Objectives (1)

1. Identify the impact purchasing has on the organisations balance

sheet

2. Identify an applicable code of ethics for buyers

3. Compare the BoB’s purchasing system and procedures to those of

industry and commerce.

4. Explain the need for for accurate, detailed information.

5. Identify the character of various supply markets.

6. Plan an approach to suppliers.

7. Plan and conduct a survey of potential suppliers.

8. Analyse a suppliers capabilities and capacity

9. Rate a suppliers performance

Objectives (2)

10. Compare and contrast cost and price analysis

11. Perform cost analysis

12. Perform price analysis

13. Select a supplier

14. Communicate a supplier selection result

15. Recognize how a contract is formed

16. Describe the elements of a contract

17. Define common trade terms

18. Explain how to change a contract once it is made

19. Identify when to seek advice and help in contract matters

The Five Rights of Purchasing

The specified equipment, material, supplies and services must be obtained:

In the...............................................Right Quantity

With the...........................................Right Quality

At the ..............................................Right Time

Delivered to the ..............................Right Place

All of which should be achieved at

the..................................................Right Price

Challenges in Purchasing

� Understanding End User Requirement

� Cost Containment

� Cost Reduction

� Value Enhancement

� Service Delivery - Balance Cost Quality

Effect of Purchase Savings on ROI

InvestmentTurnover

2.1

ROI

10.5%

ProfitMargin

5.0%

Sales$20 m

Total Assets

$9.1 m

Profit$1 m

Sales$20 m

Total Costs$19 m

Other Costs$8.4 m

Purchases$10.6 m

Sales$20 m

Multiplied By

Divided By

Divided By

Minus

Plus

13.6%or 29%

Improvement

(6.5%)

$1.3 m

($18.7 m)

($10.3 m)

Net Profit Versus Purchasing Savings

At 5 % Net Profit Margin, an Organization needs :

$20 of sales to generate

$1 contribution to the balance sheet

Whereas

Every $1 saved by purchasing is a

$1 contribution to the balance sheet

Characteristics of a Profession

� A Body of knowledge and/or principles

� Responsibility to clients or employer

� A code of ethics

� Exchange of information

Code of Ethics

� Consider the Organization’s Interests First

� Be Open to Advice

� Obtain Maximum Value

� Obtain Knowledge of all Processes

� Be Honest, Avoid Sharp Practice

� Be Courteous and Professional in all Dealings

� Respect the Obligations of all Parties

� Assist Other Commodity Officers and Organizations

Conflict of Interest

� Employees must be careful that their interests are not in conflict with their organizations interests

Outside Employment and Other Activities

� Keep all outside activity totally separate from your organizations work

� Not undertaking outside work without approval

� Ensure outside activity does not involve use of your organisations information, property, funds, materials, systems or time

� Avoid outside activity likely to affect your performance or conflict with your organisations interests

Conflict of Interest

Dealing with Suppliers

� Business is awarded strictly on suitability, quality and price

� Avoid relationships with current or potential suppliers that may be seen

as influencing your judgement

� Be careful in accepting gifts - restrict to nominal value items only

� Do not solicit expensive hospitality, concessional travel, gifts or loans

� If you accept a meal or a few drinks in interests of normal business courtesy, return the compliment as soon as practical

� If in doubt on any matter seek advice from your manager or the organization’s Ethical Standards Committee

Stages of Purchasing

� Recognition of Need

� Procurement/Requisition Planning

� Supply Market Analysis

� Requisitioning Method

� Offer or Bid Analysis

� Order or Contract

� Contract/Supply Management and review

Information to be Shown on Requisition

� Adequate Description of Item Service to be Purchased

� Required Delivery Date

� Delivery Point

� Specification - Minimum Requirement

� Clear Statement of End Use

� Estimated Cost/Budget (Optional)

� Inspection Requirements

� Confidentiality Requirements (Optional)

Supply Market Dynamics

Three fundamental types of competition

� Pure

� Monopoly

� Imperfect

Types of Competition

Pure Competition

Forces of supply and demand alone determine

prices not the individual actions of buyers or

sellers

Monopoly

One seller or selling group controls the entire

supply of a particular commodity and is free to

maximise profits by regulating output

Types of competition (2)

- Imperfect competition

Essentially two types:

� Markets characterised by few sellers producing relatively few different products.– Automobile, steel, cigarette industries are examples of

this oligopoly situation.

