Purchasing Notes

Purchasing

Purchasing: Process of buying goods or services, involving all company departments to obtain the right material in the right quantity, ensuring timely delivery from the right source, all at the right price and right place. This goes beyond merely placing orders; it involves strategic decision-making.
Inputs from Marketing, Engineering, and Manufacturing guide material selection, ensuring alignment with product specifications and market demands. Quality, sustainability, and cost considerations are key.
Outsourcing Definition: Process of having external suppliers provide goods and services that were previously provided internally. Strategic decision to leverage external expertise, reduce costs, or improve efficiency.
Objectives:
- Obtain goods/services of required quantity and quality, meeting or exceeding expectations and specifications.
- At the lowest possible total cost, considering not only the purchase price but also transportation, storage, and associated costs.
- With the best possible service and delivery, ensuring reliability, responsiveness, and flexibility from suppliers.
- Maintain and develop suppliers, fostering long-term relationships, collaboration, and continuous improvement.
- Minimize environmental impact through sustainable sourcing, ethical practices, and environmentally responsible operations.

Profit Leverage: Improving pre-tax profit can be achieved by increasing sales revenue or reducing purchasing costs. A dollar saved in purchasing has a direct impact on profitability, often more significant than a dollar increase in sales.

Functions:
- Determining purchasing specifications: Defining detailed requirements for materials, components, and services, ensuring clear communication with suppliers.
- Selecting suppliers: Identifying and evaluating potential suppliers based on factors such as quality, reliability, price, and service.
- Negotiating terms and conditions: Establishing contractual agreements with suppliers, covering pricing, delivery schedules, payment terms, and other relevant factors.
- Issuing and administering purchase orders: Creating and managing purchase orders, tracking order status, and ensuring timely delivery.

7 Purchasing Cycles:
1. Receive & analyze purchase requisition: Gathering and reviewing requests for materials or services from internal departments.
2. Select & issue quotation: Identifying potential suppliers and soliciting quotations for required items.
3. Determine the right price: Evaluating quotations and negotiating pricing to achieve the best value for the organization.
4. Issue purchase order: Creating and issuing a formal purchase order to the selected supplier.
5. Follow up to ensure correct delivery: Tracking order status, monitoring delivery schedules, and resolving any issues that may arise.
6. Receiving & accepting goods: Inspecting delivered goods to ensure they meet quality standards and match the purchase order specifications.
7. Approving invoices: Verifying invoices against purchase orders and delivery receipts, and processing payments to suppliers.

Based on quantity, price, and function: Specifications are influenced by the amount needed, budget constraints, and the intended purpose of the item.
Functional specification defines the quality level from the customer's perspective: Focuses on how the product performs its intended function, meeting or exceeding customer expectations.
Value Analysis: Identifies required functions, establishes value, and provides the function at the lowest cost. Analysis of the value of each component or function of a product or service to determine if it can be eliminated or improved to reduce costs.

Can be described by brand, engineering drawings, or specifications (physical, chemical, material, method of production and performance).
Brand: Relies on supplier reputation; higher cost, restricts suppliers. Using a well-known brand can assure quality but may limit choices and increase costs.
Specification:
- Physical and chemical characteristics: Defining specific properties and attributes of the material or component.
- Material and method of production: Specifying the type of material used and the manufacturing process required.
- Performance: Defining the expected performance characteristics of the item, such as durability, efficiency, and reliability.

Engineering Drawings: Detailed configuration of parts, expensive but exact. Precise visual representation of the item, ensuring accurate manufacturing and assembly.

Sourcing Types:
- Sole sourcing (one supplier): Using a single supplier for a particular item, often due to proprietary technology or unique capabilities.
- Multiple sourcing (more than one supplier): Utilizing multiple suppliers to reduce risk, increase competition, and ensure supply continuity.
- Single sourcing (partnership with one supplier): Developing a close, collaborative relationship with a single supplier to achieve mutual benefits and long-term value.

Factors to Consider: Technical ability, manufacturing capability, reliability, after-sales service, location, JIT capabilities, price, etc. A wide range of factors are considered when evaluating potential suppliers, including their expertise, production capacity, reputation, and geographic proximity.
Ranking Method: Assign weights to factors, rate suppliers, multiply weightage with rating, tally scores to determine the best supplier. A systematic approach to evaluating and comparing suppliers based on predefined criteria and weightings.

Fair price and breakeven analysis
Competitive bidding
Price negotiation
Breakeven Analysis:
- Fair price is competitive and allows profit for both buyer and seller: Ensuring pricing is reasonable and sustainable for all parties involved.
- $X = \frac{Fixed Cost}{Price per unit - Variable Cost per unit}$

Competitive Bidding: Comparing prices from various suppliers. Obtaining quotes from multiple suppliers to identify the most competitive pricing.
Price Negotiation: Resolving purchase conditions for mutual benefits. Engaging in discussions with suppliers to reach mutually agreeable pricing and terms.

Procurement: Includes establishing specifications, selecting suppliers, price determination. Encompasses all activities related to acquiring goods or services.
Supplier scheduling and follow-up: Concerns with releasing orders, scheduling delivery, and follow-up. Managing the timing and delivery of materials from suppliers to meet production needs.
Buyer/Planner Concept: Coordinates flow of goods from suppliers, matches material requirements with supplier capabilities. A role that combines purchasing and planning responsibilities to optimize the supply chain.

Supplier responsiveness and reliability. The ability of suppliers to quickly and consistently respond to changing needs.
Close relationships with suppliers. Building strong, collaborative partnerships with key suppliers.
Supply Chain Management (SCM) organizational implication. Integrating purchasing activities with other functions across the supply chain.
Use Electronic Data Interchange (EDI). Utilizing electronic communication methods to streamline transactions and improve efficiency.
Vendor Managed Inventory. Allowing suppliers to manage inventory levels at the buyer's location.
Environmentally friendly effort –