"The Educational Society for Supply Chain Management"

The SAPICS 20th International Conference & Exhibition

SAPICS 98 "Integrating The Supply Chain"

Cape Town, South Africa

July 6-8, 1998

SAPICS Website http://www.sapics.org.za/

"Drive Purchase Orders Out of The Supply Chain"

James D. Reeds

M.S., CFPIM, CIRM, C.P.M., CPCM

Research Associate,

Henley Management College

Henley-on-Thames, England

and

Adjunct Associate Professor

Golden Gate University

San Francisco, California

Abstract:

This paper seeks to explore the appropriate uses of the Master Production Schedule, or MPS and Master Planning concepts as the most appropriate tools for communicating customer demand throughout the supply chain. The traditional instrument of the purchase order, which has served as the traditional vehicle of communication of demand to suppliers, is seen as less relevant and appropriate. "Supplier--tailored master planning" can replace forms of contracting and purchase order item releases as instruments for supplier materials scheduling and capacity management. An underlying theme of this paper considers the notion that as enterprises seek to employ best practices and strategies throughout the supply chain, traditional adversarial and arms-length constructs of buyer-seller relationships are less useful and even disintegrative.

Introduction:

"we are living in very confused times, because many of the things that gave structure to our lives are disappearing. Institutions which we relied on, particularly the work organisation, are no longer so sure or so certain."

-- Charles Handy in Rethinking The Future¹

The evolution of relationships between buyers and sellers in the marketplace is today heavily weighted in favour of business between fewer, agile partners, who co-produce and co-develop in an environment of open communications and trust between the business enterprises. This is in stark contrast with a more traditional model of buyer-seller relationships characterised by fierce price competition, arms-length contractual instruments, and a pervading atmosphere of mistrust. Enterprise relationships will increasingly be driven by business strategies which (1) emphasise management within and throughout the supply chain -- versus a focus on internal organisational issues, and (2) consider outsourcing of various elements of the means of production and distribution, while concentrating on core competencies. The legacy of the purchase order as a contractual instrument in which each item-level commitment between buyer and seller is viewed as an independent contract which must be negotiated and renegotiated is at odds with evolving supply management strategy and application. Further, this conundrum extends to the instrument which creates the purchase order: the material requisition or "replenishment signal" -- whether the product of a formal planning and control tool such as MRP/MRP II, or Just-in-Time or demand-pull signals.

To foster integration throughout a supply chain, one must focus attention not only on redefining organisational structures, the skills of those employed in applying supply management strategies, and the technological vehicles to transmit planning information, but especially upon the nature and character of the information which is the basic "raw material" of communication. We must consider the notion that "The thing delivered is more important than the delivery vehicle. Having a telephone does not guarantee or even encourage brilliant conversations...Having more information technology will not necessarily improve the state of information." ²

The Traditional Buyer-Seller Relationship:

Most traditional approaches to the engagement of business between buyers and sellers (at least in Western industrialised societies) have emphasised market competition, with pricing the key determinant in the award of business. Elements of delivery and quality of product were important, but price was paramount. The result was an overall emphasis on source selection on the basis of lowest price, and, an approach which pitted multiple suppliers against one another for each material requirement. All purchased requirements were seen as having independent demand characteristics. This scenario led to a proliferation of suppliers in competition with one another and as a purchasing strategy, this view evolved as the best means to the end of assuring the supply of materials.

Additionally, the heritage of the "purchase order-as-contract" still colours a majority of buyer-seller relations. The term, "Purchasing Agent" refers to the "Law of Agency," under British Common Law, wherein those who are specifically empowered to form binding contractual agreements between a principal (customer) and a third party (supplier) are referred to as "Agents of the Firm." Hence, the origin of the term, "Purchasing Agent." A cursory review of any firm’s Purchase Order (PO) document will reveal it is viewed as not so much as an instrument to schedule and release materials from a supplier (the common materials planning view), but rather as a set of legal terms and conditions which must be satisfied under the cover of legal obligations between a buyer and seller. The "proof of a binding contract" is witnessed through the typical negotiation process between a buyer and seller. An "offer" on the part of the buyer (customer); "acceptance" from the seller (supplier) in for form of an acknowledgement, and "consideration," the satisfactory exchange of "something of value" in the production and release of material from the supplier. Further, under the lens of a legal contract, any change of a material requirement’s order quantity, a schedule change, or even an outright cancellation is viewed as a "constructive change" in the contract, and hence, a requirement for renegotiation of the contract between the buyer and the seller. This scenario suggests a complex and on-going set of demands upon the purchasing organisation above and beyond matters of materials planning and replanning.

