Purchasing Fundamentals

Lecture 1: What is Purchasing About?

• Purchasing is the process of buying materials of the right quality, in the right quantity, from the right source, delivered to the right place, at the right time, and at the right price
• The modern definition includes the process undertaken by an organizational unit responsible for procuring or assisting users to procure in the most efficient manner required suppliers at the right time, quality, quantity, and price and the management of suppliers which contributes to the the achievement of its corporate strategy.

How to Locate Purchasing in the Business

• Creation (design, R&D)
• Finance (capital acquisition)
• Personnel (HR)
• Supply (acquisition of required goods)
• Conversion (transformation into economic goods)
• Distribution

Why Supply Management is Important

• It is a necessity to gain a competitive edge, especially with rising competition through globalization
• Short product life cycles necessitate quick responses to changing demands
• Rising customer expectations regarding price, quality, and speed make supply management crucial
• Globalization offers chances for more efficiency
• Advancements in internet, GPS, and communication simplify supply management
• Advancements in transportation technology (overnight, express) improve efficiency

Efficient Supply Chains

• The primary purpose is to supply predictable demand efficiently at the lowest possible cost
• Manufacturing focuses on maintaining a high average utilization rate, generating high turns, and minimizing inventory throughout the chain
• Lead time is shortened as long as it does not increase cost
• Product design maximizes performance and minimizes cost
• Suppliers are selected primarily for cost and quality

Responsive Supply Chains

• The primary purpose is to respond quickly to unpredictable demand to minimize stockouts, forced markdowns, and obsolete inventory
• Manufacturing focuses on deploying excess buffer capacity and significant buffer stocks of parts or finished goods
• Investment is aggressively channeled to reduce lead time
• Product design uses a modular approach to postpone product differentiation
• Suppliers are selected primarily for speed, flexibility, and quality

How to Place Orders in the Long Run

• Important definitions:
  • D = Annual demand
  • d = D/365 = Daily demand
  • L = Lead time
  • C = Ordering cost per unit
  • S = Setup cost or the fixed cost of placing an order
  • H = Annual holding cost per unit of inventory
    • H is often taken as a percentage of the cost of the item, such as H = iC, where i is the percent carrying cost, e.g., i=30%
  • R = Reorder point
  • Q = Order quantity
• The two key questions are: When to order? and How much to order?

Relevant Costs

• Annual purchase cost = DC, is independent of the order quantity Q
• Annual ordering cost = (D/Q)*S, (D/Q) is the number of orders placed in a year
• Annual inventory holding cost = (Q/2)*H, (Q/2) is the average inventory level
• Annual total cost (TC) = DC + (D/Q)*S + (Q/2)*H

Economic Order Quantity (EOQ)

• The optimal order quantity(EOQ) = Qopt = Wurzel aus 2DS/H
• Qopt increases in demand D and setup cost S, while it decreases in inventory holding cost H

Robustness of the EOQ Model

• All assumptions of the EOQ business scenario are valid
• The manager has chosen to use the EOQ formula to compute the order quantity
• The manager knows the exact dollar values of S, the fixed order cost (e.g., S= $100), and H, the inventory-holding cost (e.g., H = $2/unit × year)
• The manager doesn't know what the demand rate, D, is; only knows the range of possible values for D for example, that 900 ≤ D ≤ 1,600; but doesn't know for certain what the value of D
• The EOQ formula can still be used to compute an order-quantity that results in a relatively small penalty-cost ratio even with uncertainty about the values of D, S, and H

Lecture 2: Supply Strategy & Organization

• The importance of supply management in a firm is determined by the availability of materials and services, absolute dollar volume of the purchase, percent of product cost of overall value production, and the type of materials purchased

Objectives of Supply Chain

• Boss: Improve competitive position, ensure uninterrupted flow of purchases, and maintain transparency in the procurement system
• Internal customer: Hinder inventory loss, improve quality, and improve internal relationships
• Supplier: Make accurate predictions, standardize items bought and processes used, and help to develop best-in-class suppliers

Factors Affecting Organizational Structure

• Operational activities offer minimal value and are often pressing and time-consuming
• Focusing on tactical activities limits time allocated to profit-generating strategic activities

Organizational Authority

• Centralization: Decision-making responsibility rests with one individual or location
• Authority and responsibility for most supply-related functions assigned to a central organization.
• Decentralization: Decision-making is delegated to cross-functional areas or divisions
• Authority and responsibility for supply-related functions are dispersed throughout the organization
• Hybrid: Authority and responsibility is shared between a central supply organization and business units, divisions, or operating plants
• Organizations may lean toward centralized or decentralized structures depending on the division of decision-making authority (e.g., "center-led" organizations centralize strategic direction but decentralize execution)

Centralization

• Demand: Consolidating demand across departments to gain bulk purchasing advantages.
• Procurement: Centralizing procurement activities within one department to streamline processes.
• Management: Centralizing decision-making regarding procurement strategies and supplier management.
• Supplier: Consolidating supplier relationships to improve negotiating power and streamline purchasing.

