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Copyright 2006 Prentice Hall Publishing CompanyCopyright 2006 Prentice Hall Publishing Company 11Chapter 17 Purchasing & QualityChapter 17 Purchasing & Quality
Purchasing, Quality Control, and
Vendor Analysis
Copyright 2006 Prentice Hall Publishing CompanyCopyright 2006 Prentice Hall Publishing Company 22Chapter 17 Purchasing & QualityChapter 17 Purchasing & Quality
Supply Chain Supply Chain ManagementManagement
A key determinant of a A key determinant of a company’s ability to competecompany’s ability to compete
Shaving 2% from a company’s Shaving 2% from a company’s CGS can increase net income by CGS can increase net income by as much as 28%as much as 28%
Requires a sound purchasing planRequires a sound purchasing plan
Components of a Components of a purchasing planpurchasing plan
Right Quality
Right Vendor
Right Time
Right Quantity
Right Price
The Purchasing
Plan
Copyright 2006 Prentice Hall Publishing CompanyCopyright 2006 Prentice Hall Publishing Company 44Chapter 17 Purchasing & QualityChapter 17 Purchasing & Quality
The Purchasing PlanThe Purchasing Plan
QualityQuality Total Quality ManagementTotal Quality Management Deming’s 14 PointsDeming’s 14 Points
QuantityQuantity Economic Order Quantity Analysis Economic Order Quantity Analysis
(EOQ)(EOQ) Economic Order Quantity with Economic Order Quantity with
UsageUsage PricePrice
Purchase DiscountsPurchase Discounts
Copyright 2006 Prentice Hall Publishing CompanyCopyright 2006 Prentice Hall Publishing Company 55Chapter 17 Purchasing & QualityChapter 17 Purchasing & Quality
TimeTime Reorder Point AnalysisReorder Point Analysis
VendorVendor Sources of SupplySources of Supply Vendor Rating ScaleVendor Rating Scale
(Continued)(Continued)
The Purchasing PlanThe Purchasing Plan
Copyright 2006 Prentice Hall Publishing CompanyCopyright 2006 Prentice Hall Publishing Company 66Chapter 17 Purchasing & QualityChapter 17 Purchasing & Quality
QualityQuality
““Higher quality is less expensive to produce Higher quality is less expensive to produce than lower quality.” -- W. Edwards Demingthan lower quality.” -- W. Edwards Deming
The endless pursuit of quality produces lower The endless pursuit of quality produces lower costs, higher productivity, greater market costs, higher productivity, greater market share, and more satisfied customers.share, and more satisfied customers.
Experts estimate that the cost of “bad Experts estimate that the cost of “bad quality” ranges from 20% to 30% of sales.quality” ranges from 20% to 30% of sales.
Quality
Copyright 2006 Prentice Hall Publishing CompanyCopyright 2006 Prentice Hall Publishing Company 77Chapter 17 Purchasing & QualityChapter 17 Purchasing & Quality
Total Quality Management (TQM) is a Total Quality Management (TQM) is a philosophy that strives for getting philosophy that strives for getting everything a company does for a everything a company does for a customer customer right the first timeright the first time..
TQM involves a life-long process of TQM involves a life-long process of continuous improvement; a continuous improvement; a successful TQM process requires a successful TQM process requires a company to change company to change everythingeverything it it does.does.
QualityQualityQuality
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Implementing Implementing TQMTQM
1. Use benchmarking to discover the 1. Use benchmarking to discover the best practices that will produce best practices that will produce quality results. quality results.
2. Shift from a management-driven 2. Shift from a management-driven culture to a participative, team-culture to a participative, team-based one.based one.
3. Modify the reward system to 3. Modify the reward system to encourage teamwork and encourage teamwork and innovation. innovation.
Success requires following 11 principles:Success requires following 11 principles:
Copyright 2006 Prentice Hall Publishing CompanyCopyright 2006 Prentice Hall Publishing Company 99Chapter 17 Purchasing & QualityChapter 17 Purchasing & Quality
4. Train workers constantly to give them 4. Train workers constantly to give them the tools they need to produce quality the tools they need to produce quality and to upgrade the company’s and to upgrade the company’s knowledge base. knowledge base.
