1. Materials Management BUS 3 – 141 Information Systems and Technology Week of Apr 2, 2007

2. Page 2 2 Agenda –“Deal of the Break” –Case due Wednesday –Overview –Technology and the 9 Elements of the Supply Mgmt Process –Supply Management Applications –EDI –Online Auctions –Summary

3. Page 3 3 Case 2: Deere Coat Management, p251, 9-1 1. FACTS OF THE CASE (Approx. 20% of Total Effort / Grade) Quantitative data (Revenue, Inventory, Costs, Employees, Divisions, etc….) 2. BUSINESS ISSUES IDENTIFIED (Approx. 20% of Total Effort / Grade) Customers, Suppliers, Internal Measurement Systems, Organization, Competitors, Supply Shortages, Price Increases, Cash Flow, etc…) 3. CONCLUSIONS (Approx. 25% of Total Effort / Grade) What has been going well? What needs improvement? 4. RECOMMENDATIONS (Approx. 35% of Total Effort / Grade) What improvements should be made? What (if any?) activities should be stopped? How can the improvements be implemented?

4. Background and Overview

5. Page 5 5 Technology in the Materials Management Process Identify WHAT Items are Required Calculate HOW MUCH is Required Schedule WHEN they are Received & FROM WHOM At the LOWEST Total COST of Ownership With the Highest QUALITY and Reliability

6. Page 6 6 Four Basic Information Flows in Supply Management Statement of Need –MRP –Requisitions –Reorder points Requests for information within the organization –Pricing –Availability –Approved Suppliers Information from Suppliers and the marketplace –Pricing and Availability –New laws and regulations Information to Suppliers –Additional requirements –Specification changes

7. Page 7 7 Simplified Flowchart of an Automated Purchasing System * From Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin

8. Page 8 8 MRP is extremely dependent on accurate DATA Open Purchase Orders In Receiving Open Work Orders In a higher Assemblies In the Stockroom In Finished Goods Shipped In a WIP Location In WIP EVERY time inventory is moved, a TRANSACTION must be executed The system MUST see ALL inventory in ALL of these categories at ALL times

9. Technology in the 9 Elements of the Supply Management Process

10. Page 10 10 The 9 Elements of the Supply Management Process Supply Mgmt Production Customer Service Shipping Identify Requirements Establish Specifications Assess Suppliers Select Supplier(s) Issue Purchase Order Follow-Up & Expedite Receive & Verify Process Payment Maintain Records Customer Demand Production Schedule

11. Page 11 11 1. Identify Requirements Identify Requirements Establish Specifications Identify Suppliers Select Supplier(s) Issue Purchase Order Follow-Up & Expedite Receive & Verify Process Payment Maintain Records –Direct and Indirect –Material Requisitions –MRP Output –Impact of Lead Time –Other items to consider  As availability becomes scarce, Purchasing alerts users  Recommending subassemblies instead of components  Proposing substitute items, where appropriate MRP Reorder Point System generated Requisitions Periodic Buys

12. Page 12 12 2. Establish Specifications Establish Specifications Identify Requirements Identify Suppliers Select Supplier(s) Issue Purchase Order Follow-Up & Expedite Receive & Verify Process Payment Maintain Records –Engineering Drawings and Specifications –Samples –Requisition Details (electronic or paper)  Date originated, Document Number, Dept, Account Number, Signature(s)  Complete description of material or service required  Quantity and date required  Shipping / delivery instructions –Authorization to Buy –Impact of Lead Time –Other items to consider  Understanding ultimate purpose (Are they asking for a Mercedes or just a car?)  Catalogues and standard items  Supplier Input Part Numbers Engineering Docs Contract Info Service Agreements

13. Page 13 13 3. Identify Suppliers Identify Suppliers Identify Requirements Establish Specifications Select Supplier(s) Issue Purchase Order Follow-Up & Expedite Receive & Verify Process Payment Maintain Records –History and Geography –Request for Quotation –Request for Proposal –Request for Bid –Other items to consider  Input from Technical Staff  Other Qualified Suppliers e-RFQ e-RFP

14. Page 14 14 4. Select Suppliers Select Supplier(s) Identify Requirements Establish Specifications Identify Suppliers Issue Purchase Order Follow-Up & Expedite Receive & Verify Process Payment Maintain Records –Supply Capability  Quality  Capacity  Reliability –Many other factors to be covered later in semester Pricing History Online catalogs PO agreements Reverse Auctions

