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.

Dabur- “The Oldest Supply Chain in India”

Dabur the leading  personal and healthcare company among the four FMCG giants in India is managing the Oldest Supply Chain in India. Dabur is over 125 years old and deals with the diversified product range in ‘Natural and Herbal’ which leads to the EBITDA –quarter growth of 27.8% and consolidated Q1 net Profit up 19.6% at `127.74 Cr with  Revenue surges 31.6% to `1216.24 Cr, for the Q1 2011-12. Building on a legacy of Quality and Experience, Dabur is at present India’s trusted name and world’s largest Ayurvedic and Natural Helath Care Company having distinct brand  identities such as Dabur master brand for the natural health care product, Vatika for premium personal care, Hajmola for digestives, Real for fruit juices and beverages & Fem for fairness bleaches and skin care products.

Dabur procures raw materials worth around `500 Cr from a wide base of vendors. The Company has wide and integrated distribution network for its around 600 SKU delivering to around 2100 stockiest, further connecting to the thousands of retail outlets covering every small and remote part to organized stores of India. Dabur has improved distribution system through its unique Retails Excellence program, “DARE” (Driving Achievement of Retail Excellence). the Program covers a major objective as a channel focus, activating key customer, improving rural focus, rewarding distribution efficiency, maximizing brand impact and building information capabilities.

Dabur has used Direct Shipment Strategy which was implemented in order to bypass warehouses and distribution centers. Thus Dabur delivers products directly to the retailers/consumer through the Institutions & Modern Trade System. Advantages of implementing strategy are –

·         The retailer avoids the expense of operating a distribution center

·         Reducing lead time

Thus, Dabur has achieved cost reduction in the transportation process which overall adds to the reduction in price of the product. By this strategy Dabur has reduced the lead time, bringing Dabur and other elements in the Supply Chain closer which improves overall efficiency of the supply chain as shown in following figure. Reduction in lead time has added in reduction in Bullwhip Effect of the Supply Chain. Dabur has managed to minimize the Inventory-Transportation cost Trade-off. By elimination of the warehouse in supply chain, the company has reduced the inventory carrying cost and Implementing ‘Milk run’ system by the small truck loads Dabur has managed the increased transportation cost in the chain.

Overall efficient tactics in the supply chain has made Dabur to succeed and sustain in the supply chain network and has increased the entry barriers in the FMCG industry. Thus, Dabur having strong distribution network will have to cope up when organized distribution network plays a major role.

Figure : Supply Chain of  Dabur

The writer of this article, Amol Deogade is a PGP student of Indian Institute of Management, Raipur and has done his B.E. from Government College of Engineering, Amravati. Prior to joining IIM Raipur, Amol was working at Cognizant Technology Solutions. Amol can be reached at titanamol@gmail.com

SAFEXPRESS

 Safexpress has created benchmark in terms of the “Knowledge Leader” in the Supply Chain & Logistics Industry. With the mission of adopting and internalizing a work culture demonstrating a “We can We will” attitude to reflect in daily responsibilities with exceeding objective towards market dominance., Safexpress has vision of conscious learning organization maintaining flexibility for change for providing the most customized solutions. The company has expanded its reach to 560 destinations across India through more than 3,600 GPS enabled vehicles, across 35 states and union territories delivering 80 million packages a year, with ware house space of over 6 million square feet. With the operations of 24 X 7 in real time Safexpress provides Express Distribution, Third party Logistics services & supply chain Consulting. By Implementing Innovative and benchmarking services, the company has given a new face to Supply Chain & Logistics Industry.

As a service provider of third party logistics, the company allows the clients to focus on their own core competencies. Which means clients can focus more on the expertise of field leaving the logistics expertise to Safexpress. The ever increasing need for technological flexibility is another important advantage of the use of Safexpress as the third party logistics provider. The Company has been able to cope up with the advanced technology coming in the Logistics Industries. Thus outsourcing logistics to the Safexpress reduces the lead time and improves the service level. Safexpress provides Technological Flexibility to the client. The company gives flexibility to the client for the service in the different geographical location.

