Logistics Management

Procurement, Purchasing &

UNIT-3 Manufacturing Strategies

Learning Outcomes
By the end of this unit the learner will be able to:

 Differentiate between Purchasing and Procurement

 Explore the Importance, Aims and Organization of Procurement.
 Recognize the Selection of Suppliers and Suppliers' Performance.
 Identify effective manufacturing strategies.

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Unit 3
Procurement, Purchasing & Manufacturing Strategies
Purchasing and Procurement
As we have previously discussed that preparation of a supply chain begins with strategic objectives, and
moves down to systematize the movement of materials, ensures that resources are obtainable, and
frequently looks for enhanced methods. But we have still not discussed the method for initiating the
movement of materials. This is given by Purchasingor Procurement.
In a supply chain, every business purchases materials from top of the list suppliers, adds value, and sells
them to downstream consumers. As every business, in turn, buys and sells, the materials flow through
the entire supply chain. The trigger that begins each move is a Purchase. This is mainly a message that a
business sends to a seller, saying something such as, “we have agreed on terms, so deliver the materials
to us and we will pay you”.
PURCHASINGgives a system for initiating and regulating the flow of materials all over the supply chain.
Purchasing is the task accountable for acquiring all the materials requisite by an organisation. Many of
the purchases transactions are not standard, but comprised of rental, contracting, leasing, gifts,
exchange, borrowing, and so on. This is the reason why some people wish to talk regarding the
‘achievement of materials’ or the more common term of Procurement. ‘Procurement’ and ‘purchasing’
are often referred to as the same thing. Usually, purchasing refers to the real buying, while procurement
has wider meaning. It can consists of different kinds of acquisition (rental, purchasing, contracting, and
so on) as well as the related work of selecting suppliers, agreeing terms, negotiating, expediting,
monitoring supplier performance, materials handling, transport, warehousing and receiving goods from
suppliers.
PROCUREMENT takes care of all the materials required by a business. It consists of all the associated
activities required to get goods, services, and any other materials from suppliers into a business.
Procurement does not generally move materials itself, but it arranges the transfer. It gives the message
that materials are required, and organises the change of possession and location. But it is another
function, like transport, that really delivers them. So, procurement is mainly concerned with information
processing, it gathers data from a range of sources, analyses it, and conveys the information to the
supply chain.

Importance of Procurement
You can easily see why procurement is vital. If we take a wider view, procurement forms a necessary
connection between businesses in the supply chain, and it gives a system for coordinating the movement
of materials between suppliers and consumers. At each point in the supply chain, procurement sends

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messages backwards to explain what customers desire in a product, and it passes messages forwards to
declare what suppliers have accessible. Then it negotiates conditions for delivery.

If we take a more limited view, procurement is clearly an essential function within every organisation.
We know that each organisation requires some supply of materials and procurement is responsible for
organising this.

If procurement is carried out badly, materials do not arrive, or the wrong materials are delivered, in the
wrong quantities, at the wrong time, with poor quality, at too high price, low customer service, and so
on.

Aims of Procurement
The overall objective of procurement is to assure that a business has a consistent supply of materials.
With this superseding aim, we can widen the following list of more direct goals:

 organising a consistent and continuous flow of materials into a business;

 working directly with user departments, establishing relationships, and understanding their
requirements;
 finding good suppliers, working directly with them, and developing beneficial relationships;
 buying the correct materials and ensuring that they have satisfactory quality, arrive at the
time and place required, and meet any other needs;
 negotiating best prices and terms and conditions;
 keeping stock low, considering stock policies, investment, readily available materials, and so
on;
 moving materials rapidly through the supply chain or expediting deliveries when essential;
 Keeping abreast of conditions, including pending price increment, scarcities, new products,
and so on.

Organisation of Procurement
The way that procurement is controlled clearly depends upon the kind and size of the business. In a small
organisation, a single consumer might be accountable for all purchases, policy and supervision. A
medium-sized organisation might have a department with buyers, storekeepers, expeditors, and clerks.
A big company might have hundreds of people co-ordinating large amounts of purchases.
Usually procurement is arranged as a single division to get the advantages of centralised purchasing.
These benefits include:

