5 – Procurement and Manufacturing Strategies

Introduction

Procurement is purchasing commodities, goods, or services that meet particular criteria. The procurement process should be optimised to achieve the lowest total cost for the benefit of the authority, the supplier, or individuals. Procurement often entails the procurement of commodities, works, or services that are required as a raw material or for operational purposes by a business or individual. Procurement relies heavily on vendor development. Some of the skill sets that the Procurement team must build include sourcing and vendor development. The procurement function collaborates with procurement logistics or the incoming supply chain.

5.1 Procurement Strategies

A successful procurement strategy to support supply chain operations necessitates a considerably stronger working connection between buyers and sellers than has previously been the case. Three tactics have emerged: volume consolidation, supplier operational integration, and value management. Each of these techniques necessitates significant engagement among supply chain partners and should be viewed as stages of continual improvement.

5.1.1 Volume Consolidation

Volume consolidation through supplier reduction is crucial in developing an effective procurement strategy. Beginning in the 1980s, many businesses were confronted with the fact that they had to deal with many suppliers for practically every commodity or input needed. Before that time, purchasing literature highlighted that having diverse sources of supply was the ideal procurement technique. Potential suppliers constantly bid for a buyer’s business, putting them under constant pressure to quote low pricing. Second, having many sources lessened the buyer’s reliance on a single supply. This, in turn, reduced the buyer’s risk if a given supplier had supply disruptions such as a strike, a fire, or internal quality issues.

Procurement is also positioned to leverage its portion of a supplier’s business by consolidating volumes with restricted suppliers. At the very least, it strengthens the buyer’s negotiation position with the supplier. More importantly, volume consolidation with fewer suppliers brings many benefits to those suppliers. The most apparent advantage of consolidating a more significant number of purchases with a supplier is that it helps the supplier enhance economies of scale by distributing fixed costs across a larger output volume. Furthermore, when a supplier is assured of a certain number of purchases, he or she is more inclined to invest in capacity or processes to improve customer service.

Risk increases when a single source of supply is used. As a result, supply-base reduction strategies nearly invariably include stringent supplier screening, selection, and certification activities. Procurement executives frequently collaborate with others to identify preferred or certified suppliers. It should be emphasised that volume consolidation does not always imply that a single supply source is used for all, or even most, purchased inputs. It does, however, imply that a far smaller number of suppliers are used than was formerly in most firms. Even when using a single source, it is critical to have a backup strategy in place.

The potential savings from volume consolidation are not insignificant. According to one consulting organisation, reductions in purchase price and other cost aspects can range from 5 to 15% of purchases. If a typical manufacturing firm spends 55% of its revenue on purchased items and can save 10% through volume consolidation, the potential for a $5.5 million improvement in revenue of $100 million exists.

5.1.2 Supplier Operational Integration

The next stage of development occurs when buyers and sellers integrate their processes and operations to increase performance significantly. Typically, such integration entails alliances or partnerships with selected suppliers to lower total costs and improve operational integration. This kind of integration can take many different forms.

For example, the buyer may grant the supplier access to sales and ordering information, providing the supplier with constant awareness of which products are selling.

With detailed sales information, the supplier is better positioned to meet buyer requirements at a lower cost. Cost savings arise because the supplier has more planning knowledge and can lessen reliance on cost-efficient activities such as forecasting and expediting.

Buyers and suppliers can collaborate to identify procedures involved in maintaining supply and seek methods to restructure those processes for further operational integration. A common benefit of such integration is establishing direct communication links to shorten order time and eliminate communication errors. More complex integrative efforts may involve removing redundant tasks performed by both parties.

For example, in some sophisticated agreements, processes such as buyer counting and inspection of arriving deliveries have been discontinued as suppliers accept increased reliance and responsibility.

Many businesses have achieved operational integration through logistical solutions, including continuous replenishment programmes and vendor-managed inventory. Such integration has the potential to significantly reduce TCO.

Some operational integration projects aim to lower total costs through two-way learning.

For instance, Honda of America collaborates closely with its suppliers to improve quality control. Honda visits supplier facilities and assists in identifying methods to improve quality. Such advancements ultimately help Honda by lowering the supplier’s rework costs and providing Honda with higher-quality materials.

The primary goal of operational integration is to minimise waste and costs while developing a connection that allows both the buyer and seller to benefit from mutual gains. Combined innovation across firms can create a synergy that a single firm functioning in isolation could not achieve. Over and above the benefits of volume consolidation, operational integration with a supplier can generate incremental savings of 5 to 25%.

