PURCHASING MANAGEMENT

Purchasing is the acquisition of needed goods and services at optimum cost from competent, reliable sources.

o Needs: examine need, timing, quantity, source, specificationso Goods and services: Make or buy or leaseo Optimum cost: Best total cost, not only lowest acquisition cost, consider also

quality and serviceo Competent sources: select carefullyo Reliable sources: monitor performance.

Components of purchasing

o Needs assessmento Source identificationo Contract negotiationo Supplier selectiono PO issuanceo Expediting / follow-upo Performance evaluation

Purchasing objectives:

o Right qualityo Right quantityo Right timeo Right sourceo Right price

Purchasing management cycle

o Analysiso Planning – make or buy, domestic vs. overseas, national vs. local, distributor vs.

manufacturer, purchasing timingo Implementationo Controlo Organisation

Purchasing role in corporate planning

o Quantityo Timeo Money

Purchasing organisation – 2 types

o Type : Structural, Processo Elements: People, activitieso Content : reporting relationships, work sequenceso Nature: static, dynamico Diagram format: Organisation chart, flow diagramo Example: product specialization, PERT network chart

Principles of Purchasing organisation

o Specialisationo Controlo Co-ordinationo Communicationo Line and Staff

Setting up a Purchasing Dept:

o Task delegationo Work classification – Management, buying, clerical work, expediting, special

project or studieso Centralisation vs. decentralizationo Material management

Procurement Process:

o Recognition of needo Requisition issueo Requisition reviewo Specification dept.o Supplier searcho Supplier selectiono PO issueo Contract formationo Expeditingo Receiving and inspectiono Contract completion

Basic options in materials sourcing

o Number of supplierso Supplier size

o Supplier locationo Distribution channelo Co-operative purchasing

Evaluation and selection of vendors

1. Published sourceso General industrial registers or directorieso Industry sources

Publication of trade / professional asso.Trade periodicalsIndustry buyers guide

o Yellow pageso Manufacturers; catalogues and sales literature

2. Internal sourceso Supplier fileso Technical personnel

3. Personal contactso Sales personnelo Professional colleagueso Trade exhibits

4. International sourceso Foreign embassies, consulateso Intl. chamber of commerce

o Plant conditions – financial statuso Quality and serviceo Priceo Selection and follow-upo The categorical plano The weighted – point plano The cost – ratio plan

Source Management and Development

The purchasing must:

o Evaluate supplier performance continuouslyo Reward satisfactory suppliers with additional orderso Inform unsatisfactory / deficiencies are identified, suggest remedies and offer

assistanceo Remove consitently unsatisfactory suppliers from approved list and eliminate

from further contract awardso Limit the size of supplier base, kept it fresh and dynamic and identify new sources

o Proactively cultivate and manger supplier relations to produce CIP in quality, service and price.

Economic consideration in price making:

o Cost approach – govt. controlled priceso Market approacho Discountso Trade discountso Quantity discounts

Price cost analysis: The analysis of all the factors that enter into a price, and the attempt to ensure that the final price is a reasonable one in terms of the use to which the material is to be put and the competitive situation faced by the buying and selling firms.

Learning curve: Is a formalization of the common sense realization that the per unit cost of production of a new item decreased as additional units of that product are manufactured. The cost should decline with each succeeding unit producted, as the supplier becomes more skilled, or learns how to make the product. – CIP.

Factors kept in mind while doing price-cost analysis:

o Priceo Costso Learning Curveo Direct material costso Direct labour costso Overhead costso General and administrative costso Profits

Purchasing procedure:

o Parameters of PRo Format of PRo Approval of PRo Checking PRo Method of purchaseo Who calls Quotations / tenderso Opens the Tenderso How should be tenders open and handledo Negotiationso Competent authority to approve Purchase

o POo Follow-up with the suppliero Negotiate purchase documents, customs clearance etc.o Receive materials and inspectiono Carry out inspectiono Discrepancy report in case of damageso Rejected materials handling

Steps in purchasing

See chart

Need for purchasing procedure

o Standardisingo Provide guidance to handle issues on past experienceo Purchasing procedure is good training toolo Procurement of quality products – quality assurance and maintenanceo Personal likes and dislikes are eliminated on timely procuremento Insurance claims are settled

Designing of purchasing strategies

o Sourcingo Costo Peopleo Logistico Outsourcing

Performance measures:

o Purchase price performanceo Purchase price change analysiso Inventory level (weeks of stock)o Delivery performanceo Quality performanceo Number of vendors in useo Lead-time analysis

Price and cost Negotiations:

The P.manager shall take into account:

Terms of payment and delivery

Trade-in, rebate and other allowanceTooling costsSetup chargesPotential penalties for quantity variancesSpecial packaging or service requirementQuality specifications

Primary steps of the preparation of negotiation process:

o Setting objectives – must have, want, tradableso Getting the facts

Pre-requisites for Competitive bidding:

o Clear specificationso Significant expenditureo Adequate competitiono Sufficient time

The competitive bidding process:

o Preparation of specificationso Selection of prospective bidderso Issuance of invitations to bido Bid preparation by vendorso Receipt and review of bido Award of contract

Tasks for computerization in purchasing:

o Preparation of PIo RFQo Typing POo Amendments to POo Review of status of PR and PO management reportso Searching of data thro; manual files for Management infoo Consolidation of datao Checking the finished work for mathematical accuracy and typo errorso Maintaining purchase history datao Storing records of old POs

Benefits of computerization:

o Reduced direct purchased material costs – lower material costs, savings in manual time.

Economic purchase quantities Calculating order release time Calculating least-cost suppliers Identifying buying opportunities Make / buy decisions

o Reduced departmental running costs – Clerical costs Additional personnel Eliminating duplicate information Data errors – duplicate files, reduction in key punching,

entering new data, using a database. Lower expediting costs Lower shipping charges Reduced cost of forms

o Imporved personnel productivityo Simplyfying the buying process – researching new sources, prepare price nego.,

remaining on top of market, know when to make or buy, building assuranceo Improving inter departmental communicationo Better planningo Job satisfactiono Increased purchasing productivityo Reduction in inventoryo Other benefits – more accurate info for nego., timely info for purchase decisions,

faster response time.

Appropriate software for purchasing:

A software package A general purchase program – Database managers, spreadsheets,

communications, word processing, integrated software Custom made programs

Internal and External communications:

Linking to other departments Networking Inter-departmental data exchange Production planning and purchasing Reverse flow of info. From purchasing to production planning Stores and purchasing Finance and purchasing Quality control and purchasing

Communicating with suppliers Developing an external system Closer communication Electronic mail

Communication of purchasing with other modules:

Controlling Financial accounting Sales and Distribution Integration of purchasing with MM Determination of requirements Source determination Vendor selection PO processing PO follow-up Goods receiving and inventory management Invoice verifications Blocking of invoices Vendor evaluation