Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Purchasing Chapter 7
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Purchasing “the process of buying” Requires input from: –Marketing –Engineering –Manufacturing –Manufacturing Planning and Control what materials to order when to order them
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Objectives of Purchasing Obtain goods and services: –of the required quantity and quality –at the lowest possible cost –at the best possible service and delivery –while maintaining and developing suppliers
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Purchasing Functions Determining purchasing specifications –right quality –right quantity –right time (delivery) –right place (delivery) Selecting supplier –right source
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Purchasing Functions (continued) Negotiating terms and conditions –right price Issuing and administering purchase orders
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Purchasing Cycle 1. Receive and analyse purchase requisitions 2. Select suppliers, issue quotations 3. Determine the right price 4. Issue purchase orders 5. Followup to assure correct delivery 6. Receive and accept the goods 7. Approve invoice for payment
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Receiving and Analyzing Requisitions 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 –Ensure all supplemental information
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Selecting Suppliers Often from a list of approved suppliers For small items: –internet –catalogues –trade journals For large items, issue a request for quotation
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Requesting Quotations Written inquiries sent to enough suppliers –to ensure competitive and reliable quotes are received Quotes are analyzed –price –compliance to specification –technical suitability –often with the involvement of the originator
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Determining the Right Price Usually the lowest May involve negotiations Responsibility of the Purchasing Department
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Issuing a Purchase Order Legal document Forms a contract with the supplier upon acceptance Copies to: Supplier Originator Accounting Receiving Purchasing file
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Follow-up and Delivery Ensure on-time delivery Negotiate any changes Take corrective action: –expedite as required –find alternative sources of supply –work with suppliers to resolve problems –reschedule production?
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Receiving and Accepting Goods Receiving inspects goods for correct quantity and any damage Accepts goods and generates a receiving report –send to quality for further inspection –hold goods damaged in transit Copies to Accounting, Purchasing
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Approving Invoice for Payment Agreement with: Original Purchase Order Receiving Report Invoice –price including discounts –quantity Send approval to Accounts Payable
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. (SKIP)Establishing Specifications Purchasing can help to make the “best buy” Quantity requirements Price Requirements Functional Requirements
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Skip-Quantity Requirements Small volume –find a standard item Large items –design for economies of scale –reduce cost –satisfy functional needs
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Skip-Price Requirements Relates to the use of the item Relates to the selling price of the finished product
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Skip-Functional Specifications What the item is expected to do Set by the end user –performance expectations –aesthetic expectations Example: functional specifications for a car –run reliably? make you look cool? safety?
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Skip-Selecting Suppliers The right supplier: –can supply the quality needed –has the capacity to deliver the quantity need and on time (JIT deliveries?) –makes a profit, but at a good price –contributes to the improvement of your product
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Factors in Selecting Suppliers Technical ability Manufacturing capability Reliability After-sales service Location Other considerations Price
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Technical Ability Do they have the technical capability? Is there a program of product development and improvement? Can they assist in improving your product? Their products become part of your product
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Manufacturing Capability Can they consistently meet the specifications and quality desired? –quality control programs –competent personnel Do they have good manufacturing planning and control systems? –to supply information on delivery
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Reliability Reputable Stable Financially strong We’re in this together
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. After-Sales Service Service organization Supply of spare parts Technical support
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Supplier Location Location may effect delivery time Local inventories May be required for after-sales service –will your customers require service?
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Other Considerations Credit terms Willingness to hold inventory JIT Information technology Reciprocal business
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Price Not always the lowest May include other services
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Supplier Selection On-going relationship Mutual benefit Supplier can depend on future business Buyer can be: –assured supply of quality products –technical support –product improvements / problem solving
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Identifying Suppliers Internet Catalogues Salespeople Trade magazines Trade directories Salespeople of the buyer’s firm
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Supplier Selection Weighted-Point Plan FactorsThings that must be considered as part of what we will be buying WeightsThe relative importance of each of the factors Rating How well each supplier compares on each factor RankingThe weight times the rating
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Weighted-Point Plan 1.Select the factors 2.Assign a weight to each factor 3. Rate the suppliers for each factor 4. Rank each supplier multiply the weight by the rate for each factor
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Weighted-Point Plan Figure 7.1 Supplier rating
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Example Using the following factor ratings data, determine which supplier that should be chosen on the bases of maximum composite score, A, B, or C. Suppliers Factor Weight A B C Technical ability Manufacturing capability Reliability After-sales service 0, Location Price And if all factors have equal weight, which supplier should be chosen?
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. End
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Price Determination Direct influence on company’s profit 50% of cost of goods sold (CoGS) Package of: –function –quantity –service –price “you only get what you pay for”
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Basis for Pricing Fair price –competitive –gives seller a profit –allows buyer to make a profit Upper limit –established by buyers Lower limit –established by sellers
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Analyzing Costs Fixed Costs –costs incurred no matter the volume of sales equipment, insurance, overhead Variable Costs –costs which vary with the volume produced direct labor, direct materials
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Analyzing Costs Total cost = fixed cost + (var cost/unit)(volume) Unit cost = total cost volume = fixed cost + variable cost per unit volume
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Break Even Point The volume of sales where total revenue equals total costs A seller must have sufficient volume to make a profit Knowing the seller’s break even point is useful in negotiations –increased volume may lower price paid
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Break Even Point -example Fixed Cost = $5,000 Variable Cost = $6.50 / unit Selling Price = $15 per unit Average Cost = $5,000 ÷ $6.50 = $11.50 per unit To find the Break Even Point Let X = Number of Units $15X = $5,000 + $6.50X $8.50X = $5,000 X = units The volume must exceed units to make a profit
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Price Negotiation Buyer needs knowledge of seller’s costs Buyer must have sufficient clout Should benefit both supplier and buyer Savings must justify the time and effort required
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Negotiations - Type of Product Commodities –price is determined by the market –concern for future contracts Standard products –price set by catalogue listings –little room for negotiation Small value items –try to reduce ordering costs or increase volume Made-to-order items (negotiation possible) –quotations from a number of sources
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Contract Buying Long term contract with a supplier for small volume items –Authorize releases against the contract when goods are needed Supplier may be given a copy of the material requirements plan Requires close coordination Works best with Buyer / Planner concept
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Supplier Responsiveness and Reliability Material requirements often change Suppliers must be able to react to change Flexibility –in volume –in products needed Reliable –in delivery promises
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Contract 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
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Close Relationship with Suppliers The need to understand each others capabilities and constraints Cooperation and team work Very frequent communications Between the buyer/planner and the supplier’s production planner
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Electronic Data Interchange (EDI) Electronic exchange of information between customers and suppliers –purchase orders –invoices –material requirements plans Reduces time involved Avoids costly paper work
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Vendor Managed Inventory Supplier maintains an inventory of certain items at the customer’s plant Customer only pays for the inventory when it is actually used Usually for standard, small value items –fasteners –electrical components
Arnold, Chapman, & Clive: Intro Materials Management, 6 th ed. © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. The Internet Internet –open public access to posted information –valuable source of supplier and product information Intranet –internal to company personnel only Extranet –between participating companies