MM ZG511-L16

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BITSPilaniPilani Campus

Manufacturing Organization

and Management

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BITSPilaniPilani Campus

PurchasingLecture 16

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BITS Pilani, Pilani Campus

Purchasing is one of the key functions in the

operation of a modern manufacturing concern.

Profits of manufacturers are affected by good

purchasing practices based on sound principles. It has already been pointed out that the

purchase requisition is the key to material

controlsince it initiates the purchasing activity.

Introduction

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Purchasing is an important phase in the control of theflow of materials into the manufacturing plant from thevendor or supplier.

The classes of inventory thus controlled are purchased

parts and raw material. In addition the inventory ofsupplies is controlled by the purchasing activity.

We have already pointed out the importance of havingmaterial available when required for manufacturingoperations, as well as the additional costs incurred if

large quantities or expensive items are received too farin advance of the required date.

Control of the flow of incoming material is an importantresponsibility of the purchasing group, particularly when

just-in-time delivery of goods takes place.

Purchasing and the Control of Material

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As a part of the overall material control activity, the statement of theobjectives of the purchasing group will include most of the objectivesof inventory management and control.

However, let us review them and then discuss these objectives fromthe view point of the purchasing function.

The primary objective is to contribute toward the profits of the

manufacturing activity. Another important objective is to ensure the availability of

materials so that delivery schedules can be maintained, thuskeeping the customer satisfied. Specific objectives that supportthese goals are:1. Procurement of the right material, in the right quantity, and of the

right quality.2. Receipt or delivery of this material at the right place at the right

time.

3. Purchase of the material from the right source at the right price.

Objectives of Good Purchasing

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The complete purchasing cycle consists of the followingsteps:

1. Receipt and analysis of the purchase requisition

2. Selection of potential sources of supply

3. Issuance of requests for quotations4. Receipt and analysis of quotations

5. Selection of the right source

6. Determination of the right price

7. Issuance of the purchase order8. Followup to ensure scheduled delivery

9. Analysis of receiving reports

10. Analysis and approval of vendorsinvoice for payment.

The above 10 steps are explained in details in next slides:

Purchasing Procedure

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Purchase Requisi t ion: Purchase requisitions normally originate with the inventory control group.

Regardless of the type of inventory perpetual or bin- a recorder point isestablished.

When existing stock reaches this level, a purchase requisition is usually preparedand forwarded to the purchasing group.

Sources of Supply: A purchasing group must constantly keep itself informed as to the best places to

buy all items of material required.

Effective purchasing cannot be accomplished on a status quo basis.

It is true that in a going situation old established sources will in all probability bethe best sources; however, new sources should be investigated from time to timeand the performance of old sources reevaluated periodically.

If the purchase requisition is for a new item, then a selection should be made for

inquiry from the list of potential sources by use of the request for quotation.

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Request for Quotat ion: The title of this form is self-explanatory. It is sent by the purchasing group to all

the selected possible sources of supply.

It should be as complete as a purchase order except for the statement of theprice to be paid. It is up to the vendor to submit the price; this is the vendorsquotation.

Because this form is so nearly like the purchase order form, it is common

practice to print this is NOT an ORDER in bold type across the form.Select ion of the Right Sou rce:

Upon receipt of many quotations from the vendors, if then becomes the job of thepurchasing group to select the right source.

A comprehensive discussion of all the factors that enter into this decision isbeyond the scope of this book.

Briefly, the purchasing group is interested in the reliability of the prospective

source of supply.

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Determinat ion o f the Righ t Pr ice: This is a major responsibility of the purchasing group. Many factors influence

what is a rightpriceand, again, a comprehensive discussion is hardly possible.

In a broad sense, a right price is one that is right for all concerned thepurchaser, the vendor, the buyerscustomer, and the public,.

Obviously, the purchaser must be able to buy material at a price that makes itpossible to sell the product at a profit- but profits are also essential to the vendor.

Modern industry is too complex and interrelated to permit sharp buying tacticsthat drive prices to a level at which the supplier cannot make a profit.

Purchase Order: Once accepted by the vendor, a purchase order constitutes a contract for the

delivery of the goods in accordance with the terms of the purchase agreement.

This constitutes a legal document, and it usually contain many other terms ofagreement in addition to the quantity, quality, delivery, and price.

