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 

                        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 over 65% of total cost of a product in the average manufacturing industry (Page 8)

3.  Purchasing as Manager for OUTSIDE MANUFACTURING

        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 general types of factories 

                        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: (more in Chapter 10)

• 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 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:

• 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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