procurement : resisting price increase
TRANSCRIPT
Welcome to the program on
Resisting Price Increase and
Implementing Cost Improvement Initiatives
by
H K Varma [email protected]
98202 62986
22 426 62986
Our Mission
Knowledge + Training
=
Prosperity
Program schedule
• 10.00 – 11.15 Session I
• 11.30 – 1.00 Session II Lunch break 1.00 to 2.00
• 2.00 – 3.30 Session III
• 3.30 – 4.50 Session IV
• 4.50 – 5.00 Q / A
• 5.00 ----------- Close
Business scenario post GATT ....
• Introduction of GATT ( General Agreement on Tariffs and trade ) under the WTO in the yr 1995
• reduced trade barriers amongst global players thru’
o Export subsidies ,
o lifting of quantitative restrictions and
o reduction in tariff rates (from 20% -1950 to 3.6% -2010)
o s How it affected the businesses ! …………
The survival mantra has become
• “Survival of the fittest”
Survival of the best
Cost ,
quality and
the fastest
Inflation and how to beat it
Inflation is a sustained increase in the general price
level of goods and services over a period of time
Inflation occurs due to an imbalance between demand
and supply of money, changes in production and
distribution cost or increase in taxes on products
It could be :
• Negative , or
• Positive
Mfg Cost Var Output at TP Stores cr. 4000
241 3972 +/- in WIP 178
PBIT Misc Output -206
1191 Input Cost
3731 Dir Malt 3000
NOPAT Dir Lab 86
810 Mktg PBIT Sales/Serv 6000 Malt OH 47
929 Cost of Sales 3972 Shop OH 261
ED on Sales 794 PGOH 36
TAX OD Adj Pers Rel Exp 89 Comm Exp 163
EVA 381 -65 T&C 54 Alloc Exp 189
361 Sales Pr Exp 8
Corp alloc NDC 19
86 ODE 63
WACC Estb 31
12% Other Exp 41
Cap Chg MMI 1034
449 Cap Emp WIP 370
3738 Net F Assets FG 53
601 Curr Assets Cust OS 3073
4597 Oth contl A 67
Net WC
3137
Curr Liabilities Vendor Cr 1273
1460 Cust Adv 33
OCL 154
Areas of focus
1. Reduction in Material & labor
costs
2. Reduction the Lead time
3. Reduction in Rejections , Wastage
4. Reduce Working capital
How
an effective
Purchase dept.
can help
improve EVA
Material Cost reduction vs Increase in Profits
55
53.9
52.3
57.5
29.0
28.5
27.6
30.4
13.0
14.8
17.1
19.1
0 10 20 30 40 50 60 70 80 90 100 110 120
Material Labour O/H Profit
Y1
Y2 –2% redu in M
Y3 –5% redu in M
10% Volume Growth
14% Incr in P
32% Incr in P
47% Incr in P
Rs in Cr
Let us understand thru major cost elements of a
Product !
• Supply-chain executives have significant role in the operating expenses cost of goods sold and
• hence have a major role in margin management
Performance Measures qualitative vs quantitative
• When analyzing SC performance, qualitative evaluations such as
– Good
– Fair
– Adequate and
– Poor
• As a result, quantitative performance measures are often preferred to such qualitative evaluations.
are vague and difficult to arrive at any meaningful conclusion.
Performance monitoring of SC partners
Should include :
• Quality
• OTD
• Cost
• Service
Once the performance of the SC operations has been measured and
performance gaps identified, it becomes important to identify what activities should be performed to close those gaps
• A team from Focal Organization visits the Vendor and
allocates points against a number of queries in a
questionnaire.
• Actual working of the quality department is audited by
examining records, analysis of the system and talking to
people on the spot.
• Rating should be numeric ... , ... , ... , ....scale
• After determining which factors are critical, a method is
devised that allows the vendor to be judged or rated on
each individual factor.
