ELECTRONIC DATA INTERCHANGE

Assalammualaikum, it seems as clear as daylight that EDI play a vital role in purchasing as it will relate between the time and cost. So today we will discuss about the advantages and disadvantages of Electronic Data Interchange. Before we start any further, do you have any idea what is Electronic Data Interchange? 

What is EDI?

EDI (Electronic Data Interchange) refers to electronic communications of business transactions between organizations.

EDI implies computer to computer transactions directly into vendor databases and ordering systems. In 1996 the National Institute of Standards and Technology defined electronic data interchange as the computer-to-computer interchange of strictly formatted messages that represent documents other than monetary instruments.

EDI implies a sequence of messages between two parties, either of whom may serve as originator or recipient. The formatted data representing the documents may be transmitted from originator to recipient via telecommunications or physically transported on electronic storage media.

The main elements of EDI system are computer hardware, software, computer compatibility between the sender and receiver.

For example, one of the largest users of Electronic Data Interchange for purchasing purposes is Wal-Mart. By using this system Wal-Mart can predict what product should be stocked and inventory in each store. The saving in paperwork and hours will lead to gain competitive advantage and market share.

ADVANTAGES OF ELECTRONIC DATA INTERCHANGE

 The first advantages of using EDI system is EDI provides cost savings by reducing paper and eliminating paper processing. It seems that by using this system it will reduce the number of using paper and shorter the lead time either in order processing or stock in or stock out. Payment also made electronically via bank account.

Second advantages of using EDI system is time savings and eliminating repetition are other benefits from the reduction in paper processing.

The third advantages of using EDI system is documents can be transferred more quickly and processing errors can be decreased allowing business to be done more efficiently. The document in softcopy so it is easily to handle and to transfer the document through the system the seller or vendors.  If the document in hardcopy so it need time to reach to the seller or vendors as will incurred a lot of cost and time needed.

TRANSPORTATION PURCHASING

Today the early decision requires the buying firm to select the suitable shipment mode. Each of the modes has specific operating and cost characteristic, and the buying professional must weight them in selecting the most suitable transportation mode. The most basic selection decision is the trade-off between cost, reliability, and speed. The cost of shipment is usually tied to the speed of the mode. However, on-time delivery and service quality are more important.

 Mode selection

        Firstly is rail. The railroads are best for large loads going long distances. To be more specific, rail is preferred for loads over 30,000 pounds over distances exceeding 300 miles. If trucks have small entry barriers, the rail industry may have the highest. Train tracks would need to be laid down, which in this ever-crowded world creates immense cost for even the shortest routes. For long routes across open terrain, most places in the world already have tracks.

        
Secondly is truck. Truck transport is the most available and accessible of the modes because motor vehicles are not restricted by terminal to terminal operation but can provide service from the shipper’s loading point to the receiver’s dock. Highway transport is used mostly for short hauls of high value manufactured goods, because trucks have higher operating costs and less capacity than train.

Thirdly is water. Water transport are classified into several categories :

(1) inland, 
(2) lakes, 
(3) coastal and intercoastal, 
(4) international deep sea. 

The majority of commodities shipped via water carriers are semi processed materials, fuel, oil, coal, chemicals, minerals, and petroleum products. Water carriers are an excellent transportation shipping mode for low valued bulk commodities in large quantities. Speed is not a critical criterion for those raw materials.

Air transportation has been the single most significant development in logistics of this century. While other modes of transport are seeing growth resulting from increasing international trade, the air cargo is experiencing exceptionally high growth. This is a result of increased trade, but also the increased wealth and resulting demand for premium service. There are two types of carriers, airlines that carry cargo as a side line, and dedicated air cargo carriers. Currently air cargo is a small part of airlines revenue, but the air cargo industry as a whole is growing. Most important is an increasing in time sensitive cargo and luxury goods being traded worldwide. 
Air cargo carriers have now evolved into three forms. There are the integrated carriers, such as FedEx and UPS. Scheduled carriers are typically airlines offering cargo services. Charter carriers are the specialized all cargo carriers. 
One of the market in air cargo is mail. The mail that monopoly market of the official postal service in a given country. Secondly is express transportation. The speed of delivery is crucial. The package is promised to be delivered at certain time. Thirdly is courier. Advance and 10 times more expensive than express service and there is no need to develop tracking services. Lastly is freight. Move larger package that would be too expensive to be sent through air express.
 

       
Lastly is pipelines. Pipelines are the last thing people think of. It require very high investment, but with very low variable costs. One unique thing about pipelines is that the cargo only moves in one direction, with rare exceptions.

      

      

TAGUCHI CONCEPT - THE SUMMARY

Assalamualaikum.
What is on your thought about Total Quality Management (TQM)? If you ever heard about this term, you may thinking that it's all about on how to achieve the best quality to be served to the business.

According to the book Purchasing and Supply Chain Mangement written by W. C. Benton Jr., TQM is defined as management of entire organization so that itself excel in all aspect of products and services that are important to the customer.

But, today we are going to narrow the scope of TQM by focusing much on Taguchi Concept, one of the approach in TQM.

