motivated study eef

8/3/2019 Motivated Study Eef

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MOTIVATED STUDY

PURCHASING

Five ideas of purchasing:

Idea 1: Purchasing is not a service function, but a profit making activity.

Idea 2: Materials are a large part of total cost; procurement is best

handled as a separate distinct function reporting directly to the top level

operating executives.

Idea 3: Real purchasing job starts long before the specifications or

requisitions are written

Idea 4: The purchasing needs and deserves highly trained, competent

personnel.

Idea 5: Purchasing should be represented in top operating councils.

Basics of Purchasing


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Purchasing involves determining the need, selecting the

supplier, arriving at the appropriate terms and conditions,

issuing the contract and following up to ensure delivery.

Objectives:

Specific Responsibilities or Activities of a Typical Purchasing Department

Records, Data and Basic Information

Maintaining general purchase records

Maintaining Price records

Maintaining Parts History records

Maintaining Stock and consumption records

Maintaining records of vendor performance on price, quality and

service

Maintaining Specification files

Maintaining Catalog files

Purchasing Research, Analysis and Studies


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Conducting Market Studies and trends

Conducting Material Studies

Conducting Price Cost Analysis

Investigating supply sources

Conducting Supplier plant visits and inspections

Developing new supply sources

Developing Alternate Materials and Sources

Participating in Value analysis studies

Developing Computer Oriented Purchasing systems

Purchasing

Checking authorized requisitions

Issuing requests for bids

Determining bidders lists

Preparing requests for bids

Conducting pre-bid briefings

Receiving all bids

Analyzing quotations and/or proposals


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Evaluating Suppliers

Selecting Suppliers

Determining quantity to buy

Scheduling purchases and deliveries

Determining mode of transportation and Carrier

Interviewing Sales people

Negotiating Contracts

Writing and issuing Contractual Agreement

Developing Legal conditions of Contracts

Determining applicable federal, State and local taxes or foreign duties

Following up for delivery, i.e., Expediting

Checking receipts of materials

Checking and approving Invoices

Corresponding with Suppliers

Negotiating adjustments with Suppliers

Negotiating Contract changes

Terminating Contracts


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Organization of Purchasing

Function

Centralized Organization

Centralized purchase exists and the responsibility for the purchasing

function is assigned to a single group and its manager. This person is

accountable to management for proper performance of the purchasing

function regardless of where the actual buying takes place. Centralized

purchasing can be entirely satisfactory in a multi-plant organization if

the plants are manufacturing similar products from similar materials.

Decentralized Organization:

In a single plant company decentralization of purchasing exists when

operations, marketing, finance, engineering do their own buying. This

tends to produce duplication of effort, inefficiency and waste.


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Departmentalized Organization:

Neither completely rigid centralized nor loose decentralized of

purchasing seems to meet the needs of all firms. A large company may

have a Vice president, a director or a Manager of purchasing and a

number of division or plant purchasing managers. Responsibilities at the

different levels vary, but a compromise between centralization and

decentralization is usually employed in an attempt to gain advantages of

both and to minimize their disadvantages.

Changing Directions:

Factors that will continue to shape and mold the future of Purchasing

function and discipline include:

Strategic Planning

In an environment characterized by many unknowns, purchasing

professionals must assist general management by providing purchasing

expertise for strategic decisions. Purchasing can assist in calculating the


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probable impact of outside factors on supply, quality and price. Key

areas of strategic forces include economic concerns, regulatory issues,

environmental and ecological influences, Changes in the organizations,

financial factors, technology assessments and general changes in the

nature and structure of competition.

Supply Chain Management:

The tenor of buyer-supplier relations has changed over the past two

decades. The expectations and roles of both parties have enlarged.

Buyers and sellers see their respective businesses as extensions of the

other. This perception is a foundation of an enlightened philosophy of

Supply chain Management, an approach that focuses on a cohesive,

partnership arrangement, as compared to the traditional adversarial

relationship.

Pro-active Purchasing:


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In the past purchasing practitioners have been characterized as reactive

to circumstances in their environments. As purchasing gains increased

visibility and clout the corporate structure, it can shift to the pro-active

mode.

Global Sourcing:

As the world marketplace shrinks due to innovations in technology,

communications and transportation, the future challenge of purchasing

is to device strategies to seize opportunities presented by these

changes.