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 Consolidation of all orders for the same and alike, materials to acquire quantity discounts;
 Co-ordinating related activities to decrease costs of transport, stockholding, and
administration;
 Eliminating duplicated effort and messy practices;
 Having a single point of contact for vendors and giving them reliable information and
service;
 Developing focused skills and enhancing procurement operations
 Allows other people to focus on their own work without indulging into
Purchasing
 Concentrating liability for procurement and making management organization easier.
Choosing Suppliers
Qualified Suppliers
Arguably, the most significant element of procurement is searching and choosing the right supplier.
There is no point in having an elegant product, if the supplier cannot in point of fact deliver it. Suppose
you are working on a plan and want to purchase some significant materials – maybe a prefabricated
bridge for a building project. You will consider two factors. First, a product design that meets your needs,
second, a seller who can promise to deliver the product as designed. In other words, the seller must be
able of doing the work, giving high quality, working to a timetable, with satisfactory costs, and so on. An
advertised time of four hours for a train journey may appear a good service, but it has less worth if the
train operator cannot really deliver this.
Procurement begins by finding a capable supplier. This is one who can in fact deliver the materials
required.
In general, organisations search for suppliers who:

 Are financially safe with good long-standing prospects;

 Have the aptitude and competence to supply the essential materials;
 Precisely deliver the requested materials;
 Send materials which are high quality;
 Deliver reliably, on time with little lead times;
 Quote satisfactory prices and financing arrangements;
 Are flexible to customers’ demands and changes;
 are knowledgeable and have skill in their products;
 have earned an excellent reputation;
 Use expedient and simple procurement systems
 Have been used effectively in the past and can expand long-term relationships.
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In diverse circumstances, a lot of other factors may be significant, like convenient location, skill to deal
with variable demand, and so on.
Most organisations contains lists of officially approved suppliers who have given good service in the past,
or who are otherwise known to be trustworthy. If there is no satisfactory supplier on file, the
organisation has to search for one. Suppliers for low worth items can perhaps be found in trade journals,
catalogues or through business contacts. More costly items need a careful search, and this can be very
time taking.
A helpful approach for deciding the best supplier for a product has the following steps:

 Look for alternative suppliers;

 Build a long list of qualified suppliers who can deliver the products;
 Compare organisations on this long list and eliminate those who are, for any reason, less
desirable;
 Continue eliminating organisations until you have a shortlist (usually four or five) of the most
promising suppliers;
 Prepare an enquiry or a request for quotation and send it to the shortlist;
 Receive bids from the shortlist;
 Do a preliminary evaluation of bids and eliminate those with major problems;
 Do a technical evaluation to see if the products meet all specifications;
 Do a commercial evaluation to compare the costs and other conditions;
 Arrange a pre-award meeting to discuss bids with the remaining suppliers;
 Discuss condition bids, which are specific conditions that have to be agreed upon by both
parties;
 Choose the supplier which is most likely to win the order;
 Arrange a pre-commitment meeting to sort out any last minute details; and
 Award orders to the preferred supplier.
This is clearly a time-consuming procedure, but keep in mind that a poor merchant can cause more
issues than poor materials. The whole process is only utilized for main purchases, and if you are
purchasing pencils the shop next door is possibly as good as any other supplier.
Normally, a business will not spend a lot of time looking at substitute suppliers if:

 It is purchasing to value materials;

 There is just one supplier available;
 There is already a successful arrangement with a merchant;
 There is not sufficient time for extensive negotiations; or
 The business has a strategy of selecting particular sorts of supplier.

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Sometimes, specifically with government work, procurement has to be clearly fair and all prospective
suppliers must be provided with a chance to give quotations. Rather than making a shortlist of capable
suppliers, a business will broadly promote that it is seeking quotations for particular materials or work.
The organisation evaluates all the bids submitted and selects the one that best fulfils the approved
criteria. This is called open tender. A difference reduces the managerial effort by putting some
qualifications on suppliers, maybe based on experience, financial status, or size. This gives a limited
tender.
As you can see, we are discussing how consumers select suppliers – and we are supposing that suppliers
are pleased to serve all the consumers they can discover. This is generally the case, but often, suppliers
have more authority and efficiently when selecting their customers. This might occur when a supplier
enjoys monopoly, or near monopoly, of some material. It may also occur when there is a short-term
shortage of some product, such as oil, and suppliers select the customers they will supply, maybe giving
first choice to larger consumers, those who pay more, or those who have long-standing agreements.