In a pre-computer environment, this suggests a purchasing organisation characterised by labour intensity. Buyers were appointed in proportion to the level of anticipated transaction volume generated by the material and planning process, and the satisfaction of other service and organisational obligations, such as facilities, new product development, and process maintenance. A further division of labour typically evolved toward a "horizontal" specialisation by commodity, and a "vertical" organisation by seniority or expertise. A typical organisation chart of a purchasing department of a firm engaged in the manufacture of a consumer electronic product would likely resemble that of Figure 1.:

Figure 1. A Traditional Purchasing Organisation³

The negative consequences of the "traditional" approach to source selection and pure price competition were many: inconsistent material quality, low levels of buyer-supplier trust, short-term and reactive purchased material planning, and a labour-intensive purchasing process which centred upon the processing of transaction volume.

The Impact of Formal Planning and Control Techniques:

With the introduction of formal planning and control systems in the period 1960-1980 -- most notably, Material Requirements Planning and Manufacturing Resource Planning, significant opportunities to improve the purchasing process were possible.

Figure 2. A Simple MRP Process

The now familiar material planning process (Figure 2) engaged the power of computing, and introduced the distinctions between independent and dependent demand planning. Moreover, the planning process was seen as seamless flow of information up and down the organisation linking long-term business planning at one end, with short term planning and replanning of materials on both the shop floor, and through purchasing, the suppliers’ shop floors.

With the evolution toward Manufacturing Resource Planning (MRP II) in the 1980’s, the pivotal role of Master Planning and the effective use of the Master Production Schedule (MPS) became apparent. This key planning process was the literal "fulcrum" upon which the effectiveness of both material and capacity management within the firm rested.⁴ There was now an imperative of timely and accurate communications between all elements of the planning cycle, and by inference, the planning evolutions of the suppliers of purchased materials. Further, the requirement for a balance of capacity management and demand management with materials management was fostered through the MRP II process, as noted in figure 3.:⁵

Figure 3. The MRP II Process

The challenges of formal planning and control systems such as MRP/MRPII, became particularly apparent in the execution of the planning and replanning of purchased materials. For the prototypical purchasing organisation, MRP and MRP II was -- and to a large degree still is -- viewed as the penultimate "order launcher." Missing altogether is any serious consideration of supplier capacity constraints, and the effects of the dynamism of demand management upon a supplier’s processes. Whether material requirements are reviewed first by a cadre of material planning or inventory planning professionals -- or, is more typically the case, purchasers themselves who review and plan material requirements as "Buyer-Planners," little else has changed in the purchasing process in many firms. In the view of many purchasers, the chief result of the introduction of MRP/MRP II has been to "automate the requisitioning process." Many in the planning world might well dismiss such a view as unfounded or even as reactionary to the vision of the powers of formal planning and control disciplines. Yet, an analysis of many contemporary purchasing organisations reveals such paradoxical views.⁶

Figure 4. The MRP/MRP II - Purchasing Planning Hierarchy

Figure 4. Suggests the typical hierarchic planning relationship which exists between Master Planning-level activities and those of purchasing. If the purchasing organisation maintains its strict item-level focus of planning, in addition to the traditional purchase-order-as-contract for each item requirement, the following are the most likely outcomes: (1) If the Bill of Material is complex and/or the part count is high, this may result in an unmanageable planning workload for the individual buyer or buyer-planner; (2) A tendency to only review "critical" or "expedited" action items with each MRP/MRP II generation and (3) Low priority placed upon negotiation of supplier capacity management issues.

More recent evolutions toward Just-In-Time and Demand Flow manufacturing philosophies have only exacerbated any material and capacity planning problems which may exist between customers and their suppliers. The absolute requirements for materials of perfect quality, flowing from a supplier’s enterprise to that of the customer on the basis of "instantaneous" pull signals from either kan-ban or demand flow environments perhaps embody today’s greatest challenge to the buyer-seller relationship. As our millennium draws to a close, the contemporaneous influences of ever-more-powerful and ever-cheaper computing capabilities, coupled with an appreciation of the wisdom of dedicated lines of supply between customers and only the best supplier-partners has forever changed the definition of the buyer-seller relationship.

