Purchase Order Management Best Practices: Process, Technology, and Change Management available in Hardcover, eBook
Purchase Order Management Best Practices: Process, Technology, and Change Management
- ISBN-10:
- 1932159630
- ISBN-13:
- 9781932159639
- Pub. Date:
- 11/01/2006
- Publisher:
- Ross, J. Publishing, Incorporated
- ISBN-10:
- 1932159630
- ISBN-13:
- 9781932159639
- Pub. Date:
- 11/01/2006
- Publisher:
- Ross, J. Publishing, Incorporated
Purchase Order Management Best Practices: Process, Technology, and Change Management
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Product Details
| ISBN-13: | 9781932159639 |
|---|---|
| Publisher: | Ross, J. Publishing, Incorporated |
| Publication date: | 11/01/2006 |
| Edition description: | New Edition |
| Pages: | 248 |
| Product dimensions: | 6.00(w) x 9.00(h) x 0.70(d) |
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Read an Excerpt
CHAPTER 1
POM: CHALLENGES AND SOLUTIONS
SCOPE AND VALUE
To survive competition in today's business world, an organization must stay ahead of its competitors. Effective purchase order management (POM) is key to staying competitive and gaining critical core competency in today's business world — something organizations have begun to realize. In all different types of businesses — from the relatively slow-moving ones such as businesses in the utilities and cement industries to rapidly changing ones such as businesses in the high-tech industry — the POM process has become a critical part of achieving a competitive advantage by enabling lean and agile supply chains.
In some companies, traditional purchasing strategies such as aggressive negotiation to reduce unit price have shifted to new initiatives such as collaboration and lean supply in order to lower transaction and operational costs and to improve response capabilities. Supply chains of the future will be leaner and faster (Johnson 2003). The POM process will grow in greater importance for several fundamental reasons:
• Global competition is exerting pressure to reduce costs, which contributes to the growing importance of POM.
• Strategic outsourcing is creating a need for improved information sharing and collaboration with suppliers.
• Firms are extending the POM process outside their "four walls" to include contract manufacturers, third-party logistics providers, and service providers, with a desire to regain direct visibility of the inbound supply that has been lost through expansion.
• A top priority for firms in today's dynamic business environment is making well-informed and timely decisions. The POM process is key to providing real-time information about the in-bound supply, which aids making correct decisions.
• Demand is increasing for building faster responsiveness, for increasing flexibility, and for having proactive management of internal and external process changes. POM can help achieve these objectives by managing and monitoring incoming material effectively.
• Supply chains are vulnerable to the variability of downstream and upstream activities. A relatively small delay in an upstream process can propagate downward throughout the entire supply chain, negatively affecting production scheduling, shutting down assembly lines, and preventing any number of deliveries. Effective POM can control and manage the impact of upstream variability, which is critical for the success of the supply chain.
• Firms are in a better position to drive improvement upstream rather than downstream in the supply chain because they have more "clout" with suppliers than with their customers. Therefore process improvement and cost reduction initiatives are more likely to succeed in processes that are related to suppliers (such as POM) than in processes that are related to customers.
• Over recent years, supply replenishment has become increasingly more complex, resulting in increased time requirements, costs, and errors, which lead to more expedited and "rush" orders.
The biggest challenge for companies in the competitive environment of today is to deliver products to their customers when and where the customers need them, exactly as the customers want them, but to also have a competitive price and to make deliveries in a cost-effective manner. Companies will not be able to address this challenge without having tight integration with their supplier bases as well as efficient order management operations.
Managing the supplier base is becoming more complicated due to globalization, the increasing complexity of supply chains that is caused by outsourcing, the need for shorter times to market, the shift from vertical to horizontal supply chains, and the move to mass customization and build-to-order (BTO) environments. As a result, operations managers are continually looking for ways to improve the conventional order management process or to replace it with a new process.
The importance of a structured methodology for tackling the order management process cannot be overemphasized. Therefore achieving an effective POM process to reduce operating expenses, to improve supply replenishment efficiency, and to obtain and sustain a competitive advantage is essential. Yet to date no studies in the literature directly relate to this important issue. Effective POM will therefore be the focus of this chapter.
The Conventional POM Process
POM of direct material can be defined as the process of issuing a purchase order (PO) and tracking its life cycle until receipt of the ordered material into a buyer's inventory or until the ordered material has been consumed by production. Returns (reverse logistics) and PO settlement subprocesses are also included in the life cycle. Depending on the arrangement between a buyer and a supplier, PO settlement can be triggered by any of these events — supplier's order acknowledgment, an advanced shipment notice (ASN), an invoice, a warehouse receipt from the buyer's receiving system, or an inventory consumption notification (in the case of a co-assignment arrangement). The trigger for a PO settlement subprocess is considered to be the handoff between the physical supply chain and the financial supply chain.
