The Significance of Procurement Category Management

In today’s competitive environment, every second of time matters and is worth its weight in gold. This fact is readily observed as there has been a lot of research in the development and introduction of various methods aimed at saving time in the industry.

One of the most important metrics that represent the extent of time utilization or loss in regards to suppliers is supplier lead time, i.e. the time between placing of order and receiving the goods. It usually includes purchase order processing time, in transit time, receiving, inspection, and any inventory processing/repackaging time.

Besides, according to a survey conducted by Accenture during the recent economic recession, most procurement officers admitted that the recession had an impact on the supplier relationships and augmented supplier risk. The main reason was that the suppliers were looking for increase in their prices.

Procurement category management involves strategic development, assessment and monitoring of procurement and supplier performance in specific supplier categories. So, the basic steps for implementation are:

1.      Categorize each supplier based on the needs served by the goods supplied by the supplier. So, in other words, the suppliers supplying similar or substitutable items are placed in one category. For example, in case of a retail business, toothpastes and hair oils can be two different categories.

2.      It is also advisable to assign a person, as category manager or owner, to each category, based on the knowledge and application of the goods being procured from it.

Apart from shorter supplier lead time, the following benefits can be derived from this methodology:

1.      Since each of the categories requires similar procurement strategies and supplier relationship programs, it is far easier to manage the categories than to manage the uncategorized suppliers.

2.      It facilitates better relationships with the suppliers, which in turn improves supplier performance.

3.      It also helps in managing the spend by providing better purchasing power.

4.      It reduces supplier risk, develops a better supplier portfolio and provides better control over procurements.

In terms of supplier lead time and turnaround time, very significant differences have been observed between the organizations that are employing procurement category management and those that aren’t. According to “APQC Open Standards Benchmarking” in procurement, the supplier lead time in the former case is found to be around one-fourth of that in the latter case. Similarly, the purchase order processing time is found to be around nine times lesser for the organizations implementing procurement category management.

Procurement is undoubtedly one of the most lucrative areas to look into for cost optimization, and category management represents a well-defined and proven technique to go about it.

References:

1.      http://www.apqc.org/knowledge-base/download/229883/a%3A1%3A%7Bi%3A1%3Bs%3A1%3A%222%22%3B%7D/Category%20Management.pdf?destination=node/229883

2.      http://www.accenture.com/SiteCollectionDocuments/PDF/Accenture_Leveraging_Category_Management_podcast_transcript.pdf

3.      http://www.driveyoursuccess.com/2011/08/using-pert-analysis-to-estimate-vendor-delivery-times.html

The writer of this article, Akshay Agarwal is a PGP student of Indian Institute of Management, Raipur and has done his B.Tech from Indian Institute of Technology, Guwahati.

The Goal: A Process of Ongoing Improvement

The following Book Review has received II Prize in the Book Review Competition held at Indian Institute of Management, Raipur

Introduction

‘The Goal’ – an operations and supply chain oriented novel was first published in 1984. It is written by Dr E Goldratt (physicist by training and management consultant by occupation) and takes a novel approach of explaining the eventual reason (goal) for the existence of an organisation/company. Also it aims to help the readers realise the methods of improving the profitability and functioning of any company.

Plot

The main character of the novel is Alex Rogo, who is the plant manager of UniCo manufacturing. The plant is riddled with problems like excess unshipped inventory, orders frequently behind the schedule and labour dissent. All this is happening inspite of advanced machinery being present in the plant. The Company executive issues an ultimatum of three months to Alex to turn around the plant or to face shutdown. Deep in crisis, Alex turns to Jonah, who helps him realise the bottlenecks in production, after removal of which the plant will return to profitability.

Analysis

The book is a continuous series of conversations between Alex and Jonah. It is interesting to note that, in spite of knowing the answers Jonah never passes them on to Alex. He urges Alex to arrive at them through a series of well directed questions. This method is known as the ‘Socratic method’, in which the instructor engages the pupil in dialogue and encourages him to think and deliberate about the problems at hand and arrive at conclusions by eliminating the irrelevant choices.

By writing the book as a series of conversations, Goldratt believes that the reader will be able to arrive at the answers before Alex. To quote Goldratt himself – “This is the way we should attempt to write our textbooks. Our textbooks should not present us with a series of end results but rather a plot that enables the reader to go through the deduction process himself. If I succeed by this book to change somewhat your perception of science and education, this is my true reward.”