Ecology and Environmental Concerns:

Purchasing has, and will continue to have, a decisive role in the

protection and care of the environment. Environmental management

requires great sensitivity to corporate actions that may have a negative

impact on the environment and other natural resources.


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Sources of Information

The Purchasing Handbook, Fifth Edition byFearon/Dobler/Killen

Industrial Purchase Price Management by Farrington Journal of Purchasing and Materials Management Global Operations by Dornier/Ernst/Fender/Kouvelis

Purchasing Policies, Purchasing forms Purchase order

A policy is a statement that describes; usually in general terms an

intended course of action. Its basic purpose is to guide behavior toward

helping the organization achieve its overall objectives. The primary

concerns normally addressed in the policy areas are:

1. Authority to make procurement commitments on behalf ofthe company


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2. Right to review and question specifications3. Right to select the suppliers4. Right to determine price5. Right to control contacts with suppliers

1. Purchasing Requisition with Flow Charts


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Purchase Requisition

YesIs it a rebuy? No (New task)

Are there pre-

assignedSuppliers?

NO Pre-assignedsuppliers??

Yes Check Last

Supplier

Buy

Can all

requirements

bemet?

Buy

Y

Canrequirements

be met?

Y

Possible

suppliers

N

No

Decide feasible

suppliers

Meet

requirements?

Yes

Meet

requirements?

Modified re-

buy

Y

B

N

N

Y

Buy

Preferred

source

Communicati

on


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Tactical Modeling of the Industrial Buying process


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Quality Metrics

Evaluating Purchasing performance

Regular evaluation of the purchasing function is needed to

maintain a professional department. In terms of behavior

evaluation of the purchase function is important to ensure

that a company or organization is represented by competent

professionals. In measuring and evaluating actual purchasing

performance, effective purchasing management must include

the maintenance of purchasing performance standards,

control and reporting systems, results evaluation. Thus

evaluating purchasing performance is part of the

management process and is important in ensuring that

progress is being made toward the realization of

organizational objectives according to plan.

Key reasons for evaluating purchasing performance are:


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1. To direct attention to main purchasing performance areasand objectives so that performance continually improves

while objectives are met.

2. To improve purchasing department organizationalstructure, policies and procedures.

3. To identify those areas where additional training andeducational efforts may be required.

4. To provide data so that corrective action can be takenwhere necessary

5. To improve inter relations within purchasing and toimprove relations between purchasing and other functions

and between purchasing and suppliers.

6. To assess the need for additional purchasing personal.

Additionally evaluations affect pay raises, bonuses and

opportunities for promotions, all factors which bear on

attitude, morale, productivity and turnover in the

organization. This in turn may have a profound effect on the


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growth and financial performance of the organization

determining its survival and success.

Purchasing Measurement and Evaluation:

Functional Reviews:

Functional reviews are usually conducted at intervals exceeding five

years and the major objective is to see if the function is indeed

performing effectively. Functional reviews evaluate many broad elements

of the organization, including its policies, procedures, personal and

inter-departmental relations. Functional review is complex, time

consuming and costly. Moreover the revelations that result from such a

situation analysis can be very disruptive to the organization. For this

reason considerable care must be taken so as to not to destroy the

function in the process of evaluating it.

Policy and Procedure Audits:


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Policy and procedure audits are performed more frequently by

functional reviews, minimally once a year. Their purpose is to determine

if established purchasing policy and procedures are being followed.

These evaluations are generally less complex and time consuming than

overall functional reviews and are aimed at identifying any need for

modification of policy and procedure to ensure adequate control.

Day to Day purchasing performance measurement and evaluation:

The measurement and evaluation of day to day purchasing procedures

compares actual performance against objectives in key purchasing areas.

This type of analysis is done on a weekly or a monthly basis, monthly

reporting, for instance, can be used to compare cost saving performance

against the plan by buyer, section, and department and may be

characterized by regular data collection and reporting for a number of

effectiveness and efficiency indicators.

The final ranking of the measurementsdeveloped in the Hedrick & Ruch

study is as follows:


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1. Commodity knowledge2. Professionalism3. On-time delivery4. Incoming quality acceptance rate5. Negotiations ability6. Quality supplier cultivation7. Accuracy and quality of work8. Timely responses to enquiries9. Order placement cycle times10. Builds team relationships between suppliers and

customers.