5.1.3 Value Management

Obtaining operational integration with suppliers opens up the possibility of value management. Value management is a more intense component of supplier integration, moving beyond focusing on buyer-seller activities to a more comprehensive and long-term partnership. Some ways a corporation might collaborate with suppliers to lower TCO include value engineering, reduced complexity, and early supplier involvement in new product design.

Value engineering is a concept that entails rigorously scrutinising material and component requirements early in the product design process to ensure that a balance of the lowest overall cost and quality is included in new product design. Early supplier participation can be crucial in obtaining cost savings. As a company’s latest product development process progresses from concept generation to commercialization, its flexibility in making design adjustments reduces. Design modifications are readily accepted in the early stages, but once prototypes have been developed, changing the design becomes complex and expensive. The earlier a supplier is involved in the design process, the more likely an organisation will benefit from that supplier’s experience and capabilities.

An automobile manufacturer’s example highlights the value of early supplier involvement. The design engineer completed the design of the bumper bracket assembly for a new model while developing the front bumper for a new model. During the process, an engineer from the assembly supplier, which had previously been picked even though actual manufacturing was still months away, requested that the bracket location be altered by around 12 inches. After some thought, the design engineer responded that it could be done without affecting the final product. The design engineer wondered why the supplier had sought the change. The explanation was that by relocating the bracket, the supplier could build the bracket using existing tools and dies. A significant capital investment would have been required for new tooling under the original concept. As a result, there was a 25% to 30% price reduction on the bracket.

Value management extends beyond procurement in a company and necessitates collaboration among multiple internal and external partners.

5.2 Sourcing Strategies

Although closely related, the procurement process and sourcing strategy differ. While sourcing strategy is concerned with the planning, designing, and developing a reliable and competitive supplier base, the procurement process is concerned with the operational business processes of the procurement function and assuring performance. Sourcing also aids in developing procurement strategies, pricing strategies, and supply chain requirements. The strategy entails aligning or confirming its objectives with operations, finance, marketing, and distribution stakeholders. Finally, sourcing strategy entails preparing for competitive purchasing sources for raw materials, components, services, and other elements.

Sourcing is a systematic and formal process that includes continual study to determine the best combination of tools and technologies to improve supplier generation and management while lowering total costs. Outsourcing can be classified into three levels:

• Transactional offshoring
• Tactical outsourcing
• Strategic outsourcing

5.2.1 Shift in Sourcing Strategic Approach

Realising suppliers play a critical role in a business’s supply chain network has shifted how businesses perceive and approach supplier relationships. Various variables have led to a change in the perceived value of supplier partnerships. Complex global business models, combined with market needs, have compelled corporations to establish production or assembly facilities closer to markets and in places where conversion costs are relatively lower.

Lean manufacturing and the cost-per-unit idea necessitate managers to explore ways to cut procurement and logistics costs. By creating a collaborative relationship with suppliers, buyers can ask supplier businesses to keep inventories for them at the buyer’s location and postpone taking inventory ownership until the point of consumption. Today, preferred suppliers accompany the buyer into countries where the buyer establishes facilities and provides value-added services such as warehousing management in the spirit of customer relationship management. As a result, management has understood that to construct a global business model, they must develop supplier partnerships, operate with a collaborative spirit, grow the supplier’s capabilities, and build connections. Supplier management is no longer a transactional activity.

5.2.2 Third Party Provider (3PL)

Third Party Logistical Provider (3PL) is defined as “the services offered by a middleman in the Logistics Channel who has specialised in performing, under contract, all or a significant number of logistics tasks for other enterprises for a certain term.”

A middleman can be a broker, a freight forwarder, a Shippers’ Association, or another entity.

What distinguishes a 3PL from a transportation provider?

A transportation provider, sometimes called a 3PL, transports goods from point A to point B. A transportation provider performs only one logistical function, whereas a 3PL provider assists in many activities.

Types of 3PL Provider

The following are some of the many types of 3PL providers:

1. Transportation-Based: In this case, the services go beyond transportation to provide a comprehensive set of logistics services. Transportation-based service providers can be classified into two types: leveraged and non-leveraged. Leveraged 3PLs utilise assets from other companies, whereas non-leveraged 3PLs only use assets from the parent company. Examples of 3PLs include Ryder, Schneider Logistics, FedEx Logistics, and UPS Logistics.

