Purchasing Lecture for SCM Class 1

8/13/2019 Purchasing Lecture for SCM Class 1

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CHAPTER 2- PURCHASINGMANAGEMENT

Principles of Supply Chain Management:

A Balanced Approach


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Learning Objectives2

You should be able to: Describe the role of purchasing and understand

its impact on an organizations competitiveadvantage.

Have a basic knowledge of manual purchasingand e-procurement.

Understand and know how to handle smallvalue purchase orders.

Understand sourcing decisions and the factorsimpacting supplier selection.

Understand the pros and cons of single versusmultiple sourcing.


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Learning Objectives- Cont.3

Describe centralized, decentralized, and hybridpurchasing organizations and their advantages.

Describe and understand how globalizationimpacts, purchasing, and describe andunderstand the opportunities and challenges ofglobal sourcing.

Understand total cost of ownership and be ableto select suppliers using more than unit pricealone.


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Chapter Two Outline4

The Role of Purchasing in an Organization

The Purchasing Process

Sourcing Decisions: The Make-or-Buy

Decision Roles of Supply Base

Supplier Selection

How Many Suppliers to Use Purchasing Organization: Centralized versus

Decentralized Purchasing

International Purchasing/Global Sourcing


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Introduction5

What is Purchasing?


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Introduction6

Purchasing-

Obtaining merchandise, capital equipment; rawmaterials, services, or maintenance, repair, and

operating (MRO) supplies in exchange formoney or its equivalent.


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Purchasing, Procurement, Material and Supply Management:The terminologies are interchangeable

Obj: Lean purchasing or lean supply management

Supply chain managementObj: Minimize costs and times across the supply chain

Supply and LogisticsObj: Control materials flows to optimize inbound or

outbound transportation

Definitions


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Evolution of Purchasing andSupply Management

Pre 1939 1940-49 1950-69 1970-89 1990-1999

Clerical World War IIManagerialemphasis

Purchasingstrategy

Integration intocorporate strategy

Integrationwith supplynetworks andinformationtechnology

2000-Future

Inbound logisticand outboundlogistic

Purchasing as anadministrationfunction


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Cost Drivers

Manufacturing Cost

SG & A Cost

R & D. CorporateAllocation

Material Cost

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Why Purchasing :The Number Makes Difference


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Standard 5% Reduction in 5% Reduction in 5% Increase

Price/Profit Material ContentManufacturing

Cost in Sales

Sales $1.00 $1.00 $1.00 $1.05

Material ($.50) ($0.475) ($.50) ($.525)

Labor/OH ($.30) ($.30) ($.285) ($.315)

Gross Profit $.20 $.225 $.215 $.21

? ? ? ?

SG&A ($.1) ($.1) ($.1) ($.105)

RD&E ($.05) ($.05) ($.05) ($.0525)

Pretax Profit $0.05 $0.075 $0.065 $0.0525

Profit Improvement ? ? ? ?

Financial SignificanceCost and Profit Improvement


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Standard 5% Reduction in 5% Reduction in 5% Increase

Price/Profit Material ContentManufacturing

Cost in Sales

Sales $1.00 $1.00 $1.00 $1.05

Material ($.50) ($0.475) ($.50) ($.525)

Labor/OH ($.30) ($.30) ($.285) ($.315)

Gross Profit $.20 $.225 $.215 $.21

Gross Profit

Improvement Increase 12.5% Increase 7.5% Increase 5%SG&A ($.1) ($.1) ($.1) ($.105)

RD&E ($.05) ($.05) ($.05) ($.0525)

Pretax Profit $0.05 $0.075 $0.065 $0.0525

Profit Improvement Increase 50% Increase 30% Increase 5%

Financial SignificanceCost and Profit Improvement


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Purchasing Trend: LeanPurchasing JIT)

Implementation of just-in-time (JIT) tools andtechniques to ensure every step in the supply process

adds value, inventory are kept at minimum level.

Scrap

Work in process inventory level

(hides problems)Unreliable

Vendors

Capacity

Imbalances


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Types of Buyers15

Merchan t Buyers-

wholesalers and retailers who purchase forresale.

Industr ia l Buyers -

purchase raw materials for conversion, services,capital equipment, & MRO supplies.


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The Role of Purchasing in anorganization

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The primary goals of purchasing 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 contributes to these objectivesby: 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 designand development efforts.


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Decision Making

Make or buy? Keep inventory and how much? What price to pay? Where, when and what size to place orders? How long is the lead time and when to expect order What is the best alternative?