Definition

An approach to engineering that emphasizes the roles of research and development, product design and product development in reducing the occurrence of defects and failures in products. The Taguchi method considers design to be more important than the manufacturing process in quality control and tries to eliminate variances in production before they can occur. 

History

Genichi Taguchi, a Japanese engineer and statistician, began formulating the Taguchi Method while developing a telephone-switching system for Electrical Communication Laboratory, a Japanese company, in the 1950s. As a result of his success, he eventually became well-known in both Japan and the United States, with companies such as Toyota, Ford, Boeing and Xerox adopting his methods.

Three (3) concepts are introduced by Taguchi aimed in improving products and process quality, which are:
1) Quality robustness
2) Quality Loss Function
3) Target Oriented Quality

Now, we are going to compare between conventional experiment and experiment of Taguchi Method.

Conventional Experiment is development type to prevent from repeating failures while Experiment of Taguchi Method is type to solve the problem beforehand with Taguchi Method.

Conventional Experiment most likely as a result of demanding quality goods, where the firm have problem in determining the right decision upon try to make most suitable thing or to make a thing of good quality, in which resulted the thing they made is defective product (as they failed to make the right decision between two decisions). This will  lead to Devil's Cycle.

Experiment of Taguchi Method is no never ending cycle, straight to the result and sure approach to the decision. There are two phases of designs,

1) First phase: Minimize variation
2) Second phase: We find the optimum

Where the firm make quality goods with a confirmation experiment (by the equations and formulas) provided by Genichi Taguchi.

ISSUES IN GLOBAL SOURCING

Good morning/evening everyone.

Global sourcing simply means you use other party service or product in your company. But what we gonna tell you today is about some issue when you are global sourcing. Those issue is not really a big deal but must take care of.

There are some issue that we are going to discuss about;   

1. Distance
2.  Communication 
3. Time value of money 
4. Quality issue 
5. Pipeline inventory 
6. Staffing 
7. The impact of increased competition

First is distance, the distance between the buying and selling firm is significant in time zones and physical location. When both party is far away usually the will communicate each other using technology such as telephone and internet. But it is better to face-to-face when you are going to start to outsource, you must go to that supplier place to make sure their product can meet our objective.

Second is communication, like I had told you above how they will communicate. You should know that communication is very important, when there is miscommunication, it will be a giant problem to your company. Your whole production might not run for certain period and will affect your profit definitely. So you should have a good communication with the party involve with a good relationship perhaps.

Third is time value of money. When you are doing some process, it might cost you. Especially when it were your first time to deal with foreign company. This means you will use bank service when you use “letter of credit”. The bank will pay first to that foreign company bank to make sure you receive the product safely.

Forth is quality issue. Before you make contract with the other company to outsource, the most important thing you should do is quality expectation. Don’t be ridiculous , it not because you are selfish but it was your right. So here, company should spend some necessary time and money to do those expectation.  If there are some problem that you think not suitable with your company you can straight tell them to change them.

Fifth is pipeline inventory. Pipeline inventory is you should make sure that there is stock available every time there is demand or to run production. When there is stock available, it will decrease the lead time. This issue usually occur when a third party is involved. The problem become pronounce when offshore sourcing is used.

Sixth is staffing. When company outsource from foreign company, that means there is no that source in local. Outsourcing will become ineffective if there is no one who can handle that process, equipment and so on. So we must hire someone who have the specialty in that course.

Last one is the impact of increased competition. The above direct and indirect cost tend to add unexpected cost to purchase items. However, the significant benefit associated with offshore sourcing to enable the buying firm to gain leverage over domestic supplier. Domestic firms are well aware that some firm are considering offshore firms in long term strategies.

Well, that all for my explanation about issue in global sourcing. Hope some of the point can help you to know about it better. Thank you,,,

DISCRETE VERSUS RELATIONAL BUSINESS STRATEGIES

Assalamualaikum and very pleasant day for all viewers.

On this post, we will discuss about discrete versus relational business strategies.

But, what is discrete arm's length transaction?

A transaction in which the buyers and sellers of a product act independently and have no relationship to each other. The concept of an arm's length transaction is to ensure that both parties in the deal are acting in their own self interest and are not subject to any pressure or duress from the other party.

Next, what is relational business strategies?

Relational business strategies is a long-term relation between the companies that move beyond special influences transaction by involving effort of both firm to coordinate functional activities.

We will discuss about the difference of both of this contractual element based on:
1. Duration
2. Transferability (switching parties)
3. Attitude
4. Communication
5. Information

DURATION

As you know, if you choose discrete orientation, the duration transaction is only one time. After the transaction, you have no relation. Different with relational orientation, the duration is long time. The transaction is not limited to  one task only, but continuously as stated in the contract.

TRANSFERABILITY (SWITCHING PARTIES)

For discrete orientation, they completely easy to switch to another party as they are independent and not directly tied with contract. You can change supplier easily but for relational orientation, it is extremely difficult to change the party as they have contract stated.

ATTITUDE

As you have single transaction with discrete orientation, you must have suspicious and independent as they have no trust between each other. But, if you have relationship between each other, the attitude must be open, trusting, cooperative, and easy to communicate.

