Chapter 7: The Purchasing Function Practice Flashcards

This flashcard set covers the fundamental concepts of the purchasing function, including management tasks, inventory classifications, quality determination, cost analysis, and stocktaking methods.

Objectives of the Purchasing Function

To buy materials of the right quality, from the right source, delivered to the right place, at the right time, and at the right price.

Just-in-time (JIT) principle

A principle where there is enough material of the right quantity and quality at the right time to manufacture products and satisfy customer demand.

Centralised purchasing

A system where the purchasing manager of one office or branch buys products and distributes them to all other branches to achieve standardization and cost advantages.

Decentralised purchasing

A system where each branch of a business performs its own purchases in its own local environment, allowing for closer contact with local consumers and suppliers.

KPI - Supplier performance

A Key Performance Indicator determined by the number of rejected orders, orders received late, and the number of times it was necessary to speed up orders.

KPI - Timeliness

A Key Performance Indicator determined by the number of urgent orders, interruptions of operations, and purchases lost due to lack of inventory.

Raw and supplementary materials

Inventory items like aluminum, wood, or plastic needed to manufacture finished products.

Semi-finished goods

Inventory items that are in the process of being manufactured but have not yet been completed.

Finished Goods

Items that have been through the full manufacturing and production cycle and are ready to be sold and used.

The Purchasing Cycle

A logical sequence of 9 steps: 1. Determine need, 2. Select suppliers, 3. Determine price, 4. Place order, 5. Expedite, 6. Receive goods, 7. Handle errors, 8. Pay suppliers, 9. Close order.

Specifications

A description of non-standard materials including dimensions or physical features like tolerances, workability, uniformity, and chemical composition to describe quality.

Standardisation

The process of making materials, methods, practices, and techniques uniform so that items comply with a specific minimum acceptable standard.

Direct inventory-carrying cost

Cost components consisting of capital cost (interest or opportunity cost) and holding cost (rent, electricity, insurance, security, and labor).

Ordering costs

Costs incurred to place an order, including telephone calls, paperwork, transportation, and the time and effort spent checking and receiving inventory.

Economic Order Quantity (EOQ)

The point where inventory ordering costs and inventory carrying costs intersect, representing the most economical quantity to order at minimum total cost.

Fixed-order-quantity system

A system where a fixed order point and a fixed quantity (EOQ) are determined; an order is placed when inventory drops to a specific level.

Cyclical ordering system

A system where inventory is checked at fixed intervals (weekly or monthly) and an order is placed to replenish stock to its maximum level, meaning order quantities vary.

Break-even Analysis Formula

The calculation used to determine volume where total revenues equal total costs, expressed as $Q = \frac{F}{P - C}$, where $Q$ is amount, $F$ is fixed costs, $P$ is selling price, and $C$ is purchasing cost.

Tenders

A principal method of determining prices, typically used for construction projects.

Advance purchasing

An internal policy involving the purchase of more materials than required to ensure future availability.

Minimum purchases

A policy where inventory is kept to a minimum for immediate needs only, with no buffer inventory held.

Pareto Principle (80/20 principle)

A stocktaking concept suggesting that 20% of stock items usually contribute to 80% of the sales or profit.

Lead time

An external factor influencing the timing of purchases, particularly important in the case of imported goods.

SABS

A quality mark provided by a quality institution used as a method to define the quality of purchased goods.

Quotations

A source of pricing information used specifically for non-standard products or large quantities.