Number of Suppliers
We have already talked about the trend towards enduring partnerships and alliances. This unavoidably
moves businesses towards single suppliers, either for every material, or for a range of diverse materials.
Some organisations labelit as single sourcing, which leaves them susceptible to the performance of an
individual business and they have harsh problems if something bad happens. If the single seller of a vital
part hits financial problems, an organisation though no fault of its own, might have to discontinue
production. To neglect this, some organizations have a strategy of buying the same materials from more
than one competing suppliers. They may use rules of thumb such as ‘never let a producer account for
more than 20% of whole revenue; never let a consumer suck up more than 50% of total resources’. The
selection must depend on individual circumstances, but we can have some benefits of policy:

Benefits of single sourcing:

 A stronger connection between consumers and

suppliers, often happened to be in alliances or
partnerships;
 Dedication of all parties to the accomplishment of
the relationship;
 Economies of scale and cost discounts with big
orders;
 Easier communication, decreased administration,
and simpler processes for standard orders;
 Less difference in materials and their supply
 Easier to maintain requirements, conditions, and so
on, secret.
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Benefits of multi-sourcing:

 Competition between suppliers decreases prices

 there is less possibility of disrupted supplies, as issues can be avoided
by changing suppliers
 can deal more simply with changing demands
 involving more businesses can provide access to broader information
and knowledge
 is more probable to cheer innovation and development
 does not rely on trusting single organisation.

Organizations utilize more sellers when they want to keep away from potential problems. Another way
of doing this is the approach called forward buying. In its simplest form, this occurs when a business
orders more materials than it presently needs and keeps the surplus in stock.
Another form utilizes contracts to bring materials at particular points in the future. Both of these carry
two benefits. Firstly, they assure supplies for some period in the future and reduce the effect of potential
disruptions. Secondly, the cost of materials is fixed, avoiding the impacts of future price increases or
ambiguity. Of course, things can still go erroneous. A company that signs a lasting contract can still go
out of business, or a storehouse can burn down, but the chances of a crisis are much smaller. It is
perhaps safest for the business to hold spare stock itself, but this has higher costs; agreeing a contract
for upcoming deliveries gives lower costs, but does not abolish so much risk.

Monitoring Supplier Performance

Most organisations examine their suppliers to ensure that they carry on giving satisfactory service. This is
called Supplier Rating or Vendor Rating. This is usually done casually by a skewed review; sometimes
there are multifaceted measures for each feature of performance. Most organisations employ a
negotiation that gives a sensible view of performance, and requires a rational amount of effort. One
general approach utilizes a checklist of significant factors and checks that the supplier meets a suitable
standard in these. The checklist may ask whether the supplier is economically sound; whether it supplies
on time; if material value is high enough; if there is practical support; whether the cost is competitive;
about related trends, and so on.
If the supplier does not meet any principle the consumer has to examine improvements or look for new
sources. The objective is not truly to substitute particular suppliers, but to check performance, recognize
areas that require improving and agree the most excellent way of getting these improvements. Only as a
last option should a business start looking for new suppliers.

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A more practical approach to score gives the seller a score for diverse aspects of performance. They may,
for instance, give each supplier a score out of ten for on-time delivery, and if a supplier’s score drifts
down below eight the consumer can consider ways of improving performance. Although this method
sounds believable, there can have substantial difficulties. How, for instance, can you recognize the most
significant factors of supplier performance, the comparative value of each, the actual performance, and
the lowest tolerable performance?
Each of these is likely to come from a blend of agreement and discussion, rather than from more
accurate measurement. The result is a skewed view that might be useful, but contains little objective
measurement.

Procurement Cycle
Steps in the Cycle
After selecting the supplier, the business has to follow some processes for arranging purchases. Suppose
that you want to purchase something costly, like a new computer. You possibly approach this in quite a
lot of stages, listing the features you want, searching for systems that may provide these, searching
suppliers, developing a list of options, comparing these, and opting for the best. Your objective is to
discover the blend of products and suppliers that best caters your needs. The procurement function in a
business does exactly the same, and follows a particular process for every purchase. This process is
diverse in each organisation, and varies with the kind of thing being bought. You would not anticipate an
organisation such as the US army, which purchases millions of items a day, to work in the similar way as
the directors of Real Madrid football club when they obtain a new striker. And the US army would not
approach its decision to purchase pencils in the same way as its decision to purchase helicopters.
Despite these expected differences in detail, we can propose a common approach to procurement. This
has a chain of common steps, which begin with a user searching a need for materials and end when the
supplies are delivered.
A distinctive Procurement Cycle has the following steps (with key documents in bold) -

1. A user department:
 Finds out a need for acquired materials;
 Examines materials accessible and prepares specifications;
 Checks departmental financial plans and gets clearance to procure; and
 Prepares and transmits a purchase request to department of procurement.

2. The procurement:
 Obtains, verifies, and verifies the purchase request;
 Inspect the material requested, looking at existing stocks, substitute products, production
options, and so on – and after negotiations with the user department make a shortlist of possible

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suppliers, from standard suppliers, lists of favoured suppliers, or those known to cater
requirements; and
 Send a request for quotationsto this shortlist.

