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PURCHASING MANAGEMENT

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Key Takeaways

ProcurementMake or Buy

Supplier Evaluation and certification

Basics of forecasting

RFQ and RFPReverse auction

Benchmarking successful sourcing practices

Preparing supply contracts

Service level agreements

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Learning Objectives

Describe purchasing, procurement andsupply management.

Understand the role of supplymanagement and its strategic impact onan organizations competitive advantage.

Have a basic knowledge of the manualpurchasing process, e-procurement,public procurement, and greenpurchasing.

Understand and know how to handle

small value purchase orders. Understand sourcing decisions and the

factors impacting supplier selection.

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Learning Objectives (Cont.) Understand the pros and cons of single

sourcing versus multiple sourcing.

Describe centralized, decentralized, and

hybrid purchasing organizations and their

advantages.

Describe and understand how globalizationimpacts supply management, and describe

and understand the opportunities and

challenges of global sourcing.

Understand total cost of ownership and beable to select suppliers using more than

unit price alone.

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Introduction

Purchasing/ Procurement

Obtaining merchandise, capitalequipment; raw materials, services, ormaintenance, repair, and operating(MRO) supplies in exchange for money orits equivalent

Merchant Buyers-

Wholesalers and retailers who purchasefor resale

Industrial Buyers-

Purchase raw materials for conversion,services, capital equipment, & MROsupplies

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A BriefHistory ofPurchasing

Terms Purchasing - key business function for

acquiring materials, services, & equipment

Contracting - term often used for the

acquisition of services

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The Role ofPurchasing in an

Organization

The primary goals ofpurchasing are:

1. Ensure uninterrupted flows of raw materials at the

lowest total cost,

2. Improve quality of the finished goods produced, and

3. Optimize customer satisfaction.

Purchasing contributesto these objectives by:

Actively seeking better materials and reliable

suppliers,

Work closely with strategic suppliers to improve

quality materials, and

Involving suppliers and purchasing personnel in new

product design and development efforts.

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The Role ofPurchasing in an

Organization (Cont.)

The Financial Significance ofSupplyManagement

Profit-Leverage Effect

A decrease in purchasing expenditures directlyincreases profits before taxes (assuming nodecrease in quality or purchasing total cost)

Return on Assets (ROA) Effect

A high ROA indicates managerial prowess ingenerating profits with lower spending (caveat- ROA

ratios vary from one industry to another)

Inventory Turnover Effect

Increased inventory turnovers indicate optimalutilization of space and inventory levels, increasedsales, avoidance of inventory obsolesce

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The Purchasing Process-

Manual Purchasing(older system)Step 1- Material Requisition/Purchase

Requisition - Stating product, quantity, anddelivery date. May originate as a planned orderrelease from the MRP system. Traveling requisitionused for recurring orders.

Step 2-

The Requestfor Quotation (RFQ)- Buyeridentifies suppliers & issues a request for quotation(RFQ) for routine items or a Requestfor Proposal(RFP) for more demanding products. SupplierDevelopment is used to develop suppliercapabilities.

Step 3- The Purchase Order (PO)- Is the buyersoffer & becomes a binding contract when accepted bysupplier. When initiated by the supplier on their ownterms, the document is a sales order.

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The Purchasing Process-

e-Procurement

Step 1- Material user inputs a materialsrequisition - Relevant information such asquantity and date needed.

Step 2- Materials requisition submitted to buyer

- At purchasing department (hardcopy orelectronically).

Step 3- Buyer assignsqualified suppliersto bid- Product description, closing date, & conditions

are given.

Step 4- Buyer reviewsclosed bids & selects asupplier

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The Purchasing Process- (Cont.)

e-Procurement(Fig. 2.4)