Vendor Assessment
Vendor Assessment ( Criticality * Rating )
1 = Not
Important
4 = Critical
1 = Poor
4 = High
Vendor
rating
Criteri
a No. Criteria Importance
(A)
Rating(B) A*B
1 2 3 4
1 Work stn condition 3
2 Maintenance of m/cs 3
3 Productivity 4
4 Safety Initiatives 4
..
20 Quality Systems 4
Vendor ::
Min Score = 20 Max Score = 320 Evaluation CFT …….. Score < 100 Rejected
Max
Score Weighted
score
1. GENERAL ORGANIZATION: 4 2.9
2. SAFETY 4 2.3
3. INSPECTION 4 3.4
4. DRAWING & REVISION CONTROL 4 2.8
5. PROCUREMENT: INCOMING R M CONTROL 4 2.4
6. MANUFACTURING PROCESSES 4 2.1
7. TOOLINGS & MEASURING INSTRUMENTS 4 3.7
8. QUALITY : QUALITY INDICATORS 4 2.6
9. M/C & TOOLING MAINTENANCE SYSTEM 4 2.5
10. ENVIRONMENT 4 3.2
40 27.9
Supplier Assessment (Summary)
Supplier Assessment score
Overall
Score
Acceptable > 30 Green
Conditional 20 - 29 Orange
Poor
Performer
12 - 19 Yellow
Rejected < 12 Red
Vendors with
low scores are
asked to
overcome the
shortcomings
with focus on
time-bound
improvements
A good supplier helps our organization to be more efficient,
produce higher quality products or services, reduce
costs, and increase profits.
A poor performer can disrupt our operations, make our
organization fail in the eyes of our customers, increase
our costs, and threaten our profits
hence need for Vendor development .........
ISO9000/
TS16949
Costing -
Transparent
Impln.of
Lean &
six sigma
initiatives
Help you
reduce
costs VE
Loaning of
tools, gauges ,
testing equip
etc Vendor
Training
Negotiation
with
supplier’s
supplier
Partnership
/ JV
Resisting
Price
Increase
Structured
negotiation On-time
Delivery
Value Engineering (value analysis)
• VE is a systematic and organized approach to provide the necessary functions of a product / service / process at the lowest cost.
• Value engineering promotes the substitution of materials and methods with less expensive alternatives, without sacrificing functionality.
• These substitutes were often found to reduce costs and provided equal or better performance.
• Value, as defined, is the ratio of function to cost , V = F
C
• Alternately : Value = (Performance + Capability)/Cost = Function/Cost
• Value can therefore be increased by either improving the function or reducing the cost.
VE (structured thought process to evaluate options as follows)
Gather information ⁻ What is being done now?
⁻ Who is doing it?
⁻ What could it do?
⁻ What must it not do?
Measure ⁻ How will the alternatives be
measured?
Analyze ⁻ What must be done?
⁻ What else can perform the desired function?
⁻ What does it cost?
Generate ⁻ What else will do the job?
Evaluate ⁻ Which Ideas are the best?
Develop and expand ideas ⁻ What are the impacts?
⁻ What is the cost?
⁻ What is the performance?
Present ideas ‒ Sell alternatives
Vendor development
• Procuring organization forms a team of engineers and
assign it to their suppliers for carrying out the specific
development projects.
• By having the direct support of their client and regular
monitoring of their development
– will be more motivated to carry out the program fully &
– will readily realize that the program is indispensable.
• Points to remember
– Negotiate the Supplier's Entire Volume not only for your
requirement but also for his other customers need.
– The larger the volume , the greater your savings.
– Always Manage The Negotiations.
• You may have the knowledge and technology to
manage the negotiations better than the supplier.
– This also gives you the control on timeline, information on
inputs, etc.
Negotiating on behalf of your subcontractor
to avail lower costs
ISO 9000 / TS 16949 certification ----
• ISO 9000 certification stresses the importance of
compliance on technical specifications and the quality
requirements .
• In fact , some procuring enterprises agree to work with
suppliers only if they are ISO 9000 certified.
