Supply Chain Super Highway

Since the beginning of the industrial revolution, or so it seems, the supply professional has received the paradoxical mandate to reduce costs but maintain quality and improve delivery times.  The traditional way to maximize supply performance, of course, is to negotiate with suppliers on price, quality and delivery. Tools a purchasing and supply manager can use in such negotiations include economic forecasts, statistical variation models and inventory capacity charts.


Supply chain efficiency continues to increase with the speed and accuracy of new Internet technologies. For example, B2B e-commerce communication linkage can be used by the supply chain manager to expedite supplier negotiations. Importantly, this channel can also enhance productivity and cut costs.


The Internet conveniently provides research and data collection used in negotiations with suppliers. Some of the tools a purchasing and supply manager can use in such negotiations include economic materials supply forecasts, statistical variation models, inventory capacity charts and productivity improvement software such as enterprise resource planning .


Check Those Figures


It's not surprising that the supply chain performance issue typically receiving the most attention is commodity, material and product pricing. This is because it's easily quantified and has a direct effect on the buyer and seller's bottom line. For the buyer, depending on the manufacturing industry, the conventional estimate is that material costs can consume 30 to 70 percent of total sales revenue. For the seller, material price is sales revenue. Thus, in order to protect the company's profit margin, a supply chain manager must thoroughly prepare to negotiate and understand pricing of raw materials, components and/or finished goods.


One fairly comprehensive source of pricing information is the National Association of Purchasing Management's (NAPM) semiannual report. The report is available at www.napm.org and is published in mid-May and mid-December. It contains data and predictions on a variety of items such as business revenues, material price changes, purchased inventory levels and purchased inventory-to-sales ratios.


NAPM also publishes a monthly online business report known as the NAPM Report On Business, which covers both the manufacturing and nonmanufacturing sectors. Well respected in the business community, Report On Business predicts such conditions as economic demand and raw material price inflation.


A supplier-requested price increase based on a change in raw material pricing can be substantiated online at www.purchasing.com under the heading Transaction Prices. To illustrate, suppose a supplier seeks to justify an 8 percent price increase on the basis of the cost of, say, methanol fuel. A skeptical buyer could readily access the latest transaction pricing at www.purchasing.com. He might see that methanol was being sold at $0.43/gallon last year compared to $0.45/gallon this year (only a 4.65 percent increase, well under the supplier's 8 percent increase). The buyer now has another quiver in his bow to shoot down a full 8 percent price increase based solely on higher raw material costs.


In addition, the supply manager can access specific industry pricing statistics at excite.com/business. This site also provides a review of the Bureau of Labor Statistics Producer Price Index. In fact, the Excite search engine is considered a solid provider of manufacturing industry statistics.


Another informative site with commodity pricing is www.cnnfn.com, which offers real-time pricing on commodity futures such as crude oil or base metals.


 


Quality Statistics: Use the Tools


The total quality management (TQM) concept introduced in the late 1970s forced buyers to pay more attention to the quality of products in the supply chain. The prevention of defects instead of mere detection became one TQM mantra. Dr. W. Edwards Deming, the leading quality guru of that era, correctly noted, Failure of management to plan for the future and to foresee problems has nurtured waste of manpower, materials and machine time, all of which raise the manufacturer's cost and the price that the purchaser must pay. The consumer is not always willing to subsidize this waste.


The delivery of defect-free goods is vital to both the manufacturer and the end-user. Deming argued that quality excellence is obtained through prevention of defects by using statistical methods. Hence, a supply manager probably should have a working knowledge of how to assure a predictable flow of defect-free materials using statistical process control (SPC) and the closely related capability index (Cpk). Both are described in detail at www.pom.edu in a power point format. In addition, an SPC template is available as a spreadsheet.


The Cpk index facilitates buyer and supplier negotiations and production by providing quantitative parameters that both the buyer and the supplier can agree upon to ensure consistent quality.


 


Smooth Delivery


The ability to maintain a scheduled flow of materials is an important aspect of a purchasing and supply manager's job. If orders are coming in quickly and the supplier cannot deliver enough materials on time, the line may not run at capacity and production may slow or stop. So the buyer and his buyer/planner cohorts need to be adept at predicting capacity and needs requirements.


Again, the NAPM semiannual report may offer relief. It contains a delivery-forecasting tool that can help manage low on-hand inventories with an uninterrupted stream of materials to plant manufacturing operations. The NAPM report estimates production capacity and material requirements, surveying businesses and then ranking strategies taken in the previous period to address such issues as increasing production capacity.


The American Production Inventory Control Society's business index also provides information on the Internet. Located at www.apics.org, this monthly publication segments supply chain data into both current and future components. This segmentation can assist supply managers in the development of short-term (one day to six months) and aggregate (six to 18 months) production planning.


Valuable information that can be turned into intelligence is a click away. The purchasing and supply manager is fortunate to have the Internet to maximize supplier performance and improve supply chain efficiency. The supply manager can negotiate using pricing data, forecasts, production/manufacturing/operating capacity projections and informative statistical quality educational tools, all found online and updated frequently.

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