Introduction to MATERIALS MANAGEMENT CHAPTER 7 Purchasing Materials Management Watch: How China is changing the future of shopping What will this transformation mean for the future of shopping? Read: Let’s Party   “the process of buying” Requires input from MarketingEngineeringManufacturingManufacturing Planning and ControlWhat materials to orderWhen to order them On average 50% of sales revenue used forRaw materialsComponentsSupplies Tremendous potential to increase profits Obtain goods and servicesOf the required quantity and qualityAt the lowest possible costEnsure best possible service and deliveryDevelop and maintain good supplier relationsSelect products and suppliers that minimize the impact on the environment Determining purchasing specificationsRight qualityRight quantityRight time (delivery)Right place (delivery)Selecting supplierRight sourceNegotiating terms and conditions (right price)Issuing and administration of PO’s and agreements Outsourcing “…having suppliers provide goods and services that were previously provided internally.” APICS Dictionary 14th edition Availability of educated offshore workforceInternet communicationsMultimodal supply chainsCompany concentrating on core competencies Offshoring Special type of outsourcingOutsourcing to a company in a different countryInternet and efficient shipping can make attractive Introduction to Materials Management, 8e Chapman, Arnold, Gatewood, and Clive Copyright © 2017 by Pearson Education, Inc. All Rights Reserved Shift from working with inside staff (operations) to working with outside suppliersEmphasis on contractsServices as wellCafeteriaCleaningMaintenanceInformation TechnologyFinance Better, faster, cheaper Receive and analyze purchase requisitionsSelect suppliers, issue quotationsDetermine the right priceIssue purchase ordersFollow up to ensure correct deliveryReceive and accept the goodsApprove invoice for payment Receiving and Analyzing Requisitions From planners (MRP system) and all other usersPurchasing willIdentify originator, account number, approvalsCheck material specificationsVerify quantity and unit of measureVerify delivery date and placeEnsure all supplemental information Written inquiries sent to enough suppliers (RFQ)To ensure competitive and reliable quotes are receivedQuotes are analyzed forPriceTotal costCompliance to specificationTerms and conditions of saleDeliveryPayment terms Legal documentForms a contract with the supplier upon acceptanceCopies toSupplierOriginatorAccountingReceivingPurchasing file Ensure on-time deliveryNegotiate any changesTake corrective actionExpedite as requiredFind alternative sources of supplyWork with suppliers to resolve problemsReschedule production Receiving inspects goods for correct quantity and any damageAccepts goods and generates a receiving reportSend to quality for further inspectionHold goods damaged in transitCopies to Accounting, PurchasingEDI 3-way matchOriginal Purchase OrderReceiving ReportInvoicePrice including discountsQuantitySend approval to Accounts Payable Purchasing can help to make the “best buy” Establishing Specifications Quantity requirementsPrice requirementsFunctional requirements Quantity Requirements Small volumeFind a standard item (Buy off the shelve)Large itemsDesign for economies of scale (volume discounts)Reduce costSatisfy functional needs Purchasing can help to make the “best buy” Price Requirements Represents economic valueRelates to the use of the itemRelates to the selling price of the finished product Functional Specifications What the item is expected to doSet by the end userPerformance expectationsAesthetic expectationsExample: functional specifications for a carRun reliably? /Make you look cool? / Safety?/ Fuel efficiency? Purchasing can help to make the “best buy” Functional Specifications – Quality Quality and product planningMeeting the expectations of the marketplaceQuality and product designDetermining the specificationsQuality and manufacturingMeeting the specificationsQuality and useSatisfying customer expectations Functional Specification Description BrandPhysical and chemical specificationsMaterial and method of manufacturingPerformanceEngineering drawingsMiscellaneous methods Items are patentedSpecial supplier expertiseSmall quantityNot worth the effort of developing specificationsPreferred byCustomersBuyer Physical and chemical specificationsBuyer-definedMaterial and method of manufactureEnvironmental or food issuesPerformance specificationsState what the item is supposed to doUses supplier expertise Carefully designedToo loose – May not give the