ppc purchasing

8/7/2019 ppc purchasing

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Chapter 17

Purchasing

Purchasing is one of the key functions in the operation of a modern manufacturing concern.

Profits of manufacturers are affected by good purchasing practices based on sound principles. Ithas already been pointed out that the purchase requisition is the key to material control since it

initiates the purchasing activity.

Purchasing and the Control of Material

Purchasing is an important phase in the control of the flow of materials into the manufacturing

plant form the vendor or supplier. The classes of inventory thus controlled are purchased parts

and raw material. In addition the inventory of supplies is controlled by the purchasing activity.

We have already pointed out the importance of having material available when required formanufacturing operations, as well as the additional costs incurred if large quantities or expensive

items are received too far in advance of the required date. Control of the flow of incomingmaterial is an important responsibility of the purchasing group, particularly when just-in-timedelivery of goods takes place.

Objectives of Good Purchasing

As a part of the overall material control activity, the statement of the objectives of the purchasing

group will include most of the objectives of inventory management and control discussed in

earlier chapter. However, let us review them and then discuss these objectives from the viewpoint of the purchasing function.

The primary objective is to contribute toward the profits of the manufacturing activity. Anotherimportant objective is to ensure the availability of materials so that delivery schedules can be

maintained, thus keeping the customer satisfied. Specific objectives that support these goals are:

1. Procurement of the right material, in the right quantity, and of the right quality.2. Receipt or delivery of this material at the right place at the right time.3. Purchase of the material from the right source at the right price.

Purchasing Procedure

The complete purchasing cycle consists of the following steps:

1. Receipt and analysis of the purchase requisition2. Selection of potential sources of supply3. Issuance of requests for quotations4. Receipt and analysis of quotations5. Selection of the right source6. Determination of the right price7. Issuance of the purchase order


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8. follow up to ensure scheduled delivery9. Analysis of receiving reports10.Analysis and approval of vendors invoice for payment.

The above 10 steps are explained in details below:

Purchase Requisition

Purchase requisitions normally originate with the inventory control group. Regardless of the type

of inventory perpetual or bin- a recorder point is established. When existing stock reaches this

level, a purchase requisition is usually prepared and forwarded to the purchasing group.

Sources of Supply

A purchasing group must constantly keep itself informed as to the best places to buy all items ofmaterial required. This is no small task. Effective purchasing cannot be accomplished on a status

quo basis. It is true that in a going situation old established sources will in all probability be thebest sources; however, new sources should be investigated from time to time and theperformance of old sources reevaluated periodically. If the purchase requisition is for a new item,

then a selection should be made for inquiry from the list of potential sources by use of the

request for quotation.

Request for Quotation

The title of this form is self-explanatory. It is sent by the purchasing group to all the selectedpossible sources of supply. It should be as complete as a purchase order except for the statement

of the price to be paid. It is up to the vendor to submit the price; this is the vendors quotation.

Because this form is so nearly like the purchase order form, it is common practice to print this isNOT an ORDER in bold type across the form.

Selection of the Right Source

Upon receipt of many quotations from the vendors, if then becomes the job of the purchasing

group to select the right source. A comprehensive discussion of all the factors that enter into this

decision is beyond the scope of this book. Briefly, the purchasing group is interested in thereliability of the prospective source of supply.

Determination of the Right Price

This is a major responsibility of the purchasing group. Many factors influence what is a right

price and, again, a comprehensive discussion is hardly possible. In a broad sense, a right price isone that is right for all concerned the purchaser, the vendor, the buyers customer, and the

public,. Obviously, the purchaser must be able to buy material at a price that makes it possible to

sell the product at a profit- but profits are also essential to the vendor. Modern industry is toocomplex and interrelated to permit sharp buying tactics that drive prices to a level at which the

supplier cannot make a profit.


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Purchase Order

Once accepted by the vendor, a purchase order constitutes a contract for the delivery of the

goods in accordance with the terms of the purchase agreement. This constitutes a legal

document, and it usually contain many other terms of agreement in addition to the quantity,quality, delivery, and price.

