O BJECTIVES To Explain purchasing and the aim of purchasing function. To find out purchasing stages. To find out purchasing cycle. To identify the responsibilities of Purchasing Department.

O BJECTIVES To identify the importance of quality on the basis of Purchasing. To learn sourcing decisions. To interpret supplier selection. To find out responsibilites of supplier.

PURCHASING Process of Buying.

PURCHASING Obtaining the right material, in the right quantities, with the right delivery from the right source, At the right price.

PURCHASING Requires input from: Marketing: Engineering: Manufacturing: Planning and Control:

P URCHASING & PROFIT LEVERAGE Sales : $100 Cost of Goods Sold Purchases: $50 Other Expenses: $40 Profit: $10 Assume an increase in profit 10% by maximizing the sales volume

P URCHASING & PROFIT LEVERAGE Sales : $110 Cost of Goods Sold Purchases: $55 Other Expenses:$44 Profit: $11 To increase profit $1, we have increased sales 10% If we reduce purchase cost,

P URCHASING & PROFIT LEVERAGE Sales : $100 Cost of Goods Sold Purchases: $49 Other Expenses: $40 Profit: $11 We have maintained the same profit by the same sales income but to increase profits by $1, we decreased costs by 2%

P URCHASING OBJECTIVES HOW TO ESTABLISH THE FLOW OF MATERIAL FLOW? Obtaining goods and services, Of the required quantity and quality, At the lowest possible price, At the best possible service and delivery, While maintaining and developing suppliers.

P URCHASING FUNCTIONS Determining purchasing specifications Right Quality Right Quantity Right Time Right Place Selecting Supplier Right Source

P URCHASING FUNCTIONS Negotiating terms and Condition Right Price Issuing and administering purchase orders

P URCHASING CYCLE 1.Receive and analyse purchase requisitions. 2.Select Suppliers, issue quotations. 3.Determine the right price. 4.Issue purchase orders. 5.Follow-up to assure correct delivery. 6.Receive and accept goods. 7.Approve invoice for payment.

1. RECEIVING AND ANALYZING REQUSITONS From Planners(MRP System) and all other users. Purchasing will: Identify originator, account number,approvals Check material specifications. Verify Quantity and unit of measure Verify delivery date and place Verify delivery INCOTERM(CIF,FOB, e.t.c) Ensure all supplemental information.

2.S ELECTING SUPPLIERS Often it is realized from a list of approved suppliers. For small items: Internet Catalogues Trade Journals For Large Items: Issue a request for quotation

2.S ELECTING SUPPLIERS ( REQUESTING QUOTES ) Written inquiries sent to enough suppliers to ensure competitive and reliable quotes are received. Quotes are analyzed on account of Price,payment Compliance to specification Technical suitability

3. DETERMINING THE RIGHT PRICE Usually the lowest price Involving in negotiations

4. ISSUING A PURCHASE ORDER Legal Document Forming a contract with the suppliers in case of acceptance Copies of forms will be hand over, Supplier Originator Accounting or Finance Dept. Purchasing File

5. FOLLOW - UP AND DELIVERY Ensure on-time delivery Take corrective action Expediting Find alternative sources of supply Work with suppliers to resolve problems Reschedule Production

6. RECEIVING AND ACCEPTING GOODS Receiving and inspecting goods for correct quantity and any damage Accept goods and generate a receiving report Send to quality for further inspection. Hold goods damaged in transit Copies to Acounting Department.

7. APPROVING INVOICE FOR PAYMENT Aggrement Original Purchase Order Receiving Report Invoice Aproval to Accounts Payable

E STABLISHING SPECIFICATIONS Purchasing can help to make the ‘BEST BUY’ Quantity Requirements(Economies of Scale) Price requirements Functional Requirements

E STABLISHING SPECIFICATIONS ( QUANTITY REQUIREMENTS ) Small Volume: Find a standart item Large Volume: Economies of Scale Quantity X Price

E STABLISHING SPECIFICATIONS ( PRICE REQUIREMENTS ) Relates to the use of item Relates to the selling price of the finished product

E STABLISHING SPECIFICATIONS ( FUNCTIONAL SPECIFICATIONS ) What the item is expected to do Set by the end user Performance Expectations Aesthetic Expectations

S ELECTING SUPPLIERS The Right Supplier Can supply the quality needed Has the capacity to deliver the quantity need and on time(JIT Deliviries) Makes a profit by means of a good price. Contributes to the improvement of our product.

F ACTORS IN SELECTING SUPPLIERS Technical Ability Manufacturing Capability Reliability After Sales Service Location Price Other Considerations

F ACTORS IN SELECTING SUPPLIERS ( TECHNICAL ABILITY ) Having technical capability Assisting buyer in improving product Suppliers product is a part of our product

F ACTORS IN SELECTING SUPPLIERS ( MANUFACTURING CAPABILITY ) Can supplier meet the specifications and quality desired? Does supplier have a progressive and efficient planning and control system?

F ACTORS IN SELECTING SUPPLIERS ( RELIABILITY ) Reputable Stable Financially strong

F ACTORS IN SELECTING SUPPLIERS ( AFTER SALES SERVICE ) Service Organization Supply of Spare parts Technical Support

F ACTORS IN SELECTING SUPPLIERS ( SUPPLIER LOCATION ) Delivery Time Local Inventories Requiring for after sales service

F ACTORS IN SELECTING SUPPLIERS ( PRICE ) Not always the lowest. May include other conditions. Quality Aggreements Holding stock.....

