Make vs Buy Decision

D0394 Perancangan Sistem Manufaktur Pertemuan IX - X

Average Manufacturing Costs

On average, manufacturing firms generate approximately 10% profit from operations.
Typical breakdown of total costs:

Labor (8%)
Materials (50%)* Overhead costs (32%) * On average, manufacturing firms spend about 50% of their sales dollar in raw material, component, and supply purchases.

Purchasing Objectives:
Four Major Objectives of Purchasing:
1. Obtain the required quantity and quality of goods and services 2. Obtain the lowest cost 3. Ensure top notch service and timely delivery 4. Maintain good supplier relationships and Develop potential suppliers

Purchasing
No longer just order takers.
Purchasing needs to know

material performance availability suppliers

Purchasing Functions:
Determine purchasing specifications (correct quality, quantity, and delivery requirements)
Select the right source Negotiate terms and conditions Issuing and monitoring of purchase orders

Purchasing Cycle:
1. 2. 3. 4. 5. 6. 7. Receive and analyze purchase requisition Select suppliers Determine the right price Issue purchase orders (POs) Monitor POs Receiving and accepting goods Approving suppliers invoice for payment

Purchasing Cycle Step 1:

Receive and analyze purchase requisition
Minimum Required Information: Identity of requestor, approval, and charge number/account

Specification
Quantity and unit of measure Required delivery date and place Additional supplemental information

Purchasing Cycle Step 2:

Select Suppliers

Routine items typically have preferred suppliers New/unusual items may require vendor search and RFQ for comparison
Some companies require multiple source solutions (McDonnell-Douglas preferred 3, single source required justification documentation)

Many firms today are opting for fewer suppliers Use of supply chain management is growing

Supply Chain Management

Apply a total systems approach to managing the entire flow of

information materials and services

Raw material suppliers

Factories & warehouses

End customer
3

Partnership Relationship
Continuing relationship involving

a commitment over an extended time period, an exchange of information, and an acknowledgement of the risks & rewards of the relationship.

Purchasing Cycle Step 3:

Determine the Right Price

Tied directly to supplier selection Price negotiationFocuses on quantity (net and gross)

Frequency of orders

Total usage Refunds are becoming popular Supplier maintained inventory (pay as you use philosophy)

Purchasing Cycle Step 4 & 5:

Issue POs and Follow-up
POs are legal offers to purchase Purchasing must follow-up on open POs
Monitor past due POs and critical need components

Work with suppliers

Take corrective action
Expediting components, alternative supply sources, reschedule production, etc.

Purchasing Cycle Step 6 & 7:

Receiving and Paying Suppliers
Reconcile POs and receivers Correct damages, variance or discrepancies Verify information for payment
PO number Receiving report Invoice

Outsourcing
Purchased items account for 60 to 70% of the cost of goods sold.

Outsourcing allows firms to focus on their core competencies.

Organizations outsource when they decide to purchase something they had been making in-house.

Typically handled by materials management function.

4

Make or Buy
Current trend favors outsourcing all activities that do not directly represent or support core competencies.
Are there any dangers associated with aggressive outsourcing? What are the implications for JIT production?
5

Purchasing Inputs
Marketing
Engineering Manufacturing

Functional Specifications
By Brand By Specification
Physical and Chemical Characteristics Materials & Methods of Manufacture Performance

By Engineering Design Miscellaneous

Gimme one just like the last one

Good Specifications
Are not to tight or loose
Allow for multiple sources Assign responsibility

Supplier Selection
Types of Sourcing
Sole Source Multiple Source Single Source

Select based on:

Technical Ability Mfg. Capability Reliability After sale service Location Price

Four Categories of Product

Commodities
Standard Products Items of small value Make to order items

Purchasing Anatomy
Specifications Supplier Selection Price Determination Negotiation

Procurement Purchasing

Schedule and Follow up

Order Release Schedule Delivery Follow up

Price Determination
you get what you paid for Fair Price- One that is competitive, gives the seller and buyer an opportunity for profit Fixed Costs- Costs incurred without respect to sales volume Variable Costs- Costs directly associated with sales volume (labor, material, etc.) Breakeven Point- The convergence of profit and loss. . . financial equilibrium

Break-Even Example
Q:To make a particular component requires an overhead (fixed) cost of $5000 and a variable unit cost of $6.50/unit. What is the total cost and the average cost of producing a lot of 1000? If the selling price is $15/unit, what is the break-even point? A: Total cost = fixed cost + (variable cost/unit)(# of units) = $5000 + ($6.5 x 1000) = $11,500 Average cost = Total cost / # of units = $11,500 / 1000 = $11.50/unit Break-even point: Let X = # of units sold $15X = $5000 + $6.5X $8.5X = $5000 X = $5000 / $8.5 = 588.2 units