Lecture Principle of inventory and material management - Lecture 15

Lecture 15

Purchasing and Supply Chain

Books
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Introduction to Materials Management, Sixth Edition, J. R. Tony Arnold, P.E., CFPIM, CIRM, Fleming 
College, Emeritus, Stephen N. Chapman, Ph.D., CFPIM, North Carolina State University, Lloyd M. 
Clive, P.E., CFPIM, Fleming College
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Operations Management for Competitive Advantage, 11th Edition, by Chase, Jacobs, and Aquilano, 2005, 
N.Y.: McGraw­Hill/Irwin.
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Operations Management, 11/E, Jay Heizer, Texas Lutheran University, Barry Render, Graduate School of 
Business, Rollins College, Prentice Hall


Objectives

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Purchasing overview
Purchasing cycle

Purchasing function
Make or buy decision
Purchasing techniques
JIT purchasing
Supply chain management
Outsourcing
Ethics in Supply chain


Purchasing Overview
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Purchasing
– The acquisition of goods and services.
Purchasing Activity
– Helps identify the products and services that can be 
best obtained externally; and
– Develops, evaluates, and determines the best 
supplier, price, and delivery for those products and 
services.


Purchasing Objectives
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Obtaining goods and services of the required quality 
and quantity.
Obtaining goods and services at the lowest cost.
Ensuring the best possible service and prompt delivery 
by the supplier.
Developing and maintaining good supplier relations 
and developing potential suppliers.


Purchasing Functions
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Determining purchasing specifications: quality, 
quantity, delivery
Selecting suppliers
Negotiating terms and conditions of purchase
Issuing and administering purchase orders


Purchasing Cycle
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Receiving and analyzing purchase req’s.
Selecting suppliers
Determining the right price
Issuing purchase orders
Following up to assure delivery dates are met
Receiving and accepting goods
Approving supplier’s invoice for payment


The Typical Procurement Cycle
Order Cycle
(one to three weeks)
Order Request
Verification by inventory 
control
Purchasing researches 
suppliers, obtains quotes, etc.
Signatures obtained
Order mailed
Receiving Cycle
(one week)
Receiving
Incoming inspection
Inventory control receives
  order, updates records,
  and notifies department

Supplier Cycle
(one to many weeks)
Supplier receives and
  enters order
Supplier manufactures
  or “picks” order
Supplier ships order


Purchasing Terminology
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Purchasing Agent
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Has legal authority to execute contracts on behalf of the 
firm.

Make or Buy Decision
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Choosing products and services that can be 
advantageously obtained externally or produced 
internally depending on which is best for the company.

Vertical Integration
Developing the ability to produce goods or services 
previously purchased, or actually buying a supplier or a 
distributor.


Make­or­Buy Decisions
Reasons for Making

Maintain core competence
2. Lower production cost
3. Unsuitable suppliers
4. Assure adequate supply (quantity or delivery)
5. Utilize surplus labor or facilities
6. Obtain desired quality
7. Remove supplier collusion
8. Obtain unique item that would entail a prohibitive
commitment for a supplier
9. Protect personnel from a layoff
10. Protect proprietary design or quality
11. Increase or maintain size of company
1.


Make­or­Buy Decisions
Reasons for Buying

Frees management to deal with its core competence
2. Lower acquisition cost
3. Preserve supplier commitment

4. Obtain technical or management ability
5. Inadequate capacity
6. Reduce inventory costs
7. Ensure alternative sources
8. Inadequate managerial or technical resources
9. Reciprocity
10. Item is protected by a patent or trade secret
1.


Make/Buy Considerations
Reasons for Making
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Reasons for Buying

Lower production cost
Unsuitable suppliers
Assure adequate supply
Utilize surplus labor and make 
a marginal contribution
Obtain desired quantity
Remove supplier collusion

Obtain a unique item that 
would entail a prohibitive 
commitment from the supplier

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Lower acquisition cost
Preserve supplier commitment
Inadequate capacity
Reduce inventory costs
Ensure flexibility and alternate 
source of supply
Product improvements may be 
difficulty because it is a 
sideline


Purchasing Terminology

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Keiretsu
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The Japanese word to describe a company coalition 
with long­term contracts with the firm; members of 
the Keiretsu function much like partners would.


