Purchasing. . .The Process of BuyingChapter 7March 5, 2001IM417 Manufacturing Resources AnalysisSoutheast Missouri State UniversityCompiled by Bart WeihlSpring 2001

Average Manufacturing CostsOn average, manufacturing firms generate approximately 10% profit from operations.Typical breakdown of total costs: Labor (8%) Materials (50%)* Overhead costs (32%)* On average, manufacturing firms spend about 50% of their sales dollar in raw material, component, and supply purchases.

Purchasing Objectives:Four Major Objectives of Purchasing:Obtain the required quantity and quality of goods and servicesObtain the lowest costEnsure top notch service and timely deliveryMaintain good supplier relationships and Develop potential suppliers

PurchasingNo longer just order takers. Purchasing needs to knowmaterialperformanceavailabilitysuppliers7

Purchasing Functions:Determine purchasing specifications (correct quality, quantity, and delivery requirements)Select the right sourceNegotiate terms and conditionsIssuing and monitoring of purchase orders

Purchasing Cycle:Receive and analyze purchase requisitionSelect suppliersDetermine the right priceIssue purchase orders (POs)Monitor POsReceiving and accepting goodsApproving suppliers invoice for payment

Purchasing Cycle Step 1:Receive and analyze purchase requisitionMinimum Required Information:Identity of requestor, approval, and charge number/accountSpecificationQuantity and unit of measureRequired delivery date and placeAdditional supplemental information

Purchasing Cycle Step 2:Select SuppliersRoutine items typically have preferred suppliersNew/unusual items may require vendor search and RFQ for comparisonSome companies require multiple source solutions (McDonnell-Douglas preferred 3, single source required justification documentation)Many firms today are opting for fewer suppliersUse of supply chain management is growing

Supply Chain ManagementApply a total systems approach to managing the entire flow ofinformationmaterialsand services3Rawmaterialsuppliers

Partnership RelationshipContinuing relationship involving a commitment over an extended time period,an exchange of information, andan acknowledgement of the risks & rewards of the relationship.9

Purchasing Cycle Step 3:Determine the Right PriceTied directly to supplier selectionPrice negotiation-Focuses on quantity (net and gross)Frequency of ordersTotal usage Refunds are becoming popularSupplier maintained inventory (pay as you use philosophy)

Purchasing Cycle Step 4 & 5:Issue POs and Follow-upPOs are legal offers to purchasePurchasing must follow-up on open POsMonitor past due POs and critical need componentsWork with suppliersTake corrective actionExpediting components, alternative supply sources, reschedule production, etc.

Purchasing Cycle Step 6 & 7:Receiving and Paying SuppliersReconcile POs and receiversCorrect damages, variance or discrepanciesVerify information for paymentPO numberReceiving reportInvoice

OutsourcingPurchased items account for 60 to 70% of the cost of goods sold.Outsourcing allows firms to focus on their core competencies.Organizations outsource when they decide to purchase something they had been making in-house.Typically handled by materials management function.4

Make or BuyCurrent trend favors outsourcing all activities that do not directly represent or support core competencies.

Are there any dangers associated with aggressive outsourcing? What are the implications for JIT production?5

Purchasing InputsMarketing

Engineering

Manufacturing

Functional SpecificationsBy BrandBy SpecificationPhysical and Chemical CharacteristicsMaterials & Methods of ManufacturePerformanceBy Engineering DesignMiscellaneousGimme one just like the last one

Good SpecificationsAre not to tight or loose

Allow for multiple sources

Assign responsibility

Supplier SelectionTypes of SourcingSole SourceMultiple SourceSingle SourceSelect based on:

Technical AbilityMfg. CapabilityReliabilityAfter sale serviceLocationPrice

Four Categories of ProductCommodities

Standard Products

Items of small value

Make to order items

Purchasing AnatomyPurchasingProcurementSpecificationsSupplier SelectionPrice DeterminationNegotiation

Scheduleand Follow upOrder Release Schedule DeliveryFollow up

Price Determinationyou get what you paid forFair Price- One that is competitive, gives the seller and buyer an opportunity for profitFixed Costs- Costs incurred without respect to sales volumeVariable Costs- Costs directly associated with sales volume (labor, material, etc.)Breakeven Point- The convergence of profit and loss. . . financial equilibrium

Break-Even ExampleQ:To make a particular component requires an overhead (fixed) cost of $5000 and a variable unit cost of $6.50/unit. What is the total cost and the average cost of producing a lot of 1000? If the selling price is $15/unit, what is the break-even point?A: Total cost = fixed cost + (variable cost/unit)(# of units) = $5000 + ($6.5 x 1000) = $11,500 Average cost = Total cost / # of units = $11,500 / 1000 = $11.50/unit Break-even point: Let X = # of units sold $15X = $5000 + $6.5X $8.5X = $5000 X = $5000 / $8.5 = 588.2 units

For Next Week. . .Do Problems:7.17.27.3

PREPARE for Test #2. . . 15% of the final grade

73945