DANNY L Armijo II, project manager for the New Mexico Manufacturing Extension Partnership, gives this definition of procurement:
The acquisition of appropriate goods and/or services at the best possible total cost of ownership to meet the needs of the purchaser in terms of quality and quantity, time, and location. Corporations and public bodies often define processes intended to promote fair and open competition for their business while minimizing exposure to fraud and collusion.
Why is it important?
“Many corporations are now really watching out for the suppliers,” he said at this year's NATM convention. “There are a lot of companies doing fraudulent acts in the supply chain, telling you things that aren't true just to get in the door. They'll sell you the bill of goods and then they don't show up, but collect money in the end. So it's kind of scary.”
Armijo, who was in manufacturing for 30 years, ran large companies in China and Europe, and was involved in importing/exporting, said procurement commonly involves purchase planning, standards determination, specifications development, supplier research and selection, value analysis, financing, price negotiation, making the purchase, supply contract administration, inventory control and stores, and disposals and other related functions.
He said single/sole sourcing can be beneficial for large corporations, but there are two big downsides: sometimes you are not able to negotiate the best price; and you are dependent on them.
“If that sole supplier goes out of business, you're in trouble,” he said. “I worked with two large organizations, one a bus manufacturer. We were dependent on our customer base. If you rely heavily on a single supplier or customer like we did … New York City was one of our largest customers. Whatever they said, we did. We failed to pay attention to the smaller orders. New York decided to leave, and guess what? We were out of business.”
He recommends up to three sources. The first would be the main supplier of your commodity; the second is a backup if the primary source can't fulfill its job; and the third is the one that really wants your business and can prevent you from having to interrupt your supply chain.
“It keeps the other two honest and can possibly come in and replace one of the other two,” he said. “In some of the companies I worked in, the third source actually became my primary source. We had the same supplier for years, but we found out after looking at pricing that they weren't competitive. They were good ol' boys and friends with buyers, but it's always good to look at a second and third.”
He gave a checklist for finding a supplier:
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Check with other customers and ask if the supplier delivers on time or has quality problems.
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Are illustrated work instructions hanging in front of every station on the line? “Each sheet should have a checklist of things the operator was supposed to do.”
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Check for cleanliness. “If the place is messy and dirty, that's an indicator of the kind of service and product you're going to get. Look at the scrap line to see how much defective material they have.”
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Ask how many shifts are running, and how many hours a day certain machines are being used.
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How much equipment is in use? “If a lot is sitting idle, it's probably a good indication they're not busy.”
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See what kind of management structure the supplier has. “Is it top heavy? How many tiers does it have? Because when you have an issue, you want an answer quick. Get a profile of the business, including annual sales, main production lines, main customers. That's doing due diligence on the company. The quality department is very important these days. Does it have calibration units? How many quality employees does it have? Some companies don't even have a quality department. They rely on employees.”
Get the best price
He said in negotiating with suppliers, he'd tell them immediately, “I'm going to cut you but never let you bleed to death. I want you to make some money from me but I don't want you running to the bank, saying how you got to us.”
It's important to really try to get the best price you can get from them,” he said.
That could include:
- Volume discounts
“They could be up to 4%, depending on what my volume purchases are. ‘If I buy $1 million from you, then I want a 1% rebate. If I spend $2 million, then I'd like 2%.’ Or even more. I've heard of companies actually negotiating larger discounts. You want that in a check, not a credit.”
- Year-end rebates
“I want them to give me some money basically for spending money with them.”
- Yearly cost reduction requirement
“I want them to find out if they can actually sell that product cheaper. Some kind of program where I'm going to try to get that product cheaper than what it was.”
He said having a preferred vendor is very important.
“In our negotiations with suppliers, I want this to be a long-term relationship,” he said. “I'm not going to use you for a year and get a special price. If you're on the supplier side, it's good to have those long-term agreements. With a lot of suppliers, I became best friends with them. Preferred vendors are also good if you're in a crunch. They'll produce the product you need and maybe bump somebody else because you're a good customer.
“The procurement department manages relationships with preferred vendors. There are a lot of forms that companies are putting together to make sure internal communication is done, especially with some of the larger companies where you have separate departments — sales, engineering, purchasing, quality, production. We have put these departments into work cells. It has increased communications and improved the design of the product because sales can sit and talk to the engineer.”
He said first article inspection (FAI) is one of the primary methods for the “inspection and testing of vendor components.” The testing of a pre-production sample is considered essential in the process of approving an order or contract; the first article inspection should determine if the product meets acceptance requirements and quality-control requirements. Customers who perform such inspections are recommended to identify this in the contract, and to use specific forms to document the results.
“The purpose of the first article inspection is to give objective evidence that all engineering, design, and specification requirements are correctly understood, accounted for, verified, and recorded,” he said.
It's a complete, independent, and documented physical and functional inspection process to verify that prescribed production methods have produced an acceptable item as specified by engineering drawings, planning, purchase order, engineering specifications, and/or other applicable design documents.
Inspection report
The first article inspection report (FAIR) includes the forms and package of documentation for a part number or assembly, including FAI results, as per this standard.
Many companies are going to enhanced first article inspections, he said.
“With the use of modern computers in the manufacturing environment, first article inspections are no longer being used with the traditional three-form layout on paper but instead recorded digitally and stored on servers for easy access and organization,” he said. “Recording the first article digitally eliminates errors with the help of software that keeps tracks of the FAIs and generates reports (FAIR) immediately after successful completion of an FAI.
“Many large aerospace companies, including Rolls-Royce, Bombardier Aerospace, and Spirit AeroSystems, have recently switched to enhanced first article inspections in order to keep track of the numerous first articles received by different companies within the company's supply chain.”
He said manufacturing quality control is important to build the product according to the specifications. Design quality is also important because a poorly designed product will not meet the needs of the customer.
“A variety of software, databases, robotics, and other technologies are employed by large organizations in the manufacturing quality control labs,” he said. “Studying other organizations' best practices in manufacturing quality control, a company can better understand how to organize its quality-control labs, allocate staffing resources, and gain recognition for quality-control innovation.
Armijo suggested that companies join manufacturer alliance organizations, which feature monthly meetings with companies to go over issues and concerns.
“This can be very beneficial,” he said. “It is really good for small organizations because you may want to negotiate with suppliers for quantity purchasing that the small individual can take advantage of. And if I'm laying off 15 people next month, I can go to someone else and find a home for them. If you're like 99% of manufacturers, it's about finding good employees.”
“There are networking opportunities. I have some companies that compete against each other but can share topics. We may be talking about bringing in insurance people or OHSA for some training. This is good for small companies that have to keep up with OSHA.”