COST REDUCTION IN
PROCUREMENT FOR INCREASED
PROFITABILITY
Presented by : Mariamma Mathai
Roll number : 1304000215
Bu Company Profile
• Founded in 1979
• Air-Conditioning components, spare
parts,
tools, instrumentation, mechanical
and
electrical supplies
• USA, Europe, Japan, Far East, Gulf
Cooperation Countries (GCC) and
Bu Objective of the project
• Research the effectiveness of the
existing procurement process.
•Find ways to lower cost of goods
procured without compromising on
quality and value of goods.
•Give recommendation to streamline
procurement process to deliver savings
to procurement cost
Bu Executive Summary
1. Reducing Costs and
Improving Value for Money
2. Building a new work flows that
can reduce the administrative
cost and speed up the
process.
3. Ensuring Legal, Ethical and
Professional Standards.
4. Supporting innovation and
Ensuring Access to best
business practice
Definition
1. Purchase planning
(2) Standards determination
(3) Specifications development
(4) Supplier research and selection
(5) Value analysis
(6) Financing
(7) Price negotiation
(8) Making the purchase
(9) Supply contract administration
(10) Inventory control and stores,
and
Bu Procurement steps
• Identification of need.
•Supplier Identification
•Supplier Communication
•Negotiation.
•Supplier Liaison
•Logistics Management
Bu Where to implement cost
reduction
• Material procurement (COG, Inventory, Product
rationalization)
• Logistics - inbound and outbound
• Production ( process ,time and work study,
maintenance ,automation)
• Human resource ( out sourcing )
• Sales & marketing to focus on high potential
segments (customer segmentation)
• Finance
•Supply chain
Bu Research design
•Purchasing as a Profit Center
•Internal Controls in Procurement
cycle
•Strategic Purchasing In Supplier
Relationship
•The New Purchasing & Supply
Management Workplace
•Negotiation in Purchasing
•Develop Action Plan For Immediate
Implementation
•Measurement of Result In Cost
Reduction
Procurement Risks
•Unrealistic schedule and cost expectations for
vendors
•Manufacturing capacity capabilities of vendors
•Conflicts with current contracts and vendor
relationships
•Configuration management for upgrades and
improvements of purchased technology
•Potential delays in shipping and impacts on cost
and schedule
•Questionable past performance of vendors
•Potential that final product does not meet required
specifications
•These risks are not all-inclusive and the standard
risk management process of identifying,
documenting, analyzing, mitigating and managing
risks will be used.
Procurement Constraints
•
•
•
•
•
•
Schedule:
Cost
Scope
Resources
Technology:
Government
regulations
rules
and
Procurement Process
Current procurement practices
10%
3%
Very good
Good
33%
Marks/ Grades
Mail
Fax
Phone
Electronic Mail
Online Orders
Plan / Scheduled orders
Order tracking
Access market place
Search low cost suppliers
Access online catalogs
Web orders via suppliers
web site
Total
Average
54%
Poor
Very good
Good
Average
Poor
6
3
6
5
5
5
5
3
7
5
3
1
6
1
1
4
4
2
4
2
3
5
1
0
1
2
0
0
2
2
0
1
1
1
0
1
1
0
0
0
0
0
0
0
53
33
10
3
Current procurement drivers
10%
3%
33%
Very good
54%
Good
Average
Poor
Marks/ Grades
Price reduction
Improve efficiency
Negotiated cost
Improve the visibility of the
requirement
Reduce administrative cost
Improve market intelligence
Reduce operational and
inventory cost
Enhance decision making
Handle customer complaints
Improve the visibility of supply
Enhance Inventory management
Shortened procurement cycle
time
Enhancing the service delivery
Management of information
report
Very good
Good
Average
Poor
3
3
4
6
5
4
0
1
1
0
0
0
4
6
4
3
2
3
2
1
2
0
0
0
5
4
4
3
5
3
4
4
6
3
1
1
1
0
1
0
0
0
0
0
3
5
6
4
0
0
0
0
6
2
1
0
Current procurement barriers
10%
3%
33%
Very good
54%
Good
Average
Poor
Marks/ Grades
Technology infrastructure
Financial resources
Procurement personals efficiency
Awareness & Training of procurement
programs
Company culture
Upper management support
Business process to support
procurement
Maturity of suppliers
Suppliers interest
Total
Very
good
Goo
Avera
d
ge
Poor
5
3
1
0
2
4
2
1
9
0
0
0
3
6
5
3
2
2
3
1
1
0
0
1
6
4
2
42
2
5
5
26
0
0
2
10
1
0
0
3
current procurement cycle is
result oriented
9%
6%
Very good
Good
26%
Marks/ Grades
Supply chain integration
Suppliers sources
Employee over head
Level of out sourcing
Efficiency of procurement
process
Staff development &
training
Average
58%
Very good
Poor
Good
Average
Poor
6
6
4
5
3
2
1
3
0
0
2
0
0
