CLASS 1

 

THE FOUNDATION

 

Evolution from clerical to specialized and sometimes highly technical function of business

 

Significant cross-functional involvement within the organization

 

Professional status (NCMA's CCCM/CPCM; ISM's CPM/CPSM

 

PURCHASING'S ROLE IN BUSINESS

 

TWO TYPES OF BUSINESS PURCHASING

 

FOR RESALE: FOR CONSUMPTION:

 

Merchant: Industrial Buyer:

Finished goods Raw mat'l/sub-assemblies

 

Both must be able to anticipate the market, industrial buyer must also: participate in planning of product lines, determine "MAKE OR BUY" DECISIONS, correlate purchasing with sales forecasts and production schedule

 

Both must be concerned with inventory control and prices

 

INSTITUTIONAL BUYERS ARE ALSO INDUSTRIAL BUYERS (schools, hospitals, government)

(Government buyers must concern them selves with regulatory procedures, Congress, taxpayer interests)

 

THREE VIEWPOINTS OF PURCHASING:

 

1. As a function of business (Page 37)

Six functions of business:

1. Creation (research) of product or idea

2. Finance, capital, accounting

3. Personnel, human resources, labor issues

4. Supply (Purchasing, the acquisition of required

materials, services and equipment)

5. Conversion, transformation of materials into economic goods

6. Distribution, the marketing and selling of goods produced

 

PURCHASING IS COMMON TO ALL FIRMS, LARGE OR SMALL. It's importance varies depending upon firm's stage in it's life cycle (early stage of a high tech firm is dominated by engineering as it's products high state of the art causes sales to soar) and it exploits it's "Technology Niche" with the rise of competition over time the roles of purchasing and marketing become more important to preserve profitability in a market that is dominated by "Price Competition"

 

2. Purchased materials as resources:

 

BASIC GOAL OF INDUSTRY IS PROFIT

 

Goal accomplishment by proper blending of the 5 M's:

 

Manpower

Money (Basic

Machines Corporate

Materials * Resources)

Management*

 

Materials, as Industry's Lifeblood, must be available at the -

        Proper time

        Proper quantity

        Proper place

        Proper price

        Proper quality

OR

        Costs increase

        Profits decrease

 

Relative importance of 5 M's over time:

 

Early industry was EFFORT intensive

        Materials were abundant

        Production was low (due largely to absence of manufacturing technology and its demand for sophisticated materials)

 

As manufacturing technology improved, production increased:

        Materials became scarce, relative to the past

        Unit labor costs decreased relative to materials Costs (due to larger rates of consumption and increasingly sophisticated raw materials requirements

 

Labor (Manpower) ___________________ Material

Technology (time )

 

Materials cost is now 65% of total cost of a product in the average manufacturing industry (Page 40)

 

3. Purchasing as Manager for OUTSIDE MANUFACTURING (Page 40)

 

WHAT???????????? (Firms must decide to Make or Buy their materials/parts/subassemblies

 

Make or buy decisions based upon -

         Specialization of labor

         Quantity required

         Complexity

         Machine/capital costs

         Comparative advantage

 

Trend is towards three types of factories (Page 41)

 

First type is maker of fabricated parts - no finished end products

         High volume-specialized machinery

         Low cost

         No finished end products

SELLS TO-

 

Maker of subassemblies still no finished end products

 

WHO SUPPLIES SUBASSEMBLIES TO-

 

Maker of finished end products who-

        May only be integrator

        May make some product unique parts

 

Therefore, in this multiple-type factory system, two sources of supply exist: (Page 41)

        Inside manufacture which is the responsibility of Production Dept.

        Outside manufacture (outsourcing) - the responsibility of Purchasing Dept.