The Imperatives Of Supply Chain Management:

While it may prove premature or even risky to offer a definition of Supply Chain Management (SCM), as it is presently evolving in both its theory and many applications, an attempt should be made for the purpose of clarity:

Supply chain management is a continuously evolving management philosophy that seeks to unify the collective productive competencies and resources of the business functions found both within the enterprise and outside in the firm’s allied business partners located along intersecting supply channels into a highly competitive, customer-enriching supply system focused on developing innovative solutions and synchronising the flow of marketplace products, services, and information to create unique, individualised sources of customer value.⁷

A Supply Chain Management perspective suggests that are at least two immediate implications on the focus of purchasing process and an enterprise’s relationships with its suppliers. The first challenge to traditional purchasing practice places an emphasis on a purchasing organisation whose charter is not primarily focused upon the internal currents and eddies of corporate policies and procedures. Rather, purchasing is poised to both engage in and influence the networks of external business relationships which exist in the marketplace in support of mutual business objectives in this scenario, purchasing may be seen as an integral component in a series of interlinked relationships which extend from the ultimate external customer to the very outermost of suppliers in a network of suppliers (Figure 5). This new perspective calls for a view of openness and the sharing of information between co-operative business entities, which can only seen to reduce or severely limit the view of a firm as strictly bounded by the architecture of legal terms and conditions. Under Supply Chain Management initiatives, the traditional adversarial, arms-length relationships with suppliers becomes is seen as counterproductive.⁸

Figure 5. The Supply Chain Model

The second apparent shift in purchasing focus under Supply Chain Management is toward that of a "facilitator of relationships," versus that of the "steward" of a group of diverse commodities. Other than a firm’s sales and marketing organisations, Purchasing is the only other viable organisation which exercises an on-going presence both within and without the firm. In its role as a facilitator of information, it is ideally placed to serve as a focus for the integration of information and knowledge, which must be a universally shared commodity between the numerous entities in the supply chain (Figure 6):⁹

Figure 6. Purchasing As An Integrative Process

Implications For Change:

The shift from traditional purchasing and material planning practices to new applications under Supply Chain Management strategies is not without its difficulties. In part, the problem stems from our use of familiar terminology in new settings. "The way we talk colours the way we think, and the way we think shapes the way we act...Our use of old words to describe new things can often hide the emerging future from our eyes." Thus, we may find that the continued use of familiar approaches to organising work and the use of familiar planning and purchasing tools no longer serves us well.¹⁰ In fact, their continued use may better serve failure than success. Therefore, we must modify our language to accommodate the new realities of working within the dynamics of the supply chain. Only from such a position may we advance to new thinking. The new thinking will manifest itself in the following: A concentration of resources on the management of value-added relationships and the modifying influence of information technology in further automating the purchasing process and communications throughout the supply chain. ¹¹

A Focus on Value-Added Relationships::

Figure 7. Supply Relationship Value Model

There is an unmistakable trend toward an enterprise dealing with fewer, high quality suppliers, and within the framework of long term partnerships, and other collaborative models. Figure 7 suggests that there are, in fact, a range of supplier relations which an enterprise may engage itself. In order that the firm manage its resources, costs, and risk most effectively, the majority of facilitative and communicative efforts must be spent engaged with those firms in the supply chain which create the most value. These relationships will either involve activities focused upon co-development, or ultimately joint ventures or even joint ownership relationships.¹² This means that the lower-value-added types of relationships must be managed through approaches such as automated systems contracts, the use of the Purchasing Card, and other elements of "Electronic Commerce." Such an approach is an essential strategy, even for the smallest firm in a supply chain, because historically, the greatest transaction volumes with the least value have originated from these types of relationships.

The Influence of Technology:

In a recent study, "The Future of Purchasing and Supply: A Five and Ten-Year Forecast," conducted under the auspices of the Center for Advanced Purchasing Studies (CAPS), Arizona State University, Michigan State University, and A.T. Kearney, the following characterised the influence of technology upon the purchasing and planning process:¹³

Electronic commerce was seen as a trend that is occurring today and will accelerate at an even quicker pace over the next 10 years. The Internet will become the backbone of electronic purchasing. It will be used for purchasing transactions such as order tracking, funds transfer, and receipt acknowledgement. Systems for low strategic value purchases will emphasise electronic efficiency. The challenge will be using the information created by electronic commerce in a truly strategic fashion. The overwhelming amount of information that electronic commerce creates will enable pull systems to play an important role. This means that activities at one end of the supply chain, like sales to the final customer, will prompt action further up the chain, such as productivity and delivery.