� Market characterised by many sellers producing many products.– Sellers spend much money and effort to persuade buyers

their products are different.

– This is the market for the majority of products in developed contracts.

Locating a Supplier

- Sourcing

� Experience Memory

� Supplier Files

� Trade Magazines

� Catalogues

� Directories

� Sales Representatives

� Peers

� Trade Commissioners at Embassies and Consulates

� Banks International Trade Department

� Advertising - Tendering

� Chambers of Commerce

� Trading Houses

Supplier Analysis

� Management Capabilities

� Quality Standards - Performance

� Technology

� Physical Facilities

� Financial Capacity

Supplier Analysis

Capacity

� Plant, Machine and or Service Capacity

� HR Manpower Capacity Order Bookings

Technical Capabilities

� Staff

� Machine

� Quality Standards

� Field Service

� Customer Reference

Supplier Analysis

Security

� Raw Materials

� Licences

� Against Takeover

Supplier Financial Strength

� Balance Sheet Review Mercantile Reports

� Customer References

Supplier Analysis

Additional Checks

� Plant Visit and Audit

� Qualifications of Key Staff Validated

� Patents Licenses Held

� Insurances Held - ExpiryDate

Weighted Point Rating System

1.Establish rating factors

2.Determine relative importance

3.Compute values

Example : Quality = 40 Points

Price = 35 Points

Delivery = 25 Points

Relationship of Price to Cost

A Fair Price:

� Will the lowest price that ensure a continuous supply from a vendor who is making a reasonable profit

� The buyer must always try to ascertain what is a fair price

Meaning of Cost

� Price is one element of cost

� Cost includes transportation, handling, storage, and also quality, service and obsolescence

Cost and Price Issues for Consideration (1)

� Competitive Bid - v - Single Bid ?

� Is the Business Base Loaded for Supplier ?

� Should Full Cost Disclosure be Requested ?

� Should Supplier Help with Life Cycle Costing ?

� Can the Learning Curve be Applied ?

Cost and Price Issues for Considerations (2)

� Where Should Order be Placed in the Distribution Chain ?

� Is There an Imported Content that Lends Itself to Preferential Treatment ?

� Is There the Possibility of Further Orders ?

� Is the Organization to Finance Research, Tooling or Development ?

� Should Penalties for Non Performance be Considered ?

Cost Breakdown

Direct Costs

� Are those which can be specifically and accurately assigned to a given unit of production/service

Indirect Costs

� Are those incurred in the operation of a production plant or process but which normally cannot be related directly to any given unit of production

� For example, rent, property taxes, machine depreciation and so on

The Essential Elements of a Contract

1. An intention by the parties to create a legal relationship

2. An offer made by one party and accepted by the other party

3. Valuable consideration

4. Legal capacity of the parties to enter into a legal relationship

5. Genuine agreement and consent by the parties

6. Legality of the objects of the agreement

All of the above elements must be present for a contract

to be valid

Rules of Acceptance

1. Must be communicated to the offerer or the offerer must have dispensed with notification thereof

2. Must be unconditional

3. Must be made in the way specified/prescribed

4. Can only be given by the party or parties to whom the offer was made

5. Cannot be revoked without the consent of the offerer

6. Must be made within the time prescribed, or if no time prescribed, then within a reasonable time

Consideration

1. Is essential in every simple contract

2. Must have some value, but courts are not concerned as to its adequacy

3. Must not be illegal or unlawful

4. Must be definite

5. Should be present or future, but not past

6. Must be possible of performance

7. Must move from the promisee

8. Must amount to something more than the party is obliged to already do

Additional Considerations for Buyers

� Inadvertent formation of a verbal contract during negotiation.

� The relevant strength of contractual clauses.

� Conditional and warranty clauses and remedies for breach.

� Use of functional specifications to enhance protection under concept of merchantability.

� If possible include functional specifications as an adjunct to technical specifications.

� If progress payment are to be part of a contract ensure the payment are linked to identifiable completed stages of a project and that a suitable passing of title clause is incorporated into the order.

Supplier Performance Analysis

Purpose:

� Improve Performance of the Supplier.

Benefits:

� Better Information for Decision Making.

