Chapter 3

The Purchasing

Function

THE PURCHASING DEPARTMENT’SFUNCTION IS TO:

The three most important elements of the purchasing department’s function are to:

1. PROVIDE APPROPRIATE LEVELS OF SUPPLY

2. AT THE APPROPRIATE LEVEL OF QUALITY

3. FOR THE LOWEST TOTAL COST

3-2

1- PROVIDE APPROPRIATE LEVELS OF SUPPLY

• To provide the right product or service in the correct amounts needed.

The other important element is the availability. That is the product or the service must be available at the right time.

Just in time is important here.

2- The correct quality

• If PPG; a paints company sends Ford a lower quality, then Ford may have to issue a recall to repaint cars.

• As a supplier if your customer is improving his quality, you need to improve your quality too.

• Here we talk about the right quality-

• TQM is significant.

3- PURCHASE PRICE Vs. TOTAL COST

• PURCHASE PRICE = THE DOLLAR VALUE PAID

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

• Each Riyal saved through careful purchasing can have a direct impact on the bottom line.

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METHODS TO EXAMINEAND COMPARE COSTS

1. TOTAL COST OF OWNERSHIP

2. ECONOMIC ORDER QUANTITY

(EOQ)

3. VALUE ANALYSIS

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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

Many companies are outsourcing services so that they can

reduce the total cost of ownership.3-7

ECONOMIC ORDER QUANTITY

THE QUANTITY THAT MINIMIZES

ORDERING COSTS

AND

STORING COSTS

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EOQ

Inventory costs include:

• Paying for additional space for storage

• Insurance

• Handling costs

• Interest on the money that the firm would lose by having to pay early for supplies used later.

EOQ

• Forward buying: buying in large quantities than are currently needed because the discount is greater than carrying costs.

• A balance is required between ordering costs and inventory costs in order to minimize the total costs.

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

Unnecessary elements 3-11

Purchasing philosophy

1- The adversarial purchasing philosophy: is to have several vendors for each product.

• Creates competition

• Lower prices

2- Partnership purchasing: maximizing the benefits of collaboration between the buyer limited number of suppliers.

Purchasing philosophy

The partnership purchasing philosophy seek out the best suppliers they can fin and then work to develop close relationships.

Ford reduced the number of suppliers from 2500 to 1000 in order to create strong relationship with suppliers.

Single sourcing is an option.Effective purchasing is an important contributor to the profit of any org

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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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 ELSEWHERE3-17

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 INTERNET3-18

IMPROVE PERFORMANCE:STAYING AHEAD OF PURCHASING TRENDS

(continued)

2. OUTSOURCE IN-HOUSE ACTIVITIES

Outsourcing is the process of finding another org to supply the buying org with a product or service, usually one that was previously created in house.

Example: the network structure

• Early supplier involvement (ESI) is one outsourcing strategy where companies use suppliers to help design new products or processes.

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Make or buy

• Outsourcing is one result of a make or buy decision.

• Its much better to outsource the intangibles (services) not tangibles.

• Like marketing research and advertising for example.

• In outsourcing, stronger relationships with sellers is very important and communication.

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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