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Formal System to Control the Flow of Materials

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Case Study – Big D Company TASK 1 1. 1 In order to advise the management on the installation of a more formal system to control the flow of materials and goods from supplier through stores and production to dispatch we must first summarize the current problem areas confronted by the Big D. • Problem areas in Big D Company are presented in the order shown in the paragraph o On the highly standard material sizes, more than enough for one order might be purchased and in most cases full lengths would be ordered rather than the exact fraction needed. Some of the ordered exceeds the immediate requirements resulting in the purchasing of the same material without verifying the available stock. o Molded plastics were sometimes bought in excess of immediate needs and the quantities shown on the bill of materials were note amended. o Materials brought in from the supplier were not crossed checked with the Big D records and taken directly to the production or assembly. o Shop works were not scheduled and machines were idle and the foreman worked on any order. o No formal purchasing system Completed jobs were not recorded and sometimes units were assembled in advance of the completion of the entire lot. o The sales and production records indicated frequent early deliveries or o Quite a few times completed orders were kept in storage room … which caused lost orders. o The superintendent usually allowed himself more time than was necessary for ordering, machining and assembly. Again this caused loss of order. o The company had not formal inventory control system. o Not records were kept of raw materials. o An Informal tabulation of finished goods was used. o Job were frequently sold even before completion A second lots were started before the first was finished, o No formal production planning and inventory control activity. • The Proposed for Appropriate Structure for the Purchasing Function Purchasing department is considered the backbone of any organization. One role of the purchasing department is to procure all necessary materials needed for production or daily operation of the company. 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.

The purchasing department also makes sure there is always sufficient product on the shelves to keep the customers happy and keep the store well-stocked. 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. Couple of conclusions was made after studying the problems noted above.

First, it is quite clear that a formal structure must be put in place. Secondly, a formal inventory control system & production planning must be introduced. Having these in place, the company will avoid losing orders and in time will solve all the above problems. It is proposed here that the purchasing function to be structured in a CENTRALIZED way. Centralized purchasing structures are characterized by all purchases, being managed by a central purchasing group. In this approach, the operating units are consulted but are not fully responsible for their own buying.

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Centralized purchasing provides the firm with a single, collective sourcing and buying power. This model captures a large part of the potential corporate purchasing synergies, but there is little user control and responsiveness to local needs. The primary advantage of centralized purchasing is to realize a favorable price due to accumulated volumes. With centralized purchasing, the actual ordering process is centralized. The purchasing function will be organized by the superintendent in a manner intended to help meet the purchasing goals of the board.

The purchasing function includes the following responsibilities: • making purchases for all departments in accordance with applicable laws and regulations, including, board policy, the superintendent’s directives, good purchasing practices and ethical principles; • establishing and enforcing a system for approving the accounting for purchases and for receiving all materials; • Establishing a practical degree of standardization of equipment, supplies and materials with sufficient flexibility to meet unique needs of the company Purchasing Process

There are many reasons why a formal process must be followed including the prevention of fraud, cost saving, compliance with regulations, management of risk and control. Approved Suppliers Approval Process and Segregation of Responsibilities Audit Trail Accounting Automation Purchasing Process Flowchart [pic] There is sometimes a significant amount of effort required to ensure that a supplier is appropriate for a particular category of goods or services. They should be able to supply goods and services that meet requirements of quality and fit for purpose.

They should be reliable financially sound and not present a commercial or reputation risk and their prices should be competitive. It makes no sense to perform the relevant research on a supplier each time goods or services are required. By developing preferred suppliers, longer term sustainable relationships can be developed that deliver a better value for money. Approval Process and Segregation of Responsibilities The principles of approval and segregation of responsibilities provides an organization with a control to reduce the risk of fraud.

The requirement for the approval of a purchase requisition prevents inappropriate purchases being made and the separation of responsibilities to unconnected parts of the buying organization helps to reduce the risk of collusion. Audit Trail A formal purchasing process that records a predefined set of processes allows the path of events to be examined retrospectively to identify errors or deliberate breaches of policy. Accounting The organization has a legal responsibility to account for their finances including for the goods and services that they procure.

It is important therefore that proper records are maintained e. g. to record dates, prices and department details as well as to categorize goods and services appropriately to distinguish between capital goods and expenses for example. This can have a crucial bearing on how the finances of the organization are described which in turn can have a tax and profitability impact. Automation A standard process allows for automation and the use of technology which reduces the cost of the process. 1. 2 A Purchasing system is defined in investopedia as a method used by the organization to buy products and/or services.