The implication of the application of such already-existing technologies demand that we seriously examine our views on how and what level of information is communicated between buyer and seller. In many cases, that will mean the use of some familiar planning tools in perhaps new ways. For this analysis, this translates into the effective use of Master Planning techniques on the part of Purchasing in communicating material needs with supply chain partners, and to help them resolve capacity constraints within their production environments. The environment wherein every purchased item requires a unique purchase order, and every change in quantity, price, or delivery results in a constructive change to a legal contract is an anachronism.

A New Emphasis on Master Planning With Key Suppliers:

A typical master planning format is given in Figure 8, with an emphasis on planning time fences:¹⁴

Figure 8. Master Production Schedule Planning Horizons

One of the demonstrated strengths of the disciplines of Master Planning (whether one uses an MPS or a Final Assembly Schedule -- FAS] are the order policy decision rules which allow an enterprise to plan into the future.

Figure 9. Master Planning Order Policy Rules

Under traditional purchasing organisations, the majority of the planning and replanning activities are focused in the current production period (typically one month). The are many reasons for this: nervous scheduling at the Master Planning level, material shortages, inventory imbalances, high item-level planning work load -- and a host of other all-too-familiar ills. One unfortunate outcome of such frenetic activity is that supplier lead time management suffers. Suppliers are frequently entreated to supply materials under less-than-lead time situations. A straightforward approach, then, is to wherever possible, using the visibility of the production plan, communicate the plan to the supplier on an on-going basis. The Master Production Schedule (MPS) [or the FAS} becomes the primary vehicle for the negotiation of not merely lot sizes of purchased materials in the current production period -- but for requirements in the intermediate and long-range planning time zones (Figure 9). Forward visibility has always been a worthy objective of formal planning and control tools such as MRP/MRP II. This visibility has rarely, however, been effectively transmitted to suppliers. This is especially important when one considers the effect of the dynamics of change in scheduling plans. Supplier capacity management is also within reach with the communication of MPS-level information.

Further, the Demand and Planning Time Fences would be established not on the basis of internal customer operations alone, but also with an appreciation and understanding of supplier processes and lead times as well. By allowing suppliers visibility into the future on an on-going basis, they in turn may between negotiate material and capacity planning issues with their suppliers. Thus, visibility of requirements extend throughout the supply chain.

The Imperatives of Outsourcing The Means of Production:

While the noble objective of the communication of item-level material requirements to a firm’s suppliers through the customer’s Master Production Schedule is not entirely a new concept, the established position of outsourcing as a business strategy has necessitated a reconsideration on how this is best achieved.¹⁵

Once a firm has embarked on outsourcing its means of production, in whole or in part, the organisational responsibility for planning, co-ordination and control of material requirements undergoes a shift. The responsibility once held by a formal planning department is most frequently absorbed into the purchasing organisation. Item-level planning now becomes planning at the product, or MPS level. Therefore the level of communication between customer and supplier should refocus from a commodity orientation, to that of a product-supplier orientation (Figure 10).

Figure 10. The Challenge For Purchasing¹⁶

Conclusion:

The challenges of using Master Planning tools and disciplines with our suppliers are no different than those we have traditionally employed within our own enterprises. However, to realise the effectiveness of this very familiar tool as an enhanced means of communicating material needs throughout the supply chain will require a fundamental rethinking of how purchasing is to function now and in the future, as opposed to its past. Traditional purchasing has often not been wholly integrated with the aims and objectives of formal planning and control. This is no reflection on the professionals in purchasing positions, but more the result of a business paradigm which has characterised every level requirement as an individual contract with a chosen supplier. Further, the model of price-only source selection has, over time, led to a proliferation of suppliers who were kept in adversarial relationships of short duration and absent of any loyalty to the customer. This model no longer suits us.¹⁷ Present and future business strategies are aimed toward the direction of partnership and collaboration with fewer, higher quality supplier-partners. With only some minor adjustments to our thinking, we will discover that what our suppliers demand most from us as their customers are accurate, timely, and on-going information as to what our material requirements are. The most appropriate vehicle for that information lies in the Master Production Schedule.