desired performanceToo detailed – Costly to develop and may limit suppliersShould allow for multiple sourcesProvide standard for performanceCan be difficult to do, e.g., colorsMay be more expensive than standard productsUsed when volume is sufficient to warrant costs The right supplierCan supply the quality neededHas the capacity to deliver the quantity needed and on time (JIT deliveries)Makes a profit, but at a good priceContributes to the improvement of product Let’s Party: Potential factors for a year-end party could include the following table. LocationLive BandAmbience                         Sole sourcingOnly one supplier is availablePatents, technical specs, raw material, locationMultiple sourcingUse of more than one supplier for an itemCompetition results in lower price, better serviceContinuity of supplySingle sourcingDecision to select one supplierLong-term partnership Technical abilityManufacturing capabilityReliabilityAfter-sales serviceLocationLean capabilitiesOther considerationsPrice Do they have the technical capability?Is there a program of product development and improvement?Can they assist in improving your product? (strategic partnership)Their products become part of your product Can they consistently meet the specifications and quality desired?Quality control programsCompetent personnelDo they have good manufacturing planning and control systems?To supply information on delivery Reliability ReputableStableFinancially strong After Sales Service Service organizationSupply of spare partsTechnical support Credit termsReciprocal businessHealth and safety recordWillingness to hold inventory Let’s Party: When selecting a supplier of industrial goods, the following factors could be considered. PriceTechnical SupportCommunications                CommoditiesPrice is determined by the marketConcern for future contracts (hedging)Standard productsPrice set by catalogue listingsLittle room for negotiationSmall value itemsTry to reduce ordering costs or increase volumeMade-to-order items (negotiation possible)Quotations from a number of sources Production activity controlControls the flow of work through the plantSchedules need for componentsPurchasingCoordinates the flow of goods from suppliers Plans are going to change! Determining material requirementsDeveloping schedulesIssuing shop ordersIssuing material releases to suppliersEstablishing delivery prioritiesControlling orders in the factory and to suppliersHandling all activities associated with buying and production schedulingMaintaining close contact with suppliers Supplier Responsiveness and Reliability Material requirements often changeSuppliers must be able to react to changeFlexibilityIn volumeIn  products neededReliableIn delivery promises Close Relationship with Suppliers Supplier flexibility and reliabilityThe need to understand each others capabilities and constraintsCooperation and teamworkVery frequent communicationsBetween the buyer/planner and the supplier’s production planner Let’s Party: Weighted-Point Supplier Selection. Environmentally Responsible Purchasing Why the Purchasing Department?First-hand knowledge of price trends, waste productsContact with salespeopleFamiliarity with company’s needs or uses of materialKnowledge of legislation for transportation and handling of environmentally-sensitive materialsThe 3 R’sReduceReuseRecycle Flow of physical materialsFlow of moneyFlow of informationFlow of materials back to the company – Reverse logisticsBullwhip effect Growing fluctuations of uncertainty and material demands through each node of the supply chain Figure 7.3. Bullwhip effect Customer relationship management (CRM)Build and maintain strong customer baseSupplier relationship management (SRM)Build and maintain close, long-term relationships with key supplies Total cost focusNot just priceIncludes transportation, storage, handlingValue stream mappingMutual value analysis with suppliersCross-functional teams for decision-makingCentralized vs. decentralized purchasingMutually advantageous supplier negotiations Information sharingCostsSchedulesInventory levelsMeasurement systemsAll aspects of the supply chainGrowth in electronic business (Internet)Consideration of environment for acquisition, storage, use and disposal of materials More effective product specificationsLeveraging through volume discounts and supplier consolidationLower costs through long-term contracts and efficient communicationsLower payment costsCredit cardsElectronic commerceBlanket ordersReduced environmental costs  


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