The argument here is that we can only learn through our own deductive processes. If we are presented with readymade facts then we are ‘trained’ and not ‘learned’. No exceptional intelligence is required for deduction and logic. The idea of the book is to encourage the reader to critically analyse any problem and not just attack it with the existing conventions because "that's the way it was always done".

Leanings

The book very lucidly explains the Theory of Constraints and how to resolve bottlenecks. Also explained in the book are the real parameters of any business which any manager should focus on. The business world today is filled with enough jargon to confuse anybody, viz - cost-effective purchasing, employing good people, high technology, producing products, producing quality products, selling quality products, capturing market share. In this mess the manager forgets the actual ‘Goal’ of the business, and that is:

·         Higher Net Profit – as the real aim of any business is to make money.

·         High Return on Investment (ROI) – as higher the returns higher the profits.

·         Regular and Positive Cash flows – to run day to day tasks and prevent the business from accumulating debt.

Dr. Ashwin Kumar Narayankar, a student of Indian Insttitute of Management, Raipur has done his M.B.B.S. from Lokmanya Tilak Municipal Medical College, Mumbai.
The Book Review of the Winner of the Book Review Competition will be published in the Half Yearly Magazine. To request a copy of the magazine, mail us at opep@iimraipur.ac.in 

Book Review: The Goal

The following Book Review has received II Prize in the Book Review Competition held at Indian Institute of Management, Raipur.

The Goal is an international bestseller business novel. It was authored by Dr. Eliyahu M. Goldratt and Mr. Jeff Cox and was first published in 1984 by The North River Press.

Dr. Goldratt was an Israeli physicist, who later became a business management guru. He has written this book as a piece of fiction. In the introduction of the book, Dr. Goldratt has stated that science can be utilized to understand and solve many industrial issues. Secondly, he has said that the main requisite for expanding the learning about anything is the courage to face inconsistencies and to question the existing popular beliefs and methods. “The Goal” also demonstrates the effectiveness of Socratic way of approaching and resolving problems, which in this story, includes the complexities of a manufacturing unit as well as marital issues. Dr. Goldratt has justified this by asserting his belief that the deductive process is the only way through which we can learn. The book aims at explaining the validity of and logic behind Dr. Goldratt’s Theory of Constraints.

The story describes the exciting journey of one Mr. Alex Rogo, in which he discovers the obvious flaws in the current industry practices, and with the help of his ex-teacher and physicist - Dr. Jonah, sets out to fix them. Alex is the plant manager at one of the manufacturing units of UniCo in a town called Bearington. UniCo has been running in losses for the last few years, and one of the major reasons for this is the unprofitability of the division to which Alex’s plant belongs. The conditions in his plant are also very tough. Everything seems to be delayed and utterly urgent. Most of the orders are running late by weeks. Everybody seems to be busy all the time, and yet, the unit is running into losses. All of this is despite the fact that this plant is equipped with the latest technology including industrial robots and computer systems.

On the other hand, a parallel storyline depicts the marital problems faced by Alex with his wife Julie. This highlights the difficulties faced by managers, especially those who are obsessed with their work, in their personal lives. Alex is repeatedly accused by Julie of not paying enough attention towards her and their children.

The story begins at a point when Mr. Bill Peach, the division vice president, asks Alex to make his plant profitable within three months. In case of failure, the plant was to be shut down by the management. Alex has the option to look for another job, but he decides to do whatever he can to save the plant. Here, he recollects a conversation he had with Dr. Jonah, when the latter, through a few simple questions, convinced Alex that the hi-tech robots in his plant are not contributing to the actual goal of the company. He also encouraged Alex to figure out the true goal of his organization. Faced with grave difficulties, Alex figures out that the true goal of the company is to make money. Equipped with this newly-found answer, he immediately gets in touch with Jonah and asks for his help and guidance.

Jonah explains to Alex that for generating profits, only three components of the system need to be in order. They are:

1.       Throughput: this refers to the money generated by sales and needs to be maximized.

2.       Inventory: this refers to the money invested by the system in purchasing things that it intends to sell, and must be minimized.

3.       Operational Expenses: this refers to the money spent by the system in converting inventory into throughput, and must be minimized.