� Fair Judgement on Competing Bids.

� Aid to Supplier in Improving Performance.

� Basis of Dropping Poor Suppliers.

The Three Basic Systems

1. Categorical - Generally too basic.

2. Cost Ratio - Data collecting too onerous for

most organisations.

3. Weighted Point - Most commonly used.

The Five Rights of Purchasing & the

Weighted Point System

5 Rights Weighted Point

Right Quality - Quality

Right Price - Price

Right Quantity - Delivery

Right Time - Delivery

Right Place - Delivery

Weighted Point Rating System

The Steps

1. Establish rating factors

2. Determine relative importance

3. Compute values

Weighted Point System - Example

Quality = 40 Points

Price = 35 Points

Delivery = 25 Points

100 Points

Quality

Supplier A

Supplier B

Supplier C

Lots

Received

Lots

Accepted

Lots

Rejected

Percentage

Accepted x Factor

Quality

Control

Rating

60

60

20

54

56

16

6

4

4

90.0

93.3

80.0 32.0

37.3

36.040

40

40

Delivery

90%

95%

100%

25

25

25

22.5

23.8

25.0

Supplier A

Supplier B

Supplier C

Promises Kept Service Factor Service Rating

Service rating = Promises kept X Service factor

Part A

Unit price discount Transportation Net price

charge

Supplier A $1.00 10% $0.9 $0.03 $0.93

Supplier B $1.25 15% $1.06 $0.06 $1.12

Supplier C $1.50 20% $1.20 $0.03 $1.23

Part B

Lowest Net Percentage x Factor = Price

price price rating

Supplier A $0.93 $0.93 93/93 100% 35 35.0

Supplier B $0.93 $1.12 93/112 83% 35 29.1

Supplier C $0.93 $1.23 93/123 75.6% 35 26.6

Price

Composite Rating

Rating Supplier A Supplier B Supplier C

Quality

(40 Points)

Price

(35 Points)

Service

(25Points)

36.0

35.0

22.5

93.50Total

Rating

37.3

29.1

23.8

90.20

32.0

26.6

25.0

83.60

Factor Guidance Scale

100

(Excellent)

Quality

(40 Points)

Price

(35 Points)

Service

(25Points)

94 - 99

(Good)87 - 94

(Fair)

Under 87 (Needs

investigation)

40

35

25

38 - 39

33 - 34

23 - 24

36 - 37

31 - 32

21 - 22

Under 36

Under 31

Under 21

Purchaser - Supplier Satisfaction Model

Satisfied

Marginal

Dissatisfied

Purchaser DissatisfiedSupplier Satisfied

Purchaser SatisfiedSupplier Satisfied

Purchaser DissatisfiedSupplier Dissatisfied

Purchaser SatisfiedSupplier Dissatisfied

SatisfiedMarginalDissatisfied

(10, 5)

(5, 10) (10,10)(0.10)

(0,5)(5, 5)

C

C

A

A

Supplier

Purchaser

Extended Analysis

Management

Quality

Price

Delivery

Technology

Elements of Management

� Organisational Structure

� Industrial Stability

� Responsiveness

Elements of Quality

1. Use of Statistical Process Control

2. Quality Standards IS0 9002

3. Problem Responsiveness

4. Utilisation Of Statistical Process Control.

5. Problem Reporting And Resolution.

6. Notification Of Changes.

7. Record Retention And Control.

Elements of Price

1. Globally Competitive

2. ProductivityService Offsets

3. Cost Reduction Program

4. Price Control

5. Long Term Contract Agreement

6. Product Development Cost Disclosure

7. Logistics

Elements of Delivery

1. Supply Performance Against Schedule

2. Notification Of Impending Problems

3. Effective Contacts

4. Valid Lead Times

5. Invoice And Packing Accuracy

6. Inventory Control

7. Electronic Data Interchange

8. Manufacturing Resources Planning

Elements of Technology

� Access to Technology

� Prototype Support

� Research and Development

Degrees of Importance to an Organisation

(Example)