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Fol low-up and Del ivery: The plan for the flow of material into a manufacturing plant is established by

purchasing procedure.

Determination of the actual performance and comparison and evaluation of thisperformance with respect to the purchasing plan can only be accomplished byeffective follow-up of purchase orders.

Receiving Reports : Careful inspection of all incoming material and parts is essential to effective

material control.

The purchase order is the basic source of reference. Of course, it is oftensupplemented by engineering specification and blueprints.

Payment of inv oices: Invoices received from vendors for goods shipped should receive the approval of

the purchasing group. This is the final control step in the purchasing procedure.

Invoices should be checked to ensure that quantities billed conform with thequantities accepted by the receiving and inspection departments.

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Although value analysis has been discussed earlier, itrequires further amplification here in as much as thevalue analysis function is commonly thought of as part ofthe purchasing activity.

The basic idea of value analysis is simply that of a cost-

reduction technique, and as such, it might logically betreated as a part of methods engineering.

However, as it is frequently used, purchasing peoplehave a very definite role to play; so perhaps it is logical

for value analysis to be under their general direction.

Value Analysis

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In the following sections we attempt to list the many factors thatinfluence both purchasing practices and the results of the work ofthe purchasing group.

Sub con tract ing: Items purchased on subcontracts are actually purchased parts or components.

However, subcontracting generally takes place when it is not possible to produce

the parts in the local plant. In placing this type of purchase order, the vendor is in competition with the

purchaser.Standardizat ion of Product:

We discussed the advantages of the standardization of products and theircomponent parts.

Often it is overlooked that suppliers also attempt to standardize the items that

they sell. One of the principal activities of the purchasing group is to encourage the

inclusion of vendors standards in the product design of the purchasers product.

Factors Affecting Purchasing

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Econom ic Purchase Lot: Earlier, we mentioned the economic purchase lot. It is similar to the economic

manufacturing lot only the cost factors are different.

Larger quantities of goods can usually be purchased for lower unit costs.

These savings must be balanced against the increased costs for the carryingcharges, the same as in the manufacturing lot.

In manufacturing we saved in setup costs, here we save in the cost of preparing

the purchase order and on all the other steps in the purchasing procedure. Owing to the cost factors involved, it is easier to calculate economic purchase lot

quantities.Short and Con trol led Markets:

We have already said that purchasing people have to know where to buy therequired items of material.

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Even if we know the purchasing source, it is not always easyto buy. Some markets are short; that is, there is not enoughmaterial to meet the demand.

Other markets are controlled, material is available but totalsales are restricted.

Cancel lat ions: Cancellations of purchase orders cannot be totally avoided. If work has been started by the vendors, or they have made other commitments

on the strength of the order, they may loose a considerable amount of money.Trade Relations :

Industry is so specialized and extensive that many purchases are made fromvendors who in turn buy back their material in the form of the purchasers

product. This is termed reciprocal buying.

Too often this presents a real problem to the purchasing group.

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The Law of Agency: Purchase order and contracts are signed by individuals, each of whom acts as

an agent of the company or corporation.

As agents, they have been given either specific or implied authority to act fortheir employer in the purchase of material, supplies, and services, or in any othertype of agreement constituting a purchase. As a consequence, such a person isknown as purchasing agent.

Organizat ion Structu re: There is no set pattern of purchasing organization.

The same sound principles of organization apply to purchasing as to all the otherfunctions in the manufacturing enterprise.

The position of the purchasing group in the overall organization is largelydependent on the importance of the function.

Purchasing Organization

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Central ization and Decentral ization In large organizations- particularly in multi-plant industriesthere is a problem of

centralization or decentralization of purchasing activities.

However, decentralized operations are more flexible, and the trend towardincreased decentralization of large corporations indicates that this method oforganization is currently the most popular.

Major contracts for principal materials may be retained on a centralized basis to

gain bargaining advantage.Purchasing Group: The purchasing group in larger organizations usually consists of several

purchasing agents, buyers, expediters, and the necessary clerical andstenographic personnel.

Organization of this group may be on the basis of product line or purchasedmaterial. If the latter, one agent may specialize in the purchase of steel, another

in plastics, another in supplies, and so on, the entire organization beingdeveloped along these lines.

