Purchasing and Supply Chain Management

Purchasing

• Purchasing is the process of buying
• It's not just the purchasing department's responsibility, all departments are involved
• Getting the right materials, in the right quantities, with the right delivery (time and place), from the right source, and at the right price are all purchasing functions
• Choosing the right material requires input from marketing, engineering, manufacturing, and purchasing departments
• The quantity and delivery of finished goods are established by market place needs
• Manufacturing planning and control (MPC) decides when to order raw materials to meet market needs

Purchasing Objectives

• Purchasing is responsible for materials flow, supplier follow-up, and expediting delivery.
• Missed deliveries disrupt manufacturing and sales.
• Purchasing objectives are divided into four categories:
  • Obtaining goods/services in required quantity and quality.
  • Obtaining goods/services at the lowest cost.
  • Ensuring best possible service and prompt delivery by the supplier.
  • Developing and maintaining good supplier relations, and developing potential suppliers.
• To meet these objectives, some basic functions must be performed:
  • Determining purchasing specifications (quality, quantity, delivery).
  • Selecting the right supplier.
  • Negotiating terms and conditions (price).
  • Issuing and administering purchase orders.

Purchasing Cycle

• The cycle consists of receiving and analyzing purchase requisitions
• Selecting suppliers involves identifying potential suppliers and issuing requests for quotations. Determining the right price and issuing purchase orders are crucial steps.
• Following up to ensure delivery dates are met is also important.
• Receiving and accepting goods, and approving supplier invoices for payment complete the cycle.
• Purchase requisitions detail needed materials (identity, specifications, quantity, date, additional notes).
• Modern electronic requisition systems streamline the process, improving efficiency.
• For routine items, a list of approved suppliers is kept. Otherwise, a search may be conducted online, in catalogs, trade journals, or directories.
• For major items, requests for quotations are sent to several reliable suppliers.
• Suppliers respond with their quotations, which are evaluated for price, compliance to specifications, terms, and conditions of sale.
• A purchase order (PO) is a legal offer to purchase goods.
• Following up and delivery ensures timely delivery; if delays occur, alternative solutions may be sought.
• Receiving and accepting goods involves inspection for correctness, quantity, and damage.
• Supplier invoices must agree with the purchase order and receiving report. Accounts payable processes payment after approval.

Procurement Activities

• Demand Planning and Forecasting: Predicting future material needs based on historical data, market trends, and business forecasts.
• Supplier Identification and Evaluation: Finding and assessing potential suppliers based on financial stability, reputation, and capabilities.
• Request for Quotation (RFQ)/Request for Proposal (RFP): Soliciting bids from suppliers for specific materials or services.
• Purchase Order Management: Creating purchase orders, tracking order status, and handling changes.
• Contract Negotiation and Management: Establishing and managing agreements with suppliers, including price, delivery, and payment terms.

Inventory Management

• Inventory Management: Managing optimal inventory levels, balancing availability with costs. Systems track order, storage, and ensure material quality.
• Supplier Relationship Management: Building strong relations with suppliers for smooth communication, addressing issues, recognizing performance.
• Quality Assurance: Ensuring procured materials meet quality standards. Quality specifications, inspections, and timely resolution of issues are crucial.
• Logistics and Distribution: Managing transportation, delivery, and tracking/inspection of materials.
• Cost Management: Controlling and reducing procurement costs, setting/managing budgets, and managing relations.
• Compliance and Risk Management: Ensuring procurement adheres to regulations, risk assessments. Finding solutions for disruptions, financial issues, or legislative matters.

Methods of Purchasing

• Purchasing by Requirement: Purchasing only when needed in the required quantity; often for emergency goods.
• Market Purchasing: Acquiring goods when favorable market conditions exist, not necessarily for immediate needs.
• Speculative Purchasing: Buying goods now at lower prices to sell later at a higher price.
• Purchasing for Specific Future Periods: Purchasing regularly required items over a specific period.
• Contract Purchasing: Formal contract for materials delivery, with terms and conditions fixed.
• Scheduled Purchasing: Providing the supplier with a schedule for material needs to maintain timing.
• Group Purchasing of Small Items: Buying multiple small items from a single vendor to lower costs.

Parameters of Purchasing

• Right Source: Reliable source assures quality delivery and consistent quality.
• Right Price: Lowest possible price but not necessarily the cheapest if compromise isn't made on quality
• Right Quality: Meets specified standards.
• Right Quantity: Meets demand but not excess.
• Right Time: Delivers materials to avoid delays, taking account emergencies.
• Right Place: Convenient location to minimize handling costs.
• Right Material: Correct material to avoid production problems.
• Right Transportation: Minimizes shipping costs.
• Right Attitude: Open to new solutions and being organized.

Introduction to Negotiation and Bargaining

• Negotiation involves parties discussing and settling on mutually beneficial terms.
• This includes scope such as delivery times, payment terms, quantity of goods, quality standards, and warranties.
• Bargaining is the part of the negotiation process where parties exchange offers and counteroffers to reach agreement.

Characteristics of Negotiation in Purchasing

• Two Way Communication: Active communication between buyer and supplier for a mutually beneficial agreement.
• Goal Oriented Description: Clear and specific goals (reducing costs, timely delivery, quality standards) guide the process.
• Preparation and Research: Market research, understanding supplier positions, and identifying alternative options ensure informed negotiations.
• Flexibility: Adapting to changes and making concessions to reach an agreement.
• Long-term relationships: Maintaining vendor relations.

Types of Negotiation

• Distributive Negotiation (Win-Lose): One party's gain is the other party's loss, typically focused on prices.
• Integrative Negotiation (Win-Win): Aims for mutually beneficial outcomes through compromise, consideration of non-price matters.

Challenges in Forecasting

• Uncertainty: Market volatility makes accurate predictions difficult, especially in rapidly changing sectors. External events and disruptions can impact supply chains.
• Data Quality: Inaccurate or incomplete data result in poor forecast accuracy.
• Lead Time Variability: Supplier lead times might fluctuate, which complicates forecasting. Production delays might reduce accuracy.
• Seasonality: Many businesses experience variations in demand tied to seasonal events. Forecasts must reflect these variations.

This quiz covers the essential aspects of purchasing, focusing on the involvement of various departments in the process. It discusses objectives related to materials flow, supplier relationships, and the importance of timely deliveries in manufacturing. Test your understanding of the purchasing functions and their impact on overall operations.