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Ch02 purchasing management

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Ch02 purchasing management

  1. 1. CHAPTER 2- PURCHASING MANAGEMENT Prof O S Rao
  2. 2. Learning Objectives <ul><li>You should be able to: </li></ul><ul><ul><li>Describe the role of purchasing and understand its impact on an organization’s competitive advantage. </li></ul></ul><ul><ul><li>Have a basic knowledge of manual purchasing and e-procurement. </li></ul></ul><ul><ul><li>Understand and know how to handle small value purchase orders. </li></ul></ul><ul><ul><li>Understand sourcing decisions and the factors impacting supplier selection. </li></ul></ul><ul><ul><li>Understand the pros and cons of single versus multiple sourcing. </li></ul></ul>
  3. 3. Learning Objectives- Cont. <ul><ul><li>Describe centralized, decentralized, and hybrid purchasing organizations and their advantages. </li></ul></ul><ul><ul><li>Describe and understand how globalization impacts, purchasing, and describe and understand the opportunities and challenges of global sourcing. </li></ul></ul><ul><ul><li>Understand total cost of ownership and be able to select suppliers using more than unit price alone. </li></ul></ul>
  4. 4. Chapter Two Outline <ul><li>The Role of Purchasing in an Organization </li></ul><ul><li>The Purchasing Process </li></ul><ul><li>Sourcing Decisions: The Make-or-Buy Decision </li></ul><ul><li>Roles of Supply Base </li></ul><ul><li>Supplier Selection </li></ul><ul><li>How Many Suppliers to Use </li></ul><ul><li>Purchasing Organization: Centralized versus </li></ul><ul><li>Decentralized Purchasing </li></ul><ul><li>International Purchasing/Global Sourcing </li></ul>
  5. 5. Introduction <ul><li>Purchasing- </li></ul><ul><li>Obtaining merchandise, capital equipment; raw materials, services, or maintenance, repair, and operating (MRO) supplies in exchange for money or its equivalent. </li></ul><ul><li>Merchant Buyers - </li></ul><ul><li>wholesalers and retailers who purchase for resale. </li></ul><ul><li>Industrial Buyers - </li></ul><ul><li>purchase raw materials for conversion, services, capital equipment, & MRO supplies. </li></ul>
  6. 6. The Role of Purchasing in an Organization <ul><li>The primary goals of purchasing are: </li></ul><ul><ul><li>Ensure uninterrupted flows of raw materials at the lowest total cost, </li></ul></ul><ul><ul><li>Improve quality of the finished goods produced, and </li></ul></ul><ul><ul><li>Optimize customer satisfaction. </li></ul></ul><ul><li>Purchasing contributes to these objectives by: </li></ul><ul><ul><li>Actively seeking better materials and reliable suppliers, </li></ul></ul><ul><ul><li>Work closely with strategic suppliers to improve quality materials, and </li></ul></ul><ul><ul><li>Involving suppliers and purchasing personnel in new product design and development efforts. </li></ul></ul>
  7. 7. The Purchasing Process <ul><li>Manual Purchasing - Older system, prone to duplication of effort and error </li></ul><ul><li>Step 1-Material Requisition/Purchase Requisition - stating product, quantity, and delivery due date are clearly. </li></ul><ul><li>Step 2- The Request for Quotation (RFQ) - Buyer identifies suppliers & issues a request for quotation (RFQ).   Step 3- The Purchase Order (PO)- The purchase order is the buyer’s offer & becomes a binding contract when accepted by supplier. </li></ul>
  8. 8. The Purchasing Process- Cont.
  9. 9. The Purchasing Process- Cont. <ul><li>Electronic Procurement ( e-Procurement ) </li></ul><ul><li>Step 1- Material user inputs a materials requisition - relevant information such as quantity and date needed. </li></ul><ul><li>Step 2- Materials requisition submitted to buyer- at purchasing department (hardcopy or electronically). </li></ul><ul><li>Step 3- Buyer assigns qualified suppliers to bid- Product description, closing date, & conditions are given. </li></ul><ul><li>Step 4- Buyer reviews closed bids & selects a supplier </li></ul>
  10. 10. The Purchasing Process- Cont. <ul><li>Advantages for the e-Procurement System </li></ul><ul><ul><li>Time savings </li></ul></ul><ul><ul><li>Cost savings </li></ul></ul><ul><ul><li>Accuracy </li></ul></ul><ul><ul><li>Real time </li></ul></ul><ul><ul><li>Mobility </li></ul></ul><ul><ul><li>Trackability </li></ul></ul><ul><ul><li>Management </li></ul></ul><ul><ul><li>Benefits to the suppliers </li></ul></ul>
  11. 11. Small Value Purchase Orders <ul><li>Processing costs can be substantial. Small value purchases should be minimized through: </li></ul><ul><li>Procurement Credit Card/Corporate Purchasing Card </li></ul><ul><li>Blank Check Purchase Orders </li></ul><ul><li>Blanket or Open-End Purchase Orders </li></ul><ul><li>Stockless Buying or System Contracting </li></ul><ul><li>Petty Cash </li></ul><ul><li>Standardization & Simplification of Matls & Components </li></ul><ul><li>Accumulating Small Orders to Create a Large Order </li></ul><ul><li>Using a Fixed Order Interval </li></ul>