2. Warehouse/Distribution Experience: Many, but not all, have previous warehouse and/or distribution experience. The transition to integrated logistics has been less complicated than the transition for transportation-based suppliers. Warehouse/distribution-based 3PLs include DSC Logistics, USCO, Excel, Caterpillar Logistics, and IBM.

3. Forwarder-Based Service Providers: These providers are autonomous intermediaries extending forwarder duties. These are non-asset owners who can supply a variety of logistics services. Forwarder-based 3PLs include AEI, Kuehne & Nagle, Fritz, Circle, C. H. Robinson, and the Hub Group.

4. Financial Based: These service providers provide freight payment and auditing, cost accounting and control, and solutions for monitoring, booking, tracking, tracing, and inventory management. Financial-based 3PLs include Cass Information Systems, CTC, GE Information Services, and Fleet Boston.

5. Information-Based: This alternative category of Internet-based, business-to-business, electronic markets for transportation and logistics services has seen notable expansion and development. Examples of information-based 3PLs are Transplace and Nistevo.

The Benefits of Using a Third-Party Logistics Provider

The typical benefits include labour reduction, operational flexibility, cycle time reduction, improved responsiveness, cost reduction in logistics operations, cost reduction in infrastructure investment, and hiring knowledge at a fair cost.

Disadvantages

The drawbacks include losing control and having a detrimental influence on the in-house employees.

• Commitments to service levels are not met.
• The Service Provider’s organisation lacks strategic management skills.
• Cost-cutting objectives are not met since the service provider does not own the objectives.
• Cost “creep” and price rises arise because the service provider lacks a proper monitoring mechanism.
• Improvements and accomplishments are also absent.
• Control over outsourced functions has waned.
• There is a lack of consultative and knowledge-based abilities.
• Capabilities in technology are not being delivered.
• The amount of time and effort spent on logistics has not been reduced.

5.2.3 Fourth Party Logistics Provider (4PL)

The Fourth Party Logistics Provider (4PL) is a relatively recent notion in outsourcing. Various 3PL service providers, technology providers, and management consultants form a 4PL partnership. A 4PL provider is a supply chain integrator who combines and controls the organization’s resources, competencies, and technology with complementary service providers.

LSCM Alliances 3PL + 4PL = 7PL 

The advancement of 4PL solutions uses the capabilities of 3PL providers, IT service providers, and business process managers to provide a comprehensive supply chain solution through a centralised point of contact. The 4PL will combine the client’s supply chain activities and supporting technology from these “best of breed” service providers with the capabilities of its organisation.

3PL + 4PL = 7PL

The Value Logistics Group coined the term “7PL,” which refers to the emerging trend of combining 3PL and 4PL. Through this solution, the client has a single service provider who handles the entire logistical chain.

The 7PL Concept

The 7PL concept combines 3PL and 4PL into one (3PL + 4PL = 7PL). A single service provider may now offer a client 3PL and 4PL services and a comprehensive 7PL solution. It can execute turnkey projects for its clients, where all services and activities are supplied under one roof.

5.2.4 E-Procurement

Supplier exchange is another term for e-procurement or electronic procurement. It is the sale and purchase of supplies and services over the Internet from a business to a consumer, a business to a government, or a company to a business. E-procurement websites often allow registered users to search for buyers and vendors of goods and services. Buyers or sellers may encourage bids, depending on the type of site. Online transactions can be begun and completed. Specific buying and selling processes can even be automated using e-procurement software. Companies that employ e-procurement services can better monitor their parts inventory, save overhead, and improve the efficiency of their manufacturing cycles.

When businesses include e-procurement in their business model, operational efficiencies multiply due to cost reductions, cost comparisons, ease of access, faster turnaround times, and system ease of use. Companies that employ e-procurement can automate the procurement process, regulate stocks, reduce purchasing expenses, enhance delivery schedules, and become more efficient.

E-commerce and e-procurement are becoming more popular as firms grasp the benefits of these systems’ increased efficiency. Inefficiencies caused by paper processing and internal discrepancies in procurement procedures are reduced or eliminated. Digital broadcasters are here to assist you in putting these efficient processes to work for your firm so you can reap the benefits of increased productivity.