COMMUNICATION

There is very little communication between discrete orientation as they make transaction with different parties and always changing while relational orientation is more complex and a lot of things they want to share.

INFORMATION

The information between discrete orientation is limited and proprietary as they have no relation. Contrast to relational orientation, information are need to be shared as it involved directly to the business. Information such as technology used and labor management are those for examples.

Conclusion is, there are lot of benefits in doing partnership rather than do it alone (discrete orientation). They can gain high quality, reduce cost, quantity discount, market stability for both parties. This also will enhance sales as both parties need each other to make profitable business.

PURCHASING PROCEDURES, E-PROCUMENT AND SYSTEMS CONTRACTING

PURCHASING PROCEDURES

What is purchasing procedures? Purchasing procedures is cycles which involve a lot of document and department before the purchasing will be done to make the production run the product.

The things that included in purchasing procedures:
1. Work area involved
2. Material required
 3. Specification
4. Point of need
5. Procedure –  the departments that handle the documents

The objective of purchasing is to get the right material, right quality, right quantity, right place and the right time.

Why purchase procedure important?

·         1. To eliminate waste

·         2. Purchase with the 5 right

·         3. Reduce lead time

·         4. Smooth the management

·         5. Reduce the ordering cost

 6. Purchasing also to determine the supplier, negotiate with supplier and choose the delivery date.

SYSTEM CONTRACTING 

What is System Contracting? 

·         System contracting is a stockless inventory method for ordering and stocking MRO and related items.

·         The systems contracting will aid the firm in reducing ordering and inventory costs.

·         The systems contracting process require the use of a negotiated agreement between buyer and sellers.

·         Systems contracting are an efficient form of purchasing.

The total cost of ownership (TCO)

·         The true cost of an item is its purchase price, plus fixed, variable, and overhead costs.

·         Beyond the direct costs are the total procurement costs.

·         The costs of procurement include:

1.  Identify need

2.  Requisition material

3.  Inquire with the potential suppliers

4.  Evaluate bids

5.  Issue purchase order

6.  Expedite order

7.  Document receipt of material

8.  Receive and handle invoice

9.  Issue payment 

E- PROCUREMENT

What is E-procurement?

·         The commercial purchasing literature on e-procurement has suggested that significant savings for business.

·         The organizations can be realized by migrating to electronic procurement systems for all of their purchasing requirements.

Categories of broad  E-procurement purchasing.

·         Indirect Materials Purchasing.

1. Operating resource management (ORM)

- Use for purchasing office equipment.

2. Maintenance repair and operations (MRO)

-  Concerned with critical maintenance and replacement parts.

·         Direct Materials Purchasing.

1.  Critical items.

2. The systems that not the first place to apply a new e-procurement system.

WHY DO COMPANY OUTSOURCE BUSINESS PROCESS

Assalammualaikum and good evening to all of our readers.

So today we are going to discuss about why company outsource their process.  As you can see in a modern organization all the other company is related as also play vital role in running the production after we outsource.

It is depend from the decision of top management either they want do all the activities or just focusing on what they want known as their objective by hiring other company to do the other process such as proton which they does not produce tires, but they hiring Silverstone to supply the tires and the process of proton company is only to assemble it to the car.

As you can see, this will lead to a lot of benefits as example is reducing cost and shorter the lead time.

Here are some of generic strategic benefits of outsourcing:
1. COST MINIMIZATION
2. FOCUS THE ORGANIZATION OBJECTIVE
3. IMPROVE PERFORMANCE
4. OBTAIN CASH INFUSION

I will explain about the first benefits which are the cost minimization.

For your information, as you hiring other company to do your process in your company it will lead to reduce the cost of operating such as transportation cost and labor cost. It will transform the fixed cost to variable cost. For example if you own your truck in your company you will liable for the maintenance and tooling cost. But if you used other company transportation such as Tiong Nam, you only need to pay them the cost you used their services.

Second, I will explain about focus the organization objective.

By focusing what organization does, it will avoid company to think about the other process that is not related to the objective. Company will be more focus on what they’re doing. For example, Proton is a well-known car brand in Malaysia. They producing a lot of design and the car must be expensive. So, they need to secure their company from being pilferage as they hiring security services as they are more expert on this job.  

Third, I will explain about the improve performance.

This will lead the company to improve their quality, increasing their productivity and obtain new technologies from external sources. Just now I have told you about the Proton who hires Silverstone to supply them tires. Because Silverstone focusing on producing tires. They have skilful labor which more experts. If Proton produces the tires itself, they might be a problem regarding the quality as they don’t specialize in producing the tires. 

Last, I will explain about the obtain cash infusion. 

I will give you an example, at first your company own 8 truck for deliver your goods to all your retailers. As a top management saw that the transportation will incurred a lot of cost such as maintenance. So, they make a decision to sell all the trucks to other company. After the trucks were sold they get cash infusion. They can use the cash to hire other company transportation services to deliver your goods as it will reduce the fixed cost.

Finally, I have told you all the benefits for outsource. As the conclusion, nowadays in modern organization by being selfish are not going to give you a lot of opportunity but if you make relationship with other company will make your company more better.