2.1 Defining supply chains and supply chain management

Although the profession of operations management encompasses
lots of different factors, working with the supply chain is one of the most important. In this module, we will look in detail at this area; discussing what it involves and what factors a good
Operations Manager can influence, in order to achieve success in this area. To begin with, we should define what we mean when we talk about supply chain management
(sometimes abbreviated to SCM).

Definition:

'In commerce,supply chain management(SCM) involves the management of the flow of goods and
services, the movement and storage of raw materials, work-in-process inventory and of finished
goods from point of origin to point of consumption.'

Source: Wikipedia - Supply chain management

This definition is quite broad and raises two important points for further discussion. Firstly, there are lots of different tasks, activities and processes involved in the effort of getting raw
materials to a finished, sold product or service, each of which we will break down further. Secondly, there are usually a number of different individuals, resources and organisations which
have a hand in bringing the product to market.

The common term for all of these parties is the supply chain of a product or service. Supply chains
are common entities and have existed ever since man has been manufacturing products, but they are
now very much recognised as a critical part of the way a business operates and represent a real
opportunity for adding value. There are potentially a number of different places along the supply chain where chances exist for
adding value through the creation of greater efficiency, with the possibility of increasing revenues, decreasing costs and ultimately, positively impacting the company's bottom line.

2.2 How does logistics fit into the picture?

Many mistakenly believe that supply chain management is just a
new term for the field of logistics. However, it is actually the case that supply chain management incorporates all of the activities
covered by logistics, but adds to them.

For example

Traditional logistics generally refers to activities that occur within one organisation, whereas the
supply chain refers to the connected networks that work in tandem and coordinate their activities
and processes, in order to successfully deliver a product to market.

The other difference is that supply chain management usually encompasses all of the traditional
activities of logistics, but also includes areas such as product development, marketing and finance. It
is in this way that supply chain management is a much more all-encompassing approach than
logistics.

Inbound logistics relates to the movement of raw materials and other goods from suppliers into your
organisation, whereas outbound logistics relates to the movement of finished goods from your
company to your customers. Let's take a closer look at the key elements that make up supply chain management.

In this module, we will focus specifically on two of the principal areas at the beginning of the supply chain - Purchasing and Inventory/Stock Control, with the remaining areas to be discussed in Module 3.

2.3 Purchasing

The first step in the supply chain is acquiring the raw materials, products, or equipment that are needed to make the finished product or service. Arbitrarily buying what is needed without a sound purchasing plan can have serious cost
implications for the business. Therefore, the drawing up of a solid purchasing strategy is a key area
in which an Operations Manager is likely to be involved.
Why is a good purchasing plan or strategy important?

Firstly, the business needs to ensure that the materials required for the production of its goods are
available at the time that they are needed. Failure to think ahead and accurately predict how much
is needed and when, could mean that either the materials arrive too early, with subsequent cash
flow implications and the possibility that you have no space to store them, or too late, causing
potential production delays and a difficulty in meeting customer demand.This is why production
scheduling is of supreme importance in manufacturing and we will discuss this further later in this
course.

Secondly, you will want to make sure that the business has the right quality of goods that it needs, at
the best possible price. This is important, in order to keep costs low and retain an advantage over
competitors. For example
Even paying 3% more can have a big impact on your margins. If you can develop good working relationships with suppliers/vendors and use them for repeat
business, you may be more likely to get a good deal on price or quality for future transactions and
develop a sound business partnership with them. There are some important key stages in the purchasing process, as detailed as follows.

Planning requirements
The first objective is to determine the materials that are required, considering the following factors:
What raw materials are required and desirable for your manufacture? This is usually detailed in the
product specifications and you may not have much influence over it, as it will have been decided at
the design stage, although there is potential scope for improvements or changes.

Once you have selected the type of materials that you need, you then need to narrow this down to a
particular brand, style, or type of material. This may depend on number of factors, including quality, price, availability, specific features, or even personal preference/experience. Again, the designers
and product specialists will be actively involved in these decisions, but your input is likely to be
useful from a commercial perspective. Researching suppliers and receiving quotations.

Once you have decided on the raw materials that are needed, you then need to decide from which
vendors you will buy the materials from. It is likely that you will work with a number of different
vendors, in order to meet the requirement for all of the different types of materials needed. Factors to consider when choosing your vendors include price, quality, delivery arrangements, brand
and reputation and product availability and you should compare the offerings of different vendors, before choosing which to purchase from.

