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Chapter 3

Chapter 3. The Purchasing Function. THE PURCHASING DEPARTMENT’S FUNCTION IS TO:. The three most important elements of the purchasing department’s function are to: PROVIDE APPROPRIATE LEVELS OF SUPPLY AT THE APPROPRIATE LEVEL OF QUALITY FOR THE LOWEST TOTAL COST. 3- 2.

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Chapter 3

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  1. Chapter 3 The Purchasing Function

  2. THE PURCHASING DEPARTMENT’SFUNCTION IS TO: • The three most important elements of the purchasing department’s function are to: • PROVIDE APPROPRIATE LEVELS OF SUPPLY • AT THE APPROPRIATE LEVEL OF QUALITY • FOR THE LOWEST TOTAL COST 3-2

  3. 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.

  4. 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.

  5. 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. 3-5

  6. METHODS TO EXAMINEAND COMPARE COSTS • TOTAL COST OF OWNERSHIP • ECONOMIC ORDER QUANTITY (EOQ) • VALUE ANALYSIS 3-6

  7. 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

  8. ECONOMIC ORDER QUANTITY THE QUANTITY THAT MINIMIZES ORDERING COSTS AND STORING COSTS 3-8

  9. 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.

  10. 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.

  11. USING VALUE ANALYSIS • THE OBJECTIVES OF VALUE ANALYSIS: • REDUCE COSTS AND/OR • IMPROVE DESIGN What is New Currently Alternatives Being DoneBeing Considered COMPARE BENEFITS RECEIVED FUNCTIONS OF PRODUCT COST OF MATERIALS WORK PROCESS INVOLVED OUTCOME: GREATER VALUE FOR LESS COST Unnecessary elements 3-11

  12. 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.

  13. 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

  14. Step 8 Evaluation of product performance Step 7 Selection of an order procedure Step 6 Evaluation of proposals andselection of a supplier Step 5 Acquisition and analysis of proposals Step 4 Search for qualified suppliers Step 3 Development of detailed specifications Step 2 Definition of the product-type needed Step 1 Recognition of a need STEPS IN THE BUYING PROCESS EXHIBIT 3-3 3-14

  15. BUY-PHASES • NEW TASK COMPLETE BUYING PROCESS REQUIRED EMPHASIZES PRODUCT DEFINITION AND SPECIFICAIONS • MODIFIED REBUY EMPHASIZES SUPPLIER SEARCH AND EVALUATION • STRAIGHT REBUY EMPHASIZES NEED RECOGNITION AND PURCHASE 3-15

  16. 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 3-16

  17. 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 ELSEWHERE 3-17

  18. IMPROVE PERFORMANCE:STAYING AHEAD OF PURCHASING TRENDS • REDUCE PURCHASING COSTS • CUTBACK ON EMPLOYEES • REDUCE NUMBER OF VENDORS/ TRANSACTIONS • BUILD RELATIONSHIPS • CENTRALIZE PURCHASING ACTIVITIES • USE THE INTERNET 3-18

  19. IMPROVE PERFORMANCE:STAYING AHEAD OF PURCHASING TRENDS(continued) • 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. 3-19

  20. 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.

  21. IMPROVE PERFORMANCE:STAYING AHEAD OF PURCHASING TRENDS (continued) CROSS-FUNCTIONAL TEAMS – MADE UP OF COMPANY DEPARTMENTS, SUPPLIERS, CUSTOMERS INCREASE PROFESSIONALISM THROUGH CERTIFICATION PROGRAMS AND ESTABLISH A CODE OF ETHICS 3-21

  22. SALES SURVIVAL QUESTIONS:CAN YOUR SALESPEOPLE ANSWERTHE FOLLOWING QUESTIONS? WHAT IS A CROSS-FUNCTIONAL TEAM? CAN YOU RECOGNIZE ONE AT YOUR CLIENT’S ORGANIZATION? DO YOU KNOW HOW TO GET YOUR COMPANY INCLUDED IN YOUR CLIENT’S CROSS-FUNCTIONAL TEAM? WILL YOUR COMPANY GIVE YOU THE PEOPLE RESOURCES TO SUPPORT YOUR CLIENT’S NEEDS? 3-22

  23. 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 3-23

  24. Changing company focus: MAKE-OR-BUY?Purchasing Determines Who Provides Best Value for Lowest Cost 3-24

  25. MAKE-OR-BUY DECISION ANALYSIS UNACCEPTABLE RISK Retain Production and Provide Services ACCEPTABLE RISK Buy the Products, Components or Services 3-25

  26. 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 3-26

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