11. Complies with procedures12. Complexity of commodities managed13. Knowledge of supplier being managed14. Knowledge and use of follow-up techniques15. Actual versus Target cost of materials


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16. Buyers knowledge of the bottom price of materialspurchased

17. Buyers knowledge of relevant law and governmentregulations

18. Buyers development of Should-Cost goals19. Participation in developing procurement plan20. Buyers knowledge of end item usage of materials.

Purchasing Performance

Measurement and Evaluation:

Supplier Quality & Delivery:

Supplier commitment to the delivery of quality product is critical to

accomplishing purchasing objectives. Quality means

1. Continually meeting the buyers needs and expectations atthe agreed upon price

2. Conformance to mutually agreed upon requirements


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3. Measuring performance on important requirements andsetting priorities to identify and eliminate the root causes

of non-conformance.

4. Accomplishing the goal of reduced variability andcontinuous improvement on requirements that are

important.

Price Competitiveness:

Price is ordinarily defined as a money value established by the seller for

a given unit of goods or services while cost is the price paid to acquire,

produce, and maintain anything. In the total cost of most manufactured

goods, the two most important price factors are the materials and

service cost. Therefore what is important in evaluating the performance

of the buyer is how effectively he or she can determine the true values

of competing materials by accessing them in such areas as quality,

service, reliability, and cost of transportation.

Various measures can be used to determine how effectively purchasing

dollars are being spent. Some of these measures are:


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1. Comparison of actual purchase price against budgetedprice

2. Comparison of actual purchase price to industry or marketindices

3. Comparison of actual purchase price for like itemsbetween operating plants or divisions within the

organization.

However, the evaluation must consider that the price variance may be

influenced by a number of factors that are beyond the control of the

buyer, such as changes in production run quantities, engineering

changes (specifications) or adjustments in allowable tolerances.

The development of the purchase plan is the most critical aspect of

measuring purchasing price effectiveness. The initial step of planning

process is to determine the purchase requirements, which normally are

driven by material requirement plans and bills of materials or other

material planning documents. Once the purchase requirements are


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determined, the operating purchase price plan for a specified future

time period must be developed. This plan is based on historical price

(current or last price paid) modified by price changes agreed to and

which take place before the end of the planning period, historical price

plus forecast price changes, and price forecasts for new purchased

items.

In developing an operating plan, forecasts of prices are made by

Purchasing in advance of the planning horizon, which is usually the next

budget period. These recommendations generally are reviewed with

other personnel involved in the planning process such as financial,

manufacturing and senior management. Such co-ordination is important

if the result is to be a fully integrated plan.

Purchasing Strategy

Cost Reduction Strategies:


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The traditional Marketing Approach

Initiative

Initiative

Reverse Marketing Approach

SUPPLIER PURCHASER

SUPPLIER PURCHASER


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Purchasing should establish long term cost reduction strategies, based

on long-term objectives. As is done in other functional areas, progress

should be monitored. Selected areas in which cost reduction strategies

can be implemented are as follows:

Increased knowledge

Increasing or improving the knowledge of the personnel in the

purchasing department can effectively help cut costs. In house or

external training programs, seminars, workshops, college courses,

certification programs are useful vehicles to use. Another approach,


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where warranted, is to bring new personnel to the department through

cross training exchanges or through replacement of personnel.

Services procurement:

If purchasing is not involved in the purchase of services, increasing

competition provides significant potential for savings and the

development of improved specifications or statements of work.

Purchasing organizations that are already involved in purchasing services

should determine if there are any services being used by the

organization which are not handled through the procurement process.

National Contracts:

If a company has multiple buying locations involved in purchasing

goods or services, a review should be made to see if there is potential

for cost reduction through the leverage resulting from aggregating the

purchase volume.

External versus In-house contracting:


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The purchasing manager should analyze the saving potential for

contracting services that are being performed in-house such as

custodial, printing, legal services.

GLOBAL PURCHASING

Benefits of global purchasing

A well-known multinational firm was in the process of developing a new

product which had various electronic components assembled on a

printed circuit board. As the bill of materials was being developed, the

U.S.-based purchasing staff requested quotations from various suppliers

of electronic components. At the same time, similar requests for

quotations were issued by the companys international procurement

office (IPO) in Hong Kong. A comparison of the price data obtained in


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the United States with the data obtained in Hong Kong for the same

parts manufactured by the same companies revealed that in most

instances the prices received in Hong Kong were lower than those in the

united states. In some instances the Hong Kong prices were as much as

30 percent lower. So we can clearly see that global purchasing is very

beneficial and helps buyers to a very large extent.


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