 

Managers of both departments are interested in

Schedules - Costs - Quality - Coordination with each other

 

The Purchasing Function:

 

Purchasing is an essential part of business management

 

The Purchasing Function is a basic element of all businesses

 

A separate purchasing department may or may not exist depending upon:

         Size of the firm

         Complexity of the product

         Volume of purchases

 

(Discuss typical purchasing department activities)

 

Purchasing for Profit

 

In most manufacturing industries over 50% of all $$$$$ is spent by Purchasing, therefore:

 

Therefore, every dollar saved in purchasing = a dollar increase in profit

 

Purchasing "skill" can affect profit by as much as 10% (skill of operation and of organization) therefore, profit can increase or decrease depending upon skill, i.e.:

         Timing

         Price (of purchased materials)

         Quality

 

Costs to improve purchasing are normally minimal, for example:

         Better management

         Proper organization for the purchasing mission (central vs. decentralized)

         Reengineering the business process

         Training

Purchasing efficiency may increase a firm's ROI by:

 

         Reducing costs

         Increasing sales relative to investment in assets

         Combination of both

 

Ways for a firm to improve performance (profit):

 

1. Increase sales relative to expenses (marketing effort to overcome what still may be inefficient operating processes)

 

2. Reduce expenses relative to sales (sales - expenses = profit) (everybody's effort, expenses go down and sales go up)

 

  How does purchasing contribute to this?

 

  Remember: Every $ saved in purchases materials potentially goes straight to profit

 

Objectives and Policies

 

A firm must buy "right" (properly) (mentioned previously) right quantity, quality, price, source, time

 

8 objectives of purchasing

 

1. Keep production going via ensuring uninterrupted materials flow

2. Buy competitively, wisely (know markets and suppliers)

3. Minimize inventory investment and losses (JIT production/inventory)

4. Develop effective/reliable sources of supply

5. Develop and maintain good vendor relations

6. Integrate with other departments to the maximum extent possible

        Sales

        Production

        Engineering

        Finance

7. Train/develop personnel

8. Develop sound/effective policies & procedures (streamline, right-size, employ technology)

 

In summary, Purchasing Activities have the common goal to "Obtain the greatest value for each dollar spent"

 

Back to Objective #6- Purchasing's relations with other departments:

Engineering functions include:

         Prepare of specifications

         Prescribe materials

         Influence cost, availability and quality of materials

Goals of purchasing and engineering may conflict by:

         Differing values (cost vs. superior design)

         Desire to reduce cost of purchased materials can lead to unwise and incorrect materials substitution by purchasing

Early involvement of purchasing and suppliers is important in the design phase

 

Production and Operations - Purchasing schedule supports

        Production schedule

        Must provide for adequate purchasing lead time (insufficient lead time may cause materials related line shutdown)

        Adequate planning and timing can reduce inventoriesand can also reduce rush orders and crisis mgt.

Marketing:

        Sales forecast drives production schedule which drives purchasing schedule

        Better sales forecasting allows for longer purchasing lead times

Finance:

        Cash flow vs. inventory vs. purchasing timing

        Cash must be available to make purchases

        Money vs. opportunity for favorable buying

SUMMARY: KEY IS COMMUNICATIONS BETWEEN DEPARTMENTS

(Purchasing is an integrative function of business management.)

 

Centralized or decentralized or a combination of both?

 

Centralization, to a degree may be beneficial in order to achieve economies of scale, ease of management, maximize expertise

 

Centralization vs. decentralization decisions include:

        Authority to make purchases and purchasing policy

        The act of purchasing and where/by whom it is conducted

 

Policies (and the policy manual):

 

External Policies:

        Salespeople (access to buyers, technical/operational staff)

        Orientation of suppliers and policy booklets

        Competition and competitive bidding procedures

        Acceptance of presale technical service and/or samples

        Buyer visits to supplier/potential supplier facilities

 

Internal Policies:

        Pricing

        Use of local firms

        Socio-economic purchasing

        Ethics

        Employee purchases

 

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Cases:

 

The Privileged Fly

Senator Foghorn

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