Supplier Relations
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Three aspects of supplier relations
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Supplier Evaluation ­ Involves finding potential 

suppliers and determining the likelihood of their 
becoming good partners.
– Supplier Development ­ May include everything from 
training, to engineering and production help, to formats 
for electronic transfer.
– Negotiations ­ Are of three classic types: cost­based 
model, market­based price model, and competitive 
bidding.


Sourcing

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Sole sourcing implies that only one supplier is 
available.
Multiple sourcing  is the use of more than one 
supplier for an item.
Single sourcing is the selection of one item for an 
item when several sources are available.


Factors in Selecting Suppliers

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Technical ability
Manufacturing capability
Reliability
After­sales service
Supplier location
Price 
Other considerations


Supplier Relations

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The supplier should be treated as an extension of the 
company.
Long­term, close relationships with a few suppliers is best 
for many critical products.
The supplier should be committed to helping the purchaser 
improve its product and win orders.
Suppliers can also be a source of ideas about new 
technology, materials, and processes.
A good supplier relationship is like a marriage.


Supplier Relations
The following characteristics have been 
proven to be present in good relationships.  
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Commitment
Communication
Working through change / improvement
Principles centered relationship
Spending time together
Appreciation / recognition / feedback


Supplier Relations
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Negotiation Strategies
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Cost­Based Model ­ Requires the supplier to open 
its books so that the purchaser can determine actual 
costs.
Market­Based Price Model ­ Based on a published 
price or index such as exists for many metal and 
paper suppliers.
Competitive Bidding ­ Appropriate where suppliers 
are not willing to discuss cost or where near perfect 
markets do not exist.

Negotiations and Product Type
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Commodities: Contracts for future prices.
Standard Products: May negotiate large 
purchases.
Items of Small Value: Minimize cost of 
ordering.  Negotiate ordering system.
Made­to­order items: Can be negotiated.  


Purchasing Techniques
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Blanket orders
Invoiceless purchasing
Electronic ordering and funds                
transfer
Electronic data interchange (EDI)

Stockless purchasing
Standardization


Purchasing Techniques

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Blanket Orders
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A contract to purchase certain items from a vendor, 
although they all may not be delivered until 
requested by the purchaser.

Invoice­less Purchasing
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Appropriate where substantial trust exists between 
the purchaser and supplier and deliveries are made on 
a regular basis and are easily verifiable.


Purchasing Techniques
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Electronic Ordering and Fund Transfer
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Stockless Purchasing
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Reduces cost by reducing paperwork; also increases the 
speed of ordering.
Developing with the supplier, a means of reducing 
inventory costs by the supplier holding inventory.

Standardization
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A technique for reducing purchases for specialized 
items when in fact a very similar standard product is 
commercially available.


Supplier Concerns in Just­in­Time Purchasing

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Desire for Diversification.  
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Poor Customer Scheduling.  
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Supplier is concerned about all business stemming from 
single customer.
Supplier is concerned that customer will not be able to 
develop smooth, consistent schedule.

Engineering Changes.  
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Supplier is concerned that customer will promulgate 
frequent engineering changes with inadequate lead time.


Supplier Concerns in Just­in­Time Purchasing

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Quality Assurance.  
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Small Lot Sizes.  
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Supplier may consider production with zero defects 
unrealistic.
Many suppliers are unaccustomed to working with small 
lot sizes.

Proximity.  
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Delivery of small lot sizes over long distances may not 
be economical.


The Supply Chain’s Strategic Importance 

Supply chain management is the
integration of the activities that procure
materials and services, transform them
into intermediate goods and the final
product, and deliver them to customers
Competition is no longer between
companies; it is between supply chains