One of the products your small company creates is a UHF/VHF radio built from materials and parts purchased from several manufacturers. You’re not completely sure how all of it works, but you do know not every component comes from the same manufacturer. Tom, the business’ current parts purchaser, is taking a job at another company closer to his home. Since she knows you’re motivated and a quick learner, your boss, Betsy, asks if you would be interested in becoming the new person who orders parts. Ordering parts…sounds simple.
What’s in a Title?
The title Tom holds, and that you are now training for, is called the Supply Chain Manager. In some companies, the Supply Chain Manager may also be titled a Procurement Manager, or a Buyer Agent. The Supply Chain Manager directs all the tasks associated with getting the products from the manufacturer to your company. Like an umbrella, the supply chain covers all tasks and functions of moving the product from raw material, to manufacturing, to the customer. This includes the sourcing and procurement of the product.
What’s In Your Radio?
One of the first things you learn is that there is a lot more to the job than just ordering parts. To build the radio, your company contracts with six different companies to produce the parts you need. The plastic molded case is manufactured by you, but the raw plastic material comes from another company. The antenna, speaker, resistors, coils and transformers, circuit boards, capacitors, transistors, and integrated circuits come from different companies.
After Tom leaves, everything goes smoothly – you need parts, you place your orders, and they arrive promptly within a day or two. A little over a month passes and you find a major flaw. The company that supplies your printed circuit boards has unexpectedly closed its doors and you are critically low in your bins. Besides the radio, these boards are used on a couple of other products you manufacture so they are critical. Production is being affected and your boss is pressing you to find a solution — yesterday.
You have to quickly identify a new source for the boards. With a little research you find five. You begin communicating with each to make sure they can produce the number you need within your delivery requirements. Once you figure out which producer’s cost and delivery agreements fit your company, you hammer out a contract and the boards start flowing.
With the importance of having enough circuit boards on hand, and not repeat the situation where a lack of manufacturers jams you up again, you research the other companies that originally did qualify as suppliers. You work out agreements with them to supply some boards too. This way your company’s most critical item is not dependent on one supplier.
Sourcing and procurement – what’s the difference?
This process of identifying, evaluating, and communicating with suppliers and creating contractual agreements for the delivery of goods and services is referred to as sourcing. Executing that contract with purchase orders, receiving, evaluating quality and purchasing the goods and services is referred to as procurement.
It might be easy to dismiss procurement as simply, “my company needs this item so I order it.” It would be too simple to state that sourcing is just ‘Googling’ companies that make circuit boards. It would be incorrect to reduce either as one process. There are many steps to be a successful supply chain manager, among which include planning, ordering, evaluating, adapting, and having backup plans for when something goes wrong – because it will.
Life cycle of procurement
As you saw in the initial example of the radio company, there is a life cycle to the procurement process. Depending on the source you use for the “procurement life cycle”, there are any number of steps identified. There may be a step or two broken out, or combined, that affects the number. Using “The 10 Steps of the Procurement Cycle by Lea Nathan”, we will put the radio article into this cycle.
- Step 1: Need Recognition – In this instance, the radio manufacturer needed the circuit board (CB) company to provide the stock necessary to maintain production requirements.
- Step 2: Specific Need – Once the CB manufacturer unexpectedly shuttered their doors, the specific need was identifying companies that could immediately fulfill the circuit boards to avoid an interruption in production.
- Step 3: Source Options – The manager found five companies that could build circuit boards. He begins to communicate with each of them to confirm that they can meet the needed specifications.
- Step 4: Price and Terms – Of those five CB companies, only three can meet the board specs with the turnaround time you need. You choose one company based on the price, turnaround, and quality track record. You place an initial order for the boards you need now and start to plan a contract for future orders.
- Step 5: Purchase Order – With a contract in place, your can create your purchase orders based on your need. The PO include the price, specs, and terms and conditions of the circuit board order.
- Step 6: Delivery – The purchase order is delivered via email as agreed upon in the contract. The manufacturer acknowledges receipt of the PO.
- Step 7: Expediting – Based on the purchase order, the manufacturer quickly begins to produce the boards in order to get them delivered to you.
- Step 8: Receipt and Inspection of Purchases – When the boards get to your warehouse, you need to inspect the products in order to accept or reject them. Once accepted, you are then obligated to pay for the circuit boards.
- Step 9: Invoice Approval and Payment – Before you pay the bill, three documents should match: the invoice itself, the receiving document, and the original purchase order. If there are issues, you need to address them before payment.
- Step 10: Record Maintenance – You now need to keep a record of all the documentation in case of an audit later.
As you continually evaluate steps 5 through 10, if you find the manufacturer fails to meet your needs then you should start looking at Step 1 again.
4 Key Challenges of Supply Chain Management
- Handling Suppliers – As a procurement manager, you need to know who is supplying your components and if they are meeting your quality and timing requirements. For very important components, you should consider more than one supplier to deliver it. Maintain oversight on suppliers, ensuring they are meeting timelines and achieving quality standards.
- Inventory Management – It is important to keep enough inventory to allow your company to build the radios it needs and still adjust for any unexpected shortages, like a manufacturer closing its door. You don’t want to halt your company’s production while you find another supplier. However, on the other hand, you do not want to stock so much that it affects your profits. It’s a balancing act to properly time your purchase orders to keep the radios moving while not over filling your bins with components you won’t use.
- Safety and Quality – With pressures to deliver products on time to keep the assembly line moving, don’t skimp on inspecting those components coming in. It could produce a safety hazard to accept a part delivered to you that does not meet your quality or safety standards. The cheapest battery you can purchase for your radios may reduce your initial production costs. If the radio quality is poor and has to be recalled, returned, or even becomes a safety hazard with the potential for fire, how much would that cost your company?
- Reducing Risk – The radio company above was almost devastated when the circuit board company closed without warning. They were too reliant on one producer for the board, a component that was too valuable to keep the radios going out to market. You must remain flexible and identify more than one producer of an item that is essential to success.
The Procurement Officer in Aerospace/Defense
In the aerospace industry, procurement officers and buyer agents interact with electronics manufacturers and electronics repair depots daily to purchase new or rebuilt components or to have their electronics repaired. They face global market challenges of identifying repair stations that may be headquartered across the ocean but still support their avionics and communications within the time frame they need and at a reasonable cost.
Many electronic repair companies in the aerospace and defense industry will have part number searches and request for quote forms so a Procurement Officer can identify if their part is supported. A lot of avionics and radar systems may require a one time repair, but the customer has other items needing to be serviced. Because of this, a Procurement Officer or Buyer Agent may have to base their decision to use a company for repairing a F-16 Fighting Falcon Radar System based solely on that repair station’s track previous record of cost versus quality, versus turn-around time of an F-5 head-up display.
To best serve your company’s operations and supply chains, you need timely and accurate responses to your requests for quotes. Conducting part number searches on repair depot websites, along with identifying the companies that respond quickly, will enable you to foster business relationships that help you reach your goals.
Duotech in your supply chain
For over 33 years, Duotech has solved the engineering, reverse engineering, repair and re-manufacturing problems of military and civilian agencies, as well as aerospace and commercial users of electronic and electromechanical equipment.
Duotech provides high quality services to assist our customers in keeping major programs operating on schedule and within budget costs. Available today at competitive prices, we deliver on shorter schedules than our competitors and, most importantly, higher quality to meet our customer’s requirements.