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Supplier Relationship Management

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supplier Relationship ManagementHello. Now in this session, we will be talking about Supplier Relationship Management.The previous section we were talking about supply chain management and suppliers orvendors are a very key component of the entire manufacturing and production set up.So, we will talk about here how to deal with suppliers, how to maintain relationshipsdevelop partnerships etcetera. Because, again things have changed; things are changingthe way we are manufacturing, the way we are practicing various business philosophiesetcetera. In the last few decades 1960, 1970s of last century, they are no longer validespecially with advent of so much of technology that the way you work has completelychanged. ERP is one for example, and it has become so much information driven. So, itis now all information and data driven.And, we are depending so much on data and information, and management, andanalytics, and big data etcetera that the management style itself is changing. So, we needto revisit all these things - classical things. So, new terminologies are coming up, newnames are coming up, new areas are coming up in management.So, these are all part of management. How we can do things? And, of course, theultimate goal is same, that is, how we can do things better, faster, cheaper and smarter.And, that is why we need trained managers, skilled manpower and smart people toimplement such new management techniques.Gartner defines SRM as; “The practice needed to establish the business rules andunderstanding needed for interacting with suppliers of products and services of variedcriticality to the profitability of the enterprise”.So, that is very important. Gartner is a global consulting company, which does lot ofreporting, management reports and they analyze performance of various companies, andthen come up with critical reports for the CEOs and other senior management.The practice is needed to establish the business rules and understanding again interactingwith suppliers of products and services of varied criticality to the profitability of myenterprise. So, now I am directly linking them. So, I making them my partners. , If I haveto be a successful business man, if I have to make profit, because that is what I want todo, I need them; I need to look at them as my partners. The view has changed.Meta is another Gartner type consulting group defines SRM as, “SRM is the system ofapplications that automates specific planning, scheduling, shipment, and paymentprocesses between a manufacturer and its critical direct material supplier. So we areactually talking about critical materials only and common standard materials are not partof this study. Because, when we are talking about supplier relationship management, it isabout the most value added components; what are the high value items, the criticalcomponents etcetera, which are crucial for the success of my business.SRM systems track both data and process- interchange of flows, as well as provide themanagement and analytical tools to intelligently track the performance of direct suppliersbased on benchmark, historical, and or contractual condition”. Because, again as theseare crucial components.So, I have to rely on them, for both quality and timely delivery. They should not getdelayed. And, these could be for the suppliers of my vendors and it is a network ofsuppliers across the world. Say you take the case of very leading apparel manufacturingcompany in US, example Levis. Now, they are sourcing all their material for jeans or thedenim from say may be India, getting stitched at Bangladesh and then, they are taking itback to US and putting some labels, marketing stuff and selling .Now, that entire thing needs plenty of coordination. It is total depending on yourinformation flow and data flow. Because, we are now in a connected network and theyneed to track the status. Multi country operations of movement of goods requires thingslike customs clearance and all that that processing takes time. Lot of documentation andpaperwork is required, when material moves from one country to another country. Legalthings are involved and you have to pay taxes when you leave the country and when youenter a new country, then you have to pay customs duties and things like that.So, all these things take time and these are where you have to depend on third party andthe government agencies. So, you have to be very efficient in your own operations,because some of the things you cannot control. So, the things which we can control iswhere we need to focus, so, that we can we make it faster leaner etcetera.Supplier relation management- the history of it started with something like we call as Eprocurement.E-procurement for MRO; MRO is for Maintenance, Repair and Operationswhere for things like aircrafts and automobile, and large machineries or transportequipment’s, maintenance and up-keep is a major expensive function. This is a businessby itself and is known as MRO business.You need so much of components etcetera, for example, replacing the tires of aircraftsand also very expensive. So, that has to be organized very well. So, that is where Eprocurementthing started for these MRO items. For office supplies and catalogmanagement, say the bulk office supplies where you need stationary items like files,pens, pencils in bulk also E-procurement is being used heavily.So, you can buy them in bulk at a