Purchasing in MLS

Purchasing is defined as the process of buying that involves all departments in a company to obtain the right material in the right quantity with the right delivery, from the right source, at the right place, and at the right price. This definition underscores the importance of input from marketing, engineering, and manufacturing departments to select materials according to the needs of the marketplace. The correct quantity is determined by market demand. The term "right" in this context pertains to the purchasing department's role in locating sources of supply and negotiating prices, making purchasing a vital part of the supply chain.

Introduction

Purchasing is especially important for companies obtaining raw materials that are difficult or precious, such as chips for smartphones like iPhones or Samsung phones. The goal is to secure the right product at the right time with the best price. Internet and technology have significantly impacted purchasing by reducing routine manual clerical activities and enabling a more strategic view of the organization, thereby increasing its impact on profit.

Management influences that encourage improvement in supplier relationships include viewing the supply chain as an integrated function, emphasizing outsourcing, and implementing lean production principles to foster trust and partnership with suppliers. The latest trend involves promoting environmentally friendly purchasing, reflecting a focus on Green Supply Chain (GSC) and sustainability.

Outsourcing

Outsourcing involves having suppliers provide goods and services that were previously provided internally. This practice has become prevalent due to technical advancements in internet communication and efficient shipping methods, making offshore sourcing attractive in terms of cost, service, quality, and delivery. Many products and services are now purchased rather than produced locally, especially in markets like the U.S. and Singapore. Purchasing now involves managing outside operations and administering contracts.

Importance of Purchasing

Reducing purchasing costs can significantly improve pre-tax profits. For instance, with sales of $100,000,000$ and a cost of goods sold totaling $90,000,000$, the profit before tax is $10,000,000$. Increasing sales revenue by 10% to $110,000,000$ with a corresponding increase in the cost of goods sold to $99,000,000$ results in a profit before tax of $11,000,000$, a 10% increase. Alternatively, reducing purchasing costs by 2% from $50,000,000$ to $49,000,000$ while keeping other factors constant also yields a profit before tax of $11,000,000$. This illustrates the significant impact of reducing purchasing costs on corporate profitability, particularly for manufacturing firms.

Objectives of Purchasing

The five main objectives of purchasing are:

1. Obtaining goods and services of the required quantity and quality at the lowest possible cost.

2. Securing the best possible service and delivery.

3. Maintaining and developing supplier relationships.

4. Minimizing the impact on the environment, reflecting the importance of sustainability.

5. Establishing the flow of material into the company, including supplier follow-up and expediting deliveries.

Purchasing Functions

To achieve its objectives, the purchasing department must:

• Determine the purchase specifications, including quantity, delivery time, and place.

• Select the right supplier based on factors like their ability to deliver on time and financial stability.

• Negotiate terms and conditions to secure the right price.

• Issue and administer purchase orders.

Seven-Step Purchasing Cycle

1. Receive and Analyze Purchase Requisition: This cycle begins with receiving and analyzing the purchase requisition, which includes originator identification, signed approval, account to which cost is assigned, material specification, quantity and unit of measure, required delivery date and time, and any other supplementary information.

2. Select and Issue Quotation: Selecting potential suppliers and issuing a request for quotation to gather comparative and reliable price quotes.

3. Determine the Right Price: Determining the right price through negotiation with suppliers.

4. Issue a Purchase Order: Issuing a purchase order, which is a legal offer to the supplier.

5. Follow-up to Ensure Correct Delivery: Following up to ensure correct delivery, working with suppliers on expediting transportation and resolving supply problems.

6. Receiving and Accepting Goods: Receiving and accepting goods, involving inspection for correct quantity and model, ensuring no damage, and using the purchase order.

7. Approving the Invoice: Approving the invoice by verifying that the purchase order, receiving report, and invoice match in terms of item, quantity, and price.

   A purchase requisition starts with the ultimate user and involves the planner releasing a plan order authorizing the purchasing department to proceed. The purchase requisition contains details such as originator identification, material specifications, quantity and unit of measures, and required delivery date and time.