5. Train employees to measure quality 5. Train employees to measure quality with the tools of statistical process with the tools of statistical process control (SPC).control (SPC).
6. Use Pareto’s Law to focus TQM efforts.6. Use Pareto’s Law to focus TQM efforts.7. Share information with everyone in 7. Share information with everyone in
the organization.the organization.
Implementing Implementing TQMTQMSuccess requires following 11 principles:Success requires following 11 principles:
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8. Focus quality improvements on 8. Focus quality improvements on astonishing the customer.astonishing the customer.
9. Don’t rely on inspection to 9. Don’t rely on inspection to produce quality products and produce quality products and services. services.
10. Avoid using TQM to place blame 10. Avoid using TQM to place blame on those who make mistakes.on those who make mistakes.
11. Strive for continuous 11. Strive for continuous improvement in processes as well improvement in processes as well as in products and services. as in products and services.
Implementing Implementing TQMTQMSuccess requires following 11 principles:Success requires following 11 principles:
Copyright 2006 Prentice Hall Publishing CompanyCopyright 2006 Prentice Hall Publishing Company 1111Chapter 17 Purchasing & QualityChapter 17 Purchasing & Quality
Deming’s 14 PointsDeming’s 14 Points
1. Constantly strive to improve 1. Constantly strive to improve products and services.products and services.
2. Adopt a total quality philosophy.2. Adopt a total quality philosophy.
3. Correct defects as they happen 3. Correct defects as they happen rather than rely on mass rather than rely on mass inspection of end products.inspection of end products.
4. Don’t award business on price 4. Don’t award business on price alone.alone.
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5. Constantly improve the system 5. Constantly improve the system of production and service.of production and service.
6. Institute training.6. Institute training.
7. Institute leadership.7. Institute leadership.
8. Drive out fear.8. Drive out fear.
Deming’s 14 PointsDeming’s 14 Points
Copyright 2006 Prentice Hall Publishing CompanyCopyright 2006 Prentice Hall Publishing Company 1313Chapter 17 Purchasing & QualityChapter 17 Purchasing & Quality
9. Break down barriers among staff 9. Break down barriers among staff areas.areas.
10. Eliminate superficial slogans and 10. Eliminate superficial slogans and goals.goals.
11. Eliminate standard quotas.11. Eliminate standard quotas.
Deming’s 14 PointsDeming’s 14 Points
Copyright 2006 Prentice Hall Publishing CompanyCopyright 2006 Prentice Hall Publishing Company 1414Chapter 17 Purchasing & QualityChapter 17 Purchasing & Quality
12. Remove barriers to pride in 12. Remove barriers to pride in workmanship.workmanship.
13. Institute vigorous education and 13. Institute vigorous education and retraining.retraining.
14. Take demonstrated 14. Take demonstrated management action to achieve management action to achieve transformation.transformation.
Deming’s 14 PointsDeming’s 14 Points
Copyright 2006 Prentice Hall Publishing CompanyCopyright 2006 Prentice Hall Publishing Company 1515Chapter 17 Purchasing & QualityChapter 17 Purchasing & Quality
Economic Order Economic Order QuantityQuantity
Cost of units = D x CCost of units = D x C Holding (Carrying) costs = Q/2 x HHolding (Carrying) costs = Q/2 x H Setup (Ordering) costs = D/Q x SSetup (Ordering) costs = D/Q x S
.... seeks to minimize total inventory .. seeks to minimize total inventory costs. costs.
