Supply Chain Chapter 5 Purchasing Management

What is procurement?

process of actually purchasing goods and services that is vital to an organization

What is purchasing?

The ACTION of obtaining merchandise, capital equipment, raw materials, services, or maintenance, repair, and operation supplies in exchange for money or its equivalent.

Purchasing is the process of how ___________ from an external third party

goods and services are ordered

Purchasing can usually be described as the __________________ of procurement for goods or services

transnational function

What is Supply Management?

A newer term that encompasses all acquisition activities beyond the simple purchase transaction.

"Identification, acquisition, access, positioning and management of resources an org needs or potentially needs in the attainment of its strategic objectives.

What is purchase requisition?

Document that defines the need for goods and/or services. An internal document. Does not constitute a contractual relationship-p with any external party.

What is a purchase order?

The buyer's offer to supplier to acquire goods or services. Becomes a legally binding contract ONLY when accepted by the supplier.

What is e-procurement?

use of online systems to manage supply, allowing suppliers direct access to supply levels

What are merchants?

Wholesalers and retailers who PURCHASE FOR RESALE

What are Industrial Buyers?

Individuals within an org who purchase raw materials for CONVERSION into products, purchase services, capital equipment

What is Contracting ?

term often used for the acquisition of services

Request for Information (RFI)

A standard business

process whose purpose is to collect written information

about the capabilities of various suppliers.

Request for Proposal (RFP)

A detailed capabilities

document used to determine a supplier's capability and

interest in the production of a product or service

Request for Quote (RFQ)

A document used to solicit

bids from interested and qualified suppliers for goods

or services that the organization needs to obtain.

What are the primary objectives of Purchasing? 3?

1. Ensure an UNINTERRUPTED flow of materials and services at the lowest total cost.

2. Improve the quality of the finish goods produced.

3. Optimize customer satisfaction.

Purchasing contributes to its primary objectives by:

1. Actively seeking reliable suppliers.

2. Working with the expertise of strategic suppliers to improve quality and materials

3. Involving suppliers and purchasing personnel in new product design an development efforts.

What is the first step of the basic purchasing process?

A need is identified, and a purchase requisition is created/issued

REQUEST FOR GOODS OR SERVICES submitted to the procurement/purchasing organization for action.

What is the second step of basic purchasing process?

Obtain authorization as necessary

A purchase requisition may be routed to an AUTHORIZED APPROVEr depending on the type of material or service being requested.

What is the third step of the basic purchasing process?

Identify and evaluate potential suppliers

What is the fourth step of the basic purchasing process?

Make Supplier Selection

What happens if the buyer already knows which supplier they will buy from? IF not?

If the Buyer already knows which supplier they will buy from, move to

step 5

If not, a competitive bidding process may be initiated through the use of

a Request for Proposal (RFP) or a Request for Quotation (RFQ).

RFP for items which have not been previously purchased

RFQ for routine purchased items

What is the fifth step of the basic purchasing process?

Purchase Order (PO) is created and delivered to the supplier.

to inform the supplier of the INTENT TO PURCHASE

identify the items to be procured, quantity, delivery dates etc

What is the sixth step of the basic purchasing process?

Supplier confirmation of the Purchase Order

When the purchase order (PO) become legally binding ?

The PO becomes a binding contract only when accepted and confirmed by the supplier.

What is the 7th step of the basic purchasing process?

Fulfillment

Supplier delivers the items

What is the 8th step of the basic purchasing process?

Receipt of Goods

Once the items are received, the buyer will conduct some form of receipt process where the items are checked for quality and quantity.

What is the 9th step of the basic purchasing process?

Invoice and Reconciliation

-The supplier prepares an invoice for the items ordered. It is either sent with the items or separately to the buyer

The invoice may need to be RECONCILED to the purchase order and goods receipt before payment is made. REFERRED TO AS 3 WAY MATCH

What is the 10th step of the basic purchasing process?

Payment

Payment is processed using an appropriate payment method once items is received and MEETS ALL OF THE CRITERIA ESTABLISHED BY PO

What is the 11th step of the basic purchasing process?