Alex takes into confidence four people working in the plant - Bob Donovan (Production Manager), Ralph Nakamura (runs data processing for the plant), Stacey Potazenik (inventory control manager) and Lou (Plant controller). They discuss the three new points of measure, and conclude that they make great sense. Thereafter, Jonah, through telephone conversations and even personal visits to the plant, explains to them that the traditional points of measure such as efficiency of individual equipments, wages, etc. do not represent the true state of the system. And the reason for this is the combination of the two phenomena that exist in every plant – dependent processes and statistical fluctuations.

Alex gets a closer and better look at this concept during a forest hike with his son and other kids, where he realizes that the speed of the whole line depends on the speed of the slowest kid (bottleneck or constraint), and to improve the speed of the line, the slowest kid must be enabled to move faster. Alex, with his team, sets out to apply these principles in the plant. They successfully manage to discover bottlenecks in the system and accordingly used them to improve the throughput and reduce the inventories and operational expenses.

Needless to say, they observe huge improvements in the plant as the pending orders start shipping at a fast rate. Moreover, they successfully deliver a very large order from an important client and get themselves a long term contract as well as the faith of the marketing manager Johnny Jons.

Following a similar route and constantly debating and understanding the principles taught by Jonah, Alex and his team finally figured out the precise steps for the process of improvement:

1.       Identify the system’s constraint(s).

2.       Decide how to exploit the constraint(s).

3.       Subordinate everything else to the above decision.

4.       Elevate the system’s constraint(s).

5.       If, in a previous step, a constraint has been broken, go back to step 1, but do not allow inertia to cause a system’s constraint.

Socratic approach has been given a lot of emphasis in the book. At one point, Jonah tells Alex that he would not provide him with straight solutions, as it would be detrimental to his understanding of the concepts. Instead, Jonah gives Alex the basic principles and some relevant questions, which helps him in figuring out the solutions himself. Besides, this approach has also been adopted by Alex to resolve the marital issues with Julie, by looking for an answer to the question: what is the goal of their marriage?

Overall, “The Goal” is a very interesting and entertaining novel, which, at the same time, provides a basic and simple understanding of the Theory of Constraints. This theory, despite being plain common sense, seems far from the conventional approach of manufacturing. Moreover, the implications of these principles are applicable in many other fields and industries.

The writer of this article, Akshay Agarwal is a PGP student of Indian Institute of Management, Raipur and has done his B.Tech from Indian Institute of Technology, Guwahati.
The Book Review of the Winner of the Book Review Competition will be published in the Half Yearly Magazine. To request a copy of the magazine, mail us at opep@iimraipur.ac.in  

Theory of Constraints

(Dr. Eliyahu M. Goldratt)

The literal concept of this theory is explained by the idiom “A chain is no stronger than its weakest link”. It may seem a simple concept to understand that when any problem is encountered in any organization, steps are taken in order to solve the problem. The Theory of Constraints just looks a little bit more into this very problem.

The theory implies that there are constraints in an organization which eventually disrupts the organization in attaining its maximum throughput thus reducing its efficiency. Well, it isn’t called a theory for just implying that a problem does not help achieve a goal but does provide a very logical solution to it.

An organization will have a lot of constraints or conditions to be put simpler. In order to solve a particular constraint, the organization must re-organize itself around this constraint thus making it easy to solve. This theory provides five main steps to accomplish this process known as "Process of Ongoing Improvement" (POOGI).

The first and foremost step is to identify the constraint, and by identifying it also means to prioritize the constraints present and select the one that is the most vital at that moment for the organization. Secondly, decide how to exploit the constraint. Create ways by which the maximum output could be extracted from the constraint. Thirdly, subordinate all other processes to above decision, by this the organization must structure itself in order to tackle the problem in the most efficient manner. Fourthly, elevate the constraint i.e., make all possible efforts and decisions to suppress the constraint. Finally, if as a result of these processes the constraint has been elevated then move on to the first step and never let the inertia become a constraint in itself.

With ‘constraint’ being an essential term in the argument being made it is only reasonable to ask what these constraints are. These constraints could basically be divided into internal constraints and external constraints. The constraint could be considered as any hiccup or a bottle neck that prevents an organization from operating efficiently. The major constraints that are basically faced by an organization are people, policy and equipment. This theory just revolves around solving these constraints thus creating optimum throughput.

The theory of constraints could easily be represented by a just a couple of blocks as follows,

The writer of this article, Anshu Katiyar is a PGP student of Indian Institute of Management, Raipur. He has done his B.Tech in Information Technology from Dr. M.G.R. University, Chennai and can be reached at anshukatiyar@hotmail.com.