15. Page 15 15 5. Issue Purchase Order Issue Purchase Order Identify Requirements Establish Specifications Identify Suppliers Select Supplier(s) Follow-Up & Expedite Receive & Verify Process Payment Maintain Records –Relationship to Material Requisition  The Requisition provides the information that populates several Purchase Order data fields (see Requisition Details) –Ensure Risk Management –Acknowledgement –Internal Controls  Budgets  Approvals –Recurring Purchase Order Releases  Pre-negotiated contracts –Other items to consider  ALWAYS ensure that the terms and conditions are in WRITING. A Purchase Order is a CONTRACT Continued on next Slide

16. Page 16 16 5. Issue Purchase Order, continued Issue Purchase Order Identify Requirements Establish Specifications Identify Suppliers Select Supplier(s) Follow-Up & Expedite Receive & Verify Process Payment Maintain Records –Discrete Orders –Pre-negotiated Blanket –Pre-negotiated Vendor-Managed –MRO –Bid and Auction –Corporate Purchase Card (pCard) System generated PO e-forms Link to open contracts Transmit via EDI e-Procurement apps

17. Page 17 17 6. Follow-Up and Expedite Follow-Up & Expedite Identify Requirements Establish Specifications Identify Suppliers Select Supplier(s) Issue Purchase Order Receive & Verify Process Payment Maintain Records –ERP Applications assume that scheduled dates will be received on time –A Scheduled delivery date needs to be monitored and managed –Possible missed dates must be identified in advance and avoided  If delays are inevitable, recovery plans must be developed and managed –Other items to consider  An understanding of the Supplier’s production process, capacity, and constraints is critical to collaborative problem solving  Expediting should be on an exception basis. If it is determined that a particular supplier is consistently being expedited, corrective action should be initiated Past Due orders Reschedule messages Orders due in next “X” days / weeks Delivery performance data

18. Page 18 18 7. Receive and Verify Receive and Verify Identify Requirements Establish Specifications Identify Suppliers Select Supplier(s) Issue Purchase Order Follow-Up & Expedite Process Payment Maintain Records –Relationship to Material Requisition and Purchase Order  Key data elements travel throughout –Key objectives  Confirm receipt of goods  Ensure proper physical condition, quantity, documentation  Quality parameters met –Cross functional activity among Purchasing, Receiving, Materials, and Finance –Other items to consider  Receiving is technically a “non-value-added” activity. It is designed to ensure that something that should have been done properly actually was. The goal is to ensure quality throughout, and eliminate the need for inspection Bar Codes Online Documentation Exception reports

19. Page 19 19 8. Process Payment Process Payment Identify Requirements Establish Specifications Identify Suppliers Select Supplier(s) Issue Purchase Order Follow-Up & Expedite Receive & Verify Maintain Records Key Document Flow Requisition Purchase Order Packing Slip (Receiving) Invoice Payment –Match the data in the Purchase Order, Packing Slip, and Invoice  Discrepancies must be reconciled before payment is issued  Some level of discrepancies can be ignored (e.g. if +/- 5% or +/- $25)  Audits of all –Discounts for early payment are often available and should be taken whenever possible –Other items to consider  Chronic discrepancies from a single Supplier could lead to a change Automated check runs Exception messages Electronic Funds Transfer (EFT) Electronic Bill Presentment & Payment (EBPP)

20. Page 20 20 9. Maintain Records Maintain Records Identify Requirements Establish Specifications Identify Suppliers Select Supplier(s) Issue Purchase Order Follow-Up & Expedite Receive & Verify Process Payments –Purchase Orders should be archived for up to 7 years –Key Records to be Maintained (from p.77)  Purchase Order Log of all PO’s  Copies of Purchase Orders  Commodity file  Supplier history file  Outstanding Contracts against which PO’s are placed –Other items to consider  Can be electronic or paper  Paper can be managed by a third party Online data bases

21. Supply Management Applications

22. Page 22 22 Enterprise Resource Planning (ERP)  SAP  Oracle  J.D. Edwards From PC Magazine An integrated information system that serves all departments within an enterprise. An ERP system can include software for manufacturing, order entry, accounts receivable and payable, general ledger, purchasing, warehousing, transportation and human resources From What is.com An industry term for the broad set of activities supported by multi-module application software that helps a manufacturer or other business manage the important parts of its business, including product planning, parts purchasing, maintaining inventories, interacting with suppliers, providing customer service, and tracking orders. ERP can also include application modules for the finance and human resources aspects of a business. Typically, an ERP system uses or is integrated with a relational database system. The deployment of an ERP system can involve considerable business process analysis, employee retraining, and new work proceduresrelational database From erpfans.com Software solution that addresses the enterprise needs, taking the process view of an organization to meet the organizational goals, tightly integrating all functions of an enterprise Definitions Popular ERP Application Providers

