Core Business Processes - Procure Materials

Procure Materials

Description

This process manages the entity’s supplier and the entity’s interaction with its suppliers

Sub Process Components

Supplier Management

Process Objectives

1. Appropriate mix of suppliers
2. Quality assured supply
3. A supply base committed to continuous improvement
4. Enhanced margin through cost reduction

Critical Success Factors (CSF’s)

     A.  Suppliers provide superior delivery performance (1,2)
     B.  Clarity of specification (of materials and performance) (1,2)
     C.  Proactive management of supplier relationships (3,4)

Key Performance Indicators (KPI’s) Linked to CSF’s

• Supplier on-time delivery performance (A)
• Supplier quality performance (B)
• Ratio of materials to suppliers; material unit cost trends (C)

Inputs

Supply base analysis Cost targets Quality assurance standards Manufacturing processes

Material requirements Previous performance data Sourcing strategy

Material specifications New product development Product direction / strategy

Activities

Outputs

Approved suppliers Purchase price performance data

Purchase orders / contracts Delivery of materials / services

Agree on supplier performance measures

Systems

Purchasing system Production forecasting and planning systems

Quality assurance procedures

Material specification procedures

Classes of Transactions

Routine  Accrual of vendor rebates / discounts

Non-Routine Long-term contracts / commitments with suppliers

Accounting Estimates

Risks Which Threaten Objectives

     A.  Poor quality suppliers (2,3)
     B.  Ineffective supplier selection process (1,2,3)
     C.  Lack of focus on value-added purchasing (3,4)
     D.  Long delivery lead time (2)
     E.   Lack of secondary (backup) suppliers (1,2)

Management Responses Linked to Risks

• Supplier assessment and selection procedures (A,B)
• Robust supplier performance measurement system (A,B,E)
• Purchase price analysis systems (C)
• Just-in-time inventory strategy (D)

Other Symptoms of Poor Performance

Unclear direction Lack of employee involvement

Undefined responsibilities Consistent failure to introduce new products/lines

Weak market position Poor financial results

Performance Improvement Observations

Supply base rationalisation Vendor partnering strategy

Procurement process improvement Supply chain integration

Procurement team training / development

Purchase Order Management

Process Objectives

1. Communicate material demands to suppliers
2. Establish procurement; receipt; payment cycle
3. Establish requirements and prices with suppliers

Critical Success Factors (CSF’s)

     A.   Efficient communications links with suppliers and internal customers (1,3)
     B.   Use of just-in-time purchasing (2,3)

Key Performance Indicators (KPI’s) Linked to CSF’s

• Purchase order error rate; percentage of purchase orders transmitted via EDI; percentage of invoices received via EDI (A)
• Suppliers continuous replenishment programme (CRP) performance; raw material CRP performance, raw material turnover ratio (B)

Inputs

Material requirements Supply requisitions Negotiated prices

Material specifications Bills of Material (BOM) Capital authorisation

Supply base Lead times

Activities

Outputs

Purchase orders / supply contracts Inventory information

Purchase price performance data

Payment items

Systems

Purchase order Bills of Material

Manufacturing scheduling

Requisition Accounts payable

Classes of Transactions

Routine Purchase orders  Invoices Cash disbursements

Non-Routine Bill and hold transactions Consignment stock contracts

Accounting Estimates Commodity hedging valuation Vendor return allowance

Risks Which Threaten Objectives

    A.   Inefficient purchase order system workflow (1,2)    B.   Too many people in the process, poor communications    C.   Suppliers invoicing for appropriate price, quantity (1,3)

Management Responses Linked to Risks

• Use of integrated systems (e.g., manufacturing, procurement, accounts payable) (A,B)
• Extensive use of electronic data interchange (EDI) transactions (A,B)
• Monitor purchase order, material receipt, invoice clearance/payment cycle (C)

Other Symptoms of Poor Performance

High level of activity surrounding purchase order processing

Inordinate time between order commitment and purchase order usable by accounts payable

Performance Improvement Observations

EDI application installation Enterprise package solution implementation

Business process re-engineering

Duty draw-back service