1.purchasing
DESCRIPTION
pptTRANSCRIPT
Purchasing
Meaning Purchasing refers to a business or
organization attempting to acquire goods or services to accomplish the goals of the enterprise
Requires input from:◦Marketing◦Engineering◦Manufacturing◦Manufacturing Planning and Control
what materials to order when to order them
Objectives of PurchasingObtain 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
Purchasing FunctionsDetermining purchasing
specifications◦right quality◦right quantity◦right time (delivery)◦right place (delivery)
Selecting supplier◦right source
Purchasing Functions (continued)Negotiating terms and conditions
◦right price
Issuing and administering purchase orders
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
Receiving and Analyzing RequisitionsFrom planners (MRP system) and
all other usersPurchasing will:
◦ Identify originator, account number, approvals
◦ Check material specifications◦ Verify quantity and unit of measure◦ Verify delivery date and place◦ Ensure all supplemental information
Selecting SuppliersOften from a list of approved
suppliersFor small items:
◦internet◦catalogues◦trade journals
For large items, issue a request for quotation
Requesting QuotationsWritten inquiries sent to enough
suppliers◦to ensure competitive and reliable
quotes are receivedQuotes are analyzed
◦price◦compliance to specification◦technical suitability◦often with the involvement of the
originator
Determining the Right PriceUsually the lowestMay involve negotiations
Responsibility of the Purchasing Department
Issuing a Purchase OrderLegal documentForms a contract with the
supplier upon acceptance Copies to:
Supplier Originator Accounting Receiving Purchasing file
Follow-up and DeliveryEnsure on-time deliveryNegotiate any changesTake corrective action:
◦expedite as required◦find alternative sources of supply◦work with suppliers to resolve
problems◦reschedule production?
Receiving and Accepting GoodsReceiving inspects goods for
correct quantity and any damageAccepts goods and generates a
receiving report◦send to quality for further inspection◦hold goods damaged in transit
Copies to Accounting, Purchasing
Approving Invoice for PaymentAgreement with:
◦Original Purchase Order◦Receiving Report
Invoice◦price including discounts◦quantity
Send approval to Accounts Payable
CHOOSING SUPPLIERS
Selecting SuppliersThe 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
Factors in Selecting SuppliersTechnical abilityManufacturing capabilityReliabilityAfter-sales serviceLocationOther considerationsPrice
Technical AbilityDo 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
Manufacturing CapabilityCan 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
ReliabilityReputable StableFinancially strong We’re in
thistogether
After-Sales ServiceService organizationSupply of spare partsTechnical support
Supplier LocationLocation may effect delivery timeLocal inventoriesMay be required for after-sales
service◦will your customers require service?
Other ConsiderationsCredit termsWillingness to hold inventoryJITInformation technologyReciprocal business
PriceNot always the lowestMay include other services
Supplier SelectionOn-going relationshipMutual benefitSupplier can depend on future
businessBuyer can be:
◦assured supply of quality products◦technical support◦product improvements / problem
solving
Supplier Selection: Weighted-Point Plan
Factors: Things that must be considered as part of what we will be buying
Weights: The relative importance of each of the factors
Rating: How well each supplier compares on each factor
Ranking: The weight times the rating
Weighted-Point Plan
1.Select the factors2.Assign a weight to each factor3. Rate the suppliers for each
factor4. Rank each supplier
(multiply the weight by the rate for each factor)
Weighted-Point Plan
Figure 7.1 Supplier rating
Price NegotiationBuyer needs knowledge of
seller’s costsBuyer must have sufficient cloutShould benefit both supplier and
buyerSavings must justify the time and
effort required
Negotiations - Type of ProductCommodities
◦ 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
Supplier Responsiveness and ReliabilityMaterial requirements often
changeSuppliers must be able to react
to changeFlexibility
◦in volume◦in products needed
Reliable◦in delivery promises
INVENTORY CONTROL (STOCK CONTROL)
Inventory- meaningInventory is actually money,
which is available in the shape of materials (raw materials, in-process and finished products), equipment, storage space, work-time etc.
Inventory control Inventory control is concerned
with achieving an optimum balance between two competing objectives.
1) Minimizing the investment in inventory.
2) Maximizing the service levels to customer’s and it’s operating departments.
OBJECTIVES The specific objectives of inventory management are as follow:
1. Utilizing of scare resources (capital) and investment judiciously.
2. Keeping the production on as on-going basis.3. Preventing idleness of men, machine and
morale.4. Avoiding risk of loss of life (moral & social).5. Reducing administrative workload.6. Giving satisfaction to customers in terms of
quality-care, competitive price and prompt delivery.
7. Inducing confidence in customers and to create trust and faith.
INVENTORY - TYPESRaw materials & purchased partsPartially completed goods called
work in progressFinished-goods inventories
◦ (manufacturing firms) or merchandise (retail stores)
Replacement parts, tools, & suppliesGoods-in-transit to warehouses or
customers
FUNCTIONS OF INVENTORY
To meet anticipated demand.
