Purchasing. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter.

Purchasing

© 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Chapter 11, Slide 2

Chapter Objectives

Be able to:Make a strong case for why purchasing is a

critical part of a firm’s supply chain strategy. Identify and describe the various steps of the

purchasing process, and discuss how this process will vary according to the type of good or service being purchased.

Explain why spend analysis is important and perform a simple spend analysis.


Chapter 11, Slide 3

Introduction

• Why Purchasing is Critical

• The Purchasing Process

• Spend Analysis


Chapter 11, Slide 4

• Sourcing decisions – (discussed in Chapter 10) High level, often strategic decisions regarding which products or services will be provided internally and which will be provided by external supply-chain partners

• Purchasing – The activities associated with identifying needs, locating and selecting suppliers, negotiating terms, and following up to ensure supplier performance

Sourcing decisions and purchasing activities serve to link a company with its supply chain partners

Focus


Chapter 11, Slide 5

Why Purchasing is Critical – I

• To compete globally, you need to purchase globally

• Global purchasing efforts are supported by advances in information systems

The Changing Global Competitive Landscape


Chapter 11, Slide 6

• For the average manufacturer, 52.5% of the value of shipments comes from materials

• Purchasing represents a major opportunity to increase profitability

Financial Impact

Why Purchasing is Critical – II


Chapter 11, Slide 7

Why Purchasing is CriticalFinancial Impact - I

Earnings and Expenses

Sales $26,491 COGS $18,465 Pretax earnings $2,359

Selected Balance Sheet Items

Merchandise inventory $3,968 Total assets $16,109

Lowe’s CompanyEvery dollar saved in

purchasing for increases pretax profit

by one dollar

Every dollar saved in purchasing

inventorylowers total assets

by one dollar


Chapter 11, Slide 8

Earnings and Expenses Current With 3% saving

Sales $26,491 $26,491 COGS $18,465 $17,911 Pretax earnings $2,359 $2,913

Selected Balance Sheet Items Merchandise inventory $3,968 $3,849 Total assets $16,109 $15,990

3% purchasing reduction in COGS

Pretax earnings

increase by $554 (23.4%)

ROA increases from 14.6% to

18.2%

Why Purchasing is CriticalFinancial Impact - II


Chapter 11, Slide 9

• Quality

• Delivery

• Ability to exploit new technologies

Performance Impact

Why Purchasing is Critical – III


Chapter 11, Slide 10

$10 $2

99.8% 95%

Overnight delivery

1 day to 3 weeks

Supplier A Supplier B

Cost per valve

% good

Delivery lead time

Sourcing dialysis machine valves

Why Purchasing is CriticalPerformance Impact - I



Effect of defective dialysis machine valves• Interruption in patient treatment

• Rescheduling difficulties

• Reduction in the effective capacity for dialysis

• Possible medical emergencies

Estimated cost of a failed valve = $1,000

Why Purchasing is CriticalPerformance Impact - II



Supplier A Supplier BValve costs Failure costs Backup inventory Total costs

Sourcing 50 dialysis machine valves (Total Costs)

50 x $10 = $500 50 x $2 = $100

0.2% x 50 valves x $1,000 = $100

5% x 50 valves x $1,000 = $2,500

1 valve x $10 = $10 3 valves x $2 = $6

$610 $2,606

Why Purchasing is CriticalPerformance Impact - III



Settlement & payments

Records maintenance

Receipt and inspection

Follow up and expediting

Purchase order preparation

Supplier selection & contracting

Supplier identification and evaluation

Description

Needs identification

Is there a preferred supplier?No

Yes

The Purchasing Process

Ordercycle



The Purchasing ProcessNeeds Identification

Needs identification• Purchase requisition –

An internal document completed by a user that informs purchasing of a specific need

• Reorder point system – A method used to initiate the purchase of routine items. Typically, each item has a predetermined order point and order quantity

• Statement of Work/Scope of Work (SOW) –Terms and conditions for a purchased service. Includes how supplier will be evaluated



The Purchasing ProcessDescription

• Description by market grade/industry standard

• Description by brand

• Description by specification

• Description by performance characteristics

• Description by prototypes or samples

DescriptionThe communication of a user’s needs to potential suppliers in the most efficient and accurate way possible



The Purchasing ProcessSupplier Identification and Evaluation - I

Supplier identification and evaluation • The complexity of the product

or service increases

• The amount of money that is committed increases

• The length of the proposed buyer-supplier relationship increases

The amount of effort increases as:



Supplier identification and evaluation • Process and design capabilities

• Management capability

• Financial condition and cost structures

• Planning and control systems

• Environmental regulation compliance

• Longer-term relationship potential

Criteria for supplier assessment:

The Purchasing ProcessSupplier Identification and Evaluation - II




• Competitive bidding

• Negotiation

• Fixed-price contracts

• Cost-based contracts

The Purchasing ProcessSupplier Selection - I



Preferred supplierA supplier that has demonstrated its performance capabilities through previous purchase contracts and therefore receives preference during the supplier selection process

The Purchasing ProcessSupplier Selection - II




• The buying firm can provide qualified suppliers with clear descriptions of the items or services

• Volume is high enough to justify the cost and effort

• The firm does not have a preferred supplier

Competitive bidding is most effective when:

The Purchasing ProcessSupplier Selection - III




• The item is new or technically complex with only vague specifications

• The purchase requires agreement about a wide range of performance factors

• The supplier must participate in the development effort

• The supplier cannot determine risks and costs without input from the buyer

Negotiation is most effective when:

The Purchasing ProcessSupplier Selection - IV




• There is a large amount of money involved

• The business needs specific requirements that need to be put into writing such as quality levels, delivery times

Two basic types of contracts:

• Fixed-price – price does not change for life of contract

• Cost-based – price tied to cost of selected key input or economic factor

Contracting is most effective when:

The Purchasing ProcessSupplier Selection - V




Purchase order preparation

Records maintenance

Settlement and payment

Receipt and inspection

Follow-up and expediting

• Purchase order preparation74% of firms currently have electronic data interchange (EDI) with some part of their supply base

• Follow-up and expediting

• Receipt and inspection

• Invoice clearance and payment

• Records maintenance

The Purchasing ProcessThe Order Cycle



Spend Analysis

Answers the questions:• What are the top 10 commodities by

annual spend? (provides priority)*

• Which commodities have the most suppliers? (helps reduce purchasing load)

• Which commodities have the lowest spend per supplier? (if also among top 10, potential for savings)

* Similar to ABC analysis to identify critical inventory items based on cost and quantity



Typical Answer to First Question

Case Study in Purchasing

The ABCs of Spend Analysis

Purchasing. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter.

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