Investments in coss-docking strategy has given Safexpress The Competitive Advantage. In such strategy warehouses function as inventory coordination points rather than as inventory storage points, so goods arrive at warehouses from manufactures and are transferred to the retailer’s vehicle, so that delivery time can be reduced as much as possible. Thus Safexpress indirectly cuts down  the inventory cost of manufacturer/distributor & decreases the storage time which finally leads  to reduction in lead time. But all in all cross-docking needs an initial investment and startup setups. Still Safexpress has managed to implement it by-
        o   Linking Distribution centers, retailers and supplier by advance information systems

        o   Fast and responsive transport system

o   Accuracy in forecast by multistage information sharing



All these have not only added value to the manufacturer/distributor but also to the whole Supply Chain Process. 

A unique value-added Supply Chain & Logistics Service, Reverse Logistics has reduced the time and cost involved in carrying defective parts. This kind of logistics is generally used for shipping the defective parts from retailer to distributor and finally to the manufacturer. Safexpress directly takes these defective goods under its possession and moves them to its warehouses where they are repaired and re-shipped.  Services such as reverse movement of goods, repacking, re-labeling, refurbishing provided by Safexpress was a step to reduce the time and cost involved in the backward supply chain & prevented customer dissatisfaction, cash lockdown for the retailer and a rise in the distributor‘s inventory. For providing reverse logistics to clients, Safexpress has deployed reverse logistics centers, where they stock thousands of Stock Keeping Units (SKU) of the client and employ well trained professionals to handle the product. Indeed, Safexpress has revolutionized the Logistics Industry in India.

 The writer of this article, Amol Deogade is a PGP student of Indian Institute of Management, Raipur and has done his B.E. from Government College of Engineering, Amravati. Prior to joining IIM Raipur, Amol was working at Cognizant Technology Solutions. Amol can be reached at titanamol@gmail.com

The Power of Trust in Manufacturer-Retailer Relationships

Manufacturers and retailers have almost always been adversaries for each other, each trying to gain leverage over the other for better profit margins. Another fact is that manufacturers have had the upper hand in this conflict for most part of the history, as they are usually huge conglomerates or powerful entities as compared to retailers. Only in the recent times have the retailers gained significant strength owing to the emergence of mega-retailers or supermarkets or buying alliances.

The aforementioned conflict seems like a necessary evil, and obviously has its disadvantages for the manufacturers and the retailers:

1.      The victim tends to have payback whenever there is a change in the position of power.

2.      The victim always tries to find a way to escape the oppression, often harming the other party in some way or another.

3.      This conflict represents a loss of opportunity, wherein the two parties could have worked together for mutual benefits as well as provided greater value to the end consumer.

If the manufacturer-retailer relationship is based on trust, it leads to the following benefits:

1.      The retailer shows more commitment towards the manufacturer, which can be observed from the relatively better performance in terms of sales.

2.      The trust preserves the relationship during patchy times, especially when one of the partners goes against the will of the other.

3.      The two partners can easily share some of their confidential information for mutual benefits. They can also customize their information systems or dedicate their people and resources to serve each other better.

Another aspect of trust is that it encourages interdependence instead of independence. This, at first, might not be very comfortable for most organizations, but it is always advisable to develop long-lasting relationships based on inter-dependence. Additionally, no manufacturer can completely trust its retailer, and vice versa. There are at least a few aspects where the two partners can’t trust each other completely, as they do have some goals that are not in synchronization with each other. But these limitations are not strong enough to impede the development of a mutually benefitting relation.

The key to creating trust is to treat the weaker partner fairly, which not only means giving the partner a fair share of the profits and benefits, but also makes it essential for the stronger partner to ensure free and bilateral communication, impartiality among the different partners, respect, courtesy and transparent policies. Besides, complicated and lengthy contracts also hinder a healthy and strong relation.

Another aspect is that such a relationship might not be possible with every partner. Thus it is very essential that the partners be chosen judiciously. An easy way to judge the suitability is to see if the values of the potential partner match those of the seeking organization.

Procter & Gamble and Wal Mart represent an extraordinary example of a manufacturer-retailer relationship based on trust, even though they are both huge and powerful and used to be very tough adversaries of each other. They have gained a lot from this alliance over the years and are representing an inspiring, but not rare case in this regard.

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.