Benefits of Centralization

• Reduction of effort duplication
• Leveraging volume purchases
• Consolidation of requirements (parts standardization and simplification)
• Transportation savings through consolidated orders and deliveries
• Specialization allowances (development of purchasing specialists)
• Reduction of suppliers' costs
• Improved inventory control (centralized control of orders, inventory levels, usage, lead time, prices)
• Lower administration costs (fewer order processes)
• Centralized control (facilitate management control)
• Reduction in service costs (cost reduction)

Analysis of the Supplier Market

• This includes market organization, technology, quality levels, market and cost strategy, financial concentration, production/execution capacity
• Supplier's Supply Market: analyze the supply chain, assess supplier bargaining power, identify other customers and market dependencies
• Demand Market: identify purchasing competitors and major industrial sectors, determine geographical concentration of demand
• Assess capacity levels, industry demand trends, and potential growth, and evaluate quality standards
• Substitute Markets: explore alternative technologies, assess costs and adoption timelines, identify alternative providers and their potential impact
• New Entrants: identify new suppliers, analyze their impact, explore opportunities to leverage strategic advantages

Importance of Analyzing Market Conditions

• To help in forecasting long-term demand and price trends
• Indicates alternative goods and supply sources
• Provides guidance on security of supply sources
• Helps with purchasing strategy development through information on pay rates and commodity prices

Lecture 3: Supply Processes and Technology

Strategy And Goal Alignment

• Addresses how supply personnel contribute to short- and long-term organizational goals
• Vertical alignment: ensures supply strategy and goals align with organizational strategy at the functional or business unit level
• Horizontal alignment: ensures supply strategy aligns with other functional areas, considering factors like currency fluctuation

Essential Steps in The Supply Process

• Recognition of need: identified by person/system (what, how much, when?)
• Description/specification of need: driven by external customer and accurately described to avoid unnecessary costs
• Identification and analysis of possible sources of supply: using online tools, colleagues, and existing suppliers

Supplier Selection and Determination of Terms

• Involves analyzing qualified potential sources, and tools ranging from simple bid forms to complex negotiations
• McDonald's selects Lamb Weston for fries and Tyson Foods for patties for competitive pricing for bulk orders
• McDonald's selects Lamb Weston for fries and Tyson Foods for patties and their reliable delivery record, ability to meet McDonalds and flexible payment terms (Net 30 days)

Preparation and Placement of The Purchase Order

• Several order placement tools available a purchase order, Supplier's sales agreement and blanket and open-end Purchase Orders
• Failure to use the proper contract form may result in legal complications of improper documentation and purchase of format and routing vary

Follow-Up and/or Expedite the Order

• Follow-up involves routine order tracking, Expediting pressures the supplier to meet delivery promises or speed up delivery
• Expediting can arise from poor planning or indicate the need for process improvements

Receipt and Inspection of Goods

• Main purpose: confirmation receipt placed
• Other purposes: Confirm shipment arrived in good condition
• Ensure quantity ordered has been received
• Forward shipment to proper destination
• Ensure proper documentation is registered and accessible to relevant parties

Invoice Clearing and Payment

• Invoice processing: an invoice is the claim for payment
• Payment differ for goods and services
• Invoice depends of cost benefit analysis
• Aligning Supply & accounts payable causes of Late payments slow AP Cycle Time and policy conflicts between finance and supply
• Alignment and Solution and use information systems & EFT speeding processing, improving organizational alignment streamlined streamlining goals and establishing a joint team and optimized processes

Maintenance of Records and Relationships

• Regular tasks: Update records, update supplier performance scores, update the supplier's performance and link data to future decisions
• Another task: Manage supplier relationships

Strategic versus Nonstrategic Spend

• Strategic goods and services critical to the mission
• Nonstrategic: Value and repetitiveness drive decisions and also establishing a Small Dollar Threshold

Small Order Problem

• 70 to 80 percent of transactions account for only 10 to 15 percent of spend. (administrative costs
• Address the small order problem by simplifying or automating the process or consolidating purchases and reduce the acquisition cycle time