A purchasing system manages the entire acquisition process, from requisition, to purchase order, to product receipt, to payment. Purchasing systems are a key component of effective inventory management in that they monitor existing stock and help companies determine what to buy, how much to buy and when to buy it. A popular purchasing system is based on economic order quantity models. Purchasing systems makes the purchasing process more efficient and helps the organization reduce supply costs.

Computerized purchasing systems can cut companies’ administrative costs, shorten the length of the purchase cycle and reduce human error, thereby minimizing shortages. They can also simplify order tracking and make it easier to manage purchasing budgets by quickly creating expenditure reports. Ways to improve Purchasing system 1. Make past-performance evaluations more meaningful. As long as neither outstanding nor mediocre performance is significantly differentiated, past-performance reports will not provide a meaningful incentive for anyone.

For large supplies, bring in interviewers trained in eliciting differentiated information to guide evaluators through report cards. 2. Reward suppliers for recommending cost-saving ideas. Before issuing a request for proposals, give potential bidders an opportunity to suggest requirements changes that would result in big cost savings with little performance penalty. 4. Use contests as a procurement technique. 5. Make successful supply management experience a promotion criterion for staff.

Purchasing System could also be improved through performance management and benchmarking. Performance measurement is a tool to help managers control the outcomes of their organizations. It enables them to be the driver rather than a passenger on their organizational journey. PERFORMANCE MEASUREMENT At the strategic level, we use a three-stage top down approach, which takes into account the conflicting interests of different groups of stakeholder. Key performance areas covering the whole spectrum of stakeholder requirements are defined.

Elements to measure in each of the key performance areas are identified. One or more performance indicators for each element to measure are considered. The following diagram summarises the approach: [pic] The performance measurement system should be: Complete - The set of performance indicators should measure whether all stakeholder requirements are being met. Each indicator should be operationally and economically feasible to measure. Consistent - All major actions that can be taken by an organisation should affect an indicator and hence be subject to measurement.

Effective - Each indicator should be a measure of current performance that is amenable to management action to change its value in the future. The set of indicators should encourage the necessary behaviour to bring about significant and continuous improvement for all stakeholders. Transparent - Whenever possible, indicators should be developed to allow comparisons to be made and benchmarking to be undertaken. As summarized blow, the set-up and continuous improvement of the management system resides in “Plan”, “Check” and “Act. [pic] 1. 3 Staff Responsible for goods & services and their respective roles: At present only the following staffs have either direct or indirect responsibility for goods: |Staff Member |Roles | |Purchasing Manager |Purchase of materials. Obtain casting, materials and parts | | |indicated. |Foreman |Work on manufacturing orders. Keep staff & machines busy. Also | | |responsible to meet the estimated completion dates. Check off each| | |part of the quantity | |Superintendent |Ordering material, machining and assembly of goods. |Superintendent’s Secretary |Updates the traffic function | |Superintendent’s employees |Receiving & warehousing materials | Based on the proposed structure, the following is the recommended procurement function: |Position |Responsibilities | |Procurement Director |Major duties include oversight of all procurement functions. |Senior Procurement Analyst |Responsible for contributing to and continually improving an efficient and | | |cost-effective process designed to assist Institution staff in their procurement of | | |goods and services through an integrated procurement process of Accounts Payable, | | |Purchasing and Receiving, in compliance with Institutional policies and government | | |regulations.

As a contributing member of the Procurement Team, is committed to the | | |common purpose, performance goals and approach for which team members hold themselves | | |mutually accountable. Performance evaluation is based on a combination of team success| | |and individual accomplishment. | | | |Senior Administrative Assistant  II |Responsible for general office management, Procurement help desk, training | | |presentations, processing major bid documents, maintaining auditable records of | | |procurement files, data input into ERP system for Payables activity  | | | | |Procurement Systems Assistant |Responsible for invoices related to purchase orders, stock room orders and | | |sub-contracts and non-po related invoices. | | | |Procurement Systems Coordinator |The Coordinator handles and coordinates all aspects of the Procurement System/Process;| | |ensures system integrity, process assurance, analysis/testing and continuous | | |operations. Serves as Supervisor for  the payables team and payables processing for | | |the institution. The Position has an interest in owning and improving current | | |administrative systems necessary to the success of the organization. |Procurement Representative |Responsible for purchasing and payable of all items and Contract for services | | |. Responsible for purchasing and payable of all items. | |Senior Procurement Representative |Responsible for assisting the Operations group in developing procurement | | |specifications, selecting supplier markets, maintaining appropriate business | | |relationships with the Institution's vendor base and processing procurement | | |documentation including bids, Purchase Orders and Accounts Payable certificates. | |Additionally, will also assist in all major contract development; and will act as the | | |Procurement staff supervisor in the absence of the Director. | |Reimbursement Facilitator I |Shared responsibility for the audit & data entry of all Request for Payments. | |Assistant Coordinator |Assists in ordering and stockroom operations. | |Stockroom Coordinator |Manages stockroom operations. | 1. 4 Supply chain management (SCM) is concerned with the flow of products and information between supply chain members' organizations.

