McGraw-Hill/Irwin Copyright © 2009 by the McGraw-Hill Companies, Inc. All rights reserved.

Chapter 3

The Purchasing

Function

THE PURCHASING DEPARTMENT’SFUNCTION IS TO:

1. PROVIDE APPROPRIATE LEVELS OF SUPPLY

2. AT THE APPROPRIATE LEVEL OF QUALITY

3. FOR THE LOWEST TOTAL COST

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Case study: Abilene Heavy Equipment Tires

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Abilene Heavy Equipment Tires sells tires for off-road mining and forestry vehicles and construction equipment. The company also retreads the tires and provides services at the mine or construction site. Because customers’ equipment is considered production equipment, a flat tire means a loss of production. Quality service is an important element in Abilene’s business.Ken Arthur is the manager of Abilene’s service business. His responsibilities include managing a fleet of 12 heavy-duty pickup trucks that are used to reach customers’ equipment in the field for service. Ken buys three trucks each January, retiring each truck after four years of service. For the previous two years, he purchased Dodge trucks from the Abilene Dodge dealer, dealing directly with owner Don Tanksley.Today, December 20, Don stopped by Ken’s office. After saying hello and asking after the family, Don said, “Come on, Ken, I want to show you something I have outside in the truck.” As they walked outside, Don continued, “I know you like to hunt and I thought you might appreciate this little Christmas present. You’ve been a good customer for nearly 10 years, and I’d like to say thank you with this.” From the inside of his truck, Don pulled out a new Browning Citori shotgun.Ken eyed the new gun with appreciation, knowing that it retailed for at least $1,200. The custom carving on the stock, with Ken’s initials, probably added another $500 to the cost of the gun. He held it, admiring the balance, and then sighted the gun as if about to shoot. He thought about how nice it would be to use this at the annual dove hunt that Abilene sponsored for its customers.1. Is there any ethical problem with Ken accepting the gift? Why or why not?2. What factors could affect your decision?

Case 3.1 Human Performance Systems

Joyce Davis leaned back in her chair and reflected on the sales call she made that morning. Her company, Human Performance Systems (HPS), provides safety training in order to bring manufacturers into compliance with OSHA regulations. She also had the data to prove that the training saved companies money by reducing the number of manufacturing accidents. What Joyce couldn’t understand was why Bob Jackson, owner of Jackson Molding, was so adamant that he couldn’t afford the training.

“Bob, you can’t afford not to do this,” she told him. “You have had three accidents

this month, losing 23 workdays.” (Three employees missed five days each, and another missed eight, for a total of 23.)

“I don’t pay them for lost workdays. That makes them more careful.” He stared at her defiantly. “Therefore, I don’t need training.”

1. What benefits could Human Performance Systems’ training provide Jackson

Molding? Think through the various ways HPS could save Jackson money,

among other benefits.

2. What is important to Bob? Why?

Transactional vs. Relational MarketingTransactional exchange Relationship exchange

Objective To make a sale (sale is end result and measure of success)

Customer needs satisfaction (customer buys value)

To create a customer (sale is beginning and relationship is the measure of success)

Customer integration (interactive value generation)

Customer understanding

Anonymous customerIndependent buyer and seller

Well-known customerIndependent buyer and seller

Market tasks and performance criteria

Assessment on the basis of products and prices.

Focus on gaining new customers

Assessment on the basis of problem-solving competence

Focus on value enhancing of existing customers

Core aspects of exchange

Focus on productsSales is a conquestDiscreet even (episodic perspective)Monologue to be aggregated

Focus on serviceSale as a agreementContinuing process (historic holistic

perspective)Individualized dialogue

Reasons to buy

Factor Percent

Product Quality 72.7%

Service 53.4%

Availability of Product 50.8%

Total Purchasing Costs 40.5%

Price of Product 32.2%

Supplier’s supports in urgent situations 26.9%

Ease of Contact with suppliers 18.6%

Technical supports 15.2%

Brand name 11.0%

Source: Calners Advertising Research ReportsSource: Calners Advertising Research Reports

PURCHASE PRICE Vs. TOTAL COST

• PURCHASE PRICE = THE DOLLAR VALUE PAID

• TOTAL COST = PURCHASE PRICE + DELIVERY + STORAGE + SERVICE

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METHODS TO EXAMINEAND COMPARE COSTS

1. TOTAL COST OF OWNERSHIP

2. ECONOMIC ORDER QUANTITY

(EOQ)

3. VALUE ANALYSIS

3-9

TOTAL COST OF OWNERSHIP OF A TANGIBLE PRODUCT

• TOTAL COST OF

OWNERSHIP = PRODUCT PRICE

+ DELIVERY

+ INSTALLATION

+ MAINTENANCE / REPAIR

+ POWER COSTS

+ SUPPLY COSTS

+ OPERATING COSTS

+ FINANCING

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ECONOMIC ORDER QUANTITY

THE QUANTITY THAT MINIMIZES

ORDERING COSTS

AND

STORING COSTS

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USING VALUE ANALYSIS

THE OBJECTIVES OF VALUE ANALYSIS:

• REDUCE COSTS AND/OR

• IMPROVE DESIGN

What is New

Currently Alternatives

Being Done Being

Considered

COMPARE

BENEFITS RECEIVED

FUNCTIONS OF PRODUCT

COST OF MATERIALS

WORK PROCESS INVOLVED

OUTCOME: GREATER VALUE FOR LESS COST

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Step 8Evaluation of product performance

