Kimball Bullington, Ph.D. - MGMT 375 1 Materials Management Systems Purchasing Chapter 7.

Kimball Bullington, Ph.D. - MGMT 375

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Materials Management

SystemsPurchasingChapter 7


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Chapter 7: Purchasing

Purchasing Overview• Purchasing

– The acquisition of goods and services.

• Purchasing Activity– Helps identify the products and services that can

be best obtained externally; and– Develops, evaluates, and determines the best

supplier, price, and delivery for those products and services.


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Chapter 7: Purchasing Purchasing Objectives

1. Obtaining goods and services of the required quality and quantity.

2. Obtaining goods and services at the lowest cost.

3. Ensuring the best possible service and prompt delivery by the supplier.

4. Developing and maintaining good supplier relations and developing potential suppliers.


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Chapter 7: Purchasing Purchasing Functions

1. Determining purchasing specifications: quality, quantity, delivery

2. Selecting suppliers3. Negotiating terms and conditions of

purchase4. Issuing and administering purchase orders


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Chapter 7: Purchasing Purchasing Cycle

1. Receiving and analyzing purchase req’s.2. Selecting suppliers3. Determining the right price4. Issuing purchase orders5. Following up to assure delivery dates are

met6. Receiving and accepting goods7. Approving supplier’s invoice for payment


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Order Cycle(one to three

weeks)Order RequestVerification by inventory controlPurchasing researches suppliers, obtains quotes, etc.Signatures obtainedOrder mailed

Order Cycle(one to three

weeks)Order RequestVerification by inventory controlPurchasing researches suppliers, obtains quotes, etc.Signatures obtainedOrder mailed

Supplier Cycle(one to many weeks)

Supplier receives and enters orderSupplier manufactures or “picks” orderSupplier ships order

Supplier Cycle(one to many weeks)

Supplier receives and enters orderSupplier manufactures or “picks” orderSupplier ships order

Receiving Cycle(one week)

ReceivingIncoming inspectionInventory control receives order, updates records, and notifies department

Receiving Cycle(one week)

ReceivingIncoming inspectionInventory control receives order, updates records, and notifies department

Chapter 7: Purchasing

The Typical Procurement Cycle


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Chapter 7: Purchasing Purchasing Terminology

• Purchasing Agent– Has legal authority to execute contracts on behalf of the

firm.

• Make or Buy Decision– Choosing products and services that can be

advantageously obtained externally or produced internally depending on which is best for the company.

– Vertical Integration– Developing the ability to produce goods or services

previously purchased, or actually buying a supplier or a distributor.


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Chapter 7: Purchasing Make/Buy Considerations

• Lower production cost• Unsuitable suppliers• Assure adequate supply• Utilize surplus labor and make

a marginal contribution• Obtain desired quantity• Remove supplier collusion• Obtain a unique item that

would entail a prohibitive commitment from the supplier

• Lower acquisition cost

• Preserve supplier commitment

• Inadequate capacity

• Reduce inventory costs

• Ensure flexibility and alternate source of supply

• Product improvements may be difficulty because it is a sideline

Reasons for Making Reasons for Buying


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Chapter 7: Purchasing Purchasing Terminology

• Keiretsu– The Japanese word to describe a company coalition

with long-term contracts with the firm; members of the Keiretsu function much like partners would.


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Chapter 7: Purchasing Supplier Relations

• Three aspects of supplier relations– Supplier Evaluation - Involves finding potential

suppliers and determining the likelihood of their becoming good partners.

– Supplier Development - May include everything from training, to engineering and production help, to formats for electronic transfer.

– Negotiations - Are of three classic types: cost-based model, market-based price model, and competitive bidding.


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Chapter 7: Purchasing Sourcing

• Sole sourcing implies that only one supplier is available.

• Multiple sourcing is the use of more than one supplier for an item.

• Single sourcing is the selection of one item for an item when several sources are available.


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Chapter 7: Purchasing Factors in Selecting Suppliers

1. Technical ability

2. Manufacturing capability

3. Reliability

4. After-sales service

5. Supplier location

6. Price

7. Other considerations


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• The supplier should be treated as an extension of the company.

• Long-term, close relationships with a few suppliers is best for many critical products.

• The supplier should be committed to helping the purchaser improve its product and win orders.

• Suppliers can also be a source of ideas about new technology, materials, and processes.

• A good supplier relationship is like a marriage.


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Strong Relationships

Commitment Communication

Shared Goals, Principles

Dealing with CrisesTim

e Togeth

er Feedback


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• Negotiation Strategies– Cost-Based Model - Requires the supplier to open

its books so that the purchaser can determine actual costs.

– Market-Based Price Model - Based on a published price or index such as exists for many metal and paper suppliers.

– Competitive Bidding - Appropriate where suppliers are not willing to discuss cost or where near perfect markets do not exist.


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Chapter 7: Purchasing Negotiations and Product Type

• Commodities: Contracts for future prices.

• Standard Products: May negotiate large purchases.

• Items of Small Value: Minimize cost of ordering. Negotiate ordering system.

• Made-to-order items: Can be negotiated.


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Chapter 7: Purchasing Purchasing Techniques

• Blanket orders

• Invoiceless purchasing

• Electronic ordering and funds transfer

• Electronic data interchange (EDI)

• Stockless purchasing

• Standardization


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• Blanket Orders– A contract to purchase certain items from a vendor,

although they all may not be delivered until requested by the purchaser.

• Invoice-less Purchasing– Appropriate where substantial trust exists between

the purchaser and supplier and deliveries are made on a regular basis and are easily verifiable.


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• Electronic Ordering and Fund Transfer– Reduces cost by reducing paperwork; also increases the

speed of ordering.

• Stockless Purchasing– Developing with the supplier, a means of reducing

inventory costs by the supplier holding inventory.

• Standardization– A technique for reducing purchases for specialized

items when in fact a very similar standard product is commercially available.


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Chapter 7: Purchasing Supplier Concerns in

Just-in-Time Purchasing• Desire for Diversification.

– Supplier is concerned about all business stemming from single customer.

• Poor Customer Scheduling. – Supplier is concerned that customer will not be able to

develop smooth, consistent schedule.• Engineering Changes.

– Supplier is concerned that customer will promulgate frequent engineering changes with inadequate lead time.


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Chapter 7: Purchasing Supplier Concerns in

Just-in-Time Purchasing• Quality Assurance.

– Supplier may consider production with zero defects unrealistic.

• Small Lot Sizes. – Many suppliers are unaccustomed to working with small

lot sizes.• Proximity.

– Delivery of small lot sizes over long distances may not be economical.

Kimball Bullington, Ph.D. - MGMT 375 1 Materials Management Systems Purchasing Chapter 7.

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