Follow-up and Delivery

The plan for the flow of material into a manufacturing plant is established by purchasingprocedure. Determination of the actual performance and comparison and evaluation of this

performance with respect to the purchasing plan can only be accomplished by effective follow-

up of purchase orders.

Receiving Reports

Careful inspection of all incoming material and parts is essential to effective material control.The purchase order is the basic source of reference. Of course, it is often supplemented by

engineering specification and blueprints.

Payment of invoices

Invoices received from vendors for goods shipped should receive the approval of the purchasing

group. This is the final control step in the purchasing procedure. Invoices should be checked toensure that quantities billed conform with the quantities accepted by the receiving and inspection

departments.

Value Analysis

Although value analysis has been discussed earlier, it requires further amplification hereinasmuch as the value analysis function is commonly thought of as part of the purchasing

activity. The basic idea of value analysis is simply that of a cost-reduction technique, and as

such, it might logically be treated as a part of methods engineering. However, as it is frequently

used, purchasing people have a very definite role to play; so perhaps it is logical for valueanalysis to be under their general direction.

Factors Affecting Purchasing

In the following sections we attempt to list the many factors that influence both purchasing

practices and the results of the work of the purchasing group.


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Sub contracting

Items purchased on subcontracts are actually purchased parts or components. However,

subcontracting generally takes place when it is not possible to produce the parts in the local

plant. In placing this type of purchase order, the vendor is in competition with the purchaser.

Standardization of Product

We discussed the advantages of the standardization of products and their component parts. Often

it is overlooked that suppliers also attempt to standardize the items that they sell. One of theprincipal activities of the purchasing group is to encourage the inclusion of vendors standards in

the product design of the purchasers product.

Economic Purchase Lot

Earlier, we mentioned the economic purchase lot. It is similar to the economic manufacturing lotonly the cost factors are different. Larger quantities of goods can usually be purchased for lowerunit costs. These savings must be balanced against the increased costs for the carrying charges,

the same as in the manufacturing lot. In manufacturing we saved in setup costs, here we save in

the cost of preparing the purchase order and on all the other steps in the purchasing procedure.Owing to the cost factors involved, it is easier to calculate economic purchase lot quantities.

Short and Controlled Markets

We have already said that purchasing people have to know where to buy the required items of

material. Even if we know the purchasing source, it is not always easy to buy. Some markets are

short; that is, there is not enough material to meet the demand. Other markets are controlled,material is available but total sales are restricted.

Cancellations

Cancellations of purchase orders cannot be totally avoided. If work has been started by the

vendors, or they have made other commitments on the strength of the order, they may loose a

considerable amount of money.

Trade Relations

Industry is so specialized and extensive that many purchases are made from vendors who in turn

buy back their material in the form of the purchasers product. This is termed reciprocal buying.

Too often this presents a real problem to the purchasing group.


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Purchasing OrganizationThe Law of Agency

Purchase order and contracts are signed by individuals, each of whom acts as an agent of the

company or corporation. As agents, they have been given either specific or implied authority to

act for their employer in the purchase of material, supplies, and services, or in any other type ofagreement constituting a purchase. As a consequence, such a person is known as purchasing

agent.

Organization Structure

There is no set pattern of purchasing organization. The same sound principles of organization

apply to purchasing as to all the other functions in the manufacturing enterprise. The position of

the purchasing group in the overall organization is largely dependent on the importance of the

function.

Centralization and Decentralization

In large organizations- particularly in multi-plant industries there is a problem of centralization

or decentralization of purchasing activities. A full discussion of the advantages and

disadvantages of each is beyond the scope of this book. However, decentralized operations aremore flexible, and the trend toward increased decentralization of large corporations indicates that

this method of organization is currently the most popular. Major contracts for principal materials

may be retained on a centralized basis to gain bargaining advantage.

Purchasing Group

The purchasing group in larger organizations usually consists of several purchasing agents,buyers, expediters, and the necessary clerical and stenographic personnel. Organization of this

group may be on the basis of product line or purchased material. If the latter, one agent may

specialize in the purchase of steel, another in plastics, another in supplies, and so on, the entireorganization being developed along these lines.

Purchasing Practices

It might be well to discuss a few of the many practices of the purchasing function.