Although there are major events (or milestones) in the PO life cycle, such as PO communication or ASN generation, some companies track more granular (smaller) events, especially for international shipments, such as manifest filing, arrival at a consolidator, when loaded on a vessel, vessel departure, arrival at destination port, customs clearance, when loaded onto a truck, etc.
In a conventional POM process, the first step is for a buying organization to send a PO for goods or services to a specified supplier and then to expect the supplier to ship the goods (or provide the services) based on the PO. After the shipment, the supplier generates invoices on a periodic basis and waits for payment notifications to arrive. These are fragmented processes in which each party has no visibility of what is happening at the other end in the time that passes between the initial steps. Lack of visibility between purchasers and suppliers is the main driver for premium freight expense. Yet changes to the conventional process order routine are very difficult to assimilate by the buyer and the supplier. Changes may include:
• Modifying a PO by the buyer (e.g., sending a PO change request): the supplier must identify and adjust the existing PO before sending the shipment; the buyer must check the received goods against the modified PO.
• Partially fulfilling a shipment: partial fulfillment of an order will generate a discrepancy during check-in of the received goods by the buyer. The buyer will then expect a back-order shipment from the supplier.
• Returning some of the received material by the buyer
• Changing pricing: a different price on the invoice compared to the price on the PO or contract will generate a discrepancy during invoice settlement.
A significant amount of time and manual effort is required to monitor the PO and in-transit shipment of the ordered goods, to match received goods against partial shipments and PO modifications, and to resolve discrepancies.
The conventional POM process has critical links, which are missing at the execution level:
• Timely ASNs: crucial for providing visibility of in-transit goods
• An audit trail: makes proving whether or not a supplier received a PO amendment easier
• Support for matching ASNs to POs: necessary to provide an accurate "picture" of incoming material to the planning engine
• Timely and clear communication of a PO or a firm's required schedule: some suppliers may not always know if the date on a PO is a shipment date or a delivery date
• Support of new, emerging settlement programs (e.g., evaluated receipt settlement, ERS, which is a significant step in eliminating non-value added activities and facilitates paying suppliers faster): many suppliers reporting more than a 60-day delay in receiving payments from buyers; many buyers reporting a significant delay in receiving invoices from vendors
• Monitoring: returns, receipt confirmations, and payment notifications
The conventional POM process also has critical links, which are missing at the operational and tactical levels:
• Real-time collaboration on changes
• Tight integration with material planning (MP) to obtain material requirements and to adhere to suppliers' constraints
• An ability to negotiate program parameters during contract processing
• An ability to "close the loop" by updating supplier and buyer performance scorecards
Figure 1.1 illustrates a best practices process for POM (highlighted in dark gray) that addresses the missing links in the conventional POM process. (Note: Figure 1.1 will be discussed in detail in Chapters 2 and 3.) The process in Figure 1.1 can have several variations, but regardless of the type or size of the variation, all interactions between the subprocesses presented in the figure should be available and streamlined for the process to be considered a best practices process.
For example, one variation would be to outsource the transportation function to a supplier. This variation would be a good practice if the transportation function is not a core competency of the buyer and if a supplier can manage transportation more efficiently and provide more granular (specific) status information. In this case, the delivery subprocess under the "Transportation" function in Figure 1.1 would be in the supplier "swim-lane" (the horizontal row) as shown in Figure 1.2. Another variation would be to outsource the warehouse function to a third-party logistics provider for some or all items. In this scenario, a third-party logistics provider would provide receipt information and an updated inventory picture. In yet another variation, a production scheduling process would need to be included in the POM process to support sequence-driven programs (e.g., to provide an assembly line schedule). This type of variation is mainly adopted in the automotive industry and in line assembly environments. Therefore, a link or integration between production scheduling and POM may not be needed if a sequence-driven variation is not adopted.
Vendor-managed inventory (VMI), sequence-driven processes, and other advanced replenishment programs have recently become more common in the supply chain. Yet many replenishment programs are implemented without a strategy, without a well-defined process, or without the enabling technology that is required to achieve the promised benefits, which creates strategic missing links in the conventional POM process.
In summary, many challenges exist in today's POM process, yet numerous potential benefits can be gained if these challenges are addressed.
The Big Picture
Although Figure 1.1 illustrates a comprehensive picture of supply management, in which a POM process and its related interactions encounter other processes such as material planning and contract processing, Figure 1.3 illustrates the position of POM in the "big picture." Figure 1.3 presents all of a buyer's processes that add value to the product throughout the supply chain until the product reaches a customer. (In Figure 1.3, POM-related subprocesses are highlighted in dark gray and MRO represents maintenance, repair, and operating supplies.) These value chain processes can be grouped into three "super" processes: supplier relationship management (SRM), supply chain management (SCM), and customer relationship management (CRM):
• SRM: a super process of effectively managing supply by using several processes, including the POM process
• SCM: a super process that has a main objective of achieving balance between supply and demand and optimizing it if possible
• CRM: a super process of managing customer relationships by effectively supporting marketing, sales, demand forecasts, sales order promises and management, and service processes
Another way to link POM to the customer is through the order fulfillment cycle, which spans the CRM, SCM, and SRM super processes and is considered to be one of the major differentiators for best-in-class (BIC) companies. As illustrated in Figure 1.4, an order fulfillment cycle links sales order management processes to supply management processes. Order fulfillment cycle "enablers" are real-time visibility in the supply chain, effective collaboration with suppliers and customers, an efficient supply chain planning cycle with "what if" analysis capabilities, intelligent alerts, and dashboards to monitor performance of the fulfillment cycle.
