measures

Qualitative performance measures are those measures for which there is no single direct numerical measurement, although some aspects of them may be quantified. These objectives have been identified as important, but are not used in the models reviewed here:

• Customer Satisfaction: The degree to which customers are satisfied with the product and/or service received, and may apply to internal customers or external customers. Customer satisfaction is comprised of three elements.

o    Pre-Transaction Satisfaction: satisfaction associated with service elements occurring prior to product purchase.

o    Transaction Satisfaction: satisfaction associated with service elements directly involved in the physical distribution of products.

o    Post-Transaction Satisfaction: satisfaction associated with support provided for products while in use.

• Flexibility: The degree to which the supply chain can respond to random fluctuations in the demand pattern.
• Information and Material Flow Integration: The extent to which all functions within the supply chain communicate information and transport materials.
• Effective Risk Management: All of the relationships within the supply chain contain inherent risk. Effective risk management describes the degree to which the effects of these risks is minimized.
• Supplier Performance: With what consistency suppliers deliver raw materials to production facilities on time and in good condition.

Quantitative Performance Measures

Quantitative performance measures are those measures that may be directly described numerically. Quantitative supply chain performance measures may be categorized by:

• objectives that are based directly on cost or profit and
• Objectives that are based on some measure of customer responsiveness.

Measures Based on Cost

• Cost Minimization: The most widely used objective. Cost is typically minimized for an entire supply chain (total cost), or is minimized for particular business units or stages.
• Sales Maximization: Maximize the amount of sales dollars or units sold.
• Profit Maximization: Maximize revenues less costs.
• Inventory Investment Minimization: Minimize the amount of inventory costs (including product costs and holding costs)
• Return on Investment Maximization: Maximize the ratio of net profit to capital that was employed to produce that profit.

 Measures Based on Customer Responsiveness

• Fill Rate Maximization: Maximize the fraction of customer orders filled on time.
• Product Lateness Minimization: Minimize the amount of time between the promised product delivery date and the actual product delivery date.
• Customer Response Time Minimization: Minimize the amount of time required from the time an order is placed until the time the order is received by the customer.
• Usually refers to external customers only.
• Lead Time Minimization: Minimize the amount of time required from the time a product has begun its manufacture until the time it is completely processed.
• Function Duplication Minimization: Minimize the number of business functions that are provided by more than one business entity.

Evolution from Manufacturing to Operations Management

For over two century’s operations and production management has been recognized as an important factor in a country’s economic growth.

The traditional view of manufacturing management began in eighteenth century when Adam Smith recognized the economic benefits of specialization of labor. He recommended breaking of jobs down into subtasks and recognizes workers to specialized tasks in which they would become highly skilled and efficient.

In the early twentieth century, F.W. Taylor implemented Smith’s theories and development of scientific management. From then till 1930, many techniques were developed prevailing the traditional view.

Systems for production have existed since ancient times. The production of goods for sale, at least in the modern sense, and the modern factory system had their roots in the Industrial Revolution.

 The Industrial Revolution

The Industrial Revolution began in the 1770s in England and spread to the rest of Europe and to the United States during the 19th century. Prior to that time, goods were produced in small shops by craftsmen and their apprentices. Under that system, it was common for one person to be responsible for making a product, such as a horse-drawn wagon or a piece of furniture, from start to finish. Only simple tools were available; the machines in use today had not been invented.

Then, a number of innovations in the 18th century changed the face of production forever by substituting machine power for human power. Perhaps the most significant of these was the steam engine, because it provided a source of power to operate machines in factories. Ample supplies of coal and iron ore provided materials for generating power and making machinery. The new machines, made of iron, were much stronger and more durable than the simple wooden machines they replaced.

In the earliest days of manufacturing, goods were produced using craft production: highly skilled workers using simple, flexible tools produced goods according to customer specifications.

Craft production had major shortcomings. Because products were made by skilled craftsmen who custom fitted parts, production was slow and costly. And when parts failed, the replacements also had to be custom made, which was also slow and costly. Another shortcoming was that production costs did not decrease as volume increased; there were no economies of scale, which would have provided a major incentive for companies to expand. Instead, many small companies emerged, each with its own set of standards.

A major change occurred that gave the Industrial Revolution a boost: the development of standard gauging systems. This greatly reduced the need for custom-made goods. Factories began to spring up and grow rapidly, providing jobs for countless people who were attracted in large numbers from rural areas.