lower cost when you go for E procurement. ecommerceusing Amazon and Flipkart etcetera can also be called e-procurement. Usuallywe refer to e-commerce for B2C business and e-procurement for B2B transactions.This is how SRM started, maybe 30, 40 years back. The first generation SRM is say is eprocurementfor direct items. Auction’s and tendering involve RFQ (request forquotation). For buying actual production items, whatever is going into my production istermed ‘direct materials’ whereas, maintenance and office supplies, are referred to as‘indirect materials’.So, you started with e-procurement of indirect materials which is easier, but when directmaterial means, the quality factor becomes very important. Because, the component hasto get into my production systems. If, there is a problem, my whole production systemgets impacted and delayed and my product quality gets impacted as well.In the second generation SRM 2 dot 0, we are talking about contract management,content management, and supplier analytics.Now, we are getting into more of analysis part. When we say contract management. So,what sort of contract? The content part of the contract has to be managed and that isbeing now done electronically. Tools like Internet and e-mails are making things easierand now you are getting into supplier analytics.Whatever data is being generated, example- when it was supplied, when it was delivered,how much quantity, quality of that etcetera. So, now, you have started doing analyticsand started ranking your supplier according to these analytics, according to theirperformance. So, whether he is my supplier of A, B, C ranking? So, depending whetherhe is a ‘A’ rated supplier, I will giving more complex orders or more quantity or criticalitems.I can decide, which supplier to give what type of order depending on their performanceand I am analyzing the performance, using analytics. In SRM 3 dot 0, SupplierCollaboration, Forecast Inventory, Product Development, Supplier Self-Service etcetera,so all these things are now coming in. Supplier self-service means, supplier knows whatis to be supplied and, you depend on the suppliers. So, he just supplies it. Usually a longterm contract is given to the supplier with a periodic (daily, weekly or monthly) scheduleof delivery.And, he gets paid electronically automatically. You do not have to check weight, qualitycheck, and etcetera as he is a trusted supplier and he supplies and he gets his payment.There can be problems, yes, but then you can always you know consider a re-look. Thisis an interesting model and the supplier is interested in supplying to you and you becomehis preferred customer, because, he knows that as soon as material reaches the gate,payment hits bank. I do not have to wait for 15 days, for their quality check etcetera to becompleted before the payment can be released. Thus it is a win-win situation for both themanufacturer and the supplier.This is how the relationships build up for the partnership. Both parties have to trust eachother and to maintain that trust you of course, have to deliver really good quality stuff,because you cannot go wrong there as otherwise the trust will break. A typical examplecould be Maruti and its suppliers. This model is also essential for establishing the JITpractice.And, finally, the current Generation 4 is about - Sourcing Optimization, Industry SpecificSRM capabilities, like government procurement, then Category Management etcetera.Category management is you have different categories of material so, you can managethem with different suppliers of different categories and your purchase department canalso be defined as per those categories.This is of course, true for large organizations, but not for medium or small organizationwhere large organizations have different or multiple production units or multiple types ofproducts. So, they have various types of products, so it is applicable for there.In government level now it has all has gone into E tender, E procurement etcetera. So,one of the advantage or reason is that you can avoid corruption. For example, misuse inthe manual tendering process there could be some chances of you know informationleaks and somebody comes to know about the price and then accordingly quotes.So, all those things can be taken care of in an e- procurement process and e-tenderingsituation, where everything is online and real time. So, nobody can really beat or gamethe system to you know do some misuse or corruption.SRM vendors serve different purpose for different types of buyers. So, we are a buyerand you are a supplier and they are using number of tools. The tools that they use, someof these names we have also become familiar after all this popularity of e-commerceetcetera, which has become common for everybody. Terminologies like- shopping cart,catalog content, P card (procurement card), workflow, auction platform, collaborationplatform etc.So, we know what is a shopping cart? We also use it in Amazon when we put things inthe cart to decide we will buy it later, but I am selecting the items so put it in myshopping cart. Then catalog content of course, what we see in that site the materialcontent is the catalog. When there is a catalog available, then you can go into the detailsand see different view, the characteristics of the item etcetera and you can decidewhether you want to buy that or not.P-card is a procurement card where it is a prepaid sort of thing,- credit card sort of thingwhere the material comes in and the supplier gets paid. Because, there