Process of Supplier Selection

• Finding a potential supplier (either from a list of approved suppliers or by searching for a new supplier).

• Issuing a request for quotation (a written inquiry, not a sales order, to get pricing).

• Receiving and analyzing the quotation (considering price, compliance with specifications, terms and conditions of sale, delivery, and payment terms).

• Selecting the right supplier (making trade-offs between price and technical suitability).

Issuing a Purchase Order

A purchase order is a legal offer and a legal contract for delivery, with copies sent to the supplier, originator, accounting, receiving, and purchasing departments. Purchasing communicates requirements to the supplier, ensuring they can provide products and services according to those requirements

Receiving and Accepting Goods

The normal process involves inspecting goods for correct quantity, checking against the bill, ensuring the same model, and verifying no damage. Exceptions occur when there is a discrepancy or variance (e.g., ordering 100 items but receiving 90). The receiving department communicates with the buyer, who decides on the variant quality or damage information.

Approving the Supplier Invoice for Payment

Approval requires agreement on three pieces of information: the purchase order, the receiving report, and the invoice. Once approved, the invoice is sent to accounts payable. Discrepancies should be checked and resolved before approval. Discounts in terms of the original purchase order must also be checked.

Establishing Specifications

Establishing specifications falls into three categories: quantity, price, and function.

• Quantity: Determined by the market demand. High demand leads to economies of scale, while low demand requires cost-effective designs.

• Price: Represents an economic value users place on a product. Subjective.

• Function: The most important and difficult to define, concerning the end user's real need or purpose of an item and what it is expected to do.

Four Phases of User Satisfaction

The four phases are:

• Quality and production planning

• Product design

• Manufacturing

• Use

Functional Specification Phases

• Product Planning: Determines what products and services to market and which market segments to serve, including product features, quality, price, and expected sales volume. This phase considers order qualifiers and order winners.

• Product Design: Builds expected quality, performance, appearance, price, and sales volume into the general design approach.

• Purchasing and Manufacturing: Ensures manufacturing conforms to specifications and that suppliers can provide the expected quality.

• Use: Concerns expectations of how the product should perform.

Value Analysis

A systematic use of techniques that identifies a required function, establishes a value for that function, and provides it at the lowest possible cost. A team analyzes current specifications to identify redundancies or unnecessary features. An example is the change from glass milk bottles to plastic, improving productivity while posing environmental challenges.

Functional specifications can be described by brand, engineering joint, specification, or miscellaneous factors:

• By Brand: Relies on the reputation and integrity of the supplier. The supplier maintains and guarantees the product quality. This is applicable when items are patented, the process is secret, or the supplier has expertise the buyer lacks. Disadvantages include higher costs, shifting the number of suppliers, and reduced competition.

• By Specification: Describes the product in terms of physical and chemical characteristics. It's used for petroleum products, pharmaceuticals, and paints. Materials and methods of production, such as hot-rolled steel, and performance metrics, such as liters per hour for a water pump, are defined.
  

Carefully designed specifications allow multiple sourcing and comparative bidding. It includes technical suitability and can trade off price and technical suitability. Specification is carefully designed. May be more expensive than supplier with stadard product.

• By Source of Specification: Buyer specification is not preferred as it is expensive and time-consuming. Standard specifications are set by government or non-government agencies and are widely known and accepted, lowering the price due to the needs of many purchasers. An example is car engine oil that meets standard industry specifications. Requires car manufacturers to provide those parts for up to 10 years after the discontinue the mode.

• By Engineering Drawing: Developed in the engineering department when no standard part is available. It gives exact part requirements but is expensive to produce. Uses CAD/CAM.

Part 2: Supplier Selection, Price Determination, and Impact of MRP

Part two will cover supplier selection, price determination (including break-even analysis), the impact of MRP on purchasing, and the latest trends. The focus will be on what to do to be a competent buyer should you choose that career.