Despite the major changes that were taking place, management theory and practice had not progressed much from early days. What was needed was an enlightened and more systematic approach to management.

Scientific Management

The scientific management era brought widespread changes to the management of factories. The movement was spearheaded by the efficiency engineer and inventor Frederick Winslow Taylor, who is often referred to as the father of scientific management. Taylor believed in a “science of management” based on observation, measurement, analysis and improvement of work methods, and economic incentives. He studied work methods in great detail to identify the best method for doing each job. Taylor also believed that management should be responsible for planning, carefully selecting and training workers, finding the best way to perform each job, achieving cooperation between management and workers, and separating management activities from work activities.

Taylor’s methods emphasized maximizing output. They were not always popular with workers, who sometimes thought the methods were used to unfairly increase output without a corresponding increase in compensation. Certainly some companies did abuse workers in their quest for efficiency. Eventually, the public outcry reached the halls of Congress, and hearings were held on the matter. Taylor himself was called to testify in 1911, the same year in which his classic book, The Principles of Scientific Management, was published. The publicity from those hearings actually helped scientific management principles to achieve wide acceptance in industry.

 Physical Distribution to Logistics to SCM

Transportation, logistics, supply chain management, materials handling, and inventory control continue to evolve. This evolution has created cross-fertilization among these functions, driven by factors both conceptual matching demand to supply and technological an enhanced ability to communicate and collaborate.

This cross-fertilization has also blurred the definition of some terms.

For example, is logistics the same thing as supply chain management?

People working in different functional areas of logistics often define supply chain management (SCM) as it relates to what they do. A recent survey of Inbound Logistics readers supports this. Some respondents say SCM is the same old thing with a new handle, while others note it is more encompassing than logistics.

Many logistics veterans believe one has progressed from transportation to physical distribution to logistics to supply chain management. By contrast, purchasing managers have evolved their thinking from purchasing management to procurement and now to supply management (SM). Some couch supply management as SCM. Others do not want to give up the term purchasing, and now refer to this functional area as purchasing and supply management.

Manufacturing professionals hold yet another perception of SCM: as the task of allocating and committing resources for obtaining necessary supplies and capacity, handling, and positioning products to meet customer demands. The material requirements planning (MRP) and enterprise resource planning (ERP) systems now address resource commitments that go beyond manufacturing to include other enterprise and supplier resources, ultimately directed to satisfying customer demands with limited and efficient use of resources.

Other departments in the company also wonder about SCM and its orientation. In marketing as well as the broader functionality that includes business and consumer research, promotions, and sales SCM addresses the needs and market potential of not only immediate customers and consumers who buy products and services, but also end users. Naturally, market research analyses of end product usage are extremely important.

Many professionals perceive SCM in terms of a conceptual flow model, with goods flowing from the beginning source of raw materials to their end use. Within this context, my peers and I define SCM as "the integration of processes composed of materials, services, information, and cash within a company and in a network of companies or organizations that manufacture and deliver products and services from initial sources to end users."

By its nature, SCM encapsulates inter-enterprise, cross-functional processes that target end users of products and services. It requires integrated teams who are open and trustful in their value engineering and activities analysis.

Initially, logistics practitioners focus on supply chain applications that interface with immediate customers, suppliers, and intermediaries. Economic functional "activity" tradeoffs are analyzed in terms of who best can perform functions that are for the good of all trading partners. The long-term vision is inter-enterprise teams working seamlessly across all functions and activities to meet end user needs.

 Quality of Supply Chain System

Supply chain management directly impacts product quality and the overall profitability of a company. For these reasons, quality control in the supply chain is critical for maintaining a competitive edge in the marketplace and reducing operating costs. Without quality control, waste becomes prevalent beyond a tolerable amount. To help improve customer satisfaction, greater emphasis is given to the aspect of quality in the supply chain. Poor quality products, an unsafe work environment, or failure to comply with regulations ranging from product safety to social responsibility, can cause business disruption, financial loss, costly lawsuits, and long-lasting damage to the brand and corporate image of organizations that are dependent upon supply chain vendor performance. In the extreme, a brand, or even a company's reputation, can be damaged irreparably.