is a bankinvolved, which gives the guarantee. We will discuss again in next slide about P card.There is workflow which is the information flow, which is happening. As soon as youraise a purchase order, vendor gets information, vendors becomes ready and he starts todeliver the material. As soon as the material comes in everybody ( e.g Productiondepartment) comes to know through your SRM tools or ERP systems etcetera.And, here what you need to know that we are not really talking about a single factory.We are actually talking about large global enterprises, global companies, with multiplefactories may be in one country or in multiple countries.If you have to think in a big scale then you will realize how these automated tools, themanagement systems, IT (information technology) is playing a very big role in these andwithout these actually you cannot run such organizations. Today it has become so,important, so all pervasive that you cannot think of running a complex organizationlarger organization without the help of such tools, such software products, such ITsystems.Without an IT system you cannot today dream of running even any medium or largescale business. May be small scale yes, but not definitely medium scale or big scale. Likea bank for example - can you imagine going into bank and you do not see any computers.Desktop buying by employees (office supplies), Professional buying by procurementdepartment (consumables, low value indirect items), Strategic sourcing by procurementdepartment (direct production items, components, commodities) and Maintenancesourcing by engineering department (MRO etcetera). This is where we say that varioustools are being developed by the SRM vendors to service these requirement by theorganizations.Because the organization needs these various types of material and the SRM vendorshave become smart, they have also become IT savvy. So, they are also now investing lotof money in their IT systems, because they also have to match this requirement fromtheir customers.The five important areas of SRM which we will discuss are:- Electronic procurement,Catalog management, Content management, Contract management and Suppliercollaboration.So, electronic procurement is e-procurement in short, common technology optionsavailable, are Electronic Shopping Cart, Procurement Card and Auction. So, shoppingcart we all of us actually now a days are very familiar with, check the procurement statusat any time, confirm the goods and service once that is delivered and can then enterinvoice for the purchase order again, very similar thing we also do on an individual basiswhen we place order on say Amazon or Flipkart.Procurement card can be used as a payment method in e-procurement system. P cards arecredit cards offered by companies like, American Express and Visa. This is what I wasexplaining earlier that, when a supplier, supplies a material he gets his paymentimmediately without any delay. It is something like a credit card when you buysomething in a shop you pay by credit card. And, the shopkeeper gets his money may bein the next day or whatever. He submits that slip to this bank and he gets the money.But, you are actually paying the money depending on when your credit card statementcomes; may be 15 days later or 30 days later or whatever. So, the money from your bankwill go out only 30 days later. Because, after you get your bill there will be 15 days or soof time that you are allowed for the credit. But, the shopkeeper from whom you got theitem, he gets his money in the next day, but you did not pay and you are paying probablyafter 30 days.So, this is the functioning of a procurement card, it is just like a credit card. So, thesupplier gets his money as soon as he has supplied. But, the company will be paying thebank or whatever American Express or Visa, depending on whatever their contract isabout credit days.So, these two are not actually linked like previous days. The supplier will supply, then hewill submit a bill invoice, then the goods will be inspected, quality check done, approvedand then there will be a credit term agreed upon the between the customer and thesupplier, for example. 15 days of credit is required. So, after 15 days, his payment will bereleased. And, then the bank they will prepare a cheque and the cheque will be physicallysent to the customer, or he will come and collect the cheque.So, it was a probably a 20-30 days cycle, but now the supplier gets his money the verynext day. So, he is a happy supplier. See, if you are happy supplier, he will also supplyyou things in time, things in quality, etcetera. And, suddenly if you need somethingmore, he will go out of his way to help you, by working extra hard, extra shift etceterawhatever he will do to meet your request and order.Because, for him you are a number one customer, because he knows that as soon as hewould supply the material, he gets his payment. In any business scenario that is the mostimportant thing, namely, cash flow. How fast can I get my cash?Auction is another e-procurement concept, which is coming in a big way. This is aprocess for selecting the most suitable offer in case of an organization dealing with largenumber of requests for quotation. And, as I told earlier also, it helps to bring in lot oftransparency, integrity and honesty.In auctioning process, where lot of things can go wrong, especially in governmentauctions, with all these E procurement transparency, those things have got almoststreamlined. Most of the wrong doings have been eliminated.Typical