What transportation mode to choose? Long or short term suppliers? Should we cancel or Who will form the negotiation team and what is the strategy in negotiation?

Should we use bidding or reverse auction?


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The Purchasing Process19

Manual Purchasing-Older system, prone to duplication ofeffort and error

Step 1-Material Requisition/Purchase Requisition-stating product,quantity, and delivery due date are clearly.

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 buyers

offer & becomes a binding contract when accepted by supplier.


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The Purchasing Process- Cont.20

Electronic Procurement (e-Procurement)

Step 1- Material user inputs a materials requisition- relevantinformation such as quantity and date needed.

Step 2- Materials requisition submitted to buyer-at purchasingdepartment (hardcopy or electronically).

Step 3- Buyer assigns qualified suppliers to bid- Product

description, closing date, & conditions are given.

Step 4- Buyer reviews closed bids & selects a supplier


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The Purchasing Process- Cont.

Advantages for the e-ProcurementSystem?

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The Purchasing Process- Cont.

Advantages for the e-ProcurementSystem

Time savings

Cost savingsAccuracyReal timeMobility

TrackabilityManagement Benefits to the suppliers

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Small Value Purchase Orders23

Processing costs can be substantial. Small valuepurchases should be minimized through:

Procurement Credit Card/Corporate PurchasingCardBlank Check Purchase OrdersBlanket or Open-End Purchase OrdersStockless Buying or System ContractingPetty CashAccumulating Small Orders to Create a LargeOrderUsing a Fixed Order Interval


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Sourcing Decisions: The Make-or-Buy Decision

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Outsourc ing-buying materials and componentsfrom suppliers instead of making them in-house. Thetrend has moved toward outsourcing.

Backward integrat ionrefers to acquiringsources of supply

Forward in tegrat ionrefers to acquiringcustomers operations.

The Make or Buy decis ion is a strategic

decis ion.


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Sourcing Decisions: The Make-or-Buy Decision- Cont.

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Reasons for Buying or Outsourcing ?


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Reasons for Buying or Outsourcing

Cost advantage: Especially for components thatare non-vital to the organizations operations.

Insufficient capacity: A firm may be at or nearcapacity.

Lack of expertise: Firm may not have the

necessary technology and expertise. Quality: Suppliers have better technology,

process, skilled labor, and the advantage ofeconomy of scale.


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Reasons for Making ?

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Sourcing Decisions:


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Sourcing Decisions:The Make-or-Buy Decision- Cont.

The Make-or-Buy Break-Even Analysis

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Roles of Supply Base30

Supply Base- suppliers that a firm uses to acquire itsmaterials, services, supplies, and equipment.

Firms emphasize long-term strategic supplier alliances

consolidating volume into one or fewersuppliers,resulting in a smaller supply base.

Preferred suppliers provide:

Early supplier involvement- Information on the latest trends inmaterials, processes, or designs

Information on the supply market

Capacity for meeting unexpected demand

Costefficiency due to economies of scale


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Supplier Selection

Product andprocesstechnologies

Willingness to share

technologies andinformation

Quality

Cost

Reliabilit

Order System andcycle time

Capacity

Communication

capabilityLocation

Service

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The process of selecting suppliers, is complex and shouldbe based on multiple criteria:


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How Many Suppliers to Use

Reasons Favoring aSingle Supplier ?

Reasons FavoringMore than One

Supplier ?

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Single-sourcing- a risky proposition. Although trends favorfewer sources, avoid single source.


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How Many Suppliers to Use

Reasons Favoring aSingle Supplier

To establish a goodrelationship

Less quality variability

Lower cost Transportation economies

Proprietary product orprocess

Volume too small to split

Reasons FavoringMore than One

Supplier

Need capacity

Spread risk of supplyinterruption

Create competition

Information

Dealing with special

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Single-sourcing- a risky proposition. Although trends favorfewer sources, avoid single source.


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P h i C t li d


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Purchasing: Centralized vs.Decentralized

Advantages-Central ization ?

Advantages-Decentral ization ?

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P h i C t li d


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Purchasing: Centralized vs.Decentralized

Advantages-Central ization

Concentrated volume-leveraging purchase volume

Avoid duplication Specialization

Lower transportation costs

No competition within units

Common supply base

Advantages-Decentral izat ion

Closer knowledge of

requirements Local sourcing

Less bureaucracy

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A hybr id purchasing organizat ion- both decentralized atthe corporate level and centralized at the business unitlevel may be warranted.