Three major inventory costs to Three major inventory costs to consider:consider:
EOQ and Carrying Costs
If Q is ...If Q is ... Q/2, Average InventoryQ/2, Average Inventory Q/2 x H, Carrying CostsQ/2 x H, Carrying Costs
500500
1,0001,000
2,0002,000
3,0003,000
4,0004,000
5,0005,000
6,0006,000
7,0007,000
8,0008,000
9,0009,000
10,00010,000
250250
500500
1,0001,000
1,5001,500
2,0002,000
2,5002,500
3,0003,000
3,5003,500
4,0004,000
4,5004,500
5,0005,000
$312.50$312.50
625625
1,2501,250
1,8751,875
2,5002,500
3,1253,125
3,7503,750
4,3754,375
5,0005,000
5,6255,625
6,2506,250
EOQ and Ordering Costs
If Q is ...If Q is ... D/Q, # Orders per YearD/Q, # Orders per Year D/Q x S, Ordering CostD/Q x S, Ordering Cost
500500
1,0001,000
2,0002,000
3,0003,000
4,0004,000
5,0005,000
6,0006,000
7,0007,000
8,0008,000
9,0009,000
10,00010,000
800800
400400
200200
134134
100100
8080
6767
5858
5050
4545
4040
$7,200$7,200
3,6003,600
1,8001,800
1,2061,206
900900
720720
603603
522522
450450
405405
360360
Solving for EOQSolving for EOQ
H
SD2EOQ
where D = Annual demand for productS = Setup (ordering) cost for a single run (order)H = Holding (carrying) cost per unit per year
EOQ and Total EOQ and Total
CostsCostsIf Q is ...If Q is ... Q/2 x HQ/2 x H Total CostsTotal Costs
500500
1,0001,000
2,0002,000
2,4002,400
3,0003,000
4,0004,000
5,0005,000
6,0006,000
7,0007,000
8,0008,000
9,0009,000
10,00010,000
$7,200$7,200
3,6003,600
1,8001,800
1,5001,500
1,2061,206
900900
720720
603603
522522
450450
405405
360360
$620,000$620,000
620,000620,000
620,000620,000
620,000620,000
620,000620,000
620,000620,000
620,000620,000
620,000620,000
620,000620,000
620,000620,000
620,000620,000
620,000620,000
D x CD x C
$313$313
625625
1,2501,250
1,5001,500
1,8751,875
2,5002,500
3,1253,125
3,7503,750
4,3754,375
5,0005,000
5,6255,625
6,2506,250
D/Q x SD/Q x S
$627,513$627,513
624,225624,225
623,050623,050
623,000623,000
623,075623,075
623,400623,400
623,845623,845
624,350624,350
624,889624,889
625,450625,450
626,025626,025
626,610626,610
Calculating Total CostCalculating Total Cost
S
Q
DH
QCD
2Total Cost
Total Cost =
Cost of Units
+ Carrying Cost
+ Ordering Cost
EOQ and Total EOQ and Total CostsCosts
EOQ with UsageEOQ with Usage
PU-1H
SD2EOQ
where D = Annual demand for productS = Setup (ordering) cost for a single run (order)H = Holding (carrying) cost per unit per yearU = Usage rate P = Production rate
Copyright 2006 Prentice Hall Publishing CompanyCopyright 2006 Prentice Hall Publishing Company 2323Chapter 17 Purchasing & QualityChapter 17 Purchasing & Quality
DiscountsDiscounts
Trade discounts - established on a Trade discounts - established on a graduated scale and depend on a graduated scale and depend on a company’s position in the channel of company’s position in the channel of distribution.distribution.
Copyright 2006 Prentice Hall Publishing CompanyCopyright 2006 Prentice Hall Publishing Company 2424Chapter 17 Purchasing & QualityChapter 17 Purchasing & Quality
Trade Discount StructureTrade Discount Structure
Manufacturer sells for $80.Manufacturer sells for $80.
Wholesaler buys at $80;Wholesaler buys at $80;sells at $100.sells at $100.
Retailer buys at $100;Retailer buys at $100;sells at $175.sells at $175.
Customer buys at $175.Customer buys at $175.
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Quantity discounts - offer price breaks Quantity discounts - offer price breaks on large-volume purchases.on large-volume purchases.
Cash discounts - offered as incentives Cash discounts - offered as incentives to pay early. (e.g. “2/10, net 30”) to pay early. (e.g. “2/10, net 30”)
DiscountsDiscounts
Trade discounts - established on a graduated Trade discounts - established on a graduated scale and depend on a company’s position in scale and depend on a company’s position in the channel of distribution.the channel of distribution.