shopping cart functions are: - creating shopping cart and shopping cart approval.This is of course, not when you buy one book in Amazon. This is we are talking about anindustrial purchase of several materials in large quantities (B2B).In this process what happens is as I said, suppose you are a shop floor engineer and youwant something, -you go to that portal of that supplier and you put your item in theshopping cart. I need so, many things at so much quantity in such and such time. Now,that might need your management approval. May be the purchase department has tooversee and approve that, whether you really need so much quantity in such a time,because he has to pay. The purchase department and the finance department will beinvolved. So, that is where the approval part comes in. In the industrial scenario,purchase order and goods receipt will need to be processed. There will be a purchaseorder and the material will be received and this is a goods receipt. Then there is a invoicepayment, because once you receive a material, you have to pay the supplier.So, somebody has to check the stock, before you place a material requirement in theshopping cart, whether the material is there or not. It may happen that it is already therein your stores, but you are not aware.So, you created a shopping cart, but somebody finds out, that the material is alreadythere. So, why do you want to buy again extra? This check is a function calledAvailability Check, which is done using the ERP software. It is done at the background,whenever, you create a shopping cart for any component ERP is doing all these checks.Identifying sources of supply and possible vendors for the item and then there will beapproval preview. So, all these are functioning of a E R P type of product, which is beingused for supplier relationship management. So, electronically at the background as soonas you, as a user, you are creating a request, that is you creating a shopping cartrequirement and adding some material into a shopping cart, at the background all thesethings happen ( Availability check , potential vendors , whether vendors are on approvedlist or not etcetera ).Procurement card: I have already explained is a win-win for both buyer and supplier.Benefits to the buyer, as it reduces cost of purchasing and payment by cutting outunnecessary administration of multiple ordering etcetera. So, payment cycle becomesvery smooth and easy. And so, the whole processing cost will come down, as it savestime and also manpower.Replacing manual process with electronic ordering, payment and reconciliation: Thisenables instant information sharing and also if there has been any mistake or error, youcan track it because you have done everything electronically. So, there is a record. Youcan go back and check that when was it payed, quantity etcetera. So, if there is a problemyou can always go back and check and do reconciliation.Reconciling transactions are easier as all transaction details are available on net- thishelps in quick reconciliations and resolve any discrepancies. If, there is some problemdiscrepancies with the supply, quantity, whatever payment terms with your supplier youcan go to the internet check the thing and you know both of you can see the same thing,both supplier and the customer. And, you can resolve your discrepancies very fast.Benefits to the supplier of course, greater security for suppliers as here the bankguarantees payment. The supplier knows that as soon as he delivers, the credit card bankwill give the payment. And, then the credit card company will collect the money fromthe original company. Low payment transaction costs as payment happens electronically.So, all electronic payments is of course, very cheap and fast.Procedure of Procurement Card with SAP. - SAP is a ERP product, which we haddiscussed earlier. ERP has all these capabilities hence, SAP product is also used for thisE procurement processing.PO created using P card, PO goes to vendor, PO is a purchase order, vendor chargesorder to P card, then the vendor now activates his P card, which he sends to his bank.Bank comes to know about a particular order. In this case it is Visa which is ensuring thepayment. In a bank statement there is an IDoc. This information document goes toEBPro, which is a SAP program, which handles electronic business procurement. So, itis a B to B; it is business to business, a vendor to the company process.There is an approval process and it could be optional and could be automated. So, P cardowner and the work item sent for reconciliation comes to the manager and he posts to hisgeneral ledger, because in the accounts department the material will be received. So,payment has to be made. And, he posts to account payable; that means, payment has tobe released to the vendor. This is the SAP process. So, all this is happening within theSAP software. So, SAP is handling this entire procurement process, e-procurementprocess and P-Card processing.Bids and Auctions; - Types of bids; - Public Bids, here bid invitations are madeaccessible to potential bidders via marketplaces on the web. So, we have everything nowon the cloud, in the internet and the bidder can reach the company’s web page. Then inthe company’s portal you can find out what is being asked for. One can then use thehyperlink in the portal to log on to E procurement system and enter the bid.In the portals there will be lot of steps, where you can you know how to login, get a userID-password, because you have to have controls. And, based on that