Download - Motivated Study Eef
-
8/3/2019 Motivated Study Eef
1/27
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
-
8/3/2019 Motivated Study Eef
2/27
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
-
8/3/2019 Motivated Study Eef
3/27
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
-
8/3/2019 Motivated Study Eef
4/27
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
-
8/3/2019 Motivated Study Eef
5/27
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.
-
8/3/2019 Motivated Study Eef
6/27
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
-
8/3/2019 Motivated Study Eef
7/27
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:
-
8/3/2019 Motivated Study Eef
8/27
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.
-
8/3/2019 Motivated Study Eef
9/27
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
-
8/3/2019 Motivated Study Eef
10/27
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
-
8/3/2019 Motivated Study Eef
11/27
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
-
8/3/2019 Motivated Study Eef
12/27
Tactical Modeling of the Industrial Buying process
-
8/3/2019 Motivated Study Eef
13/27
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:
-
8/3/2019 Motivated Study Eef
14/27
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
-
8/3/2019 Motivated Study Eef
15/27
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:
-
8/3/2019 Motivated Study Eef
16/27
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:
-
8/3/2019 Motivated Study Eef
17/27
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
-
8/3/2019 Motivated Study Eef
18/27
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
-
8/3/2019 Motivated Study Eef
19/27
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:
-
8/3/2019 Motivated Study Eef
20/27
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
-
8/3/2019 Motivated Study Eef
21/27
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:
-
8/3/2019 Motivated Study Eef
22/27
The traditional Marketing Approach
Initiative
Initiative
Reverse Marketing Approach
SUPPLIER PURCHASER
SUPPLIER PURCHASER
-
8/3/2019 Motivated Study Eef
23/27
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,
-
8/3/2019 Motivated Study Eef
24/27
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:
-
8/3/2019 Motivated Study Eef
25/27
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
-
8/3/2019 Motivated Study Eef
26/27
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.
-
8/3/2019 Motivated Study Eef
27/27