Recent development in technologies enables the organization to avail information easily in their premises. These technologies are helpful to coordinates the activities to manage the supply chain. The cost of information is decreased due to the increasing rate of technologies. In the integrated supply chain model as shown below bi-directional arrow reflect the accommodation of reverse materials and information feedback flows. Manager needs to understand that information technology is more than just computers. Except computer data recognition equipment, communication technologies, factory automation and other hardware and services are included. [pic]

The importance of information in an integrated supply chain management environment: IT infrastructure capabilities provides a competitive positioning of business initiatives like cycle time reduction, implementation, implementing redesigned cross-functional processes. 1. Satisfying customer has become something of a corporate obsession. Serving the customer in the best, most efficient and effective manner has become critical. 2. Information is a crucial factor in the managers' abilities to reduce inventory and human resource requirement to a competitive level. Information flows plays a crucial role in strategic planning. Supply chain organizational dynamics:

Big D participating in supply chain management initiatives accept a specific role to perform. It also shares the joint belief that it and all other supply chain participants will be better off because of this collaborative effort. Power within the supply chain is a central issue. It has been identified that there are five basic levels of participation of individual firms with in the interorganizational system. 1. Remote Input/Output mode: In this case the member participates from a remote location within the application system supported by one or more higher-level participants. 2. Application processing node: In this case a member develops and shares a single application such as an inventory query or order processing system. 3.

Multi participant exchange node : In this case the member develops and shares a network interlinking itself and any number of lower level participants with whom it has an established business relationship. 4. Network control node: In this case the member develops and shares a network with diverse application that may be used by many different types of lower level participants. 5. Integrating network node: In this case the member literally becomes a data communications/data processing utility that integrates any number of lower level participants and applications in real times. Information and Technology: Application of SCM: In the development and maintenance of Supply chain's information systems both software and hardware must be addressed. Hardware includes computer's input/output devices and storage media.

Software includes the entire system and application programme used for processing transactions management control, decision-making and strategic planning. Recent development in Supply chain management software is: 1. A software programme which is useful for computing freight costs, compares transportation mode rates, analyse cost and service effectiveness of carrier. 2. A Supply Chain planning software programme which is used for demand forecasting, replenishment & manufacturing tools for accurate planning and scheduling of activities. 3. A software system called Transportation Network can be used for optimization and streamlining the bidding and award process. . There is a software programme to provide a programme capable managing the entire supply chain. Electronic Data Interchange: Electronic Data Interchange (EDI) refers to computer-to-computer exchange of business documents in a standard format. EDI describe both the capability and practice of communicating information between two organizations electronically instead of traditional form of mail, courier, & fax. The benefits of EDI are: 1. Quick process to information. 2. Better customer service. 3. Reduced paper work. 4. Increased productivity. 5. Improved tracing and expediting. 6. Cost efficiency. 7. Competitive advantage. 8. Improved billing.

Though the use of EDI supply chain partners can overcome the distortions and exaggeration in supply and demand information by improving technologies to facilitate real time sharing of actual demand and supply information. Data warehouse: Data warehouse is a consolidated database maintained separately from an organization's production system database. Big D can used a multiple databases. A data warehouse is organized around informational subjects rather than specific business processes. Data held in data warehouses are time dependent, historical data may also be aggregated. Communication Improvement Information technology can improve the flow of communication within the workplace. Electronic communication methods used in the workplace include email, voicemail, videoconferences, online newsletters, instant messages and the Intranet.

The Intranet, a company exclusive website, can be a great way for you, as a manager, to obtain feedback from your workers. Task 2 2. 1 The negotiation process has become a more important element in the supply chain process as companies look to reduce their expenditure whilst increasing their purchasing power. This means that purchasing manager must negotiate increasingly better rates with suppliers whilst maintaining or increasing quality and service. So Far Big D has been on the losing of this exercise. In other words, Big D has been paying more than it should have and it goes without saying that the quality and services have been going south as well.

Purchasing manager should enter all negotiations with clearly defined objectives. Without having objectives, the possibility for the purchasing manager to compromise price and the quality or service is significantly raised. The Purchasing manager should enter strong into discussions to negotiate with the vendor with precise objectives that they wish to achieve for their company. The objective should not be absolute and should allow for some flexibility. However, the manager should also ensure that they do not deviate from the objectives and allow themselves to negotiate on areas that were not part of the discussion. Negotiation is an important part of the role of the purchasing Manager.

