Purchasing

 The activities associated with identifying needs, locating and selecting suppliers, negotiating terms, and following up to ensure supplier performance in an organization

Why Purchasing is Critical

The Changing Global Competitive Landscape
 To compete globally, you need to purchase globally  Global purchasing efforts are supported by advances in information systems

Why Purchasing is Critical

Financial Impact
 For the average manufacturer, half of the value of shipments comes from materials  Purchasing represents a major opportunity to increase profitability

Why Purchasing is Critical

Financial Impact - I

Lowes Company
Earnings and Expenses

Sales COGS Pretax earnings

$26,491 $18,465 $2,359

Every dollar saved in purchasing for increases pretax profit by one dollar Every dollar saved in purchasing inventory lowers total assets by one dollar

Selected Balance Sheet Items

Merchandise inventory Total assets

$3,968 $16,109

Why Purchasing is Critical

3% purchasing reduction in COGS
Earnings and Expenses Current With 3% saving
Pretax earnings increase by $554 (23.4%)

Sales COGS Pretax earnings

$26,491 $18,465 $2,359

$26,491 $17,911 $2,913

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

$3,849 $15,990

ROA increases from 14.6% to 18.2%

Purchasing Process
 Variations of processes of purchasing across the industries.  From initiation to completion of transactions and completion of a material cycle

5-6

Purchasing Process


Typically involves the following transactions:  Recognition of the need the process in which purchase department is formally informed about the need of a particular item (or more) by the user department  Quotation request once purchase request (PR or Indent) is received and understood clearly, the purchase department sends the request documents to all potential suppliers asking them
5-7

Purchasing Process. Cont.

   

Evaluating the Quotations and selection of the supplier Placement of the purchase order Receiving the goods Release of Payments for the goods

5-8

The Purchasing Process

Needs identification Description

No
Supplier identification and evaluation

Is there a preferred supplier?

Yes Supplier selection & contracting Purchase order preparation Follow up and expediting Receipt and inspection Settlement & payments Records maintenance
Order cycle

The Purchasing Process

Needs 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 Process

Description
Description

The communication of a users needs to potential suppliers in the most efficient and accurate way possible
Description by market grade/industry standard Description by brand Description by specification Description by performance characteristics Description by prototypes or samples

The Purchasing Process

Supplier Identification and Evaluation

Supplier identification and evaluation

The amount of effort increases as:

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 Purchasing Process

Supplier Identification and Evaluation - II

Supplier identification and evaluation

Criteria for supplier assessment:

Process and design capabilities Management capability Financial condition and cost structures Planning and control systems Environmental regulation compliance Longer-term relationship potential

The Purchasing Process

Supplier Selection - I

Competitive bidding
Supplier selection & contracting

Negotiation Fixed-price contracts Cost-based contracts

The Purchasing Process

Supplier Selection - II

Preferred supplier
Supplier selection & contracting

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

The Purchasing Process

Supplier Selection - III

Competitive bidding is most effective when:

Supplier selection & contracting

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

The Purchasing Process

Supplier Selection - IV

Negotiation is most effective when:

Supplier selection & contracting

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

The Purchasing Process

Supplier Selection - V

Contracting is most effective when:

There is a large amount of money involved
Supplier selection & contracting

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

The Purchasing Process

The Order Cycle Purchase order preparation
Purchase order preparation Follow-up and expediting Receipt and inspection Settlement and payment Records maintenance

74% 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