GLOBAL PURCHASING & MATERIALS HANDLING

CHAPTER II

PURCHASİNG

INSTRUCTOR : VOLKAN ÇETİNKAYA

OBJECTİVES

To Explain purchasing and the aim of

purchasing function.

To find out purchasing stages.

To find out purchasing cycle.

To identify the responsibilities of

Purchasing Department.

OBJECTİVES

To identify the importance of quality on

the basis of Purchasing.

To learn sourcing decisions.

To interpret supplier selection.

To find out responsibilites of supplier.

PURCHASİNG

Process of Buying.

PURCHASİNG

Obtaining the right material,

in the right quantities,

with the right delivery

from the right source,

At the right price.

PURCHASİNG

Requires input from:

Marketing:

Engineering:

Manufacturing:

Planning and Control:

PURCHASİNG&PROFİT LEVERAGE Sales :

$100 Cost of Goods Sold Purchases: $50 Other Expenses: $40 Profit:

$10

Assume an increase in profit 10% by maximizing the sales volume

PURCHASİNG&PROFİT LEVERAGE Sales :

$110 Cost of Goods Sold Purchases: $55 Other Expenses: $44 Profit: $11

To increase profit $1 , we have increased sales 10%

If we reduce purchase cost,

PURCHASİNG&PROFİT LEVERAGE Sales :

$100 Cost of Goods Sold Purchases: $49 Other Expenses: $40 Profit:

$11

We have maintained the same profit by the same sales income but to increase profits by $1 , we decreased costs by 2%

PURCHASİNG OBJECTİVES

HOW TO ESTABLISH THE FLOW OF

MATERIAL FLOW?

Obtaining goods and services, Of the required quantity and quality,

At the lowest possible price,

At the best possible service and delivery,

While maintaining and developing suppliers.

PURCHASİNG FUNCTİONSDetermining purchasing specifications

Right QualityRight QuantityRight TimeRight Place

Selecting SupplierRight Source

PURCHASİNG FUNCTİONSNegotiating terms and Condition

Right Price

Issuing and administering purchase orders

PURCHASİNG CYCLE1. Receive and analyse purchase

requisitions.2. Select Suppliers, issue quotations.3. Determine the right price.4. Issue purchase orders.5. Follow-up to assure correct delivery.6. Receive and accept goods.7. Approve invoice for payment.

1.RECEİVİNG AND ANALYZİNG REQUSİTONS From Planners(MRP System) and all other users. Purchasing will:

Identify originator, account number,approvalsCheck material specifications.Verify Quantity and unit of measureVerify delivery date and placeVerify delivery INCOTERM(CIF,FOB, e.t.c)Ensure all supplemental information.

2.SELECTİNG SUPPLİERSOften it is realized from a list of approved

suppliers.For small items:

InternetCataloguesTrade Journals

For Large Items:Issue a request for quotation

2.SELECTİNG SUPPLİERS(REQUESTİNG QUOTES)

Written inquiries sent to enough suppliers to

ensure competitive and reliable quotes are

received.

Quotes are analyzed on account of

Price,payment

Compliance to specification

Technical suitability

3.DETERMİNİNG THE RİGHT PRİCEUsually the lowest price

Involving in negotiations

4.İSSUİNG A PURCHASE ORDERLegal DocumentForming a contract with the suppliers

in case of acceptanceCopies of forms will be hand over,

SupplierOriginatorAccounting or Finance Dept.Purchasing File

5.FOLLOW-UP AND DELİVERYEnsure on-time deliveryTake corrective action

ExpeditingFind alternative sources of supplyWork with suppliers to resolve

problemsReschedule Production

6.RECEİVİNG AND ACCEPTİNG GOODSReceiving and inspecting goods for correct

quantity and any damage

Accept goods and generate a receiving report

Send to quality for further inspection.Hold goods damaged in transit

Copies to Acounting Department.

7.APPROVİNG İNVOİCE FOR PAYMENTAggrementOriginal Purchase OrderReceiving ReportInvoiceAproval to Accounts Payable

ESTABLİSHİNG SPECİFİCATİONSPurchasing can help to make the ‘BEST

BUY’Quantity Requirements(Economies of

Scale)Price requirementsFunctional Requirements

ESTABLİSHİNG SPECİFİCATİONS(QUANTİTY REQUİREMENTS)

Small Volume: Find a standart item

Large Volume:

Economies of ScaleQuantity X Price

ESTABLİSHİNG SPECİFİCATİONS(PRİCE REQUİREMENTS)

Relates to the use of item

Relates to the selling price of the finished product

ESTABLİSHİNG SPECİFİCATİONS(FUNCTİONAL SPECİFİCATİONS)

What the item is expected to do

Set by the end userPerformance ExpectationsAesthetic Expectations

SELECTİNG SUPPLİERSThe Right Supplier

Can supply the quality neededHas the capacity to deliver the quantity

need and on time(JIT Deliviries)Makes a profit by means of a good price.Contributes to the improvement of our

product.

FACTORS İN SELECTİNG SUPPLİERSTechnical AbilityManufacturing CapabilityReliabilityAfter Sales ServiceLocationPriceOther Considerations

FACTORS İN SELECTİNG SUPPLİERS(TECHNİCAL ABİLİTY)Having technical capability

Assisting buyer in improving product

Suppliers product is a part of our product

FACTORS İN SELECTİNG SUPPLİERS(MANUFACTURİNG CAPABİLİTY)

Can supplier meet the specifications and quality desired?

Does supplier have a progressive and efficient planning and control system?