• To help subcontractors acquire such certification, main
contractor should assist them with regard to system &
procedures to be adopted for
• documentation control
• product purchasing
………………..
Total quality (zero defects) management
• Detect defective components and diagnose the
causes of such defects
• Reduce waste and reworking
• Build up expertise
• Review the importance of quality in the budget
• Develop a culture centered on the workers’
accountability for quality and
• show them what they can gain in terms of personal
satisfaction and security.
Allowing use of main contractors’ production
facilities by subcontractors …
Subcontractor is an extended partner in your supply chain
He should be allowed to have access to main contractors
facilities such as :
– instruments
– moulds
– prototypes
– patterns
– quality control equipment etc which directly
enhance the quality of products.
Organization of work within the
enterprise
• Internal functioning of an enterprise is important from a
quality viewpoint.
• Thus to gain a better appreciation of overall coordination
the organization would need:
– No barriers between different departments / Sections
(Homogeneity between departments)
– Encourage teamwork
– Organize discussions on working practices and
investigate solutions to problems
Objectives of Vendor rating
– To motivate suppliers to improve performance.
– To apportion orders to deserving vendors for overall
cost reduction.
– To select vendors for further development.
– To reduce the cost of inspection of incoming lots by
modifying sampling plan
Vendor
Total receipt
s
VQR VQR
*50%
Del Timely receipt
s
Del Timely Rating - Ratio
* 20
Del Qty
Receipts
Delivery
Rating % * 20
Service
out of 10%
A 100 90 45 18.4 84 16.8 8
B 60 80 40 48 16 52 17.3 7
C 50 70 35 41 16.4 17.6 6
Vendor Composite Rating with weight ages for Quality , Delivery & Service (Subjective)
With
Improveme
nts
NOS. PECENTAGE
GREEN 72 54
Orange 34 26
Yellow 23 17
Red 4 3
133 100
After Improvement program
Quantum jump in Vendor profile
Earlier NOS.
PECENTA
GE
GREEN 68 48 acceptable
Orange 32 23 conditional
Yellow 26 18 poor perf
Red 15 11 rejected
141 100
Supplier reward program
• There are two sides of performance improvement
motivation:
– Rewarding the suppliers who perform well so
they will aspire to continue performing well ,
and
– Correcting Poor Performance : taking
corrective action with those suppliers whose
performance does not meet our expectations.
• It would never be safe to assume that switching
supplier eliminates problems
• With focus on shrunken vendor base ,
• Consolidation with limited few vendors is encouraged
called tier 1 suppliers who in turn take responsibility
for quality of tier 2/3 suppliers
• Suppliers are assured of long term commitments and
cooperative relationship
• Buyers work along with suppliers to develop cost
reduction for both firms
• Suppliers are even allowed to keep certain portion of
the profits thru these joint efforts
Vendor consolidation
Supplier Relationship model (SRM)
Unilateral “Make the best part”
Interactive “Together develop better spec”
Collaborative “Supplier teams make the best system or process.”
Higher Supplier Involvement
Higher Value Addition
1. To improve supplier performance. On cost reduction , OTD , Zero defect , Reduced W/C , prompt service .
2. To reduce risk. . Ensure continuity of supply in the face of unexpected disruption to the operations of one or more suppliers from natural disasters, political upheavals, and other events
3. To provide flexibility and agility to the organization thru’ a healthy vendor base
4. To save money
Strategic Sourcing Goals of Material department
0
100000
200000
300000
400000
500000
600000
700000
20000 40000 60000 80000 100000 120000
Cost of Buying(5) Cost of Mkg I/H
Cost of buying
Cost of Making I/H
Time for demanding Volume discount.
Conference Compromise
Conference
Conference
Negotiation
Negotiation is therefore a process involving a
conference whereby skillful maneuvering &
compromise are used to achieve an agreement
The time
invested on
negotiation
should yield
tangible results
Ensure early Purchasing Involvement
• Suppliers try to woo the Internal customers to get
insight to the decision making process & other
important information .