Quality

Delivery

Price

Purchasing Technical Average

20

40

50

60

10

20

40

25

35

110 90 100

Quality - Example

1. Use of statistical process control

2. Problem responsiveness

3. Achieved ISO 9000 Standard

Weight Score Score

10

10

20

10

5

10

40 25

Elements

Total

Delivery - Example

1. Performance against schedule

2. Flexibility to schedule changes

3. Inventory control

Weight score Score

15

5

5

15

4

5

25 24

Elements

Total

Price - Example

1. Competitive - Global

2. Price Cost - Disclosure

4. Productivity offsets. Minimum 2.5%/Yr

Weight score Score

10

5

5

5

35 27

Elements

Total

3. Absorption - zero economics 10 10

710

Supplier Continuous Improvement Program(An example from a motor vehicle manufacturer)

Process

•The team will conduct a preliminary internal assessment of the suppliers performance, quality, cost, delivery and technology.

•The team visit will consist of members from the company’s supply and quality assurance.

•Where there is limited knowledge of an element, the team will rate the element as zero “with an asterisk”. This element will be reviewed during the arranged team visit.

•Prior to the team visit, the preliminary assessment will be provided to the supplier for review and development of an action plan which will be focussed on continuous improvement.

•The visit will include a tour of supplier’s facilities and the preliminary assessment will be used as the basis of discussions with supplier senior management.

•During the team visit the supplier will provide a timed action plan for continuous improvement and identify any elements that require further clarification.

•The team will reconvene at and any additional supplier information will be considered to finalise scores.

•Revisions will be formally notified future assessments will be conducted as required.

•The ratings achieved against the performance standards will predicate future business

Supplier Continuous Improvement Program

Definition of Elements - Management

1. Effectiveness

The supplier's management team will demonstrate effective control of the key business elements of Management, Quality, Cost , Delivery and Technology.

2. Viability

The supplier's management team must ensure the company's viability is sustained to provide continuity of supply.

3. Committed to the customer.

The support and active participation in the supplier continuous improvement process will be the measure of the supplier management team commitment.

4. Continuous improvement philosophy

The supplier's management team will engender the philosophy of continuous improvement in the pursuit of excellence.

5. Business plan

The supplier's management team shall develop and provide a long term business plan and progress report which will embrace, but not be limited to the Supplier Continuous Improvement Programme elements.

6. Communication

The supplier's management team will have an effective communication system that implements two way communication between management and employees.

7. Responsiveness

The supplier's management team must be responsive to the customer’s requirements.

Supplier Continuous Improvement Program

Definition of Elements - Quality

8. Utilisation of Statistical Process Control :-

The supplier assessment is based on the utilisation of S.P.C. techniques to control process outcomes.

9. Process Control Plan (PCP):

The supplier assessment is based on the establishment of approved P.C.P.'s, conformance, and notification of pending changes.

10. Material Identification And Control

The supplier assessment is based on the identification and control of material during all stages of the process, indicating the quality status from receipt through to delivery.

11. Problem Reporting And Resolution :-

The supplier assessment is based on having in place a system to report and correct both internal and external quality problems.

12. Drawing And Specification Control :-

The supplier assessment is based on having an effective system for controlling the engineering drawings and specifications supplied to ensure only latest engineering data is being used.

13. Sample Submission Process:-

The supplier assessment is based on adherence to sample procedure and satisfactory conformance to the total submission.

Supplier Continuous Improvement Program

Definition of Elements - Cost

1. Competitive Global :-

The supplier's assessment is based on being cost competitive in a global environment.

2. Competitive Local :-

The supplier's assessment is based on being cost competitive in a local environment.

3. Piece Cost Disclosure

The supplier will provide complete piece cost disclosure at the time of quotation and in subsequent price variations for all elements detailed in " Supplier Cost Analysis " format.

4. Absorption (Zero Economics):.

The supplier will have a control to eliminate the automatic flow on of cost increases.

5. Productivity Offsets (2.5% PA.):

The supplier will reduce the component selling price to by a minimum of 2.5% per annum.

6. Reduction Program: - The supplier will have an active program to reduce product piece costs which will be shared equally between buyer and the supplier.

7. Price Control :- The supplier will use effective systems to accurately monitor all cost elements.

8. Long Term Contract Agreement: The supplier will have a proven record of Management, Quality, Cost, Delivery and Technology to be considered for a long term contract

Supplier Continuous Improvement Program

Definition of Elements – Cost (2)

Supplier Continuous Improvement Program

Definition of Elements - Delivery

1. Supply Performance Against Schedule :- The supplierwill control resources in a manner that assures conformance to scheduled requirements.

