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Make vs Buy Decision. D0394 Perancangan Sistem Manufaktur Pertemuan IX - X. Average Manufacturing Costs. On average , manufacturing firms generate approximately 10% profit from operations. Typical breakdown of total costs: Labor (8%) Materials (50%)* Overhead costs (32%)

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make vs buy decision

Make vs Buy Decision

D0394 Perancangan Sistem Manufaktur

Pertemuan IX - X

average manufacturing costs
Average Manufacturing Costs
  • On average, manufacturing firms generate approximately 10% profit from operations.
  • Typical breakdown of total costs:
  • Labor (8%)
  • Materials (50%)*
  • Overhead costs (32%)
  • * On average, manufacturing firms spend about 50% of their sales dollar in raw material, component, and supply purchases.
purchasing objectives
Purchasing Objectives:

Four Major Objectives of Purchasing:

  • Obtain the required quantity and quality of goods and services
  • Obtain the lowest cost
  • Ensure top notch service and timely delivery
  • Maintain good supplier relationships and Develop potential suppliers
purchasing
Purchasing
  • No longer just order takers….
  • Purchasing needs to know
    • material
    • performance
    • availability
    • suppliers

7

purchasing functions
Purchasing Functions:
  • Determine purchasing specifications (correct quality, quantity, and delivery requirements)
  • Select the right source
  • Negotiate terms and conditions
  • Issuing and monitoring of purchase orders
purchasing cycle
Purchasing Cycle:
  • Receive and analyze purchase requisition
  • Select suppliers
  • Determine the right price
  • Issue purchase orders (PO’s)
  • Monitor PO’s
  • Receiving and accepting goods
  • Approving supplier’s invoice for payment
purchasing cycle step 1
Purchasing Cycle Step 1:

Receive and analyze purchase requisition

Minimum Required Information:

  • Identity of requestor, approval, and charge number/account
  • Specification
  • Quantity and unit of measure
  • Required delivery date and place
  • Additional supplemental information
purchasing cycle step 2
Purchasing Cycle Step 2:

Select Suppliers

  • Routine items typically have preferred suppliers
  • New/unusual items may require vendor search and RFQ for comparison
    • Some companies require multiple source solutions (McDonnell-Douglas preferred 3, single source required justification documentation)
  • Many firms today are opting for fewer suppliers
  • Use of supply chain management is growing
supply chain management

Factories &

warehouses

End

customer

Supply Chain Management
  • Apply a total systems approach to managing the entire flow of
    • information
    • materials
    • and services

Raw

material

suppliers

3

partnership relationship
Partnership Relationship
  • Continuing relationship involving
    • a commitment over an extended time period,
    • an exchange of information, and
    • an acknowledgement of the risks & rewards of the relationship.

9

purchasing cycle step 3
Purchasing Cycle Step 3:

Determine the Right Price

  • Tied directly to supplier selection
  • Price negotiation-
    • Focuses on quantity (net and gross)
    • Frequency of orders
  • Total usage “Refunds” are becoming popular
  • Supplier maintained inventory (pay as you use philosophy)
purchasing cycle step 4 5
Purchasing Cycle Step 4 & 5:

Issue PO’s and Follow-up

  • POs are legal offers to purchase
  • Purchasing must follow-up on open PO’s
    • Monitor past due PO’s and critical need components
  • Work with suppliers
  • Take corrective action
    • Expediting components, alternative supply sources, reschedule production, etc.
purchasing cycle step 6 7
Purchasing Cycle Step 6 & 7:

Receiving and Paying Suppliers

  • Reconcile PO’s and receivers
  • Correct damages, variance or discrepancies
  • Verify information for payment
    • PO number
    • Receiving report
    • Invoice
outsourcing
Outsourcing
  • Purchased items account for 60 to 70% of the cost of goods sold.
  • Outsourcing allows firms to focus on their core competencies.
    • Organizations outsource when they decide to purchase something they had been making in-house.
  • Typically handled by materials management function.

4

make or buy
Make or Buy
  • Current trend favors outsourcing all activities that do not directly represent or support core competencies.
  • Are there any dangers associated with aggressive outsourcing? What are the implications for JIT production?

5

purchasing inputs
Purchasing Inputs
  • Marketing
  • Engineering
  • Manufacturing
functional specifications
Functional Specifications
  • By Brand
  • By Specification
    • Physical and Chemical Characteristics
    • Materials & Methods of Manufacture
    • Performance
  • By Engineering Design
  • Miscellaneous
    • “Gimme one just like the last one”
good specifications
Good Specifications
  • Are not to tight or loose
  • Allow for multiple sources
  • Assign responsibility
supplier selection
Supplier Selection
  • Types of Sourcing
    • Sole Source
    • Multiple Source
    • Single Source
  • Select based on:
  • Technical Ability
  • Mfg. Capability
  • Reliability
  • After sale service
  • Location
  • Price
four categories of product
Four Categories of Product
  • Commodities
  • Standard Products
  • Items of small value
  • Make to order items
purchasing anatomy
Purchasing Anatomy
  • Specifications
  • Supplier Selection
  • Price Determination
  • Negotiation

Procurement

Purchasing

  • Order Release
  • Schedule Delivery
  • Follow up

Schedule

and

Follow up

price determination
Price Determination

“you get what you paid for”

  • Fair Price- One that is competitive, gives the seller and buyer an opportunity for profit
  • Fixed Costs- Costs incurred without respect to sales volume
  • Variable Costs- Costs directly associated with sales volume (labor, material, etc.)
  • Breakeven Point- The convergence of profit and loss. . . financial equilibrium
break even example
Break-Even Example

Q:To make a particular component requires an overhead (fixed) cost of $5000 and a variable unit cost of $6.50/unit. What is the total cost and the average cost of producing a lot of 1000? If the selling price is $15/unit, what is the break-even point?

A: Total cost = fixed cost + (variable cost/unit)(# of units)

= $5000 + ($6.5 x 1000) = $11,500

Average cost = Total cost / # of units

= $11,500 / 1000 = $11.50/unit

Break-even point: Let X = # of units sold

$15X = $5000 + $6.5X

$8.5X = $5000

X = $5000 / $8.5 = 588.2 units