3. Then, every supplier:

 Examines the demand for quotations;
 Checks the customer’s rank, credit, and so on;
 Sees how it could best cater the order; and
 Sends a quotationback to the business, giving details of prices, products, and conditions.

4. Then, procurement:
 Examines the quotations and do commercial evaluations;
 Discusses the technical aspects with the user department;
 Checks the budget details and clearance to purchase;
 Chooses the best supplier, based on the supplied details;
 Discuss, consult, and confirm theterms and conditions with the seller; and
 Issue a purchase order for the materials (with terms and conditions attached).

5. The selected supplier:

 Receives, recognizes, and processes the buying order;
 Organises all operations essential to provide the materials;
 Ships materials jointly with shipping advice; and
 Sends an invoice.

6. The procurement:
 Acknowledges the receipt;
 Doesthe essential follow-up and expediting;
 Receives, examines, and accepts the materials; and
 Informs the user department of materials received.

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7. The user department:

Receives and inspects the materials;

Authorises shifts from budgets;

Updates stock records;

Uses the materials, as required.

8. The Procurement:
Arranges for the payment of the supplier’s invoice.
The first three steps are more concerned with the supplier and materials, and then comes the critical
point with the topic of a procure order in step 4. At this stage the organisation is willing to buy particular
materials from a supplier, and the buying order triggers the supply (along with essential production
planning, transport arrangements, finance, and so on). The purchase order is an element of a legal
agreement between the supplier and its organization. The remaining steps conclude the details of
delivery.
This process seems complicated and consists of a lot of steps and documents. If you are buying
something costly, this effort is definitely worthwhile – and you might in fact follow a much more complex
procedure to fix product specifications, choose the supplier and discuss terms. But if you are making
little purchases, if there are present relationships with suppliers, or there is just one competent supplier,
it is obviously not worth going through this entire expensive, procedure.
Some of the issues with paper-based procurement are:

 Consumes too much time to go through the entire procedure;

 Relies upon various paperwork, which shift around diverse locations;
 Needs so many to complete, examine, process, hoard, and generally, deals with all the papers;
 Has other people administer, manage, and organize the managerial procedures;
 Inevitable errors may arise because of too many documents and people involved; or
 Not given notice to linked systems like stock control.
A main step in developing procurement came with electronic buying. Electronic Data Interchange (EDI)
has been utilized since the 1980s and this permits a mechanical procurement. A business links its
information system to a vendor’s and when it is time to place an order, the system mechanically conveys
a message. This works fine for small, normal, repeat orders and most businesses gladly adopted the
principles. There are some variations on automatic procurement, all of which are measured under the
broad heading of e-procurement.
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E-Procurement
Most organisations are currently utilizing some type of e-procurement. Surveys propose that more than
60% of UK companies exploited e-procurement till 2002 and 80% of European managers soon be
expecting to use it far.
Some of the benefits this brings are:

 Allows immediate access to vendors anywhere in the world;

 Creates a clear market where goods and terms are readily accessible;
 Automating procurement with benchmark procedures;
 Greatly drops the time which is required for transactions;
 Reduces costs, usually by 12–15%;
 Contracts some procurement activities to vendors or third parties; and
 Integrates flawlessly with suppliers’ information systems.
There are essentially two kinds of e-procurement which are explained as B2B (where one company buys
materials from another company and B2C (when an end customer buys from a business). Most of the
people are more familiar with B2C transactions.
Between 1999 and 2002, the number of Internet shoppers in the UK increased from 2 million to 6
million.Nonetheless, many of those websites have hit monetary troubles with the bursting of the ‘dot-
com bubble’ and there have been a number of extensively publicised bankruptcies.
One difficulty, of course, is that people do not essentially like e-procurement. If you desire to purchase a
book, you can employ a variety of websites, fill in the forms, and get the book delivered within a day. But
if you go to your nearby bookshop, you may use less stylish technology, but pick up the book right away
and with no the delivery charge. B2C can hit difficulties since people in fact like going to look at things
before they purchase it.

Types of Purchase
Different Approaches for Different Products
When we explained a formal process for procurement, we said that it can be extremely complex and
time consuming. It would be costly and needlessly complicated to make use of this process for each
purchase, and nobody wants to waste six months buying a pack of envelopes. On the other hand, main
purchases require much more information and examination.
This is why organisations change the details of their procurement dealings, which matches the types and
methods of materials. Normally speaking, the higher the cost of materials and the more complex the
requirements, the more time and exertion procurement needs.

