Purchasing Lecture For SCM Class 1
Purchasing Lecture For SCM Class 1
Purchasing Lecture For SCM Class 1
Learning Objectives
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Describe the role of purchasing and understand its impact on an organizations competitive advantage. Have a basic knowledge of manual purchasing and e-procurement. Understand and know how to handle small value purchase orders. Understand sourcing decisions and the factors impacting supplier selection. Understand the pros and cons of single versus multiple sourcing.
Describe
centralized, decentralized, and hybrid purchasing organizations and their advantages. Describe and understand how globalization impacts, purchasing, and describe and understand the opportunities and challenges of global sourcing. Understand total cost of ownership and be able to select suppliers using more than unit price alone.
The Role of Purchasing in an Organization The Purchasing Process Sourcing Decisions: The Make-or-Buy Decision Roles of Supply Base Supplier Selection How Many Suppliers to Use Purchasing Organization: Centralized versus Decentralized Purchasing International Purchasing/Global Sourcing
Introduction
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What is Purchasing?
Introduction
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PurchasingObtaining merchandise, capital equipment; raw materials, services, or maintenance, repair, and operating (MRO) supplies in exchange for money or its equivalent.
Definitions
Purchasing, Procurement, Material and Supply Management: The terminologies are interchangeable Obj: Lean purchasing or lean supply management Supply chain management Obj: Minimize costs and times across the supply chain Supply and Logistics Obj: Control materials flows to optimize inbound or outbound transportation
2000-Future
Clerical
World War II
Managerial emphasis
Purchasing strategy
Integration into corporate strategy Integration with supply networks and information technology
Manufacturing Cost
30 55
5
4.5
?
SG&A RD&E Pretax Profit Profit Improvement
?
($.1)
($.05) $0.075
?
($.1)
($.05) $0.065
?
($.105)
($.0525) $0.0525
($.1)
($.05) $0.05
$1.00 ($.50) ($.285) $.215 Increase 7.5% ($.1) ($.05) $0.065 Increase 30%
Unreliable Vendors
Unreliable Vendors
Scrap
Types of Buyers
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Industrial Buyerspurchase raw materials for conversion, services, capital equipment, & MRO supplies.
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Actively seeking better materials and reliable suppliers, Work closely with strategic suppliers to improve quality materials, and Involving suppliers and purchasing personnel in new product design and development efforts.
Decision Making
Make or buy? Keep inventory and how much? What price to pay? Where, when and what size to place orders? How long is the lead time and when to expect orders What is the best alternative? What transportation mode to choose? Long or short term suppliers? Should we cancel ord Who will form the negotiation team and what is the strategy in negotiation? Should we use bidding or reverse auction?
Step 2- The Request for Quotation (RFQ)- Buyer identifies suppliers & issues a request for quotation (RFQ).
Step 3- The Purchase Order (PO)- The purchase order is the buyers offer & becomes a binding contract when accepted by supplier.
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savings Cost savings Accuracy Real time Mobility Trackability Management Benefits to the suppliers
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Processing costs can be substantial. Small value purchases should be minimized through:
Procurement Credit Card/Corporate Purchasing Card Blank Check Purchase Orders Blanket or Open-End Purchase Orders Stockless Buying or System Contracting Petty Cash Accumulating Small Orders to Create a Large Order Using a Fixed Order Interval
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Cost advantage: Especially for components that are non-vital to the organizations operations. Insufficient capacity: A firm may be at or near capacity. Lack of expertise: Firm may not have the necessary technology and expertise. Quality: Suppliers have better technology, process, skilled labor, and the advantage of economy of scale.
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Protect proprietary technology No competent supplier Better quality control Use existing idle capacity Control of logistics- lead-time transportation, and warehousing cost Lower cost
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Supply Base- suppliers that a firm uses to acquire its materials, services, supplies, and equipment. Firms emphasize long-term strategic supplier alliances consolidating volume into one or fewer suppliers, resulting in a smaller supply base. Preferred suppliers provide:
Early supplier involvement- Information on the latest trends in materials, processes, or designs Information on the supply market Capacity for meeting unexpected demand Cost efficiency due to economies of scale
Supplier Selection
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The process of selecting suppliers, is complex and should be based on multiple criteria:
Selection Criteria ?