The Cost of Foregoing a Cash The Cost of Foregoing a Cash DiscountDiscount$1,000 invoice 2/10, net 30$1,000 invoice 2/10, net 30
DayDay
AmountAmount
00 1010 3030
$1,000$1,000$980$980
20 days20 days
$20$20
R = R = IIP x TP x T
= $20$20$980 x 20/360$980 x 20/360
= = 36.735%36.735%
Copyright 2006 Prentice Hall Publishing CompanyCopyright 2006 Prentice Hall Publishing Company 2727Chapter 17 Purchasing & QualityChapter 17 Purchasing & Quality
Simple Reorder Point Simple Reorder Point ModelModel
Reorder Point = (L x U) + SReorder Point = (L x U) + S
L = Lead time for an order (days)L = Lead time for an order (days)
U = Usage rate for the item (units per day)U = Usage rate for the item (units per day)
S = Safety stock (units)S = Safety stock (units)
wherewhere
Simple Reorder Point ModelSimple Reorder Point Model
Copyright 2006 Prentice Hall Publishing CompanyCopyright 2006 Prentice Hall Publishing Company 2929Chapter 17 Purchasing & QualityChapter 17 Purchasing & Quality
Reorder Point Model Reorder Point Model (assuming normally distributed (assuming normally distributed demand)demand)
Reorder Point = DReorder Point = DLL + (SLF x SD + (SLF x SDLL))
DDLL = Average demand during lead time for = Average demand during lead time for an order (units)an order (units)
SLF = Service level factor (the appropriate Z SLF = Service level factor (the appropriate Z score)score)
SDSDLL = Standard deviation during lead time = Standard deviation during lead time (units)(units)
wherewhere
Reorder Point without Safety Reorder Point without Safety StockStock
Reorder Point with Safety Reorder Point with Safety StockStock
The Shift from No Safety Stock to Safety The Shift from No Safety Stock to Safety StockStock
Copyright 2006 Prentice Hall Publishing CompanyCopyright 2006 Prentice Hall Publishing Company 3333Chapter 17 Purchasing & QualityChapter 17 Purchasing & Quality
Vendor CertificationVendor Certification
1. Determine important criteria in selecting 1. Determine important criteria in selecting a vendor.a vendor.
2. Assign “weights” to each criterion to 2. Assign “weights” to each criterion to reflect its relative importance.reflect its relative importance.
3. Develop a grading scale for each criterion.3. Develop a grading scale for each criterion.
4. Compute a weighted score for each 4. Compute a weighted score for each vendor:vendor:
Weighted Score = Weight x GradeWeighted Score = Weight x Grade
5. Choose the vendor with the highest 5. Choose the vendor with the highest weighted score.weighted score.
Copyright 2006 Prentice Hall Publishing CompanyCopyright 2006 Prentice Hall Publishing Company 3434Chapter 17 Purchasing & QualityChapter 17 Purchasing & Quality
Supply Chain Supply Chain Management (SCM)Management (SCM) GoalsGoals
Reduce inventoryReduce inventory Get products to market fasterGet products to market faster Improve customer satisfactionImprove customer satisfaction
Web-based SCMWeb-based SCM Share production plans, shipment Share production plans, shipment
schedules, inventory levels, sales schedules, inventory levels, sales forecasts, and actual sales forecasts, and actual sales real-timereal-time with vendors with vendors
Copyright 2006 Prentice Hall Publishing CompanyCopyright 2006 Prentice Hall Publishing Company 3535Chapter 17 Purchasing & QualityChapter 17 Purchasing & Quality
Legal Issues in Legal Issues in PurchasingPurchasing
The concept of The concept of titletitle, the right to ownership of , the right to ownership of goods, has been replaced by:goods, has been replaced by:
IdentificationIdentification - Goods must be in existence - Goods must be in existence and identifiable from all other similar goods.and identifiable from all other similar goods.
Risk of lossRisk of loss - determines which party incurs - determines which party incurs the financial risk if the goods are damaged, the financial risk if the goods are damaged, destroyed, or lost before they are transferred. destroyed, or lost before they are transferred.
Insurable interestInsurable interest - gives the right to either - gives the right to either party to a sales contract to obtain insurance party to a sales contract to obtain insurance to protect against lost, damaged, or to protect against lost, damaged, or destroyed merchandise as long as he has a destroyed merchandise as long as he has a “sufficient interest” in them.“sufficient interest” in them.