0
2
1
8
1
0
0
2
4
3
0
31
14
5
3
SWOT Analysis
mix
S
T
R
Strong efficient personals
Customer satisfaction
Efficient procurement process
E
N
G
T
H
OPP
ORT
UNI
TES
& cycle
Access to market information
and supplier price
Excellent company culture
Vendor commitment
Improving Productivity
Moving-up the value chain
Enhancing Competitiveness
Getting closer to the
customers
Good inventory and product
More training leads to
efficiency of the process &
team members
Handling customer complaints
Enhance asset utilization
Integrate Logistics &
Distribution
W
E
A
K
N
E
S
S
T
H
R
E
A
T
S
Technically not updated as per
suppliers level
Financial turnover
Negotiation cost is more
Administrative cost
Employee overhead cost
System not efficient enough
No Safety stock alerts
Product
price
needs
to
evaluated continuously
Technology infrastructure
Financial resources
Awareness and training programs
Demand & Supply needs not
system generated.
Maturity of supplier
be
Recommendations
1, Inventory
To reduce operational and inventory cost the need to eliminate
obsolete inventory and store the right mix, will enhance cash flow
and increase profit
Improve demand planning and identification of safety stock
levels
Action plan – Improved purchase forecasting reports to be
implemented.
2, Systems
To improve the visibility of supply, improved systems and process
will help in demand forecasting and plan distribution.
The company needs to upgrade the system to generate order
tracking information, provide management information
reports like data on product segment profit ratio, debt to
asset ratio, inventory and working capital turn over. Asset
utilization and supply chain efficiency will reduce cost,
increase profits and reduce wastage.
Recommendations (Cont)
3, Supplier
To improve the commitment by external parties to think in terms of
long standing cooperation will facilitates reduction in cost of goods
and services.
By creating an environment of stability and progress will
open doors for vendors to invest more in terms of credit,
quality and value for money goods.
Action plan – Emphasis on time payment .
4, Manpower
To enhance decision making, efforts need to be taken in hiring
efficient, professional and technical qualified staff which will enhance
decision making.
Training
in
advanced
procurement
systems,
time
management and continuous development of skills is needed
to optimize efficiency. Efficient manpower, fast purchase
confirmation, improved payment terms and additional
benefits like rebates, discounts, improved warranty period
through negotiation will reduce administrative cost.
Recommendations (Cont)
5, Market intelligence
To identify new niche markets and new alternative technology
through market intelligence will bring information on phasing out of
products which will help to ordering obsolete product and identify
new products.
Weekly meeting with sales and marketing team can provide market
information of new product mix, competitors strategies & supply
source and market price.
To handle customer complains steps to be taken to record customer
complain and actions taken to help in future remedial action.
Action plan – To hold meeting fortnightly with sales and
marketing team and develop customer complain tracking
report .
Conclusion
The study of the procurement system and process in KAZEMA has
shown immense opportunities for progress and development exist.
With high inflation and tough competition for HVAC Spares in Kuwait,
reducing the cost of goods and increasing company profits is a huge
challenge.
With continual improvements in supply chain efficiency like profit
margin, asset turnover, debt to asset ratio by reducing working
capital, cost of goods sold and improved asset utilization will give
valuable results. The need to maintain inventory at the right mix
without compromising on customer service is very important. With
good upper management support, investing in latest procurement
systems will helps in on time purchase which will expedite inventory
and working capital rotation and reduce bad debts.
Result
The overall intend of this project is to bring in improvement in
procurement policies, process and systems which will lead to clear
understanding of best practices, modern sourcing tools and
techniques, effective tracking process, track variance is any,
measure saving which will give considerable motivation to
procurement team to continual develop skills and tools to ultimate
give savings in cost and increase profits