• Purchasing professionals are typically trained to uphold
high ethical standards and will ensure that these tactics
are not successfully used by suppliers.
• Purchasing professionals are experts in evaluating the
overall supplier capabilities wrt to financial(Z-score )
,Quality, Technical & Mfg excellence .
• A passion for risk management which other wise may
get ignored ( Succession plan , Tax and duty structure
,overall low cost etc )
Effective Negotiation skills preparation & planning
• Prepare in details for conducting a successful
negotiation
• Bring in more transparency to the process for a long
term relationship
• Remember you’re the expert
• A good negotiation should cover all terms : price,
warranty, delivery, payment terms, etc.
• What often happens is that one supplier offers the
best price, 2nd offers the best warranty, a third offers
the best delivery, etc.
Should A Manager Join A Negotiation In Late
Stages?
While some managers feel their jumping in at a later stage will
squeeze another 5% out of the supplier, the fact is that their
actions result in companies getting worse deals, not better.
• Actually, the supplier may welcome another counterpart -
that way he can play "divide and conquer" and get the
manager to agree to concessions that the buyer would not.
•
• If past history compels a supplier to predict that a manager
will join a negotiation in its late stages,
• will the supplier ever give its best deal to the buyer ? No -
the supplier will withhold it so that it has something to
offer the manager later.
Product Costing
• Product Cost • Direct Cost
» Direct Mfg Cost
1. Direct Labour
2. Direct Material
• Indirect Cost
» Non-Mfg Costs
1. Variable overheads
2. Fixed overheads
3. Selling Costs
4. Administrative costs
Component Cost
Nett Wt (grams) …… (Volume * Density) 105
Charge Wt (Grams) 120
Rate/Kg (Rs) after MODVAT 87
RM Cost/Pc (Rs) 10.44
ICC at 3% 0.31
Cycle Time (Sec) 380
Available time (7hrs) = 7*60*60 sec 25200
Output / Shift ( 1 Cav Mold ) 66
Molding cost per piece (Shift rate / Output - 558/66) 8.42
Post molding opr.(Rs 220/shift , Output 380 nos) 0.66
Inspn Cost ( Rs 5000 pm - 500pc/shift) 0.40
Pkg/Forwarding 0.43
Sub-total 20.66
O/H ( 12%) 2.48
Profit (10% on L) 0.99
Total rate / Unit 24.13
Zero based costing
Apportions all costs ( Direct , Indirect and overheads )
on total production
Needs to take on overall view on expenses to keep
O/H at minimum
Improve the productivity , M/c utilization
Increase production levels in order to spread the
total expenses on larger volumes
Ensure alt. product is ready for offloading as per Product
life cycle
Cost of Quality
Cost of Quality
Cost of good quality
Cost of poor quality
=
+
Cost of Quality Failure of Vendor to meet quality
• Complaints
• Warranties
• Repairing goods
•Loss due to sales reductions
• Checking & Testing Purchased costs
• In-process and Final Inspection Testing
• Field Testing
• Product , Process and Service Audits
• Calibration
•Scrap
•Rework
•Re-testing
•Delays
•Shortages
•Supplier Evaluation
• Error Proofing
• Quality Improvement projects
• ISO
• Quality Education and Training
• Quality planning
• New Product Review
Preservation Costs
Internal Failure costs
External Failure Costs
Appraisal costs
Co
st of se
rvicing d
efects
Pre
ven
tio
n a
nd
Ap
pra
isal
Co
st Your focus
Leads to
Striking a balance Economic
conformance point
Cost of Quality Management vs Cost of servicing defects
Low Quality High
Low
C
ost
H
igh
Minimum cost of Quality
Total cost of Quality
Cost of Service defects
Where you want
to be
Cost of Quality
Management
The Lean-Six Sigma philosophy Cost of Quality Management vs Cost of servicing defects
Low
C
ost
H
igh
Prevention
and Appraisal
cost
𝟒𝝈
𝟓𝝈
𝟔𝝈 Economic
conformance point
Hold Suppliers More Accountable For the Quality of their Products
Drive performance improvement thru’ CFTs to manage quality across entire spectrum of suppliers
⁻ Non-Conformances / Corrective and Preventive Action (NC/CAPA)
⁻ Complaint Handling
⁻ Statistical Process Control (SPC) – to get Real-time visibility of supplier quality metrics through web-based portal
• Real-time visibility of manufacturing data helps OEMs eliminate the black box effect of outsourcing critical components.