F ACTORS IN SELECTING SUPPLIERS ( OTHER CONSIDERATIONS ) Credit Terms Willingness to hold inventory JIT Information Technology Reciprocal Business

S UPPLIER SELECTION On-going relationship Mutual Benefit Buyer can Be assured supply of quality products Make technical support Solve problems Improve product

S UPPLIER SELECTION ( WEIGHTED POINT PLAN ) Factors: Things that must be considered as a part of what we will be buying. Weight: The relative importance of each of the factors.

S UPPLIER SELECTION ( WEIGHTED POINT PLAN ) Rating: How well each supplier compares on each factor Ranking: The weight times the rating

S UPPLIER SELECTION ( WEIGHTED POINT PLAN ) Select the factors Assign a weight to each factor Rate the suppliers for each factor Rank each supplier(by multiplying the weight by the rate for each factor.)

S UPPLIER SELECTION ( WEIGHTED POINT PLAN )

P RICE DETERMINATION Direct influence on company’s profit 50% cost of goods sold(COGS) Package of Function Quantity Service Price

P RICE DETERMINATION ‘ You only get what you pay for ’

P RICE DETERMINATION ( BASIS OF PRICING ) Fair Price Competitive Gives seller a profit Allows buyer to make a profit Upper limit Established by buyers Lower Limit Established by sellers.

P RICE DETERMINATION ( ANALYZING COSTS ) Fixed Costs: Incurres no matter the volume of sales Variable Costs: Varying with the volume of manufacturing

P RICE DETERMINATION ( ANALYZING COSTS ) Total Cost=Fixed+UnitVar.cost x Volume Unit Cost=Total Cost/Volume

P RICE DETERMINATION ( BREAK - EVEN POINT ) The volume of sales where total revenue equals to costs A seller must have sufficient volume to make a profit Knowing the seller’s break-even point is useful in negotiations.

P RICE DETERMINATION ( BREAK - EVEN POINT ) Fixed Cost = $5,000 Variable Cost = $6.50 / unit Selling Price per unit=$15 What is the total cost and average cost of producing a lot of 1,000 pcs. What is the break-even point

P RICE DETERMINATION ( BREAK - EVEN POINT ) Fixed Cost = $5,000 Variable Cost = $6.50 / unit Total Cost=6.5*1,000+5,000=$11,500 Unit Cost=11,500/1,000=$11,5 15*X=5, *X 8.5X=5,000 X=588.2 units

P RICE NEGOTIATION Buyer needs knowledge of seller’s cost Buyer must have sufficient clout Should benefit both supplier and buyer Savings must justify the time and effort required

P RICE NEGOTIATION Negotiation also depends on the product type Commodities: Fluactuates widely Standart Products: Too many suppliers,catalog prices Items of small value: A little negotiation, service buying Made-to-Order Items: Quotations are received, availability of negotiation

IMPACT OF MRP ON PURCHASING Procurement: establishing specifications, selecting suppliers, determining price, negotiations Supplier scheduling and follow-up production activity control execute the master schedule and the MRP ensure good use of resources, minimize WIP, provided the desired level of customer service

B UYER - PLANNER CONCEPT Production Activity Control: controls the flow of work through the plant schedules need for components Purchasing: coordinates the flow of goods from suppliers

B UYER - PLANNER CONCEPT Responsibility of Planning and Buying Works as a Master Scheduler and other Planner / Buyers Handles fewer components Smoother flow of information matches material requirements with supplier capabilities

P LANNER - BUYER RESPONSIBILITIES Determining material requirements Developing schedules Issuing shop orders Issuing material releases to suppliers

P LANNER - BUYER RESPONSIBILITIES Establishing delivery priorities Controlling orders in the factory Handling all the activities associated with the buying and the production scheduling Maintaining close contact with suppliers

C ONTRACT BUYING Long term contract with a supplier for small volume items Supplier may be given a copy of the material requirements plan Requires close coordination Works best with Buyer/Planner Concept

C ONTRACT BUYING Assures supplier of a certain amount of business Suppliers are more responsive to buyer’s needs Assures buyer that capacity will be available when needed Buyer can delay actual ordering

S UPPLIER RESPONSIBILITIES AND RELIABILITY Material Requirements often change.Suppliers must be able to react to change Flexibility: In Volume In products needed Reliability: In delivery promises

EDI ( ELECTRONIC DATA INTERCHANGE ) Electronic exchange of information between customers and suppliers Purchase Orders Invoices Material Requirements Plan Reduces time involved Avoids costly paper work

V ENDOR MANAGED INVENTORY Supplier maintains an inventory of certain items at the customer’s plant Usually for standard, small value items Fasteners Electrical components

A CASE STUDY You are working for a factory in FMCG sector producing milk.The goods-services you have to purchase are separated in 4 groups below. Each group has 2 suppliers (A and B). Raw material and additives Boxes and bottles Maintenance Service Car Rental Service Establish a model and containing at least 4 factors in a service group.Compare the suppliers and make a selection according to the ‘Weighted Point Plan’