Purchasing Notes Chap 1

Purchasing(BMK 3748) Diploma in Business ManagementChapter 1

Chapter 1: Purchasing.

Definition of Strategic Purchasing:The process of planning, implementing, evaluating , and controlling strategic and operating purchasing decision for directing all activities of the purchasing function toward ooportunities consistent with the firm’s capabilities to achieve its long-term goals.

Definition of Supply Chain Management:The design and management of seamless, value-added processes across organizational boundaries to meet the real needs of the end customer. The development and integration of people and technological resources are critical to successful supply chain integration.

Flow of MaterialsEvery organization buys materials from suppliers,uses these in the operations to make products and pass the results to customers (See figure 1.1)

Figure 1.1 The flow of materials through an organization

Suppliers Materials Operations Products Customers

Materials: are all the diverse mix of things that an organization needs to performs its operations. 1. Materials are interms of raw materials, components, equipment, information, facilities, money, etc.2. Operations include manufacturing, transporting, selling, training, etc.3. The main output of an organization either product or service or combination of both.For example in restaurant:

the materials are kitchen, foods, chefs, waiters and its dining area; the operations are food preparation, cooking and serving; the main outputs are meals, customer service, customer satisfaction,etc.

Purchasing as service function.The Purchasing functions can be described as both a service function and as a control function. 1. The service function involves assisting other departments in obtaining the highest quality of services

and supplies for the best price. 2. The control function ensures that the organization is complying with all state statutes and local

ordinances as well as flagging areas for potential abuse.

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Purchasing as a part of logistics.Logistics: the broad function reponsible for all aspects of the movement and storage of materials on their journey into, through and out of an organization. Logistics consist of a series of a related of activities, each contributes to the overall movements of materials:-1. Inward Transport: the movement of materials inwards from supplier to an organization’s receiving area. Choose type of transports; road, rail, air,etc. Make sure is delivers on time, at reasonable cost and safety precautions are taken into considerations.

2. Receiving: receives/ accepts materials into organization, make sure that the materials match as ordered, acknowledge the receipt, unloading delivery vehicles, inspect materials for damage and sort them.

3. Warehousing: move materials into storage and makes sure that they are available quickly when needed.

4. Stock Control: design policies to manage the inventory.

5. Order Processing: deals with order submitted by customers and ensures that their deliveries are properly organized. The forms are the key link between an organization & customers and it plays major role in customer service.

6. Order Picking: find and remove materials from stores and get them ready for delivery to customers.

7. Packaging: to ensure that the materials are protected for the next movement and are easy to move.

8. Materials Handling: provide efficient movements, use appropriate equipment, ensure no or litle damage, use suitable packaging and handle where needed.

9. Outwards Transport: takes materials from the departure area and delivers them to customers.

10. Recycling, returns and waste disposal: faulty or wrong materials need to retutn back to suppliers. Some materials are brought back for recycling such as glass, paper, plastics, etc. Some mateials cannot be recycled but are returned for safe disposal such as dangerous chemical. Those activities;recycle, returns and waste disposal are called reverse logistics.

Reverse logistics: occur whenever materials are returned bak to suppliers.

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Development of Purchasing

Financial Significance.

The financial impact of the Coprorate Spend:1. Profit-Leverage EffectMeasured by the increase in profit obtained by a decrease in purchase spend.For example: an organization with revenue of RM100 million, purchases of RM60 million, and a profit before tax is RM8 million. If receive 10% reduction of purchase would result in an increase in profit of 75%, giving a leverage of 7.5.

2. Return on Assets Effects.ROA is considered as a measure of corporate performance. Figure 1.3 shows the standard ROA model, using the same ration of figures in PL. The purchase costs were reduced by 10%.

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

Clerical World War II Managerialemphasis

Purchasingstrategy

Integration intocorporate strategy

2000-Future

Integration with supply networks and information technology


Supply Contribution.Supply contributes to organizational goals and stategies in 3 major ways:-

1. Operational vs Startegic.2. Direct and Indirect3. Negative, Neutral & Positive.

1. Operational vs Strategic Contribution of SupplyOperational a. is characterized as trouble avoidance

b. concerns with transactional, day-to-day operations that associated with purchasing

Strategic a. is characterized as opportunistic. b. future oriented c. search for opportunities to provide competitive advantage d. focus on executing current tasks as designed e. focus on new and better solutions to organizational and supply challenges

2. Direct & Indirect Contribution of Supply

a. Direct Contribution of SupplySupply savings, profit-leverage effect and ROA effects demonstrate the direct contribution supply.Inventory reduction & purchasing savings are measureable and tangible evidence of direct supply contribution.

b. Indirect Contibution of Supplyenhancing the performance of other departments/individuals in the organization.Indirect contributions come from supply’s role as:-

Information source The effect on efficiency The effect on Competitive Position The effect on Organizational Risk The effect on image

For example; better quality may reduce work, lower warranty costs, increase customer satisfaction, lower manufacturing costs, etc.

Objectives of Supply Management1. Obtain the right materials, with right quantity, for delivery at right time and right place, from the

right source, with the right servive at the right price.2. Improve organization’s competitive position.3. Provide an uninterrupted flow of materials, supplies and services required to operate the

organization.4. Keep inventory investment and loss at minimum.5. Maintain and improve quality.6. Purchase required items and services at lowest total cost of ownership.7. Achieve harmonious, productive internal relationships.

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Purchasing Notes Chap 1