Based on previous comments about procurement strategies, I can appreciate the value of this subject as a focus point for this month. As one respondent noted, procurement operations are key cost-control contributors in any company requiring inventory in order to be able to offer goods and services.
It pays to identify individual strategies that can strongly contribute to bottom line savings. With the ever-increasing use of computer-aided systems operations, the administrative costs for retrieving and placing orders have dropped dramatically over the years. With better records management, and key data archival and retrieval, the procurement efforts are not only accelerated, but are more accurate, with fewer oversights responsible for last minute expedites and added costs.
Taken to the quintessential point, a strong procurement strategy is dependent upon the integrity of the inventory database management software and maintenance thereof. Up-to-date data will always be the foundational basis for any strong parts management system. As noted from a previous article, periodic cycle counting and resultant data adjustments will promote fewer stock-out surprises, and facilitate a smoother manufacturing operation. (See: Why a Regular Inventory Audit Is Critical to Success.)
But, computers are not yet “thinkers,” and can only derive conclusions based upon pre-determined paths of calculation. It takes a human to negotiate pricing, and to form flexible business relationships that help anticipate, avoid, and mend some of the wounds that happen in operations and manufacturing on a daily basis.
So, what are the key human-dependent strategies that make the manufacturing world go around? The typical back-and-forth conversations to reach any kind of agreement involve human effort and time. For instance, I have already mentioned negotiations, but prior to the first sit-down with a supplier, the company has to know what they need and have some idea of how to get it.
Many back room discussions involving procurement allowances that won't hurt the bottom line include such things as predetermining maximum spending for any part or assembly, overall product cost (affordable and available materials, tooling, and production methods), company cash flow, project expenditure limitations, manpower requirements, schedules, and storage and handling procedures.
These allowances must be determined by individuals and teams prior to “loading” the work plan onto the company's overall business objectives. The objectives have to be realistic, based upon measurable and achievable milestones. Procurement feedback can quickly make or break the possibility of reaching the targets set forth by the company.
Meeting with the suppliers and attempting to weigh things in your company's favor requires participants to know what they can or cannot live with as a negotiated outcome. The terms on purchasing contracts must be clearly defined to reflect the agreements reached at the negotiating table. In order to get piece cost down, volume, long-term buys, and conditions thereof might be included on a time-limited blanket purchase order.
Materials that are required to produce the purchase under consideration may have to be guaranteed for composition and availability. Penalties or incentives may be included to help with certainty of on-time deliveries. Notifications for anticipated missed shipments should be specified in terms of how many days, weeks, or months the supplier must provide in advance of an anticipated missed delivery date. Packaging, along with methods for transit, should be specified in order to account for warehouse space allowance or special handling and inspection procedures.
Along those same lines, equipment that will be required for incoming inspection should be specified. The proper test instructions for product integrity validation should also be specified as much as possible up front. Any certification papers that would accompany a product or shipment must be detailed as to what specifications are covered on the certifications.
These are just a few of the human-based decisions that go into the procurement process. Not every part will require all of the aforementioned areas of attention, but it only takes one missing or bad part to stop an assembly operation. Without a waiver, Contract Manufacturers will not even begin a pick-and-place operation. They need a complete bill of materials and all parts on hand. Why? Because every additional start and stop, set up and tear down, adds cost and delay to the product.
Procurement is integral to the smooth, continuous operation of manufacturing. A broken piece of assembly or test gear can be quickly handled by Manufacturing of Test Engineering. Back-up equipment is usually readily available so the line does not stay down for long. A missing part can send workers home for the day, and if there is no contingency work around, the workers may stay home much longer.
The Materials Requirements Plan (MRP) computer program asks five basic questions:
- What do we want to make?
- When do we need it?
- What inventory will be required to make it?
- What inventory do we have on hand?
- What do we yet need to buy?
The procurement professional reads the MRP output report and begins to add real intelligence. They examine the computer lead-times to determine if the spot buying realities are different, and if the supply chain is up to the task of performing to the computer schedules. Real phone calls and emails, with up-to-date cost quotations, up-to-date commitments for delivery, and inventory availability statuses, can never be handled completely by a computer system.
This week, I logged onto a part service and saw there were 1,050 parts available. When I called the supplier, there were none. A computer can only source another computer, and therefore may record inaccurate, critical data. The best procurement strategy of all is to decide to never take humans out of the purchasing operations. That will take a company right over a very high and unfenced cliff.