Materials User Purchasing Department/Buyer

Prepares Materials

Requisition inputs

information into

computer system

Materials Requisition

is transmitted

electronically to a

buyer

Buyer reviews

Materials Requisition

Extracts and merges

Materials Requisition

data into Internet

based B2B system

Assigns suppliers to

requisition on B2B

system for bidding and

specifies closing date and

other conditions

Collects and reviews bids

submitted by suppliers

through Internet based

B2B system or fax

Selects a supplier

based on quality, cost and

delivery performance,

then issues a

Purchase Order

Purchase Order is

transmitted electroni-

cally (or faxed) to the

supplier

Materials User Purchasing Department/Buyer

Prepares Materials

Requisition inputs

information into

computer system

Prepares Materials

Requisition inputs

information into

computer system

Materials Requisition

is transmitted

electronically to a

buyer

Materials Requisition

is transmitted

electronically to a

buyer

Buyer reviews

Materials Requisition

Buyer reviews

Materials Requisition

Extracts and merges

Materials Requisition

data into Internet

based B2B system

Extracts and merges

Materials Requisition

data into Internet

based B2B system

Assigns suppliers to

requisition on B2B

system for bidding and

specifies closing date and

other conditions

Assigns suppliers to

requisition on B2B

system for bidding and

specifies closing date and

other conditions

Collects and reviews bids

submitted by suppliers

through Internet based

B2B system or fax

Collects and reviews bids

submitted by suppliers

through Internet based

B2B system or fax

Selects a supplier

based on quality, cost and

delivery performance,

then issues a

Purchase Order

Selects a supplier

based on quality, cost and

delivery performance,

then issues a

Purchase Order

Purchase Order is

transmitted electroni-

cally (or faxed) to the

supplier

Purchase Order is

transmitted electroni-

cally (or faxed) to the

supplier

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The Purchasing Process (Cont.)

e-Procurement

Advantages ofthee-ProcurementSystem

Time savings

Cost savings Accuracy

Real time

Mobility

Trackability

Management

Benefits to the suppliers

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Small Value Purchase OrdersProcessing costsforsmall valuepurchases are minimized through:

Procurement Credit Card/CorporatePurchasing Card

Blanket orOpen-End Purchase Orders

Blank Check Purchase Orders

Stockless Buying or System Contracting

Petty Cash

Standardization & Simplification of Matls& Components

Accumulating Small Orders to Create aLarge Order

Using a Fixed Order Interval

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Sourcing Decisions: The

Make-or-Buy Decision

Outsourcing- buying materials and

components from suppliers instead of

making them in-house. The trend has

moved toward outsourcing. Backward vertical integration refers

to acquiring sources of supply

Forward vertical integration refersto acquiring customers operations.

The Make or Buy decision is a

strategic decision.

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The Make-or-Buy Decision

Reasonsfor Buying or Outsourcing

Cost advantage:Especially for componentsthat are non-vital to the organizationsoperations, suppliers may have economies

ofscale.Insufficientcapacity:A firm may be at or

near capacity and subcontracting from asupplier may make better sense.

Lack ofexpertise

:Firm may not have thenecessary technology and expertise.

Quality:Suppliers have better technology,process, skilled labor, and the advantage ofeconomy of scale.

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Sourcing Decisions: The

Make-or-Buy Decision

(Cont.)Reasonsfor Making

Protect proprietary technology

No competent supplier

Better quality control

Use existing idle capacity

Control of lead-time

transportation, and warehousingcost

Lower cost

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Sourcing Decisions: The

Make-or-Buy Decision (Cont.)

The Make-or-Buy Break-Even Analysis

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Roles ofSupply Base

Supply Base- list of suppliers that a firm uses toacquire its materials, services, supplies, andequipment

Firms emphasize long-term strategic supplieralliances consolidating volume into one or fewer

suppliers, resulting in a smallersupply basePreferred suppliers provide:

Early supplier involvement- Information on thelatest trends in materials, processes, or

designs Information on the supply market

Capacity for meeting unexpected demand

Cost efficiency due to economies of scale

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Supplier Selection

Product and

process

technologies Willingness to

share technologies

& information

[Earlysupplier

involvement (ESI)

and concurrent

engineering (CE)]

Quality

Cost (Total cost of

ownership or

acquisition) Reliability Order

System & cycle time

Capacity

Communicationcapability

Location

Service

The process of selecting suppliers, is complexand should be based on multiple criteria:

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How Many Suppliersto Use

Reasons Favoring aSingle Supplier

To establish a goodrelationship

Less qualityvariability

Lower cost

Transportationeconomies

Proprietary productor process

Volume too small to

split

Reasons Favoring

Multiple Suppliers

Need capacity

Spread risk of supply

interruption

Create competition

Information Dealing with special

kinds of business

Single-source- a risky proposition. Currenttrends favor fewer sources.

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Purchasing: Centralized vs.

Decentralized

Purchasing Organization isdependent on many factors, such asmarket conditions & types of materials

required. Centralized Purchasing-

purchasing department located at thefirms corporate office makes all thepurchasing decisions.

Decentralized Purchasing-individual, local purchasing departments,such as plant level, make their ownpurchasing decisions.

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International

Purchasing/Global SourcingReasonsfor Global Sourcing- Opportunity to

improve quality, cost, and delivery performance

Potential Challenges- Requires additional skills

and knowledge to deal with international

suppliers, logistics, communication, politicalenvironment, and other issues

Import broker or sales agent-performs service for a fee

Import merchant-buys and takes title to the goods

Trading company-imports & carries wide variety of goods

Tariff and non-tariff barriers-International trade

organizations strive to reduce barriers

Countertrade- raw materials are traded for goods and

services