Your organisation may already have a Service Level Agreement with a particular vendor, meaning
that preferential terms have already been agreed with them and this is usually your first port of call, when choosing a vendor. Following this, you should ask each potential vendor to give you a quotation which breaks down the
items that you wish to purchase, along with their cost. Gathering quotations is a simple way of
comparing the services of more than one vendor. Order Placement
Once you have decided on the vendor that you wish to purchase from, you will usually inform them
verbally and then issue them with a purchase order.

2.4 Documents involved in the purchasing process

Purchase orders

A purchase order is a document created by the buyer of goods and given to the seller of goods, which lists the items which the buyer has agreed to buy for a defined price, as well as any other
associated terms of the purchase, including payment terms, delivery arrangements, etc. After the buyer has issued the purchase order and given it to the seller, the seller will accept and
this acceptance then creates a contract between the two parties for the sale of the agreed product or
material. One of the main reasons that purchase orders are used is that they offer benefits and protection for
both parties involved.

From the perspective of the seller, the document formally confirms the buyer's
commitment to purchase the goods and can therefore be referred to in the event of any issues
relating to late or non-payment. For the buyer, the purchase order gives the opportunity to set out in writing exactly what is required
and how much, at an agreed price, in order to minimise any mistakes or miscommunication during
the transaction. Receipt of goods
This document is usually issued after the ordered goods have been received by the organisation and
following a thorough check of what has been delivered against the original purchase order, to check
that no mistakes have been made and to ensure the goods' quality.

This is best done immediately upon receiving the goods, as it may be more difficult to rectify
mistakes at a later stage. Following receipt, the items will be moved to storage to await use.
Invoices
The seller of the goods will issue an invoice, which is the document requesting final payment, when
the goods have been dispatched and successfully received by the buyer. The invoice will detail the
goods that have been sold, the acceptable methods of payment and the agreed payment terms, which are generally 14 or 28 days from the date of the invoice.

2.5 Sourcing suppliers for your organisation

The first step to take when deciding upon which suppliers to make
contact with to quote for your goods is to consult your purchasing strategy. Depending on the nature of your business, you may need to work with a number of different
specialist suppliers, in order to source the particular materials that you need at the right price, quality and terms.

Alternatively, if your finished product is less complex or specialist, you may be able to work with
fewer suppliers, the benefit of this being that you are potentially more likely to benefit from
discounts or economies of scale by offering them repeat and sustained business, plus you can build
up a loyal working relationship together. The disadvantage could be that they cannot source all of your requirements, or may not have
specialist enough knowledge of some of the products that you need.

Here are some ideas of how to find suppliers, if you are starting from scratch:
Use trade directories, recommendations and/or specialist knowledge, to draw up a shortlist of
suppliers
Request detailed quotation
Compare the quotations of different suppliers, in the areas of price, quality and other terms
Choose a supplier and negotiate specific terms and conditions with them, where required
Negotiating terms and conditions with a supplier
In our first module, we discussed the fact that negotiation is a key skill that Operations Mangers
should acquire or develop in order to achieve success in their profession.

Dealing with suppliers is a
good example of a situation where negotiation skills will serve you well. You may wish to undertake negotiation with suppliers in one or a number of different areas, to find
the right terms for your business. For example
You may negotiate on price, delivery, payment terms, quality - in fact, anything that forms part of the
agreement between the two parties could be potentially subject to negotiation. With this in mind, here are two important factors for you to bear in mind, before
embarking upon your negotiation with suppliers:
Carefully consider your main negotiating priorities.

You should be aware that it is a poor
strategy to expect to enter a negotiation with everything on the table and for a supplier to
offer concessions on all of its usual terms or to meet all of your demands. This is why it is
important to decide the main areas in which you want to achieve a result in advance and make
sure that your focus your negotiation on these areas, to avoid distractions and mixed
messages.

What is your preferred outcome? You may wish to think about your upper and lower limits, in
advance. This might include the highest price that you would pay for one unit of a material, for
example. Advice on carrying out negotiations with a supplier
It is important to remember that good negotiation is a skill which requires careful thought and
practice. Operations Managers are often involved in negotiations with suppliers, but if you are not
particularly skilled or experienced in this area, you should work with somebody else in your team
who is.

