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

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

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

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

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.

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

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:

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.

Sources of Information The Purchasing Handbook, Fifth Edition by

Fearon/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 of the company

2. Right to review and question specifications 3. Right to select the suppliers 4. Right to determine price 5. Right to control contacts with suppliers

1. Purchasing Requisition with Flow Charts

Purchase Requisition

Yes

Is it a rebuy?

No (New task)

Are there preassigned Suppliers?

NO

Yes

Pre-assigned suppliers??

Yes

Check Last Supplier N o Can requirements be met?

Meet requirements?

No

B Modified rebuy N N Possible suppliers

Y Can all requirements be met? Buy

Decide feasible suppliers

Buy

Preferred source

Meet requirements?

Communicati on

Buy

Tactical Modeling of the Industrial Buying process

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:

1. To direct attention to main purchasing performance areas and objectives so that performance continually improves while objectives are met. 2. To improve purchasing department organizational

structure, policies and procedures. 3. To identify those areas where additional training and educational efforts may be required. 4. To provide data so that corrective action can be taken where necessary 5. To improve inter relations within purchasing and to improve 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

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:

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 measurements developed in the Hedrick & Ruch study is as follows:

1. Commodity knowledge 2. Professionalism 3. On-time delivery 4. Incoming quality acceptance rate 5. Negotiations ability 6. Quality supplier cultivation 7. Accuracy and quality of work 8. Timely responses to enquiries 9. Order placement cycle times 10. Builds team relationships between suppliers and

customers. 11. 12. 13. 14. 15. Complies with procedures Complexity of commodities managed Knowledge of supplier being managed Knowledge and use of follow-up techniques Actual versus Target cost of materials

16.

Buyers knowledge of the bottom price of materials

purchased 17. Buyers knowledge of relevant law and government

regulations 18. 19. 20. Buyers development of Should-Cost goals Participation in developing procurement plan 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 at the agreed upon price 2. Conformance to mutually agreed upon requirements

3. Measuring performance on important requirements and setting priorities to identify and eliminate the root causes of non-conformance. 4. Accomplishing continuous important. the goal of on reduced variability that and are

improvement

requirements

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:

1. Comparison of actual purchase price against budgeted price 2. Comparison of actual purchase price to industry or market indices 3. Comparison of actual purchase price for like items between 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

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:

The traditional Marketing Approach Initiative

SUPPLIER

PURCHASER

SUPPLIER

PURCHASER

Initiative Reverse Marketing Approach

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,

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:

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

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.