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Materials Management
Lecture 4: Purchase Practices
Udit Chaudhuri
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Purchase - Practices
1. Budgeting & Control – purchase cycle2. Price Forecasting 3. Hedging & Forward Buying4. Vendor Evaluation & Rating 5. Negotiation6. Buyer-Seller Relationship7. Supplier Quality Assurance Programme
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Purchase Budget & Control
To plan & control cost and cash outgoings
1. Annual Sanction – Expected Material Receipt
2. Auto Limit - % of previous period
3. Special sanction – new product, project
4. Posting of P.O. against Limit
5. Cost Control & Sanction Control
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Price Forecasting
Multiple approaches, top management decides1. External: Market trends, Logistics, Data availability2. Internal: Variety, facilities, skills, systems available
Techniques, based on materials research3. Extrapolation of time-series / trends – Moving
averages4. Relationship with another price - Correlation
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Moving Averages
• Seasonal buying• Commodity-based business • Sensitive raw materialsSimple Moving Average E.g. 200 Day SMA, 5-month mean, 5 Qtrs trailing
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Moving Averages
Exponential Moving Average• To accommodate wider variations – volatile markets• To remove the error in previous forecasts
EMAt = EMAt-1 + (k * (Pt - EMAt-1))
EMAt is the exponential moving average for the current period. EMAt-1 is the exponential moving average for the previous period. Pt is the price for the current period. k is the exponential smoothing constant.
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Moving Averages
Price Forecast for Month ‘m’ with Interval of ‘D.’ • Where D=1, (m-D) is previous monthHence, forecast price for the month m= 1/n [Actual price for month (m-D) + (1-1/n) Forecast price for month (m-D)]
Example: EMA for Steel and Steel products
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Correlation
E.g. Oil prices and Dollar
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Correlation
E.g. Combined trend of oil price (Brent Crude at Dubai), refining margin, AG Crude production, shipment over 2 years
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Other Techniques
• Regression Analysis• Linear programming• Delphi Techniques
• Reliability and consistency governs the choice of method used.
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Hedging
• To go against the trend of prices or demand
• Buy in slump – buy larger quantities as demand
falls
• Buffer Stocks - Counter the rising demand by
deferring purchases
• Hedge against crash by buying before free-fall
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Forward Buying
• To go with the trend of prices or demand
• Anticipate rising price and buy in advance,
keeping higher inventory – e.g. retail
• Anticipate falling prices and buy frequently
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Vendor Evaluation & Rating
1. Static aspectsa. Facilities – factory, store, office, display… b. Staff – strength, qualifications, awareness…c. Service – Efficiency, response, courtesy…
2. Dynamic aspectsa. Frequency of ‘right delivery’ b. Slippage – quality, price, terms, replacement…
3. Ratinga. Ranking of vendorsb. By industry standards
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Negotiation Practices
• Price Vs Quantity – slab discounts
• Price Vs Cash – advance payment
• Price Vs Trend – added quantity or frequent orders
• Price to stock – spl. price to ensure minimal stocks
• Material & labour component – full or part
• Tax – Transfer of liability, exemption, etc
• Transport & Insurance
• Technical support – esp. to sub-contractors – training, testing, tools
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Buyer-Seller Relations
• Effectiveness – results with ethics
• Cordial relations – free and frank communication
• Reciprocity – buying from customers
• Access by salesmen – importance, control
• Public relations – internal and external
• Training to vendors
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Supplier QA Programme
• QA evaluation at vendor location
• Issue of instruments & tools
• Control of drawings & critical documents
• QC - at vendor or at buyer’s plant?
• Testing facility – access to vendor
• Rejection – replace or debit?
• Training
• Tech upgrades
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Value Analysis
• What is the item?• What does it do?• What does it cost?• What else would do the same job?• What would the alternative cost be?
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Cases
• Copper-aluminium replacements – electricals• Al castings replacing steel – auto• Brass fins in condensor • Zinc replaces/reduces Lead content – paints• Plastic pouches replace Tin/Al cans – FMCG • Tetrapack – replaces bottles• Laminated tubes for collapsible Al – pastes &
ointments
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Materials Management
Lecture 4: Purchase Practices
Thank you