It is a skill that is learnt and training can help purchasing staff in understanding what is needed when negotiating with vendors. 2. 2 Big D’s distribution channels is in complete mess and need a face-lift. Without distribution even the best product or service fails. It is believed that Big D must undergo two levels: 1) To organise communication, which was discussed earlier and 2) To organise exchange through distribution. Distribution is important because: A. it affects sales - if it's not available it can't be sold. Most customers won't wait. As it’s the case in Big D B. distribution affects profits and competitiveness since it can contribute up to 50% of the final selling price of some goods.

This affects cost competitiveness as well as profits since margins are squeezed by distribution costs C. delivery is seen as part of the product influencing customer satisfaction. Distribution and its associated customer service play a big part in relationship marketing. Decisions about physical distribution are key strategic decisions. Channels change throughout a product's life cycle. Changing lifestyles, aspirations and expectations along with the IT explosion offer new opportunities of using distribution to create a competitive edge. Controlling the flow of products and services from producer to customer requires careful consideration. It can determine success or failure in the market place.

Decisions about levels of stock, minimum order quantities, delivery methods, delivery frequency and warehouse locations have major cash flow implications as well as customer satisfaction implications. Distribution Strategy Distribution strategy is influenced by the market structure, the firm's objectives, its resources and of course its overall marketing strategy. a) The first strategic decision proposed here is that the distribution is to be: Intensive and mass distribution into all outlets for all the small simple fittings. In addition, Exclusive restricted distribution for all the large flow meters weighting upto 70 KG. b) The next strategic decision clarifies the number of levels within a channel such as agents, distributors, wholesalers, retailers. In some Japanese markets there are many, many intermediaries involved. [pic] 3.

The current situation in Big D’s in terms of security of goods is not quite what it ought to be in company with years of operations. A lot of security issues exist. Sales had been lost to competitors and other sales had been lost due to setting estimate. No company had no formal inventory control system, hence, no records was kept of raw materials, purchased parts or manufactured parts on hand. There were no records kept on accumulated parts and even worst, the parts were stored in bins in the assembly department. The following are some recommendation on Production & Operation of Stocks and ways to reduce loss and theft of goods: There are three types of stock that a business can hold: Stocks of raw materials (inputs brought from suppliers waiting to be used in the production process) • Work in progress (incomplete products still in the process of being made) • Stocks of finished products (finished goods of acceptable quality waiting to be sold to customers) The aim of stock control is to minimise the cost of holding these stocks whilst ensuring that there are enough materials for production to continue and be able to meet customer demand. The marketing department should be able to provide sales forecasts for the coming weeks or months and so allow stock control managers to judge the type, quantity and timing of stocks needed.

It is the purchasing department’s responsibility to order the correct quantity and quality of these inputs, at a competitive price and from a reliable supplier who will deliver on time. As it is difficult to ensure that a business has exactly the correct amount of stock at any one time, Big D should hold buffer or safe stock. Big D must introduce effectiveness and efficiency as essential factors in internal control in the management of its operation. •Inventory management: Big D will have an inventory clerk assigned to the requisition and/or the distribution of items. It could add inventory management to the job description of one of the workers.

As the theft of any item is a loss to any company, managers must implement inventory procedures that ensure the smooth requisition and dissemination of items while ensuring that items are accounted for. •Separation of accounts payable and receivable: Avoid theft and fraud by one or more employees by separating the accounts payable and receivable duties. It’s best if Big D introduces segregation of duties in the Accounting Dept. and the management must continuously monitor the accounting records. Big D must ensure that internal control is deep in its organization. Employees may steal for different reasons but good internal control measures should reduce theft.

Big D can implement inventory management systems, to reduce the likelihood of employee theft. REFERENCES Supply Chain Management: Strategy, Planning, and Operations, Second Edition by Sunil Chopra and Peter Meindl (May 1, 2003) Purchasing and Supply Chain Management by Robert M. Monczka, Robert B. Handfield, Larry C. Giunipero and James L. Patterson (Mar 8, 2011) 5th Edition South-Western College/West; 5 edition (March 8, 2011) ISBN-13: 978-0538476423 Purchasing and Supply Chain Management: Analysis, Strategy, Planning and Practice by A. J. van Weele (Dec 9, 2009) ----------------------- Case Study – Big D Company Purchasing (BUS441/20762P) [Prepared by Mohammed] [13th May 2012]

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