A Lean and Agile Supply Chain
Considering the current market pressures on margins, lean strategy provides an excellent framework for "squeezing" costs out of supply chains. Lean strategy provides a strong infrastructure to support many innovative manufacturing methods, including engineer to order (mass customization), build to order, and assemble to order. Lean strategy reduces the lead time of any process and minimizes costs from activities that do not add value. Yet with today's supply and demand volatility, supply chains must be agile in addition to being lean to be able to react quickly to changes and even to be able to detect changes before they occur. Variability will continue to exist, but agility will help to control it.
Managing the supply chain is also becoming more complicated due to globalization, increased complexity with outsourcing, and a need for shorter times to market. As a result, senior managers are considering the benefits of moving toward a lean and agile supply chain (LASC) in order to address today's challenges, which have caused managers to be in unfamiliar situations such as needing to manage with less waste, inventory, personnel, and resources, while simultaneously giving customers more configuration options, more delivery flexibility, and shorter lead times.
Being "lean" means working with limited inventory, having no waste, and reacting without delay to changing conditions. Lean strategy was shaped largely around the 35-year-old Toyota Production System and was originally based on two core assumptions — low demand fluctuation to ensure smooth production and a network of local suppliers to ensure short lead times and Just-in-Time (JIT) deliveries. Yet neither of these assumptions exists in today's dynamic and global environment of fluctuating demand with suppliers that are scattered all over the world. The leaner a supply chain is, the greater the impact of disruptions will be.
Conversely, being only agile is not a good option either. As well, the old concept of building excess capacity, adding inventory, or increasing labor to solve problems is very expensive and does not solve the root cause of the problem.
LASC enables businesses to be flexible in various aspects such as providing an ability to rapidly determine customer needs, to respond to volume and mix changes, and to rapidly respond to a crisis. Yet LASC does not include providing flexibility by maintaining a high stock of raw material or spare production capacity because those conditions conflict with lean strategy. LASC is based on pull, not push philosophies. Therefore, pull-based replenishment is a standard technique of LASC operations. LASC provides an ability to profitably replenish the supply chain while responding effectively to supply and demand variability. A detailed comparison between lean supply chains (LSC) and LASC is shown in Table 1.1.
With globalization, supply chains are becoming more fragile and a small disruption can cause catastrophic results. Therefore, it is essential to detect disruptions proactively and have the necessary flexibility to diminish disruptions at their source. LASC requires constant plan changes and very short lead times. However, LASC cannot only be about processes. LASC must be supported by enabling technology so it will be broadly applicable and scaleable. LASC-supported technology should be able to provide visibility to all relevant players, proactively capture and manage exceptions, and generate alerts when performance approaches set thresholds. LASC-supported technology encourages reevaluating traditional processes and relationships with partners, suppliers, and customers and collaborating with them in real time. (Note: The POM process is a key process that can also benefit from a collaborative environment.)
LASC is not only fast and flexible, but it is also transparent — managers can "see" through the systems what is coming, be proactive, and make the needed adjustments to keep supply chain processes aligned with customers' needs and the managers' own bottom lines. In the past decade, Internet technology has radically transformed the supply chain from being in a world of POs and bills of lading to having a competitive advantage. According to Mayor (2004), "The challenge now, as CIO 100 honorees demonstrate, is to use the opportunities presented by advances like real-time data availability, global communication and business-partner alliances to create a supply chain that's not simply fast, but agile as well."
(Continues…)
Excerpted from "Purchase Order Management Best Practices"
by .
Copyright © 2007 Ehap H. Sabri, Arun P. Gupta, and Michael A. Beitler.
Excerpted by permission of J. Ross Publishing, Inc..
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
Table of Contents
Foreword,
Introduction,
About the Authors,
Acknowledgments,
Web Added Value,
PART I: PROCESS BEST PRACTICES,
Chapter 1. POM: Challenges and Solutions,
Chapter 2. POM at the Operational Level,
Chapter 3. POM at the Execution Level,
PART II: ENABLING TECHNOLOGIES,
Chapter 4. EDI, the Internet, and e-Hubs,
Chapter 5. Identification Technologies: Barcodes and RFID,
Chapter 6. Web Services and SOA,
Chapter 7. POM Software Vendors,
Part III: CHANGE MANAGEMENT,
Chapter 8. Planning Change,
Chapter 9. Implementing and Sustaining Change,