The crisis-catalyst may originate during any step in the supply chain process, from design to raw materials, to production, or transportation. Most often the issue centers on substandard materials or how well components or finished goods were designed and produced. Recently, company reputations have been damaged by substandard social responsibility practices of suppliers, even when the product quality was acceptable.

The quality management policies and practices of suppliers must be aligned with the standards of the company branding or selling the product. These quality management practices should also be aligned with accepted international standards. This is because failures in the supply chain are passed down the line to the firms ultimately marketing the products. Such failures can result in consumer dissatisfaction, regulatory noncompliance and, in some cases, public criticism of the corporate management practices.

There have been numerous, highly publicized cases in recent years from tainted toothpaste to lead paint in toys, to flawed labor practices of manufacturers. Companies are increasingly setting standards of quality management systems and worker treatment for their suppliers to avoid these kinds of problems. Vendor quality management standards are increasingly becoming a contractual condition for maintaining a supplier relationship.

Meeting stricter client and international quality management standards requires some vendors to invest in improving practices, policies, and management systems. Many adopt international standards, especially those of the International Organization for Standardization (ISO), the American National Standards Institute (ANSI), and the American Society for Quality (ASQ) to demonstrate acceptable practices. Additional security standards also may have to be adhered to by transportation, shipping, and logistics firms in the supply chain. While improvements in performance require investment, there are compelling benefits for suppliers to move forward. Adherence to quality management standards differentiates suppliers from competitors who do not comply and strengthens the relationship between a company and the vendor.

Companies should periodically validate vendor adherence to the required quality management standards by conducting supply chain vendor audits. Audit protocols serve an additional critical role, namely that of identifying and qualifying new vendors. The validation process involves on-site vendor audits that compare actual vs. required policy and practice standards. These analyses enable identification of critical performance gaps and opportunities for improvement. Constant improvement in quality management helps to reduce the risk of costly and embarrassing failures.

 Defects and Scrap

If raw materials are flawed, it can make entire production lines inefficient and increase defect rates in finished goods inventory. Also, inferior materials may require extra machining or refining, which adds to employees’ workloads and total manufacturing costs. Vendors and the materials they provide are often audited by supply chain staff members to ensure raw materials meet specifications. By controlling the quality of production inputs, supply chain managers are protecting the integrity of their company’s operations.

External Failures

When supply chain quality control is poor, products are more likely to break or wear out before their warranty period expires. There are a large number of failures that can occur once a product leaves a manufacturing facility, depending on the nature of the business. Customers who are forced to return items may lose respect for the company from which they purchased the product. Quality control in the supply chain ultimately helps to protect a company’s reputation. The better the control over supplier inputs, the less risk of returns and potentially hazardous product failures.

 Inspections

Companies that experience large quantities of defects and other forms of waste produced during manufacturing, often implement manual inspections to ensure product quality. Inspections raise operating costs and are unnecessary if quality controls are functioning properly. Quality control procedures and audits of supplier relationships are critical for avoiding continual inspections on the production line. Otherwise, labor hours will be lost inspecting materials and finished-goods inventory that could be allocated to value-added activities.

Toxic Materials

Hazardous materials are used throughout the world for various purposes in manufacturing, especially in defense-related industries. Quality control helps to protect employees and other stakeholders from being exposed to the harmful side-effects of toxic materials. The U.S. Department of Transportation prescribes important rules for the transport of hazardous substances. Non-compliance can lead to penalties or fines, which makes quality control imperative. The more efficiently and effectively toxic materials are handled in the supply chain, the better for all internal and external stakeholders.

 Overview from various Perspectives

Although there are several definitions of quality, simply put, quality can be defined as meeting or exceeding customer expectations. According to the American Society for Quality, the definition of quality is "A subjective term for which each person or sector has its own definition.

In technical usage, quality can have two meanings:

• The characteristics of a product or service that bear on its ability to satisfy stated or implied needs; a product or service free of deficiencies.
• According to Joseph Juran, quality means “fitness for use;” according to Philip Crosby, it means “conformance to requirements.” Quality tools exist and include, but are not limited to: cause analysis (cause-and-effect diagrams, pareto charts, and scatter diagram), evaluation and decision-making tools (decision matrix and multi-voting), process analysis (flowchart, failure modes and effects analysis, mistake-proofing, and spaghetti diagrams), data collection and analysis (box and whisker plot, check sheet, control chart, design of experiments, histogram, scatter diagram, stratification, and surveys), idea creation (affinity diagram, benchmarking, brainstorming, and nominal group technique), an improvement project (Gantt chart and Plan-Do-Study-Act continuous improvement model), and management tools (relations diagram, tree diagram, matrix diagram, L-shaped matrix, arrow diagram, and process decision program chart).