Step 8Evaluation of product performance

Step 7Selection of an order procedure

Step 7Selection of an order procedure

Step 6Evaluation of proposals and

selection of a supplier

Step 6Evaluation of proposals and

selection of a supplier

Step 5Acquisition and analysis of proposals

Step 5Acquisition and analysis of proposals

Step 4Search for qualified suppliers

Step 4Search for qualified suppliers

Step 3Development of detailed specifications

Step 3Development of detailed specifications

Step 2Definition of the product-type needed

Step 2Definition of the product-type needed

Step 1Recognition of a need

Step 1Recognition of a need

EXHIBIT 3-3

STEPS IN THE BUYING PROCESS

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BUY-PHASES

1. NEW TASKCOMPLETE BUYING PROCESS REQUIRED EMPHASIZES

PRODUCT DEFINITION AND SPECIFICAIONS

2. MODIFIED REBUYEMPHASIZES SUPPLIER SEARCH AND EVALUATION

3. STRAIGHT REBUYEMPHASIZES NEED RECOGNITION AND PURCHASE

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Buy Phase and Marketing Techniques

Marketing Mix and Buy-Phases

Brand Relevance and Buying Situations

VENDOR ANALYSIS RATINGS

A RATING FORM SHOULD LIST

The most important product attributes

The most important service support attributes

Pricing variables

Delivery variables

Quality variables

Supplier capabilities

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PURCHASING PARTNERSHIPS ARE MADE WITH VENDORS WHO PROVIDE:

HIGH-PURCHASE-VOLUME MATERIALS, COMPONENTS OR STRATEGIC PRODUCTS

• INFORMATION AND TRAINING FOR EFFECTIVE PRODUCT USE

• SERVICES REQUIRING SPECIALIZED KNOWLEDGE FOR COST REDUCTIONS AND/OR PERFORMANCE

• MATERIALS UNAVAILABLE ELSEWHERE3-18

IMPROVE PERFORMANCE:STAYING AHEAD OF PURCHASING TRENDS

1. REDUCE PURCHASING COSTS

• CUTBACK ON EMPLOYEES

• REDUCE NUMBER OF VENDORS/ TRANSACTIONS

• BUILD RELATIONSHIPS

• CENTRALIZE PURCHASING ACTIVITIES

• USE THE INTERNET3-19

IMPROVE PERFORMANCE:STAYING AHEAD OF PURCHASING TRENDS

(continued)

2. OUTSOURCE IN-HOUSE ACTIVITIES

• TRAINING

• MANUFACTURING

• PROCESSING ACTIVITIES

• INVOLVE SUPPLIERS (ESI)3-20

IMPROVE PERFORMANCE:STAYING AHEAD OF PURCHASING TRENDS

(continued)

3. CROSS-FUNCTIONAL TEAMS – MADE UP OF COMPANY DEPARTMENTS, SUPPLIERS, CUSTOMERS

4. INCREASE PROFESSIONALISM THROUGH CERTIFICATION PROGRAMS AND ESTABLISH A CODE OF ETHICS

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SALES SURVIVAL QUESTIONS:

CAN YOUR SALESPEOPLE ANSWERTHE FOLLOWING QUESTIONS?

1. WHAT IS A CROSS-FUNCTIONAL TEAM?

2. CAN YOU RECOGNIZE ONE AT YOUR CLIENT’S ORGANIZATION?

3. DO YOU KNOW HOW TO GET YOUR COMPANY INCLUDED IN YOUR CLIENT’S CROSS-FUNCTIONAL TEAM?

4. WILL YOUR COMPANY GIVE YOU THE PEOPLE RESOURCES TO SUPPORT YOUR CLIENT’S NEEDS?

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SUCCESSFUL CROSS-FUNCTIONAL PURCHASING TEAMS DEPEND ON:

• APPROPRIATE LEADERSHIP

• FACE-TO-FACE COMMUNICATION

• CONTINUITY– IN IT FOR THE LONG TERM

• TOP-LEVEL COMMITMENT to provide for key individuals’ full participation

• EMBRACING DIVERSITY of experience, backgrounds, outlooks, and corporate philosophy

EXHIBIT 3-9

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Changing company focus: MAKE-OR-BUY?Purchasing Determines Who Provides Best Value for Lowest Cost

Best-Value Provider

Action In-House Partner

•Training

•Transaction Processing

•Paper Processing

•Product Design

•Product Manufacturing

•Component Part Manufacturing

•R&D

•Marketing

•Sales

•Advertising

•Research

•Support

•Human Resources Administration

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MAKE-OR-BUY DECISION ANALYSIS

ACCEPTABLE RISKBuy the Products,

Components or Services

UNACCEPTABLE RISKRetain Production and

Provide Services

RISK ASSESSMENT

FINANCIAL RISKS

Resource Allocation

Investment of Resources

Accurate Cost Analysis

Legal Issues

MARKETING RISKS

Customer Impact

Supplier Impact

MANUFACTURING RISKS

Reliability

Expertise

Equipment

Patent Protection

POLITICAL RISKS

Management commitment/

willingness to partner

Turf Battles

Internal Strife

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ETHICAL ISSUES FOR BUYERS

KEY REQUIREMENT: EVERY COMPETITOR HAS AN EQUAL OPPORTUNITY TO SELL TO THE BUYER AND HAS EQUAL ACCESS TO INFORMATION

AS A BUYER, YOU MUST

PROVIDE EQUAL ACCESS TO THE BUYING OPPORTUNITY

BE TOTALLY RESPONSIBLE TO YOUR EMPLOYER

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