Salesperson Relations

Both purchasing and selling are rapidly gaining professional recognition. The continuing

technological advance in both materials and processes requires that purchasing and salespersonnel be more than glad-hand artists- they have to know what they are selling what they

are buying. Sharp trading is no longer accepted practice.


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Discounts

Industrial purchases are usually subject to cash, trade and quantity discounts. Purchasing agents

and buyers must be thoroughly acquainted with these discounts as they apply to the purchases

that they are making and with the legal aspects of the same. To promote fair trade, free from

restraint and undue favoritism, laws such as the Robinson-Patman Act, Sherman Act, andClayton Act must be common knowledge of purchasing personnel and their requirements must

be observed.

Blanket Purchase Order

With many more or less standard items, companies will often negotiate blanket purchase orders

for a period of time with an agreed- upon price. As the items are required in the plant, a request

for shipment against the purchase order is made to the vendor without any additional paperwork.

Reduction in purchasing costs could be considerable with this procedure.

Traveling Requisition

For stock items that must be replaced from time to time, a traveling requisition is often used.

This could be a standard form or a computerized transaction initiated by stores personnel. The

requisition would be linked to information on file such as

1. A short item description2. Possible sources of the material3. Past prices4. Recorder point and economic lot size5. A record of historical use.

Multiple Sources

It seldom is advisable to put all your eggs in one basket. Where large quantities are involved, agood purchasing practice is to develop more than one source of supply and divide requirements

among these sources. This takes considerable tact on the part of the buyer, especially in a JIT

situation, but ensures against the loss of delivery that may result from fire, flood, labor troubles,

or other causes that may interfere with production at a single source of supply.

Forward Buying

Although quantities to be purchased are normally determined by inventory management and

control, it is often advantageous to purchase quantities in excess of the normal operating

requirements of the manufacturing plant. If operational considerations or supply conditionsindicate the need for such an inventory reserve, these purchases are termed forward buying.


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Speculative Buying

This is not forward buying. In speculative buying materials are bought and held for resale, the

hope being to gain advantage of a rise in prices.

Ethics

Ethical conduct is a concern of departments and sections of a manufacturing organization;however, it should be of particular concern to the purchasing group because of authority vested

in them to spend money. The purchasing executive is constantly walking the tightrope of ethics

in everything that he or she does. Of the 10 standards of purchasing practice specified by theNational Association of Purchasing Management, five deal with the question of ethics.

International Procurement

As the world shrinks in economic terms, international procurement the buying of goods and

services outside the continental limits of the United States has added one more dimension tothe buying practitioners arsenal for locating qualified suppliers. Indeed, the search for the bestmaterials at the best price and quality should not be limited in geographical terms.

Evaluation of Purchasing

It is difficult to make a valid evaluation of purchasing as on overall activity. General measures

such as the ratio of the cost of purchasing to the value of material purchased, or to the value of

sales, may provide a useful index within a given organization. It is easier, however, to set upmeasures related to the more specific objectives of the purchasing group: Is the right material of

the right quality and in the right quantity being procured from the right source at the right price

and delivered at the right place at the right time? Continuous rating of the accomplishment ofthese objectives will indicate the success of the function, if not the total efficiency. Insofar as

these objectives might be accomplished at excessive cost by the purchasing organization, it

might be well to consider the ratio of purchasing costs to the profits of the concern but again,so many other factors affect these profits that a valid measurement is highly doubtful. Continued

research in the field of purchasing will no doubt result in effective ways of measuring this

principal activity in the control of material in manufacturing.

Traffic

Because it is normally the prerogative of the purchaser to designate the route and method ofshipment of material, in smaller manufacturing operations the function of traffic management is

included in the purchasing operation. However, in larger companies traffic departments are

charged with traffic responsibilities.


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Traffic function includes:

1. Planning of routes for incoming material, including the selection of the method oftransportation.

2.

Preparation of rate charts for delivery of material.3. Tracing of shipments to ensure prompt delivery.4. Auditing and approval for incoming freight and other transportation bills5. Coordinating the receipt of large shipment to avoid demurrage charges.6. Handling the adjustment of claims for good damaged or lost in transit.

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