Business Management 1B - LU5: Purchasing and Supply Chain Management PDF

Business Management 1B LU5: Purchasing and Supply Chain Management IIE MSA is an educational brand of The Independent Institute of Education (Pty) Ltd which is registered with the © 2022 IIE MSA Department of...

Business Management 1B LU5: Purchasing and Supply Chain Management IIE MSA is an educational brand of The Independent Institute of Education (Pty) Ltd which is registered with the © 2022 IIE MSA Department of Higher Education and Training as a private higher education institution under the Higher Education Act, 1997 (reg. no. 2007/ HE07/002). Company Registration number: 1987/004754/07. CONFIDENTIAL & PROPRIETARY  Consumers purchase products or services on a daily basis, simply by stopping off at the shops to buy bread and milk, a pre-cooked meal or other items on the way home. Businesses are exactly the same in this regard, as they also have day-to-day necessities that should be purchased in order to produce goods and sustain the business. The value of the purchasing and supply function within an organisation is often underestimated. The materials required by an organisation depend largely on the type of business and whether they are producing goods or offering a service. However, there are some generic products that every organisation will purchase, like stationery, cleaning agents and office equipment, to name a few. In this learning unit, we will discuss the importance and process of control of the purchasing and supply function in a business. Then, we will look at the different tasks of the purchasing and supply manager and do a thorough investigation of each of the components of the purchasing process. © 2022 IIE MSA CONFIDENTIAL & PROPRIETARY 2  Reference: Erasmus, B.J, Strydom, J.W, and Rudansky-Kloppers, S. 2019. Introduction to business management. 10th edition. Cape Town: Oxford University Press. Chapter 15 © 2022 IIE MSA CONFIDENTIAL & PROPRIETARY 3  Explain the importance of the purchasing and supply function to a business; Explain control in the purchasing and supply function; Discuss the management tasks of the purchasing and supply manager; Describe the components of the purchasing process, explaining what each component entails; and Describe each of the following activities in the purchasing process: Quality decisions as a purchasing and supply activity, Selection of purchasing and supply quantities, Selection and management of suppliers, Pricing decisions, and Timing of purchases. Learning Objectives © 2022 IIE MSA CONFIDENTIAL & PROPRIETARY 4 Definitions Purchasing and supply management entails the planning, organising, leading and controlling of all activities relating to the purchase of materials and services from an external source. It is aimed at maintaining and improving the business’s sustainability and efficiency of customer service. A supply chain is a network of organisations linked to each other through buying and selling of materials, products or services. An example of supply chain PURCHASING MANAGEMENT Objective of purchasing function: ensure Part of supply chain, a continuous flow of division materials, goods or services to meet demands of customers. Broader organization’s use Purchasing process or transformation Business management – back to basics 2e 9781998963416  PURCHASING MANAGEMENT (cont) Category Examples Raw Materials Iron ore, Crude oil, Cotton, Timber Packaging materials, Labels and tags, Lubricants, Supplementary Materials Adhesives Semi-Manufactured Products Steel sheets, Yarn, Plastic pellets, Glass sheets Components Microchips, Engines, Hard drives, Circuit boards Televisions, Packaged food items, Clothing, Finished Products Smartphones Manufacturing machinery, Computer servers, Investment Goods or Capital Equipment Commercial vehicles, Office buildings Maintenance, Repair, and Operating (MRO) Spare parts, Cleaning supplies, Safety equipment, Materials Light bulbs Transportation and logistics, Equipment Services maintenance, IT support, Consulting services Business management – back to basics 2e 9781998963416 The importance of the purchasing and supply function The purchasing and supply function should: Select suppliers Purchase and arrange for the transport of materials to the business Decide what prices to accept Determine quantity and quality of materials or services Expedite and receive materials Control warehousing and inventory-holding Determine the timing of purchases. The importance of the purchasing and supply function (continued) Greatest expenditure for the business Purchasing costs are the business’s biggest expense – represent an area where cost savings can make a vital contribution to the business profits Stock is held to prevent disruptions when there is interruption in the flow of material to a business – aim to keep inventory levels low without risking an interruption in the operational process. Greatest expenditure for the business (continued) Profit-leverage means that purchasing costs constitute a major portion of total cost, and saving on these costs has greater profit potential than similar increase in sales Purchasing materials of the right quality and price at the right time can make final products available in the right quantities at a competitive price at the right time to its customers. The management task of the purchasing and supply manager Purchasing and supply planning Purchasing and supply planning is subject to overall business planning – should be conducted in consultation with other functional areas of the business Planning takes place at the following levels: Strategic level Tactical or middle-management level Operations level Formulation of objectives is one of the most important planning tasks.  The management task of the purchasing and supply manager Strategic level. At this level, planning entails the purchasing and supply manager providing input to business planning. The elements of strategic purchasing and supply planning differ from one business to the next. Where the purchasing and supply function is deemed to be less important and merely involves a clerical function, the purchasing and supply function is not involved in strategic planning. When a business has accepted the supply- chain management approach, purchasing and supply will be involved in strategic planning. Planning at strategic level is normally of a long-term nature. It is aimed at safeguarding materials provision, developing supplier sources and maintaining the competitive position of the business. Typical strategic planning elements are supplier alliances, supplier development, supply-chain process integration, availability forecasting, and purchasing and supply policy. Tactical or middle-management level. This type of planning may cover the medium-term needs of the business, including budgeting, the purchasing and supply system and organisation thereof, purchasing and supply methods, negotiation, development of human resources, interface development with other functions and suppliers (by means of cross-functional teams), contracting and employing cost-reduction techniques. Operations level. At the lowest operations level, plans are formulated to allow the