I t ti l P h i /Gl b l


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International Purchasing/GlobalSourcing

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Global sou rc ing-

Opportunity to improve quality, cost, and deliveryperformance.

Requires additional skills and knowledge to dealwith international suppliers, logistics,communication, political environment, and otherissues.

Imp ort b roker or sales agent- performs service for a fee.

Impor t m erchant-buys and takes title to the goods.

Trading company- imports & carries wide variety of goods.

Total Cost of Ownership


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Total Cost of OwnershipConcept Total cost of ownership is more than just the

purchase price; other qualitative and quantitativefactors, including

freight and inventory costs,

tooling, tariffs and duties,currency exchange fees and fluctuations,payment terms,maintenance, and non-performance costs

Firms can use total cost analysis as a negotiationtool to inform suppliers regarding areas where

they need to improve.

Total Cost of Ownership


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Total Cost of OwnershipConcept

An Example of Total Cost Analys is

Outdoor Inc., assembles five different models of all terrainvehicles (ATV) from various ready-made components toserve the Las Vegas, Nevada market. The company uses the

same engine for all its ATVs. The purchasing manager, Ms.Henderson, needs to choose a supplier for engines for thecoming year. Due to the size of the warehouse and otheradministrative restrictions, she must order the engines in lotsizes of 1,000 each. The unique characteristics of the

standardized engine require special tooling to be used duringthe manufacturing process. Outdoor Inc agrees to reimbursethe supplier for the tooling. This is a critical purchase, sincelate delivery of engines would disrupt production, and cause50% lost sales and 50% backorders of the ATVs. Ms.

Henderson has obtained quotes from two reliable suppliers,


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An example of Total Cost of Ownership - continued

Requirements (annual forecast) 12,000 units

Weight per engine 22 pounds

Order processing cost $125/order

Inventory carrying rate 20% per year

Cost of working capital 10% per year

Profit margin 18%

Price of finished ATV $4,500

Backorder cost $15 per unit

Two qualified suppliers have submitted the following quotations:

Unit Price Supplier 1 Supplier 2

1 to 999 units/order $510.00 $505.00

1000to2999 units/order $500.00 $498.00

3000 + units/order $490.00 $488.00

Tooling Cost $22,000 $20,000

Terms 2/10, net 30 1/10, net 30

Distance 125 miles 100 miles

Supplier Quality Rating 2% 3%

Supplier Delivery Rating 1% 2%

Ms. Henderson also obtained the following freight rates from her carrier:Truckload (TL M40M or 40,000 lbs): $0.80 per ton-mileLess-Than-Truckload (LTL): $1.20 per ton-mile

Note: per ton-mile 2,000 lbs per mile

Demand & Cost Information

Which supplier is more cost effective?

Description Supplier 1 Supplier 2


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1. Total Engine Cost 12,000 units x $500 6,000,000.00$ 12,000 units x $498 5,976,000.00$

2. Cash Discount

n/30 $6,000,000 x 10% x 30/360 50,000.00$ $5,976,000 x 10% x 30/360 49,800.00$

1/10 N/A $5,976,000(10% x10/360+1% ) 76,360.00$

2/10 $6,000,000(10% x10/360+2% ) 136,666.67$ N/A

Largest discount (136,666.67)$ (76,360.00)$

3. Tooling Cost 22,000.00$ 20,000.00$

4. Transportation Cost

(22,000 lb LTL) 125miles x 12,000units x 22lbs x $1.20/2000 19,800.00$ 100miles x 12,000units x 22lbs x $1.20/2000 15,840.00$

5. Ordering Cost 12,000 / 1,000 x $125 1,500.00$ 12,000 / 1,000 x $125 1,500.00$

6. Carying Cost 1,000 / 2 x $500 x 20% 50,000.00$ 1,000 / 2 x $498 x 20% 49,800.00$

7. Quality Cost $6,000,000 x 2% 120,000.00$ $5,976,000 x 3% 179,280.00$

8. Delivery Rating

Backorder (50% ) 12,000 x 1% x 50% x $15 900.00$ 12,000 x 2% x 50% x $15 1,800.00$

Lost Sales (50% ) 12,000 x 1% x 50% x $4,500 x 18% 48,600.00$ 12,000 x 2% x 50% x $4,500 x 18% 97,200.00$

TOTAL COST 6,126,133.33$ 6,265,060.00$

Purchasing Lecture for SCM Class 1

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