Close out the Purchase order

What is the 12 step of basic purchasing process?

Analysis

Measurements of the EFFICIENCY AND ACCURACY of the procurement process.

what system can help complete steps automatically in the basic purchasing process?

E-Procurement

What is e-Procurement?

purchasing through electronic connections between buyers and sellers - usually online

it helps assists in NON STRATEGIC AND TRANSACTIONAL activities that would otherwise consume the majority of a buyers time

Automation through E-procurement provides _______ of all purchases.

increased visibility

What are the 3 steps in the basic e-procurement process?

1. An electronic PURCHASE REQUISITION and/or PURCHASE ORDER

2. An INVOICE

3. A PAYMENT

for high dollar purchases, the process will generally also include;

- authorization of the purchase order

- Reconciliation of the invoice

What are some advantages of E-procurement system

Time savings

Cost Savings

Accuracy

Real Time

Management

Mobility

Traceable

Benefits to the suppliers

What is profit leverage effect?

A decrease in purchasing expenditures directly INCREASES profits before taxes as long as no decrease in quality or purchasing total cost

One of the main reasons why procurement managers are under significant pressure to reduce purchase costs

What is Return on Assets Effect?

A high ROA indicates managerial prowess in generating profits with lower spending

Profit before tax / Assets = ROA

What is inventory turnover effect?

Inventory is an but also represents financial capital tied up and not available for use.

Inventory turnover represents the number of times the company sold through inventory in a given time period

COGS / avg inventory

What does a high inventory turnover ratio mean vs a low turnover ratio ?

a high turnover ratio is BENEFICIAL because the company is generating sales efficiently to sell inventory

a low turnover ratio is unfavorable as it means the company is not selling through products efficiently.

Buying too much inventory for demand

What is Total Cost of Ownership? And what are the four elements?

It is the sum of all the costs associated with ever y adctivity of the supply stream.

The four elements are quality, service, delivery, and price (QSDP)

TCO = Q + S + D + P

EACH ELEMENT OF QSDP IS IMPORTANT

What do procurement professionals recognize about purchase price?

Purchase price of an item remains very important but it is ONLY ONE PART OF THE TOTAL COST OF OWNERSHIP

What is the main TCO insight?

acquisition cost is often a very small portion of the TOC

accounting for only 25-40 percent of the total cost for most products

What other factors beyond purchase price must also be considered?

1. Quantity Discounts

-- inducement to encourage buyers to purchase larger quantities

2. Cash Discounts

-- offered for quick payment of invoices

3. Value-added Services

-- services like special delivery, special packaging, promotional displays

4. Administrative Expenses

-- costs associated with procurement activity itself such as screening suppliers, negotiation

5. Poor Supplier Quality

--defective finished goods

Pre-Transaction Costs

involve all of the activities carried out prior to executing the actual buy and sell transaction; and all of the costs associated with identifying a need, finding and qualify-ing sources, site visits, inspections/audits, administratively establishing new sources of supply, and any approvals necessary.

Transaction Costs

involve all of the activities carried out as part of the actual buy and sell transaction. These costs include the purchase price, placing and managing the order, transportation, tariff s and duties, incoming inspections, rejected product handling, late deliveries, missing docu-mentation, expediting, and invoice processing/payment.

Post-Transaction Costs

involve all of the activities carried out following the actual buy and sell transaction. All of the costs associated with defective/rejected finished products, field failures, repair, replacement or warrantee costs, loss of customer goodwill, and so forth.

What is the Make versus Buy decision?

the act of deciding whether to product an item internally or buy the item from an outside supplier

Make vs Buy is a ______ decision

strategic

In determining the make-or-buy decision, it is important to analyze all of the expenses associated with developing the capability to make a product, in addition to all of the expenses associated with buying the product. The assessment should include qualitative and quantitative factors. Explain quantitative and qualitative factors?

Quantitative factors primarily involve the incremental costs of making or purchasing the component, such as the availability of manufacturing facilities, needed resources, and manu-facturing capacity. Fixed and variable costs can be determined with certainty or by estimation.

