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 à)
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:
§
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?
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 inventories and 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:
·
Use
of local firms
·
Socio-economic
purchasing
·
Ethics
·
Employee
purchases