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Organisations often put rules for the effort put into procurement, maybe using ad hoc actions for low-
value routine supplies, an easy, automatic method for purchases up to£20,000, a more precise process
for purchases up to £150,000, and unique, comprehensive analysis for greater purchases.
Once such rules are defined, a management control system can check purchases and ensure that they
are completed in the best way. It can review how purchases have been made, if the result is acceptable,
if the effort is practical in relation to the costs and significance, and if the process can be enhanced for
the future. A significant point here is the difference between schedule, repeat orders and new ones. If a
seller has given good service over some extensive time, a business may be prevented from
approximately all the procurement cycle and put negligible effort into administering potential orders.
Ordering turns out to be routine and the organisation successfully sends a message to say, ‘send another
order like the last one’. With non-routine buying, an organisation has to be more cautious and put more
effort into the choice of supplier and situations of purchase.
If an order is repeated often enough, a business might consider the ‘make-or-buy’ decision. In other
words, it has to choose those materials that it can manufacture itself and those that are best met by
outside suppliers. In its simplest form, this asks whether a company can get materials more inexpensively
from a supplier than it can make them. Well-organized strategies and economies of scale often mean
that particular suppliers can carry materials at lower prices than other businesses can make them. There
are, although, a lot of other factors to consider. Making parts internally can be more reliable, give
greater control over supply, modify products, have shorter lead times, use spare resources, protect
designs, keep value-adding operations, boost the size of business, and so on. On the other hand, buying
them from sellers can get the advantages of specialisation, give access to better expertise, get
economies of scale, decrease stock levels, transport some risk, preserve flexibility, and so on.
The Department of Trade and Industry implies that the three major criteria for these decisions are:

 Financial Factors – related to costs;

 Operational Factors –related to responsiveness, reliability, and flexibility; and
 Strategic Factors – related to the lasting consequences of the decision for the business
In practice, the apparent benefits of outsourcing are rising and more organisations are contented to
focus on their core functions and use particular suppliers for materials.

Terms and Conditions

Though we have talked in broader terms regarding ‘placing an order’, there are numerous types of
orders. Organisations usually talk about ‘placing an order’ for supplies, but ‘signing a contract’ for
services and ‘leasing’ for equipment. To a great extent, these are diverse ways of saying the same things,
but there might be lawful differences.
We have already described some particular types of order, with the following being most general:

 Purchase orders are utilized in the standard manner for procurement that we described above.
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 It is fundamentally a letter from one business to another, giving information of the materials it
desires to acquire and its conditions of buying. This is generally a reaction to a quotation from a
capable supplier, giving the materials it can provide and its conditions of trade.
 Blanket orders offer a simple system for inexpensive standard items, such as stationery. A
business can put a single order for all the goods that it will require over some period, such as a
year. Then the seller delivers batches of products when requested during the year.
 E-Procurement uses EDI or the Internet to simplify purchases by replacing paper-based
procedures with electronic ones. This gives a fast and efficient method for repeat, or
straightforward, orders.
 Contracts give careful descriptions of a contract between a business and a supplier; they explain
precisely the responsibilities, work and services for each, jointly with all applicable terms and
conditions. A lot of organisations make use of contracts regardless of purchase orders for
comprehensive services, so they sign a contract for a supply of electricity. In the similar way,
businesses can sign a contract for a particular piece of work, like a construction business building
a length of road.
 Sub-contracts: when a seller signs a contract with the business, it might not do all the work itself,
but would like to assign some work to a sub-contractor. Then, there are two contracts– the
contract between the business and the supplier, and the subcontract between the supplier and
sub-contractor. For large projects, there can be some more layers of sub-contracting.
 Leases and rental agreements are again there to portray terms and conditions of getting
materials. They are usually used for buildings or apparatus that is returned to the possessor after
some period of utilization. You can rent or lease a car, for instance, and when you have finished
with it, you return it to the owner.
Pricing is a very complex issue. It is surely not in an organisation’s long-standing interest to force
suppliers to offer idealistically low pricesor they will go out of business and not be there next time they
are required. Supermarkets in parts of the European Union have followed customer pressure to decrease
food prices.
While this benefits their consumers – and most probably the broad population – it means paying less to
farmers who cultivate the crops. If farmers go out of business, there is a main impact on rural
communities and the countryside, more dependence on imported food, a consequence on the balance
of trade, and so on.
In general, there are four means of setting a price for materials:

 Price Lists –where sellers quote fixed prices. Book publishers, for instance, quote a selling
price that they anticipate retailers to utilize. They can offer discounts for large or unique
purchases, but one business basically fixes the price.