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Purchasing PracticesIt might be well to discuss a few of the many practices of the

purchasing function.Salesperson Relat ion s:

Both purchasing and selling are rapidly gaining professional recognition.

The continuing technological advance in both materials and processes requiresthat purchasing and sales personnel be more than glad-hand artists- they haveto know what they are selling what they are buying. Sharptradingis no longeraccepted practice.

Discounts : Industrial purchases are usually subject to cash, trade and quantity discounts.

Purchasing agents and buyers must be thoroughly acquainted with thesediscounts as they apply to the purchases that they are making and with thelegal aspects of the same.

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To promote fair trade, free from restraint and undue favoritism, lawssuch as the Robinson-Patman Act, Sherman Act, and Clayton Actmust be common knowledge of purchasing personnel and theirrequirements must be observed.

Blanket Purch ase Order: With many more or less standard items, companies will often negotiate blanket

purchase orders for a period of time with an agreed- upon price.

As the items are required in the plant, a request for shipment against thepurchase order is made to the vendor without any additional paperwork.

Reduction in purchasing costs could be considerable with this procedure.Traveling Requ isi t ion:

For stock items that must be replaced from time to time, a traveling requisition isoften used.

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This could be a standard form or a computerizedtransaction initiated by stores personnel. The requisitionwould be linked to information on file such as

A short item description

Possible sources of the material

Past pricesRecorder point and economic lot size

A record of historical use.Mult iple Sourc es:

It seldom is advisable to putall your eggs in one basket.Where large quantities are involved, a good purchasingpractice is to develop more than one source of supplyand divide requirements among these sources.

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This takes considerable tact on the part of the buyer, especially in a JITsituation, but ensures against the loss of delivery that may resultfrom fire, flood, labor troubles, or other causes that may interferewith production at a single source of supply.

Forward Buying :

Although quantities to be purchased are normally determined byinventory management and control, it is often advantageous topurchase quantities in excess of the normal operating requirementsof the manufacturing plant. If operational considerations or supplyconditions indicate the need for such an inventory reserve, thesepurchases are termed forward buying.

Speculat ive Bu ying :This is not forward buying. In speculative buying materials arebought and held for resale, the hope being to gain advantage of arise in prices.

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Ethical conduct is a concern of departments and sections of amanufacturing organization; however, it should be of particularconcern to the purchasing group because of authority vestedin them to spend money.

The purchasing executive is constantly walking the tightropeof ethics in everything that he or she does.

Of the 10 standards of purchasing practice specified by theNational Association of Purchasing Management, five dealwith the question of ethics.

International Procurement

As the world shrinks in economic terms, internationalprocurement the buying of goods and services outside thecontinental limits of the United States has added one moredimension to the buying practitioners arsenal for locatingqualified suppliers. Indeed, the search for the best materialsat the best price and quality should not be limited ingeographical terms.

Ethics

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It is difficult to make a valid evaluation of purchasing as on overall

activity. General measures such as the ratio of the cost of purchasing to the

value of material purchased, or to the value of sales, may provide auseful index within a given organization.

It is easier, however, to set up measures related to the more specificobjectives of the purchasing group:

Is the right material of the right quality and in the right quantity beingprocured from the right source at the right price and delivered at theright place at the right time?

Continuous rating of the accomplishment of these objectives willindicate the success of the function, if not the total efficiency.

Insofar as these objectives might be accomplished at excessive costby the purchasing organization, it might be well to consider the ratioof purchasing costs to the profits of the concern but again, somany other factors affect these profits that a valid measurement ishighly doubtful.

Continued research in the field of purchasing will no doubt result ineffective ways of measuring this principal activity in the control of

material in manufacturing.

Evaluation of Purchasing

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Because it is normally the prerogative of the purchaser to designatethe route and method of shipment of material, in smallermanufacturing operations the function of traffic management isincluded in the purchasing operation. However, in larger companiestraffic departments are charged with traffic responsibilities.

Traffic function includes:

Planning of routes for incoming material, including the selection ofthe method of transportation.

Preparation of rate charts for delivery of material.

Tracing of shipments to ensure prompt delivery.

Auditing and approval for incoming freight and other transportationbills

Coordinating the receipt of large shipment to avoid demurragecharges.

Handling the adjustment of claims for good damaged or lost intransit.

Traffic

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Documents

MM ZG511-L16