23. Page 23 23 e-Procurement Applications  Ariba  i2  FreeMarkets Popular e-Procurement Application Providers Key Functions of Procurement Applications –Spend Analysis –Supplier Performance Assessment –Supplier Sourcing –Contract life-cycle management –Procurement –Order Tracking –Invoicing

24. Page 24 24 Adoption Rate of Internet-Based Procurement To identify new suppliers:80.7% Purchasing indirect materials:70.9% As part of RFP48.8% On-line collaboration with suppliers:42.8% * From Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin

25. Page 25 25 Implementing e-Procurement Systems for Indirect Materials –Select a solutions-provider and determining the type of relationship –Determine how many suppliers and which suppliers to keep in its supply base for indirect purchases –Negotiate terms and conditions with the chosen suppliers, including deeply discounted prices in return for volume –Load digitized versions of the suppliers’ catalogs alongside the e- procurement application Planning and Set-Up Using the System –Employees use computer browsers to search the catalogs of designated suppliers, selected items for purchase, and create requisitions and a P.O. is generated –The P.O. is streamed directly into the supplier’s inventory application and the order is processed, and the goods shipped –Invoicing and/or payment is made; sometimes through and electronic bill presentment and payment process

26. Electronic Data Interchange (EDI), Online Collaboration, and Auctions

27. Page 27 27 Electronic Data Interchange (EDI) –Purchase Orders –Shipping notifications –Shipping schedules –Invoices Computer-to-computer data exchange between two organizations. Uses standards to determine how the data will be structured and transmitted Key uses of EDI While EDI remains very common, many organizations are moving toward Internet data exchange. This is less costly to implement and provides greater flexibility in structuring and standardizing data

28. Page 28 28 EDI Benefits EDI Benefits EFT paperless purchasing professionalism increased productivity inventory and lead time reduction building enhanced communication with suppliers internal systems impact increased data accuracy support for bar coding fosters JIT relationship * From Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin

29. Page 29 29 Uses of the Internet in Supply Management –Significantly reduced time throughout every step of the procurement process –Significantly reduced errors throughout every step of the procurement process –Identifying suppliers throughout the world –Searching electronic catalogs –Accessing government sources –Supporting global sourcing –Exploiting on-line auctions where appropriate –Exchanging emails –Automatic shipment and receipt acknowledgement –Near-real-time delivery tracking –Near-real-time inventory status tracking –Near-real-time pricing information –Enabling the controlled purchase of C items outside Procurement organizations Best suited for executing routine, repetitive transactions and communicating standard information status. Also very helpful in planning strategic buys

30. Page 30 30 On-line collaboration in Supply Management –Internal network for authorized employees to share information –Based on internet technologies –Secure environment that enables the use of e-procurement applications Intranets Extranets –Intranets extended to Suppliers (and others) outside the organization –Established with Key suppliers only –Can be designed to facilitate communication between  Individuals at the Buying and Selling organizations  Systems at the Buying and Selling organizations

31. Page 31 31 Online Auctions Auction On-line Reverse Auction Definitions in the Textbook A seller with goods to sell invites multiple buyers to bid against each other at a set time and place to purchase the goods A buyer wishes to purchase to purchase goods or services and invites multiple sellers to bid against one another in a declining price auction using the Internet * From Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin

32. Page 32 32 When to Use Online Auctions The good or service has the characteristics of a commodity There is a clear and unambiguous specification There are multiple suppliers available and willing to compete for business The organization has access to the technology necessary to run the auction * From Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin

33. Page 33 33 Three Types of e-Auctions Open offer negotiations Sellers list items for sale Suppliers select items for bid and enter offers until closing Names not disclosed to other bidders Buyers provide a list that includes target price and quantity Suppliers select item(s) and offer prices Status levels: accepted; closed; BAFO; open Buyer posts price and first supplier that meets price is accepted Private offer negotiations Posted price * From Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin

34. Summary

35. Page 35 35 Seven Benefits of Information Technology for Supply –Efficiency –Quick access to data –Quick communication with Suppliers –Greater focus on “A” items –Fewer errors than manual systems –Better integration across functions –Increased control and reduced maverick buying