daily functioning of the purchasing and supply function to proceed as smoothly as possible. This benefits the business as a whole, as well as other functions serviced by the purchasing and supply function. Planning at this level is of a short-term nature. It includes planning the tasks of expediting, keeping records, maintaining the purchasing and supply system, invoice clearance, handling of requisitions, enquiries and quotations, and pricing decisions. The management task of the purchasing and supply manager (continued) The management task of the purchasing and supply manager (continued) Organising the purchasing and supply function Four main issues need to be addressed in organising the purchasing and supply function: The place of the purchasing and supply function in the organisational structure The internal organisation of the purchasing department Coordination with other functional management areas Cross-functional teams. The management task of the purchasing and supply manager (continued) Place of purchasing and supply function in organisational structure Place of the purchasing and supply function in the business is affected by two elements: Centralisation or decentralization You need to know all three figures 15.1 (Centralisation) 15.2 (Decentralisation) 15.3 (Both, not on slides) The management task of the purchasing and supply manager (continued) The management task of the purchasing and supply manager (continued) Coordination with other functional management areas Coordination occurs at three levels: Various purchasing and supply activities must be coordinated internally in the purchasing and supply function The purchasing environment must be coordinated with purchasing and supply activities The purchasing and supply function must be coordinated with other functional management areas, as well as the needs of the final consumer. The management task of the purchasing and supply manager (continued) Cross-functional sourcing teams Tasks of cross-functional sourcing teams include: Supplier selection Negotiating corporate-wide purchasing agreements Developing cost-reduction strategies Developing sourcing strategies Developing suppliers and the evaluation of suppliers’ performance. The management task of the purchasing and supply manager (continued) Control in the purchasing and supply function Control is essential Measures need to be put in place to ensure purchasing and supply objectives are pursued within acceptable and accepted standards or norms according to policy Specific attention should be given to the management task in the purchasing and supply function, and the performance of purchasing and supply activities. The management task of the purchasing and supply manager (continued) The assessment of purchasing and supply management Essential that management performance be evaluated, just like other activities of the purchasing and supply function Management is intangible and difficult to measure quantitatively Use of an evaluation sheet or questionnaire can be used to assess management performance in purchasing. The management task of the purchasing and supply manager (continued) The assessment of purchasing and supply activities Control points used to gauge effectiveness of purchasing and supply activities: Price proficiency Supplier performance Timeliness Cost-saving Workload Purchasing costs Inventory-holding Relationship performance with suppliers Relationship with other functional management areas.  The purchasing process and activities Steps of the purchasing and supply cycle: Development and description of a need Choice of suppliers Research on prices and availability Issuing the order and concluding a contract Follow-up and expediting Receipts, inspection and distribution Handling errors and discrepancies Paying for the order Closing the order. The purchasing process and activities (continued) Quality decisions – a purchasing and supply activity Determining the right quality: Engineers and designers – technical considerations important End user and/or marketing function – commercial considerations Description of quality: Specifications –general method of describing quality Standardisation Other: Market grades, brands, SABS standards, engineering drawings and samples. The purchasing process and activities (continued) Quality decisions – a purchasing and supply activity Control of quality: Inspection – During inspection samples of delivered materials or services are subjected to tests by quality controllers Supplier certificate agreement SABS – ISO 9000 to ISO 9004 and ISO 14000 international standards. The purchasing process and activities (continued) Deciding on purchasing and supply quantities Need for inventory-holding Helps ensure the operations process continues without interruption Allows businesses to utilise cost savings through longer production runs and volume discounts. Inventory costs Inventory-carrying costs Inventory-ordering costs Total inventory costs. The purchasing process and activities (continued) Deciding on purchasing and supply quantities Inventory-control systems The system of fixed order quantities The cyclical-ordering system The materials requirements planning (MRP) system The just-in-time (JIT) system The quick-response (QR) and automatic-replenishment (AR) systems The efficient consumer response (ECR) system. The purchasing process and activities (continued) The selection and management of suppliers The selection process: Compilation of a list of suppliers Reduce list to a short list Short list suppliers requested to give a quote or negotiations with them are started Choose a supplier Evaluation of supplier performance. The purchasing process and activities (continued) The selection and management of suppliers Developing suppliers Black economic empowerment (BEE) through purchasing Materials or service not available Normal performance appraisals Long-term relationships with suppliers. The purchasing process and activities (continued) Pricing decisions Price determination Methods depend on nature of materials and the value of the transaction Published price lists, catalogues and brochures – suitable for the purchase of standard materials of a low monetary value Quotations and tenders – suitable for less standardised materials of a higher monetary value. The purchasing process and activities (continued) Timing of purchases The aims of buying at the ‘right’ time are: Ensure business is supplied on an ongoing basis Reduce risk of price fluctuations Keep inventory-holding at an optimal level. Factors influencing the scheduling of purchases: Internal factors External factors. Summary Purchasing and supply function importance: Significant influence on profitability of business Greatest spender of business revenue Function makes it possible for business to sell final products at competitive prices Should be planned, organised and controlled Main purchasing activities are quality, quantity, price, supplier selection and timing Different purchasing and supply activities do not occur in isolation, but on an integrated basis Integration allows the system to operate as a whole. Questions Activities on Learn:  3 Activities  Self Reflection  Chapter questions