  12. 12. Sourcing Decisions: The Make-or-Buy Decision <ul><li>Outsourcing - buying materials and components from suppliers instead of making them in-house. The trend has moved toward outsourcing. </li></ul><ul><li>Backward integration refers to acquiring sources of supply </li></ul><ul><li>Forward integration refers to acquiring customer’s operations. </li></ul><ul><li>The Make or Buy decision is a strategic decision. </li></ul>
  13. 13. Sourcing Decisions: The Make-or-Buy Decision- Cont. <ul><li>Reasons for Buying or Outsourcing </li></ul><ul><li>  </li></ul><ul><li>Cost advantage : Especially for components that are non-vital to the organization’s operations. </li></ul><ul><li>Insufficient capacity : A firm may be at or near capacity. </li></ul><ul><li>Lack of expertise : Firm may not have the necessary technology and expertise. </li></ul><ul><li>Quality : Suppliers have better technology, process, skilled labor, and the advantage of economy of scale. </li></ul>
  14. 14. Sourcing Decisions: The Make-or-Buy Decision- Cont. <ul><li>Reasons for Making </li></ul><ul><li>Protect proprietary technology </li></ul><ul><li>No competent supplier </li></ul><ul><li>Better quality control </li></ul><ul><li>Use existing idle capacity </li></ul><ul><li>Control of logistics - lead-time transportation, and warehousing cost </li></ul><ul><li>Lower cost </li></ul>
  15. 15. Sourcing Decisions: The Make-or-Buy Decision- Cont. <ul><li>The Make-or-Buy Break-Even Analysis </li></ul>
  16. 16. Roles of Supply Base <ul><li>Supply Base - suppliers that a firm uses to acquire its materials, services, supplies, and equipment. </li></ul><ul><li>Firms emphasize long-term strategic supplier alliances consolidating volume into one or fewer suppliers, resulting in a smaller supply base . </li></ul><ul><li>Preferred suppliers provide: </li></ul><ul><ul><li>Early supplier involvement- Information on the latest trends in materials, processes, or designs </li></ul></ul><ul><ul><li>Information on the supply market </li></ul></ul><ul><ul><li>Capacity for meeting unexpected demand </li></ul></ul><ul><ul><li>Cost efficiency due to economies of scale </li></ul></ul>
  17. 17. Supplier Selection <ul><ul><li>Product and process technologies </li></ul></ul><ul><ul><li>Willingness to share technologies and information </li></ul></ul><ul><ul><li>Quality </li></ul></ul><ul><ul><li>Cost </li></ul></ul><ul><ul><li>Reliability </li></ul></ul><ul><ul><li>Order System and cycle time </li></ul></ul><ul><ul><li>Capacity </li></ul></ul><ul><ul><li>Communication capability </li></ul></ul><ul><ul><li>Location </li></ul></ul><ul><ul><li>Service </li></ul></ul>The process of selecting suppliers, is complex and should be based on multiple criteria:
  18. 18. How Many Suppliers to Use  <ul><li>Reasons Favoring a Single Supplier </li></ul><ul><li>To establish a good relationship </li></ul><ul><li>Less quality variability </li></ul><ul><li>Lower cost </li></ul><ul><li>Transportation economies </li></ul><ul><li>Proprietary product or process </li></ul><ul><li>Volume too small to split </li></ul><ul><li>Reasons Favoring More than One Supplier </li></ul><ul><li>Need capacity </li></ul><ul><li>Spread risk of supply interruption </li></ul><ul><li>Create competition </li></ul><ul><li>Information </li></ul><ul><li>Dealing with special kinds of business </li></ul>Single-sourcing- a risky proposition. Although trends favor fewer sources, avoid single source.
  19. 19. Purchasing: Centralized vs. Decentralized   <ul><li>Purchasing Organization dependent on many factors, such as market conditions & types of materials required. </li></ul><ul><ul><li>Centralized Purchasing - purchasing department located at the firm’s corporate office makes all the purchasing decisions. </li></ul></ul><ul><ul><li>Decentralized Purchasing - individual, local purchasing departments, such as plant level, make their own purchasing decisions . </li></ul></ul>
  20. 20. Purchasing: Centralized vs. Decentralized     <ul><li>Advantages- Centralization </li></ul><ul><ul><li>Concentrated volume- leveraging purchase volume </li></ul></ul><ul><ul><li>Avoid duplication </li></ul></ul><ul><ul><li>Specialization </li></ul></ul><ul><ul><li>Lower transportation costs </li></ul></ul><ul><ul><li>No competition within units </li></ul></ul><ul><ul><li>Common supply base   </li></ul></ul><ul><li>Advantages- Decentralization </li></ul><ul><ul><li>Closer knowledge of requirements </li></ul></ul><ul><ul><li>Local sourcing </li></ul></ul><ul><ul><li>Less bureaucracy </li></ul></ul>A hybrid purchasing organization - both decentralized at the corporate level and centralized at the business unit level may be warranted.
  21. 21. International Purchasing/Global Sourcing <ul><li>Global sourcing- </li></ul><ul><ul><li>Opportunity to improve quality, cost, and delivery performance. </li></ul></ul><ul><ul><li>Requires additional skills and knowledge to deal with international suppliers, logistics, communication, political environment, and other issues.   </li></ul></ul><ul><li>Import broker or sales agent- performs service for a fee. </li></ul><ul><li>Import merchant- buys and takes title to the goods. </li></ul><ul><li>Trading company- imports & carries wide variety of goods. </li></ul>

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