To smoothen production requirements.
To decouple operations.
To protect against stock-outs.
To take advantage of order cycles.
To help hedge against price increases.
To permit operations.
To take advantage of quantity
discounts.
FACTORS INFLUENCING INVENTORY
Manufacture requires relatively long process cycle-time.
Procurement of materials has a long lead-time.
Demand for finished products is sometimes seasonal and prone fluctuation.
Material costs are affected by fluctuations in demand and subsequently by fluctuations in manufacturing.
Inventory Costs Costs associated with ordering too much
(represented by carrying costs). Costs associated with ordering too little
(represented by ordering costs). These costs are opposing costs, i.e., as one
increases the other decreases. The sum of the two costs is the total stocking
cost (TSC). When plotted against order quantity, the
TSC decreases to a minimum cost and then increases.
This cost behavior is the basis for answering the first fundamental question: how much to order.
Balancing Carrying against Ordering Costs
16
Annual Cost ($)Annual Cost ($)
Order QuantityOrder Quantity
MinimumMinimumTotal AnnualTotal Annual
Stocking CostsStocking Costs
AnnualAnnualCarrying CostsCarrying Costs
AnnualAnnualOrdering CostsOrdering Costs
Total AnnualTotal AnnualStocking CostsStocking Costs
SmallerSmaller LargerLarger
Lo
wer
Lo
wer
Hig
her
Hig
her
EOQEOQ
COSTS IN INVENTORY
Inventory costs may vary from 28 to 32% of the total cost. Apart from material costs, several other costs are also involved in inventory. These are given as below:
Ordering Costs Holding Costs/ Carrying CostsStock Out Costs
Ordering Costs
Stationary Clerical and processing,
salaries/rentals Postage Processing of bills Staff work in expedition
/receiving/ inspection and documentation
Holding/Carrying CostsStorage space (rent/depreciation)Property tax on warehousingInsuranceDeterioration/ObsolescenceMaterial handling and maintenance,
equipmentStock taking, security and
documentationCapital blocked (interest/opportunity
cost)Quality control
Stock out CostsLoss of business/ profit/ market/
adviseAdditional expenditure due to
urgency of purchasesa) telegraph / telephone chargesb) purchase at premiumc) air transport charges
Loss of labor hours
SELECTIVE INVENTORY CONTROL
Selective Inventory Control is defined as a process of classifying items into different categories, thereby directing appropriate attention to the materials in the context of company’s viability.
Classification of Materials for Inventory Control
Classification Criteria
A-B-C Annual value of consumption of the items
V-E-D Critical nature of the components with respect to products.
H-M-L Unit price of material
F-S-N Issue from stores
S-D-E Purchasing problems in regard to availability
S-O-S Seasonality
G-O-L-F Channel for procuring the material
X-Y-Z Inventory value of items stored
ABC Classification SystemClassifying inventory according to annual value of consumption of the items. A - very important B - mod. important C - least important
When a large number of items are involved, relatively few items account for a major part of activity, based on annual value of consumption of items.
It is based on the principles of ‘vital few and trivial many’.
ABC Classification System (Cont’d)
A-items : 15% of the items are of the highest value and their inventory accounts for 70% of the total.
B-items : 20% of the items are of the intermediate value and their inventory accounts for 20% of the total.
C-items : 65%(remaining) of the items are lowest value and their inventory accounts for the relatively small balance, i.e., 10%. Annual
$ value of items
A
B
C
High
Low
Few ManyNumber of Items
V-E-D ClassificationBased on the critical nature of items.Applicable to spare parts of equipment,
as they do not follow a predictable demand pattern.
V-Vital :Items without which the activities will come to a halt.
E-Essential :Items which are likely to cause disruption of the normal activity.
D-Desirable : In the absence of which the work does not get hampered.
H-M-L ClassificationBased on the unit value (in
rupees) of items.Similar to A-B-C analysis
H-High M-Medium L -Low
F-S-N ClassificationTakes into account the
distribution and handling patterns of items from stores.
Important when obsolescence is to be controlled.
F – Fast moving S – Slow
movingN – Non moving
S-D-E ClassificationBased on the lead-time analysis
and availability.S – Scarce : longer lead
timeD – Difficult : long lead timeE – Easy : reasonable
lead time
S-O-S ClassificationS-O-S :Seasonal- Off-
SeasonalSome items are seasonal in
nature and hence require special purchasing and stocking strategies.
EOQ formula cannot be applied in these cases.
Inventories at the time of procurement will be extremely high.
G-O-L-F Classification
G-O-L-F stands for:
G – Government O – Ordinary L – Local F – Foreign
X-Y-Z Classification Based on the value of inventory stored.X class items which are critically important and
require close monitoring and tight control – while this may account for large value these will typically comprise a small percentage of the overall inventory count.
Y class are of lower criticality requiring standard controls and periodic reviews of usage.
Z class require the least controls, are sometimes issues as “free stock” or forward holding.
If the values are high, special efforts should be made to reduce them.
This exercise can be done once a year.