5.3 Manufacturing

The changing character of manufacturing has been evident since the Industrial Revolution, when we substituted handmade goods for machine-made goods, and its progress continues now. Micro and nano production, computer-aided manufacturing, and innovative supply chain management are only a few of the most recent achievements in a long history of industrial innovation. Manufacturing is a critical component of company performance, and manufacturing strategy is tied to manufacturing success, which is linked to business success. Manufacturing has grown to be recognised as a key component of business strategy. Integration in several aspects has emerged as a critical issue that must be duplicated in manufacturing strategy.

Lean production originated in Japan, where economic and competitive climate changes prompted industrial firms to design creative and cost-effective production processes. As a result, organisations were encouraged to seek a modification of the production models as well as the Japanese management system. While the Japanese economy has suffered, several well-organized Japanese manufacturing firms, such as Toyota, Honda, and Canon, have remained competitive globally. Aside from technological advantages, JIT production, TQM, and concurrent engineering are regarded as the key strengths of Japanese manufacturers. After WWII, when Japanese manufacturers realised they couldn’t afford to create facilities like those in the United States, they focused on the lean idea. They began making and refining the production process to reduce waste.

5.3.1 Manufacturing Objectives

Because of the changing nature of competitive pressure, businesses must increasingly compete on multiple performance elements simultaneously. This fact contradicts the traditional notion that firms must identify a single area of expertise and pick between low-cost, quality, or flexibility objectives. As a result, the degree to which organisations resolve manufacturing performance trade-offs and an understanding of the mechanisms by which they do so emerge as a collection of study problems. Let’s talk about the concept of manufacturing objectives.

Manufacturing objectives include cost, quality, delivery, and flexibility, and trade-offs generally exist between these. Trade-off judgments are also required in several crucial areas to support manufacturing objectives. Skinner classified decisions into five categories:

(a) plant and equipment;

(b) production planning and control;

(c) labour and staffing;

(d) product design/engineering, and

(e) organisation and management.

These fundamental concepts (trade-offs and consistency of objectives/policies) have served as the foundation for the current knowledge of industrial strategy. Formally, it is defined as follows:

“A manufacturing strategy is defined by a pattern of structural and infrastructural decisions that shape a manufacturing system’s capabilities and indicate how it will operate to accomplish a set of manufacturing objectives consistent with overall business objectives.”

One of the critical difficulties in industrial strategy is the consideration of trade-offs between competing agendas. The selection of a product mix to provide in the marketplace is a significant issue that organisations face across industries. The operational ramifications of product line decisions have been generally disregarded, even though the importance and complexity of product interactions in the production environment increase with product line expansion. Furthermore, given attempts in many businesses to improve the cohesion of manufacturing processes across goods, considering manufacturing synergies among items in product line design is becoming increasingly helpful.

5.3.2 Manufacturing Decisions

Manufacturing is distinguished by tangible outputs (products), outputs that customers consume over time, jobs that require less labour and more equipment, little customer contact, no customer participation in the conversion process (in production), and sophisticated methods for measuring production activities and resource consumption as products are manufactured. Every dollar spent on manufacturing products generates $1.37 in other areas of the economy. In comparison, the financial services sector generates just roughly 50 cents on the dollar.

5.4 Manufacturing Strategy

The phrase “manufacturing strategy” has become increasingly popular since the 1980s. There is some ambiguity regarding when manufacturing strategy appears in the firm’s broader strategic planning process. It has been asked whether ideas such as JIT and TQM have supplanted production strategy. Managers frequently struggle to distinguish between initiatives such as JIT and production strategy.

Two definitions appear to capture best what manufacturing strategy is.

— Hayes and Wheelwright, 1984

“Manufacturing strategy consists of a sequence of decisions that, over time, enable a business unit to achieve a desired manufacturing structure, infrastructure and specific capabilities.”

—Swamidass, 1987

“Manufacturing strategy is viewed as the effective use of manufacturing strengths as a competitive weapon for achieving business and corporate goals.”

Manufacturing strategy will be linked to three adjacent concepts:

(a) manufacturing mission, which may be linked to corporate strategy;

(b) manufacturing concept, which will provide an overall, integrated picture of how manufacturing is intended to be in the future and

(c) The manufacturing implementation plan will indicate the chosen rate and scope of change.

Thus, manufacturing strategy can be defined as a pattern of structural and infrastructural decisions that shape a manufacturing system’s capability and outline how it will accomplish a set of manufacturing objectives consistent with overall business objectives.

5.4.1 Formulation of Strategy

Let’s review the fundamental procedures for analysing current manufacturing activity and examining current strategy.