References - Sources :

BATCHELOR, Joy. "Barriers to Organisational Learning with the Customer-Supplier Relationship: Breaking The Patterns of Relationships Emerging Issues In Purchasing And Supply Chain Management: Proceedings Of The International Federation Of Purchasing And Materials Management. Volume I. Budapest, Hungary, 1997. pp.1-22.

BURT, David N. and Michael F. DOYLE . The American Keiretsu. Homewood, Illinois USA: Business ONE Irwin, 1993. p. 63.

DUFFY, Roberta J. "Where Are We Headed?". Purchasing Today May 1998: p.23.

ELLRAM, Lisa M., Ph.D., C.P.M. and Arnold MALTZ, Ph.D. . Outsourcing: Implications For Supply Management. Tempe, Arizona, USA: Center for Advanced Purchasing Studies, 1997. 139.

HANDY, Charles. "Finding Sense In Uncertainty". Rethinking The Future. Ed. Rowan GIBSON. London: Nicholas Brealey Publishing, 1997. p. 17.

HANDY, Charles. "The Citizen Corporation". Harvard Business Review September-October 1997: p. 26.

PROUD, John F. Master Scheduling: A Practical Guide To Competitive Manufacturing. New York: John Wiley & Sons, Inc., 1994. 529.

REEDS, James D. "The Buyer-Planner Concept: Toward A Definition of Required Skill Sets". Proceedings of The First North American Research Symposium on Purchasing and Supply Management Atlanta, Georgia March 19-21,1998: p. 389.

ROSS, David Frederick. Competing Through Supply Chain Management. New York: Chapman & Hall, 1997. 365.

van WEELE, Arjan J. and Frank A. ROZEMEIJER. Revolution in Purchasing: Building Competitive Power Through Pro-Active Purchasing. Emerging Issues In Purchasing And Supply Chain Management: Proceedings Of The International Federation Of Purchasing And Materials Management. Volume I. Budapest, Hungary, 1997.: pp. 151-163.

ENDNOTES:

¹ Charles HANDY, "Finding Sense in Uncertainty," in Rethinking the Future, Rowan Gibson, Ed. London: Nicholas Brealey Publishing, 1997. p. 17.

² ___________, "The Citizen Corporation," Harvard Business Review, September-October, 1997. p. 26.

³ James D. REEDS, "The Buyer-Planner Concept: Toward A Definition Of Required Skill Sets," Proceedings of the First North American Research Symposium of Purchasing and Supply Management, Atlanta, Georgia, USA, March 19-21, 1998. p. 389.

⁴ John F. PROUD, Master Scheduling: A Practical Guide To Competitive Manufacturing, New York: John Wiley & Sons, 1994. p. 529.

⁵ Ibid.

⁶ Joy BATCHELOR, "Barriers to Organisational Learning in the Customer-Supplier Relationship: Breaking the Patterns Of Relationships." Emerging Issues In Purchasing And Supply Chain Management: Proceedings Of The International Federation Of Purchasing And Materials Management. Volume I. Budapest, Hungary, 1997. pp. 1-22.

⁷ David Frederick ROSS, Competing Through Supply Chain Management. New York: Chapman & Hall. 1997. p. 365.

⁸ Arjan van WEELE and Frank A. ROZEMEIJER, "Revolution in Purchasing: Building Competitive Power Through Pro-Active Purchasing." Emerging Issues In Purchasing And Supply Chain Management: Proceedings Of The International Federation Of Purchasing And Materials Management. Volume I. Budapest, Hungary, 1997. pp. 151-163.

⁹ Lisa M. ELLRAM and Arnold MALTZ. Outsourcing: Implications For Supply Management. Tempe, Arizona, USA. Center For Advanced Purchasing Studies. 1997. P. 139.

¹⁰ HANDY, "The Citizen Corporation."

¹¹ Van WEELE and ROZEMEIJER.

¹² David N. BURT and Michael F. DOYLE. The American Keiretsu. Homewood, Illinois, USA. Business ONE Irwin. 1993. P. 63.

¹³ Roberta J. DUFFY, "Where Are We Headed?" Purchasing Today. May, 1998. P. 23.

¹⁴ PROUD.

¹⁵ ELLRAM and MALTZ

¹⁶ REEDS

¹⁷ van WEELE and ROZEMEIJER