Article by Würth – Official Sponsor of the IFPSM World Summit 2018
WHAT CAN PROCUREMENT AND PRODUCTION MANAGEMENT LEARN FROM EACH OTHER?
For the purchase and procurement professional, the ABC philosophy is as clear as day. Items are treated differently depending on the value of the product and the number of transactions. In production, on the other hand, it is easier to see in concrete terms why certain products or services are purchased. When these two entities learn from each other and take each other into consideration, the whole process will remain cost-efficient, high-quality and lean.
The supply chain from procurement to the user of the product must be developed as a whole, not in parts or stand-alone pieces. A fully transparent view of the chain will make it possible to achieve a lasting competitive edge. As partners and suppliers create a significant part of the company’s added value it makes sense to utilise their expertise. Managing the whole also means that there is no need to shift the costs from one party to another, but rather to look for solutions that will reduce the costs throughout the chain.
Suboptimised purchasing often puts too much emphasis on the price. When purchasing services, it is quite clear how the content and implementation of, say, training or cleaning service determine the outcome and the effectiveness of the purchase more than the price tag. Assistant Professor, Dr Ilkka Sillanpää points out that “anyone can put a tender out for bids for providers of physical products assessed on the basis of technical specifications. Assessing expertise is much more difficult, as it is necessary to look at experience, vision and other similar properties that cannot be measured with a yardstick.”
Often, the case is not quite clear-cut for physical products either. The product to be purchased always has a function. If it does not, there is no sense in purchasing it. What the procurement organisation can learn from the user of the product and the factory floor is the reason why products are purchased. For example, the function of personal protective equipment is to improve safety at work and protect the employees’ health. What is the range of products that can satisfy the need? Who determines the effect that is sought? To use another example, the function of a drill bit is to make holes. “Drill bit, 5 mm” is not a very good technical specification for procurement when the aim is to achieve savings, speed, high quality and productivity. Competitive bidding that focuses on the price will always produce the cheapest and probably the worst solution. To find the best solution in terms of productivity requires a little more effort, expertise and understanding of the whole.
What in fact is the product?
Even if the product is well-defined in terms of its properties, it is important to ascertain what the object of the acquisition really is. Is the product an M8 nut or is the product securing 100% availability of M8 nuts at workstations complete with quality assurance and taking into account the fluctuations in the customer’s production? Although the product to be purchased is listed in the parts list and technically defined, is it possible that it is in fact a service? What is the right price for the service? And how is the service implemented in practice? What looks like a product in the buyer’s Excel table or in the resource management system, may be something else from the point of view of production. A suboptimised procurement decision may result in surprises in terms of costs. On the other hand, a buyer that understands the big picture may achieve significant savings.
For the management of C-parts, it is typical that 20% of the total cost is reflected in the price of the product and 80% of the cost is reflected as overhead in the form of procurement, logistics, administrative and storage costs. Cost savings can be found in overhead much more than in the price of the product.
Save on fingerprints, not on services
From time to time, production also tends to suboptimise, even though attention is being paid to making processes leaner and getting rid of unnecessary procedures. Previously, the JIT philosophy and now the LEAN principles, if inadequately implemented, can increase the total cost despite well-meaning intentions. C-parts, which have processing costs many times bigger than the price of the product, do not tolerate extra fingerprints. In the procurement process, classification of the items according to the ABC principle is an effective way of targeting attention and the use of time. It is easy for the buyer to understand that the goals and desired effects are achieved by paying attention to the A-items.
All the C-parts need management as well: lower-level products should be handled en masse in order to reduce the costs incurred by unnecessary processing. Managing low value products in production in too small batches, one nut at a time, is not lean, but rather waste, with the cost just being shifted from one place to another.
The cost of mismanagement is not easily eliminated even though nobody at the company can justify the cost. This is because these costs are difficult to define and measure. In the financial chart there is no cost centre for inefficiency.
When a buyer fully understands the supply chain and understands the content of the product, he or she will have the opportunity to significantly increase productivity and efficiency by eliminating ancillary costs. The buyer’s lessons that allow them to find more time to concentrate on what is essential are also valuable for a production designer. The production floor will not be losing time and energy in seeking illusory savings from the wrong place.
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