Purchasing Final Ch.3 The Legal Aspects of Purchasing In business environments, ethical behavior is the foundation of trust. Purchasing agents are governed by the company s ethical policies, o The Uniform Commercial Code o The Securities and Exchange Commission o And many state and local laws Purchasing agents who violate ethical could easily go to jail Various actual company and government ethical policies A Corporate Code Ethics Example
University Code of Ethic examples National Institute of Government Purchasing (NIGP) Code of Ethics Example (Short Version)
Significance of Purchasing Ch.6 Just-in-Time (Lean) Purchasing The cost of raw materials has traditionally been a serious concern of top management. Over the year, material cost, as a proportion of total cost of the end product, has risen sharply and is as high as 80% in some instances. Consequently, the role of the purchasing function in a manufacturing organization has become increasingly important. The JIT production control system focuses on reducing both raw materials and WIP inventories. Specifically, JIT requires that the right materials are provided to workstations at the right time. JIT Purchasing 1. Reduce order quantities 2. Frequent and on-time delivery schedules : In order to obtain small lot size of production, the order quantity size needs to be reduce and corresponding delivery schedules need to be made more frequent. 3. Reduced lead times : To be able to maintain low inventory level, it is critical that replenishment lead times be as short as possible. The JIT philosophy inherently attempts to reduce lead times for order completions. 4. High quantity of incoming materials : Japanese manufacturers attempt to reduce incoming material inspection as much as possible. In order to eliminate the associated receiving inspection cost, a very high emphasis is placed on the quality of incoming materials under the JIT system. 5. Reliable suppliers : no safety stock (buffer) so raw materials must be prepared perfectly. Purchasing Benefits 1. Reduced inventory levels : associated inventory holding costs 2. Improved lead-time reliability : shorter LT leads to higher levels of customer service and lower safety stock requirement and reducing working capital requirement 3. Scheduling flexibility : reducing purchasing lead-times and setup times offer unique competitive advantages of adapting to changes 4. Improved quality and customer satisfaction : resulting in savings associated with reduced rework and scrap 5. Reduce the cost of parts : the opportunities to conduct an extensive value analysis 6. Constructive synergies with suppliers : close technical cooperation, quick feedback, engineering changes quicker 7. Cost decrease : mainly reduce inventory holding cost
Ch.11 Supply Partnerships and Supply Chain Power Critical to the implementation of purchasing and supply management techniques is the development of supply chain partnerships. Also termed a strategic alliance, a supply chain partnership formed between two independent entities in supply channels to achieve specific objectives and benefits, and it is these partnerships that form the essential building blocks of supply chain management. Importance of Supply Chain Partnership Awareness Like supply chain management, the frequency of partnering is increasing in industry, but implementation still remains a difficult process. FIGURE 11.1 Continuum of Interfirm Relationships Discrete arm s length transaction Special influence transaction Partnership I II III Joint venture Vertical integration Relationship Intensity Relationship intensity Partnerships move beyond special influence transactions by involving efforts of both firms to coordinate functional activities Figure 11.1 shows how partnerships can be segmented into three based on the intensity and duration of the leadership. Tire I partnerships entail short-term, single-function/division coordination Tire II partnership extend coordination to integration and encompass multiple activities over a longer time span. Finally, tire III partnerships dilate into significant levels of operational integration. Independent tire III firms view their partners as difficult-to-replace extensions of themselves. Traditional Sourcing (not importance) The evolution of intrafirm functional integration has occurred for most firms over the last few decades, and the current push is toward external integration with both suppliers and customers. Supply chain partnerships bridge the barrier between buyer and seller, leading manufacturers to ally with a reduced supplier base. Reduced supplier bases (reduce no. of suppliers) Some supply managers argue that implementation of many new manufacturing techniques necessitates a reduction in the number of suppliers. The two primary factors of Asian production techniques are reduced supplier lot sizes and single sourcing. Other supply managers proclaim that single sourcing is not as widespread in Japan as believed and that many Pacific Rim manufacturers actually exercise a single/dual hybrid approach.