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 Special Quotation – where suppliers quote prices to every customer, mainly for
nonstandard materials. Customers submit a quotation request and the supplier returns a
price and conditions that it is ready to offer.
 Negotiation – when there is some flexibility in price and conditions. A seller might give a
quote, but is ready to discuss if it can get some advantage such as repeat orders. Similarly,
consumers can negotiate if they want special conditions, like fast delivery.
 Commodity Pricing – for commodities like oil, coffee, gold, and wheat, market forces
decide the going rate that is followed by all suppliers. You can observe lots of such figures in,
say, financial futures markets.

A number of standard conditions are utilized and for chronological reasons they appear to be phrased in
terms of shipping:
Ex-works: The customer accepts materials ‘at the factory gate’ and takes over all liability for transport,
documents, customs authorization, insurance, risk and so on. This kind of contract is best when the seller
has little experience of shifting materials through the related area, or the buyer has a lot of experience. If
neither has the essential experience, they can sub-contract the real movement to third party specialists.

 Free Alongside (FAS):Here the supplier moves materials to a specified ‘port’ and delivers
them ‘alongside a ship’. The customer takes over the loading on a vessel and movement onward.
 Free on Board (FOB):This is a variation of FAS, where the seller also takes care of the loading
onto the vessel, and then the consumer is accountable for onward transport. This may seem like
a small adjustment to FAS, but loading may involve heavy lifts, danger of damage, or use of
lighters.
 Delivered Ex- Ship:Where the goods are obtainable on the ship (or quayside) but the
consumer has to organize for customs authorization, duty, and so on.
 Cost and Freight (C&F):Here the merchant arranges transportation to an agreed point, but
the consumer accepts any danger and arranges insurance for the voyage.
 Cost, Indemnity, and Freight (CIF):Where the seller delivers to an agreed point, and also
arranges insurance for the journey.
 Delivered:Where the seller is accountable for all aspects of the transport up to delivery to the
consumer.

Manufacturing
A considerable number of firms in the supply chain are engaged in manufacturing products. Whereas,
about all business firms are involved in procurement and market distribution operations, manufacturers
add value by converting raw materials into customer or industrial products. They make value by
producing and marketing product/service bundles to either end consumers or middle members of the
supply chain.
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Manufacturing Perspectives
The range of products a business makes evolves from its technical ability and marketing strategy. Firms’
ideal manufacturing competencies are based upon market opportunity and readiness to take ground-
breaking risk. While the products formed are clearly diverse, the genuine differentiator between firms is
taken in competencies correlated to knowledge, technology, procedure, and strategy. Once established,
a manufacturing business's image and focus are constantly customized in the eyes of supply chain
partners as it conducts trade, researches and develops new products, and performs agreed-to value-
added services.
A firm's manufacturing capability is based on:

 Brand Power;
 Volume;
 Variety;
 Constraints;
 Lead- Time Requirements

Brand Power
A lot of manufacturers use a great deal of promotional cash to create brand consciousness and approval
among potential buyers; as a result, they are usually identified by their product brands. The evaluation of
a customer's buying preference based on a manufacturer's status, product quality, and supply chain
abilities is known as brand power.
As a common rule, the stronger a firm's product brand image is among buyers, the more leverage the
manufacturing organization will have in determining supply chain structure and strategy.For example,
John Deere & Company dominates how farm machinery, as well as lawn and garden products, are sold,
distributed, and maintained.
It is general practice for a business to subcontract some or even all manufacturing and logistics
operations necessary to market a particular product. The nature of the production procedure, cost, and
next target in the supply chain go a long way to find out the prettiness of outsourcing. Logistical needs in
terms of inbound materials and finished product allocation are created by the geological relationship
between places of manufacturing operations and those of traders and customers.

Volume
Manufacturing processes are categorized in terms of the association of cost per unit to volume of
output. The conventional standpoint is to treat volume in terms of the well established standard of
Economy of Scale. The scale principle describes a connection wherein the standard cost of producing a
manufactured goods declines as its manufacturing size increases; that is, a product quantity must be
increased as long as a per unit boosts in volume decreases the average cost per unit manufactured.
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Economy of scale arises from efficiencies generated by specialization of procedure, labour force, fixed
asset consumption, procurement economies, and restricted need for procedure changeover.
Economy of Scale is extremely important in manufacturing conditions involving high fixed cost machines
to change raw material into completed products.
In volume-sensitive industries, elevated capital outlay coupled with high price of changeover tends to
cheer enormously long production runs. In terms of logistic, two considerations associated to volume
manipulate supply chain design.
Firstly, Supply Chain Operations must lodge the number of times a particular product is manufactured
during a particular planning period. Such Manufacturing Frequencyhas a straight impact on both
inbound and outbound logistical needs. Secondly, the amount or lot size usually produced during a
particular manufacturing run determines the product level that must be handled and warehoused in a
supply chain structure.