Total quality management is a set of quality practices that seek to continuously improve quality in processes.

There are some key principles of total quality include:

• Define quality in terms of customers and their requirements.
• Pursue quality at the source.
• Stress objective rather than subjective analysis.
• Emphasize prevention rather than detection of defects.
• Focus on process rather than output.
• Strive for zero defects.
• Establish continuous improvement as a way of life.
• Make quality everyone's responsibility.

Customers and suppliers must be integrated into the product development process in order to reduce the time to market. As product life cycles shorten, the appropriate products must be developed and successfully launched with ever-shorter time schedules in order for firms to remain competitive.

 Concept of Internal Customer

An internal customer is a client who purchases products that are manufactured by the employer. The term can be applied in a number of situations, including company structures in which one department effectively purchases products from another as part of the manufacturing chain. At other times, an internal customer is simply an employee who purchased a finished good or service directly from the employer, sometimes at a price that is discounted from the pricing that is charged to other types of consumers.

The concept of an internal customer is somewhat different from that of an external customer. External customers are buyers who are not part of the company organization. For instance, if ABC Company chooses to buy widgets from XYZ Company, and the two companies are not subsidiaries of a larger business operation, the purchase is said to be external. Should ABC and XYZ actually be owned by JKL company and operate as subsidiaries to that parent organization, then the purchase would be considered internal.

Many different types of companies enjoy a flow of business volume from internal customers. Retail organizations often provide employees with opportunities to purchase goods at discounted prices, a move that prompts those employees to meet their needs by making purchases with the employer rather than buying from a competitor. In like manner, agents and administrative staff who work with insurance agencies may choose to take out policies with their employer rather than other agencies. Even with individuals who work with communication companies may be offered services such as DSL or audio conference services at a discount not readily available through other vendors.

One of the challenges for any business is to find ways to include internal customer care in the overall client strategy. Since the focus of many customer service and support operations is directed outward, the needs and concerns of a customer who is part of the organization can be overlooked. This can be counter-productive on a number of levels, sometimes to the point of losing business and having an adverse effect on how the employee perceives his or her contribution to the success of the company. Choosing to include components that provide incentives to each internal customer as well as afford them the opportunity to receive assistance when and as needed will often not only increase the desire to buy from within, but will also have the benefit of motivating those employees to be as productive on the job as possible.

 Overview of TQM and LEAN Management

Total quality management is the continuous process of reducing or eliminating errors in manufacturing, streamlining supply chain management, improving the customer experience and ensuring that employees are up-to-speed with their training. Total quality management aims to hold all parties involved in the production process as accountable for the overall quality of the final product or service.

Lean management is an important part of lean thinking. As one implement lean in any organization the traditional way of managing does not guarantee right focus or help sustaining lean initiatives. If no action is taken to change the way one manage process, people and products one is likely to see failure of lean implementations. Many people on lean journey fail to apply lean in a holistic manner. Usually they start with applying tools without proper guidance and leadership the company cannot move to the next level. Thus a management system that specifically meets the needs of a transforming organization is very much essential.

One of the main characteristic of traditional management is that it is resulted oriented. Is it good or bad to be result oriented? It is not bad to have goals but once people stop caring about how to get there rather and only focus on end result that is when one has a problem. This leads malpractices like expediting orders, over production, and excess inventory. One must be wondering how management leads to these problems. If one is in any manufacturing organization he/she will be able to relate to this problem better.

Supply Chain System: Impact

The SCM typically involves supervising the transfer of products and goods, such as from a supplier, then to a manufacturer, a wholesaler, a retailer and finally to the consumer. Information technology (IT) refers to the use of computer-based programs to store and manipulate information. IT advances directly can correlate to the SCM improvements, such as through the rise of effective virtual supply chains.

One significant impact of IT relates to the quality of information available within the supply chain. Companies can develop Web-based programs or intranets to distribute information, such as about new products, delays or changes. IT allows everyone in the supply chain to be integrated and thus, stay informed, which when used appropriately can translate into management efficiency and reduced risks.