you can enter yourbid directly into the portal; so, you do not have to fill manually physical forms. Manualprocesses are gone. It happens instantaneously, because you can just fill up the formonline and submit.There it could be something called Restricted Bids. In this case bid invitations are madeaccessible to known bidders via e-mail. In a public bid anybody accessing the portal canbid. Restricted bid is where it is sent selectively to named vendors by email. And, then inthe email there will be a link and when they will click the link, then they will be able toaccess the portal and submit their bid. But anybody else will not be able to do so.Bids can also be classified as Online Static Sealed Bid; the bidders are allowed to bidonly once with the price within a window of stipulated time; so, they can bid only once.So, whatever price you give that is final either you get it or you do not get it. And, onlineDynamic Sealed Bid, - this is another concept called a dynamic sealed bid. Here biddersare allowed to improve their price bids till the hidden reserve price level is touched.Suppose the company wants to buy a material at 100 rupees. Now, the bidding hasstarted and some suppliers are bidding say 150 rupees. It is not approved; because thetarget price is not met and the bidder knows that his price is not approved.So, he says next time let me quote 140. Now, there are various players, multiple vendorsare quoting somebody saying 140, somebody saying 130, somebody saying 120 andnobody’s bid is getting approved, but the bid system is open, and bidding can continue.So, vendors, they will understand that they have to give still lower price.So, they start reducing and finally, somebody says 100 or may be lower 90 or 95 then thebidding stops. Because, the lowest target price has been reached and then the person,who has bid the lowest 100 or 90 or 95 gets the order. This is a dynamic bidding. Theother one was static, vendors could bid only one time.Catalog management; - catalog helps E procurement in variety of ways. Catalog lists allproducts and detailed product information. Because when you go online you arephysically not seeing a product. So, you need to get the information of the product, howdoes it look, what are the sizes or the specification etcetera, including links to thesupplier data.So, catalog helps employees to easily find the product that they require. And, for thisthey support strong search engines that can locate product based on description, productattributes etc. So, when you are buying something, you need to know what you arebuying and all possible information about that product. Catalogs can provide priceinformation of course, and catalogs can also check availability from a supplier.Like, when you go to Amazon you see only two pieces are available. You get thatmessage or may be 5 quantities are available and then you have to decide. That, if I delayprobably, I will not get it somebody else will buy it, because you know it is open andonline.In Catalog management we have three types of catalogs; external, internal, and thirdparty managed. So, external catalog is catalog managed updated and hosted by a vendorat his own site. This is good for the company as a vendor in this case is taking all theresponsibility. So, it is very simple. And internal catalog is where the company itself hasit is own catalog. So, these are my list of products which I want to sell and the catalog ishosted in my company’s portal.So, catalog is managed updated and hosted by the company at its own site. The catalogcan have products of various vendors. So, I take whatever various vendors are supplying,I make a catalog out of that and I host it myself.In the previous example – External catalog meant each vendor having their own catalog,and I have to go to that vendor’s website site and see I want this product x and y so manyquantities etc. Internal catalog is where I build my own catalog for all things I buy fromvarious vendors. And, then for each product I can identify these are the possible vendorsand that is their prices.So, I can choose which vendor which price etcetera.Often, a Third party manages the multi supplier catalog on behalf of the company; wecan also upload it to a third party who can manage this catalog entirely on my behalf.The advantage of this is a consistent look and feel for the catalogs from multiplesuppliers, the disadvantage of course, the recurring expenditure that needs to be paid tothird party, for hosting your catalog. This is something like outsourcing.So, cost is a disadvantage. Otherwise there are a lot of advantages as the third party doesall the sourcing, getting information, getting updated from the various vendors contactingthem etc. So, he is managing the whole thing and it looks very uniform. They do itprofessionally.So, there are three types and it is up to you to decide, which one you will follow.So, again this is just pictorially it is explaining the same thing the three types internal,external, and third party, the areas of supplier collaborationThe areas where there is a collaboration are: - Demand and Forecast collaboration,Inventory collaboration, New product development collaboration, Paymentcollaboration, Logistics collaboration most of them we have talked about already.Specially, I just want to explain New product development collaboration. When you aredeveloping a new product, collaborating with a vendor is becoming absolutely essential,because they are going to give you the components which you need for your newproduct.