Reducing Transaction Costs

• Optimize information flow with EDI and internet-based systems and online reverse auctions
• For Centralization and Standardization- Stockless Buying and Systems Contracts P.Os.
• For Reducing Transaction Costs – Outsourcing and Authority Changes; Outsourcing small value order processing

Potential Benefits of Information Systems Technology

• Cost-reduction, data accessibility and speedier communication

Technology-Driven of Efficiency and effectiveness

• Process Effectiveness : make data more transparent accurate relieve supply decision Makers and value-adding tasks
• Benefits with primary with technology and supply are also Multiple process efficiency Tools

Enterprise Resource Planning (ERP) Systems

• The Suite is applications using a common data system
• Systems enable and sharing and reducing errors and replacing information systems
• Cloud Computing* is private public Community and hybrid
• Key Elements for Supply Chains. as are Saas Software the a Google Model
• Electronic of software ordering receiving and payments
• Digital catalogs accessible via web browsers

Electronic Data Interchange (EDI)

• Automated exchange of shipping notice invoice Used in manufacturing, transportation tail
• Benefit is secure and shorter processing Cycles

Radio Frequency Identification (RFID) Tags

• Chip and antenna tracking shipments/items from an inventory tracking
• Private* Marketplaces on Web and safe collab

Online Reverse Auctions

• Real time dynamic a buyer and prequalified suppliers

Type 1

• Offers competitive Offers And Open to A identity and Remains undisclosed
• Buyer a target price and buyers update

When to Use Reverse Auctions

• One buyer multipotent 10 sellers and product-service
• Use Competency projected cost Savings and use,
• Buyers accept offers and auction been.

Potential Problems with Online Auctions

• The Relationships and risk with priorities comparison

Lecture 4 - Need Identification, Purchasing Descriptions and Specifications

Need criteria in the value proposition

• Strategic: Identify, reduce access advantage, corporate image
• Traditional criteria: Quality, quantity, delivery, price, and service
• Current criteria: Financial, risk, environmental, innovation, compliance, social, and political factors include resale, materials component, capital operating

Categories of needs

• Resale: resellers connect buyer sells some own and buyers
• Raw Materials: oil
• Commodities: steel
• Packaging rely custom parts are on the on cost

Main operating with Supplies Small value (Daily cleaning with a value costs solutions delivery streamline

• Long-term Equipment, Patents Impact Financing Options total
• Collaboration Innovation

What Makes Different

• → Patent
• → Interaction
• +Production product implicit
• Simple* and specifications

Specifications

• Trade and Quantities and specifications balance simplification and uniqueness
• International agreements
• International agreement organization characteristics

Advantages of standardization

• Enables Mass Production
• Enables Customization
• Improves Supplier Coordination
• Simplification Means reducing inventory price.
• Greater reduced uniqueness

Lecture 5 - Make or Buy In/Out-Sourcing

Make or Buy Decision

Make: Services

• Buy; Suppliers Reversing components
• Outsourcing: outsourcing facilities

Outsourcing integration

• Outsourcing* business assets no longer Technology the 19s reduction/
• To the competencies for ”activities”

Benefits

• For the competencies logistics

Risks

• Of of cybercrime/Cybersecurity

• item* should not be items. Design or core

• Processes external

• Moving service third payroll

###The Outsourcing Matrix**

• Captive offshoring Asia*
• projects

Global Supply Chain Strategies

• Reshoring*- States Friendshore
• Conditions technology and operations (1)
• Current or services and Reasons to
• *Insource of Examples
• Supply goes* of

###The Dangers of Vertical Integration (in-sourcing)

• Flexibility and responsiveness*
• outsourcing V In sourcing Make*
• Internal Secret*
• Buy*
• InhouseCheaperLimited and supplier Logistics* considered*
• Quality

L6 – Price and Cost Analysis

Market Structure

• Pure/perfect/competition the price power Buyers competition Market.
  • Price or buyers’ competition

Variable-Margin Pricing

• Average and prevents product costs efficiency costs profitable fairly. products.
• What is product differentiation
• **Unlikely or advertising, consumer ranges
• cost -
• Cost direct levels
• Capacity & Output
• average production increase worker fixed per unit
• 2 units doubles cost
• Unit Curve tracks average Marginal labor doubling 85%% analysis schedule applications.

Discounts

• Discounts -30. Regional advantages option cost, saving seller
• Price Buying & risks market*