Impact of Global Competition

Business today is in a global environment. This environment forces companies, regardless of location or primary market base, to consider the rest of the world in their competitive strategy analysis. Firms cannot isolate themselves from or ignore external factors such as economic trends, competitive situations or technology innovation in other countries, if some of their competitors are competing or are located in those countries. Companies are going truly global with Supply-chain Management. A company can develop a product in the United States, manufacture in developing country and sell in Europe. Companies have changed the ways in which they manage their operations and logistics activities. Changes in trade, the spread and modernization of transport infrastructures and the intensification of competition have elevated the importance of flow management to new levels.

The last two decades have seen the evolution of the global manufacturing environment. Majority of the manufacturers have global presence through exports, strategic alliances, joint ventures or as a part of a committed strategy to sell and produce in foreign markets.

 Global Market Forces

There is tremendous growth potential in the foreign developing markets which have resulted in intensified foreign competition in local markets which forces the small and medium-sized companies to upgrade their operations and even consider expanding internationally.

There has also been growth in foreign demand which necessitates the development of a global network of manufacturing bases and markets. When the markets are global, the production-planning task of the manager becomes difficult on one hand and allows more efficient utilization of resources on the other. Few industries remain today in which the international product life-cycle theory still applies. Product markets, particularly in technologically intensive industries, are changing rapidly. Product-cycles are shrinking as customers demand new products faster. In addition, the advances in communication and transportation technology give customers around the world immediate access to the latest available products and technologies. Thus, manufacturers hoping to capture global demand must introduce their new products simultaneously to all major markets. Furthermore, the integration of product design and the development of related manufacturing processes have become the key success factors in many high-technology industries, where fast product introduction and extensive customization determine market success. As a result, companies must maintain production facilities, pilot production plants, engineering resources and even Research and Development (R & D) facilities all over the world. Apple Computer, for example, has built a global manufacturing and engineering infrastructure with facilities in California, Ireland and Singapore. This network allows Apple to introduce new products simultaneously in the American, European and Asian markets. Companies use the state-of-the-art markets as learning grounds for product development and effective production management, and then transfer this knowledge to their other production facilities worldwide. This rationale explains why Mercedes-Benz decided recently to locate a huge manufacturing plant in Vance, Alabama. The company recognizes that the United States is the state-of-the-art market for sport utility vehicles. It plans to produce those vehicles at the Vance plant and introduce them worldwide by 1997.

 Technological Change

The SCM refers to the active management and control of materials, information and finances as they move in a process from acquisition of raw materials to delivery to the consumer. Radio frequency identification (RFID) involves fitting items with a small transponder, or RFID tag, which stores information about the item, allowing it to be identified and tracked. RFID offers some significant advantages over barcode technology in supply chain management.

The RFID technology does not require line-of-sight between the RFID tag and reader. This means that, unlike barcode technology, items do not require any particular orientation for reading. Radio waves travel through most non-metallic materials, so RFID can be read even if they are embedded or encased in packaging, provided they are within range of a reader. Furthermore, RFID readers can read RFID tags in thousandths of a second and can scan multiple items simultaneously.

This technology can be extensively used in the domains of business:

• Retail supply chain management and warehousing management.
• Logistics, tracking of goods & trucks.
• Shipping, container tracking, cargo tracking.
• Security systems etc.

The RFID is the technology for future. In the field of supply chain, establishing global standard will be a further boon for advancement of this technology as a whole.

 Automation

Labor accounts for up to 80% of the total distribution costs of a typical distribution center. However, RFID technology can automate many supply chain activities including check-in, order picking and verification leading to reduced labor throughout the process. Even a small reduction in the amount of labor required can yield substantial financial savings, up to 90% in some cases.

Ethical and Environmental Issues on Operations and Supply Chain Functions

Environmentally Conscious Supply Chain Management (ECSCM) refers to the control exerted over all immediate and eventual environmental effects of products and processes associated with converting raw materials into final products.

While much work has been done in this area, the focus has traditionally been on either: product recovery (recycling, remanufacturing, or re-use) or the product design function only (e.g., design for environment). Environmental considerations in manufacturing are often viewed as separate from traditional, value-added considerations. However, the case can be made that professional people have an ethical responsibility to consider the immediate and eventual environmental impacts of products and processes that they design and/or manage.