1. Kimball Bullington, Ph.D. - MGMT 375 1 Materials Management Systems Purchasing Chapter 7

2. Kimball Bullington, Ph.D. - MGMT 375 2 Chapter 7: Purchasing Purchasing Overview Purchasing –The acquisition of goods and services. Purchasing Activity –Helps identify the products and services that can be best obtained externally; and –Develops, evaluates, and determines the best supplier, price, and delivery for those products and services.

3. Kimball Bullington, Ph.D. - MGMT 375 3 Chapter 7: Purchasing Purchasing Objectives 1.Obtaining goods and services of the required quality and quantity. 2.Obtaining goods and services at the lowest cost. 3.Ensuring the best possible service and prompt delivery by the supplier. 4.Developing and maintaining good supplier relations and developing potential suppliers.

4. Kimball Bullington, Ph.D. - MGMT 375 4 Chapter 7: Purchasing Purchasing Functions 1.Determining purchasing specifications: quality, quantity, delivery 2.Selecting suppliers 3.Negotiating terms and conditions of purchase 4.Issuing and administering purchase orders

5. Kimball Bullington, Ph.D. - MGMT 375 5 Chapter 7: Purchasing Purchasing Cycle 1.Receiving and analyzing purchase req’s. 2.Selecting suppliers 3.Determining the right price 4.Issuing purchase orders 5.Following up to assure delivery dates are met 6.Receiving and accepting goods 7.Approving supplier’s invoice for payment

6. Kimball Bullington, Ph.D. - MGMT 375 6 Order Cycle (one to three weeks) Order Request Verification by inventory control Purchasing researches suppliers, obtains quotes, etc. Signatures obtained Order mailed Order Cycle (one to three weeks) Order Request Verification by inventory control Purchasing researches suppliers, obtains quotes, etc. Signatures obtained Order mailed Supplier Cycle (one to many weeks) Supplier receives and enters order Supplier manufactures or “picks” order Supplier ships order Supplier Cycle (one to many weeks) Supplier receives and enters order Supplier manufactures or “picks” order Supplier ships order Receiving Cycle (one week) Receiving Incoming inspection Inventory control receives order, updates records, and notifies department Receiving Cycle (one week) Receiving Incoming inspection Inventory control receives order, updates records, and notifies department Chapter 7: Purchasing The Typical Procurement Cycle

7. Kimball Bullington, Ph.D. - MGMT 375 7 Chapter 7: Purchasing Purchasing Terminology Purchasing Agent –Has legal authority to execute contracts on behalf of the firm. Make or Buy Decision –Choosing products and services that can be advantageously obtained externally or produced internally depending on which is best for the company. –Vertical Integration –Developing the ability to produce goods or services previously purchased, or actually buying a supplier or a distributor.

8. Kimball Bullington, Ph.D. - MGMT 375 8 Chapter 7: Purchasing Make/Buy Considerations Lower production cost Unsuitable suppliers Assure adequate supply Utilize surplus labor and make a marginal contribution Obtain desired quantity Remove supplier collusion Obtain a unique item that would entail a prohibitive commitment from the supplier Lower acquisition cost Preserve supplier commitment Inadequate capacity Reduce inventory costs Ensure flexibility and alternate source of supply Product improvements may be difficulty because it is a sideline Reasons for Making Reasons for Buying

9. Kimball Bullington, Ph.D. - MGMT 375 9 Chapter 7: Purchasing Purchasing Terminology Keiretsu –The Japanese word to describe a company coalition with long-term contracts with the firm; members of the Keiretsu function much like partners would.

10. Kimball Bullington, Ph.D. - MGMT 375 10 Chapter 7: Purchasing Supplier Relations Three aspects of supplier relations –Supplier Evaluation - Involves finding potential suppliers and determining the likelihood of their becoming good partners. –Supplier Development - May include everything from training, to engineering and production help, to formats for electronic transfer. –Negotiations - Are of three classic types: cost-based model, market-based price model, and competitive bidding.

11. Kimball Bullington, Ph.D. - MGMT 375 11 Chapter 7: Purchasing Sourcing Sole sourcing implies that only one supplier is available. Multiple sourcing is the use of more than one supplier for an item. Single sourcing is the selection of one item for an item when several sources are available.

12. Kimball Bullington, Ph.D. - MGMT 375 12 Chapter 7: Purchasing Factors in Selecting Suppliers 1.Technical ability 2.Manufacturing capability 3.Reliability 4.After-sales service 5.Supplier location 6.Price 7.Other considerations

13. Kimball Bullington, Ph.D. - MGMT 375 13 Chapter 7: Purchasing Supplier Relations The supplier should be treated as an extension of the company. Long-term, close relationships with a few suppliers is best for many critical products. The supplier should be committed to helping the purchaser improve its product and win orders. Suppliers can also be a source of ideas about new technology, materials, and processes. A good supplier relationship is like a marriage.

14. Kimball Bullington, Ph.D. - MGMT 375 14 Strong Relationships CommitmentCommunication Shared Goals, Principles Dealing with Crises Time Together Feedback

15. Kimball Bullington, Ph.D. - MGMT 375 15 Chapter 7: Purchasing Supplier Relations Negotiation Strategies –Cost-Based Model - Requires the supplier to open its books so that the purchaser can determine actual costs. –Market-Based Price Model - Based on a published price or index such as exists for many metal and paper suppliers. –Competitive Bidding - Appropriate where suppliers are not willing to discuss cost or where near perfect markets do not exist.

16. Kimball Bullington, Ph.D. - MGMT 375 16 Chapter 7: Purchasing Negotiations and Product Type Commodities: Contracts for future prices. Standard Products: May negotiate large purchases. Items of Small Value: Minimize cost of ordering. Negotiate ordering system. Made-to-order items: Can be negotiated.

17. Kimball Bullington, Ph.D. - MGMT 375 17 Chapter 7: Purchasing Purchasing Techniques Blanket orders Invoiceless purchasing Electronic ordering and funds transfer Electronic data interchange (EDI) Stockless purchasing Standardization

18. Kimball Bullington, Ph.D. - MGMT 375 18 Chapter 7: Purchasing Purchasing Techniques Blanket Orders –A contract to purchase certain items from a vendor, although they all may not be delivered until requested by the purchaser. Invoice-less Purchasing –Appropriate where substantial trust exists between the purchaser and supplier and deliveries are made on a regular basis and are easily verifiable.

19. Kimball Bullington, Ph.D. - MGMT 375 19 Chapter 7: Purchasing Purchasing Techniques Electronic Ordering and Fund Transfer –Reduces cost by reducing paperwork; also increases the speed of ordering. Stockless Purchasing –Developing with the supplier, a means of reducing inventory costs by the supplier holding inventory. Standardization –A technique for reducing purchases for specialized items when in fact a very similar standard product is commercially available.

20. Kimball Bullington, Ph.D. - MGMT 375 20 Chapter 7: Purchasing Supplier Concerns in Just-in-Time Purchasing Desire for Diversification. –Supplier is concerned about all business stemming from single customer. Poor Customer Scheduling. –Supplier is concerned that customer will not be able to develop smooth, consistent schedule. Engineering Changes. –Supplier is concerned that customer will promulgate frequent engineering changes with inadequate lead time.

21. Kimball Bullington, Ph.D. - MGMT 375 21 Chapter 7: Purchasing Supplier Concerns in Just-in-Time Purchasing Quality Assurance. –Supplier may consider production with zero defects unrealistic. Small Lot Sizes. –Many suppliers are unaccustomed to working with small lot sizes. Proximity. –Delivery of small lot sizes over long distances may not be economical.