Chapter 13

Research and Metrics.

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Ingredients of Effective Buying

Effective PurchasingDecisions

Our estimated requirements (usage)

Competing demand

Raw material availability

Price history and forecasts

Cost to make (in-house supplier)

Alternative manufacturing methods

Technological change

Supplier capabilities and strategy

Supplier expansion plans

Supplier pricing methods

Quality considerationsCompetitive environment

Innovation in transportation,handling and distribution

Government regulations andcontrols (current and projected)

Systems for processingpurchasing information

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Conditions Necessary for Effective Cross-Functional Teams

• Team members are carefully selected to ensure that each really has something to contribute

• Strong leadership• Specific objectives and expectations, communicated to each

team member• Each team member’s normal job responsibilities are rearranged

to provide necessary time and resources• Performance evaluation and reward systems foster team

participation and overall team performance

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Criteria for Deciding Where to DirectResearch Efforts

• Value of product or service - top dollar

• Product profitability - red dollar

• Price/cost characteristics

• Availability

• Quality

• Data flows

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PurchasingResearch

What is Acquired- value analysis- commodity studies

From Whom- supply base analysis

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Value Analysis

• Value analysis compares the function performed by the purchased item with the cost in an attempt to find a lower cost alternative

• Value analysis is done on purchased items used in the ongoing production process

- Value engineering looks are cost saving possibilities in the design stage

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Possible Value Analysis Research Topics

• Investment recovery• Lease or buy• Make or buy and continue making or outsource• Packaging• Specification• Standardization• Substitution• Supplier switching

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Commodity Studies

• Should provide the basis for making sound procurement decisions

• Should present purchasing management and top management with information concerning future supply and price of purchase items

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Major Areas in a Commodity Study

• Current and future status of our company as a buyer• Production process alternatives• Uses of the item• Demand• Supply• Price• Strategy to reduce cost and/or ensure supply

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Topics in Supplier Research

• Analysis of financial capacity• Analysis of production facilities• Finding new supply source• Supplier cost analysis• Single sourcing• Supplier-purchased material quality assurance• Supplier attitude survey• Supplier performance evaluation• Supplier sales strategy• Countertrade

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Four Common Purchasing Budgets

• Materials (operations) purchase budget

• MRO Budget

• Capital Budget

• Administrative Budget

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Common Purchasing Activity Reports

• Total dollar volume of purchases• Total dollars spent for department operating expenses• Total number of purchase orders issued

These figure are sometimes related to each other by calculating average figures and percentages, such as:

- average dollar cost of purchase orders written- operating costs as a percentage of total dollar volume purchases

- operating costs as a percentage of total dollar volume of sales

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Major Sections forPurchasing Operating Reports

1. Market and economic conditions and price performance

2. Inventory investment changes

3. Purchasing operations and effectiveness

4. Operations affecting administration and financial activities

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Four Types ofPerformance Measurement Systems

1. Efficiency-oriented- Emphasizes cost and departmental operating efficiency

2. Effectiveness-oriented- Measure of direct and indirect contributions of supply

3. Multiple objectives- Considers both efficiency and effectiveness measures

4. Naïve- No goals, objectives, or pre-set performance measures- Supply managers told that an appraisal will be made of their

performance

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Problem Areas inPurchasing Performance Measurement

• There are no industry-wide standards of functional performance• A lack of management information systems support• Differences in the scope and sophistication of supply

- Even within the same firm- Operational versus strategic

• An historical focus on functional goals without linkages to the corporate goal-setting process

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12 Guidelines for Establishinga Purchasing Measurement System

1. Measures need to be designed for use at a point in time

2. Each organization has specific measurement needs at a given point in time

3. Measures should address financial results, supplier performance, computer systems and internal practices and policies

4. Measures must change frequently

5. Trend analysis is often useful

6. Measures should not be overdone or underutilized

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12 Guidelines for Establishinga Purchasing Measurement System

7. Measures are only tools

8. Benchmarking is a source of new ideas and measures

9. Senior management must see value in the measures used

10. Measures can show the effectiveness of purchasing and identify areas needing improvement

11. Ensure the credibility of measures

12. Continuous improvement in purchasing depends on measurement