• It also eliminates surprises on the receiving nonconforming materials.
Process Yield & First time Yield
• Traditionally , Yield is the proportion of
• Lots accepted out of total lots received
• Yield = 79/80 = 98.75%
In 80
Out 79
Yield = 98.75%
Vendor
Receipts
Lots Returned
1
Deliveries From Vendor ”A”
80 - Lots Received
79 – Lots Ultimately accepted
Inspection
Yield = (80-72)/80 = 90% - FTY
The hidden factory of in-process inspection and rework accounts for 98.75% - 90.0% = 8.75%
The
Hidden factory is due
to
The inability to correctly
comply with required
specifications the first time
FTY & The Hidden Factory
Hidden Factory
= 8.75%
The extra efforts put to get these 7 lots
accepted is HIDDEN FACTORY Ultimate Yield = 98.8%
Lots Rej. & returned -1
Rejn. - 8
An effective Purchase departments
helps to build Vendor Flexibility
&
provide Agility to our organization
Flexibility
• Supply chain flexibility is defined as “the ability to quickly respond to changes in demand while achieving your objectives of
– customer service,
– shorter lead time ,
– cost,
– inventory and
– return on assets (ROA)
F-Flexibility measures
• Volume flexibility (Fv ) : measures the proportion of demand that can be met profitably by the supply chain system
• Delivery flexibility (Fd ) :
– The ability to move planned delivery dates forward .
– This ability allows the supply chain to accommodate rush orders and special orders, and will be described as delivery flexibility.
– Delivery flexibility is expressed as the percentage of slack time by which the delivery time can be reduced
• Mix flexibility (Fm ) : the response time between product mix changes.
• New product flexibility (Fn): is defined as the ease with which new products are introduced , the time or cost required to add new products to existing production operations
Period (t)
Deman
d
volume (units)
Period (t)
Deman
d
volume (units)
Period (t)
Deman
d
volume (units)
Period (t)
Deman
d
volume (units)
1
16
9
12
17
38
25
24
2 21 10 43 18 19 26 17
3 32 11 8 19 29 27 36
4 5 12 29 20 12 28 11
5 18 13 33 21 34 29 28
6 26 14 39 22 50 30 23
7 40 15 7 23 16 31 32
8 31 16 15 24 30 32 17
Volume flexibility (𝐹𝑣) Contd.
𝐷 = 𝒅𝒕𝑇𝑡=1
𝑻 = 24.69
𝑆𝐷 = (𝒅𝒕 − 𝒅 )𝟐𝑇𝑡=1
𝑻 − 𝟏 = 11.35
Summarize Fv
Group 1 2 3 4 5
Std Dev 11.33 11.33 11.10 10.50 7.73
Avg 24.5 24.5 21.16 28.22 28.53
Min 5 9 9 9 9
Max 49 42 42 42 42
Fv 0.70 0.29 1.27 0.84 1.27 Fv comes down as range is narrowed down
Fv rises with Avg out put coming down. NO Flexibility with lower output
Lower variation clubbed with Higher output improves Fv
Further reduction
in variation improves
Fv
Supplier is geared up to give Higher
volumes consistently ( Lower std dev) leading to higher volumes +
Flexibility
Delivery flexibility (Fd)
• Delivery dates change regularly and costs are associated with not meeting the delivery dates
• The ability to move planned delivery dates forward may be important in supply chain management.
• This ability allows the supply chain to accommodate rush orders and special orders, and is described as delivery flexibility.