Variety
In comparison to manufacturing situations subjugated by scale, other production technologies mark
flexibility. These manufacturing procedures are characterized by comparatively frequent product runs
and high repetition of small lot sizes. As contrasted to economy of scale, industrialized processes that
mark variety fast switch production from one product to another while retaining competence are
referred to as having Economy of Scope.
Variety means the rangeof product variations that are able of being produced in a given manufacturing
procedure. Such difference might result from the nature of how products are routed all through a
modern plant and/or the use of general as contrasted to specialized equipment. The attainment of
economy of scope is also openly related to the speediness and cost of changeover from one product to
another.

Constraints
All manufacturing procedures replicate a balance between economy of scale and economy of scope.
Volume and variety force for logistical support requirements. Constraints interrelate with volume and
diversity to make manufacturing plans.
The three main constraints that control manufacturing operations are:

 Capacity;
 Equipment;
 Setup/changeover
Capacity is the measure of quantity of a particular product can be produced per unit of time. Of
particular attention is a firm's demonstratedability of quality production. While a factory, process, or

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mechanism might have a ratedcapability, the related measure is a firm's verified ability to attain and
sustain a particular level of quality output in an expected time period. A measure of production
capability is the swiftness to which a particular procedure reaches confirmed capacity given an
unanticipated change in requirements.
Equipment constraints are associated to flexibility regarding the utilization and sequencing of particular
machines to carry out numerous manufacturing tasks. Clearly the assortment a factory can make is
constrained by the range of obtainable equipment and the necessary sequence of work. Though, some
manufacturing requirements are more simply accommodated across a machines’ family and by using
changeable work sequences than are others. In lots of situations, a particular machine or work task tends
to limit or act as a bottleneck to the overall manufacturing procedure.
The structure for emphasizing managerial notice is captured in Theory of ConstraintMethod.
Setup changeover constraints are in a straight line connected to the earlier discussion regarding variety.
Substantial growth has been made in manufacturing administration to speed up both procedure
changeover time and the time needed to reach confirmed capacity.

Lead- Time
Manufacturing Lead- Time is a gauge of the elapsed time between release of a work order to the shop
floor and the achievement of all work needed to attain ready-to ship product status. Any given
manufacturing procedure utilizes functioning and inter-operational time.
Operational Timeis a blend of setup changeover and running or genuine production time. In any
manufacturing situation the greater the quantity of total lead-time accounted for by real production, the
intrinsically more efficient is the conversion process. Efficient functioning time must be traded off against
the issues discussed formerly about volume and diversity.
Manufacturing processes also come across unforeseen losses of time. Production efficiency is negatively
affected during those periods when a procedure, line, or mechanism is idle because of queuing,
breakdown, waiting or stoppage in logistical support. All forms of unanticipated delay represent severe
bottleneck issues.
Logistical operations dedicated to supporting production can force operating efficiency in a diversity of
ways. The possible benefits of brand power are based on a firm's track record concerning timely
performance of consumer order-to-delivery dedication.
Lot-size efficiencies related to production frequency and recurrence are reliant on dependable logistical
support. The choice to manufacture big manufacturing lot sizes straight creates requirement for logistical
support.

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Manufacturing Strategy
The exclusive nature of every manufacturing procedure and the market served limits the sensible range
of different strategies. Manufacturing strategic scope is constrained by both promotion and
technological forces.
For example, a producer having a method dominated by economy of scale might desire to develop
process flexibility. Though, an important investment will normally be necessary to boost frequency and
recurrence.
With time, the varying nature of the market and obtainable technology serve to change a firm's current
strategic posture.

Matching Manufacturing Strategy to Market Requirements

Mass marketing needs inadequate product/service differentiation. In contrast, one-on-one promotion
strategy builds on exceptional or tailored product/service offerings for every consumer. The strategic
marketing attitude of a firm in terms of flexibility and dexterity to lodge particular consumer
requirements is directly connected to manufacturing capability. To a large degree, a firm's manufacturing
ability drives the possible range of efficient marketing strategy. For a manufacturing business to
efficiently compete, it must be able to incorporate manufacturing ability into a significant marketing
value proposition.