A manufacturing strategy is a working document that provides the foundation for competitive advantage, essential issues affecting the organisation, strategic manufacturing goals, and broad strategic objectives to be pursued. Although not all manufacturing companies have a manufacturing strategy, most businesses have a business plan and a broad corporate strategy. A superior combination of people, technology, concentration, and direction can provide a competitive advantage. A manufacturing plan addresses all of these concerns.

Strategy Development

Below is an outline of developing a manufacturing strategy involving quality, technology, skill requirements, training, and make-or-buy decisions.

Form a Project Team

A strategy requires the full-time attention of several knowledgeable management team members. Team members must be thoroughly aware of the organization’s goals, products, and markets and have competitor analysis and production technologies expertise.

Gain an understanding of the current market position.

The strategy formulation process requires a detailed grasp of your present items. The following questions must be addressed:

What approach does your company use to compete?

Competing on cost (cost leadership), superior features or services (differentiation), or a subset of the market are the three generic methods (niche market focus).

What kinds of family items do you have?

• Using product life cycles as a framework, consider the production requirements of various items.
• Plotting product life cycles for existing core goods and future initiatives might help develop a picture of the business’s future size and shape.
• Measure the performance of each product as well.
• Concentrate on your contribution, market share, and market growth.
• Determine each family product’s competitive advantage. Quality, delivery lead time, delivery flexibility, design flexibility, and affordability may all be competitive features.
• Determine the criterion that provides you with the most competitive edge.

Determine the Change Drivers

When assessing the causes of change, consider business criteria such as product performance, market demands, the growth of manufacturing philosophies, and management structures. We must also take into account changes in technical progress and financial needs. Following that, we should do a SWOT analysis to assess the external influence on the organisation, internal resources and capabilities, and employee skills and competencies.

Examine Your Current Results

It can be challenging to evaluate performance versus competitive edge requirements. Some factors are difficult to assess directly, and comparison data may be complex. As a result, we can utilise approaches like Pareto Analysis and activity sampling to facilitate data gathering and obtain comparable data through published reports, databases, or direct conversations with customers and suppliers. Consider performing a destructive analysis on a competitor’s product. Take part in benchmarking investigations. We should also consider product performance characteristics, including quality, delivery, flexibility, material costs, and capital expenses.

Determine Critical Components

Identifying the components most crucial to the organization’s long-term success allows you to make the best use of the limited investment funds available. Components can be classified as having high or low business substance, with those on the high end having strategic relevance. Components with high added value should be included in the list of strategic components, whilst those with poor business content should be considered for purchase.

Examine Your Manufacturing Process

This may be the most challenging process, requiring significant time. In evaluating manufacturing operations, we look at present practices about various factors. Facilities, span of process (the degree of vertical integration), capacity, processes and how they are organised, human resources, quality, control procedures, suppliers, and new products are the nine core topics that are most frequently covered. Following that, gaps should be identified by comparing current practice’s strengths and shortcomings to the specified competitive advantage criteria.

Set New Goals

Targets for tooling costs, equipment utilization, defective materials, or inventories can be set. Without targets, it is impossible to quantify achievement and maintain pressure to meet them.

Create a Brand-New Manufacturing Strategy

A new production strategy is being developed. However, to create a new manufacturing strategy, the company must first fully grasp the existing one and ensure that it understands the strengths and weaknesses of the existing product line.

Expand Your Supplier Network

We should think about each supplier’s relationship.

We should select a potential supplier network and evaluate its capacity to meet the demands of in-house manufacture for the components we have chosen to buy.

Review

Annually, we should assess the manufacturing strategy against the changing business environment and set new goals.

REVIEW QUESTIONS:

1. Explore the concept of Supplier Operational Integration.
2. Define Value Management, supported by an example.
3. Evaluate whether value engineering involves examining material and component requirements closely, providing a rationale for your answer.
4. Discuss the three levels of outsourcing.
5. Differentiate between a 3PL and a Transportation Provider.
6. Enumerate the types of 3PL providers.
7. Examine the advantages and disadvantages of Outsourcing to 3PL.
8. Provide a concise overview of Fourth Party Logistics Provider (4PL).
9. Define manufacturing strategy and its significance.
10. Explain the objectives of manufacturing within the context of operations management.
11. Discuss the concept of manufacturing strategy and its implications.
12. Explore how manufacturing strategy relates to three adjacent concepts.