FACTORS İN SELECTİNG SUPPLİERS(RELİABİLİTY)Reputable

Stable

Financially strong

FACTORS İN SELECTİNG SUPPLİERS(AFTER SALES SERVİCE)

Service Organization

Supply of Spare parts

Technical Support

FACTORS İN SELECTİNG SUPPLİERS(SUPPLİER LOCATİON)

Delivery Time

Local Inventories

Requiring for after sales service

FACTORS İN SELECTİNG SUPPLİERS(PRİCE)

Not always the lowest.May include other conditions.

QualityAggreementsHolding stock.....

FACTORS İN SELECTİNG SUPPLİERS(OTHER CONSİDERATİONS)

Credit TermsWillingness to hold inventoryJITInformation TechnologyReciprocal Business

SUPPLİER SELECTİON

On-going relationshipMutual BenefitBuyer can

Be assured supply of quality productsMake technical supportSolve problemsImprove product

SUPPLİER SELECTİON (WEİGHTED POİNT PLAN)

Factors: Things that must be considered as a part of what we will be buying.

Weight: The relative importance of each of the factors.

SUPPLİER SELECTİON (WEİGHTED POİNT PLAN)

Rating: How well each supplier compares on each factor

Ranking: The weight times the rating

SUPPLİER SELECTİON (WEİGHTED POİNT PLAN)Select the factorsAssign a weight to each factorRate the suppliers for each factorRank each supplier(by multiplying the

weight by the rate for each factor.)

SUPPLİER SELECTİON (WEİGHTED POİNT PLAN)

PRİCE DETERMİNATİONDirect influence on company’s profit50% cost of goods sold(COGS)Package of

FunctionQuantityServicePrice

PRİCE DETERMİNATİON(BASİS OF PRİCİNG)Fair Price

CompetitiveGives seller a profitAllows buyer to make a profit

Upper limitEstablished by buyers

Lower LimitEstablished by sellers.

PRİCE DETERMİNATİON(ANALYZİNG COSTS)

Fixed Costs:Incurres no matter the volume of sales

Variable Costs:

Varying with the volume of manufacturing

PRİCE DETERMİNATİON(ANALYZİNG COSTS)

Total Cost=Fixed+UnitVar.cost x Volume

Unit Cost=Total Cost/Volume

PRİCE DETERMİNATİON(BREAK-EVEN POİNT)

The volume of sales where total revenue equals to costs

A seller must have sufficient volume to make a profit

Knowing the seller’s break-even point is useful in negotiations.

PRİCE DETERMİNATİON(BREAK-EVEN POİNT)

Fixed Cost = $5,000Variable Cost = $6.50 / unitSelling Price per unit=$15

What is the total cost and average cost of producing a lot of 1,000 pcs.

What is the break-even point

PRİCE DETERMİNATİON(BREAK-EVEN POİNT)

Fixed Cost = $5,000Variable Cost = $6.50 / unitTotal Cost=6.5*1,000+5,000=$11,500Unit Cost=11,500/1,000=$11,515*X=5,000+6.5*X8.5X=5,000X=588.2 units

PRİCE NEGOTİATİONBuyer needs knowledge of seller’s costBuyer must have sufficient cloutShould benefit both supplier and buyerSavings must justify the time and effort

required

PRİCE NEGOTİATİONNegotiation also depends on the product

typeCommodities: Fluactuates widelyStandart Products: Too many suppliers,catalog

pricesItems of small value: A little negotiation, service

buyingMade-to-Order Items: Quotations are received,

availability of negotiation

İMPACT OF MRP ON PURCHASİNGProcurement:

establishing specifications, selecting suppliers, determining price, negotiations

Supplier scheduling and follow-upproduction activity controlexecute the master schedule and the MRPensure good use of resources, minimize

WIP, provided the desired level of customer service

BUYER-PLANNER CONCEPTProduction Activity Control:

controls the flow of work through the plant

schedules need for componentsPurchasing:

coordinates the flow of goods from suppliers

BUYER-PLANNER CONCEPTResponsibility of Planning and BuyingWorks as a Master Scheduler and other

Planner / BuyersHandles fewer componentsSmoother flow of information

matches material requirements with supplier capabilities

PLANNER-BUYER RESPONSİBİLİTİES

Determining material requirements

Developing schedules

Issuing shop orders

Issuing material releases to suppliers

PLANNER-BUYER RESPONSİBİLİTİES

Establishing delivery priorities

Controlling orders in the factory Handling

all the activities associated with the

buying and the production scheduling

Maintaining close contact with suppliers

CONTRACT BUYİNGLong term contract with a supplier

for small volume itemsSupplier may be given a copy of the

material requirements planRequires close coordinationWorks best with Buyer/Planner

Concept

CONTRACT BUYİNGAssures supplier of a certain amount

of businessSuppliers are more responsive to

buyer’s needsAssures buyer that capacity will be

available when neededBuyer can delay actual ordering

SUPPLİER RESPONSİBİLİTİES AND RELİABİLİTYMaterial Requirements often

change.Suppliers must be able to react to change

Flexibility:In VolumeIn products needed

Reliability:In delivery promises

EDİ(ELECTRONİC DATA İNTERCHANGE)Electronic exchange of information

between customers and suppliersPurchase OrdersInvoicesMaterial Requirements Plan

Reduces time involvedAvoids costly paper work

VENDOR MANAGED İNVENTORYSupplier maintains an inventory of

certain items at the customer’s plantUsually for standard, small value items

FastenersElectrical components

A CASE STUDY You are working for a factory in FMCG sector producing

milk.The goods-services you have to purchase are

separated in 4 groups below. Each group has 2 suppliers (A

and B).

Raw material and additives

Boxes and bottles

Maintenance Service

Car Rental Service

Establish a model and containing at least 4 factors in a

service group.Compare the suppliers and make a selection

according to the ‘Weighted Point Plan’