Alternatively, you may work for a larger organisation which has a dedicated procurement
team, who are likely adept at negotiating with suppliers. Think about what you can offer the supplier as a deal, in order to encourage them to reduce their
base price for you. For example
You may be able to guarantee them a certain amount of business over a given period of time, or even
a good word of mouth referral.

Don't accept the first price that the supplier offers you. Make sure that you make a counter offer
first and then aim to negotiate further, until you reach an agreement that you are both in agreement
with.
Naturally, you should plan your negotiation out in advance, but it is also wise not to reveal your
position to the other person too early in the negotiations, or you could give them an advantage. Bluffing can sometimes help you to mislead your negotiating partner into thinking that you are
seeking something other than you are.

Be cautious of suppliers who offer you deals or prices that seem too good to be true. It could result
in compromises being made on quality or service that make it a worse deal in the long term. Don't be afraid of asking what the supplier can offer you as “extras” to the price that they quote. For example
You may be able to negotiate a superior quality material for the same price as a standard one, or
some after-sales maintenance for a piece of equipment.

At the end of the negotiations, make sure that you are clear on the key areas in which agreement
has been reached. If the agreement is for an ongoing business relationship with the supplier, you
should consider drawing up a formal contractual agreement or a Service Level Agreement, which
sets out all of the terms.

Take a Quick Recap Test [viralQuiz id=16]

Fact 93% of respondents have been involved in construction projects that overran, in terms of cost. 57% of those respondents believed that the chosen procurement method directly contributed to the cost overruns.

Take a Quick Recap Test [viralQuiz id=16]

Fact 93% of respondents have been involved in construction projects that overran, in terms of cost. 57% of those respondents believed that the chosen procurement method directly contributed to the cost overruns.

Source: Procurement in the Construction Industry 2010, The Chartered Institute of Building .

2.6 Drawing up a contract or a Service Level Agreement

The creation of a service level agreement (often abbreviated to SLA)
is a useful way in which to set out the key terms between yourself and a supplier. SLAs are generally used for more continuous and ongoing business relationships.

SLAs should cover the following points:

A description of the product or service being provided by the supplier, including type and
quantity
The agreed expectations surrounding the supply of materials.

For example, lead time from
ordering to delivery, delivery method, quality standards, potential replacements if the original
product is not available, etc
The methods by which to raise any issues and the agreed means of resolution
The ways in which both parties will report on outcomes and measure the success of the
agreement

Activity 1
Estimated time: 10 minutes

You have been asked to negotiate terms with a new supplier, to supply your business with the IT
equipment that it needs. Draw up your negotiating strategy.

2.7 When things go wrong with the purchasing process

There are common issues that can arise with the purchasing
process. If left unchecked and not rectified, they can have potentially serious knock on effects on the rest of
the business. Let's look at some potential problems. Availability issues
If your regular supplier does not have the materials that you need in stock, or does not have them in
the quantities that you need them, other than waiting for them, you will probably need to seek
alternative suppliers. If you cannot find those materials at all, you may have to weigh up alternative
materials altogether.

Lead time issues
If the lead time (the amount of time between the ordering of the materials and receiving them) is too
long for your production schedule and could cause potential production issues, this needs
addressing as soon as it is identified. If you are aware of this upfront, there may be an opportunity to
amend your scheduled activities to allow for it. For example
It may be due to a late, unforeseen delay to the delivery, which cannot be planned for, in which case
you will need to consider alternative, transitional arrangements. Increases in costs .

Although this is not common, it is possible for the costs of materials to increase between your
planning/budgeting stage and the time when you need to purchase said products. This could be due
to inflation (although this is unlikely to have a significant impact during the short period of time, in
this case), scarcity of the material, or supplier general price increases. A breakdown in one of the terms of the Service Level Agreement
Sometimes, problems and disagreements can arise between vendors and sellers.

When this happens, it is usually because of discrepancies between expectations in the SLA or other agreements,
including verbal ones. Where you can, you should aim to resolve these issues quickly and with as little disruption to the
supply chain as possible. If there is a complete breakdown in the relationship between yourself and
the supplier due to issues which cannot be overcome, you could try to arrange some transitional
arrangements for the supply of materials whilst you negotiate an alternative agreement with another
supplier, although this should be a last resort where possible, due to the inevitable disruption that it
is likely to cause.