• Delivery flexibility is expressed as the percentage of slack time by which the delivery time can be reduced/advanced
Delivery flexibility (Fd ) Summary
Existing Time –T period – Week No
Lj Ej - Gr 1 Ej - Gr 2 Ej – Gr 3 Ej – Gr 4
23 36 33 31 30 29 23 45 41 39 38 37 23 37 32 31 30 29 23 41 38 35 34 33 23 47 42 41 40 38
Fd 22.0 31.9 37.4 44.0
Further increase means adding resources 2X , 3X , 4X ... , Reduction in C/O time .
However there is limit to increase beyond certain levels due to inherent processing time
Agility
Improveme
nt
NOPAT
Current assets
Curr Liability
Current ratio
Fixed Asset
(Depreciation)
Total Cap employed
ROCE Capital Charge @ 12%
EVA
810 4597 1460 3.1 601 3738 21.7 449 361
1 810 4137 1460 2.8 601 3278 24.7 393 417
2 810 3724 1460 2.6 601 2865 28.3 344 466
3 810 3351 1460 2.3 601 2492 32.5 299 511
4 810 3016 1460 2.1 601 2157 37.6 259 551
5 810 2714 1460 1.9 601 1855 43.7 223 587
YoY 10% redu in Inventory
1. Working capital (Inventory) control
Six Sigma • Every mistake an organization or person makes ultimately has
a cost,
– the need to do a certain task over again,
– the part that has to be replaced,
– time or material wasted
• You consume additional resources to correct a problem before it's delivered to the customer
• Six Sigma is a scientific problem solving tool for
– meeting your customer's needs (Time , speed , Quality )
– minimizing wasted resources (Errors , rework , Hidden factory , variations +/-)
– maximizing profit in the process ,thru’ disciplined data
collection and analysis to determine best solutions
Six Sigma focus
• The goal of Six Sigma is to inject
– disciplined control,
– predictability, and
– consistency of results
so that the product comes off the production line absolutely
consistently.
• The methodology of Six Sigma was first applied in a
manufacturing company, but is extensively used in service
and transactional companies (like banks and hospitals),
• Six Sigma initiatives and projects have a direct measurable
financial focus eg OFR , Quality , Lead time , OTD ,IT , ROI etc
Higher Process Sigma – lower Rejection
• A low process sigma means that a significant part of the tail of the distribution is extending past the specification limit. More defects.
• So the higher the process sigma score Z , the fewer the defects
1. 2σ = 30.8% Rej 2. 3σ = 6.68% Rej 3. 3.4σ = 3% Rej 4. 4σ = 0.62% Rej 5. 5σ = 0.0223% Rej 6. 6σ = 0.0003% Rej
} Most of Indian Industries are here
This is the journey we have to undertake
2 approaches to Improvement DMAIC DFSS
• Six Sigma offers two approaches for improvement
1. Improve the process so that chances of defects are reduced ,ie reduce the standard deviation (increase Z score) thru’ DMAIC
2. Change the design (DFSS) so that product can accommodate process variations
• A Six Sigma process should not generate any flaws , but since , over the long run (Lt Std Dev) , every process shifts by +/- 1.5σ , 3.4 parts of every million may go beyond 6σ level generating few defects
Process capability of a process or characteristic to meet its specifications (VOC/VOP)
1. Capability : Ability to match the voice of your process-VOP to the voice of your customer-VOC
2. The simplest capability index is called Cp.
3. It compares the width of a two-sided specification to the effective short term width of the process.
USL - LSL represents
the VOC-voice of the
customer's
requirements and
6σst represents the
inherent voice of the
process -VOP
Cp = ( USL-LSL )
6σst Effective process width under Six Sigma = 99.7%
In this example ,
Process capability = 1
LSL USL
Cp
• Cp is known as measure of process capability .
• It is the number of times the spread of the process fits into the tolerance width.
• The higher the value of Cp, the better the process.
Control
• A solution that isn’t sustained over the long term has little value
• Control charts are two-dimensional graph plotting the
– performance of a process on Y axis, and
– time or the sequence of data samples on X axis.
