arnold, chapman, & clive: intro materials management, 6 th ed. © 2008 pearson education, upper...

Arnold, Chapman, & Clive: Intro Materials Management, 6th ed.

© 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Purchasing

Chapter 7



Purchasing“the process of buying”

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

• what materials to order• when to order them



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



Purchasing Functions

• Determining 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 requisitions2. Select suppliers, issue quotations3. Determine the right price4. Issue purchase orders5. Followup to assure correct delivery6. Receive and accept the goods7. Approve invoice for payment



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



Selecting Suppliers

• Often from a list of approved suppliers• For small items:

– internet– catalogues– trade journals

• For large items, issue a request for quotation



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



Determining the Right Price

• Usually the lowest• May involve negotiations

• Responsibility of the Purchasing Department



Issuing a Purchase Order

• Legal document• Forms a contract with the supplier upon

acceptance • Copies to:

• Supplier• Originator• Accounting• Receiving• Purchasing file



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?



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



Approving Invoice for Payment

• Agreement with:• Original Purchase Order• Receiving Report• Invoice

– price including discounts– quantity

• Send approval to Accounts Payable



(SKIP)Establishing Specifications

• Purchasing can help to make the “best buy”

• Quantity requirements• Price Requirements• Functional Requirements



Skip-Quantity Requirements

• Small volume– find a standard item

• Large items– design for economies of scale– reduce cost– satisfy functional needs



Skip-Price Requirements

• Relates to the use of the item

• Relates to the selling price of the finished product



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?



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



Factors in Selecting Suppliers

• Technical ability• Manufacturing capability• Reliability• After-sales service• Location• Other considerations• Price



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



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



Reliability

• Reputable • Stable• Financially strong

We’re inthis

together



After-Sales Service

• Service organization• Supply of spare parts• Technical support



Supplier Location

• Location may effect delivery time• Local inventories• May be required for after-sales service

– will your customers require service?



Other Considerations

• Credit terms• Willingness to hold inventory• JIT• Information technology• Reciprocal business



Price

• Not always the lowest• May include other services



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



Identifying Suppliers

• Internet• Catalogues• Salespeople • Trade magazines• Trade directories• Salespeople of the buyer’s firm



Supplier SelectionWeighted-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



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 0.15 80 70 60• Manufacturing capability 0. 20 72 76 92• Reliability 0. 18 88 90 90• After-sales service 0, 27 94 86 80• Location 0.10 98 90 82• Price 0.10 96 85 75• And if all factors have equal weight, which supplier should be chosen?



• End



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”



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



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



Analyzing Costs

Total cost = fixed cost + (var cost/unit)(volume)

Unit cost = total cost volume= fixed cost + variable cost per unit volume



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



Break Even Point -example

Fixed Cost = $5,000 Variable Cost = $6.50 / unitSelling Price = $15 per unitAverage Cost = $5,000 ÷ 1000 + $6.50 = $11.50 per unitTo find the Break Even PointLet X = Number of Units $15X = $5,000 + $6.50X$8.50X = $5,000 X = 588.2 units The volume must exceed 588.2 units to make a profit



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



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



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



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



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



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



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



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



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

arnold, chapman, & clive: intro materials management, 6 th ed. © 2008 pearson education, upper...

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