Supply chain Partnerships Traditional Supply Relationship Supply Chain Partnership Price emphasis for supplier selection Multiple criteria for supplier selection Long-term contracts for suppliers Short-term contracts for suppliers Bid evaluation Intensive evaluation of supplier valueadded Large supplier base Few suppliers Proprietary information Shared information Power-driven problem solving o Coercive relationship Mutual problem solving o Improvement o Success sharing Benefits of Partnership
Ch.13 Price Determination The buying professional should be able to easily defect prices that are too high The price of a product or service should be expected to cover cost of production (DM,DL,OH, IDM,IDL), promotion, and distribution, plus a reasonable profit. Pricing is usually based on variation of cost Note. Right Price ; Low TOC Price + other variables Compare with market price The purchasing decision The objective of the purchasing department is to buy the right materials from the right supplier at the right time and the right price. Price-Setting Strategy (Economic) 1. Price analysis : comparing the costs and prices from two or more suppliers Supplier A = $6, B = $7, C = $8 Choose A 2. Cost analysis Compare the actual cost of each. If the cost of A is $5.25 then negotiate with them to get the fair price Elements + other costs ( Dl,IDM,IDL, OH, etc.) 3. Total cost analysis Price-Making Strategy (Psychological) Buyer must be attempts to predict changes in the industry The major psychological influence in a buyer supplier relationship is power It is conceivable that a powerful buyer could force a supplier to eliminate its overhead from the ultimate price The danger for the good buy is that it may drive the supplier out of business No matter how powerful, buyer should attempt to obtain a fair price and good consensus
The learning curve Supplier is an expert of producing this material by using less labors and times so they can give buyer low price. Direct labor hours 10 8 5.12 100 200 300 400 800 No. of unit produced The more unit produced, the less time used Price strategy Standard Price list Standard price lists are usually price generated based on the supplier s total cost. The supplier usually offer quantity discount to influence buyers. Competitive Bidding Suppliers, are invited by openly advertising the scope, specifications, and terms and conditions of the proposed contract as well as the criteria by which the bids will be evaluated. Competitive bidding aims at obtaining goods and services at the lowest prices by stimulating competition, and by preventing favoritism.
Ch.14 Bargaining and Negotiations Two parties bargaining 1. Distributive : The parties in distributive bargaining are in the basic conflict and competition because of a clash of goals: the more one party gets, the less the other gets. That s the total gains from the situation must be distributed between the two parties involved and each party usually wants as much as it can get. Distributive bargaining can therefore be modeled and exanimated by using game theory. A two party, varying-sum, or zero-sum schedule is suitable depending upon the payoff schedule involved. In a varying-sum schedule bargaining situation, the profit (or loss) of the respective bargainer, when added together need not always equal the same fixed amount, thus the term varying sum. In the zero-sum bargaining situation, the profit (or loss) of the respective bargainers always sum to the same fixed amount. The term Zero sum stands for the fact that one bargainer gains, the other loss and the gains (or loss) net out to be zero. 2. Integrative : Integrative bargaining exists where there are areas of mutual concern and commentary interests. The situation is a very-sum schedule such that, by working together, both parties can increase the total profits available to be divided between them. In most bargaining situation, there is usually a preliminary discussion, called negotiation. The word negotiation is derived from Latin and in civil law means trading on deliberations leading to an agreement. The seller bargaining strengths depend on the following: 1. The seller s current capacity 2. The probability of being the successful bidder 3. The seller s deadline 4. The status of the seller The buyer s bargaining strength are 1. The number of bidders 2. The urgency of the buyer needs 3. The length of time before agreement 4. The status of buyer Planning (Buyer Perspective) The buyer s strengths are driven by the number of sellers in the market, the number of buyers in the market, knowledge of the item or service, the cost breakdown (if applicable), and level of preparation. The buyer must also evaluate the seller s strength and weaknesses. Data collection is the first step in the preparation process. The next step involves establishing the negotiations objectives, strategies, and tactics. Time is clearly the most important shortcoming in the preparation process for the buyer.
Once buyer has a complete understanding of what he or she is buying, a through price/cost analysis should be performed using the seller s cost data. The buyer cannot be an effective negotiator without the price analysis. There are many surprises in the business world. One way to minimize these surprises is to gain more systematic knowledge through the negotiations process. Procedure 1. Team. Select team if needed. 2. Objectives. Determine objectives 3. Preparation. Prepare a price/cost analysis 4. Bargaining strength. Determine bargaining strength be honest. 5. Plan. Develop the plan: agenda, place, time, min-max positions. 6. Strategy. Set you strategy 7. Tactic on how to achieve the strategy 8. Follow-up
Ch.15 Purchasing Transportation Services *** Hint: Focus on the advantages of each transportation. Rail Less expensive then air and truck mode Can be shipped from terminal to terminal; therefore, flexible is not an attribute Truck Flexible and versatility The only transportation mode that can be used to ship from point to point The competition in the trucking is fierce, so in order to be successful, a carrier must provide the shipper with high service and low cost Air Only premium and emergency goods are shipped via air because air is Cleary the highestcost shipping mode A fast-delivery with low-inventory strategy Water Carries American water carriers complete directly with rail and pipelines Excellent transportation for low-valued bulk commodities in large quantities. Speed is not a critical criterion for those raw materials Pipeline Pipelines are used to transport low-valued, nonperishable product such as oil, diesel fuel, jet fuel, kerosene and natural gas.
Ch.18 Procuring Professional Services Over the past 60 years, the service sector has taken on an increasingly important role in the world economy These change have opened up new global markets but at the same time forced service industries to determine ways in which to remain competitive, or they would cease to exist In recent years, many manufacturing and service firms have been challenged to increase their focus on customer satisfaction and quality of service These organization also have had to increase productivity and quality and decrease cost of service while dealing with the demands of changing technology Service Sector Characteristics and Strategies The differences and similarities between characteristics of operations in the service sector and in manufacturing.
Professional Services The purchasing of professional services is gaining exceptional attention. The separation of service into equipment-based and people based. The spectrum of types of service business is giving in Table 18.2 IBM has evolved into a solution provider.