• They are basically a type of Run chart with control limits
Why Control chart
– It shows nature of variation in the process over time
– Helps in detecting changes in the process
– Helps in controlling the process
• Specs : USL/LSL vs UCL/LCL
– CONTROL is also capability , 𝐂𝐩 - Process Capability
Why Controls
1. Process behavior is complex and fragile and that hard-earned gains slip away if the process is left to itself.
2. The Control phase helps you make sure the problem stays fixed, and, if done properly, provides you with additional data to make further improvements to the process.
3. A well designed process exhibits inherent self control, but..
4. A poorly designed process requires frequent external control and adjustment to meet requirements.
5. A process with well built-in control acts like the heating and cooling system in a house: The system automatically maintains a comfortable temperature at all times.
Variable Control Charts
• Variable Control charts are used to monitor measurable quality characteristics of a process eg Temperature , dimension , weight , viscosity etc
• Variable charts can monitor only one quality characteristic at a time .
• For more than one characteristic, a chart for each characteristic needs to be created
• Variable Control charts help to monitor both process mean and process variability
• Hence it becomes necessary to use minimum 2 control charts to study the process. Ie
– Range or Std Deviation
– Process mean , with UCL & LCL
Variable Control Chart - contd
– R Chart / X Chart or
– X / S chart or
– MR / X chart
• An X chart is the most widely used control chart which monitors the sample variability
• The R chart is used when sample size is less than 10
• S chart is used when sample size is greater than 10.
• For quality characteristic with sample size one , moving range needs to be established and hence a MR chart is used.
• As a thumb rule 20 to 25 samples should be selected for analysis with sample size of 4 to 5 .
Working Capital Cycle
Cash
FG
Purchase of Raw Matl
Receivables/ Collection
1 Months
2 Months
Production
0.5 Month
1 W/C Cycle ??
No of Cycles/ Yr = 2.4
Target ……
0.5 Month
Balance Sheet model of a Firm
Current Assets -Receivables -Inventories
Current Liabilities or
Short Term Debt-Payables
Fixed Assets
1.Tangible Fixed Assets
(M/c ,Equipments ,Land)
2.Intangible Assets
( Patents, Trade mark,
Quality of Management)
Long Term Debt
Shareholder’s equity
Assets Liabilities
Service % MMI in Rs L Sigma level
99.9996 100 6.00
99.998 95 5.80
99.994 90 5.30
99.990 85 5.27
99.966 80 5.00
99.874 75 4.45
99.78 70 4.30
99.7 65 4.15
99.5 60 4.10
99.1 55 3.90
98.6 50 3.66
98 45 3.45
97 40 3.40
96 35 3.20
6 sigma
3 Sigma
4 Sigma
5 Sigma
Sigma level Production hold-ups due to non-
availability of Material
2 Most of the time
3 25-40%
4 15-25%
5 1-15%
6 < 1%
Service level V/S Matl Non-availability
Sum-up • Last but not least :
• You’ve got to make sure your suppliers understand how you
define Quality and OTD.
– Avoiding this step appears negatively in your cost , and
second
– Your relationship with suppliers is important. You have to
treat them more like partners than suppliers.
The success mantra for getting quality products and
maximizing cost reductions is by working
harmoniously with suppliers as if they’re a trusted
partner
Establish (KPIs) of all related processes and actions to Accelerate Operational Excellence
• It's crucial to identify a specific set of KPIs that will
help you measure progress and identify areas for
adjustment.
• Equally important to having these measures, however,
is a related system of communication procedures,
processes around the KPIs to ensure that they are
being accurately measured, interpreted,
communicated, and acted upon.
Purchasing Ethics
• I believe that the position of Purchase Engineer is
important , honorable , worthy , responsible , and calls
forth the highest ethical principles in relationship and
dealing with men.
• I believe in the ‘square deal’ towards the company I
represent and towards the men with whom I do business
.
• I believe it is my duty to refuse and renounce gifts or
perquisites from those with whom I transact business.
