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ERP
- Enterprise Resource Planning
ERP
for every type of industry has become different. However ERP is
only a tool. It is still the purchaser who has to follow up for
deliveries etc. The purchaser must know all the details of purchasing
- all terms and conditions of delivery, receipt, billing etc. Dates,
quantity, quality, checking, approval routing, rejection specification
- how and under what circumstances who will bear the rejection,
to what extent and of what kind, replacement in case of damage.
The
sales pitch of vendors often carries buyers away. They often act
out of fear psychosis and build up inventory. They do not explore
other options fully due to their fears. For all these reasons, the
man behind the machine is still more important than the machine
itself. For most organizations, there is a driver department. For
example some companies are manufacturing focused, while others are
finance focused or marketing driven. ERP cannot remain oblivious
of this fact. Hence this is also reflected in the ERP system of
the organization.
Successful
purchasing means a lot of information gathering and brainstorming
to determine the best practices for an organization. After a lot
of brainstorming and information collection; if all those details
are not stored at one common place, then decision-making might become
a very difficult task. ERP and data warehousing solutions can help
organizations emerge as a strong force in its competitive area.
ERP
solutions can help maintain information in one central location
or in multiple -locations, so that it can be used in any number
of locations, by different identities in the organization, in different
countries, in different currencies and languages to form a sustainable
profit-balance sheet. After all, timely and quality information
is the key to any business.
ERP
empowered procurement
In
order to succeed in its area of operation, every organization needs
to plan, execute (the plan) and control (the execution) at various
levels of management: corporate, divisional and operational. In
order to support the three functions at the levels mentioned, ERP
solutions covers not only just planning, but also execution and
control as well.
While
sales management of any commercial organization is the breadwinner
for that organization, procurement or purchase is the backbone of
this breadwinner. A buyer comes into picture only when an organization
chooses to buy rather than make an item for it's business activities.
When this decision is taken, a buyer has to decide what to buy,
how much to buy, when to buy, how frequently to buy, when to buy
more than required, or even, when to buy less than normal purchases.
At this point, cost effective and just in time procurement can make
a very significant difference to the bottom line of an organization,
without causing any additional burden on the available resources.
Hence material planning becomes a key factor for success of any
organization.
PROCUREMENT
CLASSIFICATION
The
areas of procurement can be broadly classified as follows:
-
Trade
/ manufacturing related procurement, including sub-contracts.
-
Spares and accessories purchases.
-
Non-trade
related miscellaneous procurement such as stationery.
-
Capital
equipments.
An
ERP system caters to the needs of these classes and also enables
effective cost of procurement, optimal cost of transportation and
optimal vendor delivery quantities, while managing technical logistic
issues such as transportation and storage restrictions. Of
the categories mentioned above, the last two require financial budget
allocations and monitoring at the financial level. The first two
need closer planning and control. While spares and accessories are
needed to provide equipment maintenance support, raw material and
trading items are needed for actual business operations. As indiscriminate
procurement will result in loss of storage space, inventory-carrying
costs, non-availability of other resources etc, it needs to be taken
care of well. Hence it is imperative that ERP solutions should address
these key success factors relating to procurement. Many procured
items have inherent characteristics such as low cost, high cost,
high lead-time, special import requirements, seasonal raw materials,
special handling in logistics, etc.
ROLE
OF BUYERS
Vendors
play a major role in procurement. Their product lines, deliveries,
pricing and discount structures are essential for commodity procurement.
But it is the buyer within an organization who makes the vendors
work for the organization.
Within
an organization, buyers need to be controlled, in order to control
the organization's allocation of resources, cash flow, etc. This
requires corporate planning, which evolves top down from the objectives
of growth, and translates into operational objectives for managers.
When we talk of purchasing even in an ERP enabled organization,
a person has to be assigned for the purchasing function. An organization
buys for three reasons.
To
maintain minimum levels.
To take advantage of bulk purchase.
To buy for inventory.
All
this has to go within an overall budget. Resources have to be allocated
for any buying. That is why ERP has time scale: planning fences
indicating starting and ending. If resources are not enough, the
planning cycle is reduced, so that one can achieve planned objectives
within those minimum resources. In that case the buyer replaces
only when a sale has been made. For example, auto ancillaries do
not automatically stock a sold out part because the component make,
type and size etc may change in six months.
This
information must be given to a buyer. The buyer need not be a one-man
entity. It could be a team of professionals or even different departments
may have their own specialists for the procurement activity. Normally,
there would be a purchase ordering committee (POC) comprising representatives
from purchase, finance and user departments, which will not only
need the ERP projected plan but also all the aforesaid information.
Ultimately, the primary objective of procurement activity is to
minimize the investments for the organization, which normally amounts
to forty to fifty percent of the total costs in major manufacturing
organizations. If one can save these investments and costs to the
best extent possible, it could definitely directly affect the profitability
of the organization. To do this, the POC could use the data in the
ERP solution to decide future buys. This is important because a
buyer will be evaluated on the basis of timely payments released
to the vendor. POC decision also depends on the type of industry
and the products they are required to buy.
The
buyer must be technically aware of what he is buying, he must be
aware of the capabilities of the supplier - his abilities to supply
in time, financial soundness etc. The list of prospective suppliers
must be continuously updated with technical details about the vendors
and recorded as objects. Whenever a future requirement comes, the
purchaser must know from where he can get what. Often there are
small modification in the product. For example, in printed circuit
boards (PCBs), since the cost of gold coating is very high, silver
coating and tin coating were introduced as alternatives for low
cost PCBs. The buyer is expected to know that PCBs with silver/tin
coating are available in the market. He must know about what his
needs and the cost implication of his decision. He must consider
what the alternatives are while making any buying decision. The
buyer must be a skillful businessperson, must be a sound negotiator
for technology and price, and even be capable of negotiating a futures
option, since the activity of purchasing is becoming more and more
complex these days.
The
buyer must be aware of what modes of transportation are available.
He could be capable of calculating the landed cost taking into consideration
octroi, sales tax, freight, insurance, etc. This may help in preventing
the situation where the actual cost is much lesser than the overall
cost of acquisition (CoA). A lot of companies do broadband purchasing,
in order to save every penny that counts. If we can analyze a buyer,
we can know that the role he would have played in purchasing, by
looking at the inventory around. Buyers must continuously interact
with the intender of the purchase order. So, the buyer must also
be aware of what the organization is selling, what is moving in
the organization. Also the buyer has to keep learning about new
technologies such as payments through LC to EFT (Electronic Funds
Transfer). He will also have to understand associated legal issues.
THIRD
PARTY BUYERS
A
new concept is that of third parties who buy in bulk for the organization
so that it can economize on overall costs. Nobody wants to carry
inventory. This is the concept of a distributions and logistics
company, which manages inward logistics. Some automotive companies
are already doing that. They have huge warehousing and transportation
facilities. Basically, these manufacturing companies maintain their
inventory at Dynamic Logistics' warehouses so that, they reduce
costs on land, warehousing facilities, the maintenance, resources
to be maintained at the warehouses and monitoring the routine operation
in the premises. Also, they do not have to bother about transportation
of material at their premises. All these activities are taken care
by Dynamic Logistics.
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