Qualitative factors are more subjective and include such things as control over quality, the reliability and reputation of the potential suppliers, and the impact of the decision on customers and suppliers.

List some reasons for making internally?

-Protect proprietary technology

-No competent supplier

-Overall lower cost

-Better quality control

-Use existing idle capacity

-Control of transportation and warehousing costs

-Control of lead-time

List some reasons for buying/outsourcing?

-Non-Strategic

-Cost Advantage

-Insufficient Capacity

-Temporary Capacity Constraints

-Lack of Expertise

-Quality

-Multi Sourcing Strategy

-Inventory Considerations

-Brand Strategy

what are some risks of outsourcing?

Potential loss of control

Increased reliance on suppliers

Increased need for supplier management

What are some benefits of outsourcing?

Concentrate on core capabilities

Reduce staffing levels

Accelerate re engineering efforts

Reduce internal management problems

What is insourcing?

Reverting (i.e., going back) to in-house production when external

quality, delivery, and services do not meet expectations

What is Co-sourcing?

2. The sharing of a process or function between internal staff and an external provider.

3. Using dedicated staff at an external provider that works

exclusively under your control and direction

What is backward vertical integration?

Refers to a company

acquiring (i.e., buying) one or more of their suppliers.

What is vertical integration?

Refers to a company

acquiring (i.e., buying) one or more of their customers.

What is a CPO?

Chief Procurement Officer

There is no ideal organization for purchasing, but most companies will organize the purchasing function so as to maximize its impact, and to generate more value for the company and the end customers. Define Centralized vs Decentralized Purchasing?

Centralized Purchasing:

Purchasing department located at

the firm's corporate office makes

all the purchasing decisions

Decentralized Purchasing:

Individual, local purchasing

departments, such as at the plant

level, making their own purchasing

decisions

What are advantages of centralization?

Concentrated volume

─ Leveraging purchase volume

─ Avoiding duplication

─ Specialization

─ Lower transportation costs

─ No competition within units

─ Common supply base

What are advantages of decentralization ?

─ Knowledge of local requirements

─ Local sourcing

─ Less bureaucracy

Why would a company utilize global sourcing?

The opportunity to improve quality, cost and delivery

To exploit global efficiencies like low cost labor

What three things to companies need to know when pursuing international outsourcing?

Tariffs

Non-tariff Barriers

Counter trade

What are some potential challenges to international purchasing?

trade policies

different types of cost

communication

locating and sourcing global markets

currency management

time difference

cultural political labor issues

longer transportation

legal matters

Companies can choose to use service providers that already have the specialized

skills and knowledge necessary to deal with international purchasing issues and

challenges.

What are import brokers, import merchants and trading companies

Import Brokers - Agents licensed by the governmental regulatory authority

to conduct business on behalf of importers, for a service fee.

Import Merchants - A person or company engaged in the purchase and sale

of imported commodities for profit.

Trading Companies - Buy products in one country and sell them in different

countries where they have their own distribution network.

What is government purchases?

expenditures made in the

private sector by all levels of government.

What are non profit purchases

are expenditures made in the

private sector by all types of non-profit organizations.

What is different about govt and non profit purchases?

requires openness, visibility, and accountability since it is public money that is being spent

What is the goal of competitive bidding?

aims at obtaining goods and services at the lowest prices by stimulating competition, and by preventing favoritism.

the winning bidder will be required to furnish bonds as an incentive to ensure that they will fulfill the contract awarded. Describe bid bond, performance bond and payment bond?

Bid Bond is a debt secured by a bidder for the purpose of

providing a guarantee that the successful bidder will accept the

contract once awarded. If not, the bond would be forfeited.

▪ Performance Bond is a debt secured by a bidder for the purpose

of providing a guarantee that the work will be on time and meet

specifications.

▪ Payment Bond is a debt secured by a bidder for the purpose of

providing protection against 3rd party liens not fulfilled by bidder

It is preferable to periodically monitor the purchasing

function's performance against set standards, goals,

and/or industry benchmarks.

: Measuring what other businesses

do best and matching their performance, is an

effective approach to improving your supply chain.

Bench marking