Supplier Selection
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The process of selecting suppliers, is complex and should be based on multiple criteria:
Product
and
Order
process technologies Willingness to share technologies and information Quality Cost Reliability
Single-sourcing- a risky proposition. Although trends favor fewer sources, avoid single source.
Single-sourcing- a risky proposition. Although trends favor fewer sources, avoid single source.
To establish a good relationship Less quality variability Lower cost Transportation economies Proprietary product or process Volume too small to split
Need capacity Spread risk of supply interruption Create competition Information Dealing with special
Purchasing- individual, local purchasing departments, such as plant level, make their own purchasing35
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AdvantagesDecentralization ?
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Concentrated volumeleveraging purchase volume Avoid duplication Specialization Lower transportation costs No competition within units Common supply base
AdvantagesDecentralization
Closer knowledge of requirements Local sourcing Less bureaucracy
A hybrid purchasing organization- both decentralized at the corporate level and centralized at the business unit level may be warranted.
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to improve quality, cost, and delivery performance. Requires additional skills and knowledge to deal with international suppliers, logistics, communication, political environment, and other issues.
Total cost of ownership is more than just the purchase price; other qualitative and quantitative factors, including
freight
and inventory costs, tooling, tariffs and duties, currency exchange fees and fluctuations, payment terms, maintenance, and non-performance costs
Firms can use total cost analysis as a negotiation tool to inform suppliers regarding areas where they need to improve.
An Example of Total Cost Analysis Outdoor Inc., assembles five different models of all terrain vehicles (ATV) from various ready-made components to serve the Las Vegas, Nevada market. The company uses the same engine for all its ATVs. The purchasing manager, Ms. Henderson, needs to choose a supplier for engines for the coming year. Due to the size of the warehouse and other administrative restrictions, she must order the engines in lot sizes of 1,000 each. The unique characteristics of the standardized engine require special tooling to be used during the manufacturing process. Outdoor Inc agrees to reimburse the supplier for the tooling. This is a critical purchase, since late delivery of engines would disrupt production, and cause 50% lost sales and 50% backorders of the ATVs. Ms. Henderson has obtained quotes from two reliable suppliers,
Ms. Henderson also obtained the following freight rates from her carrier: Truckload (TL M40M or 40,000 lbs): $0.80 per ton-mile Less-Than-Truckload (LTL): $1.20 per ton-mile Note: per ton-mile 2,000 lbs per mile
Description 1. Total Engine Cost 2. Cash Discount n/30 1/10 2/10 Largest discount 3. Tooling Cost 4. Transportation Cost (22,000 lb LTL) 5. Ordering Cost 6. Carying Cost 7. Quality Cost 8. Delivery Rating Backorder (50% ) Lost Sales (50% ) TOTAL COST 12,000 x 1% x 50% x $15 12,000 x 1% x 50% x $4,500 x 18% $6,000,000 x 10% x 30/360 N/A $6,000,000(10% x10/360+2% ) $ $ 12,000 units x $500
Supplier 2 $ 5,976,000.00
$5,976,000(10% x10/360+1% ) $
125miles x 12,000units x 22lbs x $1.20/2000 12,000 / 1,000 x $125 1,000 / 2 x $500 x 20% $6,000,000 x 2%
$ $ $ $
19,800.00 100miles x 12,000units x 22lbs x $1.20/2000 1,500.00 12,000 / 1,000 x $125 50,000.00 1,000 / 2 x $498 x 20% 120,000.00 $5,976,000 x 3%
$ $ $ $
$ $ $
900.00 12,000 x 2% x 50% x $15 48,600.00 12,000 x 2% x 50% x $4,500 x 18% 6,126,133.33
$ $ $