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7. Purchasing

Chapter 7   Purchasing Introduction ·          Purchasing is the process of buying.  Obtaining the right material, in the right quantities, ... thumbnail 1 summary
Chapter 7 
·         Purchasing is the process of buying.  Obtaining the right material, in the right quantities, with the right delivery (time and place), from the right source, and at the right price are all purchasing functions.
·         Manufacturing planning and control (MPC) must decide when to order which raw materials so that marketplace demands can be satisfied.  Purchasing is then responsible for placing the orders and for ensuring that the goods arrive on time.  Purchasing has the majority responsibility for locating suitable sources of supply and for negotiating prices.
·         On the average, manufacturing firms spend about 50% of each sales dollar in the purchase of raw materials, components, and supplies.  This gives the purchasing function tremendous potential to increase profits through the negotiation of better pricing or services from suppliers
·         The objectives of purchasing can be divided into four categories: (1) Obtaining goods and services of the required quantity and quality. (2) Obtaining goods and services at the lowest total cost, not price. (3) Ensuring the best possible service and prompt delivery by the supplier. (4) Developing and maintaining good supplier relations and developing potential suppliers.
·         To satisfy these objectives, certain basic functions must be performed: (1) Determining purchasing specifications; right quality, quantity, and delivery (time and place). (2) Selecting supplier (right source). (3) Negotiating terms and conditions of purchase (right total cost). (4) Issuing and administration of purchase orders.
·         The purchasing cycle consists of the following steps: 
     (1) Receiving and analyzing purchase requisitions. 
     (2) Finding potential suppliers and selecting the right supplier.
     (3) Determining the right price. 
     (4) Issuing the purchase orders. 
     (5) Following-up to assure delivery dates are met. 
     (6) Receiving and accepting goods. 
     (7) Approving supplier’s invoice for payment.
Establishing Specifications
·         Three broad categories must be considered when specifications are being developed: (1) Quantity requirements – Market demand first determines the quantities needed, but the challenge is to satisfy the functional needs at a better price. (2) Price requirements – The price specification represents the economic value that the buyer puts on the item (i.e. the amount the individual is willing to pay). (3) Functional requirements – Are concerned with the end application of the item and what the item is expected to do.  Functional specifications are intimately tied to the quality of a product or service.
·         An item has the required quality if it satisfies the needs of the user.  
     There are four phases to providing user satisfaction: 
     (1) Quality and product planning. 
     (2) Quality and product design. 
     (3) Quality and manufacturing. 
     (4) Quality and use.
·         Functional specifications ultimately are the ones that drive the others.  If the product does not perform adequately for the price, it will not sell.
Functional Specification Description
·         Functional specification can be described in the following ways or by a combination of them: (1) By brand. (2) By specification of physical and chemical characteristics, material and method of manufacture, and performance. (3) By engineering drawings. (4) Miscellaneous

·          Two major sources of specifications: (1) Buyer specifications – are usually expensive and time consuming to develop.  Use only when there is not suitable specification available or unless the volume of work makes it economical to do so. (2) Standard specifications – have been developed by governmental and nongovernmental agencies.
Selecting Suppliers
·         A good supplier is one that has the technology to make the product to the required quality, has the capacity to make the quantities needed, and can run the business well enough to  make a profit and still sell a product competitively.
·         Three types of sourcing: sole, multiple, and single.  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 a planned decision by the organization to select one supplier for an item when several sources are available.  It is intended to produce a long-term partnership.
·         Factors in selecting suppliers: technical ability, manufacturing capability, reliability, after-sales service, supplier location, other soft considerations and price.
·         Some factors in evaluating potential suppliers are quantitative and other factors are qualitative.
Price Determination
·         Prices have an upper limit, determined by the market place, and what buyers are willing to pay is based on their perception of demand, supply, and their needs.  The lower limit is set by the seller and is determined by the costs of manufacturing and selling the product and profit expectation.
·         Fixed costs are costs incurred no matter the volume of sales.  Variable costs are those directly associated with the amount produced or sold.  Break-even point is when the revenue equals total cost and profit is zero. When the volume is less than the break-even point, a loss in incurred; when the volume is greater, a profit is realized.
·         Through negotiation, the buyer and seller try to resolve conditions of purchase to the mutual benefit of both parties.  One important factor in the approach to negotiation is the type of product: commodities, standard products, items of small value and made-to-order items.
·         Purchasing can be separated into two types of activities: procurement, and supplier scheduling and follow-up.  Procurement includes the functions of establishing specifications, selecting suppliers, price determination, and negotiation.  Supplier scheduling and follow-up is concerned with the release of orders to suppliers, working with suppliers to schedule delivery, and follow-up.  The goals of supplier scheduling are the same as those of production and activity control: to execute the master production schedule and the material requirements plan, ensure good use of resources, minimize work-in-process inventory, and to maintain the desired level of customer service.
·         Planner/Buyer concept.
·         Usually a MRP system generates frequent orders for relatively small quantities. It is costly and inefficient to issue a new purchase order for every weekly requirement.  The alternative is to develop a long-term contract with a supplier and to authorize releases against the contract.  Often the supplier is given a copy of the MRP so they are aware of future demands.  The buyer then issues a release against the schedule.  Contract buying assures the suppliers a given amount of business and commits them to allocating that amount of their capacity to the customer.
·         Electronic data interchange (EDI) enables customers and suppliers to electronically exchange transaction information such as purchase orders, invoices, and MRP information.