2. Flexibility To Schedule Changes :- The supplier will have the ability to accommodate positive/negative volume changes within the contractual lead time.

3. Flexibility To Replace Material The supplier will have the ability to supply replacement material ensure production continuity.

4. Notification of Impending Problems :- The supplier is responsible to contact Material Control in the likelihoodof a delivery interruption.

5. Flexibility Of Delivery Promises :- The supplier mustprovide timed and accurate information against critical shortages.

6. Responsive Recovery Programs :- The supplier will

provide written recovery programs to cover behind

schedule items and maintain production continuity.

7. Effective Contacts :- The supplier must provide

sufficient resources to return calls within a reasonable

period from the initial contact with timely resolution of

problems.

8. Valid Lead Times :- The supplier will provide the

necessary resources to achieve the contractual lead

times.

Supplier Continuous Improvement Program

Definition of Elements - Delivery

Supplier Continuous Improvement Program

Definition of Elements - Technology

1. Product design and development

A supplier is expected to have the resources to design and develop parts.

2. Manufacture. design/.development

A supplier is expected to have appropriate technical capabilities for the manufacturing design and development of parts and/or systems.

3. Product testing facilities

A supplier is expected to have the capabilities to perform all applicable performance tests on its parts or systems.

4. Prototype support

A supplier is expected to have the resources for prototype development.

5. Research & development activities

A supplier is expected to have the resources to undertake research and development activities.

6. Manufacturing capability

A supplier is expected to have the appropriate capabilities for the manufacture of parts and/or systems.

7. Maintenance activities

A supplier is expected to dedicate appropriate resources to maintenance.

8. Tool design and fabrication

A supplier is expected to provide appropriate resources and facilities for tool design and fabrication.

Supplier Continuous Improvement Program

Definition of Elements - Technology

Inventories and the Flow of Material

WarehouseCustomer

Demand

WarehouseCustomer

Demand

WarehouseCustomer

Demand

Supplier Purchased

Parts &

Material

Work In

Progress

Objectives of Inventory Management

A. Define and attain a desired customer service

level

B.Keep inventory investment below a certain level

C.Support the achievement of specified workforce

and equipment utilisation methods

D. Achieve a desired return on investment

Supply and Demand Considerations

1. Demand pattern of item

2. Production process at supplier

3. Variability of supply and demand

4. Marketing logistics

5. Lead times

6. Commonality of supply and demand sources

Functions of Inventory (1)

Decouple demand and supply. Inventory is a buffer between:

Customer demand and finished Goods

Finished goods and component availability

Material required and the output of the preceding

for an operation operation

Materials required and the suppliers of materials

to begin production

The user and variations in the cost of inventory

The geographical and the geographical location of the

location of the user supplier

Functions of Inventory (2)

� Fluctuation (Safety Stock)

� Anticipation (Seasonal)

� Transportation

� Lot Size (Cycle Stock)

� Decoupling

� Hedge

Logistics Chains

Our Organization

Purchasing

Operations Planning

Distribution

Transport

Supplier Supplier Supplier Supplier

Impact of Inventory Investment

Impact on Small Inventory Large Inventory

Cash investment

Customer service

Order costs

Production set

up costs

Transport &

handling costs

Low

Low

High

High

High

High

High

Low

Low

Low

Inventory Costs: Ordering

� Raising the Requisition

� Compiling the Order

� Receiving the Goods

� Physical Inspection

� Processing the Invoice

� Raising the Cheque

Example

Inventory Costs: Carrying Stock

Finance 10 - 14% pa

Opportunity 3 - 10%

Handling 1 - 2%

Space 1 - 3%

Damage 1 - 2%

Shrinkage 0 - 2%

Insurance 1 - 3%

Physical Inventory 1 - 2%

General Administration 1 - 2%

Total 19 - 40% Per Annum

Average Holding Time = 6 Weeks

Inventory Costs: Stock out

� Expediting Costs

� Freight Premiums

� Back-Order Processing

� Intangible Costs such as Lost

Opportunity and End user Goodwill

Customer Service

Customer Service is

HAVING ITEMS AVAILABLE WHEN NEEDED

The customer is:

User of a finished product/service

Another warehouse

The department performing the next operation

Obtain customer service target level for:

The initial schedule

Backorders (make to order only)

Inventory Management

Reduced Throughput Time

Reduced Inventory Levels

Frees up working capital

Reduces Debt

Reduces Interest Cost

Improves Performance

Probability of On-Time Delivery

Assemble to order

Lead Lead

Time Time

Operation (Days) Probability (Days) Probability

Order Entry 1 0.99 2 0.995

Sub-assembly

available

Item 1 0.99 0.99

Item 2 0.95 0.95

Item 3 0.98 0.98

Picking 2 0.99 3 0.95

Final Assembly 5 0.92 7 0.99

Pack and Ship 2 0.96 3 0.99

10 days 80% 15 days 90%

Normal Probability Demand Distribution

34% 34%

14% 14%2% 2%

0−1σ−2σ +1σ +2σ−3σ +3σ

Levels of Aggregation

The Three Levels of Aggregation Frequently Used

for Classifying Inventory Management Decisions:

A. The aggregate level

B. The intermediate (group) level

C. The individual item level

Aggregate Inventory Management

Factors:

A. Distribution plan

B. Suppliers schedule

C. Purchasing commitments

D. Family/Item lot sizes

E. Safety Stock levels

F. Quantity discount/hedge purchase

G. Transport modes

Principle of ABC Analysis:

“Control the Vital Few”

� Establish levels of importance

– 80/20 rule

– other item characteristics

� Classify each item

� Apply the necessary amount of control

ABC Curve

Percentage of Value -V- Percentage of

Items

Percentage of Items

0102030405060708090100

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 10

0

ItemsA

Items ItemsB C

Relative Measures of Inventory Investment

A The Inventory Turnover Rate (ITR)

1.Historical (HITR)

2.Projected (PITR)

B The Inventory to Cost of Sales Ratio

C Time Period Coverage

Essential Steps in Obtaining Accurate

Records

A.Demand accurate records. (Management's

attitude determines how operating personnel

view this objective).

B Designate those responsible for each aspect of

record accuracy.

C Provide adequate tools.

D Provide adequate training.

E Establish accuracy goals and measure

performance.

Demand

Dependent

Subassemblies Calculated

Components Requirements

Raw Materials

Independent

Finished Goods Forecasted

Service Parts Requirements

Inventory Management Concepts

Match Order Size Not matching Order Size

and Timing to Use or Timing to Use

Time Phased Non Time Phased

MRP DRP Periodic Constant

Periodic Reorder point

Review Two bin

The Periodic Review System

Conditions

� Demand is independent

� Difficult to record withdrawals

� Joint orders

� Limited shelf life

� Fully utilising transport capacity

Periodic Review System

Safety Stock

Units6 = 5.71 =

2)/1 + (10 1.0 1.65 = SS

Days 2 = L Time Lead = L

days 10 = R Period Review = R

day 1.0 = FP thusunit/day, 1.0 = S Deviation Standard = SD

1.65 = 0.95)(for SF Factor Safety = SF

0.95 = ServiceCustomer Desired Stock Safety = SS

:Example :Where

FP * L) + (R * SD * SF = SS

Order Point System

Stock Versus Time

L

OP

QS

Units

in Stock

Time

Independent Demand

Net Requirements

minus

equals

Total Requirements Available Inventory

Net

Requirements

Gross

require-

ments

Allocat-

ionsOn Hand

Scheduled

Receipts+ +

The MRP Process

5 6 7 8 9 10 11

1 2

X

Part "1" Inventory status

On Hand 50

Allocated 10

Part Master Data

Safety Stock 10

Lead Time 3 Periods

Lot Size 100

Master Schedule

Periods

Lead Time = 4 Periods

Product "X"

Planned Order Receipts

Periods

Gross Requirements

Allocations

Scheduled Receipts

Safety Stock

Projected on Hand

Net Requirements

Planned Order Release

0 1 2 3 4 5 6 7 8

10

0

50 40 15 15 85 85 85 70 70

25 15

15

30

100

100

25 30 15

Pull & Push Systems

Pull Systems

Decentralised

Warehouse submits order

Stock is pulled

Push Systems

Centralised

Warehouse requirements projected

Available inventory allocated