Strategic Alternatives
The most common manufacturing strategies are Make – to - Plan (MTP), Make - to – Order (MTO), and
Assemble – to - Order (ATO). MTP also stands forMake – to – Stock (MTS).
As a common rule, MTP strategies are a trait of industries exploiting economy of scale that arises from
long production runs. Important finished goods inventory is normally manufactured in expectation of
future consumer requirements. The logistical necessities to support MTP are warehousing ability to
accumulate finished product and to assist product variety for particular customers. When flexible
manufacturing is launched to speed up change over, the inventory lots formed are normally smaller in
size. However, warehouses are still necessary for short-term storage and to assist product variety.
In comparison, MTO manufacturing strategies look for manufacturing to customer requirement.
While MTO might not be as imperfect as the conventional job shop, precise quantities and configurations
are shaped in comparatively small quantities. Logistical ability might be required for provisional storage
and to attain outbound transportation consolidation, however most product produced in MTO
surroundings is shipped straight to customers.

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Total Cost of Manufacturing

The marketing and industrialized strategies of a firm force logistical service requirements. For instance,
MTO manufacturing strategies usually require less finished goods inventory than MTP and AT0
strategies. However, MTO strategies naturally require constituent inventory support and might result in
high-cost market allocation. In light of such cost trade-offs, the design of a logistics support system
should be based on the Total Cost of Manufacturing (TCM).

Logistical Interfaces
The well-organized and successful coordination of manufacturing policy with the procurement of
components and materials eventually relies on logistics. Resource inputs should be procured and made
accessible when required for manufacturing operations. Whether the manufacturing scheme is MTO,
ATO, or MTP, logistics links the seller base with manufacturing processes.
The better the prospect is for attaining lowest cost of possession and eventually, the lowest total cost of
manufacturing. Such operations merely appear when there is high-level supplier combination in both
operations and in design. Just-in-Time, Materials Requirements Planning, and Design for Logistics
represent three approaches to achieving desired coordination.

Just-in-Time (JIT)techniques have received considerable notice and debate in recent years, in each
functional area which has been linked to Supply Chain Management. Sometimes, this is termed as Just-
in- Time production; it’s also often called Just-in-Time purchasing, and normally referred to as Just-in-
Time delivery, the objective of JIT is to time-phase activities so that materials and components bought
land at the manufacturing or congregation point just at the time they are needed for the transformation
procedure.
Requirements can be dogged by focusing on the completed product being made. Once the production
agenda is established, just-in-time entrance of components and materials can be designed to agree with
those needs, resulting in decreased handling and negligible inventories. The implications of J1T are
many. Obviously, it is essential to deal with sellers who have high and steady levels of quality, as their
components will go straight into the finished product. Absolutely steady logistical performance is
essential and abolishes, or at least decreases the necessity for cushion stocks of materials. JIT typically
requires more regular deliveries of lesser quantities of purchased inputs, which might necessitate
alteration of inbound transportation.
Originally, JTT was implemented to manufacturing procedures characterized as MTP, since the efficient
functioning of the system is reliant upon a finalized production timetable.
Some organizations, viewing the advantages of JIT systems and recognizing the benefits of supplier
amalgamation, have gone so far as to carry their suppliers' personnel into their manufacturing plants.
The seller personnel are allowed to use the customer's purchase orders, have complete access to
construction schedules, and have liability for scheduling influx of materials.

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Requirements Planning
In multifaceted manufacturing organizations, a procedure, which is called Materials Requirements
Planning (MRP),is regularly used to help in the edge between purchaserand seller. MRP systems try to
expand benefits similar to those of JIT, reduceinventory, preserve high consumption of manufacturing
capacity, and organize deliverywith procurement and developed activities. Execution of MRP
systemsneeds a high level of technical sophistication. Software applications like superiorplanning and
scheduling systems have been developed to deal with the complicationof information essential, such as
lead-times, quantities on-hand and on-order,and mechanism capacities for factually thousands of
materials across manifold manufacturinglocations.

Design for Logistics

The logistics border with procurement and manufacturing, as well as with engineering and advertising,
can be really enhanced by incorporating a notion known as Design for Logistics into the early stages of
product development. Recall that the aims of JIT and MRP are to reduce inventories and handling, with
materials and machinery being prepared for assembly or alteration as they are required.

Further Reading:

 Caroline Booth, (2010), Strategic Procurement: Organising Suppliers and Supply Chains
for competitive advantage

 Jeffrey P. Wincel, (2004), Lean Supply Chain Management: A Handbook for Strategic
Procurement

 Robert W. Turner, (2011), Supply Management and Procurement: From the Basics to
Best-in-class

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