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PURCHASING MANAGEMENT Purchasing is the acquisition of needed goods and services at optimum cost from competent, reliable sources.

o Needs: examine need, timing, quantity, source, specifications o Goods and services: Make or buy or lease o Optimum cost: Best total cost, not only lowest acquisition cost, consider also quality and service o Competent sources: select carefully o Reliable sources: monitor performance. Components of purchasing o o o o o o o Needs assessment Source identification Contract negotiation Supplier selection PO issuance Expediting / follow-up Performance evaluation

Purchasing objectives: o o o o o Right quality Right quantity Right time Right source Right price

Purchasing management cycle o Analysis o Planning make or buy, domestic vs. overseas, national vs. local, distributor vs. manufacturer, purchasing timing o Implementation o Control o Organisation Purchasing role in corporate planning o Quantity o Time o Money

Purchasing organisation 2 types o o o o o o Type : Structural, Process Elements: People, activities Content : reporting relationships, work sequences Nature: static, dynamic Diagram format: Organisation chart, flow diagram Example: product specialization, PERT network chart

Principles of Purchasing organisation o o o o o Specialisation Control Co-ordination Communication Line and Staff

Setting up a Purchasing Dept: o Task delegation o Work classification Management, buying, clerical work, expediting, special project or studies o Centralisation vs. decentralization o Material management Procurement Process: o o o o o o o o o o o Recognition of need Requisition issue Requisition review Specification dept. Supplier search Supplier selection PO issue Contract formation Expediting Receiving and inspection Contract completion

Basic options in materials sourcing o Number of suppliers o Supplier size

o Supplier location o Distribution channel o Co-operative purchasing Evaluation and selection of vendors 1. Published sources o General industrial registers or directories o Industry sources Publication of trade / professional asso. Trade periodicals Industry buyers guide o Yellow pages o Manufacturers; catalogues and sales literature 2. Internal sources o Supplier files o Technical personnel 3. Personal contacts o Sales personnel o Professional colleagues o Trade exhibits 4. International sources o Foreign embassies, consulates o Intl. chamber of commerce o o o o o o o Plant conditions financial status Quality and service Price Selection and follow-up The categorical plan The weighted point plan The cost ratio plan

Source Management and Development The purchasing must: o Evaluate supplier performance continuously o Reward satisfactory suppliers with additional orders o Inform unsatisfactory / deficiencies are identified, suggest remedies and offer assistance o Remove consitently unsatisfactory suppliers from approved list and eliminate from further contract awards o Limit the size of supplier base, kept it fresh and dynamic and identify new sources

o Proactively cultivate and manger supplier relations to produce CIP in quality, service and price.

Economic consideration in price making: o o o o o Cost approach govt. controlled prices Market approach Discounts Trade discounts Quantity discounts

Price cost analysis: The analysis of all the factors that enter into a price, and the attempt to ensure that the final price is a reasonable one in terms of the use to which the material is to be put and the competitive situation faced by the buying and selling firms. Learning curve: Is a formalization of the common sense realization that the per unit cost of production of a new item decreased as additional units of that product are manufactured. The cost should decline with each succeeding unit producted, as the supplier becomes more skilled, or learns how to make the product. CIP. Factors kept in mind while doing price-cost analysis: o o o o o o o o Price Costs Learning Curve Direct material costs Direct labour costs Overhead costs General and administrative costs Profits

Purchasing procedure: o o o o o o o o o o Parameters of PR Format of PR Approval of PR Checking PR Method of purchase Who calls Quotations / tenders Opens the Tenders How should be tenders open and handled Negotiations Competent authority to approve Purchase

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PO Follow-up with the supplier Negotiate purchase documents, customs clearance etc. Receive materials and inspection Carry out inspection Discrepancy report in case of damages Rejected materials handling

Steps in purchasing See chart Need for purchasing procedure o o o o o o Standardising Provide guidance to handle issues on past experience Purchasing procedure is good training tool Procurement of quality products quality assurance and maintenance Personal likes and dislikes are eliminated on timely procurement Insurance claims are settled

Designing of purchasing strategies o o o o o Sourcing Cost People Logistic Outsourcing

Performance measures: o o o o o o o Purchase price performance Purchase price change analysis Inventory level (weeks of stock) Delivery performance Quality performance Number of vendors in use Lead-time analysis

Price and cost Negotiations: The P.manager shall take into account: Terms of payment and delivery

Trade-in, rebate and other allowance Tooling costs Setup charges Potential penalties for quantity variances Special packaging or service requirement Quality specifications Primary steps of the preparation of negotiation process: o Setting objectives must have, want, tradables o Getting the facts Pre-requisites for Competitive bidding: o o o o Clear specifications Significant expenditure Adequate competition Sufficient time

The competitive bidding process: o o o o o o Preparation of specifications Selection of prospective bidders Issuance of invitations to bid Bid preparation by vendors Receipt and review of bid Award of contract

Tasks for computerization in purchasing: o o o o o o o o o o Preparation of PI RFQ Typing PO Amendments to PO Review of status of PR and PO management reports Searching of data thro; manual files for Management info Consolidation of data Checking the finished work for mathematical accuracy and typo errors Maintaining purchase history data Storing records of old POs

Benefits of computerization: o Reduced direct purchased material costs lower material costs, savings in manual time.

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Economic purchase quantities Calculating order release time Calculating least-cost suppliers Identifying buying opportunities Make / buy decisions Reduced departmental running costs Clerical costs Additional personnel Eliminating duplicate information Data errors duplicate files, reduction in key punching, entering new data, using a database. Lower expediting costs Lower shipping charges Reduced cost of forms Imporved personnel productivity Simplyfying the buying process researching new sources, prepare price nego., remaining on top of market, know when to make or buy, building assurance Improving inter departmental communication Better planning Job satisfaction Increased purchasing productivity Reduction in inventory Other benefits more accurate info for nego., timely info for purchase decisions, faster response time.

Appropriate software for purchasing: A software package A general purchase program Database managers, spreadsheets, communications, word processing, integrated software Custom made programs

Internal and External communications: Linking to other departments Networking Inter-departmental data exchange Production planning and purchasing Reverse flow of info. From purchasing to production planning Stores and purchasing Finance and purchasing Quality control and purchasing Communicating with suppliers Developing an external system

Closer communication Electronic mail

Communication of purchasing with other modules: Controlling Financial accounting Sales and Distribution Integration of purchasing with MM Determination of requirements Source determination Vendor selection PO processing PO follow-up Goods receiving and inventory management Invoice verifications Blocking of invoices Vendor evaluation