2.8 Inventory/Stock control management

The next step in the supply chain, after purchasing your materials, is stock control. Essentially, when the goods that you have purchased have arrived in the possession of the business, they become stock or inventory. Inventory or stock control is the process of maximising the efficiency and the use of the items held in
stock. The main objective of the process is to create maximum profit and customer satisfaction for
your business, whilst keeping the lowest inventory cost possible.

Below are some factors to consider
in maximising your stock:- The approach of your business towards stock control
Different businesses have different ways of thinking, relating to how much stock they prefer to keep
- there is no “one size fits all” method.

Instead, there are advantages and disadvantages to keeping
little/no stock, or keeping a high volume of stock, as follows:-

Keeping high stock levels - The business could take advantage of economies of scale from buying in
bulk from suppliers. What's more, you are less likely to run out of stock, with the inevitable knock on
effects to production that this can bring. However, you may pay more to store the stock and you are
essentially tying up money in stock, which could be put to good use elsewhere in the business. In
addition, stock may go out of date or become unusable if stored for too long, creating potential
wastage costs.

Keeping little or no stock - This method of stock control is sometimes known as the Just In Time
method (JIT). You may pay less in storage costs and the risk of wasting stock that you have in
storage but do not use is reduced. However, you are very reliant on your suppliers keeping to the agreed delivery schedule and, if any
problems occur in the supply chain, you risk stock shortages and potential delays within your
construction schedule.

When making the decision for your business on what stock levels are most appropriate, you
may bear the following points in mind:

How much are your storage costs?
Are you able to reliably and accurately predict both customer demand and supply, to allow you
to be flexible in how much stock you keep?

Do you have a contingency plan for obtaining stock quickly, if needed?
How reliable are your suppliers and are they likely to stick to the SLA relating to availability?

Are there opportunities to take advantage of economies of scale for bulk buying?
Stock control systems
There are both manual and automated methods of measuring and analysing your stock levels. Computerised stock systems are increasingly used by companies to automate the process of stock
control. The principal advantage is that accuracy is usually improved, leading to lower costs and
more control over inventory. Other advantages of a system such as this can be the integration of
some other features of the purchasing process, such as automatic replacement ordering when levels
of stock get too low, or analysing stock usage to improve efficiency.

Controlling stock manually means creating an inventory of your stock, including how much there is
in volume, how much it is worth in monetary terms and where it is located on the site, or off site. There are two ways of carrying out this exercise - either by undertaking an annual stock take, or
having a rolling inventory which assesses stock levels on a continuous basis.

Fact

The Just in Time stock management process originated
in the Toyota Motor Company. Source: The Economist
Stock records and administration There are various documents and sources of information involved in the purchasing and stock
control process. These are as follows:
Purchase orders
Invoices and credit notes
Delivery notes
Receipts
Reports from stock control systems.

Activity 2

Estimated time: 15 minutes
Imagine that you are the Operations Manager for a small company that manufactures something
that you are familiar with (this could be bicycles, cosmetics, or even a recipe that you enjoy making).
Draw up an overarching purchasing strategy, using the key steps in this module.

Assignment

Supply Chain Management Part 1 – Purchasing and Inventory
Time: 30+ minutes
Hopefully, you took in as much of the information in this module as possible.

Module Summary

In this module, we have introduced you to the concept of supply chain management, a theme that we
will continue across the next module, such is its importance to operations management. We began by explaining the key terms of supply chain management and logistics, before breaking
them down into key areas. Firstly, we covered the area of purchasing, specifically the importance of creating and implementing
a plan or strategy for the purchase of the materials and other products that are required for the
manufacture of the product or service that your business creates. We discussed the reasons why a purchasing strategy is important and the main steps that form the
purchasing process. As part of this, we covered some important documentation in the purchasing process, such as
purchase orders and invoices, as well as some important principles for you to consider when
choosing suppliers and how to negotiate effectively with them in order to get the best deal possible.
We also looked at things that can go wrong as part of the purchasing process. Finally, we moved on to focusing on the stock control and inventory process of your business and
you learned some different techniques of managing your inventory and the importance of doing so.